September 5, 2025 • 20 mins
Did your accountant tell you to "just buy real estate and do cost segregation" to save on taxes? Then they're giving you incomplete real estate tax advice. In this podcast, I explain why buying rental property and doing cost segregation won't actually save you money on taxes without the right real estate investment tax strategy.
Here's what happens to business owners and entrepreneurs: You hit six figures in ordinary income, your accountant says buy real estate for tax benefits. So you purchase investment property, do cost segregation accelerated depreciation that lets you write off some of the purchase price through bonus depreciation. Sounds great, except those real estate losses are passive losses. Your business income is ordinary income. Passive activity losses can't offset ordinary income unless you qualify for real estate professional status, short term rental strategy, or self rental strategy. Your accountant probably didn't mention passive vs ordinary income rules.
I break down how to convert passive losses to active losses through real estate professional tax status including 500 hours material participation test and how to qualify your spouse as real estate professional. I also cover short term rental tax strategy for properties that meet IRS definition like Airbnb, plus self rental tax requirements when renting to your own business. I explain why you should never buy real estate in S Corporation and how becoming a passive partner in deals helps accelerate real estate tax deductions when you start buying properties.
Bonus depreciation 2025 is back making cost segregation depreciation and real estate depreciation more powerful for real estate investing tax benefits. No more falling for the "just buy real estate" lie when there's so much more to making rental property tax strategies and investment property tax deductions actually work for your situation.
I've put together this FREE resource for you:
7 Write-Offs Every S-Corporation Business Owner MUST Know
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*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this ...
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Episode Transcript
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Speaker 1 (00:00):
Business owners.
They become very profitable andthey're doing really well in
the business and you startmaking seven figures.
What's the next thing that youlearn about then you can start
doing to reduce down your taxliability?
That is to invest in realestate.
Now a lot of business ownerswatch a lot of content online
and they're told hey, buy realestate, do cost segregation, you
can write it off.
That is not true.
Now a lot of people think thatif I'm a real estate
(00:21):
professional, I need a realestate license.
Nope, you do not need realestate license.
This is where a lot of peopleactually trip.
Okay, and they're being lied to.
They're saying, hey, do costsegregation, your spouse can
basically be a real estateprofessional, but you also have
to meet material participation.
If you are investing in realestate, do it right and do it
(00:42):
with a tax strategy.
Investing is nice.
Doing cost segregation is nice.
Generating paper loss supernice.
What's not nice is that whenyou're told to do all of this
without a tax strategy, Welcometo the Tax Reduction Podcast for
Money-Making Entrepreneurs withBoris Mushaev.
Speaker 2 (01:02):
Boris has helped entrepreneurs across the United
States collectively savemillions of dollars in taxes
with the power of tax planningand advisory.
The only way you, the businessowner, can save money on taxes
is by using proactive taxstrategies, and this podcast is
all about saving you money ontaxes.
Boris will share with youin-depth and easy-to-understand
(01:22):
tax reduction strategies thatyou can implement in your
business within 30 days or less.
Let's jump into today's episode.
Speaker 1 (01:30):
Hey, boris Mushaev here.
So look, if you want to investin real estate to save money on
taxes, just investing realestate and doing cost
segregation deduction is notgoing to save you money on taxes
.
Okay, despite what youraccountant, or whoever it is
that you listen to says, youactually need a tax strategy
when you invest in real estate.
I'm going to break down for youwhat type of a tax strategy you
(01:51):
need, how to actually qualifyfor these tax strategies, using
IRS laws themselves and be ableto maximize your deductions when
you invest in real estate.
So don't listen to all the liesout there.
So let's play nice and let'sget into a tax strategy.
So I wanna bring this example.
So a lot of times, businessowners they become very
(02:12):
profitable and they're doingreally well in the business and
you start making seven figures.
What's the next thing that youlearn about?
Then you can start doing toreduce down your tax liability.
That is to invest in realestate.
So you go out and buy aproperty worth a million dollars
okay, purchase price, but afteryou deduct the land, because
the land cannot be depreciatedafter you deduct the land,
(02:36):
you're left with $800,000.
That is the depreciation.
So what happens is that if youdo cost segregation study.
For those of you that don'tknow what cost segregation is,
it is accelerated depreciationthat allows you to write off
about 25% of the purchase pricenet of land, so that will
produce $200,000 in additionaldeduction.
(02:56):
This $200,000 that you're goingto do cost segregation to
accelerate your depreciation andtake as a deduction may not be
deductible right away for you inthe first year if you do not
have a tax strategy.
And a lot of business ownersare told or they watch a lot of
content online and they're toldhey, buy real estate, do cost
segregation, you can write itoff.
That is not true.
(03:17):
The reason it is not true?
Because you have to understandthere's mainly two types of
incomes.
