Host:
You might be wondering, can you start to make moves to reduce what you’ll owe Uncle Sam this year? We are here to share strategies to lower your 2025 tax bill and set you up to keep more of your hard earned money going forward. And don’t worry, we’ll be breaking down strategies for your retirement accounts, your real estate portfolio, and everything in between.
Host:
Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen, and with me as always is my pulls-his-weight-at-tax-time co-host, Scott Trench.
Host:
Thanks, Mindy. Love tax time. That’s when I can realize my gains. All right, BiggerPockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting or how much you owe the IRS every year.
Host:
Today, we’re joined by Amanda Han, CPA extraordinaire to talk about all things tax. I promise it’ll be fun. Amanda Han, welcome to the BiggerPockets Money Podcast. I’m so excited to be talking to you today.
Guest:
Yeah, I am excited to be here. It’s tax season and taxes are top of mind for people, right?
Host:
Taxes are top of mind for people. I just got my notice that my W-2 is available now. Yay! So that’s one down and like nine million more to go. Let’s talk about saving money on last year’s taxes. It’s 2025 when we’re recording this. It’s going to come out in 2025, clearly because we don’t have a time machine. Is there anything that I can do now that we’re in the new year to help me save on my taxes from 2024?
Guest:
Yeah, potentially. Um, I think it depends. You know, there are certain things we could still do to change how much taxes we owe for last year in 2024. Um at the same time, there are other things that’s kind of like too late for us to do anything about since the, you know, the clock ran down to 12:31. So, um, what are some of the things we could still do, you know, now that we’re heading into tax season? I think one important thing is we can sort of organize and firm up our business expenses. So if you’re someone who maybe didn’t have the best of records, um now is the time to kind of comb through your bank accounts, your, you know, bank statements, and credit card statements to try to make sure you capture all of those expenses. Um, because if you don’t capture it, um, the odds of your accountant, you know, finding out there’s some kind of business expense that’s floating out there is very unlikely. So certainly something that we could still do to, you know, just make sure we maximize our our tax right off between now and the time we actually go and meet with our tax person.
Host:
Okay, and I know that every CPA and every tax professional out there is like, yes, yes, yes. Thank you Amanda for telling them to get their tax, their their numbers in order ahead of time instead of just here’s a big shoebox full of receipts, good luck.
Guest:
Yeah, I mean, I sometimes hear investors tell me like, oh, my CPA just writes off all this stuff. I don’t even know what they’re writing off. Um and that’s also very scary, too, right, on the up on the opposite side because your tax person shouldn’t be like making up deductions for you. So it’s really, really important. And especially with um a much higher, you know, audit going on now with what’s happened at the IRS the last couple of years. It’s just really important to make sure that we have all the right documentation to save on taxes. But, you know, in terms of like the other sort of pillar real estate tax strategies we talk about all the time with respect to manipulating depreciation, right? Like how we can accelerate depreciation, we can um do cost segregation. All of those kinds of things are still available to us. Um so we bought properties in 2024, we could still use those strategies this year even though the year is gone.
Host:
Oh, I didn’t know that you could still use those strategies after the end of the calendar year. And that I I would assume just like 401(k) contributions, that only is up until you file your taxes?
Guest:
Yes, yes, great question. So yeah, you have um all the way up until you file your tax returns to um do the accelerated depreciation, contribute to retirement accounts and that’s one of the reasons we actually encourage a lot of our clients to go on extension. I know for some people, extension is like the bad word. I just want to do it by April. I don’t wan- I want to file on time, but there actually a lot of instances and I guess reasons why it could be beneficial to go on extension too.
Host:
You’re saying basically you buy a property let’s say in December or you know, Q4 of 2024 and let’s say it’s a million dollar multi-family or whatever, right? And you’re going to get one, you know, 27 and a half path of the structural value in depreciation unless you do a cost seg. So you spend the 5, 10, $15,000 on the cost segregation study or whatever it is. And you’re saying that if you that may take you a few months. If you extend to October, you could complete your cost seg in June or July and still take that accelerated depreciation on your 2024 purchase, significantly saving you a lot of money on taxes. So if you don’t have all your ducks in a row for example, and you’re reacting to this message right now, you don’t have to find a CPA, hire them in the middle of tax season, peak tax time, and conduct your cost segregation. You can just extend and then begin doing that. That’s is that is that the right way to think about what you’re saying?
