Show Summary

In this episode, we’re joined by Tom Wheelwright, one of Robert Kiyosaki’s Rich Dad Advisors. Tom is an authority in minimizing your tax bill and knows the tax code as well as anyone else in the country. Most CPA’s and tax advisors are naturally conservative, that is, overly conservative with your money because of uncertainty of the code, and fear of getting audited. Tom will tell you that “conservative” for him means knowing the code better than anyone, including the IRS, and having no fear of an audit. If you’d like to learn some golden nuggets to save some $, don’t miss this episode of the FlipNerd.com Flip Show!

Highlights of this show

  • Meet Tom Wheelwright, Tax expert and Rich Dad Advisor to Robert Kiyosaki.
  • Learn from tons of nuggets that Tom shares on how to save on your taxes with accelerated depreciation, cost segregation and passive loss rules.
  • Join the discussion on new and little known regulations that can create a massive difference in your bottom line!

Resources and Links from this show:

Listen to the Audio Version of this Episode

FlipNerd Show Transcript:

Mike: Welcome to the FlipNerd.com podcast. This is your host Mike Hambright, and on this show I will introduce you to VIPs in the real estate investing industry, as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level.
We have three new shows each week which are available in the iTunes Store, or by visiting FliNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with FlipNerd.com. Welcome back for another exciting VIP interview where I interview some of the most successful real estate investing experts and entrepreneurs in our industry to help you learn and grow.
I’m excited today; we have a special guest, Tom Wheelwright. He’s one of Robert Kiyosaki’s Rich Dad advisors. Tom is the CEO of ProVision, a strategic CPA and tax advisement firm that focuses on helping entrepreneurs and investors keep more of their earnings and make great tax decisions.
Tom is also the number one best-selling author on Amazon right now as we speak with his book, “Tax-Free Wealth,” and we’re going to provide you with a link for that. And it’s very fitting for the time of the year, as we round out 2014 here. So today Tom is going to discuss things that you can actually do in 2015, that is after the year is over, that will impact your tax bill in 2014; probably some things that you didn’t know about. And he’s also going to discuss some new tax regulations and IRS rules that very few people are talking about right now that he’s going to share that could impact you as well. So it’s going to be an exciting show today.
But before we started with though, let’s take a moment to recognize our featured sponsors.

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We’d also like to thank National Real Estate Insurance Group, the nation’s leading provider of insurance to the residential real estate investor market. From individual properties to large scale investors, National Real Estate Insurance Group is ready to serve you.

Please note, the views and opinions expressed by the individuals in this program do not necessarily reflect those of FlipNerd.com or any of its partners, advertisers or affiliates. Please consult professionals before making any investment or tax decisions as real estate investing can be risky.

Hey, Tom, welcome to the show.

Tom: Hey, thanks for having me. It’s great to be here.

Mike: I’m glad you’re here, and this is such a fitting exercise for a lot of real estate investors out there. We have very veteran people that listen to our show, and even new people, and you could never get enough tax guidance and advice, because obviously the laws are always changing, and there are so many little nuggets that a lot of people don’t necessarily know until somebody like you shares them with us, so thanks for being here today.

Tom: Well, thanks very much. And really, there aren’t a lot of people that get as excited about taxes as I do.

Mike: Yeah.

Tom: Because what I always recognize is the fastest way to put money in your pockets to reduce your taxes is also the easiest way.

Mike: Yeah, keep more of what you already earned.

Tom: That’s right.

Mike: What’s funny is, and we’ll get some tips from you on how people can either contact you obviously, or maybe go about finding a great CPA or tax advisor, but in my experience when you talk to a CPA that obviously has a lot of experience with real estate and you can tell that they’re kind of giddy talking about something that most people gloss over about, then you might have the right guy.

Tom: No question. The reality is that real estate, which is where I’ve spent my entire career in the real estate arena; it’s the greatest tax shelter on earth, not just in this country, but in every country in the world. Actually as I’ve traveled the world that’s what I find.

Mike: Yeah, awesome. Tom, for those who don’t know you, why don’t you tell us your history and your background, and how you got to where you are today?

Tom: I try not to bore people too much.

Mike: No, no, this is good stuff.

