#75 - Unlocking Real Estate Professional Status (REPS) with Brandon Hall

[00:00:00] [SPEAKER_02]: Hey, welcome back to Passive Income Pilots, everyone. Tait Duryea here with Ryan Gibson. How are you, man?

[00:00:05] [SPEAKER_02]: Good to see you, Tait. How was the conference?

[00:00:07] [SPEAKER_02]: Good to see you. Yeah, set 7 hours in a 7-6-Jump C yesterday.

[00:00:12] [SPEAKER_02]: Again, home from Salt Lake, I was at the best-ever real estate conference.

[00:00:16] [SPEAKER_02]: Sixth year running. I missed you and where were you?

[00:00:19] [SPEAKER_01]: Busy back home. That's fair.

[00:00:21] [SPEAKER_01]: Taking care of things in the back office. We've got a couple of deals that we're closing,

[00:00:25] [SPEAKER_01]: so was keeping that up. We're closing a trio properties here in the Pacific Northwest,

[00:00:30] [SPEAKER_01]: and breaking ground on a deal in Savannah, Georgia.

[00:00:32] [SPEAKER_01]: So excited to get some more of self-storage in the portfolio. Incredible.

[00:00:36] [SPEAKER_01]: And I'm excited about today's guest, Brandon Hall, who's actually been in my network for the last decade or so.

[00:00:42] [SPEAKER_01]: And I believe yours is well-taped, and he's a CPA, national speaker.

[00:00:46] [SPEAKER_01]: He actually owns and is the founder of Paul CPA, PLLC, which is a accounting firm.

[00:00:52] [SPEAKER_01]: And they focus on real estate and tax.

[00:00:56] [SPEAKER_01]: So it works with real estate investors, syndicators, private equity funds to optimize tax positions,

[00:01:02] [SPEAKER_01]: streamlined accounting, business functions, et cetera.

[00:01:04] [SPEAKER_01]: And he's also the founder of the real estate CPA.

[00:01:06] [SPEAKER_01]: He believes that real estate investing is critical to building sustainable and generational wealth.

[00:01:10] [SPEAKER_01]: And he had a big corporate background with Pricewaterhouse Cooper's and Ernst and Young.

[00:01:15] [SPEAKER_01]: We're launching his own CPA firm.

[00:01:17] [SPEAKER_01]: And I love his LinkedIn content.

[00:01:20] [SPEAKER_01]: I love his approach to real estate and tax strategies.

[00:01:23] [SPEAKER_01]: And I think our listeners are really going to enjoy the deep dive that we provide on the professional real estate tax status and how

[00:01:31] [SPEAKER_01]: the material participation, how you get your spouse involved and all these strategies.

[00:01:35] [SPEAKER_01]: But Tate, I'll let you kind of give a little bit of background on that.

[00:01:37] [SPEAKER_02]: Yeah, real estate professional status is something that I've taken advantage of for many, many years.

[00:01:41] [SPEAKER_02]: And I think it's the most powerful loophole in the tax code for high income W2 professionals.

[00:01:47] [SPEAKER_02]: It's something that not everybody can qualify for.

[00:01:49] [SPEAKER_02]: So if you're, if you're listening to this and you're just like, I can't, there's no way, you know,

[00:01:54] [SPEAKER_02]: I don't have a spouse that can qualify.

[00:01:56] [SPEAKER_02]: I can't qualify.

[00:01:57] [SPEAKER_02]: I have no interest in managing my rentals.

[00:01:59] [SPEAKER_02]: Maybe this episode is not for you, but maybe give it a listen because it might change your mind.

[00:02:03] [SPEAKER_02]: The tax savings that you can get out of qualifying for real estate professional status are absolutely mind-blowing.

[00:02:09] [SPEAKER_02]: So I've been sharing Brandon's ebook, which is a 30 something page document on all the nuances that

[00:02:17] [SPEAKER_02]: Case law, all this stuff on real estate professional status were really long times.

[00:02:21] [SPEAKER_02]: I'm really excited to have them on the show.

[00:02:23] [SPEAKER_01]: If you wait to the end to if you listen all the way to the end of the show, we'll tell you you can get the five top tips for how pilots can save money on taxes and we're going to tell you how we can,

[00:02:33] [SPEAKER_01]: you guys can get a copy of this ebook on becoming our real estate professional.

[00:02:37] [SPEAKER_02]: Yeah.

[00:02:37] [SPEAKER_02]: It's a great ebook and yeah excited to talk to Brandon.

[00:02:40] [SPEAKER_02]: So with that, let's get to the show.

[00:02:45] [SPEAKER_02]: Welcome to Passive Income pilots, where pilots upgrade their money.

[00:02:49] [SPEAKER_02]: This is the definitive source for personal finance and investment tactics for 80 years.

[00:02:55] [SPEAKER_02]: We interview world renowned experts and share these lessons with a flying community.

[00:03:00] [SPEAKER_02]: So if you're ready for practical knowledge and insights, let's roll.

[00:03:04] [SPEAKER_02]: Brandon, thank you so much for coming on the show.

[00:03:06] [SPEAKER_02]: How you doing?

[00:03:06] [SPEAKER_00]: Good, good.

[00:03:07] [SPEAKER_00]: Thanks for having me guys.

[00:03:08] [SPEAKER_00]: I'm excited to be here.

[00:03:08] [SPEAKER_02]: I tell you what, taxes are the number one pain point that pilots have to deal with always.

[00:03:15] [SPEAKER_02]: I sat in the jump seat on Delta.

[00:03:17] [SPEAKER_02]: Thanks for the ride.

[00:03:18] [SPEAKER_02]: Yesterday for seven hours and we talked a lot about tax mitigation.

[00:03:25] [SPEAKER_02]: And it blows people's minds when you start talking about real estate and the things that you can do to reduce your W2.

[00:03:32] [SPEAKER_02]: If you're doing things right in your playing the game right.

[00:03:34] [SPEAKER_02]: So you have an incredible ebook that I have shared with a lot of people because I think

[00:03:38] [SPEAKER_02]: is the best resource for real estate professional status that I've ever read.

[00:03:42] [SPEAKER_02]: Thanks.

[00:03:43] [SPEAKER_02]: And there are a lot of different topics that we could dive into today,

[00:03:46] [SPEAKER_02]: but because you're such a constant expert on the real estate professional status,

[00:03:50] [SPEAKER_02]: that's what I really wanted to work on today's show around and do a really long deep dive

[00:03:55] [SPEAKER_02]: into real estate professional status, the case law around it, all that stuff.

[00:04:00] [SPEAKER_02]: So without further ado, Brandon, maybe you could give some background on yourself.

[00:04:03] [SPEAKER_02]: How you got into the BNACPA.

[00:04:05] [SPEAKER_00]: Sure.

[00:04:06] [SPEAKER_00]: So thanks for having me on.

[00:04:07] [SPEAKER_00]: I really appreciate it.

[00:04:08] [SPEAKER_00]: I run a firm called all CPAP LLC.

[00:04:12] [SPEAKER_00]: We are known all the known as the real estate CPA.

[00:04:16] [SPEAKER_00]: We've got about 800 clients across the United States,

[00:04:18] [SPEAKER_00]: everything will one of them invest in real estate.

[00:04:20] [SPEAKER_00]: You know, it's interesting too.

[00:04:21] [SPEAKER_00]: I coach CPA firms like how to run CPA businesses and one of them ask me is like,

[00:04:26] [SPEAKER_00]: to just do the real estate piece.

[00:04:28] [SPEAKER_00]: You don't do anything else.

[00:04:29] [SPEAKER_00]: I was like, actually, I guess we're not nicheed in real estate like I thought we were.

