Strength in Numbers with Marcus Crigler

Episode 65: Tax Strategy Masterclass - Why Smart Investors Pay Less (And W2s Pay More)

• Marcus Crigler • Episode 65

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The people who pay the most in taxes are often those who fail to plan, while those who pay the least are typically those who plan all year long.

In this episode of the Strength in Numbers podcast, Marcus Crigler breaks down the real tax strategies that investors and entrepreneurs use to legally reduce what they owe while building long-term wealth through real estate.

Listen as he explains the difference between depreciation and cost segregation, and the difference between passive and active real estate investing. He also explains why planning is more important than last-minute filing, and how the tax code rewards entrepreneurship and investment.

Enjoy the show!

You’ll Learn How To:

  • Use depreciation to reduce taxable income
  • Understand the difference between passive and active real estate investing
  • Offset passive income with real estate losses
  • Use tax planning strategies

What You’ll Learn in This Episode:

(01:43) How real estate depreciation works

(03:15) The difference between cost segregation and bonus depreciation

(04:53) Understanding passive vs active investing

(06:05) Investing matters more than simply saving money

(07:15) What qualifies someone as a real estate professional

(08:57) Passive investors still receive major tax advantages

(10:08) About Passive Income Generators (PICs)

(11:26) Where to find passive income and losses on your tax return

(12:52) How spouses can use real estate professional status strategically

(14:55) Depreciation is a tax deferral strategy

(17:26) How lower future income can create tax arbitrage opportunities

(18:44) The tax code favors entrepreneurs and investors

(20:28) Why entrepreneurship opens the door to more tax strategies

Who This Episode Is For:

  • Real estate investors looking to maximize tax advantages
  • Entrepreneurs focused on building long-term wealth
  • Anyone interested in reducing taxes legally

Why You Should Listen:

Marcus breaks down how real estate tax benefits work in the real world, why planning matters, and how entrepreneurship and investing can create opportunities that traditional W-2 income simply doesn’t offer.

Connect with Marcus Crigler:

SPEAKER_02

Being proactive. The people that pay the most amount of money in taxes are the ones that fail to plan. The people that pay the least amount in taxes are the ones that plan all year long.

SPEAKER_01

Welcome to Strength in Numbers, the podcast for real estate entrepreneurs who are tired of being broke and not having control of their finances. If you're ready to finally take control of your money, slash your taxes, and start building real wealth, you're in the right place. And now, here's your host, Marcus Krigler.

SPEAKER_00

Hi everybody, and welcome to the JCAM Investments. Uh got a special guest today. We've got Marcus Krigler from Beck. He's an accountant and also CFO that I've known for a few years, and we're in a few mastermind groups together. So Marcus, thanks for joining us. Happy to see you. Real quick for those listening, we're just gonna kind of really quickly talk about what we do and the real estate markets we're in, and then we're gonna dive right into the content on real estate and the tax benefits.

SPEAKER_02

So uh Yeah, so uh Marcus Krigler, I'm a CPA. I'm actually out of Missouri. So, but yeah, so Beck's CFO and CPA is a CPA firm focused with real estate investors. And typically we work on the active side. So we're working with uh guys like Jack that are investing money into real estate and uh real estate investments. We work with a lot of flippers, wholesalers, you name it. If it comes in in the form of a real estate box, we work with them. And kind of our goal is is to help them achieve financial clarity, freedom, and confidence.

SPEAKER_00

Yeah, so we're gonna talk about passive income, and that's a big big part of uh what I've been seeking for my whole career. This is probably a good time to, Marcus, if you don't mind, maybe just give a high level on what a traditional depreciation is, just for somebody who maybe owns a single family rental.

