Journey to Multifamily Millions

The Biggest Real Estate Tax Breaks with Larry Pendleton, Ep 92

• Tim • Season 1 • Episode 92

Share episode

Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.

0:00 | 42:20

Today's guest is Larry Pendleton. He is the Senior Partner of PC Financial Services LLC, CPA, and an active multifamily real estate investor.

In this episode, Larry discusses the importance of leveraging real estate investments for wealth building and employing strategic tax practices to retain more income.

He also talks about insights into tax strategies that take advantage of real estate investments, emphasizing cost segregation studies and the impact of recent tax laws. 

Additionally, He shares the advantages of being considered a real estate professional for tax purposes, material participation, and how proper tax planning can significantly reduce tax liabilities while promoting wealth growth through real estate.


Episode Topics

[01:43]  Meet our guest, Larry Pendleton
[02:56] Diving Deep into Tax Strategies for Real Estate Investors
[05:01]  Understanding Your Income Tax: Active vs. Passive
[12:27] Maximizing Depreciation: A Key Tax Strategy
[17:45] Exploring Cost Segregation Studies for Bigger Tax Breaks
[37:04] Real Estate Professional Status & Material Participation
[41:28] Closing Remarks and Thank You


Notable Quotes

  • "Real estate is the main vehicle for building long-term wealth, not just quick riches." - Larry Pendleton
  • "Shift your income from active to passive; it's taxed less harshly, allowing you to keep more of what you make." - Larry Pendleton 
  • "Replace assets to offset depreciation, but don't overspend." - Tim Little
  • "Taxes incentivize government goals, like job creation." - Tim Little
  • "One of the most American things you can do is follow the tax code. Investing in a building benefits everyone, creating jobs and housing." - Larry Pendleton
  • "Depreciation is like a loan from the government; they want it back when you sell. Plan ahead to offset it." - Larry Pendleton
  • "Give investors time to plan for a capital event." - Tim Little

 

Connect with  Larry Pendleton

👉 Connect with Tim

 Subscribe, Rate, and leave a review here 🌟
https://podcasts.apple.com/us/podcast/journey-to-multifamily-millions/id1634643497

[00:00:00] Larry Pendleton: You make your money with your business or with your w2 because as we all know as investors the income coming in from Whether, even if it's a single family home up to 100 unit apartment building, like that's rolling in slowly, like you're not living in,Belize, off of just one property. You're having to build and grow from there, but you can use your real estate to create those tax strategies, to keep more of what you make. And then we'll start diving into some of these strategies. 

[00:01:06] Tim Little: Hey, everyone, and welcome to the Journey to Multifamily Millions. I'm Tim Little, founder and CEO of ZANA Investments. We help high net worth individuals diversify their portfolios and get competitive returns by passively investing in multifamily real estate. Okay, without going out of the way, I would argue investing in real estate is one of the fastest and safest ways to build wealth. If you're not actively developing a tax strategy that leverages all of the advantages of real estate, then you may be paying more than your fair share of taxes. Here to help us fill in, fill us in on some of the top strategies We should be using especially with recent rule Changes we have with Larry Pendleton. Not only is larry a cpa, but he is also an active multifamily real estate investor So I would say he is uniquely qualified to talk on this topic having been on both sides of the fence in full transparency He is also a friend of mine and my personal cpa So it's really a pleasure to have him on and share some knowledge with us Larry, welcome to the show. And without further ado, please take it away. 

