The Ultimate Tax Saving Strategy
Welcome to the SlashTax Podcast, where we explore real strategies to reduce your tax bill, leverage federal and state incentives, and invest smarter to build lasting wealth. I am your host, Heidi Henderson. And today, I am talking with someone who truly understands real estate from both sides of the table. Joining me is Nick Aola CPA and founder of Aola CPA. This is a virtual accounting firm dedicated exclusively to real estate investors.
Heidi:And not only is Nick a tax adviser, he's also an active investor himself with hands on experience in long term rentals, short term rentals, fix and flips, and syndications. Today, we're gonna dig into why Nick launched his firm, how his approach modernizes real estate tax planning, and most importantly, how real estate investors can unlock powerful tax benefits to keep more of their income and grow their portfolios faster. We also talk about the ominous passive versus active rules and material participation, which he has some really, really great advice on. Whether you're an investor, a CPA, or someone who's just curious about getting into real estate, this episode will show you how to slash taxes legally and strategically. So let's dive in.
Heidi:Well, Nick, welcome to the show. I'm so excited to have you back. This is actually your second time with the podcast.
Nick:Very excited to be back. Yeah. This is good.
Heidi:So, you know, we have the intro of you, your story, your firm, the fact that you really specialize in real estate. But the synergies between what you do, what we do is so fantastic. And I get asked constantly for referrals and you just are one of those people, one of those firms that's been such a huge resource for us and for clients. And I think vice versa, we've worked on
Nick:a lot different
Heidi:projects together. And and it's just huge because you you are so smart with how you built your firm choosing to be really focused on real estate and real estate investing. So let's start there. Tell us a little bit about your story with why you started this firm and kind of the backstory that kinda got you to to the specialty.
Nick:Yeah. Of course. So I started out right out of school, basically, at a at a small firm in Manhattan, and it was a general firm, tax prep mainly all industries and it's great to get experience, but I always enjoyed real estate. My family is in real estate and I grew up enjoying it, knew that I wanted to do that, studied it, wanted to like, you know, enjoyed investing, eventually got my own investments. There's something I always liked, and one thing I've learned from working at a general firm is that, you see the areas that you you really can't help as much, and then you see the areas that you can help a lot more.
Nick:So focusing on the areas that I could help in and add a lot of value in just happened to be one that I really enjoyed. So that was a no brainer for me. Just focused all my attention on it, got really good at it, and went for it. And then now here we are. And now we just work with people who like to do what we like to do.
Heidi:Yeah, that's really cool. How long has it been? When did you found Aiola CPA?
Nick:Man, so that was back in like 2012, but we really started like full time back in, like, 2018. So, yeah, it's been it's been a while now. Wow. Saying it out loud. It's it's longer than it feels, but it's been a while.
Nick:So, yeah, 2018, we've been a foot on the gas all the way.
Heidi:Exactly. Well, it's amazing. I mean, you you have a modern firm. Like, I feel like, wow. We are we are in this new world, this new era of CPAs and tax expertise and consulting.
Heidi:You have a totally different structure, primarily virtual. So talk a little bit about
Nick:Before it was cool.
Heidi:Completely virtual. So so talk a little bit about that. Like, I mean, this is a big deal coming from an industry that that tends to be, you know, very, very, very old school, I think.
Nick:It's true. It's true. Yeah. So we were virtual before COVID, before the pandemic. So we had a head start, which worked out really well.
Nick:You know, we just refined when everybody when the world went virtual, we were just refined. We didn't have to rebuild, which was great. So it's something that I always wanted to do. You know, when I commuted, it was like an hour and a half each way every day, three hours commuting daily, just lose so much time. You lose a lot of energy.
Nick:It's just not the culture and the firm that I wanted to provide for people who would ultimately help me build what we're looking to build. So the virtual working from home, working from anywhere really, as long as you're able to handle what's on your plate, doesn't matter where you get it done as far as I'm concerned. And also it opens you up to the entire country, not only for client base, but also for our team. We get to source talent from everywhere. And you know, which really helps us look for helps us be selective and look for the best fit for who we need at the moment and who would be the best to service our clients and just build like fit into our culture and build what we're trying to achieve.
Nick:So it, to me at all, all the boxes just made sense and checked, and I'm not gonna lie and tell you it was easy. And so it's it's never it it still isn't like managing virtual managing a virtual firm comes with its own complexities, but like like anything else, I guess.
Heidi:Yeah. Do you and do you do you ever have issues with clients that are uncomfortable with just being entirely virtual?
Nick:Some. Yeah. And we'll be upfront. You know, we understand we're not the right fit for everybody. If somebody likes to have that in person interaction with their CPA or deliver a shoebox full of receipts, we are definitely not not that firm.
Nick:But for the most part, we've we've had a lot of successful transitions to people who are we try to keep our very system heavy and process driven. So we try to keep it very straightforward and easy on the client end to just go through the whole system virtually. But, yeah, some people some people it's not for them and that's okay.
Heidi:Yeah. Yeah. For sure. I, and I always ask people that, you know, when they're looking for a CPA and I'll, I'll ask them, look, are you open to a virtual environment? I know that it's different and, and a lot of people have become used to, depending also on age, there needs to a system where they can go walk into their CPA's office and have a meeting.
Heidi:So it's a little bit different. But you bill a little differently as well. Right?
