BiggerPockets Real Estate Podcast - 689: Landlord Tax Loopholes That’ll Help You Pay ZERO Taxes in 2022 w/Matt Bontrager

Episode Date: November 17, 2022

Non-investors hate real estate tax loopholes. It always seems like the wealthiest landlords, apartment owners, or short-term rental hosts walk away with not only massive income but little-to-no tax bills at the end of the year. Are investors unethically avoiding taxes OR are they carefully, quietly using the tax code to build wealth and bring their tax burden down to zero? And if the big investors can do it, can average investors use the same strategies? Whether you own one, ten, or a thousand rental units, Matt Bontrager, CPA at TrueBooks, has a solution for you. He’s been working with real estate investors for years to help them minimize their tax burdens and maximize their portfolio values. And unlike most CPAs, Matt can explain these strategies in a way that excites you, instead of slowly lulling you into a depreciation-induced dream. Matt touches on the most powerful ways to eliminate your taxes in 2022. These tax strategies work for almost every type of investor, whether you’ve got a full-blown business or just a short-term rental side hustle. These tax tactics, when used correctly, can allow you to walk away from 2022 with a bigger refund, no tax bill, or years’ worth of losses to roll over so you walk into 2023 in a better reposition than ever before. In This Episode We Cover: The massive short-term rental tax “loophole” most investors are unaware of Tax preparers vs. advisors and when you should start hiring these team members Cost segregation studies and using them to eliminate years’ worth of tax bills Bonus depreciation write-offs and why every investor MUST take advantage of this before the end of the year Real estate professional status, its benefits, and what you need to do to obtain it Tax avoidance strategies the wealthy use that almost any investor can mimic And So Much More! Links from the Show Find an Investor-Friendly Real Estate Agent BiggerPockets Youtube Channel BiggerPockets Forums BiggerPockets Pro Membership BiggerPockets Bookstore BiggerPockets Bootcamps BiggerPockets Podcast BiggerPockets Merch Listen to All Your Favorite BiggerPockets Podcasts in One Place Learn About Real Estate, The Housing Market, and Money Management with The BiggerPockets Podcasts Get More Deals Done with The BiggerPockets Investing Tools Find a BiggerPockets Real Estate Meetup in Your Area David's BiggerPockets Profile David's Instagram Rob's BiggerPockets Profile Rob's Youtube Rob's Instagram Rob's TikTok Rob's Twitter Understanding Rental Property Depreciation—A Real Estate Investor’s Guide 4 Real Estate Tax Strategies That Can Protect You From Inflation Books Mentioned in the Show Tax Strategies by Amanda Han & Matt MacFarland Advanced Tax Strategies by Amanda Han & Matt MacFarland Connect with Matt: Matt's BiggerPockets Profile Matt's Instagram Matt's Website Click here to check the full show notes: https://www.biggerpockets.com/blog/real-estate-689 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Check out our sponsor page! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast show, 689. I can buy a $50,000 car, put no money down. And if, let's say, say it's over 6,000 pounds and all that, I can get a $50,000 deduction for not putting any money down. So that's why depreciation is so powerful because you get so much more. You get so much bang for your buck, we'll say. With one night, everyone. This is David Green, your host of the Bigger Pockets Real Sick podcast here today with my co-host.

Rob Abasolo, who brought in one of his first. friends and people that work with him, Matt Bontrager, who is a managing partner at TrueBooks CPA and does Rob's tax planning. So we got into a great conversation with Matt, which I think was maybe one of the most fruitful and simplistic explanations of how to save money and taxes that I've ever had. Rob, what did you think? Yeah, man. So this specific episode really came out of one of the more common questions that we get, but a very specific YouTube comment, is it okay if I read it really fast? Yeah, let's hear. Okay, so it says, hey, Dave and Rob, I'm a big fan and think you guys are great.

So let's just take a minute to marinate on that. We're great, David, don't forget that. I think it would be awesome if you guys could go deep into the short-term rental loophole, go deep on the tax savings of bonus depreciation through cost segregation, which you touched on a little in this episode. Thanks and keep the great information coming. So, yeah, I think the cost segregation, the short-term rental loophole or hoophole, whatever you want to call it, it's a really big topic right now.

I'm seeing it all over Instagram, all over TikTok. and we bring in a pro to actually come in and lay it down and just give us all we need to know. So I'm excited because I think a lot of people after today's episode are all of a sudden going to be like, hmm, how do I, how do I buy an Airbnb to cancel up my taxes? So yeah, I'm excited. Yeah, and if we're being completely transparent about this, this is something that a tax preparer would probably charge you thousands of dollars to teach you. You're literally getting that and this is not a sales pitch for free in this episode.

This is what Matt would charge people to tell them. This is what my CPA charges me to talk about. In fact, I think they even charge me sometimes to go look up the information that they are then going to go charge me to tell me about, right? So if you like getting free information that will save you tens of thousands of dollars or more, would you please do us a favor and leave us a rating or review on Apple Podcast, Spotify, wherever you're listening to this? That's all that we ask for. We're never going to charge you for information. We just need to make sure we stay at the top of the charts. And with that, let's get into today's, are you going to throw it to me or can I, sorry, I felt, I was feeling froggy.

Did I just do your thunder? I like to just grabbed it and took it and ran with it. Yeah. If you're feeling froggy, leap. Okay. And for today's quick, quick, quick tip. You know, whenever you're trying to plan out your taxes, it's best to really have a good understanding of your accounting and your bookkeeping at least by October. So that you have roughly about a quarter of the year worth of time to figure out how you can, you know, get rid of some of that tax.

bill, slice and dice that tax bill to hopefully zero if you're using all the right tax strategies and tricks out there. Otherwise, if you're waiting until December to get all of your bookkeeping in order and you're trying to figure all this stuff out, you're not going to have enough time, especially if you want to buy more real estate. If you want to buy more houses, that takes time. It takes two, three, four months sometimes. So the faster you can start planning, the more time you give yourself, the more likely you are able to cut your tax bill pretty significantly. How'd I do, Dave? Amen to that.

In fact, that was only one take, which I don't know that I've ever seen you do. You are clearly developing very nicely. Thank you. I've learned from the best. Now, if you listen all the way to the end of today's show, you will actually hear us give you some examples of how to take all of the tax strategy you've given you with other strategies like house hacking and borrowing money and leveraging. And it all comes together for some very, very simple ways that you could shield your W2 income

with very little money down. And that's the beautiful thing about real estate is as you're putting in your time listening to these podcasts and you're developing your tool belt here with all these different tools, you put them all together. You can create something beautiful. So you'll see at the end sort of this like culmination, this climax of how you can take all this information, put it together. Shelter your income and then take that tax savings and put it right back into real estate investing. What if I told you you could forget everything you know about investment property loans? Because host financial is rewriting the rulebook, tossing out those pesky, DTI restrictions. They focus on your property's income potential. No tax returns or personal income

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Real estate investors, the April 15th tax deadline is coming fast. If you own rental property and haven't done a cost segregation study yet, you could be handing thousands of dollars to the IRS that you don't have to. These studies let you right-off as much as 25% of your building and generate huge tax deductions. Costsegregation.com is an online self-guided software that makes cost segregation fast and affordable. So it finally makes sense for smaller rental properties purchased for as low as $100,000. With pricing under $500 and an average savings of over $25,000, it's just a no-brainer. What's more, audit support is included by the number one cost segregation company in the U.S.

but you must complete it before the tax deadline. Go to costsegregation.com and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to cost segregation.com before April 15th. Let's bring in Matt. It's going to be a good one. All right, Matt Bondrager, welcome to the Bigger Pockets podcast. How you doing, buddy?

