In this episode, Jason Hartman talks about the flaw in Airbnb and the passing of Dr. Wayne Dyer. Then, he interviews Brandon Hall, Founder of Hall CPA. They discuss the imposition of a 15.3% tax on active income on short-term rentals, compares short-term rentals versus long-term buy and hold properties, and the new de minimis safe harbor. Brandon also explains what segmented depreciation and cost segregation is.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts, visit Hartman media.com.
Announcer 0:13
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in 1000s of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:03
Welcome to the creating wealth show. This is your host, Jason Hartman and we are at episode number 563 563. Thank you so much for joining me today. Our guest will be CPA, Brandon Hall. Yes, we’re bringing a real estate specialist CPA on the show. Mostly I reached out to him because he wrote an interesting article about Airbnb. And I’ve been following with admittedly some degree of fascination at people, you know, doing Airbnb rentals. And, and really, they’re, they’re almost in the hotel business. So it’s not a very passive investment. The way most of our listeners like to invest and really not be managing something all the time, but I’ve been really watching it very closely over the years, and I’ve been, you know, I know many people that do this. And you know, say they like it and say they’re doing well with it. But there is a huge flaw, yes, a huge flaw. And it’s not the management. It’s the tax code. Some of these Airbnb people are in for a rude awakening by Uncle Sam. Yes, Uncle Sam is going to knock on the door and say, he wants a lot more money that your Airbnb rental is not nearly as tax favored as the most tax favored asset in America, income property. Allah, Jason Hartman my way. So we’ll hear about that with Brandon Hall. And he’s going to talk about some other really good stuff as far as taxation for real estate investors and tax benefits and so forth. I’m going to have him back to talk in detail about unlimited passive loss exemptions and real estate professional at a future date. But we kind of touched on it here a bit. And we touched on several different strategies that I think you’ll like it starts off with Airbnb. So if you think hey, you know, I’m not an Airbnb guy, I don’t care about this, why am I listening? Keep listening, there’s more. But wait, there’s more, as they say on the infomercials. A couple things. Before we start on that.
First of all, it was with great sadness to see the passing of Dr. Wayne Dyer a few days ago, that happened during our Jason Hartman University event in San Diego. And I had followed his work for many, many years. I remember, actually in college learning about him when one of our assignments in one of our classes my first year of college, as I was starting as a real estate agent, part time attending Long Beach City College, was to read the book your erroneous zones. And I remember I got his tapes on how to be a no limit person. And, you know, that was that was great influence. I was so lucky to discover all these great mentors at such a young age, that they really changed my life discovering, you know, Zig Ziglar, and, and Denis waitley, and so forth at age 17. And then Earl Nightingale, and Jim Rohn. And later Wayne Dyer, and, you know, they’re, they’re all passing on, Denis waitley is still around, but all the others are gone. sad to see that. And of course, you know, we lost Stephen Covey A few years ago, too, he was another one of the greats. And you know, you might be thinking, well, Jason, why are these all men? Someone asked me that during one of my speech is once and I, you know, I don’t really know the answer. I guess men just like to get up on stage and talk more than women do. I mean, women do but not as much. You know, if you look at the population of all these gurus and motivational speakers, they’re largely male, and I have endeavored in the financial world greatly to try and get more female guests on the creating wealth show. Sometimes I go to Jason hartman.com. Well, actually, I go there all the time. It’s my favorite website. Shouldn’t be yours do anyway. Sometimes I go there and I look at the podcast page and I look at all the guests and it’s like, what is this a men’s club? It’s ridiculous. Let’s get some female perspective. But the fact is just not as many women write books about financial stuff, it just does must be, you know, just the way society has sort of told everyone they should be and their role models or maybe it’s just, you know, the differences in interest in brain, you know, I mean, there, there are actual physiological differences between the male and female brain, there’s no question about it. Anyway, it’s just kind of interesting, something I’ve thought about and we were really do try to get more female guests on the show. So stay tuned for that.
