BiggerPockets Real Estate Podcast - 753: Seeing Greene: CPAs Answer YOUR Top Investing and Tax Questions

Episode Date: April 16, 2023

Want more real estate tax deductions? If you’re a savvy investor, you can use the tax code to avoid income tax, keep more money, and grow your portfolio even faster. But it’s hard to do so without a rock-solid CPA behind you. Thankfully, we have some of the world’s top real estate CPAs on the show, and they’re giving their take on tough tax questions (WITHOUT sending you a bill!). If you want to lower your tax burden, keep more of your hard-earned money, and play the tax game to WIN, stick around! Welcome back to another Seeing Greene! This time, we’re joined by some of the most beloved real estate tax rockstars. Amanda Han, Matt Bontrager, and Tom Wheelwright have spent their careers helping real estate investors get the most out of their investments. From eliminating income tax to finding hidden deductions, boosting depreciation, and getting their clients into more tax-advantaged assets, these CPAs practice what they preach and are here to help you too! They’ll be answering questions about how to unlock the MASSIVE tax benefits of real estate investing while working a W2, when to start an LLC, how to protect your assets, whether a 1031 exchange is really worth it, and how to find the right CPA. Their suggestions could save you THOUSANDS in taxes, so don’t miss this one!  In This Episode We Cover: How to avoid income tax through real estate investing (even with a W2 job!) When to pull equity out of a property and how long to hold a rental Crucial questions to ask a CPA and how to know that they’re truly “investor-friendly” The 1031 exchange explained and when it’s NOT a good option for eager sellers Private money lending and how to ensure your lender shares in your property’s tax benefits  Capital gains tax and how to AVOID it when selling a primary residence 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 BPCON2023 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 David’s YouTube Channel Work with David Hear Our Past Episodes with Amanda: BiggerPockets Podcast 49 BiggerPockets Podcast 162 BiggerPockets Podcast 269 BiggerPockets Podcast 370 BiggerPockets Podcast 424 BiggerPockets Rookie 77 BiggerPockets Rookie 255 BiggerPockets Rookie 260 Enter to Win a FREE Copy of David's New Book, "Pillars of Wealth" Hear Our Past Episodes with Matt: BiggerPockets Podcast 689 Hear Our Past Episodes with Tom: BiggerPockets Podcast 569 BiggerPockets Podcast 631 Connect with Amanda, Matt, & Tom: Amanda's BiggerPockets Profile Amanda's Instagram Amanda's Website Matt's BiggerPockets Matt's Website Tom's BiggerPockets Tom's Website Click here to listen to the full episode: https://www.biggerpockets.com/blog/real-estate-753 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pock's podcast show, 753. Starting a company is a great way to go from a full W2 worker with no flexibility into the passive income ideal of owning real estate and living off of their rents. Very few people can make the jump from one all the way over to the other. So instead, what I recommend is that they make a little pit stop in between called owning a business. This is becoming a 1099 employee and entrepreneur and you get a lot of rideoffs. when you get into that world. What's going on, everyone? This is David Green, your host of the Bigger Pockets

Real Estate podcast here today with a seeing green episode. This is your first time joining us today. You're in for a treat. On these shows, we take questions directly from our audience. Yes, that means you. And we answer them on the show. And in today's show, I brought help from three friends. This is a tax-oriented show where we are going to share tax strategies, share specific stories regarding taxes that different bigger pockets members encountered, and we're going to have tax experts give them advice of what they could do to save that money. Today's show, we get into a lot of topics, but some of the ones that stood out the most were when a partnership makes sense and when it doesn't make sense and what to do when you run out of money to invest, when you don't need to do

a 1031 to shelter gains, and what specific questions you should ask your CPA to find out if they are the real deal or a pretender when it comes to real estate investing? This is a all really good stuff that's going to save everybody a lot of money. So thank you for being here. I think you're going to love it. Before we get to our first question, today's quick tip is when you saving taxes, it's like getting a raise. Today's guest CPAs have all been on the show, some of them a number of times. And I encourage you to look in the show notes for another tax episode featuring one of these three fine folks and really see if there is a way you can implement this information into your investing this year. Remember the old phrase, a penny saved is a penny earned.

It's actually better than a penny earned because you're taxed on money that you make. You're not taxed on money that you save. And if you end up loving this show and you want to submit your question to have me answer it, simply go to biggerpocket.com slash David, where you can submit a video or a written question that we just may feature on this show. You ever head out on a trip, lock your door, and think, cool, my most valuable asset is now doing absolutely nothing. Because while you're off traveling, your home is just sitting there. Quiet, empty, not contributing.

which feels like a missed opportunity, considering it has solid Wi-Fi and a very comfy bed. With Airbnb's co-host network, your place can earn money while you're away. You can hire a vetted local co-host with real hosting experience to handle guest messages, prep your space, and manage reservations so everything runs smoothly. Your home might be worth more than you think. Find out how much at Airbnb.com slash host. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect

and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a burr-builder's risk policy, or midterm holiday guests.

You get fast quotes, flexible coverage, and protection for property damage, liability, and even loss of rental income. Now is the perfect time to review your rates and coverage. Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, landlord insurance designed for the modern investor. Did you know your house gets bored when you leave? I can't actually prove that, but it probably misses out on the action, the footsteps, the late-night fridge raids. Yeah, when you're gone, your place is basically a... on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now.