Guest:
Yeah, exactly. You’re exactly right, Scott. And um, in fact, I’ll go as far as to say for a lot of our clients, uh we actually don’t recommend they do the cost segregation study too early. Um and example might be, you know, in your example, like, hey, I bought a a big multi-family, well before I even pay for cost segregation, I want to know am I able to use that tax benefit? You know, if I’m working full time, I’m married and my spouse also works full time, if I’m not, I’m not a real estate professional, then I probably don’t get to use all of that benefit anyways. Um and so that’s a common mistake. people are like, yes, I heard about cost seg, let me just do it. Well, often times you want to wait until the end of the year when we know, have you met the hours, do you have the right facts, and then take the step to say, okay, should I do a cost segregation or not?
Host:
Maybe we should take a quick tangent here and just do a very brief refresher on what kinds of losses can I use in real estate to offset ordinary income. Give us an overview of this REP situation and all that kind of stuff, the real real estate professional status. But what what in general are the rules I should be thinking about if I’m a normal person who’s not a real estate professional?
Guest:
Yeah, what do you have eight hours? Just kidding. Okay, so uh let’s talk about the the kind of the general rule is that if you’re someone who makes a $150,000 or less, you can use rental losses to offset all types of income. Um however, there’s a cap of about $25,000. So what does that mean? If I make $100,000 uh of other income and I have rental losses with say, you know, do accelerated depreciation and right off, I have 30,000 of losses, I can use 25,000 against my W-2 income. And this is true for everyone regardless of what your occupation is. Um it’s strictly based on like what your income is. So between 100 and $150,000, we can kind of have a a specific dollar amount of losses we can use. What we don’t use are considered passive and we kind of carry it forward. Now, um, here’s the hurdle. The hurdle is if you’re someone who makes over $150,000, then the default rule is rental real estate losses are passive in nature, which means they cannot offset taxes from your W-2 income anymore. The good news though is we don’t lose it. We get to carry it forward into the future indefinitely until a future point where we can utilize it against passive income or when we sell a property, right? So that’s kind of the rule for, I don’t know, 99% of the the people who are maybe uh listening. Um now, alternatively, if you are a real estate professional, meaning like you work full-time in real estate or maybe you’re married to a real estate professional who, you know, full-time in real estate manages their own properties, then um as a real estate professional, regardless of how much income is made um from a W-2 or whatever, those rental losses can offset W-2 and other types of income. Um so that’s the reason, you know, for a lot of high income earners, being able to become a real estate professional or marry a real estate professional is pretty key because that’s the difference in the ability to write off rental losses against WTU income now or having to wait into the future to have it off set other future passive income.
Host:
Got it. Okay. And and one one more question here. If I, you know, sell a business or sell stocks or have another capital gain, do the losses, do I have to be a REP status to to declare real estate passive losses against those types of gains?
Guest:
It depends on whether you’re a real estate professional or not. So if you are a real estate professional or you’re married to a real estate professional, then yes, rental losses offset all types of income including gains from stock, crypto, you know, whatever it is. Um, if you’re not a real estate professional, then stock and business sales, um you typically do not get to offset. Stocks almost never, you know, crypto almost never could not offset. Business says sometimes, if you like we have clients who invest passively in businesses, um and if those businesses passive to you and you sell it, there’s a gain, you could use rental losses even if you’re not a real estate professional.
Host:
I just want to clarify really quick, real estate professional is an IRS designation. It’s not just, oh I’m an agent, so therefore I’m a professional. And I think that people who are kind of on the the fringes of it may not realize that this is, it’s actually really difficult to get. I work at BiggerPockets, which is real estate related, uh more than real estate related. I am a real estate agent and I don’t qualify for real estate professional status, uh because I work more hours at my uh BiggerPockets job, which is not considered real estate for the IRS, and I have a bone to pick with you IRS, but it’s not considered real estate and I don’t work more hours at my real estate agent job than I do my my main job. So, um, it yeah, it’s not an easy designation to get and if you get it, do whatever you can to keep it. We need to take a quick ad break, but if you’re eager to get started in real estate investing, a smart first step is to partner with an investor friendly financial planner who can help you get your house in order and ensure that you are set up for financial success from the get go. Go to biggerpockets.com/taxpros. That’s T A X P R O S to get matched with a tax professional or financial planner in your area.
