Podcast

Tax Planning for Real Estate Investors in 2021 & Beyond

1Q21

Proper tax planning and strategy is a key to keeping the wealth that one builds with real estate investing.

Read The Transcript

In this episode of Real Wealth, Real Health, we turn our eyes to the ever-important topics of taxation and retirement planning, as we welcome Paul Sundin of Sundin & Fish, PLC. Paul is a CPA who specializes in tax & retirement planning. During this in-depth discussion, we dive into the world of taxes, specifically as it relates to how real estate investors should envision tax planning & preparation, how different investment types will affect their tax liability, and the types of retirement accounts that maximize tax savings, regardless of your stage in financial growth & development.

Our thorough conversation delves into the various advantages and disadvantages of investing in real estate, covering the mechanics of tax deductions: from investment income, the different structures your real estate investment can take on (and their pros & cons), and the most important things to consider when investing in multiple properties each year. We also dedicate some time to the merits of Defined Benefit Plans in retirement planning, as this retirement vehicle is not well known, but can be a significant boon to wealthy investors who want to increase their yearly retirement contributions, beyond the limits of a 401K or IRA. Finally, we address some more contemporary issues, such as how cryptocurrency can factor into your retirement & tax planning, and the risks involved in doing so.

Key Insights

  • The tax implications of real estate investing, especially through different investment vehicles, and in multiple states
  • How investing in real estate through syndications can provide significant benefits in the form of depreciation
  • The difference between debt and equity investing, especially from an investor’s perspective
  • Preparing to maximize tax efficiency in the current political environment
  • The benefits and risk factors associated with establishing a Defined Benefit Plan for retirement, and how investors can open one up for themselves
  • What should be contributed to a Defined Benefit Plan vs. a 401K

Guest Bio:

Paul Sundin is a CPA and tax strategist. He is a partner at Sundin & Fish, PLC in Chandler, Arizona and owner of Emparion, a retirement structuring firm.

With a worldwide client base, he specializes in tax planning and retirement structuring for business owners and entrepreneurs. In addition to being a CPA, he is also an author, speaker and consultant. His professional mission is to educate taxpayers on tax policy, personal finance and retirement planning.

With 20+ years of experience, Paul provides a comprehensive and personal approach that is different than most CPAs. His approach starts with educating his clients on effective and practical ways of reducing their tax liability and achieving their financial goals. He brings a depth of insight and personal engagement to his client services.

Resources:

Real Wealth Real Health

Alpha Investing

[email protected]

https://www.sundincpa.com/

https://www.emparion.com/about-us/

Podcast Transcript

Speaker 1:

Welcome to Real Wealth Real Health, the show that empowers you with insights, information, and inspiration to achieve your version of financial wellness. Learn how to balance living a full life today with planning for the future. This podcast is brought to you by Alpha Investing, a real estate centric private capital network that provides exclusive investment opportunities to its members. And now, here are your hosts AdaPia d’Errico and Daniel Cocca.

AdaPia d’Errico:

Hello, everyone. Welcome back to another episode of Real Wealth Real Health. Today we are speaking with Paul Sundin. Paul is a CPA and tax strategist. He’s a partner at Sundin & Fish, PLC in Chandler, Arizona, and the founder and owner of Emparion, a retirement structuring firm. With a worldwide client base, Paul specializes in tax planning and tax structuring for individuals, entrepreneurs, and for the real estate industry. In addition to being a CPA, he’s also an author, speaker, and consultant. His professional mission is to educate taxpayers on tax policy, personal finance, and retirement planning.

AdaPia d’Errico:

With over 20 years of experience, Paul provides a comprehensive and personal approach that’s different from most CPAs as you will hear in this episode. His approach starts with educating his clients on effective and practical ways of reducing their tax liability, and achieving their financial goals. He brings a depth of insight and personal engagement to his client services. During our in depth discussion with Paul, we dive into the world of taxes, specifically as it relates to how real estate investors should envision tax planning and preparation, how different investment types will affect their tax liability, and the types of retirement accounts that maximize tax savings, regardless of one’s stage in financial growth and development.

AdaPia d’Errico:

Our very thorough conversation delves into the various advantages and disadvantages of investing in real estate covering the mechanics of tax deductions from investment income to different structures for your real estate investment, including pros and cons, and the most important things to consider when investing in multiple properties each year. We also talk about the merits of the defined benefit plan, as this retirement vehicle is not well known, but can be a significant boon to wealthy investors who want to increase their yearly retirement contributions beyond the limits of a 401(k) or an IRA. This is a highly educational and interesting episode that will give you the knowledge you need to better understand taxes and retirement planning, including what may be changing with the new administration and how to prepare for those changes going forward. Paul, thank you so much for joining us on the podcast today.

