Ep 190 – Protecting Your Generational Wealth AFTER Death with John Ross

Investing during your life requires you to take calculated risks. It’s difficult to build a large portfolio without taking some chances. There are smart ways to do it and there are dangerous ways to do it, but it’s needed.

But after you create your generational wealth, what do you do to protect it after you die (which is something 100% of people in history have done)?

Adam Schroeder and Zach Lemaster talk with John Ross, founder of Ross & Shoalmire, P.L.L.C., about how to properly pass your portfolio down to the next generation, what things you need to consider (and what you can ignore), as well as the simple steps you can take to get started in what seems like a daunting venture.

CLICK HERE to learn more about John’s company

Transcript:

Adam

Hey, Rent to Retires. It’s Adam Schroeder here with another episode. Joined as usual by the founder and CEO of Rent to Retirement, Zach Lemaster. And we are joined today by John Ross. He’s the founder of a real estate or a boutique estate planning and asset protection law firm. That is Ross and Shoalmire, PLLC. And we’re gonna talk about, um, some protection today. That’s not exactly what you think of when you think of real estate. Uh, John, welcome to the show.

John

Yeah, glad to be here, guys.

Adam

Absolutely. So tell us a little bit about your background so we can know kind of where you came from, kind of where did you, uh, come from, what did you, you know, what did you, I guess, major in, in terms of this? Like how did you get into the field that you’re in today?

John

Yeah, so, uh, just real brief, I, I got out of the, uh, marines. I was in the infantry, uh, in the Marines for a number of years. Got out, uh, went back to college. Um, uh, weirdly enough, kind of fell in love with accounting and in particular tax. Um, you know, everybody I knew kind of thought I was a little crazy. And, uh, while I was studying tax accounting, uh, I remember one of my professors said, well, you know, once you really get up into the, the, the fancy stuff, you know, the, the estate tax and gift tax and all of that, that’s really the purview of, of tax attorneys. And, uh, I thought, well, that’s stupid. I don’t want to share my fees with anybody else. So, um, I got the bright idea to go to law school. Went to law school with pretty much the sole idea of becoming a tax attorney. Uh, so did that, went to law school, got out, uh, passed the bar exam, got into practice and really started focusing on the interplay between estate planning, taxation, business structures, and how all of these sort of things come together. And, and then that, you know, that folds into various forms of asset protection and all of that sort of stuff. So yeah, that’s the, that’s the kind of the, the short and skinny of it.

Adam

Uh, you started dropping, uh, tax, tax things. I saw Zach’s ears perk up, uh, and <laugh> that one. <laugh>,

Zach

This is something John that, um, I think would be very interesting. Yes, yes. For me personally, I mean, I love doing the podcast too, because a lot of it is self-serving, right? I get ask Adam and I get asked questions that we can apply to our own real estate investing career path. But, but of course we want to serve our community and our listeners as, as well. But, um, this is very interesting to hear about your background because you, you have both an accounting background and a law background, right? Um, and so, and then you get to marry the two, right? So I always talk with people about being a successful business owner, um, an entrepreneur, which you are, when you’re building a real estate portfolio, like it or not. I mean, you need to be aware of those things. You’re building a business, but it’s all about, you know, to be successful long term at the right people to your, um, to your network, right?

Zach

And make sure you’re getting the right tax and right legal advice. Um, and, and often I’ve found in my, uh, career path that that doesn’t always agree, right? Sometimes you can have an attorney that’s telling you one thing and your accountant telling you another thing, and it’s like, well, you know, we need to get everyone on the same page to understand our goals moving forward with running our business, with investing in real estate. And it, it’s great that you, you have both those backgrounds, so you could probably share your philosophy on, you know, weighing in, in, in both those areas.

John

Yeah, and I will say, I, you know, generally I would say, I would say most of the attorneys out there know Jack about taxation. Um, you know, they don’t, they don’t even know how to do the books for their own firm. Um, you know, they get somebody else to do that, right? And, and that’s fine, that’s not their expertise. But so often they may be giving business advice, but have no real concept of the tax consequences of that business advice or that estate planning advice. And then on the flip side, I find CPAs to be historical thinkers, right? So what they wanna do is they want to see what you’ve already done and, and then report that appropriately. Um, but, but so often they’re not prospective thinkers. They’re not, well, what could you do today that would change what would happen in the future? Um, I also typically find CPAs to be somewhat risk averse, which you want your CPA a to be risk averse, and that’s their job, right?

John

But when it comes to taxation, it’s a blurry area. And so you need to be able to, to at least know where the boundaries are and, and then you can take your comfort level to whatever boundary you’re willing to push. Um, and that’s not necessarily a, that’s more of a lawyer attitude than it is a a C p a attitude. And so, yeah, having a blend of the two is, is a bit unique, but I think it does give me a, a great perspective on, on looking at somebody’s stuff and saying, okay, what do we need to do? What do we need to think about?

Zach

That is a exceptional point that I don’t think anyone has ever mentioned about the, the way to approach your tax strategy. Um, and it’s not necessarily a black and white, you know, uh, type of scenario. Well, I think a lot of people when they look at taxes like, oh, I can do this. I can’t do this, and that’s it, right? And often that is coming from their, uh, from their C P A, who is, we, we like to refer to CPAs as defensive thinkers, right? Their necessary person. But you need to have your, your offense as well as your defense. And that, that’s where the planning or the tax strategy comes into play. And certainly there’s, there’s a legal aspect, um, that you need to be aware of. But as business owners and real estate investors, every choice we make has a level of risk threshold, right?

Zach

There needs to be an evaluation done on like, where do I buy and how do you, how do you structure the tax scenario around there? And I love that you brought up the fact that it’s not black and white, because it often is not. And it’s just, if you’re just relying, first of all, you’re filing your own taxes, don’t do that <laugh>. So you need to be, you need to have someone do it for you. Uh, but secondly, if you’re just relying on your c p A, you know, you maybe, uh, ensure if you have one property and you’re like, just filing for that year, great. That serves that, that place, um, serves that need. But then how do you strategically plan for the future to be able to take the, the advantage of all the tax benefits? Uh, and this is, this is a big thing that you need to be aware of. Um, so I’m glad, I’m glad that you, you brought that up.

John

Yeah. You know, I mean, you talk about like, you know, buying a property, and I mean, one of the, you know, just one of the first examples that would come to my mind, you know, you’re, you’re, you’re saying, okay, well, I’m gonna buy this property. And so you buy the property and then you get to the end of the year and you, you tell your c p a, you say, Hey, I bought this property. And they say, okay, well, great, well, that’s, uh, you know, you, you paid x and, and so it’s long-term depreciation, and we can, you know, we’ll, we’ll take a depreciation of one 30th of the value of the property, and we’ll just keep doing that over time. Whereas, you know, the, the, and so that’s the retrospective attitude, right? Where the, the prospective attitude would’ve been, okay, well hey, when you buy that property, maybe we should do a cost segregation analysis.

