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Key Factors RealEstateAF
Educational Podcast for Consumers, Mortgage & Real Estate Industry Professionals. We'll Talk About It All! Key Factors podcast, powered by https://ReviewMyMortgage.com . Your Host Mark Jones invites Industry Pros to help uncover & educate on the key factors of various topics. There’s something for everyone so let us be your guides and get educated. Subscribe & Follow on Spotify, Apple Podcast, Facebook, Instagram, & all other podcasting platforms. Host : Mark A Jones Founder of ReviewMyMortgage.comProducing Branch MangerSr. Loan Officer. NMLS ID# 513437NMLS Consumer Access: http://www.nmlsconsumeraccess.org/Powered by ReviewMyMortgage.com
Key Factors RealEstateAF
Balancing Life, Taxes, and Real Estate: Insights from a CPA's Journey
Discover the fascinating journey of Brad Dower, a CPA who found his path to success through an unexpected route, including a transformative stint in the Marine Corps. In our latest episode of the Key Factors Podcast, Brad shares how he transitioned from the rigors of working long hours at an accounting firm to establishing his own business with a focus on work-life balance and family priorities. His story not only highlights the importance of balancing professional and personal life but also delves into the economic pressures of changing retirement ages and life expectancies. Celebrate with us as we also acknowledge our producer JC's birthday during this engaging conversation.
Shifting gears, we delve into the lucrative world of real estate and taxation, offering valuable insights for homebuyers, investors, and realtors alike. We discuss the potential tax benefits of homeownership and explore strategies for minimizing tax liabilities through real estate investments. From cost segregation studies to the differences between commercial and residential real estate investing, we cover essential tips for maximizing deductions and maintaining meticulous financial records. Learn how to leverage these insights to make savvy financial decisions and achieve greater financial success.
Finally, we unveil essential tax strategies tailored for self-employed realtors and real estate investors. Get expert advice on maintaining accurate records, maximizing deductions, and saving for taxes, while exploring the benefits of achieving Real Estate Professional status. We also dive into recent developments concerning the Beneficial Owner Information report and offer practical tips on employing family members for tax advantages. This episode is packed with actionable insights and expert advice to help you navigate the complex world of tax planning and real estate investing with confidence.
Key Factors Podcast is Powered by ReviewMyMortgage.com
Host: Mark Jones | Sr. Loan Officer | NMLS# 513437
If you would like to work with Mark on your next home purchase or as a partner visit iThink Mortgage.
Matter of fact, go to his view real quick, this weird one that I have camera three. It's a good view. Yeah, jump away, okay. Okay, jc, I am ready. When you are, I'm ready, okay.
Speaker 1:Key Factors Podcast. Here we go in three, two, one and welcome back to another episode of Key Factors Podcast, real Estate AF, where the AF stands for and finance, and I'm your host, Mark Jones, and we are powered by ReviewMyMortgagecom, the largest index of mortgage programs in the nation. And on the previous episodes, guys, we've been talking a lot about business planning. We talked about potential projections for 2025 and giving you guys some true experts in our industry. Well, today I wanted to kind of go by that old phrase that you've heard more times than not. There are two things in this world that are inevitable. One is death, the other is paying taxes, and for this discussion, I brought along my personal CPA.
Speaker 1:So, without further ado, I'd like to introduce Brad Dower. Brad, how are you Good? How are you doing? Doing well, man, doing well. So, first time on a podcast, yeah, a second, okay, good. So I'm not breaking you in, but we are going to have a pretty in-depth discussion about some of the nuances that come along with having to pay taxes, both from a buyer's perspective, homeowner's perspective, realtor's perspective perspective, homeowners perspective, realtors perspective, entrepreneurs perspective. And there's plenty that we can go into. But before we do, I want to give you a moment to kind of tell our audience who you are, where you came from, why you got into the business going this route. So if you could tell us a little bit about yourself, Okay, yeah.
Speaker 2:So I took a non-traditional route into becoming a CPA. I joined the Marine Corps after failing at college.
Speaker 1:the first time around, semper Fi? No, I hear you.
Speaker 2:So I had to grow up a little bit, which the Marine Corps did that very well Ended up getting married and then went back, got into accounting and it really made sense, Went back to college. I really enjoyed it. And then, of course, the more I learned about taxes and being a CPA and everything you know, I got tired of cranking out 80 hour weeks and the boss getting rich, so I started my own firm right.
Speaker 1:Yeah, what is that phrase? The boss comes in, you see the Lamborghini and he says if you do well and work really hard next year, I'll get another one.
Speaker 2:That's right. And so, yeah, I started my firm and, as I had grown up through, you know, I got an email from a managing partner at a larger firm that said you know, hey, we know everybody's working 80 hours billable, but need you to work more. And so my goal with my firm was really to kind of get some more work-life balance. I mean, as a business owner, we always work a lot Right. I mean, as a business owner, we always work a lot Right. But then, at the same time, I want to be able to spend time with my family. Our motto is go to the kids' ballgames, right, absolutely. And so family comes first.
Speaker 1:Yeah.
Speaker 2:And so trying to break the traditional accounting mold in that, with my firm and so all of my employees, kind of live a double win at work and life, right, because yeah that's the goal.
Speaker 1:It's the goal. It's balance we were talking earlier. Right, it's hard. It is hard, it's something that we won't strive towards, but, as we've talked about in previous discussions, I almost believe it's a pipe dream until you deserve it, and what I mean by that is did you put in the work in the right places for the right amount of time, in order to have that so-called balance that we want to say? Because, let's face it, the retirement age is increasing and, for some odd reason, the life expectancy is decreasing these days. So we all want that form of balance in some way, shape or form. But the idea is put in that work and I can see you're doing that, I can feel you're doing that. A couple of questions for you. I mean, did you grow up here in Texas?
Speaker 2:So I grew up in the DFW area Okay, small town in Bartonville, so kind of near Denton.
Speaker 1:Yeah, what is that up there, unt? No, what is the college that's in Denton?
Speaker 2:UNT, unt, okay yeah.
Speaker 1:Very good, I can either I cannot confirm or deny being in parties there in my college years. A lot of good bands came out of that area. Yeah yeah, Eli Young Band Bowling for Soup, Deep Blue Something. And, ladies and gentlemen, that is our co-host, co-anchor producer behind the scenes, JC. So if you can throw yourself up on the screen real quick, JC, so we can let everybody know.
Speaker 2:Happy birthday to JC.
Speaker 1:Happy 48th birthday to the man behind the curtain.
Speaker 2:Thanks, man. I feel it Happy birthday, Thank you. Thank you, carry on Carry on.
Speaker 1:So, brad, with the idea of you not necessarily thinking that you were going down the road of accounting, uh, becoming a CPA, all that good stuff, what, what were your intentions? I mean, were you a wild child? What was the, what was the uh path that you were going through that led you to going through the Marine Corps and everything else?
Speaker 2:So, I had a great time in college my first time around. Okay, that sounds like you did too. Yeah, so I had a great time in college my first time around. Okay, that sounds like you did too, yeah, I went to A&M and they asked me not to come back for a second year.
Speaker 1:Okay.
Speaker 2:So a little bit of soul searching.
Speaker 1:That sounds so familiar. I was at McMurray and Abilene, that's funny.
Speaker 2:I got married super young and was basically a full-charge bookkeeper at a construction company, okay, and I was like 22, and I'm like, am I really maxed out in my salary and everything and terrible marriage at the time. You know, get married young, we all change.
Speaker 1:Absolutely yeah.
Speaker 2:And it's like well, I always wanted to join the Marine Corps and the reason I didn't join the Marine Corps out of high school was because of who was my wife at the time. Sure, women make you do crazy things, right.
