How the New Tax Code Affects Your Real Estate Investments | BP Podcast 269

this is the BiggerPockets podcast show 269 you’re listening to BiggerPockets radio simplifying real estate for investors large and small if you’re here looking to learn about real estate investing without all the hype you’re in the right place stay tuned and be sure to join the millions of others who have benefited from BiggerPockets.com your home for real estate investing online what’s going on everybody i’m scott trench co-host of the BiggerPockets podcast here with my co-host mr. Brandon Turner how’s it going brandon man I’m fantastic how you doing I am doing great although it’s a 9 degree day here in Denver Colorado Wow a little different than why a little bit different for for surfing trips this week already though you know it’s not bad it’s been good weather I think I think I’m actually gonna go on a business trip to visit Brandon here in the next couple of days yeah we actually when this show comes out I think you will have already been hanging out here but we’ll see anyway what’s up everybody so today’s show is all about taxes which everyone just turned off their podcast oh I don’t want to hear about taxes but no today is important because there were a lot of big changes that happen recently well under the new tax plan that was just announced and today we’re actually lucky to sit down with two CPAs that we look up to quite a bit around BiggerPockets and they uh they dish out the dirty details about what’s all involved and how it affects you guys so it’s a it’s really really good good information today yeah there’s a ton of detail on the changes and how they’re gonna impact various different investing strategies what rumors kind of were going around about some changes that didn’t take place and so those strategies aren’t changing so there’s lots of information on both sides of this I think that’s really important and directing your strategy going forward one thing to note is that much of what we talked about today does not affect what you’re going to be filing in 2017 so that a lot of these changes are going to be taking place up January 1st 2018 or later there’s one exception yeah though the one exception I should super super important it’s about the way that what is it like changing from 50% bonus depreciation anyway you guys to hear all about it because it listen up but like Scott said a lot of the stuff doesn’t take place until later but anyway yeah no I I learned a ton on today’s show you know sometimes shows are very inspirational they’re like stories of people who are doing stuff and then sometimes you just become a whole lot smarter after listening so today is one of those you get really smart so and one thing I’ve excited about is a little teaser is I think a lot of entrepreneurs hat must have this question at least you and I did but we’ve been too afraid to ask it like maybe a matter of public setting which is what happens when you have a business that just fails doesn’t produce any revenue and you’ve put a lot of expenses into it can you write that off or not what you know how’s that work out like and they talk about when you try to sell wooden sunglasses online for a year and end up selling hardly any yeah I actually have a Barry wooden sunglasses I got them for free that’s why probably reason you didn’t become a bigger pocket someday will have wooden sunglasses for sale because they’re pretty legit anyway what are you that secret would it ruined your great fun all right before you know the rest of the show let’s hear today’s tip short and sweet today’s quick tip is taxes are important tax planning and knowing what to you make sure you get the most money out of your taxes and back and all that good stuff so we actually put the tax book on sale I think it’s 20% off right now up until tax day so the book on tax strategies for the savvy real estate investor written by Amanda Hahn who is one of our guests today is on sale at BiggerPockets comp such store until a tax day but get it now because it’s one of those books that it’s hard not to make back the cost of a book it’s like well like 15 20 bucks or whatever like it’s like really hard not to make that back a hundred fold over your life if you learned just one tip so it’s stupid not to own it go on it get it on sale right now bigger pockets a store and that book was written before the tax changes that have taken place however it is not a specific tactical book there are specific tactical discussions in there but what that book will give you is a fundamental approach of how to manage your business how to set up your accounting that kind of stuff so that you can apply those fundamentals in a way that enables your accountant to do things much better pick a good accountant that kind of stuff yeah and there’s some cool bonuses that come with it as well when you buy it on bigger pockets so check it out now I think we should just jump into this thing I want to I want to hear about taxes that sound good to you Scott sounds fantastic alright I mr. Brandon miss Amanda Han how you guys doing I used Amanda’s last name by not yours Brandon Brandon yes so welcome to the show you guys have uh you know been on the show before but today is an important time of the year because it’s tax time it’s like everyone’s favorite holiday that lasts like four months and so we’re going to go really really deep and boring into taxes we’re actually gonna read the tax code for like an hour and a half before we get into this thing and then we’re gonna talk I’m totally kidding we’re gonna try to keep this light fun and helpful I mean it’s kind

of our goal today is like what do investors that are listening to this need to know today that’s gonna help them this year going forward tax code stuff all that so with that before we get any further I want to make sure people know who you guys are so maybe Amanda you want to go first let us know who you are what kind of your story is and then we’ll move to Brandon and find out the same sure I guess ladies first thanks for having me back on the show really excited to be here with all of you flying gentlemen my name is Amanda Hahn I am with Keystone CPA and were a boutique small firm located in Southern California and we specialize in working with real estate investors on how to save money on taxes and make best use of their funds whether it’s cash or retirement investing outside of that outside of my time at work I also am a real estate investor myself mainly my stuff is the boring long-term holds we have clients that do also just of in terms of syndications fix and flips wholesale but I’m a pretty boring investor in that you know it’s strictly long term holds because my passion itself is actually still in tax and the planning side of things although I love having real estate as one of my vehicles and I’m very fortunate to be able to see all the inside detail to our clients numbers and be able to kind of mimic what it is that they’re doing so excited to be here lots of new things to talk about and looking forward to the next 30 minutes or an hour cool Brandon Brandon Hall I run the real estate CPA we’re a virtual CPA firm we work with solely real estate investors so similar to Amanda where we’re exclusively focused on the real estate niche I also invest outside of the tax realm so do hold my own rentals and then I’ve got a Capital Group that we just started middle last year with a partner of mine so we’ve been investing in some larger syndicates and kind of expanding our knowledge there which is cool because then I can go and talk to our clients that are doing the syndications and talk more on a one-to-one rather than just purely from my wall this is what I’ve seen now it’s this is like done so let’s really talk about it cool all right awesome I was going to say you know we get a quick overview of the changes that occurred in the new tax bill maybe and talk about that for a few minutes and kind of go through the high-level changes and how they might impact real estate investors how quick is quick let’s do it let’s see if we can do it in five minutes or so all right Amanda do you want to start or