John

And, and, you know, we think about, okay, well, I buy a house, right? Well, okay, that’s a house and that’s a long-term depreciable asset, so I’m gonna depreciate the value of this home over a long period of time, right? But, but if you, you know, look around in whatever room, you know, as the listener of the show right now, right? If you’re in your car, look around inside your car. If you’re at your home, look around inside your home, well, there’s a wall plate, right? That there, you know, where your switch is, your light switch, right? There’s a wall plate there. Well, that’s not a 30 year depreciable asset. That’s a five, five-year depreciable asset. Now, how many wall plates are in that house? Now what about the electrical system? Uh, what about the HVAC system? What about the, the roof? That’s a different, uh, timeframe.

John

Um, and so you could start breaking up the, that purchase price, and maybe you buy a $300,000 property and, and maybe 150 of that is structural. And so you’re gonna depreciate 150,000 over 20 or 30 years, but you’ve able, you were able to figure out where, you know, maybe a hundred or 150,000 of that is seven year depreciable property, or five year depreciable property. And so imagine how big your, your depreciation deductions are gonna be in the first several years there. So, you know, you’re basically, you’re basically paying no income tax on your, your rental income for the first couple of years because you’ve done this cost segregation analysis right off the bat. And again, that’s one of those things that a lot of times you just wouldn’t necessarily get from that, that, that retrospective attitude, right? That’s a, that’s a, Hey, what can we do right now, now that we’re buying this property that we could, that would save us some taxes down the road?

Zach

Yeah. This is something, I mean, we personally do with, with all of our properties, it’s like our investing, um, our investing strategy is actually just completely changed at this point in our lives, in our career to focus around the tax side of things. Um, certainly the accelerated depreciation is a huge benefit that is starting to be phased out over the next few years. And if you’re gonna do it, you gotta <laugh> right now, it’s time to, to do it, right? Yep. Get on it. And just for clarification, I got a few key points just self-serving, uh, questions for you, John, that I, I’m gonna hit you with. I’ll, I’ll wait till later in the show, but I guess, um, I, and specifically one of those is my, my account told me like, Hey, we have the short-term rental, which has a different depreciation schedule because it’s like hospitality because it truly is a short-term rental.

Zach

We have like shorter than seven day average days. And, um, uh, he was basically like, you can’t take the accelerated depreciation on this this year because you bought it in November. And it’s like, well, what do I do in the next year? Anyway, we’ll get to that later because that’s a self-serving question. But, uh, just to be clear, for cost segregation studies, um, do you need to be a real estate professional status only if you’re taking it? Like do you have to, do you have to qualify as re pro to, to begin with, to even do the study? Or, I mean, you can still take depre accelerated depreciation and still offset passive losses. Like if you have a property that’s really cash flowing exceptionally well, year two, one or two, like you can still do accelerated depreciation not being repro, it’s still just when you make that translation to, to offset active taxes, that’s when you need to qualify for repro, right? Correct.

John

Yes. That’s, uh, that’s exactly right. Yeah. You may, you know, if you’re, uh, if you’re just the, the casual passive investor, you may have some carryover losses, um, that you can extend off into the future. Um, whereas yeah, if you’re, if you’re in, uh, active real estate, then yeah, you’re gonna be able to, to, uh, to, you know, offset others and yeah, more benefit there.

Zach

What ask, okay, I don’t wanna ask you this too, ’cause this is a, this is a, in my mind, this is a risk threshold, and we’ve never directly talked about this on, on the show. It’s always just been refer to your C P A and your attorney, right? The normal disclaimer. But, um, I wanna ask you about, and I think this is a risk scenario, a risk benefit scenario that a lot of people, Adam, um, run through in their minds about like qualifying for re pro is, let’s say, um, I, I wanna ask your opinion, both with the C P A and the attorney hat on, um, simultaneously here, maybe you can separate those out for me, John, but for someone that is considering re pro and they think they have a good chance of meeting all the criteria, right? Um, all the things that you necessarily need to do, they have multiple rental properties, they’re actively engaged in, you know, management.

Zach

They own properties in multiple properties, in multiple locations, you know, call it five or 10 properties, whatever. Um, so they’re gonna elect to be re pro. Um, like what is, how, how do you advise someone, obviously it’s on an individual basis, but how do you advise someone on, you know, making that election versus not making that election? And I really want to know about like, what is the potential consequences here? Like let’s say someone qualifies for or elects re pro, um, because it’s a self election, let’s say the i r s comes back a few years later and says they, they’re questioning that, right? Which we’ve never heard of someone being questioned about it, but that doesn’t mean it can’t happen. So they get audited and the r and the I R S says, alright, well we don’t, we don’t necessarily think that you qualify as re pro, are you, are they just paying the taxes they normally would anyways with possibly some penalties? I mean, is that, is that the risk threshold? Can you talk about that?

John

Yeah, yeah. So I mean, basically with, with, with any tax, with any tax strategy that you’re gonna take, right? If you’re, if you’re gonna take a, a deduction and maybe whatever that deduction is, uh, there’s a question to it. The, the general rule is, yeah, okay, if you get audited within, and, and generally from the time you file a tax return, there’s a three year statute of limitations. So if you don’t get audited on whatever you did on that issue, three years after you’ve filed that tax return, you’re clear, um, now that doesn’t apply to outright fraud. Outright fraud has a longer, uh, time. It’s

Zach

Proven intentional fraud, right? That’s right. Yeah.

John

That’s a mistake. That’s intentional fraud, right? That’s, that’s, that’s your, your Al Capone and your’re not reporting any of your income. Um, and so you’re gonna go to jail, right? That’s a different kind of deal. But if you’re just saying, well, yeah, um, um, I, I, I believe that I’m a real estate pro, and so I can take these deductions that wouldn’t be available to me as a passive investor. That’s fine, as long as you have a one in three belief that your position is accurate, then basically what you’re gonna, what you would owe would be the taxes you would have paid plus, uh, interest on the unpaid portion.

Zach

What is that interest typically?

John

Um, it’s, there’s the, uh, there’s the, there’s a federal rate that’s set every month and it fluctuates

Zach

4% roughly, right? Right now,

John

Well, you know, uh, uh, yeah, could be a couple of months ago it was 1% right? And yeah, now it’s back up to three and a half or four or something like that. But

Zach

Yeah. Yeah. As, as interest rates are higher, right?

John

Okay. Right. It’s, it fluctuates, legislate with the regular interest rates. And so yeah, you could, you might owe that plus a little bit of interest, but you know, you can actually then kind of calculate that into your, your investment decision and or your, your choice of taking that and say, okay, well if I save X dollars, what’s my rate of return on the saved dollar? And if, and if the saved dollar rate of return is gonna be greater than the, the interest on the penalty for, for that, then you know, hey, maybe it’s worth the risk right there. And you say, okay, well, yeah, worst case scenario, I gotta pay it back. I’ve got the liquid capital to, to pay the back taxes. If it comes up, you know, you, you wouldn’t want to be doing that if you’re, if you’re land rich and cash poor, where, you know, you get a big bill from the i r s and you don’t have any liquidity to pay it, well that’s a whole nother deal, right? But, but yeah, if you can afford to, to pay the back tax and maybe, yeah, there’s a little bit of interest, they will often try to assess some penalties. But again, you can usually challenge the penalties and say, look, I had a good faith belief that that was a value that, that I had a, a legitimate position there.

