Episode 112: Expected changes to YOUR taxes! Real estate professional status
In today’s show, Pancham once again interviews Brandon Hall – founder and CEO of The Real Estate CPA.
Brandon is a firm believer that real estate investing is crucial to building wealth – and tax planning is one of the important factors to consider when generating wealth. And with the new administration, changes are bound to happen.
In this episode, Brandon is back as he predicts what the future holds with the upcoming new administration and the tax laws. He will also share golden nuggets in terms of understanding the power of a real estate professional status and how it can benefit you!
Listen and enjoy the show!
Tune in to this show and enjoy!
- 1:11 – Pancham introduces Brandon to the show
- 2:34 – Changes to be expected in tax laws (and why it mainly impacts high-income earners)
- 8:03 – His judgement on the additional tax programs and how it will play out
- 9:42 – Benefits of the changes to people who has financial struggles
- 12:05 – Why you should not rush things and just wait for what will happen
- 15:04 – How the tax laws will not affect your real estate professional status
- 17:32 – How investors can leverage and offset their active and passive income
- 24:21 – What it takes to be a real estate professional (and real-life cases to guide you!)
- 36:41 – Where you can apply for a 5-week Tax Strategy Foundation Course
3 Key Points:
- Explore different options on what you can do today so you can reduce your overall income to be able to prevent tax increases
- There’s a lot of risks when it comes to being proactive since no one really knows what will happen. Focus on investing in a smart manner instead of risking a lot.
- There’s a lot of challenges in applying to be a real estate professional but if you are qualified to be one, go for it since it has a lot of useful benefits.
Get in Touch:
- Enroll in their Tax Strategy Foundation Course at https://thegoldcollarinvestor.com/cpa
- The Real Estate CPA Website – https://www.therealestatecpa.com
- Tax Smart Real Estate Investors Facebook Group – https://www.facebook.com/groups/taxsmartinvestors
- Watch The Gold Collar’s Episode with Brandon Hall here at https://thegoldcollarinvestor.com/show4/
- Pancham Gupta Email – email@example.com
Rich Dad’s CASHFLOW Quadrant: Rich Dad’s Guide to Financial Freedom by Robert T. Kiyosaki – https://www.amazon.com/Rich-Dads-CASHFLOW-Quadrant-Financial/dp/1612680054
Welcome to The Gold Collar Investor podcast with your host Pancham Gupta. This podcast is dedicated to helping the high-paid professionals to break out of the Wall Street investments and create multiple income streams. Here’s your host, Pancham Gupta.
Hi there, I’m Robert Helms host of The Real Estate Guys radio program and if you want to have better results in your life you gotta put better ideas in your mind. You’re in the right place. You’re at The Gold Collar Investor podcast.
Pancham Gupta: Thanks for tuning into the gold collar investor podcast. This is your host, Pancham. Let’s get into today’s show. Tax planning is a very important part of creating wealth. With the new administration coming in, there are things that are expected to change when it comes to your taxes. I have invited Brandon Hall to go into what changes are expected to come down the line with Biden’s administration coming in and also discuss real estate professional status where you can convert your passive losses into active losses and offset your W2 income. A bit about Brandon first. Brandon Hall is a CPA who works primarily for real estate investors. Brandon is a national speaker and is the founder and CEO of The Real Estate CPA. Brandon works with real estate investors, syndicates, and private equity funds to optimize tax positions and streamline accounting and business functions. He believes that real estate investing is critical to building sustainable and generational wealth. Brandon, welcome to the show.
Brandon Hall: Thanks for having me back. I appreciate it.
Pancham Gupta: No, I’m super excited for the show today. Welcome back to the show. You’re like, you know, your show. I don’t know if I’ve ever told you this is the most listened to episode ever. And, you know, I’ve got really, really good feedback. And your show was mine. Actually, when my podcast was launched, your show was the first one to one of the first ones to go out. And people, if you have not listened to that show, definitely will get value from it. Go check it out at the goldcollarinvestor.com/show4. So, Brandon, I know a lot of people are thinking about the things that we’re going to talk about today. But before we get to that, are you ready to fire up my listener break out of Wall Street investments?
Brandon Hall: I’m 100%. Ready. Awesome.
