About to start. Thanks everybody for showing up. My name, in case this is your first time talking with me and watching my webinars, my name is Mark Perlberg. I’m a CPA. I’m also a certified tax coach and I run a practice that focuses on creating tax planning and tax strategies to help real estate investors and business owners achieve financial freedom.
So we are looking forward and we are proactively making decisions and anticipating business decisions and life events, changes in the tax code. So we can most effectively navigate the tax code and all our different financial considerations so we can grow in the most efficient way possible. And eventually achieve that financial freedom that we all want.
So we can really live our dreams and create that freedom. Whether that be being able to hire a nanny so you can spend some more time out with the kids, or maybe that is so you can spend some time on the beach playing golf with an effective tax strategy that is interwoven with your business plans.
We can help make that happen. Now, this topic is something that really resonates with me because I love the concept of pursuing your dreams and financial freedom. And a lot of my clients, I’m assisting them with creating exit strategies on how they can leave their W2 job to go full-time into real estate investing.
Or sometimes a combination of things; investing and flipping, or consulting, or being an agent, whatever. Now ,once again, you’ll see for some of you guys are starting nights and weekends, you weekend warriors. Once you get a taste of that entrepreneurial bug, it’s really hard, it gets harder and harder, to come in every day to your day job, clock into your nine to five. And take your salary when you get so excited when you get all that entrepreneurship in your blood.
So a lot of my clients and I are collaborating and we’re planning, and creating strategies. And understanding the tax code so we can plan to leave our day jobs to become full-time immersed in our businesses. For some of you, this might just be a way that we can create a way to retire on some of our real estate investments. But it’s a lot to talk about and there’s a lot of powerful things. So I’m going to get to some of the slides and fill you in on some of the general topics.
Okay, let me put this on the screen share. Okay. But before I go into that last thing, I really want to see a lot of you interacting because I’m going to be doing a lot of these live webinars. Trying to add value to as many people as I can and I love doing it live.
So I want you guys to shoot your questions into the chats or the Q&A. Actually put it into the Q&A section. That’ll be a little easier. I think there’s a Q&A. I can’t view the chat right now because of the way Zoom is kind of set up. But anyways, submit your questions in the chat and I’m going to go through all the slides. And then I’m going to look back at what everybody’s saying and try to address all of your questions. And give you some ideas to help you with reaching your goals and answering some of your questions.
So topic here. To give you an idea of some high levels, some of what we’re going to cover. First, we’re going to discuss some of the obstacles that you may be facing with leaving your job. And then we’re going to discuss some of the tax incentives that exist to help us. Basically Uncle Sam has these tax incentives to encourage us to invest and beautify real estate.
And also to improve property and to be entrepreneurial, and we’re going to discuss at a high level how that is. We’re going to discuss a big very important significant tax incentive, which is the real estate professional tax status. Extremely significant and will help you out with making that leap when we consider the tax advantages.
Next, the benefits of passive income when you are a real estate investor and how that is treated differently from your W2 income from your job. Finally, we’re going to talk about tax strategies. So this is going to be some of the execution and implementation of the concepts that I utilize, and your CPA should utilize when you have an effective tax plan where we are considering all the tax incentives and how the internal revenue new code is designed.
And thinking proactively so we can take advantage of all of these tax incentives and benefits to optimize our chances of success and grow as effectively as possible when we’re making that leap. And hopefully with this tax plan, it’ll encourage you to make that leap a little faster.
So first thing, this is going to be something for the chat. Now, I want you guys to answer me this question, why do people stay at the jobs? And more specifically for you listening. Because I know that you all might have been drawn to this because you may be thinking about leaving your jobs.
Don’t worry, your names will not appear when I put this on Zoom so your employer won’t find out. But why do you think it is you, and why are you staying at your job even if you have this desire to eventually leave and go out on your own? What’s keeping you there and what’s keeping you at your job and away from going full speed into your real estate?
See here with a chat. So I’m going to give you … So everybody, I want you to type in what it is for you, and I’m trying to find the chat on this thing. But as a host I can’t see it when I’m sharing. Give a couple seconds here, I want to see what you guys are typing in the chat.
