00;00;07;12 - 00;00;35;13
Unknown
Welcome back to the Seven Figure Flipping Podcast. I'm your host, Adam Whitney, and I have a awesome guest today. It's my personal tax man and, asset protection guy. It's all the things that we don't think about as real estate investors, especially house flippers, who are making a meaningful amount of money and then giving 40 to 60% of it to the government.
00;00;35;13 - 00;01;02;04
Unknown
And today my guest is Ryan Carson from Advance Tax Group. Ryan, welcome to the show. Thank you. Adam, thanks for having me. Excited to be here. Ryan Ryan and Advance Tax Group have been working with the seven figure flipping community. So people throughout our community who are all doing meaningful deals every year and they don't want to worry about the admin.
00;01;02;06 - 00;01;38;16
Unknown
And before we had settlement, just a little bit of a story about one of the guys in the group, the, young guy. I'll keep him anonymous, but one of the best investors flipping 180 houses a year, but super focused on operations, but not focused on them and not focused on finances. And he calls me a while back and says, hey, man, I've been growing my business flipping all these houses and I just got a bill from the government for a half a million bucks.
00;01;38;19 - 00;02;05;16
Unknown
Yeah, I haven't really paid attention to or paid taxes since 2020. What are what are my options and I was it was hard for me because I couldn't really give him any good options other than what he was already doing. He's already a very smart guy, very, very savvy investor. But after the fact is not the time to worry about your taxes.
00;02;05;18 - 00;02;29;22
Unknown
Taxes are something you worry about beforehand. So we just came out of the previous year, and we do a tax call on our community with Bill Allen. If you want to see the tax call, we'll link it in the show notes that we did most recently. It's the first time we ever did it openly. And we scramble in November and December to look at, oh my gosh, I did actually make all this money.
00;02;29;22 - 00;02;48;07
Unknown
And now I'm going to have a big tax bill. Maybe I don't have that much cash even in my bank. What do I do. So then people scramble to find depreciable investment and all these things they call Ryan, they call it the like, what do I do, what I do? A better way to do it is to be proactive.
00;02;48;07 - 00;03;07;28
Unknown
And it's not. The taxes aren't due yet. I know most of you won't pay till October and you'll get extended, but taxes are due in April. That's what we have to file. Our taxes. So I want to have this podcast today and bring in an expert so that you guys can be proactive in your strategy and put some things in place.
00;03;08;00 - 00;03;12;26
Unknown
And that's why I brought Ryan on today. So Ryan.
00;03;12;29 - 00;03;37;03
Unknown
Tell me a little bit about Advanced Tax Group and who you work with. Yeah for sure. So advanced tax group. The main reason that we exist and that the only reason we really exist is a really focusing on real estate investors. We try not to be a kind of, you know. No. Everything firm. We're especially firm when it comes to real estate investing.
00;03;37;03 - 00;03;53;14
Unknown
So that's what we hyper focus on. We've been helping, real estate investors for years now. I have 21. Does my 21st tax season. And what we do is we take kind of a holistic approach and look at what you really have going on and ask you the questions that you need to be asked that you didn't even know.
00;03;53;14 - 00;04;19;08
Unknown
You need to be asked to lead you down a tax rabbit hole. For us, our main focus is just making sure that we are looking at everything for you and in its totality, from a business structure, estate planning, but also on the tax side, looking to make sure that we are forward thinking, opposed to backwards. A lot of times people come to me this time of year, I always say that your tax returns are really made in June and July opposed to January.
00;04;19;08 - 00;04;34;29
Unknown
Yes, because all three of those starts were days. But it really helps to kind of focus in that during the course of the year, you should be looking at your taxes. What happens a lot of times, like you said, Adam, a lot of times people will go and sink money into a bill and they don't realize they should reserve some of that money for tax time.
00;04;35;01 - 00;05;00;02
Unknown
And then when it comes up, they have all their money set up and bill tied up and deals with no, you know, no basis on what to do for tax time. Yeah. Ryan, that's that's the difference between being reactive and proactive. And I would argue based on what I've seen in the last six years in the community, 98% of people are being reactive, and it takes a lot of pain for somebody to make that move.
00;05;00;02 - 00;05;22;12
Unknown
Like you don't want to get hit with the six or multiple six figure tax bill to get to make you then start thinking about taxes. Do it now. Even if you're early in your journey, you need to start to learn and under stand the game. Now, Ryan, you said people don't put anything aside for taxes. So let's take a flip for example.
00;05;22;15 - 00;05;42;14
Unknown
Somebody comes in and they flip their first house. They make $60,000. How much should they be putting aside for taxes? Yeah for sure. And let me let me answer this and why people mess up to and then answer that question. The reason why is because a lot of people are coming from a W-2, which what I call a producer mindset, not an owner mindset.
00;05;42;14 - 00;06;02;28
Unknown
The producer mindset is you get paid, they take out taxes and you have money for expenses. So that's what they're used for. I used to, whereas a business owner mindset is you get paid, you have expenses, then you pay your taxes. And so usually on a flip, I'm going to look at being really aggressive with everything that I can.
00;06;02;28 - 00;06;20;15
Unknown
I'm not like my goal with the flip is to make as much money. So naturally not to have that much of my expenses. But what I really want to do is focus on a lot of things that are outside to I want to focus in if I have any, like mentorships I'm part of, so I won't have any outside expenses with vehicles, all those things.
00;06;20;15 - 00;06;37;28
Unknown
But usually on a flip, I'm reserving anywhere from 20 to 25% on my flip. For my taxes. That's what I'm setting aside. And then I'm talking to my tax guy after that flip, or at least once a quarter and saying, hey, how much that 25% do I need to do up? How much do I need to free up?
00;06;38;01 - 00;06;57;16
Unknown
And that's where your accountant comes in and puts out a piece of paper, earlier than January for you. So a lot of it is people just getting out of that producer mindset, that W-2 mindset where you're used to taxes being taken care of for you, then you get money. You got to make sure you're taking care of your expenses, and then you talk to your tax guy before the end of the year.
