 and nicely and this is the life of the land is in its real estate. Today we're going to talk about the tax advantages of owning a home and I have Jason Graves from Ho Siu Advisors and he is an enrolled agent. So hi Jason thanks for joining us. Thanks for having me Kena. So yeah go ahead and tell us a little bit about yourself. Well I grew up here in Hawaii in Kailua. I went to Punahou, went to college on the mainland and started working in taxes about 20 years ago and decided to move back to Hawaii about 10 years ago and start my own tax practice. Wow okay so I introduced you as an enrolled agent. What is that exactly? That's a good question. Most people don't know what an enrolled agent is. Basically there's three designations that can represent someone in front of the IRS. An attorney, a CPA, and an enrolled agent. An enrolled agent has to go through approximately two days of testing and it's specifically on taxes and it's a license that the IRS gives out. It's one of their highest licenses and it allows me to prepare taxes for anyone anywhere around the United States. Pretty much any tax return. So wow okay so about taxes. So what are the tax benefits of owning a home or are there tax benefits of owning a home? There are tax benefits of owning a home. If you own a home you can write off the real estate taxes and the mortgage interest that you pay and I believe right now you can also write off the mortgage insurance if you have any and it depends on your tax situation because we all have a standard deduction and you either take the greater of the standard deduction or your itemized deductions which includes the real estate taxes and mortgage interest if you have any. So that would be a benefit. Okay so if someone paid cash for their home or if it was paid off and they weren't paying PMI or the interest then they would probably want to go the other route of the standard deductions. Most likely but again it depends on their own situation but most likely it's the mortgage interest that people pay that helps them help their itemized deductions become higher than their standard deductions and therefore more beneficial to itemize. Okay all right so while they're itemizing I know I'm a real estate agent I get all kinds of questions and I'm always like you need to talk to your tax advisor but what about can you if you do home improvements can you write those off on your taxes? Generally for a principal residence now generally no they go into what's called the cost basis or the cost of the property that you bought and when you go to sell the property then that'll reduce your gain. Okay so that leads into my next question so what about if I sell my home sell my home? Is there you know I know there's capital gains taxes how do those all work and is there a way to avoid those or how do those work? Sure so if you sell your principal residence and you've lived in it for two years you can protect or not get taxed on up to $250,000 of capital gains if you're single if you're married that doubles to $500,000 so let's say you bought a home for $500,000 you sell it for a million you would walk away with no capital gains. Oh okay so that that's beneficial so I know people out there through COVID have taken loan forbearance. What's the tax implication of taking loan forbearance? Oh that's that's a very tough one because that's very taxpayer specific so we'd have to dive into the rules a little bit depending on their specific situation but some people if there's loan forgiveness or mortgage interest that may be non-taxable however if we're talking about like credit card debt if someone's forgiven their credit card debt then most likely that's income when when debt is forgiven the IRS says most likely that that's income to the taxpayer. So so the forbearance that they're tacking on to the end of their loan is not something that that they can claim or is it a benefit or is it hot you know is it harmful to your taxes too having taking loan forbearance. That's um that would be a very taxpayer specific question sorry it depends that's probably an income answer on that one. Okay all right so I work with a lot of investors and I know some of them have been asking me what's the tax implication when their tenants aren't paying the rent? That's a very good question and that's happening a lot nowadays so most taxpayers individual taxpayers are cash basis what does that mean that means whenever they receive income let's take the rental rental situation when you receive income or a check that's when you record it but if you're not receiving any income or not receiving your rent check if you're landlord then you don't record it as income so for that month it would you would just keep track of your expenses. So essentially a lot of these landlords let's say someone doesn't pay their rent for six months at the end of the year most likely they're probably going to run a loss because they have half as much income coming in and probably just as much expenses. Okay all right so I then I get this question all the time and we talked about this with so much working from home through COVID-19 can you write off your home office can we write this off our taxes since we're all here working from home now? Oh that is another great question and I'm gonna have to say it depends it depends if you work for an employer and you usually have an office to go to probably not if the employer said you know what you're you're gonna work from home that that's a tough one again yeah it really depends if you have your own business and you don't have a storefront or you don't have a place where you do business you do business out of your home that's very strong candidate for a home office but there's a whole list of rules that go into that as well. Yeah so what what would constitute if I wanted to write because I again I'm a real estate agent so I do work from home um what would I need if I wanted to write off a portion of of my home office that I have you know in a third bedroom in my house? That's a great question and you had a great answer if you have a dedicated space not a corner