How to Maximize Real Estate Tax Benefits feat. Ryan Carriere

People are talking about tax this and tax that, and it's like, man, there is so much garbage out there. You set it up this way. That makes no sense. Not only do I have to unteach you and then reteach you, now we've got to undo all these things that you set up and then reset them up correctly. You actually should be doing this. And now we're helping them unwind things and then reset up things. Doing things proactively is going to be way more beneficial long term. It seems like you're saving money in the short term, but at the end of the day, it's just kind of throwing money away.

What the options are, because I think a lot of people that especially don't come from a real estate background but have started investing, you know, passively don't even understand passive or active, how that impacts your tax situation.

The point is that you can kind of separate your investments into, hey, everything over here that's passive should theoretically maybe never get taxed. It's not going to offset your W-2 and business profits. If I continue this ball rolling, the time that it could stop is if you basically stop investing and you stop generating new losses.

Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Got a great episode today for anybody that has been investing in real estate passively and maybe considering trying to be a little more active to get some advantages of the tax code. So we brought on, uh, Ryan Carrier of Hall CPA. They are 100% focused on real estate investors, and he talks about advantages you can take as a real estate investor if you're just doing passive investment, but then also talks about a few different strategies for people to consider that may not want to be full-on real estate investors as their primary source of income but can still get the benefits of the tax code. So we talk a lot about real estate professional status as well as an strategy that I was even unaware of. So this is really, really neat on my short-term rentals. So you definitely want to check this out. It's a great time to be thinking about, uh, just maximizing tax savings before the end of the year here. And, uh, I think you're really going to love this episode, so be sure to listen to the whole thing, and I'm sure you'll get a lot out of it. Thanks so much. 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. Ryan, thanks for coming on the show. Appreciate you coming on.

Yeah, thanks for having me, Ben. Appreciate that.

Yeah, we'll give a little bit of background just on you and on Hall CPA and kind of what you guys do as kind of core, uh, business.

Yeah, so I'm Ryan Carrier, uh, CPA. Uh, I am in Minneapolis, Minnesota, kind of suburbs here, uh, kind of the Midwest. Uh, currently a beautiful day. It's actually going to get up to 92, which is hot here.

Oh man.

Yeah, I think that, yeah. Um, but, uh, yeah, born and raised here, school here, uh, all those things. Uh, yeah, I got my CPA many years ago and then just kind of after college went through various, uh, accounting and then kind of CPA firms. I'm also a real estate investor though myself. Not a massive portfolio holder. I think we have about 5 properties, most of those partnerships, single families, multifamily, all the way up to a fourplex is kind of the kind of size we have. Mostly bought in 20, let's see, 2017 to 2022. I feel like that was a good years to be buying with low interest rates, things like that. But certainly very different now and actually in conversations with some of my partners to sell. Some of those potentially this year if interest rates drop, and we might talk about that here on this episode. But yeah, basically here, CPA, I'm a senior tax advisor. Like you said, been at the firm for, for several years. The firm itself has been around, I think, since late 2015, so about 7, 8 years or so, whatever that comes to for the math. But yeah, we're Hall CPA, Brandon Hall is the founder, kind of managing partner. But we're also known, like you said, as the Real Estate CPA. So kind of two parts to that. I just like to break it down. So CPA, we do tax consulting, we do tax preparation, like filing taxes with the IRS and accounting services like bookkeeping. But the real estate side of that, like you said too, we specialize in just real estate tax. So really it's, you know, no one's going to come to us who doesn't own properties or, hey, I'm, you know, mostly focused on being a dentist. Can you help me there? Uh, we're CPAs, right? Just like you might need a, I always like to use the example like an eye surgeon. You might need to get surgery on your eye. Okay, well you go to an eye surgeon, you might ask some other questions about medical things you've got going on, health things you've got going on. They went through residency, they went through medical school, but their focus is primarily that eye surgery. So you're going to ask some questions specific to that. That's kind of how I see our firm. You're going to come to us when you've really got questions and pain points around your real estate. Tax questions and solutions you're looking for to be optimized and efficient, that's really where we shine and that's where our specialty is.

