The following episode is an excerpt transcribed from The Accidental Landlord podcast. You can access the full episode, here.
Peter: All right, so we have Thomas Castelli here, who is a CPA and a tax strategist and has his own podcast. Thomas, welcome to the show.
Thomas Castelli: Thank you for having me on here today. It's an honor to be here.
Peter: Yeah, it's mutual. Why don't you take a minute or two to explain to our listeners who you are and maybe a little bit about your podcast and then we can get right into it.
Thomas Castelli: Yeah, absolutely. So my name is Thomas Castelli. I'm a CPA and tax strategist as Peter mentioned. I work exclusively with real estate investors across the United States. I work with clients who have as little as one rental property and our firm works with clients as large as CineKits and funds who have hundreds if not thousands of properties. So we kind of get to get a good mix of it all. So I've seen just about everything at this point. What we go through on our podcast called the TaxSmart REI podcast.
We really break down and outline the various tax strategies and tips and tools that landlords and other real estate investors can use to minimize and reduce their taxes as they go along their journey of real property ownership. We also sometimes bring on experts, share their stories, how they built their portfolios, things like that. That's just a little bit about the podcast.
Peter: Awesome. I think it's going to be a super relevant conversation because our podcast called Accidental Landlord, they're generally newer real estate investors or real estate investors who kind of stumbled into their investment, i.e. they inherited something or they're moving away and they don't want to sell their house and now they're a landlord. But there's a lot of, I don't want to say mystery, but when it comes to what you can and can't do tax-wise. So there's a couple things that I definitely want to talk about. But before we get...
Thomas Castelli: Right.
Peter: Everyone hears stories of, oh, “Warren Buffett pays less taxes than his secretary,” or “Donald Trump paid zero taxes, but he made millions or billions of dollars.” That sometimes doesn't sit well with people, and I think it's just a lack of understanding what it is. And so, can you just briefly, I'm sure they have really complicated tax strategies, and that's not the point of the question, but what are those guys doing to
Pay less in taxes and are those things available to your everyday, you know, people like you and me just trying to make a living.
Thomas Castelli: There's a lot to break down there. So I'll give a few things, right? So what someone like Warren Buffett does, Warren Buffett owns a majority, well, majority of Warren Buffett's wealth comes from his holdings in Berkshire Hathaway, which is a publicly traded stock. What a gentleman like him could do is, first of all, they're, most of us, including myself, included our pay tax and ordinary income tax rates, right? We receive a salary or maybe we have a business and that business throws off income.
and we're gonna be taxed at rates up to 37%. Whereas Warren Buffett has most of his wealth again in that stock holding. So that stock holding is going to appreciate in value over time. So if he were to sell the stocks, he's gonna pay tax at the preferential tax rates, the capital gains tax rates, 23.8% when you include net, right? So he's paying, so we're paying up to 37%, someone like Warren Buffett's paying 23.8%.
Now, what gets even more interesting in an asset like that is you can actually pledge your asset, pledge your stock, basically put up as collateral and get a loan. Right? So say Warren Buffett, I'm just making this, I don't know what he's doing, but to say he wants to buy a new car, right? Instead of selling the stock to buy the new car, he can go pledge his Berkshire Hathaway stock, get a loan using a stock as collateral. The loan proceeds are tax free, right? So
He doesn't pay tax on that loan proceeds. Now he goes and buys the car and pays off the loan that he used to stock his collateral. That's his little strategy people call it buy, borrow, die. Basically it's like you have an asset, the asset appreciates in value. Rather than selling that asset and realizing a capital gain, you just borrow against that asset to buy. So that's how Elon Musk bought Twitter. He took a loan out against his Tesla stock and used it to acquire Twitter.
So that's one way they do it, right? That's one kind of way they use this buy bar or die strategy. Other way to do it, people like perhaps Donald Trump, right? There's something called the real estate professional status. The real estate professional, okay, so all losses from rental properties are passive by default underneath the tax code. That means that if you have a loss from your rental property, it's not gonna be able to offset your W-2 or your active trade or business income and help you reduce taxes.
The real estate professional status allows your rental losses to become non-passive and be able to offset your W-2 income or your income from your active trader business. So for example, let's just say your rental property threw off a loss of $10,000. Well, if you had the real estate professional status, that $10,000 is now offsetting your W-2 or your active trader business income. Now to qualify, you need to work more than 750 hours and more than half your total working time in a real property trade or business. So, effectively, you have to be working full-time in real estate. So while I don't know the particulars of Trump's situation off the top of my head, I would have ventured a guess at some point over his career. He was using the real estate professional status, taking the losses from all of his vast real estate empire and using it to offset the income that he was earning from other sources.
The following episode is an excerpt transcribed from The Accidental Landlord podcast. You can access the full episode, here.
