Advanced Tax Saving Strategies feat. Keystone CPA

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Got a very good show for you today. We're talking about everyone's favorite topic, which is taxes, or more precisely, how to save money on taxes by investing in real estate and other cool strategies. So we brought on some experts in kind of real estate accounting and really helping a lot of people save lots of money and even you know, people that have been working with, you know, quote unquote real estate CPAs for many, many years realizing, wow, we're actually not taking advantage of some of these strategies that we should be. And so lots of kind of in the weeds, you know, tactical ideas and strategies. But again, this is not tax advice. You got to go consult a tax advisor. But the point here is you need to have a tax advisor helping you manage your own situation, your investing strategy, the different types of income you're generating. And really, you know, focus on generating long-term wealth that is tax-deferred or tax-free. And so this is something everyone should be leveling up in their knowledge and learning how to do this better and better, myself included. So hopefully you enjoy this episode. I'm sure you get a lot of nuggets out of it. And please, if you are enjoying this podcast, share with a friend, leave a review, subscribe. We appreciate all that. Helps us get the word out and helps us continue to make this podcast worth doing and getting in front of more people. So thanks so much. Enjoy this episode. This is the Invest Like a Billionaire podcast where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to another episode of the Invest Like a Billionaire podcast. I'm your host, Ben Frazier, and today we have two guests that I'm very excited to have on the show, Amanda Hahn and Matt McFarland of Keystone CPA. So Matt and Amanda, thanks so much for joining us on the podcast.

Yeah, thanks for having us, Ben. Looking forward to it.

Yeah. So we're talking about everyone's favorite subject, you know, as we sit right now. That's right. At the end of 2023, it's probably released in 2024, but everyone's starting to think now, oh yeah, I'm going to have to send the IRS some money here soon. Got to be thinking about how to make some changes. But hopefully you might actually be getting a check back from the IRS. You never know. But I wanted to bring you guys on and, you know, this is a big part of wealth building, right? Is understanding how taxes impact, you know, the investment strategies and the returns that you're making and how those are treated differently. So give us kind of a rundown, you know, just some things that you're kind of thinking about right now as investors. Again, most of our investors are passive investors. They're investing in syndications or investing into one-off deals. Or different types of funds, but maybe don't have a holistic kind of tax strategy or picture about how they're investing. Right. And so they get maybe some surprises and, you know, first kind of just lay the groundwork of what are the things that investors should be thinking about. And we all hear about, you know, real estate is such a great tax-friendly investment vehicle and just give us kind of a rundown of some of these things.

You know, I think one really important to understand is that even as passive investors, there are tax benefits that are available to us. And unfortunately, there are a lot of CPAs, tax advisors who tell clients not to invest passively in real estate because there are no tax benefits. And I think it's important to understand, you know, when somebody says that, like, hey, there's no tax benefits to being a passive investor, that tax advisor is taking a very limited look. All they're saying is that, hey, you might get depreciation and expenses and things like that from your real estate passive deals, but you're not able to use it to offset taxes from your W-2 income, right? And so although that's true, but I think what they're missing out on is the fact that you are now generating additional income, you know, in the form of cash flow, right, from your deals. And not paying taxes on that. And so when you take a look at everything holistically, it's really important to understand that although you might not be offsetting taxes from W-2 income with your syndication real estate, but you absolutely are generating more income while not increasing your taxes. And so that in itself, I would say, is a tax benefit. And the best part of that is anybody can utilize it, whether I have one syndication investment or 20 syndication.

And the key there is you're putting your money to work for you, right? Your people are working the W-2 jobs or investing passively, but they're leveraging that money and all that work they've done to grow their wealth through somebody else's expertise, which is awesome, right?

Right, right. So if I invest in syndication, I send money to a sponsor. They're operating the assets. It's multifamily asset. And they send out a tax return as an owner of that investment in the syndication. I'm a part equity owner. I get a K-1 that shows my ownership, my income, my expenses, and any tax losses. And then I can use those on my personal tax return against other passive income. Right. So we have different buckets of income that we need to understand as investors. And a lot of people if they are a high W-2 income earner, they're generating a lot of, you know, W-2 earned income, you know, that is in a different category, different bucket. So you can't take the losses against those. But any other passive income, you can take it against those. So can you give us just a simple breakdown of what are some of the main big categories of the types of income that can be generated and kind of where the deductions from real estate can impacts? I know we have passive income, we have capital gains, we have earned income. Can you give us a little breakdown of that?

