00:01.70

wongga

Good afternoon investors. This is the investing to win podcast and under host Garret Wong this afternoon I'm pleased to have from Keystone Amanda and Matt how are you guys.

00:17.46

Amanda H _ Matt M

We're doing great. Thanks for having us Garrett. Yeah, glad to be here hear.

00:18.62

wongga

Absolutely so I said keystone I guess I should have said the entire company name. But why do you guys? Give us a little bit of background about Keystone and maybe even you guys can take turns and say a little bit about your individual introductions.

00:36.38

Amanda H _ Matt M

Sure sure. Yeah, so our company name is actually called Keystone Cpa ah and we have to be specific because there's another company called Keystone Cpa as well. So our firm is located in Southern California ah although we do help clients nationwide. Um, what we're known for is tax saving strategies for real estate investors. So the vast majority of our clients are real estate investors. Um, it kind of scans spans the spectrum anywhere from somebody who is a high income earner a service professional like a physician attorney. Ah, who is getting into real estate as one of their ways to build wealth all the way to people who are full-time real estate syndicating large deals in multifamily self-storage and all that good stuff. Um, and then beyond that Matt and I are real estate investors ourselves. So always happy to be here on these kinds of podcasts. Yeah, in full disclosure we are married to each other. So if we drop any weird comments later on like you'll you'll understand why i.

01:36.26

wongga

So your partners in the dual sense of the word. That's awesome now I think we can do an entire podcast on spouses working with each other but we'll stick to the accounting stuff.

01:39.77

Amanda H _ Matt M

Yes, yes.

01:48.80

Amanda H _ Matt M

Ah.

01:50.29

wongga

So okay, that's a great that's a great intro. The reason I wanted to bring you guys on even though we are from Canada is I have a lot of investors as we said in our pre-show that are canadian that have been dabbling down south and I'm really intrigued by a lot of your tax saving strategies. We won't sort of cross the border so to speak because I don't want to put you guys on the spot for canadian tax but certainly like to hear you know from an american citizen point of view and everything that you guys can do and you know enlighten us. So let's let's talk about. I guess we'll start with real estate investors. Can you kind of share an overview of tax saving strategies maybe a ten thousand foot view that you found most effective in the sector.

02:32.51

Amanda H _ Matt M

Yeah I mean I think it's not a secret right? where people say that um for most wealthy people real estate is part of their portfolio and. Um, the reason that is is because the tax law favors real estate and what I mean by that is the government incentivizes investors to provide housing for people right? because the Us government is not in the business of of providing housing and so they want to incentivize people to. Invest and grow their money and do it in a way that helps with housing for the you know for for the population that large and so so as real estate investors we are afforded a lot of the same benefits of being a business owner. Um from the perspective of tax writeoffs that you get to take as a business owner are similar to what you get as an. Investor um, but I think the big one that we get as investors is depreciation. Yeah I mean from a a high level like why we love real estate so much from a tax planning perspective from being an investor you know compared to like buying stocks right? if you know one of your listeners gone buy Apple stock or Google stock or 1 of those. they don't you know they don't get the right off the cost of the stock right away I don't think it's right that off until down the road when they sell the stock eventually but you know for those rental property investors listening and when we buy rental properties the irs allows us to take a.

03:54.68

Amanda H _ Matt M

Call a paper writeoff every year against the cash load that you're making for the property for depreciation Expense. So. It's a great way that we can shield the the income that you're otherwise going be paying from tax. You know shield that from having to pay tax by being able to deduct depreciation against it. So it's.. It's a huge advantage when looking you know, investing in real rental real estate for sure.

04:14.80

wongga

Yeah, no, let's let's back up a little bit and assume that we have a lot of novices listening um, can you kind of define depreciation for us.

04:24.10

Amanda H _ Matt M

Yeah, it's just um, it's kind of this concept. The Iris we I refer to as kind of a paper writeoff so you know you buy a $500000 property. Um, let's say of that 400000 is is for the building $100000 is for land. We don't get the right off the land but the building the Irs says hey due to normal wear and tear and just kind of use and things like that you get to take a deduction every year for a part of that building so that $400000 on our example, you know if it's a apartment building. You get to depreciate that evenly over twenty seven and a half years so basically it's an extra expense added to your tax return against the rental income. Um, and again this is based on the you know, starting at the purchase price it doesn't matter if you paid all cash for it doesn't matter if you put 20% down doesn't matter if you put 0% down all those things can work in those examples.

05:14.11

wongga

Okay, um, so I'm going to challenge you a little bit on that because obviously depreciating you can write it off on tax. What's the end game though after when you trying to sell.

