How the New Tax Code Affects Your Real Estate Investments | BP Podcast 269


this is the BiggerPockets podcast show
269 you’re listening to BiggerPockets radio simplifying real estate for
investors large and small if you’re here looking to learn about real estate
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your home for real estate investing online what’s going on everybody i’m
scott trench co-host of the BiggerPockets podcast here with my
co-host mr. Brandon Turner how’s it going brandon man I’m fantastic
how you doing I am doing great although it’s a 9 degree day here in Denver
Colorado Wow a little different than why a little bit different for for surfing
trips this week already though you know it’s not bad it’s been good
weather I think I think I’m actually gonna go on a business trip to visit
Brandon here in the next couple of days yeah we actually when this show comes
out I think you will have already been hanging out here but we’ll see anyway
what’s up everybody so today’s show is all about taxes which everyone just
turned off their podcast oh I don’t want to hear about taxes but no today is
important because there were a lot of big changes that happen recently well
under the new tax plan that was just announced and today we’re actually lucky
to sit down with two CPAs that we look up to quite a bit around BiggerPockets
and they uh they dish out the dirty details about what’s all involved and
how it affects you guys so it’s a it’s really really good good information
today yeah there’s a ton of detail on the changes and how they’re gonna impact
various different investing strategies what rumors kind of were going around
about some changes that didn’t take place and so those strategies aren’t
changing so there’s lots of information on both sides of this I think that’s
really important and directing your strategy going forward one thing to note
is that much of what we talked about today
does not affect what you’re going to be filing in 2017 so that a lot of these
changes are going to be taking place up January 1st 2018 or later there’s one
exception yeah though the one exception I should super super important it’s
about the way that what is it like changing from 50% bonus depreciation
anyway you guys to hear all about it because it listen up but like Scott said
a lot of the stuff doesn’t take place until later but anyway yeah no I
I learned a ton on today’s show you know sometimes shows are very inspirational
they’re like stories of people who are doing stuff and then sometimes you just
become a whole lot smarter after listening
so today is one of those you get really smart so and one thing I’ve excited
about is a little teaser is I think a lot of entrepreneurs hat must have this
question at least you and I did but we’ve been too afraid to ask it like
maybe a matter of public setting which is what happens when you have a business
that just fails doesn’t produce any revenue and you’ve put a lot of expenses
into it can you write that off or not what you know how’s that work out like
and they talk about when you try to sell wooden sunglasses online for a year and
end up selling hardly any yeah I actually have a Barry wooden sunglasses
I got them for free that’s why probably reason you didn’t become a bigger pocket
someday will have wooden sunglasses for sale because they’re pretty legit anyway
what are you that secret would it ruined your great fun all right before you know
the rest of the show let’s hear today’s tip short and sweet
today’s quick tip is taxes are important tax planning and knowing what to you
make sure you get the most money out of your taxes and back and all that good
stuff so we actually put the tax book on sale I think it’s 20% off right now up
until tax day so the book on tax strategies for the savvy real estate
investor written by Amanda Hahn who is one of our guests today is on sale at
BiggerPockets comp such store until a tax day but get it now because it’s one
of those books that it’s hard not to make back the cost of a book it’s like
well like 15 20 bucks or whatever like it’s like really hard not to make that
back a hundred fold over your life if you learned just one tip so it’s stupid
not to own it go on it get it on sale right now bigger pockets a store and
that book was written before the tax changes that have taken place however it
is not a specific tactical book there are specific tactical discussions in
there but what that book will give you is a fundamental approach of how to
manage your business how to set up your accounting that kind of stuff so that
you can apply those fundamentals in a way that enables your accountant to do
things much better pick a good accountant that kind of stuff yeah and
there’s some cool bonuses that come with it as well when you buy it on bigger
pockets so check it out now I think we should just jump into
this thing I want to I want to hear about taxes that sound good to you Scott
sounds fantastic alright I mr. Brandon
miss Amanda Han how you guys doing I used Amanda’s last name by not yours
Brandon Brandon yes so welcome to the show you guys have uh you know been on
the show before but today is an important time of the year because it’s
tax time it’s like everyone’s favorite holiday that lasts like four months and
so we’re going to go really really deep and boring into taxes we’re actually
gonna read the tax code for like an hour and a half before we get into this thing
and then we’re gonna talk I’m totally kidding we’re gonna try to keep this
light fun and helpful I mean it’s kind of our goal today is like what do
investors that are listening to this need to know today that’s gonna help
them this year going forward tax code stuff all that so with that before we
get any further I want to make sure people know who you guys are so maybe
Amanda you want to go first let us know who you are what kind of your story is
and then we’ll move to Brandon and find out the same sure I guess ladies first
thanks for having me back on the show really excited to be here with all of
you flying gentlemen my name is Amanda Hahn I am with Keystone CPA and were a
boutique small firm located in Southern California and we specialize in working
with real estate investors on how to save money on taxes and make best use of
their funds whether it’s cash or retirement investing outside of that
outside of my time at work I also am a real estate investor myself mainly my
stuff is the boring long-term holds we have clients that do also just of in
terms of syndications fix and flips wholesale but I’m a pretty boring
investor in that you know it’s strictly long term holds because my passion
itself is actually still in tax and the planning side of things although I love
having real estate as one of my vehicles and I’m very fortunate to be able to see
all the inside detail to our clients numbers and be able to kind of mimic
what it is that they’re doing so excited to be here lots of new things to talk
about and looking forward to the next 30
minutes or an hour cool Brandon Brandon Hall I run the real estate CPA
we’re a virtual CPA firm we work with solely real estate investors so similar
to Amanda where we’re exclusively focused on the real estate niche I also
invest outside of the tax realm so do hold my own rentals and then I’ve got a
Capital Group that we just started middle last year with a partner of mine
so we’ve been investing in some larger syndicates and kind of expanding our
knowledge there which is cool because then I can go and talk to our clients
that are doing the syndications and talk more on a one-to-one rather than just
purely from my wall this is what I’ve seen now it’s this is like done so let’s
really talk about it cool all right awesome
I was going to say you know we get a quick overview of the changes that
occurred in the new tax bill maybe and talk about that for a few minutes and
kind of go through the high-level changes and how they might impact real
estate investors how quick is quick let’s do it let’s see if we can do it in
five minutes or so all right Amanda do you want to start or do you want me to
start you can start okay all right all the pressures so there are lots of
