How Passive Real Estate Lowers Taxes and Boosts Real Returns | Ep 104

James: It's Christmas season, and so therefore it means it's time to talk about taxes.

Jessi: Oh,

James: I know for some reason it is how it is, but because, no, I, I guess year end, we're getting to the year end type of stuff, and if you are a strong W2 earner, that means you got yourself a tax bill coming. That's right. At the end of this year.

And if you're not passively investing, it means that you're probably paying more than you should be. Hmm. And so this is for you. We're talking about passive tax benefits. Hey, it's gonna be awesome. On the Furlo Capital Real Estate Podcast where we dive into the intricacies of passive real estate investing.

And our mission is to equip people to invest wisely and keep as much of it as they can so that together we can build wealth while improving housing. I'm James, and this is my wife Jessi.

Jessi: Taxes that I, you said taxes and benefits in the same sentence, and I was like, those don't typically go together.

That's just, that was talking about initially what popped into my head. That's what you pay taxes, you get benefits. Yeah. Yes.

James: Of learning to have an open hand,

Jessi: learning to

James: have open with the things that you have and recognizing to be generous. That's not, that nothing is actually your, which is harder.

You're just a steward of things.

Jessi: I guess that is all true. And if taxes are being used well then, well that was a big, if that is, you know, people are willing to give them I've seen like there are booths popping them everywhere and like, like even at that market we went to, yeah. They had the, like the sign the thing, Christmas bizarre sign, the petition to not tax something gas tax.

James: 'cause Oregon Okay. Is increasing gas apparently is in gas tax. Yeah.

Jessi: Food tax, whatever. That's the thing. We don't have food tax, so why don't we just start taxing food? Oh no, you do not wanna head down that rabbit hole. Don't say it.

James: Trust me, man. No, but if you are a W2 earner, like think doctors, executives, tech professionals, like what I used to be, man, you get hit with taxes the highest 'cause they'd love to go after those high income earners, even though you may be thinking that you're playing it safe.

Sure. And honestly like. There's just issues with the stock market that I have, um, where you can't depreciate shares, for example. Yeah. That's not a thing. And just pro traditional portfolios they can create these phantom tax events as well. Mm-hmm. That happen. And so there's an opportunity out there.

Mm-hmm. There's an opportunity to protect your money with different write-offs and a lot of 'em have to do with physical assets, specifically real estate. So we're gonna talk about ways that you can legally shield your income.

Jessi: That's pretty awesome. Well, real estate,

James: it's, it is gonna be awesome. Yeah. And so I already hinted at the first one 'cause it's, it's the big one.

I think. My guess is, you know what it is, it's the big D word.

Jessi: Yeah. Depreciation.

James: Yeah. Yeah. Which

Jessi: I don't know, I never really understood. So maybe you can help me, uh, to figure it out.

James: Okay. Yeah. Depreciation's interesting.

Jessi: I mean, it's like, okay. I, I should just let you define it. Take guess. Take. I wanna hear.

James: No, no, I wanna hear your guess. I Awesome.

Jessi: I always kind of thought about it like as something gets older, Uhhuh, like it gets more worn out Uhhuh and so it's not worth as much

James: Yeah. Think of it like a, think of it more like a manufacturing machine.

Jessi: Okay. Don't think

James: real estate think more oh, you bought this you bought a tractor to help you dig ditches.

Sure.

Jessi: And it gets older over time and therefore less effective.

James: Correct.

Jessi: Oh, oh, see, that makes so much more sense. Like for a tractor. Yeah, yeah, for a house. It's like, yeah, but I mean, you're gonna fix it. It's kind of true for that fix house, I guess, itself,

James: so. So this is interesting. So for depreciation, they actually make you do a split between how much of it is land versus how much is the actual building.

Jessi: Okay. And

James: so you depreciate the building, not the land.

Jessi: Which makes sense to me because it's like the land is, the land, like it's not gonna disappear, doesn't get any worse or get worse, I guess. Unless there's an earthquake or something.

James: Yeah, no, that's, that, that's yeah. Even then, you know, if you're on the coast, that's maybe,

Jessi: yeah.