Pancham Gupta: Awesome. So Ryan, and I know my listener who’s listening right now is thinking about the changes coming down the line on the tax laws, and how are they going to impact them? Right? Can you enlighten us about what changes are coming down the line?
Brandon Hall: Sure. So, I guess preface this with nobody knows nobody has the actual crystal ball except Biden and his administration themselves. But what we can do is we can look at the words that they use and the different speeches and what was actually in their tax plans to make some judgment calls, I guess. So what we feel like will probably happen, we’ll see top tax rates go from 37 to 39.6%. For anybody earning over $620,000, we’ll see long-term cap gains rates go from 20 to 39.6%. Over now, that maximum capital gain rates 20% plus that 3.8% net investment income tax, or a combined total of 23.8%. We expect to see that go to 39.6% if you’re earning more than a million dollars. And then we also expect to see Social Security payroll tax added back if you’re earning over 400k. And to explain that one right now everybody up to about $137,000 you pay Social Security and Medicare, that’s a total of 7.65% tax on your earnings, your employer pays the other 7.65% tax, and it’s a total of 15.3%. So if you’re self-employed, you get the lovely benefit of paying both halves. So you get to pay the employee half 7.65 and the employer half 7.65 for a total of 15.3%. But the Social Security piece phases out at about $137,000, which drops the total amount to 2.9% or 1.45% for each half. And so what that means is if you earn like $200,000, every dollar over that $137,000 threshold is taxed at a 2.9% rate your employee pays half, your employer pays the other half. Any dollar earned less than that is taxed at a 15.3% rate. So, people who earn a lot of money get phased out, so security, and then they’re good to go. The Biden administration is proposing that they phase back in so security once earnings hit 400,000 so every dollar above 400,000 will be subject to 15.3% total self-employment tax FICA tax, so Zero to 137 15.3%, payroll tax 137 to 400, a 2.9%, payroll tax 400 plus 15.3%, payroll tax, I expect something like that to happen. Those are the three main things we expect to have in top tax rate moving from 37 to 39.6, long term cap gains going from 20 to 39.6. And then payroll taxes coming back in if you’re earning 400. But the key here is that it is really only impacting people that earn a lot of money. And you know, some of your listeners, if they’re banking clients or their banking listeners, they are probably in these in these thresholds. So, you do need to be aware of it. And you should, you should explore options today in terms of what you can be doing to reduce your total income to stay out of those tax increases.
Pancham Gupta: Alright, so, you know, that was a lot of information I wrote down and all of that, you know, I think let me ask you this, for people who are earning more than a million, which is a lot of money already, the capital gains tax, going from 20 to 39.6. Right, that’s 19.6%, almost double. So 100% increase, basically. So what about people who are earning between, let’s say, 200 to a million no changes for them? No? Okay. No. Okay. So some majority, I think, in a nutshell, what we can say is this is mainly impacting people who are making more than half a million. Really,
Brandon Hall: yes, at least the changes that we expect to see now some changes are big toss-ups, right 1031 exchanges have been debated; I don’t expect to see 1031 exchanges going away. And just so that nobody is aware of how this works. When we have a lot of spending, or when we’re proposing a bill, we’ve got to figure out how to balance the budgets, we’ve got to figure out how to generate revenue to pay for the programs that are in any bill that’s being pushed out the way that you generate revenues, you levy taxes, and one way to levy taxes without introducing a new tax is to kill an old tax loophole or some tax benefit that was implemented way back. So 1031 exchanges always pop up because you’ve got scores of attorneys who are just combing through the code, looking for the easy ways to grab revenue. 1031 exchanges is always an easy way to grab revenue, tax revenue; if you get rid of it, then you’re gonna have a lot more tax revenue. But 1031 exchanges have been on the chopping block for a long time. Almost every single election, I believe, even came up in the Trump election, and not something that I would expect to see goes away. Typically they do a study, and they realize that the economic benefits of attended one exchange outweigh the short-term tax revenue that they’re going to get by killing it off. So that’s not something that I expect to see happen.
