Buck: Welcome back to the show everyone. We have a lot of questions to get through. Again I’m gonna try to figure out if we can do this in one pop here or we need another week but let’s just do it right. So the first question, and I’m going to start out with the questions that are written this time. As you know I like to have the voice because I like to hear your voice, but sometimes I know a lot of you just would prefer just to write your question so that’s fine. First one’s from Luke.
The question, Buck, I’ve always been confused by the real estate professional designation and what it allows you to deduct. My wife qualifies as a real estate professional so I know that allows me to take losses from my active real estate performance or real estate before portfolio regardless of how high my W2 wage is. My question is in regards to passive investments where I am a limited partner such as Western Wealth Capital which of course is one of our Investor Club partners or one of the MC company partnerships that of course is Kenny McElroy’s company. My accountant believes that the losses generated by these partnerships where I am a limited partner can only be used to offset passive gains regardless if I am a real estate professional or not. Hopefully, that makes sense. Okay so starting out the disclosure is of course that I am not a CPA, I’m not a tax attorney and I don’t play one on TV, but let me tell you what I heard, what I think, what I know from the street okay. Luke, first of all I think let me back up and for everybody who’s wondering what real estate professional designation is at all, the real estate professional designation basically is an interesting thing where if the IRS allows you know to qualify for this you basically have to have 750 hours a year of material participation in real estate and that doesn’t mean you know you’re a real estate agent, it means material participation in you know having your own real estate and so that and also you can’t have any other vocation that you do for more than you do with your real estate activity in other words if you work you know 2000 hours doing something else but only 750 hours as a real real estate professional then you do not qualify. So it does require you to keep a diary etc. Some people say that that’s not true but I can tell you that on previous audits that I have unfortunately gone through there is a requirement for a diary. If you’re going to take that designation and you really should do it. So why is it of use? Well so normally if you have W2 income and you get losses, paper losses like from syndications etc or say you know you invest in anything that you can get a ton of depreciation from but the problem is that the categorization of income prohibits you from using those losses in other words you’ve got you know let’s talk in terms of buckets right everybody’s always talking in terms of buckets. So there’s a bucket of what you would call active income, income that is you know that you actually are working like most people have to work for money right. But then there’s also a bucket of income that’s passive income. Passive income may still be you know ordinary income. It does not have to be capital gains but the difference is that you don’t materially participate or necessarily work to make that money happen so that can be in the form of you know real estate investments but that can also be in the form of you know I own a surgical center and I get you know an extra few hundred thousand dollars a year in that you know from that surgical center et cetera. Now here’s the thing though right that the problem that most people have is that they don’t have those kinds of higher you know those higher level of passive income streams so they get these losses from real estate syndications and they really can’t use them because you can’t use passive losses losses from your passive bucket to offset things in your active bucket. Now that means that if you’re a W2 income earner and you made a half million dollars and you had you know 300000 of depreciation in your passive bucket you can’t use it. That sucks, right? I’ll have some potential solutions to that later in the year. I’m thinking about some stuff but in the meantime there is one exception to the rule that allows this potential bucket you know these buckets to be combined and that is if one of the spouses if you’re filing jointly happens to qualify for this thing called a real estate professional and in that case theoretically the losses from the real estate which is depreciation etc which can be significant can offset the the income active income even W2 income so that is a potentially very very powerful you know combination to have and I’ve literally had some people in our community and their spouse might be making a lot less than them they just said hey we’re investing in real estate I’ll save a lot more money if you just stop working and focus your attention to you know participating in our real estate investments and build that portfolio so that’s how powerful it is. Now the area that becomes a little bit more challenging and what Luke is referring to is okay so does that mean if I’m a real estate professional can I become one just by investing in passive syndications? Well the answer is no you can’t do that. You need to establish yourself as a real estate professional first and now here’s the deal though right and again I want to emphasize I am not a CPA but I have a pretty good one as you know and what my understanding is this is my understanding is that if you if say your spouse is the real estate professional and she or he has got the 750 hours you know through material participation now your spouse also invested in a syndication and also received losses there all of that should be able to be transferred over and offset all of your w-2 income if you’re filing jointly. So now going back to your question Luke, the answer is