Ep 85 – How to Use Tax Strategy to Create Generational Wealth with Matt MacFarland and Amanda Han

Nobody likes paying taxes. With the proper planning, however, you can create a financial situation where you minimize or eliminate your taxes while creating a portfolio that great benefits you today and your family tomorrow.

Adam Schroeder and Zach Lemaster are joined by Keystone CPA’s Matt MacFarland and Amanda Han to discuss ways you can employ your children, minimize your taxable income, and keep more of YOUR money for YOURSELF.

Use the code: RTRTAX and receive $200 off on any of these courses or live webinars!

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Transcript:

Adam
Hey, Rent To Retirement, it’s Adam Schroeder here once again with Zach Lemaster for another episode. And we are joined by two CPAs Matt McFarland and Amanda Hahn. They are co-founders of Keystone CPA. And no, we’re not going to talk about how to prepare your taxes. We’re going to have another episode about tax strategy, because, as we’ve discussed before, strategizing how not to pay taxes is about as important as not paying your taxes. Well, not paying taxes, legally, of course. So, Matt and Amanda, thanks for joining us today.

Keystone – Matt and Amanda
Yeah, thanks for having us, guys. Appreciate it.

Adam
Absolutely. So why don’t we start just a little bit of why did y’all go the route of tax strategy as opposed to just, you know, general, when people think CPAs, just tax prep? What what led y’all to be interested more on the strategy side of things?

Keystone – Matt and Amanda
Yeah, that’s an interesting question. I’ve never been asked that before. Well, our background is that we came from big public accounting, and we happen to be in the real estate specialty group. So in working with, at our old job was working with a lot of larger investment firms, developers, and for people at that level, they really focus a lot on the planning side of things. And for us, we just felt that, you know, for the average investor, Matt and I are investors ourselves, right? There’s not a lot of education out there about how smaller investors should do tax planning. Also, we might not be saving billions of dollars or millions of dollars. But if we could say, you know, even 5, 10, 20 $30,000, it’s a pretty significant dollar amount, in terms of what we can use to invest. So, you know, that’s, that’s kind of how we kind of got started on it, let’s make sure we bring a lot of those strategies that are traditionally for those very high income large investors down to the everyday investors like ourselves.

Zach
Excellent. That’s fantastic. I love that. And maybe it starts with, you know, 5, 10, $30,000, but ultimately, potentially millions of dollars, right? If people really grow their portfolio, you guys are invested yourself. So that’s fantastic. We always stress the importance of working with tax strategists and CPAs that are investors themselves and really understand the full capacity of what real estate, you know, offers. I mean, do you would you agree that real estate is probably one of the best asset classes and investments as far as from a tax perspective is? I mean, I think that’s kind of unanimous in the answer, but I’m curious to hear about, I mean, were you were you real estate investors first? Or did you go into the the accounting world after that, or vice versa? And maybe we can just do like a quick overview of some of the key highlights just for the everyday investor some of the big tax benefits of owning real estate? That’d be great.

Keystone – Matt and Amanda
Yeah, I mean, I think for Amanda, you know, she had some history of investors, her family, my family, not so much. So my kind of exposure to it was working in the Big Four where I kind of I think my my aha moment was working on this, you know, 60 year old retire, guys tax return, it was he was making six figures and cashflow, but not paying any taxes because of depreciation. And it was like, that’s when the, you know, the light bulb went off. Right. And living the dream. Yeah, kind of seeing that. I was like, Oh, wow, okay. This is this is why people do this, you know, and so, yeah, I mean, obviously, it’s kind of, you know, as you joked, right, it’s a loaded question about, Is this one of the best asset classes, from a tax perspective, for sure. Obviously, you know, it’s, you know, it’s like when you go out and buy, you know, Google stock, right, you’re not writing off the purchase price, your Google stock, when you when you buy it, you actually don’t get the write off until you sell it down the road. Right. But with, you know, rental properties, as we all know, we can, the IRS allows you to take that paper write off for depreciation. So that’s one of those beautiful things that we love about from a tax planning perspective. You know, why we love real estate?

Keystone – Matt and Amanda
And I think for me, you know, regardless of what type of investor you are, whether you’re just someone small, starting out small, you have a full time job and you just have one rental, or you’re even just house hacking or a couple rental properties. One of the biggest benefits, like Matt mentioned is this whole concept of depreciation, where we can write off part of or we could depreciate part of the purchase price of a building over the life of the property. And that’s where you see a lot of people where, you know, you’re getting cashflow right on the properties, but at the same time, you’re not paying having to pay taxes currently on the cashflow, and also as a real estate investor. You know, what, when you hear people talk about, oh, you know, the tax loopholes, or the tax code is written to benefit the business owners. What it’s really important for us to understand as real estate investors is that we are also business owners in the eyes of the IRS. So real estate investing is a business in itself. So a lot of the things that you hear people talk about in terms of, you know, write offs writing off part of your, your car, or your cell phone or your home office, a lot of those are available to real estate investors. Because we’re in the business, right of investing in real estate and, and by business, they’re not really talking about a corporation or an LLC, which is probably one of the most frequently missed, or, you know, biggest misconceptions people have is people always tell us like, Hey, I heard you on a podcast and you talk about writing off your car or paying your kids and writing it off. But I don’t have an LLC, yet. Do I need to go ahead and form an LLC. And for the most part, it’s not really necessary, or it’s not required to let’s say that, it’s not required to have it. Because if you are a landlord, as an example, you are already in the business of real estate investing, regardless of whether you have an LLC or not, right. So a lot of these strategies are available to you, just simply because your investor.

