Real Estate Tax Planning: Bonus Depreciation, Cost Segregation and S Corps

Ryan Pulice (00:00)
Exactly. Yeah, and what what we do with most most of our investors once they get into it, and I mean you I’m sure you see this all the time, people get into real estate and most of them they tend to keep going. They kind of get that bug and they’re like, okay, this is this is awesome. Why wasn’t I doing this before? So the the idea and what we try to explain to people and recommend that they do is you take those tax savings and put it into another property, and then you do the same thing next year.

So if you get, if you get it, let’s say you get a $50,000 refund from a cost stake study and bonus depreciation, but take that and put that into another property.

Cody Crabb (01:57)
Welcome back to the Real Estate Pros podcast by Investor Fuel. I’m your host, Cody Crabb, and today I’ve got Ryan Pulice with me. Ryan runs The Pulice Group in Northern Virginia and DC, where he helps real estate investors and flippers move beyond basic tax prep into real tax planning. We’re going to dig into what investors miss, what they should plan for earlier, and how better tax strategy can protect the business that they’re building. Ryan, thank you so much for joining us today.

Ryan Pulice (02:23)
Yeah, absolutely, Cody. I really appreciate you having me on. I’m looking forward to this and hopefully I can share some valuable information with the listeners.

Cody Crabb (02:30)
Love it. so before we dive in, I’d love if you could kind of introduce yourself a little more than I did, maybe how you got into the industry and and why the tax world kind of called to you and and why would the tax world call to anybody was anybody’s guess, but I’d love to know your story.

Ryan Pulice (02:47)
Yeah, absolutely. So, my again, my name is Ryan Pulice. I’m the founder and managing member of The Pulice Group. So we are a tax accounting firm. We’re based in Northern Virginia. We serve primarily real estate investors and also small business owners. Most of our clients are what we call real estate adjacent. So they they’re investors, but they’re also real estate agents and contractors. Most are some somehow tied into the real estate investing world in one way or another.

when I first started out, I you know, I got into tax just because I at the time I started my business, it really I I had been doing some stuff on the side for several years, mostly like a friends and family thing. around that time I also started investing in real estate. That kind of drove me into eventually building a niche in real estate. Yeah, I I first started out doing pretty much anything to build the business as as I got started, needed revenue.

And I quickly learned that when when you can specialize in an area, it allows you to just really be serve serve your clients in a much better way than than you would otherwise. You know, for being a real estate investor, I kind of speak the language for w with with most of my clients. So I understand what they’re talking about when they they use industry lingo, like, I’ve got this Burr property over here where other otherwise I might be scratching my head.

Cody Crabb (04:14)
Frantically Googling things on your phone while you’re talking to someone. Yeah, exactly.

Ryan Pulice (04:18)
Yeah, exactly. And it just kind of gives you that ability to go much deeper. ‘Cause the as you’re you’re probably aware and most listeners are, the tax code itself’s just it’s massive. And there’s so much in real estate, the real estate section is it’s one of the more complex sections of the tax code, the the different sections that play into it.

Cody Crabb (04:38)
Well, and just to underline that, I I think I I was talking to a CPA who I helped them with their podcast as well. They were talking about they I think they said last year there were more than five hundred changes to the tax code last year. And again like there’s like a good chunk of those that were in the real estate arena. And I was like, How could anyone possibly keep track of all those? You can’t. It’s impossible. You actually can’t. Yeah.

Ryan Pulice (05:04)
Yeah, so really having that that that niche helps us go a little deeper and really just just work with our clients more closely and just I in my opinion, it’s brings a lot more value to the table than just a generalist. Now there’s tons of CPAs that don’t specialize that they’re gonna know enough to probably tell you yes or no, can you or can’t you do something? But there’s a lot of stuff that kind of adds on to that to make sure you do it right and have the appropriate documentation in place so you don’t lose.

In the event you’re ever examined or have to go

Cody Crabb (05:34)
Yeah. So so what types of stuff do you think investors miss when they use someone who’s kind of a general tax prep person or tax adv advice person?

Ryan Pulice (06:30)
A lot of a lot of what they miss is really it’s the getting things done upfront in the right way. So, you know, for example, in the real estate world, mm, a lot of investors are they’re trying to qualify as a real estate profession. And if they can’t do that, maybe they’re they’re you’re looking at something like the short term rental loophole, which both strategies allow you to deduct your your rental losses against active income, whether it’s a W two or a business run by your spouse, if you’re a real estate professional.

And just having the right documentation in place to prove here’s my hours, what qualifies me as real estate professional, here’s the material, particip participation, doing it right throughout the year, not trying to reconstruct it in March or April the next year when you’re you’re filing your tax return. You know, most in most CPA firms in that February, March and April timeline, if the they’re preparing a return, they’re looking backwards, not forwards.