Okay. So some of the things that we see are stability, right? We want to see stability. We want to see health insurance and we have that steady paycheck which we rely upon. Also, especially when we’re starting off you might be cash flow negative or it takes a little bit of a while before you actually see the fruits of your labor and your return on your investment.
And cash flow, sometimes you’re relying on that job to pump money into your company. And all of these reliable benefits, okay, we got the 401k. We’re going to talk about that in a later discussion on some powerful things we can do with that. Obviously we have the financial security knowing that every day we can afford our living expenses regardless of what happens if we keep our job. Where’s someone else. Oh yep, the golden handcuffs, right?
We get so used to this wonderful lifestyle that we get from our job. Even if we want to go out on our own, we know we’re going to make huge compromises and sacrifices. And then the other thing is getting the conventional mortgage rates with the W2.
Okay, great. Now, that’s an interesting one Christine. So obviously when you have a steady paycheck for the past few years, it is going to be easier to qualify for those loans. But once you get the ball rolling, some of the banks are going to be more flexible at looking at your financials. And qualifying you for these financial instruments even after you’ve left your job if we can show a good track record and financials.
So stay tuned for next Tuesday I’m going to bring a banker on who specializes in working with real estate investors. And he’s going to be able to answer a lot of your questions on how we can continue to qualify for and what we should qualify for when we are seeking financing for some of our properties. That’ll be next Tuesday. I’m going to put that and we’re going to talk about that in the end of the webinar.
Okay. And maybe some people like being micromanaged, right Joe. So sometimes you feel like you need to be told what to do. I’m going to go back to the screen share here so we can get back to these slides. And we’re going to jump back to this topic.
Now, another thing here is if you can get to the Q&A section. I want you guys to type the questions in the Q&A, so when I get back I want to see all your questions in the Q&A in case that’s mixed up with the chat. So if it isn’t already, put it in the Q&A. Okay, so it was great to just hear what all you discussed, and we’re going to talk about some of these obstacles and how they can be overcame with an effective tax strategy and understanding of tax incentives.
Okay, so first I want to give you an understanding of why these incentives exist. Now, some people think that when I talk about tax strategies and ways we can reduce taxes, some people think that I’m cheating the system. I’m waving my magic wand, my magic CPA wand. Or maybe I’m manipulating something, but that’s not true.
And one of my objectives is to change the way people see the tax code because the tax code is really a book of incentives. It’s not a punishment, it’s a book of incentives and these rules will encourage certain behaviors. Now, what does Uncle Sam encourage when he creates his tax code? He wants us to create businesses, invest in our businesses and he wants us to beautify and invest in real estate. He wants us to own real estate. That’s why we can deduct our interest expenses on our mortgages.
So these are the things that they actually encourage us to do. It helps with increasing property values. When real estate investors come in and we invest, and we purchase properties, and we have all these fantastic tax advantages, it provides value to society by creating more affordable and better quality housing for the community.
They figure they’d rather just give it and incentivize us investors to do it as opposed to creating their own governmental programs, which they do a little bit of that as well. Watch my webinar on qualified opportunity zones if you want to learn a little bit more about some of those incentives.
We also want to encourage job growth, right? And to encourage that entrepreneurial spirit that is so wonderful about America there are tax incentives for us not only to invest in real estate but to be business owners and to invest in our own businesses. Which will eventually lead to more innovation furthering society and creating jobs.
And my job is for you guys to understand what incentives have been created to help you take advantage of what the designers of the internal revenue code have intended for us. So let’s talk now about passive income and the benefits of that.
Now, passive income, if this is your first time being introduced to this topic, passive income is a different kind of income. It’s in a different bucket, it’s treated differently from active income. Most of you here have active income. Active income would be the income from your job or if you are a real estate agent that goes on your schedule, see that is active income.
When you go from having active income to passive income, you are going to be able to most likely take advantage of that qualified business income deduction. Basically, if you wind up in having a tax liability, you probably won’t if you’re working with me and you’re just doing rentals starting off. But, if we have other sources of income and let’s say we’re flipping and we’re a real estate agent, this is all going to be considered qualified business income.
And that qualified business income results in a tax liability when we net out the qualified business income, you will receive a 20% deduction of that. So right away you’re going to see a tax incentive encouraging you to have the type of business. Whether you’re actively doing some contracting or you’re a real estate investor this is an incentive for you to lower the tax liabilities of your endeavors.
