5 Tax Benefits for Real Estate Investors | GoJo Accountants
Real estate is one of the best investment vehicles for advantageous tax benefits. In this video, Gio Bartolotta (CPA) and Joyal Jose (CPA), co-founders of GoJo Accountants, discuss the top 5 tax benefits for real estate investors.
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Ariel Herrera 0:00
Hey everyone, are you looking to diversify your investments with real estate? While you're not alone, plenty of investors choose real estate as a vehicle for investing not only because you can achieve passive income, but because of the amazing tax benefits that can come from it. And this video, Gao and Joyal, both CPAs, and founders of Gojo, accountants are going to be giving us a deep dive into the top five major tax benefits real estate has to offer. Let's jump right into
it. Let's talk on Geo and joy to the analytics area channel. Welcome, guys.
Gio Bartolotta 0:47
Thank you. Thank you. Thank you.
Ariel Herrera 0:49
Super excited to be able to talk tax benefits today. But before we get into that, could you give us a little bit of an overview of who you are and how Gojo accountants started?
Gio Bartolotta 0:59
So we're a virtual CPA firm, and we don't have any physical location. We're completely paperless. Pretty much what we do is we focus on individual business tax preparation, tax planning, in addition to business consulting and accounting services. And so what we do is we look to provide that suite of services for our clients at the individual and small business level. Awesome.
Ariel Herrera 1:25
And where are you both based out of
Joyal Jose 1:26
based out of New Jersey right now? But I think for me, I might have a set up a bridge specifically in New Jersey itself, I'd like to answer his little more complicated question.
Gio Bartolotta 1:36
Yeah, so I'm originally based out of East Brunswick, New Jersey, but currently, I live remotely and an RV. So I'm kind of wherever in the United States. So that's part of the reason why we have a virtual business just kind of to support that flexibility and that type of work style that people are looking forward, you know, looking forward to going forward.
Ariel Herrera 1:57
Yeah, very cool. Can I just touch upon that a little bit more to in our next video, but let's get right into it now and love to hear some of the tax benefits for real estate. And I know you also have a ranking as to which ones you see to be top priority versus lower priority. So if you'd like to just jump in, that would be great.
Gio Bartolotta 2:15
Sure. So I what I tell my clients, you know, our clients with when it comes to real estate, taxation is the biggest benefit that the government provides to real estate investors is tax depreciation, tax depreciation, it's this idea that you can take a percentage of the total cost upfront costs of the property that you pay, you know, whenever you undertake a mortgage and the down payment, all those costs, and you can take a percentage of that annually as a deduction. If it's a business property, usually, that is based on a 27.5 year period. But if it's a personal residential property, that would be based on a 39 year period. And so what's great about that deduction is that there's no cash out of the investors pocket really, it's, it's just the tax law. So that percentage really is just non cash, which actually increases your, your bottom line from a business perspective, and not just from a tax perspective. And so that's something that, you know, you have to have the right filings done. And it's really important to work with a CPA or someone who has experience with that, because that could be a significant amount of money, 1000s of 10s of 1000s, and tax deductions that, you know, go wasted, if not utilized, and each year. So that's, that would say that's the most important tax deduction,
Ariel Herrera 3:37
that start with the sale price of the property, and then that sale price that you had 27 years on, that's like divided into and appreciated.
Gio Bartolotta 3:48
Yeah, so if you're looking at a commercial property, it would be 27 and a half years, and it would just be the sale price, right? Like, you know, if it's a million dollars, and you even if you only put down 20%, you can still take that million fair market value at the sales price and take a percentage off of that every year. And then for residential properties, like homes, apartments, condos, that type of thing, it would be 39 years.
Ariel Herrera 4:11
Oh, wow, that's awesome. So even after you've probably, like paid off the property, if you're on a 30 year mortgage, you could still do depreciation.