Nick:Yeah. So we have a different structure. And part of what you were just saying, Heidi, is like we we intentionally, I like that bit of separation because it allows us to be extremely thorough with our research and responses. You know, if you're in there with your CPA doing your tax return live or getting tax advice live, there really isn't many gaps where you can pause and dive into something because not everybody knows everything. So we take, you know, we do extensive research tax court, just like you guys do, tax court cases, regulations, dive into the IRC, new tax bill, all these things that come up.
Nick:There's thousands and thousands of pages and and sections that you have to to can't commit to memory, but you have to know. So we like that ability to to pause, look, double check, triple check, and advise. We do bill differently. Advisory, we bill like an annual, and that we we have advisory as a separate service. That's one hurdle that we see people coming from CPAs that they work with for tax prep only.
Nick:Maybe they'll get like some advice throughout the year, couple phone calls, general advice. That's okay. We separate the service because our advisory service is very structured. There is a blueprint. We have a learning phase.
Nick:We have an we have strategy meetings. We have written tax plans, checkup meetings, time log reviews for our real estate investors who are targeting certain strategies. So there is a structure to it, and that's that's billed differently and and approached differently. But in our mind, it's an investment. If we don't think we can save you as much as it's gonna cost you to retain us, then we'll be the first to tell you it's not the right time.
Heidi:That makes sense. Will you dive in a little bit more to what it looks like? Like, give like, talk more about this strategy piece because, I mean, obviously, know you do compliance. You're doing tax returns. You're working with a lot of real estate investors.
Heidi:I really am anxious to dive into the whole real estate component of this because that's like out of Yeah. The whole But before we do, one of those big pieces is that really like the higher level strategy. And those are things that I run into, like every day with clients. They're looking at cost seg or they have an investment property, which is great. Some of the struggles for us is the bigger questions actually surround their own personal tax situation.
Heidi:So my spouse has a w two and I'm working, but I think maybe I should retire. Maybe I should work on being a real estate professional, but then we wanna do this and retire at this stage. It's like this whole big story that I hear over and over. And as much as I love helping clients, that's not what we do. We're very specialized in our, like our deliverables with doing cross eggs and, you know, tax, you know, the actual tax incentive work, you have much more of this strategy, which so many people are looking for now.
Heidi:And it is harder to find that from some of the standard CPAs that are more focused on just doing tax prep. So, you know, as laying the the background for that, talk or, like, really dive into what your strategy looks like. Like, how are you working with investors? And then if you'll also give us a kind of a case study, I would love to hear about how that's worked for someone
Nick:Love that question. Yeah. Absolutely. Because you're right. You hit the nail on the head.
Nick:For us, we do approach it differently. And for investors out there, business owners, anybody really, you have to it's an it's an unlearning almost. You have to think of it differently. The tax advice and the tax prep is completely different. Compliance work is retroactive.
Nick:You're doing it after the year is over. So you might be used to going to your CPA, getting your tax return prepared, seeing the results, and saying, was there anything else I can do to lower this tax bill? Or that's that's the refund I'm getting. I was expecting a lot more. And at that point, you're really handcuffed.
Nick:You the year's already over. You can't, you know, rewrite history or go back in time. So you you can't do much at that point. So when we talk about strategy and tax planning, that is proactive. And that's the reason I love it.
Nick:Like a story that you were just built may be different from somebody somebody else's story entirely. People's goals are difference, different investment strategies, income levels, net worth, risk profiles, those are all different. And that's that's why I love tax planning because it isn't cookie cutter. If someone is coming to you with a cookie cutter tax plan, that's a red flag. We're looking for something that's individualized and situation based based on you.
Nick:And that's something that we ask upfront. The first questionnaire that you're gonna complete when you become a client is what are your goals? Short term goals? What are your long term goals? What are your investment strategies that you'd like?
Nick:How much you know, what's your net worth and describe it. That way we know where maybe you can pull some leverage to make an investment. How much debt you have? How much you have in retirement accounts? We're looking at the whole picture, but we need to find a plan that works for you and your timeline.
Nick:Somebody might come and say, I don't wanna be at my w two job anymore. I can't wait until I leave. I wanna be out of here tomorrow. And we wanna find that strategy looks a lot different than somebody who's like, don't mind working, but it would be nice to have the option to retire in five years. Very different conversation or somebody who might need $10,000 a month of after tax cash flow on retirement versus somebody who might need 30 or 40,000.
Nick:Big difference in in our approach and our timeline to get there. So similar to how you were saying, Heidi, like, we we can build a strategy and then execution for real estate, a lot of it leads back to how do we get big how do we get non passive activities and how do we get big tax deductions attached to those non passive activities? Yeah. Here's our strategy now. Go talk to Heidi and ETS.
Nick:They're great and they're gonna help you do x y z with with everything that we're implementing. And then come back to us and we'll put it on the return. So it very much is a collaborative effort. And it's not just us. Everybody has attorneys too, you know, asset protection attorneys.
Nick:There's multiple pieces to the puzzle that you're building. And we focus on a tax part just to make sure that we're proactively planning. That way, when you get to the tax return, the story's already written. We're just putting it on the return.
Heidi:Yep. Exactly. Yeah. It's huge because to your point, yeah, we're having those conversations and I love it so much that the people that oftentimes are looking at doing cost segs or, or being strategic about their futures, their financial future, and that of their family too. It's actually building generational wealth and setting their families and their children up for future success.
