Ep. 6 | Top 5 Advanced Strategies for REIs
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John Tripolsky:Hey, everybody, and welcome back to the mister r show brought to you by the team here at the Monthly Recurring Revenue Institute. I am John Topolsky, one of the cohosts here on the show. Chris Pacuro, the founder here at MRR Institute will be joining me here shortly. Today, we're gonna jump into the top five advanced strategies for real estate investors. So you REIs out there, grab the pen, grab the paper, grab the coffee, grab the water, stretch out a little bit before you sit down, throw on the headphones, maybe go for a run, sit down at a desk, little drive while you're listening to this.
John Tripolsky:We're about to throw a bunch of information your way. I'm really excited to do this one. Me and Chris are gonna be talking through this one together. Chris has done this presentation multiple times around the country. I've been with him on a handful of these and every time we hear some of the best questions and comments from the audience whether it's virtual or in person, that really we keep modifying.
John Tripolsky:We keep building on this presentation, based on those comments. So when we're done with this episode, definitely reach out to us. Let us know what you thought about this. If you have any of those questions, I will give you our email at the end of this show and the best way you can contact our team with any questions you may have. So without further ado, you will be hearing from Chris Pacquero, really the man who needs no introduction on this show here momentarily as we jump into these advanced strategies for real estate investors.
John Tripolsky:So sit back, take the notes, enjoy the show. Hey, everybody. Welcome back to the show. As you heard here in the preview, excellent topic we're gonna jump into. I've got my partner in crime here, Chris Pacira.
John Tripolsky:How are we, Chris?
Chris Picciurro:I am awesome. How are you doing today?
John Tripolsky:I'm doing great, man. I'm doing great. So this one's a special episode. I know we're doing a couple of these recordings this week. We're actually at Taxposium here in San Antonio, Texas for a couple days.
John Tripolsky:I'm not gonna put Chris too high on a pedestal, but he's actually gonna be out on stage here in a couple days for a couple other people giving a very similar presentation. So you get a little preview or I should say after the fact to get a little recap. We'll call it a recap of this one. But today, as you heard and read, we're gonna jump into the top five real estate investors. So REIs, if you're not familiar with that term, REIs, the advanced tax strategies.
John Tripolsky:So top five real estate investors, advanced tax strategies. So there's some great stuff in here. A lot of content we're gonna throw at you. So, again, don't be afraid of that pause button. Hit the pause button.
John Tripolsky:Take some notes. Awesome stuff. Chris, I know you've implemented pretty much all actually, all of this throughout your practice and your career. So I'm excited to hear you run through this with us. And we really don't have too much of a a gender or flow to this specifically, but Chris is gonna walk us through this.
John Tripolsky:So, Chris, kinda open up the brain a little bit. Let us inside. Tell us how you do this, man. Like, where where should
Chris Picciurro:we start? You tell us. You are. Let's start by well, we exchanged pleasantries. Thanks to thank you everyone, every all of our tax and accounting professionals listening to our show today.
Chris Picciurro:I've spent, many, many years as a practicing CPA in the majority of the last decades, specifically helping real estate investor clients.
John Tripolsky:Alright. You just start wherever, and I could stitch it together.
Chris Picciurro:So wherever you're comfortable starting. I've spent the majority of the last decade specifically helping real estate investor clients, and our practice, our private practice focuses in on tax planning and strategy, as well as, tax preparation. Thus, that membership based subscription business model, which I will I will stand on my soapbox on. But what I wanted to do is is spread some some love, spread some knowledge to the practitioner community. We plan to have other people with another industries on the show in the future, as well.
Chris Picciurro:But today, I would bet that almost everyone listening has run into that client that's a real estate investor. Maybe they started off with one property. Maybe they have a business and they bought a commercial property, and they liked real estate. And then they started growing and growing, and you might have gotten out of your comfort zone. And and you don't wanna lose that client.
Chris Picciurro:You don't wanna lose that relationship. So we wanna make sure that you're aware of the advanced tax strategies for real estate investors. There's some basic ones out there. Some tax elections and that sort of stuff. So de minimis safe harbor stuff.
Chris Picciurro:So we're talk but we're gonna talk about advanced tax strategies. And typically, in in our world, an advanced tax strategy is going to going to entail a multi person implementation with with with team members. Now before we get started, for those accountants, CPAs, enrolled agents, tax pros, etcetera, that work a lot with real estate investors, you are probably familiar with BiggerPockets. BiggerPockets is the largest real estate community I've had the privilege of meeting, luckily based not not because I knew these guys, Chris Green and Brandon Turner. I'm in Franklin, Tennessee and luckily, I have clients and friends that that work with them and they've come to speak to our real estate meet up group.
Chris Picciurro:Excuse me. And so if you know them and you know bigger pockets, you know that that's a huge community. So I thought, okay. Let's talk about value. You know, we talk about how does a real estate investor, we're gonna call it an REI, John.
Chris Picciurro:How do they see value? So we went out. We went out to teaching tax flow team, which is which is a sister company, and asked bigger pockets. I'm gonna quote this on one of their forums. What adds value to you as a client from your tax professional?
Chris Picciurro:The responses, John, I know you took took a look at some of these responses. We couldn't have written a better response, I don't think, than some of the ones that we're gonna talk about really.
John Tripolsky:And there there was a lot of them. These are just a sample of a couple of them that were out there. If I remember right, they just kept flowing in, which is great.
Chris Picciurro:So They did keep flowing in. So how do the how do clients see value? The the these are quotes from actual real estate investors. These same real estate investors that you're gonna be working with from as their tax professional. Here they are, and I'm quoting.
Chris Picciurro:Preplanning. This was instrumental for me with planning ahead with my tax adviser. My goals in parenthesis, my goals, and advise how to do it as a small business owner. Oh, by the way, John, we might have some, not we might have some not the best well written English, which probably isn't the best English. Hey, Tom.
