Episode 62 | Brandyn Cox | Military Millionaire

00:00 - 05:00

David:

Hey, what's up guys, this is Dave, From Military to Millionaire. In my quest to bring you more and more value. I wanted to do something a little different today.

So instead of talking about a real estate investor who's had success, or even talking about the business of someone who's had success or how they became successful, we don't really touch on success. In this episode, what we do touch on is taxes. This is my personal CPA, we brought him in because he's a real estate and small business, tax expert, and tax professional. And he is going to give us all sorts of insight.

I wrote out a whole bunch of good questions for him on everything you need to know for real estate investing, maybe not everything you need to know but a lot. And there's a ton of good information in here, including the exemption that allows you to not have capital gains tax on your personal property for 15 years after you move out if you use the right strategy while you're in the military.

So there are some really, really cool military tax benefits as well as real estate tax benefits that we're going to cover. Stay tuned all the way through, and you'll even hear how I got scammed out of 1000s of dollars and why you should use a CPA to avoid that or when you know he's honest about times when it's not necessary to use a CPA.

So stick through and show notes are found at Frommilitarytomillionaire.com/podcast and I'll have links to some of the apps that we recommended throughout this that will help you with your taxes like mine, like you.

Intro:

You're listening to the military millionaire podcast, a show about real estate investing for the working class. Stay tuned as we explore ways to help you improve your finances, build wealth through real estate, and become a person that is worth knowing.

Sponsor:

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David:

Hey, what's up everybody! It's Dave From Military to Millionaire and I am here with Brandyn Cox of BMC accounting LLC, my CPA, and Brandon was in the army for six years. And he's definitely helped me out so far this year. And we'll be continuing to work together. So I wanted to get him on the show because I get a lot of tax questions. And I got, you know, I know what I've written books that's about it, right? It is not my expertise. And that's why I hire guys who are experts in that and work with guys who know what they're talking about.

So, Brandyn, welcome to the show. And tell us a little bit about yourself, brother.

Brandyn:

Appreciate it, man. Thanks for having me on.

So my name is Brandyn Cox, I own BMC accounting LLC. I'm an enrolled agent, federally credentialed tax professional. I work nationwide, I've got clients, actually in a couple of different countries as well to really dig my heels mostly in small business and real estate investing. So that's kind of where I market most of my skills and technical services.

As David said, I was in the army for six years from 2007 to 2013. And now it's been six years actually since I've gotten out. And you know, not at the time of recording. We're on Veterans Day right now. So it's kind of a nice little reminiscent here at the time.

David:

Definitely.

Brandyn:

Yeah.

And I had a good time when I was in, did six years because my wife was finishing up her college degree. And I was thinking, you know, I'll get out, go to college and do that thing. I was an MP when I was in and I did a lot of really cool stuff. I got a deployment to Afghanistan. I did an undercover drug team for a couple years. So I had a good time in.

But when I went to college, I kind of wanted to keep up with that. So I thought I'd go for what I come to find out later is just a really cool bachelor or a really cool liberal arts degree is criminal justice. So it doesn't do you any good, right? Like I didn't do anything. In fact, I'm actually only one class away. from having a bachelor's and it's like a diversity class or something, which I don't know why I need that. I mean, I figured I had enough diversity when I was in the military, everyone's you know, it's, you get to meet people from all over the world, just in just in the military alone.

05:00 - 10:00

Brandyn:

But right at the very end, actually, I decided to take an accounting class as an elective. And they started talking about balance sheets and income statements and taxes. And I was like, you know, this sounds pretty interesting, which is funny, because most people can't stand math, right? Like most people who don't like math. And I was like, you know, I really like math. Let me take a step back from criminal justice. And let me give this a shot.

So I took a couple more accounting classes, and I was doing really, really well on it. And I was like, Alright, I can dig this. I think this is going to be a new career path. I don't think I really want to do criminal justice anymore. I want to go be a cop. I want to go, you know, be a business owner, because that was always something I've always wanted to do anyway, was be a business owner. I just never really had a good idea of what I would do.

And I actually started this business while I was in my sophomore year of accounting classes in college. I started, I did bookkeeping, and payroll for my next door neighbor who lives across the street from me and has a lot, a lot of lawn and landscaping company. And I did all of his stuff for a while. And I did really well, he was happy with it, you got it for dirt cheap, that's for sure.

Yeah, I don't think I can even give out the price I paid for him, everybody else would come knocking on my door afterwards. But I really liked what I did. And the thing about it was I got to see how it benefited him. It wasn't just running numbers and calling it a day it was actually taking what I learned and providing value to keep the bottom line bigger for him and reduce his expenses, keep more money in his pocket. That was the whole point.

So I really liked that aspect.

And in 2018 tax season is when I really got my feet wet. I'm sorry, 2017 taxes when I really got my feet wet for learning how to do tax returns. So I really marketed towards the local area. It was alright, I enjoyed doing it. But the thing I noticed is that just individual returns didn't provide very much value, it was the business owners is really where you see it. So I decided to go get a professional credential. So I got my Enrolled Agent license, which is something that the IRS awards, it's our highest recognition for tax professionals.

