Amanda Han (03:49):

As long as the home itself has a room or a space that’s dedicated for your real estate investing business. So in other words, it can’t be like, “Oh, I’m just managing my properties from my dining room table or my living room couch.” Right. But if you have little alcove or you have a separate bedroom, that’s where your home office is, I would definitely claim that. And I think that’s just one of many overhead expenses that people miss and part of the home office being missed is due to, I think, misconceptions. And also a part of it, probably the fault of some tax advisors, because I still come across investors all the time who say, “Oh, I do have a home office, but my tax person doesn’t want me to take it. They think I’m going to be audited.” That’s something that’s maybe true about 20 or so years ago when working from home was not really a thing, like maybe couldn’t be done, but especially nowadays, I mean the vast majority of people are working from home, especially for real estate investors.

Robert Leonard (04:47):

That was exactly going to be one of my next questions was about that red flag for the IRS. From at least what I know, the little I know about taxes and what I’ve read is that, like you said, about 20 years ago, maybe decade or two ago when it wasn’t that common for people to work remote and technology wasn’t where it is today. That might have been a red flag for the IRS to maybe do an audit or something along those lines. But today, I mean, so many people are working from home. So I don’t think it’s necessarily going to be a huge deal. How about utilities? Can we write off a portion of our utilities as part of that home office expense?

Amanda Han (05:21):

Yeah, definitely. And this kind of the concept of the home office, right, because you can… As a homeowner, for example, you can always write off your mortgage interest and property taxes on your personal return, whether or not you have a home office. But what we typically cannot write off individually are things like utilities, internet. If we pay someone to do cleaning of our house, if we have security systems or Nest, a lot of those things we can’t write off because they’re just personal in nature. And so that’s the benefit is when you’re real estate investor, you’re in the business of investing in rental properties. Then when you’re using your home, a portion of all those things that we just talked about can then become tax deductible as part of your home office expense. And I know sometimes people think, “Do I really pay that much in utilities? Do I really pay that much in security or cleaning?”

Amanda Han (06:09):

But if you add it up over the entire year and you add up all those different amounts, they are pretty significant. It’s not uncommon for us to see 5,000, 10,000 or more in home office expenses and the more expensive or the higher cost of living for you, where you are, the larger the potential home office. So someone living in New York might be like a really small apartment, but it still might be a huge home office deduction just by the fact that their mortgage is high or their rents are very high that they’re paying.

Robert Leonard (06:39):

I think it’s also just a good habit. Like if maybe now it’s small, but as you scale as an investor, maybe your house gets bigger, whatever the case is, that expense could become even larger. A more material piece as part of your tax deduction, so I think it’s really about building a really good habit.

Amanda Han (06:53):

The concept too, of IRS auditing, something like this. Yeah. That was the years and years ago. And in fact, several years ago, the IRS has made it easier for people to claim home office expenses where they kind of give you a standard rate, right? Where if you didn’t keep receipts, you can still claim up to, I think is like $5 per square foot for your home office expense. We can’t really hold onto a lot of these outdated data and outdated thoughts when it comes to tax filing. And also just as importantly, too, even if something is a little bit higher audit risk, it doesn’t mean you should not take advantage of it. Right? As long as you have a legitimate home office, you have a legitimate business expense. I would certainly take it because it’s allowable by law. And it’s something that you actually incurred, right? We’re not making up write offs or anything. So be it, if it’s a higher audit risk, if you’re audited, as long as you can prove your position, there’s really nothing to be afraid of.

Robert Leonard (07:50):

And when it comes to proving things, talk to us a bit about the receipts. You mentioned receipts. I know that’s an important part. Do we have to save receipts for every single thing we do? Where is the balance there?

Amanda Han (08:00):

Yeah. A great question. I know such an unpopular topic, right? People like to hear about, “Oh, I’m an investor and I saved five, $10,000 in taxes.” And then when you start talking about receipts, it’s like, “Boo!” Nobody wants to do it. But earlier you mentioned the word habit. I love that word, when it comes to taxes and tax planning, running real estate business in general. Receipts is one of those things that we always recommend for investors to get into the habit of keeping them. And by keeping them, we don’t necessarily mean you have to keep those little thin pieces of paper somewhere in your pocket or in your purse. But a lot of times you can just simply take a picture, right? If you go somewhere, you have a meal with someone, when you sign the check, just take a picture of that, so you can have record of when it was and what was ordered for that business meal.