do you want me to start you can start okay all right all the pressures so there are lots of changes I guess for me the two biggest ones are the three biggest ones would be the new pasture reduction that’s that’s for sole props sole proprietors LLC’s and S corporations we’ve got one hundred percent bonus depreciation so that’s up from fifty percent bonus depreciation and then we’ve got the business interest limitation and I’m thinking that the business interest limitation is probably one of the bigger negative impacts it’s going to be affecting a lot of people even though there’s a huge exclusion if you’re earning less than 25 million you’re excluded but then there’s an exclusion to the exclusion which subjects a lot of what I think a lot of real estate investors even small-time to the new business interest limitations so all right so that’s yeah I want to take each of those and go a little deeper on those three if we could so what what is pass-through deduction maybe we start there the first one you said what is that what does I even mean do you want take that Amanda sure so that well the boring term for that is section 199 a for those of you code heads who want to write it down what does that mean like you think Brandon essentially it means that for certain types of income that we earn as taxpayers that the first 20% of net taxable income could be at zero tax rate okay which means if you made $100 of the right type of income then maybe $20.00 of that would be at no taxes at all so tax free income essentially one of the biggest myths or misconceptions we see is in the media you hear a lot about this flow-through entity tax benefit flow-through deduction so one of the questions were getting a lot especially now and also at the end of last year is do I need to set up an entity do I need an escort do I need an LLC to take advantage of this you know 20% tax free money and the answer like Brandon mentioned earlier is no you don’t need to have a legal entity is strictly depending on what type of income so one of the greatest things for investors for those of us who own rental real estate who are doing fix and flips even syndications who are any acquisitions fees these all potentially qualify for this deduction or tax free treatment whether or not you have a legal entity and that’s an important point too because we’ve had a lot of clients ask us hey should I change my entity

structure like C corporations they have a 21% pastor rate that sounds awesome well see Corpse are still subject to the double taxation so we’re still saying no this this pass-through deduction that Amanda just described allows you to pretty much get a freebee deduction on your business income and you don’t need to go set up an LLC in order to do that like like Amanda said you can be reporting on Schedule C or Schedule E and still qualify for the deduction so let me put this into like a hypothetical sort of scenario let’s say I as an investor I’m gonna make I don’t know let’s say fifty thousand dollars next year on on rental income just from cash flow and that’s all the money I made next year it’s fifty thousand dollars in cash flow are you saying that like the first 20 of that we just knock off and now I only pay tax on 30 is that essentially the idea essentially potentially so if you’re talking about the key definition is what we’re talking about is taxable income and we all know as real estate investors when you say you you’re making twenty thousand cash flow the reality is you’re probably having zero or very low taxable income because from your cash flow we’re claim Home Office travel depreciation right but assuming that cash flow equals your taxable income then you’re exempt will be correct basically 20% of that 50,000 would be taxed at zero rate one of the reasons this particular tax change or loophole is really beneficial to those of us who own rentals and also again it does apply to people who are in the fix of fix and flip business – so the active real estate one qualify it will qualifying question on this so suppose I suppose using this example of $50,000 does my taxable income now go down to $40,000 or am I still do I still have a taxable income as my tax bracket gonna be calculated based on that forty or fifty thousand dollar number right so from what we understand it’s taxable income minus your 20% deduction so your taxable income will be fifty or I guess gross taxable income would be fifty and then and then you would have the 20% deduction of ten and then you would have the the 40k deduction but that’s also assuming that the $50,000 is the qualified business income so your net operating income after depreciation amortization interest taxes all that stuff so at the end of the day what are we reporting on the tax returns as net income if that’s equal to taxable income then yes yeah you’d pretty much be paying taxes on 40k instead of 50 okay awesome let’s talk about the second point you mentioned earlier which was moving the increase in the depreciation schedule advancing it from fifty percent to a hundred percent bonus depreciation yeah I can just add a little tidbit to that this is very important I’m really glad that we’re doing this podcast today King because it does also impact those individuals who have not yet filed 2017 tax returns so before September I think it was towards the end of September 2017 okay so January to September of last year what we were allowed to take was a 50% bonus depreciation what does that mean well if you’re running an Airbnb business and you bought new furniture for your business you were potentially able to write off up to 50% of that purchase price immediately and then the rest you would depreciate over the life of the asset effective in September of last year as part of the tax reform they’ve upped that deduction now to 100% so in that example if you spend a thousand dollars on furniture and fixture you’re writing off the entire thing and it’s really important for those who haven’t yet filed their tax returns to know that because if you’re providing information to your CPA now I know sometimes we say well you know I bought it some time last year let’s just use middle-of-the-road June well that could mean you’re losing out on the bonus depreciation so you want to be pretty accurate about your dates awesome so that that’s really helpful Brandon you wrote an article maybe three four or five months ago about the be a RRR method which is a buy advertised rehab ret refinance repeat and the reason you suggested that is because you wanted to begin marking the property prior to making some of these repairs so that you could potentially have the option to write them off or I guess get this accelerated depreciation schedule or call expenses does that strategy change in light of this new rule no it doesn’t so that that strategy by the way most of our clients wait until the very very end of the rehab to advertise their property for rent so all they’re doing is they’re saying hey mr. IRS agent my advertisement date occurred after I was done with the entire rehab so what we were saying is just advertise it right upfront then do the rehab you’re not gonna place into service the day that you advertise it because you still have to do a big rehab but at some point along the line we might be able to argue that the property is now in service and now some of the costs become operating costs rather than capital improvements that doesn’t change with the 100 percent bonus depreciation well I guess no that’s that’s not going to change because the the hundred percent bonus depreciation is going to be focused on the capital improvements and in just a

