You know, many of us are fine with paying our fair share of taxes as long as it’s legal, ethical, and moral, but really nobody wants to pay more in taxes than they have to. And I personally believe that you should always be learning ways to legally, ethically, and morally save on your taxes because really we don’t want to be overpaying. And one of the reasons we invest in real estate, especially income-producing real estate is because it is such a tax-favored asset class. It allows us to reduce and potentially even eliminate at least temporarily if not forever, our tax impact. And it’s been a while since I’ve had my next guest on, he’s just a brilliant guy when it comes to taxes and taxation, especially in the area of real estate. So I just thought it’d be a good timing to bring him back on and talk about the subject. So my guest today is Chris. You’re going to have to correct me if I pronounce your last name wrong. Is it a Picciurro, but a very clear Picciurro.
But a very clear Picciurro. I’ve been called worse.
Well, Chris is the executive officer and co-founder at integrated financial group, and they are a nationally based financial firm that strives to provide sound financial services to individuals, small businesses, and mid-sized businesses. So, Chris, I’m sorry for butchering your last name, but welcome to the show.
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Well, it is a pleasure to be here. I’m not only excited to be a participant, but I also really liked podcast. And it’s been a while since I’ve been on. And I think reached out a few weeks ago. Cause I literally on my, on my Sunday run was listening to a couple of your Ask Marco episodes and they’re always really good by 90 to 95% of our client base are real estate investors. So I actually always liked listening to those because that’s telling me what people are asking. So it’s a really good tip for me and it’s an honor to be on this podcast.
Awesome. Well, Hey, I didn’t know you were using my episodes to help you out, but that’s awesome. That’s great. Thank you for that by the way. So Chris, Hey, tell us a little bit about yourself and your firm because it’s been a couple of years, I think since I had you on. And I think we have a lot of new listeners. So tell us about you and your company.
Yes. So our firm name is Integrated CPA Group. And what we do is we legally and ethically reduce the amount of taxes our clients pay in a lifetime and our clients are entrepreneurs, real estate investors, and highly taxed households. And we do that using an exclusively, a membership-based subscription model. So it’s a little different model than most. But we really focus on tax planning and strategy because, with every person’s situation, you have a compliance piece, which would be your tax return. Preparation could be bookkeeping payroll. So obviously we offer those services, but the strategy planning and open lines of communications that we’ve kind of feel like in almost all relationships, communication solves all problems. So we like to be planners. We like to be proactive instead of putting fires out all the time.
Perfect. I love it. That’s great. It’s an interesting model because so many companies are moving to the SAS model, you know, software as a subscription. And even though yours is really personal service, it’s not service online. It’s interesting how many companies are going to the subscription model. I think it’s brilliant.
Well, thank you. Thank you. We’ve been, we were extremely early adopter and in fact, I’ve done some presentations. So I’m originally from Michigan for the Michigan Association of CPAs. And I had some angry participants when I was presenting to my peers, how to implement value-based pricing and these types of models, but I think people are coming around and I think that it’s mutually beneficial based on, you know, for all parties involved.
Great. I love it. So today’s topic is essentially why does our tax code love real estate investors? You know, a lot of people are fearful of the tax code because they think it’s all about how do I put my hand in your pocket deeper and pull more out and leave you with less. But the reality is if you understand the tax code, it’s really telling you how you can make more and pay less. If you just know what those rules are. So I’ve identified last night, about 10 different ways you can save in paying taxes or even eliminate taxes when it comes to real estate investing. So this is not a very structured conversation. I want to have a conversation with you so people listening can understand, wow, these are interesting ways to save on taxes. And maybe I didn’t know about half of these. So maybe I’ll just start the conversation by talking about probably one of the most interesting, powerful, and sometimes confusing areas. And that is depreciation because depreciation can shelter your income. And it’s one of those things that you literally don’t have to spend a single penny to get it. It’s just given to you by the IRS. It’s a noncash expense. So take us through depreciation, why it’s such a beautiful thing.