[00:02:04] Larry Pendleton: appreciate it, Tim. And thank you again for the opportunity to add value and,thank you all for your patience. no, I'm starting the late starters on my, throw your tomatoes at me. but first and foremost, I am grateful to be here. yes. Based out of Norfolk, we'll get into introductions, but I'm really excited to help add value to those in real estate. I do see it as the main vehicle of building wealth long term not just getting rich real quick from that standpoint there and the stuff we'll talk about tonight we'll Familiar for a lot of you has already been the game for a while. but we're gonna go a little bit in depth quite a bit there. further ado I have slides. I prefer to talk to you all more than go through the slides. Please feel free to interrupt,and have open discussions regarding anything that we're talking about, any questions that you may have, you got going on. So there's a bunch of different strategies, in tax savings in general, and even within real estate itself. but I really want to just hammer the two that the wealthy have been really taking heavy advantage of. and build upon that from there we can be all night, talking about it.    Tim, Rain, Rain, Rain me in a bit. And so we're just going to cover these two in particular detail. Hopefully, like I said, we'll get a lot of good questions going and keep the discussions free flowing. And I'll do a brief introduction of myself. We'll talk about how your income is taxed from a passive and active standpoint if, and if anything just sounds familiar and I'm just wasting everyone's time, please interrupt. then we'll discuss strategy one, strategy two, a little more background about me, as Tim mentioned, I am a CPA, I'm based out of Norfolk, Virginia, southeastern Virginia for those that are familiar with, with the state. I am a senior partner of PC Financial Services. We do service multiple clients in various states. Our niche is real estate because, as Tim mentioned, we are also real estate investors. not just in Virginia, multiple states, done single family, done multi family, short term rentals, long term rentals, and so a lot of the strategies and stuff I typically tell people is I've already put myself and my wife Whitney through the gamut of how to really take what you hear on YouTube and then really apply it based off what the tax code is saying. I was, I'm very big on keeping things passive and. and just as my investment strategy, there's still a lot of good strategy. You want to be active in the state, but I'm more in tune to be more on the passive side of things myself, as I build my portfolio out. Disclaimer, the only person up here that is my client is Tim and Sam. So for everyone else, this is really more for informational purposes. Hopefully some entertainment as well. I'm gonna try to keep it light, as much as possible. But please, verify whatever I'm saying with, do your own due diligence. Talk to your tax advisor. if you want to, reach out to me and my team, you'll see a QR code on the top right on every slide or onto my upper left shoulder here where you can, we're gladly to touch base, schedule an intro call and start to see where we can be of value to you. So how your income is taxed, is really the premise of how the tax code is. Like it's,they're very harsh on, on, on active income. whether it's from a W to employee self, self employed individuals. because the tax code itself is truly made for, for big business owners and investors. And, if any of the recent law changes, haven't really proven that, I will point to the most recent, student loan forgiveness and people go to school, work they butts off and they get. 10, 20, 000 forgiven from that standpoint, but then there's millions of dollars, hundreds of thousands of dollars given in PPP loans that was forgiven from that standpoint. So if recent news doesn't prove that, you need to start building your income from a different perspective, from that standpoint, it's going to be tough to ever really, Keep more than what you make. so that the term works smarter not harder his home where as you're growing your profession And you're