[00:04:32] [SPEAKER_00]: We've got tons of businesses that we serve and like all sorts of different industries

[00:04:36] [SPEAKER_00]: in areas, but the commonality is everything one of our clients is investing in real estate.

[00:04:41] [SPEAKER_00]: So we were clients across the United States, my team cut about like 55 people now

[00:04:46] [SPEAKER_00]: all across the United States as well.

[00:04:48] [SPEAKER_00]: 100% remote firm.

[00:04:50] [SPEAKER_00]: I started it back in 2016.

[00:04:52] [SPEAKER_00]: I was trying to get out of my corporate job and I was buying rental real estate myself.

[00:04:56] [SPEAKER_00]: Trying to, you know, do the passive income build wealth and that stuff.

[00:04:59] [SPEAKER_00]: And then through that process realized there were a lot of landlords asking tech questions.

[00:05:05] [SPEAKER_00]: I was like, oh, I could potentially help with this and it just sort of snowballed until

[00:05:08] [SPEAKER_00]: what it is today.

[00:05:09] [SPEAKER_00]: So that's how I got here.

[00:05:12] [SPEAKER_00]: But it's been a lot of fun.

[00:05:13] [SPEAKER_00]: I mean, I've seen, I've been able to see kind of behind the scenes of extremely successful real estate investors

[00:05:20] [SPEAKER_00]: who have built very, very large net worth and you get to kind of asking me about

[00:05:24] [SPEAKER_00]: how they did it.

[00:05:25] [SPEAKER_00]: And it's definitely like, real estate say multi-decade game.

[00:05:29] [SPEAKER_00]: But I also learned like the most successful people in real estate are running it

[00:05:34] [SPEAKER_00]: like a business so it's not like a, like, because I came into it, like I'm going to pass

[00:05:39] [SPEAKER_00]: to the investors on the side and you can be really successful doing that.

[00:05:42] [SPEAKER_00]: But if you were talking about like the echelons of net worth,

[00:05:46] [SPEAKER_00]: I mean these guys are just grinding on every single day.

[00:05:49] [SPEAKER_00]: So it's been fascinating.

[00:05:50] [SPEAKER_00]: It's been a lot of fun networking and meeting all these really successful people.

[00:05:54] [SPEAKER_01]: That's incredible.

[00:05:55] [SPEAKER_01]: What do you think it's been the biggest takeaway?

[00:05:58] [SPEAKER_01]: When you say operating real estate like a business, what do you think it's been the biggest

[00:06:02] [SPEAKER_01]: takeaway on operating and regular business or just operating it?

[00:06:06] [SPEAKER_01]: You know, what are the like the details in how that makes it different?

[00:06:11] [SPEAKER_00]: I think that our most successful client are always looking at ways to add value.

[00:06:17] [SPEAKER_00]: And they're always looking for offered trucks, opportunities.

[00:06:20] [SPEAKER_00]: So you know, you know, the thing like you make money when you buy.

[00:06:24] [SPEAKER_00]: That either has to be true or you have to be really good at adding value.

[00:06:28] [SPEAKER_00]: You see, you've got to be really good at finding great deals or you have to be really good

[00:06:32] [SPEAKER_00]: at adding value so that you can arbitrage that value.

[00:06:36] [SPEAKER_00]: That's what our most successful clients do.

[00:06:38] [SPEAKER_00]: Now, we have a ton of clients that have high income jobs and investing in real estate on the side.

[00:06:43] [SPEAKER_00]: And they're very successful too.

[00:06:45] [SPEAKER_00]: I think that the, the, the difference though is that, you know,

[00:06:49] [SPEAKER_00]: they, they buy kind of on the cash flow.

[00:06:52] [SPEAKER_00]: Then they realize later, oh, the cash flow just kind of carried the property for that appreciation

[00:06:57] [SPEAKER_00]: bump, especially those of us that have been owning over the past three years, right?

[00:07:00] [SPEAKER_00]: We've called massive increases in value.

[00:07:04] [SPEAKER_00]: So then when you see that like, well, the cash flow doesn't,

[00:07:06] [SPEAKER_00]: isn't even really that big of a deal.

[00:07:09] [SPEAKER_00]: Right.

[00:07:09] [SPEAKER_00]: So I think that's kind of the difference is just the, the,

[00:07:13] [SPEAKER_00]: the most sophisticated people on our client base create that value consistently.

[00:07:18] [SPEAKER_00]: And then the, the hiring commanders that like have jobs or run businesses like myself,

[00:07:25] [SPEAKER_00]: when we invest in real estate, we kind of wait for the value to be created by the market.

[00:07:29] [SPEAKER_00]: And I think that's the main difference.

[00:07:31] [SPEAKER_02]: Well, that definitely resonates with, you know, guys like Ryan and I where where,

[00:07:35] [SPEAKER_02]: you know, Ryan had owns this indication firm were a fund where we,

[00:07:39] [SPEAKER_02]: we partner with operators like Ryan.

[00:07:42] [SPEAKER_02]: And these people are really good at rolling up their sleeves and creating that value

[00:07:45] [SPEAKER_02]: and they run it like a business so that definitely resonates with us.

[00:07:49] [SPEAKER_02]: You know, real estate makes money in four ways, right?

[00:07:51] [SPEAKER_02]: And that's that's something I don't know if we've touched on this on the show,

[00:07:53] [SPEAKER_02]: but it makes money through of course cash flow appreciation,

[00:07:57] [SPEAKER_02]: amortization, meaning that the overall time, you know,

[00:08:01] [SPEAKER_02]: the loan gets paid down and you build equity.

[00:08:04] [SPEAKER_02]: And of course depreciation, which is tax benefits that are associated with it.

[00:08:09] [SPEAKER_02]: So let's start with depreciation for people that aren't familiar with how real estate gets

[00:08:14] [SPEAKER_02]: appreciated and why you can depreciate something that actually increases in value over time.

[00:08:19] [SPEAKER_02]: And then we can get into how we can leverage that against other income.

[00:08:24] [SPEAKER_00]: Yeah, that's a great question.

[00:08:26] [SPEAKER_00]: And it's definitely where we start with new investors because new investors like why would I depreciate this thing that's supposed to appreciate.

[00:08:33] [SPEAKER_00]: So depreciation is a non cash expense that you get to claim every single year.

[00:08:41] [SPEAKER_00]: And it's meant to track the deterioration of your asset over time.

[00:08:45] [SPEAKER_00]: So it's true that when you buy real estate, it increases in market value,

[00:08:51] [SPEAKER_00]: but it's also true that the roof literally falls apart, the windows literally fall apart,

[00:08:56] [SPEAKER_00]: everything inside of it falls apart.

[00:08:58] [SPEAKER_00]: The depreciation is meant to be an expense that tracks that deterioration year after year for year.

[00:09:05] [SPEAKER_00]: Indepreciation is a really it's a simple calculation.

[00:09:10] [SPEAKER_00]: So I buy a property, local is just these simple numbers that buy a property for a million dollars.

[00:09:17] [SPEAKER_00]: I have to make an allocation to land because dirt does not fall apart over time.

[00:09:22] [SPEAKER_00]: So dirt cannot be depreciated.

[00:09:24] [SPEAKER_00]: So let's say that 10% of my value goes to land.

[00:09:28] [SPEAKER_00]: Do not have gotten $900,000 of improvements or building value.

[00:09:33] [SPEAKER_00]: I just divide that by 27 and a half years in that's my annual depreciation expense.

[00:09:38] [SPEAKER_00]: And it doesn't matter if I 100% finance the property, 100% vodka, when 70 30 50 50 whatever.

[00:09:47] [SPEAKER_00]: So how I find it, the acquisition doesn't matter.

[00:09:49] [SPEAKER_00]: All that matters is what my improvement value divided by 27 and a half years or 39 years

[00:09:54] [SPEAKER_00]: we're talking about office building commercial properties.