Now, I have unlimited representation rights. And it's been really, really fun since I've gotten that license, many will do a lot more. I know a lot more, I have a lot better experience in education, it's been really beneficial for so many other business owners and real estate investors. So that's kind of a little background about how BMC accounting started a little bit about me.

David:

That's cool.

And I like that you're professionally licensed. Because I think I told you previously about my horror story with a guy that I thought was legit on Camp Pendleton. But if not, when I get into one of my later questions about CPA versus filing for free on base, I'll be happy to give you so stay tuned on this episode, there's my hook, listen to the end, and you'll hear how I got scammed out of like three grand.

Alright, so you know, my normal questions, but I kind of wanted to touch base on things. You know, this is different because you're the expert in a field that man, so many of us either don't know, or don't know that we don't know anything about taxes. So I wanted to touch base on some of that. So the first thing that I thought would be fun to touch on is not necessarily real estate specific, but just kind of like what are some basic things that you think servicemembers should know, should be doing for taxes, like everyone should know? Like, are there any things that people aren't doing?

Brandyn:

Sure!

So I would say at the very least, if you're not into real estate or on a business, you're just active duty military, take control of your tsp, don't just let it ride itself out with 3% at the G fund, that's 3%. It's kind of generous for the G fund to be honest with you, the G fund honestly, it doesn't even really keep up with inflation. So there's no real point in doing that you're not getting a huge break out of it.

So if you're going to put money into your tsp while you're active duty, take some time and actually learn the different funds and learn a little bit about finances, and then you can really stack some money up, you know, you have I think there's like seven or eight different funds that tsp offers. And you're not restricted. You don't have to use a tsp, nothing says that you can't go use an entirely different investment vehicle, whether that's another simple IRA or traditional IRA or whatnot, or you can even do what many people are doing now is getting into real estate.

There's a lot of ways to use that as an investment. And that's the whole point of it is you don't just get to go Oh, great. I'm a landlord. This is awesome. You got to be smart about it. It's an investment. It's a very expensive investment too if you do it incorrectly.

David:

Yeah I agree.

I made the G fund mistake for like the first 8 or 10 years I was in. Consequently, I was earning 1, 2, 3% interest in the years where the funds that I'm in now we're earning sometimes I think one of them hit 33% or 20%, right. O 8 2016 ish was some pretty good years for tsp that I didn't take advantage of. So.

Brandyn:

Exactly.

10:00 - 15:00

David:

Alright, are there any huge tax no no's that you see servicemembers do it on a regular basis?

Brandyn:

So I would say that the biggest no, no is probably not knowing just the basics of learning your taxes.

So now with the tax cut jobs act, there's not as much advantageous tax breaks for service members as there used to be used to be able to like write off like your uniform expenses that were more than what you got reimbursed for us to be able to write off a bunch of the unreimbursed employee expenses. But now you don't get those. So I mean, that might be something to keep in mind. If you've been in for a couple years, and you've done that in years past. That's not around anymore. So don't spend more money than you really absolutely need to.

My time I, you know, when I was in, I don't know how many 1000s of dollars over the course of six years I spent on just class a’s and dress greens and just blues alone. So I know that it can get expensive, but don't necessarily think that that's going to benefit you anytime later.
David:

I like that, because you're right.

Yeah, that definitely definitely was some stuff you could write off back in the day.

Alright, so moving into some real estate stuff as we kind of move along down this track does. This is what I get asked all the time, does having an LLC matter for real estate investors?

Brandyn:

Sure!

So I'll say yes and no, no, for taxes, it doesn't make any difference. So if I own a real rental real estate property, regardless of what state, and I don't put it in an LLC, the taxation on that is absolutely no different than if I had it in an LLC or if I have 50 properties in one LLC, or one LLC for 50 different properties, or vice versa, it doesn't change anything.

The only reason that that would change is if you had more than one person who owned the LLC. So if you and I David both own an LLC that also owns a real estate property as a rental, that's a partnership. So LLCs aren't even an IRS recognized entity that's entirely state. The IRS has four different for profit entities, you have sole proprietor, partnership, escort, C Corp, we don't hold rental real estate or really any real estate incorporation. So you can knock those two out.

So really either have a sole proprietor, which is a single member LLC, or a partnership, which is a general partnership, limited partnership, or LLC.

David:

Interesting!

Brandyn:

I'm sorry.

David:

No, no.

Brandyn:

Yeah, the way that it would benefit you would be for an asset protection strategy, that's all the LLC is used for in real estate is to ensure that there's a barrier between your personal assets and your business assets.

Now, there's more than just saying, Oh, I bought it, I got an LLC in Texas, and I also have a property that happens to be in the state of Texas, it doesn't mean your LLC covers you for anything, I mean, the LLC has to actually have the title on that property. And there's other aspects that go into it. So that legal portion of it, definitely consult with an attorney to get a better understanding of but in a nutshell, that's the point of an LLC for rental real estate.