James: But but yeah, no, so it's about the structure itself, and it's that exact same idea. These things get old and worn out over time. Now it just so happens that the value of, of land and the use of those things, the, they tend to just keep going up over time. Hmm. Even if the place is getting used in old, 'cause you tend to maintain and repair it anyways.

Right. But it is this, so just like, the government wants to incentivize you to invest in stuff. Like tractors and machinery and things like that. And so that's why they say, yeah, we know you're gonna spend a lot of money up front, but then you can kind of recapture that as a so typically let's say let's say you buy a new computer.

Okay. For your business.

Yeah.

The government goes, awesome. Cool. You can write off that entire expense of year one.

Cool. But if you get, let's say a car like, whoa, we're not gonna let you ride off that entire thing on year one. Just 'cause it,

Jessi: it's too much of a hit. '

James: cause we know it's gonna last longer than that.

Oh. And so they, you Well, computer's gonna last longer than that too. I know. How do.

Jessi: Make the lines, oh, there's,

James: there's rules on what's the type of asset that it is. Of course. So like cars I believe are like five years.

Jessi: Interesting. Same with like

James: appliances. Carpets are like 10 years. Yeah. Like there's, there's a whole sort, aren't properties

Jessi: like 27 or something?

27 and a

James: half. Unless it's commercial, then it's 39.

Jessi: So random.

James: I'm just saying like that's, they just take averages. So it's actually, in some ways it's, it's worse than what you would normally get to do for a business expense. Right. So like all my subscriptions, I write those off year one. Right?

There's no depreciation, so it's kind of fun where people are like, it's a depreciation benefit and like,

yeah, but it's not

as good as other short term ones. So's, that's interestings. But the idea is it's this cost. Yeah. That you get to take over time. Mm. And as you know, often with real estate, you don't just plunk down cash for the entire thing.

Right. You're getting loans and whatever. Yeah. So let's say. Let's see. Lemme think here. If you buy a place for, let's just say $270,000 mm-hmm. For the fun of it, and you do $70,000 down, get a loan for the other 200,000 every single year, you're gonna get to write off quick math, $10,000. And

Jessi: why?

James: Because that's the, you get to depreciate $10,000 'cause 270,000 divided by 27.

10,000.

Jessi: Oh, that's why you did that math.

James: Yeah. So it's, you go to do your taxes and it's like every year you go, oh yeah. And I have this additional $10,000 expense. Interesting. That didnt come out of your pocket necessarily. 'cause you've already paid for it and you got a loan. So they just take the

Jessi: total and divide it by 27 and a half.

Well,

James: okay, well let's, let's say you actually paid 350,000 of it, but some, it was land and the building itself was worth two 70. But yes. Okay. Yeah. Yeah. They take whatever the building value is, divide it by 27 point a half, and you just, and that becomes, that's an expense, which I'm putting in air quotes, that you can't see if you're listening to.

Sure. Because it's not an expense that you feel from your pocket Yeah. That you're actually

Jessi: paying out of pocket. Yeah. Correct.

James: Because in theory, you've quote already paid for it. Yeah. In year zero, they're just

Jessi: spreading it out a little

James: bit. Yes.

Jessi: That makes sense.

James: Yeah. So, so

Jessi: another way you could say that is depreciation is spreading out the tax write off over a longer period of time.

Yes. Yeah, a hundred percent. Mm-hmm. Okay.

James: Yeah,

Jessi: I understand that more now.

James: There you go. There you go. Now if you ever sell the asset, uh,

Jessi: you, you done, like, you don't get to, well,

James: that's where actually what the government goes. If you sell it for more than it was worth, they go, oh, it didn't actually lose value.

You did it. I guess you can pay us back for that and then pay all the

Jessi: Oh,

James: Yeah, yeah. Pay us those back taxes, please. Uh, so you

Jessi: gotta watch when you sell and how you sell. That's why the

James: 10 31 exists. So you can roll it into another property makes, or they give you an exception if it's your primary home.

Depending on how many people you are, there's a certain amount where they go. Yeah, don't worry about it.

Oh

yeah. Well, it's, yeah. There's another thing called bonus depreciation and cost segregation.

Jessi: Okay. Okay.

James: Which are essentially accelerators of depreciation. Mm. So there's a new rule where, let's start with the cost, like first actually be, it'll be easier to explain bonus depreciation.

