Brandyn Cox is the owner of BMC Accounting LLC and is an Enrolled Agent. Enrolled agents, also called EA’s are federally credentialed tax professionals that hold the highest standing with the IRS and have unlimited practice rights. Brandyn founded his company while in college three years ago and the company is now nationwide. Brandyn specializes in small business taxation and real estate tax issues. Brandyn enjoys reading treasury regulations, tax court memos and opinions, revenue rulings, and the internal revenue code to provide the best service possible for his clients.
- What Changed with the 2018 Tax Code Update
- 1099A Deduction for Actively Traded Businesses
- 250 Hours of Personal Participation in your business (bookkeeping, tenant leasing, contractors, etc)
- Make disclosure on tax return to take 20% deduction
- Only applicable if you have tax gains
- Dealer vs. Investor Changes:
- Dealers subject to self-employment tax while investor only subject to capital gains tax
- Real Estate Professional (get rid of the passive traded status):
- 750 hours on services provided to real estate activities and more than 50% income coming from real estate
- If your business is real estate, have to own at least 5% of the company to have those hours count
- Depreciation of Rental Real Estate:
- Up to $25,000 in tax loss against income up to $100k in taxable income
- $150k in income, no longer applicable
- Not applicable if a real estate professional
- Dealer vs. Investor Changes:
- What is the number one thing you need as a new investor to get started? Understanding Pro-forma vs tax income statements. Understand how taxes will change when you buy or sell.
- What is your number one thing that real estate investor messes up when getting ready for taxes? Self-preparation of taxes. Leave it to the professionals.
- What is your dream? Physical offices in multiple states and a large network of military spouses.
- Website: https://www.bmcaccountingllc.com
- Email: firstname.lastname@example.org
Hey, guys, what’s up? I’m your host, Anthony Pinto, and you are listening to the Lessons of Real Estate show, where we bring you lessons from industry leaders in the multifamily and commercial real estate realm. Today, we have a different guest said normally and let’s figure out why here. And they bet branded. Welcome to the show.
Thank you, man. I appreciate you bringing me on. It’s fun. Of course. Of course. So I’ve I’ve known Brian Cox for a few months now.
He’s been working with the API guys for a while. It’s just how we met. And he’s my go to guy for all things taxes. So Brandon can tell us a little bit about yourself.
Sure. So I’m an enrolled agent, which is a federally credentialed tax professional. I own BMC Accounting, LLC, and I’ve got a couple other employees as well that work for me. I got one that just says Military Spouse, CPA that just went to Okinawa, Japan.
I’ve got another military spouse that’s in Spain. And then I got another guy that works for me out at Boston. So I’ve gotten quite a geographical reach here. And we’ve got clients all over the US. I really specialize in federal taxation and I we have clients in 40 states right now. There’s only about two that I think like New Hampshire, one other state can’t remember. But we deal particularly with small business and real estate investors.
Often perfect. Well, great that you’re especially qualified then to talk about, you know, the changes that have kind of occurred over this last year or so, I think bringing in this new year is a good time to start talking about taxes as everyone starts freaking out. OK, what do I need to start pulling off to my investors and what do I need to get myself so right. So the tax code kind of changed, I think, into two thousand eighteen because I ran into a few issues with trying to figure out my taxes, especially like on the military side with the new tax changes. So can you kind of touch on that a little bit of what is the big, big changes where and what we should really know about?
So any particular area that you’re looking for is this that’s a pretty broad we let’s just talk real estate in terms of real estate divestiture. Yeah.
Yeah, absolutely. So the IRS came out with some new regulations for the Section one ninety nine, a deduction right at the tail end.
And what that is, is that allows rental real estate to receive up to 20 percent income, deduct your income tax deduction. So the reason why that there’s special regulations for rental real estate in particular is because it’s a passive trade, no matter how much you participate in it, unless you’re a real estate professional. So this Section one ninety nine eight deduction was meant for what’s called Section one sixty two.