That is on your tax return,right?
So business income usually.
So I'm doing this for businessowners, right?
Typically business owners arethe ones that are generating a
lot of profit and they want toreduce down their tax liability
by investing in real estategenerally.
There's two types of incomeincomes that can be reported on
(03:38):
your tax return.
There is an ordinary income,which is also your business
income.
So let's assume this is amillion dollars.
Okay, you make a milliondollars in your business.
Then there is a passive income.
And let's assume you have$125,000.
I don't know why I picked$125,000, okay, but that's
passive income.
Okay, two types of income.
The thing is, there's really nodifference between them when it
(04:01):
comes to taxation.
Both of them get taxed at thesame income tax rate.
Right, we're assuming this isnot capital gains.
Okay, this is passive income.
That could be from your realestate, commercial real estate.
This could be in the businessesthat you have invested and you
became a passive partner, which,by the way, if you have a
business that you are going tobe opening or investing, where
(04:24):
you have an opportunity tobecome a passive partner, you
should absolutely speak to yourtax advisor how to do that,
because that will help youaccelerate deductions when you
start buying real estate.
But that's a topic for anotherday.
If you are a profitablebusiness owner, you do not have
a tax advisor.
Get yourself a tax advisor,otherwise you will continue
(04:46):
overpaying in taxes.
Okay, but let's come back tothis example.
So we've got ordinary incomeand passive income.
Okay, this $125,000, it'spassive income and ordinary.
They're all both taxed at thesame rate.
So if you are at 35% taxbracket, guess what?
You're going to pay 35% on both, regardless what type of income
(05:06):
it is.
Now here's the kicker Realestate losses, right?
In our case, let's say, costsegregation gave you $200,000 in
losses.
Real estate losses areconsidered passive.
Okay, because generally realestate income is considered a
passive income.
So all the activities from realestate.
If you're not a real estateprofessional, they're considered
(05:27):
passive, so are the losses.
So in this case, let's imaginethat you actually have a, or
let's assume, imagine what acreative way of being an
accountant.
Okay, let's assume you have$125,000 in passive loss right
here.
This $125,000 now cannot bededucted against a million
(05:50):
dollars ordinary income.
So let's just say that.
You know let's use our numberof 200,000 from the example
before Right, so you made, youdid a cost segregation study,
you accelerated depreciation.
The $200,000 cannot be deductedagainst ordinary income.
Well, what happens to this$200,000?
It just gets carried over.
(06:10):
Okay, it gets carried over.
So I'm going to put FY, not FUFY.
Okay, it's getting carried overto future years.
Okay, now you still end uppaying taxes on a million
dollars.
So if you do the costsegregation and you paid a lot
of money to get it done and nowto find out you cannot deduct it
, so let's talk about a strategywhen is passive losses or when
(06:34):
are passive losses actually notpassive losses?
How can we turn it into notpassive losses or actually take
it as a deduction?
There's three scenarios.
We're going to talk about thereal estate professional.
We're going to talk aboutshort-term rentals and we're
going to talk about self-rentals.
We're going to cover it allafter this break.
Speaker 2 (06:51):
If you have a tax preparer and you do not have a
tax advisor, the only way youcan save money on taxes is by
using proactive tax planningstrategies that only a tax
advisor can give you.
Bora's put together a free PDFfor you, the business owner
Seven tax write-offs everyS-corporation business owner
must know.
In this PDF you can find seventax strategies that you can
(07:15):
start using in your business toinstantly start saving money on
taxes.
Click on the link in thedescription below for a free
download.
Speaker 1 (07:21):
All right, let's talk about a real estate
professional.
Okay, by the way, this costsegregation thing I don't think
I mentioned it earlier Becausewe passed, or the government
passed, one big beautiful bill.
Bonus depreciation is back,which is why real estate
deduction becomes a lot moreimportant or a lot more bigger,
I should say and investingbecomes a lot more important,
(07:41):
okay, so.
Okay, investing in real estate,doing cost segregation, is a
great tax strategy, but, like Isaid before, you need a strategy
behind it to be able toactually materialize your
deductions and your losses.
One of the ways you can do thatis becoming a real estate
professional, either you or yourspouse Now, this is you, or I'm
going to put spouse.
(08:02):
Now, here's the thing you, as abusiness owner, are generating
a million dollars.
Okay, so you need to activelyparticipate as a real estate
professional, but you're notbecause you're in business.
Okay, real estate professional,you just have to meet the IRS
definition.
That means more than 50% ofyour time has to be spent doing
real estate, investing in realestate, taking care of your
(08:23):
tenants, anything that is realestate invested.
Okay, I'm not going to get intodetails of all the to-dos that
you have to do, but more than50% of your time.
Additionally, it has to be atleast 750 hours.
