BiggerPockets Real Estate Podcast

BiggerPockets Podcast 370: Tax Hacks to Juice Your ROI with Amanda Han and Matt MacFarland

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Get to know enough CPAs, and you’ll hear the “light bulb” story.

“I was helping this real estate investor with her taxes… and thought, ‘Why am I not doing this?!'”

Yes, there are POWERFUL tax breaks available for rental property investors. But you have to know what to look for!

That’s the focus of today’s episode AND the new book (out today!) from Amanda Han and Matt MacFarland: The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors.

You’ll hear Amanda and Matt break down the basic concepts you need to understand in order to reach your goals, outline the questions you should ask your CPA, and take on the notorious “Do I need an LLC?” question.

You’ll also learn about more complex strategies like advanced/bonus depreciation, Opportunity Zone investing, and 1031 exchanges… plus, how short-term rental investors and flippers can optimize their tax strategy.

This episode is packed with free information that is literally valuable—meaning it could save you thousands, or tens of thousands, of dollars!

Download this one, check out the book, and subscribe to the BiggerPockets Real Estate Podcast so you won’t miss the next show.

Click here to listen on iTunes.

Listen to the Podcast Here

Read the Transcript Here

Brandon:
This is the BiggerPockets Podcast show, 371.

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Brandon:
What is going on everyone? This is Brandon Turner, host of the BiggerPockets Podcast here with my co-host, Mr. David Greene. David the tax man Greene. What’s up, buddy?

David:
Yeah, I’m anything but the tax man as people will realize when they listen to today’s show. That’s all that’s important, every day I’m getting better.

Brandon:
There you go. That’s awesome. Well, today’s show is about taxes, but not in the way you might think, we don’t just sit there and drill the tax code into you guys. It’s actually full of stories, full of tips, ideas. We talk a lot about opportunity zones, 1031 exchanges, cost segregation. Those are all big words, but we break them down and knowing the fundamentals of how they work could change your entire life.

Brandon:
In fact, I tell the story in the podcast of how one of those saved me $80,000 last year, actually working with Amanda and Matt, our guests today. So Amanda Han, Matt McFarland, those are our guests today on the show.

Brandon:
But before we get to the show, let’s get today’s quick tip. You’re about to hear how important it is to have a great CPA on your team, somebody who understands this stuff. But that goes for everything really, like real estate investing is a team sport. So David talks a lot about the core four.

Brandon:
So here’s the deal. BiggerPockets has an entire directory of real estate professionals that can help you do deals, agents, lenders, construction companies, even wholesalers, if you’re looking for deals. So you can find them by going over to biggerpockets.com, go to the navigation bar on the top, there’s a word that says network, hover over that, and then go to companies. And you can search by area and you can vet companies by looking over their forum posts and deals that they’ve done, references. So jump in and reach out, build those relationships. Got to build your team.

Brandon:
There you go, that’s out quick tip.

David:
I use that directory, I’m on that directory, that is one of the best kept secrets of BiggerPockets. People reach out to me all the time say hey, do you know someone that could do this or that, and they would have found it if they had used that directory.

Brandon:
Do you know that old song best kept secret of our generation? No? Anyway, moving on, that was a good song from high school. I don’t know, with that, that’s all we got. And now, David, what do you think, we’ll get deep into the world of taxes and urban hip hop? Sound good?

David:
Yeah, that’s exactly what I was hoping to do today. Let’s do it.

Brandon:
You’ll understand why I said that later. Let’s get to the interview with Amanda Han and Matt McFarland. All right.

Brandon:
All right, Amanda and Matt, welcome to the BiggerPockets Podcast. Amanda, good to have you back and Matt, you’ve not been here before, have you Matt?

Matt:
I don’t think so. This is my first time, thank you for having me.

Brandon:
Wow. All right. Well, we have some initiation that every new… I’m kidding, we don’t. But I do want to know a little about your story again. We’ve heard From Amanda and Amanda, I want to go through your story real quickly. But then I want to hear from Matt real quick and what his story is, how did he get into this whole tax/real estate game? So let’s start with Matt today.

Matt:
Okay, so I’ve been a CPA for over 20 years. I started one of the big four accounting firms. I was there a couple years and my big aha moment was working on wealthy individuals, making a lot of money. But my aha moment was working on some 60 year old guy’s tax return and all he had was, he was retired, he had rental properties galore, and you’re like, okay, well, let me see if we take his profit and loss statement and return, add back to depreciation. I mean, this guy was making like $200,000 in cash flow. I was 24. And I was like, what in the hell? This is awesome.

Matt:
So that was my aha moment and then started tailoring what I wanted to work on to be real estate and small businesses and things like that. And then left Deloitte, went to a smaller firm for a few years, then Amanda and I decided to start our own practice, I guess 12 years ago now.

Brandon:
Very cool. And Amanda, what is your story? Similar?

Amanda:
Yeah, my brief story. I’m a third generation of real estate investors from my family. But my parents didn’t really tell me to get into real estate. And it was Matt and I through work, through our jobs that we realized that real estate was such a great strategy for taxes and for wealth building.

Amanda:
We’ve been fortunate to marry our two passions, essentially, our passion for real estate investing and our passion for tax strategies, and to be able to do both of those at the same time and getting paid for it. So it’s always a good thing to do what you love doing.

Brandon:
Yeah, that’s cool. Well, what about your guys’s personal… What do you do in real estate personally are you guys out there swinging the hammer every weekend out in the suburbs? Or what do you guys do? Your choice.

Amanda:
For us, most of our investments our passive, passive more so turnkey rentals, that we have really good family members and friends that are managing for us. Although for our clients, we have clients that do all sorts of real estate from flipping to wholesale to burst strategy or just traditional long term hold investors.

Brandon:
Yeah, very cool. So today’s show, obviously, we could go through hours of your story and how you got into one deal to the next. But most people here are probably listening, because they want to know how they can save money, and how they can make more money and keep more money. And so that’s the goal today.

Brandon:
Of course, you guys have the first amazing book, The Book on Tax Strategies for the Savvy Real Estate Investor, and you have a new book coming out published through BiggerPockets shortly. Can you give a quick like 15 seconds on what that book is? And we’ll talk about it more later on in the show, but I’m just curious.

Amanda:
Sure. So our original book did really well. I think I heard a lot of feedback from people just saying I was really afraid of taxes, and it really was presented in a way that was easy for the everyday investor to understand. But we also got feedback that people wanted a little bit more advanced strategy. So going beyond just what can I write off, but what are some things I can really do to significantly reduce taxes from 50,000 to 10,000?

Amanda:
And so the second book, we set out to do just that, similar format in terms of funny stories, or sometimes horror stories, but showing how you’re able to really slash your taxes with a little bit more advanced tax planning.

Brandon:
And so in order to read this book, you have to be a CPA and super smart, correct?

Amanda:
No, it’s definitely not written for CPAs. And I think for my… that’s the reason we started writing our first book to begin with was, for us, we couldn’t find any tax strategies books that didn’t put us to sleep and we’re CPAs. So we were like, gosh, how is anyone going to really understand these things, especially for people who are not CPAs by trade?

Matt:
That’s the goal. As long as somebody doesn’t fall asleep reading it at 9:00 p.m. at night, then we’re good, right?

Brandon:
Yeah, there you go. That’s a win right there with a tax book. And it is, it’s fantastic. Both of them are fantastic.

Brandon:
But I want to go into a couple of the strategies that you outlined in the book and some things people may know a little bit about, but they don’t know the entire story. So a quick backstory on where I want to start. So last year, so a lot of people maybe already know this, but if not, Amanda and Matt actually do my taxes every year.

Brandon:
And so last year, I remember you guys sent me an email. And it said that I owed, it was a chunk of money because I make good money off book sales and off of selling properties and some off cash flow, whatever. I owed a lot in taxes. It was like, I can’t remember, I think the original email you sent me, it was $150,000 I was going to owe. I was like, whoa, and I knew it was going to come and I had some other huge like big windfalls last year that just worked out well.

Brandon:
I knew that was coming, and then one of you responded back with, oh, we still have that cost segregation study coming back on the apartment you own in Ohio. And I said, oh yeah, that’s right. And you said that’s going to change this a little bit.

Brandon:
So then you sent me a follow-up email and it was, okay, you now owe, I think it was 80,000 or it was 70,000. It basically dropped like 80 grand or something like that off of these couple of cost segregation studies that I did. And my jaw just hit the desk, right? How do you save that much money off of owning a rental property that actually while I own that property, wasn’t that great of a deal?

Brandon:
I didn’t make a lot of cash flow. I had a lot of ups and downs and a lot more downs than ups. I eventually sold that property, 1031 to something else. But how do you have a deal that’s a mediocre deal in terms of cash flow? It didn’t really go up in price, I didn’t buy in the path of progress. Yet I still saved a ton of money on taxes. How does that work? Can you guys explain that?

Matt:
Yeah, it all has to do with depreciation. Depreciation is probably one of our favorite things about being a real estate investor and doing taxes for real estate investors. So a good way to think about it for people who aren’t aware of what it is, you go out and buy a stock, right? You can’t write off the stock when you buy, you don’t write that off until you sell the stock years down the road, right?

Matt:
But with rental properties, the IRS allows you to take paper, we call paper write offs every year for a portion of the purchase price, and you spread it out over time. And so that’s what we call depreciation.

