The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 050 - How Tax Planning + Real Estate Can Help You Achieve Your Dreams
Embarking on a journey from auditor to CPA, real estate and taxes have intertwined in my life, shaping a path to financial liberation. Every brick laid in the foundation of a property can become a stepping stone to achieve your dreams, and today's episode is all about discovering just that. We start with the cornerstone of tax planning within real estate, unearthing how strategic approaches such as depreciation, cost segregation studies, and the coveted status of real estate professional can drastically minimize your tax obligations. Through heartfelt stories of clients who've seen the tides turn in their favor, I illustrate the monumental impact that meticulous tax planning can make, often resulting in savings that eclipse the initial property investment.
The art of maximizing tax benefits doesn't stop at clever planning but extends to the seamless integration of investment strategies into your daily grind. Even those anchored to a nine-to-five can harness the potential of real estate to cultivate negative income reports that work in their favor. By shedding light on how material participation can shape your fiscal future, I dissect the intricacies of navigating high state taxes and the necessity of a symbiotic relationship with a tax expert who can guide you through the evolving tax landscape. Whether you're a seasoned investor or just dipping your toes into the property market, you'll find actionable strategies to pivot your tax situation from liability to a powerful instrument of wealth.
Wrapping up this treasure trove of insights, we delve deep into advanced tax strategies and investment maneuvers. The episode culminates with a discussion on the nuanced magic of Roth IRA conversions in low-income years and the deft tactic of asset revaluation that can considerably cushion your tax blow during such strategic shifts. These are more than just stories; they are blueprints for anyone eager to turn real estate investments into a bastion of abundance and freedom. So tune in, as I demystify the complex dance between real estate investment and tax planning, setting the stage for you to potentially reshape your financial reality.
All right. So first you know. So so many of the people here I'm looking at and we're starting our new year right. Right, we're still in the beginning of the year and I'm thinking what led me into interested in, to take interest in real estate and hang around other real estate investors, and we all seem to have this common mindset of building something out of nothing and really following our dreams. And so this is the first kind of talk that I'm doing on taxes where I'm talking about following your dreams, because real estate was always so closely tied to my dream and it may not be the dream of having specifically a big property or you know amazing metrics on your, your flips, but a lot of times it's deeper than that. A lot of times real estate is the vehicle to your dreams of having more time for your family, with your family paying for your children's education. It may be part of securing a legacy, retiring, quitting your job and getting to the life you want, and that's what real estate was for me, and so we're going to talk about that. So I want to go into my backstory and we'll talk about how real estate, combined with tax planning, can help you reach your dreams. So it's there's a little bit of a lag on this button, but it's it's pretty solid. The arrow icon, there we go.
Speaker 1:I I became, I was an auditor and it was about the most miserable, boring work you can find mindless. And I, I, I would dream about how am I going to leave my job and how am I going to find my dream. So I started hanging around other CPAs and trying to keep things interesting with the memes here, for those who are over 30 probably know who this person is. But I dreamed of financial freedom and hung around other real estate investors and, as a CPA, everybody started asking me well, what do I do about my taxes? And I was a little bit embarrassed Like how am I, as with going through all the suffering to be a CPA, not going to be able to do my own taxes and advise on the topic? And so what I learned through my research was that tax planning may very well be the greatest investment you'll ever have when you look at the return on investment into a collaborative relationship with the right tax team. So what we, what we did, was some of the things I want you guys to think about here is real estate is the most tax advantage, industry, investment vehicle thing that you can do with your time and cash out. There, billions of opportunities are left on the table because, let's face it, most people, most CPA, most investors, are uneducated, do not know all of the opportunities. Most CPA firms do not do tax planning and additional opportunities, even if they know the basics, are often left behind.
Speaker 1:So now, before I jump into some examples I'm going to give and this is really all about your time so we're going to do. We're going to do things oversimplified today because I'm going to stay here until every question is answered. So everyone, I have no after party plans, nobody's waiting on me, so make sure that you bring all your questions, but high level. Let's keep things high level here. For now. Here's how it works.
Speaker 1:If you guys are just starting to think about real estate taxes, the beautiful thing about real estate is you have that depreciation tax right off. Even if you are cash flow positive, the depreciation to account for the wear and tear of your real estate will offset that cash flow and a lot of you who are W2 income earners just starting off in real estate, this may be your first opportunity to have tax deductions to offset that revenue and some of those tax deductions may be on things you may already spend your money on, but now are tax deductible events like business meetings with your spouse. So we, even if we're cash flow positive, we're not paying taxes on the revenue. We can create a negative income statement on that tax return and we can maximize that by accelerating that depreciation through cost segregation studies. And we've seen cost segregation studies where we will write off anywhere from 20 to 50% of the purchase price in year one. So imagine putting 20% down on a property and writing off 50% Any time your tax deduction exceeds your investment. You're really going to be winning the tax game here, and there are sometimes where the tax savings exceeds the down payment to buy the real estate and now your tax savings is the return of your capital and it could just be put into more and more real estate.
Speaker 1:So another thing we want to think about here is under certain circumstances we can use our losses from the real estate to offset our business income and our active W2 income. That could be if you are a real estate professional, you have the real estate professional tax status. That means more than 50% of your working hours are in your real estate trade or business and that comes to more than 750 hours. Another scenario where this can work this is really popular with dentists, doctors and attorneys is you invest in short term rentals. You self manage them. Average length of stay has to be seven days or less. Now we can use those losses to offset your other sources of income and if you can't, you want to consider you're still seeing cash flow, maybe some exit strategies, maybe some capital gains events that are going to be untaxed.
