Having helped thousands of investors across the US to save on taxes, Matt MacFarland and Amanda Han are founders at Keystone CPA, Inc. As both tax strategists and real estate investors, Amanda and Matt combine their passion for real estate investing with their expertise and knowledge in tax strategies. Their goal is to help investors with strategies designed to supercharge their wealth-building using entity structuring, self-directed investing, and income offset opportunities to keep more of what they make.
Amanda and Matt’s highly rated book Tax Strategies for the Savvy Real Estate Investor is amongst Amazon’s top seller list.
They are also frequent contributors, speakers, and educators to some of the nation’s top investment and self-directed IRA companies. Their cutting-edge tax strategies have been featured in prominent publications including Money Magazine, Realtor.com, and AllBusiness.com. Matt and Amanda were speakers at “Talks at Google” that features influential thinkers and creators. They have also appeared in CNBC’s Smart Money Talk Radio as well as BiggerPockets podcasts.
Matt and Amanda specialize in bringing top-notch tax-saving strategies that are traditionally only available to high net-worth clients to everyday investors nationwide. They both have experience working for the “Big 4” CPA firms specializing in the real estate and high net-worth individual specialty groups. Amanda is a graduate of UNLV and Matt is a graduate of UCLA with a Master’s Degree from USC. Both of them are certified by the CA State Board of Accountancy and are members of the prestigious American Institute of Certified Public Accountants (AICPA).
Episode Notes:
Narrator This is The Norris Group’s real estate investor radio show the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever -changing real estate market hosted by author, investor, and hard money lender, Bruce Norris.
Bruce Norris Hi, thanks for joining us. My name is Bruce Norris. And today we are joined once again by Amanda Han, and Matt McFarland. So, let’s go over, I know there was some changes, or at least some changes that were talked about. So, you live in your residence for two years. If you’re a married couple, you can sell and make $500,000. It’s not taxable. How often, can you do that?
Matt MacFarland You can do that once every two years.
Bruce Norris That has not changed.
Matt MacFarland That has not changed. Not, you know, not yet at least.
Bruce Norris There’s some laws that actually surprised me ever got in and that was one of them.
Matt MacFarland Yeah, you know, and, and back into, you know, 20 years ago, when I remember people were absolutely utilizing this every two years, they were selling, because, you know, the market has kept going up, honestly, as we all know, in the early 2000s. And they, I mean, I remember clients moving every two years, I have four different primary residences, and six or eight years, right, like, it’s just.
Bruce Norris Yeah, lining them up.
Matt MacFarland Yeah.
Bruce Norris The heck of a job. That’s a heck of a good job. And very high net. Good job. All right. So, 1031 Exchange, let’s talk about that, because that’s something that we are involved with, and our clients are involved with, and I’ve been involved with. So, the timeframes for 1031 Exchange, have those remained the same? I gotta find something inside of the first 45 days and say, that’s it.
Matt MacFarland Yeah, though, the time, the timelines have not changed, they got the identification period of 45 days. And then you also just have to close on the replacement property or properties within 180 days and the sale date of your current property.
Bruce Norris That 45 days is inside that 180.
Matt MacFarland Yeah, it’s part of that 180.
Bruce Norris Yeah.
Amanda Han I have to say, I think, you know, at least looking back at 2021, or even now we have clients that are in the process of doing 1031 Exchange, there’s definitely a lot of pressure in terms of finding the right deals, finding it in time for exchange. So, we’ve seen a couple clients had to make tough decisions on whether they wanted to go through a deal to save on taxes, or, you know, just deal with the tax hit, because they just really couldn’t find a deal that made sense, based on, you know, the performance of the property they’re looking at.
Joey Romero With, with everything going on with supply chain in all everything being delayed. Is there any, any talk of some relief in that 180 day? Or, you know, the talk of extending that at all? Is that anything that’s been on the table?
Matt MacFarland I don’t probably not. I haven’t heard anything with respect to like regular exchanges, you know, there may be, you know, something out there that, you know, like construction exchanges that, you know, specific one off situations, if you get into, maybe there’s a way you can do a private letter ruling or get some relief from the IRS. We haven’t had any clients per se come up against that dirt necessarily doing construction exchanges, but I think on a typical, like kind exchange, I think it’s they’re going to the argument would be is that hey, that house, that house is there. You know, it’s it’s been on the market for sale, you could have closed on it, you know, not, not nothing to do with, you know, lumber not being available or something like that, right.
