Using Rental Real Estate Losses Against Your Other Income

Foreign. Welcome, everybody, to another episode of the

Main street business podcast. With yours, Julie, Mark Kohler, and my

amazing co host, Matt Sorenson, we are broadcasting live west of the Mississippi, helping

clients around the country say taxes build well and just, you know, make life a little nicer.

You'd like my new intro. That was kind of.

That was west of the Mississippi. Does anyone refer to anything as west of the Mississippi?

More.

I was like, Lewis and Clark would say that May. Who says that anymore?

Well, I was. Okay, fair enough. I was reading Stephen Ambrose for some

of you that go, okay, Mark Fuller

could quote dumb and dumber and read Stephen Ambrose.

I'm a renaissance.

I can do it all. So I can relate to the most stupid people on the planet and hopefully some of the smarter ones. But anyway, Stephen Ambrose wrote the book about Lewis and Clark's undaunted courage. Have you read it, man?

No. No. Sounds like a winner, though.

Really good.

Yeah.

Anyway, so Matt's broadcasting live out of Phoenix. I'm over here in Idaho. Last week I was in California. We've got offices in four states, but help clients around the country. And today is a big topic. It's a really good topic. Matt, you want to, want to lay it out?

Yeah, baby. We're talking about something actually that's been in the news. Donald Trump's been getting a lot of crap for this. It was probably the biggest tax strategy revealed and why Donald Trump doesn't pay any taxes. And so we're talking about it. We're talking about how rental real estate losses can offset your other income. It's a huge topic whether you're Donald Trump with a massive hotel offsetting your, you know, income from what was his show, the Apprentice, you know, or whether you're have a day job in corporate America and you got a single family rental. You know, it's the same tax strategy. There's just different zeros on the end of it. So we're going to hit this for everybody. Learn how to use it, big or small.

Yeah, I love it. And a couple thoughts. We are coming to you via itunes, Spotify, Stitcher and YouTube. There's a good chance I'd like to use a whiteboard. It'll be a paper one. I don't know, Maybe. But I'm going to do my best to just explain it for the virtual audience listening only. So I'm going to stay away from the whiteboard. For those that have been to, I've got online workshops. I, I guess I've got next month's. Well, November's Yes. Next month on Friday And Saturday the 5th and 6th, I believe, my basic and advanced workshop, where I go for two days on a lot of these strategies. Very affordable on Zoom. Get over to markjcolder.com if you want to sign up for that. But that's where I like to use the whiteboard, so I'm going to have to hold myself back. But in my book, the Tax and Legal Playbook, I don't have one here on the desk, but this is a whole chapter. It is one of our top 10. So when people come to us and go, I need to save taxes. This is one of our really, really important strategies that we talk about. And it can be used in a lot of different scenarios. So were you looking for a book of mine? Is that what you're.

Yeah, I've got it in my office somewhere. I mean, that's a reference tool. You know, you see all these books over here on the bookshelf over there? Old school law books. Those are for show, the tax and legal playbooks. The one I actually use.

Yeah. If you go over to those books, if you're in Matt's office, you'll open them up and they've been, you know, the guts have been cut out so you can hide guns, ash, gold bullion. You know, those fake books on a bookshelf. Yeah, I've always wanted some of those.

Yep.

That's.

Thanks for letting the secret out, but

there you go. All right. Okay, so where do we start on? Let's get you a little outline. Should we do an outline of what we want to cover?

Yeah, and let's talk about maybe the. Let's hit an outline of. And then just hit the general strategy, I think.

All right, so that's number one. We'll hit the general strategy.

Okay.

Number two, I want to talk about your classification as a real estate investor. And there's three of them. Active passive, and real estate professional. And what those mean and why you need to know them and why most accountants don't understand them. Very, very important. Third, what would you like to do? Third, I'll throw it back at you.

Oh, well, let's talk about rental income losses versus well, let's talk about how I can use. Let's talk about how you can use against other properties. Maybe like, I've got multiple properties, and

I think that'll come out in the classifications. Yeah, I think that'll come out in the classifications. I like where you were going. We'll say number three will be real estate losses versus stock losses. Can they Play with each other friendly in the sandbox. And then number four, I think when you talk about real estate losses when it comes to your retirement accounts,

and

then, you know what? I say we reserve couple extra topics for whatever the heck. We want to bring this together. So you guys feel informed now, freestyle at the end.

Yeah.

Next week, our podcast is the Open forum, which we do every three weeks. You can get to mainstreetbusiness.com or mainstreetbusinesspodcast.com we have both URLs. Get over there. And you can leave a voice recording of your question or an email question to MarkqsLawyers or Mattqs lawyers. And so if you have questions about this real estate loss thing, rather than you could go out and buy my book, you could come to the workshop in another week. You could throw out a question on the open forum. We want to make sure you get answers. And probably one of the best is you may need a consultation. And I guess, Matt, we should probably touch on the political environment right now.

You wanna, you wanna go into those treacherous waters.

