The tax benefits of real estate investing are one of it’s most attractive aspects. And we’ve spoken about these benefits many times… but… how much do passive investors benefit?
In the last week we hit an Apple Podcast Review milestone, and we were pretty excited about it… until we saw the most recent review.
It wasn’t our typical 5 star review… but they did bring up a good point! In one of our previous episodes, we discussed the tax benefits of real estate investing and how depreciation played a role in those benefits.
The person who left the review brought up a good point that we didn’t cover… depreciation recapture.
So, in this episode, to get that 5 star review, we are going to discuss depreciation recapture and how much passive investors actually benefit from the tax incentives of real estate investing.
“You’ll hear people talking about how the tax benefits are are fantastic, but in reality, if you’re a passive investor, they’re good, but they’re not fantastic.”– Anthony Vicino
“We are not CPAs and so we specifically talk high level about concepts and we don’t get into the nitty gritty.” – Dan Krueger
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[00:00:00] Anthony: Hey, what’s up guys? Welcome back to the podcast. I got really bad news for you, Dan, today. Oh, today we’re gonna have to go into a dark place. I,
[00:00:08] Dan: I mean, I like the dark. It’s cozy. You can take a
[00:00:10] Anthony: nap, right? All right. That’s one way of looking at it. Yeah. Um, bad, bad news everybody. Oh, geez. Um, we got a review. I, we’re always asking for reviews, love reviews.
We love reviews. Always asking for ’em. And you know, sometimes you guys actually go and leave them and it’s fantastic. Uh, I think on iTunes we have 49 5 star reviews. Well, our perfect rating, um, is officially tarnished. Ah, yep. We have hit 50 reviews. .
[00:00:42] Dan: And was it all that Hitler stuff you were saying a couple
[00:00:44] Anthony: weeks ago?
Was that odd? Oddly enough, it was not the Hitler talk. Oh, that got us the bad review. Huh. Um, but we finally hit 50 rating or 50 reviews on iTunes, and we had 49 5 stars. Perfect rating. Thank you. Thank you. Thank you everybody that took the time to leave those ratings [00:01:00] and to listen to the podcast. That’s really cool.
We love you. And then one person came through. and they, they dropped a one bomber. One dinger. They dinged us. Dinged us real good. Now our average rating on iTunes is 4.9 Now. Okay, we could do a rant episode. We could, we could yell, we could scream, we could yell at this person and be like, you’re, you suck.
You don’t get it. You don’t understand us. We’re special and awesome . Um, we’re not gonna do that. But they did bring up a good point in their review that we’re gonna address here. We’re gonna unpack it because I think that’s a learning opportunity. And then two, . Um, if you disagree with this person’s onestar review, then we need your help to, to to, to write the wrongs and, uh, we’ll try and wash away this, this onestar blemish by.
Maybe just go over to iTunes and drop a few, uh, five bombers. But, uh, before we do that, let’s, uh, let’s talk about this review. Let’s
[00:01:53] Dan: do it. Should we read
[00:01:54] Anthony: the, read the review? Yeah. Yeah, let’s read the review. It’s not wrong. It’s really not. It’s quickie. Um, he [00:02:00] says this, these
[00:02:00] Dan: fellas that’s. That is
[00:02:03] Anthony: us did a whole episode on the benefits of depreciation, but not once mentioned recapture.
Perhaps they are not aware of it or just haven’t been investing long enough to experience it. Oof,
[00:02:16] Dan: so oof. Uh, he is correct. We did not mention it. Actually, I have no idea if he’s right.
[00:02:23] Anthony: I am gonna assume I didn’t go, I don’t know which episode he is talking about, so I don’t know the lens. Yeah, exactly.
Because he doesn’t tell us that. But,
[00:02:30] Dan: um, we should, we should check and I’m, I’m sure we didn’t. I mean, if he’s bringing up, we obviously didn’t, but I mean, something you mentioned, which I think makes a lot of sense, is the point of that episode was the benefits. No. You know, so we’re not, we’re not doing the pros and cons, you know, we were focusing on what’s awesome about it in that episode.
And I will, I should say, And I know we said this on the episode, we are not CPAs and so we specifically talk high level about concepts and we don’t get into the nitty gritty. And in, in that vein, I think we also just, you know, tread lightly on, on, uh, accounting [00:03:00] and tax topics. We keep it real, real high
[00:03:02] Anthony: level.
This one is interesting to me because, Uh, if we didn’t mention recapture, I totally understand why we probably didn’t like, didn’t think, think of it if we were talking about the pros and cons. But what’s interesting to me about it is I think that we might be the only group that talks about how the tax benefits of passive investing and syndications are overblown.
that generally when you’re out there in the social media landscape or listening to podcasts, you’ll hear people talking about how like the tax benefits are are fantastic, but in reality, if you’re a passive investor, the truth is like they’re good, but they’re not. They’re not fantastic. Mm-hmm. in the grand scheme, like, because you don’t get to take the depreciation and use it to offset your active income, which Right.
I think is, I just had an investor call yesterday actually with somebody who was really. , um, cuz he had seen something on Instagram about the tax benefits and he is like, Hey, I wanted to work with you guys. And I was like, listen, just so you know, like those tax benefits that you think you’re gonna be getting, we [00:04:00] can make it happen if your spouse is a real estate professional.
But it’s a hard, it’s a hard hoop to jump through. And so that’s one thing is I, I do believe that not many people are really talking about how overblown the benefits. .
