Hey everyone, and welcome to Passive Real Estate Investing. I’m Melissa Nash, your guest host jumping in for now. Let’s dive in. Alright everyone, I am excited to have two incredible guests with me today, Amanda Han and Matt MacFarland. These two are CPAs and tax strategists who specialize in helping people use real estate to save massive amounts in taxes. They’re the authors of The Book on Tax Strategies for the Savvy Real Estate Investor, which if you have not read, you definitely should. They have been featured in so many different spotlights from Forbes Money Magazine, CNBC, and so much more. Most importantly, they have helped thousands of investors nationwide save serious money through proactive tax planning. All right, that was a mouthful, Amanda and Matt, welcome to the show and great to have you both here.
Thanks for having us, Melissa. It’s good to be here. Yeah.
Excited to be here.
Wonderful. So, as I was just saying before we hit the record button, I have, you know, introduced many, many clients your way. So I have been very excited to have you guys on. So again, thank you for your time today.
Yeah, we’re always happy to be you know, able to share our knowledge about, you know, how to use real estate to pay less tax effectively.
<Laugh>, that is it, that is the entire conversation that we are gonna have. We all wanna save taxes, right? I mean, I talk to investors every single day and well, yes, real estate investing has so many amazing benefits, but taxes that comes up so much. And I think it’s because, you know, we don’t know what we don’t know. This is not taught in school and we are not accountants. I’m certainly not. And so we do have to rely on the professionals, but the stuff seems to be a secret. Like people are still shocked when I tell them about the amazing benefits for tax savings with real estate. So let’s just kind of start there. You guys, who is your typical client or person that you speak to that every day that, you know, may or may not be an investor yet, but who, who is that person that you guys talk to?
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It’s, it’s a good question. I mean, we do you know, obviously we specialize in working with real estate investors, but that itself runs the gamut, right? We have people who are just starting in real estate, starting on real estate, working the W2 job thinking about it, and haven’t even pulled the trigger yet, right? To people who are full-time investors doing five different types of real estate. Right? But kind of to your question, right, to your point, it’s, it’s definitely an ongoing conversation about educating people about what they can do, what they can take advantage of, what they don’t know. Because you’re right, I mean, they aren’t CPAs and we’re not expecting you guys to be CPAs. We just, we wanna arm you with some knowledge that you can have an intelligent conversation about what can I plan for going forward? What should I be thinking about? What am I missing out on? What do I need to do differently? That kind of thing.
And I think there’s a common misconception that people tend, I I think, you know, you mentioned that there’s so many benefits to real estate and the tax savings. I think the fact that there are tax benefits for real estate investors is not a secret. You know, you kind of know, everybody knows that, but most people tend to think that it’s really for people who are doing it full time or who are the super wealthy real estate developers, when in fact that’s not necessarily true. You know, you could be someone making a hundred thousand dollars or less and investing in one rental property even out of state and get some very significant tax savings. And so that’s, that’s what we’re so passionate about, is like correcting that, that thought process and demystifying a lot of these, this bad information, even from some CPAs who tell people they can’t benefit because they’re not a large investor or a full-time investor. Because there absolutely are benefits regardless of how much money you make or how much, or how little you do in real estate.
Well, that is perfect right there. And actually, let’s, let’s take that and run with it. So walk us through somebody who calls you and says, in fact, I was just talking to my brother, he was in town visiting. We’re, we’re in orange County, and my brother’s family wanted to come and go to Disneyland. And so, you know, of course, late night chats always end up around my table about real estate ’cause like about taxes.
Taxes, <laugh>
Real estate.
Interesting. Well, oh, real estate, real estate, sorry. Well,
It does get into taxes because I always bring that up. But I’m also professional real estate status and I have short term rentals, and so I also have, you know, that loophole I can take advantage of. And so, so my brother asked me this question and I actually said, well, you guys, I am, I’m going to be actually interviewing a CPA business. And so I’m gonna actually ask them, and then you can listen to it <laugh>. But this is, this is literally what he asked me. He said, okay, well I don’t own any rentals outside of my own home that I own with my family. He’s a high income earner, W2, what you would, you know, classify. And he’s like, I’m in a big tax bracket. And he’s like, what do I need to do if I, you know, bought a property with you, with, with my myself, if I helped him find a really awesome turnkey property? He’s like, where did I go from here? What should I do? Should I talk to somebody that can help me build this thing to save taxes or can I take advantage of taxes now? So that’s the question, what do we say to him?
Yeah, and you know, it’s interesting because a lot of times people will ask us like, you know, what kind of client, when should I call you? When should I start doing tax planning? Is it one rental? Is it, you know, 12 rentals? And what I always tell people is, if there is enough room in the budget, right, the earlier you start doing tax planning, the better it is. And so in this example, if we’re talking about your brother, if you do tax planning now, or if he does tax planning now before he buys the first property, the conversation we just have a lot more options. So which of these turnkeys should you buy? Which, you know, which state, what are the different ways we can make income from the property? And the reason that’s important is because, you know, if he’s working a full-time job as a single person, then we might wanna look into the short term rental taxes loop pull.
If his goal is to offset W2 income for tax purposes if he’s married and he has a spouse who’s a stay at home that maybe we have an opportunity to claim as a real estate professional, now that’s a whole different set of tax strategies to offset W2, or if neither of those are true, then we look at other things like, okay, well how do we get the highest cash flow and appreciation and preserve these losses for your longer term goal of just reaching financial independence? And so oftentimes, you know, the earlier we start planning, the more options he has, and it might impact what property where the property’s located even in that first investment.
That’s perfect. Because I think that that right there is so important because so many people wait and they just like go out and like start buying and start doing and then, oh, I’ll figure it out later. I’ll figure it out when I get there. <Laugh> not even now.
Okay. So, so you’ve talked, you’ve talked to the same clients we have then <laugh>
<Laugh>. Exactly.
Exactly, it’s, it’s April, it’s April 10th, and here’s what I did last year. Yeah, that’s that’s great.
<Laugh> And you’re just filing an extension <laugh>, right?
Right exactly.
