Brandon Hall, The Real Estate CPA – The Importance of a Professional Real Estate Status

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Multifamily Commercial Real Estate Show - Brandon Hall

Brandon Hall, The Real Estate CPA – The Importance of a Professional Real Estate Status

This advice might save you hundreds of thousands of dollars on taxable income. In this episode, we’ll be learning about this from our guest Brandon Hall. Brandon is a CPA and Founder and CEO of The Real Estate CPA company, and host of The Real Estate CPA Podcast combining his passion for developing creative strategies to reduce tax bills, and his interest in building long-term wealth as a real estate investor. Brandon and his team are dedicated to helping high net worth individuals and general partners in real estate syndicates by leveraging technology and developing automated solutions to give time back to our clients. Let’s listen in to Brandon’s expertise and learn what can happen when you qualify as a real estate professional and how to get there.

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Brandon Hall 0:00
To qualify as a real estate professional, you have to spend 750 personal service hours in a real property trader business in which you materially participate. You also have to spend more than half your time of personal service in a real property trader business in which you materially participate. So, the first test 750 hours relatively straightforward, a couple key things, personal service hours, it’s not any hours, it’s personal service hours, meaning that if I’m performing investor level activities, like reviewing financial reports, reviewing property manager reports, paying high level bills, that’s investor level activities, that’s not personal service hours, those hours will not count towards the 750 hours, education and research time will not count towards the 750 hours.

Abel Pacheco 0:49
Hello, hello. Welcome to the five towns podcast. I’m your host Abel Pacheco, I interview the top commercial real estate investors and industry experts so you can learn from their experiences. So if you’re an investor, a high W-2 earner or real estate or tech sales professional that wants to invest in real estate without having to manage properties or leave your day job, then this podcast is for you. Or if you’re already investing in real estate, but you’re doing it part time and you want to become a full time, multifamily or full time commercial real estate investor. This podcast is for you too. You’re going to learn a ton. You will learn from real life multifamily investors and other professionals in the industry. They’re gonna share their blueprints for success. And I’m super excited that you’re here. So I hope you enjoy the show.

Hello, hello, Abel Pacheco here the host of five talents podcast. We are extremely excited to have you today we have an amazing guest Mr. Brandon Hall. Brandon, thank you very much for joining.

Brandon Hall 1:53
Thanks for having me on a lot. Appreciate it.

Abel Pacheco 1:55
Yeah, man I am sincerely appreciative of you know, just having you as a guest I was referred to you by another investor and partner of mine who trusts you highly and and he goes you need you absolutely need to interview Brandon he’s a CPA is a national speaker and founder and CEO of the real estate CPA. So anyways, he was going through all your your background and he goes he works with real estate investors he does syndications. He helps with private equity funds to optimize tax positions. You know, he went on and on and on about I guess you personally given some really good advice. So man, I’m super happy to hear.

Brandon Hall 2:34
I appreciate the intro. Yeah. Happy to talk through provide some advice to your listeners.

Abel Pacheco 2:39
Yeah. And for those that don’t know a little bit about Brandon, just to give you some more background on why you should get a pen and a piece of paper. At some point. If you’re driving. That’s okay. What do you get back to the house? Rewind the episode, but you worked at Price Waterhouse Coopers. You worked at Ernst and Young prior to launching your own CPA firm, right?

Brandon Hall 2:58
Yeah, yeah.

Abel Pacheco 2:59
So a lot of yours in that area. And then your own CPA firm. It’s Hall, CPA. PLLC. The real estate CPA. Yes.

Brandon Hall 3:06
Yeah. So the firm name is Hall, CPA, PLLC. But we’ve branded ourselves as the Real Estate CPA. And that was just a decision that I made early on when I was kind of launching it was just a niche in real estate, and just stick to real estate no matter what. And it’s turned out to be a really good decision. But yeah, so I figured, what are people searching online? If they’re looking for a CPA? Like, if I’m a real estate investor, what am I going to search online, I’m probably going to type in real estate CPA, I’ll just go ahead and buy that domain name. And we’ll just brand ourselves as the real estate, CPA,

Abel Pacheco 3:36
what I think it’s a smart move. When you niche down, we’ve heard if you try to reach too many people with a broad message, you really don’t, you know, end up hitting the mark. But if you niche down into people that you think can really, really benefit from your services, you’re going to deliver amazing value. And those people refer others just like I was referred to you,

Brandon Hall 3:57
Service professionals, too. I think it’s important to niche I’ve done a couple of these, like speaking and podcast engagements with for other CPA firms. And I think it’s really important to niche down. Because when you niche, you see the same thing over and over and over again, you start to learn the minute details of how different strategies work. And you can just blow other people out of the water, the generalists that don’t get it or they’re providing bad advice, you can be the saving grace for a lot of clients, especially if you catch it early enough, before they’ve done too much damage. But like on the on the flip side, I’m not going to go and compete in the restaurant space, at least not today, because I know very little about the restaurant space. So if we get a client that comes to us that has real estate and a restaurant, we’ll figure it out. But we’re also going to tell them, Look, we’re not restaurant experts.

