BiggerPockets Podcast 049 with Amanda Han Transcript
Link to show: BP Podcast 049: Real Estate Tax Tips, Jokes, and Loopholes With Amanda Han
Josh: This is the BiggerPockets Podcast, Show 49.
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Josh: Hey, what’s going on everybody? This is Josh Dorkin, host of the BiggerPockets podcast here with Mr. Brandon Turner. My excellent cohost. What up Brandon?
Brandon: What up Josh? You’re not feeling too well today are you?
Josh: I’m bumming man, I’m totally bumming.
Brandon: Yes, you got to get over that. Come on.
Josh: Yes, well it’s a good thing the interview was recorded another day.
Brandon: Yes, you’re only bumming here during the intro that’s okay, people can’t tell. You’re feeling great.
Josh: Yes, I’m feeling awesome. Things are good. Things are good. How about you? Things are great?
Brandon: Things are great.
Josh: I heard there was a fire right next door to one of your rental properties the other night.
Brandon: There was. We, on Facebook somebody says there’s a house burning on you know, a big house burning on this street and I’m like, “Hey, that’s my brand new triplex.” Yes, so we sat there for half an hour trying to figure out if it was ours and it ended up being the next-door neighbor’s house burned, so.
Josh: Nice, which is not nice. It’s never nice when somebody’s house burns, but it was interesting. I was on the phone with Brandon while this was all going on and he couldn’t manage to figure out how to figure out how to get the police of the fire department on the phone.
Brandon: Nobody would answer their phone. Apparently they all go home at eight o’clock at night.
Josh: That’s the power of small town living right?
Brandon: There you go, rural.
Josh: Rural. Alright guys let’s get to today’s Quick Tip?
Both: Quick Tip.
Josh: Alright, so in some cases folks, Gmail is being sent to spam so in our BiggerPockets newsletter, those newsletters in some cases are going to spam for our Gmail users. Not all of them, but for some of them and please let—help us to let Google know that we aren’t doing anything weird or bad or anything like that. If you go to BiggerPockets.com/Gmail, we’ve got some information that will help walk you through how to make sure your newsletters and other BiggerPockets mail doesn’t show up in the wrong place. Rural.
Josh: Rural. Alright guys so today’s show is with the great Amanda Han and you may not know Amanda Han, but she’s going to do wonders for your business I think.
Brandon: I agree.
Josh: Yes, so Amanda is a CPA and a real estate investor. She’s a really really funny and smart lady. You know the goal of this show is to talk about boring types of things like taxes; however, as we always do, we try and keep it light and entertaining for you.
Brandon: I think this was one of the funniest shows we have done.
Josh: I actually agree so shocking that a CPA has something to do other than crunch number. This one a sense of humor so check it out. Anyway, we’re going to cover a lot of really good tax tips, loopholes, deductions and more to save you a lot of money and help you build wealth even faster with more security so definitely pay close attention and really quick, before we start the show. This is show 49 and you can find us on the show notes at BiggerPockets.com/show49.
Brandon: Real quickly, I wanted to say this is an interesting episode because it’s a CPA coming on, but I wanted to—you know, we encourage everyone to jump into the show notes after the show to ask questions which I still want to encourage everyone to do. We really want to encourage conversation; however, this isn’t necessarily, I don’t—I want to encourage people not to go on and ask specific tax tips form Amanda on the show notes page saying, “I just bought thing. I don’t know what entity I should have,” because she can’t tell you any information anyway because she doesn’t know your story. Anyway, that’s my second Quick Tip is ask questions, but try not to be so specific because she can’t answer specific questions anyway.
Josh: Just ask stuff that would apply to other people. You know, getting down to minutia about your own situation, that’s when you pay an accountant guys. You got to do it. You know, I know everybody is trying to you know do it as cheap as possible, but you know.
Brandon: Unlike you and I who took advantage of a few quick.
Josh: We did indeed.
Brandon: Tax tips during the show.
Josh: Yes, yes so with1 that, why don’t we get to Amanda. Amanda, welcome to the show, good to have you.
Amanda: Thank you. Thank you guys for having me on the show today.
Brandon: Awesome. Thanks for being here. We’re going to talk about tax tips today because everyone knows that’s the most fun activity we can talk about right?
Josh: Wait a second, wait. We’re talking about tax? Hold on—this is your show, you got this one Brandon, I’m out of here.
Brandon: Alright, bye Josh, I’ll take over. No, we’re going to keep this light, we’re going to keep this fun today because this is really really important for real estate investors.
Josh: It is. Yes, I mean normally as you guys probably know, we don’t do a lot of shows wrapped around topics, but we felt this was so important and we know how good and savvy Amanda here is so figured we would tweak it up a bit so let’s jump right in, Amanda, tell us a little bit about yourself.
Josh: We know you’re a CPA, but do you also invest in real estate?
Amanda: I do in fact, I’m actually a third generation real estate investor in my family so my grandparents, yes, when they immigrated to the US, they started with condo investments. Ever since I was a kid, I remember going and helping with make readies when you know tenant turnovers and stuff and you know I love painting and all that kind of good stuff.
Amanda: That was my first exposure to real estate; however, I have to say that my family didn’t teach me to go into real estate. What they taught me to do was to go to school, get a degree, and I ended up with one of the big four firms, coincidentally in the real estate tax department so I was doing strategies and taxes for some of the developers and investment partnerships. It wasn’t until I read this little unknown book called Rich Dad, Poor Dad, have you guys heard of it?
Josh: Yes, yes. We might have—maybe we’ll just change the name of the show I mean like, geez man.
Amanda: It wasn’t until I read that book that I personally, you know started into looking at my clients and looking at wow, you know the amount of money they’re making, that type of wealth that they’re building, and the small amount of taxes they’re paying. That’s when I personally started to look into real estate for myself.
Josh: Oh that’s awesome. That’s awesome so what’s your personal investing strategy? Are you a buy and hold investor? Are you flipping houses while crunching numbers? Well, what do you do? Do you do taxes like, you know, while painting rooms?
Amanda: No, I definitely crunch the numbers. I’m more of a long-term hold investor. Most of my stuff are single families, condos, the ones that I more actively manage and acquire myself. I also have some holdings in apartments as well, but those are more in a passive role with syndicated deals. I would love to be a fix and flipper because I do see the amount of money that my clients make from flipping, but I just don’t have the stomach for that.
Josh: You do have the stomach for tenants telling you that their toilet is clogged.
Amanda: Maybe I misspoke. I do manage managers I’m not actually the one fixing toilets.
Brandon: Just works for it.
Josh: Yes, yes, just making sure, yes, yes.
Josh: Right on, right on.
Brandon: Do you buy just locally or do you buy anywhere that there’s like a deal?
Amanda: You know, in fact, I’m from Las Vegas originally.
Amanda: Most of my investments are in Las Vegas. We do have some out of state. I do have a few in southern California as well which were my recent purchases so I would say the majority of my investments are actually out of state.
Josh: I’m actually curious about that because you know, I used to live in SoCal about ten, well eight years ago and you know everybody was looking at Vegas. Vegas had the monster monster bubble. How were you affected by all that? I mean because there was a tremendous build up and a tremendous crash.
Amanda: Yes, that is a great question. I think that’s in line with my investment strategy, like I said earlier, I’m more of a long-term hold investor so I always buy for cash flow.
Amanda: Because of that, the bubble really didn’t impact me at all. In fact, when the bubble burst several years ago that was when I acquired most of my properties.
Amanda: It worked to my advantage.
Josh: Great, great. I think that’s great advice for anyone listening. You know, the key on investments, you know, having quality investments is knowing when to buy and buying you know at the right price. I mean, if you’re buying for appreciation, you know, those bubbles and the ups and downs of the market are really going to affect you more. If you can get in at a price where you know, your rents are pretty solid, and you can take a little bit of a hit on them even, then you’re probably going to be pretty good to last through ups and downs of the market.
Amanda: Yes. Agreed.
