The Episode on Advanced Tax Strategies with Amanda Han & Matt MacFarland
Play • 41 min

Tax season is nigh, that is why we have authors and real estate tax experts, Amana Han & Matt MacFarland join us on this episode to highlight what you need to know to keep as much of your money as possible. 

 

Amanda & Matt's website: https://www.keystonecpa.com/ 

Suggest a topic for the podcast: https://linktr.ee/remoterealestateinvestor 

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Transcript

 

Michael:

Hey everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co host, Tom Schneider. And we have with us two very special guests, Amanda Han and Matt McFarland authors, CPAs real estate investors extraordinare. They're gonna be talking to us today about all things tax related that real estate investors should be aware of. So let's get into it.

 

Amanda Han, and Matt MacFarland, thank you so much, again, for joining us on the podcast. Really, really appreciate you coming on.

 

Matt:

Well, thank you for having us.

 

Amanda:

So excited to be here, lots to talk about

 

Michael:

Lots and lots and lots of talk about so I want to be very respectful of your time. So before we get into it, I would love Love, love. If you could both give us a little bit of background on yourselves a little brief introduction of who you are and how you got started in real estate and tax. You both have been guests on numerous other podcasts including the bigger pockets podcast, so floor is yours.

 

Amanda:

Yeah, I guess I'll go first. So my name is Amanda. I tell people's I'm the third generation of real estate investors in my family. My grandparents had real estate investing, my parents dabbled in it. But I was never taught to do real estate investing. I think like a lot of people I was taught to just go to school get a good job. And it wasn't until several years after I worked as a CPA for real estate investors that I realized that you know, real estate is such a great tool to wealth building and to tax savings. So that's where kind of Matt and I got started in real estate

 

Matt:

Yeah I'm Matt MacFarland and I married well!

 

Yeah. But yeah, our practice focus on real estate investors, it's kind of where we got our start and what we like and what we understand, and we don't focus on, you know, manufacturing clients or retail clients, just because that's not what we know. So I've been doing it over 20 years now. And Amanda is close to that as well. And so probably 80 90% of our clients are real estate investors. So it's, it's always fun stuff to talk about.

 

Michael:

So that was your family also involved in real estate, or how did you get involved in that space?

 

 

 

Matt:

You know, my parents did a little bit of it back in the 80s, when it was kind of you know, everybody in their mother could invest and get right off skin before they change the tax code. But we kind of got into it through the job. You know, I remember like, my mama was working on some of these taxes, who was probably in his 60s, and he was retired and he was making, you know, like six figures in cash flow. And it's like, Okay, this is, this is what we got to do, you know, so that was kind of how I got turned on. Yeah.

 

Amanda:

Yeah, it's so interesting, because, you know, for me, for both of us, even though we worked in taxes, you know, that was our profession is to do tax planning and tax strategies for for investors. And for me, specifically, growing up in a family who was, you know, fairly extensively involved in real estate, we never put the two to two together, you know, and for years, we just kind of went to work that our thing, never thought that maybe we might do real estate for ourselves, you know, until we read Robert Kiyosaki his book, Rich Dad, Poor Dad. So it took us just, you know, reading a book, not about taxes to really apply that to our own situation.

 

Tom:

I was curious, you know, you said like a third generation, what kind of investing did your parents do and your grandparents? Who is it all kind of similar residential real estate? Or what type of real estate investing did they do?

 

Amanda:

Yeah, all sorts. So I think my grandparents, I'm from Taiwan originally, so my grandparents, they were business owners who, you know, also bought the underlying real estate, which ended up being kind of a very, almost like, you know, Time Square type of a property back in Taiwan. And when they first immigrated to the US, they dabbled in land, you know, which is different, right? No, no rental stuff. But if you guys follow the real estate of Vegas, those have appreciated so much, right, like all various parts of the US. And then yeah, you know, just single families, condos and things like that. So I think like a lot of real estate investors, you kind of start out with one type, but you end up expanding into different types of real estate as well.

 

Michael:

Okay, so I would love to dive into the meat and potatoes of the subject here. And if you could give us a little bit of insight into how real estate is taxed, and whether or not that's different than somebody's earned income, and shed a little bit of light on kind of the high level tax picture, that is real estate.

 

Amanda:

That's a really great question. I think there's a misconception about that, that real estate has a different tax rate. But the reality is a real estate is actually taxed at ordinary income tax rate, which is the same rate as your W2 and other income. Okay. So, uh, rate wise, you know, you don't get any lower tax rate or preferential rate.