quick note about that we can’t go buy a rental property and deduct the cost of the rental property the reason for that is 100 percent bonus depreciation applies to property with a useful life of less than 20 years so rental property has a twenty seven and a half year period but what you can now deduct is like carpeting if you get your driveway redone if you do any sort of landscaping like say you take down a tree and plants a new one that can all be 100 percent expensed now as well starting September 2017 and going on to the future I just wanted to add to that and that’s a great point Brandon we I do get that a question sometimes from clients you know if I bought a property for $100,000 can I write off a hundred thousand dollars now with the bonus appreciation and I wish the answer was yes unfortunately it’s no however just another kind of layer of strategy some of our listeners might be familiar with the concept of cost segregation and that’s essentially saying instead of Tay saying the whole thing is building we’re gonna accelerate this purchase price of a hundred thousand into carpet flooring and things like that so what you can do is you can combine the two strategies and say well by doing a cost segregation I’m moving some of that into one hundred percent deductible item so that could be an extremely powerful tool as well and on that note I’m glad you brought up cost segregation so anybody with a relatively large property especially if you’re syndicating any sort of deal cost segregation is going to become extremely important for you to take advantage of in the first year you want to apply that cost SEC study to the first year that you buy the property because at that point all the components in the property are new to you so bonus depreciation only applies if the components are new to you so we wouldn’t wanna do it in the second year apply that cost sex study to the second year because at that point we can’t qualify for the bonus depreciation so big big benefit there to cost SEC I guess another point Amanda maybe you have some thoughts on this the 1031 exchange provisions have been modified to only include real friend Amanda’s laughing yeah and she knows where I’m going with this the 1031 exchange provisions have been modified to only include real estate sorry real property so then the question is if I do a cost segregation study where I specifically do the study to identify personal property components that I can depreciate over a faster timeframe since I’ve self-identified personal property and personal property is no longer included in 1031 exchange provisions when I do a 1031 exchange can I roll over the the gain associated with the personal property and III don’t I don’t know I thought I know that we’re waiting on technical guidance to come how to really see but I don’t have a man to had any thoughts on that yeah is Emmie really interesting you bring up that point because even yesterday I was having a conversation with a couple different colleagues I actually won a cost segregation expert another one was a 1031 exchange intermediary someone who Brandon Turner you’ve worked with in the past and you know it’s kind of the three sides of the coin we’re all talking about it from our perspective I think we are an agreement that ideally you know if you had broken out accelerate property we still want that to be part of 1031 exchange but you know as of today’s and unknown that does not mean we should not look at cost segregation though because the reality is even if you have accelerated depreciation breaking it out into furniture and fixture and carpeting what you can potentially do is exclude that from the 1031 exchange right so because if you’re gonna break out property you sell it well how much is the carpet gonna be worth how much is the fridge gonna be worth right those things don’t actually appreciate in value so even if they said that’s not a part of the 1031 are we really gonna end up paying a lot of taxes probably not because youth carpet is not really valuable and just for the listeners that are maybe a little step behind here in the conversation the the reason this is has a lot of an impact is because when you fully depreciate personal property like this you’re not expense you’re gonna have to reclaim that decree XI ation when you go and sell the property and so one way to avoid that or defer that tax is to 1031 exchange just for some folks out there who might have been not following this whole thing yeah recently was so I did a 1031 exchange at man that you’re very aware of that like was at last I don’t know October or something like that I sold my 24 unit property and we cleared a couple hundred thousand dollars in profit but because I’d done a cost segregation study I had to then go and reap it if I if I was gonna pay tax I had to pay all that back and I think we figured I was like a hundred and twenty grand a toe in taxes if I didn’t do a 1031 so then I had to go do a 1031 and I did it and I bought two more properties because of it so anyway there’s a there’s a whole fun story there and maybe I’ll tell it someday here in the podcast but today is not that day so let’s move to the third thing that you mentioned there so we talked first of all the the bonus depreciation and we talked about the other thing but what about the business interest limitations of the guys wrote know

what was that yeah so a lot of this was breezed over even by me initially but after we did a second dive we realized that it’s probably gonna apply to a lot more people than we originally thought so business interests limitations what it is it’s a 30% limit on pretty much your operating income at least for the next four years I think it goes through 2022 so what it is it’s a 30% limitation on what they call EBIT da so earnings before interest depreciation or interest depreciation amortization taxes I think that was it yeah so if I have like $10,000 net operating income before I take into account interest taxes depreciation and amortization I am now limited to a $3,000 interest deduction so 30% of my debt operating income you’re excluded from this if you have revenue annual revenue of less than 25 million so that’s like almost everybody I’m assuming that’s listening to this it’s definitely me so but but there’s an exclusion to the exclusion and that’s probably not the right way to say it there’s an exception to the exclusion that basically says if you’re running a tax shelter then that 25 million dollar allowance does not apply to you and the interest limitation at that point does apply to you and in the past a tax shelter has been a bad thing it’s it’s an entity that’s set up purely for tax avoidance or tax evasion there’s no real economic benefit but in this new code section a tax shelter simply means an entity in which more than 35% of the ownership is held by limited partners so if I’m a syndicator I have probably given away 60 to 70% of my entity to my limited partners my investors all of a sudden that subjects me to this business interest limitation and all of a sudden I’m scrambling to try to figure out how to not be subject to the business interest limitation but this also applies to people that like like let’s say I set up an entity and my dad comes in and he’s a private equity or money guy or whatever but he takes a 50% stake of my entity it’s just me and him we’re not doing anything big we’re buying like a little $50,000 homes if he’s not actively involved in the business he’s limited in that case he’s a limited partner in that case and all of a sudden I’m that entity this small entity is now subject to the business interest limitation so it is going to apply to multiple people not just the bigger the bigger fish can we go through a specific example for maybe maybe someone who’s syndicating on a $500,000 deal with two or three partners can you tell how how would this how would the how would our you make up the numbers how would this apply to a listener for bigger pockets do you want doing me to take that Amanda sure okay so if I like let’s say that all four of us partner and we all owned a 25% stake and let’s say that Scot and Brandon are the limited partner so they’re bringing the money to the table Amanda and I are hustle and we’re flipping and wholesaling and whatever if if Scott and Brandon are not actively involved in the business then they could be classified as limited partners in the business and because your combined ownership is greater than 35 percent this business is now classified as a tax shelter per this section of the code which means that we are now subject to the business interest limitation so any any amount of net income that we receive