165. Brandon Hall’s Discussion on The Real Estate Professional Status at the 2022 Tax & Legal Summit
March 1, 2022
167. The Current State & Future of the Real Estate Market with Marco Santarelli
March 15, 2022

May 23, 2024 | read

166. Back to the Basics of Tax Deductions for Real Estate Investors with Troy Silfies, CPA

Thomas Castelli

In this episode, Brandon and Thomas are joined by Troy Silfies, CPA, and they talk about the tax-saving opportunities in real estate investing.

This episode is sponsored by Landlord Studio.

Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.

Thomas Castelli 0:00
You’re now listening to the real estate CPA podcast, your source for all things real estate,

Brandon Hall 0:05
accounting and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.

Thomas Castelli 0:30
Hey, everyone, thanks for tuning in to this episode of The Real Estate CPA podcast. We cover so many advanced strategies here on the show from the real estate professional status to short term rentals that can be easy to overlook the basics and the basics still have the potential to save you 1000s in taxes. That’s why we’re going to replay a second session from the 2022 tax and legal summit where Brandon Hall and Troy selfies a tax manager and CPA here at the firm discuss the basics of tax deductions for real estate investors. We also have a special announcement to make over the last year we’ve been building the tax smart real estate investor brand and believe it aligns with the purpose of the show and the audience we’re trying to serve. For those reasons. We will be rebranding the show on Friday, March 11. And you will see the podcast appear in your feed as the tax smart real estate investor podcast. Thanks for being a loyal listener of the show. We look forward to continuing to serve you and with that said we’ll jump right into today’s episode after a quick word from our sponsors. If you’re a do it yourself landlord managing rental properties landlord studio is made for you. The software helps landlords simplify income and expense tracking. With their easy to use app you can digitize receipts record income and expenses in real time and generate reports and even manage leases and tenants plus landlord Studio makes late rental payments and bank visits a problem of the past with secure online rent collection get the rent paid directly to your bank account. And you can even automate rent reminder emails and late payment fees. Landlords studios also the best way to stay tax compliant, they offer a range of financial reports including Schedule II and supplier expense reports designed for tax time. You can learn more about landlord studio and start your 14 day free trial at landlord studio.com/cpa. And use the coupon code real estate CPA at checkout to get 25% off your plan. Again, that’s landlord studio.com/cpa and use the code real estate CPA to get 25% off your plan today. And without further ado, we’ll jump right into today’s episode Troy

Unknown Speaker 2:23
go ahead and

Brandon Hall 2:24
introduce yourself or audience who are you? What are you all about? And we’ll go from there.

Unknown Speaker 2:29
Oh, thank you, Brandon. Um, my name is Troy selfies. I’ve been at the real estate CPA now for a little getting close to a year. I’ve been a CPA for the CPA firm and world for over about over 10 years. So I really enjoyed real estate’s very lucrative we’ll get into in a little bit. So I’m excited to be here today and talk to all of you.

Brandon Hall 2:49
And you are a tax manager at the real estate CPA and Troy is definitely a go to guy at the firms wanted to make sure that he had a session slot here that he could show off his knowledge. So Troy, let’s start with a with an easy softball question here. Why is real estate so beneficial from a tax perspective?

Unknown Speaker 3:10
Real estate is very beneficial in many ways. So it is a softball question. But there is it’s definitely somewhat convoluted. So what I would say is there’s a lot of lucrative opportunities in real estate. Compared to most industries, there’s not that many of us but real estate allows a lot of tax different options and tax saving opportunities. So there’s simple ways for those income tax side. But also real estate income is usually not subject to self employment taxes or payroll taxes. So that’s one way around it. Another great way is we’re hitting the real estate professional status. I’m all maybe go through all those details right at this moment. But hitting that status can really open up a lot of opportunities for you. Other just to hit some notes, the other main items are tax deferred, you do 1031 exchanges are like kind exchanges. There’s also another unused or not as used section sections 721 exchanges, there’s qualified opportunity funds and zones. Even personally just in real estate, you have your section 121 exclusion. So that’s your your home, your personal home exclusion for your personal home that you sell at gains. So there’s a lot of different deferred and tax deferred options, tax saving options, as well as we need to get into the deduction side we’ll get into a bit Cost Segregation studies and bonus depreciation that is allowed. So there’s a lot of many lucrative ways within real estate that’s going to opens up the world to you and to real estate investors to really tax planning.

