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Short-Term Rentals & Taxes with Brandon Hall



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Gary Pinkerton starts the show with some news on his first short-term rental property. Later Jason Hartman takes over and brings on CPA, Brandon Hall. They look at short-term rentals and the tax implications associated with this investment class. Taxes are higher than buying and hold properties and there are still some gray areas that you should consider. In addition, the time and effort on short term rentals versus long-term rentals are much different. Before jumping in you should consider them.

Announcer 0:04
Welcome to the heroic investing show. As first responders we risk our lives every day our financial security is under attack. Our pensions are in a state of emergency, a single on duty incident can alter or erase our earning potential instantly and forever. We are the heroes of society, we are self reliant, and we need to take care of our own financial future. The heroic investing show is our toolkit of business and investing tactics on our mission to financial freedom.

Gary Pinkerton 0:38
Well, and welcome to Episode 165 of the heroic investing show, and Happy New Year to everyone. We’re starting 2019 This is my second episode here 2019. And making a commitment here, one of my new year’s resolutions is to get back to two episodes per week and stick to it. You might have noticed that last few months as the end of the year for my sales business and my coaching programs and everything that I was involved in, started to, you know, really, really get intense, I kind of backed off a little bit. So I went to the audience, there’s so much incredible material out there so much that I want to say so many great clients and great veterans and active duty members and first responders, real estate investors and entrepreneurs that want to be on this show and want to have a voice to help you like I’m trying to help all of us get on a better path. And so lots of people who want to participate, and I’m going to get those interviews stacked back up and get on path. So there you go, guys, that is my new year’s resolution for everyone. So here on 165, we’re going to talk taxes, it’s the last in a series that I’ve been doing, Jason talking on the subject of short term rentals. And if you remember, I brought that up because suit I have recently purchased our first one that’s down in St. Augustine on the beach. And actually for the holidays, we went down and visited the property. It’s absolutely gorgeous. And my hat’s off to a very, very good friend, Jim, who’s a close friend down in St. Augustine area, and he is a local market specialists or a provider for the Hartman network. And he just did a tremendous job, we were extremely happy. And you know, as we continue to build the the occupancy higher and the new aremy property or Airbnb or short term rental Actually, I’ve been just playing a few of these episodes, to just heighten the awareness. And, you know, give me an opportunity just to talk about that experience. And this last one is about some of the challenges concerns about perils, I guess you could say about operating what would otherwise be a long term buy and hold as more of a short term weekly or less than weekly rental. And so, you know, some of the stuff that the CPA here, Brandon Hall talks about with Jason, this episode was a couple years ago, a lot of these challenges have been, you know, kind of gone through by the industry by this point, you know, very, very fledgling industry back when they were talking about these. what he’s talking about a lot, though, is the do it yourselfer. And there certainly are a lot of people out there that are renting their short term rental on Airbnb and elsewhere doing it themselves. And I would personally caution against that. I don’t think that’s a great fit for the audience, especially as busy as everyone is. I mean, you guys have stayed in Airbnb, right? I mean, you know that you have the the owner or the person who’s rented it out to you, you have them on your beck and call, pretty much, you know, 24 seven, and that’s a lot different than just the tenants and toilets, stuff that you get the two or three phone calls a month if you’re self managing a property. And so, you know, I personally would caution against that I think your time is best devoted towards your unique ability, your unique genius and shoot if you’re active duty or you’re still actively a first responder, you know, you can’t run reputable business like that being out of commission and unavailable for that period of time, they mean that the ratings are just so extremely important with the short term rental. So I have a management team. And I pay them a whole lot higher management fee than I do for my long term buy and hold, but they earn it. And the other thing to keep in mind is that there’s no term cost, and there’s no lease up fee. So there’s the repairs, you know, really kind of get averaged out across, you know, all of the different ones. So, there’s a lot of things that is covered under this management fee that’s not otherwise covered on my long term buy and hold. And so I think that’s certainly something that I wasn’t thinking about, as I was looking at, you know, the management fee here in two or three times what it is for my long term buy and hold. So, so far, we’re happy. We don’t have a huge cash flow from the property yet, but I think that’s simply a fact that property wasn’t available the lease up months in advance like a lot of people do in these vacations, but so more to come on that. But some of the concerns, as I said, are about active business income instead of passive. Again, that’s if you’re doing all this stuff yourself for some other stuff though, like their total taxes and fees and many of the states doesn’t really come up in this interview, but it comes up in some others that they talk here. And it’s certainly a popular topic when you’re talking taxes associated with short term rental in general, you know, my property manager handles that they have a good handle on it. And it’s really charged to the tenant, the person who’s staying there, you know, as his like the cleaning fees, right, it’s all kind of taxed through to the individual who’s staying at the property. So I will give you more information as I as I learn more, this is probably the last though of the short term rental kind of flashbacks that we’re going to do. Now listen, if you’re into taxes, but you’re not into short term rental, never fear. The second half of this is really, really good on things like real estate professional status, on, you know, other tax issues. But it’s really kind of the basics. So it’s a really, really good review. And then I’ve got some other CPA tax topics I’m going to do is kind of a flashback here. From about a year ago, when the Trump taxes came out, I want to help everyone understand a little bit better what’s happening with our 2018 taxes, because now we actually have to go pen to paper with all the changes that happened in 2018. So I think that’ll be useful and helpful for everyone. Next week, have another great clients interview and listener, participation, kind of interview, new material from an entrepreneur, good friend and real estate syndicator that I think you will really appreciate. So without further ado, let’s get to Brandon Hall, CPA, Brandon Hall and Jason talking taxes, some of which has to do with short term rentals. Thanks so much. We’ll see you next episode.

