EP #16 - Accountant Explains: Tax Advantages of Real Estate Investing

In this episode, Jacob Sandoval and Mike Magno are joined by Tony, also known as the "CPA Dude," to explore advanced tax strategies and financial planning tactics. They dive into the intricacies of the Short-Term Rental (STR) tax loophole, real estate professional status, and the benefits of 1031 exchanges. Tony offers valuable insights on optimizing tax savings and clarifies common misconceptions about LLC ownership in the context of tax planning. Throughout the discussion, listeners gain practical advice on leveraging tax laws to their advantage and maximizing financial outcomes.

Connect with Tony!
https://beacons.ai/thecpadude

FREE Real Estate Investing Tools & Resources:
https://www.cashflowsaga.com/links

Join The Waitlist For "Rental Property Investing 101":
https://tinyurl.com/k4vpbd5u

Connect with Jacob:
Instagram: https://www.instagram.com/cashflowsaga/
Website: https://www.cashflowsaga.com/
YouTube: https://www.youtube.com/@cashflowsaga
Twitter: https://twitter.com/cashflowsaga

Connect with Mike:
Instagram: https://www.instagram.com/realtormichaelmagno/
Website: https://themagnogroup.com/
YouTube: https://www.youtube.com/@realtormichaelmagno

Transcript

Nancy: 0:00

This is the Financial Freedom Fighters Podcast

jacob: 0:13

Welcome everybody to the financial freedom fighters podcast. I'm your host, Jacob Sandoval. I have with me, my cohost, Mike Magno, and we have a very special guest today. He's actually my CPA, and we are going to dive into the all important world of taxes because it is not how much you make. It is how much you keep so I would love to introduce tony my cpa aka the cpa Dude on instagram creating fire content tony say what's up to the people?

tony: 0:45

Uh, what's up? What's up? Thanks for having me here.

mike_pt1: 0:47

Absolutely. Yeah, Thanks for joining us.

jacob: 0:49

I'm, very excited about the the value that you're going to be able to deliver to our audience today and Taxes is just one of those things tony and and you know this, you know, you live and breathe this but it's one of the areas that Is the least well understood in the real estate investing space. Um, and it's, you know, quote unquote, maybe the least sexy, at least to the beginning investors, but for the people that are doing this at a high level taxes is all important. So why don't you just introduce yourself, Tony, to, to our audience and tell us a little bit about the origin story of you and the CPA dude. And, and why don't you just jump into that?

tony: 1:22

Yeah, for sure. For sure. Yeah. No, it's once again Yeah, I appreciate you having us here just you know, helping spread the message of taxes since they don't teach us in school But yeah, it started real young. I was uh, 11 years old working at my mom and dad's chinese restaurant So, you know child labor at its finest Uh is Typing up tickets, adding that up. And then that's kind of where the numbers part kind of came in where it's like, Oh, okay, cool. You add up tickets on your favorite thing of the day was, you know, end of day counting the cash. So that's where the love of money came through too. So I was just like, man, when I was like sad, my mom would be like, Hey, just go count the register. Like you just like count cash and have some fun. So that kind of just snowballed into, you know, she kind of taught me payroll taxes. Like it was like, Oh gee, before I software came out, it's just, you pull up the table. You know, the book, the person, how much they made, the withholding. So I learned how to do that OG and then also sales tax. That was like calculated OG style. So everything was like grassroots. So then that kind of just set up the frame, just like, Hey, go to college and, you know, probably head towards that direction. But, you know, classic brainwashed Asian. Um, you know, I thought go be a doctor, like have a good doctor. And yeah, I think I went, went first year, uh, university of Minnesota and I think I got like straight B's or something. And my dad was like, Dude, you're doing nothing with this. Like, so he pulled me out and, uh, then he used, I just ran one of his restaurants, bought a restaurant. And I just, uh, ran that restaurant and then did that for like a year and a half. And then my mom was like very big on education. So then she was just like, you got to go back. And I was like, all right, you know, I was just, Asian sons do whatever mom wants. And then I went back and then at that point it was like, Oh, accounting makes sense. So then did the whole accounting thing doubled in like information systems just cause I like tech and then did the classic like work at KPMG, you know, brainwashed into that whole spiel. Um, amazing marketing, amazing pyramid schemes, my friend. So,