Gio Bartolotta 4:18
Exactly, exactly. So that's why we always recommend to our clients, hey, use this, you know, it's gonna really save a lot. And if you look at the long term picture, right, if you end up holding that property for let's say, 40 years, you're looking at substantial tax savings over the life of that property that could go you know, totally unused if not done properly. So, you know, that's something that we really strive to strive to emphasize with our clients. Definitely.
Joyal Jose 4:47
One thing I would add to that, just to kind of say that one thing is if you do rent, you know, buy more real estate and then you will rent it out. You'll have income coming in, right and a lot of folks they try to do where you have a long term mortgage Ah plan where your rental income is bigger than your mortgage itself payment that's going out, which is kind of a great cash flow to have. But considering the tax payment, you'll have to make on that considering it's an income coming into your play, this specific expense comes in very handy to kind of reduce that income. So your tax liability essentially goes down, then what you would initially have to pay if you didn't, if you didn't depreciate?
Ariel Herrera 5:21
Right. So say if your cash flow was maybe like 10 grand for the year, but then you're using the appreciation aspect, then you're not going to be taxed on the full 10. Grand.
Joyal Jose 5:31
Exactly. Exactly.
Ariel Herrera 5:33
Awesome. And what is a benefit of using a CPA that makes it harder for an individual on their own to file for deductions like this?
Gio Bartolotta 5:45
Yeah, so the this type of calculation is not intuitive at all. Um, when people look at taxes, we noticed that they'll look at kind of, oh, you know, my tax rate is 20%. And my income for the year is 100,000. So my tax is going to be 20,000. But it's not really that straightforward. The IRS, the tax system, it's on a progressive tax system. So it's not really that straightforward. It's actually like a completely different rate based on deductions and other types of income, how it's treated. And so with this type of deduction, um, it's incredibly unintuitive. Because you're you're looking at, you have to look at what the property is. So the characterization of that property, and you have to do an analysis with that, and also making sure that you're using the right numbers to actually calculate depreciation, that's something a CPA is has experienced with and does commonly and their profession, whatever practice that they that they do. So it's, it's something that, you know, having that experience and kind of having that repetition, it's something a CPA would have, rather than an individual who's just kind of walking into this for the first time. And it's going to be confusing, because you have additional forms. And it's going to be hard really to comply if you're walking into a blind. So that's why we, we would recommend working with a CPA or someone who has experience with it, for sure.
Ariel Herrera 7:04
Yeah, that, especially as you continue to get more properties, it's probably even more and more imperative to have a CPA and one should, what step do you start talking to, like, a firm like you guys, is it before you start purchasing real estate or, as you've already accumulated your first property,
Joyal Jose 7:23
it's always good if you want to, from a planning perspective, just kind of coming in early. And having that conversation with us more than happy to kind of do it, the most ideal time that I would say is when you're initially going through the process, and making sure as soon as your properties kind of purchased, and you have kind of established what you need to establish from a from a point of sale perspective. The reason I'm saying that is because as you just mentioned a few different things in terms of the calculation, I'm sure I know, you've kind of done this, when you buy a property, you essentially get a closing disclosure, that kind of, you know, really breaks down the cost of your property in terms of the various different things and you could look at, like all, I have a total cost of the property and then divided by 39, you know, just a number and kind of, maybe I can just do this, I don't need a CPA. But the key thing is, are certain things in the closing disclosure that you can include as part of the cause and certain things you can't. So it's very important for an individual to kind of have that conversation with us as they're purchasing it. Because having that, you know, closing disclosure right away in year one, when you've made a purchase, or understanding what is the best way to kind of plan for the year? What is the income looking like? And how can we what can we depreciate? And how much that's going to look like? And should we, you know, consider making, you know, any changes in terms of, you know, modifications to the property, you know, upgrades and things like then how should you plan that over the next year or two? Can this wait? Sure, this way, you know, based on from a tax planning perspective can be very useful from our experience. So that's the one thing I definitely kind of want to call out from a timing perspective.
Ariel Herrera 8:46
Gotcha. Yeah, that really helps. And sorry, to derail you to what would be the next benefit for tax benefits for real estate.