that I think it really just depends on your own CPA’s interpretation of this law. Now one thing I would add is that it sounds like you are making the investments yourself and you’re the W2 person. If I were you at least to increase the likelihood of this being able to count towards deductions and as long as you and your wife have you know joint finances, why not have her be the investor of record on those syndications so at least you have one clean bucket that’s just all her. Now I’m not saying that that solves the problem but what I can tell you with a hundred percent certainty is I know that there are several people in our group who are doing exactly that. They have material participation of 750 hours or more then they’re layering syndications on top of that and then they’re filing jointly and it is offsetting income. Again I am not a CPA but that’s my understanding. If I were you I would get the opinion of another one. You may you may even look into as you know I’m a big fan of Tom Wheelwright’s group Wealthability there and the information that I have for the most part is you know from Tom. You know so Tom is my CPA. I’m not gonna you know say he told me this and I’m telling you this but basically this is where I’m getting all my information because this is a very common question that you have.
Okay next question Jerry asked the question. Buck, this is from JerryJones. Not the owner of the Dallas Cowboys but another Jerry Jones. Jerry asks, Buck here’s my question, which is sort of a big picture question which might require an economist with a historical perspective to elaborate. What might be expected in the US economy in the future inflation or deflation and then what might be the expected performance of the different asset classes i.e paper real estate precious metals etc given those views. So that is Jerry’s question. Now here’s my answer, and of course I have all of the answers, as we all know Jerry here’s the thing the funny thing about your question, the assumption here is you know the thing is that even if you ask an economist, which we have on the show if you go back and listen to multiple different economists on this show you will hear different economists who are very, very smart who’ve you know gotten things right a lot of times and they all disagree with each other right so what that means is you know if well-regarded economists are predicting both inflation and some deflation well then we have to you know then 50 of them are gonna be right right. You have 50-50 shots, you might as well just you know flip a coin with regard to if you were gonna just believe the economist, which I’m not saying you shouldn’t you know all the ones that I’ve talked to and interviewed on the show have wonderfully articulated thesis you know based in history and lots of charts and all that stuff that makes it look you know highly believable, however, who knows right? So if they’re saying different things, we have to think for ourselves. So let me think with you, and this is how I think about it. Let’s start with the basic idea, what is inflation anyway? Well inflation is just a decrease in your buying power right? With a certain amount of dollars you can buy less over a period of time than you can initially so that is essentially what inflation is. It’s a decrease. If your american your dollars will buy less and that’s pretty obvious right I mean for those of us who are old enough to remember a quarter you know putting a quarter into a soda machine to get a to get a coke, well now I think it’s like two bucks or something like that and that happened in the course of like 30 years or something like that. Now so that’s inflation, buying power. So how do you protect yourself against inflation? Well let’s say you own stuff that gets more expensive with inflation right so obviously if you’re owning dollars and you’ve just got money in the bank and inflation happens you’ve pretty much guaranteed you’re losing money right. People think of putting cash in the bank is safe, what I will tell you is putting cash in the bank is probably the most guaranteed way of losing your money because it’s just gonna sit there and it’s not gonna keep up with inflation. It’s a guaranteed loss of spending power. So in reality the counter to this is that owning equity in some kind of asset of real value whether that be stocks real estate or even precious metals then theoretically because the you know the these things are going up relative to the dollar that’s where you want to be right you want to be in something that is going to cost more later relative to the dollar if you believe inflation is going to happen. So what would not be good in an invest in an inflationary environment? Well we said cash because it would guarantee to lose value but the other things that you would probably not you know want to invest so much in if you are expecting significant inflation are some fixed income investments like you know bonds and stuff right. So think about it, if you are getting you know two percent on bonds which is actually a lot for like you know bonds and inflation is running at three percent you’re still losing one percent per year right. So if you expect inflation like anything that’s giving you fixed income that’s not going to keep up with inflation is going to lose you money so that’s that’s what you have to think about. So equity as a general rule is what you want to have when if you expect inflation. Now to get to your question about inflation versus deflation again let’s not talk about using an economist because this is a very complicated thing to consider but let me give you some perspective at least that I use to assess the big picture and maybe it’ll make sense to you and you can potentially you know view the world the way I do here but look you know look at what matters to countries okay think about what matters to countries not to individuals in the context of