#76 - MOST POPULAR EPISODE: Reduce Taxes & Maximize Returns Using PROVEN Strategies with Toby Mathis

[00:00:00] Welcome back to Passive Income Pilots everyone, Tait Duryea here without my co-host today. Ryan is tied up so it's just me and we are going to be doing a rerun of our most popular episode of all time.

[00:00:14] Number 10 with Toby Mathis, Reduce Your Taxes and Maximize Returns Using PROVEN Investment Strategies with Toby Mathis from Anderson Advisors.

[00:00:23] Now we have just aired an episode with Brandon Hall from Hall CPA firm who is absolutely fantastic but we have a lot of listeners who have checked out Anderson Advisors as well.

[00:00:37] And this is really the most comprehensive episode that we've done looking at ways to reduce your taxes using real estate and other legal strategies to write things off.

[00:00:50] So if you're new to the show, you likely haven't listened to it before. If you're a long time listener, I know I've listened to it back two or three times because there's so much information density within this episode.

[00:01:03] So we wanted to take a moment. It's been a year and a half since this episode aired. It was all the way back on April 18th of 2023.

[00:01:10] The most downloads we've ever had. Before we jump in, I wanted to quickly touch on an economic update as of the middle of September here.

[00:01:21] A little known fact, the Federal Reserve is divided into 12 districts and those districts put out what's called the beige book which covers economic activity every few months.

[00:01:32] And a little update on those Fed district updates. Three months ago, 10 Fed districts exhibited growth while two recorded flat or declining activity.

[00:01:43] Just six weeks ago, seven of those districts showed growth and five recorded flat or declining growth. Now as of the end of August, only three districts saw growth while nine were at best flat.

[00:01:59] This echoes trends that we're seeing to emerge with a slowing economy. Employers added a decent 142,000 net jobs in August, but July was revised down from 114,000 to 89,000 and June from 179 down to 118.

[00:02:16] These were the jobs reports that shocked the stock markets. Four out of the five weakest monthly readings since December of 2020 have come during the past five months.

[00:02:29] The August number will also likely be revised down. So the weakening is obvious and from what we're seeing, the Fed should cut 50 basis points or a half percentage point on the September 18th meeting,

[00:02:42] but will likely do more like 25 basis points because they still think that inflation is an issue, which of course it is while it is coming in into check.

[00:02:54] Just a little update there. We think that's an interesting tidbit to share. There is definitely some slowing of the economy.

[00:03:00] But in the meantime, let's talk taxes. It's coming up towards the fourth quarter of 2024. What things can you do to change your tax situation going into 2025? We hope you enjoy the show.

[00:03:15] Welcome to Passive Income Pilots where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators.

[00:03:26] We interview world renowned experts and share these lessons with the flying community. So if you're ready for practical knowledge and insights, let's roll.

[00:03:36] Welcome back to Passive Income Pilots everyone. Tate Durya here with Ryan Gibson. How are you doing man?

[00:03:41] Good. And our guest today is one of my favorites and one of my favorite topics. So excited to be here with you Tate.

[00:03:48] I think that this was one of my favorite conversations that we have ever had. I say in the show, but I'm going to say again right now that taxes, a lot of people don't like talking about them because it's a pain point, right?

[00:04:02] You have to pay money. It's not fun to think about them. But there are so many incredible opportunities for you to get smart around not paying taxes legally.

[00:04:14] And it gets really fun when you start learning how to play the game. So hopefully this is not the last time that we have Toby on. We could have gone for a week on this.

[00:04:22] Toby could come on like every day and we could learn things. And my favorite saying is if you want to change your tax, you've got to change your facts.

[00:04:32] Boom.

[00:04:32] So if you want to know how to position yourself to not pay taxes when you're investing, you've got to learn how to do it. And we're going to do that right now.

[00:04:43] And as a bonus, if you want to see a further deep dive that Toby and I actually recorded about three years ago, actually still very relevant right after the tax code changed in 2017, we do a deep dive on how to read a K1

[00:04:56] and understanding your account balance, capital account balance for syndication. So that link will be in the show notes as well.

[00:05:03] Excellent. With that, let's get to the show.

[00:05:06] So Toby, welcome to the show. Appreciate you having us.

[00:05:09] Hey, thanks for having me, hon.

[00:05:10] Yeah, yeah, no problem. And this is probably going to be one of my most listened to episodes.

[00:05:17] At least I'll probably listen to this over and over again, because it takes me a while to digest all this tax stuff.

[00:05:23] But Tayden and I are really excited. Probably the number one question we get from pilots who are considering investing or just buying businesses or doing active activity is surrounding taxes.

[00:05:36] And you know, I think one of the things that went away with the miscellaneous tax deduction being changed is pilots can't even do they we used to do all this crazy stuff like right off our per diem and our headsets and all that.

[00:05:46] And when the standard deduction increased and all that just like all went away.

[00:05:49] And so pilots are now making more than they've ever made in their careers, most of them at least, especially the new people.

[00:05:56] And now they've got a lot of taxable income.

[00:05:58] And so, you know, they're just dying for ways to just reduce that taxable income because as you know, it's not what you earn.

[00:06:06] It's what you keep.

[00:06:07] And you can earn a lot. But if you don't keep a lot, then, you know, you start to get into this war with your tax situation.

[00:06:12] So really happy to have you. Just give us a little background about who you are and just, you know, just kind of a brief overview of what you focus on day to day.

[00:06:21] Yeah. So I'm one of the principals over here at Anderson Business Advisors, about 500 of us, attorney CPAs, bookkeepers, administrators, you name it.

[00:06:31] If it's business related chances are we do something to help you.

[00:06:36] I've been a practicing for about 25 years, 26, 25, 26 years now.

[00:06:42] Yeah. Boy, I'm flies. I'm not your typical attorney.

[00:06:45] I'm actually an investor. So I'm a tax attorney by trade, but I love to real estate invest my partner, Clint and I, one of my partners, Clint and I have been investing in real estate for decades and have over 300 unique properties.

[00:06:59] I'm kind of one of those guys that says if you're professional isn't doing what you're doing, you probably want a different professional.

[00:07:08] And when I say doing what you're doing, and I mean being a pilot, but I mean, if you're investor, if you're going to be a small business, make sure it's somebody with experience in those areas because it's so different when you do it than when you read about it in a book.

[00:07:24] And so it's like saying I'm a pilot because I read enough out of a book and I learned about all the little handles did, right? Yeah. You're just going to crash.

[00:07:34] Well, that's usually what happens with businesses. There's only one way to learn how to be an investor. That's by doing it.

[00:07:39] There's only one way to learn taxes by doing it and experiencing it.

[00:07:43] And if I'm not mistaken, I bet you that a lot of your folks, if they're making higher income, the pain level is going up because the more you make the more they take in this country.

[00:07:53] And they're seeing that they're keeping less of every dollar that they earn and they're going why? And they're probably frustrated.

[00:07:59] So, Tay, why don't you kick us off with the number one question you get because I get the same question. We had a really good conversation about this earlier. What do people ask you, Tay?

[00:08:08] Yeah. You know, I've had many, many conversations, even more so in the last few weeks with these new contracts that the new contract that we just got at our airline and the new contracts that are coming out and people reaching out to me just saying,

[00:08:23] Mate, I'm getting smoked on taxes. Like what can I do?

[00:08:26] So, I hear a lot of times, Pilots say, well, I heard I need to start an LLC. I just need to start a business so that I can lose money in that business.

[00:08:36] So, Toby, can you walk us through why that might be a good thing to do or not a good thing to do and all of the underpinnings of why?

[00:08:49] Yeah. Let's do the five minute MBA where, boy, I mean, accountants don't seem to know this and most people don't. But there's really actually three types of income that you got to be aware of.

[00:08:59] And I'll just put them into three categories. I'll just call active, portfolio, and passive. And people mix them up all the time but it's really this simple.

[00:09:08] Active income is you're doing something for money. So I'm trading my expertise, my time for money and I'm getting paid for it.

[00:09:15] So when you're a pilot, you're in the active realm. And you're subject to ordinary income tax rates and you're subject to something called old age disability and survivors of Medicare,

[00:09:25] which is the employment taxes. I'm just going to call them social security taxes to make it simple.

[00:09:31] If you're a business, they're called self-employment taxes but they all come down to the same thing as social security taxes.

[00:09:38] And it's 15.3% and it hits you right in the shin and nobody ever talks about it.