I'll just say this because I've got it right here. This is an article that I have to submit to Entrepreneur magazine on what someone's tax return might look like under President Biden if that is to happen. The reality is presidential candidate Joe Biden has said, I don't like the real estate loss strategy. He said, I'd like to minimize it. Number two, he does not like the 1031 exchange strategy for real estate professionals. Those are two where he's come directly at the real estate investor community. And you got Trump in there, who is very, very pro real estate, obviously, and we all know why. So I'm not going to talk about their other personality traits, good or bad or whatever, but I'm just saying if you're solely making a decision on your voting preference based on taxes, it's, yeah, it's, it's clear cut. So, yeah, you got to decide if you're up for paying more taxes.

Yeah, there's, there's plenty of reasons not to like Trump, but I think the tax stuff for most business owners and investors is way far in favor of Trump over Biden. So there's no sign. Close.

Yeah.

And I love the black wrapper 50 cent this week that came out and said there was an article where my podcast was quoted in the art. Well, we did a Facebook Live video that was in the article on 50 Cent, which we were honored to be there because we explained the situation quite well. For the average listener or viewer. And 50 Cent says, I don't want to be 30 cents. So what are you guys all crazy? I don't like. He goes, I don't like Trump either, but I'm talking. There's an economic thing going on here. And so that was his take. So we'll leave it at that. We don't want to piss off anybody that's a Trump or Biden fan. We try to be non denominational or nonpartisan in the political arena. We can joke around that. Okay, so let's just jump into it. Matt, tell us, do you want to describe the general strategy? And then I'll give my color commentary on what I, how I would say the general.

Yeah, so the general strategy is when you have rental real estate, you're going to have rental income. Obviously you're gonna have your expenses, your mortgage, interest, expenses on the property, all that stuff. You're also gonna have a depreciation expense. And so that's where you're taking a piece of the cost of the property in over 27 and a half years for residential. And you know you're taking up a piece of that and it's an expense every year against your income. Well, the nice thing about that is you can be cash flowing a property like money in your pocket as you're owning this rental property, but you're getting a tax loss. It's like I'm making money, the property's going up in value, I've got cash flow, I've paid down the debt. Sweet deal, right? These are all the awesome things of rental real estate. And when it comes to my tax return, I got a loss. Now what are we going to do with that loss?

Okay, how can I use it?

Now this is where the strategy.

Is it usable? And that's topic. Yeah, yeah, and that's topic two is how you categorize yourself dictates how you're going to get to use that loss. But again, I'm going to take another stab at that general principle. And I love the way you went there, Matt. I was going to do it myself. Some people talk about the trifecta or whatever. I have the trifecta for asset protection planning. But this is the quatrofective. What do you call it? A four home run. Four banger. Whatever, whatever. It's good. I'm gonna home run. I'm going all around the 4x4.

Yeah.

Like the 4x4. Yeah. In n out burger. Here's the four benefits. Very, very clearly. Let me reiterate These people, and Matt just said them quickly and that was good. But I'm gonna say them again. Cash flow that you wouldn't have received otherwise. So the property is actually cash flowing. The tenant is paying down the mortgage for you, which is creating equity in and of itself. Third, the property is appreciating in value, which over time has always outperformed Wall street with all the ups and downs. Dirt, you can't lose dirt. You can lose a stock, but you're not going to lose dirt. And if this is not a property you're going to hold three years, you might hold it 7, 10, or 15, but you're going to get that appreciation. Just got to be patient. This is not a fix and flip like Chip and Joanna. And then number four, you get the tax write off. So tax write off, appreciation, cash flow and mortgage reduction, those are the big four. And if you hit a rental properly, you're going to see a little benefit in all four and sometimes off the chart benefit with all four where you're getting 50, 60% ROIs on your original investment. That's why people buy real estate. It's a good investment, let alone the tax benefit.

Yeah, that's the principle.

Yeah. And I think those are the easy ones to capture. Is cool. I've seen some appreciation. I got money in the bank from the cash flow. I owe the bank less money when it's paid down. But the last one requires a special whole podcast episode of how do I use that damn loss? Can I use it or not? And is it going to help me? Can I get it over my other income?

And you know what? I think I came up with number two. And then we'll bump the three classifications to number three. Number two is. Let's talk to the naysayers for a moment. Is there risk with rentals? Absolutely. You kind of get, you got to figure it out and get your crap together and do some education. You don't learn this in high school, you don't learn it in college. So there's some street smart education that has to occur. And some people think of rentals as a single family home. And if they call me, I got to go over and plunge their toilet. And look, no, rental property can be storage units, duplexes, college housing, low income housing, commercial buildings. Look at what Trump, he's not buying single family homes. Trump's buying apartment buildings and commercial buildings and hotels. Same principle. And so we like our clients to start off with the little base hits. Let's just get a single family home down the street, get, figure it out. You don't have to be the property manager, but just we know there's risks, we know there's a learning curve. We get that. But I'll say this, 90% of our wealthy clients, they all own a little

bit of real estate.

Oh yeah, for sure.

Now you've said the wealth. What have you said about wealth in America?

