48. Tax-Free Strategies: The Roadmap To Financial Freedom With Tom Wheelwright

PILF 48 | Tax-Free Strategies

 

In this world, nothing is certain but death and taxes. But what if we tell you there’s a way to get around the latter? Jim Pfeifer talks to Tom Wheelwright, CPA, founder and CEO of WealthAbility and the best-selling author of Tax-Free Wealth, about how to build massive wealth through tax-free strategies that permanently lower your taxes. Tom is a leading wealth and tax expert, global speaker, and entrepreneur. He specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes. Listen in as Tom makes discussing taxes fun, easy, and understandable.

Listen to the podcast here:

Tax-Free Strategies: The Roadmap To Financial Freedom With Tom Wheelwright

I’m excited to have Tom Wheelwright with us. He is a CPA, Founder and CEO of WealthAbility. He is the bestselling author of Tax-Free Wealth. He is a leading wealth and tax expert, global speaker and entrepreneur. He is best known for making taxes fun, easy and understandable. He specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes. All Left Fielders know him because he is popular in the real estate crowd and always has great information. I’m pleased to have you, Tom. Welcome to the show.

Thank you so much for having me, Jim. It’s a pleasure to be here with you.

People know your story a little bit. Can you tell us how you became the tax guy for real estate investors? Where does that journey start? How did you get to where you are?

It started when I was working for my mother, the comptroller for my dad’s printing company in Salt Lake City, Utah. I started when I was about twelve and started doing bookkeeping. I liked numbers and then I decided I liked law and accounting. Tax is a good combination of law and accounting. When I graduated from the University of Utah, I decided, “I didn’t want to spend my life hanging around lawyers.” I figured I would get a Masters of Tax, which is what I did at the University of Texas.

From there, I spent seven years with Ernst & Young, including three years in the National Tax Group in Washington DC. I spent four years as the in-house tax advisor for a Fortune 1000 company. I specialized in real estate. They hired me because they bought a real estate development company and they need a real estate specialist. That was my specialty. I spent 14 years as an adjunct professor in the Masters of Tax Program at Arizona State University and 25 years building, buying and selling CPA firms.

I have spent a lot of time on the road with Mr. Robert Kiyosaki of Rich Dad Poor Dad fame. Every real estate investor knows his name. He and I talk regularly, at least 2 or 3 times a week. He has been a client of mine for many years. I met him when he became a client and then I got to know him. We both love financial education. It has been a great relationship since then. We built a network of CPAs around the country. We have about 60 CPA firms around the country and members on our WealthAbility CPA network.

You’re in the real estate community. You deal with a lot of real estate people. Why is the focus on real estate?

My technical expertise is partnerships. All real estate is in partnerships. It’s an LLC. Typically, tax is a limited partnership. It’s a natural fit for somebody who loves partnerships. I love partnerships because they don’t have a whole lot of rules and I don’t like rules. I figure it’s better if you don’t have rules than if you do have rules. A lot of people prefer rules. I prefer not having rules. That’s probably because I’m the youngest of six kids.

Real estate was a natural thing. I ended up doing a lot of natural resources, oil and gas, and real estate. Even my very first job back when it was Ernst & Whinney in Salt Lake City, we did a lot of natural resources back then. We also did a lot of real estate. When I moved to the Phoenix office from National Tax, I moved in order to be in charge of the real estate tax practice. That’s why they brought me out to Phoenix was to handle the real estate tax practice.

Developers are a breed, and I love the breed. They are very innovative. They never have money because the money is always invested in a deal. On top of that, from a tax standpoint, real estate has always been the best tax shelter there is. The easiest way to reduce your taxes is real estate. It’s not for everybody, but it’s the easiest way to do it. When you combine that with partnerships, you get some flexibility.

People think that getting a tax adviser is an expense, but it’s actually an investment that can provide you with the best return ever.

Frankly, it’s a fun area to practice in. I like it. If I were dealing with big corporations, I wouldn’t deal with partnerships at all because they don’t do partnerships and real estate developers. I was looking at an operating agreement and going, “What in the world are these guys doing here?” They are creative. I love the creativity of it.

