Real Estate Tax Loopholes - Reducing What You Owe With Matt Bontrager

Christian: [0:03] Hello, hello, and welcome to another episode of the Awesome in Seattle podcast. This is your host Christian Nossum of the Awesome Nossum Group in Seattle, and I am, I am here today with an extremely special guest. According to Ryan Pineda, he is the world's most famous CPA.

Matt: [0:21] Uh, I hope so.

Christian: [0:23] Well, according to social media, I think you are. So- I'm coming for it … I have Matt Bontrager with Truebooks. Truebooks is awesome. I use them, that's why I have him on here. So Matt, thank you so much for your time.

Matt: [0:34] Yeah, no, dude, thanks for having me. I'm pumped.

Christian: [0:36] Yeah. I just have a lot to talk about. This, uh, this, this is gonna be a good one. I am really excited that you're here, 'cause taxes, I get a ton of questions. As a real estate agent and an investor, I get a t- ton of real estate tax questions. I'm like, "Dude, I, I know a little bit, enough to get in trouble." That's why I hire Truebooks to help me. Matt helps me out, and we're good to go. So since I am one, and I have, like, consulted with so many different CPAs and advisory services over the years, and the level of advice that you guys have given me has far exceeded anyone else, which is why I am really excited to have found you guys, and why I'm really excited that you're here today. So thank you.

Matt: [1:15] No, dude, thank you. There's nothing more, a- as I'm sure you know as a business owner, that you could hear that's better than to hear a satisfied client, you know? Yeah. It's just like, that, that's what you aim for. So that's awesome to hear. Yeah,

Christian: [1:25] exactly. Reviews and stuff like this is, is music to a business owner's ears. So-

Matt: [1:30] Oh, yeah. So

Christian: [1:31] So first, let me give you kind of the floor and explain what Truebooks does so that if anyone is looking for help that you guys can help them out with, you can, you can do that. So what does Truebooks do?

Matt: [1:41] Yeah. So I tell people that we are basically a full service CPA firm when it comes to tax and accounting. The old style of how firms would work is you'd have a tax guy or girl on the corner, and you'd go there, you'd bring your documents. They would prepare your tax returns right then and there, and you'd walk out the door. Maybe throughout the year you could lob in a couple questions if you need advice on something, but they weren't really there for that level of service. They're really just there to do your tax return. So I would say what we're trying to do differently is fill that gap between, hey, if you need just your tax return done, cool, we'll do that. Everybody needs that. That's the compliance piece to this. Yep. That's the part that I like to say anybody I shake hands with, I could do business with.

Christian: [2:24] Yep.

Matt: [2:24] But then bridge that gap between people that are actually of the level that need an advisor, that it's like, "Hey, you're not here to just prepare my taxes. You're here to answer my questions. You're here to forward plan for me, look at this potential transaction or investment that I'm gonna make, and determine how it's gonna help or hurt me via my taxes." So there's that piece. So we break up tax into two components. We do tax preparation and tax advisory work, and then I'm just a nerd for the accounting. That was, like, my first love, being an auditor before I did taxes. Mm-hmm. Just plain Jane, bean counting, bookkeeping is a big part of our practice. 'Cause as watch, we'll probably talk about a lot of different tax stuff today, but I always find myself roundhouse-ing back to- All the tax stuff is real sexy and you can save a ton of money. Mm-hmm. But if you don't have your books in order and just a clean P&L, profit and loss and balance sheet-

Christian: [3:12] Yep … Matt: you're gonna be really behind. And, and you're gonna pay a lot more money than you would have to, you know, otherwise. So that's our other service. So I like to say tax preparation, tax advisory, and accounting. Yeah. Like to keep it real simple. Yeah. Yeah. That, that makes sense. I mean, and that's kind of where, you know, you've helped me with all of the above. So it's been, it's been really nice and saved me a ton of money, so.

Matt: [3:33] That's what we shoot for. We- And- I like to tell people that your, your accountant should be a profit center for you- Yes not a cost, you know? Yeah. If you're gonna pay us 5 or 10, we should save you 20 to 50 at least.

Christian: [3:42] Exactly. Exactly. And it's not cheap, but that's okay 'cause you're saving me way more than it costs me, and it's a write-off to spend that on you, so.

Matt: [3:51] Yeah. A lot of people forget that, which is always like, yeah, you got to remember that your accountant should be a write-off too.

Christian: [3:55] Yeah. Yeah. So. Yeah.

Matt: [3:56] Yeah.

Christian: [3:57] All right. So for this conversation today, I'm gonna start with kind of the easiest ways that the average homeowner can save on taxes. Mm-hmm. And then as the episode goes on, we'll get more and more complex. I kind of want to make this pretty easy for people to follow. So let's start with someone who is currently renting and trying to figure out if buying a house actually makes sense for them or not. What are the benefits of owning real estate versus renting?

Matt: [4:22] So I am a huge proponent, first… Because I know some people, they think renting is the way to go. Mm. I think buying is the way to go. I was able to buy a house very young with my offer letter right out of college. Mm. Paid 190,000. My… I know. I, I wish I would've… I sold it for 240, 250 thinking that was great. It's probably worth 350 now. Yeah. Exactly.

Christian: [4:40] So

Matt: [4:40] my other advice is to never sell any real estate that

Christian: [4:43] you have. Mm-hmm. Yeah. Um- That's what I tell people too. Like, clients that come to me that are like, "All right. We want to buy our next house." I'm like, "Cool." Are you keeping this one? Yeah. And they're like, "No, I think we're gonna sell." I'm like, "Are you sure?" Mm-hmm. Yeah. So

Matt: [4:55] yeah. But I think my biggest advice as far as why to buy over rent is I don't think that the people that are preaching on why they should rent truly ha- You, you're not gonna have as much operating costs as you think you do to run a home, especially if you buy a, a, a fairly decent home. So there's that, and then I think mainly it's the equity that you're gonna build into this property as you live in it. You know, you're gonna buy it for, let's say, you know, half a million bucks, whatever price point you're at, and you're gonna pay down that principal balance as time goes on. Yes, you're gonna pay some interest, which I would just think that's your rent portion. That's the, that's the pay to play kind of piece of this.

Christian: [5:28] Yep, yep.

