EP 146 - How Real Estate Investors LEGALLY Pay $0 In Taxes w/ Nonpassive Losses

Real estate can create cash flow and wealth while lowering taxable income through depreciation, cost segregation, and smarter classification of rental activity. We also flag the traps that hurt first-time investors, especially when chasing write-offs instead of solid deal fundamentals.

• why rental income can avoid FICA while W-2 income cannot
• how depreciation works and why cost segregation accelerates deductions
• what bonus depreciation is and how it can front-load year-one write-offs
• why passive loss rules block many W-2 investors from using losses
• how the 7-day average stay rule can turn short-term rentals into non-passive activity
• what material participation means and how to track hours credibly
• when real estate professional status applies and why it matters for long-term rentals
• a real client example where accelerated depreciation wipes out a large tax bill
• warnings about buying cash-flow negative properties just for tax savings
• entity myths, LLC vs personal ownership, and why deductions are about the business purpose
• S-corp complexity in Tennessee and the impact of franchise and excise tax
• the Augusta rule and self-rental basics for legitimate business use

To see if anything in this podcase or any other tax strategies may apply to you go to https://www.prosperlcpa.com/apply

Transcript

Why Real Estate Beats W-2 Taxes

SPEAKER_06 0:00

Mark Broberg, ladies and gentlemen. Alright, so let me tell you a little bit about myself. I and it's so exciting seeing you guys here in all different levels. Uh I I was once a W-2 guy and saw real estate as my way to freedom. And so I hung around other real estate investors, and with CPA initials next to my name and a Jewish last name, people started asking me, what can I do about my taxes? And I didn't know. So I said, I'm gonna start figuring this out. Uh it's like there's no way I went through all this training and education to not know tax strategy. So all of a sudden, I you know I immersed myself in tax planning and strategy, joined the American Institute of Certified Tax Players, where I now teach, and realized as exciting as real estate is in so many things, wealth creation and financial freedom, and all the things you guys are looking for, I got even more excited about the tax savings element. I started geeking out like crazy, became obsessed with it, and now we have a practice with you know over 100 clients where we plan for somewhere between 200 and a quarter billion dollars of income that is at risk of being overtaxed with many real estate investors. And um, so I'm excited to share with you some ideas on what you can think about with real estate investing. So, what I'm gonna do today is talk about some of the advantages of real estate, some very basic stuff, but I'm gonna help you guys gain some clarity on what this means for you guys. And then I'm gonna share with you some more advanced ideas, and then I'm gonna leave myself open for questions, and hopefully, you guys have some really great takeaways, and I have some additional free resources so we can continue the conversation because this is my second time here, and I've talked in front of other groups of people, and this is like one of my this is probably my favorite group to talk to because everybody is so warm and friendly and giving, and uh, so we're gonna keep the conversation going, you know. And uh, I'll be here to answer all your questions at the end. And Mariah, she's my intern, she gets paid on the hour, so it's in her best interest that you guys ask us lots of questions so she can rack in the hours. So let's talk about the real estate investing advantages

Depreciation And Cost Segregation Basics

SPEAKER_06 2:26

here. No FICA tax. That means you guys are paying a 15.3% tax on roughly your first $180,000 of income on top of your federal taxes. Luckily, you don't pay state taxes, but those of you outside of Tennessee do pay taxes. You know, real estate is taxed at your marginal rate, but if you are a real estate investor, and this is why we do all now, we do a lot of fancy, sexy things and financial instruments, we do that. But real estate is still my favorite way to create tax savings, especially for you guys just starting out as W-2s, because now you have the first time to create tax write-offs, in addition to all the other tax incentives and opportunities of real estate investing. And even if you guys are cash flow positive, your real estate rentals are gonna operate at a loss on paper. So it's one of the very few instances where you can be making money cash flowing. You can get it, you could be a cash out refi, you could sell at a gain. And at the end of the day, while you're building wealth, building cash flow, you may actually find that you are reducing or paying no taxes at all on this activity, which is just incredible for what that means for your future, your ability to build wealth and create freedom in the lives of you and your family. So you might be thinking here, well, we operate at a loss. Well, how do we create a loss? I don't want to be a loser. How can we create a negative income statement from profitable real estate? This doesn't make sense. And the answer here is this magical thing called cost segregation. Okay, you may have heard depreciation is one of the most powerful vehicles that creates tax opportunities for the affluent, right? And you can maximize that with something called cost segregation. And this is how when you purchase a property, we usually see that you will get a tax write-off anywhere from typically 20 to 40% of the purchase. We do know of some unique investments where you can actually write off the entire property in year one, financing it, not even paying for 100% down. So we can talk about that after the call, after our talk, what may be out there for you. So it's incredible with the things that we can do that we can create negative income statements and make money. Now, let's talk about what depreciation is. It's just the write-off for the wear and tear of your real estate and anything else, any other assets you may have. And let's talk about cost segregation really quick here. And I'm gonna answer all your questions. So I'm breezing through this because I know you guys are gonna have some questions. So normally you're gonna write off that rental over the course of 27.5 years, if it's a residential property, or if it's a building like this as non-residential, and by the way, Airbnb counts as a non-residential, you write it off over 39 years. So when I say depreciation is such a benefit, and meanwhile, you're only writing off less than 3% of the property, and you can't even depreciate the land. Where's the value? Well, through cost segregation, we find items in this real estate that we say this is actually doesn't have to be depreciated over 39.5 years. 39 years or 27.5 years. We also have a ref that refrigerator is not gonna last 27.5 years, neither will the cabinetry or the carpet or the couch. So when we identify these things that were purchased, we assign a value, we find out that we can write them off a little bit faster. And because of some incentives in play, when we have a real estate investor as president, you will find that you can actually write off 100% of anything that we pick as non-real estate in year one on your federal tax return. So this is what that's what we mean when you hear about bonus appreciation, and that's how powerful it is. And at a high level here, and this is why people like Richard, who even though he is making money and living off of his real estate, pays absolutely no taxes. All $53 in taxes, right? Because of the depreciation where we can front load it. Even if you're financing it, even if you're putting as little, you're doing a creative structure, you can still write off a large chunk in your one. Now, I believe the next slide, let me just take a sneak peek