getting bonuses and raises, but you're getting taxed and taxed more without any relief whereas in real estate, the reason why I love it so much is because though as people hear about Robert Kiyosaki rich dad poor dad It's really that second book cash flow quadrant You That's the big piece here. because as an employee, as mentioned before, like your income tax, your is this 30 to 40 percent and your self employed is even worse because now you're dealing with self employment tax. But as you shift more to that right side of the quadrant, now you're talking about 10, 20 percent as a big business owner because you got research development credits, you got payroll that you're paying, like you're not,you're growing your business, making more money, but also able to get more deductions. And then as a, as an investor, whether it's real estate, water, food, if you're investing like the book, the tax code opens up a bit, like a bit larger from you from that standpoint there, because even if you're, in, in, in the grand scheme of things,Even small and real estate you can still take advantage of a lot of what you hear about the mega investors entrepreneurs are seeing from that standpoint there, so rather key to be mindful of where your income is coming from Because investors and businesses don't still pay taxes. They just don't pay as much as income taxes because the government wants to incentivize those that can it To help build the economy build the nation keep things innovative from that standpoint Whereas an employer self employed you're more just benefiting yourself from that standpoint, so they don't really provide too much tax savings from that standpoint, so And I say if i'm going too fast, let me know slow down I want to make sure that I feel like this is the base of your understanding of you and or your tax advisor Have to be seeing the tax code itself So that you can reassess, and start to strategize where you want, where you're going to be investing money into. First and foremost is a good investment, and then second,secondly, then get the tax savings there.  As I discussed before, part of how your income is taxed is your Passive income. The reason why it's not taxed as harshly is because you don't have to deal with self employment taxes. The IRS does not deem that as active. You don't have to contribute to Social Security, Medicare, FICA tax buckets from that standpoint there. So you get similar deductions as a big business. So you can still write off the mortgage interest on your properties, mileage, basically any business expenses that you are incurring for your real estate because I hear a lot like what can I write off? If it's a necessary ordinary expense for your business, you can write off your rental property as well. So it's trying to expand on people's minds about that as I said you got that 15. 3 percent self employment tax that you don't have to deal with. and that alone You save people's take people thousands of dollars of taxes from my clients and it's and for other people as well It's just okay. Are you able to build the cash flow? for it to make sense for you from that standpoint how you're going to adjust especially if you're going to try to adjust out of your w2 or close down an active business that you're running. from that standpoint there and then There's additional tax strategy opportunities within real estate that you don't really catch in other industries or other industries basically having to pull from real estate in order for someone to still benefit from that there as I tell people you make your money with your business or with your w2 because as we all know as investors the income coming in from Whether, even if it's a single family home up to 100 unit apartment building, like that's rolling in slowly, like you're not living in, Belize, off of just one property. You're having to build and grow from there, but you can use your real estate to create those tax strategies,to keep more of what you make. And then we'll start diving into some of these strategies. From the standpoint here, everyone still, I still got everyone. Everybody good to go. Questions so far? 

