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Global Investors Podcast
GI67: Developing a Tax Strategy as a Real Estate Investor with Brandon Hall
September 30, 2020
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Brandon is a Certified Public Accountant, national speaker, and is the Founder/CEO of The Real Estate CPA. Brandon works with real estate investors, syndicates, and private equity funds to optimize tax positions and streamline accounting and business functions.

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Transcript:

Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
So welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Brandon Hall. Brandon is a Certified Public Accountant, national speaker, and is the Founder/CEO of The Real Estate CPA. Brandon works with real estate investors, syndicates, and private equity funds to optimize tax positions and streamline accounting and business functions. So thank you so much for being on the show, Brandon.

Brandon:
Thanks for having me Charles. I appreciate it.

Charles:
So I touched briefly on your professional background, can you expand more on what you were doing prior to starting your current from the real estate CPA?

Brandon:
Yeah, so I was working in consulting at the big four. We were out in DC, so doing some federal consulting on federal projects and I was like very, very short amount of time into my, my professional career, I guess, after college and realized, man, I do not want to do this for the rest of my life. I don’t, I don’t see myself sticking around for 15 years and hopes to make partner and hopes to make, you know, 350K 400K a year. I’ve I just want more control. I want to be able to call my own shots. So I started trying to figure out how to get out of your corporate job. I found real estate found biggerpockets.com started asking. I started asking some questions about rental real estate and through that process realized that people were asking a lot of tax questions. So I just started kinda answering those tax questions. I didn’t really have any tax experience at the time when I was studying for my CPA and specifically the tax piece of it. So I was like, this will be a great way to to test my cloud, my knowledge as I’ve been learning some of this stuff and just started kind of getting really involved with the forums, answering a lot of questions about my first three unit property, about a year or two a year and a half or so into that whole process and realized that it was going to take a long time to buy enough real estate to leave my corporate job, to replace it also is going, gonna take a lot of money. And you know, that was like, I think the whole like no money down and all that stuff was kinda hitting mainstream at that point. So I know that there’s ways that you can do it, but I’m a little bit more conservative. And anyway so I started, I started asking myself, well, what do I do now? Because you know, rental real estate is going to take me at least eight years to save up enough cash to replace my income. And I don’t want to wait that long. So I I kind of took this, answering the questions on the bigger pockets forum a little more seriously, and it just sort of snowballed into taking on clients. And now today I’ve got a staff of 17 folks. We’re probably one of the fastest growing CPA firms in the country. At least that’s what I’ve been told by other people in the industry. And it’s a lot of fun. I mean, we only work with real estate investors and people that are running real estate businesses. So we’ve, we’ve seen pretty much anything that you could throw at us at this point. And we’ve seen a lot of great stuff. We’ve also seen a lot of shady stuff and it’s just been interesting. It’s been a lot of fun, met some really cool people along the way.

Charles:
Yeah. Real estate investors are interesting for sure. There’s you go to a cocktail party and you say you’re a real estate investor. It never, the conversation never ends there.

Brandon:
Right, Exactly.

Charles:
There’s always something people want to learn. So you provided County services to mom and pops to you know, some, some corporations and businesses that have almost a billion dollars in assets under management. So what services does a real estate CPA provide that might differ from your traditional account coming from other than the IX, you know, a exclusive real estate investor.