Matt: [5:29] And then I, I truly look at it as it, it's a, it's an asset that you own. People are like, "It's a liability." Well, yeah, you have debt on it, but it's good debt, you know? I'd rather you have a mortgage than credit card debt, you know, consumer debt. All

Christian: [5:40] the

Matt: [5:40] way. And I just think that it's a, it's a forced way to build in savings, which is that principal pay down. When you go, you buy it at half a million, I don't care if it's been 10 years and you've paid the balance down to from 400,000 to 350. When you go and sell that home, you will have a gap there that you will be able to take as a profit.

Christian: [5:57] Mm-hmm.

Matt: [5:57] And then I think even more so, which I, I myself am a real estate investor, that's why Truebooks went into this real estate space-

Christian: [6:04] Yep … Matt: is that I know, just as you said, when I move, I now have an asset that will generate me income, which is my biggest deal. Yep. To u- to a continuously accumulate rentals, and I think buying a property helps you speed up that process. So if you're gonna be that buyer that buys, lives in it for two, moves, buys a new one, lives in it for two, moves, there's a new one. Yeah. I think that's great. So to me, I am all about as you move through life, you will earn money at whatever income career you have, income, uh, producing activity you have, but slowly acquiring assets. And buying a principal residence is that. So I'm all for it. Yeah. I'm always on that side. Yeah. Yep. Cool. Yeah, and that living for two and move, we'll go over that in real detail- Yeah … here in just a few minutes, so. That's a good one. That's, that's, that's toward the end because it's a little more complex, but.

Matt: [6:51] Yeah.

Christian: [6:51] Let's talk about down payment funds. I know the Seattle area, obviously where we are, it's not cheap. It's pretty expensive, and often people need to get creative when they're trying to get their down payment funds. So some people use their, like, RSU bonus income from, you know, all these tech companies that they work for. I mean, we got Microsoft, Google, Amazon, Starbucks, Meta, you know, all these places are up here. Yeah. And they're getting a lot of this RSU bonus. Some of them have money in a 401that they want to use. Some of them are getting gift funds from family. Can you talk about some of the, the tax consequences of these options?

Matt: [7:27] Yeah, so once they're exercised and you actually receive the value of these is when you're gonna see, right, obviously the tax bill come.

Christian: [7:33] Mm-hmm.

Matt: [7:33] But planning in a way, if you're not a business owner and you're purely W2, you're really kind of strong-held as far as tax goes. You don't have a lot of tax potential there. But buying a personal residence could help you tax-wise because now you have the option to itemize instead of take the standard deduction. Mm-hmm. So you're gonna be able to take some of that mortgage interest, you know, and any sort of other insurance maybe against that property as a potential tax deduction. But i- if that's me, I'm trying to find when I'm going to exercise some of those options to when… Me, it's purely cash flow. When I know that I have the cash flow coming in, if I can deploy that towards a down payment towards a house, I would try to plan for that scenario.

Christian: [8:10] Yeah. Yeah. So do you know, can you use funds from a 401as your down payment? Is that still taxed? Is that not taxed? How does that work? Do you know?

Matt: [8:20] Last, my understanding of that is you, you're allowed to take out $10,000 from a retirement vehicle towards the first time purchase of a home without getting hit with a penalty. Mm-hmm. So pre-distributions from a retirement vehicle or a retirement account, you're gonna be hit with a 10% penalty. Sometimes it makes sense to still eat the penalty and use whatever you need to do with the cash. Mm-hmm. But you get a bit of a waiver if you put it, uh, down towards a property. But it's a small amount, 10 grand. Yeah. But it could help. So, so yes, you can, but you're just pretty limited on the amount.

Christian: [8:49] Okay. And then what about RSU bonus income? What are the tax consequences of cashing those out and actually using that to buy?

Matt: [8:58] So ordinary income to you when, right, tho- those do come to you, right? Yeah. And those are realized. And then as far as the… It's not gonna be like a rental property where you can potentially take a hu- a much larger deduction off of an investment like that and net it against the money that you made in the RSUs. So putting it into a primary residence isn't gonna give you this large tax deduction. But that's, that's for me more so, that's not a tax move. That's like a wealth building move for me. Yep. So, because then you'd have to think about where el- what else are you gonna do with the cash in the event- Exactly you not put it into a property. Are you gonna go back to the market? What are you gonna do with it? So- Yeah … and again, for me, when I'm watching that, that is a cash flow move of if I have excess funds and I'm planning to get these distributions in this year, then me personally would try to deploy it into real estate.

Christian: [9:41] Yeah.

Matt: [9:41] So whether it's primary, though, then we can talk about rentals. If they deploy it- Yeah … towards a rental, even better.

Christian: [9:45] Yeah. So let's, let's go into that since we're already on this topic. Mm-hmm. If they're gonna do it into a rental, how does that help?

Matt: [9:52] So rental properties, now we're getting into this major tax game. So I like to tell people purely when it comes down to rental properties and taxes, the goal is to make your money. Think of it as a sheet of paper lined down the middle. This side is the money you make day to day at your job, the business you run, the, the, uh, the W-2 position you have, whatever it is. And on this side, you have your investing activities like rental real estate, syndications, all of that. The goal is to drive a paper loss on this side that will end up going over to your ordinary income and bringing that down. So for ease of s- like example, if I make half a million here, and I lose 200 grand on paper here, I'd like to net those together and pay tax on 300,000. And you have the opportunity to do that if you deploy those funds into rental real estate instead of a primary home. Yeah.

Christian: [10:40] That's huge. That's huge.

Matt: [10:41] Yeah. Oh, yeah Insane. That, that's the, that's the na- Anybody that would come to us is ideally looking to do that. Because if you ask me, it's, it's the most preferential tax treatment you can get is real estate, whether it's the wealth building side, because you get capital gains, not ordinary income. You likely will drive a paper loss consistently over time through depreciation. But then, like, the Mack Daddy strategy is, hey, first year I'm gonna buy this property. I'm throwing out a little bit of more terms here, but, like, cost segregated, if those of you- Yep … have heard into that, we can get into that later, but-

Christian: [11:10] We will

Matt: [11:10] drive these huge losses and then net it against my ordinary income. Yeah. That's, that's the master strategy, for sure.

