BiggerPockets Money Podcast - 112: Choosing the Right Tax Professional for YOUR Specific Needs with Natalie Kolodij

Episode Date: February 17, 2020

Natalie Kolodij is a tax strategist. (You’ve probably seen her in the forums!) With April 15 looming around the corner, we’re going to chat about ways to choose the RIGHT tax professional who can best serve YOUR specific needs. Natalie also shares a few red flags about potential tax preparers, as well as specific things your tax pro should be asking for—and what it means if they do not. She’ll also share some common missed deductions that can cost you BIG and how to prepare and organize your documents so your tax pro can process your returns quickly, efficiently, and with the least amount of time billed to you. Looking for that seemingly-elusive real estate professional status? Natalie explains in detail how to qualify for this lucrative benefit. She even shares how long you can depreciate a kangaroo! If you’re a taxpayer, this show can help you save time and money. If you’re a real estate investor/taxpayer, you can’t afford NOT to listen to Natalie’s advice! In This Episode We Cover: The right time for somebody to start looking for a tax professional How to find a tax professional How important state-specific knowledge is What a true expert can bring to the table regarding your return What a real estate professional is Benefits of consulting a tax professional prior to buying a property How to prepare for a meeting with your tax professional 3 most common errors—check these before submitting your return How to approach a tax return for a house hack or duplex What to do if you recognize issues with past returns What depreciation recapture is And SO much more! Links from the Show MileIQ: Mileage Tracking App BiggerPockets Forums BiggerPockets Money Facebook Group BiggerPockets Money Survey Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to the Bigger Pockets Money podcast show number 112, where we interview Natalie Colity from Colotex and hear tax tips for aspiring real estate investors. Just be mindful of your taxes. Don't believe everything you read on the internet that people tell you you can or can't do. Check with a professional. A lot of stuff gets set up wrong. And just make sure that, like I said, that you're as organized as you can be, that you just give all of the information in some way or another.

you don't need to know all of the tax laws. Like that's not your job. If you're hiring this out to someone else, then that's their job is to know how to maximize things for you. But they need the details. They need to know as much as possible to do that. Hello, hello, hello. My name is Mindy Jensen.

And with me as always is my astounding co-host, Scott Trench. Scott and I are here to make financial independence less scary, less just for somebody else. And show you that by following the proven steps, you can put yourself on the road to early financial freedom, and get money out of the way so you can lead your best life. Wherever you are in your financial or life journey, you can begin rapidly moving towards a position capable of generating a great income,

saving a huge percentage of that income, and setting yourself up to make larger and larger investments on your way to financial freedom. Whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate or start your own business will help you build a financial position capable of launching yourself towards your dreams. Scott, I am so excited to talk to Natalie today. Taxes is not something that people normally get excited about, but since we're huge money dorks, we are going to get very excited about these taxes because Natalie is not talking about how to pay more tax. Natalie is talking about ways to pay less tax, which is my favorite amount of tax to pay.

Absolutely. And just to give you kind of a heads up for today's show, if you have a W-2 job and don't have any other income streams or real estate, estate or any other meaningful assets, then say right up front, this show is not going to really be of that much value to you. Unless you're planning to do those things in the upcoming year, you'll probably get a lot of value out of it. If your own real estate, if you have it over a six-figure income, if you have a small business, I think you're going to get a lot of value out of today's episode. And you're going to get especially a lot of value if you are house hacking for the first time in 2019 or 2020, because we're going to go through exactly how to treat a house hack where you have additional rooms in your property, a live-in flip, a duplex where you rent out one unit

and live in the other. We're going to talk you how to walk through that tax treatment, and we all understand the trade-off that a new house hacker is making where maybe they're not earning a ton of income and a tax professional is going to be a big bite out of their expenses, but I think we'll make a good case for how you should think about that and whether you should consider using a tax professional if you are house hacking. Yes, also if you are the owner of a Petting Zoo, Natalie has some really great tips for you on how long you can depreciate your kangaroo. That's right. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're

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If you're looking to turn everyday moments into real progress, Audible has been indispensable for me over 10 years. kickstart your well-being journey with your first audiobook free when you sign up for a free 30-day trial at audible.com slash BP money. Natalie Colody from Colotax. Welcome to the Bigger Pockets Money podcast. I'm so excited to have you today. Hi, thanks for having me. Natalie is a tax strategist. And with April 15th looming around the corner, she's here today to share tips for choosing a tax professional who best serves your specific needs, including some things to look out for and some things to be. concerned about if your tax pro doesn't ask for. She'll also share some common misdedctions that can cost you big and how to prepare your documents for your tax pro so they can prepare your returns quickly, efficiently, and with the least amount of time billed to you.

So Natalie, welcome to the show. Thank you. Thanks for having me. I'm really, really excited because when I was a kid, I worked at Dairy Queen and I did my taxes on, well, my dad did my taxes for me. I'm old enough that turbotax wasn't around. Just a little too old for turbotax at the time. The internet wasn't even around when I first did my taxes. But I didn't need a tax pro because I worked at Dairy Queen. I was making $3.35 an hour and I had no deductions. My dad wouldn't even let me deduct me, which I was very angry at for a while. And was, why do you get to deduct me? He's like, I'm paying for your housing, your food, your everything. So I get the deduction. But then I didn't need them. Now I need it because I have an LLC. I have rental properties. I have all these like random things. At what point does somebody start looking for a tax professional? Yeah. So I normally tell people it kind of depends on you and your circumstance. So there are some people where from the beginning they spend a lot of time researching. They kind of figure things out really well on their own. And they feel really comfortable even if they get that first property or they are self-employed.

or kind of step outside the realm of just a W-2 job. If all you have is your W-2 job, there's nothing too complicated. You can very easily file by yourself. Or like I said, if once you move a step beyond that, if you feel like you put in the research and you won't be mad at yourself, if you do miss something because that's always possible, then that's probably sort of the point where at that time you can kind of hit a fork in the road and you can either start building a relationship with someone early,

even though you may not need them yet, or you can kind of try it on your own for a little bit and see how you fare in the waters. Well, thank you for giving us the scoop on Mindy's Dairy Queen tax bill. That's what that was great of you. But because you give us a little overview of maybe of like, hey, Mindy working at Dairy Queen, maybe she doesn't need a professional tax return tax prepare, right?

She doesn't need a tax professional to help her prepare for her several thousand dollars, perhaps in part-time income. But where does that line cross? where do you kind of begin approaching that barrier where you might need to hire a tax professional? Yeah, what I typically tell people is when your tax situation is pretty common, I think a lot of the listeners have probably been preparing their own taxes. If you work a W-2 job, you're not a high-income earner, which is typically considered six digits. So if you're under that amount, then there's a good chance you can prepare it yourself and be comfortable with it and not miss any of kind of those

basic deductions that you qualify for. If you just work sort of a nine to five job, maybe you put some money in your 401k, there's nothing crazy or exuberant at that point. What I would say is once you reach that six-digit income, where now you're limited on some of your deductions you can take regarding retirement and you kind of need a little more planning, or once you add in anything that is kind of one step further, if you add in a rental property, you're at in a business, anything that you would need to know a little more tax law for where there's going to be some guidelines to it. At that point, I would recommend reaching out to someone to at least establish the relationship, even if you don't need them that year.

