Hacking the System: How to Minimize Your Tax Liabilities

Mike DeHaan: [0:02] On Air Brands. That's the whole game. Right? Just trying to figure out to pay as few taxes as possible while being able to get as much equity debt and cash flow, accumulate as many assets as you can. Because that is one of the biggest advantages of being a real estate investor. And, you know, because it is a high leverage, high risk sort of business, and because real estate investors do create a lot of opportunity for societies in terms of, like, other jobs, terms of housing, in terms of just, like, you know, general well-being of economies. The government does wanna encourage people to continue to invest.

Speaker 2: [0:39] Welcome to the collecting keys real estate investing podcast with your host, Mike DeHaan and Dan Austin. From wins, losses, horror stories, and tactics for optimizing your business, Mike and Dan take a real uncensored deep dive into the ins and outs of running a full time real estate investment and wholesaling business.

Mike DeHaan: [1:03] What's going on, everybody? Welcome to episode 35 of the collecting keys real estate investing podcast. You feeling, Dan? You ready to go? We're about to launch in I guess, this time this one comes out, we will have launched in five more markets, bringing our total

Dan Austin: [1:20] to 10. 10 markets by June 1. 10 markets? We're going bigness. Is that right?

Mike DeHaan: [1:24] Yeah. I mean, I I think yeah. I think this one's gonna be coming out just after June 1. We're gonna be in 10 total markets around the country.

Dan Austin: [1:31] Is Officially. Officially. Know, we we were in two markets, three technically last year. We pulled back, consolidated. Don't know. What do they say? Get small before you get big. Kinda refined some of our systems. Yeah. And then within Mhmm. Within a couple months of launching to another market, we're back to 10. That's awesome. I didn't I did not expect that. You

Mike DeHaan: [1:53] know? Yeah. I didn't either. But, you know, things happen fast. And when you're when you're taking deliberate action, right, that that's sort of what comes up. But, I mean, it's interesting too because if you look at the system that we've built out, like, it's not actually that inherently crazy. I mean, it it's once you have the basis of every business, I think scaling is just, you know, the same but more. And then it's just sort of, like, finding out that middle management piece to tie it all together, which, I mean, is definitely proving a challenge. It's more of, a business problem than, like, a real estate investor problem. But we're you know, it's coming together pretty quick. And at this point, I mean, I'm confident that we can just keep growing for as long as we want to.

Dan Austin: [2:34] Yeah. Yeah. You're right. It's just a business growth and, like, how do you, you know, employee management, building the right team, having the right people, the best people you can get to grow with you that are just as motivated. It's definitely a lot of hard work where we're at right now. But with that Yeah. Just because the growth scales so fast. But it's been pretty cool to see the team step up, and we're learning as we go in some of these things. But like you said, the real estate piece, we got that dialed. Like, we can go and pick up properties in any city. I'm confident in any city, any state across the country. Now it's how do you do all of them all at the same time.

Mike DeHaan: [3:09] Yeah. For sure. And and what I think what you said there is, you know, we're learning as we go is the biggest thing that so many people, especially when they're starting out, they tend to kind of be afraid. Cause they're like, I don't know how to do this. You know, I don't know how to manage a rental or to flip a house or to do all those things. And I was like, well, we didn't either when we started. And then you just kind of start and you figure it out. And it's like the markets that we're dropping into, I'm like, well, I don't know how to, you know, what, like, what the real estate situation looks like in some of these places. And I'm like, that's fine. But, you know, the easiest way to start figuring it out is to start having conversations with people and start shooting your shots. Right? And we've built up enough of a sort of war chests now from from running our business that we can afford to be making those stretches. And we go and we drop in there. We spend a little bit of money figuring it out. We miss some opportunities. We get some opportunities. But overall, what it does, it forces you to learn. Yes. You know? And it's basically it's like paying for an education in the form of a business expansion.

Mike DeHaan: [4:05] Right? And, I mean, the way what's the worst gonna happen? You're gonna spend some money. You're gonna waste some money on marketing. You're gonna miss an opportunities, but all that shit's gonna happen anyway. So you might as well do it. Right? Yep. Well, and

Dan Austin: [4:17] to be honest, it's really not you talk about the war chest being built up. Like, we have our personal war chest, but it's not that hard to do this business and grow it. Like No. I don't believe in the no money down type real estate without everybody pitches. All the gurus pitch. Like, you could you could start wholesale with no money. I think you probably could. We've had this conversation. You probably could. It'd be very, very hard. Yeah. However, like, we're growing and it doesn't take a lot to grow this business. Yeah. The way we're doing it.

Mike DeHaan: [4:44] You're right.

Dan Austin: [4:45] Because we have the systems in place. It takes a lot of skill, a lot of time, a lot of effort. But because our system is so dialed in on the acquisition side, it makes it just so much faster, so much easier, so more scalable.

