Truth About Taxes as a Real Estate Investor (LA 1559)
Truth About Taxes as a Real Estate Investor (LA 1559)
Transcript:
Steven J Butala:
Steve and Jill here.
Jill DeWit:
Hello.
Steven J Butala:
Welcome to the Land Academy Show, entertaining land investment talk. I’m Steven J Butala.
Jill DeWit:
And I’m Jill DeWit, broadcasting from pretty Phoenix, Arizona.
Steven J Butala:
Today, Jill and I talk about the truth about taxes as a real estate investor.
Jill DeWit:
This is a hot topic often, not just tax time, but that’s when it really hurts, but this is a big deal. People come into this, and it’s kind of funny, I never thought about this going into this business. I never thought about if I make a lot of money, how am I going to do my taxes? I always let those things work themselves out at the end, but it turns out we have a lot of people, probably smarter than me, that are thinking about this now, so we wanted to talk about it to put everybody at ease and give you some insight and some ways to tackle taxes.
Steven J Butala:
If you love paying taxes-
Jill DeWit:
This is not the show for you.
Steven J Butala:
No, if you love paying taxes, then after these next three or four sentences, you can just turn the episode off, because the rest is for people who don’t want to pay taxes or like to legally minimize tax. That’s what this is about. If you love to pay taxes, this is what you do. You form an LLC.
Jill DeWit:
We’ll save it for the show.
Steven J Butala:
No, this is just for people who love to pay taxes.
Jill DeWit:
So they can get it out of the way now.
Steven J Butala:
Form an LLC, set your W2 paycheck, you and your partner, pay the highest salary as you can, and then you pay a withholding, and then there’s nothing left over, because pay yourself so much in all those taxes, so you’re all set there.
Jill DeWit:
Oh, thanks.
Steven J Butala:
Before we get into it, let’s take a question posted by one of our members on the landinvestors.com online community. It’s free. If you’re already a member, please join us on Discord.
Jill DeWit:
All right. Hello. I know these two. Erica and Abby wrote, “Hi, Jack and Jill. Just want to give you guys a quick update. My wife and I joined Land Academy a year or so ago, and we just completed 100 deals, 74 cash, 26 on terms.” They were at our last live event. I remember. “We feel grateful and want to thank you so much for sharing this business with us. Please keep up the good work. Best Erica and Abby. That’s so great. I also see them on social media traveling the world.
Steven J Butala:
Really?
Jill DeWit:
Yeah.
Steven J Butala:
That’s great.
Jill DeWit:
So, it’s obviously working out just wonderful for them. That’s so good. Congratulations. Thanks for sharing that.
Steven J Butala:
Today’s topic, the truth about taxes as a real estate investor. This is the meat of the show.
Jill DeWit:
Okay. I wanted to bring this topic up because it’s important, number one, and it’s often on people’s minds, as it should be. We’re making all this money. Where’s it going to go? How do I account for it? Do I file taxes in every state? Do I get an LLC for every property? Do I get an LLC for every state? Oh my goodness. There’s so many ways to do this. Here’s my answer. Yes, there are so many ways to do this. This is the point for me, if you don’t mind.
Steven J Butala:
Of course.
Jill DeWit:
Then I’m going to let the person with the accounting background give you their professional advice. But my advice is mainly this. People always ask us exactly how we do it, who’s our accountant, can we call our guy? Can we copy you? You know what? We’ve been doing it for so long, and we have certain tax, you’ll talk about this too, designations that may not apply to everybody. We’re all different ages. We’re all in different states. We’ve been doing things differently. Guess what? It’s okay. My main point here today is there are different ways to do this. There’s no perfect cookie cutter Land Academy approved roadmap to taxes that says, “Go to this and then do this. Get six of these, hire four of those guys,” that kind of a thing. I want you all to know you’re not nuts. I want you to know that you could look at this many different ways.
Steven J Butala:
That’s right, Jill.
Jill DeWit:
I want you all to know that you need to spend some time and interview several, not two, several accountants and pick the one who best aligns with you.
Steven J Butala:
Think about the things that you can do for a living. You can go get a job as a plumber, and you’re going to work for another plumber or a company that’s a plumbing company. You’re going to get a W2 paycheck and you’re done. The federal and state governments are going to withhold taxes as you pay, and you’re going to get some money back at the end. That’s it. You have no choices. Now, let’s kick it up a notch. Let’s say you are a day trader and you wake up in the morning, you sit down at your computer at the end of your bed, and you start making money. You make a lot of money. They’re very typical normal types of business expenses that can be incurred by a day trader. It’s very cut and dry, for the most part, plus or minus five or 10%.
Steven J Butala:
That is absolutely not the case with the business that we’re in, which is a really good thing. When you say, “I’m a land investor. Sometimes I do deals in Tennessee, sometimes Washington state. This year, I’m doing deals in Nevada.” It opens up all these opportunities for you to expense things legitimately, because it costs more to do deals, especially if you’re going traveling and visiting these places. I’ve said this in the past many times. Number one, the fact that there’s not any hard and fast rules, not just about taxes, but buying and selling land, which web scraper you use, whether or not you use data, should I send out neighbor letters? Should I not send out neighbor letters? There’s all these choices makes this for me and my personality type, and this one too, one of the greatest businesses there ever was. There’s just no on and off. Switch for a lot of people, that’s their nightmare. They just want to show up, make some money, and that’s it. That’s just not what this is.
Jill DeWit:
Have a 10 step process SOP, and this is how I do my job.