So in our tax advisory firm,when a lot of clients come to us
, mainly we have one spouse thatruns the business, another
spouse does not.
So what?
(08:44):
We say, hey, can this spouse beinvolved in your real estate?
Like, yeah, absolutely, myspouse actually does work in
real estate.
She takes care of the tenantsand so forth.
Great, we can qualify thatspouse as a real estate
professional because that spousedoesn't have any other job.
So for sure, more than 50% ofthat spouse's time is being met
for this rule.
(09:04):
Okay, then that spouse has todo at least 750 hours a week.
I mean, excuse me, a year.
If I'm not mistaken, it comesout to about 14 hours a week.
14 to 15 hours, okay, and youare now qualified as a real
estate professional.
That could become huge for you,because now, if you invest in
this real estate, this $200,000can be tax deductible.
(09:27):
Why?
Because your spouse is a realestate professional.
Now a lot of people think thatif I'm a real estate
professional, I need a realestate license.
Nope, you do not need realestate license, you just need to
meet the IRS definition ofbeing a real estate professional
.
Now you also need what's called500-hour material participation
.
So what does that mean?
(09:48):
Let's say you own threeproperties right here, right?
So let's say your spouse or youtogether, your spouse is a real
estate professional, but nowyou have to meet material
participation.
This is where a lot of peopleactually trip, okay, and they're
being lied to.
They're saying, hey, do costsegregation.
Your spouse can basically be areal estate professional, but
you also have to meet materialparticipation.
(10:10):
It's not enough that you are areal estate professional.
Okay, you also need what ismaterial participation?
I keep talking about it.
Let's just get to it, right?
That means if you combine yourhours spent on this property not
you doing real estate overall,but on one property at least 500
hours.
So obviously, if you've got aresidential home, one
(10:30):
residential home, and you'respending 500 hours a year on it,
it's probably not a very goodprofitable venture and IRS is
not stupid, right?
So if you've got one propertylike yeah, my spouse doesn't
work, they do 750 hours lookingfor properties, driving around
and we only have one propertyand they materially participate
there, that's probably not goingto fly with the IRS.
But if you already have two orthree properties, you can
(10:53):
combine the hours spent on eachproperty.
So let's say property one 300hours, 100 hours and 200 hours.
Together that's 600 hours.
You can group them.
Okay, you can group them.
Irs allows you to group youractivity.
Here's the kicker, here's thebest part about it.
Right?
Again, a strategy.
What if you, the business owner, did 200 hours here and the
(11:19):
spouse did the other two, 400hours?
Does that still qualify asmaterial participation?
And the answer is yes, okay.
So that is the cool part aboutthis.
But you cannot combine bothspouses hours for real estate
professional, but you cancombine it for material
participation.
So if you are investing in realestate, do it right and do it
(11:43):
with a tax strategy.
Okay, because investing is nice, doing cost segregation is nice
.
Generating paper loss supernice.
What's not nice is that whenyou're told to do all of this
without a tax strategy.
So real estate professional isa tax strategy number one.
(12:03):
Let's move on to a tax strategynumber two.
If, for whatever reason, yourspouse says you know what, I'm
not going driving around lookingat properties, I'm not doing
any of the real estate stuff,you go ahead and work in the
business.
Buy me all the nice things Idon't want nothing to do with it
.
I don't care.
If you want to invest in realestate, you go ahead and do it,
and I want nothing to do with it.
Then you're like Boris, what doI do now?
(12:24):
I'm stuck with this $200,000loss that is being carried to
the future years, but I want todeduct it.
What do I do?
Let's talk about anotherstrategy that you can use to
write off your paper losses, andthat is a short-term rental
strategy.
So if you meet the IRSdefinition of a short-term
rental strategy, that means youraverage stay per tenant is
(12:47):
seven days or less.
What does that mean?
So let's say you've got tenantnumber one two days, tenant
number two 10 days.
The average is six days.
That already meets this test,okay.
And you have to activelyparticipate in your short term
rental a hundred hours.
So that's very easy to meet.
That's there you go, and that'sthere you go, and that's how
(13:08):
you meet that 100-hour test.
Okay, that is activeparticipation.
Then we've got you have to workthere more than another person.
So let's say you've got aproperty manager that manages
your entire property.
Then you'll probably fail thistest, okay.
So we don't want to meet, wedon't want to fail this test.
We want to meet this test atleast the first year.
Follow me on this.
(13:29):
So let's say you have noproperty manager and you are
doing everything, so you are atshort-term rental by the IRS
definition.
So put out the property onAirbnb, vrbo, whatever you want.
Now any losses generated fromshort-term rental doing cost
segregation are ordinary losses,because IRS does not consider
(13:50):
short-term rental as passive.
Why?
