Craig is here today to tell us about tax deductions that many of us may be missing. As real estate investors we are also business owners, as such, there are many deductions that are advantageous for us. If you have a home office, there are many deductions that are available to lessen your tax burden. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Craig Cody Background:
- President and Founder, Craig Cody & Company Inc.
- Certified Tax Coach, Certified Public Accountant, Business Owner
- Former New York City Police Officer with 17 years experience on the Force.
- Has co-authored an Amazon best seller book, Secrets of a Tax-Free Life.
- Based in Manhasset, New York
- Say hi to him at http://www.craigcodyandcompany.com/bestever – Visit for a free copy of his book – 10 Biggest Tax Mistakes That Cost Business Owners Thousands
- Best Ever Book: Traction
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Joe Fairless: Best Ever listeners, 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. We only talk about the best advice ever, we don’t get into any of that fluff.
With us today, Craig Cody. How are you doing, Craig?
Craig Cody: I’m good, how are you?
Joe Fairless: I’m doing well, and nice to have you on the show. If you can’t tell from his accent, Craig is in New York. I could tell as soon as he picked up the phone, baby. A little bit more about Craig – he is the president and founder of Craig Cody & Company. He is a certified tax coach, a certified public accountant and a business owner. He is a former New York City police officer with 17 years experience on the Force. Thank you, sir, for your service, first and foremost.
Craig Cody: You’re welcome.
Joe Fairless: He has co-authored an Amazon best-selling book, Secrets of a Tax-Free Life, and most recently authored the book Ten Biggest Tax Mistakes That Cost Business Owners Thousands Of Dollars. Based in – you’re gonna have to help me with this pronunciation…
Craig Cody: Manhasset.
Joe Fairless: Manhasset. Is that Long Island?
Craig Cody: Yes, it is, Long Island.
Joe Fairless: Sounds like a Long Island town… Manhasset, New York. With that being said, Craig, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Craig Cody: Well, as you know, I was a former New York City police officer, I had a great run for 17 years, I retired, I went to work for an accounting firm that did a lot of international work; I slowly built up my own firm, and now I’ve been on my own for a number of years now. I have a staff of ten, three other CPA’s, and we’re focused on tax planning for business owners and real estate investors.
Joe Fairless: Alright, well that’s what we are – we are business owners and real estate investors, so we’re in the right place. Your latest book, Ten Biggest Tax Mistakes That Cost Business Owners Thousands – what are some mistakes that are made?
Craig Cody: The biggest one is failing to plan. People don’t communicate with their CPA, their CPA doesn’t communicate with them; most accountants are really good, they put the right numbers in the right boxes, but it kind of stops there. There’s not enough communication back and forth, and it takes two to tango; it’s not just their fault. But people spend more time researching a call than they do how to structure their [unintelligible [00:03:07].09] how to structure their real estate, how to depreciate that real estate, where if they took some time, they’d probably save themselves a lot of money.
Joe Fairless: So now that we’ve heard that, what do we need to do in order to plan? How should we approach this?
Craig Cody: You need to work with your team of advisors, who should be a CPA, an attorney and whoever you work with in the real estate field, and get the information that they’re experts on; get that information from them and share it, and make your decision based on that information versus just flying by the seat of your pants and not using your resources.
Joe Fairless: So drilling down a little bit more specifically, I wanna make sure — so a CPA is a team member, an attorney is a team member… What did you mean when you said “whoever you work with in the real estate field”?
Craig Cody: That could be the broker that finds you your deals, it could be your finance person that finds you the money… Whomever you have that’s part of your team and helps you do your transactions.
Joe Fairless: Got it. And why are they involved in this?
Craig Cody: Well, everybody has their own area of expertise, and isn’t it better if everybody talks together? I may say “I think you should do it this way, because you need to accomplish this” and the attorney can say “Yes, that’s a great idea, but if we do it this way, it’ll accomplish what you want, plus it will accomplish what I want”, and why not get the best use of that information?
Joe Fairless: Let’s just say it’s a broker, for example – why do they need to be involved in tax planning?
Craig Cody: Well, I guess when it comes down to the broker, if that’s the person that’s finding you your properties, you could probably make the point that “He knows how much I can spend, so he should be involved in that or he should know that I’m qualified.” I would say the broker might not be the tip of the iceberg, but all these people that are part of your team, whoever you use regularly to find your investments, purchase your investments, they should be involved in some level. I don’t see a lot of downside there.
Joe Fairless: Yeah, I’m just trying to identify what the purpose of them being there is, but if just more to know where you’re coming from, so they can — I don’t know. I’m not sure, actually…
Craig Cody: If you could get some value out of it, why not?
Joe Fairless: Got it.
Craig Cody: If you don’t think you’re gonna get any value out of it, then…
Joe Fairless: Okay. Alright, so we’ve got the team – CPA, attorney and maybe someone who helps us get transactions or maybe not, depending on our situation. As far as failing to plan – I’ve rounded my team up, we’re sitting down; what do I say?
