Practical Tax Planning Strategies For Real Estate Investors with Jason Malabute, CPA

What's up, you guys? Welcome back to the podcast. We have an amazing guest with us today. We're gonna bring him on in one second. What's up, Joe? We're gonna be talking about tax strategies, practical tax strategies for real estate investors, because too many of these guys are obsessed without— about making cash, flipping these properties, making large sums of money. And then you find out they don't know what they're doing with it. They're just giving it to Uncle Sam willy-nilly. And so we're gonna find out how to keep more of those profits in your pocket. But first, I'm Alex Barnett. I'm one of your hosts. I'm the new guy.

I'm Joe Holmes and I'm the Experience Guy.

You darn tootin'. And today we have Mr. Jason Malabute. What's up, Jason? How's it going?

Hey, you guys, thank you again for having me on your platform. I really appreciate that.

Absolutely. We're gonna talk about, we're gonna talk about something, um, that I think, I don't know, I don't know what you see as far as like these real estate investors and like, like I mentioned, I mean, out here, We're in the land of large profits. We're in a land of like a lot of cash flow. Well, maybe not a lot of cash flow unless you have a paid-off property like this man right here. Large profits. But I think not enough people spend time on, you know, taxes and how to save it. And real estate is such a great way to shelter taxes.

Yeah, that's very, that's very accurate, you know. As you mentioned before, that's a common misconception that a lot of people have when they are first getting into real estate, including myself. I thought that once you get into real estate, you'll be drowning in cash flow. But what I realized is that Real estate is more about a tax play, especially once you start getting more advanced in real estate, rather than a cash flow play.

Absolutely. Yeah. It's like the tax code is written for investors. I mean, it's kind of like they want the developers to start building these properties. They want the investors to fix up these properties. And so they're going to give you the benefits Of that. So we're gonna go into some practical tax strategies, um, that people may or may not be aware of because, uh, like you said, you're gonna get, you're getting into your busy season coming up here. And that's when everyone starts scrambling and getting their books in order. Joe, when do you start working on your taxes?

Year round.

Oh, wow. Wow. That's why you're experienced.

You gotta do it year round.

Last second. I'm trying to, you know, get all the, well, actually we're, we're better now that we're, we've been under Joe's tutelage here for the last 5 years, but, um, it was sketch for a little while. And then, well, first it was like we weren't making any money, so we didn't have to worry about it. And then he started making money and it was like, okay, we gotta pay attention. And then, uh, we filed late in, in one of the years and I got a tax bill that was like pretty hefty, uh, for just being late, for just being late. And then, um, now we're all caught up cuz now I have a son, so now I'm responsible.

Congratulations on that.

Thank you very much. All right, well, let's jump on into it. Um, first, you know, we have the real estate professional status. Break that down for us.

So normally whenever you have real estate, that's considered passive, right? So, so meaning that if you have losses from your real estate Whether it's from expenses or depreciation, that's considered passive, and passive losses can only offset passive income. So then that means that normally if you make, let's say, if you make a lot of W-2 income, kind of like Joe, If you're not a real estate professional, you cannot use your passive losses to offset your active income, which includes your W-2 income. But if you qualify as a real estate professional for tax purposes, now we can We can, uh, um, offset your active income with your passive losses, which is a great tax strategy.

Yeah, okay. Well, I mean, my wife's an agent, so that— does that automatically make you like a professional?

No.

Oh, okay.

No, because there's multiple requirements that You need to hit before you get considered a real estate professional. Some of those requirements is that you need to have 750 hours towards real estate. 51% of your time needs to be dedicated towards real estate. And you need to have 500 hours of material participation. towards your own properties to be considered a real estate professional. So as you can see, for some people, especially for people who are W-2 workers, it's hard to qualify as a real estate professional. So then that's why we need to find other options or other angles so they could Take advantage of.

That makes sense. Good thing I eat, sleep, and breathe real estate. I mean, are you— am I supposed to be keeping track somewhere, like making a log? What about YouTube videos? What, can I show the IRS YouTube videos? Will they accept that as some sort of currency as to like, look, I'm out here in the field?

So, so like, um, let's, let's break down your question. So First thing is yes, you do need to keep a log. Especially right now, the IRS is paying more close attention to people who claim real estate professional.

Why?

And actually now they're using AI now to To really help target those people.

Come on.

And number 2 is that making YouTube videos might count for the 700 hours, but it's not going to count for the material participation.

So what do I just like a 3-ring binder? Where am I putting it?

Um, you can, you can just put it in Excel.

Okay.

What we do for our clients is we try and make life as easy as possible for our clients. So, um, we just made them like a template that they can just—

Ah, fill it in.

There you go.

Boom.

Okay.

I've been doing that, but I'm going to do it more closely now.

Yes.

Thank you. Perfect. Joe, I don't see you ever logging anything. Are you doing it?

