Real Estate Tax Advice For Income Property Investors with Master CPA Mike Murphy Master CPA

On this Flash Back Friday episode, Jason Hartman welcomes CPA Mike Murphy of Murphy, Murphy, & Murphy. Mike was one of the speakers at the 2014 version of Meet the Masters of Income Property Investing back in January. He goes over the topic of real estate taxes. Mike gives us insight into the current US tax laws and how real estate investors can benefit. He looks at the various tax deductibles that can be utilized including the Passive Activity Loss Break which applies during periods of vacancy. Mike gives us other ways to get tax breaks with our real estate.

Announcer 0:00
Welcome to this week’s edition of flashback Friday, your opportunity to get some good review by listening to episodes from the past that Jason is hand picked to help you today in the present, and propel you into the future. Enjoy.

Announcer 0:16
Welcome to creating wealth with Jason Hartman. During this program, Jason is going to tell you some really exciting things that you probably haven’t thought of before and a new slant on investing fresh new approaches to America’s best investment that will enable you to create more wealth and happiness than you ever thought possible. Jason is a genuine self made multi millionaire who not only talks the talk but walks the walk. He’s been a successful investor for 20 years and currently owns properties and 11 states and 17 cities. This program will help you follow in Jason’s footsteps on the road to financial freedom, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.

Jason Hartman 1:08
Welcome to the creating wealth show. This is your host, Jason Hartman. And thank you so much for joining me today. We’ll be back with today’s guest or segment in just a moment.

Jason Hartman 1:19
What’s great about this shows you’ll find on Jason Hartman calm is that if you want to learn about some cool new investor software, there’s a show for that. If you want to learn why Rome fell, Hitler rose and Enron failed. And there’s a show for that.

Jason Hartman 1:36
If you want to know about property evaluation technology on the iPhone, there’s a show for that.

Jason Hartman 1:43
And if you’d like to know how to make

Jason Hartman 1:45
millions with mobile homes, there’s even a show for that.

Jason Hartman 1:49
Yep, there’s a show for just about anything, only from Jason hartman.com or type in Jason Hartman in the iTunes Store.

Jason Hartman 2:01
Let me introduce CPA Mike Murphy. His company is Murphy, Murphy and Murphy. And they’ve been in business for many years. You can tell they probably have an Irish background, okay. And they are a big company. They’re located right here in Cyprus not too far from us. They have year round about 50 employees or so. And then, during the crunch times, they swell to about 80 employees. So big company been to their offices many times. And it’s interesting, because I don’t know if you remember this, but I took a picture last time. I don’t know if it was, I don’t think it was last time was at your office, but when I was at your office about a year ago, and you brought out all my files, and they were about two feet tall, and I put Coco the little puppy on top of the files, when she weighed about, I don’t know, four or five pounds. And here she is today. So it’s pretty interesting. But Mike does a great job. He one of the things he said to me a long time ago is he says you know, just Jason even if someone comes in here, and they’re just doing like a $400, meaning that’s his charges tax return just a really simple h&r block style return, he tries to just get them out of any possible tax he can and ideally not pay the government. So he’s going to talk today for about 3040 minutes and take a lot of questions too. So we’re going to get a lot of questions in here. So give Mike a big hand.

