MFM Live: Brandon Hall — Licensed CPA talks tax advantages & strategies

#MultifamilyMasters LIVE — Raw unedited footage from our 6-1-20 Online Meetup with licensed CPA Brandon Hall who delivers expert knowledge when it comes to tax advantages & tax strategies for real estate investors.

VIDEO TRANSCRIPTION

00:00
i’m just going to the cloud okay
00:03
all right we’re recording so everybody
00:05
knows so be all be on your best behavior
00:07
here
00:08
oh i’m just kidding um so we are here
00:11
with multifamily masters live
00:13
uh this is our um let’s see our first
00:16
one in june we’ve been doing this since
00:17
january we’ve now
00:18
upped our uh frequency of doing this to
00:20
every two weeks
00:22
uh we have a number of guests on here we
00:24
have had uh
00:25
syndicator panels we’ve had lawyers
00:28
we’ve had now we’re going to today we’re
00:30
going to have
00:30
a special guest brandon halls our cpa
00:33
that’s going to be talking about
00:35
some tax advantages of real estate and
00:36
things like that um
00:38
but before we going to get into it we’ll
00:41
get into a little bit of just kind of
00:43
our quick bios and everything
00:45
and a little bit about multi-family
00:46
masters we are a global community
00:49
uh basically a networking community
00:52
that’s uh growing
00:53
significantly fast we’ve started with
00:55
one chapter in the los angeles and now
00:57
we’re up to
00:58
70 chapters i would say a few in
01:01
uh we have one in hong kong we got one
01:03
in dubai we’re potentially launching a
01:05
couple others in
01:06
internationally as well here soon as
01:08
well
01:10
and we’re all about growing and uh
01:12
educating people
01:13
making sure that uh you you know the
01:15
steps of going through multi-family uh
01:17
multi-family investing and we’re here to
01:19
educate people and and really network
01:21
and build relationships and partnerships
01:22
with people
01:24
so i um i myself am powell chi
01:27
um i started the group about two and a
01:29
half years ago
01:31
and now i run the the manhattan beach
01:33
chapter with chris collins who you’ll
01:35
see on here
01:36
and him and i run the manhattan beach on
01:39
and uh let’s see
01:40
i’ve been doing multi-family investing
01:42
since 2017.
01:45
started in indianapolis with a 40 unit
01:47
went to a 61 unit
01:48
and now have about 1000 units under my
01:52
belt
01:52
as a general partner and always looking
01:55
to do more so
01:56
how about you ferris you want to go
01:58
ahead and kick off yourself as well all
02:00
right i’ll go ahead hey everyone how’s
02:01
it going
02:02
thank you powell and i just a heads up
02:04
our third partner garrison couldn’t make
02:06
it as well so
02:07
he had some other things to kind of take
02:09
care of but as pal said we kind of help
02:11
really shepherd you know multi-family
02:13
masters and we have a strong team behind
02:14
us as well including
02:16
a lovely bethany and i think uh the
02:18
other two people aren’t on as well
02:20
but you know as pal mentioned it’s it’s
02:21
an awesome community we’ve definitely
02:23
been growing it and
02:24
the idea is really adding value right
02:26
adding value to leaders adding value to
02:27
the rest of the community and really
02:29
providing an environment where people
02:30
can learn and ask questions
02:32
and so for anyone that’s out there
02:33
hopefully you know watching this get it
02:35
you’re getting value from this you are
02:37
enjoying things and you know we’re
02:39
always looking for feedback and
02:40
recommendations
02:41
so if anyone is looking has ideas
02:43
whether it’s a speaker
02:44
or a topic they’d like to you know help
02:47
coordinate let us know
02:48
right in addition to that too i guess we
02:50
do have a vast community and a best
02:51
network so we’re always help
02:52
happy to help connect people happy to
02:54
help you know try to find speakers
02:56
if you ask us to go get you know uh bill
02:58
gates on here we probably won’t be able
03:00
to pull that off but just about
03:01
everything else we can try
03:02
and so i mean you know i do have it yeah
03:04
next year
03:05
that’s true that was probably in you
03:07
know q3 uh 2021 so we’re figuring that
03:10
one out
03:11
but um you know so i guess with that
03:12
said uh for me my background i’m based
03:15
here in houston
03:15
lovely houston i guess you guys can’t
03:17
see it’s pretty humid and hot outside
03:19
um my you know i have a company called
03:21
disrupt equity along the part of ben
03:23
and we have 1500 units throughout the
03:25
throughout basically texas
03:26
and georgia it’s kind of our primary two
03:29
hotbeds and um you know we’re vertical
03:30
integrators we from our own management
03:31
company and
03:32
continuing to grow from there and so i
03:35
guess you know with that
03:36
said um let’s go ahead and just maybe
03:38
kick it off with our speaker right so i
03:40
think for this one
03:41
you know we’re gonna go through we’re
03:42
gonna let brandon kind of introduce
03:44
himself
03:44
and kind of go through his presentation
03:46
and then at the end we’ll probably break
03:48
it off we like to basically the thing
03:49
that we’ve been trying to do lately
03:50
that’s been very successful
03:52
is doing these short breakouts at the
03:53
end right so i think 10 15 minute
03:55
breakout
03:56
where we’ll split this group up into you
03:57
know smaller groups of five six seven
04:00
people
04:00
right where you guys can get to kind of
04:02
know each other and maybe get to know
04:03
one of us right
04:04
it’s randomized but the idea is again
04:06
creating a little bit more of an
04:07
intimate environment right
04:09
and helping us you know helping you and
04:11
helping everyone get to know each other
04:13
so look for that on the tail end of that
04:15
but with that said you know without
04:17
further ado one of the topics we know a
04:18
lot of people have a ton of questions on
04:20
is around accounting and taxes right
04:23
real estate is a very very powerful
04:25
vehicle i wish i knew it even earlier on
04:27
in my life
04:28
right but it’s it’s a it’s a massive
04:30
vehicle specifically you know people get
04:32
really confused with it right
04:33
because they you know people think of
04:34
real estate and think of appreciation
04:36
that’s the thing that most people think
04:37
about in the residential world right
04:39
they don’t really realize the real
04:40
values in the depreciation
04:42
right it’s kind of almost they’re
04:43
counter-intuitive but you know it’s a
04:45
very powerful topic
04:46
there’s tons of yes the kind of thing
04:47
where if you know enough you’ll make
04:50
money tremendously in just maybe what
04:52
you might learn from this lesson this
04:53
this kind of sessions
04:54
so you know without further ado we
04:56
wanted to make sure we got on you know
04:57
someone that’s very confident highly
04:59
recommended to come and really present
05:01
to the group and teach everyone
05:02
you know their expertise about it so
05:04
with that that said brandon everyone go
05:06
ahead and take it off
05:07
yeah thank you very much for the intro i
05:09
really appreciate you guys having me on
05:11
and
05:11
appreciate the invite um so i’m brandon
05:14
i run the real estate cpa it’s a cpa
05:17
firm
05:18
i’m technically based in raleigh north
05:20
carolina but it is a
05:21
national cpa firm i have a team of 15
05:25
employees uh not including myself so i
05:27
guess the team is 16
05:29
and most of us invest in real estate
05:31
ourselves it’s kind of our unique
05:32
i guess competitive advantage in this
05:34
space you know i invest in multi-family
05:37
assets
05:38
another guy on my team just sold an 80
05:40
unit apartment building another guy on
05:41
my team has 100 properties another one
05:43
has 25
05:45
so uh so we really walk the talk we’re
05:46
doing the the things that we’re
05:48
recommending to our clients we’re also
05:49
implementing ourselves for the most part
05:51
which is really neat
05:53
i got started in 2015 i
05:56
started the firm in 2015 wasn’t really
05:58
enjoying my
05:59
big corporate big four accounting
06:01
position and uh wanted a different way
06:03
out
06:04
and i didn’t intend to start a cpa firm
06:08
i i found real estate first and started
06:10
investing in real estate
06:12
then realized it was gonna take me a
06:14
little bit longer to scale than i wanted
06:16
to i’m a pretty impatient person
06:19
um so i launched the cpa firm in
06:21
addition to that and
06:22
went full time and at the end of 2016
06:25
and the rest has been history but we
06:27
we only service real estate investors we
06:29
have about 550 clients across the united
06:31
states
06:31
most of our clients are located in san
06:33
francisco new york city
06:35
and uh we’ve got like a pocket of a in
06:37
atlanta georgia forming
06:38
now but we do have a client in every
06:40
single state and we are
06:43
really good at the tax advice the tax
06:45
advisory piece
06:46
consulting we do preparation and
06:48
accounting as well
06:49
we work with really small clients and
06:51
then we also have
06:52
really large private equity firms i see
06:55
somebody says
06:56
do we do internal audits we do not do
06:58
audits i have always stayed very far
07:00
away
07:00
from audits because they come with all
07:02
sorts of additional regulations
07:04
peer review requirements that cost 20