Great. And so most of what we're going to talk about is probably going to apply to that, those kind of bigger earners with rental properties or with business or other types of income outside of W2. Is that right? Yep. For the most part, that's the point where you would kind of reach out where you kind of start having some different options and having a strategy that you can apply before that point, it's pretty cut and dry. So there's less kind of creativity you can put into your taxes to help you save money before that point. Okay, great. Are there any things to look out for for that person with that profile of a, you know, it's called $75, $80,000 a year job who's kind of taken ordinary deductions? Is there any advice you have for them before we move on to the

need of the show here? Yeah, the biggest thing at this point to consider is that part of tax cuts and drawback, that big tax change we had last year, they doubled the standard deduction on your taxes and you get to either take that or a bunch of little itemized deductions, which gives you benefit for owning a home and donating a charity. So make sure you're looking at that and seeing if you actually make enough to itemize so that if you do, you can maximize that, track them, make sure you're putting as much to that as possible. And if not, it might be a good idea to start a small side business so that you can still deduct some of those expenses somewhere. So that's kind of the biggest thing when you're just a W-2 employee is making sure that if you are

not taking a standard deduction, that you're maximizing those itemized deductions. And could you quickly walk us through that standard deduction and what change occurred there and who that might affect? So the change that they made was they doubled that. So it used to be right about $6,000. So it was really easy for people to itemize instead. You get whatever is the better deduction of. of the two. So as long as your mortgage interest, your property taxes, your donations, potentially

your medical expenses, if all of those things were greater than the $6,000, that was the deduction you got. You got whatever was more beneficial to you. So last year they doubled it to $12,000. And so now it's a lot harder for people to kind of get above that hurdle. And so what we're seeing now is people are a little bit almost discouraged because there's not really a direct tax incentive. if there's not a direct benefit for owning your own home right now as your primary residence for a lot of people. So for most people with this increase in the standard deduction, most people are going to pay less taxes in that bracket, right? Because they're going to have a higher deduction and offset more of their income, which is, but it also means that there's no

specific advantage to like mortgage interest and there's other things. Is that right? So just making it very simple for the majority of kind of maybe lower than six-finger income. earners filing a new tax this year. Yeah, exactly. So you're going to get the bigger deduction. So that was kind of the goal, was to simplify it, have less people have to track all of those little deductions. So you're going to get, like I said, a $12,000 right off the bat. But some people, like I said, it kind of, I feel like they feel a little jaded about it, that they're not getting that direct benefit now. Fair enough. All right. So I have decided that my income is high enough or I have complex enough streams of income that I need to go and hire a tax preparer this year.

What do I need to do to go about finding one of these people? Yeah, so there are several things to look for that are both good and bad. I would recommend talking to other people in your same industry. If you want to work with someone local, head to some local events related to what you do, if you have a business or if you have real estate and ask for referrals locally. If you want to work with someone who specializes in what you do, you might need to look outside of your area. Most accountants, most tax professionals work remotely now. It's 20-20, right? It's the actual Jetsons future. So you can work with someone all over the country.

Something that I would say to look for is ask them about their experience. So if you're in real estate, ask them if they own rentals, if they're involved in real estate, and kind of what they feel their confidence level is with that, right? You want someone who really understands your specific reason that you're reaching out to a professional. You know, if you're starting a dog grooming business, find someone who specializes in that. Whatever it is that your key point is where you need kind of this advising, that's what you want them to be an expert in. One of the other things to look for is their history and their experience. Check out LinkedIn, check out some local reviews. And if what they advertise of kind of their main thing on their page is that they can get you a

bigger refund than everyone else, go the other way. Because legally, there's only one refund you're entitled. to, right? Like there's some strategy there. But if their main key point is how much money they can get you back from the government instead of how much money they can save you from paying the government to begin with, they're kind of approaching it backwards. And a lot of those people we see who do that are sort of these seasonal preparers. They just decide to open a tax preparation business in like December. And in January, they're advertising as an expert. So those are kind of the people to avoid. It's always good to work with someone who is credential to CPA. And enrolled agent who has experience and what you're looking for. Those are all great things. And like I said, look for their background. You know, check out their LinkedIn. Check out what they say their history has been and what kind of environment they've worked in. Okay, you just said the seasonal preparer as though you don't have to be a CPA to do taxes. Yeah, you don't. It boggles my mind, actually. This is one of the few industries where you don't have to have any kind of license. You literally just need to apply for a P-10 and an EFIN, which is a number that lets you file tax returns with the IRS,

and you can open a tax shop. So this time of year especially, you'll see people who like, their job experience from last week was they were like the checkout girl at a fast food restaurant, and today they're a tax pro. So you've got to be really careful and really look at what their history is because they can market whatever they want. They can fluff themselves up to sound as good as they want, but you need to do the digging. Okay. That brings me back to what you were just saying about, make sure that they're professional or they have these different criteria. Wow. Wow.

The more I learned, the more I am shocked at things like this where you don't have to have any sort of special education to be a tax preparer. That's just shocking to me. So I want to know that my person is professional, is qualified. what are those things again that I'm looking for? I just want to reiterate that for people. I can't believe anybody can go be a tax pro. Yep. In quotes.

Yeah, it's shocking this time of year. All of the online groups get filled with brand new tax repairs. And literally, like, you look on their Facebook at what their job was a week ago. And it was like they did hair and now they're doing taxes. So you've really got to dig into their background. So I say checked LinkedIn. That's always a good one. Anyone who worked at kind of a professional tax firm,

You were forced to have a LinkedIn. That was part of college. That was part of working at a CPA firm. They want you to show what your experiences and your education. Ask someone if they went to college, see if they have a degree in finance or in accounting, or ask if they're an enrolled agent, if they're licensed through the IRS. So there's several different routes to be qualified. Just make sure they have some kind of experience.