And I was just going to say, it's going to be a lot easier for you because your wife is a real estate agent and you are a wholesaler. And so when you fill out your tax return, you've put those 2 categories and hopefully even AI is looking at that and saying, oh, okay, I get it. Yeah, they probably qualify. But now, if you're a doctor, let's say, okay, and you're trying to claim that status, they're going to say, "Oh, wait a second! He made like a million dollars over here being a doctor, and he made a million dollars as a real estate agent. But yeah, he spends more time being a doctor than you know the income for the real estate agent." So, you know, for me, yeah, I do not keep track of it, but. You know, I, I, I, you know, I do put, put down there and, you know, that I am a real estate broker and stuff. So it's, it's easier for me to prove at the end of the day, right? I don't think they're going to come after me for that. I've had it for, I've had it for 50 years. Dang.

All right.

Yeah.

AI recognized game.

And they, and they never have, you know, knocked on my door, thank God.

All right, perfect. Okay, well, that's good. Well, let's take a look at, uh, maybe some of the other angles Um, in case you are a W-2 earner and you do also invest in real estate and you want to get some of those tax strategies, what's another one?

So, so, uh, let's use the same example as Joe was mentioning, right? Let's say you're a doctor and, uh, and, uh, he, and he can, I mean, you can prove that 750-hour rule You can prove that 500-hour material participation rule, but most likely what you're gonna have the most challenge with is that 51% rule, which says that you have to spend 51% of your time towards real estate. So that's the one that you're probably gonna fail at. So then in situations like that, another option that we could look into is instead of having a long-term rental, let's look into having a short-term rental. Because for a short-term rental, the requirements are much easier, meaning that you just need to have 100 hours of About participation with a short-term rental.

Wow. I did not know that.

Okay. That's cool.

Yeah.

So that is why having a short-term rental is becoming more popular now. It's because not only does the cash flow more in some Circumstances compared to a traditional long-term rental, but also for tax purposes, it's much easier to qualify for the short-term rental loophole versus a long-term rental for real estate professional status.

Yeah. And I have seen people like it gets to November. December, and they're like, I gotta get a short-term rental now, you know? And then they try and like shoehorn it in. I mean, is that—

that actually happened to one of my clients last year. Um, they closed on a property somewhere like the second week of December. So, so I told them like, hey, like, um, You guys need to get at least 2 rents before the year end because, um, because the rule for short-term rental is that, um, not only do you have to have 100 hours of participation, but you need to have an average stay of 7 days or less.

Hmm.

For the whole year. So then that means that, um, if let's say you close on like the first week or second week of December, as long as you get 2 Airbnb tenants in there before January 1st and they stay for less than 7 days, then you are good. You can qualify for the Such a rando.

Oh my God.

And then let's say you do that, plus you combine that with the cost segregation bonus depreciation, which came back at 100% because of the One Big Build Act last year in 2025. Now you're looking at a big, you know, non-passive loss that you could offset your high income with. So.

Okay.

Wow.

That, uh, yeah, 'cause I've, I've seen people, you know, start freaking out about the short-term rental. I mean, but it's, it's never as easy as just like, okay, I bought a short-term rental. Like you're saying, it's like, no, you gotta get your guests in there and like check all these boxes or do 100 hours or, you know, and, and Pray, pray that you, uh, you hit it. But you know, when you see how much you can save, especially when they're— if you've been a doctor or something, or a high-income earner, and you've just been giving your money away, and then it's like a light bulb moment, I'm sure, when you're talking to a client, you're like, look how much you can actually keep by just like getting one property right here. Like, that probably blows people away.

True story. You know, like, um, we have a client last year from North Carolina. They are a high-income earner. They bought a short-term rental last year. To make that very long story short, we did a tax plan for them. We realized that they can qualify for the short-term rental loophole. And then we did a cost segregation bonus depreciation. For the children rental. And then we ended up saving them about almost $40,000 in taxes for 2025. Plus moving forward in 2026, one of the tax strategies that we did for them is that we had their children work on the property.

Yes.

So then therefore we were able to shift some of their income to their children at a much lower tax bracket than them.

Exactly. Like, I'm trying to get my son— he's 3 months old right now— Lauren's like, she's like, I'm trying to get him to walk. And she's like, why are you trying to get him to walk? And I said, because the second he can hold a hammer, you go and you put him in the corner and he can do some nails and, you know, hammer some nails. All of a sudden, boom, we're saving tons of money.

Yeah. So yeah, but you can, you can, you know, take photos of him and put them in your marketing.

She doesn't want to.

Oh, I know. I got it. Yeah.

She won't let me do that. Trust me. I already was like, I want to put the flyers everywhere.

Yeah.

We're a family. You can trust me. Yeah. But, uh, that's all right. I'm still working on it.

