KGCI: Real Estate on Air - How I Slashed over $90,000 off my Tax Bill in One Year

Episode Date: January 15, 2025

Welcome to Uncommon Real Estate, where it's all about finding creative solutions for real estate agents and investors. In exclusive mastermind conversations with some of the brightest minds in real estate, you'll learn how to earn an extra six figures a year. Don't follow the hurt. Be Uncommon. Here are your hosts, multi-millionaire real estate agent and investor, Chris Craddock and Jeff Safright. Welcome to another episode of the Uncommon Real Estate podcast. I'm your host Chris Craddock. And today we are going to be talking about one of my favorite, favorite, favorite topics,

which is how to buy properties and how to get things done where you can grow your wealth through real estate. And then also pay very, very, very little in taxes. So what is wealth? Wealth is when your money works harder than you work, right? If you are a real estate agent, an investor because oftentimes we're spending all of our time in the hamster wheel. Well, if you ever want to get off the hamster wheel, you've got to have money coming in. Now, you will have questions like, I've got a property right now.

I'm dealing with my first eviction ever, first eviction. And it is so painful. They finally left because they didn't pay the water bill and then the water got turned off on them. And then they just were terrible human beings. We ran a background check. The company that we hired to deal with our background checks missed a lot of stuff. And so now I'm dealing with it.

Anyway, it's a mess. And so I get it, right? I'm in like, what are the bad case scenarios here? And that's why people say, oh, I don't want to deal with rentals because I don't want to be in that situation. I get it. I understand. With that said, unless you start building wealth, you will never, ever, ever get out of

a hamster wheel because it's just going to be hard, almost impossible to earn enough money that you could then just take out of your savings or just drop in the stock market and hope for dividends for the rest of your life that will actually get you where we want to be. Now, what we're going to talk about today, one of my favorite, favorite, favorite topics is how do you save money on taxes and build wealth at the same time? So there is a book that if you've never read it, it's on audible so you can listen to it, you can read it, you can just go to the gym in a car, Zig Zigler, who's a mentor of mine that I've never met,

but I've listened to everything that he's ever written or put out. He would always call it Automobile University. He said you could get the equivalent of a bachelor's degree in any topic through six years, a four-year education, through six years of just having stuff running in your vehicle when you're driving. But the reality is we spend more time in our vehicles now, and if you live in a place like the DC area, you could probably do that in two or three. So you can absolutely become an expert just by listening to the top people in the world.

So with that said, what is the top book that will change our life when we're looking at investing in taxes? It is called Tax Free Well by Tom Wheelwright. So I'm going to say this again and again so that you get it and get it. Tax-free wealth, Tom Will Ray. So in tax-free wealth, he starts off dealing with a question that a lot of people have, which is, is it the right thing to do to pay very little taxes or no taxes? Is that the right thing to do? And his whole point was the government set up the tax code, right?

So if you cheat, absolutely you're doing wrong. But if you understand the tax code, and it's not about being aggressive, or being gray or being black or white or anything else as far as how we are viewing the tax code, right? That's not how we win with it. The way we win with the tax code is we understand that the government incentivizes certain behaviors and it doesn't incentivize other behaviors. So no incentive is on W2 income, which is it's called ordinary income, right? Ordinary income is. Ordinary income is is W2 income, you get it, you just pay your taxes, maybe you take a standard deduction, and that is it.

Well, there's other income that the government will allow you to make a lot more money and pay less taxes on because you have more options with it, which is why Robert Kiyosaki says that the rich always, always, always have their own LLC so that they can run money through that LLC. and I'm about to get into how we build wealth through properties. We've got 20 minutes here. So let me continue on on this. And then we're going to shift over how to build wealth and how to buy properties with no money down

and essentially like eliminate most of your tax bill, which is why my net worth has ballooned over the last few years because I pay very little of taxes and move that over into investments instead. So, but I'll get there in a second. There's my little teaser line. So Kiyosaki says the wealth. all have corporations. And so I still remember reading rich dad, poor dad. And I went, we were having dinner with my uncle that weekend. And I said to my uncle, who is a commercial lender who works with a lot of super wealthy people. And I said, hey, Larry, so I know you work with wealthy people.

Do some of these wealthy folks that work for bigger corporations or whatever? Do they all have their own LLC, even if they're getting a usually if they have a W-2 job? And he says, well, yeah, He's like, my own LLC. I said, you have your own LLC. He's like, yeah, I do some appraisals here and there. He said, I usually take a loss of like $50 to $100,000 a year on my LLC. And I said, wait, how do you do that? And he's like, well, my vehicle is in the LLC.

