Epic Real Estate Investing - Reducing Your Investor Tax Bill Even More! - Joel Jensen | 956

Episode Date: March 13, 2020

It’s that time of the year when Uncle Sam comes around with his hand out asking to pay the piper! Therefore, Matt and Joel Jensen from Tax Sentry are joined again to talk on how to reduce your tax liability as a real estate investor! 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.

Here's Matt. Hello, and welcome to the epic real estate investing show where we show people, busy people, how to use real estate to help them retire sooner. They don't have to retire, but it's always nice to have the option. And to contrary to popular belief, you don't have to wait 40 years to make that happen for yourself. You can do it much, much quicker. And real estate is the vehicle out there that makes that accessible to the average person. and more than anything else in that shortened time frame.

I just want to be a little specific on that because, you know, you get a lot of naysays. Well, what the S&P 500 did 12% over the last three or 40 years? I hear it all. I get it. But that's a great plan if you want to wait those 40 or 50 years, right?

You can do it in 10 years. You can do it in five years by just placing a little bit more focus on the residual income rather than the transactional income of real estate. And you will reach your financial income. freedom goal much, much faster by just doing it that way. Anyway, I'll get off my soapbox. It's something I'm really passionate about. It's what the reason is for this whole show.

We've been here for 10 years. And you're listening to my rhetoric over and over and over again. And I'm not going to stop until the world starts to understand that really the financial freedom that we all talk about, that we don't even know what it is, right? It's just a word that gets used over and over and over. It's become cliche. It's lost so much of its power. but it comes to us to the average person, anyone can do it,

and it comes to us to us through residual income in real estate. Yeah, that's where you got the best shot at creating the residual income, not to mention the other for-profit centers that come along with real estate and the multiplier of leverage and probably preaching to the choir, right? Because this really is a money show. It's just disguised as a real estate show. I don't really love real estate. I love what real estate does for people.

I love what it's done for me. and yeah. So that's probably why you're here too. And thank you for being here and listening and sharing this with your friends and family. I really appreciate it. And yeah, we just wouldn't be here if it wasn't for you. All righty. So let's resume our series on it's that time of the year, time when Uncle Sam comes around,

it's got his hand out, time to pay the Piper. And, you know, we all have a legal obligation. I would even say a moral obligation for our country to keep it running. to pay our fair share, but we certainly don't want to pay more than our fair share or more than what we have to. And so I've invited Mr. Joel Jensen back from Tax Century to talk more about that of what you can do to reduce your tax liability this year and next year and far into the future. So please help me welcome back to the show, Mr. Joel Jensen. Joel, welcome back to the show. Thank you so much. So happy to be here. You know, I really like what you started off with about freedom.

in my mind oftentimes the only thing worth buying is freedom. I mean, it's always searching for. And we can start this off just a little bit by helping some of your listeners obtain more freedom. This is a good thing. Yes. I'm going to talk about hiring a CPA or some type of professional in your field. And you might say, well, what does that do freedom for me, right?

How does that equate with freedom? Let me go through it really quickly. So I'm going to take you back a few years. I'm going to date myself maybe a little bit, but I used to be. be with Urton Young. And when I left Ernst & Young, I decided that, you know, I enjoyed more individual interaction. Back then, I wanted to help people individually. Now, the problem was when I first started the firm, though, is, you know, I'm an accountant

by nature. So I'm always looking to save a buck. And I thought, you know what I'm going to do? I'm going to build my own computers. Like, I'm going to buy the individual component because I can save $100 bucks instead of buying this. Right? I'm not the other.

And then which led me to say, I'm going to buy, you know, and put together my own phone network system. And then I'm going to use my own, you know, database system. Then I'm going to try to create my own website. And then I'm going to do all these things where outside of the norm of what I typically do, which is taxes and tax preparation. That was my service. When things would break down during busy season, you know, people would go, hey, my computer broke, Joel, come fix it. So I'm running around during busy season fixing that, you know, and I'm spending hours and hours and hours a week. that and guess what I'm not doing while I'm doing that.