Real estate, for me, is a great way. It allows you to make money and not pay taxes. I have listened to your podcast and read your book. That’s why I’m so pleased to have you on here. I would like to jump right in. One of the ways that we talk about a lot at Left Field Investors of reducing taxes is using cost segregation and bonus depreciation to offset gains from active or passive real estate investments. I would like to hear your take on it. When I first was selling my active real estate, I went to my accountant and said, “How can I get out of paying taxes?” He said a couple of things.

One, he said, “Sometimes when you make money, you have to suck it up and pay taxes.” It was not the answer I liked. His next answer I did like, which is he said, “You can do this thing that he calls a lazy 1031, which is using passive syndications, depreciation and cost segregation to offset the gains from my active investments.” Can you talk a little bit about that as a strategy? Also, I’m curious because depreciation recapture on the back end is something people don’t talk about enough. Can you incorporate that into your answer?

First of all, I would probably not use that wording of lazy 1031 because it has nothing to do with 1031. You either have a 1031 where you defer the gain or you don’t have a 1031 where you don’t defer the gain. To me, since 2017, when we have had bonus depreciation, typically somewhere between 20% to 25% of the cost of any real estate is going to be taken as a deduction in the first year. A lot of times, a 1031 is not as good as recognizing the gain and then getting the depreciation.

There’s another reason. It’s not just because they offset or the depreciation might be higher, but depreciation is an ordinary deduction. In other words, it comes off the highest tax rate. Whereas capital gain is taxed as low as 0%. It can be taxed at 0%, 15%, 20% or 24%, but it’s never taxed at 37% ever. The worst that happens is you talked about recapture. In my world, the way we do things at WealthAbility, your highest recapture tax is going to be 28.8%. It’s the 25% on the building plus the 3.8% net investment income tax. You’re never going to get 37%.

To me, that spread is a big deal. I get capital gains. We have this passive investing issue that I’m sure you have talked about on your show. When I sell a deal, though, that loss that’s built up in there is no longer a passive loss. The day I sell it, it’s not passive. If I do a 1031, I don’t free it up. If I free up that passive loss, that loss is coming from depreciation. That can offset my W-2 income. That’s 37% income, but I’m only being taxed at 20% to 25%. That’s a big swing.

Sometimes it’s a 13% to 18% swing in tax rates, even if your numbers are exactly the same. If your losses are the same as your gain, you lower your tax because your losses are coming off your higher tax rate and your gains are at a lower tax rate. Through 2022 when we have full 100% bonus depreciation, you always have to run the numbers. Maybe a 1031 is better for you because you have had the property for a long time or maybe it’s not. You asked about recapture. This is a little hot spot for me because it’s talked about too much.

Here’s the thing. Recapture happens. First of all, if you hold a property for at least five years, you should not have a recapture except for the building. There are two types of recapture. There’s what we call a 1245 recapture, which is the contents or equipment. There’s a 1250 recapture, which is the building. A 1250 recapture is taxed at 25%. It’s not taxed at 37%. A 1245 is the ordinary income. You don’t want a 1245 recapture.

If you took bonus depreciation, let’s say you bought a piece of equipment because the equipment in real estate is all the same. You paid $50,000 for it and deducted the entire amount. Two years later, you sell it for $30,000. You’re going to have $30,000 of ordinary income. If you sell it five years later, how much are you going to sell it for? You’re not going to sell it for very much after five years. Typically, in real estate, you’re talking about your carpet, indoor lighting, and fixtures.

What is its worth after five years? It’s probably worth nothing after five years. At that point, why would you have any recapture because you’re selling it for zero? You can’t have a recapture unless there’s gain. Typically, I find that except for the bonus depreciation where you’re taking it and flipping it within 2 to 3 years, it’s pretty rare you’re going to see any recapture that’s going to hurt you.

PILF 48 | Tax-Free Strategies
Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes (Rich Dad Advisors

Who calculates the recapture? Do you have to do another cost segregation? If we are talking about a syndication investment, I’m going to get that recapture. I assume it’s through the K-1. How does that work?