Jason Hartman 6:38
It’s my pleasure to welcome Brandon hall to the show. He is owner of Hall CPA. And I reached out to him because he hosted a really interesting article on the tax impact of Airbnb and short term rentals in general. And you know, there are there’s a small kind of little cottage industry going on of real estate investors who are building strategies around Airbnb. And of course, you know, our philosophy is long term stable, simple rentals. You know, I thought we should talk about this because there are some very sneaky problems that can crop up when you do short term rentals. And you’re in the, you know, you’re doing Airbnb and stuff like that. So, Brandon’s here to talk to us about it. Brandon, welcome. How are you? I’m doing well. Jason, thanks for having me on the show. It’s a pleasure. It’s good to have you. So sneaky little issues with short term rentals that most people don’t know about, do they?

Brandon Hall 7:32
Oh, yeah, you really need to know what you’re getting yourself into before you jump into this business.

Jason Hartman 7:36
So tell us about that. I mean, you’re you’re a buy and hold investor, you have long term investment property. In your firm specializes in real estate clients, you basically only take on clients who are real estate investors. It sounds like

Brandon Hall 7:49
right? That’s correct. Yep.

Jason Hartman 7:51
Okay. And what happens with the Airbnb thing?

Brandon Hall 7:55
Sure, yeah. So the biggest problem with Airbnb investors is that they can turn their passive income, they’re that passive rental income into active business income. And what happens is, when you do that, you subject yourself to a 15.3% self employment tax. And that’s on top of all the other taxes that you already have anyway,

Jason Hartman 8:13
because essentially, the IRS, instead of viewing it as a passive investment, as they would view, long term buy and hold real estate, you’re saying, right, right, right. This is viewed as a more like a business, like a hotel. Exactly. Like like running something. That’s an act of business. And of course, you know, people know that they, they need to be active. I mean, if you’re doing short term rentals, there’s a lot more management, a lot more engagement. And you had a story about your personal experience with one of your own investment properties. What please share that if you if you’d like

Brandon Hall 8:49
so so Exactly. So the IRS is going to look at this like you are running a business, like you’re running a hotel, like you’re running a bed and breakfast, basically. And when you do that, your your income is gonna be subject to self employment tax like you are a regular business owner now. I own a triplex. It’s a long term buy and hold piece of property. And, you know, I’m all about what is the value of your time I want to be able to spend 30 minutes a month on my property and have it cashflow seven $800 a month. That’s perfect for me. That’s why I don’t get into Airbnb aside from the tax aspect.

Jason Hartman 9:30
So Brandon, you talked about that that difference in I believe you said that managing your triplex takes you about a half hour a month.

Brandon Hall 9:38
Yeah. So my whole philosophy is set up business systems that basically automate everything for you. So I have a property manager that takes care of everything. All I’m doing every month is doing my bookkeeping and a bank reconciliation to make sure everything’s in place.

