{"id":5113,"date":"2023-01-25T09:34:56","date_gmt":"2023-01-25T09:34:56","guid":{"rendered":"https:\/\/imsfund.com\/?p=5113"},"modified":"2023-01-25T09:34:56","modified_gmt":"2023-01-25T09:34:56","slug":"how-to-legally-avoid-taxes-by-investing-in-real-estate","status":"publish","type":"post","link":"https:\/\/imsfund.com\/index.php\/2023\/01\/25\/how-to-legally-avoid-taxes-by-investing-in-real-estate\/","title":{"rendered":"How to (Legally) Avoid Taxes by Investing in Real Estate"},"content":{"rendered":"


\n<\/p>\n

Everyone wants to know how the rich <\/strong>avoid taxes<\/strong><\/a>. You hear about it on the news, \u201cbillionaire pays zero dollars in taxes this year<\/strong>,\u201d or \u201cthis real estate tycoon made millions but gets a tax refund!\u201d This can seem like blatant tax abuse for those not in the investing game. Why do some people get to pay no taxes while others are stuck with a sky-high return just for working their W2 job? The answer lies in the assets you invest in.<\/p>\n

Real estate investing is one of the most tax-advantaged assets <\/strong>around. As a real estate investor<\/strong>, you can almost automatically count on lower income taxes <\/strong>while making more money. Don\u2019t believe us? We brought Amanda Han<\/strong>, CPA to top investors, on the show to explain how investors avoid taxes while still striking it rich in real estate. <\/strong>Amanda understands the ins and outs of the tax code, and as a real estate investor, she benefits from knowing real estate write-offs <\/strong>and deductions better than the rest!<\/p>\n

On today\u2019s show, Amanda will walk through the top <\/strong>real estate tax deductions<\/strong><\/a> and how rookie real estate investors can start paying less in taxes<\/strong>. She\u2019ll also explain real estate professional status<\/a> (REPS) and using it to lower your taxable income<\/strong> and how to find the perfect tax advisor for you and your properties. If you want to start using the same strategies that the wealthy use to avoid taxes<\/strong>, this is the episode to tune into!<\/p>\n

\n

Ashley:
This is Real Estate Rookie Episode 255.<\/p>\n

Amanda:
So there is a point where we are looking at, am I doing house hacking, am I doing short-term, or long-term, or a mobile home park? Those different investments have different tax consequences, and therefore different tax strategies. So before meeting with your tax person for the first time, you do want to have a fairly decent idea of what it is you want to do? What is my investment goals, how many rentals, what states do I want to be investing in? Because those kind of things play a very important factor for the starting point of what your plan is going to be on how to save on taxes.<\/p>\n

Ashley:
My name is Ashley Kehr, and I\u2019m here with my co-host Tony Robinson.<\/p>\n

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. And I want to start today\u2019s episode by shouting out someone by the username of Relatos, and this person left us a five-star review on Apple Podcasts with the title of, \u201cBest Boring Banter Ever!\u201d With an exclamation mark. This person says, \u201cI love listening to you guys, you definitely cater to the rookie investor, making it easy to digest what you teach, asking your guests great questions for both the novice and the pro. Keep up the boring banter and Ashley\u2019s laugh.\u201d So Ashley, you\u2019re getting some love from the Rookie audience about that wonderful laugh of yours. How\u2019s that make you feel?<\/p>\n

Ashley:
I feel like somebody I knew wrote that, because they\u2019re so used to crying from all the hurtful comments.<\/p>\n

Tony:
People love it, people love it, there you go. And the boring banter.<\/p>\n

Ashley:
Well, thank you so much. We appreciate that you guys, so much.<\/p>\n

Tony:
And if you guys haven\u2019t yet, please do leave us an honest written review on Apple Podcasts. We\u2019ve gotten so many coming in over the last couple of weeks here, it\u2019s been fantastic. But the more reviews we get, the more folks we can help, and helping folks is always the goal of the Real Estate Rookie Podcast. I know this episode comes out at the end of January, but this is actually the first episode that we\u2019ve recorded of 2023. So, 2022 is officially in the rear view, we\u2019re now in 2023. And I\u2019m excited for this year, I\u2019m excited for some changes in our business and how things are going to grow. What about you? How are you feeling for 2023?<\/p>\n

Ashley:
Good, excited. I mean, it\u2019s definitely going to be different than the last two years, just with the market changing, interest rates going up. Everybody\u2019s pivoting, changing their strategy. So there\u2019s some that are super-excited about what\u2019s going to be coming this year, and then I feel like there\u2019s others that are sweating bullets and actually really nervous what\u2019s going to be happening this year. So I think a lot of people are taking advantage of how to change, adjust and pivot their investing strategy right now to kind of take advantage of the situation and not be somebody that\u2019s going to be struggling during the next year with however the market goes.<\/p>\n

Tony:
You know what might be a cool show, Ash? And for our producers that are listening, is if we got, me and you, Dave Myer, and maybe like a panel of people who specialize in different asset classes. So maybe we\u2019ll bring on like A. J. Osborne to talk about stuff, to talk about self-storage, James Ander to talk about flipping, obviously I can talk about like short-term rentals, and even the long-term rental side. And maybe we just kind of, from the data that Dave\u2019s got like, \u201cWhich one of these asset classes is going to do worse or better as we go through this X market cycle?\u201d That could be a cool show to talk about.<\/p>\n

Ashley:
Yeah, yeah, that would be really cool. Almost kind of like a debate, where we\u2019re each advocating for how our strategy can work. But not even just at a debate, but showing how we\u2019re pivoting our current strategies to adjust to the market. So if somebody wants to change to pivot to that strategy, or stay focused on that, some of the things that we\u2019re each doing based on that asset class. Yeah, that would be really cool. And I\u2019m pretty sure our producers don\u2019t listen to the show, so we\u2019ll have to tell them after. So, how was your New Year\u2019s, Tony? I saw that you were in New York City. We\u2019ve got to do a little boring banter.<\/p>\n

Tony:
Yeah, yeah, no. New Year\u2019s was cool, yeah. We spent New Year\u2019s Eve and New Year\u2019s Day in New York City. Sarah and I went back in 2012, and we did the whole Time Square thing where we camped out all day, waiting for her to see the ball drop. Didn\u2019t want to do that this time around, plus we had our son with us, so we were just like at a cool little arcade in Time Square for New Year\u2019s Eve. So it was cool, super-busy, but still I love New York City. But I think three days there is probably the most that I can handle, just with all the people, and the noise, and the honking, and the sirens, and all the other stuff. But, it was good. We saw all the big sites, Central Park, we did the 9\/11 Memorial\u2026
The Memorial Museum for 9\/11 is probably one of the coolest things I\u2019ve been to, and I\u2019ve been to it twice now. And I was in, I don\u2019t know, junior high, elementary school when 9\/11 happened, so I didn\u2019t really understand the weight of that whole experience. But going to that museum, and hearing the stories, and seeing the\u2026 They have voicemails that people were recording when they were on the plane about to crash, and just everything in that museum was super-touching, and I was glad my son got to see it as well to kind of understand the impact of that moment. So, lots of great things in New York City.<\/p>\n

Ashley:
Yeah, I\u2019ve only been to the Monument, I\u2019ve never been to the actual museum. But yeah, I\u2019ll have to definitely check it out.<\/p>\n

