June 2026 Meetup: Mid-Year Tax Tune-Up for Passive Real Estate Investors

Or—

all right, so welcome. It's, uh, June 2026. We are going to be talking about mid-year tax tune-up for commercial real estate. We typically do this like in February, we talk about taxes, but at that point it's like it's too late. So, uh, this year our team was talking, I was like, we need to do something sort of mid-year so people are starting to think about their, um, you know, taxes for 2026. And you for those listening to future recordings, you know, a lot of the content is going to be reusable for future years. But a little bit about our meetup. We've been doing our meetup for a few years now. We meet on the 4th Monday of every month. Typically we do from 7 to 7:15. We'll do breakout groups, have conversations, you know, sort of break the ice with, you know, virtual meetups. It's hard to get to know people. But honestly, that's like really the most important part because a lot of this is recorded, you can come back to it. So we do these, uh, breakout groups and then we bring everybody back and then we, um, I'll do a lot of conversation or we'll bring in special guests. And so it really is tied heavily towards like passive investors, primarily in multifamily, but we've, um, you know, we've had a lot of different guests and, speakers and content. So hopefully it's helpful. A little bit about myself, my name is Wayne Courreges III. I'm based here in Central Texas. We've got about $100 million assets under management and development, primarily in Texas, but we have some in Alabama and Louisiana. My whole life's been in commercial real estate. I started in single-family rentals when I was in the Marine Corps when I was 19, bought our first single-family, and we've grown our portfolio and you know, have taken care of investors along the way. My whole background, as I mentioned, is in commercial real estate. I've got an MBA from the University of North Carolina, a Master of Arts in Economics, and a Bachelor of Business Administration. Um, that was many, many, many years ago though, so a whole nother life. Uh, Shelby's on our team, uh, she has been with us about 2 years now, and she runs our Investor Relations. So for those that have started investing or getting with us you're going to know Shelby because she really helps the white glove experience throughout. And then, you know, for my communication and portal, etc., that we have tax documents, etc., Shelby. So I always like to introduce her on these because, you know, there'll be hopefully follow-up conversations and relationship building. And so just having a point of who that person is along with myself is great. So I always like to do this slide too. It's just high level, you know, we, we raise capital, uh, to buy assets. We are primary sponsors. We go source deals, um, operate them, send out distributions, do the taxes with our, you know, CPA, in this case James, who's on this call. Um, and then we, uh, you know, go out and exit the property, uh, for, you know, returns. So What's— what I love about syndication is we all can do bigger assets and bigger opportunities, um, together than we could on our own. And so that's, that's a big thing I love about syndications, is if you can find the right sponsor, whether it's myself or others, uh, that you trust and can build a relationship with, um, I think the returns are a lot better and less headache than, you know, owning single family or doing, you know, properties on your own. So now enough about me. I want to introduce James Bowen, and there's a little typo, it's Stonehand. But James Bowen is a CPA, real estate investor, entrepreneur with over 15 years of experience in real estate finance, tax strategy, and investment management. As the founder of Stonehand, he manages over $20 million in real estate assets while providing accounting, tax, and fractional CFO services to real estate businesses, funds, and syndicators. You can definitely read all that content, but on a personal note, James has done our our taxes for several years. He does it for all of our property as well. So our whole portfolio, everything is through James. And so like I said, I wanted to do a mid-year just to get everybody talking about taxes, having conversations. There definitely will be some opportunities for Q&A as well at the end of this or throughout the James, but just want to, you know, stop sharing on my side and introduce James, and we'll go from there.

Thanks for the introduction, Wayne. And, you know, we have a really small group here, so if everyone is okay not being shy— Christy, Kimberly, Lucian, Maureen— if you can kind of let me know where you're at, uh, in your real estate investing cycle, I can help make this, uh, a better experience and presentation for everyone if I can get a little better context of where you're coming from. So Christie, if you don't mind starting out, just let me know a little bit where you're at with your real estate journey.

Yeah. Yeah. Thanks. Appreciate it, James. So I'm in a number of different syndications for multifamily. I've got a little bit of self-storage, a mobile home park fund. So I'm exclusively a passive investor. I also have some private credit, private debt. And I've also started branching out a little bit more into oil and gas. I do have some working interest, which I like. For offsetting income. Um, I'd kind of like to grow that a little bit and continue to have some real estate. You know, I'd say, um, between public securities, uh, real estate, and the oil and gas, and I operate each of them under a different LLC. That's kind of where I'm at.