Chris Picciurro:Literally quoting these people.
John Tripolsky:It is authentic. And that's the important part too. It's just if you know, for anybody that's listening to this or or those of you that have obviously been, you know, in conversation with Chris or or we've actually gone through with our mastermind group that's coming up here soon that we've opened that up. I mean, we've had some of these calls with applicants for that group, and there's so much of value on these relationships that it's basically just money sitting on the table with some very, very good clients, potentially.
Chris Picciurro:Here's another answer. I'm looking for a CPA that doesn't just do my tax as well, which seems to be both CPAs. Most REI are looking for CPs that will serve as tax strategists and advisers from business structure to investment strategy. This is a huge area that REI are willing to pay a little more for. Let me give you another I'm not gonna read all of them.
Chris Picciurro:We got like I said, John, when you said, we had 25 responses. I'll read a couple of the smaller couple smaller ones. In every deal, the investor has a partner, the IRS. That partner wants frequent updates, and your tax person keeps this partner happy. My CP is a great member of my team.
Chris Picciurro:Primarily, he, of of course, she, of course, is a huge saver of time. It would take a month of evenings for me to complete my tax returns. I get that part of my life back and review his work. Also, when I do new things, he already knows how those work. As a super simple example, he received money in a k one, or I received money in a k one that had some foreign stock sales with foreign taxes taken out.
Chris Picciurro:He was able to fill those forms incorrectly, and I would have been struggling for quite a long time.
John Tripolsky:That's incredible. And then those last couple are are really good because they kinda what we're just talking about. Right? They really solidify just the the amount or the value that these individuals are placing on that. So it's a it's a great opportunity,
Chris Picciurro:I'd say. I'm gonna go with one more just because this is the Mr. R Show, and you know we we put an emphasis on value pricing and and really helping our community find the, share the value with their clients. Quick this is the last one. Quote, quick answers to tax consequences of an action I'm considering.
Chris Picciurro:Not invoicing me for those one or two emails per year. And coming up with at least one idea every year that saves me the most of our than what he charges. So saving more saving more than what he charges. Sorry about that. They typed that in wrong, but we wanted us to be raw.
Chris Picciurro:So, yeah. So that's how REI clients see value. Once and we're gonna jump into these five top five, advanced tax strategies for REIs. But something I think that's important and it gets real tricky for us to consider as as tax pros is the IRS definition of real estate professional status. Now we all know in in the real estate world, we call that rep status.
Chris Picciurro:Rep status taxpayers or taxpayers of their rep status spouse really play in in different rules than normal tax payer where real estate activities are are by default, passive income. So I know this is gonna get technical, I promise we're getting more creative soon, but, we're we're reading under treasury regulation section four sixty nine c seven. This is coming right from IRS. You have to determine let me just take a step back. You have to determine if the if the client you're working with is a rep status person or is not a rep status person.
Chris Picciurro:Okay? That because that really plays a role, in my opinion, in the tax planning and strategy available. Basically, the fork in the road, if
John Tripolsky:you will. Absolutely. That's a great way
Chris Picciurro:to put it. So we have a marketing guy with us.
John Tripolsky:Hey. You know, I get craft I I don't say much, but when I do, I hope it's impactful. Right?
Chris Picciurro:It's very impactful. At least at least at least on Eric.
John Tripolsky:Hey. Like, again, we we're live at an event here. We're there is going to be no editing done on this show. So if something comes out of our mouth, we're just running away with that.
Chris Picciurro:Right? Exactly. We got we have no cough or sneeze button. But to qualify as a rep status, there are two there are two things that a a taxpayer has to accomplish. One, to quote us, more than half one half of the personal services performed in the trades or businesses by the taxpayer during such tax year are performed in real property trades or businesses in which the taxpayer materially participates.
Chris Picciurro:We're gonna talk a little bit about material participation in the at the end. So what does that mean? In layman's turn, 50% of the time a taxpayer spends working, 50% or more has to be in real estate related activities. If it's not, you can't be rep status. We have, we have some medical doctor clients that that spend a lot of time in real estate, spend a thousand hours in real estate, but they're also a full time medical doctor.
Chris Picciurro:They're gonna meet the hour requirement, which I'm gonna talk about in a second, but they're not doing it more than 50% of the time. So they're not gonna be rep status. And number two, so over 50%, taxpayer performs more than seven hundred and fifty hours of service during the taxable year in real trade property trades or businesses in which the taxpayer materially participates. Again, we're gonna talk about material participation in a couple minutes. Now according to IRS treasury reg 469C7, sounds like a football play.
Chris Picciurro:There are different types of activities that qualify for real property trades or business, which is and I'm gonna rip through them here. Real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage, trade, or business. Final thing, taxpayer must own 5% or more of the business for the hours to count. This is a question we get in our community a lot. Hey, I'm own, I I own a part of an LLC, I invest in a syndication, but I only own 1% of it.
Chris Picciurro:Does my time for that count towards my seven hundred fifty hours? In that case, it would not because you have to own more than 50% or more of the business. Or I'm a w I'm an employee, of a c corporation. I am a property manager. I spend two thousand hours a year in property management, which clearly would is one of the activities that qualifies.
Chris Picciurro:It's more than 50%. Do you own the corporation? Do you own any part of it? No? Then those hours don't count.
Chris Picciurro:So you have to own that 5%.
John Tripolsky:I imagine with syndications, it's probably very common that you have those very, very fractional
Chris Picciurro:ownerships. Correct. So three prongs, Johnny t. Material participation in which you own more than 5%, spend more than half your professional time, more than hun seven hundred fifty hours performing the, requisite real property trades or business. Okay.
Chris Picciurro:So that's your first situation is, are you rep status or are you not? So we talked about, we know that the tax, We know what real we REIs are looking for for value. We know how to identify a rep status versus a non rep status person. Alright? So we've got that covered.