Christian: [11:16] Cool. All right. Last thing on down payment. Yeah. There are a lot of people that end up getting gift funds from family or friends. Yep. Is there a max on how much someone can give before they get taxed? Like, how does that all work? Because I get that question a lot.

Matt: [11:30] So you could give up to $15,000, I think it, it is the new adjusted rate. You could walk down the street, give somebody 15 grand, not need to do anything about it as far as tax returns or anything like that. But a lot of people think, "Oh, well, if you give above that amount, you would have to," right, "potentially pay tax on it." And you, you might have to, but most of the time you will not because we all have lifetime gift exemptions. Right now it's about $12 million, I think.

Christian: [11:54] Hmm.

Matt: [11:54] And so that means I could give away that amount of, right, value or funds, uh, without having to pay tax. And a lot of people, too, get confused that they think it's the person receiving funds that would ultimately have to pay tax when it's not. It's the person giving the funds.

Christian: [12:07] Yep. Exactly.

Matt: [12:07] So what I would say is if you have a family member trying to give you a couple hundred grand as a down payment towards this property, all you'd have to fill out i- is, right, a gift tax return, but it's going against that lifetime exclusion bucket. So there's still not gonna be any tax due. You just have a formality to file with the government to be able to make that transaction clean and properly documented. Mm-hmm. But no tax. So it's- Yeah … still a great way to do it. So if, if people were thinking against doing it because of this tax consequence-

Christian: [12:34] Mm-hmm … Matt: you're totally fine. Yeah. Good. That's great. All right, let's shift gears and talk about capital gains. We kind of touched on it a little bit earlier. So let's talk about this in terms of your primary residence. So that's the house you actually live in. So I know a lot of people who use this strategy. In fact, I've actually used this strategy myself a few times, and I'm gonna continue to use it.

Matt: [12:54] Yep.

Christian: [12:54] And what it is, is basically you buy a house as your primary residence. Sometimes you force the value of the home to increase by remodeling. Other times it increases on its own just because of local market appreciation. So-

Matt: [13:07] Mm-hmm … Speaker: as long as the house has been their primary residence for two of the last five years, when you go- Yep to sell, you don't pay taxes on a large portion of that profit. And then they just keep repeating this strategy over and over, and you'll get to live in a really nice house along the way. So- Yeah … let's talk about this. Let's break this down, because I know before we started this recording, you and I were kind of talking about a little thing that I didn't even realize. So let's, let's break down the numbers on this. So if someone lives there two of the last five years as their primary residence- Yeah … what is this capital gains… Is it called an exemption? I don't even know what- Exactly.

Christian: [13:43] Okay. Yeah.

Matt: [13:44] So Section 121, uh- Mm-hmm … primary residence exclusion is the… So two out of the last five years, if it's used as a primary residence, if you're single, you get 250,000 of capital gain tax-free. If you're married, you get 500,000. So long story short, you buy a house for five, later on you sell it for eight. You're married. Ideally, if you've lived there for two out of the last five, that $300,000 in capital gain, gone. No tax.

Christian: [14:11] That's awesome.

Matt: [14:12] That's, again, kind of like the government incentivizing you. We want people to purchase homes.

Christian: [14:16] Yep.

Matt: [14:17] So but let's first go into one thing that a lot of people forget, not only the, the, the prorated portion, which is I think the, like, the poof- Yeah … mind blow that probably someone's here is gonna watch this and be like, "Whoa, I could've, you know, I could've used the prorated, uh-

Christian: [14:29] Mm-hmm … Matt: exclusion," is, two, when you're making that gain calculation. So let's say you buy the home for half a million. a few years down the line you sell it for eight, but you're like, "Ugh, I've put about 50 grand into this place." My gain is no longer 300, it's 250. So you have to make sure that whenever you're about to sell your primary residence, run the math to see what you've put into it. Yeah. I bought this house I'm sitting in for, we paid 610, I put in 220. It was a little bit of an older home. Mm-hmm.

Matt: [14:54] So now if I were to sell it later, I'm not gonna say, "Well, hey, I sold it for…" let's say a million bucks. I wish.

Christian: [14:59] Yeah.

Matt: [14:59] And I'm not gonna say, "Well, hey, my cost was 610." My cost was really, what, 8- 840,

Christian: [15:04] 830. 830, yeah.

Matt: [15:05] So always make sure to add the additional improvements, as you said, to what you've put into the home. But now this part i- is, is the most interesting that, a- again, a lot of people forget or just don't know is- Mm-hmm … let's say there's an unforeseen circumstance and you didn't meet the two years. Mm-hmm. I think right, right before we were talking you said somebody closed on their h- dream home and then realized, ugh, they got their dream job and like, "Okay, I gotta move."

Christian: [15:26] Yeah.

Matt: [15:27] Well, if there's an unforeseen circumstance that caused you to not meet that two-year window, you can prorate the gain. So I like to tell people if, let's say somebody's married. If two years is worth half a million, 500,000, one year would be worth 250. Hmm. And so on. You know? So if six months would be worth 125. That's a lot of gain, you know? Yeah. Even 250,000 bucks. So always remember that, don't think that if you didn't meet… This is what most people think. "Oh, I didn't hit the two years, you know, so I'm not gonna be eligible." Mm-hmm. Well, first consider why are you moving. Was it a death in the family? You had to go take care of somebody? You, you had to, uh, relocate because of, uh, the military or a new job? There's all of these different factors. There's actually a list of factors, um, that I wish I honestly would've had in front of me now. I could've named them all. But- … always now question, like hey, what, what was the move for?

Christian: [16:15] Yeah.

Matt: [16:15] And if it was for some unforeseen circumstance, then you… If you just wanna move 'cause you're sitting on a, uh, right on a large gain, it's likely not gonna work.

Christian: [16:22] Mm-hmm.

Matt: [16:22] But be strategic about it, and next time ask your CPA or accountant, say, "Hey, you know, I'm moving because of this. Is it still potentially, you know, partially excluded?" 'Cause that's where I've had people like, "Cool, you've only lived there for the year, but it still wipes out more than enough for your gain, so we're good. It still worked the same way."

Christian: [16:37] Yeah.

Matt: [16:37] So.

Christian: [16:37] Exactly.

Matt: [16:38] Yeah. Always watch out for the exclusion.