Your side room wants a side hustle. Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can handle guest communications, it can manage reservations, and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taken care of and your place is in good hands. You travel,

your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. All right, let's get to the first question. Today's question comes from Cody in Arizona. A quick recap of the question. I recently purchased my first investment property and it is out of state near family. My brother is a realtor and my dad is going to be my handyman slash management guy. Perfect setup. One, so question one, since I am looking to purchase more properties eventually is creating an LLC now a smart idea. And if I create the LLC, should it be located in the state where I live or where the investment property is located. First, I got to tell you that I would confirm this with an attorney just to make sure that all of

your facts and circumstances are considered here. Now, for my experience, it's going to be best to set up the LLC where the rental property is. That is what's going to give you the most protection. Next would be just to remember that setting up an LLC is not for the tax benefits, right? you're not going to get any other tax benefit for having an LLC or the rental property in the LLC. What you are going to get is an additional expense for the cost of setting up that LLC. So just remember that when setting these up. Number two is, how can I find real estate investment friendly CPAs that are willing to work with me now and that also understand my future goals?

As I stated, my husband and I are employed full time and are only experienced in W2 income prior to this rental property. First, I would say look to the BP community for CPAs and accountants. There's a ton in here that I see answering questions that are awesome, right, that I've seen on podcasts and things like that. Next would honestly be Googling them and just finding one that is obviously versed in the business of real estate and that when you talk with them and interview them, give them a sort of snippet of your scenario and ask them if they have clients that are in your similar situation. That is what I recommend. That's what we do with new potential clients that we talk to. We make sure that we can help them and what they need, right?

You don't want a CPA or an accountant that's just going to say yes to you, but that they have no experience and they're really going to use you as the guinea pig to learn on. So definitely be transparent when you're interviewing them and asking them questions if they can help you. So that would be my best advice there. I'll pass it back to David. All right, Matt, thank you for that advice. And I thought that was fantastic. Remember everybody, not every CPA is the same.

Not every realtor is the same. Not every contractor is the same just because they say they do that does not mean the job is done. You really want to dig in deep and see how much experience they have with the type of work that you want. One of the most common questions I get is, how do I find a CPA that understands tax strategy? It amazes me how so few CPAs do understand tax strategy, but that's just the thing. Just like so few realtors understand how to run numbers on an investment property or what that even means. So ask those questions when you're talking to somebody, what type of tax strategies would you recommend? men and if they don't have anything to say, that's not the one for you.

All right. Our next video clip comes from Sean in Cleveland. All right. This question comes from Sean Un from Cleveland, Ohio. Sean's question is, I'm looking for CPA who I can bounce ideas off of and can offer me suggestions, especially since I have properties located in different states. How should I approach finding the right one? And what are the key questions to ask them in an introductory call?

That is such a great question, Sean. I love it. And you're exactly right. when you're looking for CPA to work with, you're not just looking for someone to follow your tax returns, but you're really looking for someone who can help you plan proactively. And like you said, give you ideas, suggestions, and best practices, both within tax and just financially as an investor. So don't ask generic questions like, do you work with real estate investors? Because nine times out of 10, they're going to say yes. So what you want to do instead is to ask more powerful questions.

common examples might be what are your successful clients in real estate doing to save on taxes. So this way you get them to showcase what types of strategies they're working with and also who they feel are strategic, are some of the bigger investor clients that they work with. Also, you can ask them more pointed questions like, you know, what are your thoughts about 1031 exchange or what do you think about cost segregation study? I think asking more open-ended questions like that will really allow them to go as in depth as they can and really be able to demonstrate how well-vers they are in real estate, especially since you have real estate in a lot of different states.

One important question you want to ask is to see whether they're comfortable or have experience in working with multi-state tax filing and or tax planning. All right. Back over to you, David. All right, Amanda. Well, you just made me look smart because on our last question, I told people very similar advice to what you just gave, not knowing that your advice would be this. on this question, 100%.

Don't give generic questions like, what do you think about real estate? That lets people have an open out. You really want to nail them down. If you say, tell me what you understand about cost segregation or what service do you use to run your cost segregation studies. If you get a dot, dot, dot, or a, um, or some fancy way of dancing around it,

that means they don't understand cost segregation. And so that's not a person that you as a real estate investor would want to be using. You might say, what do you think about the bonus depreciation step down over the next five years? What strategies have you come up with to make up for that? If they don't have an answer or they haven't been thinking about it, not the person for you. I think this is fantastic advice for a lot of things for contractors, for real estate agents, even for mortgage brokers, right? Ask your mortgage broker, what loans do you have that are exclusive to investors or what would you recommend I do to get loans

once I get 10 properties? If they don't have an answer, then they're probably just running a cookie cutter operations, they know how to do the very simple thing that's right in front of them, but they don't think outside the box, which means they're not a good fit for you. Great contribution, Amanda. Thank you very much for your time. So this question comes from Jim in Norfolk, Virginia. And Jim asks, if I get a private lender to lend me money for investing in rental real estate, how does the IRS see that? I've got investors. They want to invest with me. They want to invest with me. They want the tax benefits, but they don't want to do anything. So you really have two choices. is one, they can be a straight lender.

