Unlocking Wealth Through Smarter Tax Strategies: A Deep Dive with Tax Expert Mike Pine, CPA

Mike Pine, CPA: 0:04

There’s not a lot that could be done. Once the year is over, you need to call someone and speak with someone while you’re making your decisions, while you’re going through the operations, while you still have time to impact change and make it happen.

Greg Lyons : 0:16

Welcome to the Passive Income Brothers podcast.

Tim Lyons : 0:19

Here we take the fear out of real estate investing using real life stories of everyday successful investors. Let’s go Welcome to another episode of the Passive Income Brothers podcast. My name is Tim Wines and today I’m joined by none other than my brother, greg. How you doing today, buddy?

Greg Lyons : 0:33

Tim, I’m doing great, but I don’t feel like I can give the full banter right now at all. This is a summertime edition of the Passive Income Brothers and I just can’t give you a full banter. That’s it.

Tim Lyons : 0:45

So apparently Greg has not eaten his Wheaties today, but I have. So I am ready to rock and roll and we are here to serve you with some great content from our archives, from episode number 43 with a CPA. That has actually changed Greg in my life because he was able to hop on a mastermind call with me a couple of years ago and he immediately lit me up with education, with nuggets, with value, and at the time I was still trying to wrap my head around real estate investing and taxes and what does it mean? And what if I don’t use an LLC and I do it personally? Or what if I file with my wife? And should we file separately? And how does it affect everything? And there’s a lot there and you can just say forget it, I’m going to just do what I always did and I’m going to put my head down and have my quote unquote my guy, take care of it or you can turn it around. Right, get a little educated. Understand the questions to ask, know that there’s resources out there, there’s people out there that are doing the thing that you want to do that can serve you with value. You just have to know where they are, where to find them and what questions to ask.

Greg Lyons : 1:51

Yeah, Tim, really. I mean, tax advice doesn’t have a timestamp on it, and this episode with Mike Pine is fantastic because we shouldn’t just be thinking about taxes on April 15. It’s a year round thing and you don’t just give your stuff to your guy or your lady and say take care of it. You got to start asking questions. You got to start asking the right questions. Is this being followed correctly? How am I taking advantage of depreciation? Those are the different things you want to be asking. So you’re ready not only for April 15 or, if you file an extension, for October, if you pay quarterly. You have to have the right questions to ask your CPA to make sure he or she is on the right track.

Tim Lyons : 2:34

Listen, while you’re building your real estate empire, in whatever form or fashion that might be, you have to have the foundation, you have to have the plumbing, you have to have the electrical lines all run right, because if you’re going to stack on top and stack on top and stack on top, you have to have that strong foundation and all the engineering below it. Do you have to know how to be an electrical engineer or a concrete engineer? No, but you have to know the team members to put in place so that you can start doing what you want to do with your capital and with your real estate investing. So that’s basically our main takeaway today is you know what? It’s the middle of the summer. People aren’t thinking about taxes right now, maybe, but we felt like we’ve had enough conversations with investors over the last couple of weeks about taxes and investing and how everything kind of works together, and we’ve made a couple of introductions to Mike Pine and Amanda Han, which is another CPA that we like to send people to, but we felt like this would be a great episode just to get our heads clear for the second half of 2023. Where are we going? What do we need to tidy up? And I think this episode is going to be great.

Greg Lyons : 3:35

And Tim, really this is going to give me more time to get outside and get a little vitamin D, because if you are a regular YouTube watcher, you know I could always use some vitamin D. We are now coming into the fall, where I start my fade into my winter white pastiness, so vitamin D is key and that’s what I’m going to do right now. So peace out.

Tim Lyons : 3:55

Greg, before we hop off, maybe you can share with the listeners what you were trying to do this weekend down on the beach in South Carolina and what happened to your accessories there.

Greg Lyons : 4:04

Well, after a couple of averages, I decided to body surf. I was out there with the kids body surf with my sunglasses on and I can only imagine, due to the undertow, my Ray Bands are somewhere in Florida, so I believe they made it off the coast of Miami. At this point, lisa, my lovely wife, my patient lovely wife, unimpressed by the whole thing and generally just a ridiculous move by yours truly.

Tim Lyons : 4:31

So, greg, I wonder if that’s the tax write off. I don’t know. I have to maybe see if Mike Pynk can help us out with that one, but it may have been a business trip. It was a great story for a summertime fail for Greg to go body surfing with his Ray Bands sunglasses. So I’m going to leave you all with that. I hope you guys get a ton of value at a Mike Pyn CPA and with that we will see you again next week. So without further ado, I want to introduce you guys to Mike Pyn from Pyn and Co CPAs down in Texas. So, mike, welcome to the show.

Mike Pine, CPA: 4:58

Thank you Very excited to be here and thanks for having me. I think you guys have the nail right on the head. You can choose to be intimidated by taxes or you can choose to use taxes and take advantage of them. A friend of mine coined this phrase a couple of years ago. The internal revenue code can truly be the yellow brick road to maximizing your tax savings, maximizing your wealth building and helps snowball effect. You can be scared of it. They’re a fact. You can’t get away from them. So you can choose to be intimidated by it or you can choose to take advantage of it. I love taking advantage of it. I’m super happy to be here to help kind of explain some ways we can do that.

