Discover Tax Breakthroughs for Real Estate Gains with Thomas Castelli

Tim Lyons  00:07
Welcome to another episode of the Passive Income Brothers podcast. My name is Tim Lyons, and today I’m joined by two absolute rockstars, one of which is my brother from another mother Paul Dircks. So how are you doing, Paul

Paul Dircks  00:48
Doing well, Tim, it’s great to be here. It’s now 2024. And it’s a great opportunity for all of us to think about what our financial goals are here in the new year, and who can help us achieve them. So an exciting day to be here and an exciting guest on our podcast as well.

Tim Lyons  01:03
Yeah, so here at the Passive Income Brothers Podcast, we love to highlight the fact that it’s a journey, right? It’s a journey that you’re surrounded by team members and tribe members, that you’re not doing this alone, that there’s a lot of people who are in the same boat as you and they’re trying to row in the same direction. And what we harp on a lot is building out that team, getting into the right rooms, getting into a mastermind, getting into a tribe that you know, because listen, at the end of the day, we’re gonna rise and fall to the level of expectation that we set for ourselves and those around us. So it’s in today’s a great example of that. So today, we have Thomas Castelli from The Real Estate CPA. How are you doing today, Thomas.

Thomas Castelli  01:43
Great. It’s an honor to be here today, kicking off 2024 in the right way. So happy to be here.

Tim Lyons  01:49
Well, you know, it’s funny that we have you on the podcast, we’re not funny, I see I love having a podcast because I’ve been listening to you. On your podcast, I’m following your social media, and I’m on your email list. And I’ve been you know, doing all those things. And when I got to meet, you know, Paul was like, Yeah, I use those guys, you know, and so it just, it’s funny how everything comes full circle. But, you know, when you’re surrounding yourself with good people, you want to have the tools available to you. So Thomas, can you kind of take us through, you know, before you were the real estate CPA, and he had the podcast and you had the, you know, the tribe that you’re building the masterminds? You know, how did you kind of come to thinking that, you know, real estate, and your CPA background kind of come together? Like, what did that look like? What does that journey look like for you?

Thomas Castelli  02:36
Yeah, no. So it all started for me, probably during my sophomore year of college. So I was going to school, and I was on the accounting track. Everybody told me if I was gonna go to school for business go for accounting, or finance. And so there I was in the accounting track. And I kind of realized that the standard nine-to-five grind alone wouldn’t get me to where I want to go in life. And so I started reading books started with the richest man in Babylon. That was the first like self help, like personal finance book I read.  And what I started to see as I kind of read more and more books is that real estate was part of the wealth building process, a wealth building journey for a lot of wealthy individuals and families. So I kind of started get interested and then around. Interesting, my my great grandfather, my great uncle had passed away at age 99. And he had this estate and in the estate, it was actually in Bethpage on Long Island. There was his house and his house was on a lot that everybody knew you could put at least three houses on. And it was right down the block from a train station that went into New York City. So I was like, huh, there’s opportunity here. So I went to I started going to real estate, networking events and meetups and what have you. And I ended up stumbling upon a group who was doing a three day multifamily syndication weekend. And this was right in between the time where it’s about to start my first full time job at a national accounting firm. And it was the summer in between that time. And so I went to their three day weekend, I fell in love with the model of real estate syndication, and the entire ability to acquire large scale properties. raise capital was very entrepreneurial, very capitalistic in my mind, and I kind of fell in love with that. With that model. I started going to their monthly meetup events. And then from there, I started investing in limited partnership opportunities with someone who become a mentor to me, and then this mentor, he said, Hey, look, if you ever find a deal, we’ll syndicate the deal. So I went ahead I started hitting the phones met a broker who sent me a bunch of deals. One of them eventually penciled out. And long, long story short, we syndicated it. We went full cycle we actually sold it in, in we’ve got more may have to 2020 Right in the middle COVID were slated to close in March, but we ended up kicking it out due to all the uncertainty uncertainty. So that was exciting. And then I basically now invest as a limited partner. And I am a tax strategist for real estate investor. So kind of blended my accounting background with my passion for real estate into something that that helps helps more people reduce taxes.

Paul Dircks  05:26
That’s wonderful to hear. And, Thomas, I’ve known you for a few years. And I think it’s very interesting to hear that not only are you an investor, but you’re obviously an accountant that works with investors, and your whole firm is tailored to working with investors, maybe stepping back for a second, can you maybe discuss for us some of the primary ways in which you guys as a firm work with investors, what types of real estate investors? And then of course, our audience, and our focus here is on passive income investing? What are some of the ways in which your firm works with passive investors?