So this is business’s active trades of businesses. So like your podcast, have be an active trade of business. My business is an active trader business, so it’s material participation. So real estate had to have special guidelines for it and they finally released what they were going to be. So you have to have over 250 hours of personal services provided to the rental activity. And those can be things like advertising, working with independent contractors and employees while buying supplies for the property scrutiny, the intended applications, collecting rent, daily operation and management, which would include like keeping your own books or keeping contact with all your suppliers and vendors. So that’s one part of it. And the next one is that you had to make a disclosure on the tax return that says, hey, we are in connection with this regulation to say that we are allowed to take up to 20 percent reduction. Now, of course, this is only going to benefit you, obviously, if you only have taxable profit.
So a lot of times with tax, with real estate rentals, you’ll have a tax loss, but your cash positive. So what this becomes really beneficial for then is short term rentals.
So short term rentals typically turn out to be a cash positive and tax positive thing because the per night rate per capita is much higher than the long term rental rates. So that’s something to keep in mind, is that there’s certain guidelines that you need to meet for that.
Another interesting thing came up, but there’s been a couple real estate professional tax court case. This is another real estate tax court cases that came about in 2018. One was Connerty commissioner and the other one would be relative commissioner. So there’s been quite a bit when dealing with real estate. So Connerty commissioner was addressing whether or not real estate generated the sale of ordinary income or capital gains. So that kind of deals the question of is this investor or dealer? So a lot of times people that are investing in real estate, particularly land, for example, come across that issue, whether they’re considered a dealer versus an investor, those are treated totally different with an ordinary income.
If you’re just a sole proprietor, single member, LLC, that gain could be subject to self employment tax. Whereas if you’re an investor, not a dealer, you’re in the property and hopes for it to appreciate. So you sell it later. That’s only subject to long term capital gains tax, which could be zero 15 or 20 percent, much, much less than ordinary income.
So solving those kind of cases can be very impactful for real estate investors.
Wow, OK. If you give us a lot to talk about, they’re so so in terms of it being a passive trade, so what would make it what types of things would make it go from being an active or passive trade when go.
Ok, so Section four section on the Internal Revenue Code states that pretty much no matter how much, even if you materially participate in the business, you’re still considered a passive activity for rental real estate. However, there is a small clause four called the real estate professional. And to be considered a real estate profession doesn’t mean like you have an MLS listing or your real estate agent or broker. Any of that stuff is strictly a tax classification and you have to have over seven hundred and fifty hours of services provided to real estate activities. And then you also had to have more than one half of all services in providing all trades and businesses or sources of income have to come from real estate. And then to go even further in this, as if you work as an employee for a business, you have to own at least five percent of that business for any of those hours to count towards it. So if you make all of those thresholds, then you’re allowed to count those hours towards the real estate professional and you get rid of the whole passive concept. And that’s really important because with rental real estate, it’s essentially a tax shelter without actually registering as a tax shelter, mainly due to depreciation. So that’s kind of one of the bread and butter of rental real estate. So with rental real estate, you’re able to take up to twenty five thousand dollars and deductions to start up to twenty five thousand dollars in tax loss against ordinary income. Granted that you don’t have more than one hundred thousand dollars in that income. And then once you reach one hundred fifty, it’s gone complete. When you’re your real estate professional, none of that exists at all. Those thresholds and limitations don’t apply to you. So they’d be just like a normal business if you lose forty thousand dollars a year. Well, that forty thousand dollars a year in tax laws goes against all your other source of income.
Interesting. OK, so you kind of touched on the 250 hours that you would have to go to put towards your rental activity. So how does how does that come into play with so let’s say that, you know, I’m just going to start with real estate investing and buy a house that are called acquired the House Hack it.
And I could do all the work myself. I do all the advertising. I find all the tenants or the leasing deal with all the issues like that. And then I rack up three hundred hours over the first year and then I decide I don’t want to do that anymore. So I switch to a property manager. How did how does that play into the tax side.
Sure. So in that case you would be if you had a taxable profit, you’d be qualified. What would that information be qualified for the Section 199 deduction? So like let’s say you had ten thousand dollars in tax profit for the year.
You’re only going to pay income taxes on probably eight thousand. Now, that won’t be enough hours to get you to qualify as a real estate professional. So that’s the seven hundred fifty plus hours. So two fifty is really called active trader participation. It’s just you actively participate enough that it’s like, OK, it’s not entirely passive, but it’s certainly not material participation. It’s kind of that middle threshold.