He said, when we go on vacations, I do some sort of activity related to that, to the appraisal business. So I'm able to write off travel. I'm able to write off hotels. When we go out to dinner, we talk about the business. we make it a business dinner. My wife is also a member of the of the company. So we make it a business dinner. So we're able to write off a lot of our life. You can't do that with W2 income. So that's why there's there's power in non-W2 income because these can be business expenses. And the government

set it up like that. So please get me right. Do not cheat. Do not cheat. Do not cheat. Do not cheat. But understand the tax code and understand what they give you permission to do. do and then use that tax code because they're saying this is what you are allowed to write off. This is what you can do. So let's jump into real estate. So when I travel, like we're about to travel for spring break, when I travel, I typically like to do a timeshare presentation. The reason I go to a timeshare presentation, well, they'll give me something, but honestly,

it's definitely not worth my time. My time is worth way more than what they give me to do the timeshare presentation. But what's not worth way more than my time to do an hour and a half, basically what that does is a time share is real real estate. Like you are actually buying you get a deed for real estate. I don't own any time shares. I don't think you should buy any time shares, but that's a different conversation for a different day. And people can argue with me if you want.

But I don't own any time. But I do check them out for two reasons. One, the people that sell time shares have a great sales model, right, where people that are new to sales can just plug and play and you can understand sales at a high level. And as somebody that teaches and coaches on sales, I think that there's a lot of power to that. So that's one. Number two, because you're buying real real estate, if you buy a timeshare. So if you listen to a presentation, you are checking out real estate. And as a real estate professional, that means that I can make that a business trip and I can write off that business trip.

right so you're not cheating you're doing exactly what the tax code gives you permission to do which is do your business in a different location just like i went to a conference right i'm able to write off that trip for that conference i just got back to yesterday and so i was able to write off the trip to go to tampa i was able to write off a trip at the hotel i was able to write off my meals i was able to write off all the stuff for the conference right and then i got back the same thing is true you can make your own mini conference, right? You're going as a business trip, you're able to write off the hotel, the travel, all the other stuff, as long as it's around business. And if you have an LLC, you can make your business whatever you want your business to be. Next, here's the other thing.

If there's a couple states where you have to, if you are a licensed real estate agent, you have to run your license through your name. But most states, I think it's 48 out of the 50 states, if I remember correctly, allow you to, I know New Jersey is one where you're not allowed to have to get paid through an LLC, right? You have to get paid by the name of what you have. But all the other states, and then there's one other, and I can't remember where it is. You can do something called a DBA, which means doing business as. You do a DBA, which means doing business as, and you go to the state. So for me, I would go to the state of Virginia, and a state of D.C. Maryland, or D.C. is not a state, but, and Virginia is technically a common rule. So I apologize for those of you out there that

are upset with that. But you can go there and you, you essentially change it to the name of your LLC. So you have to have a licensed agent that is part of that LLC. You change it to that LLC so that the state recognizes the LLC. I'm with EXP Realty. So EXP pays out my LLC to, to me. So that's how I get paid out is through the LLC. And then you can, if you have any partners in your business, then you have another business underneath the LLC that owns that LLC. So that LLC is technically a holding company. Then you have another company that is part of the LLC that where I get paid out

from title and like all of the places that I get paid and paid out all funnel up to my holding company that owns all those other companies, which then that holding company, I also have my family in, which is why we can do trips and other stuff as business write-offs. So that's how that all works. Now, let's talk through what cost segregation is. So I never heard of cost segregation until I read Taxary Wealth. I've been in real estate for a long time. I actually, I take that back.

I heard people using that term on big multi-units, hotels, and big apartment complexes. And I knew what cost segregation does is a lot. allow you to take in residential real estate, you're able to depreciate all improvements to the land. You can't depreciate the land, but you're able to depreciate the improvements over 27 and a half years. Fun fact, the reason why it's 27 and a half years was because there's a big argument in Congress. Somebody said they wanted it to be depreciated over 25. Somebody else said they wanted depreciate over 30 and they were arguing, arguing, arguing. Somebody just said, let's split the difference, 27 and a half years is the lifetime value of a structure on a property that you can depreciate.

So they all agree, and now it's 27 and a half years. So you're able to depreciate over 27 and a half years. Now, if you are real estate professional, which means, which is not a real estate agent, right, investors can be real estate professionals. Now, there are some rules, doctors, lawyers. there's been lawsuits where people with a high, high, high level job cannot be a full-time professional in real estate and a doctor and a lawyer, but just about everybody else can. So, and you can look up what it means to be a real estate professional. Does it mean just agent? What it means is that you can take accelerated depreciation through a cost segregation and take that against all of your active income. Everybody else has to take depreciation against

passive income. So let me unpack that a little bit because that may sound like a lot. Let me unpack it. So active income is when you trade time for dollars, right? It's it's your W2 income. It's what you make when you sell a house. It's it's active, right? Passive income is like rental properties or stock market dividends or things that you are not working for. There's a group that I'm a part of they call it vertical income, which is what you trade your time for dollars for, and horizontal income, which is these seeds that you planted that are blooming all around you, right? So you can take depreciation against passive income, but you can't take it accelerated against active income. But if you are a real estate professional, you can take it against active income. So let me give an example.