Mike DeHaan: [4:58] Yeah. Exact exactly. And it's not like we're sitting on millions of dollars, you know, that we're that we need to scale this thing, you know, significantly less than that, actually. I mean, if I was sitting on millions of dollars, I probably wouldn't even be doing this because I would have so much more. I could just go and blend it out at 12% and not do anything. Yep. But yeah. And you're you're you're completely right. And, you know, going and borrowing money from other people, which we did talk about doing at one point for expansion. We're like, what if we go and we borrow it? We, you know, like, pay terms or we offer these returns also people, then we're in debt, and then we're obligated to make things work. Right? Or we're on the hook. With this, I mean, we're taking our money. We're investing in our own learning opportunities and potential and investing in our own business. And, ultimately, if a market doesn't work or a situation to work, then, you know, we kind of step back and we keep, you know, march forward and make that money back at some point, instead of having to go to an investor. And this goes whether you're flipping a house, you're going to a new market, you're bringing on a partner, make sure that you can, you know, actually walk the walk where you're going do that. And that it makes sense because otherwise what's going to happen is if you do fail, you have to go and tell someone that you lost their money or that, you know, the terms of your agreement are going to change. And depending on that person, you're either going to lose a friend or you're gonna get your ass sued. And those are not things that you really wanna wanna happen to you.

Dan Austin: [6:14] Yeah. And I'm just strong I strongly believe in if you have the capital to grow something, you should use your own capital for a couple of reasons. One, you don't have to go tell people you lost their money. Two, you retain all your ownership, all your profits because you have the capital to do it. Now there's you know, when you're talking about buying properties, of course, real estate is you grow based on leverage, but we're talking about business growth. Right? Taking on money from other people to grow a business. Like, that's a whole another ballgame. And, you know, we've seen other people do that. There's another guy that I just saw something he posted about raising $2,000,000 to do his business. And I'm like, I hope you make at least $2,000,000 Right. You know, for your investors' sake for your investors' sake. Right? Honestly. You know, in a business that might be low transaction, low transaction costs to your as far as revenue goes to, that's, like, kinda scary.

Mike DeHaan: [7:06] Yeah. I mean, in in it is always, like, a weird questionable issue, especially because different circles we go in, a lot of people raise money or they syndicate money for different things. And they're going off historicals, but that's not necessarily a guarantee of future success. Right? And I understand, like, you know, the investor the the the big thing that always gets me is when people say, well, the investor understands their risk. I'm like, do they though? Like, honestly, I mean, like, I don't even understand my own risk half the time. And then the person that's not even tied to the the runnings of the business, they don't really know. They're taking your word for it because you have personal trust with them. You know, whether that's like a personal friend of yours raising money or whether that's someone lending money to Brandon Turner because they trust him because he's hosted BiggerPox podcast. Correct. Right? I I guarantee you if if Brandon Brandon Turner shit the bet on a project, people would go after him just like they would everybody else. You know? And he's not invincible. You know? Like like, people make mistakes regardless of their their social status, right, and the authority that

Dan Austin: [8:07] they have. Yeah. Speaking of, like, investing, this is a a tangent, but I saw a presentation this morning. I wish I could run the name of the company. I'll I'll I'll remember it. I'll put it in the notes. But it's an interesting way to kinda do fractional investing, in in people, in companies, in real estate. So you can aggregate. So say you know people with a lot of money, but you don't have anything for them to invest in. Like, a good example would be, say you're a real estate syndicator. Mhmm. And right now, you have a couple million of dollars of your investors' money on the sidelines because you just can't find

Mike DeHaan: [8:41] a deal. Well, you can

Dan Austin: [8:42] go to this platform, and you can either post your deals or you can see other people's deals. And it doesn't just have to be in real estate. There's other ways to do it. But you can go and build your own diversified fund within private for private companies and real estate investments. So you can kind of the there's a cap of, like, 25,000,000 for a a a single person to be able to do probably for some SEC requirements.

Mike DeHaan: [9:05] Only 25. That's that's bullshit, though. I mean

Dan Austin: [9:08] I I know. Right? Because, you know, you're not sophisticated like Wall Street.

Mike DeHaan: [9:12] Right? Right.

Dan Austin: [9:13] But, no, it's very fascinating, though. So to say you have this lump of money, you can bring it to that platform and you can actually build your own investment portfolio with these opportunities and options. It's like commoditizing these fractional investments or what would appear to be fractional investments. And then you can bring people on and say, hey, you got $10,000. You can invest in my fund. I just created a fund where we're raising $25,000,000 to invest in a diversified way across all of the you could be in three different apartment syndications. You could be in Mike and Dan, our little business growth where we're taking on investors. And so you could do it that way. It's actually kinda cool. I'm interested to see

Mike DeHaan: [9:51] how it turns out. That's super fascinating because really it's just arbitrage. Right? Like like, they're taking the debt from others and investing that debt in their own projects. You know? Like like, there's gonna be, like, a Sprite because they're gonna give a guaranteed return to whoever's investing with them, and you just have to go find people that are gonna be perceiving less of a return. Oh, yeah. Yeah. It's a

Dan Austin: [10:09] total arbitrage move, and there's multiple layers of arbitrage. Right? You could just be a person bringing money

Mike DeHaan: [10:14] Mhmm.

