The Real Estate CPA With Thomas Castelli

Foreign Today's show we have Thomas Castelli of the real estate cpa. Thomas is a tax strategist and real estate investor who helps other real estate investors keep more of their hard earned dollars and in their pockets and out of the government. That is part two of the next level income strategy of make, keep and grow your money. His real estate investing experience combined with his ever growing arsenal of hard hitting tax strategies allow him to see eye to eye with clients in ways an average CPA never could. Thomas, welcome to the show.

Chris, thank you so much for having me on today. It's an honor.

Absolutely, absolutely. Now I'm looking at sunny skies and springs around the corner and so is tax season and that's why I'm having you on the show here. I always love having accountants, but more specifically tax strategists on the show around this time. Thomas, you and I have talked multiple times. I love what the real estate CPA does and what you do and your understanding really of real estate in general. But for the audience that doesn't know much about you, tell us a little bit more about your story and how you ended up where you are today.

Yeah, yeah, for sure. So you know, I went to college for accounting. Long story short, I went to college for accounting there and then I came out during my college years towards like the last two years. So my junior and senior year I started really getting into self education. I read the Richest man in Babylon was the first book I picked up that went right into the rich dad, poor dad books. And then that kind of snowballed from there. And along the way I heard a real estate and I don't know if the corporate life, the accounting life is going to be for me after hearing everything I heard and I want to explore real estate. So what ended up happening was my first step into real estate was my great uncle had passed away and in his estate was a pretty large property with a very small house on it which is about a two minute walk from the Long island railroad in New York and Long island and that railroad goes right into Penn Station in Manhattan. And I knew it was a perfect area for city commuter. It's a big deal. And then around the block from that was pretty much a bank. You had center with grocery store, pizza place, ice cream place, laundromat. There's a subway in there, Subway restaurant. Around the block from that was the village of Bethpage, which is a big village. And I was like, this is perfect. So I went to a Long island real estate investment association meeting trying to Find someone to help, like a mentor or someone to help me kind of wholesale or maybe flip the property, something like that. That didn't happen. I could never get my hands on the property, infighting with the estate and what have you. But at that event, I actually about real estate syndication and I went three day weekend on real estate syndication where I fell in love with the model and from there started investing as a limited partner in a few deals and eventually participated in the sponsorship of an 82 apartment complex in Jacksonville, Florida, which is really exciting. That's how I got into real estate. And then the way to where I'm at today, the real estate CPA is along the time that that deal happened, that 18 unit apartment complex, I ended up linking up with Brandon hall, the founder of the Real Estate CPA on LinkedIn and was like, hey, I'm looking to kind of get back into the CPA space again. So, you know, he gave me an opportunity, took it and ran with it. And now I'm here with the firm, I'm a partner of the firm and I help a lot of our clients with tax strategy and planning and I have a team of advisors who do the same thing and as well as bookkeepers. So that's just a little bit about me.

No, thank you. I love that. And I know Brandon, he's down in North Carolina, but your accent tells us you might be somewhere different. Are you still up in New York?

Yeah, I'm still in Long island right now. I was in New York City for a little while, but then at this point mine a move to Florida. So we'll see how long I'm still in New York for.

I just had a conversation with an investor talking about just the massive growth of Florida and all the markets in there. So hey, if you're on your way down there, stop by and see us in Asheville. Here we got a lot of people, they call them halfbacks. They move from New York to Florida and halfway back to North Carolina.

Yeah, a lot of people are telling me that that might be me. If I get down there and super hot, we'll see what happens.

You come visit, I'll come visit, you make a deal. So I mean, I know the answer to this, but the real estate cpa, it's catchy. So why did you guys come up with that name? What is your specialty? Do you work with small investors, large investors? Who's your clientele and why did you guys decide to go with that moniker?

Right, so yeah, I think Brandon came up with the name a few Years back, I think it just happened to be a clever name on what he was doing at the time. Working with providing CPA services to real estate investors. And it just kind of begins to go with that name. Great name, by the way. I'm wearing a shirt with it.

Perfect.