Thomas Castelli  06:01
Absolutely. So, our firm is a firm that exclusively works with real estate investors. So all of our clients are investing in real estate in some way, shape, or form, with as little as one property all the way up to portfolios of properties and syndicates and funds that are doing hundreds of millions of dollars in acquisitions. And the way we help them, what kind of sets us apart from other firms is that, our focus, first and foremost, on client service, I think a lot of accounting firms don’t really do enough in that area that kind of just let it kind of go to the wayside. But also our focus on helping people reduce taxes, helping investors reduce taxes, like a lot of times, you’ll go to your CPA or CPA firm, and they’ll say, you know, give them your documents, and they’ll file your tax returns for you, send you on your merry way. And they won’t ever give you any advice or help you strategize on what things you can put in place to minimize your taxes when it comes time to filing your tax returns. So I think that’s one big way that sets us apart is one on one tax consulting, like will actually sit down with you see what you have going on, and lay out a map on how to reduce taxes. We obviously do prepare tax returns to help people with tax compliance, as most firms do, we also have outsourced accounting and bookkeeping services for people who want to get out of like the day to day bookkeeping, of their of their, of their portfolio. So we help people in that, on that end as well. When it comes to passive investors specifically, we have worked with a lot of passive investors or limited partners in the past. And what we found works best for for limited partners now is that we typically do one on one consultations or bring them into our community where we they can get answers from our team of tax experts. That’s kind of how we work with limited partners. This point is one on one consultations as well as a community-based forum where they can get answers from the experts themselves.

Tim Lyons  07:50
Well, as I like to say, in this podcast, I’m about to do some push ups in the Iowa here because I just get fired up about taxes and limited partnerships and syndicates and but more importantly, hearing the journey that you’ve been on, right? I mean, like you went to school, and you know, someone told you along the way, if you’re going to study business, do you know finance or CPA, right? And what you would think and Paul can jump in, you know, on this because he’s a chartered financial analyst, right. And he’s a Wall Street guy or former Wall Street guy, I should say Nepal, you know, stocks, bonds, ETFs, mutual funds, annuities, Registered Investment advisories, your quote unquote, guy, right? And you kind of set it and forget it. And you know, when you’re approaching your 40s and 50s and 60s, you start to you know, figure out oh, I should really be paying attention to where my money’s going. And, you know, you know, it’s just it’s like a it’s like, an antiquated way I feel like of you know, figuring out your finances and how to build wealth. I mean, it’s no secret. And, you know, we talked about it a lot here that, you know, we don’t we didn’t learn this stuff in high school or college, there’s no course there’s no prescribed, you know, general education, you know, pathway to figure out how to use debt leverage how to figure out taxes. I mean, a lot of us, you know, on the, you know, all of us on the school, I mean, you have your traditionally trained as a CPA, but, you know, I had to learn from Tom Wheelwright, and the rich dad advisors and podcast and going to meetups and, you know, just learning how taxes work. I mean, it’s such a, you know, part of Tom Wheelwrights book that I’m sure everybody knows it, but they don’t. It’s a must-read. It’s called tax-free wealth by Tom Wheelwright. He’s part of the Robert Kiyosaki Rich Dad advisor, crew. And in one of the opening chapters, he talks about, you know, how you work until April or May each year just to satisfy your tax requirement, and it’s a it’s an expense, you know, people don’t view their taxes as expensive. So, you know, Thomas, when we talked about some of this stuff about, you know, kind of grinding our way to the top and learning on our own, you know, you know, how has that shaped how you approach you know, your life mitted your clients who come to your firm, but there may be limited partners, or maybe they have a couple of you know, rentals, single-family rentals, because that’s kind of the trajectory that you that we see, you know, you do a single family rental and you do two or three, and then you don’t like being a landlord anymore. So now you find out, Oh, my God, there’s syndicates, you know, let me be an LP, you know, how do you approach those conversations? And what are some of the things that you’re hearing in real time? Some of the pain points?

