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Steven Jarvis, CPA (00:53)
Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, financial professionals edition. I’m your hos,t Steven Jarvis, CPA, and I’m very excited for this week’s episode. We get to dive into a topic that I usually stay pretty high level on because it’s not an area of expertise for me, but it comes up too often to ignore and that’s tax planning around real estate. So joining me to make sure we get this stuff all right is Ryan Carrier, a fellow CPA. Ryan, welcome to the show.

Ryan Carriere, CPA (01:20)
Thanks for having me, pleasure to be here.

Steven Jarvis, CPA (01:23)
Yeah, like I said, I’m super excited for this conversation because I get a lot of questions on real estate. You see a lot of things online on podcasts and like all of these like quick-hitting things of why everyone should do real estate all the time. And my favorite is and you’ll never pay taxes again because real estate is magic. Part of the reason I invited you onto the show is because you create a lot of content around this and at least my impression you’ll have to tell me if I’m way off base here is that you are all about real estate and tax planning around real estate, but similar to myself, you’re not really looking to wear an orange jumpsuit. So we wanna do this the right way.

Ryan Carriere, CPA (01:50)
Absolutely. Yep. There is, the first thing I’ll say is, yes, there’s a lot of bad content out there. TikTok, Instagram, you know, it’s these quick-hitting, you know, short videos, and it’s very much either half truths or even the truths that are trying to be touted as the truth is completely incorrect and just a lot of bad advice. So please just be careful in general, as we all should be skeptical on anything on social media from what we hear. But that’s why you’d want to work with a true strategist and someone who lives and reads this. But absolutely, yeah, I care a lot about just protecting myself and protecting my clients by doing this correctly. And that’s how you do it. You reduce risk by doing things appropriately and following the rules.

Steven Jarvis, CPA (02:27)
Yeah, absolutely. Right. And I’ve got a whole list of things I want to pick your brain on. But before we dive into that, why don’t you just kind of share a little bit of your background so the audience has an idea of your credentials, why I’m talking to you about this.

Ryan Carriere, CPA (02:37)
Yep. I’ve been a CPA for almost 10 years. kind of started after, graduating college, here in Minnesota, for those of you who are wondering where I am, graduating college went through, kind of a general accounting, type company when then worked and got my CPA, pretty shortly after that, then worked at, let’s see, three other CPA firms, some of them kind of local, small here in, the twin cities. And then some of them are very large, kind of national firms. And then most recently, Hull CPA, otherwise known as the real estate CPA, very specialized in real estate tax as a firm. And so I worked just kind of most recently at that firm for about four years at Hull CPA and really got an in-depth, very technical, smart expertise in real estate tax strategies. And so I’ve spent kind of the last three or four years really just deep into the real estate tax code and helping clients. There specifically worked with about 250 clients more directly and in a tax strategy, tax advisor type role, not tax filing, not bookkeeping, but very strictly just tax advisory and got a lot of, again, very good people there, very, very, very smart people there who are very good at this. But as I kind of got into more and more of that, as you kind of will hear from me and maybe you’ll see on my content on LinkedIn, for those of you who might already be following me. You’ll kind of see that really my main mantra and is pretty common across my firm that I’ve worked on is don’t let the tail wag the dog, right? Yes, we’re going for tax savings, but not at all cost. Just like if you want something in your life, you’re going to weigh what’s the cost, what’s the sacrifice I’m going to need to make to get there. And you need to weigh that. And that’s the same thing with taxes too. Hey, I want tax savings. I’m in the 37%, 35% tax bracket. Well, what am I willing to give up or what risk am I willing to basically take on in order to get those tax savings. So that’s kind of the being an advisor, not just exclusively tax savings at all costs, but being a real kind of thought leader with you.

