Taxes are an Opportunity
On this episode of Next Level American Dream, Abigail and Sean are joined by Josh Belk. Josh has been specializing in tax consultation, planning and preparation, business consultation and structure, and fractional CFO services since 1998. We are excited to share his vast knowledge of taxes, and how you can benefit from certain codes.
Key Topics
How can taxes be used strategically
What are popular tax tips
What are issues to watch out for in your personal and business taxes
Connect with Josh:
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SUMMARY KEYWORDS
property, investing, multifamily, cost segregation, clients, tax, depreciation, capital gains, people, benefit, single family rental, business, tax code, real estate, years, strategy, type, commercial property, investor, depreciated
SPEAKERS
Sean Thomson, Abigail Thomson, Josh Belk
Abigail Thomson 00:00
Welcome to the Next Level American Dream Podcast brought to you by Thomson Multifamily Group. Your hosts, Abigail and Sean, will discuss how you can take your American Dream to the next level through real estate investing, business practices, and personal development. Join us as we share our experiences as a father daughter duo who are trying to accomplish our goal of financial freedom. We hope you learn more about how to define and achieve your American Dream. Here's another episode of Next Level American Dream. On today's episode of Next Level American Dream, we are joined by Josh Belk. Josh has been specialized in tax consultation, planning and preparation, business consultation and structur,e and fractional CFO services since 1998. He often teaches and educates business owners and entrepreneurs on valuable information to help them remain compliant and scale their businesses. We are excited to share his vast knowledge of taxes and how you can benefit from certain codes.
Abigail Thomson 01:05
Hi, Josh, thank you so much for being on today. How are you?
Josh Belk 01:09
I am wonderful. How are you doing this morning Abbie?
Abigail Thomson 01:11
I'm great! Thanks for asking.
Sean Thomson 01:14
So Josh, you specialize in taxes and helping businesses and and produce better income and things like that, kind of tell us a little bit about what you have, what your business does and how you operate now.
Josh Belk 01:26
Sure thing, my company name Belkin associates, most of our clients. When I when I say most, I would say probably somewhere in the two thirds to three fourths of our clients are real estate investors. And it can run anywhere from somebody who has a small portfolio of homes up to those with with syndications to kind of really run the gamut everything from single family to the commercial side, most of our clients kind of fall within that five to $15 million net revenue space. So we don't have a ton of clients that that would have thousands of properties. For most of our clients. Usually, if they're, say, for example, their single family homes, they might have one to 200 properties. And then we really probably take a holistic approach. So we aren't just sitting there doing tax returns that type of thing, but really try to get into their businesses, most of our clients, we will have monthly calls with really work on tax strategy, as well as kind of spread throughout what's going on in their business to try to help them with with the day to day side as well. So you act a little bit like a CFO for a lot of people. We do yes, we do some virtual CFO work as well. But yeah, so we do try to fill in a little bit or at least help their their finance team internally with that component of their business as well.
Sean Thomson 02:34
Yeah, that's something I think a lot of small business really struggles with is that that a CFO seat is really kind of hard to fill, you know, for a small business for sure. Well, tell us a little bit, I guess it's we're gonna talk about real estate, let's talk about some of the tax benefits that you see for real estate that are kind of unique in real estate investing.
