Taxes are the largest expense anyone pays in their life. “The only guarantees in life are death and taxes”…right?

Real estate investing can help you (legally) avoid a tax bill, and The Real Estate CPAs Brandon Hall and Thomas Castellini have made a career out of helping people pay as little tax as they can.

Adam Schroeder and Zach Lemaster talk to the two about their 5 step program to educate people on getting started with their tax education.

Learn more about Brandon and Thomas HERE

Watch the Video Version HERE

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Transcript:

Adam
Hey, Rent To Retires, it’s Adam Schroeder here along with Zach Lemaster. And we have a returning guest and a not returning guests but friend of a returning guest. And that is Brandon Hall and Thomas Castelli. And we are here because, well, they have the CPA firm, if you remember from our earlier episode, and if you don’t, then go back and listen to it. But when we were talking, we mentioned that they’re doing a lot of education. And we decided we should put together a tax course and bring it to our listeners so you can be educated and know what you’re doing, as you’re going through your real estate journey. And we thought, You know what, you’re probably going to want to know what all’s in it and get educated. So we’re here today to talk with them about what on earth they can teach you as a real estate investor. So welcome to the show, gentlemen.

Thomas
Thank you for having us.

Brandon
Thanks. It’s good to be here.

Zach
Yeah. And Thomas is also a friend, but also partner, right? In your guys’s CPA firm. But I guess we can be friendly, right, Adam? I don’t know.

Adam
I’m hoping they’re friends. If they’re working together, I’m hoping their friends.

Brandon
Tom smells bad. So.. [laughs]

Thomas
That’s why I’m all the way over here in New York [laughs]

Brandon
That’s why that’s why we do virtual actually.

[All laugh]

Zach
But no, we appreciate you joining in. We’ve done a lot of like, you know, initial interviews and education about, you know, this is taxes, specifically, like that’s one of the best benefits of investing in real estate in general is the tax benefits. If you’ve listened to me talk at all. That’s that’s the thing that really gets me jazzed up. Because quite frankly, that is the most strategic thing to give yourself an immediate raise. And real estate offers so many tax benefits that most people aren’t even aware of or doing appropriately. So it’s extremely fundamentally important that we know the tax structure that we’re working with the right people to set us up. Because tax, it’s a planning scenario, right. I mean, it’s a lot of people look at as, as a defensive side, like, oh, dreading, you know, April, every year, I gotta go back and file taxes, and then turn it during this mess over to the CPA and hope they’re doing it right. No one really knows, like, has a concrete plan. But if you plan appropriately, and participate on the offensive side, which is the planning and the education piece, working with the right professionals, to help you set up that plan to execute not only this year, but future years or potentially even looking back at previous years. I mean, it’s just so fundamentally essential, because it allows you to be the best investor to have more money to invest, buy more assets that have more tax benefits, get this compounding effect. And that’s what allows us to scale our portfolio and take our investing to the next level. So we’ve we’ve had a lot of really good feedback. And we had Brandon on the show. And essentially, our community asked, Hey, this is great that you’re doing these interviews, and this is good information. But can you give us something more concrete? Can Can we have like some actual training on this versus listening to a podcast where I’m excited about taxes, but like, what’s next? You know, they need some participation and education into actually going through the planning structure. And so here we are, Thomas and Brent have been so gracious to actually put together a course specifically for our clients, there’s a lot of different ways you can participate in real estate investing. So I mean, knowing the type of investing our clients do, that can be across different parts of the country, and how you know, our strategy working with rental retirement to scale portfolios, it’s very important that we have people that know this business that know this specific area of the business and can work with our clients. So Brandon Thomas, again, thank you for being a part of the show. Let’s talk a little bit about exactly what this course is that you’re putting together for the Rent To Retirement community.

Brandon
I want to just talk about the why behind it. And actually, Tom, you might actually correct me so I might say the wrong thing. But the why behind the course. You know, originally when I started creating these boot camps in these courses, was we have a lot of a lot of people that that hit us up on an ongoing basis to become a client of the firm, and we just can’t take on everybody or our prices are too high. But my problem is, is that I want to help all landlords, and I know that there’s you know, you might go to a like kind of local CPA or large CPA or whatever that’s maybe just not in the real estate game every day. So my whole goal with creating these these courses was to enable people who take them to just have better conversations with their CPA, it’s not like take the course and come work with Brandon and Tom over at our CPA firm. It’s take the course learn the fundamentals so that you can ask your CPA better questions, so that you can just Have a little bit more peace of mind Make sure that you are more optimized than than where you would have been otherwise.