Very cool.

Very cool.

Yeah.

Seasoned passive investor.

Definitely interested in tax strategy.

Okay.

Kimberly, what about you?

Oh, I wasn't sure I was unmuted. I am considering investing in real estate. I'd like to diversify my portfolio a little bit more and probably become a passive investor. I had a rental home, but I decided not to keep it, which now I regret, but it was in a great market. So most of my assets are held in commodities and other stock investments.

Gotcha. Lucian, what about you?

Well, I think it's important to say my age. I'm 65, so it's— I'm looking nearing retirement. I started investing, I would say, around 2021, uh, with a purchase of single-family real estate mostly, and You know, it's supposed to be, uh, it was supposed to be passive, uh, but I realized it was not. It's very much active. So, uh, around 2023, I started looking into, uh, partnerships, uh, and, uh, I started investing in multifamily partnerships through a self-directed IRA. Mostly, uh, and, uh, that's, um, how I came to, to meet Wayne and invested with him in, uh, uh, Antler Ridge and Stratton as well. Uh, so, uh, I guess I'm focused more towards investment strategies for retirement and also navigating Medicare, those type things.

Okay, gotcha. Yeah, everyone likes to say real estate is passive until the toilet breaks in the middle of the night.

It's very much not passive.

I found that out. It's definitely not. All right. And then last but not least, Maureen, give us a little teaser about where you're at in your real estate journey.

I'm— I've got a rental I've had for the last 5 years down in Florida, completely paid off. So it's a pure you know, cash, uh, in the pocket, so to speak. I have it in an LLC underneath a holding company out of Wyoming, and I'm looking to expand, uh, the real estate piece of it. Um, I've been retired now. I've got a very nice retirement nest egg, and, um, I'm looking more for passive. I'm not of the age to where I want to do any flips and that type. And I realize I don't want to manage single-family homes myself. I like having a property manager handle it, but I'm also looking to help with tax purposes. That was one of the biggest things that my goal is.

Oh, cool.

Well, yeah, that's very helpful to kind of understand where everyone is coming from. As I do my presentation here, I'll try to make it more relevant for everyone. So let's see here. Am I able to share my screen, Mr. Wayne? Yes, I am. All right.

Okay.

