Short Summary
In this episode of The STR Insiders, we'll dive into the complexities of finding the right tax professional, especially if you're involved in real estate investment and short-term rentals. Our guest, Tony Hoong, sheds light on the challenges people face when searching for a tax professional who truly understands their financial situation. He emphasizes the importance of having a tax strategy tailored to your individual needs and how a specialized tax professional can help navigate the complexities of tax planning, maximizing savings in the long run.
Our special guest is Tony Hoong
Tony Hoong, the founder and CEO of The CPA dude accounting firm, brings a wealth of experience to the table. Having worked as a Big Four tax associate and held various senior accounting and tax management positions, Tony is a seasoned expert in navigating the complexities of tax strategies. With a former IRS auditor on his team, Tony's insights offer a unique perspective that's valuable for real estate investors seeking informed decision-making tailored to their financial circumstances. His down-to-earth approach and practical knowledge make him a valuable resource in the world of STR investments and tax planning.
In this episode, you will be able to:
Uncover the best accounting preferences for short-term rental owners.
Learn the ideal entity selection for safeguarding your real estate investments.
Understand the tax implications of different entity structures in real estate.
Discover the importance of strategic tax planning for real estate investments.
Explore real estate tax-saving strategies to maximize your returns.
Safeguard Your Assets
Asset protection is equally as important as tax savings for real estate investors. Choosing the right entity structure such as an LLC, based on individual circumstances and risk tolerance can provide a layer of asset protection. For thrifty individuals, alternatives like opting for a sole proprietorship with an umbrella insurance may be a prudent choice, considering the cost and level of protection needed.
Navigate Entity Structures
Deciding on the optimal entity structure can appear overwhelming due to the range of possibilities like LLC, Inc, and SP. Each carries its own set of pros and cons but rushing into such commitments without fully understanding financial implications could lead to unnecessary drain of resources. Therefore, expert guidance to make informed decisions tailored to specific circumstances is vital.
Maximize Your Tax Saving
sUnderstanding how to maximize your tax savings is key in the real estate investment sector. Implementing a strategic tax plan, like leveraging cost segregation on short-term rental property purchases, can significantly lower taxable income. Engaging a capable tax professional who is well-versed with specific tax loopholes is crucial in unlocking these potential savings.
Link and Resources
Subscribe for free episode bonus materials: https://www.thestrinsiders.com/
Join the conversation with Tracie on Facebook: https://www.fb.com/groups/strcentral
Follow Jacquie on Instagram: https://www.instagram.com/5starbnb/
Connect with Tony: https://thecpadude.com/
Follow Tony on Instagram: https://www.instagram.com/thecpadude_/
Transcription
00:04
Tracie
Welcome to the STR Insiders podcast. We share tips for achieving your STR goals. Aha. Moments, funny stories, and all the latest gossip of this STR life. Listen in as we keep it real and maybe a little sassy. Celebrate successes and own all the mistakes we've made along the way. Whether you're new to real estate investing, new to short term rentals, or a seasoned pro, there's something here for you. Jacquie is an STR property manager who consults with individuals looking to grow their own property management firm. Tracie owns STR consulting and media firms that provide education to investors who want to learn all about STR investing. For more information, please visit www.thestrinsiders.com.
00:55
Tracie
Okay, folks, if you like keeping your hard and money in your pocket, this episode is for you. Tony's the founder and CEO of the CPA dude accounting firm. He worked as a big four tax associate and then a corporate senior accountant, tax analyst, and tax manager before founding his own firm. Even has a former IRS auditor on the team. So get ready for some serious insider tips. All right. Is all that true?
01:25
Tony Hoong
Pretty close. Yeah, pretty close. Yeah. I'll take a little bit more credit than is due.
1:34
Tracie
I looked you up, I mean I’m summarizing your LinkedIn.
01:37
Tony Hoong
No, that's solid. I'm like, yeah, that was me.
01:41
Tracie
So I think most of us are not as good about talking about ourselves as we should be. At least I know that's.