Brandon:
Yeah. So, so the main difference is our advisory and the way that we do our accounting kind of CFO outsource services, which we’ll talk about in a second. So first we have two verticals at our firm. We have a, B to C vertical business to consumer. And the consumer in this case is like all of our individual landlord owners, individual flippers builders. So they they’re all running businesses, but we still say it’s B to C a and then we have B2B or business to business. And our business to business. Those are like the bigger syndications they’ve got multiple deals under their belt or the larger funds. You know, they’ve got 50 to a hundred million dollars in assets under management that they are or cash in some cases that they’re playing around with and they’re buying a bunch of assets. So that’s our B2B sort of line on the B to C side. That’s where most of our clients sit at this point, we, we specialize in tax advisory services, or that’s kind of like the big kind of bread and butter of the C side is that tax advisory. So we’ll take a client in and bring them on board. We’ll, we’ll look at their situation where they’re at stay, where they’re trying to go, and we’ll basically develop a tax plan for them. And then we’ll hold them accountable to implementing that tax plan. And that’s beneficial for a lot of our clients because, you know, especially if you’re like new to real estate, or even if you’ve been doing this for a while, taxes are confusing, entity structure is confusing. How do you account for things is confusing and to just get somebody to weed through a lot of it for you and tell you what to focus on. Like I tell our, I do a lot of our sales calls and I tell the prospective clients that if you are expecting us to write you a book on every single strategy under the sun, that you could take advantage of we’re the wrong firm for you. What we’re going to do is tell you, Hey, we respect your time. You’re a busy person, and you need to focus on the three to five highest and best use of your time strategies. And here they are, here’s exactly what you need to know about them. And here’s exactly how you educate or how you execute them. So here’s your action plan. And that’s what we for a lot of our B2C folks, and it’s just holding them accountable to that throughout the year. So we’ll provide tax preparation services at the end of the year. And then something that we rolled out earlier in 2020 was a low cost bookkeeping service for our B to C line. So previously we weren’t able to get below like 2000 a month, which obviously doesn’t work for people that have five to 20 properties. So we kept asking the question, how do we do that? how do we do that? And finally, one of the guys on my team figured it out and we outsourced to the Philippines. So I guess we kind of in-source, they sit on our team, they are our full time employee, but it shifts our labor costs and makes them a lot lower. And that allows us to kind of get within relatively similar ballparks to what you would see online for for that kind of portfolio bookkeeping. The rental bookkeeping. The benefit with us though, is that we’ve got experienced advisors, that gut check that bookkeepers work before we kick out the reports to you, and we’re looking at it and making recommendations every month. And that’s where the real value is. I think so that’s kind of the B to C line. The B2B line is, I mean, we, you know, we’ll manage the entire financial operation and we’ll manage all the accountants that the, that the companies have on staff. We’ll train them, we’ll have them follow our process and we’re acting more, typically more as like a controller or a CFO. I will provide the owners with a dashboard on Google sheets that has them tracking key metrics that were live updating from QuickBooks online. So we do a lot of cool stuff there.

Charles:
Yeah.

Brandon:
That, and, but really, it’s just kinda like, how do we, how do we spend our capital? How do we shave off a percentage point of rehab costs? I mean, at that point, a percentages is some big money when you’re playing with that much cash. And that’s kinda what the role becomes a very strong advisory relationship with our clients. So how are we different? I think it’s just the advisory. It’s our bread and butter. What we, most of us, most of my team invest in real estate themselves. We can speak the language for that our clients are communicating to us with, and we kind of know what they’re looking for so we can proactively attack that.

Charles:
Okay. Yeah. Awesome. It’s, it’s a, you can cover all different types of real estate investors wherever they are in their investing career. So how should a real estate investor prepare and plan in order to be proactive with their CPA, their accountant?

Brandon:
Yeah, so it depends on what you’re doing. The first thing that I would say is you want to get on some sort of some, some sort of plan where you’re checking in with your CPA on a relatively regular basis. And that could mean like once a quarter, even just a short email, like, Hey, these are my updates. Is there anything that I should know about what changes in the tax code that might affect me? Something as simple as that can make a huge difference in your actual tax savings at the end of the year? Because the worst thing with in the worst thing that real estate investors can do to shoot themselves in the foot is wait until January of the following year. And to start that planning conversation, it’s too late at that point, December 31st has already come and gone. We can’t really shift a whole lot of things around anymore. We can’t change the facts. We want to change your facts as we’re going and to save on taxes, you have to change your facts. And that’s why it’s so important. So we, we have to change the facts in that current calendar year, and that requires a pretty consistent check-in. So we check in with our clients, at least the first year, once every six to eight weeks, we’ll send them an email, double check with them, or just, just make sure that they’re good to go. And if they’ve got any questions and every year after that, typically once a quarter, just sending them an email, checking in, making sure that they’re still good to go, but that that’s the best thing. It’s just forced the proactive relationship. And if you have a CPA that only wants to talk to you once a year, which unfortunately there’s a ton of CPAs out there. That’s, that’s their business model. It’s, I’m going to prepare your taxes. We’ll have a 30 minute conversation and you’re good to go for a year. That’s just, it’s not enough for real estate investors. You need more advice and you need more proactiveness. And if you have a CPA, that’s not willing to give that to you, then you need to switch. You need to find something, somebody else that is going to to be proactive and have those conversations with you.