Got it. So talk a little bit about that a little more because I think a lot of people, as they're kind of getting newer to investing in real estate, whether passively or actively, or actually directly owning the properties and managing them, everyone hears about the great tax benefits of real estate, right? You really have to have a base understanding of what you're doing, how you're doing it, to be able to take advantage of those benefits. And from my experience working with, you know, the right CPAs that understand those nuances is really, really important. So talk a little bit about, you know, maybe where, you know, some CPAs that may say, yeah, we work with real estate, you know, investors, but, you know, with your guys, a real clear focus on that, how does that kind of help you and help your clients with that? You know, very narrow focus.

Yeah. So most other firms, uh, are what we would call generalists, meaning they maybe have a few industries where most of their clients are in, you know, these top 4 industries. That's great. We'd still consider them generalists because they're kind of working in all sorts of things, right? Whereas our firm, we literally will only take people who do real estate, period. They might have other businesses going on, Right? Hey, maybe they've got a small consulting business or they own a construction company. They, uh, have an architect business, you know, whatever kind of supplementary thing. But the main thing that they come to us for is their real estate. Um, so it's kind of this generalist versus specialist if we want to kind of make distinctions there and kind of make those two categories. Uh, and so what we have is essentially the whole firm greatly understands in, in so much detail all of the nuances within the code. And what allows us to be specialists is that we can kind of just narrow our focus into becoming experts in just these things. That means one, we get way more repetitions than a generalist. We have a lot more questions that specifically come through for this type of industry, real estate, whereas, you know, a general, a generalist is gonna maybe get those questions every once in a while. So it's like, hey, I gotta refresh myself on this, or Hey, I think it works like this. Let me get back to you. And then they don't, uh, or, or something like that where we just have all the repetition and we have the, the time to really just nail down and look at even court cases. For example, uh, something we've done really well is reviewed dozens of court cases just on real estate. Uh, for example, just to help us understand not only what does the code say, what does the regulation say about real estate? What does the tax court cases look like? What do the audit technique guides look like from the IRS agents as they're going through audits? So it allows us to get really, really, really deep with a whole lot of repetition. And that's what all, you know, our firm does. So just the amount of confidence and comfort and the number of questions that we've got in just a very deep, uh, one section industry like real estate allows us to be so much better than the rest of our competition that's giving kind of general advice that just kind of can't compare.

Yeah. So do you guys work mostly with, um, primary business has to be real estate, or it can be also passive investors as well?

So a little bit of a nuanced question. So when it comes to, and this can maybe be part of where we talk about, you know, some of the tax rules and things like that in a second, but really ways that we're able to help is for people who are more active because then we can be thinking about things like real estate professional status or the short-term rental loophole. How do cost segregation studies actually help to offset that active or W-2 or business profit that you've got outside of just real estate? So really the, the ways we can help most, kind of most effectively and kind of more ideal clients for us are those active investors. Doesn't mean we can't do anything with passive investors. It's just a little bit more limited, especially if they're like, nope, I'm never going to be active. This is all I've got. Okay. Well, here's a bunch of passive losses and you can use them when you sell the property or when your properties actually start making a profit, right? So it's just a lot less tools we can have, uh, especially within real estate. Again, with those passive investors, we could be talking about things like, hey, you've got this other business here. Okay, what does that entity structure look like? Should you have an S corp? Should you have a C corp? Should it just be an LLC? So we can talk about things like that. We could also be thinking about, hey, are you paying your kids, right? How does that play into your business and what you're doing there? So there's other things like that that we can explore. But it's not what I would say the bread and butter of helping an investor like an active investor is. Hmm.

It makes sense. Yeah. Because we reckon that we can talk a little bit about cost segregation and these kind of things, but effectively, obviously, if you invest in real estate, you get some, you know, non-cash tax losses that you can use to shelter other income. But if you're a passive investor, which means you're just investing in syndications or funds and not have any involvement in the day-to-day, You're limited in how you can use those losses against your other income, right? So this— it's segregated into different buckets, so to speak. And if you're— you got a strong W-2 that you're earning a strong income from, investing in real estate as a passive investor may not necessarily help protect against that income. And so what you're saying is, because if you work with more active investors You have a lot more flexibility in how you can use those losses and how you can protect other types of income. Is that, is that right?

