Ep #161 – Craig Cody – How Tax Planning Can Save Any Real Estate Investor A Ton Of Money
Here’s some of what you will learn:
- What is Tax Planning?
- The end goal for tax planning is to keep more of what you make.
- How real-estate investors fail to plan.
- Reasons to why you should put properties in their own specific LLC.
- If all your properties are under a single member LLC and they all flow into one holding company, then you only have 1 tax return.
- Why good record keeping is important in this business.
- How your kids can be included in a deductible.
- How a Medical expense reimbursement plan can be counted in a deductible.
- Your home office can be included in your deductible.
- Your home gym and pool can become a deductible also.
- Why real estate investors should communicate with their CPA on a monthly basis.
- What is a foreign retirement plan.
- How cost segregation can make you money.
- Book recommendation: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands: The Hidden Truth Behind Lowering Your Tax Bill – By Craig Cody
- Book recommendation Secrets of a Tax Free Life – By Craig Cody and 14 other authors
- Connect with me on Facebook at Rod Khleif.
- Text Rod to 41411 or visit RodKhleif.com for a FREE copy of my book, “How to Create Lifetime CashFlow Through Multifamily Properties.”
You can contact Craig Cody at:
Full Transcript Below:
Ep #161 Rod Khleif & Craig Cody – How Tax Planning Can Save Any Real Estate Investor A Ton Of Money
Welcome. This is the Lifetime Cash Flow Through Real Estate Investing Podcast. This is where you’ll learn strategies to help you achieve lifetime financial freedom through real estate investment. Your host, Rod Khleif, has owned over 2,000 homes and apartments. And he brings experts in all aspects of real estate investment and management on to the show. Now, here’s your host, Rod Khleif.
Rod Khleif: Hey, just a couple of quick things. You guys know I’m a huge proponent of mindset and the psychology of taking action and how it’s my belief 80% of your success in anything is your psychology and your mindset. And really 20% is the mechanical stuff, the real estate knowledge.
I even recently did a Facebook Live clip on creating vision boards and how do you use those to get your goals and things you want. Well, you guys aren’t gonna believe this. You are absolutely gonna love who I’ve got coming on the show on September 25th. John Assaraf from The Secret.
He’s the guy that showed us his vision boards in the blockbuster movie The Secret. In fact, he’s the reason millions of people now have vision boards. John is that guy. So make sure you check out that episode on September 25th. It will be epic.
I finally launched my course and coaching program. If you’re interested in this business at all, I can humbly say it’s the best multi-family course out there. I personally coach you on how to crush it in this business and in your lives. If you wanna get more information on my course and coaching text the word crush to 41411.
And last, I’ve created an incredible Facebook group for you guys. If you’re interested in multi-family investing at all already over 800 people on it, I’m sure it’ll to a thousand here shortly and it’s very active. All you have to do is go to multifamilycommunity.com, and it’s a direct link to the page, so go sign up and you peer mentor and learn from each other. It’s just an incredible environment. Alright, let’s get to it.
Rod Khleif: Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif, and I’m thrilled you’re here. You guys are gonna get a ton of value from the gentleman we’re interviewing today. His name is Craig Cody, and we’re kinda taking up a sidebar on multi-family investing to talk about something that’s very, very important as it relates to being a real estate investor, and that’s tax planning, because nobody does it.
In fact myself, I’m guilty of it is well. I’m typically working backwards to try to solve problems instead of being proactive. So I thought it’d be really helpful to have Craig on the show.
Craig ‘s a certified tax coach. He’s a CPA; been a CPA for 17 years. Actually, before that was a police officer in New York City for 17 years Craig has a CPA practice that focuses on tax planning, being proactive. Craig, welcome to the show, buddy.
Craig Cody: Oh, thank you very much for having me.
Rod Khleif: Absolutely. You also co-authored a best seller called Secrets Of A Tax Free Life. That’s on Amazon and I know you’ve got a gift for my listeners that we’ll talk about here in a little bit. I appreciate you being on the show.
You’ve had a tremendous amount of training in tax strategy and being proactive. So I’d like to dig right, and get right into what my listeners need to know. As you know, my listeners are aspiring and or even very successful multi-family real estate investors. So what is tax planning?
Craig Cody: Tax planning is looking for ways to take advantage of the tax code for things that you’re already doing and making those things deductable legally.
Most CPAs and accountants, they don’t do tax planning. They’re typically, recording history instead of making history. They’re looking in the rearview mirror. So when you plan you’re looking for ways to help your clients keep more of what they make.
Rod Khleif: Right. Right. Okay. Like in the case with my CPA, my own CPA, it’s always the last minute. We’re always going back and trying to fix anything that might have happened and I’m guilty of it. I know a lot of you guys that are listening are guilty of it as well of not being proactive, and taking steps to maximize all the benefits that are available.