David:

Awesome.

For our listeners, the partnership, is it still considered a partnership if your second person is your spouse?

Brandyn:

So that depends on a couple things.

So the first thing is, is it an LLC, so if you and your wife decide to go get a rental real estate property, you get an LLC, if that LLC is not in a community property state, it's a partnership, and you have to file a partnership tax return.

But if you don't use an LLC, and you're in a community property, or you don't, or it's not in a community property, either way, you can do what's called a qualified joint venture. It's just a little checkbox on the Schedule E. And there's no harm, no foul, it's very simply done.

But that does matter on where it's at, and whether or not it's in an LLC. And that can be a problem, because if you go for years filing incorrectly, the IRS decides that they come back and look at it and say well, so it just doesn't quite see. And you're supposed to file a partnership return the partnerships leave filing penalty, as $200 for each part of the month that it was late multiplied by the amount of owners that owned it for the whole year.

So I mean, that could be a couple $1,000 if you keep doing it year after year after year, right. So I mean, that's freaking expensive. We would like to avoid that if possible.

David:

Awesome.

So what are some things that real estate investors should be tracking or recording to help with their taxes like whether it's for the CPA or even if they're trying to do this mess on their own?

Brandyn:

Sure.

So there's at minimum, there are two things I tell people you need to document and document well. The first one is your mileage.

So whether you get mileage IQ, QuickBooks, self employed app, whatever, it doesn't matter what you use, it just you have to have an evidence written log and I can guarantee you in you know my experience with working with audits that the first thing that The IRS is gonna ask if they even see a standard mileage rate deduction on your or even the actual expenses, vehicle expense deduction on your tax return, they're gonna say the first thing, they're gonna ask that mileage log. Without it, it's gone.

15:00 - 20:00

Brandyn:

So you have to divide it up into three different miles, you have business miles, personal miles, community miles, community would be like going from your house to your work. And then personnel would be like going from your work to the grocery store. And then business would be like, if you left the grocery store and went to meet a client, that's the business trip, the whole thing isn't just that one part is. And that's important to know, because you can lose a lot of miles very quickly that way.

And then the second thing about documentation is your activities and what you do with real estate, and it matters for two reasons. One is if you're still in the military, and if you have a full time job, and most all of your activities throughout the year are dedicated to a wage position, but you happen to also have real estate is that you can get a section 199 a deduction, which is up to 20% deduction on your taxable income from rental real estate property if you actively participate. And you have to have a documented log for that you have to provide more than 250 hours of services to those rental properties, either separately, or in an aggregate if you make an election to file an aggregate tax return for all your real rental properties.

So that documentation used to take the date, what activity it was that you did, how long it took you. I mean, that's really in which property if you have more than one, which property it was for, because that log is going to be very beneficial. If the IRS says audit you that's another one of the first things they'll ask, oh, you took a 20% deduction on your taxes for rental real estate. Let's see that log, Oh, you don't have it? Sorry, there goes an extra $4,000 on your tax return that you have to pay taxes on now.

You know, and that can kind of bite when you're least expecting it.

David:

Is there a best practice for documenting that? Or do you just keep track of it like an Excel doc?

Brandy:

Sure.

So I don't know of any right now they're necessarily the best or a really great method of documenting, an Excel document will be more than suffice. I know that there's some nice technology coming out for just kind of like a CRM function. I'm trying to remember the name of this one. I saw a commercial for it once on Facebook, and I haven't seen it since it's like this, like 10 sided dice, right? And you can take the dice and whatever is pointing up is what it will automatically record for you doing that activity and you can customize through the software online what each side of those dice represent. So if you have one that's like Facebook, you know, if you're doing social media and marketing, well, that would be pointing up. And then when you move the dial, and it's like a picture of your real estate property, then that would be you going out to work on the real estate or so on and so forth.

So I mean, that's one way that could help, maybe automated a little bit.

David:

It's like a physical dice.

Brandyn:

Yeah, it's like a 10 sided dice.

I really can't remember the name of it. But I know it's like a simple something. I think the name of the word symbol was on it.

David:

That's interesting.

Brandyn:

Yeah!

David:

I have to pick your brain about that more for like, my all my marketing stuff that I'm doing cuz I'm not tracking specifically what activity I can show.

I mean, for one, it's pretty easy for me to show like, Okay, well, I did 52 podcast episodes this year, each one takes three hours.

Boom!

But I don't have to have that. I just can say that, you know, at least there's 50 to 1 hour episodes. So that part they can't really refute. But,

Brandyn:

Right.

David:

But I'm not tracking the editing. So that's a pretty cool idea to have a dice, right? And just say, you know, I'm doing this right now.

Brandyn:

Yeah, someone's making a lot of money on that. I just don't know the name of them yet.

David:

The other cool thing with that as would be a side effect is that you're able to physically see how much time you're wasting with a surgeon.

Brandyn:
Yes.

Right, especially if you actually stick around with it and you use it the way it should be used. Yeah, that's a really great way for office management. To determine whether or not you're actually wasting more time working than you actually are working.