Okay.

Um, another one, um, that I thought was really cool was a $25,000 passive rental real estate loss allowance.

Yeah. So, um, So you were asking me earlier about what are some other options that we could look into if you don't qualify as a real estate professional. So remember what I told you guys a few moments ago that normally passive losses can only offset Passive income. Not unless you are a real estate professional or you qualify for the children rental loophole. But there's a special rule in the IRS that says that if you make less than $150,000, then you can— Then you can offset up to $25,000. Of your active income with your passive losses. With that said though, I'm pretty sure Joe knows this, which is that $25,000 starts to get phased out for every dollar that you make over $100,000. So like once you hit $150,000, Then you're completely phased out. And then that's when we started looking into real estate professional or short-term rental.

Boom. Yeah, I know. And like $100,000 seems like so much money, but it's like being in SoCal, you know, it's like—

Not anymore. Not anymore.

Like when we were kids, like $100,000 was like insane. But now, uh, not so much. So we gotta make this paper, people. Um, gotcha. Yeah. And, and so, um, it, it's really just comes down to the difference between your active income and your passive income, and then what bucket those fall, fall into and where you can start chipping away at, at that kind of stuff. But it's, you know, when you, when you told me that IRS is using AI, I hadn't even thought about that.

Yeah.

That is insane to me. And of course they are, you know, of course they are. Just looking at everyone, they're probably just running everyone's return through AI. Red flags, pull it out. You know, it's gonna like mix some people up and some people are gonna get audited that weren't supposed to.

That's, that's like, I remember like last year, like A couple years ago, people were excited because they were saying, oh, like, there's been major layoffs in the IRS. So certain people thought they were less likely to get audited. And I told them, you do know that— You do know that. They're using AI.

You got replaced by the bot, dude. That's what that meant. I didn't even think about that.

Oh no.

And it's all, it's gonna screw it up. That's the thing. Like, it's so brand new. I've been seeing these, uh, these documentaries on, have you, have you heard of Flock? It's like, it's basically these cameras that they're putting up all over the place. And so law enforcement, anybody can, can use it. and tap into it and it's reading everyone's license plate.

Oh yeah.

And then showing exactly where you are.

Yeah.

And like, and so cops have been using it like it's, you know, not just like perfect evidence, but of course it, the AI will read it, it'll think a D is actually an O. And so it's, it's gotten people like at gunpoint, like, get on the freaking ground. And, but it was supposed to be somebody else.

Hmm.

You know? And so it, it's not a perfect system. Like AI is still being built. And so, The fact that the IRS is gonna be running your thing through there and maybe 2 Joe Holmeses have 2 different returns and they mix it up and the wrong guy gets pulled in, that's terrifying.

That is, that's definitely—

That is freaky, man.

Yeah.

Um, it all ends up as Terminator in the end. That's okay. Um, okay, well, I think we got, we got one more. Uh, what's another angle that we're going to be looking at here? Uh, time passive losses with passive gains.

Oh yes, yes. So, so, um, so remember what I told you that, um, um, whenever you're in real estate, um, That is considered passive, right? It's considered passive. So one opportunity for tax planning is, let's say you got into like a syndication deal, right? Let's say you got into like a syndication deal and let's say you bought it before—

2023.

Before 2021, so then later you're actually making money on it, right? So now here is a property that's selling that you have a part ownership in, and then you have a passive profit from. So one strategy you could look into now that the 100% bonus depreciation is back. He could look into investing in a new syndication deal where the lead sponsor is looking into doing a cost segregation bonus depreciation, getting a big passive loss from that. Timing it with your with your syndication that you're selling this year to help offset that profit.

Dang!

Okay, so if you if you join a syndication, you said actually made money. That's the key here because we're seeing a lot of them that you know maybe. That kind of had their, their, their, uh, they're not so hot. They're just getting losses at this point.

The syndicators in Hawaii, right, in a hot tub. Yeah, talking to a billionaire.

Yeah, like, yeah, okay.

Yeah, if, if you've seen one of our other podcasts, you'll know what I'm talking about.

Yeah, we, we've covered some guys that, that were, uh, running some freaky syndications and, you know, just, they just basically lost $15 million and they're like, hey, sorry about that, it's part of the game.

Oh, oh, you know, you're talking about that person who's Who's part of a very, very big platform.

Yes, you already know. You already know.

That's very unfortunate because that is a person who I was watching back in 2018.

Oh yeah, we all were.

Yeah.

And like, he was the one who I learned how to invest in real estate from.

Yeah, I know.

Very unfortunate.

I know, I know. And I think he just got too, not even just too big for his britches, but maybe just jumped into an asset class that he didn't understand. Fully, or tried to time the market and the interest rates didn't go the way he wanted, and it sucks. But yeah, um, yeah, okay, so this is a part of the show where we have a video, um, and I want to get your raw reaction on it.