This coming through for everybody? All right. So I'm going to really just kind of start with the basics here. If anyone's watched that show Reacher, you know, they like to say in an investigation, details matter. Well, in taxes and accounting and real estate, details matter a lot too. Um, this is legal. This isn't actual tax advice. This is just general. Actual tax advice means you hire someone, they look at your stuff and give you direct actionable advice. This is just very broad strokes of what taxes are, what the tax code looks like. Wayne Courreges III gave me a little bit of an intro, just some highlights there. I've been a CPA for 15 years. I'm a fourth-generation real estate developer. Um, I was a CFO of a real estate debt fund at 30 years old. I have a master's in real estate development from USC. Now I live on a farm in Idaho. Um, so with real estate, there are some incredible tax advantages here that you often hear about just at the cocktail, uh, cocktail table, webinars like this. And really what it boils down to is a few things. One. Is if you hold things for over a year for investment purposes, you can get capital gains tax rates versus ordinary income. That's generally 15% to 21% versus the highest is 37%. Now, the next one is what you hear about the most is this idea of depreciation. So you can make a $100,000 investment into a real estate syndication that gives you a $50,000 or more sometimes tax loss in that first year,, but it's still spitting off cash flow. So that's the idea that you're actually getting cash, but your taxable income is negative from it. Um, so that's the idea of this depreciation shelter. Um, in addition, like if you refinance a property, if you hold it for, you know, 3, 4, 5, 10 years, whatever, generally real estate appreciates in value. And in order to get money out, you don't have to sell it. You could do what's called a debt finance distribution and just get a bigger loan against the property and take all that out tax-free. And then one of the other last really cool advantages of real estate are these things called opportunity zones. They just got renewed with the latest tax bill, but these are kind of the main 4 things why real estate is so great from a tax-advantaged perspective. So then we get into kind of what are the different types of taxes out there. The one we talk kind of about most is this idea of income tax. And within income tax, you can be at the ordinary tax rates, the capital gains tax rates, the investment income or portfolio income taxes. That's the income taxes. Then now you have payroll and self-employment taxes. This is the FICA. This is your 15.3% if you're self-employed. This is your Medicare, your Medicaid. There's sales taxes out there, there's property taxes, there's foreign taxes, international taxes, state taxes, city taxes, estate taxes, and inheritance tax. There are so many taxes out there. And really what we're mostly going to talk about today is, is income taxes. So on the income tax side of things, here's where you're kind of having your different rate, uh, game. So C corporations have a 21% rate, individuals a 37% max rate. Um, this is the FICA self-employment, 15.3%. Investment income, that's your portfolio, uh, income. And by portfolio income, I mean specifically like interest, dividends, royalties, and capital gains. Even the IRS whacks an extra 3.8% off of that if you're doing too well. Uh, there can be an additional 0.9% Medicare tax. And if you live in a state like California or New York, New Jersey, you can have, you know, another double-digit 10 to 12% plus, um, tax there. And if you live in California and if you make way too much money, they charge you an extra 1%, um, because everyone gets depressed because you're making more than them. They call it the mental health services tax. California. All right. So types of income, like I said, ordinary trader business. That's really what real estate boils down to at the end of the day is like a multifamily apartment building is a trader business under the eyes of the IRS. Um, as I mentioned before, there's the interest, the dividends, rent some real property, go into that ordinary trader business, and then there's, there's your capital gains and then even within capital gains, there's different rates. There's the long-term rates, short-term rates, which are ordinary. There's collectibles, like if you have numismatic, uh, gold. And then we get even more nuanced into like 1231 gains, which are selling business assets, which is real estate. Uh, not listed here are 1245 and 1250 gains as well too, which is, uh, related to some of the, the property you identify in a cost segregation report. But not— don't have that listed here. Now, when I mentioned before, when you guys are investing in real estate, most of the time you guys are investing in what's known as like investor property versus dealer property. From the eyes of the IRS— sorry about that— from the eyes of the IRS, dealer property is like you're, you're just like a factory making widgets. You're buying a piece of land, you're building a home, and you're selling the home. From the IRS IRS's perspective, that's inventory. Now, when you invest in something for the long term and the IRS always looks at all these things with like facts and circumstances and what was the intent when you went into things and intent can change over your holding period too. But from the beginning, was your intent to buy this land, uh, build an apartment complex on it, hold it for a year or two and then sell it? If you do that, then you can start to get into this, the investor land where things can qualify for those capital gains. Otherwise, if you're like, you're investing in a homebuilder or being a homebuilder, that becomes dealer property. And like, those sales of those homes are all like sales of a widget or any other inventory item is how the IRS kind of looks at that. So when you're looking to make your investments, you know, really try to understand like, what is the business model of what I'm investing in and is it going to have the tax results that I think it was? With all of Wayne's stuff, you know, we're clearly in the investor side of things. We're qualifying for those long-term capital gains rates on a sale, and we're getting depreciation and cash flow along the way. Now, one of the biggest things with investing in real estate is this idea of being a passive investor versus an active investor. So on this call, uh, all 4 of you guys are pretty clearly passive investors. Versus Wayne Courreges III, we're more active investors because we're materially participating in the, the assets. Um, so when you, when you look to do your taxes, you basically have to group all the passive things together, um, in order to determine your taxes. And what I mean by that is a passive loss can't offset active income, like 99, 99% of the time. That's a general rule. Um, when you have other passive income though, the passive losses can offset that. So let's say you have, you know, some syndications that are selling that are passive and generating gains, but you make a new investment and that new investment generates a loss. Well, that loss can offset that gain. We kind of call that like a lazy 1031 exchange where you're using depreciation or losses from a new investment to offset the gains from a current one. Um, so some other things to note, like this idea of passive, like I said before, like you might think, like colloquially speaking to a financial advisor, I'm going to go invest in some passive assets. I want some dividend stocks. I want some bonds, you know, interest in dividends are not considered that passive income to the IRS. Uh, those interest in dividends are what we call portfolio income. And another way to think about this when you're thinking about passive and active and what that means. They're classifications for like trade or business income that flows through to you more than like interest or dividends that flow through to you. Um, so to further hone in on this, because it's so important for you guys, like, like I said, most of you guys are in the passive, you invest in a syndication here. I think Maureen, I think you said you own a house in Florida. So you potentially for that house in Florida can qualify as an active participant. This is just another step for— another step above passive, but a step below, uh, material participation. And with this, you can write off up to $25,000 of loss a year. Um, this is kind of like where you're managing a manager, where you're making management decisions with them. Um, you're actively participating in it and you're not just completely passive. That's where you're able to get a little bit of juice of losses out through there. Then you kind of get into the level where, where Wayne and I are at. He's a real estate professional. I'm not, but my wife is. But we all materially participate in our buildings, which once you qualify as a real estate professional, you or your spouse, you can unlock all of the real estate losses if you're materially participating. To offset like your W-2 income, your interest income, your dividend income, your Social Security, your 401 rollovers. You know, once you can qualify for that material participation threshold, you can start to deduct the things against your W-2. The oil and gas investments that Christie mentioned earlier, they're set up in a way and they have a different tax law than real estate does. And my presentation is really focused on real estate right now. But since you mentioned that, um, those oil and gas investments do have tax mechanisms to allow them to offset W-2 without you having to really be like the, uh, materially participating in them. It's a, it's a very unique one-off thing for the oil and gas industry. And that's just— go ahead, Kristi.