Bonus Depreciation And Front-Loaded Write-Offs

SPEAKER_06 7:20

here. Okay, this next slide is gonna be the most important thing that you see tonight. And it took me hundreds of hours before I even started consulting anyone of research, combing through the tax law and doing my own independent research because certain concepts weren't really brought to the public yet. And I found a way to simplify how we can use these losses in one diagram. So you might be interested in just taking a photo if you can zoom in on this screen right here on this next slide that will illustrate. We talk about creating losses, right? We got the bonus depreciation, cost segregation study, so we can get it, create a massive deduction for depreciation. However, there are all sorts of nuances and limits and restrictions on how we can actually use these losses. Now, another piece of the puzzle here is normally real estate is what we call passive per se income, meaning it's in a different bucket from our stocks, from our interest income, and from our W-2 and business income. So we have these losses, but we may not be able to use them. So certain circumstances have to be present so we can use these losses. And this is the best way I can visualize this. And if you can make sense of this next diagram, you may find that you know more about real estate tax treatment than your current tax account and the general public. Unfortunately, not as many people know this as they should. So this is how it works. Now, I want to make sense of this flow chart, hang in there. And this is a same diagram that we've used to simplify the tax treatment of these losses so you understand how we can potentially use these losses. And overall, what we want to do here is we want to get in the same place that Richard Gamble is, where we can create non-passive losses. That's the promised land. That's where you could get to the place where you're living the life you have the opportunities and incentives, the same incentives that the politicians complain about. People get upset by Donald Trump paying no taxes because of the certain rules that exist here. Uh, so here's how it works at a high level. And I'm not going to be able to answer to explain every minute detail. I'm here to answer your questions, though, but this is how it comes together at a high level. We already know we can create rental losses, right? But how can we make sure that we can use these to offset your W-2s, your business income, your roofing companies, your lending companies, etc. The number one thing that we want to make sure we have is material participation. It's a seven-pronged test. And you have to be put putting in a certain amount of time into the managing these rentals to say that we have materially participated. So if you have a property manager and you're trying to be hands-off or you're investing passively in a Grant Cardone deal or whatever, you probably do not materially participate. You're a passive investor, the IRS is gonna say, you don't have enough skin in the game, you're not doing enough for me to say that these losses are gonna give you any advantages. You're not taking enough risk, you're not putting yourself out there, can't use these losses. So you got to materially participate. That's the first thing. If you don't materially participate, the losses are passive. And you can't use them to offset all your other income. Now, at the end of the day, that's not a that's not so

Passive Loss Limits And The Flowchart

SPEAKER_06 11:04

bad. You're still making money and not and you're not paying taxes on your cash flow, but it could be a lot better. And for anyone who pays taxes, you want to get into a different place. So another thing we look at here is is the average length of stay seven days or less? So, and this is another thing that a lot of folks are not getting the clearest guidance on. I mean, this short-term rentals, Airbnb, Virbo, maybe some we see this in some of those, not a mobile home park, but the RV parks where people could come in and out. A lot of people don't realize that there's some very unique tax incentives if the average length of stay is seven days or less. Because essentially, if the average length of stay is seven days or less, it's not like you have a passive investment anymore. The code says, well, it's like you don't really have an investment vehicle. This is more like a hotel. You're managing all these people coming in and out and changing the sheets or whatever you gotta do. This is like a business. So we're not gonna treat this as passive income. Your losses and the losses that we will create from cost segregation are non-passive, and now you can use that to get a refund against your W-2, get a big fat refund, or reduce the taxes you owe from your business, or capital gains events, etc. Now, let's say you you despise the idea of having a short-term rental or a hotel, or that's just not your cup of tea. There's another way that you can get to the promised land in this beautiful place to create non-passive losses, and that is if you are a real estate professional like Richard or anyone else here who is full-time in a real estate trader business. So real estate agents have this. If your spouse has it, you have it as well. Flippers, landlords, now you have to own the business. You can't be a W-2 employee, you have to own at least 5% of whatever business this is. If we can say that is true and you're full-time, 750 hours, the def by definition 750 hours, more than 50% of your time. So if you're if you have a W-2, you can't get this. Maybe your spouse can by managing your rentals. But if we can say you are a real estate professional and you have any kind of rental that is long-term rental at this point, it could be renting out a space like this, multifamily, single-family. Now we have that coveted real estate professional tax status. And those losses, because we materially participate and we have rep status, those losses can offset any type of income. And now you're playing an amazing game where you're driving down the taxes, building wealth, building equity, getting cash flow all at the same time, where the down payment into the real estate creates additional tax savings, which gives you the liquidity to reinvest and buy more and more real estate. That's the best possible outcome you could be. And that's why sometimes you see this where you have high income earners and the spouse manages the real estate, the tax savings created by that spouse can be incredibly life-changing.

