Episode 85: [Taxes] Tax Strategies for Real Estate Investors with Craig Cody

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Show Notes

Craig S. Cody is an ex-NYC cop and certified public accountant of 17 years, he’s a certified tax coach and business owner in his own right. Here’s a few things he can speak on (one sheet also attached).

Cody has worked with a lot of businesses through out his life. The best practices he has seen, and the 3 practices that don’t tend to be done right, are here. So let’s take a look at the 3 Proactive Tax Practices:

  1. Failing to plan.

People go out and buy a car and spend time researching it, but not looking at the tax codes on it. The average person doesn’t plan.

  1. The wrong business entity.

Are you holding your business in your name? Real Estate is best held in an LLC, but you need to talk to your own attorney to see. If it’s in a corporation, there could be tax issues when or if you go to sell.

  1. Find low cost ways to manage your properties with employees.

This could be as simple as having your kids go to the properties to mow the lawn, or clean. If you’re paying them a reasonable amount, they don’t have to pay taxes on it. Their pay comes out of your income, which lowers your taxes, and they don’t have to pay taxes. It’s a win-win!

Interview Questions

– What is the biggest mistake real estate investors make regarding taxes?

Typically, most real estate is held in a LLC. The reason for this is because as a real estate investor you fall under “ordinary income”. Basically, it’s short-term capital gain. If you’ve been in for a while, it’s just ordinary income.

Some investors treat it all like it’s short-term capital gains. The problem with this thinking is the expenses of operating a business are subject to 2% threshold on schedule 8 of your tax return. They’re also subject to alternative minimum tax. This is a problem because, if you make too much money, they get added in without you getting the benefit of them.

If you do it properly, and actually in the business, then you don’t deal with those itemized deduction. The lesson is to ALWAYS document what you’re doing. This is something where we saved a client almost $80k because they were reporting their income incorrectly. More often than not, you’re in a better position by having your real estate investing business as an LLC instead of a corporation.

-Why not be a part of a C-Corporation?

A C-Corporation has the first $15k taxed at 15%. Getting that money out when you sell the property is double taxation. It’s just not efficient for a real estate investor to be a part of a C-Corporation. I just doesn’t help this kind of business.

However, if you’re using a C-Corp to manage your properties, it could work better. The best practice is having multiple LLC.

Here’s a story: There was a client who was a private business, not even an LLC, who was sued for mold injuries. The house was valued at $25k, and the verdict was $155k+ with interest. She had a pretty significant portfolio, and everything was attacked. If you umbrella it under one large LLC, you’d be safer.

– What are the tax write-offs real estate investors miss?

As a flipper, you can write off a lot of things since you’re being run as a normal business.

For example, if you have a home gym or a pool, that can be written off as a work rec area. The space you work in at your home is your home office. The gas you spend going to and from properties and locations can be written off as work expenses. Medical bills that are paid out of pocket can be written off as well.

Let’s talk about the home office for a bit, though. Take the space that you use to work in, in square feet, and compare it to the rest of the house. Let’s say your home office is 8% of your houses’s square footage. That means that 8% all of your utilities can be deducted in your taxes as a work expense: electricity, water, air conditioning, internet, etc. Your real estate taxes can be written off with that 8% as well. As long as there’s an office used exclusive to your business, it can be written off. Retirement plans can be worked in as well. If you’re working on your own, you can make a self appointed retirement plan. Food and entertainment can also be deducted.

Just keep track of your expenses. Make sure you’re keeping your receipts and keeping track of everything. Do it as you go instead of trying to pull things up at the end of the year.

-What are the limitations of the arms length transaction and self directed IRA.

The whole thing can be contributed to the LLC. Which means, the LLC owns that property. You cannot, yourself, do work on that property or it becomes an issue. You can, however, act as a lender in your own LLC. As long as you don’t have active involvement in the property, then it won’t be an issue.

Active involvement means that you, yourself, cannot be doing repairs with your hands. If there’s something you can pay someone else to do, get them to do it. IF you’re working on your own properties, you’re jeopardizing your involvement in the IRA. You can lend to other investors, as long as their not family. Tend to stay away from family!

