The Tax Breakdown Of Multifamily Real Estate

Intro
Hi. My name is Rod Khleif, and I’m the host of “The Lifetime Cash Flow Through Real Estate Investing” podcast. And every week, I interview Multifamily Rock Stars, and we talk about how they’ve built incredible wealth for themselves and their families through multifamily properties. So hit the “Like” and “Subscribe” buttons to get notified every Monday when a new episode comes out. Let’s get to it.

Rod
Welcome to another edition of Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif, and I am thrilled that you’re here, and I know you’re going to get tremendous value from the gentleman I’m interviewing today. His name is Brian Boyd, and Brian Boyd is an Attorney. He’s also a real estate investor. He’s an author. We’re going to talk about his book. He’s in Nashville, Tennessee. And I think we’re going to have a tremendous value today. Welcome to the show, brother.

Brian
Thank you for having me. I appreciate the time.

Rod
Absolutely. So, you know, why don’t you take a minute and just give us a little background on you and, you know, how you got started? You got your J.D. I know you got an MBA as well. Or no, masters in something I think you mentioned earlier. Yeah. So give us your background.

Brian
So I have an LLM in Tax from Georgetown University, Law Center, and right out of Tax School, I was recruited by a company called Ernst & Young. They’re an accounting firm and worked in the metropolitan DC area. Found my way back to Tennessee, where I’m originally from, and was working for a boutique litigation firm that had a small transactional group. And then 2008 hit and Lehman Brothers fell, Bear Stearns fell, and nobody was doing transactional tax work anymore. And I found myself without a job. So I hit the streets and put together a practice and picked up a client who has a development company, a real estate development company. And that was kind of my entree into real estate. And I saw how he was structuring things and what he was doing, and I started overlaying my tax experience with it. And I was like, well, if you do it this way and you do it that way, you know there are a lot of ways to offset this income, and then you’re just cash flowing, passive. And then in 2015, you know, a different administration was in office, and things just were not going well with my retirement fund. It didn’t matter how much money I made, I could only cap out so much money into my SEP, Simplified Employee Pension plan. So I set up a coin laundry, liquidated my SEP, bought a coin laundry, operated that for a year, sold it in 2017 for a profit, and bought my first short-term rental, utilizing everything I’d learned along the way from these developers that I’d been representing and started leveraging into other properties. And sold two of those properties you know a couple of years later to some hedge funds. Sold the first property we bought, bought 13 single-family properties in Chattanooga, Tennessee, and then we just picked up properties along the way. In fact, I’m at one of our short-term rentals in Montana right now.

Rod
Interesting.

Brian
Yeah. We’re moving along. We have a portfolio of short-term, long-term–

Rod
Any multifamily in this portfolio?

Brian
We have duplexes, triplexes. We sold a quadplex, we sold a duplex.

Rod
Okay.

Brian
So we really like the multifamily space. In fact, I do a lot of syndication deals with clients on multifamily.

Rod
Do you mean you set them up for operators that you do the SEC work or what do you do for them?

Brian
I don’t do the SEC work. I do the opinions, I do the structures. I’ll be with the GPs and work things out between the GPs and all the various attorneys. But the SEC work I won’t touch because my background is taxed. It’s not securities law. That’s a very different animal.

Rod
Sure.

Brian
So I’ll bring in a securities attorney for that.

Rod
Got you. Yeah, guys, just so you know what he’s talking about here. So the lenders will require opinions, and so when he talks about an opinion letter, they’ll require an opinion on the entity and sometimes the individuals themselves. There’s a structure involved because you’ll have multiple LLCs. There’ll be an ownership LLC. There will be a management LLC. There may be an LLC for the different classes of membership units depending on limited and active– I’m sorry, General Partners and Limited Partners. There are a lot of different ways. If there’s a 1031 Exchange involved, then it becomes a very complex organizational structure. And so that’s the sort of stuff you do, Brian, as you put all that stuff together?

Brian
Yes, sir, that’s correct.

Rod
Yeah, that’s very complex. It makes my eyes cross. I’ve seen some of these organizational charts that are just like mind-numbing, how complex they can become, especially if you’ve got a TIC, you know, a Tenants in Common through a 1031 Exchange.

Brian
That’s correct.

Rod
So you’ve got a tax background as well. So let’s go in that direction for a little bit here. You know, why is real estate such an incredible tax haven?

Brian
First of all, there are a couple of things about real estate that I think we all just need to agree on. One, the income that it kicks out every month is if you pencil out your deal, it should be good. Two, that asset is going to continue to appreciate over time whether that’s what’s happened in the last few years, which is a blip, I don’t see that happening again in the near future. But 3% to 5% to 6% a year of appreciation is pretty average.