I will tell you. I did step out of that a little bit last year and did some things that we’ll talk about, here on the show that really helped me. But this is so important for those of you listening to be proactive; to get ahead of the curve, because there’re so many deductions in the tax code that people don’t take advantage of that are right there. We’re gonna talk about those.
Let me ask you this, Craig, what would you say is the biggest mistake that you see, or some of the mistakes you see real estate investors making, tax related?
Craig Cody: Number one is they fail the plan.
Rod Khleif: Okay.
Craig Cody: That could be wrong entity choice. That could be, very often we see people holding all their real estate in their own name or maybe inside of one entity. That entity may be an LLC or maybe a corporation or an S corporation. That’s typically not a good idea, but not taking the time to plan, not working with all your advisers.
Let you attorney, and your financial advisor and your CPA communicate. They should want to communicate. There’s a lot of good reasons for them to communicate. That’s in their best interest.
Rod Khleif: Absolutely. Now, I wanna go back to something you just said about entity choice. Now, I’d just like to get your opinion on this, what I tell my listeners is, ideally you want your properties in property specific LLCs. Now, the only difference to that is if it’s just a duplex, you could put a handful of those in one. But if you’re buying a larger property, at least, let’s say commercial property.
Commercial would be five units or more. If it’s five units or more, I’m gonna tell you every single time, put it in it’s own specific LLC. And then you’re gonna have each one of these properties in a property specific LLC, and then my suggestion is you have a holding company LLC that owns the membership interests in the property specific LLCs. Is that a good strategy?
Craig Cody: It’s a good strategy. Having multiple in one entity has it’s own down.
Rod Khleif: Right.
Craig Cody: We’ve actually had a client where they owned them personally and they were $25,000 properties. She was sued for mold-induced injury, and apparently, there’s a cap on insurance for mold, which was only up to 25,000, and the jury award was 150. So as she sells each of the other properties the checks go to the person who sued her.
Rod Khleif: Well, there you go guys, I will tell you, when I had 800 houses and multiple apartment buildings here in Florida. The apartments buildings were always in individuals, but I had some times as many as 20, 25 properties in an LLC.
That’s a horror story that you just described, and that absolutely could have happened to me when I was like that. If you wanna be super careful then put each one on it’s own LLC because you’re not gonna be paying for multiple tax returns if they all feed into a holding company. Correct? Craig?
Craig Cody: Correct. If they’re all single member LLCs and they’re flowing into one holding company, then you have one tax return. So you need to keep the same books and records like everybody else but there’s no extra cost there.
Rod Khleif: Okay.
Craig Cody: Depending on the state you’re in, it depends. In New York it may cost you 1500 for an LLC, but we have clients in Pennsylvania and it’s about $150. If you look at that investment…
Rod Khleif: Yeah. Here in Florida, it’s very inexpensive. Yeah, I know New York’s is crazy. I think California gets pretty expensive as well. But they also have these new LLCs where it’s almost like you can have multiple LLCs inside of the same LLCs. I’m not too up to speed on those yet but I’ve been hearing about those.
Craig Cody: Yeah. And I don’t think that’s been tested in court yet either.
Rod Khleif: Okay. Okay.
Craig Cody: They’re called Series LLCs.
Rod Khleif: Yeah. That’s right, series.
Craig Cody: Like I said, you kind of look at what’s the cost. Is it worth it or it’s not worth it?
Rod Khleif: Right. Right.
Craig Cody: Especially, if you’re doing plenty. When you’re doing that plenty, just get that LLC form then put it in and then you’re okay.
Rod Khleif: Right. Right. Right. Yeah. Most states, you can just form them online.
Craig Cody: Right.
Rod Khleif: There are a lot of companies that’ll help you with this. You pay 100 bucks, plus the filing fees… Okay, so the wrong entities. What other mistakes to do you see real estate investors make when they come across your desk?
Craig Cody: Depreciation, cost segregation is a big one.
Rod Khleif: Oh, cost segregation, yeah. Let’s talk about cost segregation for a second. Describe that to my listeners, please.
Craig Cody: Okay. So let’s just say you bought a property, and the building itself, the house, which is a residential rental, was worth a
$100,000. Under standard depreciation, you’re going to depreciate that over 27 and a half years, which works out to approximately, $4,000 a year in depreciation expense.
If you do a cost segregation study, they break that house into different pieces such as equipment maybe seven, or 10, or 15-year property.
Rod Khleif: Let me expand on what you just said, so that everybody’s clear. What they do guys, is they basically take the different components in the building, and they assign the useful life to each one of those components, so from the doors to the windows, to the electrical to the HVAC. Even to the concrete outside.
I mean it’s crazy what they break up on these things but everyone has its own useful life and correct me if I’m wrong, Craig; what it allows you to do is basically accelerate depreciation. Correct?