Steven Jarvis, CPA (04:25)
Yeah, I appreciate the distinction there. And I like that you talked about, you know, just being a tax preparer versus a tax strategist, tax planner, because I think it’s really easy, especially since the CPA is such a widely recognized designation and really a widely trusted designation. People can assume that, OK, if I’m working with a CPA, I’m all set. And well, just like anything else, it kind of depends. And especially as you get into nuanced areas of the tax code and real estate is certainly one of them. It’s not just, is this person a CPA? Because I’m a CPA and I regularly turn people away who are really deep in real estate. Not because I don’t think it’s a great idea, but because it’s not what I do all day, every day. And it’s an area where, especially when you get really into the trenches on it, like you want someone who’s been there, who’s seen things, who’s worked with hundreds of clients, knows what can go wrong and knows how to help you navigate it. So Ryan, when you got started really into that real estate focus, what were some of the things that surprised you? For me, everyone knows real estate exists, and so they probably have some preconceived notions about how things work. So what were some of those things that really stood out to you that you got from being in the trenches on this stuff?

Ryan Carriere, CPA (05: 22)
Um, it’s a way more complex and way more nuanced than I originally thought. For even more context, you know, before I got to Hall CPA or, you know, the real estate CPA, I had listened to Brandon, uh, Brandon Hall, who’s the founder and managing partner, uh, heard him on the bigger pockets podcast. And for any of you who are listening, who maybe are familiar with bigger pockets and so forth, you know, it’s a big real estate investing community, but he was on there back in again, 2016, 2017. So I had kind of an interest in that. And they’ve had the Tax Smart Real Estate Investor podcast for years, know, seven, eight years. And I was a cohost on that for the last year or two that I was there at Hall CPA. And I was like, if I listen to every podcast on here, if I read every blog, I’ll be set. And the funny thing is, is that a lot of people will listen to, you know, even, you know, clients would be like, I’ve listened to like five, you know, episodes. I get it. And it’s like, Like you and I are both laughing. It’s like, okay, great. Why don’t you just take my job and you can go help other people with all these things. And it’s just so funny because I was a CPA and had been working at CLA at the time. And it’s just like, I thought I knew everything. And it’s just like, I knew literally half the amount of the things that I needed to, even as a CPA in a specific real estate tax department. And it’s just like, holy cow, like this world, like just as like, I’m sure any of our like older listeners who are listening are like…Yeah, the older you get and the more that you know, the more you don’t know, right? There’s just so much more out there, information, understanding, new things coming up all the time. Just the more you know, the more you understand you don’t know. Kind of like when you’re a teenager, you’re like, oh, I know everything. And then you start to get into college and you’re like, oh, don’t know anything. And then you finally become a little bit more aware of kind of what you don’t know.

(06:58)
So that was the main thing. And just as a tangential to that, I think the more that I got into it, the more I understood the actual tax code was really put in place to partly, not exclusively, but partly to benefit those and incentivize those who are getting into real estate. So all of these unique strategies, and yes, maybe some people will say it’s good lobbying and so forth from the real estate developers and flippers and brokers or whatever, but at the end of the day, it just seems like the tax code is a lot of incentives to make sure that, hey, if you do these things, you’re going to get this thing. Hey, if you move from real estate to real estate, there’s this thing called a 1031 exchange. Oh, cool…It’s very nuanced and has all these rules and all these things. And, you know, when you sell a stock and then, you know, buy a stock, it’s not quite the same thing, you know, depending on kind of your situation, maybe tax loss harvesting and all that fun stuff. But at the end of the day, it’s just very unique in terms of the asset class and the kind of incentives there and just a lot more to uncover compared to, I’m just a business owner and I’ve got great some retirement things, some normal deductions and things like that. You got to think through of your entities in real estate is just way more complex than that is kind of the ultimate answer.

Steven Jarvis, CPA (08:04)
Yeah, so let’s dive into a few of those things. want to really want to get into a couple of topics or kind of terms that I hear people use a lot. And even when they use them, I get the impression that they know they’re supposed to use the word in connection with real estate. But if you ask them to explain, hey, what does that mean? They would probably look a little deer in the headlights. So I’d love to hear how you help people understand some of these things. So let’s start. We’ll come back to the 1031 exchange. You slip that in there. We’ll come back to that one. I would say the one that makes me think this the most often is a cost segregation study. Because when real estate comes up, sure, advisors I know, people I know will throw around, yeah, of course, you have to do a cost seg study. But I’m usually not mean enough to say, yeah, but tell me what that actually means. Because the few times I try to kind of pull at that thread, I realized really quickly, most people have no idea what the cost seg study does in the first year, let alone in future years, and when it makes the most sense. So, how do you help somebody understand, let’s start high level and then specific application. What the heck is a constex study?