Heidi:I love it because it's, it's like, sometimes I get a little cheesy with it, but we kind of feel like we're helping people achieve the American dream because the interesting thing is real estate investing actually is a vehicle for helping people grow their wealth and become, I mean, it's, again, it's kind of cheesy. Like, I think the term has gotten a little bit overused, but, like, you know, financial freedom. Mhmm. But it but it in fact is. It's such a huge vehicle and with the tax benefits that associate with real estate, it is so dramatic how those apply for investors.
Heidi:One of the problems I run into is we're talking, you kind of have to have income first. Yeah. You have to have some baseline of, of net worth and some income and some level of success to really, to begin getting there. But, you know, assuming that we get to the point where we've we've we've got some income, we're starting to build some wealth to where now someone is able to begin to deploy some capital towards investing. Now let's let's really dive into the real estate side of it because real estate is huge.
Heidi:And I love again that you have background in real estate personally and that you're really coaching a lot of people in that space. So let's talk about how that applies to tax and why it matters.
Nick:Yeah. For sure. Real estate, there's the way we approach advisory is that we don't want to tell you to go spend a dollar to save 40 or 50ยข. We want you to invest that dollar, earn on that dollar, and then simultaneously save a bunch of taxes. And it sounds greedy, but when you look at it that way, there's is a wide funnel of tax deductions.
Nick:And if you Google top 10 tax deductions or approaching the end of the year, what can I do before the end of the year to reduce my taxes? You're gonna see, like, boilerplate deductions, like accelerate expenses, contribute to charity, put more into your retirement, contribute to an IRA. All those things are great, but we're looking for meaningful deductions. Large deductions that don't involve you spending a lot to achieve those deductions. We want that to be investments.
Nick:So when you look at that, it really whittles you down to a smaller funnel of a couple options that we can repurpose into different areas. But the primary one that we focus on is real estate because of exactly what you just said. Not only is it a tax write off, it's a solid investment, historical success. And over time, the goal is for real estate to appreciate, for debt to be paid down from your tenants or guests or whoever you're you're renting to if it's buy and hold real estate. And over time, your your equity grows.
Nick:Generational wealth involving your family if you have one or plan to, that's all part of it. And it it kinda checks all those boxes. And and why we look at it from a a tax standpoint, not only is it advantageous on the acquisition, it's also tax advantageous when you hold it. Real estate income with non cash expenses like depreciation, amortization, vehicle mileage, home office even. It's tax advantage when you're holding it, and there's also tax advantage and flexible exits if you wanted to level up.
Nick:Ten thirty one exchanges, opportunity zones, if you wanted to get out of a property and sell and just repurpose funding or financing. There's flexible and advantageous ways to restructure portfolios or just get out completely. And there's tons of ways to do that. So really in all three phases, acquisition, operation, disposition, there's tax advantage. And if you look at your tax returns and you look at your budget for the year, almost everybody's biggest expense is gonna be income is gonna be taxes.
Nick:And that can a large portion of that is income taxes. If you have a w two job, you may not feel that because it's being withheld directly from your paycheck. So you may not tally it up throughout the whole year. But if you look at your total tax liability based on the the wages or other income that you're earning, chances are that's gonna be your biggest expense for the year. So if we can help reduce that, just like you, I feel it's rewarding.
Nick:It feels great to help people achieve their goals, remove a big expense off their plate to be able to put that back into investments, or if they're already financially free, do whatever they want with these savings. But hit your goals faster. It is definitely rewarding.
Heidi:Absolutely. Yeah. Are you seeing any particular trends? Well, I'm sure you are. What are some of the particular trends you're seeing with real estate and some of your clients?
Nick:Well, now, I mean, for the past couple of years, we've been in a great situation tax wise with bonus depreciation, which you've heard of that. I'm sure.
Heidi:Oh, I that. Oh, bonus. Yeah. That's a thing.
Nick:Yeah. Yeah. So now that that's been phasing out, we've seen strategies started to shift, but now that it's right back up to a 100%, I think we're gonna see like a lot more of the trend for us has been short term rentals lately, or married couples, maybe maybe one spouse is focusing on real estate, targeting real estate professional status, doing more mid term, long term rentals. But primarily, it's been short term rentals for us the past couple years because of how much of a lower bar bar and barrier to entry it is to obtain these tax benefits. We just see people go to to that strategy first because you can you can do that with a full time job, whereas real estate professional, you can't unless unless, you know, you have a spouse who who's focusing on that.
Nick:But, yeah, that's that's the trend. I always am cautious. Like, I tax trends and market trends, I try to split the vision because I do see market trends with short term rentals too that can be a little bit concerning. There's there's hot areas and, you know, if you're getting into a new mark getting into a a popular STR market as a new investor, that might be a little difficult because you might have seasoned investors in that market who are capturing the first three pages of Airbnb, and vacancy is a big deal with short term rentals. So market trends, we're a little bit more cautious about.
Nick:We look for areas that are not saturated with something like that. But tax trends, STRs are great. Just really anything that we can see to to lower some tax liability and structure your time in a way where you can benefit from, you know, what those strategies have to offer.
Heidi:Yeah. For sure. I feel like short term rentals is like the gateway drug.
Nick:Yes. Yes.
Heidi:Gateway drug. It's it's it's where everybody starts and then ideally continues to go from there. But I appreciate your points on being aware of market trends as well because that's been one that, you know, the phrase I always use is look, yes, we look at tax benefits. We look at how this can help you reduce tax to make your investments and all of those things you mentioned. But what I always say is we don't want the tail to wag the dog.
