Advanced Tax Saving Strategies feat. Keystone CPA | Aspen Funds
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Advanced Tax Saving Strategies feat. Keystone CPA

Experts Amanda Han and Matt MacFarland of Keystone CPA discuss how investors can utilize real estate and other strategies to reduce tax burdens, optimize returns and increase potential gains from the IRS.

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“How Passive Investments Can Save You Taxes”

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Introduction and Podcast Overview

Ben Fraser: Hello, future billionaires. Welcome back to another episode of the Invest Like a Billionaire podcast. Got a very good show for you today. 

Understanding Tax Benefits in Real Estate Investments

Ben Fraser: We’re talking about everyone’s favorite topic, which is taxes or more precisely how to save money on taxes by investing in real estate and other cool strategies. So we brought on some experts in real estate counting and really helped a lot of people save lots of money.

But even people that have been working with, quote unquote, real estate CPAs for many years realizing, wow, we’re actually not taking advantage of some of these strategies that we should be in. So lots of kinds of in the weeds, tactical ideas and strategies. But again, this is not tax advice, so you gotta go consult a tax advisor.

The Importance of Tax Advisors in Investment Strategy

Ben Fraser: But the point here is you need to have a tax advisor helping you manage your own situation, your investing strategy, the different types of income you’re generating. And really, focus on generating long term wealth that is tax deferred or tax free. And so this is something everyone should be leveling up in their knowledge and learning how to do this better and better, myself included.

So hopefully you enjoyed this episode. I’m sure you get a lot of nuggets out of it. And please, if you are enjoying this podcast, share with a friend, leave a review, subscribe. We appreciate all that. Helps us get the word out and helps us continue to make this podcast worth doing and getting in front of more people.

So thanks so much. Enjoy this episode. 

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Welcome back to another episode of the Invest Like a Billionaire podcast. I’m your host, Ben Fraser. 

Introduction to the Guest Speakers

Ben Fraser: And today we have two guests that I’m very excited to have on the show, Amanda Han and Matt MacFarland of Keystone CPA.

Matt and Amanda, thanks so much for joining us on the podcast. 

Matt MacFarland: Yeah, thanks for having us, Ben. Looking forward to it. 

Discussion on Tax Implications in Real Estate Investments

Ben Fraser: Yeah, so we’re going to be talking about everyone’s favorite subject. As we sit right now, that’s right, at the end of 2023, it’s probably released in 2024. bUt everyone’s starting to think now, Oh yeah, I’m going to have to send the IRS some money here soon.

Got to be thinking about how to make some changes, but hopefully you might actually be getting a check back from the IRS. You never know. But a lot wanted to bring you guys on and this is a big part of wealth building, right? It’s understanding how taxes impact the investment strategies and the returns that you’re making and how those are treated differently.

So give us kind of a rundown, just some things that you’re thinking about right now as investors. And again, most of our investors are passive investors, either investing in syndications or investing into, to one off deals or different types of funds. But maybe you don’t have a holistic kind of tax strategy or picture about how they’re investing, right?

And so they get maybe some surprises and first just give, lay the groundwork of what are the things that investors should be thinking about? And we all hear about it, real estate is such a great tax friendly investment vehicle. And just give us a rundown of some of these things.

Understanding Passive Investments and Tax Benefits

Amanda Han: I think one really important thing to understand is that even as passive investors, There are tax benefits that are available to us. And unfortunately there are a lot of CPAs tax advisors who tell clients not to invest passively in real estate. Because there are no tax benefits.

And I think it’s important to understand, when somebody says that hey, there’s no tax benefits to being a passive investor, that tax advisor is taking a very limited look. All they’re saying is that, hey, you might get depreciation and expenses and things like that from your real estate.

Passive deals, but you’re not able to use it to offset taxes from your W two income, right? And although that’s true, I think what they’re missing out on is the fact that You are now generating additional income, in the form of cash flow, right from your deals and not paying taxes on that.

And so when you take a look at everything holistically, it’s really important to understand that although you might not be offsetting taxes from W 2 income with your syndication real estate, you absolutely are generating more income while not increasing your taxes. And so that in itself, I would say is a tax benefit.

And the best part of that is anybody can utilize it, whether I have one syndication investment or 20 syndication. 