In that case, they just report interest income. So they're not going to get any of the tax benefits. You're going to get all of the tax benefits. And you're just going to send them a 1099 showing interest income. Now, if you want them to have interest income, I mean, if you want them to actually get tax benefits, excuse me, then what you want to do is you want to form an limited liability company or a limited partnership.

and the title of the property will be in that limited partnership and limited liability company and you will share the profits basically with these investors and they will get their share of the tax losses from depreciation or any other tax benefits. So back to you, David. All right there, Tommy. Thank you for that. And again, very good advice. Now, this is powerful because knowing this can change the way that you market yourself

to raising money. If you're telling people, hey, lend me money in real estate because you're going to get tax advantages, you do have to structure a certain way. There needs to be shared ownership of some type, whether that's a share of the LLC, a share of the property itself. They can get a piece of whatever the depreciation will be. But if you're like me and you typically only borrow money as debt, you don't do equity, well, your investors aren't going to get any of the depreciation because I'm going to be taken at all. Now, this is very powerful for you as the investor to keep in mind, if you make a big income and part of the reason that your investment, in real estate is for the tax benefits, you're not going to want to tell people about the tax benefits of real estate because they would go by their own instead of letting you borrow the money.

If you don't have big income and you don't need to shelter any income, well, then, hey, talk about the tax benefits of investing with real estate and structure your loans in a way that that person can get a piece of them also. I thought this was really good. And it also highlights the fact that there's more than one way we make money in real estate. Cash flow is one of the ways we make money real estate, but there's many ways, and tax savings is a big one. Thanks for that, Tom. Okay, today's question comes from Shri from San Jose. She's question is, I have a handful rentals across several states currently held in my family trust. What do you suggest for asset protection? I have over a million dollars in umbrella insurers. Different CPAs suggest different

things. I want to keep things simple for tax return. And also separately, my wife is a real estate agent. What kind of entity should she use if she may have losses in the first few years? Okay, so two completely different questions. Let's tackle the first one first. So, disclaimer, I am not an attorney, so I'm only able to answer this question from the tax perspective. My limited understanding in terms of liability protection is that trust, if you're talking about a revocable living trust, that really doesn't provide any asset protection. Now, from a tax perspective, revocable living trusts do not fall separate tax returns, which means that the rentals are reported directly on your personal return. So that

that will kind of help you achieve that simplicity goal that you're looking for. But again, my understanding is the living trust don't give you any asset protection. So if you're looking for asset protection, you're looking at a true legal entity, whether it's an LLC, a partnership, or maybe some kind of a Delaware statutory trust that does provide asset protection. Now, which one of those will be best for you and your scenario? That's a good question for your attorney to work with you on. Now, this is going to be a joint effort with you, your attorney,

your CPA, the reason being your CPA is going to be able to help you do a cost benefit analysis, meaning what is it going to cost for you to have these different entities, whether it's holding company, series LLC or a DST, right? What's it going to cost for you to have those to form it, to maintain it every year, and what is going to be the added liability protection for you and then really weighing it out to see if it makes sense? I know you're in California. California has very, very high LLC fees.

So if you have seven rentals, you likely don't want them in seven different LLCs because that could get really costly real quick. But working concurrently with your tax and your legal team could really help you find that optimal point where you're getting the protection, but also at a cost that makes sense for you. All right. Back over to you, David. All right. And the second part of Shri's question comes to me. My portfolio is limited so that I cannot obtain conventional loans anymore. more. I also have limited down payments now, but I hate partnerships. What do you suggest to overcome

the mindset and do partnerships to buy more properties, either to buy and hold or fix and flip? All right, I'm going to give you some advice that's different than most people in this space. So just take it with the green assault because not everybody would agree with me. I feel it's conventional wisdom that when you run out of money or you can't get loans, the answer is to go find a partner. And then you don't need to have money and you don't need to have loans because the partner is going to provide it. And this information gets given as if it's all just that simple. Like, oh, just go find a partner. It's kind of like if someone says, hey, I don't have any other tax strategies to save money and I have

a lot of taxes. And someone says, oh, just go get married. When you get married, you get a lot of tax write-offs. That's a terrible reason to get married. And if you marry the wrong person, the pain of a bad marriage will far outweigh whatever tax savings that you might have got. Is it true? Yes, you do get savings through getting married.

taxes, but is it practical? Is it wise? No. Oftentimes, the practical application of advice that you are given is much different than the hypothetical way that it's explained. This is one of those situations. I don't think you should go get a partner just because you're out of money. Now, if you are going to do it, I would say to do it with fix and flips. And the reason is that I like to see partnerships not be for the long term, as short of a period as possible, especially when your first starting to partner with someone you don't know them. In the same way that I would never tell someone to go marry somebody after the first date, I wouldn't want to be a partner on a long-term project with someone that I don't know super well

just because I was told a partner. Now, if we go on a couple dates, we do a couple fix and flips, we start to get to know each other, we start to like how we work together. Yes, a long-term partnership can start to make sense, but you got to give yourself time and repetition before you get to that point. My advice is different. When you run out of money, the goal needs to be to make more money. Okay, it's often easy to just say, oh, I need help with something.

I'll go find someone else that can provide it for me. And if you have the right people, that does work. But sometimes that can be the carrot that incentivizes you to save more of your money, to live beneath your lifestyle, to go take more challenges in life so that you can make more money, to ask for that raise at work, to start a business, to earn more money. Real estate is a wonderful way to build wealth, but it is not the only way to build wealth. In fact, my personal opinion is that real estate works best when it is a piece in a bigger puzzle of which entrepreneurship is also present, right?

