5 Real Estate Tax Strategies To Save Big $ In 2023

I know some of you have got your S Corp strategy down, but you may not. The real estate professional, always a standard. The short term rental loophole, cost SEG and the new bonus depreciation of 80%. The 1031 exchange, always a classic. It's just like creme brulee on the dessert menu. The little things, the things that a lot of real estate investors miss. Welcome, everybody, to this week's episode of the Main Street Business Podcast, soon to be the Main street show. So excited to be here with Matt Sorenson. And for all you real estate investors, this is the podcast. This is the video you want to watch to kind of just check some boxes off and make sure your tax strategies are in place for 2023. I mean, Matt, could you think of a more fun thing to do than to just talk? I mean, I'm going to save money in 2023. I mean, you know why?

You know why it's fun is because it's. We're talking about more money in your pocket, less money going to the irs. Okay? So that's what's fun to me.

I love it. And you know what, everyone? Tax strategies create deals, they create opportunities. Because when you're savvy with tax strategies, the buyer or seller, you might be interacting with the promoter, the broker, the agent, the manager, whoever you're dealing with. When you're savvy to know what your end game is and you're more educated, things just are crisper and cleaner. And I think you can make better decisions too.

Yeah, I mean, it's funny you say that. You know, we were even. Mark and I have been talking about buying some real estate ourselves. I'm negotiating a deal on a commercial property and we're talking tax strategies to the seller. One of the issues the seller had was, I don't know what I'm going to do with all the money and paying all the taxes on it. Like, we could do an installment sell. You could delay and pay taxes over time. You know what, that tax strategy is helping us get the deal. It's not just about knowing the tax strategy that's helping this seller get his head around it and not worry about the taxes. Is delayed over time because the installment sale win for us as buyer. Us knowing that has helped make this deal happen.

Okay, here's our five strategies, folks. Just so you see where we're going today on the show. Number one, we're going to talk about the S Corps. I know some of you have got your S Corp strategy down, but you may not because so many accountants are far too conservative when it comes to reasonable comp the procedure to do it. Keeping it simple. The S Corporation with an LLC rider. All those little things that you may think, you know, let's just confirm, that's number one. Number two, we've got the real estate professional. Always a standard. So many people on our open forum always call and say, hey, I've knocked out one strategy or sorry, one of the checklist items, can I do them all? We'll hit some of the basic rules there. Number three, the short term rental loophole. A lot of people are taking advantage of this under the seven day rental exception. It's different than the real estate professional rule. Not everybody's going there, but it is one of the top strategies, kind of floating around, which brings in cost seg and the new bonus depreciation of 80%. Number four, we have the 1031 exchange. Always a classic. It's just like creme brulee on the dessert menu. You got to have it there. You never know when you're going to need it. And we're going to hit the basics on that. And then number five, it's the little things. Number five is all the, the things that a lot of real estate investors miss. And we're just going to rattle through and making sure you, you're writing off your travel, your auto, your dining, you've got your kids or your spouse or significant other on your board of advisors. You're writing off all the little things that go with the real estate project that many real estate investors miss. We won't be able to hit them all, of course, but we're going to rattle them off quickly. And spoiler alert, we've got a huge one day real estate tax summit. Second one we've held, I think it's second annual virtual summit. It's coming up in a month. So we're going to tell you about that as well. A lot of people find it extremely helpful. It's recorded and you'll be able to get access to that later too. So let's get through these five.

Yeah, let me just say that on the tax summit, it's May 25, guys. May 25, realestate tax summit.com Be there. It's going to be virtual.

Yeah, love it. All right. Okay, numerono. Yeah, lead us off, man.

All right, now the S Corporation, this is the entity you want. If you're flipping properties, you're a contractor, you're a real estate agent, any other real estate profession where you're providing services or doing short term deals. We love the S corporation. When you're doing that type of work, not only do you have income tax but you have self employment tax. The income you're going to generate requires you to pay income tax and self employment tax but the S Corporation saves you on self employment tax. We'll explain that here in a second. So that is the S Corporation. Now don't use the S corp for your rentals, okay? We're not doing rental properties buy and hold in an S corporation. Do not mix that up and get confused. We're talking about flipping new construction contractors, agents, people getting more ordinary income S corps for you. It's going to save you taxes.