[00:09:58] [SPEAKER_00]: So I just get to claim that and you will spend every single year.

[00:10:01] [SPEAKER_00]: And it's awesome because a lot of times rental real estate will produce net operating income cash flow.

[00:10:09] [SPEAKER_00]: But once you factor in depreciation, you actually have a taxable lot.

[00:10:14] [SPEAKER_00]: So there are a ton of examples in my own client base where our client will be making $40,000 of cash flow.

[00:10:23] [SPEAKER_00]: But they'll get a tell the IRS.

[00:10:25] [SPEAKER_00]: They lost $20,000 because they've got to indicate appreciation that white support

[00:10:30] [SPEAKER_00]: decay out plus 20 right?

[00:10:33] [SPEAKER_00]: So you you don't pay tax on the cash flow today.

[00:10:38] [SPEAKER_00]: Which is a huge tax benefit that continues to compound as you scale your portfolio.

[00:10:43] [SPEAKER_00]: But you also have this tax loss that you might be able to take advantage of.

[00:10:47] [SPEAKER_00]: And then that leads us back to the whole real estate professional service conversation

[00:10:50] [SPEAKER_00]: we're talking about at the beginning.

[00:10:52] [SPEAKER_01]: Excellent.

[00:10:52] [SPEAKER_01]: The objection that I always get with depreciation is yeah, but I got to recapture that tax

[00:10:59] [SPEAKER_01]: and pay it in the future.

[00:11:02] [SPEAKER_01]: So can you talk about that?

[00:11:04] [SPEAKER_00]: Yeah, yeah.

[00:11:04] [SPEAKER_00]: And you know, I think that I think that concern is is well placed because what happens is

[00:11:12] [SPEAKER_00]: we we get clients that just don't know about it or talk about it and then they go to sell property in their shop.

[00:11:17] [SPEAKER_00]: So I do think that the conversation should be had.

[00:11:22] [SPEAKER_00]: But I think that that a lot of people are overly concerned about it.

[00:11:27] [SPEAKER_00]: There's no depreciation.

[00:11:29] [SPEAKER_00]: It's an expensive to claim today, but you do have to pay it back at some later point.

[00:11:35] [SPEAKER_00]: And you pay it back through recapture in a really simple way to think about this is let's go back to that million dollar property.

[00:11:42] [SPEAKER_00]: If I sold the million dollar property for $980,000 a bottom for million sold for 90,

[00:11:49] [SPEAKER_00]: most of us would say yeah, you lost $20,000 on it.

[00:11:53] [SPEAKER_00]: But what an account is going to say is well, what is your adjusted basis?

[00:11:58] [SPEAKER_00]: And adjusted basis is my purchase price minus all the depreciation that have claimed every single year.

[00:12:04] [SPEAKER_00]: So if I've claimed a hundred k depreciation,

[00:12:06] [SPEAKER_00]: my adjusted basis is $900,000.

[00:12:10] [SPEAKER_00]: If I sell it for 9080, I actually have an $80,000 gain.

[00:12:14] [SPEAKER_00]: So even though I lost money on the books, I have an $80,000 gain and that gain is created from depreciation.

[00:12:23] [SPEAKER_00]: So that would be depreciation recapture.

[00:12:26] [SPEAKER_00]: So depreciation recapture just depreciation reduces your adjusted basis.

[00:12:31] [SPEAKER_00]: And then when you sell, it essentially inflates your gain that you have to pay tax on.

[00:12:35] [SPEAKER_00]: But when you do the math, what you find is I got tax savings by taking the depreciation every single year.

[00:12:43] [SPEAKER_00]: And then seven, ten years later, I have to pay the tax savings back.

[00:12:47] [SPEAKER_01]: When you pay the taxes at the sale and your example to 1980,

[00:12:51] [SPEAKER_01]: is it one for one? So like I saved the dollar in taxes and now paying the dollar back or is it as a potential arbitrage player?

[00:12:59] [SPEAKER_00]: So it is kind of one to one, but it depends on the type of depreciation that we're talking about.

[00:13:04] [SPEAKER_00]: So if you use bonus depreciation,

[00:13:09] [SPEAKER_00]: like you're going to get a,

[00:13:10] [SPEAKER_00]: you're going to get tax savings at your current rate today.

[00:13:14] [SPEAKER_00]: But you're going to pay it back at your current rate in the future.

[00:13:18] [SPEAKER_00]: So it's not capped at the 25% rate, like normal depreciation is.

[00:13:23] [SPEAKER_00]: So for talking about bonus depreciation, we do recapture it at our regular tax rate.

[00:13:28] [SPEAKER_00]: So if I'm in a high rate today, but I'm in a lower rate later than y'all got an arbitrage player right there.

[00:13:34] [SPEAKER_00]: Which is really nice.

[00:13:36] [SPEAKER_00]: And then the same thing kind of work with straight line depreciation,

[00:13:38] [SPEAKER_00]: where straight line depreciation,

[00:13:40] [SPEAKER_00]: I'm going to take it today at my regular rate.

[00:13:43] [SPEAKER_00]: But I'm going to recapture it at capital game rate,

[00:13:46] [SPEAKER_00]: which is also really nice up to a maximum point.

[00:13:50] [SPEAKER_00]: But then there is also an arbitrage opportunity.

[00:13:52] [SPEAKER_01]: Yeah, I know that's great.

[00:13:53] [SPEAKER_01]: And when you say bonus depreciation,

[00:13:54] [SPEAKER_01]: you're just talking about any of that five and 15 year short term life correct?

[00:13:58] [SPEAKER_01]: Correct.

[00:13:59] [SPEAKER_01]: Okay.

[00:13:59] [SPEAKER_01]: Yeah.

[00:13:59] [SPEAKER_02]: Cool.

[00:14:00] [SPEAKER_02]: Very good.

[00:14:00] [SPEAKER_02]: So let's jump into accelerated depreciation, right?

[00:14:04] [SPEAKER_02]: Because this is something that a lot of real estate investors or at least pilots that I run into don't realize is that you can do something called a cost segregation study.

[00:14:13] [SPEAKER_02]: Pull certain components out of the building and accelerate their depreciation.

[00:14:17] [SPEAKER_02]: If you want to deep dive on cost.

[00:14:19] [SPEAKER_02]: We did a great episode with Yona Weiss go back and listen to that.

[00:14:23] [SPEAKER_02]: That's going to be the real deep dive on cost.

[00:14:25] [SPEAKER_02]: But let's just touch on it here for somebody who hasn't listened to that episode.

[00:14:28] [SPEAKER_02]: What a cost segregation is, what it accomplishes.

[00:14:31] [SPEAKER_02]: And then we can sort of pile on bonus depreciation on top of that.

[00:14:35] [SPEAKER_00]: Yes, they kind of continue the conversation of when I buy a property.

[00:14:38] [SPEAKER_00]: I'm depreciating it because components are falling apart.

[00:14:42] [SPEAKER_00]: Even though the property itself is increasing in value.

[00:14:46] [SPEAKER_00]: A cost segregation study is the practice of basically going through the property and identifying components that fall apart faster than 27.5 years.

[00:14:56] [SPEAKER_00]: So after a cost segregation study, you'll basically have the value allocated to five year property,

[00:15:04] [SPEAKER_00]: seven year property and 15 year property as well as the 27.5 year property the building.

[00:15:11] [SPEAKER_00]: And then post cost segregation study, you can bonus depreciate any component with a useful life of less than 20 years.

[00:15:20] [SPEAKER_00]: So you do a cost segregation study on a million dollar building and you're probably looking at $200,000 of first year depreciation that you can see.