[00:09:44] It's actually if we looked at the total revenue generated from taxes in the country, it's here's income taxes, here's employment taxes.

[00:09:53] Sometimes employment taxes are slightly higher. Sometimes they're slightly below but it is a huge chunk of money.

[00:10:02] And the easiest way to think about this.

[00:10:04] And just for anybody listening to this and not watching, Toby's hands were right next to each other saying that they were equal.

[00:10:12] There we go. They're roughly equal. Yeah. They jockey for the largest amount of revenue generated by our country, by our tax authority, by our treasure.

[00:10:22] Thank you.

[00:10:24] But the easiest way to think about it, Tate and Ryan, is if I worked at McDonald's, let's say when I was 16 I worked for McDonald's and I made $4.15 an hour.

[00:10:33] And you expect when you work 40 hours maybe you'll get 160 bucks.

[00:10:37] And we both, we all know you're not going to get 160 bucks, right? What are they taking out of your check?

[00:10:43] They're taking out of your check employment taxes and they're withholding federal income tax.

[00:10:47] Sometimes state, right? It depends on where you live.

[00:10:51] But let's just talk federal for a minute.

[00:10:54] They're withholding your, what they think you're going to pay in income taxes which ranges from zero to 37%, depending on how much you make.

[00:11:03] It's not retroactive. Like if you get into the 37% bracket it's not every dollar gets hit at 37%.

[00:11:10] It's just the dollars over that threshold. So you go zero, 10, 12, it scales on up to 37.

[00:11:18] And then employment taxes and the employment taxes hits you on every dollar you make up until about 160,000

[00:11:24] and then a portion of it phases out the old age disability and survivors in that phase is at about 160,000.

[00:11:31] And then it gets even worse. You still get a 2.9% Medicare but then they add a 0.8% when you get over 250,000.

[00:11:41] So it gets kind of complicated. But the principle is they hit me with both types of taxes on that income.

[00:11:48] And I want you to visualize something. Imagine that, I don't know if you guys ever went to Catholic school.

[00:11:55] My whole life actually. K through 12 or K through college actually.

[00:11:59] I went to high school and college and law school all Catholic and Jesuit.

[00:12:06] But Ryan, if you were messing around in the classroom and you had a nun nearby what would they do to you?

[00:12:11] Well we had the sisters. We had the sisters of mercy. But yeah they would probably slap you pretty hard.

[00:12:17] Yep. Alright so I'll call that a whack. Here I'll just give you an audible so you can hear it.

[00:12:23] Hopefully you can hear that right? That's somebody whacking you.

[00:12:26] When you get hit with employment tax I want you to hear the whack, right?

[00:12:32] There's only so much of that you can take before you're just like, Uncle, I'm done.

[00:12:36] Wealthy people make a minority of their income from active sources because they're constantly getting whacked with the employment taxes.

[00:12:48] So that's active income. Guess what? Portfolio income and passive income are not subject to employment tax, period.

[00:12:56] End of story. If you are an investor in portfolio assets and here's your portfolio income is your capital gains, its dividends, its interest and its royalties.

[00:13:09] I didn't say rents and I didn't say businesses that you didn't materially participate in because those are in a passive category and there's a really important distinction.

[00:13:18] But when we look at portfolio income that type of income like capital gains depending on whether you've held an asset long enough or if I look at dividends that might be 0% for you.

[00:13:29] It might be 15% for you or it might be 20% for you. Those are the tax brackets for capital gains and if you're investing in US companies and you get dividends those are taxed as long term capital gains believe it or not.

[00:13:41] Everything else is just ordinary income. It just gets added into your bracket. So right there you should immediately stop and say wait a second if I'm a pilot and I'm getting whacked a lot.

[00:13:53] The last thing I want to do is get into that ordinary bracket. I probably want that long term capital gains bracket which immediately takes you into buying capital assets like syndications, buying real estate, buying stocks.

[00:14:07] If you buy stocks you should immediately be going I want dividend producing stocks because that's going to be capped at 20%. I can handle that. I don't want to keep getting hit at 37% and in any case I love these because we don't have to worry about the employment tax.

[00:14:24] Then you go to passive income. In passive income there's only two types. There's rents and when I say rents get this.

[00:14:33] If you have an Airbnb it's not a rental property unless your average rental is more than seven days. So eight or more days. So rental income is hey I'm buying a buy and hold or it's a Ryan I know you do a lot of self storage it's the self storage stuff right.

[00:14:52] I have rents coming in on a long term basis now that is not subject to self employment tax or social security taxes either but it goes into its own category and the reason they do this is because you can take huge deductions when you own real estate.

[00:15:10] Real estate unlike a stock or if I buy a share of Microsoft I can't write it off. If I buy a building I can take deductions just by buying the building. What if you finance it? I can still take the deduction.

[00:15:24] What if I put no money down? You can still take deductions and that creates losses but passive losses only offset other passive income.

[00:15:34] So all of a sudden again I'm going to go back to your pilots. So your pilots are like oh man I got I have this rental I have this rental property I got and I put into a syndication and there's all these losses and I can't use them right.

[00:15:48] You can't use your passive losses against your W2 income unless and there's a big un-loss.

[00:15:55] You're either an active participant and you're making less than $150,000 a year active just means you're managing the manager or you're a real estate professional.

[00:16:05] You're going to hear that term bantered around a whole bunch of times because it's so potent you create that deduction.

[00:16:12] Now I am going to say this if you have passive losses you do not lose them.

[00:16:17] You carry them forward until you get rid of the asset or until you have other passive income.

[00:16:23] But again if I'm a pilot and I have passive losses because so I do some syndications I have some real estate that I invest in whatever.

[00:16:32] Maybe I should be looking at some businesses that I don't materially participate.

[00:16:36] Maybe I want to be a silent partner in a business. I invest in my uncle's pizza shop you know but I do not do anything.

[00:16:43] I'm not there washing dishes or doing anything. Then you start having an appetite for certain types of investments.

[00:16:50] Or let's say that you are a silent partner in a business that's kicking down a bunch of income and you realize wait a second.

[00:16:57] Are you telling me that if I get passive losses from real estate I can offset that income and I don't have to pay tax on it?

[00:17:04] Correcto Mundo. All of a sudden you have what we call a tax appetite and we start matching those things up.

[00:17:10] Now I just threw a lot at you guys so I know that there's plenty of time.

[00:17:14] Well I was planning on going the whole hour but you just did it in 20 minutes so you know maybe we're just done here.

[00:17:21] No that was an incredible amount of information condensed. Normally I listed the podcast on like 1.5 or 2X speed.

[00:17:29] You're probably going to have to replay that in like slow motion.

[00:17:32] So much information. I'm going to go right to something that I you know just the way you said it Toby was just amazing which was

[00:17:41] you know active income passive losses you know you can't mix them together and you know I'll never forget I walked into the crew room one day when I was a regional F.O.

[00:17:50] And there was some bantering going on in the crew room and some captain goes by and he says you know Sonny you need to buy some businesses that have losses so that you can offset your income.

[00:18:00] And I was like I was like what he's like yeah he's like you need losses to offset your pilot income and I was like OK that stuck with me and I thought about that for many many years and it's just like the furthest thing from the truth.

[00:18:12] You know like you said you've got to be either material of participating in active real estate investor or an active real estate investor to do that.

[00:18:21] And it's just you can't just because you get a K1 or something in the mail that says you have losses. It doesn't mean it's going to fight against the fire that is your active income gains.

[00:18:33] And I think if that's the only thing you take away from this just know that just know that just because you bought a business for the sake of losses doesn't mean that that's going to apply against your pilot income please there's more things you need to do.

[00:18:47] Yeah.

[00:18:48] It's still going to be passive.

[00:18:50] We're going to dive into how to qualify on that but we're going to talk about a few other things first and guide us to the next thing that we want to talk about.

[00:19:01] Yeah so I mean just to really clarify that Toby you know let's talk about you know the difference between owning a business and owning real estate right.

[00:19:09] So if you own a business because there are a lot of pilots that own businesses right like so let's just use a charter fishing business for for example right pilot owns that it's they put their boat and their truck and their business in LLC.

[00:19:25] How does that affect taxes in terms of the W2 income.

[00:19:29] Yeah so great question Kate and here's how it works so if I have a business that I'm a truly participating in then I have choices as to how I structure it.

