Maximizing The New Tax Code | Guide for Investors
Today, it’s all about taxes. I have a special guest here in today’s episode, Jennifer Kirkland. Jennifer is a great friend of mine. We go back to the days when we were in college. She also happens to be my accountant of many years, and that she has graciously agreed to come in and form a couple of info sessions. Just so you, as a real estate investor, can take the most benefit out of the tax code going forward. Let’s dive in and open the floor to Jennifer to share with us what she knows best.
Jennifer: The new tax code has had everyone in a frenzy. Like, is it a benefit to me? Is it not a benefit to me, but it’s a huge benefit for real estate investors. The day’s Lucy of having this big house that I’m going to live in and just living in will be my biggest asset. I’m going to get to deduct all my real estate taxes, and mortgage interest is no longer possible unless you’re a real estate investor.
One of the crucial things that you can take away from this new tax law is that now for state and local taxes, you would depend on what jurisdiction you live in, and what state you live in is that they’ve kept it at $10,000. Now, if you’re in a high taxing state, we live in New York City. We have to pay the city tax, state tax, and now we have to pay property tax, but we can’t even deduct all of our taxes anymore. If you’re a real estate investor and have a second property or have a two-family, you can now deduct the whole thing, and you can avoid that $10,000 cap.
Now, we’re in an age where it’s almost this new tax law is, this is what I’ve taken away, it’s forcing people to have their own business, work for themselves, and it’s forcing people to invest in real estate.
Lucy: in essence, this is the year for you, so take full advantage of the real estate code and the availability of information that we’re providing you through this channel to start investing and achieve that financial freedom that you’re seeking for. Jennifer, what would you say are the major things investors should start looking forward to? Someone new coming in and want to start investing in real estate for the first time, what are some of the key components that they should start thinking about to be ready when filing for their taxes as an investor?
Jennifer: I always tell people, everyone looks like a big house, though. Maybe not start so big. It is just my opinion. Let’s say you have space in your home where you want it to start renting out your space, or you see a property that you wish to start saving your money together. One of the things is, let’s say if you had when people started renting out rooms and things like that.
Lucy: Like Airbnb?
Jennifer: Like Airbnb, or I’ve even seen people have become so creative that they’re doing this. Now, let’s say if you’re in a house, and you’re like, “Hey, I just got this house.” I can’t afford to get another property and move some creative ways that you can go around this $10,000 cap because you’re using part of your house. Now, on your tax return, you could split your home that you already live in. Maybe if you have a basement, every legal rule in each state applies. Keep that in mind.
You could start writing off your utilities, your heating costs, your insurance, all of these things on to the schedule E, and not be stuck to that $10,000 cap to start.
Lucy: In other words, a write-off, it’s a deduction that they can take on their taxes as either business or real estate investors?
Jennifer: Yes, as an expense. Let’s say you don’t have a two-family yet. The goal is to get a rental property eventually. Let’s say you don’t have it, however, and you’re just starting, and you’re like, “Man, I didn’t see this video. I got my home. I think I’m supposed to write off my stuff, and now you tell me about a new tax code is not even allowing me to write off my stuff.” Let’s say you need help with the mortgage. Now, you have someone coming in, possibly paying off part of your mortgage, and directly to keep that more than you can amortize the expenses related to that.
For example, if you have to pay for heat, part of your heating bill now can get deductible. If you live in it yourself, your heating bill is not tax-deductible, but now because you have a rental income, you can deduct your heating bill. One of the biggest, biggest tax things you could start doing while you’re in your home is depreciation. You could begin depreciating your house. Now that you’re getting rental income, of course, you have to report the income that you’re getting. Keep that in mind, but then you can’t just have a bunch of expenses on there and no income.
By things, you report the income that you’re getting from your rent. Now, you’re deducting your mortgage interest off of it. You’re deducting part of it off of it in the space that you’re using. Let’s say you have light. They get to provide them with light. Whatever your light bill is, you can amortize your light bill, your water bill, your gas bill, and all of the costs it takes to function in someone to live in that home. The biggest thing is, let’s say, you say, “Well, wait, after all that amortize that I still have income.” One of the biggest and some people say one of the most significant tax advantages is depreciation.
Lucy: Jennifer, for those who don’t know what exactly is amortization or depreciation, maybe you can share a little bit about that for those new to the subject of taxation and stuff like that.
