Minimize Your Tax Bill

 [00:00:00] Mike: Hey everybody. Welcome back to the show. Today we’re going to talk about an important topic with my buddy Joe, Joe vari. He’s going to be talking about really how to save money on your taxes. If you’re a real estate investor, if you’re. Specifically a single family house, buy and hold person, how to really minimize, uh, your tax bill.

They’re pretty amazing stuff that a lot of people are not doing. And what I found is if you’re not spending a decent amount of time trying to keep more of the money you make, then you’re probably doing it wrong.

Professional real estate investors know that it’s not really about the real estate. That real estate is just a vehicle to freedom. A group of over a hundred of a nation’s leading real estate investors from across the country meet several times a year at the investor fuel real estate mastermind. To share ideas on how to strengthen each other’s businesses, but also to come together as friends [00:01:00] and build more fulfilling lives.

For all of those around us. On today’s show, we’re going to continue our conversation of fueling our businesses and our lives. I’m glad you’re here.

Hey Joe. Welcome to the show.

Joe: [00:01:20] Hey Mike, good to see you.

Mike: [00:01:22] Good to see you. Yeah. Yeah. So, you know, uh, you’re, you’re, you’re a member of our mr fuel a family here. And, uh, when you came in and started sharing around what you were doing, it just blew a bunch of people’s minds because they’re using some techniques that people have been using on multifamily, commercial and bigger properties.

But it wasn’t really, I guess, kinda cost effective, uh, for single family people until fairly recently. So excited for you to share that knowledge today with everybody.

Joe: [00:01:46] Very good. Yeah. I’m, I’m, I’m excited too.

Mike: [00:01:48] Thanks. Yeah. Yeah. So tell us a little bit about your background and kind of how you found your way into this role.

Joe: [00:01:53] Well, when I was going to college, this is the different part of the story. When I was going to college management major [00:02:00] at San Diego state,  university, which is ranked number seven in basketball, so that, that, that blows a lot of people away. You actually ranked number seven in the nation anyway. Um, and so I was an entrepreneur and I started first in the travel business and I owned my own travel company.

Taking. Um, I, I did a lot of sports tours, so I worked with the San Diego chargers and I worked, I, I’ve been to every sporting event  known to man. And then, um, uh, after that I went into financial planning for the California association of realtors. I got out of the, I sold my business and I, I got into financial planning.

And then the two, the meltdown happened. And, um, everybody from the  who were members of the California association of realtors, they fell off the cliff in 2007. And a friend of mine who had done a cost segregation study for one of my clients said, why don’t you come and work for our company? The owner called me and, um, I haven’t stopped.

I just [00:03:00] said, Hey, I think this sounds good. And I got involved and, uh, now I own my own business. But I started working with a couple of nationwide companies. And so I’ve been doing it now for 1314 years. Yeah, that’s cool. That’s cool. And you know, this is for people that are listening right now. This is one of those topics that.

Mike: [00:03:16] It’s a, you know, it’s, it’s definitely not the sexy side of the business, but what is sexy is saving money on taxes. Right? And so the truth is, is a, you know, a lot of us are looking for the next deal, raising private money, all of these things to kind of grow the front end of our business. And sometimes we don’t put a lot of focus on minimizing the expense and it has just as big of an impact on the profit as growing the top line.

Right? Or it’s certainly maybe even bigger in some instances. So this is an, this is an important topic. Well, well, the investor fuel, they’re, they’re given a lot of education and, and they’re, they’re getting a lot of contacts to meet a lot of people. Um, you know, to be successful in business, you have to basically have your finger on a lot of different areas.

Joe: [00:03:55] And like you said. I am not an accountant and I’m not an engineer, but [00:04:00] I, I, I walk in both of those worlds. And to me, those are two of the most boring worlds, accounting and engineering. So I feel the pain when my accountant calls me and wants to go over my year end. But basically there are tools out there that at least everybody should know about.