Speaker 1:So I'm going to just give you some examples of clients we've worked with over the years. We're going to do some simple ones and work our way up, because I really want to explain concepts that will resonate with everybody in the audience, regardless of your situation. So we had a client this was earlier on, before this was such a trendy thing, but we had a client who was working at a bank husband and wife combined for about for exactly $316,000 in W2 income. They bought some short term rentals and before this was popularized, we did some research and the hairs on the back of my neck stood up as I read and reread and comb through the legislation and the tax, the tax sections that applied to this, and what we found was these rental properties hadn't averaged like the seven days or less and we could use the losses to now offset the W2 income. And we found a way to do cost segregations on those two properties. Just reviewed the tax returns last night to give you guys reliable figures. To cost segregation studies created a $125,000 tax deduction to offset that income. They had a profitable portfolio.
Speaker 1:The client was worried he was bringing in so much money. This was back in the day when short term rental income was easy money. You just had to be on the site and you were just printing money. So we did two cost sags. Not only did he not owe anything from all this cash, he winds up with a $42,000 tax refund. What do you think he does with that $42,000 tax refund? Buys more real estate. And what do you think we do with that real estate? You got it. You see the beauty here. So, 因為 off the государw, we have another client here. This client had a combined income of 86. High paid W-2.
Speaker 1:Wife was a real estate agent. Even though he didn't work full-time in real estate, his wife did. So they had the real estate professional tax status. Even though his wife was a real estate agent, he was doing the property management. That's okay. Material participation we probably don't. If you guys ask questions we'll go to town on material participation. I just don't want to put you guys to sleep too soon.
Speaker 1:But anyways, he managed the rentals, had a fairly decent, decently competent tax return prepared during the return. But there was no strategy. They did not understand the tax incentives. Remember, most of these firms are specialized in telling you how much you owe. They do not understand how to drive, how to take advantage of the tax incentives written by the government to incentivize you guys to be entrepreneurs and build businesses, hire people and achieve your dreams. They're just skilled and trained to show you how much you owe. So there are no errors in the return. But there were missed opportunities With that amendment which included cost seg not just cost segregation, and we do other things.
Speaker 1:Tax liability went from 247,000 to 157, and one amendment created $90,000 of tax savings and we did not advise that client that entire year. So this was the bare minimum. We could have done with an amendment. In the following years we're talking hundreds of thousands of dollars of tax savings year after year, and it's all reinvesting. Oh, sorry, I didn't see you changing so at a high level. What we're doing here, it's a compounding snowball effect here you buy property, you get cash flow, you do the cost segs, you get tons of write offs, you get tax savings and if you have a W-2 job or you're making estimate payments, get a nice refund, hopefully. Or you owe less. When we do your taxes, that tax savings is reinvested to buy more property and we continue to create these negative income statements. As we're building our net worth, our equity is growing. We can pull out that equity, we can borrow from it, we can sell and do 1031 exchanges. We're continually continuing to drive down our taxes and the result for all these clients is they have accelerated their path to financial freedom. So this is how, when we align our dreams with a real estate strategy in an effective tax plan, we accelerate the process by which we are building wealth and compounding that wealth with tax savings to replace the income.
Speaker 1:If you guys are, is anybody here doing things for money that they don't really enjoy so much? Anybody, have a, okay, we have any for any auditors here? Okay, there we go. No offense to the auditors, I mean very important work. I'm dealing with a few right now and but this is how it's done. So there's more to it than this.
Speaker 1:So we just talked about some basic stuff here, introductory concepts, but there is a lot of misinformation. Some of it is good. There's a lot of stuff on social media TikTok which is true but may not quite apply to you, may not be the best opportunities, you may not fully get all the information you need. A lot of people who are maybe being a little bit less served, a bit underserved. Maybe they drive your taxes down to zero, but that's not where the journey ends.
Speaker 1:After we've created the tax savings, how can we prevent future taxation and what are their misopportunities? Are there? So we just talked about the foundational big ticket items for real estate tax planning. You need ongoing collaboration, though. There's chaos changes in the tax code, changes in your life, income from other streams goes up and down, and how does that relate to your real estate? You need to strategize on how can we do things today to prevent taxes in the future, and we want to consider all available strategies because even after we've done everything possible with real estate, there may be some other opportunities on the table that you may not be hearing from the real estate gurus, and they're all wonderful people I know and love and talk to a lot of them, but there's more to the story and that's why it requires an individual deep dive, look into your situation. So we're gonna give some more examples of explaining this.
Speaker 1:We had a client who had high paid W-2 and also had his own business we're talking about seven figures of income here Wanted to invest in more real estate. Do the typical strategies, do the cost sags, drive down the taxes, but couldn't find a deal. So, and this guy was paying California taxes and, by the way, california doesn't even allow you to offset your California taxes, which is maxed out at around 13.5% reps. That won't even help. So he was out of ideas. So what else could we do here? So by strategizing with him.