[00:10:15] Tim Little: No, Larry. I, the only thing I would say is that, people try to demonize taxes or this and that. And that I think the main point is that taxes are simply a  way for the government to either incentivize or disincentivize people. If these millionaires, billionaires are getting your tax loopholes, whatever you want to call it, these are things that are part of tax law that they are taking advantage of because they are doing things that the government wants them to do, whether that's creating jobs, creating housing, whatever the case. So I just think it's important for people to realize that, you're not like getting over, you're doing exactly what the government wants you to do. That's why they're giving you these tax breaks.

[00:11:00] Larry Pendleton: Yeah, it's said one of the most American things you can do is follow the tax code, because if you're doing that, you're providing a huge benefit for the country and because you're taking on the risk. Investing into a 50 unit apartment building or whatever size of it. So it's okay, that's not just benefiting you. That's benefiting everyone that can live in that building that's benefiting all the people that will work for them. So you're creating jobs. You're creating housingfrom that standpoint there so it's and that's the and that's really what kind of Starts to create a divide between, just everyday tax preparers and your advisor. So you just want to be mindful of if your advisor is scared to look at what the code is saying, because the code is just trying to get you to move a certain way. they want people to provide housing, they provide low income housing tax credits and depreciation and, or they just want people to buy houses, they let you write off your mortgage as an itemized deduction, if you can even qualify, they want you to go, make sure you get medical, Medicare attention so that you get a Medicare, medical deduction. so it's just even from a personal standpoint, they want, they're trying to incentivize people to do certain things, donations. It's just those are pennies, in the bucket when you're talking about how they're trying to incentivize investors and big business owners to move a certain way. So great point there, Tim. And then I said the first,the first strategy that the wealthy are using is how can they maximize? Depreciation from their buildings as most people up here are real estate investors already you're already familiar that you're able to take 27 and a half years and Recognize it on an ongoing basis And so I don't want to get too deep into what depreciation is, it's put up here for informational purposes, but you're just allowed to recognize that cost over, over a certain period of time. and there are certain benefits associated with that we're not all tax deductions have to deal with. Hey, you have to pay money to, you have to pay money to come out of pocket from that standpoint. It becomes a little counterintuitive if I have to keep paying money over and over just to save on taxes. Is there a more cost effective way to do And depreciation is one of them that would forever cause million dollar property. You ain't going to put 20 percent down, but you get the full a hundred percent tax benefit of depreciation. So so that's where it becomes rather beneficial where you just have and I say I've never recommended But I've seen people just buy properties just for the sake of getting the losses so they can offset other income from other properties and other businesses and i'm not a fan of that like I understand but it's it's it's limiting was like, okay You should be investing making sure it's a solid deal first and then try to factor in the tax strategy behind it to that point was like, you have the opportunity to just wipe out a lot of your,your rental income. And as high net worth individuals, you're always dealing with this tax issue related to your job or your business. Whereas. The passive losses from the deductions that depreciation creates can actually wipe out your rental income where you have nothing shown where it's okay, you may still be paying taxes, but you actually made more money than what your income is showing. So that's when you start to see. your overall effective tax rate start to drop where you may be in that 10 to 20 percent or zero to 10 effective, tax range based off of the fact that you're not paying any money paying any taxes On the money that you're earning from your rental properties and then I said potentially even going out into like losses and then Maybe even able to offset some of your w 2 and business income You But we can say we'll cover that down the road and then the hot button, especially over the past five years, especially this year is cost segregation studies And how to use those to then offset to create even more deductions In on your from your rental properties And then to offset your more income there. I want to dive a little bit further. Any questions on depreciation from anyone? before we drill into cost segregation studies. 

