MI344: Growing Your Wealth, Shrinking Your Taxes w/ Grant Dougherty

24:10That's what I like to generally see to qualify for those tests. You had mentioned cost segregation and bonus depreciation. There's a lot of our listeners that have no idea what that is. Can you go into that a little bit? What is cost segregation and the advantages of that? So before we get started, bonus depreciation. Depreciation is just a deduction you can claim. So whenever you have an asset, let's say you buy a car, in a few years, that car is not going to be as good as what it was when it was brand new because of the wear and tear. The IRS allows you to claim a deduction based on what they generally consider is the wear and tear of an asset over its life.

24:47So for example, a car has a five-year lifespan, depreciable lifespan. Now, every asset has a depreciable life. And if it's 20 years or less, it qualifies for bonus depreciation, which is just a way where, okay, I probably won't lose a car because those are special, but let's just say you have a five-year asset. Generally, you just divide by five. If it's a$100 ,000 property, you get$20 ,000 deduction every year. But with bonus depreciation, if let's say it's a 100 % bonus depreciation, you can get that full deduction upfront in year one. That's basically what bonus depreciation is. Which creates a huge loss for the property or potentially, right?

25:26Yeah. But here's the trick with real estate. So whenever we buy a rental property, rental properties, if they're residential, depreciate at 27 and a half years and commercial properties are depreciated 39 years. But when you buy a rental, you're not only buying the structure of the building. Sometimes it comes with a parking lot. Maybe it comes with a driveway or a sidewalk or landscaping or furniture or carpeting or lighting. It comes with all these different things that could technically fall under five, seven, or even 15-year property. And that's where the bonus depreciation aspect kind of comes in.

26:01And you can go in, do a cost said, go and analyze the property and say, like, hey, this is the five-year property. And depending on what the bonus appreciation is that year, in 2024, it's 60%. So if you have $100 ,000 of a five-year property, you'll get a$60 ,000 upfront deduction, plus any remaining straight line appreciation after that. Which is huge. I talked to, I mentioned Mitchell Baldrige. I had him on the show half a year ago or so, but he said that only about like three to 5 % of real estate investors take advantage of cost segregation, which I found shocking. Yeah, that is shocking. I probably have a work perspective just because I work with, you know, a lot of the clients who I work with, I'm always bringing it up to them.

26:46So, you know, the people who I work with are informed, but if I had to put a number on it, that's really interesting. I wouldn't be able to tell you that if what percentage of people know about it and don't. I would believe it though. I'm definitely not discounting. It's an interesting thing. And is it something that you typically would recommend to your clients? Like if they own real estate, if they're going to hold onto it, because there is this thing called recapture tax, right? It depends. A few factors that I would look at. So number one, are they in a low tax year? Are they expecting their income to be higher next year?

27:15That would be one thing that I'm looking at is, okay, if we are going to be able... So I guess the first thing is like, is this going to be a non-passive loss or is this going to be a passive loss? That's probably the very first thing I'm looking at. But then after that, I'm going to say like, okay, let's just say you can use this loss against your income. Are you in a high tax year or are you going to probably have more income next year? I mean, we probably need to spread out this deduction over a few years. Then we also look at exit strategies. How are you planning to hold this property? And here's the thing, that conversation can be tough with people because of course, you talk to someone, they're like, oh, I plan to hold this property until I retire.

27:49but then I start talking to them about like how financially of a crunch is it to actually meet the bills and take care of this property. And you quickly find out that, you know, there are a few rentals that absolutely boom with cashflow, but then the majority of them are going to be pretty consistent. It's not going to just be both. And if there comes a hard time, right? And what if all of a sudden people start going on vacation and now you're not meeting your bills, are you going to sell your property then? That's where people don't understand, right? People never see that aspect of things. And so that's where that conversation kind of comes into play is like, okay, if you're going to do it cost sake, I want you to hold this property for at least, you know, it depends five, six, seven years before it actually starts to make sense.

28:33The reason I found you was you did a post on all the different tax advantages of real estate that really caught my eye. What are some other ones? We've talked about cost segregation. Are there some other ones that you can talk about that are great for real estate investors? There's a ton of them out there, man. So let's just say that you're unbelievably profitable, your rentals, and you have$100 ,000 of rental profit when it's all said and done. That rental profit is not subject to Social Security and Medicare tax. So if you take someone who has a W-2, yeah, maybe the federal income tax rate is about the same, but the W-2 earner is paying Social Security and Medicare, whereas the real estate investor doesn't have those taxes.

