BiggerPockets Real Estate Podcast - 49: Real Estate Tax Tips, Jokes, and Loopholes With Amanda Han

Episode Date: December 19, 2013

In today’s episode of the BiggerPockets Podcast, we are going to talk about something you may think is a bit boring… taxes.. BUT WAIT! Perseverance  Before you move on to go watch the latest episode of Dancing with the Stars… I promise you this interview isn’t going to bore you to tears, but in-fact could potentially save you thousands of dollars this year alone on your upcoming tax bill. Today, real estate investor and CPA Amanda Han is going to bring a TON of really great tips and advice to help you make sure you are making, and keeping, the most wealth possible. Additionally, this show is one of the most fun interviews we’ve done on the Podcast, so it definitely brings the once-boring topic of tax planning to a whole new entertaining level. No matter what stage of investing you are in – you definitely don’t want to miss this incredible show. Read the transcript for episode 49 with Amanda Han here. In This Show, We Cover: How to find a good syndication deal Important tax changes YOU need to know for 2013 and 2014 The Obamacare Tax – do you need to pay it? The loophole that allows real estate investors to write off “paper losses.” The new laws and tax changes that may limit your mortgage interest deduction When to talk to a tax strategist How to find a great CPA The biggest misconceptions about tax deductions What legal entity should you have? Things YOU need to do before the end of 2013 How to deduct your cat food? Investing with a Self Directed IRA Common tax mistakes that many investors make And much, much more. Books Mentioned in the Show Rich Dad Poor Dad by Robert Kiyosaki The Four Hour Workweek by Timothy Ferriss Tweetable Topics When looking at syndicated deals, the #1 most important thing to look at is the syndicator, the team behind the deal. (Tweet This!) If you’re educating your accountant, it’s probably time to find a new one. (Tweet This!)  Connect with Amanda Amanda’s BiggerPockets Profile Amanda’s Company Website: KeystoneCPA.com Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast, show 49. 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's going on, everybody? This is Josh Dork and host of the Bigger Pockets podcast here with Mr. Brandon Turner, my excellent co-host.

What up, Brandon? What up, Josh? You're not feeling too well today, are you? I'm bumming, man. I'm totally bumming. Yeah, you're going to get over that. Come on. Yeah, well, it's a good thing the interview was recorded another day.

Yes, you're only bumming here during the intro. That's okay, but people can't tell. You're feeling great. Yeah, I'm feeling awesome. Things are good. Things are good. How about you? Things are great.

Things are great. I heard there was a fire right next to throw up. your rental properties the other night. There was. On Facebook, somebody says there's a house burning on,

you know, a big house burning on this street. And I'm like, hey, that's my brand new triplex. Yeah, and so we sat there

for a half an hour trying to figure out it was ours and it ended up being the next door neighbor's house burned. Nice. Well, which is not nice.

It's never nice when somebody's house burns. But it was, it was interesting. I was on the phone with Brandon while this was all going on and he couldn't manage

to figure out how to get the police or fire department on the phone. Nobody would answer. answer their phone. Apparently they'll go home at 8 o'clock at night. That's that's the power of a small town living, right? There you go. Rural. Rural. All right, guys, let's let's get to today's quick tip. Quick tip. All right. So in some cases, folks, Gmail is being sent to spam. So in our

Bigger Pockets newsletter, those newsletters in some cases are going to spam for our Gmail users. not all of them, but for some of them. And please help us to let Google know that we aren't doing anything weird or bad or anything like that. If you go to biggerpockets.com slash Gmail, we've got some information that'll help walk you through how to make sure your newsletters and other Bigger Pockets mail doesn't show up in the wrong place. Rural. Rural. All right, guys.

So today's show is with the great Amanda Hahn. And you may not know Amanda Hahn, but she's going to do wonders for your business, I think. I agree. Yeah. So Amanda is a CPA and a real estate investor. She's a really, really funny and smart lady. You know, the goal of this show is to talk about boring types of things like taxes. However, as we always do, we try.

and keep it light and entertaining for you. I think this was one of the funniest shows we've done. I actually agree. So shocking that a CPA has something to do other than crunch number, but this one has a sense of humor, so check it out. Anyway, we're going to cover a lot of really good tax tips, loopholes, deductions, and more to save you a lot of money and help you build wealth even faster with more security. So definitely pay close attention.

And really quick before we start the show, this is short. show 49 and you can find us on the show notes at biggerpockets.com slash show 49. And real quickly, I wanted to say this is an interesting episode because it's a CPA coming on. But I wanted to, you know, we encourage everyone to jump into the show notes after the show to ask questions, which I still want to encourage everyone to do. We really want to encourage the conversation. However, this isn't necessarily, I don't, I want to encourage people not to go on and ask specific tax tips from Amanda on the show notes page saying, you know, I just bought this thing. I don't know what entity I should have because she can't tell you any information anyway

because she doesn't know your story. So anyway, that's my second quick tip is ask questions, but try not to be too specific because she can't answer. Yeah, just, you know, I ask stuff that would apply to other people, you know, getting down to the minutia about your own situation. That's when you pay an accountant, guys. You got to do it. You know, I know everybody's trying to to, you know, do it as cheap as possible. But unlike you and I who took advantage of a few quick. We did. We did indeed. Tips during the show.

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difference. And they're approved in 47 different states. So your next big deal could be just around the corner. Ready to unlock your property's true potential? Visit hostfinancial.com. Don't let old school lending hold you back another day. That's hostfinancial.com. So with that, why don't we get to Amanda? Amanda, welcome to the show. Good to have you. Thank you. Thank you guys for having me on the show today.

Awesome. Thank you for being here. We are going to talk about tax tips today because everyone knows that's the most fun activity we can talk about, right? Wait, wait a second. We're talking about tax. This is your show. You got this one, Brett. I'm out of here.

All right, by Josh. I'll take over. No, we're going to keep this light. We're going to keep this fun today because this is very. really, really, really, really important for real estate investors. It is. Yeah. I mean, normally, as you guys probably know, we don't do a lot of shows wrapped around topics,

but we felt this was so important, and we know how good and savvy Amanda here is, so we figured we'd tweak it up a bit. So let's jump right in. Amanda, tell us a little bit about yourself. We know you're a CPA, but do you also invest in real estate? I do, in fact. I'm actually a third-generation real estate investor in my family. So when my grandparents, yeah, when they immigrates the U.S., they started with condo

investment. So ever since I was a kid, I remember going and helping with make ready when, you know, tenant turnovers and stuff. And, you know, I love painting and all that kind of good stuff. So that was my first exposure to real estate. However, I have to say that my family didn't teach me to go into real estate. What they taught me to do was to go to school, get a degree, and I ended up with one of the big four firms, coincidentally, in the real estate tax department. So I was doing strategies and taxes for some of the developers and investment partnerships.

And it wasn't until I read this little unknown book called Rich Dad Poor Dads. Have you guys heard of it? Yeah, yeah. Maybe we'll just change the name of the show. I mean like, geez, man. So it wasn't until I read that book that I personally, you know, starting to looking at my clients and looking at, wow, you know, the amount of money they're making the type of wealth they're building

and the small amount of taxes they're paying, that's when I personally started to look into real estate for myself. Oh, that's awesome. That's awesome. So what's your personal investing strategy? Are you a buying, hold investor? Are you flipping houses while crunching numbers? What do you do? Do taxes while painting rooms?