Mike Murphy 3:29
Okay, we’re gonna pull up the PowerPoint, just take a look at it and kind of just kind of go over some of the key issues. And I got a little frog in my throat. So we have to play with that. But I want to go and hit some of the key issues that people are talking about and maybe even take a little, you know, census on what people would prefer to talk about, and then leave it open for questions and answers because there’s always a lot of questions and answers. There’s been some tax law changes. Some of that doesn’t affect the real estate owner, but certainly real estate professionals a hot topic out here for all of us here who are either married or Working or have multiple, multiple properties. The other some of the other hot topics in the past have been short sales, all those are cooling down now. So that might not be as hot a topic. So how many people are familiar with real estate professional and either are considering using it or are using it today, I have a hand show hands. So we got about a dozen or 15 people on that. And that’s kind of important. So for those people, maybe we can take some time to go over that. How many people are involved in short sales, that’s a lot less a year to go. There’s a lot of people involved in short sales on one side or the other. So maybe we won’t go through short sales as much or cancellation of debt. Okay. And so I’m going to be available after after our talk here. And anyone who has questions, feel free to ask ask some questions on underwater mortgages would probably be a possible a short sale or a forgiveness of debt would which could create income from cancellation of debt. And so that’s since we don’t have a whole lot of that deck and I can spend 45 minutes on that loan. But if you have some questions on that, feel free to ask me after the At the break, okay? So first of all Jason’s already brought the fact that we’ve got one of the benefits of real estate is that we have when you do buy real estate, you get a tax, I mean, I cash, a non cash expense. And that’s the depreciation that Jason was talking about. Somebody asked me that on the break. And let me just kind of go over that a little bit because there’s a benefit, where you actually get a deduction without having to fork out any cash for depreciation. So when you buy an asset, when you buy a piece of real estate, you have to divide it between land and building. The land is not an appreciable asset that stays the same, but the building on top of land depreciate over the years, and my change over it. So in current tax law, if you buy a residential property, you take the building portion of that purchase, and depreciate it over 27 and a half years. So let’s make it easy. Let’s say we buy a house for a place for $350,000 75,000 land at 275,000 is building that we would take $10,000 a year off and appreciate Which is 275,000 divided by 27 and a half years, we get $10,000 to write off against our, against our income each year for the next 27 half years.

Jason Hartman 6:10
And Mike, that would be a four Plex in any of their eyes. Yeah,

Mike Murphy 6:13
I

Jason Hartman 6:14
just use those, you’re talking very California,

Mike Murphy 6:17
I knew those numbers because it’s easy to divide 25,000 by 27, half years. That’s why I use those numbers. So, so it’s easy to see that now you’re not necessarily paying $10,000 a year for that depreciation, but you’re going to get $10,000 with a write off. And so that is an added expense to your other operating expenses, that you offset against your income to calculate your net income or loss from the real estate. And then from there, you go forward to see if there’s a debt if you can use that deduction, or it’s going to be a carry forward deduction, based on the passive activity loss rules, which you know, gets more and more involved. And that has so so everyone probably as familiar with the fact that everybody can write off up to $25,000 if you’re not a real estate professional Right off up to $25,000. And the baskets carry forward into future into future years, as long as your income is $100,000 or less or just gross income $200,000 or less before your before your rental income or loss. So if it’s once your incomes over 100,000, at 25,000, drops 50 cents on the dollar, until you get up to 150,000 when now you don’t qualify for anything and your entire real estate loss would be carried forward into a future year against future real estate income or against the properties when you sell the property. So that’s pretty familiar image probably pretty familiar with that, right? More or less. So so there’s an equation that you go through. And if your income is under $100,000 and you have anything less than $25,000 worth of debt over the last you can write that off with no yeah, the depreciation is calculated the same way no matter what that was one of the questions I had a break. So when you’re calculating their your loss from real estate for instance, you calculate the entire loss from real estate Before you apply real estate professional rules, or passive activity, limitation rules, so you calculate your income, plus all your operating expenses, your interest, your taxes, repairs, maintenance, association dues, etc, etc. and depreciation expense, and then that’s your net loss. And in our example, from real estate, then you decide can we use that loss in today’s on the current tax return? Or does it have to be carried forward? You don’t you never lose the loss, it just you have to defer it forward. And you can’t use it in the current period. So that $25,000 limitation amount is calculated based on your other income on the return. Yeah, you can you can recap is that when you sell the property, or when you have other income from let’s say, you have another piece of real estate or that real estate turns into net income, you offset against the for loss carry forward. That’s correct. That’s correct. So now Now, let’s say that you sell one of the let’s say you start accumulating 1015 $20,000 a year for five years. So you have $100,000 deferred pass loss carry forward, when you sell one property if you make a $50,000 gain, and the carry forward on that property is only $15,000, you can still take all the other losses up to that game. So you can actually use $50,000 worth of past loss carry forward against it. Right. So provided if you have gain from the sale of property, you can also offset that against your your passive loss carry forward, which in many cases, you have a game that might be taxed at 20%. And you have a pass loss carry forward that is considered a rental operating laws, which goes against your tax rate, which may times be higher than 20%. So even though you might have $50,000 with a game and $50,000 with the passive loss, you think that’s even on the return, it’s actually a benefit on your return. It beneficially helps you because you’re having a wife at a higher rate and you’re paying tax at a lower rate on the game. Anyway, I’m not trying to confuse you and get too technical on that but but that that is a usable gain against future income or gain on on other pieces. All your property correct unless your incomes under 150,000, then you can be taking a piece of that up to $25,000. So if your if your incomes under 100,000, you can take up to $25,000 every single year. And so if you have a $27,000 loss, you would take 25,000, carry 2004. If you had a $23,000 loss, you take the entire thing if your incomes under 50,000. And then you go, you go through that calculation between 100,100 50,000 which shrinks at $25,000 50 cents on the dollar, until once you get to 150,000 then you’re 25,000 zero and the entire amount we will get cared for Kenny so now you got $50,000 that you can recover. Let’s say you sell one properties and you gain 100,000