Doing great. Super pumped to be here. This is a huge thing for me. Well, awesome, man. Well, I want to throw you right into the fire here if you're cool with it because we actually get a lot of tax questions and you are my tax guy. You are my personal CPA and I was like, I want to put you to the test in front of everyone at home. Are you up for the challenge? I am. Hit me. Okay. First question. Fellow house hacker. I have my first house hack and I'm wondering how to best list it on my taxes.

Do you get a difference between claiming the property as a rental versus a personal residence? If so, which would be better to do? I know this various state by state, but I'm sure there's some sort of commonalities. I'm in D.C., by the way, in case you have firsthand experience. Matt, what you got? Okay. So first, house hacking is a great way to build wealth starting out, right? And so when it comes to house hacking, part of the property is going to be used as a rental. Part of the property is used as your primary. It's going to be more advantageous to, one, take the expenses like your property taxes, your mortgage interest, utilities, and things like that against the rental income that you're receiving because you're going to have to report the

rental income from the tenants you have in the property with you. So you're going to want to lower that income with those expenses. And it's basically going to be pro rata. So if half of the home is listed for rent and used for rent, you would write off half of those utilities, half of that mortgage interest and things like that. So yes, better to take against the rental income. Okay. Okay. Very good. Very good. Very concise and very clear. Good job. And it's like, we didn't even feed you this question beforehand. Question number two, at what point did you decide to get an accountant, I typically do my own taxes. I just started my investment property portfolio last year and I have less than five doors. I'm on track to have 10 total by the end of the year. Also, I have an LLC,

but I go back and forth on whether it's really necessary, right? At least until I reach 10 more doors. So I guess they're asking, at what point shall someone consider an accountant? Really good question, because we're also going to segue into when you should hire an advisor versus a tax preparer or an accountant. My answer here would be, I'm a fan of hiring a professional when you either become a landlord or when you have a small business. At that time, you need somebody that knows what they're doing. But when it comes to hiring an advisor versus just like a tax accountant to prepare your tax returns, at this pace for what you're on, I would hire a CPA or an advisor that can help you tax strategize, not just prepare your tax returns. All right. All right. Take a deep breath. We don't ever do this,

but how do you feel after just giving you a couple of, I don't know, softballs, curve balls? I don't know which one these would be classified for you. Probably softballs. Both were pretty high lob softballs, but the second one, the first one was good because that does get a little bit nuanced with, hey, I'm living in this property, but also renting it. And so there's some complexity there with separating the expenses. But, no, those were good. Okay. Well, awesome.

Well, now that we've proven your credibility to everyone at home, tell us a little bit about yourself, man. What do you do? Give us some background here. Yeah, so I'm 30 years old. I'm a dad of three hooligan kids. I have really young kids. I got a three-year-old and twin one-year-olds. And I'm a CPA. I love money. I love finance. I went to school for accounting. Luckily enough was one of those degrees that I got where I use it every day. And I've always been in accounting. Because I text you every day. I'm like, hey, can I write this off? I got to stay sharp. So that's what keeps us sharp. But no, it's great. And so I've been in accounting since I left school. I've stayed in public. accounting, which is pretty important to recognize because it's, I service a multitude of clients, right? I'm not working at an accounting firm just servicing one client or I'm not working at one clients in their back end accounting office. So, but yeah, so 30, I got a family going, I'm growing the CPA firm that I'm a part of. I'm the managing partner here at TrueBooks.

And just staying sharp, helping people with their taxes, strategizing to bring it to zero if we can. Yeah. Right. So that, yeah. That's a goal. Yeah. Always the goal. I'm very jealous. because David, I think David is, he bought a commercial property that's wiped out some of his to tax bill there for a couple years, right, David? Yeah, two years basically got covered. So, Matt, you touched on a couple of points here, but can you really, can you walk us through the difference between being a tax prepare and a tax advisor? Because I know that they're kind of two very different functions.

Is that, is that right? They are. So most people that are using a tax accountant, the old school style is they're going to prepare your taxes. So I've always made the joke that it's awesome because anybody I shake hands with I can do business with because they need to file a tax return. But when it comes to you running a business or becoming a landlord growing a portfolio, you need more than somebody that just understands the forms that you're sending them and preparing your return. All they're doing is really filling out the report card for what happened in the previous year. And so what's important now is you need

that next level of advisory, somebody that's going to help you forward plan. to, hey, buy this building. If you do, it's going to lower your tax liability by this many dollars. Or if you do this within a couple years, you will be at this stage. So somebody that's helping you plan and look at things in the future is more of that advisory role. And most people now, they either do their taxes themselves, like we just saw in that question, which is fine. I used to do my taxes myself as an accountant before I started to do tax. But now, once things get a little bit more complex, I would at least hire a professional to prepare your returns. You'll get a couple questions with them and things like that. But when you're starting to grow and

run a business or grow a portfolio, you need to sit down with somebody and look at everything holistically, which is where an advisor comes in. So for example, at our firm, those are two different services. Like, we have a tax preparation team. We have an advisory team. And it's because those roles are completely different. So two components to this game for sure. Yeah, I miss the good old days where, you know, basically from the ages of 18 to 26, I could log on to turbotax and put a couple things. Maybe I would even get a return. Maybe get a $1,000. Refund. And then I became self-employed. And I've really understood the importance here of proper strategy, really, really early on in the year. So what is it exactly that you do? What's your particular specialty?

So we specialize in three things, accounting, which will also go over. So doing the books and sort of the bean counting. We do tax preparation and then we do tax advisory. I specifically am focused on the advisory side and in real estate. So 99% of our clients have a touch point in real estate, whether they're agents, landlords, developers, whatever it may be. But we specialize in tax and then in a subsector of real estate. it's the most tax of contagious moves you can make are in real estate. Well, I can speak to your advisory skills, my friend, because you saved me, I don't know, I would say at least $150,000 in taxes, but probably more than that, and hopefully more than that this year too.

So I know we have a lot to cover here. So I want to get into some questions and just sort of understand and help people understand really everything that they should be thinking about as they start planning for taxes and everything that goes into it. Is that cool?

Yeah, for sure. So why is your accounting so important for anybody in the real estate world or if you're self-employed or if you're really trying to strategize with the whole tax side of things? What makes accounting particularly important? So there's a few reasons but of just why it is the core backbone to every business. One, if you're looking to get a loan, your loan officer is going to ask for tax returns and year-to-date P&Ls and balance sheets. So if you don't have your accounting, you will be scrambling.

If you're going to sell your business, they're going to want to see the profitability, the balance sheet, what your numbers look like. If you're looking to JV with a partner, they're going to want to see how your business is doing, see the KPIs. And last, what hits us closest to home is people see us and they're like, great, I'm in this situation to where I can use an advisor. And the problem is, if you come to us and we go to sit down in tax plan and you don't know what your year-to-date numbers are or any numbers, we can't even start. So while accounting is boring and it's like again, bean counting the green visor in the back room, it is literally the backbone to everything business related. So that's why I tell people. I just got off a call earlier and they were saying, hey, I'm just starting out.