Zach
Love that.

Adam
So you’re telling me in our last interview, 45 minutes didn’t cover everything that there was some know about taxes?

Brandon
[laughs] Well, yeah, Tom is a faster talker than I am, so..

Thomas
So you know, so the task was diverse, real estate’s complex. Everybody ever, you know, you can go online, you can listen to a few interviews, you’re not going to learn everything you need to learn in a 45 minute conversation, or, frankly, probably even a 90 minute presentation, there’s just way too much. So the course is tax strategy foundation for real estate investors. What it does is it breaks down the fundamental tax strategies, from the basics to the more complex strategies that real estate investors need to know in order to really minimize the taxes and make sure that they’re taking the full advantage of the tax code they can, so they can basically reduce their taxes the entire point. So we cover again, the basics, tax deductions, things of that nature. But we really get into some of the hard hitting stuff, the stuff that’s really going to be impactful. For real estate investors. One of them is the real estate professional status. That’s, that’s the week that’s week one, with the real estate professionals that allows you to do it allows you to take losses from your rental property. So as I’m sure Brandon had mentioned, on his episode, there’s, there’s a an expense called depreciation as a non cash expense. And what it does is, is it basically reduces your taxable income, despite the fact that you might actually generate positive cash flow. So I’m gonna give you a quick example. Let’s just say you had $100,000 in rental income, it could be 10,000, whatever, it can take zeros, add them up, whatever $100,000 in rental income, and let’s say you had $60,000 in hard expenses. And what I mean by heart expenses, I’m talking about property taxes, maintenance repairs, these are expenses that you’re actually leaving your bank account, you’re paying someone else right now, so that will leave you with about $40,000 of cash flow. And in most other operating businesses, well guess what, you have taxable income of about $40,000. But thanks to this non cash expense called depreciation, it can actually cause a loss. So let’s just say that you had $50,000 in depreciation, which is quite low, honestly, we’ll probably have more. But let’s say $50,000. Well, now you’re sitting at a loss for tax purposes of $10,000. So this does a few things for you. The first thing that does is it makes sure you’re not paying taxes on your rental income. Right? That’s, that’s, that’s, that’s one of the big that’s why real estate’s one of the biggest, like, the most tax advantaged asset is because it allows you to shelter your cash flow from tax. Now the question becomes, well, what happens to this $10,000 loss, remember, is a non cash loss, it’s just on paper. Well, the real estate professional status allows you to take this $10,000 or whatever that loss is for you, and apply it to your non passive income, which is for most people going to be their business or their W two income from their job. And it allows you to offset the tax, offset your income and reduce your tax. So for example, if you made pulling out a number of a hat, let’s just say you made $100,000, right? Well, now you’re only paying tax on $90,000. And there’s ways to boost this non-cash depreciation expense. And we cover that in the course to to really accelerate using bonus depreciation, so that you can really offset your taxes by up to five to six figures, in many cases, using the real estate professional status.

Zach
I mean, that’s huge. This is something we personally do, and especially with that accelerated depreciation with with cost segregation studies, just to be clear, depreciation is something everyone gets, you can be additionally strategic with this and accelerate some of this within a real estate professional status, you know, you need to technically meet all the criteria. So you cover that and also how how to achieve that, right? Because that’s really the question of a lot of people are aware of what real estate professional status is, and the requirements by the IRS. But really, the question is, how do I put in the procedural steps to be able to qualify for that, and you need to understand that, and that’s important to cover in the module. And there’s some instances where you can take, you know, accelerated depreciation without that, but just learning about things is so fundamentally important, but this is probably, I mean, this is a huge thing that if you’re an active investor, you should be having these conversations and researching this to take advantage of this. Before we move on Thomas, just to give everyone a quick overview. This is a I believe, a five week course, right? Where there’s multiple educational areas, there’s modules built lots of educational content, you’ll have homework which you need to do, you know, not significant amounts. But this is all part of growing your education to ultimately have those conversations, As Brandon mentioned, and save the ultimate amount of on taxes and just be more savvy investor. This is stuff that will pay you tenfold a hundredfold in the future by continually applying these things. And something that is essential that you need to learn about, but it’s a five week course you guys have five separate module Will’s we have live q&a, you’re part of the, you know, our community coming over so you can collaborate with and share ideas with the community as well. And that’s the best type of learning, I think is where you have education. You have an expert, you know, teaching this and also showcasing it and answering questions, but also collaborating with a community of people that are also going through the same things and sharing experiences. The the five modules though, the first one, which we just covered is real estate professional status. Second module is in second week is like the short term rental benefits and loopholes. I hate using loopholes because it’s really it’s, it’s allowed in the tax code. But second week is short term rentals, which I know a lot of people are interested in. And those are ways that you can take additional depreciation without being a real estate professional. Third, third week is optimizing your tax position overall. Fourth is audit defense and how to set yourself up appropriately. And then the fifth week, you have all sorts of like additional benefits with how to pay, say how to pay children cost segregation, entity structuring for tax optimization, and things like that. So I just want to give everyone a quick overview. Thomas or Brandon, anything else to cover in the real estate professional status that people should be aware of, you know, kind of coming into this?

