Ep. 128 | Top 5 Hacks for Real Estate Investors
Download MP3Welcome back to the Teaching Tax Flow podcast today, episode 128. We are looking at those top five tax hacks for real estate investors. Before we get into this one, of course, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:Hey, everybody. Welcome back to the podcast. If you read the title here, we're gonna talk about some tax hacks for real estate investors. So why bring that up and why make a point of that? Even if you're not a real estate investor yet or even if you have no intention of ever doing it, I promise you by the end of this, you're gonna learn something.
John Tripolsky:Because even though the content in this is really geared around REIs, that real estate investor, a lot of it is actually gonna be somewhat applicable to you at some point your life. And heck, even if it's not, you can at least bring up some, knowledge bombs, drop them at the Thanksgiving table, and sound like a genius. So let's stop BS ing around it. Let's jump into it. Chris Pacquero, welcome back, sir.
John Tripolsky:Are you ready for this one?
Chris Picciurro:Oh, I'm ready. You know that we, spend a lot of time with real estate investors and truly enjoy doing it, on our in our personal lives. And and you're you're right, John. I mean, even if you're not a real estate investor, being aware of this is is very important. We have a lot of content on the tax advantages of primary homestead, ownership, but this is we're talking about people that go beyond investing in their primary homestead as as real estate.
Chris Picciurro:And and the other thing to consider is you might not be in a position or that you want to maybe buy a single family home or short term rental property, but some of these ideas might spur some thoughts about maybe partnering with other people or going into a syndication where you own like, I could say personally, you know, I've invested in syndications where we own mobile home parks, and we've owned, multifamily and apartment buildings. Like, I don't personally wanna buy an 80 unit apartment building and and be worried about the management of it, but it's nice to understand those tax benefits that come along with it. So, yeah, let's jump in on REIs, as you said. You know, we like our acronyms here at Teaching Tax Flow.
John Tripolsky:Oh, yeah. Oh, yeah. It's you know, I mean, heck, you're basing off of, you know, CPA, ARA, all I mean, you got you have half the alphabet at the end of your name on your LinkedIn page. But this one, I remember specifically that we've done a few no. We you've done a couple presentations on this specifically.
John Tripolsky:So, again, if anybody's listening or watching this and you were at one of those presentations, I know one of them, I think, was down in Florida not too too long ago. It might sound a little familiar to you, obviously, but I can definitely say this, that I remember very vividly doing this presentation or, again, being in the audience for it, and there were so many questions around it because people may have heard of these concepts or these hacks, but they really didn't know kind of the the full breadths of it all. Right? Like, they they might know this much, and, again, those are watching. I'm kinda holding my finger up just a little bit, but then how they kinda play into each other as well too.
John Tripolsky:So and which is really tax planning. Right? If you don't plan, then, you know, a lot of this, you can't take advantage of, or you might miss the boat.
Chris Picciurro:Absolutely. It's proactive planning. Either you pick your tax or the IRS picks your tax. It's up to you. So these are our top five tax hacks.
Chris Picciurro:There are I mean, there are tons of hacks, and a lot of these things, these strategies, can be blended or stacked together. Well, I'm gonna just talk about our top five, Paint a picture. Remember, in teaching tax law, we have a proprietary process for tax planning and strategy, which means diagnose your situation, prescribe different strategies, run through the IQ test. Does it make sense for you financially and nonfinancially? And then implement.
Chris Picciurro:TikTok, Instagram, they are really great resources for ideas, but ideas are cheap. Implementation is valuable. That's where the teaching tax tool community comes in, helping you with these implementations. But let's just talk about our top five tax hacks. I'll give you a 30,000 foot view on each one, and we're gonna jump in with with both feet.
John Tripolsky:Sounds good. Let's do it, man. I got my swimsuit on.
Chris Picciurro:Oh, good. Well, John, I appreciate that you wore your your normal shorts and not your banana hammock this time, as a swimsuit. You know, I know you've you've donned that many times when we're on the road and we go to the pool, you know, you like to strut your stuff around. So
John Tripolsky:Oh, well, how do you know that? You know, these these webcams, they're they're very good at, you know, cutting off half of the body. I could have one that says TTF on it in places that we do not mention. So
Chris Picciurro:Well
John Tripolsky:Talk about hacks. So
Chris Picciurro:We'll we'll take that branding. And, anyway There you go. So, like, number and, again, these are in no particular order. These are just the ones we're seeing most popular. First one's gonna be the 10:31 exchange.