Short-Term Rentals And The 7-Day Rule

SPEAKER_06 14:11

Now, um, that's at a high now. I know you guys are gonna have some questions. So uh uh, by the way, I'm gonna stay here until the very end of the conversation as until we run out of questions. So I know you guys have questions on that, we'll get into it. Um, so again, real estate professional tax status to say that you have that 750 hours in that real estate trader business, and at least 50% of all your working hours is going to be in that trader business. Now, here are the roles that you get to have that real estate professional tax status. It has to be these. Unfortunately, if you're a hard money lender, you can't do it. Architects, unfortunately, do not qualify. Unfortunately, roofers do not. However, general contractors do. And the material participation test that we talked about earlier, just to let you give you a little more details on what this means. Most of you want to say that you do substantive. If you have a long-term rental, you can say you do substantially all of the work. If you have a short-term rental, that's nearly impossible because you got to hire cleaners. I don't think you guys want to scrub toilet bowls while investing in real estate for the tax savings. You probably need other people. So if you're a short-term rental investor, you'll probably want to say that you put in at least 100 hours and more, and no one else puts any more time than you. So even though you have cleaners coming in and out, and no one puts more time than you in the rentals, you can materially participate and use those losses. And if you have a large portfolio and you're leveraging other parties, we may not be able to say that these are true. But you might be able to say that you put in at least 500 hours, and now you don't have to worry about anyone else's hours. So everybody's circumstance is different. But if we can say that this is true and the other attributes are true, we can use our losses to offset our income, which is incredible. So here's an example of a real client we worked with where we took advantage of the short-term rental opportunity. And in this example, we had a capital gain event of $590,000, purchase price of $4.1 million. This is the property we were looking at here, right? The depreciation we created on a cost segregation study where we're accelerating the depreciation for this client created a loss of $783. In spite of having a half a million dollars of capital gains and other sources of income, client paid zero taxes. And this client got hammered, by the way, in every year because of the prior account and did everything right, but just didn't know how to strategize on taxes. So they were making quarterly payments based on what they were used to paying. So the taxes, the tax return had a refund of $474,000. And the government didn't want to pay them the refund. We actually had to get the local House of Reps because when you have a refund this big, they take forever. So we learned that we could push it through by contacting the local house of reps. And by the way, this was a return we were working on. When we dug through the older returns, we amended a prior year return where they sold their business. We found unused cost eggs in the in the un in the prior year returns. That amendment created an additional half a million dollars of refund that they could have had all along. But their accountant, who did everything immaculately, by the way, highly skilled,

Real Estate Professional Status Explained

SPEAKER_06 17:58

completely accurate, didn't know about cost segregation. Incredible what they could have done with that half a million. On the bright side, because we waited so long for that refund, the in the government paid them like $40,000 of interest on the money they owed them. Unfortunately, that interest was also taxable. We did, but we took care of the tax bill. But now I I I want to give you guys a warning here. But you want to use, just like anything in life, you want to use, you don't want to abuse this tool. Um, because we have seen people get seduced by the tax savings opportunity of real estate, especially with the rising popularity of short-term rentals. And what we have seen is they get seduced by the idea that you don't need a real estate professional tax status. We got folks from California coming in, overpaying in taxes, investing in these short-term rental mountain cabins. The prices go through the roof because everyone wants those tax savings, and they are buying money pits. So, how many money pits can you afford? You get the initial tax savings, but then you got to pay into a cash flow negative piece of real estate. And I want to warn you guys against that because there will be people selling, promoting, and finding ways to sell you on real estate that is not gonna be cash flow positive. And we've seen this happen many times. We have clients that you know they they they hear a few podcasts, they get seduced, especially in Tennessee, by the way. And they buy, you know, they save up all their money to buy the short-term rental, it's gonna change their life, right? We're gonna put in a hundred thousand dollars, we're gonna save 50 of it. And then what happens down the road? No, you know, they're not getting enough bookings, you know, things are breaking down in the real estate, right? They gotta maintain things, they're getting calls at night because the HVAC is down, and it's a Saturday night at 10 o'clock at night, and they gotta be up in the morning for work. Why am I doing this? I make more money at my job than at this stinking rental. Don't do that. Okay, so Richard and all you guys in your community, when you talk about underwriting deals, don't abandon the fundamentals of running a business and investing in doing a risk assessment and running the numbers. What's even we know what is the right way to do it is you get a property that drives down your taxes and is cash flow positive, and the value increases, and you do a cash out refi, and you take your savings, and you buy another rental that further drives down your taxes. You know, we used to say, because we had a lot of clients that were investing in the Smoky Mountains. I don't want to offend

Big Refund Case Study And Cautions

SPEAKER_06 20:56

anyone here, but we had a lot of people who did, and they couldn't afford their real estate, and they had to sell it again, and they couldn't afford the recapture tax when they realized it was a bad investment. We used to say that smokies are for brokies. But I know some of you guys are doing it right here. I'm just saying we had a lot of casual first-time investors who just didn't know what they were doing, and they got hurt really hard. So, so please don't abandon the five the fundamentals just to save money on your tax bill. You don't want to sell under duress, you don't want to have to refi at a crappy interest rate because you ran out of money on your on your on your renovations. I'm sure a lot of seasoned investors have seen that happen. Don't make that you. Now, another thing we could talk about here, uh, and this is for those of you who see these opportunities. Maybe you've done some cost segregation studies. And the question here now is what if you're already doing the cost segments, you're riding off the truck, your wife has rep status, you know everything I'm talking about, but Still paying a lot in taxes. This is for the high income earners. Or you can't find another real estate deal. And you're almost thinking about compromising the fundamentals of real estate just so you can get a write-off. Or maybe you're a full-time W 2, you had a gigantic bonus, there's something called an excess business loss limitation. It limits the amount of losses you can create against your W-2. So here's another way that we like to look at tax planning for real estate investors that you don't see. And this is really what separates us from the PAC in many ways is there's another way that we look at using tax planning for real