Speaker 1:The solution here was we were able to connect him with a partnership, raising capital. $100,000 went into an investment vehicle that was a multifamily mixed unit mixed use property, where they restored certain features of the property and they were able to create a tax credit. It's called a historical preservation, not conservation. We're not gonna use the C word today, unless you guys ask, but we were able to create a tax deduction, a charitable tax deduction, of a quarter million dollars Two and a half to one. Not only that, this was a cash flowing vehicle around six to seven percent in preferred returns, future capital gains of 50% projected in the next six to seven years. So now it's, when you look at the situation, we're probably at above a 40% tax bracket. When you consider California and federal taxes, the tax savings is gonna be greater than the investment into this vehicle. You put in $100,000, let's just say we're at a flat 40%. $100,000 gets you a $250,000 tax deduction at a marginal rate of 40%. Your tax savings is gonna give you all of your down payment back. The rest is just profit coming in. It's like you're investing in real estate for free.
Speaker 1:He was a limited partner, so there was zero risk, and he really, like this, was one of our more risk adverse clients and entrepreneur with a loss, one of the years where a lot of people think well, I operated at a loss this year. Our work is done, I don't really need to record my write-offs anymore. What's the point? Well, in this situation here, we realized that there was an opportunity to prevent future taxation. We did a Roth conversion. We also took advantage of the fact that if you have a $0 adjusted gross income, your first, $80,000 of long-term capital gains is completely untaxed. So we converted the $250,000 into a Roth and then we sold some of that stock with unrealized gains Realized gains. Now we have prevented $80,000 of future taxable capital gains and instead of having this $250,000 IRA that's eventually taxed at your marginal rate when you take it out now, instead of having this growing ticking tax time bomb, now we have a growing tax-free in the Roth IRA. Money grows tax-free. Take the money out tax-free and when you take that money out you may invest in more real estate.
Speaker 1:One more situation here of why we want to look at every situation possible. Recent client here had a $10 million capital gain on the sale of his business. So when you guys are ready, when my tribe is ready to exit, it will be ready for you. And we tried to do the qualified opportunity zone fund Didn't work because the investment didn't fit his profile Costs that he. We did some cost segregation studies and let's just think $10 million capital gains.
Speaker 1:You would think this guy pays a lot of taxes on this significant event. Through cost seg of some of his properties created 4 million of tax deduction Lost. Harvesting special partnership allocations. We had some proprietary relationships. We were able to structure some investment vehicles. For another $4 million tax deduction Financed equipment rentals. We were able to facilitate the organization of an equipment rental business with an organizer, made sure there was material participation and he paid approximately $200,000 for a $2 million tax deduction investing into equipment that he was gonna rent. That was gonna cash flow and eventually he'll have cap gains and we'll put that into QoZs, the sale of equipment. We expect $0 of federal taxes on this client's return. So the largest event financial and economic event in the client's life will also be in the year where he pays the lowest amount of taxes, since he was living on ramen noodles and going to college. So there are tons of other opportunities.
Speaker 1:I'm not gonna dive into all of these, but what I want you guys to think about here is yes, we love real estate. Real estate is amazing. It is the most tax-advantaged vehicle. But you don't wanna stop just at real estate when it's evaluating how can we drive down our taxes, build our wealth and achieve financial freedom. And some of the tax savings and some of the profit generated from these other strategies will be used to buy more of this real estate and generate this passive income. So oil and gas investing can offset your W-2 or your active income. 80 cents to 90 cents per dollar passive income as well goes really well with real estate investing because then you can offset future profits, maximizing your tax deductions. I call it right off. Optimization looks cool on our sales pitch deck Retirement account, timing of it when we take it out, as we've discussed earlier, terrible deduction strategies, timing of events, expense events, income events, entity structuring and other tax-advantaged investments.
Speaker 1:We wanna look at all of this because, after we've done our lower-hangering fruits and the cost-ex and the 1031s, what other opportunities are there out there to further reduce your taxes and build your wealth towards you achieving your dream? So some key takeaways I want you guys to think about Tax planning with real estate can change your life and help you all achieve your dreams. I am certain that everyone here is working towards bigger and better things. You want to strategize for your current and your future situation and think about what can we do now that sets you up for future in the form of wealth building, cash flow and tax savings, not just now, but 5, 10, 15, 20 years from now for you and your family. And you want to invest into a collaborative relationship with your tax team of experts. It's really a team effort here, with when you have financial advisors, estate planners, business partners. Everyone needs to be aligned, and you are aligned in your tax plan and your strategies, with your real estate and all your different sources of income. Okay, so next steps.
Speaker 1:So, in case you guys are interested in learning more, I believe this is the site where you can fill out a survey. It was membershipmarkprobergcpacom. If you are interested in some of our services, you can go there. Some of you and I encourage all of you, though, to go to my website and sign on to our mailing list right there, markprobergcpacom we want to help out everyone we come across. We don't always have staff, it's not always economical, but we have a YouTube page, instagram, and anyone's on our mailing list gets invited to live events. I have a free community and we're going to be developing coursework, so just follow us and stay in tune.
Speaker 1:Send us your questions, because I really, I really want to have an impact on all of the people I come across and all the investors and entrepreneurs, and going back to me daydreaming about getting out of the ninth to five and having an income that wasn't so great. I want to help you guys all achieve your goals of pursuing your entrepreneurial endeavors and reaching your dreams. So thanks for your time. If you guys have any questions, now is your chance. So I believe I understand your question correctly. So you're talking about let me, let me Sure.