So at a cost segregation, in theory, you pay someone and. We can be up in the air on whether or not the, it's actually worth paying someone, but essentially they go, look, you can do your entire property for 27 and a half years. Mm-hmm. But we know that the value of the property is not all that you do have some appliances.

Mm. And you do have some rugs and you do have some windows. Mm-hmm. And you do have a bunch of these other things that are all less than 27 and a half years. Mm-hmm. And so they say, okay, instead of your appliance essentially being written off for 27 and a half years, let's do it over five. And so you get more faster.

Jessi: But when they're doing upfront, like the property value, that doesn't include all of the appliances and stuff. Yeah, it does. In theory it does. Really? Yeah. Because? Because certain. Appliances, stay with the property. We bought our house. Yeah. Like it came with all the appliances that was part of the purchase.

That's true. Like refrigerator and stove and Yeah, furnace. And not

James: necessarily the furniture, but Sure. Yeah. Anything that's a, what's the word? App? App. App, appearance, whatever. Yeah. It's like real whatever places. Yeah. Fixtures. Yeah. Yeah. Yeah. Yeah. So essentially instead of, so you might say you might change your average, instead of being 27 and a half, it actually might move it down to like, say 15 years.

Jessi: Okay. Now there's certain

James: parts like the roof. Yeah. You're stuck with 27 and a half. Sure. But

Jessi: because they last a long time. Yeah. Yeah.

James: And that's whatever that number is.

Jessi: Huh? And they just average it all together.

James: Yeah. Well, you have to have someone go through and do all the math to figure out what all the parts are.

Sure. And then they go, okay, you've got, you know, let's stick with that two 70 value. Mm-hmm. They might go, well, you have. I don't know, 50,000 of, it's the five year stuff. Mm-hmm. You have another a hundred thousand, that's the 10 year stuff and the rest of it's the 2,700. Interesting. Then you have a little report and you like adds it all up, you gotta do it right.

And hopefully it adds up to 2,700 to 27, 200 $70,000. Yep. And then you go, cool. And then your tax accountant says instead of just being one liner, it's like however many lines. It's five or six lines. Yeah. For all of it.

Jessi: I mean, it, it reminds me of like. We've had spaces in our home that we've used as like a business space.

Yeah. And so you get to write, we're in right now some, yeah. Of those expenses, but you have to, it's like a percentage because it's like you're not using your entire house as a business. You're using like this many square feet, and so that's the percentage that counts as the Yeah,

James: it's a similar-ish idea.

Yeah. Yeah. It's more of. The 27 is they're using whatever the longest time is. Sure. For the entire thing. And it's just not true. But you gotta be able to prove that it's not true. Right. And so, which oftentimes you have to pay someone cash to do it. Yeah. To save on taxes. And I'm always dubious on whether or not it's worth it, but the.

But the idea is yeah, let's you speed up that depreciation, those phantom costs. Sure. And depending on the investment and how long you're holding it for. Like if you're only holding an investment for three to five years mm-hmm. Like you could essentially pay zero taxes on your income for those five years.

Yeah. Now you're gonna hold onto it longer, eh, it may not be worth it, but now. Bonus depreciation builds on top of that. So there's a new rule that says for anything that's, for any of those categories that are, oh man, I'm gonna mess this up. I think it's like less than 10 years, it might be less than 15.

They go, you could do it all in year one.

Jessi: Oh,

James: no. Need to wait.

Jessi: So you do kind of get a, a bump,

James: you get a bonus year one. Yeah, yeah, yeah. The bonus year one. Right. And then, and the cool part about depreciation is if you don't use it all, it just rolls into the next year. Um, so it's okay if it's like, man, that first year was a massive number.

I really did pay zero taxes.

Jessi: Yeah.

James: But now I've got, like, I got a negative tax bill. Mm-hmm. And they go, yeah, we'll just keep it going until you finally catch up.

Jessi: Interesting.

James: Yeah.

Jessi: That's kind of cool.

James: It is kind of cool. So that's, uh, so that's cost segregation and then bonus depreciation, which are both kind of subcategories of depreciation.

Jessi: So if you are, if you're doing a syndication. Your. Sponsor is navigating all of those numbers and trying to get you the best Yeah. Your sponsor tax account, but yes. Tax benefits and things.

