Pay $0 Taxes - Top Real Estate Tax Strategies Everyone Should Know

Welcome, everybody, to this week's episode of the Main Street Business podcast with yours truly, Mark Kohler and the amazing Matt Sorenson live in Idaho. Can you see the cows? Yeah, can you see the cows? There's cows right here. Matt is live in Phoenix.

Milk towels or what are those? Regular milk or.

Those are wagyu. Are you hungry for dinner tonight? Yeah, those are wagu, baby. Okay, now, Matt, remember when I was

a kid, I asked my mom, I'm like, are those chocolate milk cows? What are they teaching you at school, son?

Definitely not a farm girl. And then we. Matt there is live in Phoenix with those palm trees behind you.

That's right. Yeah.

Do those have pineapples on it? Pineapples?

We don't have any cows here. We got carne asada.

Oh, yeah. Okay.

We get carne asada.

I'm all for carne asada. Okay. All right. A little ceviche. Little ceviche. Okay. All right. Well, welcome everybody. This is going to be a great podcast. Also, for those joining us on YouTube, we're going to be using the whiteboard quite a bit. So for those of you that normally catch this on itunes or Stitcher or your favorite podcast channel, you might want to also jump over to the link on YouTube. But this is all about. We came up with seven today. Yeah, we have.

There's a lot more, by the way.

Yeah.

But we, you know, this is one hour and this is going to be at the fire hose, but we're going to let you know some awesome strategies in real estate. Real estate is one of those areas full of amazing tax strategies. So we're going to dig into them now. We have a real estate tax summit where we go over this, these topics. Each one of these gets its own hour. At least at the Real Estate Tax Summit you can really dive into it. But we want to pique your interest here and let you know the things you should be checking into as you're looking into investing in real estate. Or maybe you already are.

Yeah. Let me tell everybody this. This is not an infomercial. We are going to hit seven kick ass strategies here and break them down as best as we can, as we can in this time slot. But the Real Estate Tax Summit is in Austin, Texas is September 29th and 30th, two days. We were hoping many of you that could come will find it even more rewarding in person. There's going to be food and socials and get togethers and after tax party with a band. Again, this will be a lot of fun. It's on a Thursday and Friday. Matt and I may even get in the set list if things go well since, you know. For those of you don't know, we

did the Crypto Tax summit, which by the way, we need to share that on social. We didn't even get that out there. We gotta get that out there.

Yeah, we rock. Yeah, we rock.

And Bill S. Preston, Esquire, Mark Kohler, Matt Sorenson. I mean it was the band.

Boom. It was sweet.

Wild Stallions.

Yeah.

Now adventure. Are you with me on that one? Wild Stallions, Yeah.

Now you can go right now to realestate tax summit dot com. There is a virtual version so those of you that want to watch it from your home, everybody that attends in person or virtually will get the recordings. We're going to have over 15 sessions. Now let me give you some of these topics again, seven of which we're going to hit quickly today. Taking advantage of real estate losses, passive losses, short term rental tax strategies, how you report your Airbnb, long term rental strategies, asset protection syndications, 1031 opportunity zones, charitable trusts, low income housing, cost segregation rates, investing in notes, tax liens, self directing the Realtor broker s corp strategy or any real estate anybody create an ordinary income. We're going to hit that one today too. And installment sales. And that's just to hit kind of the short really. We've got even some keynote speakers with some additional strategies. So this tax summit is going to be legit. If you're an attorney, CPA enrolled agent, you will get continuing education credit for this and a certificate is going to rock. So. Yeah, good.

Yeah. And if you're a real estate investor, you will get tax savings from it every year because that's what with all those little topics there you say like we're like opportunity zone. Well, I can relate. It's a tax strategy. It's a section in the code that if you do this, you pay less tax to the government. And so all these things have a tax strategy. You know that's code word for pay less tax that benefits you, of course.

So yeah.

All right, we're going to hit seven of those today.

Okay, you want to list them off?

List here first.

Yeah. Why don't you lay out our. Yeah. Lay out the agenda.

All right.

Okay.

We're going to talk, we're going to start with your home. How to save money on the sale of home and avoid taxes. Talk about the S Corporation. For many of you in real estate, you got to know about the S Corporation, when to use it. Passive Losses. It's one of the great things about real estate. You can cash flow property and have losses. We'll talk about how to use those. Cost segregation. We're going to dig into that. Sometimes it's an awesome strategy. Sometimes it's oversold. We'll get into it. 1031s. Talk about 1031 exchange. That's when selling a property. You can delay and defer gains. We're going to hit that. Crt Charitable Remainder Trust. Mark's been an expert on this and been really diving deep on it. I've worked with a lot of clients recently on this, so I'm gonna defer to his expertise there as well in many spots here. And then of course, my favorite, we're gonna close it out with, you know, it's kind of like the closer. You know when you're like, you are a professional artist and you got like the last song. You gotta rock it and bring it. We're gonna close out with self directing.

That's the encore. That's the encore song right there.

Okay. Or encore. Either one.

Yeah, yeah, yeah. Okay. Self directing. Now that seven strategies for those of you that were taking notes. And we're going to burn through these. That's approximately about eight minutes each. With our introduction, we're probably pushing seven minutes each. So we're going to move quickly. Jack, I need you on in the studio. Pushing us to the next one. Sale of home is going to take a little less time. It's pretty quick. But then it's going to. These other ones deserve literally these other seven. The all these strategies.

Probably not.