Exactly. Yep. There's just so much more we can strategize about. Uh, that's kind of how we see ourselves tax consulting. That aspect of the firm is kind of like a strategist. Uh, okay, you're going to go buy this property. Okay. Passive, non-passive. If you want to make it non-passive, meaning active, that's a, you know, kind of maybe the industry terms is active. Uh, versus non-passive is kind of the same thing. If we're going to do that, how can we do that? And when might we do that? Is it a this year thing? Is it a next year thing? Is it a 5-year thing that we're doing? Okay. If we're going to do it next year, let's get you well versed in kind of how this is going to look, uh, as far as meeting those requirements and just being a lot more, uh, planning and proactive on the front end instead of like, hey, yep, just come back to me as your tax preparer and let me know if you met it. So it's very kind of proactive in our approach in planning for that. In getting the education in front of our clients to say, hey, here's how this works, right? Sometimes we have to actually unteach bad things. Social media, right? People are talking about tax this and tax that. Here's how you do this. And it's like, man, there is so much garbage out there, unfortunately. So then we have to unteach and then reteach. Or it's, hey, you thought you could do this yourself, right? DIY things out there. You set it up this way. That makes no sense. Not only do I have to unteach you and then reteach you, now we've gotta undo all these things that you set up and then reset them up correctly. Or, hey, you've been, you know, having this sort of entity structure. It doesn't make any sense. You actually should be doing this. And now we're helping them unwind things and then reset up things. So anyway, point is, is that, uh, basically doing things proactively, uh, is gonna be way more beneficial long-term. It seems like you're saving money in the short term. But at the end of the day, it's just kind of throwing money away, at least from all the clients I've helped. I've helped about 250 of our clients over the last couple of years.

Okay. Wow. Yeah. What I'd like to do is kind of set the framework of, you know, what the options are. I think a lot of people that especially don't come from a real estate background but have started investing, you know, passively don't even understand there's being passive or active and really how that impacts their tax situation. So I'd like to maybe start with, for LPs, if you're investing in real estate, how do you view or how should you view those investments and the potential losses from those? How can those get used against your income? And then I would like to shift to active investors because I do actually think there's kind of this middle ground. We can talk about the STR loophole. And some other things to where if you can go and get REP status, you know, as a household, it really unlocks a lot of things, which I think is a pretty powerful concept. But before we get there, let's talk about if someone's just saying, hey, I know I never want to be involved, I don't want to, you know, run short-term rentals, I don't want to own any long-term rentals, I don't want to be involved in day-to-day, I just want to be a passive investor, um, but I'm newer to this, what do I need to expect? I've heard it's a great tax shelter, but there are limitations. So talk about what the limitations are and then what are the benefits as an LP if you're investing in passive real estate investments?

Yeah. So I'll split it up for the passive people, two buckets in my head. One is the people who are just their first syndication and what you can do, just bifurcating one individual investment, one syndication. Is that effectively you can be using depreciation and therefore, you know, probably these passive losses to then offset and shelter any sort of passive profit that you might not have gotten from, you know, buying, being able to use depreciation. Okay. So we're kind of just looking at one property. You're basically reducing any sort of taxable income because you've got things like depreciation. Great. We've now sheltered profit there. Great. It's kind of siloed and that's that. Now, the other aspect of it though is for people who maybe have multiple investments or properties that are passive. What gets interesting once we have multiple is that we can now be doing this timing game. Okay, so let's maybe use a simple example and I'll try to make this fast. Let's pretend that we've been making an investment this year. It gives us a $50,000 loss LP investor. Okay. Uh, let's then say we kind of fast forward 5 years from now and that investment is now going to sell, right? They're going to sell it. They're going to whatever. I'm getting all my money back plus some capital gains and depreciation recapture, all of that. So now if along the way you've kind of been over those 5 years, maybe doing even just one LP investment every single year, you have been accumulating. Let's just assume every time they're doing a cost seg and just accumulating this big passive loss. For you every year, you're kind of getting new losses, new losses, new losses. So again, it's sheltering the profit from those individual properties. But now we've got this big event in year 5. Okay, so now what can happen is, just say plainly, passive losses can offset passive profit. Okay, or gain. So point is, is that you maybe have this kind of accumulation of losses. They're not offsetting your W-2 or business profits because it's passive. We got to make that distinction first. But point is, is that you might have a big sale and now you basically could be paying no tax in that year if you've got all these losses to kind of neutralize any sort of year that you've got a big gain, right? And then what happens year 5? You then take those proceeds and if you can just invest it into another deal and get more losses, the point is that you can kind of separate your investments into, hey, everything over here that's passive should theoretically maybe never get taxed. It's not going to offset your W-2 and business profits, but it can essentially be tax-free if I continue this ball rolling. The time that it could stop is if you basically stop investing and you stop generating new losses. So you've got to be careful there. Or if you have, say, in one year you've got multiple sales that all occur for some reason. Okay, you might have something there. You just don't have enough losses to cover that. But then if you again reinvest, we got more losses moving forward. That's how we can kind of play this timing game if we can basically use passive losses to offset passive gains.