Adam

So how does, you know, we got started on the cost segment. Let’s just go down that a little bit more. How does that impact your ability to do a 10 31 exchange? You know, kind of on that part, if you accelerate the depreciation, does that impact what you have to do whenever you sell the property?

John

Well, and that’s actually the, one of the questions on doing whether or not you should do a cost segregation analysis is what are you going to do when you sell or if you sell that property, right? Are you, are you gonna depreciate as much of this property as you possibly can with the idea that basically you’re gonna do 10 31 exchanges until you die, so that your heirs get a stepped up in basis and wipe out all of the, the depreciation that you took, and they, they could turn around and sell it tax free while the body’s still getting cold, right? Um, and if that’s, if that’s one strategy, then it actually probably makes sense to go ahead and do the cost segregation. On the other hand, if you’re saying, well, you know what, I’m not even really sure if I’m gonna be into this real estate business, this is just a good buy right now, but in a couple of years I’ll probably sell this and just put the money in my pocket.

John

Um, well, if that’s your attitude, then probably doing the cost segregation is not a good idea because the recapture of that depreciation is gonna get taxed higher than the capital gain, and it, it just may not make sense. Uh, you just have to start running some numbers on that. But it often depends on what, what is, what is your goal? You know, are you buying to hold? And, and even if you do need to sell or if there’s a better opportunity, you’re gonna do 10 30 ones. ’cause yeah, you can 10 31 and just roll it, roll it, roll it, roll it until you die, and then get that step up in basis, um, and, and go on from there.

Zach

And I think that really brings us to our next, um, sorry, Adam, did you have another thing you wanna hit John with? No,

Adam

I was gonna roll into the generational wealth stuff that he, uh, yeah,

Zach

No, that’s a perfect, perfect transition. I just want to hit his previous point home one more time though before we do that. But, uh, this is a perfect transition to really the bulk of what we want to talk about today with you, John, which is yeah, generational wealth and like what happens, you spend your entire life building this real estate business and portfolio, um, and sheltering it from, you know, uncle Sam. Um, and of course you want to pass this on to your, uh, to your heirs in the most tax efficient way. And we haven’t talked about like, how to do that. Most of us aren’t thinking about death, um, you know, years down the road we’re focusing on right now, how do we build wealth? Um, but before we do that, I just want to, I just, let me paraphrase you and just tell me if I’m, I’m, uh, if I have anything wrong here, because this is the way I always think about this in my mind as I explain it to people giving the disclaimer, I’m not an accountant or attorney, but it’s just your initial point about everything tax wise.

Zach

It’s, there’s a lot of black and white, and it is a risk analysis if you have, you know, if you have a good chance of qualifying and justifying real estate professional, um, it really comes down to a choice. And you’re may trying to decide, do I, do I file this or not? It, you, you, you always need to understand the back and like the what if scenario, right? Worst case scenario, well, why would you not file for that if you have a good faith belief that you would qualify for that and you’ve done the research on it? Because the end scenario is you end up paying the taxes anyways that you would’ve paid in the first place, uh, possibly years down the road. And yes, there could have been interest applied, but it’s very likely if you’re an investor that you can go out and make higher than one to 4%, um, and have that compound year over year, um, in actually taking that money instead of paying a tole Sam to actually invest it and compound your, your real estate portfolio, right?

Zach

Yeah. Now, keeping being conscious about the liquidity, and if you have assets, maybe, you know, worst case scenario, again, you can access liquidity by selling an asset or something like that. But I mean, you would want, like, it would make, it’s a no-brainer to do that, in my opinion, because if, and if you actually run the numbers out, which I encourage everyone to do, like, it’s not just that, like, okay, you get penalized potentially, or you get this interest rate at one to 4%, but if you take $20,000 with $30,000 that you would’ve paid, uh, the government and never seen again, versus leveraging that on a hundred thousand dollars property, and now you’re between appreciation, debt reduction, you know, the additional tax benefits of buying that property, which compounds over time, the cashflow, I mean, you’re talking significantly more than one to 4% am I, am I crazy? Am I thinking here?

John

No, I think, I mean, I think you’re dead on there. Again, as long as you’ve got the, the reasonable, uh, a reasonable belief that your position is accurate, I, I am of the opinion that you take the, you take the risk, the chance of getting audited is, is astronomically low. E even even 15 or 20 years ago when the i r s wasn’t an absolute understaffed train wreck, the, the odds were really low, right? Right Now it’s, it’s as close to zero as you can get without having to bring in a physicist. And, and so, yeah, I mean, take some, take some push the boundaries, take, take a little, uh, take a little risk. And again, as long as you’ve kind of run those numbers and, and again, all the way back to you have a good faith belief, right? You’re not, uh, you’re not trying to, you know, deduct the, the dollars you’re throwing up at a girl on a Saturday night that’s, you know, that’s outright fraud, but is you’ve got a reasonable belief that you can take a deduction, take it. Um, the, the risk is usually worth it.

Zach

Okay? Case, case in point, um, and, and we won’t belabor that point, but take, it’s all about calculated risks, right? If, if you wanna get ahead, you need to understand risks, you need to take calculated risks, and you need to understand how to calculate those, and you need to take them. Uh, ultimately, I, I think if you, if you want to create, you know, high net worth, um, and then pass it on to generations, which we’re trans transitioning to now, uh, you gotta take some of these calculated risks, that’s, that’s the game and you gotta be in it. So, uh, but John, let’s go ahead and talk about, like, I guess I, I wanna start first with just understanding like what, um, you know, I’m sure you have some fairly wealthy, uh, clients that, um, that you advise and, and work with. Like, what are some common things before we get into the details of like estate tax and step up basis and how to, you know, position yourself on the estate planning side, like, what are some common practices? And this could be in business, this could be specific legally or tax wise, but like, what are some common practices of the wealthy people you surround yourself with that you see them consistently doing across the board?

John

Are you talking about, uh, uh, specifically related to like taxation type things or all, all the

Zach

Above? I would say, like, or just kinda

John

All the above, right?

Zach

Said, I mean, so investing in real estate is, is probably one of those, but also like, you know, how are they structuring their real estate? And, and I don’t, I don’t wanna get into the weeds deep of, of like, do you need an L L C and how you do that, or are you running your business as an expert? But what are some general themes or just commonalities between the wealthy people and what are they doing well?

John

Well, and, and, and I, uh, I will say that one of the commonalities, um, and, and you’re right, I would say other than the, other than my clients who have gotten lucky and, and that luck could come in the form of, you know, I mean, I’ve had three lottery winners. I’ve got country music stars, I’ve got, uh, movie stars and, and you know, people like that, right? They just got, they just got lucky. Um, the folks that have built wealth have either typically done it in some sort of business though, uh, that, you know, they’ve built a manufacturing business from scratch or something like that, or, and the vast majority of though is real estate. And probably the most universal theme among so many of them is that they actually focused on very little other than continuing to accumulate more real estate.

