JF2063: Tax Strategy With Dusty Rollins
Dusty is the Owner and Founder of Oxford Business Services, an income planning, and tax strategy expert. He helps people save on their taxes as well as retirement planning. Dusty explains 5 things you might be missing by not having a tax strategy.
Dusty Rollins Real Estate Background:
- Owner and founder of Oxford Business Services, an income planning, and tax strategy expert
- Helps people save on their taxes, as well as retirement planning
- Based in DeLand, FL
- Say hi to him at https://www.dustyrollins.com/bestever
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Best Ever Tweet:
“A tax strategy is like a good chess player, it is 3 or 4 moves ahead of an amateur.” – Dusty Rollins
Joe Fairless: Best ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
It is Sunday… And because it’s Sunday, we have a special segment for you called Skillset Sunday. Today you will learn five things you might be missing by not having a tax strategy. Do you have a tax strategy? If you don’t – well, here’s five things you might be missing.
With us today to talk about that – Dusty Rollins. How are you doing, Dusty?
Dusty Rollins: I’m excellent, Joe. Thanks for having me.
Joe Fairless: Well, I’m glad to hear that. It’s my pleasure. A little bit about Dusty – he’s the owner and founder of Oxford business services. He’s an income planning and tax strategy expert based in DeLand, Florida. He helps people save on their taxes, as well as he focuses on retirement planning. With that being said, Dusty, do you wanna give the Best Ever listeners a little bit more about your background and your current focus? Then we’ll get right into the five things.
Dusty Rollins: Perfect, Joe. Thanks so much for having me on the call. I’ve gotta tell you, I love the name of your show, Best Ever. If I could have a quick segue – I have a son who’s ten years old and he’s special needs; he’s got a little bit of a learning development delay… And he loves waffles. So just about every morning he has waffles, and every morning he says “These are the best ever!” [laughter] But it’s every single morning, they get better and better and better.
Joe Fairless: That’s awesome. What a great mentality!
Dusty Rollins: Exactly, I love it. So I couldn’t help but think about that with the title of your show. But I got into taxes kind of backwards. I didn’t set out — I’m not trained as an accountant, and I didn’t set out to get in the field. I got into my own business, and actually my initial business experience was in real estate investing in Atlanta, in the go-go years… The early 2000’s, when you just couldn’t make a mistake in real estate. Any idiot could make money, and I did. So that was kind of my initial foray into business, if you will.
Then as my business began to grow, the taxes began to be more and more of a big issue. And I knew I had a sense; I loved strategies, I loved the thought process, I knew there’s always more than one way… So I knew there were these strategies that I could save on my taxes, and I also knew that the advisors I was using weren’t gonna get me there. So that kind of began a self study to learn how to best set up your tax strategies, no matter what kind of business you’re in… And real estate is a very tax-favorite industry.
So as I was doing that self-study, then other friends, other business owners were saying “Well, can you do this for me? Can you do this?” and that kind of just led me into doing the tax strategies as a business. And one of the things that I think is interesting about that, or one of the advantages I have now is I tell my clients or prospects when I’m talking to someone – make sure that your advisors have front of the check experience. And what I mean by that is if your whole life you sign the back of a check, meaning a paycheck – nothing wrong with it; the majority of America does that, and I did it for actually a very short time early on in my career… Nothing wrong with it, but there’s a different experience we have when you’ve signed the front of a check. When you’ve put that money out, you’ve put your family, your own financial well-being at risk to pay other employees, to pay the vendors… There’s another level. So I think it’s important to have advisors who have that front of check experience.
Joe Fairless: Yup, been there, I know what the clients are going through… So you can speak from experience. Let’s talk about the five things we might be missing by not having a tax strategy. And before we talk about those five things, what is a tax strategy?
Dusty Rollins: Great question. One of my favorite sayings – I don’t know if it’s good or not – is your CPA is not doing what you think they’re doing. So the overall big mistake I see business owners make is they kind of default their taxes. The term I use a lot is “Oh, my CPA handles that.” And unfortunately, the way the business model and the business structure of taxes are done, your CPA is probably handling some of your accounting work, and then your tax preparation, which means at the end of the year they fill out the forms, they put the numbers in boxes and help you discover how much money you owe, and then they say “Okay, now you’ve gotta pay the IRS.” And often if that business owner goes to that CPA and says “Well, this is how much I owe… How can I pay less? How can I owe less? Is this the absolute least amount I have to pay?”, I think they teach this in their training school somewhere, the CPA will say “Well, you make what you make, you pay what you pay.”