That’s kind of where I am at right now. Guilty is charged, my extension was filed, so I’ve gotta wrap that one up for <laugh> last year’s taxes. But yeah, so so what would that conversation look like with somebody as we just kind of talked about my brother, he hasn’t bought anybody yet, you know, just kind of jumping to the gun. I wanna just kind of get the call to action out with you guys right now. You guys are the answer for so many people, and I want people who’s listening to, to have a conversation with you guys. So I’m gonna have a link in the show notes for all of you guys out there listening right now so that you can reach out and at least start a conversation with Amanda and Matt and just kind of see if this makes sense. Just kind of maybe start the conversations. I think Is that a good point? Yeah.
And I think a lot of people tend to think that taxes are you know, very complicated, try to avoid talking to their CPA at all costs, right? For two reasons. One, CPA is charged by the hour, most of them do. So it is like, wow, is it worth it for me to pay that hourly rate? And the second thing is just kind of, usually when people talk to their CPAs, it’s sort of like, bad news. This is how much you owe and this, I need all this information. But the reality is tax planning is actually a very fun conversation. It’s a lot about some of the things that I just said. Like, what is your goal, right? Why are we investing? What does, what does the next year and two and three years look like? And then from there, the CPA’s job is to curate the strategies piggyback off of what you wanna do as an investor. So it’s not actually a lot of numbers, it’s actually just a lot of designing the future to make sure you’re doing the right things to save
Yeah, un understanding their goals and you know, where they’re at right now. What, what are their various income sources, assets, all that kind of good stuff. And bringing, bringing together holistically in terms of what they wanna do in the next, you know, one to five years.
Yeah. Perfect. Okay. We got the call to action outta the way because some people don’t listen all the way to the end. So I feel like we gotta bump it up there in the front because I really want people to have those conversations with you guys. And then of course, I’m gonna remind people to do it there at the end. So thank you guys for
Could, we could just, we could just do editing too. We could talk about it at the end. You could just edit it, put it in the front <laugh>. They’ll never know the difference.
That’s true. <Laugh>. That is very, very true. I might have to do that one next time. <Laugh>. Perfect. So, okay, so question that I’ve always wondered, and I I guarantee people out there have already have also wondered this is if you were to set up a business, let’s say a car wash business, you just like kind of formed a business and let’s say you’ve got one spouse that is a W2 employee and the other spouse is gonna be the owner of that company. And the thought process has always been, at least in, in my mind, is you open up a secondary business so that you can get write-offs, hopefully through that business you can kind of funnel stuff through to take advantage of, so to speak. If that business also owns real estate, can we still run the real estate through that to get write-offs without becoming a professional real estate status? Let me know if that thought process makes sense to you guys.
No, yeah. I under Yeah, I totally understand the question. I mean, yeah, it’s definitely from a, from a business building perspective for sure, you know, whether it’s real estate or some other type of business car wash, there’s definitely opportunities for converting what we call kind of non-deductible personal expenses into legitimate business deductions. Because, you know, you’re spending money on things that are related to the business now. And then that business, if it owns real estate, can you use that real estate to offset the business income? For sure. Now, if that real estate’s creating a loss in the business, there’s ways that you can use that loss to offset your W2 income if you’re actively involved in that business. Mm-Hmm <affirmative>. Now, a lot of times the people for liability reasons will segregate the real estate from the business, but there’s still ways for, like we call ’em like, you know, our tax nerds call ’em, like grouping elections that we can still treat ’em as one for tax purposes, but legally they’re two to different things. There’s ways to benefit from that as well without having to be a real estate professional. So yeah,
And it’s actually a strategy that we work with a lot of our clients on. I don’t know, you know, car wash is, is one example, but the more common one we see would be like maybe a doctor who has a medical practice but also runs the medical building that, you know, where his, his practice operates out of. And that’s actually a really great loophole, if you will, because that building, we could group it together with the medical practice, and thus if we’re doing accelerated depreciation and maximizing around the real estate side, those could all offset all types of income, W2 retirement stock gains crypto regardless of whether you are claiming real estate professional status or not. So it’s actually a really great loophole in the right scenario.
Okay, perfect. So again, you guys, this is why we need to talk to people who do this every single day because, you know, I’ve had that theory in my head and trying to figure out different ways that it would work, but I’ve never actually asked that to any CPA to see what is actually possible. I’ve just always personally relied on my real estate being my write offs. In fact, when I first started investing in real estate, I did own a prior business. Well, I, I still am, you know, technically in independent and self-employed, and so I still have that business, but I was in such the habit of write off, write off, write off, write off. Like, I don’t wanna pay taxes, I don’t wanna take pay taxes. So I was writing everything off to the point where when I tried to buy my first rental property, my lender was like, you don’t qualify <laugh>, you’re, you’re writing off, you’re poor.
Yes. Like, this is not gonna happen. And so he actually told me like, suck it up. You’re gonna actually have to pay taxes for a couple of years. Like, don’t take those write-offs, actually show the business is profitable. Pay those taxes for a couple years. Now, again, I don’t know if this is the best advice, but it worked for me at the time. He said, pay some taxes. Look lendable, then you’re gonna take all of your write offs on the real estate side. Quit taking it from the business side. So what do you guys think about that advice?
I mean, you know, it, it is always kind of a struggle or a balancing act I’ll say, with respect to taxes and lending. So, you know, from a tax perspective, we wanna take as much as possible when it comes to legally entitled entitlement in terms of write offs, right? On the lending side, yes, lenders typically wanna see high income as high income as possible, as little of expenses as possible. So one of the things we always encourage clients to do is to work collectively with CPA as well as the loan advisor. And so what we often wanna do is we wanna start with the end in mind, which is, how much income do I need to show in order to qualify for this specific amount of loan? And then we work backwards and say, okay, well what are all the things I could write off that doesn’t hurt my borrowing ability?
And so I think that’s what you were referring to, which is this concept of, if I do depreciation as an example, that’s not gonna hurt my borrowing ability. It does save taxes, but the lenders don’t see it as a cash outlay ’cause it’s a paper write off. And so really optimizing those two worlds and saying, okay, how can I get the most tax savings without still, while still being able to borrow? And yes, there are certain instances where we forego a certain write offs just to kind of make all the numbers work, but it that comes down to a business decision, right? Pay thousand, $5,000 more in taxes and get another 200,000 in loan. Is that worthwhile to me or not as an example?