Heidi:You can't just go buy a property just for the deductions. It needs to be a good investment.
Nick:100%. And Yeah. 100%. And that's part of our conversation too is the question I always like to ask is, what happens in year two? What does it look like?
Nick:This is a great year one strategy. We all look like heroes when everybody gets their first cost seg and their first big tax reduction, and that looks great. And now what is year two? I don't want you to pay all that back in year two because you have to cover a shortfall for a failing investment. Mhmm.
Nick:We want the investment to work first. All of this stuff is a bonus. No pun intended. Yeah. All the all the tax stuff is a bonus.
Heidi:Exactly. Yeah. Exactly. And to your point, I think because of the, at the 100% bonus, the increase in the short term rental market, just the number of transactions and the number of people getting into the space and the amount of capital that is being invested into that sector because of it being kind of a gateway drug and because of the, the short term rental loophole. So the lower threshold to achieve material participation, allowing someone to apply that against w two income, I mean, it is so it's I mean, literally, it's like it's like mind blowing how it works.
Heidi:Most people look at it and they're like, what? This this is this for real? Like, you know, this seems too good to be true. I'm like, I know. It's crazy, but it's it's legit.
Heidi:So do you have what what other investments do you see with investors who are really I mean, looking at a good investment opportunities, but also looking at the tax benefits and how they're how linking those together. Aside from short term rentals, do you see other opportunities with property types and asset classes that perform really well and have, you know, what I would say, like, a business component to them that can help them achieve material participation a bit
Nick:Yeah. Of course. I mean, there's there's a ton of different ways where you can incorporate material participation is the starting point. Right? Like, that's that applies outside of real estate too.
Nick:So you can do this. You can copy and paste that theory across other different businesses as well. We've seen people just to give some examples outside of real estate. We've seen people do like vehicle rentals, purchase vehicles and rent them out on Turo for example, and do the same strategy and buy vehicles that are eligible for bonus depreciation. We've seen people who have real estate businesses, maybe start like tangentially related businesses that kind of have something to do with real estate, that they wanted to start for purposes of tax benefit, but also to help their portfolio.
Nick:For example, we've had clients who've had a portfolio of long term rentals, and started like a landscaping business, or purchased a landscaping business. And you can do the same thing, materially participate in that business. You'd get the bonus to appreciate all the equipment that you purchase as you know, to get the business up and running. We've had that done with dumpster rentals. People would buy, you know, dumpsters and trucks, and they did a lot of renovations so they would do it for themselves, but also for other people.
Nick:And now you have, you're in a dumpster rental business and you get to write off bonus depreciate all the cost of that equipment. So this can happen in plenty of different places. Another strategy that we like to talk about is, well, not everybody wants to jump right into a short term rental, and that's okay. But there's conversion strategies. Maybe operate the short term rental for a year or two, convert it to long term or mid term later.
Nick:And you know, the long term play doesn't necessarily have to be short term rental, but we can extract some tax benefit, and then migrate that to a different use case later. And we've also seen, you know, real estate professional that opens the doors to mid term, long term rentals too, of course. Some people need passive losses though. There's some people with significant passive income. You know, we can have we have some physicians who have minority interest in maybe surge surgery centers, and they're getting passive k ones or anybody else who just has a k one that kicks out some income that they don't materially participate in has passive income, and then you can enact these strategies with passive properties.
Nick:You don't need to have them be non passive to offset a good chunk of income. So going back to what we said before, everybody's different, but there are options out there and we analyze, see what the best solution is. And that's really our role is to provide people options, pros and cons, risks associated with each of them. That way, you know, we're not the ones making the decision, but we're giving you the tools to make an informed decision. Yeah.
Nick:So that's the that's the approach.
Heidi:Yeah. I mean, that's amazing. I love all of those ideas. I mean, that's interesting because it does apply really to buying assets. I had a a discussion with a client yesterday who owns some real estate, but she's starting a restaurant.
Heidi:And she didn't realize that bonus depreciation would apply to the build out and all the equipment in her restaurant if she's getting that set up. And so it's like, look, there's all kinds of benefits with bonus for different business structures and, you know, to her to that point, not just real estate. You hit on a couple of things I wanna I wanna just dig a a little bit deeper on. Material participation is always such a big topic, and it's oh, you know, it can be really confusing for taxpayers, and a lot of people really dig in and try to understand. And and part of it is they're strategically figuring out how they can they can they can convert all of that activity or the losses to Mhmm.
Heidi:Active because they wanna offset their w two income. So, you know, big strategy with that. How do you handle it or what's your advice for a client who has multiple properties? Let's call it five properties and four long term rentals. They've got one short term rental and and and, you know, one converted from their primary house into a rental a year ago and all these kind of moving parts.
Heidi:They're trying to figure out, you know, because I get this stuff. It's like, well, my spouse is still working, but maybe she wants to quit and maybe she can run these, but we're looking at how we pencil that out. And, you know, there's all these moving parts to it as to, well, the short term rental loophole, I think applies to the one short term, but we have four other long terms. So is it seven hundred and fifty hours on those and then a hundred hours on the short term? And then how does this apply to all of our income on our return?
Heidi:Like in that particular situation, I know that's a lot, but it's, like, constantly running into this conversation. Yeah. So so how do you handle that with a client in that situation?
Nick:Yeah. That's the that's that's all great detail. So by the way, the best feeling is when when somebody says, So we can retire now? And like, that's the best feeling. Like, you retire somebody with tax strategy, it doesn't get better than that.