Dan Austin: [10:14] Or the platform itself is arbitrage because there's gonna be fees and costs with it. Yeah. But then I think the benefit is is for people with good ideas, but not rich friends.

Mike DeHaan: [10:23] Mhmm.

Dan Austin: [10:23] You know, you can bring them up there, good deals and not rich friends, so you can start seeing it. And then and then you start thinking about, I don't know what they call it, like, turning everything into a coin. You probably know this term where they're talking about, basically, everything's a a a I don't wanna say Bitcoin. Everything's a cryptocurrency. Yeah. And so then if if you're building or your business is a on a blockchain, then to sell it, you just kinda put it up for sale to the open marketplace and people just bid on it like that. Right? It's just like it's crypto cryptocurrency, whatever you wanna look at. I don't I don't know if there's a term for it. You probably know it.

Mike DeHaan: [11:01] Well well, yeah. What what they did back in 2018 is they did ICOs. So basically, like, an initial coin offering, which was basically a way what they said was a way to sell pre sell tokens of the company is basically like a IPO, you know, in the stock market. But what it really became was, oh, hey. We have this theory for this coin that we're gonna launch, and they would go and they would build this really elaborate white paper and this really elaborate plan. And they would go and they would raise $10,000,000 through an ICO, and then they would just run with the money and actually do anything.

Dan Austin: [11:31] But yeah. Yeah. That's that's probably not a good thing.

Mike DeHaan: [11:35] So but and and but yeah. Mean, going going down that path.

Dan Austin: [11:37] It's it's called token tokenizing everything. Are you tokenizing it?

Mike DeHaan: [11:40] Yeah. You can tokenize

Dan Austin: [11:41] it. Tokenize it. So your your real estate your your portfolio, your property could be tokenized. Yeah. And be sold as such.

Mike DeHaan: [11:48] Yeah. I know. That's that's a whole other ballgame that I'm not entirely sure if I believe in. Because I mean so even that that business you're talking about, I wonder where they actually make money, whether it's on, like, the spread or if it's on the, basically, the top end of it. Like, if they have a margin or something on all the the purchase.

Dan Austin: [12:05] Yeah. I'm sure I'm sure it's a transactional thing. Yeah. Because Just like most of these trading platforms, it's all transactional based.

Mike DeHaan: [12:12] Yeah. Because it has some of those businesses, they're so sophisticated. And she has a lot with tech startups too, where they'll have a deal that seems like it's too good to be true, but there's like a little area where they make money that's buried into it. Like, was it Instacart? You know, this business that, like, you can order your groceries. So they have the best marketing scheme, honestly, where they're like $99 a year and you get unlimited deliveries. Like, why would you not do that? That makes so much sense. But right? Like, you know, you can get delivery

Dan Austin: [12:42] think through that. I've used Instacart, but I just thought you you paid for your groceries and they probably marked them up or something like that.

Mike DeHaan: [12:49] That's how they make people don't realize that. Their average markup on groceries is 10 to 25% depending on the item. Right?

Dan Austin: [12:56] The more that they charge $99 a year too to be part of that?

Mike DeHaan: [13:00] They for for the or you can pay like a delivery fee per delivery. But otherwise, what you can do is you can pay $99 a year and then they'll waive that and you get like unlimited deliveries forever. But I know someone recently that was talking about that. And I was like, he told me this now, like, there's no way that you can do that for $9 a year. Doesn't make any sense. So I just, know, did a quick Google. How do they make money? And sure enough, they mark up all the groceries, 10 to 25% on average, some items even more than that. And if it's stuff that's in short supply, they'll mark things up as high as a 100%. Right? And that's where they make all their money. And I'm like, that's super genius because I guarantee you that a large number of people that use that service have no idea how much the items are being marked up. Right? Because especially Especially if they're low low cost items. Like, it's a 99¢ item. They're marking up to $2. Right? Yeah. Nobody cares. Exactly. Or or they don't even necessarily think about it because they know, like, about what, you know, a bunch of bananas cost. You know, it costs, like, a dollar, you know, 15¢ or what what actually were in inflation periods probably cost $6. You know? Right. But but they they know bananas cost $6, and now it shows up as, you know, $66 and 75¢.

Mike DeHaan: [14:07] They're like, oh, that's just what they cost. You don't think about it. But the business is making a lot of money across fit, and you do that across thousands and millions of users. They're making fat money. You know

Dan Austin: [14:16] what this reminds me of? And it's a beautiful segue.