You know? And part of that process might be too, is that you’re working with your tax person to prepare that return where it’s, you know, 95% done and give that draft to your mortgage broker, your lender, whoever it is, and say, what do you think? And if you have enough of a relationship with that person, they can come back and say, Hey, maybe not this, maybe we need XX more of this. And then make those adjustments as needed, right? So at least you’re seeing what the original could be. Like Amanda’s saying like, okay, but if we change this, we’re gonna pay X amount more in taxes. Maybe that’s worth it by any reality too, to your point, right? Like we all know the, the lending market changes every week, right? So the, the answer to this question might be different a month from now or a year from now, right? So obviously important to kind of keep that open line of communication, especially you get closer to needing to refi, you know, like we, we joked about April 10th, but <laugh>, we hear that sometimes like too, like, oh hey, I forgot to tell you I need my loan done, I need my return done right away because I’m refinancing my property. Like, yeah, that would’ve been good to know <laugh>.
Well, you just said like a really important thing there. A little golden nugget for everybody. I’m gonna call it out again, is you said work with you and the lender. And if you have a good relationship, that goes back to, I mean this is a relationship business. Like, you know, we’re all in this together to try to help investors succeed. And you’ve gotta have people in there that have your best interests. And if you guys help put together a strategy, we need to be talking to that lender. And if you have a good relationship, like you said, then they can say, okay, we’re not submitting them yet. Let’s send it to the lender. Let’s have them double check everything, make sure you’re still lendable, and then get any changes or anything back over to you guys and then submit that go button. Like that’s a huge, huge takeaway.
Just anyone getting into real estate, you know, people are always looking at loans, right? Borrowing money from the bank, borrowing money from other investors, private money. But this is an example of where tax savings is so important because it’s not just about saving taxes, but it’s actually just, you know, getting more money that you can use to invest in real estate. You know, like you’re saying. So people are so busy just looking at the first deal or the next deal and the next deal, but if we just take a little bit of time to focus on how do we protect the money we’ve already made from our rentals, from our W2, from the stock sales, because that’s the easiest money, say, that’s the easiest money you can make because you already made it. It’s just a matter of understanding the law and having it work to your advantage so you can keep it and then use it to invest in the next deal.
Yeah, that’s huge too. I think that for myself, seeing that firsthand when all of a sudden I got to the point where I’m like, wow, I actually am not writing checks to the IRS anymore. That’s kind of free money that, I mean, like you said, it’s, it was my money already, but now it’s like, okay, I can invest that now instead of giving it to them. I mean, that’s the goal, that’s the dream, right? <Laugh>.
Yeah. And I think it’s just more, a lot of Americans in general think that taxes is just something that happens to us, you know? ’cause There’s a lot of narrative even in the media that talks about how, you know, tax law favors those super wealthy, the large corporations and, but the reality is it’s the same set of laws. You know, we play by the same set of laws that someone like Elon Musk or Jeff Bezos, it is the same law. And so,
I mean, they have a few more zeros than we do, but yes, <laugh>
In terms of income, but the law
Is the same. The law is the same. Yes. Yes.
And, and so I think I just, you know, encourage everyone to understand that, you know, regardless of where you’re starting from, regardless of your income, it’s just important to make sure you have the right team so that you understand how to do the right things during the year so you can save on taxes strategically. It does not have to be something that happens to you all the time. You know, the more money you make, the more you have to pay. That’s sort of just the way of life, but it doesn’t have to be that way.
Well, and another thing too that you kind of said in there that I didn’t even think about, because I don’t really have a big stock portfolio. I have a real estate portfolio, but there are so many people that do have, you know, whether it’s small or big, they have stock portfolios. And I don’t know anything about that world you guys do where if somebody were to sell stocks to buy real estate, like what are the implications of that? And is that a good idea? Is that a bad idea? And you know, even investing with your 4 0 1 KI mean, we help plenty of people do the self-directed and there are tax implications with that as well. And so really talking to people again, to help you plan all this, because some people get so scared to anything and then they just don’t do anything. Right. <laugh>, you just, your, your eyes are frozen in the headlights.
Yeah, and I, and I think like, speaking of that stock thing, I mean there’s, there’s situations where we have clients that’ll, they’ll liquidate their stock portfolio to buy real estate. And, you know, yes, you’d have to understand, okay, do we have gains or losses? If we have gains, what’s the tax implications? But I don’t think a lot of people know that they can. And instead of actually liquidating, a lot of times there’s a lot of financial institutions out there that will let you use that stock portfolio as collateral for real estate loans. So you don’t even have to liquidate it. It’s almost like, you know, borrowing against your rental property, now you’re borrowing against a stock portfolio and using that money to buy real estate. And so that’s another great way to kind of tap into one of your existing assets to find funds to buy real estate if that’s, you know, your goal.
Yeah. And you mentioned retirement account. I think that’s so interesting because when we do tax planning you know, one of the things we do, as Matt mentioned earlier, is we look at the entire financial profile of that specific taxpayer. So not just like real estate, but we’re looking at like your portfolio of stocks, your retirement account. And a lot of times when we talk to people, they, you know, the question is how much money is in your 401k? A lot of people just don’t know. It’s like, well, I, I always contribute, I dunno exactly how much. It’s like, maybe it’s a hundred thousand, maybe it’s 300,000. I’m, I’m not sure, depending on the market, but for most Americans retirement account is, is one of their biggest buckets of net worth. And so if you’re an investor, you’re like, Hey, I wanna get into real estate, but I don’t have a lot of cash. Retirement account is a great way to get into that first deal. You mentioned self-directed investing, you can borrow from your 401k. So you know, just again, being really intentional and strategic about not just making money, but how do I actually use all the money I’ve made to actually work for me <laugh>?