[00:04:12] Dan: Yeah, no, I think that’s, that’s, uh, because it’s such a great pitch for investors, like, oh yeah, it sounds great. It sounds great. And there are a lot of really amazing benefits that you get as an active investor who qualifies as a professional real estate.
Uh, or I’m sorry, real estate professional. Like yeah, you can do the Trump thing where, you know, you make, uh, millions on the apprentice and then you get hundreds of millions of depreciation where your buildings and you pay effectively No, no tax. Like that’s a thing. It’s. . If you can check that box and say a real estate professional, then yeah, they’re, they’re amazing and you can’t beat ’em.
But for the LP, it’s just a lot better than a lot of the other stuff you could be doing. It’s not like you’re getting a get outta jail free card for your taxes. It’s just really efficient. Yep. And this is the way I explain it to our [00:05:00] investors. Is that, um, you know, if you’re gonna put some money into the stock market and pay capital gains, which is, you know, depending on how long you’re holding, it might be like 25% or something like that.
Um, you know, you might pay like 25% in taxes in the stock market over here, maybe like 10 to 15, just high level example numbers that are not reality, right? Not a cpa, but you’re looking at kind of taking an investment and doing it in a way where it’s more tax efficient, so you pay significantly less. , but you’re not like, not paying any taxes ever.
Mm-hmm. and you’re not washing out your personal income tax from your, your work, your, your, your, uh, active
[00:05:39] Anthony: W2 job. Yeah. And, and to this guy’s critique about, uh, depreciation recapture. One of the things that I think is really important to always remember when it comes to taxes is that there’s actually very few ways that you can just eliminate your tax liability.
Really what you’re in almost, almost all cases, what you’re doing is def. . Mm-hmm. . And you’re just trying to kick the can as far down the road [00:06:00] as you can before the, the tax man eventually gets us cut. Maybe you die and then you pass on your assets to the, your, your kin and they get to reset the basis.
That’s great. Not, you know, you have to die for that to happen, but the thing is, like the depreciation that you’re gonna be able to get as a passive investor or as an active investor, wiping out your active income or wiping out your, your passive gains on the cashflow distributions, that’s all temporary, right?
When we go to sell the building. The tax man come knocking and which is why you wanna make sure that you have like a, a plan for what to do when you exit the building, whether that’s through a 10 31 with, well it’s called a swap and drop with the whole syndicate. Or if you’re just own the building on your own, you know, or doing the poor man’s 10 31, which is to say you buy another asset in the same year that you disposed of the other ones that you can use the new depreciation to wipe out the old.
So it’s always this game of managing the, the tax can and never letting it settle in front of you, just. Kicking it a little bit further, that’s the game .
[00:06:59] Dan: Yeah. I think the [00:07:00] simplest thing for, for LPs when it comes to avoiding that, uh, depreciation recapture at the end, that that, that tax liability that you’re gonna have, like I said, if you look at all the dollars you make in a, a syndication, Uh, from start to finish, uh, compared to the stock market, it’s gonna be a heck of a lot better.
But just know that the first part of the deal’s gonna be really nice cuz there’s probably gonna be really no to very little tax liability. And then it’s all pretty much at the end, like that’s where, that’s where the liability comes from. So I think the easiest thing for most people to do is just enter a new opportunity that’s got, uh, the depreciation component in there with accelerated depreciation.
Um, you know, as long as we still get bonus, that’s gonna be kind of ticking down over the next few years. . Um, that’s the best way I think, because those gains that you’re walking away from are the, those gains that you had from the deal you got out of, that’s passive, right? And so you get to use those passive losses towards your passive income, not towards your active, but you can wash out a previous deal with a new deal’s depreciation.
[00:07:59] Anthony: Yeah, so that’s the [00:08:00] D appreciation and recapture. Hopefully we’ve righted the wrong and we truly do. Like all jokes aside, like we appreciate all the reviews that we get, whether they’re five stars or a one star. Like the fact that you guys are listening in and then taking time outta your day to give us feedback.
It means a lot truly. So yeah, hopefully you
[00:08:13] Dan: gave us a topic for an episode, which is totally Thank you sir. Even though it was a one-star review, we got a topic out of it. Yeah. Ho Hopefully
[00:08:19] Anthony: this, uh, maybe if you’re listening to this, whoever you are, um, maybe you go and you can bring that up to do star, I dunno.
Um. But hey, listen, like the, the, the whole, uh, maybe they just haven’t been in the game long enough to experience it cheap. Cheap shot. Yep. Getting a little personal there, ,
[00:08:36] Dan: you know, whatever. So love. Let’s end it on that note before we get on our soapbox and start doing. No, no,
[00:08:42] Anthony: no, no. I’m gonna end on an on different note, which is this five star review that came in from Mr.
Cedar. Do I don’t know who that is. Thank you. Says, says, Dan and Anthony do a really nice job to bringing pertinent continent to their listeners. I am not a guy who likes fluff. Don’t waste my time. Great stuff guys. Keep ’em coming. Thank you. Cedar Dew. I
[00:08:57] Dan: feel like we’ve got some fluff. I
[00:08:59] Anthony: mean, [00:09:00] but as long as the fluff brings value and entertainment.
Okay. Cedar D’s cool with it. Yeah. Because granted, the first maybe 10 minutes of the podcast is usually pretty fluffy. Yeah. Granted the first two minutes hardcore, you know, we’re just flying high. Yeah. Um, no adult supervision. So that’s gonna do it for us guys. If you thought that, um, you know, this person BW MPLS is.
Go drop some more one bombers. If you think he’s wrong, go drop some five bombers. Let us know and uh, we’ll see you guys in the next episode.