The interests rates are subject to typical rules, 8 – 10% + a piece of gain, secure by real estate. However, this all depends on the investor. The better the track record, the less you’ll have to give and visa versa.

– What is Cross Segregation?

Let’s use a rental property worth $100k as an example. Typically, you would depreciate that building over 27.5 years. Let’s say your depreciate expenses are roughly $4k a year.

When you do a cross segregation strategy, the building gets broken up into parts. Take the property that would be depreciated over 3 years, 5 years, and so on, and depreciate it faster. Which means, over 27.5 years you’re still getting the $100k worth, but in the first few years you would 20% more expense from depreciation because it’s accelerating. From a tax perspective, that’s money that isn’t being taxed. That’s the smarter way to go for the best gains in your business.

 

Links

YouTube.com/FlippingJunkie

FlipPilot.com

Craig Cody & Company

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Episode Transcription

Danny Johnson: This is the Flipping Junkie podcast episode 85. [music] Welcome to the Flipping Junkie podcast, the podcast for flip pilots everywhere. Flip pilots are the house flippers that work more “on” our business instead of “in” our business by keeping a 30,000-foot view. You’re now part of a small group of house flippers that considers themselves flip pilots that strive to build the life of financial freedom and time freedom so that we can spend more time doing what we love with who we love. In this podcast, I give you a glimpse of the daily life of a flip pilot, so let’s gets started.

Hey, welcome back to the Flipping Junkie podcast. We’re going to have a great episode today. First, I want to talk real quick though about doing a different set of podcast episodes. I wanted to help more people with the questions that they have or what they’re struggling with. If you have specific questions that maybe haven’t been answered in some of the other podcast episodes or you don’t have the time to look for those answers, I wanted to give you guys a place to be able to ask those and then I can do some quick episodes specifically going into detail for that specific question. So if you’ve got anything like that, here’s how you can get those questions answered. So if you join Flip Pilot Facebook Group, you can either go to FlipPilot.com and get an invite through there. Because it’s a private Facebook group, you’ll need to be invited. If you go to FlipPilot.com, you can get the invitation there. Or search of Facebook, just search for Flip Pilot Group, ask for an invite and then we’ll get you access into there.

So what I want to do though is just have you tag me in the question in the group and it will be, what is it, I think we’re going to call it Just Ask. So put maybe #JustAsk and then tag Danny Johnson in the post and have your question on there and I’m sure you’ll get answers through the Flip Pilot Group itself and then I also put together a podcast episode, if it’s something that would warrant more than a couple of minutes answer. So it’s not just like a two minute podcast episode and stuff like that. So be sure to be a part of that group and if you have any questions you’ve been looking to get answered, for sure just go to the Flip Pilot Group there and ask it there, get some answers immediately and then we’ll set up a podcast episode for Just Ask and I’ll answer those kind of questions and stuff like that.

So, great podcast today. I’ve got Craig Cody. He’s an ex-NYC cop and certified public accountant of 17 years. He’s a certified tax coach and business owner in his own right. So he’s here to talk about tax planning strategies for real estate investors, and this is a big topic for everybody and I think even if you’re just getting started, it’s important to know this because the way you structure some of your entities in how you do business can be affected and you can be paying a lot more than you should be in taxes. I’ve got Craig on the podcast. I really appreciate you being on the show, Craig.

Craig Cody: Thank you very much for having me.

Danny Johnson: I’ve told listeners out there that you are an ex-NYC cop, certified public accountant. What I wanted to start with was just a little bit of your background. So speak to being a cop and then making the transition and then helping out to real estate investors, if you would real quick.

Craig Cody: Sure. So before I became a police officer I was actually an economics major in college. I left, I followed my dad’s footsteps into police department. I thought I was going to become a chief. That was kind of my goal when I first started out but things change, you grow up a little bit and it’s civil service so you have to wait for tests etc. etc. So at some point I went back to my school for my accounting degree and I kind of fell in love with taxes. Then over time it kind of evolved into what we do now at my firm is we’re a full-service firm but we really specialize in small business and real estate investors. The first thing we do with every client is tax planning and that’s basically showing them ways to keep more of what they make.

Danny Johnson: And we all want to do that.