we now have a 30 percent limitation on on that a 30 percent Interest limitation on the net operating income so we net $100,000 and we have $50,000 in interest expenses well because we netted a hundred K we can only take a 30 K interest limitation so the net 20 K of our interest just carries forward until it can be utilized we’re not gonna be able to apply it this year yeah this is really interesting because you know for larger deals syndication specifically speaking they’re almost by definition the investors are almost by definition going to be passive right if most indications you’re going to have 100 investors you’re not going to take a vote of 100 people every time you fire manager or higher property manager so that does become an issue just by definition of most people are going to be passive I think the trick or the strategy going forward is to look at well how can we shift the definition and have less in expense so maybe in the past you you took on a lot of private lenders bank financing that you generated a lot of interest expense but instead of having private lenders maybe they become your equity partners or you know they give some sort of a profit share so that it’s no longer under the definition of interest expense therefore being limited so you know I think there will be a lot of more planning or new ways to look at how we structure these types of joint venture agreements my brain is spinning I’m thinking already about how to how to get out of this like for example could you do like a preferred equity or

preferred return something like that that way yeah that’s exactly yeah that’s the thing you’re getting you know you’re paying me or I’m paying you interest instead of giving you equity spilitt you’re gonna get more participation on the capital gain down the road or something like that and we’ll have more guidance come out on this right now what we’re telling our clients is just start thinking about if I’m going to engage in a new partnership what how am I gonna write that operating agreement to not clearly indicate that somebody is a limited partner in my entity right so if we’re coming back to what we were talking about where all four of us are partners I’m probably going to Scott and Brandon and saying hey we need to build a paper trail of you guys actively participating in the business at this point and they’re there is there is an exception so so real estate businesses can elect to be treated as a real property trade or business Amanda did you want to touch on that at all right well I mean I like you said it’s just that you can make an election to be excluded from this the caveat then these are limited to certain types of depreciation calculations that’s different from the norm so that is an analysis that you kind of have to go through I imagine I mean for most real estate investors you know we’re looking at accelerated depreciation you know write-off as much as possible so that’s going to be a real thing you have to kind of work the numbers through and say does it really make sense for me to you like to know like that of this limitation so to expand on that if I make an election to be treated as a real property trade or business then I’ve elected out of the business interest limitations but the the downside is that I’m no longer eligible for the bonus depreciation so 100 percent bonus depreciation we just talked about I can’t take that anymore but I can’t take my full amount of interest okay so okay so we just talked about those three things Amanda is anything you want to point out as well so I want to give you like anything that stood out to you is in besides those as influential or impactful for our listeners from the new tax code yeah I think kind of going taking the step further beyond the 100 percent bonus depreciation and there’s also section 179 which essentially is the same thing that allows you to write off a hundred percent of an asset that you’re purchasing in the past it’s always excluded real estate income and under the tax reform for the first time it is now also available to real estate again not available for the property itself the purchase price of the building but it is eligible for a lot of other things that you would otherwise capitalize for non residential real estate and also this is pretty significant for our short-term real estate operators dormitories apartment you know student housing Airbnb so you know similar to the the bonus depreciation the 179 allows a deduction of up to believe it’s a million dollars now another one that I thought was interesting was an opportunity zone credit so that’s a new thing that came out I don’t know if you guys remember many many years ago there was the go zone credit where you’re invested in property you were actually allowed to write off up to 50 percent of the purchase price of a real estate this is something a little bit similar to that now the government is going to identify what they are considered Opportunity Zones based on our understanding this is going to be low-income areas or or errors areas where they’re looking for real estate investors to bringing money to you know to build up the infrastructure and the opportunities though what it’s going to allow people to do is if you wanted to sell your stocks for example you have Apple stocks or Tesla stock since gone up significantly in the past you’d have to pay the capital gains you couldn’t do a 1031 exchange to move it into real estate however if you are interested in buying real estate in the opportunity zone or if you were interested in using that money to in the syndication where the real estate is in an opportunity zone then you can potentially sell your stock and pay no capital gains tax defer it almost like a 1031 exchange as long as you’re reinvesting your money into the opportunity zone areas and the other part that’s extremely interesting for me was that currently it looks like if you actually held on to that opportunity zone asset for over ten years then your capital gains goes away permanently so there’s no more capital gains at all from the sell of your initial asset so I thought that was something very interesting we haven’t really seen any deals come through yet in the opportunity zone because they’re still trying to identify what those areas are but I bet when they do there’s gonna be a lot of real estate investors flocking over there to buy up all the real estate there you go cool yeah I’ve never heard of anything like that at all and that’s that’s fantastic I would love to hear like from you guys after one of the one or two of these have come through of like how that works in practice yeah yeah I mean we’re just hoping those are actually good deals several years ago when they had the go zone well you

know with from the hurricane in the Gulf we had clients that had really really great tax savings again writing out 50% of the purchase price of an investment that’s huge but some of the issues is you had you know not-so-good syndicators and the deals actually weren’t so good so that’s where we’re hoping for this time around good tax savings and good real estate investments so let’s go summarize where we’re at now is there anything first of all when do when do the all the changes that are happening all these tax changes when do they take into or come into effect and is there anything that our listeners should be doing now to prepare or to to better their situation because of them yeah most of them were taking effect January 1st 2018 at this time I mean Amanda might have some specifics I don’t really have specifics we are kind of waiting on technical guidance to come out from the Treasury before we really start like implementing some of this stuff but it’s really just just getting familiar I mean if you’re running any sort of deal management and that’s that’s all the way from the syndicators to the person who’s buying a single-family it’s just getting familiar with the different changes you don’t have to know the nuance like I don’t know the technical details but understanding what a hundred percent bonus depreciation is understanding what the business interest limitation is understanding the