Chris Picciurro:So remember, one of the three laws of teaching tax flow. Tax agencies are your involuntary business partner. Tax laws are in to encourage and discourage certain behavior. So if you're in a situation where you wanna sell a piece of real estate, maybe you're repositioning, and you don't need the cash in your pocket, you want to have another piece of productive asset. A lot of times, we find people that are landlords, or rental property owners, and they want to be more passive, they wanna shift their portfolio somewhere else, the ten thirty one exchange works really well.
Chris Picciurro:They can sell their property. They can defer all of their capital gain, redeploy that into different assets, and still get mailbox money and not give, you know, anywhere from 10 to 40% to the to the government. So the ten thirty one exchange is really, really popular. You don't have to be a full time real estate investor. Anyone could do the ten thirty one exchange.
Chris Picciurro:There are obviously and I've done it done a ten thirty one exchange myself. There are obviously rules and regulations. You can't have the the money hit your bank account. You have to use something called a qualified intermediary. There are rules as far as identifying a replacement property and being able to close on that replacement property.
Chris Picciurro:John, we just, in the last few months, did a podcast on Delaware statutory trust, which is a type of ten thirty one exchange. Ultimately, if you're in a situation where you are selling a property and you're gonna have a large capital gain and you don't necessarily need that cash and you don't wanna give a bunch to the government, let us know. We could get you in contact with a qualified intermediary, and then you could start looking at what's called replacement property. Now one thing to consider on 10:31 exchange, this is a this is a commonly asked question. If I if I were to sell a a residential property, right, if I was to sell a residential property, do I have to buy another residential property?
Chris Picciurro:No. You don't. It just has to be like kind. It has to be investment property. So we have several people that sell a residential property and buy into maybe, like I said, a syndication where they want apartment complexes or commercial property or, you know, it could be any type of real estate that's investment that's an investment.
Chris Picciurro:So that gives you a lot of flexibility. You can sell one property. I've had clients that have sold one property and bought several other properties because they just wanted more be be more diversified in in especially not only in asset class, but in geographic location.
John Tripolsky:Yeah. And and anybody that's interested in this, Chris, you mentioned you mentioned a great point. You know, you have to go through a QI. So it's a qualified intermediary. If it hits your bank account, sorry.
John Tripolsky:Too late. You're out of luck kinda deal. And if anybody's interested in the podcast that we've mentioned this on, which has been many, in some way, shape, or form, and also content on our website, YouTube, etcetera, wherever you see something teaching tax flow, just do a search and type in 1031. That's only, like, the number 1031, and you'll get a handful of stuff. It searches everything we have, and it's a it's great.
John Tripolsky:So you can dork out on it. But the I I'll say the one piece of advice I feel like I said on the last time we talked about it is, literally, you have to plan for it. I feel like I'm I'm arping that like crazy now, but you don't wanna have to make that call at the witching hour saying, oh, crap. I'm I'm sitting at the closing table sipping on my sparkling water about to be a happy camper, but, oh, boy, I forgot something. So not that I know anybody that's done that or anything.
John Tripolsky:But
Chris Picciurro:Exactly. You've gotta take care of it before closing. And, John, you know what? I'm gonna challenge you on something. Oh.
John Tripolsky:I'm gonna
Chris Picciurro:challenge you to come up with a cool drop for this podcast every time we use a text related acronym. And you you said QI. So we gotta come up with some type of jingle. We gotta have something. I think that would be fun.
Chris Picciurro:Yeah. And, you know, I'm impressed, John. You dropped a QI on us. This is yeah. I feel like you've really learned a lot through the podcast.
John Tripolsky:I think so. I think so. Well, what's that line that you always say you don't know it until you teach it? Well, I feel like, I've I've taught it to myself on this from, you know, osmosis from working with you on these. But, yeah, it's you know, it's a it's a great hack.
