This New Bill Could Double Your Tax Savings in 2025

0:00Taxes might not sound exciting, but what if I told you there's a brand new bill that could put more money in your pocket and change how you invest today? And today we've got two of the best real estate CPAs in the game. You guys might know them. They've written several books for Bigger Pockets. They're my personal CPA and good friends of Bigger Pockets. But we have Amanda and Matt from Keystone CPA. And they're here to break down the big, beautiful tax bill, what it means, why it matters, and exactly how rookies can benefit from it.

0:34Welcome to the Real Estate Rookie Podcast. I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's give a big, warm welcome to Amanda Hahn and Matt McFarlane. Guys, thanks for joining us today. I appreciate having you both. Yeah, thanks for having us, guys. It's fun to be here. So for those who aren't tax nerds yet, what is the big, beautiful tax bill? And why is everyone in real estate talking about it right now?

0:56Amanda Han:Well, first, it's called the One Big Beautiful Bill. We're referring to it as the tax bill, but the bill actually has a lot of different things outside of taxes as well. That's why they called it the One Big Beautiful because it's sort of all-encompassing. But what we really love about the One Big Beautiful Bill is that for the first time in many years, we are seeing a bill or new tax law that benefits not just real estate investors or large corporations, but it actually benefits a lot of people. of course real estate investors is one of them but you know just average w-2 earners homeowners and you know people who are looking to purchase cars and even parents as well but of course the the intersect of all of that with real estate is what's been super amazing for us at least as real estate cpas yeah i think people are obviously people are talking about it because it just passed last month and it was there was a lot of lead up to it right they were talking about it probably the beginning of the year.

2:01So it's kind of from our perspective, it's nice that it actually passed. And now we have some time to do some planning for clients and put things into action before the end of the year. Just from like a rookie perspective, why should you care about this as a rookie investor with maybe just one deal or planning to purchase your first deal? Yeah. I think as Amanda mentioned, there's a lot of things that are impacting real estate investors and just individual taxpayers in general. So sometimes I think there's bills that are, hey, they're just skewed to business owners or just skewed to real estate investors or individuals.

2:33But this kind of encompasses a lot of things. So I think the biggest one in there is depreciation expense. I think that's going to have the biggest impact for even just rookie investors too.

2:43Amanda Han:You know, a lot of rookie investors start out with house hacking. That's actually one of the things that Matt and I did ourselves as one of our first deals. And with the one big, beautiful bill, one of the newer benefits is that if you own a home, regardless of whether it's a rental or not, it basically 4X the dollar amount that we can write off as our primary home property taxes. And so if you're a rookie investor, you know, you're like, hey, should I buy a duplex where one unit is going to be my home? The second unit, I might rent it out as a long-term, short-term or mid-term rental. Now we have potentially a much larger write-off because we can always take advantage of the traditional rental-related expenses.

3:28Amanda Han:But even the part now that is used for a primary home, we can maximize our deductions there as well. And of course, like Matt said, the 100 % bonus depreciation is, I think, bringing a lot of eyeballs to real estate. Whereas people who are like, should I do real estate? Should I not do real estate, we're seeing more people getting into the rookie investment as their first property because of the new tax incentive. I definitely want to talk about the bonus depreciation because I think that that does have a big material impact on tax bills for a lot of the folks who are listening right now. But if you guys just think about, and you just touched on one, Amanda, but if you guys think about maybe the four or five other big important parts of this bill that impact real estate investors specifically?

4:14Let's just quickly hit what those other maybe important highlights are.

4:17Amanda Han:Well, I just think, you know, in general, one of the goals of investing in real estate is so that we can try to bring down our total taxable income, right? And a lot of the things in the tax bill, although not specific to real estate or specific to rookies, do provide greater incentives. For example, we mentioned if you are a parent, right, there's additional tax credits that are available. Or if you're looking to buy a new car, for the first time ever, you can write off an interest expense on your personal vehicle. However, as with many things in the tax world, those come with income limitations.