Matt:
Now, what you were able to take advantage of, the cost segregation is, it’s accelerated in depreciation, it’s taking more sooner than spreading it out over 27 and a half years or 40 years or whatever it is. So it’s a legal tax strategy to take as much depreciation sooner than later. You are still getting the same amount. It’s just can we take more over the first five years versus over 27 and a half years, so you can get more deduction now, save more taxes now, reinvest your money and go out and buy more properties? That’s the idea.

David:
So when Brandon sold that property, did he have to pay back any of the depreciation gains that he was able to write off of his taxes?

Matt:
Generally speaking, you would, but as Brandon mentioned, he did a 1031 exchange. So there’s ways when you do a 1031 exchange to also incorporate the cost seg before and maybe even incorporate a new cost seg on the replacement property to offset that potential depreciation recapture tax, is what we call it.

David:
And that right there is why we want a good tax professional looking at this, because for Brandon and I to try to learn the intricacies, what you’re basically saying is he bought a property that maybe lost money, but he made money because he could accelerate his depreciation into a five year window, and offset the income he made from other things. Then, he would have had to pay it back when he sold, but he did a 1031. So that accelerated appreciation went to the next property. But then he could do the same thing on that property.

David:
That’s becoming four levels deep of confusion. And this is why you want to have a book like this and people like you guys, because it’s one thing to understand the actual ability to do it, but it’s another to have a person who understands the parameters of how to get it done and make sure you’re doing it legally.

Amanda:
Yeah, I love how you just summarized that, David, because that’s exactly the goal for us as CPAs and even our intent on writing the book. Our intention is not for the everyday investor to become a CPA and learn, how do I accelerate and what does it mean? Is it over five years, is it immediately? That’s all the tasks for your CPA to do. But you need to at least know the basics, so you have a conversation with your CPA, or when you’re analyzing a deal, or in a situation where you’re about to sell your property.

Amanda:
Understand that that is a time when you need to talk to your CPA and say, hey, I’m buying something or I’m selling something. What does that mean? How can I take advantage from a tax perspective on this transaction that I’m currently looking to get involved in?

Brandon:
And let’s be honest, there’s a lot of CPAs out there, where if you were to ask them, should I do a cost segregation study, they’d be like, what? Because the tax code is so big that you can’t specialize in everything. So the same guy that prepared your business taxes or your personal taxes might not be the person that you need in your real estate business.

Brandon:
I’m wondering at what point, how many rentals does a person need? How far along their journey do they need to be able to hire somebody who’s a legit, real estate focused or at least understands the power of real estate and other strategies? Where in that journey do you think somebody should start looking for a more professional…

Amanda:
Yeah, that’s a good question. I do get that quite often, what’s the number of properties I should own before I hire a CPA or how much income should I be making? I think as a strategist, the way we look at it is actually not based on those two criteria.

Amanda:
Rather, we look at it as, what are your plans for real estate? So you could be someone who owns a rental property, but for many years you don’t plan on doing anything else. And maybe you already have the best strategies in place that you don’t really need a whole new strategy. That’s one extreme example.

Amanda:
The other extreme example might be you’re just starting out, you don’t own anything yet. But by the end of this year, you have plans in place where you’re going to end up with three or five or over the next two years, you’re going to have many rental properties. That might be a good candidate for tax strategy and tax planning. Because oftentimes, you want to plan ahead, so that you have the right foundation set up and not have to unwind bad structures or bad tax returns with bad depreciation two, three years down the road.

Amanda:
So, it depends on what your plans are in real estate, rather than where you currently are in real estate.

Brandon:
That’s a really good way of looking at it. Early on, and I want to actually cover this question, even though we probably covered it in the other interviews that we’ve done with you, Amanda, but it’s just one of the biggest questions we get. And that’s the LLC question.

Brandon:
So early on in my business, really young, 21, what did I do? I went on my state website, how to form an LLC, I formed an LLC, and then I paid some money to somebody and then I filled out some paperwork somewhere, and then I let it sit there for a while. That’s what you have to do to invest in real estate, you have to go open an LLC, and then you’re legit, right? That’s what people tend to think. I’m kidding, of course.

Brandon:
What is the truth with an LLC? Because had I consulted you, I didn’t know who you were but had I consulted you when I was 21, things would have been very different. I still may have opened the LLC, but I wouldn’t have just opened some random thing and just let it sit there. So where does the LLC play into a real estate investor’s life, especially for a newer investor?

Matt:
I think the way we look at LLC is especially for real estate investors who are going to own, let’s say we’re talking about rental properties. At the end of the day, actually, from a tax perspective, you don’t need to have an LLC to own rentals or run a rental property business.

Matt:
So from a tax perspective, nothing changes whether you own your property in your personal name, or whether you own the rental in the LLC that you own 100% of with you or you and your spouse. So really, it actually comes down to asset protection.

Matt:
And so obviously, we’re not attorneys, but the way we talk to our clients about it is, where are you at in your stage? What assets do you have you’re trying to protect? What future assets are you trying to protect? And can you accomplish your goals with creating the LLC for asset protection? Or umbrella insurance or we always obviously recommend they talk to their attorneys, because that’s really where they’re going to get the best advice, in terms of the asset protection.

Brandon:
Real quick on that note then, because I’ve been asked this and I’m not even sure the answer. How do you approach the attorney/the CPA? They’re two different people, we generally don’t have CPA attorneys, right? So in the common advice, even though we probably even gave it in the introduction of the show is, consult an attorney and a CPA.

Brandon:
Do I just get both of you guys on the phone? Do I just say set up a three way call, is that how would that should work?

Amanda:
Yeah, that’s a really great question. And that’s exactly the right answer. Right. So oftentimes, when a client comes to us and we talk about legal entity structuring, now, Matt used a very simple example of, okay, someone just holding a rental property by themselves or with a spouse. There’s not really any tax implications one way or the other.

Amanda:
But if you’re flipping real estate, if you have other partners involved, there’s definitely tax considerations to whether I have a legal entity or not. If so, what type of legal entity?

Amanda:
And part of that discussion is the benefit of tax savings as well asset protection. And oftentimes, we say, okay, here’s our tax recommendation, but don’t form any entity yet. You are going to talk to an attorney and they will make a legal recommendation.

Amanda:
Once they’ve made a legal recommendation, then we all come to the table collectively, whether it’s a conference call or an in-person meeting, or just a joint email. So we’re all on the same page. What did the attorney say, what did the CPA say and do those match? Or, if they match, great, let’s go ahead and start formation and how to use it.

Amanda:
If they don’t match, then it’s time to get on a call and say, okay, what’s the disconnect? And are there things that could be done to make sure everything works well together for the investor? I think that’s really key, getting everyone together to the table, because as an investor, you don’t want to be the go between playing telephone and saying, okay, this is what my CPA said, or that’s what my attorney said. Oftentimes, you’re not relaying the right information. And it’s also just a waste of your time as well.

Amanda:
But I think for most investors, the question of whether I should have an LLC actually comes from this giant myth that’s out there, that people feel like they need an LLC to write off expenses for their taxes. And we talked about it, like you said, Brandon, in one of our previous podcasts, that’s just not true.

Amanda:
So I would say 90%, maybe even 100% of the expenses that most investors will have, can be deducted whether you have an LLC or not.

Brandon:
Yeah, that’s cool. Yeah. It’s just such a huge misconception. In fact, I talked to a gentleman yesterday, who said exactly what I’ve been, he said about himself exactly what I’ve been saying for years, is that many people use the LLC question and the whole like, well, I don’t know if I need an LLC, as an excuse not to take action, rather than a legit concern.

Brandon:
It’s like, well, I don’t have an LLC. So I guess I can’t really invest yet. It’s a whole lot easier to say that than I’m afraid, or I’m not really sure what the next step is, or I’m just too busy to invest. It’s easier to say, well, I don’t have an LLC. And so people have this fear.

Brandon:
Other people are just totally afraid that they’re going to lose everything if they don’t have an LLC. Ironically, literally I know that if you try to buy a property LLC, it’s difficult anyway, like most banks won’t lend on a residential property if you have an LLC. So it’s actually the opposite, like having an LLC can actually hurt them and make it much more difficult.

Brandon:
So consult with a CPA and an attorney on a conference call on what the best avenue there is, but yeah, there you go.

David:
I want to comment one of the reasons I think people don't want to consult with professionals is because it could cost money. And it's very short sighted, that's how the amateur looks at everything is they say, well, what's it going to cost? As far as professionals says, well, what's it going to save me? Very similar to the real estate business where they say I don't want to pay commission. So they hire a really bad agent who's really cheap, and then they lose tons of money selling their house.

David:
There’s three benefits that I can see to why I would want to consult with a professional. I want to see if you guys agree with this, Amanda and Matt. The first is asset protection, what you just mentioned, this is a way to protect yourself, it’s way to play defense. When you structure yourself the right way, you’re protecting what you’ve already got.

David:
The next would be tax savings, how to save money, like what Brandon just went through. This is a way that he can offset some of the other income he made. That’s offense, that’s actually putting money back in your account.