I know great preparers who didn't go to college, but from the time they were 18, this is all they studied kind of on their own and really built their own knowledge base. So there's no right or wrong way. Just sort of dig back into their history, look at what their past experiences prior to opening their own tax firm and make sure they actually have something, something going on there. Wow. Okay, thank you. When you're looking to find a expert in your field, how important is it that they have state-specific or local knowledge of the tax code? And when does that begin to apply maybe more so to your situation than, I don't know, industry expertise? Yeah, there's kind of a careful balance. So you'll hear when someone works with someone remotely

that they're concerned that you might not know all of the state laws. But even a local firm, there's a good chance that a good majority of their clients either have something from another state, an investment or something where you just kind of have to have a general knowledge of every state. And for tax professionals, we have guides. We have updated education each year that kind of keeps us in the know on that. There's certain states that are a little trickier. If you're from California or New York, you might want to put someone local just because those states have more like intense, specific kind of requirements and legislation related to their taxes. But for the most part, any good experienced tax approach should be able to figure out the in and outs of any state

that you are in or that you're working with or where you have generated a tax return. Great. One of the things I'm kind of wondering about is, is it really okay to kind of get a generally good professional tax preparer for many people? Or is there a real need for a niche experience? And particularly within real estate investing for a real estate expert. And what are, if we need that specific expertise in real estate, what are some of those things that a true expert can bring to the table to your return? Yeah, so I'm obviously a big fan of kind of the niche down specialized person. Real estate is all I do. And literally the week before I started my own firm, I was sitting at a CPA firm, and I got a new client that was a petting zoo. And I had to look up how long

you get to depreciate a kangaroo. And I sat there thinking how, like what a ridiculous thing this was that I had to learn. Like, I'm never going to use this again. And that's kind of what happens when you go to a general firm. Like you need to know a little bit about every weird thing. So when do you need to have someone who specializes? There's no kind of cut and dry answer. For me, like when I worked at CPA firms, we had clients with real estate and we filed it and it was pretty much correct, right? Like you probably wouldn't go to jail for it. Like it was accurate, but there was no strategy applied. When you need to spend, like I said, you need to keep up on literally every industry, there's no way to know every little detail. So a great example is like when I worked

for a general firm, if someone had a rental and did a $100,000 renovation, we just put the $100,000 renovation on the books, like capitalized the whole thing. We didn't look into details. We just added that to the value of the property. Someone who specializes in real estate knows that there are parts of that. We can depreciate on a shorter timeline that we don't have to just add to the property. We can kind of break out things and give you a better deduction up front. So that's sort of what you'll get is sort of that one step further where they're going to actually kind of just know a little more and they're just going to kind of dive into it a little deeper. Another great example is when the property is for set up. So at a CPA firm, when you buy a rental, you get to depreciate only in the

building, not the land. So we would look up the tax assessor's percentage to each of those building and land and that's what we would use 100% of the time. There's six other methods you can use. So someone who specializes will look at your appraisal. They'll look at other options to see what's the best option for you. So those are kind of the differences. So like it'll probably be right. It might not be the most strategic way. Love it. This is awesome. And just for the listeners' sake, when you're preparing a tax return, Natalie's used some words like capitalize an expense, right and the goal of the taxpayer in this situation as a real estate investor would be to avoid capitalizing wherever the law allows for that the tax code allows for that and instead expense that

because that allows you to take a bigger deduction in the current year rather than in out years and what natalie's saying is that her methods can help you accelerate that and bring your expenses higher in the current year lowering your taxable income is that right yep absolutely awesome and i think that's a perfect example Can I ask a specific question about an area of the tax? Go ahead. What happened? Did I freeze?

No, I'm just laughing at you. Can I ask a specific question about my own specific situation? Okay. This is not necessarily specific to me, although it does apply to me to certain extent. So I guess, fine, it is selfish. But I'm going to ask that anyways. You're turning into Brandon Turner. One of the areas that I think a lot of people struggle with is the real estate professional area.

What this basically means is if I have a certain number of hours, well, I don't know that you explain what a real estate professional is and why it might or might not be to your advantage. Yeah, I actually just did a YouTube video on this because there was just a tax case. I find it super interesting. So real estate professional is an IRS status where, so normally your rentals, hopefully on paper, have a loss. You don't want them to lose money in the real world. Please don't do that.

But after depreciation, you want a loss on paper. So that's one of the benefits of these properties. But if you earn above a certain amount, you're not allowed to use those losses. It's passive and ordinary and it's like oil and water. We can't mix them. So real estate professional is an IRS status that says no matter how much money you make, we can use all of your passive losses. So whether you make $500 a year or $500,000, whether your real estate has a $5 loss or a $50,000 loss, we can use it every year. Real estate status This is really tricky because it's a huge benefit. So the IRS looks at it a lot and there's some weird hoops.

There's two rules and people get all excited about the first one and then we just crush their dreams with the second one. So the first rule is that you have to have 750 hours in your real estate activity. So if you're an agent or a property manager, you're good, right? Like that is your whole job. If it's rentals, we often need to combine them together to meet that hours. So that's the first rule is the 750. And lots of people are like, oh, I do that all day long. That's so easy. Second rule. The second rule says that you can't spend more time on any other activity than you do real estate.

So this is the rule that constantly gets people hung up because even if you have 10 rentals and you spend, you know, the hours each week to hit that 750, if you work a full-time job, that's 2,000 hours a year, it's going to get disallowed. the tax court throws those cases out constantly. So real estate professionals really great, but just know that if you have a full-time job, it's going to be really hard to claim that. But the saving grace is if you're married, only one of the two spouses need to qualify for you to both have the benefit. So rock, paper, scissors for it. See who wants to retire first. You get to quit your job and deal with the properties. And the other spouse gets to keep working. And then you can use all of your losses with no limit. Okay, so I work at bigger pockets and I talk about real estate all day long. Am I a real estate professional? That's my full-time job.

We are just talking about that, Scott and I, and it's kind of a gray area. So I could see the argument for it. Like, I think we could make that argument, but you're not, it's almost more like an educational role to me, like more of a kind of a marketing. And so it would be like you could argue it. You can argue anything you want with the IRS, right? It's just kind of an aggressive stance. I think. But you could. You could say that, especially if you also have your own real estate, also coach people locally. Like if it's offline as well, yeah, I think we could make that argument and you could, you could potentially qualify. And this is why I hire a tax professional to help me prepare by annual tax return and make some of these decisions because, you know, there's a lot of, as you point it out, gray area in what you can, what you have to capitalize, what you can accelerate, what you can expense in a given year, and what your status is just in real estate, right? And I guess particularly in zookeeping. Oh, my goodness. Yeah. Yeah. How long can you depreciate a

kangaroo? I think it was seven years. Oh, my gosh. So you just have that in your pouch if you need it in a future. Oh, God. I quit. I quit. I quit. I quit. I quit. I quit. I quit. I'm out. Goodbye. I no longer work in finger pockets. Oh, that was, that was actually quite clever. Scott is like that all day, every day. Okay. Okay. So back to tax stuff that affects more than just petting zoos. We have a lot of newer real estate investor listeners or even people who have not yet started investing, but they want to. Can a tax professional help give guidance before a purchase? Is there any benefit to consulting someone prior to making an offer or prior to buying a property? Yeah, there can be. And it depends on the professional. So a lot of tax firms, like I said,

they charge based on their time. So this was kind of the problem with when I had real estate clients at a CPA firm was they would call about a property they may or may not buy or they haven't bought their first one yet. And you have to bill them for each phone call. Like you're billing for consulting. And like, that's, that's a huge bummer when you're not even sure if you're going to buy this or not. So if you work with someone where consulting is kind of part of their service, then it can be worth it for people. Because what it comes down to is in the beginning, do you need, need someone? Like, will things just go totally awry? And like, will your computer catch fire if you try to do your taxes without a professional? Probably not. Like, you could