Bruce Norris Yeah. Well, there’s the transactions that were involved in that definitely is an issue.
Matt MacFarland Yeah.
Bruce Norris So, let’s, let’s go through the math of that. Okay. So, I buy, I sell one property, I buy three exchange properties that all the numbers work. And then at the end of my 180 days, they’re 80% complete. So, round numbers, I sell a million dollar building intended to buy a million dollars of rentals, 800,000 of those rentals are actually in place. So, what what occurs? Do I get to get the credit for the 800 grand that’s in place?
Matt MacFarland Oh, yeah, you wouldn’t, you would have a basically a partial, a partial 1031 Exchange there. So, you effectively end up paying, if your shortfall was 200 grand in that example, you’d end up paying tax on $200,000 assuming your overall gain on the sale of your existing property was at least 200,000. You know, if you’re selling for a million, but your basis was 950, then you know, they have $50,000 to gain, obviously, but But yeah, if you’re selling for a million at a bought for $400,000 years ago or something, then yeah, your your gain would be 200. So, you’d have, you know, you still have a valid exchange for most of the money and just you pay taxes that, that shortfall amount.
Bruce Norris Okay. State of California has the same policy? Or is that, did being divvied up that way? 80% is deferrable 20% not?
Matt MacFarland Yeah, they follow most of the rules on 1031 exchanges, you know, they are, you know, they’re one of those states that if you sell California by out of state, they want to keep track of it, and, you know, get their money at some point in the future. So, you gotta, you got to file a separate form with a California return every year if you’re in that scenario, but, but under now, the rules for California are pretty much the same.
Bruce Norris Okay, so let’s say you went into an exchange in 2021. And it’s now April 25 and yesterday, you figured out, okay, that’s my 180 day, and these are not done. I had to file an extension. But now I have to go back and say in 2021, that I didn’t know I was going to have to pay those taxes. So, is that considered a delinquent payment by the Fed and the state? I’m just curious.
Matt MacFarland Uh, possibly, but there is this, I guess, take a step, take a step back for a second, like on a normal exchange, not because I know you’re, you’re probably talking about construction, one. But what a normal exchange, if, if you do it at the end of the year, and your 180 day crosses over into the next year, and you get to the next year, and you realize that you’re not going to have you know, you didn’t do it fully, a full 1031 or maybe it’s partially taxable, the whole thing’s taxable. There’s actually a way in the tax code that defer that gain until 2022. Because the theory lobbying that you didn’t have any control of the money, they didn’t release the funds to until day 180 or 181. So, you didn’t have any control of the money, therefore, it’s not taxable to you and to 2022. I would think, again, I don’t have a lot of clients doing construction thing, but I think that would be a similar theory that, you know, your, your exchange was completed and 180 a day, you know, maybe you’re a little short, might be a 2022 transactions to 2021 transaction. So, if that was the case that you wouldn’t have to worry about and obviously, penalties for last year.
Bruce Norris What if the, what if the tax rate changes for 2022? Then I get the new tax rate?
Matt MacFarland Yeah, tell me you’re lucky, lucky individuals.
Bruce Norris I’m playing devil’s advocate, but you know what?
Amanda Han I mean, you can…
Matt MacFarland … both sides.
Bruce Norris This is the reality of what’s going on.
Matt MacFarland Yeah.
Bruce Norris You know.
Matt MacFarland Yeah. No, for sure.
Amanda Han Yeah. I mean, you can choose right, you can choose whether you want it…
Matt MacFarland Oh, that’s true. Yeah.
Amanda Han You want it, tax it in 2021? Or you want to tax in 2022?
Matt MacFarland Yes.
Amanda Han It’s up to you.
Matt MacFarland So, yeah, if you could, because it’s kind of like it’s free, almost like a treat it like an installment sale. But you can, you can elect out, but it’s recording the whole thing in 2021. If that’s more favorable.