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Host:
Welcome back to the show. We’re joined by Amanda Han. Let’s go back and recap kind of what we learned here, right? So the rules, we all, I think a lot of people are familiar with the general concept that the rules get really interesting once you become a real estate professional if you’re involved in real estate. And there’s some serious games you can play with losses, there’s also some serious danger, um, where a lot of folks are now trapped essentially in real estate portfolios that they have to continue to defer gains on, basically for life, in order to avoid realizing major, you know, in order in order to actually harvest the equity that they’re building up and and the taxes that they’re deferring on there. But that’s another topic for another time. For most people, um coming into 2025, the headlines are, you can still contribute to certain tax deferred or tax advantaged retirement accounts through to your tax filing deadline, right? And April 15th. Is that correct? So that’s the first thing. If you missed it in 2024, you can still do it now if you want to, right? In many of those accounts, so you should go check that. Is that?
Guest:
Yes, for certain types of accounts, we still can. So, um, you know, if we just have a regular job, right, working at BiggerPockets, for example. In the 401(k) scenario, there’s an employee contribution that, you know, Mindy puts in and there’s employer contribution that BiggerPockets puts in. So the employee portion that Mindy puts in, we can no longer contribute to it after the end of the year because it had to go in with your last paycheck basically, right? So that we’re set. But the employer contribution, for example, BiggerPockets could still decide to contribute for Mindy’s benefit. Um now we don’t have, you know, the owners of BiggerPockets on on this call, but we kind of, you know, take that example and apply to a real estate investor. If I am uh I run a property management company, I am the employer and the employee. Well, I could potentially still have my company contribute retirement accounts for me all the way up until my property management company files the tax returns for me. Um they changed the law actually a couple of years ago where um before you had to at least open the account by the end of the year. You know, the rule was if you didn’t own the account, you cannot contribute after the year’s over, but now they’ve changed it. So you can literally, like if this is the first time you’re hearing about this strategy, you could still go out and open an account and also fund it all the way up until the date you file your tax return. So if you have like a legal entity that’s like an S-corp or something, you have all the way until September 15th to open and fund. If you’re doing it as a sole proprietor or your personal return, we have until October 15th to do that. So uh lots of time to still save a significant amount of taxes for many people.
Host:
Awesome. And what deadlines did I miss and are not even worth looking into if it’s now 2025?
Guest:
Um I think the only deadline you missed is probably just the employee contribution, right? So if if you like even if you had your own S Corporation, you are the sole owner and the sole employee, um and you had a 401(k) in it, it’s too late for you to contribute yourself. Um because that’s the only one that has to be done by December 31st but no, if you’re so proprietorship, you can actually contribute both as an employer and an employee all the way up until October 15th if you follow extensions and, you know, wait to file your tax returns until then.
Host:
Ooh, let’s talk about extensions really quick. I think that there is a lot of people who are under the misunderstanding that if the extension to file is October 15th, they don’t have to pay until October 15th. The extension is the extension to file, not the extension to pay. Your taxes owed, if any, are due on April 15th and they are late starting April 16th and you are accruing penalties and fees all the way up until you pay it. So even if you don’t know how much you owe, you should have a good estimate and send the government a check so that you’re not paying them even more when you do actually file.
Guest:
Yeah, that is also common.
Host:
You know, I think that the vast majority of people listening to this, not the vast majority, but a 60/40, will be folks that have a W-2, maybe two W-2 um income households. And the tax planning there is pretty straight straightforward, right? You make your determination about whether you’re going to put it in the Roth or the 401(k) first, maybe do your HSA, maybe you give a little bit to charity or put it into a donor advised fund, maybe you put some money away for college education or whatever. Maybe there’s a real estate property uh involved that you’re going to not you’re going to take a passive loss on for that. But you’re not really getting into the the this this type of structure where you’re talking about, hey, I have an S-corp, my employer can contribute to my 401(k) through October. like those are much more bigger issues or those issues are much more common with um real estate investor, full-time real estate investors and entrepreneurs, I believe. Um and and is that is it pretty pretty close to that simple for for most W-2 folks or am I overstating it?