It’s the accountant who is preparing the K-1 that’s going to calculate that. This is a good point you make, Jim. Not all accountants who prepare K-1s are created equal. They don’t all know real estate. They may think they know real estate. Let me give you an example. I got a K-1 for a client. The K-1 showed very little depreciation.

I called up the developer and said, “Please, let me talk to your CPA. I don’t understand it.” I called the CPA and the CPA said, “We don’t do cost segregations.” I said, “Why not?” He said, “It’s because our investors don’t get the benefit.” I was going, “Yes, they do. If they have a good CPA, they are going to get the benefit. If not now, they are going to get it later.” To me, it verges on malpractice.

Under the law, technically, you’re required to do a cost segregation. A lot of people say it’s aggressive. The law says that your basis for when you sell it is the depreciation that was allowed or allowable. The IRS could if they wanted to. They won’t because they said they won’t. They could reduce your basis by the cost segregation as if you did a cost segregation, even if you didn’t take the depreciation.

When you make it, let’s say you do a cost segregation five years down the road and you have to catch it up. That’s a change in accounting method from an incorrect method to a correct method, not correct to correct. That says that cost segregation is the right way to do it. Not doing the cost segregation is technically the wrong way to do it.

When it comes to selling the property, it’s the accountant preparing that tax return for the partnership that calculates the recapture, gain, and all of that. There can be huge differences. I will give you one other area that you haven’t mentioned, which is the repair regulations. A lot of times, a syndicator will go into a new development. They do all sorts of renovations, repairs and upgrades. A lot of that can be treated as repairs while repairs are never recaptured ever.

They are not added to the basis at all. There’s no recapture at all on a repair. Even if it carries over to when you sell it, that ordinary deduction becomes available the day you sell it. You get an ordinary deduction, but when you sell it, you get capital gain. It’s not even a recapture capital gain but a regular capital gain. Sometimes, we will find it in a syndicated deal because we handle tax returns for several developers in my little CPA firm. We will find $2 million to $3 million of repairs.

That’s money that you’re either otherwise not getting any deduction for or you’re getting a deduction in such a way that might be recaptured. As a repair, it’s not recaptured at all. The CPA preparing the syndicator’s tax return that you’re subject to makes a huge difference to you. You want to ask the question. Sometimes it means your CPA needs to get with their CPA and say, “Help me know what is going on. I want to make sure I’m getting tax benefits that I’m entitled to.”

Let’s use an example because most of the people who are readers are investing in syndications. If I’m an LP investing in apartment syndication and does value-added typical deal, I get some depreciation on the front end from the cost segregation and bonus depreciation. Let’s say I invest $100,000 and get a $30,000 tax depreciation loss. Take me through the cycle. When I sell the asset and do the recapture, how are all the taxes? For simplicity’s sake, that’s the only thing going on in my tax return. How does it work?

Let’s say all you had was your W-2 and then you have the syndication loss. It shouldn’t be $30,000. It should be closer to $80,000 to $90,000 if you do a cost segregation unless the syndicator is not borrowing any money from the bank. Unless they are not using any debt at all, it’s going to be 80% to 90% or it should be. If it’s only $30,000, that’s when your CPA has that phone call with their CPA and say, “What the heck is going on here?”

From a tax standpoint, real estate has always been the best tax shelter there is. 

Here’s what happens. Let’s say your spouse is a real estate professional. Even there, now you have a limit because you can only deduct up to $500,000 of real estate losses against ordinary income and your wages. You’re now limited. That’s brand new for 2021. That’s if you’re a real estate professional. Let’s say you’re not a real estate professional. Here’s what is going to happen. I will use your number, $30,000. That loss is going to carry forward forever. You never lose it.

Let’s say the property is sold five years down the road. You have a gain of $40,000. Here’s what is going to happen. Your $30,000 loss is going to offset your wages. Let’s say your wages are $400,000. It’s going to net against your wage income to $370,000. Your $40,000 capital gain is going to be taxed at capital gains rates. It doesn’t offset the gain.