07:06
grand a pop so
07:08
i decided early on that i wasn’t going
07:10
to do something like that um so we do
07:12
stay away from audits but
07:13
yeah that’s me
07:17
and i don’t have a present was i
07:18
supposed to bring a presentation no no
07:20
no we’ll definitely kick it off and so
07:21
okay cool
07:22
maybe maybe um you know with that said
07:24
right so
07:26
maybe another question so for those
07:28
listening what is your core
07:30
audience right in terms of you know is
07:32
it the person that has one or two
07:33
three four houses and you’re giving them
07:35
tax advice and how to structure and
07:37
kind of you know maximize their their
07:39
their their tax benefits
07:41
or is it this indicator that has 150
07:44
unit deal
07:45
with you know 20 investors and you’re
07:47
completing the cpa
07:48
tax part of it and you’re helping them
07:50
you know individually plan i mean kind
07:52
of what is who’s your core bread and
07:53
butter
07:54
right and then everyone else also go
07:55
ahead and start dumping in your
07:56
questions so we’ll start to kind of you
07:58
know really run them through this is
07:59
really meant to be an opportunity for
08:00
people to ask things that might be
08:02
more specific to them so please don’t
08:03
hesitate to ask
08:05
yes we actually have two separate groups
08:07
at our firm we have the groups that
08:09
focus on the
08:10
syndicates the the real estate funds and
08:12
the private equity funds
08:14
and then we have a group that doesn’t
08:16
they focus on
08:17
what i would consider a more mid-level
08:19
landlord 10 properties or so
08:21
we do have quite a few clients that have
08:23
two properties three properties our
08:25
smallest client is a lady
08:26
that has a condo that’s a rental in
08:29
florida
08:30
that’s our only real estate property and
08:33
i’m
08:33
if i if any of you guys have gone
08:35
through our sales process i’ll be the
08:36
first one that tells you
08:38
you don’t need our services we’re going
08:39
to be too expensive for the value that
08:41
we’re going to provide and she was like
08:42
don’t care
08:43
uh so so she’s so our smallest client is
08:46
a single-family
08:47
condo in florida but yeah i mean we we i
08:50
would say we provide the most
08:52
value to people that
08:55
have about a million dollars worth of
08:56
real estate
08:58
whether that’s one property or five or
09:00
ten it doesn’t really
09:02
matter we provide a lot more value to
09:05
multi-family
09:06
investors than we do single-family
09:08
commercial assets or anything like that
09:11
the reason for that is multi-family
09:14
properties
09:14
have a lot more flexibility under the
09:16
2013 tangible property regulations
09:18
and how you treat expenditures so
09:22
an example that comes right out of the
09:24
tax code that i love to share with
09:26
people is if you have a 10 unit property
09:28
and you have 10 hvac units all units
09:31
under one roof
09:32
each unit has its own separate hvac unit
09:35
if you go in and replace
09:36
two hvac units out of the 10 a lot of
09:39
cpas would say oh
09:41
you know you just spent ten thousand
09:42
dollars replacing the two hvac units
09:44
that’s a big expense
09:46
so i’m going to put that on the balance
09:47
sheet i’m going to capitalize it and i’m
09:49
going to depreciate it
09:50
over 27 and a half years but what we
09:53
would do is we would say well let’s
09:54
actually look at the 2013 tangible
09:55
property regulations
09:57
let’s step through the veteran adaption
09:58
restoration test and when we step
10:00
through those we realize
10:02
replacing two out of ten is not a
10:04
material improvement to the hvac
10:07
unit of property meaning that we can 100
10:10
expense it as a repair today
10:12
uh rather than recovering the cost over
10:14
27.5 years and
10:16
the additional benefit to that so we get
10:18
our all of our tax benefit today
10:20
but in addition to that when i sell the
10:22
property
10:23
in five years i don’t have depreciation
10:25
recapture because i never took
10:26
depreciation
10:27
on those hvac units right and i took it
10:30
all up front
10:30
as a repair which is the current
10:32
expenditure and that’s the real one
10:34
that’s the real value right there that
10:35
last bit it’s not that you’re front
10:37
loading it is that you don’t have to do
10:38
the recapture because that’s what
10:40
kind of from my experience that’s where
10:41
the killer really becomes right you have
10:42
to do this constant planning to avoid
10:44
the recapture
10:45
yeah yeah yeah taking it up front
10:49
is valuable it’s valuable because
10:52
you get the time value of money right so
10:54
your tax savings theoretically grow
10:56
over time but definitely at the end
10:58
there’s no recapture and the larger the
11:00
multi-family property so now we’re
11:01
talking about syndicators right they’re
11:03
buying 300 unit properties the larger
11:05
you get the more flexible it becomes
11:07
uh so materiality thresholds about like
11:09
30 or so so it really gives you a lot of
11:12
leg room and
11:13
our clients that do the best with us are
11:15
the ones that allow us to help them kind
11:17
of time
11:18
their rehab schedule out got it so it’s
11:21
not just in the tax
11:23
planning and tax advice but it’s it’s
11:25
that coupled with actually completing
11:27
the taxes and
11:28
you know adjusting the allocations
11:30
accordingly is really kind of the focus
11:32
for you right yeah yeah i mean i would
11:35
say that our bread and butter is the
11:37
advisory piece it’s stepping through
11:39
that the complicated piece of the code
11:41
that a lot of other cpas
11:43
are unaware of or don’t necessarily know
11:45
how to step through but
11:46
uh but definitely doing the taxes on the
11:48
back end i mean the advice is great but
11:50
if it doesn’t actually get into the tax
11:51
return then it was pointless at the end
11:53
of the day
11:54
so that’s that’s another big big factor
11:57
awesome hey brandon how do you how do
11:59
you determine and and how would you help
12:01
real estate investors determine what
12:02
would be able to be
12:03
what you capitalized and what you would
12:05
be able to put in in expenses
12:07
in the year yeah so that so
12:12
the question is really i have an
12:14
expenditure can i write it off today as
12:16
a repair or do i need to capitalize it
12:18
and if i do capitalize it and i put it
12:19
on the balance sheet
12:20
how long do i depreciate it is it five
12:23
seven 15 years or is it 27 and a half
12:25
years
12:25
and again we just look at the 2013
12:28
tangible property regulations so we step
12:30
through that we look at all the relevant
12:32
court cases well
12:33
we don’t do this every time but we know
12:34
all the relevant court cases
12:36
and we basically just know okay if you
12:38
have a certain expenditure
12:40
then we can write it off either under
12:42
one of the safe harbors
12:43
with the 2013 tangible property regs the
12:46
minimum safe harbor is a big one that
12:48
everybody knows or if we can’t qualify
12:51
for a safe harbor we look at the
12:52
betterment adaption restoration test and
12:54
that’s where that materiality threshold
12:55
really comes into play
12:58
awesome um and maybe i mean for those i
13:01
guess on the call that maybe aren’t as
13:02
familiar
13:03
i want to give a brief high level
13:05
overview of you know what it means to
13:06
depreciate what it means to recapture
13:09
and kind of how that plays against
13:10
people’s incomes right and the different
13:11
buckets of incomes between
13:12
you know ordinary income and in capital
13:15
gains right
13:16
yeah so people on the condo we have a
13:17
big spring people just so people
13:18
probably that aren’t as familiar you can
13:20
just get the foundation for probably
13:21
what we’re going to continue to talk on
13:23
for the rest of this call
13:24
sure sure so when you buy real estate
13:27
you you depreciate the value of the
13:30
building
13:31
over 27 and a half years and what it’s
13:34
supposed to do
13:35
it’s supposed to track the deterioration
13:37
of your asset
13:38
over time so they pick 27 and a half
13:41
years
13:42
and depreciation is just an annual
13:44
expense that i get to claim
13:46
i don’t have to spend any more money for
13:49
it every year to claim that expense so
13:51
oftentimes it’s referred to as a bantam
13:53
expense it’s a real expense but you
13:55
don’t have to actually shell out cash
13:56
every single year to claim it
13:58
and what it creates is it creates this
14:01
sort of parity where i can
14:03
i can cash flow positive but i can
14:05
report to the irs that i’ve actually
14:06
lost money
14:08
thanks to depreciation and things that
14:10
we can do with depreciation
14:12
so that’s depreciation you you buy a
14:15
million dollar
14:15
asset you allocate eight hundred
14:17
thousand dollars to the building 200 000
14:19
to land
14:20
um you can’t you can’t depreciate land
14:24
you just appreciate the 800k building
14:26
improvement value
14:27
and you do that over 27 and a half years
14:29
and then we have cost seg studies
14:31
and a cost segregation study the whole
14:33
point of that is to say well
14:35
in this million dollar building not all
14:37
the components are going to last
14:39
27 and a half years some components only
14:41
gonna last five years
14:42
some will only last seven some will only
14:44
last 15.