 

But the benefit of being a real estate investor, though, is that we are afforded with a lot of write offs. So when you hear people talk about, hey, the tax code is filled with loopholes and write offs for business owners that really Is the Golden Nugget because real estate also falls under the category of business owner. So when you're a landlord, when you own rental properties, you you are able to utilize those same tax write offs as business owners do.

 

 

Yeah, I mean, it's actually incentivizing you to build a business invest in real estate. And so that's the key that they're they're given these incentives that you know, you can make the money but with some of the write offs, you get, like depreciation and things like that you can kind of shelter, you know, some or a lot of that cash flow that you're making from, you know, buy and hold property, for example.

 

Amanda:

Yeah.

 

Michael:

So, Matt, you when you talk about business, and having a real estate investing business, you know, I don't have an LLC. So do I need to have one in order to qualify for these business deductions or to be considered from a taxation standpoint as being a real estate? Or is having a running a real estate business?

 

Amanda:

Yeah, I love that question. Because that is always naturally the question that follows when we talk about, you know, the business deductions. And that is such a misconception in that a lot of investors are told that they need to have an LLC or a corporation in order to take tax write offs. And, you know, unfortunately, it's something that we see every day when we meet new investors is like, Oh, I'm sorry, I love your podcast, but I don't have an LLC. And that is not correct at all.

 

Basically, if you are a landlord, right, meaning you own rentals, or if you're a flipper, or wholesaler, you are able to use these business write offs, whether or not you hold your rentals in a legal entity. So as an example, if you know, Michael, you have a property on Main Street, that's a rental property, you can take a tax deduction, you know, write off part of your home office, part of your car expenses, certain business meals, travel costs, you can write those off, regardless of whether that Main Street property is held in your personal name, or inside of a legal entity.

 

So IRS actually doesn't really care who holds the real estate, what they care about is that they expense is actually necessary or reasonable for you as a landlord, your landlord, your rentals, is it reasonable to say that you invested in a real estate course or you traveled to Tennessee to look for properties? Those are the things they're looking at, more so than did he have a legal entity for?

 

Michael:

So then, if I understand correctly, and I know that we can't say anything with the total blanket statement, but is there really then no tax benefit to having or investing via an LLC?

 

Amanda:

There's no absolutes in the tax world. So there are going to be instances where Yes, someone might get a little bit of a tax benefit, if they were to, you know, hold their real estate in an LLC. But I will say 99% Okay, for 99% of the…

 

Matt:

For rental properties, at least.

 

Amanda:

Yeah, for 99% of investors were landlords, the vast majority of expenses that we normally have on a day to day basis, that are legitimate deductions, you can take those with or without an LLC, it's a little bit different if you're someone who's doing fix and flip or wholesale in terms of, you know, different tax treatments of those, but for landlords, for the most part, you know, if you're just someone starting out, you got one, two or three single families, make sure you're tracking your expenses, right? Because those are deductible. Even if you didn't have an LLC for last year, right. A lot of us are maybe getting ready to file last year's tax returns or getting rid of this year's taxes, do make sure you track those and present your tax preparer or CPA with it. Because a lot of those are legitimate write offs.

 

Tom:

Do you think there are deductions that most people could be taking that are not necessarily aware of it? Like I know, one thing you talked about is, I don't know like a trip to Nashville to look at or I don't know, I'd be curious on common misconceptions on like, what falls in the deduction bucket versus what doesn't fall?

 

Matt:

Yeah, no, it's a good question. I think there's a lot of them, actually. I mean, the ones that are probably the most common ones we see are our travel expenses, like you mentioned, auto deductions, just people using their vehicle to kind of run their day to day real estate business. They're just not capitalizing on the opportunities, they're not maximizing their deductions because they're, you know, not keeping track of their miles or what have you, or they don't know that they can home office deduction. That's another one that we see a lot that gets missed.

 

Amanda:

Yeah. I mean, you know, most investors we work with are working from home, you know, we rarely have someone who's a landlord that goes out and rent an office space, just to manage their rental properties. Unfortunately, there are still a lot of CPAs out there who have are using the scare tactic of if you claim a home office, you will be audited. You know, it's not you're not able to do that as an investor in that information has been so outdated. The IRS has actually in the last couple years, they've made it easier for investors or anyone to claim a home office deduction by giving us a standard per square foot write off.