Tax Planning Beyond Real Estate

SPEAKER_06 22:40

estate investors. Instead of using real estate to reduce your taxes, sometimes we'll ask a different question. And the question is, how can I use tax planning to create tax savings so I can afford more real estate? Now, for some of you guys who can't get real estate professional tax status, you want to do multifamily or whatever, and you're a full-time worker, or you have a W-2, or you have zero interest in short-term rentals and it's not worth it for the savings, you don't have to compromise what you're interested in and what you're doing for work to create tax savings when you reach a certain income level. So we do holistic tax split. We find other opportunities that will create tax savings so you can free up capital that will allow you to buy that real estate, where at the very least, you can have cash flow through cash-out refines, untaxed dispositions, sales of the real estate, and build your wealth all at the same time. And there are many ways to do that. And I am not gonna have enough time to discuss all of them, but some of the things that we will look at is the sweet spots in the tax code where especially between five and six hundred thousand dollars of income for a full and the people in California getting crushed, where you can phase in additional deductions. So like a dollar of a tax write-off actually is like a dollar and thirty cents of a write-off, or we can phase you into qualifying for the child tax credit, and we can optimize how much you put in your retirement accounts or other investments. Other things that we like to do is just timing. And I'll tell you my own personal story: how timing had an incredible impact on my personal taxes. We saw a jump up in my profitability, but I was a single filer, and I am getting married this year. My situation, thank you. I love you, Patra. Uh and I knew my tax situation would be better this year. So what did I do? I paid one of the people here, Shaquan, my amazing videographer in the back. I paid him up. What did I what what what kind of conversation? What did I say to you, Shaquan? Yeah, I paid him just about all of our marketing for 2026 in December of 2025. So I had a massive write-off. I plummeted the profits reported on my 2025 taxes so I could shift my profits into a year with more favorable scenarios. And I also knew that we were closing and we weren't quite yet closed on our short-term rental, which would further drive our 2025 taxes. So I moved the income out. I don't know what you did now to take care of your extra tax bill because you may not have been expecting that revenue. But hopefully you found some ways to some workarounds there. Um other things. Sorry if you didn't. But, anyways, uh some other things here. We do have so many other things with advanced charitable strategies and tax loss harvesting, tax advantaged investors. We just did a workshop with the real estate investment that could offset as much as 50% of your income with a charitable deduction. You don't need any of those attributes truly passive. So there are a lot of other things out there where you can create a massive refund from your W-2, and now you can put it in a place that grows in a tax-advantaged manner. All right. If you do this right, you're gonna, this is one of the most incredible ways to build wealth in a tax advantaged manner at the very least. So the way we kind of look at it is we want to have this cycle. We we have profits, we have W-2 income, we save you money in taxes, you find a way to reinvest that in a way that we can be tax smart. Maybe it's buying real estate, or you're investing in tax-advantage investments, and that gives you additional liquidity to build your profits, and we protect those from savings, and now you have more profits, and you just continue to invest and compound your taxes without overpaying. Sorry, you compound your investments and wealth without having to overpay in taxes, and that's gonna have a snowball effect by which you take your tax savings and reinvest, you take your tax savings and reinvest and grow and grow and grow, and that's how you can really see an incredible impact when you understand

Free Calls And Training Offers

SPEAKER_06 27:23

what tax planning means for your future and ability to build ability to build wealth. So, well, as far as next steps, uh, I have a few offers for you guys that I really think you should do because it's free, and why not? Uh because I like this group so much, and I always enjoy talking to you folks and and connecting and having these conversations. Um, we have two open calls that are free with me, they're both gonna be an hour long. And if no one shows up, you're just gonna have all your questions answered. You're gonna get a free tax plan from me that I might have charged anywhere from six to fifteen thousand dollars. You can get it free. I'll answer any of your questions, I won't hold back. So if you scan this QR code and fill out your information, you will be on the list, and I will invite you to those two calls. Also, I have a class where I, when we go back to that chart where I illustrate and give you more details and insight and guidance so you can internalize those concepts and apply it to your life in a very structured manner. It's free just for the people here. And anyone who watches the recording, this QR code will be disabled in the next couple days. So, right now, if you want to take put in your name and an email address, phone number is optional if you ever want to chat, but name and email address. And I also will invite you to live events if you're on our newsletter. So if you find this at all interesting and you think that we can have a productive conversation, I really hope to talk to you guys. And you know, I don't care where you are, if you're just starting out, if you're flat broke, uh so passionate about this stuff, I would do it for free if I didn't need to make money for a living and cover some very high payroll and recruiting costs. So I seriously, everyone here, just show up, ask your questions. I don't care what there's no stupid question, show up and we'll we'll have a really fun time. I'll share with you what all the other real estate investors in my network are doing. You know, if there's anything you'd like to learn from me at all, just just you know, sign up, attend the events. And uh, you know, what I want to leave you guys with is, you know, this this again, real estate is the most powerful way that I've seen to build wealth and reduce taxes. The more money you make, the more important taxes are. And when you understand this stuff, it could be a force multiplier in your ability to do anything you're trying to do, whether it's retire early, start a business, quit your job, finance your children's education, build generational wealth. The tax planning can really be a force multiplier in that and can really change your life. So I'm gonna stay until I answer everybody's question. Uh, so I want to just so that's the end of our come of my presentation. I hope you guys got something out of it. Thank you. And I'm gonna stay here and after uh however much coffee I need, I'm not gonna leave until I answer all your questions, and uh, I'll leave it to you guys.

SPEAKER_10 30:47

Yes. Okay, so um last year I bought a laundromat. Yeah, and we didn't really separate uh equipment versus goodwill on the PSAs, more just he included the whole build-out cost from the laundry mat when he built it out, $480,000 or something like

Q&A Cost Seg For A Laundromat

SPEAKER_10 31:08

that. I haven't filed taxes yet for last year, but do you think that's legitimate, you know, uh price list for what I can actually write off for that purchase?

SPEAKER_06 31:17

Hold on one second. I just need some more, but let me ask you a follow-up question. Was this um, thank you? Was this an asset purchase or an entity purchase?

SPEAKER_10 31:26

Asset purchase.

SPEAKER_06 31:27

Okay. So um remember where we talked about cost segregation? If that building has machines in it, those are one of the items you will identify in the cost segregation study and it will qualify for bonus depreciation.

SPEAKER_10 31:42

Yeah, that's that's what I was thinking to just bonus depreciate all the equipment.