Charles:
Yeah. Cause they have to plan it out as well. If like you said, changing the facts, but it’s also, you know, CPAs that I’ve had before. Some of them you would be trying, you know, they’ll, they’ll say, Oh, you know, it’s this much to do the taxes and it’s a good price, but then I’m trying to get in touch with them. I can’t get in touch with them. I’m trying in the first part of the conversation is explaining whatever I’m doing in real estate, which is something that’s just a waste of time for everybody. So it’s great to work with a CPA that actually is focused on real estate. And you know, can, you can start a sentence and they can pretty much finish it and tell you what you’re doing. And you’re not on the call, you know, marking off hours a day. You, like you said, every eight weeks or something, you’re having a 30 minute call.

Brandon:
Yeah. Yeah. It’s just, it’s just the consistent, check-in that’s what you have to build the habit of. And if you are serious about growing your portfolio, you need to be serious about the professionals that you’re using to support your growth. And you know, what we found is that a lot of, a lot of B to C a lot of the business to consumer relationships, I mean, a lot of the landlords are cheap. I mean, I know I’ve got property myself and I’m cheap, but it’s one of those things where you have to figure out like, do I want cheap in this scenario? And you might, my cheap might be fine for the first few properties, but if you are getting serious about growth, you also need to get serious about upgrading that CPA relationship. And when I say upgrade it, you know, I think most CPAs across the country are or smart, I think that they’re capable. It’s just, you have to upgrade the business model. So we have built our business model out to specifically be proactive with our clients, to have one point of contact at the firm. I hold my staff accountable to a 48 hour email turnaround time. I hold my staff accountable to client reviews. So are you going to get that? Or are you going to work with a small CPA firm? That’s gonna charge you a 600 bucks to file a tax return, but you can never touch base with the owner. It takes two to four weeks to get a reply. You can’t ever get on the schedule that you follow. And they say, we’re going to be done next Friday. He follow up next Friday. They say, Oh, sorry, next Friday, next Friday. And say, I promise, I’ll get it to you next Friday. It’s like D D do you really want that? If you’re serious about the growth and typically the answer now?

Charles:
Yeah. I mean, if you’re really serious about the growth, like you’re saying the small amount of money for the additional costs in filing a return is you know, it what you can, what you can do and how you can grow your business. Definitely outweighs that.

Brandon:
Oh too, like if you’re proactive with your CPA, you’re going to save so much more money along the way. And you might not necessarily be able to tangibly point that out year to year, but there will be years where you save a boatload of money because of all the stuff, all that pre-work that you’ve been doing for years with this CPA. But you have to build that proactive relationship. I mean, I’ve got examples all day long where clients will tell me, Oh, Hey, I want to let you know that I sold a property. And I bought this new property. And I wanted to know about the 10 31 exchange thing. And I’m like, well, it’s too late. Get 10 31. He already did it. You can’t sit there. Don’t exchange you, you didn’t, you didn’t use a qui you didn’t tell us or they’ll be like, yeah, I did a flip property. and I did the flipping, the S corporation that I had, but then I decided that I actually wanted to keep it as a rental property. So I just moved it out of the S-corporation just want to let you know for tax time. And I’m like, that’s a taxable sale to yourself. That was a poor move. Right. If you were to just, just let us know in advance before you do anything crazy, we can talk you through it and save you a lot of money in the process. So, so, yeah. So you just, you got to think about the relationship that you’re getting currently and whether or not it makes sense to upgrade that relationship.