Sale of home are going to have at least an hour at the real estate tax summit. So again, we're just trying to get out what we can here for all of you on the road today. Okay? So number one, sale of home exemption. I'm going to go to the whiteboard. Let's hit the whiteboard. For those that are watching on YouTube, we're going to explain this verbally as best we can. But a little bit of Pictionary makes it fun. So here is a home. Okay, I'm going to move that over here. I got to see where we're at. Okay, there we go. How's that, Jack? There. There's our home and there's two strategies. Matt, go ahead and explain the single versus married.

All right, so for a sell of home exemption now, there's a time period here where you have to own and live in a property for two years or longer so long as you've owned and lived in the property for two years or longer. You can sell it and pay no capital gains, 250,000 if you're single, half a million if you're married. Now if you think about what's happened over the last few years in our real estate market, we've seen huge increases in appreciation in real estate. A lot of people that have only owned a property for a couple years are sitting on some pretty good gains there. Using this strategy, you can sell it again if you're married. You can defer or not defer. You can avoid tax on the first home. $500,000 of gain coming out of the property. That's huge.

Okay, let's do a quick example and I'll use a single. The single is 250 grand. Married, 500. So you bought this home, let's say maybe a year or two before COVID hit, you bought a home for 300 grand. Now it's worth 600 grand. And you're like, wow, it's time to cash in. Now let's just to hold things constant. We're not going to take out selling costs and fees. Let's just say there's 300 grand of equity there. You bought it for three, you're selling it for six. Now if you did improvements and you got cost of sale, that's going to reduce the equity amount and yada yada. But let's just say you got 300 grand of equity. Well, if you're single, you don't pay tax on the first 250. So we take that out and boom, you'd only owe capital gain on 50 grand if you were married. You get to exclude 500 grand. Well, you have 300 grand to gain 500 exclusion. You're well above the limit. Zero. That's sale of exemption. Now Matt, can I do this over and over again? Is it a one lifetime deal?

You can do it multiple times, Not a one and done. You can do it multiple times. Now here's another little thing to know on it. Because in this I've had to deal with this one on my, on my own Because I've turned a lot of my personal residences into rentals. So I move out of them and I just turn it into a rental. Now you have three years after you've moved out of it to then sell it to get the sell of home exemption. Otherwise you got to move back in, live in it again for two years. See, remember that two year period is you have to own and live in it for two years. So if I move out and let's take the example. Marc had bought a property in 2000. Let's say now it's 2022 and you move out, but you still own it. Well, you have three years to sell it to still get the sale of home exemption. Now three years passes though, and you didn't sell it. That sell of home exemption is toast. You're not going to claim it because you didn't live in it.

Now those accountants list. Yep. And so if you look at this, it's two out of the last five years to. So say it another way, you lived in it too. You rented it for two years, 364 days. You could sell it and still capture the gain attributed to when you lived in it. That's One of the IRS regulations that's come out in the last five to 10 years is they're like, well, you don't get to exclude everything because you did turn it into a rental for those last three years. So for those last three years, the IRS would require you to do an appraisal back to the day you turned it into a rental. And what was the gain while it was a rental?

And.

And that would be separated from your sale of home exemption. So you kind of have to bifurcate it based on the time period. But bifurcate's always a cool word. Whenever I can use it, I want

to throw it out there.

Yeah, bifurcate.

Let's try to use it at least one more time in this episode.

Yes, for sure. Okay, now we're going to go to the S Corp strategy. And this brings up what we call the trifecta. Because if you're involved in real estate, you've got to understand the trifecta. It should be a part of everyone's plan. We've been setting these up for years. Matt, why don't you describe it verbally for our listeners while I play Pictionary here for those on YouTube.

All right, so the trifecta consists of two sides, okay? We're talking about your left side of the equation, which is going to be your ordinary income in the real estate world. What we're talking about is properties you're flipping. Maybe you're a real estate agent or broker. You're wholesaling properties. You're a developer, a builder, okay? That's all ordinary income and that's taxed differently. You pay income tax and you pay self employment tax. When you make that money, self employment taxes, Medicare and Social Security adds up to 15.3% plus your regular tax bracket. So we want to use An S

corp. We're doing the trifecta right now. We're just saying the big picture. Big picture. Big picture.

Okay. All right.

I mean Matt's driving right into.

Okay, we'll get into more of the escort strategy. The right side.

Yeah. Left side is ordinary income or rentals.

Okay. Buy and hold properties. This could be a second home, raw land. Okay. This is just. You're going to get capital gain when you sell it and you're getting rental income as you hold it. This is passive income. You don't pay Medicare or Social Security tax on this. It's tax difference. You're generally going to see. LLC is over on this right side.

Thanks Matt. I wanted to kind of give big picture. So everybody, I'm going to reiterate, the trifecta is left side operations are ordinary, right side is passive and then the bottom is your trust or your estate plan. So it all comes together. Left, right, bottom, three legged stool. The trust is essentially where your 1040 tax return comes in. Because all the water flows downhill, all the money flows downhill into your 1040. So on the left, the ordinary income, like Matt said. I'm going to put this in red for those watching on YouTube. You have this self employment tax that applies to you. Now this is kind of a loaded word but real estate professional, if you're out there flipping, fixing, realtor, agent, broker, contractor, landscaper, anything like that, the self employment tax applies on the left side but not on the right side. That's all passive. So no self employment tax on rentals. So Matt, give us an example of

the damage on the trifecta. One thing I'll say is before we get into the S Corp strategy or you hit the numbers on it is and we'll go into this at the tax summit. We have prior episodes and stuff on this. There's asset protection built into the trifecta too. By separating these things out on that left and right side and using different entities, we're putting assets over on the right side which is where we're building assets, equity properties, rentals, stuff we're holding. The left side is liability producing stuff. A business, a flip. Right. Okay. An agent, you know, like there's liability over there, creates income. We don't typically stack up assets over there. So you know, there's a little asset protection planning in there.