01:49
Tony Hoong
Yeah. Someone asked me on a call, a sales call, once. So why you? I'm like, to be honest, I don't know why me? Do you want to save money and get some timely responses? I mean, that's all I got to offer. Besides that, I'm like, I mean, as long as you don't overpay the tax man, you're fine.
02:08
Tracie
Exactly. Well, that's for today. Jacquie, I don't know if you know, I met Tony through another savvy STR investor. Hey, Maddie! Who is also very happy with his services. We just got started last year, and we're really relieved, I think is the real word. Not even happy, just relieved to have someone who gets it. And so, for anybody listening, if you've been struggling with finding someone who understands the STR space and real estate, I think you're going to be really pleasantly surprised with some of the things we talk about today. So welcome, Tony.
02:43
Jacquie
Finding somebody in the STR world that is good with your accounting so hard to find. I have hopped around myself. My business, it's been hard. So thank you and welcome, Tony. Amazing accountants are going extinct. And we have one on the podcast. It's amazing we caught him. All right, so Tony, according to your website, The CPA dude mission is to provide holistic tax care and spread tax literacy. We love that so much. Thank you for coming on the show to spread the good news about taxes, any accounting preference on LLC versus Inc versus SP?
03:24
Tony Hoong
It's always, there are tools in a toolbox. Generally all taxes is like, there's a whole bunch of tools that are hidden in the tax code and it's just when do you use them and pull them out? So each of them kind of have their own purposes and really seeing which one makes the best sense for you, someone asks a question, it depends. Let me ask you 20 more questions to figure it out for you. But general guidelines, there's always which ones make sense. If you have an STR, of course, and you own it on that side, an LLC is going to be good just because generally if you can afford an STR at this point in your life, you probably have assets to protect. So having an LLC is good. However, there's some thrifty folks. I am asian. I like to save money too.
04:07
Tony Hoong
So maybe an LLC costs too much in California, right? It's going to cost you $800 every year. Do you need it for the first rental? And you can probably get away and maybe get umbrella insurance if you want. Obviously everything I'm talking about here is just my own opinions. None of it's actually real tax facts. LLCs are always good. If you have partnerships, of course, llcs are also great. I always see people skimp on operating agreements. So make sure you have like a solid operating agreement versus he said, she said. We used to do that as kids. It works because you have mom as a decider. But in the real world, the judge decides along with your attorney fees. So don't cheap out there. Sole proprietor wise, you just run it. You don't have to have an LLC.
04:48
Tony Hoong
One big common misconception is that you need to have an LLC to have the write offs, but you don't need to. You just operate as a sole proprietor. That's totally fine. And then just registering that do understand you have a little more exposed closure. So, if you do get sued, obviously you're getting sued, not your company. So those are a couple of big things Inc. wise which stands for incorporations. C Corps, whatever you want to call it, that one, generally, I don't see it used for in the STR space unless you're super big. Say you have like 20 units. You're arbitraging. That may make sense just because generally speaking, about seven hundred k net income is when we see C Corps make a little bit more of a difference versus S Corps or LLCs.
05:27
Tony Hoong
But generally speaking, everyone own property in a corporation just due to the double taxation. So those are like general guidelines bumpers. Like if you're bowling, right? Like, hey, you kind of move between these, but a couple bits and pieces there for which entity makes sense. And it always just depends on your budget, also your risk appetite. I have some folks where go to Vegas every weekend. Cool. Don't need an LLC. You got people like, nah, I can't keep a single dime underneath my bed. I have to put into an FDIC account. So, it really depends on the person too.
05:59
Tracie
Risk tolerance. Yeah. But the 700 k net was an interesting number that I hadn't heard before. So that's really, I think, helpful to some of our larger operating listeners.