Chris Picciurro:Now let's let talk about we know what these REIs are looking for. They they already said they're looking for tax planning and strategy. They're looking for you as their tax professional to go beyond just the tax preparation. So we said, okay. Well, what's tax planning and strategy?
Chris Picciurro:I see people all the time that are tax strategist, tax coaches, tax planners. But how do you define something that's somewhat intangible? Right? Well, you know how we like to quote sources. So I'm gonna quote you again.
Chris Picciurro:This is probably the most quoting we're ever gonna do in one of our podcast.
John Tripolsky:Hey. It's all good. It's all good. I'm gonna quote you that you said that on our next
Chris Picciurro:oh, that's that's pretty interesting.
John Tripolsky:I will leg up on
Chris Picciurro:the next one over. I'll take it. So what is tax planning a strategy? We like Investopedia as far as as some type of source, and their definition of tax planning a strategy is, quote, tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest tax possible. In teaching tax flow, we call that legally and ethically reduce the tax you pay in your lifetime.
Chris Picciurro:So lowest tax possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient. Tax planning should be an essential part of an individual investor's financial plan. So this is a big part of your financial plan. We know that taxes a lot of times are your biggest bill.
Chris Picciurro:Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success. Now there are many tax strategists and planners out there that have differing opinions on retirement plan contributions. But I think contributing to some type of retirement plan, be it a Roth, be it a defined benefit for simple IRA, is important. So that's what tax planning strategy is. It is truly a dynamic a dynamic thing.
Chris Picciurro:So, so yeah. So we've identified, you know, what our guys are looking for, rep status. We know what tax planning and strategy is. And now let's think about why is that important?
John Tripolsky:And, Chris, I love your tax planning and strategy because it's almost you know, a lot of people say, accountants and CPAs that are really they're very, very good at looking in the past, but maybe historically not so great about looking into the future. So what you're talking about is really just drawing that line in the sand. Right? So submitting IRS forms, in a sense, is looking into the past. Tax planning and strategy is literally, but not for what is looking forward down the road.
Chris Picciurro:Yes. Absolutely. And they work together. Now if you as a tax practitioner, you've probably heard a million times that tax planning is more valuable at tax preparation. Right?
Chris Picciurro:The the the forecasting, the value add, the strategy is more valuable to a client than tax compliance work, which is preparing the tax returns, which it takes a lot of skill. And you really need to understand the tax law and how to prepare those forms to do the proper planning. But Intuit came out. The Intuit accountants, the the tax planning and advisory insights, had a tax planning and advisory insight survey recently. Very recently.
Chris Picciurro:And I'm gonna give you some of the very important things that that survey that survey came up from. Feeling like Family Feud. Survey says so respondents share the tax planning and advisory services have significantly higher fees than compliance service with the average fee of $232,351 dollars per client. The industry average for individual tax preparation is $459. So what that means is that tax planning and advisory service, on average, provides four to five times more revenue and have four to five times more value than tax preparation.
Chris Picciurro:Here's some interesting stuff. Tax planning and advisories fees, on average, are five times more than tax prep fees. I I just said that. 75% of tax firms surveyed deliver tax planning services. Here's a sad thing.
Chris Picciurro:Only 62% get paid for
John Tripolsky:those services. Oh. Oh, that's a punch in
Chris Picciurro:the gut. So more than one third of of tax firms out there right now are not getting paid for planning services.
John Tripolsky:And do you think a lot of those conversations just kinda come out just in your standard I've stated about your, like, your generic client comms where it might be an email answering a question, it might be a phone conversation. It might be an in person meeting where they just a conversation kinda steers that direction. And then before you know it, you're giving advice. Is that what you when you reference it?
Chris Picciurro:I would say so because you or they don't have a formal process for doing it. Okay. Now we know in the Mr. R Show the importance, right, of tax planning and strategy. I'm gonna put you on the spot, John.
Chris Picciurro:Uh-oh. Blank percent of tax advisers say they lead with tax planning and advisory service. Now you know I just said I'm our private practice. That is our go to, and many, many of the talented people here at Taxposium, but blank percent of tax advisers say they lead with tax planning and advisory services. They lead in with that.
John Tripolsky:I'm gonna go low. Okay. I'm gonna go low. I should know.
Chris Picciurro:Oh, low. How low? There you go. I'm gonna say 18%. Dang, maybe you saw our slides.
Chris Picciurro:It's really 18. Yeah.
John Tripolsky:I'm not kidding. Like on on the money 18? Yes. I swear everybody was losing a I did not know that. I went and I was almost gonna be a smart you know what and say like 18.25.
John Tripolsky:So I'm glad I refrained from that. Holy wow. I'm I'm in class. I'm sitting up a little straighter right now. That's impressive.
Chris Picciurro:Well, you know, if we were in Vegas for this conference, we'd hit the we'd just drop the mic right now and go go play roulette on 18. Recording over, we're out.
John Tripolsky:So Yes. Okay. So 18% lead in with that. Also, add in one fist. Yeah.
John Tripolsky:So not a well, I guess part of the the and by you say lead in, is that more of their their initial kind of client pitch when you say lead in?
Chris Picciurro:Yeah. Absolutely. Okay. I would say that when when you're when you're talking to a client, really understanding the value of the tax planning strategy, what differentiates you between someone else? Okay.
Chris Picciurro:So the lead, that's in in less than 20%. One in three preparers not currently offering tax planning in advisory services are strongly considering adding in. That's encouraging. So so anyway, we know tax planning is more valuable than tax preparation. We hear it all the time, but I love to have the stats that really back it up.
Chris Picciurro:And that's from Intuit's survey. We appreciate them sharing it with the community, and, really, we agree. We agree. So this is good. We told you about rep status.
