When Real Estate Tax “Benefits” Start Costing You | Ep. 45

they get emotional about it they see their tax return they’re like oh my god and disperse this like emotional reaction like oh my god i gotta do something between now and the end of the year and then there’s fomo or their friends are doing it right next thing you know they’re rushing into a bad investment decision just as just to try to save a few bucks before the end of the year so it all comes back down to your buy box would you buy this asset between now and the end of the year if you weren’t under a time crunch, if it wasn’t this big tax benefit you were going to get.

We’ve got to slow down, be more disciplined and analytical about what you’re buying and not just get caught up in the hype, so to speak. So that’s the first thing I would say is you want to avoid doing it. There’s a dangerous moment for investors when a tax benefit starts looking more attractive than the actual investment itself. At the end of the year, as it approaches, that temptation can get even stronger. But how do you know whether you’re making a smart investment decision or just trying to react to a tax bill? Welcome to The Sage Investor. I’m Brian Spear. And my mission is to help you generate cash flow and build legacy wealth in a tax efficient manner.

That’s what I’m trying to do for my family. And I’m sharing all the secrets. that I learned along the way. Today, I’m joined by Thomas Costelli. He’s a partner over at Hall CPA. And Thomas, he’s got a unique perspective because he works with investors on their tax strategies while also putting his own capital to work. Thomas, welcome to the Sage Investor, bud. I’m extremely excited to get you on here because you have such an interesting perspective. You advise folks as a real estate tax professional, so a tax strategist, which is wonderful. So you got that beautiful lens, but you’re also putting your own capital into…

into investments, right? You’ve done some deals personally with your own money. You also have on occasion done some limited partner investments into syndications and have also done some general partner investments in syndication. So a wonderful perspective cumulatively, but really truly through the lens of that tax strategist. So I want to kind of explore kind of your perspective and all the different lessons you’ve learned over time and try to add as much value as possible for the for the audience, but I’d love to maybe get a story, maybe something that you’ve seen where an investor’s come into your office and they’ve maybe made an investment, they’ve pursued a tax benefit with an investment that looked really good on paper, but maybe it didn’t pan out the way that they otherwise would have expected.

Maybe could you give us a story of something that’s a… happen like that? Yeah, I definitely have a few of those in my time, some with limited partners, others with more active investors. I would say right now, one of the more popular strategies out there is investing in short-term rentals. So with short-term rentals, you can invest in a short-term rental, then use depreciation deductions to generate substantial tax losses that typically only exist on paper, and then use those losses to offset your active business income or W-2 income that you have. And on the surface, the requirements for that seem relatively straightforward.

Have an average period of customer use or guest stay of seven days or less, and then materially participate by spending more than 100 hours, making sure no one else spends more time than you. One story I want to share is client did a lot of it made a big investment into a multi-unit. Basically, I think I forgot if it was a triplex or a fourplex, right? And they’re like, all right, great. I’m going to operate this as a short-term rental. I’m going to get these tremendous tax benefits. But they made a fatal mistake in their investment strategy. So we’re… Uh, basically the way it works, long story short, without getting into the nitty gritty, the tax code, if you have a multi-unit, uh, building and you are renting out the different units on a different base basis.

So for example, unit a is a long-term rental unit B is a short-term rental unit C is a long-term rental. the average customer use is determined based on the entire building itself, not just in each individual unit. So we had a potential client come to us and they had everything all fired up, made big investments. They’re going to get a lot of these big tax benefits. And unfortunately we had to break their heart that because their unit, one of their units was rented on a long-term basis. It basically made the average period of customer use exceed seven days. And all of a sudden their strategy fell off.

flat, right? And they just weren’t able to get the tax benefits that they thought they were. We also have sometimes limited partners who invest in syndicates and funds under the presumption that they’re going to be able to take the losses against their W-2 income. And that law has changed way back in 1986. So, but believe it or not, there’s still almost 40 years later now, people are still under the misconception that you can just invest in a limited partner, invest as a syndicate or fund and just take the loss against their W-2. So I can’t tell you how many times that story’s happened.

But those are just two stories that happened to come to mind related to people who thought they were going to get this big tax benefit that just ultimately weren’t because they just didn’t fully understand all the nuances and the rules that go into it. Yeah, it is about understanding the rules of the game, because as you’re outlining there, that’s real consequences, some real world consequences with big dollar amounts. And you’d hopefully be able to understand those prior to unfortunately making those mistakes. So hopefully we’re able to stave off that for some folks here listening today. So appreciate the various examples there.