No, I definitely crunch the numbers. I'm more of a long-term hold investor. Most of my stuff are single families, condos, the ones that I more actively manage and acquire myself. I also have some holdings in apartments as well, but those are more in a passive role with syndicated deals. I would love to be a fix and flipper because I do see the amount of money that my clients make from flipping. But I just don't have the stomach for that. But you do have the stomach for tenants telling you that their toilets clogged. Maybe I'm misspoke.

So I do manage managers. I'm not the one actually. All right. Just making sure. Yeah, yeah. Nice. Right on. Do you buy just locally or do you buy anywhere that there's a good?

deal? You know, in fact, I'm from Las Vegas originally. So most of my investments are in Las Vegas. We do have some out of state. And I do have a few in Southern California as well, which were my recent purchases. So I would say the majority of my investments are actually out of state. So I'm actually curious about that because, you know, I used to live in SoCal about 10, well, eight years ago. And, you know, everybody was looking at Vegas, but Vegas had the monster, monster bubble. How were you affected by all that?

I mean, because there was a tremendous buildup and a tremendous crash. That is a great question. I think that's in line with my investment strategy. Like I said earlier, I'm more of a long-term hold investor, so I always buy for cash flow.

And because of that, the bubble really didn't impact me at all. In fact, when the bubble burst several years ago, that was when I acquired most of my property. So it worked my advantage. Great. Great. And I think that's great advice for anyone listening. The key on investments, you know, having quality investments is knowing when to buy and buying, you know, at the right price. I mean, if you're buying for appreciation, you know, those bubbles and the ups and downs of the market are really going to affect you more. But if you could get in at a price where

your rents are pretty solid. And you could take a little bit of a hit on them even, then you're probably going to be pretty good to less through the ups and downs of the markets. Agreed. I bought a duplex at the height of the market, my first rental property. And it was at the very height. I paid like 80, 85, 90,000. Today, the thing's probably worth like 70 or maybe even 60. But I love the fact that it doesn't matter because I bought it with good cash flow. Like cash flows every month. So people always ask, you know, like, well, people who don't like real estate and don't know real estate, they ask me, like, how could you be in that? The market goes up and down so much. Isn't that risky? But when you're doing buy and hold cash flow

investing, it's not that risky as long as you're smart about when you buy. Yeah. Hey, Amanda, I had a quick question. You mentioned something earlier, and we haven't really talked about it, syndicated deals. And I didn't plan on speaking about this, but since you mentioned it, I'd love it if you could at least kind of fill the listeners in a little bit on what's a syndication? What does that mean? Obviously, well, not obviously, but for those people listening, this is definitely a higher level topic. So if you're unfamiliar, you might want to take some notes. Sure.

So syndication is commonly known as group investing. We represent clients who do syndications and a lot of our clients invest in syndicated deals. So generally what that means is let's say, you know, Josh, you found a great apartment deal. You needed to raise a million dollars for down payment. So what you would do is you work with attorney to put together a offering. And then that offering is presented to, you know, your network of friends, family, outside investors. And so if I was interested in your, in your particular investment, I might put 10,000 or 50,000 into the deal. And I would be, maybe a 5% owner in that particular deal.

Typically in syndicated investments, for me as an investor, I'm passive in nature. So I essentially give you the money. You make all the day-to-day decisions of acquisition management, firing people. And then I just kind of sit back and hopefully get my return, get my cash flow, get my appreciation. Gotcha. And what are those return? what's I guess the average typical range on return on some kind of syndication deal? Is it similar to say a typical cap rate or are we looking at something different?

That's a great question. It really depends on the deal itself. Just like when you invest, the cap rate's different from market to market from time to time. I have my money in two different syndicated deals. and I'll share my story with you. One of them is pretty much worthless. Oh, wow. So the return is terrible.

I have another one which has been doing great, roughly about 18% return per year. Okay. So I was really happy with that one. So it really depends. What I always tell my clients is when you're looking at syndicated deals, the number one most important thing to look at is the syndicator themselves, the team behind the deal, because they are. decision makers. That's really, really good. So how do you find a good syndicator then? How do you find

somebody who you can trust and that you believe in that's going to give you the 18 and not the 0% return? Well, the first tip is to just Google their name. You never know, you know, you meet people at investment clubs all the time and they'll tell you, I've got this great deal and today's the last day. I always tell my clients, be wary of that because good deals always come. and go and you don't ever want to jump into something. If you don't know the syndicator team, at least Google their name. You know, so Google Brandon Turner and fraud, for example. They'll show up anything that's, you know, fraudulent related.

And then another thing is just to talk with other investors. You know, a lot of the syndicators that are good, they will have deals under their belt. So you can talk to people who've invested with them in the past and get an idea of, you know, how they've done. What their track track is. By the way, everyone's going to go Google Brandon Turner fraud now. Hopefully that doesn't turn anything up or my background check guy. I didn't do a good job. Well, it may, Brandon Turner is the name of a famous skateboarder apparently.

And I don't know if he did some shady skateboarding deals. That's funny. So, Amanda, do you need to be an accredited investor to participate in syndication deals or can anyone do it? And can you explain what an accredited investor is while? we're at it. Yes, that is a great question. That's actually not my expertise. This is a great question for a syndication attorney. In fact, I just took a class from Gene Trowbridge, who is a syndication attorney that teaches for the commercial real estate arena, because there has been a lot of changes.

So prior to the Jobs Act, only accredited investors slash sophisticated investors, which means financial planner or CPAs, people who are financially savvy, could invest in syndications. But that's changed now, actually. Syndicators can take on non-accredited, non-sophisticated investors. But there are a lot of restrictions and rules that they need to watch out for. So that's definitely something to run by an attorney before you proceed. It's really important when you're dealing with raising money to protect yourself

and make sure you're adhering to the rules. And I think that's a great point. And I was actually going to say that, you know, if you're at all interested in this topic, and I think we are going to cover this topic in more depth in the coming year, definitely make sure you talk to an attorney. Don't go out and, you know, just say, hey, I'm trying to raise money and start advertising it and whatnot. Before you do anything, find a good attorney who deals with this kind of stuff and talk to them, find out what's okay and get the ins and out. because there's a lot of stuff that can get you in trouble if you mess it up. Yeah, that is very true. Very true. Cool. Well, definitely interesting. It's cool to know about your background. But you know what, frankly, we don't really care about your background. We're here to talk about taxes. I care. I care. I care too. Actually, Amanda is one of our writers on the Bigger Pockets blog. and she writes some really, really awesome stuff.

If you guys have not yet checked her out, obviously we'll make sure to link to her articles on the show notes at biggerpockets.com slash show 49. But let's kind of shift and transition to the tech stuff. Are there any important tax changes that investors need to know about for basically 2014 and beyond? Well, definitely. Actually, some of the big changes that impact real estate investors and the general public as a whole actually already took place in 2013. I don't know if you guys remember what you were doing for New Year's Eve last year. But for us as CPAs, we were really hanging on the edge of our seat to look at what was going to happen with the fiscal cliff. So if you guys don't already know, what happened as a result of the fiscal cliff was that Congress passed a new bill.

It was called the Taxpayer Relief Act of 2012. So part of the relief was, you know, it makes you feel like, hey, the taxes have gone down, were all saved from this crisis. But one of the major changes that came out from that bill actually related to real estate investors. So if you've heard of Obamacare tax, correct? ObamaCare? Obama care? What is that? Obamacare or the surtax.