Rod
Pretty average, yes.

Brian
That’s historically what has been the case, and that’s what we can continue to see going forward. So your asset is appreciating, and two or three, your tenant is going to pay your note. So when it comes to the interest rate, which is a Section 163 deduction, that’s deductible to you. Don’t worry about the interest rate. And four, that asset is going to continue to grow at such a rate that if you buy that asset in year one, by year two, you should have equity built up that will allow you to borrow from that and go and leverage into another property. That’s all great, but the tax benefits of all this.

Rod
Let me stop you for one second. I just want to hammer home something you said. I mean, what else can you buy that someone else pays for, right?

Brian
Right. You can’t. You can’t.

Rod
Right. And that’s the beautiful thing about real estate. I’m not sure I completely agree with your one-year assessment because a 3% increase may not be enough to refinance and pull all your money out. But I mean, you know, in our business we do value add. It sounds like you play in the residential multifamily space more than the commercial. So anything two to four units is residential, five units plus is commercial. And in that commercial space, the value is based on a multiple of the net income, where in the residential it’s based on comparable sales, which is harder to drive value up there. But on commercial, any increase in the net income is an exponential increase to the value. And so yes, in some commercial applications, you absolutely can do a value add in one year, get the value up and get your investors all or yourself all or most of your money back. But, you know, just to give some clarity to what you said. So now let’s talk about the tax benefits.

Brian
So the tax benefits one, everything you do through real estate should be deductible to you.

Rod
Yeah.

Brian
Whether that is the minor kitchen repairs, the minor roof repairs, whatever, that should be deductible under Section 162 of the tax code. Your interest on your mortgage, on your note, is deductible and it’s not capped by the $10,000 limit for personal residential mortgages.

Rod
Right.

Brian
So you have that going beyond what the typical taxpayer usually gets. So that’s a Section 163. Then we get into Section 168, then we get into Section 179. And then you have bonus appreciation and depreciation. And then you have cost segregation studies which accelerate that depreciation. And as long as you can continue to take these deductions, you should far outstrip your income in any given year through the deductions, whether that’s your vehicle, which is owned by your LLC, if you’re depreciating that, that’s another deduction.

Rod
Yeah.

Brian
There’s no other investment vehicle out in the market that allows you to do what real estate allows you to do. Moreover, real estate builds generational wealth.

Rod
Right.

Brian
Just not right now, though. It’s generational wealth.

Rod
No, multifamily– you know, people say it’s not a get-rich-quick thing.

Brian
No.

Rod
It’s become a super freaking wealthy over time thing. Circle back to your tax thing for one second before you move into the generational wealth. Like today, they’re releasing Trump’s tax records, okay? They’re doing a tax dump, okay? I just saw that on Fox News today and you’re going to find that he doesn’t pay any taxes. But it’s legal. Okay? I mean, why would he if he doesn’t have to? He’s following the tax code. That’s the beautiful thing about real estate. If you’re doing real estate actively, and we’ll talk about active versus passive here in a second, but if you’re doing real estate actively, you don’t pay taxes. I don’t pay taxes in years. You know, because you’re able to write off so much. Do you agree?

Brian
I do agree.

Rod
Yeah.

Brian
And I don’t think that’s a problem. You know, there’s a case by the United States Supreme Court that says you should only pay what you owe. And just because somebody utilizes the tax code to their benefit, well, that’s why we have the tax code.

Rod
That’s it.

Brian
This tax code is– believe me, I’ve read enough of it in my life. The tax code is situated to encourage investment in real estate.

Rod
Sure is.

Brian
That is the public policy of this government. It encourages investment. Therefore, it also gives us the benefits of that which come in the form of deductions and credits. You’d be crazy to leave money on the table. Why would you pay the government more than you actually owe the government?

Rod
Exactly.

Brian
I mean, you can, but write a check to it.

Rod
But, as an example, you know, love him or hate him, I’m bringing up Trump just because it’s top of mind. I literally just read that they’re doing the tax dump on because they’ve let go of the January 6th thing. We won’t go down that political rabbit hole. But the point is, you know, these tax laws were put in place to encourage investments because investments create different taxes. You know it’s not like there’s no tax going to the government for what’s happening here. There are property taxes. You know, there are all sorts of other taxes, benefits that the government gets. So they’re okay with, you know, allowing real estate investors and encouraging real estate investors to do these investments. So, you know, that’s the beautiful thing about this business. And you blew through a couple of things. You talked about cost segregation, which is fantastic, because normally, you know, depreciation goes over, what is it, 27 years, 20 years, straight line is 20?

