Introducer [00:00:02]:
Welcome to The Untold Stories of Real Estate Investing, hosted by Wayne Courageous II, a place where active and passive investors come to hear the good, bad, and ugly of real estate investing. Our guests consist of experienced operators and investors who want others to succeed by sharing their stories. If you're looking to syndicate deals or grow your wealth passively in real estate, you've come to the right show. It's now time to sit back, take mental notes, and enjoy our next episode of The Untold Stories of Real Estate Investing.
Wayne Courreges [00:00:38]:
All right. Hey, welcome, everybody. So we just finished our breakout sessions in our meetup. We really try to do a lot of networking in the beginning and then at the end as well. But today we're going to be talking with Susan Geist about tax savvy savings, the tax bucket approach to put money back in your own pockets. For those that are going to be listening in at a later date, we're recording this on October 23, 2023. So we do turn this into a podcast in YouTube as well. So for those that are listening in and also want to share this with other people in the future, we'll send out a recording.
Wayne Courreges [00:01:18]:
So our monthly meetup is the fourth Monday of every month. And really, we started this back around COVID time. We really wanted to have an atmosphere where passive investors in particular were able to ask questions and learn along the way. And we really have tried to bring in a lot of outside speakers. I have also spoken quite a few times on our monthly meetups, but it's always more interesting and more fun to have people outside of myself share about their experience and their specialty within real estate investing. But we do that the fourth Monday of every month. And so we'll have our last virtual meet up in November, I believe it's November 27, if I recall. And then in December we don't have a meet up, and then in January we'll kick it back up.
Wayne Courreges [00:02:07]:
So a little bit about myself. So I'm based in Central Texas. We focus at CREI Partners on value add multifamily storage. And then even within that storage, we do like RV boat, sort of the higher end, fully enclosed storage facilities, and then the build to rent investments in Texas. We've got properties in Louisiana and Alabama as well. So we're up to 37 million assets under management. I left my w two back in June. I started our company, CREI Partners back in 2019 after working with CBRE for many years, and in June of this year finally was able to take the leap because we were just getting so busy on our investments with our investors that it just needed to happen.
Wayne Courreges [00:02:52]:
So took that leap. But it's been pretty much my entire career commercial real estate, whether it was W Two or our own personal investments. Just a few other slides here. Check out my podcast. I think we're up to like 54 episodes, which is great. If you know me, I'm very introverted. So those episodes, it takes a lot for me to do, but we are doing them every Thursday. I do one episode every Thursday record, and I've been really good at it, so it will consistently continue on.
Wayne Courreges [00:03:24]:
So I've got that podcast and then if you go to Creipartners.com, you all can check out. We've got a lot of blogs. We do a lot of blogs. The podcast. We do YouTube. Our Facebook. Social media has been good as well. And then the CREI partners invportal.com, you can see where our active listings, we just closed on 44 units in Houston multifamily near a property that we have that's Ivy at the Galleria, and we have a storage development in Brian College Station.
Wayne Courreges [00:03:54]:
So if you're a credit investor looking to invest, we do have some openings on our storage development. I think we're about 350,000 away from Finalizing. That two and a half million dollar raise. And so the loans close, work is already being started on that. I know this is a multifamily meetup, but we have a property just like this in Huntsville, Alabama, and it's been cash flowing consistently for our investors. So that's something you're interested in, or at least talking about, whether it's this one or the future ones, definitely reach out. So enough about me. Let's introduce my friend and investor on one of our deals, Susan Geist.
Wayne Courreges [00:04:29]:
Susan grew up in a lower class family in rural Appalachia and began investing in real estate in 2008, eventually achieving a portfolio that now generates over five figures in passive income. Each month, using strategic investment deductions, she reduced her annual federal tax bill from one hundred and thirty seven thousand dollars to six thousand dollars, while increasing her W two and investment income. Her current multimillion dollar real estate portfolio consists of both long and short term rentals, in addition to limited partnerships in apartments, car washes, self storage, hotels, and mobile home parks nationwide. Through her company rising fame, Wealth LLC, susan provides financial education workshops and investment coaching to power other Wellmen with the strategies and confidence to grow their wealth, reduce their tax bills, and achieve financial independence. And with that, I'll turn it over to Susan.