jacob: 3:25

I was

tony: 3:25

yeah, yeah. So. Yeah, you know how it goes. It's like, Oh my God, I made it into big four. And then you're like working 80 hours for like 54 grand. I'm like, damn, what am I doing? So yeah, we had a good coworker. Um, he was just like, dude, I'm pretty sure like how many hours we clocked divide by 54 grand. We make less than like minimum wage at McDonald's flipping burgers. And then we're like, lovely, lovely. So yeah, that transpired. Um, and I was just like, all right. And then moved to the Bay on 2017. And then, um, yeah, that 54 grand wasn't going to cut it. So that was just like, I need to find some more money just to survive. So then went to a real estate midsize firm, uh, Novogratic, and then they were specifically focused on real estate. So that was fun, picked up a lot. And then also I've been kind of just doing my parents properties, manage all their properties forever since I was like, So this guy got used to real estate investing, doing all theirs, handling all the management, all that crap. And then, yeah, just did Uber, DoorDash, did the whole tech scene. Uh, got to taste some of that while you're out here. Just, I love Kool Aid apparently. So you'll go buy into that big Ford dream, go buy into the tech dream. And then it was just a realization of. Yo, this isn't gonna cut it. Just, um, I was working like 12 hours a day, like six days a week. And then sometimes they were like, Hey, random weekends or nights just get called in. I'm like, Damn, there's like no sense of, um, space here. And then I was just like, nah, I can't do this. So I started up the firm, uh, went full time in 2021. So yeah, just spun up the firm CPA dude. Um, primarily that my fiance thought of it, the logo was her, she drew it up. The name was her, and then it was just very like, My personality on brand of like, cause like taxes is this like, it's boring. Like, how can you translate this layman's terms? Cause you'd be like, Oh, section 179, section 121. Like, Oh, that's all great. But I'm like, bro, does anyone know what this means? Like, what does this mean? Um, so my whole thing was this very like kiss, like keep it simple. Stupid is my method. And it's like, Hey, what's the TLDR. Here you go. Get it done. Save some money, you know, stay audit ready. And you're good to go. So, spun that up in 21. Uh, we're up to 4, 5, 6, 7, 8, 8 now. So eight employees, um, serving across all 50 states. So we had to send a new manager start today. Uh, he came from pwc, so uh, suckered another one out there out that big four scheme. So yeah, we got that going on now. And then primarily. The firm's just built, been built on like client feedback, just, Hey, like slow responses, not helping them save on taxes, not educating them. So in terms of building the firm, it was actually quite easy because they literally told you what they wanted. So we just turned into like a massive, like tax advisory firm, um, really saying, Hey, year one, we got to work with you just to fix up your situation. Um, because normally people think, Oh, I go to a CPA, they're going to look out for everything, but they don't. All they're doing is just like preparing your taxes, which is important. Now you got to do it right. But they're not really looking out in the future since tax plan has to happen the current year. It can't really, once the clock struck like 1231, you're kind of SOL. So that's what we do now. And then just help the folks out saving money and getting them audit ready. That's been a big focus this past year, just because the 87, 000 revenue agent hire. IRS is not pulling money out of their pocket for that, nor this government. So they're definitely going to be just, you know, taking that out of audit money. So that's been getting folks ready on the audit side. So that's been the big thing. And then yeah, of course, filing taxes. And that's where we've come to today. No.

jacob: 7:00

Yeah. Yeah. Yeah. Uh, Tony, you've, you've had an amazing, amazing journey. And I must say that the branding of the CPA dude was absolutely the reason that I decided to kind of reach out to you because It's just incredibly, incredibly confusing and uninspiring when you're kind of stressed out about taxes and you're like, I don't know who to go to, especially when your taxes get a little bit more complicated. And we can talk about the right time to kind of find it a legit CPA. But when it's like every single tax firm has the same branding, the same type of like vibe, you're just like. This, this, this sucks. And so when I saw the CPA dude, I was like, okay, okay, this is awesome. So I just have to commend you on the branding. Well, I guess your, your fiance on the branding, because that definitely stood out to me and it was a hundred percent. The reason that I decided to kind of reach out to you.

tony: 7:55

Oh, nice. So awesome. It's great feedback to know. And I'll definitely give her the kudos there for sure.

jacob: 8:00

amazing. So let's take a step back, Tony. And, um, this is a podcast of people that obviously understand the power of real estate investing. otherwise they wouldn't be listening to Mike and I ramble on here every other week, but let's just take a couple of steps back. Why should real estate investors or aspiring real estate investors, why should they really care about investing Taxes,

tony: 8:21

Oh, yeah. So I'd say there's a couple things of why you should care about the taxes and how it relates to real estate. So one, the sad thing is nothing's guaranteed but death and taxes. So you're going to have to pay taxes till you die, sadly. So that's like, hey, it's going to be an expense. It's always going to be a haircut anywhere from, you know, probably, You know, for your listeners, probably well, easy 20 percent plus of everything they make, right? So every hundred bucks you make a 20 percent is going to be gone at least to the government. So that's number one of like, Hey, how can you shield your money from this biggest, biggest expense you'll have? So it's always going to be recurring. And we all know time value money calculators, you know, Hey, put a hundred bucks in the S and P 500, watch a girl work 40 years. Think about the same for your taxes, pay 10 K plus over your, you know, 78 years if we're going statistically how long you live for. And that's a massive expense. So, well, minus 18, cause you probably don't work till you're 18. So 60 years. So that's going to be number one, but number two for real estate specifically, it's just how the tax code is written. So I always keep it simple and tell folks the tax codes written for real estate, small businesses slash business and charity. If you're not really playing in those three realms, those three sandboxes, you're, you're, you're off the field. You're not even competitive. You're just sitting on the sideline, just waiting for Uncle Sam. Reach out his hand in his pocket, take your taxes and see you next year. So if you're not even playing in the right sandbox, I mean, that, that's number one issue. So using the code, you know, to your advantage, like what's, what's the one saying? Don't hate the, don't hate the player,

jacob: 9:55

Don't hate the player. Hate the game.