Yeah, no, I think that's a super helpful way to describe it. And I think some of the challenge for some people that are getting started is that first investment or first few investments, you're starting to generate losses and say it's like a more value-add business plan to where you're not getting any income from the investment for first year or two. So you're not getting any income that you can actually shelter. You're getting these losses, but you can't use them yet, right? So it can take some time to build up that snowball. But to your point, as you're consistently disciplined in making those investments and reinvesting the earnings and using those losses from the new investments to protect— you know, against— not protect, but shelter against the sales of older assets— that can create this bigger snowball you're talking about, as long as you're continuing to to reinvest. Is that an accurate way to summarize?

Yep. And essentially just the big picture tax concept, passive losses can offset passive gains or profits. And the misconception from most CPAs is that, oh, I can only use the losses from that property to offset the, you know, income or gain from that one property. That's not true. So you can use all losses you have, even if you've got 5 properties. And you've got one big sale on one property, all of this pool of losses, even if it's across 5 properties, could be used to offset that one property's gain, for example. So it's kind of this pool of passive losses and a pool of kind of passive profit or gain.

Yep, love it. So yeah, you, you have— it's siloed to passive, but it's not siloed to the individual property that you're generating losses from. So if you have a real estate investment that produces losses for you You're not generating income on that, but you have, say, a stock portfolio with dividend income. Would that be considered passive losses, or are there other types of non-real estate income that you could be generating that could be offset by that?

The other kind of passive would be like a passive business. Those are, I'll just say, fairly rare from what I've seen. But stocks. Dividends, interest income, that's kind of what the IRS would call like portfolio income. And that actually would be non-passive. They actually do consider that active. So that wouldn't play into impact the passive losses that we're talking about.

Got it. Okay. So that would be a separate, separate bucket. Now, on the real estate side, obviously you have operating income, you know, from a property and maybe distributions from an LLC if it's a syndication, then obviously you have capital gains if you sell the property. So are both of those, you know, grouped similarly? So the losses that I get from an investment can protect against both, you know, operating cash flow as well as capital gains, or those also separate buckets?

No, those are the same. So, yep, you could use that.

Okay. So you can actually use the losses along without having actually to sell a property if you're generating income from, uh, from the assets, right? Yep, makes sense. Okay, so let's shift a little bit to, um, yeah, I think people understand what a full active real estate investor is and, you know, going and doing that as your primary business. And, um, you know, I think I want to shift more to kind of the hybrid. I don't know if you would consider yourself, you know, a real estate— you said yourself a real estate investor and you have some investments, and I'm assuming you probably would try to claim, you know, real estate professional status. And but you're also, you know, doing this as a business with the CPA firm. So this seems like this kind of hybrid area, right, where it's, hey, someone's, you know, they don't want to be a full-time real estate investor as their main thing. They still like doing what they're doing, but there's options to kind of bridge the gap, so to speak, to get into the active side, to get those active benefits, also with the spouse too. So talk a little bit about, you know, some of the options that are available for those that are thinking, hey, you know, I like real estate. I wasn't planning on being in real estate, you know, as a primary profession, but hey, maybe my spouse, you know, likes doing, uh, you know, uh, property management or, you know, running some short-term rentals. Or just getting more involved in the portfolio that we're building or whatever. So talk about some of these hybrid areas that you can still be having a W-2 income, but you can also get the benefits of the tax code as an active investor.