Billy. And that's how I make my money, right? So what I want to do is kind of maybe challenge people to gain freedom through hiring someone like me to go and sit in front of the computer and look at tax code. To figure out tax strategies for you that are going to best fit your situation, to do all that back end work so you can do what it is that you want to do, which is real estate or make money or free up some of your time. don't sit there and try to be the DIY person for everything because you're not going to be good at everything.

Become very good at making money, very good at doing real estate, then lead the stuff, you know, let's be honest, no one wants to be an accountant. You know, leave that stuff to me. Let me go through it and I'll create those systems for it. Got it. You know, you just, that whole thing that you just said there remind me of a past guest that we had the Mr. Great Dean Jackson, marketing extraordinaire. But we were talking about, he had him on the show a while back and we were talking about stuff. than marketing. And one of the things he said that one of the big shifts in mindset that you have to make

when you're kind of going from the middle class to the wealthy is to stop focusing on the how to do things and focus more on the who to do things for you. Right. And that's kind of what you just said. And he's just like, because when you're focused on the how, what you're doing is you've got to go learn first. So you're basically writing a blank check for some indefinite. into the future to get the result that you want. When you go for the who, it's someone that already knows how to do it.

It's a set amount. And it's also with those two scenarios, he had mentioned that, you know, you're using with, when you're going for the how, you're using your only unrenewable resource being your time. Right. And with the who, it's just money. It's a renewable resource. You can always go and make more. And you save the time.

And I was like, wow, it was so deep. He was much more eloquent and sharing. and that than I was. But you get it, right? Did that come across, Joel? Absolutely. Okay. So for me now, you know, I have someone that, an IT department that deals with my phones,

my network, you know, websites, lawyers, I have everything around me that supports me to be able to do exactly what it is that I want to do with in buying tax consultations, right, tax returns. So it's a great way to look at it. Let me give an example. So I do a lot of, because I'm in the real estate field, I do real estate myself. and I have lots of clients kind of in the world of real estate. So construction people, general contractors, those types.

And I had a person in my office actually last week who's a construction person. They do a lot of finish work in homes. You know, kind of the home boom that's happened. His business has been really, really, you know, it's been nice over the last few years. His revenues keep shooting up and up. So he sat down with me and said, hey, here's what's been going. on. I think I got to buy a, buy a new truck. I said, okay, let's talk about the new truck. You know, I love assets. Oh my gosh. I mean, assets, they're like toys for me. You know, it's like

monopoly money. I can like do so many different things with them. So when we sit down and we start going through this, I look at I say, okay, I'm going to go through and we're going to look at everything, right, everything in your taxes. Then I'm going to take the value of that truck and then I'm going to play with it and see what I can do with it. Where do you want to be, you know, how much do we want to preserve for future income? What do we want to take now? Do we want to just bottom this thing out and reduce as much as we can this year? So some of that tax playing stuff that I get to do that I like so much,

especially when it comes to assets and putting that in. Again, he doesn't want to be a tax guy. I don't want to do finish work. I want to buy and sell real estate, but I don't want to do finish work. And the marriage of those two has worked out really well for him this year. I've able to save him a ton of money. So it was great. Awesome.

Yeah, there's so many things you can do. as a real estate investor and as a general business owner as well, that you just can't do as a single, as a sole W2 earner, right? So the big question is we kind of already answered it accidentally. None of that did we plan on saying, but it just kind of came out, but should I choose a tax professional or just do it myself?

And I'll just go back to saying that, you know, the middle class, it will focus on how to do it themselves, the wealthy, go out and find who to do it for them. But let's get more specific with that question. question. Do you need a specialist in real estate or will any CPA do? So, yes, I get that question a lot from people. I'd like to look at it this way. You know, if you go, you may,

you know, have a cold or something, go to a general practitioner, get some answers. But if you have heart issues, you're not going to go to that same doctor, right? You're going to go find a cardiologist. So I would always say, find someone that knows your industry or better yet has some interest in that industry. Because that person is going to honestly kind of human nature. I love the behavioral aspect even when it comes to tax. People look out for themselves more than practically anyone else.