tony: 9:57

Yeah. Yeah, exactly. So if the game's written, you know, for real estate, let's keep it that way. So that's number one, like, Hey, which one can you use? And then within those three buckets, actually, it's always those, obviously those are your big three. And then within there, it's like, Hey, like deferral and acceleration. Those are your next two parts. If you're like just road mapping it, you better land on those maps. And then within that, how can you use those two strategies alone? To use it. So real estate side, it's going into it a little bit more is now that you know, that the tax code is written for real estate investors, real estate owners of any sort. It's like, what can you do? And the biggest thing that I think a lot of folks overlook is it's actually tax free income. No one realizes they want a little bit more. They're always squeezing. I get it. I'm Asian too. I like to squeeze the hell out of everything. It's like, I need double benefit. But you know, the main thing is. It's going to be tax free income, generally speaking, because of depreciation. And then depreciation is simply put, you don't get it right off your mortgage, but you know, the principle of course, but instead it's the tax version of your principle of your mortgage. So using that layered in with strategies of like cost segregation, accelerated depreciation, then bonus depreciation, Now you're speeding up the timelines. So that's why, you know, real estate is such a great vehicle. It's just, you're going to get all that rent, got money in the bank, but uncle Sam's not going to take that 20 percent again this time. So that's the big part of like, Hey, you just got to tap into it. And it's going to help you out tremendously. I mean, even if you don't invest, get a home, right? I mean, primary, primary residence, you know, even if you do nothing nine to five, I go home, watch Netflix, at least you'll get property taxes, mortgage interest versus paying rent. So even if you just own it, you're not an investor. That's still great. You know, you're still taking advantage of itemized deductions because, you know, from the tax world, you either take the higher of the standard. Or itemized. So the only ways you're going to itemize ever since 2018 is if you have a house. Like they pretty much like ruled because the standard deduction is so high, there's no way you're really going to itemize. I always tell folks either you own a home, you donated, like there's no tomorrow, or you had a horrendous medical expense that year. Other than that, ever since 2018, you don't really itemize.

jacob: 12:28

Just take the standard.

tony: 12:28

Yep. Exactly. Like 80%. I think like maybe the report was 75 percent is really bad because they capped state and local taxes. So us California folks got played

jacob: 12:38

Yeah.

tony: 12:39

all know like, you know, state and local property taxes is probably easy. 10 K. Then if you add in your state and local income taxes, anything on top is gone. So that 10 K cap really killed you unless you own a business, then you can have a pastor entity tax election. But yeah, it's just, you know, I always say your intro level to start. That's But then because a lot of the tech strategy and planning that we do, sometimes it's just accountability. They'll come to us high W2. I'm like, dude, you need a house. Like if you get a short term rental, great. If not get a primary, but I would say if you get a primary, you know, can you live with some strangers and house hack it? Or is the lot big enough, build an ADU. It's always like pushing folks to get more strategic about their taxes and how you can really. Utilize there's so much you can do like STR like is great for tax benefits, you know, mom and pop deduction. That's always a big one to business owners. Grouping elections are great. Like there's just so many angles you can hit it with. It's just which one works for you.

jacob: 13:39

Yeah. So, Tony, you just dropped so much amazing knowledge in that brief stint. I want to emphasize a couple of things. So, one, you said, don't hate the player, hate the game, which I love that use of the phrase here, because A lot of people, they hear really rich people, really wealthy people say I don't pay taxes. I don't pay taxes. And I think the instinct for a lot of people is to get mad at that, you know, to be like, Oh, well, they're taking advantage of the system, et cetera, et cetera. But don't hate the player, hate the game. Tony said it. The government has written the tax code to favor business owners and real estate investors. That just is what it is. And we can get into reasons on why we think that is, but. Instead of kind of questioning that, just understanding the rules, getting linked up with somebody like Tony, who's not just going to be filing your taxes, but that's going to be helping you strategize to say, Hey, let's keep A little bit of this money that you work so hard to make, you know, I work in tech, a lot of you listeners, you probably work in tech as well. And every single year we climb up that rung and we pat ourselves on the back and we say, Oh man, we're making like, you know, multiple six figures and it's amazing. And then you look at the tax bill at the end of the day, you're like, hold on, wait a minute, wait a minute, wait a minute. This is a, this is not fun. This is not cool. And so your reliance on your W 2, this is another thing that I kind of pulled from what Tony is saying, and I think they talk about this in Rich Dad, Poor Dad, or Cashflow Quadrant and things like that. The W 2 is the worst deal from a tax perspective. It's the worst deal. It's the least tax advantage type of income there is. that's just important for you to know. And that's okay if you're in your W 2. I'm still in my W 2 and that's fine. You know, we have to do that. As you get older. the income that you rely upon, you should be shifting that to more tax advantaged income, like real estate, like small business. if you're somebody that makes, let's just say like a hundred thousand dollars in your W 2, Versus let's say you make a hundred thousand dollars in just rental income from real estate, right? Those two things from a tax perspective are not going to be the same, are not going to be the same in terms of how much of that you're going to keep. And so all this to say, this is a different game and people like Tony are helping you play that game. And if you ignore that game, it is to your detriment, right? Because the rich people are playing this game. So let's not get mad. Ladies and gentlemen, let's play the game and let's let people like Tony help us play the game. So anyway, Tony, I wanted to kind of emphasize that point because I think That was the big aha moment for me was I, I'm just not playing the right game and just continuing to climb my way up the corporate ladder and continuing to pay more taxes. It's not actually, it's not getting me to the, to the end goal in the most efficient way as possible.

tony: 16:27

Oh, yeah, definitely. It's not like it's your fault or anyone's fault. It's an education's fault. I, if I had to point a finger, don't like to point fingers, but I'll point this one at their education system is why was there never a tax course, never a tax class, you know, in K through 12. And then even, Hey, we got electives or like generals that you have to do in college is why didn't we teach any of this? It's everyone has to pay taxes. So that's kind of like one, um, Big thing that's always like, Oh, if they had a knowledge, you would know to do better. So it's like, no one's fault. It's like you kind of after a while we work so hard, right? Cause if you're working 60 hours a week in tech, always on all it never off. And then you're like, wait, 30%, my checks gone. And then you're like, wait, 30%, my checks gone. Every time it kind of hurts. It adds up. It's like this hamster wheel doesn't stop. It's a great hamster. When you keep running, it produces cash. But just the day you stop running, it's done. There's no more cash coming out of it.

