Tax Strategies To Achieve Financial Freedom

Mark Perlberg:

All right, welcome everybody. I hope you guys are starting your years off strong this year, with some ambitious New Year’s Eve goals. And a common goal, especially among real estate investors, is to achieve financial freedom. My name is Mark Perlberg, CPA, if you don’t know me already, and I work with real estate investors and business owners towards achieving financial freedom by having the proper tax strategies and financial decisions.

Now, we are going to discuss how we can align a tax strategy with your goals of financial freedom. And before I jump into this any more, I want to let you guys know that I do a discovery session, this is almost always free, where we assess the value of a tax plan and how you and your prior or current CPA have been recording your taxes, to see if there are any missed opportunities, perhaps a need to amend your taxes in order to create savings, and what can we do, what is the power and impact that we can have with creating a tax plan that will create additional tax savings that will exceed the purchase price for any of my fees. So typically, my tax plans will create three to 10 times that amount in tax savings per year. So if you are curious, if you’ve never had a tax plan, you can email me. You have my email if you register. I’ll put that in the chat, the link, if you’re interested in the discovery session.

Now let’s jump into material on tax strategies to help you guys achieve financial freedom. Now, first, I want to start off, I want you guys to go into the chat now, I want to see you guys interact, and I’ve got some questions for the audience. So first question I want to know from you guys is what is financial freedom? I want you guys to give me, what is your definition of financial freedom? So I’m going to give you guys about five seconds and I want to read what your answers are.

Fire your W-2. Okay, right. So I think the most common definition that people will have for what financial freedom is, is to leave their day job and not have to work for money. And many people in our society do not really like their day jobs, so a common goal is when can we say goodbye to our day jobs and just live off our investments, or our business endeavors, or our savings? When your passive income surpasses your regular monthly expenses, and you can live on your passive income, absolutely. Next question I want to know is what is preventing you from achieving financial freedom? Why don’t you have that financial freedom right now? Why can’t you quit your W-2? I know the answer is going to be slightly obvious, but I want to get your answers of what’s keeping you from getting your financial freedom right now.

Because of your W-2. So most of us are receiving W-2 incomes. Even though we’re making a living, a lot of times we’re not making enough money, we don’t have the resources and excess cash to put into these real estate investments and other resources, for instance, maybe not just real estate investments, but to hire people and things that require capital to build this passive income. A lot of us are bottlenecked by that capital, or we’re putting too much time into our W-2s, and our nights and weekends, time, as you said, Norman, exactly. We don’t have enough time, because our nights and weekends are spent, that’s all we have left after our W-2, and we don’t have enough time to really dedicate and fully maximize our other businesses and our investments, or additional cash to put into other investment vehicles that we will discuss later.

So then the third question, which I am going to answer, is how can a tax strategy help you achieve financial freedom? Now the essence of a tax strategy that I apply with my clients is to minimize taxes and to create additional refunds so we can free up additional capital. Now, this capital and this money that we save in taxes is not just so you can buy a fur coat. It is so that we can take this cash in the form of tax savings, and put it back into our businesses and into our retirement accounts, and we have additional resources now.

Now we can buy more properties, more deals, we can hire more, and we can even hire out some of the chores that we don’t like to do like our housekeeping, because we have more funds, and we can delegate the things that we don’t do and we don’t enjoy doing, and those low leverage activities, we can delegate them out and focus on our highest leverage activities to build these sources, these resources that will help you with building that passive income that can support you to achieve financial freedom as fast as possible.

So I’m going to now walk you through what the topic is of this webinar, and we’re going to talk about how having a tax strategy, bringing your taxes down and taking advantage of all the tax saving opportunities available for real estate investors and business owners is going to help you out with reducing your taxes, which creates additional capital, and utilizing that capital to help you achieve your goals as effectively as possible.

So here’s the topics that we’re going to cover. First, what is the benefits of essential tax strategies? I’m going to talk about some of the essential tax strategies that I use with all of my clients at a high level. And if you’re a CPA listening, these are great things that you should be thinking about with your clients as well. Real estate investing strategies, you can’t talk about tax savings and strategies and benefits without talking about real estate. So we are going to talk about some essential real estate strategies as well. And then financial instruments that are available to reduce our taxes and help us build wealth, and get us towards that tax-free bucket where we can maximize how much we take home at the end of the day. And finally, exit strategies and dispositions towards the end of your goals, when we are reaching a bit towards the point of either retirement, or we’re selling or phasing out our roles in our businesses. We’re going to talk about some strategies and tax implications, and that is how you can reach your goals.