Bruce Norris Right. And what Joey brought up is actually pretty legit. In the sense of delays. It’s been out of control of people. So, you’re suggesting….
Matt MacFarland Yeah, I wouldn’t. I would imagine that’s happened to you, you know, you’re not the only people dealing with it probably, you know, so it’s…
Bruce Norris Oh no, of course not.
Matt MacFarland Yeah, it’s uhm….
Joey Romero 08:11Well, that’s helpful to know, because, like, we have some that, you know, we were expected to probably finish this year, and or maybe are going to, you know, bleed into 2023. You know, so that’s something that they’ll know that they can have a choice but well, you know, we always tell people is make sure you talk to your CPA.
Amanda Han And the good I mean, the benefit of delaying that game. So, in your example, right, you had, you know, maybe you had 200,000 of that uncompleted, that becomes taxable income. If you choose to report on 2021 return. It’s just taxable, right? There’s no more strategies now that you’re doing for last year. But if you elect to have a taxable this year, you still have a lot between now and the end of the year to look at other ways to reduce that tax, maybe you’re going to buy another rental property, and then that rental property, you’ll do you know, cost segregation or bonus depreciation, and that will create a loss, which in that loss can offset this $200,000 gain, right, even though it’s not part of the 1031 exchange. They’re all in the rental bucket. Or we have clients who, you know, take that $20,000 gain because they didn’t end up utilizing it. Invest in like an opportunity zone, right? Because the ozone allows you to defer the capital gain. So, it just gives you that much more time between now and year end to work on offset strategies outside of that 1031 as well.
Bruce Norris Sounds like you guys should write a book or something.
Amanda Han I don’t think we talked about that in our book. These are, these are bonus items, not in the book.
Joey Romero TNG edit.
Matt MacFarland These people trying to create more work for us.
Bruce Norris Yeah, I have to admit these are ramping up in difficulty, but that’s you know, I I had time on my hands. I said, Okay, I got to ask them this stuff. Okay, overall wealth. So, you’re doing your, your lifetime planning. And I’m just curious about the amount of assets that can be passed on to your relatives tax free. And, and then there’ll be a serious, series of questions having to do with that. So, what, what are the rules in place right now?
Matt MacFarland Um, we, in our firm, we don’t do estate taxes, but my recollection of it’s around 11 million per person. So, a couple can leave about 22 million, you know, tax free to beneficiaries, heirs, whatever gonna call it.
Amanda Han Yeah. And there’s so in that in the budget proposal, we didn’t see anything that said that that would be changed. Because before, there were talks of that being cut in half right down to like, you know, 5, $6 million per person. So, right now, there, that doesn’t seem to be part of the 2023 proposed budget. So, you know, the assumption is, it will stay at $12 million per person. However, keep in mind that absent any changes, that $12 million is set to go down in 2026 automatically.
Bruce Norris That’s what I thought and that, and that goes down to what?
Matt MacFarland I want to say it was, it was, it was, they had a specific benchmark, it was some pre, you know, some year, but I feel like it was like three and a half million dollars or $5 million dollars or something like that, you know, obviously a big haircut from what it’s currently at.
Bruce Norris That is, yeah, that’s a big haircut. So, let’s just do you know, the tax bill that would occur, let’s say, I had 10 million extra dollars that were given to my heirs. What, what is that tax step?
Matt MacFarland I, if I recall correctly, I believe the federal rate is around 40%. I don’t know, you know, what the every state may have their own I don’t know if what California is, is to be honest with you. But, but yeah, I mean, if if someone’s finding themselves in that place, obviously, you know, advanced estate planning is absolutely crucial, especially with that haircut coming a couple years down the road. And, you know, you never know, maybe it’s somebody’s Biden proposals may change some of this stuff, too, or it’s just…
Amanda Han Yeah, I feel like the estate planning is so difficult, because, you know, towards the end of last year, we had so many clients, because it was an unknown, you know, whether maybe starting as you know, 2020 to January, the estate tax could have just, you know, the exemption could have been cut in half. So a lot of people were really strapped, you know, scrambling to talk to attorneys. And at the time, a lot of attorneys were booked, that they weren’t taking any additional clients. And, you know, reverse Now, fast forward to January 2022. Now, we’re contacting clients again, say, Okay, well, we dodged the bullet, we’re still at, you know, $12 million per person. But let’s go ahead and, you know, get the party going …
Matt MacFarland Doged the bullet you didn’t die.