Zach
I love that. And, Matt, to your point on that aha moment. So many times, we’ve talked to accountants and people that are preparing, you know, returns for people and just seeing you get to see behind the scenes financially, what they’re doing, right. And so when you get to have that insight, or look at someone that’s really successful, in the majority of the times they have rental real estate, or if you’re seeing someone that is able to reduce their taxable liability significantly, which gives you a lot more money to reinvest at that point in time, which is how people really scale over time. But it gives you that kind of behind the scenes look at like this is how people are creating generational wealth and being ultra successful. And so you kind of get a leg up on maybe looking at those type of businesses and investment opportunities. So it keeps coming back to real estate. We’ve heard that so many times. But as far as rental real estate when we kind of look at, okay, and Amanda, that was a excellent point about the LLC structure, because that’s, that’s the most common question is like, Okay, do I need an LLC set up? And really, what what can you write off? And how should you be tracking this stuff? Can we just go through and do a quick bullet point of some things that are acceptable write offs? I mean, we have your your tax insurance, you know, what about your accounting and your, you know, legal fees, your cell phone? I mean, how do you how do you track that? And what really, can we write off as the everyday investor?

Keystone – Matt and Amanda
Yeah, that’s a great question. You know, the key thing to keep in mind is that the IRS allows you to write off a business deduction, to the extent that what they consider its ordinary and necessary to your business. So then the question becomes, as a real estate investor, what are some of the expenses that are ordinary, right, typically, an investor might have? And is it necessary necessary for me to have that expense, to invest my real estate to grow my real estate or take my real estate to the next level? So a lot of the things you mentioned, I’m definitely right accounting fees, if you have a bookkeeper, a tax strategist, legal fees, right? Hiring an attorney to help you with entity formation or entity maintenance, obviously, all the marketing that you’re doing, but also a lot of educational stuff, too, right? Paying for memberships, or going to a local real estate meetup going to, um, I see there’s a lot of real estate conferences going on right now. So ticket to those conferences, the flights there, the hotels there, the the meals, when you’re at the conferences, all those are legitimate business deductions. Because the reason that you have those expenses is to help your real estate right with your current and or future real estate lessons. So it’s really important to make sure you are tracking those expenses. What I always tell people is that, you know, as an investor, you are the first line of defense, in terms when it comes to tax deductions. And what I mean by that is, you have to be the one to track those expenses. Let’s say for example, you went to a real estate conference this month, and you didn’t remember to record it, you didn’t have copies of the receipts or any kind of documentation to prove the money was spent, and what it was for, if you don’t have that, odds are you’re not going to take a deduction for why because your CPA probably didn’t know you went to the conference, they probably didn’t know you spent that money. So so make sure you are taking the time to track those expenses, and then providing it to your tax person. tax time next year. Right. The worst that could happen is they can say, oh, actually this particular expense is not deductible because of XYZ reason. But first and foremost, you have to be the one to track it and present it to them because otherwise odds are they don’t know that that was actually an expense

Zach
No, I think what it really the question is on the tracking because that’s something we have often have confusion about is how do I and hopefully your account is giving you some or your tech strategist is giving you some guidance on this but is this Um, in people looking at IRS from a standpoint of fear, and I think is a lot of times misunderstanding of, Oh, am I doing something wrong here? And I think you brought up a really good point about, you know, the worst, I guess, in an audit scenario, potentially that something’s not allowed, you know, you may have to, you know, that may not be allowed and you pay taxes on it, potentially a penalty, I guess, maybe it’s some degree, but you really should be tracking this to the best of your ability. So how do you track that? Is it do they need physical copies of receipts? Do you need to have minutes at these these meetings, you need to have just, hey, I went to this conference, here’s, like, here’s the dates to justify that I went, I mean, how do you prove that? You know what I mean?

Keystone – Matt and Amanda
Yeah, I think a couple of things come to mind. I mean, you know, from a, from a pure tracking standpoint, yeah, keeping copies of the receipts is, is important, you need to do that. Now, it doesn’t need to be. Luckily, doesn’t have to be the hard-copy, the receipt anymore. The IRS does allow you to scan it and you know, you can put notes on it than scanning, keep that just keep that in your digital file, what have you, right. But, yeah, you want to keep notes on you know, if it’s a meal, right, you went out, you went out to dinner to talk to a potential investor about, you know, ABC deal, right. So you’re keeping notes on the receipt as to what was discussed during the meeting. The receipt will have you know, that, obviously, the date and all that kind of good stuff, but so keeping track of those receipts, and then also just having a way to keep track of the actual expenses from like a bookkeeping standpoint, right? So it’s either, you know, a lot of our clients use QuickBooks, but that’s not the that’s not the one and only thing out there. From a bookkeeping standpoint. Some of our clients use Excel, you know, so it’s kind of whatever works works for them.