Speaker 1:Oh my gosh. Yes, but all the while, isn't it that they're the ones that are crazy? Wait a minute. I didn't say that. I didn't say that. Fast forward, fast forward. Is there a oh, there's not. Oh, this is live radio where I can hit a dump button.
Speaker 2:Yeah, so it's just a passion and what I always wanted to do, and so I basically told my wife who's my ex-wife now that I was like, oh my gosh pause.
Speaker 1:I am so glad you said that, because leading up to it I was like holy shit. I hope that your wife is not going to watch this talking about her like that.
Speaker 2:My wife is amazing. She's the brains behind all the operations. Love it. She has the hard job with our two boys. Trying to raise two boys is a challenge at best during most days I tell everybody we have nothing nice because it's not our boys destroying it, it's our two large dogs that are 100, 150 pounds. You know boys have broken TVs and windows All the horror stories you can think of.
Speaker 1:Yeah, it's why you can't have nice things.
Speaker 2:That's right. And it's like should we redo the house? Let's see, the youngest is 11. We got eight years. Then we can do stuff to the house, you know.
Speaker 1:Smart move, smart move. Yeah, I have one, and he's rambunctious enough which is not to fall far from the tree that he came from. Does that make sense, ta-da?
Speaker 2:It makes sense. And so, yeah, I mean I just needed to grow up, I think all you know. I told my oldest who's 16. So that's challenging too, and I said I can't wait till you're 28. And he goes what do you mean? I said, because then you're going to realize mom and dad were right and you won't be a jerk to us anymore.
Speaker 1:That's so true. It's so true, and so.
Speaker 2:I needed that time from kind. You're just trying to have a great time and figure out life and figure out who you are more than anything, absolutely and until you know. So, having that family and everything it definitely brought me back.
Speaker 1:Yeah, so, but it's, it was difficult and mentions CPA or accountant or tax preparer. They all of a sudden think this monotone, clear eyes, dry eyes type of person. And since the first time I met you, that is just not you and I appreciate that. But how is it that someone like yourself gets along with things like tax laws and accounting et cetera?
Speaker 2:Accounting and taxes just made sense to me. I don't know what it was, it just resonated, you know, when you're going through college and stuff. I never had to study for accounting or tax. I never had to study for accounting or tax. Of course I was sort of studying because I was going to college, I was working full time for a CPA firm and so I was studying eight to 10 hours a day, 12 hours a day, right and so if you want to look at it that way, but it just made sense. I enjoyed it. I enjoy numbers, I enjoy Excel. I know everybody I'm getting booed now. No, no, you'd be surprised, man.
Speaker 1:I think as technology progresses and time evolves, people are getting more acquainted with the idea of what Excel can actually do for them. If they create the correct formulas in their spreadsheets, et cetera, it saves you tons of time. I'm not a mad scientist with that, as I am like with coding or building websites just yet, but I know it's a necessary evil. That is kind of fun seeing it actually work when you put the right equations into the system. And then you mentioned something else about it making sense. Like I always say, if it makes sense, find a way to make dollars out of it. Right, because they all add up.
Speaker 1:So there was a poll of about a thousand people that were asked what the first thing that they think of when they think of taxes. And it says most people viewed taxes as necessary but often frustrating part of life. And it gives us the other frequent answers that they give, starting with the negative. It says they view them as a burden, the complexity of them is too great, the lack of transparency and knowing what you're actually doing. And the last negative is unfair. And then it goes into the positive ones necessary for society, civic responsibility and progressive system approaches leading to potential gains, then the mixed feelings are definitely desire for reform and reluctant to accept the changes. You being on the other side, the other seat, would you agree with some or most of those statements?
Speaker 2:Probably none of them. Okay, and why the big one? To me, it's not your civic duty. It's your civic duty to pay taxes. However, it's your civic duty to pay the least amount possible. And so tax law is. There's 20 to 30 pages in the tax code on how to collect a tax. The thousands upon thousands of other pages are how not to pay tax. So you have to change your mindset on what the taxes are.
Speaker 2:The government is trying to incentivize behavior, and that is really what taxes are designed to do is incentivize behavior. You know, if you can be a business owner and have employees, you're going to get tax breaks. You know if you're going to be in real estate, you're going to get tax breaks. Real estate is one of the single graded asset classes to never pay tax again in your life, if you do it properly, wherever you stand politically. Trump he makes millions of dollars and they release his taxes and he paid a hundred bucks in taxes. My question was why do you pay a hundred bucks? And he's a better tax advisor? Of course, I don't want to be the tax advisor because his tax advisor went to jail. I'm not going to commit fraud, but at the same time, he's in real estate, right, and so it's the single greatest way to never pay tax again in your life if you do it properly.
Speaker 1:And that's a great way to open up this discussion. I don't like to get political on here and our goal is not to be political in whatsoever in this, but that is a good point that you bring to the table this. But that is a good point that you bring to the table the idea that the person that is creating jobs, creating opportunities, employing others, changing what little that they actually can do within the world that they operate in and now a much bigger world, if we're talking about the same person should get some tax breaks. And when I hear the other side of the coin saying, well, they should be paying more. Well, they didn't get there by being greedy. There's no way to build a business by yourself.
Speaker 1:There are others that are necessary in order to establish a business, to grow a business, to operate a business, and I think the level at which, or the magnitude at which, your business grows, the more benefits you should get as the person that took those risks, the person that took those sacrifices in order to do so. And I love the fact that you said people need to change their mindset, especially those Now. Mind you, our audience is mostly realtors, lenders, entrepreneurs. We all have this kind of mindset because we're in this seat on the bus. But for the folks that are listening, that are W-2 employee, this is giving you a glimpse into the minds of not only how we think but how we act, Because it is all stem from a good place and providing more possibilities and opportunities for many. But there would be very little incentive to continue to do that if there was not some type of relief for the people that could get it done, if that makes sense.
Speaker 2:It makes sense. Yeah, I mean I learned when I started a business. You know you have your time, your money, other people's time and other people's money and yours is a limited resource and everybody else is unlimited. So as you can start a business, you know the bank's going to give you money if you have a successful business right. So now your, you know money is almost unlimited if you do it right and then start hiring employees, you know you can only work. You can work 80, a hundred hour weeks. You're going to burn yourself out, right. But now we can get somebody and get a team behind us. You know it's. You know business is a team sport.
Speaker 1:I like that. Yeah, definitely Okay. So, going into some of these questions here that I'm sure plenty of realtors, home buyers, home owners want to know, we can start with the idea of let's address for home buyers first, home buyers versus renting. For homebuyers first, homebuyers versus renting. There's this idea of especially now when everybody's talking about home affordability someone that is renting and it's simple to say well, you're throwing away 100% of your money versus paying interest on some of it, et cetera. And then building the equity, what are some additional benefits for someone that is purchasing a home and we're talking about primary residence only right now?
Speaker 2:Okay, yeah, I mean it's good and bad. Right now They've raised the standard deduction so high, right? So a lot of people's taxes did get simpler. But if you can get, you know taxes our property taxes are ridiculous.
Speaker 2:Yeah that's true. And but if you can get you know Texas, our property taxes are ridiculous, yeah, that's true. And so you can deduct your property taxes right, and your mortgage interest are kind of your big ones, correct? And so if you and everybody's mortgages now are a lot higher than they used to be, you know, my first house was $120,000, right, three, two, two car garage, and now the same house is like 400 grand.
Speaker 1:Wow, house is like 400 grand Wow, wishing you would have held on to it. I know right, it's like dang it.