Tom: I have a master’s degree actually from your neck of the woods, in Austin, Texas, the University of Texas. And then I started my career like any good student would. At the time it was the Big Eight, and now it’s the Final Four, the big four accounting firms, with Ernst. And it was Ernst and Whinney at the time and later Ernst and Young.
I spent several years there, seven plus years, including three in their national tax department. Actually the last time the tax law was completely revised was 1986, and I was in Washington, D.C. at the time. From a professional standpoint, that was a pretty exciting time.

Mike: Yeah.

Tom: I’ve been in Arizona for the last almost 30 years, well 25 years, and spent four years as the in-house tax advisor for a Fortune 500 company here in Phoenix. And then 20 years ago we celebrate our 20th anniversary in March. I started ProVision with two clients, and no employees, out of an office in my home.

Mike: Yeah, that’s awesome. So Tom, you obviously have a lot of tax experience, but prior to going out on your own, how did you find your way into focusing more on the real estate space? Was that just happenstance, or was it something that you were passionate about?

Tom: My parents were real estate investors.

Mike: Okay.

Tom: And my Dad was an entrepreneur on top of that. And then the specialty area I really liked when I was in graduate school was partnerships. And as you know, since you’re in real estate, partnerships are the way to go in most cases in real estate. And now we have, since 1977, we have limited liability companies, which is even better because it’s like partnership with asset protection. I know you had my friend Garrett Sutton on the show not too long ago.

Mike: Yeah.

Tom: And he’ll tell you all the great things about limited liability companies, or LLCs. Well there are some terrific tax advantages with LLCs as well, and you can have an LLC be taxed as a partnership. So that’s really where I got into real estate, through my technical experience in partnerships. So then I naturally went to real estate, and literally have been working with real estate developers, real estate investors, and real estate business owners since 1980.

Mike: Okay, that’s fantastic. I don’t think I asked Garrett this, but how does one become an advisor to Robert Kiyosaki?

Tom: Devote your entire life to the Rich Dad mission. And you know what, Robert cares most about people who are interested in the mission. There are eight advisors right now, and we all joke that if you were to double our salary, it wouldn’t change. We have never asked for a nickel from Rich Dad, and that’s the way we are. We are really devoted to the mission of Rich Dad. It’s not that we’re looking for anything in return; this is not something that you aspire to. This is something that you contribute, and who knows, once in a while call someone up. We have a very tight-knit group. We’ve been together for a long time now, and it’s pretty rare that Robert adds an advisor. Most of us have been with him for ten plus years.

Mike: Yeah. That’s fantastic. What we’re going to talk about today, and we could spend hours or years talking about tax strategy and things like that, but at this time of year there are usually, and I think I shared with you a minute ago before we got started, that my wife and I just met with our advisor and started coming up with our strategy prior to year end. And we always feel this burn that, hey, the year is coming to an end and we have to start projecting how we’re going to end up in each of our companies.

Tom: Right.

Mike: We start doing some intramural stuff where we’re transferring things from different companies and really trying to minimize our tax bill, clean things up, and kind of plan for how we’re going to end the year. But as you were sharing a little bit ago, unbeknownst to a lot of people, there are actually things that you can do in 2015, after the year is ended, that will come back and affect your 2014 year. So do you want to share some of those things? Maybe you could give some context to the types of things that they have to do before the year is up, and then the types of things that could potentially wait?

Tom: Sure, and first of all, let me congratulate you on doing the most important thing, which is sitting down with your tax advisor at the end of the year. People don’t always do that. They think, oh, you know, that’s another expense. But the reality is that when you’re a professional investor or a professional business owner you recognize that when you spend money on professional advice it’s not an expense, but it’s an investment. And the return as you were tell me earlier, is way higher than probably any return you get on real estate.

Mike: Sure.

Tom: The return with your tax advisor is going to be number one. And that’s actually Chapter 23 in my book is how to find the right tax advisor.

Mike: Oh, great.

Tom: Later on if you want when we share the link, we’ll actually share a link where they can get a free copy of that chapter.

Mike: Oh, that sounds good.