But today, we got another guy. Yep, CPA, Brandon all. Just a little recap on Jason Hartman University, we had that event for the very first time last week, one of our friends from a real estate forum that asked about it and said, Can someone give me feedback on this event? And I said, trust me, nobody can give you feedback was my reply. Because I haven’t even been to the event yet. Well, we did it last weekend, we did it in San Diego. And it was great. I mean, it was a good event. Everybody liked it, the evaluations were extremely positive. So thank you for all the kind words. And we really dove in to the fundamentals of real estate investing, how to do the math, the math of real estate investing. And nowadays, of course, we all use software to do this kind of stuff. Or at least we use a calculator to do it. But it was really interesting to actually, you know, when you do the math yourself, rather than just looking at what happens on the website, for example, if you go to Jason hartman.com, slash properties, you’ll see the properties there. And it’s all figured out for you. But when you do the math yourself, you really own it, you know, you own that number, you really understand it more deeply. There’s, there’s a big difference between hearing something and actually actively doing something. So this was really our first attempt. And I think it was a successful one, at least by audience feedback at making things really interactive. So look, for more of that, in our future events, we’re gonna, we’re gonna really strive to make things more interactive. We did a fun game over the lunch break on the first day on Saturday, where everybody had to build their own real estate portfolio. And I thought about that, and how almost all the teams except one outlier got to got the same answer, you know, but the next time we do that game, we’re gonna spice it up and make it a lot more in depth, and more challenging. So, look for that. Maybe we’ll play it at our meet the Masters event, which is tentatively slated for January, early January, I guess I can give the dates and we’re going to have this on the website pretty soon. At Jason hartman.com. Slash events. We don’t have a hotel venue yet. We’re kind of looking at some different stuff. Maybe San Diego to change it up a little bit. I don’t know, maybe we’ll be back in Orange County. We’re thinking of Long Beach or Los Angeles, you know, what do you guys think, hey, listeners, what do you think? Give us some feedback on that, you can just send that feedback to the reviews page reviews at Jason hartman.com.
We set up an email address for review screenshots. We appreciate your reviews so much on iTunes and Stitcher, radio and SoundCloud, but we tentatively have meet the Masters slated for January 9, and 10th. Save the date. That’s our big annual event. And we want to get a larger room this time because it always feels like that event. oversells. And we’ve got people, you know, sort of sitting in the hallways and and we want to make sure everything’s comfortable. We do all of our events, classroom style or schoolroom style, so you always have a desk in front of you. And a place to write I you know, I went to a seminar in Las Vegas. Well, about two months ago, I guess, internet marketing type seminar. And you know, we were so squished in no tables, it was so uncomfortable. I don’t know, I like a little bit of space. I don’t know about you, but we try to do our events in a more comfortable fashion. But then we get limited by room size and last minute registration sometimes. And that’s always a challenge. So we’re definitely going to a larger room for me to master. So that’ll be up on the website soon. Jason hartman.com slash events. But what do we have coming up? Well, our most exciting thing coming up is our trip to Providence and Newport, Rhode Island, including a side trip to Martha’s Vineyard. And that’s at the end of September here. And it’s going to be fantastic. It’s coming up quick. It’s a venture Alliance trip. And the dates are September 26 and 27th. That’s for the venture Alliance weekend and our side trip. Pretty sure that’s going to be a day before it’s going to be Friday the 25th so A really good plan is to fly into Boston and just get an airport hotel on Thursday the 24th that evening, and you can wake up and fly over to Martha’s Vineyard with us. This is our tentative plan. On Friday morning, the 25th. We’ll spend the day in Martha’s Vineyard. Heck, maybe we’ll see Obama leeching off US taxpayers there. Who knows? We’ll spend the day in Martha’s Vineyard. Then we will fly back to Providence. We’ll get there about five we’ll meet everybody for dinner. You know, check into the hotel. We’ve got a beautiful hotel there in Providence, and check in, relax and go to dinner at 7pm. We’ve got a beautiful dinner at this absolutely stunning, spectacular restaurant on Friday evening. I mean, it is. It is stunning. I don’t know I looked at the photos online. And I’m, I’m guessing the ceilings are 2025 feet high in that restaurant. It’s just spectacular, beautiful, beautiful restaurant. So that’s Friday night, and then Saturday morning. Well, you know, after dinner, we may go out and have a couple of drinks. Okay, we may do that too, which sometimes, that’s where the best conversations have all happened. And the best business ideas and investing ideas happen at the bar sometimes. Then we’ll get up Saturday morning. And we will mastermind together for about three hours. And then our tour operator is coming to pick us all up and take us over to Newport we’re going to tour these spectacular mansions, some of the most spectacular mansions in the world. in Newport Rhode Island, there should be I think we’re going to our timing is going to be just about perfect for fall foliage is going to be beautiful, then we’ll come back and we’ll have dinner we’ll have another spectacular dinner Saturday evening. Sunday morning, we’ll get up and we’ll mastermind for a few hours. And then we’re going to have a unique trip on Sunday afternoon. And then adjourn the venture Alliance weekend. If you’re interested in that, go to Jason hartman.com. Slash events, you can come to one venture Alliance weekend as a guest. And then decide if you want to join if you join your guests fee is applied toward your membership.
If you join right after, and we would love to have you we’ve got some good new members that have joined and good new guests. And we’re gonna have some great speakers at that event. By the way, one of them. We’ve got a hard money lending speaker you’re gonna learn all the ins and outs of hard money lending, and some really unique ways to do it some hybrid approaches to do hard money lending. So that’ll be exciting. And then I have a tentative speaker, I’m I want to say we’re 95% sure on this speaker, a young man who he and his wife own 1800 units, he has 1800 units. And that’s pretty amazing. But wait, there’s more, as they say on those cheesy infomercials. Right. But wait, there’s more. They did it in four years, just four years. So I hope we can have him there. I’m you know, he said he was about 95% sure, he lives in Pennsylvania. So he’d be coming up for that, and meeting us and in Rhode Island. So anyway, it’s gonna be a great weekend. I hope you can join us, Jason hartman.com slash events for that and meet the Masters coming up to not on the website yet, but it’ll be on there soon. And we’ll have early bird pricing, of course. Hey, without further ado, let’s get to CPA Brandon Hall, we’re going to talk about some great real estate tax strategies. So here he is.