Speaker 2:I should have held on to it, but it's like you know, at the same time I had to sell my Amazon stock to buy that house. If I held on to that, we probably wouldn't be sitting here today. I'd be sitting on the beach somewhere, oh my gosh.
Speaker 1:What's funny is yesterday I saw a post about Bitcoin and 2020. I owned a full Bitcoin. Matter of fact, we forgot to put the cost basis and that's why we ended up on my amended returns, but the idea is, if I would just held on to it, oh my gosh, it would be absolutely. I think it's at $106,000 for one Bitcoin today something like that, something like that.
Speaker 2:It went over a hundred thousand over the weekend, I think.
Speaker 1:Whoa. But yeah, you never know and you can't foresee the future on things like that, but the idea of owning a home is something that a lot of folks tend to shy away from when they're looking at pinching pennies and trying to sustain their current lifestyle. When it comes to those expense write-offs deductions that you're talking about, are those big game changers or are they just small gains, or does it depend on what you're doing with other income that make them bigger or less of a benefit?
Speaker 2:You know, this is the tax standard answer. It depends, right? Yeah, you know what I say? The same thing.
Speaker 1:And it means more so that you're an expert, because you don't give some blanket response to a broad question like that. But go ahead.
Speaker 2:Yeah, I mean so if you can get over the standard deduction, right. So as a married couple we're roughly around $30,000 now, right, okay, so that is going to you know, and your state and local tax is maxed out at $10,000 now. But then, so, really, mortgage interest so if you are paying the mortgage, interest deductible but then it gets into your charitable contributions is kind of the key three things that are going to go into your itemized deductions.
Speaker 1:Okay, repeat that one more time for our listeners.
Speaker 2:You've got. So you have your state and local tax, which maxed out at $10,000. And then you have mortgage interest. And then, on mortgage interest too, if you have a second home, they can deduct that too. And a second home can be like an RV. So if you have a recreational vehicle, you can consider that your second home. It's kind of one of that gray area tax loophole things, okay gotcha. And then your charitable contributions is your big third one. You can deduct medical expenses as an itemized deduction. However, it's limited to seven and a half percent of your income and so most people you know if you're making $100,000 a year, you know then you have to spend over $7,500 in that example, right.
Speaker 2:To be able to deduct any kind of medical expense and so and that before you see a dollar of medical expense I see, and so, unless you have something catastrophic happen, you're really not deducting medical expenses typically.
Speaker 1:Yeah, it's more so going to be your taxes, your mortgage insurance and then your state taxes, which does fall into what type of category when it comes to state part, when you hit the 10K. How can you hit the 10K quicker than not?
Speaker 2:I mean down in Texas, right Property taxes is over 10 grand, you know typically over that so losing that? You know if you buy a car the sales tax is deductible. You do get a standard deduction for sales tax as part of is included in that area as well, and so any kind of large purchases for sales tax you can kind of acclaim that and extra on top of your standard sales tax.
Speaker 1:I think think that's the one thing and we'll get into this a little bit later One of the reasons why you have realtors that buy new cars each year to write off on their taxes. But we'll get into that in a little little bit later in the discussion. So that is the personal side of being a homeowner. It's going to help you on your taxes and us mortgage professionals and realtors say it quite often, but it doesn't sound like it's going to be a whopping savings for them. That's going to change how they're living, based on what they purchase. So, as we lean into the next category, the investor side of things, how can you help us understand some of the deductions, some of the ways of paying less taxes, bottom line, when you're an investor?
Speaker 2:Sure, let's go back to the individual side real quick, because there's a bunch of tax credits for energy efficient homes, new doors, windows, solar panels. It's like definitely don't overlook those clients. All the time when they put new windows in their house. They totally forget about it. But pretty much every window that comes out now is energy star certified. Right, that's right, and so it has to be. Have the double pane with the gas, the gas in between them and all that. So like, don't forget about those. Is it only going to save you a couple hundred bucks? But hey, you know, I would say, take the family to Disney World instead of paying Uncle Sam.
Speaker 1:Boom. I like that. No, that's a great way to look at it, absolutely.
Speaker 2:And then back on the investor side, it really depends. So, as we know, real estate is like this giant gamut. You can do everything from syndicating real estate deals to having a single family home, commercial real estate. You can wholesale stuff. I mean like it's almost unlimited potential on what you can do in real estate, which is one of the reasons I love it so much. And, like I said, real estate is the single greatest way to never pay tax again.
Speaker 2:I love it, I love it and if you do it properly and have a great strategy From an investor's side, you know, if I was to give you the 30-second clip of how to do it, you can make it longer. This is long form.
Speaker 1:By all, by all means yeah, I want to make sure that the folks out there know that I'm working with a badass bottom line. So yeah, go for it.
Speaker 2:I mean, it's from an investor standpoint and on the individual side too, a little bit is, you can do what's called the short-term rental loophole, right, okay, and so that you there's two buckets for tax purposes of income, as far as when we're looking at real estate, you have passive and active income. So passive income is typically going to be your real estate income, right, right? And then your active income is like your W-2 wages, and so typically you can't offset your active income from your W-2 against passive losses. And real estate is tax advantage, which I'm sure we'll dive in more here due to depreciation and some other stuff, correct, and so you typically have a loss on tax purposes for real estate, but then you have a cash flow positive asset, so you get to basically have income and not pay tax on it, which is what we all want.
Speaker 1:That's right.
Speaker 2:And so the quick way to do that is, if you want to get a property, is to start with a short-term rental, and you can use arbitrage and go do the whole Airbnb thing. There's all kinds of different options, sure, and, but you can, once you, the key to that is it's you have to keep the average stay under seven days, okay, and once your average stay is under seven days, it's you're basically quote unquote, operating a hotel, right, and then so that's an active business under the IRS viewpoint, and it's not that your stay you can have. You can have like a month long stay with somebody stays in your short-term rental, right, but then you've got to make sure that you have somebody go in there for a weekend, you know, and so you can get that average stay.
Speaker 2:Yeah, I get your average stay throughout the whole year under that seven day mark and that's kind of the big thing that clients miss on that one. But then you can go and do advanced strategies. On top of it is you can go do a cost segregation study, which is what the government wants you to do. But that's where you basically separate out what they call the units of property on a building, and so it's everything from your flooring to your cabinets, to your HVAC to plumbing. You can get a cost segregation study done on your building.
Speaker 2:And when we had 100% bonus depreciation which I hope they'll bring back, they've had a bipartisan bill in Congress for over a year to bring back 100% bonus depreciation. Right now we're at 60%, so the value is not quite as big, but it's better. And if you can get, you basically take your property. You know so on a standard residential property at 27 and a half years. On a commercial property you're at 39 years for depreciation and that's how long you have to take that basically the cost and divide it over that right, right.
Speaker 1:To determine the depreciation.
Speaker 2:To determine the depreciation for the year, but you can typically go and get around 20 to 30% of that total purchase price as a deduction year one if you do a cost segregation study.
Speaker 1:Wow, and I don't think many folks know that. Matter of fact, one of the issues, the issues and this is side note potentially rabbit hole, one of the issues that I see with many first-time investors even second-time investors is they're not claiming their properties on their tax return. They either forgot or they think that it is a benefit to not put it on there so that they don't know that you're making the money. But then they realize that, hey, if you go to buy another one and you haven't actually claimed this on your taxes, you technically are still a first-time investor. So all of the first-time investor requirements are issued on that type of condition and it causes a lot of issues when it comes to purchasing more properties, continuing to grow your portfolio and your wealth. Do you see that quite often from the folks that you work with?