Brandon: I bought a duplex at the height of the market. My first rental property and it was at the very height and I paid like I don’t know $80, $85, $90,000. Today, the thing is probably only worth like $70 or maybe even $60, but I love the fact that it doesn’t matter because I bought it with good cash flow. Like it cash flows every month so people always ask, you know like well, people who don’t like real estate and don’t know real estate and they ask me, “How can you be in that? The market goes up and down so much. Isn’t that risky?” When you’re doing buy and hold cash flow investing, it’s not that risky as long as you’re smart about when you buy.
Josh: Yes, hey Amanda, I had a quick question. You mentioned something earlier and we haven’t really talked about it, syndicated deals.
Josh: I didn’t plan on speaking about this, but since you mentioned, I’d love it if you could at least kind of fill the listeners in a little bit on what’s a syndication? What does that mean? Obviously, well, not obviously, for those people listening this is definitely a higher-level topic so if you’re unfamiliar, you might want to take some notes.
Amanda: Sure, so syndication is commonly known as group investing. We represent clients do syndications and a lot of our clients invest in syndicated deals so generally what that means is let say you know, Josh, you found a great apartment deal and you needed to raise a million dollars for down payment so what you would do is you would work with an attorney to put together a offering. That offering is presented to you know, your network of friends, family, outside investors, and so if I was interested in your particular investment, I might put $10,000 or $50,000 into the deal and I would be you know, maybe a 5% owner in that particular deal.
Typically, in syndicated investments, for me as an investor, I’m passive in nature so I essentially give you the money. You make all the day-to-day decisions of acquisition, management, firing people, and then I just kind of sit back and hopefully get my return, get my cash flow, get my appreciation.
Josh: Got you. What are those return—what I guess is the average typical range on return on some kind of syndication deal? Is it similar to say a you know, typical cap rate or are we looking at something different.
Amanda: That’s a great question. It really depends on the deal itself. You know, just like when you invest, the cap rate is different from market to market.
Amanda: From time to time.
Amanda: You know I have my money in two different syndicated deals. I’ll share my story with you. One of them is pretty much worthless.
Josh: Oh. Wawa.
Amanda: The return is just terrible.
Amanda: I have another one which has been doing great. Roughly about 18% return per year.
Amanda: I was really happy with that one so it really depends. What I always tell my clients is when you’re looking at syndicated deals, the number one most important thing to look at is the syndicator themselves.
Amanda: The team behind the deal because they are the decision makers.
Brandon: That’s really, really good. How do you find a good, you know, syndicator then. How do you find somebody who you can trust and that you believe in that’s going to give you the 18 and not the 0% return.
Amanda: Well the first tip is to just Google their name. Okay? You never know, you know, you meet people at investment clubs all the time and they’ll tell you, I have this great deal and today is the last day, I always tell my clients be wary of that because good deals come and go and you don’t ever want to jump into something.
Amanda: If you don’t know the syndicator team at least Google their name so Google Brandon Turner and fraud, for example.
Amanda: It will show up anything you know that is fraudulent related and then another thing is just to talk with other investors. You know, a lot of the syndicators that are good, they will have deals under their belt so you can talk to people who’ve invested with them in the past and get an idea of you know, how they’ve done.
Brandon: By the way.
Amanda: What’s their track record.
Brandon: By the way, everyone is going to go Google Brandon Turner fraud now.
Josh: Hopefully that doesn’t turn anything up or my background check guy didn’t do a good job.
Brandon: Well, it may. Brandon Turner is the name of a famous skate boarder apparently and I don’t know if he did some shady skateboarding deals. That might come up so, yes.
Josh: Oh, that’s funny, well so Amanda, do you need to be an accredited investor to participate in syndication deals or can anyone do it. Can you explain what an accredited investor is while we’re at it.
Amanda: Yes, that is a great question. That’s actually not my expertise, you know, this is a great question for a syndication attorney. In fact, I just took a class from Jean Trowbridge who is a syndication attorney that teaches for the commercial real estate arena because there has been a lot of changes so prior to the Jobs Act, only accredited investors/sophisticated investors which means financial planners, CPAs, people who are financially savvy could invest in syndications, but that’s changed now actually. Syndicators can take on non-accredited/non-sophisticated investors, but there are a lot of restrictions and rules that they need to watch out for.
Amanda: That’s definitely something to run by an attorney before you proceed. It’s really important when you’re dealing with you know raising money to protect yourself and make sure you’re adhering to the rules.
Josh: I think that’s a great point and I was actually going to say that if you’re at all interested in this topic and I think we are going to cover this topic in more depth in the coming year. Definitely make sure you talk to an attorney. Don’t go out and you know, just say, “Hey, I’m trying to raise money.” Start advertising it and what not. Before you do anything, find a good attorney who deals with this kind of stuff and talk to them. Find out what’s okay and get the ins and outs because there’s a lot stuff that can get you in trouble if you mess it up.
Brandon: Yes, that is very true. Very true.
Josh: Cool, well, definitely interesting, definitely interesting. It’s cool to know about your background, but you know what, frankly we don’t really care about your background. We’re here to talk about your taxes.
Brandon: I care. I care.
Josh: I care too. Actually, Amanda is one of our writers on the BiggerPockets blog and she writes some really awesome stuff if you guys have not yet checked her out. Obviously, we’ll make sure to link to her articles on the show notes at BiggerPockets.com/show49. Let’s kind of shift in transition to the tax stuff. Are there any important tax changes that investors need to know about for basically 2014 and beyond.
Amanda: Yes. Well, definitely, actually some of the big changes that impact real estate investors and the general public as a whole actually already took place in 2013. I didn’t know if you guys remember what you were doing for New Year’s Eve last year, but for us, as CPAs we were really hanging on the edge of our seat to look at what was going to happen with the fiscal cliff. If you guys don’t already know, what happened as a result of the fiscal cliff was that congress passed a new bill. It was called the taxpayers relief act of 2012.
Amanda: Part of the relief was you know it makes you feel like, “Hey, the taxes have gone down. We’re all safe from this crisis, but one of the major changes that came out from that bill actually related to real estate investors so if you’re heard of the Obamacare Tax correct?
Josh: What is Obamacare? What is that?
Amanda: Obamacare? Obamacare or the surtax so essentially what that is in short is it’s an additional 3.8% tax on investment income and that’s important to us as real estate investors because we make rental income. For those of us with cash flow rental real estate, also when we sell properties, we have potential capital gain that might be subject to this new tax. Also, if any of the listeners today have trusteed investment, you generate interest income. That’s another that’s potentially subject to this new tax as well so very important change that came out effective January this year.
Josh: I thought the 3.8 was for a very specific target. Something like 250K in profits or above. It was pretty narrow wasn’t it? It’s not just anybody who makes income is paying the 3.8% is that correct?
Amanda: Correct, correct so this tax is subject to individuals who make total $200,000 per year or more or if you’re married, $250,000 or more. That’s kind of like a marriage penalty right?
Amanda: Because if you’re single it’s 200, if you’re married it’s only 250.
Josh: Nice. Nice. I just want to point out really quickly to Brandon who’s listening along with our listeners that you know I know a thing or two about this stuff.
Brandon: You do. I know. Did you see me looking impressed when you said that?
Josh: I did, I saw your eyeballs pop out of your head.
Amanda: I’m surprised too. I’m very surprised because we teach on this topic quite a bit and not a lot of people know the rules or have even heard of it.
Brandon: Josh, you’re not just a good face, you’re also good with money.
Josh: Yes, yes, yes. Alright, anyway, no okay, well, that’s, yes that was definitely a very very important change. Are there any others that come to mind just you know, really quickly.
Amanda: Yes, another one that’s along the same line is another 0.9% and that’s on earned income and similar threshold. That’s people who make 200 and 250 and over. That one more impacts real estate investors who are maybe flipping or wholesaling or doing syndications. Okay so that’s kind of the evil twin sister to the Obamacare tax.