It’s my pleasure to welcome Brandon Hall to the show. He is owner of Hall CPA. And I reached out to him because he posted a really interesting article on the tax impact of Airbnb and short term rentals in general. And you know, there are there’s a small kind of little cottage industry going on of real estate investors who are building strategies around Airbnb. And of course, you know, our philosophy is long term stable, simple rentals. You know, I thought we should talk about this because there are some very sneaky problems that can crop up when you do short term rentals and you’re in the, you know, you’re doing Airbnb and stuff like that. So, Brandon’s here to talk to us about it. Brandon, welcome. How are you?
Brandon Hall 14:30
I’m doing well. Jason, thanks for having me on the show. It’s a pleasure.
Jason Hartman 14:32
Well, it’s good to have you. So sneaky little issues with short term rentals that most people don’t know about, do they?
Brandon Hall 14:39
Oh, yeah. You really need to know what you’re getting yourself into before you jump into this business.
Jason Hartman 14:43
So tell us about that. I mean, you’re you’re a buy and hold investor. You have a long-term investment property. In your firm specializes in real estate clients, you basically only take on clients who are real estate investors it sounds like, right?
Brandon Hall 14:57
Tthat’s correct. Yep.
Jason Hartman 14:59
Okay, and what happens with the Airbnb thing,
Brandon Hall 15:02
Sure, yeah, so the biggest problem with Airbnb investors is that they can turn their passive income, their passive rental income into active business income. And what happens is when you do that you subject yourself to a 15.3% self employment tax. And that’s on top of all the other taxes that you already owe anyway,
Jason Hartman 15:20
Because essentially, the IRS, instead of viewing it as a passive investment, as they would view, long term buy and hold real estate, you’re saying, right?
Brandon Hall 15:32
Right, right.
Jason Hartman 15:33
This is viewed as a more like a business, like a hotel.
Brandon Hall 15:36
Exactly.
Jason Hartman 15:37
Like like running something. That’s an act of business. And of course, you know, people know that they, they need to be active. I mean, if you’re doing short term rentals, there’s a lot more management and a lot more engagement. And you had a story about your personal experience with one of your own investment properties. Please share that if you if you’d like.
Brandon Hall 15:56
So, so, exactly. So the IRS is going to look at this, like you are running a business, like you’re running a hotel, like you’re running a bed and breakfast, basically. And when you do that, your your income is going to be subject to self employment tax like you are a regular business owner. Now, I own a triplex. It’s a long term buy and hold piece of property. And, you know, I’m all about what is the value of your time, I want to be able to spend 30 minutes a month on my property and have it cashflow 7 to $800 a month. That’s perfect for me. That’s why I don’t get into Airbnb aside from the tax aspect.
Jason Hartman 16:37
So Brandon, you talked about that that difference in I believe you said that managing your triplex takes you about a half hour a month.
Brandon Hall 16:45
Yeah, yeah. So my whole philosophy is set up business systems that basically automate everything for you. So I have a property manager that takes care of everything. All I’m doing every month is doing my bookkeeping and a bank reconciliation to make sure everything’s in place.
Jason Hartman 17:02
Some investors, I’m sure would doubt that you can really manage a triplex with a half hour a month. Take care to address that at all.
Brandon Hall 17:10
Yeah, I mean, I honestly doubt it, too. And I’m sure it’ll be subject to change over time. But right now, that’s what it’s trending at. So,
Jason Hartman 17:18
Fantastic. Good, good stuff. So tell us about your clients who are doing Airbnb rentals. I mean, do you have clients or people that you know, or even heard of, maybe they’re not your own clients, but you know, who buy a bunch of properties. And they go the route of Airbnb or, you know, any type of short term rental. I mean, we’re kind of maybe unfairly characterizing Airbnb just because they’re the big name in the field. And they sort of founded this new industry of sort of Uber and Lyft kind of sharing economy for, for rooms and residences and so forth. But it’s any short term rental. It doesn’t have to be through Airbnb, obviously, right?
Brandon Hall 17:57
That is correct. Yes. So I have a couple clients, they use Airbnb, they use a couple other websites out there, and then they just, they just advertise locally. And it’s all the same thing. I mean, it’s short term rental is gonna be a short term rental, regardless of what you use to get the tenants in. And we can talk a little bit about, you know, how to actually avoid being classified as an active business and, you know, shelter that income from that self employment tax.