Thomas
Yeah, yeah, absolutely. So the one that I want to cover on the real estate professionals as real quick, as you know, there’s a lot of information and misinformation about this on online forums and stuff like that free communities like BiggerPockets, things like that. And the problem with that is this is it is this is one of the more lucrative tax strategies, but it’s also the most litigated, there’s over 500, tax court cases dedicated to the real estate professional status, because people continuously abuse it and get it wrong. So it’s absolutely critical you do this, right. And it’s even more critical that this is done right. Because back in the summer, what they did was they passed the inflation Reduction Act, and with their the IRS getting a billion dollars in new funding, they’re gonna hire over 87,000 new agents, which is more than doubling their workforce, and they’re going to their audits are expected to increase by one point 2,710,000 of those new audits are going to be targeting the middle class like small business owners, real estate investors. So, you know, we went through this period over the last 10 years or so where the IRS was not fun, well funded, they didn’t have many agents and had historic low audit rates. So being that this is one of the more lucrative tax strategies, but also the most litigated, you want to make sure you’re doing this right. And that’s why we created this course is so people can get the facts, we have all the citations from the IRS tax court from the IRS, excuse me, from the IRC, a tax court cases, all that stuff to back up and substantiate this position. And us really want to make sure you’re dotting all your eyes, dotting all your eyes crossing all your T’s, when using this position. So it’s the last thing I just wanted to say in the real estate professional status.

Adam
And you know, if they’re doubling their, their size of employees that everybody they hire is going to be highly qualified, and completely under the tax code and real estate professional status. So..

Zach
It’s always changing legislation and taxes. It’s an ever evolving world. So I mean, it’s good to have this this foundation, but also keep up on legislation. And I mean, that’s, that’s super important. There’s a lot of changes happening right now. Brandon, what were you going to mention?

Brandon
I was gonna say a lot of tax advisers mess up real estate professional status, because they just don’t understand the ins and the outs, and they want to make clients happy, right? Like if a client comes and they, you know, push you hard enough. We see some tax advisers kind of saying, oh, yeah, you can you can count, you know, education hours time spent on on webinars, you can count that for real estate professional status. Sure. And then they say to one person, they say at the five more people, and then 100 more people. And then and then soon enough, you’ve got this whole community saying, hey, this CPA allows you to count all your webinar time. And what you’ll learn in our course, is that it’s not about what a CPA is gonna allow you to count or not, it’s about what has shown up in the tax court historically, what’s in the Internal Revenue Code and what’s in the Treasury regulations? How is the IRS gonna audit you? And what are they gonna allow and not allow? And what you what you will walk away from, even after the first module is is a really good understanding of what works and what doesn’t work with real estate professional status, what hours count, and what hours don’t count what myths we bust myths and one of the sessions myths that we’ve picked up from just listening to what other tax advisers tell folks and then we give you citations showing that it’s wrong. So you will walk out of there knowing how to have a much better conversation with your own tax advisers.

Zach
And protect yourself I think that that’s I mean, that’s so central because yeah, there is so much information in our a pro is one of those things that super exciting to learn about. But you know, can be detrimental if you do it. Do it wrong.

Adam
Let me ask one more question about this. Brandon, Thomas, if you do get audited, what is the cost of that to people in general? Like how much are people actually spending to protect themselves when the audit comes down?

Thomas
No, I And I honestly don’t know the exact cost. I was hoping you did.

Zach
Do you mean costs of actually going through the audit, we’re assuming that you’re not paying penalties, right? We’re talking about to go through the audit.

Adam
Yeah, like getting getting your CPA to help you out through it, if you have to hire somebody else to represent you, or something like that, you’ll have like a rough number of how much it’s gonna cost you to do something like that.