Charles:
What I’ve heard from CPAs before is they would complain with some of their clients that they had a really good year, and they’d never told their CPA. And it was something where it was, you know what I mean? There was nothing they could do about it. And no T no way of offsetting any of the income. What do you find? You said you’ve worked with all different types of clients. What do you find as your most difficult client to work with? Is it just poor communication? No communication?

Brandon:
The most difficult client for us. Yeah. So poor communication is definitely a big one. If you don’t have the discipline to like, we’re, we’re going to promise you a 48 hour email turnaround time, or at least that’s what I hold my team accountable to. If you’re going to take weeks and weeks to get back to us, it’s just not going to be a good relationship. It’s not going to work out and there’s gotta be a mutual commitment to good strong communications and organizations. That’s the first big one for us. The second big one though, is, are you a coachable person? And what I mean by that is, are you going to come in and you’re hiring us to help you sift through a lot of this stuff and tell you what to focus on? Are you going to be the person that comes in and says, you guys are wrong and I’m going to do it my way, or you’re going to come in and say, Oh, thank you so much. I’m going to try to do it your way. Even if I think you might be wrong, I’m gonna try to do it your way anyway and just see what the results are. And we have found that if you’re the coachable people, we love working with those types of people because they come in, they listen to us, they do it the right way. They’re gonna win audits. The non coachable people are going to lose audits. They’re going to be the ones that are, that the tax court is rendering opinions on. She’s not going to be a pretty process at a later point. And it just makes us all measurable along the way. So if you, you gotta be open to, to hearing feedback. And a lot of the feedback, like the most difficult conversation that I ever have with people is you’re not going to qualify as a real estate professional this year. And I know that’s something we’re going to touch on a little bit later, so we can get into the details. But man, you know, sometimes I have to be the dagger in the heart, you know, the dream crusher. And then they go, well, you’re way too conservative. And I’m like, no, I’m not. I just, you’re going to lose an audit. You’re going to lose the tax court. You don’t want to do that. You just don’t wanna set yourself up to fail. And my job is to tell you that you’re going to fail, unless you change your facts and working helps change your facts, but you have to do these things. And are you willing to do those things? So you have to be willing to implement our advice. And if you are, then you can be a great client.

Charles:
Yeah. It doesn’t make sense to pay for the advice and then not use it. It’s like a, you know, paying your attorney and then not using any of the advice and saying, you know, I’m gonna just have to represent myself.

Brandon:
Yeah. It’s kind of, yeah, people do that though. It’s very bizarre. I don’t get it.

Charles:
Are there common deductions or write offs that you see real estate investors typically miss or overlook?

Brandon:
Yeah. The most common ones are just not understanding of the 2013 tangible property regulations. So the 2013 tangible property rags basically tell you how to treat expenditures. So if I spend money on a repair or improvement or materials or labor, do I get to write that off on my tax returns as a repair, or do I need to capitalize it to the balance sheet and depreciate it over 27 and a half or 39 or five, seven or 15 years or whatever. That’s where we see the most mistakes. We actually see a ton of mistakes from CPAs related to this too. A lot of CPAs haven’t gone through the 2013 tans for property regs. Some don’t even know that they exist and they’re preparing real estate related tax returns. And it’s very easy to see. All you do is you go to your tax returns and you look for the federal depreciation statement or the federal asset schedule or whatever your tax return calls that supplemental schedule. And if you want to find it, you just pull your tax returns up on your computer in PDF form. You scroll down at real quick because everything is in portrait mode, but these statements are in landscape mode. So you can very quickly find them. And all you’re looking for is, do I have anything on this balance sheet? It’s a balance sheet will show you what you purchased it for, what the land value is, what the purchase date was, what the annual depreciation is. So it gives a lot of good information, but it’ll also tell you if you’ve been, if you’ve been following the 2013 tangible property regulations, and that’s typically the first place that I go, anytime that we’re reviewing a new client’s tax return, because I can point out, Hey, here’s where you’re not following the 2013 tangible property regs, the biggest ones, the $2,500, diminimous safe Harbor. So if I pull up your balance sheet and I see a bunch of $500 fridges and you know, appliances and small repairs, and then boom, you’re not following the 2013 tangible property. So your CPA probably is not the best one to be working with you on this. It’s very easy to, to point out those missed opportunities if you know what you’re looking for there, but that’s the biggest one. That’s the biggest one.

