How Real Estate Investors Overpay the IRS and Miss Huge Tax Deductions | Ana Garcia, CPA

Ana B. Garcia, CPA (00:00)
Yes, in fact, we actually have another case of a client. think this was a married couple. I think they started, I’m going to say five years ago. I don’t remember exactly, but five years before they came to us, they had bought an apartment in a huge building and they were just owners of that apartment. Then two years later, they sold the apartment, but a house or a duplex actually. Then two years later, they sold that duplex or, know, and they’ve got a big

a multi-family. So that they did that by not paying taxes through a 1031 exchange. Okay. So that’s another thing that you can do.

Cody Crabb (02:08)
Welcome back to the Real Estate Pros podcast. I’m Cody Crabb with Investor Fuel. Today I’m joined by Ana Garcia, who’s a real estate CPA and tax strategist who’s been helping investors keep more of what they make for over a decade. We’re gonna talk about how investors are overpaying the IRS, what they’re missing when it comes to tax strategies, and how to actually structure things the right way from the beginning. So Ana, thank you so much for joining us today. I think we’re gonna get some really helpful information.

Ana B. Garcia, CPA (02:34)
Thank you, Cody, for having me.

Cody Crabb (02:35)
Of course. So just to start out, a quick origin story. I’d love to know how you, how did you get into real estate and, and specifically the CPA side? Was it CPA first or was it real estate first?

Ana B. Garcia, CPA (02:46)
It was CPA first, actually. So I graduated in 2006 and started my career at one of the big accounting firms as a CPA. So I have over 20 years of experience at this point. from the beginning, I didn’t really know real estate, but my senior at the firm one day said, have you read Rich Dad, Poor Dad? And I think that’s a story many people tell, right? So I…

Cody Crabb (03:09)
I always joke, it’s like that’s one of the

three stories we hear is Rich Dead, Dead, Dead, yeah.

Ana B. Garcia, CPA (03:15)
Well.

That’s also how it started for me. read the book and I got, know, that was the beginning. And this was 2006, seven, eight. So at that point, when I read this book, was already, you know, prices were on the floor, right? So I started investing with my sister, bought an apartment in Miami where we live. And ⁓ after that, started continue to invest with my husband. ⁓ Once you get bit by the real estate bug, you never leave it, right? So because I

love real estate and also taxation, when I opened my business 10 years ago, I decided I was going to focus on ⁓ real estate taxation.

Cody Crabb (03:55)
Yeah, that makes a lot of sense. mean, if you’re kind of, we see that a lot. Like someone will have a, they’ll be in real estate, but they have some other passion. Like they love music, so they open a music venue or something like that. They kind of get into both sides of it.

So when investors come to you, what is it that they’re trying to fix or optimize or just improve on their financials? Just give me a picture of who’s your typical client and what do they need?

Ana B. Garcia, CPA (05:06)
So our typical client is someone with who is buying and real estate, whether it’s for long-term, long-term rentals, short-term rentals, residential commercial, or they can be flipping, they can be wholesaling, anything within real estate. ⁓ And usually their needs are, or what they need most help with is the entity type. What is the most beneficial entity type for tax purposes? Maybe they’re not organized.

don’t know what kind of expenses to report, right, to lower their taxes. Do I do depreciation or not, which you should, we can talk about that later. You know, I think that’s the biggest one. Also when they sell property and or they’re buying, right, they’re selling property, they’re paying capital gains taxes. How do they mitigate or eliminate that completely, right? Or if they’re buying is a cost segregation study a good alternative for them.

Cody Crabb (06:04)
Okay, so all right, let’s say ⁓ you see a lot of this. You see the day to day for a lot of ⁓ different investment strategies and things. I’d be curious to know, what is it that you see, what’s a common mistake that you see investors make? It can be ⁓ anything. I’m curious if you’re like, it’s always this one thing. What do you always see?

Ana B. Garcia, CPA (06:28)
We see a lot of mistakes, right? So number one is not being proactive. You’re selling the property, you’re in the moment, and then you’re like, my God, I owe this much in taxes, right, the next year. So that’s one big mistake that we see investors not being proactive is you want to be a smart real estate investor. You want to make sure that you’re strategic and that’s why you need proactive planning, right? ⁓ Another mistake we see is depreciation not being included. because investors think, well, I don’t want to put it because

then I have to pay taxes on it when I sell the property. Well, guess what? You’re to pay it anyway because depreciation is something that’s accounted for either way. you better take the advantage of this non-cash expense. We also see people missing out on home office expenses. You have an office at your home and it doesn’t have to be specifically, you don’t need to have a specific office setting. It could be anywhere in your house, but that’s

You can deduct interest on your home, a portion of it, electricity, HOA, right? A portion of that could be a business expense. Another thing that we also find people doing or not or doing actually, yeah, and not being necessarily beneficial to them is a cost segregation when they don’t necessarily qualify or they’re not prepared to qualify. So we help investors make sure that the cost segregation deduction that they’re trying to pay

actually is deductible, right? Because it’s, you have to have, it has to be, if it’s passive income, it’s not going to mitigate or reduce your W-2 income or your business income. So we have to make sure that we’re helping the investor qualify for those expenses.