Yeah, I think it's important to understand because like you said, right, we as passive investors and we use the word passive assuming this particular investor or their spouse otherwise does not qualify as a real estate professional, right? Which we can cover a little bit later. So we'll just assume it's like one person or married people both working a high, you know, W-2 job or running a business that's not real estate related. The question we get all the time then is, okay, well, what type of income do these passive losses help to offset? And passive income actually comes in a couple different forms. You mentioned capital gains earlier. So absolutely, there are types of capital gains that could be considered passive. An example would be sale of rental property. And that's true regardless of whether it's sale of your own rental property on Main Street or sell of a real estate property from a syndication, right? So if I invested in a syndication, syndication number 1 with Ben, that has a huge gain because we exited the property. I have a different investment with Ben's other syndication that generates a loss on a K-1. What that means is the K-1 loss on one will be able to offset the gain on the other real estate property in terms of capital gains. So that's just, you know, one example of the types of capital gains that could offset. But really important to distinct, even, you know, within capital gains, there are differences. So if I were instead to sell Tesla or Apple stock for capital gains, then typically my rental losses would not offset that type of capital gain. And it's confusing to people because They're both called capital gains, right? It's just one from real estate, the other is from stocks.

And is that because of the nature of passive versus active, or it's just a different type of asset that differentiates those?

Yeah, it's more of the activity, right? So that, you know, you're not, you know, someone's buying Tesla and Apple stock, you're not controlling anything there, obviously, you know, it's just kind of a, it's almost like what would they call portfolio income, but you buy a rental property, you invest in a syndication that has rental properties. That's a different asset class. That's— and that's where they say, yeah, if you're generating capital gains from selling that underlying asset, then that can be considered passive income. So that can be huge when from a timing perspective, if you've got somebody investing in syndicate, you know, a couple of new syndications, they're expecting some losses from depreciation, cost seg, but in the same year they got a, you know, K-1 sold their asset and they're cashing out. Now they got gain on that one. Those two can offset each other in such a way that they don't have to pay, you know, may not have to pay any taxes on that sale.

Yeah. I mean, we see this a lot with some of our clients who've held real estate for many years. You know, a lot of people who are nearing retirement age or already retiring and, you know, they have their real estate, but they want to kind of exit the properties, right? They no longer want to manage it. So they kind of want to be something more passive. But for a lot of our clients, they just love real estate. You know, they're not about to sell and put that money into the stock market for the first time when they're in their 60s or 70s. But at the same time, they don't want a 1031 exchange into something else that's bigger that they have to manage. And so this works out pretty well too, where it's like, okay, I'm selling my own properties for capital gains and I'm going to just, you know, leverage other people's time now by putting it into syndications and be able to sort of have an offset strategy that way too. You know, I know we're so far we're talking about real estate, right? Your own versus a syndication versus multiple syndications. We also see a huge opportunity with respect to using passive losses on other business investments too. So, you know, great example is you might be a, you might be an orthopedic doctor who invests in some imaging centers or surgery centers, right? That's where, that's, you're not in control, you're not like the full ownership of it. But if you're generating passive income from some of those business investments, then oftentimes rental losses from syndications can offset those as well with respect to overall taxes. So again, you know, still not offsetting W-2 income, but absolutely a huge tax benefit for someone that is a passive investor.

Yeah, I mean, as an example, we had a client come to us a couple of years ago that had a similar profile. He was, you know, physician, medical, some— he was making like $1 million of passive income from these other surgery centers he was getting. And so for him, it made natural sense. He wanted to invest in real estate and like, no, you don't need to be a real estate— for your first million dollars of income, you don't need to be a real estate professional, right? You can just invest passively, find the good deals, get those losses those first couple of years and, you know, save taxes on a million dollars of income. It was obviously a big win.