Right? So it’s confusing, it’s a very confusing concept for our real estate investor clients. You know, if you think about our clients, let’s say their contractor and they buy a new F350. They know that that vehicle depreciates over time. So it’s easy for them to understand that the depreciation. So instead of thinking, depreciation, think about what we call now MACRS – Modified Accelerated Cost Recovery System. So instead of depreciation, think how am I recovering the cost of my investment over time? And the federal government provides us with guidelines for the amount of time, each piece of capital acquisition, which could be a single-family home. It could be an improvement or it could be equipment machinery, how long you should deduct that. And, it changes between commercial and residential. So why the tax code loves us is that you can have a property that appreciates in value yet you get a deduction.
And we’re kind of talking about that before the show, but the concept that we use between cash flow and tax flow, obviously our clients are, many of them are looking for positive cash flow. And what I’m working on is getting them positive tax flow, meaning, you know, they’re, they’re not. Cause once you pay a tax, that’s gone for the most part. Now, obviously, with the Care’s Act, there’s some new language that you can carry a net operating loss back five years but just think about the tax, the tax you pay as a black hole. But that being said, you know, the tax code provides us with a lot of opportunities to change how we write off our acquisition of properties. So what we do in our firm as we first diagnose, and then we prescribe, so the diagnosis, we have four basic diagnoses as we have green or the red, green, purple, gold, and depending on your diagnosis. So if you’re a red diagnosis, meaning, Oh my gosh, I have a ton of recognized income this year. What can we do? A great diagnosis would be using bonus depreciation, 179 depreciation it’s actually a cost segregation study. So from a 30,000-foot view and from a listener standpoint, understanding that when you buy something, a capital asset until you file that tax return, that’s when you formally declare your depreciation schedule or your cost recovery system and timeline,
What are the other categories? Maybe it’s a bit of a tangent, but red is like, you’re bleeding in taxes, right?
That’s red is stop the bleeding right, green and green is income acceleration purple is tax neutral. And then gold is what we all want tax free growth. If we can accomplish something, using all of those, that’s even better. So just thinking about how real estate loves, you know, the tax code, most real estate, right? If you’re a red diagnosis, you could run up and do a cost segregation study and actually pick up more deductions. Then especially if you put down 20% and you’re speaking up 30% on a property, immediate deduction, you could actually be cashflow positive. There, you can have a deduction more than your tax flow is better than your cash flow. You can. Then in that case, you might have a large deduction. I’m assuming you can take that deduction. You might have the ability to recognize other income tax-free, such as let’s say, if you want her to convert a Roth IRA, or you might or to sell a property. The nice thing about the appreciation is if you hold a property and you pass away and your beneficiaries inherit it, they’re going to get a step up in cost basis. And all of that cost recovery or that depreciation we’re talking about gets wiped clear, and we get to reset the clock based on fair market value. So that’s truly tax-free growth, right?
Yeah. That’s the beautiful thing about real estate and sadly, it’s basically saying never sell your property, hold it until you die. You know, it’s just, you pass it on at least today on a tax-free basis because a gain on the capital gains is wiped away and your heirs that inherit the property essentially start at zero again. So that’s a beautiful thing. Going back to the depreciation. I mean, really what you’re saying is that you can show positive cash flow and actually have real spendable dollars coming from your income portfolio, your property portfolio, but at the same time on paper show a loss that you can use to minimize or even potentially eliminate the tax impact of your income this year and virtually for the next 27 and a half years or more.