Cody Crabb (08:08)
So how early should someone be thinking about this? Is this something that you think about before you even are buying? Is this something you think about as you think about selling? I’m curious, what point do you start preparing these things?

Ana B. Garcia, CPA (08:21)
Well, you know you need to know what kind of entity you need

If you’re flipping, you need one. There’s one that’s beneficial for you, wholesaling. If you’re doing long-term rental, it’s another one. So you have, so I think from the beginning, from the very moment you think you’re gonna start investing in real estate, you can already start planning or at least, know, talking to your, your, your accountant, your CPA, your tax strategist to make sure that you’re benefiting from the entity that you’re gonna select. Right. ⁓ And then if you’re, of course, once you get at the bigger you get, the more you need tax planning.

If you’re selling property, you want to make sure that you get somebody, a tax strategist on your side before you make the decision of selling. Because you need, if you’re do a 1031 exchange, you need to do the process six months before you sell. So it’s always good to have that advisor next to you helping you from the very beginning. No matter how small or how big you are, you can benefit from tax planning.

Cody Crabb (09:20)
Yeah, mean, it sounds like it’s one of those things that you think, it’s not that hard. It’s money I could save on hiring somebody. ⁓ But really, I mean, and this is just my imagination here, but I would imagine that hiring a CPA pays for itself many times over. Would you agree with that?

Ana B. Garcia, CPA (10:13)
100%. 100%. And I’ll tell you, a lot of people are using AI now to even do their bookkeeping and we see so many mistakes that cost them thousands of taxes.

Cody Crabb (10:25)
Yeah, that’s the thing, AI is great. AI is good. I would say AI is probably better for getting you ready to go to a CPA, because then it’s like, know, gathering things and whatever. But yeah, you’re right. At this point, it makes, too many mistakes, there’s too many variables that, if CPA can get to know you and your goals, importantly, I think that’s another thing that we don’t talk about. So what’s something that somebody does, ⁓ let’s say they’ve got a goal in the future.

to, well, let me, okay, yeah, here’s a better way to ask this. What’s something that a CPA or ⁓ tax planning can do for someone to achieve goals way in the future? Let’s say I have big plans in the future and I’m like, this is what I wanna do. What are some things that start early, just to give people an idea of the kinds of things, the kind of difference it could make in down the line if I start now?

Ana B. Garcia, CPA (11:21)
So I’ll give you an example. had a client ⁓ who bought a building, right? And ⁓ he, we did the cost segregation. He met the requirements to qualify for the deduction. And ⁓ because of those savings, he was able to get $70,000 off of his taxes. Okay. ⁓ And with that, with that, he’s like, you know what, I’m looking for the next property. And then a year later, he was buying another multi-family. So that is

Cody Crabb (11:42)
Wow.

Ana B. Garcia, CPA (11:51)
the power of tax planning, right? We also have another case where we had a client come to us, somebody come to us, they became our client after that. They had done a cost segregation study, but because they didn’t qualify, they were not getting the deduction on their taxes. So they have paid money invested in a ⁓ strategy that didn’t really make sense at that point. And then we got him ready to really take advantage of those losses. That were just sitting there on the tax return without being really productive.

Cody Crabb (12:19)
It sounds like a lot of this is just kind of sitting on the table and you really need the expertise to know exactly where to get to. So yeah, thanks for digging in there because I think it’s important to point out like this is some of this stuff is it’s easy. You just don’t know about it because that’s not your expertise.

Do you have any other examples of this? Because I feel like that’s something that you would see quite a bit.

Ana B. Garcia, CPA (12:37)
Yes, in fact, we actually have another case of a client. think this was a married couple. I think they started, I’m going to say five years ago. I don’t remember exactly, but five years before they came to us, they had bought an apartment in a huge building and they were just owners of that apartment. Then two years later, they sold the apartment, but a house or a duplex actually. Then two years later, they sold that duplex or, know, and they’ve got a big

a multi-family. So that they did that by not paying taxes through a 1031 exchange. Okay. So that’s another thing that you can do.

And we have a lot of people say, well, you know, Ana, I don’t really want to, I want to my property. I don’t want any more. I don’t want to deal with the tenants, the toilets and taxes. So we do have other options also where you get, you, you, you sell your property, put it into some investment. That’s more passive. I’m still real estate and you’re getting income, but you’re deferring.

