Welcome to The Get Real Podcast, your high-octane boost and in the trenches tell-it-like-it-is reality therapy for personal, business and real estate investing success with your hosts, power-preneurs Angela and Ron. It’s time to get real!

Angela: Hi. Welcome to The Get Real Podcast. This is Angela Thomas and I’m here with Ron Phillips.

Ron: Here we are, let’s do this.

Angela: Hey, so you know it’s, I’m out in Utah. I know, I know your weather’s a little nicer out there where you are Ron but a man here in Utah, I just know every time a year it’s the ugliest, it’s cloudy, it’s freezing and on top of all that it’s my favorite season you know tax season, woo hoo. So I thought we should…

Ron: You got to love it. I just figured maybe just, I mean, not for anybody else’s benefit other than for yours that I would just look up the weather real quick out here.

Angela: Oh great, okay.

Ron: Well I can see outside that it’s sunny. It is a little breezy today, but it’s 68 so kind of chilly.

Angela: Well we have tons of snow that is not melting at all it’s stuck on. So that will tell you it’s stuck on all the trees. You know, it’s beautiful except I hate it.

Ron: I’d love to tell you I miss it, but I don’t, let’s talk about taxes. You’re going to get depressed.

Angela: I know. Let’s not talk about the weather. So although taxes are a little depressing also….

Ron: Not Today.

Angela: Today we’re going to laugh about them.

Ron: We’re going to, yes.

Angela: There’s this quote, I really love this quote by Will Rogers. I’m not sure who that is, but he said the difference between…

Ron: That’s just because….

Angela: You want to tell me who Will Rogers is?

Ron: No, you need to look it up so you’ll remember.

Angela: Well, I’ll look it up later. Anyway….

Ron: Will Rogers is a stud though, everybody that, he’s got a bunch of more really good quotes too.

Angela: Yeah. So he said the difference between death and taxes is that death doesn’t get worse every time congress meets.

Ron: Isn’t that the truth.

Angela: That’s just great.

Ron: Isn’t that the truth? What gets better when Congress meets anything? Does anything ever get any better?

Angela: Not for me. I don’t know.

Ron: I don’t think so. I think they should just not meet, but they definitely shouldn’t get together on taxes that never ends well.

Angela: Well, no, it really doesn’t. So Ron, I think you had an example you were going to share. I know you’ve told me before about.

Ron: I think people need to understand a little better how taxes affect them and their investments. So that’s what we’re going to talk about up front and then we’ll talk about maybe how to, well, how to not have this happen to you. I think everybody out there has heard about the, you know, would you rather have a penny a day for 30 days compounded daily or would you rather have $1 million?

Angela: And if you haven’t seen that on Facebook, you’ve been under a rock.

Ron: Yeah, I mean it’s been around forever. For anybody who, for anybody who hasn’t heard of this, I can tell you how this works right. It’s a penny the first day, second day it’s two, third date 4, 8, 16, 64, a dollar 28, right. I mean, it’s just not on day 15 you got to $163 and you’re thinking to yourself this, this is not working for me.

Ron: But on day 20 you’ve got 5,242 Ooh, maybe you should have taken the million, right. And then, but 5,200 turns into 10,500 turns into 20,000 then 40,000 then 80,000 and 167,000 and then 335,000 day 27 you’ve got 671, things are looking up because now we’re going to be day 28 1.3 day 29 2.6 day 35 8 million. It’s a big number.

Angela: It’s crazy. Every time you hear it.

Ron: It’s a big number. And I just kind of ran through it really quick so you kind of see, but you can do a simple Google search on this and you can come up with it. So in 30 days, a penny doubled every day becomes 5 million, $368,000 it’s insane. 

Ron: Now here’s the point I want to make combat and interest is fantastic I think anybody that hasn’t been living under a rock knows that, at least you know that when you pay compounded interest of your credit card company that it’s really bad.