Guest:
Um yes. I think if you’re like you said someone inside a job, maybe you have one or two passive rental properties, pretty straightforward. Um if you especially if you’re high income, right? Like the rental real estate is just it’s not going to touch your W-2 at all in terms of tax savings. Um and in that scenario, yeah, probably pretty easy for you to know throughout the year how much you’re overpaying or underpaying, right? Um so maybe uh what I always tell people is like, okay, so in either case you want to have an idea whether you’re pretty on par with what you expect to owe. Because if I’m expecting a refund, right, I certainly don’t want to go on extension because that’s just more um interest free money that I’m giving to the IRS. Um and if I owe, then yeah, I want to make sure I’m paid in by April 15th so that I don’t have to deal with any potential penalties.
Host:
Got it. One one call out I’ll I’ll suggest for some folks is in the rising interest so most people are probably taking the standard deduction. I mean you tell me if this is right, but I think this is this might apply to some small minority of BiggerPockets Money listeners. You can deduct interest on the first $750,000 of your home mortgage, but the standard deduction is now so high, thanks to the last Trump administration um in there, that most people just take that standard deduction and do not declare primary mortgage interest because it’s only up to the first $750,000 in that mortgage. But now that interest rates have risen so much, if you bought a home in the last two years, you may want to do that, right? Like that’s something that probably a lot of people have not thought through that it’s like, oh, if if you’re one of those people that just bought a home and you bought at a higher interest rate and your mortgage balance is reasonably high, that’s a gotcha, right? Are there any other kind of gotchas or or changes that that like that that are subtle that maybe maybe if snuck up on people in America when they’re thinking about their tax, how to file their taxes or set up for tax time?
Guest:
Yeah, I mean I would hope that um, and I have to assume this to be true, that most CPAs are doing that analysis, uh, because we certainly do that and it’s my hope that all CPAs at least do that because like you said that’s kind of the baseline, right? Um, even maybe Turbo Tax will do it. just to say, okay, the standard deduction, you at least tell me what your mortgage interest, property taxes and state income tax, I just get from your W-2, um, just to see like which one is the higher one. But you’re right, I mean, um, you know, if if how many people are are uh have fallen victim to, you know, just kind of the standard deduction being even higher than uh itemizing. I think a lot of our clients we see people who are retired, right, they pay off their homes so the loan is very, very small. Um, and then I think also people who live in states where it’s very low tax or low in, low state income tax or no tax, right? Because you don’t even, you know, that’s one of the write offs in terms of itemized deductions. Um, so I think those are probably the two more common ones with respect to itemizing or taking the standard deduction.
Host:
What are some things that people are missing in their right offs? I know that uh there’s also some things that you can’t write off anymore. You used to have the home office deduction and that went away several years ago. Um I was watching an old movie and they had uh the accountant in the movie was like, oh how much of your office is, how much of your house is your home office? You can deduct that now. I’m like, no you can’t, no you can’t. But I think there’s people that don’t keep up with this all the time because they’re not uh tax nerds like the three of us are.
Guest:
I was gonna say I’m kind of offended. So, um, well, you could actually still write off your home office. Uh home office is a still a legitimate business expense. Um I think what you’re referring to with it going away uh was with respect to like my job as a W-2. So previously, um if you work at a job, a W-2 job, and you’re working from home, you have a home office, we could actually use it to offset taxes a an itemized deduction against W-2 income. Um they have, you know, in recent years they have uh limited that. So current law is you cannot claim a home office if it’s related to your W-2 job, but you could still claim it against business and rental real estate. So, um, you know, we do have clients who use that pretty effectively in terms of, you know, claiming your home office or if you use your car for business purposes, um, you can claim that as an expense against your rental income regardless of whether you’re a real estate professional, um, or not a real estate professional. I think a common misconception is people tend to think I can only claim the business miles when I’m driving to a property or to and from a property. But if we think about it, there are actually a lot of other business uh uses that we have with respect to being an investor that’s outside of just to and from the property, right? If you have to shop for materials, supplies from Home Depot, going to banks. Um so I think making sure you track a lot of these just common expenses we have is really important. Um I’m of the thought that, you know, for for a an effective tax spending, we’re never trying to spend more money just for tax write offs because that’s silly, right? If we don’t need it, we don’t need it. Um but what I do want to do is to make sure that the stuff that I am already spending money on to the extent that I can substantiate they’re related to rental real estate, I want to make sure that I’m capturing those because they will help me save taxes. If not today, because I’m still working W-2 and this is passive, they will still help me in the future. So I want to make sure I capture all that.