Brandon
So I believe that the average cost I can remember where I saw this statistic is about $2,500. When you have real estate professional status, and you call us up, it’s gonna be much more significant at that point to help like if there’s anything to really help you on. But honestly, like a lot of, we’ve had folks call us up, after we did this whole real estate professional guide, and all this stuff. And they’ll jump on and look at their stuff and just say, yeah, there’s nothing that I can do for you. You’re just you’re dead in the water like that. The audits, the audit cost there, at least the fees, you pay taxes, whereas there’s nominal, because you just you just automatically lose. But, but if you challenge and you go to tax court, I mean, they can get into the 10s of 1000s, because you got to hire tax attorneys, and it gets extremely costly. So getting it all right up front, getting the good documentation habits in place, will will definitely prevent that and it’ll make it a breeze, it will, it really will make it a breeze.

Zach
Not one of those fun things any of us are looking to do is tax prep, but it’s just one of those things we got to do. And that’s why it’s important to be educated and have the right people on your team to assist you with that. So let’s move on to number two, which would be short term loopholes. So I mean, what do you guys mean by loophole? And what do we want to talk about with this?

Thomas
Yes, so, so kind of long story short, so us real estate professionals, it’s, it’s for long term rentals, right? It’s sort of real estate professional status for and also, you generally have to work full time in real estate, in order to use the real estate professional status. And again, we break all that down in the course. But the short term rental loophole is for short term rental property. So if you have a short term rental vacation rental, there’s an exception to the definition of quote unquote, rental activity, under the tax code that basically makes short term rental properties a business. And the bar for a being for materially participating in the business and making the losses non passive, are much lower than the real estate professional status, because you do not have to work full time, you just have to meet one to seven tests. And again, the it’s a lot more lacks, like if you do everything yourself, you can qualify is one way to do it. There’s other ways. But basically, it allows you to take those losses, same example I mentioned before, and just use those losses against your active income without having to work full time. And it’s for specifically for short term rental properties.

Zach
Those losses. Let’s say you have long term and short term, are those just applying those can you do like accelerate depreciation just on the short term? Or does that open up the door to do your short term and your long term portfolio if you don’t necessarily meet real estate pro status?

Thomas
Right? It’s good question. So this is specifically on the short term rentals. So if you don’t, if you don’t have the real estate professional status, you’re not going to be able to take the losses from your long term rentals. But from the short terms, if you’re using the short term rental loophole, we call it a loophole, because it was designed for hotels, that’s what it was designed for back in the 80s. You know, whoever wrote this legislation didn’t probably foresee, oh, you know, in 2020, we’re gonna have, you know, Airbnb and VRBO. And all these platforms, we’re gonna be listing residential houses out on for rent on a short term basis. So that’s why it’s a loophole wasn’t really intended to be used that you know, for residential houses, but it’s legal nonetheless. So you might as well take advantage of while you can. So that’s kind of the short term rentals. It’s only for short term rentals won’t impact your long term rentals, but allows you to still accelerate your depreciation, take those losses. And, you know, we’ve had, we’ve helped, you know, I don’t know, probably, well over 500 Clients use this strategy. And, you know, people are saving five, six figures very, very powerful strategy right now.

Adam
Is this something that’s audited? You know, I mean, I’m assuming that a lot of these auditors don’t understand everything, but is this something that’s audited? On a similar basis to real estate professional status? I mean, it seems like it’d be pretty easy to defend. But is this something that’s audited on a decent basis?

Thomas
Yeah, that’s another good question. So there’s a lot less tax court cases around this because in terms of the tax landscape, right, this is relatively recent phenomenon. Like, you know, Airbnb only really came to prominence over the last 10 years or so. And it takes time for people to get audited and then go to tax court. And with audit rates being so low as they have been over the last 10 years, it just hasn’t been much generated from this yet. There are a handful of cases one very recent and 2020, which we do outline in the course, which is kind of like in my opinion, a Cornerstone case, it kind of covers everything that you kind of do wrong in the short term rentals. And so in terms of audit hasn’t been many historically that were that we’re seeing or that has been coming up in tax court, but I would expect that to increase probably with these audits that are coming up. So it’s just another Raggi highly lucrative, but you want to make sure you’re dotting your T’s crossing your eyes or the other way around, you know.

Zach
Is this acceptable? If you have a property manager to handle your short term rentals? Or do you have to be the manager?

Thomas
You effectively have to self-manage in most cases.