Brandon Hall 4:39
And a lot of those ways we’re going to be discussing throughout this tax and legal summits, you mentioned a lot of things that are future sessions. So we’re really excited about that. But you did mention one thing that I want to hone in on a little bit you said that rental income is not subject to payroll taxes, self employment taxes. Talk to us a little bit more about that like what what The implication of that, why is that a good thing?

Unknown Speaker 5:03
Um, well, just to go off it is, obviously, that’s a very decent saving. So just say you have a construction business. So let’s get outside of the of the real estate industry. And you have that that income is being passed through to you say through a partnership that gets passed through to you. And that’s going to be subject to self employment taxes. So you have to put the employer side and the employee side. So you have 6.2%, up for social security, both sides, employer employees, times that by two and 1.45%, for Medicare, so that’s about I think it’s 15.3% Total self employment taxes that you’re gonna pay. So you have $100,000, you’re gonna pay $15,300 on that taxes for a construction partnership. In real estate, I should say also, plus your income taxes or whatever your marginal income tax rate is. So if you’re a real estate, entity investors, that same partnership, you’re not construction, now you own five rental properties, and it produces 100,000 of income, it is not subject to real estate taxes, so that 15.3%, you don’t have to pay on real estate income in this scenario. That’s a huge savings.

Brandon Hall 6:15
So to kind of just rehash so if you’re in business that you mentioned, construction, but this goes really for any business, right? If I’m a real estate agent, broker, property manager, you know, if I’m in the, if I’m in the business of really doing anything significant, and that’s all going to be subject to self employment income, income taxes, which is a 15.3% tax, but investing in rental real estate, is not self employment, earnings, right. So like you said, if I have $100,000, from running my CPA firm $100,000 of net income from running my CPA firm, I’m gonna pay that 15.3% tax before I even talk about my marginal tax rate. But if I had $100,000 of net income from my rental portfolio, and this is $100,000 of rental income, after all the expenses after depreciation we’re going to talk about, but if I had $100,000 of net income from my rental portfolio, then I would not pay that 15.3%, I would not pay that $15,300 tax. So I get to at least avoid that. So right off the bat there, you know, investing in rental real estate is going to allow you to build income streams that are not subject to Social Security, and Medicare tax, it’s much more tax efficient than being a business owner. Well, let’s talk about one of the big tax deductions that everybody likes to focus on. And that is depreciation. So give us a rundown on what depreciation is and why it’s beneficial to real estate investors.

Unknown Speaker 7:47
Sure, yeah, depreciation is a very good area in an area that should always focus on what I want to just I always throw this out to the new people, I speak to some people I get asked for real estate investors, why am I why is my property being depreciated? I really, I’m investing in these real estate properties because of the appreciation of my fair market value. So my always response is depreciation is really just a cost recovery method. So just like you would normally do any other, you know, cash expense, or a true expensive insurance, you’re going to get that deduction, typically right away, for when you buy a full property, you’re really just getting a cost recovery method over the deemed life the IRS sets forth. So I just always want to say that that’s the really the purpose of this, it may appreciate in fair market value, but it’s going to depreciate it from the cost, the cost basis side.

Brandon Hall 8:39
Yeah, a way that I like to explain this is that your your roof, your windows, the components that go into your property are literally going to fall apart over time. And that’s what depreciation is meant to track. So carry it carry on with your depreciation explanation.