Tim Lyons : 5:32

Awesome. I love that. And, mike, before I met you, I read the book Tax Free Wealth by Tom Wheelwright, who you know. If you’re a fan of the Rich Dad Radio podcast, you’re going to know who Tom Wheelwright is and you know he says something very similar. He’s like you know, the tax code is. Whatever. It is 4,000, 10,000 pages, I don’t even know how big it is, but it’s voluminous and you can either be scared by it or you can use it as a guide. Right To say this is the proven path, this is how you do it and, just like Greg said, it’s finding the expert. So, mike, can you take a few minutes and just let people know? You know what’s your background, how did you get into taxes, how did you get into the real estate side of taxes and stuff like that, and who do you seek to serve?

Mike Pine, CPA: 6:10

I seek to serve anyone who’s paying more taxes than they should be, which is just about anyone out there. I got into being a CPA back in 2020. I started my career off at Pricewaterhouse Cooper’s Venture Capital and Private Equity Group down in Silicon Valley right before the dot com bubble burst and I was right there in the middle of all the venture capital private equity firms, got to see the meteoric finale of the rise and then the crash and burn. It was really exciting to be part of that and one of the things I realized, even as things were just going haywire and the rest of the country was very annoyed by it people in the Silicon Valley, the people who are running these funds, the people who were invested heavily in these funds. They might have lost some, but they didn’t lose near as much as the rest of the economy out there. It got me big into partnership tax and realizing you don’t have to be a victim to the economy. You don’t have to be a victim to the tax law. You can again use it and leverage off of it. And by being in partnership tax by default, I had to grow up in real estate tax the majority of real estate out there, especially in multifamily housing, but just about any kind of real estate. Once you go big, if you’re trying to get past a few doors which you should be trying to do if you only have a few doors and you have two doors down on vacancy, you’re two-thirds vacant and that’ll kill you. It’ll kill your profitability. So most multifamily housing out there is done through partnership tax and I’ve been working on those since 2020, back in the private equity days. I want to go back to Tom Realwright. He makes this one great quote that I’m sure I’m in a butcher, but he writes. And, by the way, the tax code is a lot more than 8,000 or 10,000 pages 10. Depending on what you consider the tax code. There’s internal revenue code. That’s the law that Congress write, but none of it makes sense. There’s no way to put it into practice. So they tasked the Treasury Department to write Treasury regulations. So the internal revenue code is probably about 5,000, 6,000 pages. The Treasury regulations are over 80,000 pages and if you just leave it at that, you’re approaching 90,000 pages with the tax law is. But on top of that there’s literally hundreds of thousands of pages of tax court cases that set tax precedent, and tax law is really impacted hugely by tax court precedents. That’s what writes most of our tax law. So you really think about the tax laws over 300,000 or 400,000 pages, and Tom Realwright mentions something in fact, that 99 and only 1.5 of 1% 1.5.5 percentage points of the entire tax code is focused on the assessment of taxes, actually levying taxes. Over 99.5% of the tax code deals with and provides incentives and opportunities, and it’s what our country has gotten together as a society to say. Hey, we want to incentivize these actions and activities because if we do, it’s better for our society, better for the economy. It’s good things. That might not be the mindset behind every person in Congress that’s writing tax law, but I’d like to think our society as a whole is the reason that we provided all these incentives and those incentives. Too many CPAs are focused purely on following the rules. I don’t blame them. That’s how we were raised in CPA schooling with the college. They teach you to follow the rules. Stay inside the box. This number goes on this line item this is taxable income, this is a taxable deduction. But they’re focused on that 1.5 of 1%. They’re not thinking outside of the box. I learned very early in my career that not many CPAs were focused on that 99.5% of the rest of the code. That offers all the opportunities and incentives and that’s where our firm, my partner and the rest of our team love to live those things. We believe it’s a patriotic duty for you to save taxes so you can grow the economy and pay money to IRS and see how well the government doesn’t grow in the economy with it or keep it in the private sector and grow our economy. And don’t mean to get political, but it is. I believe it’s our patriotic duty to help clients save taxes so that they can help grow our economy, which lifts everyone up in this nation. So those are the basics. I love that.

Tim Lyons : 10:15

You know, I don’t think I’ve ever heard any CPA say it’s our patriotic duty to save you tax money so that you can help grow the economy. But that’s a fundamental paradigm shift, right? I mean either you can just get overtaxed and let the government do whether you’re Democrat, independent Republican, doesn’t really matter right. Or you can take control. Right, you can hire folks, you can go develop real estate, you can go start a new business. I mean there’s so many different ways to have impact on a community, on a business, on your bottom line of keeping more right and elevating your lifestyle. So I really like how you took that and kind of wound it into that little introduction there, mike. So you know, mike, so obviously this is the passive income brothers podcast where heavily focused on the one of the buckets of income and I think I might have heard this from you, but you know there’s three buckets, right. There’s your active income from your W2 or 1099 position. There’s then the portfolio income buckets stocks, bonds, etfs, stuff like that, mutual funds and then there’s your passive income bucket. So, mike, can you take a minute and just kind of walk people through maybe those three buckets why they’re significant, how they’re taxed and why the passive income bucket is the most ideal place to have income flow into.