And they might be able to give you a few little pieces of advice, but when the year’s over, after December 31st, there’s not a whole lot you can do to impact your tax situation. So if you’re doing things throughout the year, meeting with your advisor, like right now, this is the the first part of what we call tax planning season from from May through August. And then we have it again in Q4. Like you you’re able to get ahead of the curve and really just strategize and see what you can do to help.

Not only lower this year’s tax bill, but look ahead to future years. You know, the the idea, I ideally what you’re gonna do is minimize your total tax over your lifetime, not just necessarily your So it’s really getting in front of things early and making sure you’ve got all the the the correct documentation in place that’s that supports the positions you’re taking on.

Cody Crabb (08:18)
Mm. So one question I’d have for you is, I mean, obviously you’re saying, you know, you should work with someone to help you plan your strategy as early as possible. But is there a point where you would say if you haven’t done that yet, what’s the point where you should bring someone should bring you in, like before a purchase, during a deal, before their own year end? Like what what’s the timing look like in the in a best case scenario?

Ryan Pulice (08:41)
Yeah, so if before you’re doing a deal is always a good time because if you’re if you’re buying into a deal thinking you’re gonna get, you know, tax benefits X, Y, or Z, you should have someone kind of guiding you up front that can tell you, like, hey, is that true? Can you do this? What do you need to do this if you’re potentially eligible? Otherwise, you might find yourself in a position where you think you’re gonna get a bunch of losses to offset your income that now you find out you can’t deduct them. Like if you go into

You know, often you’ll hear syndicators talking about how you can you know invest a hundred thousand dollars and you’re gonna get this big year one deduction. But I mean, that is very well potentially true for a lot of real estate professionals. But if you’re an LP that’s not a real estate professional, those losses are suspended and they carry forward. And that doesn’t mean they’re gone. You do get the benefit at some point. But understanding that going in is

it that’s a great time to bring someone on. And it just if you’ve never done it, you know, if your tax return is very simple, basic W 2 and maybe a brokerage account or two, there might not be a whole lot you can do. But if you’re running a business or you’re you know you’re actively investing in real estate and you haven’t had someone kind of sit down and go over a strategy with you or or develop work on a strategy with you and for you, then you know now is a good time to do it. definitely before the end of the year, but the sooner the better. And most places will

They’ll take a look at your prior tax return, they’ll take maybe get the last couple of years and identify some possibilities and they should be able to tell you like, look, we think we could save you somewhere between X and Y in taxes if we work together. And then you can kind of dig in after that and see what strategies are gonna work. But often that that upfront, that call, that initial meeting, gonna be relatively inexpensive, and you can at least get an idea of what is out there and available to you. For free.

Cody Crabb (10:31)
Yeah, I think yeah, they they know what they’re they know what they’re looking for. So at the very least you could get an idea of if it’s gonna be even worth it for the money you’re gonna spend. So that’s a really that’s a really good call out because true like a lot of times they’ll just be like, I’ll take a look at it for very cheap or free and then we can see what to do from there. So yeah. so for let’s say for flippers listening, what’s a mistake you see, you know, I would I would assume something like not saving for taxes or

Bagged bookkeeping or something like that, or setting it up in a r in the entity is not set up correctly. Like i is it something like that or is there something sneakier that you see that’s maybe not as obvious?

Ryan Pulice (11:46)
So with flipping, everything you said, all all of those are good examples. Poor bookkeeping is probably bad bookkeeping, bookkeeping is probably the easiest and lowest hanging fruit anyone can fix because almost always you’re gonna identify a lot more potential deductions by keeping everything in a a good set of books, whether it’s Quickbooks, there’s there’s free versions that it’s done correctly. And usually you can you can find a decent bookkeeper and not break the bank. So having that everything kind of put together and reconciled with real financials is key.

Cody Crabb (12:17)
Yeah, I always say d d that’s knowing how much of low hanging fruit that is is a good way to tell is how much does your CPA hate you because if you really feel like they glare at you and I mean I I’m definitely calling myself out here because they my CPA hates me a lot. So No, but that’s a good that’s a great call out too. I feel like that’s that’s probably the f one of the first things you do wrong if you don’t really know what you’re doing. So Exactly.

Ryan Pulice (12:41)
And you know, an Excel an Excel phone might work when you’re just getting started. And but as you start to get volume, if you’re if you’re doing any serious activity, you really need to have good bookkeeping. And then the other thing that you mentioned, entity choice. You know, with flippers, your your flip income is ordinary income. So everything is or it’s is taxes ordinary income for income tax purposes also considered self-employment income. So though that is you’re you’re subject to the Social Security and Medicare tax on top of your income taxes.