Yeah, so that's kind of how that happened. Now, as for who we work with, we do work with investors pretty much across the spectrum. We have clients with one single family rental to clients with large portfolios of single family rentals, multifamily rentals. We work with syndicates. Our largest clients is $100 million fund. So we do work across the spectrum. Of course, we do work with flippers agents. We focus on the real estate niche, but we're pretty broad in that niche, I guess you could say. So all of our clients are in the real estate business or our real estate investors in some way, shape or form.

Yeah, and I think you provide a tremendous value. I've listened to a lot of the stuff that you guys have put out. Most specifically, and we can put this on our resource page here. You and Brandon did a whole instruction guide about real estate professional status, which is, you know, it's talked about a lot in the industry. You know, some listeners to the show, that might be the first time they've heard it. But if you are a real estate investor, you probably check this out. So tell us a little bit about what real estate professional status is and why the IRS likes to target that, why it's dangerous to get into if you don't know what you're doing and ultimately the resource that you guys put together.

Absolutely. So the real estate professional status, long story short, what it does is it allows real estate investors to the losses from their rental real estate and use it against their active income. Their active income could be from a W2 job or just active business, could be interest income, could be various assorted types of income. Long story short, the way that came into play back in 1986, they had a tax reform act in 1986 under the Reagan administration. And prior to this time, you could buy a rental property, depreciate it, and just take the losses against your income. And people started to abuse it. Beautiful. Started to abuse it. So what they did was they put section 469 of the tax code, which is passive losses. And they said that all rental activities are by default passive, meaning you can only use the loss to offset other passive income. And for real estate investors, for the most part, that's going to mean other rental income or capital gains from the sale of your rental asset. What happened is a bunch of people in the real estate industry started complaining. They started saying, hey, how come it's fair for say, a doctor who owns a medical practice to depreciate their medical equipment and take their losses against their income? But we're in the real estate industry full time. This is what we do. This is our bread and butter. Maybe we develop, maybe we're an agent. Why can't we do the same with our rental Property? So in 1994, they introduced the real estate professional status. And basically you need to spend at least 750 hours in a real property trader business and it must represent more than 50% of your total working time. And really what this was designed to do is allow people who are in the real estate business full time to use their rental losses against their other income. And the reason why it's so dangerous is because as you can imagine, there's a lot of high income earners, a lot of high net worth individuals out there who are paying a lot of money in taxes. You know, 37% tax bracket at the federal level. It's tough, it's tough. And you start looking at the numbers, you see people paying hundreds of thousands of dollars taxes and you're paying, when you look at your effective tax rate, sometimes 40% or more in California, sometimes.

It'S more than 50%.

Yeah, it gets to the point where it is, and we've seen stuff like that before and it gets to the point where it's really painful. So people are highly motivated to try to get state professional status. And the IRS knows that and the tax courts know that. And it's one of the most highly litigated parts of the tax code. Over five tax court cases on it. We see audits on this all the time. And most of the time people are just trying to abuse the rules, you know, so unless you really know what you're doing, unless you're really putting, you know, dotting your T, crossing your T's and dotting your I's, you can get into some trouble there if you abuse that.

Yeah. And that's one of the reasons we connected. You know, Thomas is kind of making sure that, you know, I understand this rule and I remember my accountant was like, don't go there, like that's going to be, you know, you got to really know what you're doing when it comes to that. And I've heard people say, oh, I'm going to do this. And I would say, hey, you know, you should talk to somebody who knows that. What we can do is we can get your white paper, we can put it on our resource page, and that way we'll put in the show notes as well. So if anybody's like, hey, this sounds really interesting. I want to learn more about it. They'll know where to find it.

Be awesome.

And that brings up another point. So I talk about in my book, we have the make, keep, and grow strategy at Next level Income. So I always tell my clients, I talk to investors about make more money, find out how to make more money, then you can ultimately invest more, but also keep more money. And the two things I talk about are proper tax strategy, and I talk about entities and life insurance. So maybe three things. But a lot of people, they're like, well, I have an accountant. Chris. I have an accountant. I took a course when I was in college from a former IRS agent. And what I learned, Thomas, was accountants. They're like TurboTax, right? They don't necessarily do anything but take your receipts and do that. So I always ask, especially the people I coach is, hey, do you have a tax strategist? And normally they say, I have an accountant. Yeah, like, well, wait, do they come to you and tell you how to structure your entities, tell you what to invest in, or do they just file your taxes at the end of the year? So, so tell us, what is the difference between a tax strategist and an accountant?