Because they're classifying itquote-unquote.
This is like you're treating itas a hotel.
Right, you have an activebusiness.
It's an active trade orbusiness.
So the income generated fromthis is ordinary because you're
actively participating.
It's seven days or less.
You're operating as if you area hotel and you're actively
(14:11):
participating more than anyother person that is also
helping you with a property.
So IRS says you know what?
This is no longer passive, thisis ordinary.
Now short-term rental thisbecomes ordinary and now the
$200,000 can be deducted againstyour million dollar business
profit.
Okay, that's a short-termrental.
Now you might be thinking, boris, well, I don't want to deal
(14:33):
with tenants, airbnb and all ofthose tenants.
Cool, that's fine, but there isa still strategy.
What if your first year youtreat this property as a
short-term rental?
You meet all the rules.
You put it out on Airbnb.
You do not rent it for morethan seven days.
You actually activelyparticipate in it.
Make money, rent it out totenants on Airbnb.
(14:57):
Do all of that stuff your firstyear, do cost segregation,
generate the $200,000, get yourdeduction the second year.
You know what?
I don't want to be activelyparticipating in this anymore.
I want to focus more on mybusiness.
Great, you can turn this backinto a passive activity, which
is the regular rental.
But remember, in the first yearyou participated, you met all
(15:19):
the rules, you worked.
It was treated as a hotel.
The losses that are generatedare ordinary losses and can be
deducted.
Because now you've done thisbeautiful thing that's called
cost segregation 100%depreciation from one big,
beautiful bill.
All right, that is thatstrategy.
Now let's talk about anotherstrategy.
(15:43):
I love this, right, this isamazing.
Now, this is for thosebusinesses that actually own
their own commercial building inwhich their business is
situated.
Right, so there's two ways youcan have a property for your
business.
So let's say, you have an Scorporation, okay, so you've got
an S corporation, okay, thatowns your business, right, so
(16:06):
I'm just gonna well, it does ownthe business.
I'm just gonna write businessactivity, right.
So you've got business activityand the S corporation buys real
estate.
So I normally never recommendand if you're working with a
proper tax advisor and anaccountant, they should tell you
that you're working with aproper tax advisor and an
accountant they should tell youthat you should not be buying
any real estate in an Scorporation.
(16:26):
There's some.
Sometimes you may need to dothis for a completely different
reason, but honestly, you do notwant to have a real estate in
an S corporation.
So what a lot of my clients doand what I recommend to them
instead is that when we have anS corporation and you want to
buy a building for your business, just put it into an LLC.
I'm going to put it a triangle.
(16:47):
This is an LLC.
Okay.
Now this between S corp and LLC, right?
S corporation will pay rent toyour building.
Now there is a relationship.
Okay.
Now what happens is that theybecome under IRS rules and under
(17:08):
IRS eyes, this becomes oneactivity.
Okay, I kid you not.
This is all in the IRS tax code, right?
Irs is if you are renting yourown building to your business,
you become one activity.
Any losses generated from doingcost segregation can be deducted
against your S-corporation, butyou have to meet what's called
(17:30):
an economic test.
Now, what is an economic test?
This is really important, bythe way, business owners that
are watching.
That means either you or yourspouse have to own the business
100% and you or your spouse haveto own your rental property
100%.
Did I say 1% here?
I don't remember what I said.
100% and 100%.
(17:50):
Now if it's you and yourpartner owns this and you and
your partner owns this, youstill meet the test.
Now you also have to be yourown tenant 100%.
If you're not your own tenant100% let's say there is 50% you
and 50% another tenant and youdo meet economic tests then only
50% of losses generated in theLLC let's say doing cost
(18:15):
segregation can be deductedagainst you as corporation
profit.
In most cases, my clients thatwe work with they're like all
right now, I understand thescenario.
Maybe I'd rather invest in abuilding.
I have an opportunity to investwhere I am the only tenant, so
I can do this, and actually wehave few clients right now using
this strategy and we are doingexactly this for them.
(18:37):
So this is another strategy.
So when you combine this, thereis no passive losses generated
from this building.
Why?
Because we're combining it and,by the way, if your accountant
does not know this and if youhave the situation, you should
let them know.
Hey, do this for me and attacha statement to the tax return
letting the IRS know that we'recombining, grouping, in other
(19:01):
words, both activities.
So these are the three realestate tax strategies that you
can use.
Obviously, if you're doing thecost segregation, investing a
lot more in a lot more buildings, you don't want to deal with
the short-term rental, you don'thave the self-rental, the real
estate professional, qualifyingyour spouse is the biggest play
for you, especially doing thematerial participation.
(19:22):
Again, if you've got oneproperty, okay, if you have only
one property, you did the costsegregation and you're like, hey
, I've got this residentialproperty, two-bedroom home and I
want to do the cost segregation.
