BiggerPockets Real Estate Podcast - 370: Tax Hacks to Juice Your ROI with Amanda Han and Matt MacFarland

Episode Date: February 20, 2020

Get to know enough CPAs, and you'll hear the "light bulb" story. "I was helping this real estate investor with her taxes... and thought, 'Why am I not doing this?!'" Yes, there are POWERFUL tax breaks available for rental property investors. But you have to know what to look for! That's the focus of today's episode AND the new book (out today!) from Amanda Han and Matt MacFarland: "The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors." You'll hear Amanda and Matt break down the basic concepts you need to understand in order to reach your goals, outline the questions you should ask your CPA, and take on the notorious "Do I need an LLC?" question. You'll also learn about more complex strategies like advanced/bonus depreciation, Opportunity Zone investing, and 1031 exchanges... plus, how short-term rental investors and flippers can optimize their tax strategy. This episode is packed with free information that is literally valuable—meaning it could save you thousands, or tens of thousands, of dollars! Download this one, check out the book, and subscribe to the BiggerPockets Real Estate Podcast so you won't miss the next show. In This Episode We Cover: How Amanda and Matt ended up doing tax/real estate What they do and how they help clients What their new book is all about How to save tons of money in terms of taxes Best time to work with a CPA How an LLC plays into a real estate investor’s life 3 benefits of working with a professional Importance of having a system in place with the help of tax and legal advisors How cost segregation comes into play Who does a cost segregation study Other things investors should not do on their own Why it pays to be cautious when it comes to 1031 exchanges Why buy and hold is preferable over flipping from a tax perspective Cool things about short-term rentals from a tax perspective What an Opportunity Zone is and why it matters What a flow-through entity tax break is And SO much more! Links from the Show BiggerPockets Forums BiggerPockets Webinar Explore Companies on BiggerPockets BiggerPockets Bookstore IRS Website   Check the full show notes here: http://biggerpockets.com/show370 Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show 370. There are so many tax loopholes, especially designed for real estate investors. So it's just a matter of making sure you're taking advantage of them. And of course, with the recent tax reform, that's just been even better for real estate investors of all types. So, yeah, definitely. It's just a low-hanging fruit for all investors to make sure you capitalize on those tax savings. You're listening to Bigger Pockets Radio. simplifying real estate for investors large and small.

If you're here looking to learn about real estate investing without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. What is going on, everyone? This is Brandon Turner, host of the Bigger Pockets podcast here with my co-host, Mr. David Green. David the taxman green. What's up, buddy?

Yeah, I'm anything but the tax man, as people will realize when they listen to today's show. But I'm becoming a tax man, and that's all that's important. Every day I'm getting better. There you go. That's awesome. Well, today's show is about taxes, but not in the way you might think. We don't just sit there and drill the tax code into you guys. It's actually full of stories, full of tips, ideas.

We talk a lot about opportunity zones, 1031 exchanges, cost segregation. Those are all big words, but we break them down. and knowing the fundamentals of kind of how they work could change your entire life. In fact, I tell the story in the podcast of how one of those saved me $80,000 last year, actually working with Amanda and Matt, our guest today. So Amanda Hahn, Matt McFarland, those are our guests today on the show. But before we get to the show, let's get to today's quick tip. All right, you're about to hear how important it is to have a great CPA union team,

somebody who understands this stuff. But that goes for everything, really. Like, real estate investing is a team sport. That's why David talks a lot about the, what, the core for? So here's the deal. Bigger Pockets has an entire directory of real estate professionals that can help you do deals, agents, lenders, construction companies, even wholesalers if you're looking for deals. So you can find them and go over to biggerpockets.com.

Go to the navigation bar on the top. There's a word that says network. Hover over that. and then go to companies. And you can search by area and you can vet companies by looking over their forum posts and deals that they've done,

references. So jump in, reach out, build those relationships. Got to build your team. There you go. That's a quick tip. I use that directory.

I'm on that directory. That is one of the best kept secrets of bigger pockets. Honestly, you should be, people reach out to me all the time and say, hey, do you know someone

that can do this or that and they would have found it if they had used that directory. Do you remember that old skillet song, best kept secret of our generation? You're the best kept secret. No. Okay. Anyway, moving on.

Hey, one last thing before we jump in today's show. You guys remember Josh Dorkin? Of course you do. He was the host of the Bigger Pockets podcast here for like the first five or six years. And then he stepped away when his daughter went through some medical struggles a couple years ago. You probably heard the story. He's been back on a couple times to talk about it. But here's the cool thing.

Josh has a brand new show. It's called Undeniably Curious. It is awesome. It's him interviewing people, both celebrities, there's athletes, there's business people, there's entrepreneurs about a, kind of like how to get a better life, how to do better things in life, how to we get better at life. It's a really, really cool show. And guess who's the guest this week? That's right. This guy, me. So I'm on Josh's show this week. So let's do Josh a huge favor for thinking for starting bigger pockets, first of all. And everybody listened to this after the show,

go over and listen to the undeniably curious podcast with Josh Dorkin. You can also just type into your search bar like in your podcast app, Joshua Dorkin. You'll probably find it. But it's called Undeniably Curious, and I am on the show this week, Brandon Turner, so go check it out. You'll hear a little about my story, but more non-real estate stuff. We talk about a lot of other fun stuff. So again, go check it out, undeniably curious. I have an uncomfortable question for you. If your rent collection drop to 80% next month, how long would your cash flow hold up?

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not just a checkbox. One uncovered claim can undo years of progress. Before your next acquisition, review your insurance. Talk to NREG and get investor-specific coverage from specialists who actually understand real estate at NRE.com slash BPPod. That's N-R-E-I-G.com slash BPPod. Have you ever lost a DSCR deal

because the financing just took too long? Red flags popped up late. The lender needed more time. The deal fell apart. Well, our friends at Dominion Financial just launched a program to help prevent that. With their new Express rental loan, you can close in 10 days or less. And they still offer their price beat guarantee. So you can get great pricing and a timeline you can count on.

Fast, simple, reliable. That's Dominion Financial. Check them out at biggerpockets.com slash dominion. That's biggerpockets.com slash dominion. And with that, David, what do you think we get deep into the world of taxes and urban hip hop. Sound good? Yeah, that's exactly what I was hoping to do today.

Let's do it. You'll understand why I said that later. Let's get to the interview with Amanda Hahn and Matt McFarland. All right, Amanda and Matt, welcome to the Bigger Pockets podcast. Amanda, good to have you back. And Matt. You've not been here before, have you, Matt? I don't think so.

This is my first time. Thank you for having me. Wow. All right. Well, we have some initiation that every new pot. I'm kidding. We don't. But I do want to know a little bit about your story.

Again, we've heard from Amanda. And Amanda, I want to go through your. your story real quickly. But then I want to hear from Matt real quick on what kind of his story is. How did he get into this whole tax slash real estate game? So why do we start with, let's start with Matt today. Okay. So yeah, I've been a CPA for over 20 years. I started one of the big four accounting firms and I was there a couple years and my big aha moment was working on, you know, wealthy individuals making a lot of money. And, but my aha moment was working on some 60 year old guys tax return and all he had was he was retired. He had rental properties galore. And you're like,

okay, well, let me see if we take his profit and loss statement on return, add back to depreciation. I mean, this guy was making like $200,000 in cash flow. And I was 24 and I was like, what in hell? This is awesome, you know? So that was kind of my aha moment and then started tailoring what I wanted to work on to be, you know, real estate and small businesses and things like that. and then left Deloitte, went to a smaller firm for a few years, then Amanda and I decided to kind of start our own practice, I guess, 12 years ago now. Very cool. And Amanda, where does your story go similar?

Yeah, my brief story. So I come from a family. I'm a third generation of real estate investors from my family. But, you know, my parents didn't really tell me to get into real estate. And it was, you know, Matt and I through work, through our jobs, that we realized that real estate was such a good. great strategy for taxes and for wealth building. So we've been fortunate to marry our two passions, essentially, you know, our passion for real estate investing and our passion for tax strategies

and to be able to do both of those at the same time and getting paid for it. So it's always a good thing to, you know, do what you love doing? Yeah, that's cool. What about your eyes as personal? Like, what do you do in real estate personally? Like, are you guys out there, like swinging the hammer every weekend out in the suburbs or what do you guys do? What's kind of your choice? So, I mean, for us, most of our investments are passive, passive, you know, more so turnkey rentals that we have really good family members and friends that are managing for us. Although we, for our clients, we have clients that do all sorts of real estate from flipping to wholesale to birth strategy or just, you know, traditional long-term hold investors. Yeah, very cool. So today's show, obviously, you know, we could go through hours of your story and how you got into one deal to the next.

but most people here are probably listening because they want to know how they can save money and how they can make more money and keep more money. And so that's the goal today. Of course, you guys have that amazing, well, the first amazing book, tax strategies for the savvy real estate investor. And you have a new book coming out published through Bigger Pockets shortly. Can you give a quick like 15 seconds on what that book is? And we'll talk about it more or later in the show. But I'm just curious. Sure. So our original book did really well. I think I heard a lot of feedback on people just saying, I was really afraid of taxes and it really was presented in a way that was easy for the everyday

investor to understand. But we also got feedback that people wanted a little bit more advanced strategy. So going beyond just what can I write off, but what are some things I can really do to significantly reduce taxes from, you know, 50,000 to 10,000? And so the second book we set out to do just that, you know, similar format in terms of funny stories or sometimes horror stories, but showing how you're able to really slash your taxes with a little bit more advanced tax planning. All right. And so in order to read this book, you have to be a CPA and super smart, correct? No, no. It's definitely not written for CPAs. And that's kind of, I think for Matt and I, that's the reason we started writing our first book to begin with was, you know, for us,

we couldn't find any tax strategies books that didn't put us to sleep. Yeah. And we're CPAs. So we're like, gosh, how does anyone going to really understand these things, especially for people who are not a, you know, not CPA spied trade. Yeah, that's a goal. As long as somebody doesn't fall asleep reading it at 9 p.m. at night, then we're good, right? Yeah, there you go. That's a win right there with a tax book. And it is.

