WCI #273: Tax Credits and Passive vs. Actively Managed Funds

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

This is White Coat Investor podcast. 273 tax credits and passive versus actively managed funds. No more wading through dozens of books at the library, scrolling through hundreds of blog posts on dozens of blogs, or checking in daily with online forums trying to gain a financial education the way the hobbyists for a fraction of the price of hiring a professional financial planner, the Fire your financial advisor online course will take you from feeling anxious and having no plan to having a written financial plan. You can follow the rest of your investing career as a professional and a retiree. This course is the material that should have been taught to you in college, medical school or residency, but never was. Fire your financial advisor also has a version eligible for CME credit. Get your financial life in order today. Go to whitecoatinvestor.com courses to sign up. You can do this and the White Coat Investor can help. Welcome back to the podcast. Thanks for what you do out there. I know it's not always easy. I was in the ED last night. Let's see, we're recording this. What is today? July 6th? It's going to run on July 28th. But I was in the ED last night, had a patient bent over backwards, really pulled in some favors with consultant and hospitalist to get them taken care of and then they eloped from the ED because I couldn't tell them what time their procedure was going to be the next day. I don't know. You guys deal with that sort of stuff all the time and it's not easy to put up with that sort of stuff. So thanks for what you do out there. If nobody said thank you today, let me be the first. All right, let's start with some mea culpa here. So I got this wrong. We had a podcast a while back about where we talked a little bit about asset protection on cars. And we also talked about tenants by the entirety titling. And it turns out that in some states you can do that on your car. You can title your car as tenants by the entirety. And the beautiful thing about that, of course, is that if only one of you are sued, then they can't take the car. So if you have a really valuable car, you got a $400,000 Ferrari or something, you know, you could kind of protect it that way. The problem is that cars are mostly a liability. They're a toxic asset. In fact, if you look at umbrella insurance, 80% of the claims for umbrella insurance are auto related. So when you put both of your names on that car, that actually can bring additional liability there. So you may not want to do tenants by the entirety on your cars. And I got a couple of emails about that from people in Florida who are basically saying maybe don't do your cars as tenants by the entirety, but if you can in your state, you generally want to do that with your house. If your state allows it, you can often do it with bank and brokerage accounts and provide yourself a little bit of extra asset protection that way. All right, let's get into some more of your questions. This one comes from a military resident who has some questions about tax credits. Let's take a listen.

Hi Dr. Dali, I am in the fairly unique situation in that I'm graduating from residency in the military and my income will ideally only ever go up from here. Projecting out my federal taxes this year, it looks like I will likely have zero federal taxes from the various credits I'm eligible for with a good amount left over. My understanding is that most of these credits I will be unable to carry forward to a future tax year. I'm curious if I can take advantage of this situation to offset future taxes in other ways. I've been fortunate enough to have grandparents who bought me stocks and bonds when I was a very young child that have appreciated significantly. Would it make sense to cash out these investments now? While we'll be able to offset a good amount of the capital gains, if I wanted to keep the particular stocks that I have, can I just repurchase the same stocks, which is essentially just a step up in basis. Thanks as always.

All right, great question. Yeah, this process is called tax gain harvesting. You've heard a lot on this podcast about tax loss harvesting, which is what people who make more money than you do. When you have a relatively low taxable income, which is not unusual for a resident and is certainly not unusual for anybody in the military, you can do the opposite. You can update the basis on your investments. That way when you sell them down the road, you'll have less of a gain and you don't have to wait 30 days. There's no waiting period with this. There's no wash sale. You can simply update the basis. And now of course those capital gains are going to flow through onto your taxes if you do that. So you better be sure there's not going to be a whole bunch of income at the end of the year, which could cause those to become taxable. But given that the 0% capital gains tax bracket is fairly sizable, especially in the year you're coming out of medical school, for instance, that can be a pretty significant amount of capital gains that you can realize. So that's a good idea. You certainly can do that. Other things to keep in mind, other opportunities you might have would be like a Roth conversion. If you can do a roth conversion at 0%, that's pretty much always a good move. You know, when people go into medicine as a second career, for instance, and they have some retirement accounts and then they go back to medical school. Well, in that second and third year of medical school and you have no taxable income whatsoever, you can do a pretty fat Roth conversion and pay no taxes on it whatsoever. So take advantage of those times in your life when you have low taxable income to, you know, to update your basis to do Roth conversions. You know, any other opportunities you may find there to really arbitrage that super low tax rate. I'd call it artificially low, but it's just low relative to the rest of your life. All right, let's take another question, this one from Michelle about the foreign tax credit.