00;06;57;19 - 00;07;29;21
Unknown
Let's dive into the W-2 mindset real quick so you have a job. You fill out a W-4 or a W9, depending if you're a contractor, you're your W-2 employee and you tell them, you know, how many people you're claiming on a W-4, for example, and that it dictates how much they take from you. So the government takes money, and then everybody gets really excited around taxes and about getting money back.
00;07;29;24 - 00;07;57;21
Unknown
Which is a completely wrong way to think about it from my perspective, because what you're really doing is you're overpaying the government. You're giving the government a 0% interest loan. Now, let me ask you this for everybody listening, does the government give you a 0% interest loan on anything? Not typically. So why would you give the government a 0% interest loan?
00;07;57;23 - 00;08;28;17
Unknown
The beauty of business is we're moving all this money in and out. You make that $60,000 on a flip. You have an opportunity to play the game in the tax code to where instead of giving that money to the government, you get to keep that money. And we don't talk about this enough. Ryan, it's great that I can teach you to make millions of dollars in real estate actively, and then you can get something called real estate professional status, which I'll have Ryan talk about in a second.
00;08;28;20 - 00;08;57;13
Unknown
But it's better when all the money that comes in, you get to keep it. So, Ryan, for those people who are doing this in their business and they're giving the government, they're used to giving the government a loan, they just jumped into the real estate side. They're starting to bring some capital in. What are the strategies that they should be thinking about right now to make sure that they keep their money instead of giving it to the government?
00;08;57;16 - 00;09;23;13
Unknown
For sure. One thing to bring up Adam is a lot of people. Here's my biggest pet peeve in the tax world. You guys have learned some of my pet peeves on this today. My biggest pet peeve in attacks road. Like you said, some people get super giddy about the tax refund. They're like, yeah, that's great. I actually when I present a lot, I bring up this graph of two people who made 100 grand and one person got a three grand refund, one person got a three grand, three Grand balance owed.
00;09;23;15 - 00;09;41;23
Unknown
What they do is everybody strained to only look at refund and balance owed. They're not focusing on what we call total tax. That's all that matters. So total tax is how much you owe for the year based on your income. So a lot of times people fixate like, well, I own a business. Hold ten grand. I'm like, yeah, but your total tax is ten grand.
00;09;41;24 - 00;10;00;22
Unknown
You made 200 K. That's a win. So you don't need to focus on what you owe. You need to focus on your total tax because that's always the way you look at it. Other than that, you're giving out that loan to the IRS. One thing I do bring up on, things you could do now to really help yourself, the IRS, their biggest terminology they use is ordinary, necessary.
00;10;00;22 - 00;10;19;24
Unknown
If you ever get an audit, they say, hey, tell me how that was ordinary, necessary. And then it is our position to have to justify that. The thing that you could do is look at things that you have that are ordinary, necessary, your business and things that are there for your business to really help you elevate it. And the remember, we get that payment then we have our expenses, then we have our tax.
00;10;19;27 - 00;10;37;25
Unknown
So the payment you want to be the max your expenses. You want to be the max. And then down below you want your taxes to be the less the least. So that being said, some things I usually say, especially real estate investors, I'm going to look at taken number one, if I'm just starting out what it took for me to get that first deal right.
00;10;37;25 - 00;10;56;06
Unknown
A lot of times I'm going to networking events, mentorships, traveling, if I'm going out and having to do a lot of advertising, marketing, add spin software, I'm deducting all those things even before I turn $8. The reason why I'm doing that is because these are startup costs. No business in the US just starts without money. That doesn't really exist.
00;10;56;06 - 00;11;11;21
Unknown
If that does exist, somebody DM me and I'm happy to look at it. Me too. Oh yeah. For real. Like it doesn't exist. So the government gives you all these startup expenses? I always say, because I'm a bigger guy, I like to eat, look at a restaurant. They got a lot they do before they serve you a plate of food.
00;11;11;23 - 00;11;30;26
Unknown
So look at all your startup expenses. If you're going pretty heavily, and you're already flipping and going and going hard, there's always these things that I call, a little bit more aggressive deductions for yourself. Now, some people call this loopholes, which I hate. I find that to be pretty corny for lack of a better term. It's like, oh, you found a loophole.
00;11;30;26 - 00;11;46;15
Unknown
No. You just read the tax code. Get off Instagram, I saw tell me a loophole. Tell me really what that means. So if you're anybody on Instagram saying they found a loophole, they didn't find a loophole. They just finally read a book, called our tax code. So with that being said, I always look at my ordinary necessary.
00;11;46;15 - 00;12;03;25
Unknown
Then I look at my aggressive based on where I'm at. Those are things that you look at because if you ever get an IRS audit not to bring that word up, because that's a terrible buzzword. The IRS is always like, hey, prove to us how this ordinary necessary. And that's something that we always stand by. How often do people get audited?
00;12;03;25 - 00;12;22;18
Unknown
Ryan, have you ever went through an audit with anybody? Yeah, yeah. So right now you remember a couple of years ago, I don't they're like, hey, we're going to hire 88,000 new people for the IRS. That's right. Does it nobody even listening to this podcast had any friends who were hired by the IRS? No. Nobody. Really?
00;12;22;21 - 00;12;40;19
Unknown
Yeah. I didn't meet any young kids out of college or, like, you know, when I grew up, I'm like, I work for the IRS. Nobody did. So now a lot of it's automated. And audits are they're not common, but they are more common, now than what they were back when I started, 21 years ago.
00;12;40;21 - 00;12;55;18
Unknown
And the reason why is just because it's what we call correspondence, our audits. A lot of people think that the IRS going to come kick down our door and have a face to face audit. You know, we've helped produce over I mean, at this point, my career, like half a million turns. I've seen one face to face.