changes I guess for me the two biggest ones are the three biggest ones would be
the new pasture reduction that’s that’s for sole props sole proprietors LLC’s
and S corporations we’ve got one hundred percent bonus depreciation so that’s up
from fifty percent bonus depreciation and then we’ve got the business interest
limitation and I’m thinking that the business interest limitation is probably
one of the bigger negative impacts it’s going to be affecting a lot of people
even though there’s a huge exclusion if you’re earning less than 25 million
you’re excluded but then there’s an exclusion to the exclusion which
subjects a lot of what I think a lot of real estate investors even small-time to
the new business interest limitations so all right so that’s yeah I want to take
each of those and go a little deeper on those three if we could so what what is
pass-through deduction maybe we start there the first one you said what is
that what does I even mean do you want take that Amanda sure so that well the
boring term for that is section 199 a for those of you code heads who want to
write it down what does that mean like you think
Brandon essentially it means that for certain types of income that we earn as
taxpayers that the first 20% of net taxable income could be at zero tax rate
okay which means if you made $100 of the right type of income then maybe $20.00
of that would be at no taxes at all so tax free income essentially one of the
biggest myths or misconceptions we see is in the media you hear a lot about
this flow-through entity tax benefit flow-through deduction so one of the
questions were getting a lot especially now and also at the end of last year is
do I need to set up an entity do I need an escort do I need an LLC to take
advantage of this you know 20% tax free money and the answer like Brandon
mentioned earlier is no you don’t need to have a legal entity is strictly
depending on what type of income so one of the greatest things for investors for
those of us who own rental real estate who are doing fix and flips even
syndications who are any acquisitions fees these all potentially qualify for
this deduction or tax free treatment whether or not you have a legal entity
and that’s an important point too because we’ve had a lot of clients ask
us hey should I change my entity structure like C corporations they have
a 21% pastor rate that sounds awesome well see Corpse are still subject to the
double taxation so we’re still saying no this this pass-through deduction that
Amanda just described allows you to pretty much get a freebee deduction on
your business income and you don’t need to go set up an LLC in order to do that
like like Amanda said you can be reporting on Schedule C or Schedule E
and still qualify for the deduction so let me put this into like a hypothetical
sort of scenario let’s say I as an investor I’m gonna make I don’t know
let’s say fifty thousand dollars next year on on rental income just from cash
flow and that’s all the money I made next year it’s fifty thousand dollars in
cash flow are you saying that like the first 20 of that we just knock off and
now I only pay tax on 30 is that essentially the idea essentially
potentially so if you’re talking about the key definition is what we’re talking
about is taxable income and we all know as real estate investors when you say
you you’re making twenty thousand cash flow the reality is you’re probably
having zero or very low taxable income because from your cash flow
we’re claim Home Office travel depreciation right
but assuming that cash flow equals your taxable income then you’re exempt will
be correct basically 20% of that 50,000 would be taxed at zero rate one of the
reasons this particular tax change or loophole is really beneficial to those
of us who own rentals and also again it does apply to people who are in the fix
of fix and flip business – so the active real estate one qualify it will
qualifying question on this so suppose I suppose using this example of $50,000
does my taxable income now go down to $40,000 or am I still do I still have a
taxable income as my tax bracket gonna be calculated based on that forty or
fifty thousand dollar number right so from what we understand it’s taxable
income minus your 20% deduction so your taxable income will be fifty or I guess
gross taxable income would be fifty and then and then you would have the 20%
deduction of ten and then you would have the the 40k deduction but that’s also
assuming that the $50,000 is the qualified business income so your net
operating income after depreciation amortization interest taxes all that
stuff so at the end of the day what are we reporting on the tax returns as net
income if that’s equal to taxable income then yes yeah you’d pretty much be
paying taxes on 40k instead of 50 okay awesome let’s talk about the second
point you mentioned earlier which was moving the increase in the depreciation
schedule advancing it from fifty percent to a hundred percent bonus depreciation yeah I can just add a little tidbit to
that this is very important I’m really glad that we’re doing this podcast today
King because it does also impact those individuals who have not yet filed 2017
tax returns so before September I think it was towards the end of September 2017
okay so January to September of last year what we were allowed to take was a
50% bonus depreciation what does that mean well if you’re running an Airbnb
business and you bought new furniture for your business you were potentially
able to write off up to 50% of that purchase price immediately and then the
rest you would depreciate over the life of the asset effective in September of
last year as part of the tax reform they’ve upped that deduction now to 100%
so in that example if you spend a thousand dollars on furniture and
fixture you’re writing off the entire thing and it’s really important for
those who haven’t yet filed their tax returns to know that because if you’re
providing information to your CPA now I know sometimes we say well you know I
bought it some time last year let’s just use middle-of-the-road
June well that could mean you’re losing out on the bonus depreciation so you
want to be pretty accurate about your dates awesome so that that’s really
helpful Brandon you wrote an article maybe three
four or five months ago about the be a RRR method which is a buy advertised
rehab ret refinance repeat and the reason you suggested that is because you
wanted to begin marking the property prior to making some of these repairs so
that you could potentially have the option to write them off or I guess get
this accelerated depreciation schedule or call expenses does that strategy
change in light of this new rule no it doesn’t so that that strategy by the way
most of our clients wait until the very very end of the rehab to advertise their
property for rent so all they’re doing is they’re saying hey mr. IRS agent my
advertisement date occurred after I was done with the entire rehab so what we
were saying is just advertise it right upfront then do the rehab you’re not
gonna place into service the day that you advertise it because you still have
to do a big rehab but at some point along the line we might be able to argue
that the property is now in service and now some of the costs become operating
costs rather than capital improvements that doesn’t change with the 100 percent
bonus depreciation well I guess no that’s that’s not going to change
because the the hundred percent bonus depreciation is going to be focused on
the capital improvements and in just a quick note about that we can’t go buy a
rental property and deduct the cost of the rental property the reason for that
is 100 percent bonus depreciation applies to property with a useful life
of less than 20 years so rental property has a twenty seven and a half year
period but what you can now deduct is like carpeting if you get your driveway
redone if you do any sort of landscaping like say you take down a tree and plants
a new one that can all be 100 percent expensed now as well starting September
2017 and going on to the future I just wanted to add to
that and that’s a great point Brandon we I do get that a question sometimes from