Let’s take a, let’s take a cash flow property. Let’s say the acquisition price was $150,000. I’m going to use round numbers. So if you’re driving right now or running, try not to, you know, grab a pencil, I guess when it’s safe, but let’s say the property is $150,000. Let’s pretend you don’t have a mortgage on it. What would be your positive cash flow typically? Let’s say it runs for, you know, 13 to $1,400. And let’s say, I’m just making numbers up, but let’s say you’re positive cash flow is $800, seven, eight $7,200 a month. Well, in that case, that $150,000 property, first of all, if you do nothing, we’re going to have to do a land allocation, but in general, you’re going to get a $4,000 deduction just for buying that property without a mortgage. So your cash flow is 8,000 plus 8,000. Your tax flow is you’re only paying tax on 4,000. And not only are you, do you have, but that’s also what you’re paying tax on. You’re also only paying tax at ordinary income rates. It’s unless you have a really rare circumstance, that’s not subject to self-employment tax. So it’s considered a passive income. What you could do, though, what we’ve seen is, is let’s say you’re in a situation where we want to, let’s say that you are a high-income earner, and if you had a passive activity loss, you might not be able to deduct it in the current year. What you could do is potentially do what’s called a cost segregation study. I know we’ve talked about it on the podcast before. Let’s assume we get to be a very conservative, let’s call it 20%. Let’s say you get a $30,000 immediate deduction. Well, now what happens is for the next four to five years, you’re going to pay no tax and an $8,000 positive cash flow.
Or here’s another situation where we would say if you’re a green diagnosis would be maybe buying a cashflow property with no mortgage. If you have, let’s say you are a W2 person with high income and you have a lot of passive activity losses. We were looking for what we call PIGs – Passive Income Generators. So you might want to buy a rental property that provides positive cash flow, lower taxable income. And not only does it provide lower taxable income, it offsets other passive losses that could have been in the past. Now there are some special things you have to do on your tax return or what they’re called rental grouping elections. But again, it really it’s diagnosed first and then prescribe. And a lot of times we have clients coming to us with potential prescriptions and we just have to weed through it. So think about depreciation. If you’re listening is a big honk of Plato and we can kind of mold it the way we want. We can just leave it as it is and take the 27 and a half year on residential property, straight-line depreciation, or we can maybe segregate out a chunk of it and it immediately deducted. Sometimes we want to do that. So that’s why the whole deal with depreciation. It’s really powerful tool.
Can you talk about accelerated depreciation, what that is, and how it comes into play?
Absolutely. So with the tax growth and jobs act of 2017, starting in Texas with 2018 and beyond any assets, what we call 15-year assets or less are immediately deductible. So that would be carpeting. You know, again, it’s always a facts and circumstances situation. Let’s say you buy appliances for your rental property. Now there are other things you can do. Other special tax selections you can make to immediately deduct appliances, for instance, that are the de minimis safe harbor, the Safe Harbor for small pet taxpayers, and the routine safe Harbor election. I don’t want to get all technical and that sort of stuff, but because, but I don’t want someone hearing this and saying, why don’t you depreciate an appliance? You could just make a tax election and deduct it right away. But let’s assume you’re, you’re setting something up for depreciation. If it’s a 15-year asset, then you can deduct that immediately if you want. But here’s the cool thing. You can also elect out of it. I’ve got several clients that I’m, you know, it’s kind of nice. It’s like monopoly, you get that. Get out of jail free card. I don’t have to decide my depreciation schedule until we file that tax return. So there’s a lot of times when things, even though we’re doing a lot of tax planning, we’re looking if I have, I’ve got someone in that’s usually in a 25% marginal tax rate this year, they’re at a 12% marginal tax rate. We might say, Whoa, let’s elect out of the five-year it’s by asset class. I could elect out of the five-year bonus depreciation and take the 15 years. So it’s really, really cool.
So it basically sounds like what you’re saying is that we as real estate investors have options available to us in terms of how we take those deductions. If we have a high-income year or we’re expecting to pay a lot of taxes this year on our current tax return, then it sounds like we can accelerate that depreciation and take those write-offs immediately. Like this year, it’s a lower tax impact, but if we have a low income or low tax year this year, but we’re expecting to pay higher taxes going forward, like in the next two to five years, we can defer those write-offs in that depreciation and that bonus depreciation two years, two, three, four, five to lower our tax impact in higher tax years.