I'm about to buy my first flip. I have one rental. What would you do before year end? And I pose the question of could you pull your financial statements right now through at least September? And that answer was no. My answer to him was I would scramble to get your accounting caught up. to at least October before doing anything else. Because again, it's going to be,

it's the first step to anything else that you want to do. And again, it can be costly, but it's such a requirement, which I think you both now could attest to, Rob, we've had a lot of conversations about accounting. So, again, I can't emphasize enough. No matter what talk I do if I'll like get to do a speaking engagement, it always ends with and comes back to the importance of accounting. Yeah, and just to clarify for people like punching in on that,

that's bookkeeping, right? properly understanding how much your how much cash flow is going into your business how much cash flow is leaving are you profitable there are months where I really when you just look at your bank transactions for example it shows you two numbers money going in money going out if you're looking at that it's a very in my experience inaccurate way of really understanding the profitability of your business just because money comes in and out at different points in a month but it doesn't necessarily reflect. I don't know. They could have implications for many months down the road and stuff like that. So for 2021, I was having a VA do a lot of my bookkeeping, but my business exploded. And then I

gave you my books. And you were basically like, yes, thank you for these for 2022. Would you mind putting them in a garbage can and pouring gasoline on it and lighting it on fire? So now we're having to scramble to get to get back. And I know that a lot of the, one of the main questions we get in the forums a lot is, should you wait until you're established to dial in your bookkeeping? It's really the first thing that you need to do, right? The very first thing. And that's where I tell people, if you're comfortable using a spreadsheet, I mean, I'm in spreadsheets hours a day, cool.

If you can use a spreadsheet and track your money in and out, your expenses, your income, great. But I'm a fan and I'm not affiliated with them, but QuickBooks Online. They make it so easy. You sync your bank accounts directly with it. The money comes in and out. You just classify what it is. You're done. But when you have the cash flow and it makes sense and you're a flipper, you need to hire

a bookkeeper. If you care about your finances and your tax strategy and all of that, you're going to need your accounting. Because that's the other thing that blows my mind. Accountants are very risk adverse. But I've seen so many people make a ton of money and they have no clue where it's at, how many bank accounts they have, what their P&L looks like. All they're worried about is the day to day. So that's when I say the first thing you can do in starting a business, buying a rental, whatever. Getting your accounting squared away.

Either you're going to do it or you're going to hire somebody to do it. Yeah, so really a follow up on here is because you did talk about if you know how to work a spreadsheet. I do remember when we were doing taxes this year, I mean, when my bookkeeping was still getting caught up, that was a big back and forth. Hey, do you have this now? And I'm reporting back to the bookkeeper. But then I brought you a surprise set of taxes. I was like, hey, my other CPA dropped the ball. Can you do my taxes here? And I gave you a spreadsheet that had all of those listed. And you were able to like really crank out the return super fast. So the spreadsheet method, that's a totally viable way of at least, tracking expenses when you're starting out. At what point should you convert over to something a little bit more robust like a QuickBooks online account? I'm honestly a fan of, I don't care if it's a

lemonade stand. If you're willing to pay the 20, 30 bucks a month for QuickBooks, I would come out of the gate with an accounting software because you're not in business to just start up and fail in six months. So if you plan to be in business, you might as well come out of the gate with what you need that will sustain you when you're doing 5, 10, 20 million in revenue. But if you will wanted to do the spreadsheet, I would say the break, like, if you have more than 100 transactions a month, I would go to an accounting software because then if you care about your time, you will get so much of your time back using an accounting software. Well, you know, fun fact, in college, I took fundamentals of accounting. And legitimately, uh, for like the first 15 minutes of every class,

we played lemonade stand, which was like a new app back in the day on the iPhone. Yeah. And everyone was always like, okay we get it like because i guess it was a good illustration of accounting in some capacity but the professor was obsessed with it and sometimes we would spend the whole class playing it we'd be like teach us we the test is next week and we still haven't actually learned what what you're trying to teach us so yeah uh so yeah i get a little PTSD there um but moving on man i what one a question that we get i mean this is like one of the hottest topics right now we're going to actually get into a lot of hot topics here hot topics um what is a cost-segregorg And when can this be performed?

I think there's a lot of confusion here, a lot of people that don't really know all the ins and outs. I'd love to dive into this if you don't mind just imparting some wisdom on the greatness that is cost segregation. So when you purchase a property, you are buying the land that it sits on. You're buying the actual structure of the building, the roof, the plants outside, the windows, the carpets, the paint, all of that. all a cost segregation study is doing is you are telling let's assume you hire a firm to do it because you can you can go one of two ways you can like kind of DIY it online and use like a software where you're telling them what you paid for it you're submitting pictures and things like that let's assume you hire a firm to do it all they are doing is going in and evaluating this property

and saying okay we know that you bought this asset including the land and they're going to break out the cost of that into certain buckets. Why does that even matter? Bonus depreciation and depreciation alone is the holy grail for people in real estate. It is basically you getting the expense for likely sometimes money that you never even paid. So if you put 10,000 down on a house, you can get a way larger depreciation expense just because it's based on the purchase price, not based on how much money you put down. So at the end of the day, a cost segregation study is literally taking what you paid for something, the cost, and segregating it into these smaller buckets so that when they're done, you literally take that PDF report, stash it away,

give a copy to your accountant so that they can do your tax return correctly. But you honestly hope to never use the report other than what your accountant needed it for because why do you need the report? Let's assume you buy a rental, you do a cost segregation, you get this huge depreciation number. And then you later get audited. And the IRS goes, hey, how did you come to that? What do you have in your back pocket? The cost segregation study from a reputable firm, an engineering based firm that now you can use to defend that audit. But that's all it is. It's really an evaluation and a cost segregate report of this piece of property you just purchased. And so, I mean, we can dive into like when I would do one and stuff like that, which, I mean,

it's fairly quick. If you're a landlord of long term, short term, or you're, you're in real estate full time, it's very likely you should do a cost segregation study. And to the point of when, we're about to close out 2022. Let's say I bought a rental right now. I get it up and running by December 1st. It's rented for those 30 days. And we're in March of next year. And I want to cost segregate it. I totally can. I can go hire a firm. They can go do that report for me. I just wouldn't get my tax return done obviously until that report's back and I can compile all my records, but you can do them after the fact, too. And quick tip there, I'm always a fan of doing the study, the cost segregation study, after you spend your rehab money. So I would

buy the property, rehab it, then go in for the study so that they can look at everything as a whole. Oh, okay. Yeah, that's a good tip. So I guess let me, let me punch in on this because there are a few intricacies with, I think with how this works. So typically, if I, if I'm not mistaken, you're my CPA, so I'll let you take all the liability here. Um, typically, when you're depreciating a long-term rental, for example, that is depreciated over 27 and a half years. And then if it's a short-term rental, it's over 39 years. Is that right? 39 years, yep. Okay, cool. And so basically every single year when you're running your taxes on these properties, you get a small portion of that depreciation that you can write off. Right? Okay. And so if you run a

cost segregation report, basically what this allows you to do is instead of breaking up that that depreciation over 27 and a half for 39 years, you can now actually just, and taking a small portion of it every year, you can take a very large chunk of that depreciation and write it off in the first year. Exactly. So yeah,

do I'm going to hit you with like a numbers example? Yes, please. Okay. Yeah, yeah. So, okay, if an accountant is listening to this, they're going to grill me, but that's where I want to preface this with. This is an example, a drastic example.

If I bought a property for $400,000, I just paid, and we're not going to rehab it. We're assuming it's rent-ready. Turnkey. Let's say of that $400,000, $100,000 of that value is to the land. The IRS says, which is safe to assume, you cannot depreciate land. It is not going anywhere that we know of. Do you mind if I stop you real fast, Matt?