Abel Pacheco 4:45
Yeah. Yeah, it makes perfect sense. Well, that’s great. I’m glad you’ve had a lot of success and it sounds like you can really hone in on what investors that come to you for real estate absolutely need. And so that’s great, the more benefit you can provide to them. They’re going Gonna be happier. Yeah. So that’s great. You’re also a multifamily investor yourself.

Brandon Hall 5:04
I am though, it’s kind of hard to come across a non large deals these days that make any sense. So actually, we onboard the client relatively recently who’s a big time builder in the south, and I’ve been having conversations with him because I’m like, you know, I think that that’s a really cool way to go. You get a lot of these mom and pops like myself who work full time jobs, and they go, Alright, I want to own real estate. So what do I do I go look on the MLS, I get an agent and anything that comes I’m gonna bid on it. But yeah, so the 50 other people was like, How can I like, how can I get over? How can I get into this area where there’s not a whole lot of competition, and I was like, oh, building building could make a lot of sense. So it just seems like this big barrier. You know, if you’re like a normal person, like building a house, no way you can buy a house, but buildings, a completely different beast. And what I’ve learned is it’s actually not that challenging. I mean, it’s it’s definitely challenging, but it’s not like, it’s not as challenging as I thought. But regardless, that perceived barrier to entry, I think, means that there’s a lot of opportunity there. So at least every builder I’ve ever talked to, is absolutely killing it, which I know is not that was not the case back in the ’08 ’09 crisis, but at least in today’s world. Yeah. Yeah. Good opportunities there. So looking into that, so yeah, long story short multifamily investor, I own a three unit property. I had two I sold one. And I invest in a couple syndications, the LP side. And on the GP side. Yeah, most of my team owns rental real estate, too. So I’ve got 17 employees at the firm. And between all 18 of us, we have over 300 properties. I think it’s a big competitive advantage. A lot of clients like talking to us, because, yeah, you know, we’re not just gonna BS them with all the different tax strategies they could use. Yeah, sure, you can go pay your kids. But is that actually worth your time? Right? Like we’re investors, too. We know that your time is valuable. Let’s figure out the highest and best use strategies for you to execute on and let’s just forget all the noise. It really simplifies the conversation when you can start talking investor to investor.

Abel Pacheco 7:02
Yeah, I would agree. And I trust you more. Yeah, right. Oh, you know what I’m doing Yes. Or someone else on my team knows what we’re doing. Yes. Yeah, absolutely. It’s

Brandon Hall 7:12
funny. Every every once in a while I get like a new prospect on a sales call that always ask what why are you leaving your current CPA and every once in a while, I’ll hear somebody say, Oh, my CPA told me real estate’s a bad investment. I started laughing. Really? Well, that’s not somebody want to work with. Right? Like?

Abel Pacheco 7:29
Yep. Yeah. Yeah. Not really, by the way, I see why. Yeah, especially as you’re heading down

Brandon Hall 7:35
that real estate is a great investment. We have some extremely wealthy clients that have been in real estate their entire lives. So it’s, that’s actually why it started in the niche in the first place. I know that we’re getting way off topic here. But that’s okay. That’s why I started the niche in the first place. I wanted to invest in real estate personally, I was investing real estate personally. So I also decided that I wanted to see the books and the tax returns of the people that claim real estate. Just to make sure that my future plans made sense. And it does it is great.

Abel Pacheco 8:06
There’s something to be said about looking behind the curtain and peeking behind the covers or pulling back the curtain it and the fact that you guys, you and your team, see everyone’s numbers, you can cut through all the marketing, jazz and like, what are you actually doing? And how are you doing? Oh, this is how you’re making all that money? Literally.

Brandon Hall 8:26
It is funny the way you say, Oh, it is so funny. We have a pretty powerful position, I think in terms of figuring out the level of integrity that people actually have. I mean, we’ve had people that make millions of dollars with like online courses and training programs and things like that. But then where they go and actually execute what they’re teaching people they actually lose money. I mean, it’s it’s amazing. Yeah, we see it. Sometimes the wholesalers will they’ll teach people how to wholesale and they make millions of like, literally seven figure incomes on these online courses and education on the front end, then they lose money wholesaling. Like, oh, gosh, that’s interesting.

Abel Pacheco 9:07
Let me go towards multifamily syndication. And so how did the syndicators look? How did the syndicate?