[00:19:37] If I am making that a flow through business so it's either going to be an LLC taxed as a sole proprietorship and LLC tax as a partnership in S corporation LLC taxed as an escort so it's going to flow on to my return.

[00:19:53] Then I can take those those assets that I'm purchasing in that business and they're given a useful life by the IRS everything's on a schedule.

[00:20:03] And if that useful life like for example car might be five year property you know house everybody knows a house is 27 and a half years right like there's always these useful lives.

[00:20:14] You know if I buy something let's say a plane seven and seven year property right since you guys are all pilots.

[00:20:22] I'm writing that off and I'm getting a deduction even if I financed it.

[00:20:27] That's how you create losses so like you get it as a deduction and if that deduction is greater than the income you're going to end up with a loss.

[00:20:34] And if you are involved in that business we call it material participation which is generally more than 500 hours a year then you could use it to offset all of your income.

[00:20:44] 100% like I get to use those losses and I'm going to use those losses and I can take them against the money I make as a pilot.

[00:20:53] Not your employment taxes for federal income tax purposes right.

[00:20:57] Perfect.

[00:20:58] No so yeah your example is great because that boat's going to be depreciated and there's little things in the code there's section 168K where they say hey you can bonus your depreciation.

[00:21:08] So instead of taking it over five years how about you take it all in one year.

[00:21:13] And let's unpack bonus depreciation more because this is going to apply to the real estate conversation that we're going to have in a minute.

[00:21:21] Hold on I want to jump in on depreciation really quickly because I.

[00:21:25] Yeah that's even a step back further perfect.

[00:21:28] Yeah because I'm.

[00:21:29] Because Toby mentioned like seven year life 25 year life and I just want to make sure that everybody understands how this works.

[00:21:35] So Toby said airplane is seven year life.

[00:21:37] What that means is if you spend $700,000 on an airplane and you enter that airplane into service and correct me if I'm wrong here Toby but I'm really trying to simplify this for someone like me who was listening to something like this 10 years ago right because I didn't understand any of this stuff.

[00:21:54] But seven seven year life $700,000 airplane you buy this airplane and you're using it to fly charter whatever you're doing you're actively using it in your business.

[00:22:03] That means that regardless of what the airplane is worth, regardless of what you put on it or whatever well maybe that that can change it but you're going to deduct $100,000 a year for seven years.

[00:22:18] And at the end of that you've completely depreciated that airplane that airplane might run for another 30 years.

[00:22:24] But the IRS has recognized that that airplane is a seven year life that's just like what they decided right.

[00:22:30] And so for like rent buying a rental property, there's all kinds of different things you can bucket and depreciate faster.

[00:22:38] But the home if you don't even do that that's called cost segregation where you like strip out all the pieces and parts and you say, okay, you know appliances are five.

[00:22:46] Yeah five year life or whatever.

[00:22:48] Oh you did that.

[00:22:49] I said we'll get to that.

[00:22:50] Yeah we'll get to that but basically the depreciation life that is assigned to whatever you're doing is scripted by the IRS.

[00:22:59] And then you just divide it by the numbers of years of useful life based on the purchase price with some exclusions here and there but we won't get into that detail.

[00:23:06] It depends on the month and the time that you put it into service, you know so for example it on a depreciation life and I buy it in December I'm not going to get up full year right.

[00:23:19] I'm going to but for bonus depreciation I can write it off like I could take 80% of that is 2023 I could take 80% of whatever I purchase.

[00:23:31] Let's say about a plane for $3 million I could take 80% of that I could take a $2.4 million deduction so long as I put it in service before the end of the year.

[00:23:41] And that's how you create the loss.

[00:23:43] Boom I just put it into service I'm not getting any money out of it.

[00:23:46] I have this massive loss can I use it and if you've maturely participated in that business then the answer is yes.

[00:23:54] And what if I can't use all the loss what if it wipes out all my income carry it forward you don't lose it you just keep carrying it forward until you do use.

[00:24:01] And just for historical context for the listener base.

[00:24:04] So this is called bonus depreciation bonus depreciation has been around in various forms here and there in history we got it in 2017 via the tax cut and jobs act under Trump.

[00:24:18] It allowed instead of taking depreciation over the entire five seven or 15 year bucket correct me if I'm wrong depending on what asset you're talking about.

[00:24:27] It allows you to take everything in your one.

[00:24:30] So and that is now phasing out over five years.

[00:24:34] It was 100% for five years from 2017 until 2022.

[00:24:38] And now it's phasing out by 20% per year so this year it's 80 and that's why Toby was referring to an 80% bonus depreciation.

[00:24:45] Yeah, Congress likes to mess with it.

[00:24:47] So they it's been a hundred percent before it'll be 100% again.

[00:24:51] They just yeah just went to 80% it's going to go to 60% next year 40% the next year and then eventually phases out.

[00:24:59] But generally speaking it usually lives with us around 50%.

[00:25:03] And that's probably what we expect is they're going to say hey you know I put it into service here's a big write off in the first year and what does a write off really mean means you're front loading your deduction.

[00:25:13] So like it's not like you get to write it off twice.

[00:25:17] It's just instead of spreading it out let's use rental real estate.

[00:25:21] You just said something right about a cost segment rental real estate that's 27 and a half years you're spreading it out over 27 and a half years.

[00:25:28] So you're going to get a little piece if it's a if it's a you don't get to write off land.

[00:25:33] So let's say that there's a box on the land called a house in that house is worth the house itself not the land but the house itself is worth 275,000 then rough numbers you're getting about a $10,000 deduction year.

[00:25:46] Right that's essentially how it works and you can just figure out what other piece of whatever useful life you have.

[00:25:54] And the code section you're actually referring to Tate is 26 USC 168K and it basically says hey if it's 20 years or less useful life you get this bonus you can write it off faster.

[00:26:08] And you know why would somebody write off something faster because there's a benefit for them it's going to offset income that would go into a high bracket.

[00:26:15] I generally wouldn't accelerate unless I had income that I could offset otherwise I would just write it off over its useful life and say hey you know what I'm going to take a little bit here a little bit there my tax my tax brackets not high.

[00:26:30] You know maybe you're making $100,000 a year you might not want to do bonus you're making $500,000 a year you probably do want to do right but it's your choice as the taxpayer as to whether you're going to take it you can opt out if you want.

[00:26:42] But remember just to clarify you're not getting this against your earned active income unless your material participation is there or you're an active real estate investor so just be mindful when he's referencing how much you're making it's because you're making something that you're actively a participatory in or you're a real estate full time real estate professional.

[00:27:06] And here's the cool part. So if you're a business so take the charter business as an example. Okay, new material participate in that. Then you could write off against your W2 income.

[00:27:17] But remember when I said that rentals or if it's eight days or more greater than seven days. You could be an Airbnb like this is what I always kind of look at airline pilots and I'm like what would I be doing.

[00:27:29] A I'd be maximizing a 401k or something where I can get my money deferred. I wouldn't be messing around with Roth's I would just be going straight like it is.

[00:27:38] I would be deducting out of my top bracket as much as I can do a 401k do a DB plan do something.

[00:27:45] I'd probably be doing gifts to charity like you have a pretty good size incentive if you're if you're the standard deduction you exceed the standard deduction which is this automatic deduction you get.

[00:27:57] Which is actually pretty high it's right around 26,000 for married couple 13 some thousand for an individual.

[00:28:04] If if I'm a giver then maybe maybe I set up my own charity and do a big gift or maybe I do a donor advice fund and do a gift because I'm getting 37 cents on the dollar as a savings right.

[00:28:16] Or maybe I do a business and that business might be an Airbnb business where I buy a structural say I buy a $500,000 property that I'm going to Airbnb.

[00:28:25] If you manage that this is easy if you manage it your wife or your spouse manages it in your that means your materially participate then if I can front load that depreciation.

[00:28:38] I can use it against my pilot income and all you look at is you say how much is that worth to me well let's say I got $100,000 deduction and I'm and I'm making 750 a year you know that that saves me $37,000 cash without figuring out my state.

[00:28:56] Right that's a that's a good chunk of that money right.

[00:28:59] All right maybe that's the down payment.

[00:29:01] Maybe that's a strong enough incentive for you to do that and then once you depreciate it and you take that depreciation it's not like you're going to have to read recaptured against your income if you change it into a long term rental later.