Brian
For residential is 27 and a half and the commercial is 39 years.

Rod
Okay. So 27 and a half.

Brian
So if you do a cost seg study on residential real estate, you’ll end up taking the bulk of that depreciation between five and seven years because it breaks it into five, seven, and a 15-year asset classes.

Rod
Right.

Brian
Doing this accelerates your depreciation. So if you have, let’s say, a $100,000 house, instead of dividing that by 27 and a half years, you’re going to really divide it by, let’s say, six. And that’s going to be your depreciation.

Rod
I did a cost seg on a package of houses, gosh, it’s been about seven or eight years ago, maybe even longer, and I saved 600 grand, you know, on houses. So it’s not just commercial real estate you can do cost seg on. You can do it on residential as well.

Brian
No, and I hear you. You know, one year, we had $300,000 of depreciation on our portfolio because we were doing a cost seg studies on every single property. And why wouldn’t we?

Rod
Exactly.

Brian
Why wouldn’t your listeners do it? If you can take that and you can snowball a tax loss and roll that forward, that is just going to shelter your income as you move forward.

Rod
For years, literally. Yeah.

Brian
And allow you to take the money that you would be paying in taxes and buy more real estate. And you just continue to do that.

Rod
Talk about bonus depreciation for a minute.

Brian
Well, unfortunately, this year, as of December 31st, is the last year of 100% bonus depreciation. Bonus depreciation is the extra depreciation you get for any asset put into business. For the furtherance of that business. Now, that falls under, I think, section 168, and next year it drops to 80%. And then they’re stepping it down from there. So that bonus depreciation allows you, for example, everybody talks about buying a vehicle and writing it off. It’s over 6,000 lbs. Well, that’s through bonus depreciation. Next year, that’s going to drop down to 80%. So if you’re going to buy that vehicle, I got to tell you, buy it now.

Rod
Right.

Brian
You’ve got a few, you got, what, 24 hours left? But bonus depreciation is phenomenal. We use it on everything.

Rod
Yeah.

Brian
Everything from you know refrigerators, ovens, anything we put into the house. We go ahead and depreciate it in year one, and that allows us to create a larger deduction in depreciation. So if people aren’t bonus depreciating, they need to talk to their Accountants and they need to do it because that little bit more helps.

Rod
Right. And some CPAs are a little intimidated by the whole cost segregation discussion, and some are really good at it, you know, that have done a lot of it. So just make sure your CPA you know understands it. And typically, you’ll involve an engineer to go out there and actually do the cost seg study and the pricing is all over the board. I won’t even get into that. But we’ll take a minute and talk about active versus passive as it relates to real estate investing.

Brian
Absolutely. So there are active and passive activity rules. In order to take these deductions that we’re talking about here and apply them to your current income, you need to be an active investor in real estate. What that means is you need 750 hours a year between you and your spouse involved in real estate activities. That’s everything from looking at the MLS, to driving streets, to listening to podcasts, like yours. Anything associated with real estate in the furtherance of a real estate business will make you a real estate professional.

Rod
So it’s basically 19 weeks. 19 of the 52 weeks in a year you need to be doing something like– but you can even be– yeah, so you can be educating yourself through a podcast. That’s what I hadn’t heard before. That makes good sense. Yeah.

Brian
Yes, you can. And so if you’re driving to work, turn on a podcast. If you’ve got some downtime, turn on a podcast. Read the MLS, you know, look for things. Do that market research. Market research is the key to all of this. And by being an active real estate investor, an active real estate professional, you will achieve a certain status with the Internal Revenue Service that allows you to take the deductions that we’re talking about as active instead of putting them in a passive bucket. If they’re in a passive bucket, that gets treated differently. And you only get to realize the losses upon the sale of those assets. You don’t want that because people like you and me, we hold our assets. We hold our assets and we want the benefit of those tax deductions. So what do we do? We write books. We speak to people. We go to meetings. We look at real estate online. We go see real estate in person. We do home inspections. We live the real estate investor life. And that’s necessary if you want these deductions.

Rod
And you can do this on the side, I mean, but you need to document that time. You can absolutely do this you know, after 05:00 P.M. And while you’re driving to work like you said, and just capture this stuff and track it, and you know, you can absolutely make this happen even with another job.

Brian
If you spend an hour and a half a day, that’s all it takes.

Rod
No kidding? Yeah, 1.5 times 365. Is that right? Wait a minute, how many hours do you need?

Brian
You need an hour and a half a day.

Rod
Okay. So the rule is 750 hours?