Yeah. No, I'm so glad you brought that up. There's so many different strategies and I think you know, my excitement to get into all the details. I love this stuff. Yeah, I think taking a step back, it's, it's so important to understand what's available. And you said kind of early on in your first comment that a lot of CPAs, if they're not, they're not, you know, understanding some of these nuances of the tax code and really going at it from a strategy standpoint, not just I'm going to do your tax return and check the boxes, but let's actually shift the way that you're investing, or here's some things that you could be doing to improve your tax situation. Having a strategy in place and knowing what's available is so important, right? And I see so many people, myself included a few years ago, where you just kind of hear some things, oh, see, real estate's great for tax benefits, and you start investing, but you don't understand some of the nuances of it, right? And maybe you don't even need to be a real estate professional in that scenario, which, you know, which I'd love to get to in a minute, but talk a little bit about why having a tax strategy is so important and maybe some examples of, you know, case studies that you guys have worked with to where, you know, it's been able to kind of just rearrange a few things and kind of make, make a pretty big difference.

Yeah. I mean, there's so many different things to look at and every investor, every taxpayer is very different. You know, you might both work at Google, But, you know, maybe similar amount of money, but your tax strategies might be very different. Maybe one person has a spouse who could do real estate and also owns another rental property. The other person just purely has a syndication that's single, right? So I think it's that, that's the benefit of planning is having a tax advisor look at what you have going on. And even more importantly, what you plan to do in the coming 1 to 3 years and really mapping out the plan on like, okay, here's what you're planning to do in real estate. Is that really the best way to do it? Or can we make some small tweaks so that you can maximize your tax savings from it? You know, in that example that Matt just talked about with the client who had a huge amount of passive income, what was really interesting was, you know, I think in the tax world when you hear the word passive income, passive loss, it almost seems like a bad word. So for a lot of CPAs, the natural tendency is to say, let's not have it be passive, right? Let's call it active. And I think, you know, that's an example of where we see this misdiagnosis. CPAs just automatically try to classify some income as active when with the right analysis, like in that example, we said, hey, you know, he's actually passive, right, in these other investments that he's in. So let's accurately classify them as passive on the return. So that he can use all these passive losses instead of just having that cookie cutter, like, hey, everything that I can, I'm going to try to call it active. Sometimes it's detrimental.

And I think too, to your point earlier, right, it's, you know, we're talking late December, this might air January, early next year. So from a planning perspective, that's a great time of year to start planning, right? Because it's the more, the earlier you do, the more options are going to be available to you, right? It's a lot harder when you come to your, CPA in April or October, talking about last year, at that point in time, all they're looking at is let's file your return with the correct numbers, put on the right forms based on what has happened already.

Right.

But now we want to talk about what's going to happen going forward. What are you going to do? What's your goals this year? What are you looking to do? Because then we can tweak things. There's a lot more options available. So I think it's a, it's a great time for people to start thinking about that for sure.

Yeah, absolutely. And it's a little hard to try to maneuver within the tax code when you've already locked in all your income for that year and you're looking backwards, right? But looking forwards, I think you can get a sense of what am I projecting my income to be and maybe different categories of income, and then how do I potentially invest accordingly to create the losses that I need to shield some of that. So let's talk a little bit about, because this is a subject that we've talked a lot about on our podcast and you know, I think there's still some mystery around, you know, the real estate professional status. And, you know, so I was just talking with a friend the other day. Now he's making $500,000 in W-2 income, has a great, great job, great career. His wife, you know, stay-at-home. Their kids are getting a little bit older, so they're going to be in school now. She's going to have a little more time. And I'm thinking, I mean, you're paying a ton in taxes, right? At that income threshold, it's all W-2. I'm like, you should talk to your wife about becoming a real estate professional, right? And what that looks like. But talk a little bit about what that means and where are the kind of dos and don'ts and things you have to do. I mean, you can hit some of the rules, but also some of the strategies that maybe you advise folks in that situation to consider, right? Because from my standpoint, if you can become a real estate professional, even generate a little income or even not, I mean, even if it's neutral, if you can now as a married filing jointly tax return, get all of your income kind of, you know, unshielded from other losses that you're generating, then that can be a pretty big impact. But you still have to have losses being generated to, to use in that scenario. So in this scenario, this individual has not made many investments into real estate. So it's, you know, it might not be a huge impact now, but kind of moving forward and kind of tax planning, you know, so talk about that a little bit. I think this is a really, really helpful or interesting topic for a lot of people.