Josh: Got you. Got you. Alright, so is there anything other than making less money that we can do to protect ourselves from these changes.
Amanda: I wouldn’t look at it as making less money. It’s just more about making the right type of money.
Amanda: You know, I mean you guys know one of the best things of being a real estate investor especially as a landlord is deducting appreciation expense as a pay per loss.
Amanda: Even though there are all these band new taxes and they’re taking away deductions, depreciation is still, you know, is still a strategy we can use and in fact for the most part, with appreciation, not a lot of people, not a lot of our clients at least are going to be paying this brand new tax anyway because it’s based on net investment income so it’s after mortgage interest, it’s after property taxes, management fees and all that great stuff.
Brandon: Okay, say could you actually touch on something real quick just for those who maybe aren’t investors yet and maybe are a little bit newer at this game. Can you kind of explain what depreciation actually is? Like what do you mean by you know that’s a great benefit that we have because it is, but I want to make sure everybody who doesn’t own rental properties yet also understands why it’s kind of cool.
Amanda: Sure so the IRS has a loophole. Basically what they think is that, they think that real estate, you know, just like when you buy a car, the IRS feels like, but the car is going to go down in value and is if you bought it for $10,000, you get to deduct part of that per year because it’s assumed to be going down in value and they apply that same theory to real estate. If you buy a house for $100,000 for example, then the IRS says well I think you’ve owned it for a year now, it’s lowered in value so you get to write off part of that $100,000 purchase price. That’s a huge benefit for real estate investors because you know, even if you’re in a time period where it’s appreciating in value, the IRS still allows you to take the write off assuming that it’s still going down in value. That’s what we refer to as a pay per loss, essentially you’re taking a tax deduction and nothing actually really happened. You’re—the value hasn’t gone down, you haven’t spent additional money on that.
Josh: Is that lowering your base? Is that what essentially that does?
Amanda: Correct so it lowers bases so then in the future when you sell, that you have a lower base to calculate to what your gain is going to be.
Josh: Got you. Got you.
Brandon: That means you’ll—when you sell though, you’re going to end up paying more later on, right? You got to pay back that depreciation essentially correct?
Amanda: Potentially if you sell out a gain.
Amanda: There are other strategies such as a 1031 Exchange where you can defer the gain to the extent that you’re going to buy a replacement property. Let’s say you’re selling a single family. You’re buying a duplex. Then you could potentially defer the tax on that gain.
Josh: Oh okay, that’s cool, so what other important right offs do investors have. You know, I think the most famous is going to be the mortgage right off right?
Amanda: Yes, the mortgage interest write off.
Amanda: One of the things that came out in 2013 in fact is for primary homeowners. Say if you’re income is over $250,000 single or $300 married. That the IRS is going to start limiting your mortgage interest deduction.
Amanda: Now the key here is. Yes.
Josh: I didn’t know that one.
Amanda: Oh see I’m teaching you something.
Josh: I got make more money to worry about. Yes, but I don’t make enough to worry about that so forget.
Amanda: That’s on primary home owners and but the good thing about it is for us as real estate investors, there’s still no cap so whatever your mortgage interest expense is, that’s always going to be a write off against rental income.
Josh: Got you. Hey so there’s a lot of debate out there because I think it’s been floated in congress that now is a good time to kill off the mortgage interest write off. Do you see that as just kind of politicking or do you see that as potentially having any steam behind it?
Amanda: You know, I think we’re already seeing that in action. I don’t think that they would get rid of it completely, but with the phase out, right if you make over $250 or $300 there already phasing out your home mortgage interest so yes. Indirectly, they have already started to take that away. The good news is that under the new rules they can only take away up to 80% of your mortgage interest. Okay, so you can always deduct 20% of your mortgage interest no matter how much money you make.
Josh: Okay, but previous to this adjustment it was a 100% wasn’t it?
Amanda: Correct, correct.
Josh: Wow, so they’re taking away a significant amount of write off so for those higher net worth individuals, it’s starting to make a lot more sense to pay in cash than it is to hold on and pay a note so you can have those write offs.
Amanda: That’s correct.
Brandon: That’s only for your primary residence or is that for anybody.
Brandon: Whose rental even they’re rich. Their rental property is still a 100%?
Amanda: The reason is because is rental is kind of like a business.
Amanda: You know, so they’re not limiting the deduction for investors.
Josh: That is a fascinating piece of information and that changes my mind on buying that $10 million dollar house I was looking at.
Brandon: Me too Josh. Me too.
Josh: Yes, yes.
Brandon: Well, cool, hey let’s move on a little bit to some tax planning stuff. What exactly is tax planning? Why do we need to plan for it?
Amanda: Sure, you know I think a lot of people feel tax planning is something very scary and only very rich people do. You know, rich people like Josh do tax planning.
Josh: Can I open my books too Amanda? Just to prove and demonstrate that you know, that’s just wrong. I got three kids to feed.
Amanda: You know tax planning could be a you know, a very simple process. Really, it’s about open communication, open communication with your tax advisor. What I always encourage people to do is to stay in touch with your tax advisor though out the year because you know we all know tax law is changing all the time and it is hard for the average investor or average tax payer to keep up to date on what all the changes are and so from a planning perspective, you really just want to lean on your advisor. You know, give them a call from time to time. For investors, you know, whenever you’re buying or selling a property or you’re entering into a new or different kind of transaction.
Those are always great times to just call your advisor because they will be able to tell you, “Hey, you’re going to, you know, you’re going to do a lease option. You’re going to sell something via lease option so what are things the things we should look out for? How should we structure those? Should we have an entity?” From a tax perspective, it’s really easy. It’s really just about communication.
Brandon: What do you think, at what stage in the real estate game should somebody go and talk to a tax advisor? I mean I know from a CPA standpoint, you probably say always, but like if I’m brand new, I don’t have any rental property yet, I want to get into the game, should I talk to one before I get started after I have one property, ten properties?
Josh: That’s a great question.
Brandon: When does that make sense?
Amanda: Yes, that’s a great question and then my answer might surprise you so no I don’t think everyone needs to have a tax strategist and have this overall plan and legal entities. I do think it’s a good idea that as you get started, even before you purchase your first property, to at least have a quick conversation with the CPA so you know what are some of the things you want to look out for based on your scenario. Before you close on your first property. That’s definitely a good time to have a more in depth conversation so that’s what I would say to newbie investors. At least have a conversation. I mean before you get started, you do want to interview a couple different advisors just to see you know, which one works with you, which one jives with your personality.
Josh: Where and how would I go and find somebody is there a specific certification that I’d be looking for in particular you know, I know there’s a lot of tax advisors out there, but there’s not a ton that are super savvy in the world of real estate or is that not true?
Amanda: Yes, I think you know asking fellow investors is a great place to start. Going to real estate clubs and you know, when you go you will who are the people doing the deals who are active in investment. Ask them who they’re using. Most likely, they’re using someone who’s well versed in real estate. From a designation perspective, if you can you know if you can work with the CPA that’s always the best because they’re the ones with the highest level of training. You know, I would just stay away from a lot of the franchise type of tax prep shops. The only reason is because a lot of times you’re working with people who are just coming out of college.
Amanda: Maybe he didn’t even go to college so you know from that respect, maybe you might as well just do the research and do the tax return yourself.
Josh: Yes, is that and that’s a probably a pretty good point. I mean you’re talking, we’re not going to name names, but there are people who will come out without degrees working at these places who are doing preparation and it’s something to be cautious of.
Amanda: Yes and I think when you’re interviewing CPAs it’s also important just to make sure they understand your business. You know, make sure they understand your lingo so if you’re talking about depreciation or if you’re talking about lease options, you know hopefully that’s something they already understand so that you don’t have to be the one educating them on what those are.
Josh: Well and I think if you’re educating, you’re CPA or your accountant or tax advisor on what a lease option is. It’s probably time to find a new one.