Get out of here. No way. Right? So if I'm doing real estate, I'm going to do everything I can to know every little tax thing that comes to real estate. So when you come see me, I already. you know what it is that you may be doing or going to do because I've implemented all those strategies for myself, right? So it really is extremely beneficial to find someone who knows

about your industry or is integrated somehow into that industry because they're going to know more than the person that's just typically has, you know, clients with W-2s and homes and a few kids and you're looking at earned income credits. Don't really have a business going on. They don't know the ins and outs of Section 199A that's new and those types of things, for example. So it really does let itself to finding someone who knows about your industry. Yes. We're not all created equal, unfortunately. Right.

Right. Yeah, it's the same thing with probably everybody on our team. Like everybody, when we work with somebody, particularly our property managers and our contractors, and we want them to be real estate investors themselves. You know, it's not a perfect world. We can't always find someone. But that's someone that will certainly break any sort of tie when it comes to us choosing people. But I think when it comes to your finance.

is that there's a lot of distinctions there between, you know, the white picket fence in the house and the two kids and a W-2 income and a business owner and a real estate investor, right? Yeah, exactly. Because those are the people I can help. If all you have you and you own a home and you have no business, I mean, what realistically am I going to help you, like really help you? But the minute, the minute you decide to go into real estate, just that brain shift, right? Your mentality has changed over.

I'm going into real estate. Boom, I can help you. Right. So if I were to employ you, I don't have to, you know, you'll just save me all my tax. I want to have to pay anything, right? Well, I'll do the best you can, you know. Those are the expectations, though, because there are a lot of great ways to eliminate your tax liability with real estate. But are they realistic?

And what should expectations be? Actually, they can be. Yes. Okay, let me give you, I'll just give you a couple examples for quick. We all have about 1031 exchanges, right? my ability to exchange one like-kind property for another. Let's say I have a, it's kind of like going up some, I don't know if you want to call it stairs, but it's leveling up and leveling up and leveling up as I kind of look at it.

upgrading your portfolio, right? So I buy a home, let's say it's, you know, I don't know, a $200,000 home. It's cash flowing, you know, maybe $1,000 a month. It's great, but now I have an opportunity to go buy a $500,000 home. residential home that's going to cash flow me $2,000 a month. And based on how I can make it work, my payment really isn't going to go up that much, and I'm going to put a bunch of money into my pocket each month. My ability to sell that home and use all the gains tax-free and place that into a new home,

I mean, it's an amazing tax-deferment strategy. It really allows us to maximize our investment dollar. And then from that $500,000 home, leveling up from, then another one that provides you even more cash flow. I always like the leveling up process. And we always want to be able to maximize the dollars that we use whenever we buy an investment property. Right. So just clarify, because you kept on using the word home. It's real estate for real estate, isn't it? It doesn't have to be home for a home. My family, right. So the big thing is just there's an identification that has to happen. I got to be able to identify properties

that I'm going to possibly exchange. So I have about 45 days to identify properties. And we always say you may think you're going to close on this specific property but I would identify three or four that may work into your scenario. You don't want to get caught, right? And then you close it, I think it's within about 180 days after you sell your property to close on the new property and you always have to use an intermediary right. So you a 1031 exchange company. If you take that money in yourself, it's called boot and boom you are you are toast. So always put that third person, right, that third party in between the transaction to make it to make it actually work.

Right. Yeah. There's some days and some things that you need to do in order to make it qualify. Sweet. Yeah, that's one of the great strategies inside of real estate with regard to, you know, deferring your taxes. You're not, you don't get to save those taxes. You just don't have to pay them as long as you keep on doing that, right? Let me give you another one. So I have a tax client. He's a real estate guy, lives in Ohio. He owns some commercial buildings. He's thinking about selling out of them.

And I said, okay, that's interesting. He says, do you have any kind of ideas for me? I said, well, let's look at the current capital gains rates. And lots of what happens on the capital gain rate side will depend on how much income you have outside of that. So you can manipulate how much money you make during a certain year when you sell a property to try to reduce those capital gains rates rather than paying 20, maybe I can get it down to 15.