Craig Cody: Exactly. Whereas most CPAs and accountants do a good job, they put the right numbers in the right boxes but it kind of ends there. They’re like looking in the rearview mirror, we’re looking at it forward.

Danny Johnson: Right. So what’s the background? How long were you a cop?

Craig Cody: I was a police officer for 17 years. I retired as a lieutenant. It was interesting when I first started in the accounting field. I was working part-time during the day for a CPA firm and I was the new guy. I was making copies and that stuff. And I’d go into work in the city and I’d be in charge of 75 people out on patrol. So it was interesting because by day I was just a copy guy and by night I had all this responsibility. So, I did that for 17 years. I retired, went right to work for a CPA firm that did about a third of their business in St. Thomas and right away I knew I wanted to have my own business. So I did that for about 5 years and then I started to develop my own business. I left, I worked a little per diem for them which was a good thing for both of us. Then I was out of there fully and then 2007-2008 came around and got crushed, and I had to start all over again. That’s when I figured, “All right, I need to start something different,” and that’s where we started focusing on tax planning as the cornerstone of everything that we do. And here we are today. We have 10 people, three other CPAs here and we have clients from Oregon to South Florida.

Danny Johnson: Oh, nice. Let’s just get right into this because I know I myself I’ve got other people sort of handling this for me and kind of trust that it’s being done correctly and who knows. It’s one area that I know that I need to focus on a little bit more. That’s why I’m glad to have you on the show because probably the majority of investors out there that are busy running their business and don’t take the time to figure this stuff out. So did you want to talk about the three proactive tax planning strategies that you give most of your clients?

Craig Cody: Sure. I just wanted to say when you had that question, you trust that it’s being done right. It’s probably being done right. They’re probably putting the right numbers in the right boxes. But the thing is, does it end there? So I would say most times the work is done right, it’s just not all the other things that they can be doing.

So the three biggest things that we see are: Number one, failing to plan. People, they go out and they buy a car and they spend all this time researching the car. People aren’t looking for ways that the tax code says you can do things differently and save money. I mean, Trump, Buffet, all these people with all this money, they have teams of people scouring a code to see how they could do things differently to save money. And the average guy out there is not really doing any of that. So that’s failing to plan.

The wrong business entity. Even in real estate if you’re an investor, are you holding your real estate in your own name? Are you holding it in a corporation? Typically, not always but typically real estate is best held inside of an LLC, but not always. So you need to speak with your attorney and your CPA. That can be costly. It may not cost you dollars today. It could cost you dollars, God forbid something happens to you and you die and it’s inside of a corporation, the asset itself doesn’t get a step up in bases. The company does. So if you go to sell it, your heirs wind up paying tax on basically the difference between what you purchased it for or the depreciated bases and the value today versus if it was in an LLC, they sell the next day, conceivably they’re going to have no tax. So that’s really important and we see that a lot.

Then there’s a lot of different things you can do with real estate where you could take advantage of different things such as if you have a couple of properties or one property, you can hire your kids and let your kids if their local properties go by and check on the properties. Cut the lawn and do that kind of stuff and by paying the kids, you reduce your income and they typically don’t pay any tax on it. We use that strategy a lot. The tax code says you can hire your kid is – actually in tax court was 7 years old. I like 11 and 12 years.

Danny Johnson: So is there a limit on the amount that you can pay them?

Craig Cody: Well, it’s not a limit but 6,000 is kind of where now all of a sudden they start paying taxes. It may not make as much sense but it has to be reasonable compensation. One way to look at it is like this. If your kid is going to private school or maybe he’s going to a sports camp and let’s say it’s costing you $5,000 and you’re paying that with your own money after tax. So that might be 9,000 in gross before you net that 5,000. Whereas if you paid your child that money, it goes into his bank account, he’s making under this let’s just say $6,000 limit, he pays no tax and then when it’s time to pay the camp, they just draft his account so you just turn them to tax-deductible expense. That just takes a little time to do a little bit of planning.