Hi, Dr. Dali. Thank you so much for all of the education you've provided over the years. I have a question about the foreign tax credit. I read an article by William Baldwin at Forbes that explained that at a certain point, there's a complicated adjustment to the foreign tax credit calculated on Form 1116, which could lead to losing much of the credit. This occurs when you receive over about $20,000 of foreign dividends, which corresponds to holding several hundred thousand dollars of a foreign fund in a taxable account. I'd love to hear your thoughts about this. Should someone approaching this situation preferentially hold foreign funds in their deferred or Roth accounts going forward? Thank you so much.

All right, Michelle, congratulations. You have asked the hardest question that's ever been asked on this podcast. We had to pause the recording for 15 minutes while I tried to figure out what the heck you were talking about. This has never affected me. I looked at my last tax return that I have done, which is 2020, and I only had $11,000 in foreign dividends on that tax return. So this doesn't affect me or did not affect me in 2021. I think it will, though. I haven't completed those taxes yet, just filed the tax extension. I'm still waiting on K1s actually, as we record this. But at any rate, yes, you're right. Or your tax person is right. There is a limitation on this credit. If you dive into the details of Form 1116, specifically line 18, you get in there and there is a limitation on your qualified dividends. They basically get multiplied in step nine of the worksheet by 0.5946. So in essence, one of the exceptions to not have to do that worksheet is having less than $20,000 in dividends. And so once you have more than those, you have to do this worksheet. And it looks to me like that limits your dividends by 60%. So in essence, this is going to decrease or reduces it by about 40%. Sorry. So in essence, this is going to decrease your foreign tax credit from what you might think it was going to be unfortunate, but there's nothing you can do about it. This is the way it's calculated and your tax software will take care of it. Or if you're paying someone else to do your returns, their tax software will take care of it. You know, anybody who's still doing their entire return by hand and is having to do worksheets like these is just a glutton for punishment. But your question is, should this change your asset location decision? Well, in my case, all of my US Total Stock Market stocks are now in taxable account, and all of my foreign Total International Stock Market and Small International Stock Market Index Fund is all untaxable. So it's all intaxable anyway. I'm going to get what I get. It's not going to affect my tax location decision. But if you were at that stage in tax location where you were trying to decide whether to put Total Stock Market into taxable, or you're trying to decide whether to put Total International Stock Market into taxable, I guess this could sway your decision slightly. But the truth is this was always about the same anyway. Because foreign stocks pay a little bit more in dividends, but you get the foreign tax credit. So that kind of offsets that US Stocks pay a little bit less in dividends, but you don't get the foreign tax credit. So they're about equal when it comes to tax efficiency. If you're really debating which one of these is more tax efficient, Total International or Total Stock Market, you win, right? You've won the tax location game, you have won the investing game. You've gotten down to something that really doesn't matter all that much. So would this change my decision? No, because there's not really a right decision here anyway. It's really trivial. Which one of those Two funds goes into taxable first. And if you're like a lot of us, you're going to end up with both of them in there eventually anyway. So, yes, it's an interesting bit of tax trivia that I just learned today. Thank you for that education. But is it really going to affect your tax location decision? Not by much. Not by much. But expect your foreign tax credit to be a little lower once you're pretty wealthy. That's the bottom line. All right, let's do our quote of the day. This one comes from Rick Ferri. He said stuffing money in a mattress is also diversification, but I wouldn't do that either. You know, there's a lot of people that try to justify the addition of an asset class to their portfolio by the fact that it has low correlation with stocks, right? Well, there's lots of things that have low correlation with stocks, including putting money in a mattress. If it doesn't also have a halfway decent return, you may not want to invest in that. Hey, by the way, I got a book sent to me. This is From Jordan Grummet, MD, aka Doc G. You may know him from the Earn and Invest podcast. I've been on his podcast. He sent us this book. He's got his. I don't know if it's first book, his only book out, it's called Taking Stock. And he emailed me to make sure I got it a couple of months after he sent it. And I didn't have it. And you know why I didn't have it is because Cindy took it and she was reading it when it came in in the mail. And then Katie took it and she was reading it. They both loved the book. So this is out and there's a lot of good stuff in here. But one of the best parts I think about it is, is a section he calls Defining Enough before It's Too Late. And here's his recommendation. And I think this is really important. If you don't know how much money enough is, you may be doing work that you don't enjoy to get more money than enough. So it's really important, I think, to define enough. And this is Jordan's recommendation for figuring that out. Says, clear your schedule for an hour for two or three separate days over the next week. Turn off your electronics. Make sure you're well rested and fed. Quiet, comfortable place. Doesn't say, pour yourself a strong drink like you should when you add up all your student loans, but you might want to do that, too. Close your eyes. Imagine you've gone to the doctor's office for your annual physical and feel great. And your doctor's got a serious face on, tells you you have one year to live. If you feel some anxiety arise while doing this exercise, know that's natural. Take some deep breaths, help it pass. And now that you know the timing of when you're going to die is no longer in question, what do you feel empowered to contemplate and question? Then he says, make a list of all those things you feel would be important to do, experience or achieve before you leave this earth. So these might be traditional bucket list items, but maybe you think about the story of your life so far and think about what's missing. And he says, be specific. What relationships in your life need repair? What lifelong goals have I yet to achieve? What deep needs have I not had the courage to fulfill? What have I denied myself because I was too afraid to spend money? Which places have I always wanted to go? What legacy do I want to leave for my family and friends? In what areas do I not yet have enough? Then he says, you'll notice that enough is not about a specific number. Not yet, anyway. In the next chapters, we'll explore how to use both fiscal and human capital as levers to get to enough sooner. For now, simply ask yourself where you don't have enough and be generous with your answers. Don't be afraid to tackle each concept on different days. Maybe the first hour is spent thinking about that moment in the doctor's office, the second hour asking those important questions, and the third hour exploring enough. Great book. Jordan Grummet, MD. It's called Taking Stock. You can get it on Amazon, but I encourage you to check that out. Thanks, Jordan, for the review copy. All right, let's take another question, this one about life insurance tax code changes off the speak pipe. I wonder if they're trying to beat Michelle for the hardest question ever asked. Let's Find out.