Brandon
And we’ll go we go over all that. And that second module, we talked exactly about what what can and cannot happen with them?

Zach
Can you partner with your business partner as a property manager? I just say that because ours is our business partner.

Brandon
You can. We go over the material participation test. That’s the key, is the test.

Zach
You actually have a test to run. I love that.

Adam
Good. Because material participation. Tell you what, you you Google that online and Good grief.

Brandon
It’s very overcomplicated, and there are definitely some complications related to it. But we really try to break it down for folks to understand at a foundational level.

Zach
What else do we want to cover on the short term loophole? Is that a fair summary of it?

Thomas
Yeah, it’s a fair summary of it basically, long story short, if you have short term rentals, it’s a way to reduce your tax bill significantly. Super powerful. And that’s pretty much the bottom line of it.

Zach
No, I think what some people don’t maybe realize this when they’re first getting started. But definitely as you become a more successful investor, in this case, for us, I think a lot of our investing has actually our strategy has revolved around the tax code, in tax benefits. I mean, that’s, that’s really what’s tailored, the type of assets we’re buying, when how we look at properties and cash flow on them. A lot of it is is a tax play to this to this day? And I mean, it’s in looking for long term as well. So this is this is fundamental to understand this stuff. Module Three here, optimize tax position, what what the heck does that mean?

Thomas
Right, you want to take that one? Alright. So optimizing your tax position. So the real estate professional status, short term rental loophole, those are like, those are like bombs to your tax liability, right? They’re like these massive hits, that you’re just going to reduce your tax liability to optimizing your tax positions, more like the little incremental things you do, that aren’t as sexy, they aren’t as major, but you do them consistently over time. And you’re going to be able to save 1000s of dollars over the years. So one of them is going through, the bulk of the module is going through what’s the difference between a repair and an A capital improvement, right? So capital improvement, you generally have to capitalize and depreciate. And that means that you’re taking a little bit of that excess that cost every year, a little bit of it on your p&l and reducing your tax just a little bit. But when you can expense an item to repair or maintenance, you’re taking that entire costs in that year. And there’s certain safe harbors, IRS safe harbors or that are in the Internal Revenue Code that allow you to expense certain items, rather than capitalize them. And when you’re in the bottom line is you want to expense as many items as you can. And there’s an entire, there’s an entire set of entire framework the IRS has, what are they the Congress released, called the tangible property regulations that outline what these differences are, what the safe harbors are, where the fine lines are. And we break all that down so that basically you’re putting yourself in the most favorable tax position possible, when you are renovating your properties and repairing them, which is inevitable when you’re dealing with a piece of physical tangible property. Right. So the other part of that was something called a partial asset disposition. Right. And this is something that is really underground people really don’t talk about as much as they talked about the other strategies are the partial asset disposition allows you to do is fully expensed the remaining value of certain items in the year that you replace them. So to give you an example of kind of paint the picture, when you have a roof, if you have a residential property, the roof is part of the structural components, and it’s gonna be depreciated over 27 and a half years for residential property. So that means every year you’re taking a little bit and deducting it well, that your existing roof has value on your depreciation schedule. So when you replace it, you’re you’re putting the new roof on your depreciation schedule, depreciating that over 27 half years. So now technically, theoretically, if you didn’t do anything, you’d be depreciating the old roof and a new roof. But with a partial asset disposition, what you do is expense is basically to duck the cost the remaining value of that old roof in that year. So basically, you’re taking let’s just say it was worth $10,000 Left, right of value, that would be depreciate over 27 half years. Whoa, because you replaced it, you take that the old roof which is worth $10,000. Now it’s expense, right? It’s an expense on your p&l. And again, it’s non cash because you already paid for it. You already paid for it when you bought the asset. And it just you do if you’re able to execute and use partial acid dispositions, they can save you significant amounts of money over time, and just something that most people don’t talk about. But we cover that all the safe harbors everything betterman restoration that added taste tests all that the bar test they’re called, I’m really just how to make sure that you’re expensing as much as your repairs and maintenance as you can. And taking advantage of that.

Zach
That’s huge. I think most people don’t don’t understand. I mean, what what is an appropriate expense? And how do I take that on a house, whether it was just a rental, especially in a rehab, or when you’re doing, you know, rehab to a property or improving value? I mean, yeah, it gets complicated, real quick. I mean, I almost it’s good to go through the module and educate yourself on that. But still, I mean, to this day, I’m still a little loss of like, you know, what do you do with this? How much of this is like, you taking notes and trying to categorize it and then turning it over to your CPA with? I mean, what, what’s your recommendation, if we could just take a moment to step back and say, What’s your recommendation for how to like, keep track of these things? To turn over to your CPA when it’s tax time?