Matt MacFarland: And the key there is you’re putting your money to work for you, right? You’re, people are working the W2 jobs or investing passively, but they’re leveraging that money and all that work they’ve done to grow their wealth through somebody else’s expertise, which is awesome, right?

Ben Fraser: So if I invested in syndication, I send money to a sponsor, they’re operating the assets, it’s a multi family asset. And they send out a tax return as an owner of that investment in the syndication. I’m a part equity owner. I get a K one that shows my ownership, my income expenses and any tax losses.

And then I can use those on my personal tax return against other passive income. So we have different buckets of income that we need to understand as investors. And a lot of people, if they are. high W 2 income earners, they’re generating a lot of W 2 earned income. That is in a different category, different bucket.

So you can’t take the losses against those, but any other passive in income you can take it against that. So can you give us just a simple breakdown of what are some of the main big categories of the types of income that can be generated and where the deductions from real estate can, because I know we have passive income.

We have capital gains, we have earned income. Can you give us a little breakdown of that? 

Amanda Han: Yeah, I think it’s important to understand because like you said we are passive investors and we’ll use the word passive assuming this particular investor or their spouse otherwise does not qualify as a real estate profession which we can cover a little bit later.

So we’ll just assume it’s like 1 percent or married people both working high, W2 jobs or running a business that’s not real estate related. The question we get all the time then is, okay what type of income do these passive losses help to offset? And passive income actually comes in a couple of different forms.

You mentioned capital gains earlier. Absolutely. There are types of capital gains that could be considered passive. An example would be the sale of rental property. And that’s true regardless of whether it’s the sale of your own rental property on Main Street. Or sell off a real estate property from a syndication, right?

So if I invested in a syndicate number one with Ben, that has a huge gain because we exited the property. I have a different investment with Ben’s other syndication that generates a loss on the K1. What that means is the pay one loss on one will be able to offset the gain on the other real estate property in terms of capital gains.

So that’s just one example of the types of capital gains that could be offset but really important to distinguish even, within capital gains, there are differences. So if I were instead to sell Tesla or Apple stock for capital gains, then typically my rental losses would not offset.

That type of capital gain and it’s confusing to people because they’re both called capital gains, right? It’s just one from real estate, the others from stock. 

Ben Fraser: Is it because of the nature of passive versus active or it’s just a different type of asset that differentiates those? 

Matt MacFarland: Yeah it’s more of the activity, right?

So that, you’re not, someone’s buying Tesla and Apple stock, you’re not controlling anything there, obviously, it’s just a, it’s almost what would they call it? Portfolio. But you buy a rental property, invest in a syndication that has rental properties, that’s a different asset class.

That’s yeah. And that’s where they say, yeah, if you’re generating capital gains from selling that underlying asset, then that can be considered passive income. So that can be huge when, from a timing perspective, if you’ve got somebody investing in a syndicate, a couple new syndications, they’re expecting some losses from appreciation, cost seg.

But in the same year, they got a K 1 and sold their assets and they’re cashing out. Now they got back on that one. Those two can offset each other in such a way that they don’t have to pay, and may not have to pay any taxes on that sale. 

Amanda Han: Yeah. We see this a lot with some of our clients who’ve held real estate for many years.

A lot of people who are nearing retirement age are already retiring and they have their real estate, but they want to exit the properties, right? They no longer want to manage it. So they want to be something more passive. But for a lot of our clients they just love real estate.

They’re not about to sell and put that money into the stock market for the first time when they’re in their sixties or seventies. But at the same time, they don’t want a 1031 exchange into something else. That’s bigger than they have to manage. And so this works out pretty well too, where it’s okay, I’m selling my own properties for capital gains, and I’m going to just.

Leverage other people’s time now by putting it into syndications and be able to have an offset strategy that way so far we’re talking about real estate, right? Your own versus a syndication versus multiple syndications. We also see a huge opportunity with respect to using passive losses.

On other business investments too. A great example is you might be an orthopedic doctor who invests in some imaging centers or surgery centers, right? That’s where you’re not in control. You’re not like the full ownership of it. But if you’re generating passive income from some of those business investments, then oftentimes rental losses from syndications can offset those as well with respect to overall taxes.

So again, apps, they’ll not offset W2 income, but absolutely a huge tax benefit for someone that is a passive investor. 

Matt MacFarland: Yeah. As an example, we had a client come to us a couple of years ago that had a similar profile. He was, physician, medical, some, he was making like a million dollars of passive income from this.