14:45
so a cost segregation study is the act
14:48
of essentially
14:48
reallocating that 800k building value to
14:52
5 715 and 27 and a half year property so
14:55
we’re kind of accounting for like
14:57
the carpet that’s in the units the
14:58
appliances that are already in the units
15:00
the
15:01
paving in the parking lot the shrubbery
15:05
um those types of things
15:08
and then you want to maybe the other
15:09
part of the second half that question
15:10
was just about
15:11
how to take those losses and apply them
15:14
to income to save money right like you
15:15
know and
15:16
how that kind of how that’s structured
15:19
right and what it can be
15:20
applied towards what it can’t be yeah
15:22
and this is where it gets deep so
15:23
actually before i
15:24
touch that i’ll touch on that i’m going
15:25
to hit depreciation recapture so
15:27
depreciation is great right while it’s
15:30
while it’s benefiting you but when you
15:31
liquidate the property
15:33
at some later point you’re going to have
15:35
to pay recapture
15:37
a recapture tax on any depreciation that
15:40
you have taken
15:41
or could have taken and that could have
15:43
taken is really key because every once
15:45
in a while we’ll get a client a new
15:46
client that’ll come on board we’ll
15:47
review their tax returns we’ll say hey
15:49
you haven’t been depreciating your
15:50
property we need to fix this they go no
15:52
no
15:52
no don’t worry about it i don’t want to
15:54
pay that recapture tax at the end we’re
15:56
like oh well you’re not aware then that
15:57
the irs doesn’t care
15:59
they’re going to tax you even if you
16:00
didn’t take it on the depreciation that
16:02
you could have taken
16:04
so you do have to pay a tax whenever you
16:06
sell on the back end so let’s say i’ve
16:07
got this million dollar property
16:09
i depreciate it 150 000 over the whole
16:12
period and then i
16:13
sell it for 1.2 million dollars now at
16:16
face value you would say oh there’s a
16:18
200
16:19
000 capital gain because i sold it for
16:21
1.2
16:22
i bought it for one 200 000 spread but
16:25
in reality my basis is eight hundred and
16:28
fifty thousand dollars my adjusted basis
16:31
is eight hundred and fifty thousand
16:32
dollars because i claimed a hundred and
16:34
fifty thousand dollars 000
16:35
depreciation during the hold period so
16:37
in reality
16:39
i have that 200k capital gain but i also
16:41
have an additional
16:42
150 000 of what they call section 1250
16:46
uh gain as well and that’s the gain that
16:49
has to be recaptured and it’s typically
16:50
going to be
16:51
captured at a 25 tax rate so i’ll pay
16:54
25 a 25 tax on the 150 000
16:59
and then i’ll pay capital gain tax on
17:01
the remaining 200k and for people that
17:03
invest in syndications
17:04
sometimes this can really shoot them in
17:05
the foot because especially if they can
17:08
use the loss during the hold period
17:10
because they’ll get to that end
17:12
at like way down the line they’ll have
17:15
pretty much
17:15
zero basis in this indication and then
17:17
they’ll have a like a 150 000
17:20
capital gain 50k of which is actually
17:22
capital gain and a hundred thousand
17:23
which is section 1250 recapture and all
17:25
of a sudden their tax bill is 40 000 and
17:27
it wipes out their distribution so uh so
17:30
it takes some kind of careful planning
17:32
for that end goal but for us you
17:34
mentioned the
17:36
uh how do you how do you claim the
17:37
losses and so this this is where this is
17:40
where it gets complicated
17:43
section 469 of the tax code defines
17:46
rental
17:46
real estate and the default treatment of
17:50
rental real estate
17:51
is that it is a passive activity that’s
17:54
default
17:55
so any real estate that you own is
17:57
automatically passive
17:58
doesn’t matter at least starting on
18:02
on stage one here it is a passive
18:04
activity
18:06
now there are there are exceptions to
18:07
the passive activity
18:09
rules and there’s two exceptions the
18:11
first if you earn less than 150
18:13
000 you can claim a passive activity
18:14
loss allowance up to 25
18:16
000 a year the second exception is if
18:19
you qualify as a real estate
18:20
professional and materially participate
18:22
in your rental real estate activity
18:23
now why would i want to have an
18:25
exception to the passive activity
18:26
rules well when i invest in real estate
18:29
so i buy a million dollar property
18:31
it’s an apartment complex i do a cost
18:33
segregation study
18:34
i’m probably going to be able to claim
18:36
250 to 300 thousand dollars in
18:38
first-year bonus depreciation
18:41
and that’s because i’ve this caustic
18:43
study allocates 250 to 300k
18:46
of value to five seven and 15 year
18:48
property and because of the 2017 tax
18:50
cuts and jobs act
18:51
i get to claim 100 bonus depreciation on
18:54
any component with a useful life of less
18:56
than 20 years
18:58
so big big write-off right if i’m going
19:01
to claim 250 000
19:02
in depreciation i’m probably going to
19:04
end up with a 230 000
19:06
loss now the question is is that a
19:08
passive loss or is that a non-passive
19:10
loss
19:11
and if it’s a passive loss i might not
19:14
be too happy because a passive loss can
19:16
only offset passive income or
19:19
gain on the sale of passive activities
19:23
so if i can sell another rental property
19:25
or i can liquidate a stake in a
19:26
syndication
19:28
and i can have passive losses offset
19:30
that gain
19:31
but if i don’t have that and i don’t
19:33
have passive income then i’m stuck with
19:35
230k of losses and they’re just going to
19:37
be suspended
19:38
and they’re going to be carried forward
19:39
indefinitely so the question is well
19:42
how do i maximize it then i i want to be
19:45
able to use that loss
19:46
and that’s where we look to those
19:47
exceptions and specifically we
19:49
we would be looking at that real estate
19:51
professional exception
19:53
so qualifying as a real estate
19:55
professional materially participating in
19:57
the rental real estate activity what it
19:58
does is it changes the classification
20:00
from passive
20:02
to non-passive and now my non-passive
20:05
losses can offset
20:06
all of my income doesn’t matter if i
20:08
have w-2
20:09
business dividends capital gains selling
20:12
uber stock whatever you want to do
20:14
your passive losses can offset that
20:17
income at least through the end of 2020
20:19
and now and there’s going to be a cap on
20:21
that going forward in 2021
20:23
um which we can get into later if we
20:25
want to but yeah
20:26
and i hope people of the call heard that
20:28
because that’s really the meat and
20:30
potatoes of it right it’s really
20:31
you have just a kind of simplified and
20:33
brighter correct if i miss anything
20:35
wrong
20:35
but really have two buckets of income
20:36
right you have your active you have your
20:38
passive
20:38
and your passive losses can be you know
20:41
held up against your passive gains
20:44
that’s fine and dandy but most people
20:46
unfortunately would say a lot of people
20:47
have
20:48
you know their incomes actually in the
20:49
active section right your passive is
20:51
your
20:52
distributions from stocks maybe some
20:53
income from your other rentals
20:55
but the active is your w-2 income and so
20:57
you know most people have
20:59
maybe you’re making you know 100 000
21:01
salary in the active side but you can’t
21:03
you know basically use that to offset
21:05
the loss of the
21:06
passive side and so it’s really it’s a
21:08
matter of how do you become an active
21:09
investor and
21:10
you know maybe brandon i’m going to
21:11
queue you up for that question and then
21:13
one other and then we’ll maybe start
21:14
going to people’s questions because
21:15
the other really caveat that i’d like
21:17
you to kind of go into
21:19
this is something i recently learned
21:20
which i thought was huge but with the
21:22
new
21:23
basically with the current uh what’s it
21:25
called the stimulus that kind of got
21:27
passed right
21:28
now you can you know instead of just
21:29
carrying your losses forward
21:32
right you actually can carry them back
21:34
and on top of that right
21:36
even if you maybe you weren’t an active
21:38
investor you know an active
21:40
real estate investor a year ago but this
21:41
year you are you can actually
21:43
apply that to go backwards right brandon
21:46
yeah yeah exactly so if in the current
21:49
year you qualify as a real estate
21:50
professional for tax purposes
21:52
and you materially participate in your
21:53
rental real estate activity and you have
21:55
really large losses this year
21:58
that have been created this year and
22:01
those losses exceed all of your other
22:03
income
22:04
then you do have a net operating loss
22:06
most likely that you can carry back five
22:08
years
22:09
yeah so we’ve been helping a few of our
22:11
clients with that and one of the
22:12
strategies to kind of maximize that by
22:14
the way is to look at all of your
22:15
acquisitions that you’ve made over the
22:16
past three years
22:18
so i mean we’re going all the way back
22:19
to 2017
22:22
when we’re trying to create these nols
22:23
for 2020 right so we’re looking at 2017
22:26
18 and 19 acquisitions and we’re asking
22:29
hey can we
22:29
can we qualify as a real estate
22:30
professional in 2020 and if we can
22:33
can we cost segregate all of the
22:34
acquisitions that we’ve made previously
22:36
that maybe we didn’t cost segregate
22:38
because maybe we couldn’t qualify as a
22:39
real estate professional
22:41
now we can cost segregate we can file a
22:43
form 3115 and a 481 a adjustment
22:45
when we file those forms we get to claim
22:47
all the all the 100 bonus depreciation
22:49
or 50
22:50
if you bought early 2017. so we get to
22:52
still claim all this bonus depreciation
22:54
in this year we get to pinpoint
22:56
everything in 2020.