So the difference, that next level of tax strategy is it’s kind of like playing chess; I don’t actually play chess, but I know that a good chess players is 3-4 moves ahead of an amateur chess player… Whereas checkers, you’re just doing a jump. The next jump, the next jump… But chess – you’re playing 3-4 moves ahead, and that’s what a tax strategy is. Tax preparation is checkers; you just fill out the forms to keep you out of jail… And you need to do that; don’t stop doing that. But the chess part is the tax strategy, where you’re figuring out moves, you’re figuring out what you’re wanting to do, so that you can pay the least amount legally required tax-wise.
Joe Fairless: Okay. So what’s the first thing that we might be missing.
Dusty Rollins: So the number one — and again, geared toward real estate investors, which I’m assuming a lot of your listeners are…
Joe Fairless: All of them.
Dusty Rollins: All of them, there we go… One of the big things is the new Trump tax law change over the last few years. A lot of the people said “Oh, this is a tax cut for the rich”, and I always like to say “It’s not a tax cut for the rich, it’s a tax cut for the business owner.” So what I mean by that is you can have a doctor who is making half a million dollars a year on a W-2 income, meaning they work for a hospital or for an employer – that doctor is probably paying more in taxes than they did before the Trump tax cuts. But if you take that same doctor and he/she is a business owner, they could pay considerably less in taxes.
So for the real estate investor what’s really important is understanding that now even more so you’re in the small business realm. So even if you don’t have another business outside of real estate, real estate can open that portal to the tax savings.
So here’s the big one. Number one is to take full advantage of section 199A. It’s called Qualified Business Income (QBI). If you qualify, you get an extra 20% deduction on that small business income. The problem is for most real estate investors what they need to watch is the way they 1099. So there’s a way that if you don’t give a 1099 to the people who provide services for your company, then you might lose deduction. Did that make sense at all?
Joe Fairless: It does.
Dusty Rollins: So that’s number one, is really making sure you’re handling the 1099s correctly, which will give you the maximum deduction allowable under section 199A.
Joe Fairless: What’s the most common mistake when handling the 1099s?
Dusty Rollins: Not doing them. [laughs] Because there’s massive penalties for not doing them. It’s not like not filing the tax return, it’s not on that level… And it gets a little bit complicated, but if you’re not doing it properly, or at all, then you might not be able to take the full 199A deductions.
Joe Fairless: Okay.
Dusty Rollins: Any other questions on that? That was number one.
Joe Fairless: No more questions on that.
Dusty Rollins: Perfect. Number two is real estate professional status. What’s important to know here is if you have passive losses, it’s sometimes hard to take them if you only have earned income. So what the IRS has said is if you have the passive income, you can take the passive losses. So the real estate professional status means you worked at least 750 hours a year as a real estate professional. Now, a lot of people take this and don’t work those hours, or they kind of fudge that a little bit… So one of the things to watch that I’ve seen is there are some cases where a W-2 worker, so a person who has a full-time job, also claimed that they’re a real estate professional status, meaning they’re working about 15 hours a week in real estate, and the IRS didn’t like that.
So one of the things to watch for if that’s the case, and you have a spouse, and the spouse doesn’t have a full-time W-2 job, there’s a natural fit there. But that’s just an area — because it can be very lucrative tax savings-wise if it’s handled properly… But I see it mishandled a lot.
Joe Fairless: What’s an example of how that can be beneficial, dollars and cents? You gave a really good example with the 500k doctor on number one… But how about number two?
Dusty Rollins: Let’s go back to a doctor, just to stick with the —
Joe Fairless: Sure.
Dusty Rollins: …because everybody thinks they’re rich anyway. So a doctor couple, who are clients – he had a very high W-2 income, and they had a lot of rental properties, investment properties… So before they talked with me, they weren’t declared real estate professional status, so they couldn’t take some of the losses. What we did is we set up a clear plan — and the IRS always wants a Why, and they want everything clear; so that’s a free one there, not even part of the five. So we clearly showed where this lady – in this case, the doctor was the husband, the wife was not a doctor – was able to qualify, because she legitimately spent 15 hours or more a week managing the properties.
So by getting that status, we were able to open up and take a number of losses, and in their case it was an additional 35k a year in tax savings.
Joe Fairless: Wow. Okay.
Dusty Rollins: And the key point – she didn’t have to start doing it. She was already doing that work, she just wasn’t classifying it correctly.
Joe Fairless: Okay. Number three?
Dusty Rollins: Number three is cost segregation. A lot of your real estate investors will know this… You know how when you know something so well, you assume everyone knows it… We just keep running into people that don’t know it. So what cost segregation does is one of the magics of real estate is that you can have positive cashflow, and yet still not pay any taxes on it up to a degree, because of depreciation. So what depreciation is saying is the IRS understands that yes, you have positive cashflow, but your property is in essence decaying every year.
So what they do though is they make you depreciate the value of the property over a certain schedule. So it can be 27,5 years, 30+ years… There’s different schedules, depending on the type of property. So again, if you’re depreciating a property over 27 years, that’s a much smaller yearly depreciation.