So spoiler alert, and then I'll give you some numbers is a Realtor would have an S corp on the left and an LLC for the rental on the right. A builder would have an S corp for their construction on the left, but have an LLC for the duplex on the right. So you want to keep your assets on the right with an llc. And on the left, spoiler alert, you want the S Corp. Now let's just juxtapose. Juxtapose.

That's a sweet juxtapose.

I'm throwing down some big words here. Juxtapose means compare. So if we take a regular LLC for those that are out there being realtors, brokers, agents, builders, fix and flippers and compare it to an S corp, here's the damage. Let's say you bring in 100 grand in gross sales or income in both examples. So we're going to compare apples to apples. Then you have 25 grand in expenses and that means you're netting 75 grand. Now if you fix your flippers, you're like, well we're doing, you know, add a zero to that and a zero to this and all that and agents and brokers and I get it, I get it. Just deal with the concept here people. Okay, so we're going to net 75 grand or 700 grand, I don't care, just cut it, whatever. The same principle applies. So if you're going to net 75 grand in an LLC or net 75 grand in an S corp, here's the difference and I'll put this in red, is that on an LLC or a sole proprietor, you're going to pay 15.3% in self employment tax, which is 10 grand. Then you're going to pay state tax. If you live in a state with state tax and federal, so you're getting hit three times, boom, boom, boom. It's not uncommon to see a brand new contractor, realtor, plumber, electrician, landscaper, make 100 grand and to see almost 40% of that or more go in taxes. And they're just devastated. At the S corp though I'm not

really keeping much of it.

Yeah. All right, so tell us to show us the numbers here. All right, as you describe. But If I have 75 grand on the S corp side.

Yeah, if you have 75 grand on the S corp side, you're going to have to take a salary on this and then the rest of it comes out in net profit, dividend, whatever you want to call it. But the cool thing about the S corp strategy here is I only got to pay this self employment tax on the salary. Now the IRS makes you take a reasonable salary. Okay, you can't just be like, I'll take $1 Bob, $1 Bob. Yeah, I remember prices, right.

I used to love $1, Bob.

$1.

Yeah, the strategic one. He thinks everybody's high, so they're going

$1 on this, you know, $1 anyway, so you can't do that. Okay. You got to take a reasonable salary. And Mark's got the color payroll matrix, you know, that lays this out. It's in his book. We have lots of stuff on that too. Content. But, but in short here, let's just say you take one third, okay? One third of that you take in salary, which let's say, just so I can do the math. Well, I'll tell you the math better. Let's say you did 30,000, salary 40,000. Wait, now let's see, you got, let's do. You did 75 grand. Why'd you do 75 grand? I can't do the math on that.

Well, okay, I'll help you out here because I'm the CPA in the house here. But if we do 25, let's just do one third. Now some of you accountants out there go, one third is too aggressive. You should be taking 40, 45% of that in salary. Maybe. It depends on a lot of factors, but I think it's reasonable. We can say, let's say 25 grand in salary, which means that 75 is split into two pieces. You got 50 grand as pass through and 25 grand a salary. Well, the beauty is you don't pay FICA on the 50, which is 15%. So if I take 15% times 50 grand, I just saved. Yeah, 7,500 bucks. That's not chump change.

Now every year, that's every year you're doing this Strategy, you're saving 7,500 bucks. Yeah.

And again you hardcore accountants out there are like, well, you get a deduction for your self employment tax over in the LLC and then this and that. Yeah, there's. You're going to see a 5 to 10% kind of swing on these numbers. But in general here, people, you're saving thousands of dollars. So every dentist, doctor, attorney, accountant, landscaper, plumber, electrician, realtor, broker, we're all S corporations. It's common strategy. Don't listen to anyone that says it's going away. The lobby in, in Congress is all over this to help make sure the S Corp doesn't go away. The S Corp association is, it's got just all sorts of networks here to bring this together and save it for us. Joe Biden had an S Corp going into his presidency. Very, very common. So don't be afraid of it. And if you're in a producing ordinary income, you, you as a real estate investor, you got to have this. So, yeah, okay. Okay. Yeah. That's strategy two. Now we're going to beat that up for at least an hour at the crypto tax. Absurd. Crypto. Right. We just finished our crypto tax on it at the Real estate tax summit. We're going to beat that up for an hour. So make sure you participate in that. Okay?

Passive losses, okay? Now generally, you know, we don't. No one likes losses. No, we're talking tax losses, all right? Paper losses. We're not talking about losing money. We're talking about losing money on paper for tax purposes. So so many of us can have a rental property that cash flows in value. Like I'm making money every month, but because of depreciation, expense and all my other expenses, I'm taking on the property. I have a loss on it for tax purposes. All right? Now how do I use that loss? Becomes the question. And this is, this is, we'll get into this with cost segregation too, is the next topic. But, but obviously we want to use those losses to offset other income we have.

All right. And bringing it big picture trifecta. We're now on the right side. So you're over on the left side with your S corp, saving on self employment, tax, writing off cell phone, electronics, travel, dining, everything you can write off over there. But on the right side, you're using the D word depreciation. And if you have a tenant, they're paying the mortgage interest for you, which you also get to deduct. So you're using leverage, mortgage interest deduction, depreciation deductions. And what happens is the average rental and this year we're going to do tax returns on over 7,000 rentals for clients around the country. We see patterns. So the average rental here could lose a single family home rental average, it's going to lose 6 to 8,000 on paper, even though it may be cash flowing in your bank account. So that loss can be a deduction on your 1040 or maybe not. So you come up with three categories. Matt, I'll write them down as you explain.