inflation or deflation. Now the united states has a lot of debt payments to make right we all know that of course. Now what happens to that debt if there is inflation? Well the debt that we have in the context of inflation actually over time it becomes less expensive. Think about that. You have debt you’re paying a thousand dollars a month and you know over time you know the thousand dollars that a month it means less and less right. So effectively what inflation does is it washes away debt right, it makes debt more less meaningful over time and it becomes therefore easier to pay right. So like again think about that 1980 if you had a mortgage that was a thousand dollars per month that would have been a lot more in buying power than a thousand dollars per month right now so essentially inflation is a tool that in that essentially rewards the debtor by making it easier to pay back payments so given that context do you think it is in the best interest of the United States of America to make sure that inflation continues over time do you think that the federal reserve believes that you know we better have inflation so that all of the sudden our debt doesn’t become more expensive, you bet it does. So the last thing you want to do is to have deflation because in the context in the big picture of the country it would mean that you would effectively have increased your debt payments and you don’t want that the country’s not going to want that the fed is going to do everything possible monetary policies and then the fiscal and monetary policies of government and the fed are going to do everything and anything to avoid that possibility of deflation so I say follow the money. If the US would have a hard time paying debt because of deflation like I said they’re going to do everything, the powers that be will do everything they can to prevent it and with that in mind I’m going to tell you that I firmly believe that your money is safest again in some kind of equity in real assets rather than cash or fixed income. In fact, again let’s talk about that debt question again. If you have leverage on your own investments like real estate, again theoretically inflation would wash away your debt as well right so effectively you are getting rewarded for being a debtor and that’s the way it works and Robert Kiyosaki you know uses that line you know savers are losers that’s what he’s talking about. Savers are losers, the debtors are the ones who are winning the game in the context of inflation. As long as you’re using debt properly, inflation rewards debtors, remember that. And we use it all the time in real estate when we leverage from the bank because we believe overall that inflation will continue.
All right. Next question, Bill is asking, Hi Buck. What is the preferred way to hold title? Investing personally or via an LLC to an oil and gas fund like the recent Resolute Capital offering. Bill’s obviously in Investor Club. He says holding the investment personally allows one to offset active income which is great but while remote does expose the investor to inside liability i.e you are technically an active partner and outside liability the investment is not protected in an entity on the other hand holding the investment in an llc limits the liability since it is in an llc and since liability is limited for the investor you lose the ability to offset active income is my understanding correct do you have any guidance on this okay so again I’m not a cpa I’m not I’m not going to give you tax advice I can only tell you what I believe to be true and if I am wrong don’t sue me okay because I am not a cpa I’m just a surgeon just a surgeon surgeon who knows a little bit about this and that but what I can tell you is what again you know just being in the weeds here that I have seen and that I understand you’re gonna have to ask your cpa what they think however if you’re dealing with specifically you mentioned resolute capital which is you know a group that I i do like I know they have a tax opinion letter that says that in reality any flow-through entity should allow you to take the losses against your personal income in other words if you have an llc and it’s flowing to your personal income then you should be able to take those losses and I have actually seen that many times before but again this is an area sometimes that cpas tend to disagree on when I have invested in oil and gas I have used an entity myself and at the end of the day you just have to make sure that you know the the opinion of resolute matches that of your cpa at the end of the day there’s also the reality that there really is very TRUE you know very little liability the gp on these deals as they carry enormous amounts of insurance and sometimes they switch to an lp after the first year etc so again you may want to check on those details but the big picture what bill’s talking about is oil and gas which is one of the few types of investments we talked about the active versus the passive buckets and all of that stuff but basically if you invest in oil and gas right now for the most part in many cases dollar per dollar whatever you invest can be deducted against any kind of income including w2 income so it is something for many of you you know high pw2 people to seriously consider you know I am actually not I’m a real estate professional so I am incentivized to do do real estate but there was a time when I had I did not have that designation and oil and gas was more attractive to me next question antoine asking hi buck I’m a high income w-2 health care provider I want to start investing in buy and hold rental to generate passive income and benefit from the tax breaks but I just found out that I can’t use any of the tax benefits to offset my active income and he’s going by the way I’m going to remind you this is what we keep talking about that active bucket versus that pack passive bucket okay