Yeah, yeah, definitely. Well, you know, so my clientele that I work with personally and everybody on the team is, is a working professional who wants to buy real estate as passive as possible. You know, they already have a job, they don’t wanna create another job. So they’re usually not, you know, the flippers, you know, that that’s making money. That’s a job. <Laugh>. Yeah. You know, there, there are people who are investing in other markets from where they live. You know, Indianapolis, Kansas City, Alabama, you know, all of these markets where they can get a little bit of cash flow, but the properties are already done, they’re renovated or, you know, there’s different different kind of strategies than there were any in there. But that’s just kind of the, the lump sum kind of idea is buying properties already renovated with a tenant in place, you know, little bit of money.
So when I’m running, you know, a, a proforma on there, I do have a, a little column in there and I put, I, I always kind of put it in a parentheses and it’s tax benefits <laugh> because I’m always so hesitant to promise tax benefits because everybody’s financials are so different, their income levels are different. I don’t know what you guys are gonna use. So what, what should, or I guess, I don’t know if this is just too blanket of a question, but what is the best weight for me to run that number as correctly as possible? What, what is an average return that somebody maybe be, be able to take advantage of if they make over a hundred thousand a year?
Yeah, I mean, I think it’s, like you said, it’s difficult because everyone’s scenario is gonna be different. But you know, the common issue that we hear from from investors is like, oh, my CPA told me I make too much money to benefit from real estate. Therefore all these, you know, podcasts and you hear people talk about it doesn’t apply to me ’cause I make too much money. Yep. And when CPAs say that, what that means is they’re taking a tunnel vision look, and they’re, all they’re saying is you have rentals, your rental taxes tax benefits don’t offset taxes from W2. Right? Effectively, that’s what they’re saying. And so they kind of shorten it into no tax benefit. But the issue we have with that statement is they’re not looking holistically at all the finances. Because if you’re someone like you said, I, I make good money, I wanna invest passively in a rental property.
If that property generates 20,000 of cash flow and I can use depreciation to offset that 20,000 of, of income and pay zero taxes, well I’ve definitely saved on tax, right? ’cause I’ve made more money without paying more in tax. So at a minimum, this kind of estimate is, is you can kind of use across the board with anyone, they don’t have to be a real estate professional. The short term rental report, everybody gets to utilize that. Now if you’re trying to do, you know, even like if you extrapolate that over multiple years, that that’s tax savings across all those years. And you know, not a lot of people know this, but eventually when you sell the property, if you have accumulated a lot of these tax losses, these are actually freed up generally to offset taxes from W2 income, even if you’re not a real estate professional and never have been. So there’s always tax benefit regardless of how much or how little you do. But you know, you’re right, it is difficult to quantify because it’s so investor and year specific. Maybe I can’t use it this year, but next year I’ll save 50,000, right? Depending on my facts and, and my profile.
That was actually really cool information. I didn’t even realize that I’m literally learning something right now. <Laugh>, I mean, I, I don’t pretend that I know everything about taxes even being, you know, kind of where I’m at with my portfolio, but I didn’t even realize that.
Well, you know, the other thing I was thinking of, Melissa, is that you might have, you guys might have clients that are have been doing this for a while, right? They’ve been successful buying those turnkey rental properties. Maybe they got a portfolio of five or 10 that are kind of, they’ve, you know, cash flow is pretty consistent. They’ve kind of used up their depreciation, maybe they’ve owned ’em for 10 or 15 years. Well, in situations like that, people can also look at buying into syndications that are buying new properties or generating depreciation and generating losses on paper where they can use those losses to offset the cashflow from their own properties. And so we see that a lot too, where people that, to your point, Hey, I don’t want another job. I don’t want to be a full-time real estate investor, but I like the benefits of it, but hey, maybe I’ve owned this portfolio and it’s, you know, for 15 years and what else can I do to offset that income? It’s like, well, that’s another situation or example somebody could utilize
Or just more turnkey properties, <laugh>. Yeah.
Or you buy more of your own for sure, too <laugh>.
Right, right. Okay. So I’m gonna pivot and I’m going to kind of ask you guys about the short-term rental loophole. So I’m a short-term rental investor myself, and I know there’s a lot in the media about it right now because of the maybe a hundred percent bonus depreciation coming back and all of this stuff. So can you guys give us the overview of kind of what is that short-term rental loophole? And maybe that’s the wrong word. I was actually corrected by somebody that I use that word loophole, and they’re like, it’s not a loophole, it’s a tax law, so don’t use the word loophole. So, so I don’t know what, what is the corrected way? Tell us what that is.
Hey, hey, loophole sounds better on a podcast. Okay, so <laugh>,
It does, it sounds like you’re doing something like kind of sneaky and kind of tricky <laugh> mm-hmm
<Affirmative>. It’s, yeah, there are people who nowadays there’s, I think there’s a trend of, you know, don’t call it a loophole. But you know, for this one, I actually do feel like it is a loophole, and I use that term because I don’t think that was the intention of Congress in, in terms of how this turned out. And that for that reason, I think that’s why a lot of CPAs, we call it a loophole that’s not like a technical legal name or anything. Right? So the reason we call it loophole is because, you know, generally when you invest in long-term rentals if you’re someone who’s higher income, which, you know, currently is, is anyone making over $150,000? Your rental losses are passive, which means, you know, they only offset taxes from passive income now or in the future, right? Unless if you sell it.
And so that’s generally the case, unless if you or your spouse as a real estate professional, which you know, that means you have to effectively have more hours in real estate than your job. So that’s very difficult for most people who have a full-time job. I’m, I’m not gonna have more than 40 hours a week in my rental properties, especially if it’s out of state turnkey, right? Now when it comes to short-term rentals, though, we don’t have those same restrictions. And so what happens a lot is you have higher income individuals, or just anyone lower income as well. If you have a job and you’re, you’re investing in short term rentals, it could be a side hustle. You don’t have to quit your job and you can potentially use these tax losses and depreciation to offset income from everything W2 stocks, retirement and all that stuff. And so that’s why we call it a loophole because you don’t have to quit your job. You don’t have to spend a crazy hours in real estate and you can potentially get the benefits as if you were almost a real estate investor.