Nick:Yeah. So that's a huge goal. But yeah, those conversations are great because it's, again, it's individualized. So, you know, somebody has a group a mixture. Short term rentals, long term rentals.
Nick:So when we say short term rentals as tax advisors, in the scope of tax planning, that may look different from short term rentals from an investing standpoint. Short term rentals is a very black and white classification. Seven days or less average length of stay of your guests for the year. So if it's seven point one days, that's technically for tax purposes considered to be a long term property. So you might rent short term for, you know, month long stays or a couple weeks or even a couple months more mid term rental, and you might classify that in your own portfolio as short term rental investing, and technically, it's shorter than a year lease.
Nick:But for tax purposes, when we say short term rental, we're talking about transient guests, seven days or less on average. So when we have short term rentals, tax tax definition of short term rentals on one side, those hours that you spend for material participation are in a silo of short term rentals alone. You can't use those hours for material participation and group them with reps hours, real estate professional hours for long term or mid term rentals and vice versa. Those are oil and water. So if you have a mixture, depending on how much time you're really spending on both of them, usually it's pick a path.
Nick:Which way are we going? Because it's a lot of time to dedicate to both. It's possible, and people have done it. But if you're working part time, full time, you're really just probably gonna have to pick one. And if we do short term rentals, and this goes for short term and for long term rentals, but the more you have in each bucket, the easier it is to qualify for material participation because you can make an election for each one separately on your tax return to aggregate all of the properties as one activity for purposes of material participation.
Nick:So if you have two STRs, you don't have to materially participate in both separately unless you make this election on the return. If you don't make the election on the return, it doesn't matter if that's how you conceptually went about it. If it's not on the return, it's not aggregated. It's not grouped, and you'll fail an audit. Same thing with real estate.
Nick:Real estate professional. You have to make an election on the return. It's irrevocable to say I'm grouping all of these long term and mid term rental properties together as one activity. That way, I don't have to materially participate in each one individually because that would be impossible to do once you get more than two properties, for example. So that's how we approach material participations.
Nick:How many do you have? Which buckets are they in? How much time are you spending on each? And what's the most realistic and defendable Mhmm. Position that we can take on your return, and how do we get there?
Nick:So it is different for everybody, but that's the concept that we approach it the same way.
Heidi:Perfect. That that is such good clarification. And I appreciate you explaining how they're in their own silos because there is so much confusion and there is a lot on social. Now everybody's going to social media and they're they're following these clips and they're listening to videos and they're they're trying to understand all of these ins and outs of that. And that piece of it, that the silo of short term rental activity and long term rental activity or material participation are essentially two different things and are siloed from each other.
Heidi:The grouping rules we have found are are fundamentally powerful, but again, still siloed between those two kind of applications. And that's huge. So so we'll be forwarding the podcast link to many clients because it's huge to understand these in understanding the strategy of how to invest and what to focus on in their investments and, and how to like make a decision and say, look, if you wanna go this route, choose that route and stick with it Mhmm. And and follow that path, or if not, you know, do the long term path or some other vehicle. But, yeah, that's that's huge.
Heidi:And a great reason why a CPA that's very specialized in in something you are going into is so powerful.
Nick:Yeah. And to double down on that, we had recently had an audit. I say recently, probably within the last year. We had an audit for a client who had two short term rentals, and we did not make the election on the return intentionally to group them because they materially participated in each one separately. And the grouping election if you make the grouping election, you have to have with short term rentals, it's a bit different than with long term rentals.
Nick:You have to there are certain parameters that you wanna abide by when making a grouping election, like location of the property and common ownership. There's just certain things that you wanna be aware of, and that's definitely a conversation. But also, it's I don't wanna say impossible, but difficult to ungroup. So we have these conversations with our clients, and there was a decision point, And we decided, okay. Well, you're materially participating in each one separately, so let's save the grouping.
Nick:We don't need to do it. Let's let's not until you need to. And they were audited, and that was one of the questions that the IRS asked them in auto. We don't see a grouping election on this return, So we think you failed. And then we had to submit the time log and go through the whole process and say, well, actually, here's our meticulous records because we proactively advise you.
Nick:And we won the audit, thankfully. So it is a question that they ask. It is something that they look for. And keep in mind, when you're filing tax returns with advanced tax strategies like these, the IRS doesn't get all the information. They don't see your time log.
Nick:They don't know how many hours that you've spent. They don't know that you materially participated. They're seeing a couple check boxes on the return that tells them you did it all. Mhmm. But they can't verify with the tax filing.
Nick:So it makes sense that they wanna ask questions. The more income that you have, the bigger the tax losses that we generate, the more of a target there is. And we don't fear audits. They're not scary if you're prepared. And that's why the preparation is important, and the proactive planning is important because they do ask these questions.
Nick:Every single audit I've been a part of, they ask for the time log. And then that one, they asked about the election. So they're they know what to ask for, and they're looking for it. And as long as we have the answers Yep. We keep the savings.
Heidi:That that is so big because there there's so much fear around the audit, first off, and the audit on claiming that material participation. So it's like you check the box, I'm a real estate professional and it's like, oh, will I automatically get audited? Well, not necessarily, but there are certain triggers. Do you think that it is a trigger for the IRS? If you have two taxpayers married filing jointly, two large w two incomes, and you see a checkbox saying that they're a real estate professional?
Nick:Absolutely. Yeah. Absolutely. Because it could be a case. Normally, time employment will knock you out of qualification for reps.