Christian: [16:39] Yeah. And that was something that I did not realize. I did not realize that you could get a prorated portion of that if you weren't there for the full two out of five years. That's-

Matt: [16:47] Yeah. That's hu- yeah, that's huge. Yeah. And, and it happens a lot more with our clients. Usually there's things in tax where I'm like, "Yeah, I've never seen it," and I have no problem saying that. This, I see it a lot.

Christian: [16:55] Yeah.

Matt: [16:56] Hmm. A- and they'll be, "Oh, man, you know, like I, oh, you…" Whatever. 18 months, 20 months. I'm like, "Well, hey, you're fine." Like, they're thinking that they've already lost it, and it's like, "No, relax. Like, there's still a chance this'll work here." So.

Christian: [17:06] Yeah.

Matt: [17:06] Little bit of a shining light.

Christian: [17:08] All right. Going back to people that are… Well, I guess this isn't just W2, but this is really, really anybody. A lot of people since COVID are working from home now.

Matt: [17:18] Yes.

Christian: [17:18] Are there deductions for working from home?

Matt: [17:23] Yes, there are. And it's always a, whenever you go out and start a new business or start a new activity like buying a rental property, you now should consider your home office. And the, e- so overall, you will get to deduct the use of the space for your business activity, right? You can't sit in your home office like me and work for my normal day job and say, "Hey," if you're a W-2, and say, "Hey, I'm gonna write off part of these costs." You're not gonna be able to do that. Yeah. But if you run a rental property or have a business, you can. Mm. And the, in most simplest terms, this is how it works. You will have to take the square footage of, one, it has to be exclusive business use. Now, the, I'm sitting in my home office. My wife has a desk over there. This is complete mayhem on the other side, 'cause I have cameras and lights and all this. Exactly,

Christian: [18:06] yeah.

Matt: [18:06] But this is my exclusive use. Will my son run in here and we'll wrestle for a minute, and I'll shoot a Nerf gun at him or something? Yeah. But this is my exclusive home office, and so I would take the square footage of this office, and let's say it's a, freeze of numbers, 500 square foot office in a 2,000 square foot home.

Christian: [18:23] Mm-hmm.

Matt: [18:23] That is, what is that? 25% of, of use space.

Christian: [18:27] Yep. Mm-hmm.

Matt: [18:27] So once you have that calculation down, you now can say, "Hey, well, 25% of my power bill, 25% of my internet, 25% of other utilities, would be 25% of my mortgage interest would be-" Yeah … deductible towards the income that I generate using this office," right?

Christian: [18:46] Wow.

Matt: [18:46] But what a lot of people forget is, or they'll think, "Oh, well cool, now I can take 25% of this camera, of that camera, of the light." Well, no. Though these are exclusive business items that I use for my business, so- Wa- one, watch out for that, that if, if it's items within your actual office, write those off. Those are purely business. Everything in here is purely business. And so- Mm-hmm … you know, I'd be able to write that off directly, like dollar for dollar. Yeah. That light cost me

Christian: [19:12] 300 bucks. Not, not just 25%, but the entire thing. Yeah.

Matt: [19:15] Exactly. Yeah. That light cost me 300 bucks, I'm writing off 300 bucks.

Christian: [19:18] Yeah.

Matt: [19:19] But anything indirectly related to this office, I would get a portion of that as a deduction. Mm-hmm. And so home office is usually a great way that, again, you're already spending the money. You live in this house. Yep. So why not take more advantage of it and be able to allocate a portion of that as a deduction? Yeah. Which kind of comes back to good bookkeeping. Like, it's the most slept-on tax strategy, 'cause it's, it- Yeah … you know, you're in the 25% tax bracket between state and federal, sometimes even higher.

Christian: [19:42] Mm-hmm.

Matt: [19:42] You know, every dollar you miss is 25 more cents. So that just starts to add up when you miss deductions, and- Yeah. For sure … home office is a real easy one.

Christian: [19:50] Yeah.

Matt: [19:50] Easy one. Yeah.

Christian: [19:51] That makes sense. All right. Let's go over a topic that is near and dear to my heart, and that's private lending. So- Yes. I love this thing, and I'm, I'm actually really geeked out about talking about this right now. So let's go over how I see people earning 10 to 12% return on their money, and I see some really smart people who aren't real estate investors using their Roth IRAs to grow their money tax-free as a private investor. Mm-hmm. Now, they're using this money that's sitting in their Roth IRA, and they're lending it out to real estate investors like myself, and they're earning, like I said, say a 10 to 12% return, you know, over the mortgage rate, higher than a normal mortgage rate. And when the investor sells or flips, or sells the, the flip or the development project, that profit returns back into their Roth IRA, and they don't have to pay any tax on that gain. Mm. It just continues to grow and grow and grow and grow. So let's, I'll let you kind of explain the rules behind this, how they can grow this tax-free, and did I explain that cor- the correct way?

Matt: [20:54] Yeah. No. Okay, so you did. The first thing I'll highlight to kind of back up is, 'cause I think most people are used to traditional IRAs.

Christian: [21:01] Mm-hmm.

Matt: [21:01] Which those are not tax-free. So traditional IRA- Let's say the easiest example I have is you made $50,000 on a W-2. Mm-hmm. You chose to put away 10 grand in an, let's say, a 401that's traditional or whatever, you know, five grand in an IRA. But let's say 10 grand in a 401and it's traditional. That would mean that since I only took home 40 grand of that 50, uh, the government's only gonna tax me on 40 because I put in 10 grand as like a, "Hey, I'm putting this away for retirement." The government gives me sort of a break. But now that means that that 10 grand has never been taxed when it went in. So if I grow that 10K to 100K, I'm taxed on all of the 100K 'cause I never paid tax on the 10.

Christian: [21:43] Mm-hmm.

Matt: [21:44] Roth is the complete opposite, where Roth, let's say I put 10 grand in the Roth, so I still made 50 grand and I put away 10. I took home 40. The government is going to tax me as if I took home 50. Mm-hmm. So what am I doing? I'm putting in the 10 there, and I'm taking the harder tax hit now. Mm-hmm. But now my 10 that's in there can grow to 100, and it's tax-free completely. So it's like Peter Thiel and this whole, you know, was the, the Roth 401where he invested that money into PayPal and turned it into, like, $5 billion tax-free. Yep. That is true.