Brandon: Yes, hey how important do you think it is that your CPA invest in real estate as well? A lot of people say that’s a good idea to find someone is that vital or is that just a good idea?
Amanda: Gosh, it—for me, I feel like it is very important because I do have clients who have good CPAs, but their CPAs will advise against real estate investing. You know, maybe because their CPA/financial advisors who want to direct you towards the stock market or maybe they just personally don’t like real estate so you know, I don’t think it’s the end of the world that they don’t, but I think it’s very very helpful if they also invest in real estate as well.
Josh: Alright cool, yes. That’s great. You know, you had mentioned earlier, entities and we didn’t have in our notes to cover this, but you know, I think it’s an important topic. Can you tell us, a little bit about that? You know, you’re talking about me not purchasing a property as Joshua Dorkin, correct. You’re talking about creating a company, an LLC, an S Corp, a C Corp, something like that and purchasing either one property in that entity or purchasing multiple properties in that entity. Is that right?
Amanda: Correct, correct and I’m glad you’re asking me about entities because that’s probably one of the most common questions that I get asked when you know, when I speak, whether presenting or talking to clients so I know you’re going to hate me, but the answer is really is it depends.
Amanda: I’ll give you a little bit more than that.
Josh: Amanda, make a decision here, okay. We want real answers. This is—you are not running for congress, you need to answer the que—no I’m just kidding.
Amanda: What it depends on is it depends first and foremost, on what you’re doing in real estate, right because we don’t want to make the assumption that everyone’s doing rental real estate.
Amanda: If you’re doing rental real estate, the tip here is that from an entity perspective, okay, it really makes no difference on your taxes. Okay, as a real estate, as a rental real estate investor, you get the same deductions, the depreciations, the same write offs, whether you hold that piece of property in an LLC or if you hold it in your personal name. A lot of times when you hear people talk about, “Oh, you must have your rental in an LLC.” Generally, what they’re referring to is the asset protection side of things. I’m not an asset protection attorney so you know, I won’t tell you all my crazy thoughts about that.
Josh: Oh, we want to hear them.
Amanda: Gosh, I don’t even know if I can say stuff like this on the show.
Josh: Let’s—up front with Amanda’s not giving any legal advice and of course you need to speak to an attorney about anything and everything that you hear on this and frankly all of our shows, you know, if you’re going to make any decisions in real estate, you definitely want to seek the advice of a counsel before going forward so.
Amanda: Okay, I like that so for me whenever I look at entity for rental real estate, from an asset protection perspective, I’m always looking at the cost benefit so for example, if I have a client who has you know, not a lot of assets personally, just starting on real estate, they have really no equity in the property. Then it might be okay for them to actually hold that property in their personal name. Why? Because they have no equity and they have no assets that they’re concerned with.
Amanda: On the other hand, if it’s someone with a lot of net worth then yes, you know, I would highly suggest an entity. What I hate is a lot of times I have clients that come to me after they’ve formed five different LLCs. You know, the LCC, they’re set up to do such and such. This one is set up to do such and such, but they’re not really doing anything. The reason I don’t like that is because they’ve incurred a lot of costs to form them first of all and then they’re going to have to pay me a lot of money because the entities have to file tax returns.
Amanda: If they’re lucky or unlucky enough top be in California, the state wants $800 per entity.
Josh: No matter what if you don’t even make a dollar, you got to pay $800 bucks. Yes.
Amanda: Exactly. Even if you lose money, you still got to pay them.
Josh: Yes. Yes.
Josh: No that—I think it’s important here, I mean you know, again Amanda is not giving legal advice on what you should do, but she’s just kind of talking about you know, her take, her opinion on it. Just to clarify and CYA so to speak, but yes, I think a lot of people will kind of assume that you have to do it and I think that main reason that asset protection attorneys will tell you to do that is primarily to protect yourself if you’ve got money and.
Amanda: Yes, I think the biggest misconception is people feel that you know, I have rental properties, but I—it’s not in an LLC so I might have gone to a real estate conference, oh, but I can’t deduct it because I don’t have an LLC and that’s absolutely incorrect. As long as you have an expense related to your rental. You could deduct it regardless of what funds you pay that expense with.
Amanda: You know, however so on the other end of the spectrum, if you’re someone who’s active in real estate, meaning you’re wholesaling or you’re flipping or you’re syndicating, you’re doing money raising stuff then entity does have a tax impact so from a tax credit, you know, I do strategize with people on what that is.
Josh: Can you explain that because there is an actual distinction between somebody’s who’s active in real estate and somebody who is not active in real estate and what does that mean exactly?
Amanda: Sure so when someone is a rental real estate investor, you are never subject to self-employment taxes, okay. On the other hand if you are someone who is active in real estate, wholesale, flipping, raising money. That type of income is subject to self-employment tax. The easiest way to look at it is, you know, for people who make W2 income, right? We have our money coming from our paycheck and then as part of the paycheck, you know, part of that money is taken out in payroll taxes so payroll and self-employment taxes are essentially one and the same. The reason there’s a difference is because the IRS again just penalizes people who actually work for a living. They’re saying if you’re actively involved, if you’re you know, on the short term buying, selling, wholesale, that type of stuff then not only are you going to pay income taxes, but you’re also going to pay self employment taxes on that income.
Josh: Got you. Got you. Hold on a second, I need to wake up Brandon here. He fell asleep here.
Brandon: No, I’m here this is fascinating because.
Josh: There he is.
Brandon: I’m here, I just, you know I mute my mics so my cats that are—tend to walk across my keyboard don’t make noises.
Josh: Amanda, isn’t there, there’s also something to do with active real estate for somebody who spends x amount of their time doing real estate? What’s that all about?
Amanda: Yes, I think what you’re referring to is active real estate with respect to rentals.
Josh: Yes. The management of the rentals, yes, that’s what it was.
Amanda: Correct, so you know, again, going back rental real estate is never subject to self-employment taxes in case so if you spend 700 hours or 10,000 hours on real estate, you would still never be subject to self employment taxes and so from that perspective, that’s what I was talking about earlier. It doesn’t matter whether you have a legal entity or no legal entity. Now, when you’re flipping real estate for example, that money is generally always going to be subject to self-employment tax so.
Amanda: Typically, from an entity structuring perspective we recommend that you flip inside of an entity such as an S Corporation or a C Corporation so that you don’t have to—so that it minimizes the self-employment taxes that you pay.
Josh: Just so our listeners can tell, Brandon has called his cat over.
Brandon: I did not call it.
Josh: To now sit on his lap distracting both Amanda and I.
Brandon: I did not call it over. It just—he saw that I was warm.
Brandon: Lonely and decided to come and hang out.
Amanda: He saw that you’re falling asleep.
Brandon: Yes, no.
Brandon: Well, he’s gone so what I mean?
Josh: Okay so that makes a lot of sense, but in terms of management, you know there are specific tax implications of being an active participant in the management of your property versus not being active. Is that correct?
Amanda: Potentially, kind of depends on your income.
Amanda: You know, the IRS has a this quirky little rule that says, “Okay, if you’re someone who’s doing rental real estate and you know, you have depreciation, you have all these write offs, but if you’re someone with higher income then you don’t get to use those losses to offset your other income like W2 for example.” The way around that is that you show them that you’re actively involved in managing your real estate and that’s typically referred to as real estate professional status.
Josh: Yes, yes.
Brandon: Does that mean you’re the one out there plunging toilets and getting cats from underneath the house.
Amanda: Not necessarily, real estate professional just means that you have to be spending more time in real estate than you do at your other jobs or businesses. Okay, so if you’re someone let’s say you’re part time, you’re part time teacher and you teach 20 hours or lets say you teach 10,000, 2,000 a year, well that means you have to be spending at least 2,000 hours in your real estate activities. Not necessarily plunging toilets, you know you could be taking classes or looking for properties, but you do have to be spending more time real estate than being a teacher.
Josh: Got you.
Brandon: Well, what about this then? I’m getting specific because you know I can because I’m the cohost here.