Nick:But there could be a case where you have a w two. We've seen instances like severance pay. Mhmm. Or maybe you ended your job at the end of the year, and you got a large bonus paid out in January. So, you know, large is relative.
Nick:You know, everybody has different w two amounts, but the IRS doesn't know. If they see $200,000 w two, there's no detail on the return by saying that says you received all this in January, or that this is a severance pay, a one time payment, or RSUs, whatever the case might be. They have no way of knowing that. So when you see a big w two man on the return, that's a question mark. This person clear looks like they work full time and earn these wages.
Heidi:Mhmm.
Nick:But they're real estate professionals, so something must be up. So, yeah, there's there's red flags definitely. This is one of the one of the hottest topics for audits that we see is is nonpassive real estate losses Mhmm. Because real estate by definition is passive
Heidi:Yeah.
Nick:By default.
Heidi:Right. So then back to documentation because that's another really big question for investors. How do you prove material participation?
Nick:Yeah. That's the that I'm glad you said that because the burden of proof is on the taxpayer. Yep. It's not on the IRS. It's not on the CPA.
Nick:We facilitate, and we help you, but the burden of proof is on you as the investor, as the taxpayer. And even if you qualify for something, even if you hit all the targets, if you can't prove it, it's your word against the IRS's, and guess who wins? The IRS is gonna win if there's no proof. So how do we prove that? And how do we prove material participation?
Nick:Time log. That is your that is number one shield when you're going into an audit with something like this in your tax return. The number two shield are your books, your accounting system. Because if you're if you're looking at, like, an includes a part of that is the cost segregations. We include that in, like, our accounting system because we book when we do it for our accounting clients, When we do books, we mirror your study.
Nick:So we put whatever you give us for your stat for your cost seg study onto the book. So just like a receipt would verify an improvement or a repair, a cost seg study verifies the whole asset section of our balance sheet. So that's all one like, those are your two shields. Your your time log for material participation, daily entries, descriptions of what you do, verification, instantiation. Anybody could put something on a spreadsheet.
Nick:But how do you prove the entries that you put on your time log? Mileage logs to prove that you took drives to the to Home Depot. Seat to show that you actually bought something at Home Depot. Pictures before and after to repair whatever it is you went to go, repair. You know, screenshots of calls, screenshots of texts, all of these things to verify and place you, prove that you were you were in this position or in this whatever you were doing in that given day or time, that's how you prove material participation.
Nick:So, yeah, like I said, every audit that we've been a part of has involved material participation, and every single time they ask for the time log. I will say that every single time they did not review the time log with me in the audit, they said, okay. We'll we'll take it. We'll review it. We'll let you know if you have any questions.
Nick:Okay. To date, we have not had any questions on the time log, and we won all the audits. So I think that's a plus.
Heidi:Nice.
Nick:But I wish I could get some insight on how they reviewed them.
Heidi:Yeah. Right? So You're like, can
Nick:I start asking?
Heidi:Fly on the wall. I would like to see what exactly are you looking for.
Nick:Yeah. Are you spot checking? Are you looking for the and at this point, you're dealing with people. So say might approach it differently. You know, they might spot check.
Nick:They might look at every line. They might, you know, the more credibility you can add to your log, the less questioning that they'll have if they jump around. You know, if they find some inconsistencies or something that doesn't make sense, it's gonna it's gonna ding the credibility of the time log in your records as a whole, and they might throw the whole thing in the garbage. So, yeah, we wanna make sure that we actually do this in real time. Where people get hurt is trying to build this retroactively.
Nick:That's tough to do.
Heidi:Mhmm. Have you come across any apps or platforms or tools for tracking material participation? I haven't looked. It's just something I think if there's gotta be something. If there isn't, we should build one.
Nick:Yeah. There is one. Always happy to add some competition to the market, though. I do. If you wanna do that.
Nick:There is so we use we if you like software, there's reps tracker, which we've seen success with. That is a paid app, I know, but built for this, built for real estate material participation tracking. We've seen success with that. Clockify is another good one that we we suggest. That's a free one.
Nick:So if you like software and don't wanna jump to the paid app, Clockify is a good free option. Also, built if you don't prefer software, we have, like, an Excel spreadsheet that we built and modeled after the the audit technique guide for material passive activity and material participation. That's basically the an audit technique guide is basically the IRS's instruction manual
Heidi:Mhmm.
Nick:On how they're gonna approach an audit for a given topic. So we read the whole technique guide and built the time log based on exactly what the IRS is looking for and would ask for. And that's local. So that's like an Excel copy. The reason we did it that way, and I would recommend this if you do use software to track your time, export regularly to a local copy.
Nick:If you get locked out of your account or something happens to the software that you're using, data gets lost, if that is your number one shield heading into an audit, you don't wanna you don't wanna lose all that. So I would say, you know, depending on how much you're in there and what how much you're you're doing, export regularly, monthly, weekly, even if you want. Export to, like, a local copy. It's just a backup if you're using software.
Heidi:Yeah. That's a great that's really good advice. Really cool. That's awesome. Well, there's a I I love that you built an Excel form, so even more reason for people to reach out and talk to Nick and and work with him because
Nick:For sure.
Heidi:You know, I I, again, love the background that you have and the expertise in that space. Certainly, it's so much a part of our business and what we're dealing with and clients that we deal with every day and a lot of the pain points. So the big beautiful bill.
Nick:Yeah.