Okay, I just let me add a couple of things to that. Once you realize the S corp might be a good tool and again for realtor, broker, fix and flipper, contractor, handyman, fixer, upper rehabber. If you're creating ordinary income and you're doing more than two or three deals a year and you're creating that short term income, even wholesalers that that situation, you're going to want to run it through an LLC taxed as an S corp and you're going to hit that threshold at about 40 grand net. So as soon as you start making on average around oh I don't know, ten grand a quarter, three to four grand a month, take home. You're like me. We're starting to take home some money. We got to talk about it and you got to get involved with your tax advisor sooner rather than later. Now once you do make that decision, the payroll level is critical. We've got a payroll matrix. We've watched every continuing education class on the in the country on reasonable comp. We teach classes on reasonable comp. You CPAs and enrolled enrolled agents out there, we've got your back. We don't want you in trouble with the irs. We don't want your client in trouble with the irs. You. But we find over and over again tax advisors are far too conservative on the reasonable comp. And we stand behind our strategy with that. We've interviewed prior IRS agents. We've never had a client audited for it. And those companies out there saying you need software to do it, we don't agree. It can be an art, it can be simple and it can be easy. But if your accountant is not talking about it and strategic then you need to reevaluate your S corp strategy. You might be doing it, but you're not getting enough juice out. It's not worth the squeeze, is not Worth the juice? What does it matter?

The juice isn't worth the squeeze. It's funny, I was speaking this weekend actually to a group of real estate investors. There was a vet in the room, a veterinarian, and she's like, I use an S corporation. And she wanted to learn how to use a solo K. I'm like, great, you can have a solo K in here. She didn't have any other employees, but she doesn't take a salary. Some bozo told her, don't take a salary, you've got to take a salary. I was like crushing her. She was like, oh my gosh. So make sure you are taking the salary and get some solid advice. That's the thing on this. So many people are doing their tax and legal planning online nowadays or hacking it out on some XYZ software or online company. Get real solid advice. Use our law firm, KQS Lawyers. It's affordable. We can get this set up right, get it dialed in, get you on the right course to make sure you're doing the strategy and get the most out of it.

Yeah. Love it. All right, well, let's jump to number two. Number two tax strategy for 2023 for a real estate investor is the Real Estate professional always a classic. A lot of people rush to it thinking it's the get all, end all and or get fixated on it and think they have to do it. Let's just make this point first and foremost. If you don't have three to four or five rental properties, single family homes to multi unit to even commercial, and you're not involved at all, the real estate professional strategy is not going to help you whatsoever. You cannot be a passive investor in a real estate fund, reg A, reg D, whatever and think that those losses are going to help your W2. They're not. They'll help the cash flow from the project itself. You might not pay tax on that cash flow from that fund you've invested in, but if you're not participating and personally owned now, you can still have property managers. But if you don't have three to five rental properties and are pretty involved in the process of your short term or long term or commercial rentals or whatever strategy, Real Estate Professional is not going to happen. And it's not worth it. It's not worth it. So don't stress and conceptually, Matt, that's my first point.

Yeah. What everyone's trying to do with Real Estate Professional is right. You get losses on your rental real estate and, and people are like, okay, well I want to take those losses and not only offset other gains I have on real estate, but I want to move them over and offset my W2 or my small business or my side hustle income. And so there's certain rules on how you can do that. And if you're high income making more than 150 grand a year, it becomes tricky. I've got a bunch of losses over here. I want to push them over to offset some of my ordinary income or maybe my spouse's ordinary income. So the, the escape hatch to kind of like get out of all the the rules is it qualifies real estate professional and you get to move all those losses over, which is an awesome strategy. And clients that can qualify, we want to get that. But it does require, you know, the 750 hours you got to put that time in and unlocks those losses to come and offset other areas of income. So if you are a real estate agent, if you are a full time real estate investor, like this real estate professional designation is, it can be super powerful for you to use those losses to offset ordinary income. Now I can't be a real estate professional though, because even if you do real estate, which I do, it has to be your full time occupation. Right, and so my full time occupation, we're running our businesses. You know, there aren't real estate businesses per se, so I can't use it. My spouse can't. Isn't in the business doing it either.

