Latest / The Active Duty Passive Income Podcast / How Military Families Use Real Estate to Lower Taxes | Ep 399

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How Military Families Use Real Estate to Lower Taxes | Ep 399 · The Active Duty Passive Income Podcast

• 0:00
  Speaker 3: Hey, everybody.
• 0:01
  Speaker 3: Time to get tactical about taxes.
• 0:04
  Speaker 3: Now, I know that taxes are probably maybe one of the most boring things on the face of the earth, but I truly believe that that's just your perception.
• 0:13
  Speaker 3: If that's what you actually think, I'm going to challenge you today, and we're gonna talk about why it's super exciting, and I'm gonna give you two things we're gonna talk about.
• 0:20
  Speaker 3: We're gonna...
• 0:20
  Speaker 3: I'm gonna teach you two things that are very tactical on how you can cut down your taxes if you get involved in real estate, you and/or your spouse, and you'll see what I'm talking about here.
• 0:30
  Speaker 3: 'Cause I personally, after I learned a certain amount about taxes, taxes actually became fascinating to me, and I learned that if I build strategy around it, it actually long-term really compounds.
• 0:41
  Speaker 3: Now, without further ado, let's jump into some of these tactics.
• 0:44
  Speaker 3: But the first thing I wanna say, and I heard Ryan Pineda say this on the other day, uh, or he, he said this on his podcast the other day.
• 0:50
  Speaker 3: He said,"You shouldn't worry about taxes until you start making enough money for taxes to be a problem in the first place." Now, yes, I 100% agree, except for I just wanna make sure that everybody understands that doesn't mean that you shouldn't plan for the future with how you're setting up your LLCs and entities in fact, we work for-- we work with, not for, uh, an amazing company called Nevada Corporate Headquarters.
• 1:21
  Speaker 3: So if you go to activedutypassiveincome.com/ira, like a, like the retirement accounts, like India, Romeo, Alpha, uh, it'll forward you to a place to book a call with them.
• 1:31
  Speaker 3: And the cool thing about them is that they're really good at merging the two worlds of all your L- LLCs and entities and, uh, you know, your, your trusts, asset protection, all that kind of stuff, and taxes.
• 1:43
  Speaker 3: So they won't file your taxes for you.
• 1:44
  Speaker 3: They can refer you to somebody to help you do your taxes.
• 1:47
  Speaker 3: We can refer you to somebody to do your taxes.
• 1:49
  Speaker 3: But they're really good at simply the strategy and also then setting up any of those legal entities and trusts and stuff like that if you need help with that.
• 1:57
  Speaker 3: Oh, and by the way, they also help with self-directed retirement accounts, which you can use to then invest in real estate or have your friends and family invest in real estate with you or in your deals, right?
• 2:06
  Speaker 3: And that's why activedutypassiveincome.com/ira.
• 2:10
  Speaker 3: The two things.
• 2:11
  Speaker 3: First is depreciation, and the second one is tied to depreciation, and, uh, i- and, and it'll kind of like all come full, full circle, and you'll understand why this is so powerful.
• 2:20
  Speaker 3: And I'm gonna use my parents as an example for what I believe any military member can do because, um, just their example w- w- will really align, and it'll kind of, um...
• 2:30
  Speaker 3: I think it'll make a lot of sense to y'all.
• 2:31
  Speaker 3: So first, let's talk about depreciation.
• 2:33
  Speaker 3: What is depreciation?
• 2:34
  Speaker 3: I've done podcasts on this in the past.
• 2:36
  Speaker 3: But if, you know...
• 2:37
  Speaker 3: It's, it's good to have a refresher every now and then, especially if you're new to this podcast.
• 2:41
  Speaker 3: Okay.
• 2:42
  Speaker 3: Depreciation is essentially a phased out or, um, you know, taken in pieces deduction.
• 2:51
  Speaker 3: It is you're taking a deduction against your income, but you're not doing it in one big fell swoop.
• 2:56
  Speaker 3: You're doing it in pieces.
• 2:59
  Speaker 3: Think about if you owned a business and you had a car that you had to buy for the business.
• 3:05
  Speaker 3: Obviously, that car is gonna lose value over time, and actually, I'm gonna look ov- look it up right now on my computer while we're talking.
• 3:12
  Speaker 3: I'm gonna say, how long does a car depreciate on taxes for a business?