James: Yeah. And, and it costs a lot to hire someone to walk through and do all that math so they Sure tend to only do it for larger projects.

Jessi: That makes sense

James: though. Technology is making it. Easier and easier to do it. And so it's starting to make sense for smaller and smaller projects.

Like in theory, now, I can't remember the name of the company, but they just have an app that you can use. You take pictures and document everything, and they're able to estimate it from there.

That's cool. And so like, you can do it for, I think it's like a hundred bucks. Wow. It's great. Like normally these things are thousands of dollars. Yeah. And so, um, so in theory you could do it for homes and stuff.

Jessi: Yeah.

James: Okay. It's not as accurate, but you're also like Yeah. The risk isn't as much because it's a smaller asset.

Jessi: Yeah.

James: In theory I could do it for Baker Tower. I got a quote on it and it was not cheap, and it was like 20 grand

Jessi: Oh, my word. And I was

James: like, okay. I mean, it's not a small building, but Right.

Jessi: Huh?

James: Yeah. So you pay 20 grand up front to then save, save on your taxes. Sure. It's a weird, it's weird math and it's not.

And it's not. I'm gonna, and I put It's not save on your taxes.

It's to, to not pay them right away. It's not pay them as quickly.

Jessi: Yeah. It's just spreading out the cost over a longer time period. Yeah.

James: Because you gotta remember, like if you do the bonus depreciation and a cost segregation, come year 15, dude, your tax bill's big because you, it's gonna jump.

Yeah. You've used up all the depreciation. So I'm kinda like, I don't know, is it worth it? But there's the whole time value of money argument. Sure. And so I guess if you are perfectly good at timing and using your money. Awesome. Cool. Or again, if you have like a three to five year investment mm-hmm. Then it makes sense.

'cause you're never gonna hit that, right. That longer term Yeah. Timeframe. You won't run out of depreciation. Yeah. Yeah. That's the trick. Don't run out so longer you hold on your property, the less. Those things are valuable. There you go. Well, I mean bonuses. Yeah. Anyways. And the bonus, again, it's not for the entire thing, it's just for those shorter ones, it's just a portion of it.

So you kind of gotta pay for the cost s to take advantage of the bonus depreciation. But you get regular depreciation no matter what. That's free ish, you know, just gotta, it's whatever. It's part of the deal. Alright. That was the first two. Dang. All right. Awesome. Uh, the next one, number three is phantom losses.

Uh, you have things like mortgage interest mm-hmm. Which you're gonna pay no matter what. And then your you get to essentially write those off and go, yeah, no, that's a general expense. Mm-hmm. Which it is, but it just never feels that way. Right. Just kinda

Jessi: like it's baked in. But

James: yeah. And then, and we already kinda talked about this.

If you do capital repairs, it's kinda that same thing. You can carry those things forward and then you have those carry forwards for mm-hmm. When, you know, if you have more than that, which is just a, it's, it's, they can help boost your returns mm-hmm. Uh, for it. Uh, the next one is the 10 31 alternatives for passive investors.

So this is really interesting and I've been trying to learn more about it. Mm. So again, we've talked about the idea of a 10 31. Is if you have a bunch of depreciation and capital gains. Mm-hmm. If you sold it just straight up, you would all of a sudden have a massive tax bill and you'd be like, oh my gosh.

Well instead through the 10 31 exchange, essentially they say if you have a like for like type of. Whatever. Mm-hmm. You can then essentially roll over all of that capital gains and depreciation onto the new property.

Jessi: Yeah.

James: So instead of starting out with, a zero balance, it's whatever that old balance was.

Which is great. And then it can snowball and if you ultimately end up selling that final property. Yeah. Oh man. Like it's a massive tax bill. Right. But you know, who cares? 'cause you got to build, essentially tax free wealth. Sure. Right? Because if you had to pay you'd, you could buy just a smaller property each time.

But this lets you buy bigger pro projects every single time. So, super cool. But there does come a point in time where investors like you wanna get outta the race.

You know, because, 'cause then what they say is, well, you just, you, you keep 10 30 wanting it. Get onto it, and then eventually you die.

Your heirs, they get to reset that basis. Essentially it goes back to zero. So they could sell it and like, yeah, there was no depreciation or capital gains. Dang, that's huge. How does

Jessi: that work?