I'm sorry. Can you just define what depreciation is so it makes sense why you can't depreciate land, but you can't improvements? Yes. Is because think of it as the deterioration of the asset. The best example is cars, how they're always. It's like, I don't buy that new car. It's going to depreciate the second you drive it off the lot. Sure, it will.

But it's basically the wear and tear of an asset over time. There you go. And so the reason there is why it's so powerful to that extent is, think of the car. I can buy a $50,000 car put no money down. And if, let's say, say it's over 6,000 pounds and all of that, I can get a $50,000 deduction for not putting any money down. So that's why depreciation is so powerful because you get so much more. you get so much bang for your buck, we'll say.

Now, the problem with cars, the reason we don't do this is often, it's very difficult to make a car cash flow. So even if you borrowed 50 grand, you'd be losing that money plus the interest every year. But with real estate, it will cash, so it'll pay for itself. Yet the IRS still gives you that deduction because technically it's losing value as it falls apart. So thank you for. I just know everyone gets confused by when they hear depreciation and no one ever wants to admit they don't know what it is.

They don't want to be the one person who says it. No, for sure. And so right, so to that question that you just mentioned is that's why I, land, land is land. You can kick it. You can dig it. You can do whatever. But you own that piece of land. It's not going anywhere. But now there's a difference between land improvements, which you can depreciate. So if you lay concrete and all of that, you can do that. But, okay, so we got a $400,000 house we just bought. We're going to say $100,000 is land. So we're left with $300,000 of this pie. For ease of numbers, let's say the building structure itself. So the roof, the framing, the

the actual structure and foundation is of the $300,000, $200,000 worth. Okay. So now we're left with $100,000 of this pie. $400, $100 was land. $200 was the building itself. Now we're left with that other bucket of $100,000. And let's say that that cost segregation study report shows you that the windows that are in that property, the paint, the carpet, the desks, the furnishings, the lights, the

fans, the sinks, the cabinets, all of that equates to $100,000 of value. Now I'm sitting with that and I can bonus depreciate that because the rules say every asset that you buy is given a life. And if it's a 20 year or less life, the IRS allows you to bonus depreciate it in the first year. So normal cabinets, if I spent $20,000 on cabinets, I'd have to take it over five years. but because the bonus depreciation rules allow me to bonus anything less than 20 years, I can bonus that. So that's where in that example, if the COSSEG firm evaluates this house and they say, yeah, 100,000 is your small assets inside that are five and seven years, you can bonus

depreciate that. Why that is so important is because if you didn't do that study, your normal accountant is going to look at, oh, cool, you just bought a $400,000 house. We'll say $100,000 is land. and they're just going to take the 300,000 divided by 27.5, which, let me run this, would only give you like an $11,000 deduction. But if you went to a COSSEG firm and they say, wait, we're going to say only 200,000 is the building, but then 100,000 is small assets inside of it.

You would get like a little over $100,000 deduction. So that right there would swing you from probably having to pay tax because you would cash flow and have income. profit on paper versus now showing this huge depreciation expense, which would drag you to a loss, which is what everybody aims for. So to illustrate this point even further, are you saying if I buy a short-term rental, and let's say it grosses me $100,000, or let's say my profit is $100,000. If I take a $100,000 deduction, is my tax bill then zero? If that was all you did, exactly. Your tax bill would be zero, because now you're looking at your P&L for that property is zero. You have no taxable income when it comes to that property.

And normally, you would not be able to depreciate $100,000 of losses because it would be spread out over 27 and a half years or five years for the cabinet. But with bonus appreciation, you're able to take that long period of time, crunch it up into a short period of time and take it all up front. Exactly. So that's all you're doing. All as COSSEG report does is, hey, what in this property that I just bought? I don't care if the property is $20 million or $200,000.

It's tell me what the five and seven year and $50,000. year property is so that I can identify the value. So if I paid a million bucks, what if the value of that property is 300,000? I get to take 300,000 immediately as an expense, and I still get to take the building just over 27 and a half or 39 years. So that's why they're so important is because you get a huge depreciation expense deduction, which is likely going to swing you to a net negative or a loss. Okay, so, man, there's just so much. Okay, cool, cool. So let's say that you do a cost segregation and you take all your depreciation in that first year, you still, there are still components that you can still depreciate for the next 39 years, right? Isn't there like a still some left over, 27 and a half?

Exactly. So let's take that example of the 400,000, 100,000's land, 200,000 is the building, 100,000 is the 5 and 7 year property. If you depreciate the 5 and 7 year property in year one, that's gone. Think of it as you're not going to get to depreciate any of that 100 grand anymore. But what are you left with? The $200,000 building. that you just have to depreciate over 27 and a half. So let's say instead of 11 grand, if your accountant did it the wrong way, you'd get 200,000 and you'd still get $7,200 bucks as a deduction because that $200,000 for the building value, you're just taking it over a longer period of time.

So remember the rule. Bonus depreciation is 20-year life or less. The building in a residential long term is 27.5. Commercial 39. So neither of those are you going to get to bonus? But the goal is to identify the small stuff, the electrical, the paint, carpet, windows, all that. That's crazy. So really, you still get depreciation every year after.

So is there any reason to not run a cost segregation report on your property? Time value of money and all that would tell you no. You would always, that's what I'm saying. If you're a landlord, short term or long term, or you're in the nature and the game of real estate, I would cost seg it. Because worst case scenario, you make a $50,000 W2, you kick up too long. term rentals that you cost seg and somehow drive a $100,000 loss. Even if you don't meet the rules to where like, hey, you have this W2 for 50 grand and this $100,000 loss and you can't net them and say, hey, IRS, I made no money on paper, you can still roll that loss forward. Or you can sell

rental property number two and you take this huge loss you just got from year one and net that against it. So there's still so many other ways. Just think of it as like delayed gratification if you just can't use it that year. Dang. So that's why I would still cost seg. And sorry, this is the last year to do 100% bonus. When Trump passed that tax act, we got 100% bonus depreciation. It was just a heyday for real estate investors. Now, this is the last year that we get 100%

and it will phase down to 80% next year and continue to phase out 20% each year. Yeah, yeah. Okay, so just so I'm clear and I want to make sure we understand the concept because then we're going to get into another thing here. But let's say that I, let's say I have a short-term rental and let's say I take a $100,000 deduction from the cost segregation you talked about. Let's say that I have any rental, I guess.

And let's say I'm making a $25,000 profit. And then let's say that I have another business that's self-employment, like about 1099 employee of myself, right? And that's a $75,000 profit or gain. Would my deduction count towards both of those? So think of it as the rentals could offset. So if you have a rental making 50 and a rental losing 50, it's likely there are circumstance that you can net them out and pay no tax on your rental income. If you want to start involving your business and saying, hey, I'm going to buy real estate and I'm going to take these huge losses against my business income, that's where we're going to get into that.

Because there's a few ways to do it, but there's a lot more checkboxes to go that route. But for sure on the rental side where rental making money, rental losing money, and you can net those out. Okay, cool. Cool. So I guess that gets us into another really big hot topic here in real estate in the forums, which is real estate pro status. And sort of what are some of the qualifications here and what are the benefits of being a real estate pro? Yeah. So, okay, so that's exactly what we'll go over. One thing I want people to think of real estate professional status as being as a designation or a badge that you get from the IRS. There are two rules that you have to follow to be a real estate professional. And they're not this or that. It's this and that. You have to meet both of them.

