Mastering Tax Advantages in Real Estate Investing with Brian Boyd- REIA 462

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now, here is your host, Dr. Allen Lomax.

Enlightened investors, welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen, and I'm so delighted you are with us today. And I know you are going to be delighted because we have with us an expert on the tax code who's not only an expert on the tax code, he's also an attorney and a real estate investor. So we have a wealth of information for you today. And with us is Brian Boyd, and he helps real estate investors like us to build wealth through using the tax code. And he is the author of Replace Your Income: A Lawyer's Guide to Finding, Funding, and Managing real estate investments. And when not practicing law or working on his real estate ventures, Brian can be found on the Brazilian jiu-jitsu mats at his local gym. And Brian just informed me of something I never heard of, and that is Brazilian jiu-jitsu. So, welcome, Brian. We're so glad to have you with us today. So, just tell us a little bit about who you are.

Well, thanks for having me this morning. I do appreciate it. So, I was born and raised in Chattanooga, Tennessee. I went to the University of Tennessee in Chattanooga, and then I matriculated on to law school at Samford in Birmingham, Alabama, where I graduated with my JD, took the bar, passed the bar, and then went on to Georgetown where I earned a master's in tax law and then I worked in DC right out of grad school for a company called Ernst& Young. I think some of the— most people probably see them at golf tournaments. They sponsor events, things like that. But it's a huge accounting firm and I was doing corporate tax transactions there with them and I really got to see a lot of things. And then eventually I moved back home to Tennessee and I joined a firm in Nashville in 2007 as a transactional tax attorney, and in 2008, the world fell apart. So, I've been here ever since, but I've been out on my own. I have my own firm, and we focus on real estate business, and I handle tax issues for clients, everything from litigating with the Department of Justice to giving strategies and helping people navigate the tax code, especially real estate investors. And that's where the intersection section of my interest in real estate and my legal practice of tax business and real estate really do intersect. And it's one of the reasons I wrote the book, was I was having the same conversations over and over and over again. I was like, well, you know, why don't I just make this simple and write it down? And then people can just, instead of paying me my hourly rate, just buy this $19.99 book and And read it. It's far cheaper. So, yeah, I do seminars now. I do social content to help people understand the tax code and real estate and how— and we were talking before we went live here, how there is nothing in the market that I know of that is as tax-advantaged as real estate. And not only that, And we didn't even touch on this, but 80% of all millionaires in this country earned their wealth through real estate. So I really think if people can just get over the phobia of the word tax, they would be much happier understanding that real estate investing is truly a phenomenal vehicle for them.

Well, absolutely. I totally agree with you. And I know the benefits are fabulous because Ever since I started investing in real estate. I was working my W-2 job at the university and have never really had any desire to depart from that. But my first real estate investment, to my surprise, eliminated my tax liability almost entirely. And I was getting a Fairly good salary as a university administrator. And after that first— it was just a single-family home— and after that first investment, and looking at April 15th with dread went away. I started looking forward to April 15th because I got back almost everything that they had taken out of my salary throughout the year. And that was just with one. With just one rental. So I know it's an amazing, amazing vehicle for that. So tell us, Brian, how can we build wealth using the tax code and do it legally?