Host:
How do they help you in the future?
Guest:
Well, one one of these I was talking about with respect to passive, right? If you’re someone who’s W-2 full-time, two rental properties, my rental losses are passive to me, which means I don’t get to use it to offset W-2 income. However, those losses don’t go away. So if part of my losses from, you know, um my business or BiggerPockets membership or went to BP Con, that loss carries carries forward from year to year. So in 2024 it’s passive, 2025 maybe it’s still passive. 2026, let’s say I sell a rental property for a gain. Well guess what? I can use those passive losses to offset the tax on that property I just sold, right? So that’s one example of how do I use it in the future.
Host:
I know that there are some deductions that can be more of a red flag for the IRS audits. Real estate professional status can sometimes trigger an audit more frequently than a a return that doesn’t have that. What are some of these red flags and when is it, like worth the gamble to use and when is it not worth the gamble to use?
Guest:
You know, I think everyone has a different risk tolerance level. Um for me, I would say it’s never worth a gamble. You’re either able to claim something or you’re not able to claim something, right? And that’s the purpose of a tax planning. The whole purpose of tax planning is to say, okay, I understand what are all the things I have to do to legitimately qualify for writing something off, for claiming real estate professional, and I want to be able to make sure I qualify. So if you qualify, you should certainly take it. If you don’t qualify, I never recommend taking a gamble. Although I know some people do it, they’re like, I don’t know, I think I’m a real estate professional. I’ve heard enough of webinars, got it, let’s go. Um the issue with that is when we talk about real estate tax benefits like something you said Scott earlier, the real estate tax savings are generally pretty decent, sometimes massive. So you don’t ever want to be caught like you don’t want to ever be audited and lose an audit because you weren’t actually able to qualify for the tax benefit.
Host:
All right, we got to take one final ad break, but more from Amanda on strategic tax advice if you are a real estate investor.
Host:
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Host:
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Host:
Thanks for joining us again.
Host:
Today or yesterday, Donald Trump said that he is going to abolish the federal income tax. Should I stop withholding my federal income taxes on a go forward basis?
Guest:
Definitely. There will be no more taxes going forward. You’re free to use 100% of your money on everything.
Host:
Oh, great. Well, I don’t know why we had the rest of the episode going on with this. So thank you. Okay.
Host:
To be clear, this is called sarcasm.
Guest:
Oh my God, someone’s going to take a snippet of this and probably blackmail me.
Host:
I’m sorry. I just couldn’t withhold that question um uh as we continue the interview here.
Guest:
Yeah, I I honestly thought it was a joke initially when um I saw in social media like there was like uh he’s coming with an ERS instead of IRS, the external revenue service to um assess tariffs and IRS is out. But I mean the reality is, yes, there is external revenue service now coming in, but IRS is still going to stay around, right? The vast majority of of tax revenue is going to be still from income taxes. Um will that change in I don’t know, decades? Maybe. But certainly wouldn’t not stop with holding taxes. Uh I don’t think we get out of it that easily.
Host:
I am going to continue to accrue and withhold taxes from my paycheck on a go forward basis despite that announcement from our fearless leader this week. And I am also planning on tax brackets going up over the next several decades on ordinary income and probably long-term capital gains and other forms of income as well. And that is why I bias towards the Roth and and happy to pay a little bit more in taxes now, um, in in exchange for, you know, a reasonably high probability of no taxes or a less taxes later on and why I’m not personally afraid to realize capital gains in the current current landscape, um, especially for the next couple of years. What do you think about that? That’s kind of like a big long-term bet where I’m paying the IRS and the taxman now and that and that that results in me having higher basis on whatever I’m exchanging or reallocating or whatever gains I’m realizing. But you know, you’re you’re trained as a CPA to basically avoid those things um for the most part. So I wonder if if you’re feeling that, oh no, why would you realize more income right now? But what what do you think about that from a I think the the way way I’m phrasing it and the way I’m thinking about really long-term planning in terms of tax liability?