SPEAKER_06 31:46

Now it's not just the equipment though. There are there are going to be other assets you will find in that study that will qualify for bonus depreciation as well. And you know, as long as you can say that you materially participated in the business, yeah, then you can use those losses to offset your other sources of income.

SPEAKER_10 32:02

Okay, good deal. I don't know the own the building, though. We we rent the building. Oh, you we just own the equipment.

SPEAKER_06 32:08

Okay, yeah, okay, then as long as you can find the value of that equipment, we can find a way.

SPEAKER_10 32:13

Cool. So I don't need to take like a you know, because this is it was the price like six years ago, right? So it there's no like depreciation from that that I can claim, or can I claim that original value of all the equipment?

SPEAKER_06 32:25

No, can we say you own are you are you a tenant of the building that has equipment, or can we say that you own the equipment?

SPEAKER_10 32:32

So yeah, I mean I own yeah, own the equipment for sure.

SPEAKER_06 32:36

Okay, yeah. Now, even if someone else wrote off that equipment in the past, because you are the new purchaser, you still qualify for bonus depreciation on the purchase of that equipment.

SPEAKER_10 32:46

Cool, good deal. It'll be a healthy write-off. I'm psyched for that. This would be a fantastic write-off.

SPEAKER_06 32:51

Yeah.

SPEAKER_08 32:53

Who's up?

SPEAKER_00 32:56

Come on.

When Cost Seg Makes Sense

SPEAKER_01 33:01

Would you say that this is first-time investor and home buyer friendly? And if so, or if not, what size portfolio do you recommend cost segregation for? And then my third question would be for tax extent incentives and write-offs, is it better to purchase under a business entity or purchase as a person?

SPEAKER_06 33:20

Okay. Um I've been doing too much to remember all those questions. So let's start. What's the first one again? Um, would you recommend uh specifically the cost egg that you first have a buyer that I would if it saved you enough money in taxes to justify the investment? So if it saves you money in taxes and the savings is significantly greater than the cost for the cost seg, then absolutely. If it and so we simply run the scenario, and you know, sometimes it's on a case-by-case uh uh analysis, but you know, you can tell me your situation. Do you have rep status? Do you have a short-term rental? Like it may not make sense at all. So but we do cost seggs on first-time purchases all the time. Are you a real estate agent? Or no, uh you're a full-time okay, but you have a full-time W2? So yeah. Okay. So what what do you do full-time? Okay, so yeah, so there will be no tax savings. So no point. Now, what you could do when you become a full-time real estate investor, you can look at that rental, and now you'll have rep status, and we can do a cost seg in the year when you have rep status. So we can move that massive amount of depreciation into the year where you're actually capable of using it to offset your income or your spouse's income, or even maybe offset a Roth conversion. We need to say that you work more than full time, more than more hours than any other activity, and a total of 750 hours. And by the way, like if anybody, you know, I've kind of given you a very high-level simple, overly simplistic view of this just for the purpose of not putting you to sleep and saving time. So I can clarify some nuances here based on your question. What was the other question you had? Uh yeah, so there is no impact on your taxes, whether you invest through an LLC or your own personal name. The only advantage you're gonna see is the benefit of asset protection. Sometimes there are some nuances with partnerships, but 99.5% of the time you're only using an entity because it gives you asset protection. Yeah. Yeah, well, then you have the the fonts, you know, that whole thing with the fonts and the franchise next size taxes, yeah, that's a pain in the neck. But yeah. And what was the final question? Okay, cool.

SPEAKER_05 36:15

Um, what if uh you said as far as going off the purchase as an entity or personal, um, would it not be beneficial in an entity besides the asset protection? So that like if you were an LLC with a S-corp designation to be able then to do additional write-offs for your business, like auto leases, all of the things, home office reimbursements, et cetera, that you might qualify for with the S-corp versus a personal um buying it personally.

SPEAKER_06 36:50

If we were to uh ground sue some TikTok videos, the answer would be yes. But you know, there's there's one thing you know, there's a lot of misinformation online. One thing you want to keep in mind is you do not you do not need an LLC to create or to write off your expenses. What we need to say is that these write-offs are ordinary and necessary for your trader business. It can come out of your personal account, you can pay in cash. It doesn't matter. As long as you spend that money, you can write it off. It doesn't have to go through an LLC. So you could still write off a home office even if you're paying for your costs associated with that home office out of your Capital One card. Ideally, you have a better, you know, you have some sort of organized way to track it, but you don't need an LLC to give you the ability to take write-offs.

SPEAKER_05 37:43

Gotcha. And then what as far as cost segregation costs typically, I mean, obviously it ranges, I'm sure, based on the size of the transaction, but is there kind of a threshold like this is a cost segregation study is gonna cost at least bare minimum X that you're looking at just to give a ballpark idea of when it's worth it and what the threshold is?

SPEAKER_06 38:12

Yeah, so I would say the lowest you can I can I've seen people pay for a decent cost egg is maybe 3,000 if it's a small property. Let's say the cost is like a quarter million dollar rental and someone's in a high enough bracket where they can justify those procedures. And overall, you know, the answer of whether or not we need a cost egg is just a simple analysis of does the investment into this procedure justify create enough tax savings to justify our investment in our efforts? So that could be impacted by how much do we save you, what's your tax, which is impacted by what's your tax bracket, et cetera, et cetera.

SPEAKER_04 38:51

And just to give everybody a ballpark, usually you see you pull forward 25 to 30% of the value of the asset.

SPEAKER_06 38:58

Yeah, if you want to get an idea, our our rule of thumb is if you're buying like a short-term rental, our ballpark is 30% of the purchase price in year one because it comes with things like betting and televisions that we can also write off, you're gonna get a higher amount. Our rule of thumb with other types of real estate is 25% of the purchase price as a deduction for short for uh cost variation.