Cost segregation is a study you do, and what it does is it goes through and takes out the different parts — so it says “Your light fixtures and different parts inside the property depreciate differently.” So your life fixture is not gonna last 27 years, right? It’s gonna last five years. So it’s a little bit complicated; you need a professional, I believe. You can kind of do it on your own, but it’s really hard… And I don’t do them either, but we work with teams that do it. And then you can accelerate the depreciation… Let’s say massive parts of the property – if you can accelerate it to a 4-5 year period, then you get a much bigger deduction each year. Does that make sense at all?
Joe Fairless: It does. What is your response to someone who says “Okay, I hear you, Dusty, but isn’t cost segregation just kicking the can down the road, because eventually it’s gonna be recaptured?”
Dusty Rollins: Yes, that’s a great question. There’s a lot of different answers to that. One would be though that I would rather have the cash now, meaning the tax cash back, than in 27 years.
Joe Fairless: Yeah, the time value of money.
Dusty Rollins: The time value of money, and then opportunity cost. So now, instead of leaving that tax cash in the IRS coffers, if you will, 27 years from now, let’s use it now to go buy another property to go build more wealth, and then the time value of money will capture it down the road.
And then there’s other things though about depending on when you sell it and how you sell it, and if you ever sell it, and how you transfer it… There are other ways, that again, the magic of real estate when it comes to taxes can help you alleviate. Did that make sense? I feel like I got in a little bit of a wormhole there.
Joe Fairless: Yeah, it’s a big wormhole, because there’s a lot of different variables, and different permutations of how that could look… But yes, time value of money I think is the main reason why a dollar today is better than a dollar in five years.
Dusty Rollins: Correct.
Joe Fairless: It just makes a lot of sense. Okay, number four.
Dusty Rollins: So number four is — again, there’s three levels of taxpayer. Number four is slightly more complicated, in terms of this… There’s three levels. Level one is the W-2; we’ve kind of talked about that. But that’s a W-2 – an employer pays you the money, they take out half the tax over the time for your withholding for the government. When it comes to the tax code, you’re basically screwed. There’s like three deductions; you don’t have many plays when it comes to the tax code. So that’s level one.
Level two is a business owner. And again, all of your listeners who are involved in investment real estate are in essence business owners in one way, shape or form… So that opens up the portal to a lot more tax strategies. And those strategies center around writing off your mileage, the cost segregation, like we just talked about, personal things that you used as a business being deductible.
Level two is the realm of deductions and write-offs. But there’s a level three, and this is where not many business owners, even really smart ones that have good advisors – not many business owners go to this level. I call it the elite level. It’s kind of like the Navy SEALs level. And that’s where you’re actually partnering with the IRS to help you build your wealth. Now, all of your libertarian clients just had chills go up their spine. [laughter] It’s a partnership where you sleep with one eye open, and it’s not a surrender type of partnership.
What I mean by this is the government uses the tax code to drive behavior; so that’s why at various times some politician will suggest we do away with the mortgage interest deduction on your house. And all the mortgage people and the real estate agents, that industry, the realtors – they get up in arms, because they feel like if you take that deduction away, you’ll hurt home sales, thus hurting mortgages. So whether they’re correct or not is another discussion, but the government definitely uses the tax code to direct behavior.
So what level three (elite level) is is when what you’re wanting to do to build your wealth and protect your family and leave your legacy – when that lines up with what the government wants you to do, and are willing to give tax breaks for, then there is real magic. Did that make sense at all?
Joe Fairless: Yeah, it makes sense, but by partnering up with the IRS — and I’m not taking it literally, so I’m not going down that path, but… That seems to be pretty general, not specific. Because I could say that “Well, as a real estate professional status, I’m essentially partnering up with the IRS, because I’m going towards the direction that they want me to go to maximize benefits.” By being a business owner, I’m doing what the IRS is wanting me to do, because I’m a business owner and I’m getting those deductions… So what’s the actionable item here, other than the concept?
Dusty Rollins: Sure. Well, real estate as a giant umbrella is — the IRS wants you to go into real estate. If you look at the Forbes 400, the top people, they either made their money in real estate, or after they made their money went into real estate. So it is dripping with lucrative tax advantages, like we’ve just talked about. But when you have tax-free exchanges and you can accumulate and pass over, you can have the magic of depreciation, where you’re getting positive cashflow, but the property is actually depreciating… So real estate is absolutely a giant area.
I’ll give you one caveat. When you get on a high level of real estate — I knew a couple guys in Atlanta that did major deals, and they would get tax credits. So a municipality would give them tax credits to go in and build mixed-use real estate; a lot of times it would be nice apartments and condos, a little bit of commercial underneath, and then mixed in with a little bit of low-income housing, properly done… But they would get tax credits, and if they didn’t need those tax credits for that project or for that company, they could actually sell those tax credits on the market, usually for a slight discount… And then that way, somebody else who needed those credits could buy them. So that is a way, again, where “partnering” with the government to build the wealth you want anyway.