Heidi:I mean Yeah. You know, we we have seen we we knew it was coming. It was just a matter of time. I I we really never doubted that he would get it done. That we would we would essentially get a 100% bonus back.
Heidi:It's so so fundamental to what's happening with real estate. What we see in this year, like we just do so many transactions now. It gives us an interesting perspective on the number of transactions we see and how they fluctuate. It's And so I I feel like my perspective is weird because I look at it from, the tax incentive side, and then I see the number of transactions and I talk with investors every day about, well, we've gotta buy because I need this much, and I'm gonna back into my my, you know, my my tax liability and how much I can use this year. So I'm gonna buy something.
Heidi:And then I have some clients I had one know, he came up an event I do every year, and he comes up and he was like, Heidi, you guys are so amazing, but it just sucks. I have to buy a property every year. Like, every year, I just have to keep buying. Yeah. I'm like, well
Nick:Good problems to have.
Heidi:Exactly. I'm like, if that's the worst problem you have, then, you know, you're doing pretty good. But but have you seen the same? Have you have you seen Yeah. People react based on tax bills like this?
Nick:Percent. Yeah. And I've seen the opposite. When bonus depreciation was phasing out, you see a trend downwards. More of an analysis.
Nick:Now a 100% bonus depreciation. You tell me what the property's worth without even doing the intricate math. I can tell you it's worth the investment from a tax standpoint, tax beneficial standpoint. When we were trending to 40% with line of sight to 20% and going back to zero, Cost segs are still I should be clear, and I'm sure you probably preach this to your base too, but, like, cost segs are still beneficial even with zero bonus 0% bonus depreciation because you're still accelerating depreciation. But the analysis becomes tightened.
Nick:We look at, like, how much are you like, with 40% bonus depreciation. We were running analyses. Like you said, we saw it coming. So beginning of the year well, here's what the law is now. But if and when this passes, this is like a 250% increase from 40 to a 100% bonus depreciation.
Nick:Mhmm. Look how big of a difference that is without you having to do anything differently. You're still spending the same amount of time, the same amount of money, and now you get a whole bunch of other benefits. So that's how we started framing our conversations because we wanted people to see this coming too. Not everybody has their pulse on tax law.
Nick:So that's our job, our responsibility to inform people just like just like you guys. And, you know, if you're not considering buying now, keep your ear to the ground about when this law might pass because then at least you have a plan and you know when it does pass, here's all the extra benefits we talked about. Now just go find the property in within these parameters and execute. And that's exactly what we're starting to see, which is exciting because something that may not have sprung somebody into action Mhmm. Now there's extra reason to do so, and, it's cool to see.
Heidi:Yeah. Yeah. That is awesome. Okay. So before we wrap up, I would love it if you can think of and this is kinda putting you on the spot.
Heidi:I would love to hear a story. Like, tell me a story about an amazing client you worked with that you helped and what the end result was. Nope. It was just amazing.
Nick:Okay. Well, I'll go back to let's see. Just so many of them.
Heidi:I know. I know.
Nick:I'm just joking. The one that I'll go back to is one that I mentioned before, because it is one that sticks out. We had a actually, a couple. It's two or three of two or three clients that had almost the identical scenario where a husband and wife, couple that one wanna really get out of their w two job just wasn't happy anymore. And, the conversation was like, how can we make this happen?
Nick:You know, what do we do to make this happen? And the conversation different applications because they had different investing goals, but the the the structure of the conversation and the concepts were the same. So we back we did a backwards analysis of, okay, this is how much spouse number one who wants to retire makes, take home. This is what you would have to do to achieve that with real estate and just structuring up a step by step plan, like a multiyear step by step plan of acquisition. Like you were saying, an acquisition is where it comes.
Nick:So you have to buy a property every year or maybe multiple. These people were in a position to do that, which worked out well. So we worked backwards. And then at the end of it, it was like, well, wow. This is attainable.
Nick:You know, this we can actually do. So, one case was short term rentals, one case was long term rentals with real estate professional status. So we worked in an acquisition plan to buy a specific dollar amount of real estate per year, doesn't matter the amount of properties for this analysis, specific dollar amount of real estate per year that would yield x amount of dollars of tax savings per year. Mhmm. Now, of course, when we're making a multiyear, multistep plan, we have to incorporate some variables in our planning.
Nick:So it's never gonna be pinpoint accuracy of what we can expect at the end of the day tax savings. But we know enough like you were just saying, transactions. We've seen enough transactions to know averages of what we can reasonably expect.
Heidi:Mhmm.
Nick:Now we can get you in a pretty pretty good ballpark of what to expect based on certain averages that we normally see. So buy x amount of real estate per year, track your time, hit these targets, keep doing that for three, five years, whatever the situation was for this specific client, and that will yield y amount in tax savings per year. And when you compare that to the net take home versus the time spent that the spouse would now have to be spending on real estate, it was a no brainer. No brainer. And I don't remember exactly when it was, but it was very shortly after they quit their jobs and dove right into real estate.
Nick:And it's been a couple years, and it's and it's going right according to plan. And it's extremely good feeling because you basically just took somebody out of a situation that they didn't wanna be in, and now they're spending less time and making more money managing their investments and just basically a complete one eighty on your day to day life. And not not saying tax planning was a 100% the reason of it, but we help them we help them get there, which is which is a huge part of it. So, yeah, that those case studies are my favorites. How do we get people to either go from full time to part time, full time to retired, or or part time to retired, or at least have the option to do it?