jacob: 17:24

A hundred percent. A hundred percent.

mike_pt2: 17:26

Yeah, so I saw this post the other day and it just, I, I look at it and I just laugh. It was talking about the taxes, right? It says, you know, everybody's got to pay everybody else. I don't, I'll paraphrase, everybody has to pay taxes. But then. You have to figure out what you own. Right? Like you say, okay, well, I have to pay taxes. Well, what do I owe you? Well, that's, we don't know. You have to tell us what you owe us. Like, like, really? Like, come on. This is, it's, it's such a ass backwards, uh, system. And, you know, I have this conversation with people when they obviously are doing consults with me about investing in our market. And I go through Not a lot. I don't go real in depth, obviously, because I'm not a CPA and I can't give advice, but, you know, just letting, giving people the perspectives to look at it, right? Just, just the little things that, that they can get, you know, between the, the depreciation on, you know, a residential property or, um, the mortgage interest. Like people don't think about that. Cash out refinances, right? Like there's another one where, you know, you can, it's a loan. So it's, it's, you don't get taxed on it, right? That's the big, the big Robert Kiyosaki. That's what he always talks about. I've got debt. I've got, right. Wasn't there a quote out recently, I have a billion dollars in debt. It had the internet, uh, uh, on fire.

jacob: 18:41

all, all of the non business non real estate people like took that headline and kind of ran with it. And I was in a, I was in a Barnes and Noble. It's really funny. And I think, I think Robert Kiyosaki is, you know, he, he's been doomsday for the past 20 years. And I think he's a little yeah, he's a little bit wacky and he's an OG in the real estate investing space, obviously because of rich dad, poor dad, but I was in a Barnes and Noble. And uh, somebody was like, you know the guy who wrote, cause we were like right next to RichDadPoorDad. There's these two random people behind me there. Oh, you know the guy that wrote RichDadPoorDad? He's like, so much debt, he's He's terrible with money. Like, I can't believe that people are reading his book. He's terrible with money. And I was just like sitting there and it was early.

mike_pt2: 19:18

that, that,

jacob: 19:19

early in the morning. I didn't, I didn't feel like getting into a random argument with people in a Barnes and Noble, but this is, this is part of it. Like. This is like a massive gap to your point, Tony, right? A massive gap in understanding of just the system, right? Yes. Robert Kiyosaki is a billion dollars in debt, but he probably has all that debt because it it's helped him acquire much more value in assets and it's generating cashflow to service that debt. So that debt is not the same debt as people think of debt,

mike_pt2: 19:49

The missing piece of that headline is the fact that that, that billion dollars in debt is on 3 billion in assets. Or some, you know, some, you know, some asinine number of, of, even if it's a, even if it's 50 percent of debt, right? He's still got 2 billion in assets. Now, how much cash flow is 2 billion in assets thrown off every month? I mean, come on.

jacob: 20:09

Yeah. So, so, so the random Barnes and Noble people, you know, just don't, don't list, don't listen to the clickbait articles and, uh, until you do a little bit of research. So Tony, let's go a little bit deeper on some of the tax concept. We talked a little bit about this, but I think that I'd love for the listeners to kind of understand this when we say, Oh, real estate is the most tax advantage asset class around. Let's depreciation, but. What is depreciation for the listener and how exactly does that kind of shield income? Cause it's a little bit weird and counterintuitive if you don't really know what that concept is.

tony: 20:41

yeah, yeah, yeah, no, it's a really good concept to like dive into. So generally speaking, like in the normal consumer's mind, I got 2, 000 of rent, got a mortgage of 1500 bucks, and then I got a profit of 500 bucks. And then come tax time. They're like, all right, cool. I paid 1, 500 out, got 500 of profits, a 6k a year. However, they always think that whatever I pay for my mortgage, that's how much I get to deduct. And in the tax world, there's, you know, there's a thing called book the tax differences. So on the books, you made 500 bucks per month. However, on the tax books, There's a difference in terms of, Hey, depreciation is actually a further breakdown of your mortgage payment. So depreciation, you can real, this is how you can get some general, generally speaking, everything's defaulted, single family home, 27 and a half years. So buy your house, take out your land, divide by 27 and a half. That's how much you're going to get equivalently, you know, similar to a 30 year mortgage. So it's pretty close, right? 27 and a half years, 30 years. However, on a tax side, depreciation is a non cash expense. So it's not real money. That you have to spend in order to get the deduction unlike everything else in the world. There's yeah, what other non cash expenses can there be? There's phantom income if you have, you know, some stock options if you're in tech. That's the opposite. So we're talking deductions here. So what you can do though is you can accelerate A lot of that depreciation. So instead of dividing by 27 and a half years, can you divide more five years, seven year, 15 year? So that's going to speed it up and then you layer in bonus depreciation and take the whole shebang or 80, 60 percent as of today, as of right now, until they pass it, hope, pray to God, they pass it and goes back to a hundred percent, but it's just saying, Hey, let's just take an example, 500 K home. And you have 100k of land value. So you have 400k as your depreciable basis. So if you have 400k divided by 27. 5, pretty slow. But if you have, you know, you can strip down that 400k through a cost segregation study. Say 100, 000 of that is considered 5 year property. Now, you can take either 20, 000 in year one, or you can take the whole shebang or 60 percent as of today and then take 60, 000 instead. But say, for example, you paid, you know, barely anything down. You paid, you know, total 30, 40%, you know, 30, 40 grand down on the, on the property. So the big thing is that you can speed up and it's always a Rob Peter pay Paul type of game. So you have to pay Paul one day. Don't get me wrong. It's just, where's Robin Peter for a very, very, very long time. So the big part is that, you know, big part on STRs is that 500k home, generally speaking, you'll probably see about 80k of a tax, um, extra depreciation, 80k times 30%, it's about 24 grand. So more or less all your furnishings just came in for free. Especially in the STR space. So all you're out is really your down payment, 500 K times two was a hundred grand. So you're a hundred K out and then hopefully it's cash flowing a lot more, but you're gonna get such a big tax refund on it. So depreciation, how you use it, you can use it. Number one, straight line, number two, accelerated or number three bonus. So those are your big three things on why depreciation matters. Cause it's a non cash expense that you can manipulate. So hard into making yourself look extremely poor and pay, you know, relatively low to zero taxes, depending on what status you have, which loopholes are you using, but it says money. You don't have to spend to get a tax benefit at the end of the day.