Jason Hartman 18:22
Okay, so let’s do that. But first, I wanted to kind of I was asking a question there of, you know, what, what do you think is involved in the management of one of these, say, you know, because obviously, with an Airbnb type of short term rental, you get a much higher rate and much higher nightly rate? Of course, you’re not occupied as often, ideally, or not, ideally, but typically, I should say, that’s the wrong word. You know, so you have a much higher vacancy rate in most cases, and there’s a lot more management and involvement. So, you know, can you share any of that experience that you hear from some of your clients, or just people you know, who’ve responded to your articles and so forth on this topic?
Brandon Hall 19:02
Yeah, absolutely. I mean, I can just share my experience with my clients. So I’ve arranged clients, I have some that want to be really active in the business and some that don’t. So the guys that are really active, they’re going to the rental, every time that they’re turning over units, and they’re doing all the cleaning, they’re fixing things that are broken, they’re rearranging everything to make it look nice for the next guy to come in. I also have clients that pay people to do that, and that’s perfectly fine, too. So there’s a whole range of you know, what actually goes into this stuff, but it’s pretty labor intensive. Compared to the typical buy and hold property, I mean, you got to get in there and really fix everything. You got to make it look like the pictures otherwise, people are going to come in, they’re not going to enjoy the stay, they might give you a bad rating, which you know, hurts your income potential later on in the future. And yet, just overall, you really got to make sure that you’re on top of it. It’s a completely different ballgame compared to the average buy and hold property.
Jason Hartman 19:58
Well, but people would say you know, they’ve got a property that they rent on a short term basis, and they hire all of that stuff done. I mean, my investors that do buy and hold strategy, you know, they’re not swinging a hammer, they’re not fixing up their houses, they’re not cleaning it between tenants. If the tenant stays there a year, they’re not, you know, doing any make readies. And they’ll say, well, you can hire all of that stuff done. But, you know, that would be like saying, I’m going to start a business and hire everybody. And they won’t ever bother me, I’ll never have to manage them. They’ll just run this company and make it hugely successful without any of my own attention. Kind of crazy huh.
Brandon Hall 20:38
exactly, yeah, well, I actually had a conversation with a client, about a month ago, he was kind of going through that whole thing. And what he was realizing is that, what he is regular buy and hold properties. And he does hire out all the work. And he manages the contractors, the property managers, all that stuff. And so he was going down the Airbnb path, the short term rental path. And what he was realizing is that, he’s not having to, he’s not having these conversations, once a month, or once a quarter anymore, it’s three times a month, four times a month. I mean, he’s talking to cleaning services, he’s talking to contractors, he’s talking to the property managers, he’s talking to schedulers. So it becomes much more time intensive, labor intensive. You just got to, like I said, I keep going back to just know what you’re getting yourself into.
Jason Hartman 21:23
Some people say that, and, of course, you have to remember with short term rentals, they’re furnished, of course, they have to be furnished and not just furnished, but plates and silverware and everything, you know, has to be in there. Because it’s got to be sort of viewed like a hotel, almost, you know, with that, there’s just gonna be a lot more stuff that breaks, people spilled drinks, on the furniture, and the you know, things like that. And it’s just a, it’s just a much more complicated scenario, right?
Brandon Hall 21:51
Absolutely. There’s a lot of planning that goes into it. I mean, like you said, you have to furnish everything, a guy that’s coming in for three days is not going to move the bed in. So you have to provide that for them. And that just goes, I mean, all that’s coming out of your pocket, it can play into the tax strategies, but ultimately, it’s just a lot more that you have to do to set this thing up. Now, there’s nothing wrong with that. I mean, like you were saying, it can be very lucrative, you do generally get higher rents. But you are also working on it, more so than a typical buy and hold property.
Jason Hartman 22:25
And see, what I’ve found is that even on these short term rentals, where, you know, and then the rates definitely vary based on the season, and all kinds of much more complex business factors. I mean, it’s like hotel pricing. You know, hotels have software programs that run their business that go out and compare rates of other hotels, and spider them off the internet, and then have these pricing algorithms. I mean, I don’t know if anybody really realizes how complex this is, when I was in young entrepreneurs organization, why eo now called eo for 10 years, I remember meeting someone who owned a software company that did this, for rental cars, and rental car agencies do this, I’m sure the airline’s do this, I’m sure many types of businesses have this stuff. And it’s incredibly sophisticated, where they will go and they’ll, you know, spider and get the rates off other competitor websites for whatever product or service they’re selling. And it will, you know, suggest that their pricing do this, and they do that. And it’s it’s really, it’s really like Wall Street, you know, the modern version of organized crime, as I like to call it, because, you know, that it’s it’s almost like high frequency trading. You know, and so, within with a short term rental, I mean, you’ve got to be constantly looking at what all the competition is doing to keep your unit rented, you’ve got to adjust the rates constantly based on seasons and so forth. And, I mean, there’s, there’s a lot to this, you know, and, and what I find is, at the end of the day, I should really say, in this case, the end of the year, in talking to people that do short term rentals, and comparing them to long term buy and hold investors. It kind of works out about the same, it seems like most of the time, you know, because if you’re if you’re occupied and your short term rental, you know, 280 days per year out of 365, and you get a higher rate, but then you have higher management fees, and also more of your own time, which has never factored in. All of that. Just it kind of just seems like it’s a wash. What I’ve noticed, but I don’t know you’re doing the tax returns for these people. So what do you think?