What selling the property does is it frees up the loss. I keep hearing people say, “It’s going to offset the gain.” That’s not what it’s doing. Whichever is the highest-taxed income you have, it offsets your ordinary income and then you pay capital gain on the gain. You don’t have to offset your capital gain with your ordinary loss. You don’t do that.

I thought the passive losses couldn’t offset W-2 income.

In the year you sell the property, they are no longer passive losses. They become active losses. They are freed up to offset any kind of income.

What is the benefit then of being a real estate professional if the losses from your real estate can offset your W-2 already?

It’s timing. If you’re a real estate professional, you get that loss the very first year. If you had $30,000 in 2021, you get a $30,000 loss to offset your wages. If you’re not a real estate professional, you have to wait until the property is sold to be able to use that loss. If the property is not sold for five years, it’s sitting there for five years and doing nobody any good. Five years later, now you get to offset it against wages. It’s only a timing difference.

If you have multiple syndications that you’re investing in, then what does that depreciation offset when you invest in a new one? Can that offset the monthly cashflow from other syndications or capital gains from sales?

This is a big misunderstanding in the real estate community generally. Passive losses are not disallowed. Passive losses are a bucket. They go with a passive bucket income. Passive losses can always offset passive income. If you’re a business owner, you can turn your business into passive income pretty easily with good advisors on your team. Let’s say you’re a W-2 owner. That passive loss carries over and tells there’s passive income.

Here’s what is interesting. Let’s take your example again, the $30,000 and $40,000. You freed up the $30,000 right from that investment. Let’s say that you have another $40,000 or $50,000 of passive losses over the previous five years and they accumulated there. You’ve got a total of $80,000 of passive losses. The $30,000 is applying to that original investment and $50,000 for subsequent investments, but you’ve got a gain of $40,000.

PILF 48 | Tax-Free Strategies
Tax-Free Strategies: If your losses are exactly the same as your gain, you actually lower your tax because your losses are coming off, and your gains are at a lower tax rate.

 

What that means is it frees up the entire $30,000 plus another $10,000 of the other passive losses. This is a mistake I see on tax returns all the time. The gain is not capital gain. It’s a gain called 1231 gain and it’s passive income. If you have $40,000 of 1231 gain from the sale of the partnership and you have $30,000 of loss, you’ve still got $10,000 leftover that can free up another $10,000 of passive losses to offset your wage income. It doesn’t offset the capital gain. It offsets the wages.

I know this is complicated. I would suggest everybody read this over and over again because eventually, it will get through. You have to break this down into pieces. Once you break it down into pieces, it’s pretty magic. We had a client a number of years ago that the gain had been misclassified on the tax return. It had been classified as capital gain, not 1231 gain. The difference is that the 1231 gain is business gain that is taxed at capital gains rates. It’s not capital gain.

It had been taxed at capital gains, so they had never freed up the losses. We freed up enough losses. It was a net tax benefit of $2.5 million. This is why people misunderstand. They think that a tax prepare and tax adviser are expenses. This is an investment that can provide you the best return ever if you’ve got somebody who understands real estate. Real estate is a pretty complex area in the tax law. If you don’t have somebody who can sit down and explain it to you, you’re going to lose out on a lot of tax benefits.

The more I understand it, the more I realize that maybe I don’t. I want to step back again.

That’s good news. That means you’re smart.

Let me understand. I have always thought of the passive bucket as passive loss offsets passive income. You have said that is correct. Can you explain again how the passive loss when an asset is sold becomes active so that it offsets a W-2? That’s the part that I’m confused about.

Remember, you can’t confuse the bucket of passive with the character of the income. The passive bucket is passive. That doesn’t say anything about the character of the income. A passive loss could be a capital loss. A passive gain could be a capital gain or ordinary gain. Those are the characters. That’s not non-passive. That’s where the disconnect happens with people. We have two types of income, primarily in the US. It’s three when you count non-taxable. Let’s start with capital gain and ordinary income.

Depreciation is an ordinary deduction because your real estate is a trader business. If it weren’t, it wouldn’t be passive in the first place. Only trader business can be passive. It’s a trader business deduction, which makes it an ordinary deduction subject to the passive loss rules. An ordinary deduction offsets ordinary income while your wages, interest and retirement income are taxed at the ordinary income rates.