Maybe. A little bit of color in terms of you gave a couple examples there, but why do you feel right? It’s kind of interesting because there’s so many different folks that are really, really successful, but unfortunately make some of these significant mistakes. Right. After advising so many different clients over time, what do you notice about the guys that build lasting wealth in a very tax efficient manner versus those who stumble over themselves just chasing the next shiny object and next immediate opportunity? Yeah, I’m going to say I’m going to say it’s a handful of things is going to be first having a long term vision of what you want to achieve over the period of typically, you know, decades, right.

And then also have translating that into tangible goals to get there and then remaining disciplined. Yeah. on your path to get there. And really kind of adding into that discipline and knowing what you want is having a firm buy box, right? And what I mean by that is like, I’m gonna, this is the criteria in which I’m gonna accept investment opportunities. And when you have that level of clarity, that buy box, because it all kind of cascades down, you have your long-term vision, your long-term goals, and you know what you’re looking for, it makes it easier to filter out, okay, this fits my buy box, fits my long-term goals, and this opportunity doesn’t, right?

And without that filter or without being able to look that far ahead, you’re often at the whim of chasing the next shiny object to your point. Oh, short-term rentals are the next biggest thing. Well, do short-term rentals really make sense for your goals? Maybe, maybe not. Right. So, you know, from from not only my own experience, but watching just successful investors, most people who are building lasting wealth have a long term vision and then they’re surrounding themselves by advisors going to help them achieve that long term mission rather than just chasing the next biggest thing they sell on social media today.

Agreed. You talked about the buy box a little bit. We’ll circle back to that. So, you know, as a guy that’s so tax aware of the tax efficient structure of investments, I’d love to understand your buy box and kind of how you think about investments, right? Because a 13% internal rate of return on an income fund is a lot different than a 13% internal rate of return on an equity investment. with advanced significant tax advantages. So when you think about the buy box, are you looking at it pre-tax, post-tax? Do you gross up the returns after tax? How do you think about the buy box?

Maybe just talk about that for a little bit. Yeah, so I think for me personally, when I think about a buy box, I’m like, okay, what is my objective goal? you know, at this stage, right? For me, I don’t need cash income from my investments. I just, I don’t need that at this stage. So it’s like, I’m looking for growth, right? Growth in terms of like, you know, value add, equity, multiple pre, you know what I mean? So like when I’m looking at that, like I’m, I’m, it’s cash funds, right? I’m not going to look at those, right? I’m not going to look at debt funds necessarily.

I’m going to look at, you know, industrial, what’s going to get me that, that growth, right? That value add play. Now, in that specific structure, there is a tremendous amount of tax benefits, even if you’re just a limited partner, because when you’re investing in this, you’re going to have typically rental income that’s going to come in some way, shape or form. You’re going to have all your expenses, your depreciation, and that depreciation helps shield any rental income that’s coming your way, even though it’s not the intent normally of those investments. It’s going to generate that, but it’s going to shield that investment income.

And then later on, when you sell it, you can use some depreciation, some other strategies to offset the capital gains, the depreciation, recapture, all that when you ultimately exit those deals. So from the buy box perspective, it’s really knowing what you want, what you’re looking for. And then using that filter, because look, for somebody else, an income fund who’s more, who needs more income might, that might be a better investment for them. And sometimes it’s not just about the tax benefits, right? Or maybe it is. And then you’re going to invest in your income fund, but you’re going to put it in your IRA, right?

Which is tax shelter. So maybe a long winded way of saying that it really comes down to knowing what your goals are. And then looking at from there, what’s the best investments to get there? And then how can you make those investments tax efficient? not only just looking at the individual deal and does the deal pass the underwriting metrics inside of the buy box, but understanding the tax ramifications. Cause when I see pro formas and different deals that are pitched out there, right? Sometimes they’ll just share the deal level metrics. Sometimes they’ll share the grossed up, deal level metrics kind of from an after-tax perspective.

But you’re kind of conveying even beyond that of not only understanding what the deal level metrics are or the growth stuff metrics, but really truly how it impacts you and your family and your personal tech situation. Because at the end of the day, that’s what matters, right? It ain’t about what you make. It’s about what you keep for you and your personal family situation. So understanding your personal vision, which no sponsor would ever be able to do for you. is a necessary piece prior to even beginning to vet the opportunities out there. So all good insights there. Well, how about this, right?

