\n<\/p>\n
Want more <\/strong>real estate tax deductions<\/strong><\/a>?<\/strong> If you\u2019re a savvy investor, you can use the tax code to avoid income tax<\/strong>, keep more money, and grow your portfolio even faster<\/strong>. But it\u2019s hard to do so without a rock-solid CPA behind you. Thankfully, we have some of the world\u2019s top real estate CPAs on the show, and they\u2019re giving their take on tough tax questions<\/strong> (WITHOUT sending you a bill!). If you want to lower your tax burden<\/strong>, keep more of your hard-earned money, and play the tax game to WIN<\/strong>, stick around!<\/p>\n Welcome back to another Seeing Greene<\/strong>! This time, we\u2019re joined by some of the most beloved real estate tax rockstars. Amanda Han<\/strong>, Matt Bontrager<\/strong>, and Tom Wheelwright <\/strong>have spent their careers helping real estate investors get the most out of their investments. From eliminating income tax<\/strong> to finding hidden deductions, boosting depreciation, and getting their clients into more tax-advantaged assets, these CPAs practice what they preach and are here to help you too!<\/p>\n They\u2019ll be answering questions about how to unlock the MASSIVE tax benefits<\/strong> of real estate investing while working a W2, when to <\/strong>start an LLC<\/strong><\/a>, how to protect your assets, whether a 1031 exchange is really worth it, and how to find the right CPA. Their suggestions could save you THOUSANDS in taxes<\/strong>, so don\u2019t miss this one!<\/p>\n David: Matt: David: Amanda: David: Tom: David: Amanda: David: Tom: David: Amanda: David: Matt: David: Tom: David: Matt: David: Tom: David: Amanda: David: Matt: David: \u00a0<\/p>\n \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show 753. Starting a company is a great way to go from a full W-2 worker with no flexibility into the passive income ideal of owning real estate and living off of their rents. Very few people can make the jump from one all the way over to the other. So instead, what I recommend is that they make a little pit stop in between called owning a business. This is becoming a 1099 employee, an entrepreneur, and you get a lot of write-offs when you get into that world.
What\u2019s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene episode. This is your first time joining us today, you\u2019re in for a treat. On these shows we take questions directly from our audience. Yes, that means you, and we answer them on the show. And in today\u2019s show, I brought help from three friends. This is a tax-oriented show where we are going to share tax strategies, share specific stories regarding taxes that different BiggerPockets members encountered, and we\u2019re going to have tax experts give them advice of what they could do to save that money.
Today\u2019s show, we get into a lot of topics, but some of the ones that stood out the most were when a partnership makes sense and when it doesn\u2019t make sense and what to do when you run out of money to invest, when you don\u2019t need to do a 1031 to shelter gains, and what specific questions you should ask your CPA to find out if they are the real deal or a pretender when it comes to real estate investing. This is all really good stuff that\u2019s going to save everybody a lot of money, so thank you for being here. I think you\u2019re going to love it.
Before we get to our first question, today\u2019s quick dip is when you save in taxes, it\u2019s like getting a race. Today\u2019s guest CPAs have all been on the show, some of them a number of times, and I encourage you to look in the show notes for another tax episode featuring one of these three fine folks and really see if there is a way you could implement this information into your investing this year. Remember the old phrase, \u201cA penny saved is a penny earned.\u201d It\u2019s actually better than a penny earned because you\u2019re taxed on money that you make. You\u2019re not taxed on money that you save. And if you end up loving this show and you want to submit your question to have me answer it, simply go to biggerpockets.com\/david where you can submit a video or a written question that we just may feature on this show. All right, let\u2019s get to the first question.<\/p>\n
Today\u2019s question comes from Cody in Arizona. A quick recap of the question. \u201cI recently purchased my first investment property and it is out of state near family. My brother is a realtor and my dad is going to be my handyman\/management guy.\u201d Perfect setup. So question one, \u201cSince I am looking to purchase more properties eventually, is creating an LLC now a smart idea?\u201d And if I create the LLC, should it be located in the state where I live or where the investment property is located?\u201d
First I got to tell you that I would confirm this with an attorney just to make sure that all of your facts and circumstances are considered here. Now, from my experience, it\u2019s going to be best to set up the LLC where the rental property is. That is what\u2019s going to give you the most protection.
Next would be just to remember that setting up an LLC is not for the tax benefits. You\u2019re not going to get any other tax benefit for having an LLC or the rental property in the LLC. What you are going to get is an additional expense for the cost of setting up that LLC. So just remember that when setting these up.