[00:15:33] Tim Little: this isn't cost segregation or depreciation specific, but Ray did have a question. I think it was referenced to your previous slide. It said, what's the difference in structure between self employment and a business? Great 

[00:15:47] Larry Pendleton: question. Let's take it back. Wait,so self employed is basically a single member LLC. you're not, you're not taking, you can't take a payroll. even if it's a partnership, you can't take a payroll because the government is attacking you. To the business itself. So any money that you take out is equity from the business. So wherever your net income is, you're going to be, you're going to be taxed on that. In addition to that, you're going to be hit with self employment taxes as a big business owner. you may be a S corp election. You may even be, you may even be a C corporation, but you're hiring people. you're developing new products,you're buying more or buying other businesses or buying other franchises, so you're actually outsourcing more of your work where it's okay, the income from the business is jumping up high, but then your salary is what is a particular set amount that's deemed reasonable how the business is running. So really the difference really is that are you,are you truly an employee of your business or are you the business itself? Cause if you're the business yourself, then you're going to be hit with all the taxes that the business is making. And then you can't continue because a lot of people try to game the system and show a loss for their single member LLC or their partnership. but at some point, the IRS will expect businesses to be making money so that you are contributing to the social security and medicare buckets. Whether that's around or not in 30 years, who knows? That's a whole nother topic of discussion. but hopefully radio answers your question. from that standpoint there, it looks like I got a thumbs up. I'm always here for the thumbs up. Thank you, sir. Jump ahead again. Boom. Some silly slides and all that stuff. Great. So over the past five years, cost segregation studies have been very popular.but they're all where they have always been around because there's always been some type of bonus depreciation associated with the prop associated with rental property or just properties in general, business properties in general. So What would create the popularity over these past five years is with the trump tax changes in 2017 Basically anything that depreciates Over less than 20 years can be fully depreciated year one which creates these huge losses when you're talking about rental properties The standard process for most accountants and tax preparers is just to take that cost and Cost for the property break out the land portion and then depreciate that amount over 27 and a half years great non cash expense, but it's good But we weren't great and that's where the cost irrigation now becomes even popular because now we're saying hold on now Out of that million dollar cost basis for that apartment building, that Paul bought. Not all of that is 27 and a half year property. Some of that is five year property. Some of that is 15 year property. Those are mostly that they could be seven year property. They could be 10 year property, but the two main ones are five years, which you have, carpet type of flooring, ceiling fans, appliances, furniture and all that there versus the land improvements, which is your 15 year property. So parking lots, pools, driveways, patios, decks, fences, breaking no components separate from the building itself, which is all considered 27 and a half years in the building itself, like the roofs, walls, some, sometimes the windows. So like we're creating these different buckets on the tax return, to take advantage of the time value of money concept because now we're recognizing more upfront because whether it's inflation, all that's going to continue to increase. dollar value is always going to be lower. Like it's always going to be more cost advantage to take advantage of deductions now that if you can, then just to ride it out over a single,limited period of time. And that's part of what the IRS wants because it's incentivizing investors to buy more, to trade more because you, now you could depreciate faster because you got five, seven, 15 year property But now you're able to even do 100 percent bonus, that start, that ends after 2022, in year one. And it doesn't end, it just starts to sunset and phase down, 20, 20%, over, over the next until 2027, 2026. but we're expecting in the CPA community, there's going to be some legislation that probably comes out 2024, 2025. To possibly amend it because before 2017 it used to be 50 percent bond depreciation And like I say, it's just it just they just put stairwells on something that was already pretty strong for investors from that standpoint there So so that's one of the benefits how we can maximize depreciation with the power with the cost set also allows for Asset disposition And what, and that particularly means is that, it's an opportunity to mitigate your, depreciation recapture on the back end. For those not familiar with depreciation recapture, that depreciation itself is only a loan for the government. it's a binding contract of, okay, you're buying this rental property, you're providing a service, you can get this deduction. Man, we'll keep this agreement in place. As long as the appropriate depreciation periods are in place, but as soon as you sell that property, you have broken our contract with the, you broke your contract with the government and now we want that depreciation back cause we're going to give it to the next investor. So that's where it's okay, if you're going to break it, do you have a plan to then offset it? Possibly doing more, getting more properties, getting depreciation on those to help offset the gains. 1031s have always been around. Like I said, we won't really get into 1031s much tonight. We can talk about it, but it's not really part of the presentation. But it is another option there. but it, but now you have to deal with this additional gain.on your property that you wasn't aware of because you had to pay back this depreciation asset disposition helps out because if you're replacing, certain components, if you have replaced the roof, now you're able to write off that fully old value. The value of the old roof of that 100 unit apartment building that you bought and get that in deduction and now you have a new depreciating roof so that if you did sell you don't have as much depreciation on the back end to deal with so that's part of and then having these components broken out helps with hey When can we write this thing off our books so that we can focus On something new and mitigate the back end so It's providing an initial benefit up front, and then also providing potential benefits throughout the whole period of the property, as well as on the back end when the property goes full cycle. I think a question came up and didn't want to get too far off, without addressing it.was it, was Paul, is depreciation you're speaking of limited to the amount of equity, you have in the property? So not much depreciation itself. Great question, Paul. so depreciation really when people hear about the limitations of losses, that's from the property as a whole depreciation as a factor, as another expense line item, whereas you can, you could have a loss from the property with no depreciation or with very little depreciation. but you may be limited to how much of that you can claim. If you have no equity or no basis,in the property itself, basically means a lot of GPs go through this where they get all the capital ready. They don't put any money in the deal. they don't get the right type of financing in order to get basis in the property. So they're not able to use these losses, because the IRS deems that you like, you have put no risk associated with the property itself. Oh, you have no money in the deal. You may have some very little credit involved, but you didn't get the right type of debt. so obviously LPs put money in the deal and they potentially can use those losses. GPs potentially can if one, they put money in the deal. or they get what's called qualified,non recourse financing or just non recourse financing from that standpoint. And that helps give you basis,in, or some equity in the prop, in the property itself, in order to be able to claim these losses or potentially be able to claim these losses that depreciation typically covers. Hopefully I address your question, Paul.