Yeah, and that's the. There's really a three part test everybody. And you've got to knock out all three. Number one, do 750 hours of real estate during the year. You may say I'm a full time real estate investor because you have no other job, but you have one rental, you're not going to meet the 750. So some of you do 750 hours on top of your day job, but you have a day job. And it's not that you can't have a part time job, but you have to show that more than anything else you do real estate. So there's kind of your, your primary gig more than full time. So I'm doing real estate as my primary occupation. Number three, you have to materially participate under seven subtests. So under the third part you have these seven material participation rules. And if you're invested in a hedge fund or any sort of equity fund, that's not going to happen. But those seven can be met quite easily even if you have property managers. So meet with your accountant and if you are your spouse qualified, then you unlock all those rental losses from depreciation that you can pass on and use against your W2 or other K1 income. That's the real estate professional strategy. It's a tried and true strategy for many, many professionals. You saw Donald Trump, check the box in 2016, the year before he became president, and he took his real estate losses on all of his hotels. That wiped out income in the millions in other areas. And whether you have four zeros or three zeros or eight zero on your tax return, it's the same concept. So consider it.

Yeah.

All right, Matt. Oh, man. Do you want to add to that?

Yeah, I was gonna say one last piece on that before we get to the next one is remember, even if you don't qualify as a real estate professional, those losses you have on your rental real estate carry forward. And so, and we get into this at the Real estate tax summit, go much, you know, we're going to do deep dive on your rental real estate losses, but how do I use those to offset future gains on other properties or maybe even on the same property when I sell it? So don't stress out. You're not losing those losses. Those losses aren't lost. Okay. Those losses carry forward and they'll be used in future years. So if you're like, ah, I'm not going to meet the real estate professional, those real estate losses are still important. They'll come back and benefit you later.

Number three strategy for real estate investors in 2023 is, is that of the short term rental loophole. That's probably the best way to refer to it. And that's if you buy and rent out a typical Airbnb type strategy and your average rental stay is less than seven days when you're working on it throughout the year and managing it. And so it puts you in this class as really kind of managing a hotel. And, and if you have losses from it, those losses can be used against your ordinary income even if you're not a real estate professional. So if you're like, why don't qualify as a real estate professional? Well, under the short term rental exception, you don't have to meet test one and two. You get out of the 750 hours, you get out of the primary occupation and you can, can here's keyword, unlock those losses on your short term rental, but you have to still meet one of the seven material participation tests. And so we've got podcasts, we've done on this and all sorts of videos, but once you can meet one of those seven material participation tests you can crack. You can grab those losses and use them in a massive way on your tax return.

Yeah, I think a lot of people are doing cost segregation on those properties and this bonus depreciation, right. To kind of juice up the loss. Right. These are high income earners typically chasing this. This is a new and developing strategy. But, but this is one that I think is, I don't know, Mark, the last two or three years this one's kind of came on the scene more and more as you've seen high income earners who are not real estate professionals go buy these short term rentals, Airbnbs, whatever they're doing and capturing losses that help them today to offset income in their business or maybe a high W2. So now, as Mark said, we have a prior podcast on that. It is a standalone also section Real Estate Tax Summit. I hate to say that it's not like promotional, but it is. Okay. There's a lot more to learn on that. We've had other experts even at last year short Real Estate Tax Summit where we had a panel on this topic. So really important developing topic.

All of these strategies we're talking about here are going to be vetted with our or more sections in the virtual Real Estate Tax Summit later this month. So make sure you look at that down below. Very affordable, simple and great information. Number four strategy is the 1031 exchange. Again, a tried and true strategy that's been around for 30 plus years or more. I apologize. I look up when it originally was enacted into law. But it's the wonderful strategy of selling a property and buying a new one of equal or greater value. And we'll go through some variations there, but by doing so, I don't pay any tax, not even depreciation recapture. And I can take all that equity and throw it into that next property and keep compounding my real estate portfolio without paying any tax. I know you've done 1031 yourself. They're kind of exciting.

Yeah, it's cool because you know, if you're a real estate person and you're like, well, I want to sell real estate, but I'm going to buy something, you know. And usually what I like to do and I think the successful real estate clients is you're stepping up anyways, right? You're getting a bigger property anyways. If you're selling real estate, buy bigger, start getting a bigger property. And that's where the 1031 works perfect. It's for those people that want to stay in real estate, you can sell a property, not pay any gain, even though Mark said the depreciation recapture and it rolls into the next property. Right. And so it's kind of kicking the can down the road, it's deferring the tax, it's not eliminating it. The 1031 doesn't exchange, doesn't eliminate the tax, it just throws it into the next property. But the nice thing is, is you can go buy that next property, rent it out, and then you want to level, go up another level again and buy another bigger property. You know you can do another 10:31 exchange.

Okay.