[00:15:26] [SPEAKER_00]: And then you're going to claim and, you know, if that first year I had 40 k in an operating income that I'm looking at 160,000.

[00:15:34] [SPEAKER_00]: And that's where the tax benefits start to get really juicy.

[00:15:38] [SPEAKER_02]: Yeah, and to be clear, bonus depreciation was brought in in the tax cut and job exact of 2017 100% bonus depreciation.

[00:15:46] [SPEAKER_02]: So anything you bought for the business with a 20 year life basically and real estate, you know, falls into this category.

[00:15:53] [SPEAKER_02]: So if you pull anything out of that 27 to have year and you put it into one of these five seven or 15 year categories, it's bonus level right.

[00:16:01] [SPEAKER_02]: And so it was 100% bonus depreciation 2017 all the way through 2022 last year we had 80% this year where it's 60 next year 40 that following your 20 and then it phases out in what is the 2027.

[00:16:15] [SPEAKER_02]: However, there's a bill currently in the Senate that may bring it back.

[00:16:21] [SPEAKER_02]: Yeah.

[00:16:21] [SPEAKER_02]: We want to touch you.

[00:16:22] [SPEAKER_00]: Yeah, we're hopeful.

[00:16:24] [SPEAKER_00]: Yeah.

[00:16:25] [SPEAKER_00]: We would be hoping that it would be passed by now.

[00:16:27] [SPEAKER_00]: But I think the chances of that are getting a polymer each day.

[00:16:33] [SPEAKER_00]: So I don't know if I don't know if that'll end up getting passed.

[00:16:36] [SPEAKER_00]: I do think that something will change with bonus depreciation.

[00:16:40] [SPEAKER_00]: I don't know if it's going to be retroactive to 2023 like we were all hoping for.

[00:16:44] [SPEAKER_01]: I understood.

[00:16:45] [SPEAKER_01]: I think we're all, I think we've all been waiting for interest rate cuts in tax change and we're on pins and needles over here.

[00:16:56] [SPEAKER_02]: So let's talk about the difference between passive and active losses.

[00:17:02] [SPEAKER_02]: We talked about this with Toby Mathis back on episode 10 that's a great one if you want to go back to that but talk about the wall that stands between passive income and passive losses.

[00:17:13] [SPEAKER_02]: And active income and active losses and why it's there and how we can break a dump.

[00:17:18] [SPEAKER_00]: Yeah, so rental rental activities are passive.

[00:17:24] [SPEAKER_00]: And passive losses cannot offset non-passive income.

[00:17:32] [SPEAKER_00]: So non-passive income is like W2 income and business income and also interestingly enough interest income and dividend to income is all considered non-passive.

[00:17:43] [SPEAKER_00]: So really like passive income if you think about it is just rentals and then it's any business that you don't materially participate in right.

[00:17:50] [SPEAKER_00]: So if you guys came in like took a stake in my CPA firm and you didn't participate in my firm and all you were just kind of capital partners that would be passive income to you that whatever income we pass back to you.

[00:18:12] [SPEAKER_00]: And the problem is that with section 469 the passive activity loss rules are these rules were put in place to prevent people from using rental real estate for offset the regular income.

[00:18:22] [SPEAKER_00]: So the problem is that rentals because they're passive the losses are passive and passive losses can't offset non-passive income.

[00:18:32] [SPEAKER_00]: There are a few ways around it, you know you can qualify as a real estate professional you can earn less than $150.

[00:18:38] [SPEAKER_00]: You could buy short-term rentals rather than long-term rentals. There's a few things that you can do but in general the idea is we don't the Congress does not want high-income taxpayers buying rentals.

[00:18:55] [SPEAKER_00]: Do shield their regular income so they make it difficult to do.

[00:18:58] [SPEAKER_02]: Right. So for anybody that gets the end of this episode and they listen to all this real estate professional status stuff and they're like yeah, there's no way I can pull that off.

[00:19:06] [SPEAKER_02]: Go look into the short-term rental stuff if you buy an Airbnb and it's you know you self manage you do it less than seven days. You can still take advantage of some of this cost aggregation stuff.

[00:19:16] [SPEAKER_02]: Let's dive into real estate professional that's what I really the meat that I want to get into here because this is how you can knock down that wall and you can qualify as a as a real estate professional.

[00:19:26] [SPEAKER_02]: And pilots are one of the only professions that you can pull this off because we don't we don't work 2000 hours a year right. We only work.

[00:19:35] [SPEAKER_01]: You know say 900 block hours. How do we knock down that answer depends on who you're talking to that's true.

[00:19:41] [SPEAKER_02]: That's true.

[00:19:41] [SPEAKER_01]: That's true. Are we in contract negotiations?

[00:19:44] [SPEAKER_01]: Are we talking to the IRS very true?

[00:19:47] [SPEAKER_02]: Very true before we jump into it I just want to highlight why you should care because you know I was I was talking to these this flight

[00:19:56] [SPEAKER_02]: I was talking to the IRS yesterday in the jump seat and you know he was trying to wrap his head around I go yeah if you buy a two million dollar property.

[00:20:05] [SPEAKER_02]: And you cost aggregate it you know you could find a four five hundred thousand dollar loss.

[00:20:10] [SPEAKER_02]: And if you're a real estate professional you can apply that to your W2 you could pay no federal income tax for that. So I just I just want to set the stage there like this is why you should care about this so Brandon.

[00:20:21] [SPEAKER_02]: Over to you what is real estate professional status and that we can dive in from there.

[00:20:26] [SPEAKER_00]: Yeah, and that's that was a great example is actually an ask that you'll run through numbers like you did it.

[00:20:32] [SPEAKER_00]: Okay, so real estate professionals that if you can qualify as a real estate professional then your rentals become you have to material participate in your rentals.

[00:20:41] [SPEAKER_00]: But if you can qualify as a real estate professional in material estate then your rentals are non-asset.

[00:20:47] [SPEAKER_00]: Now that's the key right there were basically moving our rentals out of this passive bucket of income and we're putting it into the non-passes bucket where our W2 income is.

[00:20:59] [SPEAKER_00]: So especially good for pilots right we're flying and I'm making all this money and now I can use rentals rental losses to offset my income and not pay any federal taxes and often not pay state taxes do it doesn't depend on state.

[00:21:11] [SPEAKER_00]: So very powerful to qualify as real estate professional you have to spend 750 hours in real property trades or businesses and you've just been more time working in those real property trade or business.

[00:21:25] [SPEAKER_00]: Then you work at your day job.

[00:21:27] [SPEAKER_00]: So in that second piece kicked out anybody with a full-time job with the caveat of if your full-time job's not actually 2000 hours of work a year.

[00:21:38] [SPEAKER_00]: That's a little bit different right.

[00:21:40] [SPEAKER_00]: In some pilots have that you guys are the one of the only groups that I'm aware of that has that nice caveat there even the physicians that we talked to were like well I do two weeks on and two weeks off does that matter no because the two weeks on your work in like 20 for our dates.

[00:21:57] [SPEAKER_00]: You're still you're still pulling two k hours if not more but pilots is not the case you can be full time like you said your you're spent a 900 hours.

[00:22:06] [SPEAKER_00]: So if that's if that's my back pattern if I fly for 900 hours and you also have to like like I know there's like other work that's not literally in the seat right so you have to you have to we have to log all that time that you spend so let's just say 900 hours between between just work and then being in the seat.

[00:22:24] [SPEAKER_00]: If I've been 900 in one additional hours managing my rentals, I'm a real estate professional and now I can use cost aggregation studies bonus depreciation to extract that depreciation from all my rentals create large tax losses in offset my income.

[00:22:40] [SPEAKER_00]: And then obviously if you offset your income with the tax that you've come with that you know we advise clients don't go would joke like don't go buy Ferrari go roll it back in two more real estate or like the S&P or something do something with it don't just.