Ok, so when you’re talking about the real estate professional, does it have to be you specifically, can it be a spouse?
Like how does that connection how do you use that?
Yeah, so if your spouse qualifies for it, it will benefit the both of you guys. If you married file joint. However, you guys can’t use each other’s hours to make up one considered real estate professional.
So like if me and my wife were going to do to get into real estate and let’s say I put in four hundred hours and she puts in four hundred hours, neither one of us met. The qualification for real estate professional. We can take the advantages, the benefits of it. Now, if she took eight hundred fifty hours of real estate services and more than one half of all services, she provides us to real estate. Not only did like ten, well, even then, we both can still benefit from the real estate professional status based off of at least that information.
Interesting. OK, so seven or 50 hours here comes out to be about 14 hours a week or two hours a day.
So let’s say i’m a weekend warrior with real estate investing and I have a new job.
And I get I’m able to get those two hours a day and I can log it really well. But I still have that W-2 job and real estate still my side hustle if you work and I still claim real estate professional.
No. So what you would lose is the one part of the element that says more than one half of all services have to be provided to real estate. So unless your W-2 position is in real estate and you own at least five percent of that business, then it doesn’t do you any good.
So like, let’s say your military. Right. So that’s a great example of your military. And you’re doing some house hacking with QUOD wherever you’re stationed. You’re not going to be able to take advantage of the real estate professional. Now, one of the things that that is still going to be available for you is that up to twenty five thousand dollars in tax loss that you can take against other income. However, let’s say you do go over the threshold of like one hundred fifty thousand. Right. Let’s say military post office or something. Right. So you guys are up high enough. What’ll happen is you can’t take any of those losses against your income for the year, but they carry over from year to year to year to you end up having taxable profit to offset that. And then one of the other large, large benefits of the real estate professional is once you become a real estate professional all these years, let’s say you do have disallowed losses and you just kind of accumulate carry over when you become a real estate professional, they hit and they become deductible. So you could have years worth of disallowed losses, become a real estate professional 10 years later. And then that could benefit you, right? All at one time.
Ok, so let’s say that I work as a I get out of the military and go and work on real estate full time, and I decide to be a commercial real estate broker on the side, passively and fast and multifamily, for example. And so let’s say I get a hundred thousand dollars in profits and cash flow. I guess we’ll call it from the passive side of things. Right. And then I make another hundred thousand or so doing that broker side of things. But I have them in two separate companies, like I have a company that just deals with the passive income side and then I have my obviously my other company doing the brokers. I can combine those two incomes together. Can I separate them to have them taxed differently or am I just kind of, you know, so, so much fraud there.
So that’s a good question. Now, there’s several activities underneath the umbrella of real estate.
When the IRS says real estate, there’s several activities to talk about. There’s develop, redevelop, construct, reconstruct rent, there’s lease, there’s manage and operate, there’s broker and then there’s dealing. So there’s several different activities. Each one of those are a separate real estate activity.
So if you are making well over seven hundred fifty hours in the broker side as part of your business. Right. Well, then that already gives you over your seven hundred fifty hours. And then so long as the material participate in another real estate activity, then you’re definitely going to be able to take those tax losses. So that’s one of the issues that a lot of people have with Section four. Sixty nine, the real estate professionals, probably the most litigated part out of four. Sixty nine in the tax court. And it’s because people will usually kind of misunderstand it. It’s like let’s say you are considered a real estate professional and you put seven hundred fifty hours into programming, which you only did like two hundred hours of rental real estate. Then you didn’t meet the 750 hours, at least for the rental parts. The rental part, if there’s any tax losses, you’re not going to get over the twenty five thousand dollars allowance.
Interesting. OK, so let’s say I decide to I want to be a passive investor and I give a hundred thousand dollars to two different, let’s say, two different multifamily syndications.
Right. But I am I’m a strictly limited partner on that deal. Right. But I consider myself a real estate professional based off of X, Y, Z. Right. So on that side of it, I’m not putting in hours being active on that deal. Right. And I’m getting income coming in from the passive side, but I’m still making money on the broker side and I still claim real estate professional on that on that passive income, even though I’m not actually active doing anything, doing rent or doing anything, property management wise, finding the deal and have any of that stuff.