And the first test is 750 hours, personal service hours, in a real property trader business, real estate. There's nine of them. I'll read them quickly. Development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operations, management, leasing, and brokerage. those are the types of businesses which if you're a realtor if you're a flipper wholesaler landlord you will pass but you have to have 750 hours in this business quick note there if you're an employee you have to own at least 5% of the business for those hours to count but the first test 750 hours we have a lot of clients who are like great i'm a real estate pro i've hit 750 but they forget about test number two which is more than one half of your total work time has to be in a real

property trade or business or in real estate. And that is where most people fail. They'll be a manager at a department store. They'll be a doctor, a dentist, whatever. And that's why what we see is one spouse will, let's say they're a moneymaker, they're a dentist, they're making a ton of money. Their spouse will now go out, maybe be a realtor, start flipping, run their portfolio, and they will earn this real estate professional status. Because let me tell you now, from my understanding, there's been one court case where somebody argued that they were a full-time employee somewhere yet still a real estate pro. And it's because it's very hard. If you're working full time, how are you going to argue to the IRS that you work 4,000 hours a year and more than one half in

real estate while you maintain a W2 job? So those are the two rules, 750 hours and then more than one half of your total work time to be a real estate pro. So the reason why real estate professional status even matters. We have to look at rental real estate and business income of like what you do day to day, they're separate. Rental real estate is considered passive and business income is non-passive. There are a lot of rules with the IRS to merge the two. Being a real estate professional is one of those carve-outs where the IRS says, hey, if you have a lot of losses from real estate, rental real estate and you are a real estate professional, you have the ability to take those losses. If you're not a real estate pro, basically kiss it goodbye. Your only other option. You're

only other option is the short-term rental loophole, which we'll go over after. And so what we need to segue next into is being a real estate pro is great. And that gives you the ability to take these losses. But if you don't materially participate, being a real estate pro doesn't even matter. Okay, so you mentioned something when you were breaking down real estate professional status, which is material participation. That's pretty important too. I know that this is it. There's a lot that goes into it. So can you quickly just break? that well, as quickly as, as, you know, whatever you need to do to get the point across. But what is material participation?

So at the end of the day, the IRS wants to see if you're taking these losses from real estate, they want you involved. They want skin in the game. They want to see that you're managing or assisting managing the property. And so material participation basically is there's seven tests. You have to, in this case, you only have to meet one of them. There are three that most clients will meet. And so we'll cover those.

And so if you have a long-term rental and you are a real estate pro, and now you need to meet material participation, this is how you would do it. The gold standard is 500 hours. If you spend 500 hours on that rental, they call it an activity, but a rental, then you would qualify as materially participating. The next one is, and that's hard. If you have one long-term rental, it's very unlikely you're going to hit 500 hours. test number two is a little bit easier where you have to hit 100 hours and more than anybody else. So you notice how if I hire a landscaper, a cleaner, or anybody like that, I now have to manage their time and see how much time they're spending because I have to hit at least 100 hours and more than them. Again, showing the IRS that I have skin in the game.

I'm doing the work. Test number three is sort of a catch-all, but it's a little bit sketchier. and it is basically substantially all. You're saying you did substantially all the work. The problem with that test is, notice that the second you hire somebody to assist with the property, you're now held back to that test number two

because now you have to track their time and make sure you're doing more than them. And so I say this is, you have to think of real estate pro as sort of the first hurdle jumpover and then materially participating as the second. You have to be a real estate pro. You have to materially participate

to take that loss that you just got from that big, cost segregation study. And that's why I was saying, even if you don't get to take the loss, because let's say you're not a real estate pro or you failed material participation, it's okay. You'll get the loss later. But for you to maximize this and take these big losses that cost segs are giving you, you have to be a real estate pro and you have to materially participate if you're going long term. We'll get into the next piece, which is short term rentals, which is there's a bit of a loophole there around this entire section that we just talked about.

but it's everybody, every TikToker, every Instagrammer forgets or leaves out that piece. And that's the piece that I want people to remember is, not only do I have to be a real estate pro, but I have to materially participate in these properties or else the real estate professional means nothing. Okay. And so if you materially participate and your real estate pro, at that point, you are able to take your depreciation losses against W2 income or no? Exactly. The best example. You have a spouse making $50,000 as a manager somewhere. You have the other spouse being a real estate agent and that you buy a property. They're a real estate pro because their day-to-day work is in real estate. You buy this property. You self-manage it. You do a cost segregation study. You get a little bit of rental income. You write off your mortgage interest and you're basically at zero on your profit and loss. Then you come in with this whopper depreciation expense of let's say it's, 60 grand, you now would be able to take your W2 of 50, take the $60,000 loss, and on paper, look like you lost $10,000, you're getting your entire refund back, and you're sitting pretty.

You're going into year two with a $10,000 loss. But notice, they had to be a real estate pro. They had to materially participate. But when they did, huge tax savings, because now you basically made no money on paper, when in reality you took home at least $50,000 and the proper. probably cash flow. If you own a large or complex rental property, congrats.

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Zero guesswork. That's Dominion Financial. Check them out at biggerpockets.com slash dominion. Again, that's biggerpockets.com slash dominion. Man, okay. So, all right. I guess the, so you, man, this is, this is again, every time I talk to you, my mind melts. But this is kind of where this short-term rental loophole, this is a really popular thing. Like, this is really a groundbreaking thing for people in the Airbnb space, short-term rental space. So tell us about that. Because this is where things start changing a little bit, right? This is a wild one. And let me preface this with too. People don't like the term loophole. Don't care. Because this is truly. a loophole. I don't think this is the IRS's intent with this. I do think this will go away. And here's why. Real estate professional status and material participation and basically back to

that example of you earning rental real estate and taking losses and trying to net them with your business income, you're held back by doing this because of Section 469 rules. And the STR loophole, you are simply skirting the rules because in the definition of Section 469, it says these things are not rental activities with respect to these rules. So you think, okay, well, if I don't have something that's a rental activity, I don't have to abide by those rules. And how you're avoiding it is is two main rules. If you have a property where the average rental period is seven days or less, you are

considered transient use property, not rental property. So therefore I get to avoid those rules. The next rule is I have a, so a client out here in Vegas, they just bought a high-rise condo, and they're held to doing midterm rentals. So they have to do 30 days. The rule for that is, so another one of those exceptions to this whole code section is if you have a property where it's equal to or less than 30 days on average being rented, that's okay too. That's not a rental property.

But in that case, you have to have substantial services, which in that case is like daily turnover service, private chef, a vehicle for them to use, something more along the lines of like a bed and breakfast. This is not just a normal short-term rental now. This is like a business. And so if you can meet those two, you've now skirted the rules of 469, which was disallowing you to merge these things, your day-to-day business and your rental real estate, and now you're able to do that. The only kicker is what do you still have to do? You still have to materially participate. So, perfect example. A couple. They buy a short- short-term rental. Doesn't matter what they do for their day-to-day job because I don't need to be a real

estate professional here. They get an Airbnb. The average rental period is six days. That's the average stay for a tenant. They manage the bookings. Right. So let's be honest. Back to those three tests of material participation, you're not going to want to clean it yourself. You're going to hire a cleaner. What happens if you hire somebody? You're held to doing 100 hours and more than everybody else. So what's going to happen? You're going to manage the bookings. You're going to walk it. You're going to, you're going to post it online. You're going to do everything else but clean the property. You're going to hit your 100 hours. You're going to let somebody else clean it. You're going to do a cost segregation study. You're going to drive a huge loss. And you're going to net it against your