It's fantastic. Both of them are fantastic. But I want to go into a couple of the strategies that you outlined in the book and something people may know a little bit about, but they don't know the entire story. So a quick, a quick backstory and what I want to, where I want to start. So last year, so a lot of people, maybe I already know this, but if not, Amanda and Matt actually do my taxes every year. And so,

Last year, I remember you guys sent me an email and it said that I owed, I mean, it was a chunk of money because I make good money off book sales and off of selling properties and some off cash flow, whatever else. Anyway, I owed a lot in taxes. It was like, I can't remember. I think the original email you sent me was, it was $150,000 I was going to owe. And I was like, whoa. And I was expecting. I knew it was going to come. And I had some other huge, like, you know, big windfalls last year that just worked out well. And I knew that was coming. And then I, and then you said some, one of you responded back with, oh, oh, we still have that cost segregation study coming back on the apartment you own in Ohio.

And I said, oh, yeah, that's right. And you said, that's going to change this a little bit. So then you send me a follow-up email. And it was, okay, you're now, oh, I think it was 80,000 or 70. Oh, it was like 70. It basically dropped like 80 grand or something like that off of these couple of cost segregation studies that I did. And like my jaw, like just hit the desk, right? Like, like, how do you save that much money off of owning a rental property that actually

while I own that property wasn't that great of a deal. I mean, it didn't make a lot of cash flow. I had a lot of ups and a lot more downs and ups. I eventually sold that property 1031 to something else. But how do you have a deal that's a mediocre deal in terms of cash flow? It didn't really go up in price. I didn't buy in the path of progress. Yet I still saved a ton of money in taxes. How does that work? Can you guys explain that? Yeah, I mean, it's all has to do with depreciation. I mean, depreciation is probably one of our favorite things about being a real estate investor and doing taxes for real estate investors. So a good way to think about it for people who aren't aware of what it is is,

you know, you go out and buy a stock, right? You can't write off the stock when you buy it. You don't write that off until you sell the stock years down the road, right? But with rental properties, the IRS allows you to take paper, we call paper write-offs every year for a portion of the purchase price and you spread it out over time. And so that's what we call depreciation now. What you were able to take advantage of the cost segregation is just it's accelerated

and depreciation is taking more sooner than spreading it out over 27 and a half years or 40 years or whatever it is. You know, so it's a legal tax strategy to take as much depreciation sooner than later. You know, you're still getting in the same amount. It's just can we take more over the first five years versus over 27 a half years so you can get more deduction now, save more taxes now, reinvest your money and go out and buy more properties, right? I mean, that's the idea.

That's awesome. So when Brandon sold that property, did he have to pay back any of the? the depreciation gains that he was able to write off of his taxes? Generally speaking, you would, but as Brandon mentioned, he did a 1031 exchange. So there's ways when you do a 1031 exchange to also kind of incorporate the cost egg before and maybe even incorporate a new cost egg on the replacement property to kind of offset that potential depreciation recapture tax is what we call it. And that right there is why we want a good tax professional looking at this.

Because for Brandon and I to try to learn like the intricacies, I mean, What you're basically saying is he bought a property that maybe lost money, but he made money because he could accelerate his depreciation into like a five-year window and offset the income he made from other things. Then he would have had to pay it back when he sold, but he did a 1031. So that accelerated depreciation went to the next property, but then he could do the same thing on that property.

That's becoming like four levels deep of confusion. And this is why you want to have a book like this and people like you guys, because it's one thing to understand the actual ability, to do it, but it's another to have a person who understands the parameters of how to get it done and make sure you're doing it legally. Yeah, I love how you just kind of summarize that, David, because that's exactly the goal, right? For us as CPAs and even our intent in writing the book, we don't really, our intention is not for the everyday investor to become a CPA and learn, how do I accelerate? And what does it mean? Is it over five years? Is it immediately? That's all

the tasks for your CPA to do. But you need to kind of at least know the basics. So you have a conversation with your CPA or when you're analyzing a deal or, you know, like in a situation where you're about to sell your property, understand that that is a time when you need to talk to your CPA and say, hey, I'm buying something or I'm selling something. What does that mean? How can I take advantage from a tax perspective on this transaction that I'm currently looking to get involved in? Yeah. And let's be honest. Like there's a lot of CPAs out there where if you were to ask them, you know, should I do a cost segregation study? They'd be like, uh, what? Like because they don't the tax code is so big that you can't specialize in everything. So like the same guy that

prepared your business taxes or your personal tax return might not be the person that you need in your real estate business. So I'm wondering at what point, how many rentals does a person need, how far along their journey do they need to be able to hire somebody who's like a legit real estate focused or at least understands the power of real estate and all these strategies? Where in that journey do you think somebody should start looking for a more professional? Yeah, that's a good question. I do get that quite often. You know, how, what's the number of properties I should own before I hire a CPA or how much income should I be making? I think as a strategist, the way we look at it is actually not based on those two criteria.

Rather, we look at it as what are your plans for real estate? So you could be someone who owns a rental property, but for many years you don't plan on doing anything else. And maybe you already have the best strategies in place that you don't really need a whole new strategy. That's one extreme example. The other extreme example might be you're just starting. out. You don't own anything yet, but by the end of this year, you have plans in place where you're going to end up with three or five or over the next two years. You're going to have many rental properties. That might be a good candidate for tax strategy and tax planning because oftentimes you want to

plan ahead so that you have the right foundation set up and not have to unwind bad structures or old, you know, bad tax returns with bad depreciation two, three years down the road. So, you know, depends on kind of what your plans are in real estate rather than, you know, what where you currently are in real estate. That's a really good way of looking at it. You know, early on, like, I, and I want to actually cover this question, even though we probably covered it in the other interviews that we did, we've done with you, Amanda, but it's just one of the biggest questions we get, and that's the LLC question.

So early on in my business, I, like, I'm really young, 21. What did I do? I went on my county or my state website, how to form an LLC. I formed an LLC and then I paid some money to somebody and then I filled out some paperwork somewhere and then I let it sit there for a while because that's what you have to do to invest in real estate. You have to go open an LLC and then you're legit, right?

That's what people tend to think. I'm kidding, of course. What is the truth? I mean, with an LLC, I mean, because had I consulted you, I didn't know who you were, but had I consulted you when I was 21, things would have been very different. I still may have opened the LLC,

but I wouldn't have just opened some random thing and just let it sit there. So where does the LLC play? into a real estate investor's life, especially for a newer investor? I think the way we look at LLCs, especially for real estate investors who are going to own, we'll call it, let's say we'll talk about rental properties. At the end of the day, actually, from a tax perspective, you don't need to have an LLC to own rentals or run a rental property business.

So from a tax perspective, nothing changes whether you own your property in your personal name or whether you own their rental in the LLC that you own, you know, 100% of with you or you and your spouse. Really, it's actually comes down to asset protection, you know. And so obviously we're not attorneys, but the way we talk to our clients about it is, you know, where are you at in your stage? What are you, what assets do you have you're trying to protect? What future assets are you trying to protect?

And, you know, can you accomplish your goals with creating the LLC for asset protection or umbrella insurance or, you know, and we always obviously recommend they talk to attorneys because that's really where they're going to get the best advice in terms of the asset protection. Real quick on that note then, because I've been asked us and I'm not even sure the answer. How do you approach the attorney slash the CPA? They're two different people that we don't have generally don't have CPA attorneys, right? So in the common advice, even though we probably even gave it in the introduction of the show,

is consult an attorney and a CPA. And like, do I just get both of you guys on the phone? Do I just say, hey, can we set up a three-way call? Is that how that should work? Yeah, that's a really great question. And that's exactly the right answer, right? So oftentimes when a client comes to us and we talk about legal entity structuring. Now, Matt used a very simple example of, okay, someone just holding a rental property by themselves or with the spouse.