The way the tax calculation works is because it’s ordinary loss, it’s going to offset the highest-taxed income first. Let’s say you have no wages and all you have is gain that year. It’s going to offset the gain because that’s your highest-taxed income. If you have wages that are taxed at a higher rate than the gain, it’s going to offset the wages. That’s the character of the loss. As long as you don’t do a 1031 exchange, that loss is no longer in the passive bucket on the day you sell that property. That loss is now active.

Even if it’s through a syndication investment?

It doesn’t matter. That property is sold in a fully taxable sale. It’s an ordinary active loss. In the passive income, which is the gain, you can’t say, “I have got this $40,000 of gain. I freed up my $30,000. I’m getting another $40,000 of passive loss.” It doesn’t work that way. You have to use that $30,000 first, but that extra $10,000 is passive income, even though it’s capital gains rates. It frees up another $10,000 of passive loss. That freed-up passive loss is going to be applied against your highest-taxed income, not your capital gain income. You’re always better off.

You can’t be a real estate professional by just having syndications. You must have your own properties and be active in some way.

This is why we talked before we started investing through an IRA. This is why people hear me all the time say, “I do not like investing in real estate through an IRA because you lose that differential.” IRA money is always taxed at ordinary income rates. Unless you’re planning on retiring poor, your ordinary income rate when you retire is going to be higher than it is while you’re working because you don’t have all the tax deductions of your home mortgage interest, kids or business deductions. You end up typically in a higher tax rate when you retire. I much prefer to see investments in real estate outside of an IRA because the tax consequence is better.

Let’s say you have already funded the IRA. You’ve got $500,000 in an IRA. You’re going, “Do I pull it out and pay the penalty?” Don’t think about the tax when you pull that money out because you’re going to pay the tax anyway when you pull it out. There’s no difference. It’s only the 10% penalty if you’re under 59.5, but you do pay it now. You don’t get to defer that tax, which there are some compounding benefits of deferring. The reality is, in real estate, you’re not paying tax anyway. Why do you care? On top of that, if you have it outside the IRA, you can be offsetting your wage income and be paying a net less tax by investing outside an IRA than you ever would invest inside an IRA.

Let’s pivot a little bit to the IRA conversation. There is this ruling of McNulty versus Commissioner that clarified some things. You have talked a little bit about why maybe real estate in an IRA isn’t a great idea. I agree with that. Can you talk a little bit about the changes and some of the difficulties with investing through a self-directed IRA?

The term that everybody should have imprinted on their foreheads is prohibited transaction. If you engage in a prohibited transaction, then your IRA gets treated as being distributed and you have huge penalties to go along with it. You want to avoid a prohibited transaction at all costs. There is nothing good about a prohibited transaction. The question is, “What is a prohibited transaction?” We know that you can’t borrow from your IRA. This is self-dealing with your IRA. That should be obvious. You can’t commingle funds with your IRA. That would benefit you.

What about if all you do is you have an LLC that your IRA owns and you’re the manager of that IRA? Is that a prohibited transaction? What McNulty stands for is probably yes because what happens is that you are now rendering services to the IRA. Here’s what you can do. What is clear that you can do in a self-directed IRA is you can direct the investment. Does that mean you could write a check to the syndicator? You’re probably okay with that, but can you then go to the developer’s annual meetings? I don’t know that you can.

Can you have any impact on real estate? For example, if you had your own real estate in an IRA, could you write a check to the property manager? I don’t think so because what you can’t do is you can’t render services. All McNulty does was long overdue. Self-directed IRAs have been abused unwittingly by taxpayers for many years because of the promoters. It’s the promoters that say, “You can set up a checkbook IRA and have complete control of your IRA.” That’s not true. Checkbook IRAs are incredibly dangerous because your chances of having a prohibited transaction are high.

The question is always saying, “The IRS won’t catch me.” McNulty, they caught him. What McNulty stands for is the IRS is now paying attention to their abusive IRAs. They are completely contrary to the law. We had a Swanson case many years ago. We have had subsequent cases where they said, “For example, could you invest in a business?”