Ryan Carriere, CPA (08:59)
Yep. A cost segregation study is essentially taking, I’d answer this exact question on a podcast I was on earlier today. So I’ve got some good practice already today. Nice and fresh. it’s basically a cost segregation study is taking the component parts of a piece of real estate and breaking them down into their smaller pieces. So, for example, when you just have a normal property, okay, let’s say it’s a residential home single-family. And what you’re typically gonna do without a cost segregation study is just take the, you know, say you bought it for a million dollars, you’re gonna take some of that million dollars is gonna be land, let’s just say 200,000 because it’s typically kind of an 80-20 split, and the remaining $800,000 is gonna be the building. A typical no-cost segregation study involved is just gonna say, Hey, 800,000 divided by 27 and a half, that’s the depreciation you get for the next 27 and a half years. That’s it. But a cost segregation study is gonna say, whoa, whoa. Okay. Yes, you’ve got the land, but in that buildin,g the 800,000 in my example, you’ve got things like cabinets and countertops and appliances and light fixtures and a driveway and a deck and maybe a pool and whatever it is, right? So it’s basically kind of further detailing and breaking out, like I said, into different component,s very typical thing,s and basically why that matters is because these different things are going to have different asset lives, useful lives according to the IRS. And that’s kind of why this comes in is because, basically anything that falls into, let’s say the five year category, which is going to be more broadly spoken, talk about personal property. Again, that’s appliances, cabinets, countertops, things like that. And then 15 year property is going to be a thing like land improvements. Again, decks, sidewalks, driveways, things like that. Basically anything that has a useful life less than 20 years is eligible for 100 % bonus depreciation these days, right? Especially with the new tax bill that came out in July. So we can accelerate with the bonus depreciation. We can accelerate the depreciation that normally we would have taken over 27 and a half, but now we’re taking a good chunk, typically 20 to 30% of the building is now gonna get accelerated to again, 100 % bonus depreciation now, which means more deductions sooner. And ultimately why that matters is the time value of money.

(11:02)
And as your financial planners and advisors are listening, that’s really the crux of it because one thing that yes, it sounds sweet in the beginning. if I take a let’s use simple numbers, right? A hundred thousand dollar tax savings. That’s pretty big. A hundred thousand dollar tax savings. If I can take that hundred thousand dollars and let’s say I’m even just going to hold this property for five years. OK, if I can turn that hundred thousand dollars into one hundred twenty five thousand, even if I sell that property in five years and I don’t do a 1031 exchange, I don’t do a 1031 light, anything else crazy and fancy, even if I have to do because of depreciation recapture, I have to pay back all that depreciation I took on the front end, I’m still positive 25 grand because I took that 100 grand, invested it, whether it was interest or some other investment or brokerage in the stocks, whatever it is, okay, it doesn’t matter. I’m just gonna say 25 grand is a flat number. Even if I have to pay back the 100 grand because it’s kind of like a loan, right? Cause I have to pay back through depreciation recapture, I’m still positive 25 grand.
So that was totally worth it. So even if we have these additional fees, I’m still in that benefit.

Steven Jarvis, CPA (12:05)
Yeah. Yeah, well, I appreciate how you’re explaining that, Ryan, and particularly what you’re calling it alone, because I think that gets missed. And for people listening, this might be the first time you’ve heard somebody explain it that way, because it gets missed quite often that a cost segregation study is a timing thing. These are tax deferrals. They’re not tax savings on their face. And if we want to go back and speculate about why the rules came into being in the first place, it was really intended to give investors access to capital sooner so they could keep investing. And so yeah, you got depreciation recapture in there, which is basically the IRS saying, okay, we gave you a benefit before now we want to take that benefit back. And so these are things that we’ve all got to consider. And when you just go out and try to learn this from TikTok, those are the really important details that get get left out. Because Ryan, to your point, there can still be a huge advantage we can in this example, if we come out 25k ahead, like, hey, 25k is real money. But we’ve got to make sure that we understood going in. Hey, the rest that’s coming back because that’s where I see this stuff really go sideways and people get upset and surprised and frustrated is when someone didn’t articulate for them up front. Here’s what this is not just what this is going to mean up front because there’s some there’s some great marketing out there for hey, do a cost seg study. It’s going to cost you a couple grand to do this study and you’re going to save $100,000. Why wouldn’t you do this? And they leave out. Hey, we got to keep in mind this is coming back at some point. So yeah, love love how you’re articulating that you clearly do this a