 

So the IRS is you know, they're understanding that a lot of people are working from home and I certainly you know, if you're someone who's tax advisor saying hey, you know, you shouldn't take it as a huge red flag, then it might make sense to look elsewhere interview other CPAs because you're likely getting very outdated information. But I think to second what Matt was saying the, you know, some of the most commonly missed ones are like the travel in the car. And the reason is because a lot of people feel that they can only write off these expenses if it's directly related to a property. Right? So so you might be going to Nashville to look for properties, but you don't own one yet. So people think, oh, maybe I can't write those out, because I don't own a property yet. But the tax perspective, you know, if before you left for that trip to Nashville, you had already scheduled meetings with realtors or brokers or property management companies, then you have a really solid case to make the argument that the reason you went there was for real estate investing, and therefore it's a real estate related expense.

 

Michael:

Oh, fantastic. Okay. So can you talk to us and our listeners a little bit about something that I've heard often called is the three DS of real estate investing and why they're so powerful from a tax point of view.

 

Matt:

Yeah, if you want to refresh your memory about what the three Ds are! Dirt Dogs and something?

 

Tom:

Dinosaurs.

 

Matt:

There you go. Yeah.

 

Michael:

Yeah, it's depreciation deduction and deferment.

 

Amanda:

I like that. Maybe I'll use that as a…

 

Michael:

Yeah, consider yours

 

Matt:

Apparently we should be using that as marketing.

 

Amanda:

I like it. You know, we already talked about deductions, right, which is all these you know, legitimate write offs, Home Office, car, travel, you know, cell phone, computer, laptops, things like that. That's the low hanging fruit, because these are expenses that you are spending money on anyway, right? You have a home, and you have a car. And a lot of people have, you know, cell phone, computer, we have those anyway. So it's a way of shifting that from what's usually non deductible into legitimate write offs

 

Matt:

and stuff on the actual property side, most people don't, they don't miss the insurance. The mortgage is just the property taxes, the repairs, or utilities for the rental properties, those that I get to talk to, but those are ones that kind of get overlooked.

 

Amanda:

Yeah. And depreciation. I mean, clearly, it's just something that we love as real estate investors.

 

Tom:

My wife works in tax as well. And every time I say write off, she's like, you mean deduction, Tom, you mean deduction? And Am I understanding that correctly? Am I being corrected correctly?

 

Matt:

Yes, your wife is correcting you correctly? Yes.

 

Tom:

I knew it. I just, you know, yeah, good. Good.

 

Matt:

Yeah. And then depreciation is a form of a deduction or a write off. The main difference between that and the man was saying, though, the auto and other expenses is that you're not actually paying for the depreciation every month or every year. I mean, obviously, you bought the property, you paid something for the property. But the incentive in the tax code is that, you know, you put $100,000 down on a rental property, but the purchase price is 500. Your depreciation expense, which is really a paper write off every year is the starting point for that calculation is your purchase price, not your down payment, they're letting you write off, essentially, the bank's money, right. So that's why we like it, because you can use leverage, you can use that right off to shelter your cash flow. So you've got the regular deductions, you've got the depreciation, and then talking about on the deferral side.

 

Amanda:

Yeah, so I mean, for tax deferral, you know, usually people are referring to 1031 exchange, right, where for real estate investors, you have the ability to sell a rental property, and instead of paying taxes on the gain, you are deferring the taxes by purchasing one or multiple replacement properties instead. So it's the whole concept of, you know, play Monopoly where, you know, three red houses trade up to a green house or something like that.

 

Matt:

I think it's a green house for red hotel, house or red hotel, maybe, maybe you're right, to verify that what the what the pull out our Star Wars monopoly house.

 

Amanda:

So that, you know, what's so interesting about the 1031 exchange is that that's a tax benefit, or some people like to call it a loophole that's been available for years and years and years. But actually, back in the back when the tax cuts and jobs act took place couple years ago, there was a significant change that was made to it, where prior to that tax change, businesses could have also done 1031 exchange as well. And they took that benefit away. So in the past couple years, 1031 exchange was only available to real estate investors. And, you know, but we don't hear about that a lot, you know, within our industry only because we specialize in real estate, but what you know, people used to be able to 1031 exchange, like a car, you know, a business card, they could have done a 1031 exchange.

 

And of course, you guys probably heard that there might be potential changes or limitations to 1031 exchange that might be coming up under the new proposals. So it is something that we're definitely keeping a very close eye on because although some people say oh, they'll never change that. They'll never take that away, because so many people use it. But you have to keep in mind that a big part of that was taken away in the tax cuts and JOBS Act. So as of today, this strategy is really only limited to real estate investors. And I think in the next, you know, few months or a year or two, we'll we'll see kind of whether investors still get that deferral benefit of the 3ds increases.