Speaker 1:So the answer is you're going to need to look at all of your sources of income here and when it comes to taking your money out of this 401k or IRA, which is tax deferred even capital gains at a crew in here, when you take it out, it's taxing your marginal rate. Now, actuarial studies and professional guidance have all shown that in order to do this most tax efficiently, first you need to know what's the mix of all your other income streams here, because if we find you're in a really low bracket or a negative AGI, we might go to town on this thing and liquidate it. But let's say, or let's say we know you're going to quit your job next year and go full time into real estate investing, you may hold off. You may say, okay, we're going to use your savings right now, maybe even do a HELOC, but as soon as you quit your job and you've eliminated that active income now we take the money out of the 401k and we use the cost tags to offset the taxes on it when those income events are activated. So a lot of times it's a mix.
Speaker 1:You want to look at what's in the 401k, what's in your stock portfolio, if you have any other sorts of accounts, and what's your path.
Speaker 1:What are your income streams, what are we going to see next year and down the road and, based on what we project here and the corresponding tax consequences, what's the most tax efficient way? Now there's another. I don't want to take my CPA tax hat off too much here, but there's a little bit more to consider here when we're thinking about this now we're not just in the game to reduce our taxes, and I've had clients, even in their 20s and 30s, liquidate their 401ks and that sounds a little bit illogical, right. But we're not here just to reduce the taxes. We also want to evaluate the opportunity cost to get that capital. So we have had clients liquidate the 401ks and IRAs take the tax hit, pay the 10% penalty, but when you look at the profitability that they generate and the opportunities that create in their life, it was worth that tax hit. And now they're investing in syndicating deals that are giving them tens of millions of dollars of tax deductions Cool.
Speaker 4:Next question.
Speaker 2:It's all right. It makes a sense. You've got a $100,000 rental amount that are doing it.
Speaker 3:What can we call a savings amount?
Speaker 2:Yep.
Speaker 1:Okay, yeah, absolutely. So question here at what limit or what's the minimum price here that is worth investing into a cost segregation study In? The best way to answer this would be to explain our thought process on what's the return on investment into the cost side. So it's highly unlikely we would invest into a cost tag on a $100,000 property, especially at 80%. This year might be 60%, it might be 100%, who knows. We're still waiting to hear back on that. But what the process of looking at this is?
Speaker 1:We look at what's the tax savings created from that cost segregation study versus the cost of performing it. If, by some miracle, you could create like a $60,000 tax write off and you happen to have a client that was in the 37.5 tax bracket, you might find that it's worth it. But that would be highly unlikely because most of those guys are investing into larger properties. So our general rule of thumb is a quarter of a million right now, but we evaluate that opportunity on a case by case basis. Yeah, so my answer was based on purchase price. Now the market value, the fair market value of the real estate, has no impact on it. Some of the things that we evaluate on whether the juice is worth the squeeze on a cost segregation study is if we have a beach rental property, the beach rental property is going to have such a high portion of value assigned to the land because of the exclusivity of the location. So now the price threshold has to get even higher when you're in neighborhoods where the land valuation is significant.
Speaker 1:Okay, so we got a question here is can we do our own cost segregation studies instead of paying someone else to do it? Now let me ask you is this something related to a specific property that you have? Okay, very interesting. I'll also follow question so case the audience in here. So they've done cost segregation studies, but she has been able to evaluate them, identify the different components and assign valuations.
Speaker 1:Let me ask you I'm not, I'm not, I'm not, I'm not questioning, I'm just trying to understand a little more how did you figure this out? What was your background? What gave you the ability to understand the valuation of these items? That's kind of a long conversation, okay, okay, so if you were fully capable, there are instances where I wouldn't be against it if we knew the whole situation here. But let's think about the time it would take to evaluate the property and what's the breakdown in the valuation of. First we got to do land and building and then we got to understand the valuation of the furniture, the fixtures, the cabinetry, the carpets, the kitchen utensils. This is a lot of time.
Speaker 1:So I think that the answer for the majority of you here would be it's more effective for you to spend your time investing in finding new deals and building your craft and building relationships and closing more opportunities.
Speaker 1:But if you have the ability to legitimately find the market value of these items and you can provide work papers that substantiate this and you have audited and inspected other cost segregation studies and you can really have confidence and back this up, it might make sense. You might be able to do it. I would say for the majority of people, though, the amount of work and research involved in doing that it wouldn't make sense. But it sounds like there's a good chance that this may make sense for you, and the way that most of them do it is they will look into a job costing software or they pretty much are going to research what is the cost to build these things or install them in a new unit or a new construction, and then I'll allocate it all out and assign the building value to come out with these valuations. So I hope that answers your question, and when we evaluate the materiality and risk and size of the project, those should all be involved in considering it.
Speaker 3:So let's stay on line.
Speaker 1:Okay. So I'll repeat the question I'm doing a cost segregation study. How long should I hold on to it to see the benefits of the study? So follow up question to this is what are you planning to do with the property? Are you going to plan to sell it?