Mike Murphy 10:44
but you’re still making over $150,000 a year.

Mike Murphy 10:48
What benefit Are you getting here? Okay, so you’re you’re accumulating a passive loss carry forward a 50,000 and you have not used it you kind of have on the books that we’re carrying forward. We sell one of the properties for 100,000 dollars gain, gain for sorry $400,000 gain. So that hundred thousand dollar gain, you could reach back into your deferred loss bucket and take up to $100,000 of gain, I’m going to pass laws against that gain. Since we have 50,000 accumulated we take that entire $50,000 in the year that you sold that property. And then you carry forward to be zero, you take it all in the current year because you have $100,000 of passive gain or real estate gain you can offset against at

Mike Murphy 11:26
that time, all the loss that you carry up to that point gets zeroed out from

Mike Murphy 11:30
all the properties right, you can suck and all those awesome, you can carry it forward as long as you own the property or your entire life. There’s no limitation on it. That’s good question. Okay, so that’s that’s the passive activity loss carry forward. And that’s something just to be aware of, it’s a calculation you can work closely with your CPA or tax preparer with that. And also it’s good to look into your planning for that because some of these guests we have is if we’re going to be buying a property and we have income from the property or maybe we have cash flow pot positive but because of depreciation We actually have a rental laws that might affect which property you want to buy, depending on what your particular tax situations in case I get a client that makes over $150,000. And they may create a $10,000 or $15,000 loss on a property or in a duplex or something and they can’t use that loss. So they’re thinking, Okay, it’s a little bit negative but Mel savings in taxes, they’re not going to save it in taxes a little bit negative, they’re gonna have to feed that and accumulate that that loss until they either their incomes comes under 150,000 or they sell property or they have other gain on on other pieces of real estate.

Jason Hartman 12:34
Yes. still sticking with that that passive loss carryover, can you use the carryover to counter against, say an IRA conversion or some some other taxable event? Maybe that or say a long term capital gain on equities or something?

Mike Murphy 12:51
Yeah, that’s a that’s a really good question. The answer is no on that because now, in current tax law, we have all these different buckets now. So one of the buckets is the real estate bucket where you have the deferred deferred loss, a different bucket is your gain on on an investment, like on your portfolio. So that doesn’t offset each other. If you had a gain on a passive business investment, then that may do that. So like if you rolled over an IRA and took took the income that would not offset the deferred the for loss? That’s a good question. No, you have to make sure you plug that in. So you get the right answer. So when you’re making a decision, you can make a good, good decision. Yes. Can you sell that question? Okay. If you sell your you buy a piece of property, you actually sell it at a loss in the year that you sell a property, all the loss and all the accumulated loss for that property is taken in for that year. Yes, you can. So that’s a good question. So you know, let’s say that you’ve accumulated, let’s just say it, make it easy have one property you’ve had for six or eight years you have $1,000 a year that you’re not able to write off and accumulate the $64,000 over eight years. $8,000 a year and When you sell that property, you can take the accumulated loss from that property, as well as a loss on the disposition if you had loss as well. So you can take that. So sometimes someone’s going to get a big hit to income for some reason, they may have an executive bonus or something else that might have come in. And they’re they’re toying with selling the property that has $84,000 worth of past loss carry forward this sticking with that property. That’s a good year to sell it. Take all that lost in that in that current year.