Yeah. My, well, my understanding with the new tax law is that, um, obviously the working interest will offset, uh, ordinary income first., but that it can also now offset portfolio income.

Yeah, it, it really comes through as like an active loss.

Yeah.

So it can, it can really offset anything. And, you know, I always try to like bring back to like reality and give context to where all these laws come from. Like, I, I know for sure, like the real estate lobby has like the biggest lobbies for Congress in the United States. I'm sure oil and gas is either number 2 or number 1 right there with them. Um, and so it's also really important from like a government's perspective is they want to incentivize growth. So if you're incentivizing real estate and real estate ownership and development, you'll get more of that. If you incentivize, uh, energy development, you'll get more of that. So the tax code essentially becomes a way for the government to implement, uh, their policies, uh, through incentives to people.

Right.

Like to stimulate the economy.

Exactly. Exactly. Um, so I want to do a little deeper dive onto depreciation here. And in the tax world, we use this adjective called phantom a lot of the time. Usually it's called phantom income. And what that means is like, if you get a K-1 from a syndication and it has like $10,000 of income,, but $0 of distributions, that's $10,000 of phantom income. Um, that can hop it happen a lot in later stages of passive investing where the cash flow might be paying more down on the principal and which isn't deductible for taxes. So you could, after enjoying the depreciation for so long, it could, it can honestly flip to be a phantom income scenario in like year 10, 15, 20 of an investment. But early on, when you're enjoying this idea of depreciation, it's a phantom expense. It's where you buy a building, you still own the asset, but you're able to start writing off the asset over prescribed years, which for residential real estate is 27.5. I've always asked why it's 27.5, and I heard that when the Congress was going to come up with the lives. Half of them wanted 27, half of them wanted 28, and the other half wanted lunch. So they just split the difference. Uh, commercial property is 39. F&F means furniture and fixtures, 7 years. And then once you start to get out of these building lives, residential and commercial are the building component you can depreciate. We start to get into this bonus depreciation land, which I'll get into next. So your 5, 7, 15-year property, 10-year property, anything like less than a billion is subject to this idea of bonus depreciation where you can write off 100% of those allocated costs in the year of purchase. So, um, bonus depreciation, it just came back with the latest tax bill to be at 100%. They were phasing it out with 80/20 or 80/60/40 over the years, but This is one of the things, Kristi, to your point of incentives, is that they wanted to further incentivize and stimulate the economy by giving them bigger tax breaks for buying assets. Usually you can't deduct an asset when you buy it. You can depreciate it. But this is where this idea of bonus depreciation comes in, where you can go in and like, let's say I bought like I'm on a farm here. So let's say I go buy a John Deere tractor, that's equipment, that's 100% write-off. And when it comes to real estate, it's a little harder to conceptualize, but when you're buying real estate, you're buying a portfolio of different asset classes from an IRS perspective. You're buying the land, you're buying the building, you're buying some land improvements. You know, there's a parking lot, like on a farm, there's fences as well too. And where this idea of cost segregation came from was actually the medical office industry where these hospitals, you know, would have all this specialty equipment in the walls. Think about like, I'm not a doctor or nurse, but there's things in the walls about computers. Maybe they take your breath or they do some things, but it's very specialized equipment in the walls. And so when these, uh, very smart tax people for these medical offices were going in and saying like, hey, we bought this for the building, but there's all this equipment here, and this equipment really has a different life than the building. And so what's really evolved over the past 20 years is these companies that are able to do cost segregation reports. So even with something as small as a single-family home, you can get a cost segregation report to see to break out that building component and see like, hey, how many of these, you know, 7 or 5 or 15-year life assets are in this purchase you just did? And you can segregate those costs out from your purchase and start to do some accelerated and bonus depreciation on those smaller components and create a great tax result. It's something, uh, Wayne Courreges III and I, uh, Often, almost always, I won't say always because that's very final, but almost always do these for his investors to really help get them those tax benefits in year 1 because there's a lot of passive investors out there that are maybe getting a deal that's maturing and like I said, getting those capital gains and then they invest those capital gains. And then the new syndication helps wipe out any of those tax bills associated with it. Anything on depreciation and bonus up until now? I know this stuff is extremely complicated. It's very technical. If anyone has any questions, we're going to pause right now before we keep going.