So let’s get into the first slide, and talk about the benefits of essential tax strategies. Now, I’m going to talk about these things at a high level. I expect you to populate the Q&A section with plenty of questions here, because we could write a 10,000-page book on all these topics, but if you have any questions on how this applies to you, feel free to put them into the Q&A section, and we will talk about that at the end. And I hope that me answering these questions can add value to you and the rest of the audience.

So the first essential tax strategy is what I call write-off optimization. So when we’re optimizing our write-offs, first and foremost, we are aware of what is a business write-off. In the words of the IRS, it has to be ordinary and necessary in the regular course of business. At the very least, we want to identify all the write-offs we can create, some of the easy ones, or the travel, maybe a home office expense, we have supplies and materials, meals, which are now 100% deductible for 2021 and 2022, so many others. And if we have the right strategies and we’re proactive, we are recognizing all of our write-offs to drive down our taxes.

Now, if we are proactive, and we are aware of what our write-offs are and how to document them, not only are we maximizing these write-offs, but we’re actually increasing our compliance by maintaining the proper records, and being able to support our financial records and our tax returns if we were to be under scrutiny by the IRS.

Next topic is income shifting and timing. Popular strategy for business owners and real estate investors is to hire family members, hire your children, because your children can get that standard deduction, and their first 12,500 or so is going to be untaxed. Other ideas of income shifting and timing is when we evaluate what tax bracket you’re in this year and next year, or what opportunities we have, maybe you’ll have real estate professional tax status down the road shifting expenses into different years as well, and even shifting income and expenses into different entities, creating multiple entities, or just evaluating when and where and who is going to be receiving these revenues and expenses to maximize tax savings.

Another topic that we focus on is accounting methods, incentives, and credits. A simple accounting method… Well, it’s actually not simple at all, but a common accounting method that can provide tremendous tax savings is a change in accounting methodology. We can go from cash to accrual. We can now even do that now with corporations, it’s a little easier, that could potentially free up additional capital in the form of tax savings.

Other strategies, changes in accounting methodologies and estimates, cost segregation is a big one I talk about all the time. Other incentives, some are incentives, for instance, the qualified opportunity zones, credits such as the low housing credit, the new market housing credit, tons of opportunities here, research and development credits that, energy credits, so many ways. When we understand the tax code and the incentives created by our government to encourage certain activity, just being aware of this with the right support and the right tax advisor, we can free up so much capital and this can be such a powerful force in generating wealth and building up your portfolios and your businesses to grow at a fast rate, and reach that point where you can eventually get out of your jobs.

Legislation updates is another one. For instance, a common topic right now is a 1031 exchange, doing planning for that, planning for changes in the tax code and the tax rates. We have a new bill understanding what the PPP loan and the EIDL is, and all sorts of incentives and different opportunities and restrictions that we need to follow to maintain compliance, to keep our business operating effectively, and also potential opportunities to receive additional forms of grants and credits. And then entity structure, so whether you have a C-corp or an S-corp or a spinoff entities or multiple entities, these are all going to be things that have significant impact on your taxes. And how we maintain this is an evaluate every year will impact what you are paying in taxes, and that will impact how much we can set aside to put back into your business.

Next topic, now let’s get into the real estate tax strategies. I know most of my clients are real estate investors, so let’s dive into some of these real estate tax strategies that can be so powerful in getting you to achieve financial freedom. First, let’s talk about the benefits of passive income. When you think about it in the definition, passive income is income that you’re not actively managing and doing all the work, maybe you’re assigning out, but let’s look at it from a tax perspective as well. Not only can we scale out this passive income and have hundreds of rental properties putting money in our pockets, we also see the benefits of passive income in the way it’s classified by the Internal Revenue Code. We do not have to pay that dreaded payroll taxes, which is so expensive when you have a job or are self-employed. The payroll taxes is going to be 15.3% in your first $137,700 in 2020, and only half of that is deductible against your federal and state taxes.