pass-through limitation just make sure that you understand what these things are and then we can start we can really start building things out the one the one piece of advice that we give to all of our clients and we’ve always given this advice but now it becomes even more imperative when you’re getting a rehab done just make sure that it’s all itemized I don’t want you to send me an invoice that says kitchen rehab fifty thousand dollars I want to know exactly what went into that kitchen rehab down to the nuts and bolts you’ll have to get like that detail but as much as as much as the contractor will allow without throwing his hands up and getting really mad cool yeah I think on my end I would just say the main thing to do is just keep that line of communication open with your CPA I agree with Brandon Hall you know it’s it’s not up to the investor to memorize all the rules I think even some of the stuff that we talked about today it may or may not be actually finalized or in its final format but the key really is just to keep your tax advisor updated you know you’re buying a property you’re selling a property you’re getting to some kind of creative deal you’re thinking of refinancing or relocating to Hawaii these are things that you you want to talk to your CPA about way in advance so that you can plan ahead you know instead of kind of knowing that you did something wrong after the fact you know what I want to expand on that like that that’s really like my biggest takeaway from all this is like you don’t necessarily need to know all this stuff people listen to that right now a lot of you guys are probably like well this is way over my head I don’t know what I’m doing I know like you don’t need to know all this stuff just find somebody who does know the stuff in other words hire the right person you know like I if I could look back on my career and one of the biggest mistakes I made in my entire investing was I waited until what two years ago Amanda to hire like like at a CPA like to hire you like it took me like forever because I don’t I just was arrogant I was like I don’t need a tax person come on taxes aren’t that complicated but like I would I would recommend people like just put that in your system build that into your team early on I mean even like maybe you’re I don’t would you guys actually say the first property should they have a CPA and obviously there’s some you know you guys are CPAs but do you think your first property’s like when does somebody need that well I mean for me I think it depends right that’s everyone’s favorite answer so I don’t know that you you have you know if you have a first property do you need to have a CPA it really depends on I mean it depends on how financially savvy you are how much time you like to spend researching and things like that you know we have clients who who make maybe half a million million dollars a year you know if they have their one property first property should I hire CPA probably if they’re not someone who’s financially savvy because you know if they’re paying thirty seven thirty nine percent taxes they could be saving a lot even with just one rental property right but if it’s someone that you know maybe as an accounting background themselves not really making a whole lot of money yet and just buying a first property with you know and pretty much strapped for cash then you know you might be able to work through some of these with a lot of great information on bigger pockets or you know podcast that you’re hearing so I think it kind of comes down to the person than what they have going on – yeah to follow up on that point kind of along the same lines if your analytical I would say you could probably handle your first by yourself maybe even your second you just have to make sure that you really catch everything because that we always find that mistakes and people people that have done it on turbo tax rate or even H&R Block and we’re always finding these mistakes what I would recommend that you do if you’re unsure you pull up Schedule E or whatever schedules you’re preparing just google IRS Schedule E pull up the PDF I think you can scroll all the way down to the

bottom and you can see the projected hours that it takes for a non expert to fill this stuff out I think schedule is like 80 hours I don’t think that it would actually take that long for you to do that but just like something that you should keep in mind and then the other thing too like we always get these people that have like really high net worths and then they want to do their own bookkeeping right it’s like man your time is so valuable don’t waste your time doing this just offload it go focus on what you’re doing so in that case I would agree the mandate yeah if you’ve got a high net worth and your times not worth digging through everything offloaded as quick as you can yeah I would I would generally anybody who asked me my opinion I will always tell them like higher higher right Pete the right people right away like I’m such a big believer in that cuz I’ve seen it I’ve seen myself fail at at time and time again and that’s like the big lesson I learned like if I could sum up 2,000 like the last couple years of my life it’s like hire the right people right away so alright let’s move on and we’re gonna actually shift gears here and head over to the the fun part of the show which we lovingly refer to as our fire round it’s time so today’s fly around obviously these questions on the fire on always come from the bigger pockets forums today we’re going to be focusing on tax questions that people in our forums asked and because they knew you guys were coming on the show and so we’re gonna use this time to get some free tax advice of course you are not officially any of them probably none of them CPAs so you know this is just general advice right do you guys have any like disclaimers to throw out there you’re not telling people exactly what to do how does that work yeah I would just say we don’t want anyone to go to jail so before implementing anything do speak with your tax advisor to come from the right action item nice okay well second ah on the record yeah so I house I house hack this is not my question but it is very I can relate to it very much I house hack in my duplex I’m learning that the homestead tax exemption doesn’t apply to my full property since I rent the other side out is there a way I can still qualify for the homestead exemption without getting into trouble with the county and then just basically how do I manage my what are some basic tax tips for people that are house hacking how do we declare income what’s personal property what’s a business expense oh okay so what’s the so if your house hacking what’s the best way to account for everything I would say that you so there’s one list if it’s a duplex one side of is your primary home the other side of is the investment property generally speaking unless you’re going to be selling the primary home portion soon improvements you’re doing to your primary home really does not have a lot of tax benefits right so it’s kind of like if I own my own home and I just want to make it beautiful great that’s a personal preference it’s personal money that you’re spending on now improvements you’re making to the duplex where it’s going to be rented out that definitely is going to be you know we talked about depreciation bonus depreciation maybe even in being it write-offs so it’s really important to make sure you’re tracking those something that Brennan said earlier and we say this to our clients to keep detailed record of what you’re doing we don’t want to see $60,000 in improvements because that’s not very helpful but of the 60,000 you know split out between carpet flooring and all those different things so that your advisor can help accelerate and again this is important on the portion of the duplex that is going to become a rental property okay so to follow up with that the homestead exemption I think is where you sell if you live in a property for more than two years as your primary residence you can sell it for a tax-free capital gain without having to do a 1031 exchange and that