Tony:
Yeah, I highly recommend it, yeah.<\/p>\n

Ashley:
Yeah. I did the New Year\u2019s Eve thing when I was in college, and the same thing. You were packed, and you were cattle, and these-<\/p>\n

Tony:
This little block, yeah.<\/p>\n

Ashley:
\u2026 crowds were sectioned off. You can buy a $50 pizza, you can\u2019t go to the bathroom. And then as soon as the ball drops everybody just runs, and it\u2019s just garbage everywhere. And I just remember we were like, \u201cThere\u2019s an Applebee\u2019s. Okay everybody, we\u2019re going to book it there. We\u2019ll meet you there,\u201d and everybody just took off and ran just to eat something. But yeah, for me it\u2019s like one of those things, like you do it once and never do it again, yeah.<\/p>\n

Tony:
Everyone, yeah.<\/p>\n

Ashley:
Yeah. So this year we took the kids and we went to a ski resort, and so we did\u2026 That they had the fireworks, we went snowboarding, they do like a torch parade with the skiers down the hill before midnight. They had like a family party where they had a DJ and they had a dance contest, so we were so proud of the kids because they each did the dance contest, and they were telling us how nervous they were and everything, going up to do it. And they were well-deserved to be nervous, because there was like six and seven-year-old girls doing back flips and all these things. And we were like, \u201cOur boys are still going to go out there and do a dance?\u201d And there\u2019s these girls doing acrobats out there. But we were just so proud of them for getting over those nerves, and going in there, and trying it out. But yeah, it was a lot of fun.<\/p>\n

Tony:
Where was that at, where\u2019d you guys go? Was it in New York?<\/p>\n

Ashley:
Yeah, yeah, it\u2019s Holiday Valley, so it\u2019s the second-closest ski resort to us, yeah.<\/p>\n

Tony:
Oh, cool.<\/p>\n

Ashley:
It\u2019s in a really nice town, [inaudible 00:06:48], which has a actually really nice short-term rental market, they actually-<\/p>\n

Tony:
I remember you talking about that place.<\/p>\n

Ashley:
Yeah, they stopped doing short-term rentals directly in the village of it now, just because there was so many that the actual occupancy of people who lived there full-time was so low, so they actually stopped doing short-term rentals right in the village. So it\u2019s only in the town that you can actually have them, and so it\u2019s definitely been like a changing market there for short-term rentals.<\/p>\n

Tony:
Yeah, and we\u2019re seeing that all across the board in a lot of different cities as well, where regulations are starting to tighten up a little bit. Which isn\u2019t a bad thing, but part of the process.<\/p>\n

Ashley:
Yeah. One of the projects I\u2019m working on this year is a property I bought that\u2019s about 10 minutes outside of this town, [inaudible 00:07:33]. And when they stopped doing the short-term rentals in the village it just added to our property value because we can still do it where we are, and we\u2019re on the outskirts enough but still so close. We actually had somebody that stayed in one of my other short-term rentals, and this one\u2019s 20 minutes away from this town, and they were staying just to go skiing at this resort, so\u2026<\/p>\n

Tony:
Well, we\u2019ve got a good episode for you today right? We have the world-famous, none other than Amanda Han. If you guys don\u2019t know Amanda Han, she is like the Obi-Wan Kenobi, or I don\u2019t know, who else is like\u2026 She\u2019s like the, I don\u2019t know, who\u2019s someone that\u2019s like super knowledgeable? I don\u2019t know, I\u2019m struggling with my metaphors.<\/p>\n

Ashley:
First of all, she is the nicest and most friendliest person you will ever meet. You are just like automatically attracted to her just because she\u2019s so nice, and bubbly, and yeah. So that\u2019s like the first thing, like-<\/p>\n

Tony:
But she\u2019s like, wicked smart.<\/p>\n

Ashley:
Yes, full of knowledge.<\/p>\n

Tony:
Yeah, she\u2019s like a savant when it comes to everything related to tax strategy. So she\u2019s written not one, but two books for Bigger Pockets on tax strategy, the first one is Tax Strategies for the Savvy Real Estate Investor, and the second one is The Advanced Tax Strategies for Real Estate Investors. And both of those books are really good kind of foundational building blocks if you want to learn about ways that real estate can help you from a tax perspective. But we brought Amanda on today to talk about a whole slew of topics, ranging from when should you start looking for a tax planner, tax strategist for your business, the difference between someone doing tax prep and tax strategy, and so many other things. I don\u2019t know, what was your favorite part of the conversation Ash?<\/p>\n

Ashley:
Well first of all, those books that you mentioned, highly recommend. I have them both, I\u2019ve read them both, I give them out to a ton of people. But we do actually give a discount code out, so if you guys are interested make sure you listen to the episode for that discount code too. I think my favorite thing was talking about actually setting up your LLCs too, because you may not think that would be something you\u2019d talk to your CPA about. Maybe that\u2019s something more you talk to an attorney about. But she\u2019ll go through reasons why you should consult your CPA, and I think there\u2019s a joint offer there between an attorney and a CPA as to how you should set up that legal structure for your entity. So, that was kind of my favorite part of the episode.<\/p>\n

Tony:
Yeah, I enjoyed that. I think my favorite part was when she ranked the different investment strategies from like best tax treatment, versus worst tax treatment. So if you\u2019re on the fence about which way you want to go, listen to that part of the episode, it might help you decide the strategy that\u2019s right for you.<\/p>\n

Ashley:
Amanda, thank you so much for joining us, and welcome back to the show. We always love having you on. Can you start off with telling us a little bit about yourself and why you\u2019re on the show today?<\/p>\n

Amanda:
Yeah, yeah, I\u2019m so excited to be here, to be back on the Rookie Podcast. So my name\u2019s Amanda Han, I am a CPA and real estate investor myself. So not unlike a lot of the Rookie investors I still have a daytime job, my daytime job happens to be working at my firm, Keystone CPA, where we help investors nationwide on how to use tax planning to save on taxes. And by night I\u2019m a real estate investor, again. I like a lot of you guys, wait until the kids fall asleep so I can sneak in some time to work on my real estate stuff.<\/p>\n

Ashley:
Amanda, before we even get into the CPA part, and your daytime job, and all of the tax benefits of real estate investing, can you tell us just a little bit about your own real estate investing journey and maybe some of the strategies you have used?<\/p>\n

Amanda:
Yeah, yeah. Well, I started investing in real estate in kind of like my mid-20s, and not unlike a lot of people my impetus to doing it was I read Robert Kiyosaki\u2019s Rich Dad book. And at the time what was interesting was I was actually a CPA working with investors, but I just never thought I could do it. It was almost just like something that other people did, people who had a lot of money and experience and all that. But really seeing the tax benefits of what a lot of my clients that were making a ton of money, but not paying a lot in taxes was when my husband Matt and I decided we were going to get into real estate investing. And I just remember it was very horrific for me to sign the paperwork to buy my first rental property, again, which was this thing of like, why would I be able to do it?
Is it something that I can\u2019t do? But I think for me that was like the hardest investment. Thereafter, every investment thereafter that has been just easier and easier, so never looked back.<\/p>\n

Ashley:
So it seems that you definitely have some experience as an investor. What is your take on how beneficial that can be when you are looking for a CPA?<\/p>\n