Thomas
Yep. So absolutely. So there’s basically it’s all in the accounting, it’s all in accounting, and your bookkeeping system and keeping good records of your expenses. Because when you’re doing say, when, when you’re getting a roof repaired, or you’re getting any type of renovation done, you’re gonna have a scope of work probably from your, from your contractors, you’re going to have receipts or invoices. And really, it’s all going to get booked in your accounting system. And so your bookkeeper or your accountant is going to have to know what the difference between some of this stuff is. So you can train them on it. If you’re working with a professional, they’ll probably know, hopefully, they’ll know. But basically, it’s you being aware of why these items are important. Sometimes it’s about the way a certain invoice is done, right. So for the determinant, a safe harbor, for example, which is one of the safe harbors we discussed in the course. It’s based on line item, right? So if you get an invoice and says kitchen rehab $25,000, well, there’s not much you could do with that. But if you are able to get your contractor to break down and itemize that invoice, where you have stove you have, you know, cabinets you have so on and so forth. If certain if they meet certain requirements, then you can go ahead and expense those in the year. And if you and the only way to know that is by getting them itemize. So that’s the type of stuff we break down and then obviously categorizing them in your your accounting system appropriately. So it’s just being aware of the rules so that when you’re working with contractors, when you’re handing information to your CPAs, that you’re handing them the right information, so it can be categorized appropriately, because you don’t want to be missing out on this stuff. It’s like low. It’s kind of like I don’t want to say the low hanging fruit because it’s really not it’s more of the more some of the more advanced stuff. But it’s easy stuff that you can do that if you do consistently over time you do it the right way. It’s just going to add up over the years.

Adam
Absolutely. So when it comes to, you know, think, is there anything else you want to say on that? Or do you want to move on to number four?

Thomas
I think that that about covers that one.

Adam
So the next one is audit defense. And kind of some you talked about some of the exit strategies that are going on there? I mean, it sounds like if you keep track of everything, that’s your audit defense, right? You just throw it in there, or is there. Maybe there’s a little bit more to it kind of can you talk a little bit about kind of how you set yourself up to be ready for an audit? And what is the audit rate in general that we’ve been seeing? And kind of you mentioned that it’s expected to go up what, what number do you are they kind of expecting it to maybe go up to?

Brandon
It’s very low. Right, Tom? Do you know the number?

Thomas
I don’t know, off the top of my head, I think it’s something like less than 100,000 audits like going on or something like that. It’s it’s, it’s, it’s, it’s strikingly low. When I read numbers, I was like, wow, I mean, I’m not surprised, but to see to see the number, but when you actually see it on paper, you’re like, Well, I can’t believe it’s that low.

Brandon
Yeah. So how you defend yourself. I mean, defense starts, when you start investing, it doesn’t start when you get audited. And I think that’s the mistake that people make. And that’s what we try to cover or highlight at least in the course is defense starts on day one. It’s your it’s your accounting system, it’s your receipt management system, it’s it’s the it’s how you’re substantiating the various transactions that you’re engaging in with the authority that you’re that you’re you know, basing that those decisions on. So that that’s how you defend yourself is you just you create great documentation systems, you you work with advisors that will help you understand that from the get go, how to defend yourself from an audit. We also believe that understanding how the IRS will audit you is an important piece to learn as well to help bolster your defense so understanding what stones they’re going to you know, overturn and look behind is step one to understanding kind of where where to really start documenting a little bit better if that does come back to that documentation.

Thomas
Right right. Know thy enemy right? So you have to know what the IRS is going to come at you with so you could prepare for it in advance. That’s pretty much that’s pretty much one of the keys to audit defense. Just being prepared for it when it comes is like you already you already want Right, you already won the battle because you’ve already prepared for it.

Adam
So a lot of times people go into these audits, I’m assuming not very well prepared, y’all know, kind of, I don’t know if there are any statistics out there about how many people tend to lose their audit, just because they don’t know what the heck they’re doing. And they don’t have any prep, I’m assuming it’s probably a pretty high percentage.