Amanda Han (08:42):

The majority of the time for those receipts, what I do as best practice is every month or so, I will then move those images on my cell phone over to a folder. And then that’s pretty much it. I don’t look at it. I don’t chronologically organize it or anything, but I know it’s there in a folder, everything for April 2022. And the reason for that is if I’m audited might not be two, three years from today. And by then, I probably don’t know what I spent money on. Who did I eat with and all that good stuff. And so if I’m audited, I can then go to the out folder and pull up my receipt and figure out, okay, here’s my proof for what I did. But because the audit risk of most taxpayers are very, very low. It’s just as it’s simple, as it sounds, you take a picture of the receipt, you file it away. We don’t have to do anything meticulous to then further document a lot of those things.

Robert Leonard (09:34):

I’m so thankful for technology, especially, in this realm, because if I had to do this a decade ago before a lot of this technology came around, I probably wouldn’t do it. I’d probably just say, “Forget all this small stuff. I’d only do the big ones.” But I mean, like you said, it’s so easy. What I do is I just take a picture of it on my phone and I have Google drive right on my phone. Most people should have access to Google drive. I just upload it, right in to there. Name it, the date of the transaction or the… Give something that I know if I have to go back and can find it, what credit card it was spent on, who the merchant was, whatever the case is. And then I have all this whole folder with all of my receipts. Now, if I ever need one, I can go back and find it.

Robert Leonard (10:07):

And there’s even, a lot of times you could search within a photo album or software and it can actually read what’s your receipts. So, if you know you find a specific transaction, you could just search it and it’ll actually pull up that same receipt.

Amanda Han (10:20):

Yeah, exactly, exactly. I mean, it’s a lot easier, right? And I think we’re really beyond the days of being afraid of receipts, paper copies, a lot of times now receipts are even emailed to you, which you can archived pretty quickly. There are rules of receipts are under certain dollar amount out, you don’t really have to worry about it. Just for best practice, for getting to the habit, right. As an investor, instead of learning how to memorize all the rules of what receipts do I keep, do I not keep. The best habit to get into is just keep all receipts. Because if you’re audited, IRS asks for a $5 receipt and you just happen to have it, you’re going to look really great, right?

Robert Leonard (10:59):

What is the minimum needed for a receipt?

Amanda Han (11:02):

So it depends. It’s different based on food versus just repair costs, right? Repair costs and expenses. Even if it’s $2, technically you still have to have a receipt. And that’s why for us, we just say, “Hey, don’t worry about the minimums, the maximum, because it also coincides with what type of expense it is as well.”

Robert Leonard (11:19):

You talked about utilities, those are all things like internal of the house. And you’d mentioned cleaning, things like that. What about things external like landscaping, things like that.

Amanda Han (11:30):

So landscaping, unfortunately… When it comes to home office. Okay. Landscaping. Obviously, if it’s a rental property, it’s completely tax deductible because it’s part of your real estate property. When it comes to home office though, landscaping, unfortunately based on many tax court cases they have indicated is not part of the home office. Taxpayers have tried to make arguments that I have clients, I have investors coming in, I need my front yard to look nice. But they’ve said, “No, that’s not really a necessity.” So the gardening and things like that, typically not part of home office.

Robert Leonard (12:02):

For the items that are tax deductible, as part of the home office deduction, they are based on a percentage of your square footage of your house that your home office takes up. Correct. So, let’s just say your home office is 10% of the total size of your house, you can deduct 10% of the expenses. Is that how that works?

Amanda Han (12:18):

Exactly, exactly. And so the bigger the office, the better the tax write off. So we have clients who have a basement that’s their office, which is almost a third, right, of their entire property or like a loft area. So yes, it’s based… So when we’re looking at household expenses that you’re paying for the entire house, like interest, taxes, utilities, you’re taking a percentage. On the other hand, if we are talking about office specific expenses, for example, you have a home office and in that home office, you bought a new desk, you bought chairs, you bought computer equipment, some paintings, some rugs, those are a 100% tax deductible because that is used exclusively in the office itself. So it’s really important to make sure you’re keeping those separate.

Robert Leonard (13:03):

One of my favorite things about this is I house hack a duplex. And so all of the expenses and some of the utilities for the other unit are tax deductible. And then I can deduct a portion of my own for my home office. So when I look, get my total tax bill from like the whole building perspective, I’m really only paying out of my pocket for a very little portion of all the utilities and taxes. And so when you can kind of combine this tax strategy of home office expenses and really just being on top of your taxes with house hacking, I mean, it’s super powerful.