22:57
if we can crush everything in 2020 and
22:59
create this big loss
23:01
that that is a non-passive loss then
23:03
yeah we can carry that in a well
23:04
back five years which is huge so for
23:07
people that have active income right
23:08
maybe you
23:08
you know you had a w-2 job for four
23:10
years and then you quit and you became a
23:12
full-time real estate investor
23:13
right it’s powerful now you can go back
23:15
and capture all
23:16
you know all your losses against that
23:18
past five years of income so
23:20
that’s a little thing i think a lot of
23:22
people don’t know about to me that was a
23:23
huge
23:23
kind of thing but i think maybe the
23:25
natural question that people want to ask
23:26
is what qualifies as a real estate
23:28
investor
23:29
that’ll be my last one then i’ll shut up
23:30
and we’ll just start reading the
23:31
questions that people have
23:32
yeah so what what qualifies as a real
23:34
estate professional for tax purposes
23:37
so the the important the first important
23:39
thing here to understand is that
23:41
all that matters is the time that you
23:43
spend in a real property trader business
23:46
it’s all that matters doesn’t matter if
23:48
you’re a real estate agent doesn’t
23:49
matter if you’re flipping
23:51
if you’re a rental land if you’re a
23:52
landlord doesn’t matter
23:54
all that matters is the number of hours
23:57
that you spend you have to spend 750
23:59
hours
23:59
and more than half your time in a real
24:02
property trader business so
24:05
let’s talk about who is not going to be
24:07
a real estate professional for tax
24:08
purposes you will not be a real estate
24:10
professional if you work a full-time job
24:11
if you have a w-2 job
24:13
that is full-time it’s just not going to
24:15
happen
24:16
we we have clients every once in a while
24:17
that go no no no i i
24:19
definitely work more more in real estate
24:21
than i do at my 2000 hour a year job
24:23
which i find hard to believe
24:25
and we won’t take that position because
24:26
there have been about 100 tax court
24:28
cases where people have tried and every
24:29
single person is lost
24:31
the people that have full-time jobs that
24:33
do qualify as a real estate professional
24:35
are going to be
24:36
pilots like airplane pilots boat pilots
24:39
they have full-time jobs but they’re not
24:40
actually working full-time
24:43
anybody anybody in that in an industry
24:45
where you get paid a full-time wage
24:48
you’re technically a full-time employee
24:50
but you don’t actually work full-time
24:52
teachers can potentially count there
24:55
have been court cases in the past where
24:56
teachers have won
24:57
and lost so you just have to be really
25:00
careful about the time that you
25:01
you log in and um that’s really the key
25:04
there but yeah we’re just looking at 750
25:06
hours
25:07
and greater than half our time in a real
25:09
property trader business
25:10
real property trader business is going
25:11
to be construction wholesale brokering
25:15
acquisitions liquidations rental
25:18
management i mean anything that you can
25:19
think of that’s like
25:20
real estate specific is going to count
25:24
i i cannot qualify as a real estate
25:26
professional because i am providing
25:28
tax services to real estate investors
25:31
right i’m not
25:31
working on the real property trader
25:33
business itself
25:35
attorneys won’t qualify insurance agents
25:37
won’t qualify
25:38
mortgage brokers private money lenders
25:40
none of those people are going to
25:41
qualify
25:42
right so so it’s it’s really important
25:45
to understand who
25:46
does qualify and it’s typically going to
25:47
be the people that are actually
25:49
like i almost think of it as people that
25:51
are actually walking down to the
25:52
property and touching it or making it
25:54
go they’re operating it or they play a
25:57
hand
25:58
in that right there they’re either
25:59
building the assets that it can be
26:01
operated
26:02
they’re selling the asset so that it can
26:04
be operated or they’re running the asset
26:06
itself those are the people that are
26:08
going to qualify as a real property
26:09
trader
26:09
as a real estate professional but it’s
26:12
also important to understand that
26:14
qualifying as a real estate professional
26:15
in and of itself does absolutely nothing
26:17
for you
26:19
the second piece to all this is that you
26:21
have to materially participate
26:22
in your rental real estate activity and
26:26
this is critically important and it’s
26:28
it’s even more important if you
26:31
are not a landlord for if if being a
26:34
landlord is not
26:35
driving the the primary um
26:39
if that’s not the primary activity for
26:41
you then this is
26:43
super important to understand so
26:46
all the time we’ll get builders
26:48
developers
26:49
real estate agents who go well i do real
26:52
estate full time
26:53
i am automatically a real estate
26:54
professional and we go yes you are you
26:56
are automatically real estate
26:57
professional you have
26:58
met that threshold but we’re still not
27:00
going to claim your losses as
27:01
non-passive
27:02
because you’ve not demonstrated that
27:04
you’ve materially participated in your
27:05
rental real estate activities
27:07
right so if you if you’re a landlord
27:09
full-time
27:10
and you qualify as a real estate
27:11
professional on your landlord activities
27:14
then you’ve got the material
27:15
participation piece in the bag
27:17
material participation the safe harbor
27:18
for it’s 500 hours
27:20
in a rent and a rental property trader
27:22
business so
27:23
if you’ve already hit if you’ve hit 750
27:26
in that landlord business then you’re
27:28
good because you’ve already you’ve
27:29
already hit the material participation
27:30
piece but where we often see the issues
27:33
are when we have a person that full-time
27:36
is a real estate agent and they go well
27:37
i’m a real estate professional why can’t
27:38
i take my losses because you didn’t
27:39
demonstrate that you materially
27:40
participated in your rental real estate
27:42
activities that’s step number two
27:44
step number one is just real estate
27:46
professional status so that’s really
27:48
important to understand it’s also
27:49
important to understand that you can
27:50
combine your spouse’s hours for material
27:52
participation purposes
27:53
only so if you are a real estate agent
27:56
if you do
27:57
if you are developing if you are in
27:59
construction if you are wholesaling and
28:00
you
28:01
qualify as a real prop sorry as a real
28:03
estate
28:04
uh professional on those activities and
28:06
your spouse
28:07
is managing the rental real estate then
28:09
you can qualify
28:11
you’re good right because the spouse is
28:13
going to materially participate in the
28:14
rental real estate activities and
28:15
together you can combine
28:17
your hours for material participation
28:19
not for real estate professional
28:21
but for material participation it’s good
28:23
for people that have w2 jobs right
28:25
oftentimes we’ll have a spouse that
28:27
will be a real estate agent and then
28:28
we’ll have another spouse that has a w-2
28:30
job and
28:31
and manages the rental real estate well
28:33
maybe the spouse that’s the
28:35
the real estate agent doesn’t want to
28:36
touch the rental real estate that’s fine
28:38
just let them be a real estate agent
28:39
they’ll qualify as a
28:40
as a real estate professional for tax
28:42
purposes and then you
28:44
can just manage the rentals you
28:45
materially participate and now you guys
28:46
can combine hours for material
28:48
participation purposes and the losses
28:50
will be non-passive
28:52
can you just do that again because i’ve
28:53
never heard that so you you’re saying
28:56
that
28:59
so yeah could you could you say that
29:01
again brandon yeah
29:03
um what part so it’s just uh with with
29:06
the spouse because i think there’s a lot
29:08
of people here that are that
29:09
are investing in real estate they maybe
29:11
have a couple properties but they also
29:13
maybe have a w-2 job or they have
29:15
a full-time job right but now
29:19
how how would they or is it possible
29:21
like you said
29:22
to have their wife um you know either
29:25
qualify as a real estate professional
29:27
and or could they share the uh i guess
29:29
the material
29:30
time uh duties yeah yeah so
29:34
so we have we have a couple of things
29:36
that we can do with with spousal
29:38
relationships uh
29:40
and a couple ways that we can structure
29:41
this so let’s say one spouse spouse
29:44
a is earning 300 000 in their w-2 job
29:48
and they’re just doing their w-2 job
29:49
that’s full-time and they don’t have a
29:51
lot of time to
29:52
touch rental real estate but they want
29:54
to use the losses to offset their w2
29:56
income
29:57
well spouse b can go and be a real
29:59
estate professional and materially
30:01
participate in the rental real estate
30:02
portfolio
30:04
and the losses will become non-passive
30:06
and they’ll be able to
30:07
basically say well because of spouse b’s
30:10
status
30:10
in real estate the losses are
30:12
non-passive now we can offset spouse a
30:14
we can we can offset their w2 income so
30:17
that’s one option that’s the most common
30:18
option but the second option
30:20
is spouse a is the w-2 earner
30:23
300k full-time spouse b
30:26
is a real estate agent and maybe spouse
30:30
a
30:30
is the more financially savvy one they
30:34
want to manage the rentals
30:35
spouse b does not so spouse b
30:39
as a real estate agent will qualify as a
30:41
real estate professional under section
30:43
469
30:44
if they’re doing it full time or even
30:46
part time
30:47
they’ll they’ll qualify so so you get
30:49
hurdle number one out of the way
30:51
so one spouse has to qualify for a real
30:54
estate professional
30:54
on their own with their own hours and
30:57
spouse b does that by being a real
30:58
estate agent
30:59
but material participation in the rental
31:02
real estate activities
31:03