jacob: 24:19

yeah, absolutely. And this is one of the concepts I think is just really difficult to understand because it is very counterintuitive to have a non cash expense. So just to kind of emphasize again, what Tony saying, Your house is not depreciating in value the way that it kind of sounds when you think of when you, when you think in depreciation, you're like, oh, my house is not depreciating though. It's going up in value every single year. So how am I having this non cash expense? No, that's just the rules, right? The government is saying you have a physical building, a physical structure and physical structures. You know, eventually wear and tear over time. And that is an expense you get to book, but it's a non cash expense that you get to deduct against real earnings. So even though on paper, like Tony was saying, you're making that cash flow. If you're shielding it under this non cash expense to the government, to the IRS, it looks like you made, you didn't make that money at all. And then like Tony said, you can get a little bit more advanced with how you use that. With the bonus depreciation. So let's double click into that. Tony, can we talk about the short term rental tax loophole and how you actually take advantage of that as a high earning W 2 worker? Because. Typically, typically, right, Tony, if you are a high W 2 earner you're pretty limited in what you can use in terms of real estate to offset your W 2 in terms of the tax deductions that you can actually use. But there is a way, um, through the short term rental tax loophole. Can, can you talk a little bit about that?

tony: 25:48

Yeah. Yeah. So yeah, high W2. This is like, One of the few things you can do. So like when you're W2, like one hand's tied behind your back, this is like one of the few like rabbits you can pull out from the hat that are legal. So a short term rental loophole is essentially it goes back. I think it's like 1980s code, 1986. I think that's when tax reform happened and it changed how like bed and breakfasts worked. So by nature, by definition, all rental income is considered passive. and passive losses cannot offset active income. So how can you make your real estate active is the name of the game. So part of the code changes is that if you're running a bed and breakfast, so if your average stay is seven days or less, so if you just have total days divided by total stays, so you can have like a couple 30 day stays and then probably just have a 31 days, days or two days, days, as long as that number is seven or less, They see that as, hey, people are leaving, going in, out of your property, seems like bed and breakfast. And then number two is that you actually have to work at it. So there's like seven different prongs. Uh, most people either meet the hundred hours and no one else works more than you. So essentially you do everything. Or 500 hours and someone else can work more than you, a. k. a. property manager. First one you can't, second one you can. And then there's this third gray one that says you substantially performed all services. Uh, but there's not an hour part. So, but you have to just showcase that. So now that they see that you're actually working on the property, now it's all considered active. So the short term rental loophole, what it allows you to do is that, you know, Airbnb, those days are going to probably average out seven or less anyways. You're going to go there, clean it, talk to all your guests, actually do the real work. You actually have to do the work. And then what it's going to do is it's going to change that default passive to now active. And in year one, there's just so much cost from furnishings to setting it up to, you know, you're buying it and then you can use bonus depreciation on it. So like on that 500k example, you buy a house for 500k and you accelerate 80%. Um, or 60 percent as of now, I'm just going to pray to God it goes 100, but you get, you know, a big, large benefit, you know, looking from 80, you know, 60 to 80, 000 of accelerated depreciation. And then that will actually reduce your W 2. So for example, if I rewind and cheat, uh, go back to 2022,

jacob: 28:15

Yeah.

tony: 28:15

someone in the Bay made a 205. as w2 pretty standard right after rsu's in the bay at this rate which is sad right 205 anywhere else in america is like jesus give me that um 205 and then their str because of still 100 bonus depreciation and they made improvements improvements are better because you get to fast track that then they picked up like a 215k loss So they paid zero in income taxes that year, got about 20 something, 20 something grand refund. So that's kind of just how powerful it can be, especially once it goes back to 100 percent or pray, knock on what it does. So 200 K may, may, you know, pay nothing on the federal level state. Of course they got killed, you know, still California's, California, they're going to get their money no matter what. So they still paid, you know, 15, 20 grand on state side though.

jacob: 29:04

Guys, this person made over 200, 000 in salary, W 2 salary in the Bay Area, California. They did bonus depreciation, accelerated depreciation on their one short term rental claimed

mike_pt2: 29:18

Ha ha ha.

jacob: 29:24

tax loophole, I think loophole is even the wrong word because it's legal to do this. they are, they're wiping out their tax, their federal tax liability entirely. Entirely where they otherwise would have paid what, like, more than 30%. So,

tony: 29:38

easy.