When you started going down the path, the career journey, you’ve done a lot of different things, but ultimately you’re then going out into the real world and allocating your own dollars. And when you’re investing your own money, what changed about the way that you evaluated deals in the marketplace? I came into the real estate world through the lens of syndication. I went through a syndication training program back in 2014. So maybe that’s like 12 years ago now. And that really shaped my overall way I look at investing. I thought, okay, real estate’s the end all and be all. I want to invest in real estate, higher returns, better tax advantages, all that.

Then invested in a few deals and lost some money, right? Not on a real estate deal. It was an ATM deal. Not actually lost money. And that’s when I came to the conclusion that there’s a lot of risk in syndication. I’m going to get – I’m going to break that down a little further. But there’s a lot of risk. So maybe not all my – and like – People who come through the real estate space tend to hate the stock market. I think that comes from like sales pitches against it. Like there’s stocks, there’s nothing inherently wrong with investing in the stock market.

So really what I realize is, uh, is that I am going to have an allocation in, in, in stocks, whether it be ETFs or direct, you know, it’s ETFs for me at this point. But then I’m going to allocate a portion of my investments, a smaller portion to real estate and syndications, because right now I’m a partner CPA firm. I don’t have time to go and syndicate a deal right now myself. So I’d have to be a limited partner. And with that, if I’m going to allocate that capital, what is the most important thing? Well, first is knowing my buy box.

Again, what deals to just say no to just on its face? But then it’s, okay, who’s the sponsor behind that deal? That is incredibly important. It might even be cliche at this point, but at the end of the day, the sponsor is going to make or break that deal, right? They’re going to be in charge of operating the deal. They’re going to be in charge of getting the financing for the deal. They’re going to be in charge of making distributions, making key decisions. You want to make sure you’re investing with an experienced sponsor. That’s been my lesson because some sponsors, just because they’re just starting out, doesn’t mean that they’re going to be,

Right. But you’re taking a bigger risk, right? Because they’re unproven. And then, so really understanding the sponsor, their experience, and do they have experience in the asset class that they’re currently syndicating, right? Sometimes they do, sometimes they don’t. So really evaluating the sponsor, making sure that all the boxes are checked with the sponsor has really been The key thing when I’m allocating capital is do I trust a sponsor to execute on on what they’re saying first and foremost? And also, I add one more layer to that. Sponsors, sometimes they are syndicating a very specific type of deal just to get really granular.

Some sponsors might be doing multifamily in Savannah, Georgia. not to pick on Savannah, Georgia, but just picking out of a hat. And that might be all they’re doing. So they’re going to always be bringing deals to you from Savannah, Georgia. Now, the Savannah, Georgia, is that the best option for your capital as of today? Maybe, maybe not. Maybe you’d get a better deal in Dallas or Indiana, or maybe industrial is better for you, right? For what your buy box looks like or for what your return hurdles are, right, that you’re looking for. Sometimes you have to take a step back and realize that you might even have a great sponsor, right?

But maybe that opportunity in that market sponsors in and that asset class may not be the best use of your capital for your goals at that period of time. And I would double click into the word better, right? It might be better for you, but you have to define what better is. Better does not always mean the highest return or dare I say the highest projected return because the highest projected return doesn’t always pan out the way that you would have otherwise anticipated, right? So it’s whatever is best for you and your family at that moment, allocating the capital. Wonderful, wonderful, wonderful stuff.

Double clicking a little bit into, you know, maybe some additional things that folks have learned over time. Circling back to your lens as a tax strategist. There are inevitably, there’s going to be somebody out there listening today that made an investment. I’m not going to say entirely for the tax benefits, but at least partly because of the projected tax savings. What is something that maybe you would want them to go back and review? And it may be an assumption that they made something that you would say, hey, why don’t you go back and review that just to ensure that you’re in a in a good spot on that particular investment?

I would ask them to remove the tax benefits from the equation and then ask themselves, will they still make that investment? If the tax benefits were not there, a mentor told me if years back, if you have to, if, if the tax benefits, if the tax benefits are the only thing making the deal work, then it’s not a good deal, right? The deal, the investment, the investment should stand on its own merits and then the tax benefits be the icing on cake. Now, yeah, granted, you might be looking at after tax benefits, after tax returns, and that might be a strong criteria for you.