Unknown Speaker 8:57
Sure, absolutely. So just to explain in general, so let’s go back for you buy a million dollar property, a million dollars is great, but not all of it is subject to depreciation. So you take that million dollars, you need to figure out first split it between land and building. So typically, you’re you’re buying the land plus whatever the building, that is the structure on the unzips land or a lot. So the three kind of main methods is I always, we always bring forth to our clients and how to split out that million dollars, what is land and what is what is building is one if you actually get a true appraisal of the property, you can use that appraisal to break out between land and building or recall and proven value. Or you can use the property tax court. So you want to go onto the county’s website or the locality. Figure out how it was assessed by the tax assessor for property taxes, and split the improvement value and land value that that’s probably the most common way because it’s it’s usually all public knowledge that you can always reference. The last method is you can really use If you use a similar property appraisal within a local, other building that is very similar type property, or structure and or a similar type property tax card that you can find that you can’t use the other two is usually the kind of the default to go. So that’s how you would split between land and building. What I want to say next, and this is where opens up more opportunities is now you haven’t split. So just say simply in that situation, you have 20% land, so you have $200,000 land, that land does not get depreciated, so there’s no expense to that you’ll use that basis for when you sell a very now no depreciation 800,000. Now, you can depreciate that amount, but for how long? For how much? That’s the question. So if it’s residential property, it’s 27 and a half years, if it’s non residential or commercial, it’s 39 years, that is not very lucrative at first, because that’s over a straight line basis, are you recovering the 800,000, either over 27 and a half, or 39 years, that’s obviously a very long time to read recoup some of that expenses. So the one way around that is doing a cost segregation study. The cost segregation study is exactly what what it sounds like, is an engineer if you do a full blown study is going to come in and try to segregate the cost of that unproven value of that building to figure out is some of this building not 27 and a half or 39 year property? Can it be reclassified or segregated to be five year or seven year property or 15 year property? And what’s the reason for that? The reason for that is obviously, you’re now instead of taking over 27 and a half, or 39 years, you’re accelerating that depreciation by either doing a five year schedule a seven year schedule a 15 year schedule, or you can do a lucrative 100% bonus depreciation. So that can really advance a lot of deductions in this situation.

Brandon Hall 12:03
So let’s talk about an example. Let’s say that we have $10,000 of net rental income before depreciation, and we have $8,000 of depreciation. Talk to me about like, how much cash Am I actually receiving here? And how does that $8,000 of depreciation kind of come into play? Like, how does that help me?

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Unknown Speaker 12:24
Yeah, that’s a very good question. So I always want to always explain cash flow versus tax income, right? So that’s always going to be different because of depreciation. So that’s an error, you had $10,000 of income $8,000 of depreciation, the net, there’s obviously $2,000 of taxable income. But you’ve got $10,000 in cash flow from the rental with ease going on partner maybe missing, there’s any, you know, debt cost that if you if you bought it, you might have to have some mortgage and stuff, which was usually less than depreciation overall and mortgage interest. But from a cash flow, your cash flow is much higher than what your true taxable income is. This is kind of where the taxable income and cash flow really differ. And that’s what really makes it lucrative in real estate.

Brandon Hall 13:16
And so even if you were so great, great, great call on so you have $2,000 of taxable income, even though you’ve received $10,000 of cash flow. And what I always like to think about is my effective tax rate, right? Because at the end of the day, it’s not necessarily about eliminating my income tax, right. It’s about overtime over a span of 10 to 20 years. How can I deploy the Warren Buffett method of investing? Warren Buffett pays millions of dollars in taxes, but why is he Why is it often cited that he pays less than his secretary? Well, it’s because his effective tax rate, the total tax that he pays on all of his income is lower that percentage is lower than his secretaries. And so this is a really good example because I’ve earned $10,000 of cash flow, but I have $2,000 of taxable income. If I’m in the 37% tax bracket, that’s like, what? So what is that? Two times three, that’s like $700 or so $700 tax. So so I’ve got $2,000 of taxable income $700 of actual tax on that income, on the taxable income, but in reality, it’s $700 of tax on $10,000 of cash flow. So my effective tax rate even though I might be in the 37% tax bracket, my effective tax rate on this income stream is 7%. Thanks to depreciation so depreciation is tax sheltering this for me. Now, what happens if depreciation creates a tax loss? Like what happens if I have $10,000 of of cash flow of income, but I have $12,000 to depreciation

Unknown Speaker 14:56
so it does depend a little bit but basically you’re going to It’s gonna write down to zero, obviously, you’re not going to have any taxable income, but now you have a taxable loss. So now this depends if you are a passive investor or a non passive investor. So if you’re a passive investor, that loss and the scenario you had 10,000 of income, 12,000 depreciation, so you have a loss of $2,000, you’re a passive investor, that $2,000 gets suspended and carried forward until you have any passive income to offset that, or you sell such property and it gets released. All the other ways, if you have multiple passive activities, they all get netted together. So if you have a $5,000 passive income on one property, a $2,000, passive loss, on the second property that nets to actually only $3,000 of passive income.

