Latest / The Jon Sanchez Show / Should You Sell Your Rental Property Or Keep It?
Transcript
- Jon G. Sanchez: Welcome to the John Sanchez show on News Talk 780 KOH. Pleasure to be with you and a pleasure to be with one of the Edge team members, Mr. Aaron Clark. How are you, my friend? Good to have you. Aaron Clark, Edge Realty: I'm doing good. Yeah, I haven't seen you since the fourth. Since before the fourth. I know. Jon G. Sanchez: Exactly. It seems like an eternity ago. I know Aaron and I were joking before the show is like, man, I wish this was like last Thursday where you know market was closed tomorrow. We had a three day weekend and all that. But ⁓ nope, gotta grind it out. Back to the norm, back to the norm. Exactly. How's the world real estate treating you, my friend? Good. Aaron Clark, Edge Realty: Back to the norm. Yep. Going good, man. This is like our the Fourth of July week is kinda like a slow, relaxed week in our crazy madness of summer. So it was enjoyable. Jon G. Sanchez: Yep. Yep. Good. Good. Glad to hear it. Glad to hear it. Yeah, Cory's always emphasizes how the real estate market locally peaks around this time of the year. So yeah. It's ⁓ you think that's gonna happen this year? Or you think we got too good a momentum going? Aaron Clark, Edge Realty: I feel like we've kind of just been where we've been and haven't really moved too much off of that. I mean, little fluctuations. So I don't know that there really is a big peak. It's more like probably a a rolling hill, you know? So I don't think we'll see a big fall off or anything like that. I think it'll be kind of straightforward until the end of probably the end of summer. I mean the reason we say that is because kids go back to school and so y y primarily you don't get a lot of people that are wanting to buy when the kids are back in school. Jon G. Sanchez: Okay. Got it. Got it. Okay. Aaron Clark, Edge Realty: ⁓ but that's that a lot of that's changed over the past few years too. We're not seeing those impacts like we used to. Jon G. Sanchez: Right, right. See, I every time he mentions that, I I always bring that point up. It's like, I mean, you know, when you and I were going to school, we didn't have at least when I went, I'm much older than you, but you know, there was no such thing as year around school. I mean, it was your traditional you get out in June, you go back ⁓ end of August, beginning September, and you know, so on and so forth. But, you know, I always wonder that, you know, with year around school and the crazy schedules and all the different, you know, private schools and so on and so forth that we have here locally. It's yeah, it's completely different this time. Aaron Clark, Edge Realty: Mm-hmm. Yeah. I think COVID really changed that sort of normative way of doing well, I mean just like work, right? Like everybody knows somebody now who works from home. And before COVID, it was like, Wow, that's I mean, that's seeing Santa Claus. Like that just doesn't that doesn't exist, you know. When somebody said, I'm a remote worker, you're like, What is that? What is this wizardry that you have? Now somebody says it and they're like, Yeah, I tried that. It was cool, but Jon G. Sanchez: You think so? Yeah, yeah. Exactly. Yeah. Yeah, yeah. Right, right. Right, right, right. How do you do that crazy stuff? ⁓ Aaron Clark, Edge Realty: I never worked, so you know. Yep. Jon G. Sanchez: Yeah. Yeah, good old times, that's for sure. That's for sure. All right, my friend. Well, let me tell you what welcome everybody, first of all. Let me tell you what Aaron and I have lined up for you. We're gonna go through the stock market recap. Quite ⁓ quite fortunate. Just like I said yesterday, ⁓ you know, don't get excited when this market sold off yesterday after the president called off the ⁓ the ceasefire and missiles flew, and then they did it again yesterday, right during the show. I I was joking yesterday, Aaron. It seems like it, you know, for the last two days it happens right when the show starts. We get the headlines coming across. Well, missiles are flying again. And so I yeah, just a strange coincidence. But ⁓ but yeah, woke up this morning, market's like, Yeah, we're not concerned about that. Didn't really have any positive comments other than Trump said this morning, Iran called me and they want to make a deal. And is that why I w w was that during the ⁓ you know, all the radar facilities ⁓ you know, on fire and their sixty boats that were blowing up? It was at that time period they they said they wanted to do that? Aaron Clark, Edge Realty: ⁓ wow. Sorry to be cynical, ⁓ wow. Jon G. Sanchez: I I you know, in all seriousness, or actually kind of joking serious, can you imagine if that's true, Aaron? Can you imagine if that's true? And you're sitting there and you're, you know, you're the commander in chief and you just, you know, issued the the order to, you know, continue the air strikes and stuff. And all of a sudden your assistant comes in and says, Excuse me, ⁓ Mr. President. Yeah, yeah, I'm I'm I'm busy. I'm watching, you know, what's going on in Iran and ⁓ i it it's the Iranian leaders, they want to talk to you. Hey, Fred, how's it going? Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: Well, ⁓ sir, ⁓ you know, we're a little upset right now that ⁓ you know, our our radar just got knocked out and so on so y you wanna make a deal? You y you wanna talk about this again? Go grab a cup of coffee and let's sit down and have a little video chat, shall we? I that's why I always visualize it with stuff like that. So again, don't know, but the street all that matters the street believed that ⁓ Iran called the president and said they want to make a deal, but never heard anything more about it the rest of the day. But the market didn't care. The market rallied, ⁓ oil prices fell and Yeah, that's all we care about. It's our clients making money and everybody's happy. So give you all those details here in a moment. But let's get to the real estate topic that we're going to be discussing. We've titled today's show, Should You Sell Your Rental Property or Should You Keep It? So here's a scenario I want you to think about. This is kind of our our ⁓ our our ⁓ imaginary client. Your rental property just you just found out you looked at Zillow, you talked to a real estate professional, your real estate property, your investment property. Has appreciated dramatically. But the downside is your tenant just moved out. So the first question that goes through your mind is well, should I sell it? Should I do a 1031 tax deferred exchange? Should I do a what's called a Delaware statutory trust exchange or DEST? Or should I go out there, try to get a new tenant, start collecting rents again, and come back and revisit this at a later time? Aaron, I bet you wish you had a dime or a dollar for every time one of your