Amanda:
Gosh, well I think it\u2019s very important when you\u2019re working with not just a CPA, any kind of advisor right? So CPA is your attorney, your real estate agent, right? So your team, you just want them to invest personally in real estate. Because as real estate investors, we have kind of a different lingo that we use when we talk about stuff. Especially for bigger pockets people, the Burr strategy, or subject twos. And you just don\u2019t want to be the person to be teaching your tax advisor what is going on in the real estate, you want them to understand the transactions in real estate because that\u2019s the baseline for them being able to know what you\u2019re doing, and then be able to help you with the planning and the strategy surrounding those transactions. So yeah, I think it\u2019s very important.<\/p>\n

Tony:
And Amanda, I don\u2019t know if you know this, but you\u2019re actually the reason, or at least a big part of the reason why I invest in short-term rentals. So our mutual friend Alex Savio was a client of yours, and you encouraged him for some of the tax benefit to come along with short-term rentals, to look at that asset class. He took your advice, bought a cabin in the Smoky Mountains. And then after he got his contract under a cabin he came to me and said, \u201cTony, you should buy a short-term rental.\u201d And I said, \u201cAll right, cool. If you\u2019re doing it, I guess I\u2019m going to do it too.\u201d So had it not been for your advice, I would have no short-term rentals at this point. I don\u2019t know if I\u2019ve ever shared that with you before.<\/p>\n

Amanda:
Yeah, you know, it\u2019s funny, but no, I didn\u2019t know that. Until recently, when I was at your short-term rental summit, and I think everybody was there together, I heard that story. And I love it, it\u2019s such an amazing story, to know that I was a tiny bit in kind of helping to help you guys build your portfolio. And that\u2019s why I really love being on like podcasts like this, just, you never know who\u2019s listening, and you never know who\u2019s going to take action and implement like that tiny, tiny little golden nugget, and then grow their wealth and grow their friends\u2019 wealth.<\/p>\n

Ashley:
Amanda, before we get too far into the show, I want to make sure that we\u2019re capturing our full audience. So this is the Rookie show, and maybe people are listening that don\u2019t have a deal yet. And I don\u2019t want them to tune out. What are some of the reasons they should listen to this episode? How important is it for you to know about these things, this tax strategy before you even start investing, or as you\u2019re starting out, even if you have one, two, three properties?<\/p>\n

Amanda:
You know, actually I think when it comes to tax planning, the best time to do planning is actually before you buy rental properties, or before you buy a lot of rental properties. And I\u2019m sure we\u2019ll talk a little bit about legal entity in a minute later today, but\u2026 And the reason for that is, as with anything, when you\u2019re putting together the plan for a rookie investor, what am I going to be doing? Is it short-term rentals, is it long-term, is it house hacking? The different types of investments have different strategies. And so as soon as you know, \u201cWhat\u2019s my plan? What am I going to invest in, how many properties this year, or next year?\u201d Then that\u2019s a good time to educate yourself in terms of, \u201cWhat are the possible ways I can use my investments to save on taxes?\u201d
If you start planning too late, let\u2019s say after I have five, six, seven rental properties, unfortunately I see this way too often, where people end up in the wrong entity structure, or just the wrong way to do things. And sometimes if you make a mistake earlier on, it could be very costly and sometimes even impossible to fix some of those issues. So yeah, the earlier you understand some of these benefits, the better it is.<\/p>\n

Tony:
Yeah, and I can speak from firsthand experience the challenges that come along with waiting too long to get some of that professional help. So Amanda, one thing I want to circle back to because you mentioned this, is that you focus on tax strategy and tax planning. Can you just define for us the difference? What is the difference between what you do as someone who focuses on tax strategy, versus tax preparation, and how do those two different kind of people play into when folks start looking at those different aspects of tax?<\/p>\n

Amanda:
Yeah. Well, I think one of the most common mistakes that investors make, and that\u2019s not just rookies, that\u2019s even very experienced people, is not understanding that there\u2019s even a difference between tax planning and tax return filing. So tax return filing, I think that\u2019s what a lot of people are thinking right now when they\u2019re listening to our podcast. So tax return filing is when you\u2019re taking your paperwork, a recap of what already happened last year, and you\u2019re having a tax person put the right numbers on the right forms. That\u2019s really it, they\u2019re reporting what did or didn\u2019t happen, and they\u2019re going to tell you how much you owe in taxes, that\u2019s really it. But tax planning is when you\u2019re doing the right things throughout the year, so that by next April you can pay the least amount of tax, or get the biggest refund.
And so again, even though a lot of people right now are thinking, \u201cOh, I\u2019m going to get my tax return file from last year,\u201d what you\u2019re doing is really just reporting what happened last year. But really what you should be doing is taking a look ahead at this upcoming year and saying, \u201cOkay, what are some of the things I should be doing so that I can not just make more money, but save more money?\u201d You know, or save more of the money that I just made. So I think that\u2019s a huge difference in the two.<\/p>\n

Ashley:
Well, let\u2019s get into it. How are some of the ways a rookie investor can save money by purchasing their first investment property? And I\u2019m not sure the best way that you want to kind of go through this, but do we want to go\u2026 You know, some of the top reasons for each strategy, or just things overall in general? But just, let\u2019s start there as to, how can investing in real estate kind of benefit anybody? What are some of those tax strategies?<\/p>\n

Amanda:
Yeah, it\u2019s a really good question, because I think\u2026 I mean, we all know like wealthy individuals make a ton of money and don\u2019t pay a lot in taxes. And so you read about those people, Elon Musk, Donald Trump. But I think for a lot of investors, especially for rookie investors starting out, it\u2019s kind of like, \u201cWow, that\u2019s great for them. But how does that relate to me?\u201d And what I love about real estate is that that\u2019s an asset class that encompasses a lot of the strategies that these super-wealthy people use. So if we go over some examples, so how do wealthy people make a lot of money but pay no taxes? Because they build businesses, or they buy things that go up in value, but they don\u2019t have to pay taxes on that.
So that\u2019s the same thing for real estate, if you buy a property for $100,000 and a couple years from now it\u2019s worth $150,000, we\u2019re not paying taxes on that appreciation. Versus comparing that to like a W2 income, if you make $50,000 of income [inaudible 00:19:03] you\u2019re paying a good amount of taxes on that. And so that\u2019s one of the reasons that real estate is really beneficial, because it allows you to grow your wealth without having to pay a ton in taxes.<\/p>\n

Tony:
So yeah, there\u2019s obviously a ton of benefits that come along with investing in real estate. But every strategy kind of has its own I guess ability to help you reduce your taxable income, like some strategies are better for taxes, others are not so great. So if you think about like the big buckets of investing in real estate, you have long-term rentals, short-term rentals, flipping, wholesaling, maybe at a higher level like commercial real estate in terms of syndications and stuff like that. If you had to kind of rank from maybe least tax preference to like highest tax preference, how would those strategies stack up?<\/p>\n

