Tax Hacker Tuesday is back to teach you about real estate investing strategies and tax savings!
Tim Berry answers questions from listeners about which real estate strategies he suggests, the magic behind cash flow, the truth about recapturing depreciation, and how to use partnerships for success beyond your wildest dreams.
Find out how to apply all of the above to your business with Epic Real Estate and Tim Berry on Tax Hacker Tuesday!
What You Will Learn About Real Estate Investing Strategies and Tax Savings:
- What real estate strategies (besides flipping) Tim suggests with the new tax laws going into effect
- How it’s possible for rental income to be negative in terms of taxes and positive in terms of cash flow
- The potential of cashless deductions
- How refinances are viewed by the IRS (and how to take advantage of this)
- The truth behind recapturing depreciation when you sell
- The smartest way to sell
- Who to partner up with if you’re low on time or money
- How to get maximum value out of partnerships
- The 4 things you need to be successful in real estate
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Speaker 1: This is Theriault Media.
Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%?
Now, you can. Tim Berry, attorney-at-law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.
Matt Theriault: All righty. Welcome to the Epic Real Estate Investing Show. Welcome back to Tax Hacker Tuesday with my attorney and friend, Tim Berry. Tim, how goes it?
Tim Berry: It is going fantastic Matt. Yourself?
Matt: Couldn’t be better. If I told you, you’d be so jealous. On Mondays here at Epic, we show you new and creative ways, as well as time-honored ways, of making money with real estate, and on Tuesdays, Tim and I… Well, actually just Tim, will show you how to keep it. I ask him questions and he gives us really clever, creative answers.
Speaking of questions, it doesn’t always have to be my question. You can actually have the ability… or you do have the ability, not can… You do have the ability to ask questions to Tim as well and we’ll answer them here right on the show. You can go to taxhacker.com/questions. You don’t have to say forward slash anymore. You can just say slash, right? We all know it’s a forward slash. taxhacker.com/questions. Right there you can post your questions and Tim and I… Or Tim will… I’ll ask the question for you on your behalf and then Tim will answer it.
We have a few questions here. We mentioned this a long time ago. There’s not a lot of questions here, so this would be a great time to go there. You certainly get your question answered directly right here on the show. We might have answered this before. I remember putting this in… I put it here on behalf of one of the listeners that asked this inside of our private Facebook group, and that’s Gilbert Ross.
He had asked, what real estate strategies do you suggest for real estate investors besides flipping with the new tax laws going into effect? Tim?
Tim: Yes, sir.
Matt: What can you say to that? When you’re talking about investing strategies, really, like you can flip or you can hold or you can finance, are kind of what we’re limited to, right? I mean, in general?
Tim: Yeah, in general. I mean, holding is a wonderful thing because, gosh, you get the rental income. Chances are, the rental income is going to be negative from a tax viewpoint. Even though it’s probably going to be positive from a cash flow viewpoint.
Matt: Right. Okay, stop right there.
Tim: I’m stopping.
Matt: Explain that, because I think that’s really key, and I don’t wanna brush over that. That’s really one of the magical things about real estate, that cash flow.
Tim: Oh yeah, it’s super magical. The explanation is, let’s say that you have rent on a property of, I don’t know, $14,000 a year. Chances are, you’re gonna have depreciation of, I don’t know, about $6,000 a year, and you’re gonna have an interest deduction of probably about $8,000 a year. Translation, you have income of $14,000, you have tax expenses of $14,000, you have a net tax bill of zero, if not negative. Most people, it’s probably negative.
And the cool thing is a lot of these are cashless deductions. So like, the depreciation deduction, if that was $6,000 a year, you’re still getting that $6,000 cash into your grubby little paws and you can spend it, and yet you don’t have to pay taxes on it. And then there’s a way how if you can really go crazy and off the reservation, you can get double depreciation on a piece of property, so theoretically, you could probably get, I don’t know, about $10,000 of depreciation by doing this stuff. So right off the top, buy and hold is fantastic because you get cash flow, and you typically don’t have to pay taxes on the income generated by the cash flow.
Matt: Right. So the government, or as far as your tax reporting, it looks at as you lost money, but you had actual money go into your bank that you got to go buy stuff with?
Tim: Absolutely. It’s a wonderful thing.
Matt: Right, okay.