day-to-day income. That at the end of the day is what everybody in real estate should aim for. Because that's the Holy Grail. That's the Trumps, the Kiyosakis, the Grant Cardones, all of that of how you're netting these losses from your business against this or with this rental income. And so the STR loophole is a great way to do it. And like you said, is really catching a lot of attention now because it's so powerful. So if I'm understanding this correctly, you know, just to break it down, let me make sure that I'm picking up what you're putting down. So you can basically buy a short-term rental or an Airbnb of sorts. I guess in some instances a mid-term rental, but I'm just going to go with the short-term rental side of it. You can materially participate in that your

working at least 100 hours on it and more than anyone else who's working on that property. And if you do that, when you take a loss with the cost segregation, you can count that loss towards W2 income as well. And the loophole is that in other scenarios like long-term rentals, you would have to be a real estate professional on top of materially participate. In this instance, you just have to materially participate. Is that right? Exactly. I can avoid right? So me as an accountant and a CPA, I can do this. I don't need to be a real estate professional. Prior to that, it was cool. Real estate's great. It appreciates your cash flow. But if you want to really realize the tax benefits, you got to be a real estate pro. Now this is simply a way

to skirt those rules. If you can still meet these new rules and still maximize your losses from real estate. Matt, what are some other things people can do that would qualify for working on the property. So if you're doing research on other properties and what they're doing to generate revenue or stay booked, or if you're looking up information about how you could generate more per stay, or you're shopping for furniture for a couple hours, does all of that, can those hours be counted towards the time you spend on the property? That time does count. What I want people to watch out for is, is if you went to battle with the IRS and they look at your time log, there's operational hours we'll call it, which are the good stuff, like you said, furnishing it, dealing with tenants,

drafting the contracts, walking the property, those kind of things. Very managerial day-to-day ops. But then there's like you mentioned, I'm researching other properties, I'm checking the financials, I'm collecting the rent, I'm reconciling the bank account. Those are investor level hours or what could be considered education and research hours. If you sent a time log to the IRS, you wouldn't want the majority of those hours to look like educational or investor level hours, you want it to be property related. So there's no for sure answer of what allocation can be those hours, but I wouldn't have the bulk of them be that. But just as you said, there's a lot of different things you can do to earn those hours. Yeah. So, David, I was going to ask you, you bought 15 short-term rentals this year.

Is that just going to slice your tax bill for life? That's nice. Now I'm actually wondering, because I wasn't thinking about this before. I had that property that covered, last year's taxes and this year's taxes. But I'm wondering if these ones could cover next year's taxes. So is there a way that I can build up depreciation in 2022 that is unused and can be applied towards 2023, Matt? For sure. We just had a conversation with a client this morning that it's still rolling over depreciation.

This will be his third year into 2023. So if you have a net operating loss, which is what you likely generated last year, that rolls forward with you. And if you generate another one in 2022, you will continue. you on with that for sure that's the game that's the name of the game this depreciation is just like a superpower right like that's really when we're trying to figure out how to shield our income from real estate this is almost exclusively we're just looking for creative ways to take advantage of it and we call it a loophole i hate that phrase i know i know what we mean when we say it but it sounds shady

it's not shady like the reality is if you owned a restaurant and bought a dishwasher that dishwasher is going to break down it's not going to run forever you get to ride off the period of time because you got to new equipment for it, right? Your rental property, even though it's a house or whatever, it does fall apart. And you got to spend money to paint it and fix it and the foundation will go out over time. The roof will go out over time. The cabinets will wear down. It is slowly falling apart. It's just got two things that nothing else has. One is you can leverage buying it much easier. You can borrow a bunch of money against it. And two, it tends to appreciate in value where your car doesn't, the dishwasher doesn't. Everything else you buy becomes worth.

less once you own it, but real estate because of inflation goes up and you can borrow. And you get this trifecta of leverage, increasing value through inflation mixed with this depreciation factor. And bam, it's how the Trumps and the Kiyosaki's, like you said, say they don't pay taxes. Now, it kind of irritates me personally when they go up there and say, I don't pay taxes. I'm not that dumb. Because then it incites everyone to go want to get on this like political rampage. Like, let's get rid of depreciation. So these greedy investors, like stop doing. that. Like we don't like right like if people hear everyone say oh there's a short term rental loophole it's very easy to say loophole that's bad and not at my backyard and the next thing you know you've got a

political wave of people that are going after short term rental owners. This is more of a way of qualifying as a real estate professional because they are recognizing this is hard work. Owning a short term rental is not just buying an apartment complex having someone manage it and swimming in the dough. It's frustrating like Rob can sit here and tell you he wears the same black shirt every day because he has no mental energy when he wakes up trying to deal with the complaints and the headaches of managing what accounts to be a very small hotel by yourself, right? Like, there's a reason why the tax code is written to benefit you. The key is, in my opinion, at least, it stops you from looking at real estate, like,

should I buy real estate or should I make money at my job? Oh, yeah. It's this, it lets you do both. I can make money at my job that I can save if I buy real estate, right? It creates this holistic approach to wealth building, which is what I think our industry needs. There's too much of this, take a $100,000 course of mine. And I will teach you how to quit your job and just buy real estate, right? It never works.

There isn't a person I know. I know, Matt, you work with Ryan, I believe. And like a lot of us know people that own real estate. All of them work a lot. We don't know people that are sitting on the beach doing nothing that bought real estate, right? Yeah, not really. No. We're still lurking to earn money in different ways, but we're sheltering it in the real estate, right?

And let's not forget, there is a risk associated with buying real estate. This is part of why you're compensated for these things, because you could lose money in it. It's not like a W2 job where you go to work and you do a bad job and your boss charges your $900 bucks for sitting in their office or at their desk all day. Like there's no downside to a W2 job. There is to real estate. Now, we haven't seen much of a downside because the last 10 years we've been printing money like crazy, so everyone's done well.

But it's not always like that, right? Like you do hit circumstances where you can lose in real estate. estate and this is a form of shelter against some of those losses. Yeah. For sure. And it's to the point of, so I get a lot of flack because, again, to that loophole method. And it's like, you're still following the rules. And when people like to talk about, oh, well, you're sort of one with the government and you

get these incentives because they're written by the government. And what do they want you to do? Spur economic development. What are you doing by being an STR landlord? You're spurring economic development. You're now, right? Like, you're likely rehabbing a property and making it nicer for the area. you're generating income that'll likely be taxed.

So it's just like that's the benefit that they're giving you. You're also ruining neighborhoods, driving up housing prices in my backyard. If you really, really go deep on this. I love your point, Matt. Let's take the property Rob and I bought in Scott Sell it example, okay? We are employing house cleaners to go in there and make money that are going to have their income tax and provide revenue to the government. We are employing landscapers who have to go in there and they have to do work.

and we're generating revenue for them that will be taxed and will go to the government. We are paying money for utilities, for water, for energy, a lot of stuff. We have a pool service person that has to go in there. We're constantly buying new products like a $25,000 water heater that Rob really wants for this property. That's going to be taxed. That's going to make money for some business that employs people that all pay money on that. We have handymen that have to go fix stuff all the time, right? A person had to build that house in the first place that made money from it.