clients you know if I bought a property for $100,000 can I write off a hundred
thousand dollars now with the bonus appreciation and I wish the answer was
yes unfortunately it’s no however just another kind of layer of
strategy some of our listeners might be familiar with the concept of cost
segregation and that’s essentially saying instead of Tay saying the whole
thing is building we’re gonna accelerate this purchase price of a hundred
thousand into carpet flooring and things like that so what you can do is you can
combine the two strategies and say well by doing a cost segregation I’m moving
some of that into one hundred percent deductible item so that could be an
extremely powerful tool as well and on that note I’m glad you brought up cost
segregation so anybody with a relatively large property especially if you’re
syndicating any sort of deal cost segregation is going to become extremely
important for you to take advantage of in the first year you want to apply that
cost SEC study to the first year that you buy the property because at that
point all the components in the property are new to you
so bonus depreciation only applies if the components are new to you so we
wouldn’t wanna do it in the second year apply that cost sex study to the second
year because at that point we can’t qualify for the bonus depreciation so
big big benefit there to cost SEC I guess another point Amanda maybe you
have some thoughts on this the 1031 exchange provisions have been modified
to only include real friend Amanda’s laughing yeah and she knows where I’m
going with this the 1031 exchange provisions have been modified to only
include real estate sorry real property so then the question is if I do a cost
segregation study where I specifically do the study to identify personal
property components that I can depreciate over a faster timeframe since
I’ve self-identified personal property and personal property is no longer
included in 1031 exchange provisions when I do a 1031 exchange can I roll
over the the gain associated with the personal property and III don’t I don’t
know I thought I know that we’re waiting on technical guidance to come how to
really see but I don’t have a man to had any thoughts on that
yeah is Emmie really interesting you bring up that
point because even yesterday I was having a conversation with a couple
different colleagues I actually won a cost segregation expert another one was
a 1031 exchange intermediary someone who Brandon Turner you’ve worked with in the
past and you know it’s kind of the three sides of the coin we’re all talking
about it from our perspective I think we are an agreement that ideally you know
if you had broken out accelerate property we still want that to be part
of 1031 exchange but you know as of today’s and unknown that does not mean
we should not look at cost segregation though because the reality is even if
you have accelerated depreciation breaking it out into furniture and
fixture and carpeting what you can potentially do is exclude that from the
1031 exchange right so because if you’re gonna break out property you sell it
well how much is the carpet gonna be worth how much is the fridge gonna be
worth right those things don’t actually appreciate in value so even if they said
that’s not a part of the 1031 are we really gonna end up paying a lot of
taxes probably not because youth carpet is not really valuable and just for the
listeners that are maybe a little step behind here in the conversation the the
reason this is has a lot of an impact is because when you fully depreciate
personal property like this you’re not expense you’re gonna have to
reclaim that decree XI ation when you go and sell the property and so one way to
avoid that or defer that tax is to 1031 exchange just for some folks out there
who might have been not following this whole thing yeah recently was so I did a
1031 exchange at man that you’re very aware of that like was at last I don’t
know October or something like that I sold my 24 unit property and we cleared
a couple hundred thousand dollars in profit but because I’d done a cost
segregation study I had to then go and reap it if I if I was gonna pay tax I
had to pay all that back and I think we figured I was like a hundred and twenty
grand a toe in taxes if I didn’t do a 1031 so then I had to go do a 1031 and I
did it and I bought two more properties because of it so anyway there’s a
there’s a whole fun story there and maybe I’ll tell it someday here in the
podcast but today is not that day so let’s move to the third thing that you
mentioned there so we talked first of all the the bonus depreciation and we
talked about the other thing but what about the business interest
limitations of the guys wrote know what was that yeah so a lot of this was
breezed over even by me initially but after we did a second dive we realized
that it’s probably gonna apply to a lot more people than we originally thought
so business interests limitations what it is it’s a 30% limit on pretty much
your operating income at least for the next four years I think
it goes through 2022 so what it is it’s a 30% limitation on what they call EBIT
da so earnings before interest depreciation or interest depreciation
amortization taxes I think that was it yeah so if I have like $10,000 net
operating income before I take into account interest taxes depreciation and
amortization I am now limited to a $3,000 interest deduction so 30% of my
debt operating income you’re excluded from this if you have revenue annual
revenue of less than 25 million so that’s like almost everybody I’m
assuming that’s listening to this it’s definitely me so but but there’s an
exclusion to the exclusion and that’s probably not the right way to say it
there’s an exception to the exclusion that basically says if you’re running a
tax shelter then that 25 million dollar allowance does not apply to you and the
interest limitation at that point does apply to you and in the past a tax
shelter has been a bad thing it’s it’s an entity that’s set up purely for tax
avoidance or tax evasion there’s no real economic benefit but in this new code
section a tax shelter simply means an entity in which more than 35% of the
ownership is held by limited partners so if I’m a syndicator I have probably
given away 60 to 70% of my entity to my limited partners my investors all of a
sudden that subjects me to this business interest limitation and all of a sudden
I’m scrambling to try to figure out how to not be subject to the business
interest limitation but this also applies to people that like like let’s
say I set up an entity and my dad comes in and he’s a private equity or money
guy or whatever but he takes a 50% stake of my entity it’s just me and him we’re
not doing anything big we’re buying like a little $50,000 homes
if he’s not actively involved in the business he’s limited in that case he’s
a limited partner in that case and all of a sudden I’m that entity this small
entity is now subject to the business interest limitation so it is going to
apply to multiple people not just the bigger the bigger fish can we go through
a specific example for maybe maybe someone who’s syndicating on a $500,000
deal with two or three partners can you tell how how would this how would the
how would our you make up the numbers how would this apply to a listener for
bigger pockets do you want doing me to take that Amanda sure okay so if I like
let’s say that all four of us partner and we all owned a 25% stake and let’s
say that Scot and Brandon are the limited partner so they’re bringing the
money to the table Amanda and I are hustle and we’re flipping and
wholesaling and whatever if if Scott and Brandon are not actively involved in the
business then they could be classified as limited partners in the business and
because your combined ownership is greater than 35 percent this business is
now classified as a tax shelter per this section of the code which means that we
are now subject to the business interest limitation so any any amount of net
income that we receive we now have a 30 percent limitation on on that a 30