Mike Murphy 14:28
Mike, if you’re, if you’re deferring losses every year, and you’re filling that bucket, even if you don’t sell a property, couldn’t you empty that bucket in the first year you qualify as a real estate professional?

Mike Murphy 14:40
No, you can’t? That’s a good question. That’s also a really good question. His question is, let’s say you’re accumulating these losses on four or five or six properties, and then you become a real estate professional in year six. And you have you know, X amount of dollars accumulated in, in deferred pass laws that you haven’t used That still stays with the property. And when you’re a real estate professional, you can’t pull that into the current year, you can take the current years losses, but the old stuff yet still have to sit and apply the same rules to when you sell a property over the other passive income.

Mike Murphy 15:13
So I guess the strategy would be, you know, if you don’t have any deferred losses in this bucket, you had 1031 exchange, but if you do have some deferred losses, you can offset again, then that would be a good year to just sell out, right?

Mike Murphy 15:27
Yeah, so sometimes you don’t, you don’t? Yeah, tax free exchanges are great, especially when you have a lot of gain in the property, you’ve got a appreciated property that’s appreciated quite being to take a lot of depreciation, but it’s appreciated quite a bit through the market. Tax Free exchanges are great, but occasionally, you’re gonna have tons of those pass loss carry forward and go ahead and not have to worry about the hassle of tax free exchange and just utilize a passive, passive activity loss when I say that that’s a real estate loss and dump it in the current year and offset it. Or you can do a partial, you know, you can do a tax free exchange where the whole thing doesn’t have to drop and you can you No mix it master that the planet right to Okay, let’s go let’s take him in and go over the real estate professional because there’s at least 15 people that want to be familiar with that, too. So they’re either in that involved in that or not. And it’s a it’s a really high tech area and the IRS is adding the Excuse My French hell out of a real estate professional right now they just pick them up and they’re just, I got a real estate professional audit about two years ago. I think I brought this up last year, and I went out to Santa Ana, we usually have everything transferred to Long Beach office, but the guys that will just come out sand and we’ll go over this. So I sat down with this guy who’s older gentlemen, nice guy. He said that he done 200 real estate professional audits him alive. Oh, are you that? Are you the the office expert? Because no, I there’s other people are doing it too. Because what they did is about five years ago, five or six years ago, they didn’t audit real estate professional at all. I didn’t get I got zero audits on real estate professionals for you know, since it was available all the way till maybe 2005 or six. And then there’s a couple of me heard through your CPAs Association they’re starting to pick up. So they start doing little study, start picking up these real estate professionals. And, and obviously on that they had enough adjustments where they actually focused on real estate professionals. So if you if your incomes over $150,000, and you have losses from real estate that are significant, and there’s there are different things that they look at, you have a much higher chance of getting audited for that particular thing. One of the things that they change on the on the tax forms themselves, is they used to just put an alpha, the address of the property, scripts in the property, the single family dwelling address, blah, blah, blah, Alabama, right. And so it was the computer can read that I was just alpha numeric data, it was just data. Then they changed about three years ago, after they did this study, they actually changed the forms to put that you have a separate box for the city and a separate box for the zip code. So the computer the big computer in the sky can read that and identify that you’re in California with your zip code, which is a separate box. Your address also now, and your real estate property is an Alabama, Louisiana, South Carolina whatever. So they can see that they also have a separate box for management fees. So they see management fees so that the computer can they can program the computers. Okay, I got some of those over $150,000. They’ve got management fees on the properties. Others have codes are outside the state of the of their current address, it, you know, increases the possibilities. Now, I do have some people I’m like,

Jason Hartman 18:29
what, what’s the significance though of having the property be out of state? What does that mean to the Iraqis? That’s