Yeah. So for the active side, using losses from rental properties to actually offset that W-2 or business profit. Essentially, we're talking about either REPS, which is just the acronym for Real Estate Professional Status, or the short-term rental loophole or strategy. Some people don't like the word loophole, and so be it. Uh, but point is, those are kind of the two, uh, strategies that we can use to kind of move losses that would normally be passive, right, for LP investors to now actually being considered active or non-passive to offset that W-2 and business profit. So just to comment on myself, I would not meet it personally because one of the tests for real estate professional status is you have to spend more than 50% of your time in a real property trade or business. So, but you mentioned spouses. So here's the thing. So my wife is currently staying at home. We have, we have our daughter due in like a month from like today. So she's staying at home taking care of the kids. But point is, she could potentially, because she doesn't have necessarily what the IRS would call like another job to provide personal services because she's staying at home with our, our family. She could potentially not have that issue with the 50% of her time, but she would need to accumulate 750 hours in a real property trader business and then make sure that she meets material participation in our long-term rentals. So she could, right? That's kind of what your comment is on the spouse thing. We could do that. Here's the thing, my wife does not want to do that. So there's tax things, right, that are good and beneficial for tax savings. There's also family and marriage dynamics that don't make sense. So my big comment I just want to make to people, and we talk about this almost every episode on our podcast, Tax Smart REI, is that do not let the tail wag the dog. Okay? Do not let the tax savings dictate and be the primary focus for why you're making investment decisions or what you're going to buy. Okay, that's one kind of key. I don't know if you want a tenant or principle that we have. We have seen people do that and then get frustrated and regret those decisions because they got into a bad investment. Okay. Right. So that's just a big picture comment. But again, you could do that if you're listening to this and you're like, hey, I'm working full time. My spouse doesn't have another full-time job, or maybe they're working 10 hours a week. They've got some little side business. Hey, you could pursue that. You just need to make sure you meet all the requirements. Okay. So that's absolutely a possibility. Um, for real estate.

One little note on that. So in that situation, if your wife was, uh, qualified, uh, REPS, that would— if you guys filed jointly for your taxes, that would actually, uh, your W-2 income would be sheltered from those losses, right? So it's the household perspective, not an individual income perspective, right?

Correct. Yep. And that's actually something we've seen other taxpayers mess up on. They will kind of assume that, you know, it's, it's like they'll have a partnership between the husband and wife and, uh, 50% will go to the husband, 50% will go to the wife. They'll say, hey, the wife met real estate professional status, so only her losses can be non-passive. That's not what the code says. So it's the whole married filing joint couple. Both aspects of that can all be considered non-passive. Even if, for example, I'm the only one working full-time in a W-2 type job. Yeah, all the losses we generate then can offset that income. Absolutely. Yep.

Yeah, that makes sense. And I appreciate your comment too, because I do think this is a very powerful concept in the tax code that's perfectly legal and can be pretty, pretty impactful. But it's not a magic pill. You're basically doing this to create tax savings, you know, but if you make a bad investment or you're doing something you hate, the juice probably isn't worth the squeeze. And tax savings on a bad investment actually, that could result in a loss or something, probably puts you in a worse-off position than just not doing it at all. So, point well taken. I think a good point to make. I think about some friends that I have that wife is a business owner and does very well, makes a lot of money. And the husband was W-2. He had a great job, kind of mid-level management. They started buying real estate just with the income they were generating. And he decided, they ran the math and talked with a CPA. And basically, for him to leave his W-2 and become a real estate professional by having material participation in their few properties they had was actually going to save them substantially more money than he was making as a W-2 earner. And in that situation, you know, he actually got to leave a, you know, pretty hefty hour work week that he could, you know, then move over to the real estate, save time and save money. So that, that's a unique situation. That's not everybody. But I think it's, you know, he wasn't even aware it was possible and probably would have done it several years sooner if he hadn't known it.

Yeah, that's very, that's very common for people to come to us and help them evaluate that. I think people need to look holistically, not, not only just of like, okay, how many hours am I putting in my W-2? What am I making kind of after tax on that? What are the other though benefits that I might be giving up? Is there like a health insurance or a 401? You gotta kind of look at the whole compensation package. Uh, but for one spouse making a lot, And if the other spouse isn't making a lot, if you're in like the 37% bracket, yeah, that can make a lot of sense to make a switch like that. But the other thing too, maybe for your, your friend's example, is that he actually might be happier and be able to spend more time on family or taking care of other things and whatever. So it's not only just saving taxes, but then you've got the intangible of like better just work-life balance and happiness. And especially the, the triple benefit, maybe you want to call it a win-win-win. Is if he actually likes the work of being more hands-on, right? Maybe he actually switched to doing more renovations himself or talking more with tenants or whatever. Now that's, that's a total win, right? You've got the taxes, you've got the time, right? And you've got just the enjoyment of the work that you do, right? We've only got so much time here to work. We're going to all retire at some point or just be incapable to do it. So like enjoying the work while you can, that's a triple win to me. So that's, that's awesome. Yep.

