The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 111 - Tax Planning for Pivoting OUT of Real Estate
The dream of mailbox money through real estate investing often collides with the reality of demanding property management, leading many investors to seek alternative wealth-building paths while maintaining tax advantages.
• Hire property managers to maintain real estate professional tax status benefits while reducing workload
• Invest in real estate syndications as limited partners to leverage expert deals without active management
• Consider oil and gas investments for truly passive income with 70-90% first-year write-offs
• Explore Delaware Statutory Trusts and Qualified Opportunity Zone funds for passive 1031 exchange options
• Evaluate solar panel investments on properties for both tax credits and long-term energy cost savings
• Return focus to your primary business with retirement, healthcare, and charitable tax strategies
If you want to learn more about how these concepts may apply to your situation, go to prospercpa.com/apply for a free opportunity report or visit taxplanningchecklist.com to get started with strategic wealth building and tax reduction.
PS. Whenever you're ready, here are some ways we can help with reducing your taxes...
Ready to slash your tax bill? Schedule your free consultation and let's strategize your tax savings together! Book now at: https://www.prosperlcpa.com/apply Or, if you still need more time, here are some other ways to begin winning the tax game...
Take our free Tax Planning Checklist & learn about what tax savings may be available for you in our minicourse at https://taxplanningchecklist.com
At the very least, get on our newsletter to gain access to free live events and exclusive insight you won't find anywhere else: https://www.prosperlcpa.com/subscribe
So we have so many of you that are very enthusiastic about real estate and for obvious reasons and I'm not going to deny the power of real estate and passive investing and when our clients come to us, a lot of times they come to us in the earlier stages. You know they're listening to the BiggerPockets podcast and they're very sometimes they're seduced by what they're seeing in these masterminds and the concepts of mailbox money, passive income, wealth acceleration, tax savings, financial freedom, and they really go to town on these concepts and go all in. And then you fast forward a few years and many of our clients find that real estate isn't giving them all the opportunities that they were hoping for. One thing for certain is there's anything about passive, anyone will tell you, especially with our short-term rental clients. It is a lot of work. You know some of these clients of ours. They find that there's this amazing cap rate. We're going to buy this property and fix it up, it's going to be worth so much and all these things are true. The cap rate can be really good, but what they don't realize is you're not really buying an investment as much as you're buying a job, and that is a job that many of them realize they don't want.
Speaker 1:So what's the next step here? Want. So what's the next step here? And what are we going to do to create comparable wealth or wealth in a way that is aligned with our expectations and needs and create the tax savings? When real estate isn't enough to create the tax savings, to create the passive income and the financial freedom, how can we sort of pivot or maybe evolve in what we're doing here, when our initial intentions of using this real estate tax strategy to build wealth and drive down taxes is not really providing the solutions and outcome we are hoping for? So a couple of things I'm going to share with you. I want to share with you some ideas and also some stories and examples of what we're seeing our clients doing, and hopefully you'll get some insight. And, of course, as always, if you want to see how we can help you out with some of these concepts, you can always go to prosperalcpacom, slash apply or taxplanningchecklistcom for an initial free mini course and series of emails and case studies.
Speaker 1:Now, one of the things that I like us to consider here, when we start becoming overburdened, very simple is simply hire a property manager. Very simple is simply hire a property manager when our portfolio gets big enough, we can hire a property manager and leverage support. As long as we're putting in 500 hours between the two of us, we can still pass that material participation threshold for our real estate. So we can keep the real estate profit from the real estate but move into more of a passive role, still oversee and be involved in our portfolios. And if we have real estate professional tax status or short-term rentals, leveraging someone else is going to allow us to maybe get more of that passive income and not really feel overworked. And maybe you don't have to wake up at two in the morning to address a broken HVAC and deal with people, maybe stealing your stuff or whatever the challenges are, but still see the wealth advantages in the tax savings.