 

Tom:

Such a neat aspect of just on how it's just like such a moving target, you know, on on the tax code. And you had mentioned before looking at some of taxes, and back in the I don't know, I think you might have mentioned the 70s, were kind of just curious of super high level, you know, some of the major, like changes to the tax code in history from, you know, in the 70s, to how it's moving today.

 

Matt:

What I remember is that, you know, I made it look like I'm 70 years old, I was only born in the 70s. So, the major change, actually, the tax code happened, and I think it was 1986. So my understanding prior to that was that it was, you know, you are a limited partner, limited investor, you know, you're investing in somebody else's real estate deals, and they were allowing just, you know, no limits to your right off. So if the entity split off, you know, depreciation, net losses, whatever, everybody could write off their share of it without any limitations. So they really kind of tweaked that in 1986, to, you can still get write offs for investing in other people's real estate deals, it's just not as easy anymore, it's a really want to incentivize the, I guess, the day to day investor, the person doing it all the time versus the you know, the kind of the passive investor on the side who's just earning their income, you know, working a W two job, but then investing all of it on the side and hoping to offset all their w two income as a passive investor, I think that was the major change that they did.

 

Amanda:

And that's where the real estate professional status that we are always talking about nowadays, right? It's kind of the big hurdle and the big opportunity. So prior to the major change, that wasn't even an issue, you know, you just are able to utilize rental losses to offset other income. So yeah, the good old days.

 

Michael:

So I have a question about the depreciable value or where the depreciation number comes from. So I know that you can only depreciate the building value. And when you buy a piece of real estate, it's broken down into building and land value. So if the county tax record shows the building value at 10,000, but I bought the thing for 150,000. I mean, how do I figure out how much of that is land? How much of that is building? And if the tax record number is different than my purchase price? How does that work?

 

Matt:

Yeah, it's a great question. Because obviously, unlike a situation like that, a lot of times your property tax basis is lagging behind your purchase price, right? Because you, you know, it's based on the previous owner, the brand previous two owners for that matter, and then you buy for 150. And they don't update that for, I don't know, six months to a year, right. But essentially, your starting point for depreciation is going to be based on your purchase price.

 

And then typically what will happen is you can use the property tax records, but what you're looking for is not the the actual number, per se, you're looking at for the breakdown of building versus land. So even if they have it as the property's worth, right, so if they have is probably worth 50, but you paid 150, for it in that 50,000 they have, they're still gonna have a breakdown of building versus land, you know, maybe it's 35 for building and 15 for land. So it's a percentage, that's, you know, I can't do math in my head. But you know, whatever that ratio is, you would apply it to your purchase price. That's how you apply that ratio to your purchase price. Now, that's the I think that's probably the typical way most people do it. There's other ways like, people sometimes use appraisals, if that works out better for you, if it gives you a sometimes you're looking for, as you mentioned, Michael, you know, you can only depreciate the building part. So in areas where you know, Southern California, like where we are, land is, you know, most property tax statements, you see the land is 80%, or something not great from a depreciation perspective, because that only these 20% are right off, right?

 

So in ways when you're looking to get more building, then with the property tax ratio is going to give you sometimes you can base it off an appraisal, if the you know, the appraiser is saying, Yeah, you paid one do this property is worth 150. But the building is really worth, you know, $130,000 or something like that, you know,

 

Amanda:

Yeah. And also, if you're someone who is going to be doing a cost segregation project for your rental properties, this cost segregation firms sometimes use different methodology to re evaluate so that you get a higher percentage to the depreciable building and less to land as well. So there's multiple ways I think, you know, if you're just someone like doing your returns yourself, usually just use the property assessors information.

 

Michael:

So if you get an appraisal done that chosen a new value, does that open up a can of worms with the county? And are they able to then tax your property at a different rate? If you say that there's more building value there for your tax purposes?

 

Amanda:

No, not at all. So you're not challenging the county at all right? The county is not involved. You're just saying for income tax purposes, when you're preparing your tax return your CPAs preparing the tax return. We're just saying we're using the appraisal information to calculate our depreciation. At no time do we contact the county to say hey, I realized that.

 

Matt:

I would like to pay more in properties.

 

Amanda:

Yeah, exactly. Yeah, exactly. So they're completely different. So so we're using the information, but those two numbers are always still gonna be, you know, fairly different.

 

Michael:

So the IRS is willing to utilize an appraisal for the building portion of the depreciation values. I mean, that that's good enough. They're not gonna rely just on county tax records or anything of that sort.

 

Matt:

Yeah, I mean, it's more than what we've seen is if you're hiring like a qualified appraiser Give me a written report and everything that usually will is enough to hold up to it, you know, if it got audited or scrutinized for any reason, that's usually enough. But typically, like sometimes clients say, Can I just get like a online, you know, Zillow or some other, you know, opinion that's not not from a, you know, qualified appraisers that in our experience isn't enough to pass muster. If you've got questions.