Brandon
There’s no I don’t, I’m not aware of any statistics on that IRS. Maybe. But yeah, I’m not I’m not aware. I mean, most of the time, you know, they’re gonna settle. It’s either gonna be IRS backs off, you settle, or you get a tax court. I will tell you what the the section 469 audits that I’ve assisted with, most people just throw their hands up and basically give in to whatever the IRS is saying, because they’re not. These are real estate, professional status audits. And once you start digging into it, you realize you’re not even close to being a real estate professional, and you’re gonna lose this no matter what. So you might as well just start playing nice. I’m sure there’s a tax attorney out there that disagrees. But you know, it’s just your book in education research hours as your real estate professional status time, you’re not going to win that. So yeah, I don’t know any statistics off the top my head I’m not aware..

Thomas
They don’t unfortunately, release statistics on it. They like to be an enigma. They want to be mysterious. They wanna catch you sleeping.

Zach
You don’t want to be one of those people at them that will just say that. So in the best defense is a good offense, I guess we can say so. Awesome. Audit defense is huge. And it’s all about preparation, and really more so naturally, education, right? I think it starts there with, if you don’t know what you’re doing, you’re not doing it appropriately, then you’re bound to make mistakes. So that’s why these things are fundamentally important. I think the last module is kind of a conglomerate bonus module with a lot of different stuff in here. I’ll let you speak about a little bit more Brandon and Thomas. But I know that you cover cost sex study, and really talk about setting up businesses, real estate specific businesses doing, you know, possibly having children on payroll and how to do that appropriately. S You know, LLC structuring, possibly, you know, S corp versus LLC, you know, when you want to do that type of stuff. I mean, what, what else are you going to covering in here?

Brandon
Yeah, I would say the purpose of that last module was just to kind of cover all the general things that people have asked us over the years, because we want people walking away from this with saying, Man, I got a lot of value out of it. And we’ve experienced in the past that people will say, Well, I can’t be a real estate professional, and I don’t want to buy a short term rental. So real estate is not beneficial for me. And those last few modules kind of show, you know, real estate is really beneficial for you. Here’s, here’s why. So we kind of hit all the different things that you could potentially do. But it’s it’s definitely not as in depth as our dive into the real estate professional status. So we do spend a lot of time there. But, Tom, do you want to jump in? And kind of explain a little bit about that last module?

Thomas
Yeah, absolutely. So we have an interview with a with an attorney on entity structure, and how to set up efficient entity structure. So there’s a lot of attorneys out there, I’m not knocking any attorneys or anything like that, that just, you know, kind of oversell what people really need. When it comes down to you have these big complex entity structures, which are sometimes necessary, but not always, you have people who will jump into a by a $10,000, you know, complete, you know, LLC structure, and they’ve even bought a rental property yet, right. So that that module kind of breaks down what’s really needed, like when you’re first getting started, and also, you know, kind of a little bit more than just that. But then we have an interview with a cost segregation company, that kind of goes through Cost Segregation is how that works. We also then talk about how to pay your children in there, I just, I just took another look at the bonuses, most of investing through retirement accounts in there. So if you invest through self directed IRAs, things like that, we have a module on that. We also we also have another module on scrubbing your depreciation schedule. So before it talks about optimizing your your your tax, your tax position, the kind of scrubbing your depreciation schedule is kind of a way to go back and kind of see basically, what you can do in the past, is there anything on your depreciation schedule that you can you could do now to basically save more money, so just a little bonus in there, and kind of just in a nutshell, it’s just like Brad said, all the little odds and ends and stuff that people have asked about. Also in the audit defense section, we also have the exit strategies, which I don’t think we highlighted things like 1031 exchanges, at some of the other exit strategies, because you know, when you sell real estate, that’s probably when you have your biggest taxable event, right? You have hopefully, right? You, you generate a big capital gain. And just another reason why real estate is one of the best asset classes out there is because you can exit real estate tax efficiently with a 1031 exchange or use a cost segregation study to offset the capital gains, all these other little things. So that’s all included in there. That’s, that’s that’s a lot. I mean, that’s what’s in there.