So essentially what that is in short is it's an additional 3.8% tax on investment income. And that's important to us as real estate investors because we make rental income for those of us with cash flow rental real estate. Also, when we sell properties, we have potential capital gains that might be subject to this new tax. And also, if any of the listeners today have trustee investments, you generate interest income. That's another one that's potentially subject to this new tax as well. So very important change that came out effective January this year. I thought the 3.8 was for a very specific target, something like 250,000. and profits or above was, it was pretty narrow that it wasn't it? It's not just anybody who

makes income is paying the 3.8% is that correct? Correct, correct. So this tax is subject to individuals who make total $200,000 per year or more, or if you're married, $250,000 or more. So that's kind of like a marriage penalty, right? Because if you're singles, 200 and married's only 250. Nice. Nice. I just want to point out really quickly to Brandon, who's listening along with our listeners that, you know, I know a thing or two about this stuff, man. You do. I know. Did you see me looking impressed when you said that? I did. I saw your eyeballs pop out of your head. I just. Wow. Yeah. I'm surprised, too. I'm very surprised because we teach on this topic quite a bit and not a lot of people know the rules or have even heard of it. Yeah. Josh, you're not just a good face. You're also a good mind. Yes, yes, all right, anyway. No, okay, so, well, that's, yeah, that was definitely a very, very important change. Are there any others that come to mind just, you know, really quickly? Yeah, another one that's along the same line is another 0.9% and that's on earned income.

And the similar threshold, it's people who make 200 or 250 and over. That one more impacts real estate investors who are maybe flipping or wholesaling or doing syndication. Okay, so that's kind of the evil twin sister to the Obamacare tax. Gotcha, gotcha. All right, so is there anything other than making less money that we can do to protect ourselves from these changes? Well, I wouldn't look at it as making less money. It's just more about making the right type of money. Okay.

You know, I mean, you guys knows one of the best things of being a real estate investor, especially as a landlord is deducting depreciation expense as a paper loss. So even though there are all these brand new taxes and they're taking away deductions, depreciation is still a strategy we can use. And in fact, for the most part, with depreciation, not a lot of people, not a lot of our clients at least are going to be paying this brand new tax anyway because it's based on net investment income. So it's after mortgage interest, after property taxes, management fees and all that great stuff.

Okay. Could you actually touch on something real quick? Just for those who maybe aren't investors yet and maybe are a little bit newer at this game, can you kind of explain what depreciation actually is? What do you mean by, you know, that's a great benefit that we have? Because it is, but I want to make sure everybody who doesn't own rental property yet also understands why it's kind of cool. Sure.

So the IRS has a loophole. Basically what they think is that they think that real estate, you're just like when you buy a car, the IRS feels like, well, the car is going to go down in value. And so if you bought it for $10,000, you get to deduct part of that per year because it's assumed to be going down in value. And they apply that same theory to real estate.

So if you buy a house for $100,000, for example, then the IRS says, well, I think you've owned it for a year. now it's lower in value, so you get to write off part of that $100,000 purchase price. And that's a huge benefit for real estate investors because even if you're in a time period where it's appreciating in value, the IRS still allows you to take a write-off assuming that it's still going down in value. So that's what we refer to as a paper loss. Essentially, you're taking a tax deduction and nothing actually really happened. the value hasn't gone down, you haven't spent additional money on that.

So is that lowering your base? Is that essentially what that does? Correct. So it lowers your basis so that in the future, when you sell, then you have a lower basis to calculate what your gain is going to be. Gotcha. So that means when you sell, though, you're going to end up paying more later on, right? I mean, you've got to pay back that depreciation eventually, correct?

Potentially, if you sell out of gain. Okay. And there are other strategies such as a 1031 exchange where you can defer the gain to the extent that you're going to buy a replacement property. Let's say you're selling a single family, you're buying a duplex, then you could potentially defer the tax on that gain. Okay. That's cool. So what other important write-offs do investors have? I think probably the most famous is going to be the mortgage right-off, right? Yeah, the mortgage interest write off. One of the things that came out in 2013, in fact, is for primary home owners, if your income is over 250,000 single or 300 married, that the IRS is going to start limiting your mortgage interest deduction. Now, the key here is, yes.

Oh, see? I got to make more money to worry about it. Yeah, but I don't make enough to worry about that, so it's all good. So that's on primary homeowners. But the good thing about it is for us as real estate investors, there's still no cap. So whatever your mortgage interest expenses, that's always going to be a write-off against rental income. Gotcha. Hey, so there's a lot of debate out there because I think it's been floated around in Congress that now's a good time to kill off the mortgage interest write-off.

Do you see that as just kind of politicking? or do you see that as potentially having any steam behind it? You know, I think we're already seeing that in action. I don't think that they would get rid of it completely. But with the phase out, right, if you make over 250 or 300, they're already phasing out your home mortgage interest. So yes, indirectly, they have already started to take that away. The good news is that under the new rules, they can only take away. up to 80% of your mortgage interest.

So you can always deduct 20% of your mortgage interest, no matter how much money you make. Okay, but previous to this adjustment, it was 100%, wasn't it? Correct, correct. Wow. So they're taking away a significant amount of write-off. So for those higher net worth individuals,

it's starting to make a lot more sense to pay in cash than it is to hold on and pay a note so that you can have those write-offs. Potentially, that's correct. But that's only for your primary residence, or is that for anybody's rental, even if they're rich, their rental property is still 100%. Exactly. And the reason is because rental is kind of like a business, you know, so they're not

limiting the deduction for investors. Well, that is a fascinating piece of information, and that changes my mind on buying that $10 million house I was looking at. Me too, Josh. me too. Yeah, yeah. Well, cool. Well, hey, let's move on a little bit to some tax planning stuff. What exactly is tax planning?

And why do we need a plan for it? Sure. You know, I think a lot of people feel tax planning is something very scary and only very rich people do. You know, rich people like Josh do tax planning. Can I open my books to you, Amanda? Just to prove and demonstrate that, yeah, that's just wrong. I've got three kids to feed. You know, tax planning could be, you know, a very simple process.

Really, it's about open communication, open communication with your tax advisor. What I always encourage people to do is to stay in touch with your tax advisor throughout the year. Because, you know, we all know tax law is changing all the time. And it's hard for the average investor or average taxpayer to keep. keep up to date on what all the changes are. And so from a planning perspective, you really just want to lean on your advisor, you know, give them a call from time to time for investors, you know, whenever you're buying or selling a property or you're entering into a new or different kind of transaction, those are always great times to just call your advisor because they will be

able to tell you, hey, you're going to, you know, you're going to do a lease option. You're going to sell something via lease option. So what are the things we should look out for? How should We structure this. Should we have an entity? So from a taxpayers perspective, it's really easy. It's really just about communication. What do you think at what stage in the real estate game should somebody actually go and talk to a tax advisor? I mean, I know from a CPA standpoint, you probably say, you know, always.

But like if I'm brand new, I don't have any rental property yet. I want to get into the game. Should I talk to one before I get started after I have one property, 10 properties? When does that make sense? Yes, that's a great question. And my answer, my surprise you. So, no, I don't think everyone needs to have a tax strategist and have this overall plan and legal entities. But I do think it's a good idea that as you get started, even before you purchase your first property,

to at least have a quick conversation with the CPA. So you know what are some of the things you want to look out for based on your scenario. Before you close on your first property, that's definitely a good time to have a more in-depth conversation. So that's what I would say for, you know, newbie investors, at least have a conversation. I mean, before you get started, you do want to interview a couple different advisors just to see, you know, which one works with you, which one jives with your personality. Okay. Where and how would I go and find somebody? Is there a specific certification that I'd be looking for?