I've got an off market property right now in D.C., which if anybody knows anybody that might be interested in something like this, please let me know. But it is a 3.5 million four union, right? Well, here's the deal with that. So of that 3.5, probably about 500,000 of that is the ground. And then about 3 million is that building. So that building can be depreciated in year one through a cost segregation. Now what a cost segregation is is where an engineer on a high, dollar building, they have to go in and look at it and everything on a lower dollar building, which the IRS defines as $500,000 or less for the structure, not the land. So if it's a $600,000 property and $100,000 or more is land, it still counts for a lower dollar one. But a higher

dollar, somebody has to come in, lower dollar, they can do a desktop evaluation. What they do is say, what is the age of the fridge? What is the age of the flooring? How many years am I going to get out of these things that you have in the house. And let me accelerate all that and move it into year one. So the example of this $3.5 million building is essentially you'll get about 25% of that building. And give me one second. I'm going to pull out my calculator here. So let's say it's $3 million times 0.25. So you'll get about a $750,000 right off. in year one. So let's say you made a million dollars, then what will happen is your tax bill, because you're able to write off against all your active income, your tax bill goes from being a

million dollars to $250,000. Or let's say you made $500,000. Your tax bill goes from $500 to zero. And next year, you get an extra $250,000 that you get a write off. So you're going to $500,000. taxable income than the following year when you roll it over is only $250,000. Just think about that. So I, and I'll give an example. One of my buddies, I'm in this small group of guys from a mastermind. We look at each other's net worth. We look at our vertical income, our horizontal income. Heck, we even look at body fat percentage, all the other stuff that we submit to the group and then go through it and then we kind of pick it apart so that we can work to be better. And one of the guys, I don't want to use real numbers, but he made a lot of money,

but he paid, he's been paying 50% tax rate on everything. And so all, I mean, he's in real estate. He owns a couple hotels. He owns some real estate. And all of us were like, your tax rate is way out of whack. And he said, why? And he went to his CPA. A CPA didn't have.

He's like, well, I guess you could be a real estate professional. But I don't, I don't really know that. you qualify. And I'm like, he calls me back. And I'm like, bro, you own three hotels. You are a professional investor in real estate. How much of your time is geared around finding new real estate properties, everything else? And he's like, most of it. And I'm like, look up the definition of real estate professional. And he looked it up. And sure enough, he's talking to a new CPA, a CPA, which, by the way, please send me a DM at Cred Rock if you want. And I'm happy to introduce you to a great CPA that will actually help you understand. If your CPA has not talked to you about

false segregation, you are with the wrong CPA. I'm just telling you. They need to be telling you because you should not be doing the research and being like, oh my gosh, hey, tell me, tell me about this. They should be looking at you, thinking about you and saying, how can I make your life better, right? That's how I think about my clients. That's how I think about my agents. That's how I think about the people in my ESP. Delma, I'm like, how can I benefit these people in my old, how can I make their life better? And if they are just being reactive, you're with the wrong person. I don't care how much you like them. I don't care how much you think they know their stuff. If they are not coming to you telling you, you need to understand cost segregation, boom,

you're wrong. So let me give you an example of last year. So I get a call from my CPA saying, hey, Chris, your taxes are going to be a little high this year. You're going to need to buy a couple more properties. And so I was like, all right, well, what do I need to do? And he's like, well, I know you want to be under, I'm just going to say, I knew you want to be under a six figure tax payment every year. So you're probably going to need to get at least three more properties before the end of the year. And so I looked at it and I ended up getting a, I didn't quite get as low as I wanted to get last year. But I ended up getting more properties. And for each property that I bought, I ended up saving about $25,000 to $35,000, not in write-offs, but in real dollars because of the cost segregation,

right? So I was able to, like I think I got three more properties. One of them I saved like 26,000. One of them I saved like almost 30 and one of them saved like 32,000. So I was able to to save almost $90,000 in real taxes. It didn't get me below that number I wanted to be, but I still got to a place where my tax bill was so much bad. better and that almost $90,000 in taxes would have just gone to the government, but now I have properties and those properties every single month I have principal pay down on them. So my net worth goes up. Every single like at the like I was able to save $90,000 that goes directly to my net worth, right? Which means my net worth goes up. Every month those properties are going to cash flow.