Hi, Dr. Dalle. I've been meeting with an independent financial advisor. First, I just want to say thank you for everything you do for us. And he was talking to me about a couple of the larger life insurance companies and this recent tax code change. I believe it's tax code 7702 that allows the cash value to grow on a much faster rate than it previously was otherwise. I know you've got some pretty negative thoughts around the whole life insurance, but some of the companies sounded like they pay a very nice dividend and have historical good returns. So as an alternative to bonds, I thought this might be a good Idea. Particularly ones that are paid up in 10 years and require no more premiums. The cash value is growing at a fairly nice rate of return. So I didn't know if you had any new thoughts on this based on the tax code or what your opinion was. Thank you again. I appreciate everything you do.

Okay. 7702. I kind of hate 7702 because, you know, these guys that sell whole life insurance, they use things like these tax code numbers to sell whole life insurance, right? Instead of saying, hey, this is whole life insurance, they say, here's a 7702 retirement plan. It's brand new from the government and makes you think that you're dealing with a 401k or something. It's not the same thing. Okay? This is just like a section of the tax code that talks about life insurance. It's not some new retirement plan by any means. All right, so there is a post out that was probably published since you recorded this question on the Speak pipe. It came out on June 11th on the White Coat Investor blog. It says, why you shouldn't buy a TFRA or 7702 plan. And, you know, there was a guy out there selling these things and he was selling them hard. And I wrote this post just ripping them up one side and down the other. And my team said I had to neuter it. I could not run it in the form I had written it. It was entirely too personal. We were going to end up having legal problems with it, et cetera, et cetera, and it was just downright mean. So I neutered it back, but left in enough that you can learn exactly what I think about someone selling whole life insurance using a name like a 7702 plan. I don't like it as the bottom line. What were the recent changes to section 7702? Basically, it lets you pay more premium for less permanent death benefit. So a little bit more of the premium paid goes toward the cash value. That's it. That's the change. Okay. Do you still have to buy a permanent death benefit? Yes. Does it still go through all these fees and commissions that the insurance company makes you pay? Yes. Is it a great idea as an investment? No, it still isn't. Okay. And then they'll tell you, oh, we don't sell them as investments. We sell them as life insurance. It's not an investment, it's insurance. Well, whatever. You're trying to sell it to us to use our dollars for inst. Putting them into a real investment. So here's the bottom line, right? If you are skipping out on a retirement account in order to put money into a whole life insurance policy, that's almost surely a mistake. If you are skipping out on an investment that likely has higher investment returns, we're talking stocks, real estate, and instead putting that money into whole life insurance, that's almost surely a mistake. You are far more likely to grow your wealth faster in a riskier, but maybe less risky over the long run investment like stocks or real estate than you are in whole life insurance. If you look at the policies being sold today, and you hold these policies from the time you're 30 or 35 until you die over 50 years, your guaranteed return on that is about 2% a year. That's the guarantee. That's if you hold it the whole time, right? You sell this thing in five years, you're probably selling it at a loss. The projected return will be up around 5%. That's the return they'll put in the illustration that they're projecting. What you'll actually get. You'll probably get something in the 3% to 4% range. That's what I would expect holding a whole life insurance policy in the long run. I don't think this change on 7702 significantly changes that. So I would expect about the same thing in the long run. Now, if you sit back and think, well, what about investing in bonds in a taxable account? This might compare favorably to that. Well, okay, it might. There are some downsides, though. For example, if I invest in bonds and I want my money in a year or five years or 10 years, I'm almost surely coming out ahead with the bonds than I am with whole life insurance, because it's going to take five to 15 years to break even with whole life insurance. Now, you don't get a death benefit like you do with whole life insurance, but you can buy that pretty cheaply with term life insurance, at least for your working years. So I don't think this changes the calculus of whether you ought to buy a whole life insurance policy. I don't own one anymore. I got rid of the crummy one I had sold to me as a medical student, which is basically malpractice, financial malpractice, if you will. And I really don't think you ought to buy one. But if you understand how it works, you really have a clear understanding of what you're going to get out of this policy, and you still want it, go buy it. Knock yourself out. I don't Care I don't get more money or something if you don't buy a policy? I don't get more money if you do buy a policy. But what I'm sick of is running into docs who got suckered into buying one when they had a better use for their money, like maxing out their retirement accounts, like paying off their student loans. I mean, you're getting this investment that maybe you make 3 or 4% in the long run while you're running around with 6% student loans. It doesn't make any sense. Right. I'm sick of that. And if you look at the statistics, if you look at the statistics from the Society of actuaries, about 75% of these policies, 75 to 80% of these policies are surrendered prior to death. So four out of five people that are buying them are regretting it. You ought to really understand the reason why they're regretting it before you buy one. And when we've surveyed white coat investors who have actually bought a whole life insurance policy, 75% of them regret it. So take from that what you will. Hope that's helpful. All right, let's take another question about an inherited IRA. This one from Jared.