• 3:22
  Speaker 3: Okay.
• 3:23
  Speaker 3: It's a six year, okay?
• 3:25
  Speaker 3: Six calendar years.
• 3:26
  Speaker 3: So cars, according to the IRS, depreciate.
• 3:29
  Speaker 3: Hopefu- hopefully Google AI answers this correct.
• 3:32
  Speaker 3: Um, even if it's not, you get the point.
• 3:34
  Speaker 3: Five, six, seven, 10 years, whatever it is.
• 3:37
  Speaker 3: According to this, it's six years typically that a car will depreciate, okay?
• 3:41
  Speaker 3: So the government's like,"You know what?
• 3:43
  Speaker 3: That car you bought, we can't count it as an expense.
• 3:46
  Speaker 3: You're gonna keep using it over time.
• 3:47
  Speaker 3: It's not like you use it once and it's gone.
• 3:49
  Speaker 3: But we do recognize it is an expense, and so we want you to l- to deduct it and expense it, but not all in one year." So they say,"Hey, you have to break it up over six years." And we all kind of get that.
• 3:59
  Speaker 3: We're like, you know, you look at the car, like in six years it's gonna be a lot less valuable than it was when you first bought it, right?
• 4:05
  Speaker 3: Cars don't last that long unless you really take care of them, uh, because they have like the mileage issue, right?
• 4:12
  Speaker 3: Eventually, the mechanics of a, of a car are going to need repair or they're gonna break.
• 4:18
  Speaker 3: Now, with real estate, it's the same thing, okay?
• 4:23
  Speaker 3: The depreciation is going to be a thing regard...
• 4:28
  Speaker 3: Like you have to depreciate your home essentially, because the government's gonna do what's called depreciation recapture, and I'll cover that here in a little bit.
• 4:34
  Speaker 3: You have to look at a home and if it's a residential property, it's going to depreciate over 27 and a half years.
• 4:43
  Speaker 3: So if a property cost, I don't know,$275,000, that means every year you can deduct 10 grand, right?
• 4:50
  Speaker 3: You take that, you divide it, you take the 275,000, I hope I'm doing my math in public right, divide it by 27 and a half, that's how much you can deduct every single year.
• 4:59
  Speaker 3: Um, and that's, that's pretty cool because if you think about it, basically any income it makes, if it, if it creates$10,000 of cash flow for you in a calendar year, but then you're able to, on paper, make it look like that amount of income gets wiped out, right?
• 5:14
  Speaker 3: Then all of a sudden you're not gonna have any income to show from that property to pay taxes on in the first place.
• 5:22
  Speaker 3: And I think it might be worth noting, especially for some of y'all who are brand new to like thinking about taxes and strategy, let's just go over what a deduction is.
• 5:30
  Speaker 3: A deduction isn't a, isn't, um, it isn't money back.
• 5:34
  Speaker 3: It's not credit.
• 5:35
  Speaker 3: Nobody's giving you money back.
• 5:36
  Speaker 3: All that a deduction is, is it lowers the amount Of your income that you made that year that the government's going to be consider- considering when it's gonna be calculating how much you should pay on taxes.
• 5:50
  Speaker 3: So if you made$50,000 in a year, but you were able to deduct 10,000, you still made 50,000, right?
• 5:57
  Speaker 3: But on paper, the government is only going to calculate your tax rate based off of the 40,000.
• 6:03
  Speaker 3: And so obviously, you wanna keep knocking that down, down to zero, hopefully, so that the government, you know, will-- even if you made the 50,000, you put that in your pocket, the government will still, you know, it'll think you made a lot less, hopefully.
• 6:17
  Speaker 3: So depreciation is just a form of that.
• 6:20
  Speaker 3: Now, here's the cool thing with, um, with real estate depreciation, is it-- is you can actually accelerate it by taking out--'cause like a property is composed of a bunch of different components, right?
• 6:34
  Speaker 3: The electrical, the plumbing, appliances, all, you know, all this type of stuff.
• 6:39
  Speaker 3: Uh, and all of that depreciates at different rates.
• 6:42
  Speaker 3: And so what you can do is you can pull out from the value of the, of the property, less the, the land, you don't count the land.
• 6:50
  Speaker 3: But you can pull out from e- all those components from a property, and you can make their depreciation schedule accelerate.
• 6:57
  Speaker 3: So let's say there's a component that you pulled out of the property, I don't know, I'm just making it up.