Susan Geist [00:05:20]:
All right, thanks for having me, Wayne. I'm glad to be here again to talk about taxes. It's probably all of our least favorite topic to talk about, but super important as part of your wealth building strategy. So I've started with a disclaimer that I'm not a CPA, I'm not a certified financial professional. So this is not personal financial or tax advice. This is for informational purposes only. I believe in people becoming empowered around their finances and their taxes and getting as much education as they can to be able to evaluate their own tax situation. All right, so the two biggest wealth killers are inflation and taxes.
Susan Geist [00:06:09]:
Inflation, there's not a whole lot we can do about except maybe start buying less things, but taxes, luckily, there are a lot of things we can do to reduce our tax bills. So I started going down this path in 2021 when I was hit with a federal tax bill of $137,000. And this was more, quite a bit more than I was making at my W two job. And I didn't understand what was going on because my husband and I had W two income. But we also had a lot of stock losses that year we also had a lot of real estate losses that year from depreciation and expenses. And I didn't understand why aren't these offsetting the income that we have coming in? And so I started reading more about the tax code, learning about the tax code, and starting to kind of decode how the IRS categorizes our income and the deductions. I stopped looking for angels and I started looking for angles. So after using this tax bucket approach, I got my 2022 federal tax bill down to $6,500 with higher income.
Susan Geist [00:07:26]:
So, as you can see, doing tax optimization can be extremely lucrative. You can actually make more from this than even taking a second job or doing a side hustle. You can really use this to grow your wealth if you know the right tools and techniques for your situation. So the goal of this tax bucket approach is really to visualize how income is divided into the active portfolio and passive categories and be able to pair each of those with deductions in order to lower your tax bill. So why even care about any of this? So, just to show you, if you can just save $1,000 a year on your taxes, which isn't that hard to do actually, after 30 years, if you invest that money every year, you'll have almost $131,000. If you just save $1,000 once on your taxes, in 30 years, you'll have $11,000. This is the power of compounding and the time value of money, how it will grow over time. If you can save money on your taxes each year, and if we look at going bigger, so what if you can save $10,000 a year on your taxes, which again, is not actually that challenging to do.
Susan Geist [00:08:47]:
Over 30 years, you save $10,000 each year, you'll have over $1.2 million. You've got your retirement set there just for money you've saved on taxes. If you save $10,000 just one time and you're 30, you're looking at over $109,000. And so in my situation, I saved over $100,000. Think about that compounded what that could do for my wealth and my family's wealth in the future. So what if you don't really care about taxes, right? They're just not your thing. There are also a lot of benefits from just getting your adjusted gross income down on your tax forms. That number is used to determine all sorts of different things.
Susan Geist [00:09:32]:
So it's the number that you put on the FAFSA. So if you have children going to college, this is the number they're going to look at to determine how much aid your child is going to get. This number is used for the Affordable Care Act plans. It determines how much you pay in your premium. So another reason to try to get that number as low as possible, it also is used to determine your Medicare premium. So if you're at retirement age or close to retirement age, there are a lot of benefits to getting your AGI down on your tax return. Even if you don't care about the tax benefits. There are all these outside things that it impacts.
Susan Geist [00:10:14]:
But should you feel bad about paying fewer taxes? So, the government writes tax law to shape the economy. They are incentivizing and disincentivizing different behaviors using the tax code. So you can think about sin taxes, right, like paying extra taxes for cigarettes, for alcohol. So they're trying to disincentivize that behavior through taxation. Well, the opposite also occurs. So they give you tax breaks in return for doing things like saving for retirement, providing housing for other people, creating jobs, so starting your own business, and also energy production, so investing in oil and gas. So essentially, you're doing what the government is incentivizing you to do, and you shouldn't feel bad about that. But I already have a CPA, so this isn't tax planning is not to replace your CPA.
Susan Geist [00:11:13]:
So a CPA tends to be very reactive, right? So you bring your CPA, all of your forms, your spreadsheets, QuickBooks, whatever you have together, your CPA puts it all into the forms and sends it to the IRS. Your CPA is not buying investments for you. They're not investing in retirement accounts or a health savings account for you. They're not doing tax loss harvesting for you. All of this is on the front end, right? So this is being proactive about your taxes and understanding what you need to do to put yourself in the best situation. When you do, bring all of your numbers to the CPA so they can get you the tax refund that you deserve, right? So really, it's up to you to understand this and take the steps that you need to optimize your taxes. And it's also helpful because a lot of CPAs, if you have real estate investments, a lot of CPAs don't specialize in real estate investments. And so it's helpful to be able to look at the tax return you get back from them and see if everything has been set up the way that you expected it to be set up.