My spouse is going to be a realestate professional.
He's probably not going to passthe IRS smell test, all right.
So be careful who you work with, be careful how you do this.
(19:43):
I love the fact that you wouldwant to invest in real estate.
That is a solid strategy, right, I mean that is a solid play, I
should say.
But you need a tax strategybehind this and hopefully this
was helpful.
Thank you so much and until thenext time.
Speaker 2 (19:58):
That's it for today's episode.
Be sure to check out thedescription below for some free
tax reduction resources thatBoris put together for you.
If you're ready to work with atax advisor on your tax planning
, be sure to schedule your callby heading over to
wwwtaxplanningcallcom.
That's wwwtaxplanningcallcom.
And be sure to subscribe to ourpodcast to be notified when the
(20:20):
next strategy is.
Business owners.
They become very profitable andthey're doing really well in
the business and you startmaking seven figures.
What's the next thing that youlearn about then you can start
doing to reduce down your taxliability?
That is to invest in realestate.
Now a lot of business ownerswatch a lot of content online
and they're told hey, buy realestate, do cost segregation, you
can write it off.
That is not true.
Now a lot of people think thatif I'm a real estate
(00:21):
professional, I need a realestate license.
Nope, you do not need realestate license.
This is where a lot of peopleactually trip.
Okay, and they're being lied to.
They're saying, hey, do costsegregation, your spouse can
basically be a real estateprofessional, but you also have
to meet material participation.
If you are investing in realestate, do it right and do it
(00:42):
with a tax strategy.
Investing is nice.
Doing cost segregation is nice.
Generating paper loss supernice.
What's not nice is that whenyou're told to do all of this
without a tax strategy, Welcometo the Tax Reduction Podcast for
Money-Making Entrepreneurs withBoris Mushaev.
Speaker 2 (01:02):
Boris has helped entrepreneurs across the United
States collectively savemillions of dollars in taxes
with the power of tax planningand advisory.
The only way you, the businessowner, can save money on taxes
is by using proactive taxstrategies, and this podcast is
all about saving you money ontaxes.
Boris will share with youin-depth and easy-to-understand
(01:22):
tax reduction strategies thatyou can implement in your
business within 30 days or less.
Let's jump into today's episode.
Speaker 1 (01:30):
Hey, boris Mushaev here.
So look, if you want to investin real estate to save money on
taxes, just investing realestate and doing cost
segregation deduction is notgoing to save you money on taxes
.
Okay, despite what youraccountant, or whoever it is
that you listen to says, youactually need a tax strategy
when you invest in real estate.
I'm going to break down for youwhat type of a tax strategy you
(01:51):
need, how to actually qualifyfor these tax strategies, using
IRS laws themselves and be ableto maximize your deductions when
you invest in real estate.
So don't listen to all the liesout there.
So let's play nice and let'sget into a tax strategy.
So I wanna bring this example.
So a lot of times, businessowners they become very
(02:12):
profitable and they're doingreally well in the business and
you start making seven figures.
What's the next thing that youlearn about?
Then you can start doing toreduce down your tax liability.
That is to invest in realestate.
So you go out and buy aproperty worth a million dollars
okay, purchase price, but afteryou deduct the land, because
the land cannot be depreciatedafter you deduct the land,
(02:36):
you're left with $800,000.
That is the depreciation.
So what happens is that if youdo cost segregation study.
For those of you that don'tknow what cost segregation is,
it is accelerated depreciationthat allows you to write off
about 25% of the purchase pricenet of land, so that will
produce $200,000 in additionaldeduction.
(02:56):
This $200,000 that you're goingto do cost segregation to
accelerate your depreciation andtake as a deduction may not be
deductible right away for you inthe first year if you do not
have a tax strategy.
And a lot of business ownersare told or they watch a lot of
content online and they're toldhey, buy real estate, do cost
segregation, you can write itoff.
That is not true.
(03:17):
The reason it is not true?
Because you have to understandthere's mainly two types of
incomes.
That is on your tax return,right?
So business income usually.
So I'm doing this for businessowners, right?
Typically business owners arethe ones that are generating a
lot of profit and they want toreduce down their tax liability
by investing in real estategenerally.
There's two types of incomeincomes that can be reported on
(03:38):
your tax return.
There is an ordinary income,which is also your business
income.
So let's assume this is amillion dollars.
Okay, you make a milliondollars in your business.
Then there is a passive income.
And let's assume you have$125,000.
I don't know why I picked$125,000, okay, but that's
passive income.
Okay, two types of income.
The thing is, there's really nodifference between them when it
(04:01):
comes to taxation.
Both of them get taxed at thesame income tax rate.
Right, we're assuming this isnot capital gains.