Mike Murphy 18:36
good. So in a real estate professional, I’ll go over that in a minute here. Real estate professional, they want to see that you are involved in the active participation of managing that property. So you’re involved in the property if you’re, if it’s in your own backyard, you’re going to be going to it you’re going to be maybe collecting around you’re going to be discussing stuff that ended up checking the gate that’s broken, blah, blah, blah, blah. If it’s out of state, then it’s tends to be that you might have someone do that for you, or maybe having a lot more telephonically. And so they want, what the IRS wants to do is prove that you’re not a real estate professional, which means you have someone else doing a lot of the work. And you’re just, you know, in the back, kind of passively actively managing it. That’s what they try to

Jason Hartman 19:18
say. So this is this is what we talked about yesterday, about the 750 hours, but 500 750 total hours, about 15 hours a week, which you can do that. But 500 of those have to be material participation. Now, I’ve mentioned this before many times, but maybe some of you didn’t catch it on the podcast or you want it the last masters. I was audited for real estate professional. If you can believe that. Like, I live, eat, breathe real estate. What else do I do? Right? And Mike handle the audit, he represented me and I won.

Mike Murphy 19:53
But feel free to do. I mean, that’s a good indication. Jason’s income was high enough and it was right out for Enough. And so they flagged him and try to create. He’s in the real estate industry. He’s definitely a real estate professional. But they said yes. But do you have? What they tried to nail him on? Was 500?

Jason Hartman 20:10
Yeah, yeah. Yeah, it was no problem to have the 750 it was the 500 of x. Oh,

Mike Murphy 20:14
750. We could show that all day. Right? But but this is where they’re trying to tag the people on. Because 750 you can be working, paying bills, calling your real estate management company, doing all investment investing activities is outside the seminar. 50 By the way, but you can do that. But they but this is where the IRS came in and honed in a yes, but you have done 500 hours of active participation.

Jason Hartman 20:39
And the problem was, at that time for the year they were on it, I think was 2007 they were auditing me for I had all property managers. I didn’t self manage anything. So they were claiming that well, you know, you didn’t participate. And what we produced is a bunch of emails I sent to property managers giving them instructions and Showing that I was engaged and involved

Mike Murphy 21:02
so we had to work. So what we did and a good CPA is gonna help you do this is going to show active so think of, you gotta be smarter than a fifth grader, whatever we think our fifth grade English class, and we have verbs, right? And we have passive verbs and we have action verbs. action verbs are things that you’re doing something you’re, you’re making decisions, you’re meeting with people, you’re and passive verbs are more like discussing things or reviewing things or paying bills. So what they’re trying to do is saying, well, this, you know, they’re trying to find as much passive activity, Pat passive action, say, well, that’s, that’s okay. You have 750 hours or 1000 hours, but you only have 400 hours or 450 hours that are active, where you’re actively involved. So for Jason, he was, you know, talking to real estate, to property managers, making decisions on what type of repairs needs to be made, who the renters were going to be. Should Should we tell renters, they have to leave Lisa They had to redo. So we just showed a lot of activity for 500 hours. And here’s the weird thing for real estate professional, it’s not an allocate, it’s not an allocated amount. If you’re a 449, you’re out, if you’re at 500 you’re in. So it’s all or nothing type thing. So it just, it just being smart, just being smart. And you can look at bills that you pay email that you do. And so you’re trying to just not say, hey, discuss, you know, reviewed income expenses with the property manager. Two hours, that’s gonna, that’s gonna, that can be added to your 750 hours. But that’s that can be part of your 500 hours. And that’s where they that’s where they’re getting their book of their the benefit. Yeah, the IRS has got some copies of what the IRS has like a workbook that they trained their their agents on, saying that active is like, if they see management fees, they automatically think of the managers making all the active, active decisions, and that you’re just, they’re just reporting to you. So then you got to show that you’re actively in involved in making those decisions and reviewing the bids for, you know, for, you know, the garage door repair work or whatever. So, so, so so so if you’re looking, you know, if you’re just let me give a description of passive because this is where everybody messes up on the passive, discussing things, reviewing things, looking at month n statements, paying bills, opening mail, that’s all part of your 750 hours, but that’s more passive management active is when you’re involved in the operations of that rental property. So you’re actively involved in making decisions on who you’re going to pick for the bid for the repair work, do you you know, this is a new roof that we need. I’m evaluating the five potential tenants so we’re going to lease this place from me, you know, so that you’re much more involved in the operations of it not passively reviewing stuff after the fact or bill paying or things that are kind of outside the property. here’s, here’s two things you can do. One is and if you’re a member where you pay $120 a year and you have a back end, you get the monthly conference calls and all that stuff. You know, I’ve done some monthly calls on self management