David:

Yeah, I like that. I'm gonna do some homework on that thing.

Cool. I appreciate that.

All right. Let's see here. Um, I don't know if I want to get into that one yet. We'll get to that one in a second.

Any big myths about taxes that you hear a lot?

Brandyn:

Sure.

So one that, you know, was true, was 2019 now. 30 years ago, was the home office that actually people used to be really nervous about if you have some older school type CPAs or accountants working with you on taxes, they might try to dissuade or sway or discourage you from taking a home office deduction if you have a real estate property, your business, right. And the reason why is because 30 years ago, think of the technology differences between then and now. It was almost impossible, really to have a good working home office in the 1980s.

But in 2019, it's, you know, my cell phone is my office half my day, right? So it's not an audit risk. A lot of people that are older like to think that that's an audit risk, and they say, Oh, don't take that. I'll be okay, fine. You're leaving money on the table. You know, if that's what you want to do, by all means, that's perfectly fine with me.

20:00 - 25:00

Brandyn:

The other thing is selling property.

So a lot of times people will think that they don't necessarily need to report that I've actually heard that quite a few times. That's not the primary residence. But if you had a rental property, you just take some money in on the side, and you sell it and nothing about that ever gets on the tax return, you might get away for a while. But the problem with that is that the statute of limitations for the IRS to assess taxes on a tax return is three years, right. But that's if everything was reported properly. If you didn't, technically, that's a fraudulent tax return, there is no statute of limitations.

So if the IRS were really wanting to pick with you on a fight, you can have a big fight to have on your hands, and a big tax bill as well, too. So be sure that you're actually reporting everything correctly, you know, I mean, nobody likes paying taxes, or at least a lot in taxes, the whole point is to keep as much money in your pocket as possible, while paying out the least amount.

So that's, that is the goal in mind, then you just gotta make good decisions. Spending money is not a good decision. Spending money correctly is a good decision. And what I mean by that is buying things that are assets, or they're going to turn into deductions are going to create tax breaks for you. You know, just because you spend money doesn't necessarily mean it's going to do anything.

David:

It's like you recommending that I buy a solar system for one of my investments this next year. Yeah, a big expense. But I'll get whatever 30% of it back or whatever. Plus, it'll help with everything else.

Brandyn:

Right.

Yeah, there's a big tax credit right now for the investment tax credit, and it's going to be gone by 2024, I think is the last year and it decreases each year. From here until then by a little bit each year.

So I think next year, it goes down from 30% to 26%. And then it's like 18%, I think after that, and it just goes down a little bit further and a little bit further until it's like gone.

David:

Assuming I get my working capital back, I plan on doing that next year, cuz that'll cut now, not only is it a huge tax write off, but I also will get, I mean, it'll cover a thousand, 1200 dollars worth of my utilities.

Brandyn:

Right!

David:

No, that's pretty gnarly, to be able to do that and get a tax break. And there's actually a way, this is kind of crazy, but there's not a super sidebar, there's in my county, there's a program where essentially they will do your entire thing through taxes.

So it's a loan with I think it's zero down, but they'll do the entire solar system. And it's not least you own it. But it's basically the county pays you, and then you pay it back in taxes over the length of the loan. Which is really crazy. Because a, it's actually a really good interest rate, B, you don't have to pay anything out of pocket and C it stays with the property. So if I sell the property, I'm not on the hook for the solar anymore. The guy who buys it is interesting.

Yeah. And I almost did it last year. But at the time, I didn't have the equity stake and my commercial banker didn't want to sign off on it.

Brandyn:

Sure.

David:

But I'll be at that point in a few months. So I'm probably going to do that.

BRandyn:

That's not a bad idea at all, man!

David:

It's a cool way to look at it like a different strategy where it's like, Oh, you mean, I don't have to pay for this. And if I sell the property, I don't have to continue paying for it like that.

Brandyn:

Yeah!

Like that's, that's the icing on the cake right there in my mind.

David:

Yeah.

And you still get the 30%.

Brandyn:

Yeah.

David:

Or 26 or whatever. It'll be by that.

Brandyn:

Sure!

Yeah. Whatever that is, that's a good tax credit.

David:

Yeah.

It's pretty cool. Awesome.

All right. Okay, so we will dig into this one now. Because I'm intrigued. What can you tell us about cost segregation? And at what point do you think it's worth considering for property? So I asked that part because I had looked into it for my 10 units. And basically, I told like, not worth your time.

Brandyn:

Yeah.

David:

Open my eyes to realizing like, Oh, this is like once you get to a certain threshold level things. So.

Brandyn:

Sure.

So the first thing is what is a cost seg? So a cost segregation study, kind of think of it as when you buy a property, there's two types. So when you buy a real estate property, there's two types of property you get inherently, you get the building, and you get the land.

So that the land is section 1230 one property in the building of section 1250. So when you buy it, let's say you buy a property for $400,000, well, part of that goes to the land, it doesn't depreciate, it keeps the same basis the whole time until you sell it. And then the other part of the money that you spent to purchase the property goes to the building.