Ryan Carriere, CPA (13:21)
Thank you, yeah. And just to keep in mind, the whole paying it back, that is again, assuming no 1031 exchange, but that is a solution. For those of you who are listening, hey, I’ve got a client, they’re gonna sell this property, they’ve had it for 10, 20, 30 years. Yes, it’s almost fully depreciated or half of it’s depreciated. Okay, well. We can do a 1031 exchange, you know, just know if we’re thinking, hey, we’re trying to do this 1031 and then do a cost seg on the new property with a 1031, very different situation. When, people don’t realize that because now we’re combining strategies and the basis is completely different and the rules are very different if we’re doing a 1031 and a cost seg. So we don’t have to get down that rabbit hole, but just want to mention that too.

Steven Jarvis, CPA (13:58)
Well, even that description right there, like what you just said is a prime example of why, as somebody who doesn’t specialize in real estate, that’s a perfect example of why I refer that out to other people when it comes up. At some point with this, there’s so many areas that are like this with financial planning or tax planning where, sure, especially financial savvy people, there’s some amount of this, great, you can kind of work your way through if that’s really what you want to spend your time on. But you’re going to get to a point where you need an expert in this stuff.

When cost-seg studies come up, when 1031 exchanges come up, especially when we’re getting into our second or third or fourth step of this 1031 exchange into subsequent properties. We’ve got to make sure we’ve got somebody with their arms around this so things don’t get messed up. Adding the complication to that, I worked with a client with a few years ago, one of the few 1031 exchanges I’ve been involved in, where they were 1031-ing the property but into a different state, which adds a whole nother level of complexity because some states will say, okay, that’s fine. But we still, like, we’re not gonna forget that you have this property in our state, and when you sell that subsequent property, we’re still gonna ask for money back. And by the way, we’re gonna check in every year to make sure you haven’t sold that property yet. And so, this isn’t stuff that you wanna take lightly. To your point, there are absolutely potential tax planning benefits to this, but you can’t just come at this with some kind of willy nilly approach.

Commercial (15:12)
retirementtaxservices.com/obbba

Ryan Carriere, CPA (15:50)
Yeah, very, very little in the tax world has a one-sided, you know, kind of one-sided coin. Everything is kind of two-sided. Like you’ve kind of got this heads and tails or this yin and yang or, you know, kind of black and white comparison because everything has kind of a trade-off, right? It’s very, very, very, very rare that there’s no trade-offs. One, and there’s also a difference in terms of categories between, you know, permanent tax savings and deferring. Tax savings kind of like we were talking about eliminate versus defer in a 1031 exchange Ultimately at the end could be become eliminating via a deferred deferred deferred die step up and basis type thing that that is a true Eliminate kind of strategy, but that takes decades and you have to be able to hold that property for until you die, right? It’s it’s very long long long tax planning and that’s it’s why oftentimes it just ultimately doesn’t happen because there’s…Hey, I need the cash or hey, we’re going to do this and that or hey, my family doesn’t want to take over the real estate or whatever it is. And so there’s just different, you know, implications and everything also has a tangible and an intangible trade off. And that’s another thing that I would just have people in the categories of, Hey, I’ve got this tangible tax savings, but that means I have to go buy real estate and I’m not comfortable with that. I don’t think the risk tolerance is there for what I want to buy. Okay. So again, we have trade-offs again. So there’s always kind of a yin and yang to all these things.