Susan Geist [00:12:29]:
So everyone has a unique tax situation, and really knowledge is your best tool. There is really no downside to being empowered around taxes. So two main income tax rates that you'll see, so these are the 2023 ordinary income tax rates. So this is what most of your income is taxed at. And so you're probably familiar with these, it goes from 10% to 37%. And then the long term capital gains tax rates. So you can see they go from 0%, 15% and 20%. So they are quite a bit lower than the ordinary income tax rates.
Susan Geist [00:13:10]:
So the more of your income you can get in long term capital gains rates, the better compared to ordinary income tax rates. So let's get into the tax bucket formula. So, like I said, this is a visual way of looking at taxes that I put together because I was having trouble understanding where my income was being divided up by the IRS and which deductions could be applied to which income. And so, as you see here, so there's three different kinds of income. So there's active income, also known as earned income. So this will be like your W two income, your 1099 hourly income, business income, like active business income. All of that will go in that red bucket, portfolio income that'll be like your stock portfolio, your interest dividends, things like that what we typically think of as like a standard investment account, and then your passive income. So these are going to be your passive, essentially passive businesses.
Susan Geist [00:14:16]:
So your rental properties, if you're invested as an LP in syndications, that'll go in this passive bucket over here. Really, anything you're receiving money from, like royalties and distributions from where you're not actively involved in that business, will be over here in the passive bucket. And there are different deductions that apply to each bucket. So let's see it in action. All right, so we had a client come to us, and I'm going to call her Meredith. I changed her name for privacy, but she was a single woman. Her income comes primarily from her W two job, which is in the active the red bucket and the stocks from stocks in the blue portfolio bucket. She did not have any real estate, but she was open to investing in real estate.
Susan Geist [00:15:12]:
So her primary goals were to reduce her annual tax burden and diversify her income streams. So just taking a look at her buckets at the outset, so she was making $200,000 a year at a W two job. And then in her portfolio bucket, she had $10,000 in dividend income, $10,000 in interest income, and $20,000 in long term capital gains from some stock she had sold that year. She had nothing in her passive bucket. So when we look at her tax burden, you can see she was making $240,000. So that as a single person, puts her in the 35% tax bracket. So that's very high. Her standard deduction was for a single person only $13,850.
Susan Geist [00:16:06]:
So her approximate tax due was $53,000, which is a significant amount since she's only making 200,000 at her W two job. And that doesn't even count what's being taken out for the FICA taxes, the Social Security and Medicare on top. So here's what we did with Meredith. So first we wanted to hit the low hanging fruit. So we had her invest in her tax advantaged accounts that were available to her. So she maxed out her 401, she maxed out her health savings account. We had her put some money in a limited expense FFA for dental and vision expenses. We did a little bit the 3000 extra of tax loss harvesting, which I'll talk about in a minute.
Susan Geist [00:16:53]:
And then she was in an interesting situation because her property that she owned actually had the opportunity for an adu, an auxiliary dwelling unit in the backyard. And so we actually had her set this up as a short term rental. And there were a few reasons for this. So the IRS will classify short term rentals as active businesses if you are managing them yourself. So this will move that type of rental from the passive bucket to the active bucket. So short term rentals can be a really good way for people with high w two incomes to have some write offs from real estate in that red bucket, the red active bucket. So in her case, so she was putting in enough hours, she was managing it herself. So it was counted as an active business by the IRS.
Susan Geist [00:17:51]:
So she was able to do a cost segregation and take some bonus depreciation, some accelerated depreciation on that. And then because it was in her backyard, she also was able to take some of her normal expenses and classify part of them as business expenses. So like her internet that she was already paying for. Well, a portion of that also was going now to the short term rental. And she could write that off on her taxes as a business expense. Same with her cell phone. She was talking to guests on her cell phone. Same with the lawn care, her utilities.