So as you know, you can still take the tax losses up to twenty five thousand dollars on the basis you didn’t materially participate in the rental activity of real estate. That’s what it’s going to get hemmed up and make you lose that you’ll really lose a real estate professional status you still qualify for.
It’s just a one time kind of thing. And then every year you are set to continue to make the status. But if you don’t materially participate in all of the activity, ultimately participate in one activity, that’s the part that benefits you materially, participate in several different activities. Let’s say you do develop and you also construct and then you also rent and you do a thousand hours each between each one of those activities, then, yeah, you would definitely be able to to use whatever benefit you could out of the real estate professional status for rental, real estate rental. Real estate is really the one that it really matters for when you think about it. Right. Because if like let’s say you own a construction company, unless they have massive losses because of massive losses, because I bought a bunch of new equipment, right side bonus appreciated things on purpose. Well, obviously, that’s an active trade or business. It’s going to be rare that the IRS is probably going to come ask me why did I claim real estate professional? It’s a material participation activity rental. Real estate is kind of a special little niche in the real estate section. So it gets scrutinized a little bit more than the others, really.
Interesting. OK, so just to be clear, let’s say that I put on a thousand dollars and I make fifty thousand dollars back and depreciation and all these other tax benefits.
Right. Can I but I am not a real estate professional in terms of that rental real estate.
As a passive investor, can I still claim that? Fifty thousand or what? I have to apply it next year. It just takes twenty five thousand each year.
Sure. So if that was your total loss for the first year or sixty thousand, you’d be able to take twenty five thousand right off of that and then the remaining portion would carry over next year. So let’s say the following year because there was a cost aggregation study and that’s why there was so much depreciation and whatnot.
Right. So what would happen is like let’s say you have ten thousand dollars in taxable gain from rental real estate. Well, then you would only pay taxes. You wouldn’t pay tax on any because you ten thousand twenty five thousand fifteen thousand left to carry over to the next year, so on and so forth. So you don’t lose it, it just gets carried over OK.
And then that applies to all the properties I have. Right. Is not just this property gives me ten thousand. This one gives me twenty five thousand and I can’t take twenty five thousand one.
Right. It’s total income.
Right. And then what you would want to do Sue, is make an election on the tax return to aggregate all rental real estate activities as one interests. So you wouldn’t have to materially participate.
One property, the next property, the next property can just aggregate all of them so that when you could spread those hours amongst everything, then you could spread those losses against everything to get it OK.
Ok, I want to switch gears here a little bit because I kind of want to dig into your knowledge some. So it’s kind of along the same lines.
So so let’s say that I am interested in being a general partner or a limited partner on a multifamily deal or could be it could be a storage units where multifamily or mobile homes. So what are the type of are different tax benefits I can expect to see? Or really, I guess that makes it worthwhile to invest in real estate rental, real estate.
Ok, so I will say is a little probably different between general partner and Loida partner, because if you’re if you’re just an LP, you’re pretty much put your money in.
Essentially, you’re not really receiving dividends, but that’s kind of what it’s like. You just receiving money back on your investment so you don’t really have much control over any of the other deductions or things that happens on the actual tax return for that partnership. Right. But if you’re a general partner, you probably have a lot of say in power on whether or not certain things can happen within the partnership. So as an LP, you’re pretty much going to make sure I would I would want to make sure your due diligence on the GPS and make sure that they won. They know what they’re doing with real estate investing, what their intentions are. Are they going to cost this or are they going to 10 thirty one exchanges property or are they going to sell this property? Because these are all things that can come back and have major tax implications for, you know, like let’s say they do a cost aggregation study and then for some reason, the guy sells it the next year. Right. All those benefits you just got are going to come back anyway is on recapture till 50 and depreciation recapture for twelve point five. So you’re going to pay taxes on that.