Correct, Correct. And then, so a lot of it comes down to understanding what someone’s either acquisition or disposition strategy is, but their portfolio, because if I know, you know, it’s, it’s crazy because what we’re trying to do is we’re trying to match things. We don’t want a ton of capital gain in one year. And then the next year we have a huge capital loss that we can’t use. So that’s how we can. So we’re really trying to, and again, last time I checked, I don’t have a crystal ball, so I can’t predict what’s going to happen, but yeah, exactly. It allows us some flexibility. When we also know that it’s important for any investor to build their team out, which includes their lending partner and for the, your CPA or tax advisor to work with the lending partner, to understand what’s going from that tax turn into their underwriting process, into their decision process. As far as usually these depreciation deductions are added back when they’re going through underwriting. But, but yeah, depreciation is really neat.
So this just all comes. This is just tax planning, tax planning. That’s what you’re talking about. You’re strategically looking at what the situation is today. Maybe what you’ve had taxed over the last or past five years, and then planning what you can do this year and what you should be doing in the next two to five years, as far as adjusting your tax situation to minimize the impact each and every year. So this is really what you do with your tax advisor or your CPA is you do tax planning to minimize how much tax you’re going to be pay year over year.
Exactly. You have to consider your tax is the expense of owning the property. Now, normally it’s a very, very small expense. If any it’s you, it’s rare until typically until you get to a point where you’re disposing of properties. And even if you dispose of properties, you have other options to defer your tax to keep the cash. And a 1031 exchange obvious it’s not literally going in your pocket, but eventually, it’s going into your equity in the next property,
Right? So that kind of segues to thought here, you know, a Warren Buffett, one of the most famous and probably one of the best investors, you know, out there, he has a saying, you know, my favorite holding period is forever. You know, he’s clearly a buy and hold, not a transactional investor. And you know, if he had his way, he would hold everything forever and never sell. And for the most part, that’s what he does. But the reason he, he does that, one of the reasons is that there’s no tax on appreciation. The appreciation is there and you’re never taxed on it until you actually realize it. So what can you say about that? What are your thoughts about appreciation and lack of taxation? How do we take advantage of that?
Right. So I would say, you know, now that we’re in the tax reform era and the estate tax exemption is so high, now we’re gonna, we’re talking on a federal level. Every state’s a little different, we have conforming and nonconforming States, but yeah, to be able to pretty neat that you can have a capital appreciation, that’s tax-free in your lifetime. If you hold onto the property at a minimum it’s tax-deferred until you recognize that. And the other thing is, that’s a great powerful tool, and there’s a potential now, again, consult your tax advisor on the deductibility of this, but there’s a potential to utilize that equity tax-free with refinancing, with HELOCs, with whatever your strategy is. That’s why we say real estate. You know, the tax code loves real estate. I did want to point out more things out that just came to me with depreciation, just because I want the listeners to really think about, we talked about step up and basis and a step up in basis can occur between spouses.
And I see that as a major miss on tax terms when we’re reviewing prospective client tax returns, husband and wife owned an apartment complex, or a lot of times its one spouse owns it. The other spouse inherits it. That’s all. You can get a step-up in basis for sometimes for a hundred percent of it. If it was jointly titled sometimes at a minimum 50% of it. And in some states, if you have a title properly within a there’s some special trust, you can get a 100% step-up in basis. So the spouse gets a reset.
Can you explain how that works? I’m hearing what you’re saying, but I’m not entirely following. Cause if you’re married, do you not, I guess it might depend on the state, but do you not share in the tax reporting on that? And so you’re really in the tax basis together?