Zach

Can you, can you clarify that though? I mean, that’s a basic statement, but just, I just wanna make sure we’re hitting that point home, because that was the number one thing that I talked about growing my pf Just state that again, if you don’t mind. Yeah,

John

Yeah. No, I mean, you, you know, uh, and I’ll just, I’ll just give you an example. I have a farmer right now that I’m, I’m doing some estate, uh, planning for, um, he, he’s come to me to do estate planning. This is, he had a will in place, I mean, when, you know, like a basic will, right? But that was the only real estate planning he had in place. He’s got an, uh, uh, an L l C in place, but it’s nothing fancy. It’s not a series l s a, it’s just right. But he’s got $55 million worth of real estate, um, in this case it’s timber, um, uh, farmland. Um, but there’s some, some rental properties and things mixed in there. But, you know, for the last probably go call it 75 years of his life, when he had an opportunity to buy more real estate, he bought more real estate.

John

He may, if he had the cash, he paid cash. If he didn’t have the cash or he didn’t want to use the cash, he used credit. And, but, but whenever there was an opportunity to buy more real estate, he bought more real estate. And you do that over a long enough period of time and you end up like this guy who’s 92 years old and has a $55 million worth of worth of dirt. Um, and, and so yeah, he actually probably paid less attention to taxation. He probably paid less attention to structuring and business and, and asset protection and, and, and all of these sort of things. Now, you know, given his age, certainly the, the death tax and things like that are, are hitting him right square in the face. Now, you know, he’s, he’s facing it. And I certainly would’ve encouraged him to have these conversations with me many years ago, but, and, and I, but I’ve had a lot of clients like him. They, they’re, they’re, they’re in the business of real estate. And so when they find opportunities to buy real estate or invest in real estate, they take those opportunities

Zach

And they’re probably not hyper-focused on, well, what are interest rates right now? What are things, I mean, sure, that’s things to be taken into consideration, but, uh, really it goes back to the point like, there’s no secret sauce here, people, it’s just you accumulate wealth over time. It doesn’t happen overnight, but it happens over like, and yes, you wanna be intentional on where you’re buying and, and know how to run numbers. And you know, you, you, you gotta have a strategy and a plan, but, but you also kind of don’t, to some degree, <laugh> just buy in real estate. It does. It’s not over complicated. Just keep doing it, right? Yeah. And then,

John

And, and, you know, I had another client and, and one of the things he said to me, and it’s always kind of stuck with me, um, he’s, you know, he, he was, we were talking about his estate planning and he said, you know, John, um, I have lost more money than most people will ever make in a lifetime, but I’ve made more money than I’ve lost

Adam

<laugh>.

Zach

I love it. I love it.

John

Right? And, and I mean, I think you kind of have to think about that, you know, you know, yeah, okay, hey, this looks like a good deal. I’m gonna go for it. Um, and you know what? Maybe, uh, maybe, uh, you know, maybe I lose out on this one, but that’s all right, because there’s gonna be more, there’s gonna be other opportunities, and I’m gonna lose some, and I’m just gonna try to win more than I lose. And, and I do that long enough. And, and there you go.

Adam

Yeah, I, I had the same thing happen just a couple weeks ago buying some property, and I started freaking out and my wife was like, what’s going on? And I was like, well, you know, we’re doing this and what happens if it goes wrong? And she’s like, well, you did the research, right? Yeah, you did this, right? Yeah. Like, so we’re going in knowing worst case scenario is this, right? Yeah. Okay, <laugh> like, we can handle that. Let’s do it. Right? But I want to go into a little bit bit, you mentioned that you wish this guy had come to you several years, bef several decades before. Um, we have a lot of people who are just getting their first, second, third real estate properties there who probably had a will bef, you know, maybe, maybe they have some younger kids. They probably had a will made up whenever their kid was born before they owned real estate. If you’ve got something just simple will set up there and then you start buying real estate, what are some of the next steps that you recommend people consider doing in order to protect themselves, their heirs, all of that kind of, what’s the simple steps you can do as you’re getting started?

John

So, on a very, so on a very simple standpoint, um, one of the first things, particularly with things like rental properties where you have ongoing active management, maybe you’re not the one doing the management. Maybe you’ve got a company that’s doing the management. But, but these things require management, right? Somebody has to collect rents, somebody has to pay expenses, somebody has to fix water heaters. And, and maybe you’re not the one doing that, but somebody’s gotta do it, or somebody’s gotta direct other people to do it, which means you don’t have a lot of opportunity for delay, right? So if, if I do a, a will, right? And I do a will, and I say I leave everything to my kids, um, in, in, in any state in the United States, no will is valid until it has been admitted to a court after my death.

John

Now, if you’re in a rural community, maybe you get that process done in three to four weeks. If you’re in a, a major metropolitan area, uh, uh, Boston, New York, Los Angeles, Dallas, Texas, it may be six months before you even get the will admitted to probate and the executor appointed, I mean, can, can those real estate properties, can they go six months without management between the time of your death and the time somebody is able to weasel their way through the court system to get appointed as the executor in charge of your estate? No, absolutely not. You need to be focusing on non-probate transfers of assets so that the minute you die, somebody is in charge. Somebody can take over, whether that’s a, you know, somebody you appoint or a bank or whoever you’ve got in position, but you need to be looking at non-probate transfers of assets at death, period. There’s just almost no good reason to use will-based planning in this day and age. There are better alternatives.

Zach

Can we, um, and these are like the little nuanced things that I think most people are probably, myself included, like really aren’t aware of. Um, maybe we’ve created a will, maybe not, um, or maybe we just haven’t gone through now that we’re on the path of creating a larger wealth scenario where we, we need to be conscious of these types of things. I mean, can you just give us an, an an idea of like, you know, what, what certain things, obviously people can reach out to you or, you know, whoever they’re working with to have a, a consultation, like start setting some of these things up, but just for awareness, like what are, what are some things we do need to be aware of, um, from a taxation and a logistical standpoint like this as, as we near, near death and, and look at in the most tax efficient way passing on our, our wealth to future generations?

John

Right. So I, I would generally tell, I, you know, I give speeches on this sort of stuff, and I say there’s three elements to a good estate plan. Um, element number one is having a plan for incapacity. Um, that’s, you know, if, if you live to age 80, the chances of you being incapacitated prior to death are 90%, and maybe for a short period of time. But we’re, we’re back to the question of if you’re talking about properties that need management and stuff like that, what length of time can you go without those being managed? And so you need a plan for incapacity. You need a a, a smooth and easy and tax efficient transfer at death. Um, and so, and we can talk about this, but you need to be looking at, uh, the, the estate tax, uh, versus step up in basis. Um, and we can get into some of that.

John

We, but we also need to be looking at things like, uh, retirement accounts. If you’re doing, um, you know, if, if you’ve got the bulk of your net worth in an I r a or 4 0 1 K, um, especially if you’re talking about having real property inside those, a self-directed I r a or something like that, you know, there are some significant tax consequences when those qualified accounts are inherited. And so we need to be looking at, at all of those issues surrounding death, making it transition fast and, and cost effective from a tax standpoint and otherwise. And then we need to be looking at protecting the beneficiaries, whether that’s from themselves, uh, or whether that’s from outsiders. Uh, you know, with, with kids, for example, you know, I always talk about what, what I call the four Ds. You know, your children could die, they could predecease you.