And I, I think it’s important for people to understand, you know, what, what is a short term rental for tax purposes? And that’s where it’s a property where the average stay during the year is seven days or less. So you basically add up the number of days it was rented out, divide by the number of bookings. If it’s seven or less, you’ve got a short-term rental. If it’s eight or more, you’ve got a long-term rental. You know, even if it, you know, has nothing to do with you listing on Airbnb or vrbo, it’s really comes down to the number of days. But yeah, for whatever reason, that’s, that was the way that the tax law was written. It was written in such a way that, hey, a property where the average stay is seven days or less is not really a quote unquote rental property.
So it stays out of the rest of that bucket that Amanda was talking about. And now it just falls into, are you involved in it on a day to day basis, just like, I don’t know if generated a loss for some reason, we want to use that loss on paper to offset other income. We’d have to be able to show that we’re actively involved in the business. The same law applies to short-term rentals. So if you can meet one of what they call the material participation requirements, which again just means you’re actively involved doing a lot of the day-to-day, if you’re self-managing it easy to do, then if you can generate a loss on paper from depreciation cost s maximizing your deductions, then we can use that loss to offset W2 and everything else without having to be a real estate professional or whatnot, you know? Yeah.
So, so what makes it active if you have a property manager for a short-term rental? Or do you have to self-manage it?
That’s an interesting question. You know, I, I hesitate to tell people you have to self-manage because every case is gonna be different. I will say that if you self-manage, that generally means you’re involved in the day-to-day operations of the investment. And so it becomes easier to meet real estate professional status, right? Short-Term rental short-term rental material participation. So there’s actually three ways to qualify. One is you and the spouse, if you’re married, have at least 500 hours on the short-term rental properties. If you meet 500 hours, then they’re non-passive and you can use it to offset all types of income. If you don’t meet that, you can also have at least a hundred hours as long as no one else has more time than you. So in an example, the cleaning crew has 80, you have a hundred, you know, you would’ve met that requirement.
And then the third way to meet it is you have more hours than everyone else combined. So out of everyone, they’re at 60, you’re at 80. That also works too. So it’s really, you know, different. ’cause A common question we get is, yeah, do you have to sell, manage? How many rentals do I need? Can I do it out of state? All these are possible, but you really are just looking specifically at the hours. And so what could work sometimes is if, you know, I’m buying a property, if it’s a turnkey, I didn’t have to rehab it. And there it’s out of state. If I self-manage and nobody else has more time than me, I could use the loophole. It doesn’t mean I always have to self-manage or turn it to a second job, but I would wanna make sure I’m doing those right things, at least in the years where I’m trying to use these tax benefits against W2 income. Right.
So does AI
As you <laugh>, oh,
Does AI, AI, Melissa, count <laugh>?
Because is
This, is this being recorded
<Laugh>? Well, I’m just thinking about it because I have so many AI systems built in. I self-manage, but I’m not answering every single email. I’m not answer, you know what I mean? I’m not pricing it out daily. The AI prices it out for me.
Yeah, that’s such a great question. And you know, obviously AI is so new, right? Keep in mind, you know, when it come, taxes and audits are always years and years behind, right? ’cause Now we’re using ai, you’re filing a return, you know, by October, right? You’re on on extension. And then, you know, if it’s audited, it’s gonna be two, three years from now. So, so there’s no court case about is AI you or is it somebody else? But I, you know, the trend that we’re seeing though is that, is is, is exactly what you’re describing, is that with ai, a lot more of our clients are able to self-manage because we’re no longer relying on somebody else to do it. It’s cheaper. We get to keep more of the cash flow, and it helps to it helps to substantiate you are doing it because AI doesn’t automatically do everything. Even the ai, you have to set it up, you’re training it, you’re still overseeing that. Yeah. And I don’t think it’s the IRS’s current stance that AI is another person. You know, it’s just the tool that Melissa is using as part of self-management. So I think for me, I’m more optimistic. I think that helps investors in qualifying rather than hurt them in comparison with an actual property management company.
And, you know, besides taxes obviously help you run that property more efficiently, more, you know, hopefully make more money on it, give them a better client customer experience for the customer too, right. That’s gonna hopefully, you know, come back to you in, in tenfold in terms of returns and, you know, branding and all that kind of good stuff.
Yeah. Because, you know, it is a hospitality business first and foremost. And you know, I, I can’t be twenty-four seven on my phone. I mean, as much as I feel like I already am glued to it, but I’m doing this because I wanna free up my time, not, you know, take away more. And so the ability to, I self-manage all of my short-term rentals, and I, I tell people this all the time. I don’t spend more than 20 minutes a day, like physically me, but the systems I created and put a lot of time into them and perfecting them and, you know, tweaking them and, you know, I’ll update, you know the cleaners with things, you know, there are things that I’m doing and, you know, but if there’s no news, it’s good news. Unless there’s a disaster, then a then it, then I am communicating with the guest directly <laugh>.
But yeah.
Yeah.
And like you said, ai, when you automate it, it takes the, it takes a lot of the need out of other people, right? It was before you had somebody, somebody, a virtual assistant or someone scheduling these things and, and now we don’t need it. So not only are we receiving on costs, but you know, one of those rules where I have to have more time than other people when now there is no other people now it’s just still me, me, me, me and ai, right? So it, it, it definitely helps you know, quite a bit from a tech, you know, technology definitely helps the tax narrative that we’re trying to implement.
Yeah. So let’s knock on wood and hope that <laugh> that doesn’t change. I mean, if, if I couldn’t get my tax benefits, well, I think I, I do have professional real estate status, but I’m just thinking of like selfishly about that as if, you know, I all of a sudden couldn’t get my tax benefits because I use ai. I would be like, in a world of her, I could not manage a property, you know, a thousand miles away without it. Yeah. That’s just not possible.
Yeah. I mean, we have clients who, you know, manage short term and long term rentals from, you know, other countries and, you know, they travel all the time, but still are able to with, you know, systems AI and you know, virtual assistants. So yeah, definitely possible to do. And I think a lot of people hesitate with short-term rentals. They feel like it is, it sounds like a second job or just really time intensive. And, and one of the strategies is, you know, it, it doesn’t always have to be a short-term rental. You can use it in the years where it’s, it’s beneficial and then you could turn it into a long-term rental or a midterm rental because it’s furnished, right? So,
Or turn it over to a property manager in second or third year when it, when, you know, it’s kind of stabilized and, you know, you maybe moved on to a new, new short-term rental to focus your time on. Yeah.