You will file a joint return, but the titling of the property is going to dictate the step-up in basis. So if it’s, if my spouse and I own a rental property in Jackson, Mississippi, and I’m just saying, because I’m kind of interested in that market and I know you guys worked in there. So but let’s say we owned property in Jackson, Mississippi. Let’s say, you know, I get hit by a beer truck. And now she’s very wealthy and probably happier with a guy with flowing locks. Let’s say that I’m gone. Whatever that property is. If we bought the property for 120,000 and now it’s worth even 140, she gets a step-up in basis for my half of it and gets to start read, appreciating it from my half. So if she ends up selling the property in the future, maybe, Hey, I don’t want to ma I don’t want to have to work with these. She’s going to reduce her capital gains and her cost basis in the property from my half resets to half of the bailey that was owned jointly. And that fact there.
Interesting. I think that’s the first time I’ve ever heard that.
It’s really interesting. So if you’re, if you’re filed partnership returns or I don’t want to get too tactical, but it’s called the seven 54 elections and you’re, and we’ve seen it where spouses again, that’s a, that’s a big mess. And it usually gets caught. If a client comes to me and says, my spouse passed away three years ago, I’m trying to sell these properties. I don’t know what to do. And I’m looking at the depreciation schedule. So in that fact pattern, you might want to same with cost segregation studies. You might want to do a change of accounting method and on your texture and, and make an adjustment so that your cost basis is increased before the sale happens. So it’s, I know again, a little technical now, but again, it comes down to planning, right? Or lack of planning for some taxpayers.
Yeah. No, that’s, that’s interesting. Cause I don’t think I’ve ever heard that before. And so I’m just mauling it in my head. I’m thinking, wow, that’s, that’s actually pretty powerful.
It is, one more thing under appreciation. I just, just cause I want, I don’t want to be remiss when the IRS calculates your capital gain, it’s depreciation allowed not taken. So sometimes I run into a taxpayer that says, I didn’t want her to appreciate my property because I don’t want to have to pay tax on it when I sell it. And that doesn’t matter if you buy a single-family home, you just have to deduct or cost recover the structure of the building over 27 and a half years.
Chris, is that optional or can you opt-out of that or do you have to depreciate it over 27?
You don’t have to, you can not take the deduction, but when the IRS calculates your capital gain, they are reducing it by the depreciation allowed. If you get really bored out there, check it out. It’s not depreciation taken. It’s depreciation allowed. Now that doesn’t mean you. They’re going to say you should have done a cost segregation study. It’s going to be based on a 27 and a half year on a single-family home.
So when would you do that though? I don’t understand why you would not take the depreciation.
Some people. Like a lot of times, it’s on self-prepared tax returns or tax returns prepared by people that don’t know a lot about real estate. To be honest, it’s, it’s rare, but it could happen. Sometimes people say, well, I don’t, I need to show more income for, to get a loan. It’s like, well, the depreciation is going to get added back anyway, but that’s okay. You know,
That’s true. So for those people listening to this that maybe do their own tax returns or they’re using a, you know, turbo tax or whatever it may be. And they didn’t whether, you know, they forgot or it was on purpose. They didn’t actually take the depreciation for the last five years. And now they’re listening to this. What should they do first of all, can they go back those five years and take that depreciation? And how would that play out? And should they actually implement that depreciation starting now?
Yes, first they should have implemented immediately. The second thing is you can only go back and amend your tax trends for three years and have any type of benefit. So what they would want to do is do what’s called the change of accounting method and potentially take the, all that depreciation deduction in the next year’s tax return. So they’re going to want to talk to someone about that. There’s something called the 401 A adjustment. So that same situation when you do, if I have a client that in 2015, they bought a commercial building and now they have their red diagnosis and they’re not looking for us. So they have, we need some tax deductions and they’re not buying any other properties. And they have a lot of, and no better fact better. It would be, they own two properties. They’re going to sell one and I’m looking for deductions. And the other one, you can actually go back through the cost side study, pretend you did it in 15. And any deductions you should have taken now I’ll come into play is when you do have to do, what’s called a change of accounting method on your tax return. So that’s what you would do.
And if they can’t use up all that depreciation this year to minimize their taxes, can they carry forward any unused portion of that depreciation from the last three years?