There’s no payroll tax when you are a passive real estate investor or even materially invested. When you have long-term rentals, this is always going to be treated as passive income and it will not result in payroll taxes. Payroll taxes are extremely expensive. It is going to be 15.3% tax on your first $137,500 of income. And that’s not including your state and federal taxes and only half of that is going to be deductible against your federal taxes. So you’re going to pay taxes on it again at the Federal level.
Anything above that threshold, you’ll be paying additional 3.8% on the Medicare tax. Sometimes you’ll see in tax returns that I see, you’ll actually find that they’ll be paying more in your payroll taxes than their ordinary state and federal taxes. New write offs. So, once you’ve become a business owner, whether it’s your first rental or your full-time, we open up the door to create all sorts of write-offs that we normally didn’t have.
Now that you’re a business owner without getting carried away, now we have the ability to have that home office. You’re located operating out of your home. Every time you leave your home we get the travel deduction. We have the ability to create write-offs on business meetings and every time we’re going to seminars and conferences to improve ourselves. So many ways to create a ton of write-offs now that you are a business owner.
Now, depreciation and bonus depreciation, you can’t talk about the benefits of real estate investing from a tax perspective without mentioning depreciation. Now, depreciation is a non-cash expense and we are normally going to see, especially in these days, away with the opportunities available.
And you have a good tax strategy and a good tax plan, you will have these non-cash depreciation expenses on your books so you will not be taxed on the positive cash flowing assets. Just to give you a basic idea, for some of you who haven’t been introduced to this topic, depreciation is to account for the wear and tear of your asset. Which would be in this case, a long-term rental.
Now, if you want to learn more about that, I have a webinar all about depreciation you can find out on my site or my YouTube page. What we can see and what I’ve seen is I have clients that are generating cash flow positive assets, but we can do some things to accelerate depreciation I’ll talk about later. And we have the cost segregation studies and bonus depreciation which allows us to write off 100% of items that depreciate in 20 years or less if we do it in the right time.
And that will allow us to create these losses on paper. So even if we’re bringing it in cash, we have losses on paper to create write-offs. Capital gains and 1031s. So if you do wind up selling some of these properties, that income can be taxed at the lower capital gains tax rate. Or we may not be paying any taxes at all on the income. If we do the 1031, we can defer it indefinitely.
Next, this is a really, really important topic is the real estate professional tax status, especially if you are married. To have that real estate professional tax status, you have to spend at least 750 hours in your real estate trader business. And more than 50% of your business hours have to be dedicated to that real estate trader business.
The cool thing about this is remember I was talking to you about the difference between active and passive income? Normally if we have passive income and we have losses on paper, that’s nice. But a lot of times you can’t use those losses to offset your active income from your job. So they just kind of hang out there. You have what’s called suspended losses and they get carried forward indefinitely until you have taxable income that results in tax liabilities from future passive income. Normally you can’t offset active income.
There are some exceptions. This one will talk about others. We don’t have time. Now, if you get this real estate professional tax status and we create these losses through cost segregation and bonus depreciation, all these other write-offs. We have losses on paper even if we are very successful in our investments. These write-offs create a loss and those losses will offset your active income.
So maybe you were working at your job for the first few years before you got the real estate professional tax status. That money that came out of your paycheck, that was just taken out of your paycheck to pay for your federal estate taxes, we can use this real estate professional tax status and some tax strategies to actually get a refund and get some of that money back in your pocket.
Or, let’s say that your wife or your husband has a day job where they are paying federal state taxes coming out of their paycheck every day, paying maybe a higher, up to 37% in federal taxes. And we also have our state taxes. When we have that real estate professional tax status by one of the members now we can create losses from one spouse. And that one spouse’s losses can be used to offset the tax liabilities incurred from the active job of the husband or wife.
So we have the money that’s coming out if you’re a doctor, lawyer, teacher, whatever, it doesn’t have to be real estate related. If the husband or wife has that real estate professional tax status, we can create these passive losses and get refunds coming out of your paycheck. We can get that money back at the end of the year and this can be really powerful.