Speaker 2:Yeah, for the first time. Yeah, they typically forget depreciation or they calculate it wrong. And if you get audited by the IRS something to know about depreciation it's the depreciation that was allowed or allowable. And so if you miss the deduction whenever you sell that property, you're supposed to report the deduction even though you didn't take it. So you're losing money and so it's a double loss, double loss.
Speaker 2:So hopefully you don't get audited, right. But if you do get audited and that's pretty low hanging fruit for an IRS auditor to figure out like oh, you didn't take the seduction too bad, but now you have to, and so then you're taxed higher on depreciation recapture anyways, and so you definitely want to make sure you're taking all your depreciation on your buildings.
Speaker 1:Yeah, see, and that's just one thing that I've seen happen over and over, especially as rates increase, we saw the qualifications for investors decrease. So they're going off script to purchase either hard money or they're going non QM type products. And then the year passes, they come and say, hey, time to buy another one. Oh, I didn't claim that one on my taxes. Well, we can't offset it. I've got to hit you with that mortgage payment completely. Oh, I can't qualify for another one. No, you don't, because we've got nothing to offset it.
Speaker 1:And I think it's something that could be resolved by people educating themselves a little bit more and understanding the idea of what you're actually doing, and you said it best at the beginning you're finding ways legally to pay less taxes for your hard work and risks that you're taking, essentially so continuing down the road of the investor pool and this is an odd question. But I'm going to ask if you were to paint a perfect picture of and I don't know, maybe this is stuff that you dream about at night as a CPA, as an investor, as an entrepreneur myself these are some of the dreams that I have. What would it look like for you, a perfect scenario of someone that is attempting to build a, an empire, so to speak, starting with one. What does that look like as it grows? If you don't mind me asking or going through that, paint me the picture. Paint me a birmingham what?
Speaker 1:about some oceanfront property hey, as long as we're not in arizona, yeah, go for it yeah, so starting kind of the beginning in the real estate world, it can be tough.
Speaker 2:I mean, like we were talking earlier, there's a ton of different avenues to get in Right. I steer away from residential property, so all the realtors are probably going, oh, no, no.
Speaker 1:And I've got commercial realtors on here. I've got brokers? No, not I've got commercial realtors on here. I've got brokers? No, not at all.
Speaker 2:And the single fact is that most commercial leases are triple net. Now, right, If I go to a residential tenant and say, hey, I'm raising your rent $100 a month, they're going to freak out and be like we're just going to move. Then you've got turnover and then you've got to go out and repaint it potentially and fix whatever they fix. But in a commercial space, if your property taxes go up which is anywhere around the country, property taxes are skyrocketing it just gets passed through to the tenant. That's right and you got a business in there and the business, to keep going, is going to make sure they pay their rent typically. And then if you have a residential tenant that's not paying their rent to a victim as a whole, it's like a three to six month long process right, absolutely yeah, even to just get that.
Speaker 1:Uh uh, notice to them, you're right. And if it's their primary, it could even take longer.
Speaker 2:And on the commercial side, you don't pay your rent and go lock your door. Yeah, that's right. And so you're, as a landlord and an investor, you're a lot more protected on the commercial side and then I mean you're probably may not make as much, especially if you're going to go in and flip the home and redo it and that kind of stuff. But you know there's the BRRRR strategy on the residential side, which is great.
Speaker 1:It is when you can find the right properties, the right trades to work on that property, to flip, the right hard money lenders that have the right terms. It's a lot of work to get into it and to do it right.
Speaker 2:And that alone, like in all of this, record keeping, is key, having a good accounting system in place that isn't burdensome. Or if you're like, hey, I'm not a great at accounting, go find an accountant to do it for you and you can get bookkeepers pretty cheap these days, but I will say there are a lot of terrible bookkeepers out there, yeah, and so be careful. And you don't need to have this in-depth QuickBooks online, multiply class and all this crazy stuff going on, like if you only have a few transactions a month. You can do a simple Excel spreadsheet, okay. What we recommend to our clients, too, is, every time you've got a receipt is get Dropbox or OneDrive or something on your home screen, on your cell phone, because you can pull up that receipt, take a picture of it and then you can throw that receipt in the trash. Digital copy counts. That's right For record keeping, and so that is huge.
Speaker 2:And then, for real estate investors or agents, mileage is your number one deduction. Typically, especially on the residential side, they are probably some of the hardest working people ever. They're driving and they seem to have no personal life. You're like somebody calls them. Hey, I want to go see your house. Okay, want to go see a house. Okay, be right there. You're like, yeah, you're right, they're super hard. Every residential realtor I know is very hard working and but their mileage log is something they don't do. That's right. And if you get it's the number one probably not the number one, one of the number one over most overturned expenses on an irs audit. Oh and so what you want to get is some kind of app like mile iq okay, great ones, what we recommend for our clients, because then it automatically records in your background and everybody's like oh, I'll write it down and I'll get a log book and then you know if you've got kids, the kids are yelling and screaming in the back seat or whatever, right? So you just, it doesn't happen, right?
Speaker 1:so I believe in automating as much as you can yeah, you must have been my cpa for the last couple years or something, I don't know or just any parent right I mean that's right I can keep my kids to be quiet for five minutes.
Speaker 2:Sometimes I'm like, yeah, what are they breaking? Actually, you know, it's true, and but anytime you can automate any of it, that's really the best you can do. And QuickBooks is kind of the go-to, but at 80 bucks a month most people probably don't need it. Sure, there's other solutions out there that you really want. To make sure it connects to a bank feed and, on that note, too, for investors or realtors, you know, when you set up your business, you need a separate business bank account. Okay, and then get a separate credit card. Absolutely, because that makes your record keeping at the end of the year 100 times easier, because if you forgot something, be like, oh, flew through this bank account.
Speaker 1:Like this is it?
Speaker 2:Instead of commingling everything. You definitely want to make sure you're not commingling assets, because then the liability protection from your LLC is kind of null and void and any attorney worth anything is not only no matter, even if you have an LLC in place, it's going to sue you and your LLC, right, because they're going to come after everything and so. But if you're commingling assets inside your business, then they can come after you personally.
Speaker 1:So that leads me to a question about the commingling. I've got a borrower situation that we're having a tough time with, and this is current what's going on right now. They are sole proprietor Schedule C, have never opened a business account. The only income that they receive is 1099 as a plumber comes in, that's it. All the money goes into the personal account and all the expenses go out of it. Now, mind you, some are personal expenses, some are business expenses. But from the way that I look at it is, if the only money that's going in there is from business funds, should he not be utilizing that concept? Or would it not then be considered everything is considered business from that one account? Or is it the other way around, to where, technically, if you don't have a business account, it's all personal buddy?
Speaker 2:Yeah, and it's the burden of proof relies on you, right, if you ever get audited. Okay, and so you want to have certain things set up in place that when you're going through them and so just having as simple as a business account, you can just go down to the county and get a DBA.
Speaker 2:They're like 20 bucks, right, I've got a county here I had to go get a DBA and that way you at least have the business. You set up the business bank account and then you can always take money out. Everybody asks well, if I take money out of my account, you get taxed on your profit or loss of your business at the end of the year. Right, you can leave $100,000 in your business, but you're still going to be taxed on that $100,000. Or if you take it out and you can add money in, it's just a capital contribution or distribution. You're not really taxed on that as long as you have what's called basis, as long as you don't take more money out, right.
Speaker 2:And if you go get a loan, have, there's a whole slew of tax consequences that happen from that. But that's I mean. So there's really keeping a separate business bank account and keeping all your records in place, no matter what you're doing. You know whether you're a plumber or you just have a, you're a realtor or whatever. It is keeping that separate and it'll be help you down the road. You know. Hopefully you never get audited and you never need it, but you'd rather have all the information and be able to provide it.