Jason Hartman 9:55
Some investors I’m sure would doubt that you can really manage a triplex with a half hour A month to address that at all.

Brandon Hall 10:03
Yeah, I mean, I honestly doubt of it too. And I’m sure it’ll be subject to change over time. But right now, that’s what it’s trending at. So, fantastic. Good,

Jason Hartman 10:11
good stuff. So tell us about your clients who are doing Airbnb rentals. I mean, do you have clients or people that you know, or even heard of, maybe they’re not your own clients, but you know, who buy a bunch of properties. And they go the route of Airbnb or, you know, any type of short term rental. I mean, we’re kind of maybe unfairly characterizing Airbnb just because they’re the big name in the field. And they sort of founded this new industry of sort of Uber and Lyft, kind of sharing economy for, for rooms and residences and so forth. But it’s any short term rental. It doesn’t have to be through Airbnb, obviously, right?

Brandon Hall 10:50
That is correct. Yes. So I have a couple clients, they use Airbnb, they use a couple other websites out there, and then they just add, they just advertise locally. And it’s all the same thing. I mean, the short term rental is going to be short term rental, regardless of what you use to get the tenants in. And we can talk a little bit about, you know, how to actually avoid being classified as an active business and, you know, shelter that income from that self employment tax.

Jason Hartman 11:15
Okay, so let’s do that. But first, I wanted to kind of I was asking a question there of, you know, what, what do you think is involved in the management of one of these, say, you know, because obviously, with an Airbnb type of short term rental, you get a much higher rate and much higher nightly rate? Of course, you’re not occupied as often, ideally, or not, ideally, but typically, I should say, that’s the wrong word. You know, so you have a much higher vacancy rate in most cases, and there’s a lot more management and involvement. So, you know, can you share any of that experience that you hear from some of your clients, or just people, you know, who’ve responded to your articles and so forth on this topic?

Brandon Hall 11:55
Yeah, yeah, absolutely. I mean, I can just share my experience with my clients. So I’ve arranged clients, I have some that want to be really active in the business and some that don’t. So the guys that are really active, they’re going to the rental, every time that they’re turning over units, and they’re doing all the cleaning, they’re fixing things that are broken, they’re rearranging everything to make it look nice for the next guy to come in. I also have clients that pay people to do that, and that’s perfectly fine, too. So there’s a whole range of you know, what actually goes into this stuff, but it’s pretty labor intensive, compared to the typical buy and hold property, I mean, you got to get in there, and really fix everything, you got to make it look like the pictures otherwise, people are going to come in, they’re not going to enjoy the stay, they might give you a bad rating, which you know, hurts your income potential later on in the future. And, yeah, just overall, you really got to make sure that you’re on top of it, it’s a completely different ballgame, compared to the average buy and hold property

Jason Hartman 12:51
well, but people would say, you know, they’ve got a property that they rent on a short term basis, and they hire all of that stuff done. I mean, my investors that do buy and hold strategy, you know, they’re not swinging a hammer, they’re not fixing up their houses, they’re not cleaning it between tenants. If the tenant stays there a year they’re not, you know, doing any make readies. And they’ll say, well, you can hire all of that stuff done. But, you know, that would be like saying, I’m going to start a business and hire everybody. And they won’t ever bother me. I’ll never have to manage them. They’ll just run this company and make it hugely successful without any of my own attention.

Brandon Hall 13:30
kind of crazy. Yeah, exactly. Yeah. Well, I actually had a conversation with a client, about a month ago, he was kind of going through that whole thing. And what he was realizing is that, what he is regular buying whole properties, and he does hire out all the work. And he manages the contractors, the property managers, all that stuff. And so he was going down the Airbnb path, the short term rental path. And what he was realizing is that he’s not having to, he’s not having these conversations, once a month or once a quarter anymore. It’s three times a month, four times a month. I mean, he’s talking to cleaning services, he’s talking to contractors, he’s talking to the property managers, he’s talking to schedulers. So it becomes much more time intensive, labor intensive. You just got to, like I said, I keep going back to just know what you’re getting yourself into.

Jason Hartman 14:16
Some people say that, and of course, you have to remember with short term rentals, they’re furnished, of course, they have to be furnished and not just furnished, but plates and silverware and everything, you know, has to be in there because it’s got to be sort of viewed like a hotel, almost, you know, with that, there’s just going to be a lot more stuff that breaks people spilled drinks on the furniture, and, you know, things like that, and it’s just a it’s just a much more complicated scenario, right?