Now in that building, obviously, there are other things like carpenting, electricity, or you know, electrical wiring, plumbing, ah, you tend our appliances, countertops, all that stuff, right? That's all in there. But you don't get to separate the cost that when you initially buy the property, it just all gets into there and over the next 27 and a half years, if it's residential, or 39 years, if it's commercial property. You get a depreciation deduction each year, and it's a standard amount. It's straight lines about the same amount every year except for the first and last year.

25:00 - 30:00

Brandyn:

With a cost segregation study, what they'll do is they'll take that 1250 property the building, you'll actually segregate all the different costs that are in that property and speed up depreciation. So instead of let's say $300,000 worth of depreciation that gets taken over 27 and a half years, after the time they do that, they say, Okay, well, what we think out of the 300,000, 180,000 of it is all 575 year property and seven year property, so you're going to get way more depreciation way up front, and then on the back end, you get a little bit less, because only 120,000 goes to the building 180,000 goes, the property has flowed off like real fast.

So it creates a huge tax loss, which is great. If it's not going to get you to go over $25,000 in loss or your real estate professional. The reason I say that $25,000 loss for the year is because unless you're a real estate professional in the eyes of the IRS, you can't take more losses than 25,000 per year, it just gets carried over to the following year. So let's see, I did a cost segregation study to decrease a $30,000 tax loss. I want to take 25 now and then five years, or five grand will get carried over to next year, it's 2020.

And then the second part about that is your adjusted gross income. So if your adjusted gross income for the year is $100,000 or more, you may not want to do that, because then you're going to start to phase out that deduction. So for every $2, over 100,000, that you make for the year, you lose $1 of that $25,000 special allowance. So once you reach 150,000, in gross income for the year, that deduction is gone. So it doesn't even matter if you did a cost segregation study, the only way out of that is the last option, which is a real estate professional. And in a nutshell, because that could be a whole episode in itself and the real estate professional. But in a nutshell, more than one half of all services that you provide to all trades and businesses have to be in real estate. And you have to have more than 750 hours of services provided to each real estate activity. And there's seven different kinds, there's quite a few of them, you got like constructing, reconstructing, developing, redeveloping, acquiring, or acquisition, renting, or there's a couple more, so they're all different, right? So you have to do all of that, for each one of those types of activities for you to be considered a real estate professional, then you can take way more, you can take what's called at risk. So whatever your amount invested into the property is, you can take that loss.

So most people that are going to be either working as a W two, somewhere either part even part time, or full time where if you're military, you're definitely not going to qualify for that real estate professional. So you probably would not want to take that cost segregation study, because it's probably not going to get, you know, because it costs a couple $1,000 at least to do one, and you may not get any benefit out of it anytime soon. So it just depends.

David:

Yeah, I’m glad that we touched on the real estate professional piece too, because that'll hopefully be me in two years.

Brandyn:

That long gone, man that that habit he got in the habit. Now that was the other part that I forgot to mention before is just the habit is a good thing. So even if you're not a real estate professional now, if that's something you intend to be in the near future, if you make the habit successful now, then when you actually are a real estate professional in the eyes of the IRS years later, you're not going to have a problem. You'll already have good behaviors.

David:

Yeah. Yup yup. Gotta be on my best behavior for the IRS.

And with that, I'm going to take two seconds to preface my story that I mentioned earlier before I asked you this question. And that is essentially that in 2000 it might have been 12. I don't know. So a buddy of mine was like, Hey, I got my taxes filed at this place. The guy was awesome. He's given, you know, a $50 referral. If you do your taxes and say that I referred, you're like, Oh, great. Cool.

So I met this guy, supposedly IRS, Marine, whatever. If you're familiar with Camp Pendleton, or for those of you who are it was the Old Main side met him right outside the Wendy's area over there. We sat down and I don't remember where I did most of my preliminary questions. I was just W two guy didn't didn't know anything. about taxes. He sent me a report. I know three weeks A month later, two months later, whatever, saying hey, you know, here's everything. Here's all the data, I just need to sign this yet. Look through it. Everything looks great.

So I sign everything and say, yeah, sign me up for direct deposit, no big deal. So I got my check. Great. But apparently, and this is where I messed up and where I will never mess up again. This was free for you know, it's very cheap for me. So whatever. I guess after the fact he changed some stuff and essentially claimed $4,000 worth of education credits, which I think is the max, really, and then set it up to where the original deposit amount went to me with the additional deposit amount. So it wasn't till four years later, three years later on recruiting duty when the IRS came knockin saying, hey, you owe us this much money and it was saying I don't remember how much it was after interest, but it was three or $4,000. I think, Oh, yeah, like maybe five. I mean, it was enough that at the time I was like, Ah, I'm screwed. My life is over.

Brandyn:

Yeah.