All right, so the first one is if you want to just be active. Okay. And if you're active, what do you want?

Passive. I'm just going to go number one is passive.

Active real estate professional.

Yep, yep, yep, yep. There's three.

Let's just go passive. By the way, you don't want this one.

But yeah, if you don't check the right box. The default is this and we see it all the time on clients returns. So okay, so the first one's passive.

Now I'll say this, I am in this one. I hate it. Okay, I'm over here. I'm just saying on my rentals I'm essentially over here. Well, because

no, okay, I'm going to dive in here. Bless your heart. Okay. Matt is the expert on self directing and so we're going to def. But Matt is right. Effectively he is in this bucket, but he's not. So let me explain why. The first category is passive investor. If you don't check any box on your tax return, if you just let turbo do its thing, you're going to be a passive investor and those losses from your rental are going to go into a little bucket. Now if you're watching on YouTube, you've got this little passive loss carry forward bucket. We call it a pal. It's your little pal passive loss and you want this little bucket to grow. Now when you sell your rentals you get to dump it out, which is great. But in the meantime you don't get any write off against your regular income. 1040s corp, K1 nothing because you're just passive.

Now 3000 bucks. Don't you like 3000 bucks or something?

Nope, that's only for stock sales. For that's a different. In our fruit. That's a different fruit. So when you come to the real estate tax summit, we're going to talk about capital losses, short term losses, real estate losses, all of them are a different type of fruit. And we got this basket and you want to try to use them in the best way. So a stock loss is very different than a real estate loss. You don't even get the 3,000. That would be a stock loss. So now okay, so with this, everybody's passive. If you don't take an active, take active Steps to be active. When we want you to be active. Every one of our clients is active. On Matt's tax return. We check the box, he's active because you just make decisions. Now if you're active, one of two things can happen. If you make less than 150 grand, you get up to $25,000 of those losses against your 1040. Boom. So if you're single or married and you make less than 150 grand, those, those lot, you can have 25 grand in losses to go against W2 everything. It's wonderful. But if you make more than 150 grand, then option two kicks in and it bumps you back to the passive. And you now have to put those losses, which Matt said effectively he is, but, but, but he's act. We want to make sure everybody, you're not active.

But I don't get the benefit of taking 25,000.

Yes. My other income, what Matt just admitted is he makes more than 150 grand a year, which is okay, well, I

better be in an attorney for 20 damn years.

You better be

doing something else.

That's right. But, but conceptually, everybody, I want you to know we want every one of our clients checking the box active because you're going to have up and down years income this way, that way, you never know. And so now if those losses go into a carry forward bucket, you're going to get to deduct them. Some years when you sell property and people go, yeah, I made too much money. My accountant said not to write off, you know, travel to check on my rental or whatever. I'm like, no, write it off. They go into this bucket that never expires until you expire. When you die, they go away. Okay, now the third category. Go ahead. Thanks, Matt. Let me explain those nuances because passive and active is kind of a nuance and I appreciate your patience.

Okay, now, now the last one is this is the one you want to be or you want a spouse, that is this. You only need one of you to do this if you're married. You want to be a real estate professional. The nice thing about real estate professional is if you exceed those income levels and you have losses or even if you got more than 25,000 losses, all of your losses can come over and offset your other income, your ordinary income, which is huge.

Yeah.

So if you remember Donald Trump, for example, let's take that example. Okay.

Yeah.

Everybody's like, you know, he's running for president. They're like, how's this guy, a billionaire or you know, worth hundreds of millions, whatever he is? And he pays no taxes. He's a real estate professional. On tax. He's making all this money on the Apprentice and selling ties and stakes or whatever that's bless them. But then he's got a ton of real estate assets with losses that has a ton of value, but it's coming off and offsetting. This is why Grant Cardone, you'll see him talking about how he pays no tax. This is why he's a real estate professional, has tons of income from his events and books and all that. He's got also a ton of real estate Assets creating losses coming to offset all that other income.

Now here's the nuance though. There's a trick here that you have to be careful about. Just because you have an S corp and you think, oh, I'm a real estate professional with an S corp, doesn't mean you're a real estate professional. For passive loss rules. The real estate professional in the passive loss rules is two part. Three part really. One, you have to put in at least 750 hours a year doing real estate and being a landscaper doesn't qualify. Even though you think you're working in real estate, you're not. And so. Well, I'm a real estate professional. I'm an architect. Nope, that, that's not going to count. You know, there's, there's different rules of what qualifies of being in the real estate industry. Number two. So number one is 750 hours. Number two, you've got to be in a category that the IRS considers you a real estate professional. Even though you might have an S corp and work around real estate, you still might not hit it. And number three, you have to materially participate under one of seven rules. And I've had clients that are a Realtor and they get audited for not materially participating in their rentals. Now under these seven rules, I've gone head to head literally in a little metal room against an IRS agent and won this. But it can be a battle. So you've got to make sure you just don't think it's a slam dunk. And so this strategy is going to be a full hour at the real Estate tax summit where we vet it so that you make sure as an accountant, as an attack lawyer, and you professionals out there, enrolled agents and for you as real estate investors, you know, if you're a professional is doing it right.

Yeah. And it's got to be your full time gig too. You can't be like, well, I'm a doctor, but I got a ton of real estate and I materially participate and I can claim the hours. Not going to work.