 

Amanda:

you know, we are talking to someone just last week, they said, hey, I've heard of CPAs, you know, for high areas like California or coastal places where the CPA just says, I think it's going to be 15% land, I'm just going to use that for all my clients. So that's the kind of stuff you want to avoid. Because I CPAs we have no license or any, you know, we have no standing to say what, what exactly is this and of course, a house on the beach versus a house inland is going to be very different. And you just across the board, say 15% land, you know, there's no substance behind that. So that's kind of what you know, that's the kind of stuff that they would try to disallow.

 

Tom:

Could you change your appraisal method? Like, if it was advantageous to use like an income approach with like a cap rate? Or is it just strictly like sales comparables in using in your basis for depreciating?

 

Matt:

I mean, that's a good question. I haven't To be honest, I haven't dived into details enough to know that I mean, I would kind of my recollection of those. And you guys may know better than I do, I think they typically lay out like three or four different methods, right? And then at the end of the day, the appraiser decides on, you know, based on these four methods, this is what we went with or something right, like, Yeah, I don't know, if it ever got, if they go that deep into it, if they could challenge, you know, like, hey, well, yeah, you decided to use this one. But on page 12, it mentions this one, you know.

 

 

Amanda:

I mean, I don't think you know, in the tax world, I think what they're looking for, obviously, is just that, I think the main thing would be that it's done by an actual qualified appraiser, right? That would probably be the key versus getting into the nitty gritty of which methodology because, you know, at the end of the day, from an audit perspective, don't assume all auditors understand real estate, right? And of course, you know, not many of them understand.

 

Matt:

So that might be Mind blown right there for everybody listening to.

 

Amanda:

Fortunately, we don't have a lot of audits go through our firm, pretty proud of that. But I always hesitate to say, because I feel like I'm not bringing us bad luck. But in the few that we've had, you know, in the past couple years, I've come across auditors who really have very little understanding of real estate, where, you know, I have to sit down and walk through a closing disclosure, HUD with them to say, this is what this line means. This is what that means.

 

Matt:

So in today's training your agent, we're gonna go over hud.

 

Amanda:

So yeah, so when we, you know, and we know so much about you every line on the HUD and like you're saying different methodology of appraisals, I honestly don't think that they're getting into that level of detail. For the most part.

 

Michael:

It's so funny, you say that Amanda, I was just chatting with a lender the other day, and I sent them over my tax records and returns and stuff and applying for this loan, and they go, Oh, well, it looks like your real estate didn't perform very well. You got all these negative cash flows here. And I'm like, Yeah, because I did a cost segregation study, and I'm using depreciation, it's not actual loss. It's like, come on,

 

Matt:

It's funny. You mentioned that. I mean, I got an email like two days ago that that exact situation where someone's like, our client, you know, kind of done a cost segregation study, which is, you know, more advanced strategy, I get that, but they're like, why is this big? $200,000 write off on line 19. And, you know, you give him a line explains what it is, or what the tax code says it is. And they're like, I still don't understand that. I can't help you. I'm, I'm not the lender, you know, like, yeah, it's just one of those signs that maybe you're not working with the right lender, right. Like, and to be fair, you know, totally fair. Not all CPAs or tax people understand real estate. But not all doctors do the same thing, either. Right. Not all lawyers do the same thing. So it's just, you know, making sure you're working with the right people on your team. Right. I mean.

 

 

Amanda:

Yeah, I think as an investor, one of the things that you want to make sure you do, as you're getting ready for tax time is make sure when you meet with your CPA, provide them with the closing disclosures, right, any properties you've purchased this year, and you've sold this year, any refinances you've done this year, make sure you bring all those closing disclosures, closing statements with you, because it's one thing for us to say, Hey, I bought a rental for $100,000. But we really paid probably more than that, because we had closing costs, we had fees, we have title transfers, there's all kinds of costs associated with it, and not all CPAs. Ask for that. Right? And so sometimes they'll just say, hey, how much do you buy for 100,000? Great, and that's the number you use, but just by not bringing that information could be 1000s of dollars of write offs that you missed out because they're not seeing a closing disclosure.

 

Right. And I know a lot of people did refinances last year and probably going into this year just because of interest rates. So make sure you bring all the closing items from the refinances because there are a lot of costs associated with that for the most part.

 

Michael:

Okay, I want to shift gears here a little bit. And Amanda, you said something you mentioned this previously, and so doesn't want to circle back to it. What is a real estate professional status? So what is it? How do people use it and do I have to be a real estate agent to take advantage of it?