Amanda:
Well I mean, I think the preference will differ from investor to investor, because every person has a different profile. Someone might be still working full-time, someone else might already be doing real estate full-time. But we\u2019ll just take a kind of\u2026 The scenario of someone who is still working full-time at a job, because a rookie investor just starting out in real estate may be one property this year. From that perspective I would say for me personally, I heavily lean towards short-term rentals. A little bit about what you brought up earlier Tony. And the reason for that is for short-term rental properties, if you create a tax loss, and tax loss meaning that we\u2019re maximizing write-offs or doing clever things with depreciation, not actually losing money.
So we strategically create losses, it\u2019s a lot easier for us to use that, not just offset income from the rental property itself, but also offsetting income from our W2 job as well. And so the short-term rental, out of all the different ones that you named, that\u2019s kind of the lowest-hanging fruit where it\u2019s very possible for people to have a high W2 job but still be able to utilize a lot of those tax benefits by doing real estate on the side. For long-term rentals I think that\u2019s probably next, and by long-term rentals we also combine single family, multi-family, commercial property, those are all typically long-term rental properties. That\u2019s generally the second bucket, because we can still use all those depreciation and expensing and all that to offset the income.
But if you\u2019re someone with higher income you just might not be able to use it to offset W2 taxes. I mean, it\u2019s obviously possible to do with planning, but again, not as easy as the short-term. And then the third bucket is kind of what you mentioned, more the active real estate, so flipping, wholesaling, maybe getting real estate commissions. That\u2019s kind of the third, or least preferred bucket, because when you\u2019re doing those kind of transactions typically you pay higher taxes on that earned income. And especially for flippers and wholesalers, we don\u2019t really get the benefit of rental real estate in terms of depreciation. Because after we\u2019re done with the rehab, we\u2019re just selling it immediately, so we\u2019re not really getting depreciation like we would with rental real estate.<\/p>\n

Ashley:
And Amanda, let\u2019s talk about how this is all legal, these tax benefits. You hear sometimes in the news about, \u201cOh, this person or this corporation, they didn\u2019t pay any taxes, they did this awful thing by cheating on their taxes somehow.\u201d But these are all legal tax benefits, and if somebody else is taking advantage of them why aren\u2019t you guys? Go ahead, this is at your disposal, this is for anybody to take advantage of these tax benefits to reduce your taxable income.<\/p>\n

Amanda:
Yeah, and I think not only is it legal, it\u2019s actually encouraged. And the reason the government gives us a lot of these benefits is because they want to encourage certain actions. So they want for investors specifically, they want us to be providing housing, because the government doesn\u2019t want to do all their\u2026 They don\u2019t have time to do all that, so that\u2019s why they give us the incentives. Right now with, write off some depreciation, we\u2019re getting bonus depreciation. And again, that\u2019s another one of those that came out when they were trying to stimulate the economy, they\u2019re trying to stimulate investors and business owners to spend money, make improvements on properties, and in exchange for incentivizing you to do those things is why the government gives us these different tax breaks. So yeah, definitely all our legal strategies, we don\u2019t want to head towards the illegal side of things right? That\u2019s not what we\u2019re here to do.<\/p>\n

Tony:
So Amanda, I think there\u2019s this balance that especially new investors have to strike between showing the\u2026 Because you talked about the benefits of showing paper losses, and how it could allow you to pay zero to little taxes. But the flip side of that is that if you\u2019re showing all these paper losses, it also makes you less bankable when you\u2019re trying to go out and get that next loan. So as a new investor, how do you kind of balance trying to reduce your taxable income while still showing enough to help you get approved for that next mortgage?<\/p>\n

Amanda:
Yeah, that\u2019s a great question. And that\u2019s one we hear a lot from investor clients that we work with. So I think there\u2019s two main things, one is that if you\u2019re doing things correctly there is a way to achieve both. Meaning you\u2019re writing off, or you\u2019re maximizing your write-offs so that you can get the tax savings, but at the same time it\u2019s not eliminating your ability to borrow and use leverage to grow your real estate. So one of the major benefits of being a real estate investor is we get to write off depreciation, and that\u2019s just a paper loss\u2026 We take the building of the property, we write it off over time. If you\u2019re working with a good mortgage broker or a lender, they\u2019re going to be able to explain that to their underwriters.
And so that\u2019s a perfect example of something that\u2019s tax-deductible for you to help reduce taxes, but is not hurting you when it comes to looking at your debt-to-income ratio. A couple other things on a similar note would be like, we always encourage investor clients, if you\u2019re using your car for your real estate or if you have a home office, to make sure you\u2019re claiming those. Because these are personal expenses that we all have already, but we\u2019re just shifting it into a tax-deductible bucket when we\u2019re a real estate investor. And those are two other things that, the lender\u2019s already factoring in your rent or your mortgage payment. And so the fact that you are now deducting it as a rental expense, they shouldn\u2019t be double-counting that against your income.
So there\u2019s always little, different things like that where it helps to benefit you from a tax perspective, but doesn\u2019t hurt you. But I will have to say, I mean we work\u2026 I think the vast majority of our clients are real estate investors, and I rarely come across someone who said, \u201cYou know Amanda, I really can no longer grow my portfolio because of loan issues.\u201d I think I definitely see it more where if you have the right deals, you can find the money right? It doesn\u2019t have to be bank financing, lots of other ways to achieve that goal of using leverage.<\/p>\n

Tony:
So Amanda, we talked a little bit about deductions and reducing your taxable income. So just, if we can\u2026 Two questions here, first if we can just break it down, like the basic definition, what is a tax deduction? Is it just free money that the government is giving us, or what exactly is a deduction? And then if you can, what are some of the common deductions that a new real estate investor should be looking to take as they build their portfolio?<\/p>\n

Ashley:
Yeah, so there is like this misconception that when you write something off you don\u2019t pay for it, that the government pays for it. But yeah, so Amanda, if you can go in and kind of talk about what a deduction is, what a write off is, and what it means, and how it actually works.<\/p>\n

Amanda:
Yeah, yeah, I love that. And so yeah, so a deduction or a write-off is the same thing for tax purposes. It\u2019s a business expense that you\u2019re using to offset the income that\u2019s generated from that specific business. So we\u2019ll use rental properties as an example, I made $100 of rental income, but I had $20 worth of expenses, right? And so $20 is my write-off, so instead of paying taxes on $100 of rental income I get to subtract 20, so now I\u2019m only paying taxes on $80 of rental income. But you\u2019re right Ashley, I think people are kind of confused sometimes and say, \u201cOkay, well if I write off $20 that means I didn\u2019t actually use my $20 to pay for the item.\u201d But no, you still did, you still use it to pay.
The true cash from the tax saving is going to depend on what your tax rate is going to be. So let\u2019s say you\u2019re an investor and you spend $100 on Bigger Pockets membership for example, and your tax rate is 50%. So you write off $100, but then you apply your tax rate of 50% against this so you\u2019ve saved $50 in cash. So that\u2019s the way it works in terms of tax write-offs. Now there\u2019s also tax credits, like if you are putting in solar for your car, or certain\u2026 Solar for your investment properties, or if you\u2019re buying a new car and there\u2019s electric vehicle credit, tax credits are actually dollar for dollar. So if someone says, \u201cIf you buy this car, you get $7,500 in credit,\u201d that is actually $7,500 of cash in terms of like a refund or reducing your taxes. So, there is a difference between write-offs versus credits.<\/p>\n

Tony:
But then Amanda, there are some things, like you talked about depreciation, that are paper losses, but not necessarily money you actually have to spend. Can you elaborate on those a little bit as well?<\/p>\n

Amanda:
Yeah, for sure. So depreciation basically is what the\u2026 The government allows us to take a write-off over time for the purchase price of our building. So for example if I bought a building for $100,000, normally I can write it off over 27 and a half years. And there\u2019s things that could be done where we can accelerate it, where we\u2019re writing off much faster than waiting the entire 27 and a half years. But what a lot of people kind of get confused on is, what is the starting point for my write-off? So in my example I said we bought a building for $100, now regardless of whether you bought that building all cash, or if you did 20% downpayment, or if you did a subject two deal where you put like no money down, your depreciation is going to be exactly the same in all scenarios. We\u2019re still looking at the purchase price.
So in other words, especially for new investors, I guess all investors, the more leverage that you\u2019re comfortable to use in investing in real estate, the higher the potential tax benefit. Because our depreciation\u2019s always based on purchase price, irrespective of how much downpayment you\u2019ve put on a property.<\/p>\n