There's not really any tax implications one way or the other. But if you're flipping real estate, if you have other partners involved, there's definitely tax considerations to whether I have a legal entity or not. If so, what type of legal entity? And part of that discussion is, you know, the benefit of tax savings as well as asset protection. and oftentimes we say, okay, you know, here's our tax recommendation, but don't form any entity yet, right? You're going to talk to an attorney, and they will make a legal recommendation. Once they've made a legal recommendation, then we all come to the table collectively, whether it's a conference call or an in-person meeting or just the joint email. So we're all on the same page. What did the attorney say? What did the CPA say

and do those match? Or, you know, if they match, great. Let's go ahead and start formation and how to use it. if they don't match, then it's time to get on a call and say, okay, what are the, what's the disconnect and are there things that could be done to make sure everything works well together for the investor? And I think that's really key getting everyone together to the table because as an investor, you don't want to be the go-between playing telephone and say, okay, this is what my CPA said or that's what my attorney said. Oftentimes you're not relaying the right information. And it's also just a waste of your time as well. But yeah, I mean, I think for most investors, the question of whether I should have an LLC actually comes from this, this giant myth that's out there,

that people feel like they need an LLC to write off expenses for their taxes. And, you know, we talked about it like you said, Brandon, in one of our previous podcasts. That's just not true. You know, I would say 90, maybe even 100% of the expenses that most investors will have can be deducted whether you have an LLC or not. Yeah, that's cool. Yeah. It's just such a huge misconception. In fact, I talked to a gentleman yesterday who said exactly what I've been, he said about himself exactly what I've been saying for years is that many people use the LLC question and the whole like, well, I don't know if I need an LLC as an excuse not to take action rather than a legit concern. It's like, well, I don't have an LLC, so I guess I can't really invest yet.

It's a whole lot easier to say that than I'm afraid or I'm not really sure what the next step is or I'm just too busy to invest. It's easier to say, well, I don't have an LLC. and so people have this fear. Other people are like just totally afraid that they're going to lose everything if they don't have an LLC. Ironically, literally, they know that if you try to buy a property in LLC, it's difficult anyway. Like most banks won't lend on a residential property if you have an LLC. So it's like it's actually the opposite.

Like having an LLC can actually hurt them and make it much more difficult. So consult with a CPA and an attorney on a conference call on kind of what the best avenue there is. But yeah, there you go. You know, I want to comment on one of the reasons. I think people don't want to consult with professionals is because it could cost money. And it's very short-sighted. That's kind of how the amateur looks at everything is they say, well, what's it going to cost? As far as the professional says, well, what's it going to save me?

Very similar to the real estate business where they say, I don't want to pay a commission. So they hire a really bad agent who's really cheap. And then they lose tons of money selling the house. There's three benefits that I can see to why I would want to consult with a professional. And I want to see if you guys agree with this, Amanda, Matt. The first is asset protection, what you just mentioned. This is a way to protect yourself. It's a way to play defense.

When you structure yourself the right way, you're protecting what you've already got. The next would be tax savings, how to save money, like what Brandon just went through. This is a way that he could offset some of the other income he made. That's offense. That's actually putting money back in your account. And then the third is when you actually look at what you're doing and you consult with someone and you keep really good records, it forces you to become aware of your profit and your loss. You may think that you're making money and you find out you weren't.

this happens to me all the time. I think I'm raking it in and I look at my expenses and I say, oh my God, where did all the money go? And other businesses that I just thought were doing okay, I'm like, holy cow, I'm crushing it on these. And that you would never think to do that until you have someone else looking at your books and looking at your numbers because they're looking into you. And it allows you to make adjustments, right?

I can pour the gasoline on the right fire, the one that's burning well. And I find my 20% where I know that I'm doing good in business. So you may be flipping houses and doing burrs and buying big buildings or syndications. And once your tax professional looks at this and they say, did you realize that you're making like three grand on a flip? You're taking this much risk and that's all that you're getting. And on these deals, you're doing really good. And maybe you can actually adjust your business plan around that advice. Would you guys agree that in your experience, that's what you've seen?

Yeah, yeah. I love that story because that's when we see quite often. Unfortunately, what clients is say, hey, I flipped a property. I'm making a lot of money and I have a big tax problem. And when we ask the follow-up questions, you know, what was your hard? Is that all the expenses? What about the hard money loan interest and the points and the fees? After all that, it's like, oh, actually, no, I didn't make as much money as I thought. So yeah, if you have someone helping you along the way, you have good financial statements where you can see how you're doing in real time. I think that's

very helpful than finding that out, you know, next year or maybe even next April. So. Yeah, it's not uncommon for someone to, to your point, David, like, could they finally get around to looking at their organizing of things and it's 18 months down the road? And that's a lot better to figure that out in month three or month four and do that quarterly than it is to do it a year and a half later, you know. Yeah, you know, I'm going to say this on the show. I'll probably regret that I'm saying this. When I started selling houses for the David Green team, I am not the guy that wants to slow down to look at the numbers. I didn't have anyone in the team to do it.

And my philosophy was, hey, I'm just going to make as much money as I can and let the check. fall where they may. In hindsight, it still probably was the right call that I didn't stop to look at what I was doing and said I just kept making the money. But what I found is when I did bring someone into look, the amount of taxes that I had to pay would make you sick if I told you guys how much because we weren't keeping records of all the people that I hired and paid and the salaries. They just weren't being noted. I was told it was being noted and it wasn't. And I went almost three years without tracking any of that and had to pay way, way more to the IRS than I should have because I didn't keep good books. Like literally, for the last two years, I've almost been working

for free just to pay back the taxes that I made a year ago, right? Very discouraging. And now that it's actually, I have people in place to do that, what I'm thinking is over the next 10 years, that will have, that will save me over a million dollars, probably closer to two million dollars that I put the systems in place right now. So the point isn't I'm beating myself up because I was going fast and being successful in growing a business. It was still better to grow a business and then figure out how to how to track everything. But the sooner you can put these things in place, it's not just saving you the money when you first do it. It's all of the future of your business that you have. The next 40 years, if you wait 10 years to do it, you will be losing so much that you're not aware of.

Yeah, exactly. Well, yeah, you got to play to your strengths, right? I mean, you know, you know yourself and you know that, hey, I'm very good at taking action and doing this. I'm not very good at this over here, or doing the numbers. So go out and hire somebody who can do that, or whether it's a CPA or whether it's a team member that's in-house and doing it for you. I mean, you're not trying to learn everything yourself, obviously, or do everything yourself.

Yeah, and I love how you use the word systems, right? Because I'm a big systems person, and we're not saying as an investor, you need to stop doing what you're good at, but you just need to have the systems in place with the help of your tax advisor, your legal advisor, so that these things are naturally built into your everyday business

because the goal is not for you to stop doing. doing what you're good at. We all know that there are so many tax loopholes, especially designed for real estate investors. So it's just a matter of making sure you're taking advantage of them. And of course, with the recent tax reform, that's just been even better for real estate investors of all types. So yeah, definitely, it's just a low-hanging fruit for all investors to make sure you capitalize on those tax savings. What are some of the tax reforms? Like, what are some things have changed in the last couple years, especially since the first book came out that real estate investors are being affected by. Yeah, I mean, there's been many changes. One of the more notable

ones. So, well, let's start with cost segregation, right? Accelerate depreciation always has been available. But as part of the tax reform, we now have a 100% bonus depreciation on a lot of assets. And what does that mean? And bonus depreciation just means that instead of writing something off over five years, 17 years, or 27, even 40 years, you might be able to write it all off immediately in the first year. And so that's huge when we talk about, you know, if we, for people who are in the Airbnb business, for example, right, short-term rentals, a lot of times we have to furnish our properties

with furniture, microwaves, all types of stuff. Those things used to have to be depreciated over a couple years, but currently you can take an immediate right off for it this year as part of bonus depreciation. So it makes cost segregation, you know, even better than what it used to be. Yeah. Can you, can you describe real quick for those who are not sure exactly? I mean, we talked a little about cost segregation earlier, but basically, I guess maybe just tell me if I'm right around here and how I usually just explain it. It's like you have a house, but in reality, you don't have a house. You've got 400 square feet of carpet and 800 square feet of tile and you've got

75 windows and you've got, well, hopefully not that many. But you've got, you've got, well, hopefully not that many. all these individual parts and we're saying the IRS says you can take a stove over five years or seven years. So why would we take the stove over 27 and a half, which is the whole house as a whole? So we're basically breaking out all the individual little pieces so we can deduct them over a five year or seven year period. But now with bonus depreciation, we're now deducting them over a one year period. Is that right? You should be a CPA. I should be a CPA. There we go. All right. So that's the power is that year. And is this something that somebody can just go and, oh, actually, let me ask two questions on the cost segregation thing.

Is somebody today who's listening to this who owns a rental property, maybe two rental properties, small house duplex, $200,000 or $300,000 in assets that they own, got mortgages on it, should they be looking at things like cost segregation studies? Or is this for the David Green, Brandon Turner, you know, I own dozens of properties kind of situations. Where is this important? That's a good question. I think that's a misconception, too, that people feel like cost irrigation is only

for, you know, the ultimate investor, like the two of you, uh, or, ultimate investor. That sounds like a TV show. Yeah, we should make a TV show called the ultimate investor. We're going to do it. Can we start hashtagging ourselves that way on social media? Yes. Can I get a royalty for that?

Yes. Today on the ultimate investor. Somebody needs to make. A shit monk in the attic. Yeah. Take like a video of the ultimate warrior running around and the radio. Put Brandon's face on it and my face on it. That would work.

That would work. That's a good. I'm doing that. Yeah. Or large commercial property investors, right? Yeah. You know, okay, those are the people for cost surrogation. And that's true, right?

The more properties you own, the larger, the dollar amount, the better it is. But it does not mean if you own two or three duplexes that you shouldn't consider it. It just depends on your profile. It depends on if that is a good strategy for you. Let's say you're someone who is a high W2 income earner and you're at the 50, you know, over 50% tax rate between federal and state, right? Right. So, I mean, even if you have a small single family residential and you get 30,000 more in depreciation, that saves you 15,000 of cash, right? Yeah. So I wouldn't reserve that just for the ultimate investor, but it could be for anyone.