 

Amanda:

Oh, yeah. All right. So at a high level, the IRS, you know, we're talking earlier about back in the days anyone could invest in real estate. Yeah, you can use real estate and use that to offset, you know, W2 and other income, right? There's no limits or anything. But under current rule, if you're someone who makes less than $100,000, total income, then you can use up to 25,000 of rental losses to offset w two and other income. And by loss, we don't mean actually losing money. We mean, you know, after you take your home office and travel and depreciation, right, so we create a loss from a tax perspective strategic. And so usually, if your income is under 100,000, you can use up to 25,000 of that to offset taxes on the W2.

 

So that's really great. Because the more real estate you buy, the larger write off, we can create, and then you start to see your taxes go down significantly, once your income exceeds 100,000, let's say you're between 100 and 150, then your ability to use those losses start to decrease, as income goes higher, your ability to use the losses goes lower,

 

Matt:

So say 25 grand gets phased out, basically. So once you get to 150, that cap of 25, where you conduct is now down at zero.

 

Amanda:

And once your income reaches 150,000, this is as a married couple, okay. And once your income exceeds 150,000, then you can no longer use rental losses to offset taxes on the W two and other income you have. So that's the issue we have is a lot of high income earners who also happen to invest in real estate on the side, maybe you don't get to use the benefits to offset W2 So you're still paying tax on the W2.

 

So the main thing I want to tell people though, is it's not the end of the world, okay, doesn't mean we lose out on the deductions, you get to carry forward any of the losses you're not using. So if you claim the home office car expenses, if you're not able to use it this year, you do carry it forward indefinitely. And you can use that to offset taxes from future rental income, or eventually when you sell the property, you then can use that to offset taxes from your W2 income, so we never lose it. I know we have people who say, Hey, you know, I tried to hold my expenses, but I'm not seeing the benefit. But that's okay, because you will see the benefit in the future. Right, it will still help you offset taxes. So that's one of the restriction,

 

Michael:

It's like going back to the future.

 

Matt:

We can talk about the future if you want!

 

Amanda:

Back to the Future. Exactly, exactly. So one of the ways around that is if you or your spouse can qualify as a real estate professional, then you can use the rental losses to offset w two capital gains and all types of income without limitation. So if you're someone who makes a million dollars in your W2, and your spouse is a real estate professional, you can then use rental losses to offset W2 income without any limitation. And that's, you know, the the benefit of being a real estate professional for higher income.

 

Michael:

And so when we talk about these income limits, something I've always struggled with, and I have a hard time putting my finger on is what is that based off of. So let's say I have a salary of 130,000. But then I make contributions to a retirement plan. And maybe I pay for medical, and so I'm bringing home, you know 110,000 after that, how does that work?

 

Matt:

It's technically based on adjusted gross income. So in that situation, if you know typically your retirement contribution of work as a pre tax deduction, if your medical that you were referring to is also a pre tax deductions or like in a fringe benefit plan that your employer provides. So if your taxable w two gets down to 110. And that's all you have, they're gonna base it on the 110. But it's also the W2, its interest in dividends, it's other capital gains, it's, you know, other business income, if you have an unemployment comp, you know, a lot of people have unemployment right now, you know, it adds a lot of things, basically to get to, you know, what they consider adjusted gross income.

 

Amanda:

Yeah, so the ones that will help you to get lower, the main ones that you mentioned would be retirement contributions, because that does bring down your income, and then any pre tax medical that you're taking advantage of. So for some people, you're kind of at the border, where you say, hey, yeah, if I just maximize my retirement contributions, and I can get there, but you know, sometimes we have clients who, you know, who alone is, you know, 300 400. So, you know, it's a lot more difficult to say, hey, how much retirement can I do to get that down to as low as possible?

 

And that's where real estate professional comes in, right? Where it's, you know, if maybe, if you're someone who is married, and you have a spouse that's either working part time or not working out, you know, because they're staying at home or something like that. That's where the real opportunity comes in. In that you can be making 500,000 of W2, but we don't really care if because one of you is able to claim real estate professional status.