Jennifer: Let me give a simpler example. Let’s say you have a car. Let’s say you had the car for ten years and the car cost you– I’m going to say a crazy number, $100, 000 and you had ten years for that life of this car. Every year, your car will be– depreciation, 10,000. It’d be amortized over 10 years, 10,000, 10,000, 10,000 per year. When two years go by, and you drive the car, your car is not as strong. Your battery is not as strong. Your engine is not as strong as it was two years ago.
The longer you go out, the lower the value is of your car. Your car is not as soon as you drive it off the– Well, technically, when you drop it off lot, the lights depreciated, it ridiculously you’re ripped off. When you drive it off the lot, for example, your home is not in the same condition as when it was brand new. The roof gets rusty. All of these things, the IRS understands and factors in.
As you get to enjoy that benefit of every year, IRS law says for your home, it’s over 27.5 years, but every year, just for simplicity sake, we’ll say ten years, you get to take 10,000, 10,000, 10,000, 10,000, write off every single year. You didn’t spend $10,000 out of your money.
Lucy: Let’s say, for example, I have a house that costs 100,000. What you’re saying is you’ll take that 100,000 divided by 27.5, and that will be the faction for them on that particular year?
Jennifer: Yes, correct. Minus the land.
Lucy: Your house is not depreciating because home does depreciate depending on the area that you’re in, circumstances, but in terms of taxes for the IRS, when you’re taking any business deductions expands, declaring your income, you can take that expense, that depreciation in your real estate property as an expense that’s going to help you keep money in your pocket because that’s basically what the whole idea of the rich debt, poor debt concept. It’s not so much how much you made, but it’s more about how much you keep in your pocket, right?
Lucy: What you just shared typically works well for people who have rentals as a real estate investment vehicle. What about those who, let’s say, for example, do house flipping or wholesaling? Those who don’t know what wholesaling means, you go, and you assigned a property from one person to another. You’re like the middle person in between. How does that impact them from a tax standpoint because technically, you don’t own the property? You go out, you find the house as merchandise, and then you sell it.
You resell it to another investor who’s willing to pay a little bit more for that house, and you, as a middle person, you make a profit out of it. How does that profit factor in with you as a real estate?
Jennifer: That’s when they’re going to get a bit hurt because they can’t depreciate something they don’t own. The goal is– it’s funny because everyone has their niche. If their goal is to get a retainer fee, that’s their business. That is their business. I’m sure they can write off the cost that it took them to research the home and all that other stuff, but they don’t own the home. They’re getting their finder’s fee.
Lucy: You were saying that from a real estate standpoint, there’s no deduction from that end, but there’s still the caveat that they can deduct those business expenses, like driving around for dollars, money that was spent in gas, but the money that you spend on paying your utility bills, like the internet, or even the light and electricity that you use to put your computer back on so that you can do that.
Jennifer: Yes. You do get that benefit. I do think for– so I can give myself as an example. Having your own business is a great advantage because you get to take advantage of write-offs when investing in wholesaling and trying to own your home. One of the best tax ways is to get a wholesale property for yourself, and then you can utilize it. It will be at a cheaper rate, so your depreciation expense will be lower the cheaper you get your home. Then you can use if you have long-term, having a more long-term asset, I’ll give you an example.
Let’s say you do get the home and you own it, and you want to flip it and sell it right away. Now, it’s become a business, and your tax will be impacted by it higher because you’ll have a short-term capital gains tax, which is pretty high. It depends on each person’s tax structure. If you keep the house for more than a year, it is at a lower capital gains tax if you become and sell it.
Lucy: Short-term capital gains are anything, any gain you acquire and appear with 12 months or less, right?
Lucy: Then long-term is anything 12 months or above. If you understand correctly, if you happen to acquire a property, let’s say you flip it or wholesale it. If you sell it at a profit within those 12 months, your tax rate will get higher. It’s going to be higher as if you were to hold that property for over 12 months, let’s say 12 months and one day. As soon as it hit 12 months on one day and you sell it at a profit, the tax rate will be lower?
Jennifer: It’s going to be significantly lower, almost like nearly 10% lower. Everyone’s tax rate is different, so I don’t want to put rates, and you say, you told me this-
Lucy: Right, it depends on the state, right?
Jennifer: Which is your income, your state, what your income is, how many children you have, but that also goes with stock. Even if you own stock, that same scenario goes, but there is one way around getting around the total tax from the real estate investment standpoint.
Lucy: How is that?