• 7:02
  Speaker 3: Let's say it's a roof for$20,000.
• 7:04
  Speaker 3: And now you're gonna be able to, if you pull it out and separate it, like, let's see, how fast does a roof depreciate?
• 7:14
  Speaker 3: Let's see.
• 7:16
  Speaker 3: Uh, come on, Google.
• 7:19
  Speaker 3: Okay.
• 7:20
  Speaker 3: The IRS says that asphalt shingles, uh Okay, wait a second.
• 7:28
  Speaker 3: Let me...
• 7:28
  Speaker 3: Okay.
• 7:29
  Speaker 3: Maybe, maybe that doesn't.
• 7:30
  Speaker 3: So what, um, what is one of the components of a cost segregation study that, uh, lowers the depreciation schedule?
• 7:49
  Speaker 3: Okay, so let's see.
• 7:51
  Speaker 3: So there's personal property and there's, uh...
• 7:53
  Speaker 3: And it's depreciated over five or seven years, so carpeting and flooring.
• 7:58
  Speaker 3: And then there's, uh, and then there's land improvements that are placed at a 15-year schedule.
• 8:02
  Speaker 3: Okay.
• 8:03
  Speaker 3: So typically, the building would be 27 and a half years, but you're gonna pull out components and you're gonna turn them into five, seven, and potentially 15-year components.
• 8:11
  Speaker 3: So now let's say, I don't know, I'm not gonna use a roof.
• 8:15
  Speaker 3: Sorry, maybe that was a bad example.
• 8:16
  Speaker 3: Um, let's say an appliance that you know is worth$5,000, whatever the appliance is, right?
• 10:03
  Speaker 3: And now you pull that out of the value of the home and you now depreciate it at five or maybe seven years or whatever the case may be.
• 10:12
  Speaker 3: So now that$5,000 gets depreciated over a five-year amount instead of over 27 and a half years, so you get to take a lot bigger chunks of deductions faster.
• 10:23
  Speaker 3: And so what you wanna do is you wanna pull out as many components out of a property as possible and, and decrease the amount of time it takes to, to depreciate them to take that deduction, because then you'll be able to deduct more and more and more and more and more, right?
• 10:37
  Speaker 3: And then you can also do what's called bonus depreciation, which allows you to take that accelerated property and take it out all in one year.
• 10:45
  Speaker 3: Now, I'm not a CPA, so definitely advise with your enrolled agent or CPA on any of this type of stuff, but this is-- I'm a, a...
• 10:51
  Speaker 3: As a practitioner, I've done cost segregations a handful of times, and it costs like, you know, four or$5,000 to do, but it's well worth it because the amount of tax savings you get by pulling all the components out, like, especially if like a$5 million property like the last one we did, there's so much that you get to pull out all these little components and then you depreciate them on a very quick schedule, right?
• 11:12
  Speaker 3: Instead of 27 and a half years.
• 11:14
  Speaker 3: And then the government, with bonus depreciation, you've probably heard that in the news a lot, they'd say,"Okay, now you don't even have to do the five, seven, whatever years.
• 11:21
  Speaker 3: You get to take all of those and do it in year one." So it's almost like you took a big part of the property and you just like wiped out your taxes, uh, massively.
• 11:33
  Speaker 3: You took a massive deduction, not the whole value of the property, but still a very large portion of it, like maybe 20, 25% of it, year one, boom.
• 11:43
  Speaker 3: And that, that is massive because if you do not want to pay taxes on any income you make, guess what?
• 11:51
  Speaker 3: That'll massively help.
• 11:53
  Speaker 3: Now, here's the crazy part.
• 11:54
  Speaker 3: Here's where a spouse can help or you can help yourself.
• 11:59
  Speaker 3: There is an opportunity to have that depreciation count against your other income, not just from the income from the real estate The way that works is you need to have obviously other income elsewhere that's active income, potentially, right?
• 12:15
  Speaker 3: And then you have your passive income over here with passive losses from your real estate and depreciation of the real estate.
• 12:21
  Speaker 3: If you prove to the IRS that you and/or your spouse spend more time in your professional capacity working on the real estate, managing the real estate than you do on the other thing that's making you money, all of a sudden, this is how I think about it, is that, that income and those deductions, tho- that depreciation is now considered active'cause you're an active investor.