00;12;55;20 - 00;13;14;03
Unknown
But the correspondence audits, they they happen, and they're very easy to respond to. As long as you have an accountant who, always has a defendable position, which, when we do a returns, that's always what I'm looking at. It's like, can I defend this person? And if the answer is yes, then we take it. There's a difference in being aggressive and aggressive, but smart.
00;13;14;03 - 00;13;36;16
Unknown
And we're aggressive but smart. But yeah. Seen audits before. Okay. Tell me tell me. So there are people out there who hear you, but they're still a little nervous about it. But Ryan, how do I know? How do I know? Like what? What do I have to do for an audit? What? What information do I have to have to make it defensible?
00;13;36;18 - 00;13;55;28
Unknown
Like, what would that mean? What would that look like? Yeah. So you got to look at audit statistics. I do I can self prepare my own return. I could do my return. Do I do my return. Do I sign it. No, I have one of my colleagues on it. Number one most, most audited returns are self prepared returns.
00;13;56;01 - 00;14;18;05
Unknown
And then number two, most audit returns are sole proprietorships. So for any of y'all out there who are doing a self prepared sole proprietorship, your IRAs, target number one, you have statistically the most audits. So that's one thing I look at. Number one, I for to my I like make sure I have everything prepared and look at stats based on that.
00;14;18;07 - 00;14;35;06
Unknown
There's other dumb things that you'll see people audit it on. People just round up and guess that expenses, like I once saw an audit where a guy brought it in was like, can you help me? And he literally took every expense is $10,000 rounded up. Oh, and I was like, no, man, I can't help you. And another thing is just substantiate what the accountant make your accountant.
00;14;35;06 - 00;14;56;14
Unknown
If your accountant doesn't deal with audits, leave your accountant. Because guess what? They have no skin in the game for you. For every return we say we sign. If you get an IRS letter like I'm on the hook with IRS letter with you, I took the position on that return. So as a client, you're as a just normal person, any good accountant is going to say your responsibility is receipts, which are a pain to track.
00;14;56;16 - 00;15;12;28
Unknown
But that's, that's really one thing that's that you need to have there. And you also need to have justification from your, tax preparer, your CPA, to really do it. So a lot of CPAs, and if they are, it's like, yeah, I'll take it. You said take it. You need to give them a high five and leave their office.
00;15;13;01 - 00;15;32;12
Unknown
What do if you do an audit and you don't have a receipt for something, what do you do then? You know, sometimes you'll just have to be like, okay, well, right now, we're in the realm of electronic receipts, so I could kind of go over a couple things to make that easier. But right now, like, you have to produce receipts.
00;15;32;12 - 00;15;49;15
Unknown
If it's over $100, you'll try to produce those. If not, you can say, hey, I don't have them in. The IRS will actually work with you. What they're mainly going after is like bigger expenses, like when somebody doesn't have a car receipt or a vehicle receipt or somebody's about 16 tractors. Well, you should be able to call a dealership and go get that.
00;15;49;18 - 00;16;04;25
Unknown
And so you just make sure that you are getting those. What I like to do if I'm just starting out and even now I'm old school, y'all, I will. I will admit that right now, I started a business. My first business was when I was 24, and and I've had multiple entities since. This is how I keep my receipts.
00;16;04;27 - 00;16;24;20
Unknown
I have an LLC named Ruger Roux LLC. Somebody in Louisiana is going to be like, there's a fellow Cajun. You're welcome. They'll know where Ruger remains. That means Cajun werewolf. So at least I learned something today. It's a very distinct werewolf. But I have Reguera LLC is one of my LLC names, Ruger Roux LLC. I go open up Ruger LLC at gmail.com.
00;16;24;22 - 00;16;42;15
Unknown
That email is not for anything else, but keeping my receipts. And then on my sidebar I have what I call chart of accounts. Are are categories of expenses. When a receipt comes in for five minutes every month, I drag and drop my receipts in those folders. They're time stamped. I'm good. I can find them by year, and then I'm ready for an audit.
00;16;42;17 - 00;17;04;16
Unknown
Oh, that's a beautiful system that you've got there. I think that's brilliant. I hope that that doesn't go over people's heads. I mean, you just got my brain firing on that. Okay? I want to, I want to shift gears just a little bit. Ryan. So we talked about the audit, and I had mentioned what we can do now to be proactive.
00;17;04;18 - 00;17;29;08
Unknown
And I want to talk about some of those things, like, what are the things, the Augusta rule, the, depreciation. 179 like, what are all these things that people should be doing starting now, leading up to the end of this year to reduce their income, their taxable income down to zero. And do they have to be real estate professional status?
00;17;29;08 - 00;17;51;06
Unknown
What is real estate professional status on? How do you get real estate professional status starts in the core of it really starts from IRS courts case, a court case like everything else does. Basically, the IRS has a limitation on how much passive loss you could take or some real estate losses you could take. If you make over $150,000 on a W-2.
00;17;51;08 - 00;18;10;17
Unknown
So if you make over $150,000 on a W-2, real estate professional status helps you be able to override that and start taking those losses at their maximum. The rules for real estate professional status. This means that you can take the losses if you qualify. Now some people are like, man, that sounds really hard. I'm not a real estate professional.
00;18;10;17 - 00;18;30;28
Unknown
I'm not driving around selling houses. It's not that hard. So let's break it down. First thing is only once. If you're married, only one person needs a qualified, not both. That's a critical thing that people miss out on. They don't understand that. Now that these are two things called material participation, active material just means you're kind of guarding the situation or overseeing it.
00;18;31;01 - 00;18;49;00
Unknown
Active means you're getting your hands dirty, either one. You could qualify material for dissipation of 750 hours. Somebody is going to say, man, that's a lot of hours. It's really not. If you are just doing real estate for 750 hours a year, it's like two hours a day. Yeah, it's not that much. I mean, that's that's a hobby.