And in particular, you know, I know there's a lot of tax advisors out there, but there's not a ton that are. super savvy in the world of real estate, or is that not true? Yeah, I think, you know, asking fellow investors is a great place to start, going to real estate clubs. And, you know, when you go, you'll know who are the people who are doing the deals, who are active in investment. Ask them who they're using. Most likely they're using someone who is well-versed in real estate. From a designation perspective, if you can, you know, if you can work with the CPA, that's always the best because they're the ones with the highest level of training. You know, I would just stay away from a lot of the franchise type of tax prep shops.

And the only reason is because a lot of times you're working with people who are just coming out of college or maybe didn't even go to college. So, you know, from that respect, maybe you might as well just, you know, do the research and do the tax return yourself. Yeah. Is that, and that's probably a pretty good point. I mean, you're talking, we're not going to name names, but there are people who will come out without degrees working at these places who are doing preparation. And it's something to be cautious of.

Yeah. And I think when you're interviewing CPAs, it's also important just to make sure they understand your business, you know, make sure they understand your lingo. So if you're talking about depreciation or if you're talking about lease options, you know, hopefully that's something they already. understand so that you don't have to be the one educating them on what those are. Well, and I think if you're educating your CPA or your accountant or tax advisor on what a lease option is, it's probably time to find a new one. Yeah. Hey, how important do you think it is that your CPA invest in real estate as well? I don't let people say that's a good idea to find someone. Is that vital or is that just a good

idea? Gosh, you know, for me, I feel like it is very important because I do have clients who have good CPAs, but their CPAs will advise against real estate investing, maybe because they're CPA slash financial advisors who want to direct you towards the stock market. Or maybe they personally just don't like real estate. So, you know, I don't think it's the end of the world that they don't, but I think it's very, very helpful if they also invest in real estate as well. Okay. All right, cool.

That's great. you know you had mentioned earlier entities and and you know we didn't we didn't have it in our notes to to cover this but you know I think it's an important topic can you tell us a little bit about that you know you're talking about me not purchasing a property as Joshua Dorkin correct you're talking about creating a company an LLC an S corp a C corp something like that and and purchasing either one property in that entity or purchasing multiple properties in that entity. Is that right? Correct.

Correct. And I'm glad you're asking me about entities because that's probably one of the most common questions that I get asked when I speak, whether presenting or talking to clients. So I know you're going to hate me, but the answer really is it depends. But I'll give you a little bit more than that. Amanda, make a decision here. We want real answers. You are not running for Congress. You need to answer the question.

So what it depends on is it depends first and foremost on what you're doing in real estate, right? Because we don't want to make the assumption that everyone is doing rental real estate. So if you're doing rental real estate, the tip here is that from an entity perspective, it really makes no difference on your taxes. As a real estate, as a rental real estate investor, you get the same deductions, the same depreciation, the same write-offs, whether you hold that piece of property in an LLC

or if you hold it in your personal name. And so a lot of times when you hear people talk about, oh, you must have your rental in an LLC. Generally, what they're referring to is the asset protection side of things. and I'm not an asset protection attorney, so I won't tell you all my crazy thoughts about that. Oh, we want to hear them. Gosh, I don't even know if I can say stuff like this on the show.

Well, let's upfront it with Amanda's not giving any legal advice, and of course you need to speak to an attorney about anything and everything that you hear on this and, frankly, all our shows. You know, if you're going to make any decisions in real estate, you definitely want to seek the advice of counsel before going forward. Okay. I like that. So for me, whenever I look at entity for rental real estate from an asset protection perspective, I'm always looking at the cost benefit. So for example, if I have a client who has, you know, not a lot of assets personally, just starting on a real estate, they have really no equity in the property. then it might be okay for them to actually hold that property in their personal name. Why? Because they have no equity and they have no assets that they're concerned with. On the other hand, if it's someone with a lot of net worth, then yes, I would highly suggest an entity.

What I hate is a lot of times I have clients that come to me after they formed five different LLCs. And the LLCs are set up to do such and such. And this one is set up to do such and such, but they're not really doing anything. And the reason I don't like that is because they've incurred a lot of costs to form them, first of all. And then they're going to have to pay me a lot of money because the entities have to fall tax returns. And if they're lucky or unlucky enough to be in California, the state wants $800 per entity. No matter what, if you don't even make a dollar, you got to pay $800. Exactly.

Even if you lose money, you still got to pay them. Yeah. Yeah. Yeah. No, I think it's important to hear. I mean, you know, again, Amanda's not giving. legal advice on what you should do, but she's just kind of talking about, you know, her take, her opinion on it, just to clarify and C-Y-A, so to speak. But yeah, I mean, I think a lot of people

will kind of assume that you have to do it. And I think the main reason that that asset protection attorneys will tell you to do that is primarily, you know, to protect yourself if you've got money. Yeah. Like I think the biggest misconception is people feel that, you know, I have rental properties, but it's not in an LLC. So I might have gone to a real estate conference. Oh, but I can't deduct it because I don't have an LLC. And that's absolutely incorrect. As long as you have an expense related to your rental, you could deduct it regardless of what funds you paid that expense with. Yeah. So, you know, however, so on the other on the other, on the other end of the spectrum, if you're someone who is active in real estate, meaning you're wholesaling,

or you're flipping, or you're syndicating, you're doing money-raising stuff, then entity does have a tax impact. So from a tax that, you know, I do strategize with people on what that is. So can you explain that? Because there is an actual distinction between somebody who's active in real estate and somebody who is not active in real estate. And what does that mean exactly? Sure. So when someone is a rental, real estate investor, you are never subject to self-employment taxes. On the other hand, if you're someone who's active in real estate, wholesale flipping, raising money, that type of income is subject to self-employment tax. And the easiest way to look at it is, you know, for people who make

W-2 income, right, we have our money coming from our paycheck, and then as part of the paycheck, you know, part of that money is taken out in payroll taxes. So payroll and self-employment taxes are essentially one and the same. The reason there's a difference is because the IRS, again, just penalizes people who actually work for a living. So they're saying if you're actively involved, if you're on the short term, buying, selling, wholesale, that type of stuff, then not only are you going to pay income taxes, but you're also going to pay self-employment taxes on that income. Gotcha. Gotcha. Hold on a second. I need to wake up, Brandon. He fell asleep there. No, I'm here. This is fascinating because, yeah.

Oh, there he is. I'm here. I mute my mic so my cats that tend to walk across my keyboard don't make noises. Isn't Amanda, there's also something to do with active real estate for somebody who spends X amount of their time doing real estate? What's that all about? Yes, I think what you're referring to is active real estate with respect to rentals. Yeah. The management of the rentals.

Yeah, that's what it was. Correct. So, again, going back, rental real estate is never subject to self-employment taxes. So if you spend 700 hours or 10,000 hours on real estate, you would still never be subject to self-employment taxes. And so from that perspective, that's what I was talking about earlier, it doesn't matter whether you have a legal entity or no legal entity. Now, when you're flipping real estate, for example, that money is generally always going to be subject to self-employment tax. So typically, from an entity structuring perspective, we recommend that you flip inside of an entity, such as an S corporation or a C corporation, so that you don't have to, so that it minimizes the self-employment taxes that you pay. just so our listeners can tell.

Brandon has called his cat over. I did not call it. To now sit on his lap. Distracting both Amanda and I. I did not call it over. It just, he saw that I was warm and... Lonely.

