The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 66 - Tax Planning Mistakes & Solutions
Can traditional CPAs really optimize your tax savings, or are they leaving money on the table? This episode of our podcast takes you through the untapped potential of strategic tax planning specifically tailored for real estate investors and entrepreneurs. We dissect the common pitfalls and misconceptions that plague the industry—like the mishandling of 1031 exchanges and improper cost segregation—highlighting the importance of professional guidance to build lifelong and generational wealth. Through compelling case studies, we illustrate the dangers of self-diagnosed tax strategies and the critical role of proactive planning to maximize tax benefits.
We also explore how even those with more modest incomes can leverage tax planning to their advantage. From converting tax-deferred assets to Roth accounts to utilizing the standard deduction for substantial long-term savings, we uncover strategies that can benefit everyone. We delve into the specific tax incentives for real estate investors and entrepreneurs, including cost segregation and short-term rental tax treatments, breaking down the complexities into actionable insights. Finally, we introduce our comprehensive real estate tax planning course aimed at equipping you with the practical tools needed to achieve your financial goals. Don't miss this opportunity to revolutionize your approach to tax planning and secure your financial future.
Have an idea of what you guys can do with real estate to really create some tax savings, lifelong wealth and generational wealth. So you know here's a problem in our industry and I know many CPAs. I'm part of many organizations and CPAs are taught to report how much you owe. I call most of them 1040 factories and their job is to report that amount to the IRS. You give them the numbers, they ask some questions, they pop it in and then you don't hear from them again until maybe January, february, when it's time to get your reports.
Speaker 1:A lot of them undercharge and underserved. They don't have the manpower, resources and time to actually research the tax code, learn about your situation and actually what they can do to preserve your wealth, protect you from the IRS and over taxation and reduce your taxes. So they lack the systems, the staff, the knowledge. There's a lot of misinformation online. And finally, who here? What do you guys think about our public school system? And it's been a while since I've been in high school. It's been a little bit longer for me than for Hayden but who here thinks that they had a quality education to at least be prepared to understand taxes and taxes sentence for entrepreneurs in their high schools Anybody at all? What about you, christian? You learn anything about taxes? Nope, are we better at taxes or parabolas from high school? I don't even know what parabolas are. Okay, trigonometry, long division. Okay, trigonometry, long division.
Speaker 1:So there's just a void of ideas here and understanding of the tax incentives available for real estate investors, which results in a lot of you guys kind of, oh, press the wrong button, where do we go? I would make fun of you. Know, I'm open to making fun of Trump too. I'm the wrong button. Where do we go? I would make fun of Trump. I'm open to making fun of Trump too. I'm apolitical. I hope this doesn't offend anybody here, but this kind of resembles what I see as the sentiment among many people when they start thinking or worrying about their taxes.
Speaker 1:So what we're going to cover is common tax planning mistakes, how we can prevent these common tax planning mistakes and how you guys can win the tax game. Does that sound good? All right, let's jump into it. So here's one issue we often see is self-diagnosed tax plans. This is more how I am like when I tried to do things from Amazon, but we see so many people Now. I think BiggerPockets is a wonderful resource and there's very intelligent people, but a lot of it can be taken out of context. And there's very intelligent people, but a lot of it can be taken out of context. And we see many examples where the cpa isn't going to give them the strategy, so they decide to figure it out on their own. Not a bad idea, but a lot of it can be taken out of context.
Speaker 1:For example, we had a client who did a 1031 exchange. Right, because when you sell a property, what does a 1031 exchange do? Anybody know? You can take your existing basis and move it into a new property without paying taxes on it. Yeah, you take your basis and move it into a new property. You keep the basis and you defer the gains. And you can do this indefinitely and what we call a swap until you drop. You can avoid the taxes for the rest of your life with enough 1031 exchanges. Well, the basis carries over. Well, what if the base is less than the sales price? Are you going to defer? What are you deferring here? A tax loss? Yes, so he could have written off a $30,000 loss. But read a couple of blogs hired exchange intermediaries. That sounds like a plan. Some plan right, and so he winds up overpaying in taxes. His taxable income is $30,000 more than it is and he has to pay us more money to report the 1031 exchange. And that's something you're not going to be able to DIY. If you are a masochist out there, maybe if your wife's a CPA you can do it there or, you know, maybe if your wife's a CPA you can do it right. But most of you guys you can probably find another find and close another deal before you'll finish the forms and the 8824 to report your 1031.
