How Real Estate Investors Legally Pay Zero Taxes (Cost Segregation & STR Loophole Explained)

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Show Summary

In this episode, Stetson Anderson from Imperial Tax Advisors shares expert insights on maximizing tax benefits for real estate professionals and investors. Discover strategies like cost segregation, real estate professional status, and the short-term rental loophole to optimize your tax savings and understand state-specific nuances.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • Imperial Tax Advisors’ Website
    • Stetson Anderson on Facebook
    • Stetson Anderson’s Phone no.: 801-644-1822

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Stetson Anderson (00:00)
  Yeah, 100%. So yes, literally zero in taxes. If you look at Donald Trump, okay, not to get political in any way, but back in 2016 and 2017, he only paid $750 in income taxes, despite making millions of dollars. Donald Trump, before he came to president, was a real estate professional. And that’s how he’s able to offset his taxable income, because he makes a ton of money everywhere else. But real estate, it can choke an income on paper that’s profitable.

  but for tax reasons it generally shows a loss.

  Michelle Kesil (02:04)
  Hey everybody, welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil, and today I’m joined by someone I’m looking forward to chatting with, Stetson Anderson, who helps real estate professionals with their taxes, offering tax advising services. So excited to have you here today, Stetson.

  Stetson Anderson (02:26)
  Excited to be here.

  Michelle Kesil (02:28)
  Awesome, so let’s dive in. First off, for those not familiar with you and your work, can you share what your main focus is?

  Stetson Anderson (02:35)
  Absolutely. So Imperial Tax Advisors, that’s my company and we are a firm that mainly focuses on working with real estate professionals and investors. So if you’re a real estate agent, general contractor, fix and flipper developer, ⁓

  you work really anywhere in real estate or if you invest in real estate, we focused on essentially those type of people because from what I’ve seen, they are very underserved in the accounting community. There are so many amazing tax benefits that you can incorporate with real estate, ⁓ but unfortunately a lot of people don’t know about them or don’t hit certain qualifications and are sold things from other firms that they don’t really need. And so we’ve really made it our mission to go out and

  share this knowledge and everything that’s accessible to these people so they know exactly what they can and can’t do ⁓ with real estate to offset their taxable income.

  Michelle Kesil (03:34)
  Awesome. And what areas or markets are you currently serving?

  Stetson Anderson (03:40)
  Yeah, so we can ⁓ serve all 50 states. The main area that we’ve been focusing on as of right now has been Utah, ⁓ but we can serve all 50 states. Anyone? Yeah, all 50 states essentially. Short answer.

  Michelle Kesil (03:58)
  Awesome.

  And so when you’re working with investors, how are you like serving them? Like what does that process look like to be in partnership with you?

  Stetson Anderson (04:10)
  Yeah.

  So essentially what we like to do, and just to give you an idea, so our accounting firm, we’re different in this aspect as well. We like to meet with clients throughout the year, not just at the end of the year, because once the year is over, there’s not a whole lot that you can do. But everybody’s situation is so different, and so really we like to sit down and have a general 30 minute conversation, see what types of income we’re dealing with, whether that’s W-2, 1099, if you’re a business owner. And then from there, we can present tax strategies

  ⁓ that will work best for that business. And then look and see if there’s something that we can do inside of the real estate portfolio or if you’re interested in investing in real estate, we can show you how you can maximize the tax benefits ⁓ with that.

  Michelle Kesil (05:45)
  Awesome. And where do you kind of see people missing some of the tax benefits or having like a misunderstanding of them?

  Stetson Anderson (05:55)
  Yeah, probably the biggest area that we see. ⁓ Really.

  There’s a lot of people that go to sometimes these real estate tax conferences and they’re sold this idea on cost segregation studies, if you’ve ever heard of those before. ⁓ But essentially, the only way that you can utilize a cost segregation study, and I guess I’ll explain what it is before we jump into it, but a cost segregation study is where an engineer goes out to the property and they do a study on it. And so they break down the property into its individual components. So like carpet, flooring, counter,

  water

  tops, paint, sheetrock, drywall, landscaping, plumbing, electrical, and all these products have a different IRS to find useful life. Generally when you do a cost segregation on a property, it can pull forward 25 to 35 % of the property’s value. For instance, if you were to purchase a $500,000 property, it will pull forward about 25 % of it.

  off with the return of 100 % bonus depreciation anywhere between $100,000 to $150,000 that year against that person’s taxable income. But the issue is, and…

  people that are generally buying real estate, have a lot of income. So you have high income W-2 earners, but if they’re a doctor, if they don’t do what’s called the short-term rental loophole or qualify for real estate professional status, then they do not get to utilize that cost segregation study. And so I’ve seen where a doctor was sold five cost segregation studies, but they weren’t able to be used at all. And those studies are not cheap. They’re three to $5,000, depending on the property. And so it can end up costing them a lot.

  in something that they wouldn’t be able to use. There are ways that you can use it, but we have to be able to structure it properly with that real estate professional status or short-term rental loophole.