John

Um, they could become disabled, in which case they’re on government benefits, which you just cause them to lose if they inherit an asset. Um, they could be in debt, they could have their own creditors, unpaid child support or behind on taxes or, or whatever it is. Uh, or, you know, uh, you know, you wanna leave assets to your daughter, but her husband just ran off of a stripper named cinnamon. You know, you don’t want the inherited assets getting tied up in the, you know, the divorce of the child. So, so it’s kind of these three parts, your own incapacity, the transition at death, and then the, the, the protecting the beneficiaries. So those are the three elements of a good estate plan.

Zach

Yeah, a lot of times. And that’s, that’s a difficult thing to think about that maybe we, we don’t want to, uh, but protecting the beneficiary, right? I mean, you do need to have, to have those things set up in place. Um, it’s hard to say all the, all the potential out there, but certainly we’re all working very hard to, to build a, uh, a lifestyle and a scenario where we can take care of, uh, our beneficiaries for, for many years and obviously create generational wealth as a goal. So we, yeah. Have to protect it appropriately.

John

And, and, you know, I I, one of probably the most common question that I get, uh, from people is, is related to the death tax. They don’t understand it. They’ve heard it talked about on the news. Uh, they, they hear politicians going back and forth with, we need to, uh, in make more people subject to the death tax. We need to make less people subject to the death tax. So we need to get rid of the death tax altogether. And, uh, and yet most people don’t really have any concept of it. They don’t know what they’re talking about. Uh, they’re scared about it. Um, but in many cases have very little to, to worry about. Um, you know, just, just as a, I mean, real brief history, uh, prior to 1916, there was no inheritance tax. It came out in 1916. And in 1916, if the value of your estate was greater than $10,000, you were taxed at 90%.

John

Um, now 10,000 bucks was a lot of money back then. Um, but not if your last name was Rockefeller. Um, you know, and then, and so what rich people like Rockefeller did is they started giving money away. They said, well, if you’re gonna tax me when I die, I’ll give it all away before I die. And they got away with that until the, uh, the mid 1920s, I think 1924 when they created the gift tax. And they said, okay, if you, if you die holding a certain amount of money, uh, over that, we’re gonna tax you, or if you try to give it away while you’re alive, um, then we’re also gonna tax you. And those two are kind of tied together, so you can’t understand the death tax without understanding the gift tax. ’cause they’re, they’re one and the same, they’re tied together. And, and the funny thing is, is right after that, people like Rockefeller or, or Carnegie or whoever, they got the idea, well, if you’re gonna tax me when I die, and then I’m gonna leave everything to my son, and then when my son dies, you’re gonna tax him again, right?

John

Because he’s still be over the limit. Um, well, I’ll tell you what, I’m just gonna skip my son and I’m gonna go to grow my grandson or maybe my great-grandson, and that way I can skip a couple of generations of that death tax. And they got away with that until I think about 1936, at which point they created the generation skipping transfer tax, um, which is, is a whole separate tax that says if you try to skip a generation, then they’re gonna hit you there. And, and so all of these things, you know, they’ve been around forever. Uh, now, and, you know, we’re a hundred years of this sort of stuff. Um, as we sit here today, a person would have to have a, an estate valued at roughly $12.93 million before they have to worry about the death tax. Um, so I’ve got lots of folks, they’ll come in, John, uh, we’re worried we don’t wanna have to, we don’t wanna have to pay the government anything when we die.

John

And I say, okay, well, what do you got? Well, we got a house. We got a couple of rental properties, you know, total estate’s worth 3 million bucks. Okay, well, you’re fine. You’re not anywhere close to $12.9 million. Now if you cross that $12.9 million tax, it’s effectively 40% of everything above that. So, you know, I mentioned my, my gentleman earlier, you know, we’re just say a $50 million estate. Well, if we subtract 13 off of that, you know, well, we’re still looking at a, you know, a $35 million estate, you tax that at 40%. That’s a fat tax bill after his death. And if all of that real estate, if all of that net worth is tied up in real estate, where are you gonna come up with the cash? You know, the i r s expects that check within nine months of the date of death, you know,

Adam

They don’t take land and payment

John

And they don’t take land and payment. Um, and so, you know, the family’s stuck there in a position where, what are they gonna do? Are they gonna take out loans against the real estate to pay off taxes? Um, or are they gonna have to, you know, fire sale, um, some of the dirt, or they’re gonna have to cut timber before it’s ready to be cut? I mean, what, you know, it’s a, that’s a real, real danger when you’re heavily, uh, invested in illiquid properties, um, especially when it comes to a big fat tax bill. So that’s the marker right now. But the weird thing is, we’re in a very unique time right now because the current estate tax exemption amount was set in under the Trump administration. Uh, it was part of the Tax Cuts and Jobs Act, and in order to make the budget work they built in an expiration date.

John

And, and so that law expires on January 1st, 2026. And if it expires, which who knows, you know, we can’t predict the government, but if it expires on January 1st, 2026, then the law reverts back to what it was under the Obama administration. Well, that was a $5 million exemption. And, and then that’ll be adjusted for inflation. Um, probably putting it at around six, maybe seven, depending on inflation numbers over the next couple of years. Um, but, you know, imagine you’re somebody right now and you have a $7 million estate, well, you don’t have an estate tax problem today. You might in three years.

Adam

Yeah,

John

That’s, that’s hard to plan for. So

Adam

When you’ve got that, well, two a two part question. Um, you’ve got the guy $55 million kids might get hit with, you know, roughly a what, $10 million, um, hit on their, uh, on their for the death tax there. What do you put it in? Like, is that like kind of what are the, what are you putting that in to make sure they don’t get hit with it? And then also on the flip side, if you’ve got an elderly parent who owns real estate, um, and they don’t have anything set up, is there anything you can do as a child, you know, if they’re slightly incapacitated, is there anything you can do as a child at that point in time to prepare yourself?

Zach

Let me just get, let me jump in and get clarity on a couple things. Um, obviously getting to the bulk of Adam’s questions is exactly what we want, wanna know is like, okay, well what do you, what do you do? Right? Right. There’s, there’s the, there’s a oh, crap scenario, and then what are our options? Talk about step up and things like this. Um, but I, I want just clarify for everyone because 12, 12 and a half million or whatever, um, and even, even 5 million may seem far fetched, far fetched, uh, to some people, but it’s really not, especially as we’re talking about like, it, it may be, it may seem that way if you’re buying your first one or two rentals, but you can get there very, very quickly, um, over a course of a few years just owning Reynold’s in appreciation based markets. Uh, but when you’re looking at, let’s say the, the $5 million, um, you know, mark, the, the death tax, is that based on like total? Does, does leverage count into that at all? Like, is it net worth or is it like, I own $5 million of real estate that I leveraged and you know, it’s based on 5 million?

John

Yeah, so your gross estate does factor in the debt associated with properties. So if, if, if you have a, a $5 million property, but your mortgage has is $4 million, then that’s $1 million to your gross estate for tax purposes. Um, so they do take that into account, but they also also included in the value of your gross estate is the, the death benefit of life insurance.