Ron: So if you’re on the receiving end of it stands to reason, it would be really good, right. So that’s what we’re all after we want this compounded interest. What I want to do though is I want to show you what the, what is it that just taxes does to this? What, what if we tax every day the returns before it’s doubled, right? So you earn a penny, you get taxed on the penny and then you get your gains, okay. 

Ron: So not to belabor this, but if you’re at a 30% tax bracket, okay. Which is not that crazy because I think the top tax bracket is somewhere around 40 now. So at 15 here’s your gain and your net. So here’s your net, 15 days your net is $16 and 84 cents. Now, I mean it wasn’t, look, if you compare that, it wasn’t crazy different than the, than the other one, but it is different, okay. Sorry, I just clicked a button and could just sorry, just give me a second. Day 15 you were at $163 before. So now we’re at $16 and 84 cents.

Angela: That’s pretty drastic. I mean, percentage wise man.

Ron: Very dramatic difference. Right? And it’s, it’s because of the taxes that are coming out of your gains every single time. Fast forward all the way to the end of the month, day 30 having been taxed only 30% on all of your gains, okay. You ready for this number, Angela?

Angela: No, I’m terrified, man.

Ron: We went from five point, what was it, 6 million? Call it five to $48,196.86 cents. So what is the, what’s the actual effect of us quote, paying our fair share? The effect is staggering on your money, okay. And you know, I saw this, I saw this, anybody out there who’s a Parks and Recs fan, Ron Swanson is my, he’s like my hero. Love Ron Swanson, right. So there’s an episode, and I just saw it again on Facebook. Somebody posted the other day where Ron is teaching a little girl that comes in to do a report. She has to talk to somebody in the government. So she finds Ron, and for those of you have never seen this show, Ron is completely, he works for the government and he’s completely antigovernment, hates it. So he teaches her about taxes by dumping out her, her lunch and eating 40% of all of it.

Ron: And at the very end, after he’s eating a whole bunch of her lunch, like 40 people took a big bite out of her sandwich. At the end he goes, Ooh, Ooh, I forgot about capital gains tax and then eat another bite of her sandwich. And you could keep going, right? There’s death tax and taxes on taxes, on taxes, on taxes it’s insane. So to the extent that we can legally reduce our bill to the government, it’s going to help our investments obviously. 

Ron: And you know, and just in the last segment, we talked about 1031 exchanges. We’re not going to talk a ton about them today, but I mean, thank goodness, you have to build money and pay less. You have to pay less taxes. It just annihilates your gains and hopefully you can see that from this little example. I mean 30, 35% Angela, 35%, just five percentage points more. So when all these jokers are out there talking about how they want to raise everybody’s taxes, five percentage points more goes from 48,000 to $20,278 five percentage points.

Angela: Wow, that’s crazy. Wow.

Ron: It’s insidious is what it is.

Angela: It really is. So you’ve experienced this, Ron. I mean I’ve been working closely with you for awhile, you know and I’ve watched you experience this as a business owner, you know, you’re a business owner and you own a rental properties. So, you know, I think we should talk about a little bit like the differences between, you know, your business, the taxes you have to pay on that compared to passive income rental property.

Ron: Yeah. And I think, I think the first time the taxes really hit me in the gut was the year that the money that I actually took home, not the money that the company made, but the money that Ron had in his hand took home and used was the exact same amount of my tax bill. That year I woke up, my accountant called me and he’s like, okay, yeah, I get your taxes done here they are. And I said, so I net made $0 last year. Well, no, no I mean, your company made x. Yeah, but my company has to have operating capital in it, right. I mean, my company has to have operating capital for, to move into January I can’t just take the money out. I didn’t get that money. But when you’re a, when you’re an S corporation, this is one of the things I think people out there need to know.

Ron: This isn’t actually, this is going a completely different direction than we thought it was going to do it.

Angela: I’m sorry. We’ll go, we’ll get back to this.