  Michelle Kesil (07:46)
  Yeah, absolutely, that makes sense. And are there any sort of hidden tax advantages that you often uncover for people?

  Stetson Anderson (07:58)
  Yeah, so along with that, I guess, first 30 minute consultation, we generally like to overview the prior year tax returns and we’ve uncovered, I mean, the last one we did, there was $100,000 in tax savings that was reported incorrectly ⁓ on this tax return. So along with that, we’ll overview the tax returns, make sure everything is in there correctly. As well, if there’s any red flags, we like to go over it with the client and just overview it.

  accounting firms are bad generally most accounting forms are good but they just don’t specialize in working in real estate and so they don’t understand all the nuances ⁓ and ⁓ at time that can end up for this specific client will be getting a very large refund because we’re gonna go back and amend the return ⁓ so yeah

  When we do that, we’ll go through and overview the tax return and whatnot, see if there’s any missed opportunities for business owners. I mean, there’s always additional strategies that we can implement if you are a business owner, such as the Augusta Rule, income shifting to the kids, home office deduction strategies, travel, and oftentimes a lot of these things are being under-reported or misreported essentially. And so we just like to go through and show these strategies that they can implement. And then in accordance with real estate, there’s a lot that we can do there.

  ⁓ Many real estate professionals especially don’t even understand exactly what they’re entitled to ⁓ with the use of a cost segregation study on a rental property. They could literally pay zero in taxes every single year if they wanted to.

  Michelle Kesil (09:32)
  When you say like pay zero in taxes, that’s like on all of their taxes or what is, yeah, can you expand on that?

  Stetson Anderson (10:14)
  Yeah, 100%. So yes, literally zero in taxes. If you look at Donald Trump, okay, not to get political in any way, but back in 2016 and 2017, he only paid $750 in income taxes, despite making millions of dollars. Donald Trump, before he came to president, was a real estate professional. And that’s how he’s able to offset his taxable income, because he makes a ton of money everywhere else. But real estate, it can choke an income on paper that’s profitable.

  but for tax reasons it generally shows a loss.

  And so yes, if you are able to purchase rental properties depending on what your taxable income is, we can generally offset that. Essentially, if you buy enough rental properties, we can take your income to zero for as many years as you want. And for real estate professionals or people doing the short-term rental loophole, I always recommend saying, let’s buy at least one rental a year, minimum. And if we can do more, that’s fabulous because that’s obviously

  we’re taking the money we would have paid into taxes and we’re essentially getting an investment property out of it depending on how much you’re having to put down.

  Michelle Kesil (11:19)
  Awesome. And so, yeah, is there like a minimum amount of rentals in order to receive those benefits?

  Stetson Anderson (11:25)
  No, no, no minimum at all. If you even have rental properties that you’ve had for a while, we can even go back and look at their depreciation schedules. And if you’ve had a rental for 10 years or five years, we can even go back and do cost segregation on rentals that you’ve already owned as well. And so yeah, there’s no minimum if you’re buying your first property or your 50th property. ⁓

  There’s not going to be a minimum for that. So, but the more that you have and the more that you can purchase, the better the tax benefits that we will have if we compare it with again, those two strategies, short-term rental loophole and real estate professional status. And I guess let me explain what real estate professional status is essentially, because I’ve been saying it a lot. So to be a real estate professional, you have to work in one of the 11 qualified trader businesses. And I mentioned a bunch of the other ones earlier that would qualify for that, like a real estate agent does developer does, property manager.

  would be a real estate professional, ⁓ fix and flipper, developer, okay, those are all real estate professionals. So to be a real estate professional, has to be 750 hours a year in that industry, okay, so that’s about 15 hours a week, and that has to be more than anything else that you’re doing. So you can’t be, let’s say you have a full-time job being a doctor. ⁓

  or a chiropractor or something like that. And you’re doing that for like 2,000 hours a year and you still hit the 15 hours a week for real estate professional status because you had more time being a chiropractor, you actually still would not qualify as real estate professional. So it has to be 750 hours and more than anything else. And then the other strategy, the back door so we don’t have to hit real estate professional status is the short-term rental loophole where essentially you go out and you buy an investment property and we rent it out on Airbnb or VRB.

  Okay, and if we do that and we materially participate in that property for a hundred hours and more than anyone else then we can do that exact same study the cost segregation study and use it to offset W-2 income. So if you have a high income W-2 earner that’s making 400,000 to a million dollars a year or whatever it is and they want to buy an investment property they can do the short-term rental loophole and use that to offset their taxable income. And then one more important key

  point is, and this is like the dream team, if you have a high income earning W-2 and then you have a real estate professional on the side, only one spouse, if they’re married, has to qualify as a real estate professional and we can use losses to offset W-2 active income as well. So only one needs to qualify for those statuses.