Zach

So

Adam

That,

Zach

Clarify how that works again, um, because this is something we, we personally do as well, and like the, at least how we build our policy out, there should be a very, very large payout at, at death, assuming I live, you know, past 60 or whatever.

John

Yeah. So, so let’s just say, let’s say that I’m a hobo, right? Just a good old fashioned riding the rails, hobo, I don’t own a thing in the world, but somehow I am able to afford a $15 million term life insurance policy, right? So term life no cash value to me whatsoever, but when I die, my heirs get $15 million. The value of my taxable estate for death tax purposes is $15 million. Um, so, you know, you take something like, uh, you know, we use the example, okay, I buy a piece of property for 5 million, I take a $4 million loan out to purchase it, but let’s say that I have, uh, uh, some sort of credit life, right? So that’s gonna pay off that balance if I die. And so my kids get a full $5 million paid off property. Well then now because of the life insurance component, my taxable estate is 5 million because they’re gonna include the value of the life insurance in my taxable estate.

Zach

What about people that have whole life where there’s the death benefit is, is um, paid, you know, tax free?

John

Yeah. So it’s, it’s income tax free to the beneficiaries, the, the death benefit, but that, that same dollar figure is added to your gross estate for death tax purposes. Got it.

Zach

Okay. Alright, well, let’s get to the juice of it. If, what, what options do we have to yeah, strategically navigate this?

John

So, uh, there’s a, there’s, and there’s a, there’s a, uh, uh, there’s obviously a lot of different options that we, we certainly couldn’t cover the whole world, but let me just give you an example for like this, this one that we were talking about. So let me ask you a question. Let’s say that, let’s say that I have a property house, let’s say, and, and we’ve had it appraised and it appraises at $300,000. Okay? So we’re all in agreement that the property is worth 300,000. And so Zach, I’m gonna sell you this, this property, I wanna sell it, you wanna buy it, okay? But once I sell it to you, even after I sell it to you, I’ve retain the rights to determine what paint goes on the walls, what furniture is placed inside this house, what the thermostat is set on, what, you know, tile goes in the kitchen.

John

All right? Sounds like a great deal for Zach <laugh>. All right? So, so, so we, we we’re all in agreement that the house itself is worth 300,000, but how much would you pay for this with these restrictions on it? Prob probably not 300,000, right? I mean, you’d, you’d pay something. It’s, it certainly has value, but you probably wouldn’t pay the full fair market value. You would, there would be, there would be some restrictions, you know, you would, you would’ve to say, well, look, if I can’t decide what paint color and what, what floor tile and what furniture goes in it, maybe I give you 200,000. Uh,

Zach

I guess it depends on who, who you are in relation to me, right? <laugh> and certainly, but,

John

And then, and then what if I also, what if I said, okay, yes, I’m gonna sell it to you, but if you ever wanna sell it, you can only sell it to another member of your family. You could never sell it to a third party. Um, well, all of a sudden that that’s gonna have a, that’s gonna change the value too, because, you know, if, if you know, you’re thinking, well, yeah, okay, I’m gonna buy it at 300, but I’m buying this asset that’s gonna grow in value, and maybe I want to cash in on that at some point, but if I’ve got restrictions on who I can ever transfer it to, well then I’m not, I’m once again, I’m not gonna pay safe, fair market value for that. I’m gonna pay something less. Okay? So, so keeping that whole concept in mind, let’s say, um, let’s take this gentleman and let’s say that I create a limited partnership.

John

Now a limited partnership is gonna be made up of a general partner, um, who, who has all the control and limited partners who have no decision making authority whatsoever. Now they, they, they’re the owners, right? So the general partner typically owns nothing or very little, you know, zero or 1% or a 0.1% or something, but they own basically nothing. The limited partners now own everything. So let’s say I create this limited partnership, um, and I own 50% of the limited partners, and then each of you two guys own 25% of the limited partners partnership interest, right? And I put a million dollars worth of real estate fair market value, million dollars worth of real estate into this limited partnership. Okay? What’s the value of my 50% limited partnership interest? If we had to walk out onto the street and, and, and find a willing buyer to say, Hey, we would like, would you like to buy John’s 50%?

John

Well, 50% of a million bucks is 500,000, right? Except that that limited partnership, if you buy it, you can never demand a distribution, you can’t make any, uh, investment decisions related to the limited partnership. Um, you, you can’t vote on anything. All of that is done by the general partner. You’re not buying that. You’re just buying this limited partnership interest. And if you do buy the limited partnership, the limited partnership agreement says that it can only be transferred to certain members of a family. And so if you ever wanna sell it, you’ve got restrictions there. So all of a sudden, if we were to go and get, uh, a business appraisal and say, what is the appraised value of John’s 50% of this limited partnership interest? Well, we’re gonna take a discount for lack of marketability because it can’t easily be sold on the open market with all these restrictions and say, if it limits it to family, you’re, it’s zero, right? To No. Yeah. Yeah. I mean, so we’ve got a, we’ve got a lack of marketability and we have a, a, a discount for lack of control because you’re buying into a business that you can’t make any decisions about. So we have a lack of marketability, we have a lack of control. And, and maybe the business valuation comes back and says, okay, well John, you’re, you’re $500,000 worth of limited partnership interest, we need to discount that by 30%.

John

Right? Okay, well, you know, or or maybe even just 20% we say, we’ll discount it by 20%. Well, we just cut a big chunk off of that. You know, if you start adding more zeros to that number, right? If we say, instead of my, you know, if I put in, you know, uh, if I, you know, not not 1 million, but you know, 50 million, right? And then we, we say, okay, well then what’s, you know, let’s discount that 50 million for lack of marketability and lack of control, and let’s discount that by say 30%. Um, well if we, if we cut, you know, $15 million off of that, you know, so now my taxable estate, the fair market value of my, what I own and what I own is limited partnership interest. The fair market value is not 50 million, it’s 35 million, 40% of that extra $15 million was a lot of money. <laugh>, I, right? So, so I mean, right Then just bam, I’m able to make some significant discounts on the valuation. So, you know, that’s a, that’s a, an, you know, that’s a, that’s a just an example of the kind of strategy that might be available for somebody that’s on that high end of things. So

Zach

That’s putting in, uh, putting in a portfolio, uh, basically turning it over control to, to, and we, we didn’t talk about like who these working parts are, but basically you’re taking an LP position on, on your portfolio and getting a, a discounted rate ’cause of that, right? On the, the value, right?

John

Although you might still be in a position within the general partner to, uh, to manage those assets, right? So, so, you know, I’m, I’m, I’m transferring my assets into this family limited partnership. I’m gonna, uh, maybe control the general partner or depending on my age, maybe I wanna bring in some of the kids and, and, and create some kind of co-management to get them working in the business and so they can start learning how it’s going as well. Um, but, but the ownership of it is essentially gonna be these limited partnership interests where we get the discounted valuations.