Yeah. You know, for real estate professional, I guess we'll start the rules first, right? If you're someone of higher income, higher income means $150,000 or more of income in total, that means your rental losses, should you have any, from tax strategies are considered passive. And that's what we're talking about earlier. If you have passive losses, it doesn't offset W-2 income, it only offsets other passive income. However, there's a loophole around that, which is the real estate professional loophole. What that means is if you or your spouse is a real estate professional, then your rental losses doesn't just offset passive income, but it can also be used to offset W-2 income as well. And so that's the benefit. So then now the question becomes, what is a real estate professional? And contrary to popular belief, you don't have to be licensed in real estate. You don't have to become a realtor, start showing houses on the weekends. But there are 3 rules you have to meet in order to be a real estate professional. So in your friend's example, we'll use the spouse because that's the more likely person. So the first rule is you have to spend more time in real estate than your job. Okay. So when I say the spouse in this scenario, because they don't have a job versus if it was the husband, let's say he would have had to have more time in real estate than his job, which becomes almost impossible.

Or if the spouse maybe is working part-time, maybe they're working, you know, X number of hours a year, you need to have more time in real estate than that job, right? Yeah.

So that's the first rule. Second rule is you have to have at least 750 hours in real estate. So this would be the relevant one for someone who doesn't have a job. So if you don't have a job, you still have to have at least 750 hours. And then the third rule is material participation. That means typically at least 500 hours of hands-on work with respect to your rental property. Hands-on doesn't mean you have to be like swinging a hammer, right? But it means things like you're doing on a day-to-day basis for the property, managing it, you know, dealing with contractors, all that kind of stuff. And so again, what's the benefit of all this? Well, the benefit is if one of you, you or your spouse meets all three of these rules, then to the extent you have rental losses, you can use it to offset not just rental income, but also taxes from your W-2 income as well. And so this is where you'll see people who say like, I made $500,000 last year and I paid no tax. Odds are they're using this strategy along with, you know, a couple other things. So yeah, I mean, we also have clients who, whose spouse is like, I don't know, kids are growing up. I don't know if I want to be real estate professional. That sounds really scary. I don't know if I want to do it. The first step I think for anyone is to look at the numbers, right? What do the numbers tell you? It could be a situation where it doesn't benefit them at all 'cause they don't own any real estate. But it also could be a scenario where we're like, hey, if you buy a couple local properties that you can self-manage, you also throw some money into syndication investments, then maybe you'll save $200,000 in taxes. Then maybe that's a different conversation with your spouse 'cause they're like, I would love to pay $200,000 less in taxes.

Taxes, right? Yeah, absolutely. And I mean, there's another scenario I had with a friend. Both spouses were working and, you know, they started talking with a CPA and started running the numbers to your point. And they realized, you know, this, you know, one spouse is making a great income, but they actually realized based on the total income they're making, and if one of them took a step back, quit their job, and actually became a real estate professional and they had a few rentals already, but they're going to buy a couple more, they would actually keep more income after taxes with actually stepping away from the job because of the amount of savings they were going to get. So this is the thing that people don't understand, right? Because if you're in the high income bracket, you're paying anywhere, what state you live in, 35, 40, 50%, you know, tax rates all in. And that's, if you can erase all of that, you just gained another income potentially, right? So that's the power of evaluating this. So in this scenario with my friend, I was, the first friend I was talking about, they already own a rental. And so I said, hey, you know, kind of save up and build, you know, buy another one or two. And then all of a sudden it gets pretty simple to kind of, or not simple, but it's, to meet the minimum requirements is a lot simpler, right? One of the things you said, you know, not becoming a, a realtor, but that is an option too, right? If you do become a licensed real estate agent and that can help towards some hours there. And what are some other kind of ways? I mean, buying single-family rental properties is one approach, probably the most common approach. But what about Airbnbs? What about becoming a realtor? What are other kind of strategies Have you seen that that can work with that?

Yeah.