Mike Pine, CPA: 11:26

You bet. First let me just clarify so I don’t get in trouble here. Being online, it is your patriotic duty, in my opinion, to pay no more taxes than you legally owe, and it’s also your patriotic obligation to pay every dollar you’re legally obligated to pay. I just don’t think you should tip the government more.

Greg Lyons : 11:43

So I just want to clarify that. But you’re right.

Mike Pine, CPA: 11:45

So the internal revenue code basically stratifies three different kinds of income or loss. You got your active, your passive and your portfolio. Active income is anything you’re actively involved in generating your income, like you said. Generally it’s your wages, your W2s, your 1099s and again, portfolio is the stuff that you make in the stock market, as well as interest income and bonds. Passive income is its own related bucket, and the IRS for different sets of tax rules require that you stratify each of your income buckets and losses into each of those. Passive losses can offset active income or offset any of the other buckets. Passive income and passive losses have to stay in their own and they can only be offset by active losses, portfolio income and loss those like, as everyone knows, if you have a net capital loss, you can only carry forward $3,000 a year, can’t offset it against other things. Passive income, like you mentioned, a rich-stead, poor dad is. In my opinion, it’s not necessarily only a tax reason for being in a great place and why you’d want to invest in passive income producing investments, but it offers you the ability to stop trading time for money If that’s your only way of making money. Time is finite, there’s only so many hours in a day and if you read much about me online, you’ll find one of the big motivating factors that I got into what I do and I do it such joy and fun is one of my fathers who is a great, very active teaching physician down in Atlanta Been a career saving tens of thousands of lives, training tens of thousands of physicians. As he retired and went to his retirement ceremony he told me his biggest regret in life to that point was he didn’t spend more time with us as kids. He focused his entire life on his profession and he didn’t have any time left for his family. I’ve seen too many other people in professions do that. Tim, my grandfather, was a lieutenant, retired as a lieutenant. He literally killed himself. He died of cancer that probably he got from going into those burning buildings before they had breathing apparatuses. In those days he wasn’t around much my dad to grow up in or my aunt to grow up in and he mentioned that in his later days of life. That was one of his regrets. The only way to change those facts is either decide to grow, live for and try to spend no money, or start growing a passive income stream, and passive income is that it’s passive, you have to spend time to generate wealth from it. Otherwise again, you’re stuck. Even if you’re a highly paid attorney or CPA or physician, you still have to trade your time for money. At some point you’re going to want to be able to provide some time for things that you love in life and for your passion, like family, like whatever charities you’re involved in or whatever your mission in life is Hopefully something besides just work. But a really cool thing about passive income, especially in real estate, is it can provide tax advantages to income too. It’s great to get extra income on the side, but I know we’re going to talk about this in a little bit, about depreciation. But with the power of real estate and its depreciation, it allows you to earn income that’s quite potentially tax free to you for at least a period in time. If you’re able to keep more of your money each year, you can snowball that to grow. Everyone knows time value and money. The more money you can keep today, the more money you’re going to have 20 years from now. So in the passive income bucket, if you can generate not just passive income but tax advantage passive income, which real estate can do, if done right, you can grow your net worth a heck of a lot faster than you can in your active income bucket or in your passive income bucket. Now you want me to go into a little bit of the details about specifically in real estate, and passive income versus active income.

Greg Lyons : 15:40

Yeah, you know what? Something big that you said there, just for our listeners, is that time is finite. If you’re just trading your time for money, it’s kind of like a hamster wheel, right, and learning not only passive investing, but learning about taxes is just so important to maybe hop off that hamster wheel one day. That could either be before 65, around 65, after 65, but you want to be able to get off that hamster wheel and I like the incentives and opportunities that you talked about real estate, energy, a couple of different things but real estate is what we focus on, and trading time for money is why we started the passive income brothers podcast and I think it would be really helpful if you could kind of take our listeners through. Okay, I worked really hard, saved a bunch of money. I have $100,000 to invest and I want to put that into a multifamily project from CitySide Capital. It’s always a good idea and can you kind of take our listeners through what that $100,000 investment will do, not only from a cash flow perspective but from a tax perspective?