Absolutely. And I think that's the important focus, right, is, you know, don't cut corners. Don't try to get one over on the IRS, because I promise you, they have more resources than you do. The, the better way to handle the tax issues are to meet with somebody like me or your CPA that knows real estate and let us walk you through specific code sections. For example, let's talk about Section 179. That is the depreciation section in the tax code, and that's really where the, the bulk of your deductions are going to come from. For an asset. What do I mean by that? Well, real estate is typically depreciated either 27.5 years or 39 years, and that is 27.5 years for residential and 39 years for commercial. Well, once you have that basis in mind, that is your starting point. Then you can start utilizing things like cost segregation studies where you break apart the property into its individual components because a house is more than just— The structure itself. It's everything within the house. It's the lighting, it's the wiring, it's the flooring, it's the cabinets, it's the appliances. And all those things have their own life. So under Section 179, and it's called MACRS, Modified Adjusted Cost Recovery System, I think it's been a while since I've looked at it, but you break everything into its life and then you start depreciating them over their natural life. Well, what this does, it has the effect of accelerating depreciation. Now, the great thing that we have from the most recent tax act passed in 2017 is what we call, uh, bonus depreciation. So bonus depreciation falls under Section 168, and that allows you to take a percentage in this year of the purchase price and fully depreciate it Now, why is that important? Well, in 2017, all the way up to 2022, it was 100%, and now it is 60%. Last year was 80%. Next year it's going to be 40%, then 20%, and then it's going to phase out to zero. But that allows you, for example, let's use an air conditioning unit. So let's say you have a single-family home, you have an air conditioning unit on it. Let's say you paid $10,000 for the air conditioning unit. Well, what the tax code allows normally would be to do a cost segregation study and depreciate that asset over 5 years. So you get $2,000 in depreciation a year. Well, if you overlay bonus depreciation, you could take 60% of that this year. So your $10,000 asset, you can actually deduct and depreciate $6,000 worth of it. Now imagine extrapolating that across all the assets in the house. Well, that's a big chunk of change for you, especially when it comes time— and we're coming up on it, April 15th— to file your taxes and to take all the deductions to offset your income. So that is the most important thing people can really take away from real estate investing is that, look, it's There's a public policy within the tax code. I know a lot of people don't understand that, but the tax code is written in such a way to encourage certain conduct, certain actions, and it rewards those actions. So when the Ways and Means Committee in Congress sits down and they're having their meeting, and let's say they're talking about depreciation, they're like, well, how has it impacted the economy? And they'll do the reports and then they'll take a look at it and they're like, well, maybe we need to extend this because it seems Like it's stimulating a little bit of purchasing. So, that's very important because the public policy in the tax code encourages real estate investing. In fact, the government is not in the business of building and housing people. So, they don't want to go build buildings and then put tenants in it because that's not their job. They would rather private citizens, you and me and everybody else, to develop, own, and rent out real estate. And they reward us for that. They reward us in the form of depreciation and, you know, tax deferral through Section 1031, 721 DSTs. That's a Delaware statutory trust. And these other, you know, mechanisms within the tax code that are completely legal and they are there specifically for that. In fact, 1031 exchanges are specifically for Real estate sales. So the public policy is, is basically telling the public, hey, we want you to not pay taxes now. We would rather you take your profits and we're not going to tax you on it. We're not going to make you do depreciation recapture. We're going to allow you to take that and go buy more real estate with it as long as you follow the rules in doing that. And so I think that's very important for people to understand. Because, for example, and I'm going to use very easy numbers here, let's say you bought a property for $100,000. You've depreciated it through a cost segregation study. So about year 7, you're really at the peak of all the depreciation you're going to take from that property through a cost seg study. Well, what do you do? So you've held it for 7 years. Maybe it's worth $200,000, maybe $225,000 now. Well, when you sell it, the government says, okay, well, as long as you buy another property for at least that $225,000 that you sold it for, we're not going to make you pay taxes on it as long as you follow our rules. And there are rules around 1031 exchanges. You have to use a qualified intermediary. You can never touch the money. It's got to go from this sale to that sale and without you touching it. But the point remains is that is there To help investors buy more property because you don't have to buy one property. You could actually take your profits and buy multiple properties. So it allows you to scale a lot faster and do it over and over and over again, which is the the public policy behind you know the tax code that's written for real estate investors. So for your your listeners out there, I would encourage them to. Read up on these things. Now, you don't have to be an expert. I promise you, you don't. You just have to know the basics. And if you can speak fluently within the basics of the tax code as it relates to your investments, not only are you going to become more comfortable when it comes tax time, but you're also going to understand how to start using these mechanisms to grow your wealth. Because, for example, my wife and I have, I think we've got 4 short-term rentals and then we have 12 single families and 2 duplexes. So when we sell, we're going to either buy up in the property value where we're going to take the money and split it amongst all of, all the things we can get our hands on. So for example, And let me explain this to your, to your audience, because this is a good example of how we use a 1031. We bought a short-term rental in Gatlinburg, Tennessee in 2017. We paid $400,000 for it. Now, we did not pay cash for it. We put money down and then we financed the rest. And I encourage your listeners to never pay cash for anything. It's not a great idea. Use leverage, please use leverage. But we sold it a year later for $475,000. So we took that money we made, and we went to Chattanooga, and we bought 13 single-family homes with that profit. Because we got our equity back that we put down, so about $100,000, then we got, you know, our profits. And then we moved on and we scaled. So that property in Gatlinburg that may have been generating about $5,000 a month, well, now we've got these 13 single-family homes that are renting on average at the time for about $800 a month. So we certainly scaled up in revenue, we scaled up in doors, and we definitely scaled up in tenants. But the point remains is that is a concept that the Internal Revenue Code encourages. It really wants you to do that because good landlords are hard to find. And we personally manage our properties, so we know every tenant, we know all their children, we know intimately these houses. So that's one of the things that the public policy that the Congress has implemented into the tax code. And if you use the tax code right, it's not punitive. It rewards you, in fact. And it rewards you, just like you said, with getting your tax money back if you're a W-2, or quite frankly, it could replace your income at some point. So, that's something that I think your listeners would be very interested in understanding. Now, as it relates to the tax code, there are a couple of things that people need to understand. The tax code is Byzantine. I mean, that's why people go to school to actually learn the tax code. And I promise you that if you are able to start putting together the pieces like the gears of a machine, then you can really accelerate your wealth in a very short amount of time. Now, a short amount of time to most people is like, oh, I can do it in a month. No, a short amount of time in my mind is 5 years and under. So, you know, just know it's not going to happen overnight, but it could happen relatively quickly, you know, given your work life. So yeah, it's one of the things I like to educate people on.