Amanda Han (13:31):

Yeah, definitely. And that’s really the concept. When we talk about tax planning, especially, these overhead expenses that we’re referring to. I mean, so far we’re only talking about the home office, but you think about cars, right? I mean, if you’re driving a car and you’re using it for real estate, whether it’s go to Home Depot, going to look at properties, visiting existing properties, meeting with investors, going to the bank, then part of your car expenses become tax deductible and as well. And from a planning perspective, we’re always trying to look for ways to shift some of these personal expenses, like a home, a car, a computer, a cell phone, and trying to shift as much of that as legitimately possible into business deductions using rental real estate.

Robert Leonard (14:16):

One of my key takeaway from your book is that we need to be proactive with taxes. The book said, “Learning to think creatively and proactively about ways to minimize your taxes and how this applies to day-to-day things will help you keep more of your profit in your pocket rather than handing it over to the IRS.” How do real estate investors act proactively about their taxes? What are some things we should be doing before buying certain items and just doing generally throughout the year?

Amanda Han (14:41):

I mean, of course, if you buy an item for your real estate, right, you buy a property, you buy some appliances for the rental property. You have deductions, you have depreciation. But before going into that part, the first thing that we just talked about is trying to look at what are all the things you’re spending money on already personally that are maybe traditionally non deductible. And so how can we move those into legitimate business deduction portion. Going back to that word habit, right? How do we get into proactive tax planning is making tax planning almost like second nature, get into the habit of asking yourself when you spend money on something, “Is this something that is ordinary and necessary for me to have as a real estate investor?” And some of those answers are going to be really easy, right?

Amanda Han (15:30):

If you go to Costco, you buy some paper, you buy stamps, you sign up for a real estate course or you buy a tax book, you’ll know, it’s for real estate. There’s no other reason really. Why you’re you having those things? And so if the answer is, yes, make sure you track the receipts, make sure you’re somehow capturing that cost or paying with your LLC credit card. There’s going to be things that are unsure, right? If maybe I’m going somewhere or with my friends, probably, going to talk to them about real estate. I’m not really sure if this trip is going to be tax deductible or not. And those are times when your tax advisor will come in. Right? So before you plan that trip, before you spend that money, send them a quick email, give them a quick call and say, “Here. Here’s what I’m thinking of doing. Going to be a pretty significant amount of money. What do you think should I pay with, with my LLC? Do you think it’s a business deduction?”

Amanda Han (16:14):

Because then that puts your tax advisor on alert and they’ll be able to help you. Maybe this trip for Robert ordinarily is not tax deductible, but are there things that could be done before you leave for the trip to make sure that you have more of that become tax deductible? Are there real estate activities or things that we can preplan so that we create the fact pattern to have at least part of this become tax deductible? Not for everyone to just become like a tax geek or anything, but it’s kind of a little voice in the back of your head. Like, “Hey, is this something I think that might be real estate.”

Amanda Han (16:48):

Because one of the downsides in what I think, going back to your first question of why people miss out on tax savings, is we tend to have this thought that I can’t take a deduction. This is probably not legitimate. And if you already have made that decision that you can’t write it off, then you won’t write it off because your tax advisor probably will never see that expense, right? They were not with you. They didn’t know you went here or spend money on that. And so, you’re sort of the first line of defense. If you don’t the answer, that’s when it’s a good time to just reach out and find out.

Robert Leonard (17:17):

You’re mentioning a couple things that are… Your tax advisor will help with your CPA versus what you’re doing. And I’ve actually heard a lot of people say, “Oh, it’s my CPA’s job. They’re going to take care of it.” When it comes to not only what you mentioned, but just tons of tax related items. But in your book, it says, “We know that some of you may think that what we just described is the job of your CPA, your tax preparer. But that would be as incorrect as saying that your doctor takes care of your body.” Where does the fine line end between, what is expected of someone’s CPA versus what they should be doing themselves?

Amanda Han (17:49):

Yeah. It’s funny because we do have a lot of clients who are in the medical practice, right? It’s like, “Hey, if your doctor says you’re overweight, you don’t blame the doctor say, “Well, gosh, you know how come I’m so overweight?”” It’s like, “Well, obviously, because I didn’t take care of my… I didn’t exercise.” So is the same thing when it comes to taxes. I think a lot of people tax time, they end up owing a lot taxes. They tend to blame the CPA. “My CPA did a bad job. I paid a lot in taxes.” And it is a fine line, but I kind of go back to you as a taxpayer, right? You’re the first line of defense because you are the one spending the money. You are the ones deciding whether you get involved in the transaction.