Mike Pine, CPA: 16:48

Yeah, let me start off saying let’s say you have this $100,000 and somehow you’re able to shop and find a place that’s going to pay you 10% interest on it. Can you imagine that? I know we’re in way above 10% inflation in my opinion, but can you imagine 10% interest? Let’s say you did that. You live in a high tax state, in a high tax city like New York, for instance, you’re going to be paying. If you get 10% interest on the $100,000, you’ll get $10,000 of income. That’s great $10,000 of income. In your first year. You’re going to be paying close to 50%, if not more, of that back to the government if you’re a high income earner. So out of that $10,000, you pay $5,000 in interest. You only got $5,000 left over to reinvest and grow your portfolio, and $5,000 is better than nothing. But what if you could have $10,000 and keep all that 10%? So if you invest in real estate and it’s done right and it’s earning 8%, 12%, stick with the 10%, because it’s easy math for me to be able to do on this podcast. If you’re earning 10% and it’s a tax advantage real estate deal where it’s providing depreciation to a passive investor once in the year, this year you get 100% bonus depreciation. Let’s say you put in $100,000 and you end up getting $50,000, $60,000, $70,000 of depreciation allocated to your passive investment. As a passive partner you can’t take that loss to offset your W2 income or even your portfolio income, but you can certainly use that to offset any other passive income you have. Let’s say this is your first real estate investment. You don’t have any other passive investment. Now you have a 50, 70, maybe even $80,000 loss carry for it that’s going to offset your future income from that passive investment, from that real estate investment. Let’s say it does pay you $10,000 that first year, guess how much tax you owe. In year one you got $10,000 in income, exactly Zero. Instead of giving $5,000 back to the government, you got $10,000. You can go real estate and else Number two, summing same scenario, you get $10,000, zero tax. In the case if you got $50,000 in bonus depreciation, ignoring the fact that you’re probably going to be earning operating income for the real estate but let’s assume that didn’t happen You’d have five full years of tax-free income coming through before you run out of your passive activity. You lost carry for you have to start paying taxes. That’s five years and consider the time, value of money and being able to compound that $10,000 a year for five years versus only $5,000 a year that’s hugely powerful. That generates income, that snowballs and catapults your income, wealth and generation. It’s quite simple. How much more detailed do you want me to get? Greg and Tim before your eyes glaze over.

Tim Lyons : 19:32

No, I love this. I’m actually taking notes furiously over here. If you’re driving, how do you suggest you rewind this podcast when we’re done to start taking your own notes? Just don’t do it while you’re driving. Anyway, Mike, keep going on this trajectory. Say it’s at year five and say there’s no refinance, there’s just a straight sale at year five. Now you have your $100,000 hypothetical investment years. If this was a deal, I would put my 100 grand into it, by the way, if I can get 10% a year every year. Anyway, now it’s year five. I’ve now collected $50,000 in distributions throughout the hold period and say that there was a 2x multiple On sale. I would get a check or direct deposit for, say, another $50,000. How is that $50,000? When we sell the property, how is that treated by the IRS? What would you advise clients? Or just take us through how that shakes out?

Mike Pine, CPA: 20:26

We’re assuming it sells out in year five or 2x. First of all, you get your original $100,000 initial capital contributed back. You get $100,000, you get back, plus the $50,000 we’ve reinvested over the last five years. You’re at $150,000, and now you have a $50,000 gain. Depending on how you used that passive activity loss carry forward, you may be required to recognize what’s called depreciation recapture. You got this big benefit of passive depreciation loss in year one that you got to use for five years. Generally speaking, you usually get to use it for more than five years, considerably more than trying to be conservative on this. Let’s say you use that $50,000, and let’s say you were able to use it to offset income that would have been taxed your ordinary rates. You’re going to be required to recognize the first $50,000 of gain as ordinary income, potentially, unless you have other passive activities that are generating losses to offset it. That’s one. Generally we usually see in five years a higher and 50% ROI. Let’s just bring that example. Instead of having a 2x, let’s say 2.5x, you get your original $100,000 back. You already have your $50,000 back and now you’re getting a $100,000 gain. That first $50,000 in this scenario would be subject to ordinary income tax rates. The next $50,000 would be subject to long-term capital gain tax rates, currently 20% or, if you’re subject to that, investment income tax, 23.8%. It’s even more advantage than interest that would have been taxed at your highest tax rate every year. Ability and possibility of getting capital gain income characterizes capital gain Taxes. Long-term capital gain is just a multiplier effect against investing something where you get 10% interest each year and paying half of that in taxes.

Tim Lyons : 22:15

Mike, listen, this makes a ton of sense to me, but I’ve been a student of taxes and read a couple of books and I listened to tax podcasts. I’m even investigating going to some tax real estate tax conferences. I’ve spoken to you a bunch of times. I’ve heard you speak on other podcasts. This is really making sense and resonates with me. This is really why I chose real estate as a vehicle to invest in, to propel my own wealth and to start a company around it so I can share the opportunity with other folks. This could be really, really confusing to people. This is why we build out our team. Any real estate investing book if it’s a one-on-one type book, they’re going to say look, number one, discover your. Why, why do you want to do this? Number two establish your goals. Number three build out a team. This is what we mean with building out a team. You want to build out a realtor and a mortgage broker and a CPA and an attorney. I always joke with folks when I talk to them on the phone during our intro call is that hey, do you have a real estate-centric CPA that you use? They go well, I don’t know, he or she’s been doing my taxes for 20 years. I think they’re doing a good job. I just say, look, if you broke your ankle playing basketball, would you go see a real estate-centric CPA? Would you go see a neurosurgeon that does brain surgery, or would you go see an orthopedic surgeon that specializes in ankle fractures? The answer is well, I’d go see the orthopedic surgeon. It’s the same thing with CPAs. There’s generalist CPAs, there’s CPAs that graduate at the top of their class, at the bottom of the class, just like the MDs. Mds, they could be at the top or the bottom. The guy who graduated at the bottom he’s still called Dr So-and-So. This is my point is getting around. Folks like Mike can really help you establish a game plan, strategize. How do you use losses? What income is coming in If you had a capital event, if you cash out of an IPO, if you sell a company, if you have a 1031 exchange? You want to have somebody like Mike that you can call on the phone and say look, mike, I have this thing going on. How do I proceed? How does this work? Having confidence and clarity surrounding your financial picture means everything. I feel like a lot of people out there. Mike, I’m sure you can tell war stories about getting on the phone with people that probably have a problem. Then they call you, then they say, hey, can you help me out, as opposed to getting somebody like you on your team in the beginning of the process to help you figure things out along the way. What do you think about that, mike?