Josh Belk 02:54
So of course, it's a it's a pretty broad question and try not to get into the weeds too much here. But there are when we get into working with a client, many of the kind of the most foundational elements that we will look at, well, we first tried to figure out as far as what type of investing they're doing. So if they are for example, in wholesaling, okay, they could be wholesaling houses, or even fixing and flipping houses, there's not much difference between doing that. Versus say, for example, you know, the produce door across the street that we have as a client, you're basically buying, you know, buying, it's not really even an asset. I mean, it is but basically the item you're holding is inventory, you're turning around and you're selling it, that's active income, there's not really a whole lot from a tax strategy component as it relates when we talk about getting into specifics as it relates to real estate, we basically look at other avenues that any business owner that has active revenue would be looking at, where the where the greatest benefit comes is in those that have longer term type holdings, whether it's single family rentals, whether it's in multifamily, which of course you specialize in, or commercial type property. And so when we get into that, and there's a lot of tax benefit benefits that are there, which is why a lot of the wealthiest individuals in our country get into real estate. That's, of course, where our president now when he got into we look at Warren Buffett, we look into others, that's where a great deal of their wealth come from is in their real estate holdings. And most of that is in the longer term. And so when we get into the specifics of the tax strategies that relates to the most basic that we would look at would be the cost segregation strategy, which essentially takes a which would take a an asset. So we're talking about whether it's a single family home, whether it's a commercial property, we take that asset and we break it down into smaller components. Under the tax code, for example, you go through and you buy a single family, residential property for example, that gets depreciated over 27 and a half years. So part of part of the the purchase we would essentially apportion to land that does not get depreciated at all, then the rest of it we would essentially depreciate it. expense over over 27 and a half years, if it's a commercial property, that gets stretched out even longer, that's 39 years. So the idea of cost segregation is we take that particular property, and we break that down into smaller components. And so when you talk about depreciation under the tax code, you have some items that are five years, some that are seven, some that are 15. And then you have 27 and a half and 39 years, a couple years ago, with the tax cuts and JOBS Act, which kind of made a lot of changes that relates to our tax code, at least in the short term through at least the next five years. It allowed for accelerated depreciation for items that would fall in the five year seven year and 15 year buckets. So that would be furniture and fixtures, for example, land improvements. So when you go through and you purchase property, whether it's a residential property or commercial property, you can essentially break that down into components that anything from the drywall in, for example, can be it can be depreciated over five or seven years, any sort of land improvements can be depreciated over 15 years, with the tax cutting JOBS Act, it allowed for those items to be fully expensed in year one. So if you kind of think about it, you go through and you purchase a property out, most of the time, our investors are not paying cash, they're going out and they're getting alone. So they're going through and they are they're getting a loan on the property. So they're gonna be paying us off over time. But they're able to fully expense portions of their of that of that property immediately in year one, so they can go through and they can make an unlimited amount of money, and then be able to expense a portion of that property that otherwise they would not be able to in year one. So we can literally push them down from from a higher tax bracket down to a low tax bracket or paying no tax at all. And that's the one of the strategies that could be used.
Sean Thomson 06:50
Yes, efficient and cost segregation is that you kind of just ran through those there. So if you don't mind, let me unpack a little bit of what you just said. It's okay. Oh, of course. So depreciation and cost segregation is there. It's it's a it's an expense item, according to the IRS is this understanding? Right?
Josh Belk 07:09
Right. And we talked about depreciation, the the concept of depreciation, and whether we're talking about accounting, okay, or we're talking about tax, the concept there is is to kind of try to match income and expenses. So, one theory of accounting and accounting is a theory, I do want to kind of point that and point that out there it is a theory it is not fact. Okay. So it is something basically we look at it, we have kind of some of these arbitrary timelines. So the concept here is you go through and you buy a refrigerator for an example, which is an appliance what generally gets depreciated over five years, now you go May, you may go and purchase it in in year one, but the concept of depreciation is to match understanding that we're going to be using that appliance over X number of years, the same thing with a piece of real estate. And so somebody at some point, said that, okay, a single family rental should last about 27 and a half years. Okay, that's about the the timeline that we would expect this before we'd have to completely rehab this property. The same thing with commercial with 39 years. So the concept is to match the income, the revenue that's coming in the rents coming in every month or the lease coming in every month, against the the timeframe that you would use that particular asset. Okay, so that is kind of the theory behind depreciation. And so when it comes to so if we're talking about generally accepted accounting principles, there is no accelerated depreciation. Okay, that's on the tax side. So the everything that we find in the tax code is an effort to get the tax payer to act in a certain way. A lot of people view taxes as a problem. People who effectively use taxes view those as opportunities. So they would go through and say, Okay, well, we're How does the government want us to spend our money, and if we do certain things, then they are going to lower or eliminate our tax exposure? Okay, so with the tax cuts and JOBS Act, the point behind that was infrastructure spending. So to have the private sector, because I think for the most part, government understands that the private sector does a lot better at investing improving, as it relates to infrastructure spending, then the government does. Okay, we know there's a lot of ways there's a lot of those types of things. But if they give the incentive for the private sector to go through and do certain things, then they know that the end result will probably be better than if the government were to do it. So the the when so when we think about the tax code, it needs to be you need to kind of think of it from an opportunity. And so we do have clients that they would go through and they would utilize a cost segregation, I was something that is more beneficial. We could talk about opportunities owned, for example, and probably you guys may talk about this on another podcast. There are plenty of them out there that essentially go through and invest invest capital gains money and put it into basically distressed areas areas, in a better been defined as opportunity's own areas where you can put money in, you pay a little bit of capital gains. That's the first And then all the all the increases essentially tax free. And so this is also part of the tax cuts and JOBS Act. And so once again, to get the to get the investor to act in a certain way, and they give them a tax benefit for doing so.