SPEAKER_02

You know, it's funny, depreciation is kind of one of those weird tax benefits when you think about it, right? Because you jump in and you buy an asset. And this asset tends to appreciate in value, right? If you buy the right asset, we're talking specifically about real estate here. We buy this asset, it appreciates in value over time, right? There's always hiccups in the market. We may see a decrease here and there, but overall, we have a pretty consistent increasing of real estate market in the United States. And the IRS came out and said, Hey, even though this is an appreciating asset, we're gonna allow you to take depreciation on that asset. And depreciation is simple. If but county one on one, so depreciation is simply taking an expense over a course of time. So, what depreciation allows you to do, and depending on the asset class, depends on how much depreciation you get. So for a single family rental or for anything that provides housing for somebody. So this could be single family, this could be multifamily, it could be a mobile home. Depreciation is allowed to be taken over 27 and a half years of the basis of the property. Basically, what that means is you get a write-off just over 3% of the purchase price of that property, minus land. We're not going to get into detail there, but basically a little over 3% of that property a year against the income of that property. So that's a really cool thing about depreciation that you're getting on an asset that is appreciated, right? The second thing, and this is something that a lot of people ask about, and they kind of use cost segregation and bonus depreciation interchangeably, and really they're very different. So, cost segregation is simply an engineering study. A lot of people ask their accountants to do a cost segregation study for them. That's not an accountant's job. An accountant is to put the numbers on paper. An engineer actually performs uh a cost segregation study and they basically go in to an asset. Oh, let's let's use a piece of real estate, for example, here, uh, because that's what we're talking about. They look at that big asset and they say, okay, this asset has a bunch of parts to it, right? So you've got this big real estate building, but maybe it's a single family house or it's a 400-unit multifamily, doesn't matter. The process is the same. They go in and they say, okay, this is built up on these various parts that have lower depreciation lives. So when I said a residential real estate, a piece of residential real estate gets depreciated over 27 and a half years, what this cost segregation study does is breaks it down into other asset lives that get depreciated faster. So for instance, it breaks it out, breaks out carpet. Well, carpet is allowed to get depreciation over five years. So instead of having to take a portion of this property over 27 and a half years, you can now take it over five years, which accelerates that depreciation, accelerates the tax benefit, and ultimately puts more money back in your pocket to reinvest into other assets, right? So that's a good thing.

SPEAKER_00

The other question we get a lot is the difference between active and passive and what who can write off what? I know enough to explain that if you just have a W 2 salary and you don't own much else, you're not going to be able to offset, but you can carry forward. But maybe you could go through a couple of different avatars from a high-earning W-2 person that also owns a couple of rental properties to the real estate professional who's a full-time investor and active, but also potentially investing in funds, you know, like ours or syndications passively. Uh, maybe we can kind of go through those two scenarios at a high level.