Steven J Butala:
It’s very common for people like us in buying and selling land, if we’re going to go visit it or meet some real estate agents or whatever, to write off, or expense is the right phrase, airline tickets when you’re going to see your property. It’s very common to take a reasonable deduction for wherever you’re working in a home office. It’s reasonable for you to expense all or some of your communication, whether it’s a telephone or computer equipment or your internet expense, and on and on and on. The normal plumber could never do this. The day trader, maybe, some of them, some of it’s ordinary, some of it’s not, and then everything in between.
Steven J Butala:
Then, and I’m not trying to complicate this, I’m trying to give you a big overview about why this can be such an attractive situation for us, as we’ve gone through buying and selling land, and as our career careers have developed individually and collectively, we have Land Academy. Now, is it ordinary and necessary for Jill to write off the makeup she uses when she’s in front of this camera? Yeah, and on and on and on. There’s all kinds of things that you can do and ways that you can do things that can minimize your tax liability at the end of the year. That’s just the overview of tax. This is a very positive thing.
Steven J Butala:
I know people don’t want to talk about this, but it really is. We are in a better situation than medical doctors. We’re in a much better situation than a CEO of a publicly traded company. You you hear all this stuff about companies never pay taxes and all of that stuff, maybe that’s true, maybe it’s not. For us, I spent a lot of time in the fourth quarter of every year making sure that everything’s structured right and that we’re expensing things correctly and legitimately, so it’ll super easily pass an audit, if that ever happens. There’s lots of things that you can do, but it has to be managed.
Jill DeWit:
Correct.
Steven J Butala:
If you’re brand new, I’m hearing a lot of people now say, Jill and I are hearing people say that their accountants are recommending that they withhold a certain percentage of the revenue on every deal, put it in a separate bank account, and so you don’t get stuck at the end of the year in April, or the April the next year, when you can do nothing about it, and you just don’t have enough cash because you’re out buying real estate, which is what you should be doing.
Jill DeWit:
Put something aside. That’s a good recommendation always. Whatever don’t need, great. There’s more acquisition funds.
Steven J Butala:
The title of this episode is a truth about taxes as a real estate investor. Here’s the truth. You are in a fantastic tax situation, an amazing opportunity for you to really look at your tax situation. That plumber we were talking about, if he does well that year, he’s going to be in a crazy high tax bracket. Doctors, forget it. They hit the top in January. They hit the top entirely, for medical doctors, most of them. A CEO. There’s nothing you can do. There’s stock compensation. There’s no real opportunity to expense anything. But as individual entrepreneurs, which is what we are, what weird types of businesses, up all night trying to figure stuff out and need a new computer, those are all legitimate tax expenses. So, please, before we sat down and did the show, this is what Jill said to me. I don’t think we’re delivering the message correctly that we have the control.
Jill DeWit:
Right.
Steven J Butala:
When you go from a W2 job to owning your own company, you have all the control. You need to sit down with your accountant and actually educate that person. 80, 90% of their business is just processing a 1040S for a W2 position.
Jill DeWit:
Right.
Steven J Butala:
They don’t know.
Jill DeWit:
This is part of the process.
Steven J Butala:
What they do, most of them, I know this because I have an accounting background, not a tax background, but accounting background. Most of them want to encourage you to stay the hell out of trouble and pay as much taxes as you can, and you don’t want to do that. Like so many things in this business, we’re entrepreneurs, get out the Google, get out the YouTube, and start figuring this stuff out yourself. Don’t do your own taxes. Please don’t ever do that.
Jill DeWit:
True. True. Do your own homework. You do need to know a lot going into it. That’s a good one. Like Steven’s saying, research it, have a good idea, what’s possible, how you want this to go, and then start interviewing accountants.
Steven J Butala:
That’s right. Unfortunately, I mean, I can answer a lot of these questions. I can answer most of these questions about where my comfort zone is, but I can’t for you. So, you have to decide how conservative you want to be about it, or if you want to be a risk taker with it. That’s the truth. There’s a lot of things that you can try and see what happens. That may or may not get you into trouble with the IRS or with the state that you’re in.
Jill DeWit:
You worded it perfectly. Lucky for us, there’s no one perfect way.
Steven J Butala:
Yep. If there was, everybody would be doing this.
Jill DeWit:
Right. It would make it easy. We’d be telling you right now. Because, again, we’re all in different states and all different situations, and we all look at things differently.
Steven J Butala:
Yeah.
Jill DeWit:
We have a lot of options. Congratulations.
Steven J Butala:
There’s a few hundred Land Academy members right now, and it’s always been that way, because this business naturally keeps people out of it that aren’t reasonable risk takers. I love that about this business that we’re in. I’ve always loved it.
Jill DeWit:
That’s good.
Steven J Butala:
There’s a million, I don’t know, some millions of numbers of real estate agents in this country. There’s only a few hundred of us that buy and sell land full-time. So, think about that.
Jill DeWit:
It’s amazing when you put it like that. Happy to join us today. Five days a week, you can find this right here on the Land Academy Show
Steven J Butala:
Tomorrow, the episode of the Land Academy show is called why is Jill confused about our accountant’s email? You are not alone in your real estate ambition.
Jill DeWit:
Don’t say what it is.
Steven J Butala:
I won’t.
Jill DeWit:
Okay, good. I want to save it for tomorrow, because I’m like, “What the heck kind of response is that?” It’ll be good. By the way, if you need access to any sort of ownership or property information, including owner phone numbers and FEMA flood map overlays, check out neighborscoop.com or parcelfact.com, created by investors, that’s us, for investors like you.
Steven J Butala:
We are Steve and Jill.
Jill DeWit:
We are Steve and Jill.
Steven J Butala:
Information.
Jill DeWit:
And inspiration.
Steven J Butala:
To buy undervalued property.
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