4:56Amanda Han:So traditionally for someone who says, hey, I make too much income to get these tax benefits. Well, now with the investment of rental real estate, If I wasn't in real estate before, now I'm getting into real estate that potentially brings down my taxable income, which then allows me to get additional benefits beyond just my initial plan of real estate deductions. Another one I was thinking of, too, is I think there's a lot of rookies out there that are still working the side hustle. Maybe they're a real estate agent. Maybe they're doing fix and flip wholesales and kind of getting into the rental property side of things.

5:34But with those active businesses, one of the things that the One Big Beautiful Bill did is it's continuing on the ability for people to get, we call it qualified business income deduction, QBI. So people can get 20 % of their income from their business to be tax free. So a realtor could make$100 ,000 and only have to pay tax on$80 ,000. So the nice thing is that the bill has continued that on because there was talk that that was going to expire. So I think that's something that people can take advantage of when they've got, you know, Schedule C income, maybe an S Corp doing some sort of active income, some sort of active business on the side.

6:09Yeah, I want to touch on that one because I think that's one that a lot of folks don't know about. So, Matt, what you just said is that I can basically take 20 % off of whatever income I generate in my rental portfolio and only pays taxes on the other 80 % that's left. Yeah, exactly. So this would apply to people having an active, it could apply to rental property income as well. Obviously, a lot of rental properties, well, you know, strategically can create losses. So that wouldn't apply to the ones with losses. But yeah, certainly, if you've got a good portfolio going with rental properties, and you're doing it day to day, and you're kicking off a profit of$50 ,000, you can get 20 % of it tax free for sure.

6:53Amanda Han:Yeah, what's really interesting about qualified business income deduction is this came about in 2017, I want to say. And for many years, when we review, you know, new clients who come to us, we review their tax returns, it's something that's often missed. And, you know, we would just chalk it up initially to, okay, it's brand new, people don't really know about it. But now that's years later. it's interesting that it's still something that's missed but you know now that it's been extended as part of the one big beautiful bill you do want to make sure if you think this is something applicable to applicable to you you do want to make sure you're taking advantage of it and one of the reasons one of the ways you can check pretty quickly is it's actually on your individual tax return so regardless of whether you're holding your rentals in an LLC or a partnership the qualified business income deduction shows up on the first page of your personal 1040 form.

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11:13Thank you so much for taking the time to check out our show sponsors. So, Amanda, do you think you could walk us through an example? say, I'm a brand new investor with one rental property. How might my taxes look before and after implementing the things from this bill?

11:30Amanda Han:Yeah, it's really interesting. One of the catch phrases we've been telling people is after the One Big Beautiful bill, your tax savings may have more than doubled. So that gives you an idea of kind of the power of the law change. So prior to the change of the One Big Beautiful Bill, bonus depreciation was at 40%. And now after the enactment of the bill, it's now at 100%. So if we just give a very simple example, let's say you buy a rental property for$130 ,000 and we say$100 ,000 is the building. Maybe prior to the bill change with bonus depreciation, we might expect about$15 ,000 of first year depreciation if you're doing cost segregation and just accelerating as much as you can.

12:21Amanda Han:But now using those same numbers,$100 ,000 in that building, you could probably write off$30 ,000 or more just in first year depreciation. So you can see the significant difference in tax savings or the tax depreciation amount using one specific rental property. You guys mentioned a few different terms in there. If we can, I just want to define some of those. So we talked about depreciation, cost segregation, accelerating. Can we just kind of break each one of those down? So when we talk about depreciation for a rookie investor, what does that actually mean? Yeah, so depreciation is probably one of the best things about investing in real estate, rental real estate from a tax perspective.

13:08So, you know, unlike if somebody was going to go out and buy Google stock or whatever, they buy Google stock. They don't write right off the cost of the stock right now. They don't even write that off until they sell the stock down the road. But the difference with rental real estate is the IRS does let you take a paper write off or a portion of the purchase price of your building every year kind of due to, you know, normal wear and tear. So Amanda's example, talk about that$100 ,000 building where we're getting their take. We get a certain amount of depreciation every year that we can use to offset our cash flow from the property.

13:37So not uncommon for a rookie investor to get, hey, I got$3 ,000 of cash in my pocket, but with my depreciation expense on my tax return, my taxable income from that rental is now zero because basically that paper write-off is sheltering the cash flow from taxes. So that's a huge advantage to investing in real estate compared to other investments, obviously. And then when we talk about accelerating that depreciation, walk us through that.