Josh: Wait clearly Brandon is now to take advantage of.
Brandon: I am taking advantage of this.
Amanda: A free tax strategy.
Brandon: Yes, there we go.
Josh: Oh man. Well here’s what I’m wondering, a person who has a job like me who’s working for BiggerPockets 40 hours a week. My wife works fulltime on the rental properties. She works, you know, fulltime so do we claim that or not?
Amanda: Yes, you can because so as married couple, that’s very common that one spouse is working maybe fulltime, the other person does the real estate so yes, in your example, if your wife’s not doing anything else, she’s spending at least 750 hours for the whole year on your real estate then she can qualify as a real estate professional and the best part about that is now you guys collectively can use all the real estate losses to off set your income from your W2.
Brandon: Nice. See that was a good question. I bet there’s lots of people out there.
Josh: It was. It was and just so you know, you will be billed, let’s see that was about four minutes and four minutes, Amanda charges a thousand an hour so yes, okay, $40 bucks. I don’t know. I don’t know. I didn’t do the math.
Josh: No that’s great, that’s great.
Brandon: Yes, good to know. Okay so let’s, I don’t know. Let’s move on a little bit too because I know we could—this could be the longest show we’ve ever done so we don’t want it to be the longest show ever. Why don’t we move onto?
Josh: I would like it to be the longest show ever. I think Amanda’s fantastic. What are you saying?
Amanda: I think so too.
Brandon: I agree. What I want to know is we are like for those listening live right now or you know the day this comes out, the few days afterwards. We’re at the very very tail end of 2013 so I’m wondering are there any—we talked about things changing and there was some things that happened at the end of the year. We’ve got a week or two left. Is there anything we need to be doing right now for those listening? Or anything we should be concerned about? About taxes this year?
Amanda: Yes, yes. Well couple tips so this is the last year of bonus depreciation. You know we talked a little bit about depreciation earlier. This year if you bought new assets for your business for example, you bought a new large SUV let’s say that you’re using for your business okay.
Josh: Must be nice Brandon.
Brandon: I don’t have an SUV.
Amanda: This is the last year that you can write up to 50% of that purchase price all in one year.
Brandon: Oh, does that count for rental houses? I’m assuming.
Josh: You’re just talking equipment right?
Amanda: Well, yes, yes, not the property itself.
Amanda: If you’ve bought a house, you can’t write off 50% of it.
Brandon: Oh darn.
Amanda: If you bought a computer or you bought new trucks, SUVs, appliances for your rentals, all of these as long—so the caveat it has to be brand new.
Amanda: If you’re a slumlord and you’re buying used refrigerators?
Amanda: That does not apply. It has to be brand new.
Brandon: I buy used, but I am not a sl—okay, maybe I am.
Josh: You—yes, no. Yes and I’ll stand for all the slum—I mean landlords out there. Just cause you buy used equipment, doesn’t mean you’re a slumlord.
Brandon: Thank you Josh.
Josh: Yes, yes, yes. I’ve.
Brandon: Thank you.
Josh: No but I—that’s great. That’s really interesting so essentially, we’ve got two weeks left to spend some cash is what you’re saying.
Amanda: Spend some cash. Exactly and then also you know, from a year-end perspective, outside of depreciation, if you’re someone who does a lot of marketing—or you know just—I would look at ahead in January 2014. What are some you know major expenses you think you are going to incur if you’re going to redesign your website for example. It couldn’t make sense for you to charge that expense on your card before the end of the year way, that way you’re just prepaying for that by a week or two.
Amanda: That you accelerate that deduction for one entire year.
Josh: Yes, no that’s good advice. That’s very good advice.
Josh: Time to figure out how to spend this money. Well so that’s really useful. Well let’s talk about mistakes because I think you know, I think it’s really easy to go ahead make lots of mistakes in terms of taxes because frankly I don’t think anyone on the planet has actually read our entire tax code all the way through despite what Amanda wants to tell you. You know, what are some common tax mistakes that you see investors make.
Amanda: Sure, gosh. I think the most common one that I see is probably just not claiming legitimate deductions. You know, a real estate investors, what a lot of us do you know we’re really good at claiming mortgage interest and property taxes and you know, insurance, right. That’s no brainers.
Amanda: A lot of people aren’t claiming car expenses so when—if they drive to a property that they already own or driving to new properties or even driving to a local real estate clubs. A lot of that is missed or you know what you pay for membership dues to local REA groups.
Josh: Or websites like BiggerPockets.
Amanda: Yes, exactly. That’s all tax deductible in case anyone wanted to prepay that right now for the next ten years.
Josh: That’s a really good idea, Amanda. That’s—I strongly advice anyone to go to BiggerPockets.com/Pro and sign up a year in advance. That’s a great idea.
Brandon: That is a great idea.
Amanda: Gosh. I don’t even know what I was even talking about now.
Josh: Oh man, we were talking about mistakes.
Amanda: Mistakes, okay, yes. Just making sure you understand what are all the tax-deductible items. You know, if you’re unsure, always ask your tax advisor. You know, how can I deduct that? Brandon, you know, he has a cat for example, right? How can I deduct my cat food? Well, it might not be possible, but.
Brandon: I would like to.
Amanda: If you’re cat is your security at a place that you’re rehabbing for example.
Josh: Oh, great idea.
Amanda: Right, maybe some of those expenses could be taxes?
Josh: Could you tax, can you get a write off on like, well most cities don’t allow Pit-bulls, but can you get a write off on like a Doberman if you have a pet Doberman and put him in all your houses.
Amanda: Yes, that’s happened in the past before actually. There’s been court cases where people were able to deduct pet food if their pets were used in their business. You know there was actually a court case where someone was able to deduct money that he paid to his girlfriend. What happened was this guy was.
Josh: Wait why did he pay money to his girlfriend?
Amanda: It’s a true story. Well, you’re getting ahead of me.
Brandon: Is that girlfriend in quotation marks?
Amanda: What happened.
Josh: She did live in Vegas, Brandon.
Amanda: Yes. What happened was there was a guy who was a real estate investor actually and this one all the way up to the tax court so real estate guy paid his girlfriend, took a write off for it. At the end of the day, he was allowed to take the deduction because he paid his girlfriend to stay at one of the properties he was rehabbing because there was a lot of theft and stuff so he paid her to actually stay. You know, I don’t know where it was, maybe it was in the ghetto, but she stayed there. He paid her for it. He was able to get a tax deduction. I think that’s similar to your scenario Josh.
Amanda: About a Doberman, but that might be better than sending your girlfriend there. I like that idea.
Josh: Yes, I don’t know like if I’d want to send my girlfriend unless she’s like a 3rd degree black belt to you know, sit on a rehab property to protect it.
Josh: My wife would be really pissed if I were paying a girlfriend.
Brandon: If he had a girlfriend. Yes. Yes, your wife would be upset. Alright, I just want to acknowledge, Josh that you had the total opportunity to throw in a Detroit, “make fun of Detroit” moment there and you didn’t so you’re growing. You’re maturing. This is good.
Josh: Wait, I thought—I thought I heard something. I’m sorry. We’re trying to keep a professional interview going here.
Brandon: Yes, I’m sure you are, alright anyway so mistakes. We talked about those. You got any other good ones for us?
Amanda: Gosh, other good ones that not necessarily made by the taxpayer, but believe it or not, I see it quite a bit when people actually don’t take depreciation expense. That’s something you know and that’s more of a result of not working with a tax advisor.
Amanda: Who works with investors, but the easiest thing to do, what I always tell people is pull out your tax return from last year. On the schedule E, there’s a line specifically called depreciation and there should be numbers on there for every property that you own. If you don’t see a number there, you know, obviously, time to move your—move your books to someone else.