Christian: [22:13] Yep.

Matt: [22:14] Uh, so that's the, the difference between Roth, and you'll hear a lot of people talk about why Roths are better when you're younger, and it's, one, they are. You get phased out from contributing to a Roth as you make more money. Government says, "Yo, you kind of shouldn't get this benefit." There's backdoor ways that if you work with an advisor, they can… Literally a backdoor Roth IRA you can do.

Christian: [22:30] Yep.

Matt: [22:30] But so Roth is typically the better investment vehicle when you're younger or earlier in your career.

Christian: [22:35] Mm-hmm.

Matt: [22:37] You can self-direct, which is this whole new world of things. Instead of throwing it into, like, a traditional brokerage account or in a 401that's ran by your employer, if you're here and you're self-employed, you can run a solo 401and self-direct it. Self-directed is as it stands, is, you know, what it says. It's I'm deploying these dollars into investment vehicles that I want to manage instead of just into a brokerage account that buys funds or stocks.

Christian: [23:01] Mm-hmm.

Matt: [23:02] Now, again, Roth would be my choice there. And as you said, you now can take those dollars, let's say you've accumulated up these contributions and you have 100 grand in there now. If you're self-directed, you can take 100 grand, deploy it into a real estate deal that you now can earn that relationship with and manage that project and follow up with the sponsor of that project, and then when those funds come back, you will put them back into that retirement account and they will grow tax-free. But with it being self-directed, you can redeploy. You can take 100 grand, put it in one deal. You can take 100 grand, put it in 10 deals. Yeah. But you are now in way more control of the investment while still gaining this massive tax benefit of it growing tax-free, which is the bigger piece.

Christian: [23:41] So to recap, what someone needs to do if they want to be a private lender, private investor, is they need to have a self-directed Roth IRA. Is that kind of what the gist- Yep … of that whole conversation was?

Matt: [23:52] Yep. Self-directed Roth IRA.

Christian: [23:54] And if you don't

Matt: [23:55] have that- Or if they're self-employed, solo, solo 401Roth self-directed. Yeah.

Christian: [24:00] Got it. Now, if they don't currently have that, but they're like, "Ooh, that sounds interesting," is there a way to transition or transfer what they have into one of those or do they just need to start a new one?

Matt: [24:10] Nope. You can roll over your funds currently that are in there Which is what most people would do because now you're not- Yeah … starting from scratch.

Christian: [24:16] Yeah. ' Matt: Cause the problem with a, right, any of these retirement vehicles is you couldn't sit on half a million dollars in cash now and just say, "I'm gonna go put this into," right, these, right, these retirement vehicles. They have caps that you can contribute every year. And so rolling it over would be the best way. But what's the biggest difference now? Now you get to self-direct into your own investment classes, which what the market's gonna give you, 5 to 10. So again, if you ask me, I'm a little bit biased, but real estate has shown way better returns. Yeah. And so when you're able to self-direct, you could do anything. You could do real estate. You could do another business. But you have way more opportunity when you have control over the investment instead of just these- Yeah … t- uh, traditional brokerage accounts. Yeah. Well, and that's why people that they see what we're doing, and we're building, like we talked about this too, like Dadu's here in Seattle.

Matt: [24:58] Mm-hmm.

Christian: [24:59] Where, you know, it costs 350 to build and you sell it for 700, 750, maybe more. Yeah. People are like, "Hey, I want to invest in your projects." I'm like, "Sweet. Here's one way you could do it, where you can earn this money tax-free." And they're like- Yep … "Wow, I didn't realize. That's even a bigger savings than or bigger earner than the 10 to 12% that you're paying me." I'm like, "Yeah, you're right." Like, that's-

Matt: [25:19] Really good point that you bring up there that I should have, which is if you look at your… So many people focus on the upfront savings or upfront cost of things. Mm-hmm. When you… As a tax guy, we always have to look at the after tax effect. So your after tax ROI is way greater than 10 to 12 when you factor in- Yeah that you're not going to pay tax on it. Exactly. Yeah. Yeah. So you'd be looking at returns 15 to 20 potentially or higher if you're in a higher tax bracket.

Christian: [25:41] Mm-hmm. Yeah. All right, well, if that's you, reach out.

Matt: [25:46] He's your guy.

Christian: [25:47] All right, let's go over rental properties. This is something near and dear to my heart. I think you have rentals as well. For those that have rental properties or are considering owning one, let's kind of go over those deductions that are available to landlords, 'cause I know there's numerous, but let's, let's kind of let you go over that.

Matt: [26:02] Yeah. So I will start to name a couple, but I always love to do this. When… A lot of people get confused as to what they can write off-

Christian: [26:09] Mm-hmm … Matt: for anything, whether they're a business or a rental property. Yeah. But I will actually read them straight from the tax form themself, 'cause they're pretty solid. Because I think it resonates more with what landlords expect to write off, and sometimes w- they won't even know that they can. Like, one of my favorite things is if you have a primary residence- Mm-hmm … Matt: you go out and you get a home equity line of credit- Mm-hmm … say 100 grand, you use that home equity line of credit to purchase a rental property. Mm-hmm. So many people think that that interest that you'll pay on that HELOC, that home equity line, is not deductible, but it is. Hmm. Because of the interest tracing rules. I'm using- Yeah … those funds to purchase now this activity, which is a business activity. But if I went and used those funds to buy my wife a new ring, something like that, I… that's obviously not deductible. Yeah. But if I'm using those funds in this activity, I can. So- That is something exactly that I did, so maybe you're remembering my tax return.

Matt: [26:59] Oh, there you go. It could be. So when it comes to sch- so Schedule E is where you will report your rental activity most of the time. If there's an accountant watching this and they say, "Schedule C," yes, there's a time and place for that, but Schedule E is where you will report your rental income and losses. Now, I'm gonna name some of these, and they're very general, but this, on here, if I could show this or if somebody looks at this, maybe in the… or you'll show a snippet. Yeah. But there's line 19 that says "Other," which means you're not limited to this. One of the things you'll notice that's not on here is HOA fees. HOA fees are 100% deductible. Hmm. You would just put that listed as an other expense.

Christian: [27:32] Mm-hmm.