Pancham Gupta: Yeah, no, I, I’m with you. And if it does happen, for whatever reason, that .001% chance, it’s going to really be very, very impactful when it comes to the real estate-related stuff. Yeah, okay. All right. So, from a person who is, you know, if you think about it from a Kiyosaki’s cashflow quadrant, right on how people are tax people, on the left side, employees are self-employed. And on the right side, business owner and investors, from their point of view, what you just mentioned, like all of these changes, all of the changes you mentioned, it doesn’t really kind of differentiate between how people are making their money, it will impact both two sides of the quadrant. Is that right?
Brandon Hall: Yeah, yeah, exactly.
Pancham Gupta: Okay. Okay. And how about the bonus depreciation? Do you know anything about that and any anticipation? And he talks about that?
Brandon Hall: Yeah, I haven’t heard anything on both depreciation is supposed to start phasing out in 2023. As it is, so I don’t know that it’s going to be worthwhile to attack bonus depreciation; I could be totally wrong. Now, I don’t have any insights on bonus depreciation at this point.
Pancham Gupta: Got it. Got it. And do you know when all of this will become clearer that is also not clear? That’s awesome.
Brandon Hall: That is the million-dollar question. If Yeah, the problem is that a lot of this stuff comes up very quickly. Things get thrown into a bill at the last minute, and then it gets signed in. So you might not have much of a warning on some random tax provisions. But I would expect later this year, potentially q3 q4. They’ve got to see how the rest of the pandemic plays out, what additional programs need to be implemented and what additional spending is going to come down the pipe, and how to corral that spending with tax revenue. So it’ll be interesting to see how it plays out.
Pancham Gupta: Got it? Got it. So yeah, we talked about what changes are coming where we are potentially paying more taxes. What about the benefits side? Do we have any insight into any benefits for any sector or any different kinds of, you know, businesses?
Brandon Hall: Well, yeah. So if you are in certain income thresholds, you can certainly grab the benefits like stimulus checks, PPP loans, but they’re targeting people who are struggling financially at this point. So for most real estate investors, you’re not going to meet the threshold for struggling financially. And there’s not a whole lot of benefits coming your way. As a result, at least that’s my understanding. I could eat my words later. But
Pancham Gupta: But and also, I’m sure for the people who are making more than 200,000 or 150,000. Nothing really is coming as far as the benefit goes. Yeah, I
Brandon Hall: wouldn’t count on it. I wouldn’t count on it.
Pancham Gupta: Okay, and how about any industry, the light green energy, I know, Biden and his administration is pretty big on low carbon and, you know, green energy stuff, do you see anything on and also the oil and gas-related benefits that we had? Are they going away?
Brandon Hall: So I don’t know, I will say the entire world is started, or the major world leaders are starting to shift towards green energy, you can see it with the vehicle emission standards that are being put into place, and the goal is to you know, be completely EV by 2035. And those types of things are starting to come out. I know that green energy-related stocks shot up once Biden was elected. Yeah. And I would expect to see tax benefits come into play related to all that I don’t know what it’s gonna look like. But I would expect to see like, if the US wants to be a major player in this space, you’ve got to incentivize people to build and then purchase, and the way they do that is through tax benefits.
Pancham Gupta: Right. The same applies for oil and gas, right, like, you know, they want to discourage that. So potentially take away some of the benefits.
Brandon Hall: Yeah, potentially, I don’t know for sure. For certain, how that’s gonna play out. Yeah.
Pancham Gupta: Yeah, we all are waiting and watching. So let me ask you this, then, right. You mentioned in the very beginning that if you are a high-paid professional making more than 620,000, or a million dollars, you should start thinking about how to plan around this now, which I 100% agree with. So what are some of these strategies, if there are any right now that they can employ? To circumvent some of that now, and you know, someone who’s listening wants to be super proactive and wants to get ahead of the curve? Obviously, he can call you up and find out more and schedule a strategy session with you. But what are some of the highlights? Would you would say?