Tom: Because I think the most important person in your life financially, outside of your spouse, is your tax advisor. They are going to have the biggest impact. And the first thing to recognize, whether it’s your tax advisor or yourself, is to recognize what the tax law really is. Most people are scared to death of the tax law. They think that it’s something to punish you. When the reality is, there is one line in the Internal Revenue Code that says, “All income is taxable, unless we say it isn’t.” And there are about 29 pages of charts and tables that tell you how much tax to pay. But there are a total of 5,800 pages in the Internal Revenue Code, that’s not counting regulations, rulings, anything else; of that 5,770 pages all of that, except that 30 pages that tell you how much tax to pay, is really a roadmap to reducing your taxes.
What people don’t normally realize is the tax law is just a series of incentives for business owners and investors, and that the investors that get the most benefit, without the exception, are real estate investors.

Mike: Yeah.

Tom: So that’s why, as we were talking earlier I was saying, real estate is one of those few areas where you can actually do something after the end of the year to affect what happens during the year. There are actually opportunities to catch up on your tax benefits. So there are really two things that we ought to talk about in there, and they are related.
Of course the greatest tax benefit to real estate is depreciation. I mean, everybody knows that that’s the greatest tax benefit, depreciation. So of course it doesn’t apply if you’re flipping properties or developing properties. But certainly I know a lot of your listeners and viewers are buying and holding properties, and for them getting the most depreciation possible is huge; because the more money you have now, the more money you have to invest in more real estate. Right?

Mike: Absolutely.

Tom: And the easiest way to get that money is to reduce your taxes.

Mike: Yeah.

Tom: And the easiest way to reduce your taxes if you’re a real estate investor is to accelerate your depreciation. And the way to do that is through a cost segregation.
Now cost segregation is simply when you think about it, when you buy a piece of real estate you think about what you purchased. You bought the land, you bought the building, but you also bought the improvements to the land, like the fencing and the lighting and the driveway and the landscaping. And you bought the improvements to the buildings, so you bought all the contents of the building, whether it be the ceiling fans, the cabinets, or some of the specialized wiring. There are all sorts of things, but what I find is the biggest mistake real estate investors make, the number one mistake, is they don’t do a cost segregation.
The cost segregation just means, by the way, it’s entirely not only allowed, but expected under the law. There is an IRS audit guideline on how to do it. There are a couple of requirements; first is you must hire a professional to do this. The IRS will just slam the door on you if you don’t hire a professional to do this. And the professional should be either a CPA or an engineer, or best is hiring both.
We don’t actually do this work ourselves; we refer it out, and we hire a firm that has both the CPA and the engineer. Basically what they’re doing is they are analyzing the property and determining what portion of the cost of that property should be allocated to land, building, contents, and land improvements.
And I’ll give you a simple example. If you were doing commercial real estate, the building itself you’d get about 2.5% a year as the cost of that building is depreciation. But on the contents you’re going to get 20% to 30% a year. So it’s 10 to 15 times as much depreciation in the early years, and as long as you continue investing you’re going to continue to build your depreciation.
So the cost segregation, by the way, does not have to be done before the end of the year. This is one of the things you can go backwards on.

Mike: Oh.

Tom: Not only that, I’m going to tell you a secret that very few people know. Let’s say that you bought your building five years ago. You can catch up your depreciation when you do a cost segregation.

Mike: Wow!

Tom: Imagine that your contents are depreciated over five years. Well, let’s say you had a commercial building, and for the last five years you’ve been taking 2.5% a year. Right? Okay, so that’s 12.5%, right? You’ve taken 12.5%; well you could have taken 100%, which means that there is 87.5% you haven’t taken. And when you do that cost segregation you get the entire 87.5% the year you did the cost segregation.

Mike: Wow!

Tom: So there’s a huge catch-up. I mean, literally we’ve had clients that saved over $1 million in taxes and gotten that much in a refund just the first year they did the cost segregation. And then of course, there’s a benefit to, you know, ongoing.

Mike: Sure.

Tom: So the cost segregation is something that’s not very expensive. You could do an entire apartment building for $15,000 and you might save a couple hundred thousand dollars in taxes the very first year.

Mike: So talk about some items that you can accelerate and the different schedules. You said something about five years, but is everything the same five years, or are there some things that have longer lives, like roofs for example?