Brandon Hall 14:44
Absolutely. There’s a lot of planning that goes into it. I mean, like you said, you have to furnish everything. A guy that’s coming in for three days is not going to move the bed in. So you have to provide that for them. And that just goes I mean, all that’s coming out of your pocket. It can play To the tax strategies, but ultimately, it’s just a lot more that you have to do to set this thing up. Now, there’s nothing wrong with that. I mean, like you were saying, it can be very lucrative, you do generally get higher rents. But you are, you’re also working on it, more so than a typical buy and hold property.

Jason Hartman 15:18
And see, what I’ve found is that even on these short term rentals where, you know, and then the rates definitely vary based on the season, and all kinds of much more complex business factors. I mean, it’s like hotel pricing. You know, hotels have software programs that run their business that go out and compare rates of other hotels, and spider them off the internet, and then have these pricing algorithms. I mean, I don’t know if anybody really realizes how complex this is, when I was in young entrepreneurs, organization, why EEO now called eo for 10 years, I remember meeting someone who owned a software company that did this, for rental cars and rental car agencies does, I’m sure the airline’s do this, I’m sure many types of businesses have this stuff. And it’s incredibly sophisticated, where they’ll go, and they’ll, you know, spider and get the rates off other competitor websites for whatever product or service they’re selling. And it will, you know, suggest their pricing do this, and they do that. And it’s it’s really, it’s really like Wall Street, you know, the modern version of organized crime, as I like to call it, because you know, that it’s almost like high frequency trading. You know, and so, within with a short term rental, I mean, you’ve got to be constantly looking at what all the competition is doing to keep your unit rented, you’ve got to adjust the rates constantly based on seasons and so forth. And I mean, there’s, there’s a lot to this, you know, and, and what I find is, at the end of the day, I should really say, in this case, the end of the year, in talking to people that do short term rentals, and comparing them to long term buy and hold investors, it kind of works out about the same, it seems like most of the time, you know, because if you’re if you’re occupied and your short term rental, you know, 290 days per year out of 365, and you get a higher rate, but then you have higher management fees, and also more of your own time, which has never factored in. All of that just it kind of just seems like it’s a wash. What I’ve noticed, but I don’t know, you’re doing the tax returns for these people. So what do you think?

Brandon Hall 17:30
Yeah, so I, I’ve actually compared that on tax returns, because I’m interested, that’s part of being a real estate savvy CPA, you can see the strategies that people are implementing, and figure out which one works. Um, and it is kind of a wash. I mean, I will say that the short term rental guys do typically earn more. But like you were saying times not factored in, they’re not factoring their time. And so what’s interesting is when you when you put it on a, how much time that I put into my buy and hold property versus how much time that I put into my Airbnb property or my short term rental property. Now, let’s compare our net operating income and you will find that it’ll be about the same.

Jason Hartman 18:07
Yeah, that that’s, that’s really interesting. Okay, so just circle back for just a moment. And then I want to talk to you about some other things, just maybe some general real estate and tax strategies, but circle back for just a moment, as you did in the beginning and explain the difference with a short term rental, the IRS basically views it as though you’re running a business. And when you’re running a business, you are supposed to not saying everybody does it. Okay? But you’re supposed to pay this additional self employment tax,