James: So the depreciation in capital gains goes with the person, not the property.

Jessi: Oh,

James: yeah. So if the person goes away the people who inherit it, it's as if you sold it to them.

Jessi: Interesting. So they just now it resets at that, at the current value of the property. Yeah. Yeah. And they could sell it for that. Yeah.

James: This is one of the reasons why on my side of the family, they have not sold my grandmother's house Right cabin. '

Jessi: cause it kind of makes sense because they,

James: They've owned it for how, you know, 50 years.

Yeah. Yep. So it's been fully depreciated and it's worth 'cause of the Bay area, six figures and it's like, and. And she hasn't lived there for a while. Mm-hmm. So you wouldn't get to write off that first amount anyways.

Jessi: Sure.

James: But if they wait, which is why they're renting it out right now. Mm-hmm. So if they wait, then it essentially resets to zero and they, they can sell the house tax free, move on.

Wow. And then the, and the other crazy part is some people want to, um, inherit the cabin. Mm-hmm. Super sweet cabin. Awesome. I was there all the time growing up. But again, if they just. Gave it to the to them. Now

Jessi: they'd have all of the, they'd

James: have, that would count as a sale. Yep. And someone, they'd have to pay capital grand would have to pay capital gains and all the depreciation, all that stuff.

Which, that would be interesting 'cause they actually built it on land. I don't know how that works. Oh, whatever. Like 100% essentially of those gains would be taxes. Taxes. The sale would be taxed. Mm-hmm. And I guess whatever minus the land is. Mm-hmm. Not important. So they had got this other quandary. We're like, great, now what do we do with this one?

Mm-hmm. To which I was like, yeah, you just lease option it, lease it to those guys. They can run it, they own it. They're in charge of maintenance, all that stuff.

Jessi: Yeah.

James: Then they have the option for when she finally passes they can buy it. Yeah. So they can have control today without doing it.

So it's very powerful.

But not everybody wants to do that. Not everyone's like, yeah, I wanna hold on to these assets forever. Mm-hmm. So I've been learning about this. There are very creative, very smart people who have been trying to figure out how to. I'm gonna say get around this. Okay. So there's something that's called a Delaware statutory Trust.

Of

Jessi: course there is. Of

James: course there is. Of course there is. Remember

Jessi: that is.

James: So here's the deal. When you do a 10 31, it's really interesting. You have to have an intermediary person. The second I touch the cash, a tax event happens.

Mm-hmm. But as long as

I never touch it.

Mm-hmm.

We're good. So in theory, what happens is when I sell my place mm-hmm.

I don't get the money. Right. It goes to this third party, 10 31 holding exchange. Yeah. Escrow person essentially. And then they put in the funds to the next property. So I never touched it.

Jessi: Uhhuh,

James: which is kind of actually really interesting. Some subtleties there. If let's say I wanted to take out like $20,000 just for myself, I could say like, yeah, give them all of it, but gimme 20,000.

I'll pay the taxes on that 20 k. Then the rest of it rolls over tax free, like you can do partials and all sorts of stuff. Interesting.

Jessi: Sure. It is very, but the instant that you get it, you pay taxes. I pay

James: taxes on it. Yeah. So Delaware was like, I got an idea. They kind of capitalized on this idea of it's, and it has to be like for like is kind of the thought.

Mm-hmm.

But they go, well what if we put it in a perpetual escrow account and then we just pay you interest. On that escrow account. So you're like, you're always trying to like, it's kind of a weird, it is weird. And so, uh, and I'm people who are technically into this and I'm like, you're not representing it.

Right. I know. I'm just trying to help my wife wrap her head around how this works. Yeah.

Jessi: Because I'm not gonna get it if you tell me the right way. So let's say

James: I sell a property. And I put it into this statutory trust account. Uhhuh, have I touched the money? No. No. So I'm not having to pay taxes on it. Yay.

And then they, under my direction, re invest it somewhere else, say the stock market and it goes into a regular index fund that earns interest. They charge a fee to manage it for me. And then whenever I want, I can withdraw funds from that account. I then pay taxes. It becomes almost like it's a normal retirement

Jessi: account.