be okay. But keep in mind that the same mistakes you can make with a $2 million apartment building, you can make with your duplex you just bought that your house hacking. That might even even be a little more complicated because you're living in part. So it's not a matter of if one property justifies it. It's just a matter of how comfortable you are and being aware that it's easy to make mistakes early on. And it's almost better, I think, to start with a professional to kind of get you set up correctly than to end with one who has to backtrack and fix things. Love it. Well, later on in the episode, I want to ask you specifically for how you would think about approaching a tax return for a house hacked duplex. However, before we get to that, can we

quickly talk about how to go about preparing to meet your tax preparer once you've decided to go and hire one? Yeah, so the biggest tip there is be organized. We see this question on the forms a lot. People will say, you know, what do you use to track your expenses? What do you use? How do you do it? There's no cut and dry answer. Just don't be the person who goes into a tax office with a big box of papers, you're going to pay someone to open your mail. So that's not adding any value to you. There's a bunch of different things that you can do to help you be organized and figure out what works for you. So a lot of people use a spreadsheet. It can be a very simple spreadsheet. Track any income. If you're not sure if an expense is deductible, put it down anyway. Put a note

there. Just say, I don't know. Can I deduct my audible account? Not sure. Let them decide. but anything you don't write down or put on a sheet and give to the preparer, they don't know you have, right? We don't have crystal balls, so we need you to tell us. So that's kind of the first thing, is just be organized in some way. Another suggestion I have, especially for new investors, if you only have one or two properties, an easy way to sort of keep track of things when you're figuring it all out. We don't want people getting hung up on how to organize their expenses and not taking action. So a really easy method is if you have a single bank account for each property, most banks and credit unions let you categorize your expenses in your online app. So they do this for personal so that you can track and see how much money you spent eating out this month, but you can just as easily assign categories to your business related expenses or you can call the categories, whatever.

So if you're looking for kind of an easy way to track your overall income and expenses for a property, there's a good chance. you can do it within your online banking, and then use that year-end report to provide your accountant. So what it comes down to is just being organized, keeping track of anything, even if you're not sure. If you don't know if you'll get to deduct something, it's always better to ask. And another important thing to keep in mind

is that you might need to track some additional things if you use home equity financing or if you partner with someone. So anything you can think of that happened because of your investment or happened because of your business, write it down in some way, whether it's a spreadsheet or just notes and Google Doc, whatever works for you, just make sure that information is all available to them. Love it. What I'm hearing is this activity of organizing all of the numbers and presenting a picture of your financial position is called bookkeeping, right? Yes. in business. And your accountant or your tax preparer is not your bookkeeper. Bookkeeping is not a high dollar per hour activity. And if you're paying them to do that, you're probably likely way

overpaying for that activity. So do it yourself or hire someone, an assistant or something like that to help that for you, but do not hand over your bookkeeping work to your tax preparer. Yeah, exactly. You'll pay a much higher rate for them to do the same work. Another easy thing to do, If you're not sure what you can or can't deduct, if you have rentals, you can go to the IRS and see form Schedule E. That's what you'll report the rentals on. And you can look at the categories they have for different expenses and just use those same categories. So doing things like that, anything that sort of streamlines the process for your tax repair is going to help save you money. And we'll give you a better idea of where your business or your property stand throughout the year.

So it's not like a fun surprise come February. Love it. And this activity of doing all this work is not very fun, right, for most people? Yeah, that is the general feedback I get. And so it's just one of those things. And this is true across the board, right? No one opens a business to do, I mean, I guess bookkeepers, but no one else opens a business to do the bookkeeping, right? Like they open a bakery because I love baking and the bookkeeping is sort of the thorn in everyone's side. So that's why I stress, like figure out what works for you, whatever. makes this the least painful for you, just make sure you do it. They'll come a time where it makes sense to hand it off and pay for someone to do it. It's kind of that value of your time. At what point are you spending more money using your time on that? Then, you know, could you be finding your next deal or doing something more productive? But in the beginning, if you have to do it, figure out what works. It's kind of like a New Year's resolution, right? A diet or exercise. Figure out what kind of thing

works for you. If you hate spin classes, don't commit to that. Do weightlifting. Just figure out what works for you. Yeah. The answer is preparing to meet your tax preparer is not going to be fun. You're not going to enjoy it. You're not going to like it. Too bad. You have to do it. And otherwise, you're going to be out of pocket by a lot of money. I'm going to jump in here and give another tip. I'm going to say do it regularly. Waiting until December 30th to do all of your expenses for the whole year is going to make you want to quit investing. It's going to make you want to just be like, best, let's see if the IRS is going to catch me. this year. I would even say do it weekly, but definitely do it monthly. Be in your spreadsheet every single month for, I mean, January, does January have 30 days or 31? I don't remember. Anyway, 31. Okay, so there's 31 whole days of expenses. Now, do you have an expense every day?

If you've got one or two properties, probably not. But doing those expenses for January, then you've got a clean slate. You get into February. This year, February has 29 days. So you've got an extra day to get all your stuff done. But do it every month. month at the very minimum so that you're not just tearing your hair out so you don't miss a deduction. And so your tax preparer doesn't look at you like, really? Natalie is like my dream client does all their stuff by December 30th, right? If they do it by December 30th, you're probably way ahead versus the guy who does it on April 10th, right? Yeah, there's all kinds. Yeah, no, I'm saying don't wait until December 30th to do all of your whole spreadsheet for the

whole year. So, well, this brings up a good question about timing. I know on the last last, I think going into the last bit of March, Linda sends a note, don't anybody talk to me about anything. I'm ignoring you because I'm in full tax preparer mode. So, you know, at what point do I come to you with my things? What makes it the easiest? As early as possible. So you always get people who, like, April 10th will be like, well, I gave you everything. Why can't you get it done by the 15th? Well, because there's people who gave me everything two weeks ago. So like, it's kind of a first come, first serve. So you've got to keep in mind that even though, and it's always the people who will tell you, oh, it's so easy. It's so easy. You can do this in an hour. Well, okay, but I can't skip

everyone else. So different firms will have a different cutoff. Most places, I think it's April 1st, is kind of a pretty common industry standard. So try to get your stuff together as early as possible. We know sometimes you don't get forms till later on. You've got to wait for something. That's totally fine. Just be in contact in some way. You don't want to not talk to your tax repair. until April 10th and then suddenly have it be this last minute crunch because there's a good chance they're just going to file an extension and they'll handle your return later. So you've got to be kind of mindful of the time and how much work actually gets done in that short time frame at most tax firms. Let's talk about an extension. I just learned about this recently because I thought April 15th

was the drop dead. That's it. There's nothing, you know, so I never even considered an extension. What does an extension do? Does it cost me any money? Does it hit? me in any way? Am I more likely to get audited? The dreaded audit. I've never been audited, but... Knock on wood, Mindy. Knock on wood. So an extension gives you six more months to file, but not to pay. So this is really tricky for a lot of people because it means you can put off the actual submission, but you still need to do almost the whole return when you file to make sure you don't owe anything or you'll have penalties. So the amount of tax you owe is still due by April 15th. So if you're in a position where you get money back every year, you're really cautious.