David:
And then the third is when you actually look at what you’re doing and you consult with someone and you keep really good records. It forces you to become aware of your profit and your loss. You may think that you’re making money and you find out you weren’t, this happens to me all the time. I think I’m raking it in and I look at my expenses and I say, oh my God, where did all the money go?

David:
And other businesses that I just thought we’re doing okay, I’m like, holy cow. I’m crushing it on these. You would never think to do that until you have someone else looking at your books and looking at your numbers, because they’re looking into you. And it allows you to make adjustments, right? I can pour the gasoline on the right fire, the one that’s burning well, and I find my 20% where I know that I’m doing good in business.

David:
So you may be flipping houses and doing BRRRRs and buying big buildings or syndications. And once your tax professional looks at this, and they say, did you realize that you’re making three grand on a flip? You’re taking this much risk and that’s all that you’re getting? And on these deals, you’re doing really good. And maybe you can actually adjust your business plan around that advice. Would you guys agree that in your experience, that’s what you’ve seen?

Amanda:
Yeah. I love that story. Because that's one we see quite often, unfortunately, where clients say, hey, I flipped a property. I'm making a lot of money and I have a big tax problem. And when we ask the follow-up questions, is that all the expenses? What about the hard money loan interest and the points and the fees? After all, that's like, oh, actually, no, I didn't make as much money as I thought.

Amanda:
So yeah, if you have someone helping you along the way, you have good financial statements, where you can see how you’re doing in real time, I think that’s very helpful than finding that out next year or maybe even next April.

Matt:
It’s not uncommon for someone to, to your point David, could they finally get around to looking at organizing things, and it’s 18 months down the road? That’s a lot better to figure that out in month three or month four and do that quarterly than it is do it a year and a half later.

David:
I’m going to say this on the show, I’ll probably regret that I’m saying this. When I started selling houses for the David Greene team, I am not the guy that wants to slow down and look at the numbers. I didn’t have anyone that on the team to do it. And my philosophy was, hey, I’m just going to make as much money as I can and let the chips fall where they may.

David:
In hindsight, it still probably was the right call that I didn’t stop to look at what I was doing, instead I just kept making the money. But what I found is when I did bring someone into look, the amount of taxes that I had to pay would make you sick if I told you guys how much. Because we weren’t keeping records of all the people that I hired and paid and the salaries, they just weren’t being noted. I was told it was being noted and it wasn’t.

David:
And I went almost three years without tracking any of that and had to pay way, way more to the IRS than I should have because I didn’t keep good books. Literally, for the last few years, I’ve almost been working for free just to pay back the taxes that I made a year ago. Very discouraging.

David:
And now actually I have people in place to do that, what I’m thinking is over the next 10 years that will save me over $1 million, probably closer to $2 million, that I put the systems in place right now. So the point isn’t I’m beating myself up because I was going fast and being successful in growing a business, it was still better to grow a business and then figure out how to track everything.

David:
But the sooner you can put these things in place, it’s not just saving you the money when you first do it. It’s all of the future of your business that you have, the next 40 years. If you wait 10 years to do it, you will be losing so much that you’re not aware of.

Matt:
You got to play to your strengths, right? You know yourself, you know that, hey, I’m very good at taking action and doing this. I’m not very good at this over here, doing the numbers. So go out and hire somebody who can do that, or whether it’s a CPA or whether it’s a team member that’s in-house and doing it for you. You’re not trying to learn everything yourself, obviously, or do everything yourself.

Amanda:
And I love how you used the word systems, right? Because I’m a big systems person. And we’re not saying as an investor you need to stop doing what you’re good at. But you just need to have the systems in place with the help of your tax advisor, your legal advisor, so that these things are naturally built into your everyday business, because the goal is not for you to stop doing what you’re good at.

Amanda:
We all know that there are so many tax loopholes especially designed for real estate investors. So it’s just a matter of making sure you’re taking advantage of them. And of course, with the recent tax reform, that’s just been even better for real estate investors of all types. So yeah, definitely it’s just the low hanging fruit for all investors to make sure you capitalize on those tax savings.

Brandon:
What are some of the tax reforms? What are some things that have changed in the last couple years, especially since the first book came out, that real estate investors are being affected by?

Amanda:
Yeah, there’s been many changes. One of the more notable ones, let’s start with cost segregation, right? Accelerated depreciation always has been available. But as part of the tax reform, we now have a 100% bonus depreciation on a lot of assets.

Brandon:
What does that mean?

Amanda:
Bonus depreciation just means that instead of writing something off over five years, 17 years or 27, even 40 years, you might be able to write it all off immediately in the first year. And so that’s huge when we talk about, for people who are in the Airbnb business, for example, short term rentals, a lot of times we have to furnish our properties with furniture, microwaves, all types of stuff.

Amanda:
Those things used to have to be depreciated over a couple years. But currently, you can take an immediate write off for it this year as part of bonus depreciation. So it makes cost segregation even better than what it used to be.

Brandon:
Can you describe real quick for those who are not sure exactly, we talked a little bit about cost segregation earlier. But basically, I guess, maybe just tell me if I’m right or wrong here in how I usually just explain it.

Brandon:
It’s like you have a house, but in reality, you don’t have a house. You’ve got 400 square feet of carpet and 800 square feet of tile and you’ve got 75 windows, and you’ve got… Well, hopefully not that many, but you’ve got all these individual parts. And we’re saying, the IRS says you can take a stove over five years or seven years. So why would we take the stove over 27 and a half, which is the whole house as a whole?

Brandon:
So we’re basically breaking out all the individual little pieces, so we can deduct them over a five year or seven year period. But now with bonus depreciation, we’re now deducting them over a one year period. Is that right? Am I explaining that correctly?

Matt:
You should be a CPA.

Brandon:
I should be a CPA. There we go. So that’s the power. And is this something that somebody can just go and… actually let me ask two questions on the cost segregation thing. Somebody today who’s listening to this to owns a rental property, maybe two rental properties, small house, duplex, $200,000 to $300,000 in assets that they own, got mortgages on it, should they be looking at things like cost segregation studies? Or is this for the David Greene, Brandon Turner, I own dozens of properties situations? Where is this important?

Amanda:
That’s a good question. I think that’s a misconception too, that people feel like cost segregation is only for the ultimate investor, like the two of you, or-

Brandon:
Ultimate investor, that sounds like a TV show. Yeah, we should make a TV show called the ultimate investor. We’re going to do it.

David:
Can we start hash tagging ourselves that way on social media?

Amanda:
Yes. Can I get a royalty for that?

Brandon:
Yes. Today on the ultimate investor, there’s a chipmunk in the attic.

David:
Yeah, take like a video of the Ultimate Warrior running around in the ring and put Brandon’s face on it.

Brandon:
There we go.

Matt:
That would work, that’s a good idea.

Amanda:
With the beard. You got to keep the beard.

Amanda:
Or large commercial property investors. Okay, those are the people for cost segregation. And that’s true, right? The more properties you own, the larger the dollar amount, the better it is. But it does not mean if you own two or three duplexes that you shouldn’t consider it. It just depends on your profile, it depends on if that is a good strategy for you.

Amanda:
Let’s say you’re someone who is a high W2 income earner and you’re at the over 50% tax rate between federal and state. So even if you have a small single family residential, and you get 30,000 more in depreciation, that saves you 15,000 of cash, right?

Amanda:
I wouldn’t reserve that just for the ultimate investor, but it could be for anyone.

Brandon:
That’s cool. Yeah, definitely. Now who does the cost segregation study? Can anybody do it, is this some paper you file or how does that actually happen?

Matt:
It’s not for the everyday person to do on their own, unfortunately, but we recommend you hire, there’s companies out there that specialize in it. They’re generally engineering companies of some kind, just have specialties. They’ll go out and they’ll look at your property, analyze it, and do all the mumbo jumbo they do.

Matt:
It’s unfortunately not one that you can do on your own or do online. We’ve seen people try and do that, based on talking to colleagues. That usually backfires under IRS audit.

Amanda:
It’s the engineers that break out the components of the building and then your tax advisor, your CPA, will then calculate the depreciation based on the components that are broken up.

Matt:
Here’s something really cool about it too, with a lot of things in the tax world, as you get closer to year end, there’s some things you actually have to do before year end to take advantage of tax deductions or tax strategies. Cost segregation is actually one you can wait until the following year. So if your tax return is due April, you can wait until you have 90% of your tax return done and decide, okay, work with your CPA, decide is the cost segregation going to make sense based on these final numbers?

Matt:
If so, you pull the trigger, you extend your tax return, and you get it done in the next six months. So it’s not something that has to be done by year end. And so that’s really cool is you can wait to see, get pretty concrete numbers before pulling the trigger and spending the money on it.

David:
Yeah, that’s very cool. You made a good point that a lot of people will be tempted to think, well, I’ll just do it myself. I’ll google how to do a cost segregation study. I’ll do it myself. And then when Uncle Sam comes knocking on your door to do the audit, I can guarantee the feeling you get in the pit of your stomach will not be a happy one.

David:
I wanted to ask you if there’s other things that you’ve seen investors think they can do on their own, and then later mess it up. I’ll start it off with an example that I learned. You’ll often hear Brandon and I talk about the 1031 like kind exchange. It’s one of the building fundamental blocks of tax savings.