Susan Geist [00:18:29]:
And so now it's taken these normal expenses that she had that were just expenses and weren't write offs at all. And now a lot of them are classified as business expenses and she gets to write them off. So after all of that, it generated in that first year $120,000 loss. Now, most of that, as I mentioned, is like a paper loss from depreciation and from these expenses that she was paying for anyway. And then she made 30,000 in short term rental income. So she did have income from that. So after all those deductions, we got her active bucket down to $65,800. And then on the portfolio side, we had her do tax loss harvesting to negate her capital gains from stock sales and tax loss harvesting, that's when you're able to generate a paper loss from your stock portfolio and it's a great way to offset capital gains and you can offset any kind of capital gains.
Susan Geist [00:19:33]:
So even if you sell real estate, you can do tax loss harvesting against those capital gains too. But in her case, she had sold stock and was able to negate that. So we got her down to $20,000 in portfolio income. All right, so let's take a look at how it turned out. So, her previous tax burden was $53,000 on $240,000 in income. So her current tax burden with this optimization, we got her tax bracket down to 22%, and her approximate tax due is $13,000 on $270,000 in income. So her income went up, her taxes went down by $40,000. So let's take a look at what that means.
Susan Geist [00:20:20]:
So, if she just takes that $40,000, she invests it 8%. So over 30 years, that $40,000 will become $437,000. And that's just investing it one time and never doing any tax optimization again, which, of course, hopefully, she would keep doing this. But, yeah, that's the power of stopping to look at your taxes, right, and saying, what can I do better on my taxes? How can I take advantage of what's out there and find ways to take these deductions against the income that I have? All right, so let's take a look at another example. So, this is a couple that came to us sam and shelby. Again, I changed their names for privacy. So they were filing as married filing jointly, and their income came primarily from their w two jobs, which, of course, is in the active bucket. And they owned three rental duplexes.
Susan Geist [00:21:19]:
So that was over in the passive bucket. And so they had a similar situation to me, where they had two sets of income in very different buckets that they were working with. Sam really wanted to leave his job because they wanted to start a family. So their primary goals was to allow him to leave his job to cover more of the household responsibilities, which would free shelby up, too, so she could just focus on work and then have free time available in the evening. But they also wanted to maintain financial security for the family. One person leaving their job can throw a family in turmoil financially. So they wanted to see if there was a way that they could actually do that. All right, so when they started out, this is what their buckets looked like.
Susan Geist [00:22:09]:
So, shelby was making 200,000 at her w two job. Sam was making 120,000 at his w two job. They had about $10,000 in dividends coming in every year and 150,000 coming in from their rental duplexes. So if we look at just straight tax burden without any deductions other than the standard deduction, this is what their taxes would have looked like. So their income 480,000. That puts them also in the 35% tax bracket very high. They get to take the standard deduction for a married couple. So their approximate tax due was $106,000.
Susan Geist [00:22:51]:
So this is almost as much as sam was making at his w two job. And as we know, he wanted to leave his job. So it looked like, okay, let's figure out a way to do this. If we can get rid of your tax bill, then this looks very probable that you could have a similar financial scenario. So I'll show you what we did. So first we looked at okay, well, just Shelby is working. So again, we're going to hit this low hanging fruit. We're going to max out all the tax advantaged accounts.
Susan Geist [00:23:23]:
So we had her max out her 401, max out the health savings account, and she gets to take a higher amount for that because she's part of a family. We had them put money in a limited expense FSA we again did the tax loss harvesting. You can do up to 3000 towards active income and the standard deduction over in the passive bucket. We wanted to make sure they were taking full advantage of their deductions over there. So we had them look at all their depreciation expenses and everything, and they were able to deduct $120,000 rental loss. Again, a lot of that was a paper loss. And then we had them invest as an LP, a limited partner in real estate syndications that generated a lot of depreciation. So they were able to generate $200,000 in depreciation that year from their investment.
Susan Geist [00:24:19]:
But as you can see, we still have the problem right where we've got a lot of income coming in in this active bucket and a lot of deductions coming out of the passive bucket. And it would be great if we could take those two buckets and combine them. Well, there's a way to do that. So since Sam is no longer working his w two job, he took over management of their Duplexes. And so that gave him enough hours to obtain real estate professional status. And so that indicates to the IRS that you have an active business in real estate. And he was able to do a grouping election on his taxes to also group in that syndication distributions as part of his business, overall real estate business. And so that allowed him to dump that whole green bucket, this passive bucket, into the red bucket.