SPEAKER_02

A lot of passive investors look at real estate investment. And because they don't get the ability, and I'm gonna explain why you don't get the ability in just a second, but because you don't get the ability to take these massive losses against your other income, they kind of look at these investments and say, ah, maybe it's not a maybe it's not for me because it's you know, the investment isn't uh doing what it's doing for other people. But keep this in mind tax benefits is a in addition to the benefit of an investment. It's not about what you make, it's about what you keep. That's a lie, right? You know why? Because if you kept all the money that you made, you'd still we've got inflation higher than the value of money, right? It's not about what you keep, it's about what you invest in. So when we first talk about this, take tax benefits out of any investment decision. Number one, if you're a passive investor, take that, get it off, get it out of your mind. Because it's all about what you invest in. It's not about what you make, it's what you keep, it's about what you invest in. So that's number one. Billionaires did not become billionaires because they made a billion dollars in a year. That's not how they did it. They invested in the right things, those things increased in value, and then in their net worth was worth billions. But that doesn't necessarily mean they're making billions every year. On a passive investor, a passive investor is simply somebody that they don't have enough hours in real estate to become active, right? And there's passive investors in businesses, there's passive investors in in tons of things, but we're talking about real estate specifically. So when if you haven't spent 500 hours into any activity, you're going to be considered passive. For real estate investors, there's this there's this cool little term that they have, which is called a real estate professional. And a real estate professional basically says that if you are considered a real estate professional and you check off a couple of different additional boxes, you can be considered active in real estate. And that will allow you to be able to take a lot of these depreciation benefits. That's a good thing. If you're not, if you're in the passive bucket, that's not necessarily terrible. And let me explain why. If you are investing passively and you invest with Jack, and Jack's K1 that comes to you is going to give you, let's say you invested $100,000 and you got $60,000 worth of loss that came to you. Well, you got one of two options that can happen there. The first one is going to be you could use that $60,000 of losses against passive income that you have coming in, right? So maybe you have another real estate investment that's producing income coming to you. Maybe you have another business that you're not active in that's producing income coming to you. And you can offset that income and utilize that strategy as well. The other thing, if you can't use it, you don't lose it. This is the thing that that's kind of a misnomer. If you can't lose it or can't use it, you don't lose it. It carries forward to future years. Here's the thing the goal of an investment is to make money. So we're gonna have to pay tax on this investment at some point in time. So if you get these depreciations, that $60,000 comes to you and you can't use it, guess what? It's gonna go against that investment in the future when it does start making money on paper, and probably uh most likely when it sells. Here's the other thing that's cool about becoming being a passive investor, and this is for active investors as well. You're getting preferred returns generally, right? You're getting cash coming into you, but you're not paying taxes on that cash because you're getting these losses. So even though you're a passive investor, you're still getting tax benefits. If you've got a 6% preferred return on a hundred thousand dollar investment, it gave you a $60,000 tax deduction, you got $6,000 in cash, all the taxes on that $6,000, that's deferred down the road, probably until this thing sells. So that's why if you're passive, don't just throw away the idea of investing into something.

SPEAKER_00

So if you're a passive investor and you say, Oh, you maybe you own two rental properties that are free and clear, and you're collecting that six, maybe you're collecting 60,000 a year in rent and you're at the 37% tax bracket. You know, maybe you're in a state that is even has higher, you know, it's feasible that you know, with a negative K1, you may be saving 37 cents on the dollar that year just by deferring the taxes through a K1 loss. Am I am I doing that math relatively close?

SPEAKER_02

I think that's the exact thing you should be thinking about as a passive investor, as accountants. We kind of have a funny term for these things. They're called pigs, passive income generators. So, what we like to do is suggest that you invest passively in items that make money and passively in items that lose money, like real estate. And now you've kind of got this awesome tax efficient uh passive investment strategy that is really, really cool.

SPEAKER_00

Um, yeah, without going too, too far into weeds, uh, because obviously everyone's situation is different. If someone's trying to figure out how much passive income they had last year and, you know, assuming they think it might be about the same this year, where should they look on their previous year's tax return? What schedule? Is there a couple of quick boxes you can tell people that can they can find what they might be looking at for passive income and that could be eligible to potentially be written off?

SPEAKER_02

First off, if you are a passive investor, there are passive activity loss schedules in your K1. Okay, now it's typically buried pretty deep. So you might need to ask your accountant, hey, do I have any passive activity losses that were carried over from the prior year? Or what was I considered passive in and what was I not considered passive in? But as far as specifically where to look at what income you had coming in last year, you want to look on schedule E is the schedule. It's mixed in there. A lot of times, if you're uh uh a business owner, you might have a K1 that goes through that same schedule. It kind of anything that you are an owner of, or if you get a K1 from it, it's all going to be on that schedule E. And then on that schedule E, they kind of determine is it passive or is it non-passive? Is it passive income? Is it passive losses? So that's where you would look. But I think the most important thing to kind of be thinking about as you're doing tax planning, which by the way, if you're not doing tax planning, that's probably recommendation number one, right? But recommendation number two is to begin with your accounting accountant, your CPA, and understanding what makes you passive in a specific investment and what makes you not passive in that investment, and understanding that from your personal perspective. But Schedule E is going to be the place to find that too.