29:11So that's a big advantage that I always tell people is that you have that passive treatment of rental income. But even after that, you start getting into, if you sell a property, you got capital gains. Of course, you do have to worry about depreciation recapture. But here's the cool thing about just depreciation recapture and capital gains in general. Depreciation recapture, I'm not going to say that it is a capital gain. It's a type of capital gain. It'll be recapped for your ordinary income rates, but tax loss harvesting can actually offset not only capital gains, but also your depreciation recapture.

29:46So there's ways that you can mitigate if you indispose of a property, you could tax loss harvest against it. Maybe you could do a 1031 exchange into a new property. Go into that a little bit because a lot of people might not know that terminology. What is tax loss harvesting? How's that come about? Yeah. So tax loss harvesting, if you have a capital gain, that's whenever you have an asset, let's just say you got some stocks or bonds or even like a rental property. If you buy it at a hundred grand and you sell it for 300 grand, you have a$200 ,000 capital gain. Now, if you also have stocks in the stock market, it's like a rough year, and maybe you sell some stocks at a $150 ,000 capital loss.

30:29You can use that loss to offset some of your capital gain. And that's essentially what tax loss harvesting is. Now, here's the thing. A lot of people get caught up in like, oh, why should just go invest in some really bad stock and just draw a loss? I'm like, no, that's not the idea. The idea is you have a diversified portfolio. And if you have a diversified portfolio, you're in the US, you're in this market. I'm not a financial advisor. let me just get that out. So don't take my advice, but take it with a grain of salt. But the idea is you have a diversified portfolio. And whenever that happens, some of your portfolio is up, some of your portfolio is down.

31:03So you could actually use the part that's down, sell that off and lock in that capital loss and use that to offset your capital gain. Robert Leonard What about a 1031 exchange? You hear that a lot, real estate investors talking about that. Explain what a 1031 exchange is and if you recommend that or not. Yeah. So a 1031 exchange is just essentially the way that a real estate investor can essentially sell their property and then they can use the gains and roll it over into a new property. Now, if you sell a property at 300K, you have to then go, you have to basically trade up. So if you sell a property at 300K, you got to go get a new property that's at least 300K or more in value.

31:41Otherwise, if you sell it at 300 and you go and get a new property at 250, you're going to have$50 ,000 in taxable gain. Now, there's a lot of nuances to a 1031 exchange. That can be great. I do think that 1031 exchanges can be great for investors, but there's, like I said, a lot of nuances. Number one, I think probably the biggest mistake I see people make, or not necessarily a mistake, but the misconception is that they can just sell the property, they can take all the money and they can just roll it over to a new property to qualify. And you actually need a qualified intermediary to essentially take that money from you and they will hold the money and they'll essentially continue the transaction for you.

32:20But that's something that I remember across, man. And then if you boil it down to different states, different states have different clawback rules. So you have to file those forms with the states every single year. And you also only have what, about six months, right? To make that next purchase, which I can bite people in the butt too, if they haven't identified something. And it's crazy. So whenever you are, depending on when you're trying to do this, right? Because number one, you never want to tell someone when you're doing a 10th, besides your qualified intermediary and your tax advisor, don't tell your real estate agent, oh, by the way, I'm doing 10th, everyone's exchange.

32:55Because guess what? Now, if they know anything about real estate, they'll tell you that you are on a time crunch. And if you don't think they won't leave that to their advantage, they certainly will, right? So have some planning involved because like I said, you have 45 days to identify. And then of the ones that you identify, you have 180 days to close. So you can identify multiple properties if you wanted to, but you can't identify some and then say, oh, I'm not doing that. I'm going to go get someone else and buy that one. It doesn't work that way. So that's what I do want you to keep in mind.

33:25Let's get into small business owners and some of the different tax strategies that you recommend your new clients. Right off the bat, Like here's one, two, three things that you should be doing. Oh, I'm big on retirement accounts. So if you're self-employed, you have no employees, I like the solo 401k. I think it's a huge benefit to solo. And there's also SEP IRA, there's simple IRAs if you have employees, but definitely with retirement accounts. That's like one of the very first things I look at is like, let's just, I always tell people that it's not something that you need to take advantage of, but at least you have it in your back pocket.