Keystone – Matt and Amanda
Yeah, I think people always ask me, like, how should I track my expenses? And the answer to that really is could be different from investor to investor. So even between the two of you might be different, right? So as long as it’s a methodology that works for you, as the investor, that’s going to be key. So if you’re someone who’s pretty good with software, QuickBooks is great, right? It has a lot of automations, you can download a lot of information from your bank and credit card statements. So that’s awesome. But if you’re someone who does not like software, you don’t like to learn it, then QuickBooks is probably not something for you. If you’re more like Excel, right? I can, I can type everything. And then that’s great. And the reason it’s important that it’s something that works for you is again, you are the first line of defense. So it has to be a system that you can use comfortably, so that you’ll be doing it consistently and be able to track bills, right? Well, we see the messes like if you don’t track things for about three to six months, are you forgotten what you spend money on,

Zach
And I’m so terrible at keeping receipts, that’s just something I really don’t do a lot of times, but I will download I mean, I have my I have my bookkeeper, I have my accountant, my CPA, and then I have my tax strategist. And those are all three different organizations, they communicate, thankfully. But a lot of times, it’s like, okay, let’s, let’s do some reconciliation to go back and look at all the expenses on the business credit card, and then I gotta go through and write through, I don’t have a good system doing that. But I’m the one keeping receipts and writing on them and stuff. And I’m in the wallet and things like that. So

Keystone – Matt and Amanda
Yeah, and I think you know that I mean, you really don’t have to spend a ton of time on the receipts, you know, what, what we do is we just take a picture of those receipts. And, you know, over time, you just kind of fall away in a folder, right? The odds of that receipt being requested are very low, right? You only have to produce a receipt if you’re audited. And if the auditor is questioning that specific transaction. But hopefully you do have documentation like in addition to the receipt, if you use Google Calendar as an example, right, you can always pull the receipt and say, Okay, on this date, I had lunch with Matt, and we talked about whatever, right? Or you can go to your email and say, okay, here are all the things that Matt and I talked about where we were scheduled talk to talk about for that particular meal. So you know, I think in this digital age, a lot of this stuff is already documented naturally, because of how we live our lives. You know, everything is email, text phone call. So you know, a lot of those things are probably readily available, if you ever needed to pull them up.

Adam
You just don’t want to start that process on April 14 sec.

Zach
I’ve been there, Adam, and then you get the extensions, and it’s chaos. And you gotta go through a whole month of trying to figure out what you did over the last year.

Adam 
When y’all talked about depreciating stocks, I just got to thinking just jumping back a little bit. It’s like when you depreciate your Google stock, you’ve literally lost money when you sell. So when I say they’re not you have when I went to your website to look over kind of who you all are and what you did. It popped up that y’all have an ebook on one of the things that they all cover in that ebook is the most common and costly tax mistake by investors. So what is the most common and costly tax mistake by investors?

Keystone – Matt and Amanda
Well, there’s actually so many, so many of them, but I know in the eBook we talked about people who are real estate professionals and they don’t claim that legitimately. So real estate professional. So in the tax world, there are sometimes limitations. means in terms of how much rental losses can offset your non rental income. So for example, w two income, or income from a business that you that you own. So if you’re someone whose income was over $150,000, then your rental losses can only offset rental or other passive income. So one of the one of the ways around that is if you or your spouse can meet real estate professional status, so if you own long term rental properties, and you or your spouse is a real estate professional, then you no longer have that limitation. So rental losses can offset other income, like who knew when maybe other businesses that you might have? So this is, you know, a common big mistake. That’s what I mentioned in our ebook. But I think another really common mistake that we see from investors is really not understanding the difference that there is actually a difference between tax return filing and tax planning. So earlier, you were saying, Okay, I so for you know, I have a bookkeeper, I have a tax preparer, and then I have a tax strategist. You’re the first person I’ve heard in a long time, who actually says that there’s a lot of people just assume that whoever is preparing my return is also doing my planning for me. And I think a lot of our listeners, probably no, that that’s a false assumption, right? Because when you’re meeting with your tax person in March or April, April 14, apparently, they’re probably up to their eyeballs of tax filings. Right? A lot of them are probably not saying, hey, let’s brainstorm and strategize on what’s going on for the rest of this year. And that’s really what you should be doing. Now I’ll be at April 15, is not the best time to do it. But you know, in the summertime, right, today, for example, this is a good time to reach out to your tax person. And if there’s someone who offers tax planning, it’s a really great idea to talk to them about, what are my plans this year for real estate? Am I looking to refinance properties? Am I looking to maybe sell some properties expecting a game, right? Or maybe I just have, you know, a lot of stocks were Google stocks have gone up, or crypto has gone up? What are some of the things I can do to reduce taxes? Because it’s only through tax planning, where you have the options and different things that you can utilize to offset taxes? If the first time you’re asking how do I save taxes is in April, when you’re sitting with your CPA to prepare the return. That’s probably too late, right? Because everything has already happened in the previous year.

Zach
I like to look at a like an offensive and defensive type of play. Because your your defense is your account that’s filing the taxes and they’re looking at your scenario at that point in time. But then the offensive strategy, of course, is leading up to that point in time, everything that you need to be doing what you really need to have those conversations now for this year, because at the end of the year, there’s certain things that you have to have done, you have to own property this year to take tax benefits on it this year. So there’s there’s certain things you have to do right now. So that’s so such an essential piece. And I always hit the point home with people that having the right tax team in place is worth their weight in gold plus more like they end up saving the right team saves you way more than they cost you. And this is something that we get a common question about even people in the newer investors and that’s okay, than filing their own taxes, you know, initially, but we really don’t encourage that. Depreciation is a perfect example. You are required to take depreciation if you don’t you get, you know, it’s your taxes, just as if you did you got to pay it, pay it back anyway. So I mean, those are certain things you just need to be aware of, kind of switching gears here to the average investor who’s just holding rental real estate, what are some what are some things that are just normal write offs or deductions that the average investor always gets things like mortgage interest, normal depreciation? What else?