Hey, Dr. Daly. This is Jared in the Northeast. I'm a surgical subspecialist and have been in the highest income bracket, tax bracket. My question is, I recently have a inheritance of about $100,000 in a traditional IRA or inherited IRA. My question is, what should be my policy on taking that money out and transitioning it out of the ira?

I'm early in my career.

I have no plan in changing jobs. Does it make more sense to hold on to that money in the event that I change jobs and drop income brackets? From a tax standpoint, does it make more sense to move that money out now or potentially during any recession we have moving forward? We'd love to hear your thoughts and kind of get a framework on how to manage it. Thanks so much.

Okay. Used to be with these stretch IRAs that you could stretch withdrawals from this IRA over the rest of your life. You can't do that anymore. The IRS says you got to have the money out within 10 years. So your options are to take all the money out now, take all the money out in 10 years, or take the money out in some MANNER over those 10 years. But in your case, you're in the highest bracket. You don't need the money. It doesn't sound like you're making a gob ton of money. You're clearly saving a significant portion of that. So this is not money you need to spend. It doesn't sound like you're planning to give it away. Although if you give a bunch of money to charity, you know, giving it out of an IRA is usually not a bad way to do it. But the bottom line here is maybe you'll be in a lower tax bracket in 10 years. Probably you'll still be in the top tax bracket. So you might as well enj 10 years of tax protected growth before you take the money out. That's what I'd do. I'd just leave it in there for the next 10 years, take it all out after 10 years and you know, invest it in taxable or whatever you want to do with it, spend it at that point. I don't know what your life's going to have going on at that point. But if this were me, that money is sitting in that IRA for the next 10 years. Now, for other people that aren't in the top tax bracket, that may not be the plan. For example, let's say you're in the 24% tax bracket and you want to get all this money out of there. And maybe it'd have to be more than $100,000. Let's say you inherited a half million dollar traditional IRA. Maybe you take that money out over years 7, 8, 9 and 10. So you divide it into four and you take it out over those four years so that you can take it all out in the 24% tax bracket. That might be a smart plan for you. But in the case of this surgical specialist who's in the top tax bracket now and expects to be for the foreseeable future, leaving it in there for the whole 10 years and then taking it all out at once and paying the taxes on it is probably the right move. You're going to be paying 37% on it whenever you take it out. So you might as well maximize the asset protection, maximize the tax protected growth and go from there. All right, so we've got a guest I'm going to bring on here. This is a guest you've heard before. This is Letty, who you have been introduced to her and Kenji, her husband's zero to freedom course in the past. And this is something that a lot of white coat investors have taken. They enjoy this course. If they are interested in direct real estate investing, if you want to go buy rentals, whether they are houses, duplexes, triplexes, small apartment buildings, et cetera, you want to get into direct real estate investing. This is the course that teaches you how to do that. And you can get more information about this@whitecoatinvestor.com rental. But this course opens up a couple of times a year and it's going to be enrolling from July 25th to August 3rd. So we're right in that enrollment period. As you listen to this, if you're listening to it on the day it dropped. But if you are interested in taking this course, I recommend you check it out. Whitecoatinvestor.com rental and let's bring Letty on to talk for a few minutes about real estate investing. All right, Our guests today on the White Coat Investor podcast are Dr. Letizia Alto and Dr. Kenji Asakura, the creators of the Zero to Freedom online course that will bring you from zero to Freedom in cash flowing rentals. This is the course you've probably heard about on the podcast before that helps you get into direct real estate investing and particularly in cash flowing rental properties. Welcome to the podcast, guys.