Brandon Hall 15:49
And in listeners, you’re gonna be hearing about the passive activity rules throughout the summit. So that just kind of overwhelmed you don’t worry, you’ll hear about it on the short term rental piece on the short term rental session, and then also on the real estate professional sessions that are upcoming, so we’ll do a deeper dive into the passive activity loss rules. But those rules, those passive activity rules are the most important rules for individual real estate investors and landlords out of the entire tax code. So make sure that you pay attention to that type of stuff, because like Troy just mentioned, you can have this $2,000 tax loss and it can either be suspended, or it can be used, it really depends on how you execute under the passive activity loss rules, will try to talk to me about depreciation recapture. Because everybody always likes to talk about the benefits of depreciation, and then they’d like to skirt over the actual recapture piece. So what is depreciation recapture? And and how does it come about?

Unknown Speaker 16:41
Sure. So similar, you get your depreciation in year one, you depreciate it, say it’s over 39 years, and so you’re at the highest tax bracket 37%, you’re going to get a nice deduction, right, so you’re going to get a deduction at 37%, because you’re lowering your taxable income because of depreciation expense. But so your five, so now your five, you’re going to sell such property, if you have a gain on the overall property, you’re gonna have to recapture that prior depreciation that you took. But what I will say is that there’s three different ways to recapture. And I’ll explain this a little more detail. So there’s section 1245, recapture, their section 1250, recapture, and there’s unreal captured section 1250. So this can be very confusing. So I’ll take this as slow as possible for everyone to understand. It’s all comes down the original way. It’s section 1231 property. So that’s what this real estate property is going to fall into. If you have a loss, you have 1231 loss fine. If you have a gain, some of that game can be basically re characterized as those three recapture sections that I said. So for 12 for Section 1245. Recapture. And what I should explain what the point of this real quick is, you get a deduction at that 37%. The reason you’re doing this recapture is because this is an investment property. So typically, any gain of any investment is that capital gain rates 15% or 20%. As of right now, the IRS does not like that, because you got a deduction potentially at 37%. And now you’re getting you’re only recapturing it at 15 or 20%. That’s a pretty good deal. So the way then fixing this is doing these these recapture provisions. So going back, so 1245 recapture, that’s your five and seven year property. So what that really is, is typically appliances and furniture, that’s what would be in that five to seven year property category. So say you took 100% bonus on that recapture on that game, we’re going to allocate that game, the 1245 recapture, that recapture is is actually an ordinary rates, so you’re not going to be subject to that capital gain rates at 15 20%, it’s going to be subject up to that 37%. So you still got a benefit of the time value of money of getting the depreciation in prior years. But now you’re gonna have to also recapture at the same tax rate. So just want to make that make that known. The same thing happens for Section 1250 recapture. That is 15 year property typically. So that’s land improvements, fences, driveways, sidewalks and give you some some ideas of what what would be in that 15 year property category. So same thing that is also going to be recaptured at ordinary rates. So it could be up to that 37% marginal tax rate. The real benefit comes at the end the on recaptured section 1250. So what that typically is is depreciation on that building, so we didn’t cost segregated out. That’s anything that’s 27 and a half years or, or 39 years or anything that was not above straight line depreciation. So we’ll go you know, to a nerdy are standing that but on recaptured part of it, that is going to be subject to tax at ordinary rates up until the max of 25%. So this can be very lucrative in this scenario, once you under capture tool 50, you say you had a deduction at 37%, you’re only now gonna pay tax on the gain up to 25%. So that’d be 12% tax win. This is obviously very, very beneficial that the IRS allows this. So just Just an FYI, this helps the time value of money still, but you also get the 12% swing.

Brandon Hall 20:35
So let’s start. Oh, I’m sorry, good. Oh, usually,

Unknown Speaker 20:37
the last part is if there’s no more recapture, the gain is above all these recapture provisions, the last part goes is going to be taxed at section 1231. gain capital gain rates 15 20%.