Brandon Hall 9:12
Yeah, you know, I think that I think that the syndicators are for the most part in good shape. And one of the biggest things I’ve learned working with syndicators, so we work with the GPS and the LPS will do the accounting for the GPS, the financial reporting and the tax planning for the GPS. And then we also work with a ton of the high net worth investors that are investing in these deals. Yep, one of the biggest things that I’ve learned is one, you have to have good financial reporting, and it has to be consistent for GPS out there. The easiest place to raise money is from people that you’ve already raised money from in the past. And to do that you got to build trust, and the trust means that you give good financial reports, but you don’t provide too much detail. Like I don’t need to send an investor a financial report that says our water bill decreased by you know, 2% and then have them blow me up in the emails. With emails and all these questions like that, that’s irrelevant, but good financial reports that are relatively transparent, that give the investors high level information they’re looking for and allow them to trust you. That’s one of the keys to success, I think being a GP. And that definitely cost money. It’s funny, every, every once while we get these folks that are starting up syndicates, and they’ve just come out with one of those syndication course, trainings, and like, yeah, I’ve got a budget of $800, we’re like, yeah, it’s gonna be 10 grand to work with. Because we know, we know how important this is, you’re the fiduciary, you need to get it right. And we’re gonna file your tax returns on time. So none of your investors are going to be complaining to you mid March, because we’ll already be done. And so what does that mean that whenever you go to reraise, they’ll all be right there ready to open up their pocketbooks books again, which is good for you. But yeah, it’s kind of resetting that expectation. But the other big thing that I’ve learned working with general partners, and just syndicates in general, is if things start going south, you’ve got to just blow up your investors with communications. And if you do that, you’re going to be good, because your reputation is really what matters here, the investors are investing more so in you rather than the asset. I mean, a great team can turn around the bad asset, and a poor team can blow up a really good deal. But if it starts going south, you have to step up and take it on the chin. And you’ve got to communicate effectively and consistently with your investors. We’ve worked with a couple folks in the past that things start going south, and they haven’t communicated and now they’re wrapped up in lawsuits. So it’s not a place you want to be not a place you want to be.

Abel Pacheco 11:31
Yeah, absolutely. I think that level of communication is absolutely paramount, right, especially when we’re handling people’s money, we’re being financial stewards. And we’ve got to make sure that, you know, good times, or bad times they can get ahold of you, they know how to reach you, you’re proactive. I’m remembering an old management advice through my professional career. And one of the guys goes, it’s way better to be throwing the spears than taking them. So send out your communication, you know, nuggets good or bad. And if they’re bad, like you said, send them out away much more frequently. Absolutely, man.

Brandon Hall 12:05
For me, it’s just like, if I’m an investor in your deal, I want to know the truth of what’s going on at all times. And that to me, is gonna make me trust you. And even if we lose money on this deal, I’ll probably reinvest with you because I’m not getting that experience elsewhere. Right. Or at least I know that that’s a rare experience to get somebody that’s going to be really upfront and honest with you, if if things start going downhill, that is great. I’m going to give that person more money, even if they lost money for me, and previously, I’m going to be mad, but I’m not going to be like I’m gonna sue you and I’m not gonna trash you online. Right, and that, that’s so important to the syndicators and I think that a lot of these guys that do these, like first deals that are coming out of the courses, they just, it seems overwhelming to them, if they’re talking about losing a million dollars of their investor capital. And yeah, and it’s just such a huge pain that they just prefer to put their head in the sand and hope that time corrects it, but time doesn’t correct it. You’ve got to jump on it. Yeah. And manage that. manage those communications quickly.

Abel Pacheco 13:07
Yeah, yeah, makes perfect sense. The new asset investors or new syndicators, those are all good nuggets, what you’re looking for, and then what you want to communicate as well. So yeah, steering back to man, your experience here in the the, you know, really, as a CPA, as a professional on the tax side, I always give a disclaimer, like often and frequently, when people ask me, Hey, if I invest $100,000, into multifamily syndication with you, and you do accelerated, you know, cost segregation study, and you accelerate the depreciation, am I gonna get a win? Am I gonna be able to write off some money on my, you know, some taxes and have reduced taxable income? And I always say, like, Yeah, we’re gonna be able to have accelerated depreciation, we’re leveraging the cost side study. So we’ll do that. But your specific scenario, you need to talk to a CPA. So walk us through like, you know, just the highest level. So people that have never heard of, you know, an accelerated depreciation, what it means maybe the difference between straight line depreciation on a single family house and the way we do accelerated appreciation via multifamily syndication, I think that’d be a great place to start.

Brandon Hall 14:20
Sure, sure. So to set the stage for that before 1986. If you were working a W-2 job running the business high income earner, you could invest in real estate, and the rental losses that were created, you could claim against your W-2 income. So I could just buy large rental properties and then I could wipe out my W-2 income which would eliminate my tax but a lot of physicians did this prior to 1986. In 1986, the passive activity loss rules were put in place and the passive activity rules say that there are two types of passive activities one, a trader business in which you do not materially participate two all rental activities. So this is where this whole like rentals or passive comes from. It’s section 469 of the tax code. In the early 1990s, they added an exception for real estate professionals. And we’ll talk about what that means. So if all businesses in which you don’t materially participate are passive, and if all rentals are passive, that means when I now go buy a rental property, the loss that’s created as a passive loss, that passive loss can only offset passive income, or gain on sale from a passive activity. And I can have like a rental loss from property A, that’s passive loss, and then they can offset the income from property B, or the gain on sale from property B, that’s a big misconception for some reason. But all my passive losses can offset all of my passive income. What they cannot do is offset my non passive income. Yeah, so my W-2 job, my business income, that’s all non passive. So if I go out and buy a four Plex, and I have a loss from that, that’s passive, the loss just becomes suspended and carried forward. I can’t use it against my regular income.