Chris Picciurro:We told you why tax planning a strategy is valuable, and that people want it, especially real estate investors. Now here's the next thing. How do I do it? How do I do you know, it's like, hey, man. You wanna get in better shape?
Chris Picciurro:Go exercise. Oh, that's cool. Right. Where do you start? Gym membership.
Chris Picciurro:Go for a walk. Go for a run. Just step by step. So baby steps. Right?
Chris Picciurro:Absolutely. Baby steps. So we in our private practice and the the mister r show supports using teaching tax flows four step process. And that four step process entails one, understanding the three laws of teaching tax flow. We're gonna talk about that in a moment.
Chris Picciurro:Two, understand marginal tax rate. Marginal tax rates much different than your tax bracket. And once you start getting into tax planning and strategy, that's gonna become really apparent. Three, diagnose your client's situation, and then four, complete the remaining three or four t t f step strategy, AKA implement the strategy. So let's look at step one.
Chris Picciurro:First step when you're tax planning a strategy, in my opinion, is understanding the principles of tax planning a strategy. Now you can go out and create your own principles, your own rules. And and if you can do that, I encourage you to. For our private practice, we've created those three laws of teaching tax flow. First one, cash flow doesn't equal tax flow.
Chris Picciurro:What that means is that a lot of times you are running into your client's situations where a client says, hey, but well, they don't have that voice, do they? They might. They might. Maybe they do. Could, you know, I I I would just, sold this property and, you know, I got $50, at closing, how much tax do I owe?
Chris Picciurro:Well, tax pros, you know that how much they get at closing has nothing to do or very little to do with how much tax they pay. Right? We've gotta figure out what their adjusted cost basis is. Do they have a step up in basis? Do they have closing costs?
Chris Picciurro:Same with the rentals. If there's anyone out there, if you have, I sure hope you comment on our social media and our LinkedIn in the in the mister in the MRI Institute and have a client say, hey, I see you have a rental property. Can you can you tell me the income and and expenses so I could prepare your tax return? Oh, I my mortgage is 700, and I rent it for a thousand. Great.
Chris Picciurro:Yep. That's not how we do tax return
John Tripolsky:work.
Chris Picciurro:Alright? So that person has a positive cash flow of $300. Chances are, they might not owe any tax on that because of the depreciation deduction. So law number one, cash flow does not equal tax flow. Tax flow is the tax burden or benefit of every financial decision or transaction that you have.
Chris Picciurro:Cash flow is a money that comes in, money that comes out. So we know that, you know, another great one is is that, hey, sir, mister taxpayer, you you I you buy a new vehicle last year. Yeah. The payment's $900. That doesn't tell me very much.
Chris Picciurro:Right. Right?
John Tripolsky:That just means that you're spending $900 a month
Chris Picciurro:out of date. Let me put that on your tax return. $900 says Klein. We know that that that that vehicle may have been purchased. It might be eligible for bonus depreciation.
Chris Picciurro:Maybe it's leased. Maybe they traded a vehicle in to get that. So, again, tax flow doesn't equal cash flow. Number two, tax agencies are your involuntary business partner. So the IRS or if you live in a state with the state taxing authority or even local taxing authorities, they're your they're your clients business partners.
Chris Picciurro:And and we know that tax laws are encourage and discourage certain behavior. Specifically, we're gonna stick to real estate. Tax laws are gonna encourage people to invest in real estate, so we need to take advantage of that legally and ethically.
John Tripolsky:And it's probably one of the largest encouragements. It's a big encouragement. Fun.
Chris Picciurro:Absolutely. It's one of the most tax favored industries out there.
John Tripolsky:And when you said that, it it was a moment. I should have taken a picture of your face there. Your eyes kinda squinted down to your smile. It just went literally from year to year, and there was that millisecond of pause. So I I appreciate that and the enthusiasm.
John Tripolsky:So it was it was great hearing that. Hey.
Chris Picciurro:I'm happy to be at REIS.
John Tripolsky:If if any of you in the you know, any tax pros are also REIS, congratulations. You're,
Chris Picciurro:you're eating your own food. Well, I you're eating your own cooking. Yeah. Own cooking. Hopefully, you eat your own food or else, you know, you're gonna have to get your hands slapped.
Chris Picciurro:But we a lot of our tax professionals out there listening know that they've get they have clients come in and say, I've heard there's a bunch of benefits for real estate. Well, yeah, there are. So let's get acquainted with them. We're gonna we're gonna we're gonna get acquainted with the five, best advanced tax strategies soon. Third and final, law of teaching tax flow or pillar.
Chris Picciurro:Your tax return is a verb and not a noun. Right? If you're going to do tax planning and strategy, if you're gonna implement tax strategies with your clients, the tax return is just a result of all the activity that occurred from the previous year. The lack of planning or planning. It's a scorecard.
Chris Picciurro:It's a scoreboard rather. It doesn't tell give you it's not the play by player of the box score. So the your tax return we talk to our people in our community and our private clients that your tax return's a verb, not a noun. You can either pick your tax by the way you operate and by the decisions you make or you don't. And if you don't pick your tax, the IRS is gonna pick your tax for you.
Chris Picciurro:So your tax return is a verb not a no. And usually not in your favor. That's so, yes, that's step one. How to do tax planning. We're step one out of four.
Chris Picciurro:Step two, understand marginal tax rate. Now when we present, in our private practice to real estate investors, we really need to talk about marginal tax rate quite a bit. I'm not gonna dwell on it here with this audience because you all are tax pros. And if you're not, maybe you just like us. So thank you.
Chris Picciurro:But your marginal tax rate is the amount of tax you pay for each additional dollar of taxable income and the amount of tax you save, so you don't pay that business partner for each additional dollar of tax deduction. Your marginal tax rate is not your tax bracket. Okay. So we all know that as tax pros, and understand that marginal tax rate of your client. Sometimes you have to use software, spreadsheets, to really figure that out.