up to certain limits how does that work when I go to sell the duplex in a few years so assuming that you did live in that property for at least two years where you meet that the primary home expand exclusion then what you can actually do is you can do a 1031 exchange and a 121 exclusion so we have lots of clients who do that that they’re able to you know defer part of the gang using a 1031 because technically this is a rental property but they can also sell and take cash out of this transaction to the extent that the gang was related to their primary home using the 121 exclusion so it’s actually the best of both worlds and that you can combine those two strategies together that’s fantastic yeah their next question in a recent blog post and BiggerPockets they mentioned that the new tax reform provides certain flow through business income with a 20% deduction which we talked about earlier in the show which essentially makes twenty percent of the profits tax-free does this apply to income as an independent contractor like if you’re a real estate agent or that only w-2 earners or that like rental property income or that all of it if your taxable income not to be confused with your AGI if your taxable income is below one hundred and fifty seven point five K and

you’re single then yes it applies that you just take a 20% deduction on all qualified business income if your taxable income is below three hundred and fifteen K and you’re married then yes the 20% deduction applies to all business income if you run a service based business so accountants attorneys brokers property managers real estate agents and your income your taxable income is above those two thresholds so 150 7.5 and 315 if you’re married then no the 20% does not apply so service based service based businesses get phased out but I do want to add one thing to this one of the questions I think I did read this on the forum unfortunately this thing this the 20% benefit does not apply to w2 income so if you’re someone who’s strictly working a job and you’re getting WT you know let’s say you work for Google you’re getting paid a w-2 income of 100,000 this unfortunately does not apply to you and like Brandon was saying that you know they are I don’t know for whatever reason they don’t like CPAs and doctors and all that so if you’re a higher income service provider then you are either being you know potentially phased out or excluded from this benefit altogether a really interesting real-world example we have a client who owns an assisted living house so he owns the real estate I mean he also has beds and there where you know all their patients stay and so for him you know he has two types of income he has rental income and he has income from providing medical services so that example it’s really important for him to track those two income very separately because there is no limitations on rental income versus theirs you know on the service medical service side it could be faith out or limited based on this 20% benefit all right let’s see next one Scott your turn I forget yeah how about this one I have several homes I’d like to put each of them into an LLC one LLC for each house I would like to have an LLC as the holding company of all the other LLC’s so I can just have one bank account where all the income and expenses would go into and flow out of is that a good structure is that a practical one if that you’ve seen before or do you have any advice on structure for business with this many properties sure so obviously the more properties and the more LLC’s that you add the more complicated it gets if you’re running a series LLC you can likely get away with this by having one bank account in the primary or the the overarching company but generally speaking even if you have sub LLC’s if they’re not series based LLC’s then you would need to have a bank account per LLC and that’s just from a liability perspective that’s not even from a tax perspective you need to show that the business is actually operating like a business so if you’re going to break it all up just understand that it’s going to get really complicated really quick clean you’re gonna have a lot to manage but this is the conversation that you should be having with your attorney because it could be very worthwhile to do just that the other caveat I would add is to make sure you’re aware of all the fees that are required especially for any investors in California as an example California recognizes series LLC’s as different tax payers so in what you describe if you have a holding entity and you have three babies underneath that that’s four entities in California each subject to $800 annual fee so again you know like Brian was saying it could get costly costly and complicated really quickly not to say it’s a wrong structure but again you know from our end I always look at the cost benefit how much benefit are you getting by having all this complexity and what is the cost on a related question on that this is some that I give the advice all the time when people ask me about C I mean LLC is I say talk to your CPA and attorney but then the question I get back sometimes and it’s a really good question who do I talk to first and what do I do if they disagree right like I haven’t start that process I don’t I don’t think there’s a preference in terms of who you speak with first okay what I often recommend for our clients if they’re talking to me first or attorney first and if there’s a disagreement what I recommend is getting on a conference call or a joint meeting because then we can bridge the gap we want I want to know why is it turning recommend all these what are actually the legal benefits and the attorney probably wants to know what is the cost what is the tax issue associated and that there at the end of the day we try to bridge the gap so that the taxpayer can make a decision maybe somewhere in the middle right not having the holding company with 10 subs maybe the holding company with 3 subs or something like that where they get the asset protection but you know not at the high cost of 10 $20,000 a year and in terms of like like who should you talked to first I think it just depends on the personality of your service providers like me personally I like the quarterback the relationship so I like to make the introduction to the attorney and the attorneys know what page I’m on and what work what we’re doing but it could be vice versa too like if you go to an attorney and they like to quarterback the relationship then you start there

the key though is like Amanda said make sure everybody’s in agreement before anything is executed we’ve seen we have seen attorneys execute agreements and and and execute plans with our clients and they have horrible tax consequences and if they would just quote it drop this align literally a short email before they they executed that we would have saved them a lot of money so just make sure that you do talk to both before you do anything all right good answer next one I’ve heard that in the new tax bill that home equity lines of credit and home equity loans he locks and heals the interest is not tax deductible I’ve also heard that it may be in some situations tax deductible or maybe not can we get some clarification on that yeah oh good now we’re about two nice all right yeah so he locks you can still take he locks you can still deduct the interest as long as the loan proceeds have been applied to either rental or business use so that’s the key you can no longer take a HELOC and pay off your student loans and deduct the interest you can no longer take a HELOC and buy a vehicle and deduct the interest you have to use it for some form of business use all right so I can’t so I really want a Tesla I really want to test all right can I go and call my Tesla a business expense cuz I’m you know let’s say I’m a real estate agent or even just an investor I want to drive around look at property than in a new car can I call my tests on that and then take the hundred thousand dollar one hundred percent depreciation then this year can I do that why or why not Oh or can I use a HELOC to buy that Tesla and then do that well