is lacking in this example so you can
31:06
have a
31:06
massive portfolio that generates
31:08
millions of dollars in losses
31:10
but if spouse a is qualifying as a real
31:12
estate professional
31:13
on the real on the uh the agent
31:15
activities
31:16
and spouse a over here is just doing the
31:18
w-2 job and neither one of them are
31:19
materially participating in their
31:21
rentals
31:21
then they can’t claim the losses the
31:23
losses are still passive
31:25
but spouse a being the more financially
31:28
savvy one or
31:29
whatever maybe just has a the the bigger
31:31
interest in rental real estate
31:33
spouse a can spend 500 hours or 100
31:36
hours and more than anyone else and
31:38
they will rise to the level of material
31:40
participation
31:41
and because spouse b has already hit the
31:43
real estate agent
31:44
like already hit that real real estate
31:47
professional threshold with the agent
31:49
activities even though they contribute
31:50
zero time to the rentals they can
31:53
combine hours for material participation
31:54
purposes so spouse
31:56
a can hit material participation spouse
31:58
b
31:59
doesn’t have to worry about it they’ll
32:00
just hit real estate professional
32:02
good question so if you let’s say you’re
32:04
invested in a syndication right the same
32:06
example
32:07
you know 10 million a ton of money in a
32:09
syndication right where it’s passive
32:11
but you go buy one rental house and you
32:13
manage that yourself does that now
32:15
qualify you
32:16
to be in the active and now really all
32:18
of the all that you have invested in the
32:20
syndication can also apply
32:22
potentially it depends on your
32:25
activities in this indication it also
32:26
depends on your
32:28
if you’re purely a passive investor in
32:29
syndication like a limited pro limited
32:32
i’m an active i’m an active real estate
32:34
investor
32:35
in a you know a house right like the
32:37
wife example they were managing you know
32:39
maybe
32:39
one person’s w2 incoming the other
32:41
person’s managing that one property
32:43
right they bought that property
32:44
specifically so they can you know bring
32:46
this bucket
32:47
over here right does that they don’t
32:49
care about
32:50
ratio it’s just purely you have
32:52
something that you you know you you
32:54
qualify in terms of the time and you are
32:56
managing
32:56
a piece of real estate yeah so so again
32:59
though
33:00
it depends on your stake in the
33:02
syndicate what type of membership
33:04
units you own if you own limited partner
33:07
membership units then you cannot
33:09
ever count the hours in the syndication
33:12
doesn’t matter what time you spend if
33:13
you own
33:14
gp membership units general partner
33:17
membership units then you might be able
33:18
to count some of those hours
33:22
because you can influence decision
33:23
making and because you have a vote
33:25
theoretically so that that’s one piece
33:27
of it right but the other piece
33:29
let’s say that you are a limited partner
33:30
in the syndicates you can’t count any
33:32
time at all from the syndicate
33:34
activities
33:35
the other piece is is you can qualify as
33:38
a real estate professional on your own
33:40
rental portfolio and then you can make
33:43
what we call the nine election it’s an
33:44
aggregation election
33:46
and you can aggregate in all of your
33:48
rental real estate activities into
33:50
one activity and if you’re
33:53
if you’re aggregating in everything into
33:55
the the activity that you already
33:57
qualify as a real estate professional on
33:59
you already materially participate in
34:01
and then you’re just aggregating in
34:02
these lp interests
34:04
then yeah you can use that strategy and
34:06
a lot of our clients will do exactly
34:07
that and then they’ll
34:08
it’s a really nice it’s really nice it’s
34:10
really flexible because
34:12
at the end of the year we can look at
34:13
their taxes and say hey we need to
34:14
generate a hundred thousand dollar loss
34:16
they’ll go put a hundred thousand
34:17
dollars into a syndicate as an lp
34:19
and then boom we get the loss because
34:21
the syndicate’s going to run run the
34:22
caustic study they’re going to pass the
34:24
100 bonus appreciation back to the lp um
34:27
so yeah you can absolutely do it can you
34:28
do it on one property that depends on
34:30
what type of property right there’s
34:31
a court case that dropped march 2018
34:33
that says you can do it on one property
34:36
it’s that during the same week there’s
34:37
another court case that says that you
34:39
can’t do it on 10. so it just kind of
34:40
depends on
34:42
on the activities that you um that
34:45
you’re
34:45
that you’re doing with the property and
34:47
the one that did qualify it was a big
34:49
rehab project
34:50
and it took a long time and he was doing
34:52
it all himself the one the the 10
34:54
properties that didn’t qualify
34:56
the woman uh actually the court
34:59
basically said we believe you could have
35:00
been a real estate professional but
35:02
your time log says that you’re at the
35:04
rental property on a saturday
35:05
and when we subpoenaed your credit card
35:07
statements your credit card statements
35:09
show you traveling in london so which is
35:11
it right
35:12
um so it’s those types of things you
35:13
have to watch out for but yeah
35:15
you can definitely do it with one
35:15
property awesome
35:18
i guess i’ll start going through
35:19
questions then just to kind of you know
35:20
let people
35:21
chime in as well things that they wanted
35:22
to know so um
35:24
maybe a simple one but do you assist
35:26
with cost segregation studies i think
35:28
you do not right you just kind of help
35:30
with you know someone else does the cost
35:32
extended you’re just taking that and you
35:34
know applying it
35:35
yeah so we’re not going to do the cost
35:37
segregation study for you
35:39
now there are software cost segregation
35:42
studies that can be performed
35:44
kbkg and elb are two companies that will
35:47
do that
35:48
they have a software program that you
35:50
can use and it’s essentially for
35:52
properties that are less than a million
35:54
dollars so
35:54
for the longest time less than a million
35:56
dollars it has not been feasible to run
35:58
cossack studies
35:59
these two cost segregation companies
36:01
basically pooled or
36:03
aggregated their decades worth of cost
36:06
segregation data
36:07
put it into an algorithm and or i guess
36:11
just to say a statistical analysis and
36:13
they basically say hey if you give these
36:15
certain inputs we’re 95
36:16
confident that this is 100 correct and
36:19
buy our audit insurance on top of this
36:20
or i believe kbkg includes it
36:23
and we’ll do the cost egg study for you
36:24
for free if it ever gets contested
36:26
during an audit
36:27
and those cost 500 so when our clients
36:31
are doing one of those
36:32
yeah we’ll we’ll help walk them through
36:34
it typically we’ll hold their hand
36:35
through that process
36:37
but other than that we’re kind of just
36:38
playing we’re kind of just coordinating
36:40
with the cossack firm on the larger
36:41
properties just making sure that
36:43
you know when we get a report back that
36:45
it makes sense and then it’s
36:47
it’s thick enough to uh to meet our
36:50
our criteria all right next question
36:54
uh if the syndicate buys my building can
36:56
they write off
36:57
all the improvements in one year
37:01
if a syndicate buys your building can
37:03
they write off all the improvements
37:09
all the improvements in year one i i i
37:12
the part that’s confusing me is the
37:14
syndicates by is my building but i think
37:16
let’s just reposition the question right
37:17
and martin i think you asked this
37:19
question if i’m not repeating it
37:21
correctly and you’re asking somebody
37:22
else let us know but
37:23
i think it’s what the question is is if
37:26
a nasty gets bought and they put a
37:27
million dollars of rehab into a year one
37:29
can that one million dollars of
37:31
improvements get written off in year one
37:34
um yes and no so
37:37
some of it can probably get written off
37:39
in year one
37:40
uh what we would be doing is we’d be
37:42
applying the 2013 tangible property regs
37:44
first to try to figure out
37:45
any sort of safe harbor application
37:47
betterment adaption restoration test
37:49
that materiality threshold
37:51
to see if we can actually deduct
37:52
anything as a repair
37:54
but then we would be moving into
37:57
capitalization territory and trying to
38:00
bucket it between
38:01
five seven and 15-year property or 27
38:03
and a half year property
38:04
and if we can assign a five seven or
38:06
15-year life then you can write it off
38:08
in year one
38:09
via 100 bonus depreciation so
38:12
so yes you can write off improvements in
38:15
year one
38:15
either as repair or via 100 bonus
38:18
depreciation can you write off the
38:20
entire
38:21
amount no probably not
38:24
all right next question do you often
38:26
work with low-income housing properties
38:29
and the applicable tax credits we do
38:32
i’m not the expert in my firm on that
38:34
topic but we do have a woman that’s very
38:36
good at it
38:38
all right next question from our friend
38:41
chris
38:42
for the past investor can you talk about
38:44
investing using an llc
38:46
corp or other entity versus investing in
38:48
their personal name
38:49
any tax benefits one way or the other
38:52
so 99 times out of 100
38:55
there are no tax benefits between an llc
38:59
and corporation in most cases the
39:01
corporation’s actually going to hurt you
39:03
whether it’s an s corporation or a c
39:04
corporation
39:05
that one out of 100 if you’re earning a
39:07
million dollars plus
39:10
then a c corporation could potentially
39:12
provide you
39:13
with some sheltering we actually call it
39:15
a c corp blocker
39:16
because the c corporation prepares its
39:19
own tax return
39:20
and the income does not flow through to
39:22
you it’s blocked
39:24
so potentially could be beneficial
