The following has been transcribed from Episode Four of The Accidental Landlord Podcast. The following episode can be viewed on Spotify, here.
We want to give you an opportunity to introduce yourself!
Absolutely! I appreciate that. I've been working the last 25 years with several thousand accounting firms and CPAs to do the tax credits and tax structures for their clients that invest in real estate, whether it's a duplex, a residential apartment, or they're newly starting out. We work across the country with the accounting firms and real estate clients to make sure that everyone takes advantage of these benefits.
I'm also an investor in real estate, so I understand the rollercoaster ride of investing in real estate.
Tell us about how you got started in the real estate investing side of your career!
I invested in real estate primarily to get the tax benefits to offset my active income and other operations. If I was making profit and I owed the IRS money, instead of taking that money and paying the IRS, I would take that same amount of money and buy real estate. Then, I would take the tax benefits like depreciation, and take that write off, offset my taxable income, and ultimately, instead of giving the IRS money I would set up an asset that I owned. I got the same tax benefits. That's how I got started.
How can you get others to grasp how powerful the aspect of depreciation really is?
The one thing that is great about real estate is that it's one of the few investments you get to expense. With real estate, uou get to expense the whole amount. Typically, you'd expense over a 30-40 year period depending on the type of property you buy. Under the US tax law, you can do a cost segregation study. It's a study that basically breaks out what's considered the bricks and mortar, and anything that's more tangible. When we're doing a cost segregation study, we're breaking down the building to the carpet, windows, heating and cooling systems, etc. Anything that's bricks and mortar can be expensed.
Let's say someone buys an apartment for $100,000. We do a cost segregation study and determine that 50% of that property is basically tangible. It's not bricks and mortar. Then that 50% can be expensed immediately at the time you buy the building. If I owe 50k in taxes, let's say I buy an apartment. I'm going to get that 50k write off, and eliminated my taxes. It sometimes gets a bad wrap, but those are the tax rules.
You can do a cost segregation study on any investment property that isn't your primary home. It could be a condo or apartment or multifamily home. It can apply to anything. There's a lot of benefit there.
Depreciate can offset passive or active income.
It depends. A lot of my clients are active, meaning they spend a good deal of their time in real estate each week. You have to collect rent, do maintenance and more. Everyone that has a property knows a lot of time goes into managing it. If you buy into a real estate fund where you're completely passive, and you're not active in the property, then it would offset passive income.
It depends on whether you're managing the property and being an active participant, or you're investing in a property and being a passive participant.
I love your perspective. If you had to teach someone who was about to buy their first property what the most important things they should consider from a tax perspective?
Depreciation is a powerful tool. Through a cost segregation study, you can accelerate a lot of that depreciation in the first year. Also, if you do anything to the property that makes the property more energy efficient, those things come with tax credits. Most people do this for better rents, but don't take advantage of the tax credits that come with it. That's a big change.
The other thing is that any investment property is going to have annual property taxes. You can negotiate the taxes on the property every year with the county. This is a year where you may want to go ahead and negotiate your property taxes with the county, because of the pandemic.
What is the difference between good debt and bad debt and how can someone use debt to their advantage?
I've used debt in my properties! I think debt has had such a low interest rate the last decade that the interest rate associated with debt is low. It doesn't add a lot to the payments. You can buy such a bigger property with debt. So, say you have 250k in cash. If you use cash, you're buying a 250k property. If you use debt, you can go up to a million dollars a property. With a million dollars, remember, you get up to 500k dollars in write offs, so that's a big advantage that you wouldn't get with debt. You also would have a larger property which means more rent payments.
It's good debt. The low interest rate environment is an opportunity. Those things considered, good debt is a great option if you do the break even analysis and can afford it.