 

Naturally, one of the questions we get is what is a real estate professional, right? How can I be a real estate professional, something you mentioned, you know, do you have to get licensed or be a realtor, and you actually don't have nothing to do with what licenses you hold so you never have to be licensed as a realtor. In fact, a lot of our clients who are real estate professionals don't have their license, it doesn't hurt, of course, right? If you also want to be licensed, sure, that's fine. But really, it's looking at a hours and activities test. So to be a real estate professional, there's really three main criteria. One is that you have to spend more time in real estate than your job where other jobs, okay, so if you're someone who's working full time of 2000 hours a year, that's probably difficult, because you need more than 2000 hours in real estate, to be a real estate professional. But if you are someone who's working part time or stay at home, then you can probably fall under the second requirement, which is at least 750 hours in real estate. Okay, so looking at January through December, are you able to spend at least 750 hours in real estate activities, then If so, you might be real estate professional.

 

Matt:

It’s that situation talked about earlier to where maybe one spouse is working full time, the other one is working on the real estate. And that situation, that first test of spending more time in real estate they do their job is doesn't apply because they don't have another job, right? So then it would come down to the 750 hour requirement. And then the third main requirement is which is also vitally important is that you've got to be what they what the IRS calls materially participating in all of your real estate activities. So what that means and you know, layman's terms is that you're kind of doing a lot of the day to day or boots on the ground, you're really involved in your rental properties or other real estate activities, if you have them to get to your 750 hours, what they're trying to prevent is the you know, we kind of alluded to it earlier, right? The passive investor sitting back collecting a check from their property manager once a month looking at the property manager statements. And you know, even if they have an extreme example, let's say they have 100 properties, where they're doing this on, they just sit back and collect a check. And somehow they can get to 750 hours by doing this, because they have so many properties, that won't qualify as a real estate professional, because they're not, you know, materially participating. They need to be, you know, doing a lot of the day to day stuff that, you know, active investor would be doing, I guess, for lack of a better term.

 

Amanda:

Yeah. But I think that, you know, a common misconception too, though, is people have been told they have to self manage their rentals in order to be a real estate professional. And that's not necessarily a true statement. Because, you know, we do have a lot of clients who have out of state investments, you know, they invest in out of state properties that are not local to them, it's very much a case by case situation.

An extreme example, if you're someone who works full time you have one rental property out of state that's a turnkey with tenants in them, you're not doing anything at all. Sure, that might be difficult for you to be a real estate professional, because how will you need to have 500 hours of working on the property or working with property managers. But as that person's real estate portfolio grows, maybe they go from one property to five to 10, then it becomes a lot easier, even though they have property management companies, there's probably still quite a bit of stuff that they would need to do as an investor. And then it might become easier and easier to qualify as real estate professional.

 

Michael:

So question for you both. I'm a W2 employee, but I'm just really, really, really efficient with my time hope my boss isn't listening. And I only need 1000 hours to do what most employees do in 2000 hours. Does that make it easier for me to qualify as a real estate professional?

 

Amanda:

I love that. I love that. You know,

 

Matt:

You're you're a creative real estate investor at heart.

 

Amanda:

Yes. You don't know how many times I've heard that question. That's exactly the question that was brought up in several court cases under the IRS. Right. And what Matt said, although sounded like a joke, does your employer know this? That's kind of the the stance of the IRS. So they said the way they look at it is, hey, you're paid as a full time employee, your full time employee benefits, and don't really care how efficient you are, the time assessed for your job is going to be a full time. So 2000 or, you know, 2100 hours, whatever that is the full time equivalent.

 

So yeah, that's not the you know, the best answer, but that's how they've looked at it in court cases to say, you know, sure, you might be efficient, but we're still looking at it that your full time salaried employee, and therefore that's still the number of hours to meet.

 

You know, numbers wise, we don't have a lot of clients who are full time workers that qualifies real estate professional, we have some, but the percentage is fairly small. The ones who are are really doing a lot of stuff in real estate, but maybe in your situation, you know, where you have a bunch of rentals, you run a real estate company, you also have podcasts, and you're just doing a lot of different things for real estate, where maybe real estate is taking up, you know, 2000, or more than $2,000. But I think, you know, for most investors, right, it's like they're really working on the full time job, they got a couple properties, you know, here or maybe out of state, that becomes a little bit more difficult to be able to beat the number of hours that way.

 

Michael:

That makes total sense, Tom, forget everything you just heard. So I just want to highlight really briefly here the fact that you both have written not one but I think two books now that are about tax strategies, is that right?

 

Matt:

Yes, that is the rumor.

 

Amanda:

Yeah, the first one is called Tax Strategies for the Savvy Real Estate Investor

 

Matt:

The Advanced Book on Tax Strategies. Along with the 3ds, we should probably really know that.

 

Amanda:

Yeah, I mean, the book, we use a lot of real life stories from clients that we worked with throughout the years in showcasing what strategies can work, you know, how is it done when it's done correctly?

 

Matt:

Horror stories for ones that didn't work?