Tom: Again, this is why you have to have a professional do this. Okay? There are some things that are five, some that are seven, some that are 15 years, some that are ten years.
So it’s not as simple as saying, okay, you have five year property, and you’ve got 15 year property, you’ve got 27.5 year property, okay?

Mike: Sure.

Tom: You really have to look at the details, and that’s not something you might not even want to try to attempt.

Mike: Right.

Tom: Nor do you want your CPA to try to attempt it. You want a professional who all they do is cost segregation. That’s why we refer it out, even though we understand it really well.

Mike: Yeah.

Tom: It’s a very technical discipline. You’re going to get a massive report. The IRS, if they audit you for any reason, is going to want to go through that report. And you’re going to want to make sure that that report is absolutely clean and thorough, has all the pictures and everything looks right.

Mike: Sure.

Tom: But it is something that our clients do it all the time. And it literally saves them hundreds of thousands and millions of dollars.

Mike: Sure, yeah. That’s awesome. Okay, so you can do that after the end of the year. While we’re on this topic, for personal reasons I’m curious what your thoughts are on how to manage. Let’s say you added a new roof, and I don’t know if it has to be depreciated over 15 years, for example, if it’s a 15-year period. And then a year later you have a hailstorm that comes through and that gets destroyed. Now you could start depreciating the new roof over 15 years, but just tracking every individual expense and where you’re at on the depreciation cycle for previous periods, I know from personal experience it can be a bit of a nightmare. So any kind of quick tips on how to manage that?

Tom: The quick tip is you have a really good tax advisor that helps you track that. But I have really good news for you, Mike.

Mike: All right.

Tom: And that is that that roof may be deductible, and not have to depreciate at all.

Mike: Okay.

Tom: Remember at the beginning of the show you said that we’re going to talk about some new regulations?

Mike: Okay.

Tom: The new rules that the IRS issued? They issued these rules; these are called, or just refer to them as the new repair regulations. And basically what they do is they set really clear guidelines on when you make improvements to a building, what portion has to be capitalized and depreciated, and what portion can be expensed. And it’s a very complex set of regulations, so this is where you sit down with your tax advisor and you make sure first of all your tax advisor is a real estate specialist. I mean, this is a very technical area, as you know. You don’t just hire any tax advisor for this. You must have somebody who really understands real estate, and preferably is a real estate investor themselves.

Mike: Sure.

Tom: Because then they’ll have a different perspective.

Mike: Absolutely.

Tom: But then what you do is they go through very much like a cost segregation and they look at what you’ve done. And here’s another one; you can do this retroactive. So let’s say you hire your tax advisor and they go in and they review your improvements to your buildings over the last ten years. Basically, you can go back forever, but let’s take ten years. And what they find is that under these new rules, because these are changes; they just happened this year. Under these new rules you should have deducted a whole bunch as repairs that you actually capitalized and depreciated. Well, you can catch up all those repairs into 2014. Okay? You have to file a Change of Accounting Method. It’s a Form 3115.
Now here’s a tip for everybody. Every real estate investor must file a Form 3115 for 2014. It’s attached to your tax return. It’s something that your tax advisor should know how to do, and if they don’t, by the way, wrong tax advisor. Get a new one. But they really have to. The IRS has said you need to, and I’ve been to many conferences, including one I just went to one in Washington, D.C., which was the National Tax Conference for the American Institute of CPAs. And all of the speakers there said you must file a 3115.
I think it’s very advisable, even if you think you’ve been complying, you really couldn’t have been, because the rules are brand new. We didn’t know what they were prior to 2014, and these rules, what we had was a bunch of court cases. We did our best to follow the court cases, but they were different in every jurisdiction.

Mike: Right.

Tom: So what we have now is we have a clear set of rules. I don’t like them; a lot of people don’t like them. They say, “Oh, they’re more restrictive,” etc. I disagree. I think that it’s really nice to finally have a clear set of rules on what you have to capitalize, what you can take for repairs, and I don’t think they’re nearly as restrictive as I’m hearing most tax advisors say they are.
My reading of them and what I’m getting from some of the conferences I’ve been going to, and I’ve been going to a lot of training on this this year. There is just a huge opportunity, and there could be literally you could have hundreds of thousands of dollars of items, like a roof for example. A roof typically, not always, but typically a roof is going to be deductible. It’s a repair.