Paul Sundin, CPA:

Sure, glad to be here. Thank you.

AdaPia d’Errico:

Yeah. So, I know you. We’ve worked together for many years, and you have such a deep experience in real estate tax planning, amongst other things. And so, we really, really appreciate you coming on to just share so much of your knowledge and expertise with everyone. You also write for some pretty well known publications. And so, it’s really great to have you. And like we talked about before the show started, there’s really two main categories that we want to cover today. One is real estate investing and the tax implications and some tax questions there. And then retirement planning, specifically something called a defined benefit plan that I’m really excited to learn about.

AdaPia d’Errico:

And so, these are really the categories like we said. Because as investors we’re always so focused on the making of money, like what are the returns and what are the distributions? And whether that’s the passive cash flow capital appreciation, but there’s this fundamental piece to the investing that we all need to understand more in depth, which is the taxation and this idea of keeping more of what we make. So, let’s start with that, some general real estate taxation questions. The most basic one what what are some of the tax benefits of investing in an equity syndication?

Paul Sundin, CPA:

Great. Yeah, I get this question all the time. Equity syndication, any sort of real estate in and of itself is going to offer the biggest benefit is going to be the depreciation. And you see a lot of syndications where there are value add deals. Someone comes in, a sponsor is putting a big chunk of money. They’re going to fix up the property, exit in five years or whatnot, hopefully with a large capital gains. So what that typically means is in the early years, you’re generating some losses, you’re getting depreciation. And in addition to that, you’re also getting some distributions.

Paul Sundin, CPA:

And so, as you’re getting cash distributions, those aren’t taxable to you. They can be in some situations, but generally speaking they’re not taxable, but you’re getting some tax losses. And so the biggest advantage is the fact that you’re not paying any taxes on any of the distributions. At the end of the whole period once you get a sale you’ve got some capital gains, but presumably that’s going to be at a much lower tax bracket. And then you also can take all those losses that you’ve accumulated over that period of time. So a lot of tax advantages.

Paul Sundin, CPA:

In fact, if you’ve got multiple syndications going on, you may have an exit on one where you’ve got a capital gain, but you’re able to take some losses on another one because of the passive loss rules. And so you can use losses from other activities to offset gains. So very, very tax efficient for the equity deals. That’s for sure.

Daniel Cocca:

So, let me ask you a quick question, Paul, whenever we chat with investors who are trying to get exposure into real estate for the first time, let’s say, and this is something that I thought about as well as I was at that point in my journey, which is, well, what do I do? Do I buy a property and fix and flip it or rent it or do I try to do something passively? And I think a lot of those people oftentimes think the tax benefits for owning myself substantially outweigh whatever kind of time and money and additional risk that I need to put into a project. I’d be really interested just to get your thoughts on the difference and how investors should be thinking about that distinction as they evaluate potentially investing in a passive deal.

Paul Sundin, CPA:

Well, I guess as far as I look at it, I mean, I would say in a perfect world you’d own all the real estate yourself. But the problem you’ve got is I’ve got a lot of clients that are physicians, consultants, attorneys. And the reality is they just don’t have the motivation, or the ability to manage a property. So I think if you’ve got a lot of money, and you’ve got the ability and interest to be a landlord, I think that’s a great option for you to take. But for a lot of people, they just have to start off and just try to understand a little bit about the real estate deals. Maybe they’ve only got 10, 20 grand a rather small amount, which for all the appreciation in real estate we’ve seen, it just doesn’t get you as much.

Paul Sundin, CPA:

And so, I think doing a syndication deal can be a great way to start for a lot of folks. And I actually have some clients that they have the money to do their own real estate deals. But again, they just don’t have the motivation to manage it. So they just do syndications only. So yeah. To each his own, I guess, depending on your motivation.

AdaPia d’Errico:

Yes, I guess that’s also really speaks to knowing your goals, and really understanding yourself, and like you said, your motivation. Really getting into what’s involved in active. Sometimes, well, a lot of times people get into flipping and they might have even heard about or attended one of those seminars where it’s like, “Oh, here’s fast flipping, and wholesaling, and all this kind of stuff.” And then in reality, it’s obviously never going to be as simple as they really make it out to be.