Cody Crabb (13:22)
Yeah, yeah.

Ana B. Garcia, CPA (13:34)
your taxes and if you, you know, there’s a lot of like, there’s also the opportunity zone funds. If you put money into an opportunity zone fund and we’re getting into another, another strategy I hadn’t mentioned before, then you can even forget about paying taxes altogether. If you, if you ⁓ keep your assets or your investment, if it’s just a fund for, for as long as the IRS requires, which is it used to be 10 years now they’re trying to change the law to be a shorter period of time.

Cody Crabb (14:02)
Gotcha. So most of my questions now are gonna be, the answer’s basically just gonna be call a CPA and they will let you know. But just to kind of give people an idea, like what, well yeah, exactly. What would be, like how does someone know what path makes the most sense for them? Like the whole 1031 versus going more passive. mean, I’m just, how does someone even start to think about that?

Ana B. Garcia, CPA (14:11)
I love this.

Well, so it really depends on a case by case basis, right? That’s why it’s so important that you contact a CPA. And more importantly, because not all CPAs are tax strategists. You need a tax strategist, okay? Someone that will really know about all these strategies that will really look at your situation. Are you a W-2 employee? Do you have a business? Are you a full-time real estate investor? What kind of investor are you? Are you flipping? Are you wholesaling? Are you doing long-term rental? And that’s how you’re gonna get your answer.

Cody Crabb (15:30)
Yeah, I think that’s kind of what I was getting at was like, every situation is so complicated just because you have so you have to everyone has different goals, different financial positions, different everything. And so knowing what your situation is, I think is the most important. So ⁓ here’s a here’s a good one, ⁓ because, mean, you’re not going to be everybody’s CPA. ⁓ If somebody is looking for a CPA to help them with this stuff, what what would you suggest that they look for?

Ana B. Garcia, CPA (15:55)
Well, ⁓ I think, you know, when you’re talking to a CP, number one, being a tax strategist, like I said, right? You have to, they have to know tax planning because a lot of CPAs don’t know the strategies, even the basic ones like home office deduction, depreciation, you know, we see a lot of mistakes. So that would be number one, make sure they’re tax, they’re certified by the AICTP, which is the American Institute of Certified Tax Planners. Okay, that’s number one. ⁓

you wanna make sure that they’re listening to what you’re saying. They’re listening to your goals, they’re asking about your goals, your challenges, that they’re reviewing your taxes. The first thing we do when we talk to someone is send me your tax return. We evaluate it and we tell the person what opportunities are being missed and how much deduction we think they’re missing out and how much taxes they could save. And then just, comes out like we talked before, you have to have this connection with your CPA.

and your tax strategies, you wanna make sure that this person, ⁓ you connect well with them, that you understand what they’re saying, that you agree with their values, et cetera.

Cody Crabb (17:05)
Absolutely,

yeah, I think the values thing too. I mean, it’s just like any relationship in this industry, like it’s important to find somebody that kind of gets you, like that you kind of, you can work with and that you trust and that, you know, you don’t think they’re giving you answers just to feed their bottom line and things, ⁓ yeah, everything you said, I think that’s great. ⁓ Okay, so ⁓ let’s say people want to work with you. ⁓ Who would you recommend, what situation would they,

be in for you to be an ideal person to work with and how should they reach out to you?

Ana B. Garcia, CPA (17:39)
So anyone really buying, real estate, anyone considering a 1031 exchange, somebody that doesn’t know if the cost segregation is a good strategy for them, anybody that just like had, we’re going through tax season right now, anybody who’s just crazy scared because they owe a ton of money to the IRS, anybody also doubting that their CPA is really providing the strategies, we see this a lot.

my CPA is, you know, I’m telling my CPA the strategy and you know, they have no idea. anybody just doubting that they’re really taking advantage of the tax code, which is super beneficial for real estate investors can give us a call and we’ll be able to help them.

Cody Crabb (18:20)
That’s great. I’m excited to see if ⁓ people get through to you, because it seems like you’d be really helpful. ⁓ can you give me the, what’s your website?

Ana B. Garcia, CPA (18:31)
So they can go to our website, it’s anabgarcia.com. That’s A-N-A B as in boy G-A-R-C-I-A-C-P-A.com.

Cody Crabb (18:45)
Gotcha, and we’ll have that linked in the show notes if you don’t want to type that out. You can just do a little click and you’re there. So, ⁓ Ana, thank you so much for joining us today. This has been really helpful. And thanks again to our audience as well for listening. If you got something out of this, and I’m sure you did, please go ahead and hit subscribe, like, comment, do all the things, and we’ll see you on the next episode of Real Estate Pros. Ana, once again, thank you and have a good one.