Yep, yep. And I, I vet this in my book and we're going to be covenant at the workshop. This alone can save you thousands of thousands of dollars if you do it right. But here's the big takeaway. Just if you're not. Just because you're not a real estate professional doesn't mean the sky is falling. Put those losses in the bucket, carry them forward. Now we got to move along here and let's go to the big you

know, back, you know, those are rollover losses.

They're good. Yeah, they're good. Okay, now this leads us right into number four. This is kind of the consumer. What do you call it when you're warning consumers?

We call it public service announcement.

Yes, Public service.

It's not an Amber alert. This is a

consumer protection. Consumer protection alert. Okay, here's the consumer Consumer protection alert here. There are all these folks out there that are, gosh, I'm having struggle here on, on YouTube. Some of you are like, what the hell's he writing? Okay, I'm going to write cost segregation, but here's the consumer protection alert. There are promoters out there that love to talk about cost segregation to get you excited about real estate. And they don't tell you that if you're not a real estate professional, it does you no good whatsoever. And so you may be thinking you're buying into a syndication or a REIT or an LLC that's part of a rental project and you're thinking, oh, this is great. I'm going to get all these write offs and cost segregation is awesome. And then it doesn't help you. Matt, can you break it down and I'll try to kind of diagram it. What is cost segregation first, why don't you tell us that?

So what you're doing with cost segregation is you're taking certain assets on the property. Because if you think of a youth, it's a single family rental, commercial, multi, family, doesn't matter. But think of the property. There's different things in that property that depreciate and need to be replaced faster than others. So when you're depreciating a property like a single family rental, what's the time schedule on that? Is that 27 or is that 27

and a half years?

27 and a half years. You know, you're taking, you know, one divided by 27 and a half over the value of what that property is. And this is just the building only you don't get to depreciate the land cost. So you're doing the building only now with cost segregation. What they're saying is, and what the tax code says is a lot of this stuff isn't going to last that long. A refrigerator, okay, let's just think of your, your appliances, light fixtures. There's a lot of things that are going to go that, that go into a home that don't last that long. So those get an accelerated depreciation schedule where you can say that only lasts seven years. So that's Price of the property that I can say is appliances. Let's say I'm going to accelerate and get faster depreciation which creates more expenses for me. Now, now you need a report to do that. So you gotta have someone come in and do this cost segregation analysis to break those things up in your property. To say what? You get a faster time schedule to expense or depreciate.

Yep. Now the if what relates to and for those able to watch here, Matt's seeing my wonderful drawing. I hope his team's got him seeing this so that as he's talking you got these red areas here that are going to be depreciated faster. Maybe even a fence or a sprinkler system or who knows what. And because of that depreciation, that loss could be very valuable to you. But if we go back to strategy number three. If I'm not a real estate professional and all they're doing is going into my bucket, who the hell cares, right? So, so these bozos out there that are like, oh you need cost segment and it's like I'm a doctor, I'm a, I'm an engineer, I've got a day job. Well then cost segregation is useless. In fact it's a waste of money. You're losing money doing a cost seg because anyway, so we're going to break that down further at the, at the summit.

And yeah, so for those of you that come to be big property property holders though or you are a real estate professional for other reasons, I mean this is an awesome strategy. Now again you want to make sure you have taxable income that you can, that you're going to offset this. So, so it's a unique strategy. It works for some people, but it's not an everyone type thing. A lot of these things we talked about sell of home exemption S Corp passive loss, self directing 10:31 exchange. We're talking about a second. Every real estate investor is going to, should come into that during their life cycle of being a real estate investor. Cost seg is just one that despite doesn't hit a lot of people.

Doesn't, doesn't. Okay, number five is the 1031 exchange. Now I hate to say this, I, I'm going to do my best here for folks that are listening, but seeing the diagram of this visually says a thousand words. So let me just do this verbally first without even drawing. So that way we do a better job of this. The 1031 concept is you've got a property that's not your primary Residence, but you have a property for investment purposes. It could be raw land, it could be oil and gas, it could be minerals. It has to be real property. It's got a duplex, commercial building, anything, any sort of commercial or rental property or just raw land. It doesn't have to be income producing, but it's appreciated in value. You bought it for 500 grand, now it's worth a million. And you don't want to pay the tax on that, but you do want to go out and buy more real estate. So the concept of a 1031 is you're going to sell a property and buy one of equal or greater value. You're going to sell the property for a million and buy another property for a million and $1. And so now the IRS says, well, as long as you do it within a certain time period, you've got to identify the property you're going to do within 45 days. You've got to complete the transaction within 180 days from the day you sell. You got all these little time periods that will go through at the summit, but you're going to sell one and buy another one of equal or greater value. But then it goes on steroids. You can sell one and buy three or four or five. I once had a client that sold one property on the beach in Newport Beach, California. It was like $3 million property. And they bought 26 properties with that money. And they were, the total of those 26 was equal or greater than the value of what they sold. So there was no tax. You could also sell three properties and buy one. You can also do a reverse exchange. You can go buy three properties and sell your property before the time period. So you've got the reverse exchanges, you've got construction exchanges, you've got three for one, one for three, one for seven, seven for one. It gets crazy, but the Real Artists in 1031 is bringing together the CPA with your accommodator, who's going to hold the money or title in the middle. And so that's where we get to a diagram. Matt, why don't, do you want to add anything to that while I kind of diagram this out?