David:
A lot of people know that after you have your house for sale, or your property for sale, you have 45 days to identify a list of properties, and 180 days to close on it. And everyone is more or less aware of those rules. I’ve seen people that think I will just sell my house with the realtor, identify the houses through the website or whatever I do, and then go close on them.

David:
And they come to me to help them buy the new house and I say, wait a minute, so you closed on a house last week and the money is sitting in your bank account? And they say, yeah, now I got 45 days to go identify properties. And I face palm. Can you explain to the audience why it’s easy to think that you know what you’re doing, but why that person would not qualify for a 1031 and maybe other examples of things that investors should be aware of, don’t try this at home?

Kevin:
Yeah, but can you explain what a face bunk is first?

David:
A face palm. Why would you do that?

Brandon:
All these kids and their hippie language.

Matt:
Yeah, actually, that’s a really good example, to be honest. We’ve seen that more times than we should is that, yeah, the person thinks they can do their own 1031 exchange and doesn’t understand that they can’t take that money and put it in their bank account, because at the end of the day, they think they’ve accomplished the same thing.

Matt:
Yeah, there’s 1031 exchanges. Real estate professional is another one, without getting into the nitty gritty of everything. That’s another one that people think they can do on their own, or they think they can, we’ve seen a lot where they’re hiring somebody, John Smith down the street, who doesn’t have real estate background and being a tax accountant, but doesn’t understand the rules, and they think they can do it the right way. And they miss an election or something like that on their tax return. That’s a huge problem.

Amanda:
Yeah, I think in the past couple years, we probably all agree that real estate market has done really well. And so as CPAs, the number of 1031 exchanges that we’re seeing and reporting has skyrocketed. I think a big percentage of our clients have been selling properties and replacing it with one or even multiple properties. And yeah, you need to have an intermediary involved prior to the sale of your property. So if you’re telling your real estate broker after the fact or even your CPA after the fact, that’s too little too late with respect to 1031.

Amanda:
And yes, besides those, the number of days for identification and replacement, there are a lot of other roles.

David:
Like a constructive receipt, that’s what this person didn’t understand.

Amanda:
Exactly. And we had, oftentimes just not knowing what do I have to do in order to defer all of the tax? I just talked to a new client the other day who got bad advice from their CPA that they only reinvested the cash that they got from closing into the 1031. And what they ended up doing was essentially owing taxes on the entire transaction.

Amanda:
So he went through the stress of trying to meet the deadlines and paying an intermediary And really didn’t get any tax savings at all. So in the new book, we talk a lot about 1031 exchange and frankly, some of these horror stories, so that hopefully people can get an idea of what can go wrong when you’re not meeting all of the specific rules and requirements.

Amanda:
But we also talk about what are some creative things that you can do with 1031 exchange? How can we take cash out of a 1031 exchange without paying taxes? Because that’s something a lot of people want to do as well.

Brandon:
How do you take cash out of a 1031 exchange without paying taxes?

Matt:
You buy the book.

Amanda:
Give you a hint, one of the ways is refinancing, right?

Brandon:
All right. I’m pumped.

Matt:
That wasn’t subtle enough?

Brandon:
No, I love it. But here’s actually where I was going to go with that. I want to talk about 1030 exchanges from a not tax standpoint, from another standpoint, and that is, for those again, if you’re still confused about 1031, you sell a property, you buy another one. And if you do the rules all correctly, you can potentially not pay any capital gains tax on the profit you made on the first thing. Are we good with that basic definition?

Brandon:
So here’s the problem with that. Today, the market has gone up significantly. We are in a very competitive hot market, people are selling this property, which was performing really well for them, they had a good grasp on it, they had a good handle on it, and they’re making good money. They sell it, because it’s a great time to sell.

Brandon:
But now what they find themselves in is they have a 45 day shotgun wedding here to find a new property at a time in the market that’s incredibly difficult to find great deals. So now what they are trying to save on taxes by dumping into a new deal, and I’m not saying they something bad. I’m not saying this person did something stupid, but this is my own story. Like this is what I did, right?

Brandon:
I sold my 24 unit I had in Washington, and I don’t think I’ve ever fully told us on the podcast and then I went and bought a property in Ohio. Now, there was a lot of things I did wrong there. And I don’t regret any of the choices really, I made on that property, it’s all fine, especially because of the cost segregation savings and all that.

Brandon:
But what happened was I sold a really good performing property into another property because I had to find something. And it was a very mediocre to not good deal. I wouldn’t call it a bad deal, just a not good deal for me.

Brandon:
And honestly, one of the biggest reasons was because I didn’t listen to my friend, David Greene, and pay attention to his book on finding the core four. So I never had my core four in Ohio. I never had a rock star property manager.

David:
You would have, had you had more time, right?

Brandon:
Yes. Had I had more time, the 45 days killed me. And even though a lot of it was I was moving to Hawaii, and I was busy, and I was having a baby. And so anyway, my point being in all of this is, be careful with the 1031 exchange because yes, it can be a great tax savings. But if you’re going to sell a good property just to have to go buy a bad property, just to save taxes, just be careful. That 45 day thing is legit. It’s tough.

David:
You really got to understand the difference between practice and theory, like the 203K loan in theory sounds amazing. You’re going to give me money to do my house? Then you look at what it’s like in practice and I got to get three bids from licensed contractors and they got to agree to get paid by the government when the government decides to pay them.

Brandon:
Monthly.

David:
Yeah, it's hard to find a contractor as it is. And so realize it doesn't always work out in practice. And that's why we love tax professionals. Because not only… this is what I really like, not only do they know the law, they are working with other investors who are probably smarter than me, and seeing what worked for them. And then bringing that strategy into my world, when I say here's my problem, and they've already seen it.

David:
You don’t want to surgeon that you’re the only person they ever operate on. That’s my surgeon for life. Doesn’t work with anyone else. I want somebody who’s worked hundreds of other people and they know what different bodies do and can respond to mine that same way.

Amanda:
Yeah, I think that’s a great example, because oftentimes, we’ll talk to a client they’ll say, hey, I’m thinking of selling these properties, we go through the scenario of 1031 exchange, and they come back and say I really couldn’t find any good replacements. So maybe the decision is we hold onto this property, and instead we do a cash out refi, use that money to just invest in more properties.

Amanda:
That way, we don’t have to pay commissions, we don’t have to worry about 1031 exchange, because it looks like we already have a good performing property, maybe we just wanted to tap into the equity to grow our portfolio. So we do also see that quite a bit as an alternative.

Matt:
And also maybe that person didn’t actually need to do a 1031 exchange for tax purposes. We’ve unfortunately seen that where clients will pull the trigger on a 1031 exchange without consulting with us, because they’ve heard people talk about how great it is. And then lo and behold, like, well, you had some carry forward losses that you could’ve used to offset the gain and not have to worry about the 45 days and the stress.

Matt:
There’s studies out there, I’m sure you guys have seen it where people will pay like 7% to 10% more on average for a property that they’re buying as a replacement property because they’re up against the clock. That’s a horrible thing to do, horrible reason to buy a property obviously.

David:
So one thing that I do in my own investing is, because I flip houses and I buy rentals, I do a lot of different things. I limit how often I flip and I really prefer to build wealth the boring way, which is buy and hold. The BRRR method is a popular term we’re using, I wrote the book on that, but it’s really just a way to do buy and hold.

David:
Can you share with us as far as from a tax perspective only, why you would prefer buy and hold versus flipping and for people who are looking at, oh, man, I could flip a house and make 50 grand, how that 50 grand often ends up being like 20 grand, 25 grand when you’re done?

Amanda:
Yeah, I think the biggest difference is when you flip properties, what a lot of people don’t understand is that it’s not capital gains income. It’s not at a lower tax rate. In fact, it’s ordinary income tax rates. So whatever your personal highest bracket is for the year.

Amanda:
In addition, you oftentimes have to pay self-employment tax, which could be an additional 15% on top of federal and state income taxes. So that’s where your example David comes from where, okay, we made 100,000. We might lose $50,000, $60,000 of that to taxes.

Amanda:
In addition, with fix and flip, because we’re getting rid of the property, we don’t have any depreciation left, versus in a very similar transaction, if we kept that property as a BRRR transaction, now we’d get to take depreciation. We can do accelerated depreciation, we can accelerate all the rehab that’s been done and we don’t have any capital gains or ordinary income.

Amanda:
So it’s essentially, no tax liability, and you get additional write offs that you otherwise wouldn’t have, with respect to flipping. So yeah, for our clients who flip and we do have a lot of them who do a handful of flips, it’s okay. There are some deals that just makes sense, it does not make sense to hold.

Amanda:
But ideally, you’re simultaneously keeping some of those as rentals too. So you can use the rentals to offset some of that tax liability from the flips.

Brandon:
Can I ask an advanced question here, but that might apply to a lot of people? Let’s just say hypothetically, somebody was flipping houses a little bit, like doing a couple of flips. For example, we closed on one this weekend, my partner and I cleared $133,000, that’s actually true. And we’re splitting it 50/50. I walked… $65,000, roughly, let’s call it.

Brandon:
Now, that’s money I got to pay a lot of taxes on, Hawaii state tax and federal tax. I’m going to just get killed on this. At the same time, within the same company that we flip houses, we also buy rental properties, and we buy other stuff. I have employees that work in every aspect. I might even hire a new employee shortly here, who’s going to be doing a lot of stuff for a lot, like just real estate in general.