jacob: 29:39

yeah, so this, this is, this is insane. This is insane. And this is exactly why I'm going to do SDRs this year. Well, I don't know, Tony, maybe I should wait, right. For bonus appreciation to come back to a hundred percent. Well, on that note, Tony, can you do a cost seg at any point in time? What if you own the property for a few years and you're just doing standard kind of depreciation, but then you then were like, Oh, I learned about this. So like, can you do a cost seg at any point in time? How does that work?

tony: 30:05

Yeah. So the cost segregation study, you can always, you can do it whenever you want. It's generally, I'd say number one, if you're doing a short term rental loophole, do it that same year just so you get your tax benefit. You know, dollar today is worth more than a dollar tomorrow. Or if you just learned about it and you've been operating like this for a couple of years, that's fine. You can still do a cost seg, say your year three of operating your Airbnb. Then you just have to do a change of accounting method. And this is a little bit more paperwork. It's kind of a headache, but you're still, I mean, just shove it to your CPA. It's not your work. That's not your job. So that's totally fine. Or the year that you quit your W 2 and turn real estate professional. There is, um, one, this is new. And there's some creative folks out there for sure. So COVID happened, right? Remote work. Let's be honest. No one works like the real 40, right? You just just show up, talk to your coworkers for an hour, go get the free food and the snacks for an hour, maybe work six hours. And then half of those are not real hours.

jacob: 31:09

I think, I think you're being, you're being generous. You're being generous with that. So,

tony: 31:29

yeah, yeah, yeah. So remote work happened and we all seen the articles about the overemployed, right, where you go get two, three, four W 2s just cause you don't have that much real work at your day job. So I've had some creative folks where they are W 2. And they're like, Hey, can I take the real estate professional angle? And I'm like, well, the rules are, you know, over 50 percent of your time, more than 750 hours in the trades or businesses. And I was like, you can probably do some 50 hours cause people are willing to work, but generally most people always fail on the over 50 percent of your time. And then dude actually doesn't work like that much during his W2. I'm like. Hey, whatever floats your boat. And then, uh, so we're going to attack the angle of taking them as real estate professional status. Of course, we have the full logs to support this. We're not taking any like frivolous positions because the data shows it. So I'm like, all right, cool. Like log, how much you worked at your W2 log, how much you worked on your rentals and single person too. So generally you always fail on real estate professional status, but yeah, ever since COVID. It's a different approach to doing taxes since some jobs actually, you don't work, you know, 20, 80 hours, you work apparently, you know, less than, you know, 10, 40 hours or something.

jacob: 32:48

yeah, so you kind of mentioned something, but I want to, I want to talk about a little bit more specifically. So. Can you talk more deeply about reps or real estate professional status and, and, and why that kind of affords you a different, you're just viewed differently into the terms of the IRS and the flexibility that you kind of have with real estate professional status. And I'm sure Mike knows pretty well, pretty well as well being a real estate professional, but yeah, why don't we go a little deeper on that?

tony: 33:12

Yeah. Yeah. So, uh, the short term rental loophole is the ugly duckling. Of real estate professional status. So short term rental loopholes. Great. W 2 I don't got that much time. I still want some tax benefits. However, if you upgrade into real estate professional status, so this is like a tax status that you can get. And I say it's like the unicorn of all statuses. So you have this unicorn and there's a lot of hoops you have to jump through in order to get the status. So essentially what it is is that it allows you, like I said, um, Earlier was that all real estate rental activities are considered passive. And one of the ways to unlock it was short term rental. Number two is through real estate professional status. So now you can turn all your losses. that were stuck in the passive piggy bank into active losses. And how do you get it? It's that you work over 750 hours in a trades or businesses, a real estate. There's about 12 of them defined more likely than not. Most people always meet either rentals, operations, brokering, being an agent. So you were actually working the, uh, the active losses. Development. That's another common one. Those are your big ones and you have to do at least 750 hours in those. Then you have to have over 50 percent of your time in those trades or businesses. So, you know, it has to be, you can't be working on w two or I can't be just talking about Real estate and taxes all day and be considered a real estate professional status because my trade or business is being a CPA and tax is not, you know, talking about real estate, those activities. So those are the first two hoops you have to jump through. So now you're considered active because you're working over 750 hours. It's all, it's your primary craft. And then this is where most people get hung up on is they think, Oh, I got 750 hours. I'm clear. It's not. So now you have to show material participation and it has to be material participating. In what you want to offset keyword, what you want to offset is because you don't want, I mean, there's no point in 500 hours in you being an agent. There's no losses, right? But 500 hours in rentals, that's where everyone's activities are. So you have to do 500 hours in your rental properties because that's where all the passive income, passive losses are that you need to flip around. So you have to do 500 hours per property, but how you bypass that as you make a grouping election. So say you have seven properties who are just a hair bit over a hundred hours on each property pair per year, then, or five properties, I guess, cause yeah, five properties, sorry. And then you a hundred hours per property, you can make a grouping election and how the IRS sees that is it's all squished into one. Activity now. So now you finally met that hoop. All losses from your real estate will offset whatever trader business that you were doing personally, and then offset your spouse's income also generally w w two. So we always see it's one person's usually like, Hey, w two, hold down the anchor. And then the other person's just a real estate professional. Grabbing and investing into all these deals to offset all the income. Or it's like, you know, one person owns and operates a business dealer, person's a real estate professional. So that's generally how you can really take advantage of the tax code. And this is how you really pay nothing in taxes. It's, you know, cause all your activities now grouped together. So that's like what, you know, the big guys, big real estate folks are doing here and it's just how you play the game.

