How Real Estate Investors Can Reduce Tax Risk and Stop Fearing the IRS

Paul Levine (00:00)
Well, number one, don’t be afraid of the IRS. ⁓ Everybody does things not to be audited. ⁓ One thing that I did as a CPA, and I still recommend because I work with CPAs, is there are ways to be audit free. ⁓ I do something that I’ve never seen anyone else do. I know what questions the IRS is going to come up with.

and I add a schedule to the tax return with that question and I answer

Scott Bursey (02:06)
Welcome back to the Real Estate Pros podcast powered by Investor Fuel. I’m your host, Scott Bursey. Our guest today is Paul Levine of Beverly and Company. Paul is an absolute legend, bringing the fuel of five plus decades of tax and accounting mastery. He doesn’t just know the rules. He’s seen every shift since the 1970s. Paul is here to give you the blueprint for maximizing wealth and minimizing your tax burden. Get ready listeners.

for some high octane financial clarity. Paul, welcome to the show.

Paul Levine (02:38)
Thank you, Scott.

Scott Bursey (02:38)
It is just wonderful having you here and for our listeners who may not be familiar with your journey. Please give us the front row seat on how your career ignited and where you’re applying the fuel now.

Paul Levine (02:50)
My career started in New York. ⁓ I went to the best accounting school in the country at the time back in 1964. Took my first income tax class in 1965 and in 1965 I started working in accounting. And then I was a practicing CPA for over 50 years. ⁓ Saw it all.

I negotiated the sale of one of my accounting clients to this small company in Delaware called EI DuPont. ⁓ It was four guys from DuPont and me and my client on the other side of the table. ⁓ So I did a lot of things. I was an expert witness and I absolutely embarrassed the posing council. ⁓ I had fun because nobody knew more than I did about what I was doing.

I was also a university professor for six and a half years at California State Los Angeles. So I know how to explain things to my clients in terms that they will or at least should understand. And I have been a commercial realtor and real estate income tax consultant since 19, no, since 2015. It’s been a long time.

And that gives me 11 or 12 years doing this and I love what I do. I I set the rules on something. I had a friend whose tax return I did and it was a 1031 exchange. You mentioned 1031 exchange before. And as it turned out, it collapsed because the facilitator went bankrupt.

⁓ And then my friend got one check one year and another check another year. And I changed everything. I amended stuff all over the place and I did it as an installment sale because they kept getting money. And 30 days after I filed all of these wonderful amended returns, the IRS came out and said, do this as an installment sale.

So I basically set the rules.

Scott Bursey (05:56)
You sure did. What an incredible trajectory. Paul, what really caught my attention about you was the way that you’ve been able to navigate a half a century of changing tax codes, market crashes and booms consistently helping real estate investors structure their deals for maximum wealth preservation and growth. That sustained financial discipline is pure fire.

Paul Levine (06:20)
Well, starting out early in my career in the early 1970s, I was put in a position where I was the forensic accountant on a divorce case with in 1972, $14 million in multifamily housing. And I had to split up the property. So I did a spreadsheet of spreadsheets.

covering everything that I had to in order to know what the wife should get and did get and what the husband should have been left with, which he was. He wasn’t happy with me, but then he tried to hire me.

Scott Bursey (07:00)
Paul, thank you for that amazing insight. Now let’s start our engines. With 50 years underneath your belt, 50 plus, what is the biggest, most timeless principle of wealth preservation that new investors constantly overlook?

Paul Levine (07:16)
Well, everybody thinks you invest in real estate and because the words cost segregation study and bonus depreciation have now come to the forefront of real estate investing, everybody thinks that you could take huge amounts of depreciation. And if you are a real estate investor, and remember that word, if you are a real estate investor,

you are limited to a $25,000 passive activity loss on your tax return that you can take against other rental income and rental losses. One thing that you have to remember though is before you get to that $25,000, you have already offset rental income versus rental expenses and some other expenses

that we can creatively put in there in order to get the maximum deduction before we get to the $25,000 passive activity loss. Now, if you want to do more than just be a real estate investor, you have to become a real estate professional. One thing I would suggest, I will tell you what that is, but I suggest that everyone

listening to this podcast, Google, I don’t know if everybody just Googles now, but that you Google real estate professional so you know the rules because they’ll be a little more detailed than I’m going to give you now. Number one, there are two rules, really simple. Number one, you have to spend more than 50 % of your time doing

real estate. And when I say doing real estate, even took notes before this. And when I say doing real estate, we’re talking about buying, selling, renting, leasing, and or managing properties. Plus, you have to put in 750 hours doing these things. 750 hours isn’t really a whole lot.