Brandon Hall: So if you want to be super proactive ahead of the curve, that carries a lot of risks, it carries a lot of risks because nobody, nobody has a crystal ball and can predict what’s going to be implemented and when it’s going to be implemented. And that’s the challenge. We have a lot of clients are like, should I sell one of my properties right now? And frankly, we tell them all, no, we’re just gonna wait to see what comes down the pipeline, that’s our professional advice is no, wait and see. Because if you go and sell something, and then you later realize that you shouldn’t have because you’re trying to avoid this upcoming tax issue that never came about, now, was it worth selling and may not have been may not be? My advice, everybody right now is don’t let the tax tail wag the dog, focus on focus on investing in a smart manner, get the returns that you’re looking for, don’t worry about tax, I mean, taxes are going to come up, they should be in the back of your mind. At this point, I would expect to have a lot more clarity by q3 of this year. But until we know, I wouldn’t let the tax tail wag the dog; I would say get on a CPAs newsletter there, you know, CPAs are watching this stuff coming down the pipeline. And they’re looking at all the packages that are coming out to figure out how any sort of tax changes might impact your clients so that they can alert them. So get on a CPAs newsletter, give them your email so that you can get updates. But even then, it might be too late because there is at least one time in history where tax changes were implemented retroactively to the beginning of the year. So there’s also a chance that some tax changes could be implemented retroactively. But if we look back to the 2017 tax cuts, tax cuts, and JOBS Act, most of the provisions started on September 28, 2017. So in the middle of the year, and then some of the other provisions started January 1 of the following year. So typically, you’re going to have a little bit of time to make some moves.
Pancham Gupta: Right? And if you really think about that, and you know, history gives you some clues that the elections happened in 16. And only until September, you know, they were not active. So you know, we still have some time before we actually see stars seeing some, some more updates on that. So yes, switching gears from here, Brandon, I want to touch on a topic that I get a lot of questions on, and especially this time around the year or if you’re in the middle of some active race, definitely get questions on that, which is the real estate professional status where you can actually take your passive losses, convert them into active losses and take the ticket against your active W2 income and hence, decrease your overall tax liability. One question, the first question is, do you anticipate any changes around that? Number one? And second, can you actually explain in some detail like how person a person who has a full-time job maybe one spouse is working and the other one is not if they can leverage that.
Brandon Hall: So I don’t expect any changes around real estate professional status. There would be little reason to change it. It’s a highly litigated piece of the tax code. The IRS is pretty good at finding people who are abusing real estate professional status and section 469. So I wouldn’t; I don’t expect much to come have that. Okay, and I in to further that to real estate professional status was added to the tax code in 1994, to help people that were in real estate full time, or it was a significant part of their day job or their daily activities as real estate. And it was implemented because you would have like a flipper who’s earning real estate income through flipping or a real estate agent who’s earning real estate income through selling homes. And they have rental real estate that produces losses that they can’t claim due to the passive activity rules. And that was kind of unfair, because on the flip side, if you had a surgeon who was like, like doing a bunch of surgeries, and then bought a bunch of surgical equipment, that maybe they even rent it out, the surgical equipment itself could be offset against the surgical income. But in real estate, you had this weird issue where rental real estate, the losses from the rental real estate couldn’t offset my other real estate-related income. So real estate professional status was added in 1994 to the code to address that point and make it more equitable for people that were in real estate full time. Yeah, so I don’t expect any changes there. I think it’s a solid piece of the code, and it’s not going to go anywhere. And like I said that the IRS is good at reading out people who abuse it. Okay,
Pancham Gupta: so let’s move on to like, you know, I know we just discuss, you know, whether it’s gonna be in there or not there. Can you just explain real quick for people who are who don’t know what that is? Number one, and then how can they leverage that if they want to leverage it?