So that’s something that you definitely want to know. As an LP. Knowledge will be the most important aspect, I think, of getting into real estate and then GP2. And I would say, especially if you’re going to be really participating in the project, is to make sure that the people that you’re with have some experience in the back. So it would definitely be a much more trustworthy position than simply an LP record and LP be just going to give you the money day. You’re going to make decisions about what’s going to happen with that property, whether you guys are going to do a long term hold or get other investors. What kind of amounts are you going to distribute out to those investors that are LPs? You know, because if I put in fifty thousand dollars, the thought process is I should at least get that back, that money back at some time or sometime soon at least anyway. So that’s that’s something you got to know is how are you going to make your investors happy? If your investors aren’t happy, you’re not going to be really well liked probably in the real estate industry.
No doubt. Definitely makes sense.
Ok, so yeah, I like that part that you talk about as an LP, kind of really had to have have the knowledge, as I know a lot of people talk about multifamily and really real estate investing in general, this huge tax benefit like, you know, it’s tax free cash flow and you get all these benefits, blah, blah.
Right. And that’s great up front. But as a limited partner, there’s a lot of different things that could happen that you really don’t have a say. And. Right. So let’s kind of dig into some of these terms because you kind of went over pretty quickly.
So let’s start with ten thirty one exchange.
You kind of explain what that actually means.
Ok, so in this most basic sense is essentially taking basically the proceeds from the sale of one property and immediately taking that money into the next property that you’re going to get or a swap of properties.
It’s called a like kind exchange. Most commonly what will happen? Is you’ll have a property that you want to get rid of and you go to a qualified intermediary, and those can be found like most financial institutions have them or certain companies are just that’s all they do is qualified intermediary, which is probably what I would recommend because there’s very strict regulations and policies within a 10. You want to change? I don’t facilitate them. I just advise people on the tax implications of them. There are people that actually facilitate this 10, 30, one exchange. So what would happen is you take this property that you have, you’re going to title it over to the qualified intermediary. And from there you’ve got forty five days that you need to identify which property it is that you’re going to essentially swap. Right. Or whatever proceeds you get from the sale of this property, you’re going to go into that next property. And then you also have one hundred and eighty days from the day that you change over the title, or this is the part that gets people over to what is or the due date of the tax return, whichever is sooner. So if one hundred and eighty days is going to put you past whatever the due date for the tax return is going to be, which would be April 15th, generally for most people, unless it’s a partnership, you need to file an extension because if you don’t, you’re going to lose that that qualified 10, 30 one exchange.
You’ll have gone over that limitation of actually transferring the property over. So so making sure that you are going to have enough time to first identify the property and second, to transfer all the assets back into the next one is going to be very important. But that’s really what a ten, thirty one exchange generally is. And when it is, it defers all of the tax gains that you would recognize on it. So like a good example, let’s say I had a multi-family property that was worth two hundred thousand when I bought it and appreciated it by like eighty thousand dollars. Typically when you sell that property or dispose of it, you’re going to have at least eighty thousand. And uncaptured, top 50 games to pay taxes on, and then, of course, you have a on long term capital gains tax to pay on a basic appreciation on that or the ten thirty one exchange you don’t have that. It defers it. So it’s not that it goes away or it’s gone for good. It’s only gone for good if you never actually sell that property of you can 10 thirty one exchange. It can be a really great strategy and I always tell people it’s 10 30. One change in my eyes really should be a death plan. It should be something you do until you’re dead because if like, let’s say, 40 years down the road, after you’ve done this for so long and you sell that last property, don’t do it. No way. Within another 10, 30 one exchange, you might have millions of dollars tax windfall. Come here once and chances are pretty good that you are going to have the cash wherewithal to pay that.
Ok, interesting, so then as a show, just kind of recap, so let’s say that I have a property two hundred thousand dollars, I go find a qualified intermediary company and they kind of handle a lot of these details and keep them keep the money so it’s not in hand with me. So I then have forty five days to find the property which what is, what does that mean. Do I had to have anything official.
So that would be the paperwork that would be drawn up with a qualified intermediary. There would be some documents filed and sure that that is actually the property one or that this is the property that you want.
And essentially that’ll be kind of begin the process of getting the property transferred.
Ok, so do I have a certain number of properties that I can hack and I just put like 20 properties on this list and hand it into the into the court. But in Mediary.
Yes. So there’s not there’s not a limitation on how many properties you can do a ten thirty one exchange on. Definitely. It’ll be reportable on the tax return for that year. So that way they can keep track of the basis.