Well, I mean there's, there's really, there's. If you think about it, there's really three ways to have wealth in America. Business ownership, you own your own business or company. Real assets, like real property, which has created more wealth than anything. And paper assets like stocks and mutual funds, which really is created from saving and then investing and growing it. But real estate's such a huge category. And we, Mark and I buy rentals ourselves, invest in real estate. And so as we, as I, you know, as I was kind of like a newer lawyer, I was always doing estate plans. And I would look at clients and you know, I'd look at someone they kind of had made 100 grand a year, you know, maybe their spouse made 50 grand a year. And then I come into their estate plan like, wow, you guys got 3 million bucks in assets. Good job.

How did you do that?

And it was like they bought their house and paid it off. They bought some rentals, they maxed out their retirement accounts and it was just these easy base hits that they did that over time. They did it for 30 years. It's like, huh, you've got a bunch of assets now and you're gonna have a pretty great retirement. Even though they just kind of the millionaire next door type thing, you know, so.

And it's not a get rich quick scheme. I've said it before and I'll just

say it quickly here. When I first got married, we're going on 28 years now of marriage.

My mom and dad said, hey, we'll

give you some money for a, a

honeymoon and you know, a little trip and all this. Or we'll help you with the down payment and let's buy this little duplex that needs some work. And it was tough. You know, we're looking at tropical island paradise, 10 days honeymoon, or a rental property that needs some work. But we were going to live in it as well. And luckily we, they, there was a little coercion as well, you know, don't be an idiot. And then I, my dad, and then, so we bought the house. We sold it later for three times more than we bought it for. After eight years of college and fixing it up. And I learned how to be a landlord. I was an idiot. I'd rent it to the wrong people. I wouldn't fix stuff properly. It was a disaster for the first two to three years, but my dad just sat back and watched. He's just like, love it.

Yeah.

So, okay, three categories. Matt, you want to lay them out?

Yeah, let's hit. Let's go from worst to best. All right, so the worst passive. Okay. We don't want you to be passive. Passive means you're not gonna be able to take that loss over to your regular income. Whether you're a small business owner, you got a W2 somewhere, working spouse, whatever it is. This is going to get locked over here as a passive loss. Now it can carry forward to be used against that property when it sells later or maybe other real estate you have, but it's going to be just locked over here on the passive side. We're not getting it over to your ordinary income on your return.

Yep.

And a few other thoughts. By default, the IRS is going to make you passive unless you check the right box number two. Those passive losses carry forward until you die. Just to add a little bit more to Matt's comment, so it's not a bad thing. I have some clients who are like, oh, I'm only a passive investor. I'm not going to buy a rental by grandma and right off the trip every year to go check on the rental. You know, so many good strategies here. But some people don't harvest as many write offs against the rental because they think, eh, I don't get the write off. No, no, no, no, you do. It's just delayed gratification and that's okay. Down the road you might be able to sell that rental and pay tens of thousands of dollars less in tax because you, you wrote off the kids in the rental property rental car and the airfare check on a rental where you travel. So.

Yeah.

You don't mind me nursing this diet

do while we're here?

Oh, thanks for bringing that up. I'm a little thirsty right now.

I already knocked down my rock star. I mean, once the rock star is gone. Yeah.

Now let's talk on just the losses too. Let's say I've got other real estate. I got two rentals, one that had a gain net rental income and one that had a loss. Those are netting out. Right. I'm not, I'm not even passive. Those are going to net out because

they're both on the passive side. Yeah. So that's good.

Yeah. And I have that. I have some that, that have a loss. Again, they cash flow. But because of depreciation I get a tax loss. But then I have some that cash flow really well beat depreciation expense that I get a gain. But those are netting out on the return. So you're still getting the work of it. And if you're building a real estate portfolio for the long haul, you'll see this at least this netting of losses and gains between other rentals.

Yes, and now we're going to call these type A losses. Now, Matt, you're going to like this. I told Matt before the show, I've got a new way of presenting this because it gets really confusing. These are losses from the operation of the rental property. And what can you use them for? Well, Matt just said I can use them against any other passive gains from those rental properties. Ooh, can I use those losses against stock gains? We're coming to that. Okay, but these are type A losses. Now I got this whiteboard here. Thanks, Luis. We're gonna, I'm gonna use this at some point here. I got my shadow in it. But that's okay. We're just gonna, we're gonna deal with it. Okay, so Matt, that's passive. What's number two?

Okay, active. Now active's pretty sweet. We want it to at least be active. And now you can phase out on active. If you're high income, you can phase out on active. But the nice thing about active is you get deduct $25,000 of rental real estate losses against ordinary income. All right, that's awesome. 25,000 is a lot. That could be a few single family rentals, you know, to get to that high of a loss. But you can use up to 25 to offset ordinary income. We're talking about your W2, your small business income, your self employment. We're not talking about other passive income. We're talking about, you know, your regular income.