Danny Johnson: I like that. What I wanted to do is guide this just a little bit because I think people listening, the big question I think from a lot of newer ones and we’ve got experienced people listening, newer investors, but whenever it comes time to determine “what is the best entity for me to use?” and I know there’s different legal aspects of everything, there’s the tax planning aspects of the different entities and stuff like that, but let’s do a hypothetical here. Let’s say we’ve got an investor who’s wanting to do some quick-term flip, so he’s buying some houses, fix them up and then selling them, not holding them for very long, maybe the whole process is about 6-7 months in and out of the deal. So you recommend an LLC then for that. You want to speak about the reasons why you would want to do that?

Craig Cody: Well, typically real estate is under most circumstances best held inside of an LLC, and that’s basically for protection-wise and a step up in bases. That’s really the two main reasons. When you’re in a business of flipping, it’s ordinary income; it’s not long-term capital gains, it’s short-term. And if you’re really in the business of it’s actually ordinary income, not even short-term capital gains. So mistakes I see with those kind of investors is treating it like it is short-term capital gains instead of “in the business of”. When it’s short-term capital gains and you have all these expenses that may go into it, your operating expenses not just the cost to remodel but other operating expenses, those are subject to the 2% threshold on Schedule A on your tax return. They’re also subject to alternative minimum tax. So if you make too much money, basically they get added back in and you don’t get the benefit of it so you’re kind of getting squashed. But if you do it properly and you’re actually in the business of like a trader business, then you’re not dealing with those 2% itemized type of deductions and you get the whole benefit and you’re still short-term and ordinary income. So it’s important that you document what you’re doing so you can say “I am in the business of” versus a short-term capital gain. We had a situation like that where we saved somebody $87,000 because they were reporting it incorrectly. So hopefully that answers that part of the question.

Danny Johnson: Yeah, I think so. So you recommend the LLC. I’ve heard the LLC can be taxed different ways. So you can choose to be taxed as an S corp.

Craig Cody: Correct. Typically you want the straight pass-through LLC for real estate. You don’t want to elect to be taxed as an S corp or anything like that because then you’re back to the whole bunch of issues you have having real estate inside of the corporation. Now, it’s not a blanket statement but more often than not you’re better off having your real estate inside of an LLC. I’m not an expert on liability protection but having multiple entities or having multiple pieces of real estate in one entity is probably not the best way to go when you look at the cost of creating separate entities and if you do it right, you shouldn’t be in excessive cost of operations. That’s the way to go.

Danny Johnson: From a tax perspective, why not use a C corporation to flip houses and take advantage of a lot of the benefits of having the C corporation? Why not do that?

Craig Cody: Because when it comes to real estate, I don’t see a whole host of benefits of being inside of a C corporation. Typically a C corporation defers $50,000 is taxed as 15%. But when you go and sell that piece of property down the road, now you’re inside of a C corporation and getting that money out is double taxation.

Danny Johnson: Yeah, getting the money to yourself then.

Craig Cody: Right, is double taxation. So it’s not very efficient for that because you pay tax at the ordinary rate and the ordinary rate could be 15% but then in order to get that money out you have to dividend it out to yourself or pay it out on wage, so now you’re looking at at least another 15% and it’s not helping you that much. So C corps are typically not the way to go and if we’re doing planning, a C corp may fit into the planning we’re doing but typically not to hold the real estate. Maybe you’re using it to manage your real estate and taking some benefits that way.

Danny Johnson: So if you are a landlord and you’re picking up rental properties and like you said it’s not probably wise to have a lot of properties in one LLC. So you would recommend multiple LLCs then, just getting more protection into things? We’re not an attorney with regards to that.

Craig Cody: It’s getting more into protection but I have a real-life story to share where I had a client that had a bunch of them and they weren’t even in a single LLC, they were owned personally. She was sued for mold-induced injury. The house was worth about $25,000 and the verdict was 150 or 155 with interest and everything like that. So they went after everything she had and she had a pretty significant portfolio, like that was the garbage that she had in her portfolio.

Danny Johnson: All in one LLC.

Craig Cody: It wasn’t even in an LLC. So it was just owned personal which was just as bad, but if she had 5 inside that LLC, they could have went after all 5 of those. Whereas if it’s in a separate LLC and maybe each of those single-member LLCs are owned by one LLC that’s almost like the mothership, you’re not doing 10 different tax returns, you’re doing one tax return and everything’s protected.