Nick:Yeah. That's those are my favorite ones.
Heidi:I it's so cool because, you know, we see similar things and we deal with similar clients and see it work and see people really dive in. It's amazing. It's inspiring to me to see some of these clients and to see the success that they achieve and, you know, how their families are living. I've got one client I work with. It's now really big on social media, he shares a story about how him and his wife and their family are running, you know, short term rental properties and living the dream and, you know, talking about, you know, vacationing and and, you know, just the the the the work life balance, I think, is just different.
Heidi:And it is a beautiful thing and it's, it does kind of feed my soul. It sounds so silly because people are like, you're in tax strategy or tax incentive. And like, I know it seems silly, but what I love is we legitimately help people achieve really big goals. And it's so cool to see. So I love it that you have that strategy in place.
Heidi:I think it's, I think it's so powerful too, because a lot of people, there's so much confusion with where to go or who to work with because you've got wealth managers. You have like your legal side, your tax, like tax attorneys and and legal structuring for entities. You've got a CPA on the on the finance or tax side, and then where most people have no idea we exist on the specialty tax side. We're like, we just do the brain surgeries over here. Never mind us.
Heidi:And it's really difficult for people to navigate, but it's beautiful because you you have the tax piece, but it is the tax strategy that I think a lot of people don't realize can be such a leg up and a catalyst towards achieving goals. But I think most people would think that that would reside with, like, a wealth manager.
Nick:Yeah. Yeah. You're right. There is a difference. There's definitely a difference.
Nick:Tax strategies is is a separate thing all by itself. Wealth manager is gonna give you a whole overview of your picture, not only focusing on, like, your overall financial health, but also leverage, like, how to leverage your accounts to make more investments, how to just manage the investment portfolio from top level. Mhmm. Legal, of course, there's a lot of overlap between everybody that you just mentioned. There's your lines bleed.
Nick:Legal is gonna be, like you said, entity structuring more about like protecting your assets, litigate, avoiding or assisting you through litigation. There's stop signs for us as CPAs on each of those fronts. Like we don't we don't make it. We don't give investment advice and we don't give legal advice because we would not be the person to defend you in the legal case, for example. We that's not our qualification.
Nick:But the tax side of it, all of those all of these different things, what what you guys do, what attorneys do, what wealth managers do, it all has tax effect.
Heidi:Mhmm.
Nick:So that's why I love working with you guys because we've worked together for a while now. We've seen each enough of each other's work, believe, this point to know that we understand how we can interact with each other and we trust each other and how we can benefit a mutual client, we're on the same page.
Heidi:Mhmm.
Nick:So working with a team and collab having that team collaborate with each other is extremely important. Just is efficient. But, yeah, there there is definitely a difference for sure. Definitely a difference.
Heidi:Talk a little bit about how people can reach out to you. What's the best way to get in touch with you? And then do you offer any resources or something where people can, I don't know, follow you? Do you have social media or YouTube or videos or just your website? Talk a little bit about things you might have that people can, you know, online stalk you.
Nick:Yeah. Of course. Please do. I'm actually excited to mention this now. I'm glad it's good timing because I'll no no embarrassment to admit that my my online and social presence has been basically nonexistent up until this point.
Nick:We've been fortunate enough to where like, enjoy I networking, talking with people and just providing good service and hopefully, you know, having good referrals. Right? And and good relationships with people that are in our network that we can help each other out. And that's always how it's been. And this year, we've really started to dive more into content.
Nick:So, yeah, now I'm excited to say go follow us on all social platforms. So like like we're we're leading that up now. We have a newsletter that we send out monthly. Actually, it just went out today, end of each month. So you can subscribe to that on our site.
Nick:You can follow all our social pages. It's all iola c p a, a I o l a c p a. And we're putting out a lot of content. We're gonna kick off YouTube, some video content too later on. But, yeah, follow us.
Nick:The site is the best place to get in contact. We have a short intake form, and then we'll get you set up with a complimentary meeting to start out and learn more about us so we can learn more about you.
Heidi:Yeah. Perfect. Okay. Well, we will share links to all of that stuff in our show notes. And then this will be a great catalyst for both of us to share videos and to provide this information because I thank you so much for letting us get into the weeds a little bit.
Heidi:These topics are so fundamentally important to a lot of our clients, both mutual clients. And and yeah. I mean, I don't know that I wanna share you to the world. You are best kept secret in terms of being able to send clients for the level of expertise you have in in this space. So
Nick:You'll always have priority, Heidi. I'm not going anywhere. Don't worry.
Heidi:You're the best. Well, thank you so much for the time. Thanks for being a guest. I hope our listeners enjoyed the show, and we'll be back next time.
Nick:Thanks so much.
Heidi:Nick has been incredibly insightful. His knowledge between tax strategy, planning, and investing really helps to bridge a gap for today's high income earners and real estate investors or aspiring investors. And for our listeners, if you're an investor or a CPA looking to really understand or increase your tax scheme and work with someone that's really specialized in real estate, make sure to check out Nixonfirm, which is a aiolacpa.com. It's ai0lacpa.com. And also follow him on social media for some great content.
Heidi:If you found value in this episode, please share it, subscribe, and leave us a review. Every week on SlashTax, we're bringing you expert advice on how to slash taxes, grow wealth, and invest smarter. So thanks to our sponsor, Engineered Tax Services, and thank you for tuning in. We'll catch you on the next episode of SlashTax.