Craig Cody: Okay, let’s start with “What type of entity are we gonna purchase this asset in?” If it’s real estate, it’s probably going to be an LLC; not always, but probably. You’d be surprised how many pieces of real estate I’ve come across that are in C corporations or owned individually. I’m not an attorney, but what’s the bad thing about owning that thing personally and what’s the bad thing about having that piece of real estate in a C corporation? Let’s talk and let’s figure out a way to do it that’s gonna accomplish what everybody’s expertise is and get it involved in there.
Joe Fairless: Okay. After we identify what type of entity we’re buying it in, what other questions or topics need to be addressed?
Craig Cody: Okay. Well, let’s say we got it into an entity; how are we going to depreciate this? Are we going to do a cost segregation study? Is it a residential rental property? What’s the value of the building versus the value of the land? Am I gonna save money? Is it cashflow positive? Am I gonna save money if I do a cost segregation study? What is a cost segregation study?
Joe Fairless: For anyone who’s not familiar, then you just google “cost segregation Joe Fairless.” I’ve had a couple guests on the show talk about it.
Craig Cody: That’s something in the accounting world, but that is something that will help you keep more of what you’re making.
So you have your team together and you’ve chosen your entity, you’ve looked at depreciation… Now we look at “Okay, what other benefits can I get in the tax world? What can we do?” Can you hire your family? Do you need a home office? Do you use a home office? What can a home office do for you? How do I write off my car expenses? What other things can I be doing that I’m not doing that will generate tax deductions for me that are legitimate? Have those conversations. But if you don’t plan, you can’t have those conversations.
Joe Fairless: So number one is gathering the team, asking these questions, and thanks for giving us some questions to ask.
What’s another tax mistake that business owners are doing?
Craig Cody: I’m trying to keep them in real estate, so let’s talk about a home office. Are you managing your property yourself or are you using a management company? If you’re managing it yourself, where are you conducting your business? Are you doing it out of a home office? Are you taking advantage of everything that’s allowed inside that home office? Are you deducting a percentage of your utilities? Do you have an on-premise athletic facility?
The code says if you’re having an on-premise athletic facility, with a home office you can deduct the cost of that. That could be a pool, it could be a gym in your basement.
Are you taking advantage of medical expense reimbursement plans? Most real estate, if it’s not owned individually, it’s typically inside of an LLC, and an LLC allows you to have a section 105 medical expense reimbursement plan that lets you deduct the out of pocket cost that you have for medical expenses.
We see that with a lot of older clients, where maybe they’re doing a little bit of remodeling in the teeth area, and with the younger clients it’s braces and stuff like that, that are typically $6,000-$7,000 a pop, so they get to deduct that, which fortunately most people don’t get to deduct their medical expenses on schedule A, because they would have to be so large that it would have to be something very bad.
Once you have a home office, now you can write off your mileage from your home office to your different properties. It just opens up a whole lot of areas.
Joe Fairless: When you work with someone – and this can be a real estate investor or a business owner, because as real estate investors we are business owners, so if you need to think more broadly about this, that’s fine… What are the first steps that you do when you sit down with a person?
Craig Cody: The first steps we do is we get copies of their last two years’ tax returns. If they’re using some type of accounting software, we’ll get a portable file from them, and we’ll do an analysis. We’ll go through our analysis and we’ll basically uncover missed opportunities missed deductions.
We’ll present those via a WebEx or a Zoom call, and we’ll basically say “Okay, we see X amount of dollars in missed opportunities in deductions. That’s gonna save you $20,000 a year. Over five years, that’s gonna save you $100,000. If you wanna do a plan with us, we’ll do a plan for you.” We get paid upfront for the plan, it’s 100% refundable, and nobody’s ever asked for their money back, because it’s instant gratification.
So we do a plan, and from there clients will ask us if we’ll help them with their ongoing accounting work.
Joe Fairless: Got it. That makes sense. As far as the missed opportunities for deductions, any one or ones come to mind that you haven’t talked about already?
Craig Cody: There’s retirement plans, you see those all the time. They’re not that prevalent in the real estate arena. At Mill’s Entertainment you have what we call the [unintelligible [00:10:39].00] that allows you to rent your home to your business for up to 40 days a year and not have to pay income tax on that income. There’s a couple of higher-level ones that we’ve come across with people that are a little bit more high net worth…
Joe Fairless: Like what?
Craig Cody: It could be conservation easements.
Joe Fairless: What’s that?
Craig Cody: A conservation easement is when you invest in a property, and then that property gets donated, basically, for conservation purposes, and you wind up getting a tax deduction. That’s typically a multiple of your investment. They have to be done correctly and with reputable companies, and we typically do them with clients that are involved in the conservation movement or are very charitably-inclined. They’re not just doing it to get a tax deduction, they’re getting it because they wanna do some good. And as a side note, they actually get a decent-sized deduction out of the deal, too.