Mike: Yeah.

Tom: Because the unit of property you have, and I mentioned that term before, the unit of property is your building. The roof’s not a separate unit of property; therefore the roof is just a part of that property, and typically you’re not replacing the whole roof. Really what you’re doing is you’re putting new singles on it, or you’re replacing a part of it. And because of that you ought to be able to in many cases, deduct that roof completely when you put it on. When it’s damaged, of course, then you get to deduct it again.

Mike: So Tom, where would somebody find . . . what would somebody search for? Where do they find these rules? I’m going to tell you, I don’t normally share a lot of personal information on the show. We have a rental portfolio; we actually went through a fairly nasty IRS audit last year, and they found no wrongdoing, but we had to write a very large check for the exact opposite of what you’re saying here. They wouldn’t allow us to expense some basic repairs, and they said I needed to be capitalized, and we were kind of undoing that. And so this is really interesting for me. And of course, you and I may need to talk offline about it.

Tom: We may need to talk offline, because first of all, I’ve been like I said, I’ve been doing this for close to 35 years now. And I’ve never had a nasty IRS audit in 35 years. Now I’ve had some that were challenging, don’t get me wrong.

Mike: Yeah.

Tom: But we just don’t lose those audits, and part of that really is just because what we understand is we understand the law better than the IRS does. And second of all, we understand that an IRS audit is about managing the auditor more than it is managing the technical side of the audit.

Mike: I could see that.

Tom: So it’s a very personal…understand that these are people that nobody likes. Right? Seriously, I mean, it’s worse than being a dentist or a proctologist. I being an IRS auditor, “I’m here from the government; I’m here to help you,” yeah, right. Okay. Nobody likes them in the first place.
But we treat the IRS auditors very well. We put them in our best conference room, not a worse conference room. We make sure that they have everything that they need. But we manage that audit. I hate to hear somebody say, like you said, I hate it when I hear somebody say we had a nasty audit. We had to write a big check. That should not happen.

Mike: Yeah.

Tom: And that’s a function probably more of managing the audit…

Mike: Sure, I can see that for sure.

Tom: …versus what you actually did.

Mike: Yeah.

Tom: It is a big deal. The real estate, that’s what I say real estate is just one of those areas where you want to be very careful who your advisor is. I’m not saying I should be your advisor. I’m saying to make sure that advisor not only has a lot of real estate experience, but that they really understand the law and how to handle the IRS. Because chances are if you do get audited, we all know about the real estate profession rules, right?

Mike: Yeah.

Tom: And the passive loss rules, which is a big issue for real estate investors. You will be challenged. I mean, you’ll be challenged on your repairs; you’re going to be challenged. Real estate is just a great tax shelter, and so the chances are you will be challenged, so you have to be prepared for that. We look at every tax return we prepare as if it’s going to be audited.

Mike: Yeah, okay. Well, maybe we can talk about some of those things afterwards. But to continue talking about some of the other things that you can do in 2015, retroactively that will impact you in 2014, what else do you have?

Tom: Well, I’d say the other thing; we already talked about cost segregations, which we can catch up. We talked about repair rights, which we can catch up and those are two big things.
The third one is really looking at those real estate professional guidelines. These are the passive loss rules under Section 469. And by the way, to answer your previous question, where would you go on those repair rights, that’s the regulations under Section 263a; not a capital A, small a. There’s an important difference. They are two different code sections; 263a.

Mike: Okay.

Tom: Do not go there; go to your tax advisor.

Mike: Yeah, yeah.

Tom: I really can’t emphasize that enough. This is not a do-it-yourself situation.

Mike: Sure, of course.

Tom: You have to have a tax advisor who understands those regulations and can explain them to you. So that’s where I would go. I’d send you to your tax advisor. But if you really want to and that nerdy, that you really want to go look at the law, it’s Section 263a. That’s where those regulations are.

Mike: Okay.