Brandon Hall 18:39
right? That’s correct. So the big difference is, when you have a buy and hold property, you report that property on Schedule E, when you have a short term rental property, you’re going to report that on Schedule C, unless, unless you’re able to have an average rental period of over 30 days, or you have an average rental period of seven or between seven and 30 days, but you’re not providing substantial services. So what it really boils down to is what is your average rental period, per property? And there’s a couple ways that you can calculate that. There’s sorry, there’s not a couple ways. There’s one way you can calculate that. to basically what you do is say you have a two bedroom house, and you rent out one room for an entire year. Well, that’s 360 days, and there’s one rental period, right? Because it’s one whole year. Then say in the other room, you’re renting it, you’re renting it out every month. So you have 30 days, that’s your rental period, but you have 12 of them. So now you have 13 rental periods for this property because you got the one year lease and then the every 30 days guy and you have 720 total days rented. So if you do 720 days rented, divide that by 13 rental periods, your average rental days, 55 days, so since you’re 55 days, You’re over that 30 day threshold, and you’re not going to be considered a short term, it’s not going to consider a short term rental. So really what you’re looking for here, if you are a, if you’re investing in the short term rentals, you absolutely do not want a rental period less than seven days. If you have a rental period, less than seven days, the IRS is going to say your business, regardless of what you try to claim, you’ll have to report that on Schedule C, and you’ll be subject to self employment tax. And would you say that a lot of people aren’t doing this now? I mean, I guess you have no way of knowing but you know, are they gonna be they’re gonna be a lot of audits coming our way is our broke overspending, drunken sailor government is looking for more money, I would assume. So that’s kind of the way that I think it’s gonna go especially since Airbnb has gotten so popular and short, the short term rentals. You know, we mentioned the Uber stuff earlier, as, as those sharing apps become more popular, the IRS is definitely gonna hammer down on the short term rental stuff. So I mean, I have, I have a couple clients that came to me, and they’ve been reporting their short term rentals on Schedule E for years. And we have to go back and amend those tax returns because they are reporting them incorrectly. You don’t want to be audited and have the IRS come in and assess tons of penalties and fines, because you’ve been mis reporting your your short term rentals. And, you know, we talked earlier about all the things that the short term rental guys have to do. Taxes is the last thing that they think about. And it’s unfortunate, because it’s taxes is really going to have the big impact the biggest impact on your margin. And that needs to be one of the first things you think about. But you know, a lot of people wait till April 15, to start thinking about it. And by that time, it’s way too late.

Jason Hartman 21:45
Are there any other aspects of this that people should know, for example, the holy grail of tax benefits, I think income property is the most tax favored asset class in America. And the holy grail of tax benefits is depreciation. Because it’s a non cash or Phantom write off. I just love depreciation write offs, and they’re the best thing ever. And to take full advantage of them. You need to be classified as a real estate professional. Not everybody can do it. But it’s a that’s just, you know, a huge gift if you can do that. Do you have the same thing on your on your Airbnb type of properties? I would assume that you would, because it’s a business. And you can depreciate business equipment.

Brandon Hall 22:28
Yeah, yeah, absolutely. And you know, with your Airbnb, you even have the, I mean, you can do it with regular rentals, too. But with Airbnb, you’re going to be furnishing everything right? So we talked about furniture, so you can depreciate the furniture that you’re furnishing, you can, you can write off the silverware, the plates, the cups, anything that you are putting into the rental, you can either depreciate or expense, and that’s going to be the big that’s gonna be the nice thing about Airbnb rentals is that you are going to get that extra depreciation every month.

Jason Hartman 22:58
Right? But you know, I want to just say, I mean, what’s the depreciation schedule for that stuff? Five years or seven years? Maybe? Probably five?

Brandon Hall 23:05
Yeah, yeah, five, seven years. Okay. So,

Jason Hartman 23:07
here’s the problem, though, folks, that really isn’t that good a deal unless I’m missing something because you’re probably going to have to replace it in five years anyway. If you want to get premium rent, certainly, you know, I’ve rented condos and things and places that you know, we’re tacky as hell frankly, it seems like in ski places, a lot of that is true, you know, whether it be Tahoe or or Aspen or whatever, even high end Aspinall Tahoe is pretty high into, you know, you get these ski condos seemed like they were furnished, you know, quite a few years ago, they’re pretty, pretty tacky looking. A lot of that’s why I like hotels personally. You know, so maybe it’ll last you longer, but certainly it’s come out and gonna last you longer and get you top rent. And hotels, they remodel pretty often if they’re, you know, if they’re going to expect, you know, good room rates.

Brandon Hall 24:00
Yeah, well, one thing that I do with a lot of my clients is, regardless of whether it’s a short term rental or long term buy and hold, we look at personal property items, and we try to figure out which ones that we can deduct under the new de minimis Safe Harbor.

Jason Hartman 24:15
Tell us what that is. You can’t use words like that on the show not explain them. The de minimis Okay folks, here we come drumroll for the de minimis Safe Harbor.