Thomas Castelli  10:25
Yeah, absolutely, a lot of it is a lot of the pain points that we hear. And it really helps aid in our approach is that people, the CPAs, that they’re working with the accountants that they’re working with aren’t providing them with the guidance that they need to actually navigate the complexities of the tax code and, and use it in such a way. So they can reduce taxes, which is often Their largest expense. So that’s one of the pain points. Another one is, of course, like, like you mentioned, they don’t teach this stuff in school unless you go to school to become an accountant. This stuff isn’t available to you. And frankly, even when you go to school to become an accountant, it’s more focused on compliance with the law and not on how to actually utilize the law to help people reduce taxes. So we take a big approach is a very consultative approach and educational approach on educating clients on not only what is available out there, what strategies are out there, but also how it benefits them and how they can use it, and specifically what they have to do in many cases, right. So, in many cases, our conversations go, Okay, what do you have going on? What’s your tax and financial situation? What are your goals? Okay, great. Now we know where you are, where you’re looking to go? Here’s what level of commitment are you? How committed are you to real estate? Are you more on the passive side or more on the active side? Okay, and based on all this information? Well, here’s the strategies that are available to you the ones that we’re going to recommend, here’s what this strategy is, here’s how it benefits you. Here’s what you need to do about it. And of course, here’s the risks. In some situations, some strategies are not black and white. The one thing interesting about tax code quick sidenote, is that not everything within the tax code is black and white. Some things are open for interpretation, some things carry more risk than others. So, really, it comes down to educating, educating our clients on what is available and guiding them through that path for them. So they’re taking the right actions so that when it comes time to filing their tax returns, they’re putting themselves in a favorable tax position, or more favorable tax position than they would be if they had not gone through that.

Paul Dircks  12:25
Think that’s so important, Thomas. And certainly, in my experience as a client, and somebody who’s been a real estate investor, I can attest to the fact that a lot of these strategies are powerful. Maybe you could, in a very quick manner, discuss the difference between passive income and non-passive income for us and why that matters for the real estate investor. And once you address those, perhaps you could discuss how you’ve seen that difference in income, how that guides future tax treatments and investment decisions for the real estate investors that you work with?

Thomas Castelli  13:08
Yeah, absolutely. It’s a great question. So non passive income, is income is, I guess, you can say earned income, right? It’s another way people might refer to it as that’s income that you’re generating from your, your, your efforts. So it’s a job that you might be you might have, or it might be a business that you’re running. Most income that people think of is most of the time falls in the non passive bucket. And non passive income is typically taxed as ordinary income, which can be up to 37% at the federal level, and then you have state taxes on it, then you have something called FICA, which is Social Security, Medicare, which can be 7.65% of your income up to up to a threshold, and then that, and then that, if you’re self employed, is actually doubled. So 15.3%. So that’s the type of taxes you’re paying on earned income, and it’s non passive income. And it’s not, it’s not uncommon to see people paying 42, sometimes even 50%. If you live in a state like California, or state like New York, on the earned income. And the thing about a thing about non passive or earned income, is it’s very difficult to shelter from tax, you know, you have your 401 K contributions, perhaps your HSA contributions or health savings accounts and, and other things, charitable contributions, things of that nature, but very challenging to offset. Now with passive income, which is where you’ll find your rental income, whether you’re active or whether you’re an active investor or you’re a passive investor. Rental Income tends to be on the passive side. And the interesting thing about passive income is it is also taxed at ordinary income rates. So up to 37%. Usually you won’t see the self employment tax or the FICA tax on that, but there’s something called depreciation which is a noncash expense that can help you reduce your taxable income, but not necessarily your cash flow. So you might actually tell the IRS So, hey, I have a loss on this, this form of income, my rental income, my passive income, despite the fact that you’re generating positive cash flow. So the passive buckets more easily to shelter, your income, I guess is what I was what I’m the point I’m trying to get to here. So what you what we see a lot of investors doing is starting to focus from just generating earned income or non passive income, and starting to take that and starting to invest in passive sources of income that can first of all, don’t always take your time and effort to actually generate, but be can also be sheltered from tax. So you’re actually as like long story short here is as you start to siphon off your non passive income into the passive bucket, what we often see is people have lower effective tax rates. And what that means is, you’re paying less, basically, you’re paying less taxes compared to the income you’re earning. And we’ve seen people generate significant amounts of wealth, doing that. So just taking their nonpassive income and putting it to the passive bucket.