So at a certain level of activity, it may make sense to make to consider using an S selection and operating your flip business out of a S corporation rather than just on it Schedule C of your personal tax return. Now there’s added costs in compliance with that, but you know what we usually look at is somewhere around like that seventy five thousand dollars a year in net income, that S election makes sense and it’s gonna cover any additional costs several times.

so getting that getting that advice for the right entity structure, it’s huge. That could save you a ton in taxes. And then another another mistake I’ve seen a few times is trying to 1031 exchange a property that is that was part of your flip business. So your real estate that is being bought and flipped is not eligible for a 1031 exchange. It’s considered inventory, not you and it’s not considered used in a trader business or for investment like most other real estate.

So I I’ve run into that a few times as well.

Cody Crabb (14:06)
Yeah, I I feel like those are those are great call outs. I feel like these these are a lot of things that you might just run into on the kind of your the early side when you’re just not a hundred percent sure. so having having somebody on your team that really knows their stuff around taxes, especially, which can just get so complicated so fast. It’s yeah super crucial for sure. I mean that can make a difference between like I mean how how big of a difference do you see? Like, give me just give me like some rough numbers just as an example of like what kind of money are we talking about losing here if you don’t if you don’t work with someone like you?

Ryan Pulice (15:21)
Right. So let’s just say like a simple example with the right entity selection. Let’s say your your flip business is generating a hundred thousand dollars a year. So all tax at ordinary income, that’s fine. The S selection is really designed to save money on self employment taxes, your Medicare and Social Security. So those two together add up to fifteen point three percent. Or so they’re fifteen point three percent. So that’s a little over fifteen thousand dollars on a hundred K of income.

But if you do a reasonable comp study and find out you can structures an S corporation, take half of that or fifty thousand dollars as just profit, and the other half is going to be your W two income. So your W two is still subject to Social Security and Medicare. The net profit after you pay yourself is not. So with a fifth with an S election and a fifty thousand dollar salary, you just save yourself a little over seventy five hundred dollars just on. Just by making that simple election and that’s on a hundred thousand dollar net profit. So as it gets bigger, those numbers and savings get bigger. And all that was was choosing the right entity. That doesn’t factor into any other type of planning.

Cody Crabb (16:31)
That’s literally just on that does not affect you in any way just except for on paper, right? Like so that is that really should show. Like it holy cow. Like that’s the amount of you’re you’re literally talking about like that amount of money is just you’re leaving it on the table when you don’t pay attention to stuff like this.

Ryan Pulice (16:46)
Yeah, exactly. So that that entity choice really can it can not only save you a lot of money, it could also keep you out of trouble with the IRS because if you’re a if you’re flipping properties and you’re also investing properties, the best best strategy there, best way to set it up is keep those in two separate entities. You know, your rentals, you don’t want you don’t want your rentals in an S corporation. That’s another thing I see a lot. Your flips, great. If you’ve got the income to cover any additional administrative costs with the S corporation. Go that route, keep your flips there, but keep your your buy and hold rentals, keep those out of the S corporation because you run into so many issues later on that could potentially trigger tax or just there’s a lot more flexibility keeping it in a single member LLC versus an S corporation.

Cody Crabb (17:33)
so let’s let’s pivot a little bit to kind of the current tax code and and things. what has what it let me ask this. Let me think how about this. what changes or differences have you seen in the tax world that real estate investors should really know about or pay attention to that’s come up in recent years?

Ryan Pulice (17:52)
Yeah. So since the since passing the the one big beautiful bill passed just over a year ago today, actually. So fourth of July in 2025, two big pieces two big things in there that really help real estate investors. One, we a hundred percent bonus depreciation was brought back. So bonus depreciation started phasing down in 2023, 80% and 60%, 2025 started out with 40% bonus depreciation. The with the passage of that bill, any property that was purchased and placed in service after January 19th, 2025, is eligible for 100% bonus depreciation. So since since then we’ve we’ve seen just an offer a large uptick in people using cost sake studies, those folks that qualify as real estate professionals, but also that we’ve been doing a lot of work with the short term rental loophole now, because that is something that a W2 earner not going to qualify as a real estate professional unless

Maybe their spouse can do it if they have a spouse, that doesn’t work. But with the short-term rental loophole, you your high W2 owners can still manage to deduct losses on a short-term rental if they if they qualify and pass all the all the tests. So using that cost stake study on, let’s just say, okay, a million dollar property, ignoring the land value for a minute, that cost stake study is probably gonna find about $250,000 of the building value that can be eligible for bonus depreciation rather than being depreciated over twenty seven and a half or thirty-nine years. short term rentals are thirty nine years. So that’s a huge tax savings for some especially someone in the higher tax bracket. So we’ve seen a a large uptick there since the the bonus 100% bonus depreciation.