S-Corps In Tennessee And F And E

SPEAKER_02 39:24

Okay, so in 2024, I had a CPA that I paid that I because I don't know what I'm doing, and so I relied on them. They said, trust me, you know, just get you know, don't don't don't worry about anything. We got you. So they had me do a S Corp, and it was a nightmare all the way through 2024. I had no idea where anything was. Um I heard that you can't do S Corps in 20 in Tennessee. It's not a good idea. So um basically, I'm self-employed, I have an LLC, uh, I own a home repair business. My wife is a realtor. Yep. And we do some investing and partnership investing with people. So um which entity is that what does the S Corp do? Well, we got rid of the S Corp because it was costing us a lot of money. I felt like I was doubling up on things and I had no idea where I was. Uh-huh. And partly that's with CPA. But um what's uh is there a is there a good because the the the accountant we're talking to now says, as my home repair business, don't worry about it. You don't need an escort. But there's a part in with my wife in real estate that an escorp would be a good idea.

SPEAKER_06 40:45

Wait, and what entity did what activity did he say an escort makes sense?

SPEAKER_02 40:50

Yeah, anything above, like once she makes over like 35,000 for the year.

SPEAKER_06 40:55

Okay, I I would be hesitant because here's the thing. Um, first I'm gonna talk about S-corps, and then I'm gonna talk about why Tennessee flips everything upside down for entity structuring. It's like is there's some very unique things in the state of Tennessee, which we we generally we see as a tax haven, but there's some complications here. Um, one, when you have an S corporation, you're introducing a new layer of complexity. You gotta report a balance sheet, you got to pay yourself a salary out of the S-corp. You're subject to all these other complexities and limitations, your ability to use your write-offs. And if we weren't in the state of Tennessee, I would want to see at least a profit of $80,000 to justify those efforts because your fees increase, your responsibilities increase, the juice has to be worth the squeeze. And now, if we're in the state of Tennessee, a lot you may, if any one of you guys who own businesses, you might be sold proprietorships, and then you see all these videos online saying why you should have an S-corp. But the reason why your accountant may not have done S-Corps is because you have this thing called a franchise and excise tax, where you are gonna pay a tax of 6.5% on your profits when it rolls through an S-corp. That sucks. I thought Tennessee was tax-free. So now your entity structuring is like entirely different just in the state of Tennessee when you consider the value here. Now, as of January 1st, 2025, they created a like a standard deduction of 50, the first $50,000 of profit in the S-corp does not pay that 6.5% tax on the profits. But this makes it really hard for us to make this recommendation because we know that we're gonna make your life more complicated with an S Corporation. You're gonna pay us more, you gotta just do pay yourself a salary and all these complexities. And I don't even know if it's gonna save you any money at all. In fact, it may increase your tax. Not only that, you're paying the franchise tax where you're just giving money to say to Tennessee that you'll never get back. I'd rather you stay a sole proprietorship because you're paying a tax into Medicare and Social Security. And at least you're paying into a future benefit that you can see the benefit from. Paying into your Social Security, you'll get Social Security benefits in the past as opposed to giving your way your money away to the state of Tennessee. So for that reason, uh many people are very hesitant to recommend S-Corps at all in the state of Tennessee, unless we have an incredibly predictable profit and we can run the numbers and be confident that it's worth the investment. We we usually just keep it simple and keep it as a sole proprietorship. Does that make sense? That's what we typically do for active businesses, and we never invest in real estate with an S corporation, with exception of some very rare instances.

SPEAKER_07 43:55

Okay, so I own a construction company and I also just opened up a real estate.

Paying Yourself And Reasonable Compensation

SPEAKER_07 44:00

Investing company. Is there any tax benefit to doing my own construction? And is there any way that I can do anything different? Because I work on my own properties. I work, so I'm paying myself twice, essentially.

SPEAKER_06 44:18

Yeah, I wouldn't bother. Unless you're trying to qualify for a loan to show more profit in your construction pump company. You know, it's just a wash. It's like, well, here's the thing, actually, when you're paying your rental business is paying your construction company.

SPEAKER_07 44:31

Yes.

SPEAKER_06 44:32

So now we're it may seem like a wash, like I'm creating a write-off, but I'm paying taxes here. But what you're doing is you're shifting income into away from your rental income and into ordinary income. And ordinary income is subject to that painful FICA tax where you're not only do you pay federal taxes, you also pay a 15.3% Social Security Medicare tax on all those profits. So even though it's a wash, you're moving your profits into a category where you're taxed at a higher rate. So I don't see the economic benefit, um, and it's gonna cost you more in taxes.

SPEAKER_07 45:09

Okay. And I also have an M1 brokerage account. Cool. Is there anyone? I know a lot of people probably don't know what that is, but I need to know, like, figure out a way that I could borrow against that to buy assets.

SPEAKER_06 45:26

Okay, so you have like a stock brokerage account? Yes. Yeah, when you borrow against your stocks, it's tax-free. So I do this personally. So I want to take part in the growth of the stock market, but my income is a little bit unpredictable. I put as much as I can in the stock market. And while that may sound risky that I don't keep as much liquid in cash, the fact of the matter is if I have a down month, I can borrow from my stock portfolio. And the interest rates are really low. It's like 4.25%. Yes. And I pay no taxes, I access my capital, and I still get to see my portfolio grow with the market. So it's a good way of acquiring capital. And as long as you're not, you know, getting taking things too risky, I'm I'm all for it.

SPEAKER_07 46:12

All right. Thank you. Yeah.

SPEAKER_12 46:21

Sorry. Completely that's how it runs. Thanks, pray. Uh, so with the escort. Um, if hypothetically speaking, you're doing a million in revenue and you're paying yourself a substantial amount, but your CPA wants to eliminate paying the federal tax just because we're not looking for no return on it. Is it beneficial that way or just go back to the LLC?

SPEAKER_06 46:52

Well, you can't it's really hard to convert an S-corp to an LLC.

SPEAKER_12 46:56

Well, it's already got the LLC and then it's identifying on the federal level as a back to a sole prop. Yeah.