I’ve seen this real estate professional tax status can result in reducing your tax liabilities. I’ve seen anywhere from 20 to $150,000 being returned to the taxpayers. Actually I’m proposing a tax plan right now. We anticipate $230,000 being returned to the taxpayer by taking advantage of this real estate professional tax status.
So that right there, let’s backtrack just a little bit here. When I think about some of your objections here about financial stability and budgeting, and stabilization, here’s one thing that we can think about. If you’re on the fence, we’re trying to time this thing right? This tax incentive might be just the one thing that helps push you over the fence to going full-time into real estate investing.
When you consider not only the cashflow you’re bringing in from your properties but then the additional amount of money you’ll bring in from the tax refunds you’ll get from this real estate professional tax status. You have to consider that when you’re thinking about your budget and can I really afford to do this? With this tax incentive, it becomes a lot more feasible.
Now, I’m going to talk about some high level tax strategies. And I’m just going to kind of riff on some of the things that I do and work with my clients and to give you an idea how it all comes together. Now, obviously the big thing, and I can’t have a seminar or podcast without talking about cost segregation. So cost segregation, for some of you who are new to it is where we look at this real estate property and we do a study to identify items in the property that will depreciate faster.
Normally real estate will depreciate over the course of 27.5 years if its residential, 42 for non-residential. And that’s a long time to write off the amount of money that you’ve invested into this property. With a cost segregation study, we find items such as the driveway, the furniture, the fixtures, carpeting, all sorts of items that are going to depreciate faster than 27.5 years.
If we do it in the very first year as place in service, we can recognize bonus depreciation and write off 100% of that. Now, this is so powerful because think about this, you’ll see where we can write off, I’ve seen up to us writing off up to 50% of the purchase price on some of these properties.
And think about this, a lot of times you’re financing them so you’re not even putting 50% down on the properties and you’re getting more than that in the form of a write-off. Sometimes you’ll get a tax refund that’s greater than the amount that you had to shell out to put down on the property. What do you do with this refund? Put it back into more property.
So this here’s a great incentive to help you grow your portfoli.o revenue shifting. I could go on for hours on this, but the idea is once we get to the point where we can really use these passive losses to optimize our tax situation. Let’s say you and your husband together are in a high tax bracket, by shifting some of your income to other areas, we can create additional write-offs to offset your tax liabilities and bring you a tax bracket.
An example of this. You can hire your children, you can hire maybe a family member who you are already supporting, get your children to do the social media marketing and pay them. The first $12,000 is going to be that standard deduction that we all love that won’t receive that federal and state tax.
Lots of ways to reduce our taxes and put it into other people’s taxable income that is going to be taxed at a lower rate. Another idea, if you want to get really fancy with this thing, let’s say you’re in this 37% tax bracket. We might see the opportunity to create additional spinoff entities and services where we can take advantage of that 21% flat corporate tax rate.
And now we have write offs against the 37 and we’re shifting into that lower 21% tax bracket. A lot of playing to do there and C corps, we have to consider double taxation on dividends. But just to give you an idea, I don’t want to get down these rabbit holes. But a lot of opportunities here to move the income around into more tax favorable places.
Timing is a big one. We want to think about the timing. So let’s say we’re thinking about buying a suburban for $60,000 or whatever. And we want to get that bonus depreciation, right? We want to write off that 60,000 right away. Well, think about this.
If you are on the cusp, you’re not quite that real estate professional yet, but you know will be in 2021. Let’s wait until 2021 to get that $60,000 write off so we can use the write off to bring down your tax liabilities most effectively with that real estate professional tax status.
Retirement planning is also something that is so crucial that everybody should be thinking about. So now that we are leaving our day jobs and we don’t have that 401k that I saw you guys talking about earlier. We’re leaving our day jobs and we have to be thinking about our future. How are we ever going to be able to support ourselves in our older age?
Well, as I said, we might create spinoff entities and other ways that we’re creating active income. So we could potentially create that solo 401k. Now we can contribute up to $56,000. Also consider this, if we really have a great year where we have lots of write-offs and cost segregation, we put ourselves into a really low tax bracket. Now might be a great time to think about taking that 401k from our old job and rolling it over into the Roth because now we’re going to be in a lower tax bracket.