Amanda Han You know, get the, get the planning going. Because it is set, it’s scheduled to sunset in 2026. So, just be prepared. You know, now when attorneys have more time, but you know, but most people will you know, now that’s on the backburner, right, because we don’t have that immediate need again, I think people are always cautious of what if I do some planning and the laws change significantly? Where my planning is, you know, is becomes obsolete or something? So, I think that’s the difficult part of planning for estates, because you just, you know, we don’t really have any certainty on what it’s going to look like, and 3 million versus 12 million per person is a huge change.
Bruce Norris That’s a huge change. Yes. Okay. Is it in your, your client base? I’m sure some of them certainly surpass that. Are there? Do you know that they have plans to how do they plan for that? How do they plan that? Okay, the first 22 million is going to go here. But what’s interesting, you know, I didn’t realize, I looked up one time, what’s the, like, the top 1% that we always hear about? What is that number? I didn’t think it was going to be the number was it’s $11 million. When you think about that, I’m going holy cow. I mean, I know a lot of those people. So, and I know a lot of people that are you know, multiple times that. So, you do think about okay, what is the, what are they doing tax wise to avoid handing 40 present plus another number to the state? Or is it even avoidable? So, that’s, that’s interesting.
Matt MacFarland Yeah. I think what the, what they, what they’re doing is in, you know, what they should be doing is definitely having those meetings with their estate planning team and advisors, making sure that they’re not even just from a strategy perspective is making sure documents are up to date because a lot of people have kind of maybe say outdated trust documents that, you know, maybe were set up pre kind of some of these changes originally, you know, 10 years ago, 15 years ago before they, you know, these exemptions took off and stuff. So, some people have not updated in a long time, that would be the first step is just to kind of meet with your team and you know, get those documents updated to see what’s, yeah, what’s what’s going to be the most advantageous set up of your living trust or, you know, as involving your revocable trust is an evolving, you know, other things that kind of take advantage of getting assets out of your estate sooner than later if you need to.
Amanda Han I think a lot of charitable planning to, you know, most clients with, you know, that high net worth, or are typically looking at charitable planning, because they’re just looking at it from you know, I mean, they’re gonna pay it to taxes or I can give it to charity right and, and get, you know, get it out of my estate and, and also maybe getting a tax write off too, up front.
Matt MacFarland And I think, you know, there’s also remember, there’s the annual exclusion by which somebody can give them another, give $16,000 to any other single person during the year. It’s free from gift and estate taxes. You know, obviously, that doesn’t sound like a lot on the on the face of it. But I think what I, what I’ve read a study show that obviously, if somebody can make a, you know, purposeful design and plan to do that every year to whoever they want to do it to, it can have a significant impact on reducing our state over time, you know.
Bruce Norris It doesn’t have to be relative.
Matt MacFarland No, yeah, you can be Matt MacFarland, Amanda Han.
Amanda Han I had that same thoughts as now.
Joey Romero My ears are ringing.
Bruce Norris You’re, yeah, that’s why you’re married. I like that. Okay, and is that taxable to the recipient?
Matt MacFarland No, it’s not because gift, it’s a gift. So, you know, when you receive a gift, it’s not taxable income too.
Bruce Norris Interesting. All right. I’m almost out of questions, because we didn’t link around the overall wealth thing.
Joey Romero Can I ask one?
Bruce Norris Yeah. Go ahead.
Joey Romero Matt and Amanda, what’s the biggest mistake that, you know, Main Street, you know, like the mom and pop investors making come to you with? Like, what’s the biggest fixes that you’ve ever heard? Or what’s the most common mistake that they make?