Sean Thomson 10:16
Yeah, so me as an investor, it incentivizes me to maybe purchase new properties and and rehab them, or remodel them and put new products or new carpets and paint and things like that in those because then I get that benefit in the tax code. So that it doesn't hit me so hard in the pocket when I make those capital investments to improve properties or to renovate properties. So it's really beneficial on two sides in that I can take some of the money that I've invested, and not get a tax penalty on it, but then also have a nicer property that I can then rent to someone and they can live in. That's kind of
Josh Belk 10:56
That is correct. Yes, sir.
Abigail Thomson 10:58
So those are some of the benefits of capital gain, but you keep talking about depreciation, are there certain benefits as an investor and even more specifically a passive real estate investor that can benefit from depreciation?
Josh Belk 11:13
right, so the depreciation would would only come for someone who is a who is investing passively, and there's a lot of confusion on those terms. Okay, so when you have an active real estate investor, and an active real estate investor, and there's these timelines, these 250, our rules, our rule timelines that have to be mad, but if you're, if you're going through and you're investing, meaning that you're putting money into, into single family rentals, commercial property, that you are not turning around, and, and, and selling, that you're actually holding on to, that is where depreciation comes into play. If so, if you're going through and you're an active investor, meaning that you're going through and you're buying a property, you're fixing it up, and you're gonna turn around and sell it either retail or to a term key. That is not that is neither subject to capital gains, exposure, nor is it subject for depreciation, you're going to, you're going to essentially recognize at the same way, if you're, if you're, if you are an active real estate investor, you're gonna, you're gonna recognize that the same way as the guy just going through buying a widget turning around and selling it, okay, Walmart going through buying inventory turn around, and they're, they're selling apples, oranges, and wherever else they sell, okay? Right. So it's essentially handled the same way, capital gains is a little bit different. So capital gains is kind of that that middle ground. And Shawn, you kind of alluded to this a little bit here a moment ago, and there has been some, when you talk about, you know, 1031, exchanges, some of those types of things that would allow you for to take the capital gains that you have, and then turn around and essentially roll those gains into the next property and decrease the basis of it. Okay, so that is a different type of a different type of a strategy. So you have, so you have those that they go through, and they have a property they've held for a long period of time, they because they've been, they've been receiving rents over that period of time, they want to turn around and sell it to maybe step up and buy another property, for example, a larger property. And then you could use a 1031. For there are those that can go through and they'll go through without purchase a property, a new property that they're going to utilize as a single family rental, or as a multifamily or commercial property, then they can go through and do cost segregation, and that taking advantage of the depreciation on the front end on those particular properties. I hope that helps provide clarity at all. Yeah, essentially three different areas that that essentially kind of result in three different types of conversations, and three different strategies.
Sean Thomson 13:35
Okay, fantastic. So that, you know, for us as for us, the idea is to produce income. So our whole investing strategy is to produce income for ourselves and for the future. And the long term hold strategy for us is the most preferred. And it seems to me that that gives you just overall, as an investment strategy gives you the benefits of everything, you've got income, I've got appreciation of your properties, and then you just have tremendous tax benefits as well. So are most of your clients is that is that generally what most your clients aspire to do? Is the longer term properties or do you find that people are happy with the fix and flip business?