So if they did a change of accounting method and then they have a big depreciation deduction in 2020 that they can’t use, then what would happen is it would just become part of their passive loss carry forward. So they would essentially get it.
Got it. Cool. So you mentioned two things actually in last 10 minutes that I I’ve been trying to remember in the back of my mind here. One is that the equity you know, I had mentioned that appreciation essentially is not taxed that’s there, it grows. You know, I mentioned Warren Buffett and he likes to hold things forever, but you can borrow against that appreciation. You can borrow against the equity as a whole, and it’s a tax-free event. You can borrow the money, use it, and put it to work, and you can do that through a cash-out refinance. And you can do that through a line of credit or a HELOC, a home equity line of credit. So, that’s a beautiful thing. You mentioned it. I just want you to kind of talk a little bit more about it from a tax perspective. I know people love to be able to do this because it allows you to rapidly or accelerate, you know, the speed that, that what you build your portfolio with and gain more equity over time. And it accelerates wealth creation. But any comments about it from a tax perspective?
One thing you want to consider as we would call that a portfolio reallocation, there are some rules, as far as the deductibility of your mortgage interest, if you’ve pulled out of the property more than what your cost basis is. So that’s just something to consider doesn’t mean you shouldn’t do it. If you’re in a partnership tax situation, then it gets really complicated because each partner has their own basis. But let’s say you’re the only owner of a property. That’s a good way to pull equity. Another thing that we’re seeing, and one of, one of my tax tips is using the 10 T election, which means we see a lot of the clients on the coasts. Okay. They have a ton of equity in their property, right. And what they’re doing is they’re using the first position or it doesn’t have to be first position, but home equity lines of credit to buy property in the Sunbelt, in the, in, in the Midwest.
And then they’re kind of doing the BRRRR method, but financing it through their home equity line or they’re buying it rent ready. I know you had an episode about, you know, the term, Turnkey’s kind of a newer thing. So let’s say they buy it, what we call turnkey or rent ready property. And then they use those rents to either pay back their HELOC or they refinance out and kind of do it over and over again, in that case, we’re talking about pulling equity out of a property. So it doesn’t always have to be a rental property, investment property. It could be their primary residence. And in that case, you can make what’s called the 10 T election and actually deduct that mortgage interest, even though it’s tied to your personal residence against your rental property income, and now little tax reform with the standard deduction being almost $25,000 for most married taxpayers, depending on age, that’s attractive because a lot of us aren’t really deducting our mortgage interest.
When I say us, I mean America, right? A lot of taxpayers, a lot of people with mortgages. So it comes down to the diagnosis and strategy. If someone says, this is what typically happens, I’m looking to buy a property, you know, I need X amount of down payment and what should I do? Well, probably the worst thing you could do is pull it out of your IRA, right? Because now you’re getting taxed plus potential 10% doesn’t mean you shouldn’t do it. It’s just typically a bad look, right. Or just depending, you know, we have to figure out what you’re trying to accomplish. If it’s something that someone that’s saying, I want to get into hard money lending. Yeah. I’ve seen horror stories where people could pull money out of an IRA, lose 40% of it to tax and turn around and do lending with it where they could have just done the lending and the self-directed IRA or something more creative.
Let’s drill down on that 10 T for a minute here, cause I’m sure there’s a lot of people listening to this, that fall into that situation where they’re thinking, yeah, I’ve got, I jokingly refer to them as equity, rich cashflow poor. And so these are a lot of the people in the coastal States and the expensive markets like Denver and wherever else. So if you’re borrowing against your principal residence and it’s, let’s say home equity line of credit or whatever it may be, but you’re paying interest on it with the 10 T election, you are now able to shift that interest deduction. Well, that interest charge on the borrowed monies from your equity to your rental properties, right? That’s what it’s for now. If you make that election, does that apply to your principle mortgage as well, your first mortgage, or just that second mortgage where you’re pulling equity out?