Joe Fairless: What’s something else for high net worth that you look at?
Craig Cody: We have captive insurance that we see a lot of.
Joe Fairless: What’s captive insurance?
Craig Cody: To keep it real basic, it’s self-funded insurance, and you’re ensuring certain risks, and you basically get a deduction for the premiums that you pay for that insurance. Once again, this is high net worth, and then down the road if you have no claims or there’s money left over after claims, when you take that money out it’s capital gains, versus ordinary income.
Then we’ve recently gotten involved in some international retirement plans that are perfectly acceptable and allowed by U.S. treaties where people get to take advantage of these. In the U.S. how much can you put away a year? $18,000, maybe $50,000. In a lot of foreign countries you can actually put away a lot more money than that. So there are treaties that allow clients to do different things, and shelter some money.
Joe Fairless: Based on your experience, what is your best advice ever for real estate investors as it relates to taxes?
Craig Cody: My best advice ever is communicate, plan, and look at your depreciation, and make sure you’re doing it correctly and in the most advantageous way. I can’t tell you how many times we see depreciation is a mess.
Joe Fairless: What do you mean by a mess?
Craig Cody: They miss it, they move from one accountant to another accountant to another accountant, and somewhere along the line they got missed and it wasn’t picked up by the next accountant, and by the time they get to the third accountant it’s not even around. I’ve seen that many times – people that are doing their own taxes (God forbid) and they have all these passive losses, and next thing they know they use a different computer to do TurboTax and they don’t move all that passive loss history over, and it’s gone.
I look at 2014 and I see $60,000 in passive loss carryovers, and then I go to 2015 and I see it starting at zero. Where did it go?
Joe Fairless: Can you capture that retroactively once it’s identified?
Craig Cody: Yes, you have to amend the return. But if you don’t know what you don’t know…
Joe Fairless: Yeah, someone’s gotta point it out first.
Craig Cody: Another thing with real estate investors that also have other businesses that they operate is when they have these passive losses, you look at opportunities to generate passive income. So would I rather take that deduction today, or would I rather wait 5, 10, 15 or 20 years until I see that property? I’d rather have that deduction today.
Joe Fairless: Great stuff. And as far as cost segregation, Best Ever listeners, one of them is episode 750, titled “Why You Are Losing Money Not Understanding Cost Segregation And How To Use It.” So episode JF750 with Jeff Hobbs. Are you ready for the Best Ever Lightning Round?
Craig Cody: I’m ready.
Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Alright Craig, best ever book you’ve read?
Craig Cody: Probably the one I’m reading right now is Traction, and I’m trying to think who is it by… It’s a very popular book. I’m about a third way through it and it’s living up to everything I’ve heard about it.
Joe Fairless: Yeah, a couple people recently have mentioned that, I’ll have to check it out.
Craig Cody: Best ever business deal you’ve done? Take that however you wanna interpret it.
Joe Fairless: I’m gonna say how about the worst business deal I’ve done, which was I sold my Manhattan co-op in 1992 for $125,000 and it was just sold two years ago for $565,000.
Joe Fairless: Where was it?
Craig Cody: Manhattan.
Joe Fairless: I know, but where?
Craig Cody: West 96th Street between Columbus and Amsterdam.
Joe Fairless: Okay.
Craig Cody: A one-bedroom with a Pullman kitchen.
Joe Fairless: Well, you sold it in ’92? That’s a lot of years, ’92 to 2015. What’s the best ever way you like to give back?
Craig Cody: To give back? I like to give back by just being a good person. I like to say “You know what? Leave people with a smile.” It was something I learned when I was in the police department. Make a friend, that’s the way I like to give back.
Joe Fairless: And how can the Best Ever listeners get in touch with you and learn more about your company?
Craig Cody: They could go to our website, which is www.CraigCodyAndCompany.com, and if they actually go to /BestEver, they can request a copy of our book, The Ten Biggest Tax Mistakes That Cost Business Owners Thousands, and we’ll send you out a free copy of that book.
Joe Fairless: Oh, cool. Alright, I will amend the notes in the show notes page. Thank you for being on the show, and Craig, thanks a lot for talking through some mistakes that we need to watch out for. First and foremost, let’s make sure we’re planning ahead by getting the right team members at the table, asking questions like “What type of entity are we buying the asset in? How will we depreciate this? Are we doing a cost segregation study? (episode JF750 has that info on cost segregation) What about the home office? What are other things that I can be doing that I’m not doing to minimize my exposure to taxes?”, because taxes are our number one expense, and a lot of people don’t think of it that way, but they’re our number one expense… So thanks for being on the show, giving us some tips; I hope you have a best ever day, and we’ll talk to you soon!
Craig Cody: Thank you very much! Have a great day, too!