Oh, yeah, that's a great question. So, you know, you have a lot of taxpayers and accountants, CPAs out there who just file tax returns. That's their core business. They want to file as many tax returns as they can before the deadline, and that's their objective. But the problem is the tax return at the end of the day is simply a report card of the activities, so that the income, expenses, and deductions, et cetera, that you had from the prior year. So when you file your tax return, say, we're in Q1 of 2020 right now. So when you're filing your tax return in Q1 of 2020 for the 2020 year, the 2020 year is already over. What happened in 2020 is there's no way to go back and change it. And the problem is there. I mean, there are some things you could do after the year ends, but not significant. So it's really, at the end of the day, the actions that you're taking throughout the year and. And the strategies you're employing or not employing throughout the year that are going to impact your tax liability. And your taxable income, essentially when you go to file your tax returns. So most CPAs will just prepare your return based on what happened next year. The tax strategy is essentially sitting down saying, okay, based on where you are today, your current circumstances, and based on your goals for the future and where you're looking to go, here's the strategies you're going to need to employ. Here's the actions you're going to need to take throughout the year to make sure those strategies get implemented in order to impact your tax liability when it does come time to file that tax return, which is, again, the report card of the income, expenses, deductions, et cetera, from the year prior.

Yeah, I love that. So answer this question. I already know it, but for our audience, I've heard people say, well, I have an accountant. I'm happy with them. Do you work with investors? Do you work with business owners that already have an accountant that are happy? Thomas, or they have to just work with you? How does that work?

Yeah, so we work with both clients who come to us and they just move everything to us. We work with clients just on consulting. On the real estate side, the answer to that question, it depends. I think if you have a really good accountant and they're really rock solid and you just need some targeted real estate advice for certain aspects of your business, your portfolio, et cetera, that could work really well if your accountant's sophisticated enough to go and report those things on your tax return. The challenge I see us running into sometimes is that, you know, the real estate part of the tax code, it's rather complicated when you look at general small business and you have a lot of CPAs who don't understand the aspects of. So when we give you the strategy, they go back to their current cpa. And the CPA either is very conservative and scared to implement some of those strategies, such as, let's say, professional status, for example, or simply just doesn't know how to report some of the more complex aspects of it. So to answer your question, we've done it on both sides. It generally works better if we're working with you exclusively because we're able to handle all sides of action, if you will, for lack of a better term. But yeah, we've done it both ways.

Yeah. And look again, if you're listening and you have a business, you're an active investor and you don't have a tax strategist, that's the first thing you should do when you finish listening to this podcast or pause it and say, okay, where do I find one of them? You know, give Thomas and his group a call. You know, check out our website for resources. But especially with real estate, these guys are the pros, so it's huge on that. So at the end of 2017, we had some really great tax changes that came into play that have been, you know, really wonderful for investors over the past few years here with the Tax Cuts, Job and Recovery Act. Did I say that right?

Tax Cuts and Jobs Act.

Yeah, Tax Cuts and Jobs Act. I threw some stuff in there. Tell us, when is that sunset in? Thomas, what effects should real estate investors be looking out for? And also any potential changes that you think are coming with the new administration that's coming up here, and what can we do to prepare for that?