It's, yeah. It's not a 10 31 because you're not, they're not putting it back into real estate.

James: Correct.

Jessi: They're putting it into this holding account, right? Like a Yeah, like a retirement account.

James: Yeah. Yeah. Yeah. That's a good way to think about it. Weird. Yeah. It's kinda an interesting loophole of you quote, getting out of the game.

Right. Without having, without paying a pile of cash, capital gain to worry about. Yeah. Now, again, that makes sense. Whenever you get the funds, you gotta pay for it. Just like a, a traditional retirement account. Wait,

Jessi: so but that's only in Delaware.

James: It's, they're the ones who put together the statutory trust.

Oh, they created the, the concept of this thing. Yeah. I mean, you can live wherever. Okay. But it's, the money's held in one of those accounts there. I mean, they might have 'em in a place. I could see that being really

Jessi: valuable for someone who had invested in like, buy and holds mm-hmm. Over long periods. And then eventually they're like we can't hold it anymore.

Yeah. We don't wanna pay the big capital gains, tax. Yeah. Just getting rid of it. So we're gonna put it over here. Yeah. But we don't have all the management and property. Maintenance and all of that sort of stuff. Yep, yep.

James: Yep. It's super cool. It's especially cool for passive investors because you may not have control over when that project is sold.

Oh yeah. So I can think like Baker Tower, right? I won't hold onto this thing for 10, 15 years. Mm-hmm. But eventually it'll make sense to sell it. And maybe you're like, well, I don't want to, I'm gonna have a big tax bill that comes for it. You can instead roll it into this thing, roll your money into, okay.

And you're good.

Jessi: And then

James: I

Jessi: think. Yeah, talk to your

James: tax advisor theoretically about that. I should make that caveat. I am not a tax professional. This is, uh, that's true. Informational purposes only. Please talk to your pro ary research before I should've said that up front case. It's not obvious. I'm really not a professional.

Jessi: So if on taxes, like in that particular case, if you rolled your money into this statutory account Yeah. Thing.

James: DSTA dst, daylight Savings Time, Delaware statutory Trust.

Jessi: If you rolled it into the DST, uh, to kind of not pay the capital gains while you're waiting to reinvest it, can you pull it back out of that?

Ooh. Um, to reinvest it in a interesting question. Different property,

James: I don't know. Probably not, but interesting. Maybe, but I don't know. Depends. It's not, it's more end game, right? Is what that's for as opposed

Jessi: to. Hold that thought. Correct. And then I'm back it. Yeah, yeah,

James: yeah. If you're still gonna 10 31, like go through the normal way of doing it, you should just 10 31.

Yeah. Because there's a whole bunch of extra fees and everything doing it that way. And it's, yeah, I was just thinking

Jessi: as a, as a passive investor, if you weren't ready to sell yet and you don't want your big chunk of cash Oh Hmm. It's like, okay, I'll put it in here, but, but I want it, that's a great question later.

I actually dunno the answer to that. Yeah.

James: That's worth, that's a good question to ask a DT expert. Yeah. Yeah. Interesting. Okay. This next one, it's probably one of my favorites. Mm-hmm. Because it's super cool that you can do with a passive investor that you can't do Oh. At. You just can't do it other ways.

So it's refinance.

Mm-hmm.

That's it. It's amazing. It's a totally cool, tax-free way of getting money. Yeah. So let's say you've got a property, you bought it for a hundred thousand dollars, you have a loan on it that was, I don't know, a hundred thousand dollars. Mm-hmm. You got zero whatever in it. Over time, the property value goes up.

You have a choice. You can either A, sell the property for $200,000 or B, refinance it for $170,000. Mm-hmm. You would refinance it all day long because if you sold it. Not only would you have transaction fees mm-hmm. But you would have the capital gains and depreciation taxes that you would have to pay on it.

You would actually get significantly less than that. A hundred and 170,000. Yeah. When it was all said and done. So instead what you do is you take the mortgage. You have to pay. It's a thing and, but you get the cash tax free upfront and usually you go put that to work and do something else. Sure.

Like this is 100% what, uh, what wealthy people do. Mm-hmm. They they don't sell their assets, they just refinance 'em over and over and over again. And then what they do is, this is amazing, is they then take that money, reinvest it, and then live off the cash flow off of whatever that new investment is.