Mike DeHaan: [14:19] Yeah.

Dan Austin: [14:20] Taxes.

Mike DeHaan: [14:21] Right. That's the hard how does that remind you of taxes? Because making money government. Right?

Dan Austin: [14:27] They just they just put a the government just puts a little transaction fee on every single point of your dollar being spent Of course. Up and down the supply chain. And when you're moving large assets

Mike DeHaan: [14:39] Mhmm. Taxes are important. Yeah. That's true.

Dan Austin: [14:42] You know? I mean, there you gotta pay attention to them because you don't think about it when you're not making money. Like, you're starting a real estate business. You're just hoping to make money. Yeah. Right? That's where we were. We didn't really care about taxes. But now for us, it's a big deal, and we we've got some things that we're, you know, doing to hopefully grow our business while also reducing our tax liabilities. Yeah. Because it does kind of become a problem.

Mike DeHaan: [15:03] Yeah. You know? And and just like Instacart, they the government has their tax budget, and they will layer it with all these little things. And what you don't know is that, you know, Nancy Pelosi's cut for her insider trading plan is, like, buried in there when part of, like, the

Dan Austin: [15:17] Oh, man. You know, what happened. There is definitely I 100% agree. There's some weird backdoor channels. I don't know if it comes from tax dollars or how it comes in, but there's some backdoor channels to some of these.

Mike DeHaan: [15:27] Of course.

Dan Austin: [15:28] There's some

Mike DeHaan: [15:28] what was it when they sent all that money to Pakistan, like, last year or something? And there was, like, it was, like, $1,500,000,000 just went for, like, women's rights. You know? It was just, like, just, like, weird shit that was buried in there.

Dan Austin: [15:41] Well, yeah. And then they and then those women rights groups has to donate 500,000,000 back to the Democratic or Republican parties Yeah. You know, DNC or whatever. You know?

Mike DeHaan: [15:50] Yeah. Right. But oh, yeah. Yeah. That yeah. It's a scam. It's all a scam. Yeah. Good segue, though. So that's what we're gonna talk about for our educational portion this episode. It's gonna be slightly longer educational portion. There's a lot to cover. But it is something that people in our instant investor program have asked us about kind of a lot is how to deal with taxes and kinda like setting up your your entity and yourself to be tax advantaged when you start making fat stacks as a real estate investor. Yeah. And it is something that's kinda just talked in the real estate community as a whole because it does have a lot of income potential. And usually that does come in waves that are much larger than you're kind of anticipating. Yeah. And it

Dan Austin: [16:28] has a lot of tax advantages if you do it right.

Mike DeHaan: [16:31] Correct. Yep. So after we get back, quick note about the instant investor program, and then we'll talk some taxes with you guys. So perfect. Be right back. Alright. The instant investor program is our twelve week group coaching program, which includes a self driven course and access to our private investor community. We will take you through the full process of how we find our leads, how we market, how we do our sales and follow-up, and how we determine the best strategy for every opportunity that comes our way. On top of that, you will also join a community of other like minded investors nationwide that are all marching towards the same goals, and you'll have direct access to Dan and myself so you can continue learning and growing with us as we continue to adapt and grow our business. Whether you're a new investor or already established, our systems can help take you to the next level. So if you think you might be a good fit, go to the instantinvestorprogram.com and schedule a call, and we can have you talking to motivated leads in as little as two weeks. Alright, Dan. Taxes. I know this is kinda your jam. I know nothing about taxes or finances or books. My role in our business is just to create an absolute shit show of paperwork and financial disaster and make you figure out how we don't go to jail. So I don't know

Dan Austin: [17:37] if I figured that out yet. I mean, I'll keep trying. I'm I'm not I'm not

Mike DeHaan: [17:41] doing this from a prison cell yet, so you must have figured out something, at least a little bit.

Dan Austin: [17:44] One thing one thing I do know from personal experience is it usually takes the IRS about two years to come back to you if you made a mistake. I've heard that. So you get two years of fees, and I've had that happen to me a couple times. That's funny. Yeah. I have mistakes. Innocent mistakes. Yeah. Maybe we should just start really quickly with, like, entity structure, because there's a couple different things to talk about there for reducing taxes. And it all

Mike DeHaan: [18:06] and from It's also, like, the most basic thing that you can do from the start before you're making, like, big money to bring your Yeah. Know, your tax burden down, like, in a very early days.

Dan Austin: [18:16] Yeah. And you kind of step into it too. So the LLC limited liability company is what everybody pretty much uses nowadays for any small business. There's a ton of other entities prior to the LLC. This is a little history lesson. But when the LLC came out, it kinda made them not as useful because the LLC captures so much and it does limit your liability, and it's just a pass through entity. So that means if you make money in an LLC, it just passes down to your ten forty or your your your taxes. Right? It doesn't get taxed like a c corp, which is what everybody's always kind of benchmarking towards. The a c corp has an income tax. Mhmm. And then the owners and the shareholders pay taxes on their income after that, once it's distributed out. So it's double taxed. LLCs don't have that.