Keystone – Matt and Amanda
Yeah, I mean, I think from from from a rental property perspective, a lot of people, you know, most most investors don’t, don’t forget about, you know, the mortgage interest and the property taxes, the insurance, utilities, obviously, it’s a common expense. You know, some have homeowners association dues. But a lot of times some of those overlooked ones, they were kind of talking earlier, you know, you were asked about cell phone, auto expenses, right. So people, a lot of investors are driving around looking at properties or looking at their existing properties or trying to find new properties, they’re going to meetings, you know, all those business miles add up. And so you want to make sure you are taking advantage of the, you know, auto expense deduction for for your situation.

Keystone – Matt and Amanda
Also, income shifting to kids or other family members who might be in a lower tax bracket than you so we have clients who have kids who can help them out, you know, they’re old enough where they can help out in their rental properties. And so instead of just giving them an allowance for doing nothing right over the summer break, why not have them help you out in your real estate, they can help with turnover, they can help you with all kinds of you know, maybe administrative tasks or even marketing things that they can do. And basically, it allows you to take a tax deduction for the work that they’re providing for you. And if your kids are someone you know, hopefully your ideal They’re in a low or zero tax bracket that can result in some pretty significant tax savings. We also, you know, a lot of times I think we don’t when we talk about the power of tax planning, right, something you mentioned before, like, well, the money we save in taxes is money, we can reinvest in real estate. So if you’re someone who has saved $20,000, in taxes in either one or a couple years, that could be a down payment on $100,000 worth of real estate, right, versus, you know, the 20,000 that we pay to the IRS, we know what the return on investment is, right?

Zach
Yeah, you love that compounding effect, because not only are you not giving it to Uncle Sam, right now, but then you get to go out and invest it, earn a return on investment on that money, and then buy yourself into additional tax benefits. And so there’s a snowball effect I absolutely love Adam knows that tax strategy is my like, favorite topic to talk about. It’s very applicable, because I mean, rental real estate, when you really understand all the benefits of it, especially from like a real estate professional status. And you’re really in the business. I mean, there’s manners, there’s nothing else that compares, let’s talk about the kids a little bit. You know, that’s something that I think a lot of people have heard about and interested in. In, it’s a great way to involve your family and teach them a little bit of the business too. In the real estate side, if they’re interested in Adam, his some of his kids are professional actors. And so they actually do have an income. Netflix, right, Adam? Is that the messengers? Basically, okay, but anyways, I mean, how can you give us kind of a real world example? And like, how do you actually structure that on having your kids be employees and income shifting?

Keystone – Matt and Amanda
Yeah, I mean, I, you know, kind of real world example is, it can be just as simple as having, you know, maybe somebody has two kids, and they’re, you know, in their town alone, 1112 years old, you know, obviously, the older they are, the more work they can do, because their skill set is, you know, theoretically higher, right? But, you know, real world example is, you know, saving families in, you know, 30 40% federal estate tax bracket, right. But kids, maybe they, maybe they have another job, maybe they don’t have another job. But generally speaking, right now, kids can, you know, any individual can, you know, earn about $12,500, and not have to pay income taxes on it. So, if you are a family that’s paying, you know, 40% federal state, and you pay your kids say, $10,000, I mean, you’re gonna save $4,000 for the parents, right? But then the kids not gonna pay income taxes on it. So as a family, you’ve just saved $4,000 We all know, that’s money already given the kids anyway, right? It’s just we’re trying to find a way for them to help in their business. So you can take a tax deduction for and then obviously, the other all, you know, the ancillary benefits is that they’re learning, you know, hopefully good working habits, a sense of responsibility, that kind of thing, right to help you in your business. Yeah.

Keystone – Matt and Amanda
And the kids can, you know, if you can convince them to, they can take part of that earnings, and maybe put it into retirement account, right, for like a Roth IRA, for example. And that would be so powerful, you know, to have young kids with money in a retirement account that’s potentially growing tax free.

Zach 
I love it, teach them about investing. And so it’s really up to you to decide what what the rageous skill set what their interest is, and how you apply that to your, your real estate investing business?

Keystone – Matt and Amanda
Yeah, I mean, the IRS does require to be reasonable, right. So that’s where, you know, depending on their age, and and each child is different, you know, and so so depending on their age, and the compensation, I think the question you would ask yourself really is if I wasn’t paying my child, and I was paying my neighbor’s child to do the same tasks, what is the reasonable compensation that you know that this particular task would warrant? Right? And that’s how you determine what the compensation should be.

Adam
Now, when we talked about kind of business structure a few minutes ago, um, you mentioned, you don’t have to have an LLC and S corp, anything like that you can do it individually. It seems like in this situation, if you’re going to do you know, having employees, your kids working for you, it seems like an entity structure would be very, very beneficial. In that situation, when it comes to justifying it to the IRS. Can you talk a little bit about kind of what is what are good entity structures to set up? Whenever you are doing this? Is it just the simple LLC like people think about and put the property in? Or should they form an S Corp for hiring their kids? Kind of how do you go about doing that?