Jennifer: It’s called a 1031 like-kind exchange. If you were able to find it– Well, it’s no getting around it. It’s deferring the tax. You can keep delaying, deferring, deferring, deferring. It pretty much means– let’s say, you get this house, you see a buyer, and just so happens to be that you want to sell it right away. If you could find another home similar to that house, that gain gets transferred over there, and essentially, you’re not paying any tax.
Lucy: I’ve heard about the 1031 exchange. I have not done it myself. In that essence, what you’re trying to say is, let’s say, for example, I have a house that it’s worth $100,000, and I want to sell it. If I sell it, then I’m going to have to pay taxes on the gains that I’ve made and even give back the depreciation expense that I’ve taken advantage of over the years. If I sell that house and find, let’s say, another real estate property worth either the same or a higher amount, let’s say 250,000.
I sell it, and I take those gains, and I put it either as a down payment or acquire the other property at the same or higher value, then I don’t have to pay any taxes off of it, right?
Jennifer: Correct, because you use the money. It’s not like you kept it in your pocket and was like, “Whew, I made money.” It’s you use the money into another asset.
Lucy: All right. That’s great. Now, we know a little bit about how taxes play a role in wholesaling. What about flipping? I buy a house for $50,000. I renovated it, making it beautiful, and suddenly, I want to sell it for $100,000. How does the capital gain factors in, in this sense? Typically, household things are done in less than one year. How does that work?
Jennifer: All the costs you put into building a house can be a write-off before selling the home. It’s all the costs that it took. That question could be a bit technical. It is why you may need to hire a CPA because it depends on what did you do. Like your original example of bought a house for $50,000, you want to double it and sell it for $100,000, but you’re going to put $20,000 invested into it. It depends on what did you invest in. Did you have painters paint? Then that’s like an automatic expense.
Did you have to fix the roof? Now, you have to add that to the cost and capitalize it. Essentially if you do it in less than a year, you will be subject very similar to wholesale to a higher capital gains tax rate. After all, you own it now because you’re subject to a higher capital tax rate. If you take advantage of things like 1031 like-kind exchanges, you possibly can defer not to pay tax at all.
Lucy: Right. It is why it’s essential to be mindful of taxes and to have someone qualified to work with you like Jennifer. Not every accountant cannot take away from the value that your accountant has to offer, but your accountant has to be investor-friendly. They have to be expert in working with investors, understanding the tax code, and how that’s going to factor in in your role and your business as a real estate investor because you want to keep as much money in your pocket by taking advantage of what the code has to offer.
Our next question, I’ve had many people reach out to me asking about having a real estate property that they can also reside in. For example, in New York, the properties are pretty expensive over here, as you all know. It’s almost impossible to make a gain out of it if you were to, let’s say, buy a one or two-family house and just rent that out. It’s only the mortgage payments price versus how much you can get out of it in rent. It rarely pays off. Some people have gotten a little creative.
They’ve asked, “Well, how does it work, if let’s say, I buy a two-family with an FHA loan?” For those who don’t know what an FHA loan is, here’s a link that you can refer to and learn a little bit about that. Those people who want to take advantage of the FHA loan but as little as 3.5% down live on one side and rent the other, how it helps them, affect them in terms of depreciation, deducting some of the expenses the utilities and stuff like that. How does that work for them?
Jennifer: Well, you do qualify for an FHA loan. I guess the benefit is that you’re keeping a lot of your cash if you have it in your own 3.5%, but the beauty is that, with your mortgage interest, you get to split it. If you do have a two-family, you get to split your home. The flip side of it is that the benefit is they get to write part of their real estate taxes off half off if they have a two-family.
Half of the home belongs to the real estate taxes as being ripped off and the mortgage interests and half of their, and things that they couldn’t write off if they live by themselves like their insurance and all that other stuff. Back to your question about the depreciation, the depreciation is the same because the cost of the home is still the cost of the home. It’s still your home, and you always have the title. Your name is on the deed. You get the benefit of half of the cost of your home now being depreciated since you live in the other half.
Lucy: It’s like almost the best of both worlds. You’re getting benefits that typically real investors or businesses will bring, but at the same time, because you live in it, you get to apply some of it to your advantage, right?
Jennifer: Yes. As a CPA, my takeaway is that this new tax law encourages people to become real estate investors or become savvier in taking full advantage of their home and getting the best possible deductions for it.