Chris Picciurro:It's not their tax bracket. Tax brackets are static. Tax returns are a noun. Tax planning is a verb. Marginal tax rate is is a fluid number that can change quickly.
Chris Picciurro:Number three step. Figure out your client's situation. We call it diagnose. In in our private practice, we use color coded diagnosis using the teaching tax flow system where there are four different diagnoses based on your marginal tax rate. And if you have a high marginal tax rate, which we consider 25% or more your red diagnosis if you're 20% or less marginal tax rate your green diagnosis purple means tax deferral which basically means you're giving example if you're a purple diagnosis, that means your current marginal tax rates higher than you expect in the future, so you expect, hey, I'm in a 25 I might be in the 22% marginal tax rate today, and I think I'll be in the 10% later.
Chris Picciurro:So I'm a purple diagnosis, meaning that tax deduction today is worth more than what then then in the future. Now we know the tax rates are gonna be going up in the future, so we're seeing a lot less purple diagnosis. And then the final one, probably my favorite, gold, tax free income and growth. In pretty much every case we see, someone is a gold diagnosis. In our system, you can be multiple diagnosis.
Chris Picciurro:Most most clients come to you as a tax pro with a high marginal tax rate. So in our world, that would be a red diagnosis. And most tax strategies or the red diagnosis have probably the most tax strategies available. But before you could do tax planning a strategy, figure out where you're at. Think about down if you're a football fan, you need to know the down and distance before you call play.
Chris Picciurro:Don't just start firing off plays until you know what's going on. So step three out of four, figure diagnose your client situation. Understand that your diagnosis could change from year to year and understand that you could have more than one diagnosis. Final step. No drum roll.
John Tripolsky:Oh, that was a that sounded more like static. There we go. That's better. That sounded like a star wars character. I wish we could edit this one after if we were just pushing it live from here because then I would get a little crafty with the editing, but you know,
Chris Picciurro:we'll run with that. Hey. That's alright. I'll give you that. Step four.
Chris Picciurro:Complete the teaching tax flow teaching tax flows remaining three or four step strategy implementation. So what does that mean that means that we diagnose the client already that's the first step in the teaching tax system now we're gonna prescribe we're gonna prescribe a tax strategy so for instance John you might be read diagnosis high marginal tax rate. You might be looking for a diet how do I legally and ethically reduce my taxes? I would come up with a several prescriptions for you. Not medical prescriptions, but tax planning prescriptions.
Chris Picciurro:We're gonna talk about some of these, coming up. I know the lead up Free financial health. For your financial health. The last then the next step in the TTF process is the IQ test. Stands for identify, quantify.
Chris Picciurro:Hey, John. Your red diagnosis, I think you might want to consider, you might wanna consider doing a cost segregation study on one of your properties. Oh, that sounds good. It's gonna cost you $5,000. Okay.
Chris Picciurro:Well, what's my tax benefit? That's the thing. I don't know. We've got to calculate that. So we have to make sure that something passes what's called our IQ test.
Chris Picciurro:It's got to give you a positive tax result. It has to be suitable for you. You have to have the liquidity liquidity to implement it. There might be a tax strategy that you really wanna take advantage of and you don't have enough cash to do it. And it has to be you have to be comfortable with it.
Chris Picciurro:So if you, for some reason, refuse to invest in any company or or implement any strategy that takes place in the state of Ohio because you happen to be a huge University of Michigan fan, which I know you're not. And, you might refuse it. You might say, no. This doesn't fast. Like, not happening.
Chris Picciurro:Right? And then finally implement. So we talked about diagnose. Right? Diagnose that situation.
Chris Picciurro:Then you prescribe. Send it through your IQ test. Does it make sense? And then you implement. The the the more complicated the tax strategy, the more people we need to implement it.
Chris Picciurro:That but typically, the more valuable that is. So those are the steps. Now now the juicy part comes. Now we're gonna talk about those top five real estate investor, REI, advanced tax strategies, and we're gonna talk about when to implement them. Alrighty.
Chris Picciurro:Alrighty. No.
John Tripolsky:That sounds good. Is everybody warmed up for this? Hopefully. Again, don't be afraid of the pause button. Take a break if you need to.
John Tripolsky:If not, mister Pacuro, let's Ready to rock. Let's hit it.
Chris Picciurro:So strategy number one, the ten thirty one exchange. A ten thirty one so we're gonna kinda walk through each of these five and we're gonna have a format. We're gonna talk about what it is, how to do it, and when to do it. Alright? So it's the what, the how, and the when.
Chris Picciurro:Ten thirty one exchange, that is a like kind exchange that's identified in section ten thirty one of the tax code. And it allows people to sell one piece of property, sell one piece of real estate, and exchange it for a like kind property. Now like kind is a pretty there's kind of a loose, term. Right? You could sell a commercial property and buy residential property.
Chris Picciurro:You could sell raw land by commercial property. There's a lot of different real estate asset classes within that like kind, definition. So section ten thirty one defines that One thing to consider, one major change that occurred with the Tax Cuts and Jobs Act of 2017 is that like kind exchanges were limited to only real property transactions. So as of 01/01/2018, exchanges of personal or intangible property like vehicles, artwork, collectibles, pens, etcetera, do not qualify for like kind exchange per the Tax Cuts and Jobs Act. And that was issued on, IRS twenty twenty, dash two sixty five on 11/23/2020.
Chris Picciurro:So that's that's now the ten thirty one exchange is just for real estate. So how do you do it? Well, there's a lot of rules with ten thirty one. And you know that we had a full podcast episode on that on the mister r show already. But in general, what you need to remember is, I would say your number one takeaway is gonna be this.
Chris Picciurro:If you have a client that's considering a 10:31 exchange, make sure you're talking to them before the exchange even starts to occur. Because once the money hits their their bank account or what we call boot, the the the ship has already sailed. The the opportunity is gone. The opportunity is gone. The other 30,000 foot takeaway is you need to use a qualified intermediary.