Brandon Hall 20:49
Okay, so let’s do let’s walk through two examples. And let’s do example one first. So let’s say that I buy a home for $100,000. And over the whole period, I’d appreciate it all straight line 27 and a half years, I’d appreciate it $30,000, I then sell the home for $100,000. So listeners, it’s important to understand I bought the home for 100,000. And there’s in the market was just flat for the hold period. And maybe it went up and came back down. And now I need to get out of it. So I bought it for 100. And I’m going to sell it for 100. But I depreciated this $30,000 over the whole period. Troy, what do I have gain? And if so how is that tax?

Unknown Speaker 21:30
Yeah, absolutely. So let’s let’s walk through it. So you get $100,000. That’s what you received. That’s what you sold it for? You bought it for 100,000. But you had the 30k Depreciation 100 minus 30. So you have $70,000 The basis of your of your property. So you got 100,000, your basis is 70,000, you have a $30,000 gain. So now how is that taxed? So we can go into that scenario. But in your scenario, you said it was all straight line. So that is going to be unrequired 1250. So that gain that 30k is going to be fully recaptured at ordinary rates up to 25%.

Brandon Hall 22:09
Got it? Okay, very good. So it’s important to understand that if I take depreciation, I’m going to have to pay that back, even if the value of my home has not increased. And again, pay attention as we talked about the passive activity loss rules throughout the various sessions. Because if I was never like if that depreciation created tax losses, and I was never able to utilize those tax losses, I can use any suspended tax losses to offset that $30,000 of gain from depreciation. Now, example number two, let’s say that I sell that same home for $110,000. So bought it for 100 depreciated that 30. I’m selling it for 110. What are the various components of gain that I’m gonna have to pay tax on there?

Unknown Speaker 22:52
Sure. So same scenario, so you did 30,000 of depreciation. So our net basis cost basis of our property is 70k. But we sold the 410 solenoid a $40,000 game, but only 30,000 of it is going to get recaptured because that was our depreciation. Same scenario that 30k is going to be unreal captured section 1250 gain tax at ordinary rates up to 25%. The other 10% that additional 10% of gain is now going to be subject to capital gain rate. So that 15% or 20% tax rate.

Brandon Hall 23:25
Very good. Very good. Thank you for explaining that. Alright, let’s move on to other deductions for landlords. So just in general, what are deductions that I can claim if I buy a rental property, like what should I be paying attention to and looking out for?

Unknown Speaker 23:41
Sure, so your typical deductions other than depreciation that we just talked about, and I want to real real quick say depreciation as a use it or lose it. So make sure to always depreciate as a property. Because you’re gonna, you’re gonna need to if you don’t use it, you will lose it in the future. Other items, deductions you can have or mortgage interest. So you obviously pay debt, you have debt on such property, that interest is deductible, the principal is not, that’s kind of done through the depreciation side. So your mortgage interest you have any insurance, property taxes, those are all deductible. Also, any repairs that you’re doing on such property, certain those repairs will be done talked about in a later session of the of the tax legal summit that needs to be capitalized or not. But repairs will be allowed as a deduction if there’s a hole in the wall, you have to spackle it that repair, deductible simple, easy, other simple, you know typical expenses or utilities. You’re gonna have property management fees, if you use a property manager, those are all deductible any you know, legal and professional fees that you’re paying for, you know, your CPA, for lawyers for attorneys for setting things up, although LLCs etc. Travel home offices. We’ll get to some of these in a little bit further and further details. What I want to explain though is how do you know is is if they don’t is actually allowable. So the easy way of understanding of understanding it is, you can deduct anything that is ordinary and necessary for your business. That’s your real estate. So what is ordinary and necessary? Anything that is current? What does that mean? So what is current mean? You cannot prepay your property taxes for 10 years, that’s not going to be allowed. So obviously, whatever is due within the next year, so just letting you get advanced the doctrine that certain scenarios, I asked to be actually directly related, I can’t deduct personal use on my business, just because I paid it through business funds. So I just want to make that make that obviously very known. And then the last part is, is reasonable amount. So anything that’s outside of fully, that’s not reasonable, it’s usually going to be disallowed as

Brandon Hall 25:43
well. What if, what about the monthly property tax and insurance payments that I pay with my mortgage are those deductible