Okay, this is passive income.
That could be from your realestate, commercial real estate.
This could be in the businessesthat you have invested and you
became a passive partner, which,by the way, if you have a
business that you are going tobe opening or investing, where
(04:24):
you have an opportunity tobecome a passive partner, you
should absolutely speak to yourtax advisor how to do that,
because that will help youaccelerate deductions when you
start buying real estate.
But that's a topic for anotherday.
If you are a profitablebusiness owner, you do not have
a tax advisor.
Get yourself a tax advisor,otherwise you will continue
(04:46):
overpaying in taxes.
Okay, but let's come back tothis example.
So we've got ordinary incomeand passive income.
Okay, this $125,000, it'spassive income and ordinary.
They're all both taxed at thesame rate.
So if you are at 35% taxbracket, guess what?
You're going to pay 35% on both, regardless what type of income
(05:06):
it is.
Now here's the kicker Realestate losses, right?
In our case, let's say, costsegregation gave you $200,000 in
losses.
Real estate losses areconsidered passive.
Okay, because generally realestate income is considered a
passive income.
So all the activities from realestate.
If you're not a real estateprofessional, they're considered
(05:27):
passive, so are the losses.
So in this case, let's imaginethat you actually have a, or
let's assume, imagine what acreative way of being an
accountant.
Okay, let's assume you have$125,000 in passive loss right
here.
This $125,000 now cannot bededucted against a million
(05:50):
dollars ordinary income.
So let's just say that.
You know let's use our numberof 200,000 from the example
before Right, so you made, youdid a cost segregation study,
you accelerated depreciation.
The $200,000 cannot be deductedagainst ordinary income.
Well, what happens to this$200,000?
It just gets carried over.
(06:10):
Okay, it gets carried over.
So I'm going to put FY, not FUFY.
Okay, it's getting carried overto future years.
Okay, now you still end uppaying taxes on a million
dollars.
So if you do the costsegregation and you paid a lot
of money to get it done and nowto find out you cannot deduct it
, so let's talk about a strategywhen is passive losses or when
(06:34):
are passive losses actually notpassive losses?
How can we turn it into notpassive losses or actually take
it as a deduction?
There's three scenarios.
We're going to talk about thereal estate professional.
We're going to talk aboutshort-term rentals and we're
going to talk about self-rentals.
We're going to cover it allafter this break.
Speaker 2 (06:51):
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using proactive tax planningstrategies that only a tax
advisor can give you.
Bora's put together a free PDFfor you, the business owner
Seven tax write-offs everyS-corporation business owner
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In this PDF you can find seventax strategies that you can
(07:15):
start using in your business toinstantly start saving money on
taxes.
Click on the link in thedescription below for a free
download.
Speaker 1 (07:21):
All right, let's talk about a real estate
professional.
Okay, by the way, this costsegregation thing I don't think
I mentioned it earlier Becausewe passed, or the government
passed, one big beautiful bill.
Bonus depreciation is back,which is why real estate
deduction becomes a lot moreimportant or a lot more bigger,
I should say and investingbecomes a lot more important,
(07:41):
okay, so.
Okay, investing in real estate,doing cost segregation, is a
great tax strategy, but, like Isaid before, you need a strategy
behind it to be able toactually materialize your
deductions and your losses.
One of the ways you can do thatis becoming a real estate
professional, either you or yourspouse Now, this is you, or I'm
going to put spouse.
(08:02):
Now, here's the thing you, as abusiness owner, are generating
a million dollars.
Okay, so you need to activelyparticipate as a real estate
professional, but you're notbecause you're in business.
Okay, real estate professional,you just have to meet the IRS
definition.
That means more than 50% ofyour time has to be spent doing
real estate, investing in realestate, taking care of your
(08:23):
tenants, anything that is realestate invested.
Okay, I'm not going to get intodetails of all the to-dos that
you have to do, but more than50% of your time.
Additionally, it has to be atleast 750 hours.
So in our tax advisory firm,when a lot of clients come to us
, mainly we have one spouse thatruns the business, another
spouse does not.
So what?
(08:44):
We say, hey, can this spouse beinvolved in your real estate?
Like, yeah, absolutely, myspouse actually does work in
real estate.
She takes care of the tenantsand so forth.
Great, we can qualify thatspouse as a real estate
professional because that spousedoesn't have any other job.
So for sure, more than 50% ofthat spouse's time is being met
for this rule.
(09:04):
Okay, then that spouse has todo at least 750 hours a week.
I mean, excuse me, a year.
If I'm not mistaken, it comesout to about 14 hours a week.
14 to 15 hours, okay, and youare now qualified as a real
estate professional.
That could become huge for you,because now, if you invest in
this real estate, this $200,000can be tax deductible.
(09:27):
Why?
