Unlock Financial Freedom: Passive Income & Tax Secrets

Christian (00:01.784)
Hey everybody, welcome back to the show. Today we are joined by Larry Pendleton. So his mission is to help people achieve financial independence through passive income and tax saving strategies. You’re not gonna wanna miss this one. Larry, my friend, welcome to the show. I know you and I were just chatting offline before I just pushed record, but why don’t you just introduce to the audience, you know, who you are, man, you know, your journey, how you got here and what you got going on.

Larry P, The Investor’s CPA (00:26.984)
I appreciate it, Kristen. Yeah, Larry Pellenton, the investor CPA based out of Norfolk, Virginia, so southeast Virginia for those familiar with the area of the state. Yes, as he mentioned before, my mission is to help people achieve financial freedom by building passive income through real estate and saving on taxes. We leverage a lot of different strategies within the code itself, primarily for real estate investors, but we find opportunities for everyone to take advantage of those opportunities as well.

Christian (00:56.846)
That’s awesome. That’s awesome. So Larry, mean, what inspired you to, you know, to focus and give you the drive to help people achieve, you know, financial freedom through passive income? Was that something you just learned by obviously being in the business yourself or what kind of gave you that drive to help other people?

Larry P, The Investor’s CPA (01:13.852)
Well, probably the first half of my CPA, I’ve been a CPA for nearly two decades now. I always knew the benefits of real estate when it comes to tax savings. then about halfway then I was just kind of your standard CPA filing taxes, not really adding value and people were really was kind of pushing for that. And as I tell people that the CPA exam is just a test, it doesn’t teach like really the true strategies and stuff. So I had to really make a pivot.

in my life and in my business to how am I really going to be a value to people and really self-educate myself on how the IRS code does really benefit big business owners and investors and then applying that to building cash flow for myself and then kind of realizes that a lot of us aren’t living in our purpose because we just got these W-2 jobs just to pay the check but like maybe have additional stream of income coming in.

we may be able to kind of really serve a bigger purpose in life. So I want to help people achieve that goal for themselves.

Christian (02:18.766)
I love that, I love that. So let’s talk about maybe what are some of the most effective passive income strategies you’re utilizing and you show other people how to utilize as well.

Larry P, The Investor’s CPA (02:29.64)
Yeah, so I think a lot of people hear about just joining to a syndication or a fund, where it’s Google economics at that point. You’re compiling resources. You’re working with a general partner or syndicator who’s going to be operating the asset itself. And you may get some losses, you’re one, you’re two, from a TAP perspective, but you’re expecting that to be producing some type of cash flow for you down the road.

depending on how long they keep it, maybe two years and maybe 10 years, they may do a sale or cash out refi so you get your seed back and be able to reinvest the funds that way. So that’s one way to do it from a passive standpoint if you’re not really into acquiring the properties yourself and doing the a landlord because this is a whole other animal when you’re to manage it yourself.

Christian (03:19.276)
Yeah.

Larry P, The Investor’s CPA (03:23.176)
You also could be a private lender. We work with a lot of private lenders in our new construction side of things where like you’re the primary or maybe you may be in second position, but you may be first or second depending on how much capital is in and how many other investors are involved, but it should be no more than like one or two first and second positions that you’re funding the deal. You may be working with a flipper, you may be working with a builder.

You may be working with a rental property holder and they plan on doing a cash out refi to pay you out that way but your goal is hey maybe end this for six months to 18 months and getting cash flow or getting paid out at the end along with your principal and interest. So making sure the proper terms are in place there to protect you and make sure you got your attorneys involved with stuff like that. Or if you really want to be passive and

not really have to worry about the management of anything. Mortgage notes is a solid arena to be in as well, where you may be working, most likely be working with a broker or someone who has mortgage notes from other people. They could be performing, they could be non-performing, but it’s an opportunity to be the bank at that point and buy someone’s mortgage at a discount and build the cash flow that way. So those are some of the ways that you can invest in the real estate.

have cash flow come again, but it’s secure by tangible asset, which is the key piece there. If something goes wrong, you can go after whoever at that point with your attorney and be able to collect the asset from there if you’re not getting paid what you’re agreed upon.