[00:29:14] You could literally just do this for three months at the end of the year I have my property in October every year and I manage it as an Airbnb I get a bunch of guests the average day is the average is actually three days for Airbnb so let's say I average three days and and I take a huge chunk of depreciation

[00:29:32] and then I make it a long term rental you could do that and I'm just getting all the tax benefit in that first year.

[00:29:38] Amazing and here in here can I can I ask to if your wife is the one doing it or your spouse and you're filing a joint tax return the pilot technically or the person who's working the full time flying gig right who's gone all the time he can't do this can file jointly and collect all those benefits right because you're filing right.

[00:29:58] Yes so the way material participation works is it's the spouses together that that's that's the same for real estate so they add up both spouses together and then for real estate professional which we haven't really talked about yet but for real estate professional one spouse has to qualify so if you're if you're a pilot is no different than doctors no different than attorneys usually like I'll give you an example just to just to make it really clear.

[00:30:25] I had clients in Seattle I know you have a connection there Ryan so.

[00:30:31] I live here right now.

[00:30:33] Yep so a client Seattle surgeon gal was making the wife was making $800,000 $900,000 a year as a surgeon has been doing the real estate investing qualifies real estate professional and they were able to accelerate their depreciation just like we talked about on the real estate which yes you can do you don't have to do it but you can do it.

[00:30:55] It's called a cost sag and then accelerate your depreciation they saved $138,000 no excuse me $183,000 in taxes in one year.

[00:31:04] So all that means is that they would have paid X they paid $183,000 less simply because the husband qualified as the real estate professional professional together they qualified as a for material participation and boom the losses are no longer passive and they can use it against their their W2M.

[00:31:25] And I'm being a huge savings.

[00:31:27] So I really want to dive into the real estate professional tax loophole now because this is something that you know nobody tends to know about and it's one of the most powerful tools in a high W2 income earners tool belt.

[00:31:43] So let's dive into that what is that.

[00:31:45] So real estate professional is its code provisions 469c7 just to be nerdy.

[00:31:53] But it's it it's spelled out really clear I'll give you the history of it so that you kind of understand in 19, excuse me 1986 huge tax act passed and what high W2 earners used to do is they'd go invest in any investment and they'd write off the loss there was basically tax shelters is what they call it.

[00:32:14] They all invest in anything and then I'll take the losses from it and I'll offset my W2 income aren't I smart and the Congress.

[00:32:21] Nip that in the button said passive losses only offset passive income.

[00:32:27] And so that was kind of that way for a year and a bunch of people that were in the real estate world can you know people that did construction people that were builders real estate agents or whatnot they all complained and they said this isn't fair because this is what I do.

[00:32:41] I need to be able to take these losses to continue to unlock cash so I can continue to buy additional properties and develop additional properties it's not fair to deny me those deductions.

[00:32:53] And so they created this exception in this exception says if you are a real estate professional and it's really simple there's two prong test prong number one has two conditions.

[00:33:05] So prong one two conditions ready 750 hours.

[00:33:11] And it's more than 50% of your time that you're spending on on work.

[00:33:15] What does that mean in English.

[00:33:17] It means I'm in a real estate trader business and that's how I make the majority of my living and that's one spouse has to qualify.

[00:33:26] And it doesn't mean your property.

[00:33:28] I could be a real estate agent I could be doing construction I could be a developer I could be a property manager.

[00:33:34] I could be a broker whatever as long as I do at least 750 hours during the year and it's more time than I do on any other job.

[00:33:43] So if I have a part time job and I make and I do 1000 hours a year as long as I would have to spend at least 750 but then I'd have to do 1001 hours in real estate to qualify.

[00:33:56] And if I may interject real quick pilots out there we are one of the only high paying W2 professions that can meet that test without before you even talk about spouses right.

[00:34:09] So if you're single and you want to take advantage of this 750 hours is a lot of a lot of hours if you're not involved in real estate already but we have a limit Toby I don't know if you know this but FAA limits are 1000 hour 1000 block hours per year.

[00:34:25] So we can't fly more than 1000 hours you can easily do more than that in real estate related activities especially if you're flying low time.

[00:34:33] And I'm a walking case study I mean I started investing in my I started my business in 2013.

[00:34:40] I was working at the regional airlines and I started you know I was grinding really hard doing both jobs it was a lot of work right and I started buying in service rental property that qualified for depreciation.

[00:34:53] And over the past 10 years I've had millions and millions of dollars in losses and I have not paid W2 income on my pilot salary it's all been deferred through depreciation so I'm a walking example of this you can you know I'm not sure

[00:35:23] Yeah.

[00:35:24] Prong to so we'll reiterate prong one real estate professional and it doesn't have to be your stuff as long as you're a 10% or greater owner in whatever the company is that's doing the real estate.

[00:35:36] So like if you're if you're a developer and you own 15% of a company and you develop all day for other people you're a real estate professional you're a real estate agent you're not buying any of your own properties.

[00:35:48] You don't even touch your own properties.

[00:35:51] Your real estate professional that's pretty.

[00:35:53] And I wanted to add I did I did want to just a slight nuance going deeper on that like people work for Spartan investment group who don't own more than 10% of the business.

[00:36:04] They don't qualify as a real estate professional so like I have for the tax purposes of course.

[00:36:10] Yeah.

[00:36:10] Like I have people that are property managers their brokers inside Spartan they sell property they buy property develop property but they don't qualify unless they own more than 10%.

[00:36:21] So if you're if your spouse goes and works at some random real estate company they may or may not qualify so that's a really really important detail that I just wanted to highlight.

[00:36:30] 100% if they're if they're 1099 chances are they do if they're W2 they'd have to be an owner as well and that's gonna be really tough if they're W2 then they better be getting a good job.

[00:36:40] If they're K1 probably an escort or something as long as they're greater than 10% then they can add that time.

[00:36:45] One spouse and it's you don't add them up so if one spouse is doing 300 hours and their spouse is doing 500 hours you don't you don't call right.

[00:36:55] And this is on trade or businesses.

[00:36:58] This is why that Airbnb thing becomes even more critical because that could that could that could qualify as a trader business if you're managing your own Airbnb's right.

[00:37:08] And technically if one spouse is just managing probably there's actually a case where one guy was managing one property and he qualified as a real estate professional.

[00:37:18] Because every day he went to that property every day he worked on the property he did the maintenance he swept he did all this stuff he qualified.

[00:37:27] So if you have two or three Airbnb's and that's all your spouse does or that's all you do and you're able to exceed your pilot time.

[00:37:36] Then you would qualify as a real estate professional.

[00:37:38] So I have a quick question here and first yeah I used to fly with a captain who used to pick up his tenants rent checks.

[00:37:45] He said no don't send it to me I'll come pick it up because he wanted to log the time.

[00:37:51] Question for you on the Airbnb.

[00:37:52] It was my understanding that if you were if you had an Airbnb portfolio that you wouldn't even need to do the real estate professional thing because the short term rentals are considered active already.

[00:38:07] Right.

[00:38:07] Just remember that if it's not a rental activity if it's an Airbnb so all you have to do is qualify for material participation but if you're trying to qualify as a real estate professional it counts.

[00:38:20] You have a whole bunch of other rental let's say you have a let's say that you're you're doing syndications with Ryan and you have a bunch of rentals in other states and you have three Airbnb's locally.

[00:38:32] You would want to qualify as a real estate professional so you could wrap all those activities together.

[00:38:37] Right.

[00:38:38] And in that case I would actually be careful about making the Airbnb into a long term rental I'd probably rent I'd probably set up an escort for the Airbnb and rent my properties.

[00:38:48] I'd have an LLC holding my properties and I'd rent it to the escort so that I am a long term for me personally when it goes on my return I'm a long term investor.

[00:38:58] I just probably twisted some minds I'm not going to not going to I'm not going to push me further.

[00:39:02] No I do want to capture this because like you know you're doing so you may be thinking OK like I really understood the Airbnb example that you gave about five minutes earlier where you become the active property manager it's not considered a rental and I are active.

[00:39:16] Now you can deduct the depreciation that you get from buying that rental property right but not only that now you get if you invest 50k 100k and syndications you know our typical investments will give you a 30 to 60% tax write off in the first year from bonus depreciation and cost aggregation.

[00:39:33] So now you're investing $100,000 into something and you're getting a 50% tax write off in the first year because of that Airbnb participation so really change.