Zach

What else could, what else can we do? I mean, ’cause that’s, sure that knocks off 15 million in that, in that scenario, which is great. But I mean, it’s kind of my understanding that there, there’s more options that can even be potentially more effective too, right? Can we talk about also like what is step up basis? How does that work?

John

Um,

Zach

Yeah, so we need to get deep into the weeds. I know we could talk about this all day long and we’ll probably have to have you back, John, to do it deeper dive into some of these things. But it’d be good to just get like a teaser on some of ’em just we’re for awareness. Well,

John

And, and, and so let, I mean, just using that as an example, but now let’s, you know, let’s flip this over to, to Adam’s other question, you know, it’s, okay. So I’ve got my, my, my parents over here, right? And these are not $12 million folks. So that whole discussion was irrelevant to me. The, this is, you know, it’s mom and dad and they’ve got a house and, and let’s just say they’ve got a couple of little rental properties. They’ve had ’em for a long time, so they’ve just depreciated them all down and, and you know, their house, they bought in 1952 for $25,000 and it’s, it’s worth 300,000. Now, you know, the inheritance when I, when they die and I inherit their assets, inherited assets come generally income tax free. So I’m not worried about the income tax coming to me, but I’m not going to, you know, I don’t want their house.

John

Um, and so when they, when they die and they leave me their house, I’m gonna want to be able to sell that house. And so my question is, well, how much tax would I have to pay on the sale of that house? Well, um, generally speaking, if you own an asset at your death and you transfer that asset as a result of your death to your family members, um, it’s as if the family members went out and paid fair market value on the date of death. So although mom paid 25,000 for it, it’s worth 300,000. She dies, I inherited, it’s as if I paid 300,000 for it. If I turn around and sell it the next day for 300,000, well then sales price minus my basis is zero. I pay no tax. That’s the step up in basis. And, and preserving that in that scenario is much more important than worrying about a death tax.

John

’cause these folks aren’t ever coming to the death tax. They’re never gonna have $12 million. Um, on the other hand, if my mom has Alzheimer’s and she’s gonna need $6,000 a month in long-term care, um, you know, having these extra properties may be a bigger problem because she can’t qualify for government assistance. Um, you know, you’re not gonna qualify for Medicaid and have two rental properties. But, um, maybe if I would have shielded those assets with a trust, um, so that they, that my mom still gets all the rental income from it so she can use it for her quality of life, but the assets don’t count towards her eligibility for Medicaid. Well, that’s now I’m solving her incapacity problem right now, I’m, she’s gonna be able to get the government to pay for her care without having to burn through the, their net worth. But now we base the question, if the assets are in a trust and I’m inherit, I’m not inheriting them from mom anymore, I’m inheriting them from a trust and, and the trust didn’t die.

John

And so do I get this step up in basis and if the trust is structured correctly? Yes. Um, and so this is where a lot of these things start interplaying, you know, I wanna be, if if you’re talking about somebody that’s say, uh, under the death tax, you’re gonna be more focused on preserving step up in basis. If you’re above the death tax, you’re gonna be more concerned about avoiding that 40% death tax. Um, and so trying to find the balance between those two things and where you’re at and and, and where you are in your stage. If you’re just starting out, you’re gonna be more concerned about step up in basis. If you’ve been doing this for a while and you’re now starting to amass some wealth, your focus will start to shift to that death tax and that’ll become more important than preserving the step up in basis. Now

Zach

Is there anything else, just, just offhand, that you can do to, I mean, shelter the 40% beyond, you know, doing the GP LP scenario?

John

Yeah, so, well, so I will say, you know, the vast majority of my clients are not in that $55 million range. Right? I have those, but, but more often I’m gonna see folks with, you know, maybe they’ve got a 2 million, 3 million, maybe a six, maybe a five, maybe an eight, maybe a $10 million net worth. So, so they’re in that middle range, right? One to 10. Um, but their, their goal is to grow, their goal is to get bigger and bigger and, and they, they certainly would hope that over time those assets would get bigger. So I mentioned that, that these things that, that the death tax and the gift tax are tied together. People will often ask me, well, uh, John, I heard I can only give away $17,000 each year without having to worry about the gift tax. Well, that’s, that’s true. That’s the annual exclusion. But in addition to the annual exclusion, I could give away up to $12.9 million during my lifetime. Now, if I did that, if I gave the whole $12.93 million away, I don’t have any death tax exemption left. Right. If I use up one during my life, I’m using up the, the other one. Right. But let’s just say that I’ve got, I’ve got a, a net worth of 7 million, so I don’t have a problem today, but I will have a problem in 2026.

John

Well, now I could have a couple of options. Um, if I’m married, for example, I could create a trust for the benefit of my wife and I could put my $7 million worth of assets into that trust. I can make a gift to my wife of $7 million. The trust is structured so that it’s not part of her estate when she dies. And since I’ve given it away, it’s not part of my estate when I die. And then over time, that trust, maybe that trust grows from 7 million to 14 million or 22 million or whatever. It doesn’t matter. I got it out of the tax system while it was low. No. And yeah, I used up a little bit of my exemption amount, but who caress, right? I, it was much more important for me to get it out while it was low and then not have to worry about it once it got big.

John

Um, as opposed to like this other guy where it’s already big and now we’re, we’re, we’re kind of solving the problem, but not really. I mean, we’re, we’re helping, we’re, we’re slowing the bleeding, right? Um, but if I’d have gotten to him say, you know, a, a few decades ago we might’ve done something like that, you can also even create a trust for your own benefit that is excluded from the death tax when you die. So I could transfer assets to a trust that I’m a beneficiary of, but they’re not mine for death tax purposes any longer <laugh>. Um, and that sounds crazy. Gotta

Adam

Love our tax system. Yeah,

John

That sounds that, that sounds absolutely crazy. And and the funny thing is, is there’s only, um, I think there’s 21 states in the United States that you could do that in. So you would, you, you would have to be creating a trust under the laws of one of those 21 states. But for example, I practice in, in, in Texas and Arkansas, Texas is not one of those states. Arkansas is one of those states, but Arkansas just became one. This, this last legislative session, I drafted their bill. Um, but prior to that we would use Nevada. ’cause Nevada was one of those states. So it’s South Dakota and Alaska,

Zach

I’m sure Wyoming’s probably

John

Wyoming as well. And, but that’s kind of the cool thing is you could, you could be a Texas resident and create a trust that’s governed under the laws of Nevada, um, or one that’s governed under the laws of South Dakota. And so you can turn around and take advantage of, of the, the tax systems of other states, uh, if again, if the planning is done correctly.

Adam

So is this, is the death tax based on your portfolio or how much you’re giving each child? Because let’s say, you know, I run up a $20 million, um, estate, I die. I’ve got four kids, they’re each gonna get 5 million, let’s say. Is it based off of what I own or what they receive?