Josh Belk 14:16
Well, it is that's a that's a kind of a difficult question to answer. So when when an investor gets in, basically to have to figure out what they're good at the the long term hold, it requires a lot of patience, which flies many times in the face of somebody who has kind of an entrepreneurial spirit, they want to go through, they want to get something, they want to monetize this thing right away. They want to turn around, they're looking for the quick dollar to go and do something else. Which if somebody kind of goes into real estate investing without mindset, they're gonna have a real difficult time with the long term hold strategy. However, if you're going to want to really truly accumulate wealth, that is a strategy that has to be that has to be taken. There are very, very few and I know there's a lot of kind of this Sexy component, especially with, you know, with TV and all these others, you know, you know, flip this house, all this other kind of stuff. And if somebody is happy doing that, that's great. However, once you sell that property, you can no longer monetize on it. Okay, so you're going through, you're essentially, you know, you kind of have this golden, what could be a golden goose, and you just turn around, he just keeps selling it. And then you have people that are out there that okay, well, I'm going to buy that property, I'm gonna hold on to it, I'm going to utilize depreciation I'm going to understand I understand property to appreciate over time, and then they allow, essentially for somebody else to pay the mortgage. So they they put people in those properties, and whether it's a if you're talking about multifamily individuals, if you're talking commercial property, a business owner like myself, that would go in and we would lease this property, and essentially, I'm turning around, maybe for the investor, they're turning around, they're paying, they're they're paying, they're paying a lender. And that spread, they get to keep an asset, something to do over the long term.
Sean Thomson 15:55
So just tell us about some of the mistakes that people make early on or guessing or when they're getting started in their businesses with real estate. Some of the things they're not doing or should be doing or are doing that they shouldn't be doing. Some of the common mistakes that you're seeing your clients do with before they get to you.
Josh Belk 16:11
Well, I think the biggest mistake that we see is people not defining who they are, and what they want to do once they get into this. So once they get into real estate investing, what are they? Are they are they going to be a wholesaler are they going to be you know, the fiction flipper fixed and retail type of investor? Are they going to be a long term hold, because each one of those require a different type of strategy. They all require different type of processes, different types of business structure. And so when they go in, and they they say, Okay, I'm gonna find this property, and I'm just going to kind of figure it out as I go, what I want to do with this property, usually they end up losing money, okay, because there are more savvy people that are going to do going to take advantage of them. So kind of really understanding what their skill set, what are they good at? And then from there, what is their exit strategy on every property? So when they get into it, is it property? Am I going to look at this simply as a wholesale? Am I going to get into this property to be fixing, fixing, flipper fixing retail? Or is my objective to, to get into this for the long term hold strategy, understand that mindset, understand the processes and then improve on it?
Abigail Thomson 17:23
Do you have any strategies that an investor can use and going into that process of defining what they want to do?
Josh Belk 17:31
Well, I'm not sure exactly how to answer that question. I think for each person is going to boil down I think most First of all, to their own individual purpose. And maybe we talked about this here in a few minutes. I think when you want a question to ask them, you can find a question you're asked, we get into this a little bit. But why are you getting into this? And is it essentially to be a side hustle? I mean, do you have debt that you need to you need to pay off? For example? Are you just looking for a side income, that type of thing? And then understanding that understanding what are you good at and and then once you kind of define those, and then to build that strategy behind it, so you end up beginning to work with people get people around you that can help you to meet those particular goals.
Sean Thomson 18:11
I do fixin flip in my business. I do wholesaling. I mean, I kind of do everything really honestly, which is probably not what you recommend. But I specialize in all of it. So for me, I look at my business as an opportunity hunter slide, I've gone hunt for an opportunity, and then I try and seize the opportunity, right. And so as we're transitioning into multifamily for us, it's always for the last several years, and my business has always been about producing income and the only way to produce income, like you said, well, real wealth is that long term hold position of any real estate. So we have rental properties, you know, rental single family properties, and we're moving into multifamily now. And the idea is just that income and the wealth building, you know, the legacy, that sort of the legacy wealth is next for us. So I kind of do all of it it really, for me, I think a lot of guys they prefer to do just wholesaling. And you know, and I really don't like that business, I can do it, but it's not my favorite thing to do. So for me, it's always about income, how can I produce income for myself? And so I think while I do all those other things, I think my I guess if I had to say which but my specialization would be producing, you know, always looking for properties that produce income. So I think to me, that's the best that's the best one but everybody i'd like you said everybody's kind of different. And what they want to do.