That's cool. Yeah, definitely. Now, who does a cost segregation study? Can anybody do it? Is this something you just have paper you file or how does that actually happen? You typically, yeah, it's not, it's not for the everyday person to do on their own, unfortunately. But we recommend you hire. like there's companies out there to specialize in it. They're generally like engineering companies of some kind, just have specialties. They'll go out and they'll look at your property, analyze it, and, you know, do all the mumbo-jumbo they do, you know. But so, yeah, it's unfortunately not one that you can do on your own or do online.

We've seen people try and do that based on talking to colleagues that kind of usually backfires under IRS audit, you know. Yeah, so it's the engineers that break out the components of the building. then your tax advisor, your CPA will then calculate the depreciation based on the components that are broken out. Here's something really cool about it too is that with a lot of things in a tax world, you know, as you get closer to year end, there's some things you actually have to do before year end to take advantage of tax deductions or tax strategies. Cost segregation is actually one. You can wait until the following year.

So if your tax returns do April, you can wait until you have 90% of your tax return done and decide, okay, is it a cost aggregation? you work with your CPA, decides the cost segregation and make sense based on these final numbers. If so, you pull the trigger, you extend your tax churn and you get it done in the next six months. So it's not something that has to be done by year ends. That's really cool. So you can kind of wait to see get pretty concrete numbers before pulling the trigger and spending, you know, spending the money on it. Yeah, that's very cool.

You know, you made a good point that a lot of people will be tempted to think, well, I'll just do it myself. I'll Google how to do a cost segregation study. I'll do it myself. And then when Uncle Sam comes knocking on your door to do the audit, I can guarantee. guarantee you the feeling you get in the pit of your stomach will not be a happy one. I wanted to ask you if there's other things that you've seen investors think they can do on their own and then later mess it up. And I'll start it off with an example that I learned. You'll often hear Brandon and I talk about the 1031 light kind exchange. It's one of the building

fundamental blocks of tax savings. And a lot of people know that after you have your house for sale or your property for sale, you have, what, 45 days to identify a list of properties and 180 days to close on it. And everyone is more or less aware of those rules. And so I've seen people that think I will just sell my house with the realtor, identify the houses through the website or whatever I do, and then go close on them. And they come to me to help them buy the new house. And I say, wait a minute. So you closed on a house last week and the money's sitting in your bank account. And they say, yeah, now I got 45 days to go identify properties. And I face palm. Can you explain to the audience why it's easy to think that you know what you're doing, but why that person would not

qualify for a 1031 and maybe other examples of things that investors should be aware of, don't try this at home. Yeah, but can you explain what a face bunk is first? A face palm. Why would you do that? All these kids in their hippie language. Yeah, actually, that's a really good example. To be honest, we've seen that more times than we should is that, yeah, the person thinks

they can do their own 1031 exchange and doesn't understand that they can't take that money and put it in their bank account because at the end of the day, they think they've accomplished the same thing, right? So, yeah, there's 1031 exchanges. I mean, real estate professionals, another one, you know, without getting an nitty-gritty of everything.

That's another one that people think they can do on their own or they think they can, you know, we've seen a lot where they're hiring somebody, you know, John Smith down the street who doesn't have a real estate background and being a tax accountant, but doesn't understand the rules and they think they can do it the right way

and they miss an election or something like that under taxing, that's a huge, that's a huge problem. Yeah, I think, you know, in the past couple years, we probably all agree that real estate market has done really well, right? And so as CPAs, the number of 1031 exchanges that we're seeing and reporting has skyrocketed. You know, I think a big percentage of our clients have been selling properties and replacing it with one or even multiple properties. And yeah, I mean, you need to have an intermediary involved prior.

to the sale of your property. So if you're telling your real estate broker after the fact or even your CPA after the fact, that's too little too late with respect to 1031. And yes, besides those, the number of days for identification and replacement, there are a lot of other roles. So in fact, like the constructive receipt, right? That's what this person didn't understand. Exactly. And we had oftentimes just not knowing, you know, what do I have to do in order to defer all of the tax? I just talked to a new client the other day who got bad advice from their CPA that they only invested, reinvested the cash that they got from closing into the 1031.

And what they ended up doing was essentially owing taxes on the entire transaction. So he went through the stress of trying to meet the deadlines and paying an intermediary and really didn't get any tax savings at all. So in the new book, we talk a lot about 1031 exchange and, you know, frankly, some of these horror stories so that hopefully people can get an idea what can go wrong when you're not meeting all of the specific rules and requirements. But we also talk about what are some creative things that you can do with 1031 exchange. Like how can we take cash out of a 1031 exchange without paying taxes, right? Because that's something that a lot of people want to do as well.

How do you take cash out of a 1030 an exchange without paying taxes? You buy the book? Give you a hint. One of the things. One of the things. one of the ways is refinancing, right? All right. All right. I'm pumped for that. No, but that wasn't subtle enough? No, yeah.

No, I love it. But here's actually where I was going to go with that. I want to talk about 1030 exchanges from a not tax standpoint, from another standpoint. And that is, yes, okay. So for those, again, if you're still confused about 1031, you sell a property, you buy another one. And if you do the rules all correctly, you can potentially not pay any capital gains tax on the profit you made on the first. thing. Are we all, are we good with that basic definition? All right. So here's the problem with that. Today, the market has gone up significantly. I mean, we are in a very competitive hot market.

People are selling this property, which was performing really well for them. They had a good grasp on it. They had a good handle on it. And they were making good money. They sell it because it's a great time to sell. But now what they find themselves in is they have a 45-day shotgun wedding here to find a new property at a time in the market that's incredibly difficult to find great deal. So now what they are trying to save on taxes by, you know, dump it into a new deal. And I'm not telling that they end up buying something bad. And I'm not saying this, that this is some other person did something stupid. But this is my own story. Like, this is what I did. Right. I sold my 24 unit I had in Washington. And I don't think I've ever fully told this

on the podcast. And then I went and bought a property in Ohio. Now, there was a lot of things I did wrong there. And I don't regret any of the choices. Really, I made on that property. And it's all fine, especially because of the cost segregation savings and all that. But what happened was I sold a really good performing property into another property because I had to find something. And it was a very mediocre to not good deal. I wouldn't call it a bad deal. Just a not good deal for me. And honestly, one of the biggest reasons is because I didn't listen to my friend David Green and pay attention to his book on finding the core four.

So I never had my core four in Ohio. I never had a rock star property manager. But you would have had you had more time, right? That's what you get at. Yes. Had I had more time. 45 days killed me. And even though a lot of it was like I was moving to Hawaii and I was busy and I was having a baby. And so anyway, my point being in all of this is be careful with the 1031 exchange because yes, it can be a great tax savings.

But if you're going to sell a good property just to go have to go buy a bad property just to save taxes. I mean, just be careful. I guess that 45 day thing is legit. You really got to understand the difference between practice and theory. Like the 203K loan in theory sounds amazing. oh, you're going to give me money to do my house. Then you look at what it's like in practice, and I got to get three bids from license contractors, and they got to agree to get paid by the government when the government decides to pay them. Months later, yeah.

It's hard to find a contractor as it is. And so you realize it doesn't always work out in practice. And that's why we love tax professionals. Because not only, this is what I really like, not only do they know the law. They are working with other investors who are probably smarter than me and seeing what worked for them. And then bringing that strategy into my world when I say, here's my problem and they've already seen it. You don't want a surgeon that you're the only person they ever operate on. That's my surgeon for life.

He doesn't work on anyone else. I want somebody who's worked on a lot, hundreds of other people, and they know what different bodies do and can kind of respond to mine that same way. Yeah. I think that's a great example because oftentimes we'll talk to a client. They'll say, hey, I'm thinking of selling these properties. We go through the scenario of 1031 exchange and they come back and say, you know, I really couldn't find any good replacements, right?

So maybe the decision is we hold on to this property. and instead we do a cash out refi, use that money to just invest in more properties. That way we don't have to pay commissions. We don't have to worry about 1031 exchange because it looks like we already have a good performing property. Maybe we just wanted to tap into the equity to grow our portfolio. So we do also see that quite a bit as an alternative. Yeah.

And also maybe the person didn't actually need to do a 1031 exchange for tax purposes. We've unfortunately seen that where clients will pull the trigger on a 1031 exchange without consulting with us because they've heard people talk about how great it is. And then lo and behold, like, well, you had some carry forward losses that you could have used to offset the gain and not have to worry about the 45 days and the stress and the, you know, maybe, you know, there's studies out there. I'm sure you guys have seen it where people will pay like 7 to 10% more on average for a property that they're buying as a replacement property because they're up against the, the clock, you know.

That's a horrible thing to do, you know, a horrible reason to buy a property, obviously. So one thing that I do in. my own investing is because I flip houses and I buy rentals. I do a lot of different things. I limit how often I flip and I really prefer to build wealth the boring way, which is buy and hold, right? The Burr method is a popular term we're using. I wrote the book on that, but it's really just a way to do buy and hold. Can you share with us as far from a tax perspective only why you would prefer buy and hold versus flipping and for people who are looking at, oh man, I can flip a house and make 50 grand, how that 50 grand often ends up being like 20 grand, 25 grand when you're done.