Chris Picciurro:You unless you are a qualified intermediary, just being an accountant, you're not a qualified intermediary. Their family members aren't a qualified intermediary. A QI is a designated entity. Most times, it's a title company. It could be an attorney.
Chris Picciurro:We have QIs that we use all the time. We we had, Asset Preservation Inc, which is one of the best QIs in the country, if not the best. They are the ones that take, those assets from the sale and hold on to them before they're deployed. And there are a couple of rules as far as finding replacement property. There's a forty five day identification period.
Chris Picciurro:There's a hundred and eighty day closing. There's a bunch of rules within the ten thirty one exchange that go beyond just this lit that we're talking about today. But a ten thirty one exchange can really be an awesome tax strategy. Now when should you do this? Alright?
Chris Picciurro:You're gonna wanna do this when your client's looking to change their investment portfolio, and they're either a red, purple, or gold diagnosis and they don't need the cash in their pocket. So if they're a green diagnosis per person is really the only person that a ten thirty doesn't one ten thirty one exchange doesn't make sense for. You might say, why? Because a green diagnosis is in a very low marginal tax rate so to defer that tax might not make sense so number two similar to the ten thirty one exchange but not exactly is the Qualified Opportunity Zone Fund investment. So many of us call that the QOZ.
Chris Picciurro:Now, this was born with the Tax Cuts and Jobs Act of 2017, and it was much more popular a few years ago because as we get closer, as we get closer to January first of twenty twenty seven, the popularity of the strategy is somewhat diminishing. But the what it is is is a strategy where you can like I said, born with the Tax Cuts and Jobs Act, and it allows you to defer your capital gain portion of a transaction, and you don't have to deploy the entire amount of cash that you receive similar to a $10.31 exchange. The other cool thing is with this, and I know we're talking about top five advanced tax strategies for real estate investors, it allows you to take any type of capital gain and deploy it into this qualified opportunity zone fund. Okay? So it could be a sale of stock.
Chris Picciurro:It could be a sale of anything that triggers a capital gain. Right? It could be a music catalog. It could be anything. And if you properly deploy into the QoZ, a QoZ fund, then you receive tax deferral till January first of twenty twenty seven.
Chris Picciurro:There's a step up in basis after ten years, and there's just a lot of interesting and really cool tax advantages for that qualified opportunities on fund now the cool thing about this is you you you the time frame for deploying the money into a qualified opportunities on fund is a lot more lenient than the ten thirty one exchange. So let me explain how it works. And this is according to, according to the IRS. Eligible gains include capital gains and qualified twelve thirty one gains. And the gains are a couple of things.
Chris Picciurro:Gains for tax purposes are recognized till 01/01/2027 and you can't be from a related person. You you have to make sure that you're putting the money into a qualified opportunity zone fund. We've seen a lot of clients where there was there's a misunderstanding that they could just go buy a piece of real estate in a qualified opportunity zone, but not it has to be in a qualified opportunity zone fund. If you it could be a syndication. Typically, it's gonna be a, an an LLC, LLP, or corporation, and that client is going to be able to, again, reinvest just their cap all or some of their capital gains.
Chris Picciurro:There are some filing requirements on a personal return if the, if you do invest in a qualified opportunity zone fund, you you have to report that deferred gain, and you're gonna have to continue reporting that deferred gain on your tax return through 2027. So I would say the QOFF, that one gives you more flexibility than the ten thirty one exchange. You because one, the time frames are different. And number two, the, the ability to not have to deploy all of your money, a portion of it is is attractive because you might not wanna take all that cash and
John Tripolsky:You like your options, basically.
Chris Picciurro:I do like my options. Yes. So and it could be you can actually overlay it with the $10.31 exchange if you wanted to. But, now when does it make sense? If you have a client that has any type of capital gain remember I said it doesn't have to be real estate, but any type of capital gain, they're looking to change their investment portfolio and is a red, purple, or gold diagnosis that does not need all or some of the gain in pocket.
Chris Picciurro:So again, not good for green diagnosis, but if someone has any type of capital gains that's different than the ten thirty one, and they wanna keep some of that money, they don't have they don't have to use a qualified intermediary for for the qualified opportunity zone fund. There are a lot of rules with that within the IRS code and, again, you know, let us know, and we're happy to share that share that with you. Strategy number three. You're gonna hear this if you work with REIs a lot, the cost segregation study. John, you hear about this
John Tripolsky:a lot. All the time. Cosegs. Cuck. Speak Coseg to me.
John Tripolsky:That's it.
Chris Picciurro:Well, lord have mercy. That's like and, you know, talk dirty to me.
John Tripolsky:First time I heard this, so I'm not gonna lie. I was super confused. But then the more I learned about it, I actually get a little bit more confused and then you have the moment. We're like, this makes absolute sense for certain situations. So walk us through that one.
Chris Picciurro:Right. So Great topic. Walter, it's so hard to define the cost psych study. So we went out. Believe it or not, there's an American Society of Cost Segregation Professionals.
Chris Picciurro:I did not know that. That's an exciting group, I bet. I bet their conference is just as exciting as Taxposium.
John Tripolsky:I might not be going that way. Yeah. Let's be on they might not want me there.
Chris Picciurro:They probably don't want me there either. But according to them, according to the American Society of Cost Segregation Professionals, cost segregation is the process of identifying property components that are considered personal property or land improvements under the federal tax code. So as you know, if you buy per if you buy a piece of real estate, if it's residential, you're gonna have to take straight line depreciation over twenty seven and a half years, commercial thirty nine and a half, break out the land. But what the cost seg does is it identifies those personal property components. The primary goal of a cost segregation study is to identify all construction related costs that can be depreciated over a shorter life, which are five, seven, or fifteen year assets instead of thirty nine years or twenty seven and a half years.