Speaker 1:Absolutely. I agree with that. Now you've mentioned audit probably 15 times thus far I'm going to ask ChatGPT this question to see if it makes sense. In the United States, how often is someone's taxes audited? Let's see if you agree or disagree with this thing. Overall audit rate as recent years, less than 0.5% of all tax returns are audited, meaning fewer than one out of 200 taxpayers are selected for an audit. The rate has been declining due to the budget cuts and resources limitations of the IRS. So business owners out there going yeah, let go of all of those people at the IRS. Let it take longer, but then at the same time, when they're waiting for their refund to be processed or anything else, it takes longer for that stuff as well.
Speaker 2:And so there's two types of audits. So what they're probably keying on here is the actual physical audit, where you have somebody come in and actually audit you. Most of your audits are really matching errors.
Speaker 2:And so you get what's called a CP notice and that just stands for computer process. So just like we're all instituting AI and everything else behind our businesses to try to make us better, so the government's getting there, but at a much slower pace, but at a high level they run everything through a computer. And so if you get a and for realtors specifically like you get a 1099 that says you made $100,000 in income, you report $98,000 in income and maybe your broker took some of that so you didn't get it. But then there's a broker fee that you need to report and gross up your income to that $100,000. You need to report the $100,000 because if you don't report that $100,000, it's just going to be a simple computer and you'll get a letter from the IRS that says hey, guess what?
Speaker 2:You've been randomly selected Not really the computer randomly selected, you Right, you know. And because you didn't match, and so you always want to make sure you're matching anything, any document you get. That you're. You know W-2s are easy, you know you've got one wages. Put that in.
Speaker 1:Sure.
Speaker 2:So on and so forth, but really it's the 1099s, because you may may not match because some, you know, sometimes a broker gives you the wrong amount or they're taking fees out or, like a lot of clients who use Stripe, stripe takes their fees out and you only get the net amount to your account, right, but at the end of the year Stripe's going to send you, you know, about three, three and a half percent. Whatever they're charging right, they're going to send you for the total gross amount as your 1099. But if in your accounting system you only recorded the net amount, because that's what came into your bank account, then you're going to get a matching notice.
Speaker 2:That makes sense, because you get the 1099K, which is for all your credit card transactions, right, yeah, and so that's kind of a big red flag and that it's easy to fix right, and your tax situation is not going to change, because we add income but then we add expense, so it nets out to zero. Sure, but as far as making sure you're doing what's right and not going to trigger their computer, not going to trigger their computer, that's really what we're trying to do.
Speaker 1:In addition to the uh uh loss time that you have from receiving that notice and going oh shit, oh shit, oh shit.
Speaker 2:Um, open the envelope and everybody freaks out, but half the time, like especially, I have a business is like hey, we updated your address, or it's like something. Or like, hey, if you have employees they send out, hey, your you know deposit schedule is this, don't ignore it. That's right. Open it up and hopefully it's nothing. I mean it could be more, but Right.
Speaker 1:We got another one I haven't let go. It's okay, don't just take it and throw it in the shredder and be like I never got it. I don't know what happened to it. Yeah, no, oh, they know, you got it.
Speaker 2:Yeah, because they know you got it, and then you can't ignore them anymore. That is correct and, as from a CPA standpoint, we can help you a lot more earlier on when you get the letters, versus when they say, hey, we're going to levy your assets because we're kind of, you know, okay, we're going to take them to tax court.
Speaker 1:We've done all we can at this point.
Speaker 2:Probably not going to take them to the tax court because that's you know, through this and take care of it, and communicating actively with the IRS is key. If you ever get a notice, you can call them, if you can get through, because they'll probably have to wait. Yeah, half the time you call for an hour and then they just hang up on you. Sorry, we're too busy.
Speaker 1:You know nothing's more frustrating right, we've all been there, absolutely.
Speaker 2:And so it's just like it's so frustrating. But at the end of the day, like if you can call them, they can typically put a 30 day stay on everything and they give you 30 days, like if you don't can't get everything together. But the sooner you can be in active communication with the IRS, the better.
Speaker 1:Yeah, and and you know it's what's funny is you mentioning that is the same philosophy, same concept with real estate? When it comes to a single transaction, Get in communication with the parties that are associated with that transaction as soon as possible so that everybody knows. Everybody assumes that, oh my God, they're going to be upset at me, Maybe, but at least they now have the time to do something about it and to work with you and iron out whatever it is that's going on, versus keeping it close to your chest and thinking things are going to change because it's not.
Speaker 2:Yeah, half of it is just setting clear expectations with both parties, right?
Speaker 1:Right, that's exactly correct. So, going over some of these next questions here we've talked about thus far benefits from a buyer's perspective, a homeowner's perspective, both primary residents in addition to investors out there. Now obviously there's way more nuance to all of this. There's no way to go down all of these rabbit holes today. We want to kind of keep it surface level, so it kind of piques the listener's interest. Maybe they give Brad a call here. But the idea of this next piece is for realtors specifically. It has tax strategies for realtors. What are tax strategies should realtors keep in mind, especially those who are self-employed running their own real estate business? And I think you mentioned some of those already. But if you don't mind reiterating, like, specifically, what would you recommend for a realtor? Um, because I know the listeners we've got first year, second year, all the way to experts that join us on this show, uh, listening in.
Speaker 2:I think the key phrase there is. You said as a business, treat it as a business. Love that, and so do all the stuff. So if you've ever been in corporate America, they have all these rules and regulations.
Speaker 2:The reason they do that nine times out of 10 is for tax compliance purposes, like submitting your expense reports and doing all this seems like a pain, but the reason they have to do it is because the tax law requires them to do it. So even if you're just a small mom and pop shop or just a single realtor out there, you still fall under the same tax law as corporate America. I mean, it's a little different nuance between all of it, but at the same level you have to have certain things in place, right? So we talked about record keeping already.
Speaker 2:It's definitely keeping clean records. Having a separate business bank account makes it easier. Keeping track of mileage, like we said for realtors, is one of your biggest deductions.
Speaker 1:So actually get a mileage log, because if you get audited they're going to throw it out and then now you just lost a $40,000 deduction. Now question for you, because I do quite a few loans for realtors out there and a lot are having to go the bank statement route or non-traditional route because they don't claim all their income year after year after year, and it's not necessarily claim all their income but their expenses either outweigh what they gained or get very close. So they're not essentially paying taxes, which in many cases, like for me, part of my income is W-2, so it gets taken right away With them. They've got to tuck away some money, hopefully at least 30% every year for the taxes that are going to be coming due.
Speaker 2:It's 30%. It's a great rule of thumb as far as it, but a lot of them, especially first-year agents, they come in and see us and I'm like, well, you owe $27,000. They're like I owe what? Yeah? And it it's like remember, when you're a w-2 employee and they take out federal income tax, have you paid any taxes in this year? They're like no. I'm like, okay. So there's this thing called self-employment tax, right, so that's 15.3 percent. Um is your self-employment. So you, not only when you're self-employed, when you're an employee, you only have half of your social security, medicare, right, but as it, when you're your own boss, you have the full brunt of both the employer and employee portion, which totals up to 15.3%.
Speaker 2:So whatever your profit is at the end of the year, you're already paying 15% plus whatever your tax rate is.
Speaker 1:In the bracket that you fall within In your tax bracket right.