Brandon Hall 24:37
Yeah, so I, I’ve actually compared that on tax returns, because I’m interested that’s part of being a real estate savvy CPA, you can see the strategies that people are implementing and figure out which one works. And it is kind of a wash. I mean, I will say that the short term rental guys do typically earn more. But like you were saying times not factored in, they’re not factoring their time, and so. What’s interesting is when you when you put it on a, how much time that I put into my buying hold property versus how much time that I put into my Airbnb property or my short term rental property. Now let’s compare our net operating income, and you will find that it’ll be about the same.
Jason Hartman 25:14
Yeah, that’s, that’s really interesting. Okay, so just circle back for just a moment. And then I want to talk to you about some other things, just maybe some general real estate and tax strategies, but circle back for just a moment, as you did in the beginning and explain the difference with a short term rental, the IRS basically views it as though you’re running a business. And when you’re running a business, you are supposed to not saying everybody does it. Okay. But you’re supposed to pay this additional self-employment tax, right?
Brandon Hall 25:46
That’s correct. So the big difference is, when you have a buy and hold property, you report that property on Schedule E. When you have a short term rental property, you’re going to report that on Schedule C, unless, unless you’re able to have an average rental period of over 30 days, or you have an average rental period of seven, or between seven and 30 days, but you’re not providing substantial services. So what it really boils down to is what is your average rental period, per property. And there’s a couple ways that you can calculate that. There’s sorry, there’s not a couple ways, there’s one way you can calculate that. So basically what you do is say you have a two bedroom house, and you rent out one room for an entire year. Well, that’s 360 days. And there’s one rental period, right, because it’s one whole year, then say in the other room, you’re renting it, you’re renting it out every month. So you have 30 days, that’s your rental period, but you have 12 of them. So now you have 13 rental period for this property, because you got the one year lease, and then the every 30 days guy, and you have 720 total days rented. So if you do 720 days rented, divide that by 13, rental periods, your average rental days, 55 days, so since you’re 55 days, you’re over that 30 day threshold, and you’re not going to be considered a short term, it’s not going to be considered a short term rental. So really what you’re looking for here, if you are a, if you’re investing in the short term rentals, you absolutely do not want a rental period, less than seven days. If you have a rental period, less than seven days, the IRS is going to say your business, regardless of what you try to claim, you’ll have to report that on Schedule C, and you’ll be subject to self employment tax.
Jason Hartman 27:34
And would you say that a lot of people aren’t doing this now? I mean, I guess you have no way of knowing but you know, are they gonna be they’re gonna be a lot of audits coming our way is our broke overspending, drunken sailor government is looking for more money?
Brandon Hall 27:49
I would assume so. That’s kind of the way that I think it’s gonna go especially since Airbnb has gotten so popular and shortly short term rentals. You know, we mentioned the Uber stuff earlier, as, as those sharing apps become more popular, the IRS is definitely going to hammer down on the short term rental stuff. So I mean, I have a couple clients that came to me, and they’ve been reporting their short term rentals on Schedule E for years. And we have to go back and amend those tax returns because they are reporting them incorrectly. You don’t want to be audited and have the IRS come in and assess tons of penalties and fines, because you’ve been mis reporting your your short term rentals. And, you know, we talked earlier about all the things that the short term rental guys have to do. Taxes is the last thing that I think about. And it’s unfortunate because it’s taxes is really going to have the big impact the biggest impact on your margin. And that needs to be one of the first things you think about. But you know, a lot of people wait till April 15, to start thinking about it. And by that time, it’s way too late.
Jason Hartman 28:52
Are there any other aspects of this that people should know, for example, the holy grail of tax benefits, I think income property is the most tax favored asset class in America. And the holy grail of tax benefits is depreciation. Because it’s a non cash or Phantom write off. I just love depreciation, write offs, hunger, the best thing ever, and to take full advantage of them. You need to be classified as a real estate professional. Not everybody can do it. But it’s a that’s just, you know, a huge gift if you can do that. Do you have the same thing on your on your Airbnb type of properties? I would assume that you would, because it’s a business and it, you can depreciate business equipment.
Brandon Hall 29:35
Yeah, yeah, absolutely. And you know, with your Airbnb, you even have the, I mean, you can do it with regular rentals, too. But with Airbnb, you’re going to be furnishing everything right? So we talked about furniture so you can depreciate the furniture that you’re furnishing, you can. You can write off the silverware, the plates, the cups, anything that you are putting into the rental you can either depreciate or expense and that’s going to be the big that’s gonna be the nice thing about Airbnb and rentals is that you are going to get that extra depreciation every month.