And depending on the scenario, maybe I can even get it down to zero. But some of the other income really comes into play when I'm looking at capital gains rate. So when I want to sell a property, you really should be sitting down with someone and say, how can I minimize my capital gain tax on this particular transaction if I want to take all the money in that scenario? Capital gains rates will fluctuate based on your other income level. Right. Got it. So that's if you got property to sell. Everything else that goes with real estate, what should your expectations be if you're going from a DIY situation to a real estate CPA specialist or even just from a general practitioner to a specialist? What should your expectations be in that transition?

So what I would say is I would, one, think of us not as kind of just a form, filler out person, you know. you just give information I just transpose it from one spot to another and I'm just filling in the same information you give me. I mean, that doesn't really do you any good. If once you transition to someone, you know, that's a CPA professional or a tax professional, I'd be looking at sitting down with them all year round, not just now when it comes time to do my actual tax return because that's not when the benefit occurs. So you sit down now and you say, oh, how can I save money? I say, I don't know. You know, maybe there's a couple things we can do, but really all that should have been happening last year during.

the year. Let me give you maybe two quick examples. One, I have a client who lives in California, scientists. I mean, when scientists deliver their tax information, it's a thing of beauty, right? It's the same every year when he gives it to me. So I'll go through it and I'll get it back to him. He'll look at it and then his, and then we'll go over his refund. His refund for that particular year was about $10,000. But the reaction was that's it. That's all I'm getting is $10,000. But the idea is that if that's your reaction during that time, really, you should have been talking to me more throughout the year than you were so I can get you up to speed on what's going on. So when it comes time to do your actual tax return, then you know what you're getting. You know what you're in for.

You know, it's not the surprise, you know, that you sit down and say, hey, you owe $4,000. And it's the shock of your life because you thought you were getting a $2,000 refund. I would just say there's all kinds of tax planning we can do throughout the year. It's when you should be doing it to kind of change your expectations of how that process works. So it's not just, hey, it's tax time. I'm going to go buy some software. Do it. And let me just see where it comes out.

That's not saving you any money. There's no tax planning with that strategy. So when is the opportune time or how frequently should you meet with your CPA to plan your taxes? I would say anytime you're looking at buying or selling a significant asset, that could be even a car. You don't have to think of it just in terms of, I'm going to go buy this property or land or I'm going to sell one of my units, right? If I'm going to buy a car, if I'm going to buy a big piece of a machine or if I'm going to buy a trailer, you should be sitting down with them quarterly to see what your cash flow is because the cash flow is what drives my decisions, right?

So can I buy this particular property? It's going to depend on what cash is available to me. For example, I was up, so I live south of Salt Lake City. I was in Salt Lake City looking at a deal I was doing with my group. we were going to go buy this property, rehab it and sell it, right? So we're going to flip it. We started going through all of the numbers,

looking at it, and we quickly realized that the cash that was going to be involved with that was going to make it kind of a non-moneymaker, so we backed out of the deal. But the only way that we knew that is because, well, they had been sitting down with me and I've been doing it for them, but I knew exactly where our cash position is.

And what we could buy, what we didn't want to buy, that becomes really crucial because cash is king in small business. I want to know what I can leverage, where I can borrow, where my lines are, what I have available to me. I mean, that becomes really important. So I would say at least quarterly and any time to be kind of simplistic and any time I'm going to buy a big asset. Got it. And then how much preparation or what should they bring to that meeting? So oftentimes tax guys have checklist.

I have my own. So you're going to come see me. I'm going to give you a big checklist of stuff of that one. I want to look at your income statement, for example, your balance sheet, your cash position, any debts that you have, your third party forms that you receive in the mail, any purchases that you have made, closing statements, you know, I want you to bring it all. You know, all your financial goodies and sit down with me and so we can start to go through them. And sometimes people will say, oh, I don't think that you need this, so I'm going to leave

out. You know, don't do that. That's like one of the worst things you can do. Let me decide, you know, whether or not this is applicable or not. So I would almost assume you bring more than what you need. But usually I'd have a checklist of stuff for you. It's at a minimum I need your financial records. Got it. Yeah, just bring everything, right? Just bring it up. Will and adhere and let me start going through it. Yeah, I remember, I mean, when you just say a financial statement or bring your profit and loss statement, I mean, that was just totally foreign to me. I mean, I'd been in real estate making money for two or three years before I even kind of understood what that was. Yeah, that kind of brings me to a thought when you said that,

you know, sometimes we can go online and we can look at tax rates. You know, like they have nice charts. They're online. They can show you various tax, you know, tax rates and so forth. And people kind of tend to ignore those. They look at them, glossy eyed, uh, yeah, whatever, and they pass it by. then take, for example, the guy or gal that wins a lottery, right? That huge one of the few years ago, over a billion dollars, you're going to win a billion dollars. People think, oh, I'm going to actually get a billion dollars. Well, you're not going to get a billion dollars.