Yeah. So you brought up midterm rentals. So just for everybody listening, the way that I understand midterm rentals is, you know, it’s maybe a traveling nurse or I know a lot of pilots or flight attendants, they’ll do midterm rentals or even people who, you know, lost their home in a fire and they need to live somewhere temporarily, and the insurance companies kind of help pay for it. So does a midterm rental count for a active or passive, where would, where would that one fit in?
Yeah, it’s a good question. Most midterm rentals in the tax world are gonna kind of fall into that long-term rental bucket. So really for taxes, we’ve got short-term rentals and long-term rentals. Now obviously people are operating properties as midterm rentals. 30, 60, 90 days stays anywhere in between, right? But that’s gonna kind of fall in that long-term rental bucket. One of the, one of the exceptions to that might be is if you’re doing a property where the average stay is 30 days or less, and you’re providing kind of hotel type services like daily cleaning, you know, changing the sheets, food and beverage room service, that can still fall into the short-term rental bucket and still be considered, you know, active if you’re taking, you know, self-managing and meeting the material preservation. But yeah, most of those midterm rentals are gonna fall into the long-term rental bucket, which can actually provide a lot of flexibility depending on people’s situations, right? Like we’ve had clients that they were borderline, you know, trying to get the real estate professional status, couldn’t really get there with a long-term rental. They, they converted a couple of their properties to midterm rentals where they had to spend a little more time on those properties. Now all of a sudden they’re getting to get to the hours they need, they’re meeting the material for space requirements, and now they’re benefiting from all their long-term rentals just by a couple tweaks like that. Mm-Hmm <affirmative>.
Well, and so one thing too that I, I was just kind of thinking ahead as you were talking about that is everything isn’t setting glue. Like it’s not, or cement, it’s not permanent. Like sometimes there’s a strategy where, you know, it’s a short-term rental and then you get tax benefits from that and maybe you took advantage of some cost segregation and kind of took all of that, and then all of a sudden you move it over to a midterm or a long term or, you know, it’s, this is moldable, right? We’re not just like stuck in like one situation
Mm-Hmm <affirmative>. Yeah. And it’s, you know you know, we were chatting about analyzing deals, right? Previously, and so what I, we always tell clients when you look at purchasing a property, you always want to analyze the numbers a couple different ways, right? If you are trying to go for the short term rental loophole, sure, we’ll see what it looks like cashflow wise as a short term, but you know, like the county and city loss change. So I always want to know, well, what if I can’t operate as a short term then what do my numbers look like as a, as a midterm? And the default is always what does that look like as a long term? Because we know for sure you can’t operate as a long term. And then you just kind of get a piece of, you know, more peace of mind, like, okay, I’m comfortable with the numbers. In a worst case scenario, this is what it looks like, and the best case, this is sort of what it looks like.
Same thing on it. Same thing on exit strategies too, right? Have a couple different exit strategies in mind when you’re going into properties. Now those may change over three to five years, but, you know, is there a couple different ways I can operate this property? And then also, is there a couple different ways I can, if this market goes this way, I can, I can sell it this way. If a market goes that way, there’s an option here, right? So kind of have the end in mind when you’re looking at the properties as well.
Yep. Yep. I think that’s actually really, really, really good advice. I, thousand percent, I, I say that like all the time, like if I’m analyzing a short-term rental, I personally am like, I’m a little bit risk adverse just because of past real estate traumas, maybe <laugh>. But I always look at short-term rental, okay? And I go, okay, worst case scenario, like, could I put this as a long-term rental? Is there a demand for that? And could I at least break even if I had to do that? Like you said, if like tax laws changed or anything could happen, one of my rentals is in Palm Springs and there was a change that they put in place because COVID blew up and everybody started freaking out. ’cause All of a sudden there was like, you know, a thousand more rentals than normal. And of course we all know it slowed down since then, but they still enacted a law, like really quick and shortened the amounts you’re allowed to rent it for in the year.
Yeah. And so now people are like selling their properties and their short sales and I mean, people are just trying to get rid of these huge, massive, expensive mortgages because the laws change and now they can’t rent it out and make money. And now, now the market is dipping. I mean, it just caused chaos. And so I remember when we, when we bought ours there, I was like, okay, worst case scenario, can I rent this as a long term property and does the math work? I got into the property early, thank goodness. And so I kind of have a little cushion there, but yeah. But you could do the reverse for a long-term rental as well. So most of my clients today are buying long-term rentals, but I always try to mention to them as like, okay, the math checks out as long-term rental, but what if mm-hmm <affirmative>. It’d be kind of cool if you could make more cash flow as a midterm or a short term. That would be kind of cool too as part of that, you know, what if bubble Yeah. What if scenario.
Well, and I, you know, we also see that where we have clients who come by the time they come to us, they already have a portfolio of properties, right? Where, you know, some of them are, are outta state, they’re turnkey. And if this is the first time you’re hearing about the short term rental loophole, the one thing we would consider is, well, do any of these, can any of these potentially work as a short term? Right? Do the, does the law allow for it? Is it a good area where you could cash flow? Because then that sort of helps to unlock maybe some strategies, right? This was always a long term. We’ve never done cost segregation, but now if we change the facts, maybe that gets us 50 or a hundred thousand additional write off that we can actually use to offset W2 income. You know, especially for people who are higher income earners, the more income you make, the more the higher tax rate you’re in, which then just means the more taxes you would save by actually deploying any of these strategies.
That’s a great idea. Okay, everybody, everybody’s listening right now. If you have a rental portfolio already, you guys need to talk to Amanda and Matt because that is a really cool strategy. I mean, we’ve talked about this, but I’m just literally like putting it all together right now going, wow. Yeah. So many people, they could be missing this piece of their just trying to save up their the professional real estate status hours and they’re just counting them and logging ’em and doing all the things to try to get there and not realizing they might have a property already that they could just kind of flip that switch and take advantage of stuff there.
