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by | 16, Apr 2022

Key To MASSIVE Tax Benefits

It’s still everyone’s favorite time of year, Tax Season!

So for today’s episode, we come to you with a story! A while back, we were working on a deal and had an investor come to us with a problem…

They needed roughly $200,000 in depreciation… that’s a hefty tax benefit and hefty goal. Well, we figured it out! Not without the help of multiple CPA’s of course! We are not tax experts after all.

Join us as we discuss the tax benefits of depreciation, and how being a limited partner or a general partner factors into the benefits.

Find out all of this, and more, on another episode of Multifamily Investing Made Simple, in Under Ten Minutes.

Tweetable Quotes:

We can be flexible and come up with a solution. That’s one of the great things about being a small scrappy company. We can find a way to make the deal work.” – Anthony Vicino

“You can do one or two deals a year that you’re doing as a JV, just for that depreciation, and then do a bunch of other LP stuff to actually make money on.”  – Dan Krueger

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** Transcripts

Cutting a HUGE Tax Bill

[00:00:00] Anthony: hello and welcome to multi-family. Investing made simple to podcasts. It’s all about taking the complexity out of real estate investing so that you, my friend can take action today. I’m your host, Anthony Ticino of Invictus capital joined by Dan

[00:00:25] Dan: the tantrum. Um, for you listeners that weird knowing this was me having a visual tantrum for the viewers.

This guy can

[00:00:35] Anthony: handle himself. And if you want is where, how does cocoa have a tantrum? Does she throw she

[00:00:40] Dan: actually, she throws like the mildest. She’s like the most chill baby, like her upset. She only like really cry cries if like it’s like once in a very blue moon. Serious problem. Um, define

[00:00:54] Anthony: serious, like interest rates are rising.

Yes or[00:01:00]

[00:01:00] Dan: no, like teeth

[00:01:00] Anthony: hurting, Elon Musk buying Twitter. Okay. With that actually there’s an, a board, right? He’s on the board of what? 9% or something that should make Twitter better. I’m cool with it. Um, everything he touches seems to get better. So maybe Twitter can not say, put him on the board of everything.

Yeah. Bet you guys didn’t know that he doesn’t know. He doesn’t

[00:01:19] Dan: know that either. You’re putting his name on things

[00:01:25] Anthony: that might get us sued. We’re not really, that was not actually on the board of directors or anything like that. So just don’t add us. Anyhow. Let’s, let’s get to the meat of today’s entree. Um, a couple of years ago we helped an investor say.

I don’t know exactly what the number was, but let’s say $250,000 in taxes. Yeah. Here here’s let me lay the groundwork. Um, we were closing a deal. I think this was granted Goodrich was granted Goodrich. Okay. So this was November, 2020. We were closing before the end of the year, I got a buddy comes to us and he’s like, Hey, I got like [00:02:00] $200,000 of, uh, if I don’t wipe this out, I need appreciation.

If I don’t want this, I’m going to have a big tax bill.

[00:02:04] Dan: I think the tax bill was about 200 K that’s what it was.

[00:02:07] Anthony: And so he’s like, I need $200,000 a depreciation. Good luck. Okay. That’s a lot. Um, yeah, so, um, with about only a couple weeks, Before the end of the year to get this thing done. Uh, we scrambled and having conversations with his CPA or a CPA and found a pretty interesting solution that we had never known it wasn’t on our radar before that.

Um, so we want to share that story and the solution that was, that was found. Um, that was interesting. Um, but then we’ll also share a way to get it done easier, um, at the end way, way easier. And then, uh, before we do any of that, just remember guys, we’re not tax advisors, this is not tax advice. It’s not financial advice or anything like that.

We’re talking taxes over here only through the scope of our very limited experience.

[00:02:57] Dan: Yeah. We’re just telling you a story, telling your story to [00:03:00] us for. Entertainment purposes.

[00:03:02] Anthony: Yeah, that’s it. And we may not actually tell it entirely accurately because it’s been, it’s been awhile. It’s been two years. And so our minds are foggy.

Like, have you seen

[00:03:09] Dan: us? Yeah. I try to forget everything immediately after it happens, find it just keeps life more interesting. But yeah. Um, yeah, let’s, let’s kind of explain what the heck’s going on here. So for, for most, for those of you that don’t know, uh, commercial real estate and in the residential space, anything above five units, you have the ability to accelerate depreciate.

Which means that instead of dividing up the value of the building over 27 and a half years for apartment buildings or for different type of property might be, you know, 30 some years, uh, instead of taking that depreciation over that long of a timeline, you’re able to accelerate that and actually take the vast majority of it.

And the first year was something called bonus depreciate. And so we do that on all our properties because it gives a great tax benefit to our investors. And for that reason, a lot of people when they need to clean up a tax bill look to real estate, and that’s what, uh, our, our buddy did with this, uh, [00:04:00] situation.

So he came to us, like you said, and a couple of weeks before we’re closing it’s November and he had. Less than six weeks to get this all squared away. So he didn’t know the IRS 200 grand. So

[00:04:10] Anthony: here’s the thing is when we, this was a syndication and we had this thing fully funded, um, and we were done, we were done like we were, we were through, there was not any more.

There was no more room in the deal. Okay. And

[00:04:21] Dan: all the paperwork, all the dogs, everything was done in this guy. Wasn’t

[00:04:25] Anthony: in there. And we had this. Yeah. This, this is bringing back some bad memories. Not just like you’re getting triggered. Now. You’ve ever had to have a legal team, like rewrite. Within in December before the end of the year, it sucks.