Josh Belk 19:31
There are those who have, you know, effectively built teams around them. But usually when an investor first gets into it, you know, thinking about the process they'll go to a local local Meetup group because they're interested in investing in real estate, they get up there and somebody will talk about one aspect or another aspect and they get into this shiny object syndrome type thing here. You know, I want to do this I want to do this I want to do this. Yeah, that kind of focusing on Okay, this is what I want to do and then as your as your company grows, you know, I think about in any business as a tax professional, okay, when I first started out I was basically it We rented out a little closet and an office building and it was a closet cleaning thing out, it started doing tax returns in the evening for individuals in the area. Okay, it was a side hustle type of thing. And that as you know, as my skill set grew, and I began to bring on team members and allow for me to do more and different types of things. So now at this point, if you were to call my office to Hey, you know, I'm, you know, john doe, and I want my tax return done. No, we don't do it, well, we'll send you to another place. And so our business has kind of grown to that certain level. So Shawn, I imagine in your business, you've grown to be grown to the extent to where, okay, I figured out, I'm good at this, I figured out this process and figure out how to do this. And then you've grown to allow for yourself to do other things, and then kind of lift that lid within your business, as you bring on team members. And as you improve your skill set the skill set of your team.
Sean Thomson 20:43
Yeah, I see what you're what you're most comfortable with and what your specialization is, I guess.
Josh Belk 20:48
Yes, sir.
Sean Thomson 20:49
So I guess just to talk a little bit about, you know, we talked about conventional investing to some of our episodes, you know, stocks, bonds, mutual funds, and how they relate to real estate, talk about from a tax perspective. Because I think real estate is one of the best tax benefit investments you can make either active or passively, as we'll talk about, if you don't mind, some people that are near experienced are investing on the markets, and how they benefit differently from investing in real estate. And if you have an opinion on which one is more successful, or preferred, or something like that.
Josh Belk 21:25
I really don't get into kind of the financial consulting type of, you know, for per year, even, you know, through my conventional type of training is a real, he always heard that word diversification. I don't put all your eggs in one basket, that type of thing. Usually, for those that have accumulated wealth, yeah, they're not 100% invested in real estate. Okay, they do have a diversification of their portfolio. I was just reading here recently a blog, that daymond john gets familiar with Shark Tank, I think for those of us who are business owners who kind of get enjoy that, and then follow some of their content and Daymond John, I think we're doing an interview with Mark Cuban and two of them have become a relatively good friend over the years and, and of course, Mark Cuban, a very wealthy and successful individual, regardless of what you think of him personally, he has reached a certain level of success. He talked about this, because all these guys and gals on those panels are invested in real estate, they're invested in other businesses, and they have a very diversified portfolio. And he talked a little bit about this. And he was saying, I mean, he, of course, he basically told people, they should have about 10% of their investments in basically an S&P 500 type fund. And so a lot of kind of conventional wisdom is yes, it's still there and diversification. So you're going through, and then you're still putting some money into the stock market, and you're still putting money into maybe into more aggressive type areas, whether you know, it's precious metals, or Bitcoin, whatever it may be. And then, but I think bottom line for most people is kind of investing in what you know, is still there, for the most part, you're gonna invest in what you know, what you feel comfortable with, where you add in your, you know, your lifeline, if you're, if you're in your 70s, you don't want to be going through and investing in that device in your entire portfolio into into small cap bonds. Okay, I know already, you're gonna want to invest in long term real estate holdings, because you may not have a long term, you know, a long term, you're not going to probably not be here for another 30 years. Okay. So kind of where you at? What do you know, what do you feel comfortable with? And that they kind of use as a foundation as far as your investment strategy?