Yeah, so the Tax Cuts and Jobs Act, a lot of the things that are in there will be sunsetted in 2026 as it currently stands today. And one of the biggest items in there for real estate, there's a few big items. Biggest item for many real estate investors is going to be 100% bonus depreciation. So 100% bonus depreciation allows you to depreciate assets with the class life in 20 years. For most real estate investors, it's going to be tangible personal property. Things like appliances, for example, or land improvements like landscaping, driveways, fences, things of that nature. You could depreciate those all in the first year you place that property in service, which it, for the most part is going to be the year you acquire, but not always. So that's significant because somewhere between 20 and 30% of the building's value can generally be depreciated. So, for example, if you had $100,000 property, you're looking at somewhere between 20 and $30,000 deduction, which can be significant during the higher tax brackets. So that's by far the biggest one that is phasing out. In 2023, it's going to drop 80% bonus depreciation. 2024, or you're going to be at 60, 2025, you're going to be at 40, 2026, you're going to be 20, and then 2027, it phases out as it is today. There's no plans that know what's going to happen after that. So that's the biggest one. There's qualifying opportunity funds. Not going to go too much into the detail into that. But long story short, there's areas of the country you can invest in if you improve properties, if you build properties, you start businesses, you could start A fund and your investors, including yourself, could defer capital gains from real estate, any capital asset, essentially, so stocks, bonds, mutual funds, et cetera, into these funds and get some tax benefits there. That has been big. It's a little bit complicated than I think a lot of people anticipating, but we have seen some people use those. So those are the two biggest items there. Then we had the CARES act that came into play. 2020, 2021. Most of that stuff has been handled already. What was one of the biggest ones was the ability to carry back losses, big losses, net operating losses that you incurred in 2018, 19 or 20 back up to five years to 2015 for 2020, for example. And so that was big with the CARES Act. That's now gone. It's pretty much, unless you have the opportunity to do it in 2020, that's gone now with the Biden administration, there's been a lot of speculation about what's going on with the Biden administration. Potentially capital gains going up to the ordinary income tax rates, which would be 37% today at the highest rate, for example. There's also been talk about increasing the tax rates, I think to 45%, I think, don't quote me on that, but they may increase at the top end. So there's surprisingly, as far as I'm aware, not been any noted changes to 100% bonus depreciation. I thought there would be, but maybe they're just going to let that phase out. The other thing is 1031 exchanges. There's been some speculation on whether or not they're going to try to further limit 1031 exchanges or get rid of them altogether. I spoke to a lot of different people about this, especially people in the industry. The 1031 exchange industry, this has been proposed by many administrations, but it just usually never gets eliminated. The Tax Cuts and Jobs act, let me back this up, actually limited 1031 exchanges to just real estate. Prior to the Tax Cuts and jobs act, you could 31 exchange almost any type of asset. You could 1031 exchange a car. 1031 exchange piece of equipment now currently stands as just real estate. But I think the Biden administration wants to either cap it potentially at a certain limit, like you can only do a 1031 exchange, like 1.2 million or something along those lines, or if your income is over $400,000, that's been discussed, or potentially eliminating completely. But long story short there, I guess the 10 exchange industry has pretty good lobbyists because this has been proposed many times and it's not taken out yet. And they don't anticipate it being taken out this time either.

Well, and I think a lot of people in Congress own a lot of real estate.

If they were to take that away, you're going to stop a lot of transactions from happening in the marketplace. People will be slower to sell because they don't want to recognize the capital gain is going to cause a lot of issues not only in the marketplace but also in the job market because there's so many businesses from even 10th exchange, just qualified intermediaries to title companies, agents, brokers, et cetera, that are going to be affected by this that usually when the numbers are out on paper, it usually makes sense to keep the 1031 exchange.

Yeah, it's interesting. You look at the actual economics and what happens and what politicians do and they don't always align. But I've used it, my family's used it, our investors and clients have used it. So we had a 1031 professional, Bill Exeter on at the top of the year here to talk about it. So I don't know. I'm bullish to thinking it continues. I certainly hope it does for in my opinion, the economics of the country and that. So Thomas, you mentioned about being a real estate investor yourself. So talk about what are your favorite asset classes, what are you personally investing in, what do you think are going to be beneficial going forward? And how's your tax expertise affected those decisions?

Yeah, so that's a great question. So I kind of came into the real estate investment space on the syndication side partner. I think it's a really effective way to get exposure to real estate without necessarily having to do a big lift. If you're able to qualify for some of those investments, do a syndication on the general partnership side. But with the real estate CPA and what I'm having going on here, it's challenging to balance both. So I put that to the sideline. So right now my investment strategy is going to be to invest as a limited partner. Now what asset classes? I'm currently invested in a private equity fund that has my family self storage and a hotel, believe it or not, in upstate New York that's actually doing really, really well because it's so located so far off the grid, if you cool. But my next investments, I'm looking at making limited partnership investments with sponsors in growing markets. So of course Florida, I have an eye on Florida, have an eye on certain markets in Texas, particularly Elon Musk talks about some of the markets. So you can imagine. But really I have some more analysis to do, but at the end of the day, I want to be investing probably in multifamily that are in those markets, because there's still a fundamental supply and demand factor.

