Pay Zero To Become The Hero Part 2 (Presented at Anaheim Hills Brokers Caravan)

Noel:                Third strategy that you need to apply – expenses. Missed expenses! There’s a lot. I’m only gonna cover two that you might be missing. The first one is called, the start-up cost. If you’re into real estate investing, any cost incurred before buying or renting a property, they’re all deductible. Examples – legal and consultant fees, CPA fees and business formation. You got to travel out-of-state to look for properties – that is tax deductible. Car expenses – the whole work is deductible. You picked it up and it’s deductible.

Noel (cont’d):  Number two, that a lot of people might be missing is the closing cost. When you’ve to sell the property or buy it. It’s on the closing disclosure. There’s a lot of numbers there. Each one of those goes – uh – you have to treat each one differently. Some of them are gonna be amortized meaning spread on the life of the loan like points. The other ones’ are going to be fully deductible. We have property taxes, partial insurance, they’re tax-deductible up front and then there’s the – what they call title charges added to the purchase price. And, lastly, if you have an impound account, those reserves- they are not tax-deductible. They’re not deductible for now because the lender is reserving it to pay for property tax and for the insurance. Keep that in mind.

Noel (cont’d):  The fourth one, the R, the first R – Rates. The rates, if you plan accordingly, and I keep telling my clients – it’s all about structuring. The rates, if you sell the property, you can potentially zero it out. The capital gains – how? Two strategies, number one, you have to hold the property for more than a year. Number two, you have to make sure your income is lower than like around $75,000 if you are married, and if you are single it’s $38,000. You might be looking at me like, ‘How are we supposed to do that?’ You have to – If you have a business, you got to postpone your income. You have to maximize your deductions and if you do that, you can zero it out. How do I know? I’ve been doing a lot of those the last five years.

Male:               But with residential lending, you’re not gonna be able to get a loan on those properties, without showing any income.

Noel:                Well, that’s a different – ah. His question is that, How can we zero it out, we need that?

When a client have that issue, the question that I always ask is that, ‘What is the priority? Is it tax or is it the lending?’ Because a lot of my clients, when they want to buy more properties, guess what?

Noel:                You gotta show more income. So, you gotta pick kinda like which one is more important. Is it going to be wealth building cause the potential over here or paying the taxes? If the tax is gonna be a bucket – a nickel – go for the wealth building. Good question. Okay?

Noel:                So, if you do that, the bracket is a 10 or 15 percent tax bracket. If you do that you can potentially zero out your taxes. I have a client, got one property in Corona del Mar. We did some structuring – a lot though cause the property there is pricey. We did- we combined this – this, uh, – we combined this strategy. Some life-kind, some zero out – he got business deductions, he’s got a real estate. We combined. He – he sheltered almost like half a million dollars capital gains tax. But, it’s all about planning.

Noel (cont’d):  The last strategy – the last R is R E Pro, real estate professional. You guys heard about this? Raise your hand. No? Ok. Real estate professional, the reason why it’s so powerful is because it potentially zero out your taxes. If you have a lot of real estate holdings, it will allow you – it will allow you to deduct your rental losses against your earned income, W2, business income and could potentially zero out your taxes.

Noel (cont’d):  What are the requirements? There are two major requirements. It’s all about time. The first one is called, the 50 percent test. So, the amount of time you spend in real estate business needs to be more than your working hours. So, if I’m a CPA – that’s my full-time- job – and I’m working 2,000 hours. Well, I gotta spend 2,001 hours in real estate – might not be possible, so I gotta do some structuring. The other time requirement is the 750 hours. You have to have 750 hours in a real estate business. And, you might be thinking, ‘What’s that 750 about?’ Well, it’s for non-working spouse. They want to make sure you meet some rules. So, if you apply those again, you can zero out your taxes.

Noel (cont’d): Got a client…makes 200,000 – 250,000 dollars. Got business and all that – once everything is done, his income is around fifty while his rental losses is fifty grand. He pays zero taxes.

Noel (cont’d):  One reminder, though. The real estate professional designation was abused way back during the real estate boom that the IRS came up with the – they call it, the audit procedure, in 2008. So, If you’re planning to do that, re – I want to remind you there’s an audit risk that you’re gonna get audited. So, what’s the audit-proofing? You have to make sure you know the rules of the game.

Noel (cont’d):  So, in closing, those five strategies would help you potentially zero out your taxes. The like-kind exchange, depreciation, missed expenses, key tax rates and real estate professional. Apply that to zero out your taxes but the most important thing though is it’s not about the tax savings but what can you do with it. So, the financial freedom is more important. So, just imagine these are your choices of questions – ‘Do I buy a new car? Do I buy a new home? Do I buy a second home? Do I fund my retirement? Do I travel?’

Noel (cont’d):  So you see…when you pay zero, you become the hero.

Noel:                Thank you so much.

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Noel Dalmacio, CPA, CFP, MS TAX
30 Corporate Park, Suite 102.
Irvine, CA 92606

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