Paul Sundin, CPA:

Totally.

AdaPia d’Errico:

And so, then there’s, then they come in and then they start to learn about about syndications. And something that I wanted to actually ask about because a lot of people get into hard money or they understand the debt space and the lending space, which is also another way. I mean, there’s so many ways to make money in real estate. Tax liens runs the gamut. But let’s talk really quickly from a taxation perspective too, and maybe just an add, a strategic perspective, what’s the difference between an equity and a debt investment as a real estate investor?

Paul Sundin, CPA:

Certainly. So, the equity deals are going to be similar to what I kind of previously discussed where you get a lot of depreciation, a lot of losses early on, because you’re actually a, a partial owner in the property and it’s going to flow through to you via the LLC, and it’s going to flow through to you. So you get some of the ownership benefits of the depreciation. But when you look at a debt deal, debt deals are going to generate interest income, and interest income is probably one of the least favorable types of income just because there’s not a lot that you can have to offset it. There’s interest expense and a couple other things and it is taxed at your highest ordinary tax rate.

Paul Sundin, CPA:

So, again, real estate equity deals very much more tax effective outside of say a retirement plan. Interest deals, hard money deals, probably some of the most stringent tax and highest tax rates, but they also lend themselves to complexity as well on the tax filing side because the debt deals are typically a lot more easier for people to report on their taxes. Whereas, when you look at an equity deal if you’ve got something in a state I’ll get people that have syndications in five different states. When you technically have to file a tax return in five different states on your personal tax return. So even though there’s a lot of tax advantages, a little bit more tax headaches, debt deals a little simpler, but maybe not as favorable on the treatment of the income itself.

AdaPia d’Errico:

Yeah. And so, just along those lines, too, then because we get this question a lot. And because I always lead like, “I’m not a CPA. I can’t give tax advice.” And so, it’s great to have you so that you can really answer the question. Should one hold an equity syndication in a retirement vehicle versus holding debt in a retirement vehicle? What are some of the pros and pros and cons around that?

Paul Sundin, CPA:

Absolutely. Yeah, I get this question all the time as well. You as a general rule, you want equity deals to be taxed to you personally because of the depreciation and everything like that. So, that’s going to flow through to you personally. Whereas for a debt deal, if you’ve got the option for both, if you’ve got money in both retirement plan, like a self directed IRA, and then you’ve got cash. You put the cash into the equity deal, the debt deal goes into the self directed IRA. And that’s a few reasons, not only because of the tax advantages that we just discussed before, and the disadvantages of having a debt deal personally. But also, there’s what’s called UBIT. I don’t want to get too detailed into this, but there could be debt financing income, where there can be certain equity investments that you can have to file a tax return every year.

Paul Sundin, CPA:

People think that, “Oh, it’s in an IRA. I don’t have a tax problem. Well, you can have the investment in the IRA, it doesn’t mean you don’t potentially have a tax issue if you’ve got debt, financing income, but you don’t have any UBIT issues, no restrictions for interest income deal. So in a perfect world, all your debt money goes into qualified plans, IRAs. All your equity deals, would go outside of that, and probably flow through to you personally. Yeah, but I do see people that they got a couple 100 grand, and they’re just chomping at the bit to be an equity owner. And so, they’ll do it in a plan. I mean, it’s you can do it, you just have to understand and get with your accountant to understand if you’ve got any sort of UBIT or other problems associated with it.

Daniel Cocca:

So over the last three to five years, let’s say, at Alpha we’ve seen an increasing number of investors who want to invest through their self directed IRA, and the vast majority 95% of opportunities you see from us will be equity. And we often have a high level conversation about UBIT, but the reality is, I don’t think most people even know that it exists or understand what their obligations are. Can you just chat at a really high level how should an individual be thinking about UBIT on an equity deal if they’re investing through a self directed IRA?

Paul Sundin, CPA:

Yes, certainly. No, I agree with you. UBIT is a very unique area. In fact, most CPAs aren’t aware of it and don’t deal in that space. And what it stands for is it stands for Unrelated Business Income Tax. It’s essentially the taxation in a trust, in a tax exempt trust, the taxation of any items that would be not subject to the actual utilization of the… Or how do I say, not subject to the exempt purposes, which would be interest income and things of that nature. For example, you see it a lot if someone were buying a business. You can’t go out and buy a business through an IRA, and not incur some sort of tax because we’re trying to level the playing field with other business owners, so to speak.