Unknown Speaker 25:53
so they typically will go into escrow. So the escrow is not it’s not deductible at first is when truly those tax payments are due. So typically, it’s very nice service that these mortgage companies hold. And you know, they accept the escrow amount for insurance or property taxes or whatever, but then they set then they subsequently pay the county or local local taxes at that point in time, that’s when it becomes deductible, they’re now in escrow essentially, will be deductible at a certain point in time, but it will not be deductible until it is actually currently do with whatever authority

Brandon Hall 26:29
so so it’ll be deductible when escrow like releases the payment. Correct? Correct. Now, what about like guard dogs and lavish meals? can I deduct those?

Unknown Speaker 26:43
Um, guard dogs? No, I’ve actually never seen that situation before. But no, that is typically a personal expense, you’re having a pet, you’re not going to be having a true, there’s no ordinary necessary reason for that. And a warm system. On the other hand, that to me is a little bit more of an ordinary necessary expense, not a guard dog, lavish meals. Why are you having a lavish meal? Is it ordinary and necessary? And that’s also a reasonable amount. If I’m taking out you know, an owner, I mean, of a person is renting a property for me a tenant, that he’s paying $1,000 a month? If we go for a $20,000 meal? Is that really ordinary? Necessary? Probably not?

Brandon Hall 27:25
I want to know where you’re getting a $20,000 meal. That’s incredible.

Unknown Speaker 27:28
I’m going Hi, I’m going on? Um, oh, yeah, pull it up. But I’m just making your very, very clearly some ordinary necessary. Good stuff.

Brandon Hall 27:39
What about home offices and cars in? No, I always hear people ask like, oh, are they’re fearful of the home office deduction, because they think that it’s going to create like an audit flag. So talk to us about the home office deductions and writing off vehicles.

Unknown Speaker 27:57
Sure, so home offices in vehicles are very great areas that you can kind of plan for. But you want to make sure you plan ahead of time and are well informed in these areas. So home office is really nice. But you need to have your home office, you have an office, I’m in my home office right now. But your home office needs to be used regularly and exclusively for a principal place of business, and also regularly exclusively, as a place that you’re gonna meet and deal with patients, clients, customers in the normal course of business. So if you don’t have an area that you do, so you have a home office, you call it your home office, but you’re in there doing personal things, your kids using it for school, you know, you have a W two job using it for as well as your outside business. That is not exclusive to a trader business. So that is not allowable. So I just want to explain that right off the bat. So people think they have a home office, because they do have a desk and a computer in their home in their home. That necessarily doesn’t mean that it’s truly whole office in the eyes of the IRS. So that’s that’s the first way of just making sure you’re understanding the home office. But it’s important to create that because now you have a principal place of business as your home. So your travel to and from real estate, your real estate investments can now be deducted. So I’ll go into the vehicle side a bit. But going back for home office, there’s two methods to use for home office. You ever Safe Harbor, Safe Harbor ZZ, you have $5 per square foot, I have 100 square foot home office $5 times 100 is $500 deduction. Other way is his actual expense method. So going off before you’re gonna have you have depreciation, utilities, insurance, interest, etc. But for your home off of your home office, you can only allow the deduction for the actual home office, the actual business use. So make it really simple. So you have 100 Even $1,000 1000 square foot home 100 Square foot is, is your home office, that’s 10% 10% of all utilities would be deductible on my home office. Does that make sense? The last part is also anything that’s directly applicable to that space. So that’s where square footage, so ever repair in my home office that’s going to be 100% deductible not subject to the business use requirements.

Brandon Hall 30:26
And in what about vehicles? When can I deduct the car?