Amanda Han (18:24):

You’re deciding whether you buy a rental, whether you refinance, whether you sell, right, your CPA’s not with you day to day with those things. But at the same time, it’s also not your job to know all the rules. If you’re selling a property, you don’t have to know, start to finish of a 1031 Exchange or how you’re going to defer the tax. The best thing to do is the role of the investor is simply to make sure that they’re keeping their tax advisor in the loop, right? So you would say, “Hey Amanda, here’s what I’m thinking of doing. Should I sell this property for $200,000 or should I refinance?” And that simple two-sentence statement can create thousands, if not tens of thousands of tax savings, because then your CPA can talk to you about, “Okay, well what are the tax consequences of refinancing?” Maybe there’s no tax. You can tap into a $50,000 tax free.

Amanda Han (19:11):

“And if you sold it, well, maybe you might be paying $20,000 in taxes. But if you did want to sell, can we do a 1031 Exchange?” And so, the value is in the conversation that the CPA is going to give you options on what you can do. And the key here is options, when it comes to planning. And planning, this is all happening before you actually implement a specific decision or investment. Like after you’ve sold your property, it might be too late for your CPA to say, “Oh, here are all the 10 things you can do.” Maybe there’s like one or two things you can do. But if you talk to them before selling a property, they might be able to give you 10 things that you can consider, but you still have to do it right. If you have the ideas and you don’t do it. And you’re probably going to still end up paying the tax at the end of the year.

Robert Leonard (19:53):

Other than not being proactive, missing overhead expenses, not maybe consistently checking in with our CPA, what are the most common mistakes you see investors make? And what should we be doing differently?

Amanda Han (20:06):

I also sometimes come across investors who put too much focus on the tax side. And what I mean by that… And this might sound ridiculous to some of you, but I hear this pretty frequently. People say, “Hey, I’m I want to buy this piece of property and there’s very little cashflow, if any, and it’s not the greatest deal I’m going to pay over market for it. But I think it’ll give me a really great tax write off, right? Is this something I should do?” And nine times out of 10, the answer is to going to be, no. The saying, we always say, “We don’t want to let the tax tail wag the dog.” Right? So you never buy something, invest in something, spend money on something simply for the potential tax savings.

Amanda Han (20:44):

Because first and foremost, our goal is to use our money to invest, grow our wealth, reach financial independence. And then yes, taxes is a great byproduct of all of that. Yeah, definitely something to be aware of. Especially, in today’s market, I think, we’re seeing a lot of multiple offers on properties. Investors are having a little bit harder time accessing deals. And I think sometimes they try to justify that, but saying, “Okay, well I’m overpay. This is not a great deal, but I’m going to get tax savings.” That’s not a good way to start the investing journey.

Robert Leonard (21:15):

One of the most hotly debated and common things I hear in the real estate world, especially for new investors, is that… Really, it’s just this debate of whether you need an LLC or not to invest. And I know there’s a legal side to this debate, but from a tax perspective, give us a rundown of the different scenarios of when we might want an LLC versus when we might not and if one’s even necessary.

Amanda Han (21:37):

So I typically break that down into two different types of real estate income because as investors, we can’t just assume everybody’s a landlord there’s other ways to invest in real estate. For example, you might be someone who’s flipping, right, fix and flip, or you might be doing wholesale deals. And so for more active income, like flipping and wholesale, oftentimes having an LLC or specifically, an S corporation, having an S corporation could be very beneficial because it could help to save on self-employment taxes. Of course, it’s going to depend on what your flip or wholesale profit is, what other income you have. Like, “Do you have a job still and how much are you making at your W2?” So there’s a lot of different factors that come into play. But if you’re someone who’s actively doing flip wholesale, that type of stuff, at least have the conversation with your CPA because there could be some pretty significant tax savings.

Amanda Han (22:29):

As an example, someone who flipped and made a $100,000, if you do that in an S corporation, you might save $7,000 or more just in taxes. And this is outside of the asset protection part of it. Of course, if you’re flipping there’s risks associated with contractors going in and out and all that good stuff. The other side of the real estate realm is on the investment side. And that’s if you are doing house hacking, you just have rental properties, or if you’re doing the BRRRR method that people talk about a lot on BiggerPockets, those are all rental income. So when it comes to rental income, my job is fairly easy. There’s not really a significant difference or any difference, really whether you hold your rentals personally or in an LLC, because you generally get the same tax deductions in either scenario.