Gio Bartolotta 8:55
Okay, so the second one is something known as the active participant, active participant exclusion. And so this if you're a real estate investor, and your income, in this case, specifically adjusted gross income is between is no more than $150,000 a year. If you're a single filer, you can deduct up to $25,000 on any rental losses throughout the year against your other income. And so I'll give an example. Let's say I personally own rental property in Florida. And I own three properties and each property generated a loss of 5000. So it would be 5000 times three equals $15,000 and net rental losses. That as long as my total income so my income from my w two my income from a side hustle my income from other items or like awards, prizes, anything like that, as long as that doesn't exceed 150,000 I'll be able to take at least a percentage of that loss up to the total loss of 15,000 against my other income. And so that's really important because Ariel as you know, enjoy, as you know, as well, when you're when you're a property owner, you incur a lot of costs. And if you're looking to rent that property out, you're probably not going to turn a profit in your first year, and possibly not even in your second year. And so having as long as you are an active participant, which means that you for 100 hours out of the total year, were working on the property like acting as a landlord, you know, cleaning up the area, collecting rents, doing maintenance work, that type of thing. If you do 100 hours of that, you will qualify for this active participant exclusion. So then that 20,000, that 15,000, in my example, would act as like another tax deduction. So that's a really great tax benefit. Because you're, you're saving money just by building up your investment just by preparing or your investment actually looking to, to cash out on that investment down the road, you're realizing tax benefits up front. So that's something that a lot of people don't know about. And you could take advantage of it. And you can save 10s of 1000s in a single year. So that's something that we also like to recommend to our clients.
Ariel Herrera 11:11
Yeah, actually had no idea about that. So that's really awesome. Because just like you said, usually that first year, you don't turn a profit, especially if you're doing fixes and such. So can you still be an active participant? If you have a property manager in place, since I guess you're technically not the one making all of the phone calls on behalf of the tenants property manager and said,
Gio Bartolotta 11:34
Yeah, because in that case, that would be like a mad that I guess that's a management fee. So that would be a deductible expense. But then as long as you're, you're functioning with the property in some sort of active way. So let's say, you know, you're the owner of the property, and you go, and you communicate with clients, like, Oh, you're like your, your rent ease for for, like, 200 hours out of the year, like that counts as a function. And that would as long as you log it and document it, you'll be able to take that expense in that case.
Ariel Herrera 12:07
Awesome. Yeah, that really helps. So not just like, it also helps with your own personal taxes as well.
Gio Bartolotta 12:15
Oh, 100%. Yeah. And it's something that you see a lot like tons of people who are in real estate investments, they have passive losses, and they're just generating these losses, but they have the full intention of keeping the property long term. So might as well take advantage of those savings whenever you can. So this is a really key one for sure.
Ariel Herrera 12:35
Yeah, exactly. Is there any cap there? So say, if you're managing a property, and maybe the whole year of 2020, that in the tenants couldn't pay? Because of COVID reasons? Would you be able to talk like that whole amount? Or is there a cap there?
Gio Bartolotta 12:51
Um, yeah, so you would, there is a cap there. So if you were an active participant, the cap would be 20,000. Um, but I'm 25,000. Sorry, but if you were, let's say, this is a little going off track. But let's say instead of just being an active participant, you are a material participant. So a material participant means that you are like extremely involved. If you are a property manager, I mean, the I guess the assumption would be that you are materially involved in the property, you would be able to deduct more of those losses. So it's really just about what type of real estate investor Are you? Are you more of a passive investor? Are you kind of have your feet in it a little bit like dipping your toes in terms of the operations? Or are you dealing with the daily day to day, every single day and it's consuming a lot of your life? That actually kind of follows with how much you can deduct? So it's kind of those three different levels? Yeah.
Ariel Herrera 13:47
Okay, so it's not even just about the type of property that you might have for real estate, but also the type of investor that you are to that would potentially change the tax deductions that could be made.
Gio Bartolotta 13:58
Exactly.