John Tripolsky:And without getting into a
Chris Picciurro:lot of detail, there's a very defined line between structure and land. Absolutely. We know land is not depreciable. We also know with the tax cuts and jobs act that if you can reclassify some of the asset that was purchased and it's five, seven, or fifteen years, it's gonna be eligible for bonus depreciation. Especially for those assets that were purchased after 09/27/2017.
John Tripolsky:Now speak bonus to me.
Chris Picciurro:I know. That is. So that is the what. Right? Continuing on the what.
Chris Picciurro:So that is a cost segregation study. We're simply segregating out the personal property components and lane improvements from your acquisition. This is done after the acquisition and the cost segregation study. You know, as we talk about the how, the cost segregation study, if you're doing it in the year that you purchased the asset, as long as you do before the tax return is completed and prepared, then you're good. So I'll give you an example.
Chris Picciurro:In our private practice, gosh, two thirds of our clients take advantage of tax extensions. Many of them because we have cost segregation studies that we want to see how they're gonna lay out to determine what the deduction's gonna be. And so we're running conservation studies now, so we record this in the summer of twenty three, and we're applying them to to 2022 tax year. And this also gives you some flexibility for those of you that are more experienced. You know, you could elect out of certain asset classes, so you could potentially take bonus depreciation on the five and seven year and not elect out on the fifteenth.
Chris Picciurro:Typically, you're gonna reverse that. So that's the how. You can either take that cost segregation study in the year of acquisition or, you know we love monopoly here, You could actually take it in a subsequent year as well. And and how you do that is you would do a form thirty one fifteen. You do an application for automatic change of accounting method.
Chris Picciurro:So John, let's say you bought a property in 2021. You're bozoing around. You didn't make any money. Twenty twenty two, and you hit the lotto. Right?
Chris Picciurro:You guessed '18. And then you ran the and you hit hit for for a million bucks. And let's assume you're a real estate professional also. Right? We're we're stretching it.
Chris Picciurro:You're like, man, well, in 2021, a cost segregation study, you were a green diagnosis. You didn't have any money. Now you're a red diagnosis. So here in 2022, now the cost seg makes sense. But you're saying, Chris, this stinks.
Chris Picciurro:I should have bought this property in '22. No, my friend. We could take that cost seg and count it for '22 as a subsequent year and do the accounting method change. Okay. So Good to know.
Chris Picciurro:Not bad. Don't remember when you're doing the cost seg study.
John Tripolsky:And everybody remember that I actually guessed that 18% too. So just a reminder, you know, about about thirty minutes ago or so, we did that. So
Chris Picciurro:It was impressive, and it was a really impressive myself. Remember with that cost seg study? You can go you can go either the year you purchased it or the subsequent year. What's very important to remember is that you, that you need to figure out. Remember one of the first things we talked about is understanding of your client's rep status.
Chris Picciurro:Just because you have a cost segregation study and you get a big deduction, doesn't mean the taxpayer is going to be able to take advantage of all of that that given year. So that's something that we really need to think about. There are some there is a something called the short term rental loophole as well, that mirrors a that that match that uses a cost segregation study. We're gonna have some additional content on that in the future. So when do you use that study?
Chris Picciurro:When a client is eligible property, and you're either rep status, or you meet the short term rental loophole, or passive income, and do red or gold diagnosis. So again, this is something these are these strategies are for the red diagnosis, the first three. Red diagnosis and gold diagnosis. Looking for tax free income and growth it has a high marginal tax rate so those are the first three out of four we're moving on to number four which is income shifting I love income shifting what is it it's moving income from a higher marginal tax rate to a lower marginal tax rate. Wow.
Chris Picciurro:That's fascinating. Can be accomplished using either related entities or family members. I wanna stress legally and ethically shifting income. Right? You can't pay your dog but the dog doesn't have a social number.
Chris Picciurro:I know you you'd, you know, you'd love to pay Cooper. I tried.
John Tripolsky:You know, I tried, but he's, he's not very reliable at times.
Chris Picciurro:So income shifting, let's say you have a family member that's doing legitimate work for you and you wanna shift income to a child, that's fine. Or let's say you have a commercial property that's leasing space to your operating company. Let's say you're practicing lawyer or you're you have a plumbing contractor, that's income shifting. And you're taking things from that that higher marginal tax rate. So let's say you're paying self employment tax on dollars and you wanna shift it over to passive income.
Chris Picciurro:So that's what it is. The how? Well, depending on your facts and circumstances, these are the things that you should consider. I already said legal and ethically. Right?
Chris Picciurro:I mentioned hiring a child, potentially hiring your spouse, maybe implementing an employee benefit plan and hiring your spouse. Paying rent, if you have a building that you own. Excuse me. Paying management fees, if they're legitimate. Using the infamous Augusta rule.
Chris Picciurro:I personally think that, that's probably one of the over most overrated things because it doesn't it it's a nice benefit. Potentially looking at a private reinsurance program and maybe transferring to assets to an estate or trust of some type. Those are the most common income shifting strategies, which is strategy number four. When do you do it? You do it if you're a red or gold diagnosis, and you own rental property or have a business.
Chris Picciurro:If you are John, if you are a w you have a w two and that's your only source of income and you have a child that helps clean the house, you don't you can't income shift. You might be a red diagnosis, you don't have rental property and you don't own a business, so you have no no where you could really shift income to that child. Some limitations there. Yeah. Now hurdles.
Chris Picciurro:There are some hurdles. Now you know what? Our friends with the green diagnosis, low marginal tax rate are getting jealous. They're getting envious. They know the first four strategies really focus on that red diagnosis and the gold diagnosis.