Abel Pacheco 16:03
How about a flip single family house? That’s usually like, let’s say in the same year, I bought it and sold it. And then that was a capital gain that I earned on that. Can I use the passive income, the passive side to, you know, reduce that active side?

Brandon Hall 16:20
Probably not. Because so it depends on your involvement in the flip, and we go back to Section 469. And we look at those two rules, right? The first one, we’re not

Abel Pacheco 16:29
a real estate professional, then you’re getting hammered. So sorry, oh, well, well, not

Brandon Hall 16:33
yet. Right. So first, let’s look at the flip. Okay, let’s ask, Are we materially participating in that business activity, if we’re not materially participating, meaning if I’ve given money and we’re JV-ing and somebody else is gonna run the deal? Yeah, I probably have a passive activity that can be offset by the passive losses from my rentals, okay. Okay. I’m the one that’s running the deal that I’m materially participating. And that’s a non passive activity. So if I do the flip, I can’t use my rental losses to offset the flip income. Okay. So rental losses are by default, passive, passive losses can only offset passive passive income or gain on sale from a passive activity, okay? Any excess passive losses are carried forward and suspended, okay, or they’re suspended and carried forward, I said that backwards. To get around the passive activity loss rules, there’s a few ways one, you can dispose of another passive activity, right, so then you can use the losses, too, you can earn less than 150k a year modified adjusted gross income, and you are allowed a limit up to $25,000. And that gets phased out as you get closer to 150. Most of our clients are above that. The third exception, to get around the passive activity loss rules, is to qualify as a real estate professional and materially participate in rental activities. So if I have a full time job, I cannot qualify as a real estate professional. So that’s automatically out. So now all my rentals are passive, which means that if I go and place $100,000, into syndication, and I’m a limited partner, the loss that’s coming back to me might be like 92, or $93,000. Once that cost segregation, studies run, and I’ll cost egg in a second. But that $92,000 loss, while it’s there, I can’t use it. Because I have a full time job. I’m not a real estate professional, I’m not materially participating in my rental activities. So it’s a passive loss, and I’ll be able to use it in the future to offset passive income or gain on sale from the disposition of a passive activity. But today, I can’t use it.

Abel Pacheco 18:29
Yeah, only my passive income, which is my the rentals that you said you own, you know those properties. But my active income or my w two withholdings, those can’t be reduced in your example that you’re giving.

Brandon Hall 18:44
Exactly, exactly. So if I have sometimes our clients that are not real estate professionals, they’ll go and invest in a syndication, so put 100k into it, they’ll get a $92,000 loss that gets passed back to them. Yep. And then they’ll go and sell a couple of their rentals at a game. Nice at 90,000. Our loss can offset the game right? On their own rentals. Mm hmm. So it’s a good way to move money around, like not all is lost. But if you don’t have any of those other opportunities, then that $92,000 loss just becomes suspended. It sits on your tax return forever until I was about to ask you Does it ever go away? Never goes away just sits on your tax returns forever until Wow. Yep. Which provides you flexibility later on down the line. I mean, a few years later,

Abel Pacheco 19:26
I can take advantage of it.

Brandon Hall 19:29
Yep, yep, you can sell a stake in a syndication the syndication can liquidate past capital gain back to you you could have rentals producing a gain or passive income in that it can all tap into that suspended loss so not all is lost. From a time value money perspective, though. We would prefer to take the entire game know the entire loss today. Yeah, so we get the tax savings today. But again, not the worst case.

Abel Pacheco 19:54
Hello, hello. This is Abel Pacheco, your host for the five talents podcast. After listening to a few episodes, deep down, do you know that multifamily and commercial real estate investing is one of the best ways to create financial freedom? If you said yes to that question, and you are where I was a few years ago, then I’d absolutely love to connect with you. A few years ago, I started personally consuming a ton of real estate education. I traveled all over the country, as many real estate conferences and seminars that I could go to, I took 200 plus hours of real estate education, I spent thousands of dollars along the way. And I did this because I knew the path to financial freedom for me and my family was through commercial real estate and syndication. So if you’ve made a similar decision, I’d love to connect with you. And potentially in the future, I’d love to partner with you as well. Take a moment go to And I’d love to set up a time to talk.

So thank you that was, that’s a really good explanation of why I don’t think I’ve heard it, you know, that’s the simply right. And sorry, I’m interrupting midway through it. So that’s one example for not you know, that’s not a real estate professional. How does one qualify to become a real estate professional, and maybe even talk about strategies between a husband and wife, right?