Jason Hartman 30:05
Right? But you know, I want to just say, I mean, what’s the depreciation schedule for that stuff? Five years or seven years? Maybe? Probably five?
Brandon Hall 30:13
Yeah yeah, five, seven years.
Jason Hartman 30:14
Okay. So, here’s the problem, though, folks, that really isn’t that good a deal unless I’m missing something, because you’re probably going to have to replace it in five years anyway. If you want to get premium rent, certainly, you know, I’ve rented condos and things and places that, you know, we’re tacky as hell frankly, it seems like in ski places, a lot of that is true, you know, whether it be Tahoe or or Aspen or whatever, even high end Aspinall Tahoe is pretty high into, you know, you get these ski condos seemed like they were furnished, you know, quite a few years ago, they’re pretty, pretty tacky looking. A lot of that’s why I like hotels personally. You know, so maybe it’ll last you longer, but certainly, it’s gonna last you longer and get you top rent. And hotels, they remodel pretty often if they’re, you know, if they’re gonna expect, you know, good room rates.
Brandon Hall 31:06
Yeah, well, one thing that I do a lot of my clients is, regardless of whether it’s a short term rental or long term buy and hold, we look at personal property items. And we try to figure out which ones that we can deduct under the new de minimis safe harbor.
Jason Hartman 31:22
Tell us what that is. You can’t use words like that on this show. Explain them. The de minimis. Okay, folks, here we come drumroll for the de minimis safe harbor.
Brandon Hall 31:32
So the de minimis safe harbor allows you to deduct low cost personal property items. And then also components of tangible of tangible property, there’s a threshold, you can deduct up to $500 per invoice or item, that per item is key. So what I have a lot of my clients do if you have a contractor, so he’s coming out and doing repairs or whatever, you want to have your contractor itemize everything that he’s done, especially to get below that $500 threshold, because just say that he lumps everything into one sum, and it’s $1,000, well, you can no longer use the Safe Harbor, but if he’s itemized everything in each line items, 250 now we have some flexibility, if those are, if those items are personal property items, or components of tangible property, then we can deduct them currently. So going back to the short term rental thing, if somebody’s furnishing their, their rental with, with furniture or appliances and things like that, you can generally I mean, unless you’re buying nice furniture, you’re gonna be able to deduct that in the current year under this safe harbor.
Jason Hartman 32:38
Very interesting. Okay. So in terms of just real estate in general, or any other tax tips that you want to share with people, Brandon, becoming a real estate professional, we’ve done shows on that, you know, complicated, not everybody can do it. If you can, it’s phenomenal. You know, if you want to share any comments on that, or any other things that, you know, maybe real estate investors can take advantage of that they might be overlooking.
Brandon Hall 33:01
Yeah, I mean, I can I can talk about all of that he, the real estate professional is going to be very difficult to qualify for. Impossible if you have a regular job.
Jason Hartman 33:10
Yeah, but I don’t think it’s very difficult to do. I mean, you know, if you if you don’t have a regular day job, or you have a spouse who doesn’t have a full time job, okay, you know, 750 hours and 500 material participation. What’s so hard about that? Why do you say that’s so hard?
Brandon Hall 33:25
Right, right. Well, the big problem is the 500 material participation, that needs to be solely for your rental properties, in order for you to pull these out and make them active instead of passive, that tends to be hard to do, especially if you’re using property managers. If you’re not doing the rehab, but rather acting as a general contractor, I mean, you can do it, but you have to be smart about it. And a lot of people they don’t, they won’t spend enough time and their rentals to satisfy the requirements. Now, I have, I have an example. I have a realtor client. She works, you know, 1500 hours a year, so she qualifies as a real estate professional, she meets that stuff much better, that 750 hour threshold, but she doesn’t materially participate in a rental shielding, you know, participates 200 hours a year, and she has a portfolio of like 20 rentals, and there’s nothing that I can do other than, hey, we need to, you know, do a better job of tracking your hours, just track everything. And then we’ll go back through and do a little audit before we report this come tax time just to make sure that we’re capturing the right hours. But it comes out to be 200 hours, and there’s nothing that you can really do there to substantiate material participation.
Jason Hartman 34:37
Is there a number of I mean, I know I know, there’s not but you know, this is an opinion. Obviously, you know, you keep a log, you keep good records, and you try to be as inefficient as possible. So you can spend more hours you know. Think like a union member who’s basically leeching off the system who doesn’t want to upgrade and use computers, they want to use clipboards because it’ll take longer, and they can get paid more, you know, and I’m sort of being obviously very sarcastic here. You do understand that, right? But but you know, that’s that was the battle in California is with a longshoreman in Long Beach when they went on strike, one of the things they were striking over is that, you know, the businesses wanted to install computers and computerize everything. And they said, No, no, no, no way. We got to use clipboards, to log in the inventory, because it’s really inefficient. And we can get more hours that way. Yep. And that literally was the battle. I hope you listeners remember that. And that’s how bureaucrats think. Okay, certainly in government, it’s that way, too. So with that in mind, I mean, how many properties Do you think in need to be able to justify 500 material participation hours? I mean, can you do it with a dozen properties maybe?