You pay an extra each quarter kind of thing. You'd be good. But if you're one of those people who pays it all in April when you file and you do an extension, if you wait until September or October when you file it to pay, you'll have late payment fees. So there's no cost for an extension. It's free. It's easy to do. But just keep in mind that if you think you'll owe money or if something changed this year,

like there will be people who never owe money, but this year you know you sold a bunch of stocks or you did something crazy, make sure your preparer knows about it when you ask for the extension. Otherwise, you're going to get those penalties. Audit-wise, doesn't increase your risk. There's kind of an old wives tale that it decreases your risk, but the IRS is sort of like a weird algorithm, so we can't guarantee that. Okay, so I file for an extension. I haven't done all of my taxes yet, or my tax preparer hasn't done all of my taxes yet.

Do you just pay estimated? you overshoot it? Like, is there a way to figure that out? Because if I come to you on April 10th and say, hey, I need to do my taxes, you're like, we're just going to do an extension, but I owe money. Like, how do you figure that out? You do kind of a quick and dirty version of it. You're just going to take sort of your basics. We're going to ask, did anything major change this year? If you're like, oh, yeah, I sold $50,000 worth of stock. We're going to drop in $50,000 more. And we're going to kind of just look at that compared to last year and sort of rough estimate. it as close we can, kind of to cover yourself, you can always pay more. Like, if you pay,

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The best of the best stories now with even more from Hulu. Amazing. Have it all with do on Disney Plus. What are some big mistakes that you see people making in returns? What's like a really common mistake or a common misconception that people have? Yeah. So these are the things I would recommend, whether you're doing the return yourself. or if you go to a preparer, something to keep in mind that people, I don't know if they just don't

realize it or forget, is even if you use a tax preparer, when you sign the return, you're saying you looked over it and everything looked reasonable to you. So if you ever are audited and your preparer was one of those, you know, just started doing taxes last week people and they did a bunch of stuff wrong, the IRS, that can't be a defense. You can't say, oh, I didn't know. They did it for me. You still have to kind of have reasonable knowledge. of it, sort of a general oversight. So before you sign the return or before you submit your return, these are kind of the three things I see errors on the most that you should look at. So if you have real estate, if you have rentals, ask to look at your depreciation schedule first. This is

normally the only horizontal sheet in your tax return. So it's sideways. It's easy to find. It's called either an asset or depreciation schedule. The biggest thing you want to look for on there is make sure there is a separate amount for the value of the land or make sure the amount they have listed is less than what you pay because the error we see a lot is you don't get to depreciate land. It doesn't have a life. It's here forever. It is literally the earth. So you only get to appreciate what you paid for the building portion. So you can't put that whole amount as a depreciable amount of your tax return. We need to separate out land. So it's important for you to check before you sign off to have it filed that they backed out that value for land. Otherwise, you're claiming

too high of a depreciation deduction each year. And then when you go to a good preparer, they're going to fix it. But to fix it, you end up paying back money because you were taking too large of a deduction. So that's one of those things to make sure you look at before you sign off. Also good to look at on there. So land is kind of the key one. If you don't see that separated out, you're in a bad, you're just, you're in a bad spot. The next thing is if you did any renovations this year, if the preparer only asks you for the total, they don't ask for any details. And all they put on that depreciation schedule is the total. It's okay. But like I said, there's a more kind of more strategic way to do it. There's a good chance you can break out a lot of those things. So kind of your,

these should be sort of the easy freebies to spot is appliances. If you know you bought appliances and you don't see those separated out if they left them in there, those are always something you can expense because they're not attached to your building. So that should be kind of your, almost your test. If you know you bought them, your tax repair didn't deduct them, they just lumped it in, then you should look a little deeper. Another good thing to look for if you have rentals is make sure kind of the standard deductions are there.

I see a lot of returns where, so you get a 1098 at the end of the year that tells, you how much you paid and mortgage interests on the property. Often it also lists your real estate taxes. So those are pretty easy to grab. Very often, though, I don't see an amount for insurance. Insurance won't be on that form. It's not going to be on something a bank sends you or that is provided to you. It's up to you to tell your preparer that amount. But your preparer should also know that you probably insure your properties, right? So if you look at your return and there's no amount for insurance, you've got to kind of circle back. So look for things that you know you paid that you know should be there. Same thing when you're preparing, if you're doing it yourself, just kind of think to yourself,

you know, what expenses does a rental need? What did I definitely pay for? And you've definitely paid for insurance. So anything like that, if you think of it as what would I have not paid for if I didn't own this property, make sure those all make it on to the return. What about utilities? Are those, if I, as the landlord and paying the utilities, that's an expense that I can deduct on my taxes? Yep, but you have to make sure. So those are kind of a sometimes tenants pay them, sometimes landlords pay them, sometimes landlord pays it and gets reimbursed. So it is actually a cost to you. The tenant doesn't pay you back. Then you get to deduct that. So anything that you pay that you wouldn't have paid for if you didn't own that property, make sure it gets on there. What about when I go over there

to fix the light bulb for the tenant that get to deduct my mileage and those other things? Yeah, good question. So you get to deduct the light bulb. So we've got that going for us. You do not get to deduct your time. This is something I get asked a lot. Your time that goes into properties is not deductible. So don't issue yourself a 1099. Don't do anything crazy. Or you'll hear people who want to set up a management company so they can charge themselves for their time. that's not a good idea. It just turns your income into regular income with self-employment tax, so you're paying more. Don't do that. Just ignore your time. You don't get to deduct it. Move on. You're miles. So yes, this is one of the things I see missed on returns quite a bit,

is automotive or mileage expense. Most people do the mileage rate, which gives you a standard rate per mile you drive that you get to deduct. Something that makes it tricky is you are not allowed to deduct commuting. So same as your regular job. If you go from home to work, that's not deductible. If you go from home to a rental, that's not deductible. It's a commute. The way we make it deductible is you have to have a qualifying home office. If you have a dedicated office space at your home, that is where you run the rentals from or where you run your business from, and it is an exclusive use for an office. Now you're going from business location A to business location B, and now those miles are deductible. So home office expense is another one I see missed pretty often. Talk to your

tax professional or kind of make sure it's a dedicated space. It can't be like your game room. You've got a big screen TV, your Xbox, 4,000 games and like a little tiny card table in the corner where you put your laptop. Like it has to be its main purpose as an office. Okay, completely random, totally not specific to situation. What if it is the office and it also has a Murphy bed where sometimes when people sleep over, they sleep in that room? Probably okay because the bed folds up. That's still pretty gray area. I once worked for a CPA who said if a client ever has their home office audited, we're going to just send some movers over to move the bed out of the room before the auditor shows up. So you're probably okay if its main purpose is more of an office and it has a fold-up bed kind of thing.

