Epic Real Estate Investing - How to Beat Uncle Sam This Year - Joel Jensen | 945

Episode Date: March 2, 2020

Even though it does not show as money in your mailbox, depreciation is a legitimate profit center. Therefore, Matt is joined with Joel Jensen, a certified CPA and a real estate investor who shares how to lower your tax expenses, legally, honestly, and ethically. Tune in and find out more! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terrio Media. Success in real estate has nothing to do with shiny objects. It has everything to do with mastering the basics. The three pillars of real estate investing. Attract, convert, exit. Matt Terrio has been helping real estate investors do just that for more than a decade now. If you want to make money in real estate, keep listening. If you want it faster, visit R-E-I-A's.com.

Here's Matt. All righty. So, hello, and welcome to the epic real estate investing show. I got a great show for you today. As we talk about here, all of the different profit centers of real estate, right? We talk about the cash flow. We talk about the appreciation. We talk about the amortization.

We talk about the impact that leverage has on all those profit centers. And we also do mention the depreciation part of it. And a lot of people kind of discredit that or don't take that into consideration when they're purchasing real estate, but it is a legitimate profit center. It might not show up as money into your mailbox, but it certainly cuts down the amount of money that you send to Uncle Sam. And to me, that's a win. And it's really one of the really, I guess, the final legitimate tax shelters that the average person has available to themselves. And it's that season, right? It's time to start thinking about the tax man and how we're going to manage that.

and pay as little as we possibly can. Of course, legally, honestly, and ethically. But there's a lot of stuff in the tax code given to us by Mr. Uncle Sam. It says, if you do this, you don't owe me as much, right? So it's all about the, we're mostly talking about how much money you can make, but a big portion of being successful in real estate investing and being a wealthy individual is focusing on how much money you get to keep. And, you know, Dave Ramsey and Susie Ormond, they would say, hey, cut down.

down on your weekly latte, that's going to make a difference. And then stop going out to eat so much and buy it T.J. Max and not at Macy's. And they gave you all this type of advice. But those little pieces of advice, I guess over time, they could add up, as they always say. But if you're going to cut your expenses, particularly when you've got the formula that you're looking to escape the rat race, you want to increase your passive income and decrease your expenses. And once that passive income exceeds your expenses, you're essentially financially free. And that's a 40-year plan for most people following traditional advice,

but here on the real estate investing show, the epic show, you know that can be done in three or four years. And so if cutting your expenses is a big portion of that formula, it makes sense to me to start from big to small, to work from big to small. And most people don't realize their biggest expense in life is going to be their tax bill, right? Depending on where you live in the country, it could be anywhere from 25 to 45%. I just moved from California. And I was just, just by making that move,

I saved 13.5% on my income tax. And you don't have to move to Nevada like I did. But there are things that you can do. And being that time of the season, it's something that we should all be thinking about. And I invited a very special guest on the show today. A certified CPA, Mr. Joel Jensen. Joel, welcome to the show.

Thank you. Appreciate it. Glad to be here. Yeah, glad to have you. You know, we have a mutual friend that introduced us. I guess you're actually the business partner. Share with me a little bit about your business and what you guys do. Okay, so we're a tax firm, full service firm.

We do tax consulting. We prepare tax returns. We like to help real estate investors, mostly because I am a real estate investor myself. So I do flips and I host a commercial rentals. It's a great way to make passive income. So it allows me a certain look from the ownership side and then kind of translate that to the tax and tax saving side as I help my clients through, you know, the, the wandering path of real estate tax. So just as far as a background on me, so people can at least have a sense

of who I am. So I graduated from with my master's a long time ago back in the early 90s and went to work for a small little firm called Ernst & Young. I don't know if you know who they are. Small little firm, yeah. Small little firm, yeah. One of the finals fours I like to call them nowadays. When I was there, they were the big six, but now final four. I was there for about 10 years and then decided that I liked helping individuals much more than I liked helping huge companies. The interaction for me was much more satisfying. So I went left Ernst & Young, started the firm back in 2003, and we've been helping small business owners and real estate investors ever since. Fantastic.

Well, thanks for being here. And we're probably going to turn this into a series at the very least of, things that you can do and we'll meet here probably once a week to do that. But one thing I wanted to kind of just start off with is, you know, I introduced you by way and laid the groundwork for this as saving expenses, right, and reducing your expenses. And one of the things that people might do is they might be tempted to go out there and do it themselves because they don't have to pay for the CPA, right? And this time of the year, all the commercials are coming on like, you don't need to pay a CPA. You can do it yourself, buy our fancy software, and you'll be good to go.