Okay, now to add a little bit to that great way of presenting that, Matt, that $25,000 that you might cultivate. Now let me give some figures. An average rental is going to lose. This is a single family home rental. By the way, this year in our accounting firm, we did over 5,000 tax returns that had rental rental properties. Over 5,000 rental properties on tax returns for clients around the country, 98% of them had a loss because of the big D. And when you're going through the big D. Oh, sorry. Many people consider the big D divorce. We talked the big D depreciation. So you're going through the big D depreciation and you're just like choo choo. You're like, I'm getting this depreciation. So the average rental is going to lose money on paper and that amount fluctuates between five to 8,000. So if you've got say three to four rentals, you're going to be pushing

25 grand in losses.

Now rather than just put them in this bucket, this passive bucket that I get to dump out down the road when I sell something or have rental income that's taxable, I'm going to say, hey, I'd like to use those this year. Well, that 25 grand of losses that you can use starts to phase out when you make more than 100,000. So you only get 50 cents on the dollar starting at 100,000. And so at 150,000 of AGI the losses are gone. Now did you lose them? No, no, they just go back to the passive bucket. But if you make too much money, and again, this is where accountants don't even bring this up with their clients because they go, well, you make too much money, rental losses aren't going to help you. Doesn't help you. Just maybe not this year. But it doesn't mean you give up on the whole damn strategy. Sorry, kids in the car got a little mad.

Yeah, yeah, that's the strategy about Hoover Dam. That's what it is.

So yeah, Hoover Dam.

Okay, so those are, that's active. Now I'll say this, on all of our clients tax returns, Matt's tax return, my tax return, we check the box active. You don't have to be a realtor, you don't have to be a contractor, you don't have to put in any certain amount of time. You just have to be a decision maker. So unless you're in a coma and you own rentals, we're checking the frickin box for active. I mean you don't have to be the property manager, you don't even have to go look at the frickin rental. Just have to be on a phone and say yeah, yeah, do.

This isn't done.

Yeah, you're done. So everybody's active. Don't let your accountant check the box or leave you passive.

Yeah. Even if you're high income and phasing out. So still check the box active is what you're saying.

Because you never know.

Okay. Yeah, it's true. And you might have a year that's low and then you, you get the, you get the to Use it. So. But of course, because a lot of clients and a lot of, you know, you are maybe exceeding this a hundred thousand, $150,000 income threshold where that you're phasing out on active. There's another option, and that is the third option of real estate professional. Love this.

The real estate pro. And again, this might put chills up your spine because you hate it when his name's brought up, but I've got to say it because it's been in the news. Donald Trump is a real estate professional. Now, right now that's actually an interesting point. Right now he is not a real estate professional because his full time job is being that of the President of the United States and he gets a W2 for working for the United States. Although he has said, don't pay me, I'm gonna put that back in the coffers. Which I know again, some of you may hate Trump, but that's somewhat admirable. You know that he's saying, I don't need the money. Let it go to the American people. Fine. But he's a W2 government worker, so he can't be a real estate professional. We'll give you the definition in a minute.

Right now, can Melania, though, can Melania

be, you know, I don't know. Does the first lady get a paycheck? I bet you she does. I've never known that someone's gonna send us a message. Yeah, if you followers that we're gonna send us hate mail instead. Just, just work with me here. So I want to get my shadow out of this. I don't think the shadow is not gonna happen. My studio guys are like, dude, you gotta tell us if you're gonna do a whiteboard. You're pissing me off. Okay, I'm gonna do this right here.

Okay.

So the point is, the tax returns that are in question for Donald Trump and all this taxes that he didn't pay were when he was a real estate professional. And so he gets to take all these write offs. And when you're a real estate professional, there's no income limit. So this 150 grand thing is going. So if you qualify as a real estate professional, all those rental losses from a single family home, no matter what your income is, or an apartment building or a hotel or whatever it is, you can lose those. Use those losses against your day job, a W2, yada yada. Okay, Matt, what are the qualifications? I'm not going to write those on the board.

Yeah, so as Mark said, you have to Spend majority of your time in the real property business. Okay. And then you must spend at least 750 hours or more in essentially real estate business, being real estate professional. So that's where Trump can't say, well, the majority of my time is spent in the real estate business. Yeah, you're president, United States. It's not. You can't. And that's where some people get caught up is they'll say they have a day job and like, well, I'm hitting the 750 hours. Yeah. But that's. That's not enough. It has to be your primary business or employment.

Yeah. And you don't have to be a licensed realtor. You don't have to be licensed contract. It helps because it obviously slam dunk. That's what I do. But if you say, well, I'm a mortgage officer for a bank doing real estate all day long.

Nope.

It has. You have to be greater than a 10% owner of the company. So you can't be an employee for someone else doing real estate. It has to be your real estate operation. Hence, you're a professional managing your own real estate. You could manage your own rentals. You could be Chip and Joanna. I don't know if Chip down in Waco, Texas. For those that watch Fixer Upper Chip is our hero. We want to get him on our show. Chip comes in and does the demo. Then Joanna with her brand Magnolia comes in and makes the house look pretty. But Chips, the real. We believe in Chip. But is Chip a realtor?

I don't know.