05:25.41

Amanda H _ Matt M

That's a great question I think that the answer to that will really depend person to person. Um, so we have a lot of clients who have invested in real estate for um, a couple years right? So let's say the property appreciates in value and you decide well I want to sell and maybe. Reinvest my money into bigger better deals. Um, when you do that you can do a ten thirty one exchange and basically the ten thirty one exchange in the us allows you to defer any capital gains taxes that you would otherwise pay. This strategy could be used time and time again and so one. Ah really amazing way to really save on taxes in your lifetime is to continue to 10 30 1 exchange from a small single family to a small multifamily small multifamily to a larger multifamily. And ultimately pass away with the asset in your name or in the name of your living trust and what happens is at that point in time you get? What's called a step up basis. So the example would be you bought the property for 100000 when you pass away. It's worth a million. Your beneficiariesaries get to inherit the property at $1000000 in cost basis and so if they were to sell it that means the first million dollars they don't have to pay taxes on so that's you know more kind of advanced multi-year planning. But you're right I mean if I bought a property I take depreciation I sell it the next year I don't have any strategies.

06:53.36

Amanda H _ Matt M

Then you're going to end up paying taxes on some of that depreciation that you took previously if you're selling for a game.

06:58.16

wongga

Yeah I mean that's kind of my basic knowledge of it I mean just to to make easy numbers. Let's say that you have I don't know $100000 property and depreciate for 5 years at 10% each year and I'm I'm not going to do the exact math on that but let's just say it's like 45000 or something like that.

07:04.47

Amanda H _ Matt M

Um.

07:12.55

Amanda H _ Matt M

Is.

07:17.19

wongga

And then you sell it for 200000 instead of going from 200 down to 100 now you're subtracting 200 from like 65000 so there's that extra tax you'd have to pay of course capital gains is tax differently depending on your whole bunch of different things. I I don't think I quite I've heard of ten thirty one but that's just me like you know, reading in bigger pockets and things like that maybe dive deeper into that a little bit for us.

07:43.60

Amanda H _ Matt M

Um, yeah man, it's ah you kind of excuse me your you understanding it kind of you know correct it's you know you do when you do take depreciation it does reduce what they call your basis in the property so that can increase the gain on the back end but it is something to be honest, did the irs actually ah expects you to do so they can if you somebody who doesn't take depreciation you and you later sell it. Can actually recalc your gain as if you did take depreciation. So. It's always in your best interest to take depreciation expense a lot of times it works out in the favor of the investor especially if they're a higher tax bracker when taking depreciation versus that capital gains or depreciation recapture rate. Um, but for a ten thirty one exchange kind of think of it like. Someone's selling an asset you know rental property. Keep it simple and they're gonna have gain on sale. They're gonna be paying taxes but they don't want to because they're going to just reinvest that money back into more real estate. So the tax code in the us gives you this ability to if you meet certain requirements to reinvest that money into new. Rental real estate for lack of a better term and not have to pay taxes right now and that gain than from the from the old property. So that's kind of in a nutshell.

08:51.10

wongga

Okay I see okay, okay, so again I have to go really simplistic because that's kind of how my level of knowledge is for accounting so you have a property you've depreciated it for 105 years you do a. And then you sold it. But you basically a ten thirty one exchange could we kind of compare that to a suitcase where you're taking your tax liability and as long as you're buying up I don't know what if there's different types of properties. But then now you're able to shift that suitcase over so that tax. Liability then goes from property to property to property is that accurate or am I completely off base.

09:30.40

Amanda H _ Matt M

Yeah, no, exactly It's like the game of monopoly right? So you buy a couple single- family homes you decide to sell it. You can ten thirty one exchange into other real estate and other real estate could be more single family homes. It could be a large property or $10 smaller properties. It could be a Multifa could be a a medical. Building right? Any kind of commercial property. So that's the benefit is that that that role is pretty flexible in terms of what they consider like kind right? So like kind could be all kinds of real estate could be a longterm rental short-term rental midterm rental. All those are possibilities.

10:07.10

wongga

Okay, so are there any actual like restrictions on a ten thirty one or it's kind kind of like buyer's choice.

10:08.69

Amanda H _ Matt M

Exchange.

10:14.72

Amanda H _ Matt M

Now there's plenty. There's there's lots of roles that are probably way too ind depth to go into it. but but yeah there's there's definitely there's definitely restrictions but it's it is very flexible I mean that's we've seen clients I mean change from selling a 16 in a multifamily to forcing a families or.

10:22.42

wongga

Um.