06:09
Tony Hoong
The main reason why is because C Corps, for now, are only taxed at 21%. So, if you have like a train a versus a train b and they start colliding, the C's start to start make more tax savings for that purpose versus you're probably entering more towards the 37% plus your state, whatever that amount is. Obviously, Tennessee is nice and no state local taxes there, but it always depends on where you want to see. But yeah, I see some people pull the trigger on C Corps too fast. I'm like, your attorney was a professional salesperson, all your assets covered, and also your wallet got drained. Nothing against that. I just try to manage costs a lot more because I'm like, yeah, your money is my money, more or less when you're a client, so its like, yeah, let’s not overpay. Because I see the 20 llcs hidden. I'm like, oh, dear God. Especially with the new beneficial ownership reporting this year. So, I'm sure you've seen that all over social media, but if anyone that's been living, no idea what you're talking about.
07:10
Tony Hoong
Oh, well, there you go. This is good. This is good then. Yeah. So, if you own an LLC corporation, any legal entity, FinCEN, they want to know who's the beneficial owners behind these companies. So, any LLC previously formed before 2024, you have the whole entire year to tell FinCEN who owns the companies, more or less. They're trying to crack down on just any type of crimes, money laundering, tax evasion. So FinCEN is like an entity you do not mess with. So definitely those people that do have those 20 LLCs, now you need to file 20 of these reports and it's not a hard report. I went in to go play with it myself and it's fairly straightforward. Just because I own my own company, I don't have partners.
07:54
Tony Hoong
But it can get pretty administratively burdened just because if you have 20 partners then you need everyone's info. So, you had to get your was it either driver's license, passport, date of birth, address, where you live, all that fun stuff to sign up for an id, and then you have to pop it in for each one. Penalties are extremely hefty. It's $500 per day if you don't file it by 1/1/2025 next year. And then I think the caps at 10 k. But I think it was like maybe two years in prison. It was something like ridiculous. Yeah. It's never like an organization you mess with because they generally monitor all the bank accounts overseas. FinCEN is way worse than the IRS. The IRS is pretty nice in terms of administrating penalties like sending you to collections you can get on a payment plan.
08:36
Tony Hoong
They're pretty chill on income taxes compared to like FinCENstates. I wouldn't mess with though. States are pretty aggressive. California, they'll seize your bank accounts in no matter of time.
08:49
Tracie
You mentioned Tennessee. It's not having state tax, is that right?
08:53
Tony Hoong
Personal income taxes, yeah, they kill you at the business level, but yes, statewide you're good. Florida, Texas, Washington. Great states, to all live in for state living for income tax purposes. I don't know. I'm such a pampered princess now. I love my California 60 deg weather. I probably couldn't survive in Texas.
09:14
Jacquie
So what is the difference between active and passive real estate income?
09:19
Tony Hoong
By definition, all real estate income or rental activity is defaulted as passive. To undo the passive nature of it, there's only four things if you keep it simple. I always kiss method, keep it simple, stupid. My way of doing taxes and it's how can you make this passive income go to active? And the big one for here is STRs. STRS is if you show your material participation, either have your average stay of seven days or less and you show one of the seven problems. Easiest one most people do are 100 hours. No one else works more than you. So, you can't have a property manager or you do 500 hours and you can have a property manager. It just depends on how much time effort you want to do. So that flips the script as active.
10:07
Tony Hoong
Other active is that you have some super advanced folks. Generally speaking, it's usually a couple one person has day job with nice W2 that can get loans and the other person is the real estate person in the relationship. There you go. Right. And then they just go town. Right. Fixing things, having phone calls at the middle of the night. So you show that your real estate professional status, now you get the rep status. I always compare it to the unicorn of the tax world. Just because it's not that easy to get. It's hard. It is very doable as long as you're playing by the rules. Over 50% of your time dedicated towards the trades or businesses of real estate. And there's like twelve defined categories and then 750 hours and then showing you spend 500 hours managing your rentals.
10:56
Tony Hoong
You can also make a grouping election so you don't have to do 500 hours per rental. You can just do five of them, combine them all, do 100 hours each. So that's number two of how you can turn it from passive to active. Number three is going to be your grouping election. So can you group an active business that you own? So a lot of my was that restaurant owners, they'll own their buildings and group it with all their other activities from real estate investing. So now they're able to take money from their commercial building and offset it. So that's another good way to unlock these areas. The big thing is that you're running depreciation on all this. It's not going to be worth it if it's active and you're positive. You definitely have active with a big loss of depreciation.