clients have called you and said that exact scenario, right? Aaron Clark, Edge Realty: ⁓ yeah. A dime would be fantastic. A dollar would be amazing. Jon G. Sanchez: Yep. Yep. A dime would be fantastic. That's right. That's right. Well, I had this discussion with a client this morning, and that's what prompted me to to ⁓ to be thinking about this. So today what Aaron and I are gonna do is we're gonna discuss one of the biggest financial decisions you ever make as a real as a ⁓ a rental property owner, as a landlord. If you do it wrong, very costly tax mistakes can hit you. So we're gonna go over some things to make sure that you don't make those tax mistakes. Also look at all the pros and cons and and and really, you know, I want to get Aaron's advice on what does he actually tell his clients when that phone call comes. I'll share what I tell my clients, but he's the real estate professional. And ⁓ you know, the my conversation this morning, Aaron, with with my client was he was pretty adamant. He he just had a tenant, like I said, left. And ⁓ we had ⁓ was the reason for our phone call this morning. And within 10 minutes of the phone call, I gave him my numbers and my analysis and stuff. He's like, yeah, you know what? I'm gonna go get a new run, new tenant. It was it was literally a 10-minute conversation. And I think that's what happens a lot is when you own your own property, if you're trying to figure these things out on your own, it's really an emotional decision. It's almost like, geez, do I buy a stock? Do I sell a stock? Right. Because you're looking at it and you're going, Wow, I bought it for you know 200,000. It's worth 600,000 now. Wow, I could just make 400,000. ⁓ shoot, you know, I've got these things called capital gains tax. And then people still are very confused about how the rules and how things work when it comes to doing a 1031 tax deferred exchange or even something like the the ⁓ the DST that ⁓ that we handle for our clients. And so they look at that and they the the brain starts spinning, right? You're like, ⁓ what direction I go? ⁓ you know, I'll come back and I'll I'll think about it later. But in the meantime, you know, what usually prompts that, of course, is you lose the tenant, you know, whether tenant dies, tenant moves out, whatever the case is. ⁓ in this case, the tenant did pass away. And ⁓ he had ⁓ I remember talking to him years ago about this. He was very much it was out of the kindness of his heart, ⁓ it was a ⁓ very, very below market rents that he was collecting. But again, he was he there I won't go into the reasons why he was doing that, but he had rational reasons. but now you know, you look at it and and talking substantial increase in in rents that he's ⁓ able to get now, right? I mean, significant, significant. And so, you know, we ran the numbers and looked at the, you know, cash on cash return and w alternative things that you know, if he did sell it and lost money to taxes, et cetera, what could he do with that money and so on and so forth. And like I said, it was about a ten minute conversation and boom, we made the decision to to stick it out and get some new tenants in there and boom, here we go. Aaron Clark, Edge Realty: Yeah. It's I I find a lot of people too in that moment when they are getting super overwhelmed with the situation. I mean, you have the fear of like of getting into the what ifs and whatnots and whatever, but then people will also get into the fear of just I'm gonna make the wrong decision and not find out till later. Like, you know, my whole life I was trying to accumulate a rental property and if I sell it now, what will people think? And I was trying to do that. Is this dumb? So there it just gets so overwhelming and Jon G. Sanchez: Sure. Yeah. Aaron Clark, Edge Realty: And that's where you have to run the numbers because then you know you're not making a mistake because the numbers will not lie. That you'll be able to evaluate the numbers and realize because a lot of people, many, many people I talk to, they'll think, I've got four hundred thousand dollars in equity. I'm just gonna stick that four hundred thousand dollars in my pocket and I go, you know, the first word we use is the dirty word that starts with a T called taxes. And then they look at it and go, Okay, well it can't be that much. Jon G. Sanchez: It does. Right. That's it. Aaron Clark, Edge Realty: What are we talking? Like 10 grand, 15 grand? I mean, out of 400, that's nothing. But then when you start crunching the numbers and you realize it could be up to 50% of that $400,000, depending on how long you've owned it, how much it's appreciated, how much depreciation you've taken. Yes. Yes. Mm-hmm. Jon G. Sanchez: Yeah, right. Right. Yes, that's right. If you're in a a a state like California where you and people always you you you know this, Aaron, there people forget California has their own ⁓ capital gains tax as as well as a lot of states. We don't obviously here in Nevada, but a lot of states do. And ⁓ yeah, you're you're right. But but you know, I'll let the kid out of the bag. One thing I always like to to bring to everybody's attention that I still even even when I tell clients, you know, if they're thinking about selling, go to talk to your tax professional, make sure that they understand what's going on. And they come back and I said, by the way. Aaron Clark, Edge Realty: Yeah. Hundred percent. Jon G. Sanchez: Did your accountant talk to you about depreciation recapture tax? Like, no, what is that? See, okay, good. So you're you're in the same boat as me. Yeah. And and until we bring it to our clients' attention, they're like, and folks, I'll just tell you right now, it's a nasty tax. In in in some cases, it can be higher than your capital gains tax. And people don't realize it because it's not. Absolutely it can. Absolutely it can. Does does California Aaron ⁓ still have that rule where Aaron Clark, Edge Realty: No one ever knows what that is. Yeah. Yes. Can wash out all the equity. Jon G. Sanchez: It at escrow closing, they withhold, and I can't remember what it was. It was like five percent or something, regardless of whatever, they're gonna withhold five percent. ⁓ you know, in their mind is for the California capital gains tax. Does that still go on? Do you know? I know you don't do a lot of business in California. Yeah. Yeah. I remember that. Yeah, yeah. I remember that was that was always a big surprise. I had one client years ago and they Aaron Clark, Edge Realty: believe so. Now I'm not licensed in California, so I don't know if it's changed, but I believe they still hold they trust me, California's gonna get their money. Yeah. Jon G. Sanchez: That they're gonna walk away with a bunch of money and they go to closing, and then they're waiting for the wire from escrow. And here the wire comes, and now they called me. I'm like, ⁓ my god, I just lost. I forget the dollar amount, but it was substantial. And and yeah, it's like California's like, ⁓ you know what? We're it it's just it's it's a goodwill deposit. That's the way they kind of look at it. We decided to make sure it's a ransom. That's right. That's right, that's right. So yeah, so it's gonna be a gonna be a really fun topic to discuss, and we'll share with. Aaron Clark, Edge Realty: And then they hold it. Yep. Yeah. It's the it's a ransom so you don't run. Jon G. Sanchez: you with all of you some of our war stories, which is really the best way to, ⁓ to understand things. So let's get the stock market side going, Aaron, and ⁓ get that out of the way. So like I said, it was a day that we had ⁓ pretty good strength right from the ⁓ from the opening bell. even in the pre market session, things were going pretty well. Dow kinda struggled throughout the day, didn't really get all that excited about, you know, again, the the president indicating that Iran wants to make a deal. But we had, you know, once again Thank goodness for these things called semiconductors. We love them one day. We hate them the next day. And today was one of those days after yesterday, you know, ⁓ they were not ⁓ loved, and a couple times this week they were not loved, but boy, they loved them today and drove the NASDAQ to a nice level. Gained 336 on the Nasdaq, 1.3%, closed at 26,206. Now, 139 point gain, it's only a quarter percent, 52,487, and the SP higher by 61 points or 0.81% to close at 7,543. So Rotation back into the semiconductor stocks. ⁓ again, yesterday was more of a rotation out of semiconductor, back over into consumer cyclical staples, you know, the things that aren't really quote really economically sensitive. ⁓ pretty good run up in ⁓ applied material today. So I'm gonna mention this one up eighteen dollars and sixteen cents, about a three point one eight percent gain to five eighty-eight sixty. ⁓ the CEO of applied material, AMAT, ⁓ Gary Dickerson's his name. He said the chipmakers are preparing for years of expansion. That reinforced the optimism surrounding AI-related capital spending. You had ⁓ I'm not sure if you saw that story or not, Aaron on ⁓ Meta. They're basically gonna be producing their own, you know, AI chips and so on and so forth, which ⁓ I don't know about that one, but ⁓ anyways, that that made that stock bounce a little bit. Micron was strong today at $42 and some change, Lamb Research, the whole group, AMD, etc. Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: ⁓ cruise lines, they rebounded after yesterday's sell-off. Because again, today it's safe to go on a cruise line around the world. ⁓ Norwegian cruise lines up almost 7%, 6.98 to be exact, $1.29 gained in 1976. Tesla had a nice rebound up $12.49 to $406.55. Interesting one on this one, Costco. Again, I ⁓ Aaron, I don't know about you, but I like to look at Costco as almost a barometer of the economy, right? ⁓ of consumer spending, more so the higher end of consumers, right? Stock lost forty dollars and sixteen cents today, four point two one percent loss to close at nine, twelve ninety-seven. June comp sales came in a little over eight percent growth rate, which ⁓ trust me, any retailer would would give ⁓ you know anything to have those numbers, but that was down from over twelve percent in the month of May. So they they punished the stocks at ⁓ you know, consumers slowing down. So they punished that. ⁓ also in the consumer sector, you had Pepsi Today report numbers, very slight ⁓ earnings beat. ⁓ but ⁓ sales in North America were down. They punished that stock down three and a quarter percent, four dollar and sixty five cent loss to one thirty six or excuse me, one thirty seven eighty six. So like I said, it was kind of a mixed showing there. show on Newstock 780K with Aaron Clark of Veg Reality. Mr. Millard again is on still on vacation. Of course, he had the week off. All right, once again, we finished with a gain of $139 on the Dow. The NASDAQ rose 336, SP up 61. All right, we're going to get right to our ⁓ real estate topic. Again, should you sell your rental property or ⁓ should you keep it? ⁓ interesting scenario to be thinking about. ⁓ once again, on the commodity side, we lost $1.43 on oil, $72.10 a barrel, up $58.20 ⁓ on gold. 414160 announced. There's a nice round number for you. And the 10 year treasury down three basis points on the day to a yield close of 454. And in the absence of Mr. Willard, according to Mortgage News Daily, 30-year fixed mortgage down three basis points to a yield of 6.65%. It's just not budget error. Mortgage rate is just not I it's just like for weeks we have said six point six three, six point six five. So yeah, it's goodness. Yep. Come to the reality, it's just gonna hold the steady. Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: All right, let's get to this topic, Aaron. This is fascinating. Once again, our scenario is this you're a you know ⁓ you're a landlord, ⁓ things have changed, you realize, hey, you know what, man, I've got some nice equity built up into this thing. And ⁓ but guess what? Your tenant just moved out. And then you start thinking in your mind, should I sell this? Should I complete a 1031 tax deferred exchange? Delaware Statutory Trust, which we'll go into in a little bit here. Should I keep collecting rents? Right? What do I do? Well, we're gonna lay out some scenarios, right? Every scenario is there. We can't say, ⁓ yeah, yeah, so always want to sell you, always want to, you know, stay there. A lot of different things. That's what we're gonna be talking about, real life examples of that. Because, you know, ⁓ for many, many of you, a rental property represents, like Aaron said earlier, literally years or decades of hard work, right? You sacrificed, you went over there, you did repairs, you did this. Maybe it's your first one, maybe it's your tenth one, whatever it is. But the bottom line is you've watched it steadily appreciate over time. So you got a little bit of love towards that thing. Then one day again, you get that phone call. Hey, I'm moving out, giving you my 30-day notice. What do you mean you've been here for 10 years and you know, I gave you below market rents and all that stuff. And like, nope, I'm moving on, I'm buying a house or moving somewhere else, whatever the case may be. And then the light bulb comes on. Should I sell? Should I keep it? Should I exchange it? Which I want to get Aaron's opinion on how many times people come to him and say, Hey, should I exchange it? Because what I find is, Aaron, most people don't even know about the tax deferred exchange. So Today we're going to walk through exactly how you make those decisions because guess what? Selling an investment property isn't like selling your primary home. It isn't a simple real estate decision. It's really a financial planning