Ron: I’m reliving old angry memories here.

Angela: I’m sorry.

Ron: But what people don’t out there don’t understand is that when a business owner has an S corporation, it means all the money from the business flows through to them on their tax return, whether they took the money and spent it or not, which in this case I didn’t I needed it moving into the next year. I have to have money in the bank to be able to operate my business, but that is profit. That profit is passed through to me and it goes onto my personal tax return, which means I was paying top tier taxes on money I never even got, and that equaled the amount of money that I, that I took home that year and it was that year that I decided, yeah, there has got to be a better way.

Angela: And if there’s not, we are done.

Ron: I told him, I said, why does anyone go into business? This is ludicrous. I made no money. I net made $0 million and worked all year last year. He goes, yeah, I mean, I said, well, how do you grow? I’m trying to get this accountant to go, how do you outgrow this? Because next year if I make money I’m going to have the same exact problem, right. And God forbid you didn’t save the money out to pay those taxes because then you have to dip into next year to pay last year’s taxes. And guess what, the money you dipped into to pay last year’s taxes you are also taxed on.

Angela: Yeah, same way.

Ron: It’s a never ending battle. It’s I’m telling you, if you are out there and you’ve never paid those kinds of taxes before in your life, you cannot comprehend the level of stress that comes from earning $0 million on paper hundreds of thousands, right. In actuality $0 million. And it was that year that I decided I needed to figure out what all these other rich people were doing and try to figure out what, how in the world do they pay less taxes? Because if you can’t, you’re in effect going to be out of business. And that’s the dirty little secret that nobody out there wants to talk about, right. Is that they talk about all the rich people out there. 

Ron: Rich of course being defined as $250,000 or more. They talk about all the rich people out there. That means every single S corporation on the planet they’re all rich. They all have to pay this crazy tax even on money that they actually don’t ever personally get to use. It’s insidious. And how do you get ahead of that, right?

Angela: Yeah. I mean, the same way as with, as with your investment real estate, you have to figure out, you know, loopholes or ways to offset that a little bit. I’m going to save some money and get some money back in your pocket, right.

Ron: I guess, Angela, what I’m trying to say is that the penny thing that I just was trying to articulate to everybody that happened in real life to me. Not the same numbers, but that’s exactly what happened it killed my year and in business. And I mean, it just, it was such a gut punch. And it took me, I don’t remember you remember? I was like in a depressed state for days.

Angela: Yeah. And Ron is a happy, I don’t know if you can tell he’s a happy, funny guy and he was just not himself.

Ron: I was moping around the office like, why the hell am I even doing this? And I was trying to convince myself that I’m doing this because I’m helping other people, which, which I am, but damn, I want to get paid too at some point, you know?

Angela: Yeah, man.

Ron: Anyway…

Angela: Yeah. That was rough.

Ron: Let’s move on to something, like this has not been happy so far but it’s the truth.

Angela: I know so how we come out of this. I mean, I think we just need to talk about, you know, what you did about it, like, and the difference. I mean that’s your, that’s your business. But there are even more, you know, loopholes and tax breaks. You know, there’s a bunch that you can use on your rental income as well. So yeah. I just want to talk about kind of what those are. We don’t have to talk about all the ones in your business because we, you know, we’re focusing more on the real estate side, but you did figure out loopholes to prevent that from happening again, right.

Ron: Yeah. And you know everybody calls them loopholes.

Angela: They’re not, they’re not.

Ron: What they are is, there are things that are put in there so that businesses don’t go out of business. And there’s ways that I can redirect money that helps both, all of my, all of my team and it also benefits me and they do that so that business owners won’t just take all the money personally, but they’ll help their team. And I agree with that, I think we should do that as business owners I don’t have a problem with that, but I was trying to navigate all of that and try to figure out how do you do all of that stuff. And you have to pay somebody to help you to help you navigate…

Angela: And you had to keep looking for the right person, not everyone knows.