Other surgery centers he was getting, so for him it made natural sense, he wanted to invest in real estate, and no, you don’t need to be a real estate, for your first million dollars of income, you don’t need to be a real estate professional you can just invest passively, find the good deals, get those losses those first couple of years, and Save taxes on a million dollars of income.

It was obviously a big win. 

Ben Fraser: Yeah, no, I’m so glad you brought that up. There’s so many different strategies and I think, in my excitement to get into all the details, I love this stuff. Yeah. I think taking a step back it’s so important. Understand what’s available and you said early on in your first comment that a lot of CPAs, if they’re not, understanding some of these nuances of the tax code and really going at it from a strategy standpoint, not just I’m going to do your tax return and check the boxes, but let’s actually, shift the way that you’re investing or here’s some things that you could be doing to, improve your tax situation.

Having a strategy in place and knowing what’s available is so important, right? I see so many people, myself included, a few years ago, where you just hear some things. Oh, real estate’s great for tax benefits. You start investing, but you don’t understand some of the nuances of it, right?

And maybe you don’t even need to be a real estate professional in that scenario, which, you know, which I’d love to get into in a minute. But, Talk a little bit about why having a tax strategy is so important, and maybe some examples of case studies that you guys have worked with to where, it’s that you have been able to just rearrange a few things and make a pretty big difference.

Amanda Han: Yeah, there’s so many different things to look at, and every investor, every taxpayer is very different. You might both work at Google but, maybe similar amounts of money, but your tax strategies might be very different. Maybe, One person has a spouse who could do real estate and also owns another rental property.

The other person just purely has a syndication that’s single, right? So I think the benefit of planning is having a tax advisor look at what you have going on. And even more importantly, what you plan to do in the coming one to three years and really mapping out the plan on okay, here’s what you’re planning to do in real estate.

Is that really the best way to do it, or can we make some small tweaks so that you can maximize your tax savings from it? In that example that Matt just talked about with the client who had a huge amount of passive income, what was really interesting was, I think in the tax world, when you hear the word passive income, passive loss, it almost seems like a bad word.

So for a lot of CPAs, the natural tendency is to say, Let’s not have it be passive, right? Let’s call it active. And I think, that’s an example of where we see this, the last CPAPs just automatically try to classify some income as active when with the right analysis, like in that example, we said, Hey, he’s actually passive, right?

In these other investments that he’s in. So let’s accurately classify them as passive on the return so that he can use all these passive losses instead of just having that cookie cutter, Hey, everything that I can, I’m going to try to call it active. Sometimes it’s detrimental. 

Matt MacFarland: And I think too, to your point earlier it’s, we’re talking late December, this might air January early next year.

So from a planning perspective that’s a great time of year to start planning, right? Because it’s, the more, the earlier you do, the more options are going to be available to you, right? It’s a lot harder when you come to your CPA in April or October, talking about last year. At that point in time, all they’re looking at is, let’s file your return with the correct numbers, put it on the right forms, based on what has happened already, right?

But now we want to talk about what’s going to happen going forward. What are you going to do? What’s your goals this year? What are you looking to do? Because then we can tweak things. There’s a lot more options available, so I think it’s a great time for people to start thinking about that for sure.

Ben Fraser: Yeah, absolutely. And it’s a little hard to try to maneuver within the tax code when you’ve already locked in all your income for that year and you’re looking backwards. But looking forward, I think you can get a sense of what I am projecting my income to be and maybe different categories of income.

And then how do I potentially invest accordingly to create the losses that I need to shield some of that. So let’s talk a little bit about, cause. This is a subject that we’ve talked a lot about on our podcast and, I think there’s still some mystery around, the real estate professional status and, so I was just talking with a friend the other day, he’s making half a million dollars in W 2 income, has a great job, great career, his wife stayed at home, their kids are getting a little bit older, so they’re going to be in school now, she’s going to have a little more time, and I’m thinking, you’re paying me.

And in taxes at that income threshold, it’s all W 2, I’m like, you should talk to your wife about becoming a real estate professional and what that looks like. But talk a little bit about what that means and, where are the kind of, do’s and don’ts and things you have to do.