I mean, in terms of, you know, the hours, like, you know, or with respect to real estate professional and, you know, it's really applicable as people that have kind of long-term rental properties, we can talk about short-term rentals too. But in terms of those hours, yeah, I mean, being a realtor and having hours doing that as a 1099 person can count towards those 750 hours. And, you know, and the more time in real estate than your other job test, anything in real estate really can count towards that. So if you're, I don't know, you're fixing your fix and flip, you're wholesaling, you're a property manager for maybe other people's properties, all that kind of real estate time can count towards that. Yeah. And then, you know, other things like we have, we have a lot of clients who are investing in short-term rentals. So they are maybe, you know, client profile might be, you know, one spouse working full-time, maybe it's both spouses working full-time and they're not, you know, they're not going to be able to quit their job or, you know, cut back half to half time and do real estate professionally. So for them, they're looking at the short-term rental market where the strategy can kind of be the similar where you're using, you know, cost, you know, depreciation, maybe cost segregation. So you're trying to create losses on paper for your rental properties. I mean, short-term rentals use those losses to offset other income and the threshold, it's a little bit easier to meet with respect to short-term rentals.

Now, are there any restrictions with short-term rentals? Because I've heard that that's viewed more as like an operating business than real estate activities. Is there kind of some nuance to how that is or is just difference of opinions within the accounting world?

Yeah, I mean, we call it the short-term rental loophole. And the reason for that is if you invest in short-term rentals and you create losses on those properties, you don't have to be a real estate professional and you can potentially use those losses against W-2 income. As long as you can meet material participation. So if you meet material participation hours, right, and you could, you could still be working your W-2, that will be a side hustle and you can use it against that income. And the reason for that is not necessarily operating business, but it's because short-term rentals, the IRS does not deem it as a rental property. And so for that, purpose, because it's not a rental property, then you don't have to be a real estate professional. So this is where we're like, you know, we see people who are like, hey, I have a couple short-term rentals, I spend at least 500 hours on these properties, now I've met material participation and I can just use it to offset W-2 income.

So yeah, now it changes from being a passive loss to a non-passive loss, right?

Yeah. So really great for high-income earners, business owners who really just want to do real estate, you know, as a side hustle. And this is an area I think we see probably has become one of the most common tax mistake areas we see just because a lot of CPAs don't really understand. Not most CPAs don't really understand real estate in general. Right. And for those who do, short-term rental loophole is like within that niche. It's like another small area that you have to go down a step further. And so this is one we see all the time. People tell us like, oh, well, I bought all these short-term rentals, but my CPA says I can't use it. Because I'm not a real estate professional. So that's a really important key takeaway is that you don't have to be a real estate professional when we're talking specifically about short-term rentals. Right.

But if depending on how much time you are spending, you hit the minimum thresholds, you actually could be a real estate professional, you're saying, by managing those rentals. Is that right?

Possibly. So, I mean, I think the easiest way to explain it is there are actually two different buckets. So if you happen to be someone who has long-term rentals and short-term rentals, Part of the hours do have to be tracked separately. So like Matt said, all types of real estate hours are real estate professional, right? So whether you're long-term, short-term, property manager, flipping, being a realtor, all those count towards that $750. But separately though, you have to meet material participation on your long-term rentals and then you also have to meet it on the short-term rentals. That piece of the requirement is not a— is not combined. Each other. So all that to say, if you're a newer investor and you have 2 properties, then you should try to pick your strategy, right? I want to either be a real estate professional and have them all be considered long-term, or I'm going to have them both short-term because otherwise you end up having to earn hours in 2 separate buckets. It just becomes more challenging.

Okay. Interesting. Interesting. You mentioned, you know, some of the potential pitfalls or mistakes that you know, investors make or even CPAs don't understand. What are some other areas or pitfalls that, you know, you see kind of in the real estate space that investors are making or maybe not taking advantage of that, you know, people should be aware of?

I mean, how long do we have, right? Like, I think one that we see a lot is in the area of depreciation, you know, with respect to how do you depreciate properties. If you're depreciating properties. I mean, as crazy as that sounds, you know, just being, you know, you're in the rental space, right? Like, it's not that uncommon for us to look at a new client's tax return and find out that, you know, they haven't depreciated properties when they should have. Or, and it did, you know, it's, it's like Tax 101 to us. But I guess to a CPA who doesn't do real estate, it's probably a foreign, foreign concept. But so just claiming depreciation, maybe they're not taking advantage of bonus depreciation and accelerating as much depreciation as possible. And there's no good reason other than, well, I'm just used to spreading out depreciation, so I just don't take, you know, our opinion is if you can take as much deductions and you can use, let's take them as soon as possible because you never know what the tax law is going to be. You never know what your tax bracket is going to be 5 years from now. So let's take advantage of things while they're available.