You don’t deal with that when you have passive income, no payroll taxes. Depreciation is another element of the tax code that makes real estate investing so favorable and will allow us to have cashflow positive assets that are not generating tax liabilities because depreciation, I did a whole webinar on it, you can find on my site and on my YouTube page, it is a non-cash expense for the wear and tear of our properties. Even when the properties are increasing in value, we can depreciate them to eliminate tax liabilities, we can accelerate the depreciation and recognize bonus depreciation with a cost segregation study to further drive down the taxability and create paper losses. We can actually have cash flow positive real estate investments that are going to operate at a loss of paper when we report them on our returns, and those losses can be extremely valuable under certain circumstances.

One of those circumstances is the real estate professional tax status. This is a fantastic opportunity. Either you or your spouse, one of you gets that status, it applies to both of you. And what that means is you create some rental losses, we accelerate those losses with the depreciation. Even if you’re profitable, we are going to create losses on your returns. If you have that real estate professional tax status, those losses will offset your sources of active income. Active income would be income maybe as an independent contractor or real estate agent, or one of your W-2 incomes. If one spouse makes a lot of money and the other one is putting some of that money into real estate, we drive down the taxability of that real estate and create some losses.

And then at the end of the year when we do our taxes, we get back some of that federal and state taxes because of the losses will offset that income that was assessed in tax and paid out of your W-2 jobs. Again, what do we do here? We create massive refunds with the proper strategies, creating all our write-offs, bringing down all the taxability of our businesses, which frees up capital to put back in, buy more deals. And those new deals can be further depreciated, create more write-offs that’s going to have a snowballing, compounding effect to allow you to free up that capital and build and grow, so as quickly as possible we have sources of revenue that can replace our W-2 income jobs or other sources of income that we need to do to live. Financial instruments here. Now, these financial instruments, now there are several, we can go on for days, and I’m going to talk about this at a high level, but if you have questions on these topics, put them into the Q&A section.

So tax deferred retirement accounts, those would include the 401(k), solo 401(k), SEP-IRA, traditional IRAs. When you have taxable income each year, you put those into the tax deferred, it will reduce your taxable income and your adjusted gross income, and that allows you to put tax-free income into whatever. This could be into the stock market, it could be potentially in some circumstances even things like Bitcoin, or it can even own real estate and it will grow tax deferred, because we have a higher principle of untaxed assets, we can grow it at a greater amount because we’re not paying tax on it, we have a mere amount to put into this bucket. Other vehicles is the Roth IRA, which grows tax free. So we put funds into our Roth IRA. One great strategy I love is to become a hard money lender from your Roth IRA, and becoming a hard money lender, you can get some fantastic rates of returns, it will grow tax free.

So planning opportunities where we put this all together, if you think back to all the things we were discussing, if we can create massive losses with real estate professional tax status, accelerating our depreciation, bringing down our tax rates, we can take some money from them, the SEP-IRAs or the 401(k)s, roll them into the Roth. At a lower tax rate, we will not pay as many taxes on that rollover and then maybe not even pay any taxes at all, or maybe at a really low rate, as low as 10%. And then even though we’re paying the taxes on that rollover transaction, it’s going to grow tax free and it’s going to create a nice bucket of tax free savings. Other things we want to think about are pension plans. If you are a business owner, pension plans is another vehicle by which we can put some funds that can grow in a tax favorable way after we’ve used up all these other retirement accounts.

Maybe the real estate investing is a better way to go for you, but maybe it isn’t. Maybe you don’t have that real estate professional tax status, or maybe you want to have a combined approach to your savings accounts, or maybe you know more about the stock market, so many different ways to evaluate your strategies to build wealth. And finally, life insurance is another way to build savings in that tax free bucket, the funds in your life insurance will grow in a tax deferred manner, and then you can borrow from those funds. So you’re not actually going to be paying taxes when you take the money out, you’re just borrowing those funds, and eventually they’ll be paid out upon your passing. This is different from those tax deferred vehicles. When you take money out of your 401(k)s and your IRAs, you are going to be recognizing the income on those transactions when you eventually take it out.