30:00 - 35:00

David:

And I met with a CPA. This is like, right when I was getting into real estate, so right when I started to kind of understand taxes, and basically we called the IRS, me and the CPA and confirm that the only way I was getting my money back was at gunpoint because they had my signature on the form, even though he had changed stuff afterwards didn't matter, you know?

So anyway, so my question with that is like, hey, at what point is it worth paying for a CPA vise filing on base for free? Or how do you know if someone's legit?

Brandyn:

That's a great question.

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Brandyn:

So the first thing is if you just have like maybe a primary residence, so W two income, maybe a little bit interesting dividends, honestly, there really is no need for someone like me to come in your taxes, you could do them for free with military onesource. That's how I used to do. And you know, as long as that's all your money, that you make it and maybe a creditor to you know, they got a kid or something great, then you're probably not going to mess up, I won't say that you can't guarantee that stuff, but you probably won't.

But if you own real estate property, or you own a business or anything like that, the thing that I noticed most people mess up is that they leave things on the table that they just didn't know about. Or you know, the biggest thing is depreciation, right? So if you have assets or real estate, depreciation is kind of like the bread and butter, especially for rental real estate. That's the whole point of it. A lot of people don't take depreciation. And the issue with that is twofold, one, that you're gonna pay more taxes right off the bad by not claiming it. And then two is when you go to sell that property, there's a thing called the Unreal capture tool 50 gain, what that amount is. And this is where they get you the greater of the tax deduction taken for depreciation or allowable.

So if you didn't take any depreciation on your rental real estate property, but it was an allowable depreciation deduction, because it was an asset, you're gonna pay the bullet twice, you know, you're gonna pay it when you didn't take it and second when you sell it. So that sucks, right? You know, if you didn't have someone that was qualified telling you about these things, you know, that's worth way more than anything, I'm going to charge you to do a tax return. You know, that's the whole point is, when you hire someone there should be the value that they provide should more than outweigh what you're getting back, whether that's through advice and guidance and knowledge, or actual cash back, you know.

David:

Oh, sorry.

Brandyn:

No.

David:

I was just saying that it was called the 12. The unrecaptured 12.

Brandyn:

1250.

So that 1250, remember, we talked earlier about the properties. When you buy there's 1245, 1250 and 1231. That's all 50 was that real estate property, the building as the depreciation you took on that building, and if you sell that property, you have to pay taxes on all the depreciation that was taken are allowable. So that's really important to know.

David:

Yeah, especially if you didn't take it and now you're like you said, that's essentially like saying, you know, hey, I'm gonna give you rent, but I'm not gonna live here.

Brandyn:

Yeah!

David:

You're losing twice here. You don't have a house and you're not, you don't have your 500 bucks.

Brandyn:

Then verifying who you're using. So I am not a big fan of those big box places like h&r block or Liberty tax. And it's not so much because they're a competitor I don't really see those guys as competitors. And the main reason why their clientele is totally different. They don't go after businesses and corporations and partnerships and real estate because they don't know that the people that do your returns at h&r block and liberty tax and all those little shops, they usually get like a six to eight week course on basically how to use the software, they get a little bit of knowledge. There might be one EA or CPA in that whole office or region.

So the person filing your return is probably not really a tax professional. And you'll probably see that they're called tax specialists or something which is like a made up thing. It doesn't mean anything right. You know, it doesn't exist. It's like the points on whose line is it anyway, it just doesn't matter.

35:00 - 40:00

Brandyn:

So my recommendations. And it's not always a guarantee is a CPA, an enrolled agent or tax attorney, or my favorite type of, you know, individuals that are professionals that you would use for your tax returns. Of course, just because you use somebody that's licensed doesn't guarantee that you're not going to get the best possible service.

Service is service, you know, if you go to a game and get your haircut, right, you might go to the same type of store, like great clips at two different locations, your haircuts are going to be wildly different, probably from those different people.

So you know that then ask them questions about your investments, or your property or buildings or your business, you know, if they are able to give you a really quick answer, a very simple answer that you can understand, they probably don't know. And that's usually how I go about vetting other people, when I ask them to do things for me, if they can't explain it, so I can understand it. Nahh, you're not my guy.

David:

I like it.

I agree. If it's not that simple, that's, I won't dig into it as far as what it is. But there's an investment strategy that some of my friends have started doing. You know, using whole life insurance or whatever.

Brandyn:

Oh, yeah.

David:

And, and none of them have been able to explain it to me in a way that is understandable. So I'm like, yeah, it might be great. But I don't want anything to do with it until you can break it down to where I know what you're saying.

Brandyn:

Right.

I have the basics of that understood, is not my specialty, because that's a different thing, right. That's finances. That's financial. That's not tax. Yeah. I mean, there's tax implications with it. But doesn't mean I know everything about life insurance, by far, I definitely don't. But I understand some of the basics.

David:

Yeah.

Yeah. It's kind of like I understand the concept. But it's kind of the same thing. Like, if you can't break it down this easily for me, then it's clearly not something I want to dabble with, I like to understand at least the basics of what I'm messing with.

What should we talk about in regards to capital gains tax? What do you think would be some good points on that, that people should know?