Tony:
So Amanda, just to clarify, we have like two different types of\u2026 I guess really three different types of like tax benefits here. There\u2019s the deduction you get for spending money, but you don\u2019t get that full value dollar realized when you\u2019re doing your taxes. You have tax credits, which is a dollar for dollar match, but you\u2019re still spending that money. And you have this other bucket of things like depreciation, where you\u2019re not actually spending that money but you\u2019re still getting a tax benefit from doing it. So those are kind of the three big buckets, if I\u2019m understanding that correctly.<\/p>\n

Amanda:
Yeah. I mean, so depreciation just means that, you know, you don\u2019t have to spend the cash today, right? You\u2019re using leverage. I think we can also think about it in terms of deductions in general. So let\u2019s say for example that I wanted to buy Ashley\u2019s new book that just came out, but I don\u2019t have money, I don\u2019t have cash to buy it. And so what I did is I\u2019m going to buy the book, but I\u2019m going to charge it on my credit card. I could still take a deduction for it, just, even though I didn\u2019t pay cash for it I can still write it off, because I charged it on my card, it\u2019s an expense that I\u2019m committed to\u2026 At some point I\u2019m going to pay off the credit card. So yeah, when it comes to taxes it doesn\u2019t always have to equate to cash spent. It\u2019s more of, once I\u2019ve incurred this expense. So that could be charging it on a credit card.<\/p>\n

Ashley:
Amanda, besides buying Bigger Pockets books to educate yourself, what are some common tax deductions for rookie investors? Besides the property utilities insurance, should they be tracking their mileage when they drive to the properties? Things like that.<\/p>\n

Amanda:
Yeah. I mean, I think for investors, all people but especially rookie, this is an area that where we see the biggest missed opportunity, where people are always looking at just the property stuff. Like you said, interest, and insurance, and things like that. But really there\u2019s all kinds of things that could be tax-deductible. I think the best practice I always tell people is that when you\u2019re about to spend money on something that\u2019s somewhat significant, always ask yourself, \u201cIs this something that\u2019s going to help me improve my real estate portfolio or my wealth building? Is this something that\u2019s ordinary and necessary for me as a real estate investor?\u201d So yeah, it\u2019s more than just the books or things like that, or definitely your mileage, your home office if you\u2019re traveling to go to conferences.
It\u2019s the flight, it\u2019s the hotel, it\u2019s the dinner and the drinks when you are networking with other investors. So really, just making it a habit. I know not everyone is like me and always thinking about taxes, but just make it a good habit. When you\u2019re spending money, just kind of ask yourself a little bit, \u201cIs this something that potentially could be a deduction?\u201d Because here\u2019s why it\u2019s important, if you don\u2019t track those expenses when you\u2019re not asking yourself that question, then your tax person doesn\u2019t even know you spend it. Unlikely they know, unless if they went to the conference with you. But you\u2019re kind of that first line of defense to be tracking those expenses, and what\u2019s the worst that could happen?
When it\u2019s tax time your tax person might say, \u201cOh, actually no, that massage that Ashley had by herself was not a tax deduction.\u201d But that\u2019s fine, at least you\u2019ve tracked it, it could have been.<\/p>\n

Ashley:
So I have to get a couple\u2019s massage with Tony in order for it to be a tax deduction and we\u2019ll discuss business.<\/p>\n

Tony:
Yeah, we\u2019ll talk business.<\/p>\n

Amanda:
Yeah, you can do some podcasts from there. I know it was Brandon Turner always talks about how he gets his inspirations when he\u2019s getting massages. So yeah, that could work.<\/p>\n

Ashley:
Okay producers, I know you\u2019re listening. The next time me and Tony are in-person we\u2019re going to do a couple\u2019s massage while we record. Amanda, one thing I wanted to ask you about is the home office deduction. How does that work? Like, how do you actually deduct a home office?<\/p>\n

Amanda:
Yeah. So a home office, basically it\u2019s the IRS allowing you to take the business use part of your home as a deduction. So normally when we have our home, if you\u2019re renting a house, or you purchase your primary home, we can only deduct mortgage interest and property taxes. Everything else, like internet, utilities, house cleaning, securities, those are personal expenses, we don\u2019t really get a benefit for it. But as a real estate investor, if you have a room or a part of your home where you\u2019re using for your real estate, that could potentially be a legitimate home office. And when you have a home office, well what happened is when it\u2019s time to do your tax returns your tax preparer will help you determine a business percentage of the home that\u2019s tax deductible.
So if I spent $1,000 on my utilities or internet for the year, but my home, 10% of it is my business office, then you might get like $100 of tax deduction on your utilities or internet use. And so again, it\u2019s a low-hanging fruit because we all have home expenses. So if you can set your home up where you have a legitimate office, then you could be shifting some of these personal expenses into business deductions. A misconception that people think home office is only for people who own their home, but it actually works really great for renters too. So if you\u2019re a newbie investor, you don\u2019t own your home yet, you\u2019re just renting, you can deduct part of your rent expense as your home office too.<\/p>\n

Tony:
Amanda, now, one question from me, obviously there\u2019s so many\u2026 Actually let me ask you, maybe you know the answer to this question. The IRS tax code, do you know how many pages, ballpark, it is?<\/p>\n

Amanda:
I don\u2019t, I know it\u2019s like thousands of pages. And that\u2019s just the code, right? And then there\u2019s the regulations and all that that explains the tax code.<\/p>\n

Tony:
So there\u2019s so many different pieces to getting your tax strategy right, and I think as a new investor it can feel almost overwhelming when you start thinking about like, \u201cOh my God, am I doing this, am I doing this, am I doing that, am I doing that?\u201d So if I\u2019m a rookie investor and I\u2019m having that first conversation with my tax strategist, what kind of information should I have ready for that person so that they can educate me on the deductions that are right for my unique situation?<\/p>\n

Amanda:
Yeah, I think this is such a great question, because the goal, or my goal is never for an investor to become a CPA, right? We can get into the nitty gritty of depreciation, and the calculating the home office and all that. But really that\u2019s not the intent, the intent for an investor is just to really understand, what are some of the things I need to do during the year, what are the systems I put in place? What expenses should I be tracking, how should I be tracking them? And that\u2019s pretty much it, if you know what you should be doing and then you have the right tax advisors, they\u2019ll be able to take the data, or the information you have, and then helping you to create the ideal outcome of your tax returns.
So for newer investors, I think it\u2019s just understanding the basics of what I need. For very rookie investors, I think one of the issues that I see as an advisor, sometimes people will come to us and say, \u201cOh, I\u2019m ready to do planning,\u201d you want to know what is your investment strategy first. So there is a point where if you\u2019re looking at, \u201cAm I doing house hacking, am I doing short-term, or long-term, or a mobile home park,\u201d those different investments have different tax consequences, and therefore different tax strategy. So before meeting with your tax person for the first time, you do want to have a fairly decent idea of what it is you want to do, what is my investment goal, how many rentals, what states do I want to be investing in? Because those kind of things play a very important factor for the starting point of what your plan is going to be on how to save on taxes.<\/p>\n