Jason Hartman 24:12
and the property managers in the room may not like me talking about this. Sorry, but I think the self management thing works pretty great. Honestly, I really like it. I don’t get midnight calls never happened and all these years, you know, blah, blah, blah. I know you hear those stories, but the worst thing like I mentioned last night that ever happened on the self management was that air conditioning guy in Houston, right? He got kind of mad at me. Okay, but But wait, there’s one other thing. So So self management, you can do and then you are definitely active. I mean, if you’re if you’re if you don’t have a manager Yeah,

Mike Murphy 24:44
but again, if you’re reviewing bills or paying bills, that’s going to be part of 750 but that’s not gonna be part of your active material participation.

Jason Hartman 24:49
But if you directly deal with a tenant, you are act Yes. Okay, for sure. There’s no question. The other thing you can do and this I would recommend any way regardless whether you want to be real estate Professional or not, and the property managers may not like me saying this either. But they all put clauses in their property management agreements that you signed with them that say, we have the right to spend $200 a month or per incident, maybe it might be written either way for repairs on your behalf without your approval. Now, I’ve been annoyed by property managers spending too much money over the years. And so I’ve really made that lower I make it 100 bucks a month. And some managers that I got, you know, that ultimately ended up firing me if you want to get fired and you don’t like your manager. This is one way to do it. Say no authorization whatsoever. You call me about your I mean, you email me about everything. And they might object and say, well, that’s impossible. What if we can’t reach you? Are you kidding me? You know, with this little phone, I can be anywhere on planet Earth. And I mean, I don’t know about you, but I love being connected. I don’t get these people that want to go on vacation and like disconnect. That’s overrated.

Mike Murphy 25:58
Okay.

Jason Hartman 26:00
I check my email like every, you know, 20 minutes. Okay? And you know it’s just you can just kill me it’s easy you know, it’s just an answer like Yes No, it’s not like a complicated paragraph so

Mike Murphy 26:11
for those people who do use property managers which a lot of us do that’s okay but just be involved in active and keep track of more than discussion but more decision making that you’re doing and more your or if you’re getting it you’re getting tenants are looking hadn’t email you the tenant stuff email back saying I don’t like the first one I don’t like second I like the third one, you make it three or four different emails, whatever, but show that activity and what I do as far as for all my real estate professionals, are the managers fee. I never put it on the management fee box. I never put under under the management fee box. I always put it in a different in different category. Okay, so I never let the shoulda computer that, that that’s the case and some with some of my clients. We even discussed the the zip code of the property saying well, it’s really being managed by my zip code where I’m at so it’s sometimes you do that. A couple times two, but for the most part, you know, they can’t say anything about that at the audit, but it’s certainly not tip your hat to the computer to help it out. Dino, if you’re likely to be

Mike Murphy 27:09
like Jason was audited for the 2007. tax year, are you more likely to be audited in the same year as you file the return or years later? Or do you see any correlation?

Mike Murphy 27:19
Normally an audit like right now we’re just finishing with 2011 audits, and they’re just starting 2012 auditors. So so they’re, you know, they don’t they don’t even start the audits for a year after you file. An April 15 audit, a 15 file return might get pulled by the end of the year by the end of the calendar year. Question.

Mike Murphy 27:40
Do you have to show consistent activities in for instance, in every month activity or is it okay? If they’re bunched up into a couple three months,

Mike Murphy 27:48
consistently through the year so and it’s actually beneficial to do that? And you know, you can keep track of a doesn’t have on your calendar of activity or maybe with your emails and try to try to create on that, and I’m not saying you have to have this perfect book that you bring your CPA or your tax professional. If you’re thinking you’re close, have a discussion. If you don’t get audited, save the time, enjoy the ballgame. But if you do get audited, then you might have to go back and pick up some of that and reconstruct it and work well, very close with your tax professional, and they’ll help you organize it. If they’re not familiar with it. Give me a call. I’ll help you with it the coordinate just just a log to make sure that the activities there, Mike.