percent Interest limitation on the net operating income so we net $100,000 and
we have $50,000 in interest expenses well because we netted a hundred K we
can only take a 30 K interest limitation so the net 20 K of our interest just
carries forward until it can be utilized we’re not gonna be able to apply it this
year yeah this is really interesting because you know for larger deals
syndication specifically speaking they’re almost by definition the
investors are almost by definition going to be passive right if most indications
you’re going to have 100 investors you’re not going to take a vote of 100
people every time you fire manager or higher property manager so that does
become an issue just by definition of most people are going to be passive I
think the trick or the strategy going forward is to look at well how can we
shift the definition and have less in expense so maybe in the past you you
took on a lot of private lenders bank financing that you generated a lot of
interest expense but instead of having private lenders maybe they become your
equity partners or you know they give some sort of a profit share so that it’s
no longer under the definition of interest expense therefore being limited
so you know I think there will be a lot of more planning or new ways to look at
how we structure these types of joint venture agreements my brain is spinning
I’m thinking already about how to how to get out of this like for example could
you do like a preferred equity or preferred return something like that
that way yeah that’s exactly yeah that’s the thing you’re getting you know you’re
paying me or I’m paying you interest instead of giving you equity spilitt
you’re gonna get more participation on the capital gain down the road or
something like that and we’ll have more guidance come out on this right now what
we’re telling our clients is just start thinking about if I’m going to engage in
a new partnership what how am I gonna write that operating agreement to not
clearly indicate that somebody is a limited partner in my entity right so if
we’re coming back to what we were talking about where all four of us are
partners I’m probably going to Scott and Brandon and saying hey we need to build
a paper trail of you guys actively participating in the business at this
point and they’re there is there is an exception so so real estate businesses
can elect to be treated as a real property trade or business Amanda did
you want to touch on that at all right well I mean I like you said it’s just
that you can make an election to be excluded from this the caveat then these
are limited to certain types of depreciation calculations that’s
different from the norm so that is an analysis that you kind of have to go
through I imagine I mean for most real estate investors you know we’re looking
at accelerated depreciation you know write-off as much as possible so that’s
going to be a real thing you have to kind of work the numbers through and say
does it really make sense for me to you like to know like that of this
limitation so to expand on that if I make an election to be treated as a real
property trade or business then I’ve elected out of the business interest
limitations but the the downside is that I’m no longer eligible for the bonus
depreciation so 100 percent bonus depreciation we just talked about I
can’t take that anymore but I can’t take my full amount of interest
okay so okay so we just talked about those three things Amanda is anything
you want to point out as well so I want to give you like anything that stood out
to you is in besides those as influential or impactful for our
listeners from the new tax code yeah I think kind of going taking the step
further beyond the 100 percent bonus depreciation and there’s also section
179 which essentially is the same thing that allows you to write off a hundred
percent of an asset that you’re purchasing in the past it’s always
excluded real estate income and under the tax reform for the first time it is
now also available to real estate again not available for the property itself
the purchase price of the building but it is eligible for a lot of other things
that you would otherwise capitalize for non residential real estate and also
this is pretty significant for our short-term real estate operators
dormitories apartment you know student housing Airbnb so you know similar to
the the bonus depreciation the 179 allows a deduction of up to believe it’s
a million dollars now another one that I thought was interesting was an
opportunity zone credit so that’s a new thing that came out I don’t know if you
guys remember many many years ago there was the go zone credit where you’re
invested in property you were actually allowed to write off up to 50 percent of
the purchase price of a real estate this is something a little bit similar to
that now the government is going to identify what they are considered
Opportunity Zones based on our understanding this is going
to be low-income areas or or errors areas where they’re looking for real
estate investors to bringing money to you know to build up the infrastructure
and the opportunities though what it’s going to allow people to do is if you
wanted to sell your stocks for example you have Apple stocks or Tesla stock
since gone up significantly in the past you’d have to pay the
capital gains you couldn’t do a 1031 exchange to move it into real estate
however if you are interested in buying real estate in the opportunity zone or
if you were interested in using that money to
in the syndication where the real estate is in an opportunity zone then you can
potentially sell your stock and pay no capital gains tax defer it almost like a
1031 exchange as long as you’re reinvesting your money into the
opportunity zone areas and the other part that’s extremely interesting for me
was that currently it looks like if you actually held on to that opportunity
zone asset for over ten years then your capital gains goes away permanently so
there’s no more capital gains at all from the sell of your initial asset so I
thought that was something very interesting we haven’t really seen any
deals come through yet in the opportunity zone because they’re still
trying to identify what those areas are but I bet when they do there’s gonna be
a lot of real estate investors flocking over there to buy up all the real estate
there you go cool yeah I’ve never heard of anything like that at all and that’s
that’s fantastic I would love to hear like from you guys after one of the one
or two of these have come through of like how that works in practice
yeah yeah I mean we’re just hoping those are actually good deals several years
ago when they had the go zone well you know with from the hurricane in the Gulf
we had clients that had really really great tax savings again writing out 50%
of the purchase price of an investment that’s huge but some of the issues is
you had you know not-so-good syndicators and the deals actually weren’t so good
so that’s where we’re hoping for this time around good tax savings and good
real estate investments so let’s go summarize where we’re at now is there
anything first of all when do when do the all the changes that are happening
all these tax changes when do they take into or come into effect and is there
anything that our listeners should be doing now to prepare or to to better
their situation because of them yeah most of them were taking effect January
1st 2018 at this time I mean Amanda might have some specifics I don’t really
have specifics we are kind of waiting on technical guidance to come out from the
Treasury before we really start like implementing some of this stuff but it’s
really just just getting familiar I mean if you’re running any sort of deal
management and that’s that’s all the way from the syndicators to the person who’s
buying a single-family it’s just getting familiar with the
different changes you don’t have to know the nuance like I don’t know the
technical details but understanding what a hundred percent bonus depreciation is
understanding what the business interest limitation is understanding the
pass-through limitation just make sure that you understand what these things