Ariel Herrera 14:01
Awesome. So what would be the next benefit for real estate?
Gio Bartolotta 14:06
Okay, the next benefit for real estate, I would say is, if you are a real estate investor, and you are generating a lot of income, and you're living off of the income that you that you're getting from from renting, um, that income is not going to necessarily be treated as like regular salary income. So when we pay when we get a salary, or we're a contractor, we have to pay what's known as self employment tax, and that's 15.3% of your total gross income up to 120,000 or so dollars. And so when you are when you have a rental business or you're just looking to rent individually, the government doesn't see the income as like self employed income, it sees it as passive income. So you're not that income is not subject to that 15.3% of extra tax. And just to give some clarity, The self employment tax is, it's like your Social Security tax. It's your share of Medicare and Medicaid. So it's those types of taxes that we would always see coming out of our paycheck. You don't have to pay those when you're dealing with this type of property and this type of investing. So it's something just to note, hey, it might behoove you to do this over the long term and do real estate investing from a tax perspective, because you're going to be saving 15.3% versus let's say, if you just started a sole proprietorship, and you did a different type of business. So it's something from a tax planning perspective, that's pretty substantial.
Ariel Herrera 15:36
Yeah, that's really huge. And I didn't know about that. So say, if my fire number was like 10,000, cash flow a month, may even need to be less, because I won't be taxed as much because of its rental property.
Gio Bartolotta 15:51
Exactly. Yeah. You'd have to compare that number to what that number would be if if you had just non rental property or non rental income versus rental income, and you would see the the savings would be substantial over a long period of time.
Ariel Herrera 16:06
Would you say that a lot of maybe investors or those that you work with, like are aware of this type of tax benefit? Or you feel like, wow, the public doesn't really know.
Gio Bartolotta 16:18
The public doesn't know. Yeah.
Joyal Jose 16:22
There are people who have like multiple properties. And they've kind of already kind of figured out the process. I've gone through a couple of rounds, I would say they are more familiar with it, I think, definitely on the younger side of people are kind of starting to jump into it. Going to the first initial set of property to like, yeah, I would definitely say people aren't aware of it. And it's kind of important to know, because it could kind of really help you increase your savings for the next property that you're trying to buy.
Ariel Herrera 16:43
Yeah, definitely. Is that some thoughts that you've had? Oil? Since I know, I think you have a mess on property, right?
Joyal Jose 16:51
Yeah, I do. I did currently just buy one recently. And my goal is to obviously buy one probably next year, a lot of different things kind of going out from a variable perspective of our personal life to kind of figure that out. But yeah, definitely, the goal is to kind of maximize the tax benefits and increase the savings to see what we can do next. Don't obviously like more kind of real estate agents and have more hacks in terms of kind of finding the appropriate properties. And the current market is a bit crazy, but it just kind of finding the opportunity when it arises and just being ready for it. And that's kind of always the goal for but that's the plan for next year. So
Ariel Herrera 17:23
nice.
Joyal Jose 17:25
me how it goes for the current market situation.
Ariel Herrera 17:28
Yeah, the market is very tough right now. But in terms of Yeah, tax benefits, so far, we've covered the appreciation aspect, the aspect of being able to deduct from your own self taxes. And then this current one, which is being able to have less taxes deducted for using Rental property income as passive income. So what would be the fourth one Gio,
Gio Bartolotta 17:58
the fourth one would be other long term capital gains tax rate. And so the IRS allows individuals who hold investment property for at least 366 days, and and then once they sell to take advantage of a lower preferential tax rate, versus an ordinary tax rate. So for example, if your tax, your total taxable income is $100,000, you would be in the, if you're single, you would be in the 24% tax bracket, or maybe 32% tax bracket, I'll have to look but one of those two, but your cat long term capital gains rate, if you were to sell a real estate property that you own for at least 366 days. So let's say in this case, two years, you sell that total gain the difference between what you sell the property for and then what you purchased, it would be taxed at 15%, rather than being in that 24 32% tax bracket. And so that's something that's really important. I feel like for real estate investors, because usually real estate investors have a very long term horizon. And so it has to be bait when you're doing that analysis. And you're looking at, okay, what's the total cost of holding this property, you actually have to factor in a lower tax rate than what you normally would take because you'd be taking the preferential tax rate. And so that tax savings is something they consider actually when doing an analysis on making an investment. And it's substantial. I mean, we're talking about possible difference and 15 to 10%. So between the ordinary rate and the long term capital gains rate, and so that's something that just a few real estate investors that we have worked with, they love hearing that because they know that when they sell, they're not going to be hit as hard as they originally thought, because they didn't know about that rule. So I would say that's a big benefit.