00;18;49;00 - 00;19;08;21
Unknown
I, you know, I do scroll sometimes for that when I'm, when I'm trying to fall asleep. With that being said. Yeah. Lee. Yes? There's that kid from high school. Yeah. Well, with that being said on the 750 hours, you could track it. Usually I track mine. Do I just use Calendly? I have all my appointments at Calendly.
00;19;08;23 - 00;19;28;02
Unknown
And let me tell you right now, that's easy. They're all timestamped. I take notes after every appointment. Y'all say, well, that takes a long time. Well, yeah, it does, but that's also adding to my material participation. So there we go. That's an administrative tasks. There are 750 hours. You had to have properties. That's another thing. You can't just be out there spending time with no properties.
00;19;28;05 - 00;19;47;20
Unknown
And the third thing is, really there is that you actually are, you know, actively pursuing real estate. That's something that you're doing. Now, some of y'all, if you're under 150 K on W2 or you're doing real estate full time or your agent or broker, you're gonna easily hit that. Another thing that some people call and you'll you'll see this all over the internet.
00;19;47;20 - 00;20;04;13
Unknown
And it makes me cringe every time when people are like, hey, there's a short term rental loophole, is what they call it. It's like, shut up. It's not a loophole. Years now, finding this out this year like this has been around forever. Don't be don't be a nerd. But all these guys on Instagram call it a loophole.
00;20;04;15 - 00;20;23;21
Unknown
If you have a short term rental, that's only 100 hours. I'm not encouraging anyone to say, hey, go short term rental, but this are all, 100 hours of active participation. This means that you're actively working that rental, that you're cleaning, that you're that you're basically going in there cleaning or you're going in do an actual work to it.
00;20;23;23 - 00;20;41;24
Unknown
And another role in that short term rental is nobody else can have more hours than you. So for some y'all with short term rentals, you're like, hey, my cleaning crew has over 100 hours. Well, how do you solve that? Go get 2 or 3 cleaning crews. Hedge. I know you're so good. So you have to have 100 hours, and nobody else can do more work than you, meaning more hours.
00;20;41;26 - 00;20;59;26
Unknown
So diversify if you're going to go that route. That's a real estate professional status in a nutshell. There and then let's go over some aggressive tax deductions that help real estate individuals. We can start with the basic stuff. You know, y'all could there's a lot of basic things that we'll teach you that we like to teach.
00;20;59;29 - 00;21;23;03
Unknown
Let's get into some nitty gritty because there's a podcast, here today. Another thing, one thing that you're hearing right now everywhere is the Augusta rule. This is IRS section code two eight. Ada. If anybody wants to Google it later, go ahead. But that's the section code. We talked a little bit about rigorous LLC, so we won't go to any of my other weirdly named Cajun LLCs that have.
00;21;23;03 - 00;21;42;28
Unknown
There's also Glenn Yap LLC and Gregory LLC, but we'll just go over rigor Router LLC. Me and my wife, we are both members of that LLC. We're both owners of it. Rick. My wife is a physician's assistant. That's what she does for a living. She knows medical. She tells me to take care of myself, and I'm like, yeah, whatever.
00;21;43;00 - 00;22;00;24
Unknown
And then I tell her to take care of. I'm like, let me teach you about our financials. That she's like, yeah, whatever. So once, once every once in a while, rigorous LLC has a meeting with those members, me and my wife, we legitimately have a meeting because we have kids, and I need to sit down and really talk about the business.
00;22;00;26 - 00;22;31;18
Unknown
Ruger LLC rents a space to have that meeting. What happens is Regrew LLC rents this space, but conveniently, the space is my personal home that is renting. There is a tax roll that if you rent, you can rent your own home for 14 nine consecutive days based on the market rate of, room renting, meaning like a board room or, you know, board room, hotel room, meeting room, whatever type of room.
00;22;31;20 - 00;22;53;23
Unknown
You can rent for 14, nine consecutive days at that rate. And you do not have income tax on the home, on the rent that your personal home is receiving. And you get the tax deduction from the business. So Ruggeri LLC comes in and it pays pays my me personally $800 a day for a meeting room. You times up by 14.
00;22;53;26 - 00;23;11;27
Unknown
I have a lease agreement. Everything in there with myself. I guess. What I have a tax deduction and I had a I had a meeting and I check those boxes I need. That is the Augusta roll. That is amazing. So that's one that's one thing. So that's 800 bucks a day for up to 14 days is what you just told me.
00;23;11;27 - 00;23;41;00
Unknown
It could be more. I'm sure that's my market rate market. Yeah, more or less. Now, I, I'm based out of Salt Lake City, Utah. I do my market rates like, based off the ski season. Yeah. And I think that's an important distinction on the Augusta rule. And I've seen some case law where folks, took advantage of it in a way that the IRS wasn't okay with where they they're charging $5,000 a day for something that's worth $800 a day at max.
00;23;41;00 - 00;24;01;14
Unknown
And of course, then they get audited and then they get in trouble. So you have to really be a good steward and ethical about what the true market rate is. Now, like Ryan said, you know, you can say, hey, ski season is a high season. That's reasonable. During that season, I'm going to use that market rate and you could defend that, but you don't.
00;24;01;14 - 00;24;20;09
Unknown
What you don't want to do is go, hey, my 3 to 1200 square foot house in the Midwest. I'm renting it out for 14 days for five grand a day. Like, that's not going to I was not going to pass the sniff test. You're going to get yourself in trouble. So the Augusta rule is one thing Ryan and B, let's go into like maybe 2 or 3 more of the biggest leverage things that people can do.
00;24;20;09 - 00;24;38;03
Unknown
But before we do that, I want to talk about because we're talking about losing money. And I think this could lose people. You're talking about how do I create expenses and losses in my company, but wait a minute, Adam told me to be profitable and stop listening to these idiots talking about revenue and talk only talk about net profit.
00;24;38;06 - 00;25;06;19
Unknown
What does it mean to take a paper loss? Right. Because we're talking about paper losses. There's like the actual finances and the money. And then there's what goes into the taxes. Yep. Let me yeah, let me tell you, like, I've had some of the poorest people be the richest people. And two ways, one way is I've had people who make millions of dollars, spent every dime they get, and they're like, write off everything.