Paul Sundin, CPA:

But how you see it as specifically for a debt deal is there’s something called Unrelated Debt Financing Income UDFI, and it has to do with the leverage associated with it. And to the extent you’ve got earnings that exceed, essentially gains over $1,000, you don’t typically see it in early years of a deal because you’ve got a lot of losses, but when you do sell it for a gain, to the extent that you’ve got gains that were utilized based on a leverage in the deal, those gains can be subject to a UBIT tax, which based on current rates I don’t see it that much because a lot of times people have losses from other deals to offset it. So I don’t see the UBIT.

Paul Sundin, CPA:

I also find that a lot of sponsors don’t give the accountants the debt financing income necessarily, or the debt balances in the tax returns. So it’s usually not a big deal. But in theory, it’s out there and it exists and it is somewhat hard to quantify but I do have a handful of folks that if they want to do it, they’ve got a lot of deals out there. We just analyze it every year, determine if there’s a UBIT issue and file any tax return. But usually it’s very negligible in anything they might know.

Daniel Cocca:

That makes a lot of sense. I want to transition very briefly to the K-1 world. Something that for us I think is always a crazy time of year. I’m not going to ask you why we never get our K-1 by April 15. But with that aside, I do want to ask you about how individual investors should think about their filing obligations in different states. And if you have a passive loss on your K-1 meaning there’s no income to declare, and I own a property in I don’t know, California, for example, do I need to file in California just because I have an investment there that hasn’t generated any economic return at least on paper? Or is that my option? How should an individual investor be thinking about this, particularly in the context of trying to build up a diversified portfolio and not wanting to have eight to 10 K-1s a year spread over five years, and before you know it you got 50 K-1s a year? How should people think about that?

Paul Sundin, CPA:

Yeah, I hear you. It is a tough situation. They have up until… I mean, sponsors, syndicators, for any sort of partnership return has up till September 15th to actually get you your K-1s, which, again, is horrific for a lot of people who want to file early. I would say most K-1s that I see, most folks will get them out mid March is sort of a good general idea. It also depends on the deal, and how clean the records are, and the timeframe and all that type of stuff. But so it is definitely an issue. And I think for a lot of people, and a lot of my high end or clients with high net worth, or business owners are typically fine with extensions anyways.

Paul Sundin, CPA:

So my guess would be maybe half of the folks that you guys have as investors might routinely file extensions, so it’s not that big of a deal. But you’ve obviously got a few people, you’ve got your 5% that are really pestering you for those K-1s and really want them. So I think for the most part, if you’re going to do deals like these, you have to be prepared to have to file extensions, which it’s a pain for some people, but it’s just part of doing business.

Paul Sundin, CPA:

As far as filing in the different states, here’s what I would say is. If you’ve got a loss in a given state, the state tax rules are all different, of course, but the basis is that the state… Obviously, if you’ve got control of a property in the state, you sell it, you make money, the state wants its money. Now, in the early years, if there’s a loss, the state doesn’t necessarily care about that loss. In fact, a lot of states have minimum filing requirements. So it’s not that you necessarily have to file. But the problem is, if you have a loss let’s say in year one $1,000, and you file for four years and you have losses. And then the year five, you sell the property, you get a $4,000 gain. In theory, you’re supposed to file that loss in year one. You carry those losses forward, kind of like what people are used to doing on the federal level, year four, or your five you sell for the gain. The prior loss has offset that, the tax liability goes away.

Paul Sundin, CPA:

So, again, you might not legally have to file in the given state, but to pick up those losses and carry forward, you really should. And I think for investors that are doing a lot of deals in different states, you just got to be cognizant of it. We’ve got what eight, nine some odd states that have no taxation of these types of deals Florida, Texas, Wyoming, some of the larger ones. If you’re going to be… And maybe a lot of people, a lot of your investors probably do live in California, so it’s not as big of a deal. But you may want to do deals selective in certain states. Maybe you’re just going to do three in New York and three in Florida where you don’t have a state income tax or something like that. But yes, if you do 10 deals in 10 different states that have income tax, it could be a headache for you.

AdaPia d’Errico:

Yeah, when we structure our Alpha funds even though in the mandate we’re going to invest, let’s say in 10 to 12 projects, we’re going to minimize that to five to seven states. Possibly some that don’t have the filings so that all of us don’t have to have 12 different K-1s. So even at the level of the fund when we do the fund that’s part of our strategy as well is to try to build a bit of a concentration. And so, that’s always something that we let investors know. So, it’s just part of the strategy. Diversification is great, but sometimes you can go overboard if you don’t understand the implication because someone’s got to file those tax returns. And do you have a good CPA? Are they going to overcharge? Are you going to do it yourself? There’s there’s a lot of those things and same with the SDIRA question.