Craig Cody: Yes. So over 27 years, you still have the same $100,000 worth of depreciation but you may get 20% of that up over the first five years.
Rod Khleif: Right.
Craig Cody: And the beauty of cost segregation is, if you don’t do the study until year five, in year five you get to pick up all that missed depreciation that you would have had if you did a cost segregation study in year one.
Let’s just say, you sold another property that year so now you’re able to offset it. That’s a great…
Rod Khleif: Offset that income. Yeah.
Craig Cody: That’s a great planning tool.
Rod Khleif: Yeah. I did it myself last year. I literally save $600,000 and I did cost segs on properties that I owned quite a while. It was a huge deal for me. I highly recommend that strategy for you guys. Definitely something you want to explore and understand so that you can utilize it.
Rod Khleif: I will say, you typically have to bring in an engineer to do the analysis and then they’ll prepare a report that goes to a CPA. Is that how you see it done?
Craig Cody: Right. Yes. On a bigger commercial, but we actually work with a company that you could have it done on a residential property for less than $1000.
Rod Khleif: Wow. That’s very reasonable.
Craig Cody: It’s so low.
Rod Khleif: That’s very reasonable. Okay. Fantastic. What other mistakes do you see?
Craig Cody: Paranoia. Failing to do something ‘cause you’re worried that the IRS is gonna come after you. Now, if you do something, whatever you do you should always document it. And if you get a letter from the IRS, you have the backup right there. It’s not a big deal.
Documentation is key. Everything we recommend to clients we make sure are typically they’re working with us. We’re making sure they’re documenting it.
Another thing is the wrong retirement plan that doesn’t typically come into place with real estate…
Rod Khleif: I’m sorry. Let me just hammer one thing home, ‘cause you really didn’t hammer it home. Guys, good recordkeeping is critical. Okay. If you’re gonna do any of these advance strategies you have to have good records. I just wanted to put an exclamation mark that. Don’t you play around with the IRS, if you don’t have good records.
But it’s not that hard. Use your credit card to pay, you keep your receipts, you keep track of what you’re doing. Anyway, I apologize. Please continue.
Craig Cody: No. that’s fine. That’s fine. Another one is missing family employment. Okay. Hire your kids; make their high school tuition, or their camp tuition deductible.
What you do is… Court says, you could hire your children as young as seven. Okay.
Rod Khleif: [chuckles]
Craig Cody: We typically like 11 or 12. Alright. They come in. They do something you pay them a reasonable wage. You make sure you document that. The money gets deposited, just like everyone else’s payroll into their bank account.
The high school tuition comes out; you have them draft it right out of their bank account… Whether their hockey camp or whatever it is comes right out of their bank account. So now you’ve made that tax deductible. If you’re in a single member LLC there are times when you don’t even have to. If you do it right, you don’t even have to pay FICA tax on that money.
Rod Khleif: Wow. Wow. So they’re no longer slaves. You’re children are no longer slaves. Guys, you can actually hire them and have a tax benefit. Love it. Alright, what else do you see?
Craig Cody: Missing medical benefits. A medical expense reimbursement plan, which is a section 105 plan, which allows you to let say, hire a spouse in your single LLC. Her wage is the medical expense reimbursement plan. That is basically, you get to deduct your out-of-pocket medical expenses.
That could be braces, that could be eyeglasses, that could be special classes. Maybe it’s one of your kids has ADD or something; they say he needs to take Taekwondo. The doctor gives you a prescription for that. It could be, people who are a little bit older. We have a lot of clients where they’re going for implants. Dental implants, okay, which could be easy $25,000.
So now you made a, what’s basically a non-deductible expense. Because on our tax returns, in order to deduct something on Schedule A for medical, it has to exceed 10% of your adjusted gross income. If you’re making 100, the first 10,000 in medical expenses is non-deductible. This way you could take the full benefit of everything.
Rod Khleif: That’s huge. That’s huge, guys.
Craig Cody: Yep.
Rod Khleif: So basically they would do this inside of an LLC and create these section 105 medical expense reimbursements plan and then write off anything medically related, or even quasi medically related. This is what it sounds like. I mean you don’t play around with that but it’s like you said, if the doctor says do something then you can deduct it.
Craig Cody: Right. And it has to be reasonable wage and you just [bad audio] You’re just doing some planning.
Rod Khleif: Okay. Okay. Alright. What else do you see?
Craig Cody: Missing the home office. If you’re doing work out of your home, do you have an area that you use exclusively for your business? It should be about at least 12 hours a week that you’re doing that. I know, I spend over 12 hours a week just answering emails from my home office.
Rod Khleif: Sure.
Craig Cody: And then what that opens up is, now for your travel between your home office and your real estate properties, and so on, is now all the deductible.
Rod Khleif: Or your home office and your other office.