But as long as you’re working with a qualified intermediary, they’re going to make sure all those minor details and small little clauses are met with. This is definitely not something that you would want to handle by yourself. It doesn’t actually say anywhere in any regulation or seen that you have to use one, but you would not be very smart, not qualified.
Ok, all right. Forty five days to find a property in 80 days to close on the property or until the tax returns due date.
Right. Which are sooner. So if that tax return due dates coming before one hundred and eighty days and you don’t think you’ll get it done in time, file an extension that will say, OK, perfect.
So kind of touching that from the syndication side.
So as a general partner, can I still take the 10 30 one benefits as a ten thirty one exchange? Can I still benefit from that in a syndication that’s just a limited partner?
So even if you’re a limited partner in this investment, if they do it 10, 30, one exchange on the property that you guys are investing it into another property, you’re still going to have all these deferred gains that are likely going to arise from this, mostly from depreciation recaptures. So you’re still not going to have any extra taxes to pay on at the time and at the time. And they’ll either you sell out your interest or they sell out the property or whatever happens with it. Right. So as long as you stick with it, there’s not going to be any immediate tax implications for depreciation is it’s bittersweet. It’s a great at first and it stocks at the end because you have to pay it all back. Right. So and then it’s even worse. If you don’t take it all, you’re going to pay for it twice. But so, I mean, as a limited partner at 10, 30, one exchange, it’s still going to be fine. You’re still going to have immediate tax consequences.
Got it. So let’s say that I get into this property five years later, we decide to sell it into a ten, thirty one and some other property. But I don’t want to, but I don’t want to purchase that property.
I don’t want to put my money with that syndication anymore. If I decided to sell out of that share what I didn’t have to pay capital gains on that on that money that we were supposed to be getting from the ten thirty one.
Yeah. So what would you would do your allocated portions like let’s say you’re a one percent owner in this property and there was one hundred thousand dollars in recapture.
Twelve fifty gain that would have resulted in the sale, then you’re going to end up having to pay that thousand dollars. Would you include that thousand dollars in your unreported 12 figure on recapture top 50 and so would show up on your schedule. Kadesh one and one of the boxes.
Ok, interesting. So it sounds like something as CPA should kind of help me. Lockyer in that in that regard, right.
Yeah. If you’re thinking about swapping out of things, especially when things when they start doing fancy things like segregation studies, ten, thirty one exchanges, qualified opportunity zones like those kind of things that are much more specialized. I would highly recommend that you work with someone that’s either some experience or some really great knowledge behind those.
Ok, got it. Perfect. All right.
A couple two more terms I want to get into before we get into the snapshot right here. So you talked about depreciation and depreciation recapture.
Can you kind of touch on what that actually means?
Yeah, of course. So there’s really two main kinds of depreciation recapture. It’s one is section twelve forty five.
So that’s like your tangible property, like appliances, furniture, equipment, those type of things. Right. Usually five or seven year class lives. So what happens is if you sell something even for exactly the price that you paid for it, all, the depreciation that you received from that, you’re going to bring back into ordinary income and pay ordinary income taxes on and doing whatever is in excess of that would be the long term capital gain. Now, with real estate, generally speaking, when you first, but you have two types of property, property, one here, which is land doesn’t depreciate for tax purposes. And then the twelve fifty property, which is the building. Right. So even if the building, the real estate property has things in it like furniture and appliances. Right. You don’t normally you don’t get to initially say, OK, part of the price went to this part of the price went to that. That’s where the cost. Segregation study comes in, but initially it’s all just building, that’s all it is building 12 50 property. Now, the same exact thing applies to real estate is for it’s not called twelve fifty depreciation recapture that actually got phased out some years ago. Now there’s a thing called on recapture twelve fifty, which is exactly the same thing really. They gave it a different term and a different part of the code so it didn’t go away. And what that is exactly the same thing. Whatever amounts were due to depreciation, you have to recapture that when you sell that property or dispose of it.
Ok, interesting, and then so depreciation itself, what does that mean as a as a real estate investor? What does that what does that mean to you?