Tim Lyons  16:08
I love that, right? Because that was eye opening to me, as a New York City firefighter, and an ER nurse, I was strictly who, right. I didn’t have a tech strategy I had, I smoked a lot of opium, and I hope that I got 510 grand back a year. And that was just my strategy. And when you finally wake up, and you realize that there’s folks like you and your firm, that are classifying and educating and, putting material out there, and, you know, what I found in this space, and I don’t know, if you guys feel to, but in the in the real estate investing world, I feel like people are so generous with their time with their knowledge, with their expertise. And, you know, if you just take a few minutes to figure out who and where you need to position yourself, you know, you can make a world of difference, because when I ever found that there was three buckets of income, you know, active passive and say portfolio, and they’re taxed differently. And there’s things that strategies that you can do as a blue collar kind of guy, right? As a blue-collar kind of guy, I could figure this out, too. It wasn’t just for the quote-unquote, 1% or the, you know, the richest and everybody you know, there’s ways if you’re, and I love what you said before, you know, when you when you have that onboarding, phone call, you know, you let people know what strategies are available to them, and you educate them, but you also find out how committed they are to real estate investing, right? Because I feel like in this world of instant gratification, Instagram, Facebook, Tik Tok, whatever it might be, you know, people can look at the shiny object, right? They can see the person with the, you know, whatever the bleeding. I don’t know what the right words to say anymore. Paul, you can tell that I’m getting older. But you know, but are you committed to this asset class? Are you committed to finding out, you know, what are the strategies, right, Tom Wheelwright says all the time that the tax code can be overwhelming to even CPAs. Right. But if you use it as a roadmap to get your get you and your family and your wealth, situation, if you use it as a roadmap to get to where you want to go and where you want to be. It’s just incredible. Right? I want you to touch on that again. You mentioned something about people trading their time for money, right? It really kind of goes into the mindset, I’d love for you to kind of share your mindset when you know, yes, you’re a CPA, yes, you’re, you have a firm, you have a podcast, but when you when you can really unlock that passive income, right? Like not trading your time. And you get an email every month that says dang distribution, you know, in your account, like, what how did that change you even though you’re a professional, you know, you got your credentials, you got your education? What was that mindset shift like for you?

Thomas Castelli  18:51
It’s almost it’s almost unbelievable. When it first happens, it’s like because if you’re so used to working, I’ve worked since I was a teenager. And that becomes like your your view of how to make money and say I go work and I make money. And all sudden when you put money when you make that investment and all sudden that investment starts paying you without you really having to do much besides just made that decision. It’s like, there’s something wrong here. Like is this real? Like am I it that’s kind of that was my first reaction. Like, when I first did this syndication back in 2017. We were it’s a big push to get into it. But once we got into it, there was not much we had to do and I couldn’t believe it. And even today, today, investors a limited partner and I just go ahead, I dropped the money into the investment, I make that decision to make that investment. And then on a quarterly basis or monthly basis, whatever the the investment agreement is, I start getting money into the bank account. And you know, even today, it’s still somewhat unreal, which is very nice. I go into my bank account sometimes and I just more money there and I’m like, How’d that get there? I’m like, I didn’t work for that. So it’s really it’s, it’s life changing. to certain extent it makes you want to do more of that. How can I invest more into This space to continue building my passive income and just make mailbox money, money that comes to me without me having to lift a finger, if you will.

Paul Dircks  20:08
No, it’s powerful. And I think one of the things that’s powerful that I’ve seen as well, it’s not just the fact that you can shelter, some income, it’s not just the fact that you can shelter income from investing in passive activities. It’s the net present value that you receive from having those funds available to you again, to then deploy elsewhere. So there’s an amplifying effect that investors can enjoy by investing in passive activities. And by following the tax code, right. And as Tom Wheelwright outlines, and many others, certainly in the industry, the tax code as it’s written is a basically a big bulk of incentives on what we buy, we I mean, all Americans can do to lower your tax burden to keep as much of your hard earned money for yourself, but then also to provide hopefully good services, in this case, maybe housing or jobs, to the broader economy. So it’s a very powerful amplifying effect, not just for the individual, but really for the economy as well. I think that’s think it’s wonderful that that’s something that real estate investing, and being a passive real estate investor allows you to do. You know, Tom, one thing that I certainly wanted to ask about is, you know, here we are in 2024, it’s a big year, there could be some changes on the horizon, from your view, as somebody who’s been in the investing game for several years, but then also who’s running a business and working with, you know, obviously, the IRS on many different accounting cases? And also, you know, with your, with your clients, what changes are on the near term horizon, or may be in the longer term horizon that affect real estate investors? Is there anything either positive or negative out there? Of course, we’ve seen bonus depreciation. That’s been a focus in recent years, we’ve seen, you know, the continued allowance for passive activities to be treated as a separate bucket of income. Is there anything out there on the horizon of maybe accredited investors? And the definition of them? Is there anything on the horizon that you see here in the next year or so that could affect the investor landscape as it relates to taxes and our ability to maintain and keep more of our hard-earned money?