are and then we can start we can really start building things out the one the
one piece of advice that we give to all of our clients and we’ve always given
this advice but now it becomes even more imperative when you’re getting a rehab
done just make sure that it’s all itemized I don’t want you to send me an
invoice that says kitchen rehab fifty thousand dollars I want to know exactly
what went into that kitchen rehab down to the nuts and bolts you’ll have to get
like that detail but as much as as much as the contractor will allow without
throwing his hands up and getting really mad cool yeah I think on my end I would
just say the main thing to do is just keep that line of communication open
with your CPA I agree with Brandon Hall you know it’s it’s not up to the
investor to memorize all the rules I think even some of the stuff that we
talked about today it may or may not be actually finalized or in its final
format but the key really is just to keep your tax advisor updated you know
you’re buying a property you’re selling a property you’re getting to some kind
of creative deal you’re thinking of refinancing or relocating to Hawaii
these are things that you you want to talk to your CPA about way in advance so
that you can plan ahead you know instead of kind of knowing that you did
something wrong after the fact you know what I want to expand on that like that
that’s really like my biggest takeaway from all this is like you don’t
necessarily need to know all this stuff people listen to that right now a lot of
you guys are probably like well this is way over my head I don’t know what I’m
doing I know like you don’t need to know all this stuff just find somebody who
does know the stuff in other words hire the right person you know like I if I
could look back on my career and one of the biggest mistakes I made in my entire
investing was I waited until what two years ago Amanda to hire like like at a
CPA like to hire you like it took me like forever because I don’t I just was
arrogant I was like I don’t need a tax person come on taxes aren’t that
complicated but like I would I would recommend people like just put that in
your system build that into your team early on I mean even like maybe you’re I
don’t would you guys actually say the first property
should they have a CPA and obviously there’s some you know you guys are CPAs
but do you think your first property’s like when does somebody need that well I
mean for me I think it depends right that’s everyone’s favorite answer so I
don’t know that you you have you know if you have a first property do you need to
have a CPA it really depends on I mean it depends on how financially savvy you
are how much time you like to spend researching and things like that you
know we have clients who who make maybe half a million million dollars a year
you know if they have their one property first property should I hire CPA
probably if they’re not someone who’s financially savvy because you know if
they’re paying thirty seven thirty nine percent taxes they could be saving a lot
even with just one rental property right but if it’s someone that you know maybe
as an accounting background themselves not really making a whole lot of money
yet and just buying a first property with you know and pretty much strapped
for cash then you know you might be able to work through some of these with a lot
of great information on bigger pockets or you know podcast that you’re hearing
so I think it kind of comes down to the person than what they have going on –
yeah to follow up on that point kind of along the same lines if your analytical
I would say you could probably handle your first by yourself maybe even your
second you just have to make sure that you really catch everything because that
we always find that mistakes and people people that have done it on turbo tax
rate or even H&R Block and we’re always finding these mistakes what I would
recommend that you do if you’re unsure you pull up Schedule E or whatever
schedules you’re preparing just google IRS Schedule E pull up the PDF I think
you can scroll all the way down to the bottom and you can see the projected
hours that it takes for a non expert to fill this stuff out I think schedule is
like 80 hours I don’t think that it would actually take that long for you to
do that but just like something that you should keep in mind and then the other
thing too like we always get these people that have like really high net
worths and then they want to do their own
bookkeeping right it’s like man your time is so valuable don’t waste your
time doing this just offload it go focus on what you’re doing so in that case I
would agree the mandate yeah if you’ve got a high net worth and your times not
worth digging through everything offloaded as quick as you can yeah I
would I would generally anybody who asked me my opinion I will
always tell them like higher higher right Pete the right people right away
like I’m such a big believer in that cuz I’ve seen it I’ve seen myself fail at at
time and time again and that’s like the big lesson I learned like if I could sum
up 2,000 like the last couple years of my life it’s like hire the right people
right away so alright let’s move on and we’re gonna actually shift gears here
and head over to the the fun part of the show which we lovingly refer to as our
fire round it’s time so today’s fly around obviously these
questions on the fire on always come from the bigger pockets forums today
we’re going to be focusing on tax questions that people in our forums
asked and because they knew you guys were coming on the show and so we’re
gonna use this time to get some free tax advice of course you are not officially
any of them probably none of them CPAs so you know this is just general advice
right do you guys have any like disclaimers to throw out there you’re
not telling people exactly what to do how does that work yeah I would just say
we don’t want anyone to go to jail so before implementing anything do speak
with your tax advisor to come from the right action item nice okay well second
ah on the record yeah so I house I house hack this is not my question but it is
very I can relate to it very much I house hack in my duplex I’m learning
that the homestead tax exemption doesn’t apply to my full property since I rent
the other side out is there a way I can still qualify for the homestead
exemption without getting into trouble with the county and then just basically
how do I manage my what are some basic tax tips for people that are house
hacking how do we declare income what’s personal property what’s a business
expense oh okay so what’s the so if your house hacking
what’s the best way to account for everything I would say that you so
there’s one list if it’s a duplex one side of is your primary home the other
side of is the investment property generally speaking unless you’re going
to be selling the primary home portion soon improvements you’re doing to your
primary home really does not have a lot of tax benefits right so it’s kind of
like if I own my own home and I just want to make it beautiful great that’s a
personal preference it’s personal money that you’re spending on now improvements
you’re making to the duplex where it’s going to be rented out that definitely
is going to be you know we talked about depreciation bonus depreciation maybe
even in being it write-offs so it’s really important to make sure you’re
tracking those something that Brennan said earlier and we say this to our
clients to keep detailed record of what you’re doing we don’t want to see
$60,000 in improvements because that’s not very helpful but of the 60,000 you
know split out between carpet flooring and all those different things
so that your advisor can help accelerate and again this is important on the
portion of the duplex that is going to become a rental property okay so to
follow up with that the homestead exemption I think is where you sell if
you live in a property for more than two years as your primary residence you can
sell it for a tax-free capital gain without having to do a 1031 exchange and
that up to certain limits how does that work when I go to sell the duplex in a