Brandon Hall 35:58
Oh, yeah, I’ve a client that did it one.
Jason Hartman 36:01
No way. Come on. Well, what kind of property was it though? and we should be talking about properties, we should say units. Number of doors probably is a more accurate way to say it.
Brandon Hall 36:09
So it was a triplex, three units. He essentially did the rehab, and he does all the management himself. And yeah, he was able to substantiate it. And, you know, the big key was that he did the rehab and put it in, put it into service in the current year. And then he just continued doing all the repairs himself. He was just, yeah, you can’t he counted all of his hours. And it worked.
Jason Hartman 36:33
Has he been audited though? They keep believing him that just on three units, you’re spending 500 hours a year, I can see it in the initial period, when he did the rehab, I could see them believing that, you know, a lot of time there. But on an ongoing basis that surprises me.
Brandon Hall 36:49
Yeah. So he has not been audited yet. And
Jason Hartman 36:53
Yeah, well see. Everything’s okay. Until you get audited
Brandon Hall 36:55
Well, yeah. But in in, you know, in future years, he’s gonna continue picking up properties. So we thought that it was okay to go ahead with this. But yes, that is a great question. If if you’re gonna pick one property up and then not do it, then it’s probably not the best bet.
Jason Hartman 37:07
Okay. So in in the rest of the world, otherwise, other than your three unit guy, what do you think? 10 units, eight units? 12? What do you, I don’t know.
Brandon Hall 37:16
Yeah, I mean, I would say, I would say anywhere between 10 and 20 units, I mean, it really just depends on, it depends on where you’re buying the properties. I mean, if you’re going out of state for these properties, you’re gonna have a property manager, that’s gonna do everything like me, for instance, right, I spend, you know, 30 minutes a month. So if you have local properties, then you tend to spend more time managing those properties, because you don’t need a property manager at that point.
Jason Hartman 37:43
And and then by the way, you know, we we teach people how to self manage long distance. So which, if you asked me several years ago, if I could do that, I would have thought you’re crazy. And it happened to me, by default, I’ve told the story many times on the show, you know, self management long distance is very possible with today’s tools and technology. And you know, I use an agent in between for make readies and turnovers and releasing, but no manager, you know, we had really can do it, a lot of times, it works out better. In fact, one of our bigger clients who has about 70 units, he talked about at our last annual meet the Masters event, I can’t remember the exact number, but somewhere around half of his properties were self managed, and he found those to be easier to manage, because you don’t have that third party in there. And sometimes it’s, it’s harder to manage your manager than it is to just go direct, you know, disintermediate the managers So, you know, I’m not saying it’s for everybody, I’m just saying it’s an option. And, and you gotta you got to know what you’re doing.
Brandon Hall 38:41
Yeah, I definitely have to check that out.
Jason Hartman 38:42
But yeah, if you have managers, in other words, the point you’re making, if you have managers, it’s the IRS is going to have a harder time believing that you’re spending as many hours and you’re materially participating in the property. And I, my managers do it differently. By the way, some will ask me to actually sign every lease, and some, just sign them for me. Okay. And you know, some managers want you more engaged, and you can also manage that relationship and tell the manager, how engaged you want to be. And if you’re trying to qualify as a real estate professional, be more engaged, you know, make tenant decisions, some managers, they just rent it and don’t even ask about the tenant, which admittedly could be a bad experience. But sometimes the manager is just really good and they know what they’re doing. And, you know, they do a great job. So it It depends, obviously, every situation is different. But yeah, that’s that’s pretty interesting. Okay, go ahead. What else?
Brandon Hall 39:38
Yeah, so, some of the you know, tactics that we use, we do segmented depreciation. So, you basically break out the property into asset classes and you depreciate it at different rates. So we look for easy things like personal property, you know, like your stove, your fridge, will will break that out and will depreciate it at a quicker rate. You can also break out structural components
Jason Hartman 40:02
Other otherwise known as cost segregation,
Brandon Hall 40:05
Yes. Yep. Cost segregation. Yeah, you can break out really anything. I mean, you can break out walls, floors, things like that. But generally at that point, you need a kind of like a feasibility study an engineer to come in and say, Hey, this is the remaining life. This is what it’s worth with the personal property items. It’s nice, because if it’s new, you can just pick up a Sears catalog and compare what the replacement costs be today, and that’s your fair market value.