Susan Geist [00:25:17]:
And this is a very powerful strategy that a lot of couples use, where one has a really high w two income, they also own rental property, and the other spouse will get real estate professional status. And you don't have to be a realtor, you don't have to get any sort of certification. You just have to meet the criteria. So you have to put in a certain number of hours. It has to be the main thing that you do. So you can't have a w two job and claim real estate professional status. The IRS will come after you and audit you for that, so don't do that. But otherwise, as long as you're meeting the hourly requirement, it's pretty easy to do this and you can get your taxes down extremely low.
Susan Geist [00:25:59]:
So let's take a look at what this does to their taxes. So as you can see, we've moved everything from the green bucket. Now over to the red bucket. So the income over there, we've got 200,000 from Shelby's job. We've got 150,000 in rental income. We've got all the tax advantaged accounts we had before. Now we also have their $120,000 rental loss. Again, a lot of that's a paper loss and their depreciation, another paper loss from their syndications.
Susan Geist [00:26:33]:
So they ended up with negative $33,000 in their active bucket, and we still have the $10,000 in dividends in their portfolio bucket. So it's not really any use to have negative numbers in your active bucket. You typically don't get a refund for that. So we wanted to take advantage of that, right, because we had this negative 33,000. You can carry it over in the future, but we wanted to go ahead and do something with it right then. So we had Sam do a $33,000 backdoor Roth IRA conversion tax free. So Sam had left his W two job, right? So he had a 401. So he went ahead and rolled that over to a regular IRA.
Susan Geist [00:27:24]:
So all that's tax free, right? Because you put your money into a 401K pretax, and you can roll it into a regular IRA without paying taxes. Normally, when you roll into a back to a Roth IRA, that's when the taxes are due, and you've got to pay regular income taxes on that. But because they have a $33,000 loss already, they can do this $33,000 backdoor Roth IRA conversion and not have to pay taxes on it. So they took this money right when Sam was working, put it in the 401K tax free, rolled it to the IRA tax free. Now they're rolling it to the Roth IRA tax free, and it will grow, and they can withdraw it tax free. So it's completely tax free retirement money.
Wayne Courreges [00:28:16]:
Hey, listeners. It's Wayne courageous. I just want to pause real quick to say thank you for listening to our show. I hope that you're getting a lot of value out of it. If I could ask you to go ahead and, like, subscribe and share this podcast, that would mean a lot. It will get a lot of other investors like yourself learning about the process and the steps to successfully invest in real estate, either as a passive or an active investor. I also want to do a quick introduction of CREI Partners. I'm the managing principal for CREI Partners, and we started it back in 2019 with one goal to grow your wealth passively in real estate.
Wayne Courreges [00:28:49]:
We do so by buying assets in multifamily build to rent communities and RV boat storage facilities. And we do so in areas that have strong market fundamentals and also have strong partnerships with other real estate investors, such as ourselves. We personally discovered that passively investing in real estate was a really great blend for people that are busy like yourself, and that you can invest passively in real estate and still reap the rewards of the returns the tax benefits, et cetera. If you're interested in learning more about passively investing, check out our website. We do a lot of content through our Passive Investor Coaching program, through our podcast, our blogs, and just other information that we do on a daily basis. Check out Creipartners.com. Again, Creipartners.com. If you're interested in building the relationship and joining our Investor club, there's a link there to join.
Wayne Courreges [00:29:39]:
We'll set up a call and continue building the relationship with you. We're super excited to have that opportunity, and I wanted us to get back to the show and hopefully, again, you're enjoying the conversation and look forward to connecting soon. Thank you.
Susan Geist [00:29:52]:
So let's take a look at what we have now. So, in the active bucket, you can see we've added in this $33,000 backdoor Roth IRA income because it is considered income. And that brings us to $0 in that bucket. So, 0% tax rate and then dividends. So they're under the threshold on the long term capital gains that dividends are taxed at that rate, and they are under that threshold. So they're in the 0% tax rate for those, too. So they actually could have made more money in dividends and still been in the 0% tax bracket for that. So their previous tax burden, $106,000 on 480,000 income.
Susan Geist [00:30:39]:
Their current tax burden, we got them down from the 35% bracket to 0%. The approximate tax due is $0 on $383,000 in income. So, yes, their income went down, but they still came out ahead. So overall, they're in a better net financial position. Sam is not having to work. He has more family time available, and it's now freeing up Shelby's home responsibilities. So things were better with them all around. They contributed and now can withdraw $33,000 in retirement funds completely tax free.