Number two is, \u201cHow can I find real estate investment friendly CPAs that are willing to work with me now and that also understand my future goals? As I stated, my husband and I are employed full-time and are only experienced in W-2 income prior to this rental property.\u201d
First I would say look to the BP community for CPAs and accountants. There\u2019s a ton in here that I see answering questions that are awesome that I\u2019ve seen on podcasts and things like that. Next would honestly be Googling them and just finding one that is obviously versed in the business of real estate and that when you talk with them and interview them, give them a snippet of your scenario and ask them if they have clients that are in your similar situation. That is what I recommend. That\u2019s what we do with new potential clients that we talk to. We make sure that we can help them in what they need. You don\u2019t want a CPA or an accountant that\u2019s just going to say yes to you, but that they have no experience and they\u2019re really going to use you as the guinea pig to learn on. So definitely be transparent when you\u2019re interviewing them and asking them questions if they can help you. So that would be my best advice there. I\u2019ll pass it back to David.<\/p>\n
All right, Matt, thank you for that advice and I thought that was fantastic. Remember everybody, not every CPA is the same. Not every realtor is the same. Not every contractor is the same. Just because they say they do that does not mean the job is done. You really want to dig in deep and see how much experience they have with the type of work that you want. One of the most common questions I get is, \u201cHow do I find a CPA that understands tax strategy?\u201d It amazes me how so few CPAs do understand tax strategy, but that\u2019s just the thing. Just like so few realtors understand how to run numbers on an investment property or what that even means. So ask those questions when you\u2019re talking to somebody, \u201cWhat type of tax strategies would you recommend?\u201d And if they don\u2019t have anything to say, that\u2019s not the one for you. All right, our next video clip comes from Sean in Cleveland.<\/p>\n
All right, this question comes from Sean Unn from Cleveland, Ohio. Sean\u2019s question is, \u201cI\u2019m looking for CPA who I can bounce ideas off of and can offer me suggestions, especially since I have properties located in different states. How should I approach finding the right one and what are the key questions to ask them in an introductory call?\u201d
That is such a great question, Sean. I love it and you\u2019re exactly right. When you\u2019re looking for CPA to work with, you\u2019re not just looking for someone to file your tax returns, but you\u2019re really looking for someone who can help you plan proactively and like you said, give you ideas, suggestions, and best practices both within tax and just financially as an investor. So don\u2019t ask generic questions like, \u201cDo you work with real estate investors?\u201d Because nine times out of 10 they\u2019re going to say yes. So what you want to do instead is to ask more powerful questions. Common examples might be, \u201cWhat are your successful clients in real estate doing to save on taxes?\u201d So this way you get them to showcase what types of strategies they\u2019re working with and also who they feel are strategic or are some of the bigger investor clients that they work with.
Also, you can ask them more pointed questions like, \u201cWhat are your thoughts about 1031 exchange or what do you think about cost segregation study?\u201d I think asking more open-ended questions like that will really allow them to go as in-depth as they can and really be able to demonstrate how well-versed they are in real estate. Especially since you have real estate in a lot of different states, one important question you want to ask is to see whether they\u2019re comfortable or have experience in working with multi-state tax filing and\/or tax planning. All right, back over to you, David.<\/p>\n
All right, Amanda. Well, you just made me look smart because on our last question I told people very similar advice to what you just gave, not knowing that your advice would be this on this question. A hundred percent, don\u2019t give generic questions like, \u201cWhat do you think about real estate?\u201d That lets people have an open out. You really want to nail them down. If you say, \u201cTell me what you understand about cost segregation.\u201d Or, \u201cWhat service do you use to run your cost segregation studies? If you get a dot, dot, dot or a, um, or some fancy way of dancing around it, that means they don\u2019t understand cost segregation, and so that\u2019s not a person that you as a real estate investor would want to be using.
You might say, \u201cWhat do you think about the bonus appreciation step down over the next five years? What strategies have you come up with to make up for that?\u201d If they don\u2019t have an answer or they haven\u2019t been thinking about it, not the person for you. I think this is fantastic advice for a lot of things; for contractors, for real estate agents, even for mortgage brokers. Ask your mortgage broker, \u201cWhat loans do you have that are exclusive to investors or what would you recommend I do to get loans once I get 10 properties?\u201d If they don\u2019t have an answer, then they\u2019re probably just running a cookie-cutter operations. They know how to do the very simple thing that\u2019s right in front of them, but they don\u2019t think outside the box, which means they\u2019re not a good fit for you. Great contribution, Amanda, thank you very much for your time.<\/p>\n
So this question comes from Jim in Norfolk, Virginia, and Jim asks, \u201cIf I get a private lender to lend me money for investing in rental real estate, how does the IRS see that? I\u2019ve got investors, they want to invest with me, they want the tax benefits, but they don\u2019t want to do anything.\u201d
So you really have two choices. One, they can be a straight lender. In that case, they just report interest income, so they\u2019re not going to get any of the tax benefits. You are going to get all of the tax benefits and you\u2019re just going to send them a 1099 showing interest income. Now, if you want them to have interest income\u2026 I mean, if you want them to actually get tax benefits, excuse me, then what you want to do is you want to form a limited liability company or a limited partnership, and the title of the property will be in that limited partnership, with limited liability company, and you\u2019ll share the profits basically with these investors and they will get their share of the tax losses from depreciation or any other tax benefits. So back to you, David.<\/p>\n
All right there, Tommy. Thank you for that and again, very good advice. Now, this is powerful because knowing this can change the way that you market yourself to raising money. If you\u2019re telling people, hey, lend me money in real estate because you\u2019re going to get tax advantages, you do have to structure a certain way. There needs to be shared ownership of some type. Whether that\u2019s a share of the LLC, a share of the property itself, they can get a piece of whatever the depreciation will be. But if you\u2019re like me and you typically only borrow money as debt and you don\u2019t do equity, well, your investors aren\u2019t going to get any of that depreciation because I\u2019m going to be taking it all. Now, this is very powerful for you as the investor to keep in mind. If you make a big income and part of the reason that you\u2019re investing in real estate is for the tax benefits, you\u2019re not going to want to tell people about the tax benefits of real estate because they would go buy their own instead of letting you borrow the money.