decision because you do it wrong. And as we were saying at the first segment, you can cost yourself a significant amount of money and capital gains tax and other forms of taxes. So, Aaron, when someone calls you and says that scenario, I imagine the first question you ask them is, why are you selling? Aaron Clark, Edge Realty: ⁓ yeah. Yeah. Yeah. Cause because the the common reasons usually are of course the tenant has moved out and so now they're reevaluating everything in life, just like we do if you know if you lose a job or something like that. Yeah. ⁓ and so you have that scenario. A lot of it is people are just tired ⁓ of being a landlord. Jon G. Sanchez: Take it from there. What are the common reasons? Yeah, that's a good way to put it. They they reevaluate everything. You're right. That's what I hear number one with our clients. Yeah. Aaron Clark, Edge Realty: Or maybe they have four of them and they're just like, you know, they they just retired from work and their life focus is changing and now it's time to cash in and break all the piggy banks open and not do anything anymore. ⁓ they're getting frustrated because it's a let's say maybe it's a poor quality rental property, so they're having a lot of problems with it, meaning it's really old and it's requiring a lot of repairs. They're having issues because they don't live here. And they're using a property management company, and so they're having issues with the the property management company and finding a good one. So it's been frustrating. ⁓ I mean, a lot of those things are all key factors. And I've had a lot of people where they're undercharging and they haven't raised the rent in 10, 15 years on properties, and they're literally below 50% of what the market rent is on the property, and so they just don't see the value at all with the rising cost of everything else. ⁓ so there's a whole Jon G. Sanchez: Mm, good one. Yes, yes. In the yep. Yep. That was my scenario with my client. Aaron Clark, Edge Realty: bunch of different scenarios that people will call to self. Jon G. Sanchez: Yeah. The the ones that I hear ⁓ is number one, I'm tired. I I don't want to be a landlord anymore. the when I ask why, ninety-nine percent of the time the catalyst is they had a bad tenant, right? I mean, you and I both have had the stories. ⁓ you know, ⁓ went did my annual inspection squatters, I had my did my annual inspection. Aaron Clark, Edge Realty: Yeah. ⁓ yeah. Squatters, non payment. Jon G. Sanchez: Place was was ransacked. They stripped everything out, including copper wire many times. I've heard that one. and I'd say the second biggest one is like you just said, is ⁓ the major repairs. Usually, of course, a roof, which is gonna be one of your more expensive things. Like I I just I don't want to spend 20 grand on getting a new roof put on this thing. So I want to get rid of it. So, all right, so you hear the same things that I do. Beautiful. Let's go to question number two. What will it cost you to sell? Take it from there. Aaron Clark, Edge Realty: Mm-hmm. Yeah, so the other part of it is finding out exactly when we decide, you know, why they're selling it, what it's gonna cost them to sell, because depending on how what they bought it for and what it's worth today, that equitable number and how long they've been depreciating it, was it their primary residence that they converted? how's their CPA been doing their tax structure on that property? Have they been collecting receipts over the years for upgrades, repairs, things like that? All of those things will Jon G. Sanchez: Good point. Which would lower the cost basis or increase cost basis. Aaron Clark, Edge Realty: Yeah, all of that will determine what the the value of the property is and what they're gonna end up paying. And then of course, like we said earlier, we have the depreciation on on the sale of the property. A lot of people, they understand that they've been doing it. They understand why they've been doing it, but they don't understand what that could even total or close to. So they don't even consider it. It's like going to the dentist and they say, We gotta pull one of your teeth and without taking an X ray, they just guess on which one it is. Like that's Jon G. Sanchez: Right. Right. Good analogy. Ouch. Aaron Clark, Edge Realty: Yeah, that's the that is the the reality of it. So I always tell people I'm like, listen, the first thing you need to do is you need to talk to whoever's been doing your taxes and find out what the cost is going to be on this. Now, we can offset those things and defer those things by doing a ten thirty one exchange or ⁓ doing the Delaware exchange. So all of those things are ways that if we we've determined Jon G. Sanchez: DSC. Aaron Clark, Edge Realty: We need to sell the property, we're gonna sell the property, cause maybe it's something that we can't control that the only way we can control is to sell it and move that money into something else. So we still wanna keep some sort of investment style alive in real estate, then by doing that we can do an exchange and then we don't have to pay any taxes. So all all of those are determined by that. Jon G. Sanchez: All right. When we when we come back, we're gonna break these down because the the these these points that Aaron just covered, these are really the gist of today's ⁓ subject, which is we're gonna go deep into capital gains, make sure you have a thorough understanding of the of the long-term capital gain structure. We're gonna go deep into the depreciation recapture and state taxes. ⁓ because you man, this is why Aaron is so good. ⁓ you do this it's we do the same thing. You gotta talk to the accountant after after you talk to the real estate professional, get an idea what this property could sell for, you start doing a pro forma and say, I sell it for this, here's my taxes and so on and so forth. So there's no guesswork. That's the worst thing. All right, we're just getting started on again. Should I sell my rental property or should I keep it? To the John Sanchez Show on News with Aaron Clark of Edge Reality. Great to be with you this Thursday afternoon. All right, we're gonna get back to our topic today, which again, very, very ⁓ interesting. Should you sell your rental property or should you keep it? And again, the scenario that many of you ⁓ that are landlords that that go through or could go through at some point, you lose your tenant, your eyes are open, you're like, you know what, this is maybe my out, right? I I'm tired of being a landlord or geez, look at I, you know, just got a an offer from a real estate agent and Jack Sabin: Welcome back. Thank you. Jon G. Sanchez: They're saying, you know, geez, I can walk away in my house, you know, I can make 500,000 profit on this thing. I've owned it for so long. Well, we want to just tone you down just a little bit, right? We