Enlightened Investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one. Yeah, I'm glad you mentioned that. That, I mean, a lot of people think that this is a get-rich-quick scheme, but there's, I mean, there's no scheme about it. It's extremely legitimate. And it's not get-rich-quick if you're thinking within the next month or within the next year, but it is just like you just illustrated. It is like a snowball rolling down the hill. It just, once it gets going, it just begins to accumulate. And, you know, it's not a get-rich-quick scheme. And once it starts accumulating, then yes, you can really build some wealth through this process. But you're right, it's going to take 5 years before those returns really start coming back to really start making a significant difference in your financial well-being there. Well, if you haven't already shared with us already, there are— there's one thing that many rich people will not share with us. You will. So, what is that?

And it's how to use the tax code in a way that is not only legitimate, but it also allows you to pay almost zero federal income tax. Now, let's be very clear. You're going to pay tax one way or the other, whether it's property tax or sales tax or employment tax if you're employing people. But the tax code, and the wealthy understand this, is geared towards encouraging that conduct again. So, what the wealthy will do is once they've built up a certain portfolio amount, they stop using their own money. They start using leverage. And I kind of touched on that earlier when I said don't pay cash. So, the wealthy will use leverage quite a bit to accelerate their growth. Moreover, The wealthy mindset thinks of money differently than those that are wage earners. And what do I mean by that? I mean that if the wealthy get a huge tax return, for example, they're not going to take that money and go on a vacation. They're not going to go buy an exotic car. They're not going to go buy fancy clothes. They're not going to live. In a very loud way. They're going to take that money and figure out how can we deploy that. So instead of buying those things I just mentioned, they're going to go buy an asset, and that asset is going to do multiple things for them. One, it's going to generate money because they want cash-producing assets. It's going to appreciate in value, and it's going to provide them with tax benefits that they otherwise would not have. For example, if you bought a car, And it's your plaything. Well, that's money wasted. It's gone. What do you, I mean, now you gotta earn more money to replace that. What they do instead is they think of things in the terms of what will it give me? And by buying an asset, a house, a duplex, multifamily properties or short-term rental, it's gonna give you tax benefits. It's gonna give you cash. And it's going to go up in value over time because historically— now I say historically, but I think we both remember 2008 to 2010, it was kind of a rough time. But, um, historically real estate goes up in value, and conservatively speaking, between 3% and 5%. But I think since COVID I think we're seeing, you know, valuations go up 10% on average. I know in the Nashville area where I am, it is going up that much. So That's how the wealthy think. They think of money as a tool, and that's the mindset that most people don't understand. Because if you're, if you're living paycheck to paycheck, real estate investing is probably not for you right now. Stabilize yourself a little bit more, save up some money, and then go buy your first asset. But the wealthy think of money as a tool. It's just a tool. You know, just like a backhoe is a tool for a construction site, or, you know, a shovel is a tool for a gardener. So, these are just tools, and that's how the wealthy think. And if you think that way, then you're not so focused on how much money did I make this year. As long as your needs are being met, you're not thinking, oh, I've got to keep up with the Joneses. I've got to make more than my neighbor. Or I've got to have a nicer car because the wealthy aren't thinking about that. My wife and I both have good jobs and, you know, I'm a lawyer. She works for a big pharmaceutical company and we have this real estate, but I drive a pickup truck and my wife has a company car and then she has a company car for the real estate as well. But we're not trying to be the flashiest people on the street. You know, right now I'm wearing a ball cap, a a hoodie and sweatpants, and then I'm going to go to the office and do some work. But if you saw me, you wouldn't think we had all this real estate. And that's the mindset that wealthy people think. They just don't care what other people think. They don't care about the flash. And if your listeners can get comfortable with that, then I think they're really on a good path. Now, I say that with the caveat that there are social media influencers out there like, you know, the Grant Cardones and the Kris Krohns and the people that are showing their Lamborghinis and their Rolls-Royces and getting on their private jets. Hey, that's great. And real estate can get you there if that's what you want. But mostly real estate for the average investor starts with an accidental landlord situation where, oh, I don't need to sell my house. I'm just going to keep it and rent it out while I buy this other house and move into that. And you suddenly become a landlord, and then you start realizing, oh, I can now depreciate that house. I'm making money. It's paying the note on it, or it's paid off, and I can take that extra vacation, or I can put my kid through college, or I can buy that car, or my car payment's not quite such a burden anymore because I have this extra money coming in. So, those are the mindset that most wealthy people won't tell you about. But it's also predicated upon understanding how money works, the time value of money, and how to manipulate that money through the tax code. Because there is different treatment for money generated either passively or actively. And then we start getting into the passive activity rules under Section 469, and that's another code section that people need to learn. But that's what most people won't tell you about real estate. And that's what most wealthy people don't want to share with you. Because quite frankly, if you're being flashy, they don't want anything to do with it. They eschew that kind of behavior because they would rather just go buy another property and, you know, do it over and over and over again. And suddenly, you know, you're BlackRock. So—