But at the end of the day, if you wouldn’t make that investment, if the tax benefits were not there, then it’s a bad investment. So that’s the first thing I would tell someone to go back and reanalyze it without the tax benefits. Yeah, love that. And so, I mean, I’ll toss out kind of like a couple, a few questions that I like to think about in terms of the tax aspects of it, right? Because we always like to say around here that we never let the tax consequences wag the investment dog. We want to find a durably wonderful investment, a truly good real estate investment, as it were in our case.

And then once we found that, then we optimize the structure, right? Then we create the most tax efficient structure that we possibly can along the way. Because as you know, it’s not about what you make. It’s about what you keep. I’ll leave it at that. But the three things would be, one, would I still make this investment without the tax benefit, exactly as you just outlined? Two, have I confirmed whether I can actually receive the tax benefit, given my personal situation, and actually use it? And kind of what time is that going to hit? And then the third piece is if the tax benefit doesn’t materialize because tax laws change, does the investment still make sense?

So that’s kind of how I think about it. Is that a useful way to think about it? And maybe what would you change or what would you add to that framework? Yeah, I think it’s a great list of criteria to look through. What would I change about it? I don’t know if there’s anything I would change to that offhand. So I think it’s a great framework. Appreciate it. It makes me feel like I know something about tax, even though I don’t. But I know a little bit. I know enough just to be dangerous, right? That’s the whole thing. When I first got started as a generalist, you’re like an inch deep and a mile wide.

Then we started getting unbelievably granular. It’s starting to get deeper and deeper in various places. I know just enough to get dangerous, as it were. But let’s try to help some other folks out there looking to invest capital passively in various syndication deals, as it were. When a sponsor… presents an attractive return alongside significant tax benefits. You know, what what warning signs would you would you want to to see to maybe slow down a little bit? What warning signs would would pop out to you when you see that sort of stuff? Yeah, the first thing is that some people would say, I’m not saying I would necessarily say this, but the fact that they have to advertise how strong the tax benefits are could be a red flag in and of itself because they have to try to use the tax benefits to prop up the return or the lack thereof, perhaps, in their own investment.

The second thing I would say is that, again, I would go back and analyze that deal if there were no tax benefits. Then what I would do is I would actually take that to a tax advisor. And make sure that the tax benefits that are being stated are actually there and that would apply to you. Because there’s a lot of, and I’m not saying necessarily in real estate, but there’s a lot of syndicated offerings and schemes, for lack of a better word out there, that either are fraudulent from a tax perspective or just straight up just this won’t work. And B, or just mis-

missold to investors um like there’s equipment leasing things out there that don’t necessarily work the way that people think there’s like complex trust structures that you have to have you know a million one legal documents to just you know with you know signs everywhere seeing you know like arrows does this actually work like there’s a lot of fraudulent things out there so kind of just to break that down i would look at the deal first and foremost without the tax benefits then i’d bring the tax benefits to a an advisor tax professional and say okay Are these tax benefits legitimate, A?

And then B, if they are legitimate, can I actually tap into them the way that they’re stating that I can? Because it comes down to your individual situation. You may or may not be able to use the tax benefits in the way that the syndicator or the promoter of these investments is indicating that you can. Yeah, of course. Everybody’s tax situation is different. And clearly, you should understand your personal situation prior to assuming that you might be able to use any respective tax benefits from any given individual syndication. I will convey I do think it’s important to try to maybe not highlight and promote, if you will, the tax benefits, but educate folks on what the entirety of the holistic investment is.

My personal contention there, because I just I do believe that the after tax compounding is a big piece of the wealth building strategy over the very long term. I can go on and on about this. I also think it provides I’ll use the term retail investors, everyday investors, a benefit compared to sometimes what institutional investors would have the luxury of receiving. By way of example, I was speaking on a panel yesterday. for our mobile home park industry panel in Tennessee a couple of months ago. And one of the guys I was on the panel with is running multiple billion dollars of institutional capital.