39:27
generally not and and if it’s generally
39:30
not beneficial there’s really no
39:32
difference between
39:33
you know personal name versus llc we’re
39:35
going to recommend llc
39:36
for those 99 times out of 100 because it
39:39
does keep it super flexible
39:40
llcs are very flexible and you get that
39:42
liability protection
39:45
next question i’ve heard of conflicting
39:47
reports could i just uh
39:49
just just um just with that question
39:52
is there any difference between doing
39:54
with an llc like a passive investor
39:56
invests
39:56
passively through llc versus their own
39:59
personal name
40:01
not from a tax perspective yeah you
40:04
might want to
40:04
you might want i mean you might have
40:07
local
40:08
franchise taxes like if you set up an
40:09
llc in california you’ve got an 800
40:11
tax every year maryland’s uh 300 you
40:15
know you’ve got all these different
40:16
states and localities you have to watch
40:18
out for when you set up llc’s so
40:20
it might increase your administrative
40:21
burden but from a tax perspective you’re
40:24
not going to gain anything
40:26
by using an llc that said there is
40:29
definitely a liability aspect to it
40:31
and the way that i think about it is if
40:32
something happens in my personal life
40:35
and i’m not an attorney so take my words
40:37
to the grain of salt here but if if
40:38
something happens my personal life
40:40
if i don’t have that llc well the
40:42
syndicate’s making distributions to me
40:44
personally right now that can all get
40:46
wrapped up in the lawsuit but if i have
40:47
the llc and the llc has a bank account
40:50
the syndicate makes the distributions to
40:51
the llc
40:52
it sits in the llc’s bank account i
40:54
don’t technically have to distribute the
40:56
income to myself
40:58
so it could provide a little bit of
41:00
benefit there in terms of asset
41:01
protection
41:03
all right so then chris i’m going to
41:05
skip your next questions i think we
41:06
covered it
41:07
unless you say otherwise all right um
41:10
oh the next question is i can find some
41:11
info on opportunity zones
41:14
um yes
41:18
for those listening maybe a quick rehash
41:20
of what opportunities it is and why it’s
41:22
a
41:22
interesting tax vehicle yeah so so
41:25
opportunities zones were enacted back
41:28
2017 tax cuts and jobs act um
41:31
relatively went flew under the radar for
41:34
a while until people really picked it up
41:36
but basically if you invest in a
41:38
qualified opportunity fund you can roll
41:40
your capital gains over into the
41:42
qualified opportunity fund section 1250
41:44
recapture depreciation recapture can
41:45
also be rolled in
41:47
and if you i believe you hold i’m not
41:49
the qualified opportunity fund expert on
41:51
my team so
41:52
i’m gonna apologize for potentially
41:54
messing this up in advance but if you
41:55
hold
41:56
for uh i think five years
42:00
five years yeah five years you get a 10
42:02
step up in your basis
42:03
so if i roll over 100k of capital gains
42:05
and i hold for five years my basis is
42:07
zero in the capital gains
42:08
but if i hold for five years i get to
42:10
jump at the 10 000 so i’ve sheltered
42:12
10k of my capital of my 100k capital
42:15
gains if i hold for an additional two
42:17
years
42:17
then it’s uh seven sorry it’s 15 total
42:21
so now my basis is 15k i’ve sheltered
42:24
15k out of my 100k
42:26
but in 2026 everybody has to pay tax on
42:29
the capital gains that they’ve deferred
42:32
so if you invest today you’re not going
42:34
to have
42:35
seven years elapsed so you’re only going
42:37
to be eligible for that five year step
42:39
up at this point so you’re going to lose
42:41
out on that additional five percent
42:42
which may or n
42:43
may or may not break an investment for
42:45
you but
42:46
also if you hold for 10 years a total of
42:48
10 years whatever
42:49
gain that you’ve invested the the
42:52
additional
42:53
gain that you’ve made the additional
42:55
appreciation on the original investment
42:57
will be tax-free so there are tax
42:59
benefits our clients
43:01
have not been very interested in
43:03
opportunity everybody was really
43:05
interested at the beginning we were
43:07
we were putting out all sort of sorts of
43:08
content at the beginning
43:10
but what we realized is a lot of our
43:12
clients really aren’t interested in
43:13
opportunity funds because of that
43:15
10-year hold period
43:16
a lot of our clients like to have a
43:19
little bit more flexibility
43:26
next question uh can you talk about any
43:28
slick moves that clients have done
43:30
some success stories or aha moments
43:34
yeah good question chris
43:37
yeah i mean there’s real estate
43:39
professionals obviously a big one i
43:41
think that another thing that a lot of
43:43
a lot of people don’t realize in a lot
43:45
of cpas and tax advisors don’t know is
43:47
that your short-term rentals i don’t
43:49
know if you guys invest in short-term
43:50
rentals but
43:51
if you do invest in short-term rentals
43:53
or if you want to invest in short-term
43:54
rentals
43:55
short-term rentals are excluded from the
43:58
definition of a rental activity
44:01
under section 469 of the tax code and
44:03
remember
44:04
section 469 was everything we just
44:06
talked about so that’s the
44:07
the code section that says rental
44:08
activities are default passive
44:10
you can you can get around that by
44:12
qualifying as a real estate professional
44:14
yada yada yada
44:15
so if a short-term rental falls outside
44:17
of that section
44:19
then what that means is that you don’t
44:20
have to qualify as a real estate
44:21
professional
44:22
in order to take the losses as
44:24
non-passive you just have to materially
44:25
participate in the rental activity
44:27
so if you have a short-term rental you
44:30
could theoretically have a w-2 job your
44:32
spouse could have a w-2 job everybody
44:34
could have a w-2 job
44:35
and you could just materially
44:36
participate in the short-term rental
44:38
the losses that you are able to generate
44:40
on that short-term rental via cost
44:42
segregation
44:43
ideally would be considered non-passive
44:46
so you don’t have to worry about real
44:48
estate professional status at all it’s a
44:50
much lower
44:51
bar and that’s something that we see
44:53
cpas get wrong all the time
44:55
especially if the landlord has other
44:57
long-term rentals
44:58
you know they’ll show them all on
44:59
schedule e and they’ll just throw in the
45:02
the losses as passive from the
45:03
short-term rental without really giving
45:05
it any sort of consideration
45:07
so it’s a good planning opportunity to
45:08
kind of go back and correct but
45:11
for you guys and i know this is a a
45:13
multi-family group
45:14
but realistically uh i mean short-term
45:17
rentals are going to provide a great
45:18
opportunity to come q3 q4 this year
45:21
and if you can get into one of these
45:23
properties and effectively get your down
45:24
payment back
45:25
after you run a cost segregation study
45:26
because of the non-passive losses and
45:28
the
45:29
tax refund that comes as a result of
45:30
that it could be a
45:32
decent opportunity to acquire some
45:34
short-term rentals
45:36
i did not know that that’s interesting
45:39
um
45:42
but there’s still there’s still
45:43
recapture right you know that doesn’t
45:44
change right okay
45:46
i’m still recommending sure i didn’t
45:47
find another loophole
45:50
all right let’s keep going then so what
45:51
are some of the biggest misconceptions
45:53
you get from investors assumptions they
45:55
come in with that are incorrect
45:59
um i mean most of the
46:02
i mean there’s a lot of incorrect
46:03
assumptions the most the most frequent
46:05
ones
46:05
are revolving around real estate
46:07
professional status well i got my real
46:09
estate license so i’m gonna be real
46:10
estate professionals
46:11
that doesn’t really work like that it’s
46:12
about the hours that you spend right you
46:14
have to spend the correct amount of
46:15
hours
46:16
the my most favorite uh incorrect
46:19
assumption
46:20
is when we have clients that are in real
46:23
estate full time
46:24
so they are a syndicator full-time they
46:26
are investing in rental real estate
46:28
full-time they
46:29
are building or being an agent full-time
46:33
and they refuse to keep a time log of
46:36
their activities
46:38
what we have done to combat that as we
46:41
finally
46:42
i just put my foot down and said well
46:43
we’re not going to claim real estate
46:44
professional on the tax return unless we
46:45
get a time log
46:47
and we’re not doing it to be a pain in
46:48
the butt what we’re doing what we’re
46:49
doing is we’re saying look
46:51
there are court cases and i have a whole
46:54
list of them
46:54
there’s at least 15 that these people
46:58
are full-time they’re they’re full-time
46:59
agents they’re full-time builders
47:00
they’re full-time landlords they don’t
47:02
have a timeline in the court case shoot
47:03
the courts shoot them down they say
47:05
sorry you don’t have proof
47:08
it sounds ridiculous but that’s the the
47:11
those are the ones that kind of fire me
47:12
up because it’s like look you’re hiring
47:14
me i’m not going to give you the advice
47:15
that you want to hear i’m going to give
47:16
you the advice that you need to hear
47:17
because when we get under audit
47:19
i want you to win right and you’re not
47:21
going to win if you have to go back and
47:22
recreate your time timelock like i was
47:23
talking about that one
47:24
tax court case from march 2018 the woman
47:27
had 10 properties
47:29
her time log says she’s working on a
47:30
rental on saturday but her credit card
47:32
statement says she’s in london traveling
47:34
well what do you think happened she got
47:36
audited and she retroactively built her
47:38
time log out
47:39
and uh we just don’t want our clients to
47:41
fall into that so that that’s a big
47:43
incorrect
47:43
assumption that we see more more often
47:46
than we’d like to
47:51