But if it's clearly a bedroom that just happens to have a desk, it's sort of, if it walks like a duck, quacks like a duck situation. Okay, no, it's actually an office and that's just like 10 nights a year somebody sleeps over. Yeah, that seems more like an office than a bedroom. Okay, okay, cool. How do you prefer somebody to keep track? Do you have like a favorite app or do you just write it down? I used to have a mileage thing. I had some complicated taxes at one point,

but I just had a calendar in my, like a desk, not a desk, like a book calendar. And every day I drove someplace, I would just write down my mileage that day. Yeah, so you can do that. They just want you to keep an ongoing log and track kind of the details of it.

You can't just say, oh, you know, I drove 10,000 miles for the year. No, I can't tell you where or when or what. So as long as you have a daily log, it can be something if you are putting, events and things really like you know on Wednesday you're going to go to a property. On Thursday you're going to meet a realtor. If you're putting those on your calendar anyway, if you Google Maps it and just sort of save

the mileage there, it just has to be something ongoing and tracking. But an easy way to track this is with an app called Mile IQ. And that's what most people use. It's kind of a swipe right. If it was a business trip, swipe left if it was personal. And so at the end of each time where you arrive somewhere, you choose what kind of trip it was and it categorizes it for you. Oh, neat.

It's a really good one. Okay, so let's transition here for a moment. And let's say that we have a new investor who has bought their first house hack duplex halfway through the year in Pick Your City. Yeah, the local's you, Natalie. And so, all right, Charlotte. So I bought my first house hack duplex in Charlotte.

How do I go about thinking through my tax return for last year? Yeah, what I tell people is the easiest way to think of a house hack. Well, so let's clarify that first. I guess there's two kind of versions of house hack. I feel like that where the word gets used. One is if you buy a house and you rent out rooms in your house. And one is if you buy a duplex or a fourplex and you rent out other units. And there's actually differences tax wise. So if you buy a duplex, the easiest way to think of it is like you have two totally separate properties. You have a house you live in and you have a house. house do you rent? And so everything gets split between them, all of your personal tax deductions that are applicable, like your mortgage interest and real estate taxes, go on your schedule A for your half. The other half would go on Schedule E, just like it was a standalone rental. So that's assuming both are the same size. You'll just need to take all of your expenses that relate to the whole property and split them based on the square footage. So if your rental is 700 square foot and your personal is only three, the rental gets 70% of the expenses. So you just need to allocate your

percentage to it, split it up, and report it on their separate schedules. If one has its own standalone expenses, say you go in and put in all new carpet in the rental, nothing gets put on your schedule A related to your half. If it was exclusive in the unit that's a rental, report it just like it was a totally standalone separate rental. If it's something that applies to both, Like say you have lawn care every week, you have someone come and do landscaping. You need to split those costs between the two. So that's the easiest way to think of it. What about a capitalized expense, like a roof?

Yep, same thing. So if you did something like a roof and say it was $10,000, you would get to take 70% of that. So $7,000 would get capitalized and appreciated on the rental part. Personally, it's not deductible, but you still want to track it because probably what you're going to do is move out of this in a year right and do this again. So on your half, you keep track of improvements and costs, but they don't actually change anything tax-wise in the year they happen. So when I move out, do I begin depreciating the entire $10,000? Let's say it was $10,000. I live there for a year, and then I move out. So in the first year, $3,000 of that is not capitalized, and I'm not

seeing depreciation on that. But in year two, do I see depreciation on the full $10,000 improvement? Yep, it gets added to the basis on your side and we start depreciating it. The difference will be when they began. So on that rental half, January 1st of year 1, it goes into service. Your primary half, we don't get to deduct anything year 1. So your roof kind of shows up and begins getting depreciated January of year 2 when you moved out. And it turned into a rental. This is fascinating.

Hopefully I'm not the only one who loves this tax discussion here with this roof stuff. I did not know that. No, anybody who's still listening is totally into this as well. So here's a question that I have as a flipper. I'm a live-in flipper. I move into a house. I rehab the whole thing. And then after two years, I sell it and find another one and do it all again.

I know that as a flipper, I can't take depreciation on my supplies and things like that. But I don't have a good way to explain why. So depreciation is something we get to take on an asset, which is considered by the IRS, something you're going to keep for a long time in business use that's going to earn you income over an extended span. So kind of the theory to it is the older something gets, it should be worth less. And since you'll get to use it for 10 years, instead of deducting it all at once, we want to kind of match it up with as it's making you money. So we take a little bit of the cost over 10 years. In real estate with a rental, that's true. You're going to to own it for a long time potentially. So it's going to earn you money each year. So we're going to go ahead and deduct against it each year, a little bit of its value. With a flip, it's not really an asset that's earning you money. It's considered inventory. So inventory isn't something you're really going to keep for a long time necessarily. It's something, the easiest way to think of it is instead of thinking of it as a house, right? Like you're buying a house and then you're buying drywall and

carpet and fixtures and fixing it up, and then you're selling it in two years when you're ready to move out. If it was, say, a table maker, you know, when you were buying wood and nails and varnish and building a table and then selling it, you don't get to depreciate that table because it's just your product. It's just what you made to sell. So with a flip, it's just a product that you're going to resell. So you don't get to depreciate it. It's not a long-term asset earning you money. It's just something that you're creating to put on the market and sell for profit. Okay. Wow. That was a great. Good explanation. Well, what about this? So a true flipper gets to expense everything that goes in because it's inventory, right? To their flip, a live-in flipper, do they get to expense everything that

goes into their project? Yep. You've got kind of a few options, but the best way to treat it is while you're living in it, you can still deduct your mortgage interest and taxes, just like on a regular primary home. Even if you're not a live-in flipper, so to speak, like even if you're just living in a house and you fix it up while you're living there, you want to track all of those expenses that go into it because when you sell those expenses get to reduce your gain. So same thing in this circumstance. What Mindy would do is she'd move into the house. If she lives there two years, then that means when she sells it as a primary home, there's a good chance she gets to sell it tax-free. Yep. If you're married, you get to take

$500,000 of gain tax-free. So she can track all those expenses. She probably won't really need them because the gain exclusion is so large, but you still want to. So you keep track of them. the year you sell, you take those expenses and reduce your sale price by them, all of your improvements, your fixtures, everything you put into the house and you get that final number. And in Mindy's case, it's tax-free. But if it wasn't a flip you lived in, if it was one you were doing just on the side, it would reduce the tax you pay and reduce your taxable gain from the project. Wonderful. That's very helpful with that. Yeah, I have, I was going to say I've never hit the 500 yet, but I'm so... Is it a goal?

It is a goal. I want to hit the 500 at some point. Maybe he wants to pay taxes. No, I don't want to pay taxes. I just want to maximize my capital gains deferral. Exemption. What is that called? Exemption. I want to maximize my capital gains exemption. I've never made it to the max before. I think I'll be happy to pay taxes if you ever do in that situation. This house has the potential to. Yeah. Yeah. All right. So a question, we kind of skipped past this. I bought a house hack. and I'm renting the other rooms in my primary residence as a house hack. How do I think through that situation?