Steven Jarvis, CPA (17:09)
Such a great reminder for the client a couple of years ago who is getting ready to retire, had heard literally probably on TikTok, maybe on YouTube, they’re a little bit older, but they had heard of this 1031 exchange idea. They had a rental property that they had planned on selling and they’re like, oh, well, and the way that the kind of the presentation they had heard really skipped over this whole, like it’s going to come back around at some point. They skipped over all the details and just really focused on, oh, you’re going to save all this money. And so
they almost felt obligated to, like really I think this client felt like they were gonna be an idiot if they didn’t do it. Like it was kind of like this guilt thing or almost shame. And so then we started talking through it. I said, hey, but before we get into the details of how this works, like to do a 1031 exchange, like it has to be a like-kind property. Like you have an income-producing property, we need to end up with an income producing property. And there’s some nuance to how that can work. But at the end of the day, if you want to do this, you’re going to still have some kind of property you’ve got oversight and management of at some, even if you hire somebody to help you with it, that’s still something you’re going to have to worry about. Does that mean, and as soon, and I could see his, we were on the zoom call, I could see his face and I could just see like his face just kind of falling. He’s like, no, I want to retire and not worry about any of this stuff again. Like, can I just move on? Like, yeah, you can just pay the taxes and move on. And so, especially with this real estate stuff, it’s, it’s sometimes it’s more tangible example of, we need to make good life decisions and then figure out the tax-efficient way to go about them because to use your words there, if the intangible cost exceeds any tangible benefit, like just don’t do it.

Ryan Carriere, CPA (18:28)
Again, yeah, it’s just trade-offs like opportunity costs, trade-off, it kind of the same concept, but everything is gonna have something that you’re giving up. And that’s also my concern about things like social media, TikTok and Instagram is because it’s usually not always, but because it’s usually such short form, you just don’t see, they don’t have enough time to explain. And in the tax world, there’s just so many nuances. It’s hard. Not everyone’s gonna put like, oh, disclaimer, this is not tax advice or whatever. And sometimes that’s good to do that, and sometimes not. But ultimately, sometimes in kind of the marketing world, and I post a lot of stuff on LinkedIn, and I’m not perfect by any means. So for those of you who might find me and be like, oh, here he is, like, I’m gonna call him out. It’s like, well, okay, hold on, I get it. But when people work with me directly, now they’re paying me to sit down and actually think through these things with them. I’m gonna walk them through A to Z, pros, cons, benefits, risk, all those things. It’s hard to just get an idea out there to make something kind of presented to, hey, here’s an option. Did you know this was available to you? And be like, okay. Yeah. Let me explore that more. Let me think about that. Okay. Can you help me do this? absolutely. Right. And now I can kind of be their advisor. But my point is just because a lot of these things are short form. And I think maybe in the long run, we moved to longer form content, which would be great for us to be able to like fully explain things. But for kind of these quick-hitting like videos, it is hard to kind of fully explain everything because it’s so nuanced.

Steven Jarvis, CPA (19:47)
Yeah, absolutely. That’s where I mean, the internet’s great for getting ideas, but we want to make sure we’re working with professionals before we get too too far into these things. And on that topic, I one of the one of the risks I see any tax planning really, but particularly with real estate is when people don’t realize at what point in the process they should be talking to a professional like you know, when I’m sure you’ve had this happen before Ryan, where you get a new client and they’ve done stuff a year ago that they’re bringing to you now for the first time and saying, okay, Steven, here’s all the things I did, now make it tax efficient. I’m hey, time out. Most of these things, we need to have a plan ahead of time. We can’t decide after we’ve already purchased a new property that we want a 1031 exchange it. At the end of the year or geez, in March of the next year, trying to go back and put together contemporaneous documentation, that’s not what contemporaneous…means like we can’t go back like my time machine’s broken like you’ve got to be you’ve to have an intentional plan for how you’re executing these tax strategies before you start executing them.