• 12:45
  Speaker 3: You're an active manager of those investments.
• 12:48
  Speaker 3: They're no longer passive investments.
• 12:50
  Speaker 3: And so now that income is now considered active, and those deductions and depreciations are now active, and so they can count against your other active income.
• 13:01
  Speaker 3: And that's huge because what-- with the depreciation, if you do bonus depreciation, maybe even if you don't, if you just do a cost segregation or maybe even just the regular depreciation schedule of 27 and a half years, that might be more of a deduction than the income that the property produced itself.
• 13:19
  Speaker 3: So if the property produced$10,000 but you were able to depreciate$20,000 that year, means you wiped out the income.
• 13:26
  Speaker 3: You're not paying mon- uh, any taxes on the income, right?
• 13:28
  Speaker 3: That that property made, and then you still have$10,000 of losses, and where does that go?
• 13:31
  Speaker 3: What do you do with it?
• 13:32
  Speaker 3: Well, wouldn't it be nice if that could count against your maybe W inc- W2 income over here, your 1099 income over there?
• 13:39
  Speaker 3: Wouldn't that be nice?
• 13:41
  Speaker 3: Well, absolutely.
• 13:42
  Speaker 3: If you're able to take deductions against something completely unrelated, right?
• 13:46
  Speaker 3: And that is where the magic happens, is where if you can figure out a way for you and your family and your strategy to have both happen at the same time, you have your real estate investments
• 13:56
  Speaker: All right, I'm gonna do a super quick recap because my dang camera and audio equipment overheated.
• 14:00
  Speaker: So this is me continuing on with the whole real estate professional and depreciation stuff.
• 14:05
  Speaker: So If you are depreciating more than the income that that property is making, if you set yourself up right, you might actually be able to count that depreciation against your active income, because now that, the, that income and those losses in your business are now considered active and no longer passive, which real estate is typically passive.
• 14:25
  Speaker: Again, I'm not a CPA, but I want to make sure that you guys understand where I'm...
• 14:29
  Speaker: Like, I'm just trying to teach you something that I've learned as a practitioner.
• 14:32
  Speaker: Okay.
• 14:33
  Speaker: Now, here's a couple of things you can do.
• 14:35
  Speaker: If you-- And, and actually let me explain the mechanism.
• 14:39
  Speaker: Why is it switched to active, right?
• 14:42
  Speaker: Um, it's becau- it's called real estate professional or REPS status.
• 14:46
  Speaker: Uh, R-E-P, right?
• 14:48
  Speaker: Real estate professional.
• 14:50
  Speaker: So that's, if you hear somebody say REPS, they're talking about real estate professional status.
• 14:55
  Speaker: Now, it's something you qualify for in a couple different ways.
• 14:58
  Speaker: You need, uh, to have at least seven hundred and fifty hours managing or participating in the, the, that business, the real estate, right?
• 15:05
  Speaker: The real estate business.
• 15:07
  Speaker: Five hundred of it has to be material.
• 15:08
  Speaker: All the definitions of this are in the IRS tax code.
• 15:10
  Speaker: You can also just ask ChatGPT or Claude or whatever AI you use.
• 15:14
  Speaker: Um, also more than fifty percent of your professionally spent time, I'm not sure if that's the right verbiage, uh, but basically more than half of the time that you spend, mmm, you know, professionally making money and stuff has to be spent on that real estate, not anything else that's making you money.
• 15:32
  Speaker: Okay?
• 15:32
  Speaker: And then you have to own at least five percent equity in that real estate.
• 15:36
  Speaker: Um, and there's a couple of more nuances, but long story short, that you just need to spend more time doing the real estate than anything else for that real estate activity to now be considered active, which will then allow you to knock out your other active income with any additional losses.
• 15:49
  Speaker: Boom.
• 15:50
  Speaker: Here's where it gets crazy.
• 15:51
  Speaker: If you are married filing jointly, um, you can have your spouse get real estate professional status if it's something that you think will be m- difficult for you to get, right?
• 16:03
  Speaker: Like if you're active duty military, maybe you're working like twelve-hour days, like there's not enough hours in the day to spend more hours doing real estate and to be able to justify that in front of the IRS in case they audit you.
• 16:18
  Speaker: So you need to be able to have a justifiable and trackable position on,"Hey, I spent not only seven hundred and fifty hours, five hundred of them materially, I actually spent that-- those amount of hours were more than I spent elsewhere." And you need to be able to justify that.