Thank you for having us. We're excited to be here.

Now, we've had you on the podcast before, but I don't know that we have ever heard your story. So today, take us from the beginning. Take us from when you were at zero to now when you have freedom.

Yeah. So actually Kenji has been investing in real estate since 2001. And we started investing in 2015. When we started investing in 2015, he actually didn't really have anything because from 2001 until that point, he had been doing appreciation plays. And so he had been buying raw land and really type A, like fancy condos that didn't cash flow. And so he was doing appreciation plays where he was hoping that a property would gain in value.

Yeah. So it was a lot of lessons learned. I was just out of medical school and working at a company called McKinsey. And so I had some extra money and started investing in real estate. And as Latey said, yeah, back then there were a lot of opportunities to buy property. Properties have them appreciate 100, 200,000 leading up to the market crash in 2007, 2008. You could also buy these properties with very, very little money down, which is what resulted in a lot of people getting into trouble, myself included. But I think the main thing is that we learned a lot from it and Latee benefited from that as well, because we took all those learnings and put it into the course. And I think it's really important, especially kind of looking at maybe a downturn coming. You know, I've invested through two recessions and so I really had a chance to experience what that's like. And even at that time I did have a property that probably one property that actually saved me was a property, it was an eight unit townhouse complex which cash flowed and I was able to force appreciation. In other words, I was able to increase the value of that property by about $200,000 just by increasing the rents. And this was in the middle of the recession. And so that showed us that this is a really great recession proof investing method where we invest in cash flowing rentals and we increase the value of those properties using. It's called forced appreciation.

Yeah. So when we got together, one of the things Kenji had asked me was hey, how do you, what do you want our lives to look like? And I had started describing kind of the current path we were on and, and he said no, no, if there were no limitations, if there was unlimited money, if that didn't matter, what would you want your life to look like? And I described a very different life and we were like. And one of the things that came out of that is we realized, well, we need to have a source of income that doesn't rely on us trading our time for money because we were both working more than full time and that wasn't going to get us the life I was describing of having a villa in Italy and having all our friends there and a big family there, ability to travel, it just wasn't, it wasn't in the cards working w two incomes. And so what we started doing was looking for ways to get there. And about six months later real estate actually intervened because we were on this trip to New Zealand and I started reading Rich Dad, Poor dad which Kenji had already read and suggested for me to read and started reading it, got so excited we read it out loud to each other and about halfway through that book we were already convinced, you know, we, this is the key is getting real estate and getting real estate that pays us every month. Instead of what Kenji had been doing previously, which was real estate that actually took money out of his pocket every month to support but he was hoping would gain in value. And so we at that time in our lives were just married. We were starting to, we had saved up a down payment for primary residence. We were going to buy a house in Seattle and came back from that trip and said to our agent who had been helping us and we were getting outbid left and right, we said to him, you know, we no longer want a primary resident. We're real estate investors now. We only buy Properties that make us money. And so we're switching things completely.

Yeah. So $200,000 that we had saved for the primary residence and focused just on rental properties. We haven't bought a primary residence since. We've just been putting our money into rental properties. And then within three years we had achieved financial freedom. We achieved enough, enough cash flow from our properties to pay for our expenses. And then currently we own over 150 units, apartment units.

Awesome. Well, congratulations on your success. That's pretty awesome. And what's even better is you're teaching other people how to do the same thing. Which is, which is, you know, paying it forward in the best, you know, in the best tradition of medicine to see one do one, teach one, right?

Yeah, exactly.

Cool. Well, let's get into the weeds a little bit and talk a little bit about something that people have been doing a lot the last few years, especially while bonus depreciation laws have been in place, which is a cost segregation study. And can you explain to us what a cost segregation study is and why real estate investors like to do them?