John

Yeah, it’s based on what you own. So when you look at the, uh, the, the estate tax return, um, which is the, this form 7 0 6, and I mean, it just, it’s just goes schedule after schedule list, all the real estate, the person owned list, every bank account they owned list, every stock that they owned list every mutual fund they owned list the death benefit of all their life insurance. Um, I mean it’s just, it’s just page after page of list. Everything that dead person either owned directly or in some cases didn’t even own, but had certain level of control over. Um, and so it’s, it’s quite complicated. But yeah, it, you can pretty much assume that the, that when it comes to the death tax, they’re gonna try to add as much to that gross estate as they can come up with. Yeah,

Zach

That makes sense. That way we’re not just adding a ton of different beneficiaries and carving, carving it up as easily as you can. But, um, John, I’m, I’m mentally exhausted now. Um, <laugh>, but <laugh>

John

As, as you should be, the,

Zach

This is important stuff to talk about that we, like I said, we probably haven’t done, I mean, certainly we wanna have you back and, and do deeper dive into some of these things, but the, I the key point is here, this is things to possibly think about and, you know, people are at different stages in their business, in their real estate investing. And at some point, if you stay the course to our earlier point in this conversation, if you just stay consistent to buying real estate year after year, these are things that you’re gonna need to think about. And so it probably, you know, be to your benefit to have these discussions earlier, um, rather than later to, to get ahead of the, the curve and solve, you know, have a plan for these issues. So, um, but if you’re not at that point yet, I mean, just awareness is, is important and the idea of continually buying your portfolio to eventually have these, these problems, which are good problems to have ultimately, um, I think is is the focus here. Let me just ask you, ’cause I know we’re just coming up. Well go ahead and, and, uh, yeah, let’s do a showcase to where people can find out more about you.

Adam

Yeah, so you can find out more about John and his [email protected]. That’s Ross and sulmeyer.com. If you’re a lover of podcasts, he also hosts the, uh, big Picture Retirement podcast, which you can check out, just go to your podcast platform and type in big picture retirement podcast. And I’m sure, um, you’ll, uh, be able to find it on that platform. But, uh, but yeah, so Zach, you had one last question.

Zach

Yeah, and I, um, people can feel free to tune out, but I, I do know that this is probably of interest to some people as, as well. Um, I have, uh, mass, uh, a large portfolio of multiple different asset classes, probably the bulk in commercial retail, but I also have a, a good portion of short-term rentals. We acquired one last year in November. Um, and my c p a determined, we’ve already filed taxes, so it’s a little late now. Um, but I wanna revisit this, um, and I just wasn’t given clear direction on it as far as we had a short-term rental that we did accelerated depreciation on that we did, we do all of ’em on. Um, but I was told that like, since it was acquired in the year last year, uh, in November, end of November, um, that we wouldn’t qualify to, like, we weren’t able to dedicate on like, on a short-term rental.

Zach

You need to have, I think like, I forget like 500 hours of material participation or something like this to actually take the accelerated depreciation, um, against active income to, I mean we’re, we’re reporting a significant loss every single year. So this is just furthering that loss. But the question is, is like, alright, you, you take the, you count it for the year that it goes into, um, I guess into your, into activity, right? You take ownership of it, but it, it just didn’t seem, it just didn’t sit with me. I’m thinking like, well, there’s gotta be something I’m missing here. If I bought the property in November, sure. I’m not gonna be able to calculate f 500 hours or whatever that year of, because I only own it for one month. But, um, I mean, what, what is your opinion on that? And like, could we have taken it that year? What can we do this year with that property now? We would’ve owned it and operated it for a full year. Any ideas on that?

John

Yeah, I mean there’s, there’s several examples of of similar things throughout the tax code that don’t make a whole lot of sense, um, where there’s some sort of, of holding period requirement, um, whether it’s, you know, a number of hours or, or some sort of use or something where if you purchase it at the end of the year, it just doesn’t work. Where if, you know, if you were a, um, you know, if you were a manufacturing facility and you built, uh, you bought a brand new piece of machinery on December 31st, you could depre, you could take accelerated depreciation on the whole amount because there’s no, there’s no arbitrary time usage according to that piece of equipment. Um, so basically you’re just, you know, I mean the short answer is, uh, you know, buy sooner <laugh>, um, <laugh>.

Zach

So you would say that my CPOs, it was probably correct in, in stating that that was not appropriate to take that

John

That is my under, yeah, that is my understanding is that, is that if, when it, when it’s got those kind of arbitrary, it has to have x number of hours of use or it has to have x number of days of use for you to take the accelerated depreciation, it’s not a, it’s not one of those where you can take, you can, you know, create some sort of fractional formula or something and say, well, we could take, you know, one 12th of it because we bought it at the end of the year, uh, like you could with, with other assets that don’t have that arbitrary use number on it.

Zach

What about this year though, with, um, I mean now that we would’ve owned it for an entire year, but we did the cost sa cost egg study in 2022. We’ve, we’ve now, when say when we filed 2023 tax, we would’ve owned it for a full year, but we already took accelerated depreciation as a passive loss last year or in 2022. Is there anything we can do to roll that back over? And if I’m going, I know I’m throwing this at you without any additional information, so feel free to decline, but like, is there anything we can do this year to use that as an active property now to like, do I go and get another study done or do I have to amend the previous taxes? You know, I, I’m just kind of curious on that.

John

Uh, you, you wouldn’t have to go back and amend and, and, but now I am stretching my, my, just off the cuff recall knowledge, it seems as if, and because I just looked at this for another client here recently, but there’s, there’s something about if you, if if for example, you didn’t take the cost segregation analysis, the, the, the at first, but you, maybe you’re a couple of years into it, right? So somebody that, that bought a property, say three years ago and they’re just now listening to this show and it’s the first time they’ve ever heard the, the, the phrase cost segregation analysis. There is a, there is a way that you can go back there. You have to make like a, an election to change accounting method with the IRS if I’m remembering correctly. So there, there, I’ve, there may still be a way in there, but I just don’t remember it off the top of my head.

Zach

Fair enough. John, I’ve, I’ve thoroughly quiz you on, on a lot of stuff and I know your forte is, is certainly the, the estate planning aspect of things as well, and this is probably how it goes if people just ask you a thousand questions about all things accounting <laugh>. Absolutely. But, um, and I, and you are correct, I do know that people that have owned properties previously, if you haven’t taken accelerated depreciation, you still can, right? Um, and that’s important to know, especially this year as we are now at 80%, uh, bonus depreciation next year goes to 60. So if you’re now getting into this, like we talked about into this area where you might qualify as repro and you own rental real estate and you’re paying money and Uncle Sam that you know you otherwise could invest, this is the time to probably start considering that, at least doing further research on it. But, um, John, this has been a pleasure. Thank you so much for all the detailed information. I’ll let absolutely Adam sign us off here. Absolutely. Yeah. Anytime y’all want me, I’m, I’m here.

Adam

Alright. So once again, the website is Rosshandshoalmire.com. That’s Rossandshoalmire.com. If you wanna see some assets that you can acquire to, uh, hit that death tax limit that we’re all aiming for, you can head on over to rent to retirement.com. That’s rent to retirement.com. Really appreciate the time you spend educating yourselves. Don’t forget to, uh, leave a review on whatever podcast platform you use. Just search for the rent, re you know, get on there, take a screenshot in the next few days and we will, uh, enter you into a raffle. But again, that’s at renttoretirement.com. Appreciate the time you spent educating yourself, and we’ll talk to you on the next episode.