Lonely. And he decided to come and hang out. He saw that you were falling asleep. Yeah. He's gone. See what I mean? But, okay, so, no, that makes a lot of sense. But in terms of management, you know,

there are specific, tax implications of being an active participant in the management of your property versus not being active. Is that correct? Potentially, it kind of depends on your income. So, you know, the IRS has this quirky little rule that says, okay, if you're someone who's doing rental real estate and, you know, you have depreciation, you have all these right-offs, but if you're someone with higher income, then you don't get to use those losses to offset your other income like W2 for example.

But the way around that is that you show them that you're actively involved in managing your real estate. And that's typically referred to as real estate professional status. Yep. Yep. Does that mean you're the one out there plunging toilets and getting cats from underneath the house? Not necessarily.

Real estate professional just means that you have to be spending more time in real estate than you do at your other jobs or businesses. Okay, so if you're someone, let's say you're a part-time, you're a part-time teacher and you teach 20 hours, or let's say you teach 10,000, 2,000 hours a year. Well, that means you have to be spending at least $2,000 in your real estate activity, not necessarily plunging toilets. You know, you could be taking classes or looking for properties, but you do have to be spending more time in real estate than being a teacher.

What about this then? I'm getting specific because, you know, I can because I'm the co-host here. Wait, clearly, Brandon is now about to take advantage. I have taken advantage of this. A free tax strategy. Yeah, here we go. Well, here's what I'm wondering. A person who has a job like me who's working for bigger pockets 40 hours a week. My wife works full-time on the rental properties. She works, you know, full-time. So do we claim that or not? Yes, you can because, so as a married couple, that's very common. that one spouse is working maybe full-time, the other person does the real estate. So, yes, in your example, if your wife's not doing anything else, she's spending at least

750 hours for the whole year on your real estate, then she can qualify as real estate professional. And the best part about that is now you guys collectively can use all the real estate losses to offset your income from your W-2. Nice, nice. See, that was a good question. I but there's lots of people out there. It was. And just so you know, you will be billed. Let's see. That was about four minutes and four minutes. Amanda charges a thousand an hour. So yeah. Okay. 40 bucks. I don't know. I don't know. I didn't do the math.

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Okay, so let's, I don't know, let's move on a little bit to, because I know we could, this could be like the longest show we've ever done, so we don't want it to be the longest show ever. Why don't we move on to... I would like it to be the longest show ever. I think Amanda is fantastic. What are you saying? I think so too. I agree.

What I want to know is we are like for those listening live right now or the day this comes out the few days afterwards, we are at the very, very, very tail end of 2013. So I'm wondering, are there any... We talked about things changing and there were some things that happened at the end of the year. We've got a week or two left. Is there anything we need to be doing right now for those listening or anything we should be concerned about taxes this year. Yeah, yeah. Well, a couple big, a couple tips. So this is the last year of bonus depreciation. You know, we talked about a little bit about depreciation earlier. So this year,

if you bought new assets for your business, for example, you bought a new large SUV, let's say, that you're using for your business. Must be nice, Brandon. I don't have an SUV. This is the last year that you could write off up to 50% of that purchase price all in one year. Does that count for rental houses? I'm assuming that. You're just talking to equipment, right? Yes, yes. Not the property itself.

So if you bought a house, you can't write off 50% of it. But if you bought a computer or you bought new trucks, SUVs, appliances for your rentals, all these. So the caveat, it has to be brand new. So if you're a slum lord and you're buying. use refrigerators that does not apply. I buy used, but I am not a slow. Okay, maybe I...

Yeah, no. Yeah, and I'll stand up for all the slum. I mean, landlords out there. Just because you buy used equipment doesn't mean your slum lord. Thank you, Josh. Yes, yes, yes, yes. No, but that's great. That's really interesting.

So essentially, we've got two weeks left to spend some cash, is what you're saying. Spend some cash, exactly. And then also, you know, from a year-end perspective, outside of depreciation, if you're someone who does a lot of marketing, or, you know, just I would look at ahead in January 2014, what are some, you know, major expenses you think you're going to incur if you're going to, you know, redesign your website, for example. It could make sense for you to charge that expense on your card before the end of the year. That way, you know, you're just prepaying for that by what, two, a week. week or two, that you accelerate that deduction for one entire year. Yeah. Now, that's good advice. That's very good advice. Time to figure out how to spend this money. Well, so that's, no, that's really, that's really useful. Well, let's talk about

mistakes because I think, you know, I think it's really easy to go ahead and make lots of mistakes in terms of taxes because, frankly, I don't think anyone on the planet has actually read our entire tax code all the way through, despite what Amanda wants to tell you. So, you know, what are some common tax mistakes that you see investors make? Sure. Gosh, I think the most common one that I see is probably just not claiming legitimate deductions. You know, a real estate investors, what a lot of us do is, you know, we're really good at claiming mortgage interest and property taxes and, you know, insurance, right? That's no-brainers. But a lot of people aren't claiming car expenses. So if they drive to a property

that they already own or driving to new properties or even driving to local real estate clubs, a lot of that is missed. Or what you pay for membership dues to local Ria groups. Or websites like bigger pockets. Yes, exactly. That's also a tax deductible in case anyone wanted to prepay that right now for the next 10 years. That's a really good idea, Amanda. I strongly advise anyone to go to biggerpockets.com slash pro and sign up a year in advance. That's a great idea. Gosh, I don't even know what I was talking about now. Oh, man.

We were talking about mistakes. Mistakes. Okay. Yeah, so just making sure that you understand what are all the tax deductible items. You know, if you're unsure, always ask your tax advisor, you know, how can I deduct that? So, Brandon, you know, he has a cap, for example, right? How can I deduct my cat food? Well, it might not be possible, but if your cat is your security at a place that you're rehabbing, for example, right?

So maybe some of those expenses could be tax deductible. Can you get a write-off on, like, well, most cities don't allow pit bulls, but can you get a write-off on like a Doberman if you have a pet Doberman and put him in all your houses? Yeah, that's happened. That's happened in the past before, actually. there's been court cases where people were able to deduct to deduct pet food if their pets were used in their business. You know, there was actually a court case where someone was able to deduct money that he paid to his girlfriend. And what happened was, that was a true story. Wait, why is he paying money to his girlfriend?

Well, you're getting ahead of me there. Is that girlfriend in quotation marks? She did live in Vegas, Brandon. Yes. what what happened was it was a guy was a real estate investor actually and this went all the way up to the tax court. So real estate guy paid his girlfriend, took a right off for it. At the end of the day, he was allowed to take the deduction because he paid his girlfriend to stay at one of the properties he was rehabbing because there was a lot of thefts and stuff. So he paid her to actually stay, you know, I don't know where it was.

Maybe it was in the ghetto, but she stayed there. And he paid her for it. And he was able to get a tax deduction. So I think that's similar to your scenario, Josh, about a Doberman. But that might be better than sending your girlfriend there. Yeah, I don't know. Like if I want to send my girlfriend unless she's like a third-degree blackbell to, you know, sit on a rehab property to protect it. Yeah.