Danny Johnson: Nice.

Craig Cody: Like I said, I’m not a liability expert but I have a real-life story that I see and people say “Well, we have insurance.” Well, apparently which I found out, mold only has a cap on how much you still pay for mold insurance on inside of a policy. That was at $25,000.

Danny Johnson: I’ve got more questions but they all seem to be legal-related so I need to get a follow-up episode to this one with an attorney so we can answer those questions. But going back to tax planning strategies and things like that for investors, so you’ve got three proactive tax planning strategies. Are these three specifically spelled out for different situations?

Craig Cody: We have 10 different strategies that we use on a regular basis. One of them we talked about is just planning. Another one is having the right entity. There’s a whole host of other things we can do and we’re talking about the flipper, correct? We’re not talking about the buy and hold.

Danny Johnson: Right, yeah, mostly flipper.

Craig Cody: So we would take the strategy that we typically use on a regular business owner, the things that a regular business owner is going to do. Okay? Such as hiring your family, maybe a medical expense reimbursement plan which is Section 105 in the tax code that allows you to let’s just say hire your spouse and instead of paying him or her a wage, their wage is a medical expense reimbursement plan where you’re able to write off the cost of your medical out-of-pocket expenses. So that might be a lot or it could be a lot, depending on where things fall. Then you have your home office. If you’re spending like 12 hours a week operating out of your home office doing something that’s a principal activity and that could be administrative work, you meet the qualifications. And once you have a home office, that opens up the gates for the home athletic facility which could be a gym, could be a pool, which is for use of your employees. So now you start adding those expenses in there. So there’s a lot of different things you can do as a flipper or as I call somebody that’s flipping houses treat it more like a regular business owner.

Danny Johnson: Let’s talk a little bit more about the home office. What are the rules with deducting some of the like utility bills and stuff like that? Is that based on the size of the home office as it relates to the rest of the house?

Craig Cody: Correct. There’s like two different ways, the basic ways. Look at the square footage of the room versus square footage of the house and then you get to write off let’s just say 8%, 8% of your utilities, 8% of your maintenance, 8% of your real estate taxes which comes into play even though you typically get your real estate taxes anyway. It comes into play if you’re subject to AMT. It could be beneficial to have that 8% move to the business and then you have your home office, whatever you have going on there. You have your home athletic facility, now you have your travel because now you’re traveling from your home office to another location, so that becomes a deductible. So it opens up a whole big world of different things you’re allowed to do and these are all in the tax code. These are not gray areas.

Danny Johnson: Yeah, if you’re going to do a home office, I guess move your desk into the biggest room in the house, right?

Craig Cody: Well, it has to be exclusively for you so you can’t do it in your bedroom, you can’t do it in your living room and your dining room. You have to have an office that you use exclusively for carrying on your activities.

Danny Johnson: So time to move the sofa and the TV into the small room in the back of the house.

Craig Cody: Whatever makes sense.

Danny Johnson: All right, great. So what are the other different things that people can take advantage of that maybe you see most people sort of miss or don’t take advantage of?

Craig Cody: So we talked about medical, we talked about the kids. If it is a flip, a trader business, you can do a retirement plan. Then people can do self-directed retirement plans and then they can deal with loaning money to other investors that are doing work in real estate and stuff like that. Meals and entertainment. Those are basic ones when it comes to a small business unless we get into big, big numbers where we have to kind of do a couple of other things that might work. But the typical person that’s a flipper, those are coming in and just keeping track of your expenses, you’d be surprised how many people actually don’t really track the expenses, what are they spending their money on then. Because just like every other business that’s out there, they’re spending money, they’re not documenting everything. They’re not keeping their receipts and then they try and reproduce things at the end of the year versus doing it on a regular basis.

Danny Johnson: That’s what I would do if I didn’t have my wife. She’s the one that keeps track of everything and gets mad at me when she sees the deductions in the bank account online and asks me what the heck that was for kind of thing. But yeah, she’s really good at keeping all that together. Let’s talk real quick about the IRA, the self-directed IRA kind of thing. Because I think there’s big benefits in this and I think a lot of people aren’t taking advantage of the benefits of doing this. So what are the limitations? Can you speak very much on the arm’s length transaction kind of stuff like what to watch out for, how much you can contribute, all that kind of stuff.