Another area, that’s not directly real estate related is ESOPs (employee stock ownership plans). Those are where the government is saying “As a business owner, if you’re gonna help out your employees, give toward their retirement, help give them some ownership, then we’re gonna reward you with some ways to save on taxes as the business owner.” Now, you’ve gotta set them up correctly, or they don’t work unless you’re a really giant company. But ESOPs are another good way where you can build that wealth, and you’re “partnering” with the IRS.
Joe Fairless: Okay, cool. ESOP planning. We won’t go do deep into that type of plan, but what are some general guidelines that you’d give for a listener who does not have a Fortune 500 company, but is looking to implement this and get some tax advantages.
Dusty Rollins: Sure. On this level you need a couple things. You need a business, you need to have some employees (usually, it’s over ten employees) and you need to have a tax bill. You need to pay a fair bit in taxes. And largely, a part of that is because to make it worth everyone’s time to set it up and to operate it properly.
If you have somebody who’s just the sole operator, they have zero employees and they don’t pay that much in taxes, then the ESOP is probably not something they need to really pursue heavily… But if they have the employees and they have a big tax bill – and a big tax bill, in my mind, would be basically 100k+. At that point you can really start to get some exciting strategies going under the ESOP realm.
Joe Fairless: Number five.
Dusty Rollins: The last one would be to get a second opinion. One of the things we find — one of my new clients is a chiropractor, and we were doing a tax plan for him, and as we were looking over it, we saw that his previous accountant of 18 years who had retired had put one of his rental properties on the wrong form… Just for no apparent reason, just some kind of mistake that we never actually figured out why they did it, but we were able to amend it. But he put it on the wrong form, and by doing that, it cost the client over $1,200 in extra taxes.
And again, you say “Well, that’s not that much”, but the client only paid the CPA $800/year to do his taxes, so the CPA was making these errors… And the reason I said 18 years and retiring was because a lot of times these guys get into kind of a rhythm or a system where they’re just filing year after year after year, so if they make a mistake one year, it just kind of keeps going. And it wasn’t a mistake — the IRS is not gonna hound you to refund your money, so it’s not a mistake that would be legally problematic, but it took in this case $1,200 out of his pocket that he didn’t need to pay.
So I think the fifth or the overarching thing is to really look at getting a second opinion, make sure that you’re getting that tax strategy in place, and not just handle it by default.
Joe Fairless: What are some questions you should ask him/her in order to see if they qualify to give you a second opinion?
Dusty Rollins: Someone else or your own CPA a second opinion?
Joe Fairless: Someone else. Let’s assume we’re good with the CPA, but we wanna get that second opinion. How do we qualify the second opinion person?
Dusty Rollins: Great question. I would say, again, start with how do you handle your clients, and if they immediately start talking about tax preparation – “Here’s how we do the forms, we get this to you ahead of time” – if they immediately start there, they’re probably not a tax strategist mindset. If they start with “Well, we first need to look at where you’re at, ask you some questions about what you’re wanting to do, and then make sure all the strategies you’re taking advantage of.” That starts to help you see — if they start talking tax strategy first. Did that make sense?
Joe Fairless: It does.
Dusty Rollins: And then a key thing too, if you go back to your CPA — because invariably, when we work with the client, we don’t even want them to fire their CPA, we just wanna do a tax plan to help make sure they’ve got all the strategies available… But when they go back to their CPA with our strategies, their CPA will go “Yup, yup. Yeah, we can do that.” The client will call me up and say “Well, if we can do all that, why weren’t we doing all that?” I’m like, “I don’t know, don’t ask me that. Ask them.”
So that’s some place you can start. If you really like your CPA and you think they’re doing a great job on the tax side, ask them “Am I taking advantage of every strategy possible?” and see what their responses are.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing and get in touch with you?
Dusty Rollins: If they go to dustyrollins.com, and I think the link will be in the show notes… DustyRollins.com/bestever. It’s a page there just for your listeners, Joe. One of the offers – I have a book called “The taxpayer manifesto”. If they go to that page, they can get it a completely free copy of the book shipped out. No credit card needed, just send me a mailing address and I’ll mail you the book.
Joe Fairless: Outstanding. Thank you for that, thank you for sharing with us five things we might be missing out on by not having a tax strategy… And it’s not only things we’re missing out on, but you talked about some practical ways to implement those five things. So you didn’t just leave us hanging, and I appreciate that.
Dusty Rollins: [laughs]
Joe Fairless: Dusty, thanks so much for being on the show. I enjoyed our conversation. I hope you have a best ever weekend, and we’ll talk to you again soon.
Dusty Rollins: Thank you, Joe. Take care.
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