so he says is it worth it for a busy health care provider to start a portfolio of small multi-family or would I be better off investing passively into syndications again this is a very much an opinion question but let’s start out by saying this you are right you cannot write off these wonderful losses against your w-2 income because you are not a real estate professional and that’s why you know as we’ve said before in many cases we’ve had situations where the high paid w-2 professional has a spouse that is a real estate professional or decides to become a real estate professional again that being the irs designation not meaning you’re going out necessarily getting an insurance license you’re just materially participating in real estate so so if you can do that then then you get all those benefits we talked about before otherwise if you’re not going to do that you the goal here is really to create a robust flow of passive income where you can use those paper losses right and that’s not going to make a difference whether you’re you know an active or or active invest you know limited partner or a direct partner you’re going to need to build that bucket one way or another now sometimes people have lots of passive income but they don’t even know it and that’s one thing to think about you could be somebody who falls into that category let me give you an example okay a number of our investors have ancillary income from surgical centers hospitals or other passive assets you know I’m talking about you know a lot of money too in some of these cases hundreds of thousands of dollars even millions of dollars that they’re making from these ancillary businesses that are not the thing that they’re doing on their daily basis so infusion centers surgery centers you know dialysis et cetera if you can identify or even create these kinds of robust flows of passive income then you can use those big losses from real estate you’re matching up passive buckets right you’ve got more passive income and you can match up all of those passive losses to offset that so in many cases we have people in our group who know they’re making 300 thousand dollars of euros of additional income through a surgery center they try to match that up with 300 000 in losses from real estate every year that’s a real goal for them and so so that’s you know that’s that’s something that you can consider doing but you really need to start creating that robust flow of passive income to make to make the the tax rules work for you now as for your question regarding you know direct versus syndication only you know for most people in our high income cohort that we deal with here the only reason to invest directly into a real estate you know to buy your own buildings in my opinion is because you like being a landlord you really love the real estate part you know you like walking the buildings and you know being managing these things or like we said before you want to get the real estate professional designation for one of the spouses in a marriage and so that those passive losses can get applied to your w-2 income and you do need to have you know material participation which you cannot get simply by investing as a passive investor now if that is not the goal my opinion is and my experience is in this you know cohort of high paid professionals that we have here that you’re much better off spending your time finding the right jockey to invest with passively rather than trying to find buildings that you that you’d buy yourself the thing is you have to remember that making material money in real estate making real money is there is time it does take time and effort it is not it is not something that is completely hands off if you are going to try to do this and buy your apartment buildings you know I used to do a lot of that people sometimes think that they are going to make more money if they buy their own property manage it themselves instead of going through syndications but in fact that is often not the case I mean if you look at the you know passive real estate investments you know I’ve been involved with in in you know multi-family apartment buildings etc that are you know purely passive their their average annualized yield is well over 20 percent now most people who have full-time full-time jobs are not going to get those kinds of numbers because they are not going to squeeze every last you know opportunity of creating equity out of those properties and even if they do pretty well they often find themselves putting a lot of time into these properties now one thing to remember is your time is actually worth something as well right if you’re spending 10 hours per month on a real on real estate you know the cost of your time has to be factored into that ultimate return on investment that’s really really important to remember I mean bottom line is you know if you charge you know 400 an hour at your job and you’re putting in 10 hours a month into your real estate endeavors well I i hope you’re you know tacking on that four thousand dollars you better be making that you’re spending on your real estate activity bottom line for most people choosing the right syndication might be a better option especially again if you are a busy person and I will take a moment here just to let you know again I would just plug the Investor Club at wealthformula.com for you to consider that okay let’s see I think I have a time to do one more here and I think we will probably just extend this to a third Ask Buck show so the next question and maybe the last one we’ll do here this week is from sam and the question is what are your thoughts on conservation easements at this time during the current legal and covid environment? Do you think there’s any chance the Biden presidency are a threat to real estate depreciation 1031 exchanges will ever come to fruition and what would that mean if all the benefits of real estate are