Thomas Castelli  22:35
Yeah, absolutely.I think the biggest thing is bonus depreciation. So bonus depreciation allows you to rapidly accelerate your depreciation expense. So just to kind of take a step back for listeners who may not know how depreciation works, basically what happens is you buy a property or you invest into a property via syndicate. And that property, if it’s a registered residential property, say multifamily, it’s gonna be depreciated over 27 and a half years, so that means a little chunk of it every year is gonna be depreciated. Now, with with bonus depreciation, what happens is like when you buy that property, that multifamily building, it’s not just the building, there’s going to be components of that building, like appliances, carpeting, fixtures, land improvements, light pools, things of that nature. Those are depreciated over a shorter period of time, somewhere between five to 15 years in the case of real estate, and bonus depreciation allows you to rapidly depreciate that five and 15 year property which can represent anywhere between 20 to 30%, of that property’s purchase price, depending on the specific property. So bonus depreciation was at 100% from the tail end of 2017, like September 27, seventh 2017, all the way through the end of 2022. And then it started to drop down 20%. So when it was 100%, you could take 100% of that five and 15 year property, again, anywhere between 20 to 30% of a property’s value, and just take it as a depreciation depreciation expense on the first year, which would generally cause you to have massive losses. So you show a big loss in the first year that you make that investment. And that’s all on paper doesn’t really exist, right? It’s it’s a phantom loss, but now start to phase out 20% per year starting in 2023. So that so last year, it was 20 80%. This year in 2024 it’s going to be 60%, 2025 is gonna be 40% ,and 2026 will be 20%. And as it phases out, that initial first year loss that you generate, thanks to depreciation is going to be lower and lower. Now, that means that you want to capitalize on that while you can. Now I will say this that, you know, as of this recording, there is a bill that is, quote unquote, very close to coming to fruition that would extend 100% bonus depreciation go back to 2023 Make it instead of 80%, make it 100%. And as well as 100%, all the way through 2026. So there will be no step down to be 100%. And if that comes to pass that can be very powerful for real estate investors. So that’s something to keep on the lookout. The second thing I would say and something you mentioned, the definition of accredited investor, well, the definition, the traditional definition to my knowledge is not going to change, it would still be you know, the the income requirement $200,000, last two years, and 300,000 If you’re, if you’re married, and then you’re expecting to make the same amount this year, or a million dollar net worth excluding your primary residence, but they are, they are coming out with a test or they’re supposed to be developing a test that would allow you to become accredited, even with human without that net worth or income requirements. So that’s on the horizon, trying to think of anything major, that is coming up in 2024. Besides bonus depreciation, I don’t see that much really changing for real estate investors as of now, from a tax perspective

Tim Lyons  26:07
There’s so much information in that last little piece, Thomas and for those who are maybe new to this podcast and into the space and there’s a lot of terms being thrown out, right, you know, limited partner, general partner active-passive, you know, the whole thing, you know, that’s okay. Right, because there’s, there’s, there’s resources out there, there’s the real estate, CPA, they have a course they have many courses, they have a mastermind, they have a group of Texas Tech smart investors, I think it’s called right. And you can join like a tribe, right? Because this is what people are talking about in that kind of space. And you can align yourself with folks like Thomas and his partners over at the real estate CPA. So, you know, fear not right, because the the antidote to fear is education. And there’s no shortage of resources out there for you to get started doing something like this. What I really, what got me excited when I first started getting into this space was just realizing how large you know, the reg D spaces, right? So, Reg D could be basically unregistered.