Amanda: Another mistake was the real estate professional. We talked a little bit earlier. You know, Brandon, in your example, we have a lot of people who, you know maybe the husband is doing—is the husband or wife is working fulltime and doing real estate fulltime, right so then neither of them is qualifying for real estate professional. That’s a mistake that could easily be fixed by you know, just by delegating by splitting the job so that one of you is doing the real estate, the other one is working at the fulltime job.
Josh: Got you. Got you.
Brandon: Yes, that makes sense.
Josh: No, definitely. It’s interesting because there are so many little things that you can write off in your business and I think people aren’t aware of it. You know, I used to be in the entertainment business. I used to live in SoCal and you know.
Brandon: Whenever you say that, I always think like you were a stripper.
Josh: God forbid I was a stripper. Nobody wants to see that business.
Brandon: Anyway, entertainment business, you were in there.
Josh: No, but I mean you can deduct haircuts, you could—it’s you know, your livelihood is what you look like. You know, for example, us, if you and I you know, part of business now is podcasting, right. This is part of our business so you know anything to do with our throats. I mean writing off you know, lozenges and that kind of stuff I mean that—you know, I know it’s minutia. These are all little things that have to do with how we run our business and those are acceptable write offs. Correct?
Amanda: Correct. Yes.
Josh: Yes. Yes.
Josh: Interesting. Alright so you know next on the list here and I—Brandon’s got this written down and I’ll let him ask because I think it’s an appropriate question for him.
Brandon: It’s not an appropriate question for me. Alright so I don’t have kids, but I hear they are expensive. I—that’s what the rumor is. My cats are expensive and now I found out—I learned how I can deduct their cat food so I’m going to go have my cats stay at my rental property, but so if you have kids, those investors out there with kids, how can we get a tax deduction for the money that we spend on those kids if they’re human kids not cat kids. How do we spend the mo—like how do we get the tax deduction for that?
Josh: Or is that even relevant at all to real estate?
Amanda: Yes, no it’s definitely very relevant. You know, earlier, I was talking to you guys about how I used to help my grandparents paint their vacant properties, right and so my grandparents would pay me for the work that I was doing. Essentially, that’s how you know, that’s how you take a tax deduction instead of, let’s say you have two teenage boys, instead of just giving them money for them to buy a car and take girls out on dates.
What you can do is you can have them help you out in your business. Help you paint, help you know door knocking, hang posters, anything that’s business related. If they’re helping you on the business, you can pay them a reasonable salary and the amount of money you pay them becomes a tax deduction for you because that’s a legitimate business expense.
Josh: Now is that not like violation of every child labor law. If my three year old was painting my rental houses, I mean, wouldn’t I get in trouble.
Amanda: You’ll have to figure out that you know from the EDD, that’s what it is for California. The EDD on what the restrictions are. Typically, every state will have requirements on you know how many hours.
Amanda: A child can work if they’re under the age of ten or 12 or something like that, but you know, you were in the entertainment industry like you said so you’ve seen babies who were part of diaper commercials or they were in the movies right?
Josh: I suppose that’s true.
Brandon: Oh, she got you Josh. Burned.
Josh: Oh man, I got burned. I’m putting my three year old, my five month old to work baby. Get painting kids.
Brandon: You do have cute kids.
Brandon: They can make it in the entertainment industry.
Josh: We’re talking about real estate here, but you know, let’s screw our heads on folks.
Amanda: Before you put your kids to work, okay, the IRS does have their own restrictions or their requirements and it’s not necessarily age related, but what they do want is that what you’re hiring them to do is appropriate for their age first of all and what you pay them is reasonable for what it is they are doing so your five month old probably cannot be you IT guy. You probably can’t pay her $10,000 unless if you know.
Josh: She’s pretty good with a hammer. She might do better than some of the contractors that I’ve hired.
Amanda: Yes, so those are—essentially those are the requirements you know is something that is reasonable for their age and them what you’re paying them is something reasonable for the markets so if you weren’t going to pay your son to paint for you and you’re paying someone else, you know, maybe you pay that person $500 or a $1,000 and then that’s what you would pay your kid.
Josh: Interesting, interesting. That’s fascinating. That’s whole explanation why our tax code is so screwed up. Well, that’s a whole other discussion. Alright, so let’s move onto a topic that’s pretty popular. It’s self-directed investing.
Josh: Can we start first with what is a self directed IRA?
Amanda: Sure, self–directed IRA is just like any other IRA that you owe—you know like in the past you typically, most people will go to their local bank or their financial planner and open up an IRA. The only difference with the self directed IRA is you can use that to invest in real estate, notes, all sorts of assets as compared to the regular IRA, you know, the banks will give you five or six different options of mutual funds or stocks or CDs. That’s really the only difference. All the rules are the same. The contribution amounts are the same. The only difference is that you have more investment choices because you get to choose what you want to invest in.
Brandon: What are those limits on the IRA?
Amanda: For this year, it’s the maximum is $5,500 for regular IRA contribution.
Brandon: Alright so how does that help me or maybe it doesn’t help me. If I don’t have an IRA, if I wanted to use like I can’t just go put $50,000 into an IRA and then go buy a rental house with that, correct? That’s out of the picture?
Amanda: It depends which is you know you’re least favorite answer.
Josh: Where’s my pail? I want to get my like giant cane and like get her off stage.
Amanda: For this year, it is possible for some taxpayers to put $50,000 or more into a retirement account.
Brandon: Oh really.
Amanda: Use that for self-directed investing. It depends on how much income you have and what type income that is, okay. To give you an example, if I was someone who’s doing fix and flip real estate and I had a $100,000 profit let’s say or $200,000 profit. Then it is possible for me instead of paying taxes on $200,000, it possible for me to put maybe $50,000 of that into a retirement account, get a deduction, and then use that $50,000 self-directed to buy a rental property.
Brandon: Is it—you say it’s certain income level. Does that mean you have to be a lower income or a higher income to get that?
Amanda: It’s a higher income because how much you can put into a retirement account is a calculation based on that income.
Amanda: You know, everyone knows about the IRA right so we can put $5,500 in it. There are other retirement accounts like self-directed 401Ks or self directed SEP IRAs. Those are the more advanced accounts where you can put in you know, $30-$40-$50,000 per year.
Brandon: Oh okay so it is possible. There are ways that a person could. They don’t have to wait 10-15 years in order to have enough money to—I mean cause that’s always what I used to think because I—well I can only put $5,000 a year and.
Josh: Yeah what can you do with it?
Brandon: I’m going to be a hundred—yes, I’m going to be a 150 before I can buy anything. There are answers to that if you have a qualified professional telling you what to do, correct?
Amanda: Correct, correct, yes so you know, right now. I don’t know if you have a 401K at work let’s say, you can put $17,500 this year into the 401K.
Josh: Wow, putting her on the spot.
Brandon: Yes, where is my 401K come on.
Josh: That’s a good question. Where’s mine?
Brandon: That’s right.
Amanda: Yes. If you did, if you had a good boss and he gave a 401K.
Josh: Oh my gosh. Holy cow.
Josh: Can we find another guest?
Amanda: I know. I don’t think I’m coming back.
Josh: The CPA is throwing jabs.
Amanda: I’m going out firing.
Brandon: I love it. I love it.
Amanda: If—let’s say not you, Brandon, but if someone—let’s say there’s a listener on the call who had a 401K with their work and they’ve put in $17,500, well they potentially can move that money into a self-directed account and use that for real estate investing.
Amanda: Right and maybe next year maybe they put another $17,500 and move it over to a self-directed. It is possible to do that in less than 100 years or whatever you said earlier.
Brandon: Okay, that’s awesome.
Josh: I had the same question as Brandon. I think it’s actually probably the best question he’s ever asked on the show, but yes.
Brandon: I don’t think so. I got better ones.
Josh: Yes, yes. Alright. That’s great. You’re done. What—we talked about mistakes for tax purposes. What about common mistakes you see people make with respect to self-directed IRA investing?