[00:22:54] [SPEAKER_00]: But that's how it works in a nutshell.

[00:22:57] [SPEAKER_01]: I think that's so powerful because as airline pilots were always looking for tax deduction opportunities and there's literally hundreds of thousands of dollars that you can save.

[00:23:07] [SPEAKER_01]: By implementing some of these strategies that we talk about on the show all the time and so by listening to passive income pilots, I think people are getting this sense of I actually have a lot of deductions that I can take.

[00:23:20] [SPEAKER_01]: But they don't really know where to start and we bring people on to the show like you to talk about these strategies and really help the flying community learn as much as they can about.

[00:23:30] [SPEAKER_01]: Shielding taxes and a legitimate way and also growing their investment portfolio at the same time so thank you for sharing that yeah problem it's if you can qualify as real estate professional the tack benefits are incredible.

[00:23:42] [SPEAKER_00]: Now the challenge is to call if I can take professional or making sure that you walk the appropriate time right so what happens with our clients is if you buy like a couple rentals.

[00:23:54] [SPEAKER_00]: The acquisition time and the management time it can add up it can feel like a lot when you put it down onto a time sheet you might go oh I only have like a hundred hours here so what do I do.

[00:24:04] [SPEAKER_00]: And what we encourage clients to do is definitely not start inflating your time log which a lot of clients do they'll are not not our clients but a lot of investors will do because they're really trying to hit that 700 hour 750 hour threshold.

[00:24:18] [SPEAKER_00]: So the key is to make sure like if you're going to claim real estate professional status to make sure that you learn what hours count and what hours don't count.

[00:24:28] [SPEAKER_00]: And we we infer this by looking at the internal revenue code looking at the treasure regulations and then also reading a ton of tack court cases that have come out on this stuff over time.

[00:24:40] [SPEAKER_00]: So we know what counts we know it doesn't count in terms of the hours that I log what type of work I'm actually doing.

[00:24:46] [SPEAKER_00]: But it's important to understand that because if you end up on the bad side of an audit it's getting it pretty nasty pretty fast in these these audits are have ticked up over the past six months.

[00:24:57] [SPEAKER_00]: And the IRS is now implementing AI and that's going to be that's going to be helping them kind of pick what returns to examine so I would expect this to be audited a little bit more frequently going forward as well so it's really important to get the documentation right two questions.

[00:25:12] [SPEAKER_02]: One around logging so it's my understanding that it doesn't matter how you log.

[00:25:17] [SPEAKER_02]: Yeah, you can keep it on Excel in a notebook whatever you want but it has to be contemporaneous meaning you can't do it.

[00:25:22] [SPEAKER_02]: You know at your IRS notice when it says you're getting audited you can't like throw your log work together.

[00:25:28] [SPEAKER_02]: It has to be reasonable.

[00:25:30] [SPEAKER_02]: Are those those two things correct.

[00:25:32] Correct.

[00:25:32] [SPEAKER_00]: Yep, both those things are correct.

[00:25:33] [SPEAKER_00]: So the log itself doesn't matter as long as you have the property name or address.

[00:25:39] [SPEAKER_00]: The date how much time you spent and what you did on that log that's fine.

[00:25:45] [SPEAKER_00]: So that's what you're doing.

[00:25:46] [SPEAKER_00]: And then the reasonable next thing is there's court cases where the court will examine like emails so we'll it there's one in particular where they walked through the taxpayers time log.

[00:26:00] [SPEAKER_00]: And they were like yes, been an hour on this email hour on that email and then they pull the email up and it's like a one sentence.

[00:26:06] [SPEAKER_00]: You know emails to the tax worth like I don't know.

[00:26:09] [SPEAKER_00]: I believe you right.

[00:26:10] [SPEAKER_00]: So it's really important to be as accurate as possible when you're recording your time.

[00:26:15] [SPEAKER_00]: So we recommend that you do it on a daily or a weekly basis definitely not when you're getting audited because that's where all the issues will start popping up.

[00:26:24] [SPEAKER_01]: Copy that.

[00:26:25] [SPEAKER_01]: Well, are you still logging stuff because we log our light hours right after we enter flights right every pilot.

[00:26:32] [SPEAKER_02]: So my my second question there was how many properties would you say, you know ballpark would someone have to own physical, parental properties in order to reasonably start qualifying for this.

[00:26:44] [SPEAKER_02]: You know is one property probably not enough to is it three what are your thoughts on that and I suppose it depends on the type and the size and all that sort of stuff but it gives it a ballpark there.

[00:26:55] [SPEAKER_00]: Yeah, it really depends.

[00:26:57] [SPEAKER_00]: It really depends like you said on the type and on the size.

[00:27:01] [SPEAKER_00]: There's not a bright line test for it.

[00:27:04] [SPEAKER_00]: There are there are tax court cases where taxpayers have only had like one or two rentals.

[00:27:08] [SPEAKER_00]: There's one in particular where the taxpayer had a three unit property and is kind of in a a shot he part of town but that was their only rental and they visited it daily to kick homeless people off the grounds and to clean it all up.

[00:27:21] [SPEAKER_00]: So every single day right the IRS audit the tax fair and basically is like there's no way that this to qualify is but the tax court decided with the tax fair to know yeah you spent a amount of time on your one three in a property.

[00:27:34] [SPEAKER_00]: There have also been cases where there's one in particular where a taxpayer had a believe eight eight or nine rentals and didn't spend a time in them, but put a put it all on the time log that she did.

[00:27:49] [SPEAKER_00]: And then when they compare the time log to credit card statements, they realize that she was thanks you to at the rental property but a credit card statements for saying that she was like in one did traveling.

[00:27:59] [SPEAKER_00]: So it's really it's hard to answer that question.

[00:28:01] [SPEAKER_00]: I would definitely say the more properties that you have the the easier it's going to be choose to differentiate it.

[00:28:08] [SPEAKER_00]: So it's less about the number of properties that qualify and it's going to be more about like you said the type of property, you know if it's a single family home and you've got professional management on it or even a property manager then that's going to be super hard just to pay an G eight.

[00:28:22] [SPEAKER_00]: If you're self managing becomes a little bit easier if you're managing bigger properties a little bit easier to substantiate if you're managing like you know mobile home parks can be a little bit easier because basically what you're thinking about with real estate professional status is in general.

[00:28:38] [SPEAKER_00]: How hard is this thing to manage on an ongoing basis.

[00:28:41] [SPEAKER_00]: And you also have to consider the distance that the property is from you to you from your home right like we have clients that.

[00:28:50] [SPEAKER_02]: Because you can't you can't count the travel right so if you're thinking oh I'm going to buy something six time zones away right how it's all the time I sense spent sitting on an airplane now you can do that right.

[00:28:59] [SPEAKER_00]: And you know the weird thing is about the travel to is you can actually you can expense the travel as a business expit.

[00:29:06] [SPEAKER_00]: But it's not going to count as real estate professional status hours and that's like that always trips everybody up be at like if you're not only can you not count the travel but also.

[00:29:16] [SPEAKER_00]: When the properties far away the IRS starts asking will choose actually managing the property and now you start to lose points in the credibility arena.

[00:29:26] [SPEAKER_00]: So to in general the more properties you have to better the bigger they are the better the closer they are the better and if you self manage the better.

[00:29:34] [SPEAKER_02]: Incredible.

[00:29:34] [SPEAKER_02]: So what sort of activities count as real estate professional because you don't actually you don't judge not just property management counts right.

[00:29:44] [SPEAKER_02]: You could be you know doing floors doing tiling you could be a real estate agent right correct yeah.

[00:29:51] [SPEAKER_00]: So let's talk about being a landlord first and then we can talk about the other real property trades at business is so when you're a landlord.