don't want you to get too excited yet. Hopefully that will work out. So what we're trying to do is bring some questions to mind that you need to be thinking about. Again, we started with, why are you selling? Again, I'm tired of being a landlord, is what Aaron and I hear the most. I need the cash. There's better opportunities. Maybe I'm not getting the cash flow that I expect. Retiring, I just don't want to do this, so on and so forth. Now, here's where we left off before we went to break. What will it cost you to sell? Okay. So, what Aaron and I want to right now, we're gonna get little technical for you because we were both comparing notes during the break that we're amazed many times, many times, that we have clients of pretty good financial stature, and they have very little, if any, understanding of the tax structure ⁓ and and so on and so forth when they go to sell an investment property. Aaron, I don't about you, but just real quick before we get to the list, I've had clients that think that the two fifty or five hundred thousand dollar tax free exclusion that we enjoy if we are, you know, for our primary residents, ⁓ applies to a rental property. Have you had that one? Yep. Aaron Clark, Edge Realty: Yeah, I have that. And then they miss the term that you know, they have to live there two out of the last five years. So they think that if they converted their primary residence fifteen years ago that they never have to pay it, they're exempt from it. So they don't understand that either. Jon G. Sanchez: Yes. That's right. That's right. That's a yep, that's a good point. Okay, so let's get down to the the tax side of things. And once again, before we get into this, we are not CPAs, we are not attorneys. We do want to emphasize the minute that you are convinced that you are going to sell it or when you're doing your due diligence, what Aaron and I both recommend and we tell our clients, you gotta go talk to the accountant, and you're gonna understand why here in a second. Before you sign any listing agreement, before you do anything. All right. Aaron Clark, Edge Realty: Ha ha. Jon G. Sanchez: So, Aaron, let's talk long term capital gains. You want to tackle that one or you want me to tackle it? All right. So remember, folks, long term capital gains applies the same for stock market assets as it does for real estate. Long as you own that property 12 months or more, it's going to be taxed at the long term capital gains rate. Now remember, standard answer is, excuse me, is 20%. But it can really, depending upon your income level, it can be up as much as 23.5%, or it can literally be down to zero. Aaron Clark, Edge Realty: for it. That's that's all you. That's your world. Jon G. Sanchez: Right. So your capital gains rate is based upon where you are in the in the income tax table. So that's one of the first things you, you know, you will ask or your accountant should know is okay, yes, you're in the maximum ⁓ capital gains bracket. Or geez, yeah, I I I don't have to pay any capital gains tax. You should know those things. But the bottom line is you know, ⁓ we here's what happens with us a lot, Aaron is you know, the client will do as we said, they'll talk to their accountant, they decide they want to sell. And then, which is a very smart move, and I I get this sometimes. They'll say, Okay, hey, John, we you know, we just sold this rental property and we've got you know half a million dollars. ⁓ we're gonna give it to you and you guys invest it. Like, uh-uh. No, we are not gonna do that. at least the full amount, right? So we always say, What's your tax liability? ⁓ it's you know two hundred thousand dollars. Great, we're gonna take that because it's not due until April of next year. We're going to take that 200,000. We're going to put it in some short-term treasury, some CDs, something very safe and cons and secure. You do not ever want to take risk on that. The rest of it, okay, are you sure you're never going to go back into real estate? Or they'll do this on their primary home, Aaron. Same scenario. Walk away the half a million dollars. They're like, yeah, we're we're going to ⁓ I don't know, take six months off. We're just gonna rent or take a couple years off, rent, travel. ⁓ okay, are you gonna end up using that 500,000 again? You're gonna buy another primary home? ⁓ yeah, eventually. But I want you to invest in the meantime. Nope, don't do that. You don't want to take risks with those types of funds. Okay. So long term capital gains, average numbers, about twenty percent. It can be up as high as twenty three and a half, can be as low as zero. That's again the the question you want to have your ⁓ your accountant answer. Okay, let's talk to the ⁓ the unknown, the big phantom expense, Aaron, depreciation recapture. Aaron Clark, Edge Realty: Yeah. Yeah, keep in mind that you know when you have that asset over time, we we use depreciation everything. Even the the ⁓ the Washoe County assessor, for example, when they're basic giving you your annual report of what your home is worth, ⁓ depending on the age of the home, it'll affect your tax rebate structure of of what your home is worth minus whatever the age of the home is, there's a depreciation value. That's why you're not paying taxes on what the actual home. Value is if you were to sell it. In the same way, if your accountant or CPA or whatever has been filing your taxes on your rental property and taking the depreciation every year for the past 20 years, when you go to sell that property and you make a profit on it, you have to repay that depreciation that you've been taking every year. That's why, again, going back to what we were talking about earlier, in almost all cases, when someone calls me and says, I want to sell my rental property, usually and In myself and John, we are the first people you should call to get an idea of what it would look like before going to the CPA and saying, now that I know what it would look like and what the dollars are, now break it down for me. In that conversation, most of the time, I would say it's better to do the exchange. It's never ⁓ almost never is it better to just sell the property because Jon G. Sanchez: Yes, yes, yes. Aaron Clark, Edge Realty: We can, in essence, do the same exact thing, but never have to pay any of that money back to the IRS. The Uncle Sam gets nothing because you're reinvesting it, which is still cash revenue for taxation. So depreciation, recapture, can cost you. I've seen people where they sit down and they think they're gonna get $100,000 at the end of the deal. And we sit down and they owe $20,000 because they took the depreciation for so long and they didn't recapture it. And no matter how many times I say, Jon G. Sanchez: Mm-hmm. Mm-hmm. Aaron Clark, Edge Realty: Now that we have the information, talk to your CPA. They go, No, I'm good. Uh-uh, I'm