Brandon:
How much of that… and I know this is very specific. When you have employees, how much of the profit from flipping can you offset by saying I paid this employee $65,000 and I made $65,000 on flipping, so that’s just a breakeven. I owe no taxes. Is that how that works or how can people look at that scenario? You know what I’m saying?

Amanda:
Yeah, I would say the key is just trying to determine how much that employee is actually doing for the flip specifically, versus for just like you said, your real estate business. Ideally, we want to try to have an argument that 90% or 95% of what this person is doing is for Brandon Turner’s whole real estate empire, if you will. Maybe they helped out a little bit here and there-

Matt:
The ultimate investor, empire, this is getting good.

Amanda:
Maybe they’re doing a little bit with helping out on the flip, but maybe your partner was the one doing the majority of the work, because then that could result in a situation like what you said. We had 50,000 flip profit, but I had this employee salary of 50. So that really wipes out the taxes on the transaction, right?

Amanda:
And a key here, I know you briefly mentioned that the rentals and flips are in the same entity. They don’t have to be in the same entity in order for the rentals to offset the flip. So, if let’s say you’re flipping in company one, and then personally, you own a bunch of rental properties, generally the income and losses will offset each other, assuming they all end up on your personal return.

Brandon:
Yeah, because the ultimate idea here that I love the idea of thinking through this and if you can flip, let’s say you made half a million dollars a year flipping houses, you made half a million a year flipping houses and you had a team of people doing that. Or a few people involved, half a million.

Brandon:
Then, you hired five people at 100 grand a year that you’re paying salaries to overall, and between that, they’re buying rentals and they’re helping with the flips. And here’s what I’m getting at with… The idea of you’re turning active income, flipping income into… You’re dumping stuff into buying rentals at the same time.

Brandon:
And so essentially you just paying no taxes, but you’re building long term wealth. It seems like an awesome strategy if we can pull that off, right? Is that how that works?

Amanda:
Yeah. So let’s say you did a flip and you made $100,000 a profit, you turn around and take that 100,000 as a down payment on a $300,000 rental property where you do a cost segregation on. Maybe that’s enough depreciation by itself, just to offset the taxes on the flip.

David:
And if you have someone like Amanda helping you with this, whatever you’re paying them is much less than what they’re saving you with what you’re doing. And that’s how the professional looks at these situations. It’s not I’m not irritated that I have to pay a tax professional. It’s, oh, this person is going to save me so much, like what you just described, that it becomes an investment in the business. I’m really harping on that because I see in the businesses that I’m running that oftentimes where I tried to save money, I ended up costing myself money.

David:
Another thing I like to point out with house flippers is you get hammered on taxes. Unless you’re an experienced flipper, you just do not understand how bad it’s going to be. But when you lose money, the government doesn’t show up and say, let us reimburse you for 50% of your loss, like we were going to take when you made a profit, right? It really is, when it goes well, that’s capped. But when it goes bad, there’s nothing that can stop it from going really, really bad.

Brandon:
Unless you’re a giant billion dollar bank, then the government will reimburse.

David:
Then you’re too big to fail or if you’re Brandon Turner and you become the ultimate investor, too big to fail, we will all dive in and save you, so that you don’t actually lose your money.

David:
So guys, I know one thing that’s really popular right now is short term rentals. In a market like this, you have to be a little bit creative to make things work and short term rentals is the way that you can increase your income. Can you talk about some of the common write offs for that, tax strategies that people may be missing out on that would benefit them from getting this book or consulting with you when it comes to short term?

Matt:
Yeah, I think the cool thing about short term rentals is from a tax perspective, it’s a lot like long term rentals. So in terms of deductions, there’s a lot of the same things, but as Amanda was talking about earlier, with like the Airbnb model, where sometimes you’re going to buy a house with the plan to make it a short term rental. So obviously, most of these short term rentals are furnished, right? So you could be spending 15, 20, $25,000 on just that stuff alone, just to furnish the property.

Matt:
So with this bonus depreciation in the new rules that came out a couple years ago, that’s an immediate tax write off a 20, $25,000 right away versus on a long term rental, maybe some of that you can write off right away, but maybe some of that you got to write off over five years. That can be a slight difference.

Matt:
But yeah, just from a pure economics standpoint too, I’m amazed when we look at tax returns, and you’ll see a tax return for a single family house that’s pulling in $140,000 in gross rents. And you’re like this isn’t adding up, it’s not penciling out over 12 months, something sounds off, and then obviously you figure out it’s a short term rental.

Matt:
I think financially, it’s a model that’s working very well and then you can still take advantage of the depreciation and things like that from a tax perspective.

Brandon:
Sorry, go ahead.

Amanda:
I just love hearing success stories, we have a couple of clients who, maybe both husband and wife are working full time. And once they got into the short term rental business, that maybe in a year or two, we had one or two clients where the spouse has already stopped working, and just doing the short term rental that’s already replaced their W2 income and having lots of depreciation and write offs to really make the same amount of money that they were making, when both of them were working full time.

Amanda:
I think one of the common misconceptions is that people are under the impression short term rentals are taxed differently or taxed higher than long term rentals. And at least in terms of what we see, that’s not the case for the majority of the clients. So traditionally, Airbnb, VRBO, it’s just going to be regular rental tax rates. Now, if you’re operating your short term rental similar to a hotel business, that’s generally when you might be paying maybe like 15% more in self-employment tax.

Amanda:
So, just real quick the definition, what does it mean to be a hotel business? It means you’re offering auxiliary services beyond what a short term rental does. So if you also can do airport pickup and drop off, or if you offer food and beverage services, not just giving them water and soap, but I’m going to cook for you, like a bed and breakfast. Or hey can use a rental car while they’re staying there.

Matt:
Or you’re changing the linens or sheets and towels every day, like a normal hotel would do.

Amanda:
Right, which most people don’t, you do a cleaning once people leave. So for the vast majority of our clients in the short term rental space, they get all of the same benefits as long term rental investments. Same depreciation, and they don’t have to worry about that additional tax.

Brandon:
What about those who are playing the Airbnb arbitrage game, which is where they rent an apartment and then they rent that apartment out on Airbnb or they rent a house and they rent, they don’t actually own the real estate. So now they can’t get any of… they’re not real estate investors at that point from a tax standpoint, right? Or how does that work?

Amanda:
They are. For tax purposes, it’s treated just like any other rental property. The only difference is, because in the rental arbitrage, we don’t own the property. So we don’t get to take depreciation, we don’t get to use cost segregation. But instead, what we deduct is the rent expense that we’re paying to the actual property owner.

Brandon:
Okay, well, is there any difference, this is probably a stupid question, I haven’t thought this through at all, but it just occurred to me. We can only deduct mortgage interest on our taxes when we own a property. But if you’re playing the arbitrage game, you can deduct the entire rent amount, right? Doesn’t it seem like you’d actually potentially make more money by owning, like at least now, by doing the arbitrage game than by doing… did that make sense?

Matt:
I see where you’re going. I think it comes down to numbers.

Brandon:
What is the rent compared to the mortgage?

Matt:
What is the differential, what are you paying in rent versus mortgage interest or property? Because remember when you’re owning, you got the interest of property taxes, utilities, as a renter. All you got is rent, maybe you’re paying some utilities.

Brandon:
That’s true. Maybe it’s pretty similar.

David:
It’s also a very short term way of looking at it though, because you’re only looking at the cash flow. You might maximize cash flows doing the arbitrage style, but you’re not owning an asset that you’re paying down the mortgage on and it’s appreciating over time and you get all the benefits that come from real estate ownership there.

Amanda:
I agree.

Brandon:
The Airbnb arbitrage thing reminds me more like flipping where it’s a business, if you stop doing it, you stop making money. There’s nothing wrong with it. It’s great. In fact, if I was suddenly just bankrupt right now and had to start all the way over and had nothing, I’d probably start with the Airbnb arbitrage.

David:
It’s like rental wholesaling, a person that has a house that they’re not using. You’re finding a person who wants to sell their home and a person that will buy the contract. It’s very similar.

Matt:
I’m going to go copyright that term right now.

David:
Matt is basically typing this entire podcast, the CPA attorney over there. I’ve got 24 patents that I’m going to put in. Ultimate investor is already too late, someone’s going to hashtag us and get a bill.

Brandon:
So this is really good stuff. There’s probably like 100 more topics I would love to cover but we just don’t have time. But just to give a quick plug for the book, it’s called The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors Volume Two, because it’s a sequel of the first book. And there’s a ton of stuff in the book, all details about the new tax laws, stuff opportunity zones which I’d love to maybe touch on if we get time, self-directed IRA stuff, short term rental stuff and pretty much any scenario you have questions on, you’re going to find information in there.

Brandon:
So if you guys want to get the book it is for sale today at biggerpockets.com/advancedtaxbook, and you can get the physical book, 24.99. And I would actually recommend the ultimate package which includes the physical book, like shipped to your house, audio book, and the e-book, which is cool. And there’s a whole bunch of bonus materials and such as well.

Brandon:
So it’s one of those things you might spend on the ultimate edition like 50 bucks, but if you look at how much money you’re going to be saving, it is one of those no brainers. So check it out, biggerpockets.com/advancedtaxbook, you can also find it if you can’t remember that biggerpockets.com/store. So anything else you guys want to add about the book or any of the bonus stuff? Anything you want to add there?