If you don\u2019t have big income and you don\u2019t need to shelter any income, well then hey, talk about the tax benefits of investing with real estate and structure your loans in a way that that person can get a piece of them also. I thought this was really good, and it also highlights the fact that there\u2019s more than one way we make money in real estate. Cashflow is one of the ways we make money in real estate, but there\u2019s many ways and tax savings is a big one. Thanks for that, Tom.<\/p>\n
Okay, today\u2019s question comes from Shree from San Jose. Shree\u2019s question is, \u201cI have a handful of rentals across several states currently held in my family trust. What do you suggest for asset protection? I have over a million dollars in umbrella insurers, different CPA suggest different things. I\u2019m want to keep things simple for tax return. And also separately, my wife is a real estate agent. What kind of entity should she use if she may have losses in the first few years?\u201d
Okay, so two completely different questions. Let\u2019s tackle the first one first. Disclaimer, I am not an attorney, so I\u2019m only able to answer this question from the tax perspective. All right. My limited understanding in terms of liability protection is that trust, if you\u2019re talking about a revocable living trust, that really doesn\u2019t provide any asset protection. Now, from a tax perspective, revocable living trusts do not file separate tax returns, which means that the rentals are reported directly on your personal returns. So that will kind of help you achieve that simplicity goal that you\u2019re looking for, but again, my understanding is the living trust don\u2019t give you any asset protection. So if you\u2019re looking for asset protection, you\u2019re looking at a true legal entity, whether it\u2019s an LLC, a partnership or maybe some kind of a Delaware statutory trust that does provide asset protection.
Now, which one of those will be best for you and your scenario? That\u2019s a good question for your attorney to work with you on. Now, this is going to be a joint effort with you, your attorney, and your CPA. The reason being your CPA is going to be able to help you do a cost benefit analysis, meaning what is going to cost for you to have these different entities, whether it\u2019s holding company, series LLC, or a DST. Right? What\u2019s it going to cost for you to have those, to form it, to maintain it every year, and what is going to be the added liability protection for you? And then really weighing it out to see if it makes sense. I know you\u2019re in California. California has very, very high LLC fees. So if you have seven rentals, you likely don\u2019t want them in seven different LLCs because that could get really costly real quick, but working concurrently with your tax and your legal team could really help you find that optimal point where you\u2019re getting the protection but also at a cost that makes sense for you. All right, back over to you, David.<\/p>\n
All right, and the second part of Shree\u2019s question comes to me. \u201cMy portfolio is limited so that I cannot obtain conventional loans anymore. I also have limited down payments now, but I hate partnerships. What do you suggest to overcome the mindset and do partnerships to buy more properties either to buy and hold or fix and flip?\u201d
All right, I\u2019m going to give you some advice that\u2019s different than most people in this space, so just take it with a grain of salt because not everybody would agree with me. I feel it\u2019s conventional wisdom that when you run out of money or you can\u2019t get loans, the answer is to go find a partner. And then you don\u2019t need to have money and you don\u2019t need to have loans because the partner\u2019s going to provide it and this information gets given as if it\u2019s all just that simple like, \u201cOh, just go find a partner.\u201d It\u2019s kind of like if someone says, \u201cHey, I don\u2019t have any other tax strategies to save money and I have a lot of taxes.\u201d And someone says, \u201cOh, just go get married. When you get married, you get a lot of tax write-offs.\u201d That\u2019s a terrible reason to get married. And if you marry the wrong person, the pain of a bad marriage will far outweigh whatever tax savings that you might have got. Is it true? Yes, you do get savings through getting married in taxes. But is it practical? Is it wise? No.
Oftentimes the practical application of advice that you are given is much different than the hypothetical way that it\u2019s explained. This is one of those situations. I don\u2019t think you should go get a partner just because you\u2019re out of money. Now, if you are going to do it, I would say to do it with fix and flips. And the reason is that I like to see partnerships not be for the long term, as short of a period as possible, especially when you\u2019re first starting to partner with someone you don\u2019t know them. In the same way that I would never tell someone to go marry somebody after the first date, I wouldn\u2019t want to be a partner on a long-term project with someone that I don\u2019t know super well just because I was told to partner. Now, if we go on a couple dates, we do a couple fix and flips, we start to get to know each other, we start to like how we work together, yes, a long-term partnership can start to make sense, but you got to give yourself time and repetition before you get to that point.
My advice is different. When you run out of money, the goal needs to be to make more money. It\u2019s often easy to just say, \u201cOh, I need help with something. I\u2019ll go find someone else that can provide it for me.\u201d And if you have the right people, that does work. But sometimes that can be the carrot that incentivizes you to save more of your money, to live beneath your lifestyle, to go take more challenges in life so that you can make more money, to ask for that raise at work, to start a business to earn more money. Real estate is a wonderful way to build wealth, but it is not the only way to build wealth. In fact, my personal opinion is that real estate works best when it is a piece and a bigger puzzle of which entrepreneurship is also present. Real estate works great as a tax savings, but you have to be making money in order to have something to shelter your income, especially if you\u2019re doing it in a 1099 endeavor like entrepreneurship.
So Shree, can you start a business? Can you work more hours? Can you find a way to be more efficient with the hours you\u2019re working so you can make more money? Do you have equity in some of your previous deals that you could pull out to reinvest? How can you move forward without relying on a partner that you don\u2019t know? I don\u2019t know that your mindset is wrong that you hate partnerships. You might have really good reason to not like them, so I\u2019m not going to tell you to get over that mindset. I would need to know more about why you have it. I am going to say if you\u2019re going to partner, do it on short-term deals like flips, and if you don\u2019t want to partner, then let\u2019s ask different questions. How can I make more money? How can I save more money? How can I get more capital to invest so I don\u2019t have to have a partnership? Submit us another question with some ideas you have. I\u2019d love to help you out with that.