• 16:32
  Speaker: Now, let's say you are the active duty spouse, and your spouse or the active duty member, right?
• 16:39
  Speaker: And your spouse is maybe not active duty.
• 16:43
  Speaker: Maybe, I mean, i- if they have a full-time job, again, this will be difficult for them as well.
• 16:47
  Speaker: But let's say they don't have a full-time job.
• 16:50
  Speaker: Maybe they have a part-time job or, or whatever the case may be.
• 16:53
  Speaker: Um, if they are the ones that then accrue the seven hundred and fifty hours and, you know, meet all the ch- uh, check all the boxes, they can now claim real estate professional status and claim it for both of you who are filing together, married filing jointly, and now you're able to g-get the best of both worlds, right?
• 17:12
  Speaker: You're able to still maybe, you know, if, if-- It doesn't matter who the active duty person is or like in this case, if, if you're the active duty member and you want to make the real estate investing happen for you and your family and you want your, uh, spouse to help and, and your spouse wants to help and, and, and it just works out that way.
• 17:32
  Speaker: Again, okay, so this doesn't apply to everybody, but if you want it to work out that way and you guys agree on this strategy, it is a beautiful thing.
• 17:38
  Speaker: That means you can continue being active duty or have, I don't know, some very intense, uh, time-requiring W2 job after the military, and your spouse can help boost your wealth massively by not only creating income with the real estate but also lowering your overall tax burden from the real estate and the W2.
• 17:58
  Speaker: And so, you know, not spending, uh, not losing money to the government is a form of income if you think about it.
• 18:04
  Speaker: So that is where this thing kind of gets crazy because we talk about compound interest, right?
• 18:11
  Speaker: We talk about, uh, you know, that's like the eighth wonder of the world and how that, that's what really makes you very wealthy.
• 18:17
  Speaker: Well, can you imagine compounding and reinvesting all the tax savings?
• 18:22
  Speaker: We're talking about like potentially, you know, 10, 15% or more in tax savings relative to your income.
• 18:29
  Speaker: That is huge.
• 18:31
  Speaker: And then reinvesting and compounding and working on that together as a team.
• 18:35
  Speaker: So again, if you can qualify for it, fantastic.
• 18:37
  Speaker: But typically, as a beginning investor, it's difficult to qualify for real estate professional because you need to make enough income actively to put food on the table.
• 18:46
  Speaker: And so most people don't just, just the way it works out, won't qualify for that.
• 18:51
  Speaker: But that's where you got this kind of like a loophole.
• 18:53
  Speaker: Remember, I hate that term because it's not really a thing, where your spouse can be, uh, can claim it, can claim real estate professional with you.
• 19:02
  Speaker: All right, let me see.
• 19:02
  Speaker: Is there anything else I wanted to mention on this?
• 19:05
  Speaker: Not really.
• 19:05
  Speaker: I think that's about it.
• 19:07
  Speaker: Um, and that's basically what my parents are doing.
• 19:09
  Speaker: That's why I brought them up as an analogy.
• 19:11
  Speaker: My, my dad is, has a W2 as a, um, as a professor.
• 19:15
  Speaker: My mom is a real estate professional, and so she claims real estate professional for both of them.
• 19:20
  Speaker: And so, uh, I think every single year so far they've been like wiping out his tax bill.
• 19:26
  Speaker: So, um, it's pretty cool.
• 19:29
  Speaker: Pretty freaking cool.
• 19:30
  Speaker: I haven't looked at their taxes in a while, but, um, I remember they were in a pretty good spot.
• 19:33
  Speaker: So, and we're gonna continue doing that.
• 19:35
  Speaker: So anyway, that's it.
• 19:37
  Speaker: I got pretty tactical on those r- on those tax things.
• 19:40
  Speaker: Hopefully that was helpful.
• 19:40
  Speaker: If you have any questions, you know, comment in the, in the, uh, whatever description or comments below if you're on YouTube, wherever you are, wherever you're listening to this.
• 19:49
  Speaker: And also, as always, please share this episode if you found it valuable.
• 19:53
  Speaker: That'll help us with our mission of impacting three million military families positively in their finances.
• 19:58
  Speaker: This was Markian Sich with Active Duty Passive Income.
• 20:00
  Speaker: See you in the next episode.
• 20:02
  Speaker: Bye.