14:01Amanda Han:I mean, what we love about depreciation is that not only is it a paper loss, like Matt just said, but there's so much flexibility in how we utilize this concept of depreciation. So the IRS allows us to just take it in the normal, standard way. Typically, you write it off over 27 and a half years if we're talking about residential properties. or we could accelerate it. And so that's the whole concept of accelerated appreciation, which is to say, okay, instead of waiting evenly over 27 and a half years to write off the components of my building, I'm going to write it off faster. And you do so through a cost segregation study.

14:42Amanda Han:And for those of you, if this is a new term to you, you don't have to worry. It doesn't mean you have to become an engineer or do any of that stuff. You simply hire a firm that does cost segregation. And so you provide them with your property information, generally the address, property tax records, probably the purchase closing disclosure. And what they'll do is they will have engineers on their team to analyze the building. And what they're trying to do is they're trying to say, OK, instead of just calling this whole$100 ,000 building, they're going to help you break out the building into different components like specialty plumbing, specialty electricals.

15:15Amanda Han:And with those numbers, then your CPA could follow your tax return using faster depreciation because the IRS has a set of law that says, you know, certain things we can write them off or depreciate faster than other items. So from an investor's perspective, especially for rookie people, I think a lot of people are geared by a lot of these terms and definitions and like, what do I have to do? And the good news is you as an investor don't have to do too much. These are things that are done by a cost-seg firm as well as your personal CPA. Now, as a rookie investor that has one property, you're probably not generating a ton of cash flow to even need to offset it with depreciation and doing a cost-seg study.

15:56But what if you have a W-2 that is very high income? How can you use some of these deductions from the tax bill to actually apply them to your active income? Well, I think before we get to that, I think just to your first point, kind of bringing it home, it's not uncommon for, let's say that one of your rookie investors is making$100 ,000 or less. They have the ability to actually generate and use up to$25 ,000 of rental losses against their W-2 income. So it's not uncommon for us to see somebody just getting in the game, like Amanda would mention house hacking earlier, right? Not uncommon for someone making$90 ,000,$95 ,000 that they can get a$15 ,000,$20 ,000 depreciation expense on their property through doing some bonus depreciation, accelerating some stuff.

16:41I mean, that would wipe out 15%, 20 % of their income on their tax bill. So that's definitely a viable option for people who are kind of just getting started and making under$100 ,000. Now, to your point, once somebody makes kind of over$150 ,000, has that high W-2, that's when some other tax laws kick in, some limitations that we can talk about. But I think there's opportunities for everybody.

17:00Amanda Han:Yeah. And I'll just say before I answer that question too, is cost segregation, we just kind of gave some numbers and it sounds really amazing. One of the common mistakes we see rookie investors make is they'll go ahead and just get a cost segregation study. Some of those are pretty affordable. You can get one for a couple hundred dollars online. But before you do a cost segregation study, you need to talk with your CPA Because what we want to know is whether or not you should do a cost segregation study. If your income is too high where your rental benefits can't offset W-2 income, then that might be a scenario where I want to delay doing a cost segregation study into a future year when I can actually use it to offset my W -2 income for tax purposes.

17:46So I think for those people who are making, let's say, over$150 ,000 in W-2 and they are investing in long-term rental real estate on the side or getting started building up their portfolio, they're still going to want to look at utilizing that depreciation, at least offset the cash flow. So then if they have more depreciation and it can create a loss on paper, then we look at, you know, can they or their spouse qualify as a real estate professional? If they can do that, then whatever losses they can generate from their long-term rental real estate can be used to offset deduct against their W-2 in the current year, which can provide significant tax savings.

18:21Amanda Han:It's what we call the marriage loophole. You know, if you're working full-time, you can't be a real estate. Marriage tax advice right here. if you can't be a real estate professional then marry one yes we actually just had a guest on who talked about how he got started in real estate and it was because his father was a real estate investor and he kind of like mentored him along the way so we made that joke of like oh so you married into a real estate investing and you gotta find a wife that has a dad that invests in real estate to get started we tried to uh copyright uh realestatematch.com but i think somebody already took it.