Speaker 1:Now a lot of our clients also may find that they love the idea of real estate, the economics, the opportunities, but they just don't like landlording at all and don't even want to deal with their property managers and some of them may. So a lot of them will also pivot into investing in other people's deals as limited partners, so real estate syndicators and we've had a few of them on Jeremiah Bausche or it looks like it spells voucher, but anyways. He's one of those guys who raises capital for profitable deals and a good syndication is going to double your money in five to six years on the exit. So a lot of our clients will maybe do what they need to do to get that real estate professional tax status. Maybe you're holding on to your rentals but you realize that this is not the best use of your time and you want to leverage other experts on their investments and you trust them. You have a good relationship. You've seen their record in the past. You just enter in as an LP. You can group them for material participation and if you have real estate professional tax status, you can use the losses created from their investments and their costs to offset your income and you can focus on what you're best at, which is most likely other endeavors that are going to give you the wealth and the cash to afford to invest in more and more of these syndications.
Speaker 1:And this is really popular with highly paid professionals. So we see lots of folks that are physicians and dentists, et cetera, et cetera, and insurance agents making really good amounts of money and they quickly realize that this land learning thing is not for them. They get them or their spouse to do what's necessary to create the tax savings and then, instead of expanding by building out this robust portfolio that would create all sorts of complexities and challenges and further remove them from their personal investments, they just say, hey, this guy knows what he's going to talk about. I'm going to invest passively and we see really great tax savings opportunities and wealth opportunities. One of the investment vehicles I like here, especially if you're in a high bracket, is mobile home park investing. The cash flow can be really good, but also the tax savings can be amazing. We've seen folks do cost exits and write off 60% in year one back in the good old days of 100% bonus depreciation, which is likely to come back. But other investment vehicles are also going to be reliable. Some are going to have less volatility and really just gives you the ability to see those benefits that you had been hoping for Getting the money back through the cash out, refis, cost seg losses and having the passive income Really exciting stuff from some of our clients.
Speaker 1:And then they refocus their energy Instead of looking for more properties. They hand out the money and they focus on building their business and what's the best use of their time. Now some of the things I want you to consider here. Another thing that is really popular with our clients, and this is good when it comes to diversifying your income, oil and gas investing no longer can materially participate in the activities. Or let's just say you can't find another deal and you don't want to hire a property manager or you need a break from thinking about real estate. Oil and gas investing is going to give you similar benefits from a tax perspective and a passive income perspective.
Speaker 1:One thing I like about oil and gas is it's a truly passive investment, so you do nothing at all. You don't have to worry about material participation. You don't have to worry about real estate professionals, tax status, seven days to let. Any of that stuff doesn't matter. You just put your money into the oil and gas investment, into what we call working interest. You collect quarterly distributions, usually quarterly. It can vary, but you collect the distributions and you write off your initial investment into the oil and gas and the numbers can be very similar to real estate, depending on what year. We're talking about the investment vehicle and the bonus, but usually we see our clients writing off anywhere from 70 to 90, and sometimes as much as 100% of their year one investment into the oil and gas, the velocity of cash is a lot faster. It doesn't last as long. You don't see that huge cap gain payoff like with real estate, but the money comes back to you faster. So oftentimes what I've heard people say is it takes about 18 months between all your money comes back to you in the form of tax savings and in the form of cash flow, and I've seen it even faster. So these are ways where we can now not only diversify, but there's also some really interesting things with oil and gas you don't see with real estate.
Speaker 1:For example, with oil and gas, when the money comes in, you get a depletion deduction. It's like depreciation, it's a paper loss and we typically see it offsetting 15% of revenue. So it's really going to offset as much as, even more than, 15% of the net income there. So you're paying taxes on less than the cash that comes in Very similar to real estate. You also might get that 20% QBI deduction on some of your income. Now, this is a complex topic and you may be phased out. We may be able to get your income low enough to phase back into that 20% QBI deduction.
Speaker 1:But what you need to know is that when the money finally comes in from your investments it's very tax advantage. So you see an initial investment when the money comes in in from your investments is very tax advantage. So you see an initial investment. When the money comes in, you see an initial tax savings. And then when the money is finally cash flowing and profitable and let's say you're not operating at a loss in the following years, you still have the opportunity to pay less. Your taxable income is less than the amount that hits your account because of these tax advantages and the tax advantage treatment of your oil and gas investing income.