Christian (04:59.406)
Definitely, I love that. So let’s talk about maybe some, you know, the biggest, you know, tax mistakes that people are doing right now. Maybe also not even just mistakes. People just obviously don’t know this. They don’t teach you this in school, right? So let’s just talk about, you know, do people just not have the education on it? You know, not the resources available or, you know, what are some mistakes that you’re seeing people that are doing when it comes to, you know, their taxes or not taking advantage of certain things?

Larry P, The Investor’s CPA (05:25.746)
mean, the primary thing is the education of it. I’d like to tell people to be straight up and honest with them. The tax code is not made for employees. Even if you are, I know people read Robert Kiyosaki in the cashflow quadrant, whereas employees, self-employed, business and investor. Yes, the cashflow flows that way, but the tax savings are on that side as well because the government wants to incentivize those things.

to help grow the economy. The government relies on big businesses to provide jobs and rely on investors to provide housing and so forth. So that’s why they get all the tax breaks. That’s how the game has been since the very beginning. Nothing that has been created recently, as some people may think, but that’s been the rules of engagement. So it’s that understanding of your biggest tax burden is gonna be that high paying W-2.

And if you’re, and if you have both spouses, if it’s two spouses in the house, say, and neither one is able to be real estate professional, then like that’s going to create an issue. So you can be acquiring assets, but not really seeing any tax savings because you’re still trying to phase out of your W-2 and that’s the transitional piece that’s not really explained properly is that you’re going to go through the transitional period of making income and not really seeing any tax benefits other than not being taxed on the rental income or other.

investment income that you got coming in because you’re still working these high paying W-2. So it’s understanding that is okay we got to keep building the assets keep building cash flow to replace potentially replace that W-2 income. Especially for those who are in that who are real estate agents or brokers or flippers or new construction sellers where like a lot of them are still reporting all this stuff on their on their schedule. See that’s the biggest mistake I’m seeing nowadays is that okay if you’re

generate active income and you’re over a certain amount, it’s time to be an S-Corp at that point. Yes, it requires a separate tax felony, it requires payroll, but if you’re not aware of that, then you’re not able to make the assessment if that’s the right route for you at that point. So outside of the education and knowledge, is that the base of it? And then, okay, here are certain strategies.

Larry P, The Investor’s CPA (07:45.082)
or when is the right time to do a cost segregation study for your rental property and claim bonus appreciation. Like it may not make sense all the time, but it’s really investing into yourself and the team around you to make those types of determinations.

Christian (07:59.506)
I could not agree more in it. This is why it is so important to obviously, you know, work with somebody such as yourself that has the know how has the knowledge, you know, on this so they can help you avoid these mistakes, right? Because you see it day and day, right, man? I mean, a lot of people, they again, they just don’t have the resources. And then they get stuck with just thinking, I can just keep going this way. And the next thing you know, you know, you’re losing so much of your money and it’s just being tossed out. Right? It’s for example, it’s, you know, someone that’s just, you know, a traditional single family investor that just has everything wrapped.

inside of an LLC and next thing you know you’re doing fix and flips, you’re doing wholesaling, you’re doing ovations and then you the tax burden that comes with that, it’s pretty hefty, right? If you’re not knowing how to actually pivot in a different direction to where you can save on that. So let’s talk about that. mean, have you worked with people that have, you know, obviously been stuck in that position, right? Single family, you know, stuck doing the wholesale and the fix and flips and then they’re like, hey, I’m giving up 35, 40 plus percent of what I’m making here.

And how do you, can you walk through like how you set them up differently from that?

Larry P, The Investor’s CPA (09:03.016)
Yeah, so and honestly, it could be more. could be 50, 60 % in some of those cases. So if we’re dealing with flippers, it’s like, OK, well, what’s your, like, really assessment numbers? I tell people if you’re netting at least $50,000 a year, we have to have a serious discussion of if that S-corp election is going to make sense. So there’s certain forms that need to be filed to make that election so that LLC is legally still at LLC.