Brandon Hall: Sure. So when you buy rental real estate, if your gross rents, let’s call it $10,000, gross rents, for my rental real estate, and then I have my expenses, right? I have property management, interest, taxes, insurance, repairs, etc., etc. And maybe I have $1,000 in total expenses. So my net operating income of $10,000 minus $8000 is $2,000 as $2,000. Let’s assume that’s also cash flow. So that’s $2,000 that hit my pocket, cold hard cash. I also get to depreciate rental real estate. And depreciation is meant to track the deterioration of my asset over time. Rental property has depreciated over 27 and a half years. So if I buy a property for $100,000 on my allocation, like 90,000, to the building and 10,000 to land, land doesn’t depreciate because land doesn’t deteriorate. So you can’t, you can’t depreciate land. But that $90,000 of building value depreciate over 27 and a half years, which comes out to about $3200 a year. So every year, I get to write off $3,200 of depreciation expense. I don’t pay $3200 every single year; it’s just a free expense that I get to write off meant to again track the deterioration of my building over time. So if we go back to our $10,000-$8000 example, I got 10,000 of rental income $8,000 in expenses $2,000 no operating income, that’s cold, hard cash hits my pocket, I also have $3,200 of depreciation, when I factor depreciation in turns out that I have a $1,200 tax loss, right? 2000 minus 3200 equals a loss of $1,200. So I get to tell the IRS that I lost money on this property. That’s my tax loss. Even though $2,000 actually hit my pocket, I actually cashflow $2,000; I still get to tell the IRS I lost $1200 thanks to depreciation. The question is that $1200 loss can I claim that today and in 1986, Congress implemented the passive activity loss rules, and that created two buckets of income. One bucket is called passive income. The other buckets are called non-passive income; all rental are passive by default, as well as any business that you don’t materially participate in. So if Pancham invested in my CPA firm, and I didn’t give him voting rights or any management rights, and he wasn’t involved in the day-to-day, Pancham’s participation in my CPA firm would be passive. And that would fall into the passive bucket. Passive losses can offset passive income; we always get confusion from CPAs like, well, your rental losses can offset your passive activity income from some business. And that’s not true. If it’s in the passive bucket, any passive loss can offset any passive income.
Pancham Gupta: What about you know, a lot of people confuse, and I get this question too, about the stocks, they are not actively involved in Apple stock or Facebook stock. Sorry, not involved in the stock. In the company, they don’t have any management rights or potentially voting rights right. So is that passive?
Brandon Hall: So, within section 469, they actually talk about that they talk about stocks, dividends, and interest and guaranteed payments from partnerships, and they say that those payments are treated as not from a passive activity. So essentially, that means that they are in the non-passive bucket.
Pancham Gupta: Got it. So that is a passive bucket, and non-passive and non-passive basically means you may or may not be active, but it’s Yeah, you cannot really offset your active income.
Brandon Hall: Exactly, exactly. Okay. My W2 income is in the non-passive bucket. My business income is in the non-passive bucket, interest, dividends gain on Apple stock sale is in the non-passive bucket, my RSUs are in the non-passive bucket, my incentive stock options ESPP are all in the non-passive bucket.
Pancham Gupta: What about the losses in the non-passive bucket? Can they offset my active income? So let’s say if I have a $100,000 loss and on Apple stock? Can I have set my entire income?
Brandon Hall: Well, if you have a $100,000 loss in Apple stock, now you’re subject to the capital loss limitations of $3,000 a year. And that’s a completely separate code section. So you can, if you can generate a loss in the non-passive bucket, you can certainly potentially use that loss. But for our discussion today, the question is, can I use that $1200 rental law? Yeah, and the answer is no; if it’s in the passive loss bucket, it can only offset other passive income. But a lot of real estate investors don’t have a whole lot of other passive income if any. And if you don’t have any other passive income, then the $1200 passive loss becomes suspended, and it just carries forward on your tax return; it just sits there until it can be used at some later point. So one way to recharacterize that loss from passive to non-passive, we want to move it into the non-passive bucket. One way to do that is to qualify as a real estate professional. Another way to do that is to earn less than $150,000. But those are the two primary ways to move the losses from the passive bucket and into the non-passive bucket. And I want to do that because I want to use that $1200 loss to offset my business income, or my w two-income or my spouse’s business or W2 income; I want to do that, based on our time value of money theory, right? The dollar today is worth more than dogs tomorrow. So if I can extract money from the IRS, I want to do that now, not 10 years from now; I want to do it right now. Especially when we start talking about bonus depreciation, that same $90,000 building could be I could be depreciating $30,000 in the first year.
Pancham Gupta: Yeah, that’s exactly what I asked where it becomes super powerful. And you know, we have some buildings where if you have invested $100,000, that negative depreciation could be around $70,000, which is a lot,
Brandon Hall: right. And so and so if we have a $30,000 bonus depreciation deduction, now we have, you know, a $28,000 tax loss. And in that $20,000 tax loss is passive and it’s stuck in the passive bucket unless I qualify as a real estate professional or earn less than 150k, then I can move it from the passive bucket to the non-passive bucket, and that can offset my business income my W2 income, so the whole purpose of real estate professional status, why everybody’s so so into it so interested, is because it read characterizes their passive losses as non-passive, and then it allows them to use their rental losses to offset their W2 income, business income and really any income. Got it?