The Concept of Real Estate Professional Status

Ben Fraser: You can hit some of the rules, but also some of the strategies that maybe you advise folks in that situation to consider, right? Because from my standpoint, if you can, become a real estate professional, even general income, or even not, even if it’s neutral, if you can now, as a married filing jointly, tax return, get all of your income unshielded from other losses that you’re generating.

Then that can be a pretty big impact, but you still have to have losses being generated to, to use in that scenario. So in this scenario, this individual has not made many investments into real estate. So it’s, it might not be a huge impact now, but moving forward and kind of tax planning, so talk about that a little bit. I think this is a really helpful or interesting topic. Yeah. 

Amanda Han: Yeah. For real estate professionals. I guess we’ll start with the rules first, right? If you’re someone of higher income means 150, 000 or more of income in total. That means your rental losses, should you have any, from tax strategies are considered passive.

And that’s what we’re talking about earlier. If you get passive losses, it doesn’t offset W 2 income, it only offsets other passive income. However, there’s a loophole around that, which is the real estate professional loophole. What that means is if you or your spouse is a real estate professional, then your rental losses doesn’t just offset passive income, but it can also be used to offset W 2 income as well.

And so that’s the benefit. So now the question becomes, what is a real estate professional? And contrary to popular belief, you don’t have to be licensed in real estate. You don’t have to become a realtor, start showing houses on the weekends. But there are three roles you have to meet in order to be a real estate professional.

So in your friend’s example we’ll use the spouse. Because that’s the more likely person. So the first rule is you have to spend more time in real estate than your job. So when I say the spouse in this scenario, because they don’t have a job versus if it was the husband, let’s say he would have had to have more time in real estate than his job, which becomes almost impossible.

Matt MacFarland: Or if the spouse maybe is working part time, maybe they’re working X number of hours a year. You need to have more time in real estate than that job, right? 

Amanda Han: Yeah. So that’s the first rule. Second rule is you have to have at least 750 hours in real estate. So this would be the relevant one for someone who doesn’t have a job.

So if you don’t have a job, you still have to have at least 750 hours. And then the third rule is material participation. That means typically at least 500 hours. Of hands on work with respect to your rental property. Hands on doesn’t mean you have to be like swinging a hammer, right? But it means things like you’re doing on a day to day basis for the property, managing it, dealing with contractors, all that kind of stuff.

And again, what’s the benefit of all this? The benefit is if one of you or your spouse, meets all three of these rules, then to the extent you have rental losses, you can use it to offset. Not just rental income, but also taxes from your W 2 income as well. And so this is where you’ll see people who say I made 500, 000 last year and I paid no tax, odds are they’re using this strategy along with a couple of other things.

Yeah, we also have clients whose spouse is I don’t know, kids are growing up. I don’t know if I want to be a real estate professional. That sounds really scary. I don’t know if I want to do it. The first step I think for anyone is to look at the numbers, right? What do the numbers tell you?

It could be a situation where it doesn’t benefit them at all because they don’t own any real estate. But it also could be a scenario where we’re like, Hey, if you buy a couple of local properties that you can self manage, you also throw some money into syndication investments. Then maybe you’ll save 200, 000 in taxes, then maybe that’s a different conversation with your spouse. Cause they’re like, I would love to pay 200, 000 less in taxes. 

Ben Fraser: Yeah, absolutely. And there’s another scenario I had with a friend, both spouses were working and they started talking with the CPA and started running the numbers to your point. And they realize, this one spouse making a great income, but they actually realize based on the total income they’re making.

And if one of them took a step back, quit their job and actually became a real estate professional and they had a few rentals already, but they’re going to buy a couple more, they would actually keep more income, after taxes with actually stepping away from the job because of the amount of savings they were making.

So this is this, the thing that people. Don’t understand, right? Because if you’re in the high income bracket, you’re paying anywhere, what state you live in, 35, 40, 50%, tax rates all in. And that’s if you can erase all of that, you just gained another income, actually, right?

So that’s the power of evaluating this. So this scenario with my friends, the first one I was talking about, they already own a rental. And so I said, Hey, save up and build, buy another one or two. And then all of a sudden it gets pretty simple to or not simple, but it’s to meet the minimum requirements is a lot simpler.

What are the things that you said, not becoming an A realtor, but that is an option too, right? If you do become a licensed real estate agent, that can help towards some hours there. And what are some other kinds of ways? Buying single family rental properties is one approach.