Keystone – Matt and Amanda
That’s a great question. You know, legal entities is another one of those areas where there’s not a one size fits all. So the answer will differ significantly from one investor to the next. But speaking about income shifting that strategy in itself, you actually don’t have to have a legal entity and depending on the age of your kids, sometimes it might they’d be less beneficial when you’re paying them from an entity, like an S corp. And the reason for that is for kids who I think is age 18. and younger, if you’re paying them from like a sole proprietorship, they avoid part of the payroll taxes that they would otherwise have to pay if you instead paid them through an S corp and did a W two and things like that. So, so so so yeah, how paying your kids itself doesn’t necessarily mean you should have a legal entity for people who are landlords, right rental real estate, people who have rental income. The only reason you would have it in an LLC would be for asset protection purposes. Okay, so we’re concerned with tenants or other people suing us, we put it in a legal entity so that we get the asset protection. But in terms of the deductions, a lot of the ones that we’ve talked about so far, they are available, regardless of whether it’s an LLC or nine and LLC, flows through right, it all flows through right now, if you’re someone else who has more active real estate income, if you’re a syndicator, if you’re flipping, wholesaling, property management income, those are a little bit different. Those are ones where it could potentially be beneficial to operate those inside of a different kind of entity, maybe like a corporation, S corp, or C Corp. S corp specifically helps you to avoid or minimize your self employment taxes. So you know, as a general, as kind of a standard example, if you made $100,000, fixing flipping comm having an S corporation could potentially save you $7,000 or more in self employment taxes, okay, but but those are very different than rental real estate, we typically don’t recommend holding rentals, in any sort of corporation. There’s always anomalies. But generally speaking, we don’t.

Zach
May it even be like, for an active type of business. I mean, that could even be short term rentals, potentially, or some other stuff that you’re doing consulting. I mean, you can do the like an LLC, S corp selection or something like this. What are some other low hanging fruit for just the average person that might just like, you know, you found in your experience working with people that are just like a few things that easily most people can take advantage of in the tax planning, but they’re just not aware of it? I mean, you talked a little bit about entity structuring, depending on your business, I mean, that that could be one of them. owning rental real estate in general. But is there any other kind of key points like aha moments with working with people with tax strategy?

Keystone – Matt and Amanda
Yeah, well, short term rentals, you touched on that one? That’s a huge area right now for tax planning. A lot of investors are getting into short term rental. And there’s some huge benefits with respect to short term rental properties.

Keystone – Matt and Amanda
Yeah, I mean, we were talking earlier about the whole real estate professional status, right? If you’ve got losses on your rental properties, you want to use those losses to offset non rental income, you can do that with real estate professional, when you know, the real estate professional actually applies to long term rentals. So short term rentals are kind of their own little bucket, if you will. And so with short term rentals, if you can generate losses from them, and, you know, I guess taking a step back, when we say losses, we’re not meaning you’re losing money, we’re talking about, you know, hopefully, with the money, yeah, the depreciation expense is kind of more than your income, right. So you’re creating a loss on paper, and we want to be able to use that loss to offset your other income. While with short term rentals, it’s actually a little bit easier to do that. All you really need to do is attach what they call material participation. But it kind of for the layman’s terms, you know, if you’re really self managing yourself short term rentals and kind of dealing with the day to day stuff, it’s a lot easier to meet the qualifications to be able to use that loss offset your W two or interest, dividend income, business income, whatever it is a lot easier than it would might be for a long term rental and a real estate professional.

Keystone – Matt and Amanda
Yeah, and you know, short term rentals for the most part, right, we are doing the furnishings up front. So a lot of that right now is eligible for bonus depreciation, we have a lot of investor clients who have you know, buy a pool table, or even build a pool in the property for short term rentals, getting kayaks and all that kind of stuff are potentially eligible for bonus depreciation. So that’s where, you know, kind of the big tax loss can be generated. And, you know, like Matt said, you don’t have to be a real estate professional. So this works a lot with investors who maybe are working full time. Or maybe both spouse, spouses are working full time, and they’re in real estate, and they want to use those losses to try to wipe out or reduce some of that w two income. It’s a you know, pretty, you know, one of those low hanging fruits, and pretty significant when it comes to tax savings.

Adam
Yeah, excellent. So, you know, you talked a little bit about kind of the low hanging fruit. Does the fruit become juice here as you build up your portfolio? Or is it kind of the same strategy when you have one as opposed to you know, 10, 20, 30?

Keystone – Matt and Amanda
Yeah, you know, that’s such a great question, because I think I hear this a lot from newer investors. He knows that, hey, these are all great things you’re talking about. But I’m not at that level yet. I’m not a big investor yet. So I’m not going to do tax planning. Because I don’t have that many properties to work with, or my income is not that high to work with. And actually, what I tend to see is that, for the people who have lower income, oftentimes, the savings are a lot more impactful, right. So people who have lower income, maybe don’t have as much money to invest into their second, third or fourth property. And in those scenarios, if you can say, five or $10,000, that’s very impactful, because that gives you a lot more money to go after the next deal. So, so so so I think it’s never too early to start being proactive in your tax planning. And in fact, tax savings is probably one of the easiest ways for you to supercharge your pathway to financial freedom, right? If, if normally, we’re just work, pay taxes, and whatever we have remained, we invest, but instead we take the tax issue out, and whatever we’re making, right, you know, 10,000, in rental income, all of that goes into a down payment, for my next property, instead of taking 10 years to financial freedom, you might only take you five years or four years, right. Huge point. But in terms of the level of savings, of course, you know, the the higher the dollar amount, the more portfolio, the the larger the portfolio, the higher the potential tax savings,

Keystone – Matt and Amanda
But uh, you know, you’re adding zeros to it, right, but the strategies are the same. That’s the thing that I think a lot of people have this misconception that, well, you know, somebody with a thing that I think a lot of people have this misconception that, well, you know, somebody with a $5 million portfolio is using vastly different strategies and somebody with a $500,000 rental portfolio, and that, you know, some of those things might be different. But from a big picture, a lot of that tax strategy is gonna be just the same, it’s just adding zeros to it. Right?

Keystone – Matt and Amanda
You just might just add a couple more tools when you’re, you know, in the millions of dollars of income, or revenue. But a lot of the standard stuff that we’re talking about today, though, kind of the foundational strategies, you know, even very high income or low income individuals are utilizing the same.