[00:39:46] Yeah but but I'm going to do a big butt Ryan in order to write off the syndication you're going to have to be the real estate professional when it's just Airbnb got it we could pretend that it doesn't exist if we want to add that Airbnb time to the real estate

[00:40:02] professional I need to wrap that activity together as a passive activity so I can grab all those Airbnb's and add that time to my qualification as a real estate professional unless I'm somehow qualifying outside of it but but regardless the time that I spend managing

[00:40:21] the Airbnb I can add towards my 750 hours and towards that qualification what we haven't hit is the second prong which is why this is important.

[00:40:33] I also have to materially participate in my rental activities so if I want to be a real estate professional not only do I need to hit the 750 hour and the 50% rule but then I have to and when I say I it's if your joint return it's you and your

[00:40:51] spouse member material participation takes into effect both spouses I would have to materially participate on my activities and it's actually per property.

[00:41:03] I have to materially participate per property unless and this is a huge unless I aggregate all of my rental activities together.

[00:41:11] This is why it's important if you need and there's actually a court case where somebody was denied real estate professional for this very reason that's why we're so so I'm harping on it.

[00:41:20] You need to make sure that if you have Airbnb's and you need to qualify as real estate professional you need to make sure as far as your personal return that it's aggregated in with your rental properties and the only way you're going to do that is by making I'm going to rent long to my S Corp or to a C Corp and let the S or C Corp be the host.

[00:41:41] If I do that it's no longer an Airbnb on my return it's a rental property because I'm renting it by the month and then the host is the corporation that collects all the monies and then it just pays me monthly rent.

[00:41:55] Now I can aggregate all of my rental activities this one activity and I have to maturely participate there's seven ways to qualify the only three we're going to worry about the only ones that ever affect pilots.

[00:42:07] Number one I manage them myself and nobody else provides substantial services in that that's not an hour test if I am self managing I don't need to worry about any other test.

[00:42:19] If I manage my own properties I am I qualify for mature participation.

[00:42:24] This is you only have to hit one of the seven right.

[00:42:27] Yep, you got it.

[00:42:28] The other one is I spend between my spouse and I combined or just you if it's if you're single 100 hours at least a year managing your property and I'm not talking about looking for new properties or that you actually have to be managing supervising fixing up collecting rent checks dealing with tenants 100 hours and nobody else spends more time than you.

[00:42:53] And then third is I spend 500 hours and then I don't care about how any other anybody else.

[00:43:02] So as long as I spend 500 hours with me and my spouse managing my portfolio managing my properties then I don't have to worry about anybody else spending any time on my properties they could spend thousands of hours as far as I'm concerned I'm still a real estate professional because I meet those two problems.

[00:43:21] So let me see if I can accurately recap this so that everybody is you know congealed here.

[00:43:28] So let's forget about the Airbnb is for a moment.

[00:43:31] Now let's just say you have your trying to claim real estate professional status and you meet that 750 hours.

[00:43:37] So you've just got a long term rental portfolio that let's not even worry about their being these you got to meet two tests one 750 hours and more than 50%.

[00:43:48] So if you flew 900 block hours this year you'd have to you'd have to do at least 901 hours in real estate related activities.

[00:43:56] Correct.

[00:43:57] And you would also and that has to be just you or your spouse you can't combine your time.

[00:44:03] Correct.

[00:44:04] You are perfect.

[00:44:06] And then the second test would be the material participation which you can combine time with correct the spouse.

[00:44:14] OK.

[00:44:15] So and those would qualify by one of either self managing the property 100 hours per year managing it.

[00:44:25] And if you're only going to be 100 hours nobody can do more that work than you or 500 hours total material participation in real estate.

[00:44:35] Yep.

[00:44:35] And I would add one caveat to that that 100 hours.

[00:44:38] If you have a property management company it's not the company it's individuals working for the company.

[00:44:44] You just have to make sure that there's no other individual out there that spent more time on your properties than you.

[00:44:49] So now I want to layer in the Airbnb thing because OK maybe somebody says you know what 750 hours that's just going to be too much.

[00:44:56] But we have we have a property we can turn it into an Airbnb and then we could do a cost segregation which we'll get into in a moment.

[00:45:05] And we can we can benefit from that.

[00:45:08] Right.

[00:45:09] So if you're not going to qualify for the real estate professional exemption you can still use short term rental strategy rental strategy in order to because that's all going to be active.

[00:45:20] Yep.

[00:45:21] And then you can combine the two by saying hey the work that you do over in your Airbnb can be used to satisfy that 750 hours.

[00:45:31] It's just that you need to do a little bit of rent to your S corp in order to group it.

[00:45:37] And I would say that's a maybe if you need that time.

[00:45:40] So for example the material participation if I need to qualify.

[00:45:45] I'll give you an example.

[00:45:47] I have an Airbnb by my house and I have 10 properties that I own out of the state.

[00:45:53] And I need to I need to spend 100 hours on my properties managing them like I'm not going to be able to spend any time outside the state.

[00:46:00] So I need to add that Airbnb time that I'm managing it but it needs to be a rental activity.

[00:46:07] And if my Airbnb is less than seven hours is averaging less than seven days it's not a rental activity.

[00:46:14] So then the way I do that is I set up a new host a corporate entity to be the host and I rent it.

[00:46:20] I rent that same property to my own corporation that qualifies it now.

[00:46:25] I do it as a monthly rental and now it qualifies as my rental activity I can aggregate it with those other 10 properties.

[00:46:32] And now I have 11 properties that I that I use for qualifying from to a participation.

[00:46:37] And now all the time that I spend managing that Airbnb that Airbnb gets added up with all my other men with all my other rental properties.

[00:46:46] And I magically qualify.

[00:46:48] That's how granular it gets.

[00:46:50] And I tell you that the reason I'm breaking this down like this is because these are actual cases.

[00:46:55] Like there's actually a case where the person would have qualified had they not had their Airbnb's separate.

[00:47:02] It's like.

[00:47:04] And the takeaway that I'm that I'm getting from this is talk to your tax professional.

[00:47:09] Yeah, talk to the folks at Anderson Advisors before before you go on this journey.

[00:47:14] I mean you heard the story of what Toby mentioned in the beginning of the surgeon making you know 750 or $800,000 and setting this up correctly and saving like 138,000 on taxes.

[00:47:28] So this isn't this is like money well spent.

[00:47:30] This is time well spent to make sure that if you're going to go buying rental properties just change the way that you approach maybe your strategy to doing it.

[00:47:39] And there could be massive tax implications on that that may enable you to offset your income or some of your depreciation can be realized.

[00:47:49] I'd like to change the gears a little bit for somebody's like man that is just too much.

[00:47:53] I'm not going to be buying rental properties.

[00:47:56] I don't have a spouse.

[00:47:57] I'm not you know I have no interest in doing this schematic.

[00:48:01] And I just I'm just trying to be passive.

[00:48:04] I'm trying to retire and enjoy life.

[00:48:06] I'm just investing in syndications and I'm getting these losses.

[00:48:10] Can we kind of go into kind of go into a little bit of depth on what those do and you know you say they carry over year to year and kind of what that means and what other taxes that may offset.

[00:48:20] Yeah so this is where it gets really kind of fun for accountant geeks is when when you have passive losses they you don't lose them.

[00:48:32] So if you have if you're investing in a syndication it invests in a passive activity like like rental real estate and it kicks down its loss and you have this passive loss which is what you're going to get right.

[00:48:46] I'm not a I'm not a general partner in it.

[00:48:48] I'm not managing the property.

[00:48:50] I'm just an investor so I get this passive loss and you're like what am I supposed to do with this.

[00:48:54] You just keep carrying it forward until that activity is sold once it's sold it becomes an ordinary loss and I'll tell you this is where accountants screw up.

[00:49:05] If I have ordinary loss and immediately I think I'm going to use that against my other passive income or anything like that.

[00:49:13] No you're not.

[00:49:14] You're going to use it against your ordinary income.

[00:49:17] You're going to go use it against your W2 income and then you say but I but I sold it isn't there gain don't I want to offset the gain and I'm like yeah that's portfolio income.

[00:49:27] And here's the best part this is the only time you'll ever hear this by the way.

[00:49:31] I want to watch your guys's faces.

[00:49:34] It's passive it's passive capital gain and if it's passive what offsets passive income other losses.

[00:49:45] Yes and all of a sudden I can use my carry forward passive losses to offset that capital gain.