Mm-hmm. And that cash and that investment pays for the mortgage, or I don't wanna say it. So you have this property. A hundred thousand dollars, you've been living off the cash flow off of it.

Mm-hmm.

Cool. Right? And then what you do is you get this new loan on it, and so you can no longer live off that cash flow, but you can now take that $70,000 or I guess $170,000.

Really? And you can now roll that into a bigger project mm-hmm. Where your cash flow is now more. Yeah. And so on, on this old pro, on the first one. Now the cashflow is just paying for the mortgage. It's no longer paying for your lifestyle, but it's paying for itself.

Jessi: Yeah.

James: And then this new one is now the one that you've stepped up and is now paying for your lifestyle.

And what makes this really cool is like five, 10 years from now you do it again for both of them and you just you just keep ratcheting that bad boy up. Because by then, like you know, 10 years in that first one, you're like, oh, actually I'm getting additional cash flow. 'cause every year runs go up.

Your mortgage stays the same and you just kind of, you just keep on trucking. Mm-hmm. It's a hundred percent. So, especially like when you see these guys out there, like they're buying boats and whatever, like they're, they're doing it with refinance and then it's all pre-tax money because it was all from debt and Yeah.

They just got a property that's paying for the loan on it. It's kind of insane. It's,

Jessi: it is kind of brilliant.

James: It's really kind of sweet.

Jessi: I mean.

James: Yeah, you're in debt and you're leveraged. It's a thing. Yeah.

Jessi: You're leveraged. So, and your debt increases. But,

James: so it's important to have good asset, you know, have it backed by good assets.

Sure. Yeah. And you obviously don't want to over leverage yourself. Yeah. I use an extreme example to make the math simple. Sure. But,

Jessi: but there's a balance there.

James: Yeah. Yeah. So I think the combination of doing that 10 31 into bigger projects mm-hmm. And then doing the refinance. Yeah. It's like if, if you're,

Jessi: if you're doing the refinance and reinvesting that's the good combo.

Yeah. Because you are leveraged, however, you're also reinvesting to increase cash flow and Yeah. Assets and all of that it evens out. Yeah. If you're just refinancing, like you said. Well, in theory, what, like what some people do go on

James: vacation or something, so, so let's say that you're, that you're doing flips right.

And that's your actually your primary, um, you've like, you've got that job going on. In theory, what some of them will do is they'll then, after they do a bunch of flips, they'll then go buy an asset.

Mm-hmm.

And then maybe they keep doing the flips on the side, but then eventually they refinance that asset.

And then again you get a mortgage where you're more than the cash flow from the assets paying for the mortgage. Mm-hmm. And so you get a lump sum of cash.

Jessi: Yeah.

James: And then they go, yeah, this is my fun money. That makes sense because my assets paid for it. Sure. Whatever. And that's just, so they'll even do that kind of thing.

I mean, in that math, like it can kind of make sense. Yeah. Where you can imagine if we took sale line apartments, we got a pretty small loan on it relative to its value. Like we do live off part of the cash flow, but I could see us very easily, like we don't a hundred percent live off of it. And so I could see saying, well, what was that amount like?

Let's figure that out, and then we're still gonna have a chunk of change left over. Mm-hmm. It's like, yeah, man, let's go on vacation or whatever. Mm-hmm. Like, you could, I could totally see the, the logic behind it, but it's cool. Um, let's see. We already talked about the legacy thing of the step up basis where if you hold onto it long enough then your heirs Yeah. Just reset, get it, which is a tax benefit for them. Not necessarily for you, but, you know, whatever.

Jessi: You're, I mean. You're thinking of your family and planning ahead for them. So that makes sense. That's a guess.

James: That is a benefit. And then you

Jessi: said at the beginning nothing was yours and you're just stewarding it.

So

James: Yeah. Fair enough. Doing it well for those after you. Fair enough. Fair enough. And then we already talked about the lost carry forwards as well which is a cool, just safety net. Which is neat. So I think a lot of times when people first get started. I think this is rightly so. They just look at cash on cash.

Mm-hmm. Like how much money am I getting for the money I'm putting into it? Yep. That's it. And they, for the most part, ignore the tax treatment side of things. Which again, that was, that was you and me. Oh, yeah. When we first got started. Yep. And I think as, I mean,

Jessi: my reason for doing it was different than yours.