Guest:
I don’t necessarily disagree with that. You know, everyone has uh everyone requires a different set of tax strategies. It’s never a one size fits all, right? So certainly if your expectation is tax rates will be higher for regular taxes, capital gains taxes, your income will be higher, um then yeah, it makes sense to pay taxes now, lock it into a tax-free environment. In fact, we have clients who are currently in high tax rates where we suggest, hey, let’s convert to Roth. An example could be because you’re going to put it in a property that you know will quadruple in value in the next 12 months, right? Or a stock that you just know it’s going to explode. So there’s always reasons for making certain decisions. I think the important part of it is to make that decision with careful analysis and determination, right? Like what do you think is going to happen, what’s going to be your profile in the future. Um, you know, we have a lot of clients who started doing a little variation. So somebody who’s very high tax bracket right now, working full-time, but also building real estate on the side, one strategy we use frequently is to say, okay, well let’s fund pre-tax retirement account now because you’re at 37% tax bracket. If you live in a high taxing state, you’re over 50%, right? So we’ll save 50 cents on the dollar for all the the contributions towards retirement. Um and in a couple of years, if your plan works out, you’re going to stop working and you’re going to be full-time real estate, real estate professional with a big portfolio of properties. Well, at that time, because I have no income and a bunch of losses, maybe I then take my traditional 401(k) or IRA, I convert that to Roth and pay no taxes or convert at, you know, 15%, right? So everyone’s kind of has a little bit different fact pattern, and that’s the fun part of tax planning for us tax nerds.
Host:
Would you say that that most people though bias towards, how do I defer or pay the little the smallest amount of possible tax now and figure out the next the next deferral piece later rather than the it’s a it’s a rare strategy to to realize now assuming that tax rates will go up and it’ll make harder or later. Is that is that relatively rare?
Guest:
I would say yes. Like the the the more common narrative is how do I pay less taxes, right? today. Um and make my money grow for me rather than how can I pay more taxes now and save money later? Yeah, I would agree. That’s most people. But again, it’s not necessarily, there’s not necessarily a right or wrong answer. It’s just kind of depends on so many um different fact patterns.
Host:
Let’s go back to a little bit of um a couple of more things on real estate. One is, um can can you remind us the brief history of opportunity zones and what those benefits used to look like and what they look like today heading into 2025 for folks who may be interested in looking into that?
Guest:
Um opportunity zones. So opportunity zones came out several years ago and the rules are, the current rules are if you sell something um and you have capital gains, so it’s whether selling your primary home, selling a rental property, your business, stocks, crypto. If you have capital gains, um generally we have to pay taxes on that, right? There’s no other other options to defer it unless we’re talking about real estate. Real estate, if it’s rental, we could 1031 exchange. Um but if we’re selling stocks or other stuff, uh we generally have to pay taxes. The benefit of opportunity zone is that if you have these capital gain events, um you can choose to invest that amount of money into an opportunity zone fund. And if you invest in an ozone, we call it ozone, ozone fund, then you can defer the taxes until 2026. Um and also, if you hold on to that asset for at least 10 years, you can get up to 10 years of tax-free appreciation. Uh so an example might be, and we don’t see this a lot with real estate, um because most of our clients who do real estate, they just 1031 exchange. Um we see this more commonly in our clients who like have stock gains. So let’s say you work for Nvidia. Um who didn’t do so well recently, but let’s say you worked for Nvidia. There’s a huge capital gains, you sold it. Um what you can do instead of paying taxes on the gain, let’s say it’s 100,000 of gain, you can take that whole 100,000 or 50 or 80, whatever you want to do. Let’s say you took 80,000 of it, you invested in an opportunity zone fund. Well let’s say for example, that fund invested in real estate, like multi-family or whatever it is. Um when you do that, then uh that means you don’t have to pay taxes right now on that 80,000. So this year, you only pay taxes on the difference of 20,000. That 80,000 is reinvested, it kind of grows and grows. In 2026, when you file that tax return is when you’ll pay tax on the 80,000 that you deferred initially. Um and if 10 years later that 80,000 grows to be 180,000, then you don’t ever have to pay taxes on that 100,000 of appreciation. So those are like the two-tier benefit. Deferring taxes and also potentially tax-free growth.
Host:
So the the real benefit to an opportunity zone investment in reality is if you hold you intend to hold it for 10 years, never having to pay tax on that gain. There’s just a small a near-term deferral as well on the recent capital gain that is that is also mildly helpful.
Guest:
Mildly helpful, yes. And it hasn’t changed. It’s just the years uh we when we started, this was back several years ago, so we had a 10 year, a seven-year deferral. So every year that goes by, now it’s only until 2026, right? But years ago, you know, we had we had a handful of years to defer.