of a dining room but a dedicated room like a third bedroom um where you could put a desk and a computer and really designate that as a workspace that's a very strong support for having a home office and the IRS looks for support so the more support you have the better chances you would you would survive an audit let's say. There is a they call it a de minimis rule um or a safe harbor rule not de minimis I'm sorry a safe harbor rule where um and again we have to dive into the details for a home office a little bit but it basically says if you live let's say in a studio apartment where you don't have another room right um you could probably dedicate a very small space if you have a desk and a computer and you could probably take some of those home office expenses there's there is actually a court case in New York where um a taxpayer uh they went to court and she said I work from my apartment it's a studio I don't have a a separate room um and she won so um so I need to take a photo of my my office the day I get you know if there's a day I get audited um how do you prove I mean I photo would photo would be good um I would go to if it were my client I'd go to the county city and county website and pull down a schematic of their property um so you have a third party telling the auditor here's a schematic of their their property here's the you know the maybe the third bedroom or whatnot um they don't have any children uh you know uh you know the IRS if you can have if you can supply some really good support um I think he'd probably um survive an audit it's facts that the what am I trying to say I'm trying to find a good word reasonableness the IRS wants you to take a reasonable position and I believe if you take a reasonable position most likely you'll survive oh okay well that's good to know so I'm gonna kind of switch gears here um I do work with a lot of investors um is are there tax benefits to um first of all like let's talk about flipping homes people who buy homes rehab them and put them on the market is there a tax benefit um to doing that to to buy multiple properties um let's let's take let's take the flipping okay that's that's that can be a hot button issue um the flipping is basically here's the issue with the flipping it's either capital gains or which is a lower tax bracket or um short-term gain or ordinary income and those are all kind of different tax tax implications there okay uh a long-term gain would be if you bought a piece of property flipped it let's say um after a year and a half and sold it okay capital gains rate is a small smaller rate right um so that's probably the ideal if you flipped it in less than a year less uh 365 days or less then that would your ordinary rate would be your your tax rate okay so most likely a little higher than your capital gains rate there is a kind of a gray area in this space because if someone let's say doesn't have a w2 job doesn't have any other operating business on their tax return you know something that they do for a living all they do is flip houses that's their main source of income the irs might again this is very facts and circumstances uh related the irs might come back and say hey this is actually your job and you're subject to self-employment tax which uh which is kind of another you know you being a realtor is probably uh you probably know about self-employment tax because because uh self-employed uh people um have to pay that most of the time yes so what about my investors that are buying and holding and and they're doing rentals are there tax benefits or is that a tax risk to uh there are wonderful tax benefits for rental property um there's three major ones i think um one again this is facts and circumstances but i would think 90 of the landlords out there fall into this category that if you have taxable income from uh real estate uh rental real estate which the irs deems is passive income um that's not subject to self-employment tax so self-employment tax is a 15 generally about a flat 15 percent um rate so you're not subject to the 15 percent rate on any taxable income that's number one the second benefit um is a 1031 exchange what is that that's a like kind exchange what does that mean that means if i want to sell a property uh that i've been renting um generally it's two years again that's kind of a gray area but generally if i've been renting it out using it as investment property for two years i can sell that property buy another property or multiple properties and any gain in the property that i sell is automatically rolled over into those properties and i don't have to pay tax on that so that's that's the second that's the second the third and i think it's one of the most most powerful is depreciation so when someone buys uh investment property and rents it out uh a portion of the purchase price is allocated to building and another part is allocated to land now land doesn't depreciate right land is land it doesn't go anywhere it doesn't lose its value for the most part but a building does and the irs does lose its value the irs has deemed that the price that you allocate to the land to the building is going to depreciate at uh over 27 and a half years what does that mean that means that if you have let's say $270,000 allocated to the building that you purchased and that you're renting out you're going to take approximately ten thousand dollars of depreciation expense every year what does that depreciation expense do it's an expense so let's say you have a net income of five thousand dollars okay from from your rental for the year and you have ten thousand dollars in depreciation expense that ten thousand dollars depreciation expense will come in and wipe out the five thousand dollars of of income okay powerful huh yeah so it does sound like you know investing in some rentals is probably a good tax benefit um all right so I did have one of my clients ask what are there legal ways to save on legal is the key word there uh legal ways to save on taxes as an investor Lee wow that's that's I I just illustrated one yes um yep um the the like kind