Brandyn:

Sure. So I would say with capital gains, there's two kinds, first of all, they're short term, and there's long term.

So short term is if you hold the property for at least exactly one year or less, and then long term would be, you know, one year in a day or more. So the long term capital gains is generally what you kind of want, because the tax rates are better. They're either zero, they're 15, or 20.

The short term capital gains are whatever your marginal tax rate is. So if that's 32%, well, there's your tax rate for short term capital gains, so it's going to be expensive. Now, with long term capital gains, there's really a lot that you can do with it, especially now, there's a thing called qualified opportunity zones, you can dump your long term capital gains into not pay taxes, until maybe years down the road, if ever, actually, so there's a lot of strategies out there, you can use your long term capital gains, if you know what they're up what's out there and how to use it properly.

The second thing is that timing, so if I'm going to sell an asset, and I know it's going to add money to my gross income for the year, and I know my married filing, or married filing joint, or from single or from head of household what our gross income is expected to be for the year, if you can time it just right, you might not even pay capital gains taxes at all.

So the 0% for married filing joint, you can have up to $78,750 in gross income for the year, and not pay any capital gains tax on any, any asset you sell. You know, and then single, for example, is about half its 39,375. At a household is, let's see, what was it like 50 to 750. So if you know those type of numbers, and you know, at least know where to look and look them up, and how to determine whether or not it's gonna apply, you know, you can make a really good business decision right now, or you could kind of sit on it and not realize that you just walked away from something where you didn't pay any taxes.

You know, generally speaking with time, velocity, money, cash is better now than tomorrow, you know, granted that it's relatively going to be the same amount.

David:

Yeah.

That actually just sparked another question for me in regards to capital gains, which is, if you can explain the loophole that exists. I don't want to say loophole, that's such a click betty word. But you know what I mean. We all know the rule, every real estate investor who's read any book understands that if you lived in a house for two of the last five years, cumulatively, you don't have to pay capital gains tax up to, you know, $500,000, or whatever the number is spending on whatever.

But I know there's a loophole for military guys. And I don't want to be the one to ruin how I articulate that. So if you could expand on that.

Brandyn:

Yes, section 121 subsection 9, actually.

David:

Already sounds better than I would have been explaining.

Brandyn:

So if you wanted to look it up, you know where to find it. So Internal Revenue Code 121, section 9. What that is, is if you're single, you can exclude up to 250 actually anything but married filing joint, you can exclude up to $250,000 of the capital gain on sale of your primary home and if you're married filing joint, it's 500,000.

Now the way to make that work for you is you have to live in the property for at least two out of the most recent five tax years. However, if you're military and you're on extended qualified official duty, so PCs, TV, why deployment, whatever it is, right? That window goes from instead of five years up to 15. You know, it doesn't make it immediately 15. But it goes up to 15.

40:00 - 45:00

Brandyn:

So let's say I go live in Fort Carson for two years, and then I PCs to drum and then you know, Hunter and wherever and then 11 years later, I decide to sell that property that I've kept as a rental back at Carson. And all these years. Any depreciation, basically, the gain on the sale of it is going to be a wash, you don't pay taxes on that.

One caveat, I will say is that you don't get to walk away from that thing called the Unreal capture 1250 gain. So the depreciation taken or allow you still are going to have to pay taxes on it. But the maximum tax rate you pay on that is 25%. So let's say you're the top highest earner 37% tax rate, right is what your marginal tax rate is. If you sell a property and you unrecaptured 1250 gain, you still need to pay 25%. So it's not going higher than that.

David:

I would just like to pause for a moment and say that the fact you utilize the word caveat correctly in a sentence. One of my favorite people who's ever been on this podcast because this Marine Corps world where people, you know, where they're like to caveat off what he said and then agree with it. And I'm like, yeah.

Brandyn:

I saw a really good Facebook meme about that yesterday, actually, it was like every Lieutenant ever and it was like to piggyback off the commander...

David:

Yeah, and they use caveats, like piggyback but it literally means exception. So it's like, it'd be like saying, you know, to piggyback off why he likes pancakes, screw pancakes. Like, wait, what? How does that? That one and orientated, right, those are the two words. And then there's one other that I owe irregardless, which is actually in the dictionary, but it's still stupid. So yeah.

Brandyn:

Nobody reads it, right?

David:

Anyway, all right.

Well, I love that I actually see. And here I thought it was 10 years. But it's 15, possibly, which is really cool. Because like my primary residence back in Missouri, I haven't lived there and four and a half right now. And I'm right now. So I'm past that window if I didn't have this exemption, because the two years is no longer a full two years in that five year window.

Brandyn:

Exactly.

David:

But I'll be in the military in two years. And if I move into the house, great, if I go house hack and Wales, and we decide to sell that house, I it's just nice to know that as long as I do it in that window before I'm out of military or whatever, that I want to make apple gains on it, because that saves me money.