jacob: 36:50

Absolutely. Absolutely. I, I haven't told you this, Tony, but, uh, I'm getting my real estate license here in California. Um, I'm going to have to. Try to get more strategic about how we do this. If especially if my wife keeps her w 2 job And so I need to need to figure that out with you. But um, but yeah, no, so just for for you folks Um, there are levels to this game. There are levels to the tax game and you need A coach a guide an advisor like Tony to kind of shepherd you through the different levels of the tax game But once you start playing the game at a high level, it starts to get really fun Um, and taxes don't get really boring anymore and that's, that's what we're trying to kind of import on you today. So we have a little bit more time, Tony, let's do kind of like a fire round just so we can kind of get through some more tax terminology that people maybe not have heard of before. So can you just real quickly explain, uh, the 1031 exchange and what's all the considerations for that from kind of a tax perspective?

tony: 37:50

Yeah. So 1031 exchange, it's just section 1031 of the tax code and simply put, it is just trading your property for a different one. That's like Sibler, like kind, it's a like kind exchange. So you can trade a single family home for multifamily or you trade a multifamily for a couple of single families or, you know, multifamily into commercial, like kind, generally it's always the same, right? Four walls and a roof, generally speaking. So when you're trading and what the code's written again for is that if you trade your property up for a bigger, better one, or just more or less expensive. Then your current one, all the taxes get deferred and you don't have to pay the taxes now. So say we're in the bay. Grandma had a house for a hundred K back in the day. And then you, you know, she wants to sell it. And not pay the capital gains. It's worth a mil. So we have 900k of capital gains to defer. So as soon as she can go do a 1031 exchange, and buy either a million dollar property, or like four properties at a quarter million, as long as they reinvest the full amount, they won't be taxed on any of that 900k of capital gains. So that's the way to defer your taxes. And it's always the big way. So you did your STR, Took a lot of depreciation. Now you want to sell it. You don't want to pay back the recapture on it. So you can do a 1031 exchange, go find a different property. And generally speaking, how, you know, generational wealth builds is that you either keep the property or you 1031 it, and then whoever holds it, they pass, and then the full step up basis comes to that person. So, in an example, grandma sold the house, you know, 100K. She bought for 100. You know, sold and bought 1, 000, 000 worth of property. The basis in those properties that is still 100k. It's not a million, but when she passes and gives it to, you know, favorite grandchild, it's going to be at a million. So you pay 0 in capital gains. So that's when a taxes and death can finally work together.

jacob: 39:56

Yeah, so this is what I learned this. I thought, wow, because you have to understand everyone for depreciation for 1031 exchanges for all this stuff. You're, you're kind of just kicking the tax liability down the road, so to speak, But this is. When you just literally inherit the property or, you know, you pass it down to your heirs Then they're inheriting it at that new basis and then the tax liability is gone which mind blowing to me mind blowing to me And so this is another level to the game where the wealthy people are not only deferring and kicking the tax liability down the road they are just evaporating it at the end and and doing a massive massive benefit to Future generations and this is just stuff that normal people don't know. Why would you know this? You have no idea about any of this stuff unless you have someone like Tony. So this one was just like, that one was just mind blowing to me that that people are actually doing this.

tony: 40:48

1031 is for the win.

mike_pt2: 40:49

the other thing too, um, for those listening on 10 31, if you pay off debt, um, an important piece, you have to acquire new debt as well, um, in the amount that you paid off. So I've done a 10 31, a couple of times. So. The other thing, the other thing I do, we'll throw out too, is why the 10, the 10 31 can be so powerful. You know, Tony, you said, Hey, grandma bought the house for a hundred K. She sells it for a million. Then she acquires a million dollars in property. Well, what you could do is leverage it then, right? Even if she owned it free and clear, you could take that million dollars and buy a 2 million building. With 50 percent loan to value. And then you're like, wow, that's where, you know, that's where it can be become very, very powerful, especially for when you're selling something that, you know, you've had huge appreciation on, and then you take it and you multiply it basically. It's like, it's like, you know, given the gremlins water after midnight. So I might be too old. That might, that, that reference might be too old for for you young, for you

jacob: 41:47

I love gremlins. Um, that was great. That was great. I didn't know we're going to work in a gremlin analogy,

mike_pt2: 41:51

I have a question. Can I, can I throw it out that I, cause I get this a lot when I'm, when I'm consulting with people, Tony. So people always ask me about, um, LLC having a property in the name of an LLC and, uh, versus their personal name. And I, you know, to me, it doesn't really matter from a tax perspective, right. Or does it matter?

tony: 42:07

Yeah, exactly. Now from income tax perspective, it does not matter. So they always think you need an LLC to write off your expenses. It's like, no, you get them no matter what, uh, on your schedule E. So not always needed, but you know, asset protection, definitely. You should consider it if we have, if you have some assets at play here, but it's always, I tell people, what's your risk tolerance. Do you go to Vegas every weekend or you just, you know, don't. Yeah.

mike_pt2: 42:36

Yeah. That's just a question. I get quite a bit and I, you know, try to explain it to people and then you get those weird looks and you're like, okay.

jacob: 42:43

No, that was, that was a good one, Mike. That was a good one. Um, I have a question as well. if you are trying to execute on the short term rental tax loophole. What if you have a, uh, a partner that you are a business partner that you bought that short term rental with, like, how does that work, um, in terms of like executing on the loophole and, You're trying to make that work this one person exclusively have to take the benefit there. how does that work Tony?