Maybe you may over time, but still, it won't be a billion dollars because we have our wonderful partner, the IRS, and possibly the state that's going to come in and grab their portion. I would always tell people, understand the tax rate that you're in. Because if I sell a home, let's say I'm flipping, that's ordinary. come and I say great I made $100,000 is the money that's coming back to me. Did I really make $100,000? I got a tax effect that. Maybe I only made 60, right?

Because 40 that's going to go to the state and the IRS. So understanding what tax rate you're in will help you view better your position in a transaction. So I'll know the money I'm getting. Now conversely, on the flip side, have you been into an Apple store lately? Yeah, about at least once a month. Once a month. So you look at the new iPhones that come out, right?

Yep. iPhone, what are we? 11 Pro. I was in there. They were looking at that. It's like $13,400, right? But in my mind, when I look at that, I don't say I'm paying $1,400 for that. Right?

Because I say, hey, I'm going to tax effect. It was my tax rate because I'm going to write that off. So when I walk into the Apple store, I look at everything as it's on sale. I'm paying $1,400. Man, I'm only paying $900. I'm getting a $500 discount because of my effective tax rate. So I want people's mentalities to change to understand on the front side, what am I actually making?

And on the backside, when you walk into places, know that stuff is on sale for you if you're in business and approach it that way. You know, I'm not spending $1,400 on that new iPhone. I'm only spending $900. And it does start to change your mentality when it comes to money and how you spend it. So it's just kind of a great tool to have in the back of your mind. Speaking of that, how just by owning a rental property, you are a business and all of a sudden something like that phone is a tax write-off, right? Yeah.

Even though you're using that phone for a bunch of personal calls? Even though I'm using that phone for a bunch of personal calls, I'm still going to write it off. Okay, very good. And what if you don't own a property and you haven't made any money yet? Can you still classify to the RIS as a business? You can. It just depends on what. So what we look at is what stage of the business are you in?

The IRS will define stages. If I'm just starting out, I haven't bought anything, but I'm starting to go into real estate. I'm in what's called a startup phase. There are rules on how I can write off my startup phase. And then as soon as I buy a property, that means I have now transacted in some fashion, in whatever I was set up to do, and I've switched out of my startup phase, and now I'm a going concerned and I'm an actual business and then my code sections that I use change. So I'll say, oh, I haven't bought anything yet, but I'm starting to do it. I'm in business.

I'm starting to buy things. Well, you're just in the startup phase and when you sit down with your tax preparer, say, hey, I'm starting this business and this is part of my startup costs. So it doesn't mean you've lost them. It's just how you categorize them. Got it, got it. It just occurred to me in, this is a little self-serving, but it did I did just realize it, and I'm going to say it. Coaching and education and training, all of that is a tax deduction, yes? Okay, so, let me, I'm going to back you up. Shoot, I thought I found a juicy.

You know, words matter in the IRS. Words matter. So I always tell people, while you are getting educated, it is not education. Okay? There's a difference. I may buy coaching, for example. I'm new to real estate. I mean, we can do a whole segment on this thing.

I'm new to real estate, never bought anything. I buy a book. I want to start. I buy maybe a few products here and there. And I realize, much like the DIY thing we started with, I'm not going to be able to do it on my own. I need some help. So that means I got to go out there and start hiring professionals within the field to consult with me. and provide me the tools I need in order to go out and do my real estate.

Okay. That's part of my business development costs. That's part of my professional development costs. Those fall into my startup costs. So even if I buy coaching within this industry, it's part of my startup costs. And when I buy a property, then I flip over to an ordinary business. You can still write those things off. I just, the education term, I would never use education.