Ok, so depreciation. All it really means and what it’s supposed to be for is just for the normal wear and tear of an asset. The IRS lets you recover. That costs because if you think about it, like let’s say you buy a four million dollar property, you don’t get to immediately write four million dollars off just because you spend even if you didn’t even if you paid in cash were right, you have to capitalize.
So over so many years, you get parts of that money as deductions back, essentially. Then, of course, when you go back to sell it later, you kind of have to pay that all back as ordinary income tax.
So depreciation really is beneficial at first, and it’s definitely not something I wouldn’t suggest you don’t take, because one of the caveats on it particularly tough, 40 to 50 property is the depreciation recapture. That is the greater of whether you took it or how much you were supposed to take. So even if you say Iowa, I’m just going to try to be advantageous and not take any depreciation recapture later. You still I to recapture the parts that you didn’t take anyway, so you can pay for it twice. So depreciation is a necessity.
You have to take it. OK, excellent.
All right. Well, we’re going again to the Snapchat, right?
A lot of great information here, but I kind of want to touch on some big topics here real quick for me and the get to the end here. So that’s I’m. Get ready. Yeah, absolutely. Go. All right. Here we go. First question. All right, Brandon, what is the number one thing you need to know, tax wise new investor to get started?
I would say the first thing to understand would be a pro forma understanding. Pro forma is on properties and with the difference between pro forma and tax means.
Ok, and Labora, what is proforma mean?
So the problem is when you’re investing, when you’re looking at investing into a property, a lot of times a listing agent or the company will send a pro forma income statement to kind of show you what you can expect for cash rule on any given property.
But there’s certain parts of it that don’t apply to you your interest. So their interest is not your interest.
You’re going to get a totally different loan rates also to if the property sells for higher property taxes are probably going to go out when they start losing their money. So, yeah, if you sell for a higher price that probably you’re going to have higher property taxes. So that’s something to consider as well. And then if they are putting their own depreciation in there, their depreciation is not your depreciation. Totally different. So pro forma is useful, but not a set in stone kind of thing.
Ok, awesome. And I’ve run into this a couple of times, too, with some properties, especially if you’re kind of looking at properties across the country. You know, the particular city or state might have different tax codes in that. And if they reevaluate based off of a sale, if they re-evaluate based off of every calendar year, something like that.
Right. So you could buy property and not see taxes. The taxes go up for maybe a couple of years or it could be a bitterly right. So I see a lot of people don’t factor that into their underwriting because they really could. It’s really huge. It could be a huge difference for you right here. And I ran into that in with one of my properties in Virginia, in the Norfolk area. It was like we’re paying like seven hundred dollars a year in taxes. And then we lost this property and. Yeah, right. And then this property had been pretty much flipped. And suddenly we had a tax bill that was four times as high as what originally was. Right. Because now the property was worth way more. But we didn’t take that into account when we were going to purchase the property. And luckily, like, they were able to absorb all that. But that’s just that’s his cash flow being being drained away. Right. So that’s a great thing to point out. All right. So next question. What is the number one thing that a real estate investor messes up and getting ready for taxes that you’ve seen?
Ok, so I will say self preparation and I say I’m a little biased for that, too, but here’s why. So preparation, you’re only going to be your returns are going to be as good as, you know, the tax laws.
Right. So for example, like that, section one ninety nine a deduction. Most people have no idea that’s even a thing or they do know it’s a thing for businesses. They don’t know there’s special regulations for real estate in general. So a lot of times they’ll just say, oh yeah, I totally get those qualifications and everything is deductible. Right. So you get into an audit. That’s kind of what people say. So once you get hit with an audit and you lose everything, then that’s money back out of your pocket. And the other thing is that people have almost all. I have very rarely met someone that didn’t they didn’t depreciation up, whether by not taking it or just saying that the whole purchase price was depreciable. There’s a certain way that you have to depreciate properties. The regulations really specify that you look at the county assessor site, look at the property value and then the land value. So whatever the the let’s say the land percentage is like 14 percent out of all of the land property value, then 14 percent of the price you paid for it has to go to land. So only seventy six percent or eighty six percent of your purchase price is actually even depreciable. So I could change a huge thing right there.
At that point, so you so you recommend as a new investor or an experienced investor.
