How to Invest in Commercial Real Estate

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Episode 126 - Unlocking the BIGGEST Tax Secret in Real Estate Investing!

by Criterion, Braden Cheek, Brian Duck
November 13th 2023

Today hosts Braden Cheek, Brian Duck and Joel Thompson discuss a commercial real estate tax secret that could save you tons of money!

Time Stamps: 0:00 - Introduction to the episode 1:22 - ... More

All right. What is up and welcome back to another exciting show of how to invest in commercial real estate. What's up? What is going on? We got a good show today. I'm excited to tell people about what we got. Uh But before that typically don't love telling secrets, but today we're gonna expose one of the biggest secrets for sure. And of course, the biggest secret. Ok, I love the enthusiasm. Ok. So this week is a busy week this week. Um I think tomorrow actually. So we're filming, it was Thursday, tomorrow's Friday. Well, the day it's releasing, ok, I'm playing chess. You're playing checkers, my man. So I ever been accused of that. Anyway, tomorrow we are closing on uh the latest deal in Henderson, Nevada, which is right outside of Las Vegas. It's considered the Las Vegas market. Um We've done deals before there with criterion. I know precision's got several deals in Vegas and, and has done stuff in Henderson. So we've loved it out there. We've had great uh returns, great experiences. Um We found another great sponsor that I think can, can really start funneling a lot of deals um over, I I know we toured at least half a dozen other sites of stuff that we're looking at funding later on in Las Vegas.

With that. Yep. I know we have one in Carson City or Reno, I guess, which is a little bit further north. Um, but anyway, super excited about that deal. That's closing this week. We think it's gonna be a super fast, uh, flip. And then the other thing we did last week is we just finished a site tour in Jacksonville, Florida. I, you know, I was kind of, it's not like I was questionable, but it's just, I didn't have the inherent excitement about that project before I saw it. And then we went out there and, and so let's play the drone video. Actually, we got the drone video. So put the drone video up right here and you can see uh this intersection. It's basically like this. Uh six or seven lane road has 50,000 cars a day and then the other road on the intersection has 50,000 cars a day. So this corner is 100,000 cars a day. It's right in front of uh a sprouts grocery anchored center. It's right across the street from a public grocery anchored center. Guys, I didn't go to Jacksonville. They sent me the videos and I was sold immediately. I'm gonna invest in this deal.

The location just looks great and we sent Joel a video of it and as soon as he got the text, he's like, let's do it. So it works out a slam dunk. This one's a slam dunk. Uh, new developer. So excited about that. We, we looked at some other opportunities down there. We, we kind of toured the sub market a little bit. I know, uh, that, what was it? Beach Boulevard, I think was the name of it? I mean, I would buy almost anything on that road after having gone out there. Now. Just some of the biggest master planned communities I've ever seen just driving for miles and miles and miles and it's the same master planned community that's a good market. And guys going back to Vegas, uh you know, we're trying to work with this developer. We got the deal in Car uh Reno or Carson City. We have got the deal in Carson City. We got the deal in Vegas. We're trying to give you guys opportunities to have a tax deductible trip out to Vegas. You know, if you have property there, if you're an investor in properties in Vegas, then when you go out there, you can deduct that trip. Uh you're going to take a look at the in your investment, you want to drive by the property, you want to make sure it looks good. And so who doesn't want tax deductible trips to Las Vegas? Who doesn't want them? No hands right?

Everybody wants that. So we're trying to help you guys and actually that's not a bad segue into our subject today. Right. It is, it is a good segue. Yeah, because what we're talking today is about taxes and I know everyone's saying, oh, skip. Right. They talked about taxes last week or two weeks ago, whatever. But this is different. Uh, this is the, one of the biggest, uh, tax secrets, tax hacks of, uh, real estate investing that we know about. Brian says it's the biggest and I love it. Let's get to it. Real estate tax professional. What does that mean? I don't know if you had to add the tax part. It's just like you're a real estate professional, you're a real estate professional. Yeah. Yeah. On, on your taxes, I mean, nobody actually cares for your professional in real estate. But according to the IRS, once they consider you a real estate professional, that's when things really start to change for your tax return. Yep. And so let's talk about why or how you would want to do that first, the why we, we mentioned it last week when we were talking about taxes. Uh, once again, taxes are your biggest expense in life life total. And so if you can, you know, spend any time reducing the biggest bill you have, it's gonna pay off for you.