Tim: The other component, too, that other neat component [inaudible 00:04:30] buy and hold. Heaven forbid, let’s say the property even appreciates. You don’t have to pay taxes on the appreciation, and yet it’s growing hopefully each and every year, and then if you wanted to, you could go and get cash refinance and get money out that way tax-free. It’s a wonderful thing.
Matt: So refinances, that’s not counted as income?
Tim: Refinances are not counted as income. You might have gotten some cash but you have the duty or liability to pay it back, so you have no increase of net value in the eyes of the IRS. Voila, tax-free income. It’s a wonderful thing.
Matt: My friend Jason, he says, “Refi until you die.”
Tim: Why wouldn’t you? Why wouldn’t you? Yeah.
Matt: Right. Cool. Another question that just came up, and I’ve been asked this several times and I’m like, “I’ll have to ask Tim,” and I always forget, but now I’m gonna ask because I’m remembering. It is when you take that depreciation, the cynics and the skeptics out there, yeah, but you have to recapture it when you sell it. Is that true? How does that work?
Tim: No. Most of the time you don’t have to recapture it. Recapture is if you have accelerated depreciation. Otherwise, it’s really a non-event. Depreciation is just a wonderful thing, because you get the depreciation, it goes against your ordinary income which can be taxed super high, in the 30% plus and all that stuff, and then whenever you sell you get capital gains treatment, and that’s if you’re stupid enough to even pay taxes on the sale.
If you’re smart, you’re going to do a 1031, which is a way to sell the property without paying taxes and then refi until you die on that acquisition and/or there is all sorts of different trusts and ways that you can sell the property in a tax-free nature or a tax-deferred nature. So yeah, the recapture is kind of a non-event. That’s amateur hour, that’s what it is.
Matt: Okay. That’s my answer from now on.
Tim: Yeah. Yeah.
Matt: It’s amateur hour. That’s amateur hour. Bring a tough question to me. That’s it.
Tim: If you don’t know what you’re doing, yeah, you might have some depreciation in recapture, but realistically, you’re not going to have it.
Matt: That’s why we need an expert on our side. Cool. All right. I guess that kind of answered it, maybe it didn’t unless you… Because I did stop you mid-sentence, so maybe there was more you were going to add to Gilbert’s question, or add to the answer you were going to add to his question?
Tim: I was just going to add about the component of depreciation of the actual property too is cool. That’s [inaudible 00:06:57] to be tax free.
Matt: Right. Right. You know, the four profit centers of real estate, we just talked about two, appreciation… we talked about three – appreciation, cash flow and depreciation. And there is amortization, right? Particularly if it’s an income property. You’re building equity in that way as well because it’s the tenant that’s paying that down for you, that debt.
So, with regard to, say, partnerships, and you’re gonna buy a property with a partner, and kind of what I’m thinking about is someone that’s in real estate because they want the cash flow ’cause they wanna start paying their bills, they wanna escape the rat race and then they might be partnering with someone who doesn’t really have those cash flow needs but might have use for the other profit centers, we can divide those up, right?
Tim: All day long.
Matt: All day long. So the scenario I’m thinking about is, you know, someone that doesn’t have a lot of money but got the time, got the knowledge, and they are willing to go out and get dirty on behalf of someone like a busy professional, a doctor or a lawyer, we’ve got a bunch of surgeons in our community, I don’t know how we attracted all the surgeons, but we have them. So they are cash rich, but they pay a crap load in taxes. So there’s a really powerful way that those two could partner, right? And how would that work?
Tim: There’s so many open doors in front of me right now by asking how would that work? Simple, easy way to make that work would be we kind of alluded to this in a different podcast – we give all the cash flow to the person who wants the cash flow. And so the person wants to get their hands dirty, we say, “Okay, cool, you are in charge of the rental property. You’ll make sure everything in the toilets are working, all that other good stuff.” And you have to pay the taxes, if any, on that cash flow.
In the meantime, the high net worth type who doesn’t want the current income, why don’t we give them all the appreciation of the property? And once again, they don’t have to pay taxes on that until they sell it and chances are, they’re not gonna pay taxes on that either. And then, it’s even cooler… I don’t know how far down to go inside this little rabbit hole but the cool thing is, even if there is no appreciation on that property, if we did the deal correctly, we did in a certain manner, they’re still gonna get appreciation, the high net worth person would still get appreciation [inaudible 00:09:35] cash flow gives them xyz dollars upfront from that cash flow.