10:33.66

Amanda H _ Matt M

Vice versa or you know selling s singlea families buying strip malls you know things like that. So. It's it's a lot of flexibility. Yeah I think the restrictions are more on the timing side. You know in terms of like when you sell um you have to identify your replacement properties. You have to close on your properties. There's like purchase price requirements. So that's a part of That's where the planning comes in right is that what we tell clients is hey before you sell a property when you're planning on selling. That's what we want to know because a lot of the analysis and calculation have to be looked at before it you sell after you've already sold the property believe it or not it's too late to do a ten thirty one exchange it all has to be done prior to.

11:11.34

wongga

Oh interesting. Okay, so that's where having a really good planning and advisor on your team is important. Um, just 1 more thing on depreciation before we move on I think traditionally in my mind.

11:11.45

Amanda H _ Matt M

Closing a film.

11:26.23

wongga

I've always thought of depreciation as kind of like an rsp type tax tool where you can defer that capital gains tax to later when maybe you're you know you're in total income is in a different class. Would you does that work that way in the Us.

11:44.34

Amanda H _ Matt M

Ah, not based on how you're describing it I mean you know you can't you get to take the deduction like really that deferral is more like on the on the sale side of things from the tinder anyone exchange or something like that.

11:59.37

wongga

Okay, all right? So I know you guys work with a ton of different clients. Um, you know we had said what's like small individuals and you've got small businesses medium size businesses high net worth individuals. How do you?? How do you. Tail your tax planning strategies for all those needs.

12:18.95

Amanda H _ Matt M

Ah, you know it's difficult because tax planning really? um, can't be cookie cutter. You know we actually tell iga talk clients this all the time like hey if somebody is telling you like without. Doing a deep dive and just telling you like this is exactly what you should do this is your plan. Um, you have to be fearful of that because you can have 2 taxpayers working in the same company. We're earning the same amount of income but have very different strategies depending on like you know what their goals are. And also depending if they're married or not married on what their spouse does so for us the planning around you know smaller investors larger investors. That's not really the the profile. The profile is just you know different investors have different needs based on what they're planning on doing so it is pretty tailored to each person. Um, even within the same person right? So Garrett for example, what you plan to do in 2024 might be different than what you're planning in 2025 with respect to your business and your real estate and so your strategies will change and evolve over time too. So. That's part of being the role of a good advisor is understanding all those differences.

13:25.88

wongga

Okay, can you give us some general examples though of a tax planning strategy for let's say us a small or medium size business because I don't really you know I think that's going to be good for some of our listeners as well because a lot of people just think about that individual tax.

13:42.94

Amanda H _ Matt M

And by business. Do you mean like full time in real estate business. Are you thinking like a non-real estate business.

13:47.81

wongga

Give us both examples I mean we're here to explore.

13:54.70

Amanda H _ Matt M

Yeah I would say you know I mean for real estate I think we kind of touched on some of the major things right in terms of like doing depreciation. Um, accelerated depreciation. So that you can really use a lot of these paper losses to offset all of your rental income. Um, if we're talking about a non-real estate business. Let's say it's a doctor who's also interested in investing in real estate one really powerful strategy is if you have a spouse who can be doing the real estate full time in the tax world. If the spouse can be a real estate professional under Irs terms then what could happen is you can create strategically a bunch of rental losses and use that to offset the active income of that physician from their medical practice. Or or even if it's a w two income right? from being a doctor. So um, regardless of whether you know your full time job is real estate or not there are sometimes ways to combine those 2 worlds real estate and non real estate and get some pretty significant tax savings. Um, but I think the caveat is like anything in real estate is not a 1 ne-size fits all so there are plenty of people who cannot use this strategy so it does take careful consideration and and and planning for you know the coming year.

15:11.92

wongga

No, that's fair, um, well let's shift over to a real estate investor. That's where I'm really really curious to see the differences. Um, what would you tailor or I mean what are the specific rules around real estate investing I know I'll kind of give you a hint because up here we have sort of. Active and passive like even rental income and there's there's a whole different class that you might have to pay there. What can you kind of describe an overview of what what that scenario looks like in the Us.