Charles:
So we, we, you touched on earlier about bringing, coming a real estate professional. Can you talk about what the benefits are and how one would be classified as a real estate professional?

Brandon:
Yeah. Glad you asked. All right. So real estate professional status. So to explain this, we first have to explain that. So, so real estate professional status is embedded in section four 69 of the internal revenue code. And section four 69 says that all rentals are by default passive activities. And that’s just by default they’re per se, passive, there are three exceptions to the passive activity rules, one, you dispose of a property. So if I sell rental a I can use the losses from BCD and E to offset the gain on rental a so that’s one way, the second way is to generate net passive income. So maybe in the past, I’ve generated passive losses of 50 K they’ve been suspended and carried forward this year. I generate net passive income of 10. Well, now I can use my, I can use 10 of my 50 caves suspended losses to offset today’s gain today’s income that’s option number two. And then option number three is to qualify as a real estate professional and without hitting any, either one of those exceptions or any one of those three exceptions, your passive losses generated from your rental activities, or sorry, your rental losses generated from your rental activities will be considered passive. And those passive losses can only offset passive income or gain on sale from a rental activity. So what happens is they just get suspended and they carry forward year after year after year, you can’t use them to offset your w two income or your you’re a stock sale income, or cashing out your fallen care, whatever you, they just get suspended and carried forward. And that’s obviously not ideal. If we create losses from our rental real estate, we want to use them now today, the best, best thing for us, time value of money, we’ll show you that. So that’s what we want to aim for. So to get there, we qualify as a real estate professional because when we qualify as a real estate professional we can take our losses in an unlimited amount. This is awesome. right? I can earn 300 K in my w two job and go and buy rental real estate, take my losses and, or buy rental real estate. Do a cost X study, generate a big loss of a qualified real estate professional. I can then offset my three inch KW to income in an unlimited amount, whatever loss I’m able to create. So it becomes very powerful. I can wipe my taxes out, essentially to qualify as a real estate professional, you have to spend 750 hours and more than half your time in a real property trader business in which you materially participate and that’s a big threshold, right? But the, the other kind of thing to remember here is that qualifying as a real estate professional in and of itself actually does nothing for me. I also have to participate in the rental real estate activities in where this becomes important to understand the difference is I can be a real estate agent full time. If I’m a real estate agent full time, I’m materially participating in a real property trader business, leasing brokering business I’ve probably got a, you know, a log 1600 hours. So I meet my 750 requirement. I also, that’s the only thing that I do so more than half of my time is in a real property trader business. So I meet those two statutory tests, but if I don’t spend any time in my rental activities, then my rentals are still passive. My rental law are still passive. So you also have to materially participate in your rental activities and we can get, there’s a ton of nuances there. You know, your spouse can participate in kind of spousal time from a dual participation purposes, and we can jump into all of that. But but we see a lot of, a lot of issues and a lot of misconceptions with people. There’s a lot of misinformation online about real estate professional status. I’m happy to clear some of that up.

Charles:
Yeah. There’s a, you have a great page on your website about that. There was a blog post or something, so I’ll put that into the notes of this, about being a professional so people can refer to that and then they can contact you if they have any further questions. Cause obviously it’s pretty much a per case basis, I imagine. And so you work with a lot of clients throughout the world as well. I mean your clients span all over and what, what do you see? I mean, all of your clients mainly are active real estate investors. Do you have a lot of clients that are passive real estate investors?