And he was, to some degree, griping a little bit about the depreciation allocable to investors that are, quote, retail investors inside of mobile home parks. As you know, it’s an unbelievable benefit from a cost segregation study, et cetera. It’s one of the wonderful aspects associated with the asset class. Not the main thing, but it is most assuredly a benefit. I had to chuckle to myself internally because what we perceive is such a wonderful tax benefit that we can pass along to all of our partners along the way. He literally receives zero tax benefit and his limited partners as institutional capital folks literally cannot benefit.

from the additional Big Beautiful Bill and the accelerated bonus depreciation and the like. And so he puts it up there in a more material manner, kind of in a detrimental manner as it were. And when I’m chuckling to myself thinking, just because he can’t use it doesn’t mean it’s a negative thing. Viewing it holistically, you just, have to understand all the pieces of the puzzle. And you never let the tax consequences wag the investment dog. But you have to understand the rules of the game and play within the rules of the game to the best of your ability. So in any event, all wonderful, wonderful feedback.

Maybe let’s pivot to the long-term philosophy of just how to view tax and maybe what a good tax strategy looks like. If you’re looking to structure that for you and your family and maybe change the family tree in one generation and build legacy wealth over time, What is a what is a good tax strategy look like when it’s part of your long term wealth plan rather than just kind of a single deal or a single year’s tax bill? Yeah, I think you really have to look at the big picture and really zoom out, right? I’ll break it down like this.

There’s a few angles. First, the asset class you choose can have different tax benefits, right? If you choose to invest in stocks, right? There’s going to be different tax outcomes, right? But by investing in real estate and specifically rental real estate or investment real estate, there are depreciation benefits, right? First of all, let me back this up. So with real estate, there’s more tax benefits in that asset class available to your typical investor than pretty much anything else. Right. So if you buy a single family rental property, there’s so many different things you could do that. First, you can shield any rental income from depreciation.

Secondly, when you sell that property, you can. You can 1031 exchange it. You can do what they call lazy 1031 exchange, which is buying another property and then offsetting the gain on the sale of the property just sold. You can hold it until death pass it along to your heirs that has stepped up basis and not pay any taxes on that. Um, So that’s something that just choosing the asset class in and of itself of real estate, you’re putting yourself into an asset class that can really help you build generational wealth just because of all the different tax benefits that surround it.

Secondly, it’s going to be the investment strategy, right? Sure, you can invest in real estate. Great. We’re in a great asset class. We’re playing a good sandbox. But what is your strategy within that? Is it value-add opportunities? Are you going to be investing in syndications? Are you going to be investing actively yourself? So if you invest in value-add play, they call it BRRR, the buy, rent, refinance, repeat. That has tremendous capability to build wealth. I have a partner we used to work with at the firm who built over a $30 million portfolio in 10 years, effectively using the BRRR method.

And the way that it works is you buy a property, could be a single family, multi-family, commercial, industrial, whatever the case may be. And you add value to that property generally through renovations. And then you push the, that not only will push that, that will push the rent value up. That will push the market value of that property up. And then you can go ahead and you can keep that property within your portfolio and go get a cash out refinance and tap into a bunch of cash tax tax free and use that to go buy the next property or continue optimizing your portfolio.

So that that is part of it. First is going to be what asset class you’re going to be in and what your investment strategy is within that asset class can really make things tax advantage for you. The third thing I would say there is just long term structuring of how this is all going to work. And now we’re getting a little bit more into like wealth planning or estate planning. But choosing the right entity structure can go a long way, right? Holding companies generally have pretty good tax attributes, but putting a property in S corporation, probably not the best long-term solution.

Also, being mindful of what your net worth is or what the value of your estate is, quote-unquote, is going to help you determine whether or not you should be setting up complex trusts, like irrevocable trusts of removing assets from your taxable estate while you’re alive so they can continue appreciating, and you’re not going to have to pay estate tax on it. I’m a long story shorting a lot of things here, but it comes down to asset class, investment strategy, and then – structuring at the end of the day, from a legal standpoint, how that all kind of plays into the long-term well plan.

Now you can go much further than that and say, okay, well, who’s going to take this all over, right? When you pass away, right? Is it going to be a simple and easy, you’re going to just pass away. You’re going to sell all the assets. Your heirs are going to just, you know, just dispose of all the assets and sell it all when you pass, or are you going to, or are you going to raise, you know, your children, your heirs, et cetera, to eventually take that over. And now you’re getting into family governance and. how to educate your children and that whole entire, you’re opening up a whole different aspect of wealth building and wealth transfer than just the asset class and the investment strategy that you’re using.