Mike DeHaan: [19:04] Mhmm.

Dan Austin: [19:04] But the main point I wanted to bring up in that, because that's where you're probably gonna go. So if you, if you're gonna buy a rental property, everybody always says put an LLC if you can, because that's limiting your liability. It has nothing to do with taxes. You're still going to if you own the property with a partner, you're still gonna have a partnership return. It's all gonna pass through to that to your ten forty. If it's just you as a person, it's all just gonna pass to you. It's not really a a big deal. But as you do start making, you know, semi significant income, and that doesn't have to be a lot, but say say you make a $100,000 in your wholesale business, that's when you go on and talk to your accountant and talk about what an s corp election can do. So you you start out with your LLC. You look back over the year and you say, wow. I I kinda made some money this year. And and you're you can make that s corp election before the end of the year for tax purposes. And what that allows you to do is take a minimum salary Mhmm. From the business. It has to be reasonable. I shouldn't say minimum. Reasonable salary from the business.

Mike DeHaan: [20:03] Well, reasonable for your role that you provide. Right? Which which There you go. Super up for question. I mean, because, obviously, if you own a business, so, like, we pay ourselves, what, $36,000 a year base, $3,000 a month. But, you know, it's like but if you go and you're like something that's high skill and you're like, I'm gonna pay myself $36,000 a year, and they can just go and look and be like, well, people that are in that role make a 100,000 a year. IRS might slap you for that.

Dan Austin: [20:29] Yeah. Well and and As an investor, that's not necessarily

Mike DeHaan: [20:32] the case. You can be an admin. Yeah. Yeah.

Dan Austin: [20:34] And and 36 is probably an old number. We should we should probably talk about that. But as as your as your business, basically, what you wanna do is look at your business, and if you can argue the gray area, you're safe. Mhmm. So, basically, what you're trying to do is you're taking the the reasonable, in my opinion, most minimum salary you can because what's gonna happen is you're gonna have to pay self employment tax on that.

Mike DeHaan: [20:58] Mhmm.

Dan Austin: [20:58] That's another gotcha. It's not an income tax. It's self employment tax. But the nice thing about that is is once you are an s corp, that minimum salary is the only piece of that income that gets the self employment tax. And then anything else is a distribution, a dividend to the owners of the s corp, the shareholders for our in our case, it's Mike and myself for the shareholders, and that is only taxed at your standard income tax rate. Mhmm. So it doesn't have any other capital gains, any other self employment tax. So that's like the first little bit as you start making money to look at on on just entity structure where you can save 7.2 on your, you know, self employment tax right off the top on, say, seventy, eighty, 90% of your income. Yeah.

Mike DeHaan: [21:40] And and I believe this might have changed, but back when I was working for myself doing some freelance stuff, the threshold for where it makes sense to become an s corp was, like, about $85,000 a year $85,000 a year. So, you know, like, once you get above that, it kinda makes sense because you're gonna be saving more money, paying out that dividend structure than you are. And, well, like, bouncing out that plus the additional cost to file those taxes and other things, it makes more sense to go that structure versus just paying yourself the self employment tax up to that point.

Dan Austin: [22:11] Yep. Yep. And to be to be clear to that that you're quoting that $85,000, whatever, that's net income, not not gross. It's not your total revenue. It's it's after it would be after your expenses. So if you're a wholesale business, all your marketing expenses, all your software services, that's gonna come out of that. Mhmm. And then below that would be what Mike is quoting, which is probably about reasonable. Yeah. That's kinda where I I kind of just just anchor it or buoy it down at, like, a $100. If you're gonna make a $100 wholesaling, which is not hard to do, you probably should look at doing the s corp election, and and your accountant will help you. Everybody's situation is a little different, but that's pretty standard to do for a lot of folks. Not everybody does it, but that that worked for us.

Mike DeHaan: [22:49] Yep. Exactly. And key point there, we're not accountants. You should ask your accountant.

Dan Austin: [22:52] Yeah. I'm definitely not an accountant. So So Cool. What's the next what's the next tax savings? Oh, this one everybody talks about, but this one I'll I'll I'll start with this one. Just depreciation in general.

Mike DeHaan: [23:03] Mhmm.

Dan Austin: [23:05] Especially if you're doing, like, wholesaling as a side hustle and all of sudden you realize you made $300 in in a year, like, you should probably be buying some properties.

Mike DeHaan: [23:12] Yeah. But but but in order in order to get anything with this depreciation, you have to be called a real estate professional. Correct? Otherwise, you can't use No. You can't offset your active gain.