Unknown Speaker 30:30
Yeah, um, so a vehicle is actually very similar to the two methods that we talked about, there’s a safe kind of a safe harbor method or the mileage method or the actual expense method. So from the IRS side, you’re going to want for the mileage side, sorry, you’re going to want to do, it’s going to be for 2022, it’s 58.5 cents per mile. So you’re gonna have to have a compliant mileage log. So if you need this for both methods for the actual expense method, and for the mileage, so you want to figure out what is truly a business mile, or a business model versus a personal mind. So one simple way, a good way to be compliant is going to odometer at the beginning of the year, odometer at the end of the year that knows how many miles you drove. Then after that, you have to put a purpose, you have to wall join the purpose of your of your miles, how many miles, the locations of your trips, and basically proving out why it is truly a business model, you’re going to need this for either method. One way to do this, because this can be burdensome administrative burden, help yourself by using, you know, tracking apps or an Excel spreadsheet. A tracking app is you know, MileIQ is a good one that we like to reference. But please use that to help you facilitate and make it make your life easier. But going off those two methods, the mileage is simple. You drive 1000 business miles, you get 58.5% of the all those business models. What I will say is that where you typically get a bigger benefit is the actual expense method. If you do the actual expense method, that is simply you’re going to take also depreciation, your lease payments, gas, interest, repairs, insurance, but at the same time, you have to figure out what your business uses. So if you use out of that scenario, if you only use it for 60% business, out of all those expenses, that I just referenced, only 60% is allowed to be deducted. And you’re gonna have to if the IRS ever audits you, you’re gonna have to basically prove burden of proof is on the taxpayer. That’s why it’s very important to have these logs and keep receipts. So you want to be able to prove it easily provided to the you know, IRS agent, etc. We also like to ask to get our tax payers or our clients prepared in these situations. So I just want to make sure to be regularly doing this. You don’t have to retrospectively doing that, because the IRS doesn’t like that either.

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Brandon Hall 33:00
Great, great. And if you’re wondering, can I write off the cost of a car that I just purchased? We’re not going to dive into that on this session? I think that that’s a requires a pretty detailed explanation. But but just so that I can give you that information at a very high level, if you are a small landlord, the answer is probably no. If you’re running a business where you need a vehicle, the answer is probably yes. And that can include being a larger landlord as well. So make sure that you do touch base with your tax advisor, if you’re thinking about purchasing a vehicle because it can be a pretty lucrative tax deduction. Well, tell me about education expenses, we get this question a lot. Let’s say that I’m a, I’m studying for my real estate agent exam, and I’ve got to buy all these books to study for it, and I’m out 500 bucks or something, kind of duck this $500 cost. And let’s also assume that this is my first foray into real estate.

Unknown Speaker 33:59
Um, so the short answer is no, because and I and there’s a treasury regulation that I will I will quite fully reference. But basically, it’s all education is only deductible, when the expenses are used to maintain. So that’s the key word here maintain or improve the taxpayers skills in such trade or business. So if you’re new to this industry, and you’re in inside the trade or business of real estate, those you know, just that you’re saying that the books and stuff for real estate exam, you’re not in the real estate, and you’re not really maintaining your skills, you are not inside the real estate business yet, and you’re not improving. Maybe you’re improving to get into it, but you need to actually be in the trader business. So that’s not the ductable but going off that if you have an existing trader business and you’re taking a real estate course, just like you’re paying for the tax and legal Summit, that course if you have you know 10 rental properties you are now utilize it you’re you’re taking this course to maintain and improve your skills that is allowed and that

Brandon Hall 35:03
is deductible. Perfect, perfect. So the tax and legal summit fees, if you purchase the VIP tickets, or the recordings can potentially be deductible, if you’re already in a trade or business related to real estate, and in a trade or business is being a landlord, as long as you own your own properties, if you’re just investing passively, in LP deals, there’s a good argument to be made that you’re actually not in the trader business of real estate. So just be careful with that. Now, if I’m a landlord, and and I’m listening to everything you just said, I’m just like, Whoa, man, that’s a lot of information. Where can I go? To remind myself very quickly and easily? What expenses are allowable, at least at a high level? Is there a particular form that I could look up, that would just list it all out? For me?

Unknown Speaker 35:51
The easiest way is yeah, just going right to the tax forms, and that’s gonna kind of explain kind of what typical expenses, there are, at least what the IRS has already deemed are actually segregated out on a form. So from an entity side of the partnership, escort, etc, you’re going to go to form 8825. That’s where it’s going to be reported on the tax side, if you are going to report on your individual returns, so your 1040, you’re going to go to your schedule E, that’s where you’re gonna put rental properties. And that’s where you can basically look and see kind of the items that the IRS has already deemed appropriate or give you some ideas of what are proper expenses, there could be for such real estate.