11:39
Tony Hoong
And also if you have other income sources such as your W2 income or business income. So depending on how you want to see it and do it also because also we see investors where you could have a very high cash flowing positive even from a tax side added to appreciation in STR, because usually like year two, three, four, after you run the cost, take the first year, there's not that much depreciation left. So you might want to keep it as passive years two and three, because then you can also invest into other passive investments and get a K-1. So say you pair it up with a food truck, that food truck income is going to always generate money. Now you have losses, possibly from real estate, and you can collapse them all because you can match positive income with passive losses.
12:22
Tony Hoong
You always have to match it though. So active income can only be offset by active losses.
12:26
Tracie
I heard you say food trucks are always going to make money. Now is that because every food truck company that you do taxes for is cash flow positive?
12:37
Tony Hoong
Well, we make them cash flow positive.
12:42
Jacquie
Okay. I'm buying a food truck.
12:45
Tony Hoong
Yeah, well, usually if you come in and there's sometimes some difficult conversations, I piss some people off. But it's fine. It's just like, hey, if you're spending 12 hours in a day in this thing, I mean, we better make some money or else what are we doing here?
12:59
Jacquie
I feel like my head is exploding. There's too much information.
13:03
Tracie
I'm just going to throw that out there.
13:05
Jacquie
I want you to know that I was a double major in college. I was business management and accounting, and I changed my second major to marketing because I couldn't keep up. So, I am doing my best.
13:17
Tony Hoon
gOh, you're fine. You're fine. Marketing. In hindsight, if you did marketing and accounting, it'd be like such a killer combo. The more you find out in life, you can be the smartest person around. But if you can't really tell people what you can do, it doesn't really matter, right?
13:32
Tracie
Yeah.
13:33
Jacquie
Marketing and business management worked out really well for me. We'll just put it that way.
13:38
Tracie
I think it's really hard for a lot of people to not only understand, but also just to find the right tax professional for their needs. Because even between Jacquie and I, ours are different. She has a management company and investment properties, and that's her and her husband's entire business. Mine is investments and my husband has a W2. So even between the two of us, it may not be the same person. Now, I have a feeling you could handle both of those fine, but it makes it harder to talk to your close friends or colleagues even to get a good referral, because their dynamics are different.
14:16
Tony Hoong
Some folks, like some CPA’s messed it up. So, we had some folks that had STRs, and then it's like straight line depreciation. They don't pick out the losses against their W2. And I'm like, wait, I thought you told me this is an Airbnb per your tax return. It's not. So that gets messed up, which is kind of sad because, I mean, obviously Airbnbs, you invest for cash flow. It's not like you don't invest for tax benefits. If you do, oh, my God, you should reconsider your strategy. I never say, like, don't let the tax tail wake the dog. But, yeah, I see that messed up a lot. I see a lot of Schedule C's. They report that on there. That gets all messed up, too.
14:53
Tony Hoong
The only time that you put it on Schedule C is if you're truly operating a bed and breakfast like you're there cooking for them, taking out for tours, cleaning for them, like day of and truly providing a service. I see that messed up a lot.
15:07
Jacquie
I'm questioning my whole life right now. First of all, I've been hopping around an accountant since I started my business. But my most recent accountant is my first accountant who specializes in real estate. And that was one of my biggest mistakes was going for somebody local, going for a well known accounting business, whatever it may be, and not finding somebody who specializes in real estate. Listeners, if you have an accountant and they don't specialize in real estate, you need to switch things up.
15:33
Tony Hoong
Yeah, that local one. I don't know if local is a great idea when you have a complex situation. I think local is good if yours simple and you want to get it done or you need that facetime with the person, they understand it. But yeah, I always see a lot of comments and local CPA, I'm like, you can Google search pretty easy, a lot better options. But there are some legendary gems that are local, though. So if your accountant is probably like 55 or plus and they know real estate, just sign on with them forever because their rates are the best rates. I'm like, man. I'm like, how's this guy operating a business? So there's more CPAs retiring than they're being produced. No one wants to do the profession anymore. More people are retiring.