Speaker 1:So really fun stuff here and really popular for our clients that kind of get tired of the real estate stuff. And another interesting thing with oil and gas is you can even 1031 exchange into an oil and gas investment. So this can be part of your capital gains planning strategy. Or if you're exiting out of real estate and you need a way to reinvest it into stuff, oil and gas could be one of those things which is not quite a real estate investment but it actually. You can do the 1031 exchange with that and mitigate the capital gains with that.
Speaker 1:Here's another thing I want you to think about here. So if you're looking to exit on the topic of exits a lot of our clients when they're maybe towards the end or later part of their real estate investing career or let's say they're trying to be in retirement mode and really get even more passive Delaware statutory trusts are essentially a 1031 into passive investments through a trust vehicle Really good for moving all your finances into that passive economic vehicle where you do nothing at all. Qualified opportunity zone funds are a really fun way to defer taxes, have a tax-free exit. I have lots of content on that and I'm very excited about what's going to happen in the upcoming tax law with QOZs. It's just another way to move yourself into that passive income tax bucket where you're seeing really great tax advantages and we can also roll stock gains into it. By the way, too, I can geek out all day on QOZs, but we do see some of our clients consider these opportunities as they move out of the active management of their real estate.
Speaker 1:Some of the things here really going back to a lot of our clients that we see are going back to what got them to the place that allowed them to afford the real estate. So you know, they dabbled in real estate. They made a few purchases and now they're realizing, hey, you know what my time is really best spent building my business? I mean, my dollar per hour building my insurance company or my ex-company, or working in my W-2 job or whatever it is, is just so much more valuable than the time I was spending looking for deals and dealing with being a landlord. So when that happens, a lot of times we'll shift our focus and maybe they'll start putting more money into stocks and crypto and other types of investments and then also just really focusing on driving profit.
Speaker 1:And then our tax planning may because we're not using real estate or maybe any other investment vehicles to drive down taxes, we're often returning to or introducing some new strategies more related to the business income. So retirement account strategies, foundational write-off strategies, healthcare related strategies, entity structuring and spinoff entities. All those types of conversations are going to become even more valuable when we have a larger tax burden to tackle, when we're no longer using real estate to reduce our taxes. So one of the other things that we want to consider here is what are the other tax strategies for, not only for your business, but just your overall taxable income? Or maybe they don't have the liquidity to invest right away, or again, they're not using their investments to drive down income.
Speaker 1:Not just business-related strategies, but charitable-related strategies. If you haven't at least considered an advanced charitable deduction strategy and your income's over half a million, you may be very, very upset when you realize what opportunities you're leaving on the table here. So we've been able to eliminate as much as 60% of our clients' income with charitable strategies that they love and are incredible, and now that their income is really high and we don't have those same business losses from the real estate, these can be even more powerful, especially because the deduction threshold is determined by the charitable. The deduction threshold is determined by the net income of the clients we are also looking at. So here's a really cool idea I also want you to consider here is if you have the real estate. You're keeping the real estate a few of our clients and this really makes a lot of sense.
Speaker 1:If you have commercial real estate, or if you have short-term rentals, which is using solar panels for your real estate, here's a way I would look at it. You're already footing the bill for the energy costs of these investment properties. So we have had some instances where you can install panels on the investments and the panels will allow you to access depreciation and tax credits and you're financing it over time. So what this looks like here is we are not spending any more on whatever cost it is associated with the energy, but we're accessing an immediate tax benefit. But the deal is sweeter than that, because we're actually going to hedge against inflated energy costs in the future. We have a fixed fee to finance the purchase of the panels and we're going to reduce our energy costs significantly. So we had a client where this really made a lot of sense and this won't make sense for all of you it really depends on the property. But we were able to access a 30. We're projecting a 30% federal tax credit to pay for the panel Not only 30%, but South Carolina, another 25% tax credit to pay for the panel not only 30%, but South Carolina, another 25% tax credit to pay for the panel. So 55% of this asset is paid for by tax credits upfront. Not only that, we're looking at like $180,000 savings in energy costs over the next 25 years. So even without the tax savings, this is going to make sense, but the tax savings when you look at the credits in the fact that we can write off the panels and that we're buying it over time and getting that immediate write off. It's just a no brainer.