SPEAKER_00

We work with a lot of people who, you know, are transitioning into that full-time real estate role, or in some cases, yeah, there's a husband with a W-2 job, they're building a portfolio, and the wife is sort of managing the properties, or the other way around. I mean, it's it's 2021 here. Um, can you maybe talk through, you know, let's use a scenario where uh one spouse is a W-2 employee, there's you know, the family owns 15 rental properties, and the spouse is kind of running things and and you know, meeting the requirements. Can you kind of go through how that scenario works? So I know a number of people in that scenario.

SPEAKER_02

So basically the the strategy Jack is referring to is that if you can get one spouse, doesn't matter, male, female, it doesn't matter. If you can get one spouse to be considered a real estate professional and then active in a real estate portfolio, then there is a chance that you could be passively invest into a syndication or a fund, get those depreciation benefits, and then do what's called a grouping election. It's a 469 grouping election. I don't want to get too nerdy here, go talk to your accountant about it. But you can do a grouping election, which will in turn because you have a act you're active in a portfolio over here, that grouping election will allow you to group this K1 that's passive in with your active and consider it active. And then once you've considered it active, that's kind of like when you open up the golden chest and all the gold kind of starts shining. That's the that's it right there, right? Because that's now allowing you to use that depreciation against your ordinary income, which the ordinary income's tax that you nailed it, 37%, probably going to go up next year to 39%. And then you've got another, you know, four or five percent, depending on the state. Maybe in some states like California, 11%, and they're just hammering you. But that strategy is a really, really good strategy. And if you if you're somebody that's on the fence about, hey, my spouse, I've got a really good income. I've got, you know, maybe I'm making high six, low seven figure income, W-2, but I'm not gonna leave that income. I'm not gonna leave that job to come go do real estate because it's a great position. But maybe your wife or your husband stays at home and and they've got some time to invest in real estate. Well, potentially they could make you or make the family hundreds of thousands of dollars a year being a real estate investor just by reducing the tax bill, right? Not necessarily making more money, but utilizing the money that's coming from that W-2 job, putting it into these investments and using that depreciation to offset income and ultimately reduce your tax bill. If you take depreciation on something, it is simply a deferral. You are deferring the taxes to a future time period. So what recapture does is it recaptures all that depreciation that you took. And then once the property is sold, then you're gonna have to pay taxes on the deductions that you took in the past plus whatever the gains are on the on the property. So before we get into how to mitigate that, I want to I want to explain a couple things. Some of your listeners may be saying, Well, Jack, why would we take depreciation then if I just gotta pay taxes on later? Why? Well, time value of money, right? A dollar in your pocket today is worth more than a dollar in your pocket two years from now. And that's especially going to be the case if we see inflation like it's expected to be, right? So the sooner that you can put those dollars back in your pocket and reinvest them into something that is going to keep pace or exceed the returns of inflation, then you're going to have arbitrage in that depreciation. So that's number one. So for the next several years, there's still going to be some sort of bonus depreciation out there that you can utilize. So when a property gets sold and creates taxes, now you can go reinvest that money into something else. Utilize those tax benefits to offset the cost or the taxes that were incurred from your previous investment. And Jack, I don't know about you, but I hope it's a lot of taxes because that means it was a good investment, right? And now we figure out a way to offset those taxes. So that's kind of how how to utilize that strategy. If you continue to invest, the more you invest, the less taxes you pay.

SPEAKER_00

Yeah, let's say you're 55 years old, you still have a high-paying W-2 job, and you've got a significant amount of capital that you're investing into these types of syndication deals. And you're in a building, say, for five years, but in that, you know, so in today you're paying 50% tax because you're in a high-tax state. So you have your federal, you have either New York or California. But in five years, when the building sells, you've now retired and now you live in Florida, but your income that year is just your retirement plus maybe you made 100,000 profit on a deal. Are you actually paying the lower tax bracket at that point instead of the higher tax bracket in addition to all the time value of money?