Host:
Awesome. Well, anything else from you Mindy?
Host:
No, I was just going to ask any final thoughts on how people can prepare for 2024 taxes or what they should be thinking about for the 2025 year so that 2025 tax paying time in a year from now isn’t a shock.
Guest:
I mean, I think 2024, some of the things we talked about, right, gathering up your expenses, which um I know nobody likes to do. We like to talk about saving taxes, no one likes to do the work of actually, you know, gathering expenses. But do take the time to do it. Um talk with your tax person about a lot of these things, you know, as, you know, how do I use the short-term rental loophole? Can I be a real estate professional? Can I do all, have all those discussions so you make sure you are able to file 2024 in the most optimal way. Um, you know, 2025, we’re expecting it to be a year of pretty significant tax changes. Whether that will pan out to be true or not is anyone’s guess. Uh but it’s important to understand that if there are no tax changes, a lot of the benefits that we currently enjoy as real estate investors, uh where, you know, qualified business income where the first 20% is tax-free, bonus depreciation dwindles down. So a lot of these current benefits do expire at the end of this year. Um, so we kind of have to plan for, you know, a higher tax bracket. I think Scott is really happy. He’s like, I told you all along, taxes are going up.
Host:
I would certainly not be happy about that. I think I think they could get lower this administration, but there’s I I just think there’s no reason to believe that over the next 20, 30 years brackets are coming down. That’s more of my my my take.
Guest:
I mean, or the opposite could be true, right? Trump has talked about bringing back 100% bonus depreciation. I mean, Republicans generally pro business. So we could have some even supercharged benefits, more so than what we’ve seen in the past. So I think 25 হবে kind of to be determined how it is going to be for taxes and real estate. Um but the best thing we can do as as investors is, you know, keep updated on the news, um and what’s coming out of legislation, and then keep your line of communication open with your CPA. Um if there’s one thing to take away is, you know, your CPA should be your friend, call them, email them, talk to them about what you’re doing in life with respect to investing, retirement, job change, because it’s in those very simple conversations that they could help identify opportunities for you.
Host:
I think it’s great advice. And and if we get 100% bonus depreciation, then I think a lot of career W-2 income earners are going to have to get their real estate agent license, try their darndest to sell one house and then use that to to create huge losses to turn those uh 401(k)s into Roths uh in those years. So that that’ll be a fun one if that actually happens.
Guest:
Well, then we would actually probably have to quit their job, right? They’d probably have to quit their job to actually meet real estate professional.
Host:
Yeah, but if you can get a two, $300,000 loss and then then take all that out of your 401(k), that may be well worth it. So, we’ll we’ll see. Yeah, if that if that stuff starts happening, that’d be wild.
Host:
Okay, we’ll do another episode about that if you could do this bonus depreciation thing. So uh Amanda, reach out if the if if this goes into effect because I I would love to take some money out of my 401(k) and not pay any taxes on it.
Guest:
Okay, are we talking about both of you quitting BiggerPockets right now? Is this what’s happening on the podcast?
Host:
Mindy’s going to go to uh uh 19 hours a week, I think, for one year, uh uh in the event of a uh a 100% bonus depreciation play comes up and she’s going to buy about $2 million over the real estate, I think.
Host:
Yeah, 19 hours a week with a lot of uh donated time. Oh no. This is what happens with real estate investors. They start coming up with these crazy ideas of uh yeah, donated time. But you know, just in real life though, we I saw this quite a bit um during COVID. We had a lot of clients who are in the medical field um that actually, you know, one spouse took a step back or they just took a step back um not just for tax, obviously, you know, kids were learning from home and stuff, but really uh planned ahead and using it just for that one or two years. So, it does happen.
Host:
All right, Amanda, where can people find you if they want to talk to you about taxes?
Guest:
If you want to talk more about taxes, um my company is called Keystone CPA, so you can go to keystoncpa.com. We have a lot of great free resources. Um if you’re looking for more educational content, I have a YouTube channel as Amanda Han CPA and I’m always on Instagram for daily tax tips as Amanda Han CPA.
Host:
Awesome, Amanda, thank you so much for your time today. It is always fun to nerd out with you about taxes and that is a term of endearment. tax nerd, money nerd, real estate nerd, uh that is all everybody, we are it is it is me saying that I uh I see you, I hear you and I am right there with you.
Guest:
Thank you.