What if I if I only hold one property versus one hundred properties? Right. Do you still recommend getting a CPA involved, doing taxes, especially since it’s not business taxes and. Right. OK.
I would. I would, yeah. Even with one rental property, because there’s other things too that you can take as a deduction that you just don’t think of.
Right. So like Home Office type of deductions or your cell phone, your internet, that’s just money coming out of your pocket if you think about that. So generally, I always tell people, especially when they’re kind of on the fence with like, look, no, that’s fine if you don’t pay, like, let’s say three or four hundred dollars for tax returns. This is a pretty good I’m going to say to you at least that or more taxes based on what I know versus what you know. And that’s where the value is, is that it’s not an expense for someone like it’s supposed to bring you better results or more accurate results.
Yeah, yeah, that makes sense. I mean, it’s kind of similar to hiring a lawyer to draft up an LLC documents. You’re right. You could save yourself probably hundreds of dollars. Right. But especially if you’re doing it from out of state, you don’t know what the specific wording is.
I’m sure there’s certain loopholes you have to jump through. Right. So, yeah, I think even in cases of taxes or legal issues, having a profession on your side is, in my opinion, what I’ve done and what I’ve kind of dealt with. This is absolutely vital, right? It’s like what you’re going to do, a syndication, not getting FCC attorney involved in trying to do everything yourself. Like you’re just asking you’re asking for trouble. Right. And it may hurt you. And up front with all the costs of trying to use a CPA or an attorney, but in the long run, like a could save you probably gosh, you probably saved millions of dollars of your real estate career and mistakes are made. So definitely good, good, good advice there. And then last question, Brandon, what is your dream?
So my dream with I would say my dream mostly is is with my business. I like to have physical offices and a couple of different states, but I like the remote workers that I have.
I like the concept of hiring military spouses because I’m a veteran as well, too.
So it’s just really need to be able to hire mostly veteran spouses or military spouses that are all over the world. So I like to be able to create a very large network and become a very large competitor to somebody like Age in our Block or Liberty tax, although my clientele is a little bit different than them. I’d like to be a kind of a household name for that company of the sellout.
Gotcha. Yeah, that sounds great. A B many fingers in many pies all over the world. That’d be awesome. And I definitely. So you get in there so. All right. Well, yeah, of course. Brandon, I appreciate having you on today.
And I definitely learned a lot, you know, and I’ve tried reading through the actual wording of a lot of these things and the new rules for the for the that that came after twenty eighteen. And just like it’s kind of like eyes glaze over a little bit. Right. So I’m glad you’re able to add some kind of a personal basis and kind of explain a lot of the issue or a lot of the benefits that people can get from real estate investing in general on the tax side of that.
And of course, I appreciate those questions and I learned a lot.
So, Fauria, before we go, how can people get a hold of you if they want to ask you more questions or bring you on as a CPA? Right, right.
Ok, so they’d like to have you for the tax is one of the best ways to get a hold of me is go to my website. That’s BMC Accounting LLC dot com.
Or you can email me to which is Brandon B.R. and why in at BMC Accounting LLC dot com. I will say especially usually about mid-December until about April, phone calls are almost impossible unless it’s scheduled. So those are usually the best ways to get a hold of me is to hop on my calendar and my website or simply email me. Those are the quickest ways.
Perfect. So we’ll definitely put those in the show notes or.
Brandon, I really appreciate you coming on it. Definitely. I think we’ve been kind of going back and forth on this, trying to figure this out for a while. So I’m glad we’re able to make this work.
And I think these are a lot of great points for people, especially starting the New Year. Now, the types of documents are going to start rolling in and investors just start going out wondering where the key ones are. So, you know, I think this is really good for people look, and they still have some time to get a lot of these things before or taxes.
I’ve got 15 March is when the key ones are really do, because that’s when the partnership’s tax return is due.
But if they file an extension, then you’re kind of at the mercy of the partnership. So you’ll have to file an extension to. That’s just something to keep in mind for most real estate investors.
Ok, yeah, that’s definitely good to know. OK, once due on March 15th.
Go awesome brand. Well I hope you have an awesome day and I feel like a man.
Hey, have a good one. Appreciate it. Anthony, thanks for having me.