 

[00:25:29] Tim Little: Hey, Larry. Yeah, that makes a lot of sense. I'm sure Paul will let us know if he needs more clarification, but I had another point, that I wanted to hit on this asset disposition piece. So that I understand it, you're saying if, as I, learn today, the depreciation recapture is essentially one for one, the depreciation that you've taken over the course of, say it's five years, just as an example, that total amount is going to be recaptured at the point of sale with this asset disposition, what you're saying is, say took 10, 000. for a roof, but then you replace that roof that, that can be, that can offset basically the depreciation recapture.

[00:26:16] Larry Pendleton: Yeah. So part of that is that it's a, it's an initial benefit of the period of you replacing the roof. So in your example, 10, 000 roof, let's just say that it was. 5, 000 depreciation, accumulated during that time of you holding it. So if you will have sold that property,in that year, you have to pay back that depreciation that you claim on it. But if you replace the roof now, we can, you can't depreciate two of the same things. so we're now writing off the value of the old roof. So if there is depreciation, if it's not fully depreciated, you actually get a deduction that year, because there's leftover value. If it's fully depreciated, it's just a wash on your P and L. but it removes it off your balance sheet. So you're not paying back depreciation on that roof. but on the new roof, let's say you, you had to replace the roof in order to get the sale. And now you've got this new roof in place. you, you may have sold that year or the year after, but you have less depreciation to recapture on that one. so now you don't, you're not dealing with as much of a game to deal with because now you're dealing with a new roof that you sold the property a lot sooner. So that's where actually doing renovations on the back end could be useful. I say if the costs are all associated with it, it makes sense. And outweighs the all the hassle the stuff of make sure you got the proper sale in place and getting the type of returns that you're looking for 

[00:27:52] Tim Little: Okay. Yeah, that makes sense. obviously don't go double over your capex budget just because you're trying to avoid depreciation recapture, but If it's part of your overall business plan, anyway, it's beneficial in that sense, besides it being part of your overall plan, it sounds like it helps you with that, depreciation recapture piece. And I guess the only other thing that I wanted to mention. Was, you talked about, that depreciation being potentially passed down in my experience anyways, with the LPs, the passive investors specifically, that's something that, that we always do. And we do that through a K one that is pushed down to them, and a K one would have whatever distributions they might've gotten, but we also pass down. That, that, depreciation so that they're able to offset some of the distributions that they may have received.