Yeah, now remember, with the one big thing with the 1031 exchange. So what's happening is, is we're deferring the tax. Okay, you're not getting rid of it. So that gain effectively is getting going into the next property. So when you sell the next property. So let's say you, let's say you had one property let's just take the one mark. The Newport beach, you know, beach house sold for 3 million. You bought 26 rentals with that. Well, the gain is now over in these 26 new properties. And you don't pay tax yet until you start selling those. But when you start selling those properties now, you're going to start paying the gain unless you 1031 again, which you can do. Okay, so you can keep 10:30 wanting until you die. And a lot of real estate investors have done that and a lot of our clients have, they just kept 1031 and growing their real estate portfolio, getting bigger and better assets and, and, and they have huge gains built into these properties. But when you die, and this is, you know, partnering in some tax planning here, your family can inherit that property, pay no tax on it, they get a total step up in basis and it could be a huge, huge win. Now of course, as all that equity's building up in the properties over these years, you can tap that, get lines of credit off of it. There's so many great little cool tax planning stuff you can do with this. But 1031 is a tried and true method. You can do multiple 1031s, but just remember, if you eventually sell one of those properties, you know, the replacement Property, you buy 1031, you don't 1031 that then you're going to get hit with

the tax on yeah, it's deferred. In other words, just deferred. You're just deferring. Okay, now for Those watching on YouTube, you saw me flipping around, I got my screen mixed up for a minute. Okay, so, so a taxpayer is going to sell the property to a buyer. The reason why it's called a deferred exchange as well is you're not going to find a seller that has the property you want. And the stars would never align. So it's kind of deferred. You're going to sell the property to a buyer who's going to give the money to the seller through this accommodator in the middle that kind of holds all the money together into titles. The buyer is going to give the money to the seller of the property you want. And so you're selling this property, the buyer is putting the money to the seller that's going to give you the property you want in this exchange. The accommodator in the middle makes it all happen. So this kind of circular, circular event occurs with some time periods. There's a 45 day rule, 180 day rule, and then there's the number of properties rule and, and there's a lot of calculations as to how, where that gain is going. So that's a 1031 exchange. Something that I think like, I like what Matt said. In the life cycle of most real estate investors, they're going to do one, you know, at some point and so very, very common.

And some people try them and they sell a property and they're like, all right, I might buy another property, I'm not sure. But let me just get a 1031 exchange accommodator involved to hold the money and park it and let me shop and see what's out there. And, and if you don't, then you just take the money and pay the tax. You know, you'll have capital gains on this, which is, which is a lower rate than your other type of tax you pay.

But which brings into the word boot. Some people want some cash out of it and then they take a little cash but then defer the rest. So there's so many variations. Okay, now that brings us to, and I think we're right on schedule to strategy number six. Now I'm talking. Matt was gracious enough. He even said it before the show started. I'm probably going to talk a little bit more during the 1031 and CRT, but Matt's going to bring up the encore song here at the end on self directing and take us home. So. But Matt, I'm sure you'll comment on this as well. Okay, strategy six is the charitable remainder trust. Now I've got almost 45 minute videos on YouTube on this. Well, maybe 30 minute videos. We're going to be covering this for an hour at the summit. But let me just explain how a charitable Mariner Trust works and why someone might do it. Let's say you've got that same property that you bought for 500. Now it's worth a million and you're like, I don't want to do a 1031 exchange. I don't want to buy more real estate. 1031 is not working for me. I just want cash flow and I don't want another rental in my life. I just want cash flow. In fact, I'm kind of interested in investing in ETFs or stocks or notes, investors and maybe even some crypto or something, who knows? But you want to go out and invest that money, but you don't want to pay the tax on this sale of a million dollar property. You're like, what the hell? Well, that's where CRT comes in. Now, there's actually seven to nine steps involved. And I'm just going to quickly highlight these and I'll write it and speak it, hopefully verbally. For those that are listening and not able to watch on YouTube, this should make sense. So let's go through it. So step one in this process is you create a charitable trust. Now, we like what's called a crut. In fact, I'm going to correct my little drawing here. A charitable remainder unit trust is a type of trust where you get to be the trustee of it and continue to invest the money and build it. And you get a fixed percentage of it every year based on the revaluation. So it's not like an annuity that pays out a specific amount. A CRUT pays out a specific percentage based on the value of the CRUT every year for the rest of your life. Okay, so that's a crut. And again, so much to talk about here, but I'm just hit highlights. So step one is you create the trust, and then in this trust, you're going to be a beneficiary of all the income for the rest of your life. We'll come back to that. You get life income, and then when you die, the remainder, that's why it's called a charitable remainder trust, is going to go to some charity, and it could even be a charity you create, family foundation. It could go to your favorite school or church or who knows what. So we'll come back to that. But step one, you create this trust with these rules. Step two is you're going to transfer this property. That's highly appreciated, that you don't want a 1031, and you transfer it. Step two, before any contracts are signed, before you sell, step three is the property is sold, which was your master plan anyway. So you sell the property and where's that money go? In step three, the property goes to your seller. Oh, my gosh. Come on, Mark. And the property goes out to the, to the buyer. You're the is a seller. So this buyer gets the property and the money goes back into the crut. So now you have a million dollars sitting in the CRUT after step three. So you set up the trust, you transfer in the property and you sell it. Buyer walks away with the property. You got a million dollars and you didn't pay any tax at all because the charity sold it. Charities don't pay tax. Now step four is we've got to figure out what that income is and make sure it's paid out. To you quarterly for the rest of your life based on your age. This could range from anywhere to 8 to 13 or 14%. And you may go, well, hold it. Where do you get in 14%? You're not making 14%. You might be making 20%. You might be making 5%. How you invest the crud is different than the percentage that pays out. See, the crut is built to slowly go down if you don't make more than your percentage of distribution. So it's going to continue to pay out for the rest of your life. And IRS tables help us calculate all this. So if you want to know when you're going to die, call mat or I, and we've got a table, and we'll tell you when. It's pretty straightforward, Matthew.