Speaker 2:And so kind of an all-in a good rule of thumb is 30%, and if you end up with extra money in that account at the end of the year, great. If not, you know you've got to pony some up. That's right. But definitely, and don't get into um where you have 15 different accounts and you know like I have my tax account and then I have my payroll account and then I have my vendor account, that's right. Uh, it's really. You know, if you can have a savings, business savings and a business checking account, it makes it your life a lot simpler, because when you start doing you, you know it's escaping my mind.
Speaker 1:I forgot what it's called, but there's the whole philosophy of having all the different accounts and every you know, I, I see it more often from people that aren't business owners and it's like you've got five accounts and you call this one, you're this account, you're that account, you're this account, but every month you're pulling from this account and that account and this account to move it to the. You're making your life a lot more complicated than it needs to be.
Speaker 2:Kiss method Keep it simple.
Speaker 1:Keep it, there you go. Kiss method. That's exactly. I do remember that it's been a while since I've heard that.
Speaker 2:Yeah.
Speaker 1:I'm like, okay, that's right. Where, yeah, I'm like, okay, that's right, where did that originate from? You know, I don't know, it damn sure wasn't taught in schools.
Speaker 2:It was yeah, and it's either you know stupid or shithead at the end of that right.
Speaker 1:Yeah, that's right.
Speaker 2:And depending on who you're talking to you.
Speaker 1:know that's right. Keep it simple, stupid shithead.
Speaker 2:I like that.
Speaker 1:I'm adding that from now on, keep it simple, shith, ed. You know what I mean. Now the question comes into play when the IRS is seeing this self-employed realtor continue to take losses year after year. Is there a limitation? When it comes to the eyes of the IRS, that goes hey, dude, it's been four years. At what point are you going to turn a profit so that we can make some money from what you're doing, if that makes sense?
Speaker 2:It makes sense there's a three-year rule for hobby losses.
Speaker 1:Okay.
Speaker 2:And hobby loss is a higher area of audit than anything, and so you want to be included in that lucky you know 0.01% of taxpayers. Sure, have a business that is not reducing its loss, um, or going ahead and having a profit, right if you have three years of losses that, like I said, the computer is reviewing everything, right? Oh yeah, and so when you just flag, boom just flag, then you'll get the letter that says hey, you would randomly selected, right?
Speaker 1:it's not random at all.
Speaker 2:It's not random at all you do this to yourself that's right and then like, if you're trying to get a mortgage right, if you, if you show losses I mean so there's ways to show losses and not pay tax and that's typically going to be through depreciation Then on the mortgage side you'll add it back.
Speaker 1:That's exactly right.
Speaker 2:And so if you're going to go buy a new vehicle you brought it up earlier purchasing a new vehicle every year, I mean from a tax standpoint great, from a personal finance side not great. Yeah, you spend $100,000 to go buy the new, latest and greatest F-150 or whatever right, that's right.
Speaker 1:Isn't it sad that they're that much? It is what the heck did they add to them. You're right.
Speaker 2:That's why I'm going backwards. I'm buying a 1948 F-1. That's my next drive. Boom, beautiful stepside, I love it. Okay. But yeah, I mean, there's ways to not pay tax but still do everything. And when you have your own business, there's the gray area of your personal versus non-personal expenses. There's ways to tie back because, like your realtor, your cell phone home office deduction is a great one that most agents can take, and so then you've got to prorate a portion of all your utilities and repairs and maintenance and property taxes and mortgage interest on your business to offset that as well. Right, so you get to capture. You know, if you didn't have your own business, which are personal expenses, you don't get any of the tax deduction for.
Speaker 2:That's right when you have your own business, you do get to start taking some of those.
Speaker 1:That makes perfect sense and also makes sense as to why we see a lot of non-self-employed borrowers that have an Etsy store.
Speaker 2:That is losing money, I think everyone should have a side hustle, or something right so because you know I can write off my cell phone now and now, you know. Or a home office. So home office, you know, say you have a thousand square foot home and a hundred square foot office. You can get 10% right Of all your home expenses now that basically, if you didn't have a business, it's just gone right.
Speaker 1:Right. And that leads to another question that hopefully people can get some value out of and that is the idea of everyone should have a side hustle. What would constitute being able to claim that on the taxes, let's say as a Schedule C, utilizing their social security number as the ITIN number or the EIN number of the business, without a DBA or anything like that, before it starts to cause any ripple effect or red flags? Random audits.
Speaker 2:Yeah, it sounds like a broken record, but record keeping right, yeah, I mean because it really gets down to having good records. And so if you're going to have a business and a side hustle, I mean you need to be doing it for a profit purpose is going to be one of the first things IRS will ask, right, and so are you in this for making a profit? And if you turn up and say no, then you just shot yourself in the foot. Yeah, no, I'm just like doing it, keeping track. Yeah, I'm doing it so I can save.
Speaker 2:Not the best answer, right, that's right and so anytime you go into a business right, it's typically to make money yeah, we hope not to lose money, unless you want to go into farm and ranch you know, touche ranch.
Speaker 1:No rancher ever makes money never it's so funny, but yet they continue to stay in business for years and then pass it down generationally weird well, that's how they can.
Speaker 2:Right, because they haven't had to buy the land. You had to go buy a thousand acres. Now, right, good luck, good luck. Yeah, that's right. Um, okay, right, because they didn't have to buy the land. You had to go buy 1,000 acres. Now, right, good luck, good luck yeah, that's right.
Speaker 1:Okay, so we talked about the real estate side of things we talked about for homebuyers and real estate investors and I think I kind of know the answer to that. But if you don't mind shedding light on it the idea of rising interest rates and how that can impact what both homeowners as primary and business entrepreneurs investing on their side of the tracks I only see it as a benefit.
Speaker 2:I mean you're paying more but you get a larger deduction from a tax standpoint. It's more of a personal finance and cash flow issue from an investor or from the personal side, because you get into the debt to income ratios and all that kind of stuff to qualify for the mortgage. Yeah, you want to be a loan officer.
Speaker 1:That's all on that one. Let's see here it says controversial topics short-term rental properties Ooh, that came up and we talked about it already. How do short-term rental properties, like Airbnbs, differ from long-term rentals in terms of tax implications? We talked about that earlier.
Speaker 2:It's the active versus passive income right, and so short-term rentals are considered active income, and so a common mistake we see on taxes is they're still reporting on your Schedule E, which is the typical form that you report it all on, but it should go on a Schedule C.
Speaker 1:Makes perfect sense. So that is all the questions that I have here. Now I'd like to open it up to some other things that I have on my brain that I think folks would want to know, especially investors out there, because I tell you this is probably one of the most it's either asked prior to or they're telling me that this is what they did because of a CPA that told them to do this. And that is the concept of I purchased an investment property with finance from a loan and my CPA is telling me to put that into an LLC for liability protection. My response to that and you can tell me if I'm right or wrong, doesn't bother me.
Speaker 1:I want to learn today, as the lender on that property, if they are putting that into an LLC, that is now essentially triggering a due on right now clause, essentially because you just removed it from your own personal which that's who qualified for this property over to an LLC. That the idea is if, if there's any liability, I get sued, the LLC gets sued, but yet you've got this personal loan on it that is tied back to you. So my response is always the good idea is to leave it in your personal name. Make sure you have insurance, obviously, but until that property is paid in full, there is no reason to move it over to an LLC. Am I wrong, right indifferent to move it over to an LLC? Am I wrong, right indifferent kind of wrong, you tell me?
Speaker 2:Both, I mean. The problem is, when people say they put in their LLC, most of them never actually go retitle it at the county.
Speaker 1:Oh, good point.
Speaker 2:Good point, and so it's still in their individual name, even if they're reporting it under their LLC.