[00:28:46] Larry Pendleton: Yeah. And part of that is, is how the operating agreement is set up and how it's being pitched to investors, because you can allocate per your operating agreement, a hundred percent of depreciation to your investors. so the GPs don't really, so it's all about how do you want to sweeten the pot,in order to get someone to invest into your deal. Now the cats eye the bag a bit because operators have oversold the tax benefits of depreciation. And then a lot of LPs that I end up Coming to me because they think their cpa isn't doing it correctly There's no like you don't qualify to take these losses and we'll go into that in the next strategy But it's it's making sure you're getting the full picture of what the gps are offering and then If you can even use that as a benefit to You year one not saying you can never use it as a benefit. It's just there's a timing aspect of and as I said, it's and it's not always clear from a gp who's Basically, they're using the tax advisor They probably don't have their boring tax advisor talking on the webinar because that's not sexy That's not going to drive people to go subscribe, to the deal. So it's just You It's just being mindful of you may have to have these one on one conversations with your, with your advisor as well as with the GP of, okay, I'm expecting to get, and let me see if it's even going to be beneficial. But once again, don't let the tax tail wag the investment dog. If it's great returns, don't let the fact that you're not going to be able to use losses offset your W 2. Skew the fact that you're going to make a good return on this property And you probably won't be paying taxes on that income in the first few years Because you'll still have those losses built up because they'll be suspended and rolled forward into future years And then once the property goes full cycle You can use those losses that you couldn't use to then offset the capital gains On the property when the property is sold cool. Cool. Good stuff. Great questions Let's just do it. I just like my Big Mac analogy when it comes to, to call surrogation. straight line, you get a straight 3. 99. break that over 27 and a half years. But call surrogation study, that's when we go with the song. To all beef pegs, extra sauce, lettuce, cheese, pickles, zanes, and a sesame seed bun. I know someone is a little nostalgic and it's not, it can't just be me,from that standpoint there. but this is what basically what the call surrogation is doing where it's okay, they're all beef patties. Okay. That's your 27 and a half years. Probably can't, we can't fully depreciate that, but we possibly can do the onions and we can possibly route the pickles, which is creating a larger deduction. then what you're getting, just doing a straight line of the full 4 burger over 27 and a half years. Now I'm hungry. and then, here's just one example of a cost of irrigation study I did,for a client. I think this one, earlier this year. Things to point out, is that we got nearly 60, 000 of additional tax deductions year one, and it's important to highlight here, there's a difference between tax deductions and tax savings. Tax deductions are just hey, you get to see, you're going to reduce your taxable income. By 60, 000 that doesn't mean you're saving 60, 000 in taxes. you just have a lesser That less than income and depending on your effective tax rate, which is based on all the components of your tax return Your tax savings is going to always going to be lower than what your deductions are So in this case for this particular client, they got 60, 000 deductions, but it's only going to show 18, 000 Of tax savings which is still huge like I don't want to Disregard that, but I just feel more comfortable knowing that it was properly explained That there's a difference between like why I didn't get a 60, 000 refund because like it doesn't work that wayBut actually, yeah, I did this earlier this year. I was looking at the dates so this is the 5 and 15 year property down here that I was referring to. So still the majority of the property you still get depreciation going forward You Because a lot of questions I give is is this a one year thing? Yes. It's really a per property. 'cause you can buy multiple properties and do cost segregation studies on all of 'em. It's just, you'll get the one year benefit and then the rest, like the, so this, nearly $60,000 you're going to. Be able to claim, in year one. And then the rest of this 166, 000, you're going to depreciate over 27 years. So there'll still be some depreciation, but to my point earlier, the tax code is set up where it was like, it's almost like a drug. you got this big hit and now you're chasing it. After that, which requires you to buy more properties, questions on this. You'll see something like this from Mass Inspects or CSSI or any of the cost seg firms. Everyone has their own little versions of it, but it's all basically the same. From that standpoint, you really can't go wrong. I haven't really heard much complaints and I was like, I've dealt with seven different cost seg companies across the country and all of it is about the same. It's just, Do you have a good rapport with whoever's selling the product and just trying to make sure you're not being oversold from that standpoint?

[00:34:25] Tim Little: No, the only thing I would say is that,referring to the conversation we had earlier, I think it goes back to, as an individual, you need to make sure that you have a tax strategy, not just do your taxes. because, if you're investing in stuff like this, Yeah, you may have a three to five year time horizon, but you need to be cognizant of when that capital event probably is coming up when they're probably going to sell. Because that's the time when you want to start looking for another deal so that you can get that bonus depreciation that's hopefully gonna to offset that big capital event that you have when that property does sell and you get a big fat check, which is all goodness. But at the same time, you still want to try to offset it as much as you can by again, having that bonus depreciation from the next one. Or if you had some, stored up over the past three or four years. That's great too. And then for us as general partners, the ones who are putting these deals together, again, like we talked about, it's having that transparency with our investors and making sure that we keep them informed to say, Hey, I know we said we were going to. sell in year five, but it's only year four now, but the market looks great and we think that now is the best time to sell. So we wanted to give you a heads up that's probably going to happen. give your investors enough time to. react with their own tax strategy, so that they're not blindsided by this good capital event, but still a capital event. And if there's preparations that they need to do with someone like you, their CPA to better plan for it, they have the time to do that. And I think that's just something that I certainly hadn't really thought about. Obviously, we're communicating with our investors all the time. but I guess I hadn't really thought about it from the perspective of, Hey, let me help this person out for their individual tax situation. They need to know as soon as possible if you plan on selling, because it's not just impacting them. It's going to, or it's not just impacting you. It's going to impact all your investors and you don't know what their specific tax situation is. So sooner the better. 