We may be at a zero taxable income with all our investments. We want to at least get that standard deduction of the first $24,000 if you’re married and the next rate up is that 10%. You’d rather pay that 10% now and have a grow tax free in Roth. Then whatever tax liabilities you’ll face in the future.
Lots of other things to think about. When we think about retirement planning and because we’re not going to have maybe some of those traditional perks that your employer will give you, but we will have these appreciating assets. These cash flowing assets that we can effectively structure and plan for retirement will be protecting our assets. All these wonderful opportunities to get to retirement faster if we plan it right.
Also, when we think about retirement planning, if we have additional entities performing additional activities that are real estate related. There are lots of things that we can do when we consider maybe creating pension plans for those pension funds for those entities to maybe help out with some of that double taxation we see from the dividends, the C corps. We can create healthcare reimbursement plans.
We also want to be thinking about FHAs and all of these other favorable devices that help us save money on our taxes when we plan for our wellbeing and our health. Also, when you are self-employed, your health insurance premiums are fully deductible. Now, goes on that schedule one so you can write off your monthly health insurance expenses. So all these tax write-offs are going to give you some wonderful opportunities to encourage you to go out on your own.
Here’s some closing thoughts. So I don’t know where all of you are and I’m not trying to tell you to jump a little too quickly into the world of full-time entrepreneurship. ~But I want you to understand that with a good tax strategy and with the right planning, you can really see it’s going to help you make that leap, and identify when the timing is right.
You know might find that it’s going to be a lot easier to make that leap when we consider the tax benefits and with an effective tax strategy it’s going to make this a lot easier for you to make this leap into full-time real estate investing. So I want to go back into the poll that I did earlier on this event where I asked what is the greatest thing that keep you and your peers from going into full-time real estate investing?
We’re going to talk about some of these things. One was risk, and uncertainty was probably the most popular thing. Well let me ask you something about that, getting a little bit away from taxes here, but with risk and uncertainty.
Well, once you’re building up a portfolio, you have one cash flowing property, great, two, great. Once we’ve diversified our income from multiple properties that have proven to be cash flow positive for a number of years, we have income coming from all different tenants and all different buildings.
But when you have a job, you have one employer paying you and that’s it. So if you get fired you go from one to zero. If you have to evict someone and you got 40 properties, you go from 40 to 39. So when we think about the risk, think about as we build systems and diversify and really build a robust functional system. We can really mitigate risk in a way that’s more effective than being a W2 employee.
Not enough savings. Okay. Right. Savings is a tricky one. So one idea we were talking about earlier, you’re going to be fully immersed in the real estate game. You might have the ability to partner with people who have W2 incomes and you can now … maybe they don’t have the time or they want to seek someone who’s a little bit more seasoned. And going full-time to partner with and getting some of those real estate investments.
And that can help you out with acquiring and qualifying for financing. Also, talk to me, there are ways that we can structure partnerships so it can be really advantageous for someone who wants to be a cash buyer but doesn’t have the time. We can structure in, allocate some depreciation for him or her to make it really advantageous for that person. And then you can get your lions share in a way that makes sense from everyone in a tax and business perspective.
Need more experience. Wonderful. If you need more experience, I totally hear you. You got to get the deals done too. And in order to qualify for those loans you want to see and at least show to yourself that you can do it. And when you have a job, the beautiful thing is, and when you’re already supporting yourself it gives you that cushioning. So that is a legitimate objection. Hopefully you are gaining this experience as we pursue it while balancing that out with our day jobs.
So when we consider all of these advantages and we consider a budget, how much money we need to live on and how much money we’re bringing in from us and our spouses. Looking at an effective tax plan and looking at all of the advantages we are going to find that we have to consider all these advantages of the money that we can save in our taxes, which will make this a lot more feasible.
We actually don’t need to make as much in our monthly and annual income as we would need to for our job because the taxes are going to be far less. And in some instances you’re not going to pay any taxes at all on your real estate investments.
In fact, it might even reduce your overall taxable income as you’ll see from the real estate professional tax status. There are so many other things that we can dive into for a real estate tax strategy based on different circumstances, scenarios and situations, different forms of investing and activities.