Brian
That’s correct. Between you and your spouse.

Rod
Oh, okay. You and your spouse. So, yeah, if you’re each doing an hour and a half, you got it. For sure. Okay. Love it. So 750 divided by 365 would be basically 2 hours a day if it’s just you.

Brian
Just you. That’s right.

Rod
Two hours a day–

Brian
Yeah. You’re easily going to achieve it.

Rod
Right. If you throw in Saturdays, you know, you work it all day Saturdays, I mean, that’s like, say, eight times 52. That’s half of it right there. 416 hours if you work Saturday. So you could absolutely do this, guys. Okay? And you can get these incredible tax benefits. So love it, love it, love it. Okay. I think you and I have differing opinions on this, so I think it’ll be fun to talk about it. Let’s talk about what you think is happening economically, and what you think is going to happen. Okay. Now, you’re in the short-term rental business, and so have you seen an impact in your reservations, in your Airbnb business at all, so far?

Brian
So our Airbnb, we’ve got three. One here in Montana and then two in Gatlinburg, Tennessee.

Rod
Oh, that’s a nice market.

Brian
They just stay rented.

Rod
Sure.

Brian
So honestly, those haven’t been impacted.

Rod
Okay.

Brian
This one here in Montana, it’s impacted, but it’s also snowing outside and the river behind the house is frozen solid.

Rod
Wow.

Brian
We’re in western Montana. We’re near Missoula. So this will pick back up in January because we get a lot of snowmobilers come up here, and they love the snowmobile up near Sealy Lake. So this property, we just put it online last year. It’s doing great. It’ll do better next year.

Rod
So what do you think is going to happen? I mean I know that– actually, before you answer that question, where’s your residential multifamily? Where’s your plexus at?

Brian
So we’ve got properties in Knoxville and in Chattanooga.

Rod
Okay, nice. Good markets.

Brian
We got 17 doors in Chattanooga and then we have three doors in Knoxville. That’s a triplex. And then we are currently working with the partner to build a 20-unit development north of Nashville.

Rod
Nice. Good for you. Good for you. So, again, back to the economic discussion. We talked about this briefly. I think we’re in agreement on one thing, and that is it’s going to be a buyer’s market. It’s already a buyer’s market. Okay? I just saw a headline today, you know, housing is down 20%. And what did the Fed say? The Dallas Fed said it’s likely going to be a severe recession. That’s a quote from the Dallas Fed.

Brian
I think we’re already in a recession.

Rod
Yeah. Jamie Dimon, head of Chase, said severe recession. Elon Musk said if they don’t lower the interest rates it’s going to be a severe recession. They’ve already concluded they’re going to continue to raise the rates even through 2023. So, you know, guys, let me just say this, should you be afraid? No, get freaking excited. It’s going to be a buyer’s market. Everything’s going on sale. And we talked about this before, Brian. Don’t be afraid of the interest rates, and, you know.

Brian
Don’t be afraid.

Rod
Right.

Brian
Don’t be afraid. You know I tell people all the time if you’re going to buy a stock, why would you buy at the top of the market? Why would you buy Google at $3,300 a share when you get it at $500? Why?

Rod
Right.

Brian
It makes no sense. If this is a stock market, this is the dip by the dip.

Rod
Right.

Brian
It’s going to come back.

Rod
And we’re definitely going into a dip right now. This is no question.

Brian
Exactly.

Rod
It’s happening. It’s already happening. You know, home sales have slowed each of the last ten months. They’ve slowed down and continually to slow down, and it’s going to continue you know because people are afraid of these interest rates. But listen, here’s the thing. You know, even if this business– residential or commercial multifamily, depending– the size is irrelevant, is empirical, it’s numbers. If the numbers make sense if you can cash flow because the pricing has to come down to accommodate the rates. And so, you know, if you can cash flow, it’s all about cash flow, and that’s the number one factor. But if you can cash flow by now and you can always refinance in a few years when it comes back down, which it will. I mean, you and I were talking before we started recording, when I got into this business, in 1978, the interest rates between 78 and 80 were in the 18% range, and we were doing 18%.

Brian
That’s insane.

Rod
And, you know, I remember how excited we were when they hit 7%. And that’s where they are pretty much getting there right now. You know, I think it’s going to be pretty ugly. I do. But again, with that, I think it’s going to be an opportunity. I think you think it’s not going to be quite as bad. I think you indicated that.

Brian
I don’t think it’s going to be quite as bad for serious real estate investors because we’ve been waiting for this. We’ve been waiting for a buyer’s market.

Rod
Yeah.