Mike: [00:04:17] Yeah. Especially if you are told by your accountant, you must write a check to the IRS. Yup. That’s when you got to stop and say, wait a minute, do I really? Right, right. Yeah. And I’ll tell you, I mean, it’s near and dear to my heart. Like entrepreneurship is hard, right? We work hard, we hustle hard, we do whatever we have to do to improve the life of our families and all that stuff.

And you know, it’s really important to try to maximize your bottom line profits. And there’s some things you’re going to talk about here today that help people do that without spending another dollar on marketing without working any harder to grow the top line. It’s just keeping more of what you’ve already made.

And so I think, honestly, a lot of people, you know, are so focused on growing the top line that they’re just not paying attention to some things that are kind of below the line there. So, [00:05:00] um. Let’s talk a little bit about why, I mean, we kind of talked a little bit about why people, why people need this, but what’s, why is this a bigger deal in single family now?

Just just to kind of want to talk a little bit about kind of what it is that you do and kind of the traditional route of people like depreciating their rental properties and stuff over like 27 and a half years. But let’s talk about, you know, what I guess kind of what this is that you do and. Tell us a bit more.

Joe: [00:05:24] Okay. So when I first started, uh, 13 years ago, we did a four engineered based study, which means that we had construction engineers looking at a building, looking at all the data that we collect, photographs, measurements. Building component types of how the building was, was built. And what we do is we reallocate the, um, the, the buildings, um, components.

So there’s two classes. There’s real property, which everybody should know what real property is. That’s the main structure of the building, the roof, the walls, the windows, the doors, the, the, the, [00:06:00] um, uh, uh. Slab, the foundation. Um, that’s the real property. But what the IRS says is that all of the property that, um, is personal property has a shorter life than 27 and a half years.

And that property, I can use one very simple explanation. If I’m, for example, in a single family home and I pointed the carpet, I say, how long will this carpet last? Will it last 27 and a half years? And everybody will light up and go, are you kidding me? I’ll be lucky to be alive. Errors, you know, whatever, you know, you know the answer to that.

It doesn’t last 27 and a half years. And so basically the IRS recognized that 50 years ago and they’d been allowing this for 50 years until finally in 1999, there was a big court case and they finally, um, they, they gave us all of the, um, the instructions on how to apply this concept, which is, there’s a bunch of components in the building that do not have 27 year lives.

And as engineers, we know the tax law. [00:07:00] And we apply the personal property. And when you put them together, the personal property and the real property, cause there’s always going to be real property. The structure stays the same. But when you carve out the real property, basically you get an acceleration of the depreciation expense.

Mike: [00:07:14] Yup. And the tax laws are such that right off. And the tax laws are such, now that you can, you can accelerate that all in year one or one year. Right? The new tax law, the Trump tax law has what’s called a hundred percent bonus, and that’s huge. You get all of what I find in, in the personal property. So let’s say I find 25% of a a hundred thousand dollars building, you get a 25 $25,000 right off in year one.

Joe: [00:07:39] So the way we used to do that was we would need engineers to go to the property each property. So if somebody owned 12 properties in there all over the Midwest, we would have to, so it, it, it, it just didn’t make sense. I would have to charge a minimum of three grand. However, we’d come up with a new technique where we can now quote, model the property and using [00:08:00] our experience in statistics.

We can model the property and we’re telling the IRS, okay, for this address, for this home, we expect we will, you will be able to find this impersonal property. Yup. Yeah. That’s awesome. So what, what is, what’s the kind of IRS viewpoint? I mean, why. How do they, how do they feel about all this? I think sometimes people, when they get around tax stuff, they get afraid, right?

Mike: [00:08:25] It’s like we’re afraid that I’m going to do something wrong. And they tend to just say they tend to overpay taxes, right? Cause people are afraid they’re gonna be like Wesley Snipes and end up in prison or something. So, uh, what’s kind of the viewpoint on this for, for, for real estate investors are for, or for the IRS, like their angle.