Christian (09:06.83)
Yeah, I was gonna say. Yeah.

Larry P, The Investor’s CPA (09:31.004)
but it’s electing to be taxed as an S-Corp, which will require a separate tax filing and then you’re required to pay yourself a reasonable salary. Now, the purpose of the S-Corp and how it helps saves on taxes, it doesn’t help save on income taxes. The big thing that it helps saves on is self-employment taxes or FICA taxes. So when you have your W-2, you split that with your employer. I you’re just having a, a business on your personal tax return.

you’re responsible for that full 15.3 % on top of your income tax. That’s why I say it can get to 50, 60 % depending upon how much money you’re making from your main gig or your main W-2s. Okay, well now we got this additional tax that’s on top of it. yes, you can just write off a whole bunch of stuff and that’ll be great, but are you bankable?

Christian (10:09.678)
Jeez.

Larry P, The Investor’s CPA (10:23.172)
at that point. we were balancing those two worlds. Do we write off everything or are you trying to set up to get a loan to do other and bigger projects? Because if your business isn’t showing income and you don’t have many assets, you’re going to be kind of hamstring of what the banks are going to raise private money at that point. So it is having those type of conversations with clients to understand that and kind of get back to the tax savings of it is that, okay, once we have it in that S-Corp,

Christian (10:23.182)
Hmm.

Christian (10:33.314)
Yeah.

Larry P, The Investor’s CPA (10:51.496)
and you’re paying yourself the salary, that 15.3 % no longer hits your bottom line. It only hits the salary that you’re paying yourself. So to throw numbers in this, if your flipping business was netting $100,000 on your schedule, seeing your personal tax return, your minimal tax bill is going to be, or tax liability is going to be at least $15,000 because that 15.3 % is hitting that bottom line. But with that S-corp election,

and then you pay yourself whatever like $30,000 salary per se that 15.3 is only gonna hit the $30,000 which is like I say you’re still paying income tax on that $30,000 and the 70K that the company is netted out but you save and then that brings it down to roughly about five, four, four, five thousand dollars somewhere in that range so like we’re talking about like nine.

$10,000 in tax savings just by making a certain entity election. that costs you probably a couple hundred dollars to make that election. And then the actual tax following, that may be a thousand, couple of thousand, but you want to ensure that the tax savings outweigh those costs. And that you’re talking to someone who is not selling you something, they’re actually gonna walk you through on when is the right time to pull that trigger.

Christian (12:12.366)
Yeah, and something you just touched on right there, right? It has to be the right time because you see there’s there’s so much out there right now to where it’s like you’re not in the position right to to make that switch yet, right? And it’s just not ethical, right? So you have to really figure out, you know, with working with somebody that obviously clearly knows what they’re doing, it’s going to set you up for success and not derail you, you know, so everything you just said, you just hit it on the head, my friend. Let’s talk about, you know, you know, 1031 exchanges, you know, for those that don’t know what a 1031 exchange

Larry P, The Investor’s CPA (12:38.087)
Yeah.

Christian (12:41.208)
Could you explain maybe what that is? Is that something you assist your clients and your people with as well? When is the best time to utilize the 1031?

Larry P, The Investor’s CPA (12:50.504)
Yeah, so we do work with our clients on that. So if you’re if you have what’s called investment property, so if you’re flipping a house that doesn’t apply for this, we’re talking about true rentals or just land you’ve just been sitting on for a few years. It’s called a like kind of exchange where like you sell that property and then you roll those gains into the acquisition of another property that does involve getting a 1031 ameliorary or qualified ameliorary in place for that because

you as the owner, cannot touch those funds. That blows up the whole 1031 strategy. So, okay, you’re trying to kick, you’re preferably kicking the can down the road of, okay, we’re gonna roll these gains into this property over here and then keep cash flowing from there. A morbid way of looking at it. Sometimes we call you swap till you drop, you just keep 1031 and keep trading up.