It can be, it can be a first mortgage. It depends if that money was used to buy a property. So let’s say you get a cash-out refinance. So let’s say you own a hundred grand you’re in California. You pull out 400, then three-quarters of your new mortgage could be allocated to what we would call schedule E sometimes schedule C, some to schedule A, as an itemized deduction.
But that interest is already deductible on your principal residence. If you’re getting HELOC. So why would you want to take the 10 T election?
Right? Well, it’s deductible, if you itemize your deductions and then in, there are some states that don’t allow itemize deductions with the standard deduction being, you know, $25,000. Right? A lot of times you’re not going to be able to deduct it, especially if you’re in a no-tax state like Texas or Washington, you know, you don’t have paying any state and local income tax or very little so. And it’s, to me it’s better to move that in general. It’s from schedule A as in personal deduction to schedule E as a what we’d call a business deduction against rental properties.
Got it. Okay. So people are listening to this and if they didn’t know about it, they’re actually missing out on a potential deduction towards their taxes that has been there for a long time, and you’re not taking advantage of it.
Right? Because Marco think about some of the, some of the the, like the child tax credit the college tuition credit, there are a lot of credits that are based on your adjusted gross income. And we know that schedule A is an itemized deduction after adjusted gross income schedule E is before adjusted gross income and most States tax you on that adjusted gross income figure. If we can move something again from schedule A, as a personal deduction, a business deduction in general, that’s going to make sense. It doesn’t always make sense, but it’s a tool we have.
Interesting. Okay. Well, we’ve really only covered three or four bullets at the time.
Not going down. If you ever want to hit me with a few fast ones, I don’t care. I’ll be short-winded.
No, you’re fine. You know what? Let’s just hit one more and we’ll record another episode. So anything on that off the top of your head that you think would be pertinent for the subject of, you know, the tax code and why it’s so favorable for real estate investors?
Well, obviously we’ve harped on that planning is very, very important. The use of your depreciation deductions important, I would say it’s also important for you to look beyond the numbers of your tax return and tax planning into your tax elections. So these are things that are going to be attached to your tax returns, or maybe they weren’t attached to your tax return that don’t affect the numbers, but making sure that you are aware of what we call the de minimis safe Harbor election, which means that any in general, any improvement under $2,500 is immediately deductible. Even if it’s a new set of appliances, why is that important? Well, when you go and sell that property if you do sell a property, you have to pay tax on your depreciation recapture. And if you capitalize it, then you’re either paying tax on that at a higher rate than capital gains, or you’re forcing to put more money into another, you know, tax to a 1031 are qualified opportunities don’t fund.
So making that safe Harbor election is important. I would say the other elections, the well, that’s the de minimis safe Harbor election. The other elections are the safe Harbor election for small taxpayers, which basically in general means the lesser of 2% of the basis of the property or $10,000. It was immediately deductible. And then there’s a routine maintenance, safe Harbor. That means that says, Hey, if it’s routine maintenance, as long as I’m not creating a betterment of the property, I could still deduct it. Now, every, each of those could be its own episode. I just want to make the listeners aware of those things. Now, one more, one more election. That’s very important for those of you that are with tax reform. Section 199A such and 199A was born, which is the qualified business income deduction that deduction provides you with a up to a 20% deduction based on your business income.