Brandon Hall 21:27
Yeah, sure. So there’s so much misinformation on this through different books, courses that we’ve seen, even tax advisors are giving bad information on this. We went in recently, early September, I think, produced a 12,000 word guide to qualifying as a real estate professionals. So anything that you need to know about qualifying as a real estate professional is probably in that guide that’s on our website, you can hover over education and click the link.

Abel Pacheco 21:57
What a great resource man, that’s a great resource.

Brandon Hall 21:59
Thank you, Thank you, you can download a copy, it’s like 35 pages, something really good. So basically, the way that real estate professional status works. Now, we’ve already kind of explained why it’s important to qualify as a real estate professional. But in case if you’re listening to this, you haven’t connected the dots. If I’m a real estate professional, and I invest in syndication, and that syndication passes a $92,000 loss back to me, I can claim that against my w-2 income, or my business income or my spouse’s w-2 or business income or my capital gain income or any other any other income behalf.

Abel Pacheco 22:28
Right, it’s pretty fast. Yeah,

Brandon Hall 22:32
$92,000 loss can easily translate into 30 to $40,000 in tax savings. And that’s why it’s critical that we explore this, to qualify as a real estate professional get to spend 750 personal service hours in a real property trader business in which you materially participate, you also have to spend more than half your time of personal service in a real property trader business in which you materially participate. So the first test 750 hours, relatively straightforward, a couple key things, personal service hours, it’s not any hours, it’s personal service hours, meaning that if I’m performing investor level activities, like reviewing financial reports, reviewing property manager reports, paying high level bills, that’s investor level activities, that’s not personal service hours, those hours will not count towards the 750 hours, education research time will not count towards the 750 hours, because that’d be personal service hours. And a way to think about this a good litmus test is, if the hours that you are logging, do not enhance or improve the property’s operations in those hours do not count. So if you’re if your property would have continued to collect rent, if the bills would continue to be paid, then your hours don’t count. If you don’t have a property manager, because you’re not doing the hours anymore, then those hours obviously count because then there’s no rent collected, there’s no bills paid to property management type hours are going to count acquisition hours are going to count coordinating with tenants are going to count, but really critical, because we’ve seen a lot of high net worth individuals that want to offset their taxes. And so they go, I’m just gonna record you know, 400 hours of education and research and we’re like, that’s not gonna fly. It’s never gonna fly. And there’s tons of tax court cases that will tell you that, yeah, so the second test is more than half your time in a real property trader business in which you materially participate. And that immediately kicks out all the full time w-2 job people and most of the part time w-2 job people. So i f I have a full time job, 2000 hours a year, then I have to work an additional 2001 hours in real estate. Yeah, right. That’s hard to do. Yeah, the more than half my time has been real estate. So 2001 hours, if I’m working like a 900 hour part time job, or I’ve got a part time business. Okay. I can probably prove that. Well, we like to caveat here say, especially with the full time folks because we get people that are like well, I can work 4000 hours for the year and like look I’m not doubting that, right? I’m not saying that it’s not impossible to do. But you’re gonna have to convince a tax court judge who in their mind, they’re never going to be able to understand how you can work 4000 hours for the entire year. I mean, it’s just it’s a very big hurdle for them to get over. And so the big question is going to be, are you a credible person, the IRS is going to attack your credibility. That’s their approach and the tax court’s going to assess, are you a credible person, so how are you going to be able to credibly prove that you spent 4000 hours in real estate, so those are the two tests, if you qualify as a real estate professional, now you’ve overcome the presumption that your rentals are, by default, passive, didn’t have to show that you materially participated in your rental activities. And that’s a whole separate set of tests. But basically, you just have to have exposure to managing rentals, you have to be, you know, part of the acquisition part of the actual property management, and part of the disposition if you’re doing a lot of dispositions, but you don’t have to focus on rentals, right. So the reason that that whole rental material participation piece exists is I could be a full time real estate agent, and I’m going to hit my 750 hours, also more than half of my time, so I’m going to be a real estate professional. But if I don’t also materially participate in my rentals, then my rentals are still are still passive. So I have to be a full time agent, and materially participant my rentals, which is, again, a separate set of tests.

Abel Pacheco 26:23
Yeah, I’m ready to look for the guide so that I can just for people and say, Hey, how do I qualify? Read this, because there’s a lot of information there. But you know, that makes a lot of sense, personal service, you got to materially participate. And so goes without saying you don’t want to get in front any credibility check with with any governing body about this stuff. So right if you’re following the rules, right. Okay.

Brandon Hall 26:46
So for people that are investing in syndications. Yeah, the question is, well, how are you going to get personal service hours and material participation in your rental activities? How are you going to demonstrate that if you’re investing passively in syndicates? And the answer is, you’re not going to be able to, there’s just no way, you’ve either got to be on the GP side, or you have to build your own rental portfolio out, to log hours on your own rental portfolio. So that’s what a lot of our clients will do, they’ll build up their own rental portfolio, they’ll hit their real estate professional hours, they’ll be able to show that they materially participate in the rental activities. And then they’ll go play syndication investments to accelerate the losses that they can claim, because you can group all those into one rental activity. So it’s a really cool strategy. But it takes some time to build up and you do have to start with your own rental portfolio. And sometimes our high net worth folks are like, yeah, no, thanks. I don’t want to manage my own rentals, then we’re like, well, then you can’t tax benefits of the losses?