He's working on his own properties. So he doesn't have to be a contractor. He probably is a contractor. I apologize, Chip. We didn't know that. But, but you don't have to be. You just have to say, my day job is doing real estate. Now here's the cool part. I'm going to stick with Chip and Joanna. If your spouse qualifies as a real

estate professional, you both qualify.

So you can say, well, I make too much money. I'm a pharmacist, I'm an engineer, day job, corporate America. But if your spouse is a real estate professional, all those rental losses that we just talked about, deductible against your W2. So, Joanne, who is it? Joanna or Joanne? I think it's Joanna.

Joanna. Yeah, you got it.

Joanna. Her brand is Magnolia. I think if I was the irs, I would argue that she is in retail more than she is in real estate because her brand is everywhere. So at Target, it's just taken over. Martha Stewart. See you later. Magnolia's in. So Joanna's profession is out of retail product. Well. Oh, she happens to be married to Chip. So if they have 10 or 15 rentals around Waco, which I bet they do, those losses are going to be deductible against her income. Selling crap on at Target. It's not crap. I mean, it's really good stuff, apparently. But anyway, it's. Some of her stuff's around my house. But anyway, that's the concept. So we have clients that are firemen and their spouse is a real estate professional. I have women that are attorneys that prosecute and make great money and their husband's a stay at home dad and manages all the real estate. So it's either way, but it's all match made in heaven.

Yeah, yeah. For someone that has a real estate portfolio, you know, and you're single, you might want to be looking for a real estate professional, you know, might want to put that in your dating profile.

I've created a website called taxmatch.com and we don't want to see a picture of you. We don't care what your interests are. We just want to see your tax return. And we'll match your tax return up with the best, sexiest, you know, possible option to save you taxes. It doesn't matter if you love them. Tax.

Exactly.

There's how much taxes you pay. Yeah, right.

And, yeah. So, but here, let's. Let's hit this again on. On Real Estate Professional.

I thought that was kind of funny. Matt, you didn't even. I didn't even get a snicker out of you on that one.

Oh, I missed the end punchline. I. I mean, I was saying, trying to say tax sexy to try and save you from, you know, something. So I was like, tax.

I think you heard the punchline. It just wasn't funny. So. All right. Okay. So you.

So let's say my feedback on that joke.

Yeah.

Okay, so there's three. Three classifications. So you wrap it up. What are you gonna.

Okay, well, I was just gonna say on the Real Estate Professional, so let's say that, you know, let's say you've got husband and wife, one of you has a day job essentially, or you have a small business that's not real estate. But the other could be managing your properties. If you get enough properties where you have 750 hours you can spend on it, that person can be a real estate professional just by managing a few of your rentals. Now, you're not going to get away with that by just one rental, you're not gonna say, well, I'm a real estate professional because I manage one single family rental. That ain't gonna do it. Maybe one apartment building, a multifamily type deal that takes a little more work. Maybe a few single families. You could get away designating that other spouse that doesn't have the day job working, that is kind of working the rentals in the real estate business. As a real estate professional or another one that Mark mentioned, that's common. We see a lot of clients able to pick this up is the spouse goes and gets a real estate license, becomes a real estate agent or broker and now they're self employed. Right. All real estate agents self employed. They have their own real estate business. Now all these real estate losses are going to come and offset the other spouses W2 or small business income that has nothing to do with real estate. And we've got some huge, huge tax savings that can, that can occur. All right, that's the three real estate professional, we love it. Unlimited no income phase outs. You just got to meet the test. Active gives you 25,000. You at least want to be active. All you got to do is have some participation in it. Mark said, as Mark mentioned, it's very minimal, but you phase out and then passive is better than nothing. But remember your losses, even if you don't use them, get a carry forward or they can at least go against your other real estate gains that you may have.

All right, I love it.

Now I'm prepared for those that are watching on YouTube.

I'm preparing a little whiteboard that with that squeaky pen, the Sharpie king size. It's a good

nice hit there.

I want to get this podcast really rolling.

So you know, a good whiff of

a Sharpie can always make the day

a little perk you up, huh?

Okay. Yeah, that's it. That's it kids. Just one snip.

Okay, now

here's.

I'm gonna. Before we get into this, I want to give.

Just kind of. Let's step back and take a breath. What's the strategy? What we tell clients all the time is just be open to real estate. If you own rental real estate right now, just change your mindset a little bit. I'm not telling you go out and rush and spend thousands of dollars of hard earned money on something you know very little about. Just start learning about it. Pick up a couple books, make a goal. Matt and I talk about the strategic plan every year for your ten year plan. If you meet with one of our tax attorneys, we're going to ask you what's your 10 year plan? What are you doing? And one of those is we'd like you to consider buying one rental property a year or part thereof.

If I buy a rental with Matt

every year, other year, that's I'm meeting my goal.