Cody Crabb (19:34)
Wow. Yeah. I mean some W two people will just get into real estate just for the just for the the advantages in that direction. So the fact that that’s out there, I mean, that should give you some idea of what a big deal this is. so who does bonus depreciation actually help most in in that sense?

Ryan Pulice (19:51)
So it would help any those investors that can qualify as a real estate professional or use the short term rental loophole. So because in both cases, what you’re doing, your your rental losses typically they’re passive. They’re going to be suspended and carried forward until you have other passive income. When you can qualif when you can convert those to non passive by qualifying as real a real estate professional or using the short term rental loophole, now those losses can offset your W two income or your active business income.

And that’s that just unlocks so much, especially when you get into large numbers. If you can find a decent sized property with without a huge land value, some places the land value is so high, it’s almost like, why bother? But we’ve we’ve seen we’ve worked with quite a few W two earners that have used this successfully. And one thing I will say, like the the tax savings are there and they’re great, but you don’t ever you don’t want to just run out and buy a short term rental that doesn’t perform.

You know, you first run your numbers and make sure, hey, this property’s gonna cash flow for me and give me the ROI I want and look at those tax savings as a bonus. I I’ve seen where folks have done basically the the opposite. They go buy a property, they get the tax savings, and now they’re like, I’m losing money on this property, I need to sell it. When you use that bonus depreciation, as wonderful as it is, if you turn around and sell it, especially in the next five to seven years or so, you’re gonna recapture a significant portion of that.

Cody Crabb (21:15)
Mm-hmm. Yeah, so the message I’m getting is it’s like it’s not to make you money, it’s to save you money. So like if you’re looking at this in a in a money making way, it’s probably not gonna benefit you very much.

Ryan Pulice (21:27)
Exactly. Yeah, and what what we do with most most of our investors once they get into it, and I mean you I’m sure you see this all the time, people get into real estate and most of them they tend to keep going. They kind of get that bug and they’re like, okay, this is this is awesome. Why wasn’t I doing this before? So the the idea and what we try to explain to people and recommend that they do is you take those tax savings and put it into another property, and then you do the same thing next year.

So if you get, if you get it, let’s say you get a $50,000 refund from a cost stake study and bonus depreciation, but take that and put that into another property. And next year do a cost stake study on that property. Get another $50,000 or $60,000. Continue to do that. It lets you build your portfolio so much faster than just trying to save that $50,000 out of your paycheck every month. If you can take it from taxes in a legitimate way and then redeploy it. It just it’s like throwing gasoline on your your investment strategy.

Cody Crabb (22:27)
So Yeah, love that. so let’s say there is there are investors listening to this, hanging their heads, feeling so much shame about their tax strategy, and they’re like, I just I really need to get this taken care of. what are the like two to three things that they should start to get organized and then go talk to a tax advisor for for some advice here?

Ryan Pulice (22:47)
I would say the first thing, make sure you have some sort of good bookkeeping in place. Even if you’re not at a point where you need to go hire someone full time, and make sure the first thing you can do this from day one, open a totally separate bank account. And if you’re gonna use a credit card, a separate bank card, and at least start download those statements and get everything summarized in an Excel sheet so you have it ready to go. Ideally before the end of the year, so you can kind of Project what your income’s gonna be like. So getting some sort of system in place to track all of your income and expenses for your properties or your businesses.

And then the the other thing, then the next level would be getting some like a formal accounting system in place, but the bank account, separate bank account is that stuff from data. And then the the other thing is really just talk to someone about getting the the right type of entity in place or at least have an understanding. A CPA can help guide you there, but so can your attorney. If you’re using an attorney to set up your an LLC or something, if you’re going to run your business sent through an LLC or your investments, talk to them and many of them can also advise like what’s going to be best for you in this case. Ideally, you’d get them and your CPA talking together up front. So you choose the right entity from day one and have everything clean and ready to go.

Cody Crabb (24:08)
Love that. Well, so if people wanna connect with you, they wanna learn more about what you’re doing, they wanna get some help ’cause you they like how you sound, they like the stuff you talked about, how can someone get in touch with you online?

Ryan Pulice (24:19)
So best ways to go to our website, that’s thepulicegroup.com. So T-H E P-U-L-I-C-E-G-R-O-U-P dot com. Or they could check out actually I host a podcast called The CPA Zone. And you can find that on iTunes and Spotify, all the major podcast platforms. So that’s just The CPA Zone.

Cody Crabb (24:38)
Love it. Well, thank you so much. This has all been really great. I think a lot of people are gonna hear this and either realize that there is way more opportunity here than they realized, or be terrified that they are not gonna get some of this stuff. So it’s what it’s good it’s good fear. That’s a good kind of fear. So I think it’s a good thing. thank you so much for joining us today, Ryan. And we’ll we’ll talk to you next time. Thanks. See you on the next episode.