Yeah, yeah. I think the biggest difference is when you flip properties, what a lot of people don't understand is that it's not capital gains income. It's not at a lower tax rate. In fact, it's ordinary income tax rate. So whatever your personal highest bracket is for the year. In addition, you oftentimes have to pay self-employment tax, which could be an additional 15% on top of federal and state income taxes.

So that's where that, you know, your example, David, comes from where, okay, we made $100,000, we might lose $50,000, $60,000 of that to taxes. In addition, with fix and flip, because we're getting rid of the property, we don't have any depreciation left, right? Versus in a very similar transaction, if we kept that property as a Burr transaction, now we'd get to take depreciation. We can do accelerated depreciation. We can accelerate all the rehab that's been done.

and we don't have any capital gains or ordinary income. So it's essentially, you know, no tax liability and you get additional write-offs that you otherwise wouldn't have with respect to flipping. So, yeah, for our clients who flip, and we do have a lot of them who do a handful of flips, whereas, you know, it's okay. There are some deals that just makes sense. It does not make sense to hold. But ideally, you are simultaneously keeping some of those as rentals too, so you can use

the rentals to offset some of that tax liability. from the flips. There are two kinds of real estate investors, those who have reviewed their insurance and those who think that they have. Most don't realize their coverage wasn't built for how they actually invest. Vacancy periods, rehabs, short-term rentals,

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don't assume you're covered. Have NRE review your insurance with someone who gets investing at NREG.com slash BPPOD. That's N-R-E-I-G.com slash BPPod. Tax season reminder for all the real estate investors listening. If you own rental properties, short-term rentals, commercial buildings, basically anything that's not your primary residence, you need to know about cost segregation.

It's an IRS compliance strategy that lets you accelerate depreciation on your properties, which means you're paying less in taxes this year and keeping more cash in your pocket for your next deal. Cost Segregation Guys is the go-to firm, having done over 12,000 of these studies with $500 million in total depreciation identified. Head to costsegregationguise.com slash BP to get a free proposal and see your potential tax savings.

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about Indeed on this podcast. That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. Wouldn't it be great if your houseplants paid rent while you were out of I mean, they've got the whole place to themselves, lots of sunlight, zero responsibilities. But no, they just sit there waiting for someone to spray them with some cool mist like a bunch of leafy loafers. But guess what? Your home actually could be earning you money while you're not there. Airbnb has a great feature called the co-host network, which makes hosting your home so easy. If you live far from your property or are away for extended periods, you can hire a local co-host to take care of the hosting for you. These co-hosts are vetted locals who already have experience hosting on Airbnb.

A co-host can handle all the details like messaging guests, creating your host space, and managing reservations. So everything runs smoothly. It's a practical way to earn a little extra money, maybe even some cash toward your next trip. Plus, you get to share your place with someone traveling to your area while you're off making memories somewhere else. Your home might be worth more than you think.

Find out how much at Airbnb.com slash host. Can I ask a kind of an advanced question here, but they might apply to a lot of people? Let's just say, hypothetically, somebody was flipping houses a little bit, like doing a couple flips. For example, we closed on one this week and my partner and I cleared $133,000. That's actually true. And we're splitting at 50-50.

So I walked with $65,000 roughly, let's call it. Now, that's money I got to pay a lot of taxes on Hawaii state tax and federal tax. I'm going to just get killed on this. At the same time, within the same company that we flip houses, we also buy rental properties and we buy other stuff. And I have employees that work in every aspect. But I might even hire a new employee shortly here who's going to be doing a lot of stuff for a lot like just real estate in general. How much of that, and I know this is very specific, but when you have employees,

how much of the profit from flipping can you offset by saying, well, you know, I paid this employee $65,000 and I made $65,000 on flipping. So that's just a break even. I owe no taxes. Is that how that works? Or how does that, how can people look at that scenario? You know what I'm saying? Yeah, I would say the key is just trying to determine what, you know, how much that

employee is actually doing for the flip specifically versus for just like you said, your real estate business, right? Ideally, we want to try to have an argument that, you know, 90% or 95% of what this person is doing is for Brandon Turner's whole real estate empire, if you will. Yeah, maybe they helped out a little bit here and there on the fix and flip. And the ultimate investor empire. I mean, this is getting good. You know, maybe they're doing a little bit with helping it on the flip, but, you know,

maybe your partners when doing the majority of the work. Because then that could result in a situation, kind of like what you said, we had 50,000 a flip profit, but I had this employee salary of 50, so that really wipes out the taxes on the transaction, right? And a key here, I know you briefly mentioned that the rentals and flips are in the same entity. They don't have to be in the same entity in order for the rentals to offset the flip. So, you know, if let's say you're flipping in company.

and then personally, you own a bunch of rental properties. Generally, the income and losses will offset each other, assuming they all end up on your personal return. Okay. Yeah, because the ultimate idea here that I love the idea of thinking through this is if you can flip, let's say you made half a million dollars a year flipping houses. You made half a million a year flipping houses and you had a team of people doing that or, you know, a few people involved.

It's half a million. Then you hired five people at 100 grand a year to, that you're paying salaries to overall. And between that, like they're buying rentals and they're buying, they're helping with the flips. And here's why I'm getting out there with this.

The idea of you're turning like active income, flipping income into, then you're dumping stuff into buying rentals at the same time. And so essentially you're just paying no taxes, but you're building long term wealth. Like that's what I like that. It seems like an awesome strategy if we can pull that off, right? Is that how that works?

So let's say you, you, you did a flip and you made $100,000, of profit. You turn around and take that $100,000 as a down payment on a $300,000 rental property where you do a cost segregation on, then maybe that's enough depreciation by itself just to offset the taxes on the flip. And if you have someone like Amanda helping you with this, whatever you're paying them is much less than what they're saving you with what you're doing. And that's how the professional looks at these situations. I'm not irritated that I have to pay a tax professional. It's, oh, this person is going to save me so much like what you just

described that it becomes an investment in the business. And that's, I just, I'm really harping on that because I see, you know, in the businesses that I'm running that oftentimes, where I tried to save money, I ended up costing myself money. Yeah. So another thing I like to point out with house flippers is you get hammered on taxes. I just, unless you're an experienced flipper, you just do not understand how bad it's going to be. But when you lose money, the government doesn't show up and say, let us reimburse you for 50% of your loss. Like we were going to take when, when you made a profit, right? It really is your, you're, When it goes well, that's capped.

But when it goes bad, there's nothing that can stop it from going really, really bad. Unless you're a giant billion dollar bank, then the government will reimburse you. Then you're too big to fail. Or if you're brand-and-you-be-too-big-fail. We will all dive in and save you so that you won't actually lose your money. So, guys, I know one thing that's really popular right now is short-term rentals. You know, in a market like this, you have to kind of be a little bit of creative to make things work. And short-term rentals is a way that you can increase your income.

Can you talk about some of the common write-offs for that tax strategies that people may be missing out on that would benefit them from getting this book or consulting with you when it comes to short-term? Yeah, I think the cool thing about short-term rentals is it's from a tax perspective, it's a lot like long-term rentals. So in terms of deductions, there's a lot of the same things. But as Amanda was talking about earlier, with like the Airbnb model, right, where sometimes you're going to buy a house with the plan to make it a short-term rental. So obviously most of these short-term rentals are furnished, right? So you could be spending $15,000, $25,000 on just that stuff alone, just to furnish the property. So with this bonus appreciation and the new rules that kind of came out a couple years ago, that's an immediate tax write-off of $20,000, $25,000 right away versus, you know, on a long-term rental,

maybe some of that you can ride off right away, but maybe some of that you got to write off over five years. That can be a slight difference. But, yeah, just from a pure economic standpoint, too, I'm amazed when we look at tax turns, you'll see a tax return for a single family house that's pulling in $140,000 in gross rents. And you're like, this isn't adding up. You know, it's not penciling out over 12 months. It just doesn't, something sounds off. And then you obviously figure out it's a short-term rental.

So I think financially people are, it's a model that's working very well. And then, you know, you can still take advantage of the depreciation and things like that from a tax perspective. I just love hearing success stories. We have a couple clients who, you know, maybe both husband and wife for working full time. And once they got into the short-term rental business, that maybe in a year or two, we had, you know, one or two clients where the spouse has already stopped working and just kind of doing the short-term rental that's already replaced their W-2 income and, you know, having lots of depreciation and write-offs to, you know, to really make the same amount of money that they were making when both of them were working full-time. I think one of the common misconceptions is that people are under the impression short-term rentals are taxed differently or taxed. higher than long-term rentals. And at least in terms of what we see, that's not the case for the majority of the clients. So traditionally, Airbnb, VRBO, it's just going to be regular,

you know, rental tax rates. Now, if you're operating a short-term rental similar to a hotel business, that's generally when you might be paying, you know, maybe like 15% more in self-employment tax. So just real quick, the definition, you know, what does it mean to be a hotel business? It means you're offering auxiliary services beyond what a short-term rental does. So if you also can do airport pickup and drop-off or if you offer food and beverage services, not just giving them water and salt, but offering, you know, I'm going to cook for you, like a bed and breakfast. Or, you know, they can use a rental car while they're staying there.