Now, again, as I was saying earlier, remember we were talking about those essential strategies of timing, how are we going to best time for these different ideas and strategies? We want to take money out of these deferred accounts when we’re in the low tax rates, and perhaps when we’re in the higher tax rates, we want to look for these tax free buckets. So we want to have a holistic look at your financial picture to best decide which vehicle will create the most effective ways to build wealth in a tax favorable way, and also what fits your interests and what you’re good at as far as what you want to put your money into.

Exit and disposition strategy. Let’s say we’ve reached the point where we have these vehicles, we have our real estate investments, or our side businesses, our restaurant franchises, whatever it is, we have a self-sustaining ecosystem of different employees and assets creating cashflow positive activities for us that can support us without our involvement, so what are some exit strategies and tax implications? Owner salary reductions, so let’s say we have an S-corporation or a C-corporation, as you become less and less involved, you have to pay yourself a lower salary, and that is a good thing because when we have less salary, we have less self-employment tax that I was talking about earlier on that first $137,500. Guys, that number’s going to change, so note that we are talking about 2020 right now. I didn’t check the 2021 rates, it’s always changing, but it’s going to be around roughly that amount. So that will give us an opportunity to have more distributions and less salary, which is more favorable in the eyes of the IRS.

Passive participation, we might even spin out some of our activities in the different businesses we own. Even though real estate is passive, we can also have other business interests, partnership interests. If we are not materially participating in those businesses, we can now classify them as passive. And when they are passive, we don’t have the payroll taxes, and we can use real estate losses to offset that passive income potentially net out and give us zero tax liability, or minimize our tax liability for our interest in those businesses. Capital gains planning, so if we are selling our business interests or our real estate, we want to consider the tax liability issues and maybe do it in a way that is most advantageous and profitable. One common approach for people reaching towards the end of their careers is to do installment sales for their properties.

So they’ll still be collecting money as though they’re a landlord and receiving rent payments, but instead of receiving rent, they’re selling off their properties and they’re just collecting the funds as though they are the bank, they don’t have to worry about landlord obligations, and tenants, and dealing with things breaking, and relationships like that. They just collect the payments and they pretty much have an even more passive role in that.

So many ways to look at how we’re going to sell properties or a partnership of interest, maybe maintain minimal interests in some of our businesses. So just having a thoughtful look at how we are going to be having a more passive role in some of our businesses that we own as we transition from someone who is in the grind and is constantly grinding and working every day, as we transition from that role into someone who is more passive and really spending more time maybe working on other projects, spending time with family or traveling, maybe you want to take a year off once you’ve built that effective business ecosystem, we want to consider what’s the best way to maybe sell off some interest or at least phase out in our participation in it, and what are the tax incentives and savings that we can create as we go from a full-time hustler, which I know a lot of you guys are, working nights and weekends, to someone who has a little bit more of that financial freedom.

So these are some of the main topics that I wanted to talk about. Now I’m going to go to the Q&A section here to see what else we got. Let’s look at the Q&A. What is the best tax advice for someone who will start renting out an apartment attached to a home that they just purchased? From Jesse. Now, we will have to analyze a home, but here’s a wonderful thing about what you’re talking about. Now that we have business property, we will be able to write off a portion of some of the general expenses for your home. For instance, we can now write off a greater portion of your property taxes against your rental properties. And instead of being limited to that $10,000 [inaudible 00:24:40] deduction, some of it’s going to be considered a business deduction, your state and local taxes for that property, and we can write off more of it. Other portions of your property we can now write off.

We might in some circumstances consider at least maximizing our write-offs and acceleration associated with those elements of your property that you live in but are renting out. We want to consider what tax bracket you’re in, see if we can use some passive activity losses to offset your active income. We can deduct as much as $25,000 against your W-2 income under certain circumstances if your modified AGI is under $100,000, so we can see if we can maximize that. And then obviously we have those general strategies. If you’re a first time business owner, this is your first purchase, just being aware of all the write-offs that we can take to drive down the taxable amount of that activity. Bill says, “I don’t have a job, I am disabled, living on my rental income, Social Security and a small pension. I have two LLCs. Can I set up a tax advantage retirement plan for myself and my wife?”

Now, Bill, to answer your question effectively, I really would have to look at a variety of factors, and really look at what your tax liabilities are right now and what tax bracket you’re going to be in, because if we are generating rental income that is so tax favorable where the depreciation is offsetting the positive cash flow, we might find that it’s more beneficial for us to just have more real estate than to put some of this money into other retirement accounts where there are greater restrictions. But we might not.

