The new tax law offers opportunities to reduce taxes, but you must get educated. In this episode, Tom speaks with a real-estate investor who is currently implementing the new tax law and creating big tax savings.
00:57 – What Are The Most Important Ways to Deduct Expenses?
04:37 – How Does The New Depreciation Deduction Affect Real Estate Investing?
07:58 – What Changes Can Real Estate Investors Do Right Now To Reduce Taxes?
11:32 – How Has Bonus Depreciation Changed?
14:25 – How Can I Buy A Car And Reduce Taxes?
This is The WealthAbility™ Show with Tom Wheelwright. Way more money, way less taxes.
Tom Wheelwright: Hi. This is Tom Wheelwright. Welcome to The WealthAbility™ Show where we're always learning how to make way money and pay way less taxes. What if you could get a tax break for every dollar you spent? Today, we're going to learn five new deductions from the Trump tax law that will allow you to take amazing tax benefits on your investing and in fact, even on some other personal benefits that you get from the tax law. I have an amazing guest with me. He's a client, he's a good friend, and he's truly an amazing investor but before we get to that, what I'd like to do is I'd like to just explain basically what the most important way to deduct your expenses is. Okay? Remember, a deduction comes … We get taxed on our net income. That's net of deduction. We take our gross income, whatever we earn. We subtract off our deductions. With the new Trump tax bill, we actually reduced some of the personal deductions. Right? We don't have personal exemptions anymore. There are other personal deductions we don't get, but we still get all the business deductions. The key is a business deduction.
Either if you have a business or you're an investor like a real estate investor, you're going to get these deductions and there are four simple rules to getting a business deduction. The first one is you simply have to have a business purpose for the expense. That's a pretty easy test to make and if you have any kind of business reason for doing this, then you're going to get the deduction. Number two is it has to be ordinary, which means that it's typical in your business. Okay? It would be typical, for example, you take a client out for a meal. That's going to be typical that you would take a client out for a meal, so that would be ordinary. The third thing is it has to be necessary, meaning that the purpose of the expense is to actually make money. The purpose of the expense is to make money. You take that client out for a meal. What are you trying to do? You're trying to get more business from that client. Right? That's probably what you're trying to do, so that's why that meal is deductible. Okay?
Then, the fourth thing, of course, is documentation. We'll talk about these in more detail in other podcast, but I want to set this up because remember the deductions we're going to talk about, actually four of the five deductions, you do have to have those four things. You have to have a business purpose. It has to be ordinary. It has to be necessary and you have to have proper documentation. Today, to talk about his experience with this new tax law and a couple of these amazing deductions, I have Brad Sumrok. Now, Brad is … He's a client, but more importantly he's a friend and he is a great teacher and I love having great teachers on the show and Brad teaches multi-family investing. Brad, why don't you just tell us a little bit about yourself and actually give us your website right off the bat because I want people to be able to find you.
Brad Sumrok: Tom, thanks for having me on. I'm excited. Yeah. My website is just my first and last name, .com. That's bradsumrok.com, and that's the best way to get information about what we do. I'm also on Facebook. My wife says I'm on Facebook way too often, so I have a business page on Facebook and a personal page on Facebook. This is some of the best ways to get in touch with me, and I'm just so excited to be here on your podcast.
Tom Wheelwright: Well, thanks Brad. Brad and I had been working together for quite some now time and Brad has events and I speak at Brad's events, so just in full disclosure. Brad, we've done some tax planning in the last couple of months that relate to this Trump tax bill. I'd like you to share your experience particularly about what you … And your mindset and how you change your thinking about investing because we're in a market that is a little tough because price is a little high, and yet what the tax law did kind of my thinking is got you going out there looking for a property and I just want you to talk about how your experience with it and what this new depreciation deduction has done for you?
Brad Sumrok: Yeah. I'll give a 60-second background for those listening. I've been investing in apartments since 2002, and 2005, I was able to replace my corporate income with my investment income. I've been retired since 2005 from the corporate world as a result of apartment investing. Then, we started mentoring and training other people. Me and my wife, as you mentioned, we have an education company and we help people invest profitably in apartments and we continue to invest in apartments. The main investment model that I've taught and that I've done over the past many years has been syndication. Syndication is a fancy term for pulling money together from other people and putting in a little bit of your own money and then raising money from other people in an SCC compliant manner, and there's a lot of benefits to syndicating deals.