But this is just a high level. I want to get you guys maybe a little bit fired up, give you some clarity on the value of effective tax planning and understanding the tax incentives. There are so many things that we can do to improve your situation and optimize your path towards reaching your goals.
So before we get to the questions, just some final thoughts as well. I want you guys to stay in touch because what I’m trying to do is I’m trying to cultivate environments where I’m providing the most value to you guys.
I want to help inspire and connect, and inform you as best I can. And because I talk to investors all day, it gives me the benefit of having a large audience. I can bring in some great experts and also I have a great understanding of some things that you need to know and clarify to help you guys along your journey.
So get on my email list if you found this of value and you want to go to my next webinars and follow my stuff, get on my mailing list and I’ll send you the invites. Follow me on Facebook. This webinar will be YouTube. I have some goofy memes on my Mark Perlberg CPA. Especially my Notorious BIG one; more money, more problems, no money, most problems. Follow me. You’ll see some good stuff there. I really want to reach out to as many of you and encourage you along your journeys.
Also, so as we were talking about with banking, lots of open-ended questions on banking and I can’t really speak directly from for the bankers. But I’m bringing a fantastic resource next Tuesday at 4:00 PM EST. It’ll be recorded as well.
So if you just get on my mailing list and follow me and you’ll see the recording. We are going to talk about how the right banker and bank can help you out with finding financing, can help you with closing deals. Sometimes the right bank can be make or break and help reach your goals in closing these deals.
So Mark Lewis is going to be a fantastic guest. He can answer all your questions. Unless you know everything you need to know about banking, I really think you should tune into this. There’s going to be some great content. Talking about commercial, conventional loans, how to qualify, all that great stuff.
And next, I am offering free discovery sessions before I get into the Q&A’s. So discovery session is where we talk high level about where you are and where are your goals. And what have you been doing to plan for your taxes, and how have you prepared.
I’ll look at your prior returns to see if there were any missed opportunities in tax savings and we’ll identify future tax savings. And this is going to help us out with seeing if a tax plan is right for you. I only give tax plans that create savings that are greater than the cost of the investment into a tax plan.
Typically, my tax plans will create five to 10 times that amount in tax savings per year. So that is free. It’s a good chance for maybe even if you’re just starting out and you don’t think you have that real estate professional tax status. I can help you out with just some basic questions understanding what you can write off, making sure we’re getting those write offs. How to classify and document. You’ll find some resources on my site as well.
And so yeah, if you’re interested, I’m going to post that link in the Facebook thread for this event. You can also schedule 30 minute calls, time to talk, on my website. Just schedule 30 minutes with me, send me your most recent return if you’re interested and let’s start talking.
It is no pressure. It’s just a great chance also for me to network and meet awesome investors like yourselves. And my last thing about that is if you want to be on my mailing list, I want you to give me just a brief description of what your goals are and what you’re working on.
Because I’m trying to be a facilitator in these events and to help connect people with people who can help each other out. So let me know if you’re a wholesaler, you’re an attorney, you’re a multi-family investor, whatever, I’d love to know what you’re doing and help you out and keep you connected with my network of investors.
Okay, so I am going to end the screen share, and answer your questions in the Q&A. Let’s see what we have here. Fred Marsh, benefits, ignorance of other ways to build wealth. I don’t understand the question, but if you want to rephrase that, hopefully I can answer your question. Feel free to write it again in the Q&A.
Is there a balance of actual hours counted towards transaction versus educational network in order to qualify for the real estate professional tax status? Is there a balance of actual hours can … transactions? Oh, right, so it just has to be hours.
So what we’re going to be looking for is the hours that we are spending in our trader business. So there’s no ratios or anything like that. It has to be the amount of hours that we are actually dedicating to our trader business.
Potential changes to tax benefits for investors and small business owners if there is a turnover in political parties later this year? That’s a great question, Christine. Now this is something I’ve been thinking about and all of the CPAs are thinking about.
So there are talks of eliminating the 1031 exchange, creating higher capital gains rate for higher income earners. And also, when we dispose of properties to our heirs, normally it gets that step up basis so you can depreciate it all over again.