few years so assuming that you did live in that property for at least two years
where you meet that the primary home expand exclusion then what you can
actually do is you can do a 1031 exchange and a 121 exclusion so we have
lots of clients who do that that they’re able to you know defer part of the gang
using a 1031 because technically this is a rental property but they can also sell
and take cash out of this transaction to the extent
that the gang was related to their primary home using the 121 exclusion so
it’s actually the best of both worlds and that you can combine those two
strategies together that’s fantastic yeah their next
question in a recent blog post and BiggerPockets they mentioned that the
new tax reform provides certain flow through business income with a 20%
deduction which we talked about earlier in the show which essentially makes
twenty percent of the profits tax-free does this apply to income as an
independent contractor like if you’re a real estate agent or that only w-2
earners or that like rental property income or that all of it if your taxable
income not to be confused with your AGI if your taxable income is below one
hundred and fifty seven point five K and you’re single then yes it applies that
you just take a 20% deduction on all qualified business income if your
taxable income is below three hundred and fifteen K and you’re married then
yes the 20% deduction applies to all business income if you run a service
based business so accountants attorneys brokers property managers real estate
agents and your income your taxable income is above those two thresholds so
150 7.5 and 315 if you’re married then no the 20% does not apply so service
based service based businesses get phased out
but I do want to add one thing to this one of the questions I think I did read
this on the forum unfortunately this thing this the 20%
benefit does not apply to w2 income so if you’re someone who’s strictly working
a job and you’re getting WT you know let’s say you work for Google you’re
getting paid a w-2 income of 100,000 this unfortunately does not apply to you
and like Brandon was saying that you know they are I don’t know for whatever
reason they don’t like CPAs and doctors and all that so if you’re a higher
income service provider then you are either being you know potentially phased
out or excluded from this benefit altogether a really interesting
real-world example we have a client who owns an assisted living house so he owns
the real estate I mean he also has beds and there where you know all their
patients stay and so for him you know he has two types of income he has rental
income and he has income from providing medical services so that example it’s
really important for him to track those two income very separately because there
is no limitations on rental income versus theirs you know on the service
medical service side it could be faith out or limited based on this 20% benefit
all right let’s see next one Scott your turn I forget yeah how about this one I
have several homes I’d like to put each of them into an LLC one LLC for each
house I would like to have an LLC as the holding company of all the other LLC’s
so I can just have one bank account where all the income and expenses would
go into and flow out of is that a good structure is that a practical one if
that you’ve seen before or do you have any advice on structure for business
with this many properties sure so obviously the more properties and the
more LLC’s that you add the more complicated it gets if you’re running a
series LLC you can likely get away with this by having one bank account in the
primary or the the overarching company but generally speaking even if you have
sub LLC’s if they’re not series based LLC’s then you would need to have a bank
account per LLC and that’s just from a liability perspective that’s not even
from a tax perspective you need to show that the business is actually operating
like a business so if you’re going to break it all up just understand that
it’s going to get really complicated really quick
clean you’re gonna have a lot to manage but this is the conversation that you
should be having with your attorney because it could be very worthwhile to
do just that the other caveat I would add is to make
sure you’re aware of all the fees that are required especially for any
investors in California as an example California recognizes series LLC’s as
different tax payers so in what you describe if you have a holding entity
and you have three babies underneath that that’s four entities in California
each subject to $800 annual fee so again you know like Brian was saying it could
get costly costly and complicated really quickly not to say it’s a wrong
structure but again you know from our end I always look at the cost benefit
how much benefit are you getting by having all this complexity and what is
the cost on a related question on that this is some that I give the advice all
the time when people ask me about C I mean LLC is I say talk to your CPA and
attorney but then the question I get back sometimes and it’s a really good
question who do I talk to first and what do I do if they disagree right like I
haven’t start that process I don’t I don’t think there’s a preference in
terms of who you speak with first okay what I often recommend for our clients
if they’re talking to me first or attorney first and if there’s a
disagreement what I recommend is getting on a conference call or a joint meeting
because then we can bridge the gap we want I want to know why is it turning
recommend all these what are actually the legal benefits and the attorney
probably wants to know what is the cost what is the tax issue associated and
that there at the end of the day we try to bridge the gap so that the taxpayer
can make a decision maybe somewhere in the middle right not having the holding
company with 10 subs maybe the holding company with 3 subs or something like
that where they get the asset protection but
you know not at the high cost of 10 $20,000 a year and in terms of like like
who should you talked to first I think it just depends on the personality of
your service providers like me personally I like the quarterback the
relationship so I like to make the introduction to the attorney and the
attorneys know what page I’m on and what work what we’re doing but it could be
vice versa too like if you go to an attorney and they like to quarterback
the relationship then you start there the key though is like Amanda said make
sure everybody’s in agreement before anything is executed we’ve seen
we have seen attorneys execute agreements and and and execute plans
with our clients and they have horrible tax consequences and if they would just
quote it drop this align literally a short email before they they executed
that we would have saved them a lot of money so just make sure that you do talk
to both before you do anything all right good answer next one I’ve
heard that in the new tax bill that home equity lines of credit and home equity
loans he locks and heals the interest is not tax deductible I’ve also heard that
it may be in some situations tax deductible or maybe not can we get some
clarification on that yeah oh good now we’re about two nice all right yeah so
he locks you can still take he locks you can still deduct the interest as long as
the loan proceeds have been applied to either rental or business use so that’s
the key you can no longer take a HELOC and pay off your student loans and
deduct the interest you can no longer take a HELOC and buy a vehicle and
deduct the interest you have to use it for some form of business use all right
so I can’t so I really want a Tesla I really want to test all right can I go
and call my Tesla a business expense cuz I’m you know let’s say I’m a real estate
agent or even just an investor I want to drive around look at property than in a
new car can I call my tests on that and then take the hundred thousand dollar
one hundred percent depreciation then this year can I do that why or why not
Oh or can I use a HELOC to buy that Tesla and then do that well there’s
nothing that says you cannot Drive a Tesla for your real estate business and