Ariel Herrera 19:55
Yeah, it's saving 1000s and 1000s of dollars. you can make a big difference if you're going to acquire a certain deal or not.
Joyal Jose 20:04
Yeah, in the current environment makes a big impact. Because just because we're just talking when the market is one or the prices increases, like crazy, right? People think about, oh, I have this property and you know, the prices increased by like 10, or 20k, I should sell it now and make the 20k pop in the inner taking parking, but they were only considered like, you know, the code, you know, the closing costs, and kind of all the money they spent in terms of what they're gonna make. And they say, oh, cool, I'm gonna make like, you know, 10k, but we're not understanding is because now if you sold the property, within less than a year, you're getting almost hit by 24% in taxes, because you have a short term, and you have your regular income coming in for 100k. So, or if it's more if you're if your regular income from other areas, w 299 is even more like your percentage is even higher than that. So you're not really making as much money off of that deal by doing what you're doing. But I'm not saying it's bad and bad thing to do. Sometimes that might be the best play considering the market. But it's something you just have to consider as part of your costs when you're making those sales. And when you're making those purchases.
Ariel Herrera 21:03
Yeah, 100%, which I've seen, people not consider. So they just see like the price difference, and I think I'll just take the whole 20k If we got the tax are also paying the agents and then now you're going into a market that's super hot. So you're gonna be purchasing like a very expensive factory. So you go becomes a wash at times. It does. Awesome. So do what would be the final tax benefit for real estate investors to be aware of.
Gio Bartolotta 21:32
So this one, I would say is the least impactful, but still important, and is easily overlooked. And Joel touched on it earlier. It's the Closing Disclosure deductions. And so on the Closing Disclosure, whenever you're you know, you finally close on whatever you're looking at a purchase, you'll see that there's a ton of items on that an itemized list of, you know, points, paid interest, interest items paid, you know, payments to the agent. Yeah, exactly. So there's a whole list of things and certain items on there are actually tax deductible up front. And then certain items are not. So it's kind of going through that analysis of figuring out which ones are deductible, and which ones aren't. And most people don't even like look at that closing disclosure, or even think of it because it's so overwhelming. And then tax time comes and I don't even remember, like where it was and don't even report those items. And they can add up to like $10,000 in some cases, maybe even more. So it's a considerable amount. And that gets deducted on your personal tax return. So it's important to take advantage of because you can deduct those costs against your other income if you if you have the active participant exclusion qualification. So then that's that's the least important, but I still think it's very important. But yeah, that pretty much concludes the list.
Ariel Herrera 22:55
Yeah, that's excellent, terrific benefits. And, of course, always important to save all the documents, including closing disclosure, so it's easy to give off to you and doing taxes. So where can people find you if they want to be able to use go Joe accountants for their real estate investing business?
Gio Bartolotta 23:14
Yeah, so you can find us at go Joe accounts.com. We have a section there just listing our services. I'm requesting time for a free consultation to discuss your situation. And an area for FAQs to so pretty much all our resources are there. But you can also find us on Instagram, Facebook and LinkedIn. And yeah, and we can also send out our contact information as well with you.
Ariel Herrera 23:40
Yes, and I'll leave that in the comments for the show notes. Thank you so much. Do enjoy. I'll really appreciate it.
Gio Bartolotta 23:46
Of course. Thanks, Ariel.
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