Tom: They’re the Treasury regulations. But let’s go to Section 469 just for a second, because that’s where the passive loss rules are. If you’re a real estate investor, remember that the general rule is your losses from your real estate are passive, which means that the only negative to that is that you can only use those losses to offset passive income.
So there are a couple of things to consider. First of all, is there any way out of those rules? Well there are two exceptions to those rules. One is that you’re an active investor, and your adjusted gross income is less than $100,000. Okay, if that’s where you are, you get $25,000 of your losses not treated as passive losses. And by the way, all you have to do is breathe it on the property and you’re an active real estate investor. That’s the easiest test in the entire tax law to meet. So that’s an easy one. I rarely see that one missed.
The other one though is the real estate professional status. This is one where it’s very important, and so here’s another tip. It’s very important that your tax preparer; by the way tax preparer and tax advisor always need to be the same person. They always need to be in the same place, don’t think that you can go to a cheap little strip center for your tax preparation and then you go to somebody like us for your tax advice. It will not work. The tax preparation process is part of the planning process, so don’t try to cut corners on that one. Okay?

Mike: Yeah.

Tom: So your tax preparer has to make an election. You have to make an election on your tax return. You really must do this, and the election is called, and I know it’s technical, but here’s what it’s called. It’s called a Section 469C7 election, 469C7. And what it does is you elect to combine all of your real estate and treat it as a single piece of property and solely for this purpose. Okay?
Now there are some potential downsides to that, so don’t just go do it. Sit down with your tax advisor and run the number, make sure it works for you. But you can never be, well I can’t say never; it’s rare that you can be a real estate professional and get your losses without making that election. If you don’t make that election, you can’t make that election on a mended return. You must make that on your original return when you file it. And I recommend, technically you don’t have to make it every year; but I recommend you do make it every year, just because all it is for your tax preparer is clicking a box and it prints out a statement with the return.

Mike: Yes.

Tom: But if you miss that, there are a number of cases that say if you miss that you’re done. It doesn’t matter what else you do.

Mike: Okay.

Tom: The other thing of course is you have to actually be a real estate professional, and what that means is that you spend more than 750 hours in real estate, and you spend more time in real estate than all your other jobs combined. Okay? So you meet those two tests, and that’s your get-out-of-jail free card. If you meet the real estate professional exception, and you make that election–and that’s an “and”–and that 469C7 election to combine your properties, then all of your losses will be treated as ordinary losses. That means you can offset your other business income. It means you can offset your wages from your spouse, or your wages. It means you can offset your interest income, your dividend income, all of that income.
And in addition, by the way, if you’re a real estate professional, you are not subject to the new Obama Care Tax on your real estate income. Okay, that’s an exception to that rule. You are not subject to that 3.8% Medicare tax on your real estate income. So that’s a very important thing to do, and it’s something that you do when you prepare your tax return.
Now here’s a quick caveat. If you are audited, you will be challenged.

Mike: Yeah.

Tom: So don’t say that you are. We actually require our clients to sign a form every year saying I meet the test. Here’s the test and I meet them. Because if you don’t meet the test, you will lose that argument and you’re going to have a big tax bill and you’re going to be writing a big check for that.

Mike: Yeah. In my experience one of the things that I think is important, and I think you’ll probably agree, but I’m interested to hear your thoughts. A lot of CPAs or tax advisors that people use, if they are not also investors, they tend to be conservative by nature, and they really have no vested interest in pushing the envelope for you, pushing the limits, taking things not over the line, but to the line. Most would just prefer to stay safe, because they don’t want to be audited; whereas I think some of the very best people don’t mind being audited because they want to take it to the line every time for their clients.

Tom: Yes. I would actually say two things about that. First of all, if your CPA is afraid of an audit, then you need to new CPA.

Mike: Yeah.

Tom: Because you do not want your advisor being afraid of the IRS. That means that they feel like they know less than the IRS knows, and I think the IRS knows very little. So that means that your tax advisor knows even less than the IRS. I mean, that’s like the IRS is typically a C student, and that means that your tax advisor is a D student, okay? Seriously, I’d rather have the A student handling my audit.

Mike: Yeah.