They said, “Yes, but it can’t be your business because you can’t run the business, render services in the business and get paid by the business. You can’t invest in a business through an IRA or 401(k). You can’t do that. That’s a prohibited transaction.” There have been a lot of promoters saying, “You can do this.” The IRS is finally paying attention to it. It has always been illegal.

Does the self-directed 401(k) falls under the same umbrella with IRA?

The prohibited transaction rules are exactly the same for 401(k)s as they are for IRAs. The primary difference between an IRA and a 401(k) when you’re investing, particularly in a syndication, is that a 401(k) has an unrelated business income tax on the debt portion of the income, whereas an IRA does. To say that IRAs are completely tax-deferred if you’re into syndication is erroneous. The gain that relates to the portion of the property that was paid for with debt is going to be taxable to the IRA. A self-directed IRA doesn’t mean you pay no tax.

You also mentioned the real estate professional status. That is always something that people in our community want to talk about. Should most W-2 earners try to get their spouse to qualify or to qualify themselves if they are going to do a lot of the passive syndication investing? Do they even need to be a real estate professional? Is it worth trying to get there? Is it worth the trade-off for possible increased audit potential? What is your take on that?

PILF 48 | Tax-Free Strategies
Tax-Free Strategies: Passive losses can always offset passive income, and if you’re a business owner, you can actually turn your business into passive income pretty easily with good advisors on your team.

 

I’m a big fan of it. It’s pretty much a get out of jail free card. You have to document it well. You can’t be a real estate professional just having syndications. You must have your own properties. You must be active in some way other than the syndications. You can be a real estate professional. Let’s say you’re a contractor. A contractor is a real estate professional if they own their business, but that doesn’t mean that they still get the losses from their syndications. In the syndications, your rental real estate combined has to meet the active participation rules, which is typically 500 hours of active participation. Participating in a syndication doesn’t qualify.

Once you have your own properties, could you invest in syndications and roll them into your properties as a single activity? Absolutely. In fact, the regulations are very clear on that. If one of you can be a real estate professional, it’s great. Remember what I said, though. Beginning in 2021, only $500,000 of those losses as a real estate professional can offset your wage. It can offset all the business income you’ve got, but you can’t offset wages, retirement, interest and dividend income except for $500,000.

Also, there’s another question that came up when I was talking about having a conversation with you. When investing in passive syndications, some of us invest through an LLC. There’s always the question, disregarded entity versus not disregarded entity. Some sponsors ask about it and some don’t. What is the significance of a disregarded entity? What happens if you get it wrong when the syndicator checks the box? How do we handle that?

The real question is, “Is the LLC an accredited investor?” It’s not a tax question. It’s an accredited investor question. For most syndications, you have to be an accredited investor in order to invest in the syndication. If it’s a disregarded entity, they are looking at you. They treat that as you. You only have to meet the regular accreditation rules, typically. Let’s say it’s a partnership. That’s a whole different level. That’s $5 million. That’s not $1 million. Partnerships have a different level for accreditation than an individual.

I would always ask the question, “Why do you need to be in an LLC? It’s already in an LLC.” You don’t have any risks, to begin with. You’re a limited partner in a limited liability company. I can’t see where you’ve got liability in the first place. I’m not a lawyer. That’s a lawyer question. I can’t see why you would need to do that. The only reason you might do it is, let’s say that you’ve got a family limited partnership. Maybe a trust for your kids, wife or husband is one of the owners. You have multiple owners of that syndication. It’s way easier for the syndicator if there’s one party, which would be that partnership.

That helps clarify that for sure. Some of the people in our community invest through their LLCs so they have all their syndications in one separate bucket or business bank account. It makes it cleaner for some of it. I invest it through an LLC because I already had that for my active properties and I started investing. There’s no downside is what you’re saying, correct?

I don’t see it, but I would ask the syndicator. It’s going to be what the syndicator is comfortable with because it’s not a tax question. That’s an accredited investor question.

With passive investors investing in syndications, what are some common mistakes you see regarding taxes that people make?