Brian
All the deals that everybody talks about, this is the time. This is the time. And I’m not afraid of the interest rate. I’m not afraid of the cash flow. As long as the numbers pencil out, I’m going to keep buying.

Rod
That’s it.

Brian
I’m going to keep buying.

Rod
Yeah.

Brian
And I’m going to scale up through this recession. I am going to scale up. And when you come out on the other side of it, we’ll be really happy with it.

Rod
This is when the exponential money is made. You know, when you buy in a dip, you know. If I hadn’t been hiding under a rock in 2009, ’10, ’11, and ’12, you know, and building a different business because it was a little soured on real estate for a while, you know, be game over at this point, you know. So, you know, I’d be on the back of a yacht.

Brian
That’s right.

Rod
Yeah. But anyway, well, let’s talk about your book for a second. Your book is called “Replace Your Income: A Lawyer’s Guide to Finding Funding and Managing Real Estate Investments”. Talk about the benefits inside that book. It’s on Amazon, right? Did I title that correctly?

Brian
That is correct.

Rod
Okay.

Brian
You did. And it is on Amazon.

Rod
Right.

Brian
The benefits of this book are it’s a nuts and bolts approach to real estate investing. It’s not designed to get you excited about real estate. There are other books out there that do that. This is the book that actually tells you how to do it. Everything from how to property manage. The benefits of property managers, the drawbacks to property managers. You know, they get a fee that hits your bottom line. The different structures, the taxes, the finances, all the things that people don’t really touch on. I go into code sections. I talk about cost segregation studies. I talk about 1031 Exchanges. What all these things are. And one of the few things that I do in this book that most people don’t do is if you download this on Amazon or any of the other locations, I will give you the forms to set up your own LLC and your own operating agreement and your own lease. Like, here you go. This is the lease I use. Use it. I don’t care. Use it, you know.

Rod
Nice.

Brian
I don’t think a lot of other books do that. I want people to succeed. And I think, Rod, one of the things your podcast tells people is that this is possible. You can do this. You don’t have to be a lawyer. You don’t have to have 40 years of experience. You can do this. Aim small, miss small. Go buy that duplex. Go buy it. And now is the time to–

Rod
Everybody starts there, man. With very few exceptions, they start with a house, a duplex, and a fourplex, you know, and then they move up. And that’s a very common dynamic. I mean, my students own upwards of 130,000 units that we know of, and I’ve been teaching for around five years, so I’m really proud of that. But even everyone I interview on this show, even the ones that have thousands and thousands of doors, they started smaller. Very few exceptions, very few people start with 100 units. And you can be wealthy with plexus, too. I mean, you know, you’re doing extremely well. You can become very wealthy just with a plex. So don’t discount the smaller stuff, either.

Brian
And what I’ll say to your listeners is you can’t get your second property until you get your first. You have to start. You just have to start.

Rod
It’s the law of the first deal. It’s the scariest. It takes the longest. It’s the most stressful. I see with my students all the time. It’s like, oh, my God, it’s been six months. We don’t have a deal yet. It’s been eight months, sometimes even a year. And then they get one, and the next thing I know, they have five. You know, I’m like, what the hell just happened? You know, they got past that fear, and they realized it was just, you know, have taken action, massive freaking action, and they make it happen. Well, listen, guys. Get his book. “Replace Your Income: A Lawyer’s Guide to Finding Funding and Managing Real Estate Investments”. Brian, I appreciate you coming on the show, brother. You’ve definitely added value.

Brian
Thank you very much, Rod. It’s good talking to you.

Rod
A pleasure to meet you. All right, buddy. Take care.

Outro
Rod, I know a lot of our listeners are wanting to take their multifamily investing business to the next level. Now, I know you’ve been hard at work helping our Warrior students do just that using our “ACT” methodology which is Awareness, Close, and Transform. Can you explain to the listeners how they can get our help?

Rod
You bet. Guys, we’ve been going non-stop for three years building an amazing community of like-minded people, and our coaching students which we call our Warriors have had extraordinary results. They’ve purchased thousands and thousands of units and last year we did over 1,000 units with our students. And we’re looking to grow this group and take it to the next level. We’re looking for people who want to follow a proven framework that’s really step by step and then leverage our systems and network to raise equity, to find and close deals, and to build partnerships nationwide. Now, our Warrior community is finding success in any market cycle. So if you’re interested in finding out more about how you can become more of our incredible network and take advantage of the incredible opportunities that are coming very soon, apply to work with us at “MentorWithRod.com” or text “CRUSH” to “72345” and we’ll set up a call so you can check us out and we can check you out. That’s “MentorWithRod.com” or text “CRUSH” to “72345”.