Craig Cody: Well, if you have a self-directed IRA, you can contribute the whole thing into let’s just say an LLC. So let’s just say then that LLC owns a piece of a property. But you have to make sure that you’re not doing any work yourself on that property because then it becomes an issue. So more often than not with real estate and self-directed IRAs, we’re seeing people that act as lenders inside the self-directed IRA and taking that money, investing that, self-directed is investing into an LLC that is then going ahead and purchasing a property. But they have no active involvement in that property because then you’d get into these rules and most people are not going to pass the test and they’re going to just knock the whole thing out.

Danny Johnson: So now you say active role, what exactly does that mean?

Craig Cody: Anticipation. That basically means you really can’t be doing that much. You can’t be doing any repairs, that kind of stuff. You really have to be out of it. We’re not talking about collecting a rent or anything like that but something that you pay somebody else to do is basically going to kick you out of the box when it comes to owning real estate inside your IRA. There are people out there that specialize in that and if you’re doing that, you really do want to work with somebody that specializes in that on the compliance side to make sure that you’re not doing anything that you shouldn’t be doing and jeopardize the standing of that IRA.

Danny Johnson: Right. So if you want to do a flip, what’s the best way? You can’t really use your funds in your IRA to do a flip for your own business yourself, right?

Craig Cody: Correct. Because you can’t do it to yourself or your family members basically. But you can do it with if you know somebody else that does flips maybe you could lend him money.

Danny Johnson: So you do the lending for the deals, for people that are not in your up and down lineal heritage or your family.

Craig Cody: Correct. I like to just stay away from all family members.

Danny Johnson: All family members?

Craig Cody: Be safe.

Danny Johnson: Because it’s like aunt and uncles or something and stuff like that is fine, right?

Craig Cody: You know what, I don’t know and I have to look at that one. I know brothers, sisters, parents and stuff like that, it’s not just worth getting into that headache.

Danny Johnson: Yeah. So you can build up a lot inside of that IRA doing that lending. Are there any kind of limitations on the interest rates that you can charge or anything like that?

Craig Cody: They would just be typical rules that are out there now. We see a lot where it’s 8 to 10 percent plus a piece of the gain. So that’s usually pretty secured by real estate. What I’ve seen, it all depends on the guy that’s doing the flip, what kind of track record he has. Obviously the better the track record, the lower the rates he’s going to pay and the lower the equity interest he’s going to give somebody. Now, whereas somebody starting new is going to have to give away more. That’s been my experience.

Danny Johnson: Have you seen anything from other investors doing things like maybe an IRA and using the IRA to maybe buy like an option to buy a property and that you’re not involved with also and then having that option, like not exercising the option and then having a payment to release that option off the property?

Craig Cody: I have never seen that.

Danny Johnson: I heard some things like that but I don’t know enough about it to really probably even ask the question correctly.

Craig Cody: I do about 10 days a year continuing education just on tax planning and I’ve never heard that one. So I’m not sure. Another way and it’s really not in your listeners where it’s somebody that’s buying a second or third home and they have all this money in the IRA and they want to take it out and use it as down payment and get crushed in taxes. We’ll recommend doing a distribution to your what’s called 72T which is a series of equal payments so it’s not big penalties so you’re kind of like now you get those interest expense and you get the income on your 401k or your IRA that you’re taking money out of, they kind of offset each other so it’s almost like a way of taking money out tax-free.

Danny Johnson: Interesting. Was it 1031 exchange?

Craig Cody: 1030. Yeah, we’ve been involved in a host of 1031 exchanges. They’re typically really not for the flippers. They’re supposed to be long-term investments. I guess you can make the case of every once in a while you had something that turned over quickly just because of the way things were. But they are supposed to be long-term investments so technically they don’t really fit the flipper.

Danny Johnson: What else do you have? Do you have anything else in your arsenal of things?

Craig Cody: Yeah, we do. I’m just trying to think as they relate to your audience.