Mike Pine, CPA: 24:42

I would say it just goes back to the same example we said. You can choose to be a victim of the tax code or take advantage of it. If you want to take advantage of it, you got to do that proactively. Yet you can’t do that on January 1st, after the year passes, and say, ooh, I have a tax problem. Call someone on a CPA and say how do I fix it? There’s not a lot that could be done once the year is over. You need to call someone and speak with someone while you’re making your decisions, while you’re going through the operations, while you still have time to impact change and make it happen. Again, if you’re investing in a real estate project, not all real estate projects are equal. They’re not. They’re simply not. They don’t all have the same tax benefits. Some tax benefits that might be great for some people won’t impact other people the same way. There’s not a one size fits all book out there that impacts everyone to discuss, that impacts everyone, that will show them exactly how a real estate investment will impact their own tax return. It’s important to work proactively with someone that knows you, someone that knows what you’re doing, someone that knows your risk tolerance level, someone that knows how aggressive you want to be with the tax code. It’s someone that knows the business deals that you’re getting into, investments that you’re getting into. You’re right, all of us specialize in different areas. Again, if we go to figure the tax code, 80 or 90,000 pages are three or 400,000 pages. There’s no way anyone well maybe some people I certainly can’t memorize it all and learn it all. I think it’s important to find people that specialize in their niches. That’s why doctors have their specialties. A neurosurgeon can’t know everything about orthopedics. A general practitioner can’t know everything about neurosurgery. It’s just not possible. You should find someone that specializes in the area that you’re investing in and the areas that you’re doing business in. If you specialize in multiple or if you’re investing in multiple different areas, grow a team together. Like you say, you can have team specialists in all areas.

Greg Lyons : 26:41

Mike, that’s really interesting. We have a lot of first time investors, especially in the syndication space. They may have had a single family rental or something like that, but then they jump in with CitySide Capital and invest passively. They may come to the point where they’re thinking we talk about depreciation, we talk about passive losses offsetting passive income. They may go to their CPA that they’ve been using again for 10 or 20 years because they did their mom or dad’s taxes. They may say, hey, are we taking advantage of depreciation? Their CPA may look at them and say what are you talking about? If a new investor like that was to switch to someone like your firm, hine Company, and they said we would like you to be our CPA, can you take a look back at previous year’s taxes and do anything on a look back situation?

Mike Pine, CPA: 27:34

In most cases, yes. Generally there’s a three-year statute of limitations, so if it’s more than three years old, you’re probably stuck with it 99% of the time. Very occasionally it would get the IRS to open up a statute. In some cases that’s not a good idea either when the statute is passed, but generally it has three years. There are some elections, though, that are made that can’t be made retroactively, or the IRS will fight you on. For instance, if you have multiple passive investments and you haven’t elected to have them aggregated in the one or treated as once these losses from some to offset income from others. You can’t always get that retroactively done, depending on what happened in the tax returns in previous times, but other times you can do that. In some cases you have to get the IRS’s permission, but it’s not impossible to get their permission to do that. So, yeah, generally, with all of our new clients, if they’ve got complex business investments or dealings going back, we’ll try to review at least their previous three years tax returns and see if there’s any way. What a great way to start a client relationship. Hey, nice to meet you. Let’s get you $40,000 refunded from two years ago.

Greg Lyons : 28:43

That’s what I’m saying. That’s a good one.

Tim Lyons : 28:45

Yeah, I love that one too. So, mike, talking about taxes, like I said, excites me a lot. But what really excites me is when I found out what a 1031 exchange is. And if anybody doesn’t know, section 1031 of the code talks about like-kind exchanges. So, for example, if you had a family property or you owned a rental property for 10 or 20 years and it’s appreciated like crazy, right? Obviously the run-up in the market in the last couple of years has been fantastic, and now I’d say you could sell it free and clear for a million bucks. And now you just don’t want to pay Uncle Sam taxes, right, and you find out about a 1031. Mike, can you take the listeners through what some of the options are and maybe some of the nuts and bolts on a high level on 1031 exchanges?