um let’s see next question uh do you
47:53
ever utilize ticks
47:55
uh tick structures and or dst’s to
47:56
assist syndications
47:58
to take advantage of 1031 yeah yeah
48:01
definitely
48:02
um there’s drop and swaps there’s
48:05
uh well i guess that’s not really
48:06
technically a drop-in swap but yeah
48:08
yeah we we use ticks uh often we’ve
48:12
we’ve helped people through relatively
48:13
complex 1031 exchanges
48:16
you have to be really careful the
48:18
advisors that you work with even
48:20
i mean we had an attorney at one point
48:22
that was like telling our client that
48:24
you know we don’t know what what we’re
48:25
talking about and we’re way too
48:27
conservative and
48:28
he was recommending this structure we
48:30
were like it’s
48:31
it’s black and white it’s like literally
48:33
written in the code right here that you
48:34
can’t do that
48:35
and uh and we ended up getting like two
48:38
national i ended up paying two national
48:40
law firms to
48:41
tell me if i was right or wrong we were
48:42
right so you just
48:44
just make sure that you’re working with
48:45
um and this attorney had like 30 years
48:47
of
48:48
experience on and way more than we had
48:50
that’s why we’re like wait are we wrong
48:52
but uh yeah i mean we’ve worked with a
48:54
lot of complex structures
48:56
and uh it’s good to especially if you’re
48:58
investing in syndications it’s
49:00
it’s really good to ask that question up
49:01
front when you’re investing before you
49:03
make that investment
49:04
you know what what sort of tax
49:05
mitigation strategies you’re going to be
49:07
employing here you’re going to cost sag
49:08
you’re going to bonus depreciate are you
49:10
going to elect out of business interest
49:11
limitations
49:12
and by the way at the end is there any
49:14
sort of 1031 opportunity
49:17
are you going to 1031 do i need to drop
49:19
out of this syndicate so that i can
49:20
1031. there’s a lot of
49:23
a lot of good questions that you can ask
49:24
up front and so that you can start
49:26
putting your plan in place
49:28
way before you actually need to all
49:31
right
49:31
next question uh active investor in this
49:33
indication if there’s fortify partners
49:35
in syndication
49:36
are they all active or are there
49:38
thresholds
49:40
yeah so this goes back to that material
49:41
participation thing for us that i think
49:43
you were actually asking me about
49:45
and it it depends it depends on two
49:48
things it depends on
49:50
what type of membership units you own if
49:52
you own lp
49:53
units limited partner units you’re not
49:55
gonna ever qualify
49:56
your hours will not count you’re just an
49:58
investor if you own gp units
50:01
your hours can count but it doesn’t mean
50:03
that all your hours are going to count
50:05
you actually have to be
50:06
working in or on the syndicate
50:09
moving the property forward helping with
50:11
operations making decisions if you’re
50:13
just reviewing
50:14
you know monthly or quarterly financial
50:16
reports even if you have a gp stake that
50:18
would be an investor level activity and
50:19
those hours will not qualify
50:22
all right next question is i understand
50:24
the hurdle for becoming an active
50:25
investor while having a w-2
50:27
is proving you work more on real estate
50:29
than your w-2 what are the best ways to
50:31
prove this
50:32
if you work a full-time w-2 job you will
50:34
not be able to prove it you just will
50:36
not
50:36
you can try and you’re going to join the
50:39
rank of the 100
50:40
plus people that have already tried and
50:42
lost in court it’s just not going to
50:44
it’s never going to work
50:45
and that that’s actually going back up
50:47
to the incorrect assumption i actually
50:48
have a presentation on
50:49
a big presentation on real estate
50:51
professional all sorts of fun citations
50:53
and one of the
50:54
slides at the end is the mistakes that
50:57
investors make and the mistakes that
50:59
advisors make
51:00
but one of the mistakes that investors
51:01
make is thinking that they can qualify
51:03
as a real estate professional
51:04
when they have a full-time w-2 job it’s
51:06
never going to happen
51:08
if you have a part-time w-2 job you can
51:10
qualify
51:11
or if you if you are a boat pilot or
51:14
you’re an airline pilot
51:16
or you’re running some sort of other job
51:18
or you’re not actually working full-time
51:20
you can potentially qualify but just
51:23
understand that the tax court
51:25
is going to subpoena your employer’s
51:28
employment records and they’re going to
51:30
look at that pay stub if it says 40
51:32
hours they’re going to use that they’re
51:33
going to say it’s 40 hours
51:35
40 hours a week that’s what you’re being
51:36
paid to do so it doesn’t matter what you
51:39
say
51:39
this is what’s being recorded by your
51:42
employer this is what you’re getting
51:43
paid to do so now you have to
51:44
overcome the hurdle of 40 hours a week
51:47
on the rental real estate side of things
51:49
and that’s that’s an additional 2001
51:52
hours for the year so you’re working
51:53
4001 hours
51:55
for the entire year which is a lot of
51:57
time
52:00
all right uh department money lenders
52:02
qualify as real estate professionals if
52:04
there is no other wq income
52:07
no uh private money lenders are not
52:09
going to qualify as a real estate
52:10
professional
52:11
there’s a tax court case that came out
52:12
2017 it’s hickman tc
52:14
summary 2017-66
52:18
that one specifically says mortgage
52:19
brokers well i should take it back
52:22
it depends on you it depends on the
52:23
facts and circumstances of your private
52:24
money lending activities
52:26
um you may be able to qualify depending
52:28
on exactly what you’re doing but if
52:30
you’re just
52:31
putting deals together and lending funds
52:33
then typically
52:34
no
52:38
next question finally an actual
52:42
advantage to logging most of my 830 plus
52:44
hours here today being a landlord
52:46
and doing hands-on rehab kudos to here
52:48
there you go
52:49
all right from eddie can i qualify for a
52:51
real estate professional if i work a
52:53
normal job outside the country but i
52:55
deal with lots of real estate
52:56
investments
52:57
if your normal job is 40 hours a week
52:59
i’m going to say no
53:05
all right next question um do we have to
53:09
uh costs on the smaller properties
53:12
for example a hundred thousand dollars
53:14
single family rental is yes i think to
53:15
get benefits
53:16
saying you do but the thing i did learn
53:18
is that there are cheaper ways to do it
53:19
than
53:20
you know like what we do on large
53:21
departments right right now that existed
53:23
and over in my rentals
53:25
yeah yeah you don’t have to do a cost
53:27
like you actually don’t have to do a
53:29
cost like ever
53:30
um i mean you know the the cost sig
53:32
firms and cpas that want you to do
53:34
cossack all the time will tell you
53:35
that’s the technically correct way to do
53:37
it because they’re trying to
53:38
push services on you but you don’t need
53:41
to cost-sag
53:42
anything you can just appreciate
53:43
everything straight line over 27 and a
53:44
half years
53:46
um less than 100k sure yeah you can do
53:49
it
53:50
all right next question i think the
53:52
questions keep on growing so i guess
53:53
that’s good
53:55
and we’ll cut it off in i guess in 10
53:57
minutes and then we can kind of do
53:59
10-minute breakouts and wrap up so you
54:00
know i definitely appreciate you taking
54:02
the time brandon we
54:03
you know we’re very appreciative of that
54:05
yeah it’s been fun all right if i buy a
54:07
very old building is there any
54:09
uh assist segregation sorry cost
54:12
aggregation what they mean
54:13
still available even if it’s a very old
54:14
building yeah so so when you buy
54:17
a when you buy any building you get the
54:20
new basis
54:21
at your acquisition price and you get to
54:22
cost segregate that basis
54:24
so the building could be a thousand
54:26
years old and just stone
54:28
i guess because that’s how old that
54:30
that’s what that building would be made
54:31
of
54:32
and you could cost that the
54:33
thousand-year-old building so it doesn’t
54:35
really matter how old the building is
54:36
you can cost second now
54:37
will certain buildings in certain ages
54:39
provide different results yeah
54:41
absolutely
54:42
um but you can still do it all right
54:45
so let’s go into a little bit of a
54:46
lightning round mode right let’s try to
54:48
see if we can kind of maybe bang out the
54:49
bus let’s kind of help get everyone’s
54:50
answered so
54:51
oh yeah i’ll try to speed my interest oh
54:53
no your answers are doing great it’s
54:55
probably me reading as well so
54:56
uh um all right so this one to summarize
54:59
it basically if
55:00
you have a couple one’s a high w-2 job
55:02
earner another one is a low w-2 job on a
55:05
part-time basis
55:06
um and they’ve met the 75 750 hour uh
55:09
hour requirement combined can this
55:11
couple claim to be a real estate
55:12
professional status
55:13
and offset passive income
55:16
uh uh yes yeah yeah
55:20
so so if if if spouse b
55:23
who has the low w2 income because it’s
55:26
part time
55:27
and spouse b meets the our requirements
55:30
but for real estate professional spouse
55:32
a does the material participation yeah
55:34
you can combine hours for material
55:35
participation so
55:36
you can use real estate professional
55:38
status in that example
55:39
if one spouse does a 100 hours and the
55:41
other one does 650 does that count
55:44
no it’s not combined because one spouse
55:46
has to achieve real estate professional
55:48
on their own
55:49
only for material participation purposes
55:51
can you combine ours
55:53
got it all right uh next question can
55:55
you talk about the taxes incurred when
55:56
investing in syndication as an lp using
55:58
a
55:58
self-directed ira um so
56:01
is it not recommended to do so yeah
56:04
so you know you when you invest in a
56:07
self-directed ira
56:08
when you invest in a retirement account