Also, Shree, I see that you are in San Jose, California, just a hop skip and a jump from me. I\u2019m recording this over in Brentwood, so hopefully we run into each other soon. Would love to meet you.<\/p>\n
This next question is from Dale Vance Jr. in Los Angeles, California, and he says, \u201cIf I 1031 a property to buy a condo where I\u2019m going to live, how long do I have to keep it a rental before I can make it a personal residence? Will there be tax consequences, say after two years? Thank you.\u201d
Dale, I actually think two years is a really good timeframe to be renting it. You do need to show that your intent of buying the new property was to rent it. You can\u2019t pre-establish\u2026. Don\u2019t write a two-year lease. I\u2019d write a regular one-year lease. You can renew it. You want to make sure you at least straddle two tax years, but two full years is probably a good rule of thumb. I think that\u2019s a really good idea. And then remember, after that, as long as you actually live in it for two out of five years, then anything other than the depreciation you\u2019ve taken should be tax-free up to that 250,000, 500,000 exclusion for single versus married individuals. So you actually can have your cake and eat it too. Thanks Dale. Back to you, David.<\/p>\n
Thank you, Tom. That was a great answer to a tough question. Oftentimes, we as human beings want to turn subjective matters into objective ones because our brain finds comfort in knowing exact answers, and this was a question just like that. How long do I have to wait before I can take a business property that I bought through at 1031, or an investment property I should say, and turn it into a primary residence? And there is not an objective answer to that. I don\u2019t believe the tax code specifies a period of time you have to wait. It would come down to a judge\u2019s subjective interpretation of what your intent was, and Tom, I thought you gave a great answer that two years would be a healthy period of time.
Just remember everybody, sometimes there\u2019s not an answer like that. Similar to when you\u2019re buying a house as a primary residence and then you decide that you want to rent it out. There\u2019s not a period of time that you have to live in it before you do that. It\u2019s often said you have to live in it for a year. That\u2019s because when you buy the property, you\u2019re intending to occupy it as a primary residence and you\u2019re not allowed to buy another primary residence until you wait a year getting a conventional loan, of course. That\u2019s where the year thing comes from. It doesn\u2019t come from the tax code saying that you have to live in it for a year. Many people have bought a primary residence and had a life change, a sick parent, they got a new job and they had to relocate. Some other life event happened and they couldn\u2019t live in that house. Well, they can\u2019t force you to live there and say you\u2019re not allowed to rent it out. What you get in trouble is if the bank can prove during a foreclosure that you intended to rent it out and you never intended to live there.
So thank you Tom for that advice and making us all a little bit smarter.
All right, I hope you\u2019re enjoying the advice for my colleagues here. We\u2019ve blazed through five already and we have more to come. I just want to remind you to like, comment and subscribe to our YouTube channel here. Specifically comment, I want to know what you think about these shows. Now, I always like to get feedback about the length of the show, the topics, my light color, and guess what? You all responded, which is awesome. These comments come from episode 741 from Mountain Surf. \u201cI love how you admit this is a difficult market. I turn off 80 to 90% of YouTubers because they\u2019re trying to put an optimistic bullish spin on this market.\u201d Oh, bullish like positive, not like bullish like a substitute for a bad word. That\u2019s funny. I read that differently.
\u201cTo me, it means they are not adapting to the situation because they are not fully acknowledging it. We don\u2019t know when or if the fed is going to pivot. Your concepts are also not basic. It\u2019s so relieving not to listen to the same stuff other people say. At the end of every YouTube I watch, I asked myself, \u2018What do I know that I didn\u2019t know before?\u2019 I\u2019m finding more and more of YouTubes end up being nothing burgers. Yours are thankfully advanced enough that I gain insight. Don\u2019t simplify, stay advanced.\u201d
Wow, Mountain Surf, that might be my favorite comment that I\u2019ve read for somebody. You put a lot of effort into, well, not only complimenting me, but saying why you like the show, and that\u2019s a very valuable thing you can give other people. It\u2019s one thing to say I\u2019m a big fan or I love what you do. It\u2019s another to tell somebody why you like it. That gives someone like me a direction to know how to make the shows better, what\u2019s working, what people are enjoying and why they\u2019re liking it. I really appreciate that comment. This is awesome. And it is something that I put a lot of effort into trying to do. I could come in here and tell you guys that everything is easy. That wouldn\u2019t make any sense. I could also come out here and say, \u201cIt\u2019s hard, so nobody should invest in real estate. Go buy a bunch of NFTs.\u201d That wouldn\u2019t be honest either. This is the most challenging market that I\u2019ve ever seen in my real estate investing career.
Now, I\u2019m not Sam Zell. I haven\u2019t been doing this for that long, but I\u2019ve been doing it for a minute and this is incredibly challenging and the reason is that there is significant inflation, especially related to assets, which is the best safe place to put money to protect it from inflation at the same time that they keep raising rates, which is lowering affordability. So it\u2019s not affordable to buy a house which eliminates cash flow for investors a lot of the time, but you still got to put your money somewhere because it\u2019s losing value. It\u2019s like there\u2019s no safe place to run and there\u2019s nowhere to hide, and that\u2019s what makes this so hard, which is why we\u2019re making more of an effort to produce more shows and share more information.
I also appreciate you saying that you liked it. I\u2019m not giving you basic information here. I try really hard to avoid just giving something basic, and I always give my explanation for where my advice came from so that if you don\u2019t agree with it or you don\u2019t want to follow it, at least you understood the perspective I was coming from so you can decide if it\u2019s right for you or not.