It's gonna give you more money to invest. But today we're specifically talking about how do I become a real estate tax professional and why, and, and the why is this? If you're an investor, a passive investor, let's say you give us some money, you don't do anything. You don't look at real estate, you don't spend any time on real estate. That sounds like a dream honestly. And, and we, and when people do that, they give us their money and then we give them the returns. The problem is they can't maximize the deduction. So let's say we have a property and the property makes the investor $10,000 in a year, but there's $20,000 of losses that we could deliver to that investor. It's bittersweet, right? You're not paying taxes on the 10,000 of distribution, but at the same time, you're rolling over this loss but paying taxes on this other income that you're earning or your spouse may be earning. So, yeah, and so, so then we, we, what this show is about is how do we get, you know, if you're, if you're in a high income tax bracket, let's say you make uh $500,000 a year. And I know that's not a lot of people, but it is a significant amount of the investor base that we have. So if you're making a half a million a year, most likely your tax bill, federal tax bill is 40%. Ok? And maybe state tax, maybe another, you know, 5 10%.

And so you could be close to half uh your salary in taxes So let's go back to the example, if you had $10,000 of write off uh that you can't use one year. Uh But if we could get that to be used towards your personal income, then you could, that would be $5000 in your pocket, right? And so that's an additional return on your invested capital. So now, not only let's say you, you give us $100,000 and your cash flow is 10,000 a year. Now you're making 10% on your money, but we could increase that return by 50 percent if you were a real estate tax professional and you could apply those losses, those depreciation losses against your ordinary income. Ok? That's what today's show is about. How do you uh here, here's the thing is when you're a passive investor, you can only apply a passive losses to passive income. And so if you have more passive losses than passive income, you just have to roll it forward. You can't use it into, into the future. But if you're a real estate tax professional that allows you to use your passive losses or sorry, they now become active losses and you use those active losses and you can use them against any income.

You make ordinary income included. And that's the secret of the show today. Yeah. And I think that's the big ticket here. A lot of people who have problems paying taxes, they're, it's not typically long term capital gain taxes that they're trying to get out of, or depreciation, recapture taxes that they're trying to get out of. They're lower percentages and, and they're already at an advantage, right? Like that's the advantage is long term capital gains instead of ordinary income. So, what we're focusing today is, is how, how to lower that ordinary income number as low as possible because you've already got these losses. All of our investors have these losses. They just can't use them and I guarantee it them or their spouse has some sort of ordinary income on their tax return that they wish they could be using their losses to offset that income. I mean, it just, it would be aggravating, it would be so aggravating knowing you have losses and not being able to use them. So, but here I can hear it now, there's, there's these high income earners, maybe you're a surgeon, maybe you're a business owner or a lawyer or whatever. And you make a half a million dollars a year and you say, well, my spouse, they're busy.

My spouse is stay at home, they're handling all the other things that I don't have. I'm making half a million dollars a year. And so just that isn't feasible for me, Joel. It's just not worth it. Right. It's not worth the time. The conversation probably went. Yeah. My wife has tons of time for that. And then babe, what do you think? I do all day. I'm busy and no question, uh, spouses that stay at home. They, they work just as hard and do just as much. Uh, but we're, there's a way to do this where they can still become qualified as a real estate tax professional and still get their stuff their day job, stuff done. But here's, the thing is real estate if done. Right. Could provide enough losses if you bought enough property to offset all 100% of that. Half a million dollar income. Well, what does that save you if you're paying 50% taxes? 250,000 a year? So much money? So where, where else is your spouse gonna do part time work and be able to save you or make $250,000 a year? I don't know of any place. I love this. We didn't write this down. This is live folks. I'm coming up with this. So guys, that's what we're talking about today. And so let's get into how, how does this work?

How do we get, uh, a spouse, uh, qualified as a real estate tax professional? So then all real estate investing losses can be offset, can offset the high tax earned income that you pay taxes, can any? Why can't anybody? What you're saying is when you do your, when you file your return under occupation, you put real estate professional as opposed to whatever you occupation might have been before. Yeah. And, and, and just to clarify just in case somebody's starting at the end of the podcast, instead of starting at the beginning or just picking a random episode or, you know, somebody's scrolling through and says, I want to learn the biggest secret. The reason real estate producer losses is because of depreciation. We're allowed to write off this depreciation as long as we pay it back when we sell with depreciation recapture. So that, that's why you have all of these losses. It's not a secret. That's what people love about real estate. But at the same time, if you're not adding value into real estate, you're just passively investing in it, which I would, I don't know what percentage it is, but I would bet there's just as much wealth and completely passive real estate ownership than there is active.