Abel Pacheco 27:38
Yes. And this is where husband and wife teams do make a lot of sense. Oh, if one of them is ultra high net worth or high w-2 earner or something like that, and husband and wife one of them’s a real estate professional? Yes.

Brandon Hall 27:53
Oh, 100%, one of the first things that we’ll ask people is, is your spouse interested in real estate? And if not

Abel Pacheco 28:02
a professional but is she interested in doing this?

Brandon Hall 28:04
Exactly, exactly. So sometimes we get no and we’re like, okay, but what if we can save you $1,000? In taxes? Yeah.

Abel Pacheco 28:12
Oh, yeah. Oh, she may be interested.

Brandon Hall 28:15
Yeah, definitely. So you can earn a million dollars. Yeah, work in a W-2 or full time business owner, and your spouse could be a homemaker. And in once you start investing in real estate, your spouse can run all that your spouse can qualify as real estate professional, the losses that come from your rental portfolio at that point can then offset your $1 million of W-2 or business income. So 100% legitimate strategy is something that we deploy a lot.

Abel Pacheco 28:40
One of my first really good years in real estate tax, you know, losses or write offs, or whatever was I was earning as a high w-2 professional on this side. My wife was the real estate professional, we had a portfolio kind of like what you’re talking about. And we had probably like 69, $70,000, of, of depreciation or losses in our K-1’s. And so I got to offset, you know, my w-2 because my wife was the professional. But when we think about it, she was working a full time job before she changed over to be a real estate professional. And we made more money, you know, this way, you know, using this strategy where she was the she was the pro in the family for a little while.,

Oh yeah, definitely. Yeah. It’s always a fun conversation to have when it’s like, well, you know, we can save you $70,000 in taxes and a pre tax income on that’s like 300k w-2 or something. I mean, effectively, you’re now working 300k w-2 job if you you’re able to eliminate those taxes, right. So, yeah, it’s just a it’s a fun conversation to have. Absolutely.

Yeah. And so the best strategies that you’ve seen on your side to, you know, really work the multifamily syndication. We just talked about it right. You see all the numbers you see all the dollars What are the best strategies that you see that you’ve experienced? And you’re like, Man, this is what I’m gonna go do, or this is how I advise my clients today.

Brandon Hall 30:09
Yeah. So I think it depends a lot on where you’re at in life and what exactly you’re doing. If you’re a GP in a syndication, then every single syndication should be running a cost segregation study, we’ve talked to people that have said, Well, none of my investors can use it, it’s like, it doesn’t matter, because you might have that one investor that actually can. And that’s worth it for the cost SEC study in and of itself. So the general partners need to always run costs and studies, they need to typically elect out of the business interest limitations, which we don’t need to go into, but the cost segregation study what that is going to do. So when I buy property, any type of rental property, I depreciate that property over 27 and a half years unless it’s commercial property, then I depreciate it longer. But any type of residential real property, I’m gonna depreciate over 27 and a half years, it cost segregation study is the practice of looking at that asset. And basically allocating the purchase price to five, seven and 15 year components, as well as 27 and a half year components. The reason that I do that is when I buy a 300 unit apartment complex, I’ve got a lot of appliances and carpet and things in there that are not going to last 27 and a half years. So the cost segregation study is the practice of saying of identifying those items and saying these are not going to last 27 and a half years, this bucket is going to last five, this bucket is going to last seven, and then this buckets only going to last 15. But the nice thing if you pair a cost segregation study, with 100% bonus depreciation coming out of the 2017 tax cuts and Jobs Act, we can now 100% Bonus depreciate any component with a useful life of less than 20 years. So when we were talking about you know, you invest $100,000, you get a $92,000 loss, what that’s really coming from is if I buy a $10 million property, and let’s say raise $3.2 million in capital to buy that $10 million property, sure I run a cost segregation study, I get a $3 million first year bonus depreciation, which creates a $3 million dollar loss, I get to wipe out $3 million, I get to pass a $3 million loss back to all my investors. And they’re left with a 200k aggregate capital account at that point, which is kind of how we get to that $92,000 Number. Really nice, really nice way to push the passive loss. And especially if you can claim those passive losses, now you’re rocking and rolling. So that’s the real big one. For anybody that’s doing a GP or thinking about syndication. If you’re on the GP side, you’ve always got a Cossack, if you’re on the LP side, it’s more about just timing, you know that these guys are going to cost segue, you know that you’re going to get a passive loss passed back to you. The question is, how can you best utilize that loss? And does it make sense to invest today? Or does it make sense to invest in January or February of next year, based on what what activity you have going on? Maybe I’m, maybe I’ve got a stake in a private business that’s going to liquidate, and it’s going to create a large passive income or passive gain for me. And assuming that I am passive in that, well, I might go and invest in a couple syndicates at the same time, or during the same calendar year to create losses to offset that. So a lot of timing considerations that need to be explored. Or just start building out your own real estate portfolio to go after that real estate professional status.