[00:29:59] [SPEAKER_00]: If you are self managing then it's all like the property management related time that's going to count.

[00:30:05] [SPEAKER_00]: For real estate professional status.

[00:30:07] [SPEAKER_00]: So it's like you know we sing the property communicating with tenants maintenance repairs even managing some of those contractors that might come out.

[00:30:16] [SPEAKER_00]: It's not going to be like education and research and reviewing reports doing the bookkeeping all that type of time is not going to count unless you're you're the one that's like really managing the property.

[00:30:29] [SPEAKER_00]: So that's kind of always where we start there but in terms of other businesses there's a leaven real property trades or businesses that you could be involved in.

[00:30:39] [SPEAKER_00]: To count hours towards real estate professional status being a real estate agent is one of them so if you're buying if you're showing homes all that time is going to count.

[00:30:47] [SPEAKER_00]: If you're developing or redeveloping like flipping properties all that time is going to count as well.

[00:30:53] [SPEAKER_00]: But it is kind of nuanced right because like in each back contractor their their time is not going to count and that sounds weird but that's true a mortgage broker their times not going to count.

[00:31:03] [SPEAKER_00]: Painters even their time is not going to count like if that's your trade you got to be really careful and aware of these rules because they're they're kind of new on how they work.

[00:31:12] [SPEAKER_00]: But in general if you are like if you're fixing up properties if you're if you're brokering properties.

[00:31:17] [SPEAKER_00]: If you are managing your own rentals all that time is going to count for real estate professionals and here is the kicker.

[00:31:24] [SPEAKER_02]: If you're married and your spouse is one of these things the jackpot bell should be going off in your head right now right absolutely absolutely or if she is doing one of those things or he they could be doing those things and.

[00:31:39] [SPEAKER_01]: And then all of a sudden you've got some more magic to happen so yeah because if one spouse is it qualifies then you both qualify so anyway and a little tangent about that I mean like if your spouse is looking for employment.

[00:31:50] [SPEAKER_01]: And they are deciding between you know some random twenty five dollar an hour job whatever doing this or some random real estate job doing that that pays the same.

[00:32:03] [SPEAKER_01]: And one gives the break and one doesn't give the break that could be hundreds of thousands of dollars in tax breaks so.

[00:32:10] [SPEAKER_01]: Maybe think strategically like of course enjoyment of what you do day to day is critical but we're also if it's to make money and to save money because it's not always about what you make it's about what you keep.

[00:32:21] [SPEAKER_01]: That could be a huge strategic swing in the right direction so make sure that you know if you're thinking about your spouse is thinking about going back into employment that might be a strategic.

[00:32:28] [SPEAKER_00]: Yeah, you're right on the mind there Ryan and it's a really good point because if they can stay if you can eliminate your income or wipe out a lot of it.

[00:32:40] [SPEAKER_00]: The actual tax things that come from that might be more than enough than going on getting another seven come so it's really important to analyze that but the the other thing too that.

[00:32:52] [SPEAKER_00]: That we always start with our clients like typically the consulting that we do the tax plan that we do is.

[00:32:58] [SPEAKER_00]: New client comes on and they're like I got a living in my income my heaping taxes.

[00:33:03] [SPEAKER_00]: And it's typically the high income earner spouse that's initiating the entire conversation and so then we do we get to well you can't qualify but your spouse can qualify based when you've said.

[00:33:13] [SPEAKER_00]: You're like great my I'm going to make my spouse call by the little one.

[00:33:16] [SPEAKER_00]: Why don't we have a conversation with spouse first and try to figure out like this.

[00:33:20] [SPEAKER_00]: I'll see what I do this to you.

[00:33:22] [SPEAKER_00]: So if you're listening to this you get really excited.

[00:33:26] [SPEAKER_00]: You know there is work to be done on the relationship that I'm not an expert at that but I will tell you that that you spend some time there.

[00:33:34] [SPEAKER_02]: Yeah, I mean it's 60 what is it a great deal about 60 hours a month right for it to hit the 770.

[00:33:39] [SPEAKER_00]: Yeah, it's like 15 hours a week.

[00:33:41] [SPEAKER_00]: Yeah, yeah, yeah, yeah.

[00:33:42] [SPEAKER_02]: So it's it's it's no small about a time.

[00:33:45] [SPEAKER_00]: Yeah, but if you can get it if you can get it then again right my rentals they move out of the task of bucket and they go into the non-pass of bucket where my W2 income is and I mean you know every year that I buy a $300,000 rental.

[00:34:00] [SPEAKER_00]: I'm probably going to get I don't know an 80 90 thousand or tax loss which is going to yield 20 K in tax savings.

[00:34:07] [SPEAKER_00]: So just extrapolate that out how much can you buy in anyone year.

[00:34:10] [SPEAKER_00]: Right, that's going to that's going to yield more and more tax savings for you.

[00:34:14] [SPEAKER_02]: And it's not only the physical properties you buy if you qualify for real estate professional status you will also be able to unlock syndication losses against your W2 correct.

[00:34:23] [SPEAKER_02]: So if you invest with us or you invest with Ryan we give you a you know 100 K you invest on or K we give you a K one that shows you that you lost 50,000 you get to take that 50,000.

[00:34:33] [SPEAKER_02]: Negative K one and apply it against your W2 as well.

[00:34:37] [SPEAKER_00]: As in in this gets nuanced you are correct.

[00:34:41] [SPEAKER_00]: In certain situations the way that this works is there's something called a grouping election for your rentals or for any rental activity.

[00:34:50] [SPEAKER_00]: So what would have to happen is I would have to qualify as a real estate professional and then I would have to materially participate in my own rentals.

[00:34:56] [SPEAKER_00]: Yes, and then I could make this grouping election that groups in all of my L.P. investments as well into the portfolio that I've already materially purchased participate in.

[00:35:08] [SPEAKER_00]: So who wouldn't qualify for something like this is like a real estate agent?

[00:35:10] [SPEAKER_00]: So if I'm a real estate agent and I show houses for 1500 hours a year and it's all I do I'm a real estate professional.

[00:35:17] [SPEAKER_00]: But if I don't materially participate in my own rentals then my syndication losses are still going to be passive.

[00:35:23] [SPEAKER_00]: So that's kind of work. It's like a little nuance.

[00:35:25] [SPEAKER_00]: I always have to come back to my rentals.

[00:35:27] [SPEAKER_00]: I can flip houses develop build be a real estate agent.

[00:35:31] [SPEAKER_00]: But I always have to come back to my rental and make sure that I hit the material participation tests and then I can group in my L.P. investments as well.

[00:35:39] [SPEAKER_01]: And this is really critical because you know when you think about all these nuances right this show is meant to educate and inform and inspire

[00:35:49] [SPEAKER_01]: and give you tactics and strategies that you could deploy in your day to day.

[00:35:54] [SPEAKER_01]: But there's nuances and so Tate and I are not here to be the experts and all of these things which is probably bring folks like Brandon Hall on the podcast because he is an expert but he doesn't know automatically every single nuance of every single person listening to this podcast right now.

[00:36:12] [SPEAKER_01]: So what you need to do is you need to probably take the first step and we're going to send you a copy of Brandon's ebook on becoming a real estate passive investor.

[00:36:26] [SPEAKER_01]: If you go to ask that passive income pilots dot com we can send you that we're also going to send you the top five things that really that pilots can do to save taxes.

[00:36:37] [SPEAKER_01]: Brandon is work with us to kind of do that. And then if you're looking for a CPA if you're looking for somebody that knows this stuff inside and out.

[00:36:47] [SPEAKER_01]: Brandon is the guy to know that so he's going to take the time to work with you on your personal tax situation and your personal tax strategy.