Brandyn:

One of the cool things to actually have this come up this most recent tax season, which threw a little bit of a curveball made me do some research is somebody was like, Well, I'm not in anymore. But that exact thing happened, right? They lived in a property for two years. 11 years later, they got out of the military, they wanted to sell or they sold it right. And I was like, let me see what I can do for you. And I went reading further and further and further into the code and I was like, are you reserve or national guard? He's like, Yeah, actually, I'm reserved from like, there you go, you still qualify. Because the definition for what qualifies as a standard official duty is any US military person on orders, whether that's reserved National Guard, or active.

David:

That's cool.

So if I go into the reserves after these two years, which is kind of my plan, I'm not throwing that benefit out the window. I still, that's cool. Yeah, that's really cool.

Brandyn:

It's like a little cheap way of definity. I guess when you think about it.

David:

Yeah.

And I mean, while that might save me a little bit of money here in Missouri or whatever, that's huge for people who lived somewhere like most, you know, San Diego, Hawaii. I've been in this place for like 12 years, and over the last 10 years, that place may have appreciated 4 or 5 $600,000. That's a lot of tax and not have to pay.

Brandyn:

Yeah, no kidding.

David:

Cool.

Well, look at that. He messaged me to say that he's got about 10 minutes left, right as I was gonna roll into wrapping things up with questions. So that works. I like it.

And you're the first person who's ever done that in a chat. I've had people like run log on podcasts before and not even like thought to mention it up, mentioned it before, so I appreciate that.

Brandyn:

Actually I just yeah, cuz I've got a little one. I gotta get ready to take her to go out and run some errands here soon. So I just wanted at least give you a heads up. I know I can talk about this shit forever. Seriously, it is so dorky. Because people are like taxes is so boring. It's like, yeah, it's boring. If you want to waste your money, you know, like, you don't need to be a tax expert to at least be able to use it as a tool.

You know, there's a good saying that the IRS is not your friend. But the Internal Revenue Code is and that's a fact. So the Internal Revenue Code, its treasury regulations, its rulings all that different stuff is out there. It's public. It's free. You don't have to pay to get it right. The IRS is very good, and publishing all of their stuff. So that way, they can't come back and say, well, there was no way for him to know we can't make him pay taxes. So they publicate everything. thing, you know, as long as you know where to look for it, and you know that it's actually a substantial authority position. That's what that's what you need, you know. So learning even the basics make a big difference.

45:00 - 48:32

David:

Awesome.

Do you have any resources or books that you recommend on the subject for anyone? Is there anything you think is a good, good one to read?

Brandyn:

Sure.

So I would say my book!

Well, I've got a book called the Entrepreneurs Handbook, and it was a Amazon bestseller a couple months ago for about a week or so. And a couple different categories. So you can actually go to my website, and bmcaccountingllc.comm. there's a spot that'll take you to the Amazon link, as well, too. Or if you reach out to me, because you saw this podcast, I'd be more than happy to just send you a free PDF copy too instead of paying the 695 for an Ebook, or I think I think it's like 17 for a paper copy. You get a free PDF. If you let me know you. You've seen it through Mr. Pere’s wonderful podcast here.

David:

Awesome.

I appreciate that. And we will, I will be sure to link to all of that down below. And I will definitely link to both the book and to your website. So they can find that.

Is there anything we missed? Anything you think that is like a must know? Or a last minute tip that you'd like to share?

Brandyn:

Yeah, I would like to share one thing.

So if some of the stuff that you've learned over the course of the last, what, 45 minutes, we've been talking, and you go, oh, man, I've jacked up some returns, like you're self repairing or you're like, I don't think my accountant said anything about this or notice there, you've got three years to file like to go back and claim for a refund. So right now you've got until either when you file the return, or the due date of 2016 return. So you've either got to probably April 15 of this coming year to file and get a claim for a refund in 2016. Like, let's say you forgot to take depreciation for the whole time you under property. But you can go back to 16, 17 and 18 and do an amended return and get that money back. So it's not gone forever. Anything past 15 generally is past the three years would be but you know, it's not a total loss. I mean, you can kind of recoup some of your losses if you made a mistake in the last couple of years.

David:

Yeah, that's huge, especially for those people who did not utilize depreciation. That's a lot.

Awesome!

Well, Brandon, I know you already met your website. But once again, if you can plug where people get a hold of you, and then we'll wrap this up.

Brandyn:

Absolutely.

So it's Bmcaccountingllc.com, and then my email is just my name, Brandyn@mcaccountingllc.com.

My phone has my email on it. And it's pretty much another arm and my body. So if you rate me, I'm probably gonna write you back pretty darn quickly.

David:

It's true. He's good at responding.

Awesome!

Hey, well, thank you very much for joining us today, Brandyn. I'm sure I mean, not only is this going to be interesting for some people, but this is, I mean, legitimately gonna save people 1000s of dollars this year. So.

Brandyn:

Yeah, I agree.

David:

That's cool.

Brandyn:

It's a pleasure being here David. As always, nice talking with you, man. I get cashed up too often. But here and there, we get to cross paths and it's always fun.

David:

I appreciated it.

End:

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