Amanda Han (23:16):

So the common things we talked about home office, travel, car expenses, all that, it is available, regardless of whether you’re holding things personally or LLC. So from the rental side, the LLC is for the most part used for asset protection purposes. And that’s where good attorney comes in. Oftentimes you’re looking at the cost of the entity and weighing that against the asset protection. Especially, for newer investors, the cost is always a concern, right, the cost benefit. If it’s going to cost me $800 and I’ll get to protect a $100,000 worth of equity, probably a really great deal. But if I’m doing these like no money down real estate where I have almost no equity, and I have an attorney trying to sell me a 10, 20, $30,000 entity structuring, then it’s probably believe not worth it. Right? So it does come down to investor by investor as well.

Robert Leonard (24:09):

A surprising piece of information that I’ve heard regarding LLCs is that even if minor or infrequent personal transactions are intertwined with LLCs transactions, it can actually invalidate an LLC’s protections. Can you talk to us a bit about this and if it’s a common problem you see in your work?

Amanda Han (24:27):

So the issue you’re talking about is considered like co-mingling, right, co-mingling personal and entity funds and transactions. And the issue of that is not necessarily a tax one, first and foremost, it stems from the liability protection side. So if someone were to sue you and you say, “Hey, I have a LLC.” The other party is going to say, “Well, actually Robert has been using LLC money for his parties and he’s kind of co-mingling everything. So the LLC really is not anything different from Robert. So we’re going to pierce the corporate veil.” And therefore you have no protection. So that’s typically, the issue that comes. And yes, unfortunately we do see that. That’s one of the reasons when it comes to entity formation, especially, for newer investors, we’re not looking just at the cost benefit, but also at the complexity too. So meaning if Robert has one rental and one LLC, that’s probably easy to administer, right.

Amanda Han (25:21):

Rental income and expenses from the LLC, all the personal stuff, personally. But if you happen to have bought into like a really complex structure where you have three LLCs by a holding company, you have another management company, investors often get very confused. Like, “Where’s the rental income go? How does it go to me? From the [baby 00:25:38] to me, from the holding to me? And how does the management company, what is that doing?” Right. If you’re getting into a more involved entity structuring, just make sure you’re okay with that complexity. And you have a full understanding of how you’re supposed to use it, because otherwise you probably just spend all this money for something like what you were mentioning. That’s going to be basically invalidated because you’re not doing things correctly.

Amanda Han (26:02):

From the tax side, one of the things is we also recommend not as live or die like the legal side, but we do recommend that personal expenses be paid personally and not through the LLC for the same reason. If you’re ever audited, IRS is going to want to see the LLC bank account. And if they’re seeing a lot of personal things running through it, then they’re going to just question a lot of these expenses, right? Why is Robert… Sorry to keep using you as a bad example but, “Why use a Robert paying for personal gym through the LLC?”

Robert Leonard (26:33):

So in that same vein, how do reimbursements work? If we have to pay for something, we don’t have our business LLC’s credit card or debit card or something we have to pay personally, is it okay to transfer money to ourselves as a reimbursement? Or is there a process specific that we should go through to make sure that this is a really clean cut line?

Amanda Han (26:49):

Yeah, exactly. And that’s exactly how you do it. So let’s say… And this happens a lot more with newer entities, right? “I have all these real estate expenses before the entity was formed. So now I have entity, how do I reimburse myself?” So yes, personally, you can move money to the LLC. It’s considered owner contributions. And then what happens is the LLC will then reimburse you. I mean, it sounds ridiculous, I know, but that is the process. So then LLC reimburses you for legal fees or marketing fees. And the expense then, is claimed on the LLC return. Now the money has been returned to Robert’s personal account. So those are not as problematic as the reverse, which is what I was saying is the LLC money being used directly to pay for Robert’s gym membership or something like that.

Robert Leonard (27:35):

If it’s done the correct way, an investors’ children and potentially even their spouse can be part of their tax write off, explain to us the creative ways to write off our kids and potentially our girlfriends and boyfriends and wives.