Brandon Hall 24:25
So the minimis safe harbor allows you to deduct low cost personal property items. And then also components of tangible of tangible property. There’s a threshold you can deduct up to $500 per invoice or item. That per item is key. So what I have a lot of my clients do if you have a contractor, so he’s on a coming out and doing repairs or whatever. You want to have your contractor itemize everything that he’s done especially to get below that $500 threshold because just say that he lumps everything into one sum, and it’s $1,000. Well, you can no longer use the Safe Harbor, but if he’s itemized everything in each line items 250 now we have some flexibility, if those are that those items are personal property items or components of tangible property, then we can deduct them currently. So, going back to this short term rental thing, if somebody is furnishing their, their rental with, with furniture, or appliances and things like that, you can generally, I mean, unless you’re buying nice furniture, you’re gonna be able to deduct that in the current year under this safe harbor. Very interesting. Okay.

Jason Hartman 25:32
So in terms of just real estate in general, or any other tax tips that you want to share with people, Brandon, becoming a real estate professional, we’ve done shows on that, you know, complicated, not everybody can do it. If you can, it’s phenomenal. You know, if you want to share any comments on that, or any other things that, you know, maybe real estate investors can take advantage of that they might be overlooking.

Brandon Hall 25:54
Yeah, I mean, I can I can talk about all that he, the real estate professional is going to be very difficult to qualify for impossible if you have a regular job,

Jason Hartman 26:03
but I don’t think it’s very difficult to I mean, you know, if you if you don’t have a regular day job, or you have a spouse who doesn’t have a full time job, okay, you know, 750 hours and 500 material participation. What’s so hard about that? Why do you say that so hard?

Brandon Hall 26:18
Right, right. Well, the big problem is the 500, material participation, that needs to be solely for your rental properties, in order for you to pull these out and make them active instead of passive, that tends to be hard to do, especially if you’re using property managers. If you’re not doing the rehab, but rather acting as general contractor, I mean, you can do it, but you have to be smart about it. And a lot of people they don’t, they won’t spend enough time and their rentals to satisfy the requirements. Now, I have, I have an example. I have a realtor client. She works, you know, 1500 hours a year, so she qualifies as a real estate professional, she meets that $700, or that 750 hour threshold. But she doesn’t materially participate in a rental shielding, you know, participants 200 hours a year, and she has a portfolio of like 20 rentals, and there’s nothing that I can do other than, hey, we need to, you know, do a better job of tracking your hours, just track everything. And then we’ll go back through and do a little audit. Before we report this context, I’m just to make sure that we’re capturing the right hours. But it comes out to be 200 hours, and there’s nothing that you can really do there to substantiate material participation.

Jason Hartman 27:30
Is there a number of? I mean, I know I know, there’s not but you know, this is an opinion. Obviously, you know, you keep a log, you keep good records, and you try to be as inefficient as possible. So you can spend more hours, you know, think like a union member who’s basically leeching off the system, who doesn’t want to upgrade and use computers, they want to use clipboards, because it’ll take longer, and they can get paid more, you know, and I’m sort of being obviously very sarcastic here. You do understand that right. But But you know, that’s that was the battle in California is with a longshoreman in Long Beach when they went on strike. One of the things they were striking over is that, you know, the businesses want to do install computers and computerize everything. And they said, No, no, no, no way. We got to use clipboards, to log in the inventory, because it’s really inefficient. And we can get more hours that way. Yeah, yep. And that literally was the battle. I hope you listeners remember that. And that’s how bureaucrats think. Okay, certainly in government, it’s that way, too. So with that in mind, I mean, how many properties Do you think you need to be able to justify 500? material participation hours? I mean, can you do it with a dozen properties? Maybe?

Brandon Hall 28:51
Oh, yeah, I have a client that did one.

Jason Hartman 28:54
No way. Come on. Yeah. Welcome. What kind of property was it, though, and we should be talking about properties, we should say units, number of doors probably is a more accurate way

Brandon Hall 29:02
to say it. So it was a triplex three units. He essentially did the rehab, and he does all the management himself. And yeah, he was able to substantiate it. And, you know, the big key was that he did the rehab and put it in, put it into service in the current year. And then he just continued doing all the repairs himself. He was just, yeah, you can’t he counted all of his hours. And it worked.