Speaker 1:So in normal situations we would not recommend doing a cost segregation study. We're planning to sell it in around a year because when we do the cost segregation study and we get all that bonus depreciation, like that $125,000 tax induction when you sell it, there's something called depreciation recapture and the recapturing of that depreciation from your cost sag is taxed at your marginal tax bracket. So the general answer is no. There are some exceptions to this. So if we could do a 1031 into another property, now you deferred indefinitely the capital gains on that event and rolled it into another property. So in that example, if you were able and willing, capable of executing a 1031, it might make sense. Now here's an idea you don't have to decide on a cost segregation study right when you buy it, or even in I think them okay or even in the year of its activity. Is this mic still working? Okay, whatever. So what we could do also, thanks, buddy, we got mic number two mic number three Sorry.
Speaker 1:So what we can think about here for you if you're going to sell it in like around a year, you can consider extending your return. Try to do the 1031 exchange and if it fails we wait until October on the deadline of the extension and we find that you couldn't implement that 1031, then we don't do the cost act, but let's say you do the 1031. Now what we can think about is let's run that cost act because we know we're not going to pay taxes on the recapture. Does that help? Awesome, Thanks for系.
Speaker 2:So they work. Well, I can speak up really about pressure. So the thing that Parker's doing right now I'm just explaining this to you he's trying to tread softly on this whole subject as far as off segregation. There's even more than this in his bonus to persecution. He hasn't even got a look at it.
Speaker 2:The point being is that when you're doing a cost-execute study, you don't want to ever sell your property, especially just putting it into service, because you're going to appreciate that for the next five years, seven years or 15 years, depending on if you do any improvements in planning. So it's very violent that you communicate with your CPA value, but the cost-execute person that's going to do the study usually isn't going to be CPA. It's because you need to have a professional engineer that's licensed or a cost-execute certificate to prevent you from having any type of audit. If you have an audit, you're not protected. Does that make sense? So I just wanted to defend what he's trying to share with you. It's a lot of information, but it's very beneficial for everyone in this room to make the proper, whether it's a single family, glory, or a small family and you're renting it and you're not residing. You absolutely should do it.
Speaker 1:Yeah, so we have seen people purchase cost segregation studies because it is a hot topic and, as you can see, I mean we say, one of our clients is $90,000 in cost segregation study, but cost segregation study doesn't always make sense. You may sell it at a gain. Also, we got to make sure that it's actually going to reduce your taxes right. We need real-estate professional tax status or we need short-term rentals. We don't need to stay seven days or less Self-managed with material participation, and we need at least some income for it to offset. And that's why, with all of these variables, you want to be collaborating with an accountant, a CPA, who understands these strategies and knows when to apply them. Yes, let's hear it.
Speaker 3:Okay, if you know we have. We know we have a fluctuating tax brackets from year to year. It's a strange world, but we know that's a world of events. So my question is if we one, if we go back and do a cost tag for tax purchases, is it a mini return now or is it going to go on this year because we collect that from it? And second, if it were to be recaptured later, is it going to be for the amount which is this year or is it going to be a lower tax bracket later? If it's sold in a lower tax bracket year, does that make sense?
Speaker 4:Yes yes yes.
Speaker 1:So the question we were asked is because our income is volatile, sometimes we don't know when is the best year to run the cost segregation study. So if we were to amend a prior, could we amend a prior year return with a cost segregation study? And we absolutely could. We have done amendments with cost segregation studies. We're working on one right now, on three cost segregation studies. We're anticipating a refund of about $95,000.
Speaker 1:Now if you sell this cost segregation, this property with a cost segregation study, and you get that recapture, how is this going to be taxed? It is going to be taxed at the marginal rate of the return that it's sold in. So to illustrate this, let's say you make $100,000 a year but you sell a property and the recapture is an additional $200,000. You're going to be taxed as though you had $300,000 of federal taxable income. This is going to be added on from schedule one all the way up to your 1040 as other income when we look at your total mix of income subject to federal taxation in that year. Now another thing we want to think about back to thinking about the time value of money is, even if you're going to get that recapture and maybe you have a failed 1031 exchange. Let's go back to what we were talking about our process here. We may sell this property in a few years. It may not be the best bracket, we may be in higher brackets but again, when we do the cost segregation study and we drive down our taxes, we generate more wealth that can be invested into more property where we can do more cost segregation studies and further drive down our taxes in future years as well. Not to mention that that other property is going to give you cashflow, equity and future tax advantage, capital gains events if you exit on those as well. And then there's a whole world of real estate tax planning strategies you can even do, even without Repstatus, you can do a cost tag on one property to offset the capital gain on another property, going a little bit on a tangent, but there's just so many exciting ways to do this and we usually try to take that tax savings as soon as possible to create that additional capital to reinvest and accelerate the growth of your real estate portfolio.
Speaker 1:Here we go. So with seller financing. You know we would have to look at the financials and what capital gains rate, but when you do seller financing or an installment sale, you would be recognizing that gain over time. Now, I'm assuming there's no cost segregation on this, correct? Okay? So if there's no cost segregation study done on this property, then you would be recognizing that gain over the life of the sale. Now the thing that I like about this is if they don't compare the saline lording you got to deal with the three T's right Tenants, toilets and trash. When you have installment sale money coming in, you have truly passive income, not just passive in the words of the IRS. You're doing nothing. If they stop paying, you take the property. So there is an opportunity here. But then there's a time value of money and a lot of entrepreneurs are impatient and they want their cash right away. So it might be a hard sell, but there are certainly some tax saving opportunities. Let's hear it.