Yeah, it’s really I mean, I guess it’s really fun for us. I don’t know if it’s fun for, for the, for every investor, but I don’t know if it’s fun for the non-tax nerd, but Yeah. Yeah. It least for us to look at a portfolio and kind of walk, you know, talk with clients about what can you do with what you already have. ’cause Also I think a misconception people think is, you know, accelerated depreciation, I have to do it in the first year of owning a property. If I didn’t then I’m done. But, you know, that’s not the case at all. You can do it in, in a specific year where it makes sense. So yeah, people who already own real estate, you know, just because you’ve been limited in the past doesn’t mean it always and forever has to be that way.
Yeah. I, I totally geek out about stuff like this. I am, I’m with you guys. Like, except for not in the tax part of it, but like spreadsheets and I have ai, I obviously loving AI right now, I keep talking about ai, but I actually have AI building out some cool new spreadsheets for me, and I’m just messing around with it. I’m like, what if we add this and what if we add the profit centers? And then I got to the tax part and I got really nervous because I was like, I don’t wanna like promise people, you know mm-hmm <affirmative>. Tax benefits and savings. So I’m like, potentially talk to a cpa a this is potential, this is what you could make. But you gotta see, so I’m still kind of including it, but like with a little bit of like, you know, asterisk, asterisk, you know, yeah. This is potential, well <laugh> well.
And that is the role of the investors’ CPA, right? Is to help quantify those things. So I mean, I had a client this morning who said, Hey, you know, I’m looking, I’m deciding between these three rentals with, you know, specific address to the Zillow or Redfin and how much he was gonna spend potentially. And so he was like, what’s the tax benefit between these three? And so we can run the numbers so he knows, you know, not exactly but a pretty good estimate of if you buy this one, here’s the benefit. You buy that one and it differs across the properties because of where they’re located, what the land value is, you know, how many bedrooms and all that stuff. So yeah, I mean you’re, you’re, you are putting in kind of like a rough estimate, but they can take that to their CPA to get a more accurate amount when they’re trying to decide, you know, what to invest in.
Yeah. Well, and I think too is, you know, part of the fun in looking at a spreadsheet for myself, <laugh> I’ll say fun ’cause I am geeking out and nerding about it, is, you know, it is dreaming big. It is setting goals and it is seeing what’s possible. And of course, you know, there’s one side of the pro forma when we’re running the numbers that it’s like best case scenario. And then there’s also worst case scenario, you know, you’d be, you know, not looking at the full picture if you didn’t also kind of run, run both. But dreaming big, that is the goal for people. They want to take advantage of, you know, tax benefits and they wanna get their time back and they wanna retire early and they wanna create wealth and you know, they wanna do all these things. And so we can look at the proforma and go, this is the potential, this could possibly be it. But then let’s also look at the worst case scenario. What if it’s not, you know, how, what are your exit strategies? How are you protected? All those things.
Yeah. Yeah, for sure. I will say one thing, I mean, we love AI also. We, we use it quite a bit in our business. But I just wanna warn people, if you use AI for tax questions, and I mean like technical tax questions AI oftentimes provides the wrong answer for two reasons. One, they’re, they’re using, you know, very outdated data from, you know, years ago. And two, AI actually hallucinates. So our team has played around with this quite a bit. You ask it a question, it gives you a seemingly legit answer. It’ll even reference court cases. But they’re fake court cases. So we look up these court cases, they don’t exist, and we’ll ask ai, are you sure this court case? And, and the AI will say, oh no, sorry. No, you’re right. Lemme, it doesn’t exist. Yeah, yeah. Let me check it again and give you some other fake court case. So it does quite a bit of hallucination. You just wanna always like verify whether what it says is true or not.
Oh my gosh, you know what? I’m so glad that you brought this up. And so I know we’re getting to our time limit here, but that is a big thing because not only have I heard about, you know, people, you know, trying to avoid paying the professionals. Like, I have clients that all the time that are like, oh, I use AI for my counseling. Like, they actually use it as a psychiatrist and like, you know, <laugh> Yeah. And then, you know, tax things too. I’ve had people that are like, Hey, you know, I, I typed this in and I don’t know if this is true or not. Did I get the right answer? And I’m like, oh gosh.
Well, yeah, I, I think, I mean, I I don’t think that’s, I’m sure that’s not, you know, just just for tax industry stuff, I’m sure any, anyone using AI should be doing trust, trust and verify, right? Like because yeah, it’s, it’s, you know, it is, it is exciting, but it’s all new and it’s kind of everyone’s learning at the same time and it’s gonna get better. But yeah, you want to make sure you’re <laugh> double checking your, your research.
Yeah, yeah, yeah. Well, and with that I think I’m really glad that you guys mentioned that because it is super, super prevalent right now. I mean, my age to the younger kids, I mean, we’re no longer just kind of googling stuff and looking up 20 pages and then trying to find the source of those pages. We’re just putting it in one time and looking for that quick, quick answer, that quick response. And I will tell you guys, for the, everybody listening out there, taxes are not that simple and easy where you can just plug in one thing and get a straight shot answer. No way. That is absolutely wrong and bad. You definitely need somebody who understands and can look at everything you’re trying to do, help you goal set, look ahead, trying to see what you’re trying to build, why you’re trying to build it, and then working with a team to help you do it. And then of course, working with somebody like myself over here, I’m, I’m happy to help you on the real estate side and help you find those really cool properties. But also we’ve got lenders that we’re working with. We’ve got, if somebody wants to sell their property and do a 10 31 exchange, we’ve gotta work with somebody there. If we’re gonna do a cost segregation, we gotta work with somebody there. Like it really is a team effort.
Yeah. And I think the thing for investors to understand, especially people who are new to real estate, is that you don’t have to be an expert in any of this. You don’t have to understand all the tax jargon we said today. You don’t have to understand what is 10 31 exchange, how to calculate cost segregation because you can lean on your team to do that, right? Your CPA is gonna ask you the right question so they know how to advise you. Your, your 10 31 exchange intermediary is gonna kind of help guide you through the deadlines and the process. And so it’s not as daunting as, you know, some people might think it is when you actually do it. It’s kind of like doing anything. You have experts helping you along the way.