Ryan Carriere, CPA (20:41)
Yeah, absolutely. Yep. There’s so much more you can do when you actually do, quote unquote tax planning, right? It’s planning, it’s proactive, it’s front-end, it’s future thinking compared to tax reactive. I don’t have a tax reaction. I don’t know what else to call that. It’s, you’re just limiting the amount of things that you can do. So let’s, for example, like the limiting thing that you could do, it’s like, Hey, we sold the property. I want to do 1031 exchange now. It’s like, you blew that. Like that’s gone. Okay, well now we have to think about this is the only other option. And it’s like, okay, well that stinks. I wish I would have known that beforehand, right? And that’s kind of the thing. yes, tax planning, financial planning, financial advising, all that stuff always has kind of a future-oriented. You’re thinking, you know, way before it actually happens. That ultimately is the best outcomes and gives you the most options and opportunities in front of you instead of… Hey, I’ve taken off half of the options in front of you because now you’ve been a little bit, you know, procrastinating this, or a little lazy to kind of reach out and, and, you thought you could do this yourself. So I would say though, like, how do you kind of determine when someone should reach out to an advisor, a specialist it’s multifaceted, but I would say if you’re starting to do more advanced things, like even considering a 1031 exchange, or you’re considering things like cost segregation studies, or you’ve heard that you want to implement something like real estate professional status or their short-term rental tax strategy, now you need to actually, I think, start to work with someone.

(22:04)
Otherwise, if you’re like, hey, I just am gonna have this rental, it’s gonna be passive, I’m not gonna do a cost seg, I’m really just in this for some future appreciation, debt pay down, and some cash flow. If you don’t care about the taxes, you’re not gonna do anything crazy, nothing cute and fancy, okay, maybe that’s okay, but you should probably at least have a professional file your tax return rather than probably you trying to do it, that could be a little bit of a risk of you missed depreciation or you think you don’t need to take it or you forget the de minimis safe harbor election or something like that, right? There’s all these little nuances or if you’re a business owner, ultimately, I’d say you’re a business owner. You’ve got lots of income, lots of deductions. You got to think through retirement things. You’ve got to think through entity stuff. That’s a good time or quarterly tax estimates, all those things. It’s good to have a professional in your corner.

Steven Jarvis, CPA (22:44)
Yeah. Yeah, that’s a great list of times that you should be strongly considered not DIYing anymore. You mentioned it in there, Ryan. Let’s chat for just a minute about real estate professional status, because I do feel like this is one of those areas, particularly with my high-earning W-2 employees I work with. They get targeted with a lot of this marketing quite often of, hey, you don’t have any other deductions, so you need to get a rental property so you can deduct all these losses. You’re going to offset your W-2 income. You’re never going to pay taxes again. And like so many things on the internet, there is some truth buried in there. just kind of gets, the net gets cast very wide. And then end up with some frustrated people who wait too long to talk to a professional. So kind of talk us through how that actually works when it’s done correctly to be able to take what would otherwise be passive losses and offset ordinary income.

Ryan Carriere, CPA (23:26)
Yep, thank you for prefacing with that last sentence there for me. And just as we get started, the very first thing that I typically tell clients as I get started with them as clients is, hey, I want to first review why we have this huge Tax Reform Act of 1986 and why we’re even talking. Because what happened back, you know, what is that? 40 years ago or whatever, coming up here is crazy. Basically what happened is they said, hey, real estate in general by default is considered passive. Okay. What that means is that if you have any income or if you have any losses, it’s all passive. And so what happens is basically if you have losses, even let’s just say it’s 10 grand, you cannot, if it’s passive, offset your non-passive W2 business profits because it’s passive. It’s two completely different categories. Imagine it’s kind of this big chasm kind of split down the middle. They can’t intersect, but the way that you can, is by meeting either real estate professional status, which is relevant for long-term rentals, or the short-term rental tax strategy, which is usually, I would say, Steven, more commonly kind of, net is kind of casted pretty wide because, and that’s who my clients typically use, is the short-term rental tax strategy because, I’ll walk through maybe the specifics of why, but it’s just a difference in time required. So what’s like the minimum barrier to entry to get maximum tax savings? People typically go a short-term rental strategy route.