Speaker 4:Ten thirty one exchange. There are ten units on the property. You want to weigh out your ten thirty one exchange. How do you ascertain because an attorney once told me that you could sell just the number of those units independently to equal what you put into the ten thirty one exchange, to roll into something else, to keep it, but that you would be able to sell the other five units outside of the house? Is that true? I mean, how do you got to keep it because you're capturing appreciation and your capital gains, and still massive. You can't afford to get out of the ten thirty one exchange completely, but you want to get out of the property with the lowest amount of wall into the new ten thirty one exchange. So can you rip it out like that?
Speaker 1:I'm not sure I fully understand what you're asking. So you're asking on how are we going to be looking at multi asset, ten thirty ones and maintaining basis? We're trying to do here is we're trying to maintain a high basis for depreciation, we're trying to prevent depreciation recapture and we're going to consider multiple assets. How should we be looking at that? Is that a fair OK? So we've done this before and we've seen some errors made by people who are misadvised on this topic.
Speaker 1:When you want to do ten thirty one, you're looking at the replacement property. I want to go as big as possible here because we saw a client who was working with an advisor and exchange intermediary really good at ten thirty ones, not the best taxpayer. They exchange three properties to be little itty bitty properties into one large vacation rental Played, paid, no taxes, deferred like a million dollars of gain, which sounds really great, right, but they didn't need all that cash from all those sales proceeds to purchase the replacement. They could have just sold one of them. They would have had enough cash. Put it as a down payment into this vacation realm. And what's the downside? The basis of the replacement property is reduced by the deferred gain. So the more you save in taxes, the less depreciation you get in the future on this ten thirty one. So what I would have recommended is to sell one of them or the minimum amount of properties to roll into that larger property. So now we have a higher basis, maybe only deferred half of them, and now we have a depreciable basis that is not so greatly reduced. But we have done multi asset ten thirty one exchanges where it does make sense, and what we really want to see here is that the replacement property and we have enough debt involved, so we have enough basis in the replacement so we can do more ten, more cost segregation studies and have more access to depreciation. So and also so, there's three attributes you need to see when you do a ten thirty one. One of the three has to be true. You can have up to as many as you want, but then you have to buy 95% of the properties. You can have as much as twice the value than you're limited, I believe, to Don't quote me on this. There's three attributes. I'm going to have to maybe revisit this. This is the last time I advised my client on this, actually a few months ago, and then I believe. I believe it's either three or or an unlimited amount, where you buy 95% and there's another one where I think it may be up to double the value. So a couple of variables to consider there. I hope I gave that was.
Speaker 1:We could probably embark on a multi hour long conversation on that topic, but hopefully it gives you some things to think about. Yes, sir, I think that's a good point. Let me ask you, how much was that? Trust me, I've seen them go for more than that and have they called these like dynasty trust, silver medallion trusts and their copyrighted trust Right? I know exactly what you're talking about and you're using the trust now like you sell your house to the trust and then your trust pays you back the money for your house instead of the gains in the property. We've gone down that rabbit hole and we've observed the functionality of them and we also observe all the abilities that we have in everything we just discussed. So when you do these other spend thrift type of trust where there's all these, you were like you're pretty much rewriting the tax code for these trust.
Speaker 1:We've consulted with experts, including Dominic Molino, who's the founder of the American Institute of Certified Tax Planers, and other CPA firm owners, and we found that it would be extremely hard to validate and protect these trusts and the rules around them. A lot of it, where you're like you're selling your home to a trust, but you still live in the home, but your trust is your landlord is an issue of substance over form. And when your money is locked in that trust, now the losses aren't going to roll onto your 1040, and now your losses can't offset your other sources of income. As we described. The losses can't offset the Roth conversions. The losses can't offset stock gains and other sources of income that are not real estate. So, for all of these reasons, and also because we have seen some attorneys being shut down, we've decided not to explore that feature. Good question, though I put a lot of time into researching those things.
Speaker 2:Yes, I've got 200,000 passive gains.
Speaker 1:So you said you have a $200,000 passive gain. So when you say active passive gain, what do you mean? Let's just talk about, just so I understand what we're trying to figure out. Let's talk specifically about this. What's the you're calling a passive gain? What is that? So profit from your rental properties? Okay, so let's say your revenue exceeds your expenses from your rental properties to the point where you have a profit of $200,000. And you're looking to offset this and you're considering starting a property management company to pay it. But what's the problem with this is that if you own that property management company now, you're getting paid through that vehicle and you're not actually. You're just paying yourself. So this is going to be kind of a wash, but actually you'd pay it. You might be paying a little bit more taxes because now you have an S corp where you got to pay payroll taxes out of there and now you got to pay more fees for an account to do an extra 11, 20, yes, tax return. So what?
Speaker 1:I would say the solution as an alternative, what kind of properties are these? Single family rentals? You may want to consider taking some of that profit and investing into larger properties where you can do cost aggregation studies, these single family rentals. If you're like a wholesaler, the seller cost tag is usually out of the question because your basis is so low. But if you have some cash, and let's say you want to stick with just managing your own rentals, you can invest in other people's deals passively to access the depreciation as well. And then there's a general tax strategies out there, and when you have passive profits now we have a whole world of opportunities to offset that passive income, where you can even buy tax credits to offset that passive income remaining. So there's lots of different variables to consider there. So, but the simple answer to your question is no.