And my wife would be really pissed if I were paying to girlfriend. Yes, your wife would be upset. I just want to acknowledge, Josh, you had the total opportunity to throw in a Detroit, make fun of Detroit moments. there and you didn't. So you're growing. You're maturing. That's good. Wait, I thought I heard something. I'm sorry. We're trying to keep a professional interview going here. Yeah, I'm sure we are. All right. Anyway, so mistakes. We talk about those. You got any other good ones for us? Oh my gosh. Another other good ones that not necessarily made by the taxpayer, but believe it or not, I see it quite a bit when people actually don't

take depreciation expense. So that's something, you know, and that's more just a result of not working with a tax advisor who works with investors. But the easiest thing to do, what I always tell people is, you know, pull out your tax return from last year. On the Schedule E, there's a line specifically called depreciation, and there should be numbers on there for every property that you own. If you don't see a number there, you know, obviously time to move your books to someone

else. Another mistake was the real estate professional. We talked a little bit earlier. Brandon, in your example, we have a lot of people who, you know, maybe the husband is doing, is the husband or wife is working full time and doing real estate full time, right? So then neither of them is qualifying for real estate professionals. So that's a mistake that could easily be fixed by, you know, just delegating by splitting the job so that one of you is doing real the other one is working at the full-time job. Gotcha. That makes sense.

Yeah, no, definitely. So, you know, it's interesting because there are so many little things that you can write off in your business, and I think people aren't aware of it. You know, I used to be in the entertainment business. I used to live in SoCal. Whenever you say that, I always think like you were a stripper. God forbid I was a stripper. Nobody wants to see that business. Anyway, entertainment business.

No, but I mean, you can deduct haircuts. I mean, you could, it's, you know, because your livelihood is what you look like. You know, for example, us, if you and I, you know, part of our business now is podcasting, right? This is part of our business. So, you know, anything to do with our throats, I mean, writing off, you know, lozenges and that kind of stuff. I mean, you know, I know it's minutiae, but, you know, these are all little things that have to do with how we run our business. and those are acceptable write-offs, correct? Correct.

Yep, yeah. Interesting. All right, so, you know, next on the list here, and Brandon's got this written down, and I'll let him ask because I think it's an appropriate question for him. It's not an appropriate question for me. All right, so I don't have kids, but I hear they're expensive. That's what the rumor is.

My cats are expensive, and now I found out I learned how I can deduct their cat food. So I'm going to go have my cats stay at my rental property. But so if you have kids, those investors out there with kids, how can we get a tax deduction for the money that we spend on those kids if they're, you know, human kids, not cats kids? How do we, how do we get the tax deduction for that? Or is that even relevant at all to real estate? Yeah. No, it's definitely very relevant. You know, earlier I was talking to you guys about how I used to help my grandparents paint their vacant property.

right and so my grandparents would pay me for the work that I was doing and essentially that's how you know that's how you that's how you take a tax deduction instead of you know let's say you had two teenage boys instead of just giving them money for them to buy a car and take girls out on dates what you can do is you can have them come help you out in your business help you paint help you uh you know do door knocking um hang posters anything that's business related if they're helping you on the business, you can pay them a reasonable salary, and the amount of money you pay them becomes a tax deduction for you because that's a legitimate business expense. Now, is that not like violation of every child labor law? If my three-year-old was painting my

rental houses, I mean, wouldn't I get in trouble? So you'll have to, you'll have to figure out, you know, from the, from the, uh, EDD, well, that's what it is for California, EDD on what the restrictions are. Typically, every state will have requirements on, you know, how many hours. Yeah. A child can work if they're under the age of 10 or 12 or something like that. But, you know, you were in the entertainment industry, like you said. So you've seen babies who are part of diaper commercials or they're in the movies, right?

I suppose that's true. Yeah. Oh, she got you, Josh. Oh, man, I got burned. Well, I'm putting my three-year-old, my five-month-old to work, baby. Get painting kids. You do have cute kids. They could make it in the entertainment industry.

We're talking about real estate here. Let's screw our heads on, folks. Before you put your kids to work, the IRS does have their own restrictions or their requirements, and it's not necessarily age-related, but what they do want is that what you're hiring them to do is appropriate for their age, first of all, and what you pay them is reasonable for what it is they're doing. So you're five-month-old probably cannot be your IT guy. probably can't pay her $10,000 unless if, you know.

She's pretty good with a hammer. She might do better than some of the contractors I've hired. Yeah. So essentially those are the requirements. You know, it's something that is reasonable for their age. And then what you're paying them is something reasonable for the market. So if you weren't going to pay your son to paint for you and you were paying someone else, you know, maybe you would pay that person $500 or $1,000.

and then that's what you would pay your kid. Interesting. It's fascinating and that's a whole explanation why our tax code is so screwed up. Well, that's a whole long discussion. All right. So let's move on to a topic that's pretty popular. It's self-directed investing. Can we start first with what is the self-directed IRA?

Sure. Self-directed IRA is just like any other IRA. that you owe, you know, like in the past, you typically, most people will go to their local bank or financial planner and open up an IRA. The only difference with the self-directed IRA is you can use that to invest in real estate, notes, all sorts of assets. As compared to the regular IRA, you know, the banks will give you five or six different options of mutual funds or stocks or CDs. So that's really the only difference. All the rules are the same, the contribution amounts on the same. The only difference is that you have more investment choices because you get to choose what you want to invest in.

And what are those limits on the IRA? For this year, the maximum is $5,500 for regular IRA contribution. All right. So how does that help me as an like, or maybe it doesn't help me? If I don't have an IRA, if I wanted to use like, I can't just go put $50,000 into an IRA and then go buy a rental house with that. Correct? That's out of the picture. It depends, which is your least favorite.

Where's my bill? I want to get my giant cane and get her off the state. So for this year, it is possible for some taxpayers to put 50,000 or more into a retirement account. And use that for self-directed investing. It depends on how much income you have and what type of income that is. Okay, so to give you an example, if I was someone who's doing fix and flip real estate and I had a $100,000 profit, let's say, or, you know, $200,000 profit, then it is possible for me, instead of paying taxes on $200,000, it's possible for me to put maybe $50,000 of that into a retirement account, get a deduction, and then use that $50,000 self-directed to buy a rental property. Is it, you say it's a certain income levels. That means you got to be a lower income or a higher income to get that?

It's a higher income because how much you can put into a retirement account is a calculation based on that income. Okay. So, you know, everyone knows about the IRA, right? So we can put $5,500 in it. There are other retirement accounts like self-directed 401Ks or self-directed SEP IRAs. Those are the more advanced accounts where you can put in, you know, 30, 40, 50,000. per year. Oh, okay. So it is possible. There are ways that a person could, they don't have to wait 10, 15 years in order to have enough money to, I mean, because that's always what I used to think.

I was like, well, if I can only put 5,000 a year and I'm going to be like 100. Yeah, I'm going to be 150 before I can buy anything with my, with my money. But there are, there are answers to that if you have a qualified professional telling you what to do, correct? Correct. Correct. Yeah. So, you know, right now, I don't know if you have, if you have a 401k at work, let's say, you can put 17,500 this year into your 401k. Yeah, where's my 401k? That's a good question. Where's mine?

Oh, that's right. Yes. So if you did, if you had a good boss and he gave you a 401k. Oh, my God. Holy cow. Can we find another guest? I know. I don't think I'm coming back.

The CPA is throwing jabs. I'm going out firing. I love it. I love it. So let's say not you, Brandon, but let's say there's a listener on the call who had a 401K with their work. And they put in 17,500. Well, they potentially could move that money into a self-directed account and use that for real estate investing. And the next year, maybe they put another 17-5 and move it over to a self-directed.

So it is possible to do that in less than 100 years or whatever you said earlier. I have the same question as Brandon. I think it's actually probably the best question he's ever asked on the show. I don't think so. I got better ones. Yeah. All right. It's great.