exchange is another and and this goes for any those are those are real estate pacific but any investment almost and I have to qualify myself and this is not tax advice to anybody in particular okay I always tell people you need to um uh visit with your tax advisor for your specific situation but in terms of investing in almost any asset the best way to do that is to hold it for long term and you get the capital the capital gains rate long term capital gains rate and that's generally going to be lower than your ordinary rate all right so for our last few minutes we are going to switch gears again and we're going to go into LLCs so I always get the question should I buy this property in my LLC or in my own name and again I always say you need to talk to your tax advisor because that's not my job or my expertise so what is your advice what should people if they want to buy even let's first let's talk about their own homes should they purchase those in their own names or is there a benefit to purchasing purchasing in an LLC I would not purchase it in the LLC because that to my knowledge to my knowledge now and I don't know the whole code I don't think anybody does um if you purchase the home your principal residence and put it in LLC and live in it you will not be able to take the 250,000 or 500,000 dollar exclusion capital gain exclusion when you go to sell it now let's switch gears over to rental real estate which is I think where the the the main question is um LLCs are a legal entity there's no tax benefit owning an LLC so there's no LLC tax return there never has been um that's purely I think for for asset protect not purely I'm sorry I'm back up there it's mainly for asset protection there's probably some other advantages that the attorneys would would talk about so they'd I would say visit your tax advisor and your attorney um but from from a tax standpoint LLCs again are legal entities but once you create the LLC and this is how I explain it to my clients when you create an LLC you're basically creating another entity another person a pseudo person let's say now the IRS says behind that that's great you have a pseudo person but we need to know how how do you want this pseudo person to be taxed do you want this pseudo person to be in your own personal tax return that's a disregarded entity um if only one person owns the LLC or you can tax the tax the LLC is a partnership or is an S corp or a regular corporation so what happens when you create an LLC you have to kind of hold up your hand the IRS and say hey mr or mrs irs we'd like to um have you tax this this LLC is a corporation so that's that's on the that's the tax advisor that's that's pretty much my job okay um so that's with if they want to buy rentals should they buy rentals we're saying they should buy rentals in an LLC or what what do you advise clients then for again for tax wise it it has no bearing tax wise whatsoever um for uh you know for uh asset protection you know you'd have to talk to your attorney but um I believe and I've I've read enough to to think that there's a there's a good amount of asset protection but then that that's the attorney's realm I don't want to steal too much fire from them okay so are there any other um any other advice you could give people just just general tax advice whether it's owning properties rentals um we didn't really touch on what if they're investing in the the stock market are most of those we have time we could spend a couple minutes if their investments are not real estate um how do the taxes work on those okay uh so let me touch on the LLC for a bit okay for real estate um because I get a lot of questions I deal predominantly with business owners and real estate investors um I would keep things simple as you can um people like to create a lot of LLCs like one LLC per property um I would caution um on that and and only because because of this fact um every LLC you create generally speaking generally speaking um you should have its own bank account its own federal ID number um so that's a lot of bookkeeping and okay so you want to you want to keep it as simple as possible so you because I have always heard and and people again people ask me and again I'm like yeah you need to I'm a consultant expert if they should open because I work with people who buy houses flip them and then resell them if they should have a separate LLC for each property um and that is a question I get so you do not recommend you recommend it's okay to put three of our properties into one LLC I think the rent if you're renting them um I think that's probably a good idea um particularly if you're going to go out of state you know if you want to have uh if you want to invest in you know properties in Kansas um then maybe you create one LLC for all your Kansas properties um if you do flips I've heard you know some people might want to create one one LLC per flip but I think that's that's you know that's okay because you're not going to keep it around too too long I mean it's just if you have 10 properties in Hawaii having 10 different LLCs with 10 different bank accounts that's uh that's a that's a lot of bookkeeping all right so is there any other quick advice you want to give our viewers um um keep things simple um really try to um be well organized that helps your tax professional and you know when things start getting I know a lot of people do like to do their tax returns themselves but when it starts getting to be a headache I'd look for um a tax professional who's uh has a lot of uh real estate and business experience oh all right well thank you so much for joining us today and thank you for joining us on the life of the land as the real estate I will be back in a couple weeks and we will have an investor who is investing in multiple doors on the mainland while he lives here in Hawaii as you talked about and we'll be sure to cover whether he has them in one LLC or several um and he's going to tell us how he's been able to do that and manage that from Hawaii and I wish you all so a happy holiday tomorrow and I will see you all in a couple of weeks