Jason Hartman 29:27
It has he been audited, though. They keep believing him that just on three units, you’re spending 500 hours a year, I can see it in the initial period, when he did the rehab, I could see them believing that, you know, a lot of a lot of time there. But on an ongoing basis that surprises me.

Brandon Hall 29:42
Yeah. So he has not been audited yet. And yeah, we’ll see every everything’s okay. Until you get on well, yeah, in you know, in future years, he’s gonna continue picking up properties. So we thought that it was okay to go ahead with this. But yes, that is a great question. If if you’re going to pick one property up and then not do it, then it’s probably not the But

Jason Hartman 30:00
okay, so in in the rest of the world otherwise, other than your three unit guy, what do you think? 10 units? eight units? 12? What do you I don’t know.

Brandon Hall 30:09
Yeah, I mean, I would say, I would say anywhere between 10 and 20 units, I mean, it really just depends on, it depends on where you’re buying the properties. I mean, if you’re going out of state for these properties, you’re gonna have a property manager, that’s gonna do everything like me, for instance, right? I spend, you know, 30 minutes a month. So if you have local properties, then you tend to spend more time managing those properties, because you don’t need a property manager at that point.

Jason Hartman 30:36
And and then by the way, you know, we we teach people how to self manage long distance. So which, if you asked me several years ago, if I could do that, I would have thought you’re crazy. And it happened to me, by default. I’ve told the story many times on the show, you know, self management, long distance is very possible with today’s tools and technology. And you know, I use an agent in between for make readies and turnovers and releasing, but no manager, you know, we had really can do it, a lot of times, it works out better. In fact, one of our bigger clients who has about 70 units, he talked about at our last annual meet the Masters event, I can’t remember the exact number, but somewhere around half of his properties were self managed, and he found those to be easier to manage, because you don’t have that third party in there. And sometimes it’s, it’s harder to manage your manager than it is to just go direct, you know, disintermediate the managers. So, you know, I’m not saying it’s for everybody, I’m just saying it’s an option. And, and you got to you got to know what you’re doing.

Brandon Hall 31:34
Yeah, I’m definitely have to check that out.

Jason Hartman 31:35
But yeah, if you have managers, in other words, the point you’re making, if you have managers, it’s the IRS is going to have a harder time believing that you’re spending as many hours and you’re materially participating in the property. And I owe my managers do it differently. By the way, some will ask me to actually sign every lease, and some, just sign them for me. Okay. And you know, some managers want you more engaged, and you can also manage that relationship and tell the manager, how engaged you want to be. And if you’re trying to qualify as a real estate professional, be more engaged, you know, make tenant decisions, some managers, they just rent it and don’t even ask you about the tenant, which admittedly could be a bad experience. But sometimes the manager is just really good. And they know what they’re doing. And, you know, they do a great job. So it depends, obviously, every situation is different. But yeah, that’s that’s pretty interesting. Okay, go ahead. What else?

Brandon Hall 32:31
Yeah. So, some of the you know, tactics that we use, we do segmented depreciation. So, you basically break out the property into asset classes and you depreciate it at different rates. So, we look for easy things like personal property, you know, like your stove, your fridge, will, will break that out and will depreciate it at a quicker rate. You can also break out structural components,

Jason Hartman 32:55
other otherwise known as cost segregation,

Brandon Hall 32:58
yes. Yep. Cost segregation. Yeah, you can break out really anything. I mean, you can break out walls, floors, things like that. But generally, at that point, you need a kind of like a feasibility study, an engineer to come in and say, Hey, this is the remaining life. This is what it’s worth with the personal property items. It’s nice, because if it’s new, you can just pick up a Sears catalog and compare what the replacement costs be today, and that’s your fair market value.

Jason Hartman 33:23
What is it like? 1972? Here, the Sears catalog? You’re joking, right? Sears even still in business. That was funny. I gotta, I gotta bother my guest here and get on your nerves. This, folks go get the Sears catalog. And after you’re done with that, open up the Yellow Pages. Sorry, Brandon, I couldn’t let you get off the hook on that one. Gotta give you a hard time. I mean, I mean, I mean, folks, I feel like I’m talking to my mom here. And she wouldn’t even say that. My mom would have said Google it. And you sound like a pretty young guy. I don’t know your age. Yeah. Well,

Brandon Hall 34:06
you know, I grew up around Sears.