SPEAKER_02

If in a future year you recognized income, but your other income was lower. So maybe instead of let's say right now you make a million dollars. And in five years from now, you're gonna be making $200,000. Well, the $200,000 max tax bracket is significantly less. I think it's the 20% tax bracket or 23% tax bracket. I don't have them in front of me. But the difference there is you're gonna take deductions at 37% and then pay taxes at 23%. So you're gonna get a 14% arbitrage right there, right? Just on the Fed side. So you're exactly right, Jack. I mean, that's a that's a really, really good thing. And also, the more opportunity you have of reducing your taxes today, the more opportunity you have to plan for future taxes tomorrow, right? So taxes is all about planning. It's about it's about being proactive. The people that pay the most amount of money in taxes are the ones that fail to plan. The people that pay the least amount in taxes are the ones that plan all year long.

SPEAKER_00

Uh, we've covered uh most of my major questions. Is there anything I missed, or do you have any uh other tips that you give to you know typical uh investors that are something I want I want everybody to kind of consider, and and and I want you to figure this out for yourself because it's different for everybody.

SPEAKER_02

But we have a tax code that quite honestly, the amount of taxes that you paid is is about 50 pages of the tax code. That's all the tax code, the 50 pages of the 70,000 plus page tax code is about how much you owe in taxes, the rest of it is about how you get out of paying those taxes. Think about that for a second, right? So, and how as a W-2 employee do you fit into those 70,000 pages and reduce your taxes? Well, unfortunately, the tax code wasn't built for W-2 employees, it was built for real estate investors, it was built for entrepreneurs, and it was built for people that are willing to take risk, employ people, house people, and better the world. That doesn't mean just because you're I don't mean by saying that that because you're a W-2, you're not trying to better the world. But what the IRS has said is hey, if you are somebody that's trying to own a business and employ people, put clothes on people's backs, trying to provide housing for people, we're gonna give you good benefits. So if you're kind of in this world and you're sitting here thinking, hey, I'm a pretty high-earning W-2, but you know, it's wearing me out. Uh, they got me working 60, 70, 80 hours a week. Maybe find that passion. Find what you're passionate about. If you really want to make a dent in your tax bill, you got to start with becoming an entrepreneur. You've got to get out of the rat race of being that W-2, and you've got to get into being an entrepreneur. And then once you become that entrepreneur, then the world kind of opens up for you as far as tax deductions, reducing your taxes, and ultimately getting you in a spot where you could make less money but take home more as an entrepreneur than as a W-2 employee. So I would consider that if you're somebody like that 55-year-old that might be in five years looking to retire. Hey, maybe this is an opportunity for you to become an entrepreneur, to start your own business. You can potentially buy a business. There's all kinds of tax benefits buying businesses and utilizing the tax code to work for you because it's not built for W 2 employees. And for companies like myself, I don't even take on individuals that are W-2 because there's very little I can do to help them. Uh, that, you know, other than if they got passive income, I can work in and find them some passive losses. But above and beyond that, it really becomes difficult versus you know, somebody like Jack or another entrepreneur, we can do a lot of things to do some tax planning for those. So, you know, if you're in the W-2 grind, we got to have you guys out there. But if you are ready to move on to the next, the next phase of your life, uh, entrepreneurship is the way you reduce your taxes.

SPEAKER_00

Great. Well, Marcus, thank you so much uh for your time and uh and your expertise. There we go. I like it.

SPEAKER_02

I encourage you if you are one of those people that you're like, hey, I'm I want to get to that next phase of my business, I just don't know what it looks like. You probably need Understand where you're at financially, right? To make that decision, to get out of wherever you're at in business and roll on to that next phase. It's a financial decision as much as anything. And that's what we do at Beck CFO and CPA. So feel free to reach out to us at BeckCFO at BeckCFO.com if you want to learn more about how we can help you understand when it's time to move on to that next phase of business. Until next time, keep making better decisions so that you can get better results.

SPEAKER_01

Thanks for listening to Strength in Numbers. If you're ready to take control of your finances and start building real wealth in your business, be sure to schedule your free discovery call with Marcus at BECCFO.com to get started. Thanks for listening, and we'll see you on the next episode.