Susan Geist [00:31:25]:
They now have income benefits for the Affordable Care Act, for FAFSA and Medicare if they need them. They're showing a very low income, and then if they're able to take that 100,000 that they saved and invest it just one time, just invest it, put it away at 8%, they, in 30 years, could have around $1.1 million just from this one year of tax optimization. So, the Tax Bucket formula is a really powerful visualization tool because it allows you to actually see what bucket do things belong in? And things didn't make sense to me until I started writing it out in this way, in this visual manner. I think we all hear all these buzwords depreciation, tax loss harvesting, cost segregation, and it's really hard to understand how all that works together until you start writing it out with the income buckets and see where it goes in and where it's coming out. All right, if you're ready to learn more. So, my business partner Caitlin and I are working on putting together a full online course on this. So we've done a fair number of in person workshops, but I get a lot of people. Coming to me saying, hey, I'm not in Austin, but I still want to learn this.
Susan Geist [00:32:53]:
So we're going to do an online course that'll be downloadable. Hopefully it should be available early next year. So we're going to cover about two dozen tax bucket reduction strategies and how to plan for your optimal tax scenario. We'll also look at how to read your tax return, all the different schedules, all the forms you need to know, and then we'll have bonus lessons on how to interpret those. Dang K one forms that a lot of us get when we're invested in syndications, what all those numbers mean, where they go on the tax return, how to put in the QBI numbers, because that's pretty complicated. IRS tax forms that investors should know, like the 85, 82 are your passive carryover losses. That's a very common question that we get it's. How do I find that number? Where is it? My 2022 tax return.
Susan Geist [00:33:50]:
I do my own taxes on TurboTax and that tax return was 480 pages long. So it can get pretty complicated. But there are particular forms that you should know. You don't have to know everything, but there are particular forms that if you're an investor, you should know. And then we'll also go over other taxes you may encounter. So there's the FICA taxes, self employment taxes. If you have a self directed IRA, there's all these unrelated business income taxes that you might be hit with. There's AMTS a lot of different other things that may apply to you, but not necessarily.
Susan Geist [00:34:31]:
So that'll be like a bonus lesson if you're interested in that. All right. And have a QR code if you want to get on the waitlist. We also have a free newsletter that we send out. We have a blog on our website. We do one on one consultations. If you're interested in working with us on tax strategy or just want to run by some different investment plans, we can look at stuff, we look at PPMS for syndications and help people interpret. So we'll do workshops and we do speaking.
Susan Geist [00:35:11]:
So if you're interested in any of that, feel free to reach out. I've got our website here, I've got my email, and my business partner, Caitlin Muldoon is actually, I think, on this call too. So she's also available. So yeah, I think tax optimization, as dry of a topic as it sounds, it's something that can really impact your life and your financial future just by taking a little bit of time to think about it and learn what works for your situation. You don't have to learn all 70,000 pages of the tax code, but if you figure out a few things here and there, you can make a really big difference for your future and your family's future. And in some ways I feel like a lot of the tax code is written for the billionaires, the ultra wealthy, and I feel like learning a little bit of it and being able to take advantage of a little bit of it, kind know, it bumps us up. And we can ride that ultra wealthy wave for just a little bit, right, and get to take some of the advantages that they're taking and how they get so wealthy and how they can stay so wealthy. So I think it's really empowering to learn about and I am happy to help you guys in any way that I can.
Wayne Courreges [00:36:43]:
So thank you, susan, that was really great. One of the questions that's been in the meeting chat, it's been answered, but I feel like it'd be good for people to who are listening, whether it's a podcast or down the road. So the question is, following up on Sam's case, did you mean you can claim depreciation from your syndication when you're an LP as long as you have the real estate professional status? And then Caitlin responded, as an LP, you can claim that depreciation reps allows you to apply those losses to your active income and then he says without materially participating, and that's where it stopped. So maybe clarify a little bit more, if you could, Susan, on the real estate professional status and then how it ties to a limited partner for loss purposes.