Real estate works great as a tax savings, but you have to be making money in order to have something to shelter your income, especially if you're doing it in a 1099 endeavor like entrepreneurship. So, Shari, can you start a business? Can you work more hours? Can you find a way to be more efficient with the hours you're working so you can make more money? Do you have equity in some of your previous deals that you could pull out to reinvest. How can you move forward without relying on a partner that you don't know? I don't know

that your mindset is wrong that you hate partnerships. You might have a really good reason to not like them. So I'm not going to tell you to get over that mindset. I would need to know more about why you have it. I am going to say if you're going to partner, do it on short term deals like flips. And if you don't want a partner, then let's ask different questions. How can I make more money? How can I save more money? How can I get more capital to invest so I don't have to have a partnership? submit us another question with some ideas you have. I'd love to help you out with that. Also, Shri, I see that you are in San Jose, California. Just a hop, skip, and a jump from me. I'm recording this over in Brentwood. So hopefully we run into each other soon. We'd love to meet you.

This next question is from Dale Vance Jr. in Los Angeles, California. And he says, if I 1031 a property to buy a condo where I'm going to live, how long do I have to keep it a rental before I can make it a personal residence? Whether it be tax consequences, say, after for like two years. Thank you. Dale, I actually think two years is a really good time frame to be renting it. You do need to show that your intent of buying the new property was to rent it, right? You can't pre-establish. Like, don't write a two-year lease. I'd write a regular one-year lease. You can renew it. You want to make sure you at least straddle two tax years. But two full years is probably a good rule.

of thumb. I think that's a really good idea. And then, remember, after that, as long as you actually live in it for two out of five years, then anything other than the depreciation you've taken should be tax-free up to that $250,000, $500,000 exclusion for single versus or married individuals. So you actually can have your cake and eat it too. Thanks, Dale. you, David. Thank you, Tom. That was a great answer to a tough question. Oftentimes, we as human beings, want to turn subjective matters into objective ones because our brain finds comfort in knowing exact answers. And this was a question just like that. How long do I have to wait before I can take a business property that I bought through a 1031 or an investment property,

I should say, and turn it into a primary residence. And there is not an objective answer to that. I don't believe the tax code specifies a period of time. You have to be a period of time. You have the way it would come down to a judge's subjective interpretation of what your intent was. And Tom, I thought you gave a great answer that two years would be a healthy period of time. Just remember everybody, sometimes there's not an answer like that, similar to when you're buying a house as a primary residence, and then you decide that you want to rent it out. There's not a period of time that you have to live in it before you do that. It's often said you have to live in it for a year.

That's because when you buy the property, you're intending to occupy it as a primary residents and you're not allowed to buy another primary residence until you wait a year, getting a conventional loan, of course. That's where the year thing comes from. It doesn't come from the tax code saying that you have to live in it for a year. Many people have bought a primary residence and had a life change, a sick parent. They got a new job and they had to relocate some other life event happened and they couldn't live in that house. Well, they can't force you to live there and say you're not allowed to rent it out. What you get in trouble is if the bank can prove during a foreclosure that you intended to rent it out and you never intended to live there.

So thank you, Tom, for that advice and making us all a little bit smarter. All right, I hope you're enjoying the advice from my colleagues here. We've blazed through five already and we have more to come. I just want to remind you to like, comment, and subscribe to our YouTube channel here, specifically comment. I want to know what you think about these shows. Now, I always like to get feedback about the length of the show. The topics, my light color, and guess what?

you all responded, which is awesome. These comments come from episode 741 from Mountain Surf. I love how you admit this is a difficult market. I turn off 80 to 90% of YouTubers because they are trying to put an optimistic bullish spin on this market. Oh, bullish like positive, not like bullish, like a substitute for a bad word. That's funny. I read that differently. To me, it means they are not adapting to the situation because they are not fully acknowledging it. We don't know when or if the Fed is going to pivot. Your concepts are also not basic. It's so relieving not to listen to the same stuff other people say. At the end of every YouTube I watch, I ask myself, what do I know that I didn't know before? I'm finding more and more of YouTube's end up being nothing burgers. Yours are

thankfully advanced enough that I get insight. Don't simplify, stay advanced. Wow, Mountain Surf. That might be my favorite comment that I've read for somebody. You put a lot of effort into, well, not only complimenting me, but saying why you like the show. And that's a very valuable thing you can give other people. It's one thing to say I'm a big fan or I love what you do. It's another to tell somebody why you like it. That gives someone like me a direction to know how to make the shows better, what's working, what people are enjoying and why they're liking it.

I really appreciate that comment. This is awesome. And it is something that I put a lot of effort into trying to do. I could come in here and tell you guys that everything is easy. That wouldn't make any sense. I could also come out here and say, it's hard so nobody should invest in real estate go buy a bunch of NFTs. That wouldn't be honest either.

This is the most challenging market that I've ever seen in my real estate investing career. Now, I'm not Sam Zell. I haven't been doing this for that long, but I've been doing it for a minute. And this is incredibly challenging. And the reason is that there is significant inflation, especially related to assets, which is the best safe place to put money to protect it from inflation, at the same time that they keep raising rates, which is lowering affordability. So it's not affordable to buy a house, which eliminates cash flow for investors a lot of the time, but you still got to put your money

somewhere because it's losing value. It's like there's no safe place to run and there's nowhere to hide. And that's what makes this so hard, which is why we're making more of an effort to produce more shows and share more information. I also appreciate you saying that you like that. I'm not getting you basic information here. I try really hard to avoid just giving something basic and I always give my explanation for where my advice came from so that if you don't agree with it or you don't want to follow it, at least you understood the perspective I was coming from so you can decide if it's right for you or not. Here's the last thing I'm going to say. If you're getting your information from YouTubers, TikTokers, people that are telling you how great real estate is

and they're selling you on a dream, not on reality, it's usually because they want your money. Podcasts like this are free for you, so you don't have to worry about me telling you something just because I want your money. Now I do sell houses and I do have a mortgage company, which I I use when I'm buying my own property. So I do provide services to people, but I'm not sitting here telling you guys that you need to all go buy houses so that I can sell it to you. In fact, very few of you have actually bought a house with me. I'm telling you the truth and it's free and you can trust it.