Jason Hartman 34:09
Well, I remember the Sears catalog, too. Okay. But yeah, that’s a long time ago. Yeah. Okay. All right. So what were we saying?

Brandon Hall 34:18
Yeah, so segmented depreciation cost segregation. If you have new at new personal property items, you can pick up a don’t pick up a Sears catalog, go to Sears and

Jason Hartman 34:29
or go to Home Depot or Lowe’s, but okay,

Brandon Hall 34:32
or good Home Depot, anything like that. If you have older assets, so say you buy a property and it comes with an old stove, old fridge, just look it up on eBay, look it up in the classified, see what it would go for today and then break it out that way. That’s your value that you’re gonna apply to that property. Yeah, excellent.

Jason Hartman 34:49
And so cost segregation studies. I mean, I just did one a few months back on a big property, a big apartment complex that I had, you know, it seems to have really big For itself many times over, but let me tell you that was expensive. I mean to to have we had a CPA do it. And that must have been about, I don’t know, $12,000? I think it was, it was a lot of money. And it was a lot of paperwork. Do you know? I mean, is there a sort of rule of thumb for that? Because you can do it on little residential properties, you could take a single family home and do cost segregation and say, Look, the dishwasher can depreciate on a faster schedule, the air conditioner depreciates on a faster schedule. And you can really break it up a little house. I mean, it’s mostly done in big commercial properties. But do you do those? What does that cost?

Brandon Hall 35:37
Yeah, so I’ve never actually engaged in a feasibility study, I typically refer my clients elsewhere. But those are the guys with the big multifamily properties that are doing those because like you said, they’re expensive. I mean, they’re anywhere from five to $20,000. For the smaller guys, we typically just look at the easy things that we can we can pick off. So that’s the personal property items that we’ve already talked about. And then anything that anything that’s not really structural, but could be something that’s easy. So like, h back units, we can pick up the floors, you can typically estimate floors pretty well. But yeah, it does require a lot of work, and a lot of studying and

Jason Hartman 36:20
in a lot of paperwork. But what for a single family home, though, is there a sort of a cost range someone should expect for that, you know, if if one of our investors listening contacts you and says, Hey, we do cost segregation study. On my one single family rental property, what are you gonna tell them that’ll cost? I I assume it to be pretty cheap on just a single house?

Brandon Hall 36:40
Yeah, yeah. I mean, for something like that. Again, it? It depends on how, how much in terms of property we’re trying to find here. But it would probably range from, it would probably start off around $500. And it could probably go up to two to three

Jason Hartman 36:57
for a single yet,

Brandon Hall 36:57
but Okay, that’s going to be more in the higher end, single family range. I mean, you got to come back and look at it. Like if I’m paying $2,000 for a feasibility study. Is it really worth it? If you own a single family home? Probably not. Unless it’s one of the higher end single family homes. Yeah,

Jason Hartman 37:13
yeah, that’s why and hopefully nobody owns higher end single family rentals. That would make sense, because the lower end ones make a lot of sense. Okay. Anything else you want to share with investors before you sign off? Brandon? How about your website?

Brandon Hall 37:25
Yeah, yeah, absolutely. You can find me at www dot att Hall, CPA LLC calm. Yeah, just feel free to reach out. If you have any questions, I always make time just to answer questions and happy to jump on the phone with anybody that wants to talk. Any other tips or suggestions, tip wise, I would say everybody needs a home office, if you can justify it. The you open yourself up to a lot of tax deductions with a home office. So definitely go that route, if you can. And then at the end of the year, so towards like November ish, look at your rental properties, and figure out how much income you’re going to show for the year. And if you’re going to show income, figure out if you can buy tools that you can use in the business next year, if you can buy that before December 31. So you can deduct it in the current year, or if you need to make any sort of repairs on your rental properties. And if you can make those before December 31 to reduce your income and then also your tax liability. Excellent.

Jason Hartman 38:29
Good stuff. Well, thank you so much for joining us, folks. That’s Brandon Hall. Remember, taxes are the single largest expense any of us have in our lives. So do not be bored by taxes. Make sure you learn how to pay a minimal amount of them legally. And patriotically. By the way, this is what the government wants you to do. They want to incentivize certain behaviors. Providing rental housing is something the government likes to incentivize. So let’s do what they want us to do and get a tax benefit for doing it.

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