Amanda:
No, I would just say don’t let the name scare you. We called it the advanced tax book. But hopefully the goal is that it’s filled with stories, real life stories from our investors that are anonymous, of course. But yeah, it’s real stories about when tax strategies are done correctly, how powerful they could be, in terms of saving you taxes and just retaining wealth.

Amanda:
But also the horror stories about when you do a small thing incorrectly, how that could cost a ton of money in lost taxes.

Brandon:
Can I ask a serious question? Are all the anonymous horror stories mine?

Matt:
Just the ones with pictures of guys with beards next to them.

Brandon:
The little icon next to them [crosstalk 00:51:30].

Matt:
We changed the names, so they’ll be fine. They won’t be able to figure it out.

Brandon:
It’s Randon Burner. Weird. Pick up the book, you guys. Check it out. I think you’ll like it a lot. It’s amazing as is the last one, and maybe even pick up, if you haven’t read the first book, pick up both at the same time. Because there is different information in both. It’s not the same thing. It’s not just updated. It’s actual new information. So it’s a sequel. It’s like the ultimate investor part two. That’s going to be the new one.

Brandon:
All right, with that, last thing I want to cover before we move on to a bunch of fire round questions concerning taxes, opportunity zones. What the heck is an opportunity zone and why does it matter? Like give me an example of why that would matter.

Amanda:
So, we talked about 1031 exchanges quite a bit, when you sell real estate, you replace with real estate and you defer the taxes on the capital gains you’ve made. So opportunity zone is a very similar concept where you can sell real estate and buy real estate, defer the tax. But one of the biggest differences is that opportunity zone is not limited to the sale of real estate.

Amanda:
And so we have a lot of clients who have stocks, that’s also appreciated in value in the past X number of years, or people who work for the high tech industry, that just have appreciated stock, and they’re wanting to get into real estate, to sell the stock and use that money for real estate, but they don’t want to pay the hefty taxes. So opportunity zone is a great way for them to be able to do so, sell stocks, avoid or delay the taxes and reinvest that into opportunity zone real estate in our example.

Amanda:
Go ahead.

Brandon:
I sell a business, let’s say I own a business or stocks or whatever. And I’m going to clear $1 million in profit from the sale. They don’t have a 1031 for business over stocks. But I can put that money… do I have to put the $1 million I made or is it the real estate version of 1031? Where you have to put the entire amount or is it just the profit?

Amanda:
Yeah, so good question. So for the opportunity zone, it’s optional, how much you want to put in. So in your example, if we sold our business for 2 million, but we cleared 1 million in cash, you can put 2 million or you can put 1 million if you wanted to. If you wanted to only put 500,000, that’s fine, you defer $500,000 of that from tax and the rest you pay taxes on.

Amanda:
So it’s very flexible. We don’t need to have an intermediary. So David, if you have a client that’s coming to you, you don’t have to face palm, you can say, hey, let’s look at opportunity zone, because you didn’t do a 1031 exchange. So it’s very flexible.

Amanda:
The other benefit of the opportunity zone that’s really great, is we’ll continue with your example, Brandon, of $1 million, we’re going to invest that into an opportunity zone that holds a piece of apartment, let’s say. And we hold it for 10 years, let’s say that property went from $1 million to $3 million. One of the benefits is that the $2 million of appreciation potentially could be completely tax free forever. So that is an added benefit of the opportunity zone and I think one of the main reasons why that’s been such a popular topic.

Brandon:
So what’s the deal with the seven year thing? Wasn’t there, you have to pay it back in seven years or something like that. But if you hold it for 10, isn’t there a thing with that? Am I making that up.

Matt:
No, you’re right. So when it first came out, it was the end of 2017. They had this window if you held the replacement property for five years, you could defer or avoid 10% of the taxes that you would have had to pay originally. If you held it for seven years, you could avoid 15% of taxes.

Matt:
Now, if somebody goes in at this point in time, they’re only looking at the five year window, because the cut off for when you have to pay the taxes is actually the end of 2026. So there is no more, they can’t even make the seven years anymore. Because once you get to the end of 2026, you have to pay the taxes that you would have had to pay when you sold your property originally, regardless of whether you actually sell the replacement property by the end of 2026.

Brandon:
To go back to the million dollars, I put a million bucks into an opportunity zone. Whether it’s a fund or my own deal. I can do either one, somebody else’s fund.

Amanda:
So it’s an opportunity zone fund. It doesn’t have to be a syndication, which is a misconception. So let’s say Brandon and Heather created an LLC, and we call that an opportunity zone fund. That’s perfectly fine.

Brandon:
Okay, so I take my million bucks, I put it into a thing. I want to hold it for 10 years, because I want to pay no taxes forever, except I owe taxes on it in year seven. Where do I get that money for taxes?

Matt:
That’s a thing that everyone’s got to be aware of and talk to their advisor about and plan for, because what’s the liquidity going to be in 2026? So, that’s something you got to plan for, obviously.

Amanda:
And hopefully, in the example we used, you sold your business for 2 million, right? So today, you’re clearing an additional million dollars of cash. So in the meantime, you can invest, just make sure that there is liquidity by 2026 to pay for some of that.

Amanda:
And that’s the main difference with opportunity zone own versus 1031 exchange. 1031 exchange, if we sell a property for $2 million, we have to replace, we have to buy a replacement properties of around 2 million to get the full deferral. But in this scenario, you only need to reinvest the gains.

Amanda:
You can basically take your equity back out in cash, and there are no taxes at all today.

Matt:
Well, that’s the carrot they are dangling, is that if you can hold it for 10 years, the appreciation you get on your replacement property can be totally tax free, whereas a 1031 exchange, there’s nothing prevents you from continuing to swap and swap. That’s one of the tax strategies or swap until you drop, like just keep exchanging until you die.

Brandon:
I’ve never heard that before, that’s funny.

David:
That’s the third thing you said that rhymes, mumbo jumbo, nitty gritty, swap until you drop.

Matt:
Did I say nitty gritty too?

David:
Yeah, you did. I noticed that you got a thing for rhymes, like this is a freestyle rapper turned CPA.

Matt:
I got to get into another career.

David:
Do your taxes and then get into a cypher.

Brandon:
When I first met Matt the very first time I think we met in person we had like, we were eating lunch or something. My first thought was, this guy’s a rapper. Everything about him screams I am from the streets and the hood and I rap, clearly.

Matt:
That’s the first time anyone’s ever heard that about me.

Brandon:
All right, so two quick clarifications on the opportunity zone, first of all, opportunities zones, where are they and who defined what an opportunity zone is? This is all wrapped in one question. How do you figure out what they are? Where are they, who defined it? And why did the government… I’ll give you a hint, the government defined it, why did they pick those areas? What does that mean?

Amanda:
Good question. So the government, yes, it’s defined by the government. And these are just areas they want revitalization projects to come in. And a common misconception when we hear the word opportunity zone, investors are thinking about the worst neighborhoods of Detroit, just abandoned buildings.

Amanda:
And that’s not necessarily true. There are opportunities zones all over the US, also in coastal cities like California, in Malibu, Santa Barbara, New York City, Hawaii also has opportunities zones. So they’re not necessarily what you tend to think of when it comes to really run down areas.

Brandon:
Yeah, here in Maui, the opportunity zones are either… I know there’s one over in Wailuku, which is like the rough part of Maui, but it’s like the rough part. It’s over by Costco and Walmart and it’s like the nicest developed area. I don’t know how they chose it though, but it’s like they picked the worst area and the best area and that’s opportunity zones here for Maui.

Amanda:
I think oftentimes people are shocked to find out where they are, because we found, Matt and I were looking in Fullerton, offices in Southern California, there’s opportunity zones really close to our office. Our office is not anywhere near like a war zone type of place.

Matt:
I think we looked too, there was one, Orange County has parts along the coast, Newport Beach, I think somewhere along the coast there was an opportunity zone in Orange County, which makes no sense to you and me. Because properties are worth millions of dollars already.

David:
It’s the rough part of Orange County. It’s like the clearance rack at Saks Fifth Avenue.

Amanda:
You can find Matt rapping there on the weekends.

David:
Yeah, there you go. For somebody who wants to find opportunity zones, can you give us the resource where you can look-

Amanda:
Yes, it’s actually-

Brandon:
Google.

Amanda:
Actually the IRS website. So if you want the IRS website and search opportunity zone, there’s a link that they update pretty frequently. I think that you can run it by state, by city, by zip code to get the most current listing of where those are.

Amanda:
I think for those people who buy the advanced tax book from BiggerPockets, we have an additional chapter specifically on opportunity zones that has that information as IRS website is the best place to get that.

Matt:
Now, here’s another thing, as we mentioned, we don’t need an intermediary like a 1031 exchange. But like a lot of things in tax, this is not a do it yourself thing. So make sure you talk to your advisors ahead of time, because there are numerous rules you have to follow to make sure you’re getting all the benefits you’re hoping you get.

Brandon:
And one of those is you have to actually fix the property up to a certain degree, right? It has to be either a development job or like a massive rehab, right?

Amanda:
Yeah, massive rehab. So good for advanced BRRR strategies where you’re doing quite a bit to the property.