15:43.85

Amanda H _ Matt M

Yeah I mean down here. We have something very similar. They do have anytime you're investing in rentals or businesses. You know that you're kind of you know a part owner you get you know the income pass through to you. Um, they have those distinctions active and passive or you know we call it passive and non passsive same thing. Um. And you know rentals by rental that properties by default are considered passive activities. So here in the United States if you know if somebody makes $100000 or less. They're generally allowed to deduct up to $25000 of rental losses against other incomes of w 2 business. Whatever they have. Which can make a you know can be a big swing if you go from a hundred grand of income to $75000? Um, but once that person reaches about one hundred and fifty thousand dollars income their ability to deduct rental losses against their income kind of goes away so and kind of you know between one hundred and one fifty it kind of phases out. So for the people who are above one fifty um with rentals being default passive and if you're looking to use rental loss is the offset of their income. That's kind of where some of the advanced rates like real estate professional come into play or we've got clients investing in short-term rentals. They're kind of using some some being actively involved in their short-term rentals and being able to generate losses through depreciation that way and. There's lots of different things. You can do. But you yeah, there's definitely you have to factor in the active versus passive categories anytime you're looking and invest in yeah and I think the natural question for most people is like what is a real estate professional right? because we're saying that's how you bring the passive into the active world and so contrary to popular believe.

17:13.59

Amanda H _ Matt M

Real estate professional is not does not mean you have to go out and get license and start showing properties on the weekends. In fact, whether you have your license or not is is not really a leading indicator. So what the irs will look for is what are you doing with respect to your real estate and how many hours are you spending in real estate. Versus non-real estate. So the 3 main rules to being a real estate professional first is you have to spend more time in real estate than your other jobs. So like if you don't you know if you're if you're a part-time teacher and you you spend 1000 hours at work then you have to have more than a thousand hours in real estate um if you don't work right? Then the next requirement is you have to have at least seven hundred and fifty hours in real estate so again even if you don't have a job your stay at home mom or dad you still have to have at least seven hundred and fifty hours in real estate to be a real estate professional and then the third role is you have to materially participate. In your long-term rentals and so those are just more like hands-on hours dealing with the dayto-day operations right? So that's managing the contractors managing the properties managing the crew. Um, at least some hundred hours is typically the the threshold and so once a person meets all 3 of those. Then they can be considered a real estate professional in the tax world and what that means is now you can bring those passive losses into active losses and they can offset W2 and other income.

18:34.20

wongga

Okay, interesting, interesting. Lots of questions in my head here because like you keep referring to passive losses active losses. But what about actual like income I mean is there a difference between an active and a passive investor with respect to paying. Income tax on those on that Net profit.

18:56.20

Amanda H _ Matt M

I Mean regardless of whether you're active or passive if you have taxable rental Income. They're all treated the same in that you don't have to pay social security Medicare versus like if you are in a business if you're an attorney and you earn that kind of active Income. You have to pay federal State Income taxes as well as payroll taxes or self-employment tax into social security for rental income. Um I don't want to say 100% of the time but the vast majority of the time you don't have to pay to social security and Medicare so that is another added benefit of rental income. Compared to other type of earned Income. You get.

19:35.80

wongga

Okay, what about for corporation? are there different rules for tax taxes with a corporation versus owning as an individual.

19:48.00

Amanda H _ Matt M

Ah, yeah, there can be I mean there's different new you in the united states there's different corporations or ccorps or Sscorps Ccorps pay their own taxes um scorbs partnerships or we would call it flow through entities or passor entities where the whatever income they make ends up. Getting tax on your personal returns so that doesn't really get tax at the company level. Um, so yeah, ccorps are really the you know other than yeah there's trust and other things like that. But that's a main the c corporations the main one that pays its own taxes.

20:14.53

wongga

Okay, and would there be different tax levels like I guess let me let me instead a skirting around it I know here at least in Canada we can own real estate and you know as a corporation but that's not enough to pay a lower like a corporate tax rate right? because that's. Kind of here. There's also active and passive and I'm not going to quote percentages and I should have put a disclaimer on myself that I'm on an accountant and that everything should not be construed as advice or actual knowledge but to the best of my recollection.

20:36.76

Amanda H _ Matt M

And.

20:48.76

wongga

You know I'll give you an example right? An individual here might pay 45% on ah rental income sort of the same as a stock or an investment. Um and yet a corporation. Not even in real estate just a corporation here might be paying you know Eleven twelve percent type of thing. And here in Canada if you if your corporation that owns real estate has 5 or more full-time employees then that is considered an active corporation and an active partner in real estate is there anything similar to that in the Us.

21:23.76

Amanda H _ Matt M

Um, I mean there's similar stuff. Yes, like for us C corporations pay a lower tax rate. Um, but I don't want to confuse our audience because the 2 different countries are just very different. So what I'll say is in short.

21:34.87

wongga

Sure yeah.