Maybe more. There's probably more wealth real real quick before we get into uh how you qualify? What are some other losses besides depreciation? What are some other losses in, in real estate? Could it be because your rental income isn't as much as your expenses? Is that what we're talking about or, I mean, it's typically depreciation and interest are, are your two big ones? Assuming you've got a good piece of property that's not losing money. I mean, to your point, Brian, let's say you invested, uh you know, let's say you invested in a real estate deal and it didn't go well, you had major occupancy issues. And now, uh you have a major, major, uh you didn't make any money but you lost money and you have the depreciation losses. So you have this compounding huge loss. But if you're still a passive investor, that huge loss is gonna sit out there while you pay 50% taxes on your ordinary earned income. That's a problem. Ok? So we're gonna help you try to solve that, that problem. And if you don't have that much income for that particular year, you can roll those losses over for when you do make a profit, right? But we want to help you take advantage of those today. So we got excited. We're gonna tell you the biggest secret. We're gonna get there. Ok? We, we kind of tease, but we're the biggest secret is really at the end.

So you gotta stay dialed in, we gotta stay dialed in here. The next one is how, what is a real estate? Let, let's define this according to the IRS. What is a real estate professional? According to the IRS, the IRS has specific rules, right? Brian's gonna walk us through them one by one. Hey, hey, full disclaimer. We're not CPA S. We do not file taxes. We hire CPA S to do taxes like you should be doing all this should do is, is spur you to go and research this subject and to talk to your accountant. Uh, but it is doable. Uh, we're gonna tell you how right now. Ok. So, first, uh, qualification is the more than 50% rule. So more than 50% more than 50% of your time needs to be spent on real estate business activities. More than 50% of your services. I don't know if it specifically says time. Yeah, it's services, services. So if you have a day job, uh, if you're, you know, like I said, if you're a doctor or something, then this is not, you're not gonna be able to qualify because you're gonna spend, you know, 70 hours a week at the hospital, you're not gonna spend more than, you're not gonna be able to argue that you can spend more than 50% of your time. But this is where a spouse comes in. Maybe there's a stay at home dad, stay at home mom and they don't have another job.

Well, now 50% of the services is easy to get to because you, you're not really rendering services 40 hours a week to somebody. Uh besides your family, you may not render any services. So now any, any work you do on real estate, you qualify for the 50% rule. Uh And so let's talk about what that could look like. Um You know, you, you may have a rental houses, you have to manage those, you have to upkeep those. Maybe you're searching for new rental places or new properties that's acquisition mode, maybe you're a realtor and you spend time on brokerage or on realtor services. All of these things count towards these, these qualifications right here that we're going over. Uh And so it's not too hard to, to figure out a way to get there. You know, when me, back when I started real estate and I um basically just trying to educate myself and looking for property. Well, now I'm driving markets, I'm looking on the internet. So I'm spending hours a day, you know, looking for deals and those are, those are services that you're rendering. I mean that still qualifies as, as I'm trying to buy and make money in real estate. This is my business and I'm spending time on my business.

It doesn't matter that I didn't buy as many as I wanted to buy. It stills time and it still qualifies under the 50% rule. So that's number one, over half of the services you provide need to be in real estate. Ok. Number two is the 750 hour requirement. So not only does 50% of your time have to be towards uh activities, but it has to be a minimum of 750 hours in a tax year. So there's, there's 2080 hour workable hours in a tax year if you're working a 40 hour week. So what is that? 750 divided by 2080? Well, what I'll say is, yeah, well, 750 I'll divide it by 2000 because really, um, and that's 37% because most time you get, you get weeks off, um, for vacation and things. So if you just take a standard 2000 hour work year, 750 is less than half of your time. Ok. And, and so then let's talk about that. Uh, you know, I think that most people could get there if you take 750 divided by 52 weeks, uh 14 hours a week, you gotta spend, that's two hours a night, that's an average of two hours a night or that's like, you know, could that be five hours a day on three days?