if your name is Brandon Turner I don’t see why you would not be required to
have one you know there’s nothing that says you can’t drive a Tesla or Mercedes
or a Hummer for your real estate business the question is just you know
is it is it reasonable that you would be needing to drive a car for business okay
so yes if you’re driving it for your real estate for your book for you know
any kind of business that you have as a realtor as an agent a syndicator
then yes if you took HELOC loan proceeds use that to purchase
a business you know a vehicle use for business
the interest is still deductible like Brennan said the only one the only time
it’s not deductible is if you’re using it to you know go on vacation or
something like that before your primary home in terms of the bonus depreciation
unfortunately with the Tesla it is not eligible for a 100% right off so you
know you mean if you paid $100,000 I didn’t know how much they cost but if it
was $100,000 it would not be an immediate write-off for it for cars
there are still certain limitations in terms of how much you can deduct every
year however I do believe if you were actually going to buy Tesla I do believe
there’s still tax credits for federal and the state if I’m not mistaken all
right so can we talk about how passive losses from real estate investing can or
cannot be used to offset income from other sources like invent other
investments or your job sure so we’ve I’ve gotten a lot of
questions on has anything around this changed and the answer is no so we’ve
still got the if you if your AGI adjusted gross incomes 150 K your phased
out of taking passive losses against your ordinary income that’s still all
the same so nothing along those lines has changed if you if you if your AGI
model technically its modified adjusted gross income but we always just could
AGI cuz our clients are like way over their heads if your AGI is between a
hundred thousand and one hundred and fifty thousand you can take anywhere
between zero to 25 thousand dollars in passive losses from your rentals so if I
my rental generates net income of ten thousand and then I take depreciation
and amortization and all the other expenses I’ve now got a two thousand
dollar loss I can probably take that loss if my incomes below one hundred and
forty five ish K what happens though is that if my in if my AGI exceeds 150 at
that point those losses become suspended so I can’t take those losses anymore and
then we’re talking about strategies that we can utilize to take those losses so
they might be buying better deals buying better property that cash flows might be
looping your spouse in as a real estate professional or maybe you qualify as a
real estate professional might be in vesting in a business as a passive
partner so that you receive passive income to offset the passive losses
there’s a lot of creative things that we can do there so I always tell people
don’t get depressed when you can’t take the passive losses and don’t not write
things off because you can’t take the passive losses right you still want to
write everything off because at some point we will be able to utilize those
losses they get suspended until we can offset them with passive income or
liquidation of a rental alright so this is this is one of the next questions
that we’re gonna ask the fire round but you just mentioned it here can you talk
about what it means to be a real estate professional and how to qualify for how
to qualify as a real estate professional sure so real estate profession what are
the most common myths that we hear about real estate professional is people under
the impression that they have to be a realtor you know get licensed do open
houses you know take people around and that’s actually not true real estate
professional is only defined in the IRS code okay and you don’t have to have a
license you don’t have to be showing real estate all that means is that you
have to spend at least 750 hours actively involved in real estate and you
have to be spending more time in real estate than all of your other non real
estate income activities combined so you know common examples we see would be
like a stay-at-home spouse right we have someone who’s out working and you know
kind of a middle high income earner and then we have another person who is a
stay-at-home spouse and then they own you know handful of real estate if their
income was over 150,000 generally they wouldn’t be able to use new rental
losses but now if the non-working spouse decides to take the active role in
leading up all the real estate transactions and that’s you know rentals
looking for more rentals you know doing wholesale being a realtor anything that
that’s actively involved in real estate now if she can qualify his real estate
professional then you can use the rental losses to offset the w2 income and any
other income of the other working spouse as well so it’s strictly and hours and
activities tests and it’s not related to any sort of licensing or you know state
requirement awesome all right my another fire around some I mean this is a really
good question I’ve always wondered this as well I’m currently looking for my
first deal if the deal fell through this could be first dealer million deal right
if the deal fell through during inspection can i still deduct all the
money spent on the deal a travel inspection cost whatever so we
personally would probably capitalize those costs and apply them to the next
deal instead of deducting them currently I don’t know if Amanda does anything
different but that that’s typically how we would approach that yeah I think
generally speaking that’s what we would do if this was a very first deal for
someone now on the other hand if you own a rental property you have another one
to contract and it fell through generally we would deduct that because
you’ve already started your investing business it does come down to a lot of
it does come down to risk tolerance level of the particular taxpayer you
know if it’s your very first deal fell through but you can show that you know
you’re in the flipped business and you’ve made tons and tons of offers
already this year and you know you’re someone who’s more willing to take the
risk then there are instances where we do deduct at all in the initial year
under the assumption that you are able to prove you’ve started actively working
in this business so this is actually really interesting point that I’d love
to follow up on with more general question about business so like if I
start a couple of businesses a year and all of them fail and none of them
generate more revenue than the expenses I put in you’re saying that there’s
you’re allowed to potentially capitalize some of these expenses into a future
business or how does that work for me as a as it may be a serial failing
entrepreneur that’s working a full-time job is rating some side hustles yeah no
so what I was kind of referencing was was related to rental properties right
so if I if I’ve gone through appraisals and inspections and the deal falls
through in general we’re gonna capitalize those costs and we’re gonna
apply it to the next rental property but if I’m doing like a business let’s say I
go to start a consulting business and it just never goes anywhere I can I can
deduct those costs it the key is going to be is your business in service so you
have to your business has to be open and and willing to accept clients or willing
to I don’t know buy flips like Amanda was saying in order to deduct those
costs until that point until you place your business into service you can’t
deduct those costs so what I could do for instance is say that I’m gonna
start a consulting business literally take no action and then I don’t know
deduct like a $2,500 a month mind a group fee or whatever
subscription or something like that I can’t do that but I could say I’m gonna
try to start a consulting business do a lot of advertising build out like my
platform and then just say alright well in 2018 I just didn’t get any clients
but I can still deduct it all in 2018 awesome interesting all right so let’s
uh let’s shift gears one last time and head over to the world famous all right