Wonderful feedback. And again, part of it’s the building phase, then part of it’s kind of the harvesting phase as it were, and then passing it along in the legacy. Regarding the asset class, I share the sentiment, right? It’s the old Jeff Bezos philosophy from my perspective of people always ask, hey, what’s going to change in the next 10 years with new technology and AI, whatever. His question is always, what’s not going to change? Because if you know what’s not going to change, you can build a real business behind that, My perspective is affordable housing, right? It’s been in high demand since literally, let’s check the time here, literally since forever.

And so it’s probably going to be around in affordable housing in high demand for an extended period. That’s my contention. As far as the strategy goes, I share the sentiment. I love the idea and the concept of the, You know, we call it buy, improve, refinance and hold. Right. Same exact sort of sort of scenario. But we have likewise come to find that that is the best way to generate long term compound interest in a tax efficient manner. We went full cycle on 16 mobile home parks before we were like, hey, we should probably just refinance these because the deals that we sold are now two or three X what we we sold them for.

And we thought we were making the best decision ever. Right. And we sold it. This is amazing. And then now we turn around. We’re like, oh, man. We literally could have made millions and millions of dollars more by doing nothing other than just simply waiting and allowing the macroeconomic talents to hit. And for structure, as those deals grow in value and you do begin to generate that compound interest and you’re building wealth, trying to get out in front of passing it along in your – maybe while you’re still building can be prudent. So if you’re out there listening and you’re one of the guys that’s contemplating doing some of that estate planning, leveraging the –

non-revocable trusts, as Thomas is alluding to, prior to those assets appreciating is an important piece. And sometimes if you’re kind of on the cusp or borderline, sometimes folks stumble into the fact that they’re already at or above the thresholds unbeknownst to them as the assets continue to appreciate. So if it’s something that you’re kind of on the path towards reaching those thresholds, probably prudent to do a little bit of self education or jump on, have some conversations with some attorneys to think through, well, you don’t have to pull the trigger today, but think through when you might want to ultimately begin leveraging some of those more complicated estate planning strategies for the betterment of you and your heirs.

So all great insights there, man. You know, that’s long term. Maybe we just circle back here to the very, very, very near term here as we are in the fourth quarter of 2026. Can’t even believe it. It’s crazy. Years flying by. But here we are as we approach the end of 2026. What decisions should investors be thinking about right now throughout the end of the year here and make some maybe decisions to try to minimize the tax bill this year? And what should they definitely not do just to capture an immediate tax benefit? Yeah, but they should definitely not do.

And we see this every year. We have to help clients steer clear of this. It’s just make it a last minute buy of an asset, whether it’s an investment in syndication, an oil and gas investment, or a rental property that you’re going to own directly, just to try to get a tax benefit before the end of the year, like a buzzer beater, right? It all comes back to, you know, is this a good investment to begin with? Right. Like we’ll see people like, you know, paying high taxes is a visceral thing, right? People are in a 37 percent tax bracket.

You add on state taxes. You could see high income earners paying upwards of 40 percent of their income in taxes. And they get emotional about it. They see their tax return. They’re like, oh, my God. Right. And this spurs this like emotional reaction like, oh, my God, I got to do something between now and the end of the year. And then there’s FOMO or their friends are doing it right. And, you know, next thing you know, they’re rushing into a bad investment decision just to just to try to save a few bucks before the end of the year. So it all comes back down to your buy box.

Would you buy this asset between now and the end of the year if if you weren’t under a time crunch, if you weren’t, if it wasn’t this big tax benefit you were going to get? Like, we got to slow down, be more disciplined and analytical. about what you’re buying and not just get caught up in the hype, so to speak. So that’s the first thing I would say is like, you know, you want to avoid doing that. Other thing you have to realize, too, like what to do between now and the end of the year is realize that a lot of the tax moves you can make in any given year or tax strategies, deductions, things that you can execute or need to be taken care of in that year.

So, for example, if you want to have a property, not to contradict myself here, but if you do want to have the property included in your 2026 tax benefits, you do need to close on it before the end of the year. Right. So you want to make sure it’s a good investment, but realize that you do. Right. Another thing we see a lot of people do is go buying. Whether it’s vehicles, equipment, or just go buying a bunch of stuff between now and your end just because you’re going to get the tax write-off. Now, that could work, and that might be a prudent decision if you actually need that stuff, right?

Do you really need a new vehicle, or are you buying it just for the tax benefits, right? Because there’s going to be issues down the line with that vehicle anyway in terms of tax benefits. tax implications down the line. So, or are you just buying a bunch of new computers because, oh, your CPA told you to get the tax write-off, right? Or do you actually need those computers for your business or whatever the equipment, you know, from that standpoint, I would definitely make sure that you’re just being prudent with how you’re allocating your capital, whether it’s to an investment or to equipment or other things that you could deduct.