So, I guess, let's go there. Why do people who, I don't know, share with me your experience. What's the big distinction there? Okay, so the big distinction is basically what you have going on. Okay, if you are employed somewhere, so you have a W-2, you rent where you live, you don't really have any deductions, you take the standard deduction, and that's about all you have, then there's no reason coming to see me. I can't really save you any money. You have maybe a dozen inputs and that's it. But once you cross that threshold and you start going into the self-employment world or you start buying real estate, your whole landscape is going to change. So then you've got to understand which forms you need to fill out, what deductions are available to you, best ways to strategize as far as your

real estate may go or your self-employment business may go. Great use of depreciation. I know you mentioned depreciation earlier. That's that's one of those things I always stick in my back pocket to use to help people save money. So it's just your landscape changes. It becomes much more complex, much more complicated, and the ability to save you money should be left in the hands of a professional who does it every day. Got it. I'm going to play devil's advocate. Okay, go ahead. Sure, Joel. You just want me to hire you, right? I mean, I guess there is a sense of that, yeah. But, Sure, sure. But for example, I had a client who I was just working with this week,

submitted their tax returns. They're not in real estate, but he is self-employed in the health industry. And I said, listen, we do this one little thing, and I'm going to save you $4,000. This one little thing, super easy, doesn't really require much of you, and I'm going to save you money. Right? It's those little tips and tricks that someone like me can bring to you. If I can't benefit you far more than what you're paying me, I'm not worth it.

Right. So my goal always is to maximize my ability to save you money. Perfect. Perfect. Great. So, yeah, I know the value of a CPA. I was just kind of playing devil there. And mine certainly is worth his weight in gold and he does a good job for us and we have it all in-house now. If someone was resisting and I said, yeah, yeah, no, I'm a smart guy. I can do this. Let's just send them, let's give them some information. What are some common mistakes that they're going to want to look out for if they want to do it themselves? So I'll give you just a real easy one. It seems so basic.

But the problem is, you know, when you're dealing with a lot of clients, I see it all the time. And that is simply waiting to the last minute to try to file your tax return. So I always like to throw out the analogy. Let's say you're going to go on vacation somewhere. You know, you got your spouse. You got a couple of kids. You know, you have a flight tomorrow afternoon.

Leaves at 1 p.m. Got to get there, get the airport a couple hours early. Let's say if I waited to pack until about 10 a.m., the day of my flight. You know, what is that situation really going to look like? Am I going to get everything in there?

Am I going to forget my sunset lotion yet I'm going to Hawaii, right? So it's that kind of analogy. If I wait until the last minute, your tax return is not going to be as beneficial to you personally as it could be. Had we spent the year tax planning,

going through it, understanding where your numbers are, and then the tax returns just becomes more of a compliance issue. So one is, for me, is waiting until the last minute. Some other basic, ones would be, for example, incorrect credit. There's lots of tax credits out there, your calculations,

not understanding which forms you need to fill out in order to get those tax credits, or simply being unaware of what tax credits are available to you. There's lots of educational credits are available to people. I see them leave them out all the time. Filing status error is another one. Let's say you're in real estate, you're married, but for whatever reason, someone told you who doesn't know much about tax, that married filing separately. is the best way to go when you go into real estate. I've seen that happen as well, and that's a horrible position to put yourself in.

It suspends deductions and all kinds of things. So understanding even something as simplistic as what you think your filing status should be, you can run into problems. And probably another one that, let me just throw out there, is missing deadlines. Deadlines are really big.

So a few years back, I don't know if you remember this, but LLCs, S-Corps, corporations, they used to be due on April 15th. And then the IRS got this wonderful idea to move them up a month. And it caused strife amongst every business owner that was out there. A lot of people didn't realize that got moved up. And the penalties that they ended up incurring because of late filing that year,

I mean, it was horrendous. I mean, that doesn't sound like the IRS, I know. No, they don't do that at all, do they? You know, you got to remember, they're in the money-making business. That is their business, right? They're the single largest collection agency in the entire world. They're very good at what they do. They're very good at extracting money for us.

So we have to be just as diligent with the money that we have to be able to keep that in our pockets. So the last one, I guess let me just throw one more out there because you had mentioned depreciation. I love assets because assets give me a wiggle room, shall we say, where I can employ different strategies with assets in order to either increase depreciation or stretch depreciation. or stretch depreciation out. Sometimes people think, oh, I just want to take it all now, now, now. When in actuality, it may be a better strategy to stretch things out based on the money

that's going to be coming in next year, or the year after that, or the year after that. Right? So I always love my ability of power of asset depreciation to employ that strategy within a tax return. So a lot of those mistakes I see when people bring, you know, or a new client, I go through tax returns and sit down and speak with them. Got it.

You know, and I mentioned depreciation is that one of the four profit centers of real estate. But when you started investing in real estate and correct me if I'm wrong, you become essentially a business owner and you open up a whole new world of business deductions available to you, right? That's absolutely correct. You are a business owner the moment you sign on the dotted line and you own a piece of real estate, right, investment property.