Mike Pine, CPA: 29:31

Okay, so the various basics of 1031 is the IRS allows you, through internal revenue code section 1031, to do like-kind exchanges from income producing asset to an income producing asset. You can’t do it on your personal home if you never use it as a rental or if you didn’t have it hold it as an investment for a period of time. But you can do it with a real estate fee on the piece of property, Even if it was raw land and you owned it as an investment for a number of years. If you can sell, like you said, for a million dollars, free and clear, well, if you do that and don’t do a 1031, you’re going to have to pay taxes because you’re recognizing a million dollar gain. But you can, under 1031, choose to reinvest it in a like-kind asset. You got to follow the rules. I highly recommend everyone work through a qualified 1031 intermediary if they’re ever doing a 1031. Don’t try it on your own, don’t. There’s too many horror stories of it. But you can reinvest it into another property, avoid any gain recognition in that year and defer that gain into the future. You can actually keep doing it. You can keep kicking that can down the road and I’ve had some clients do this successfully kind of quiver to say successfully, because ultimately they had to die to never pay taxes on it. But they 1031, for generations. They died. They’re a state. They’ve done some good estate planning. Their heirs got to step up on basis and that gain wasn’t just temporarily deferred for 20 or 30 years, it was permanently deferred and no taxes were ever paid. So 1031s are pretty awesome. One thing you can’t do in the real estate investment world is take a property that you own and 1031 into a partnership interest as a limited part. A lot of people thought you could do that. I’ve heard some misleading podcasts that say you can do that. You can’t do it. But there are some funds, like Cityside, that have figured out. You can use tenants in common to help people place their 1031. So don’t just go oh, I can do a 1031, sell your property and go invest in some other syndication. Make sure if you’re going to do 1031, you’re working with a syndicator and an intermediary that knows what they’re doing in this area of the best. Normally in 1031, you’ve got 60 days to mark out your replacement property, 180 days to close. So from the time you can’t ever take receipt of the money again, it has to go through an intermediary. But as long as you have some options that you want to reinvest your money in, you can do a 1031, but you’ve got to name that property before it’s too late. And again, a 1031 qualified intermediary will walk you through all the rules and there’s a lot of good ones out there. Don’t get a new one. Get someone that’s been around for a while. Find some references. A good 1031 intermediary is worth their weight in gold. They don’t charge that much.

Tim Lyons : 32:15

No, and I want to stack on top of that Dequalified intermediaries. They’re non-licensed, like folks, so there’s no state licenses as far as I know, or national licenses for a qualified intermediary. So what Mike’s saying is talk to people, go to your local meetup, talk to somebody that’s used a Dunham 1031 and you use the QI a qualified intermediary to get some references. They want to be a national firm with a lot of experience, right? Not something that was started during the pandemic downtime, maybe out of somebody’s garage, but yeah. So, like you know, once you can get somebody to hold your hand. And as far as pricing, I’ve heard my clients tell me anywhere from like 1500 to 2500 per transaction, something around that. Don’t quote me, but so it’s not a lot of money to pay for somebody to hold your hand through a pretty intense process, because if you make one mistake, then the contract is broken, they return the capital to you and now you’re on the hook to recognize the entire gain and pay your taxes. So, with that being said, mike, you said something about you know working with guys like us that could help us. You know we do multifamily and self storage and, soon to be, industrial syndications. You know we use something called a tenant in common agreement, right, and that’s a whole other probably podcast that we could do. But you know there’s ways that you can, you know, get into a bigger deal. Obviously, things have to align. You have to align with the operators and their thesis for investing and the asset class and the market. So there’s a lot that you have to do to qualify the operator and the deal and you know the terms and everything like that. But it’s possible, mike, could you well actually you know what I’m going to call time out, because I’m stepping on Greg’s toes right now. Mike, I don’t know if you know that Greg and I have like a little volley back and forth where he talks.

Mike Pine, CPA: 33:56

I was thinking that it didn’t happen here.

Greg Lyons : 33:58

Yeah, I’m usually guilty. No, this is all you, tim. You take it. I will sit on the sidelines yet again, no problem.

Tim Lyons : 34:06

Yeah, I get in trouble, mike, as you can tell, because I like to talk a lot. But another thing that’s really powerful and I almost like keeled over the first time I heard about it was something called real estate professional status or reps, and if you go to any local meetup or if you go to some conferences, a lot of people will talk about it. They’ll throw the terms around, but what I found was that that not a lot of people actually know exactly how it works and how they can legally use it to check that box and say, yes, I am a real estate professional, so can you take us through a high level of you know what are the benefits of a real estate professional and how does somebody attempt to qualify for their rep status?