John Tripolsky:It's a great strategy, and there's so much power to that one specifically. And, you know, it's, we'll have fun with some noises. If anything, if anybody's, you know, really wants to geek out, just have to listen to our podcast and make a drinking game out of it every time we drop an acronym. And, I mean, you'll you'll be in good shape by the end of every every episode.
Chris Picciurro:So, yeah, don't don't listen in the car then. Right? Make sure you're taking your dog for a walk or to go in for a jog.
John Tripolsky:Now somebody's gonna get a public intoxication citation. Oh,
Chris Picciurro:man. Well, another one is gonna be numb is the now before I say this, John, you know this is a hot button issue for me, and this is the this is a strategy that is often used too early, prematurely in the in in the life cycle of a business. But for the right situation, it could save a significant amount of payroll taxes. That's s corp election. So if you're in the real estate business, let's say you're a broker and you can have your your commissions paid to an entity or you are a full time house flipper or a wholesaler and you have a profit of a hundred and $50,000 or more and you're self employed, the s corporation election can make a really, really big difference in your tax bill.
Chris Picciurro:It is not a good option if you have buy and hold real estate. So s corp election is number two, often overused. But real story, John, we just in our private CPA practice we worked on a case where we had a taxpayer who has a significant amount of income, well over $200,000 of self employment income in the real estate business. His spouse helps him out with the business, and they have well over $20,000 a year medical expenses that they are getting no deduction for. In that case, we did an s corp election for the business.
Chris Picciurro:We put, we're paying the the the operator, and we're gonna pay his spouse a fair wage based on what we call reasonable compensation study. Yes. We have an episode just on s corps that John made me do.
John Tripolsky:Episode 120, by the way, if anybody's interested.
Chris Picciurro:And, also, we implemented what's called a section one zero five plan so that the business can reimburse employees for out of pocket medical expenses, and now this whole thing is gonna save them, we think, between 18 and $20,000 a year. So in that case, huge savings.
John Tripolsky:Absolutely. And and, Chris, I would say or or you tell me, am I wrong in saying that the s corp election is definitely one of those strategies that's kind of out there, probably the most on social media reels? And I feel like they're almost like hype videos. Like, they get people very excited about it. But, you know, as we discussed in that podcast one twenty, it it it could be a sticky situation, if not really.
Chris Picciurro:Way I'm looking at this, John. You've ever been to one of the I haven't been in a while. But in my younger days, we used to go to all you can eat pizza buffets. Very dangerous place to go if you're China.
John Tripolsky:Wasn't it like a Pizza Hut that used to do those way back in the day?
Chris Picciurro:They had lunch ones, but there was other ones. Most of them have been out of business, actually. But these all you can eat piece I think, is it Cici's Pizza one whatever. You're not a sponsor, so I'm not gonna mention your darn pizza. But here's the thing.
Chris Picciurro:John, you and I going to the all you can eat pizza buffet for $10, you and I are gonna pound down about $30 worth of pizza. Right?
John Tripolsky:Oh, yeah.
Chris Picciurro:Right. You take your daughter, who might is about four years old. Is she gonna eat $10 worth of pizza probably? Probably.
John Tripolsky:Probably $2.50 and a dollar 25 that's gonna be on the floor.
Chris Picciurro:Or, you know, some you know, let's say you bring in someone that just wants some salad in one little slice. My point is, the s corp is like the buffet. If you're gonna if you're gonna eat a lot, it's worth it. If you have a lot of profit, it's worth it. If you don't have a lot of profit, it's not worth it.
John Tripolsky:Great analogy. It's the pizza strategy.
Chris Picciurro:The s corp, all you can eat pizza buffet. I'm gonna I'm gonna use that in the future.
John Tripolsky:Yeah. Number three. A way to make, like, the s stand for saucy or something. Yeah. We'll come up with that.
Chris Picciurro:I like it. Number three is gonna be and we have an entire episode on this, cost segregation study. So what this is doing is it is allowing you to front load the deductions for your real estate that you buy and hold. Okay? I'm not gonna worry about too much about the mechanics of it here, but if you have buy and hold real estate, you might wanna consider a cost segregation study because you're able to take out the personal property portion.