34:02So if you ever want to pull it out and use it, you can do that. And then of course, I'm all about investing back into the business and trying to reclaim your time back. So I'm big on hiring employees, hiring employees or contractors to essentially save you on work time. You can get a tax deduction that way. And then depending on the type of employee, you may get credits for starting up a retirement plan or whatever the case may be. There's different employee prices you can get. But then if you, you don't just, maybe you have a business where you have to use a vehicle a lot in your business. You know, now we started looking into like different vehicle types of deductions and you know, do you want to get a vehicle that's over 6 ,000 pounds, that's under 6 ,000 pounds?

34:43So if it's over 6 ,000 pounds, what's the advantage of that? So whenever you get a vehicle, right, you can claim deductions for using a vehicle. There's two ways to go about it. There's the actual method. There's the standard method. The standard method, just calculate the total business miles and drove. So you multiply by a set standard rate, boom, that's your deduction. Then there's the actual method where you got to go in, you got to still track your miles, but let's just say you use it for 60 % business usage. Well, you can deduct 60 % of all the expenses related to that vehicle, including like gas, tire changes, oil changes, things like that, including depreciation.

35:18All right. Now, the depreciation is a huge part of why people go and get vehicles. And the reason why 6 ,000 pounds or greater vehicles are more strategic is the IRS actually allows them to claim more of a depreciation deduction. Well, it's a section 179 expense on heavier vehicles, almost 6 ,000 pounds or more versus if they're under 6 ,000 pounds. That's the big benefit to going after like, yeah, I like F-150s. I'm a Texas guy, F-150s, F-250s. That's what I see a lot. But yeah, there's all sorts of vehicles out there that or 6 ,000 pounds or more. Let's take a quick break and hear from today's sponsors.

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39:18All right, back to the show. Right. I wanted to get in, if you have time a little bit, how you structure your own portfolio. How do you invest? I wanted to get into some specifics. You talked about insurance a little bit, but I wanted to hear, you talked about, you've got some, since you're self-employed, you've got some 401ks or things like that. How do you think about investing for yourself? Are you like a active investor? Are you an index fund investor? Do you do real estate? Yeah, I'm pure passive, man. Index funds. I got some bonds also. Yeah. I don't know why I got the bonds. They're not the best before, but I got some bonds too.

39:53I got the life insurance as like, I guess I have an investment in some syndication with real estate. So I'm pretty well diversified. But hands down, where I probably put most of my investments. So if I were to get$10 ,000 right now, how would I invest it? I would probably only put maybe$2 ,000 into one of those buckets because the other 8 ,000 is going to go to my business. Because hands down, the largest ROI that I'm personally seeing right now is actually investing back into my business. And so, yeah, it's kind of hard. You can't really quite see the green number that tells you how much you're up.

40:26but I can look at tax returns and I can see how much more money that I make this year versus last year and go on and so forth. So for me personally, I'm constantly investing into different softwares, different contractors, finding ways to not only make more money, but then save time just because time is very precious. Especially now you're in the thick of it with tax returns. I wanted to, let's see, what do we want to talk about? Bookkeeping thoughts, like how not to procrastinate on filing taxes. I know I'm guilty of this is just putting off taxes. I dread it, honestly. Administrative stuff is not my thing.

41:01Bookkeeping stuff is not my thing. Stuff just backs up. What kind of recommendations do you have for small business owners, real estate owners to stay on top of their taxes? I would outsource to a bookkeeper. If it's taking up too much of your time, hire someone to take care of it for you. That way you can take that stress off of your plate. Now, one thing whenever you're looking for a bookkeeper is because they have crunch deadlines as well. So they want to get, you know, they have plans to get their stuff done for because they need to take that information and get it to the tax advisor so that we can get them projections.

41:33Right. So I would make sure that you have someone who is good at what they do. You trust them and then have a good open communication with them. Have quarterly, at least quarterly meetings with them so you can stay up on top of your numbers and just know in the back of your head. okay, this is possibly what I may owe come tax time. So let me start setting some money aside. Right. You know, take that stress of crunching the numbers and doing the work off of your plate and go get a bookkeeper. If that's something that you want to do, that's fine. Just make sure that you stay on top of your schedule.