And James, if you don't have enough income from passive to offset all the paper losses, it can accrue to future years, right? And that's So you don't lose it if you don't use it in year 1. Um, and so as people are building their portfolio, it is something that, uh, can be used, um, for future years if they haven't allocated all of that loss on paper.

Exactly. There's a, a passive activity loss form on your tax return that tracks all this. And so like, let's say you get a $100,000 loss tax loss from a K-1 in one year and you can't take any of it, that $100K will continually roll over until you have other passive income to offset it, or you dispose of the activity. Like if you dispose of the activity and you get a $150,000 gain from it, you're able to take your $100,000 loss from before. And then in that year, only pay taxes on $50,000. And if you think about it, that's very even over the life of your whole investment. You've got minus $100K over here. You got plus $150 over here. And then over the course of the whole thing, it evens out to just plus $50. Uh, the tax code can be very logical in that way. There's really nothing created or destroyed along the way. It's all just kind of balances out at some point, except with opportunity zones. Opportunity zones are the one, the only ones that I ever see that actually eliminates tax, not defers it.

Okay.

So a few scenarios here to talk through. Um, let's just go over this one. The property has positive income after expenses and depreciation are deducted from rent revenues. In this scenario, yes, there would be, there would be taxable income. The property is performing well. It's making so much more money than the depreciation that there'll be taxable income though. Now the next scenario, let's say a partnership, one of your syndications, like just sends you a check, sends you their quarterly check. Is that taxable income? Generally? No, that's just a distribution from, uh, the investment. When you get your K-1, you'll be able to see if that's taxable or not. Like I said before, you could be getting your, your quarterly distributions, but your K-1 could show like a minus $10,000 loss. That's why distributions are not always taxable. Usually when you're in a debt fund and the income really matches distributions a lot more., you're able to like know, okay, yeah, this distribution from a debt fund, that's going to be taxable. Okay. So let's say, uh, you foreclose on a note and take title of the secured property. Is that a taxable event? Generally, no. Your basis in the note will then carry over to your basis in the property. Now, another scenario, let's say your loan gets forgiven. Is that taxable income? Generally, yes. Generally, that's called cancellation of debt income. Um, it's another thing to be aware of. Uh, I mentioned this before. Let's say the property owning LLC refinances the property and distributes the loan proceeds out. That's generally tax-free as well too. And then another question I get asked, is there a deduction allowed for capital reserves? Generally, no. Like if you put money into a different account or just segregate it as reserves for the future, you generally can't deduct that until you actually spend it. Um, some basic entity types. Uh, I've heard a lot of people say LLCs, Wyoming LLCs. That's generally over here on the partnership side of thing. Even, uh, um, partnerships can generally be limited liability companies, limited partnership, limited liability partnerships, and double limited liability partnerships. You see a lot of law firms doing these. Um, that's when like different attorneys don't have liability for the other attorneys. Most real estate and syndications are going to be held in this partnership structure. Corporations rarely ever used for real estate ownership. Same with S corporations. And then REITs are these institutional-like vehicles that capture a lot of the tax benefits— excuse me— of real estate while still getting some C corp aspects to them as well. But at the end of the day, they operate very similar to a partnership. These are rules for REITs. I don't think that's very applicable to you guys. Here's generally what an organizational structure looks like from everyone's end. You'll have the property down here, you'll have your deal entity, LLC or LP here. So Lucian, you invested in Stratton. This was, you know, the entity you came into. Um, so from Wayne's perspective, he has CREI Partners as his S corporation, which is the manager for the entities. And then he has a different GP for each of the projects as well too. And Wayne, I'm not sharing any state secrets here. This is always disclosed in your PPMs here. Um, but th— this is kind of how it's like kind of visualized and then using some like actual real world, uh, entities and names that you guys might be familiar with. Um, okay. Opportunity zones. Opportunity zones are amazing. There's something that came out in Trump's first tax bill back in 2018. And, uh, this was a program that had bipartisan support. Um, of all people in the world, it was really championed by, um, one of the Napster guys. You know, he got into VC and, um, I think Sean Parker or something, his name, something like that. Anyways, they were able to get this through. It got renewed with the last tax bill. How this works is if you have a capital gain, and here's the idea going back to the incentives, is that there's so many of these founders out there with these private equity holdings or really appreciated Facebook stock or VCs, private equity funds just sitting on unrealized capital gains. That were not going to work other than just sitting in that Facebook stock. So they wanted to create an