Craig Cody: Exactly.
Rod Khleif: I mean, in my case, I’m in my main office now but I absolutely got a home office. And I work there a lot, as I’m sure just about everybody listening does; if you’ve got email.
Craig Cody: Yes, and then it also opens up the opportunity for a on-premise athletic facility for your employees, which means, could be your home gym. It could be your pool, alright, which now that stuff all becomes deductible.
Rod Khleif: No kidding. Yeah, I did that myself. I converted a big area into an incredible exercise room and I’m able to deduct it. I just started it last year. I wasn’t aware of this until last year myself. So guys you definitely wanna look into this and take advantage of it; your pool. It’s just extraordinary.
It’s in the tax code. It’s completely legitimate. You don’t have to be afraid of it; you just have to document it. I think you have to do some measurements. You have to know the square footage of the house, and the square footage of the different facility, the home office, things of that nature. There’s some hoops you have to this have to jump through but it’s absolutely worth it.
Craig Cody: Right. When we do a plan with a client, we make sure that they have the code in the plan that says, “You’re allowed to do this.” So if you go back to your accountant and he says, “No. You can’t do that”, ‘cause he doesn’t know about it, you open it up, “Let’s go to the code”, and it’s there.
Rod Khleif: Right. [chuckles] Love it. Love it. How often do you think a real estate investor should communicate with their CPA and why?
Craig Cody: On a regular basis, and that might be monthly. We communicate with our clients, who are business owners and real estate investors on typically a monthly basis. That might be phone call, it could just be an email, it could be a WebEx, a Zoom or something like that. Just so you know what’s going on. Because if you’re discussing things, you’re gonna learn what they’re doing.
Business owners, real estate investors, tend to have that little bit of ADD. They’re always doing something. If you know what they’re doing, you could help them do it the right way.
Rod Khleif: Right. Right. Okay. Okay. I think we’ve covered a lot of the mistakes and I know you’re offering a book on the 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands. That applies to you guys that are in the real estate business or all business owners. You’ve covered a lot of them.
Again, you’ve got the book Secrets Of A Tax Free Life on Amazon. We will have a link to the book on the show notes, guys, so that you can access that, The 10 Most Expensive Tax Mistakes… and what haven’t we talked about? We’ve gone over a lot stuff quickly.
Craig Cody: One thing we didn’t talk about which we talked in our pre-chat was captive insurance.
Rod Khleif: Oh, yeah, yeah, yeah. Captive insurance is something that if you’re really high net worth, there’s a couple of supplemental strategies that you could consider one of them is, have your own captive insurance company.
It’s expensive to setup. You absolutely wanna use groups that specialize in this stuff but it can be very, very advantageous. Correct?
Craig Cody: Yes. Then another thing is, for your real high net worth people, is basically, foreign retirement plans where the US has a treaty with them.
Rod Khleif: Wow.
Craig Cody: There’s ways to actually put your assets into these foreign retirement plan. The asset might be a piece of real estate in Florida. It’s titled into this retirement plan and then you go and sell it down the road, and it’s in the requirements plan so there’s no tax on it.
Rod Khleif: Wow.
Craig Cody: Then you buy another piece of property.
Rod Khleif: Interesting.
Craig Cody: Then there’s a huge benefits when you go pull money out.
Rod Khleif: No kidding. Yeah. I don’t know anything about that. That’s very, very cutting edge. That’s something I’ve never even heard of. That’s something I’m gonna explore. Very interesting. Foreign retirement plans. Do you have any idea what countries they’re with?
Craig Cody: Yeah. The one that we’ve dealt with is Malta.
Rod Khleif: Malta. No kidding. Oh, yeah. That’s kind of a tax haven. Interesting, very interesting.
Craig Cody: But the key is, there’s a treaty with the US that allows you to do it.
Rod Khleif: Right.
Craig Cody: That’s key.
Rod Khleif: I mean, it’s all legal. This is not grey. There’s no crossing the line. There’s no even fudging the line. This is absolutely legitimate. As long as you document and you work with somebody that knows what they’re doing.
Well, Craig, I really appreciate your valuable time today, sir. You’ve added a ton of value in a very short amount of time. Where can they reach you, Craig?
Craig Cody: They could reach me via email atHYPERLINK “mailto:Craig@CCodyCPA.com” Craig@CCodyCPA.com. Our website isHYPERLINK “http://www.CraigCodyandcompany.com” www.CraigCodyandcompany.com.
Rod Khleif: Fantastic.
Craig Cody: And our office phone number is 516 869 4051.
Rod Khleif: Super. And all that will be on the show notes, guys. Craig, thanks so much for being on the show today.
Craig Cody: Thank you so much for having me.
Rod Khleif: Absolutely.
Craig Cody: Appreciate it.
Rod Khleif: Alright. Take care.
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