Yeah, it's something really interesting that just happened in the last month. So Matt and I were on a podcast It was a pretty big podcast. I won't share the name, but somebody who's done a lot of real estate. And so we were talking about depreciation and accelerated depreciation, and then the host was like, yeah, I'm pretty sure I'm doing it. My real estate is a CPA expert. And so when they met for year-end tax planning, he just talked to his CPA, said, I want to confirm I'm doing cost segregation, right? We've been doing it all these years. And his CPA's response was, what's that? And so I think that response was the, yeah, that was kind of the last conversation that they had.

That was the last Christmas gift.

Yeah, that was the last conversation. So I think really important again, you know, I think it's not the client's fault, right? Again, clients, we, you know, we assume the CPA is doing all this stuff, right? Because they specialize in real estate or they've done my taxes for years. So it doesn't hurt. It doesn't hurt to ask. I just to bring it up like, hey, I know we've talked about it. I just want to confirm that we're doing it. And I think, you know, just simple questions like that will really help you to understand and also just asking powerful questions. Matt and I love sharing tax strategies on platforms like this. And really the goal for our audience is not for you to become a CPA or tax advisor. We don't want you to remember all the rules. We don't want you to have to do any calculations. But the purpose of our message is so that you have enough knowledge to have an impactful conversation with your tax advisor, right? Hey, I heard about short-term rental loophole. What do you think? That work for me? You know, and so, so that's really the gist of it, is knowing what questions to ask and what to tell your tax advisor when you're—

Right. I mean, there's so many available options legally within the tax code that, you know, people may not be taking advantage of. And I think it's you know, it's— you're doing yourself a massive disservice if you're not educating yourself around it, but then also not getting around the right people that can help you implement these strategies. I mean, it's, you know, depending on your situation, it can be life-changing, you know, numbers, right? If you can just implement some simple, some simple strategies. Yeah. You know, talk a little bit about— you mentioned earlier just that individual who's, you know, been in real estate for a long time. As an active investor and they're wanting to shift to more that passive approach, but they don't want to go do 1031s and still have to be involved in the day-to-day. So they're selling off assets and then maybe investing passively into syndications or funds. What are some things that they need to be thinking about? Because they've probably been a real estate professional for a while, And if you're kind of selling, say, majority of your real estate and now kind of going 100% passive, just for argument's sake, they probably can't be a real estate professional anymore, right? Or at least it's going to be more difficult to hit those numbers. They want to be passive. So what are some things to be thinking about from a tax standpoint? Because, you know, I know several people that are in that kind of boat and also listen to this podcast. So people, I'm sure, that are wanting to kind of make that transition but may not feel comfortable because they've been in a good spot for a long time, right? With maybe some really low basis assets. They have some great gains in and they've been claiming real estate professional status for a long time. So they've been paying low taxes. But talk about some things they need to be thinking about and just ways that you might suggest, you know, as you sell it all at once, you kind of roll it over time and, you know, just give some, some, some general ideas on someone in that boat.

Yeah, I— there's so many things that come to mind, right? So I think from a looking at, you know, again, from a planning and holistic perspective, you want to take, you know, a multiple-year approach, right? So I'm, you know, I hear that kind of story. I'm thinking, you know, not, not to define ages, but I'm thinking somebody maybe they're in their 60s, right? They're looking at, you know, they're kind of winding down the W-2 career. They're, you know, maybe they've had the spouse who's been focusing on the real estate. So but before they really pull that trigger, one of the things I would look at would be, Okay, what do we have in retirement accounts, right? Like, have you been building up that pre-tax retirement account, the 401 balance that, you know, 10 years you're going to start to take required distributions and paying a lot of taxes on that? Maybe you don't even need that money in the end. So maybe looking at doing Roth conversions while you still are a real estate professional and can still manage those tax brackets and, you know, maybe look at doing that before you, you know, quote unquote, unload the real estate and stop being a real estate professional. So you're still taking advantage of low tax brackets. I think that's one thing that I would they look at before they kind of pull that trigger.