Sean Thomson 23:24
Right? Yeah. Okay, good.
Abigail Thomson 23:28
So, we touched on this a little bit in the previous question, but what does the American Dream mean to you? And then additionally, what are you doing to take it to the next level?
Josh Belk 23:39
Okay. Well, I think the the American Dream, I think for anyone is finding out your what your purpose is, and fulfilling our purpose. We have the ability here in this country, we still have freedom I know in in recent days, I know by the time this airs, hopefully will be will be separated on quite a bit more from this. But you know, in over the recent months with a lot of kind of stay at home orders a lot of lockdown and we're we're just here outside of Chicago. And, you know, downtown is you know, all retail is closed, everything is just, I mean, it's just, it's just difficult. For the most part, it will get back to some sort of modicum of normalcy here pretty soon, but you're in the United States, we have the ability to define our purpose. We don't have an oppressive government telling us that we can't do certain things, we're still we can pretty much if we can dream it, we can do it. And but truly understanding what is our purpose? What are we been created to do? All of us have a purpose, finding out what is our purpose? And then what what do we want to do and to align those? And so who is it that we want to serve? I'm in I'm in a mastermind and the leader, the mastermind talks about this, and it talks about this quite a bit. And I really like this, are we doing the right thing? for the right reason for the right people? And is it the right timing for it? And I think if we're doing all those types of things, and we have the ability to do it here in the United States of America, then I think we'll find ourselves in it. Place of joy in a place of happiness. And we look back at the end of our lives, and we bought the legacy and realize that we truly have fulfilled the American Dream.
Abigail Thomson 25:08
That's a beautiful answer. Could you tell me a little bit, but you're doing to take yourself specifically as an as an individual, or even your business in general to take that dream and that purpose that you've created for yourself to a whole nother level?
Josh Belk 25:23
Well, for us, and I really tried to align with my team members with people who we aren't just about ourselves and building wealth that we do we have team members here that really do want to see our clients succeed. Because if I think Ziggler may have kind of used this line, if we help enough people get what they want, we will get what we want. And so if we're, if we're there, and we're truly they're trying to serve our clients bring value to our clients, they really tried to be a help to them, beyond just the you know, to kind of the day to day, how do we book this transaction? You know, tax strategies, don't a tax return, work with our banker, kind of all these things that we do. But beyond that, trying to find out, you know, help them, find out what is their purpose, and then help them get there? Then we'll we'll do that. We'll do the same here.
Sean Thomson 26:08
Awesome. Thanks, Josh.
Abigail Thomson 26:10
You bring so much value to your clients. So how could they get in touch with you or learn more about your business?
Josh Belk 26:17
We're on all platforms, you can look me up Josh Belk, Belk & Associates is the business name. So you can find us on Facebook, LinkedIn, have a Belk On Business Podcast on all the platforms out there. We've done a couple interviews, most of them are just me just running off at the mouth. I'm on most of them. Yeah, that's pretty easy to find.
Sean Thomson 26:33
Awesome. Yeah. Awesome. Well, thanks, Josh, we really appreciate you coming on the show. No, taxes is one of those things. It's just it's this mysterious world, we try to talk about as much as we can, because you can benefit a ton from tax it, you know, tax policies and stuff, but trying to figure out how to do that is really, you know, it's a, it was quite a struggle. And someone that is knowledgeable as you are, you know, it's amazing help that you convey to people so we're really close.
Josh Belk 27:00
Taxes are one of those things you can pick and take away a third to half of your wealth, or if you use it properly, you can pretty much keep it all.
Sean Thomson 27:11
Yeah, we like that keeping keeping the money! Well, thank you so much for coming on the show. We appreciate it.
Josh Belk 27:19
Thank you!
Abigail Thomson 27:20
Thanks for joining us for another episode of Next Level American Dream. If you'd like to learn more about what we talked about today, want to contact the team directly, or interested in passively investing and being a part of our deal room, head over to our website at www.thomsonmultifamilygroup.com Before you go, please leave a review! Your comments help us create more episodes for you to enjoy.