SPEAKER_06 47:02

Yeah.

SPEAKER_12 47:03

Yeah. What would have been the strategy was to eliminate self-employment tax?

SPEAKER_06 47:07

Yeah. Now the numbers might make sense where it saves you some money in taxes. Uh now, what you what you're wondering here is like, does that make sense or what was what's your question?

SPEAKER_12 47:20

Does it make sense is it worth and worth the risk? So what I don't understand all what y'all hand it over and I'm like, here, I trust you, you know. And but then again, it's like, holy shit, this don't look right. Because I'm not, I'm eliminating so much tax, my mind on a second opinion.

SPEAKER_06 47:37

So you said a million in revenue. What's the profits? Asking for a friend, you don't have to reveal it.

SPEAKER_12 47:44

Yeah. We like to say around 15 to 20.

SPEAKER_06 47:48

15 to 20 percent. It's like $200,000 of profit. And the question is, should does it make sense to not pay yourself a salary so you can No, we do pay a salary, but I'm kind of looking at am I not paying enough in salary? Okay. So here's what you should be doing. And this is what the law says is that um because I am getting hit with the F E D tax. Yeah, right. Well, I mean, some just so you know, like this FICA tax, like there was a time where people would do intentionally create FICA tax so they can pay into their social security benefits. It's not the worst tax in the world. Um, but what I would say is when you you what the law says is you have to pay yourself um the fair market value of the work performed in your company. So there's something that should be called a reasonable compensation study. Now there is room for interpretation on what that amount is, and there are a lot of variables that will impact what's the optimal amount to pay you. There's something called a QBI deduction, there's also FICA taxes and all these other things out there. So you're gonna need to someone to look at your tax return and they can see what would be you know the optimal amount that you could pay yourself, and would that still be reasonable?

SPEAKER_12 49:14

I'm just like preparing as growth, and I'm kind of on the board as this CBA. I'm using, I mean, these things pretty good. The banks are kind of okay with it when they look at spreadsheets and stuff. There's some questionable things on that end, but I'm still like, I don't like the feds.

SPEAKER_06 49:32

Well, you come to the right place. You're investing in real estate in the state of Tennessee. Yeah, but uh, yeah, you know, I mean, to answer your question, what's the best to do? Someone's gotta, because of the the moving pieces here, someone's gotta look at your stuff. And hopefully your accountant is looking at yourself. You know, look at how much you're paying in taxes, and if you're doing all right, it's a good chance it makes sense.

SPEAKER_12 49:53

Second question and outlet say you set

Self-Rentals Audit Logs And Rep Proof

SPEAKER_12 49:58

up an LLC, right, to um hold an asset like a rental, a commercial rental, and you're gonna rent that asset to a nonprofit, and one person owns the LLC, and then the board members in the nonprofit own the LLC. What how far apart at arm's length should that be?

SPEAKER_06 50:29

Well, yeah, to me, I don't think is we worry about this being arm's length if you're renting it out to the nonprofit. Because here's the thing the nonprofit is paying you rent revenue, it's simply tax for taxable rent revenue. Well, here's the way I look at it. As long as if you're charging rent, that's taxable rent revenue. And you actually there are some nuances in the world of self-rentals. In fact, um, what we will sometimes do is we will, because of some unique treatment and you don't want to have your real estate in an S-corp, if you have an S-corp and you have an office building for your S-corp, you'll actually rent that building to your S corporation that you own. So you will rent it to your company. So there are instances where you can do self-rental and still write off the asset. So I don't see anything wrong with it. Yeah. But even though it's a non-profit, it's still rent revenue, no special treatment. Yeah.

SPEAKER_08 51:40

Yeah. So I have um 50 grand in profit that I need to make go away from 2025. Start 2026, bought a fourplex. Is there any beneficial benefit to that?

SPEAKER_06 51:58

If you bought in the property in 26?

SPEAKER_08 52:01

Yeah.

SPEAKER_06 52:02

No. It's not gonna hit your tax return in 25. Yeah.

unknown 52:13

Let's hear it. Is there any uh bottom line? Is there any specific attack benefits for real estate development that you can think of?

SPEAKER_06 52:21

I mean, yeah.

unknown 52:24

Yeah. I mean, eventually we'll buy and hold, or buy and build and hold.

SPEAKER_03 52:28

Uh but as always, real estate development goes, but he is very small as you can.

SPEAKER_06 52:33

Yeah, there are some pretty unique things, but those incentives become more available as you scale in your larger operation. So there are tax credits available for real estate developers if you meet certain criteria for energy development. You can even get research and development tax credits. Now, these things are only gonna make sense and worth the effort if the tax savings is big enough. If you're just starting off, it might not be worth your time. One of the downsides of flipping and real estate development is you're encouraging all these costs to buy inventory, and it's inventory. You can't write off until you sell it. And by the time you sell it, now you've got to pay taxes on the revenue. And we've had a lot of instances where people are flipping or developing real estate. They have this massive profit and they go, you know what? I don't want to pay taxes on it, so I'm gonna dump this into my next flip. I'm gonna spend all this money to get write-offs. And they don't realize like that money they spent is capitalized into inventory and it doesn't give them any tax savings. However, you still have a real estate professional tax status. Hopefully, if you're a full-time developer, you can buy some uh some real estate and do cost eggs. As far as the I want to ask you to really as far as uh research development tax so it has to do with the percentage of the effort that is put into to essentially at a high level build unique or systems and structures. It's rare. Um, you would need to be a decent size for this to be worth the analysis for, but it is prevalent in larger real estate development projects. Yep. In the back.

SPEAKER_09 54:12

Thanks for coming to speak with us again, Mark.

SPEAKER_06 54:14

Yeah.