Tom: But the second thing I’d say is okay, so my question is what constitutes conservative and aggressive, because we get this question all the time. Are you conservative or are you aggressive? Well, I think we’re the most conservative firm in the world, and here’s why. Because I think that the definition is do you stay within the lines of what you know.
If you were to draw a horizontal line and that horizontal line was the entire tax law. And then you draw a line of what you know, and let’s say your line is like just an inch into that line, and that’s all you know about the tax law. Then that means that anything outside of that line is going to be aggressive for you. Well, that’s what you’re talking about. These tax preparers only know that very small portion of the tax law, so anything outside of that is aggressive for them. And they should not be doing it. The key is to find a tax advisor who understands most of that tax law.

Mike: Yes.

Tom: We understand it and we’re nerds. I mean, I am a tax nerd through and through. It took me a long time to admit it, but I love it. It’s who I am and what I do. I love the tax law. I love reading the tax law, I love interpreting the tax law. I love going to seminars about the tax law. I mean, I’m totally a nerd. I love the name of your company, FlipNerd, because I would be TaxNerd.com.

Mike: Yeah.

Tom: Because here’s the thing; once you understand the law, then anything that you do within your understanding is conservative. So I would say that the things we do, we don’t do anything we don’t understand. Okay? It’s important that your tax advisor not do anything they don’t understand. So if you’re finding that you feel like they are a little conservative, and maybe you know some things they don’t, again, it’s time for a new tax advisor. Find an advisor who understands the law so well that whatever they’re doing, while it’s more than what you would know about, is well within the confines of what they know about and so they have no problem supporting it to the IRS.

Mike: Sure, absolutely. Well, Tom, I want to make sure we have time to talk about some of the changes that are coming up that we wanted to get into. Can you share some of those?

Tom: Well yeah, but remember that we have an Extenders Bill that has not passed as of the date we’re recording this. The Extenders Bill, remember last year there were 55 tax benefits that ended at the end of 2013. They were not extended into 2014. Both the Senate and the House, the Senate Finance Committee and the House Ways and Means Committee, these are the tax committees for their respective houses. Both of them have taken up this bill. We thought it was going to be passed back in June, but what we had was the House wanted to make these permanent; the Senate wanted to make them temporary again. And there’s a big budget issue when you do that.
What we’re left with now is we don’t know what portion if any of it is going to actually be signed into law. And it very well might be January before these extenders are signed, even though they will be retroactive to the beginning of 2014.
Some of those include, and our listeners here would be interested in, the Section 179 deduction for business. Right now that stands at $25,000. The new bill would push that up anywhere from $200,000 to $500,000 of equipment that you could purchase, so that’s a big one.

Mike: So that’s equipment like heavy machinery, big, big trucks, like a lot of real estate investors have?

Tom: Cabinets, ceiling fans; there’s a lot of stuff in your real estate, again, cost segregation.

Mike: Yeah.

Tom: That’s a reason to do the cost segregation, because a lot of those things are going to qualify for Section 179. Okay? In addition there is bonus depreciation. This is a huge one, okay. Bonus depreciation is basically 50% of what you buy new, and you get that, and that’s on top of the 179 deduction. So bonus depreciation is another one.
I actually was surprised it was even in the extenders bill, because to me I don’t think it accomplishes what it wants to accomplish; where I think the 179 deduction does. But I’m not going to complain, because it’s a huge benefit for our clients.

Mike: Yeah.

Tom: That’s another one; that’s in that Extenders Bill. A third one is the research and development tax credit. I know real estate investors don’t typically think of that, but you’ve got FlipNerd.com and I’d be thinking about that. You’ve got a new business there and I’d be thinking about the research and development tax credit.
By the way, in many states they do have the research and development tax credit, and it’s bigger for the states than it is for the Federal. So that’s a big one, too.

Mike: Sure.

Tom: There are 52 other extenders that have not been extended. Here’s one that does affect some real estate investors, that’s the conservation easement guidelines, the conservation easement where you put a conservation easement on your property, so that it can’t be developed. Right now the limit of deductibility is 30% of your adjusted gross income; where the extended would make it 50%.
So there are just all sorts of them, and little things that go on in this Extenders Bill; that’s something that you are definitely going to watch for.
Something that you should, again with your tax advisor, make sure to ask them, “Tell me about the new laws, and make sure that they stay on top of that. It is a fulltime job to stay on top of all these tax changes. And this Extenders Bill is going to have a serious impact on a lot of businesses, including real estate investors.
And let me say one other quick little thing about real estate investors. Because you include in your term real estate investor, flippers right; people who buy and then fix us and then sell their properties.