So this gets a little tricky, and I see this messed up a lot too. So if it's shared space, if it's within the walls of yours personal dwelling, not a separate unit, you can only depreciate as business use the square footage that is exclusively business use. So if you have four bedrooms that are all the same size, yours isn't business use. we've got to scrap that. If you rent the other three, we can depreciate the portion that's related to the square footage of those three and say there's a guest bathroom for them. We can depreciate that.

But like your living room, your kitchen, any of the space that is both personal and business, we can't depreciate. It's mixed use. So you've got to keep that in mind. What I'll see people do is say, oh, well, my room's only 200 square feet. The other 1,800 of the house is depreciable. And that's not the case. So if it's a shared space, we can't.

appreciate it, but there's a big benefit on the backside. So like we are just talking about with Mindy's Live in Flips, if you both own and occupy a house for two out of five years, then you can sell it tax-free. If it is something like a duplex, that's not the case, because now we have half is your house really and half as business property. Since we can't depreciate those mixed-use spaces, you've only got a small use in there. What it comes down to is when you sell, if you have have just been renting rooms of your house, like your primary residence within your walls, you still qualify for that full primary resident 121 exclusion. So you can still sell that totally tax-free. The only gain you're going to pay is that little bit of recapture on the little bit of

depreciation you did take, but otherwise it fully qualifies. That's kind of the trade-off. I love this discussion because if I'm in this circumstance and I have a four-bedroom house with two bathrooms or whatever, that I am renting out three of the bedrooms living in the other, and I intend to move this into a rental property or sell it in the future. I arguably have the most complex and difficult tax situation of anybody listening to this show. However, I'm probably also in this gray zone where I'm really not comfortable with my income or an expense profile with hiring a tax professional, right? Yeah. Is that kind of situation? Is that sum it up, do you think, in some ways? Yeah, it comes up quite a

bit because it is, I think, the starting move for a lot of people, but it is more complicated. Now we've got all these allocations. And especially when, like, if you've got a duplex, we have half business, half personal, and you live in it for a year or two, and then you move out, now it's all business. So like we have a split between all these things year one and year two, and then it totally changes. And now it's all business and we have to reallocate again. So even though it's kind of a beginner's investing move, that's what I was saying where I would almost recommend working with the tax pro your earlier years when you're setting everything up, this is a great example because there's going to be a bunch of weird like percentages on percentages

on percentages and splits of things. And you want to make sure to get that right in the beginning. Otherwise, that's the thing with rentals. You own them for years and years. It's just wrong forever. You know, fix it in the beginning. Love it. So at the beginning of the episode, we talked about how this might apply mostly this discussion to people earning over six figures or with rental, real estate or other income streams. really it seems like the complexities where it becomes really difficult to do it yourself are right here in this house hacking scenario and that maybe we should consider a couple hundred to maybe a thousand dollars in expenses in tax preparation and getting this right up front as part of the cost of doing business in a house hack. Yep, and that's one of those things I tell people. Like the way I'm set up, I do advising with my service.

So even if you've got a simple circumstance, it lets you know that as you're growing, as you're kind of getting your next properties, you've got someone to know it's getting set up correctly and you're getting the most of it. Like I said, you don't want to leave money on the table or do something wrong, whether it's one property or 10 properties. Losing money is a bummer. So you want to make sure you're getting all the deductions you're entitled to you and not filing incorrectly. like I said, what I see it quite often is people get to their third or fourth property and they're

like, okay, I'm ready to work with someone and I look at all their last years and they're all wrong. Now we've got to backtrack and fix them all. Like it's often a lot easier to just do it correctly from the beginning, work with someone from the beginning and get it set up right and know it's going forward correctly. And then you'll know what to do a little better for your next properties instead of if you do it wrong year one and no one helps you. You'll do it wrong year two and year three. and year four. So it kind of, it's based on your circumstance. But yeah, I'm a big fan of working with someone from the jump to make sure they're set up correctly to begin with. Well, okay, let's say I'm listening to this episode and I'm recognizing issues with past returns. Oh, I never saw that

sideways depreciation schedule. And I know that they depreciated the exact amount that I paid for it. What do you do when there's a mistake? Are you just out of luck? Yeah, it's the worst. You just have to give up, quit investing, go on. No, some people fix it. And in conclusion, everyone just give up. This is too hard. So what we can do is we can amend it. So you can always go backwards and kind of refile

a return. Where it gets tricky is with depreciation, this big thing, this huge benefit in real estate, if it's wrong for more than one year, it establishes what's called kind of a pattern of that with the IRS. And then there's a special form you have to file to fix it. So kind of the worst scenario is if depreciation, say someone has two rental properties, they owned one for two years, they bought one year one and one year two, and they both had depreciation wrong. If it's wrong for one year, we have to amend. If it's wrong for two years, we have to file another form. Now you have both and we have to file both. So I see that kind of a lot where, like I said, if you don't know you did it wrong the first time, you'll do it wrong the second time. And then it could add to what we have to do to fix it.

and it's one of those things where a lot of good tax pros can't move forward without fixing it, even if it does cost you money, like that's a bummer, but we've got to make it correct because a good tax professional won't knowingly file a wrong or an incorrect tax return. And so depreciation flows forward for the rest of the life. We'd be filing it wrong every single year if we didn't fix it. Okay, well, it sounds like it would compound, and the IRS doesn't take too kindly to not giving them all the money that they are due is my understanding. So you want to do it right. If you have a problem, fix it and move on. Okay. And I don't really know how to bring up the fact that the IRS assumes

that you take depreciation, even if you do not. But I want to throw that in here because that was something that I learned probably the first week I started working at bigger pockets. I read this somewhere. The IRS assumes that you are taking depreciation on your property. And when you don't take depreciation on your property, they still assume you are. So when you sell it, you have to do this depreciation recapture, which is something I know but don't know how to explain. So I'm going to throw that whole depreciation bomb your way and have you explain it. So depreciation recapture, like we mentioned earlier, the reason you get to take depreciation is because the IRS assumes the longer you own something, it's worth less and less. So they're saying, you know, if you bought a car

year one by year 10, it shouldn't really be worth anything anymore. So you've got a gotten to kind of deduct its whole value by then. Real estate just sort of threw a wrench into that. So where recapture comes in is basically if this item that they've said, you know, this should be worth less and less each year, now you go to sell it and it's worth more. They're like, well, wait a second, we gave you a deduction for 20 years. What do you mean it's worth more? So now what they're going to do is do a tax on that profit. So any amount of your gain related to that depreciation is taxed at a slightly higher rate. It's at your ordinary income tax rates instead of a capital gains. And it's just their way of saying, you know, we gave you kind of this, sort of this

freebie, this sort of this deduction all these years based on the fact it would be worth less, but because it's worth more, we want you to pay some of that back to us. And like you mentioned, they assume so depreciation is what's called allowed or allowable, meaning that they're assuming you did it. So if you, you'll hear this sometimes people say, oh, I won't appreciate it because then I won't pay that tax when I sell. You will pay that tax when you sell and you just missed out on the deduction for all those years. So it's important to make sure your depreciation is happening and happening correctly. Okay. And coupling back with the comment about you recognize issues and amending returns, how far back can you amend your return once I've had a rental property for seven years and I've