Ron: I had to go out and get another accountant.

Angela: And you may have to for your real estate as well.

Ron: You have to change your mentality. Have to change your mindset. When you hit a certain level of income, you have to change. And it’s what we said, I don’t remember how many episodes ago we were talking about if, I mean, if you’re looking at somebody and they’re successful, go figure out what they’ve done. And that’s what I did. I had to get out of the office and off of my, you know, pity potty and I had to go out there and find people and go, what are you doing to keep your money? Because I just had all of mine taken, literally every, every cent I had it all taken. So tell me what you’re doing so that I can do what you’re doing.

Ron: And they introduced me to accountants who were versed in this stuff that could help me out. And because I was in the real estate space, they were like, look, there’s other things you can do in the real estate space that can help you out on your business side and things like that. So it’s really critical at every step. Like if you’re starting out, find people who are doing what you want to do and go ask those people what they’re doing.

Angela: And who their using, right.

Ron: All you have to do is just copy them in every aspect, but especially this one, you know, the taxes because they’ll kill you.

Angela: So specifically, I mean, so that was on your business. So let’s talk about ways that you, you know, those loopholes that are actually just, you know, opportunities to make profit. Let’s talk about what those are on real estate. I mean, cause it is kind of like operating your own little business, right?

Ron: It is. And if you’re smart, you will have a company that’s set up and so you will be most definitely running a business. And when you start a business, first off, we should probably say, Angela, that I am not an accountant. I don’t think you are. Where are you in a previous life? I mean you are pretty smart and you went to college and everything.

Angela: Not for finance, exercise science remember?

Ron: That’s right. Yeah, we did talk about that the other day.

Angela: It’s a good thing too because if I had gone for finances I would hate them. So yeah, get a tax professional and like Ron said, you might have to go through a few before you find one that knows all these loopholes for opportunities because not everybody does. And you’ll find, you’ll find accountants. I know my mom had to switch accountants a few times because she makes quite a bit more than I do with real estate. But she had to keep switching until she found somebody that kind of believed in real estate and knew about these tax breaks.

Ron: Yeah. So I mean, one that we talked about in our last episode was just that you on your real estate, you get to write off you get to depreciate your property, need to write it off and you get to write that off against your income you’re getting from the property. So you can, in effect, you can, you can reduce or eliminate the income coming from the property and it’s fantastic. I mean, hopefully you get so much cash flow from your property that doesn’t eliminate it, but in some instances it can. 

Ron: And I don’t think we have enough time to go over cost segregation studies, but you can, there’s definitely ways that you can do this with cost segregation because in cost segregation you are, you’re moving a lot of the expenses up to the front. You’re front loading a lot of that 3.6%.

Ron: You’re front loading a ton of it up front and that allows you to write off more obviously more than you’re making from the property. And little secret if you’re a real estate professional, ask your accountant about what that is. If you’re a real estate professional, then there’s no cap and all that can be written off against your personal income from like from my business or from your, from your job or whatever, okay. So again, ask your accountant about that. But in addition to that, Angela, you don’t have, there’s no FICA taxes on rental income.

Angela: Yeah. So huge difference between your business and your properties, right?

Ron: Yeah. So and a lot of people don’t even know what FICA taxes are, but you pay them, they come out and you can see them on your W2 and on your, on your pay stubs, your employer’s going to pay basically half of them. But if you, if you’re self employed, in other words, if you, if you work for yourself, you get the privilege of paying all those, you get to pay 0.3% all by yourself. But on rental properties, on passive income, you don’t have to pay that tax at all. So there’s taxes right there that go away.

Angela: That even though you have, you know, I think your property management is kind of like your, your employees, right? Running your business for you, but you don’t have to pay any of those taxes on them you get to keep all that.

Ron: Those people, those people run their own business. There are 1099 business and 1099 means they’re not an employee of yours so you don’t have to pay any taxes on them either because they’re paying their own taxes over there and their business, you know?