Amanda: Common mistakes for self-directed investing, gosh I think the biggest one is sometimes I see people take money out of their retirement account to invest instead of going the self-directed route. You know, every year, I probably have a handful of these people who talk to either their CPA or their financial advisor and they say hey, I’m going to get into real estate. I have a bunch of retirement money. I want to move it over to real estate and they say oh no. The only way to do it is to take out your retirement account as a distribution, pay taxes, penalties and then invest in real estate.
I’d say that’s probably the biggest mistake is people not even knowing they can do it. The tips is you know if you have an IRA or a 401K and you want to move it to a self-directed arena. What I recommend is just doing a direct custodian-to-custodian transfer. Meaning if the money right now is with Fidelity, you have Fidelity transfer it directly into a self-directed custodian so that the money never touches your hands. That way you don’t have to worry about potentially making a mistake and then having to pay taxes on that.
Josh: Okay and in terms of those custodians, so you can’t open a self-directed just at any brokerage correct? I mean you, there are firms that are specific to that like interest, equity trust and on and on and on. Correct?
Amanda: That is correct so what happens a lot is you know, if you have Fidelity for example and you go and you say I want to open a self-directed account and then they’re going to say, “Yes sure. We’ll open one for you; however, still, here are the ten options you can invest in.” That is still not a truly self directed if you want real estate or notes or something other than the stock market, it does have to be one of these special custodians.
Josh: Got you. Got you.
Brandon: Hey, can I just in and ask a real basic question, again for those who are brand new to this stuff. What’s the benefit or a self directed IRA? Why do we even want to do that?
Amanda: That’s a great question.
Josh: That is. Look I’m shocked.
Brandon: I’m full of questions today.
Josh: Oh my god.
Brandon: Man, this unbelievable for me.
Amanda: Two reasons for self-directed IRA, one if you’re someone who’s brand new to real estate and you want to buy a property, but you just don’t have any money. You don’t have cash, right, but while all your money is tied up into a retirement account that you’ve been putting money into for several years that’s one reason you want to use self-directed investing. It’s cash that you can use for real estate. The other reason really is just looking at return on investment. If you’re someone who’s got some money accumulated in the retirement account and it’s earning you know 2% in a CD or 5% in the stock market, but you know you can generate a higher return by putting it into real estate. That’s the reason why you want to self-direct that.
Josh: That’s great. That’s great. I didn’t know CDs actually turn out 2% these days. I thought it was still like, you know, half a percent.
Amanda: You’re probably right.
Josh: Yes, yes. Alright and before we move to the next section here. Do you have any best practices you suggest with respect to self-directed investing?
Amanda: Best practice, I would say the main thing—I guess the number one tip I would say would be if you know that you want to do self-directed investing, move your money over and open the account first. What a lot of people tend to do is they’ll keep their money with Fidelity and then they’re going to look for properties. The one day, they’re going to find that perfect property or the perfect deal, but they forget that it’s going to take anywhere from a week to a few weeks to move that money over.
Amanda: By the time the money is over, the deal is gone.
Amanda: Once you make that decision, you know I do want to go the self-directed route, I no longer want my money in the stock market. Then it’s time to move the money over so it’s parked and ready for you to deploy.
Brandon: Got you. Got you. I’ve got a question. This is a not a personal, but this is a question of a friend of mine is dealing with since Brandon got to ask a question. I know somebody who’s got a property that the property is partially their home and partially a business. Can you actually 1031 a property like that? Or how would that work?
Amanda: Yes, you can so is this like a duplex you’re talking about?
Josh: No, for example, I guess that’s probably something similar if it were like a house on a ranch and the ranch is the business and the house is the house, obviously.
Amanda: Yes, you can. You definitely can 1031 exchange, the thing that would encourage you to look at is you know, as a primary home, if you’re someone who’s married, you do get up to $500,000 of tax-free gain already.
Amanda: If you do a 1031 exchange, you are potentially losing on that tax-free gain so.
Josh: Got you.
Amanda: That’s just something to strategize on, but yes that is possible.
Josh: No, that’s good. I just—you know I felt like Brandon asked a personal question and I thought it might be appropriate that I get you know my four minutes of free counsel.
Brandon: No, but I actually think Josh touched on something really good. We need to every real estate investor works from home. I mean like they might have a job as well, but they obviously have their base of operation at some point in there house so let’s talk about the home office deduction.
Brandon: What is that and how does that work and should we even claim it? Or is that just a red flag?
Josh: Wow, another good question.
Brandon: I’m on fire. I’m on fire.
Josh: Fire, fire.
Amanda: Home office deduction is actually like you said, most real estate investors actually have one. A lot of times, I see people not claiming it and the reason is because of the scare tactics right. Maybe the old CPA said, oh it’s a red flag, it’s super scary, but in fact, one of the changes that came out of this year is that the IRS is actually making it easier for people to claim the home office deduction so they’re doing it where you know for car expenses, you can do a standard mileage deduction.
You now have that option with the home office too so instead of keeping receipts for all of your you know electricity bills, phone bills, and all that. You could potentially take a standard deduction from the home office. In terms of who qualifies, essentially two things. That space has to be exclusively used for the business meaning you can’t also have your baby’s nursery be you know, right there. You can’t be working from the nursery. Your office can’t also happen to be your dining room kitchen table okay.
Josh: You need a dedicated space right?
Amanda: Exactly, dedicated space and the other requirement is that it has to be the place where you’re primarily where your business is run so you know a common example would be a realtor. A lot of times realtors work from their office. That’s where they make offers, they look at properties and stuff like that. They also go to the broker’s office because there’s like a temporary hotel in cube that they can go to or maybe it’s the conference room for example.
Amanda: At the broker’s office right? That’s an example of where home office works because even though you go somewhere else to meet with clients, but you’re home is where you do most of your actual work that allows you to claim the home office deduction.
Josh: That’s fabulous. Amanda, I wish we had more time. I really do. You know we didn’t talk about 1031, we didn’t talk about a lot of things that I wanted to, but we’ve got to move on. We’ve got to. You know what’s going to happen is Amanda is going keep writing amazing content on BiggerPockets and you can learn all sorts of great information from her there. With that, I think it’s time to move.
Brandon: To the Fire Round.
Announcer: It’s time for the Fire Round.
Amanda: That was scary.
Brandon: Alright, these questions all come directly from the BiggerPockets forum. These are all actually from the like tax forum so let’s just go with number one here. Are business/real estate books, tax deductible and then the second half of that question is what about guru boot camps? If you go to some $20,000 weekend boot camp are those all tax deductible?
Amanda: Yes, they’re definitely tax-deductible.
Josh: It better be.
Josh: It’s about the only value you’ll get out of it.
Brandon: What about a cruise? What about an investor cruise like if the BP summit was at sea or something? That would be cool.
Amanda: That’s a little bit tricky and that’s—short answer is generally the cruises are not deductible. That’s just a loophole they have about cruises being out in international waters and why that’s not deductible.
Josh: Really? Wow.
Amanda: Yes so if you guys are planning a cruise.
Brandon: We’re not.
Amanda: Maybe do.
Josh: Man, that cruise needs to lobby needs to get on the IRS.
Amanda: Yes. Exactly.
Brandon: No cruise for the BiggerPockets next summit, but that’s alright.
Brandon: I’m still going on one in February. I’m just not deducting it.
Amanda: I’m going in January.
Brandon: Nice. Nice.
Josh: Must be nice. I’m going nowhere.
Brandon: Hey Josh, what is yours? Oh that’s right you have kids and you know.
Josh: Wow. Wow. I like you less and less everyday.
Josh: Amanda, next question. Should a real estate investor have a health savings account?
Amanda: Yes, generally, I would say yes if they qualify. If they have a high deductible insurance, why not. I love the HSA because it’s one of the only things in the world that gives you a tax deduction when you put money in. It grows tax-free and the money comes out tax-free. More importantly, you can use that money into real estate. There’s self-directed HSAs as well so.
Brandon: I’ve heard that. No down side.
Brandon: Is there a limit on how much you can out into an HSA?