[00:49:50] I don't have to use the on the released passive losses there they become ordinary and I can go use them against my W2 and then I use my other passive losses for my other syndications offset the capital gain.

[00:50:03] I'll pay tax on 99% of the accountants will screw that up promise.

[00:50:08] So let me get this straight.

[00:50:10] Let's say you invest $100,000 in a syndication deal and it had it generates a 50% tax loss in year one due to cost segregation which we can talk about later in another episode and bonus depreciation.

[00:50:23] By the way that's probably about an accurate number isn't it right.

[00:50:26] Yep.

[00:50:26] Yeah, I would agree in all of our deals and all of your deals.

[00:50:29] Yeah, right about 50%.

[00:50:31] So you invest $100,000 the year one you get a K1 from the sponsor from us that says you lost in air quotes right because it's a phantom loss 50,000.

[00:50:42] Let's say you don't qualify as a real estate professional your spouse is also working professional they can't qualify for this because that 50,000 could be used in that year to offset your W2 if you qualified as the real estate professional correct.

[00:50:58] Yes.

[00:50:58] Well we just talked about in the last.

[00:51:01] Yeah, exactly.

[00:51:02] But if you don't qualify you're going to carry that forward let's say maybe the project kicked off 3 grand this year so you have 47 that you would carry over right.

[00:51:12] Just a timeout real quick.

[00:51:13] Yeah.

[00:51:14] It's a passive loss and it's going to look for other passive income.

[00:51:18] Right.

[00:51:18] And if there is no other passive income so for example if you have another rental if you have rentals that are generating a profit.

[00:51:26] So you made $10,000 on the rental.

[00:51:28] Then yeah you'd use the $50,000 whatever portion of that will wipe out your other passive income and then you would carry forward whatever portion you couldn't use.

[00:51:38] Right.

[00:51:39] So let's say you were making $5,000 a year in passive income and this project lasted for five years.

[00:51:45] So at the end of it you had 25k left.

[00:51:48] Yep.

[00:51:49] And the project sells and you have this 25,000 that converts into an ordinary loss.

[00:51:54] Correct.

[00:51:54] You could then take that in whatever year you're in now five years in the future and take that $25,000 against your W2.

[00:52:02] Correct.

[00:52:03] That's exactly where you would apply it.

[00:52:05] Yeah.

[00:52:06] 100%.

[00:52:06] I did not know that.

[00:52:08] I did not know that.

[00:52:09] I have to be honest I didn't either.

[00:52:11] Yeah.

[00:52:11] It's really interesting.

[00:52:13] Yeah.

[00:52:13] Wow.

[00:52:15] That's pretty incredible.

[00:52:16] That's really.

[00:52:18] I didn't I did not know that.

[00:52:20] So I always learned something from you tell me which is why we wanted really badly to have you on the show.

[00:52:25] So.

[00:52:25] But that's the idea is like passive losses are always like when you when you dispose of the activity it releases and most people are like, oh, I'm just going to use it against the the gain.

[00:52:37] And it's like, well, you don't have to.

[00:52:39] You can take that loss and use it against your W2 and let the gain just be capital gain.

[00:52:44] It's probably going to be less than your income.

[00:52:46] Right.

[00:52:46] I'd rather I'd rather use that loss against my ordinary income and let the capital gain be the capital gain.

[00:52:51] So, I mean, again, you're in the driver's seat on a lot of this stuff.

[00:52:55] You get to choose and there's a lazy way and then there's the little more elbow grease way.

[00:53:01] And it's like this, the lazy way.

[00:53:03] I buy real estate and I write it off over 27 half years or 39 years.

[00:53:07] If case of self storage is probably 39 years non residential.

[00:53:12] Yeah.

[00:53:13] That's the lazy way.

[00:53:14] But you know what?

[00:53:14] This is funny.

[00:53:15] And you guys can check me on this.

[00:53:18] When you do a cost say and you change your accounting method and you file something called a 31 15 just for kicks and to be a complete nerd go read it.

[00:53:27] As it says, you're changing from an impermissible method to a permissible method.

[00:53:33] Let that just sink in.

[00:53:35] You're changing from an impermissible method to a permissible method.

[00:53:39] What does that tell you about the 39 years?

[00:53:42] It's what you're not supposed to do.

[00:53:44] See, you're supposed to break things into the useful life.

[00:53:47] You're supposed to write things off over their useful life.

[00:53:50] Like if I buy a single family residence and I make it into a rental, I'm not supposed to deduct my carpet over 27 and a half years.

[00:53:58] I'm supposed to write it off in five years.

[00:54:01] But the lazy people don't do a cost segregation.

[00:54:05] And I'm not saying like there's a reason to be lazy because it's not worth it.

[00:54:09] Maybe it's not the juices and worth the squeeze because cost sags aren't free.

[00:54:14] Or maybe they don't know.

[00:54:16] Maybe they don't know.

[00:54:17] Most people just have no clue.

[00:54:19] Most accountants are too lazy.

[00:54:21] And it's like the IRS says, go ahead write it off over 39 years.

[00:54:26] Probably pay us more tax.

[00:54:28] Speaking of not knowing, could you explain what a cost segregation study is please?

[00:54:32] All right.

[00:54:33] So I'm going to do a visual.

[00:54:36] So let's walk into Ryan's, what if Ryan's rental property?

[00:54:41] So we'll walk into Ryan's rental property.

[00:54:43] We walk up to it and he just put in a brand new fence.

[00:54:47] The yard is wonderfully coiffed.

[00:54:49] It has some new trees sitting there.

[00:54:51] He has a new driveway that's just got refinished.

[00:54:54] You walk up and there's a nice deck in the front.

[00:54:56] You open up the front door and you smell fresh paint and new carpeting.

[00:55:03] And you walk in and there's new appliances.

[00:55:05] You walk out the back and there's a brand new deck.

[00:55:08] You're like, this is a great rental property.

[00:55:11] And then you write that all off over 27 and a half years.

[00:55:15] An accountant walks up to that and says, hey, that fence is 15 year property.

[00:55:19] That driveway is land improvement, 15 year property.

[00:55:22] Hey, that the nice deck in front there, that's 15 year property.

[00:55:26] Let's walk in.

[00:55:26] Oh, they're carpeting.

[00:55:27] It's five year property.

[00:55:28] All those appliances are five year.

[00:55:30] The cabinets are seven.

[00:55:31] Let's walk out back.

[00:55:32] Hey, those trees, those trees are 15 year property.

[00:55:35] That's what you're supposed to do.

[00:55:37] But in order to do that, you need to have an engineer say, here's the values.

[00:55:41] And that's called a cost seg study.

[00:55:43] And so in order to do a cost segregation and to write off your property over the five,

[00:55:49] seven, 15 years or 27 and a half years or in the case of non residential 39 year is

[00:55:55] you have to have somebody tell you what those values are.

[00:55:57] And the IRS allows you to use an engineer to do those studies.

[00:56:02] And they're actually really, they've been doing them for decades.

[00:56:05] They're actually fairly simple.

[00:56:06] They're not horribly expensive.

[00:56:08] But boy are they potent when you do them right.

[00:56:11] So to clarify what we're doing is we're taking values of pieces, components of

[00:56:17] the property and we're pulling them into accelerated depreciation categories.

[00:56:22] Five, seven, 15 year buckets, right?

[00:56:24] You're breaking them into personal property and the structure itself.

[00:56:30] So there's land can't write it off structure.

[00:56:33] You can write it off, but it's 27 and a half years personal property, five,

[00:56:37] seven or 15 year and you're breaking them into those categories.

[00:56:40] And now you can attack on bonus.

[00:56:42] Yep.

[00:56:43] And then when it's five, seven or 15 less than 20 years,

[00:56:47] you have the right to accelerate that into one year.

[00:56:49] And you know, this is, let me just mess with you guys a little bit more since I

[00:56:53] can see that you, this is kind of, this is fresh.

[00:56:56] Right?

[00:56:57] I don't have to write off my five year property in one year.

[00:57:01] I could write it off over five, but I could write off my 15 year property in

[00:57:04] one year or 80% of it.

[00:57:07] 80% of it this year.

[00:57:08] You could have done it 100% last year.

[00:57:10] But you take, you could still do last year up until you follow your

[00:57:14] tax return, which could be in October.

[00:57:16] So we could still go back and we could still do cost seg studies on properties

[00:57:20] that we bought in previous years.