Danny Johnson: Well you can speak to long-term stuff too because we also have people that have rental properties and I have some myself, so you can speak to some of those strategies as well.

Craig Cody: A big strategy is cost segregation. I’m not sure if you’re familiar with cost segregation, if you want me to explain.

Danny Johnson: Go ahead, sure.

Craig Cody: So let’s just take that $100,000 rental property. Let’s just say the building itself is worth $100,000. Typically you would depreciate that building over 27.5 years. So let’s just say your depreciation expense is about $4000 a year. When you do a cross segregation study, they break that building up into different parts and you take the property in there that would normally be depreciated over 3 years, you take the stuff that normally would be depreciated over 5 years or 7 years or 15 years. So now you’re depreciating stuff faster. So over 27.5 years you still depreciate $100,000 but you might depreciate it in the first 5 years get $20,000 or 20% more expense in the first 5 years from depreciation because it’s accelerated. So from a cash flow perspective that means extra money that’s not being taxed. The wonderful thing about a cross segregation plan is you can do that 4 or 5 years in and then you get to recoup all that missed depreciation, let’s just say. So let’s say you had a sale on something and you made a lot of money and now you could do a little planning and do a cross segregation study and reap an extra 20 or 30 or whatever it is in depreciation in that same year and you kind of offset that sale.

Danny Johnson: Nice. I like how you said it doesn’t have to be right away. So if you’ve got some big profits coming and you want to offset that a little bit, yeah it’s nice.

Craig Cody: Yeah. So that’s a good way to do it and you should be communicating with whoever you’re working with. You should be communicating with your CPA, you should be communicating with your attorney. Everyone should have a team. That’s a big part of planning, is communicating with your advisor. They have a lot knowledge and you don’t know what you don’t know. So unless you speak with them, they can’t help you.

Danny Johnson: So let’s get into that a little bit. How do you find? What questions do you ask and how do you find the proper CPA for somebody doing flips and has long-term rental properties and stuff like that? How do you find the right person?

Craig Cody: The first question I say is, when was the last time your CPA came to you with an idea to save taxes? If it’s no, then okay you need to start looking around. Then you want somebody that’s going to communicate with you, willing to explain things to you and willing to take the time to grow with you as you grow. You should talk to get referrals and see people out there that have had good experiences and see what they do.

Our clients come from referrals, they come from people that have heard us on podcasts. But they’re all looking for somebody. They’re not getting something that they want from their current team and that’s why they’re looking elsewhere.

Danny Johnson: Nice. Okay, so what is a certified tax coach? What do they do and why do real estate investors need one? Is that basically what you’ve been speaking on or is there anything more?

Craig Cody: That’s kind of what I’ve been talking about. I’m a CPA and a certified tax coach, so in order to become a certified tax coach I had to do specific training and then I go to ongoing training every year and then I have webinars every month. Like I said, I do about 10 days a year in continuing ed on tax planning alone. So that’s easily twice as much as most CPAs out there and mine, that’s really devoted to tax planning because that’s our area where we see people need the most help.

Danny Johnson: Any changes recently that we need to be aware of or that might be coming down in the future?

Craig Cody: Obviously we’re not sure what’s going to happen in the future. I don’t know if the administration is going to get anything done. As we speak today, I just saw something 15 minutes before the call that the new White House Communications Director is out, so I think that’s going to make it hard to get policy change that a 15% income tax would be a wonderful thing for business owners and real estate owners but I don’t see that happening. That’s my own opinion. Obviously whoever you’re working with should be aware of what’s going on. They may not know every answer to every question you ask them but they should be able to get you the answer.

Danny Johnson: So anything recently that’s changed that did happen that maybe some of your clients had been surprised by?

Craig Cody: No, because like I said, we do a lot of communicating. When there’s major changes we let everybody know. We put a weekly little email blurb of different things going on and if it’s something that changes, we kind of like to tweak it into something entertaining so people get the message. But there’s some changes with depreciation that’s kind of being phased out with bonus depreciation and stuff like that. But that’s not going to affect most of the people in the real estate world so much.

Danny Johnson: All right. So if we could, what would you say would be the biggest tax break for real estate investors to take advantage of? Do you have one that you think would do?