Susan Geist [00:37:35]:
So you can so you have to do a grouping election on your taxes, which is a separate form. So you will group that you've probably seen on your taxes, where there's like a question that says, is this business related to any other business? That's what it's asking about. So it's asking, are you grouping this with any other active business? Is this part of something else? And that's where you would say, yes, this is part of my active real estate business and it will all be grouped together. Now, once you group it, you typically cannot ungroup it. So you want to make sure that you want to have it grouped essentially forever or until that syndication exits. But yes, so you can do that grouping election. You do need to have some active real estate. So your own, like duplex fourplex, you need to have something that you own, that you're managing that you can say, okay, this is my active business, but this other thing over here, this is part of that and you can group it together.
Susan Geist [00:38:44]:
So if you just have syndications, you're not going to be able to get reps. But if you have syndications plus some duplexes, plus a fourplex, and you meet the hourly criteria, then yes, you can group those together.
Wayne Courreges [00:39:00]:
Yeah, and the hourly criteria is 750 hours. So, as Susan mentioned, it becomes a big red flag for the IRS if they see that you have a W two and you're claiming the rep status. Because 750 hours on top of a day job is a lot. But one recommendation I got from our tax consultant is like, every time you have a call this meetup is an hour on my schedule. And so at the end of the year, I print out our schedule and it's easy to back up that 750 hours when you are active in real estate for yourself or for other partnerships. I did get a question when someone was signing up. So this question is, what can you do to prevent paying all taxes on income from owner financing? This is my first and only investment so far.
Susan Geist [00:39:59]:
So owner financing is a little bit different and it's a challenging one to eliminate because it comes in as interest income. So it's sitting in your portfolio bucket usually. And that's a challenging one. Yeah, I would have to look into that a little bit more to see because I haven't done owner financing on any of mine. I am invested in some debt funds, so that's something I'm going to have to start looking at because that's going to come in as interest income for me on a 1099. Yeah. Do you have any advice, Wayne?
Wayne Courreges [00:40:43]:
I don't because I don't do anything owner financing. So we just bought a property that they're doing seller financing, but I don't have anything that I'm doing the financing on. So it's a great but all right.
Susan Geist [00:40:59]:
Looks like Moses, you have your hand up.
Participant 1 [00:41:01]:
Hey, Susan. Thank you. First of all, I want to commend you and Caitlin as two females to hit this topic know wayne knows me, this is my forte. So the one thing I've learned new tonight was the rollback IRA that I didn't know. So that was my big takeaway tonight. But I'm very good friend with Brandon Hall and Thomas, so they're 469 all the way. So I've always advised my clients and I'm a realtor by profession, so I know this to a great degree. But I do have two questions.
Participant 1 [00:41:37]:
One is going to be a recommendation that if the two of you are going to do anything online, I recommend highly that you do a K one entry and show LP how it's done because I use TurboTax as well. That's the one thing that's missing on YouTube or anywhere that you go. There are some that they talk about when it's a publicly traded business, but they don't do a regular LPK one anywhere. And I think those entry would probably give you a lot of hits if you can do it on there. And it's funny when you mentioned when you do the K one, when you do the entry, you have to select is it part of another business? That's where a lot of folks fail to realize that's where you group all of your activity as one, and then you put in the ein and what's not to show where it's going. But here's the question I have for you on the question that Wayne asked. Would it be possible if you do have a final K One, that your losses could wipe out the dividend that's coming from the seller financing. I know you said you're not a CPA, but I'm trying to think along the same line, because when you have a final, it's my understanding that if you have suspended losses, it can go against all income for that year.
Participant 1 [00:42:57]:
So if you time it right, would it work? That's maybe something for you to research and see if it brings any merit to it. But that's my only one thought when that question came up from Wayne.
Susan Geist [00:43:10]:
I'll have to look into it and see if anyone has been successful with. So most of that is going to come in when the syndication exits. Right. It's all going to come in on the Schedule E, and the interest income is on a different schedule. It's on a schedule. C I believe.
Participant 1 [00:43:33]:
But can the liquidation at liquidation, the passive is not going any farther. So you can't do anything with sitting losses at that point, whether it's depreciation.
Susan Geist [00:43:45]:
Yeah, that's your passive carryover loss.
Participant 1 [00:43:48]:
Correct.
Susan Geist [00:43:48]:
Right.
Participant 1 [00:43:49]:
But if the final it doesn't carry, except if you group it and then you have it as one trade of business, then it'll carry.
Susan Geist [00:43:58]:
I'm not sure. My thought would be that it would still carry, but yeah, I'll have to look into that.
Participant 1 [00:44:04]:
Okay. All right.