Speaker 1:Another example here Cost segregation. Don't we love it? Everybody here who here knows about cost segregation A lot of us here. So cost segregation is going to allow us to move that depreciation up front front, load our depreciation expenses and get tax savings. Not for this guy. So the client didn't have real estate professional tax status. His real estate was already operating at a loss. But cost segregation sounds really cool, right, cool, right. What are you laughing? Isn't it cool, winnie? It's not cool. Okay, there's cool things out there, like me, right? Okay, no comment.
Speaker 1:So the losses could not be used. There was no tax savings. Again, this guy overpaid in fees to do these engineering cost segregation studies and there was no tax savings. So we're talking about tens of thousands of dollars of professional fees wasted because he was trying to DIY his tax savings. So we're talking about tens of thousands of dollars of professional fees wasted because he was trying to DIY his tax plan. And not only that his wife was about to get real estate professional tax status. To tell you how incredibly important that is, that makes all the difference in the world where we could have used this to offset some of this client's taxable income. His AGI was around $2 million he was paying taxes on. He could have reduced it by $500,000. And let's just say, to keep the numbers simple, if it was a 30% tax bracket, how much taxes could he have saved? With a properly timed cost set, 30% of half a million dollars is how much? $150,000. Right. So if he was proactive, timed the real estate professional tax status to be present when these losses were incurred, we could have used them. But now we can't. Well, we kind of use them, but they're not nearly as valuable when they're suspended. They will in no situation offset the income from his business, which is taxed at a high rate.
Speaker 1:Okay, here's another one a lack of collaboration. You have all these moving pieces and nobody is collaborating and taking the initiative to be proactive. So here's one client we saw capital gain of $1.1 million combined with business income gave us an income of $2.1 million, zero tax planning. The accountants actually did some wonderful work on the returns Very complex partnership returns and tax selections spotless. Some wonderful work on the returns Very complex partnership returns and tax selections spotless. Really good work on the compliance side. But the preparer did not inform them of any of the opportunities with cost segregation. These guys had real estate professional tax status and could have done the cost seg to create depreciation losses tax status and could have done the cost seg to create depreciation losses to offset their income. If they just did the cost seg they would have reduced their taxes by $580,000. Their total taxes was $825,000. They could have reduced it by $580,000 just by doing the cost segregation studies which they didn't hear of.
Speaker 1:We estimate had we done some proactive tax planning, there's lots of things we could do to mitigate the capital gains. We could have potentially eliminated all of it with other strategies. Some of it may include trusts, qualified opportunity zones. There are hundreds of different solutions to having a capital gains event of this size that were completely ignored. So we're talking about over half a million dollars of overpayment from lack of collaboration with a tax strategist.
Speaker 1:Okay, now look at this guy's situation. We got an AGI here. He's from a real client here. Guy's situation we got an AGI here. He's from a real client here. Adjusted gross income is negative $219,000.
Speaker 1:Let me ask you, zach, do you think that this guy needs tax planning at such a low amount of taxable income? What do you think? Probably not, and that's what a lot of people think. Probably not. But this guy also had about half a million dollars in an IRA and 401k and most people think, well, I'm not paying taxes, who needs to do tax planning right? Well, here's the thing. I don't mean to pick on you because this is the general consensus thing. I don't mean to pick on you because this is the general consensus, but if you have assets and potential taxation in the future from these tax deferred accounts, don't let a good tax bracket go to waste.
Speaker 1:You see the standard deduction. This is a $26,000 deduction $25,900. If you don't use it, you lose it. So this is a tax deduction we don't get to use. What we could have done is we could have taken some of these losses and used it to convert some of his IRAs and 401ks into the Roth, it would have activated the losses, no taxes on conversion, and now we have a compounding, tax-free investment vehicle that will compound and grow and accumulate wealth and double and triple and quadruple, and when he takes the money out he pays zero taxes. If we did it right and we could have maybe gotten some of this standard deduction here to offset some of that rollover but now this is a $26,000 deduction we'll never get to take. But now this is a $26,000 deduction we'll never get to take. So overall, we see misunderstandings of the tax code.