Tim Lyons  27:33
So what gets me really excited about this space is the fact that you know, this is not just like Buddha type stuff. You know, this is not Bernie Madoff, you know, all their bad actors out there. Yeah, there’s bad actors everywhere. But, you know, when I was doing my research for this episode, I pulled up a reg D research paper from sec.gov website. And it says 2021 and 2022 4.4 trillion of reg D securities were sold. No, I mean, let that sink in. Right? You know, that it’s a huge space, right? People are looking to diversify away from Wall Street, you know, they want to be maybe more active, they want to kick the tires on a particular deal or real estate makes sense to them. Or, you know, there’s just this opportunity. And if you don’t know where to look, and you don’t, and the people that are doing this aren’t in your tribe, you never know what’s available to you. So when you guys are talking about accredited investors, maybe the definition is going to be expanded or maybe actually curtailed. Actually, I’m hearing that they might want to index the numbers of the salaries and net worth to inflation. Because when this came out in 1983, only about six or 7% of the population was eligible to invest in a unregistered security as an accredited investor. And these days, it’s in the low teens, right? 13 14%. And if we keep going at that same trajectory, you know, it’s going to be by 2052, I heard it’s gonna be over 63% of the population would be accredited because they don’t they haven’t moved the goalposts on the $200,000, you know, salary or the 300 if you’re filing jointly with a million dollar net worth. So it’s all these things combined to figure it out. Now, just you know, my last thing before we hop into the three questions would be when I heard about depreciation, Tom Wheelwright calls it magic, and it seems like magic, right? It seems that the non cash loss that you could just record on paper, and it can lower your taxable income. Then I heard about something called real estate professional status. And I’m going my god, I gotta be a real estate professional because this is going to be amazing, right? And then the wind gets taken out of your sails because as a W two employee or 1099. You know, there are a lot of rules that sort of surround the real estate professional status, how you can take depreciation. So can you talk a little bit about that, like maybe want a high level You know, just what is real estate professional status who can qualify? And what would be the major benefit if you can qualify that depreciation plays into that?

Thomas Castelli  30:09
Yeah, absolutely. So just to kind of preface going back to before, we’re talking about non passive versus passive, right, so the losses generated by real estate that are non cash, they’re in the passive bucket, and they can only offset other passive income, so it can offset your non passive income. And that was put into place back in 1986. To prevent high income earners, like doctors and lawyers, specifically, were noted in that, from taking these non taking these like non cash losses and using it to significantly offset their active income or their income that they’re generating through their job or business, and using the Save some substantial amounts of money in taxes. Now, fast forward a few years, I think, believe it was 1994, if I’m not mistaken, the real estate industry was kind of ticked off. They’re like, Okay, well, I develop properties I fix and flip properties, or I’m in construction, what have you, I was it fair that a doctor can go ahead and expense or depreciate their x ray machine, for example, but I can’t depreciate my rental property. So lobbying came about and the real estate professional status was born. And the real estate professional status allows investors who worked effectively full time in real estate, I’ll get into the exact requirements in a second to use the losses from their rental activities, which again, are typically non cash to offset their non-passive income. But in order to qualify as a real estate professional, certain requirements need to be met, you spend more than 750 hours and, and it’s the part that trips a lot of people up and more than half of your total working time in a real property trader business. Now, there’s 11, real property trades or businesses not gonna go through all of them today. But rental act rental properties is one property management, construction development. Being a broker and agent, these are real property trades or businesses. And when you’re spending 750 hours and more than half your total working time in these businesses, then you’re able to take these losses from your non-rental income and use it to offset your W two or your active business income. Now, I will say one thing in there that in order to be considered in a real property trader business, you need to own at least a 5% interest in that business. So if I, you know, if I were to go take a job at a property management company, was a W two job, I’m not going to be considered to be part of a real property chair businesses, for the purposes of the real estate professionals test, I would need to own at least 5%. So that that is the real, that’s a real powerful strategy, a lot of people see it’s sought after highly sought after. And if I could just throw one thing in here is that even if you can’t qualify as a real estate professional, perhaps your spouse can, and if your spouse can, if you’re married filing joint, well, then you’re both kind of effectively considered real estate professional. So what we see is a lot of times will have and it will have a couple, one of them might be a doctor or physician or might be in any any field, that’s not a real estate, they may be earning a high income, and then they’ll have a spouse who’s either working part time or they’re fully focused on the real estate portfolio, they’re able to qualify as a real estate professional, and they’re able to acquire these rental properties use these non cash losses to offset the income, the non passive income from the other spouse, and significantly reduce their taxes. So it’s quite a powerful, powerful strategy, the real estate professional status. Now, just one last thing I want to throw out there. Because a lot of people sometimes they’ll realize, okay, I can’t qualify as a real estate professional, or maybe my spouse can’t qualify as real estate professional either, like, I guess I’m Sol on this real estate thing, this isn’t going to work for me. And I would I would put in an encouraging word there that even without the real estate professionals that in the short term, it’s a loophole, simply investing in real estate, and the ability to shelter your passive income from tax and reduce your effective tax rate is very powerful. It’s a longer term game to build up that passive income. So you have to make investments into that bucket. But if you take if you zoom out, and you look over at Real investing in real estate over decades, over years, you start to realize, okay, you know, you can really build a really tax advantaged income simply by investing in the passive bucket even without the real estate professional status. Having said that, if you can use the real estate professional says, by all means, go ahead, use it’s powerful, but it’s not the end all be all and it’s not something that’s like making that should make or break your decision to get into real estate.