All that I would ask in return is that you would go and give us a five-star review wherever you listen to your podcast, whether that's Apple Podcast, Spotify, Stitcher. It helps so much for us to get reviews. I would really appreciate if you guys would do that. We want to stay the top real estate investment. podcast in the world so we can continue to bring you these shows. Most investors spend more time chasing deals than reviewing their insurance. But a quick coverage check can be fast, easy, and one of these smartest ways to protect

and even improve your property's cash flow. As the months get colder, frozen pipes, icy walkways, and seasonal wear and tear can increase the likelihood of claims. And traditional insurance companies aren't always built to handle these claims quickly or smoothly. That's why more real estate investors are turning to steadily. They focus exclusively on landlords, whether it's a single-family rental, a burr-builders risk policy, or midterm holiday guests. You get fast quotes, flexible coverage, and protection for property damage, liability, and even loss of rental income. Now is the perfect time to review your rates and coverage.

Get a quote in minutes at biggerpockets.com slash landlord insurance. Steadily, landlord insurance designed for the modern investor. Did you know your house gets bored when you leave. I can't actually prove that, but it probably misses out on the action, the footsteps, the late night fridge raids. Yeah, when you're gone, your place is basically on unpaid leave. It's sitting there in the dark thinking, I could be contributing right now. Your side room wants a side hustle.

Even your Wi-Fi is like, we could be networking. You're on vacation, spending money like it's a sport, while your staircase at home is fully capable of sending your income upwards. Here's the twist. You can go on a trip and actually earn money. Airbnb makes that possible with the co-host network. If you're away for a while or have a secondary property, you can hire a vetted local co-host with real hosting experience to handle it all. A co-host can handle guest communications, it can manage reservations and keep things running smoothly so you don't have to check your phone between beach days. That means less stress and more time enjoying your trip. You can relax, knowing guests are taking care of and your place is in good hands.

You travel, your house works. Everyone wins. If you're ready to host but could use some help, find a co-host at Airbnb.com slash host. Managing properties can feel like a full-on circus. You're juggling vendors, tracking payments, chasing approvals across multiple properties, and maybe a few HOAs, all while trying to keep tenants happy and owners confident. One delay can throw everything off, and suddenly your day is all clean up, no progress. That's why hundreds of property managers rely on bill to streamline their finances. Bill for property management lets you add all your properties, assign permissions, pay bills, and receive payments quickly and efficiently without the usual bottlenecks.

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That's Indeed.com slash rookie. Terms and conditions apply. Hiring Indeed is all you need. For free. All right. Our next comment comes from Army Faser. I love the show and don't give a darn about the background color. This is because I always forget to change the light.

Thanks for the reminder about focusing on the long term. My insurance costs are steadily rising in South Louisiana, but we are still above water. At the moment, it does have me wondering if I should sell and buy outside of Hurricane Alley. P.S. don't worry about the length of the show. If it's good info, it is worth the time. Well, thank you for that, Army Faser. I appreciate that you're liking the show and you're not worried about the time. So we will continue to make them. And if you do decide to invest outside of Hurricane Valley, check out Biggerpockets.com slash long distance book to learn how to put systems together to buy real estate and other places.

And our last comment comes from aberrant art. I might be wrong, but it feels like it's too late to get started at this point. and only the people who got going in the golden age have the advantage over everyone else. That's a deep one, man, and I see where you're coming from. I'm not going to sit here and tell you that. That's not the case. Now, I will say that it is more difficult to do this than before, but it's not too late, right? Adversity is the fuel of greatness. I will also tell you that the people that bought five years ago, 10 years ago, 15 years ago,

15 years ago, 20 years ago, here's the truth. They all thought it was too late also. They all thought prices had already come up too high. It was too expensive. They were waiting for a market where houses were less. Anyone who's honest will say the same thing. I've yet to meet a person who bought a house and said, man, that was a great deal.

They always thought they bought high. And at the times when we were buying low, we didn't know it was the bottom. We thought it was going to crash more. There's no person at the time they're buying that knows if it's the right time or not. But every person, when they look back, says, I'm really glad I bought real estate.

I wish I had bought more real estate. And I have to tell myself this all the time because I struggle with the exact same feelings as you. It's especially hard when you go buy a bunch of real estate and the market dips a little bit like it has. And I went from I bought it to it went up and then it came down a little bit. I forget that it went up before it came down, right?

I only think about the fact that it came down and I feel really bad in a lot of ways. So keep in mind that you're not the only person feeling that. Everybody feels it when you're buying for the long term, those worries go away. Now, on episode 741's YouTube page, there are a ton of great comments,

specifically two really good threads, where people made comments and it started a conversation going back and forth. Piece of advice number one, beware at Bigger Pockets. We get spam, and there's a WhatsApp account that will frequently pretend to be bigger pockets. That's not them, so don't message them.

But there are a lot of people who are making real comments. So if you want to avoid the spam and you want to make sure that your comments get acknowledged, because sometimes people stop paying attention to YouTube comments. After you leave the comments, just head over to the Bigger Pockets Forum and start the conversation over there where you can be free of spam as they're moderated.

And you don't have to worry about asking something that nobody sees because the Bigger Pockets forums are monitored more than the YouTube comments. But keep leaving them comments, folks. I love it. All right. Let's take another video question. All right. This question comes from Mary Hopkins from Florida.