Here\u2019s the last thing I\u2019m going to say. If you\u2019re getting your information from YouTubers, TikTokers, people that are telling you how great real estate is and they\u2019re selling you on a dream, not on reality, it\u2019s usually because they want your money. Podcasts like this are free for you, so you don\u2019t have to worry about me telling you something just because I want your money. Now, I do sell houses and I do have a mortgage company, which I use when I\u2019m buying my own property. So I do provide services to people, but I\u2019m not sitting here telling you guys that you need to all go buy houses so that I can sell it to you. In fact, very few of you have actually bought a house with me. I\u2019m telling you the truth and it\u2019s free and you can trust it.
All that I would ask in return is that you would go and give us a five-star review wherever you listen to your podcast, whether that\u2019s Apple Podcast, Spotify, Stitcher. It helps so much for us to get reviews. I would really appreciate if you guys would do that. We want to stay the top real estate investing podcast in the world so we can continue to bring you these shows for free.
All right, our next comment comes from Army Faser. \u201cI love the show and don\u2019t give a darn about the background color. This is because I always forget to change the light. Thanks for the reminder about focusing on the long term. My insurance costs are steadily rising in south Louisiana, but we are still above water. At the moment, it does have me wondering if I should sell and buy outside of Hurricane Alley. PS. Don\u2019t worry about the length of the show. If it\u2019s good info, it is worth the time.\u201d
Well, thank you for that Army Faser. I appreciate that you\u2019re liking the show and you\u2019re not worried about the time. So we will continue to make them and if you do decide to invest outside of Hurricane Valley, check out biggerpockets.com\/longdistancebook to learn how to put systems together to buy real estate in other places.
And our last comment comes from Aberet Art. \u201cI might be wrong, but it feels like it\u2019s too late to get started at this point and only the people who got going in the golden age have the advantage over everyone else.\u201d
Whoo, that\u2019s a deep one man, and I see where you\u2019re coming from. I\u2019m not going to sit here and tell you that that\u2019s not the case. Now, I will say that it is more difficult to do this than before, but it\u2019s not too late. Adversity is the fuel of greatness. I will also tell you that the people that bought five years ago, 10 years ago, 15 years ago, 20 years ago, here\u2019s the truth, they all thought it was too late also. They all thought prices had already come up too high, it was too expensive, they were waiting for a market where houses less. Anyone who\u2019s honest will tell you the same thing.
I\u2019ve yet to meet a person who bought a house and said, \u201cMan, that was a great deal.\u201d They always thought they bought high. And at the times when we were buying low, we didn\u2019t know it was the bottom. We thought it was going to crash more. There\u2019s no person at the time they\u2019re buying that knows if it\u2019s at the right time or not. But every person when they look back says, \u201cI\u2019m really glad I bought real estate. I wish I had bought more real estate.\u201d And I had to tell myself this all the time because I struggle with the exact same feelings as you. It\u2019s especially hard when you go buy a bunch of real estate and the market dips a little bit like it has, and it went from I bought it, to it went up, and then it came down a little bit. I forget that it went up before it came down. I only think about the fact that it came down and I feel really bad in a lot of ways. So keep in mind that you\u2019re not the only person feeling that. Everybody feels it. When you\u2019re buying for the long term, those worries go away.
Now on episode seven 741\u2019s YouTube page, there are a ton of great comments, specifically two really good threads where people made comments and it started a conversation going back and forth. Piece of advice number one, beware at BiggerPockets we get spam and there\u2019s a WhatsApp account that will frequently pretend to be BiggerPockets. That\u2019s not them, so don\u2019t message them, but there are a lot of people who are making real comments. So if you want to avoid the spam and you want to make sure that your comments get acknowledged, because sometimes people stop paying attention to YouTube comments. After you leave the comments, just head over to the BiggerPockets forum and start the conversation over there where you can be free of spam as they\u2019re moderated. And you don\u2019t have to worry about asking something that nobody sees because the BiggerPockets forums are monitored more than the YouTube comments. But keep leaving them comments, folks. I love it. All right, let\u2019s take another video question.<\/p>\n
All right, this question comes from Mary Hopkins from Florida, and the question is, \u201cI have a friend who\u2019ll be selling two of her farms and have a significant amount of tax. We were discussing the 1031 exchange issue, but I was not sure the options within it. Can she invest in the REIT or syndication and still receive the tax benefits?\u201d
All right, so great question Mark. When you sell farmland, you can actually do a 1031 exchange directly. So if your friend is interested in buying more real estate after she sells a farmland, then I think that would be the most straightforward way to save on taxes. So again, sell the farmland 1031 exchange the proceeds or the sales price into other types of real estate. Now, if she wanted to do a 1031 exchange, unfortunately REITs are not eligible as replacement properties. They\u2019re typically set up as corporations, and so when you 1031 exchange, it has to be the asset itself and not a corporation that owns a piece of property.
Now, with respect to syndication types of real estate, it may be possible what she\u2019ll want to do is to contact the various syndication investments that she\u2019s interested in and ask them if they are set up to take 1031 exchange money. Some of them are set up that way, many of them are not. So she\u2019ll just want to find that out from the company that she\u2019s interested in investing with.
Now, last but not least, even if she was not able to do a 1031 exchange or the syndication that she wants to invest in is not accepting 1031 exchange, she can always use what we call a lazy 1031 exchange. And that simply means buying other real estate, whether it\u2019s directly on real estate or real estate in a syndication. To the extent that those real estate can strategically create tax losses, those losses should be able to offset the taxes on the sale of her farmland. So a lot of different options there. Now, back over to you, David.<\/p>\n
Amanda, that was a great answer. In fact, you\u2019re bringing up something that I just realized was a bit of a secret in our industry that you mentioned that never gets talked about, but I remember having a conversation with a CPA that brought it up and my mind kind of like\u2026 It took me a couple times to wrap my head around what they were saying.