Paul Dircks  34:35
That’s very helpful. Obviously, a lot of intricacies around the real estate professional status in general tax and tax management, involved in intricacy. So it’s encouraging to you know, obviously know, folks like Utah missing the real estate CPA are out there to assist investors and, you know, a comment before we go into our lightning round three questions. One of my biggest pet peeves out there is especially coming from the world of Wall Street is that you’re told as a client to consult with your tax advisor. Many of us don’t have a tax advisor, we have a tax preparer. And we have a retroactive look at our finances. And we’re not thinking ahead and planning ahead. So you know, something I would encourage our listeners and you know, we can include a link in our show notes here to the real estate CPA is that there are firms and there are people like you, and your colleagues who can help investors March their path forward, right, and to actually seek out tax advice, because let’s face it, we’re not going to always have years and decades of VC money. And we’re not always going to have the easy opportunities that we’ve had, where we can park our money in our in our Wall Street accounts and expect it to go up into the right. So being a little bit more proactive is something that I think is possible. It’s not too complicated to just simply reach out, ask questions and learn a little bit more. And that’s certainly something I would encourage our, our listeners to do. And you know, with that in mind, it’s a pretty perfect segue, I might say to our last three questions. And Thomas, these are questions we ask all of our guests. And you know, just answer them with what comes to mind. The first question is a quote from the great Jim Rohn, who said, a formal education will make you a living and self education can make you a fortune. What does that quote mean to you?

Thomas Castelli  36:30
I absolutely love that quote, we have been living by that since 2014. It’s formal education is designed to almost indoctrinate you, in my opinion, into a system. But self-education could free you and make you see the whole picture and the whole playing field, the whole game of life and business and economics in a way that you’re not going to be able to get from the traditional system. So self-education is not only freeing from that perspective but can also help you develop the skills that you need to get to where you want to go. Thinking grow rich, great book by Napoleon Hill. If you read that book, self educate, you could put yourself on the path that you want to go. So that’s what it means to me.

Tim Lyons  37:15
Love that. That’s just a great quote. And we’ve gotten so many great answers from that. I just I’m so happy that we have that in our in our show here. The second one is from the great Robert Kiyosaki, right, a lot of us get our start reading Rich Dad, Poor Dad, because we have that pain point that we just want to scratch and itch. And we read that book and then you know, if you’re, if you’re into what he’s about, you kind of read a lot of his stuff and follow Him. And you know, he can be a little bit of a ornery controversial guy these days. But he said something that goes like this. Savers are losers, and debtors are winners. Now to the to the novice out there. And when they hear that, they might sound that that might sound crass, you know, but if you’re in this space, it probably means something different. So how does that land for you, Thom?

Thomas Castelli  38:00
Yeah, absolutely you want is saving your money in a bank account is not going to earn even more interest rates these days are not too bad. But saving your money in a bank account is usually not going to get you rich, you need to put that money to work to earn a return for you. Otherwise, what’s happening is the banks in the Gobi lending out your money to other people are the banks going to be having a balance sheet full of loans that are paying them right people are paying them? So basically, what you want to do is a concept that I learned about a while back called a balance sheet affluent be adverse income athlete. So if your income affluent, you’re making a lot of money, it’s great. If your balance sheet affluent, you have a bunch of assets that are earning you a yield, whether that be interest if you’re if you’re loaning money out and you’re holding debt. Or you’re investing in real estate and that real estate’s giving you passive income from from rental income. The point I’m trying to make here is that you want to be on the side where your assets are earning money and you’re not paying other people. Yeah, you’re gonna be using debt probably financed through real estate, but you basically don’t want to be paying a lot of consumer debt, you want to be paying more good debt, I guess they call it. So you want to be on the side where you have a balance sheet full of assets that are paying you as guests. The bottom line is what that means to me what comes to mind.

Paul Dircks  39:15
I like the term balance sheet, the fluent, that’s a new one for me, but I certainly appreciate the concept. And I think it’s pretty important. Lastly, if Thomas, you were at a party and you were describing to somebody what you do, and the fact that you are a real estate investor, including a passive real estate investor, and that person says to you is real estate investing, too risky. How would you respond to that question?