Zach
I mean, what can you be specific on a couple of those tools? For some people that are?

Keystone – Matt and Amanda
Well, I think, I think like one one thing that people big misconception is Cost Segregation studies. So a lot of people think that you need to have millions and millions of dollars of real estate to be able to benefit from a cost segregation study.

Adam 
And that’s that started.

Keystone – Matt and Amanda
I mean, that’s very far from the truth, right? I mean, it’s so you know, for those people who don’t know, a cost segregation study is where you hire, you know, kind of a firm engineering firm to go in, they look at a property, they’re trying to break out components of the property to depreciate it quicker, right? So rental property, residential house, you depreciate over 27 and a half years, when they do a cost, they were looking at ways can we depreciate it quicker, like five years, seven years, 15 years. And with bonus depreciation, now, some of that stuff might be written off on the first year. And so getting the same amount of depreciation, but just taking it quicker. And so there’s a lot of misconceptions that well, that only works with you know, your commercial properties, or what have you. But no, it works with single family houses where people buy a house for $200,000. You know, we’ve seen it day in and day out in our firm and from a tax planning perspective.

Keystone – Matt and Amanda
Yeah, I think just to put like some numbers to it, I let’s say you, you put a $20,000 downpayment on a built, you bought buy a property for 130,000. Right, and let’s just assume that the building portion is $100,000. With cost segregation, and bonus depreciation, which the building portion is $100,000. With cost segregation, and bonus depreciation, which we have in 2022, at 100%, your first year, right off my buy, might be as high as 30,000. Right? So think about that you put $20,000 down payment, resulting in an immediate deduction of $30,000. It’s more than the downpayment you put in. And that’s where a because of the current law, and the kind of adding one strategy on top of another. That’s where, like, Matt was saying, a lot of misconceptions, and people are thinking, wow, that sounds a great like a great strategy, but I can’t afford it, because it’s only for the large apartment owners, where it’s not necessarily the case. And we’ve seen it work time and time again, with smaller investors who just have one or two rental properties.

Zach
Now, that’s outstanding. And I think you touched on this point earlier about being under that 100 $150,000. And below, I mean, you could potentially even take accelerated depreciation on without being a real estate professional, right. And that in that setting,

Keystone – Matt and Amanda
Definitely, if your income is under 100,000, and under you can take up to $25,000 of rental losses against your other type of income. And then if your income was between 101 50, there’s just a phase out.

Zach
Single or combined. It’s both

Keystone – Matt and Amanda
It’s the same for whether you’re single or married, but believe it or not,

Zach
Okay, I mean, we have a lot of investors that are in that range that you know, whether it’s dual income family or single income family that just probably isn’t aware of that, but that’s a huge thing. I mean, this is so vitally important. That’s why we have such excellent guests like yourselves on our shows. because this is so important to people, this is the best way to give yourself an immediate raise. Right? It’s just pay less taxes and expedite your investing ventures and have more capital working for you now is to have some of these tax strategies implemented. This is the the ultimate hack really, versus, I mean, if you had to go out and earn an additional 50% on your money, you know, I mean, hurting additional 50% of income, that’s a lot of time involved, unless you’re starting a business or doing something like that. But the tax, the tax strategy is something that everyone needs to understand, especially getting into the rental real estate world, there’s, there’s so many benefits readily available, you just got to have the right people got guiding you and educating yourself on that. Switching gears a little bit, talking about one thing we always love is the what what real estate offers right now for people in terms of providing financial independence, additional streams of income tax benefits, etc.

But ultimately, the long term goal is generational wealth. And we’ve seen that so many families that build generational wealth through real estate, can we talk a little bit of just kind of what that picture looks like, as far as we don’t have to get great into the details here. But how can someone build up a really large portfolio and also have minimal tax on that passing it to their family? And things like that?

Keystone – Matt and Amanda
Yeah. Well, you know, we, we’ve been talking a lot about deductions, right and write offs in terms of how we can get cash flow and not have to pay taxes currently. The other benefit of owning real estate, in addition to cash flow is the appreciation. Right, and we’ve seen a lot of that in the last couple of years, which is, which is really great. With depreciation, I mean, with appreciation, it’s another way for investors to build wealth without paying taxes. Why because if my property that I purchased for $100,000, is now worth $400,000, I don’t have to pay taxes on that appreciation, right? I don’t have to pay taxes on any of that. Unless if I sell. And if I did sell for real estate specifically, I could still defer the taxes if I do a 1031 exchange. And for any of you who don’t know, 1031 Exchange is basically a tax law that allows us to sell one property, defer the paying taxes on the gain by reinvesting the money into another rental property. Okay. And that could be done like selling single family homes to reinvest in other single family homes or selling single family and reinvesting in apartment buying up buying to the next asset class for Sir, yeah, commercial center. So there’s a lot of different ways to, you know, to utilize that. But so So another way to kind of grow that that generational wealth right to create it without paying taxes currently, another way we’ve seen people do it is just to tap into the equity, right? similar example $100,000 property is now worth $400,000. What if I don’t want to sell but I do want to take that equity and use that to grow my portfolio and down payment on other real estate. So when you do a cash out refi on a property like that, that’s also not taxable, right? You don’t have to pay taxes on that money. Currently, if I pulled out 100 or $200,000 of cash, that’s tax free money to me today. And what’s more, if I took that money as a down payment on yet additional real estate REITs, I’m trying to grow my portfolio, I can also deduct the interest on that additional, that I’m paying the additional loan proceeds that I’ve taken out. So there’s a lot of different ways that you can utilize real estate, tap into all that equity and growth with essentially no tax hit immediately. So really, you know, just a really wonderful vehicle,