Ashley:
So Amanda, we talked about different ways to track your expenses, and you may be able to save the receipts from your Lowes purchase of the new hardware you got for the cabinets, or you\u2019re saving the copy of your insurance policy, showing the premium. But what\u2019s the best way to track all of these expenses? And then even the expenses where you\u2019re not getting really receipts from like your mileage, or even if you\u2019re taking the home deduction, is there a good way to kind of keep track of how much you\u2019re using your home office and what percentage of your utilities, things like that. Is there any great software that you recommend for a rookie investor?<\/p>\n

Amanda:
Yeah, I think in terms of the how to track it, the system, I\u2019m a huge systems person. I know everyone\u2019s really busy, and so creating a system on tracking those expenses is really key. Because if you have the right system it\u2019s something that you\u2019ll be using throughout the year, right? I mean for me as a tax advisor, I don\u2019t have a preference in terms of what an investor should be using. I think it\u2019s going to be very specific to the investor themselves, so a lot of people like to use apps to track their stuff. You know, QuickBooks has apps, Stessa is another good one. So those different software and apps are really great, they can be geared towards real estate investors where a lot of these could be automated, you don\u2019t have to do a lot of data entry.
But we also have investors who just don\u2019t really like technology, they don\u2019t really want to learn how to use yet another software, memorize another login. And so for people like that, especially for rookie investors, Excel or Google Sheets, something like that is also really sufficient too, as long as it\u2019s something that you\u2019re comfortable with and you\u2019re using consistently throughout the year. For car expenses I really like MileIQ, it\u2019s one that I use, it\u2019s pretty user-friendly. But yeah, there\u2019s different apps out there that you can utilize. For anyone who\u2019s tracking like the real estate hours, if they\u2019re trying to qualify for a real estate professional, or they\u2019re using like short-term rental loopholes, a really great app is called REPS Tracker, R-E-P-S Tracker.
It was actually created by a client of mine who was a physician, and because I was tracking that in Excel. And she told me, \u201cYou know Amanda, Excel\u2019s not good enough. Someone needs to create an app for it.\u201d<\/p>\n

Tony:
Amanda, can we just really quickly, because we\u2019ve talked about this phrase a little bit. But can you define REPS? Like, what is REPS, and how can a rookie investor utilize that strategy in their investment business?<\/p>\n

Amanda:
Yeah. So REPS stands for real estate professional status, and it is\u2026 Real estate professional is important for people who make over $150,000 a year, and are investing in long-term rental properties. Reason being that if you\u2019re of higher income, and you invest in long-term rentals, even if you\u2019re able to strategically create tax losses through write-offs and depreciation, things like that, your losses can only offset taxes from other passive income. So other rental properties, or anything else that\u2019s passive to you. In other words, it\u2019s not being used right now to offset taxes from your W2 income. So this is the limitation that\u2026 Kind of a current limitation that investors are concerned with.
So to be a real estate professional means that you or your spouse is spending at least 750 hours in real estate, and that you spend more time in real estate than your jobs. So if you\u2019re working full-time at 2,000 hours a year, you can\u2019t really be a real estate professional unless you spend more than 2,000 hours a year in your real estate. So, that\u2019s why it\u2019s important to track hours. And you know, and this kind of goes back earlier Tony, when you were asking what is the different buckets, what\u2019s the order of preference, and that\u2019s when I said short-term rental is the preferred bucket. Because for short-term rental properties, we don\u2019t have to be a real estate professional to use the losses. In other words, we don\u2019t care how many hours you\u2019re spending at your job, we don\u2019t have to have 2,000 hours.
You just have to have some material participation hours for your short-term rentals. So yeah, we can talk for eight hours on the whole real estate professional stuff, but that\u2019s kind of the gist of it. And again, why it\u2019s important, if you\u2019re trying to go with one of these loopholes or strategies, that you\u2019re not just tracking expenses but you\u2019re also tracking your hours as well.<\/p>\n

Ashley:
So, would this work for a married couple filing jointly if maybe the wife has a high-income W2, and then the husband is the stay-at-home dad, is it beneficial for him to actually take on the workload of their real estate business? And then with them filing jointly they\u2019ll get that tax benefit of her high income along with the real estate professional status of his?<\/p>\n

Amanda:
Yeah, yeah, exactly. That\u2019s exactly the profile that would make sense, you\u2019ve got one high-income person, you\u2019ve got someone else who\u2019s not working full-time, and having that second person be the main person in charge of your real estate activities and your investments and things like that. So this is where when you hear stories about, \u201cOh, I made $500,000 last year and I paid no tax,\u201d odds are they\u2019re talking about some kind of profile like this. And not just the same person making 500,000 and doing real estate full-time, right.<\/p>\n

Tony:
So Amanda, with all of this information out there, and it\u2019s mind-boggling to me how many different things you have to keep track of as a CPA. So I have the upmost respect for you and your ability to kind of keep tabs on all that. But if I\u2019m a new investor, what steps can I take to I guess protect myself from getting the wrong information.<\/p>\n

Amanda:
Gosh. You know, it\u2019s interesting, especially with social media now right? There\u2019s so much information and content out there, and I put out content myself too on social media. But I always try to tell people like, \u201cHey, content is content, but you want to make sure you\u2019re talking to your own tax advisor to see if this strategy or this idea actually applies to your specific scenario.\u201d So a strategy that works for Tony may or may not work for Ashley, right? And so it\u2019s just making sure that you are speaking with someone who knows about you and what you have going on. So then the next question is, how do I find that person who is well-versed in real estate, or can help me in real estate? And I think nine times out of 10 when investors are interviewing tax preparers or CPAs, the question they ask is, \u201cDo you work with real estate investors,\u201d right?
That\u2019s a easy question to ask. And probably 10 out of 10 times the answer\u2019s going to be, \u201cYes, I work with real estate investors,\u201d because everybody has at least one real estate investor client. So it\u2019s not really a powerful question, I think a more powerful question is to kind of have them talk about real estate. Earlier we talked about the real estate lingo, so you can ask them. For example, \u201cWhat do you think about subject two deals? How do you treat those for tax purposes?\u201d And let them talk. I mean, maybe you don\u2019t really know if they have the right answer or not, but at least you know whether they even understand what is a subject two deal. Or you can ask, \u201cWhat are your other rookie investor clients doing, where are they investing, what are you seeing is successful with your other investor clients?\u201d
And just really let them talk, and I think you\u2019ll quickly be able to see how in-depth of a real estate conversation they can get into to see if they actually are someone who works with a lot of investors.<\/p>\n

Ashley:
So Amanda, we talked a lot about different tax strategies, things like that. And in the beginning you had mentioned putting together the actual structure of the entities. So, could you maybe talk a little bit more in-depth about that, and as rookie investors what\u2019s the best way to start? We hear all the time, \u201cPut it into your personal name so you get that long, 30-year, fixed low interest rate,\u201d or, \u201cPut it in an LLC.\u201d Should you do a corporation, do you have a holding company? There\u2019s all these different ways. Do you put it into a trust? All these things. So what would be your recommendation for just somebody starting out, or does it really depend on what they have going on outside of just buying their first property?<\/p>\n