And the question is, I have a friend who will be selling two of her farms and have a significant amount of tax. We were discussing the 1031 exchange issue, but I was not sure the options within it. Can she invest in the REIT or syndication and still receive the tax benefits? All right, so great question, Mark. When you sell farmland, you can actually do a 1031 exchange directly. So if your friend is interested in buying more real estate after she sells a farmland, then I think that would be the most straightforward way to save on taxes. So again, sell the farmland, 1031 exchange the proceeds or the sales price into other types of real estate. Now, if she wanted to do a 1031 exchange, unfortunately, reeds are not eligible as replacement

properties. They're typically set up as corporations. And so when you 1031 exchange, it has to be the asset itself and not a corporation that owns a piece of property. Now, with respect to syndication types of real estate, it may be possible. what she'll want to do is to contact the various syndication investments that she's interested in and ask them if they are set up to take 1031 exchange money. Some of them are set up that way. Many of them are not. So she'll just want to find that out from the company that she's interested

in investing with. Now, last but not least, even if she was not able to do a 1031 exchange or the syndication that she wants to invest in is not accepting 1031 exchange, she can always use what we call a lazy 1031 exchange. And that simply means buying other real estate, whether it's directly on real estate or real estate in this indication, to the extent that those real estate can strategically create tax losses, those losses should be able to offset the taxes on the sale of her farmland. So a lot of different options there. Now, back over to you, David. Amanda, that was a great answer. In fact, you're bringing up something that I just kind of realized was a bit of a secret in our industry that you mentioned that never gets talked about,

but I remember having a conversation with the CPA that brought it up in my mind, kind of like, it took me a couple times to wrap my head around what they were saying. The 1031 is a way that you shelter the gains from something that you sold. But what you described is, I think you called it the lazy 1031 or the sneaky, something along that lines, it's buying enough real estate that the bonus depreciation would show losses that would also shelter the gain that you made. So you don't always have to do the exchange and play that game with those rules. So it is very conceivable if you have enough depreciation because you bought enough real estate,

then instead of doing a 1031, you just sell the property, buy new ones, take your capital gains and then have those offset by the depreciation that you took on the new real estate and you don't need to do a 1031. Great advice. It doesn't get talked about very often and it will save a lot of people headaches if they get into it. Brought to you by us of bigger pockets all for free. All right. Let's get to our next question.

Today's question comes from JD in Sacramento. A quick recap of the question, how is it that there are so many tax benefits for real estate, but they don't count if you have a W-2 job? And why does no one ever talk about that? So the first reason is because rental real estate is considered passive by the IRS versus money that you earn as a W-2 employee or a business owner is considered non-passive. And we have to look at those two things as buckets of income. Now, it's very difficult without jumping through all of these hoops to offset those against each other. So meaning if you make $100,000 at your W-2 and you lose $50,000 with your real estate, you ideally would want to net those to where you only pay tax on $50. But again, you can't if you're simply a W-2 job, not in the nature of real estate and you don't pass those rules. Rules being being a real estate professional. and materially participating in your rental properties. Now, I do want to mention that you can be

a W2 employee and still utilize these sort of loopholes and tax tricks, but you will need to own at least 5% of that business for it to count towards being a real estate professional. And the last thing is, is you can be a W2 employee within, let's say, your own S corporation, so you're basically self-employed, but again, that business would just have to be in the nature of real estate. So let's say that you're a realtor and you operate as an S corporation. You likely or should be getting a W2 from that position that you play within your own company. And again, since you would qualify as a real estate professional and let's say that you do materially participate in your properties, that very well could give you tax savings right

there. But really just remember that there's two buckets. There's passive and non-passive. and rental real estate is technically considered passive, and money that you earn at a W2 rule is considered non-passive. So at the end of the day, you're going to need to pass these tests in order to net those against each other and really maximize your tax situation. Now, I'll pass it back to David. Thank you, Matt. Great job answering a tough question. This is misleading because when you hear certain phrases like depreciation, that sounds like the value of an asset going down.

it'd be the opposite of appreciation, but that's not what it means. It means the asset deteriorating overtime. When you hear phrases like passive income, that is misleading. You think, oh, I just buy something and it gives me money like a stock. Real estate is considered passive income in the tax code, but in practical application, it's rarely ever that passive. Many of the tax benefits that come in the tax code come from non-W2 work. And there's many reasons why, but here's the way that I like to think about it. When you have a W-2 job, like most of us do, you're taking a lot of of the risk out of the way you're earning money. Your employer is taking the risk, okay? So if one of my businesses loses money, I don't pass that loss off to the employees.

They just didn't make money. Or maybe they made less money than they used to, but they don't lose money. Employees don't take risk. They have a floor, a sturdy foundation that they stand on where they get a check, regardless of how good the business does until the business runs out of money and they lose their job. But that floor comes to the price, and that's the ceiling. It is much harder to get higher to make more to do better for yourself when you're standing on that floor. And this is where a lot of people get upset is they only look at the fact that they have a ceiling on themselves and they don't recognize the fact they also get a floor. When you take a step out of that cage, which sometimes feels like a nice safe fort keeping you safe,

and you get into the entrepreneurial world, you get a lot of tax benefits, but you also take on a lot of risk. starting a company is a great way to go from a full W-2 worker with no flexibility into the passive income ideal of owning real estate and living off of their rents. Very few people can make the jump from one all the way over to the other. So instead, what I recommend is that they make a little pit stop in between called owning a business. This is becoming a 1099 employee, an entrepreneur, and you get a lot of ride-offs when you get into that world. Now, I'm not a CPA. This is why we brought a bunch of them onto the show. But you can often write off dinners that you would already be having if you have them for a business purpose. You can write off vehicles that you would need to be

driving anyways if you're using them for your business. Think about me as a realtor. I'm driving all over the place when I was showing houses or going to listing appointments. I had to have a car. I had to have an iPad in order to give my presentations. Now, the IRS doesn't say you're not allowed to use that iPad unless you're giving a presentation. I could also use it for other things. A lot of people take advantage of write-offs when they run a business that they can't when they're a W-2 worker because they use it for the business. And that's something that you could just think about. If you're having a hard time finding tax write-offs, starting a business and owning real estate are the two best ways to do it. And if you combine them together, you'd get even more.