Christian (13:43.374)
Yeah.

Larry P, The Investor’s CPA (13:46.938)
and then you pass away and your heirs get the benefit of the step up basis, which we can talk about at different time. But with 1031 exchanges, you want to ensure that whatever property that you’re acquiring is at equal or greater value of what you’re going to be selling. Typically, we say go greater value just to be safe on that end. And it doesn’t have to be one property. can be multiple properties that you can acquire. You can wrap in multiple properties in your sale.

into a 1031. There’s multiple ways to do it whether it’s before you sell or after you sell it but it’s just getting an understanding of working with that 1031QI of what your options are. In a lot of cases a lot of people who have rental properties who weren’t able to use the losses because they have high paying W-2s they got built up losses along the way that is kind of suspended and rolled for in the future years. A 1031 may not make sense

if you have enough losses from previous years to offset the gains with the sale of the property, including depreciation recapture. it’s like making sure that your tax return is being fully assessed to know whether or not it is, can we just do this without paying someone, whatever, a couple of thousand dollars to hold the funds for a certain period of time until you find another property. And you do have that.

There’s a total of six month period the first 35 days you got to have the properties identified You’re gonna do a 1031 and you got to close on them with 145 days Which could create some issues, especially if you want to do some real due diligence or you get into bigger properties and apartments that will require Like more walkthrough and more time for lenders So just being mindful of the timeline that’s involved with it if you have with the losses

that could be involved or could you do a poor man’s 1031 exchange where you don’t do the normal route, you buy another property, you do a cost segregation study and use those losses to offset the property that you just sold. So it’s like, once again, that’s just kind of a big picture of what a 1031 exchange is, the different options with it. And then let’s say if when, whenever, when doesn’t make sense or not.

Christian (16:03.64)
That’s awesome, man. Yeah, it’s such valuable information. There’s a lot of people that really just, again, don’t know the ins and outs of that, right? So by you sharing that, it’s huge value. So what would you say was one of the most overlooked tax deductions that people just are not using that you’re working with right now with your clients as well?

Larry P, The Investor’s CPA (16:24.558)
I think people aren’t taking the opportunity to really wrap their kids into the business. then people ask like, well, there’s an age limit or anything like that. It’s like, there’s not really an age limit. It’s just, the work make sense for, is it age appropriate for that child? it’s a good, especially if you have rental properties. I know it’s touchy subject at times, but some clients are, if you got a two-year-old or a one-year-old, the best you can do is marketing.

If you’re going to market your properties out there and put the kids in the pictures and all of that. So like, okay, cool. You can do some type of marketing agreement from there as they get older or they may help with office cleanup or property cleanup. And they may even get involved with social media and actually posting stuff for you. So it’s a good opportunity to actually get the kids involved in the business sooner while they’re young and early and get them engaged while being able to pay them up to the

the state standard deduction or the federal standard deduction without them having to file taxes as well. it’s once again, as long as they’re working for just mommy and daddy’s business, there’s a way for them to get paid, not to file taxes, but you still get the tax benefit as well. So that’s what I see overlooked quite a bit because people are not sure or just don’t want to get their kids involved in business that type of way.

Christian (17:46.348)
Right, right, right. That definitely makes a lot of sense, Larry. If you guys haven’t realized by now, Larry’s dropping a million dollars worth of game. hope everyone’s paying attention. Cool, man. I’m assuming, correct me if I’m wrong here, do you help structure estate planning and also assist with setting up trusts as well? Is that something that you have?

Larry P, The Investor’s CPA (17:52.744)
Yeah.

Larry P, The Investor’s CPA (18:04.166)
Yeah, so we work with our clients’ attorneys if they’re going to trust. Most of time it’s revocable living trusts that were helping our clients and their attorneys set up to make sure they’re fully aware of the tax implications on our end while the attorney makes sure all the legal stuff is in order.