  Michelle Kesil (13:58)
  Awesome. Thank you for explaining all of that. I’m sure that is super valuable for people that don’t know all of that. Right. Yeah. So what is something that all investors should know when it comes to taxes? ⁓

  Stetson Anderson (14:07)
  For sure, it’s a lot of information

  Yeah, I’d say just one of the main things is once you start getting up there with enough rental properties and depending again, depending on what your business is, this is a big key part of it. If you’re a business owner, W2, ⁓

  employee, it just really depends on the strategies that we can recommend. ⁓ But I’d say the main thing just to watch out for is if someone is selling you a cost segregation study, you just have to make sure you hit either real estate professional status or the short-term rental loophole. Because if you don’t hit either of those, all of your losses from that rental property will just go into a essentially a bucket and it can only offset other passive income activities. Now this can still be valuable because if you sell a property later on

  down the road and we’ve done this to where you had a large gain on an investment property and we actually did cost segregation studies on properties even though they weren’t a real estate professional or doing short-term rental loophole but we were able to generate enough losses with the other rental properties to offset the taxable gain on that property that they sold. So there’s a lot of different ways that we can spin this but everybody’s situation is just so different and a lot of nuances when it comes. So I’m just trying to throw out as many ideas.

  for people to get the wills turned in for investors.

  Michelle Kesil (16:19)
  Yeah, absolutely, that makes sense. That it depends case by case as well. Are there any states that have completely different laws that people should watch out for?

  Stetson Anderson (16:33)
  Yes, and that’s another reason ⁓ why we’re so far we’ve stayed in Utah as of right now because once we add another state now we have to start learning other states laws like California for instance if you live in California they actually do not

  recognize real estate professional status over there. And so we’re not able to utilize the strategy ⁓ of cost segregation studies and all that because it doesn’t even matter to them. So California, mean, obviously from a tax standpoint, not great because they’re the highest tax state, also, but yeah, we’re not able to use that. So to answer your question, yes, every state does have different… ⁓

  rules and requirements, which again makes it little bit more tough, having someone that’s researching that for you on your behalf definitely helps. Great question.

  Michelle Kesil (17:26)
  Yeah, absolutely. So are you only serving like Utah currently or do you have clients in other states?

  Stetson Anderson (17:35)
  So

  we have one client that’s in Georgia as of right now, but that’s really it. But I mean, if there are people that are interested in reaching out, definitely, I mean, we have the capacity to be able to serve all 50 states. It’s just, we’ll just have to do essentially a little bit more research, just making sure that we’re staying compliant in accordance with ⁓ state standards as well. So yes, we can serve all 50 states and we would.

  Michelle Kesil (18:01)
  Yeah, absolutely. And is there a typical or most common real estate professional that you’re currently working with?

  Stetson Anderson (18:10)
  Yes, great question. We work with a lot of real estate agents, honestly. That’s probably our biggest ⁓ box of clientele that we have is probably real estate agents and then developers and then some general contractors as well. But real estate agents is probably our biggest. And then obviously a lot of investors as well. But from a job standpoint, yes, real estate agents.

  Michelle Kesil (18:29)
  Yeah.

  Awesome. And so usually people just have like these quarterly meetings with you where you look over like finances and help them see where they can save money in their taxes or other services as well.

  Stetson Anderson (18:48)
  Yeah, so we were a full service accounting firm. yeah, the tax advisory and the filings is obviously some of the most important that we do, but we do offer bookkeeping services and payroll as well. ⁓

  And so we’re able to really anything that that somebody will need in accordance with their business. like to view it as a one-stop shop. So it’s like, we have a bookkeeper over here, a payroll provider over here. And we like to really just keep it in one place so that ⁓ they’re only having to communicate with essentially one team rather than multiple different people.

  Michelle Kesil (19:25)
  Yeah, absolutely. That is helpful to have that one spot to do it all.

  Awesome, so before we begin to wrap up here, if someone wants to reach out, connect and learn more about everything that you’re up to, where can people find you and connect with you and reach you?

  Stetson Anderson (19:45)
  Yeah, probably the easiest way would be would just to be shoot me a text message saying, Hey, I’m interested in getting a free console. We always offer a free console and we’re actually doing free tax plans as of right now for 2026 in exchange for a review of the business. so these plans, we generally charge around a thousand dollars for them. But if your viewers are interested ⁓ in getting one done for their business for this upcoming year, it’s completely free in exchange for a review of

  business and then they can see all the strategies that they will have ⁓ and be able to utilize and essentially what that looks like we’ll have a 30-minute call I’ll them upload their tax returns I’ll overview it and then we’ll schedule another meeting typically 60 to 90 minutes and I’ll present the tax plan ⁓ to them so they can see all the areas that they can be saving essentially on taxes ⁓

  But the best way if they’re interested or want to get in contact would just be my phone number. is 801-644-1822 and just shoot me a text message and ⁓ tell me your name and where you’re coming from.

  Michelle Kesil (20:51)
  Perfect. Appreciate your time and your story. Thank you so much for being here.

  Stetson Anderson (20:55)
  Of course, and thanks for having me on. Appreciate it.

  Michelle Kesil (20:58)
  Yeah, you’re welcome. And for the listeners tuning into the show, if you got a value, make sure you’ve subscribed. We have more conversations with operators like Stetson who are building real businesses and we will see you all on our next episode.