never taken depreciation on it? Can I go back and amend all seven years to take the depreciation? Do I have to pay a penalty on that? So if depreciation is the only thing wrong, and it was wrong for more than one year, there's just a special form we file with the current year. But kind of the bummer of that is say for seven years, you were deducting depreciation based on the entire purchase, not just the building. So now in year seven, we file this form and correct it. And it turns out each year for the last seven years you were deducting, you know,

an extra $10,000. now in year seven, you kind of have to pick up $70,000 of all of that over-claimed expense. So in the year when you fix it, if you were deducting more than you should have been, you pay it all back all in one year and it makes for a really rough year. What if I wasn't deducting it at all? Same thing. So then, though, it gets better. So I just had someone who did that actually where they didn't depreciate their property

for quite a while. It was like seven or eight years. And so then in the year they came to me, we got to a problem. put it on the books, set it up correctly, take all of that missed depreciation. So then in that year, they have a big deduction for all of those prior years depreciation expenses that they missed out on. Okay. So they would get more money back in theory. Yep.

Okay. Oh, so, hey, if you haven't been taking depreciation, now's the time to take it. Yeah, I was just talking to another tax pro who just called himself a 3115 hero, which is the name of the form you file to get all that back, because that's exactly what happened. The client came in, hadn't been taking it. And he got to be like, guess what? Here's $50,000 in deductions. And they were so excited. He didn't do anything special. It's just what you do to fix it. But it makes for a really good looking year on paper. Oh, sure. And then the next year, it's just a regular return. You're not penalized or anything just because you fixed it. Correct.

Then we're just back to normal. Okay. Oh, well, that's awesome. Yeah. Okay. Natalie, is there anything else you want to share about taxes or preparing for your taxes? Is there anything like that before we get to Our Famous For? I think that is really it. Just be mindful of your taxes. Don't believe everything you read on the internet that people tell you you can or can't do. Check with a professional. A lot of stuff gets set up wrong.

And just make sure that, like I said, that you're as organized as you can be, that you just give all of the information in some way or another. You don't need to know all of the tax laws. Like, that's not your job. If you're hiring this out to someone else, and that's their job, is to know how to maximize things for you. But they need the details. They need to know as much as possible to do that.

So if you do a renovation, make sure they get the details of that, that they know what was done, how much it costs, kind of all of these little breakdowns. Because if you just tell them I spent $10,000 on a house, they can't do anything with that, really. They're just going to add it. So make sure you just track everything as well as you can in a method that works for you.

Don't wait until the last minute. and find someone who you work well with. That's, I think, a really important thing. There's lots of good tax preparers. They're not always a good fit for you and what you are comfortable with. I'm very kind of tech-based and very automated. So if someone is very on paper,

they don't know what a PDF is or how to open it, we wouldn't work well together. So find someone you work well with, figure out a system that works well for you, and just make sure that even from the beginning that you're working with someone if you want to make sure you're actually maximizing the tax benefits of your real estate. Wow, that was a great.

That was a great wrap-up. Okay. It is now time for our famous four questions. These are the same questions we ask of all of our guests. Natalie, what is your favorite finance book? For a finance book, probably one of the better ones I've read is the cash flow quadrant, which I'm sure everyone kind of brings up. But it's a good one.

It's a good one to kind of get people started. That's one of the rich, dad, poor dad kind of series of books. So I think that's a good one. That is a good one. I haven't actually read that yet. We've not heard that one mentioned before. I do like that book a lot. And it's a very, it's a very good intro to the framework of how we think about assets and income and those types of things. Yep. And liabilities. All right, what was your biggest money mistake? Or let's change that up. Today, what is the biggest mistake that a new real estate investor is making on their tax returns? on their tax returns, the biggest mistake I think someone is making is not getting all of their deductions.

There's a lot of little things people miss. Two that I see a lot are your cell phone and your home internet. It's like I said, 2020, we're running our businesses from our phones these days. So you get to deduct a portion of those. So the biggest mistake I see people making is leaving money on the table. If you are legally allowed to deduct it, you want to deduct it. Love it. That's awesome. What is your best piece of advice for people who are just starting out? I think that kind of tags on with the biggest money mistake there.

Best advice for someone new would be not to get hung up on all of the tax and accounting. All day long, I talk to people who don't even have a property yet, but they're talking to me for two hours. They're wondering about LLCs. They're wondering about QuickBooks. Make sure that you put your time into the business first and the rest kind of follows. is it don't put your cart before the horse. It's easy to kind of feel productive with busy work, like feel like you're working towards your first deal because you're talking to me for an hour,

but I'm not going to make you any money. Like, that's not my job. So make sure you're actually putting your time into income-generating activities and not sort of spending forever, making spreadsheets about hypothetical, imaginary things. Love it. The saying that I've heard,

and maybe if I'm wrong, is don't let the accounting tail wag the business dog. Yeah. Make money for, and then let your accounting take care of itself. Yeah, absolutely. All right, what is your favorite joke to tell at parties? How do you find Will Smith in a snowstorm?

You look for the fresh prints. Ah, nice. That was good. I like that. That's a good one for wintertime. Yeah. Okay, Natalie, where can people find out more about you? So the best place to find me is on my website.

It is colotax.com, K-O-L-O-T-A-X. I've also got a YouTube real estate tax strategist, and, of course, you can find me on Bigger Pockets. I'm on there every day, answering questions and talking with people. Same. And you do prepare taxes for real estate investors. Yeah, I do that in between my time on Bigger Pockets when I'm not too busy. Yeah.

Well, thank you so much for coming on the show today. This was really informative. As you can tell, I am very enthusiastic about taxes. So I really appreciated this conversation and learned a lot. All right. Perfect. Thank you guys for having me. I think I need to correct, Scott.

I think you're very enthusiastic about paying as little tax as possible. That's right. Yeah. How do I tax efficiently distribute returns to shareholders, which is myself in my real estate? Okay, Natalie, thank you so much for your time today. We'll talk soon. All right. Thanks, guys.

from episode 112 of the Bigger Pockets Money podcast. That was Natalie Colody. Scott, how did you think that show went today? I thought it was fantastic. I think we talked about a lot of the big points in the show. I just wanted to give a quick shout out to Natalie as being one of our newest moderators on the Bigger Pockets forums. You can see her and her thousands of posts to contributions

to our Bigger Pockets forums by checking out her profile on Bigger Pockets. Yes, and you can find the link to Natalie's profile, along with links to all of the rest of the things we discussed in today's show notes at, which can be found at biggerpockets.com slash money show 112. Scott, I am about done with today. How about you? Let's get out of here. Okay.

From episode 112 of the Bigger Pockets Money podcast, she was Natalie Colody. He is Scott Trench and I am Mindy Jensen. And we are hopping out of here to continue on with that kangaroo theme. Your pouch joke was much better. I like the hop-a-jerk. Let's jump on out. Let's jump on. See, that's better, too.

Scott is just so quick with it. Okay, bye.