Same date for everybody, depending on the year you were born. And male or female.

Yeah. So Matt the other day wanted to know, mark, I've got a bucket list. Can you tell me when I'm going to die? And I looked it up in a table, and he said, ooh, I better.

This is what the IRS says. Must be accurate.

Yeah, I must get to work. So we started on Matt's bucket list the other day. Okay, now, after you get this income payment for the rest of your life, step five is. Well, and again, there's a few more steps in this. We're just truncating it. Step five is when you die. Well, I'm. Let's skip that part. Step five is once you really get this thing up and going.

I don't want to die.

I know. That's why we jump into that. You're going to get a tax deduction. In fact, I normally put that as step four. So I'm going to clean this up a little bit. Step four is a tax deduction because you sold the property and you're going to give money to a charity, but it's a charity in the future. So we're going to figure out present value wise, what is your tax deduction today? In a CRUT, that tax deduction might be 10% of whatever you donated. So if you donated a million dollars, you might get $100,000 tax deduction today, which you can use against your other income. So for you real estate investors, you're saying, hold it, I didn't pay any tax on the sale. I get a tax deduction, I get income for life. And then step six, when I die, it goes to charity. Holy crap. Sign me up. Well, we're pretty busy. We're setting up CRTs all the time. Call the office and say I need a consult with Mark. Mark me, Mark Kohler. I handle all the CRT use as the only appointments I'm taking right now, they're extremely complex and that's where I work in. So anyway, you could, we could work together on that. The, the last point I would make is the people that are really pissed is not the irs, it's the kids. They're like, what the hell happened? You sold the property, I don't get any money and the charity gets everything. What are you crazy? Mom and dad? What happened to me? Little Johnny or Susie? Well, step seven is we can create an irrevocable life insurance trust and keep create a little life insurance that's paid for with some of the income from the trust in this islet pays out tax free, $1 million when you die. So the kids get money tax free, the charity gets money, you get income and the IRS gets nothing on the sale. Now as you get this income during your life, you're going to pay taxes on that. So, okay, that was a really quick summary, Matt. What would you add to it? And just for the average consumer, the

crt, this is a little expensive to execute. So this is not something you're doing. If you're going to make $100,000 on a property, okay, maybe do a 1031 or you know, or think of some other things to do. But you generally want to be seeing about a half a million dollar gain or at least you want to. These are bigger gains where this tax planning makes sense because this is expensive. You're, you know, I think we're at eight grand to do these CRTs, but there's some ongoing expenses to it as well that totally pays for it. If you got enough gain, you know, built up here and you see all the little points where you can get some tax savings and benefits. The other thing I'd note is there's actually some little asset protection perks to this. There's just so many little nuances to this because there's a charitable component. A lot of people when they're planning their estate and we've just been doing a lot of estate planning with clients recently, which get your estate plan done if you haven't already. But a lot of them want to do some charitable giving in their estate plan when they die. Well, why not do it while you're living and get a tax deduction for it, right? Do you have a highly appreciated asset rather than it going to a charity, you know, just through your state upon death, why not? Do it now. Get a tax deduction. Also, the charity is going to love you. Maybe it's your favorite school. You're going to get some, like, you know, go to the president's box at the college football games, whatever, you know. So there's a lot of little components and perks to this, little asset protection, because it's. The reason I said asset protection earlier, let me just come back to that is you don't really. You're. You get money from this, but this asset is out of your control, and so your creditors couldn't come and get this or get it from the charity, even though you're getting benefits from it. Income tax deductions during your lifetime.

That's amazing. Now, as we're sitting here, I want to prevent some of the hate mail that comes on YouTube. Let me just point out, the percentage that you're paid out on this CRUT could actually go as low as 5%, because I've got clients in their 30s that are trying to do this, and the IRS is like, whoa, whoa, whoa. You know, we got to make sure there's enough for a charity here. You're going to live another 40 years. Slow down, tiger. So it could be as low as 5%. I've got clients in their 60s or 70s that are setting up cruts and their percentage. I had them one the other day that was 18% because they're like, I hate to tell the guy, yeah, the IRS thinks you're going to die in about five years, so go ahead and drain this sucker. You know, they're like, what the hell? Anyway, so that's an important point. And how you invest the CRUT is a big conversation. So just, just chill. Everybody get a consult. Now. Let me say, if you're going to do a 1031 exchange, you're going to spend a couple thousand. By the time you work through the accommodator and the CPA and the tax return, you're going to spend 2 grand on a 1031 Todoist charitable trust. We're around 8 grand. And that's from start to finish, with all the paperwork and approvals. You're is. You're looking at these deals and you've got a $500,000 gain or more. You might be spending with state and federal and Obamacare. 30% in tax. You're like, holy hell, I don't want to write a check to the IRS for 100 grand. I could for 2 to 8 grand. I got some strategies here to defer and maybe not even pay Any tax at all on the sale. So that's, that's why you're going to consider this kind of stuff. All right, which brings us to number seven.