I didn't have to own it 100%,

but I'm in the mix. And it could be commercial, it could be a third party rental, residential, whatever. Just start learning now. The beauty is three to five years out, you've got three to five rentals. There's some synergy. You may be single now, married, then you got the right spouse that has some real estate experience or you're married and one of your spouses, your spouses decides, you know what, I'm going part time, let's manage this real estate. I'm not telling anyone. Quit your job today. We're not just. This is what wealthy people do, they just keep their eyes open. Matt, would you add to that at all? I don't know.

Yeah, I mean this is one where it takes a little strategy. But if you've got a real estate portfolio and you start accumulating properties, you're going to start seeing this on your 1040. You're going to see this bucket of losses building up over here. And again, these are great properties. They may be cash flowing, money in your pocket, they're appreciating, the mortgage is getting paid down like you love it. But you get this bucket of tax losses building up over here. Meanwhile, you've got your ordinary income that you're getting crushed, paying taxes on. And so figuring that out on how to move these losses over here is just take some strategy and some planning here doesn't work for everybody, but there's a lot of clients that can figure out a way to get to real estate professional and really start maximizing this, particularly if you're married because, you know, now we can work with a spouse possibly and trying to figure out how to do this.

I love it.

Well, I'm not kidding when I say this.

This little diagram I just created,

I've

had this in my head and sometimes it just takes teaching it over and over again until you finally it clicks on a better way of explaining it. Matt, this may be a diagram in my next book. I'm not kidding. Wait till you see this. Matt, have you ever seen this diagram?

No, this is a newbie. I mean, I've seen all the mark. I've seen all the mark, hold their Greatest hits in terms of diagrams. But this is a new one. This is his latest.

This is like Michael Jackson going out and pulling off the moonwalk on the David. You know, it was like on the night show, late night show, and everybody's like, oh, my gosh, what's that? No one's ever seen it.

This is.

This could be the moonwalk right here, right?

You put the bar pretty hard, pretty high there.

Okay? For you tax geeks out there, this is the moon. All right, so here's the deal. Here's what I've diagrammed for everybody here. Now, by the way, if you're catching this on on podcast, please, when you get a minute on your phone or at home, get on YouTube and just type Main Street Business. And if you have to type in the word Sorensen or Kohler. And we switched from the Refresh youh Wealth show after four years of broadcasting under that name.

Before that, we had a different.

And so we're really trying to get that brand down. So it may take a minute to find, but when you find that channel, please subscribe. Whenever we shoot a new podcast, it'll be up on video as well. So you might find that more enjoyable sitting on your phone watching a YouTube video of the show. Okay, when it comes to real estate, what I've created is a line down the middle. What we want to talk about is where can I use these losses when it comes to stock? Because, see, a lot of people come from the corporate world where they've got some stock gains or stock losses. Now, stock losses are a pain in the butt. Stock losses, you can only take up till stock gains, and then you get this 3,000.

Here you go.

You can have 3,000 losses and the rest carry forward forever. And millions of Americans die every year with stock losses that just disappear on their tax return, never to be used again. So a lot of people ask, well, if I get these rental losses, can I use them against stock gains? And if I have stock losses, can I use them against my real estate gain?

And it can be really complex for

an average accountant because you get into what's called 1231 losses, 1250 losses. And any of you that are a tax practitioner, you know that that is muddy, muddy water. So, okay, take your breath, everybody. So here's what I've done.

I've created a line down the middle

of the paper and said, rental operations on the left, selling property on the right. Now, in my trifecta, these would still both be on the right side. These are both real estate passive related this is not your day job. This is on the right side of your trifecta. If you don't know what the trifecta is, you got to get over to YouTube anyway and watch some videos on that.

But I've got.

You can have a rental property with losses and gains. Yeah, you can have a rental property you sold. Okay. For a gain loss or a loss. That's right.

So what I did here is I've

got A and B, A on the left for all of you driving down the road. I got a line down the middle of the whiteboard. On the left is rental operations. We're going to call those A gains or a losses. And then on the right side, we've got sale of rental property, which is B gains or B losses.

Now, in the IRS code, A and

B are very, very different. Okay, so A, let's say I have rental losses, and I put over here on the whiteboard, 98%. 98% of rental property owners are going to have rental losses, which is good.

We know that.

We're still getting cash flow. Matt laid it out. Right, Matt? We're good. Yep. Yep. Then I could have rental gains. Now, where rental gains come into place when someone's like, I watched Dave Ramsey and I need to pay off my rental and just sit back and collect rent maybe. Very safe. Love Dave Ramsey. Not a good investment move. You got all this cash sitting in

a rental ready to get in a

lawsuit, and it's not making you a great roi.

So when you said cash sitting in a rental, it didn't sound like. That's what you said. Sound like the cash is doing something else in the rental. That's. I don't think what you said, but that was funny.

Sorry. We don't have technology to fix that. That. So you're just gonna have to. Okay. All right.

Okay.

But we got type A gains or losses.

I like it.

All right. Okay.

Now, the losses come down with a little arrow, and they run into the first gate. Can I use stock gains against rental losses? No. There's a big no here. So, no, I can't use stock gains against my rental losses.

Dang. Bummer.