Getting more units under control and having better management and better economy to scale and better financing. Then, you could have … With your own money, let's face it, a lot of people don't have a couple of million dollars just zooming around liquid where they can go out and buy 100-unit building. By syndicating, you can do that but what happened with us is our earned income from our other businesses really started to grow. We have an education and consulting and mentoring company. We have a brokerage company, and so those source of income started to really take off and what was happening, Tom, and you know this because you're doing my taxes, and you gave me a lot of these ideas. Most of these ideas that we're going to talk about today came from you personally, and what happened is our tax liability just started increasing to the point where we're paying hundreds of thousands of dollars in taxes, and I'm embarrassed to say that I almost paid seven figures in taxes right about the time when I met you.
Tom Wheelwright: This is really interesting, Brad because I remember you said that a couple of your goals in life, one was to have a million dollars of income. One was to have a million dollars of cash, and then a third one, you originally have this goal of paying a million dollars in taxes. Right? You remember telling me that?
Brad Sumrok: Correct. I used to just think that, “Hey, you have to make a ton of money in order to pay a million dollars in taxes,” and so being purely focused on the income side of the equation, that's correct. I actually used to brag in my seminars that I wanted to pay a million dollars in taxes because I have to be making three, $4 million a year and that would be fine with me, but in the past, it would've been fine with me is what I want to say because now I understand that I'd be continuing to grow my income and I could continue to pay less in taxes. That's what I think that my big takeaway was from working with you is I could continue to grow my income above and beyond a couple of million dollars, and I could pay less taxes. Why wouldn't I want to do that?
Tom Wheelwright: Exactly. One of the things we always say is the more assets you have, the less taxes you pay. You can actually make more income and pay less taxes. What do you do this year that was different than what you've done in the past? What specifically? Because this bonus depreciation which has been huge, I think for the real estate industry, you just jump right on that. Explain what you did specifically, if you don't mind, Brad?
Brad Sumrok: Yeah. When you syndicate a deal, you have certain ownership interest in the LLC that owns the property, and so you get your pro-rata share of depreciation, but if you want to pay less taxes like I do, Tom looked at my … Tom, you looked at our situation and just said, “Brad, you need to own more real estate.” The first thing is … It just blows me away, Tom, too that there are people out there not doing cost segregation. People are actually getting advice from their CPA saying, “Don't do cost segregation.” That blows me away. One of the things you taught me even before the whole bonus depreciation is you got to do cost segregation on your deals. Okay? Some people aren't doing that.
Tom Wheelwright: Right.
Tom Wheelwright: Just so everybody understands, and we'll talk more about cost segregation in the other podcast, but cost segregation is simply breaking down the cost of your property between the land, the building, the contents of the building and the land improvement. It's something that everybody can do and every investor should do, and it increases the amount of depreciation even in a normal year, but this year was a little different, Brad. This year, you're taking a little more depreciation on that cost segregation than you probably originally expected.
Brad Sumrok: That's right. What's going to happen this year is that we are actually buying our own deal with our own money, and we're going to continue syndicating deals as well because that model obviously works and we make a lot of money and we help other people make a lot of money, but in addition to that … This is a strategy that not only I could do, Tom, but a lot of high income earners out there that have high income from their job or their other sources of businesses, and then they're paying a lot in taxes. That's exactly our situation. We're going out and we're buying a property roughly $12 million. We're buying this just with me and my wife, and the bonus depreciation that we could take in year one, which is this year, the first year that we acquired the property and we got to do the cost segregation study, but we expect the bonus depreciation to be about 30% of the purchase price.
We look at the purchase price of 12 million, and 30% of that is about $3.6 million and that will actually be our depreciation loss, so the deals projected to cash flow, about $400,000 a year. Okay? We're going to buy this building. We're going to get $400,000 a year in cash flow. Then, we're going to have a $3.6 million depreciation loss in year one. $400,000 income, $3.6 million loss, we're going to have a net loss of $3.2 million, and that $3.2 million could go ahead and offset the money we make from our other businesses.