 

Amanda:

Yeah, exactly. So it's kind of like the you know, I don't know Chicken Soup for the Soul type of book in story format. But the Themis is tax savings.

 

Michael:

And for all of our listeners, I've read them both. They're both excellent, excellent books, and very easy to digest with a lot of actionable steps, and actionable takeaways. And then we just read the advanced book on tax strategies, their second book at the Roofstock Academy book club, and Matt and Amanda, you both joined us for our book club, happy hour session at the end of the month, which thank you again, for joining us, it was a lot of fun, and all the members of the academy had a really, really good time

 

Tom:

There on Audible too. So I joke that I don't know how to read, but I can listen really well. So they're on Audible for folks that want

 

Matt:

At least you're honest, right?

 

Tom:

Yeah.

 

 

 

Michael:

So I want to ask you both the question here, as we're starting to wrap up, but what can we as real estate investors do or you know, any real estate investor, for that matter, do to work more cohesively with their tax professionals, or to make their lives a little bit easier?

 

Amanda:

Gosh, that's a great question. I think one of the most important things, as an investor that you want to be able to do is to keep your line of communication open with your tax advisor. And what I mean by that is not really waiting until, you know, January, February, or April to talk about last year's taxes. And that's very difficult for, for people to do because nobody likes to think about taxes in our day to day where we're so excited about investing and growing their wealth. And, sure there's tax strategies, but I'm sure my CPA understands it. And they're going to do all that next year when I go to them for taxes.

 

But that's really not how it works. We just talked about real estate professional status, right? And how do you try to qualify? And so the best time to learn how to qualify and get your documentation, right, is actually at the beginning of towards the beginning of the year. Why? Because now you have all year to make sure you're doing the right things to qualify as real estate professional, right versus have no now it's next April, and you talk to your tax person say, Hey, I really think I should try to qualify, while they're going to come back as if you have documentation. What did you do? And, you know, maybe you didn't meet the number of requirements for hours but you could have done that, had you done a little bit more in real estate, or maybe if you had bought one more rental property?

 

So I think the two main ways to work cohesively is one understanding, what are some of the things you should be doing throughout the year? How do you track those items throughout the year, so that you'll be you know, ready by the end of the year with everything you needed to do like, you know, checklists and worksheets, and, and ways to track all of your expenses. And then the second thing is just to make sure you keep that line of communication open with your tax advisor, are you buying a property? Are you getting into a new state that you're investing in? Did you form, are looking to form an entity? Did you do a refinance, these are all times to talk to your tax person, it doesn't always have to involve, you know, very long extended conversation.

 

Matt:

Yeah, it can be just a simple email, right? Like I'm have just closed on this property, or I'm thinking about doing, you know, especially if you're selling properties, it's always we want to know that you're selling a property before you even enter the contract to sell the property. No. So you can, you know, plan from a tax perspective, how much gain Are you going to have? What are your options? What are you going to do with the money? You know, is there deferral opportunities, 1031, exchange, you know, things like that, that that's a lot better and easier conversation to have up front, then it's March and I sold a property eight months ago, what can I do to reduce my taxes? Right?

 

Amanda:

Exactly. Because at that time, there's very few things that could be done, you know, so we talked about real estate professional, and there are a lot of other strategies you can use. If you don't qualify as real estate professional, right, maybe you get into short term rentals. And there are easier ways to use losses from short term rentals to offset w two and other types of income. So if that is a strategy for you, maybe instead of looking for long term out of state rentals, maybe you start looking for short term rentals, whether in state or out of state. So yeah, just think your tax advisor should be part of your team when you're making investment decisions as well throughout the year.

 

Tom:

Fantastic.

 

Michael:

So Matt, Amanda, I want to be very conscious of your time. Thank you both so much for hanging out with us. if people have questions, comments, want to reach out to you for your tax services advice. What's the best way for folks get in touch with you?

 

Amanda:

The best place I think is just check out our website. It's www dot Keystonecpa.com. We have a lot of great information on there. We have some free downloadable ebooks and things like that. So that's the place to start.

 

Michael:

Thank you both again, really appreciate you coming on. I would definitely love to have you back on the podcast at a future date when there have been some tax changes and really thank you both again, look forward to catching up. soon.

 

Tom:

Thanks, guys.

 

Amanda:

Thanks a lot, appreciate it.

 

Michael:

Hey everybody that was our episode a big big big big thank you to Amanda and Matt, thank you both again so much for coming on the show. It was such a pleasure. So great to catch up with you guys also at the Roofstock Academy book club session that was so much fun. We look forward to having you both on again. And if you have any commen…

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