You can keep using that strategy over and over and over and kick the can down the road. So the IRS never gets any tax. So. And then, you know, you could even just die and get a step up in basis for your heirs when they inherit the property, no tax at all. So that's a great strategy where you're continuing to buy real estate and you want to reinvest in buying properties of equal or greater value.

Yeah. And the, the 1031 actually has a lot of variations. You can sell one property and buy four or five. I once had a client sell a three or four million dollars property and buy 20 plus rentals with the equity and didn't pay any tax. You can sell three properties and roll all the profit from those three and buy one property of equal or greater value than the whole of the three that were sold. You can do it a construction 1031. You can actually go out and buy a property pending the sale of another property and have it in escrow till that one sales. So a reverse 1031. There are so many variations. In fact, there's full day seminars on 1031 exchanges. At our summit we're going to break it down for at least an hour and we're going to have a 1031 expert there that manages a accommodation escrow for real estate investors. And we'll be vetting a lot of those kind of unique strategies. Even those that have a shop or a office in their home or a bed and breakfast or a duplex.

They're.

There's some unique 1031s when your home is a part of the property being exchanged. So farms, ranches, very, very unique. So make sure you study up on the 1031 before you sell any property. Because if you're going to go out and just buy more real estate, then a 1031 could be a good fit.

Yeah. Now keep in mind when you do the 10:31 mark brought up an accommodator You've got to have a 1031 exchange accommodator. What that is is that someone in the middle. When you sell property, the first property, that gain goes and is held kind of in escrow, so to speak, until you buy the new one. If you take the proceeds from the sale of the initial original property, that you're not able to do a 1031. So you've got to know when you're selling the property. Oh, I'm doing a 1031. I better get an exchange accommodator involved. By the way, they know the rules and can help you make sure it's staying compliant and they hold the funds and the until you close on the next one. There's some timing rules there. You got 45 days to identify a replacement property and 180 days to close. But there is a party in the middle here that you need to make sure is on your team. And that's the 1031 exchange accommodator.

Yeah, love it. The number five strategy that real estate investors this year should be aware of, and that is called the little things. It's all the little things that we kind of forget about that we could take advantage of if we were just a little more careful. Matt, I'm going to rattle off just quickly two or three, and I'll, I guess leadoff hitter choice here, and then I'm sure you can dig up two or three.

I'll bat cleanup. You know, that's where all the home run hitters go.

So it's true the best hitters bat and cleanup. I'll just give quickly three. One would be travel. Make sure that you're traveling to your rental properties. You're buying rentals where you travel, writing off travel, which is hotel, air, Uber, Airbnbs yourself, rental cars, rental car, gas, valet, anything related to travel. This is not your auto, which I'll say is number two, auto. Making sure as you're driving around, managing your rental properties, looking at rental properties, making offers on rental properties, managing rental properties, buying supplies, equipment, auto is often underutilized and should be a part of your rental property project. And number three, I'm just going to throw out dining as well. A lot of people don't realize that when you're traveling, you can write off dining by yourself. If you're in your local area, you got to be meeting with someone, talking about business to write off dining with a business partner, associate, someone you're networking with, even a family member, employee, vendor, whatever. But when you're traveling and you're outside of your normal local area and you're checking on rentals or real estate projects you might be involved in. You can write off dining by yourself. And a lot of people forget to use their business debit card for their dining when traveling. All the traveling expenses and making sure they're writing off auto. Huge strategy there, Matt. Maybe I got a few more. Yeah, give me your three.

Yeah, let me hit another few. I think there's a lot of expenses people just miss. But this is stuff you're using in your business. Your cell phone, okay, you're using that in your business or with regard to your properties. What about cameras and equipment? Maybe you're an agent. You're showing properties, you take photos of properties, send them to customers, even drones. Even if you're a rental, you got own rentals and you're using them to with tenants. Even if you're doing it to inventory the property before they check in and check out. I mean guys, you're using this stuff in your business. Let's take some expenses for it. Tools you might use also home office deduction. Okay. You know you're managing your rentals from your home office. We want to make sure we're taking a home office deduction too.