Amanda Han (27:47):

Yeah. We always talk about writing off kids, but yes, it’s absolutely… We’re seeing people who write off their significant other as an unmarried, right? Girlfriends, boyfriends, aging parents, who might be semi-retired. The whole concept of that is if you are helping out someone financially, anyways. If you had a friend who needs money, you gave them money. It’s not a tax deduction, it’s just a gift. But if, instead of just giving out the money you had these family members or friends work for you in your real estate business, helping you with marketing, helping you with tenant turnovers, or with cleaning out your short term rentals. If they’re doing work to help in the real estate, a business, then what you can do is pay them for those work done. And then that money that was paid becomes a legitimate tax deduction.

Amanda Han (28:35):

There’s really nothing magic about kids per se, right? It could really be anyone that you are helping out financially who can work for you, in the interim, take a tax write off for it. Yeah. It’s someone that if you have a significant other, like a girlfriend, who’s helping out, but let’s say they’re in a higher tax bracket than you. Then you might not want to income shift that one. Then you just want to call it a gift, right? Because then you’re just maybe creating more income and… Tax more income for them.

Robert Leonard (29:00):

I talked earlier that one of my key takeaways from your book was this idea of being proactive. I typically reactive with my taxes rather than being proactive, but because I travel so much, the second item in your book that really stood out to me was this idea of being able to write off some travel expenses if we do it correctly and schedule meetings in a certain way, and depending on what they’re related to. So explain to us your strategy to write off potentially every penny of our travel expenses.

Amanda Han (29:28):

The key to traveling is that you have to have what we considered predetermined business activities. We’re talking about, like if you went somewhere, right… If you’re going somewhere with your friends on a trip, you happen to look at real estate. Well, sure. Maybe you can write off some of your car rental and meals for the day that you went to look at real estate. But your airfare, your hotel cost for the trip generally is not deductible. Why? Well, because you were there to have fun with friends, you happen to say, “Hey, this might be somewhere that I want to invest in.” The alternative would be to say, “Before I’m leaving on the trip, what are all the real estate things that I wanted to do, right? Am I’m going to schedule appointments with local realtors. I’m going to schedule meetings with local lenders, maybe meet with real estate investors locally, maybe attend a local meetup on real estate.”

Amanda Han (30:16):

If I have all those things in place, then what you’re able to substantiate is the reason I took this trip was for all these real estate things that I’ve arranged. If my buddy happens to be there as well and we happen to have some fun on the weekends, that’s okay. Right. It doesn’t mean my flight is no longer deductible. And so that’s the key is making sure you have plenty of prearranged business activities before booking that trip to be able to show as much of my flight and hotel and all that is tax deductible. There’s a fine line between that too. Because I also talk to people who are like, “Well, I’m going to be somewhere for two weeks and I really don’t want to have so much real estate stuff.” Right? There’s a fine line between how much you want to write off and how much real estate stuff you actually are willing to do as well.

Robert Leonard (31:01):

And if I remember correctly, there’s a strategy where you have to sandwich your weekends if you want to spend the weekend over. So you’d have to plan for like a meeting on a Monday, if you’re going to stay until Monday… Covering the weekend, if you want that to be tax deductible. Can you explain that a little bit for us?

Amanda Han (31:17):

Yeah. Yeah. So there’s not a requirement that you have to work on the weekends. So one of the questions we get it is like, “Okay, if I’m visiting my properties, let’s say Thursday, Friday, can I stay over the weekend, go home on Monday and then still deduct my hotels for the weekend?” And so generally the answer to that would be no, because there’s really no business purpose as to why you were there over the weekend. Right. So sure you can still do all that. But those nights wouldn’t really be deductible because there’s not an any business associated. But on the other hand, if you had something on Friday, you have also something on Monday, then it becomes unreasonable to say, “Hey I’m going to have you fly from Florida back to California on the weekend and then fly back again.” And so the [reasonableness 00:31:58] person says, “Sure, you can stay over on the weekend because naturally you also have more stuff to do on the following Monday as well.” So that’s where that weekend sandwich concept comes from.

Robert Leonard (32:09):

How do we balance this dynamic of maximizing our tax deductions versus showing a profit on our tax returns so that we can still qualify for mortgages? That’s kind of the dynamic that I’m running into is like, “I want to pay as little taxes as possible…” I mean, that’s kind of one of the big pieces of real estate, right, is all the tax benefits that we get. But at the same time, if you’re full-time self-employed or a real estate investor, you know that you need to show some profit to be able to qualify for a mortgage other than just depreciation. So where do we go? What do we do in this respect? How do we balance this dynamic?

