In a recent episode of the Millennial Investing Podcast, host Patrick Donnelly sat down with Grant Doherty, a Houston-based tax professional specializing in real estate and small business tax strategies. Doherty, a former college baseball player, shared insights from his athletic career, emphasizing the importance of discipline, humility, time management, and fundamental skills – lessons he's successfully applied to his professional life.
Doherty's journey into tax advisory wasn't direct. After studying business in college and securing an MBA, his "first real exposure" to managing money and taxes came with his initial corporate W-2 job. This experience sparked an interest that led him to start his own tax practice, initially by offering to file tax returns for free to gain experience. His business truly took off during the COVID-19 pandemic, leveraging social media platforms like Instagram and Twitter to provide valuable tax tips and attract clients. Doherty attributes 85% of his clientele to social media, highlighting the power of consistently providing value over direct selling.
For small business owners and real estate investors, Doherty stressed the importance of proper financial tools. He recommended Stessa for real estate investors due to its specialized bookkeeping features, but also acknowledged QuickBooks as a more widely used and versatile option, making it easier to find bookkeepers.
Doherty primarily serves high W-2 earners and small business owners (up to $5-10 million in revenue) who invest in real estate. He outlined several key tax strategies:
1. **Real Estate Professional Status (REPS):** For high W-2 earners, if one spouse qualifies as a Real Estate Professional, losses from rental properties (amplified by strategies like cost segregation and bonus depreciation) can offset the W-2 income, significantly reducing tax liability.
2. **Short-Term Rentals (STRs):** If both spouses are high W-2 earners, the REPS strategy might not apply. However, STRs (like Airbnbs with average stays of 7 days or less) are generally not considered passive rental activities by the IRS. By actively managing the property and meeting one of seven material participation tests, owners can treat it as an active business, allowing them to deduct losses against other income without REPS. Documentation of time spent on activities like guest communication and property maintenance is crucial.
3. **Cost Segregation and Bonus Depreciation:** These are powerful tools to accelerate depreciation deductions. While typical residential properties depreciate over 27.5 years, a cost segregation study reclassifies components (like landscaping, furniture, or specific fixtures) into shorter depreciable lives (5, 7, or 15 years). These shorter-life assets can then qualify for bonus depreciation, allowing a significant portion of their cost to be deducted in year one (e.g., 60% in 2024). Doherty notes that a surprisingly low percentage of real estate investors utilize this.
4. **Other Real Estate Advantages:**
* **No Self-Employment Tax:** Rental income is not subject to Social Security and Medicare taxes, unlike W-2 or active business income.
* **Tax Loss Harvesting:** Investors can sell underperforming assets (like stocks) at a loss to offset capital gains from real estate or other investments.
* **1031 Exchange:** This allows real estate investors to defer capital gains taxes when selling a property by reinvesting the proceeds into a "like-kind" property. It requires a qualified intermediary, strict timelines (45 days to identify, 180 days to close), and trading up in value.
For small business owners, Doherty recommends:
1. **Retirement Accounts:** Utilizing solo 401(k)s for self-employed individuals without employees.
2. **Investing in the Business:** Hiring employees or contractors and investing in software can lead to tax deductions while reclaiming time and improving efficiency.
3. **Vehicle Deductions:** Vehicles over 6,000 pounds often qualify for larger depreciation deductions under Section 179.
Doherty emphasizes a passive investment strategy for his personal finances, primarily focusing on index funds and bonds, coupled with real estate syndications and life insurance. His largest "investment," however, remains his own business, where he sees the highest ROI.
Addressing common pitfalls, Doherty highlighted commingling personal and business expenses, forgetting tax documents, and misconceptions about the true tax savings of deductions (e.g., buying a $50,000 vehicle doesn't save $50,000 in taxes). For managing finances, he suggests outsourcing bookkeeping and maintaining open communication with financial professionals.
Regarding cryptocurrency, Doherty advises using tracking software like CoinTracker or CoinLedger. He also pointed out a key distinction: the wash sale rule, which prevents claiming a loss if a security is repurchased within 30 days, currently does *not* apply to cryptocurrency.
Finally, Doherty shared a creative strategy for those with passive rental losses: investing in a profitable service business (like a friend's dog-poop-scooping business, as he described) to generate passive income, which can then be offset by those passive rental losses.
Grant Doherty's advice underscores the importance of proactive tax planning, strategic investment choices, and leveraging professional guidance to maximize financial outcomes for real estate investors and small business owners.