The 1031 is the way that you shelter the gains from something that you sold. But what you described is, I think you called it the lazy 1031 or the sneaky, something along that lines. It\u2019s buying enough real estate that the bonus appreciation would show losses that would also shelter the gain that you made. So you don\u2019t always have to do the exchange and play that game with those rules. So it is very conceivable if you have enough depreciation because you bought enough real estate that instead of doing a 1031, you just sell the property, buy new ones, take your capital gains, and then have those offset by the depreciation that you took on the new real estate and you don\u2019t need to do a 1031. Great advice. It doesn\u2019t get talked about very often, and it will save a lot of people headaches if they get into it. Brought to you by us at BiggerPockets all for free. All right, let\u2019s get to our next question.<\/p>\n
Today\u2019s question comes from JD in Sacramento. A quick recap of the question, \u201cHow is it that there are so many tax benefits for real estate but they don\u2019t count if you have a W-2 job, and why does no one ever talk about that?\u201d
The first reason is because rental real estate is considered passive by the IRS versus money that you earn as a W-2 employee or a business owner is considered non-passive. And we have to look at those two things as buckets of income. Now, it\u2019s very difficult without jumping through all of these hoops to offset those against each other. So meaning if you make 100,000 at your W-2 and you lose 50,000 with your real estate, you ideally would want to net those to where you only pay tax on 50. But again, you can\u2019t if you\u2019re simply a W-2 job, not in the nature of real estate and you don\u2019t pass those rules. Rules being a real estate professional and materially participating in your rental properties.
Now, I do want to mention that you can be a W-2 employee and still utilize these loopholes and tax tricks, but you will need to own at least 5% of that business for it to count towards being a real estate professional.
And the last thing is you can be a W-2 employee within let\u2019s say your own S corporation, so you\u2019re basically self-employed, but again, that business would just have to be in the nature of real estate. So let\u2019s say that you\u2019re a realtor and you operate as an S corporation, you likely or should be getting a W-2 from that position that you play within your own company. And again, since you would qualify as a real estate professional, and let\u2019s say that you do materially participate in your properties, that very well could give you tax savings right there. But really just remember that there\u2019s two buckets. There\u2019s passive and non-passive and rental real estate is technically considered passive, and money that you earn at a W-2 role is considered non-passive. So at the end of the day, you\u2019re going to need to pass these tests in order to net those against each other and really maximize your tax situation. Now, I\u2019ll pass it back to David.<\/p>\n
Thank you, Matt. Great job answering a tough question. This is misleading because when you hear certain phrases like depreciation, that sounds like the value of an asset going down, it\u2019d be the opposite of appreciation, but that\u2019s not what it means. It means the asset deteriorating over time. When you hear phrases like passive income, that is misleading. You think, \u201cOh, I just buy something and it gives me money like a stock.\u201d Real estate is considered passive income in the tax code, but in practical application, it\u2019s rarely ever that passive.
Many of the tax benefits that come in the tax code come from non W-2 work, and there\u2019s many reasons why, but here\u2019s the way that I like to think about it. When you have a W-2 job like most of us do, you\u2019re taking a lot of the risk out of the way you\u2019re earning money, your employer is taking the risk. So if one of my businesses loses money, I don\u2019t pass that loss off to the employees. They just didn\u2019t make money or maybe they made less money than they used to, but they don\u2019t lose money. Employees don\u2019t take risk. They have a floor, a sturdy foundation that they stand on where they get a check regardless of how good the business does until the business runs out of money and they lose their job. But that floor comes with a price and that\u2019s a ceiling. It is much harder to get higher to make more, to do better for yourself when you\u2019re standing on that floor. And this is where a lot of people get upset, is they only look at the fact that they have a ceiling on themselves and they don\u2019t recognize the fact they also get a floor. When you take a step out of that cage, which sometimes feels like a nice safe floor, keeping you safe, and you get into the entrepreneurial world, you get a lot of tax benefits, but you also take on a lot of risk.
Starting a company is a great way to go from a full W-2 worker with no flexibility into the passive income ideal of owning real estate and living off of their rents. Very few people can make the jump from one all the way over to the other. So instead, what I recommend is that they make a little pit stop in between called owning a business. This is becoming a 1099 employee, an entrepreneur, and you get a lot of write-offs when you get into that world. Now, I\u2019m not a CPA, that\u2019s why we brought a bunch of them onto the show, but you can often write off dinners that you would already be having if you have them for a business purpose. You can write off vehicles that you would need to be driving anyways if you\u2019re using them for your business.