I was just like, I don't understand that. I just want it to make money. Yeah. Don't do all that fancy math, I promise. Or all the craziness. If it makes money without that, I'm good.

James: Yeah, yeah, yeah. Which is, you know, that's fair. I get it. But as you get more sophisticated, and especially I think as you become a passive investor, it makes more sense to ask questions about like, well, what's the after tax yield on this thing?

Mm-hmm. And what do those depreciation schedules look like? How are they doing it? Which again, for Baker Tower, we're just doing a straight. I'm like, I'm not messing around with it 39 years because I'm like, we're gonna hold onto it for a while. Yeah. That's the plan. And so if I'm not gonna sell it right away Yeah.

I'm not gonna spend money on a cost segregation just to speed something up that eventually we're gonna have to pay back anyways. Sure. So questions you wanna ask. As an investor is, will there be a cost segregation?

Will there be a cost? Eg. That's what the cool kid saying. Cost seg, um, Howard depreciation allocations determined.

Um, how do you handle refinances and 10 31 opportunities? And then what's the timing of a K one in historical accuracy of that, because that's the actual tax report that you receive. So you just wanna know, when am I gonna get that? So when will I have to pay my taxes? Interesting. So, yeah. So some of the advantages, like they're pretty cool.

They're not just loopholes, they're structurally built into this Sure. To incentivize people to invest. Mm-hmm. So I think they're really powerful. Really powerful tax savings. Yeah. I think there's more if you become an active person into it. Mm-hmm. So like one of the things is like, it's all considered passive income and passive losses.

Mm-hmm. And so. It can't directly offset your active income, which is fine. 'cause if you're investing, that means you have passive income.

Jessi: Okay.

James: But if you're doing it actively in a, a professional, then any losses can actually offset active income as well, which is. Convenient, but also a lot more work. So just invest with us.

You don't have to worry about that easy. Don't worry about it. So yes, there you go. There's some Christmas cheer for you. Some tax. That was actually

Jessi: more interesting than I thought it was gonna be.

James: Oh, that's what I like to hear. You're welcome. Making tax strategy. Interesting. Everybody

Jessi: poo-poos taxes, but you don't have to be a Grinch about it.

Yeah, there's some upside is

James: what you're saying. There's there's just two. Yes. Two guarantees.

Jessi: Death and taxes. That's

James: it, man. Dang. Yeah. So spoiler alert. So every year I've gotten into the habit of having a theme for the year that I listen to for audio books and I that I do more like, you know, Kindle reading stuff.

Mm-hmm. But I'm thinking, I'm like, I'm pretty certain for next year what I'm gonna do. 'cause we're celebrating, the US' 250th anniversary is doing books from each quarter century. So like my first one might be a biography on George Washington. The next one might be an interesting book on say Pearl Prohibition.

It happened during that time. I don't know. Something I've always heard about, don't know much about. Could be interesting. And so I was just kind of working through time. So you could read a book about the history of taxes. Oh, I bet you that exists. Oh, you know, for, that's terrible. For the right, for the right author.

It could be really interesting.

Jessi: Yes. If Malcolm Gladwell wrote that book, I would read it if fair enough. Some tax accountant wrote it. I'd be like, what about Adam

James: Grant? You'd probably read it if it was him. You like his He's the rethinking podcast. Yeah, yeah. He'd

Jessi: be interesting.

James: He's good. Yeah.

Anyways, I just listened to a podcast where he, uh, he was interviewing a mentalist,

Jessi: Ooh. Oh, Oz Perlman. That'd be a good

James: one. So good. Who also just recently wrote a book that is on my list. So I recommend it anyways. Death and taxes really interesting if you gotta do it. Real estate's a great thing to look into, to try to shield from some of those taxes in ways that, again, not loopholes, just it's structurally built in to be advantageous.

It

Jessi: won't give you eternal life, though. Only Jesus does that.

James: That's fair enough. Merry Christmas next week. We'll be there Christmas day. Look for it. It'll be fun. We're gonna be talking about Hallmark movies, so,

Aw,

it'll be super fun. So with that, thanks for listening. Have a great day.