Exactly. Just one thing. You had said that if you're just getting by, it's not the time to to invest in real estate. And I might take a little exception to that.

Sure.

If you're just getting by, I would say learn about house hacking and get you a single-family home and split it up and share it and have somebody else pay your mortgage. If you're just getting by, that will help you tremendously to get on the road to developing your wealth.

And I agree. And, you know, I guess maybe I should rephrase that and don't say— don't, don't go buy a 5-bedroom, 6-bath house and expect to Airbnb it if you don't have any money. There are ways to get into real estate. You can house hack like you just mentioned. You can bird dog deals and add value to a partnership. You may not be the money guy, but you can add value to the deal by finding the deal, by setting up the financing for it, by bringing the money partner in, by managing the property. And that would give you some equity, which starts you on your path. So there are ways for people that have no money. And in fact, I think that's a great lesson for people right out of college that, hey, don't go buy a house. Or if you do buy a house, get a roommate and offset your expenses every month. Get 3 roommates if you're in a, you know, 3-bedroom house, you know, put bunk beds in, make as much money, alleviate the pressure on your life so you can then go do what you want to do. I have a client, and this is a really great story. He was on a nuclear sub.

Mm-hmm.

And when he got out of the Navy, he went to college on the GI Bill and He, at the same time, got his real estate license. Well, he had saved enough money and he got a VA loan and he bought a house and he moved people in. And so the upstairs part of the house he lived in and then downstairs, which is a walkout basement, he rented out. And so he was house hacking along the way. And then suddenly he earns his MBA and he's off to the races selling properties. And things are going great. And now he's a great guy. He lives in Florida now, but he has hundreds of properties and he's probably 35. And, you know, he's doing just fine. And it all started from house hacking. This young man right out of the Navy, and he's like, I can figure this out. It's possible. So I'm going to do that. And that's what he did. And it all started with house hacking for him.

Yeah, it's a great way to get into it. I think one of the lowest risk ways to actually get into real estate investing with a property that depreciates and appreciates. Of course, you mentioned the bird dogging and different aspects like that. That to me, that's just another job, but the house hacking is actually an investment. So, but there are As you mentioned, there's many, many ways to get into real estate investing even if you have no money of your own there. Well, share with us this— oh, we're getting close to the end of our show here, but share with us some of the horror stories of people you have worked with who misused the tax code and found themselves in hot water.

Oh my. Um, so my day job, I'm a lawyer. And I basically solve problems for people. And this doctor came to me and he hadn't paid taxes. And this was probably in 2018. He hadn't paid taxes since 2004. And he was— this is really interesting. He was traveling. He was doing like contract work as a surgeon. So he would get on a contract and he would go work at this hospital. But every time he did it, he would try to stay on an Indian reservation. And the reason for that is, well, he liked to gamble. That was one part of it, but he could cash his paycheck. So he was cashing his paycheck at the casino and just living. So the IRS comes knocking and they're like, hey, you haven't paid in a while. You've got this massive liability.