Or you're changing the linens or sheets and towels every day like a normal hotel would do, right? Right, which most people don't, right? You do a cleaning once people leave. So for the vast majority of our clients in the short-term rental space, they get all of the same benefits as long-term rental investments and, you know, same depreciation. And they don't have to worry about that additional tax. What about what about those who are playing the Airbnb arbitrage game, which is where they rent an apartment and then they rent that apartment out on Airbnb or they rent a house and they

rent it on Airbnb. They don't actually own the real estate. So now they can't get any of the, I mean, they're not real estate investors at that point from a tax standpoint, right? Or how does that work? They are. I mean, for tax purposes, it's treated just like any other rental property. The only difference is because in the rental arbitrage, we don't own the property.

So we don't get to take depreciation. We don't get to use cost segregation. But instead, what we deduct is the rent expense that we're paying to the actual property owner. Okay. Well, is there any difference? And this would probably a stupid question. I haven't thought this through at all, but it just occurred to me. We can only deduct mortgage interest on a, like on our taxes when we own a property.

But if you're playing the arbitrage game, you can deduct the entire rent. amount, right? So doesn't it seem like you'd actually potentially make more money by owning, like at least now, by owning, by doing the arbitrage game than by doing, did that make sense? I see where you're going. I think it just kind of comes down to numbers, right? It's, it's, you know, how much, what is the, what is the differential? What are you paying rent versus mortgage interest or property? Because you got, remember when you're owning, you know, you've got the interest of property tax and utilities, you know, as a renter, you're probably, all you got is rent. Maybe you're paying some utilities. That's true. Yep. Yeah. That's.

It's also very short-term way of looking at it, though, because you're only looking at the cash flow. You might maximize cash flow as doing the arbitrage style, but you're not owning an asset that you're paying down the mortgage on it. It's appreciating over time and you get all the benefits that come from real so I don't ownership there. Yeah, I agree. The Airbnb arbitrage thing reminds me more of like flipping where it's a business. If you stop doing it, you stop making money. There's nothing wrong with it. It's great.

In fact, like, if I was suddenly bankrupt right now and had to start all the way over and had nothing, I'd probably start with the Airbnb arbitrage game. It's kind of like rental wholesale. right? Like I find a person that has a house that they're not using and I find a person that wants a house to use. You're finding a person who wants to sell their home and a person that will buy the contract. I'm going to go. I'm going to go copyright that term right now. Hold on a second. Yeah, you are. Matt's friend is typing this entire podcast. The CPA attorney over there is like I've got 24 patents that I'm going to put in for trademark. Ultimate investors are already too late. Someone's going to hashtag us and get a bill. Yep.

All right. All right. So this is really good stuff. Really good stuff. There's probably like 100 more topics. We, I would love to cover, but we just do not have time. But just to give a quick plug for the book, it's called the book on advanced tax strategies, cracking the code for savvy real estate investors, volume two, because it's a sequel of the first book.

And there's a ton of stuff in the book, all details about the new tax laws, stuff about opportunity zones, which I'd love to maybe touch on if we get time. Self-directed IRA stuff. term rental stuff and pretty much any scenario that you have questions on. You're going to find information in there. So if you guys want to get the book, it is for sale today at biggerpockets.com slash advanced tax book, advanced tax book. And you can get the physical book by 2499.

And I would actually recommend the ultimate package, which includes a physical book, like ship to your house, audiobook, and the ebook, which is cool. And there's a little bunch of bonus materials and such as well. So it's one of those things. You might spend, you know, on the ultimate edition, like 50 bucks. But if you look at how much money you're going to be saving, it is one of those no-brainer. So check it out, biggerpockets.com slash advanced tax book. You can also find it if you can't remember that, biggerpockets.com slash store.

So anything else you guys want to add about the book or any of the bonus stuff, anything you want to add there? No, I would just say don't let the name scare you. You know, we had to call it the advanced tax book. But it's hopefully the goals that, you know, it's filled with stories, real life. stories from our investors that are anonymous, of course. But yeah, it's real stories about, you know, when tax strategies are done correctly, how powerful they could be in terms of saving you taxes and just retaining wealth. But also the horror stories about how, you know, when you do a small thing

incorrectly, how that could cost a ton of money in lost taxes. Can I ask a serious question? Are all the anonymous horror stories mine? Just the ones with the pictures of guys with beards next to them, you know. Yeah, it's okay, good. Yeah, there's a little icon next to you. It'll be fine. They won't be able to figure it out. Yeah, thanks.

It's random, it's random burner. Random burner. Weird, yeah. Weird. All right. So anyway, pick up the book, you guys, check it out. I think you'll like it a lot. It's amazing as it is the last one.

And maybe even pick up, if you haven't read the first book, pick up both at the same time. Because there is different information in both. They're not like, it's not the same thing. It's not just updated. It's actual new information. So it's a sequel. It's like the ultimate investor part two.

That's going to be the new one. All right. With that last thing I want to cover before we move on to a bunch of fire around questions concerning taxes, opportunity zones. What the heck is an opportunity zone? And why does it matter? Like give me an example of why that would matter. So we talked about 1031 exchanges quite a bit, right? When you sell asset, when you sell real estate, you replace with real estate and you defer.

the taxes on the capital gains you've made. So Opportunity Zone is a very similar concept where you can sell real estate and buy real estate defer the tax. But one of the biggest differences is that Opportunity Zone is not limited to the sale of real estate. And so we have a lot of clients who have stocks that's also appreciated in value in the past X number of years or people who work for the high tech industry that just have appreciated stock. And they're wanting to get into real estate to sell the stock and use that money for real estate, but they don't want to pay the hefty taxes. So Opportunity Zone is a great way for them to be able to do so.

Sell stocks, avoid or delay the taxes, and reinvest that into Opportunity Zone real estate in our example. All right. So I sell a business. Well, let's say I own a business or stocks or whatever, and I'm going to clear a million dollars in profit from this sale. They don't have a 1031 for business or for stocks. stocks, but I can put that money. Do I have to put the million dollars I made or is it the entire,

is it like the real estate version of 1031, right, where you have to put the entire amount or is it just the profit? Yeah. So good question. So for 10, for the opportunity zone, it's optional, how much you want to put in. So in your example, if we have, if we sold our business for two million, but we cleared a million in cash, you can put two million or you can put a million if you wanted to. If you wanted to only put 500,000, that's fine. you defer $500,000 of that from tax and the rest you pay taxes on. So it's very flexible. We don't need to have an intermediary. So David, if you have a client that's coming to you, you don't have to face palm, you can say, hey, let's look at Opportunity Zone because you didn't do a 1031 exchange. So

it's very flexible. The other benefit of the Opportunity Zone, that's really great is, you know, we'll continue with your example, Brandon, of a million dollars. We're going to invest that into an opportunity zone that holds a piece of apartment, let's say. and we hold it for 10 years. Let's say that property went from a million dollars to $3 million. One of the benefits is that the $2 million of appreciation potentially could be completely tax-free forever. Okay.

So that is an added benefit of the opportunity zone. And I think one of the main reasons why that's been such a popular topic. So what's the deal with the seven-year thing? Wasn't there like you have to pay it back in seven years or something like that? But if you hold it up for 10, isn't there a thing with that? Or am I making it up? No, you're right. So when it first came out, it was the end of 2017.

So they had this window. If you held the replacement property for five years, you could defer or avoid 10% of the taxes that you would have had to pay originally. If you held it for seven years, you could avoid 15% of taxes. Now, if somebody goes in at this point in time, they're only looking at the five-year window because they cut off for when you have to pay the taxes,

actually the end of 2026. So there is no more. They can't even make the seven years anymore. So once you get to, because once you get to the end of 2020, you have to pay the taxes that you would have had to pay when you sold your property originally. Regardless of whether you actually sell the replacing property

by the end of 26. So how does that go back to the million dollars? I put a million bucks into an opportunity zone, whether it's a fund or my own deal. I can do either one, right? So somebody else's fund? So it's an opportunity zone fund. It doesn't have to be a syndication,

which is a misconception. So let's say Brandon and Heather created an LLC and we call that an Opportunity Zone fund. That's perfectly fine. Okay, so I take my million bucks. I put it into a thing. But I want to hold it for 10 years because I want to pay no taxes forever, except for I owe taxes on it in year seven. Where do I get that money for taxes?

Do I, is that? So, and that's a, that's a thing that's a thing that everyone's got to be aware of and talk to their advisor about and plan for because, you know, how are you going to have liquidity? What's the liquidity going to be in 2026? So that, you know, that's something you got to plan for, obviously. Yeah. And hopefully, you know, in the example we use, you sold your business for two million, right? So today you're clearing an additional million dollars of cash. So in the meantime, you can invest.

just make sure that there is liquidity by 2026 to pay for some of that. And that's the main difference with Opportunity Zone versus 1031 Exchange. 1031 Exchange, you know, if we sell a property for $2 million, we have to replace, you know, we have to buy replacement properties of around $2 million to get the full deferral. But in this scenario, you only have to, or you only need to reinvest the gain. So, you know, you can basically take your equity back out in cash and there are no taxes at all today. Wow. Very good.

That's the character dangling, right? Is that if you can hold it for 10 years, the appreciation you get on your replacement property can be totally tax-free, whereas 1031 exchange, there's nothing prevent you from continuing to swap and swap and swap. You know, that's one of the tax strategies, swap until you drop, right?

Like, just keep exchanging until you die. I've never heard that before. That's funny. That's the third time you said that rhymes. Mumbo-chumbo, nitty, gritty, swap until you drop. Did I say nitty gritty to you? Yeah, you did. I noticed that you got to think for rhymes.