Amanda Han There’s so many. Well, case, because we’re talking about estate, I’ll share one. You know, for people who are under the lifetime exemption, what I see happen a lot is people start giving away assets to their kids later on in life without talking to their tax person. So, what you typically see is like, you know, maybe mom and dad, you know, bought a, bought a single family home for 200,000. And now it’s worth a million dollars. And they say, Okay, let’s just give it to, you know, John, right, give it to son, John. And just to get out of their estate, thinking that’s a good thing. But one of the downsides of that is, if you’re giving it away during your lifetime, for a highly appreciated asset like that, you are actually losing out on the step up basis, right. So, if mom and dad died with it, their son could have gotten step up basis, and they could have sold the asset later on and not pay any capital gains taxes on all that appreciation, you know, from the 200,000 to the million dollars, but if it was gifted away, during lifetime, now the son is only going to have the dad’s carryover basis of 200,000. So, in the future, when the Son sells, they’re going to pay all the capital gains taxes. So, that’s a, you know, fairly decent sized mistake that we do see, because I think people just kind of haphazardly give away, you know, just oh, let me just add you to title or let me just give this to you, and just go to the county and get it done. Don’t really have a second thought about it. Until later on, you know, if we talk to them and say, Oh, wow, maybe you shouldn’t have done that. But of course, these are people with a lot lower net worth, right, than those who were going to be hit with, you know, potentially estate taxes down the road.
Bruce Norris Okay.
Matt MacFarland You know, I think along those same lines, not just, you know, from a state planning perspective and income tax planning perspective, right, I think, you know, we reach out to clients, you know, throughout the year to try and stay up to date on what’s happening with them. But it’s also, you know, we do ask our clients to communicate with us when things are going to change, right? It’s communicate with us beforehand. I don’t want you know, it’s best to hear that you’re going to sell a property or you’re thinking of creating ABC entity before you actually do it, right. That’s probably a big mistake, too, is that people, you know, you know, obviously, we’re all busy people forget to do that sometimes but that can, you know, you have a lot more options. If you plan ahead, obviously.
Bruce Norris We talked about people leaving the state of California. Do you have anybody that’s left the country and said, Okay, um, I don’t want to be a US citizen. And I’m just curious if that ever happens, what’s the taxable event that occurs?
Matt MacFarland Oh, we haven’t had anybody do that. I think we have clients that talk about doing that or threatened to do that, obviously. But I think there, there is a there isn’t, there is an exit tax for lack of a better term if you renounce your citizenship.
Bruce Norris It’s not small?
Matt MacFarland No, it’s not. And I don’t remember what it is. But it’s, you know, if you don’t renounce your citizenship, then you’re still gonna be paying US taxes going forward anyway, so that’s not a big deal. But if you want to get out of paying US taxes, then you got to renounce your citizenship, and then they’re gonna get you on a hefty exit tax, exit tax.
Joey Romero So, when I visited the Bahamas, like everything’s like all fun and games when you get there, you want lemonade, you want your hair braided? And when you leave there, like, that’ll be, it’ll be $30, $30. For what? Oh, for leaving.
Amanda Han Yeah, it’s interesting, because because the Tax Foundation, which does all the kind of analysis on the proposals that are coming down, and how does that impact, you know, economics at large and what they said was that the the most recent 2023 budget proposals, it alongside the build back better plan would give us one of the world’s top tax rates for individuals as well as corporations in all of the developed world. So, that’s really interesting. You know, so not very business friendly type, doesn’t incentivize people to, you know, do business in the US or with the US, unfortunately.
Bruce Norris Do we have any new books you’re working on?
Matt MacFarland No, why, you keep suggesting it?
Amanda Han Yeah. I feel like you have some ideas for a new book for us.
Joey Romero …on that collab.
Matt MacFarland I just got done with tax, tax deadlines, come on.
Bruce Norris And that’s right, you need oxygen…
Amanda Han So, we can have a co authored book with Bruce.
Joey Romero Now, obviously, to nameless to protect the innocent or guilty, what’s the biggest, like tax mess of that you’ve had to be involved with?
Amanda Han The 1031 Exchange?
Matt MacFarland Yeah, we’ve seen some 1031 Exchange stuff where, you know, it’s partial. The easiest way to explain it, but it’s, you know, one of those where it’s kind of you’re trying to fix something after the fact.