Probably the most common approach, but what about Airbnbs? What about becoming a realtor? What other kinds of strategies have you seen that can work with that? 

Matt MacFarland: Yeah. In terms of, the hours or with respect to real estate professionals and it’s really applicable as people that have long term rental properties.

We can talk about short term rentals too, but in terms of those hours, yeah, being a realtor and having hours doing that as a 1099 person can count towards those 750 hours and and the more time in real estate than your other job test anything in real estate really can count towards that.

So if you’re, I don’t know, you’re fixing your fix and flip, you’re wholesaling, you’re a property manager for maybe other people’s properties, all that kind of real estate time can count towards that. Okay. Yeah, and other things like we have a lot of clients who are investing in short term rentals, so they are maybe, client profile might be, one spouse working full time, maybe it’s both spouses working full time and they’re not, they’re not going to be able to quit their job or, cut back half to half time and do real estate professional.

So for them, they’re looking at the short term rental market where the strategy can be similar to where you’re using, cost, depreciation. Maybe cost segregation. So you’re trying to create losses on paper for your rental properties from your short term rentals. Use those losses to offset other income.

And the threshold, it’s a little bit easier for me with respect to short term rentals. 

Ben Fraser: Yeah. Are there any restrictions with short term rentals? Because I’ve heard that it’s viewed more as an operating business than real estate activities. Is there some nuance to how that is or is it just a difference of opinions within the accounting world?

Amanda Han: Yeah. Yeah. We call it the short term rental loophole, and the reason for that is if you invest in short term rentals and you create losses on those properties, you don’t have to be a real estate professional, and you can potentially use those losses against W 2 income as long as you can meet material participation.

If you meet material participation hours and you could still be working your W 2, that would be a side hustle, and you can use it against that. And the reason for that is not necessarily operating business, but it’s because of short term rentals, the IRS does not deem it as a rental property.

And so for that purpose, because it’s not a rental property, then you don’t have to be a real estate professional. So this is where we’re like, we see people who are like, Hey, I have. A couple of short term rentals. I spent at least 500 hours on these properties. Now I’ve met material participation and I can just use it to offset W 2A.

Matt MacFarland: Now it changes from being a passive loss to a non passive loss. Yeah. 

Amanda Han: So really great for high income earners, business owners who really just want to do real estate, as a side hustle. And this is an area I think we see probably has become one of the most common tax mistake areas we see just because.

A lot of CPAs don’t really understand, not, most CPAs don’t really understand real estate in general, right? And for those who do, a short term rental loophole is like within that niche. It’s like another small area that you have to go down a step further. And so this is one where all the time people tell us like, Oh I bought all these short term rentals, but my CPA says I can’t use it because I’m not a real estate professional. So that’s a really important key takeaway is that you don’t have to be a real estate professional when we’re talking specifically about short term rentals. 

Ben Fraser: But if, depending on how much time you are spending, you hit the minimum thresholds, you actually could be a real estate professional, you’re saying by managing those rentals. Is that right? 

Amanda Han: Possibly. So, I think the easiest way to explain it is that there are actually two different buckets. So if you happen to be someone who has long term rentals and short term rentals, part of the hours do have to be tracked separately. So like Matt said, all types of real estate hours are real estate professional, right?

So whether you’re long term, short term, property manager, flipping, being a realtor, all those count towards that. But separately, though, you have to meet material participation on your long term rentals, and then you also have to meet it on the short term rentals. That piece of the requirement is not a, is not combined with each other.

So all that to say, if you’re a newer investor, and you have two properties, and you should try to pick your strategy, right? I want to Transcribe by https: otter. ai Either real estate professional, I’d have them all be considered long term or I’m going to have them both short term because otherwise you end up having to earn hours in two separate buckets.

It just becomes more challenging. 

Ben Fraser: Okay. Interesting. Interesting. You mentioned some of the potential pitfalls or mistakes that investors make, or even CPAs don’t understand. What are some other areas or pitfalls that, in the real estate space that investors are making, or maybe not taking advantage of, people should be aware of?