Pancham Gupta: Yeah. So that’s awesome. Thank you for that explanation. You know, I did a solo show recently, I talked about this, I was like, you know what I’m gonna get brand into discussing that. So. So let’s move on to the, you know, how if the person who is listening to this and their spouse listening as a couple and they’re like, you know what, this is the thing that they have been investing in real estate. They really want to use this as one of their strategies, and they want to have one of the family members be a real estate professional. How can they become one?
Brandon Hall: So there are two statutory tests for real estate professional status. These are found in Section 469 of the code. The first test is that you spend 750 hours in a real property trader business in which you materially participate. The second test is that you spend more time in real estate than in any other material participation activity. What is the material participation activity? Well, your W2 job is a material participation activity. So if you have, if you spend 2000 hours, it doesn’t matter if you’re on one week and off one week or on one day and off one day, you work three days, and you’re off, it doesn’t matter, the total number of hours that you work your W2 job, it’s been more time in real estate than that. So if you spend 2000 hours a year in your day job, you got to spend an additional 2001 hours in real estate to meet that second test, more time in real estate. So 750 hours and more time in real estate, if you can hit that, then you are a real estate professional. And that still means absolutely nothing for your rentals. You also have to materially participate in your rentals. And here’s where that gets tricky. You can have a real estate agent who spends 2000 hours being a real estate agent. Well, they’re a real estate professional because they spent 2000 hours doing it. It’s all they do. They spend more time in their real property trader business of brokering than anywhere else. So they’re real estate professionals. But if they forget to participate in their rental activities, their rentals themselves are still passive. So real estate professional status qualifying as a real estate professional is just hurdle number one. Hurdle number two is showing that you materially participated in your rental real estate activities. What a lot of our clients do is we’ll have one spouse who’s a high-income earner, physician, banker, technologist, whatever high-income earner, the other spouse is staying at home, they’re running a part-time business, they’re doing volunteer work, whatever that is, well, a spouse who’s a high-income earner can’t qualify as a real estate professional because they can’t meet that second test have to spend more time in real estate than anywhere else. But a spouse who is staying at home who has flexibility with their time, that spouse can qualify as a real estate professional. And on a married filing joint return, when one spouse qualifies as a real estate professional, the entire return is real estate professional status. So what a lot of our clients will do is one spouse will qualify as a real estate professional, they will make sure to materially participate in the rental activities. And then they’ll be able to use the rental losses to offset high-income earner spouse’s income.
Pancham Gupta: Got it? Yeah, so this is a great explanation. But we know that it gets really complicated, it’s not really hard to it’s actually really hard to prove yourself as a real estate professional, especially if you have a W2 job, it would be very, very hard for you to prove that you are a real estate professional because you had like Brendan said you have to spend 2001 hours, you know in the other activity, which is managing your rentals to prove that and Brandon, I remember you talking about one set, there was one guy or one case where they actually won the case against IRS where they were able to prove that yes, they did work more than what they spent in the W2.
Brandon Hall: Yeah, there might have been Miller [inaudible], he was a boat pilot, he was a full-time, air quotes full-time boat pilot. He only worked though he was only piloting his boat was like 950 hours or so. So he was able to show that he spent more time in real estate. But he had to bring multiple witnesses to the stand who could attest to his incredible work ethic. And so, to reiterate what you were saying, like if anybody tells you that real estate professional status is easy to qualify for, even if you’re full-time in real estate, believe it or not, anybody tells you that it’s easy. They either don’t know what they’re talking about, or they’re trying to sell you something. It’s one of those two things, real estate professionals out of cells. If I tell you I know how to whack 30,000 bucks off your tax bill, you’re not going to be interested, right? And so if I could tell you Oh, yeah, real estate professionals, so easy. Just track your time. You’re good to go. All I’m doing is setting you up for failure. So we hone in on the education piece with our clients, making sure that they really understand what real estate professional status is. Because a lot of people screw up with what time counts and what time doesn’t count. Many people think that they can count education and research time and investor level activities like bookkeeping and the Tax Court has shown time and time again that none of that time counts.
Pancham Gupta: Yeah, yeah, absolutely. And have you seen cases where they were last? Where people were working full-time jobs, and they were trying to qualify as real estate professionals? Is there a case law with this that has happened?