Mike Pine, CPA: 34:50

Real estate professional designation according to IRS rules is one of the most magical things I’ve seen. This is where you can have someone truly making hundreds of millions of dollars a year and not pay a dollar in tax legally and it’s works and it’s fair and there’s good reason behind it. It’s helping to create what we all need know is needed, as affordable housing. It’s really important. But if you qualify as a real estate professional, those investments in real estate that we talked about being in the passive bucket suddenly can move to the active bucket or the active stratify. And if you have an active real estate investment and through the beauty and magic of depreciation, you get a big taxable loss even though you’re cash flowing positive. You can offset all of your income. In almost all cases you can offset your W2 income, your 1099 income. It’s a beautiful thing but it’s not easy to get. It’s hard to qualify for it. There’s two hurdles you have to achieve to qualify as a real estate professional. One is you have to spend 750 hours in a year doing qualified real estate professional activities. It’s actually not that hard if that were the only hurdle and I wish it was, because I might even qualify but it’s only 15 hours just under 15 hours a week actually. So most people could do that. Tim, you could even do that, but you also have to do. The other hurdle that knocks us almost all of us out of it is you have to spend more time on real estate professional activities than all of your other professional activities combined. So, as a CPA working 3000 hours a year unless I didn’t sleep and never saw my family, there’s no way I could qualify. However, if you’re married to a spouse and your spouse is able to doesn’t have a lot of professional hours versus a lot of homemaking hours, which, in my opinion, is a lot harder than the job I do. My wife would agree with me. It’s definitely harder. Your spouse could go and achieve real estate professional designation just by spending 15 hours a week doing it. You could do it as being a boutique realtor. Go get your realtor license. The time you spend, the 300 hours you spend taking the classes and get your license would qualify you towards your 750 hours. Go show homes just for select few people and collect commissions. As long as you’re in it for a profit motive, it doesn’t have to be a 40 hour week or 60 hour week job. It can truly be 15 hours a week, you can qualify as a real estate professional and if you’re married to a spouse, that’s a real estate professional. You both are real estate professionals under the IRS law. And here’s one really cool thing about it as long as you have a real estate professional activity or own let’s say, you have a single family rental and you qualify or someone in your family qualifies as a real estate professional, you’re your wife or you’re your husband. As long as you have your own, that you materially participate one single family property. There’s an election out there that allows you to combine all of your syndication investments, all your limited liability company interests. You can’t do a limited partnership interest but if you have an LLC, you can combine all of your K-1s from your LLCs into that group to be qualified as a material participant and be able to take losses from an investment in a syndication to offset your active income or your spouse’s active income. It’s a beautiful deal and I’m going to try to stay away from politics, but we know of someone pretty well known who has been accused of not paying taxes for like 20 years of some sort. I suspect I know that person was a real estate professional and qualified as one. I suspect I’m not saying that person hasn’t broken a bunch of other laws, but that person likely was following the tax law inside and out and is fine. Real estate professional designation can be beautiful, but it’s not available for everyone and again, that’s another reason why I like, as a professional, investing in passive real estate, because you’re still getting tax-advantaged income, even though I can’t offset my income from my practice from it.

Greg Lyons : 38:47

Mike, that’s a great explanation and I’m wondering we do have a lot of high-income earners, either a husband or a wife, or a physician, a surgeon, a lawyer, something like that and the other spouse doesn’t work. Can the spouse become a real estate professional if you only have passive investments?

Mike Pine, CPA: 39:07

They can be a real estate professional, but they cannot take the bonus from only their passive investment or the depreciation from only their passive investments to offset their other income. Other income yeah, okay. Unless they have a single property that they do materially participate, they need to have a rental property that they spend at least 100 hours or more on qualifying, or all the other. So it could be a whole other podcast for material participation, as long as they materially participate in one activity and if they are a real estate professional, they can elect to aggregate all of their real estate activities, including LLC interests, into one bucket under the material participation roles, which would allow it to be an active loss from their depreciation.

Greg Lyons : 39:50

This is why you hire an expert because I don’t know how our download numbers are going to be on this episode, but someone may have tuned out 20 minutes ago. The power of real estate combining it with an expert in taxes, can be very, very powerful. I think that’s the biggest thing that we want to get across in this podcast is reach out to a real estate-centric CPA. Those are the people that will take your income maybe to that next level. You could aggregate more, build more wealth, invest more. It’s just so powerful. It really is, mike. This has been Tim. We say it often in masterclass, but this has actually been a masterclass in really learning about how powerful taxes can be for you in the positives, mike. We’re going to transition to our three questions that we ask each guest at the end of every podcast. The first question that we get often, especially in times like this, when inflation is high, interest rates are high, people say that investing in real estate is too risky. I’m going to stay away. What would you say to people like that?

Mike Pine, CPA: 40:59

Are they making any new real estate out there? Is there ever going to be more? Save a few volcanic islands? Prices are going to go up. Prices are going to go down, but one thing we always said, and this is my grandfather’s rule of thumb they’re not making more real estate. There’s a finite amount of real estate. As inflation goes up, that value of real estate is going to go up. There will be ups and downs, but over time I’ve never seen any real estate not make money as long as you can hold during the bad times.

Greg Lyons : 41:29

You know, tim, you kind of sounded like a financial advisor there. Your stocks are going to go up, your stocks are going to go down, the whole thing. Real estate is the same way really.

Tim Lyons : 41:38

Yeah, but you mean, like, here’s the thing about real estate that I love so much is that, just like Mike said, like it’s going to go up, it’s going to go down, but it’s not marked to market every day, right, like you’re not going to be able to go on to your phone, go to your app and say what’s my real estate syndication doing today? Oh, my God, it’s down by 14%. Right, the stinks real estate stinks. Right, it’s not you’re holding through the quote unquote downturn in real estate, but you’re still cash flowing. That’s why you got to buy cash flowing assets, right, you got to have the income minus your expenses, right, and then the debt service and everything else after that you get to keep as cash flow. So, mike, I love that. Number two is you know we are big on education, mike. You know you can either be ordinary or you can be extraordinary. Right, it’s taking that effort to go to the next level. So there’s a quote by a guy named Jim Rohn you may have heard of him, right that says a formal education will make you a living and a self-education will make you a fortune. You know, given what we just talked about today, what does that mean to you?