18:56But something that's important that you guys just highlighted that I think I see a lot of investors misunderstand is just because you generate paper losses from your rental portfolio, that doesn't automatically mean that you can apply those paper losses against your W-2 or other forms of active income. There are certain boxes you have to check, one being qualifying as a real estate professional, to be able to take those losses and apply them to your W-2 income. But that's also part of the reason that I think short-term rentals got such, I know there's such heavy interest in that space, not only because of the cashflow perspective, but because it's easier to qualify those paper losses with a short-term rental than it is to qualify them with a long-term rental.

19:48So can you guys talk about the differences between the long-term and the short-term mental strategy for applying those losses?

19:54Amanda Han:Yeah, for sure. So let me first define what real estate professional is, and I think that will help the listeners understand why do we care about all this. So contrary to popular belief, real estate professional does not mean you get a realtor's license and start selling real estate and showing houses on the weekends. Real estate professional is a set of hours that you have to meet in order to get those tax benefits to offset W-2 and other income. So three major ones. One is you have to have at least 750 hours in real estate. You know, for some people, it might be not too difficult. And this is year by year.

20:30Amanda Han:The second one, which is the more difficult one for most people, is you have to have more time in real estate than your other jobs or businesses combined. So if you're someone working full-time at a W-2 job that's over 2 ,100 hours, then you'll have to have over 2 ,100 hours to be a real estate professional. So that's why we say, okay, if you're a high income earner, you're working a full-time W-2 job, very difficult for you to become one. Unless again, if you marry into one or you marry someone who has those profile. And then the third rule is you have to meet material participation, which basically is you're involved with the day-to-day operations of the rental properties.

21:09Amanda Han:So as you can see, for someone working full-time, difficult to have more time in real estate than their job. and that's where the short-term rental loophole comes in because when you invest in short-term rentals you don't have to be a real estate professional to use the losses against w2 in other words we don't care how many hours you're working at your full-time job you don't have to exceed those hours and this is why we see a lot of high-income earners or just you know doesn't have to be high income anyone right low-income earners high-income earners um you know we got doctors, CPAs, celebrities, athletes who use the short-term rental loophole because they can continue doing what they do in their day job or their business and have short-term rentals as almost like a side hustle and still be able to get the benefits as long as they meet material participation hours.

21:58Yeah. So as you mentioned, Tony, it's just with a short-term rental, the tax laws are just different than what the long-term rental laws are. And so it just makes it easier for people who generate losses on their short-term rentals to use those against their W-2 and other active income. As Amanda mentioned, you just have to meet with the time you spend on your short-term rentals. You just have to meet one of the material participation tests. Now, one of those is, did you spend 500 hours a year working on your short-term rentals? And this could be you and a spouse. This could be one short-term rental.

22:28This could be 500 hours over five short-term rentals combined. There's a lot of flexibility there. If you can't get to 500, sometimes it could be as little as you spending 100 hours. And as long as you spend more time than any other single person spent on your property, your short term rentals, then you can qualify. So you can see how it could be a lot easier to get that that bar is a lot easier to cross than 750 hours in real estate or more time in real estate than your other W2 job, which could be 2000 hours, right? Yeah, and I think that's the part that I really want Ricky to understand is that not only is the bar a little bit lower, but there's also multiple ways that you can get over that bar.

23:03So just make sure that for those of you that are watching and really want to try and reduce your W-2 tax bill, like how much you pay in your W-2 job, these are the kind of questions you should be asking to your CPA to make sure you've got the right strategy, because I think a lot of folks aren't even aware of this. And if their CPA isn't well-versed in the short-term rental side, then maybe they're not even giving them that direction. So I think that's the goal of this conversation is to point them in the right way.

23:27Amanda Han:Well, I do, I will say that the short-term rental tax loophole is probably one of the most frequently seen mistakes for me as a real estate CPA. Because I try to post a lot of content on social media about the short-term rental loophole. And inevitably, I will get a lot of people who comment and say, this is illegal. There's no way you're working in your short-term rental more than your job. My CPA says I'm not a real estate professional. So here's a key for all of you guys who, if you're already investing in short-term rentals or you want to, and you're talking to your CPA, here's a warning flag to show you if they don't understand it.