Brandon:
I think it’s fascinating. We make fun of the government a lot for being stupid, we love to tease the government for being dumb and red tape. But here’s why this is such a genius plan, whoever came up with the idea. We’ve got all these areas that we want to develop, but some of them are really bad. Some are just areas we want to see developed. We could go spend a lot of money doing it. Or we could just make real estate investors do it for us. We can make real estate investors do it for us, and we can use all the money from the economy that they’re going to pay us in taxes to dump in…

Brandon:
It was just like a genius move to like, you have to fix the property up. So now we’re improving these areas, you have to add or build, which now we’re adding more like housing for Americans and stuff. And we’re going to use Americans’ money to do it.

David:
I agree 100%, because the government is terrible at everything they do. The government’s going to come in and they’re going to fix this thing. Face palm. But real estate investors who have experience doing this that are good at it, like let’s get you to do it for us. That’s what I love about the idea.

Brandon:
That’s the truth about the tax code in general. And Amanda, you brought this up to me like years ago. The tax code exists because the government wants to incentivize certain actions. That’s why we have taxes and why we have the offset taxes in some way and incentivizes you in another. The government doesn’t do this stuff arbitrarily. They’re not just randomly giving us 1031 exchanges and cost segregation studies and all that because somebody just felt good one day to do it.

Brandon:
Generally, I’m sure there’s some just backhanded stuff or backroom deals, but like a lot of it, they want us to do stuff. So when we play within their rules, they reward us and they like real estate investors.

Amanda:
I just want to mention real quick, because I know we’re short on time, but one of the biggest benefits that came out as part of tax reform is what’s considered the flow through entity tax break, which really just means that if you have certain types of income, that the first 20% of that profit could be completely tax free.

Amanda:
So meaning, let’s say David with his brokerage business made $100,000, potentially under the new tax reform, 20,000 of that could be taxed at zero rates. So he never has to pay taxes on that at all. And we mentioned previously that tax reform was so beneficial to real estate investors, because this 20% tax break applies to many types of investment income.

Amanda:
A lot of rental income potentially could be eligible for 20% tax free treatment. We have clients who are brokers, realtors, that had a really great tax year, because of this tax break, where part of their commissions was not taxed at all. And also people who are flipping and doing wholesaling, first 20% could be at zero tax.

Amanda:
So definitely the government incentivizing us to do more real estate, do more business and reaping the benefits of that as a result.

Brandon:
Very cool. Very cool. All right. Well, we got to move on to the next segment of the show. And this is what we call the fire round. This part of the show where we take questions direct out of the BiggerPockets forums, and of course today they’re tax related questions, and I’m going to fire them at you. Of course, I will say everyone’s position is unique and you guys are going to have to make some assumptions here, based on almost no information whatsoever, but do your best.

Brandon:
Here we go. Number one, Jason from Wichita, Kansas said as a house flipper, what is the best entity or structure to use from a tax perspective?

Matt:
Generally, for flippers, obviously I’m going to make an assumption that he’s the owner of the business, but generally speaking, we usually look at using as corporations for the flipping business, they’re flexible, they’re strategic, in terms of minimizing self-employment taxes, there’s easy ways to get money in and out. So that generally works the best, but obviously if he’s got other partners or things like that, there’s other considerations, for sure.

Amanda:
Yeah, I think as an example, a very high level example of someone who’s flipping and making $100,000 of flip profit operating as an S corp, could save upwards of six $7,000 in self-employment taxes per year, right? Of course, the final result will be different depending on what else you have going on. But that’s a general guideline.

Brandon:
Perfect.

David:
All right, next question from Chris G. Home office question. I have a W2 job and also have multiple rental properties. But I do not qualify for real estate professional status. Can I still claim my home office as a deduction?

Matt:
Yeah, a person can still claim the home office deduction against their rental property, under the assumption they’re using it for the rental property business. Depending on where their numbers fall there, the deduction itself may be limited or there’s rules in place, but yeah, you can still take it. It doesn’t preclude you from taking, just because you’re not a real estate professional or just because you have a W2 job on the side.

Brandon:
Number three, Ronald from Winston, Salem, North Carolina, I inherited a home from a parent who passed away. How do capital gains taxes work when you’re inheriting a longtime family home?

Amanda:
Good question. So typically when someone passes away, they get what’s called a basis step up. So let’s say parents bought the home for $3,000 back in the day, when they passed away, it’s worth 100,000. And we’re going to turn around and sell it for $100,000. There’s actually no tax, there’s no capital gains tax, because we inherited the property at the fair market value on the date that parent passed away.

Brandon:
There you go. Which is also tied into the 1031 thing, which is why if you swap till you drop, that’s why Matt said that.

Matt:
It rolls off the tongue, dude.

Brandon:
It does, you just keep 1031 exchanging until you die, that massive tax bill you would have had at the end of your life, 50 years down after doing this 20 times, your kids, it just wipes it out. Let’s hope that keeps for the next 50 years and I don’t burden Rosie and Wilder there with a $100 million tax bill.

Brandon:
All right, next.

David:
Last question from Alex Cordero in New Jersey. Is my BiggerPockets Pro membership tax deductible because it’s business related?

Matt:
Absolutely. That’s the short answer Yeah, it’s helping you, ordinary, necessary business expense to expand your business and learn new things obviously.

David:
And did you use the words ordinary and necessary, because that’s the case law? That’s the test that the courts will use?

Matt:
Yeah, because I’m a CPA.

David:
It just rolls off the tongue, doesn’t it?

Amanda:
And when we say ordinary necessary business, we don’t mean a legal entity, right? We just mean your business as a real estate investor.

Brandon:
Perfect.

David:
Yeah, that’s how the IRS is getting a look at will we let you deduct it, is it ordinary necessary, you can’t go buy a ferret and say this ferret is here to keep me company because if I’m in a better mood, I’ll do better on my sales calls. That’s a very-

Matt:
It sounds like you’ve read court cases in the past.

David:
Yeah, as a police officer, I would always be studying case law with how they determined like when forced use was good or not. I would never want your job and I know just enough about it to know I would never want to do it.

Brandon:
All right, well, good answers to the fire round. We could’ve done 50 of those. Let’s go to a famous four.

David:
How come you’re making my voice go higher than yours on these now? I feel like you’re doing that on purpose.

Brandon:
I don’t know what you’re talking about.

David:
Is this your way of trying to take the alpha role in this podcast? You’re getting deeper and deeper every time.

Brandon:
Famous four.

David:
Yeah, I’ve turning it into like, who’s the guy from Maroon 5? Adam Levine, and you’re going Jocko at the same time.

Matt:
Man, what are they talking about?

Brandon:
Keep in mind, David, that doesn’t mean go live, we got a recording that goes famous four.

David:
You’re just trying to embarrass me in front of our friends.

Brandon:
Number one, wait, before we get to the famous four, let’s hear from Jay Scott to see what’s going on this week over on the BiggerPockets business podcast.

Brandon:
All righty, let’s get to it. Famous four questions, number one, from each of you, what is your favorite real estate related book? Besides your own, of course.

Amanda:
Gosh, I would say my own, I would say Brandon’s.

Brandon:
Besides Rich Dad Poor Dad.

Amanda:
Besides Rich Dad, besides Brandon’s, I think everybody says those. I’m going to go, today, I’m going to go with David Greene’s book, The BRRR. I love that, like I said we have clients who are flipping and I’m always trying to convince them to do the BRRR strategy. And that’s a good resource that I often refer people to. It has really great content, and I especially love the piece about taxes, that chapter where you talk about the tax benefits of it. So yeah, that’s what I’m going to say.

David:
Well, thank you, Amanda. You have no idea how nervous I was that I included a tax piece in my book. I’m not a tax professional. I feel really good now that it’s been given a seal of approval from a tax pro.

Brandon:
What about you Matt, anything you want to add?

Matt:
Yeah, I’d say mine is a book by Steve Burgess, it’s called The Complete Guide to Buying and Selling Apartment Buildings. I read it a long time ago, but the cool thing about that for me was that he talks about how you can do forced appreciation of apartment buildings. But being a numbers guy, he’s got tons of spreadsheets in there, he can show you how you can build your wealth, scale it up as you but and sell more and more of these appreciated apartment buildings. So that was that was a cool book.

Brandon:
Yeah, I totally agree. I love that book. It’s fantastic. Number three.

David:
Brandon’s read every single book. I’ve just noticed that, every time they say this book is… Oh, yeah, that was great.

Brandon:
There’s a lot of times I’m like, I haven’t read that one.

David:
I think you need to make like a video, the Tai Lopez style where he’s like, hey, I’m here in my garage with my Lamborghini and I got 2,000 books on my wall, you should make one of those videos for all the books.

Brandon:
In my garage, knowledge.

Matt:
Doesn’t he just sit on the beach all day long and read books? Isn’t that what he does?

Brandon:
That’s all I do anymore.

David:
Knowledge, here’s the three things you can do, yeah, that’s funny. You should do it with like your Ford or whatever it is that you’re driving around.

Brandon:
My Tesla, come on.

David:
You have a Tesla now. You are Tai Lopez status.

Matt:
Can I rap the intro for it if we do it?

Brandon:
Of course, you could.