Speaker 1:Yep, I've seen that too.
Speaker 2:Right. And so if and if you're going to start purchasing stuff in your LLC, I would say go, go, get a business loan. That's right, cause you know the paperwork is like this big right On a business loan you're in and out in like two minutes. Even it can be a $10 million property and it's like 10 pages. You're like, oh, this is awesome, versus, you go buy a hundred thousand dollar residential property.
Speaker 2:Well, if you want, if you wonder if you can find them anymore at that price, but that's true, but you know, then it's like the pile of paperwork, right, it's like this and you're like how many times have to sign my name?
Speaker 1:So true Um and and personal experience on that. When Kristen and I uh, were flipping the properties, we were buying the house's cash, so essentially, or getting hard money loans on them, we had to put the properties in the name of the LLC, which at the time made sense, and it felt like I had confirmation of everything that I had told borrowers prior to, because it's like, OK, I've got to put this in an LLC that makes perfect sense, feel like they're doing it the right way, or feel like they are have more established and causing more hurdles down the road for them, either from the lender, the CPA side, or is it many cases in an experience of the CPA that's advising them or them just trying to make a couple bucks off of claiming more work on the taxes filing for the DBA, et cetera. Whatever the case, the LLC and there's a charge to register your DBA and all that jazz. What?
Speaker 2:are your thoughts?
Speaker 1:on that.
Speaker 2:I think as you get bigger and have more properties, maybe you set up some kind of LLC, but if you're going to have one or two properties, that may be all you ever get. It goes back to the KISS method. Just keep it simple. And if you're worried about liability protection, go get an umbrella policy. Right, you can go get a couple million dollar umbrella policy. So I mean you should have the homeowner's insurance and the landlord insurance and all the other insurances in place and if that gets kind of capped out, you know you have an umbrella policy to cover it. It's going to be a lot easier. Keep it simple, cause half the time when all these people set up their LLCs, if they were actually get sued, they're not doing it right and they're commingling assets and the. Basically the attorney and the judge is going to say, hey, you're not operating a business like manner LLC is defunct.
Speaker 2:And then all these years you've been having them doing it right. Or, like you said, the due on sale clause, it's in all, that's all there. I mean that I've never seen it happen, but same here. But the bank could call it and there's no reason to open it unless you're sitting on a couple million dollars that, if you got a, you know 10 properties that you could just pay cash for. That's right, right. If the bank calls your note, your most people are probably like oh shit what am I going to do?
Speaker 1:Let me go retitle this. Yeah, you're exactly correct. I mean the idea of saving or protecting yourself. It seems a bit redundant from what they're trying to accomplish because, you're right, they are commingling what they're doing, whether their activity, their funds, that concept and overcomplicating something that doesn't need to be that complicated, and if you go to any of the guru conferences right, they always have the attorneys in the back.
Speaker 2:Hey, for a few thousand dollars we'll set up your holding LLC, your operating LLC, your real estate LLC. So then we can set up a series LLC for you. By the way, it's five grand. They're there to sell you the five grand that's all they want.
Speaker 2:You don't need to have all these different LLC. Hey, you know, my tenant keeps calling me at five o'clock on Friday night when I'm supposed to be out with the family. I don't want to do this anymore, that's right. Or, you know, go get a property manager to do it for you. But at the end of the day you may be like I just don't want to do real estate anymore. Don't go set up all those headaches and compliance on the back end.
Speaker 1:That's right Until you start getting because of this. But prior to and I was not in the lending world in this time frame, but 2008, 2009 crisis, the fraudulent activity that was going on. Everybody and their mother and their dog apparently were getting mortgages. People were putting them in their LLCs and when the finance company or the lien holder or the servicer of that loan goes to foreclose on something that's not being paid, it's a shell of a shell. That was, I hope, why they did it or changed that, or did it ever even change from that? Because I know on our side we used to accept that type of financing in an LLC. Now you have to go hard money if you want it that way and keep a loan on it.
Speaker 2:And you can't, or you just have to go to the banks right and you get. And so your your bigger banks, not your. Typically, the best way to get loans business loans, is through small local banks. That's right. Not your Wells Fargo's and Bank of America's, Absolutely, Because if you don't fit inside their little boxes, it says you have this, this and this and this, right?
Speaker 1:Oh, this is outside of that box. Then they're like we're not gonna give you money. That's right, and in many cases it is up to the computer making the decision, Whereas what you're advising is go to a bank that has a board, somebody that meets every week or so, that makes some decisions on people and their vision and what they're trying to accomplish and their business plan, versus what was entered into a computer screen and, like you said, the red flags go at. We can't give them that loan.
Speaker 2:Well, it's even on individual mortgages, right? Go talk to you, Right Cause if you try to talk to those on the individual mortgages, if your credit score is not a seven 20 and you're making 200 grand a year and you're like, oh no, we're going to get you a mortgage versus you know, y'all can find ways to help people get qualified and guide them through the process, Right.
Speaker 1:That's exactly right, and I think that is the most important thing about this little transition here is is the guidance piece is no matter who you're working with. If you feel like they are just taking orders, chances are they are, and you need to be working with somebody that can guide you, that can advise you, that can give you their expertise, because, essentially, is that not what you're paying for?
Speaker 2:Exactly.
Speaker 1:You know. But yeah, let's see here, jc, how are we doing on time? 1.11. 1.11. Okay, minus 15 for my little okay, we're about an hour Three minutes.
Speaker 1:Yeah, minus 15 for my little. Okay, we're about an hour Three minutes. Yeah, mas o menos. I'd say we're right around. I like it, brad. This has been an enlightening conversation. There's a lot of stuff that I learned within it and I'm sure the listeners out there learn plenty. Most would go wait a minute. You had a CPA on there. That's got to be a lame episode, but I guarantee you people are going to tune into this, because most of the listeners are either looking for a CPA, dealing with a CPA, and most, if not all, don't know what the hell they're doing anyway, because they're there to sell real estate or they're there to run their business. They don't dream about tax stuff like you do.
Speaker 2:Yeah right, we all dream, but some are nightmares.
Speaker 1:Good point, good point.
Speaker 2:That being the case, is there anything that you'd like to enlighten our viewers, listeners, about regarding I'll try to give you the 90-second playbook on how to save the most money on taxes as a real estate investor. So you want to qualify for what's called a rep status, and so that's real estate professional election on your tax return. And you have to document 750 hours of real estate and do that greater than anything. So you can't be like a job somewhere else, right? So as long as you're doing in real estate full time, which as a like a realtor, is a great way to do it, right? So so hopefully, you're a very successful real estate agent. You're making a couple hundred grand a year.
Speaker 2:Take the profits now go buy some kind of commercial or residential real estate and when you buy that, go do the cost segregation study on it, which you know. You may put 20% down and guess what? We can probably get you a 30% deduction year one. So all your money you put in you can basically get as a deduction year one on your taxes. And now you get that so that reduces your tax. Basically you can offset, since you have a rep status, you can offset your passive income and your active income with your passive losses. Since we accelerated your depreciation, you can still make a couple hundred grand qualify for those mortgages as a realtor. And now you have that properties and you're building your wealth through properties. And then, on top of that, after you've done your cost segregation study, hopefully, if you've got kids running around the home, get them employed in the business.