Joe: [00:08:41] Or their angle is basically they, it, um, we may have lost that court case in 1990, I think it was 1998 when they lost that case, the judge was so upset with the IRS. He goes, you have to tell everybody how this works and explain it to them. No, no hiding behind the curtain. So the IRS came out [00:09:00] and I think it was 2004 with an audit guidelines for cost segregation.

Everybody’s invited to, to Google audit guidelines for cost segregation. You can read what the examiners should be looking at for cost segregation and how it’s, how it’s applied, and basically, um, because of that, the IRS is onboard. Now take it one level further. Um, you will not get audited for cost segregation.

The only time you would get audited for cost segregation is if they saw something really crazy. Like if you had a building worth $100,000 and your cost SEG reports said that you have $60,000 in personal property. Well, yeah, you might get audited, but if you get audited by a quality firm, um, this will not be a trigger for audit.

So put that bed bed, you know, put that 13 years ago I had that question, this must be a scam. How could this be? Now that question has been been put to bed because accountants around the country, if [00:10:00] they don’t do it, they have at least heard about it. Right, right. So talk, talk about, uh, is this something people can do themselves, or what’s the importance of having a firm like yours do this?

Mike: [00:10:09] They were, does the IRS require a kind of third party firm like yours to do this or talk about that a little bit. Yeah. Basically, if you go to the audit guidelines, you’ll see their, their, their ranking of the methodologies. And basically number one is having an engineered based study. The last one is, well, in fact, it’s not even on there.

Joe: [00:10:29] They do not want an accountant or a building owner to, um, to do this, to carve out the personal property. Their position is what do they know about construction, right? How do they know? How do they know and how do, what do they know about tax laws? How do they know? And there’s, there’s, there’s differences in even, um, we sometimes question, for example.

Um, let’s take, uh, um, ceramic tile. Okay. Well, there are costs and companies and say, ceramic tile is [00:11:00] 30, is 27 and a half years. Okay. However, our viewpoint is different because now when you attach ceramic tile, you can easily pop those tiles off and reuse them. Hmm. So you have to know the tax law and you have to know, you know, will the, what component this is and where it should fall in terms of can it be accelerated or does it have to stay with the building?

For example, in that example, you know, our experience tells us that nowadays, um, there’s been a court case where it was argued in, in, in the court case, um, the, the account one. Saying that, no, this is a five-year property because now ceramic tile can be re be removed and doesn’t have to be thrown away. It can be removed and re glued on.

It’s a lot of stuff like that where the individual building owner just, there’s no way they know this. Right, right. And even the traditional account, I mean, you know, I’ve known a lot of accounts. I know, you know, way more accounts than I do. Anybody that’s listening to this that has an account and you know that they’re [00:12:00] generally risk averse, right?

Mike: [00:12:01] So if they don’t understand something, they’re not going to put their neck on the line. I mean, the end of the day, it might save their client more money, but it puts more risk on them and they get paid the same either way. I’m not saying anything bad about accountants, but you know, by nature it’s a conservative person usually, right.

That is doing this stuff. So they would appreciate having a third party arm that’s kind of taking on. That burden to say, here’s what we found, and know that they’re kind of protected from, you know, they don’t necessarily have to validate what you said because they’re taking that as, um, kind of a third party endorsement.

Right. 

Joe: [00:12:30] Well, as a matter of fact, what we really do provide is we provide audit support. So in other words, if you ever get questioned by the IRS, don’t forget there’s, there’s questions and there’s audits. Right? So cost segregation is not going to cause an audit. But if you get dragged into an audit for another reason, like say, let’s say for an example, let’s say that you’re expensing things you shouldn’t have expensed, and they see that you’ve done a cost segregation.

They may look at the report and they may say. [00:13:00] Well, why did you take this? Um, why did you price this, this molding and any, anyway, so they’ll, they’ll, they’ll ask a question and then what we do is we’ll get on the phone and we’ll, we’ll talk to them. And we represent our, our, our work. We take a lot of pressure off the owner and the CPA.