You're done. So we talked about mistakes for tax purposes. What about common mistakes you see people make with respect to self-directed investing? Common mistakes for self-directed investing. Gosh, I think the biggest one is sometimes I see people take money. out of their retirement account to invest instead of going the self-directed route. Every year I probably have a handful of these people who talk to either their CPA or their financial advisor and they say, hey, I'm going to get into real estate.

I have a bunch of retirement money. I want to move it over to real estate. And they say, oh, no, the only way to do it is to take out your retirement account as a distribution, pay taxes, penalties, and then invest in real estate. So I say that's probably the biggest mistake is people not even knowing they can do it. it. The tip is, you know, if you have an IRA or a 401k and you want to move it to a self-directed arena, what I recommend is just doing a direct custodian to custodian transfer, meaning if the money right now is with fidelity, you have fidelity, transfer it directly into a self-directed

custodian so that the money never touches your hands. And that way, you don't have to worry about potentially making a mistake and then having to pay taxes on that. Okay. And in terms of those custodians. So you can't open a self-directed just at any brokerage, correct? I mean, there are firms that are specific to that like entrust, equity trust, and on and on and on, correct? That is correct. So what happens a lot is, you know, if you have fidelity, for example, and you go and you say, I want to open a self-directed account, and they're going to say, yeah, sure, we'll open one for you. However, here, still, here are the 10 options you can invest in. So that's still not a truly self-directed. If you want real estate or no,

or something other than the market, something other than the stock market, it does have to be one of these special custodians. Gotcha. Hey, could I just jump in and ask a real basic question? Again, for those who are brand new to this stuff, what's the benefit of a self-directed IRA? I mean, why would we even want to do that? That's a great question. Thank you. Look, I'm full of questions today.

Oh, my God. Man, two reasons for self-directed IRA. of one is if you're someone who's brand new to real estate and you want to buy a property, but you just don't have any money, you don't have cash, right? But why all of your money is tied up in a retirement account that you've been putting money into for several years? So that's one reason why you want to use self-directed investing. It's cash that you can use for real estate. The other reason really is just looking at return on investment. So if you're someone who's got some money accumulated in a retirement account and it's earning 2% in a CD or 5% in the stock market.

But you know you can generate a higher return by putting into real estate. That's the reason why you want to self-direct that. That's right. I didn't know CDs actually turn out 2% these days. I thought it was still like half a percent. You're probably right. Yeah, yeah. All right.

And before we move to the next section here, do you have any best best? practices you suggest with respect to self-directed investing? Best practice, I would say the main thing, I guess the number one tip I would say would be if you know that you want to do self-directed investing, move your money over and open the account first. What a lot of people tend to do is they'll keep their money with fidelity and then they're going to look for properties. And then one day they're going to find that perfect. property or the perfect deal, but they forget that it's going to take anywhere from a week to a few weeks to move that money over. And by the time the money's over, the deal is gone.

So, yeah, once you make that decision, you know, I do want to go the self-directed route. I no longer want my money in the stock market. Then it's, you know, it's time to move the money over so it's parked and ready for you to deploy. Gotcha. Gotcha. I've got a question. This is not a personal, but this is a question, a friend of line is dealing with. Since Brandon got to ask a question, I know somebody who's got a property that the property is partially their home and partially a business. And can you actually 1031 a property like that? Or how would that work? Yes, you can. So is this like a duplex? No, for example, I guess that's probably something similar. If it were like a house on a ranch and the

ranch is the business and the house is the house, obviously. Yeah, you can. You definitely can 1031 exchange. The thing that I would encourage you to look at is, you know, as a primary home, if you're someone who's married, you do get up to $500,000 of tax-free gain already. So if you do a 1031 exchange, you are potentially losing out on that tax-free gain. So that's just something to strategize on. But yes, that is possible. No, that's good. I just, you know, I felt like Brandon asked a personal question, and I thought it might be appropriate that I get, you know, my four minutes of a free counsel. No, but I actually think, Josh, you touch on something really good that we need to is every real estate investor works from home. I mean, like, they may have a job as well, but they obviously have their base of operation at some point in their house.

So let's talk about the home office deduction. How does that, what is that? How does that work? And should we even claim it? Is that just a red flag? Wow. Another good question. I'm on fire. Yes. On fire, fire, fire. Home office deduction is actually, like you said, most real estate investors actually have one. A lot of times I see people not claiming it. And the reason is because of the scare tactics, right? Maybe the old CPA said, oh, it's a red flag.

It's super scary. But in fact, one of the changes that came out this year is the IRS is actually making it easier for people to claim the home office deduction. So they're doing it where, you know, for car, like for car, expenses, you can do a standard mileage deduction. You now have that option with the home office, too. So instead of keeping receipts for all of your electricity bills and phone bills and all that, you could potentially take a standard deduction from the home office. In terms of who qualifies, essentially two things. That space has to be exclusively used for the business, meaning you can't

also have your baby's nursery be, you know, right there. You can't be working from the nursery. Your office can't also happen to be your dining room kitchen table. Okay. You need a dedicated space, right? Exactly. Dedicated space. And the other, the other requirement is that it has to be the place where you're primarily, where primarily your business is run. So, you know, a common example be, you know, a realtor. Okay. A lot of times, realtors work from their office. That's where they make offers. They look at properties and stuff like that.

But they also go to the broker's office because there's like a temporary hoteling cube that they can go to. Or they maybe use the conference room, for example, at the broker's office. So that's an example of where home office works because even though you go somewhere else to meet with clients, but your home is where you do most of your actual work that allows you to claim the home office deduction. Fabulous. Yeah, that's fabulous. Amanda, I wish we had more time. I really do.

We didn't talk about 1031s. We didn't talk about a lot of things that I wanted to. But we've got to move on. We've got to. And you know what's going to happen is Amanda is going to keep writing amazing content on bigger pockets. And you could learn all sorts of great information from her there. And with that, I think it's time to move to the fire round. It's time for the fire round.

Oh, scary. All right, these questions all come directly from the Bigger Pockets Forum. These are all actually from the like tax forum. So let's just go with number one here. Are business slash real estate books tax deductible? And then the second half of that question is, what about guru boot camps? If you go to some, you know, $20,000 weekend boot camp, are those all tax deductible? Yes, they're definitely tax deductible.

No. It better be. Cool. It's about the only value you'll get out of it. What about a cruise? What about an investor cruise? Like if the BP summit was at sea or something, that would be cool. Yes, that's a little bit tricky.

And that's, short answer is generally the cruises are not deductible. And that's just a loophole that they have about cruises, being on international waters and why that's not deductible. Yeah. So if you guys are planning a cruise. We're not. Man, that cruise at the street lobby needs to get on the IRS. Yes. Exactly.

All right. Okay, well, no cruise for the bigger pockets next summit, but that's all right. I'm still going on one in February. I'm just not deducting. Ah, I'm going in January. Nice, nice. Oh, it must be nice. Yeah, I'm going nowhere.

Yeah, what is yours? Oh, that's right. You have kids and, you know. Wow. I like you less and less every day. I good. So, Amanda, next question. Should a real estate investor have a health savings account?

Yes. Generally, I would say yes. If they qualify, if they have a high deductible insurance, why not? I love the HSA because it's one of the only things in the world that gives you a tax deduction when you put money in. It grows tax-free and the money comes out tax-free. And more importantly, you can use that money into real estate. There's self-directed HSAs as well. I've heard that.

That's fascinating. Is there a limit on how much you can put into an HSA? Yes, I think it's a little bit over $3,000 this year for single and then a little over, I think it's about $6,200 for family coverage. Oh, so you can actually use this to buy Detroit property. There you go, Josh. You got it in there. You could. All cash.