The first is they use an IRA. That’s the most common mistake that people make. The second is that they don’t force the issue on the cost segregation. I invest in syndication myself. I’m not a real estate professional. I called the developer and said, “Are you going to do a cost segregation?” They said, “I don’t know.” The next day, one of my clients called me. He said, “What do you think of this investment?” I said, “They told me that they are not sure if they are going to do a cost segregation.” They are on the phone with him. They are after him.

It’s like your local legislator. If they got five calls, they pay attention. That’s going to be the same thing with the syndicator. You’ve got to force the issue with the syndicator because there’s so much money out there. It’s easy for syndicators to get money that they don’t even care, “So what that you’re not getting the tax benefit? Who cares? You’re getting a better return than you would in your bank account or bond portfolio anyway.” The difference is it doubles your investment return to get the tax benefit.

Business owners should always learn to create passive income.  

I know a lot of your readers are W-2s. You can always create passive income if you have a business for those who can be business owners. It’s a matter of ownership. You have somebody else on it that’s not an active participant in the business. You have that same entity that’s typically going to be a trust is going to own the real estate. Now, your losses offset your income. That’s a huge mistake I see.

What is interesting is I have talked to several top-end tax and estate planning attorneys who go, “I have never heard of such a thing.” I’m going, “It’s not that hard.” When I explain it to them, they go, “You can do that.” I’m like, “Why isn’t everybody doing it?” The key to real estate investing is to get your money now because you want to put more money in. You want your tax benefits now because that’s the money that you can use for more investing and you can keep doing it.

It’s a cycle that becomes what I call a positive addiction. You have to keep doing it. Otherwise, you get hit with tax. You’re addicted to not paying tax, so you have to keep investing. That builds your wealth more. It’s a positive cycle of investing in tax benefits. I find that serious real estate investors who have good real estate CPAs stopped paying tax after 2 or 3 years and will never pay tax again.

We have readers who have tax accountants who are doing their taxes every year. How do they check to ensure that they are getting all of the benefits they should be getting and that their taxes are being done correctly? It’s super complicated for someone like me to look at all the different syndications and investments I’m in and to know my tax is being done most efficiently for me.

Let’s say you go to the doctor and get a prognosis. How do you know the doctor is right?

Second opinion.

That’s what we do at WealthAbility for people. We will give you a second opinion. We will look at that tax return and say, “It looks like you’re doing great. No problem. You’re good to go,” or, “You’re leaving a lot of money on the table.” You have a choice. We created our network of CPAs because we wanted to give people a choice. If they think their CPA is never going to be able to figure this out, come and join one of our CPAs. If they think, “I have got a great CPA. They just need to learn this,” then send your CPA to us. We will train them.

Most of the CPAs in our network came from their clients. First of all, they gave me my book and said, “You’ve got to read this book. Now, you need to join Tom’s network.” I have a quick, funny story. I have a client. His family has a CPA firm. He came to me because he wasn’t getting the tax advice that he needed. I went through this whole strategy. We saved him hundreds of thousands of dollars in the first few months.

It took him about three years. He finally convinced his family CPA firm to join our network. They have joined our network now. We don’t care. One way or another, get that second opinion. Get another CPA who you know and trust is a good real estate CPA. We will do that for free. We don’t charge for that review. We will take a look at it. If we think there’s a way we can help you reduce your tax further, we will let you know that. If we don’t, we will let you know that too.

The last question I ask in the show is this. Other than your own, what is a great or favorite podcast that you listen to, whether it’s tax-related, real estate-related, business-related or something that you like to listen to?

PILF 48 | Tax-Free Strategies
Tax-Free Strategies: Real estate is a pretty complex area in the tax law. And if you don’t have somebody who can sit down and explain it to you, you’re going to lose out on a lot of tax benefits.

 

It’s going to be Robert Kiyosaki’s podcast. I’m going to give you two if that’s okay. I will give you Robert’s but also Patrick Bet-David. I don’t know if you know Patrick Bet-David. He is a YouTuber. He has got 3 million followers. He is a great interviewer. He has great guests on his show. I’m fortunate enough to have been one of those guests. His shows are amazing. Robert does too. Robert has some amazing guests on his show. Those are the two that I pay the most attention to for sure.