They don’t have to get in front of the IRS. We’d like getting in front of the IRS our positions cause we don’t lose. Yeah. Yeah, and I will tell you, that’s one of the things, I’ve hired different accountants over the years and different people that we’ve had like. It. This sounds counterintuitive. There’s actually a commercial that I just saw because it’s tax season right now, right?

Mike: [00:13:35] So there’s a commercial I just saw about somebody trying to find a new accountant and this guy and the guy was talking about an audit and they made it sound like that’s some big red flag. The truth is, I found, I prefer the accounts that are not afraid to be audited. They’re like, well, if we could audit it, here’s what we’ll say.

I mean, it’s very, matter of fact, they’re kind of anticipating, here’s why we’re making this decision and if we get audited, then here’s what we’re going to say. And then I have some that are like, well, I’ve [00:14:00] never been audited before. It’s like, well, I kind of, that means you’re basically staying way away from the line.

Like I want people to go up to the line, like don’t cross it, but don’t be afraid to go up to it. Right. And there’s a, there’s a lot of techniques out there besides cost segregation. Where it doesn’t take somebody who’s really an accountant, you know at all, but somebody who just cares enough to know. One thing we talked about earlier was the new expensing rules.

Joe: [00:14:24] The IRS came out with bright lines on now what you can and cannot capitalize in, which you can expense. In year one, we were talking about de minimis, which is everything that’s $2,500 or less. You can, you can expense that without any questions from the IRS. Just 500 you have an invoice, $2,500 or less, you can expense it.

And so basically there’s a lot of techniques out there that if you just. You know, just consider that there’s a lot of techniques out there that, that you can take advantage of. And, and finding the right accountant is, is important. Somebody who, yes. [00:15:00] So let’s start, can you talk a little about your techniques?

Mike: [00:15:01] So just, just to kind of clarify here, cause this is for some people that are listening right now, you have the ability to accelerate depreciation. Uh, which is a, you know, it’s a, it’s an expense on, on the, on the, on your tax return that’ll help minimize your taxable income. So talk about kind of your technique of, of how you work with a client and, and what you’re looking for and I guess what the, what the end product is ultimately.

Joe: [00:15:25] Okay. So basically, um, one thing that everyone should understand is basically it’s an expense against income. So let’s say you are showing a, a taxable income of $100,000. You do cost segregation, and I’m going to give you a $50,000 expense, so that means you’re going to take $50,000 off the hundred so instead of paying tax on on 100,000 you’re going to pay tax on 50,000 if I give you $100,000 right off, you’re not going to be in jacks.

So that’s number one. Everybody was kinda confused because we’re talking about expenses, but that’s not tax [00:16:00] savings. If I save you 100,000 if I give you $100,000 right off, that means you’re going to save your income tax rate, which is at 40% would be 40 grand. So make sure that everybody knows the difference between, you know, writeoffs and expensing and all that.

Okay. Right, right. Basically, the other thing is, um, in terms of what we do is, is we use to send an engineer to the property. As I mentioned, we don’t do that anymore. We do a modeling technique for single family homes. And to make it even, um, even clearer, uh, to understand is any building with the basis under $500,000, we could model.

So I don’t care if it’s a strip mall, I don’t care if it’s an, if it’s a bakery, we can, we can do the modeling technique, anything over that by $1, we will not model because we feel that that’s our threshold. And like you said, we don’t want to go over any thresholds. We want to be, you know, perfectly within the IRS regulations.

So basically what we do is we use our statistical [00:17:00] modeling and we use our experience and we use our database. To tell the IRS, okay, this building in Waco, Texas at 1500 square feet, three bedroom, two bath, home of this type of construction, we feel we’ll have this amount of personal property. Now, the one thing that you cannot do with modeling is you cannot use a modeling report to determine the, um, the value of something that you throw away and dispose them.