Okay, number seven, self directing. So what we're talking about here is rather than you or your S corp or your LLC buying and selling real estate, have your IRA or 401k do this. So it is true. And if you've been following our podcast and our content, you cannot miss this point. Your retirement account can own rental real estate. It can flip a property, it can get an option on a property, it could wholesale a property. All these real estate strategies you may do personally to make money and pay tax on your retirement account can do. And if you're using a Roth ira, you'll pay no tax. All right? And so that's the basic premise of it. So for example, let's say you have. Facebook stock, you have $100,000 worth of Facebook stock. It goes up to 150 grand. Most people are familiar with this. In a retirement account, you sell that for 150 grand, all the money goes back in the retirement account. You don't pay tax. Right. And if it's a Roth account, you pull it out later at retirement, no tax at all. Well, it's the same thing for a rental or a flip or any piece of real estate. I buy a property for 100 grand, I sell it for 150, that whole 150 goes back into the account. I don't pay tax, it's not on my tax return, no capital gain. And if this is a Roth account, it's going to come out totally tax free at retirement. So some of our most sophisticated clients in real estate will use this on certain deals that they're going to have big gains on. They want to get a large Roth account. A lot of clients just rather not be in the stock market roller coaster, which is currently in the toilet. So they're like, I'd rather own real estate. It's a lot more predictable, it's tangible and I get a rent check every month, you know, plus it appreciates in value. So you could just be buying rentals. So, so that's the self directed topic. There's so much to say on it. I even wrote a book about it. There's so much to say. We have even a conference just on self directing in general. But of course that'll be one of the components of the real estate tax summit too, is just talking about self directing, how to incorporate in your real estate investing. And it's really A tax strategy at the end of the day, I mean, retirement accounts, when Congress created them, they're like, let's give all these huge tax incentives to encourage people to invest and use them. And people gone all in on them. Right. There's $30 trillion in U.S. retirement accounts. And that's because everybody's figured this out. It's an efficient way to grow and build wealth. We're just saying don't think you got to buy a stock or a mutual fund to do it. If you believe in real estate, you're into real estate. No, you can use your retirement account to buy and sell real estate. Invest in the stuff, you know.

Yeah, I love it. And for Those watching on YouTube, what I created here and Matt saw this was a trifecta. And in this trifecta on the right side, where your assets are we really divided into two parts. You've got your LLC for your personal rentals, and then you have your retirement account investments, which may include real estate as well. So you can see the basic steps. You have an IRA that has Facebook stock in it. You might sell that Facebook stock tax free or tax deferred, depending on the type of ira. Maybe you've got a Roth. And so you just sell your Facebook stock, put the money in your IRA and then you're going to transfer into a self directed IRA or self directed Roth or a self directed 401k, all sorts of options. And once that money is over here, now you can create an LLC and buy those rentals or do the flips. And I would really encourage many of you that are fascinated by this to get over to our podcast. Our sister podcast is the Directed 1 IRA podcast. You can go to directed ira.com podcast. You can go to any of your podcast portals and just type in directed Ira. You'll see mine and Matt's cute little faces pop up and there's our podcast. And I would encourage you to watch the first or listen to the first 10 to 20 podcasts in a row because we really kind of go through the basics of building on that until your brain explodes and you're like, oh my gosh. And so every week we record a new episode. We do call ins with Q and A every month and get over there and learn about this. It's incredible.

So love it. All right, well, you know, that's the lucky seven. I don't know, what are we going to call these?

Yeah. Okay, let's go off. I would say this to take the whiteboard off the screen is people, our wealthy clients Own real estate. They know these strategies. You can't just get into real estate without knowing the tax strategies. Because heaven forbid your tax advisor, which might be your sister in law, that you do a spaghetti dinner for once a year on TurboTax. They might not know these strategies. You've got to increase your knowledge. You've got to upgrade your professionals because there's so much money at stake. Some, like Matt said at the very beginning, some of the best tax strategies in America revolve around real estate. That's what our wealthy clients do. So learn this stuff, embrace it. It's fun, it's exciting. Come join us nerds in Austin, Texas in September. You're going to love it. Get over to realestate tax summit dot com.

Yeah. And you know, there's always people talk about building wealth and making money. Tax planning is about keeping it okay. This is about you can make all the money you want. Everybody can make a reservation. But it's like keeping the reservation. Right? You can make money, everybody can make money. But sorry, this is Seinfeld little bit here. It's not keeping the money. Okay? We want to keep the money. And good tax planning is about keeping as much of it because it's hard to get out there and earn it and do deals and take that risk. And so we want to only send as much as we have to to the irs. And the nice thing is the tax code tells you a way to do it.

Yeah.

And it said, you can send us less money if you do it this way. And some people just don't want to read that thing. And they're like, not for me. I'll just keep doing what I'm doing and send you more. Okay.

The tax savings is the ying and the yang of making the money. And I know you young people out there that go to some of these workshops and these events that I won't refer to that, that are exciting. Lots of cool speakers and cool music and bands. And you're learning how to invest and you're getting excited to invest, but you're not learning the strategy on the backside. What type of entity do I need? What's my tax plan and tax strategy? And you think your accountant just knows it. They don't. Do. You know, we teach more accountants than we teach real estate investors. I teach more classes to tax advisors that are like, I got out of school. I took the CPA exam, I took the enrolled agent exam. I don't know this because you learn it on the streets. We're freaking out. We're out there on the streets, people. We're in a van. We're dealing drugs. We're figuring this out for you, and then we bring it here to the show.

Yeah, yeah. We're street smart on the streets. This is raw, you know? Yeah, but. But seriously, thanks, everyone. Of course, we have tons of amazing episodes at Main Street Business Podcast on basically how to take control of your finances, your wealth, how to build it, how to protect it, how to keep it, how to pay less tax, how to chase the American dream. We love all that stuff. We're trying to teach it every week on the Main Street Business Podcast.