Chris Picciurro:Now that's a that's a mouthful of the real estate and take immediate deductions for it. When does this make sense? You've got three situations. One, if you are a real estate professional status with IRS and you want to offset your active income. Two, if you own and operate a short term rental property and you meet the short term rental loophole.
Chris Picciurro:Oh, but what's that? Well, guess what? You better go back to that episode and listen to it because it's pretty darn good.
John Tripolsky:And that's another one that we've talked about a couple times too. And, yeah, there's some there's some real meat to that one. Huge, huge benefits.
Chris Picciurro:Oh, you're you're staying on the meat lovers pizza? Yes. Thick. Number three. You are trying let's say you are a passive investor, but you wanna generate passive losses, losses.
Chris Picciurro:You could do the cost seg study. Why? Well, not every tax advantaged or tax strategy means that we need deductions today. Creating passive losses could create tax free cash flow in the future, Or let's say you sold when you're when you're passive rentals and you have a big gain, you wanna pair that with a passive loss, and you could hit that cost segregation study on it. So cost segregation study number three, It's pretty much the best bang for your dollar when it comes to tax strategies in real estate.
Chris Picciurro:Now I'm gonna mention this. Maybe I did mention it. I don't know. I've been on a roll today. Tax strategies.
Chris Picciurro:John, they're not they don't like being lonely. You know? They're not they're not Han Solo's. They're they're they want a they want a friend. So when you're talking
John Tripolsky:about tax mustard and ketchup or peanut butter jelly.
Chris Picciurro:Peanut butter jelly. Right?
John Tripolsky:Like water the other way.
Chris Picciurro:Yeah. The the so tax strategy should be blended or stacked together. They don't live on an island. So when I talk about the next one, it's typically blended with the strata the second one I mentioned, which is your s corp election, income shifting. So income shifting to family members, such as a spouse or children, can significantly reduce your overall tax burden.
Chris Picciurro:It could also allow you to provide employee benefits and group benefits to your family, especially if you're income shifting to children. It could be paired with, hey. Let's pay our kids. You know? We've had we have content on this.
Chris Picciurro:Right? It's gotta be a fair wage for the work that they're doing for the business. Okay? But let's say you could pay your children $15,000 a year. They're to but they're not gonna pay much tax on that at all, but then they can contribute to a Roth IRA.
Chris Picciurro:So you're pairing maybe a Roth IRA contribution with income shifting. So if you're operating a a real estate business, shifting income to your spouse or shifting income to your children can make a lot of sense. If you're if you don't have a spouse and you don't have children and you still have a significant amount of net revenue, income shifting to a related entity like the eight thirty one b strategy, which we have an entire podcast on that, could make sense. And if you don't have a spouse and children, you probably have a lot more profit than you're probably the same, but you
John Tripolsky:have a
Chris Picciurro:lot more disposable cash.
John Tripolsky:Yeah. And I think it was episode one thirteen. Again, kind of a shameless plug. I think that was the one thirteen or 14 that we called it or titled it, it should say, should I pay my spouse, where we dive into that specifically. And that was another good one.
Chris Picciurro:So income shifting both to related entities. And if don't have a related entity, does it make sense for you to create one, or to family members? So that's my fourth one. The final one is one that I love to pair with cost segregation studies, Roth conversions. Okay, John.
Chris Picciurro:I'm gonna paint a picture for you.
John Tripolsky:Bob Ross style, heavy treats.
Chris Picciurro:I I don't think it's pizza, but I I can't remember.
John Tripolsky:Let's see. Believe it or not, tuna fish salads. Oh, that's kinda weird. You don't know what we might we won't make me sound like some crunchy person here. We're, let's say let's say steak.
Chris Picciurro:Okay. Here's what we're gonna do, John. We're you you and I are gonna go out to dinner. We're gonna go to a beautiful steak place. You're gonna have a nice steak, and when you go to pay for the steak, they're gonna say, no, John.
Chris Picciurro:I'm you don't have to pay for the steak. Okay. You consumed it. You enjoy it. Yep.
Chris Picciurro:Actually, John, in thirty years, we're you're gonna pay for that steak, but you're gonna pay whatever that steak's price is in thirty years from now. Which we have no clue.
John Tripolsky:That's like filling up your tank and with gasoline thirty years ago. Well, let's say twenty five years ago. Right?