Matt: [27:33] So here are just some common ones for rentals. Advertising, auto and travel. Yes, if you have a vehicle and you bought a rental, some of your vehicle now is deductible. A lot of people forget that.

Christian: [27:43] Yep.

Matt: [27:43] Cleaning and maintenance, commissions, insurance, legal and other professional fees, management fees, mortgage interest paid to banks, and listen to the next one, other interest.

Christian: [27:53] And

Matt: [27:53] then the HELOC interest

Christian: [27:55] Mm-hmm … Matt: even though that could be mortgage interest paid to banks, but either one, or that could be private money as well. Repairs, supplies, taxes, utilities, and then my favorite one, line 18, depreciation. Mm.

Matt: [28:06] So which, I mean, that's its whole… If we want to- Yeah … segue, just tell me when, but- We

Christian: [28:10] are. We're gonna- We're- … segue into- Yeah … cost segregation right after this, so.

Matt: [28:13] Yeah. There you go. So overall, though, when it comes to a rental, you're looking at w- where, one, are you spending your money to operate this rental? Mm. Yes, you're paying the mortgage. So what? Your mortgage and the principal piece is not deductible. That's the equity that you're earning- Yep … that now they're paying down for you.

Christian: [28:28] Mm-hmm.

Matt: [28:28] But the interest is deductible. Again, advertising with, if you have to pay to run credit checks on screening tenants, that's deductible. Mm. So first look to where you're spending your money, and then if you're trying to deploy dollars to get the best ROI on this activity, it's probably, as you would maybe say, rehab, like making the property nicer to end up driving larger rents.

Christian: [28:47] Yep.

Matt: [28:48] So the first thing is look to what you're already spending your money on when it comes to running the rental, and then start to get strategic with it, which is, again, where you'd really lean on an advisor.

Christian: [28:57] Yeah. Okay. Well, we talked about- Cost segregation a few times now. Let's just go right into that. Yeah. What exactly is cost segregation?

Matt: [29:06] Okay. So I like to say that cost segregations are purely a PDF report that you will get that hopefully you never have to use. You're gonna give it to your accountant once, and in the event you get flagged for audit or examination by the IRS- Mm-hmm … we have this in our back pocket now to say, "Hey, this is why we took such a huge deduction on our tax return." Boom.

Christian: [29:25] Mm-hmm.

Matt: [29:26] These cost segregation studies are done by engineers typically, and here's what a cost segregation is. The best way I could lay it out is think of a pie chart, and when you buy any property, it likely is made up of two pieces in that pie chart, two buckets, which is what? Building and land.

Christian: [29:42] Yep.

Matt: [29:43] So if I buy a half a million dollar property, let's say $100,000 is land, $400,000 is the building. Now, when you really think about it, if you buy that building or that property, there's way more of that $400,000 that's allocated to smaller stuff, not just the structure, but the windows- Mm-hmm … the carpet, the fixtures, the paint, the things- Flooring whatever it is. The, yeah. Flooring, exactly. Furnitures, all that stuff. Everything else. The electrical. Yeah. All of it.

Christian: [30:07] Mm-hmm. And

Matt: [30:07] the IRS, each asset, so all of those are different assets, assign different lives to them on how long you're really gonna get the value of it. So the actual building structure is 27 and a half years if it's residential or 39 if it's commercial. And so, but paint, carpet, flooring, windows, all that is 5, 7 or 15-year property. Mm-hmm. And the goal here is, is to break up those values into smaller buckets because I can depreciate those in year one. Mm-hmm. And so if you notice now in that $500,000 example, instead of saying, "Okay, I have $400,000 as the building, $100,000 as land," what if they say, "Hey, I really have $100,000 in land, and of the $400,000, let's say $100,000 is the smaller stuff."

Christian: [30:51] Mm-hmm.

Matt: [30:51] The windows and all that, and then $300,000 is the actual structure. Well, what I've just done now is instead of taking 400,000 divided by, let's say, 27 and a half- Mm-hmm … I've taken, whoa, I get 100,000, 80% of it this year, 'cause, right, our bonus depreciation amounts go down each year.

Christian: [31:08] Yep.

Matt: [31:08] I get 80% of it right now, which is 80 grand, and then I still get to take my remaining 300,000 divided by 27 and a half. So long story short is what you get there is you're breaking down the assets and the entire purchase price into smaller buckets so you get a much larger depreciation deduction in year one, which is why I tell people when you buy a rental property, you're likely gonna operate at about a netting, like net o- NOI will be about even, right? Your net operating income. Income, expenses, you maybe may make a couple hundred bucks, lose a couple hundred bucks. But then when you factor in depreciation, you're, it's gonna drive you to a huge paper loss.

Christian: [31:44] Yeah.

Matt: [31:45] So this is where I tell people, most of the time you'll break about even. You're gonna drive a loss on paper. Then the goal is to get that loss over against your ordinary income and bring it down. Mm-hmm. And this is where, you know, uh, so it's funny. I- in certain slides for, like, a presentation I have, I have a case study where s- you know, somebody makes 90 grand on a W-2. They buy one rental. They can lose 50 grand on this rental very reasonably in year one.

Christian: [32:07] Yeah.

Matt: [32:07] They would take that 50K loss, net it against their 90. Their tax bill goes from 19 grand to four grand So then the next question is, "Well, wait, what if they just deployed and bought another house?" Well, it's going to do as exactly as you'd think. Now you'd wipe your tax bill out to completely zero. Totally. Yeah. Likely have a loss to carry forward to next year. So that is the ultimate strategy. And, and so depreciation is the, again, the, like, that's how we're going to get most of our tax savings when you're in the real estate space.

Christian: [32:33] Yep. Yep.

Matt: [32:33] Yeah.

Christian: [32:34] And it's, so it was 100%, then it went down to 80%. Next year- Next year 2024, it goes to what, 60?

Matt: [32:40] 60, then 40, then 20, then 0. Yeah. And so many people are freaking out about it going to 80, and I'm like, "Dude, relax. It used to be 50."

Christian: [32:49] Yeah,

Matt: [32:49] yeah. 50 was great. 100 was like, you should have took advantage of it- Yeah, yeah … because it was a good time. And even 80. 80 this year is huge, and then 60 next year is still big because it's still, it's still going to be your largest deduction.

Christian: [33:00] Yeah.