Amanda:
Yeah. I mean, I have to go with the unpopular answer of it depends, because it really does. And I think that if you\u2019re ever talking to someone and they say\u2026 Like if you go to like a conference and someone is saying, \u201cEverybody needs to have a Wyoming LLC with a corporation,\u201d definitely stay away from that, because there\u2019s never a one-size-fits-all strategy, especially when it comes to legal entities. But kind of a couple high-level points, if you\u2019re talking about rental real estate it\u2019s going to be in your personal name or in an LLC, okay? It\u2019s not going to be in any kind of corporation, and the reason is because there\u2019s a lot of downsides to owning rentals in a corporation. On the other hand, if you\u2019re someone who\u2019s an active investor, meaning like flipping, wholesaling, real estate commissions, property management, then those are times where it could make sense and you could save taxes by being in a corporation.
But the vast majority of rental investors, and especially rookie investors, the LCC\u2019s going to be the way to go because you can likely maximize all of the various write-offs we talked about today, regardless of whether you own the property in your personal name or inside of an LLC, okay? So the LLC is really just there for asset protection purposes, not for tax reasons. And a lot of newbie investors come to me and say, \u201cOh my gosh, I heard you on the podcast talking about writing off books, and this and that, but I don\u2019t have an entity yet.\u201d So it\u2019s really important to understand, you don\u2019t have to have a legal entity to be writing off these expenses, you just have to be in the business of investing in real estate.
And that could simply mean owning a rental property in your personal name, starting out just with the simplest, buy a property in my name, renting it out. Or even like house hacking, that you are in the business of real estate. So, don\u2019t necessarily need to have an entity.<\/p>\n

Tony:
So Amanda, I just want to recap what you just said, because I want to make sure it doesn\u2019t go over the heads of our listeners. But what you\u2019re saying is, you do not need an entity, an LLC, an S-corp, any of that to take advantage of the tax benefits that come along with investing in real estate? So the property could be in Tony\u2019s name, the mortgage could be in Tony\u2019s name, all of the expenses could flow through an account that\u2019s in Tony\u2019s name, and I could still have the tax benefits that come along with investing in real estate?<\/p>\n

Amanda:
Yeah, exactly, exactly. And I think one thing especially for rookie investors is, even if you decided to have an LLC for your first one, or two, or three rental properties, the caution is don\u2019t go overboard with legal entities. I unfortunately meet investors who spend 10 to $30,000 in legal fees forming all these very complicated, extravagant entities. A lot of times it\u2019s not needed, especially if you\u2019re just starting out. And it could get very costly in terms of the annual fees, different bank accounts and bookkeeping, and tax returns. So, be careful of getting too complicated too quickly.<\/p>\n

Tony:
Amanda, just one followup question on that. What could be the reason that an investor would need more than one entity? Like, in what scenario does it actually make sense for them to do that?<\/p>\n

Amanda:
So if we\u2019re talking about rental real estate specifically, it would be from an asset protection perspective. So it could be a case where your attorneys says, \u201cOkay, well you have two rental properties. One you have a lot of equity, the other one you have very little equity but high risk.\u201d You know, there\u2019s a pool, there\u2019s stairs, your tenants have babies. So, maybe you want to have them in two different entities so that you\u2019re bifurcating kind of the different risks associated with it. But you know, the reason you\u2019d have multiple would be because your attorney feels like you need that level of asset protection, and not just because Robert Kiyosaki has these crazy structures, and therefore I must have that to be successful.<\/p>\n

Tony:
So from a tax benefit, or from a tax perspective, there typically isn\u2019t a whole lot of reasons you should have multiple different LLCs?<\/p>\n

Amanda:
Yeah, yeah. I mean, we do want to separate out our investments from our active income, so again, if you\u2019re someone who\u2019s flipping and wholesaling you have an entity for that, then you have rental real estate, you have a different set of entities just to keep them separated. But yeah, tax-wise, specifically looking at taxes there\u2019s not a reason to have a bunch of entities holding a bunch of different properties. For me, I think with anything else in real estate or business in general, I always take a look at it from the cost\/benefit perspective. What is it going to cost me to have X number of entities, and what is the benefit that I\u2019m getting from it? Whether it\u2019s saving on taxes, or being able to sleep at night a little bit better, to then decide how many entities do I really want to not just form, but maintain, right? People love forming entities and picking out cool names, but you have to maintain those entities and bank accounts, and it\u2019s just a lot of stuff.<\/p>\n

Ashley:
I think one thing too, just to add to that, it\u2019s not really for a tax reason. But also if you have different partners, you\u2019re going to have different LLCs too, you\u2019re going to\u2026 That would be a major reason to open up different LLCs, is if you\u2019re taking on different partners. Because it would be almost impossible to have one LLC, but have a property me and Tony own 50-50, and then me and Darryl own 50-50, another property within the same LLC. So that would be just another obvious reason to have a separate LLC too, outside of the liability and the tax implications too.<\/p>\n

Amanda:
Yeah, definitely. And we do see that sometimes with rookie investors who are scaling quickly, where they\u2019ll have different deals with different partners. And that\u2019s also a good sign that you should be working with a tax advisor too on, are there better ways to simplify the structures, or are there better ways to scale without having like six different partners and six different entities with just six properties too? But yeah, that\u2019s a great point.<\/p>\n

Tony:
Cool, all right Amanda. Well Ash, should we head into our questions? Is there anything else you want to hear from Amanda first?<\/p>\n

Ashley:
No, I think we should definitely go into\u2026 We have a Facebook question today, instead of a Rookie voicemail. So Amanda, today\u2019s question comes from the Real Estate Rookie Facebook group. This question is, \u201cMy husband and I are new investors, but I come from a family with a past in real estate investing. My grandfather, now deceased, had many rentals and eventually set up trust funds for several apartment complexes and storage unit sites with my uncle as the trustees, and my siblings and I as the beneficiaries. None of us have really taken the dive into all of this to see how to maximize the portfolio, we\u2019ve just been enjoying passive income for years. My question is, once a property no longer has the tax depreciation, what options do you have to continue getting the maximum tax benefits of real estate investing?
\u201cSell the property, use equity to invest in something with a higher price tag? I am very curious as to how we can leverage equity to purchase more deals, especially since the 27 years of tax depreciation is up. One apartment building he bought over 40 years ago.\u201d<\/p>\n

Amanda:
Well, first off what a lucky person to inherit such a wonderful asset. And I think for all of us as investors, that\u2019s where we hope to be, to leave our legacy to kids and grandkids in that manner. But yeah, that\u2019s one of the best ways\u2026 And we talked earlier about the super-wealthy people, how they get the tax benefits, and we can do the same as real estate investors. So this is a really great example, right? This property has a good amount of equity. Now you could probably sell the property, and depending on how it\u2019s structured, how it\u2019s in the trust, or coming out of the trust, potential ways to do a 1031 exchange to defer the taxes on the gain, and then also reinvest that money into bigger and better properties, and create new depreciation, new write-offs, which sounds like it\u2019s their goal.
But if you didn\u2019t want to do that, tapping into equity is one of my favorite strategies. So if there was a million dollar, or $2 million of equity in this property, you can get financing to tap into that equity. The money you take out, you don\u2019t have to pay taxes on it. So if you took out 600,000 or $800,000, you\u2019re not paying taxes on that currently. So you take the $600,000 as a downpayment, and then you can buy another, a million, 2 million, 3 million dollars\u2019 worth of real estate. That\u2019s a huge amount of new depreciation and write-off that you get, and you still continue to hold onto the original property, right? Still appreciating, and maybe a little bit less cash flow because now we have debt.
But it\u2019s still going to be appreciating too, so I love the possibility of being able to tap into that equity tax-free, and then using the new money to grow and build your portfolio even fasteR.<\/p>\n