but you can’t have a W-2 job and expect to be a real estate professional because the IRS is just going to go, no. And being that real estate professional or wanting to be, you have to do one thing. And when I say one thing, if you don’t do it, you will go down in flames. You have to have a calendar book.

on your computer,

pen and pencil, ⁓ that you write down everything. And when I say everything, you have to write down every meeting and do it for meetings that pertain to real estate, as well as those that don’t in order to give that calendar book ⁓ credibility. You don’t just want, ⁓ here’s what I did. And, you know, it’s all

Just too clean. You can’t go a whole year. Excuse me?

Scott Bursey (11:04)
documentation.

Documentation, documentation, documentation.

Paul Levine (11:10)
I mean, very few people who are listening to this podcast have ever stood toe to toe with an IRS agent. And I have done it, I did it with a guy who is this tall and we literally went nose to nose and I used the F word on him, but I walked out with a no change audit. That means that I walked out with the tax return done as I filed it.

Not only done, done and accepted.

Scott Bursey (11:42)
While beyond 1031 exchanges, what is the most underutilized tax code or legal entity structure that offers significant immediate leverage for mid-size investors?

Paul Levine (11:53)
Well, if you’re talking about a way to get the biggest deductions, you’re talking about, again, being a real estate professional. 1031 defers taxes. Cost segregation defers taxes. So you’re not, quote, saving taxes. And people have to realize that. And I write articles every workday, and I post them.

excuse me, I publish them on LinkedIn and on Facebook every single work day. And I have an article that talks about being a real estate professional versus a real estate investor and all of the rules that you defer income taxes, because people don’t pay income taxes this year. And they think, gee, I just saved it.

You didn’t save it, you got to do it right. If you plan, you will end up saving it. And quote, you asked the greatest tax savings. mean, you hold on to your real estate in the proper way, in the proper entity and pass it on to your heirs. And then they get a step up in basis to current market value.

Scott Bursey (12:56)
Happy?

Paul Levine (13:17)
they can start depreciating it all over again. I was playing golf one day and it was with one of my dear friends and two of his friends. And one of his friends was complaining that his dad was really ill and that he had to sell his dad’s house in order to pay medical expenses. That was about the third hole. And when we got to the sixth hole, I found out that daddy was sick and

that there was no loan against the property. And now we got to the ninth hole. And I said, what I just said to you, hold onto it, pass it on to your heirs, let them get a step up in basis, let them sell it if they want, that no gain or loss. And then you’ll have the money by refinancing it in order to pay for your dad’s medical expenses.

and he bought lunch when we the 18th hole.

Scott Bursey (14:13)
Let’s continue to smash the gas. After 50 years, what is the most surprising change you’ve seen in investor behavior and how does that impact their current tax planning?

Paul Levine (14:25)
There is no current tax planning. ⁓ Everything is day to day at the whim of one person. And that’s playing havoc with the investors out there. ⁓ They’re scared. They don’t want to go into something not knowing what may be different tomorrow. And my theory is that if you negotiate a good deal for a good property,

You do it now. You do it whenever that property is available because they are not always available.

And you have to have trust in your negotiator. I mean, I was in one meeting, I had to go all the way up to Bend, Oregon. And it was me and my client against an attorney and the client.

His client who was against mine, they were breaking up a company and their CPA. And we walked in and I put on a show, putting my papers down, taking off my jacket, rolling up my sleeves. I sat down and I said, the first thing is that the price is $70,000. And the attorney looks at me and says, I don’t know that to be the case.

And I said, the second thing is, and I don’t remember what it was, but I got the same exact response. I don’t know that to be the case. And I said, the third thing is that ⁓ the date of the transaction will be such and such, giving your client a long-term capital gain. And again, this dumb attorney guy, I don’t know that to be the case. And I turned to their CPA and I said, am I right? And he goes, yeah.

And I turned back to the attorney and I said, he just said I’m right. And he goes, well, I don’t know that he’s right. And I said, gentlemen, the meeting is over. So I started putting my papers together and put my jacket. I made it to the door and two hours later I had it.