There’s value in dispositions. So if you do some remodeling and you throw in windows and doors, everything fell in the trash, has a write off value, but unfortunately you can’t use the model and report for that. So what you can use it for is the acceleration of your depreciation. So if you bought the property in 2019 you need to do no extra accounting work.

You basically, you get my report and you take what I’m, and you each tell the IRS, this is how much we’re going to show. For accelerated depreciation, and this is how much we’re going to show. That stays in 27 and a half year. Yeah. The [00:18:00] little bit of weirdness gets in if you do a lookback study, and I can go back 15 years and usually and make the numbers work.

So if I do a look back property, meaning the property that wasn’t purchased in 2018 there’s another calculation that has to be done and it’s, it’s called the change of accounting method form 31 15. And we provide the, the, the, the numbers for your account. So we do all the calculations. He has to fill, fill out the form, which is very simple and we’ll help him, but he’s got to sign it so we don’t fill them fill, fill a form out.

So to do a lookback study, you’ve got to file a form 31 15 and file that with your taxes to tell the IRS, this is what we took. When we did straight line and this is what we’re taking now when we do acceleration. Yup. Yup. And part of that, that’s what you’ll be doing for us, right, for personally for my properties is cause we smoked many of ours.

Mike: [00:18:49] We’ve owned from, you know, 2010 forward and there’s already some amount of depreciation in there. So you have to look at all those things. Kind of see how much, how much of that depreciation has left. Right. You got it. [00:19:00] Exactly. So we do, and we do that calculation and we give it to your accountant and say, here’s the, that’s called the four 81 eight adjustment.

Joe: [00:19:05] Here’s the adjustment. This is what you record to the IRS. And, um, basically you, you, you usually will come out still ahead. So when people do look back studies, if you’ve owned a property for longer than 15 years. And you know what, I’d have to run the numbers. And by the way, we do all of our estimates for free.

We don’t charge. Can we talk to the client and say, okay, this is how much much it’s going to cost you. This is how much it’s going to save you. Do you want to move forward? And if they say yes, then that’s when we go to a proposal contract. Yeah. Yup. What, what do you, of course, we don’t know when the tax laws could change all the time.

Mike: [00:19:41] So how, how long do you think this window is open for? Is this something, I mean, obviously. As long as Trump is in office, probably it’s not going to change, but these things could change. What are your thoughts on, on, uh, this kind of window of opportunity, if you will? It’d be better for me to say, you got to do this by tomorrow and then people [00:20:00] are going to be in play tomorrow.

Joe: [00:20:02] Yeah. You know, one of those card Carlye deals, no, by, by five o’clock and you save $500. Here’s the reality. I hate to say this, Mike, because this is not a sales. Technique, but we’re not salespeople anyway, but here’s the deal. Um, cost segregation is not going away. It’s been around in different terms, like they call the component depreciation in the 80s in a way.

However, the a hundred percent bonus is definitely on the books to go away. Um, I believe it’s the 2022 after two, 2022 it’s gonna. It’s going to be phased out, and by phasing means that right now you get 100% bonus, and then in 2023 you get 75%. And then in 24 you get 50% so the bonus will go away. It’s still not a big deal.

It just, the only difference between bonus and non bonus is that you get all of it right now in the tax year. You file it. If you get it all [00:21:00] now, you would get your benefit mostly in the tax or your file, but you get trails. It gets some more in the next year, so more in the next year for five years. About.

Mike: [00:21:08] Okay. Okay. The end of the world, it just means boom. Instead of getting $25,000 you’re going to get 18,000 and they didn’t get another thought and another couple thousand, another couple thousand G you reach the 25,000 yup. Yep. That’s awesome. And in the event that your accelerated depreciation is more than your taxable income, that that carries forward as well.