Lucy: Great. Aren’t they any differences in the deductions that they can take in the old tax code versus the new one?
Jennifer: Well, my takeaway from the New York tax bill is the real estate investor is getting all the benefits. They used to get the services in the past, but now they’re getting it. The average person who wants to live in the home and just live with my family, I don’t want to invest, I don’t want to think of these creative ways, they’re almost penalized. They’re almost forced to think of creative ways that they can make income and take deductions now. This new tax code is really for real estate investors and people who own their businesses.
It’s a very creative way that’s almost encouraging, making some small investments, so you can take advantage of the tax opportunities for the property that you’ve purchased.
Lucy: Thank you for sharing. Those are very informative. The next question is going to be all about interest. I’ve had people reach out to me asking me about the interest you pay towards your mortgage and the interest you pay towards the business credit card, not personal but business. We’re wondering how that plays a role here. Are they deductible? Are they not?
Jennifer: Personal credit card interest is not deductible. I suggest that as you grow and develop your credit, maybe look forward to getting business credit because that is deductible because it is with your business. Still, your shopping sprees, the interest you paid for being late or not spending it on time, are not tax-deductible, but business interest is.
Suppose you have a business loan or have a business credit card, and you had expenses that you had to buy to finance things that you use to flip your home or the investment in the property of your wholesaling, whatever. In that case, that interest is tax-deductible and the same thing for the mortgage.
Jennifer: The mortgage interest on any type of property, even if it’s for yourself, you’ll get something from your bank called a 1098 interest statement, and it will be from your mortgage company, and they report it to the IRS, and you will file that with your tax return and depending on how you utilize your home, you’ll take advantage of that when you work with your CPA.
Lucy: What about expenses like your insurance? You buy insurance to protect your home from liabilities from any natural disasters. How does that factor in as a real estate investor? Even as a person who wants to buy insurance for their own home? How does that play into the tax?
Jennifer: If you’re buying it for your own home and you’re doing nothing with it, then no. If you are renting out a portion of your space, you can deduct a part of it. If it’s a complete rental, it’s 100% tax-deductible insuring your home, so all of it is a write-off if you’re living in the house and are starting to see that this new tax law is making you think of ways to mitigate your tax risks and grow your real estate, then yes.
You can deduct a portion of it related to how your property is set up for your two-family on your mortgage interest. Maybe you could split it in half, depending on how it’s set up. If you are a full-blown real estate investor, you have a full-blown rental property, all of the insurance is tax-deductible.
Lucy: See? There are significant benefits to the tax code for real estate investors. Again, the examples that Jennifer is sharing with you are more for illustration purposes. If you have a home where you’re residing in, but then you’re renting the other half and want to take advantage of the depreciation and deductions, please work with an accountant. This is not a do-it-yourself kind of thing. That’s why you have to go on and work with specialized people because they are very familiar with the rules, with the laws, and they’re there to help you stay away from trouble.
Okay, Jennifer, so thank you for sharing all those tips. Now, you might probably be wondering why Jennifer and not any other accountant out there. The reason why I chose Jennifer and I’ve always been working with Jennifer for the past, and I don’t know how many years, but Jennifer is a real estate investor herself. She owns her rentals, and she’s been taking full advantage of what the tax law has to offer. I’ll let her talk to you or share a little bit about her experience as an investor and how she applies for the tax code’s benefits.
Jennifer: My name’s Jennifer. Again, Jennifer Kirkland. I’ve been a CPA for nine years. I’m also the first African-American woman to graduate from NYU law schools, early masters in tax law, and I’m also an EA. I’m a CPA licensed in New York. You may have a CPA in different States licensed, but I’m also an enrolled agent. I’m licensed everywhere to help you with your tax return. As Lucy said, I’m also a real estate investor, so I know firsthand the benefits of utilizing the tax code to work in your benefit, taking full advantage of your depreciation, and all your tax deductions that you have in your home.
Reach out to your CPA if you have one already, or I can assist you at jenniferatmytaxologists.com, and I’m sure Lucy will put the link in there.
Lucy: Yes. I will put the link down below so you can have access to her. Now that we have learned a little bit about what the tax code has to offer, her expertise, and how you can apply some of that to your real estate business, whether you’re a flipper or a wholesaler, or even a long-term rental holder like we are. How about you share a little bit about yourself? How did you wind down in this journey doing taxes, and where are you today?