So I get benefit there. And in most significant, scenarios over time, if you look at history, those properties are going to go up in value. So I get three more properties that are all increasing in value. So principal paydown, tax advantage, and cash flow monthly, and increase in appreciation. So there's no better, there's no better version of how to win than that. Now I'm going to get into something that's super, super crazy. If you have a real estate license, here's where it can get, nutty. Okay, you find an off market property. Somebody says, I want to sell. Now, be very carefully here. There's a lot to this. So you have a fiduciary if you sign a listing agreement,

right? Now, here's one of the things that I argue with a lot of my coaching students. I say, hey, just so you know, a fiduciary doesn't mean that you are promising to get them the most money for the property. What you are promising to do is to serve them the way they, you know, want to be served. And what I've learned over time is that not everybody wants the most money for a property. Now, you or I may say, no, that's what I want is the most money for a property. But what I do know is that most people do that, but not everybody does. So if you've ever traded in a car to a dealership, 1,000 percent, you would have made more money on a on Craigslist, right? But why did you traded into a dealership because you want to ease, you wanted convenience. You wanted it to be super,

super, super simple, right? And so people will actually say, and I learned this, one of them, it was a referral from a buddy of mine. And he had a property. He lived in California. He had a property in Woodbridge, which is about 45 minutes from where I was. And he said, hey, I tried to fix this property up to get it sold. I've had three contractors walk off the job. I just want a cash offer on it. And I said to him, I'm like, a cash offer. Like, you'll make, and here with the numbers, I was like, you'll make probably like 375 if you were to sell this house the way it is. And this was like 10 years ago, right? And just as is on the market, we just pop it on the MLS, you'll make 375. And he said to me, no, I just want a cash offer.

What would be your cash offer? And I said, listen, you came referred as like one of somebody who I hold super dear. I want you to make the most money for it. And he says, I don't, I just want the cash offer. I'm tired of dealing with this. He's like, what would be your cash offer? I think. I think I said something like, I mean, I think our number is like $275. You'd make an extra $100,000 by just putting it on the market minus some of the commission. So probably like 80 grand. And he's like, nope, I'll take it. Let's do it.

And I was like, okay, what I need you to do, I need you to write, write down that I advise you to take more money because I don't want my friends thinking that I like scammed you, that I did anything else other than. And the crazy thing is he's like, sure, no problem. So we wrote it down. Hey, Chris advised me to put it on the market and then I make more money and all that. So I ended up buying it, made a ton of money on that property. But more than that was what I realized is that not everybody wants the most money. They want ease and convenience. And so that's where I made way more money in the future because all of a sudden I realized

how people think. And I'm like, oh, yeah, the person that trades in the car, things like that too. So here's what you can do is. If somebody says, hey, I want 400 for this property, that it would sell on the market for $450, right? You can put an 8% commission on there, a 9% commission on there and go to your lender and say, hey, I would like to use my commission as a down payment. So then that's moved over and you never receive the commission, which means it's not taxable. Check with your CPA to confirm that.

But at least that's what I've been told. So that that 9% is not taxable. So now you only have 20 or, sorry, whatever that is, 16% left if you put 25% down or 11 if you put 20% down. But then what happens is if you're like most real estate agents that should, you put money aside every month in your tax account. Right. Well, then you talk to your CPA and say, okay, what will I get ballpark for this cost segregation for this property? And they say, oh, another 25,000, another 30,000. on something like that, you'd probably be right around 30,000. Another 30,000 there. All right,

well, that's almost another 10%. So I can come out of pocket like maybe $10,000 because I take money out of my tax account and I take a larger commission because I found an off market property and then put it together. And then you're paying almost nothing out of pocket for an off market property where somebody just wants to ease and convenience and you're willing to solve that problem. obviously you've got to have all the disclosures together. You have to do all the right things. Do it right. Again, just like taxes, never, never cheat.

Always do it right. But when you do it right, you can save money on taxes and you can save money on everything else you're doing there. So what I need to do is tell you, go get the book tax free well. One. Number two, if you want to be connected with any of the people I was talking about, CPAs, cost segregation people, any of those people, send me a DM at at cradrop. If this has been helpful, it would really mean a lot to me if you gave us a five-star review

and refer to us to a couple of your friends to start listening. And until next time, again, let me know if I can serve help or just do anything for you in the meantime. But go out and kill it and just get it done. Go build well, people. All right. See guys. Bye-bye.

Thank you for tuning into this episode of Uncommon Real Estate. Subscribe to the podcast to stay up to date with the latest mastermind conversations from Chris, Jeff, and other uncommon real estate industry leaders. If you love this podcast, please write us a review. And to fast track your real estate career, go to chriscratic.com.