Common Mistakes and Pitfalls in Real Estate Tax Planning

Matt MacFarland: How long do we have? I think one that we see a lot is in the area of depreciation, with respect to how do you depreciate properties? If you’re depreciating properties, as crazy as that sounds, just being, you’re in the rental space, right? It’s not that uncommon for us to look at a new client’s tax return and find out that, they haven’t depreciated properties when they should have, or, And it did, it’s like tax one on one to us, but I guess to a CPA who doesn’t do real estate, it’s probably a foreign concept, but, so just claiming depreciation maybe they’re not taking advantage of bonus depreciation and accelerating as much depreciation as possible, and there’s no good reason other than, oh, I’m just used to spreading out depreciation, so I just don’t take, our opinion is if you can take as much deductions and that you can use, you Let’s take them as soon as possible because you never know what the tax law is going to be.

You never know what your tax bracket is going to be five years from now. So let’s take advantage of things while they’re available. 

Amanda Han: Yeah, it’s something really interesting that just happened in the last month. Matt and I were on a podcast. So it was a pretty big podcast. I won’t share the name of somebody who’s done a lot of real estate.

And so we were talking about depreciation and accelerated depreciation, and then the host was like, yeah, I’m pretty sure I’m doing it. My real estate agent is a CPA expert. And so when they met for a year in tax planning, he just talked to a CPA and said, I want to confirm I’m doing cost segregation, right?

We’ve been doing it all these years. And his CPA’s response was, what’s that? And so I think that, that response was the, yeah, that was the last. conversation that they had. That was the last Christmas gift. Yeah, that was the last conversation. So I think it’s really important again, I think it’s not the client’s fault, right?

Again, clients, we, we assume the CPA is doing all this stuff, right? Because they specialize in real estate or they’ve done my taxes for years. So it doesn’t hurt. It doesn’t hurt to ask, right? Just to bring it up. Hey, I know we’ve talked about it. I just want to confirm that we’re doing it. And I think, just simple questions like that will really help you to understand and also just asking powerful questions.

Matt and I love sharing track strategies on platforms like this. And really the goal for our audience is not for you to become a CPA. Or a tax advisor. We don’t want you to remember all the rules. We don’t want you to have to do any calculations. But the purpose of our message is so that you have enough knowledge to have an impactful conversation with your tax advisor, right?

Hey, I heard about the short term rental loophole. What do you think? That worked for me? And so that’s really the gist of it is knowing what questions to ask and what to tell your tax advisor when you’re. 

Ben Fraser: THere’s so many available options legally within the tax code. People may not be taking advantage of, and I think it’s, it’s, you’re doing yourself a massive disservice if you’re not educating yourself around it, but then also not.

Getting around the right people that can help you implement these strategies. It’s depending on your situation, it can be life changing, numbers, right? If you can just implement some simple strategies, talk a little bit about, as you mentioned earlier, just that individual who’s been in real estate for a long time as an active investor.

And they’re wanting to shift to more of that passive approach, but they don’t want to go. 1031s and, still have to be involved in the day to day. They’re selling off assets and then maybe investing passively into syndications or funds. What are some things that they need to be thinking about, right?

Because they’ve probably been a real estate professional for a while. And if you’re selling, say, a majority of your real estate and now going 100 percent passive, just for argument’s sake, they probably can’t be a real estate professional anymore, right? Or at least it’s going to be more difficult to hit those numbers if they want to be passive.

What are some things to be thinking about from a tax standpoint because, I know several people that are in that kind of boat and also listen to this podcast, some people I’m sure that are wanting to make that transition but may not feel comfortable because they’ve been in a good spot for a long time, right?

With maybe some really low basis assets. They have some great gains in and they’ve been claiming real estate professional status for a long time. So they’ve been paying low taxes, but talk about some things they need to be thinking about and just ways that you might, I would suggest, as you sell all at once, you roll it over time and just give some general ideas on something about voting.

Strategies for High-Income Earners Transitioning to Passive Investments

Matt MacFarland: Yeah. I, there’s so many things that come to mind, right? So I think from a. Looking at, again, from a planning and holistic perspective, you want to take a multiple year approach, right? I’m, I hear that kind of story. I’m thinking, not to defy the ages, but I’m thinking somebody maybe they’re in their 60s, right?

They’re looking at, they’re winding down their W 2 career. They’re, maybe they’ve had a spouse who’s been focusing on their real estate. But before they really pull that trigger, one of the things I would look at would be, okay, what do we have in the retirement accounts, right?