Christian (18:23.65)
Very cool, very cool. Yeah, I just wanted to ask, know, the best way is how you’re helping, you know, structure that as well, because, you know, there’s a lot of people that think that even when you do have set stuff set up like that, I mean, there’s, you gotta make sure you’re doing it correctly, right? Because people think, you know, you’re safe completely from that, right? So in your experience, do you even feel like even with having an actual trust, is that, is it untouchable? Like people will say it is untouchable or how does that work in your experience? Yeah.

Larry P, The Investor’s CPA (18:53.04)
Yeah, and I just had a conversation with a client this past week because they got it all set up. They got it set up without me. And then they thought that they’ll be shielded from all taxes. Like you just got a revocable trust. Like tax wise, it’s just a disregarded entity. Like I said, all the activity that’s owned under the trust is still going to flow through to your personal tax return. It doesn’t help save you from taxes. You’re not this special entity.

Christian (19:10.702)
Mm.

Larry P, The Investor’s CPA (19:23.071)
I think that there’s this misconception that like these trusts make you exempt from taxes like that’s that’s not the case and as I was explaining to him he thinking he was I think he was talking about more of so like irrevocable trust which you really don’t want when you’re when you’re alive because once that set is very difficult to move maneuver and move stuff in and out of that trust so

Typically people have a revocable trust while they’re alive and when they pass it converts into irrevocable so it can’t be adjusted after they’re passing and it’s aligned with their will. Plus irrevocable trusts are still subject to taxes so even though like you an individual in the irrevocable trust may not be taxed your irrevocable is paying taxes sometimes even much more than what’s on your personal tax return and then you have to find ways to fund it because they can still come through

the IRS could still come through and and and and and we collection from anybody that’s involved or anything that’s within the trust itself. So that’s why you want to make sure that no one’s selling you whole bunch of tax benefits of a trust when it’s not it’s not fully shielding you from from from that perspective. It’s primarily an asset protection anonymity play which is very important but there’s okay how do we align actual tax strategies

to mitigate your tax liability that reduces your tax on your personal tax return.

Christian (20:48.75)
Man Larry, I’m so glad you’re mentioning this because this is what we need, you know We need the real meat and potatoes right on what’s actually the truth, right? Because as you know it I mean a lot of stuff you’ll see on Instagram YouTube and you know They’ll paint the picture and this dream that you know, this is that and there’s this is the Holy Grail You know, and that’s simply just not the case, you know, you have to be educated on this stuff So I appreciate you being in being authentic my friend Awesome, man That’s it. That’s it

Larry P, The Investor’s CPA (21:09.864)
Thank you.

That’s all I can do.

Christian (21:15.54)
I wish honestly man I wish we had more time because there’s a bunch of more questions that I do want to ask you Larry but fortunately we don’t so I just want to give it back to you my friend and just where can the audience find you man how can they work with you where do they need to go

Larry P, The Investor’s CPA (21:28.454)
Yeah, they can go to my page, theinvestorcpa.com. I’m also on Instagram, Facebook, LinkedIn as Larry Pilgrim, CPA. But yeah, people can see different webinars and investments that we’re into and happy to connect and serve where we can.

Christian (21:48.95)
Awesome, awesome. We will definitely drop those links in our description on YouTube, Larry, so people know where to go. So guys, be sure to reach out to Larry and hit him up. So, but Larry, my friend, it’s a pleasure having you on my friend again. I’d love to have you back on here in the future, because there is some more questions I would love to dive in with you and discuss on this, because it’s such an important topic. I really do feel like in this industry. So we’d love to set that up, man. We’ll connect, but pleasure having you on my friend. Thank you.

Larry P, The Investor’s CPA (22:14.696)
Definitely. Appreciate it. Thank you.

Christian (22:18.058)
Awesome, awesome. Well guys, hope you enjoyed today’s show as much as I did and got a ton of value. I know you did because I did, but as anyways, we will see you on the next episode, my friends. Take care.