Yeah, well. I mean, because obviously you can't do squat in Los Angeles. Yeah, you can't. Well, what about this then? Could you, this is going to be my next fire round question, even though I didn't have it pre-written. All right. A wholesaler. If they were to take a thousand dollars from their HSA or their self-directed IRA, and then they were to use it as an earnest money on a property, and then they were to flip that contract to another buyer and they were to make $10,000 on it.

Is that $10,000 tax-free? Correct. Wow. So a wholesaler has a really large incentive for having a tax planning strategy. Yeah, exactly. Awesome. That's pretty nice. That's pretty nice.

All right, I've got one. A tenant completely trashed my unit, been there, done that, and now it needs a total rehab. Can I count the entire project as a repair, or do I have to expense it? I think my answer is going to be an unpopular one. It's going to be it depends. It depends on what are the items that are being fixed. So, you know, maybe the fact that they trashed the toilet, the appliances, you have to redo all that, that would be repairs expense. If as part of that, you have to redo drywall and all those kinds of things, that would still be an improvement, unfortunately.

Interesting. Fascinating. All the more reason to talk to your accounting professional, isn't it? Yes. There you go. All right. Next question. Can I deduct the cost of an iPad if I plan on using it, at least in part for business? but I'm sure I will also play some angry birds with it. Oh gosh, my answer depends on if the IRS is listening to this show or not. So IRS, if you're listening, no, it's not deductible. It has to be 100% business use. But I think though in reality, most people are using our devices majority for business. You know, maybe sometimes if you happen to play Angry Bird on it, which I highly recommend to get.

which I highly recommend against. But if you happen to, I think that's immaterial enough, you can probably get away with it. Fascinating. All right. Last question here. Amanda, I need help. Amanda?

Yes, yes. Yeah, hi. Amanda, Amanda's falling asleep on her own interview. Amanda, I need help. I'm getting audited from the IRS. What do I do first? Well, that's a good question. And in fact, we've seen audits on the rise.

Not for our clients, fortunately, we really haven't had that many. But my uncle, who's also a CPA, he said that he's seeing tons of audits. And in fact, he was thinking of changing his business so that he specializes in dealing with audits. So, you know, if you get audited, I really, you know, the first thing is don't freak out, right? You know, just take a deep breath. And then my suggestion is to send that notice to your tax advisor, okay? Whoever prepared that return. You might have changed CPAs from that time because, you know, you might be being audited

for like a few years ago. But send it to the person who prepared it first and see, you know, if they include audit protection as part of their fees or, you know, if there's going to be any additional fees for that. It's generally better to have someone represent you because there's a buffer point. Okay. So what happens is if my client got audited and they said, what is this? What is this $30,000 expense or give me your documentation for your real estate hours?

Well, now I have time. I can say, oh, well, let me find the client and ask, you know, so now that buys you a week to put this stuff together. If you represent yourself, you're sitting across on the agent, you kind of have to just, you know, show them what you have. Gotcha. Good, good tip. All right. Good fire round. Good fire round.

Anyway, all right. So fire around. That was great. Lots of, lots of good stuff. I think it's time to move this forward and move on to the... Famous Four. All right. Famous Four, these are the same questions we ask every guest, and I like these questions.

So, number one, what is your favorite real estate book? Oh, gosh. I have to say rich, dad, poor dad, because that was my first. I don't know if that's necessarily real estate specific, but... It's good. I know. It's my choice, too, so... There you go.

All right, fabulous. All right. Amanda, your favorite business book, and no, you cannot cite the IRS code. I really liked the four-hour work week because I'm a very lazy person. I like to work as possible. I'm glad to hear that about the person I was about to hire as my accountant. But it's about working smarter, right? Yes, yes. All right. That's a very popular book amongst our guests. What about hobbies? Surely it's not all number crunching for you.

Do you do anything exciting out there in the land of sunny California? Yes. I'm afraid I'm going to have to bore you guys on this one. My favorite hobby is actually eating. I love eating. I'm a foodie. I love going to all types of restaurants and home the walls. You know, Yelp stuff.

Yeah. Where do you live in Southern California? In Orange County in Fullerton. Okay. Okay. Gotcha. Gotcha. Yeah, I'm a foodie too.

and I love going to restaurants in SoCal when I get out there. And so that's awesome. Foodies unite. I just like pizza. I just want pizza. That's something bad. All right. Final question of the famous four.

From a tax standpoint, what do you believe sets apart the real estate investors who succeed and do great from those who don't and they maybe, you know, I don't know, fail, give up, whatever? So when you say, when you say, say from a tax standpoint, you mean like a good at saving taxes? Yeah, maybe like, you know, most of the ask this question always like, what do you see successful investors do differently? But I kind of want to get your take on what do you see from a tax standpoint, those who save the most taxes or have the best luck with taxes or whatever you want to call it.

I mean, the people who scam the system the best. Is that what you're trying to say? The people who play the system the best, not scamming. What are they, what's the difference between them and everyone else? Got it. Okay. They pay them into cash under the The best is probably answer number one. I think, you know, even within the tax world, I think the most successful real estate investors are the ones who actually implement. So, for example, we do a lot of tax planning with our clients. So we come up with strategies and ideas.

But it's only as helpful as your willingness to actually implement. So if we're talking about opening entities or setting up retirement accounts, you know, simplistically is following directions, right? If your advisor tells you to do something, you do it, and then you see the results of tax saving. So I think that would be my answer to your question. All right. I like it. Amanda, I got to tell you've been a great sport.

Yes. No, seriously, you've put up with Brandon's abuse throughout the show. And you've answered concisely and definitively, and every question asked of you. Never waffling or wavering, you know, never giving a, it depends. And we appreciate that. Thank you so much for having me on the show. It's been, no, honestly, it's been a real pleasure. We've really enjoyed it. And to be

frank, I was, I was a little nervous. I said to Brandon yesterday, I was like, Brandon, we're doing a show on taxes. This is going to be incredibly boring. And I've been at the edge of my seat the whole time. So it's really good stuff. Thank you. Thank you. Thank you, Amanda. We'll see you on the site. All right, everybody. was Amanda Hahn, the CPA from hell. Clearly. No, Amanda's awesome, awesome, awesome. We love her. If you guys haven't checked out her stuff on the Bigger Pockets blog, definitely do that. We really, really want to thank her for the time.

And as we talked about up top, definitely check her out on the show notes at biggerpockets.com slash show 49. But as we said earlier, you know, don't get into your whole store and ask her for free advice. If you've got questions about anything we talked about, fabulous, but you're going to have to hire a CPA guys if you want that financial feedback.

Otherwise, thanks as always for listening. We wanted to make sure to get this show in before the end of the year because there are some really good last minute tips in there. So hopefully you got those. That's it. Keep following us. Keep engaging.

And don't forget that quick tip about Gmail from the front in the show. And otherwise, jump on Bigger Pockets. If you're not doing it already, we'd love to have you. We'd love to see you participating and growing your network with us. So come on board. That's about it. I'm Josh Dorkin. 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 hype, you're in the right place. to join the millions of others who have benefited from biggerpockets.com.

Your home for real estate investing online. This is the Bigger Pockets Podcast Show 49. Thank you all for listening to the Bigger Pockets Real Estate podcast. Make sure you get all our new episodes by subscribing on YouTube, Apple, Spotify, or any other podcast platform. Our new episodes come out Monday, Wednesday, and Friday. I'm the host and executive producer of the show, Dave Meyer. The show is produced by E&K.

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