You know, so Saturday morning, you get up and you go from 8 to 1 on a Saturday spending time looking at deals, driving markets, I mean, analyzing stuff. How many people go pick up the rent, check, go, go deposit it, go drive by the property, go meet with a broker, talk about a market, boom, two hours. You do, you do like it's not that much time. So what we're saying is you can, you can get there, a spouse can get there and you like, well, I don't, you know, maybe they don't wanna do two hours a day, you know, or three hours a day fine. But there's gonna be certain circumstances where that two or three hours a day can end up. Uh, saving you or generating hundreds of thousands of dollars in, in income by, by, you know, eliminating a tax bill. So that's why it's really, really worth it depending on your circumstance to evaluate how to get this done for you. Ok. Ok. So the next thing the IRS does is they uh stipulate what these activities are. Uh uh and I don't wanna, I'm not gonna comment about each one of them. I'm gonna read them out and you guys tell me if you want to make some comments afterwards. But, but some of the services that qualify are rental unit management, new construction, uh property and business operations, time spent as real estate or broker, realtor, realtor or broker, right?

Um Property development or redevelopment and property acquisition. Yeah. So literally everyone is a realtor. I'm, I'm a realtor, I've got a real estate license. I never use it because we're principles in the transactions. But literally everyone knows like seven real estate agents, nobody has a problem finding a realtor to sell their house. All of all of those people are real estate professionals. I mean, ok, there's a lot, there's several tax requirements or there's several requirements that I may not know intimately. I'm just saying like 9.9 times out of 10, a realtor is a, is a tax professional and meets these requirements. Would you guys agree with that? Nine, nine out of 10, my guess is that yes, if you're a realtor even if you're not selling a bunch of houses, if you're trying to get listings, if you're kind of working in the business, um, you're, you're pitching your realtor services to your friends and family that, that could all add up to becoming a real estate professional and, and we were kind of chatting about it in the beginning because you're supposed to kind of keep records of this time and it, and it kind of seems a little bit insane. But my point was just my calendar at any point, you can pull up my calendar and I've got, well, well, over 750 hours booked in my calendar with a name, an address, a time, a place, a Zoom or whatever it was with a quick note about who I met with that would easily justify a real estate tax or a real estate professional designation.

And I'm sure a lot of people are doing something similar already. It may just be their email. Like if you went through my email, you could see that I'm spending, you know, an hour or two a day or hours or responding, reviewing material all day, it would be easy to justify in a sense. That's, that's a good point. You know, when I think about what we, some of the tips we've told people about how to get into commercial real estate is to get on brokers list, to get properties emailed to you. You know, I get hundreds of emails a day, uh, looking at property all around the country. Now, do I look at all of those? How long do I look at them? You know, that that's up for you to decide if you're gonna try to meet this requirement. But if your inbox is flooded with deals and you're doing, you're having email correspondence with, with, you know, let's say a broker in Dallas about an apartment complex or a potential re retail deal, you're gonna buy all you're doing is you're documenting the hours and, and the Rs comes in and they say, ok, did you really do stuff? You know, did you, were you really working on real estate? You're like, well, look at my inbox, dude, I have 500 1000 2000 emails with brokers all around the country and I, you, you can see here I drove and, and, and was looking at these properties.

Another thing, think about if you, let's say you, you had a uh you know, a good opportunity you heard about an investment in, let's say another city like L A or something and you wanted to go out there for the weekend and, and meet with brokers, uh get to know the market, drive the market and maybe even put an offer in on a small retail deal in L A. Well, if you did that over the weekend and you, you left on a Saturday morning and you came back on a Sunday night, I mean, that you might, could book 30 hours. Right. Because I don't, I don't know, but I think all that time, if you were working for a company, you would bill a lot of that time. Uh, maybe not while you're sleeping, but for sure the daytime that you're, you're getting there all that's billable time, uh, if you're in the industry. So, so we're running out of time and I, I want to get to a point here. I think in short, we can kind of justify this as 750 hours. Figure out a way to actively evolve to 750 hours. What, what would be a dollar amount that would be worth it? I mean, a dollar saved is a dollar earned. So, if you're not paying a dollar in taxes, you earned that dollar by being this real estate professional, regardless of whether you're bring in, uh, income or not being a realtor.