Zach
We get asked all the time about you know, should I take a HELOC? Should I take out some equity on this property, that could affect the cash flow a little bit, obviously, you want to make sure the property’s going to support it, you know, the cash, the cash flow supporting the new debt on that property. But if you really look at it to take out $100,000 of equity on a property through a cash out refi if you were to get that $100,000 through another income source or taking out from other investments, selling stocks, something like that, that is all taxable events. And so I think that that point is overlooked a lot of okay, here’s 100, like legit net $100,000 to invest, that is tax free. And equity is yes, that’s money sitting in inequity, but you have such thing as return on equity, you need to be utilizing that equity to actually get a higher return on that. And then you get additional tax benefits by doing that. So yeah, that’s point people should look at.

Keystone – Matt and Amanda
Yeah, alternatively, let’s say you didn’t tap into it, and you were just hoping to save money right from working from your paychecks to do it. So you probably have to make like what $150,000 And the after paying federal income taxes, state income taxes, payroll taxes, and then maybe you’ll net to like, you know, something like $100,000. Right. So yeah, a really great way to tap into funds without paying taxes.

Adam
When it comes to the tax strategy, tax planning. One of the things that people might get concerned about is if you’re making a strategy and implementing more tools into your tax prep and all have that? Have you seen? Does it open you up to the bigger likelihood of an audit or anything like that? Or does it not really matter? It’s not going to impact you at all. You’re still doing, you know, obviously, you’re doing all of these things legally. But are they? Is the IRS gonna look at it and say, These people are doing different things? And these people, we need to look at them more closely, or does it not really impact it?

Keystone – Matt and Amanda
Yeah, I’d say depends on what it is, right? I mean, it’s, it depends on the person too. It’s, you know, I guess, various scenarios, like real estate professional status is something that the IRS, quote unquote, says they are going to audit more. You know, in practice, we haven’t necessarily seen it. I mean, you know, every once in a while, yes, somebody gets selected for audit, and they want to look at real estate professional, but they could get selected for audit for something totally unrelated to that. Right. And, you know, and they’re not always going to tell you exactly why they’ve selected somebody fraud. And unfortunately, that’s not always kind of, you know, information they give out. But But yeah, I mean, there’s certain things obviously, there’s there’s things on tax returns, where, you know, somebody’s got a rental property, and they’re wanting to take a bunch of deductions on it, but they don’t have any rental income showing on the return, you know, you know, that could be a red flag, right, that hey, you know, did you really, is this really a rental property? You know, did you advertise it for rent, you know, things like that. That was a one off things. But But yeah, I think it all comes down to you know, if, again, if you are legally entitled to take a tax deduction, or a tax position on your return, you know, our point is, don’t be afraid to do it, just have your ducks in a row that if you know, if you do get audited, you know, two, three years down the road, you have the documentation in place to support real estate professional or to support those deductions or what have you.

Keystone – Matt and Amanda
Yeah, and I would have to say, you know, for us, so in our firm, because although we mostly focus on the proactive planning side for investors, we do have a, you know, good number of tax return clients to that’s been with us for many, many years. And, you know, a very large percentage of our clients do use the strategies that we’re talking about, right, whether it’s real estate, professional or short term rental loophole, or cost segregation. So, you know, being that a large percentage of our clients do utilize those, we have very few audits that come through our firm in terms of tax returns that we prepare, you know, I don’t know, on average, maybe like, one audit every two years or something like that. So it’s still fairly low, I would say,

Zach
I think it’s really important, Matt, you brought up a good point about not being afraid, I think so many people have a fear standpoint with the IRS. And no one should be afraid of an audit, if an audit happens, you know, that that’s okay. I mean, that’s important to have. These are not when we talk about benefits of real estate, these are not being illegal or sneaky that you’re doing. These are not, I really don’t even like the term loopholes. Because the reason there’s a reason behind why the IRS code is written this way. And often, it’s to encourage people to go out and do proactive things like this too. And, you know, increase the economy to revitalize a certain area to invest more money in this sector, things like this. So it causes economic growth. And that’s the underlying reason why the IRS is writing the code it is. So really in their eyes, you’re you’re being you know, a proactive member of society, following the rules. And this is just something you need to understand. And it’s important that you do that if you get audited, it’s not the end of the world. That’s why you have professionals going through this with you, it’s important to make sure that you are working with the right professionals. So you take advantage of these things, and they can make you a better, more savvy and successful investor. But don’t look at it from his fear standpoint. Because really, where fear comes from is not understanding, not understanding the code and understanding what you’re doing. Just going back to the generational wealth aspect, I mean, is there any key points of recommendations you’d have for people in terms of how to set themselves up for success? If, you know, maybe, and this is probably far in the future for many people are just starting out on their journey. But what I mean is as far as how to position someone, let’s say they’re building this large portfolio, they want to pass it on to their kids with minimal tax implications, any key points about how to do that as far as like, you know, estate planning and things like that?