Speaker 2:Now. Would you be better off cash out the current properties that have been bought at initial real estate so that he actually can have segregation? Investing in equity Currently has anyone who can even do so actually, you know, you still have a cash of double the amount.
Speaker 1:So we have properties with high cash flow but we're paying taxes. Should we sell them and exit out and consolidating to larger, more tax efficient vehicles that give us bonus depreciation? Now that might make sense from a tax perspective where you're consolidating your assets, you get large chunks of bonus depreciation on the cost tax. But maybe I mean, it's so rare we see this level of profitability around portfolio he may really like him. And now I am guessing that if you have this high of a profit margin on your portfolio, the values of these property are far in excess of what you purchase. You're all in the purchase plus repairs.
Speaker 1:So here's another way to take cash out. Why not refinance them and use a refinance fees to now purchase assets that are going to grow and compound and give you cost segregation to study bonuses? Now here's another idea I really like Invest passively into mobile home parks Huge chunks of bonus depreciation from those cost segregation studies. Really love the opportunity there. We got some more quick. You look like you have a question. What do you got? Yes, sir, in the green.
Speaker 2:Why don't you slide through?
Speaker 3:and see something about those. Okay, right.
Speaker 1:So this is another opportunity where, again, we don't want to just look into driving down your taxes in the current year, but thinking about how we can take advantage of you being in these low tax brackets. So most of you, at least at some point in time, had a job and oftentimes you were putting money into 401ks and IRAs. It was reducing your taxes and growing tax deferred. Eventually, one of these days, the money is going to come out and you're going to pay taxes on it. So why not time this with loss, a loss that we can create with cost segregation study? So when we convert the 401k and the Roth, we're recognizing that deferred gain, so any W2 income that was untaxed because it was put in the 401k, plus the growth of that fund, whether it be interest income or dividend income or capital gains income. Instead of paying taxes on that and taking out in the future, you recognize that income and then your cost segregation comes in and eliminates or at least reduces the taxation on that event.
Speaker 2:Yes, sir.
Speaker 1:What's the typical cost for a cost segregation study on a $2.5 million property? What kind of property is it? And let's say this okay, for multifamily, I would expect this to be around $5,000 to $8,000, depending on the complexity of the study and what we will also see is, if you're going to work with an engineer, single family rentals are usually be a minimum of $3,000. You might get lucky and do $2,500. Yeah, all right, I forgot, I wasn't talking to a room full of accountants. So bonus depreciation the best way I could explain bonus depreciation is just giving you an example of where it kicks in. So we do a cost segregation study. Before we do this cost segregation study, think about this you buy a rental property, you put 10% down, 20% down, usually 20% but you have to depreciate this real estate. You can only write it off over the course of 27.5 or 39 years 27.5 for residential, 39 if it's a commercial property. That's a long time to write it off. So when we do our cost segregation study, we find that there are items in this house or apartment complex or commercial building that depreciate faster. That refrigerator is not going to last 39 years, neither is the carpet or the cabinets or the driveways, et cetera, et cetera, but there's more. It sounded like an infomercial.
Speaker 1:The cherry on top is the bonus depreciation that really makes this special and where we can think having a former real estate investor as a recent president when the tax cutting jobs act came out. If you have five, seven or 15 year life property, you also get something called bonus depreciation and up until 2022, you were able to write off 100% of that five, seven or 15 year property in year one. Last year. We think for 2023 that amount is 80%. It might go back to 100 in like a few weeks. This is very definitive answer. And then we think right now it's going to be at 60%. You're out, but the remaining amount you still write off over that shortened period of time five, seven or 15 years. So we're getting our deductions upfront. It's a timing mechanism to get the tax savings. So now we can reinvest into other things. Yes, sir.
Speaker 3:When you try to determine the cost basis for you. Let's say, for example, by spending $50. Is that how I talk about the cost basis? How is it useful to have a proposal at the end of the year.
Speaker 1:Okay, so the question is, where do we get our cost basis for doing these cost segregation studies? So we want to understand what's the valuation of the building of the land. First we determine the purchase price. We add in the cost for closing any repairs made before the property was made active in place into service. That is all going in to the total cost basis. Then we break out the land and building valuation based on the allocation that we find in the appraisal statements. Typically we may use the tax assessments and let's say the tax assessment says 20,000 was land and 80,000 was building. Then we apply that 80, 20% to the cost basis of that total property. Yes, okay. Yet condos with no land. So we still do cost segregation studies when we have condos with no land. When I first did cost segregation studies on condos I thought I'd be super excited because we didn't have any land and we know land doesn't depreciate, so we were expecting some real juicy tax savings. But also on that land is a lot of stuff that qualifies for bonus depreciation, like the driveway and the pavement and maybe landscaping. But we still do cost segregation studies on those condos and it is still a worthwhile investment if all of your other facts align and it makes sense for the investment.
Speaker 1:Now what I really like if you really want to get some nice returns, have a property with a pool Like those pools right, pete? Pete's been helping us out with some of our cost sags and those pools just create a whole world of tax savings on these returns. It just really helps our clients a lot, in fact. Here's an interesting thing Now I love we have a lot of short-term rail investors because of the tax incentives. We had a client who spent like half a million dollars on a pool at a high end rental. It increased the value of her property so much that she refided out of it to pay for all of the pool and we wrote off 100% of that $500,000 investment into the pool. She paid no taxes. It's nuts, you know. I almost like lost myself when I started returning because she forgot to give me the numbers on her pool. So I called her up. That's why it's important that your accountant knows what you're doing. We got some. We got Blackshire. Is that a question? No, just stretching. Yes, ma'am, if you're rising up, all that is depreciation and our 100% depreciation efforts here. Is there any music for a fact-dating. So that's a really good question.