Brandon Hall: Oh, yeah. Yeah, there are quite a few. I think there’s a Santa pour VS Commissioner; where has Santa pour)? I believe that’s the right case. Let me actually, yeah, give me one second. The Santa pour VS Commissioner, that was one where the taxpayer was a full-time employee, submitted time logs to his employer indicating about 1900 W2 hours during the year until the Tax Court know those time logs are actually incorrect. And he only actually worked like 1600 hours. And then he produced the time log to the Tax Court that showed like 1800 hours in real estate. So, in that case, though, it’s interesting because when you read these Tax Court cases, you realize that the Tax Court is just kind of trying to figure out you are credible or not credible? And if you say that you submit, you tell your employer one thing, And then you didn’t actually spend that much time. How can we possibly believe you went with the employer records and in the taxpayer did not exceed that amount of time. So they ended up losing. There’s another one, Escalante VS Commissioner Escalante; in Escalante, the taxpayer was a teacher. And I don’t know if you know any teachers, but I lived with a teacher for a short amount of time in her basement. She was renting it out to me when I was up in DC for my first job at Price Waterhouse. And she, like living with a teacher, newfound respect for teaching. I mean, seriously, before that, I was complaining about how much they make. It makes zero sense to me. You get summers off, a chill job, holy crap. Living with a teacher was eye-opening, she she would come home at six hang out with her husband for an hour. And then she would grade papers from like seven to literally 1030. I would go to sleep before her, and then she’d have to be up the next morning at like 530 to make it into school by 630. Teachers work an incredible amount. They deserve to be paid more. That’s all I have to say about that anyway. Escalante, VS commissioner of the taxpayer, was a teacher who only recorded time at the W2 job between opening and closing bells. That was the first mark against them. Because we know that teachers work really hard and long hours, but also had a had an entry in their time log for a 25 hour day. Okay, and so the prosecuting attorney asks the taxpayer about that, and the taxpayer goes, Well, I guess it was a big day. Five-hour day, right? Yeah, big day. Indeed. So so a lot of it’s Are you credible or not, but when you are working a full-time job, you have to keep a time log of your job, full time or part-time, if you’re working a part-time job to keep a time record of how much time you spend in that job and be legitimate about it. Because the IRS is really good at fishing through things and being able to show that you’re, you know, recording fake entries, or you’re recording things that don’t make sense. Their whole job when you get to Tax Court is to prove to the court that you’re not credible, right. So
Pancham Gupta: we discussed until now, all these examples that you gave were people who were working W2 jobs, and we’re trying to prove our real estate professional status. But let’s say if your spouse who’s at home, right, they are trying to do this, then they have to spend 750 or more hours, it’s much easier to prove, given that they keep the time logs and they use, you know, different tools to kind of keep that and prove it. But still, it is a lot of work. Right? It’s not super simple to kind of prove that do you have cases where people had lost versus also cases where people had won against the IRS when they didn’t have full-time jobs? But they were, you know, non-working spouses, and they took this up?
Brandon Hall: Yeah, so there is Windham versus Commissioner. The taxpayer was a part-time stockbroker and was able to show that she spent more time in real estate than anywhere else, including her stock brokering activities. And she won. There was another one Frank Hoover’s Commissioner. This was a 2018 Tax Court case; Franco was an architect who ran his own business. But his time logs from his architecture business show that he only had 649 hours of architectural work as a self-employed architect. He spent a ton of time managing one of his three-unit properties like he was down there daily doing maintenance repairs, picking up after tenants, and the Tax Court pulled his credit card statement. And they realized that his credit card statements matched his time log when he when his time log said he was down there doing repairs. He had credit card swipes at Home Depot and Lowe’s. So they basically said, cool, you’re a real estate professional. But on the flip side, I always mispronounce this one. It’s (poor, poor Mears, a premiers) a VS commissioner has another 2018 Tax Court Case came out the same time Franco in this court case the taxpayer did. All she did was rental real estate. She had five rentals, nine units and claimed that she was a real estate professional. The problem was that her time log showed every single Saturday from like, I believe is 10 to 4 pm at the rentals every single Saturday at the same time, which is just not if we’re thinking about credibility. That doesn’t help credibility, right. Every Saturday, the Tax Court also pulled her credit card statements and saw that she was swiping her credit card in Europe while the time logs that she was repairing rentals. So the Tax Court, through a time log out, said sorry, you’re not a real estate professional.