[00:36:38] Larry Pendleton: And that goes along, piggyback off. All the great stuff Tim just said, it is going to go a long way when you're building that rapport where okay, they feel like this person is looking out for me. I feel more comfortable reinvesting with these funds that you have to try to find new investors. Like I said, if you're able  to keep that nuclear base that you have, it just makes your next capital raise a lot easier,from my experience, as well. Awesome. Keep it moving. so tax strategy number two, like I really wanted to get into 1031s as it really is 1031 is number three but I really wanted to hit real estate professional status and material participation because I get And if I'm comparing that to 1031s, it's a 70 30. I'm here. I'm hearing about questions on real estate, professional status, and material participation because it's missed in so many areas. and it's really where the wealthy are positioning themselves to maximize the losses from, from a cost segregation that came created from that standpoint there. So I wanted to dig a bit deeper and help clear up the misconception of these. which I'm pretty sure everyone has heard of, like a real estate professional status, like annual election, and what, then the overall goal of rep status is that you do not want your passive losses to be treated as passive. you want those, you get this K 1, you, I've seen it multiple times where they got five figure losses, sometimes even six figure losses on their K 1s and they can't use it. because both spouses are W 2 or it's a single person and they're running a business. Or it's me. I'm a victim of it. I'm an investor, but I spend more time. In my tax business than I do with my real estate portfolio. Like I'll outsource everything. Like I'm not managing, I'm going to be completely honest, very passive. So even I like having to get stuck in this world as well, because I'm not actively involved in running a real property trade or business, and I'm not materially participating, with the day to day operations with my property. Like people hear about reps, but they don't really get into material participation. probably because it's not as catchy. but a lot of times you get your material participation and your reps are the same type of hours. but it's just, can you qualify for both? and then once again, IRS, Deans, rental, real estate, as passive, most of us, Are just collecting mailbox money and there's a property manager involved like you're not really active they don't really perceive it as active Even though those that does is like we're pretty aware like you're not sitting back not doing anything But the IRS still deems it to be path passive But there are ways to create these exceptions and real estate professional status becomes that from that standpoint there. And as mentioned before, even if you can't use it in the year 2022, it doesn't just go away. It just sits in purgatory, waiting to be, waiting to offset future passive income or passive gains. Now, a lot of people don't want to hear that because they want to offset their W 2 and their business. Okay, you can't, but you'll still have a benefit because eventually all syndications go full cycle. More likely than not, they're going to be selling the property, not just refinancing and pulling the money out. so you'll be happy to have these losses to offset these future gains, going forward. If you can't qualify for those professional status and material participation. So as I asked before, this is one of the, one of the exceptions. And I said, I want to go deeper than what you call it? Qualifying for these things is how the wealthy are taking advantage of where I say, even if from a married couple perspective where, okay, the one spouse is working other ones, staying at home so they can commit the time to reach the status. it's not a, it's not a job title. it doesn't it doesn't matter if you're a real estate agent or a real estate broker and you pass the test like All that means nothing if you're not putting the time in so Marrying the visuals i've seen them like they'll just one would just quit their job and it's okay they're just focused on this and they get a mini break because Their income dropped but now they have more time to invest in their portfolio and they get these losses So they're building back up their portfolio and i've seen like individual business owners shift their work schedules in the way where Or their business schedule where they're putting more time in their real estate business Than their main business and that's where kind of the big business aspect of where like you're not hiring people to outsource stuff You're not so involved yourself You Where you're wrapped in all your time, from that standpoint there. So a lot of times people hear about the 750 hours, but it's the more than half your work time that ends up tripping people up because it's, like I say, if the average person is working, 2, 000 hours a year with their W 2, it's tough to tell the IRS you're working 2, 001. 

[41:28:00] Tim Little: Yeah, all right, everyone. appreciate you spending your time with us on this. Thank you, and have a good night everybody.

Head Shot

TIM LITTLE (FOUNDER/ CEO)

Host