Zach
That’s a tremendous amount of information and that alone the value. I mean, again, it’s just going to allow you to be more savvy investor and ultimately prepared to say taxes probably year one, I don’t know if you guys have any stats internally, like what your average client that you’re working with. And that would be hard to, I guess come up with from a from an educational course. But I mean, definitely the this is an essential thing, right to save taxes immediately even if you have one rental, I mean, there’s a lot of things that you can just one rental property that you can, you know, apply to. And that also allows you to start learning from the very beginning on how to potentially change your strategy or apply the appropriate tax code moving forward. As you grow your portfolio, everyone is in this game to, you know, grow a portfolio, no one stops at one rental property, but it’s super essential to understand the tax side from the first rental as you become a more successful investor. And we love real estate, because it’s a great way to build, you know, tremendous amount of wealth, a lot of that is protecting it’s not, it’s not about how much you make, right, we all know, it’s how much you keep real estate is a great way to keep a majority of your profits, and then create generational wealth that you can plan on passing to to your family. And that’s, that’s something you got to start prepping. Now. I mean, you do not want to, because if you spend, and we’ve talked with people in this position, but if you spend your whole life working your ass off to build a tremendous amount of, you know, net worth in real estate, but you haven’t done it appropriately, where you can pass that on potentially tax free to the right people that you want to your beneficiaries. I mean, that’s your working backwards. I mean, it’s really unfortunate. So that preparation starts now. But gentlemen, this has been a tremendous amount of value to our community, we appreciate you being responsive to our feedback to put together something specifically for our community that that can be a value. I guess just in an animal will let us know how to like learn about this course. And I believe we’re probably I don’t know, a few weeks out, we’ll we’ll send out more information on on this course and how to be join the community of rent retirement investors to sign up for this course. But I just I just had a curiosity outside of this course. I mean, I just want to ask, is there any sort of legislation changes or things that, you know, we should be aware of as real estate investors that are that are happening now or for the foreseeable future?

Thomas
Yeah, that’s a great question. You know, back in the summer, they actually released the inflation adjustment Act, or the inflation Reduction Act, I think it was called. And what they did was is, you know, they talked a lot about knocking into the carried interest, which is big for people doing syndicates and funds, but they didn’t touch it, right. They always talk about getting rid of the 1031 exchange, but they didn’t touch that either. So really, for real estate investors, I mean, right now, there’s not not much not motion on the horizon coming up. But the audit thing is probably the biggest thing that came out of that, that people have to worry about is just that it’s not going to be what it appears, at least at this point is not going to be this this free for all like you know, kind of fun and games type of thing you’ve seen over the last 10 years or so just if you look at the audit rates compared to what they were to what they’re going to be now. I mean, they’re going to be doing 710,000 New audits on small for basically target, like I said before, the middle class and small business owners, right. So that’s, that’s substantial. I mean, no matter how you look at that, and it used to be 1.2 million new audits total. And I’m sure that’s going towards corporate America and you know, wealthy individuals. But that’s the biggest thing you want to watch out for, you just want to you want to make sure you have your ducks in a row.

Zach
That just makes it so much more important and relevant than learning about this stuff now, in preparation.

Brandon
Yeah, especially since real estate, professional status is a highly litigated area of the Internal Revenue Code. You know, if you ever, you know, if you are working with a tax advisor who’s just kind of maybe agreeing with everything that you’re saying, if they’re not really pulling citations to substantiate the positions that you’re taking, you definitely need to get educated on it. And you need to think about how you are claiming real estate professional status is short term rentals, anything like that. Paying your children same thing in anything that you are doing, that’s not a straight laced, you know, I’ve got income, and I’ve got actual expenses. You’ve got to make sure that you’ve got good documentation in place.

Zach
I love it. And that’s, that’s so fundamentally important. And, and as we’ve received that feedback that while all this stuff is good to talk about and raise awareness about, people have to spend some time and learn it. And so again, we appreciate you spending a lot of time to prepare the course. And you’ll obviously be there with live q&a throughout that course. So we’ll be sending out information to sign up for that within the community, we’ll have a limitation to how many people can attend. So just kind of first come first serve sort of situation. Adam, how can they find out about the course and sign up for it?

Adam
Yeah, they can just head on over to renttoretirement.com/hallcpa, and that will take you to the page that you need to register for the event. That’s renttoretirement.com/hallcpa, all one word. You can see it in the show notes as well. So make sure if you didn’t write that down fast enough, just go in there and click on the link and it’ll take you right there. So, Brandon, Tom, thank you so much for your ons really appreciate your time look forward to seeing this course. And, you know, seeing all the questions people have to ask because, you know, there’s one or two questions out there about taxes, I think and so we’ll get them all answered as best we can. So, again, head on over to renttoretirement.com/hallcpa, and we will help you get going on your tax strategy. Don’t forget to leave us a review on whatever platform you’re watching this on, or listening to it on. And if you have any questions, you can email us at podcast@renttoretirement.com. And we will get them answered for you as soon as possible. So thanks for joining us today, and we’ll talk to you on the next episode.