Angela: Yeah. That’s a huge savings right there.

Ron: You can write off travel expenses to your property to go see it if you, if you want to, repairs. And they’ve actually just done some pretty cool things with capital expenditures where you can depreciate a lot of them first year. Like, so some of these ones that you, that you would do to your properties like replacing roofs and things like that, that you would have to depreciate over time. You can depreciate those in the year that you do them.

Angela: Hey, they actually did improve, improve something look at that.

Ron: They got together and…

Angela: It actually worked in our favor for once.

Ron: They did something, right? Yeah.

Angela: Cool.

Ron: I guess if that’s all they’re going to do, then they should get together more often, but, but probably not.

Angela: Yeah. And then you can also deduct the fees you paid your property management, right?

Ron: Yup. Because those are all expenses, you know, so you can deduct all of your expenses. You don’t get taxed for the appreciation on your property until you sell right. So you’re, you’re making money also for the, for the part of the property that’s being your principal reduction. Those gains are not taxed either. And then if you’re smart, you can sell the property to do a 1031 exchange, which we talked about last time, which differs those taxes.

Ron: In other words, you can, you can sell, you can take a couple hundred thousand dollars out of your property and you can, you can sell it and put all $200,000 into more properties, increase your cash flow and do this all over again without paying any taxes because you’re deferring them until later on. And then there are strategies to be able to make it so that you pretty much never do. And then when you pass away, your kids get a stepped up basis on your, on your properties in your 1040 ones.

Angela: That’s pretty cool stuff.

Ron: Yeah. So there, I mean, there’s some really cool things. I wish we had enough time to dive into and maybe we’ll, maybe if you guys want to, let me just make some comments on our page if you want us to I’ll come back and do. There’s opportunity zones right now. Opportunity zones are really cool especially if you’re planning on doing a 1031 exchange because it’s different. 

Ron: And really briefly, what it, what it does is it allows you to exchange money without an intermediary. All you have to do is just buy into it gets complicated. Basically, you buy a property in a fund and an opportunity zone fund gives you, I can’t remember the years, but if you hold it for three or five years or something like that, you get a 15% off of your taxes that you would have paid on that exchange. If you hold a property for 10 years, you don’t have to pay gains on any of the gain from that particular property that you bought in the opportunities zone.

Angela: Yeah, it’s pretty cool.

Ron: Very powerful very cool. We could do, we could do, maybe we can put that together with 1031 or something like that.

Angela: Yeah. Yeah. We’ll have to get more detailed on all that. We also have some resources about that kind of stuff on our other website, RPC Invest. So feel free to check that out. There’s some good videos on there.

Ron: And look if you guys comment a ton that you want a lot more in depth on this stuff, you know, maybe I can, maybe I can get my accountant to come on and we can, we can really throw down and in two or three segments about, about taxes, from somebody who actually can tell you what it, what it is.

Angela: Yeah, yeah. Feel free to send any specific questions and we’ll, we’ll have a guest on and have him answer them on here. So, yeah, that’ll be cool.

Ron: Maybe he can do a little piece on a cost segregation studies too cause they’re crazy awesome if you’re a real estate professional for eliminating or reducing taxes. So if you’re out there, you’re listening and you’re a real estate professional and you are not buying properties and cost segregating them, you are silly. We’ll leave it at that.

Angela: That was a very nice way to say it all right.

Ron: I’ve calmed down a little bit since the beginning of the episode.

Angela: I know. Cool. So yeah, thanks for listening. Like we said, make sure you go subscribed on GetRealSuccess.com. Sorry, GetRealEstateSuccess.com and yeah, make sure you subscribe and leave us any feedback and let us know future topics. Thanks for listening.

 

This has been The Get Real podcast to subscribe and for more information, including a list of all episodes, go to GetRealEstateSuccess.com.