How To Save Money On Taxes Through Buying Your Dream Car... | Karlton Dennis Interview

All right, all right, welcome back to the Investment Fund Secrets Show. And today we got Carlton Dennis on. Carlton, welcome on. Good to see you here, brother.

Hi, it's a pleasure to be here. Thank you for having me on.

So real quick, give us the, the 2-minute, you know, elevator pitch on you and what you do at Tax Alchemist and all your kind of stuff. I know it's a big, it's a big overview, but if you can press it down to 2 minutes, what would the elevator pitch be?

Okay, there's a difference between CPAs and tax strategists, right? You're typically meeting with your CPA during the months of January, February, March, and April, you're typically doing tax compliance, filing your tax return, handing over your W-2s, your 1099s, and your profit and loss statement. But most business owners and real estate investors are making financial decisions all year long. And so as a tax strategist, I'm there with you as you're making financial decisions, showing you how to leverage the tax codes to reduce your tax bill in real time. So I have a lot of fun being on the phone with a lot of clients, a lot of investors like yourself, Bridger, and, uh, I'm helping you leverage the tax codes to the fullest extent.

All right, let's get into it. First thing I want to ask, vehicles. Yes, I think a hot topic. A lot of people— I actually, I love, I love cars and vehicles. I don't really post them. I just don't want to be that guy on Instagram. We bought— I bought an Audi R8, I don't know, 8 months ago. And so walk us through, you know, people that want to buy a Lambo or want to buy a G-Wagon that's over 6,000 pounds. What are some car tax strategies that people can use around vehicles as well?

Yeah. So first thing to understand is vehicles that are not over 6,000 pounds, you can depreciate them inside of your business, which means that the government's going to tell you that you can write them off over the course of 5 years. You can claim what's called bonus depreciation, which pretty much means is that if you have anything that you place inside of your business that the government says has a useful life of 20 years or less, you can accelerate parts of that depreciation.

Hmm.

So let's just say— and I'm just using a random number— let's just say Bridger's R8 was $50,000. On a normal depreciation method, he would only be able to take $10,000 each year in a write-off. But leveraging bonus depreciation, he can accelerate that amount, so he's taking more more in that first year.

Mm-hmm.

Just know that when you have a luxury vehicle, there is a luxury vehicle cap on how much you can take in a deduction in that first year. Now, if you are someone who is into bigger cars, such as the G-Wagons and the Ram LT 1500s, those bigger cars, and even the Tesla Model S, then you can go ahead and leverage the 179, IRC Code Section 179, which allows for you to take a full vehicle write-off in the first year on a vehicle that's over 6,000 pounds, leveraging bonus depreciation as well. So let's just say Bridger decided to get a Tesla Model X, and let's just say the purchase price was $100,000, and it's strictly used for business, which means 100% of that vehicle is for business. Underneath Code Section IRC 179 plus bonus depreciation, he can write off that $100,000 of that vehicle, whether he financed it or not, and that would dramatically reduce his tax bill in that current year.

But then the following year— Wait, so if I, hold on, hold on, if I, $100,000, if I took out a lease, or not a lease, let's say I did a, I put down 10 grand and financed the $90,000, I can write off the whole $100,000?

That's correct.

Wow.

That's correct, that's correct.

And then, so hold on, hold on, what happens if I sell the car? So I write it off year 1, Year 2, I sell the car for— I mean, actually car prices are going up right now. Let's just call it $100,000. Let's say I bought it for $100,000. I sold it for $100,000.

Yes.

Do I pay— is there a, you know, anytime I gain or I got to pay that back or something on the depreciation? How does that work?

Since you took all your depreciation, your cost basis went down. So you're going to have a huge sizable gain if you were to sell that vehicle. So a lot of people do is they exchange their vehicles for new vehicles inside of their business, something that you can do with your tax strategist.

So you just exchange it into a new vehicle?

Yeah. Yeah. A lot of our clients will just buy a new vehicle.

I love this. This is great.

Something to be mindful of is that it does not matter whether you're making $1 million or you're making $50,000. The IRC 179 is a tax code that you can leverage if you qualify for it. If the vehicle's over 6,000 pounds and it falls on the approved IRC list, then you can go ahead and take that depreciation deduction in the one year.

That's awesome. Now for Like my car, Audi R8, right? Yeah, it's not over 6,000 pounds. How does that— is it similar rules? Just you just get less then, or what? How does that work on maybe a Lamborghini or something about some kind of car like that?

Yeah. So we have clients that, like a majority of our clients actually all have luxury cars, Ferraris, Lamborghinis, R8s. One thing that we always educate them on is just know that you can't write off 100% of that vehicle in the first year because it does not meet the qualification. IRC 179 over £6,000. It's broken down over the course of 5 years. So the government says that a vehicle has useful life of 5 years. So whatever your purchase amount is, we're able to take that purchase amount if you're doing depreciation over the course of 5 years.

Okay.

If you chose to lease the vehicle, some of our clients lease the vehicle, then we're writing off actual expense. So your car payments, your car insurance, the tires, the gas, in the maintenance that you're putting into that car.

Gotcha. So, just the lease, if it was like $2,000 a month or something, that lease or $6,000, whatever it is, just would calculate for the year for 12 months. All those would be expenses pulled off the car.

Exactly.

Or off your business.

And that could be a pretty sizable expense if you're $2,000 a month. That's a $24,000 deduction, not including tires, maintenance, or gas.

Is there a cap on that?

No.

There's no cap?

Yeah, you can write it off.

So, literally—

You're taking your vehicle deduction, actual expense. There's not a cap on that.