00;25;06;19 - 00;25;26;05
Unknown
And then I'm like, hey, can you pay this $2,000 tax bill? And they're like, I don't have money. Help me. I'm poor. And I'm like, well, you just bought a Bugatti. Like, I don't know what you're doing. Don't spend money and say it's a tax write off like you never spend money is for tax write offs. That's a rule for me.
00;25;26;07 - 00;25;52;04
Unknown
If you're just going out saying it's a tax write off, it's tax write off, great. You spend money to make money every time. So and that's how I've always ran a business. And paper loss by definition or by accounting definition is basically an expense that you're getting without paying extra money. It is something that you're getting like we'll go over depreciation here in a minute, but paper losses is what's shown up on paper as a loss, when in reality it's not a loss.
00;25;52;07 - 00;26;10;06
Unknown
So what does that mean, Ryan? What does that mean? How can that be true? You're giving me a dichotomy right now. How can I make money but show a loss column? Let's go over depreciation, stuff like that, then. That's all right. Let's do it right. There you go. I don't let me down the hall pretty easily there. He's like take it.
00;26;10;08 - 00;26;34;07
Unknown
All right guys, whenever you buy a house, let's take a single family house. As long as that house. And a lot of times people have this misconception and are like, oh, I'm only going to take it as new. No. Whenever you purchase it and it's new to you, you start depreciation. If you have a common thing I'm seeing right now is I'm seeing a lot of accountants not take depreciation, which blows my mind because the IRS is assuming you're taking it.
00;26;34;07 - 00;27;02;19
Unknown
So you better take it. But whenever you buy a house, you take the purchase price and then you divide it by the livable age of that house, meaning how long it will exist. And the IRS says that's 27.5 years. So if I have a house that's $275,000, I will take $10,000 depreciation. If I'm only collecting $8,000 worth of rent on the house, I have $10,000 appreciation plus my other costs.
00;27;02;21 - 00;27;20;29
Unknown
I am not now at a loss, although I receive rental income. That is how you make a paper loss. There's ways you can accelerate this, where you can stuff it it and you can say, hey, I don't like the 27.5 year old. Let me see. Can I accelerate this appreciation and take it in a 5 to 7 year window?
00;27;21;03 - 00;27;42;08
Unknown
That's another way you do it. The way you do that is you have to have a cost segregation study, and then you take it in five years. So now that $275,000 house you do, you divide it by five years as opposed to ten. And that. Oh, sorry, opposed it 27.5. And that helps you accelerate that loss there and take even more of a paper loss.
00;27;42;10 - 00;27;59;13
Unknown
The thing I do keep in mind, I do not do a cost seg study on a house unless a I'm going to hold the house a little bit longer term and then be it's actually worth it for me. Doing the cost saga. If you're about like an $80,000 house, you might not want to do it necessarily unless you have a portfolio of them.
00;27;59;16 - 00;28;21;10
Unknown
The reason why I say something you want to hold over a longer term is because if you ever sell that house, you sell it at is depreciated value minus the sales price equals your gain. So keep that in mind. So what happens. So I buy this house I or I invest in an apartment or I invest in a real estate asset and I get depreciation.
00;28;21;10 - 00;28;46;25
Unknown
I do a cost seg study or I participate in somebody else's cosmetic study. I get this paper loss is K-1 loss. It comes off of what like does that mean that's my tax bill. So let's say I got a $20,000 loss Ryan, in my tax bills, $20,000 are projected to be $20,000. Does that mean that it takes -20 off my tax bill, or does it take money off my income?
00;28;46;27 - 00;29;11;18
Unknown
It takes money off your income. Okay. Can you talk about the mechanics of that? Because I think there's a lot of confusion about that. So I make $600,000 this year, $1 million this year. My goal is to get my to show that my income goes down to hopefully where it's not taxed, even though I made the money. I'm taking these depreciation, these K-1 losses.
00;29;11;18 - 00;29;33;20
Unknown
And how does that mechanics of that work? Yeah, it goes back to our goals. Total tax is always our goal. Not not refund or balance Sue. So basically if I make 600,000 less we'll do $100,000 for an easy one. All right. Let's say I have $100,000 and then I'm like, all right, I had $20,000 in ordinary business expenses, cell phones, home office, all those things.
00;29;33;23 - 00;29;53;05
Unknown
100,000. Then let's say I take 20,000 ordinary. Now I'm at 80 and is like, man, I need some more juice to squeeze. Right? Let's say I go and I do like I do a conference and that's, let's say $5,000. All in all, let's say ten freezing numbers. So now I'm at 70 and then I'm like, well, I mean, gusts are all my house.
00;29;53;07 - 00;30;07;09
Unknown
And then that's another 15. So now I'm at 55. So this is driving it down. I went from being taxed on 100 k. Now I'm at 55 K. And then let's say man where can I do to get down to 55 k. Oh yeah. By the way I have my two kids and we'll go over that here in a minute.
00;30;07;12 - 00;30;28;03
Unknown
Who are working in my business. I'm paying them $14,000 a year. I'm going to drop that down. I'm going even more over, say, 35 K. Yes, or simple math at that point. So I'm at 35 K that my businesses has made and I'm went from 100 K to 35 and I'm like, man, that's a huge drop. Well, let's say I even want to get a little bit more aggressive and a house I purchase.
00;30;28;03 - 00;30;45;28
Unknown
I'm going to do a cost seg study on, and then I'm taking another 4050 K of depreciation on it. But then I wiped out my whole tax bill plus some. So a lot of times you're going to start lo see what you have and then you're going to deploy aggressive to bring it down. Well that 100 K is now down to zero.