Speaker 1:And now some of you may be thinking hey, I'm listening from New York, pennsylvania, I'm in Idaho. We don't see as much sun as South Carolina. Well, hold on, before you jump to any conclusions here. There are still opportunities to leverage solar panels on your properties. Even if you're up north, the numbers may still make sense. We figured this out in one of our exclusive client workshops. We brought in a solar vendor national vendor and so to determine if solar works for your property, you have to consider.
Speaker 1:Some of the variables are going to include what are the energy costs? So we were surprised to find that some of the people acquiring solar were in Pennsylvania and saw really good energy savings in Pennsylvania, which is obviously a lot colder and less sunny than South Carolina, and so it all depends on the energy. A lot of it depends, as far as whether this makes economic sense, on the energy costs and the difference between the panel costs and the energy costs. Some other variables you may need to consider is the design of the property how old is the roof? Are there trees blocking the sunlight? All these other factors that are over my head. I got enough to learn in learning the tax code, but this is still a really cool thing to do. Where you can't really find or don't want to buy any more real estate assets, but you're looking for a way to access that depreciation and tax savings, and I love it when we have some of those few strategies that reduce your costs in your business and your taxes at the same time. How awesome is that? And then? So now I just went on a tangent on solar because I just think it's so cool.
Speaker 1:And also, before I move on to the next topic, we're running out of time here. Because we're likely running out of time because we have this new administration. They're going to be bringing back bonus depreciation, creating all these incentives, and the old administration brought in all these energy incentives. So we have this sweet spot right now, because energy incentives aren't going to go right immediately. They're likely to be phased out, at least in the drafted return. So we have this sweet spot where we have the 100% bonus depreciation and before the phased out and reduction of the energy incentives. So if we can see both of these opportunities at the same time, this is just going to be a double whammy of tax savings, so you have a limited opportunity to consider this. By the way, we're also helping our clients facilitate purchasing panels and renting them out to third parties, even if it doesn't make sense for your rentals, and we've seen as much as $2 million in tax savings created for one of our clients.
Speaker 1:And then another thing that I want you guys to think about here, especially if you're entrepreneurs maybe it's a little harder if you're moving away from real estate to drive down your taxes. You know, maybe you might be reinvigorated when you see 100% bonus coming back, but let's say you're in the category of folks that just had it or you need to take a break from the real estate. There's still so many other foundational tax reduction strategies out there where, if you're aware of them and you're cognizant of them and you're collaborating with the tax team, you know how to maximize your write-offs. Maybe you're aware of them and you're cognizant of them and you're collaborating with the tax team, you know how to maximize your write-offs. Maybe you're putting your kids in the business. Maybe you're finding legitimate ways to write off your travel and you're utilizing some of these low-hanging fruit and some of these deduction strategies and tax saving strategies are going to allow you to reduce your taxes without compromising liquidity, without taking risks and really without stepping too far out of your comfort zone. Just understanding the law and the tax incentives available for someone like you as either a high income earner, an entrepreneur or a real estate investor. So there's still so many things to think about.
Speaker 1:If you are the type of person where, let's say, you can't find a deal, or you had enough of the real estate investing and you're looking for ways, I just want you to understand that there's still so much out there.
Speaker 1:We have this massive tax code and so many opportunities and incentives to drive down taxes and build wealth and achieve that financial freedom and the passive income at your fingertips if you have the right resources and team and obviously, as you know, I'm here for you and my team of amazing advisors is here if you want to learn more about how any of this could apply to you. So, if you want to see more on this concept, you can go to prospercpacom slash apply, prosper with an L cpacom slash apply and we can give you a free opportunity report where we share with you how these concepts may apply to you. So at the very least, do that or go to taxplanningchecklistcom just to get in our environment and we can share ideas with you and start thinking about being a little more strategic, about building wealth and driving down taxes. So I hope you enjoyed the conversation today. Send me your feedback and have a great day. Got more conversations and podcasts coming your way.