Like you, you could not sell a single house in a year and I think still work 750 hours. So let's just say it was $100 100 dollars an hour where you felt like you could do your 750 hours a year. If you could just make it worth $100 an hour, that's $75,000 a year. I bet there's a lot of people out there. I bet there's a lot of people out there that are investing with us that if, if their spouse got a real estate professional designation, they could save up to $75,000 a year. What people need to remember is this is $75,000 net, right? This is not a $75,000 job where you're gonna pay taxes. On top of this is, this is, this is directly $75,000 in your bank account. All right. So we, we think you can get there if you have questions about how to get there, text us, call us and email us, we'll help you get there. We've done this. But let's let's keep going. Ok. The next thing the IRS stipulates is this has to be a single taxpayer requirement. In other words, the three of us can't try to qualify for this. For instance, the 750 hour collectively, collectively, it's not associated to business.

Nothing. So each taxpayer has to qualify for all these stipulations. But the great thing is is they make an exception for married couples filing jointly, right? This is the biggest secret. That's the secret. OK? Is that in any other circumstance, you have to spend the time. But as a married filing jointly, only one partner needs to. But if one partner, then all the losses or depreciation or anything can be, can be applied to either of their earned income, that's the secret. So let's take somebody making half a million dollars a year because it's an easy number. Not because it's an easy salary to obtain, but because, I mean, a $250,000 salary, whatever number you wanna do, what do we think the average tax bracket is for that? You know, 30% 40%. So, I mean, what is, well, half a million, I think you're, you're up to the 35 to 40% federal. Let's do 250,000 times. What is that point? 0.3 30%? No, 250 would be probably 3035 and it's graduating.

So it's not exactly. So, so 87,500 is what you would pay in taxes. Ok. So, I mean, I, I think that's worth it if you're making, let's just say a six figure salary. I, I like if you have six figures of ordinary income coming in and you have access to real estate losses, which you should be able to do with six figures, you should, you should seriously look at becoming a tax professional. It would be real professional, real estate. It, we're at the end of the show and I said it a bunch and he doesn't even realize it. Oh, that's even better. Just watch the delete all that. He never said he, he's gonna delete the word tax. What else we got? Ok. So the IRS is gonna tell you that they require documentation that you've worked we kind of touched on this a little bit but they're gonna say that they require documentation. So what kind of documentation don't freak out about the documentation guys? Let's, let's say that uh the documentation is um that you put down in your calendar that you were working on, you know, acquisitions and you were looking at deals from six pm to nine pm and, and maybe you, you know, copy some links into the documentation of some properties you looked at, I mean, the RS, what can they do?

They can't say, well, no, you didn't, no, you didn't spend three hours, you know, like it's just, they're just trying to make sure that they're not getting scammed. So it's not, it's don't make it over burdensome here. They just want to know, are you in the game or are you not in the game? Are you doing the work? Are you, are you involved in real estate or are you not? That's all the documentation is, it's just to make sure that someone's not claiming that they're a real estate professional and they, they don't even bother to look at real estate. Ok. So uh I I would advise you to look up what documentation you might need, but don't let it be a roadblock to you pursuing this because it's worth it. I agree with you. I, I think the last point just to clarify being a real estate professional. Good job. There you go. Does not get you write offs just to clarify, investing in real estate, gets you right off. So this is really only applicable to people who invest in real estate. I, we should have said that at the, at the beginning, maybe if your investment was under the state, then this is the biggest secret. I'm just now realizing that maybe some people are like, well, this doesn't save me any money at all. I can work 750 hours and I don't save any money on taxes.

So there's only two ways to save money on taxes is to have expenses where you actually spent money. Like maybe you went and looked at a property, you know, your mileage, your phone, all those deductible expenses that we talked about last week. But the other thing is to have the depreciable losses that come from owning real estate. So if you have neither of those, if you're not spending any money trying to buy real estate and you're not, you don't have any depreciable losses, owning real estate, well, then this isn't for you. But if you're, if you want to be in the game and you're, you know, you're already looking to buy real estate, this is gonna be important. Ok. Is there anything else? That's all she wrote? Well, uh guys biggest tax secret in real estate is having one of two people filing jointly to be able to call themselves a real estate professional. Also just realize something else. This is not for single people. No, I just decided I'm getting, I'm getting married. This is such a big deal. I'm getting married. Look at you. He's already a tax professional. It's a real estate professional. See, I did it already. That's true. I guess, I guess I'm all right. That is it. We will see you guys next week on how to invest in commercial guys.

Episode 126 - Unlocking the BIGGEST Tax Secret in Real Estate Investing!
Episode 126 - Unlocking the BIGGEST Tax Secret in Real Estate Investing!
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