Mike: Sure.

Tom: From a tax standpoint, that’s not an investment; it’s a business. Okay? So you have to treat it like a business. The cost segregation rules don’t apply to that business.

Mike: Right.

Tom: Okay? They only apply if you’re going to hold that; however, the repair regulations do. Okay? The repair regulations do apply to that. So even if what you’re doing you say, well, cost segregation doesn’t apply to me, because I’m not holding any of it, I selling it; I’m developing and selling it. The repair regs will still apply to you, and so if you want to make sure that anything you put into the home, or that property, is deductible as much as possible right off the bat. Because then you get that benefit right away instead of having to maybe wait until next year when you sell the property.

Mike: So specifically things that you have on your inventory at the end of the year you’re saying?

Tom: Well yeah, because anything you have in inventory at the end of the year I would look at, okay, what kind of costs have I incurred that I might be able to deduct for 2014 instead of capitalized and then get the benefit when I sell the property.

Mike: Yeah.

Tom: So that is a way to accelerate some deductions if want.

Mike: Sure, sure, that’s interesting, yeah, that’s really interesting. Great, well, Tom, man, I wish we had more time. We might have to do a Part II at some point.

Tom: Any time, as you know, you can tell I love talking about it.

Mike: Yeah, I can tell you’re passionate. And it’s great. It’s one of those things where I think a lot of newer real estate investors don’t think about . . . just like they don’t often think about what’s the best legal entity for me over the long term, they just want to get going.

Tom: Right.

Mike: Because it doesn’t really impact them that much in the near term. It’s difficult to unwind that down the line, and there could be some serious tax implications, financial implications. But even with tax advice, I think there are so many people who just want to get started and they’re like, if I make enough money it’ll all work out. But once you start to make money, you realize how much you’re willing to fight for keeping as much of that as you can.

Tom: Well, the reality is in most cases, and I’ve talked about a couple of times you can go back, but in most cases you can’t go back.

Mike: Yeah.

Tom: So if you don’t set the things up right from the beginning . . . the number one thing everybody who is watching this show should do is develop a comprehensive long-term tax strategy with their tax advisor to permanently reduce their taxes.

Mike: Awesome. Well, Tom, tell us how folks get access to your book. We’re going to provide links, but just go ahead and tell us, to your book, and then to learn more about all the great work you’re doing.

Tom: Awesome, and thank you very much for that, Mike. I appreciate the plug. Go to TaxFreeWealthAdvisor.com, TaxFreeWealthAdvisor.com. And there you can get a free chapter, Chapter 23 of my book, which is how to find the right tax advisor and how to tell whether you have the right tax advisor. And you can buy my book really anywhere. You can buy it on Amazon, as you know, as it’s number one right now. You can buy it at Barnes and Noble. It’s on audio. I read the book myself. You get to hear like 15 hours of my voice.

Mike: Awesome.

Tom: How much fun is that?

Mike: Yeah.

Tom: And of course it’s also on Kindle and you can buy it on Kindle or iBooks.

Mike: Sure. And how about learning more about your firm and if people have an interest in working with you?

Tom: You know what? Come to TaxFreeWealthAdvisor.com and I actually think that’s really simple to remember, and really easy to come to and you can find it. The firm name is ProVision, but if you go to ProVision you’ll find a ProVision is actually a nonprofit, which it should be, providing provisions for the poor. But our company, of course, is an international CPA firm and the best way to find it is TaxFreeWealthAdvisor.com.

Mike: Awesome. Well, Tom, thanks again for your time today. I appreciate it. It’s one of those things that I’m a little nerdy about, too, because I know the benefits of doing this right. And I know some of the pain of doing it wrong, maybe. So I appreciate all you do and I’m sure all your clients do, too. So hey, thanks so much for you time today. I definitely appreciate it and look forward to talking with you again soon.

Tom: Thanks, Mike.

Mike: All right, have a good day.

Tom: Thanks.
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