Yeah. And then obviously the more and more you do it right, the more you become armed with information and knowledge so that you can ask that better question yourself, right? You can have that more intelligent conversation where, again, you’re not a CPA, but you can at least, hey, I can talk the talk here. I can understand, you know, they’re, they’re making sense based on what they’re saying, or hey, they’re, you know, I need to work with somebody else ’cause they don’t understand real estate. You know, things like that, right. Where you’re, you’re getting that knowledge base and growing your own knowledge base.
Yeah. ’cause I think, I think that’s one thing that people fear, I’ve heard that a lot, is they’re afraid to sound stupid when they’re talking to, you know, one of these professionals. Like, oh, I feel dumb, I don’t want to, you know, and then they just go out and do stuff and make mistakes and <laugh> then, then we gotta call in the cleaning crew <laugh> to kind of clean and mop up the mess that they made, which can be done. But I’m sure you guys don’t love filing dent amendments very often. <Laugh>.
Yeah. And you know, that’s the thing is you can, you know, there are certain things in the tax world you can correct, you can file amended returns for, and there are certain things you can’t, you know, especially on like legal entities, and we see this all the time where if a property’s in the wrong entity, we might be able to fix it if it just happened. But if we’re talking, you know, 3, 5, 10 years down the road, sure you can fix it, but it’s very costly. And so then you’re stuck with having to decide, do I wanna pay the tax and correct it so I’m better going forward? Or I do, I just stick with this pain point until at some point I get rid of the property. And so I think with anything, it’s when you do it right from the beginning, it’s always much cheaper and easier than to correct something. And the longer something has been going wrong, the harder it is, the more costly it could be to correct it.
Yeah. Yeah. Yeah, I agree with that. I think one, one of the best things that I did early on was kind of forced. I, I didn’t mean to, but it kind of got forced on me because as I mentioned earlier, when I was trying to buy that first very first rental and, and my lender was like, wait a minute, wait a minute. You don’t actually, you know, you’re taking too many write offs here. I actually did that. I hired a real estate strategist, tax strategist. I paid them, you know, a little bit of money up front and they definitely mapped it. Wasn’t you guys, I didn’t know you guys that back then, <laugh>. But it was, you know, so important for me to understand you know, putting this all together and strategizing and what was it I was trying to get to and how am I gonna be able to take advantage of stuff?
And I was self-employed, and so a lot of stuff was just jimmy rigged. I’ll say <laugh>, you know, when you’re, when you’re, when you’re an entrepreneur, you just kind of like throwing spaghetti at the wall and just kind of jimmy rigging stuff and trying to figure it out as you go. And so you know, real estate is a serious investment. It should not be taken lightly. This is, this is a big deal. And, and even though what I focus on is passive and a lot of the work has been done for you, it’s definitely you’re still creating a business and you do need to take it seriously. So yeah. Love it. Anyways, anything else that you guys wanna add before we wrap it up today?
I mean, I think the only, the other thing that’s on a lot of people’s minds is this big, beautiful tech ta, big, beautiful bill. That’s, you know, we’re all hoping as we’re sitting here recording right now, the, the, the bill is sitting with the Senate and they’re doing their, their thought process and negotiations on it. But all signs are good that they’re gonna bring back bonus depreciation at a hundred percent. So we’ll keep our fingers crossed on that and we’ll see kind of what else, what else transpires from that, hopefully over the next month or two. Yeah,
It’s funny, like taxes, it’s you know what, what we always tell our clients is tax planning happens all year round. It’s not like I do it once and it sits on a shelf, right? It’s sort of a living, breathing document because your investment profile changes your goals with respect to, you know, income and wealth building changes, and then tax law changes, you know, all the time. And so it it, but it’s not about you as an investor needing to do all those things and learn all the things and, and follow the bill. It’s, that’s the job of your CPA, right? Keep up abreast and, and, and your job as an investor is simple, is keeping that line of communications open with your CPA, with your attorney, with your investment advisor so that they all know what you’re trying to do before you do it. And because that’s when they can jump in and say, Hey, let’s consider this, or stop, before you do that, here’s what you need to know and let’s strategize around this thing that you’re considering.
That’s perfect. And you know what, and that also gives us an opportunity to schedule another interview and we can talk about if that big beautiful bill passed and what cost segregation is, and what bonus depreciation is, because we hinted at it and we kind of talked about it a little bit. But being able to really dive into that a little bit more and have people not sit there, you know, ai searching <laugh> for, for the correct answer I think that would be really beneficial and pretty awesome. So if you guys are okay with that, then let’s make that a part two interview for next time.
Yeah, for sure. Hopefully that will happen soon. Sooner
Than later. Yes. <laugh>,
Hopefully not in December, right? Yes. Hopefully this month or next month, <laugh>.
Yeah. So is that, is that, I mean, do we think that that, is that supposed to be passing? I’ll just, I, because I haven’t been paying attention.
I mean, I, I think kind of the stuff we read and, you know, the tea leaves that we’re seeing is like, you know, hopefully Q3. Okay. There’s, there’s been tax, there’s been tax laws passed before, like the last week of December, so don’t quote us on this, but you know,
Yes.
Well, hopeful, hopefully We’ll see, see that. And I know for, for me personally, I am hoping that one gets passed. There’s some other stuff on the bill that I don’t want it to that to happen. So I’m hoping they can kind of scrub it up a little bit. But that is one, right?
Keep the good stuff. Get rid of the bad stuff.
Exactly. That’s one that, I mean, we are gonna be talking about that forever if that one gets passed, it’s pretty exciting. So anyways, thank you. Thank you guys. It was so amazing talking with you, and I know that our listeners really, really appreciated you guys just simplifying. I think that’s, again, back to what we said is it’s, you know, it’s not this big scary, bad guy talking about taxes and this horrible thing. It’s something that can be cool. It can Ben be beneficial. It can be you know, fun to talk to with you guys and not scary and just, you guys prove that today by simplifying it for us. So I appreciate it.
Yeah, thanks for having us. Yeah, thanks. That was fun, Melissa.
Definitely. Thank you guys. Bye.
Thanks so much to Amanda, Matt, and Melissa for an insightful and informative episode. If you haven’t subscribed yet, make sure to hit that button. We’ve got plenty more valuable content coming your way. We’re really glad to have you with us. That’s it for now. Thanks again for tuning in and we’ll catch you in the next episode.
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