So that’s getting weird and out there but there’s all sorts of ways we can… it just comes down to what do the different parties want and we can create a solution to do that. And that’s one thing, Matt, that I think is just the absolute mindblower of the legal world if you just stop and think about it. We can drop a contract… pretty much do anything. We’ve got a bunch of rabbits in my neighborhood, so we can drop a contract to say if five rabbits run across the street at the same time, you can get this property. And that’s a [inaudible 00:10:11]. So what we have to, trying to bring that back into the conversation you started, how could we do this? We can do this however the parties wanted, we can mix and match the cash flow however the parties wanna do it and we can probably create some pretty darn neat tax benefits to go with that as well.
That is too out there, wasn’t it?
Matt: No, it wasn’t. It’s taken me through other questions but then we got totally off of Gilbert’s question but I think we answered Gilbert’s question. You’re really good at this, Tim. I never know what I’m gonna ask you and we just start talking, again, but what about this and what about that? That’s good.
You know, and people come in to start investing in real estate, you know, we take an assessment right upfront when we have our first call with them. To be successful, you need four things. You need knowledge, you need time, you need money and you need credit. Now they don’t all… you don’t have to have… they don’t all have to belong to you but you do have to have access to them all. And every time someone comes in, whatever they’re short on – they think they are at some sort of disadvantage, and what they don’t realize is that whatever you’re short on, someone is really high on and they’re deficient in what you’re really strong on and they think they are at a disadvantage as well.
So I think there is opportunities for once you realize that what you bring to the table is an amazing amount of value to somebody else. You know, partnerships are really a way that can work out and benefit both sides as if they were the sole person in there ’cause they’re getting what they need, what they’re deficient in. Does that make sense?
Tim: It’s the Reese’s Peanut Butter Cup story, isn’t it?
Matt: Right, right. Or the beer.
Tim: Or the beer. Although I think of Reese’s Peanut Butter Cup. I mean, you have chocolate, that’s cool. You have peanut butter… that’s cool. You put the two together, and what do you get? An absolute miracle.
Matt: Right, right. I like it. It is a miracle candy for sure. If you go up down the candy aisle right now, there is like nine different variations of the Reese’s Peanut Butter Cup and still, the original is by far the best.
And you heard it here first. All righty-
Tim: [inaudible 00:12:22] endorsement deal for them.
Matt: I know, I know. We’re gonna do hashtag Reese’s. Brought to you today by Tim and his bunny neighborhood, the Reese’s Peanut Butter Easter egg.
Tim: There you go.
Matt: Okay, this is getting dumb. All right. So Tim, thank you so much, we can only handle so much tax talk though before we start losing the audience, so we do our best to keep it entertaining. If you’d like to get a free copy of Tim’s book, you can go to taxhacker.com and his book, How to Take Advantage of Five Loopholes in Trump’s New Tax Plan the Mainstream Media Isn’t Sharing You and Could Cost You a Small (or Large) Fortune. You don’t want that. And after you’ve done that, you’ll have the opportunity to schedule some time with Tim, and either he or one of his team members will get on the phone with you for a short five to 10 minute call, just to assess your situation, just to see if there’s gonna be a good fit here. ‘Cause if there’s not a good fit, we don’t wanna waste your time. If there is a good fit, we’ll tell you how we can help and then, so after that, we’ll take the next step, and if it’s a good fit, we’ll show you the benefits of a tax action plan on how to improve your situation. And if there’s not a good fit, we’re gonna go ahead and I’m gonna share some alternative resources with you to where a better fit for you can be made.
Either way, Tim and his team are committed that you are better off after the call than you were before. That’s just Tim. That’s what he does, and that’s what he’s committed to, and that’s why he’s here on the show. That’s why I’m sharing him with you. I was gonna keep him all to myself but I was like, “No, Tim, we can help a lot of people.”
So, Tim, any parting words?
Tim: I can’t think of any, but thank you very much for having me.
Matt: You bet, you bet. And I’ll see you next week, all right?
Tim: Sounds awesome. Thank you.
Matt: And I’ll see you next week as well on another episode of Tax Hacker Tuesday.
Speaker 1: That’s it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.