Pancham Gupta: But say I know anyone who’s listening there is you know, this is not to discourage you actually this is to encourage you that you can definitely use it but use it properly and then it can reap a lot of like great dividends right. As far as the benefits go, they are huge. You just have to be diligent and be able to prove it. Anything else Brandon on this that you would like to mention?
Brandon Hall: Yeah, yeah. So real estate professional status is like the second, third, something, something like that. So it’s one of the topmost litigated sections of the entire tax code. Every year, we get three to four new Tax Court cases, and behind every Tax Court case, another 100 audits, right? Those people are winning or losing, right? The thing that I’ll leave you with on real estate professional status is that, like contra said, if you can do it, you should 100% claim it. And if you’re scared of an audit, protect yourself now. Keep a good time log. Take well. Maintain good records, good documents, talk with a CPA that understands it so they can help you prepare today. We prepare every single one of our clients for an audit. If they’re claiming real estate professional status, we want to take the time log. We want to have a conversation with them about what counts what doesn’t count. So prepare today. But don’t just Just be careful of anybody that says that it’s easier than it is because it’s not easy. Even when you are full-time, you have to check some boxes off. So make sure that you’re doing that before it’s too late.
Pancham Gupta: Right. Thank you, Brandon, that has been great information. And I would absolutely love to have you back. After we have the Biden administration’s tax code out, and you know, we will discuss, and we can geek out then on all the changes, and we can bring back these episode clips and see if you have to eat our words. Alright, so Greg, and Brandon, I know that you know, this is your second time. So we’re not going to go into the second round. But I know that you’ve spent so much time and energy putting together a course for people who want to be tax-smart, want to really understand taxes, be strategic about it, and be tax-smart real estate investors. You know, how can your launching it soon? I think your second you’ve done it multiple times. And you know, how can they get that course? Yeah, they
Brandon Hall: thanks for allowing me the opportunity to talk about it. We’ve had about 100 people go through it. We’re actually right now in the middle of our third launch, and we launched once a quarter. And it’s a five-week course where I dropped one. I dropped two to three hours of pre-recorded video content each week for five weeks. We have a live q&a, and there’s a community on the back end where you can jump in and ask questions, meet other students, and I’ll answer and help you out that course. You can find more information at www.thegoldcollarinvestor.com/CP. And yeah, we’d love to have you, right yeah,
Pancham Gupta: no, absolutely. You know, I’ve seen that course myself that content, and it’s great to go to thegoldcollar.com/CPA and Randall. How can they connect with you? If they want to reach out to you, your form? Is there a way they can reach out?
Brandon Hall: Yeah, there are two ways to reach out to us. If you’re interested in exploring who we are and potentially coming on board as a client, you can go to www.therealestateCPA.com. We also have many guides, like on real estate professionals that we have a 12,000-word guide on real estate professional status on that website. So go check that out. I got a cool podcast, let’s 40,000 downloads a month, which is awesome. If you want to connect with me more personally, I recommend if you have Facebook jumping into our tax-smart real estate investors Facebook group, I’m jumping in there and answering questions and producing content and videos and things like that a little new venture for us.
Pancham Gupta: Great. Cool. Thank you, Brandon, for your time here today. You know, have a great day. Thanks, man. I hope you learned something from this show. I’m sure that there are people who might be impacted by these new changes but again, you know, you can do your tax planning, which is very important. And if you’ve not listened to the show that Brandon was on before, it’s show number four, and it’s the highest listened episode on this podcast. It’s thegoldcollarpodcast/show4. And you know CPA is one of the critical team members of your overall wealth planning strategy. Thanks for listening. If you have any questions, do not hesitate to reach me at being firstname.lastname@example.org. This is Pancham signing off. Until next time, take care.
Thank you for listening to The Gold Collar Investor Podcast. If you love what you’ve heard and you want more of Pancham Gupta, visit us at www.thegoldcollar investor.com and follow us on Facebook@thegoldcollarinvestor. The information on this podcast are opinions as always, please consult your own financial team before investing.