Jason Hartman 40:30
What is it like? 1972? Here, the Sears catalog? You’re joking, right? Is Sears even still in business. That was funny. I got I got to bother my guests here and get on your nerves. This, folks go get the Sears catalog. And after you’re done with that, open up the Yellow Pages. Sorry, Brandon, I couldn’t let you get off the hook on that one. Gotta give you a hard time. I mean, I mean, I mean, folks, I feel like I’m talking to my mom here. And she, you know, wouldn’t even say that. My mom would have said Google it. And you sound like a pretty young guy. I don’t know your age.
Brandon Hall 41:13
Yeah. Well, you know, I grew up around Sears.
Jason Hartman 41:16
Well, I remember the Sears catalog, too. Okay. But some a long time ago. Yeah. Okay. All right. So what were we saying?
Brandon Hall 41:25
Yeah, so segue into depreciation cost segregation. If you have new at new personal property items, you can pick up a, don’t pick up a Sears catalog, go to Sears and
Jason Hartman 41:36
or go to Home Depot or Lowe’s, but okay,
Brandon Hall 41:39
or good Home Depot, anything like that. If you have older assets, so say you buy a property and it comes with an old stove, old fridge, just look it up on eBay, look it up in the classifieds, see what it would go for today? And then break it out that way? That’s your value that you’re going to apply to that property.
Jason Hartman 41:56
Yeah. Excellent. And so cost segregation studies. I mean, I just did one a few months back on a big property, a big apartment complex that I had, you know, it seems to have really paid for itself many times over. But let me tell you, that was expensive. I mean, to have we had a CPA do it. And that must have been about, I don’t know, $12,000? I think it was it was a lot of money. And it was a lot of paperwork too. You know, I mean, is there a sort of rule of thumb for that, because you can do it on little residential properties. You can take a single family home and do cost segregation and say, Look, the dishwasher can depreciate on a faster schedule, the air conditioner depreciates on a faster schedule. And you can really break it up a little house. I mean, it’s mostly done in big commercial properties. But do you do those? What does that cost?
Brandon Hall 42:44
Yeah, so I’ve never actually engaged in the feasibility study, I typically refer my clients elsewhere. But those are the guys with the big multifamily properties that are doing those because like you said, they’re expensive. I mean, they’re anywhere from five to $20,000. For the smaller guys, we typically just look at the easy things that we can we can pick off. So that’s the personal property items that we’ve already talked about. And then anything that anything that’s not really structural, but could be something that’s easy. So like h back units, we can pick up the floors, you can typically estimate floors pretty well. But yeah, it does require a lot of work, and a lot of studying and in a lot of paperwork. But
Jason Hartman 43:28
For a single family home, though, is there sort of a cost range someone should expect for that? You know, if if one of our investors listening, contacts you and says, Hey, we do cost segregation study on my one single family rental property, what are you going to tell them that’ll cost? I I’d assume it’d be pretty cheap on just a single house?
Brandon Hall 43:47
Yeah, yeah. I mean, for something like that. Again, it depends on how, how much in terms of property we’re trying to find here. But it would probably range from, it would probably start off around $500. And it could probably go up to 2 to 3%.
Jason Hartman 44:04
For a single family? Okay.
Brandon Hall 44:05
Again, but that’s going to be more in the higher end, single family range. I mean, you got to come back and look at it. Like if I’m paying $2,000 for a feasibility study. Is it really worth it? If you own a single family home? Probably not. Unless it’s one of the higher end single family homes.
Jason Hartman 44:20
Yeah, yeah, that’s why and hopefully nobody owns higher end single family rentals. That would make sense, because the lower end ones make a lot of sense. Okay. Anything else you want to share with investors before you sign off, Brandon? How about your website?
Brandon Hall 44:32
Yeah, absolutely. You can find me at www dot Hall, CPA LLC dot com. Yeah, just feel free to reach out if you have any questions. I always make time just to answer questions and happy to jump on the phone with anybody that wants to talk.
Jason Hartman 44:47
Any other tips or suggestions?
Brandon Hall 44:49
Tip wise, I would say everybody needs a home office. If you can justify it. The you open yourself up to a lot of tax deductions with a home office. So definitely go that route, if you can. And then at the end of the year, so towards like November ish, look at your rental properties, and figure out how much income you’re going to show for the year. And if you’re going to show income, figure out if you can buy tools that you can use in the business next year, if you can buy that before December 31. So you can deduct it in the current year, or if you need to make any sort of repairs, on your rental properties. And if you can make those before December 31 to reduce your income, and then also your tax liability.
Jason Hartman 45:36
Excellent. Good stuff. Well, thank you so much for joining us, folks. That’s Brandon Hall. Remember, taxes are the single largest expense any of us have in our lives. So do not be bored by taxes. Make sure you learn how to pay a minimal amount of them legally. And patriotically. By the way, this is what the government wants you to do. They want to incentivize certain behaviors, providing rental housing is something the government likes to incentivize. So let’s do what they want us to do and get a tax benefit for doing it. So thanks for joining us, and we’ll talk to you soon.
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