Have you been building up that pre tax retirement account, the 401k balance that, 10 years you’re going to start having to take required distributions and paying a lot of taxes on that. Maybe you don’t even need that money in the, so maybe looking at doing Roth conversions while you still are a real estate professional and can still.

Manage those tax brackets and, maybe look at doing that before you, quote unquote, unload the real estate and stop being a real estate professional. So you’re still taking advantage of low tax brackets. I think that’s one thing that I would look at before they pull that trigger.

Amanda Han: Yeah, for sure. We have people who use that strategy every year to convert a couple hundred thousand dollars tax free into their Roth. And then from there it’ll just be permanently tax free growth. For the rest of their life. And then they get to pass it off to the kids. I say, what’s the, what’s the best type of inheritance money is the one that’s tax free, right?

Already paid their taxes for the beneficiaries. 

Matt MacFarland: I think actually I was going to say from there, then I would look at, if you are looking at selling real estate then you’d, you have to obviously work with your tax advisor, get an idea of what the gains are going to be, right? Is it, what are we talking about?

Are we talking 50 grand? Are we talking 500, 000? What is the number going to be? Cause that’s going to help you plan. Potential strategies from there, because, based on the numbers, strategies are going to be different, I think. So having an idea and a grasp on that would be crucial, too. 

Amanda Han: Yeah, and I think moving it into syndications first off, there are syndications who will take 1031 exchange money.

And there are others who will only do it if it’s like a significant amount, right? Because the sponsors, as Ben, it’s more difficult for the sponsors to take on 1031 money. What we see a lot is what we call a lazy 1031. And so that means basically I’m not going through a real 1031, but I’m going to just buy more real estate in the year that I sell my properties.

So if I’m going to sell and, like Matt said, I’m going to have a hundred thousand dollars worth of gain, then I’m strategically investing in syndications to give me enough losses. to then offset this gain. And so usually that works out because if I’m selling in the year where I am a real estate professional then those losses are going to be ordinary losses.

If I’m selling in the year where I’m not a real estate professional, then that’s passive gain. And then those losses are passive losses as well. So usually there’s a matching of those. I think fast forward, then if I’ve unloaded everything that I own and I’m just passively investing and everything I have is in syndications, then naturally it’s all passive income and passive losses.

And so they will also offset each other. 

Ben Fraser: I Think that’s a great point because you’re converting a lot of them from active income to passive income, which you’re going to be generating passive losses from these investments, hopefully, right? Theoretically, that can shield a lot of that, a lot of that income talk a little bit about this, the lazy 1031 because I think.

I’ve talked about it before. I’ve done it before. Just explain what that is, right? Because a lot of people think that to continue to defer taxes on a property that you’ve owned, you have to roll it into a kind of real estate and a defined window. And that’s obviously a good option, but there are, being other options and you from my mind, you get out of jail, so to speak because 1031s are very complicated, and if you want to be passive, it’s, it is difficult to find sponsors that will work with you, especially if you have a smaller amount and you get an increase in basis when that happens too and then the new property, so talk a little bit about that, of just what it means and you alluded to it, but just explain a little further and then maybe some just things you need to be thinking of are there, difference of different buckets of income that might be generated from selling versus investing passively and that might not match, the new losses might not match, the gains that you have in the old property.

Matt MacFarland: Yeah. From a conceptual standpoint, I think, thinking step back, thinking about what a 1031 is trying to do. A 1031 exchange for those people who may not know is. You’re selling an asset and you’re reinvesting the money in qualified assets that you don’t have to pay tax on the gain that you’d have from the assets you’re unloading.

That’s the concept. But there’s a lot of, to your point, there’s a lot of rules you’ve got to buy new properties. You’ve got to, a lot of rules and meet there. Sometimes if people don’t want to be actively involved going forward, this is a typical situation we were talking about, right?

They’ve been actively involved. They want to. I’m unloading the real estate, but they still want to be involved. They still want to be invested in real estate, but they don’t want to be actively involved. That’s where, there’s, this is not the lazy 10 though one is not a technical term by any stretch of the imagination.

It’s just from the sense that you’re accomplishing the same thing. You’re selling your real estate, you’ve got gains. If you don’t do anything with money, you’re going to pay tax on it. But in the same tax year maybe you sell your real estate in June, but by December you’ve invested in somebody else’s syndication, they’ve gone and bought an apartment building, they’re doing a cost segregation study, they’re giving you a K 1 with a big loss and because it’s real estate and real estate, those, the the gain might be passive to you, and And then that loss can now offset it from a timing perspective, that’s where, it can accomplish similar results.