If you’re in a low tax bracket, we might find now is a good chance to take some of your funds, maybe if you have funds in a 401(k) or an IRA, and if you’re not working now, as you said, if we’re in a low tax bracket, maybe now is the time to roll that stuff into a Roth and have the Roth grow tax free, maybe even own rental properties in the retirement accounts. I wish I could give you a clear-cut answer, but without looking at your financials and your goals and interests, I’m looking at your prior year returns, that’s the best I can do. There are so many variables to consider, but shoot me an email if you want to continue this discussion so we can further evaluate your situation. We have an anonymous attendee saying, “Do you have a formalized LLC, C-corp, S-corp, or even business license to reap any of the tax benefits deductions?” Or do you have to have a formalized. Okay, that is a fantastic question to my anonymous attendee.

The answer is absolutely not. There’s this misperception that you need to have an LLC to have a write-offs, and that’s absolutely false. I’ve heard other gurus say this, “You need an LLC, you need a company before you have any write-offs,” and that’s absolutely false. Just consider the fact, if you own a lemonade stand, you’re a babysitter, you are incurring business related expenses. Especially for real estate investors, if you have rental properties, the only difference an LLC will have is that it will shield your personal assets, it provides asset protections, it has absolutely no impact on your tax liabilities, so you do not need these entities, but there is value to these entities, and the S-corp and the C-corp can create potential tax savings opportunities. So that doesn’t mean you shouldn’t have that, you might be missing opportunities without the S or the C-corp in evaluating those opportunities. But to answer your question, no, you do not need these entities to have business write-offs. Now let me look in the chat real quick to see if we have any additional questions that happen to be in the chat.

Okay, we don’t have any. I think we have all the questions answered. I’m going to give you about 10 seconds or less to ask any more questions before I conclude the webinar. All right, so let me just tell you guys a little bit more about me and what I do and some follow-up activities if you found this stuff interesting or of value or want to learn a little bit more about these topics. So if you are interested in the discovery session, as I was discussing earlier, the discovery session is a free evaluation of how you have been recording your expenses and how your taxes have been reported to see if there have been any missed opportunities, and if you’ve been overpaying taxes, if there’s a need to amend your prior returns and what value can we add with a future tax plan, shoot me an email.

Here’s my email in the slides market, If you are interested in this tax assessment to see if maybe we can do some tax plan for you to help reduce those taxes, free up capital, and put them back into your investments and businesses to help you get faster towards achieving that financial freedom that we all want to have. Also, give me your email if you found this interesting so I can put you on my list and invite you to all of my future webinars, give you my newsletters of legislation updates, and add just some free value to you if you found this at all value. No pressure, just send me your email, and I’ll put you on the list. Also, to those of you watching the recorded version, hit subscribe down here, and I would love to hear from you. And if you have any fur further questions, it would be fantastic.

Also, yes, my YouTube channel, all you got to do is search Mark Perlberg CPA to find my YouTube channel. But anyone who’s attending this webinar, you are going to receive the recorded version of this video, the YouTube version of this video. And Eli, I will also email you my YouTube video. All my videos are also eventually put onto my website, as well as my podcast appearances and guest appearances. Final statements, again, I hope you found this of value. I really appreciate having a live audience, I always enjoy this stuff, and the opportunity to interact with like-minded people pursuing financial freedom and pursuing their dreams, and doing the best that they can to really create a life by design. And I strongly believe that an effective tax strategy can help us get there more effectively and efficiently.

And I hope to help out as many people doing that. That is my life mission and that is the mission of my practice. So if you are more interested in learning about these topics, let’s stay in touch, subscribe, get on my mailing list, see if a tax plan is right for you now or maybe in the future. Thanks again everybody for tuning in. I really hope you enjoyed this, and I love talking about this stuff. We are going to have some future webinars. Some of them are going to be CPE credits for you CPAs. I got one coming up on international taxation of investments to US real estate, so I’ll be sending that out to some of my CPA colleagues and international investors. Hope to hear from you guys again soon. Again, thank you, and have a wonderful night. And let’s make 2021 amazing and reach our goals, and get that financial freedom. Mark Perlberg signing off. Have a great night.