there’s nothing that says you cannot Drive a Tesla for your real estate business and if your name is Brandon Turner I don’t see why you would not be required to have one you know there’s nothing that says you can’t drive a Tesla or Mercedes or a Hummer for your real estate business the question is just you know is it is it reasonable that you would be needing to drive a car for business okay so yes if you’re driving it for your real estate for your book for you know any kind of business that you have as a realtor as an agent a syndicator then yes if you took HELOC loan proceeds use that to purchase a business you know a vehicle use for business the interest is still deductible like Brennan said the only one the only time it’s not deductible is if you’re using it to you know go on vacation or something like that before your primary home in terms of the bonus depreciation unfortunately with the Tesla it is not eligible for a 100% right off so you know you mean if you paid $100,000 I didn’t know how much they cost but if it was $100,000 it would not be an immediate write-off for it for cars there are still certain limitations in terms of how much you can deduct every year however I do believe if you were actually going to buy Tesla I do believe there’s still tax credits for federal and the state if I’m not mistaken all right so can we talk about how passive losses from real estate investing can or cannot be used to offset income from other sources like invent other investments or your job sure so we’ve I’ve gotten a lot of questions on has anything around this changed and the answer is no so we’ve still got the if you if your AGI adjusted gross incomes 150 K your phased out of taking passive losses against your ordinary income that’s still all the same so nothing along those lines has changed if you if you if your AGI model technically its modified adjusted gross income but we always just could AGI cuz our clients are like way over their heads if your AGI is between a hundred thousand and one hundred and fifty thousand you can take anywhere between zero to 25 thousand dollars in passive losses from your rentals so if I my rental generates net income of ten thousand and then I take depreciation and amortization and all the other expenses I’ve now got a two thousand dollar loss I can probably take that loss if my incomes below one hundred and forty five ish K what happens though is that if my in if my AGI exceeds 150 at that point those losses become suspended so I can’t take those losses anymore and then we’re talking about strategies that we can utilize to take those losses so they might be buying better deals buying better property that cash flows might be looping your spouse in as a real estate professional or maybe you qualify as a real estate professional might be in vesting in a business as a passive partner so that you receive passive income to offset the passive losses there’s a lot of creative things that we can do there so I always tell people don’t get depressed when you can’t take the passive losses and don’t not write things off because you can’t take the passive losses right you still want to write everything off because at some point we will be able to utilize those losses they get suspended until we can offset them with passive income or liquidation of a rental alright so this

is this is one of the next questions that we’re gonna ask the fire round but you just mentioned it here can you talk about what it means to be a real estate professional and how to qualify for how to qualify as a real estate professional sure so real estate profession what are the most common myths that we hear about real estate professional is people under the impression that they have to be a realtor you know get licensed do open houses you know take people around and that’s actually not true real estate professional is only defined in the IRS code okay and you don’t have to have a license you don’t have to be showing real estate all that means is that you have to spend at least 750 hours actively involved in real estate and you have to be spending more time in real estate than all of your other non real estate income activities combined so you know common examples we see would be like a stay-at-home spouse right we have someone who’s out working and you know kind of a middle high income earner and then we have another person who is a stay-at-home spouse and then they own you know handful of real estate if their income was over 150,000 generally they wouldn’t be able to use new rental losses but now if the non-working spouse decides to take the active role in leading up all the real estate transactions and that’s you know rentals looking for more rentals you know doing wholesale being a realtor anything that that’s actively involved in real estate now if she can qualify his real estate professional then you can use the rental losses to offset the w2 income and any other income of the other working spouse as well so it’s strictly and hours and activities tests and it’s not related to any sort of licensing or you know state requirement awesome all right my another fire around some I mean this is a really good question I’ve always wondered this as well I’m currently looking for my first deal if the deal fell through this could be first dealer million deal right if the deal fell through during inspection can i still deduct all the money spent on the deal a travel inspection cost whatever so we personally would probably capitalize those costs and apply them to the next deal instead of deducting them currently I don’t know if Amanda does anything different but that that’s typically how we would approach that yeah I think generally speaking that’s what we would do if this was a very first deal for someone now on the other hand if you own a rental property you have another one to contract and it fell through generally we would deduct that because you’ve already started your investing business it does come down to a lot of it does come down to risk tolerance level of the particular taxpayer you know if it’s your very first deal fell through but you can show that you know you’re in the flipped business and you’ve made tons and tons of offers already this year and you know you’re someone who’s more willing to take the risk then there are instances where we do deduct at all in the initial year under the assumption that you are able to prove you’ve started actively working in this business so this is actually really interesting point that I’d love to follow up on with more general question about business so like if I start a couple of businesses a year and all of them fail and none of them generate more revenue than the expenses I put in you’re saying that there’s you’re allowed to potentially capitalize some of these expenses into a future business or how does that work for me as a as it may be a serial failing entrepreneur that’s working a full-time job is rating some side hustles yeah no so what I was kind of referencing was was related to rental properties right so if I if I’ve gone through appraisals and inspections and the deal falls through in general we’re gonna capitalize those costs and we’re gonna apply it to the next rental property but if I’m doing like a business let’s say I go to start a consulting business and it just never goes anywhere I can I can deduct those costs it the key is going to be is your business in service so you have to your business has to be open and and willing to accept clients or willing to I don’t know buy flips like Amanda was saying in order to deduct those costs until that point until you place your business into service you can’t deduct those costs so what I could do for instance is say that I’m gonna start a consulting business literally take no action and then I don’t know deduct like a $2,500 a month mind a group fee or whatever subscription or something like that I can’t do that but I could say I’m gonna try to start a consulting business do a lot of advertising build out like my platform and then just say alright well in 2018 I just didn’t get any clients but I can still deduct it all in 2018 awesome interesting all right so let’s uh let’s shift gears one last time and head over to the world famous all right these are the same four questions we ask every guest every weekend any of you guys answer them before but will ask him or ask him anyway number one and we can just go both of you number one what’s your favorite real estate related book other than anything you’ve written Amanda you want to start real estate-related book that’s a hard one can I say Rich Dad Poor Dad that’s not really real estate-related yeah everyone says that’s good okay alright I I’m gonna say Amanda’s book