So I'll give a little context and then you can explain what cost segregation study is. So in the government's eyes, an investment property loses value every single year. And so if, let's say you buy a duplex, a two unit property, in the government's eyes, the structure, the building will go to value of 0 over 27 and a half years. And so every year you get to write off a certain amount of a loss on that property. It's called depreciation off your taxes. So it's lowering your taxes, but your property might be gaining value. It's irrelevant what's going on in the market. It's actually the building is seen as losing value.

Yeah. Another way to kind of think about it is like when you drive a car off the lot, you know, you hear the story. Oh yeah. You know, the day you drive the car off the lot, it loses value. Right. That's depreciation. And so unlike cars, you know, with houses you can actually write off that depreciation offset the income that your rental property generates. And that's why a lot of times we say cash flow is tax free because of that. Depreciation is essentially what makes your cash flow your net income, the money that you have left over after expenses, zero or negative.

Yeah. And so with, if you're using straight line depreciation, which is you're writing off that same amount every for 27, over 27 and a half years, you know, it's a certain amount of money you're writing off every year. But then there's this thing called 100% bonus depreciation, which has been around since end of 2017. And what that allows you is to take the first 20 years worth of stuff in that building and write it off in year one. So it's effectively taking the first 20 years of depreciation and writing it off your first year. And that's really important, especially if you can shelter your income from taxes with that depreciation. And the way that you get the ability to kind of figure out in your building what amount you can write off is you use a cost segregation study.

Yeah. And just a real tangible example, if you have let's say $1.2 million property, let's say a million dollars of it is the building and 200,000 is land, and then you can only depreciate the $1 million worth of building, and then you do a cost segregation study. They identify all the components in that building that have a useful life of less than 20 years, and then that's the stuff that you can write off immediately. And so for a million dollars or $1.2 million, that might represent just back of the envelope, might represent about $300,000. And that's the depreciation expense that you can add to all your other expenses to offset the income that your property generates. And therefore you show a loss when you do income minus expenses.

And how you do a cost segregation study is there are actually a couple different ways, but what we do is we get an engineer to come over to our properties and they walk around and they look at everything and they really kind of start categorizing everything. And then that's taken to. You have a cost segregation company and they kind of tell you how much money you should be able to write off. And you give that to your CPA and then they write that off. Your taxes.

Yeah, there's a seven year property and 15 year property. You know, some of the stuff in your building qualifies for faster depreciation, right?

Yep. Yeah.

And what I want to give you an example using a short term rental, because I know a lot of people are buying short term rentals right now. So we bought a $660,000 cabin and we ended up doing about a $50,000 rehab on that CA and it was a short term rental. And so we bought it. And that year we achieved something called material participation. So we made it active by really participating in our property. And what that allowed us to do is take that cost segregation study, which is almost $200,000, and write that off to shelter active income. So shelter our W2 income from taxes just using the bonus depreciation.

And then on top of that, you can also bonus depreciate the renovation. So the $50,000. So you have the $200,000 from depreciating the building plus the $50,000 renovation for a total of $250,000 that you can write off.

Yeah, it's pretty awesome. It's pretty powerful tax technique to be able to use that. All right, so we are now in the enrollment period for your Zero to Freedom course. The enrollment period for this time is July 25th to August 3rd. This podcast is going to drop on July 28th, so we're already into it. If you're here in this podcast, this is your chance to sign up. You can do so@whitecoatinvestor.com rental. And what can they expect to learn in this seven week course?

Yeah, I mean, the goal of our course is really to take somebody who, you know, knows little or nothing about real estate or investing in real estate and feel really confident at the end of it to go out and be as good as an experienced investor. And we really feel like the people that graduate from our course, and we hear this from a lot of the students that go through our course, that they go out there and they can compete with even the most experienced investors. And I think in a time like this, this is a really great time to learn. There may be some really great opportunities coming up. Especially if there is a downturn, a recession, then this is when you want to get trained. This is where you want to invest. We actually interviewed Jay Scott recently. He's an author of several books and that's what he was saying. He was saying the one thing that he would recommend doing right now is educate yourself, learn. That's the one thing that you can do that will really set you up nicely, no matter what happens.

Cool. Awesome. Well, thanks for putting the course together. Thanks for introducing it to our readers. Again, the URL for that whitecoatinvestor.com rental and thanks again for coming on the podcast and help us learn more about real estate.

Thanks, Jim. Thanks, Jim.

All right, let's take another question off the Speak pipe. This one about Roth conversions in retirement from Mark.