21:39.38

Amanda H _ Matt M

If you are a real estate investor in the us for us tax purposes. Um, we don't recommend holding rental properties in a c corporation even though c corporations have lower tax rates than individuals. It is not recommended to hold rentals specifically in c corporations. Um, several different reasons I'll just cover the main 1 main 1 being that as investors are are typically our rentals are creating tax losses tax losses that we strategically create through write-offs through depreciation through accelerated depreciation. And and so what we always want to do is we want to try to use that to offset our personal income where we pay high tax rates. We don't want to have it trapped in a corporation by itself because that's not helping me to reduce my personal taxes. Um, like there's several other reasons why we don't recommend Ccorp but I think that's probably. 1 of the main reasons to to answer your specific question.

22:41.18

wongga

Okay, no, that's great. That's very clear. Thank you very much for that. Um, you mentioned retirement and I'd like to spend a ah good portion of of the next segment on that retirement planning specifically for real estate investors. What can you tell us about that.

22:57.20

Amanda H _ Matt M

Well, it's just I mean it's it's just as important as any other any other taxpayer right? I mean you got looking at looking at everything they have going on holistic like what are what are their short term longterm goals where do they want to be. And can they use a you know retirement account as 1 of their investment vehicles to help them get to that that end goal. Whatever that angle might be um so for real estate investors they you know have options just like any other person I mean somebody might be working at as an employee at somebody's company. They got their 4 1 case set up. Real estate investor depending it depends on the type of real estate. They're doing if they are doing um you know rental property investing versus doing fix and flip or wholesale or property management more like an active business There's going to be different options there as well. So but a lot of the same types of plans can can be available to to everybody. Yeah. Because most of our clients are real estate investors what we tend to work a lot in is people using their retirement money for real estate. So for example, let's say you worked at Google and over the years you've built up $300000 in your google 4 1 k well. There are ways that you can roll that money out of the google 4 0 1 k account right? because within Google's 4 1 k you're probably limited to stocks bonds and mutual funds. So there could be ways for you to roll that out into like a self-directed retirement account still within retirement but now it's a self-directed account and then from that Ira.

24:21.25

Amanda H _ Matt M

Use it to invest in rental properties. So That's when we see a lot because again most of our clients are like hey I want to put my money in real estate rather than the stock Market. So The retirement bucket is a really great bucket of income or not income but bucket of money that you can potentially deploy into real estate. Ah, rather than just having it stuck in the market.

24:42.28

wongga

Um, okay, can you define self-directed investing for me just for the audience.

24:45.92

Amanda H _ Matt M

Yeah, it's a great question so when we talk about self-directed. We mean a true self-directed account is one where nobody's telling you what to invest in right? So I mean you're gonna move it to Garrett's self-re to Ira. Garrett gets to decide I'm Goingnna buy this property on main street I'm gonna invest in John's syndication I'm going to make a a note to Bobby over here right? You decide the different options. Um a lot of financial advisors will tell you they have self-directed accounts like Charles Schwab um fidelity they'll say oh we you can self direct here. The difference is when they say self-direct. They mean you get to choose from our portfolio of stocks bonds and mutual funds right? but you cannot go out and invest with Bobby or Amanda or whoever you want. So that's the difference when we say soft drag. We truly mean you choose what it is that you want to invest in It's not limited to those paper assets.

25:46.10

wongga

Okay, okay, let's let's move on to audits. Um they can be daunting. How do you? you know, maybe talk about your approach on audit Representation. You know resolution. Specifically maybe for real estate clients.

26:07.25

Amanda H _ Matt M

You know I think um for us audit preparation starts. Ah before the audit audit preparation starts at tax. Return preparation Time. So every return we do. We always reference like where the numbers are coming From. So if a client provides something to us and we have to add stuff up or we have to move things Around. We internally have our paper trill of how things are you know? How do we arrive at whatever number is that that's on the actual tax. Return. And we also ask clients a lot of questions about expenses and income and try to match things up right? and all that I know some of our clients are like gosh you asked me so many questions my oltpa never asked me those questions and so part of that is just really making sure we understand what's happened and are reporting things correctly. So. Yeah I mean part of it is just educating the clients to get their ducks in a row right? I mean it's it's you know I think the overriding theme is don't be afraid of an audit I mean if you're entitled to legally deduct something and you have the documentation and you've met the requirements then you should be deducting that. You know, maybe that is a quote unquote higher risk item than something else. But again if you have everything in place and you're allowed to do it Then? Why wouldn't you do it. So yeah, don't don't fear the audit but you know plan ahead, you know upfront you know that? Ah yeah, Okay, if I'm gonna do this I've got the receipts I've got the invoices I've got.