Ashley:
Amanda, let me ask you, how does it work then as to who actually gets the loan on this? So the trust would actually get the loan on the property, but then would the beneficiaries, or would it be the trustee? Who would actually sign as a personal guarantor, or would they have to go and get a mortgage where they\u2019re not personally guaranteeing anything?<\/p>\n

Amanda:
There\u2019s various different ways to do it. I imagine probably\u2026 It\u2019s going to be dependent on how the structure\u2019s set up, and also whether they want to continue holding the properties in the trust. Or at some point, maybe they want to distribute the assets out of the trust so that the beneficiaries are just owning it individually or collectively in some sort of other entity too. But yeah, in terms of who\u2019s going to sign, who\u2019s going to be guarantors on it, I mean, I imagine it could be everybody, but I think that\u2019s a better question maybe for like a lender to address.<\/p>\n

Ashley:
Yeah, I was just curious of that. I don\u2019t have a trust or anything, but I\u2019ve worked with another investor who does, and it\u2019s actually become like more of a headache for him than actually beneficial, I feel like. So that was just a question I had.<\/p>\n

Amanda:
Yeah, and we do see that a lot too. That\u2019s why I was saying sometimes the best option is to unwind the trust, just to take it out of the trust, because there are limitations. And the word trust is very generic, we don\u2019t really know what kind of trust. There\u2019s so many different types of trust that exist out there, some are easier to unwind and others not as easy to do.<\/p>\n

Ashley:
Okay, well thank you so much for answering that question.<\/p>\n

Tony:
Yeah, that was a great response. And I feel like we could keep this conversation going forever, like there\u2019s so many things in the world of tax prep and strategy that\u2026 Yeah, there\u2019s so many things, but you provided so much value, Amanda. So I want to finish things out by going into our rookie exam, these are the three most important questions you will ever be asked in your life, Amanda. So are you ready for the real estate rookie exam?<\/p>\n

Amanda:
Yes, scared but ready.<\/p>\n

Tony:
Question number one, what\u2019s one actionable thing rookies should do after listening to this episode?<\/p>\n

Amanda:
One actionable thing that they should do is follow me on social media, Amanda Han CPA. I try to put out good content every day, and so yeah, I think that little snippets of information, so that it\u2019s not too overwhelming.<\/p>\n

Tony:
And Amanda, you\u2019ve been blowing up on Instagram, so kudos to you. I think you were at like what, 1,000 followers a few months ago. Now you\u2019re at like, what, 10, 11,000, somewhere around there? So you\u2019ve been doing a great job on social. Guys, make sure you do give her a follow.<\/p>\n

Amanda:
Oh, thank you, yeah. It\u2019s been fun, it\u2019s been fun to share little tidbits and tips here and there.<\/p>\n

Ashley:
Amanda, what is one tool, software, app or system in your business that you use today?<\/p>\n

Amanda:
I use a ton, I use a ton for taxes and things like that. But I started using Zapier, I don\u2019t know if you spell\u2026 I don\u2019t even know if you pronounce it Zapier or Zapier, if you guys know, but it\u2019s an automation tool that automates like a lot of stuff in our firm. From marketing, to administrative, I don\u2019t really use it for real estate specifically right now, but I do use it for marketing and I really like that.<\/p>\n

Tony:
Yeah, Zapier is great, and it has so many connections to so many different things. I even want to say that it has like some kind of accounting stuff built into it as well, but don\u2019t quote me on that. But yeah, Zapier\u2019s a great tool. All right, last question Amanda. Where do you plan on being in five years?<\/p>\n

Amanda:
In five years, gosh. It\u2019s interesting, because I really love what I do, my role, our firm, Keystone CPA. It sounds so strange to say, but I hope I\u2019m doing the same thing that I\u2019m doing now five years from now. Investing-wise, I think I want to be more passive. I mean, I\u2019m somewhat passive now, I have a portfolio. My husband and I, we have a portfolio of properties that we somewhat self-manage. But we are trying to grow more into the\u2026 Put more of our money in the passive side of things. I\u2019m a huge believer in leverage, in real estate we talk about leveraging when it comes to debt, good debt. But my new thing now is leveraging the expertise of other people, so other investors who are bigger, better, smarter than me, and just having them help me grow my portfolio.<\/p>\n

Ashley:
Amanda, thank you so much for coming onto the show with us. Besides your Instagram account, where else can people reach out to you and find out some more information about you?<\/p>\n

Amanda:
Yeah, I think Keystone CPA is our firm name, so keystonecpa.com is our website. I think that\u2019s the best place to find me. We have a lot of great, free downloadable resources. So we talked a little bit today about real estate professional, and the short-term rental loophole, and legal entities. So if you\u2019re a rookie investor and some of these kind of was the first time you\u2019re hearing about it, definitely check out our website and download our free tax savings toolkit to get more information on that.<\/p>\n

Tony:
Amanda, you also have two amazing books under the Bigger Pockets umbrella. Would you mind dropping those for us as well?<\/p>\n

Amanda:
Oh yes, here it is behind me. So, Tax Strategies for the Savvy Real Estate Investor, and then our second book is the book on advanced tax strategies. And so for any of you who haven\u2019t read it, I promise you it\u2019s not what you think when you hear about a tax savings book. It is filled with stories, success stories and also kind of nightmare stories about what happens when you do tax planning correctly, versus when you do it incorrectly. So yeah, definitely check it out.<\/p>\n

Tony:
Yeah, and it\u2019s a great foundational book. Like if you were intrigued by some of these strategies that we talked about on the podcast today, but you also feel kind of overwhelmed by the idea that there\u2019s so much more for you to learn, those two books are a great first place for you guys to get started. Before we close things out, I just wanted to give a quick shout out to this week\u2019s rookie rock star. This week\u2019s rock star is Raleigh Anthony Salazar, and Raleigh says, \u201cIt\u2019s done, I bought my first true rental property, and I did it out of state. Back in July I cashed out and refinanced my live-in [inaudible 01:01:48], that is currently my primary residence for now. I put about 90K into my pocket, so I started looking for opportunities to invest.
\u201cLiving in the Pacific Northwest, I wanted to find better options so I looked into the Midwest.\u201d And Raleigh says, \u201cIt would be possible without connections I made in the Real Estate Rookie Facebook Group,\u201d so just another plug, if you guys have not yet joined the Real Estate Rookie Facebook Group make sure you do. But to wrap it up really quickly, Raleigh said, \u201cBought this property for $100,000 at 25% down, three bed, one and a half bath,\u201d and is now looking to put in a lease for about $1,100 per month. And there\u2019ll be cash flow in just over 100 bucks every single month, so Raleigh, congrats to you for getting that first deal done, and we\u2019re super excited to see where it goes.<\/p>\n

Ashley:
Amanda, thank you so much for joining us onto the show, we really appreciated having you. And if anybody would like to purchase the book on tax strategies for the savvy real estate investor, you can go to the Bigger Pockets bookstore and you can use code ASHLEY or code TONY to get 10% off. So Amanda, thank you very much. I\u2019m [email\u00a0protected]<\/a>, and he\u2019s [email\u00a0protected]<\/a>, and we will be back on Saturday with a Rookie reply.<\/p>\n

Speaker 4:
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