42:03Maybe dedicate one day a month to just solely doing your bookkeeping. How would you go about finding a good bookkeeper? Recommendations from other people or how would you go about finding somebody? Yeah, I got some recommendations that I always refer to people, but you just got have to ask the right questions. Do you handle someone that's similar to me? What is your experience with people in my industry? What is your experience in general? You're going to have to ask questions. That's kind of a tough one, right? Because a lot of times, people will tell you whatever you want them to hear. So sometimes you actually have to get your feedback and actually experience what it's like to work with them, which is kind of a drag because everyone knows what it's like to work with the wrong person at times.

42:45But the best you can do is just try to ask the right questions. I know people, whenever they're looking to work with me, they ask me things like, do I work with other people in real estate? Have I worked with other... Maybe I'm like a doctor or a physician. They ask me like, hey, have I ever worked with other physicians? And heck, if they're down to give referrals, like, hey, can you give me a referral of someone who you've worked with? Maybe that... Some people are okay with this, some people aren't. So you got to see with caution with that one, but I think it's an option. Yeah. How do you view referrals?

43:14I mean, that is a tricky situation as a CPA, you know, like for example, like cost segregation stuff. I'm just curious in my own situation, like we would like to give people a referral, but how is that viewed? Like in the referral fee, how is that viewed in, in like the tax preparation world? Is that kind of a no, no, or I'm talking about you referring, like, let's say Nick Huber's sweaty startup company, like, and he gives you a kickback from that. Is that, how is that viewed in the industry? I found my general small group of people who I work with. So I always refer them to those same people.

43:48And if they can't take them, they're very open with them. But I generally give them four or five contacts. Like, hey, try these people out. They're all very good. Generally, one of them can work with them. Got it. Got it. So Grant, I wanted to get into some of the biggest mistakes. You're right in the middle of tax season right now. Stressful time for everybody. But I wanted to talk about just the biggest mistakes you see small business people make, real estate investors make? What are some of the things that you see that could easily be avoided? I see all sorts of different ones, and I guess it depends on what level they're on.

44:21But if you want to talk about fundamental mistakes, that bookkeeping. I don't know how often I run across people that co-mingle their personal and their business expenses. And it just makes it very difficult. It's very easy to let expenses slip through the cracks that way. So hands down, that's probably like, you know, whenever we talk about the basics, that's one of the most common mistakes I see. Other than that, you know, so whenever I like work with people, especially if I've worked with them previously, I like to look at all the documents you gave me in the previous year. And then now the following year, if you don't give me those documents, I'm going to be asking about them.

44:56And I mean, all the time, you know, people just, it's a lot of tax forms, right? So it's easy to forget, but that would be another one, right? Just simply forgetting tax documents that are sent to you. That happens all the time, man. But it's also, there's a lot of misconceptions, right? Because, you know, so for example, the whole vehicle, we were talking about the vehicle deduction a little bit earlier, but essentially a lot of people just have this misconception when they can just go and buy a vehicle and then like they can, all right, I'm going to get a tax write-off, but they don't realize all the documentation that kind of like goes into it.

45:27So that would be like another misconception. A lot of people think like, I got this$50 ,000 vehicle, so I'm going to save$50 ,000 in taxes. I don't even realize that they're not going to get 50K in taxes. They'll get maybe what, 10 to 15, maybe if they're lucky, 20K in tax, tax able. So it's a lot of misconceptions and then a lot of mistakes that I see. So it's like a combination of two create a perfect storm. Yeah. I also wanted to touch a little on, you said that the best way that you've grown your practice is through social media, through Twitter. It sounded like Instagram was more your focus, but you're also focusing on Twitter.

46:03Talk to me a little bit about somebody who is listening to this, who's trying to just get on Twitter and start providing value. What did you do? Who did you copy? Who did you study? Things like that. The biggest thing is just put out valuable content. Of course, it's always great to hit them with that wow factor, but sometimes people just need to know the basics. Like, hey, don't forget to separate your business and personal bank accounts. That right there is a ton of value for someone who's not even doing it, right? So get out there, put out good content, just go in there and looking to improve other people's situation.