Like, this is a freestyle rapper turned CPA. I got to get into that career, guys. And they get it a cipher. Yeah. When I first met Matt the very first time, I think we met in person, we had like, I don't know,

we were eating lunch or something. My first thought was, this guy's a rapper. This guy clearly, everything about him screams, I am from the streets in the hood and I rap, everything about it.

Yeah, clearly. Absolutely. That's the first time anyone's ever heard that about me. All right. So two quick clarifications on the opportunity zone. First of all, opportunity zones, where are they and who defined what

an opportunity zone is? And then all of this is all arrived from one question. How do you figure out what they are? Where are they? Who defined it? And why did the government well, I'll give you a hint. The government defined it. Why did they pick those areas? What does that mean? Good question. So the government, yeah, so it's defined by the government.

And these are just areas they want revitalization projects to come in. And common misconception when we hear the word opportunity zone, investors are thinking about, you know, the worst neighborhoods of Detroit, right? Just with like abandoned buildings. And that's not necessarily true. There are opportunity zones all over the U.S. also in coastal cities like California, in Malibu, Santa Barbara, New York City. Hawaii also has opportunity zones. So they're not necessarily what you tend to think of when it comes to, you know, really run.

down areas. Yeah, here in Maui, the opportunity zones are either, I know there's one over in Wailuku, which is like the rough part of Maui, which is, you know, a rough part of Maui, but it's like the rough part. And then it's over by like Costco and Walmart and it's like the nicest developed area. It's the way, like I don't know how they chose though, but it's like they pick the worst area and the best area. And that's opportunity zones here for Maui. I don't know, it's weird. So people are, I mean, so I think oftentimes people are shocked to find out, you know, where they are because we found Matt and I were looking, and in Fullerton, where offices in Southern California,

there's opportunity zones really close to our office. And, you know, our office is not anywhere near, you know, like a war zone type of place. I mean, I think we looked too. There was one, you know, Orange County has parts along the coast, Newport Beach, honey. I think there was somewhere along the coast, there was an opportunity zone in Orange County,

which makes, you know, no sense to you and me because properties are worse millions of dollars already. It's the rough part of Orange County. It's like the clearance rackets. Sacks Fifth Avenue. You can find Matt wrapping there on the weekends. Yeah. There you go.

For somebody who wants to find opportunity zones, can you give us the resource where you can look up? Yes. Yeah. It's actually the IRS website. So if you go on the IRS website and search Opportunity Zone, there's a link that they update pretty frequently. I think that you can run it by state, by city, by zip code to get the most current listing of where those are.

And I think for those people who buy the advanced tax book from bigger pockets, there we have an additional chapter specifically on Opportunity Zone that has that information as well. But yeah, IRIS website is the best place to get that. Even though, as we mentioned, we don't need an intermediary like a 1031 exchange, but a lot of things in the tax, this is not a do-it-yourself thing. So make sure you talk to your advisors ahead of time because there are numerous rules you have to follow to make sure you're getting all the benefits you're hoping you get. And one of those is you have to actually fix the property up a certain degree, right?

It has to be like either a development job or like a massive rehab, right? Yeah, massive rehab. So good for, you know, advanced burr strategies where you're doing quite a bit to the property. Here's what I love. I mean, here's, I think it's fascinating. We make fun of the government a lot for being stupid, right? America, like we just love to tease the government for being dumb and right tape. But here's why this is such a genius plan.

Whoever came up with the idea, I don't even know who it was. It's like, we've got all these areas that we want to develop. Some of are really bad. Some are just areas we want, we want to see developed. We could go spend a lot of money doing it. or we could just make real estate investors do it for us. And we can make people, we can make real estate investors do it for us.

And we can use all the money from the economy that they were going to pay some taxes to dump in. And it was just like a genius move to like, you have to fix the property up. So now we're improving these areas. You have to, you know, add or build, which now we're adding, you know, more like housing for Americans and stuff.

And we're going to use Americans money to do it. It's like, I don't know, it's just a good. I agree 100%. It, because, the government is terrible at everything they do. Yeah. When you're like, the government's going to come in and they're going to fix this thing, you face them, right?

But real estate investors who have experience doing this that are good at it, we're like, let's get you to do it for us. And that's what I love about the idea. That's the truth about the tax code in general, right? Amanda, you brought this up to me like years ago. It's like the tax code exists because the government wants to incentivize certain actions. That's why we have taxes and why we have, you know, the offset tax in some way and incentivize you another.

The government doesn't do this stuff arbitrarily. They're not just randomly giving us 1031 exchanges and cost segregation studies and all that because like somebody just felt good one day to do it. Everything in there generally, I'm sure there's some was just backhanded stuff, but like or back room deals. But like a lot of it, they want us to do stuff. So when we play with in their rules, they reward us and they like real estate investors. Yeah. And I just want to mention real quick because one of the biggest benefits that came out as part of tax reform is the what's considered the flow through entity tax break, which really just means. that, you know, if you have certain types of income, that the first 20% of that profit could be

completely tax-free. So meaning, you know, if, let's say David, with his brokerage business made $100,000, potentially under the new tax reform, $20,000 of that could be taxed at zero rates, right? So he never has to pay taxes on that at all. And, you know, we mentioned previously that tax reform was so beneficial to real estate investors because this 20% tax tax, tax break applies to many types of investment income. So a lot of rental income potentially could be eligible for 20% tax-free treatment. We have clients who are brokers, you know, realtors that had a really great tax here because of this tax break where, you know, part of their commissions was not taxed at all. And also people who are flipping and doing wholesale

lien, right? First 20% could be at zero tax. So definitely, you know, government incentivizing us to do more real estate, do more business, and, you know, getting the, reaping the benefits of that as a result. Very cool. Very cool. All right, well, we got to move on to the next segment of the show.

And this is what we call the fire round. It's time for the fire round. All right, this is part of the show where we take questions direct out of the Bigger Pockets forums. And of course, today they're kind of tax-related questions and we're going to fire them at you. Of course, I will say everyone's unique, you know, position is unique.

And you guys are going to have to make some assumptions here based on almost no information whatsoever. But do your best. Here we go. Number one, Jason from Wichita, Kansas said, as a house as a house flipper, what is the best entity or structure to use from a tax perspective? Generally for flippers, you know, obviously I'm going to make an assumption that he's the only owner of the business.

But generally speaking, we usually look at using as corporations for the flipping business. They're flexible. They're strategic in terms of minimizing self-employment taxes. There's easy ways to get money in and out. So that generally works the best. But obviously, if he's got other partners or things like that, there's other considerations for sure. Yeah, I think as an example, you know, very high-level example,

of someone who's flipping and making $100,000 of flip profit, operating as an S-corp could save upwards of $6,000, $7,000 in self-employment taxes per year. Of course, you know, the final result will be different depending on what else you have going on. But that's kind of a general guideline. Perfect. All right. Number two. Next question from Chris G.

Home office question. I have a W-2 job and also have multiple rental properties. But I do not qualify for real estate professional status. Can I still claim my home office as a deduction? Yeah. A person can still claim the home office deduction against their rental properties, you know, under the assumption they're using it for the rental property business, depending on where they're not.

numbers fall there. The deduction itself may be limited or, you know, there's rules in place for there. But yeah, you can, you can still take it. It's not, doesn't preclude you from taking just because you're not a real estate professional or just because you have a W2 job on the side. Awesome. All right. Number three, Ronald from Winston-Salem, North Carolina. I inherited a home from a parent who passed away. How do capital gains taxes work when you're inheriting a long-time family home? A good question. So typically when someone passes away, they get what's called a base to step up. So let's say parents bought the home for $3,000 back in the day. When they passed away, it's worth $100,000. And we're going to turn around and sell it for $100,000. There's actually

no tax, no capital gains tax because we inherit the property at the fair market value on the date that parent passed away. There you go. Which is also ties into the 1031 thing, which is why if you swap till you drop, that's why Matt said that. You just see it rolls up to time. It does. You just keep 1031 exchanging until you die, that massive tax bill you would have had at the end of your life, 50 years down after doing this 20 times. Your kids just, it just wipes it out, right? I mean, essentially. Let's hope that keeps for the next 50 years and I don't burden Rosie and Wilder with a $100 million tax bill.

All right. Next. Last question from Alex Cordero in New Jersey. Is my Bigger Pockets Pro membership tax deductible because it's business related? Absolutely. That's the short answer. Okay. Good.

No, it's helping you, you know, ordinary necessary business expense to expand your business and, you know, learn new things, obviously. And did you use the words ordinary and necessary because that's the case law? That's the test that the courts will use. Yeah, because I'm a CPA. It just rolls off the tongue, doesn't it? And when we say ordinary and necessary business, we don't mean a legal entity, right? We just mean your business as a real estate in that. lester.

Perfect. Yeah, that's how the IRS is going to look at, will we let you deduct it? Is it an ordinary and necessary? You can't go buy a ferret and say, well, this ferret is here to keep me company, because if I'm in a better mood, I'll do better on my sales calls. That's a very unordinary. Sounds like you've read court cases in the past. As a police officer, I would always be studying case law with how they determine, like,

when forced use was good or not. So I would never want your job, but I know just enough about it to know I would never want to do it. All right. Answers to the fire. We could have done like 50 of those. Let's go to Famous Four.

Famous Four questions. Number one from each of you, what is your favorite real estate related book? Besides your own, of course. I know. I would say my own. I would say Brandon. Besides Rich Dad, poor dad.