00;30;46;01 - 00;31;07;15
Unknown
And actually it's negative. And guess what. I don't have a tax bill at that point for my business. I've wiped it all out with things I'm already doing without going out and buying a new, you know, new Rolex or buying a new whatever you want to buy or a bunch of suits like I've wiped it out with just organically and things I'm already doing in my day to day life and business.
00;31;07;17 - 00;31;23;09
Unknown
And yes, there's a cost of doing business. And so I went from a hundred K to negative on that to then get rid of my total tax. So those are things you need to keep in mind is there's a you always got to look at what can you really get aggressive on. Start small get aggressive. So that's that's how I chip away at my tax bill every year.
00;31;23;14 - 00;31;48;19
Unknown
Now there's some years naturally where I'm at like a gain and I'm like, well cool. My total tax is still, you know, 15, 20%. I'm fine. There's some years where I have that and that's totally fine. But that's all I'm looking at is my total tax and making sure I'm offsetting that. Yeah. That's, I think just people understanding how the losses show up on your taxes is really, really important.
00;31;48;19 - 00;32;12;18
Unknown
So, you know, in this case, I think a lot of people go, I need to I need write offs. It's a write off. You know, these those those memes or it's a it's a write off. Yeah. It's cracks me up. Well, like, what does that mean? It's a write off. And I think what people need to understand is that if I take a paper loss, a depreciation loss from a cost study, I get AK1 that says you lost 100 grand.
00;32;12;20 - 00;32;31;01
Unknown
That doesn't take 100 grand off my tax bill. That takes 100 grand off my income and effectively what that does is it changes your your marginal or effective tax rate. So I was maybe made a bunch of money and I was being taxed at a 30% or 32%. Now I just bought myself down to 22 and then 12 and then hopefully nothing.
00;32;31;01 - 00;32;49;11
Unknown
Right. And is that is that somewhat accurate? That's my goal. Like I've been in investing your real estate for 16, you know, 15 years now. I had to do the math on how old I was. 15 years now I've been investing. And if you ask me, I've never made any money on real estate. Have I put money in my pocket?
00;32;49;11 - 00;33;09;20
Unknown
Yes. Have I put money in the government's pocket? No. And that's where paper loss comes into play. Yeah. So I'm doing everything I can do to offset my taxable income. Possibly. I've also ran large CPA firms, and, you know, people are like, well, isn't that a hobby? Isn't that a hobby? No, a hobby is when you're not bringing in any revenue.
00;33;09;21 - 00;33;35;05
Unknown
There's a difference in revenue and there's a difference in net income. Revenue is your top line or your gross income. That's why the IRS is like, hey, that person's got a hobby. They brought in a million net income doesn't matter as much. So as long as you have a profit motive, an intent, you're not a hobbyist and you're allowed to have a paper loss if it is legitimate and if it is something that you're actually taking.
00;33;35;08 - 00;33;54;08
Unknown
Now, somebody on this podcast came out right, and told me I wouldn't pay any money on income tax. That's not true. Are you sorry? You could be aggressive. Be smart. Ryan, here's something that I'm doing right now. So I have, I have three legs, three stools to my real estate empire. Stool. One is active income. Turning properties over.
00;33;54;08 - 00;34;15;21
Unknown
I'm making fast cash, 50, $60,000 checks. Stool two is. I'm building wealth through rentals. I'm buying those 30 year mortgages. Those 30 are DSR mortgages. And I can hold these for a long period of time where somebody else is paying the debt, and it's appreciating in the market. And then stool three is what I call my mid-range game and my mid-range game.
00;34;15;23 - 00;34;35;18
Unknown
This is where I get the most of my tax benefit, and that's when I'm putting my money into apartment buildings, either as a general partner who's taking the deal down myself, or I'm investing in other people's money. And like, for example, right now, Bill and I just partnered to invest with, on a deal that Jay Scott put together.
00;34;35;18 - 00;34;59;18
Unknown
Jay Scott, the, you know, OG flipper from Biggerpockets, wrote a bunch of books. So Jay's a friend of ours, and, Jay put together an amazing deal down in Texas. That is a new construction. This deal is interesting because, it's a three year player. I want to talk about this play because it matters. There are tax benefits in it, but they're short term tax benefits because.
00;34;59;20 - 00;35;19;02
Unknown
And year three or beginning of year four when it sells that depreciation that right off that I claim gets recaptured. And I do want to talk about that in a second. So why am I doing this. Deal number one I believe in the deal. Number two, it's got like an insanely good debt that I've never seen before, which is called the HUD.
00;35;19;02 - 00;35;39;09
Unknown
220 14D loan. It's a 40 year fixed rate loan on an apartment. Like literally the most insane thing. And it's really, really hard to get. And they have significantly excruciating underwriting, which tells you that the HUD team that only does two of these per market is willing to bet on this apartment. It's a good one. So what happens with this?
00;35;39;10 - 00;35;56;03
Unknown
We're going to buy this thing. We already own the land. We're going to build this thing. We're going to, build it in year one. We're going to start to fill it up as it comes online throughout year, to stabilize it and sell it in the end of year three, beginning of year four. What does that do for me?
00;35;56;05 - 00;36;15;15
Unknown
Does a couple things. Number one, I get a normal investment return. So I take my cash and I invest it in this property. So I'll probably put 50 or 100 grand in it. So I put 50 grand in this property and I'll get I'll get to participate in the 100% bonus depreciation. But it won't be in 2026 because there's nothing there.
00;36;15;15 - 00;36;41;03
Unknown
They're building it. It will be however in 27 and 28. So I'm I'm so proactive that I'm going who I'm going to plant the seed in my backyard. That's going to make me money over three years, a 1.6 x return over three years. And then I'm going to also get these write offs in 27 and 28 because I think to myself, am I going to make less money over the next few years or more money?
00;36;41;10 - 00;37;06;08
Unknown
I'm going to make more money every year. I'm in my best. I'm 40 years old, like I'm in my prime in terms of working and earning time, right? So like every year I'm trying to make more and more and more and I'm trying to plant those seeds and all these different investment places. But while I'm doing that, I'm using this strategy that allows me to invest in this apartment building and even bring my friends and family in it with me, and we're all going to get to make money together.