AdaPia d’Errico:

And so, actually I want to get into the defined benefit plan and the work that you’re doing there. So you have this long history within real estate and you do a lot of work with international investors as well. I’m curious, the nexus of this new… It’s more than a project. It’s like an arm of your business, but tell us how you got there, and then we can get into what a defined benefit plan is, and who it’s for, etc.

Paul Sundin, CPA:

Sure, yeah, I’ll give you a little bit of background. I’ve been a CPA for 25 some odd years. And I certainly do have a heavy real estate background. But I’ve got a lot of high income clients, a lot of self employed clients, a lot of physicians, consultants, attorneys, things of that nature. And I saw more and more where I’d have someone who would come to me and say, “Hey, I’m going to make half a million dollars this year, and then I’m going to get creamed in taxes. What can I do?” And typically, these folks you do see them for people in their 20s and 30s sometimes, but typically they’re a little bit older, a little bit more mature business. And so, I would get heavily and much more involved in working with actuaries. I’m setting up defined benefit plans and cash balanced plans. You may have heard that phrase before. It’s a type of a defined benefit plan.

Paul Sundin, CPA:

And so I got heavily involved with actuaries doing that probably 10 plus years or so ago, and just got to a point where about five years back, we decided to kind of break out my separate company called Emparion, and that’s pretty much all we do is we structure the plans to be tax efficient. We administer the plans and set them up for clients and help guide them through the process. We do have clients that invest in debt deals, and all kinds of other things like that. So, sort of a natural evolution of my tax business. Again, because so many people are looking for tax deductions. And I think most people think the tax rates are going up. So I think there’s a bigger focus these days on getting tax deductions on the front end. And so, we plan to have a lot more business on that side here in the near future.

AdaPia d’Errico:

Yeah, absolutely. Absolutely. So, this is a total noob question, I guess. But is a defined benefit plan, is that like an annuity? Is it like life insurance? Is it part of the taxation code? Really, what is that?

Paul Sundin, CPA:

Yeah, absolutely. Sometimes people do think of it like an annuity. And I think it’s because the calculations are done assuming there’s going to be an annuity payout at retirement. But in reality, that doesn’t happen. It gets terminated and rolled over into an IRA. But I’ll just go back to some of the basics. A defined benefit plan is people are very familiar with 401(k)s and IRAs. We know you can’t get a lot into IRAs. You can get up to $57,000 into a 401(k), but there’s other limits.

Paul Sundin, CPA:

A defined benefit plan is sort of like a 401(k) on steroids. If you’re self-employed person you can get… I got a guy yesterday. He made $2 million last year between him and his wife we’re probably going to get about six, $700,000 into the plan for him. And he’s going to get a full tax deduction for the entire amount, and he’s going to get tax deferred growth. So, it’s for a lot of people just think of it as a very large 401(k) that’s a bit more complex because 401(k)s are what we call defined contribution plans. They define the limits upfront. They say, “This is the maximum out you can put in.” Whatever happens to money, happens to money. It doesn’t matter if it grows to a million dollars or whatnot.

Paul Sundin, CPA:

Whereas, in a defined benefit plan, we’re looking to get, for example, $3 million into an account for an individual by age 62. So, if you’re 50 or so the closer you are to that age, the more money you can put in. And to answer your question about annuities, you can basically invest… Our plans allow essentially self direction. So people do syndication deals, people do… Most people will do stocks, bonds, mutual funds, traditional stuff, but you absolutely can do hard money, real estate, any type of stuff you want to do. There’s a few more complexities involved, and you still have some of the UBIT rules that we discussed. But if you’ve got someone who’s looking to get large money into a plan, half a million dollars in there’s just you’re not going to be able to get that with a 401(k) or any other structure.

AdaPia d’Errico:

Wow, that really, really interesting, especially for us so many of our investors as well. A lot of them are doctors and professionals or they’ve like startups they’ve exited. And so, this is amazing. It’s really great information. So, the the next logical question is there’s a lot of the benefits. What might be some of the cons? So we’ve gone over some of the pros, but what might be some of the drawbacks, and who are these not for?