Amanda Han (32:44):

I mean the first step is to make sure you’re working with a mortgage broker who works a lot with investors because part of their job is to explain your tax return to their underwriters, right? The underwriters are the ones making the decisions on the loans. And there are things in there that reduce taxable income, but don’t necessarily hurt your borrowing ability. So some of the ones that you talked about, like depreciation, as an example, if you’re working with a good underwriter or mortgage broker, they understand that’s not a real cash outlay. So although, it saves you taxes, it doesn’t reduce your income for debt to income ratio. Other common ones like we talked about today, car and home office expense, right? Home office, when you’re applying for loan, they’re already taking that into consideration the mortgage you’re paying on your home or the rent that you’re paying on your home.

Amanda Han (33:34):

So the fact that you are claiming home office, they shouldn’t count that against you again, because those are already expenses they know you have. Same thing for a car, right? If you have a car payment, they already are factoring that debt. So again, the broker being able to explain that to the underwriters. So these are things that are saving you money, but not necessarily hurting your debt to income ratio. We do see investors where even after all that. So, depreciation, home office, car expenses, maybe even like 401k contributions for anyone. Self-employed people, if you’re making retirement contributions to reduce taxes, that’s a discretionary item. You can choose to make it or not make it. And so those are also things that shouldn’t hurt your borrowing ability. Sometimes even if after all that, there’s just still not enough to get under property loan that you want.

Amanda Han (34:24):

That’s where it becomes more of a business decision, right. You can say… And typically the way we approach it is to say, “Okay, here’s your tax return based on everything you could legitimately deduct. And here’s the refund, you’ll get, send it to your mortgage broker and let’s see what they can do.” And so they might come back and say, “Okay, well, if you want to get this loan, I have to show another $10,000 worth of income and that’ll get you a $100,000 worth of loan.” Then it becomes a business decision. Like, “Am I going to forego writing off my marketing or forego writing off money that I’m paying to my girlfriend or something, right? Just so I can get another a $100,000 of loan. And in exchange, I know my refund will be two, $3,000 less.” We’ve seen that as well. Is not the most ideal, but if getting that a $100,000 loan is going to get you a great property, then might be worth it.

Robert Leonard (35:14):

So just to clarify, we can withhold deducting anything we want, but we can’t go… Obviously, we can’t make up expenses to increase our deductions and reduce our tax expense, but we can withhold things, is that… No matter what, it’s pretty much legal and okay?

Amanda Han (35:30):

Well, I’m only speaking from the tax perspective. I think there’s legally, on the loan side, there’s probably different laws surrounding that, right, outside the taxes. For example, you can’t, not claim mortgage interest or property taxes or insurance, right? I mean, those are things that you have for sure incurred them. You have to claim it, but things like maybe you bought a tax book, you went to a real estate course. There’s nothing that says you claim it. You can say, “It’s not really related to my real estate. I mean, I’m just trying to better my investment, but I don’t see it as a business expense. So I’m not going to claim it as such.” I don’t see the IRS having an issue with it, certainly. I think there’s certain things that you can make an argument that it’s personal in nature, therefore, you’re not going to write it off. But then there’s other things that you really can’t apply this test to like interest taxes, insurance. Those are clearly expenses you have for your rental properties.

Robert Leonard (36:26):

Most things we’ve talked about so far have come from your beginner tax book, which is the first book in your two-part series, where the second book is about more advanced tax strategies. In the book, you explain common retirement investing tax traps and how to avoid them, break down those ideas and strategies for us.

Amanda Han (36:45):

Retirement. So, yeah. It’s really interesting because for people who work at a W2 job and someone who’s been at a W2 for years, a big bulk of liquidity and their investible cash is that actually in the retirement account. And so, what I often hear people ask is, “Hey, can I liquidate my retirement account and use that money for real estate?” One of the downsides of doing that, and that’s… One of the reasons it’s a big mistake is because when you liquidate retirement account, you have to pay taxes on it. In addition, if you’re not of retirement age, you also have to pay penalties on top of it.

Amanda Han (37:23):

So we’ve seen some people who lose up to 50% or more of that money just to taxes by pulling money out of retirement and using it for real estate. The better ways to move retirement money to real estate is just to invest in the retirement directly. And that’s through self-directed investing. So self directed investing simply means that instead of taking money out of my retirement, my retirement account is going to directly invest in real estate, whether it’s rental property or be part of a syndication, or I’m going to be a [note 00:37:52] investor, you can do it directly inside of the retirement account.