[00:57:22] Hey, if I bought a property three years ago,

[00:57:24] I could do a cost seg study and accelerate the depreciation into this year.

[00:57:28] Or I could go back into last year and as long as I do the study in

[00:57:32] change of accounting method before I follow my, my, my return plus extension,

[00:57:38] then I can, I can still do a cost seg study and wipe out 2022 taxes.

[00:57:43] This is important.

[00:57:44] Let's touch on this real quick.

[00:57:46] Let's say you own a property, you had no idea this existed and you're

[00:57:49] listening to this right now, you're going, oh my God,

[00:57:51] and you have extended, we, you extended your,

[00:57:54] your tax filing deadline.

[00:57:55] So you've got until what October 15th.

[00:57:59] What's the deadline for someone to do a cost segregation study to

[00:58:02] get that 100% bonus?

[00:58:03] Well, it's up until the return is, is due, which is the with extension.

[00:58:08] Even if you filed your return, technically you could,

[00:58:10] you could amend and, and, and still do that.

[00:58:13] And it's the owner of the property.

[00:58:15] So if you have a partnership that owns the property,

[00:58:17] it's September 15th.

[00:58:19] If it's you that owns the property, it's October 15th.

[00:58:22] So it's going to be either September or October.

[00:58:24] And just to clarify, the cost segregation study isn't due to anybody.

[00:58:28] It's due to your CPA who's going to take the information and

[00:58:31] apply it to your return.

[00:58:33] So really be nice to your CPA and give it to Emma, her, you know,

[00:58:36] well in advance.

[00:58:38] So, yeah, right.

[00:58:39] And this is what we do.

[00:58:40] If it's October 10th, we're going to call up our cost seg partner.

[00:58:44] It was cost seg authority.

[00:58:45] Great guys.

[00:58:46] Eric Oliver over there.

[00:58:47] And we're going to get an estimate.

[00:58:49] And that's what we're going to use in the return.

[00:58:51] And then we're going to do the study and the study might take

[00:58:53] a month or something, you know, whatever it comes back to.

[00:58:56] And if it's better, we're going to amend.

[00:58:57] If it's not better than we're just going to leave while we still

[00:59:00] have to get, we'll just leave it as their, their estimates.

[00:59:03] We've never seen them overestimate.

[00:59:05] We've seen them underestimate on occasion, but they're still,

[00:59:08] it's usually 30, 30%.

[00:59:11] So it's, it's a good chunk and that's on residential on,

[00:59:14] on self storage.

[00:59:16] I mean, you guys are 50.

[00:59:18] I think it's probably higher than that.

[00:59:19] Yeah.

[00:59:19] It's about 60% on storage.

[00:59:21] There's some other asset classes that are particularly

[00:59:25] advantageous like mobile home parks and car washes because

[00:59:28] all the assets are under the 20 year mark, right?

[00:59:32] Correct.

[00:59:33] Right.

[00:59:33] A big chunk of it are.

[00:59:34] Yeah.

[00:59:34] Like in manufactured homes, it could be as 80, 90%.

[00:59:38] If it's a mobile home park where it's, it's all of land

[00:59:41] improvement.

[00:59:42] It's almost 90%.

[00:59:43] Right.

[00:59:44] Right.

[00:59:46] Absolutely incredible.

[00:59:48] What I'm dealing with a fluent people, it's different.

[00:59:50] And I don't want to say like, Hey, you know, somebody making

[00:59:52] a hundred grand or less is, is, is not, but there's certain

[00:59:56] things that become really valuable to somebody making over

[00:59:58] half a million dollars a year that may not be for

[01:00:00] everybody else.

[01:00:01] Right.

[01:00:01] One of those things is recognizing that for the wealthy,

[01:00:05] it there's almost always a charity involved.

[01:00:08] Clinton Foundation, Trump, Trump Foundation, you know,

[01:00:12] Bill and Melinda Gates.

[01:00:14] Why are they doing that?

[01:00:15] Even Elon Musk, it's because you can donate money into it

[01:00:19] and it's almost like an IRA or 401K because as long as

[01:00:24] you follow the rules, you can pay yourself a salary

[01:00:27] later, you can get the money back out in another way.

[01:00:29] And what I like is there's certain activities like

[01:00:33] affordable housing, transitional housing, residential

[01:00:37] assisted living, recovery housing, all these different

[01:00:41] things qualify as charitable activities.

[01:00:45] Section eight is technically a charitable activity.

[01:00:48] There's actually a revenue ruling that you could act

[01:00:50] as actually a safe harbor 70% of your rents come from

[01:00:54] affordable housing.

[01:00:55] It's a charitable activity.

[01:00:56] And the reason this is important for airline

[01:00:57] pilots is because if you're buying property and you buy

[01:01:02] it individually, you're in that realm where we're

[01:01:04] talking about real estate professional and depreciation.

[01:01:06] If instead you set up a charity and you donated,

[01:01:10] let's say any appreciated asset or cash, let's say I

[01:01:14] donated, let's say that I donated $100,000.

[01:01:20] I could write off the full $100,000.

[01:01:22] And then I take the hundred and I invest in a

[01:01:24] single person that's in the same place.

[01:01:25] I can actually do that and qualify for a 100% deduction

[01:01:32] on that investment.

[01:01:34] And then it just matters on what I'm doing in that charity.

[01:01:38] So, for example, it doesn't have to be low income

[01:01:40] housing.

[01:01:40] It doesn't have to be one of those.

[01:01:42] It could be education.

[01:01:43] It could be anything.

[01:01:43] That's a passion project.

[01:01:45] I have folks that have foundations and everything

[01:01:48] from MS to doing camps for folks that have

[01:01:53] seizures to teachers trying to teach a subject.

[01:01:58] It could even be around flight.

[01:02:00] Hey, I want to share the joy of flight.

[01:02:02] That would actually qualify as a charitable activity.

[01:02:04] Then you could do your investments through there

[01:02:07] and people always ask, well, how do I get the money out?

[01:02:10] So if I'm a pilot and I put, again,

[01:02:13] I'll give you guys some really cool examples.

[01:02:15] Let's just say I put cash into it.

[01:02:17] I wrote off $100,000 and I saved 37 cents on the

[01:02:21] dollars.

[01:02:21] I saved 37,000.

[01:02:23] I can still pay myself a reasonable salary for what

[01:02:25] I do with that charity.

[01:02:27] I probably wouldn't do it now, but I might do it

[01:02:30] when I quit being a pilot.

[01:02:32] Right.

[01:02:32] In the meantime, that money is compounding

[01:02:35] and I'm not worried about taxes anymore.

[01:02:37] I don't care.

[01:02:38] It makes a billion dollars.

[01:02:39] We don't care.

[01:02:40] Peter Thiele is a great example.

[01:02:42] Owned PayPal through a Roth IRA.

[01:02:44] Never was going to pay tax on billions of dollars.

[01:02:47] It was $4 billion that he made.

[01:02:49] Never, never going to pay tax on it.

[01:02:51] And so these are exempt entities that you could

[01:02:53] actually do.

[01:02:54] And just I'm going to give you guys one really weird

[01:02:56] example and this isn't to pat myself on the back.

[01:02:59] I like doing things with real estate that help

[01:03:01] other people.

[01:03:02] So there was a gal that was the mom of a friend

[01:03:05] and she lost her house to a bank.

[01:03:08] She's blind.

[01:03:09] She's over 80 years old.

[01:03:11] She's been living in that house for a long time

[01:03:14] and through no real fault of her own,

[01:03:16] she was kind of hoodwinked into doing a loan on it

[01:03:19] and using that money for somebody's investment.

[01:03:21] So she was kind of preyed upon,

[01:03:23] but she ended up losing that house to the bank.

[01:03:27] So I went and I bought the house individually.

[01:03:29] I just went and bought it from the bank.

[01:03:31] It was about 90 grand.

[01:03:32] And I said, don't worry.

[01:03:35] You guys could stay there.

[01:03:36] Don't worry.

[01:03:37] The son came over and fixed the place up.

[01:03:39] He decided to take a real interest in it.

[01:03:42] And about three years later,

[01:03:43] this was actually last year,

[01:03:45] house actually appraise for 300 grand.

[01:03:48] And I said, hey, don't worry.

[01:03:50] You're going to have a place to live for the rest of your life.

[01:03:52] And I put it into a charity.

[01:03:54] My deduction, my donation deduction was 300,000

[01:03:58] because the fair market value of an asset is deduct.