Speaker 1:We do a cost segregation study. We do. We get tons of bonus depreciation in year one. We are losing future depreciation. So what are we going to do in the future years?
Speaker 1:So one of the simplest answers would be you use your tax savings to buy more real estate and do more cost savings, use leverage. But let's say we can't find more real estate. That's when we want to start looking at all the other potential opportunities available that may not involve real estate as well. That can further reduce your taxes. Got some hands moving here. I know you guys are dying to here we go, so it would be highly unlikely.
Speaker 1:The question here does cost segregation study only apply to rental properties? My answer would be you can use cost segregation studies for any type of asset that's real estate. So if you have a building for your business, you could do a cost segregation study as well. You have a manufacturing plant, whatever it is. If you live in the building, if all other facts align, there's a slight chance it might make sense for cost segregation.
Speaker 1:It's highly unlikely that a cost segregation will make sense if you're doing like a house hack Because any of that property that you have personal usage on is not going to qualify as business use and won't be factored into the study. So if you're using the driveway, it gets left out of the study. Yes, I want to know if you would convert your private business to say you want a house hack. Okay, the question here now is if we used to live in this property and convert it into a rental, does it make sense to do a cost hack? The answer is most likely not, because when you used to live in a property and you convert your personal property into business property, it no longer qualifies for bonus depreciation when you turn it into the business asset. So if you have losses in excess of what you need, it will offset next year's taxes. But we likely will not recommend doing that because when you have a negative AGI negative income we lose our standard deduction and if you don't use it, you lose it or your itemized deductions.
Speaker 1:So what we would probably do in that situation let's say we did a cost tag and we have more savings than we need we will opt out of bonus depreciation on some of that property and depreciate over time. Typically we'll opt out of the bonus on the five-year property. It depreciates over five years and uses the bonus on the 15 because we don't want to wait 15 years. So we have to look at all the different scenarios and see what makes most sense for timing. So the question is can I do a cost segregation study on a property purchased two years ago?
Speaker 1:There are two ways you can do it. You can amend the prior year return and the results will reflect as though you did the cost tag in that year. You could also do it in the current year or more recent year and you would be able to get what is called catch up depreciation, section 481 adjustment. So basically that's going to factor in what deductions, what depreciation could I have taken had I done that cost tag in the past? And we will recognize all of that missed opportunities in the year you filed the tax return, including bonus and based on whatever bonus depreciation percentage was in the year of purchase I believe that was 2017, we had a bonus depreciation, but you can only amend from three years prior to the filing of that return, so we got bonus depreciation. Anybody have any general tax questions, tax prep, tax savings, real estate what do we got? Here we go.
Speaker 2:I was worried that by the return I triggered a hold.
Speaker 1:Right. So a return amendment is going to be more sensitive to an audit. So what I would say now we can't get the data on this. Here's what I want to think about. This is what we think about with our clients how reliable are your books and records? If you were to be audited and scrutinized, how well would you hold up against the audit? And what's the tax savings? What's the cost for your account to amend the return? When you consider all these variables, is it worth doing that amendment.
Speaker 1:If there's enough meat on the bone, if there's enough tax savings, I say go for it and do the amendment. Yes, absolutely. So you can go here membershipmarkprovercpacom. Also. Just email mark at markprovercpacom and just tell us about what's going on. Right now. It is busy season so I don't give out my phone number and I can't talk to everyone all the time. But also another good way if you want, to just get in contact with us and shoot some answers back and forth. I'm always hosting these live events and I post them in our mailing list. So get on our mailing list. So we have a lot of tens, because no one like I. Guess taxes is not the most exciting and sexy topic and I'm like I normally would have charged thousands of dollars for my time and I'm giving it away for free because no one's showing up to these live webinars. So you know, pretend that you're interested and you'll get some time with me Awesome, thank you.
Speaker 2:Thank you.
Speaker 1:Alright, come on, let's get one more. One more question in the night out. Here we go.
Speaker 3:If I convert the low tax year, it makes sense to pay old 401Ks and wire attire to a Roth and you got this low tax rate.
Speaker 1:Yeah, the question is can you convert 401K into a Roth and can that Roth invest into a syndication? Yes, you can invest into syndications with the self directed Roth IRA. You can also invest with a self directed traditional IRA or 401K. If you're not investing with the Roth, the next best tax advantage vehicle is going to be a self directed 401K, but you're not going to see so much of a tax advantage of it. But if you're looking for a place to park the cash inside these retirement accounts because real estate is already tax advantage, you can consider that.
Speaker 1:Now here's another cool strategy you probably haven't heard of. If you work with the right people for a passive investment, they'll invest into a real estate development project. You can do this with a 401K and at the time before you roll it into a Roth IRA, they'll revalue the assets and because of that, the revaluation, when the product, the property, is in service and they're doing all the work on it, it's all it's going to be because of the reduced value to the market. So it's actually going to offset the taxation on the Roth conversion.