So our next question comes from Sonia in Massachusetts. And Sonia asks, my husband and I recently got divorced and we own a duplex. I would like to reinvest my share of the proceeds, but I still have to give him half of the proceeds, it's about $100,000. How do I do this tax effectively? And the very first thing I would tell you, Sonia, is you need to make sure that he's going to recognize your ex-husband half of the gain. So when you sell the property, make sure that he's actually on the sale, which I presume he would.

And you need to make sure he picks up half of the game. So you would actually file a partnership return and give him a K-1 showing half the gain, unless your divorce decree says otherwise. Then you can take your money and you can reinvest it. You could actually, you could do a 1031 exchange if you really wanted to, but I think you're probably better off just taking bonus depreciation. Just make sure that you buy your new property and place it in service, meaning it's ready to be rented by the end of December.

And then you get 80% bonus depreciation on the land improvements and the contents of the building, you know, like the carpeting and the ceiling fans, the window coverings, etc. Typically, that's about 20 to 22% of the cost of the property, as long as you get a good cost segregation done. So that would be my recommendation. I would probably not mess around with a 1031 exchange. I would rather probably see you do the bonus depreciation. But be sure to sit down with your CPA, your tax advisor. make sure your tax advisor understands what they're doing and that they can run the numbers for you.

David, it's all yours. All right. Thank you for that, Tom. Again, we see that a 1031 exchange is not always necessary if you have enough depreciation available to you. Now, here's something else to think about as much as we complain about how tough the market is and how it's too hard, which frankly, side note, I think that comes from being oversold on the fact real estate is supposed to be easy. And the market has been easier than normal for the last eight years due to, to really low rates and rampant inflation,

even though we complain about it, there are still some massive benefits to owning real estate and depreciation is one of them. When you combine cost segregation studies with bonus depreciation, people have been able to buy large amounts of real estate and shelter all of their income. I'm talking 100% of their income

for several years in a row because of benefits given to us in the tax code that incentivize real estate ownership. That is not normal, That is not something that everybody gets. It's not something that other countries allow. And as Tom just mentioned, it's going to start stepping down. And this year, it'll be 80%, then 60%, then 40%, and so on.

This is a big perk that we've had for a long time. And for people that didn't jump in and take advantage of it because they were waiting for a crash. I feel bad sometimes. This is a great point that you're making there, Tom, about ways people can save money and make money in real estate that are not purely cash flow. And I'm just giving everyone a heads up. It's not going to be around for. ever unless Congress approves this to be extended or gives us another run of it. It could go away and you won't hear us talking about depreciation in the same way when it

comes to sheltering your business income or your active income like we have been able to in the past. And the second part to Sonia's question reads, Massachusetts multi-home prices are so high with the high rates I'm not expecting to be able to afford much. I have a few questions. Can I buy a home without putting down 20%? and how do I find investment property single or multifamily in other states that I can afford and run while living in Massachusetts? Actually, I'm not opposed to moving and renting out my single family home, but if I understand the capital gains laws, I have to buy an investment property with the money from the sale of a duplex.

I hope this question gives enough details. I've had a loss and a bit overwhelmed by my situation. All right, thank you, Sonia. I can tell from the way that this was written that you are feeling overwhelmed. and there's a million things going through your head. Okay. So the first thing that I would recommend is that you step up your education when it comes to real estate investing.

Get in the Bigger Pockets forums. Follow me at David Green 24. Follow other Bigger Pockets authors, especially people that have written books for bigger pockets usually have a higher knowledge base than just the casual member. I need you to get in the world a little bit deeper and sort of sort out the chaos that's jumbled in your mind that I can tell is coming out here. I definitely sense that you're overwhelmed. You brought up a couple different things like you're not opposed to moving and renting out a single family home,

but then you switch to there's going to be capital gains if you sell a duplex. The first part of your question here talks about how you can get around putting down 20% on an investment property in another state that you can afford and run while living in Massachusetts. Well, there's not a lot of options when it comes to that. One would be buying from a seller directly and taking over their note and to go. negotiating directly with that person, what the down payment's going to be. Sometimes you could get no down payment. We have to call that creative financing. The problem with that is if you're stuck right now, you probably don't have a ton of people

lining up to talk with you about selling their property directly to you, not on market. Those always sound easier to do than what they are when you go try to apply it. So if you have an opportunity like that for creative financing, that's one way to get around it. Another would be the NACA program. you can Google that in ACA and visit their website and see what options that they have available for low-income people. On episode 590, we actually interviewed somebody who got into how he has used this to scale his portfolio at a specific area. I'm not an expert in that. I don't do a ton of it, so I can't tell you on this show, but that is a place that I would point you towards.