tony: 43:07

Yeah, yeah, so it would the only way that so generally speaking, it would just be one person that gets the benefit. So that's general rule. However, if this property was like massive, and you both work 500 hours or more on the property, that's legit a part time job between two people 1000 hours in a year. You both would get the benefit, but I've not seen that yet to this day. So generally, I just see one person take the, uh, the benefit. And then, you know, there's always some, you know, agreement between them to get that side deal under the table. You, you make it happen. But generally speaking, I always say, Hey, whoever's got more tax liability, who's more, who has more money, you should probably take the benefit. Wink, wink.

jacob: 43:52

100 percent 100%. Tony. So we're coming up on time and I want to make sure that we, we kind of stay on schedule here. So quick question for you is like, how should people think about if you're, if you're the listener, like, when do you actually have to level up your tax game? When should you kind of consult with an actual CPA and not do your own taxes in TurboTax or whatever? Like, what's the right way to kind of think about when, when you should get to that point?

tony: 44:17

Yeah, I'd say if you want to measure from an income side, if you're self employed, probably 70, 000 net income as a sole proprietor, that's when you should really tap into CPA. Before then, there's not a lot of tax savings that you can be really doing with today's tax code. However, if you're W 2, which is probably most of the folks listening in here, I'd say once you kind of go past 150K W 2, then you can really start thinking about, Hey, I should probably Ask a CPA because then generally speaking at that level, you're able to get a loan. You probably have some decent, you know, down payment money, and then you can really start getting more complicated with your taxes. So, or if you, you know, drain out, have other people that make less than 150k, but they go do an STR, they can still probably need an accountant at that point. So the main reason why is, I think last year I saw that TurboTax does not do bonus depreciation. So you can't go into their software and trigger um, this, the bonus depreciation. So some people like hacked it through desktop or they just gave up and used like a CPA finally. So those are your biggest times. And then that's when you start really thinking about it. If you're 350kw2, there's like many other strategies, especially from the charity side. They can look into investment tax credits are very big. So if you have that much disposable income, but those are your general rule thumbs. Or if you're just like, dude, I'm got, you know, time to go learn all this crap. And I don't want to, you know, pay so much in taxes, probably just reach out to have a consultation and see, Hey, what can help you out at this point? It always really depends on What you want to do in the future.

jacob: 45:59

Yup. Yup. And Tony, if the listener has, you know, really enjoyed this conversation and they're getting really excited about taxes and they want to work with the CPA dude, how should people get in touch with you? and what can they expect, working with you?

tony: 46:13

Oh, yeah. Yeah, definitely. So yeah, on our website, the CPA do. com. That's the best place to just go in. See, learn about how we work and like lead you through overall the process and whatnot, and then you'll be able to schedule a discovery call with the team and then you'll see, Hey, if it's going to be a right fit or not bit picky on, you know, who we can help and who we can't. Sometimes if it's just not the right fit, we'll let you know, just don't want to waste anyone's time. It's just like, Hey, you got to transition all this knowledge. It's like dating. Yeah. Like, do you want to tell everyone the same old stuff? You know, Hey, I'm, you know, just 27 years old. You know, I live at one, two, three park street. Like, so that's the big thing. So that's, yeah. Check our website, socials, um, the CPA dude on all on that side, Instagram, Tik TOKs, like we're most active on. And then overall process is, you know, we've kind of really. Ironed out the best path for folks is, you know, year one, we're either forcing folks into the full tax plan in itself, unless they know what they're exactly doing, we'll just do the tax compliance, or we do have like a private community where like, hey, it's a group setting. It's a lot more affordable, but you can still get a lot, a lot of advice. So I go in their weekly office hours. And I was, you know, when I got questions. I just answer it. So instead of like charging for a consult, so that's a great way to get it. And then, yeah, once we get folks tax plan, we drop a full customized tax plan per their situation, see what they want to do in the next 12 to 24 months and draft that up. And then they'll sync up with our advisors every quarter. So taxes and your situation should change. If not, there should be a. More deeper discussion on why aren't we, you know, moving steps forward in life. So a lot of it's like accountability and coaching on top of it. So every quarter we'll reiterate your tax plan and then calculate your, you know, quarterly taxes, pay that in, and then just making sure that all things that we drew up are being met to plan. And then in between, of course, tax filing, plus, you know, the actual, you know, filing the returns preparation is what we do. It's a full process. And then we always know that. A lot of people have questions. So it's always, Hey, I got questions. Um, so we have our secure portal where it's set up, where you can just ask questions away and then get those answers back to you. Just because Google and chat GPT aren't the best yet. Uh, tried it myself. I was just like, Oh, they got like a 10 joint tenancy and tenants in wrong. So I ran it through chat GPT just to test it. And it was wrong. I was like, Oh dear God. I hope no one's using this right now.

jacob: 48:38

Oh, man. Oh, man. Tony, we're at time. We're going to let you go. Thank you so much for all of the value that you have given to our audience. Ladies and gentlemen, if you want to level up your tax game, you need to reach out to the CPA dude and his team. You will not regret it. I am Jacob Sandoval. You can find me on all socials at cashflow saga. He is Mike Magno. You can find him on all socials at realtor Michael Magno. This has been a fire episode. We will see you guys for the next one. Peace!

tony: 49:10

Take care.

Nancy: 49:11

Goodbye