16:21
Tony Hoong
But yeah, it's a very interesting wave just to see what's happening in the CPA industry.
16:26
Tracie
What are your thoughts about? Because I guess there are two different services. There's a tax strategist, which I kind of feel I think you do both, but I don't know that everybody does. So does it make sense, like, if I have this lovely mother type CPA who's been filing my taxes for the last 20 years, but I have all this complexity right now. I'm going to take advantage of all these opportunities and that's really not her wheelhouse. Does it make sense to work with someone like you to build this strategy and to get everything prepared and then have her do the filings? Or where does that point really? I don't know the answer. So I'm curious what your thoughts are. Or if I just scrap it and say, look, Tony, I need all your help, and here's all my chaos, which.
17:10
Tony Hoong
Is what I did.
17:11
Tracie
To be clear, maybe somebody else doesn't want to do that.
17:14
Tony Hoong
So what I generally say is a two pronged approach. So we do a lot of strategy for folks and then we don't do the filings, actually. It's actually our preference, actually, because it's more fun. I enjoy just more strategy things than just doing the compliance, but it's different cups of tea. I got people on my team that can do the compliance, but I kind of compare it to. Your strategist is kind of like your head chef at a restaurant. They create the recipe, and then you just pass it off to the line chef. And as long as they have the recipe and ingredients to make it happen on a tax return, then you're totally fine. So sometimes it's the managed cost, too. I'm like, all right, we'll help you the strategy.
17:50
Tony Hoong
We'll show you all the savings, and then, hey, just give this to your CPA or EA or prepare. It doesn't matter who it is. It's kind of like tax professionals. It's a wild west. There is literally no governing body standards of anything. Just because you have a CPA behind your name doesn't mean that you know how to prepare taxes. But I'd say if you want to keep your current CPA, as long as they can follow the recipe that your strategist prepared and cooked for them or wrote out, they'll be fine. So that's a great way to kind of maintain relationships, maintain costs, while still saving a lot of money in taxes. I'd say the biggest thing, how you can kind of shoot yourself in the foot is not having a strategy at all. I don't think the strategy has to be complex.
18:34
Tony Hoong
Some people are like, oh, what can I do here? What can I do there? I'm like, just buy an STR. You're done.
18:40
Tracie
That's right, folks. You heard it here.
18:42
Tony Hoong
Yeah. If we're talking, because I have so many folks, they pay zero income taxes each year because they just buy one str. They furnish it nice, and they can put 30, 40 grand into it, run the cost, seg, boom, we're done. Zero taxable income. There's nothing else to plan for, guys. Then we're done here. But, yeah, I'd say if you got a good CPA, they're like, on the older side. Nothing against old people. Love old people. Hold on to them, for God's sakes. Yeah, I see some of the fees come in, and I'm like, dude, I think our firm would lose money because I have to pay so many people that do the return. So just keep those people. If you're getting, like, it's like $500 or something. Oh, God. Send them some cookies.
19:23
Tracie
Keep them, treat them like we treat cleaners. They're gold.
19:28
Tony Hoong
Yeah, exactly.
19:30
Tracie
So Jacquie, for example, mentioned earlier that her CPA is a real estate CPA. And prior to recording or planning for this episode, I think she was happy with her CPA. Now I feel like she thinks she may have some questions she needs to ask. So if somebody else listening is in a similar situation where they think they have a real estate guru or experienced CPA, what maybe are the top three questions that you would recommend they ask? So if someone is their first year in STR, their first year in real estate, they don't know what to ask.
20:09
Tony Hoong
I'd say one question. So this is for STR specific. Is this like, hey, are you familiar with the short-term rental loophole? What schedule do you report it on? So it's kind of like kind of giving them a bone, but at the same time seeing how they do it and then maybe asking also what's the benefit and how many clients have you done it for? So that would be your one.
20:30
Tracie
What's the right answer for the schedule?