mine I always stumble with the title but it’s the 26 things you need to know about cash flow whatever rank that long title is Frank Yellin oh yeah cool all right next one awesome what your favorite business book that’s not Rich Dad Poor Dad mine is the 4-hour workweek because I want to be as lazy as possible so that’s actually that’s actually why I asked the question I had earlier because I read the 4-hour workweek probably like first for the first time five or six years ago and then I just tried to start all these online businesses none of them generate any revenue all of them incurred expenses and I just never did anything with the tax implications of that so I kind of missed out there but that was that was what I was thinking of what I asked that question yeah mine is the story brand so I literally just wrapped this book up but it’s it’s an awesome book great book cool all right next question Scott what do you guys do for fun for me I love cooking because I love eating so when I’m stressed out in taxis that I love to just go home and cook a great meal and eat it all by myself no I do you know with my with Matt and my child but yeah that’s what I like to do I crunch numbers another joke bad joke probably accounting joke no accounting joke that reminds Eva you ever watch sparks that was it yeah Parks and Rec you ever watch that show yeah oh it’s like that continual like running joke throughout the whole show of the the CPAs that laugh at everything at it it’s the that’s what my favorite shows because what you do is like be able to force it out right but make it sound genuine and then yeah friends that way anyway mine I just started CrossFit a couple months ago and it’s it’s been a lot of fun and you’re supposed to tell everybody about cross but if you do CrossFit so I’m telling you so yours is the exact opposite of my heart just eating nice try to happens work out there well cool alright last question of the day what do you guys believe separates successful real estate investors from those who give up fail or never get started for me I feel like with two things action and having good systems in place I think if I look at all of my most successful investors they’re the ones who take the advice that’s given whether by as their attorney or other you know mentor someone and then they systematize it so they can repeat the process over and over again yeah so those are two great ones I would just throw on top of that just understanding that failure is a part of any business and not just throwing in the towel the first time that happens just learning from it figuring out how you can improve and roll in with the punches and then continuing on and writing it off more about you guys well I’m bigger pockets calm and also our website which is Keystone CPA calm yeah and for me BiggerPockets LinkedIn I like to take stabs at the corporate world on LinkedIn with my might posts and then the real estate CPA comm and anywhere else yeah anywhere that I’m at social media wise alright good deal well thank you guys but a lot of fun and super helpful I definitely feel a lot better about the whole tax change code thing and hopefully everyone here listening does as well so thank you guys and if people need to get in touch with you they know where to find you everyone listen to this though you can check out the show notes at BiggerPockets com scishow 269 you can leave comments there questions I can’t guarantee they’re gonna jump in and answer your tax questions but you know you can leave them if you really want to and let them know what you thought of the show and of course anyway this since I shared on your social media channels Facebook whatever yeah and I’ll chime in there that both of these guys have written but I think are really good articles kind of just giving a little some overviews of some of the changes for the new tax bill which we will also link to in the show notes here so you guys can check those out all right all right guys thanks so much for joining us today thanks awesome that was Brandon Brandon Hall and Amanda Han two CPAs I thought it was fantastic and full of a ton of information I know I’m gonna use a lot of it and got to ask some selfless questions I wanna go back and listen to again because I need like take some better notes like in fact while we were doing this I like write notes like make sure I do my cost segregation this year in 2000 yeah like okay I got to do this stuff so anyway yeah it’s funny right after we stopped recording they I remember was Brandon nur Amanda asked so do we bill you guys for this timer like yeah just bills for every hour of every single listener of the show you know 150,000 hours or it’ll be great if they

actually send us a bill just to be funny that would be really funny know what’s funny though is that Amanda and Brandon are both practicing CPAs yes who have real clients and also invest in real estate but they give out so much great information and perspective on this subject like just like in the form of a today on our blog and through the content that they create so definitely go check out their their their stuff on the bigger pockets our e-news bug that’s bigger pockets calm /re news blog and you can see them on the right-hand side if you scroll down and click on them and go to their profiles so I don’t know little quick tip here trench let’s say I have a redirect set up you can just say BiggerPockets that calm slash blog goes to the same place oh gosh I’m learning things every day do here takes 20 minutes to say re news blog okay alright good good BiggerPockets comm slash blog there you go that makes way more sense doesn’t it I don’t Josh set up our e-news blog back in like you know 1912 and you know since then you know we’ve cleaned up the site a little bit anyway well now you know the more you know it NBC logo thing in 3rd here anyway alright we got to get out of here well last thing we’ll have there’s a lot of things that a lot of resources that were discussed today on the podcast we will be linking to those things in the show notes of this episode which you can find at BiggerPockets calm slash show two six nine and oh I said that is a sensible URL that makes that is very easy to say it is that’s much easier to say then like re news blogs I showed actually that’s just a redirect as well but anyway and a reminder from the quick tip this earlier on the episode the tax book the book on tax strategies for savvy real estate investors is on sale right now 20% off on bigger pockets that concise store so get it there and you get a bunch of cool bonuses including an entire conversation about how solo 401 k’s work which i really want to talk about that today we did not get time so definitely check that out that hour-long video I did with Amanda is unbelievable you’re gonna be blown away at how cool solo 401 k’s are they’re super cool anyway check it out and with that Scott go get in your nine degree weather and go get some lunch or something yes I’m very hungry alright guys thanks so much for being a part of bigger pockets and we will see you around make sure you leave us ratings reviews tell your friends and you know be awesome so thanks for being a part of BP today for BiggerPockets calm my name is Brandon my name is Scott signing off you’re listening to BiggerPockets radio simplifying real estate for investors large and small if you’re here looking to learn about real estate investing without all the Heights you’re in the right place be sure to join the millions of others who benefited from bigger pockets calm your home for real estate investing online you