Amanda: Yes, I think it’s a little over $3,000 this year for single and then a little over I think it’s about $6,200 for family coverage.
Josh: Oh so you can actually use this to buy Detroit property?
Brandon: There you go Josh, you got it in there.
Amanda: You could all cash.
Brandon: Yes, wow. Hey.
Josh: All cash. Obviously you can’t do squat in Los Angeles.
Brandon: Yes you can’t. Well, what about this then? Could you this going to be my next Fire Round question even though I didn’t have it prewritten. Alright, a wholesaler, if they were to take a $1,000 from their HSA or a self-directed IRA and they were to use it as earnest money on a property and then they were to flip that contract to another buyer and they were to make $10 grand on it.
Brandon: Is that $10 grand tax-free?
Brandon: A wholesaler has a really large incentive for having a you know, tax-planning strategy.
Amanda: Yes, exactly.
Josh: Ooh. That’s pretty nice. That’s pretty nice. Alright, I’ve got one. A tenant completely trashed my unit, been there, done that, and now it needs a total rehab. Can I count the entire project as a repair or do I have to expense it?
Amanda: Yes. I think my answer is going to be an unpopular one. It’s going to be it depends. It depends on what are the items are being fixed so maybe the fact that they trashed the toilet, the appliances you have to redo all that. That would be repairs expense. If it’s part of that, you have to redo drywall.
Amanda: Those kinds of things, that would still me an improvement, unfortunately.
Josh: Interesting. Fascinating. All the more reason to talk to your accounting professional isn’t it?
Brandon: Yes, very good. Alright, next question. Can I deduct the cost of an iPad if I plan on using it at least in part in business, but I’m sure I will also play some Angry Birds with it?
Amanda: Oh gosh, my answer depends on if the IRS is listening to the show or not. IRS, if you’re listening, no, it’s not deductible. It has to be a 100% business use. You know, but I think though in reality, most people are using our devices majority for business.
Amanda: You know, maybe sometimes if you happen to play Angry Bird on it, which I highly recommend against, but if you happen to I think that’s immaterial enough. You can probably get away with it.
Josh: Awesome. Interesting. Alright, last question here. Amanda, I need help, Amanda.
Amanda: Yes, yes.
Josh: Amanda is falling asleep on her own interview. Amanda, I need help. I’m getting audited from the IRS. What do I do first?
Amanda: Well, that’s a good question and in fact, we’ve seen audits on the rise. My—not for our clients, fortunately. We haven’t had that many, but my uncle who’s also a CPA. He said he’s seen lots of audits. In fact, he was thinking of changing his business so he specializes in dealing audits. You know, if you get audited, I really—you know—the first thing is don’t freak out. Right? You know, just take a deep breath and then my suggestion is to send that notice to your tax advisor. Okay, whoever prepared that return. You might have changed CPAs from that time cause you know, you might be being audited from like a few years ago, but send it to the person who prepared it first and see if they include audit protection as part of their fees or you know, there’s going to be additional fees for that. It’s generally better to have someone represent you because there’s a buffer point.
Amanda: What happens is if my client got audited and they say, “What is this? What is this $30,000 expense or give me your documentation for your real estate hours.” Well, now I have time. I can say oh well let me find a client and ask, you know. Now that buys you a week to put this stuff together. If you represent yourself, you’re sitting across from the agent, you kind of just have to you know show them what you have.
Josh: Got you. Got you.
Brandon: Good, good tip. Alright, good Fire Round. Good Fire Round.
Josh: Anyway, alright so Fire Round. That was great. Lots of good stuff. I think it’s time to move this forward and move onto the.
Announcer: Famous Four.
Brandon: Alright, Famous Four. These are the same questions we ask every guest and I like these questions. Number one, what is your favorite real estate book?
Amanda: Oh gosh. I have to say Rich Dad, Poor Dad because that was my first, I don’t know if that’s necessarily real estate specific, but.
Brandon: It’s good.
Amanda: I know.
Brandon: It’s my choice too so.
Josh: There you go. Alright, fabulous. Fabulous. Alright, Amanda, your favorite business book and no you cannot site the IRS Code.
Amanda: I really like the 4 Hour Work Week because I’m a very lazy person.
Amanda: I like to have life that’s comfortable.
Josh: I’m glad to hear that about the person I was about to hire as my accountant.
Amanda: It’s about working smarter right?
Josh: Oh yes, alright that’s a very popular book amongst our guests. What about hobbies? Surely it’s not all about number crunching for you? Do you do anything exciting out there in the land of sunny California?
Amanda: Yes, I’m afraid I’m going to have to bore you guys on this one. My favorite hobby is actually eating.
Amanda: I’m a foodie. I love going to all types of restaurants and hole in the walls.
Amanda: You know, Yelp stuff.
Josh: Yes, where do you live in southern California?
Amanda: In Orange County in Fullerton.
Josh: Okay, okay. Got you. Got you.
Josh: Yes, I’m a foodie too and I love going to restaurants in SoCal when I get out there so that’s awesome. Foodies unite.
Brandon: I just like pizza. I just want pizza.
Josh: Hmm, pizza.
Brandon: Alright, final question from the Famous Four. From a tax standpoint, what do you believe sets apart the real estate investors who succeed and do great from those who don’t and they maybe you know. I don’t know, fail, give up. Whatever.
Amanda: When you say from a tax standpoint, you mean like a good at saving taxes.
Josh: Yes, maybe, like most of us ask the question what do you see successful do differently, but I kind of want to get your take what do you see from the tax standpoint. Those who save the most taxes or have the best luck with taxes or whatever you want to call it.
Josh: You mean the people who scam the system the best is that what you’re trying to say Brandon?
Brandon: The people who play the system the best. Not scamming. What’s the difference between them and everyone else?
Josh: They pay them in cash under the answer is the best is probably answer number one.
Amanda: I think you know even within the tax world, I think the most successful real estate investors are the ones who actually implement so for example, we do a lot of tax planning with our clients. We come up with strategies and ideas, but it’s only as helpful as your willingness to actually implement. If we’re talking about opening up entities or setting up retirement accounts, you know, simply following directions right if you’re advisor tells you something, you do it and then you see the results of tax saving. I think that would be my answer to your question.
Josh: That’s a good answer.
Brandon: I like it.
Josh: Amanda, I got to tell you, you’ve been a great sport.
Josh: You’ve put up with Brandon’s abuse throughout the show and you’ve answered concisely and definitively every question that has been asked of you. Never waffling or wavering. You know, never giving a “it depends.” We appreciate that.
Amanda: Thank you so much for having me on the show.
Josh: Hey, it’s been—honestly, it’s been areal pleasure. We’ve enjoyed it and to frank I was a little nervous. I said to Brandon yesterday, “Brandon, we’re doing a show on taxes. This is going to be incredibly boring.” I’ve been at the edge of my seat the whole time. It’s really good stuff.
Amanda: Thank you. Thank you.
Brandon: Thank you, Amanda. We’ll see you on the site.
Josh: Alright everybody. That was Amanda Han, the CPA from hell.
Josh: No, Amanda is awesome, awesome, awesome. We love her. She—if you guys haven’t checked out her stuff on the BiggerPockets blog definitely do that. We really really want to thank her for the time and as we talked about up top, definitely check her out on the show notes at BiggerPockets.com/show49. As we said earlier, you know, don’t get into your whole story and ask her for free advice. You know if you’ve got questions about anything we talked about. Fabulous, but you know. You’re going to have to hire a CPA guys if you want that financial feedback.
Josh: Otherwise, thanks as always for listening. This is—we wanted to make sure to get this show in before the end of the year because there are some really good last minute tips in there so hopefully you got those. That’s it. Keep following us. Keep engaging and don’t forget that Quick Tip about Gmail from the front of the show and otherwise, jump on BiggerPockets if you’re not doing it already. We love to have you. We’d love to see you participating and growing your network with us so come on board. That’s about it. I’m Josh Dorkin, signing off.
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