[00:36:53] [SPEAKER_01]: And help you do these types of things these groupings and you know my spouse is thinking about working and you know she's thinking about doing this real estate professional thing and help you through these strategies and help you do your tax return.

[00:37:06] [SPEAKER_01]: So I always joke and call that the left and the right brain of being a CPA right brain CPA left brain CPA one is really good at doing your tax return.

[00:37:13] [SPEAKER_01]: The other is really good at crafting your strategy and what you want is a firm like Brandon's who does both right they actually have the strategy side of the brain and they have the I can actually file your 10 65s or K ones your 10 40s whatever it might be they could actually do that kind of stuff too.

[00:37:29] [SPEAKER_00]: So that's why we were excited to bring on and talk through all this stuff so yeah appreciate that and anybody listening if you read that book that that Ryan just talked about you know I wrote that book in response to

[00:37:44] [SPEAKER_00]: it was like during COVID we had a ton of people hitting our web forms for new consultations and in everybody was like just had bad information on how to qualify as a real estate professional like people were like well my buddy at the street call find so I'm going to call by too.

[00:38:00] [SPEAKER_00]: Like it's not quite how it works.

[00:38:03] [SPEAKER_00]: So I wrote that in response to this just so that I could like consolidate all the information that I was talking about into one spot but also provide a ton of citations for that people could like not even just trust my word but actually go and look at themselves they really wanted to.

[00:38:21] [SPEAKER_00]: But what it's kind of turned into is this guy that that you can read it's a broken down for the layman so you don't have to be attacked broder read it.

[00:38:31] [SPEAKER_00]: In the idea is that is that you become just a little bit more sophisticated with your conversations with your own accountant.

[00:38:38] [SPEAKER_00]: Right because what I found in the marketplace is a countent even if they know section 469 they know like 90% of real estate professional status and.

[00:38:48] [SPEAKER_00]: And it's all the nuances that I was talking that we have kind of talked about right there's a ton of these little nuances and that'll get you there most of the time.

[00:38:57] [SPEAKER_00]: But is that last 10% that can be pretty scary if you screw it up so.

[00:39:01] [SPEAKER_00]: I want I want you anybody listening to just spend a little if you want to qualify as real estate professional spend a little bit time educating yourself on it.

[00:39:09] [SPEAKER_00]: And just start asking questions to your own accountant make sure that they're doing it right because.

[00:39:14] [SPEAKER_00]: Just because you hire CPA or EA or tax broder doesn't mean that they are recording this correctly for you on your tax returns.

[00:39:21] [SPEAKER_01]: And so good. I love that you said that because sometimes early I mean I think I've been through like.

[00:39:27] [SPEAKER_01]: My own fault or another I've been through a lot of different CPAs you know as my business has grown.

[00:39:33] [SPEAKER_01]: Maybe they couldn't keep up with the thousands of K ones or maybe my tax strategy has become more complex and so I've moved on from doing it in turbo tax to HNR block to.

[00:39:44] [SPEAKER_01]: You know a local CPA to a real estate professional to a big major top 10 firm and you know that might not be meet your perfect situation.

[00:39:54] [SPEAKER_01]: But I think what you're saying about educating yourself and knowing a little bit not being an expert but enough to be dangerous so at least you can kind of say to your CPA.

[00:40:03] [SPEAKER_01]: What your end state goal is my end state goal is to engage my spouse.

[00:40:09] [SPEAKER_01]: I engage with my spouse in real estate activities that produces a tax efficient outcome and if your CPA goes got it right you're not claiming to be an expert you're just saying hey I want a tax efficient outcome leveraging real estate activities.

[00:40:24] [SPEAKER_01]: That should be enough for your CPA to put you on the tracks.

[00:40:26] [SPEAKER_01]: If not you're probably talking to the wrong CPA because they're not putting you on the right path.

[00:40:34] [SPEAKER_01]: Right so you want to make sure you're just talking to somebody that is familiar with this with this track and just any old CPA might not be that person.

[00:40:42] [SPEAKER_01]: And so anyway I just want to I think that's so important the education piece and then just kind of giving the end state expectation and the vision of what you're trying to accomplish as a husband and wife or.

[00:40:53] [SPEAKER_02]: As an airline pilot try to save money in taxes so not to completely dogpile on this but yet it like education and network network network right your network is your network is what Ryan and I are trying to shortcut everyone's you know learning cycle here and you know you got a you got a meet your CPA halfway.

[00:41:13] [SPEAKER_02]: You got a you got to learn you know so that you can have an intelligent conversation with them strategize right.

[00:41:19] [SPEAKER_00]: And I think it's important to just call out that when you sign your tax returns.

[00:41:24] [SPEAKER_00]: You are taking responsibility for everything in the tax returns so if you're later audited and you lose the position you know you might be able to go after the CPA and the you know insurance but there's a likelihood that you probably won't.

[00:41:38] [SPEAKER_00]: And there's a likelihood that you probably won't be able to get the penalties removed because even though you relied on the CPA the court is the court or the IRS is going to say you have it you're investing in real estate your sophisticated person you should have known.

[00:41:51] [SPEAKER_00]: So to know that that's the position that they're going to take so to go into these positions these these tack decisions by asking questions one of the one of my favorite questions ask vendors that I use personally is where can this go wrong.

[00:42:06] [SPEAKER_00]: What are the things that I'm not aware of here how how would the IRS view this for me like I'm a pilot I've got a W2 income what is the IRS going to think I think I ought to be for that.

[00:42:17] [SPEAKER_00]: Yeah, they might okay well then what would they be looking for and where could this go wrong like where we're going to screw this up understand the other perspective.

[00:42:25] [SPEAKER_00]: The IRS is perspective and that'll help you build a better position that you can defend but don't get the the confirmation bias don't get foam.

[00:42:37] [SPEAKER_00]: Don't get like yeah, you can go and call up five CPAs and you could say hey I work full time I work two thousand hours a year I make a million dollars a year.

[00:42:46] [SPEAKER_00]: I'm going to be real estate professional this year and you call five CPAs like guaranteed to and I'll say yeah yeah we'll do that for you.

[00:42:52] [SPEAKER_00]: And and and and they're putting you in a bad spot so you have to know you have to be so that you have to educate yourself on this yeah one one thing I'll also say to that is like the done and crew of fact is real so.

[00:43:03] [SPEAKER_01]: You if you're just learning about this you're at the peak of Mount stupid so you're you know enough to be dangerous and what you'll realize as you do this you really didn't know anything.

[00:43:13] [SPEAKER_01]: So it's kind of like that passenger after or you know why why your flights why is my flight delayed and the passenger comes up and shows you a picture of my whether radar and they say there's no there's no storm at the destination I don't know why this is delayed for weather.

[00:43:27] [SPEAKER_01]: And as a pilot you just kind of roll your eyes and you say this person has no idea what they're talking about.

[00:43:32] [SPEAKER_01]: That's kind of what we sound like as pilots when we go to our CPAs and say I listen to this podcast and it said I could do all these things.

[00:43:39] [SPEAKER_01]: And and and the CPA just kind of I rolls and says yeah yeah yeah here we go again right so come into it with an open mind listen to what your CPA says.

[00:43:49] [SPEAKER_01]: They're the expert right but also trust but verify.

[00:43:54] [SPEAKER_01]: You know that the passenger does deserve that explanation sometimes of pay you know that storm is over here and the routes are such and whatever but at the end of the day like.

[00:44:02] [SPEAKER_01]: They know what they're doing and there's a system and a process in place we just make sure you're on the right airplane with the right pilots and the right crew.

[00:44:10] [SPEAKER_01]: That can actually get you safely to where you're going and that's kind of the point we're making is you know educate yourself no enough to be dangerous learn what strategies are out there but make sure you're.