Robert Leonard (37:57):

We’ve actually had a couple episodes here on the show, all about self-directed IRA. So if you’re interested in hearing more about how you can actually invest directly in real estate using your retirement funds, go back and check out some of the self-directed IRA episodes that we have. We’ve done deep, deep dives into all of the different aspects of those accounts. Amanda, before we give a handoff to where people can find you, I like to wrap up the show by taking a few minutes and turning the table and letting the guest actually ask me a question. So what question do you have for me?

Amanda Han (38:25):

Oh, I love this. This is the first time I’ve been asked that. Well, I want to know what has been the single best tax strategy that you’ve used to save on your taxes or is that too much to share?

Robert Leonard (38:40):

No, that’s totally fine. It’s actually very relevant right now because what happened was I purchased an RV. So you might not know the Amanda, but a lot of the listeners know that I’ve got into RV rentals as kind of a spin on real estate and also kind of like a short term rental kind of strategy. And so at least according to my CPA… Again, I’m not a tax professional. This is just what I’ve received as information from my CPA is that because of bonus depreciation this year and the RV being used for a rental business, it is fully deductible this year. And so my $65,000 RV that I purchased provided me with $60,000 worth of depreciation in the first year. Of course, I’m not going to have any depreciation next year or the years after that. But at least this year, it reduced my taxable income by $60,000, which is obviously a really big tax savings.

Robert Leonard (39:29):

And that one vehicle alone provided a much larger tax deduction than all of my rental properties combined. And not that I have a huge portfolio, but still six or seven units didn’t even equal close to what this RV did. And again, it’s bonus depreciation. It’s kind of a one off situation next year. I believe it’s only going to be 50%. So it’s going to go down a little bit, but still, that was the biggest, I think tax savings or tax strategy that I’ve used so far.

Amanda Han (39:54):

Awesome. I’m so glad I asked that question because I don’t think I know other investors utilizing that. But yeah. Bonus appreciation is a 100% for 2021, right? The return you’re talking about, also for 2022, still 100%. So still a good year, if you wanted to add more to that business. And then next year it’s scheduled to phase down to 80% still. So still pretty high even for next year.

Robert Leonard (40:20):

Oh good. So 2022 will be a 100 and then 23 will be 80?

Amanda Han (40:26):

Yeah. Yep.

Robert Leonard (40:28):

Oh, that’s good. That’s better than I thought. I thought it was going down to 50, but I hadn’t really researched it too much yet. But yeah. I mean, if I’m going to get a 100% again, I might have to buy another RV this year, at least one maybe, maybe two or three. Well Amanda, thank you very much for coming on the show, sharing all your tax advice and experience. I really appreciate it. I know the audience is going to gain a lot of value from it. And I know we answered a lot of questions that real estate investors have about their taxes. For those who want to learn more about you connect with you, maybe even have you do their taxes or read your books. Where’s the best place to find your materials and connect with you.

Amanda Han (40:59):

Yeah, so our books can be found on Amazon it’s called Tax Strategies for the Savvy Real Estate Investor. And then we also have, like you said, the second volume, which is more advanced tax strategies. And you can find them on Amazon or also on the BiggerPockets bookstore. And our company website is keystonecpa.com. It’s K-E-Y-S-T-O-N-E-C-P-A.com. And that’s the best place to check us out for any of you who are tax geeks like me, there are a lot of proposed tax changes coming down the pipeline right now. And so we’re always constantly doing webinars to provide people with updates on what’s coming and strategies surrounding that. So check it out. We also have a free downloadable ebook. If you don’t want to buy one from Amazon, you can get kind of the short ebook conversion of it on our website as well to download that there. So those are the best places. And I’m also on social media as well.

Robert Leonard (41:49):

I will put links to all of Amanda’s resources in the show notes for anybody that’s interested in checking him out. I highly recommend at least the beginner book. If you want to go into the advanced one, I recommend that one too, but I really recommend the beginner one. I really, really enjoyed it. I actually picked up… I’m not going to name the book, but I picked up a different book, not by Amanda, on tax strategy that’s very, very popular. And I didn’t like it very much because I love Amanda’s beginner book so much. So I highly recommend you guys go check it out. And anything else that Amanda has going on I’ll put that in the show notes below. Amanda, thanks so much for joining me.

Amanda Han (42:19):

Thank you so much, Robert.

Robert Leonard (42:21):

All right guys. That’s all I had for this week’s episode of real estate investing. I’ll see you again next week.

Outro (42:27):

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