Hi, Dr. Dali. This is Mark from Madison, Wisconsin. I recently heard about some research from Dr. William Rickenstein about maximizing income and minimizing taxes in retirement to fill up lower tax brackets and avoid hitting higher tax brackets in later years, as well as avoiding more costly Medicare income thresholds. If I understand correctly, some of his technique involves doing Roth conversions in retirement to fill up those lower tax brackets. The recommendations are fairly complicated, and he says his technique runs counter to the conventional wisdom on retirement drawdowns. I don't fully understand the recommendations, but he claims the savings can be significant. I was wondering if you're familiar with this research and what your thoughts might be on it. Thank you so much for everything you do.

All right, Mark, good question. I'm not familiar with Rickenstein. Well, that's not true. I mean, I've read a few of his articles over the years. William rickenstein is a PhD in a CFA. He's the head of research at some software firms, Social Security Solutions Inc. And Retiree Inc. Which is incomesolver.com He's a professor or professor emeritus, a Baylor, and he's had lots of articles in the Journal of Financial Planning. So does he know what he's talking about? Yes. Are his recommendations contrary to conventional wisdom? I don't know. It seems a little bit of a straw man to say that. Here's the deal, right? Roth conversions can be done, and they can be done in retirement. They're frequently done in the early years of retirement before you start taking Social Security, maybe before you start taking pensions. And that can make a lot of sense to do that so that over time your overall tax rate in retirement is lower. This can especially become an issue if one spouse dies many years before the second spouse, because what happens is after the first spouse dies, all of a sudden the second spouse is now paying taxes in higher tax brackets because they're paying it in the single tax brackets, whereas they used to pay in the married filing jointly tax brackets. So Roth conversions can absolutely be a very smart thing to do. You basically want to avoid the extremes. If you're not converting anything in those years, that's probably wrong. If you're converting everything in year one when you retire, that's almost surely wrong. But there is probably some amount of Roth conversions that make sense for most retirees to do in between the time they retire and when they start taking Social Security. That's probably the best way to think about it. But it is complicated, right? How much you convert each year, how much depends on variables that are unknown today, are unknowable today, and maybe even be unknowable at the time you do the conversion. Right, because you don't know what tax brackets are going to be when you're 78, when you're 62. You don't know how well your investments are going to do. You don't know what the markets are going to do. And so you're forced to make these decisions without having complete information. You can make the best guess that you can. But know this, that most of the time, with most reasonable assumptions, most people should probably do a few Roth conversions during those first five to ten years of retirement. And on average, that's probably going to work out pretty well for them. So I don't think of that as being contrary to the conventional wisdom. I think that is the conventional wisdom. But, yeah, if he can show you with the numbers that that's the way it works out, I would probably believe him, because that's what it shows when I run the numbers and when most other people I trust run the numbers. But I wouldn't go crazy doing some Roth conversion. When you're 55 years old and making 700,000 dol a year just because you heard that Roth conversions were good. It's far more complex than that. You got to run the numbers, decide how much to convert, and especially if you can do that at a lower tax bracket than you're likely to be in later in retirement, that's going to work out well for you. Okay, let's take another question, this one about my favorite mutual fund, the Vanguard Total Stock Market index fund.

Hey, Dr. Dalle, thanks for all you do. I am an anesthesiologist in the Southwest. I had a question about some investments I made that seem to be doing worse than I would have guessed. I had a couple hundred thousand dollars earmarked for a remodel project that we thought we were going to cancel. And not wanting to sit on that much cash, I put it in the stock market in Vanguard's Total Stock Market Index, vtsax. But it's declined more than the stock market's declined, and I'm not sure why. I put in 100,000 on July 16, and it looks like the stock market's been down 5.18% since then, but the values declined almost 8,000. Then I put another hundred in on September 13. Looks like the stock market's declined 7.18%, but the value's down 11,000. And I'm just not really sure why my losses are worse than the stock market decline. Curious if you had an explanation for that. Thanks again for all you do.