Host:
Thank you again. It’s always fun to talk taxes with you. I appreciate your time.
Host:
All right, Mindy, that was Amanda Han with some great tax tips and advice. One thing, you know, now that I’ve said it, I I don’t know if I if I’m still as comfortable with with it uh even though it it is kind of my philosophy here around do you do you agree with me that it’s okay to realize gains and in a couple of cases when there could be a more uh a tax a strategy to defer those gains based on the premise that long-term tax brackets will continue to creep up over time. Do you think that’s the right approach? How do you how do you feel about it?
Host:
I understand the the thought process behind where you’re coming from. I think that on terms of economic strategy and and investment strategy, you and I have a bit of a difference of opinion. However, you are also far more thoughtful than I am about all of this. So I don’t think that I’m qualified to say no Scott, you’re wrong. Um and I would definitely need to see more numbers like actually on paper. Um that’s how I learn best is is visually, so I’d want to see all of those numbers to see what you’re thinking and where you’re going. But what I hear from you is that you’ve thought through it. This isn’t some off-the-cuff whim. Oh, you know what? I’m just going to do something different this time. I’m just going to pay all the taxes now. I haven’t even thought about it. You’re thinking strategically, you’re thinking ahead, you’re making educated guesses and what’s the worst that can happen? It’s not like you sell them now and then all of a sudden the government’s like, hey, no more taxes ever. I don’t believe that will ever happen because that will never happen. Um and I am happy to eat my words if I’m wrong about that, but I’m not going to be. So, will tax brackets go up? Most likely. Historically, they have been lower in the past and now, you know, they’re higher than they were than they used to be. So I think that it’s a strategic, I don’t want to say bet because that makes it sound like it’s a gamble. It is kind of a gamble, but it’s also like it’s a thoughtful choice that you’re making. So I’m excited to see what happens.
Host:
And just just for those who are curious, the kind of way that manifests itself for me is I max out my HSA, then I max out my Roth 401(k) despite being in a higher income tax bracket. I choose to go the Roth route um because of the dynamic I just described and I pay more taxes now, um and and I hopefully will pay less taxes later um um as I as I begin withdrawing from that Roth account. I want to get as much in there as I possibly can. I’m not afraid to realize income. I’m not willing to play intricate games to defer uh capital gains and those types of things on an indefinite basis. I am not attracted to the idea of a 1031 exchange on rental properties for the rest of my life in order to die so that my heirs inherit property at a tens of what could then be tens of millions of dollars in stepped up basis. I am much more interested in building a portfolio that is plenty, harvesting the cash flow, paying Uncle Sam and having my flexibility in my life at as an early age and maintaining it for life rather than ending with the highest possible number. And that is what drives a lot of these decisions here and I’ve just observed other folks playing that deferral game to crazy extremes in my view, um that go on that that create situations where they have millions or tens of millions of dollars of net worth, but very little in the way of harvestable cash flow. Very hard to access um gains you’ve deferred for decades um when interest rates rise for example and you can’t cash out refinance as comfortably on there. So things like that. those are all things that inform my overall strategy. I am pretty I’m I would be willing to bet a lot of money and I am I guess I am in some ways that tax brackets will creep up over the long term, but I also think that I could be specifically wrong in the case of a Trump administration where an opportunities to dramatically reduce tax burden over the next four years have a reasonable probability of of emerging. So, anyways, those are just some some random thoughts um around tax strategy where there’s really no right answer. There’s just a bunch of murky guesses on what the government’s going to do um with these tax brackets over the long term and how that manifests in your decision making about which which accounts to contribute to.
Host:
Again, you’re thinking this through. You’re looking at many different options and you’re making the best choice that you can with the information you have today and your hypotheses about where taxes are going to go. So I think that I think that it’s interesting. I think you’re thinking differently than a lot of people and maybe you’re right and we should have all listened to you.
Host:
Yeah, but I think in that in the most case, if you don’t really have a plan, pay less taxes today. That’s the If you don’t really have an opinion on these things, hire a good CPA and defer because there might be opportunities at a future point to harvest those gains uh in different ways and more very tax efficiently if you have a higher um pre-tax net worth. So go for it and people like Manhattan are definitely good ones to talk to.
Host:
All right, Scott. Should we get out of here?
Host:
Let’s do it.
Host:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Mindy Jenson saying ciao.
Host:
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