Abel Pacheco 33:18
Yeah, those are awesome nuggets. Right. I think most people don’t realize that I talked to if they’re investing 100 grand, and they do those castex studies and use, it sounds like the number that you keep giving is like a standard kind of, you know, just general number you see often is that right?

Brandon Hall 33:35
We always see it often. I mean, we after the 2017 tax cuts and Jobs Act. Yeah, basically, for every $1 that you put into a syndication, you can generally expect then 80 cents to 95 cents loss pass back to you. Well, some of these guys are able to clear 100%. So, you know, in that example, where I raised $3.2 million of investor capital,

Abel Pacheco 33:54

Brandon Hall 33:55
I do a cost segregation study that actually generates a 350k loss.

Abel Pacheco 33:59

Brandon Hall 34:00
so I wipe out my entire $3.2 million aggregate limited partner capital account. And that means that if you invested in my deal, then you put 100k, and you get 100k back in terms of a loss, then the excess loss is typically allocated to the general partners, which is also a fun conversation to have, but because these guys don’t put any money in, but then they get to claim a tax loss if they’ve structured it correctly. Yeah. So you know, anywhere between 80 to 95% is what you can kind of expect to get back in terms of a passive loss. I guess I should caveat that though, because this is coming from depreciation. When this syndication sells, you have to recapture that loss, you have to recapture that depreciation that was claimed. So sometime

Abel Pacheco 34:42
It’s gonna hit you somewhere, right?

Brandon Hall 34:44
Yeah, yeah. It’s not this like beautiful tax shelter that you never get to. You never have to actually pay up so you do have to pay up which is why it exists, right? If you if you didn’t have to pay up this thing would not exist. Yeah. So at some later point, you’re going to have to pay the taxes on the gain. And you need to be aware of that. Because in five to seven years when the syndication, liquidates, you want to be ready, you want to have the cash on hand to pay the tax.

Abel Pacheco 35:11
Yep. Also on that last point, right, so most people don’t know it’s there. Thank you very much for the knowledge and the insight of you can take it. And here’s the difference being a real estate professional and not. And so that was a beautiful explanation. And then the, the amounts are good example. So people realize if I put 100k in, man, I’m trying to have depreciation or losses almost equal to my investment amount. So my return that I’m getting, you know, is really like, you can almost consider it as like, complete upside, or at least the taxes are complete upside, which is awesome. Now, on the last kind of thing that you mentioned, right, which is, I’m trying to figure out the best strategy, I’ve got my net back, you know, have it in hand, I’m going to get hit with taxes. Would it be a good idea to put that money back into another deal that has cost segregation in the same year that, you know, we went full cycle, we sold out all my money back, instead of spending it, I put it in another deal? How does that work?

Brandon Hall 36:12
100% As long as you want to continue acquiring real estate, or continue taking stakes in real estate deals, then you can very, very much so kick the can down the road for a long time and the time value of money if something like that is huge, or the I guess the net present value of that type of scenario is huge. So yeah, if I liquidate or if the syndication liquidate. And let’s say that I took a $90,000 loss on my 100k. And on top of that, I get 150k back, so I’ve got a 50k Gain on top of that. Well, really, I’ve got a $90,000 loss that I claim that I have to recapture. My new 50k game from investing in the syndication. So I’ve got a total 140k gain, whenever the syndication liquidates I’ve got to pay tax on that 140k gain. Or I can take the money and I can invest in a new syndication, I can create another set of passive losses that is another 90k. Or maybe I invest 200k This time, and I get 180k of losses, and I completely wipe that gain now. So yes, yes, you can definitely layer it. It’s it’s a big timing consideration. Yeah, that’s how we help a lot of our limited partners out these guys that don’t necessarily have time to go build out their own real estate portfolio, they’re never going to qualify as a real estate professional. There’s a couple strategies that we can run there. But most of the time, it’s pointed out the timing over the next five to seven years of investing in syndications. And when we expect them to liquidate,

Abel Pacheco 37:36
yep, I have people when I explained this, they go, it’s like 1031. And I go, No, it’s not like 1031 at all. But it does help you avoid your taxes like 1031, if you want to consider like,

Brandon Hall 37:48
Not a 1031 but kind of the same similar tax impacts.

Abel Pacheco 37:53
Yeah, your best advice for the limited partners that are looking at syndications in terms of their tax losses, in terms of what you see what what last, you know, nuggets Can you provide here?