taken away okay so let’s there’s a few different questions there first on conservation easements we’ve talked about this before they are very powerful yet controversial the idea is essentially you know I you buy I’m going to very much simplify this and I’m not going to tell you to do it or not to do it but here’s how it works you you know say you bought or were part of a syndicate that bought you know thousand you know let’s say a million dollars even though these plots are usually much bigger than a million dollars worth of land that is as it is determined that there’s a bunch of stuff you could mine on that land and that there’s a valuation that theoretically you know the the the money that could be made from that land by mining is not the one million dollars that you paid for the land but five million dollars if you gave up the rights to develop that land theoretically you could get in that case like a 5x of basically instead of deducting the 1 million dollars you could give up rights to the mining and development and and take a five million dollar deduction so that is very powerful because it’s basically leveraged charitable giving that’s essentially what it comes down to from a tax perspective the irs hates these things they’re not illegal they are part of the tax code and then the devil’s in the details so you have to make sure that if you’re doing these you’re doing these with people who know what they’re doing get a good track record because if there are you know technical foot faults in other words any you know one eye isn’t dotted one t isn’t crossed then the thing could be in danger so these things are you know things that a lot of high net worth people are are definitely involved in we talk about some of these things within our accredited Investor Club which you should join if you have not on wealthformula.com so in terms of right now listen there’s lots of moving parts here in conservation easements there’s you know there’s some cases going on there’s some challenges being made there’s been some losses from again from from operators that you know didn’t follow all the rules and that created problems I think there will be some from what I’m hearing there will be some kind of you know decisions made on whether or not these things you know what what the limitations on valuations will be things like that I think those kinds of things are coming where there will be a much much clearer definition of what you know the irs is okay with what congress says is clearly legal and what’s not all these things that are sort of in the gray area right now but yeah I mean I listen I think that they are controversial as the government continues to need tax revenue this is going to become an area of additional additional targeting so I would just say wait and see and just you know listen but right now nothing materially has changed in terms of the laws as for the biden plan on real estate I know there’s a lot of buzz about this and a lot of freaking out about it you know I’ve been talking to tom wheelwright my cpa about this again the bottom line is I think the the thing that looks like it’s going to get is a goner is going to be the bonus depreciation benefit you may not even know what the bonus depreciation benefit is basically if you have accelerated depreciation on part of your property used to be you could separate you do a cost segregation analysis and separate you know the the what’s called real property versus personal property or chattel and you could take the personal property basically like things you could pull out of the building I do an engineering study and depreciate those things over five years instead of 27 and a half years like the rest of your real property so that was an advantage and then with the new trump law basically you could take that full five years of of depreciation in the first year and as bonus depreciation and so I think ability to do that is you know probably it was gonna sunset anyway in 2022 I think the likelihood of it it coming back is very low I will say that I don’t know if it’s still it’s going to be eliminated in 2021 I mean they may just let it expire in 2022 so we may have another year where we can use it I know there is an attack on 1031 exchanges you know tom’s take on that is listen it’s not the first time there’s been an attack on these things but 1031 exchanges basically allow people who own real estate to you know take their profits and put it into another like property like another apartment building and not pay the profits and then if you’re the only reason that’s relevant to you is if you own the apartment buildings yourself you own the property yourself not through syndications because we don’t use 1031 exchanges in in syndications typically as for the elimination of depreciation etc well that’s not even really on the table I mean and it’s almost kind of impossible honestly because depreciation is what it is you’ve got an asset all assets depreciate and you know depreciating something over 27 and a half years I mean I mean that’s I no one’s trying to challenge that depreciation is is is not being challenged I think you know the 1031s are being challenged the bonus is being challenged they’re not even you know that I’ve not heard of any legislation even that is you know that that potentially would challenge a cost segregation analysis so for us if we’re a limited partner the real thing to think about is probably the only thing that may affect you materially with a biden plan would be the elimination of bonus depreciation and of course that doesn’t if you know only a select number of you those with passive income have been really been able to use bonus depreciation to your advantage anyway anyway I think that’s it for now because we have been talking for some time and I want to save the rest of the questions for probably next week then and so we will be right back after these messages.