incentive for people to sell those and reinvest it back into America and really into impoverished communities was the idea of this opportunity zone. So each state was able to designate census CDPs, census designated tracks in each state that met certain requirements that fell below like the poverty line, or— and they got these maps approved. A lot of the time these maps became really weird where it's like you say, oh, that's like Hollywood, California is an opportunity zone, for example. Um, a lot of student housing, uh, college towns are opportunity zones because the students don't have income but the whole economy is supported by the parents paying their rent and paying for their school. So there's, there is a lot of really interesting Opportunity Zone areas that popped up over the past few years. With the latest tax bill, they renewed the program. They're going to designate new maps every 10 years. Um, and about a week from today, on July 1st, all the states are supposed to come out with their new maps. For Opportunity Zone 2.0, as we're calling it. And what this is, so kind of, I'm very long-winded on this, but let's say you have that Facebook stock, you have these appreciated capital gains. It could be any capital gain. It could be a capital gain from real estate, Bitcoin, stocks. You invest your capital gain into an Opportunity Zone and you defer the tax on that capital gain for 5 years. And you're also able to get a 15 to 30% step-up in basis on that as well. So you pay about, you pay, you know, less taxes on that sale and you defer it. Always in the tax world, the longer you can defer tax out, the more time value of money you have putting that capital to work. So it's always good to defer taxes whenever you can. Now, this is what I alluded to earlier. If you hold this new asset in an opportunity zone for 10 years and sell it, you pay no tax. You pay no depreciation recapture. You pay no capital gains tax. The way it technically works is that the IRS says after selling something in an opportunity zone for 10 years, the basis gets adjusted to the sales price and gain is usually sales price minus basis. And so by doing it in that way, they completely get rid of the whole recapture aspect of it as well. Now, the other thing with this is that you must substantially improve the asset back to, like I said, they didn't want people just speculating on land, just buying land in one of these opportunity zones. That might be a good, like, non-opportunity zone taxable investment, but to really take advantage of this program, um, you have to improve the building basis by at least 100%. And this opportunity zone also works for investing in businesses in opportunity zones or starting business in opportunity zones. I really talked about it from the real estate perspective because that's what we're here to talk about today. So kind of in real estate, this is something I've seen in my life. Um, you know, like I said, I'm a fourth-generation real estate developer. My grandpa built thousands of apartments, so did my dad. And this is what I've seen. Like, you buy a property, the depreciation shelters the cash flow where you're really not paying taxes on your rental income. Um, once you've either executed a value-add plan or just held the property and rode appreciation up, you can refinance it out, take the money out, use the proceeds to buy a new property, and start the cycle all over again. Um, if you sell a property, that you can also use a 1031 exchange. But this is the idea of like a deferral of taxes, uh, versus the elimination of them. Um, and that's kind of how I see the real estate game being played with this, and infinite tax deferral scheme. Um, there's some other considerations to be aware of when you're investing through, uh, your SDIRA or a 401. There's this idea of unrelated business taxable income. Um, and really what, to go back to how do all these crazy words make sense, like think about if you're a restaurant and the guy across the street from you is like the same exact restaurant. I'm a Mexican restaurant selling tacos. He's a Mexican restaurant selling tax tacos, but he's a 501 nonprofit. So on a competitive basis, he has a 30 to 40% advantage over me because he pays no taxes. So in order to level the playing field, the IRS says if you're a nonprofit engaged in a trade or business, like a restaurant for example, like you have to pay taxes as if that was an actual business. You don't get, uh, an unfair advantage over the guy across the street just because you called yourself a nonprofit. Now, when it comes to real estate, real estate is generally exempt from UBTI. Uh, the problem is once you start using acquisition and debt indebtedness, which almost everyone does, buying with leverage, you create something called unrelated debt finance income, UDFI. And unfortunately, self-directed IRAs are not exempt from this UDFI and generally, um, have to potentially pay taxes in the years of gains, um, when they own real estate through an SDIRA. Um, if— and the similar games can be played there where if the SDIRA is continually investing things that generate depreciation to offset the gains, that's something there. But it's something to really be aware of when you're looking to invest in real estate. And this, this thing gets super complicated once you start getting pension funds involved here too. Um, so that's really high-level overview of taxes. I hope that was helpful that people get a little more detailed understanding of what everything means, um, instead of just hearing stuff on TikTok or the, the country club cocktail hour, and you're able to hear it from like an actual real CPA living this stuff every day.