fine. Okay, are you sure? I make money whether we sell it and you pay taxes or you don't pay taxes. So I'm helping you by saying, Don't sell it until you talk to them. And I've had a few clients that learned very difficult lessons from consequences. Jon G. Sanchez: You're the same thing. Right, right, right. Yes. Yes. That's right. That's right. Learn yeah, as the same goes, unfortunately. Yeah, and as the saying goes, they they they learn the hard way. It so I wanna I wanna go into a little bit more detail because again, you should know what depreciation is, right? It's one of the big advantages of owning an investment property. It's it's again, it's ⁓ it's called a phantom expense because it doesn't cost you anything. It's it's one of the major benefits of owning real estate. Everything other than dirt, basically. So anything where there's a structure, you can depreciate it. If you own a ranch, you can depreciate your barbed wire fence, your well, your well house ⁓ or your your well casings. I mean Aaron Clark, Edge Realty: Yeah. Mm-hmm. Jon G. Sanchez: And then which Aaron and I will or ⁓ you know, we'll do a show at some point called ⁓ d ⁓ segmentation, right? This is where this is where you really sharpen the pencil and you don't say, ⁓ it's ⁓ you know, ⁓ investment property. What's what's investment now? Twenty nine and a half years, I think you're in. You're you're ⁓ somewhere around there. I so instead of that you go, ⁓ no, no, no. I want to segment ⁓ the the the copper wire that's in my my my my ⁓ Aaron Clark, Edge Realty: Yeah. Yeah. Yeah, you can go crazy. Jon G. Sanchez: my building or my my house. I I want to separate my HVAC, which I think HVACs are at like seven years or something, right? So you break it down and really, really accelerate that depreciation. So whole nother subject on that. But the bottom line is you got to go back and this is why keeping utmost perfect records is so very important. Where I see people get in trouble also, Aaron, is you know, the you know, a lot of times people will switch accountants and they'll lose that ongoing number. That should be a rolling number that you see Aaron Clark, Edge Realty: Yeah. Jon G. Sanchez: Kind like a tax loss that you see on the tax return. So if you're gonna switch accountants, make sure you know and you see it clearly how much that accountant has been writing off before you move to the new accountant to be able to make sure that data transfers over. But the bottom line is you know, let's say let's say you've owned a property for 10 years and every year, ⁓ and it's never the same, it usually drops, but every year you're writing off $10,000 in depreciation, right? That's lowering your taxable income. That's why the IRS says, Hey, guess what, Mr. Clark? You're selling this house after 10 years, you've averaged $10,000 a year. So that's a hundred thousand dollars in depreciation you've taken. Guess what? Now it's time to pay the piper. So we're gonna charge you. And it's not a flat 25, it's up to 25 is is kind of you know the the average answer, but up to 25% tax on that. So you think about it, just like Aaron said at the beginning of the show, 25% depreciation recapture tax, 20% ⁓ long-term capital gains, 40% easy. And again, for our friends over the hill. Guess what? You add in, you know, roughly five percent or so on the state side. And I mean, imagine being New York, New Jersey, some of these really, really high tax states. It's even worse there. So just be very cognizant when you are crunching the numbers to make your final decision that you understand what depreciation recapture is. We touched on the state tax. And then of course, you know, your your real estate commissions, right, Aaron? That comes into the factor also. ⁓ as far as yeah, all your closing costs, you and what you're gonna walk away with. So Aaron Clark, Edge Realty: Yep, c all your closing costs, everything. Jon G. Sanchez: There's a lot of things that you have to know before you make that final decision. All right, when we come back, let's talk about what return are you really currently receiving? Cause that's also where this breaks down. People go, ⁓ geez, I'm only making this. But in reality, you're probably making a lot more. Welcome back to the John Sanchez show on Newstock seven eighty KO H O with Mr. Aaron Clark of Agility. Aaron, your phone number, sir. Aaron Clark, Edge Realty: Six seven three sixty seven hundred. Jon G. Sanchez: Beautiful. Thank you. All right, Aaron. Let's get back to our topic again. This has been fascinating. I think ⁓ this could have easily turned into a ⁓ a two day type of topic because we're really just scratching the surface. We're talking once again about should you sell your rental property or should you keep it? Once again, now we're to the third question you should be asking yourself. What return are you currently receiving? Aaron, we can get really complicated and get into cap rates and get into this and get into that, break it down into a simple term. For the guy or gal that's out there contemplating to sell. Aaron Clark, Edge Realty: I mean, the simplest fact is we have to look at what our property is bringing in income wise compared to what's around it. W so that we know exactly if it's set at current market value. ⁓ that number is gonna determine a multitude of things. And I can guarantee you that if you're not raising your rent at least some per year, year over year, for the last at least ten to fifteen years, you're under market value. So you have to look at that. And I know it sucks to send a Jon G. Sanchez: And how do you find that out? Just Aaron Clark, Edge Realty: Honestly, the best way is to get on ⁓ Zillow's rental finder and look at what comparable properties are in the area are going for. Take mental note, check back a week later which ones are gone, which ones aren't. The ones that aren't are overpriced, the ones that are gone or the ones that were underpriced if it was too fast. And the ones that, you know, they're gone in a week or two, then they're probably priced pretty well. It it's it's rental comps, basically. So you want to make sure. And and you can get a good idea without even watching anything specific by just seeing what Jon G. Sanchez: Okay. Got it. Mm. Aaron Clark, Edge Realty: Stuff similar to yours is going for. And if you're renting yours for $1,500 and everything's for $25 to $2,300, you're way under market value. So it's time to bring it up. Now, when you do that, your tenant, if you do a big jump like that, they're going to freak out. They're probably going to give 30 days' notice. So that's why it's better to go, yeah, you screwed up. So spend the next four years slowly raising it. Don't just give it to them all at once. So you want to make sure that you're making you want to make sure that you understand what kind of tax write-offs you're getting on that. Jon