[01:04:01] So I put it into a charity.

[01:04:03] My donation was more than I or my deduction was worth more than

[01:04:07] what you paid.

[01:04:08] Right.

[01:04:09] So I could absolutely do that with stock.

[01:04:12] You can do that with houses and you could do that with cash if you feel like it.

[01:04:16] I mean, obviously in my example,

[01:04:19] what I did is I gave her a life estate to the house.

[01:04:21] And I said, you can live there until you pass away and then we'll sell the house afterwards.

[01:04:25] But I put it into one of my charities just because I was like, hey,

[01:04:29] I could use the deduction.

[01:04:30] Right.

[01:04:31] That's amazing.

[01:04:33] I mean, I didn't, I did not know that again.

[01:04:36] Another thing that this has been really, really powerful and impactful.

[01:04:40] Toby, I think we're going to have to have you back because I feel like we can.

[01:04:43] Yes.

[01:04:44] We could be, this is like, there's probably well,

[01:04:46] I'll risk it with hours of content.

[01:04:49] It's fun stuff though, isn't it?

[01:04:52] We're boring.

[01:04:53] You know, every time, every time I talk about taxes, I get fired up.

[01:04:57] I think people that think taxes are boring is because they're not doing it right.

[01:05:00] It's a pain point.

[01:05:01] Whereas if you look at it like a game and you start learning all of these amazing

[01:05:06] loopholes and these strategies that you can use to pay less tax or even benefit

[01:05:11] your financial situation, it gets really fun.

[01:05:14] Tate, that's a good transition because someone said something to me and Toby

[01:05:17] just whacked me over the head if this is the wrong mentality,

[01:05:20] but somebody said something to me like five or six years ago that completely

[01:05:24] changed by perspective on taxes.

[01:05:27] They said, you know, Ryan, there's about 2,000 lines of tax code,

[01:05:30] but only four of them talk about how to pay taxes.

[01:05:35] The rest of the tax code is how to change your behavior to not pay taxes

[01:05:40] and that the government's trying to incentivize you to do certain activities

[01:05:43] and reward you with not paying taxes.

[01:05:47] Am I off base there or is that?

[01:05:50] No, you're about right.

[01:05:51] There's 27,000 pages of tax code,

[01:05:55] over a million pages of tax court cases and regulations.

[01:05:58] And the vast majority of it is how to avoid and how to receive incentives.

[01:06:03] In other words, the reason that there's charitable donations, for example,

[01:06:06] and they allow you to write that off is because they want you to do something good

[01:06:09] for society and if you're willing to do that, then they give you an incentive.

[01:06:12] The reason they want you to invest in real estate is because it's good

[01:06:15] for society development and creates better infrastructure.

[01:06:18] They don't offer the same thing for stock.

[01:06:20] I can't write off my stock.

[01:06:21] I buy a thousand dollars worth of, you know, 3M.

[01:06:27] I can't write it off.

[01:06:29] But if I buy a property and I put, you know,

[01:06:32] $1,000 down on a property for $100,000 property,

[01:06:35] I can depreciate more than what I put down.

[01:06:38] That's because they're incentivizing behavior.

[01:06:40] They're 100% correct.

[01:06:42] That's great.

[01:06:42] Well, Toby, can you tell us more about Anderson Advisors, your firm,

[01:06:46] maybe just a brief background of what you are

[01:06:49] and what you offer to clients?

[01:06:51] Because this is another question that I personally get asked all the time

[01:06:54] is do you have a good CPA?

[01:06:55] Yeah.

[01:06:56] Yeah, we're one stop shop for folks that are doing investing

[01:06:59] or setting up a business.

[01:07:01] So we're a bunch of attorneys, CPAs, accountants, bookkeepers,

[01:07:05] about 500 of us where we do everything soup the nuts.

[01:07:09] So we'll set your business up, get a CIN,

[01:07:12] help you keep it in compliance, do the books,

[01:07:15] do the tax returns for you,

[01:07:17] maintain it on an annual basis.

[01:07:19] And then we really look at things from a tax standpoint

[01:07:22] and ask the protection standpoint in a legacy planning.

[01:07:25] There's a right way to do things,

[01:07:26] and there's the other way to do things.

[01:07:29] And we prefer to do things the right way,

[01:07:31] which does require a little elbow grease,

[01:07:33] but you only have to do it once like in a state plan.

[01:07:36] Why would you just leave it to chance and die

[01:07:38] and distribute your stuff to somebody

[01:07:39] that may not be prepared for it

[01:07:41] in a way that shows you really don't care?

[01:07:43] Do it in a state plan that creates a legacy.

[01:07:45] It's really easy to do on taxes.

[01:07:48] Why just sit there and pay the most tax?

[01:07:50] Why do you just, why get beat on?

[01:07:53] We used Ryan, the sisters were smacking Ryan around.

[01:07:56] Maybe Ryan doesn't like getting whacked.

[01:07:58] Maybe he wants to do something about it.

[01:08:01] And the rich, they don't make their money on active income.

[01:08:04] They all move it over to the passive side,

[01:08:06] portfolio income or passive income,

[01:08:08] and they do so in a tax advantage manner.

[01:08:11] That's the way to do things.

[01:08:12] And then from a business standpoint,

[01:08:14] not all entities are the same.

[01:08:16] Some get audited a lot more.

[01:08:17] Some lose all those audits and others don't.

[01:08:21] Some never get audited.

[01:08:22] Some nobody could ever take away from you.

[01:08:24] Some it's easy for somebody to take away from you.

[01:08:27] There's a whole gamut out there.

[01:08:29] A little bit of education usually goes a long ways,

[01:08:32] but the whole idea is that

[01:08:33] what if it helps somebody when they come in from A to Z

[01:08:36] without having to bounce you around

[01:08:37] between a bunch of other firms?

[01:08:39] Excellent.

[01:08:40] Well, if somebody isn't thrilled with their CPA

[01:08:43] and they want to reach out to you

[01:08:44] and get involved and engage with you,

[01:08:47] how do they do that?

[01:08:49] AndersonAdvisors.com

[01:08:50] And if you want to learn, just go to

[01:08:51] just type in my name, Toby Mathis.

[01:08:54] Google me and go to my YouTube channel.

[01:08:56] I can vouch for it.

[01:08:58] Yeah, I've watched a ton of them. They're great.

[01:09:00] Yeah, he put, Toby put out thousands of videos.

[01:09:03] He does, and you do tax Tuesdays too, right?

[01:09:05] Where you can log in, you can ask questions.

[01:09:06] You can come in and ask questions.

[01:09:09] That's what I love the most about Anderson

[01:09:10] is you guys put out so much content

[01:09:13] on the internet for free and

[01:09:15] educate people for free.

[01:09:18] And that's amazing.

[01:09:19] You don't even charge for a lot of your education,

[01:09:21] but of course, obviously if you want the White Glove Service

[01:09:23] you get the White Glove Service

[01:09:24] and you guys are A to Z.

[01:09:26] It's such a great organization

[01:09:28] and I love everybody there that I do,

[01:09:30] that I transact with.

[01:09:32] You know, in the Vegas office

[01:09:34] or out here in the Seattle area.

[01:09:36] Actually, Clint is down in the Gig Harbor area

[01:09:37] which is kind of cool.

[01:09:38] So a lot of pilots live in Gig Harbor.

[01:09:40] It's like Peachtree City West out here

[01:09:41] in Washington.

[01:09:43] A lot of pilots live in Peachtree City, Atlanta.

[01:09:46] So we call it Gig Harbor, Peachtree City West.

[01:09:49] But yeah, so it's a great, you know,

[01:09:51] they're familiar with what activities pilots have

[01:09:53] and are very skilled in that.

[01:09:56] So I can't say enough good things.

[01:09:57] So, Toby, really appreciate you coming on

[01:09:59] and dropping your knowledge.

[01:10:00] We're definitely going to have you back

[01:10:02] because we only scratch the surface on ways

[01:10:04] to change your facts so you can change your tax, right?

[01:10:08] You can change how you get structured, right?

[01:10:12] I'm totally going to rip that off.

[01:10:14] I ripped it off from Robert Kiyosaki.

[01:10:16] So you credit that.

[01:10:19] Here we go.

[01:10:21] Toby, thank you so much for your time today.

[01:10:23] Look forward to speaking with you soon.

[01:10:25] That was fun guys.

[01:10:26] Take care.