Mike Murphy 28:25
Yes. If you are not a real estate professional, does that 25,000 passive loss require material participation? No,

Mike Murphy 28:32
you just suppose if you’re not a real estate professional, basically, if you own more than 10% of the property, you’re assumed to have to qualify for that. for that. 25,000. It might. I’m presuming a few people in the room just went Oh, I’m not going to be a professional. What’s the next best thing? Can you become an escort or something? You know, what’s the next best? That’s it? That’s a great question. Actually. No, because if you’re an S corp or an LLC, and you’re not a real estate professional know, when you get your K one from that entity, it gets passed through to you individually. And there’s on the K one, there’s operating income, and then there’s real estate income or loss. So that goes to run your returns showing it as a passive activity. And he’s still gotta do the qualification. Yeah. Well, you know, a lot of times, remember, if you’re going to be a real estate professional, you have to have over 750 hours 500 have to be actively materially participation. And you cannot work another job more than you work in your real estate. So and hours and hours and hours. So like Jason’s fine because he’s, he’s already working in real estate. So that all goes in the same big bucket, right? But for a lot of us, we’re, you know, we have another profession. So if I were 2080 hours, which is 40 hours a week times 52 weeks, then that means I have to work 2081 hours in real estate in order to be a real estate professional. So it’s pretty tough to do that. The other way to do that is if you have a spouse or non working spouse or part part time spouse, then you might be able to qualify that way. So

Mike Murphy 30:04
that would be might be more fun to besides real estate professional do another one if you

Jason Hartman 30:08
can if you could do that I would definitely be married.

Mike Murphy 30:16
Over here good. You said it’s all or nothing right? So 450 hours of active you don’t count 500 hours you count how do you prove how many hours off of emails

Mike Murphy 30:25
so you’d have to put together a log so like I have a log that I usually shoot over to my client that’s an Excel sheet and kind of go through it and fine tune it and see if you can kind of quantify it as you’re going up. I’m a 450 hours I’m at five and 10 hours I’m at 530 hours or whatever. So you know you if you if anyone ever gets out of that they need a log and then put that together. Email me. I’m Mike. I should put this up I’m Mike at Murphy three.com

Jason Hartman 30:50
Okay, three is a number good Irish Catholic for

Mike Murphy 30:52
Murphy. Murphy three because remember, Murphy, Mike Murphy three.com you can email me or you can call me. We’re moving Be three or websites, Murphy three.com. So give me a call. And I’d be happy to forward you an example of that log. And you can fill that up. A lot of times, like I said, if you just kind of keep a good calendar, and again, you know, your email goes into one file and stuff like that. If you think you can qualify, then go ahead and do that. I don’t want to spend 100 hours and a log that you just fall away in three years from now just you toss it, and is it good to spend 200 hours with your family or your part time spouse, whatever? So

Mike Murphy 31:27
this is a question for maybe both Jason and and you, Mike. Jason, you mentioned in passing a few minutes ago about if you’re not, you know, if you’re an active and you’re not a real estate professional, you mentioned to start a business. What do you mean by that? If you’re not a real estate professional, I didn’t mean it relating to real estate.

Jason Hartman 31:45
Okay, I just meant, I think everybody should have some sort of home based business where they can pass a few more expenses into the right off category. So you know, maybe some of your auto mileage like if you’re a W two person, you Have any business of your own, I highly recommend you have some business of your own underwater basket weaving business, whatever you want. Okay, but in I don’t know how long you’re allowed to lose money on something, you know, maybe not very long, maybe three out of five years.

Mike Murphy 32:17
There’s a hobby law saying, hey, you’re just in business for the fun of it. If you lose for the four years in a row, they say, you can lose three, you can have a lost three out of five years, and you’re considered okay, but if you haven’t more than three to five years, they’re getting considered a hobby, that you’re just business to have fun. And the profit motive is not there and they can take it off your off your ear.

Jason Hartman 32:35
So you know, you could have a windsurfing business. I’m joking a little bit, but you know, there’s a lot of stuff you could do you know, all these online things and whatever, you know, selling just Could you just have a little side things so you can write some expenses off, that’s all, you know, like some of your cell phone bill, your internet access, maybe a home office deduction.