That's awesome.

Yeah.

And is that something you guys can kind of help with clients assess? You know, this doesn't make sense. You know, here's what the numbers say, but here's the considerations that you gotta think about and kind of work through some of those. Is that something you guys, I'm assuming, help clients with?

Yeah. Every once in a while people want to evaluate that. It does become difficult if people are making like the same dollar amount. It's like, well, who's going to leave? Okay, well, one of you is more more miserable and wants to go into real estate and wants some time back. Okay. You know, that's more clear. So sometimes it's literally like we don't care if it's tax savings, we just need a break. And if it means we get to offset just the one spouse's W-2 and business profits, great. That makes sense.

So, right. Yeah, a net neutral is a win because you get the intangible of— exactly. Just better quality of life. So absolutely. Talk a little bit about the STR loophole or strategy for those who don't like loophole. What, what that, what that means. Yeah.

So it's essentially doing a very similar thing to real estate professional status. And just to say it again, kind of plainly for listeners, essentially you're taking what would normally be passive losses from rental properties, and now by meeting the real estate professional criteria, moving them to kind of that active or non-passive bucket. Okay. So the short-term rental strategy does the same thing. The main difference is number one, the requirements, I'll get there in a second, but number two, is the type of real estate we're talking about, right? It's called the short-term rental loophole. So this is only for short-term rentals. So what makes a property a short-term rental with the IRS regulation we're talking about? It would mean properties that have an average stay per guest for the year of 7 days or less. Okay. So think of a pretty traditional VRBO, Airbnb vacation rental. It's mostly rented on the weekends. That is going to be kind of what we're looking at. And just the one comment I'll say here, some people think, oh, it's, you know, 7.1, am I good enough? No, you're not. That's above 7. Like, you're not going to fly. It's literally got to be 7.000000, you get the point, right? Or less. Okay. So it's got to be less than 7. That's criteria one. The second criteria, which we didn't really touch on for real estate professional status, but is meeting one of the material participation tests. So a lot of people just talk about You know, vague terms like, hey, you gotta, you know, be involved in your properties. Okay, what does that mean? It means according to the IRS, material participation. So essentially there are 7 material participation test options. The 2 that we, we really focus on as a group is meeting either 500 hours. So that comes to, if you've got a full year, about 10 hours a week, or second, uh, 100 hours and more than anyone else. Okay. So those are kind of the two material participation tests we look at. And just to say it again, it's, it's an either or. Okay. You've still gotta meet test one, which is the 7-day average, but then you choose one of the material participation tests. If you've met both criteria, you've met the short-term rental strategy for that, the short-term rentals. So material participation, we could get really, you know, I talk about this all day, so I can get really in depth if we want, but bottom line comments to make for most people out there. Like my clients, they're really just shooting for that 100 hours minimum and making sure it's more than anyone else because it's really hard to do with even just 1 to 2 properties if you're a full-time W-2 employee or business owner to really get to 500 hours. It, it can be really tough to do that. So they're just shooting for that, what kind of seems like a lower threshold test. So here's an example. So I had someone, so many people have done this, I'll just use one person in my head. Someone who bought a short-term rental end of 2022, that must have been, basically bought it in Florida, had a few stays that gave them an average stay less than 7 for 2022. They flew down multiple times, took care of a lot of things, managed the property remotely in Florida, and they got, I think it was something like 150 hours. The second closest person to them was like their cleaner who got like 75 hours, so they were good, right? So that's an example of meeting it, but only having to put in 150 hours for the entire year. And they did that all in December and November, right? So point is, is like you, you can meet this much easier, which I think is kind of your using of the word like hybrid. It's not a full-blown real estate professional where it's like 750 hours. Holy cow, that's a lot. It's really like, this is much simpler. And the barrier to entry is like here, real estate professional status is like way up here. So a lot of people in those situations choose this because of the lower barrier to entry.

That— okay, so these are two separate things. So this is not a subset of wraps, this is a whole separate part of the tax code that you can qualify. Wow, okay. I don't think I've even heard that this was a separate thing. So is— are there any limitations on— so say someone's working W-2 but they also are able to put 100 hours in and meet the tier participation test, um, does that allow their W-2 income to be viewed as, um, uh, or kind of not be sheltered from the tax losses, or how does that work?