Speaker 2:And you want to make sure you're employing your kids through some kind of Schedule C, even if it's a part of your real estate business, right, you want to be a sole proprietor, because if you can pay them w-2 wages and as long as they make under the standard deduction, which will say roughly thirteen thousand dollars, now you can. Once they have earned income, you're not paying social security, medicare, tax if they're inside of your sole proprietorship business because they were considered your dependent, and as long as they're under 18, and then from there you can contribute to a Roth IRA. So now you can start building your kids up with Roth IRAs and that'll be tax-free for the rest of their life. And it's better than like a college savings plan for 529, because your kid doesn't want to go to college, right, they're just not ready to do it, like we apparently weren't, absolutely absolutely. And so with the 529 plan you're stuck in college, right, but if you have a Roth plan they can pull the money out to go buy their first home.
Speaker 1:Yes.
Speaker 2:There's all these. You can always pull principal down. You know, say they want to start a business but you've got a business deduction for it throughout the years, and now your kids, right, have money that there's. It's going to be tax-free forever, wow. And so that's kind of the down and dirty of you know all. How can we really do? And there's a lot more you can do into like and everybody you know has heard, seen a TikTok video.
Speaker 2:Hey, I can you know, rent out my house, and I can you know, to my LLC and then I can shift over the income which you can and all of these kinds of stuff we're talking about. There's right ways to do it and proper documentation has to be done. And what they're talking about is the Augusta strategy. Right, you can rent out your personal residence to your business for 14 days or less and then that's a business deduction for you, so it lowers your taxes, and then you pick up the income on your individual tax return, but then you cite the code section on your Schedule E and it basically wipes it out as long as you do less than 14 days a year. So it came from the Masters Golf Tournament, right?
Speaker 1:Augusta Georgia.
Speaker 2:So they basically lobbied. So it gets back to the tax laws a set of rules on how not to pay tax. That's in the tax law. Right, there's ways to do all this, but really gets down to documentation and record keeping. Wow.
Speaker 1:If you didn't get anything out of the entire episode discussion, how about that last three minutes? Wow, damn, that was good. I'm going to go Exactly, exactly. So I'm impressed and grateful to be working with you personally. This last thing came up recently that I want to close out with, just to make sure that everybody has right information, and it is initials, acronym BIO, and it is this new requirement that business owners need to register in order to show their ownership of the business if it's more than 25%. Can you enlighten me on some of that? It came up in a group chat with a bunch of realtors, all of us business owners and we were like well, what the hell is this? I'll ask my CPA.
Speaker 2:Yeah, so you've got the FinCEN, which is the Financial Crimes Division of the US Government, beneficial Owner Information Report that everybody's supposed to file, but they had a Tuesday. It was either Tuesday or Wednesday. Okay, the National Federation of Independent Businesses actually won a court case in Texas that said, hey, this is unlawful, against the Fourth Amendment. All the businesses should not have to do it. But it's really weird. So why this court case is ongoing? Technically, the deadline of 1231 for all these businesses to register is still in effect, but then, at the same time, the court said you don't have to do it. So basically, the deadline's there, but you don't have to do it. So it's really weird.
Speaker 2:Yeah, and it's where we're at on it. And so what we're recommending is basically to have all your information ready to file. Sure, but technically, since it's pending litigation and the oncoming administration is typically more business friendly, they're probably not going to pursue it, right? But at the end of the day, it was basically whenever you register your business at the state level, you say, hey, I'm Mark Jones, this is who I am, this is my address and that kind of stuff. Right, they wanted to start doing on the federal side. Oh, and so they're trying and it's for anti-money laundering and all this kind of stuff, because all the you know criminals are putting. They're gotten a lot smarter throughout the years right and so they know.
Speaker 2:But if your business was large, you didn't have to do it. So, like they're like, hey, you're picking on small businesses and so that's why that does actually make sense as to why?
Speaker 1:because the first thing that makes me think of is monitoring people, which obviously we want to do that safely, so that money laundering isn't going on, et cetera. Invasion of privacy I don't really see it as an invasion at all, to be honest.
Speaker 2:Public knowledge.
Speaker 1:But yeah, I'm submitting my taxes anyway. You know what the hell's going on.
Speaker 2:Well, I guess they don't really know who the owners are right, because sometimes you get layers and layers of owners and so they're trying to figure out who the actual, who receives this money at the end of the day. Who's the beneficial owner, right? That's where the name comes from. Yeah, no-transcript. The state government cannot provide the information to the federal government, and so that's why they have this whole new thing. But yeah, the fees are outrageous, you know, per day if you don't do.
Speaker 1:I need to do this ASAP, and it's one of those things that I wouldn't mind doing, regardless of this court case being overturned or not. I just don't want to get hit with those penalties At the end of the day. I think it was what $150 a day.
Speaker 2:Right, what, of course? Then you get into how are they going to enforce this?
Speaker 1:Yeah, levies.
Speaker 2:One of those things and so so, yeah, you can go ahead and still file it like it's still out there. It's relatively easy. You basically say, hey, this is, you know, my llc, I'm the owner, and they need some kind of identifying document, just your driver's license or your passport or something like that. The problem is is, if you move, your driver's license expires, your passport expires, whatever identifying document you did, you have 30 days to notify them and refile it and so that's or it starts or it starts the penalties.
Speaker 2:You know, I'm sure it'll be. I don't like if the court case gets overturned, then we'd have all this. We'll see what happens. It'll be interesting. We're keeping a watch on it, yeah, but uh. So I mean it's there but not there, as I guess the that makes sense, obviously. But you can file it and if you have multiple businesses and it does take effect, they have what's called a FinCEN ID.
Speaker 1:Okay.
Speaker 2:And so, instead of you've got 10 different companies right, you would have to go in each time your driver's license expired and update each 10 companies Right the way around, that is to go get what's called a FinCEN ID and then you only have to update once and you know, waterfalls down to all your other businesses. Gotcha.
Speaker 2:And if you do want to file. You definitely still can. But if you have more than one business, make sure you fill out a FinCEN ID and it's really easy. Probably take everybody five minutes. So I mean everybody's doing it. From like Gusto, if they're your payroll provider for like 10 bucks to attorneys for like a thousand dollars.
Speaker 2:Yeah, you know, click a couple of buttons click a couple of buttons and so they have a PDF on their website you can download. Yeah, and it actually fact checks and make sure it's all filed correctly and so like, if you're worried, I'm not going to do it right, then you just submit the PDF, yeah, and then it uploads it.
Speaker 1:Well, I tell you what folks listening to this I'm going to put a link to like to get ahead of this, regardless of which way the court case's outcome turns. You can go ahead and knock that out, brad, this has been an awesome discussion. I'm not surprised at all. I know who I'm working with and I'm appreciative of that. Anything else you want to let us know before we close, before we, uh, close this bad boy out.
Speaker 2:Nope Good to go Semper Fi.
Speaker 1:I love it, baby Brad. Thanks again. Um, for those of you out there listening, I I think one of the biggest um key factors that I can give for you is coming from someone that did my own taxes for many, many years prior to finding a Brad. It is difficult and what I found is that, as smart and as long as I researched and used AI to help me when it was around back then, and as much as it could Google search, you still miss plenty of opportunities. As it could Google search, you still miss plenty of opportunities, deductions and savings that you could have had otherwise. Because, let's face it, I'm in the game of lending money for mortgage loans, not doing taxes and keeping up with regulations and all the other things that go along with that.
Speaker 1:So a recommendation that I have for you is to find yourself a good CPA. I'm going to make sure that I've got Brad's contact information in the description of this. You can also visit BernieTXCPAcom to take a look at Dower and Associates. Him and his team have done a phenomenal job for myself and my wife and our businesses. That being the case, guys, hope you're getting something out of this. Make sure to like, subscribe, share with a friend, I'm sure this is one that you can share with a business owner that would be appreciative of you doing so. That being said, we will catch you on the next one.