James, thank you so much. And if anybody has any questions, we definitely have some time. Or if you want to put in the chat, I can read it, whichever one.

I had a question just a little bit more on the depreciation recapture and—

pardon me—

with a refinance on a syndication, that's just a return of capital, correct?

Generally, yes.

Yeah. But then with, let's say, upon exit, you know, building is sold. Can you talk a little bit more about depreciation recapture and then how that would affect an investor, you know, with a taxable event at that time?

Yeah, I might get these numbers backwards here, so don't blame me. So there's two types of recapture. There's Section 1245 recapture and there's Section 1250 recapture. Okay, Section 1245 recapture is anything that was subject to bonus depreciation, and that's going to run through line 2 of your rental income on your K-1. So let's, uh, maybe use some examples here. Let's say you start at $100K, but you've gone down to zero through depreciation, and let's say $50K was 1245 recapture, and the other $50K was 1250 recapture. You would pay, uh, ordinary rates on $50K, and that which could be, you know, 15 to 37% at the highest. And on the Section 1250 recapture, which is part of the building, um, that's just taxed flat at a 25% recapture. And then anything above that, if there's gain, is going to be your long-term capital gains tax rates.

Okay, so on the 1245, it's a 25% Recapture.

So the $1,245, just think about that as like the bonus assets. That's at ordinary income rates.

Ordinary. That one's at ordinary. Okay.

And then the $1,250, which is like your normal building depreciation, that's recaptured at 25%. Okay.

And why? Because it's considered part of the capital gains or They're just clawing back what you had already claimed in depreciation because you've disposed of the asset.

Yeah, that's, that's exactly it.

Yeah. Yeah. Okay.

And does a 1031 eliminate that for you?

Like I said, that eliminate word only happens in opportunity zones. The deferred word with the 1031 exchanges generally, yes, you can defer those as well too.

Okay.

Kimberly, got your hand raised here.

Yes.

The question I had was, do you have any suggestions? One of my hesitations is most of my retirement assets are held in qualified accounts, and knowing that I would not be able to deduct the losses from passive real estate investments. So I was really trying to decide from a tax standpoint, do you have any suggestions on how to mitigate that?

I do, Wayne. You might not like this answer, but I'm going to be honest with the audience here. I really like people doing lending out of their SDIRAs and 401s. There are certain ways to maybe get that in as a preferred equity into real estate where it's really a pure kind of portfolio income that way and not subject to this UBTI. But really with your IRAs and 401s, just exactly to your point, because you can't benefit from those amazing, uh, aspects of depreciation and all that stuff. Um, and then people like to say you put a tax-advantaged account in a tax-advantaged holding account and you create a tax liability. Yeah, you know, that's never really what you want to do. And so I really love it when people are doing, you know, lending out at 8 to 12% from their IRA. You know, you're, you're tracking with the market. You have a little more control over it. Um, if you're lending, you know, 60 to 70% of leverage, you, you have a good, you know, basis and some staying power there. Um, so that's honestly my advice for, uh, IRA and 401k.