Yeah, so it can. So let's say, for example, uh, you've got a W-2 earner making just say $500 grand, okay? They're in the 30-something percent tax bracket, and let's say in 2024 they're going to implement this and they produce a, say, $100,000 loss with all their losses from the property in that first year. Now, instead of paying tax on the full $500,000, they've now got this additional $100,000 to basically offset that $500,000. Now they're only paying tax at $400,000. Okay. Kind of at max. So now we've inserted a huge amount of losses. If they do not meet the short-term rental strategy in our example, they're still paying tax on the $500,000 and this $100,000 of losses we're talking about. Just sits here. It stays passive and can't touch the W-2.

Got it. Got it. But if they can meet this threshold, the benefit that you get from being REPs, which is your, your earned income or other types of income can get advantage of these losses. You can actually do that with this lower barrier to entry method. And that's accurate.

Yep. And just the nuance is that you've got to have short-term rentals. So some people will come to us. And they'll say something, you know, silly, which is like, hey, I've got these long-term rentals and I just want to meet the short-term rental strategy. Okay, where are your short-term rentals? Right? It's like what you're trying to mix something together that can't really exist.

Right?

So it's like, you actually got to have short-term rentals.

Yep. So average of 7 days or less, no wiggle room there. Is there any limitations on like self-dealing? Like I know with, uh, if you use self-directed IRA, you can't, you know, live in a property that you use to purchase funds. Can you stay at the property if you're trying to claim this, or is there any kind of limitations there? A little bit of an aside, but no, good.

It's a good question because if people are just kind of like, hey, I'm going to go do this, and they don't talk to someone who understands it, they're going to get so many things wrong. So here's what some things can be wrong. Uh, number one would be letting, uh, family stay there. Or letting friends stay there for free, or you staying there yourself, like, or number 4 would be you swapping stays with another short-term rental owner. So there, there's so many ways that, yeah, you need to be careful of self-dealing. Essentially, just to keep it as simple as possible, just put it on the market and let someone else stay there. If you start trying to get too creative with friends staying there for free or family staying there at a big discount, anything like that, The IRS is going to see that as personal use of the property, and those aren't going to be actual rental stays as far as calculating that average of less than 7. So yes, you have to be very careful. Don't, don't try to mess with something like that would be my advice.

Interesting. Okay.

Yep.

And then one of the things, so if you have, say, a property manager helping, but you're still involved in, you know, other parts of the property, Um, does that— do you have to be the property manager on them, or just they have to then provide an account of their number of hours and you just have to have done more than them?

The latter, yep. So the, the tricky part there with a property manager is it is going to mean you probably have less time unless you're doing a bunch of like renovation and improvements on the front end with the property, which is very, very common for short-term rentals. You buy a single-family home and you renovate a bunch of stuff. But if you have a property manager, you've got less time, but now you've got someone else who has more time. So what I would generally recommend to people is, can you just manage it yourself, especially that first year, especially the year that you're trying to get this material participation? But second, if not, why do you need a self— why do you need a property manager? What are you really trying to solve for? Because some people just say, I just want someone who's, who's boots on the ground. Okay, why do you need to call them your manager? Right now that looks bad. Why don't you just have someone that you hire like a handyman to say, hey, I'm just going to message you once a month, can you just go pop into the property, make sure things look good? Okay, that's totally different. Or right, Airbnb and all these places you can do like co-hosting. Why don't you just get like a co-host if the issue is more so you just don't want to be responding to guests all the time and their questions? Okay, that's a co-host. They're not a full-blown property manager, right? So it's really just asking yourself, why are we trying to get this property manager? Because if we just get kind of this one little thing here or in a, you know, virtual assistant or something, that looks way better for you if you're ever audited and you say, oh yeah, I just had a virtual assistant help me with this. They got 50 hours, I still had 125. Okay, you're good, right? So just be careful of what are you really after and what are you trying to solve for?

Very cool. Okay, last question, Ryan. Um, obviously you're in 2024, we're in an election year. Uh, at this point it's pretty wild what's happening, and you know, it'll be very interesting to see what happens. I don't think a lot of people have, have a crystal ball, obviously, but let's play both scenarios. What do you think, you know, if we have interest rates dropping and obviously maybe a changing of the guard Um, you know, how does that potentially impact some of the tax code, um, towards real estate in general, um, or not?