Brandon:
Oh yeah. Yeah. We have a lot of clients that are just limited partners and syndications and funds. Sometimes we’re able to make connections, which is really cool. Yeah. Both domestic and international.

Charles:
Okay, great. So you can work with you can work with clients anywhere in the world that have any type of ties to U S real estate.

Brandon:
Yes.

Charles:
Awesome. Okay, great. Great. Yeah. Cause about half of our listeners on this show are are foreign, so it’s awesome to have that.

Brandon:
Cool. What what countries primarily

Charles:
We’re talking, it’s all the wealthier countries, So it’s going to be Emirates. It’s going to be throughout Europe, Germany, Switzerland Hong Kong Scandinavia. So Canada, so yeah.

Brandon:
Yeah. we, we have, we have a few Japanese folks or a few people that live in Japan, Australia, Dubai. I know that we have London is a big one. I don’t know. I don’t know about Hong Kong. That would actually be an inch. I’d have to go back and double check if we have anybody from Hong Kong. Yeah,

Charles:
Yeah, no, it’s, it’s usually from those like top 30 wealthiest countries or something that have the money to invest in another country, especially in real estate, which is, as you spoke about earlier, very capital intensive business to get involved with. But so you have a, we have a podcast as well. Right. And it goes over. I I’ve been listening to it. And can you talk a little bit about your podcast and what you guys talk about?

Brandon:
Sure. Appreciate the plug. The Real Estate CPA podcast. My, my self and my cohost Thomas Castelli is not a CPA at my firm. We basically just bring on investors and we bring on other experts in the industry to talk about real estate investing in taxes how they, how they are always kind of intertwined. So we ask our, like the investors that we bring on, we’ll ask them, well, how are you? What are you doing from a tax strategy perspective? Or how do you keep your books and records? So we’re trying to like give people like a behind the scenes view of what people are actually doing. But I mean, it, a lot of the episodes always point back to while we’re doing a cost SEG and we are real estate professionals. Those are the two, the two key areas of the code to really understand well, if you’re gonna be investing in real estate.

Charles:
Yeah, it was great. I was listening to one of the carried interest, which was it’s. I mean, it’s, it’s something like internal rate of return. You just have to learn it’s something when you’re learning it. You just have to hear it over and over again. So shared interest, it’s something and you hear different people explain it. Some people are easier to understand than others. So there’s some great episodes. People should check it out if they have any questions about anything that we talked about on this podcast, but how can our listeners learn more about you and your business?

Brandon:
Yeah. So you can go to therealestatecpa.com. That’s www.therealestatecpa.com. We’ve got a lot of good education contents on the website. We’ve got a blog. Our podcast is there too. You can also connect with me on LinkedIn. They give you just, if you Google Brandon Hall, LinkedIn, Brandon Hall, CPA, LinkedIn, I should be the first one that pops up. So happy to connect there.

Charles:
Awesome. Well, thank you so much, Brandon, for being on the show today and I look forward to connecting with you in the future.

Brandon:
Thanks Charles. Appreciate it.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

Announcer:
Thank you for listening to the Global Investors Podcast. If you’d like to show, be sure to subscribe on iTunes or Google play to get new weekly episodes. For more resources and to receive our newsletter, please visit global investor podcast.com and don’t forget to join us next week for another episode.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of harborside partners incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

  • Website: https://www.therealestatecpa.com/

About Brandon Hall

Brandon is a Certified Public Accountant, national speaker, and is the Founder/CEO of The Real Estate CPA. Brandon works with real estate investors, syndicates, and private equity funds to optimize tax positions and streamline accounting and business functions.

He believes that real estate investing is critical to building sustainable and generational wealth.

Brandon worked at PricewaterhouseCoopers and Ernst & Young prior to launching his own CPA firm, Hall CPA PLLC (The Real Estate CPA). Through the knowledge gain by working with real estate investors, Brandon invests in multi-family properties personally and through his capital group, Naked Capital.

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