Because your spouse is a realestate professional.
Now a lot of people think thatif I'm a real estate
professional, I need a realestate license.
Nope, you do not need realestate license, you just need to
meet the IRS definition ofbeing a real estate professional
.
Now you also need what's called500-hour material participation
.
So what does that mean?
(09:48):
Let's say you own threeproperties right here, right?
So let's say your spouse or youtogether, your spouse is a real
estate professional, but nowyou have to meet material
participation.
This is where a lot of peopleactually trip, okay, and they're
being lied to.
They're saying, hey, do costsegregation.
Your spouse can basically be areal estate professional, but
you also have to meet materialparticipation.
(10:10):
It's not enough that you are areal estate professional.
Okay, you also need what ismaterial participation?
I keep talking about it.
Let's just get to it, right?
That means if you combine yourhours spent on this property not
you doing real estate overall,but on one property at least 500
hours.
So obviously, if you've got aresidential home, one
(10:30):
residential home, and you'respending 500 hours a year on it,
it's probably not a very goodprofitable venture and IRS is
not stupid, right?
So if you've got one propertylike yeah, my spouse doesn't
work, they do 750 hours lookingfor properties, driving around
and we only have one propertyand they materially participate
there, that's probably not goingto fly with the IRS.
But if you already have two orthree properties, you can
(10:53):
combine the hours spent on eachproperty.
So let's say property one 300hours, 100 hours and 200 hours.
Together that's 600 hours.
You can group them.
Okay, you can group them.
Irs allows you to group youractivity.
Here's the kicker, here's thebest part about it.
Right?
Again, a strategy.
What if you, the business owner, did 200 hours here and the
(11:19):
spouse did the other two, 400hours?
Does that still qualify asmaterial participation?
And the answer is yes, okay.
So that is the cool part aboutthis.
But you cannot combine bothspouses hours for real estate
professional, but you cancombine it for material
participation.
So if you are investing in realestate, do it right and do it
(11:43):
with a tax strategy.
Okay, because investing is nice, doing cost segregation is nice
.
Generating paper loss supernice.
What's not nice is that whenyou're told to do all of this
without a tax strategy.
So real estate professional isa tax strategy number one.
(12:03):
Let's move on to a tax strategynumber two.
If, for whatever reason, yourspouse says you know what, I'm
not going driving around lookingat properties, I'm not doing
any of the real estate stuff,you go ahead and work in the
business.
Buy me all the nice things Idon't want nothing to do with it
.
I don't care.
If you want to invest in realestate, you go ahead and do it,
and I want nothing to do with it.
Then you're like Boris, what doI do now?
(12:24):
I'm stuck with this $200,000loss that is being carried to
the future years, but I want todeduct it.
What do I do?
Let's talk about anotherstrategy that you can use to
write off your paper losses, andthat is a short-term rental
strategy.
So if you meet the IRSdefinition of a short-term
rental strategy, that means youraverage stay per tenant is
(12:47):
seven days or less.
What does that mean?
So let's say you've got tenantnumber one two days, tenant
number two 10 days.
The average is six days.
That already meets this test,okay.
And you have to activelyparticipate in your short term
rental a hundred hours.
So that's very easy to meet.
That's there you go, and that'sthere you go, and that's how
(13:08):
you meet that 100-hour test.
Okay, that is activeparticipation.
Then we've got you have to workthere more than another person.
So let's say you've got aproperty manager that manages
your entire property.
Then you'll probably fail thistest, okay.
So we don't want to meet, wedon't want to fail this test.
We want to meet this test atleast the first year.
Follow me on this.
(13:29):
So let's say you have noproperty manager and you are
doing everything, so you are atshort-term rental by the IRS
definition.
So put out the property onAirbnb, vrbo, whatever you want.
Now any losses generated fromshort-term rental doing cost
segregation are ordinary losses,because IRS does not consider
(13:50):
short-term rental as passive.
Why?
Because they're classifying itquote-unquote.
This is like you're treating itas a hotel.
Right, you have an activebusiness.
It's an active trade orbusiness.
So the income generated fromthis is ordinary because you're
actively participating.
It's seven days or less.
You're operating as if you area hotel and you're actively
(14:11):
participating more than anyother person that is also
helping you with a property.
So IRS says you know what?
This is no longer passive, thisis ordinary.
Now short-term rental thisbecomes ordinary and now the
$200,000 can be deducted againstyour million dollar business
profit.
Okay, that's a short-termrental.
Now you might be thinking, boris, well, I don't want to deal
(14:33):
with tenants, airbnb and all ofthose tenants.
Cool, that's fine, but there isa still strategy.
What if your first year youtreat this property as a
short-term rental?
You meet all the rules.
You put it out on Airbnb.