Mike Pine, CPA: 42:44

I couldn’t agree more. I look at it, that my colleagues or my friends from college back in those days, many, multiple decades ago now, and I look at the ones that got their business degrees and their finance degrees and they were going to go out and make a ton of money in the market, and I chose accounting and they would laugh you’re going to go out and make a living, but I’m going to go out and take on the world. And they immediately went and worked for some investment financial advisor house and they’re still working there and haven’t done that Well. They have not gone out into the world to see what else is available. They got in there on that treadmill you talked about earlier. They’re trading time for money. If you don’t venture out and don’t learn more and don’t take advantage of the knowledge base and learn the lessons the hard lessons a lot of people have learned by researching and reading and listening to podcasts, you’re going to be stuck in your narrow lane and the world’s too big to be in one small narrow lane and the opportunities are too big to not at least learn about and see if you can’t enjoy some of them as well.

Greg Lyons : 43:42

No doubt about that, you know. The last question we have from Robert Kiyosaki, who made an appearance at the beginning of this podcast and he said that savers are losers and debtors are winners. What does that mean to you?

Mike Pine, CPA: 43:57

It’s taken me a while to come around to that, especially growing up as a Dave Ramsey fan. Rich Dadportad is an incredible book and anyone who’s listening to this I wouldn’t strongly recommend Kiyosaki. He’s talking about different quadrants that you can be in. In a world where you could have borrowed eight months ago, a lot of money could have cashed out, refinanced your home at 3% or less on a 30-year fixed loan. If you went and invested that in something that’s appreciating right now and even growing with this inflation and inflation is a. I don’t know what you guys think, but my opinion is well over 10% right now and you’re paying 3% interest for 30 years, making somewhere over 10%. That’s called arbitrage. Why wouldn’t you do it Now? I also think you’ve got to be conservative. You should always stress test any investment you’re going to make or any lending you’re going to undergo or borrowing you’re going to do. Just test, make sure you can write out the hard times, because borrowing has killed a lot of people and made a lot of people bankrupt not killed, but financially killed them. But those who do it smartly grow their net worth a heck of a lot faster. Not saying go trade on margin on Wall Street and trade a 90% margin that can hurt you. But smart leveraging and smart investing can help snowball your generation of wealth a lot faster than if you just save, as Kiyosaki said. Kiyosaki said I love that.

Greg Lyons : 45:25

Yeah, no, that’s true, and, as we come to the close of this podcast, we have no intention of giving anyone a tax advice or making any recommendations. This is just kind of a spur of thought and say, hey, should I be looking at my CPA from a different lens to help me out? And really what this podcast is going to do is is not going to make you the most popular person at the next cocktail party. Right, and taxes and insurance usually doesn’t wow the crowd. However, it can really really build wealth.

Tim Lyons : 45:57

Absolutely. I love that. Yeah, I mean this is something that we’re passionate about, right, greg? I mean this is what we talk about now on the phone. I mean we talk probably 30 times a day, but so listen, like this is what I’m talking to. This is what I want our listeners to really focus in on. It’s education, it’s action, it’s getting in the right room, getting on the right phone calls, getting the team around you. That is, either they’ve done the thing that you would like to do and they’re at a place that you would like to be, and it’s really asking who and not how, right, because if you’re asking yourself how I’m going to do my own taxes, I’m going to read my own books and figure out. You know that’s a disaster. Right, there’s experts like Mike and his company that you can go to and strategize and get the experts around you and that’s how you grow. But before we hop off talking about education and action, greg and I are going to be going to the multifamily mastery five conference in Orlando the first week of November in 2022. Which was a Jake and Gino crowd, and if anybody’s interested in joining Greg and I down there, we’re going to have a link in the show notes that you can get $200 off your ticket. So come down and if you do buy a ticket, send me an email, tim at citysidecapcom. Let me know you’re heading down there and we’ll set up a dinner or appetizers or drinks or something and we’ll meet up. So just wanted to put that in there. But anyway, mike, how can people find out more about Pine and Company CPAs if they wanted to reach out further?

Mike Pine, CPA: 47:16

It’s as easy as going to our website, pinecocpascom, or just Googling us Pine and Company CPAs. We definitely know real estate. We like to think outside of the box. I’m not saying we’re the best CPAs out there, but we’ve got some great CPAs here and we’d love to help you Go to pinecocpascom. There’s buttons all over the place to schedule an initial free consult and we’d be happy to help you figure out if there’s any way we can add value to your life.

Tim Lyons : 47:41

I love that. Thank you so much for coming on this episode of the Passive Income Brothers Podcast. Thank you to the listeners for spending another week with us. We would be so grateful if you could leave us a rating and review on whatever podcast platform you’re listening on, and we will see you again next week. Thank you for listening to another episode of the Passive Income Brothers Podcast. We would be grateful for your support of our podcast by giving our show a five-star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, head on over to citiesidecapcom to connect with us and find out more information about how to get started passively investing in real estate.