Tom Wheelwright: Right. Here's the cool thing about this is that it doesn't have to be a $12 million project, right? It could be a $1 million project and get a $300,000 deduction and not only that, but we can actually play with this. It doesn't have to be 30%. We could take 10% or 20%. Okay? We have some real opportunity here but it's the bonus depreciation. See, bonus depreciation didn't use to apply to used property and that's the difference. That's the change in the tax law is that it used to only apply to new property. Now it applies to used property, so you can go out and buy this used property, an apartment building like Brad's buying, and now all of a sudden, you get bonus depreciation. This is amazing. It's an amazing story, Brad, because you're basically going to offset all of your income and not have to pay tax this year.
Brad Sumrok: It's incredible. I've been sharing my story to the hundreds of the students that I personally mentor, and now a lot of them are starting to do … That's what a teacher does, right? Is they share their personal experience. Now, I have people that are buying, like I said, some are … They're not buying a $12 million deal, but they're going out and they're taking a half million of their own money, and they're buying a $3 million asset and again, 30% of $3,000,000 is $900,000. Some of these people are surgeons or business owners where they're making high six figures, seven-figure incomes and the depreciation they're getting from being investors in a syndication is not enough to offset their earned income, and so by buying a building and having it professionally managed and owning more real estate just like I am, they're able to go out now and say, “Dig money in taxes,” and it's a result of understanding a new tax law. Then, taking action and implementation and going out and making it happen.
Tom Wheelwright: Here's what I love, Brad. Here's what I love. Think about this. You went out looking for this new property because you wanted the tax benefit, right? That's why you're looking for it.
Brad Sumrok: Correct.
Tom Wheelwright: You are not looking for this property other ways, so you're going to get … On top of that tax benefit, you're getting a $400,000 cash flow you will not otherwise have had.
Brad Sumrok: Correct.
Tom Wheelwright: What that means is … You see, what I'm always saying is that the government wants you to be rich. These are incentives the government want you to do because here's what's going to happen. You're going to continue to have that $400,000 of income. Now, that $3.5 million loss is not going to happen every year, that happens this year, so what are you going to have to do? You're going to have to go buy more property next year and you're going to have to keep doing this and it becomes a bit of an addiction as you're going to find out, Brad, because then you don't want to pay taxes at all. You're going, “Well, if I do this every year, I end up with an additional $400,000 in cash flow and no taxes,” but there's another tax benefit out of this new law that actually you did before you did the … You took advantage of before you took advantage of the depreciation on the building, and because you called me, you said, “Tom, I want to buy a new car.” Right?
Brad Sumrok: Correct.
Tom Wheelwright: Tell us about your new car.
Brad Sumrok: Well, the story is, is we have a … We're actually Florida residents, but we do all of our business in Dallas, and so Tom, what you advised us is you'd be a Florida resident, and then all of your expenses related to going to Dallas, whether it's traveling to Dallas and doing … The time you spend in Dallas, and the car that you drive in Dallas is now 100% tax deductible. We're leasing a new vehicle in Dallas. It was going to be used 100% for business because the only reason we go to Dallas is business, and I'm actually in Dallas right now doing business. That lease payment is now going to be 100% tax deductible.
Tom Wheelwright: Yeah. On top of that, so they've raised the tax benefit under the new law for new vehicles. The amount of the lease that you get to deduct is more. Had Brad purchased the car, his depreciation would've been more. Cars are just actually a better benefit now and in fact, I got a … Brad's met my buddy, Robert Kiyosaki and Robert and I were just talking yesterday about new cars. He said, “How do I get the tax benefit?” Because Robert is always talking about taxes and always thinking about taxes, and that's on people's mind. You think about it, why does the government do that? Why did they increase the tax benefit so much? For example, if you're looking at like an SUV or a truck, you could deduct up to 100% the year you buy it. It's the same bonus depreciation, but now it applies to cars, car applies a little bit less, but Brad is still going to get a major deduction that a year ago, he’d get a much smaller deduction. It helps pay for those expenses that you've got there in Dallas, doesn't it, Brad?
Brad Sumrok: It sure does.
Tom Wheelwright: Brad, you typically do multi-family, right?
Brad Sumrok: Correct. Not typically, pretty much exclusively.
Tom Wheelwright: Pretty much exclusively. Okay. Not typically, always.
Brad Sumrok: Not even pretty much. I would say I basically would do apartments.
Tom Wheelwright: You're a multi-family guy. Got it.
Brad Sumrok: Yeah.