Then the losses go through that gate, and I've got my 1, 2, 3, passive, active real estate professional, depending on how I classify myself, is where they get. So door number one, two, or three.

Okay.

Now a rental gain, meaning you paid off this rental and your depreciation's gone, and you're just sitting back and collecting rent. And our clients that are 80 years or older, that's when it's okay. So you're just sitting back collecting rent, you're done investing for the rest of your life. You're just chilling. No stock losses against real estate gains from operations. Okay, so basically what you're seeing is you can't use stock loss or stock gains against any operations from your rentals. Not going to happen. Okay, that's the A category.

So as I'm holding as a rental, getting rental income loss, stock gains aren't helping me at all. And the rental losses aren't helping my stock gains and vice versa. Yeah, these are oil and water. They ain't mixing up.

Yep, oil and water. Ooh, I like that. Okay, now let's say I sell a rental. Oh boy. Now we're in B category. B as in boy. So now I've got a little house here and I put the word sale in a box under it. So if you're driving down the road, we're on the right side of the whiteboard now. And I got, I sold the property. Operations are over. Not collecting rent. I sold this thing. Gain or loss? Now stock loss and gains come into play, Matt. So if I have a gain from the sale of a rental property. Oh, I got a first gate. Again, my first gate is depreciation recapture. So if I have depreciation recapture, I've got to pay that. For those watching online, that's depreciation recapture.

It's a little ugly and then.

But my stock losses I can use against that gain.

I love it.

So if you're sitting on all these stock losses, you could buy a rental, wait a couple years, sell it for a gain, and harvest some of those stock losses you're sitting on.

Yeah, and some people, let's say you sold a property this year, and right now the stock market just, you know, took a crapper this week, you might have a loss in your stock portfolio, and sometimes that's this tax harvesting. You might sell that stock, capture the loss and frankly rebuy it back if you really believe in it at the now lower price. So that gets you that loss that you can now offset that gain on the sell.

There you go.

Now I kind of put this escape hatch down here called the 1031 exchange. And that's where real estate investors that start to acquire a lot of properties figure out, hmm, what am I gonna do with this money when I sell this property anyway? I'm gonna go buy more frickin real estate. So they sell a property and go buy another one or two or three of equal or Greater value. And I kick that tax down the road forever until I die even. No one pays it. So 1031 exchanges are awesome. Again, we have two different candidates that approach these strategy very, very differently. One is pro all this, one is anti all this. Okay? Now the last piece of this is what happens if I sell a rental property and I have a loss. Matt, you're gonna love it. So I'm on the B side. I had a gain. I get to use my stock losses now. Or I can do a 1031 exchange. I'm cool. Oh, I sold a rental at a loss. Maybe it was 2009 or 10 or whatever.

Right.

It was hell on wheels. Right?

Or like me, you bought a fix and flip property in 2007 that turned into a rental for 13 years. No, 12 years. I sold it in 19. And you finally sold it without taking a loss. You know, okay, yep, Work that one out. That took a decade.

Anyway, that guy. Yeah, Whoever that nut job is. Whoever that guy is. Here's what's cool. The loss from a rental property can be used against any income. Your day job, K, ones, stock gains, other real estate gains. So when you sell a rental, you don't even have to be a real estate professional. You can use it against any other income.

Sweet, huh?

Like that.

And there we go.

Nice.

A and B and A. River runs through it, baby.

Yeah.

So in the sell scenario, we got some options. We get some. We get some tax planning over there with the stock as I'm holding it as just a rental year to year, I'm just doing the regular stuff we talked about. Am I passive, active real estate professional. Whatever I'm doing on the stock side of things, it ain't mixing in here. All right, so I had one last issue to hit on all this lost stuff with with rental real estate. And that is the people who crap on buying real estate with a retirement account, self directed IRA or solo K, you know, which we do. Mark and I both do. We have helped thousands of clients do it. We do it at directed IRA with our clients all the time. It's the most common asset someone buys with a self directed IRA is rental real estate. Now, a lot of people out there will say, don't buy real estate with your retirement account because you can't take depreciation and you can't take the losses. Okay, let me hit a. Come back.

Let me just say I'm dying to

say the name of some of the organizations that do that, but we could definitely get into problems for slander. And this that and another.

But I'm gonna say it's fairly common

for any of you that are real estate investors taking real estate investment classes. I could rattle off two or three companies where they do not recommend buying rentals in a retirement account.

And it blows my mind.

I'm like, why?

And they go.

And here they go. They say, you don't get the loss because it stays in your retirement account. So why am I buying rentals if I don't get to offset my income? I'm like, hold it.

Remember the four? We just hit it out of the park for the four. That's only one of the four. There's three other reasons why real estate kicks butt. You realize that? Oh, yeah, I guess. But no one's talking about that.

Yeah, yeah. And what we're saying is, I'm not saying buy real estate in your retirement account instead of buying real estate personally. In fact, most of our clients who buy real estate in their retirement account have personal rental properties, are doing this tax planning on the tax losses.

We do both. Yeah.