All right, so. So cell phones, cameras and equipment, home office. I'll throw out a couple more and let's get creative here first. Maybe an rv. You may be using an RV as a mobile shop, mobile office, mobile truck to carry your tools. Go park it outside your rehabs, your rentals for a week or so and work on them. RVs are can. RVs can be a phenomenal write off with massive depreciation. So we teach a lot of strategies. RVs number that would be number seven. Number eight would be kids getting kids involved. If any of you have young or old, you might have kids going to college where your rental properties are, Are they helping manage them? Are you writing off the kids and their involvement in the rental properties? Whether it's management, cleanup, marketing, or just simply giving good advice to help the family get in the kids involved in the legacy project. Because those kids can take 1099 payments from you if they're over age 18 and no W2 necessary if they're under age 18 with no withholdings either. And I, we write and talk about this constantly. So I love the kids strategy. And I'll throw out number nine, the board of directors. This goes with the kids because when you put your significant other, your spouse, your parents, your children on a board and you're having regular meetings about what you're trying to accomplish. That's another avenue to write off their work involved in the business and and it, and it helps with your asset protection. You should be doing your annual minutes. We have a company maintenance program at our firm that's very, very affordable. Make sure you're maintaining your LLC for asset protection and making this board a reality.

Yeah. Let me just hit a couple others and I could let these ones go here. These last couple ones. If you're self employed real estate agent Flipper where you have ordinary income we talked about up on strategy one with an S corporation you should have a solo 401k as well. You need a solo 401k. Great way to save that. Solo 401k can even invest in real estate. Another strategy we talk about all the time on our sister podcast directed IRA podcast. And of course we'll be hitting a real estate tax summit. How can I use my retirement accounts actually buy and invest in real estate in a tax free or tax deferred nature? We get into that but it starts with a solo K for those of you self employed. You can put $66,000 a year into that as new contributions. A lot of us who are real estate investors, we don't have a day job 401k. We don't work for a Fortune 500. Right. You're entrepreneurs. You're out there earning your own income with your own business. A solo K is a great strategy for you. But also don't forget your other retirement accounts. You might have that old employer 401K, that old IRA sitting over at TD Ameritrader Fidelity that can own and invest in real estate. And so these little things that get added in and that's actually these are big ones for me of course wrote a book on it. But that's a cool strategy too to think about how these retirement accounts can be used to invest in the stuff you know and love. Real estate.

I love it. I think those are really the top 10 of the of the little things if you will. Everyone. I've got a 30 ultimate tax guide that's downloadable and for free on my website. Please get over over there to Mark J. Kohler.com I think you can also download it at the law firm site. All those links are down below. Please get educated on these tax strategies. These 5 and the little things 10 more if you will really add up to eliminating the biggest cost in your life over your life cycle. Taxes are going to be the largest cost and they can just kick your can and ruin what would have been an incredible, profitable project with your expectations being dashed and just the rug being pulled out from under you. So make sure you're aware of the tax strategies. You're going in with your eyes wide open. You're having regular planning sessions. If you can't find a good tax advisor, please get over to my website again, MarkJ Kohler.com and look at our Tax advisor network. We need to make a link from the law firm as well over to that network. But we're educating tax advisors around the country and they can be there to help you.

Yeah, and what I'll say about, you know, the tax strategies, and this is for everyone, business owners, real estate investors. There is a tax code. And if you know the game, you can pick the less tax category and it's legit. If you don't know the game, you're going to pay more tax. And this is every year. So a little education on the front end, knowing how to do it, knowing the strategies that work in your situation gets you in this category where you get to keep more of the money you've made. That's huge. But you got to get in a little bit of education, a little bit of work, get the structures and strategies in place that work for you. And then every year you're paying less tax. It's not complex where you gotta relearn it every year. I mean, sure, the laws change, but for most of our clients, they're just in this pay more tax category. Cause they're not being smart about it, they're not being strategic, they haven't thought it through, they're not implementing these strategies. Get over to the less tax game. Okay? It's a legit way to do it. Dairis has given you the choice and so many people are just like, not gonna do the work, rather just give you more of my money.

That's crazy. Well, everyone, it's a tax write off to buy a ticket and Register for the 2nd annual Virtual Real Estate Tax Summit. Super easy to attend. It's recorded and we're going to be covering 10 to 20 strategies just in real estate. I'm sure we're going to be covering all these and more. Please make sure you register. It'll be a huge benefit to you, your family. Send the link to your tax professional, send it to your friends that are real estate investors and say, hey, let's, let's watch this together and then have a little roundtable meeting about it and figure out what's going on. And maybe we need to upgrade our tax advisor. But the links down below, it's later this month. Matt, the date again.

May 25th. May 25th. Virtually get over real estate tax summit dot com.

All right, everyone. Thank you, Matt. Thank you, all of you. And we'll see you next week for another episode of the Main Street Business podcast.