56:10
what you have to be careful about is uh
56:12
ubit tax exposure
56:13
now um self-directed iras are subject to
56:17
ubit and udfi
56:19
solo 401ks are not subject to ubit but
56:22
they
56:22
are subject to udfi which makes them
56:25
subject to ubit on leveraged investments
56:27
which is often where people get confused
56:29
so self-directed iras
56:31
if you are investing with a
56:32
self-directed ira uh you could have some
56:35
ubit exposure
56:36
um thanks to the udfi component
56:40
typically rental real estate is not
56:41
going to be subject to you you bit
56:43
that’s unrelated to business taxable
56:45
income it’s not gonna be subject to that
56:47
but the udfi the unrelated debt finance
56:49
income because of the leveraged
56:51
investment
56:52
what it does is it triggers ubit income
56:55
so a self-directed ira could
56:58
pay ubit tax just like a solo 401k could
57:01
pay ubit tax
57:02
in most cases the taxes are relatively
57:04
minimal
57:05
um and i think that from an effective
57:10
rate perspective it typically comes out
57:11
maybe a little bit about the same
57:13
as if you’re investing on your own so
57:16
all right
57:17
next question if you were invested in a
57:18
limited partnership and they purchased
57:19
homes in an opportunity zone and not
57:22
in an opportunity zone so i guess they
57:23
purchased homes in both some
57:25
opportunities on some not can they use
57:27
the tax benefits from the homes in the
57:29
opportunity
57:30
zone or do they all fall under the same
57:32
category of no benefits
57:33
well so so the the fund that you invest
57:38
in
57:38
has to be a qualified opportunity fund
57:40
so you
57:41
anybody can go invest in qualified
57:43
opportunity zones but it doesn’t mean
57:44
that their investment’s going to
57:46
qualify for any sort of tax benefits
57:48
they have to set up a qualified
57:50
opportunity fund
57:51
which is a little bit of a different
57:52
process a little bit of a different
57:54
capital raising process
57:56
so i hope that that answers the question
57:57
so maybe but it depends on if they’re a
57:59
qualified opportunity fund
58:02
all right next question do you advise
58:04
new construction developers and if so
58:06
in what ways has your firm been
58:07
strategically beneficial for such
58:09
developers
58:11
um yeah i mean we we we have developers
58:14
and builders and flippers that we
58:15
advise all the time a lot of times with
58:18
developers flippers and builders
58:20
it’s more about entity structuring and
58:22
the timing of recognizing
58:24
receipt of income and the timing of
58:27
expenditures that’s where we’re going to
58:28
kind of gain the tax code a little bit
58:31
and more so the the services that were
58:34
typically the core services that we
58:35
provide those folks
58:36
are going to be the accounting services
58:38
making sure that we’re on budget for our
58:40
projects giving you kpis and financial
58:42
information you need to make decisions
58:44
and
58:44
move things along all right next
58:47
question uh where do you advise logging
58:49
time
58:50
towards real estate tasks yeah good
58:52
question so
58:54
there’s a you can do it however you want
58:55
you can use a google calendar
58:57
you can use t-sheets you can use toggle
59:00
t-o-g-g-l
59:02
you can use a handwritten notepad most
59:05
of our clients use google sheets because
59:07
it’s a it’s an excel spreadsheet
59:09
everybody knows how most people
59:10
actually ran into a person the other day
59:12
that said that they didn’t they’ve never
59:14
used excel
59:15
and he was like mid 60s i was like that
59:17
is incredible
59:19
that is honestly i don’t know how it’s
59:21
incredible so but
59:22
most people know how to use excel so use
59:23
google sheets because google sheets is
59:25
an iphone app as well
59:27
um and and can you can just do it on the
59:30
fly
59:30
that’s what most of our clients do all
59:32
right and as a former microsoft employee
59:34
i also got a shout out office station
59:36
also has an excel online version it can
59:38
be an app as well so
59:39
okay sorry yeah yeah let’s not forget
59:42
the microsoft
59:43
no no i’m just messing around all right
59:45
um next question from cario
59:47
uh what about deferred sales trust for
59:50
deferring capital gains
59:53
yeah deferred sales trusts a great great
59:55
way to defer capital gains i i like
59:57
deferred sales trust from the
59:58
flexibility perspective like if i were
60:00
to if i were
60:01
ever to sell my cpa firm for example
60:04
my basis is zero dollars so whatever i
60:06
sell it for is also my capital gain
60:08
i might look into using deferred sales
60:10
trust to spread that capital gain out
60:12
you can do the same thing with stock
60:13
rsus anything like that
60:16
you can also do it with syndicates um
60:18
the gain has to be big enough though i
60:20
mean you need probably a minimum 300 000
60:22
gain to substantiate the cost of
60:26
structuring one of these things these
60:27
things and running one of these things
60:29
but uh but yeah i mean you can do it and
60:31
it’s a very it’s a nice vehicle it’s a
60:33
nice option to have and
60:34
it’s one of our exit strategies that we
60:37
talked about with uh
60:38
on our content with our clients nice all
60:41
right next one’s shout out
60:42
basically uh paladin put a make a post
60:44
basically there’s a link in the chat
60:46
to get brandon’s ultimate guide to tax
60:48
planning so
60:49
definitely if anyone’s interested
60:51
everyone should everyone should be
60:52
interested
60:53
go ahead and go grab it please yeah just
60:56
just so you guys know about it it’s you
60:57
know it’s like
60:58
30 it’s over 37 pages basically brandon
61:00
talks about
61:01
like all kinds of things like i’m just
61:03
looking at the table of contents right
61:04
now and it’s like
61:05
uh not only is it like how real estate
61:08
income
61:09
income is taxed but it’s like short term
61:11
versus long term rentals cost
61:12
segregation
61:13
100 bonus depreciation and why that
61:15
matters
61:16
can you deduct the losses on your
61:18
rentals that you create
61:20
um you know all kinds of different
61:21
things so there’s like there’s probably
61:23
like 20 different topics in here so
61:25
it’s it’s a huge guide uh definitely
61:27
appreciate brandon putting this together
61:28
and
61:29
yeah offering this to our to our
61:30
audience and everything
61:32
no problem so i guess that’s a wrap so
61:36
thank you very much brandon that was
61:37
valuable i learned definitely many
61:39
things i’m sure everyone else in the the
61:41
the
61:42
call got some value from that so really
61:44
appreciate it
61:45
um hopefully brandi you can stick around
61:48
we’re gonna basically just split up
61:49
into random groups and someone’s going
61:51
to get the the special luxury of being
61:54
in the random group with you and maybe
61:55
pepper you have some questions or get to
61:57
know you one-on-one right they start my
61:58
clock
62:00
all right so we’ll do that for like 10
62:01
minutes and then you know wrap it up
62:02
right now anything else
62:05
we’re gonna get to the breakfall rooms
62:06
and then we’re gonna are we planning on
62:08
coming back here first or we’re
62:09
not is that the plan are we just gonna
62:12
take it off
62:12
the same things yeah sure well if i
62:15
don’t we don’t have to do it
62:17
i don’t know how it works but if i don’t
62:18
see you guys like as we come back thank
62:20
you so much for having me i really
62:21
appreciate it and also thank you for not
62:22
asking ppp and
62:23
eidl questions i’ve heard of cpas that’s
62:27
all they’ve been living breathing lately
62:28
oh yeah it’s been awful yeah all right
62:31
well
62:32
thank you very much brandon definitely
62:33
appreciate it we’ll post a link to your
62:34
to your company website as well
62:36
thanks really appreciate it okay awesome
62:40
about to send everybody to a room here
62:42
so uh we’ll be going
63:00
okay
63:21
thank you
63:35
thank you
63:56
uh
64:24
okay
64:38
uh
65:06
sure
65:20
okay
65:34
me
66:02
so
66:30
crush
66:58
see
76:18
okay
77:00
c
77:11
powell i feel like you’re uh the wizard
77:13
behind the curtain or something
77:15
i know i feel like i got like two
77:17
computers here like i never work on my
77:19
two computers
77:20
like get all this like two computers i
77:23
got like facebook up here and i got
77:25
slack going on there
77:28
nuts so
77:31
let me see you know i’m just going to
77:33
kind of close it out and everything here
77:35
um i think everybody’s probably back
77:38
here we just wanted to again thank
77:39
brandon for his time
77:41
and uh and everything in his education
77:43
and all the
77:44
great bits of knowledge that he gave us
77:46
um we’d certainly you know in the future
77:48
brandon we’d love to have you come back
77:50
and you know talk about any particular
77:52
topic that you felt like talking about
77:53
as well
77:55
again we do this every two weeks so
77:56
we’re looking forward to have everybody
77:57
back on in two weeks
77:58
i think our plan is to have um go over
78:00
financing and
78:02
the changes rules that uh you’ve seen in
78:04
multi-family financing
78:06
um if you want to you know people will
78:08
share their emails and things like that
78:10
inside of chat
78:11
you can also reach out to me if you want
78:13
to get
78:14
the brandon’s ultimate guide to tax
78:17
planning
78:18
i have that available too as well and
78:20
i’ll put that link here
78:22
that’s not the right link okay so just
78:25
reach out to me powell at multifamily
78:27
masters happy to get that to you as well
78:30
okay other than that i think we’re great
78:32
everybody thanks for joining
78:33
thank you very much brandon and like
78:35
paul said next one will be anton matley
78:37
with peak financing talking through
78:38
debt questions so come with your debt
78:40
question just like you guys brought all
78:41
the hard cpa questions
78:43
let’s talk about that next time awesome
78:45
thanks everybody
78:46
all right thank you