And for a lot of our clients, remember that example without the mortgage where we said, Hey, you have $8,000 of cash flow. You have only $4,000 of taxable tax flow. Well, in that case, it’d be nice to take an additional 20% federal deduction off of that $4,000. So there’s a safe Harbor election for rental real estate investors call the rental real estate enterprise election. And in general, it’s, as long as you have 250 hours into your real estate activities, then you’re going to be able to qualify for the 20% deduction. And that 250 hours includes all of your, so your property managers, your repairs, or maintenance folks, all of those activities count for the 250-hour rule. One more election. I promised this you’re going to also want to do a rental grouping election because of all these tests you hear about with, out that you hear about the 500-hour test, 750-hour tests. I just mentioned it does a wacky a 250-hour test. What we want to do is those tests, in general, are based on each property. So you want to make an election that says all of my rental properties, I might have five of them are really just one big enterprise. So it’s called a rental grouping election. So if I have to leave everyone with a few quick-hit tidbits, definitely look at your tax turn, make sure those elections were made. The elections don’t make sense for everyone, but I would say about 80 to 85% rate, we’re going to make those elections
Two questions real quick, the 250-hour rule, that particular election. Can you use these elections in conjunction with each other? And you mentioned one before that, I don’t remember what you called it. I was going to ask you if they both apply together.
Yeah. So they, you can use it multiple elections. Yes. Go ahead. Sorry, go ahead. Well, the 250, the rental enterprise election only really plays a role. If you have net taxable income from your real estate activities, if you don’t, then you’re not going to get the 20% deduction.
So how many of these elections would you say there are, that are applicable to real estate investors?
I would say. Hmm. That’s fun. That’s a good question. If I ever I’m let me think, I’d say it’s a ballpark. It, what would you say? Five, five of them? Ah, not including depreciation five,
You know, it almost sounds like just the elections are one whole episode by itself, right?
Yeah. Yeah. These are much more fun elections to talk about than our regular election. So, because it could save you money, but yes, I’m happy to again you know, I’ll send you, I have a couple, you know, two, three-minute videos on each election that really dives in and allows people to figure out if that makes sense.
Okay. Sounds good. All right. Well, we are running at about a 40-minute mark here. So why don’t we start to wind it down or wrap it up? I know we’re going to be doing another episode as well, so we can pick up somewhere in that new episode. So, Chris, Hey, thanks for coming on the show. Tell our listeners where they can find you and where they can get more information about what you guys do.
Right? Well, you could find us if you’re listening to the show, we’re happy to talk to you, give you initial consultation, guide you in the right direction. Our website is realestatecpa.guru, or I have a professional Facebook page. If you just go to facebook.com/YourRealEstateCPA, and you don’t have to put your information in, it’s just, well, on the, on the first one, if you want to have an inquiry and a talk, we obviously have to know where you’re at to call it, to set that up.
Know, I’m happy to help out people. I really feel like the theory of what good is your knowledge, if you don’t share it.
I love it. Awesome. Well, Chris, thank you for taking the time today. This has been informative. I know taxes is a confusing area for a lot of people, and this is why I stress the importance of having a good CPA or tax advisor to help guide you through it because there’s all these ways to save on taxes. And it’s almost impossible for anyone individual to know what they all are and how they apply and when to take advantage of them. So, you know, we need guys like you.
Well, if you’re in real estate and we’re always learning, I think I could probably help you out. And if you’re an Idaho potato farmer, I’m probably going to find his own and I know how to help you.
So it’s interesting. I mean, tax is really gone the route of medicine and so far the fact that we really are having to specialize in certain industries.
So yeah, very much so. Yeah, no, that’s great. I find that the subject very interesting because every time I learn something new, I’m thinking, Oh, there’s another way to save on taxes and that’s, you know, that’s great. It means more money in our pocket, right?
Yes.
All right. Well, Chris, thank you for your time for everybody listening today, Chris is a wealth of knowledge take advantage of his free resources, check out his website and learn a little more about what they have to offer. You know, anytime you can save on taxes, it just means more money in your pocket with that.
If you’re relatively new to real estate investing, or you just want to get a refresher and a primer, download my free report, The Ultimate Guide to Passive Real Estate Investing. It is a great frame of reference for you. If you’re thinking about real estate investing, or you are looking to build your portfolio, contact my investment counselors for a free strategy session, and they will help you build a roadmap to build that portfolio. And then of course you will bring in your tax advisor to help you save on taxes.
That’s it for today. I appreciate you listening. We will see you all on our next episode.
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