46:38So whenever I initially started, a lot of people get like on social media and they're like, they're constantly trying to sell themselves. Like, hey, sign up for my service. Hey, do this, do that. I rarely ever ask people to sign up for my service. I provide value. Hey, here's an example. Hey, here's value. And yet every now and then, once when I've really built up that trust and now they've seen me provide good content multiple times, oh, hey, by the way, did you know I'm still accepting clients? Or, hey, we have three spots left or something like that. So that's usually the way I go about it is don't create a social media page to try to sell yourself, but do it by providing value.

47:15People will learn to trust you whenever you provide good, useful content. And that's how you get clientele off of social media is constantly providing good value. So are you doing any kind of customer outreach other than that? Or are you relying strictly on social media to bring in clients? Yeah, man, I'm actually turning people away at this point. So yeah. So I mean, every now and then you get referred. So like you work with someone and they really like you, they're usually, they have a group who they work with. So they'll start referring some of the people that they know. But even then, they refer them and they go in and check out my social media and then they end up reaching out to me on social media somehow.

47:55So yeah, I don't do any direct customer outreach. It's almost solely now, it's basically solely just social media or referrals or people that I've worked with previously. That's awesome. I mean, it's true. The best marketing is just word of mouth. People telling each other about what you do and like, Hey, this guy does a great job for me. I'm really happy with them. Yeah, that's awesome. I wanted to hear like when you are first onboarding somebody, like what does that look like? They reach out to you on social media. They say, Hey Grant, you know, I want to, I need a new accountant. I'm not happy with my old guy or whatever.

48:26I'm just looking to, I've never used an accountant before. Talk to me about like the onboarding process, the questions you ask them, things like that. Usually I start off with like a free call, you know, just get on and you know, it's a free discovery call and just kind of like Tom, you know, see if we can be a good fit. So I do look for indicators, right? Because I only want to work with people who I actually, you know, would like to enjoy work with, man. So I'll ask them about their previous tax advisor. You know, I'll listen very carefully. Like I try to listen to what people say and take that and improve my skills.

48:57But if I quickly, too many red flags start to pop up, that would be like an indicator of like, or an MNM should start hearing these conversations for us. Like, Hey, we're kind of booked up right now. I don't know if we can take if you want. But I'll ask the questions like, hey, have you worked with a tax advisor before? What was your experience? What did you like about them? What did you dislike about them? You can tell a standup person by the way how they give you a response to what they didn't like about a person, right? Because it'll still somewhat be positive, maybe a little constructive criticism, but a red flag for me would be someone, I mean, it's just the way how they go about it.

49:31It's kind of hard to describe. There's a way how you can kind of tell like, they seem a little unrealistic with their expectations. So that's something that I'll look for. But then I start to talk to them. I'm really trying to gear in towards more of that real estate investing. So I tell them, I don't really hide anything from them. I always tell them like, hey, I could help you set up the foundation and get your 401k and make sure to optimize business deductions. But if you really want to get the most value out of me, you're probably going to want to start investing in real estate and start at least consider it and just hear what I have to say because hands down when it comes to tax savings, that's usually like my route to go.

50:10Other people don't leave that. Sometimes people just want to know like, hey, how much am I going to owe? Like I just want someone to contact so that whenever I need an estimate, I can run you the numbers. You can just tell me, hey, I'm going to owe 10 grand or whatever the case may be. So you said you were talking about ramping up and growing the practice. What will be your first hire? I'm curious, like when you think about your first hire, who would that be? So there's so many different thoughts that go through my head, but right now I have a lot of administrative work. So I want to hire someone who could take on admin work, but I'm really looking for maybe someone who's like fresh out of school, in college, that has somewhat of a background in business and finance or accounting.

50:50Because, yeah, the admin work will be easy, but now I can start introducing them to like, hey, why don't you try filling out this DEPME2 tax form for me? Just show me how it works. and then slowly try to build them up into a member specialist. So I would consider myself a specialist. I would want to get someone who handles the admin, but essentially they would be a member specialist. So are you in the interviewing process now? Is that coming up maybe next season? Yeah, really I'm trying to get them on board by the summer so that I can take care of them. You guys, you know, the busy seasons for tax prep, January through April is absolutely like crazy, right?