So let's do it.

You let me know. If you have set up the golf event yourself to be a business event for other people, and the purpose of the event is for networking and making business relationships and connections, Then we can write off the golf event. But if we just get together and we're talking business while out on the golf course, it's considered entertainment even though we're discussing business.

Okay. Okay.

So I like that distinction there because that's, I think that's the key that people need to understand is the 2 different distinctions because at Super Bowl, I was networking.

Yeah.

I was at the golf course. I was at TPC Louisiana. So I had to be out there doing work and all those different things. So I would see that as a write-off for myself.

If you have—

Is that a write-off? Is he right?

So, so, um, so, uh, I, I think that's pretty spot on, um, because that kind of reminds me about, um, it's kind of similar to when you travel, right? Because one of my clients, um, they were traveling to Mexico And then they were asking me, how can we make this a business write-off? And I was telling them, it just really depends on what is your intent, you know, because is your intent to go to Mexico for business purposes? Meaning, do you have paper trails and communications of you talking to vendors, talking to potential investors, talking to potential partners in Mexico about you going there for business purposes. If that's the case, then yes, we could write it off. But But if your main intent is to go to Mexico for personal or leisure purposes and then you just end up doing a little bit of business there, then no, we can't write that off.

Gosh dang it. That's how all my trips go. I'm like, well, if we just go tour a house on the side. Come on, man. All right, AI's gonna get you.

Yeah.

AI's gonna get you.

If you own a property and you fall behind on your property taxes, if you don't pay those back taxes within a specified time period, the county or taxing authority will come in and they will place a lien on your property. A lot of you probably already knew that. However, if you don't pay that tax lien, then the county will put your property on a public auction block and sell it to the highest bidder. So the difference between what the county is owed and what the property sold for is called an overage. And that money sits in a trust account with the county or tax collector's office earning interest, waiting to be claimed. Well, here's the thing is the homeowner gets very little to no notification that this money is sitting there. If that former homeowner doesn't come in and file a claim to get that money, it's forfeited to the county. And the only legal obligation the county has to let you know that money exists is to place a tiny little ad, a little classified ad in a newspaper that nobody reads. And it makes you question, it makes you wonder when laws are being written, they're supposed to be for the general well-being of the public, right? The general good of the public. But sometimes whoever wrote those laws really wrote those laws for themselves. I mean, think about that.

If you own a That one's titled, uh, Property Tax Is a Huge Scam. Now, it's not necessarily like a CPA needs to get involved in that, but what are your thoughts on that?

Well, um, I think that right now there's a lot of, uh, I don't know what's the right word for it, but there's a lot of talk about like, let's say some states like Florida are looking to eliminate property tax, which I think is an interesting concept. But at the same time, you know, they gotta get their money from somewhere. So, for example, I know Florida doesn't have income tax, so then therefore they get rid of property tax too. I mean, they're probably gonna increase their So it's tax, right? So, so it's gotta come from somewhere, right?

Taxman's gonna get his money no matter what.

You mean it just doesn't come out of the air?

No, like, um, that is why they always say that, you know, um, there's always 2 guarantees in life. One is death and 2 is tax.

Yep. Yeah.

And man, yeah. What, what are your thoughts on just California and they, the, the, their only move is to just raise taxes no matter what. It's like that, that's all that they care about as a state, you know? And luckily, I guess the real estate here is a good vehicle to offset that. I mean, with, with the numbers that you're, you're kind of playing with.

Yeah. Yeah, I mean, I mean, um, without getting, without getting too political, like, it's just crazy here in California. Like, um, we have the highest taxes here.

Mm-hmm.

But we're seeing so much homelessness, a lot of crime, which is, which is a conversation for another Podcast.

Yeah, I hear you. Yeah, I know it's like we should be able to solve every problem that California has with with what we're bringing in. But yes, we will leave that for another podcast. Awesome, Jason. It's been amazing having you on. How can people get in touch with you if they want to use your services?

Yeah, um, visit our website. It's at real estate tax pro dot com. Or, or, um, just send us a DM. My, um, my, uh, Instagram is @JasonMalabute.

Perfect. Awesome, man. It was very fun having you on. And yeah, we learned a lot. You even, you even taught Joe something. I feel like he's known every tax code since 1970s. Uh, memorized.

At least she didn't say 1901.

Awesome. Well, you guys, we're gonna be back next Thursday, and then do not forget that we have our event on August 24th. We're gonna have our, our last guest, Danny Bateor. He's gonna be, um, talking about what's your real estate pain points and how can we come together as a community to solve them. And that's what these meetups are really great for. So make sure you're there. And, uh, again, Jason, thanks so much, man.

Thank you.

Thank you so much.

All right. See you guys in the next one.

If you want some more advice on real estate investing, reach out to us one on one.