(24:46)
But real estate professional status is ultimately again, gonna move your long-term rentals from passive to non-passive. It ultimately just comes down to two steps. Number one, you have 750 hours in a real property trade or business, and more than 50 % of your working time is also in real estate. Okay? This is a really, really, really easy one for realtors. Brokers, realtors, whatever it is, maybe you have someone who owns a property management business for real estate investors. Awesome. Or you have someone who sometimes, you know, general contractors can work, those who actually build real estate, develop them, that can also count. Okay. So if you’ve got people there, Hey, check, I do this 2000 hours. I’m way over that. That’s, that’s not a big deal. I don’t have anything else. So check, check. Right. But then step two is materially participating in your long-term rentals. Okay. So here’s where people lose is usually in an audit is right here. Okay. Because you want to make this non-passive, you got to actually be really involved and really involved. There’s seven material participation tests. You can choose one and you just have to choose one. But the two most common that I see is either 500 hours, okay, for the full calendar year, January to December, or a hundred hours minimum and more than anyone else. That would include a manager. Contractors, cleaners, handymen, whatever it is. So typically, people are gonna choose the 100 hours or more than anyone else because it’s a lower barrier to entry because they don’t have to shoot for 400 hours more theoretically. Okay? But this starts to become an issue when people are like, oh, I’m a realtor and therefore I can automatically meet real estate professional status. Nope. You have a property manager? Yep. Probably not gonna win then because they probably are putting in more time. They’re not only stripping out your time that you would normally put in, but they’re also not you’re competing with another person who’s doing more of the management. Ultimately we’ve got to actually materially participate, which is the main thing, right? And so one of the main things that isn’t talked about is the time log, okay? Because you’ll see on things on TikTok and whatever like, my gosh, you can group your LP investments with your other properties that you own, yes. If you do it correctly, you have to use a grouping election. That’s a separate thing you have to do in your tax return, as well as claim that you’re meeting a real estate professional status and put that appropriately onto your tax return. Also, you’ve actually got to do the work. And that’s the thing where I think people get confused about, know, I’ll put together a time log if I get audited. And just like you said, Steven should be contemporaneous, right? You know, worst case scenario, you get to December and you go back for the full year and put something together.

(27:26)

That’s, that’s, I’d say worst case scenario, actually, maybe worst case scenario is you have no time log and then you get audited and you’re like, shoot, now we’ve got to do this. And guess what? We’ve seen court cases where the IRS will make a note, the IRS agent will make a note, the taxpayer did not have a time log readily available. Boom, they lost. Like almost instantaneously, because you already don’t have any documentation for this. Like they already go in very skeptical compared to someone that’s like, you need a time log? Yep, let me just download that, here you go. It’s like, wow, okay. You probably meet this then, right? They probably will back off immediately. But the whole thing is in tax court, which is different from a criminal court, case is that you are basically having to prove yourself innocent. You’re basically said to be guilty from the start. Whereas like in a criminal court case, you are innocent until proven guilty. It’s actually a flip, right? So very different situation, but getting off track. Ultimately, you need to have a time log and you need to have documentation. And if you don’t know what time counts and what time doesn’t, how are you going to know what to record? You just can record everything and then it’s going to be kind of a shotgun approach of, hopefully this all counts. So that’s the main one, again, long term rentals and then short-term rentals are pretty similar. We can get into that, but I know I’m getting long-winded. So any questions on that?

Steven Jarvis, CPA (28:37)
No, right. I really appreciate the way you’re outlining that because because really my goal in having this conversation and hopefully the audience hears this as well. Like I want to sort through the noise on that kind of nonsense that we hear and really clearly show which you’ve done a great job. Like there is a very legitimate way to do this and it can be a very it can be a very great strategy to use. can be incredibly beneficial for someone who getting involved in real estate makes sense in their overall goals and their overall investments. All those kinds of things. Again, we want to make good life decisions, then figure out the tax-efficient way to go about them. My other goal was not, I mean, this is such a complicated area that no one’s gonna listen to the 30-minute podcast, I mean, to your point before, you can’t listen to one 30-minute podcast and walk away and say, I’m an expert. The goal here is to that we have a better understanding of the questions that we should be asking and at what point we should be tagging in a professional. Because whether it’s we’re talking about taking, getting real estate professional status on a long-term rental, or we wanna go down the path of…getting a short-term rental reported on schedule C instead of schedule E. There are also criteria that we need to make sure that we meet. And if you watch a 90-second TikTok clip, you might get the impression that, oh, this is subjective. Like, yeah, of course I’m materially participating. It’s like, no, no, no. The IRS has been, for years, fed up with people who play games with this. And so, like you said, they’re gonna come in skeptical. So you need to make sure your documentation is locked in. And I think we should just kind of reaffirm, and you tell me if I’m wrong here…But people also go through these court cases and it gets upheld. Like this isn’t a losing proposition that as soon as you get audited, you automatically lose. Like if you do this the right way, just like any tax planning, if you do it the right way, the IRS is gonna bless it and move on. Like we just need to make sure we’re doing it the right way.