Dan Austin: [23:23] Yeah. That's a great point. So you can use passive losses, which depreciation would be technically considered a loss on your p and l against passive gains. So if it's a rental property and you say you had 7,200 in depreciation, but your net income from that was 10,000, You can you can write off 7,000 of that. Now you gotta pay taxes on 3,000. Mhmm. If if it goes the other way and say you had a bunch of expenses and a large depreciation through, like, accelerated depreciation, all that, and say your income was only $10, but your losses were 13, you can only take $10,000 of losses against that because it's passive income versus passive losses. Mhmm. And then that 3 k of additional losses just carries forward to the next year. So you still accumulate those. But to your point, real estate professional now, what you can do with that 13,000 loss is okay, writes off all your passive loss, and then the additional 3,000 starts writing off your active gains. So say you had wholesale business profits, that's considered an active business, or your w two income is an active business. So that $3,000 loss actually will go and start writing that down as well.

Mike DeHaan: [24:37] Correct. Yeah. But you not anyone can just go and become a real estate professional. Through our requirements and and how like what that looks like for the individual. And I believe it's, can keep me wrong, I think it's you have to have spent seven fifty hours for the year on your real estate business. And if you have another form of income such as a W-two job, you have to spend more time doing that real estate business versus your w two job. Yes. Yep. So a w two job, say you're full time, that's two thousand eighty hours on average. Mhmm. You know, that's what a full time is usually considered. You'd have to

Dan Austin: [25:10] work two thousand eighty one hours in real estate, which means you'd have to essentially be working eighty hours a week. Yep. Which I can tell you from experience, that's definitely possible. Exactly. The the key to that is that you need to be able to track it.

Mike DeHaan: [25:25] Mhmm.

Dan Austin: [25:26] So things that I do just to be safe, I have a mileage app. So if I'm driving around doing real estate stuff, it's tracking it. And then I can say, no. This is where I was going. This is what I was doing. Because I and I like about the app I use is it talks about the dry it shows the drive time as well. And then you need to track any meetings you have. So a calendar, if you use, like, you know, your Google Calendar or whatever, if you have meetings, which you're going to, have that all scheduled in there.

Mike DeHaan: [25:53] Mhmm.

Dan Austin: [25:53] Then you can track it. And you'd be surprised if you're going full time into real estate, how quickly you can track that. I mean, even analyzing deals, just track it. If you're analyzing an a deal a day and takes you an hour, that's seven hours a week right there. So, I mean, whether you're working at w two or not, you know, there's some risk associated with them. Major risk is proving that you work seven hundred and fifty hours or exceeded your other w two income. Yeah. And that's how you derisk it. Just prove it to the IRS. Tell me that I didn't work eighty hours a week. Tell me I didn't work seven hundred fifty hours a year or whatever it is because I can show you that I did. Yeah. Well, But that's huge.

Mike DeHaan: [26:29] Yeah. And and then what's something that gets kinda interesting at that as well is because those tax savings can be so massive if you have a very high real estate income that we see this actually pretty often with with guys and and GoBundance or similar things where they have a w two job that pays them, like, you know, a decent wage, like $80,110,000 dollars a year. But then they have a real estate business where they make, like, several $100,000 a year. Right? Mhmm. And at one point some point, it's gonna cross a threshold where it no longer makes sense to work your w two job necessarily because, realistically, the tax savings that you're gonna get could potentially be more than your total income on your job. Yep. Yep. You know? So and it it can take a while to get there, but that's not a crazy impossible thing, especially if you've been building a portfolio, you've been running a real estate business for a while and you have some momentum. Yep. So, I mean, like, I I'd be curious to know what that ratio would kinda look like. But it like, the the tax savings that you get are are one of the pillars of, you know, your total internal rate of return on your real estate, and it shouldn't be discounted. I mean, like, people sell syndications to super high income individuals with the tax depreciation being, like, their number one selling point.

Dan Austin: [27:43] Yep. Yeah. There's some yeah. Well, they'll set it up where you can get a higher percentage of the of the losses from depreciation and just general losses and no income from that investment that you're because when you're at that high tax bracket, that's huge. That's in that's that's important to be able to write off. And maybe you had a huge capital gain on a different sale of something. Maybe you sold your business, have a huge capital gain, and you'd rather put that money where somewhere where you can just scrape out tons of losses to avoid tax burden. Right?

Mike DeHaan: [28:08] Yeah. For sure. Mean, because you get some level if you're, you know, even paying retail, know, our product's gonna cash flow nothing, but your alternative is spending that $500,000 you just spent and sending it to the government. I mean Yep. Why would you not do that? Right? You know, at least it's tied to an asset. It's still tied to your net worth and you get something from it at some point. But that capital gains, that was a good segue to kind of the last point we're gonna talk about, which is the light kind ten thirty one exchange, or what we're exploring right now is a reverse ten thirty one exchange, which is the same concept. Yep. So do you want me to dive into that?