Matt: [33:00] Then usually the question is, "Well, hey, do you foresee things changing?" I do. I don't think it's going to make its way to zero.

Christian: [33:05] Yeah.

Matt: [33:05] But definitely take advantage of it this year if you can, because that works with vehicles and stuff like that, too. Mm-hmm. Any large assets. Or, like I said, even next year at 60% is something to take advantage of, for sure.

Christian: [33:16] Yeah.

Matt: [33:16] Because real estate is the asset class where you, you'll make your money on rental income and you'll cashflow every year. Mm-hmm. But the cashflow versus what's on paper is great, because you're going to lose money here. You're going to actually make money in the real world.

Christian: [33:28] Mm-hmm.

Matt: [33:28] And that's the goal here. Yeah.

Christian: [33:30] So. Yeah. Yeah. Make it look like you're not making money on, on, on your taxes, but you are.

Matt: [33:35] But you are on the back end. Exactly. Yeah.

Christian: [33:38] One thing that I just remembered that I don't have on our list of things to talk about, but I think it's important for people to understand, and that's a 1031 exchange. Do you want to explain- Mm-hmm … just kind of the basics of that?

Matt: [33:48] Yeah. So a 1031 exchange is where you've bought this property, say half a million bucks, and you're like, "Man, this thing's worth a million dollars now." Three years later, four years later, whatever

Christian: [33:58] Mm-hmm.

Matt: [33:59] And you're like, "Oh, I wanna sell it, but I don't wanna pay tax on this gain." Okay? So the government basically says, "Hey, if you buy something of equal or greater value, we will let you… As long as you don't touch the funds, you use an intermediary like a broker-

Christian: [34:13] Yep … Matt: we will let you roll that money into a new deal and not pay any tax. Kinda delay the tax." Mm-hmm.

Matt: [34:19] And that's exactly what it is. So you're, you would be able to sell it for a million, pocket your 500,000, but you will have to roll it into… And I guess I shouldn't say pocket then, but you will have to roll it into a new deal to therefore avoid the tax. And the next question that people ask is, "Well, wait. Can I keep some of it and roll some of it into the new deal?" Totally. We just call that a partial 1031 exchange. Hm. The thing I wanna mention with 1031s is, one, you have to use an intermediary.

Christian: [34:44] Yep. If

Matt: [34:44] you touch any of the money, then y- it could technically blow the exchange. Two is there's really strict rules for timing on a 1031.

Christian: [34:52] Yeah.

Matt: [34:53] So you have technically 45 days to let that intermediary know what the next property is that you're gonna buy- Mm-hmm from when you start this transaction process.

Christian: [35:02] Mm-hmm.

Matt: [35:02] And sorry, that's really from the date of sale. Yeah. So if you sell your property- Yep … you have 45 days to let them know, "Okay. The, here's my new investment."

Christian: [35:09] Yep.

Matt: [35:09] Because the IRS noticed they don't want you to sell it and really take your slow time with this, potentially use the funds and all that. Mm-hmm. So you have 45 days to identify, and then you have 180 days to close that transaction. And so if you blow any of those timelines, that could blow the 1031 too. Mm-hmm. But we like to say that there's a workaround to this, which is, let's say we're coming into the new year. You are thinking about a 1031, but you're like, "Ah, I don't really know what I wanna buy yet, but I know that I can get a really good sales price right now for the, right, for the property I'm sitting on."

Christian: [35:38] Yep.

Matt: [35:39] Well, you could s- Let's say it's January. You could sell it. You'll be hit with the gain technically, but you still have an entire year to figure it out.

Christian: [35:46] Mm-hmm.

Matt: [35:46] And then you could just buy something later on in the year and end up losing money on paper, netting it against that sale. And so there's a chance there that you can delay your time just by doing, being more strategic on when you have that transaction go through. Interesting. So again, it's where I like, I'd like to say, like, you need to work through this with your accountant, right? This is the advice- Yeah … they should be giving you.

Christian: [36:05] Yep.

Matt: [36:05] So yeah. So 1031s are great, and we like to say that's where you swap till you drop. It's like-

Christian: [36:09] Yeah

Matt: [36:10] You know, I will continuously trading up my properties- Mm-hmm increasing that equity value, and then one day when I pass, leave it to my kids, and that's where we say that step-up in basis. Yeah. And because all that tax is gone. If I buy something worth 100,000 bucks and it's worth a million dollars, if I sell it the day before I die, we owe tax on $900,000. If I die and leave it to my kid, my kid would inherit that at a value of a million dollars. He could sell it day one, pay no tax. Yeah. 'Cause it'd be, purchase price would be technically a million. Now he gets the basis. Mm-hmm. Fair market value's a million. There's no gain. Yeah. So it's really timing. And, uh- Yeah … the, the 1031 is a great way to do that and grow value. Yep.

Christian: [36:48] And that, just to remind y- everyone, that is for only for rental properties. Like, you can't do that with your primary residence, correct?

Matt: [36:55] Yes.

Christian: [36:56] Yes. And that's where-

Matt: [36:57] Yeah, yeah, yeah … Speaker: that's where that two out of five, or potentially less than two years out of five, comes back into play that we talked about earlier for your primary residence. You don't need to do a 1031 if you have- Yep your primary residence that you're selling. Exact- very good point. And it's funny, when, uh, crypto came out, people were trying to 1031 crypto, and that's when the government shut that down quick. 'Cause they were like, "Nope, this is only real property now, real estate." Yeah. So.

Christian: [37:19] Yeah.

Matt: [37:20] Yeah. 1031 is a great move. Or again, if you use the timing effect to it, then you really don't need a 1031. But still a great strategy.

Christian: [37:28] Yeah. And then to go even deeper, 'cause that's what we're doing with this podcast, you can even do a reverse 1031 exchange, correct?

Matt: [37:34] Yes. Uh, yes, and that's… Yeah, so people forget about those and then the partials.

Christian: [37:38] Yeah.

Matt: [37:38] Yep.

Christian: [37:39] So, and that's where you actually buy it first, is that right? And then you- Buy it first, then sell … sell. Yeah. So I mean, there's lots of ways that you can go around this, get around paying taxes when you're buying and selling real estate. It's just having that advice, someone like you and Truebooks- Yeah on your team to, to help you figure all that out and what makes the most sense. Like, I love your idea of even if you don't do a 1031, 'cause right now there's, like, no inventory. Exactly. We're such low inventory. If you do sell in January, February, March, then you got as much time as you need the rest of that year and you can still write off so much of that even if you don't do a 1031.