51:24But then it slows down in the summer and then we get into now the extension deadline, September, August, September, October, right? I want to kind of gear them up and get them ready for that September, October busy season. It's busy, but it's not as crazy. But that way, whenever I get them for the January through April, now they're primed and ready to go. Yeah, I can imagine this time of year for you is just busy. So I really do appreciate your time. I wanted to last touch on cryptocurrency stuff. So like people that are trading, let's say maybe Bitcoin or these altcoins on Coinbase or whatever.

51:58How do you recommend people keep track of that? I used to do that in 2017 and got totally burned in terms of my losses, and I swore off of it. But there are people obviously that are doing it. What do you recommend in terms of keeping track of all of that? Yeah. You want to keep some type of software like CoinTracker or CoinLedger or something like that to help track your basis and your total proceeds from whenever you're like exchanging crypto. So high level, most of the time if you're churning crypto, it's going to trigger short-term or long-term capital gains. One little caveat is that the wash sale rule actually does not apply to crypto.

52:36So you don't really need to be mindful of that. So explain that for people who don't know what the wash sale rule is. Essentially what it is, is if you sell a security at a loss, you cannot turn around and buy that same security within like 30 days or something like that. Otherwise, that loss can no longer be used to offset your income, but that loss doesn't go away. What ends up happening, it gets added to your overall cost basis whenever you repurchase the stock. So tax loss harvesting, that's a strategy. We were talking a little bit about that earlier. You know, tax loss harvest, you want to be mindful of wash sale loss rule, but that does not apply to crypto.

53:11Lastly, I wanted to ask you, you're a married guy, you've got kids. How do you guys manage your own finances at home with you and your wife? I just got married about a year and a half ago. So we're blending our finances and that's a challenge. And I just kind of wanted to hear some of your tips that you have for couples working together. We have joint accounts. So I'm the only source of income in the household. So a lot of the income, it comes in through the business and then that's where most of the income is. And then I kind of trickle that out to the personal accounts. Now where most of the bills, I mean, we have actually, it's all joint accounts or she can get in there whenever she wants, but I do have her own, I call it her account, but it's still a joint account.

53:50So like we can still go in and access it. But I have the money to transfer from the business over to like our big main joint account where like the mortgages, somebody gets paid. And then she has her own personal account that I'll transfer like maybe like a thousand dollars a month over there. It's where she can just go over like freebie spending. This has been fun, Grant. I really appreciate your time. Anything you wanted to touch on that we didn't get a chance to talk about? Oh, one thing, man. So we talked a lot about real estate and using the non-passive losses to offset your income. The one idea out there for everyone to maybe not be into the whole non-passive option, because again, real estate is going to be a passive activity, generate passive losses.

54:31And so a lot of people are like, what am I going to do with these passive losses? Well, maybe shift your mindset a little bit, try to find a service business. So for example, I have a buddy, he owns a dog poop street business. It's just... like absolutely, clearly, right? But if you would have been an investor and his dog proves to a business, he needs some more trucks to hire out, so he needs funding, and you get a 25 % share of his profits, well, that profit is all passive income. And now if you have rentals, you can use those passive losses to offset that passive income. You can build up a portfolio of passive businesses and passive rentals.

55:07So there's all so many different routes that we could go with the real estate, man. But that's just one little tip, right as we are wrapping everything up. Yeah. There's so much out there. And it's just, again, I think you got to stay on top of all this stuff and learn about it, read about it, study about it. You're providing great content on Twitter. I just think looking at people's profiles like yours, you can learn a ton. So it's just staying on top of it. But where could people find out about you? We've talked about your Twitter account, but how could they reach out to you and get in touch with you?

55:37Yeah, you can find me on Instagram at Doherty Tax Solutions. On Twitter, it's D-O-U Tax Solutions. Twitter has that handle. You can't go past. And then you can also just always reach out to me via email at DohertyTaxSolutions at gmail.com. Awesome. Grant, thank you so much for your time. I really appreciate it. Hey, man. Thank you again for having me on. Okay, folks, that's all I had for today's episode. I hope you enjoyed the show and I'll see you back care real soon. Thank you for listening to TIP. Make sure to follow Millennial Investing on your favorite podcast app and never miss out on our episodes.

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