Um, yeah, I like that. What you're basically saying is instead of taking a huge capital, a huge distribution which would generate, you know, ordinary income tax, you would be loaning the money to yourself and investing on the personal level, correct?

I meant lending to other people. When you loan to yourself—

oh, okay.

You can, you can loan to yourself up to $50K from a 401K. Generally, I think it's, uh, like 10% or $50K, something like that. Um,, but then you have to pay your, pay your IRA back within 5 years. I'm saying lend to other businesses and make that your investment or invest in a debt fund.

Yeah.

Wayne, you should start a debt fund.

No.

Yeah, because I've actually been looking at those. That's funny that you said that because I've actually been looking at those investments currently. Basically, they, I guess, are loaning money to invest in it.

It was oil and gas.

But, and the second question I had was for Wayne. Are any of your, um, investments held in Opportunity Zones?

No, you know, no, we haven't done anything with opportunities. Um, our, our properties are pretty core to centralized, already developed areas, um, with strong income. Um, yeah, so our risk tolerance and time horizon doesn't really fit for the opportunity zones currently.

Yeah, I'm kind of in the same boat, but I knew that there were some in San Antonio and I wasn't sure if any of your apartment complexes had qualified for those areas. I'd never looked at it real close, but so I was just curious. Thank you.

Yeah, you also have to do significant value-add or really develop in order to take advantage of those opportunity zones.

Yeah.

The other thing with debt funds, if you're not investing with your SDIRA or 401, is if the debt fund's set up properly, a debt, a debt fund can be what's called a trade or business. And so it won't pass through, but it, they, it depends on how they're doing it. But how we did it when I was a debt fund is we would run the income through line 1 ordinary income on the K-1 versus line 5 interest income. And like I said before, line 5 interest income is that portfolio income hits you with an extra 3.8% net investment income tax. When we run it through on line 1 as ordinary income for your debt fund, that debt fund income can be offset by your equity fund investment. So like you're investing in Stratton or one of Wayne Courreges III's properties, it's giving you all this depreciation and you're a passive investor living in passive land. But you also have these passive debt fund investments. If they're reporting it as line 1 ordinary income because they're in the trade or business of making loans, you can take that debt fund income and just basically wipe it all out with depreciation.

And you're referring to line 1 of the K-1, correct?

Correct. Yeah.

Yeah.

Okay.

James, can you talk a little bit about short-term rentals? Because I see that as an advantage to active income. Offsetting if, if someone wanted to do like a short-term, you know, purchase a short-term rental?

Yep. Yep. And I'm going to give you a long-winded answer again. So kind of back to my point, when the IRS was making all these rules for real estate, since they're so great, they, they have this thing that says real estate is a per se passive activity unless you really meet one of these three requirements. And those three requirements are generally one, real estate professional, 2, you own your own building. So think about like your medical office, your doctor who owns his own practice and owns the building it's in. Then you can start unlocking a lot of the depreciation and not having to be passive. Or 3 is they exempt short-term rentals from this definition of, of rental property because the IRS really looks at like you're running a hotel or like a mini hotel. And so when you go for this short-term rental loophole, as people call it. The loophole is that you don't have to spend 750 hours to qualify as a real estate professional. You just need to materially participate in the Airbnb or short-term rental, which generally means you need to spend over 100 hours in it. And usually you only need to do that in the first year to really unlock a lot of those losses through a cost seg. And then since it's not per se passive, you can unlock that to then offset your W-2 income.

Thanks, James. Yeah, that's the only one that I know to offset using real estate to offset active income. Everything else is stuck in the, the passive bucket.

It's still not— yeah, it's still not a passive, uh, investment though. Like, you still need to really put hours in into it as well.

Yeah.

All right.

Any other questions, James? I think this has been really helpful for the recording because we convert this to like a podcast and stuff. James, do you mind? I know it's on the screen here, but just let people know how to reach out to you.

Yeah, absolutely. People can get a hold of me at Stonehan.com. That's stone like a rock, han like Han Solo dot com. I'm very active on LinkedIn. James Bohan, CPA, MRED there. And then on Instagram, I'm James Bohan CFO, and would love to hear from anybody listening.

Sounds good. Thank you, James.

Thank you, Wayne.