Think about me as a realtor. I\u2019m driving all over the place When I was showing houses or going to listing appointments, I had to have a car, I had to have an iPad in order to give my presentations. Now, the IRS doesn\u2019t say, you\u2019re not allowed to use that iPad unless you\u2019re giving a presentation. I could also use it for other things. A lot of people take advantage of write-offs when they run a business that they can\u2019t when they\u2019re a W-2 worker because they use it for the business, and that\u2019s something that you could just think about. If you\u2019re having a hard time finding tax write-offs, starting a business and owning real estate are the two best ways to do it, and if you combine them together, you get even more.<\/p>\n
So our next question comes from Sonya in Massachusetts and Sonya asks, \u201cMy husband and I recently got divorced and we own a duplex. I would like to reinvest my share the proceeds, but I still have to give him half of the proceeds which is about $100,000. How do I do this tax effectively?\u201d
The very first thing I would tell you, Sonya, is you need to make sure that he\u2019s going to recognize your ex-husband half of the gain. So when you sell the property, make sure that he\u2019s actually on the sale, which I presume he would, and you need to make sure he picks up half of the gain. So you would actually file a partnership return and give him a K-1 showing half the gain unless your divorce decree says otherwise. Then you can take your money and you can reinvest it. You could do a 1031 exchange if you really wanted to, but I think you\u2019re probably better off just taking bonus depreciation. Just make sure that you buy your new property and place it in service, meaning it\u2019s ready to be rented by the end of December. And then you get 80% bonus depreciation on the land improvements and the contents of the building, like the carpeting and the ceiling fans, the window coverings, et cetera. Typically, that\u2019s about 20 to 22% of the cost of the property as long as you get a good cost segregation done.
So that would be my recommendation. I would probably not mess around with a 1031 exchange. I would rather probably see you do the bonus depreciation, but be sure to sit down with your CPA, your tax advisor, make sure your tax advisor understands what they\u2019re doing and that they can run the numbers for you. David, it\u2019s all yours.<\/p>\n
All right, thank you for that, Tom. Again, we see that a 1031 exchange is not always necessary if you have enough depreciation available to you. Now, here\u2019s something else to think about. As much as we complain about how tough the market is and how it\u2019s too hard, which frankly\u2026 Side note, I think that comes from being oversold on the fact real estate\u2019s supposed to be easy and the market has been easier than normal for the last eight years due to really low rates and rampant inflation. Even though we complain about it, there are still some massive benefits to owning real estate and depreciation is one of them.
When you combine cost segregation studies with bonus depreciation, people have been able to buy large amounts of real estate and shelter all of their income. I\u2019m talking a hundred percent of their income for several years in a row because of benefits given to us in the tax code that incentivize real estate ownership. That is not normal. That is not something that everybody gets. It\u2019s not something that other countries allow, and as Tom just mentioned, it\u2019s going to start stepping down and this year it\u2019ll be 80%, then 60%, then 40% and so on. This is a big perk that we\u2019ve had for a long time and for people that didn\u2019t jump in and take advantage of it because they were waiting for a crash, I feel bad sometimes. This is a great point that you\u2019re making there, Tom, about ways people can save money and make money in real estate that are not purely cash flow. And I\u2019m just giving everyone a heads-up. It\u2019s not going to be around forever. Unless Congress approves this to be extended or gives us another run of it, it could go away and you won\u2019t hear us talking about depreciation in the same way when it comes to sheltering your business income or your active income like we have been able to in the past.
And the second part to Sonya\u2019s question reads, \u201cMassachusetts multi-home prices are so high with the high rates I\u2019m not expecting to be able to afford much. I have a few questions. Can I buy a home without putting down 20%? And how do I find investment properties, single or multifamily in other states that I can afford and run while living in Massachusetts? Actually, I\u2019m not opposed to moving and renting out my single-family home, but if I understand the capital gains laws, I have to buy an investment property with the money from the sale of a duplex. I hope this question gives enough details. I\u2019m at a loss and a bit overwhelmed by my situation.\u201d
All right, thank you, Sonya. I could tell from the way that this was written that you are feeling overwhelmed and there\u2019s a million things going through your head. So the first thing that I would recommend is that you step up your education when it comes to real estate investing. Get in the BiggerPockets forums, follow me @DavidGreene24, follow other BiggerPockets authors. Especially people that have written books for BiggerPockets usually have a higher knowledge base than just the casual member. I need you to get in the world a little bit deeper and sort out the chaos that\u2019s jumbled in your mind that I can tell is coming out here. I definitely sense that you\u2019re overwhelmed.
You brought up a couple different things like you\u2019re not opposed to moving and renting out a single-family home, but then you switch to there\u2019s going to be capital gains if you sell a duplex. The first part of your question here talks about how you can get around putting down 20% on an investment property in another state that you can afford and run while living in Massachusetts. Well, there\u2019s not a lot of options when it comes to that. One would be buying from a seller directly and taking over their note and negotiating directly with that person what the down payment\u2019s going to be. Sometimes you could get no down payment. We have to call that creative financing. The problem with that is if you\u2019re stuck right now, you probably don\u2019t have a ton of people lining up to talk with you about selling their property directly to you not on market. Those always sound easier to do than what they are when you go try to apply it.
So if you have an opportunity like that for creative financing, that\u2019s one way to get around it. Another would be the NACA program. You can Google that, N-A-C-A, and visit their website and see what options that they have available for low-income people. On episode 590, we actually interviewed somebody who got into how he has used this to scale his portfolio at a specific area. I\u2019m not an expert in that. I don\u2019t do a ton of it, so I can\u2019t tell you on this show, but that is a place that I would point you towards.
And then the other option could be finding a partner, if you find another person that can lend the money to go in on the deal. But again, I\u2019m going to give you similar advice to what I told somebody else. If you\u2019re having a hard time finding the 20% to put down, either house hack, which no one likes to do because it\u2019s uncomfortable, but that\u2019s why I recommend doing it because you\u2019re showing that you value your future over your present comfort because you can house-hunt for three and a half percent down or 5% down and then move out of that property in a year and buy another one, and now you got to a rental property. Or figure out a way to make more money, which will force us to improve in other parts of our life. I\u2019m writing a book right now for BiggerPockets called Pillars of Wealth that talks about how real estate investing is a third of the way you build wealth, but the other two thirds are offense and defense, making money and saving money, and those are just as important.