So you step it up into fair market value even though it might be fully depreciated. Now, Joe Biden has made some proposals to either do away or minimize some of these benefits. Including maybe some of the benefits of using passive income to offset active income. Now, I think it’s a little bit too early to plan for and anticipate it because first he would’ve to get elected.
Second, this bill would need to be approved. It would need to be approved and finalized. And usually we see lots of compromises. So let’s hold off and wait for a little bit here. I will say that some of the things that we see proposing are not going to be favorable for real estate investors and business owners right now.
It’s about as good as it gets for obvious reasons when you look at who is controlling the office. But let’s hold off. However, if Joe Biden were to be elected, we definitely do. There is definitely going to be a push to reduce some of the advantages we see as investors.
My spouse earns a salary. For the past three or four years I have managed short term [inaudible 00:37:48] for the year [inaudible 00:37:51] trying to read. This is a long one from Ninas. You want to write everything off, what should I do from the [inaudible 00:37:59] one?
Okay, so in determining what you can write off, what… If you want to do a discovery session with me, with the IRS straight from the horse’s mouth. It has to be ordinary, necessary and in the regular course of business. So what you want to do, if you want to play it safe, you want to look at what the IRS determines as ordinary, necessary in the regular course of business.
If there are some questionable items, you can go to court cases. Or we can have a discovery session to whoever this anonymous attendee is. We can have a discovery session and I can help you out with gaining comfort and also creating some audit protection and how we can document things in a way that would survive the scrutiny of an audit. And we also want to make sure we’re at least appreciating the property.
Another question, how do we calculate the losses for the real estate professional tax status against active income? So basically, you’re going to have your revenue and expenses on your schedule [inaudible 00:38:59] for all your investment properties. That will result in a loss. If you have the real estate professional tax status, when we have those losses and we calculate our overall tax liabilities and what marginal tax rate we are in. Let’s say the spouse has $400,000 of taxable income, but our real estate investments created at a loss of a $100,000, we are going to be taxed as though we earned $300,000 per year.
Another question, if your wife earns $120,000 and I qualify for … You mean if your wife, not my wife. If your wife earns $120,000 and you qualify as a real estate professional, if you spent $120,000 on real estate, a huge rehab, how could you write off or get back some of that money from the IRS?
So we want to make sure that this is not a flip because if we’re putting money into repairing a property that is capitalized into the inventory of the property. And we can’t really write it off until it gets sold. But let’s say we are improving a huge rehab or a rental property.
And let’s say you put $120,000 into a huge rehab, some of that will be capitalized into the building. So we likely won’t be able to write off all of it. But with some analysis we can break down different components like we were talking about earlier. Depending on when the property was placed into service, we can either accelerate the depreciation for some of the rehab. Or we can recognize bonus depreciation just depending on the timing and the nature of these rehab expenses.
What type of experience do we have with self-directed IRAs? So self-directed IRAs, we want to make sure we are thinking about the UDFI, unrelated debt financed income. Which would result in a portion of the properties that are leveraged to be taxed at the trust rates.
Self-directed IRAs are still really powerful, not just for passive or portfolio investments, or stock market. We still can invest in real estate. And if we plan it right, it can be really valuable. Because once you’ve pay off that leverage and you sell that property, you can sell it completely tax free for profit.
Some great ideas I like are lending through your IRA as you reach towards the later stages in your career. You can use that Roth IRA to be hard money lender [inaudible 00:41:35] fantastic returns on collateralized assets and that profit will grow tax free. Very powerful.
Can you write off your health insurance premiums if you have Cobra from previous employer? Health insurance premiums are health insurance premiums for all I know. Usually I find Cobra is more expensive than other sources, especially with the Affordable Care Act. But I don’t see any reason why not. It’s still health insurance.
Do you need a real estate agent to qualify for the real estate tax status? Great question Fred. Lots and lots of people ask this. No, you do not. You don’t need any license, any certification at all. You just have to reach those qualifications we talked about earlier. The 750 hours and more than 50% of your time has to be put into your real estate trader business that will allow you to get that real estate professional tax status. Whether you’re flipping or you are investing, whatever.
However, let’s say you’re on the cusp, you need to get some more hours logged and you’re at maybe 700 hours. Or maybe you got some investments but you don’t have enough time to put into it to get that 50%. The real estate agent license is a great way to save money on the fees when you purchase those properties.