Craig Cody: Depreciation and cost segregation are going to be huge, they can be huge. Then another thing you want to take advantage of, if you are in real estate and not into flipping, a lot of times people will accumulate these huge passive losses. If you could figure out a way to generate passive income and sometimes if you have your own business, if you have enough business maybe, there’s ways to do that, so now you have this income that you’re already getting but you’re coding it a little bit differently because you’re setting it up a little bit differently, now it’s considered passive, now you have all these passive losses that you could use to offset it. So do you want to take that expense this year or do you want to wait 15 years until you see? I’d rather take it today.

Danny Johnson: Right. Nice. So for anybody out there that wants to find out more from you, how would you recommend that they either get into contact with you or do you have something that they can read?

Craig Cody: Sure, they could contact us but we’re offering a copy of our book, The 10 Biggest Mistakes that Cost Business Owners Thousands. If you go to our website which is www.craigcodyandcompany.com/flippingjunkie, I believe you’re going to have that in your show notes. They could actually request a free copy of our book and we’ll mail that to them. Email is craig@ccodycpa.com, our phone number is (516) 869-40151 and just feel free to drop us a line.

Danny Johnson: Nice, and we’ll have that in the show notes as well. So if you are driving and can’t write all that down, just go to flippingjunkie.com/83. This is episode 83. It’s flippingjunkie.com/83 and we’ll have the audio for this and the show notes with that information in there as well. Is there anything else you’d like to share before we close?

Craig Cody: I think that’s about it. You should just make sure you’re communicating with whoever your advisor is. That’s really important. That’s going to save you the most amount of money.

Danny Johnson: So if you’re not hearing from them, you need to contact them and say “hey, here’s what I’m doing. Anything I can do?”

Craig Cody: Right. And if they don’t have the right answers for you, look around and find somebody else.

Danny Johnson: Thank you so much, Craig. I appreciate it.

Craig Cody: Thank you very much for having me. I appreciate being on your show.

Danny Johnson: No problem. All right. Have a great day!

Craig Cody: You too, take care. Bye!

Danny Johnson: [music] Another great episode and I just wanted to reiterate really quick about the Just Ask podcast series I’m going to be doing. I want to answer specific questions that you have so if you have questions maybe generated by this podcast episode or previous ones or you’re just stuck on something in your flipping business and would like to get some input, by all means join the Flip Pilot Facebook group and just tag Danny Johnson (me) in the question and include #JustAsk, and we’ll be doing Just Ask podcast episodes for questions that require a little bit more in-depth answering and people in that group are just awesome, you guys are incredible. Tons and tons of people. We’ve got over a thousand people already in the group and it’s just growing like crazy and everybody’s helping everybody. So I appreciate it, you guys are all awesome so thanks for being a part of that in the Flip Pilot Facebook group.

I want to share some quick testimonials. I want to do shout-outs to people that have left testimonials for the podcast on iTunes and Stitcher. So I’m going to go ahead and read some of those out. I request that you guys if you’re enjoying this podcast, just go to iTunes and rate it for us and review the podcast, it really helps out a lot and I appreciate everybody that does that and everybody for listening even if you don’t do it. But let’s go ahead and pull some out here. All right, we got ZacRNZ. “I’ve been consuming a few real estate books and podcasts and Danny’s among the best. Books from major publishers always seem so sterilized into a mass market to hold a candle to the entrenches perspective you get from Danny and his guests.” Awesome. Thank you, Zac, appreciate that.

We got Peels. “I’m a few episodes in and I’m hooked. Great info, great guests. So glad I found this podcast.” Thank you, Peels.

We got Mike Newby. Hey, Mike. Actually I spoke with him several times so it’s cool to see his review on here. “Danny does an excellent job of asking all the right questions in order to get the answers every new investor needs to know. Has a fantastic and really qualified, experienced guest on each episode.” All right, thank you, Mike. I appreciate it. So, I’ll be doing these weekly as I get these. So if you would, go over to iTunes and leave a rating and review for the podcast and I’ll do a shout-out for you on coming episodes. Have a great week, guys! Talk to you next time.

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