They're doing both because they're good at real estate. They know real estate. That's their thing. You know, if you're going to stock, then keep doing that. If you've been crushing it for 20 years and you're beating the markets and everything, keep doing it. I'm not saying don't do anything different. Yeah.

You may be the only person on the planet, but keep doing that.

Yeah. So now here's one. My perspective on it. In your retirement account, you don't pay tax when you're making money. If it's a Roth, the whole thing's coming out tax free. What. What am I going to use a loss for? There's no tax. So do I want loss options to offset income? How about just don't tax me, period? Seems like a better deal to me.

But I don't know. Now that's Matt's take. I like it. It's like, I would rather live in a world of no tax than having to deal with losses. And that's kind of interesting, Matt, when you said that, it's like you put on another lens of glasses that are pink, and now everything you see is pink. That's kind of as when you do real estate with a retirement account, you just changes everything. Now there's no tax, so the loss issue doesn't matter. Now, my take. Matt and I have two different reasons why we hate that argument. But here's my take. Getting pass through losses is freaking awesome. That's what we've been talking about this whole show. We want you to buy rentals slowly but surely, wisely and carefully over the years to come. And I promise you it will build wealth and cash flow for the future. No way around it. It is proven. Will you make some mistakes along the way?

Sure.

Are you gonna hit some home runs along the way? Absolutely. And so you just take the punches with the high fives. You just do both. Now is that the only reason to buy rental real estate? It's because I get losses? No, we talked about these other three. Appreciation, mortgage reductions, cash flow. Guess what? Your retirement accounts gets those other three and just usually just pretty much freaking all the time. Those three benefits are a lot more than your 8% frickin mutual funds sitting in your 401k or IRA. The ROI. When I say return on investment on a rental property, that's what we should be focused on when we look at our retirement account, not the tax benefit per se. Even though Matt's like hey, I don't pay taxes over here. Pretty kick ass. I love it. But. Sorry kids, but the better part is even I'm going to get a 10, 20, 30% return on my investment by buying real estate in my retirement account versus a stock bond or mutual fund or etf. And you don't even bring up the tax loss thing. So what makes money?

Yeah, most people have money in a retirement account and they want to have more money when they hit retirement age.

Yep.

It's all about the returns. What do you care about stock losses for or losses? Just we worry about returns and having the biggest account possible when you hit retirement. If that can happen with real estate. Because that's your thing and that's what you're good at. You feel more confident about it than the market. Go that direction. Don't worry about these. This. Well, you don't get the tax losses in your retirement account. That's not the reason we're thinking about this.

All right.

That's all I had. Glad I got that off my chest.

Yeah, Dan, Geez. I really don't have much more. Except when this topic comes up. If you start to hear sales pitches for words like cost segregation or bonus depreciation or turnkey rentals where you don't even show up and look at it. You're just, just buy this, you know, sort of thing. Look, if you didn't hear it on our show, be a little careful. We, we really do look out. I know that sounds cliche, but we really do look out for our clients. We're not perfect. Some of our staff screws up, I screw up, we don't. We're not perfect all the time, but all in all, we're trying to make sure our clients don't step into a quagmire. And so please set up a console with a couple different accounts, get a couple different opinions. I'll go head to head with anyone on these topics and just debate them. It's not a perfect fit for everybody, but it is a perfect fit for a lot of people. So be open to it. I think it's just I'm buying rentals. Bat Knife, we're looking at one right now. You know, we're looking at rentals all the time and we wish we could buy one a year. Oh, I do have one last tip. If you're looking to buy a rental, who's your best tenant? Who's going to be the best tenant you would ever want? Not your mom, it's you. So if you have an operational business, one of your first places to buy a rental, your own building, your own unit, your own condo, your own whatever, I don't care if it's a shack. If you're renting someone from something from someone for your business, turn that on its head and start buying a property that could appreciate, pay down the mortgage and get a write off for that interest that your landlord's getting and you're not.

Anyway, makes a lot of sense to me. All right, well, thanks everyone for tuning into this. Hope you learned something. And I know we got a little tax nerdy there for a little bit. Mark has a dandy diagram. Make sure you get to YouTube if you want to see the diagram. It is actually pretty cool. And please give us a five star review. Our reviews have finally showed up from our Refreshed wealth podcast. They got merged over but we still would love to see a five star review for me if you like this show and I think if you're still listening by now, I hate to tell you, you kind of like it. So maybe, maybe give us a review.

We're growing on you. So next week is open forum people. Don't forget. Also, my workshop is in a week. 2 day workshop, 3400 bucks, couple days recorded with a workbook, lots of Q and a zoom call where you're networking with others around the country. I think you'd love it. Make your significant other spouse or business partner or children watch it with you. And we're not going anywhere. Don't. Also, if you're into this self directed IRA stuff and buying real estate and your Ira just blew your brain. Please go to your listening portal, whatever you're using, and type the word self Directed Ira Podcast or Directed IRA Podcast. Matt and I have started a new podcast there just for that topic alone and you can binge listen to a bunch of good stuff there.

Yeah, we already got four episodes in for the Directed Ira podcast, so thanks everyone.