Yeah, for sure. We have people who use that strategy every year to convert a couple hundred thousand dollars tax-free into their Roth. And then from there it'll just be permanently tax-free growth, right? For the rest of their life. And then they get to pass it off to the kids. I always say, what's the, you know, what's the best type of inheritance money? Is the one that's tax-free, right? Already paid the taxes for the beneficiaries.

I think Actually, I was going to say from there, then I would look at, you know, if you are looking at selling real estate, right, then you have to obviously work with your tax advisor, get an idea of what is the gains going to be, right? You know, is it, you know, what are we talking? Are we talking $50,000? Are we talking $500,000? What is the number going to be? Because that's going to help you plan potential strategies from there because, you know, based on the numbers, strategies are going to be different, I think. So having an idea and a grasp on that would be crucial to— Yeah.

And I think moving it into syndications I mean, you know, I guess first off, there are syndications who will take 1031 exchange money, and there are others who will only do it if it's like a significant amount, right? Because the sponsors, as you know, Ben, it's more difficult for the sponsors to take on 1031 money. What we see also a lot is what we call a lazy 1031. And so that means basically I'm not going through a real 1031, but I'm going to just buy more real estate in the year that I sell my properties. So if I'm going to sell and, you know, like Matt said, I'm going to have $100,000 worth of gain, then I'm strategically investing in syndications to give me enough losses to then offset this gain. And so usually that works out because if I'm selling in the year where I am a real estate professional, right, then those losses are going to be ordinary losses. If I'm selling in the year where I'm not a real estate professional, then that's passive gain. And then those losses are passive losses as well. So usually there's a matching of those. I think fast forward then, if I've unloaded everything that I own and I'm just passively investing, everything I have is in syndications, then naturally it's all passive income and passive losses. And so they will also offset each other too.

Right. Now I think that's a great point because you're converting a lot of them be active income to passive income, which you're going to be generating passive losses from these investments, hopefully, right? Theoretically, that can shield a lot of that. A lot of that income. Talk a little bit about this, the lazy 1031, because I think it's— I've talked about it before, I've done it before. Just explain what that is, right? Because a lot of people think to continue to defer taxes of a property that you've owned, you have to roll it into real estate and the defined window. And that's obviously a good option, But there are, you know, being other options and you kind of, you know, from my mind, you get out of jail, so to speak, right? Because 1031s are very complicated. And if you want to be passive, it is difficult to find sponsors that will work with you, especially if you have a smaller amount. And you get an increase in basis when that happens too, right? So I kind of, and then the new property. So talk a little bit about that of just, you know, what it means and you kind of alluded to it, but just explain a little further and then maybe some, just things you need to be thinking of, like are there, you know, difference of different buckets of income that might be generated from selling versus investing passively and that might not match, you know, the new losses might not match, you know, the gains that you have in the old, old property. Yeah.

I mean, from a, from, from a conceptual standpoint, I think, you know, taking a step back, you know, think about what a 1031 is trying to do. A 1031 exchange for those people who may not know is you know, you're selling an asset and you're basically— if you're reinvesting the money in qualified assets, then you don't have to pay tax on the gain that you have from the assets you're unloading.

Right.

That's the concept. So but there's a lot of— to your point, there's a lot of rules. You know, you've got to, you know, buy new properties. You got to, you know, a lot of rules and meet there. So sometimes if, you know, people don't want to be actively involved going forward, this is a typical situation we were talking about, right? They've been actively involved. They want to unload the real estate, but they still want to be involved. They still want to be invested in real estate, but don't want to be actively involved. That's where, you know, there's— this is not— the lazy 1031 is not a technical term by any stretch of the imagination. It's just from the sense that you're kind of accomplishing the same thing. You're selling your real estate, you've got gains. If you don't do anything with money, you're going to pay tax on it. But in the same tax year, so, you know, maybe you sell your real estate in June, but by December you've invested in somebody else's syndication. They've gone and bought an apartment building. They're doing a cost segregation study, they're giving you a K-1 with a big loss. And because it's real estate and real estate, those, you know, the gain might be passive to you, you know, and, and that, that loss can offset it from a timing perspective. That's where, you know, it kind of can accomplish similar results.