00;37;06;08 - 00;37;34;09
Unknown
We're going to get this paper losses, K1 losses, depreciation. So I just wanted to like, mention like that's a real tangible strategy that I'm literally using today. But what we didn't talk about is the we touched on it, but talk about depreciation recapture for a second. Yeah. Which by the way I mean Adam, those deals are always like for me as someone who is I call them out.
00;37;34;12 - 00;37;52;15
Unknown
Like I'm getting old and tired y'all. I'm kidding. I'm really not. But I'm 41. This is also in my prime. But for me, as far as a real estate like, single family burns a lot of people out pretty quickly. And I get that. But for me, I'm always like, man, I might have a next 2 or 3 good years.
00;37;52;15 - 00;38;15;24
Unknown
I know my projections. It's like I'm always going to go shove money in a deal like that, because I'm working offset things ahead of time that comes to that proactive planning. Recapturing depreciation. I will give a real life example. During Covid, we're in this little small town in Utah, and there's an office building across from me, and a guy was call, but he's like, hey, I'm just going to get rid of this building.
00;38;15;24 - 00;38;35;14
Unknown
And yes, we did it. And I was like, all right, man, that sounds awesome. Yeah, it's like you want to sell it. And he's like, yeah, I'll sell it. And then he it was all in like 480 K. And so I was like, why no, there's no buildings, commercial buildings in this area. Number two, I know this is the most expensive zip code in all Utah.
00;38;35;17 - 00;38;53;14
Unknown
That's a no brainer. So I went and bought the building, did a cost seg study on it. Personally, I was like, hey, we're going to hold this long term. Did a cost seg, wiped out a lot of my tax bill on it. Will you say 500 K for rounding up numbers? I end up taking 200 k worth of depreciation.
00;38;53;16 - 00;39;10;26
Unknown
And two years I'm cruising. I'm like, hey, I got this for five years. I'm going to take hundred. K worked in appreciation for five years. That third year, a guy comes in office, he says, hey, I need to get out of the house. I've been working dairy covered. I just won by the office building. And we're like, nah, man, we're we're good.
00;39;10;26 - 00;39;29;06
Unknown
We got a good deal on it. We don't want to sell it. And then he's like, you got to take cash. And I was like, well, he doesn't take cash. Cash skiing yet. I, yeah, you got cash? Where does this cash? That guy literally comes in and buys it for cash for 700 K, so everybody's like, man, that's a good deal.
00;39;29;08 - 00;39;52;29
Unknown
We're going to get 500 and 702 hundred K. Gain on nothing. Didn't even touch a property. Never did anything to it. Yes. Circumstantial gain is what that one was. So a lot of times people are like, well, yeah, Ryan, you made 200 K. That's awesome. That's all your tax on 200 K. Know what I am? Tax on is already took 200 K worked the depreciation.
00;39;53;04 - 00;40;12;20
Unknown
So I'm down to 300 K. Then it's at 700 I'm actually a 400 k gain. So that is what you call the depreciation recapture as you out. This is going down in value and you still sell it at a premium. You go from that depreciated value all the way up to that cost. You sold it as. So there.
00;40;12;20 - 00;40;32;05
Unknown
Yeah I mean I got 400 K on the still you know a lot of times people be like oh man, that's a lot of taxes for me. I'm like, no, I got that depreciation benefit. Sure came back to bite me. I still made some gain. But then also too, there's a side of me too. It's like, well, that's a long term capital gain, which is only 20%, I suppose my ordinary income if I held it under a year.
00;40;32;05 - 00;40;50;25
Unknown
So there's things there I think about. But that's a real life example of a depreciation recapture. Yeah. And I think, I think a lot of people like will go, well I'm just going to save taxes this year and then pay them all, but you're not paying them all back. Yeah. Like depreciation captures mean you're adding like a commensurate amount every year.
00;40;51;03 - 00;41;08;09
Unknown
And here's the other thing too about the game. This is a game. It's called the tax game. It's literally the rules of the game. It's in the tax code. It's like 10,000 plus pages. Don't recommend reading it. Just get an expert who's already read it, a nerd like Ryan and me, because we like that kind of stuff. Well, our own loopholes.
00;41;08;09 - 00;41;27;05
Unknown
If it makes everybody feel better. I'm kidding. Yeah. So, the game is every year I know I'm going to make money. How do I keep and preserve my money? And the more money you make, and the less you pay in taxes, the more money you keep. The more opportunities you get, the more opportunities you open up, the more tools open up to you.
00;41;27;05 - 00;41;49;20
Unknown
As these tools open up to you, you start to not just execute money making activities. You start to do wealth preservation activities. Now the game is, oh, I already know how to make money. How do I keep it all? How do I keep it and keep it growing? And a big the biggest, the biggest expense in your business isn't marketing and it isn't people.
00;41;49;20 - 00;42;18;25
Unknown
It's your tax bill. So when you can master that, your company, your business, your lifestyle can all be supercharged. Okay, Ryan, this has been incredible. Can you talk to me a little bit about the advanced tax group team? For sure. All right. So let me go over this. Why? I started when I was I have to go back a little bit when I, when I was a kid, I wasn't that smart.
00;42;18;25 - 00;42;36;22
Unknown
Believe it or not. Anybody see me? Right. Well, this got. Believe it or not, I consider myself that smart. I'm smart in a few things. While I was a kid, I had a teacher in my elementary school, and I was struggling reading, and she, started giving me baseball cards to help me read. She is the meanest teacher ever, but she helped me because she knew I like baseball.
00;42;36;22 - 00;43;00;20
Unknown
So she gave me baseball cards and I would always memorize the stats. That's why I liked on the back. And so I'm like, here's my batting average work. So I've always been a nerd for math. Whenever I started, whenever I started, I was going to college, getting an accounting degree, accounting and finance. I started working for an old school firm, and my first project was they gave me a 50 page, a 50 page tax organizer to send out to clients to mail out.