Speaker 1:Tax incentives for entrepreneurs. What people don't realize is, yes, taxes are stressful, complicated and confusing To me. I've been doing it for quite a while now and they confuse the heck out of me sometimes too. Sometimes I need to walk away and come back. But there are tax incentives specifically designed for people just like you, because the IRS and the tax code is designed to encourage entrepreneurship and, in particular, if that entrepreneurship is designed to encourage housing. There are tons of tax incentives that a lot of investors and CPAs are unaware of. And then the tax treatment of rental activities in particular is often misunderstood. So some other examples.
Speaker 1:We had a rental property. A client bought a rental property of $1.5 million and they were paying about $3 million. They had about $3 million in taxable income. Now, don't worry If you make under a million and listen, I make under a million in profit. So some of these concepts are all going to apply to you here. Million in profit so some of these concepts are all going to apply to you here.
Speaker 1:But the client was waiting to quit her job and have real estate professional tax status to do the cost segregation and create the non-passive losses as we've discussed. But what she was unaware of, and nor was her accountant aware of, is that when you have a short-term rental and the average length of stay is seven days or less, you don't need the real estate professional tax status. So, as you can imagine, these folks were in a high bracket. We estimated an overpayment in that year of $166,500. Just by not understanding this opportunity for their short-term rentals. Now we took them on as a client. We will do the cost tag and create those savings with that property and they're ecstatic.
Speaker 1:But what could we have done if we had that tax savings a little earlier? What could we have done? What would you have done with that extra $166,500? What do you guys think? Buy another short-term rental and what would you do with that short-term rental after you bought it? Cost segregation, study, more tax savings? So not only are they missing out on this $166,500, the missed opportunity is more than that. That means that they also miss on additional costs, like for a property they would have purchased. They also missed out on the cash flow from an additional property they could have purchased and the appreciation and the growth in equity from that additional property. So the losses here are in the hundreds of thousands of dollars and, compounded over time with the missed opportunities here, could be in the millions of dollars and compounded over time with the missed opportunities here, could be in the millions of dollars.
Speaker 1:So a lot of entrepreneurs and real estate investors are just unaware that even the concept of tax planning exists at all, which is understandable. The CPA licensing and I love my CPA and it was a lot of work and it really teaches you professional standards but it doesn't teach you tax planning and the default standard setting of most CPA firms is not to tax plan. So here's some common myths here. No tax planning is needed. If we're unprofitable, why not maximize our losses? Why not be aware of all our tax deductions and carry them forward? Right, and we talked about earlier using those losses to offset the retirement account. I should always pay more because I made more. Who likes that statement? Anybody want to raise their hand? If they agree with this, all right, I'm waiting, no, no, okay, may have to go to NYU or some places in San Francisco to get more support around this statement here. But you know again, as entrepreneurs, if you do what the tax code incentivizes you to do to build and to hire and build real estate there are tax rewards. I can't do planning because I'm a W-2. Here's another misstatement. Now there are fewer opportunities, but there are plenty of tax savings opportunities for those of you still working full-time as well. We talked on some of them related to real estate, short-term rentals, real estate, professional tax status, but there are others. You can create a side business, create write-offs, oil and gas investing which is really fun and exciting and pairs well with real estate investing and can reduce your taxes even if you do nothing at all but just invest and even terrible deduction strategies, where the tax savings from investing into a terrible strategy is greater than the cost. So here's how we can avoid these mistakes.
Speaker 1:Whenever you have a significant event, like earlier right Capital gains events, notify your tax advisor. Make sure you're being collaborative. Who knows of any other events here? I was curious from the audience what other events may you want to tell your tax advisor or CPA? Married, marriage, divorce great. Any other ideas? Inheritance Fantastic. Any other ideas of Inheritance Fantastic. Any other ideas of what you should be telling your CPA? Selling stock Selling stock capital gains events we have seen so many times where the client didn't even realize the stock was being sold by their advisor.