[00:44:23] [SPEAKER_02]: With the right CPA so let's quickly talk about material participation because the 750 hours I think everybody stops there and they go okay I did my 750 now I'm a real estate professional right so the 750 one person has to do.

[00:44:36] [SPEAKER_02]: The 500 of material participation you can split with with a spouse can you just touch on that briefly yeah so when you qualify as real estate professional.

[00:44:46] [SPEAKER_00]: Well all this is talking about material participation first.

[00:44:49] [SPEAKER_00]: Qualifying as real estate professional doesn't do anything for you if you don't have material participation in your rentals and that's the example is kind of using if I'm a real estate agent and I work 15 hundred hours I'm a real estate professional but if I don't also material participate my rentals the my rentals are still passive even though I qualify as real estate professionals so it doesn't actually help me.

[00:45:08] [SPEAKER_00]: So I have to meet one of the seven material participation tests typically we encourage people to go after the 500 hour test because once you hit it you're good.

[00:45:18] [SPEAKER_00]: So so the 500 hour test like if I'm if I'm managing my rentals I can be working on my material participation and real estate professional status hours at the same time but if I'm like a real estate agent I all just have to remember to come back and work on my rentals to hit that 500 hour test.

[00:45:33] [SPEAKER_00]: But to your point if you're married and you file a joint tax return if one of you qualify as real estate professional you've got to real estate professional status tax return is the beauty of this however here's our words.

[00:45:44] [SPEAKER_00]: One person has to meet the real estate professionals status test totally by themselves so either me or my spouse they have to meet the 750 hours in more time spent real estate.

[00:45:53] [SPEAKER_00]: Then anywhere else they have to meet that completely on their own.

[00:45:57] [SPEAKER_00]: But when it comes to material participation we can split our time we can count both of our hours so like let's say that my spouse is real estate agent.

[00:46:06] [SPEAKER_00]: And she works 1500 hours a year so she's a real estate professional.

[00:46:10] [SPEAKER_00]: Well let's say she hates the rentals and I manage all the rentals she can count my material participation hours so now she's a real estate professional and she's counting my material participation hours.

[00:46:19] [SPEAKER_00]: And now we've got material participation on our rentals that's kind of how that works.

[00:46:22] [SPEAKER_02]: So how do you know I mean because this is this is complex and nuanced and most the biggest complaint that I get is you know my CPA just files my taxes there's no forward looking strategy how much coaching can can someone expect reasonably expect when it comes to their personal situation from a firm like yours or is there any other place that they can go to learn about this more something craft their own strategy.

[00:46:47] [SPEAKER_00]: I think the good CPA firms are transitioning more into that advisory space that kind of like planning space.

[00:46:56] [SPEAKER_00]: So more of that coaching is kind of coming out over time but I think if you're if you are buying rental real estate you should get educated on this sooner rather than later so what you can DIY it as much as you want to but all the nuances is where you're going to trip up and that's where you rely on the expertise.

[00:47:14] [SPEAKER_00]: But just kind of depends.

[00:47:17] [SPEAKER_00]: But I would say sooner rather than later because your mistakes will compound if you don't right and if you're not getting that from your current account then I always they like give your current account in the tribe don't get me wrong like I would love for you to come work with us but.

[00:47:28] [SPEAKER_00]: Give your current account a try like there's a relationship there they understand what's going on.

[00:47:33] [SPEAKER_00]: You know, and you're with your different income streams and you give it a try by saying hey I would like some advice on this topic here are my questions.

[00:47:40] [SPEAKER_00]: And see what they say but if they kind of brush you off or if they're like I have to go research it.

[00:47:46] [SPEAKER_00]: And they're not able to kind of coach you there then you might want to consider getting a second opinion not necessarily switching but getting a second opinion.

[00:47:56] [SPEAKER_00]: Or sports switching to another firm that is going to provide you that consultation on an ongoing basis.

[00:48:01] [SPEAKER_01]: So important yeah I looked how you said.

[00:48:04] [SPEAKER_01]: Give your current CPA chance because I think too often people say.

[00:48:08] [SPEAKER_01]: All my CPA just doesn't know anything about this and it's like while you haven't asked them the right questions.

[00:48:14] [SPEAKER_01]: Right so like learn how to ask better questions and then maybe your CPA is doing the right thing but they just don't know what you're up to.

[00:48:21] [SPEAKER_01]: So take the time and have that conversation but if that conversation goes bad then call Brandon.

[00:48:26] [SPEAKER_00]: Well, I think what we're doing to like consider the business model of not just CPA is that any vendor you work with is not now any vendor or work with I want to know how they get paid.

[00:48:36] [SPEAKER_00]: And I don't even know like you know what's a profit and crap like that but what I'm what I'm really asking is.

[00:48:40] [SPEAKER_00]: Is this going to be like a transactional relationship or is this going to be more advisory conclutative.

[00:48:46] [SPEAKER_00]: Am I going to have ability to call you in the way that most accounting firms work most tax firms is it's a transactional relationship it's once the your tax prep that's what you're paying for you're not paying for the advice.

[00:48:59] [SPEAKER_00]: So consider that too with your own relationship maybe maybe it's time to ask your account to hey like if I wanted to hop on to us we calls you here can I pay you for that can I pay now for that so we can go ahead and get those scheduled.

[00:49:12] [SPEAKER_00]: I think that'll be a big game changer if you're not currently getting any advice.

[00:49:17] [SPEAKER_01]: So good yeah it's also good to like scope out what you're going to get charged when you call your CPA because I think some people find it surprising when they get a $300 or $400 or $500 bill in the mail.

[00:49:29] [SPEAKER_01]: And it's like what's this for and it's like well because you talked to me for three hours and I charge by the hour.

[00:49:35] [SPEAKER_01]: So you know I would understand like what you're getting and kind of the contractual relationship it's important to establish I don't be surprised if you get a bill in the mail because you jack John with your CPA for.

[00:49:46] [SPEAKER_01]: Three hours about some type of advice right is like they they or they were they don't charge and they don't want to talk to you yeah it goes both ways.

[00:49:55] [SPEAKER_01]: I mean you like you get what you pay for in this world unfortunately or fortunately for for those and it's like you know they're doing your tax return that is a cost.

[00:50:04] [SPEAKER_01]: And then you're getting advising that's a cost people's time is valuable they could be doing something else when they're talking to you they're not talking to you because they're your buddy they're talking to you because it's a work relationship.

[00:50:13] [SPEAKER_01]: So you should establish that open door of communication right if I'm going to talk to you can I talk to you can I schedule times how do I do that how available are you.

[00:50:24] [SPEAKER_01]: And what does that cost me in addition to doing my tax return?

[00:50:29] [SPEAKER_00]: Absolutely yeah and the CPA industry is very old and tired they use antiquated billing methods it's actually my secondary goal here is to shake it all up and show a different model that can be used.

[00:50:42] [SPEAKER_00]: But I mean your your experience is very common unfortunately.

[00:50:47] [SPEAKER_01]: Yeah, I love your thought leadership on LinkedIn ran it on just helping the new the new business world right we did we could probably talk about a whole hour about that but you know just kind of remote workers and where this has headed and you know just finding good employment so if you're on LinkedIn file bread and he's great.

[00:51:03] [SPEAKER_01]: Great thought leadership if you're starting your own business this well so.

[00:51:07] [SPEAKER_02]: Well Brandon thank you so much for coming on this has been excellent we as as Brian said if you email ask it pass them income pilots calm will send you the.

[00:51:15] [SPEAKER_02]: The ebook and Brandon thank you for everything.

[00:51:19] [SPEAKER_02]: Oh, Dr. Sim.

[00:51:20] [SPEAKER_02]: Thanks guys for getting.