Keystone – Matt and Amanda
Yeah, well, I mean, estate planning is also going to be very unique to each investor, right? It’s going to depend on me, someone with, you know, $30 million of net worth is going to have a very different estate planning strategy than someone with you know, $2 million worth of net worth, right. But generally speaking for for investors who are starting out, we’re not at that, you know, a high level in terms of net worth. The key thing to keep in mind is, is we don’t want to prematurely start passing assets to our kids. And the reason for that is right now we have what’s called a step up basis, okay, which means that when someone passes away, their real estate gets stepped up to fair market value. So as an example, I bought a property for $100,000. Over the years, I’ve taken all the depreciations on I got all the benefits It’s in my lifetime. Now my basis in the property is zero. If I were to give it to my kids while I’m alive, they’re going to inherit my basis, which is, you know, zero. And so when they sell it, they’re gonna have to pay capital gains on all that appreciation. But on the other hand, if I hold on to that property, and let’s say, when I pass away, the fair market value is 500,000. So now when my kids inherit the property, they get it at $500,000, that’s now their basis. So when they sell the first $500,000, they don’t have to pay capital gains taxes on. So something very important to keep in mind, because we do see this happen a lot, where as people get older, they start to add their kids on title to their properties, right. So having that fear, like, Okay, I need to save it for my kids. So prematurely adding title, prematurely gifting it to the next generation. And you know, that’s a that’s the wrong thing to do. But oftentimes, that could have negative consequences. So it’s important to make sure that you’re planning with your CPA, on whether or not that’s something that could make sense in you know, in your situation.

Keystone – Matt and Amanda
And I think also, from a, you know, just a nuts and bolts of basics, you know, the very least you’re going to want to, you know, meet with an estate planning attorney right and get a get a will taken care of, and have a living trust drawn up. And, you know, do they have beneficiaries get that all taken care of and incorporated, you know, do they have entities from an asset protection standpoint, get that incorporated, as well? So, those would be the basic things to definitely look into, to kind of get that, get it set up in the right path?

Adam
Yes. Yes, don’t use up your kids loan slots. Come on, don’t put them on title. Do you want to help them grow their portfolio? Leave it open?

Keystone – Matt and Amanda
Yeah. And also to you know, part of, we see today, once you started gifting ownership to a property, you know, either whether partial or full, you also gifting some away some of the tax benefits, right? So if you are the high income person, whether it’s you know, high income from working or from from retirement, you want to keep all that depreciation. But now, if your kids are owning 50%, now, if half of that depreciation becomes theirs, right, so something very important to make sure that we keep in mind, but But yes, I think, you know, you’re absolutely right, is that a lot of these things, these tax benefits, or what people might call loopholes are really ways the government is incentivizing us to take action on certain things. And I think for Matt and I, we see it all the time. You know, with bonus depreciation, a lot of investors are in a hurry to buy more real estate to rehab the properties to reapply and everything in their apartments. Why? Because we can write off more today immediately, rather than waiting until next year to do it. So so at least that’s, you know, the incentive to do that. Definitely, we see that work. And in terms of, you know, real life investor decisions being made accordingly.

Adam
Yeah, I’m definitely push some of my closings pretty hard to make sure they get done in December. That’s for sure. Well, Matt, and Amanda, thank you so much for joining us today. Once again, Matt and Amanda are cofounders of Keystone CPA. The website is Keystonecpa.com. That’s Keystonecpa.com. Is there anything else you want to leave our listeners with today?

Keystone – Matt and Amanda
I think that, you know, if you’re someone who’s looking for even more tax strategies, definitely check out our ebook. That’s the one that you can find on our website at Keystone cpa.com. We talk more about legal entity structuring and income shifting and just commonly missed tax benefits for real estate investors for starting out. So you can check that out at our website.

Zach
Can I throw in one last one? It just kind of in your guys’s opinion, if there’s since you’re working with so many real estate investors, is there any kind of last parting advice you have for people that you’ve been you’ve seen, and this could be from the tax side or just in general, with real estate investors, things that are separating out people that are being really successful in the space, versus those who are not making the traction they need to or just not getting started?

Keystone – Matt and Amanda
I mean, I think the thing that I always go back to is, you know, make sure you got a good team, right, it’s, you know, I think that one of the people that I see are successful are the people that have embraced the idea of getting people around them and help them do things, they’re not going to figure it all out on their own. And they’re okay to ask for help. And and that can be just, you know, that could be working with a tax advisor or a legal adviser, but that’s also just from building a real estate portfolio, having the right team of people looking for properties for you, and, you know, getting the financing that you need, you know, not not trying to do it all yourself, obviously, I think is the biggest piece of advice.

Keystone – Matt and Amanda
Yeah, and I think having a plan and you know, having a plan and really executing on that plan, whether it’s my plan, you know, this year my plan is to buy three rental properties, or my plan is to, you know, get into an apartment building or something like that. And of course, as part of your plan, make sure you have the tax components to it. We talked earlier about audit the fear of audit. You are afraid of an audit when you you are not pre planning right when it’s like I’ve already did this now how Can I wind it? What are some of the things that I can do in a sneaky way to correct what happened? When you’re doing proactive planning? Everything is done aboveboard. In fact, with one issue, am I going to sell property? You might have three or four different strategies for you to pick and choose from. Right? And then you’re not losing sleepless nights because you know, you’ve done everything correctly.

Zach
Wise words. Thank you.

Adam
Well, thank you all so much for joining us today. Really appreciate it to all our listeners. Once again, their website is Keystonecpa.com And you can find us at rent to retirement.com. Zach was just asking about getting started well, you can find all the properties that we have to offer their rental retirement in the act of inventory. Really appreciate you listening to this episode. Please leave us a review on whatever podcast platform you use. It greatly helps us and don’t forget to if you have any questions, email them to podcasts at rent to retirement.com. That’s podcast at rent to retirement.com and I’ll talk to you on the next episode.

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