Wow, gotcha. That's, that's insane.

Now, there's also another method that probably not too many real estate investors are leveraging, but more of like your Lyft, Uber drivers, and maybe your physicians, which is mileage. You can take 56 cents per mile. So it's important to track both if you're unsure of how much traveling you're going to be doing throughout the year, because at the end of the year, your tax strategist can just decide whether or not to take actual expense versus mileage on your tax returns.

Man, I love it. Alright, so let's— we talked, you know, personal cars, we've talked, you know, S corps, hiring your kids, all kind of stuff. Let's now talk funds. So, I mean, our show is Investment Fund Secrets. We talk funds, private equity, hedge funds, venture capital. Talking earlier, you said that you've worked with a number of general partners and limited partners investing into funds.

Yes.

So, let's talk tax strategies around a general partnership first. So, if you're a fund manager, What are some, um, you know, some, I guess, unique tax strategies that you've seen around a general partnership versus other businesses?

Yes, so most of my general partners are real estate professionals, and they're leveraging the cost segregation strategy. If I could just take the opportunity to say that my favorite tax strategy in the tax code is the cost segregation study. It is absolutely my most favorite tax law, and part of the reason why is because it is A deduction that is given to you when you decide to buy real estate, whether you financed it or not. So, so many people get into this argument around whether stocks are better or real estate is better, but you can— you're never given depreciation when you decide to invest in stocks. Depreciation is given to you on the entire asset. So if you're someone who is running your own fund, the goal would be for you to perform that cost segregation study as soon as you get into that investment property, So you can accelerate depreciation and offset the taxable income from the rents that you're receiving so that all of your limited partners at the end of the year when they receive their K-1s are getting a loss on their tax returns and avoiding a majority of the tax associated from the cash flow that they received all year long. That is probably the biggest strategy that the general partner needs to know before they even go into setting up a fund is like, what is a cost segregation study and how can that impact not only the general partner but the limited partners?

And that's for real estate funds specifically, correct?

Yeah.

Yeah, I'm a limited partner in 2 real estate funds and the last 3 years, yeah, I've gotten like negative $25,000, negative $21,000, something like that. And the first year I was like, are we losing money? Like, what's going on? And then I was like, oh no, no, they're just depreciating all the assets and this is fantastic.

Yes.

This is the best thing. Apparently, on paper I'm still making money but I'm showing a loss on my taxes and I love it. To run a cost segregation study, hiring a firm or doing it in-house, what's kind of the plan to do that? How does that look? What does that look like for a fund manager, someone running a general partnership for a real estate fund?

Yeah. So, there are cost segregation firms that you can partner with where they will go ahead and send out engineers to that property and they're going to do a full appraisal and assessment. And part of the reason why they're doing this is because they need to identify all of the components inside of that property that do not have a useful life of 39 years if it's commercial property with commercial use, or 27.5 years if it's a residential property. So most components inside of your property already don't last 27.5 years or 39 years— washers, dryers, appliances, flooring, windows, the roof. All of these different components can be written off over the course of 15 years, 7 years, 5 years, and sometimes you can even write off these components in 1 year. Any improvements that you decide to make on the property or the investment also can be written off in the same year if you decide to leverage bonus depreciation in combination with the cost segregation study.

Hmm, really cool. Wow. Does this also apply for like a private equity fund? If you're buying other businesses, you're coming in buying businesses, do you, you know, same cost segregation analysis? You send a team over, they tear apart the company and depreciate. Is that correct?

Yes. Okay. So this is also really cool when you're buying other businesses because you can identify items inside other businesses that can be depreciated in a quicker amount of time. So we have clients that are acquiring other businesses or identifying assets inside the business that they wish to depreciate in a quicker amount of time as opposed to depreciating those items over the course of 7 years. So for example, cabinets, desks, laptops, computers, rather than writing off these items over the course of 7 years as equipment. You can choose to depreciate these items all in one year, including in some cases part of the goodwill inside of the company that you're acquiring.

Wow, I love it. Okay, final question. I love asking my guests this question. Carlton, this is— I'm going to open it up. You get 2 minutes. You can share whatever you'd like. We can talk politics. We can talk religion. We can talk family. We can talk taxes. We can talk business. But if there's one thing you would like to leave with this audience, leave with this group, you know, something that's just in your soul that you feel like is just most important to distill on the people watching this, listening to this, what would it be? I'm putting you on the spot. I did not even tell you this question was coming. But Carlton, you got 2 minutes. I won't even— I won't interrupt you. Here you go.

Carlton cares most about helping other people build generational wealth. And when I come into people who understand that that's important, I do everything in my power to just try to listen. to what they, what they already know and what they don't know in order to get there. As a tax strategist, it's very easy for me to see how wealthy people have gotten wealthy over the years of life. The Kennedys, the Bushes, the Trumps. It's very easy to see. But my goal now is to just provide that information in the most digestible format possible. And I think, um, I think that we're achieving that. But one thing is certain, you have to seek out information. In order to get to a place where you have your children's children in a comfortable position, you have to be the catalyst and you have to be comfortable being the one being uncomfortable. So I've enjoyed being on this podcast with you, Bridger, and I think that it's going to have a powerful impact for your listeners.

I love it. CarltonDennis.com. Carlton, thank you for coming on. It's been fun. We're going to have to bring you back in a couple of months. I loved having you on today. Thank you so much again. CarltonDennis.com, Tax Alchemist. Go check out their channel, Instagram, all that kind of stuff. He's got great content on all of this. Um, thank you so much, Carlton.

Thank you.

Thank you, Bridger. We'll end this right here.