these are the same four questions we ask every guest every weekend any of you
guys answer them before but will ask him or ask him anyway number one and we can
just go both of you number one what’s your favorite real estate related book
other than anything you’ve written Amanda you want to start real
estate-related book that’s a hard one can I say Rich Dad Poor Dad that’s not
really real estate-related yeah everyone says that’s good okay
alright I I’m gonna say Amanda’s book mine I always stumble with the title but
it’s the 26 things you need to know about cash flow whatever rank that long
title is Frank Yellin oh yeah cool all right next one awesome what your
favorite business book that’s not Rich Dad Poor Dad mine is the 4-hour workweek
because I want to be as lazy as possible so that’s actually that’s actually why I
asked the question I had earlier because I read the 4-hour workweek probably like
first for the first time five or six years ago and then I just tried to start
all these online businesses none of them generate any revenue all of them
incurred expenses and I just never did anything with the tax implications of
that so I kind of missed out there but that was that was what I was thinking of
what I asked that question yeah mine is the story brand so I literally just
wrapped this book up but it’s it’s an awesome book great book cool all right
next question Scott what do you guys do for fun for me I love cooking
because I love eating so when I’m stressed out in taxis that I love to
just go home and cook a great meal and eat it all by myself no I do you know
with my with Matt and my child but yeah that’s what I like to do
I crunch numbers another joke bad joke probably accounting joke no accounting
joke that reminds Eva you ever watch sparks that was it yeah Parks and Rec
you ever watch that show yeah oh it’s like that continual like running joke
throughout the whole show of the the CPAs that laugh at everything at it it’s
the that’s what my favorite shows because what you do is like be able to
force it out right but make it sound genuine and then yeah friends that way
anyway mine I just started CrossFit a couple months ago and it’s it’s been a
lot of fun and you’re supposed to tell everybody about cross but if you do
CrossFit so I’m telling you so yours is the exact opposite of my heart just
eating nice try to happens work out there well cool alright last question of
the day what do you guys believe separates successful real estate
investors from those who give up fail or never get started for me I feel like
with two things action and having good systems in place I think if I look at
all of my most successful investors they’re the ones who take the advice
that’s given whether by as their attorney or other you know mentor
someone and then they systematize it so they can repeat the process over and
over again yeah so those are two great ones I would just throw on top of that
just understanding that failure is a part of any business and not just
throwing in the towel the first time that happens just learning from it
figuring out how you can improve and roll in with the punches and then
continuing on and writing it off more about you guys
well I’m bigger pockets calm and also our website which is Keystone CPA calm
yeah and for me BiggerPockets LinkedIn I like to take
stabs at the corporate world on LinkedIn with my might posts and then the real
estate CPA comm and anywhere else yeah anywhere that I’m at social media wise
alright good deal well thank you guys but a lot of fun and super helpful I
definitely feel a lot better about the whole tax change code thing and
hopefully everyone here listening does as well so thank you guys and if people
need to get in touch with you they know where to find you
everyone listen to this though you can check out the show notes at
BiggerPockets com scishow 269 you can leave comments there questions I can’t
guarantee they’re gonna jump in and answer your tax questions but you know
you can leave them if you really want to and let them know what you thought of
the show and of course anyway this since I shared on your social media channels
Facebook whatever yeah and I’ll chime in there that both of these guys have
written but I think are really good articles kind of just giving a little
some overviews of some of the changes for the new tax bill which we will also
link to in the show notes here so you guys can check those out all right all
right guys thanks so much for joining us today thanks awesome that was Brandon
Brandon Hall and Amanda Han two CPAs I thought it was fantastic and full of a
ton of information I know I’m gonna use a lot of it and got to ask some selfless
questions I wanna go back and listen to again because I need like take some
better notes like in fact while we were doing this I like write notes like make
sure I do my cost segregation this year in 2000 yeah like okay I got to do this
stuff so anyway yeah it’s funny right after we stopped recording they I
remember was Brandon nur Amanda asked so do we bill you guys for this timer like
yeah just bills for every hour of every single listener of the show you know
150,000 hours or it’ll be great if they actually send us a bill just to be funny
that would be really funny know what’s funny though is that Amanda and Brandon
are both practicing CPAs yes who have real clients and also invest in real
estate but they give out so much great information and perspective on this
subject like just like in the form of a today on our blog and through the
content that they create so definitely go check out their their their stuff on
the bigger pockets our e-news bug that’s bigger pockets calm /re news blog and
you can see them on the right-hand side if you scroll down and click on them and
go to their profiles so I don’t know little quick tip here trench let’s say I
have a redirect set up you can just say BiggerPockets that calm slash blog goes
to the same place oh gosh I’m learning things every day do here takes 20
minutes to say re news blog okay alright good good BiggerPockets comm slash blog
there you go that makes way more sense doesn’t it I
don’t Josh set up our e-news blog back in like you know 1912 and you know since
then you know we’ve cleaned up the site a little bit anyway well now you know
the more you know it NBC logo thing in 3rd here anyway
alright we got to get out of here well last thing we’ll have there’s a lot of
things that a lot of resources that were discussed today on the podcast we will
be linking to those things in the show notes of this episode which you can find
at BiggerPockets calm slash show two six nine and oh I said that is a sensible
URL that makes that is very easy to say it is that’s much easier to say then
like re news blogs I showed actually that’s just a redirect as well but
anyway and a reminder from the quick tip this earlier on the episode the tax book
the book on tax strategies for savvy real estate investors is on sale right
now 20% off on bigger pockets that concise store so get it there and you
get a bunch of cool bonuses including an entire conversation about how solo 401
k’s work which i really want to talk about that today we did not get time so
definitely check that out that hour-long video I did with Amanda is unbelievable
you’re gonna be blown away at how cool solo 401 k’s are they’re super cool
anyway check it out and with that Scott go get in your nine
degree weather and go get some lunch or something yes I’m very hungry
alright guys thanks so much for being a part of bigger pockets and we will see
you around make sure you leave us ratings reviews tell your friends and
you know be awesome so thanks for being a part of BP today for BiggerPockets
calm my name is Brandon my name is Scott signing off you’re listening to
BiggerPockets radio simplifying real estate for investors large and small if
you’re here looking to learn about real estate investing without all the Heights
you’re in the right place be sure to join the millions of others who
benefited from bigger pockets calm your home for real estate investing online you

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