So the whole world becomes, I like to say the world is at a discount. Everything is on sale for you. once you become a business owner, because my ability to push things that I may have bought personally, now I start using them for a business, I get my tax savings on them. So, you know, an iPhone, you may go in there, wow, it's $1,300. Well, if I buy it as part of my business, well, I'm going to save about $400 on that phone. So everything becomes on sale. Once I go into business, everything becomes on sale.

Right, right. Yeah, it's a huge benefit of becoming a business owner. Some people say, I know I just want to invest in real estate. I don't want a full-time real estate investing business. And I'm just like, no, no, no, you're missing the point. Yeah, totally. All right, so those are some common mistakes. If someone was still going to go, was taken note of that,

and they were going to go ahead and go forth and still do it themselves, or maybe they're just going to take this information and give it to their own CPA, which is totally fine. But what are some of the dangerous things that they can do? Like, if someone wants to kind of stretch the parameters or, play in that gray area that, like, we don't want to get the IRS's attention. What are some of common things that people do that, that makes that happen? Well, let's just say that the IRS, when it comes to an audit standpoint, they like to audit

what we would consider enjoyable. So if they were to look at your tax return, they'd look at kind of how you itemized your, you know, your deductions, they were for what seems to be enjoyable. That's what I'm going to attack. Because honestly, if they think you're enjoying it, they said, well, that it's not a deduction. So travel is a huge, you know, people pay a lot for travel. It's a big cost. But there's lots of business reasons to travel.

So my point is always, if I wanted to deduct something like travel, I've just got to make sure I'm 51% or more business involved with that travel so I can take deductions for it. And if I do that, then I just have to be really diligent on my documentation to support what it was that I was doing while I was traveling. So it's some of those types of things. So often I'll say, rather than asking, can I deduct this, the better question is, how do I deduct this? And go about my, you know, formulating a strategy to maybe turn some of those things into a deductible expense for it. Got it. Got it. All right.

So, but we are allowed to have 49% fun. 49% fun. Yes. Just don't go over that 50% marker you're doomed. Perfect. So if someone, let's just play hyperact. hypothetically. Nobody would ever do this. But if we wanted to take a trip to Hawaii, what would we have to do to make that 51% business? So if you just went on a trip to Hawaii,

and I sat down with you and I would ask you this question, hey, did you have fun on your vacation? You would answer? No. No, good answer. Right. Right. It was terrible. Vacation portion, right? No, I wasn't on vacation. I was on a business trip. So the thing would be, IRS looks at it from a standpoint of hours. So let's just talk about hours. If I was going somewhere for a job, my employer sent me out of town to work, I'm probably going to work nine to five, and then the evening I'm going to have the time off. Or if it stretches over a weekend, I'm going to have the weekend off.

I may start working again Monday morning, eight. So it's a matter of how many hours do I put into a day where I can say, listen, for the most part of that day, I was working, whether that was meeting with real estate agents, looking at properties, going through the MLS, driving around, collecting business cards, going to, you know, open houses, all these different kinds of things to try to say, for the most part of every day I was working, therefore I'm deducting most of my trip. Maybe I don't do all. Maybe I don't get overly aggressive.

I mean, the IRS, you know, you dance with the bear. Eventually the bear is not going to want to dance more. So, you know, maybe I don't get overly aggressive, but there are large leeways within travel as long as I'm working. I can demonstrate that I'm working to get that as deduction. Got it. Got it. Perfect. So you've been doing this for a while and you've had the big corporation experience and now you've got the individual experience.

I can imagine you've had all the different experiences in between. And I know when I come in and talk to my CPA, like I just listened to a podcast or I read somewhere or heard on TV. It's like, hey, I heard I could do this, can I? Right? And I just wondering, like, what are some of the things that you've heard that just kind of make you cringe? out there like bad advice. Make me cringe. Like the guy that goes and buys a $180,000 mastercraft boat and wants to try to deduct that on his tax return.

You know, not having a business and tries to figure out how to do it, never taking clients on the boat, what is the primary purpose? Usually it's large assets is what you often see, people that buy large assets that really don't employ those into their business practice and they try to deduct it. Got it. Yeah, so that's probably what I see the most often. So the big assets, trying to.

The big assets. Got it. Okay. Let's see. I got sidetracked there because I was thinking about the boat. I mean, what's not to think about a great boat? I mean, get a surf boat out there and it's freaking awesome. Right?

Totally. And if we can get the government to compensate us for a little bit more. I mean, you can figure out how to do some things when it comes to a boat. I'm trying to write the whole thing off you can't. So, I mean, I have a boat. but what then I try to do is take clients out at certain times and maybe I'll buy things for them to use but really you know they're for me to use later when I go to Lake Powell or something you know it's those kinds of things that you try to do and so instead of depreciating the boat take a lot of the expenses around the boat right I try to do those types of things to try to at least push someone out into your tax return to the best you can perfect um what are some of what are some new things that are available now that maybe weren't available yesterday or last year. Okay, so the new tax code got passed a couple years ago, right?