00;43;00;23 - 00;43;19;01
Unknown
And I was like, there's got to be a better way. So for me, since I was really young, starting in the accounting world, I grew a firm to thousands of, you know, thousands of tax returns and real estate. One of my things was was like, there has to be a simpler way for people to digest and learn and that's been our like kind of core focus of ATG.
00;43;19;07 - 00;43;42;16
Unknown
We try to take everything holistically. We try to meet you where you're at and the accounting world. My biggest issue right now is your account. You'll go into your accountant here in March or April and they'll tell you what you can't do. They'll say, you can't do that. I always try to empower my clientele and everyone here who is a staff member of mine, to tell people what they can do.
00;43;42;19 - 00;43;58;00
Unknown
So I have a mixture of accountants here who are people who tell you what you can do, who want to tell you what you can do. I don't do a lot since I've been in accounting role for so long. They first try to dress me up in a button down shirt and a pair of khakis. And then I've learned about how corporate accounting was.
00;43;58;03 - 00;44;14;19
Unknown
One thing I really hated was this firm called billable hours. Really hated it. But it's where I. It's hard to a client. And I would build them six, $700 an hour. You start to them, you can sit there and talk to me about your dog or cat or whatever you wanted to, but that clock was ticking for money.
00;44;14;22 - 00;44;29;22
Unknown
I'd never thought that was fair for a client. I never thought it was fair. That was the thing that a lot of these larger accounting firms have is billable hours. I do not do that at all. Anytime you call me with questions, need plant, need help with strategy or consulting. My staff does not do billable hours.
00;44;29;24 - 00;44;50;07
Unknown
We we are here to help you. Because really, I pay attention more as a firm to client retention than I do about client acquisition. I only care about you saying we mean long term so we can grow with you, not just stay stagnant. And that's also another thing that people ran across. A lot of y'all who've been in real estate for a while, your accountant didn't grow with you.
00;44;50;07 - 00;45;13;07
Unknown
You grew. They didn't grow with you. And so that's a little bit about us. We help people with their taxes, tax planning, strategy, unlimited consulting also respond to the IRS letters. If we do the return, entity formation. We didn't I mean, I help people at the entity and asset protection, and we also have a team full of lawyers that do trust, so that's a little bit about us.
00;45;13;07 - 00;45;44;14
Unknown
We've been around for a while. We take a holistic, client centered approach. Any opposed? Oppose anything else? Yeah. And, you know, in seventh Day or flipping, you know, you're in these communities is masterminds, coaching programs, you name it. There's a lot of service providers, people who do data, people who do marketing, people do taxes. People do like we only let people in who are value matches that we do life with that we personally use.
00;45;44;14 - 00;46;10;13
Unknown
So Ryan is my CPA. Like, Ryan does my stuff, my literal personal stuff. I literally write for. We got this call sent Ryan about, I don't know, 10 or 11 ladies. I'm like, cool, Ryan, I need you to do all these LLCs for me and untangle my entire mess and, these guys have been with our community and helping people in our community for over the past year.
00;46;10;20 - 00;46;31;17
Unknown
And I have had members come to me that I'll leave anonymous tell me that, dude, these guys are insane. They saved me $30,000. They found a bunch of mistakes. They fixed this and my taxes. And to me that means everything. Like, we value people who do what they say they're going to do. We value people who are values, matches.
00;46;31;17 - 00;46;59;04
Unknown
And of course, like I got into business and wanted to become a multi-millionaire so that I didn't have to wear a suit and tie. And Ryan doesn't wear a suit and tie. He's our people. It doesn't mean he doesn't have the skills or he's not a high level CPA. He can do literally anything and mostly better than people with suits and ties, because those people are the ones that are saying, here's why you can't do something, rather than let's talk about how we can structure it to do it.
00;46;59;07 - 00;47;18;22
Unknown
And that's what I love about advanced tax Group. And the people in our community rave about them just because they're so, there's so client friendly. Like they genuinely care about making sure, you're getting a tailored response and a tailored product for what you need. And we all need something different. We're all in a different place in our business.
00;47;18;22 - 00;47;38;06
Unknown
So, Ryan, I just want to say thanks, man. And I know you guys are going to come out to our tropical mastermind in Cancun with all of our people, and we're excited to have you guys. Yeah. Thank you so much for having us today. And, yeah, I'm excited for Cancun. We love having you guys and we love some bigger ism for everybody there.
00;47;38;09 - 00;48;04;11
Unknown
If you if you want to beat your chest, talk about your deal, count and be the biggest player in the room and you don't operate with humility in abundance. This aim for you like, I don't want you here and there are other places where you will probably be a better fit. We want people who have a whole life concept care about their family, their faith, their health, their fitness, their business.
00;48;04;11 - 00;48;24;02
Unknown
They're good operators, and they're focused on being an effective operator and making an impact in the world. Like those are the people who come into our world. And that's not like a tagline. That's what it is. So, if you're thinking about is this community, you've been listening this podcast, is this like the place I want to be?
00;48;24;02 - 00;48;41;26
Unknown
If you meet that, if you don't meet the description I just said or you meet the first description I said, it's not for you. If you if you meet it, then it's for you. So thanks for tuning in to this episode. Ryan is my CPA. I normally it's uncommon for people to share their personal resources with you like they don't want.
00;48;41;28 - 00;49;01;06
Unknown
If I give you Ryan and Ryan gets a thousand clients, then maybe my service goes down. But that's a fixed mindset. That scarcity like you guys can use my CPA. I will give you, the real problem. Sure, there will be a link to advanced Tax Group in the show notes. You can literally talk to those guys and use the same exact resources I use.
00;49;01;06 - 00;49;08;26
Unknown
There's no gatekeeping. So excited. Another day, another podcast. I appreciate you guys listening. And I can't wait to see you on the next one.
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