Thank you very much for your question. And by the way, episode 590 was with Andre Haynes about the NACA program.
All right, we have time for one more question. This one comes from Ola in Atlanta.<\/p>\n
\u201cAt what point would you pull out equity of a free and clear property, especially in this market and where we are headed?\u201d
My personal opinion is I\u2019m a fan of honestly never selling. So in this case, even if you want to refi and take cash out, I would look into getting a home equity line of credit or a HELOC, as they call it, because then the cash is accessible to you and not yet accruing interest. Versus if you do a refinance right, you\u2019re now walked into an additional\u2026 Or not additional, but a new 15-year or 30-year note, and you obviously will have a monthly payment obligation there. So I\u2019m a fan of if you need quick access to cash, consider that HELOC for that just because again, you don\u2019t really accrue anything until you use it.
The next question is, is there a rule of thumb on how long to hold cash flowing assets? I\u2019d say this is all personal preference here. You obviously want to run the numbers and see do you have a better potential opportunity for this equity, let\u2019s say, that you have in these properties? And if not, maybe leave them there.
And then the last question here was looking to refinance some, but then are just considering an overall sale, but then thinking about the tax implications, what are the thoughts here? So overall, again, I\u2019m a fan of never selling, and if you do need to sell, I would look at a 1031 exchange. I can see here that the concern is if you sell it, yes, you will come into let\u2019s say a windfall of cash, but now you\u2019re looking at a tax liability potentially. If you tax plan, there may be some tax advantages here that if you have passive losses built up, you may not have to pay as much tax as you think you would here, but overall, if you will be stuck with a tax bill, I would consider a 1031 exchange overselling here. So those are my thoughts there, and I\u2019ll pass it back to David.<\/p>\n
I love it, Matt. The idea of never selling. This is something that bears repeating because I forget people aren\u2019t aware of it, but when you refinance a property, you do not pay taxes on the refinance. Now you gain a bunch of money, but you\u2019re also taking on a lot of debt. It is not a capital event. You\u2019re not actually making money. You\u2019re just exchanging money in the bank for a note that you have to repay with interest. So of course, you\u2019re not going to be taxed on that, but people don\u2019t realize it. You can buy a house, put it on a 15-year note, pay it off, refinance it, all that money comes tax-free to you, and then use the money from your tenants and the increased rents to pay off the new note. Again, this is why I love real estate because it\u2019s something I buy with the majority of somebody else\u2019s money, and then I get a third person, the tenant to give me the money that I borrowed to buy the property and very little of it is my money. It\u2019s just the time that I have to spend operating it. Then you get all the other benefits of real estate and it is awesome.
So thank you for that advice and everybody please remember that you don\u2019t have to sell property in order to get money out of it. You can put an equity amount of credit, you can cash out refinance.
Regarding the question of how long as a rule of thumb to hold cash flowing assets for, the way that I look at that problem is I ask myself when the property stops running efficiently. So I don\u2019t sell properties very often. I\u2019ve sold a handful over my entire career, and it\u2019s usually when that property\u2019s either in a location that I don\u2019t like, some life event that was unexpected occurred and I had to sell it, or more commonly, the rents have not kept up with the growth of the assets in that area. So I talk about that in the BRRRR book, this example of how I sold one property and turned it into 10 using the BRRRR method, but the reason I chose to sell that property was that the value of it had gone up, but the rents had not kept pace at that point. The cash flow didn\u2019t justify holding it, so that\u2019s the one that I sold. If a property keeps cash flowing, there\u2019s no reason to sell it unless you have another opportunity. You\u2019re better off to refinance it and keep the property and buy more with the money from the refi.
Tom, where can people find out more about you?<\/p>\n
You can find more about myself and WealthAbility at wealthability.com, and you can also find me on social media.<\/p>\n
And Amanda, where can people find out more about you?<\/p>\n
Hi, I am Amanda Hahn, CPA, a tax strategist and real estate investor, and you can follow me on Instagram, Amanda Hahn CPA, for daily tax and financial tips.<\/p>\n
Matt, where can people find out more about you?<\/p>\n
Hey, thanks, David. You can find me on Instagram with the handle @mattbontrager, or at our website, truebookscpa.com.<\/p>\n
All right, thank you all for your contributions to Seeing Greene today. I appreciate you guys taking the burden off my shoulders to talk about taxes because I\u2019m not a CPA, and frankly, it\u2019s not my favorite thing to talk about. It\u2019s kind of like vegetables. You have to eat it, but you don\u2019t have to like it.
All right, everybody. That is our show for today. Thank you for all of your contributions. Thank you for listening to us. If you want to follow me specifically, you could do so at davidgreene24.com, or you could follow me on all the social medias @DavidGreene24. And guess what? I finally got Meta to give me that blue check, so now you don\u2019t have to worry about being taken advantage of by fraudulent David Greenes. Send me a DM and let me know what you thought of the show and go to my website, check out what I got going on.
Also, if you didn\u2019t know, BiggerPockets has an entire website with more resources than I can tell you right now, we are more than just a podcast or a YouTube channel. There\u2019s tons of stuff. So head over to biggerpockets.com next time you\u2019re bored and look at all of the free resources that we have for you there.
Lastly, if you have time, watch another video, and if you don\u2019t, make sure you tune in a couple days for the next episode that we are going to be releasing. We also have tons of other content on YouTube that you could check out in the meantime. Love you guys. Appreciate that you spent some time with me. I will see you on the next one.<\/p>\n