Do you actually need that? Does the investment actually make sense, right? That’s kind of the first thing that I would realize. Fair. Yeah. Thinking through it without shooting from the hip. I mean, really contemplating whether or not it’s something that you’d want to do irrespective of the time crunch in which periodically everybody finds themselves. So all great insight there. Tom, knowing what you know now, buddy, you’ve been doing this a long time with a lot of different viewpoints, which is so wonderful. The lens through which you get to operate, right? The wonderful tax strategist lens, but also actively actively. An investor and then again, passively into syndications and then actively as a GP.

It’s been it’s a wonderful experience over time. You’ve learned a lot. Knowing what you know today and all the things that you’ve experienced, how is your definition of a successful investment change? Like, what do you pay more attention to in an investment today than than you did earlier in your investment career? I would say, how can this go? Protecting the downside risk. How can this possibly go wrong? Earlier in my investing journey, I was like all about the upside, like, great, this has the highest returns. Let’s go with this one. Or, you know, this sounds like a sexy investment, or this is, I want to have exposure to this asset class just because it sounds something like I want to do.

Um, but now it’s been like, okay, well, what can go wrong and how do I protect that downside risk? Um, and that started with my buy box. That’s actually how I kind of came to that conclusion because I’m like, I made an investment. I felt like I needed to place capital at some point. I’m like, I don’t want to be sitting on this. I don’t want to have decision fatigue. I don’t want to be dragging my feet. So I made an investment into, um, a deal as a, as a limited partner that, um, that was more income-based. And I looked at that through the lens of, oh, this is a relatively, quote-unquote, safe investment.

I can place my capital here. But it did not align with my growth perspective. Like, I basically, then, what happened was another deal had came along shortly after that that was much more in alignment with my goals and my objectives and my buy box, and, like, my true buy box. And I didn’t have the capital put into it because I invested in a deal that didn’t make sense. So… That was the first thing that it’s the largest thing I think had changed is just knowing what my filter is and knowing what to say no to. But then from there, it’s also, okay, how do I protect the downside risk?

Because from there, it’s like, okay, great. You have all these investment opportunities that may meet your buy box, but is the sponsor good, right? Are they professional? What am I thinking about interest rates over the long term? That type of thing. That’s why I’d say those are the things that kind of really changed for me over the years. I went from just gunning for returns to saying, okay, you know what, I’m going to have a defined buy box. Anything that’s not – buy box is not going to pass stage one of analysis. And then from there, it’s, okay, great. These all meet the buy box, how the sponsor is going to perform.

What is the sponsor not considering? Right. I had this one investment. The sponsor was like, oh, great. All these returns are going to happen. But they didn’t factor in that interest rates could skyrocket or that that they might not be able to refinance at the time that they thought they were going to be able to refinance. And that killed the entire investment. So, yeah, I know I said a little bit of a lot there, but buy box and then protecting the downside. Absolutely wonderful stuff. And it speaks to my heart and my DNA and my bone marrow, Tom. That’s exactly how I feel, buddy.

So I’m all about protecting the downside. It’s one of the seven pillars of the capital strategy that we have here at Sunrise. And it’s kind of a two-pronged piece, right? Protecting the downside. You can mitigate all the knowable risks, but there are certain things that you will never be able to know, right? There’s a difference between risk and uncertainty. Risk is like insurance risk, act of God risk. You can get insurance for that. But there are uncertainties that are unknowable. How could you possibly have known COVID was going to hit? Absolutely. How could you possibly have known the September 11th attacks were going to occur?

It’s impossible. And you still have to ultimately structure your platform in such a way that you can survive those inevitable insane barbell strategies that you’re talking about. It’s that very rarely occur. But when they do, they’re absolutely massive in terms of orders of magnitudes. And so you have to protect against that anyway. You cannot predict, but you can prepare for those inevitable downturns when they arise. So you have to think through that well in advance because investing is a loser’s game, is the truth. I could give multiple analogies here. We like to say over – I played baseball my whole life.