Absolutely.

That even though you could talk about interest rates and all this stuff, there's still a demand for housing and the supply is not keeping up. We just had someone on our podcast recently that was talking about how the construction cost, the materials and all that are going up, and it's just making it harder and harder to build. So I truly believe there's some supply and demand factors there. I also like senior housing. If you look at the economic trends, like something. I forgot the number. Something crazy like 10,000 baby boomers or something like that retiring per day between now and, like, 2028. And the trend just seems like it's going to make sense. So I like self storage, although I haven't been paying too much attention to that. But, yeah, those are the asset classes that I like right now.

Well, you're appreciating the choir. I literally. I was on someone else's podcast an hour ago, and he asked me what else besides multifamily? And I said, self storage and senior housing. So we've been talking about it here on the show for over a year. And I agree. I'm a demographics guy. Thomas, and I moved to the south for demographics. I got into medical device sales originally for demographics. Gotten a multifamily because of demographics. So you almost can't look at senior housing and assisted living if you're into demographics. And you understand that.

Yeah, yeah. To me, that's all business is about at this point for me. A big picture of it. Where are the people? What do they want? And, you know, you get to some of the biggest demographics we have in the country right now. It's millennials. Right. And you have baby boomers. I think they represent 80 million people each. So if you follow the trends of where they're going and what they. It's really where they're going. Right? It's where they're going.

That's right.

And getting there. Exactly. And then getting there and putting yourself in place there. So when they come to you, you're ready to go.

Absolutely. So, again, this is why I love having you on the show. You understand the investments, you understand what your clients are doing because you're actually doing it yourself and you're thinking about the future and what they can be doing. And you have a podcast, as you mentioned, Thomas, you provide a lot of value through Your education, which is our mission here at Next Level Income. So please share with the audience a little bit more about your podcast, what you guys focus on and then what's the best way for people to get ahold of you?

Yeah. So the podcast, the real estate CPA podcast, we pretty much do episodes, we do interviews like this. We pretty much talk about people's investment strategy, what they're doing to build their businesses, their investment portfolio. We have attorneys on to talk about asset protection. We do deep dives into tax strategies. In fact, we have a four part series that's going to be releasing in a few weeks on the real estate professional status where me and Brandon go deep dive into the real estate professional status over four episodes. That's going to be exciting.

All right.

As for the best way to contact me, my email is contact or you could email me@contacttherealestatecpa.com we have an assistant who monitors that consistently and that's the best way to probably get in contact with me. Get a lot of emails to my personal inbox. Yeah. So it's tough for me to respond to all of them.

Yeah. Well, we appreciate you being on the show. I always ask people, every guest that's on, if you go back to your 25 year old self and give you one piece of advice, what would it be?

It would be money in bitcoin. I'm not kidding.

That's pressure today. Yeah, Bitcoin. And I was thinking, I was listening to a book. I want to drive back home this morning. Amazon, just looking at how they've overtaken the market. We're talking about Sears going bankrupt and Amazon. So yeah, bitcoin, Amazon real estate.

Yeah. Netflix and Facebook too. And Tesla. I mean there's in hindsight it's 20 20. I really would. Yeah. If I had time machine, that's what I would do.

There you go. Well, Thomas, thank you so much for being on today. We appreciate it. We're going to let our listeners know how to get in touch with you. We're going to put it in the show notes. I hope you do well. Enjoy tax season here. Hey, Chris, here again. I hope you found this episode valuable. Now I have one more gift for you. If you haven't gotten my book Next Level Income yet and would like me to send it to you in the mail for free, then go to nextlevelincome.com and click on the book tab. If you fill out the form on that page, I will send you a copy of my book and cover all the shipping costs as a thank you for being a podcast listener. Also, please like share and take 90 seconds to give us a rating on Apple Podcasts.