27:31.85

Amanda H _ Matt M

Um, claiming real estate professional and I need hours I got my time law. Whatever it is. They've got all their documentation in place. Yeah, and I also think too that yeah in terms of dealing with audits right? if an audit were to actually occur. They really appreciate that. Ah, because you know auditors aren't really like the scary monsters that I know a lot of cpa paint them out to be what we found is like hey you give them what they request in a very organized Manner. You explain to them if there's anything that's kind of wacky you explain to them so they understand what's going on. They can follow your thought process and your positions and your paperwork. They're very reasonable people too. Alternatively if you just throw them a pile of crap then they get angry. They start digging around. They start asking random questions and and part of that you know I presume is just because they're frustrated. They don't know what you've handed them. So I think you know with audits I Mean. I Would you know, always try to like respect the auditors as the individuals they are. They're just trying to do a job and so to the extent you can make their job. Easy. Um, then it kind of you know makes everything much smoother.

28:32.47

wongga

Yeah, no I Think what you're talking about here is building Credibility. You're Prepared. You're like okay if I get Audited. That's Fine. It's going to be a pain but here's all my documentation not going to find anything because we've taken the step to to. Prepare ourselves ahead of time are.

28:50.72

Amanda H _ Matt M

Yeah, absolutely yeah and they are not the monsters that people ah paint them out to be. But if you can if you give them a wild crap. Maybe you're gonna turn into the monster I don't know.

28:57.77

wongga

Yeah I've been audited a few times. It's It's been fine. Yeah, no, That's fair, Let's let's talk about industry changes specifically on the tax Landscape. What have you guys seen over your career in real estate. For with respect to tax changes.

29:17.13

Amanda H _ Matt M

Oh man, just the I think the overriding theme that we've seen in our career is complexity. It keeps getting more and more complex. There's more and more calculations and analysis and gosh every time there's some major event you know like doing covid back in 2020. There was just an insane amount of changes change every week it soon like um and you know every time we have an election here right? There's there's changes like before during and after so yeah I think it's you know I don't know and we all you know I think politicians always talk about simplifying the tax. Code and everybody you know loves that it sounds really amazing and then what we actually see though in practice is that it's not simplified. It's becoming more and more complex. So hopefully that will change in the near future. But I think the reason the law becomes more complex is whenever there's a new role then there are new strategies to circumvent the rule. And once the irs knows about the strategies then they create another role to prevent these strategies from occurring and just kind of you know, goes back and forth on that.

30:23.45

wongga

Okay, so trying to close a loophole so to speak as they find them. Maybe that's a poor way of of saying it. But yeah.

30:27.88

Amanda H _ Matt M

Yeah guidance and this and there's the lag la time right? The the lag time that we do want this rule and we're gonna give you some further guidance on it. But that guidance doesn't come out for 3 years after the fact it's. Yeah, and that can be that can be challenging I'll share a really interesting story. So like I said back during covid there was a lot of um tax changes and um, we had an ah so we had a client who was under audit and when I was you know because I was talking to the auditor about the case I just brought up. A question about some new law change right? because it's kind of like brand new nobody has clarity on what exactly you know this means in this scenario so I just thought well you know I have the auditor here. Let me just I want to see what what the auditor's position is and the response he said was you know that's a new thing and we are not being trained on that at all. Um. Because you know we're auditing Twenty Twenty until at least three years later so I have no idea I don't even know what the change is so I thought that was really telling that um and it's you know when when you think about it kind of makes sense right? They're not auditing you for a few years from today. So whatever launch change happens today. The auditor is not really thinking about that. Just yet. It's down the road for them whereas for us. We need to know because transactions are happening today. Not 3 years from now.

31:44.36

wongga

Yeah, can you? um maybe in the last couple of years give us some examples of different like major impact tax laws that that you've seen come through specifically for real estate.

31:51.35

Amanda H _ Matt M

Yeah, the biggest I mean covid there was a lot of changes but prior to that I mean it's in the last you know, end of 2017 here in the us we had the tax cut and jobs act and that changed a lot of things I mean that brought that brought back bonus depreciation and brought back bonus appreciation being eligible for. Used assets were before it had to be brand new assets. So that was a big that was a big change. It made dereciation much more valuable for rental property investors they have this thing called qualified business income for a 20% pass-through deduction that didn't even exist prior to the end of 2017 so that was like. A whole new thing that you know we all had to get trained up on. Um I mean those are a couple things that come to mind that you know we talked about 10 31 exchanges before in the last eight years they've probably talked about taking that off the table or changing how it's done or capping it or whatever I mean probably 10 times you know and luckily nothing's changed on it. But. You know again, it could be. You know, brought back at some point right? Yeah, those are just like some of the real estate specific changes I think one you know we talked about ten thirty one exchange right earlier and our ability to kind of defer capital gains sort of indefinitely into the future. Maybe never pay it. That's one that's sort of like. Always on the chopping block that they're trying to change it trying to get rid of it trying to put a cap on it limited in some way. Um yet so far it still hasn't changed so that's when we're kind of always keeping our eyes on just because we work mostly with investors and that's a huge you know strategy for investors.