Susan Geist [00:44:06]:
Because I know usually it will carry over from year to year on. That 85 if it's grouped and you're.
Participant 1 [00:44:11]:
A real estate professional. If not, it's suspended it's first in, first out or whatever. They treat it how they treat it. So only if you weren't a real estate professional and you had to suspend the losses until your final K one, then that year, if you had the seller financing, it could have wiped out all ordinary income. At that point, it'll used up, then you use it against anything.
Susan Geist [00:44:40]:
Yeah, I'll have to look into that because that could potentially be an option if that works. Yeah.
Participant 1 [00:44:46]:
All right, well, that's all, but I wanted to say thank you. I think it's a great presentation. You made it very simplified, more than any know, but Brandon does a really good job, too. The two guys are really good at it. But I did like your presentation. I wanted to say thank you to both of you. I think it's something that's really needed for the LP especially. And there are some know, because there's some different rulings for GP, how they are treated, and they have to hold it for a certain amount of years, I think more than a year, what's know, three years in their portfolio.
Susan Geist [00:45:18]:
Well, thank you, Moses.
Participant 1 [00:45:19]:
Anytime.
Wayne Courreges [00:45:20]:
Yeah. Thanks, Moses. There's a lot of traffic on the chat about the real estate professional status, and I think the biggest thing know, talk to your CPA, and a lot of times it's interpretation of such. And I know there's a lot of blogs and things, but know, whether it's investing in a syndication or doing mean, like Susan said in the early part of her presentation. She's not a CPA, but definitely reach out to your CPA. If you don't have a CPA, this is the time to do it. Don't wait till January, February when they're so busy and their own tax for the existing clients. But I will say again, if you are doing what I'm doing and just scheduling all the calls, all the activities, I'm driving to Lafayette tomorrow.
Wayne Courreges [00:46:10]:
I mean, that's all part of work, just keeping that all in the schedule. And if you are able to back up the 750 hours, whether you do other things work related, then maybe you're fine. But ultimately, definitely talk to your CPA or reach out to Susan or Caitlin directly. Hey, Susan, as we close up here, let me see if there's one more question. But since this is going to turn into a podcast, can you just state your email and your website so that way if anyone's listening and not seeing your slides, that they can reach out to you directly?
Susan Geist [00:46:48]:
Yeah, no problem. So the website, it's risingfimwealth. So WW risingfimwealth.com. And my email is
[email protected] and Caitlin's is
[email protected].
Participant 1 [00:47:03]:
Hey, Wayne, I remembered my question. I know it's on the hour. Would you permit me, please?
Wayne Courreges [00:47:08]:
Yeah, for sure. And what I was going to do after your question, Moses, I'll stop the recording, and then if there's any other questions that may come in, I'm sure Susan give us another five minutes or so. So, Moses.
Participant 1 [00:47:17]:
Go ahead. Okay, so, Susan, this is the one question I heard you address it, but I wanted to make sure I had it right. So even though my spouse is a w two, I'm a realtor by profession, so I have all the time. I've never been audited for real estate professional status because this is my full time work, whether investment and selling property. But can my wife not help me make up the hours? Under one has to be qualified for the rep status. But can the spouse not help you even though she's w two with making up the material hours?
Susan Geist [00:47:50]:
I use my husband's hours on my short term rentals, and that's to reach our 100 hours to get the active participation. So I believe that your spouse, if you jointly own the property, then they should be able to count their hours also.
Participant 1 [00:48:06]:
Okay, that's what we make sure. Thank you.
Wayne Courreges [00:48:09]:
Well, Susan and Caitlin, your counterpart. Do you want to say anything? Caitlin, you've been in the hey, everyone.
Susan Geist [00:48:18]:
Thanks for joining and thanks for having us on. Wayne, I think that these are great questions. So I've been trying to keep up in the chat, but also furiously taking notes to blow up on some of these awesome questions. So appreciate the opportunity to do that.
Wayne Courreges [00:48:37]:
Yeah, absolutely. Well, thank you all. Both I'm going to stop recording, and then we can take it offline for the next five minutes or so.
Introducer [00:48:46]:
That's all for this episode. We hope you subscribe share and leave a review of the show. For more information about passively investing in multifamily apartments, check out Wayne's free ebook by going to forward slash ebook. Also follow us on Facebook by searching CREI partners. This was the untold stories of real estate. Invest sting close.