Dan Austin: [28:43] Do you wanna dive in? Yeah. Yeah. Dive into the requirements. Let's let's hear it. I wanna hear what the the what is the ten thirty one exchange, Mike?

Mike DeHaan: [28:49] So a ten thirty one exchange, say, like kind of asset exchange. Basically, what that means is it, you know, it's an IRS, don't say loophole to policy where you can sell one asset. Right? And this is doesn't just apply to real estate. This can apply to, like, all kinds of assets. So one asset and you take your proceeds and you roll it directly into another asset that is of it has it has had debt of equal to or greater value than the asset you just sold. So basically, you're not actually realizing any true gains on it. And, you have a time window to do it. So basically, after you sell that first asset, you have forty five days from the day that it sells to identify a new asset you're going to buy. And after you identify, you have a hundred and eighty days from that date of identification to closing on that asset. So, like, let's say that you were gonna sell a property and the closing date was, you know, May, let's say, May 31, you'd have until the middle of July to identify the new property, and then you'd have six months after that to close on it. And it's a very common strategy for people to avoid capital gains and also to avoid what's called depreciation recapture. So if you do what we're talking about before where you're using all this depreciation to save on your taxes, I mean, the IRS lets you get away with it forever. If you do that for a bunch of properties and you go to sell them, if you were to sell that property after doing all that depreciation, they come back to you and say, All those taxes we let you waive, we want that money now. Right?

Mike DeHaan: [30:19] So Yeah. So if

Dan Austin: [30:20] you buy, like, a, say, $200,000 property, straight line depreciation, twenty seven and a half years is how they do it. That's you divide that $200,000 less the land that they usually you can't depreciate the land. I think it's like, say, 7,000. I don't know. Yeah. I'm just I'm doing quick math. Say, $7,000 a year. So you if you held that property for twenty seven point five years, it's now in the eyes of the IRS worth zero because you depreciated it. And when you go to sell it, they're gonna want not just the gains above what you paid for it, but all of that twenty seven point five years of $7,000 a year that they gave you. Mhmm.

Mike DeHaan: [30:55] Of all the tax. Exactly. Right? Yep. And so doing a ten thirty one exchange allows you to avoid the capital gains tax on the property as well as the depreciation recapture. Mhmm. And one of the big things with the ten thirty one exchange as well is when you roll over properties like that, those gains are not required to be paid through death or through Yes.

Dan Austin: [31:15] Any sort of Kids it goes right up to what they what they call ups, the step up basis. Yep. Yeah. Right? And so when you die, say that property you bought was worth 200,000 when you bought it, you'd appreciate it to zero, you died, it's now worth a 500,000.

Mike DeHaan: [31:27] Mhmm.

Dan Austin: [31:28] Your kids can sell that and get a 500,000. I'm sure there's probably some limits, but 500,000 in tax free Yeah. Money. It it Which is super cool. That is really cool.

Mike DeHaan: [31:37] Yep. Exactly. And and and so that's something that people have been doing for a while, and it's very common amongst, like, extremely high net worth individuals to, you know, keep scaling up assets, growing cash flow, building more debt, grow their net worth without necessarily having to pay the tax man anything. Yep. Right? And then the sort of, I wanna say, like, sister, brother, whatever, to ten thirty one exchange, the reverse ten thirty one exchange, which we're actually looking at right now. We're buying this little apartment complex. We're closing on it here in about a week. Just over a week, we're gonna have to come out, like, a $150,000 is down payment on this thing. Right? Obviously, we have no properties that are selling in the immediate that we can use to buy that one. So you can't do a normal 10:31, but you can do what's called the reverse ten thirty one, which is basically the opposite where you buy the asset first and then you sell other assets after the fact to basically roll the money into that asset that you just bought. But because you already bought it, basically, the money just rolls back to you, and you get to take that money tax free because you're claiming it as, know, you did a reverse ten thirty one on the subject property. And the timelines are the same. So after we close on our little apartment, we're gonna have forty five days to identify the properties we're going to sell.

Mike DeHaan: [32:51] We have, what, three flips in motion right now. So we'll identify those ones, And then we will sell those properties. After that forty five days, we have a hundred and eighty days to sell those properties. And once they sell, then we'll basically be able to collect all that money tax free without having to, you know, pay all the normal taxes we would as if we flip the property.

Dan Austin: [33:09] Which makes a ton of sense when you're in the business that we're in. Right? And, you know, we're always flipping something. Yep. We're always buying something for ourselves. Right? Like, when I say always, you know, monthly, we're doing something in the acquisitions and dispositions of our business. And so there's a good way you know, a lot of times you think about it as, well, I only ten thirty one my rental properties. Mhmm. Or I only flip for revenue for my personal income. Well, if you're buying you throw in the the wrench into that of I buy properties too for cash flow. Well, now if you're gonna sell a flip and you gotta put money into this deal, right, you you're you're just stepping it up and making sure, of course, you meet the requirements, but it's like, now how do you hack that tax system to not have to pay taxes, the large short term capital gains that you would typically pay?