Ryan Carriere, CPA (30:08)
It’s funny you say that because someone pointed out to me a few years ago, you know, once it gets to an actual court case, like they have already, you know, lost or whatever, like an IRS agent and or their manager has said, nope, we’re not going to allow these deductions. And so you have to actually go after that and say, nope, we disagree. And then it goes to court case, right? So there’s all these people who have lost that we’ve never seen and never been a court case. I just want to point that out to people, right? So I don’t know what percentage, but let’s just say it’s like 10 % or 5 % or whatever percentage it might be of all these people who lose actually gets, you know, contested. think that’s the right word. Legally, it gets contested and then it goes to the court case. And then now it’s public, right? But there’s all these people who have probably lost and won, it’s both sides, right? But all these people have won and lost that we’ve never seen. And they just said, we lost, we’ll pay the tax. Right. And they’re not going to go through an actual court case and get more attorneys involved and blah, blah, blah. Right. So there’s all these things that even with the court cases we have, there’s just so much of, they lost because of this and they won because of this. And if you’ve never reviewed them, how the heck are you going to win ultimately? Right? So it’s funny that just as you’re saying that, I just wanted to kind of point that out. But ultimately, yeah, if you have the right information, you have the right knowledge and the right experience and the right advisor, ultimately, you know, who understands this stuff, you’re going to reduce the risk as much as possible. Because what I could do, Steven, is I can on my tax return, just claim real estate professional status. I could do it. I could knowingly say, I don’t meet the test. Yeah, I could click a box and be like, I meet it. Look, I got more tax savings. I’m just gonna click this, right? Or I’m gonna tell my, know, tax preparer, hey, make sure you claim real estate professional status. Like, I could do that. But the risk is that I get caught. And then I have all the taxes I have to pay back. I have all the interest and I have all the penalties. And sometimes they could throw on like a fraud, you know, a tax fraud thing on top and not an extra penalty, right? If it’s significant enough. So there’s just oftentimes when you work with the right people and you do it right at the beginning, you’re reducing the risk and reducing the pain as much as possible from the beginning.

Steven Jarvis, CPA (32:09)
Yeah. Well, Ryan, we could go for hours on this stuff. And I’m sure for the people listening who are themselves are involved in real estate or clients or who are involved in real estate or interested in it. Like the if any of this stuff is resonating with you, I don’t confidently know the answer to that. You need to be reaching out to somebody. And Ryan, this is this is what you do all day, every day. So share how people can get in contact with you or best way to find great help like you on on real estate taxes.

Ryan Carriere, CPA (32:#2)
Yep. one place on social media that I’m a lot is a LinkedIn. So Ryan carrier a CPA. I, You can go to my website, carrier tax consulting.com. So go check out that. Otherwise my email address is just Ryan at carrier tax consulting.com. If you have people who, either yourself or people, you know, might be interested, I’ll kind of want to assess, know, for a good fit, kind of have a discovery meeting. And then if things seem to be good and I think that I can help, then I’ll kind of move forward and talking with them a bit more, but yeah, either LinkedIn website, you can kind of see things more about me or just email me directly.

Steven Jarvis, CPA (33:02)
Ryan, thanks so much for spending some time with me today and for sharing your expertise and wisdom on this.

Ryan Carriere, CPA (33:07)
Thank you. Yeah, it was fun.

Steven Jarvis, CPA (33:09)
And for everyone listening, until next time, good luck out there, and remember to tip your server, not the IRS.