Joe: [00:21:29] Oh, very good question. Yes. Another thing, a lot of a lot of folks do like to do this, it’s like having a bank account went through appreciation, and so basically it’s called a, um, a, a loss carry form. In a well, and if you don’t use all of what I give you this year, you just carry it forward until that bank is down.

Now I would like to say basically it’s unlimited, but I think the rules, if somebody wants to Google in OLS is 15 years. So it’s unlimited because no, [00:22:00] nobody really holds a property for 15 years. Yeah. Well, it might not offset your taxable income for 15 years at least. So. Yes. Yeah, yeah, yeah. Awesome. Well, uh, this is good stuff.

Mike: [00:22:11] So, Joe, if folks wanted to learn more about like your technique, what you do, your service, of course, you know, there’s a bunch of people that are an investor fuel that never even heard of this before. And. You know, hired you and like saving a ton of money. I mean, it’s pretty incredible. I mean, the great part is as real estate investors, that money you save, you can reinvest back in your business.

Like most of us can go and five 10 X our money. And so it’s not just, Hey, I saved 50 grand. It’s like, but that’s worth 250,000 or 500,000 to me. Right. Well, that’s what I tell all magnify. We magnify our profits. Honestly, I tell the investor field, I said, what would you rather do? Would you rather pay the IRS X would rather go out there and buy another property?

Yeah.

Joe: [00:22:48] So you don’t want to pay the IRS if you can go out and buy another property because you’re well build it. No, don’t be just cause this is legitimate. This is, you know, I always use it nowadays, [00:23:00] everybody understands is the people like Jared Kushner and the president of the United States, they don’t pay income taxes for taking advantage of a lot of these techniques.

That 100% solid. You just have to be smart enough to know how to use them and to ask your accountant to apply it. Absolutely. Absolutely. We’ll get a one to me. Okay. Uh, probably the best way is email and it’s my last name is, as you mentioned, Byery. So it’s J, O, E V, and the name of the company’s us tax advisors group inc.

So you S T a, G I N c.com. Okay. So a U S T a G I N c.com. Or you can go to www.ustaginc.com. Yeah. And that’s again, U S tax advisors group incorporated, I N c.com. So that was a mouthful. For those of you that are driving right now and listening, you don’t want to try to write that down, but we’re, I’ll put that in the show [00:24:00] notes so folks know exactly how to get ahold of you and your website and all that stuff.

Mike: [00:24:03] So make sure you check out the show notes here. Guys, if you want to. Get that, or obviously pause it and pull over and, you know, make sure you’re safe about it. But, uh, it’s really, honestly, you guys, it’s really good stuff. Like I said, up front, I’m very passionate about helping real estate investors build their businesses and, and building wealth and a, not a fan of paying any more than you have to.

I don’t believe this bullshit about paying our fair share all. If you’re listening to this show right now, if you’re a real estate investor, you pay more than your fair share, most likely. And so this is all really legit stuff for helping you minimize your tax bill, which helps you build more wealth. You can reinvest that money.

You can hire more people, you can expand your business, right? So doing an improvement on your properties. Absolutely. You can do that money with that money rather than. Writing a jet. It says IRS. Yeah. Yeah. There’s no doubt. I have no doubt that I can invest my own money, uh, better than the government can. I have no doubt.

[00:25:00] So we won’t, this is not a political show, but anyway, you know, we won’t go there. Well, good stuff, Joe. Hey, thanks for sharing today. All right, Mike, I appreciate it. I’ll see you in a couple of weeks. Yeah, everybody, I hope you hope you are able to increase your profits by this. Check Joe, out of good guy.

Honestly, a lot of industry leaders are using Joe. They know who he is, so I want to introduce them to you if you don’t know him already. And uh, by the way, if you have not yet subscribed to the show, I’d love it if he did go out, subscribe, leave us a positive review wherever you’re watching or listening to this right now, iTunes, Stitcher radio, Google play, YouTube.

Of course, you can always find all our shows on flipnerd.com or the investor fuel.com website, so appreciate you guys a ton. See you on the next episode.

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