The airlines that people fly in from to visit our. property are making money and being taxed, the car that you rent at the airport or the Uber driver you take to get to there are all generating revenue and they're all being tax. So it's easy to say the real estate investor isn't having to pay tax. But like you said, they're generating more revenue for the government than what they are keeping in not having to pay the tax from the property. Exactly. It's why you get the benefit for doing it is because you're spurring all of that development. And then just like you said, how many did you buy this year? Look at what you're doing across the board. I almost wish you could mind map that out and see

how many other people and how much other income and tax you're generating by those assets, you know, even though you may not pay tax. Yeah. And let's talk about the neighbors that don't like it for a second, okay? The Cairns. The Cairns, right? They all complain, I don't like that person making money with that house. All right. I bet you don't mind the value of your Scottsdale property quadrupling in the last six years. And there's a reason why those properties are worth more to an investor who runs it as a short-term rental so they pay much more for the house, which now takes the Compson bumps it up for every house in the neighborhood. And you know what happens with that house sells for more?

The Scottsdale City and the state of Arizona get more money in property taxes because the basis doubles and property taxes go up. And now they have more money to fix roads and put on events and do all the stuff that everyone loves. It's super short-sighted. Just get angry at somebody who's making moves and to get upset. It makes that entire area worth so much more. Every one of those homeowners has in like six figures minimum to all of them with what

their house is worth. And that's the same happens in a lot of different environments, a lot of different areas where short-term rentals have moved into there. You do get your stereotypical loud parties and crap. But in general, they make the area where so much more, they increase the tax revenue for the area. The basis of all the properties goes up. The homeowners make more money. Now they get equity lines of credit on that and they go spend it on new stuff, which now creates revenue for all the people that are selling them this stuff, which now pay income taxes on their W-2 income.

It's when you look at the big picture, it makes so much more sense. It's often when we focus in on the one little thing that you get that negative caring energy. Is there a name for that? NK.E. I think it's NK.E. I will say, dude, make sure that you have an editor cut that last one to two minutes and put that on TikTok and you're going to go viral, man. That's all very true. This short-term mental loophole, whatever you want to call it.

I mean, this is one of those things that I'm very a lot more unapologetic than I used to be a younger, not as wise self. It's like, people are always like, how can you not pay taxes? You know, what about the roads and how dare you? And I'm like, look, first of all, all the millionaires and billionaires are out there, they're using the tax code. I'm not going to just be, uh, what is it? I'm not going to be the guy that's like nice and being like, you know what? It's wrong that they did that. Thus, I'm going to mail in a check to the government because I'm a nice guy.

It's like, no, I don't want to do that. I'm going to use the tax code as it was written. and the tax code was written for real estate. That's exactly it. And that's what always gets me. And I love to clap back at these people in the comments is, I would love to sit across from an auditor and show them your tax returns, show them any of our client's tax returns, is because we are following the rules.

We're not exploiting any rules. Or I guess you could say exploiting if that's the word, but whatever, we are following the rules that they're writing. And to your point, too, when you look out at the macro, it's either you pay the tax, let's say as an employee and the money goes to the government, the government, the government depends on where it spends the money. The government is terrible at spending money. I would much rather have somebody going and like you said, hire the cleaners.

Maybe you buy a lot off somewhere else in the desert and you got to build roads to get to it, bring utilities to it. So you spending that money your own way is likely still better than having the money go directly to the Fed and then them spend it that way. So it's like you're going to get the economic development somewhere. I'd rather have it go from the investor who's going to want to grow it into more. you know any day so which is the same principle behind the 1031 right it's the same idea you're not avoiding taxes you are taking your gain and putting it into a bigger property that the government's going to get more money from later because you're better at using the money efficiently than any like the government isn't going to doing stuff not i'm not trying to be negative but like yeah look at your

experience with the tsa versus if you go to clear okay or like do you ever go to the dmv and walk out like I'm going on Yelp and giving a great review because this D&B experience, they were so good. It's just that's the way it works. Like they're not incentivized. It's not a capitalistic endeavor. So anytime you can take people that are good at doing something and put the power in their hands, it's going to be better for everybody than when you rely on the government. It's like opportunity zones, same idea, right?

Investors do a much better job developing an area that's been hurting by pouring money into it in a prudent way than the government going in and building public housing and then ignoring it and it turns into like a crime-ridden area that's been ignored and none of them know how to fix it. So I just, I like painting the tax code in the appropriate light, which is if they're wanting to incentivize this behavior, they want the brightest and the best minds in business that are good to develop real estate because people need housing and the more that houses are worth, the more taxes it makes for the area. All those people that are not real estate investors benefit when their area generates more property

taxes and it can get poured back into the schools and everything else that's benefited. it's not the don't take the short-sighted approach that you're going to see in YouTube comments or Instagram hate where they're like greedy landlords are ruining this for everyone. It's usually the opposite. Think about it. They want you to grow as an individual. You could be a W-2 employee, right? And when I say they, the IRS, or the government in this case for the tax code, you could sit on the couch, be a W-2 employee, and you're going to pay tax on your W-2. You go stand outside and hold a sign and start selling lemonade for a dollar, you're a business owner and can take deductions. Why? Because now you're in the pursuit of income and you're going to now start spending money

in other ways that are going to drive economic development. If you're going to just be an employee and retain money and spend it on goods and services that you're going to use personally, great, there's room for that. We need that. But if you're going to go out there and spur development, you're incentivized. And so you get to take those deductions. What happens if you buy a primary residence? You live in it for a period of time. You move out. you turn it into a short-term rental. You can cost seg it, you can take the loss, you can do all of that, and potentially when you end up selling it, because we all know if you sell your primary residence and

you've lived in it two out of the last five years, you get huge tax advantages. And so even if you, let's say, lived in it for 10 years, you have it be a short-term rental for a year or two, you don't like it, you sell it. You still may get to bite off a piece of that tax benefit, just not as much, but totally fine. It's a great strategy. So you live in it for two years, then you rent it out for three or so as a short-term rental. you get all the tax benefits of the short-term rental, then you sell it at the end of that,

and some of that gain would be sheltered by the two years that you lived in it as a primary residence. Totally legal, totally intelligent. You don't have to go put a massive amount down to get into the short-term rental game. You can go put an FHA loan on a primary residence, live in it for a period of time, rent it out. You can take advantage of everything we're talking about

without needing to be a multimillionaire with $400,000 to go drop on a Scottsdale property. Like $500. but that's that's neither here nor there uh plus another like 200 uh that's plus another like 200 uh we're gonna make it we're gonna make it back um but uh okay i do actually want to say before we wrap up today that one thing for people to keep in mind that there's already some angry man that or angry lady that's already left a comment in the uh in the comment saying oh how dare you not talk about recapture tax so all of this obviously is writing on the fact that you don't sell the property

Because if you cost egg and you take the loss on your taxes, you can't, don't think you're going to get smart and then sell the property and then use that money to go buy another one and do it again. You'll have to pay back a recapture tax. Right, Matt? Can you explain that briefly? Or did I do it? Do I do a good job? Basically, yeah. So if you take depreciation, the government is giving you the expense now. And so later when you sell that asset, you will have to pay some recapture. But for those of you that are like, well, why would I even take it then? One, you have to. Because if you end up selling the asset, the IRS is going to make you calculate. It as if you took depreciation even if you didn't. So you're still going to have to pay recapture. So that's where always up front you're going to take the depreciation when you can. But you nailed it. You're going to have to pay some recapture. Is the recapture just proportional to basically the years that you owned it?