Amanda Han Yeah, we’ve had, we, yes, we once had to allow client go, because they messed up on a 1031 exchange, like they didn’t meet the requirements. And they basically said, Well, you have to make it go away, because I’m not going to pay the tax. And it was, you know, it was after the fact, like we didn’t know about the transaction and was there’s, like, what you’re saying doesn’t make sense. You know, I can’t, how do we just make it go away? It is what it is. So, yeah, nameless, but that was a big, you know…
Bruce Norris That after the fact is a felony?
Amanda Han Yeah, exactly, right. It sounds pretty casual, you know, sounds casual, like, ‘I’m not gonna pay it. So, just make it go away?’ I was like, ‘what are you saying?’ Yeah, cuz I feel like 1031 Exchange, they’re mostly big numbers, you know, that you’re dealing with. And so if you know, something’s not done correctly, like you didn’t meet the identification deadline or something, right. It’s like, okay, well, if you didn’t, you didn’t close on one of the properties that you identified. You could have done everything else right. But you technically didn’t do like one of the main things correctly. So yeah, it’s not really a 1031 at that point.
Bruce Norris All right. Joey, did you have anything else?
Joey Romero No, that’s the, I was I wanted to hear like, oh, yeah, like $100 million tax bill that somebody costs themselves. But no, we don’t have any of those big mistakes because Matt and Amanda are too good. They don’t take clients that are criminals.
Bruce Norris You get fired.
Amanda Han You know, we, I mean, we had like, so last year, we had a very, a mistake, that almost happened, we had someone who, I don’t know, they went to a seminar, and some CPA talked about how you can just, you know, liquidate your retirement money and use that to buy a bunch of real estate and, you know, with depreciation and all that you can basically use the losses to wipe out, you know, million dollars of retirement distribution income. And when that, that all sounds really great, you know, it’s definitely legit strategy, but they just forgot to talk about the fact that, you know, in 2021, there’s a limit in terms of using rentals to offset non business income like retirement accounts, that you’re maxed out at $500,000. So, for them, they didn’t know that they took out a million dollars, they would still have to pay taxes on 500,000. But the good thing was we caught it early enough that there were with, you know, they were still had just recently taken that money out. So, they were able to just easily put the money back into retirement. So, they didn’t have to pay huge tax, but it was, yeah, it’s just one of those things that you know, the concept is right. But, I mean, you had to have all the details worked out as well.
Joey Romero You guys still all booked up?
Amanda Han For April 15th? Yes. No, no, we’re always taking tax planning clients for, yeah, for the rest of year that just the tax return work, because it’s really time intensive. So, we are booked up for 2021 filings.
Joey Romero Okay. So, what I was gonna say, so how can? How can they get ahold of you? But they were not, we’re not trying to do that. So, I’ll cut this out of the recording, so don’t worry about it. But that was going to be my follow up question. Is, is there anybody that you guys, like colleagues of yours that hey, you know, you guys aren’t taking clients? But, you know, can you go ahead and you know, refer them to somebody else who’s reputable like, because that’s, we get that question a lot like, Hey, do you can recommend a CPA? And you guys are obviously a friend of the The Norris group. But you guys aren’t taking any clients you know? So, how can we help them?
Amanda Han Yeah, well, I mean, we are taking clients for tax planning. So, it’s kind of depends on what they’re looking for. If it’s someone who, you know, maybe relocating, or has a big event or 1031 Exchange, they’re looking for planning advice, we can definitely help out. And for our planning clients, we do try to connect them with other CPAs that is a good fit for whatever that situation is. So, it kind of depends, you know, if like, Oh, you have a very complex cost segregation, or a 1031 exchange, we can put them in touch with the people who are, you know, who are, are really well versed in those types of transactions. But also, we do have planning clients that are very complex that we, we will do their tax returns for, but it just would be like, you know, for helping someone plan right now for 2022 that we can do their 2022 taxes in 2023.
Joey Romero Okay, so how would people get ahold of you?
Amanda Han I think our website is probably the best place www.Keystonecpa.com. So, on there, you can, you know, kind of look at the different services we have. And we just tried to put the latest educational content there too. So, hopefully, we won’t have too much changes. But if there are any coming down the pipeline, that’s where you’ll find us.
Bruce Norris All right, you guys. Thanks. Thanks for taking time to join us.
Matt MacFarland Thanks so much, guys. Appreciate it as always.
Narrator For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.
Aaron Norris The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.