And then the other option could be finding a partner. If you find another person, they can lend the money to go in on the deal. But again, I'm going to give you similar advice to what I told somebody else. having a hard time finding the 20% to put down either house hack, which no one likes to do because it's uncomfortable, but that's why I recommend doing it because you're showing that you value your future over your present comfort because you can house hack for three and a half percent down or five percent down and then move out of that property in a year and buy another one and now you've got a rental property, right? Or figure out a way to make more money, which will force us to

improve in other parts of our life. I'm writing a book right now for bigger pockets called Pillars of wealth that talks about how real estate investing is a third of the way you build wealth, but the other two thirds are offense and defense, making money and saving money. And those are just as important. Thank you very much for your question. And by the way, episode 590 was with Andre Haynes about the NACA program. All right, we have time for one more question. This one comes from Ola in Atlanta. At what point would you pull out equity of a free and clear property, especially in this market and where we are headed? So my personal opinion is I'm a fan of honestly never selling. So in this case, even if you want to refi and take cash out, I would look into getting a home equity line of credit or a he lock, as they call it, right?

Because then the cash is accessible to you and not yet accruing interest. Versus if you do a refinance, right, you're now walked into an additional, or not additional, but a new 15 year or 30 year note. And you obviously will have a monthly payment obligation there. So I'm a fan of if you need quick access to cash, consider that. that he lock for that, just because again, you don't really accrue anything until you use it. The next question is, is there a rule of thumb on how long to hold cash flowing assets? I'd say this is all personal preference here. You obviously want to run the numbers and see, do you have a better potential opportunity

for this equity, let's say, that you have in these properties? And if not, maybe leave them there. And then the last question here was, was looking to refinance them, but then are just considering an overall sale, but then thinking about the tax. implications. What are the thoughts here? So overall, again, I'm a fan of never selling. And if you do need to sell, I would look at a 1031 exchange. So I can see here that the concern is, is if you sell it, yes, you will come into, let's say, a windfall of cash, but now you're looking at a tax liability, potentially. If you tax plan, right, there may be some tax advantages here that if you have passive losses built up, you may not have to pay as much tax as you think you would here. But overall, if you will be stuck with a tax bill, I would consider a 1031 exchange. over selling here. So those are my thoughts there and I'll pass it back to David. I love it, Matt, the idea of never selling. This is something that bears repeating because I

forget people aren't aware of it. But when you refinance a property, you do not pay taxes on the refinance. Now, you gain a bunch of money, but you're also taking on a lot of debt. It is not a capital event. You're not actually making money. You're just exchanging money in the bank for a note that you have to repay with interest. So of course you're not going to be tax. on that, but people don't realize it. You can buy a house, put it on a 15-year note, pay it off, refinance it. All that money comes tax-free to you, and then use the money from your tenants and the increased rents to pay off the new note. Again, this is why I love real estate, because it's something I buy with the majority of somebody else's money, and then I get a third

person, the tenant, to give me the money that I borrowed to buy the property, and very little of it is my money. It's just the time that I have to spend operating it. Then you get all the other benefits of real estate and it is awesome. So thank you for that advice and everybody. Please remember that. You don't have to sell property in order to get money out of it. You can put an equity out of credit. You can cash out refinance. Regarding the question of how long as a rule of thumb to hold cash flowing assets for, the way that I look at that problem is I ask myself when the property stops running efficiently. So I don't sell properties very often. I've sold a handful over my entire career. and it's usually when that property is either in a location that I don't like some life event

that was unexpected occurred and I had to sell it or more commonly the rents have not kept up with the growth of the assets in that area. So I talked about that in the Burr book, this example of how I sold one property and turned it into 10 using the Burr method. But the reason I chose to sell that property was that the value of it had gone up, but the rents had not kept pace. At that point, the cash flow didn't justify holding it. So that's the one that I sold. If a property keeps cash filling, there's no reason to sell unless you have another opportunity. You're better off to refinance it and keep the property and buy more with the money from the refi. Tom, where can people find out more about you? You can find more about myself and

wealthability at wealthability.com. Wealthability.com and you can also find me on social media. And Amanda, where can people find out more about you? Hi, I am Amanda Hahn, CPA at tax strategist and real estate investor, and you can follow me on Instagram, Amanda Hahn CPA for daily tax and financial tips. Matt, where can people find out more about you? Hey, thanks, David. Yeah, so you can find me on Instagram with the handle at Matt Bontrager or at our website, truebookcpa.com.

All right, thank you all for your contributions to seeing green today. I appreciate you guys taking the burden off my shoulders to talk about taxes because I have not a CPA. And frankly, it's not my favorite thing to talk about. It's kind of like vegetables. You have to eat it, but you don't have. to like it. All right, everybody, that is our show for today. Thank you for all of your contributions. Thank you for listening to us. If you want to follow me specifically, you could do so at David

Green24.com or you can follow me on all the social medias at David Green 24. And guess what? I finally got meta to give me that blue checks. Now you don't have to worry about being taken advantage of by fraudulent David Greens. Send me a DM and let me know what you thought of the show and go to my website, check out what I got going on. Also, if you do, didn't know Bigger Pockets has an entire website with more resources that I can tell you right now, we are more than just a podcast or a YouTube channel. There's tons of stuff. So head over to BiggerPockets.com next time you're bored and look at all of the free resources that we have for you there. Lastly, if you have time, watch another video. And if you don't, make sure you tune in

a couple days for the next episode that we're going to be releasing. We also have tons of other content on YouTube that you can check out in the meantime. Love you guys. I appreciate you guys. appreciate that you spent some time with me. I will see you on the next one. 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 Calicoe 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

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