Matt: [38:14] Yep, exactly. So it's like you're buying the time, basically, just strategically doing the sale earlier in the year.

Christian: [38:19] Yep, yep.

Matt: [38:20] Yep.

Christian: [38:20] Perfect.

Matt: [38:21] Exactly.

Christian: [38:22] All right. That's all for the list of questions I have. Do you have any other advice or- Hmm … that you would like to share, either for first time homebuyers, for investors, for anyone?

Matt: [38:34] Yes. My advice would have to be even from a, if you're first time home buyer, maybe in the boat of, so you're a W-2 employee, not necessarily running a business or a rental property yet-

Christian: [38:44] Mm-hmm … Matt: would be to, honestly, it's gonna sound cheesy, but track spending. Because then when you move into owning rental properties or running the business side of things, you will have already that discipline of having the books together. 'Cause as soon as you buy even a, let's just say a fairly expensive home, you're gonna start taking this finance piece of things a little bit more seriously and tr- Yep … and trying to think tax-wise more strategically. And this is where I'll say we have a lot of people that are like, "Great, I wanna do this, this strategy or this strategy." But then when we come to them and say, "Hey, well, like, we need this sort of documentation to analyze this," they won't have it. And so whether you're in that W-2 spot or you have a rental or you're already running multiple rentals and maybe, like, a good size portfolio or you run a business, the record keeping and bookkeeping aspect of it is going to make your life not only so much easier, but you will save so much money. Yeah. I'll, I'll be honest, if somebody comes to me in March and they need a tax return done- Mm-hmm … and they have very clean documentation, it will be a fairly smooth process. If somebody comes to me with messier documents, I not only have to charge you more, but it delays the amount of time that we have to strategize for you and get things done right, or you'll be on extension and push it out. So there's such a delay if you don't have documents in order and have good document tracking. And so that is honestly my biggest piece of advice because it allows your advisor or whoever you're working with to do the real, like, heavy lifting for you- Mm-hmm … as long as you have the documents in order. So if you run a rental, keep a P&L, get a template. You know, I'll send you one- Yeah … that you can give to people. And if you run a business, same kind of thing. So documentation is, is going to take you so far as you work your way through these higher level investments when you start to self-direct and all that. So yeah, that'd be my biggest takeaway, honestly. It's the most slept-on tax strategy out there. Yeah. Yeah, and I think I saw some interview with you where you were, like, basically saying, you know, the, the best piece of advice that you can give someone is just what you said, bookkeeping. Like-

Matt: [40:36] Bookkeeping … Speaker: it's boring as hell, but- It's not sexy. Yeah.

Christian: [40:39] No, not at all. Yeah. Not at all. It's not. In fact, it's the opposite. But that's where- Yeah … you can actually understand what's going on, and you can see, someone with your expert eyes can actually see the opportunities in there to save on taxes and deploy all these awesome strategies that most people just miss or they hear about on TikTok or Instagram, and they're like, "Oh, I want to do that."

Matt: [41:01] Yes.

Christian: [41:01] If you don't have books- No one's gonna know how to make it work for you.

Matt: [41:05] No. It's the same way that if they came to you and were like, "Hey, you know, I'd like to deploy these, right, these funds into this investment," you would have some sort of pro forma or analysis ready for them. Mm-hmm. When they go purchase a rental property, if they have this in order, they're gonna get such better help and be so much happier with the tax savings and the service that they get because they're ready to move. So I always like to say to this, like, "If we were to meet next Friday for tax planning, could you come prepared?"

Christian: [41:28] Yeah.

Matt: [41:28] When I, when I'll do that at a conference or something and say that, 1% of the room maybe can be ready for that. And it's like- Yeah … again, it's not sexy, but it's the most slept-on strategy because also, if I'm trying to give raw value and like, hey, money saved back into your pocket, that will do it for you. You will- Yeah … you will save substantially in professional fees and taxes by having your documents in order.

Christian: [41:48] Yep.

Matt: [41:48] So, 'cause then-

Christian: [41:49] Yep … Matt: you don't need to worry about the rest. Your advisor will do the rest for you- Mm-hmm … because they have the tools to do it. Yeah, yeah. Yeah. They can see the opportunities because the books are there. It makes sense.

Matt: [41:58] You're not playing catch-up. Yeah. Exactly.

Christian: [42:00] Yeah.

Matt: [42:00] Yeah.

Christian: [42:01] Yeah.

Matt: [42:01] That's my biggest piece.

Christian: [42:02] Smart. All right, so that's it. That's all I've got. If anyone is interested in chatting with Matt or with his Truebooks team, you can go to truebookscpa.com. If you use my link, which is in the show notes, but it's also truebookscpa.com/awesomenossum, um, I don't know, maybe you get a special deal or something. Maybe I get a deal. I don't know what happens, but something special happens for somebody. An angel gets its wings. I don't know. It's almost Christmas, so that was in my

Matt: [42:33] mind. I love it. I love it.

Christian: [42:34] Matt, anything else that you want to say real quick before we go?

Matt: [42:37] Thanks for having me, man. No, this is f- Yeah … I, anytime I can come on here and try to spew some, some tax knowledge and, like, give some tips, I feel like it's… I try to be helpful, so hopefully- Yeah … somebody walks away with this and has a little bit more leverage on, you know, the next move they can make now.

Christian: [42:50] Yeah, and I definitely think they do, so thank you so much for your time. Like, I learned stuff just by chatting with you today, even though you already are helping me out, so this is awesome. Yeah, and thank you everybody for listening to the Awesome in Seattle podcast. If you are interested in chatting with me or my team about buying a house or an investment property or even potentially private lending with us, just reach out. You can either call me directly. My cell, direct cell, is 206-949-3048, or you can go to our website, AwesomeNossumGroup.com/schedule. You can schedule a strategy session right online. Super easy, free, just a really quick half-hour Zoom with us. That's it for this episode. We will see you in two weeks for the next episode. Thanks again, Matt. I appreciate your time, and we'll see you around.

Matt: [43:36] Thank you, man.