Amanda Han: And it’s definitely not a, do it yourself type of stuff. Even with the 1031 exchange like Matt said, if you’re contemplating a sale, the first step is to talk with your tax advisor, because what we’ll want to know is what is the gain, right? We’ll have to calculate the gain, that’s where it all starts, maybe you don’t have a gain.

Maybe you already have a bunch of other losses that you can use. So you might not even need a 1031 or a lazy 1031. So once we know what the taxable gain is, then it’s okay what do you really want to do with the money and how do we. Reinvested efficiently and, the word syndication itself is also generic, right?

Syndications don’t really mean rental losses. It could mean from a note investment, which would not be a rental loss. It could be from oil and gas, which is not a rental. And so in terms of you were saying like, okay, are there issues where it’s like a mismatch of things? Absolutely. And that’s why it’s really important.

Here’s to give you an example. So we have a client who when they came to us, they were already a real estate professional, right? So they’re I don’t really need a CPA, but I’ll just talk to you guys. Anyways, I’m already a real estate professional. I know I’m claiming it sold a bunch of real estate.

I got a bunch of real estate games. And our question was, okay what have you already done so far to eliminate the games? Cause you didn’t do a 10 31. And what are the, one of the strategies that they did themselves was that they invested in an ATM business. And unfortunately, we have to be the bearer of bad news and let them know, Hey, in an ATM business, that’s a syndication.

That’s passive to you. Your real estate gains are non passive. They don’t offset each other. And so that’s a great example of Hey, I’m investing in a syndication. Of course they offset each other. But guess what? ATM business, not the same as a real estate syndication, right? So really important those little differences to understand.

Ben Fraser: Interesting. So in that scenario, the individual was selling assets they were actively managing. So it was an active gain, but they’re investing in passive losses and those did not. 

Amanda Han: Yeah, because I think the thought process was like I’m a real estate professional, right? And so I just have my capital gains.

And so I’m going to put my money in some kind of syndication, right? This lazy 1031, I’m going into syndications and using it. But what they didn’t grasp was that the syndication asset was also important. 

Ben Fraser: Yeah. I think, this is a great segue too, people need to be reaching out to a tax advisor.

They don’t have one. You need to find one. And Hey, Matt and Amanda are probably good folks to talk to here. So yeah. For years I did my own taxes, on turbo tax and, I’m smart enough. I got a finance and, degree, so I can do some of these things, but the more I’ve got on and the more complicated it’s gotten, and there’s just so many little things you got to be aware of, but like to pay a fee to a CPA that could, potentially save you tens or hundreds of thousands of dollars.

It’s a very nominal amount to pay to get expert advice. If you are, on your journey, you already built a nice net worth and or any of these kinds of situations apply to you, definitely make sure you have a tax advisor in your quarter that’s giving you helpful advice that’s going to help shield your income from this.

It’s really important. 

Conclusion and Contact Information

Ben Fraser: So with that what’s the best way for folks to get a hold of you if they want to chat about their own situation and maybe get some ideas. 

Matt MacFarland: Yeah. The best place to find us is our website. It’s our We’ve got a lot of great resources there. Educational material, we do, do a lot of podcasts and things of this nature because we love talking about the stuff, obviously.

So I think you can find a lot of people who can find some good information there. 

Amanda Han: We actually recently came out just a couple of months ago with an ebook called tax strategies for the passive investor. It’s not available on our website yet, but I think Ben, I can just send you the. Internal URL, and you can put that in the show notes for people to access.

And that one is designed just for passive investors, meaning people who are not real estate professionals. They’ll have a high full time W 2 job. But yeah, outside of our website, the best place to find me is on social media via Instagram as AmandaHanCPA. So you can follow me there. I’m always sharing daily tax tips and things like that too.

Matt MacFarland: Sometimes I’m behind her in those videos or actually recording the video. That’s my excuse. 

Amanda Han: You’re behind me. You’re behind the camera. 

Ben Fraser: Awesome. All right. Thank you guys so much for coming on. This is very valuable and I appreciate you sharing your wisdom and insights. Yeah. Thanks for having us Ben. It was fun. 

Amanda Han: Thank you! 


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