Brandon Hall 38:05
Yeah, I think that we covered a lot with the tax losses. Again, the question is, the losses coming out of the syndication for you will always be passive unless you create your own rental portfolio to re-characterize those losses as non-passive. So the question is, if you don’t create that, that rental portfolio, can you claim the losses, and that’s when you have to look at your situation globally, you have to understand what your goals are for the next five to ten years, what are you going to start investing in today, so that as you continue to accumulate these losses, you can create the passive income a dish in addition to that, but you don’t pay tax on for a long time because of the losses that you’ve created. So it’s really just kind of an understanding of how to layer everything. But the biggest thing for limited partners, you know, for myself to that at least the rules that I follow is, you again, you’re very much so investing in the person more so than the asset. I have seen really great syndication teams make gold out of a deal that you thought was doomed from the get go. I’ve also seen really bad syndication teams, trash, a home run, and you just have to make sure that you do your due diligence that you’re going to get somebody that is going to have a high level of integrity, they’re going to communicate problems to you as we go. We’ve got exit plans in case it goes south, you’ve got to do your due diligence.

Abel Pacheco 39:29
Yeah, and anybody that wants some more nuggets on that we also wrote up an e book on our website, so you can go hit that and there’s like a 65 page guide on you know, your due diligence, passive investing versus active investing, really working through, you know, some of the questions you need to ask your general partners and teams and then another thing so during COVID We had some extra time so that we put it together that we put it together

Brandon Hall 39:55
Yeah, that’s great. I’m actually gonna write that down. I might reach out to you later for that.

Abel Pacheco 39:58
Yeah, our websites, and you can go register there and grab yourself a free ebook on it. And excuse the grammatical errors is the first time I actually tried to write something. And well, cool, man, this has been really great. Brandon, I really appreciate the time, your expertise. If people investor’s limited, active, want to get in your world and they they want, you know, to sit down with your team of experts that own 300 properties that can help advise them on their best, best situation, the best strategy for the future, where do they reach out to you.

Brandon Hall 40:39
So you can go to That’s our website, we’ve got a lot of educational content on it, a lot of guides, podcasts, all sorts of fun stuff there. You can also click that big orange become a client button. If you want to explore a relationship, you want to connect with me personally, the best way to do that is LinkedIn. So you just either Google or go to LinkedIn and search Brandon Hall, CPA and I should pop right up.

Abel Pacheco 41:06
Yeah, that’s awesome. Thank you very much. And the strategy part is key. Talk to them. Now sooner than later, one of the trends that I kept hearing was, you don’t talk to him at the end of the year when everything’s done, I will talk to him early. So that way you can project or just provide a strategy, they can help you determine what’s the best place. And even if it’s not now it’s in the future, I think you and your team will definitely be able to help guide people through what like what’s the best place here. So that’s awesome.

Brandon Hall 41:34
Yeah, definitely. Yep. Feel free reach out.

Abel Pacheco 41:36
Well, very good. Well, my name is Abel Pacheco, I’m your host of the five talents podcast, you can reach out to us at where you’ve got these podcasts, multiple education points, books, things like that you can you can download. And it’s been a pleasure, Brandon, is there anything else that we didn’t talk about anything we didn’t touch that you really want to highlight before we go, man?

Brandon Hall 41:58
Yeah, if you are investing in real estate, and you’re working a full time job or running a business, you’ve just listened to this podcast, you’ve done the research, you realize that the losses that you create from your rental activities are gonna be passive, and you can’t claim them. But you still want to do something today to reduce your taxes, what you can do is invest in short term rentals, like Airbnb and VRBO properties. And when your rental period per tenant is less than seven days, on average, you do not have a rental activity per section 469 of the code. So that was what we were kind of discussing earlier in this episode, which means you don’t have to qualify as a real estate professional to take your losses, you just have to materially participate in the activity. And there are seven tests for material participation, we’re not going to go through all of them. And I didn’t want to but the lowest bar is that you complete substantially all of the activity, which means that you don’t have a property manager. So if you buy a beach home in October, and you self manage it, you book all the tenants and everything through the end of the year, likely you will have materially participated, you can then run a cost segregation study on that property. And you can take the losses as non passive while working a full time job and not having to worry about real estate professional status.

Abel Pacheco 43:16
Great nugget, thank you very much. And I have a feeling we’ll have more than a few people reach out to you for your services. And thank you very much for all of your time.

Brandon Hall 43:24
Absolutely. Thanks for having me on.

Abel Pacheco 43:26
All right. Thank you, everyone. Bye bye. Thank you so much for listening to this episode of the five talents podcast. I’m your host, Abel Pacheco. Each week, we’re gonna bring you interviews from other industry experts and commercial real estate investors who followed their dreams and achieve massive success. If you enjoyed this episode, then you’re gonna want a copy of our passive investors guide. Tackling commercial real estate the easy way. It’s the guide we use to invest in $93 million of commercial real estate. It’s a 65 page ebook. It’s a great resource to learn the basic mechanics of multifamily syndications, and we’re going to show you how to evaluate your next passive investment opportunity. So if you subscribe to our podcast now leave us a review and a rating. I’m going to give you a free copy. So take a moment to do that now. We would appreciate it and then you can register for the book at, let us know and we’re going to send you a copy. Thank you so much for subscribing to the Five Talents Podcast.

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