G. Sanchez: Mm-hmm. It's common. Aaron Clark, Edge Realty: ⁓ money so that you know if you're getting benefit there, your operating expenses, ⁓ your cash on your equity return, is the equity that's in there, are you utilizing it correctly? Are you taking the equity then there, parlaying that, if you will, since we're in Reno, I'll use that term, parlaying that into other investment strategies so that they're duplicating themselves, not just sitting in an account waiting for the furnace to break. I mean, all of these things they should be cumulative. Jon G. Sanchez: That's okay. I want to, I'm gonna, I wanna go down to this path, the the cash on cash return, cash on equity return. And this is exactly what convinced my client to keep their rental. So take your equity that you have, take the rents that you're receiving, annualize those rents, divide it by the equity that you have sitting there, and then figure out what your rate of return is. It's really that simple. Now, in my client's case, Aaron, it was, I'm gonna round it up 6.7%. Aaron Clark, Edge Realty: Mm-hmm. Jon G. Sanchez: So it's gonna be pretty hard for you to go find, you know, at the at the new rent that he thinks he can get. I said it's gonna be pretty hard for you to go find a return, pretty steady, pretty guaranteed, it's almost 7%. It's like I didn't look at it that way. And I find that's a real common mistake. People don't realize, you know, but I but your your point also, depending upon where you are, you may be maxed out and say, I don't want any more rentals, I don't I don't want to leverage my money. But for someone that's, you know, in the asset accumulation stage of their life, absolutely, you don't want to keep that equity sitting there. You Get together with a professional like you, you run the numbers and say, okay, I can pull out whatever, three hundred thousand dollars. Here's what I can do with it. I maybe I'm gonna parlay it into one, two, or three rentals, right? And you run the numbers, the mortgage, back at your expenses, see what you can make. That's how you start building true net worth. Aaron Clark, Edge Realty: And there's no tax consequence. That's the beauty of it. When you are borrowing against it, you're not pulling the money out of the property from the perspective of selling it so that it's not a taxable event. That's how the rich stay richer and keep growing their assets. Jon G. Sanchez: Last well, not last thing, but ⁓ music's gonna start here in a second. We don't have time to get into the 1031 exchange. we'll do the again another show on that one. But Aaron, to your point, I wanna wrap up on this one. Let's talk about the stepped up cost basis at the time of death, because this is where it believe it or not, it needs to be one of your factors in your decision to sell. Aaron Clark, Edge Realty: Yeah, so ⁓ keep in mind that when you if you do a ten thirty one exchange or whatever and you've deferred that over and over and over again and you go ahead and do everything correctly as you're supposed to do it, and then you die, and then your kids inherit all of that. If you do it right, call John so you can get your stuff set up correctly, then all of it gets wiped out and whatever the current value of the property it starts from then forward. So if let's say that you had a hundred and fifty, five hundred thousand, a million dollars worth of taxes owed. It's now the big goose egg. Yeah, so that's the benefit about it. So you for you to not take so so many people go, I want to set my kids up for success, I want to pass something down, I want to give ⁓ an inheritance, and maybe it's not financial like millions of dollars in the bank. Maybe it's just that property. Jon G. Sanchez: Zero. That's right. Yeah, you got it. Great job, Aaron Clark. See everybody tomorrow. God bless. ⁓ Aaron Clark, Edge Realty: well, I don't remember what it used to be and if it's different from what it is. I I ⁓ think that mean, a lot of people that are going into it, they go from zero experience and knowledge in that world and it's ⁓ very scary overwhelming to anyone in that world. Whereas I think if you have a pretty basic understanding of all that stuff, then I think it's way less intimidating. It's more like Jon G. Sanchez: That's what I read. Right. Right. ⁓ yeah. Yes. Right. Right. ⁓ yeah. Aaron Clark, Edge Realty: ⁓ 'cause the the guy the instructor in the class always said, This class isn't to learn how to do real estate. This class is l to learn how to pass a test. And that that was what the whole thing was for. And nowadays the amount of the amount of stuff that's out there right now, like have you ever heard of Quizlets? Jon G. Sanchez: Yeah, that's exactly right. So yeah, yeah. Aaron Clark, Edge Realty: So Quizlets is ⁓ it's an app. You can download it on your phone and you can look up a test for any subject on anything, or you can even upload your own stuff. It'll create test questions for you. And then you just go in there. I mean, like, you know, if you're ⁓ not to be too graphic, but if you're doing a a bathroom session, you pull it out, you start running through it, and every time you get an answer correct, it categorizes it. If you get it wrong, it puts it in. Jon G. Sanchez: Really? Yeah. Right, right. Yep. Aaron Clark, Edge Realty: And gives you the answer. So it trains you to take a test. So like I did it for my the first time I ever used it was my scuba test. When I did my scuba test, I used it I I used it for maybe like a half an hour one day and just kept running through the same and it took all the questions from the scuba test. And not only did I learn it, but also I learned how to answer the questions for the test. And I aced the test hundred percent. It was like this is the easiest test I've ever taken in my life. So now I use it for everything. Jon G. Sanchez: Wow. Yes. ⁓ no kidding. Yeah, yeah. Yeah. Yep. There you go. ⁓ my gosh. Yeah. Yeah. Isn't that something? Yeah. And it has it has quiz. It has it on everything, huh? Any any subject out there? Aaron Clark, Edge Realty: I ever have to take a test, that's what I use it for. So download Quizlet. Yeah, so you would just anything that's like of any sort of popularity, which a real estate test would, just need to make sure it's the one for Nevada. 'Cause studying California means nothing, you know. Jon G. Sanchez: Right. Right. Right. Yeah, yeah, exactly. Right. No, yeah. No, not at all. W what what about getting the a real estate broker's license, you know, after the two years? What advantage would there be of that? 