Tom Wheelwright: You do apartments. One of the new … Everybody should listen to this because this is a really important change in the tax law. One of the new changes applies specifically to residential rental property and that is this 179 deduction, which is like depreciation only it basically allows you to take 100% even without bonus depreciation and it applies to some things that bonds depreciation doesn't necessarily apply to. For example, now it applies to roofs. It applied to HVAC units and for the first time ever, 179 applies to residential rental property. This is a pretty cool benefit. This is another deduction that applies specifically in your investing business. Now Brad, you've got so much bonus depreciation, you are not going to need to take the 179 deduction, but for those of you out there who don't have, bonus depreciation is enough to cover your taxable income, you might want to think about the 179 deduction because that's something … Brad, I presume in your seminars in the past, you've never been able to talk about it. Right?
Brad Sumrok: Well, I'm listening to you talk and I'm thinking, “Hey, am I still leaving money in the table and my other deals?” Because I currently owned almost 3,000 doors right now. I've gotten close to 4,000 but right now, I'm just wondering like, “Hey, I've heard of 179. I don't understand all of it.” I'll be the first to admit that my relationship with you, Tom, has just been a huge eye opening experience in terms of making more money and paying less taxes. Yeah. I'm sure there's other things that we can be doing that you could teach me about, and then I could share with all of my clients.
Tom Wheelwright: We will be sure to have that discussion because I think section 179, it's just a really … If you're a business owner, you're used to it. Right? You deduct your equipment. That's 179.
Brad Sumrok: Yeah.
Tom Wheelwright: Now, we have bonus depreciation. In a lot of cases, we won't. There are some differences between the two, but there are some people in real estate, they're going to want to look at section 179 and particularly if they're in multi-family where 179 has never applied before and now it applies. There are just a couple of other deductions, and we'll let Brad go, that I really want to talk about. One of them does apply to Brad because Brad doesn't actually create inventory, right? You're always buying long term hold investment property, right?
Brad Sumrok: That's correct.
Tom Wheelwright: I know we have a lot of listeners that they have … They're on eBay or they're on Amazon, or they have a brick and mortar type of a retail business and here's the cool thing. Brad, I don't know if you know this but the new tax law actually allows you to deduct your inventory for any line item under $2,500. Think about that. For example, we have a bunch of client who owned pharmacies and so they buy a lot of drugs that are inventory and they've always had to capitalize these and keep track of their inventory. Now, because drugs typically aren't more than $2,500 per line item, they get to deduct all of their inventory. This is a huge benefit.
Anybody who's in retail this year probably shouldn't have to pay any income tax if they take advantage of this inventory. Then, the last one, Brad, I just want you to know that I should probably be talking to Jen about this, but this is the last year you can get divorced and still get a deduction for alimony. This is probably more important to Jen than it is to you, so I just thought I'd just give you a heads up.
Brad Sumrok: I don't know if we want to have that conversation.
Tom Wheelwright: I got to tell you, I'm dying to meet the senator who's getting divorced this year to make sure that they actually postponed … Eliminated the alimony deduction until the end of this year because I am sure there's a senator out there, and he cut this deal in order to vote for this new tax law because by the end of 2018, if you haven't signed your divorce papers, you don't get to deduct your alimony going forward. If you sign it by the end of the year, just so you know, Brad, if you sign it by the end of the year … We'll make sure that Jen knows this.
If you sign it by the end of the year, then you get to deduct the alimony, but if you wait, then you're never going to deduct that alimony. Probably ought to be thinking about that. Seriously, people, if you're actually thinking about a divorce, I'm sorry if you are, that's never a good situation, but it is one of those things where you really do have to pay attention. This is the year. Make sure that you'd finalize that divorce before the end of the year because otherwise, it's not going to be deductible. Brad, we're coming to the end here. I just want to thank you so much for being such a good friend, for being a mentor to so many of our clients and once again, it's bradsumrok.com. Right? They get that right?
Brad Sumrok: Correct.
Tom Wheelwright: Okay. Bradsumrok.com. Actually, Brad and I are doing an event. Actually, Brad's doing an event in August. He's invited me in Dallas to come, so we welcome anybody who wants to come and look it up on bradsumrok.com. I want to thank you again, Brad. Tell Jen that we missed her. We love her too. No, I don't expect that the alimony discussion is going to come into play at all with you guys. You guys are about as tight as I've ever seen a couple and it's absolutely a joy and a pleasure to meet with you. Thank you for being on the show.
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