April 3, 2023

Let’s be honest. Tax strategy is not the most glamorous subject in the world. But it does have the potential to save you boat loads of money. That's why on this week's podcast we were joined by Billy Withers. Billy is a fellow tax expert who had a lot of knowledge to share. What makes him an expert?

Billy is a real estate tax strategist. He has been working with real estate professionals for over ten years. Today he told us that his personal mission is to help people pay as little in taxes as possible. He learned the tax code inside and out at his previous jobs and realized he wanted to help people save and grow. Let's dive into the topics he found important. 

The first item discussed was depreciation and cost- segregation. Billy said that every investor is different and people have options. Most people want to take depreciation all at once because of the time value of money but not always. He gives us a litmus test. He said a green light for earlier depreciation is when a property is sold in the current year but it's not a 1031 exchange. It makes sense to take the depreciation to lower the capital gains on the sale. He said a redlight could be when people are just starting out and are not real estate professionals. They could already be in a lower tax bracket as opposed to a seasoned real estate investor and those savings could be held off for further down the road. Sometimes it makes sense to save that cost segregation study for later!

Next we talked about real estate professionals. This is oftentimes a confusing subject to people. So Billy set the record straight. You need 750 hrs in a real property trade or business and you need to materially participate to be considered a real estate professional. However, once you are, you have the potential to save a lot on taxes. A lot of people reach this status by being real estate agents.Billy explains how he shows people methods to buy rentals and scale portfolios. He tries to get people to the point where their rentals pay for their lifestyle. Many high income earners will set their spouse as the real estate professional managing their rental properties to offset their W-2 if they make significant money. 

Next we talked about the short term rental loophole. Billy has been using this for a while with his clients. If you haven't learned by now, using short term rentals  you can take the benefits of being a real estate professional without being a real estate professional. This is because if someone has short term rentals where they are collecting rent within seven days or less, then that qualifies as active as opposed to passive income. It is one of the few things that seems to be a legitimate loophole in the tax code.  Billy also talks about how this ties back to cost segregation with short term rentals. He talks about how short term rentals tend to cash flow more and it could be a good idea to spread those tax savings out across multiple years.

Finally I asked Billy about his favorite or frequently missed tax deductions. He started by saying that keeping books is important. You need a separate bank account, credit card, and accounting software. There are many small things like cell phones and LLC fees that end up on personal accounts that are missed. Also, it is important to work closely with your accountant so you don’t go too far the other way and write off everything. He says round numbers on balance sheets for purchases can also be a sign of missing closing fees. Cost segregation and hiring your kids are tax strategies that should not be overlooked either. 

Lastly, we dove into partial asset disposition. BIlly used a roof analogy. It is a structural component that must be depreciated over 27 and a half years. However, when you get a new roof, you can have a cost segregation study that finds out the amount of the building that is attributed to the roof. That means when the new replacement is installed, the old one can be considered a disposal with a zero salvage value. This is an expense. The government puts out information to find the value of the old asset to find out what can be written off. This is called a partial asset disposition. It is an expense on the books and is an immediate tax deduction. Another bonus is that because it is an expense, it’s not hit by depreciation recapture when you sell. However, Billy says the best way to go is a cost segregation study to know exactly what should be written off. Finally he says that double dipping is possible. It's possible to expense the old asset and fully depreciate the new asset in the same year. People are weary right now to park cash so this could be a great way to save on taxes and invest in your properties at the same time. 

If you want to reach out to Billy, be sure to check him out at www.summitats.com for tax related content and education. 

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