SPEAKER_09 54:14

So this is about rep status. Um, I'm a W-2 employee. My wife is the non-W-2 worker, it was the non-issue, and we had the short-term rental only because of the short-term rental loophole, material participation, everything you had outlined. Once you start adding long-term rentals to the mix or other businesses, um now that rep status, the real estate professional status really starts to come to play. So if my wife doesn't have W-2 income and all she's doing is helping with the real estate business and managing the rentals and the real estate, but she's not taking income out of the business. What's the best way for audit purposes? Like, what's the best way to record this or to prove in an audit that she truly is a real estate professional?

SPEAKER_06 55:02

Do you have long-term rentals?

SPEAKER_09 55:04

Yes.

SPEAKER_06 55:05

Okay, there's some unique things here. Um, first off, to use the losses from the short-term rentals, you don't need rep status. You just gotta show material participation. An hour log will do. I'll email you one if you don't have one, a template that has been audited and survived the audit. And if you also have long-term rentals, what the tricky part here is you have to show that you've materially participated in the long-term rentals, and you can't use your short-term rentals and those hours to count towards your material participation in the long-term rentals. So you got to pass the test again. Now, you know, in the short-term rents, you're always thinking about 100 hours, everyone else's hours. In the long-term rents, if you self-manage, you pass the substantially all tests, so it's easier to material participate in the long-term rentals. So you can show that material participation maybe more easily there. Do you have property managers?

SPEAKER_09 56:03

No, so we self-manage the short-term rental and we've logged all of our time so that in an audit, uh, we we pass the hundred hour and more time than anybody else, and all of those prongs. But but on the long-term rental, we do not have a property manager, we self-manage as well. Yep. It's just how you know, should we how do you log? How do you prove that in an audit?

SPEAKER_06 56:26

Okay, so I'll I'll send you a template. If you log all your hours in a way that's reasonable, you put the information you want to put is the activity, the date, the amount of hours. Specify the property. It has to be, it has to be looked reasonable. You can't spend 30 hours fixing a blind, right? It has to be believable. Um, now here's some unique things here. Um, you want to have enough hours to show 750 hours, and you can use the short-term rentals or the long-term rentals to get that rep status. But you only need the rep status to use your losses from your long-term rentals. But the short-term rentals will help you get that rep status for your wife.

SPEAKER_09 57:06

So you can combine the time across all real estate and long-term for rep status.

SPEAKER_06 57:12

But for material material participation, you have to pass the test twice. And you can compound, but you can combine your hours for material participation. Okay. So I I my assumption is based, you know, as long as you can show 750 hours, you can use losses from both sources. And it shouldn't be too tricky to prove because your your wife doesn't have a W-2.

SPEAKER_09 57:33

Thanks.

SPEAKER_06 57:34

Yeah.

SPEAKER_04 57:37

Caleb in the back.

Augusta Rule And Tennessee Exemptions

SPEAKER_04 57:40

Um, how can the Augusta rule help you out with your taxes on your house?

SPEAKER_06 57:45

So if you have an entity that is not disregarded, so it's not a sole proprietorship, you can actually let me back up to explain you the concept. The concept is if you rent out your primary residence for 14 days or less, you don't have to pay taxes on that rent revenue. It's essentially immaterial. Because folks in you know, Gusta were renting out their place for a golf tournament and they didn't feel like taxes, and the tax court said, eh, it's immaterial. We'll let you get away with high level. So the loophole is you rent out your primary residence. You don't even need to own it, by the way. You rent out your residence for the fair market value of using that residence to your company. Now that'll only work if your company is a C Corp, S Corp, or partnership. What the way it works is you charge your company rent revenue to use your home for a legitimate business use, like a networking event. Like I'm gonna cook for my staff on a retreat. I rent my I charge my company rent for that. Company gets a write-off. So I charge my company a thousand bucks, let's say, to use a house. Company gets a thousand dollars of a deduction that rolls onto my 1040. However, I don't pay taxes on the money that comes in because I rent out my property less than 14 days. Does that make sense? And then if you want to really take this to the next level, this is what I did personally. Uh, my mom works for me, and when I visited her, we held a business meeting in her home. I paid her rent to use her home for a business. She definitely doesn't rent her home out 14 days or more. It's her own residence. So I get to pay my mom and get a write-off, and she pays no taxes on it. That's pretty cool.

SPEAKER_00 59:43

So in Tennessee, as you know, because she does rich stuff. If an LLC just holds real estate, do they have to pay that 10 cab, uh franchise, excise stuff that comes?

SPEAKER_06 1:00:00

So um there's something called a fonce exemption. That's the most common way that we can get out of the franchise an excise tax. Most of you will qualify for that to make sure that you don't have to pay that tax. Dude, it's it's a pain in the neck. We we've suffered many hours combing through the law and calling the Department of Revenue, Tennessee to navigate the F and E tax. Um, but essentially, if you have four units or less, you don't have to worry about it. And what's with property? Well, let's talk about how this applies to you. No, four units. What tell me about the properties we're talking about? Okay. Yep. Okay. So I can say with certainty, because we've done this, we've looked at this and spent hundreds of hours across the firm, you should not be paying franchise and excise tax on those properties. Yeah. Yeah. Now if that now there's also there's so many like variables and moving pieces in this, but if you flip in that LLC and it's a sole proprietorship, you don't have to pay uh franchise and excise tax. But if it's an S-corp or a corp, you do. I know it's it's such an administrative nightmare, like such a pain in the neck. Many hours of suffering and long calls with our clients and back and forth phone calls. But yeah, at a high level, you shouldn't be paying the FE tax, but you probably have to register the LLC with a couple hundred, maybe a couple hundred bucks. Yeah. Uh what I would like to do, because I want you guys to network and connect with each other, and I don't want to put anybody to sleep talking about taxes. I'm gonna hang out with the rest of the night. I want you guys to all connect and have an amazing time here. So you can come talk to me. I really appreciate your time. I love doing this stuff. I'll stay until I answer everybody's question. Wonderful talking to you guys.