Jennifer: Mine is very touching, a bit deep story. Unfortunately, my father passed away when I was 14, and my mom was a stay at home mom, and she took care of her girls, my sisters. At that time, my dad was a janitor for Hunter College, and he was a UPS truck driver. When I was a little girl, I remember he had a massive heart attack and unexpected when he was alive. My mom was home with her girls, and she didn’t wasn’t managing the finances. My dad always said before he passed away, you make money three ways.
He said you make it with your beauty, your mind, or your labor, your hard work labor. I was just like, “Oh my God, that stuck with me ever since I was 14.” That, “Okay, my dad didn’t want me to do it through beauty.” He was like, “I hope you do it with your mind.” You go to school, and you go this route. Then the part that stuck out to me was that he did work so hard. I remember when my dad passed away, I told my mom, “I’m going to save money. I don’t want new clothes for school. I want to help you. One day I’m going to have real estate and buy you a house.”
I was 14 at the time. As I was working, I was just like, “This is tough.” The whole traditional way of learning of just going to school and working a job until you get a gold watch or whatever. It’s have changed. There have been massive layoffs. If you can find a way to bring in passive income in your house and what passive income is when you close your eyes, money is still coming to you. That’s the best way I could describe it is that you could have rental income coming to you where you can take advantage of tax deductions.
You could get tax less passive income is tax less than earned income, go workday today advantage. I was like, “This is the way you can take care of it.” That’s what sparked the interest. How can I utilize my wisdom and this tax law to make it work for me and mitigate my tax risks, not avoid paying any taxes?
Lucy: That would be illegal.
Jennifer: That would be illegal. To think smarter of how you’re working, look at your W– I would say, Jay, look at your W2, and you look at box two, you’ll see, box two alone. I’m not even mentioning social security, taxes, and state, depending on what state you live in. You look at box two alone, you’re like, “Man, they took it all the money.” With the new tax load’s encouragement, this is the age of ways to start ways of thinking of business ideas or real estate investing ideas to compensate for that gap.
One of the things that I do, if you are in New York City, I volunteer for the small business association, and that Lucy is one of the most rewarding things ever because you get to see so many people’s dreams in their hands. Just to think a little bit outside of the real estate, you meet people from all over who have their creative business idea, and now the tax law indeed encourages that. I want to thank you, Lucy, for having me here because as much as we talk about passive income and things ways to save money, I am not the most– This is my first time on YouTube.
Lucy: Basically, what she was telling me is that she was doing all of these volunteer events, and it was so rewarding and people– she feels that she can make a difference in people’s lives. People wondering about the tax law, and how do I make this, how do I stay out of trouble? Because you want to do this right. In her mind, she was thinking, “Oh, how great would it be if other than just helping people in New York and New York state, what if I get the chance or the opportunity to inform a much bigger audience, people like you, who are watching right now and help everybody.”
It was funny how we’re in-sync because just as she was thinking about that, I reach out to her and say, “Hey, would you like to be a part of my YouTube channel because I wanted to do an episode on taxes and inform real estate investors and what they should be in the lookout for.” You graciously agree because you’re like, “Oh my God, this perfect.” Now, I can inform people outside of New York, it’s not just New York, but now it’s whoever can tap into the channel and learn about what Jennifer has to offer and taxes.
Jennifer: This is my first time on your channel. This is my first time on YouTube. I’m so happy that you let me come on your platform and be able to do this. It is genuinely has been an honor, even a blessing. Honored to give back and help you guys, and hopefully save money and start to think of creative ways to make money while saving in taxes.
RESOURCES & LINKS MENTIONED IN THIS EPISODE:
– Link to the presentation slides: go.novariseinvest.com/cares-act
VIDEOS COMPLEMENTING THIS ONE:
– How is a real estate investor managing her properties in this crisis?: https://youtu.be/36iowp8osqo
– Improve your credit while you maker money: https://youtu.be/eOx82LBo14g
– Fund & Grow your real estate portfolio: https://youtu.be/VV0n1crixUQ
PLAYLIST COMPLEMENTING THIS ONE:
– Investing During The Crisis: https://www.youtube.com/watch?v=sSrOt5IXnMs&list=PLbg0ENts-e2tjHtaG6f7Vb-gJwXzrFsx2
All About Business Credit Playlist: https://www.youtube.com/watch?v=dVtOEoKP8b4&list=PLbg0ENts-e2sznkpSyI-K9-rRcE3JppZh
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