And it's definitely not a, you know, do-it-yourself type of stuff. I mean, you know, even with the 1031 exchange, right, like Matt said, I mean, If you're contemplating a sale, the first step is to talk with your tax advisor, you know, 'cause what we'll want to know is what is the gain, right? We'll have to calculate the gain. That's where it all starts. Maybe you don't have a gain, maybe you already have a bunch of other losses that you can use, so you might not even need a 1031 or a lazy 1031. So once we know what the taxable gain is, is then it's like, okay, well what do you really want to do with the money and how do we reinvest it efficiently? And you know, the word syndication itself, itself is also generic, right? Syndications doesn't really mean rental losses. It could mean from a note investment, which would not be a rental loss. It could be from oil and gas, which is not a rental loss. And so in terms of you were saying like, okay, are there issues where it's like a mismatch of things? Absolutely. And that's why it's really important, you know, to give you an example. So we have a client who So when they came to us, they were already a real estate professional, right? So they're kind of like, I don't really need a CPA, but I'll just talk to you guys anyways. I'm already a real estate professional. I know I'm claiming it. Sold a bunch of real estate. I got a bunch of real estate gains. And so, so, you know, our question was, okay, well, what have you already done so far to kind of eliminate the gains because you didn't do a 1031? And one of the, you know, one of the strategies that they did themselves was that they invested in an ATM business. And unfortunately, we had to be the bearer of bad news and let them know, hey, an ATM business, that's a syndication, that's passive to you. Your real estate gains are non-passive. They don't offset each other. And so that's a great example of like, hey, I'm investing in a syndication. Of course they offset each other. But guess what? ATM business, not the same as a real estate syndication, right? So really important, those little differences to understand as as well.

Interesting. So in that scenario, the individual was selling assets they were actively managing. So it was an active gain, but they're investing in passive losses and those did not kind of—

Yeah, because I think the thought process was like, well, I'm a real estate professional, right? And so I just have my capital gains is ordinary. And so I'm going to put my money in some kind of syndication, right? This lazy 1031, I'm going to— into syndications and use it. But what they didn't grasp was, well, the syndication asset also is important, right?

Yeah, that I think— I mean, this is a great, a great segue to, you know, people need to be reaching out to a tax advisor. They don't have one. You need to find one. And hey, Matt and Amanda are probably good folks to talk to here. So, I mean, you know, for years I did my own taxes, you know, on TurboTax and, you know, I'm smart enough, I got a finance and accounting degree, so I can do some of these things. But the more I've gone on and the more complicated it's gotten, and there's just so many little things you got to be aware of. But like to pay a fee to a CPA that could, you know, potentially save you tens or hundreds of thousands of dollars, it's a very nominal amount to pay to get the expert advice. So You know, if you are, you know, on your journey, you already kind of built a nice net worth and are any of these kind of situations apply to you, definitely make sure you have a tax advisor in your corner that's giving you helpful advice that's going to help shield some of your income because it's really important. So with that, what's the best way for folks to kind of get ahold of you if they want to chat about their own situation and maybe get some ideas?

Yeah, the best place to find us is on our website. It's Keystone cpa.com. I've got a lot of great resources on their educational material. We do, you know, do a lot of podcasts and things of this nature because we love talking about the stuff, obviously. So I think you can find a lot of people can find some good information there.

We actually recently came out just a couple of months ago with an e-book called Tax Strategies for the Passive Investor. It's not available on our website yet, but I think, Ben, I can just send you the internal URL and you can put that in the show notes for people to access. And that one is designed just for passive investors, meaning people who are not real estate professionals, they'll have a high full-time W-2 job. But yeah, outside of our website, the best place to find me is on social media via Instagram as Amanda Han CPA. So you can follow me there. I'm always sharing like daily tax tips and things like that too.

Sometimes I'm behind her in those videos or actually recording the video. That's my excuse.

You're behind me or behind the camera.

All right, behind me, she got it.

Awesome. All right, well, thank you guys so much for coming on. This is very, very valuable and I appreciate you sharing your wisdom and insights.

Yeah, thanks for having us, Ben. This was fun.

Thank you.