33:23.44

wongga

No for sure I mean are there. Let's talk about real estate tax planning and I'm going to ask this question in 2 parts. So the first question would be are there some so misconceptions in real estate tax planning overlooked. That a lot of people are just like hey I'm just going to do this on my own.

33:44.75

Amanda H _ Matt M

I think that biggest misconception not just specific to real estate but just taxpayers in general in the us and maybe in Canada too. It's like having this false sense that whoever's preparing your tax returns for last year is also doing tax planning for you. Um, usually that's not the case right? when you are bringing in your paperwork to get your tax returns filed for last year you're just reporting what happened in the past and so unless you have specifically set aside time and or an agenda ah to meet with your tax person on planning for this coming year then odds are. That's not being done right? and I think that's ah, that's a very huge misconception missed opportunity area for most taxpayers is not understanding that those are actually 2 different things and just assuming that their tax fileler already somehow miraculously planning for you in their mind right.

34:39.47

wongga

Okay, and no I'm just thinking back to people. You're absolutely right? Amanda I mean I've had accounts in the past they're just going to file your taxes They're not looking but I've even had people who I didn't want to depreciate strategically. Because I was going to be selling the property soon or or different things like that and they were just automatically done I didn't even get to answer the question. You know what? I mean um, the second part of what I wanted to ask is I'm I'm always advocating right when I'm when I'm teaching this stuff online. You know.

35:04.60

Amanda H _ Matt M

Now.

35:15.36

wongga

You're going to be a real estate investor you're aspiring you haven't even bought your first property yet, you need your power team right? talking about your obviously maybe a realtor I'm a property manager as well lawyer and then of course your tax person when you have somebody coming to you. And they're completely green brand new out of the gate. Obviously that's the best time to be able to plan for them walk me through like a ah case study and onboarding what would that look like how would you plan and tell them what to do.

35:47.88

Amanda H _ Matt M

Um, gosh you know for the tax planning you do for new investors very different for how you deal with someone who's kind of already in real estate right? So so you're right and when someone that's brand new It's good because the the chances of us having to correct mistakes is very low. But I think the 2 main things we start with is taking a look at their previous year's tax return because you want to know what the starting point is what have you done in the past. And then we want to know what are you doing this year you know what's already happened this year in terms of transactions. did you buy? what did you buy do you have any entities. Um, and then we also want to know like what are their plans for the upcoming months like the rest of this year and then as well as next year. Um, because that piece out of the the 3 segments right? Prior current and future The future is the one where we have almost unlimited options in terms of planning and so knowing like what Matt was saying earlier knowing if you're interested in short-term rentals versus long-term rentals. Um. Results in a different tax strategy for us knowing if you're going to buy 1 property or 5 properties is also potentially a different set of strategies right? So starts with understanding what is your plan and then the tax strategy is developed um, you know in conjunction with whatever that plan is.

37:04.88

wongga

Okay, do you see anything coming up in the future If you had your crystal ball Trends or upcoming changes I know I'm putting you on the spot but you probably develop an instinct for these types of things anything that you might enlighten us with.

37:19.58

Amanda H _ Matt M

I mean I think yeah I think some of the feeling I get from talking to colleagues that they're you know they're expecting interest rates to come down which would you know theoretically be good for the market right? And then I don't know I expect you know political opinions aside we've got election coming up in a year I expect changes to come down in the next ten months because just from a political capital campaign like you know you're trying to you know, maybe push something through that people are going to like so you can get elected or reelect whatever the case may be I wouldn't be surprised if something like that happened because. The Biden administration has been talking about a lot of changes over the last four years and you know for the most part in the tax world. Ah not a lot has happened so that's why I kind of think something's gonna happen. But that's that might just be my opinion but ah. Yeah I mean for me I feel like you know the market is up and down right because of interest rates is because you know demand and supply. But what we've seen in in some of our our very successful clients is really the ability to pivot. Um, because you know there's money to be made regardless of which part of this real estate cycle you're in so I think um, especially for newer investors. Don't be afraid to jump in I think for your investors. It's always like.