Kind of. So it goes back to those buckets of property because there's different recapture rates. So for example, on the building, that's a 25% recapture. So if you took $100,000 in depreciation, $25,000 is going to be depreciation recapture. on the smaller assets like the windows carpet all that five and seven year property that's ordinary recapture so whatever your tax rate is wherever you fall in the bracket but okay cool you will have to pay recapture but that's where to what david was saying if you continuously purchase real estate you shouldn't have to worry about it and the example i like to use is grant cardone and the jet he buys

like a 90 million dollar jet sells it has a huge gain because of this recapture what does he do go buy another jet. What are you going to do if you're a landlord, buy another property or 1031? That is an important point to highlight because it's not, like I was saying, it's not a free loophole. There's risk associated with buying real estate. And the other thing, when you get into the strategy like we are, it hits you, oh, I can never stop. It's that. You've heard the phrase to grab a wolf by the ears. You familiar with that, Matt? I've heard that, but now I want to see exactly how that. No one knows what it means, but we have all heard. I've heard that though, but yeah. How that? Okay. Can I take a guess really fast?

I love this. Okay. So it's like you grab a wolf by the ear before it bites you and then you've got it can no longer bite you because you're holding it by the ears. But if you let go, it's going to bite you. Yeah, you can never let go, but it can never hurt you. It's a stalemate that you're locked in. And by the ears, I just, you've got both ears. So he can't bite you, but you can't let go. Right. Yeah, that's a good one. Well, to be fair, I didn't get that. I was as I explained it. I was like, I think I'm getting it. I think I'm getting it. He's formulating it as he was so funny. He's so smart. That's good though. That's good.

You're right. I totally see the correlation here for sure. It's that Michael Scott quote. Sometimes I just start a sentence and hope I find my way as I go. That's what Rob did. You got to understand as you're making money because you're taking all the depreciation. It's normally over 27. A half years or I believe 38 years from a property.

39. Okay. And you're crunching it into the beginning. So like it's not free, right? That at some point now that income is very. very difficult to shelter because you've used it all up. So if you stopped buying more real estate, you would be taxed higher on the revenue that's coming in because you took it up front. It's not free. And if I keep making money, but I stop buying real estate, I'm getting taxed on it.

So what I like about the strategy, frankly, is it forces me to always be buying real estate. If I ever got cocky and was like, you know what, I just want to buy a couple Lamborghinis. I want to get my Andrew Tate on. I want everyone to call me the top green, the top jeans. and I want to look like a big shot, I would be getting taxed terribly on the income that's coming in. It forces me to keep and delay gratification. I got to keep buying real estate. I got to keep delaying gratification.

I have to keep running my finances from a more wise position of living off of the cash flow that the assets produce as opposed to the temptation to live off the cash flow that my business may produce. And I think it's smart. It's one of the reasons I recommend this to everybody because it's kind of, you know, the biggest fear with getting in shape

is you're going to fall out of shape. it's very hard to stay constantly eating good and constantly working out. This is a way that you stay in financial shape. You can't get off the treadmill ever. You are committing for as long as you make money to investing in real estate and managing that. And you're going to have to ride some of the downtimes too. So what you often find, at least what I've found is the money I'm putting down on the

property is very close to the money I'm saving in taxes. It almost ends up being the same. Okay. So I don't really ever have a ton of money left over to go spend. The majority of my income has to get reinvested into the real estate. So it's like this perfect in so many ways. It's just a better way to live. And that's why we're here to talk about it.

Boom. Which you would think to at that point, the government probably thought that through like you had mentioned, where they're forcing you to do it over and over is because these benefits that you're getting are temporary. It's not a one and done. You've got to keep doing this stuff. It's why it's not a loophole.

It's why we all understand that. But that's why it's not fair to classify it that way. Because it's like saying work. out as a loophole. I'm coming from the con, which is really good because you're right. It's not a loophole because I think if you're following the tax code, it's legal and it's purely not a loophole. I think loophole is you're skirting some rule and that's how it sounds. Yes. Yeah. So, and so my context of it being loophole is I think that there will be new rules that will not allow this because they see, oh crap, our rules didn't cover this. So now we need new rules.

That's why we're telling people to take advantage now. For the sake of the clickbait title and the thumbnail, we're going to call up the short term rent. loophole, but if you listened all the way through to the, to the end, you know, it's just a tax rule. Yeah. We did it, guys. This was fun. This was a good, good deep dive, both educational, a little spicy at the end and then a good

just little like, here's good perspective for you moving on. Matt's got like the CPA thing going on that are typically the most difficult people ever to communicate with. I know everyone listening to this is like, you got to ask your CPA the same question seven times to finally try to get some idea of what they're trying to explain because they use big CPA words. But you can communicate with everybody. You're like that perfect hybrid that's meant to bring the two worlds together. Dude, I've been telling you this, David. I'm like, you got to get with my guy, Matt Bontrager. I talk about you all the time, Matt, because I'm telling you,

there are very little CPAs that can talk passionately and be charismatic at this tax stuff. So thank you. I'll never forget. I was at a bowling event after school, just about to graduate with my accounting degree. And I met this guy, and he was like, you're going to be a CPA. And I was like, yeah. And he's like, you don't seem like an accountant. And I was like, well, that must be pretty good. Because like, because that's it though. And that's why I was saying advisors and tax preparers are way different. Preparers are a little more nerdy in the background. An advisor has to be really smart and know their stuff, but be able to communicate. Yes. So that's where in a tax world, that's so hard to find. Well, geez, pat yourself on the back out in the back more, Matt. Dang. No, I'm just kidding.

For not. Well, awesome. Thank you so much. Well, Matt, if people want to find out more about what you do and where they can learn more about your services, where can people find you on the internet? Yeah. So the best way, I'm even still, I'm not big. I'm in my DM. So I respond is on Instagram at Matt Bondrager.

I got my handle. Just my name. And then if you want to work with us, our website is the best way. Submit your info there. We'll reach out because that's where. Which is? Oh, yeah. Sorry.

That would help. True books. CPA.com. Okay, cool. Yeah. So through the website or through Instagram, both ways.

Or you could buy truebooks.com. I looked it up for you. It was like a million dollars. Oh, they definitely, yeah. They're trying to get us there. David,

what about you, man? Where can people find out more about you on the interwebs? Check me out at David Green 24 on LinkedIn, Instagram, pretty much everywhere. Now it's a YouTube handle

so you can follow me there and let me know what you think about what I'm posting. How about you, Rob? You can find me at Rob Built on Instagram. Rob built on YouTube. YouTube is the main one,

and then Rob built on TikTok. And also, if you like this, if you learn something in the tax world and this has got you fired up, pay it forward to the Bigger Pockets Network by leaving us a five-star review on the Apple podcast platform. It really means a world to us.

It helps us in the algorithm. It helps us get served to so many new people and hopefully help change lives and help people get started in this real estate thing. And final plug here, Matt, I don't think, just go follow Matt on Instagram.

Matt Bontrager. You've been posting a lot. of good reels. You've been blowing up on Instagram. You make taxes very approachable on Instagram. So go give them a follow. And that's it. That's it. Mike drop over here. I'm done. All right. Thanks for your time, Matt. Thank you guys. That was awesome. Thank you so much. This is David Green for Rob the sworn enemy of negative care and energy Abas Solo. Signing off. 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 Ian K. Copywriting is by Calicoke content, and editing is by Exodus Media. If you'd like to learn more about real estate investing or to sign up for our free newsletter, please visit www.com. The content of this podcast is for informational purposes only. All host and participant opinions are their own. Investment in any asset, real estate included, involves risk. So use your best judgment and consult with qualified advisors before investing. You should only risk capital you can afford to lose. And remember, pass performance. is not indicative of future results. BiggerPockets LLC disclaims all liability for direct, indirect,

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