So 18 was our first year with the tax code. This will be our second tax season with the new tax code. Some of the big changes that I saw that came through, one entertainment gone, right? So when I was with Ernst & Young, because it's fun. Salt Lake City, Utah Jazz. You know, everyone's trying to get those 10th row seats,

you know, to take clients. to, I can guarantee you nurse who you don't longer owns those tickets. So, entertainment's gone. But probably from a deduction standpoint, we have the earned income business deduction. Okay, that's the big one. And what that was is kind of a reaction to what was happening on the corporation side. So the corporation tax rates lowered, right, to about 21%. And they thought of something to do for all of us, LLCs, S-Corps, or even soap.

proprietorships, right? What can we do for those people that own businesses where we didn't reduce their tax rates and this is what they came up with? Essentially, this is how it goes. So let's say that you earned or people paid you $150,000 for your services for the year. In that, you had $50,000 worth of expenses. So your taxable income is $100,000. This nice deduction allows you to take 20% of that $100,000 and deduct it on your tax return. So I get an additional. $20,000 deduction and I'm only taxed on $80,000. That is probably the biggest thing that came for a self-employed individuals. So it's a dollar-for-dollar deduction.

Yeah, it's a 20% deduction. Yeah, there are some income limits and stuff when you get up to the higher income figures. But for the most part, it's a dollar-for-dollar 20% deduction. And what do we call that again? It's the earned income business deduction. Got it. But here is the kicker. So it's how they turn.

So the IRS loves, you know, words and kind of putting words in there and trying to define their meeting. And it was earned income, earned income. So me as a real estate owner, right? If I'm collecting rent, what type of income is that? It's passive income. Right. It's not earned income. So we were wondering what was going to happen to the real estate group, the rental group, right, the investor side of real estate.

And we waited. I waited an entire year for the IRS to finally come out with information on this. And last year, whilst in the middle of tax season, doing tax returns, they finally released a bulletin. It's called the Safe Harbor Rule for Real Estate. So simply for purposes of this 20% deduction, if you rent real estate and have real estate income from rentals, you can take it as long as you meet certain criteria. So it is available to you, which surprised me, to be quite honest, because, you know, it's the IRS after all. They're not so kind to get out deductions. Right.

But it is available for you. So I own a bunch of rental real estate. I better be sitting down with my CPA going over whether or not I qualify for the safe harbor rule to eliminate 20% of my rental real estate income. I mean, that is a discussion you've got to have. Right. You know, one of the original things that I found when I first got into real estate and the one of the things I found most intriguing or maybe just enlightening is the word I'm looking for is, you know, the IRS tends to give you deductions based on the work that they don't want to do. Yeah. Right.

So providing housing for people in the form of good quality rentals is something that they want to reward in the tax code. Right. Is that accurate and is that still the case today? Yes, it is still accurate. If you, I mean, if you think about it, the IRS has very, I mean, if you were to look at the IRS pages, right? All the regs that they had written, the thousands of thousands of pages, very, a small amount of that is actually deals with income. It's all about deductions. What can I take as a deduction? And so what they're doing is they're trying to give you a reward, right, for setting up a business.

and employing people or give you a reward for buying real estate and renting it to those people that can't afford housing. And it's all about this reward system. It allows me to deduct it and earn income and not have to pay on, right? So they do do it. It is very much an influencer of the economy. They use it that way all the time. Sweet.

Sweet. Perfect. Well, let's keep this going. We'll meet again next week where I know a big question for people is, you know, what entity should they use and why? So let's hold that off for next week. And then I know you brought something for everybody, whether they want to do it themselves, they want to use their own CPA or they want to investigate into your services.

You brought a little checklist for them, right? Yes, I have a top, and make sure they don't miss anything. That's exactly right. So I have top deductions for real estate investors. If you just go to taxhacker.com, you can download it there. You can even set up a consultation with us straight from there. If you'd like to speak with us about your particulars, with your real estate operations, we'd love to talk to you. At least let us give you some suggestions of how we may be able to improve your business and save you some money and put those dollars back in your pocket.

I like it. Perfect. So go to taxhacker.com and download the top deductions for real estate investors. And then if you like to ask Joel for some more help, there will be clear instructions on how you get that. All righty. So Joel, let's do this again next week. Sound good? Sounds great. Thanks for being here, but I appreciate it. That's it for today. God bless to your success. I'm Matt Terrio. Go on the dream. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. Yeah, yeah, we got the cash flow. You didn't know home for us. We got the cash flow.

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