Speaker 1:So we had a client once who asked us whether it made sense to get married. Had a client once who asked us whether it made sense to get married and you know my initial response is like maybe you should. What does a wife say? But from a tax perspective it saved the client $35,000. Could have paid for the wedding.
Speaker 1:Invest into a collaborative relationship. Let me backtrack Other things you want to tell them when the income is going to go up, goes down. New ideas, new goals, new business strategies, any change? Because this, even if they are qualified advisors, they're not going to know what's going on in your life and they don't have a crystal ball, so they're assuming that you have all the guidance you need. Invest in a collaborative relationship, especially if you guys are paying significant amounts of taxes. This is an investment, especially if that investment pays off in tax savings.
Speaker 1:Consider the tax implications of decisions and be proactive and consider a specialist. Now, what I would say is everybody's at a different phase. One of the firms that we most refer is TurboTax and H&R Block. If you're just getting started and you just have some basic deductions, you will be taken care of. But if you are paying over $100,000 in taxes and you're expecting to grow, the more specialized the knowledge can be related to your industry, the more help you're going to get and likely the most tax savings.
Speaker 1:Okay, so here's how we win the tax game. So we've done this for hundreds and hundreds of clients and it's really three core concepts here. First, we want to attack the AGI, which is just your income here, by maximizing our tax deduction. So at least, at the very minimum, be aware of how we can write off as much as we can right Home office travel, meals, et cetera, et cetera. At least be aware of what the tax code says, and this is something, by the way, you know how I said, don't DIY your own tax plan. This step right here. It would be so valuable if you could sit down with a tax advisor and just make sure you're maximizing your write-offs. If you're an entrepreneur and this is something you can DIY there's enough resources there for you to figure out what's tax deductible. But extremely important, I can't tell you how many times we've seen hundreds of thousands of dollars of missed tax deductions Then you want to consider your foundational tax planning.
Speaker 1:This is where we stop our DIY. We're no longer in the Home Depot mindset here. We are going to consider retirement accounts, things like cost segregation, study and material participation, and really doing it in a fine manner where we have a thorough tax plan with a qualified professional. And then we want to consider the more advanced tax reduction strategies If we're paying six figures in taxes, where there are more complex, more proprietary, sophisticated entity structuring related tax strategies for those of you in the higher tax brackets. So once we have exhausted these two ideas, if we're still paying a lot of taxes, then we open up the vault and then we consider some other opportunities. So the end result here is we all want to see financial freedom right and when we win the tax game, it gives us tax savings to reinvest back into our real estate, back into our businesses and back to the things that are going to grow our wealth, improve our livelihood and get us to achieve our goals. Get that financial freedom so you can do more of what you want Maybe lose your job, maybe spend more time with your kids and grandkids and achieve the lifestyle that you're looking for and tax planning is instrumental in achieving that For those of you that are looking to build your real estate rental portfolios.
Speaker 1:All right, so I have a gift to the audience. I've wanted to do a course forever because there's only so many people we can help on a face-to-face basis, and I finally put together a course. I went into mad scientist mode two weeks ago and just did it like everything I wanted to do in one shot and revised it along the way. And for everyone here, if you're interested in learning some of the essential tax planning strategies, some of it will relate to cost segregation, material participation and other concepts here material participation and other concepts here. Also, if you sign up for the course in a few days, I will give you I'm going to host a live Q&A. So, if you want to watch the course beforehand and come with your questions, or if we run out of questions here, anyone who signs up for the course is going to get the link to the Q&A session on Zoom and I'll stay there to answer any questions. So here is a QR code.
Speaker 1:So if you're interested in the course, it's absolutely free and, by the way, I will be charging in the future so probably starting next week for my sales guy where we get unqualified leads. This is probably going to cost around $250, but I'm giving it away for free and I would appreciate it if you found glitches. Just let me know, because we're just starting to do this, but we put a lot of thought into some foundational ideas here. You're also going to see time logs, work papers to record your write-offs. If you're just starting, don't worry about the million-dollar examples here. A lot of this stuff is going to be key for you guys to build a foundational understanding of how real estate and tax planning can help you guys achieve your goals. And that's all I have now. So thank you very much and we'll open it up for questions.