Still hold the single-season walks record at the University of Kentucky. On-base percentage was my jam. That’s what I did very well. Fourth in the country and on-base percentage. And I once told one of my – it was a girlfriend I was dating in college. And this is me being an old cocky college kid, okay? You got to have a little screw loose when you’re a D1 athlete. So I’m having a conversation with her one time. And I was like, babe, you know, if I could, if, honestly, if I were to clone myself and there were nine of me in the lineup, we would never lose.

I was being dead serious when I said it. And the reason was because I had over a 500 on base percentage. And I wasn’t hitting home runs. I wasn’t hitting grand slams. But if you’re consistently getting on base, you’re hitting singles, you’re staying on base, you’re going to win the game. And that’s exactly what investing is about. It’s tons of singles and doubles over a very long period of time and don’t strike out. Same thing with investing is a loser’s game. It reminds me of tennis, okay? When you’re out there as an amateur tennis player, I’m not Roger Federer, okay?

So when I get on the tennis court, what’s my strategy? Okay. I’m just trying to get the thing back over the net and hit it in play. And that’s all I got to do. And I’m not trying to hit winners per se. I’m just trying to avoid the losers because if I can keep it in play, eventually somebody else is going to hit it out of bounds and I’m going to be okay. And that’s what investing is as well. It’s keeping it in play. Don’t lose money over very long periods of time. Given inflation and all the wonderful tax benefits and all the wonderful aspects associated with real estate, these investments oftentimes do well over long periods of time as long as you don’t shoot yourselves in the foot.

But it’s like the old Buffett strategy, right? It’s not like Warren Buffett is doing something that is unbelievably prolific and renowned. But nobody is able to really operate in the same way that he does, right? He literally tells everybody exactly what his philosophy is and has done so for 50 years. But when Charlie Munger is asked, why doesn’t anybody just replicate this and do what you guys do? He goes, because our strategy is a get-rich-slow strategy and nobody really wants to do that. So it’s a simple, simple, but, but, but not easy as it were. Well, Tom, this has been a wonderful conversation, my friend.

I appreciate you willing to spend a little bit of time sharing some of your insight and wisdom experience with all of the listeners that we have here. I will round out with one question that we always ask every single one of our guests that comes on, buddy. If somebody could only remember one lesson, one piece of sage investment advice from your entire life experience, what would it be? Know what you want over the long term and know what you don’t want. That’s the biggest thing. It sounds silly, right, out of everything. But you have to know what you want in order to get to where you’re going.

If not, you’re going to waver in the wind. You’re going to accept whatever comes your way. And you’re not going to. You may end up in a good place, right, but you may not. So I would say knowing what you want. And having discipline to stick to it is going to take you a long way. And also that that and just and realizing that. Tax benefits are a big key of things, but not making decisions solely for the tax benefits. Wonderful feedback, right? Yeah, as a business, you have to have a vision. What do you want to achieve over the very long term?

And only then can you actually structure goals or a mission to go achieve that, right? Like in a military operation, you have to have a mission, but they have to have an overarching vision of what we’re trying to achieve in order to actually execute the mission. Otherwise, it’s not. You’re just wondering. You’re just wondering. So wonderful, wonderful stuff. Thomas, thank you very much for your time, my friend. If somebody wants to reach out and learn a little bit more about you and how you might be able to help them, where would you point them? Yeah, so the best place to go is the realestatecpa.com.

If you’re looking for a new CPA firm and you’re looking for someone to help guide you with tax strategy or review opportunities that you’re looking at to see how that’s going to impact your situation from a tax perspective, Uh, we’d love to learn more about your situation, how we can help. Uh, you could just learn more about that at the real estate CPA.com. Tom, thank you very much for your time, buddy. Again, wonderful conversation. I can’t wait to maybe have you back here in the not-too-distant future. But until then, buddy, you guys be great. One of the things that I appreciated most about the conversation with Thomas is just how much of all this comes back to knowing what you are actually trying to accomplish with your capital.

I want to revisit the three questions that we discussed here because they’re a useful filter for evaluating your next investment. First, would I still make the investment without the tax benefit? Second, have I actually confirmed that I’m going to be able to receive and use that benefit given my personal tax situation? And when am I going to be able to get it? And third, if the tax benefit doesn’t materialize, does the investment still make sense? Because the goal is not simply to reduce this year’s tax bill. It is to make decisions that help you build and preserve wealth over the long term.

If you enjoyed this conversation, please do consider hitting that thumbs up for this episode and subscribe to The Sage Investor wherever you get your podcasts, guys. Until next time, you be great.