The whole thing. In a syndication, passive investors do get to, you know, benefit in the depreciation, but it’s usually pro-rata to their level of ownership. So let’s say you invest a, say a hundred thousand dollars and the capital raise is $1 million. So you own 10% of the LP. And let’s say the deal is 75, 25 to 75, going to the LPs.

That means you probably own [00:05:00] somewhere around seven or 8% of the entire deal, which entitles you to about seven or 8% of the. Alright.

[00:05:06] Dan: I think that was, I think, a simpler way to explain it is typically people see about on the low end 45 to 50% on the higher end, 60 to 70% of whatever they invested coming back as a loss on their Kaylon.

That’s typically what happens if you put it on a hundred grand, you might see 50 or 60 grand of

[00:05:20] Anthony: losses. So you can imagine in this situation where the guy needs to wipe out 200,000, let’s say I, those numbers he’s, he’s gonna have to put in like 800,000. Is that my math? Right? No, no. What’s that? Oh, 400,000.

Sorry, carry the one. Never do math in public. It’s bad. Anyways. So he would have had to put in like, and the capital raise itself was only like 1.5 million. So he wouldn’t pay, like we already had the deal full. Like there was no way that that was gonna happen. Um, so we were like, well, what else could we do?

And the solution that was found was, well, we could bring him into the GP, which we didn’t want him to give up GP shares because that’s how we get paid. Right. Like, so to bring him in, [00:06:00] we needed to make it very nominal amount. Um, so I think we gave him like, It was less interesting. Yeah, it was a very, very, very small fraction of the GP.

Now, as coming into the GP, we are able to funnel our depreciation, the depreciation that we would have been entitled to, which on this deal would have been about 30% of it. Right. Let’s say the ownership split was 70, 30 or 75, 25. Um, so we could funnel that all to him. So he’d get all our depreciation, which would go a very long way to helping him cover the thing.

Now, the nuance here. And I don’t remember exactly what the verbiage was, but effectively he had to carry a risk in order for him to participate in the GP and us to be able to funnel the depreciation to him. So he actually needed to indemnify us. So Dan and I are signed on the loan at the bank, which has recourse.

And so what he pretty much did is wrote a side letter that says, Hey, I’m indemnifying. So if they default on it, like you can come after me. And I’m, it’s pretty much a double record. Yeah. There needs

[00:06:59] Dan: to be a, [00:07:00] there needs to be a risk of loss in order to get the benefit of depreciation. That’s really the, the, the IRS nuance that you need to have.

So either you put in capital like an investor does, and they get their pro rata share per how much capital they put in, or, uh, they take on some other risk of loss in this case, uh, him signing on the loan or, or, or, you know, site effectively guaranteed the loan. On our behalf and taking that risk off of our plate and onto his now we already had a bunch of depreciation from other stuff coming in the series of like, I mean, yeah, we don’t really need the depreciation on this one deal.

Why not let’s do it

[00:07:31] Anthony: actually in hindsight, it turned out. I did need a little bit. Yep. I actually got, I got a

[00:07:35] Dan: little bit burdened in all this because that’s a

[00:07:37] Anthony: trigger episode for you, but you know, we try to lead with value. That’s one of our core values. That’s what it is anyways. So that was a very convoluted structure.

And what was interesting about the indemnification? I think we signed it only for two years. So it actually lapses and like there’s an option, there’s an option to exercise it or for it to, to disappear, um, so that he can get out of the deal or whatever. Um, so that’s, [00:08:00] that’s a very convoluted way to execute what we did.

And that was a result of the timeline. The syndication, um, the very much easier way is just to do a joint venture and as a joint venture, if it had just been me, Dan and this other guy, Then we can just funnel all of the depreciation in the deal to him. And so if you’re somebody who has like, maybe you’re a real estate professional, you have a spouse because this is how the conversation came up today.

I was talking to somebody who has a wife who makes half a million dollars and he’s like, well, I’m a real estate professional. I want to wipe out hers. I was like, you should be going to do. Cause he was thinking about being a passive investor in syndication. There’s better ways to get the appreciation than just that.

Go do a joint venture with somebody, get all of the depreciation because maybe they don’t need it. Go find a partner that does. And then use that to wash, wash out. So

[00:08:46] Dan: yeah. Yeah. You can do like one or two deals like that a year that you’re doing as a JV, just for that depreciation and then do a bunch of other LP stuff to actually make money on

[00:08:54] Anthony: it.

Yeah. And you got to find the right operators, right. People to partner with. We actually do a number of these. We don’t talk [00:09:00] about it a ton. Um, not specifically for this purpose, but we do a lot of smaller JVs with our investors when they have 10 31 money or just other reasons like other nuances in their life.

Um, we can be flexible and come up with a solution. That’s one of the great things about being a small scrappy company. We can find a, find a way to make the deal work.

[00:09:19] Dan: Yeah. We have the time to do it too. And the

[00:09:21] Anthony: desire except for when Anthony gets a tax bill. Yes. Anyways. So that is how we saved one of our investors.

One of our friends, uh, over $200,000 in just period full-stop and taxes. Yeah. It was pretty awesome. It felt good. It’s a lot of work though. A lot of work. I don’t know if I did it again. And if you came to me in December, I probably not going to do it again for you guys. Give me more time to figure that out early August.

Yeah, maybe June. So that’s going to do it for us guys. If you’ve got any value out of this, and if you’ve got a new game plan that you can go and hopefully save on some taxes, then you owe it to us. You owe us $200,000 or. Let me get a special [00:10:00] one-time offer. Go leave a review on iTunes and we’ll call it good.

It’s a pretty good deal. Pretty good. Yeah. I’m not going to get that deal again. So good. Take me up on that. Go drop a review on iTunes. Let us know how much you love or hate the episode and we’ll see you next week.

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