'Cause I'm gonna hang my license with you guys, but but but then what about getting a broker's license down the road? Any advantage? Aaron Clark, Edge Realty: But yeah, that would be good. ⁓ I mean I mean, I've always talked to Corey about it because I was curious if it would like some sort of like be some sort of an upgrade, if you will, to my credibility. And he's always discouraged me because when you become a broker, then your level expectation of understanding and knowledge as well as liability increases exponentially. So it's actually better if you're doing especially if you're not doing like actual business out there like on the regular. Jon G. Sanchez: Right. Right. Okay. Okay. Right, right. Right. Aaron Clark, Edge Realty: So if you're flipping homes or you're just trying to collect referrals or you're just, you know, doing simple stuff like that, it's better to not be a broker because of the liability aspect. Cause I was looking at doing that like ten years ago and he was he and and he was right. I I thought, you know, I was like, Yeah, is he just telling me not you know, not that I expected him to just say that, but ⁓ but yeah, it's true. When I looked in there, if you look the stuff that happens where like a salesperson does something. Jon G. Sanchez: Okay. Interesting. All right. Right. 'Cause it wants to Yeah. Aaron Clark, Edge Realty: And in most of it's innocent. I I've made probably five major mistakes that were completely innocent and they weren't even big mistakes. They were just big mistakes in the sense that it costed me something, you know, money. And so, you know, where I've had to reimburse somebody for something or whatever. And they weren't even really mistakes. I just didn't do a good job of explaining something, or I didn't do a good job of covering my own ass kind of thing. And so the liability behind that as a salesperson. Jon G. Sanchez: Right. Right. Right. Mm-hmm. Right. Aaron Clark, Edge Realty: was exponentially less than if I was a broker. And so I would say, yes, two years, great. But I would say like full time practicing, maybe ten plus years, then I think that's the realm where you would go, Okay, now it might be worth doing. But even like myself, I've been I've been doing this since ninety nine. And so for me it's like I still learn stuff all the time and I'm Jon G. Sanchez: Yes. Makes sense. Yeah. Got it. Wow. Aaron Clark, Edge Realty: Constantly asking Corey questions about things that I don't deal with on a regular. Or even I mean, if I haven't done a probate in a year and a half and I get a new one and I'm like, shoot, I can't remember this part. I call him and he knows it. He's just that guy. I'm the sales guy. Like we're the yin and the yang, man. Like I can sell ice to Eskimo. You know, he but he knows shit that no one else knows and attorneys call him for advice, you know, so absolutely. Jon G. Sanchez: Yes. Right. Right. Right. Yeah. That's so cool. Yeah, that is so cool. No kidding. Really? Really. And he literally gets attorneys calling him for probate advice and stuff like that, right? Aaron Clark, Edge Realty: Attorneys call him all the time for real estate advice, some legal and more of it is practicality, but still with legal lineage that they don't understand or they don't know how to approach it. Because you can only understand it if you're in it. And lawyers aren't in it. They just know the law. They don't understand the practical aspect of it. Like like a realtor you know, a realtor getting in trouble because they should have known that the septic wasn't the right size for Jon G. Sanchez: No kidding. And how does he? Okay. I see. Aaron Clark, Edge Realty: For the house. That was like a major lawsuit that everybody knows about here, like five years ago. And so to an attorney, they're like, Yeah, what an idiot realtor. They should have known that. But then Corey's like, well, explain how they would know that. Like and and in your the law says they have to know this and they sh are supposed to disclose, but they don't know if what they're disclosing is correct or not. They're not experts. They never said they were an act. So he's really good at like sort of exposing the weaknesses in that. Jon G. Sanchez: Right, right. Okay. Almost playing almost having the attorney mind, like like manipulating the words in a sense. Isn't that something? Yeah, I've said that before too. Yeah. Yeah, I I've I told him that too. Cause he loves that shit, right? He gets up at three in the morning and Aaron Clark, Edge Realty: He does. I think he I mean, honestly, I think his that was his calling. Yeah. Yeah. He loves it. He hates what I love and I hate what he loves. Yeah. So he hates the showing people property and disrupting his lifestyle. And I mean I of course I don't like that too. I want to be free, but at the same time. Jon G. Sanchez: No kidding. What what is what does he hate the most? Okay. Yeah, right. Aaron Clark, Edge Realty: when I'm actually doing it and I'm like walking through a house with somebody and we're talking about their future and their life and investing and the house and all this stuff. I love that stuff, you know. So, but he doesn't. He likes he likes this no, he likes the paperwork and I like the str I like the conversation. I mean from if you were to like simplify it. He's the paperwork, how do I write it in the perfect way to win? like an attorney. And I'm like Jon G. Sanchez: Yeah, yeah. He likes more of the strategy stuff. Does he really? I would have never thought Yeah. Yeah. Aaron Clark, Edge Realty: How do I help these people understand that I want to be in their lives for eternity from every generation selling them real estate by giving them the best strategy so they all look at their lives ten years from now going, If it wasn't for that conversation with Aaron, we would not be here today. That's where I'm at, you know. So that's kind of the difference. Yeah. Jon G. Sanchez: Wow. Yeah. Amazing. Amazing. Yeah. Yeah. Wow. Yeah, like you said, yin and yang. Yeah, he always amazes me when he says, Yeah, this attorney called and sought my advice on this. And like, damn, you gotta know your shit. That's the case. Gollies. It it he he just s studies it all the time. Aaron Clark, Edge Realty: Mm-hmm. Yeah, yeah. He does. Yeah. He's a genius, dude. Yep, and I think from what I understand he well, one, he's very well respected in our world and pe ⁓ yeah, and people it n new agents have never heard of him because he's not out there like beating the streets like I am. ⁓ and so he's not doing like shit tons of stuff, but when he's doing stuff, he's very well respected and new agents get destroyed because he's so much better than them. Yeah. Yeah, you can tell. So Jon G. Sanchez: Is he really? Interesting. Really? No kidding. Wow. Yeah, I love it. D does he get a kick out of that? Squashing the other agent? Yeah. Yeah. Yeah. So humble. Crazy. Good stuff. All right. Perfect. All right, buddy. Thank you, I mean. Always fun with you. See ya, buddy. Bye. Aaron Clark, Edge Realty: Yeah. I think so. I I don't even know if he realizes it to be honest with you. So mm hmm. Yeah. Cool. All right, man. See you next week. All right, later.