Thomas Castelli  39:41
I would say that not if you’re not if you know what you’re doing right. So real estate over time is going to goes up right there might be rises and falls and like might go up and down. But over the aggregate over decades, it’s going to shoot up and if you’re investing in the right market with the right People who know what they’re doing and you have a tribe around, you can help you basically get there, then it’s really not risky, they’re not making any more land, the population continues to grow, real estate’s probably going to get to you appreciate if you’re investing in the right place. So I would say think the risks that you’re concerned about would be the operational risk. And you can educate yourself if you want to go that route. Or you could do what I do invest, as a limited partner, find people who already know how to operate real estate, do your due diligence, and then hop in with them. And it’s really not, it’s really not so risky. It’s really it’s really not that risky. If you know, what you’re doing is educating yourself and investing with the right people. And you’re gonna put yourself in a good position.

Tim Lyons  40:40
 Oh, I couldn’t have said it any better education times action times, surrounding yourself with the right, folks. I mean, that is the equation for success right there. And so I just love that, you know, as we as we close out here, and we’re starting 2024, I really highly encourage people to, you know, take some inventory, right? Where do you want to go? What kind of goals have you set for yourself for this year? And if you listened to the show, and you got some value, and you finally said to yourself, you know what, I don’t have a tax guy or a tax girl, I don’t have a strategy, right? I’ve been doing hopium my entire life, like, you know, this might be the time to say, look, you know, I need to find a CPA firm that understands me, they understand my goals, they understand where I am today, and where I want to be tomorrow, right? And there’s people out there, and I’m gonna highly suggest that you’ve, if you’re into real estate, and you’re into active and or passive, you know, investing in real estate, to have a conversation with these guys over at the real estate CPA, because at the end of the day, I always like to say this, if you broke your ankle, you would not want to go see a neurosurgeon, even though they have MD next to their name, right? They’re both doctors, right? You don’t want to go see an ankle specialist. And the same thing with CPA, right. There are generalists, farming-focused CPAs, real estate-centric CPAs, and crypto CPAs. I mean, there are CPA specialties for everything. And if you want to be in real estate, you have to align yourself with the right team members. So if you want to find out more about the real estate CPA, you can go to the link in our show notes, it’s going to be WWW dot the real estate cpa.com/cityside. And you can have a consultation, these guys have already set up a whole webpage for you to check it out. And I you know, I recommend you guys go to the website browse around, they have courses that you can buy, right? It’s short term rentals, they have, you know, limited partner courses, they have, you know, all these types of things. But it’ll it’ll be a starting point for you to start on off on the right foot. Because I don’t know, Thomas, I’m trying to put words in your mouth, you can correct me if I’m wrong. But the worst thing to do is to wait until like March 15, to be like, Whoa, I need a tax strategy. And I needed a guy to talk to it now. Right? Because you want to start doing this during the other parts of the year so that you’re setting yourself up for success. So Thomas, how did I do wrapping this up? I mean, is there anything else that I should have talked about? Or any other resources or ways that people can get in touch with guys?

Thomas Castelli  43:05
No, no, I think you hit the nail on the head. Like we meet me and one of one of our advisors talking about this yesterday, like you don’t want to get to march and be saying, hey, what I do for last year 2023? You want to be getting to march and say, Okay, what can I do for this year? 2024. And you’re looking at ahead, now you have plenty of time to plot the course. So hit the nail on the head there. That’s part of proactive planning. And no, I think that that’s all I have.

Tim Lyons  43:32
I’m actually gonna stack on top real quick because I’m a consumer of your content. If you have any questions about real estate, professional status, short-term rentals, or how do I qualify? What’s passive income. What’s active income? I highly suggest you go to their podcast, The Real Estate CPA, just type it into your browser on Spotify, Apple or whatever podcast platform you listen to. And they actually have it broken down into different segments. So you can guys can search through their previous episodes. It’s really powerful stuff, and it’s free, right? So you can always start somewhere. And if you want to continue that journey, you can hop on a call with Thomas or one of his colleagues. So, Thomas, this has been a great conversation today. I thank you so much for making the time to speak to us in our in our listeners. And let’s make 2024 a healthy and prosperous year. Thanks so much.

Thomas Castelli  44:22
Thanks for having me.

Tim Lyons  44:24
That’s gonna do it for this week’s edition of the Passive Income Brothers Podcast, and we look forward to serving you again next week.