Mike DeHaan: [33:52] Yep. Yeah. Exactly. And, I mean, that's the whole game. Right? Just trying to figure out how to pay as few taxes as possible while being able to get as much equity debt and cash flow accumulate as many assets as you can. Because that is one of the biggest advantages of being a real estate investor. And, you know, because it is a high leverage, high risk sort of business, and because real estate investors do create a lot of opportunity for societies in terms of, like, other jobs, in terms of housing, in terms of just, like, you know, general well-being of economies. The government does want to encourage people to continue to invest, you know, versus, like Absolutely. If you if you're a company that just sells widgets and you're just purely cash cash revenue producing heavy business, they'll tax the hell out of you because, you know, even if you are, you know, providing, opportunities and jobs and things like that, I mean, when you're just collecting cash, like, that's easy for them to collect. Right? But if it's all tied up in equity and you're creating stability in different areas, I mean, that's what the government ultimately wants for places to be stable. So they'll reward people that are doing that.

Dan Austin: [34:54] Right. And remember remember during the last election when the big thing was Biden's gonna take away the $10.31. He's gonna take it away. Mhmm. I haven't heard that since he got elected.

Mike DeHaan: [35:03] Right. Honestly. Well, because they all they all hold real estate. You know? Like, like, all those dudes. Real estate is the number one wealth generating thing out there. Right? You know, you you own a bunch of real estate. It goes up in value over time. You can get especially over the past years, you know, they get cheap debt. It's gonna get paid down over a long period of time. Mhmm. You know, it's it's not like the thing with real estate is it's not like a get rich quick game, but it's like a get rich guaranteed game, honestly. Yes. And what if you just start taking action and you just wait, like, do they say? Don't wait to buy real estate. Buy real estate and wait. You know? Mhmm. You do that with a shit ton of properties, and I guarantee you that

Dan Austin: [35:42] you will feel wealthy. And buy

Mike DeHaan: [35:43] them at a discount. Yeah. Buy them at a discount. Even better. Yep. So yeah. So speaking of which, if you wanna learn how to buy discounted real estate and you wanna learn how to have these kind of problems where you really do need to worry about taxes, you should check out the instantinvest instantinvestorprogram.com. And Dan and I will teach you exactly how we started doing that. I we gotta spend our days trying to figure out how to pay less taxes than we used to make on an annual basis. So, yeah, instantinvestorprogram.com is our group coaching program. We'd love to see some of you guys on there. So go ahead and check that website out and book a call. We'll see if you're a good fit. Besides that, you can follow us on socials. I'm at Mike underscore Invest on Instagram. Dan is at investor man Dan. And then if you want a, a freebie that we've been giving away, we have our calculator tool that we use to analyze every deal that we go to determine if it is truly discounted and what it's gonna take to be able to make some money off of it. So if you go to collectingkeyspodcast.com/calculator, you can download that there. And then anything else, Dan? I think it kinda covers it.

Dan Austin: [36:49] I think that's it.

Mike DeHaan: [36:50] I think we're good.

Dan Austin: [36:50] I think we could sign off.

Mike DeHaan: [36:52] Alright. Sign us off. Let's hear it.

Dan Austin: [36:54] Sign us off. Investor man Dan signing off. I will see you guys next time. Look out for the tax man because he's out there. It's like the it's like the boogeyman coming for you.

Mike DeHaan: [37:05] I like how every time you know you're gonna have a send off and you still have not thought you almost you almost had a good one, like, two weeks ago. Almost.

Dan Austin: [37:12] I know. I'm gonna practice. If anybody knows, like, give me I need some coaching on my send off.

Mike DeHaan: [37:17] Yeah. Yeah. Right. Well, and I'll do

Dan Austin: [37:19] if Jason Drees is available, I can call him and see if he'll Just hit him up and me some

Mike DeHaan: [37:23] some coaching. Abundance, dude.

Dan Austin: [37:25] Really specific coaching on podcast and also.

Mike DeHaan: [37:28] Yeah. Right. And, yeah, if you are gonna follow us on Instagram too, go find Dan at Investor Man Dan, and shoot him a congratulations on his new kid that he will have by the time this episode comes out.

Dan Austin: [37:37] Oh, I will. Yes. You will. Life's gonna get crazy again.

Mike DeHaan: [37:40] Yep. So, anyway, it starts being real, real tired sounding after this. That's why. Alright. Thanks, everybody. See you next week.

Speaker 2: [37:48] Thanks for listening. Please leave us a review on iTunes or wherever you get your podcasts. And check us out at collectingkeyspodcast.com for tips and guides on starting your own real estate investment and wholesaling business.