Besides Rich Dad, besides Brandon's, I think everybody says those. I'm going to go today. I'm going to go with David Green's book, the Burr. I love it. Like I said, we have clients who are flipping, and I'm always trying to convince them to do the birth strategy.

And that's a good resource that I often refer people to. It has really great content. And I especially love the piece about taxes, that chapter where you talk about the tax benefits of it. So, yeah, that's what I'm going to say. Well, thank you, Amanda. You have no idea how nervous I was that I included a tax piece in my book about a tax professional.

I feel really good now that it's been given a steal of approval from the tax bill. What are you, Matt? Anything you want to add? Yeah, I want to say mine is a book by Steve Burgess. It's called The Complete Guide to Buying and Selling Apartment Buildings. I read it a long time ago. But the cool thing about that for me was that he talks about how you can do forced appreciation apartment buildings. But being a numbers guy, he's got tons of spreadsheets in there.

You can kind of show you how you can build your wealth, scale it up as you buy and sell more and more of these appreciated apartment buildings. So that was a cool book. Yeah, I totally agree. I love that book. It's fantastic. Brandon's read every single book. Have you just noticed that?

Every time they say this book is, oh yeah, that was great. No, there's a lot of times. I'm like, I haven't read that one. I think you need to make like a video of the Tai Lopez style where he's like, hey, I'm here in my garage with my Lamborghini and I got 2,000 books on my wall. You should make one of those videos. Yeah. Here's my, here's my garage.

Yeah, here I am. Knowledge. Doesn't he just sit on the beach all day long and read books? That's all I do. That's all I do anymore. Knowledge. Here's the three things you can do. Yeah, that's the first.

You should do it with like your route for whatever it is that you're driving around. A Tesla. Oh, you have a Tesla now. Yeah, you are status. I stand crap. Can I wrap the intro for it? There you can. Of course you can.

Oh, this is all coming together. This is all. Man, it can run the books. Okay. Let's get back on track here. What is your favorite business book? Business book. I really like one.

It's Freakonomics by Steve Levin, I think, is the last name. I've not read that one. You've not read that one? Oh, my gosh. I feel time. It's an old book. It's been around for many years. I love it.

It's about, you know, the numbers behind economics that they talk about how that impacts consumer behavior. You know, why do we do the things we do? Why do we buy what we buy? I just find that fascinating. And I'd say my favorite one business book is a book called Pricing on Purpose by Ronald Baker. So it's, you know, obviously being in a professional services firm. But it's written for all kinds of.

business but it talks about how you know a lot of professional services will use to bill by the hour but it kind of teaches you about what is the value you're bringing to the table and you know this is in economics you should be charging for the value you're bringing and not just a flat hourly rate yeah hourly rate you know so it's a way you know kind of changed the way we did our we ran our business and it's helped our business significantly and uh and like i said it's it can it can apply to all kinds of business not just professional services i feel like in general i think the world's moving that direction more as more things go virtual. We're moving away from if you're here for this long,

you get paid this much to if you are this productive or you accomplish this many things you can get paid, which is great if you're a go-getter because the better you are at what you do, the more income you earn. It's terrible if you're a slug that just shows up and thinks you should get paid. So I'm all on board for seeing more of that.

Yeah, I've seen you already, so I should get paid more and get more vacation time because I've been here longer, even though I sit around all day doing nothing. You know, what's really funny is Brandon sitting in a black chair wearing a black shirt talking. And it looks like a floating head in front of a microphone talking about having seniority.

That's exactly what you look like. I don't even bother to bring my body to work today. I don't need it. That's exactly it. I'm just going to show my arms a little about it. That's better. There we go. That's not bad. I got my white guns now.

I was getting tripped out earlier too by the floating head. This is not what I signed up for. Yeah, yeah, the floating head. You guys got to watch us on YouTube if you're listening to this in the car to see what it looks like with Brandon sitting in there. It's very funny. All right, as far as the things you guys are into that are not saving people money in taxes, what are some of your hobbies? I'll let Matt go first.

Other than freestyle rap on an eight mile. I enjoy coaching baseball or coaching my son of baseball. And I also love playing softball still. So it's kind of baseball is my sport. And I'm trying to do as much as I can. Matt seems like that guy that can calculate like what the. best move should be at any given rate. He's like, okay, this kid is batting 245 against curved balls, but 3.30 against fast balls. He could do all these calculations in his head and

decide if it's going to be hit and run or is that you, Matt? You joke, but there's people, there's people out there in Little League doing that. That's hilarious. Yeah, we're doing drafting for the Little League team. So Matt's currently working on a bunch of Excel spreadsheets with all the different stats. And that's not a joke. Yeah, they make you come out to, There's an evaluation day where you got spreadsheets and clipboards and you're out there for eight hours, like trying to write down how well these eight to ten-year-olds you're playing baseball here. That's funny. How about you, Amanda?

I'm fairly boring. My hobbies are eating and sleeping. Oh, good ones. The truth. But because I love... Favorite food? Favorite food, all kinds of Asian food. Don't really have a favorite one.

But because I love eating so much, I do enjoy cooking. Mm, all right. Do you watch the food channel, the food network, food channel? No, I try not to because if I do, when I have time to watch TV, it's usually late night. And that just leads to me going into the kitchen or the pantry and that's not good. Yeah, that's exactly what it does. That's the only channel we watch on our house ever. It's always that night when we're going to bed, like getting ready for bed.

And I'm like, oh, those cookies look amazing. Oh, yeah. They made that, yeah, they made that fondue out of Girl Scout cookies or whatever. And then I've got to go try it and it's rough. All right. Last question for me. What do you think sets apart successful real estate investors from all those who give up, fail, or never get started?

I think that's such an easy one for me. I think it's just about taking action. I think the thing I see the most with clients and friends is just not doing it. Analysis, paralysis is just taking too long. So I think even for Matt and I, you know, the first purchase we made, it was super scary. I thought about jumping out of the window before signing on the purchase agreement. But just do it. That's what I would say.

Yeah, I think kind of along those lines, to me, we talked about this earlier, is kind of playing to your strengths, right? So I've seen enough where people, I think the successful investors are somebody who can take action, but who is also detailed and organized. And again, that doesn't have to be the same person. But if you're not both of those things, and a lot of people aren't, obviously, then you need to get the right people to help you on your team that can play one of those roles because I've seen a lot of times where a lot of real estate investors go into deals

and they're really good at taking action, but they get this big deal and they're trying to raise investor money and they can't produce a financial statement for an investor. And it's like, I just blows my mind, you know. And, you know, so that's like, I think you need to be able to take action,

but you also need to have somebody on your team that's detailed and organized to kind of, you know, keep you in there, keep in the right spots and you guys can push and pull each other along the way. So are you saying that you only get one shot, do not miss your chance to blow. This opportunity comes once in a lot.

lifetime. Yeah, you got a something like that. Yeah. All right. Let's, I was thinking more like bust the move. All right. All right.

David Green. This has been great, guys. Really appreciate it. You were very fun. Yes. You're also very smart people. And that's the best guys to get on. So everybody go get these books.

Check them out. Make sure that you're not leaving money on the table with your investing. And seriously, understand that when you inspect what you expect, when you actually look at your books and look at your numbers, your mind will recognize patterns with where you should be finding, like finding ways to improve your business and what you should be focusing on. Guys, for people who want to find out more about you, where can they? Our website, I think, is the best place.

We have lots of, you know, free information on, and also the latest on taxes and tax law and strategies. It's www.kestonecpa.com. All righty. All right, check it out. And again, I think you guys are great. That's why I work with you year after year after year because you save me a whole lot more money than it cost me.

So thank you guys. And with that, we got to get out of here. So thank you guys. Thank you. Appreciate it. All right, guys. Oh, Brandon, do you have something? I was just going to say before we get out of here,

I did want to hit our pro member spotlight this week. Is that cool? Can I do that? Let's do it. This week's pro member spotlight, Lee Gersuski. I probably said that name incorrectly from Bismarck, North Dakota. recently did a burr deal on a triplex put $170,000 into it.

Once he refinances, he'll be able to pull $180,000 out, which means he's actually like getting more out than he put into it, which is awesome. And it will still cash flow like $300 a month. And here's a great thing about this deal. Well, he got it off market from someone he knew at the gym. Like he never would have known that if he didn't tell people he was a real estate investor. So go out there and do that.

So go online, everybody here, and go put your deals into your bigger Pockets profile. Let other people know that you're doing stuff. And if you're a Bigger Pockets Pro member and you want to shout out here on the podcast, just email us at podcast at biggerpockets.com. Put the word pro deal in the subject line. And we might be singing your praises next week. All right. That's all I got. So David Green, that's it. You ready to take us out? Yeah. You know, I was thinking when you were talking about tell everybody you're an investor. That's such a big piece of finding off market deals. What I would do is I'd go to Brandon's Instagram, I'd see what he posts and I'd either repost it or I'd make similar things.

So everyone sees like, yeah, I'm into real estate investing like Brandon does. That's the easiest way. Thanks. Yeah. He is, he's Beardy Brandon. I'm David Green 24. Oh, and you also made a very nice post for me on my birthday. Man, I just want to tell you that.

I appreciate that. This is very nice to do. You're very good at being nice. This is David Green for Brandon, the Floating Head Turner. Signing off. You're listening to Bigger, Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the height,

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