You do not rent it for morethan seven days.
You actually activelyparticipate in it.
Make money, rent it out totenants on Airbnb.
(14:57):
Do all of that stuff your firstyear, do cost segregation,
generate the $200,000, get yourdeduction the second year.
You know what?
I don't want to be activelyparticipating in this anymore.
I want to focus more on mybusiness.
Great, you can turn this backinto a passive activity, which
is the regular rental.
But remember, in the first yearyou participated, you met all
(15:19):
the rules, you worked.
It was treated as a hotel.
The losses that are generatedare ordinary losses and can be
deducted.
Because now you've done thisbeautiful thing that's called
cost segregation 100%depreciation from one big,
beautiful bill.
All right, that is thatstrategy.
Now let's talk about anotherstrategy.
(15:43):
I love this, right, this isamazing.
Now, this is for thosebusinesses that actually own
their own commercial building inwhich their business is
situated.
Right, so there's two ways youcan have a property for your
business.
So let's say, you have an Scorporation, okay, so you've got
an S corporation, okay, thatowns your business, right, so
(16:06):
I'm just gonna well, it does ownthe business.
I'm just gonna write businessactivity, right.
So you've got business activityand the S corporation buys real
estate.
So I normally never recommendand if you're working with a
proper tax advisor and anaccountant, they should tell you
that you're working with aproper tax advisor and an
accountant they should tell youthat you should not be buying
any real estate in an Scorporation.
(16:26):
There's some.
Sometimes you may need to dothis for a completely different
reason, but honestly, you do notwant to have a real estate in
an S corporation.
So what a lot of my clients doand what I recommend to them
instead is that when we have anS corporation and you want to
buy a building for your business, just put it into an LLC.
I'm going to put it a triangle.
(16:47):
This is an LLC.
Okay.
Now this between S corp and LLC, right?
S corporation will pay rent toyour building.
Now there is a relationship.
Okay.
Now what happens is that theybecome under IRS rules and under
(17:08):
IRS eyes, this becomes oneactivity.
Okay, I kid you not.
This is all in the IRS tax code, right?
Irs is if you are renting yourown building to your business,
you become one activity.
Any losses generated from doingcost segregation can be deducted
against your S-corporation, butyou have to meet what's called
(17:30):
an economic test.
Now, what is an economic test?
This is really important, bythe way, business owners that
are watching.
That means either you or yourspouse have to own the business
100% and you or your spouse haveto own your rental property
100%.
Did I say 1% here?
I don't remember what I said.
100% and 100%.
(17:50):
Now if it's you and yourpartner owns this and you and
your partner owns this, youstill meet the test.
Now you also have to be yourown tenant 100%.
If you're not your own tenant100% let's say there is 50% you
and 50% another tenant and youdo meet economic tests then only
50% of losses generated in theLLC let's say doing cost
(18:15):
segregation can be deductedagainst you as corporation
profit.
In most cases, my clients thatwe work with they're like all
right now, I understand thescenario.
Maybe I'd rather invest in abuilding.
I have an opportunity to investwhere I am the only tenant, so
I can do this, and actually wehave few clients right now using
this strategy and we are doingexactly this for them.
(18:37):
So this is another strategy.
So when you combine this, thereis no passive losses generated
from this building.
Why?
Because we're combining it and,by the way, if your accountant
does not know this and if youhave the situation, you should
let them know.
Hey, do this for me and attacha statement to the tax return
letting the IRS know that we'recombining, grouping, in other
(19:01):
words, both activities.
So these are the three realestate tax strategies that you
can use.
Obviously, if you're doing thecost segregation, investing a
lot more in a lot more buildings, you don't want to deal with
the short-term rental, you don'thave the self-rental, the real
estate professional, qualifyingyour spouse is the biggest play
for you, especially doing thematerial participation.
(19:22):
Again, if you've got oneproperty, okay, if you have only
one property, you did the costsegregation and you're like, hey
, I've got this residentialproperty, two-bedroom home and I
want to do the cost segregation.
My spouse is going to be a realestate professional.
He's probably not going to passthe IRS smell test, all right.
So be careful who you work with, be careful how you do this.
(19:43):
I love the fact that you wouldwant to invest in real estate.
That is a solid strategy, right, I mean that is a solid play, I
should say.
But you need a tax strategybehind this and hopefully this
was helpful.
Thank you so much and until thenext time.
Speaker 2 (19:58):
That's it for today's episode.
Be sure to check out thedescription below for some free
tax reduction resources thatBoris put together for you.
If you're ready to work with atax advisor on your tax planning
, be sure to schedule your callby heading over to
wwwtaxplanningcallcom.
That's wwwtaxplanningcallcom.
And be sure to subscribe to ourpodcast to be notified when the
(20:20):
next strategy is.
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