David:
This is all coming together. The manic that read the books. Okay, let’s get back on track here. What is your favorite business book?

Amanda:
A business book, I really liked one, it’s Freakonomics by Steve Levin, I think is the last name.

Brandon:
I’ve not read that one.

Amanda:
Oh my gosh, I think you should read it. It’s an old book, it’s been around for many years. I love it. It’s about the numbers behind economics that, they talk about how that impacts consumer behavior, why do we do the things we do? Why do we buy what we buy? I just find that fascinating.

Matt:
I’d say my favorite one, business book is a book called Pricing on Purpose by Ronald Baker. So it’s obviously being a professional services firm, but it’s written for all kinds of businesses, but it talks about how a lot of professional services use to bill by the hour, but it teaches you about what is the value you’re bringing to the table and this in economics you should be charging for the value you’re bringing, not just some flat the hourly rate.

Matt:
It changed the way we ran our business and it’s helped our business significantly. And like I said, it can apply to all kinds of business, not just professional services.

David:
I feel like in general, I think the world’s moving in that direction more as more things go virtual. We’re moving away from, if you’re here for this long, you get paid this much too. If you are this productive, or you accomplish this many things you can get paid, which is great if you’re a go getter, because the better you are at what you do, the more income you earn. It’s terrible if you’re a slug that just shows up and thinks you should get paid. So I’m all on board for seeing more of that.

Brandon:
Yeah, I have seniority, so I should get paid more and get more vacation time because I’ve been here longer, even though I sit around all day doing nothing.

David:
What’s really funny is Brandon is sitting in a black chair wearing a black shirt talking and it looks like a floating head in front of a microphone talking about having seniority. That’s exactly what you look like. I didn’t even bother to bring my body to work today.

Brandon:
That’s exactly it. I’ll show me arms a little.

Amanda:
That’s better.

Brandon:
I got my white guns now.

Amanda:
I was getting tripped out too by the floating head.

David:
You guys got to watch this on YouTube if you’re listening to this in the car to see what it looks like with Brandon sitting there, it’s very funny.

David:
All right, as far as things you guys are into that are not saving people money in taxes, what are some of your hobbies?

Amanda:
I’ll let Matt go first.

David:
Other than freestyle rapping on 8 Mile

Matt:
I enjoy coaching baseball, coaching my son in baseball and I also love playing softball still. So baseball is my sport and I’m trying to do as much as I can.

David:
And Matt seems like that guy that can calculate like what the best move should be at any given rate. It’s like, okay, this kid is batting 245 against curve balls, but 330 against fastball. He can do all these calculations in his head and decide if it’s going to be a hit and run. Is that you Matt?

Matt:
You joke but there’s people out there literally doing that, unfortunately.

David:
That’s hilarious.

Amanda:
Yeah, we’re doing a drafting for the little league team. So Matt’s currently working on a bunch of Excel spreadsheets with all the different stats.

Matt:
They make you come out, there’s an evaluation day where you got spreadsheets and clipboards and you’re out there for eight hours, like trying to write down how all these eight to 10 year olds are playing baseball.

David:
How about you, Amanda?

Amanda:
I’m fairly boring. My hobbies are eating and sleeping, that is the truth.

Brandon:
Favorite food?

Amanda:
Favorite food, all kinds of Asian food, don’t really have a favorite one. But because I love eating so much, I do enjoy cooking.

Brandon:
All right. Do you watch the Food Network?

Amanda:
No, I try not to because if I do, when I have time to watch TV, it’s usually late night, and that just leads to me going to the kitchen or the pantry and that’s not good.

Brandon:
It’s the only channel we watch in our house ever. It’s always at night, we’re going to bed like getting ready for bed. And I’m like, oh, those cookies look amazing. They made that fondue out of Girl Scout cookies or whatever and then I got to go try it.

Brandon:
All right, last question from me, what do you think sets apart successful real estate investors from all those who give up, fail or never get started?

Amanda:
I think that’s such an easy one. For me, I think it’s just about taking action. I think the thing I see the most with clients and friends is just not doing it. Analysis, paralysis, taking too long.

Amanda:
I think even for Matt and I, the first purchase we made, it was super scary. I thought about jumping out of the window before signing on the purchase agreement, but just do it. That’s what I would say.

Matt:
Yeah, I think along those lines, to me, we talked about this earlier is playing to your strengths. So I’ve seen enough where people, I think the successful investors are somebody who can take action, but who is also detail and organized. And again, that doesn’t have to be the same person. But if you’re not both of those things, and a lot of people aren’t, obviously, then you need to get the right people to help you on your team that can play one of those roles.

Matt:
Because I’ve seen a lot of times where a lot of real estate investors go into deals and they’re really good at taking action, but they get this big deal and they’re trying to raise investor money and they can’t produce a financial statement for an investor and it’s like, it just blows my mind. I think you need to be able to take action, but you also need to have somebody on your team that’s detailed and organized to keep you in the right spots and you guys can push and pull each other along the way.

David:
So are you saying that you only get one shot, do not miss your chance to blow, this opportunity comes once in a lifetime?

Matt:
Something like that. I was thinking more like bust a move, but yeah.

Brandon:
All right, David Greene.

David:
This has been great guys, really appreciate it, you were very fun guests. You’re also very smart people and that’s the best guys to get on. So everybody, go get these books, check them out, make sure that you’re not leaving money on the table with your investing and seriously, understand that when you inspect what you expect when you actually look at your books and look at your numbers, your mind will recognize patterns of where you should be finding ways to improve your business and what you should be focusing on.

David:
Guys, for people who want to find out more about you, where can they?

Amanda:
Our website I think is the best place, we have lots of free information and also the latest on taxes and tax law and strategies. It’s www.keystonecpa.com.

Brandon:
Check it out. And again, I think you guys are great. That’s why I work with you year after year, because you saved me a whole lot more money than it costs me. So thank you guys.

Brandon:
And with that, we’re going to get out of here. So thank you.

Matt:
Thank you. Appreciate it.

Amanda:
Thank you.

Brandon:
Alright, guys…

David:
Go ahead, Brandon. Do you have something?

Brandon:
Oh, I was just going to say before we get out of here, I did want to hit our pro member spotlight this week, is that cool? Can I do that? Are you sure, you give me permission, am I allowed Okay, here we go.

Brandon:
This week’s pro member spotlight Lee Gertsuski, I probably said that name incorrectly, from Bismarck, North Dakota, recently did a BRRR deal on a triplex, put $170,000 into it, once he refinances, he’ll be able to pull $180,000 out, which means he’s actually getting more out than he put into, which is awesome and it will still cash flow like 300 bucks a month. And here’s the great thing about this deal. Lee got it off market from someone he knew at the gym, like he never would have known that if he didn’t tell people he was a real estate investor. So go out there and do that.

Brandon:
So go online everybody here, and go put your deals into your BiggerPockets profile. Let other people know that you’re doing stuff. And if you’re a BiggerPockets pro member, and you want a shout out here on the podcast, just email us at [email protected], put the word pro deal in the subject line. And we might be singing your praises next week. All right, that’s all I got. So David Greene. That’s it. You ready to take us out?

David:
Yeah. I was thinking when you were talking about tell everybody you’re an investor, that’s such a big piece of finding off market deals. What I would do is, I’d go to Brandon’s Instagram, I’d see what he posts and I’d either to repost it or I’d make similar things. So everyone sees like, yeah, I’m into real estate investing like Brandon does. That’s the easiest way.

Brandon:
Thanks.

David:
He’s beardyBrandon. I’m davidgereene24. Oh, and you also made a very nice post for me on my birthday, man. I just want to tell you I appreciate that. You’re very good at being nice. This is David Greene, for Brandon the floating head Turner, signing off.

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In This Episode We Cover:

  • How Amanda and Matt ended up doing tax/real estate
  • What they do and how they help clients
  • What their new book is all about
  • How to save tons of money in terms of taxes
  • Best time to work with a CPA
  • How an LLC plays into a real estate investor’s life
  • 3 benefits of working with a professional
  • Importance of having a system in place with the help of tax and legal advisors
  • How cost segregation comes into play
  • Who does a cost segregation study
  • Other things investors should not do on their own
  • Why it pays to be cautious when it comes to 1031 exchanges
  • Why buy and hold is preferable over flipping from a tax perspective
  • Cool things about short-term rentals from a tax perspective
  • What an Opportunity Zone is and why it matters
  • What a flow-through entity tax break is
  • And SO much more!

Links from the Show

Books Mentioned in this Show:

Tweetable Topics:

  • “There are many tax loopholes.” (Tweet This!)
  • “Rentals and flips need not to be the same entity for rentals to offset the flip.” (Tweet This!)

Connect with Amanda and Matt

Real strategies that work for real people seeking to build wealth through real estate investments. Co-hosted by Brandon Turner and David Greene, this podcast provides actionable advice from investo...
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    Kyler Pace from Sherwood, Oregon
    Replied about 1 month ago
    Do you have any recommendations for accounting software for new investors? What's the best way to get started the right way?
    Erin M. Rental Property Investor from Milwaukee, WI
    Replied about 1 month ago
    Great show!! In the podcast, Matt & Amanda mention offsetting W2 income with rental property losses. I'd love to hear more about how to do this! I was under the impression passive losses couldn't be applied toward active income.... Thanks for any insight!