All right. Thanks for the question. The answer to your question is that you're mistaken. Because over the last year and over the last 20 years, the Vanguard Total Stock Market Index Fund has almost precisely tracked its index. It does so very well. They're very good at doing this at Vanguard. Their computers are top notch. And if you look at the end of every year for the last 20, 30 years, whatever, it has essentially tracked the stock market perfectly within 10 basis points. It's not that hard to do with an index fund, number one. And number two, Vanguard's better at it than anybody else. So they really do a good job of tracking the overall market, tracking their index. So what that tells me is that you're mistaken. Now, why might you be mistaken? Well, probably the most common reason why people would make this error is because they're not reinvesting their dividends. Now, that may be the case. It may be that you are not reinvesting your dividends and you're looking at the total return of the fund, but you've been taking money out. So obviously your fund has less money than that because you took the dividends and did something else with them. So that's a common reason why people might make this mistake. Another reason might be if you're not looking at the exact same starting and ending points, that could make a difference. You know, if the index return you're looking at is, you know, the end of the month to the end of the month, and you're looking at money you invested mid month, that'll be a little bit different. If you're buying the ETF version, it doesn't sound like you are, but the ETF version of this fund is VTI is the ticker symbol, and that fluctuates during the day. So if you buy that at noon, it may not have the same return as the fund that gets bought at 4pm on a really volatile day. That could be 1 or 2% different. So lots of reasons why you might be mistaken, but I am quite confident that you are mistaken. And so I would have to sit down with you and run your numbers and look exactly at your forms to try to figure out why that is. But I'm confident that there's a pretty good explanation there. And the explanation is not the Vanguard started sucking at indexing because they're awfully good at it. So I'm sorry to hear about your losses. The good news, everybody's got lots of losses this year. If you're investing in taxable, make sure you tax loss, harvest them. You can probably use those losses to offset up to $3,000 of your ordinary income this year, as well as an unlimited amount of your capital gains. That you may have from other investments during the year. It's also a good time to remember that this is not a short term investment. Right. Stocks go up. Stocks go down often. When they go down, they do not come back for two, three, four years. That's not unusual with the stock market. And so money that you piled in in 2021 or even early months of 2022, you've got significant losses on. I think this fund's probably, as I record, this fund's probably down 25%. And so many of us that have this as a major holding in our accounts are down a lot of money. I may have lost seven figures in this fund this year so far because it's a major holding in my portfolio and it's gone down a lot. And so you got to expect stocks to be volatile. You're not buying them hopefully with renovation money you need in a year. You're not buying them with some money you're going to use to pay off your mortgage in six months or something like that. This is money that you don't need for 10, 20, 30, 40 years. That's what you buy stocks with. Same thing buying real estate. You know, this is not money you need soon. So make sure you're not mistaking this for a short term savings account. It definitely is not. Okay, next question. This one comes in via email. After listening to your podcast, I've now decided to change my actively managed mutual funds to low cost index funds. Okay, that's almost surely a good thing. When should I make the change? Is it okay to do so if the market is low in a bear market right now, or should I wait until it gets better when we come out of the bear market? Well, here's the truth. I'd do it now because the truth is you own mostly the same stocks in the index funds as you do in the actively managed funds. You're just paying more fees to do so. So it'll cost you less when you own those stocks via an index fund than it will if you own an actively managed fund. So if you're investing in a retirement account, an IRA, a 401, et cetera, there's never a cost to change from one investment to another. So you can do that anytime. So I just do that now. If you're investing in a taxable account, there might be a capital gains cost. If you have a bunch of gains on these investments, if you've held them for a long, long time, you might have significant gains. You might have so much gains that you don't actually want to realize them. But if you're going to sell, the time to sell in a taxable account is in a bear market now. I'm not saying selling and going to cash. I'm saying selling an actively managed fund or some other investment you don't want for the long term and buying an index fund or some other investment that you do want for the long term. This is the time to do it. Your capital gains will be the lowest they'll ever be. You might even have losses that you can use for tax loss harvesting essentially. So I would change now if you realize this is not something I want to own for the long term. Now is a great time to change. While the market's down 25%. 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Don't forget if you're interested in that zero to freedom course that you can sign up through August 3rd and then it's going to be closed again for, you know, six, eight months. Who knows if it ever opens again? I guess there's no guarantee, but if you're interested in learning more about that, like most courses that we partner with or that we offer ourselves, there is a money back guarantee. You can kind of check it out, make sure you like it before you actually are committed to it. So check that out. Whitecoatinvestor.com rental thanks. For those of you who've been telling your friends about the podcast and or leaving us five star reviews, our most recent one said Doc. What a great topic. We joke in our family about which restaurants will do well in our area. They're talking about that non food franchising episode we had. I hadn't thought as much about non food business opportunities much to this point. Looking forward to discussing this after my wife listens to this episode. ZXM Psychiatry Thanks a lot for that review. We appreciate does help get the word out to other people. Hope you're having a great summer. I know we are. In between the time I'm recording this and when it runs, I think I'm going to float a river and have a great family reunion in Colorado. I hope you're also doing something awesome. Until we meet again. Keep your head up, shoulders back. You've got this and we can help. We'll see you next time on the White Coat Investor Podcast.

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