20:32
Tony Hoong
Oh, yeah, trivia time. Yeah.
20:36
Tracie
You can't give them the questions and not let them tell them what the answers are. That'll be in the next episode, folks.
20:44
Tony Hoong
There you go. Clickbait. Come on, we got to do marketing. I'm learning from Jacquie here. So nine times out of ten, if you didn't provide substantial services, aka you didn't go there and cook for them every day, it should be Schedule E. Yeah. If it's C, run away. Just run away. Yeah.
21:02
Jacquie
I'm so scared to give my accountant trivia later.
21:04
Tracie
All right, so question number two.
21:10
Tony Hoong
Number two, if you're more advanced and you're in the real estate professional status, I'd say, hey, for reps tracker, do you work with real estate professionals? Have you taken rep status for folks before? And just seeing like, hey, how has the results been? Or how many clients do you have that are reps that qualify for rep status? So that's that part. That kind of vets them out for that part. And we'll weed people out a lot because if you don't understand reps, it's not going to be pretty if the audit ever flushes out. So that's going to be big for question number two. And then three, I probably just go for like basic business cleanliness. Right? So are you a one man show? Nothing gets one man shows. Just make sure they have enough capacity. During COVID it was bad.
21:56
Tony Hoong
Some people passed and they're a one person show. And yeah, they had nothing oh, that was crazy. I was back in my hometown, Fairmont, and they said there's only like three CPA’s in Old Town. One guy had a heart attack. He's only 61, and now people don't have a place to go. Like, one of my mom's customers at the restaurant said, the guy used to do the whole amortization schedule and everything for him because he had to seller finance deal. But now he doesn't even know where to start because the guy did everything by paper. So see the team having some backup. I was a one man show at one time. It's fine, you grow. But it does help to have some coverage just in case I get hit by a bus the next day. Security, are you taking your documents serious?
22:36
Tony Hoong
Is there a secured portal? Because it's SSN database, it's not Joke information here. It's real information that we.
22:45
Tracie
You say this. And I found, when I was searching a while ago, one of the people that was recommended as a tax guru in the real estate space, I did a discovery call with. We were going to try and get started. The tax assistant said, okay, just email all your tax forms to this email address. And I was like, my husband works in security. We don't do that.
23:19
Tony Hoong
This is the wrong person to ask this question to.
23:21
Tracie
That was their only solution for getting your documents. And I said, well, appreciate it. This is just not the right fit.
23:29
Jacquie
Wow.
23:30
Tony Hoong
Yeah. Security is very big because we're pretty, just very cautious on it. So our tax stones are provider. They do great. But then also we have cybersecurity insurance. And then I'm just spooked just because. I just can't imagine the leaks if it were to happen. It's just, I don't know, I'd probably go cry. But hey, we got insurance for a reason. And then probably just general response rates. So we get a huge graveyard of people that say, like, hey, my prior CPA didn't respond for weeks or never respond to me, and they're just too tapped out and busy. It's nothing against the CPA. If you have a thousand clients, it's just very hard to get that many messages out in a timely fashion. So just some general things. Talk to them, see how the firm works. I think those are your big things.
24:19
Tony Hoong
Question three is, how's your process and procedure generally work? And then also at the same time, too, ask them, hey, do you do strategy and planning if you're looking for it, or do you mainly do compliance? Because a lot of CPA’s, they're just focused on the compliance arm and not really focused on the strategy side.
24:37
Tracie
Tony, if someone wants to get in touch with you or see your crazy reels or what's the best way to follow you? We'll put all your stuff on the website as well. But what's the best way to get in touch with you?
24:51
Tony Hoong
Oh yeah, so Instagram and TikTok username is TheCPADude there. So those are the easiest ways just to get more nuggets like this. And then if you want to contact us, you just go to our website, thecpadude.com, and then that way there's all the forms there and then pretty much everything's TheCPADude. So yeah, you'll find us across all social handles there.
25:10
Tracie
Perfect. Thanks again. This was wonderful. Thank you.
25:15
Jacquie
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