Chris Picciurro:Well, that's what people do.
John Tripolsky:To do it at the pump then than now.
Chris Picciurro:Well, and that's where the argument for maybe putting money away into a Roth or doing a Roth conversion today, paying the tax on your Roth conversion today instead of whatever that's gonna be in the future plus its growth. And we do that all the time. Right? So Roth conversions are great to pair with cost segregation studies. So if you are in a situation where I mean, I've had real situations where we have people making $3,400,000 of income.
Chris Picciurro:They buy an apartment building, etcetera. They get a cost segregation study to come in at a $500,000 loss this year. We've got a bad situation now. Now we've got $500,000 worth of loss and $400,000 worth of income. We're wipe we're we're we're using deductions to wipe out 12% marginal tax rate, and we have $100,000 of deductions that we have to carry forward to the next year, and we only get to carry forward 80% of them.
Chris Picciurro:The point is the cost segregation study created a loss that's now inefficient. What do we do? The first thing I'm gonna do is talk to that taxpayer and say, do you have money sending in your four zero one k, old IRA? Yeah. Well, guess what?
Chris Picciurro:Why don't you convert that to Roth this year, ultimately pay almost no tax on that, and now that money's gonna grow tax free the rest of That's another that's another example of blending the strategies. So Roth conversions, you might not think about real estate investors when it comes to Roth conversions right away, but a lot of times, Roth conversions make sense, especially for people leaving corporate America. Maybe they had those higher w two wages. They get into real estate. Maybe they could be that first year, they're not making as much money.
Chris Picciurro:You wanna do the Roth conversions when you have a lower marginal tax rate.
John Tripolsky:Right. And and everything we talked about here, Christy, I think it's super important, you know, for somebody who is not in this world yet, or maybe is thinking about it, it is a business. It's not just a, you know, like, selling things on eBay here and there. Like, you are forming an entity most likely, and then a lot of these strategies, right, you have to be aware of them. Again, because you it's almost like if you take one leg off of a of a three legged table.
John Tripolsky:Right? It's still a table. It's just, you know, head over heels. It it didn't go the way you want it to, or, you know, you went to the pizza buffet, and all the pizza was gone. Either way, there's a lot of lot of bad examples.
John Tripolsky:But I say that with it being a business because treating it as such really does kinda set the precedence for success. Right? And and knowing what you have going on, and I think kind of a twofold. Right? It helps you kind of plan for ways to obviously implement tax advantaged strategies, but then also, it helps you just frankly grow and manage your business because you treat it like that.
John Tripolsky:Right?
Chris Picciurro:Absolutely. Remember, you ought to pick your tax. If you don't pick your tax, the IRS will for you. So those are my top five. There are several other ones.
Chris Picciurro:We pretty much have a podcast episode on all this. We have YouTube episode YouTube information. But, yeah, if if any of this, you know, piques your interest or if you just wanna be a friend, bring a friend into the Teaching Tax Flow community. Just check out teachingtaxflow.com or jump into the Defeating Taxes private Facebook group. And and, John, selfishly, we get a bunch of our content ideas from our community.
Chris Picciurro:So
John Tripolsky:thank you. Absolutely. In some way, shape, or form. Right? It's either conversations, questions asked.
John Tripolsky:Sometimes it's answers to other questions that were asked. It's really interesting seeing how they come up. So as always, this is a great topic that we dove into. If it wasn't great, we'd kick it to the curb and delete it from our spreadsheet, our little roster that we keep. But, we do have some great guests coming up, and obviously, some great topics still on the on the radar here.
John Tripolsky:And then, you know, here we are kind of that time of year. We're not gonna say that thing that we'd call tax day because it really doesn't exist in our world, but keep planning, keep yourself educated on all the strategies that are out there and all of the really industry tax fed news that's coming down. Be the smartest guy in the room. Anything we can do to assist you by doing that, feel free to reach out. We are here.
John Tripolsky:Anywhere you can search teaching tax flow, you will find us everywhere. Shoot us a message. Shoot us those comments, and we'll see you back here again next week on the teaching tax flow podcast. And I almost forgot. Different time, roughly, different date, completely different topic.
John Tripolsky:Have a good week, everybody.
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