Don't use education. Okay, but coaching is okay. did, but don't use the term education because education under the IRS code means a very different thing. Got it. Well, what about like, you know, I've got a huge library here of real estate books. Great. Write them off. Okay. So what does that classify it as, not education? No, that may be classified as research. That may be classified as supplies. And maybe if you have some subscriptions that you subscribe to or putting them their dues and subscriptions, yeah, It may be required.

That may be part of your professional development, right? So we may break up those costs and how we kind of show them within a tax return because there's a little bit of, I don't want to call it creative art, but we do have ways that we like to present things in a tax return as we kind of push all of your actual expenses into the return. So, yeah, you can still get, I mean, you're in the business of real estate. Those would be a real estate expense. Got it.

Sweet. Oh, cool. I don't know. I think we've touched on a whole lot of stuff. Are we missing anything that they should know that I forgot to ask about? I think so. I mean, I just want people to do a mind shift on how they spend their money. Right. They've realized how much of it is really on sale. And if you're in the coaching world and you sit down and you go to a CPA and say, oh, you can't write that off. My advice to you would be to change your CPA. You ever want to spend that kind of money and leave it on the table.

It's not worth it to you. Yeah. And I look at stuff like taxes as just, it's just a big expense, but we put this label on it. So it gets, we give this giant special attention or this, we have this anxiety or fear around it. And when it comes to financial independence, financial freedom, it's really just a math equation. You just want more income coming in on a monthly basis than you have money going out. And, you know, you can do that and create that freedom in a few ways. You can focus on building that passive income. And, or. or you could focus on reducing those monthly expenses or those annual expenses. Or you could do both. And personally, it just makes a whole lot of sense to me to work from biggest to smallest. And with taxes being our biggest expense in life, then it deserves your attention if financial freedom is important to you. And you could go and learn how to do it yourself or you could just cut to the chase and have

someone that does this for a living and has done it for a very long time, has worked for very large firms and specializes in the real estate industry, is a real estate investor himself, like Mr. Joel Jensen. And I think that's just the wise way to go. I don't think there's too many arguments against it unless you just think you're, you just want more control and, you know, you don't have anything to do at night and on the weekends and you want to learn it yourself. Go for it, right? Joel brought a gift for everybody, and he's giving it away last Monday and the Monday before. And if you miss those two episodes, we got really into some nuts and bolts on some special

stuff just for real estate investors, but you can go to Taxhacker.com and download the top deductions for real estate investors, the top deductions for real estate investors. And then you'll have the opportunity there to take Joel up on his free consultation. It'll be right there. It'll be easy and clearly define on how you do that. And if you don't want to use Joel, that's fine too. but take those top deductions for real estate investors and take that to your own CPA, right? And make sure that they're doing a good job for you.

And if they push back on anything, maybe you've got the wrong CPA. All righty. Joel, it's been an absolute pleasure. I've loved this little series we've done together in a timely fashion. But we do want to remind people that just because it's tax season, it's not the only time you should be thinking about these things, right? That's exactly right. I know with my CPA, it was a few years ago. I had kind of a painful lesson.

I said, okay, I did this, I did this, and how can we do this? and how are we going to save me a bunch of money? Because I read somewhere that I could. He says, it's too late. You've already done the transactions. Yeah. Because I didn't plan. I didn't prep.

And it was a very, very expensive lesson. So learn from my mistakes. Learn from other people's mistakes because you won't be able to hear long enough to make them all on your own. Per the immortal words of Mr. Mark Twain. Love that quote. Anyway, Joel, thank you very much. And, yeah, maybe a mid-year tax planning.

series would be a great time to do that as well. Happy to do it. Love being here. Thanks. Super. So go to Taxhacker.com and grab those top deductions for real estate investors. And if you want to take Joel up on his offer and get a free consultation from him, it'll be clearly outlined on exactly how to do that. All right, you'll know what to do when you get there. All righty, so that's it for today. God bless and to your success. I am Matt Terrio, living the dream. Take it.

Yeah, yeah, we got the cash flow. You didn't know, home boy, we got the cash flow. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.