38:34.37

Amanda H _ Matt M

I wish I bought three years ago I wish I bought ten years ago but you can't think that way because 10 years from now you're gonna say gosh I wish I bought in 2023 or 2024 and so but I think it is really important to understand where you're looking at a property you should look at multiple exit strategies or multiple income streets. So if I I want to do this as a short-term rental. But if I cannot can this well this also makes sense as a long-term rental right? I plan to hold it. But if I cannot then how do I exit it and how do I get my money back with the least amount of losses once you've identified those contingency plans then you're not as. Fear of the interest rate and what the market is saying on a day-to-day basis.

39:14.65

wongga

Okay, plan the end before the beginning so to speak. Okay, or yeah so I did not prepare you with this question but before we wrap up I'm just curious because I mean clearly you guys are experts in your field.

39:21.60

Amanda H _ Matt M

Um, yeah, pretty what.

39:32.71

wongga

Walk me through like why real estate Why? what? drew you to becoming specialists in real estate tax advice.

39:39.19

Amanda H _ Matt M

I mean to be honest with you like it. It goes back to kind of that what we talked about earlier there to hold this whole concept of depreciation I was probably I was pretty green in my in my career I was probably two or three years in working in a big 4 accounting firm and I was working on an individual's taxes. He was probably in the sixty s retired. All he had was real estate. He was making you know easily you can tell on the taxer making $200000 of cash flow and not paying any taxes and so that's when a kind of light bulb went off for me like ah, there's something here. You know like that that made I could get my hands around that more than working on a. Fortune 500 companies tax returns or financial statements. It was some big conglomerate that I just I didn't feel that debt touch to you know I don't know if that makes sense. But um, yeah I mean for me I come from a um, ah family of real estate investors. So my grandparents were the first people to do real estate. But. I never thought I would do real estate investing I didn't have that aha moment like Matt did and and I started out at the same international firm I was in the real estate group. So my job was to to do the tax returns for these large real estate syndications. But yeah, it wasn't until Matt. Read Robert Kiyossaki's rich dad poor that book and he said you know we should really do this and I think this story surprises a lot of people like who would have thought that um you know cpas who work in real estate never thinking to use real estate as their own strategy until they had to read Robert Kiosaki's

41:10.74

Amanda H _ Matt M

But like I was ashamed to admit it. But that's kind of how it transpired so it wasn't like we were like I don't know growing up wanting to be in real estate you know doing real estate tax. It kind of happened over time. Just.

41:22.74

wongga

Yeah, but I mean if you're passionate about it and you know you can fulfill that that passion by helping other people and saving those taxes and those aha moments I think that's it doesn't it makes it more fun than work right.

41:35.97

Amanda H _ Matt M

Yeah, for sure. Yeah.

41:40.17

wongga

Well that segues into my final question which I always ask each guest. Um, this is the investing to win podcast. How do you define success and what does winning look like for you, you can choose who goes first.

41:54.56

Amanda H _ Matt M

Gosh oh how? Ah um for me I think success gosh hard to define success I think success is when you feel for me at least it feels like I'm operating at my peak. Um. So it could be. You know whether it's related to business or home life. It's just ah I think I feel successful when I've done like what I I set out to do um, what does that look like I think it's just more you know, um, freedom of time you know, being able to. Have the time to do as I choose and and the project that I choose ah always seems to happen been from a always seems to change from a day-to-day basis. Ah yeah I think for me the the thought that comes to mind is I think a lot of people. They're always looking ahead right? Like. What else do I want what else do I want what? Um, what have I not done. You know maybe they compare themselves to other people which is natural but I think it's important for people to always look back and you know look at where you've come right? celebrate the little successes the little wins along the way because sometimes there's going to be a big win. But if you look back and. You know in a business's history. You might have little wins that add up to the big wins over the years you know and so um, it's it's important for people to kind of remember and and say like yeah we have you know compared to what we were doing five years ago we are that much better and that that's that's success right? there you know.

43:20.20

Amanda H _ Matt M

Regardless of where you want to go 10155 years from now too.

43:24.35

wongga

Yeah, no, that's that's a great great advice because I think too many people are a little bit too harsh on themselves right? and they're a little bit too impatient of where they want to go you want to embrace the journey of getting there too. Otherwise there's no fun in it right? all right? Well um.

43:35.73

Amanda H _ Matt M

Right? right.

43:41.53

wongga

Thank you guys so much. Both of you for appearing on the show I learned a ton I've taken lots of notes and I know that our listeners are going to be also enlightened I'll get some information from you guys after and throw them in the show notes. So people can reach out to you and get your social media handles and everything else like that. But again. Thanks for helping me out here and hanging up with me for the last 45 minutes appreciate it. Okay, take care.

44:02.80

Amanda H _ Matt M

Yeah, thanks Garret! Thanks for having us gary appreciate it. But.