Mike Murphy 32:54
So going back to the real estate professional. One question I have is I’ve saved got a lot of stuff out of state. Would it make sense that if I had purchased a property in state that I can manage locally? And I do manage that one as part of it? Yeah. And then that would kind of be my primary focus. Yeah. Even though you’re not going to get that many hours out of it. It does show that I’m an active

Mike Murphy 33:12
man. That’s that’s a good point. You, can you Well, all my real estate professionals group did make a grouping elections that says all the real estate together as combined to make up that 500 and 750 hours. So yeah, let’s say you have one that you can go back and forth, go to the tenant, meet the gardener, that you can add a lot more hours on that one property, then you’re out state properties. That’s correct.

Jason Hartman 33:34
It kind of seems like this is a little bit like communism, Doug likes always say the saying, you know, we act like we’re working and they act like we pay us and they act like they pay us. You know, you kind of want to you sort of show that you’re doing these things.

Mike Murphy 33:49
If you do that, if I are sending that log, I’ll have suggestions on you’ll see that where it says description of what you’re doing, have action words and the active part and then the other stocks can be review words. And if I do a select and sort? Yeah, I can add the I make sure that’s all before I send it back in. It’s all you know, it’s going to go to the IRS with over 500 active participation. hours. Okay, good.

Mike Murphy 34:15
So, am I correct in thinking that if you were to actually tell all of your outside managers to refer virtually all decisions to you before they’re made? That could easily come up to 500 hours a year, then it’d be a no brainer you’d get

Mike Murphy 34:31
Yeah, actually, what Jason said is a good idea. I mean, you can even have a separate separate agreement to say, No, I want all active decisions be made by me before and these things were made. So I want to run by things I want to be understand what repair work needs to be done. I want to look at the vendors. I want to see, you know who the who the best repairman is going to be and I want to make the decisions. That would be actually you can almost draw them up and have them sign it and say, Look, I’ll sell it let you make some decision. But as far as cosmetically here, we’re going to show that

Jason Hartman 34:57
and the other strategy is do a lot of you Communications via email. So there’s a paper trail and it shows that you really were doing something.

Mike Murphy 35:04
This is not really a question. But Mike, you work locally

Mike Murphy 35:07
here. Do you work with clients all over the US?

Mike Murphy 35:09
Yes, I do. So because a lot of I plants all over United States, probably two thirds over here in Southern California, the other third are spread all over the other 49 states.

Mike Murphy 35:20
In the area of tax write offs, how do you feel about foundations versus like home based business?

Mike Murphy 35:26
Well, a foundation, you start your own foundation, you can contribute money to that and get a deduction like a charitable contribution. So if it’s your own foundation is limited to 30% of your income for that year. So if you made $100,000 $3,000 would be the max you put in there, and then that goes in your foundation, and then you can decide how you’re going to divvy it up. The other way to do if you have a sweetheart personality already, and you want to give that much to somebody you can give 10 or 10, whatever amount to the charity to that charity of your choice and accomplish the same thing. But some people like to accumulate Foundation, so you get the right off for that but if you put $30,000 in there, it’s I can save you $30,000 in taxes, that $30,000 depending on what tax bracket you’re in might save you to run your foundation that you need for it. That’s true. Yeah, so if you can fold that stuff into the purpose and mission statement of the foundation, then you’d be able to utilize some of those expenses that you you’d otherwise have. You’re paying for yourself. You pay through your foundation.

Mike Murphy 36:20
And then you get the deduction for the foundation. Go ahead again. Yeah, you guys shouldn’t use Mike. He’s like a magician. Thank you. He’s really awesome. Thank you. Appreciate that.

Mike Murphy 36:35
This show is produced by the Hartman media company All rights reserved for distribution or publication rights and media interviews, please visit www dot Hartman media.com or email media at Hartman media.com. Nothing on this show should be considered specific personal or professional advice. Please consult an appropriate tax legal Real Estate or business professional for individualized advice. opinions of guests are their own and the host is acting on behalf of Platinum properties, investor network, Inc. exclusively.

Leave a Reply

Your email address will not be published. Required fields are marked *