Brandon Hall 36:29
And you can Google these forms too. So you can literally type in IRS Schedule E or IRS at 825. And it’ll take you right to those forms. And then on the left hand side, it’s going to show you all the kind of basic expenses, you know that you should be tracking, which, which I think is a really good, just quick and easy reminder, where do I report flipping activities?

Unknown Speaker 36:50
Yeah, good question, we get this question quite often. So flips, I like to just explain what that is, you have to think about flips is really almost like your manufacturing, usually obviously rehabbing. And flipping such such property. It’s really like you’re almost manufacturing or improving something and selling it goes really inventory. So just like you would be creating widgets or anything else you manufacture, you’re creating it, it’s your inventory until you sell it. So that is really more of a trader business, not necessarily a real estate investor or a rental property, of course, that’s going to be reported. If it’s it’s in a business or partnership or escort, it’s gonna be on page one. So that’s really your ordinary income. If it’s on a individual returns, you’re on your 1040, you’re going to put it on Schedule C.

Brandon Hall 37:37
Okay, and let’s say, and let’s say that I buy a flip at the end of 2021, December 2021. I spent $100,000, acquiring a property and improving it. And then I sell it in March of 2022. When do I get to deduct the $100,000 against my income,

Unknown Speaker 37:59
we will deduct your all goes off of the tax year tax years are typically your calendar year. So you bought it in 2021. But you sold it in 2022. Just like if you manufacture something, you’d get stuck in inventory at the end of 2021. So it’s not deductible in 2021, you can deduct it when you sell it in 2022.

Brandon Hall 38:19
Makes sense? Makes sense. And, and we have actually seen quite a few instances where people will deduct the $100,000 even though they still own the property going into the next tax year. So you got to be really careful with that. All right. Um, if a real estate investor wants to maximize all this, as they’re hearing everything, they’re like, Okay, what do I need to do, to position myself to take advantage of all of these potential deductions? What’s your recommendation?

Unknown Speaker 38:47
Well, since you’re listening to us speak right now, that is the first step right off the bat. So plan early, get ahead of the game, be informed. That’s the easiest way to start, right. So plan early, be informed. Get good accounting and bookkeeping systems in place. If you’re you know, buying your first few properties, you want to make sure you get that in place early. If you already have 12 properties, it’s hard to go back and retrospectively change it all, to try to plan early and get ahead of the game. Same thing, get keep receipts, be very organized, be very, on top of all the receipts that you’re you’re going off. Same thing with logs, we talked about mileage logs, if you’re want to be a real estate professional, make sure you have your logs in order. So those are main things that you want to make sure to do. I would say the last thing to do is get great advisors, so that’s why you’re also speaking with us, reach out, get a great CPA, get a great attorney, they will lead you in the right direction. They will give you the right information, the right advising to help you and maximize all these deductions.

Brandon Hall 39:51
Alright, Troy, thank you so much for coming on and speaking to everybody today. Where can people find you?

Unknown Speaker 39:58
I’m sure so you can reach out to our website at contact. You know at real estate CPA you can reach out to me directly. So Troy dot selfies selfies SILF ies at Hall CPA llc.com Reach out to me directly, or you can always look me up on LinkedIn and message me on there. I welcome everyone to if you have any specific questions, please reach out.

Brandon Hall 40:23
Awesome. You dropped a ton of knowledge today. Thank you so much for coming in IT folks if you enjoyed this session, you can purchase all of the session recordings at recordings dot tax and legal summit.com

Thomas Castelli 40:35
Hey everyone, in case you missed it during the intro, we have a special announcement to make. Over the last year we’ve been building the tech smart real estate investor brand and believe it aligns with the purpose of the show and the audience we’re trying to serve. So for those reasons, we’re going to be rebranding the show on Friday, March 11, and you will see the podcast appear in your feed as the tech smart real estate investor podcast. Thanks again for being a loyal listener of the show. We look forward to continuing to serve you. Thanks for

Brandon Hall 40:59
listening to today’s show. If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact at the real estate CPA comm with any feedback or topic suggestions, we are always taking on new clients and with the new tax laws in play. You really don’t want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.

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