We're—

we want to talk to you. So he came to me, he's like, hey, what do we need to do? I'm like, well, let's, let's meet with them. Let's get your returns filed and let's come in out of the rain. That's a term I borrowed. It's called coming in out of the rain. So let's come in out of the rain. Let's talk to the IRS. Let's set up a plan. And, you know, you're not going to enjoy it, but it's better than prison. So we did that and we had a meeting scheduled. It was down in San Antonio, Texas, and you know my client is there, and you know we have the meeting. Everything goes well. We're supposed to do something a few weeks later to get them the documents they want so we can start the payment plan, and he disappears. Disappears. I haven't heard from him. I haven't seen him since. I don't know where he went, but that was kind of a nightmare because. They're talking about criminal prosecution and tax evaders. They will put you in prison for that. And they, they knew how much money he was making because they were getting the reports from the companies that were sending out the 1099s to him because he was a contractor. And so they knew he had made all this money. And I think his liability at the time was like $1.4 million.

Okay.

And then with your— the failure to file penalties and the failure to pay, it just, it just went on and on and on. I was like, Oh God. But, uh, that was one nightmare from a tax perspective. Another nightmare— this is, this is actually an interesting story. Again, I was down in Texas and my client was a hospital administrator, and the C-suite above him owned the hospital, and they were, they were pulling out all the money such that when payroll ran, it would bounce. So my client has signature authority on the bank account, and when he knew there was money in the account, he would handwrite a check and pay the nurse or pay the orderly or whomever, you know, to make it right so they could keep working and pay their rent. Well, the FBI raids because there's a lot of Medicare, Medicaid stuff going on with this, and they see the irregularities, and they see that there's the The company's undercapitalized, so they come in and they do the raid. And my client goes home. The FBI calls him back a week later like, "Hey, will you help us run this? We know you're not responsible for this." Well, he writes the ship and the company gets sold, and somebody takes it over, and it's a it's a functioning hospital now. But during that time, the IRS came in and said, "Well, because you were writing these checks." You're just as liable for not paying the taxes as the C-suite. And he was like, well, wait a minute, I'm the one that helped you right this ship. I didn't take any of this money. And they didn't care. It's a 6672. It's a failure to pay penalty. It's a trust fund penalty. And so, he's getting these bills from the IRS for like $2.3, $2.4 million of taxes owed. Wow. So what do we do? We we end up filing suit against the Department of or the IRS, the Department of Justice, and during this litigation, which went on for years, I think we filed in 2013. No, it started in 2013. We filed in 2015. He passed away in the middle of the litigation from pancreatic cancer, and so I had to substitute his estate in. And we had to keep litigating this. We got down to like weeks before trial, and I was on the phone with the Department of Justice. We're trying to work it out, and we ended up settling that matter. So they said he owed $2.4 million plus interest and penalties, and we settled it for $271,000. So that was a great story. It was a horror. Story for him because, you know, he was faced with this burden and then he got an end-of-life diagnosis and it was really upsetting, but we were able to resolve it in a way that, yeah, he didn't want to pay it or his estate didn't want to pay it, but it was the best thing for them because protracted litigation and appeals, it could basically bankrupt the estate. So, uh, yeah, I mean, those are 2 horror stories dealing with the, the taxes and the IRS. But that's, that's what people like me do, that we, we help you navigate it and try to resolve it.

Well, clearly it's just best to stay out of hot water with the IRS.

Absolutely. And just do it right. Just do it right, people.

Do it right from the start. Um, because like you said, uh, they've got deep pockets and it's difficult to win with them, and if you do win, it is going to be a very, very, very protracted victory. So yeah, stay on the right side. Well, Brian, it's been a wonderful pleasure having you with us today and a very insightful conversation. Uh, thanks so much for being with us.

Thank you for having me.

And Enlightened Investors, thank you for being with us once again today, and please take a moment to like, share, and subscribe And live abundantly, and we'll see you in the next episode. Enlightened investors, wait, wait, don't go just yet. I just want to remind you about our recently launched webinar that you will not want to miss. If you're at all curious and would like to learn more about how real estate investing can diversify your investment portfolio, alleviate the anxiety associated with Wall Street swings, leverage your 401s and IRAs to substantially increase the return on your investment, and can do all of this with turnkey, hands-off passive real estate investments, then you'll want to immediately go to stevetalker.com/webinar. In the webinar, we'll also address the common dubious investment schemes that you want to avoid. To access the webinar, go to stevetalker.com/webinar. I look forward to seeing you And the web now.

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