Danny Johnson: Interesting. Tell us about 1031 exchanges?
Craig Cody: 1031. Yes, we’ve been involved in a host of 1031 exchanges. 1031 exchanges are typically really not for the flippers. They’re supposed to be long-term investments. I guess you can make the case of every once in a while you had something that turned over quickly just because of the way things were. But they are supposed to be long-term investments so technically they don’t really fit the flipper.
Danny Johnson: What else do you have? Do you have anything else in your arsenal of things?
Craig Cody: Yes, we do. I’m just trying to think as they relate to your audience.
Danny Johnson: Well you can speak to long-term stuff too because we also have people that have rental properties and I have some myself, so you can speak to some of those strategies as well.
Craig Cody: A big strategy is cost segregation. I’m not sure if you’re familiar with cost segregation, let me to explain.
Danny Johnson: Go ahead, sure.
HOW Cost Segregation Works
Craig Cody: So let’s just take that $100,000 rental property. Let’s just say the building itself is worth $100,000. Typically you would depreciate that building over 27.5 years. So let’s just say your depreciation expense is about $4,000 a year. When you do a cross segregation study, they break that building up into different parts and you take the property in there that would normally be depreciated over 3 years, you take the stuff that normally would be depreciated over 5 years or 7 years or 15 years. So now you’re depreciating stuff faster. Over 27.5 years you still depreciate $100,000 but you might depreciate it in the first 5 years get $20,000 or 20% more expense in the first 5 years from depreciation because it’s accelerated. So from a cash flow perspective that means extra money that’s not being taxed.
The wonderful thing about a cost segregation plan is you can do that 4 or 5 years in and then you get to recoup all that missed depreciation, let’s just say. So let’s say you had a sale on something and you made a lot of money and now you could do a little planning and do a cross segregation study and reap an extra 20 or 30 or whatever it is in depreciation in that same year and you kind of offset that sale.
Danny Johnson: Nice. I like how you said it doesn’t have to be right away. So if you’ve got some big profits coming and you want to offset that a little bit, yeah it’s nice.
Putting Together a Team
Craig Cody: Yeah. So that’s a good way to do it and you should be communicating with whoever you’re working with. You should be communicating with your CPA, you should be communicating with your attorney. Everyone should have a team. That’s a big part of planning, is communicating with your advisor. They have a lot knowledge and you don’t know what you don’t know. So unless you speak with them, they can’t help you.
Danny Johnson: So let’s get into that a little bit. How do you find? What questions do you ask and how do you find the proper CPA for somebody doing flips and has long-term rental properties and stuff like that? How do you find the right person?
Craig Cody: The first question I say is, when was the last time your CPA came to you with an idea to save taxes? If it’s no, then okay you need to start looking around. Then you want somebody that’s going to communicate with you, willing to explain things to you and willing to take the time to grow with you as you grow. You should talk to get referrals and see people out there that have had good experiences and see what they do.
Our clients come from referrals, they come from people that have heard us on podcasts. But they’re all looking for somebody. They’re not getting something that they want from their current team and that’s why they’re looking elsewhere.
What is a Certified Tax Coach
Danny Johnson: Nice. Okay, so what is a Certified Tax Coach? What do they do and why do real estate investors need one? Is that basically what you’ve been speaking on or is there anything more?
Craig Cody: That’s kind of what I’ve been talking about. I’m a CPA and a Certified Tax Coach, so in order to become a certified tax coach I had to do specific training and then I go to ongoing training every year and then I have webinars every month. Like I said, I do about 10 days a year in continuing education on tax planning alone. So that’s easily twice as much as most CPAs out there and mine, that’s really devoted to tax planning because that’s our area where we see people need the most help.
Danny Johnson: Any changes recently that we need to be aware of or that might be coming down in the future?
Craig Cody: Obviously we’re not sure what’s going to happen in the future. I don’t know if the administration is going to get anything done. As we speak today, I just saw something 15 minutes before the call that the new White House Communications Director is out, so I think that’s going to make it hard to get policy change that a 15% income tax would be a wonderful thing for business owners and real estate owners but I don’t see that happening. That’s my own opinion. Obviously whoever you’re working with should be aware of what’s going on. They may not know every answer to every question you ask them but they should be able to get you the answer.
Tax Law Changes
Danny Johnson: So anything recently that’s changed that did happen that maybe some of your clients had been surprised by?
Craig Cody: No, because like I said, we do a lot of communicating. When there’s major changes we let everybody know. We put a weekly little email blurb of different things going on and if it’s something that changes, we kind of like to tweak it into something entertaining so people get the message. But there’s some changes with depreciation that’s kind of being phased out with bonus depreciation and stuff like that. But that’s not going to affect most of the people in the real estate world so much.
Danny Johnson: All right. So if we could, what would you say would be the biggest tax break for real estate investors to take advantage of? Do you have one that you think would do?
Craig Cody: 1031 exchanges, depreciation and cost segregation are going to be huge, they can be huge. Then another thing you want to take advantage of, if you are in real estate and not into flipping, a lot of times people will accumulate these huge passive losses. If you could figure out a way to generate passive income and sometimes if you have your own business, if you have enough business maybe, there’s ways to do that, so now you have this income that you’re already getting but you’re coding it a little bit differently because you’re setting it up a little bit differently, now it’s considered passive, now you have all these passive losses that you could use to offset it. So do you want to take that expense this year or do you want to wait 15 years until you see? I’d rather take it today.
SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.
Get your copy of my book the 10 Biggest Tax Mistakes That Cost Business Owners Thousands here.
Listen to the full podcast episode here.