How can the readers get in touch with you? If they want to get a checkup from WealthAbility, how do they go about doing that?

Go to WealthAbility.com. You will click right on the button there that says schedule a call. You can go in and schedule a call right then. You’re going to upload your tax returns confidentially to us. They are going to be secure. We have complete confidentiality. We are never going to tell anybody. If you decide to hire a CPA in our network, then we will pass them on to that CPA with your permission. That’s the easy way. Go to our website and schedule a call.

This has been fascinating. I hope you will agree to come on again because I’m going to have to read this a couple of times to make sure I got everything. I’m going to have some more questions. I’m sure our readers will as well. We will have to get you on for another show. Thank you so much for being here. This was fantastic.

I’m happy to do it, Jim.

I’m not even sure where to start with that. That was a lot of information. I enjoyed talking to Tom. He knows so much about taxes. Every time he talks to me, I learn something and possibly even unlearn something, which is what happened. I had no idea that we talked so much about W-2 and how that is active ordinary income and you can’t offset any of the passive stuff against it. Tom threw all that out the window and gave you an idea of that. When you sell an asset, the depreciation becomes active when it’s sold. You can use those losses to offset the ordinary income, which I had no idea. I’m still processing it and trying to figure that out.

It seems like the new ruling is going to make it even tougher to make sure that you’re in your lane, not doing those prohibited transactions. You have to check your own individual case. In many cases, it might make sense if you’re getting into this real estate stuff to cash out your IRA because you’re going to have to pay the taxes eventually. As Tom said, you will never have to pay taxes on that money again. Why keep accumulating that tax burden that’s going to be probably at a higher tax rate down the road? Get rid of it now and put it into your taxable bucket. You can start investing in real estate, move forward with it and never pay tax on that again.

PILF 48 | Tax-Free Strategies
Tax-Free Strategies: Your ordinary income rate when you retire is going to be higher than it is while you’re working because you haven’t made all the tax deductions you needed to.

 

This is one of those shows where I’m going to have to read it over and over again to make sure I understand it. I will have Tom on again. Hopefully, we will get some additional questions from the readers. This is the thing where you need to keep listening and trying to understand. It’s a great idea to get a second opinion. Take your tax return and send it over to WealthAbility or any tax accountant that you know and say, “What do you think?” See what they say and if they have changes, they can make. If they can make it better, communicate that back to your accountant. This was an eye-opening episode. I hope you enjoyed it. We will see you next time in the left field.

Important Links:

About Tom Wheelwright

PILF 48 | Tax-Free StrategiesTom Wheelwright is a CPA, CEO of WealthAbility (Tempe, Arizona) and Best-Selling Author of Tax-Free Wealth. Wheelwright is a leading wealth and tax expert, global speaker, and Entrepreneur Magazine Contributor. Tom is best known for making taxes fun, easy and understandable, and specializes in helping entrepreneurs and investors build wealth through practical and strategic ways that permanently reduce taxes.

As a Rich Dad Advisor to Robert Kiyosaki (Rich Dad Poor Dad), Tom frequently speaks at conferences worldwide to entrepreneurs on these topics. His work has been featured in The Wall Street Journal, Washington Post, Forbes, Accounting Today, Investor’s Business Daily, FOX & Friends, ABC News Radio, NPR, Marketplace and many more media.

Robert Kiyosaki, bestselling author of Rich Dad Poor Dad, calls Tom “a team player that anyone who wants to be rich needs to add to his team.” In Robert Kiyosaki’s book, The Real Book of Real Estate, Tom, himself, authored Chapters 1 and 21 of this book. Tom also contributed to Robert Kiyosaki’s Rich Dad Success Stories, Who Took My Money, Unfair Advantage, Why the Rich Are Getting Richer and More Important Than Money: an Entrepreneur’s Team.

Tom has written many articles for publication in major professional journals and online resources and has spoken to thousands throughout the U.S., Canada, Europe and Australia. Tom has also used his superior relationship and team building skills to advise the Canadian market in the art of investing in the U.S., by contributing to Philip McKernan’s South of 49 and Fire Sale.

 


 

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