Chris Picciurro:And typically, especially with income shifting, you're hoping to shift income from a red to a green. Right? You're shifting income to a lower marginal tax rate, legally and ethically. So these poor guys with the red green diagnosis are thinking, dang, what do I what do I have to do? Well, don't worry.
Chris Picciurro:Strategy number five is Roth IRA conversions. Now you might think, why would a real estate investor be worried about Roth IRA conversions? Well, this is where things get paired sometimes. Just like John, if someone is mixing off one of your favorite cocktails, we call we blend strategies. I'm gonna back up real quick on the, hit strategy number four again for income shifting.
Chris Picciurro:Here's a cool strategy. Let's assume you're you own a business. Your child works with you, legitimate work. They, they're your only only employee. You have plan an employee benefits plan.
Chris Picciurro:You pay them a fair wage, and then you implement a retirement plan for them that they can contribute to a Roth component. Now they've really she shifted income out of your marginal tax rate, and they've implemented their own goal diagnosis. That's blending. Okay? Roth conversion.
Chris Picciurro:What's a Roth conversion? Oh, I know. There's so many there's different types of Roth conversions and etcetera etcetera. But according to our friends and Investopedia, quote, a Roth IRA conversion occurs when you move funds from a traditional IRA, SEP IRA, or saving simple IRA to a Roth IRA. Now I believe you can move you can convert from a four zero one k also.
Chris Picciurro:For 2010, the federal government began allowing people to convert their accounts from traditional IRAs into Roth IRAs regardless of their income. We know that Roth contributions can be limited by income, but conversions are not. So that's the what. You're taking money that's pretax and converting it to a Roth account. You're gonna pay tax on that conversion at whatever your original tax rate is.
Chris Picciurro:That's why this is good for a green diagnosis, but you're not gonna pay that 10% early distribution penalty. So how do you do it? Well, how do I convert my traditional IRA to a Roth? Per IRS publication five ninety, and there's some instructions on their form eighty six zero six. You can convert your traditional IRA to a Roth by one, rolling it over or trustee to trustee transfer or same trustee transfer.
Chris Picciurro:So that's the how. You simply go let's say you're with ABC Bank or ABC Brokerage. You have 5,000 in your traditional IRA. You just say, I wanna convert that to my Roth. They convert it.
Chris Picciurro:Now, again, we're talking about real estate investors here. Okay? A lot of real estate investors have some assets in retirement accounts from previous employment. So that's just so you pair a lot of times this Roth conversion with a Rett diagnosis like your cost segregation study. So let's say you have a successful real estate investor, and their income's $500,000 taxable income.
Chris Picciurro:They bought a property, do a cost segregation study on it, their rep status, and that cost segregation study comes in at $550,000. So I'm sorry. Let's assume their income's 500, the and the cost side comes in at $5.50. They're gonna have a net operating loss of $50. That's not fun.
Chris Picciurro:Right? They didn't even use all of it. It's gonna carry forward at 80%. At that point, we'll convert let's say they had a hundred thousand in the Roth IRA. My argument would be convert that IRA today.
Chris Picciurro:It's a hundred thousand dollars worth of tax one from recognition, but it only swings your adjusted gross income to $50. You're you're probably gonna have some at least standard deductions, and you're gonna move that hundred thousand dollars from a pretax account into a tax free income and growth account for a very little tax. So that comes to the win. Klein is in a greener gold diagnosis and has significant tax deferred account balances. Remember, we're not even talking about potential RMD required minimum distributions.
Chris Picciurro:It can be used if the client has depreciated assets sets in retirement accounts that are expected to increase in value as well. Finally, clients with a red that's right. Clients with a red diagnosis might consider a backdoor Roth conversion. So to put a bow on this, we talked about, we talked about what REIs, real estate investors, client clients expect, how they see value, how to define a rep status person. We defined tax planning and strategy.
Chris Picciurro:We talked about why tax planning and strategy is more value valuable than tax preparation. We talked about the steps to start doing tax planning and strategy, and then we worked through those five real estate investor advanced tax strategies.
John Tripolsky:Holy smokes. That's all I gotta say is holy smokes. But Thank you. Thank you. Thank you.
John Tripolsky:Thank you. I, I feel like I'd learned a lot from you just a little bit. So that's kind of the goal. Right? Once in a while.
John Tripolsky:Well well, thank you, Chris, for for running through this with us. We gotta get back to the conference, man.
Chris Picciurro:Hey. We're going back.
John Tripolsky:Let's do it. Just enough time to record this. So right under that hour mark here, it's gonna give us a couple minutes to run back. Yeah. Hopefully, you guys enjoyed this.
John Tripolsky:There's a lot of good stuff here. Any questions you may have regarding any of this content, reach out to us. Let us know what you think. If you were at the event, this will probably post right after as we're kinda heading to home ish for the following week, but hopefully we meet you. So I feel like I'm talking to the the future version of you if you were at this event.
John Tripolsky:But thank you everybody for chiming in. Thank you for joining us here on the mister r show presented by the Monthly Recurring Revenue Institute. And thank you, Chris, as always, and we will see everybody very soon. Hey, everybody. Thanks for hanging in with us on this episode where we dove into those advanced strategies for REIs.
John Tripolsky:Hopefully, you got a lot of information from this. If you yourself are a real estate investor, you work in that space, you have clients that are we are positive that some of this information you will be able to take back to those clients, those projects, and add some massive value to the relationship and just start building, building their portfolio, working with them to really just improve their confidence in their tax situation. So if you have any questions, please feel free to reach out to our team at hello@mrrinstitute.com. That's hello@mrrinstitute.com or shoot us a LinkedIn message or go to our website at mrrinstitute.com. That's the monthly recurring revenue institutes website.
John Tripolsky:We'd be happy to hear from you if you have any questions, comments on this show. If you have any other topics you would like to have us discuss on this show as well, we would love to hear them. So again, thank you for joining us on this one and we will see everybody very soon.
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