Yeah, so historically, if we're kind of looking at, you know, just Democrat, Republicans, uh, basically Republicans have generally been a little bit more real estate investor friendly, as in bringing back things like, right, Tax Cuts and Jobs Act in 2017, uh, 100% bonus depreciation. Kind of came back with the Democrats and their side. Historically, what we've seen is kind of like, you know, taxing the rich and removing or proposing things like removing the 1031 exchange, or if we keep the 1031 exchange, it can only be up to this amount of gain. There's been talk about like, you know, if you make $100,000 or more, an additional 4% tax on anyone who makes over $100,000. From the Democrat side. So there, there is a, to me and all of, all of my colleagues, probably a pretty stark contrast in the tax implications if we have either side win. If we just look at real estate investors, which is our clients and a lot of your clients, pretty favorable would, would be our understanding for kind of the Republicans being nominated into the White House. Pretty, what we'd say, disfavorable just on the tax policy side. If the Democrats were to win, obviously we've got 3 parts to our political system. That's just one part. But as far as kind of the agendas and kind of people thinking, hey, we've got power to move things, these things along or get these bills passed. Very, very, very stark contrast, I would say, as far as who is going to be more benefited for real estate investors in the tax situation.

Yeah, to play devil's advocate though a little bit, um, you know, the past 4 years we've had a Democrat, uh, presidential arm, and there hasn't been a whole lot of like super negative things. I think a lot's been proposed, and you've taxed unrealized gains, other kind of crazy stuff. But, um, in large part, I mean, this stuff's been around in the tax code for a long time and doesn't, doesn't monumentally shift, you know, with the changing of a guard in general, right? I mean, is Would you expect, you know, if we continue with the Democratic presidency, that some of these things that have been proposed actually get through, you know, the system? Or obviously partly that depends on Congress and, and all that. But do you feel like there's more risk if we continue on with another 4 years as Democrats, or it's still, hey, they're still pretty limited in what they can do, and all these, you know, ideas that they have, you know, only a fraction of them ever make it through to become law.

I think that last sentence is pretty true. Only like a fraction, if any, ever really get changed. The Tax Cuts and Jobs Act was very significant as far as real estate investors because of things like 100% bonus depreciation. That was massive. The other big thing there was opportunity zones. That was a completely new thing, right? Similar in a lot of people's minds to something like a 1031 exchange where you're kind of deferring these capital gains and things like that when you've got this gain. But at the end of the day, yeah, um, it's very limited on either side generally, and we've got to kind of have it move through all three, uh, parts of our political system. So yeah, it's like every party is going to kind of say, here's what we do. At the end of the day, it might be just a couple things. And the comment I made about the 1031 exchange, for example, that has been something I think goes back like decades as far as, you know, other, uh, politicians trying to get rid of that. So it's like, who knows? Um, so you have a very valid point. Even if it's like we just look at these really objectively, here's kind of their list of things, and it's like, oh, this one seems very favorable, this one seems very unfavorable. Well, only a small fraction might actually get through at the end of the day. So who knows? Uh, like you said, as far as what's changed so far, uh, even with Biden being in office the last 4 years, it's like certain things have changed a lot. Yeah. Uh, but very minimal, uh, has necessarily changed in just the tax, uh, Wow. Yeah.

Awesome. Ryan, thanks so much for coming on, man. This was a really, really great conversation. I'm sure our listeners will pick up a lot of good golden nuggets here. What's the best way for people if they want to reach out, learn more about you and your firm? How can they do that?

Yeah, so people can find me on LinkedIn, uh, Ryan Carrier CPA. Uh, you'll see my face, you'll see Hall CPA kind of being on there. If people are interested in becoming a client, uh, of ours, you can go to therealestatecpa.com/rc, uh, RC as in Ryan Carrier. You can fill out a brief little form if you're really serious about working with us, uh, and then we can see if we want to set up another call. Otherwise, LinkedIn, I post on there, uh, every weekday, every day I work, uh, lots of content, things like this of the short-term rental strategy. I go even more in detail on, you know, real estate professional status, cost segregation studies, entity structure. All sorts of things like that. So if you want more of this conversation, find me on LinkedIn. I write on there a lot.

Awesome. All right, Ryan, thanks so much, man. Really fun.

Thanks, Ben.

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