So you don’t have to pay another agent. That 3% you can get that money yourself. You got access to MLS, you make direct offers. It’s a great idea to get those extra hours, but it is not necessary for the real estate professional tax status.
Another question, how to avoid higher taxes associated with self-employment status? Fantastic question. Now, if you are a real estate investor that higher taxes, I think you’re talking about that self-employment tax that we talked about earlier. Some things that we can do is we can create the S corp or a C corp depending on what tax bracket you’re in.
So some of that money instead of directly flowing through to us and be subject to that pricey self-employment tax, it’s going to go to an entity. And that entity is not going to be subject to that self-employment tax. A portion of that entity will pay you a salary.
Your salary is going to pay that payroll taxes. But usually that salary, once you get up to a certain threshold is going to be far less than if it just flows directly through to you. And that allows us to classify more of our income as passive.
Is it worth to share a solo 401k for his business? Here’s the thing about solo 401ks. Once you have an employee, you cannot have a solo 401k. So you can’t do it once you have a full-time employee. But you can still have the 401K and your employee/spouse can also create a 401k. There are lots of other things we can do in tax deferred instruments.
Depending on your circumstances, what we do with the real estate 401ks, the amount of activity you can do in a 401K is a little bit restrictive. You can’t really put in the physical work into some of these properties. So there’s a lot of things to consider. So whether or not you should do it, the answer unfortunately that you’ll hear from lots of tax accountants is it depends on your circumstances.
Now, another thing we can think about also is even if you don’t have that real estate professional tax status, some of you guys are going to be business owners, right? And you own businesses. Now might be a great time to think about the S election. As I was talking about earlier, the S election can turn a lot of your activity, we can reclassify it as passive.
We can reclassify it as passive. Then that passive income from your S corp activity can be offset by your passive losses we can create from your real estate investments. Here’s an opportunity even if you don’t have that real estate professional tax status, we can still utilize those passive losses that we create from the real estate investing.
And also, like I said earlier, as a lot of people shy away from it. But there are advantages to the C corp. With the C corp we don’t have to worry about that $10,000 limit on deducting state tax now and if you are in that higher tax bracket. So, what’s best for you? Answer is it depends, but it’s great to know that there are opportunities available.
I’m going to just scroll through the chats before we wrap this off. We have health insurance, see if there’s any more. Okay, email. So this is what I’m going to do. Sorry, before we wrap this up, I’m going to put my email in the chat and I want you guys, if you are interested in learning more, the best way to keep in touch with me is get on my mailing list. So I’ll send you all my events. Tell me a little bit about yourself, what you’re looking for, how I might be able to help you or connect you with reaching your goals.
So in the chat I have my email address Mark@MarkPerlbergCPA.com. Also, what I’m going to do now is I’m going to put the … If you would like to schedule a discovery session, as I discussed earlier, I’m going to put the link for this discovery session.
You can click on this, send me your prior return and we can do the discovery session and see what kind of opportunities are available or potentially missed with tax planning. So that’s going to be also in the chat. You can find it on my site. If you signed up for the Facebook event, that will be there as well. And the other thing is you can find the upcoming Zoom webinar.
You will find that on my Facebook. I will email it to all of you as well. Shoot me an email to make sure that you’re interested in learning a little bit more about banking. That’s going to be a fantastic one. And also I’ll be throwing in some tax insights along the way. Just little things here and there to help you thinking about your taxes as we also think about our financing.
One last question. Okay, there’s a lot of variables for that one, Fred. So you can watch my short-term rental. There’s a lot of variables on whether short-term rentals are active or passive. So you can watch my prior webinar, scroll down my stories. Or you can set up this discovery session and we can talk about the treatment of short-term rentals.
Okay everyone, looks like I’ve answered everybody’s question. Just book some time if you want to talk. I sent the link, just block it off on my calendar. I really hope this was helpful for everybody here. I had a lot of time. I’m really passionate about helping people reach their goals and going full-time into the things they love.
I hope this is going to help you get there. Share this with anyone you think you might find as valuable. Love talking about this stuff. Hope to hear from you. Really hope you enjoy this. I’m about to wrap this up. Great talking to you all. Have a great night.