Scott Bursey (17:06)
That’s incredible. Paul, you have half a century of experience, you know, guiding real estate professionals. If a pro’s goal is to create true multi-generational lasting wealth through real estate, what is the most critical financial or structural move they need to make right now to ensure their assets survive and thrive across decades and major tax reforms?

Paul Levine (17:08)
No, that’s fine.

Well, make sure you have enough cash reserves.

Make sure you have enough cash reserves because right now with the investment environment out there, things are shaky. And if you don’t have the cash reserves, then you can’t make the moves that you may have to make literally on a day to day basis. So don’t

invest in real estate with every dime you have, ⁓ hoping that the rents come in on time for when you have to make the mortgage payment. It doesn’t work that way right now. And it may not work that way for a while. And so it’s a different investor that has to go into the system now. It has to be somebody

who either knows what he’s doing already or has professional advice. And when I say professional advice, I’m talking about your realtor, who is me, ⁓ your CPA, and I know more than your CPA, ⁓ your attorney, who should be a real estate attorney and not just a general attorney. And also, you should talk to

and have included in that group your insurance person. Because insurance is going absolutely crazy. I am in Southern California. We had the fires in Pacific Palisades. We had fires near this house yesterday. We were watching television to find out if we had to evacuate.

So insurance questions are utmost in the minds of everybody here because fires are just like the Midwest. I you’re talking about, you know, I watched David Muir on Channel 7 and they’re talking about disaster through the Midwest. I’m thrilled I live here and there’s a fire outside.

Scott Bursey (19:37)
That is some pure high octane fuel right there, Paul, but we can’t let you leave quite yet. What imperative advice would you like to leave our listeners and the golden nuggets that will really impact our listeners, Paul?

Paul Levine (19:45)
I’m not looking to leave the way.

Well, number one, don’t be afraid of the IRS. ⁓ Everybody does things not to be audited. ⁓ One thing that I did as a CPA, and I still recommend because I work with CPAs, is there are ways to be audit free. ⁓ I do something that I’ve never seen anyone else do. I know what questions the IRS is going to come up with.

and I add a schedule to the tax return with that question and I answer

And I’ll bet I save God knows how many IRS audits doing that. So don’t be afraid of the IRS. Don’t be afraid to work out a good deal for yourself. And we have to deal with your needs, your wants, your desires. It’s not mine.

It’s not your accountants. It’s not anybody else’s. And it may take a day or two of sitting down and talking in order to find out your true needs, wants, and desires. Years ago, back in the 1970s, I took a class called active listening, and I use it all the time. And it gets me to listen to what the client really wants. I had a ⁓

wonderful client, a lady who I absolutely love, called me up one day and said, well, I’m going to redo my kitchen and it’s going to cost $100,000. And I asked her to come in and she did. you know, she was a vice president of this small hamburger company called McDonald’s. And I re-

Did I amended three years of her tax returns and got her back over $35,000 because the moron who did it before didn’t deduct so many things. But anyway, she came in and there was a clock right over her shoulder and she started talking and I kept going, uh-huh, yeah. And I would parrot a few words that she would say.

And at the end of exactly one hour, she said, you’re right, I’m not going to do it. And I didn’t say a goddamn word.

But I got her to realize what she really wanted.

Scott Bursey (22:18)
how you have brought the field today. And for those of our listeners that want to follow your journey or collaborate with you, what is the best way for them to reach you?

Paul Levine (22:27)
Well, number one, read my articles on LinkedIn and on Facebook and just go and look for Paul Levine with this face. And by the way, I’m 80 years old and I have this much hair. Beside that, my telephone number is 818-298-4000. Got a great number. And my email address,

Paul Levine (22:54)
is [email protected]. Again, let me just go over that. My telephone number is 818-298-4000. And my email address is [email protected].

Scott Bursey (23:14)
Thank you for joining us today, Paul. This has been an absolute masterclass.

Paul Levine (23:17)
Scott, it’s been fun.

No, this has been fun. I was a university professor for six and a half years and you brought me back.

Scott Bursey (23:27)
And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got exceptional guests, just like Paul Levine, who are making huge moves in the market and helping people save money on their taxes. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.

Paul Levine (23:46)
Take care.