Paul Sundin, CPA:

Yeah, so obviously, the pros speak to themselves. That’s for sure with the big front end tax deductions. The cons are really the fact that the plans are more complex. We have an actuary that calculates all the numbers. The funding is going to vary year by year. But generally speaking, the biggest cons that we see are the permanency related to the plans. In fact, a 401(k) is elective. You can choose not to do it in a given year, if you don’t want to. These plans, the IRS says they’re required to be permanent. So, you have to have them for at least a few years. I would say minimum three years.

Paul Sundin, CPA:

Usually not a problem for a physician, or an attorney or some professional. That can be a problem, though, for a real estate agent, for example. If I talk to a real estate agent who’s making half a million dollars this year, who knows what’s going to happen to the market where she’s at next year, and who knows? And there could be some more complexities. So, people don’t like the permanency of the plans that require a contribution, albeit maybe a small contribution, if you have a down year. They are a little bit more cost, expensive to maintain. Typical plan might cost you two to $3,000 a year, which again, isn’t that big of a deal if you’re putting 100 grand in.

Paul Sundin, CPA:

And so, when we look at who they’re not for, if someone comes to me and says, “Hey, I want to get 30, 40 grand in. I’m a sole proprietor. It’s just me.” 401(k) best option, self directed, can do whatever they want with it. And if their business is jumping around a little bit. Good income this year, not so sure about next year. Really, as you start getting consistent income, 75 grand a year plus is what you want to put into a plan. And typically these things are age and income driven. So the older you are, the better. So typically people, the numbers start getting a little more favorable mid 40s or so as people get a little bit older. The older the better. The more you can get in and of course, the higher the income. So those are some people that maybe it wouldn’t work so great for as well as the few that does work well for.

AdaPia d’Errico:

Yeah, absolutely. Yeah. So you’ve got the… This is so important to know because off the bat you think, “Wow, if I can put $500,000 a year into it,” that’s great. But then, what if next year I make zero money, and so you have to balance that out, which ensure as you go into it like you do all the planning for it. So speaking of planning, what are some of the deadlines that people need to be aware of when setting up these plans?

Paul Sundin, CPA:

Yeah, good question. It used to be that a defined benefit plan had to be opened up by December 31st. But you could fund them up to the date you filed your tax return. But the SECURE Act came out recently, the SECURE Act came out last year and basically said, you can now open these plans up to the date, you file your tax return as long as you open them and fund them. So you probably want to get it open and established a couple weeks before you’re going to file your taxes. And then of course, you got to open up the plan and the account and all that type of stuff. So you want to allow yourself a few weeks. But it is a great option for people to open them up late, fund them before they file their tax returns. We often give ranges, maybe. Someone might have a range of 100 grand, 200 grand, they can find out what their numbers look like with their accountant, and then finalize all the funding for that right before the deadline.

Paul Sundin, CPA:

So the deadlines have gotten very loose. I mean, basically get a plan open and get it funded before you file your tax returns. So it’s one of the few things out there on the retirement plan side that you can open up and fund this late. A lot of the SEP rules. A lot of people have heard of SEPs. SEPs have very similar flexible rules, but SEPs just generally don’t allow you to get much in 20, 30, $40,000 into a plan. So the deadlines have gotten very, very lax. We will have many people making good incomes that will be very surprised a few months from now when their accountant just tells them or they stumble across us, and they’re like, “Hey, I’m going to carve off $100,000 off my tax bill for 2020 in there.

AdaPia d’Errico:

Yeah, absolutely. Dan, did you want to jump in?

Daniel Cocca:

Well, yeah. I was just going to ask how do I find someone like you? What should I be looking for? A lot of people don’t know that this is out there. And so, to that person, what would you say?

Paul Sundin, CPA:

Well, you’re right, good point. I mean, a lot of, 90% of financial advisors don’t understand these plans, don’t deal with them. CPAs don’t understand them. It’s just not what your traditional CPA does because there’s a real tax planning component. And unfortunately, a lot of CPAs don’t do a good job of tax planning. It is really tough. I mean, we’re unique in that we’re third party administrators, but we’re a carve out of a CPA firm. So we have a unique structure in and of ourselves. I think we’re the only company that really does this. But realistically, if anybody Googles defined benefit plans, cash balance plans is a very important topic. That’s typically where they’re going to find them.

Paul Sundin, CPA:

I mean, you’re not going to see… You’re typically not going to get mailers, something in the mail about these. You’re typically going to stumble across it because of something you found online or a colleague. Again, we have a lot of physicians. Probably, if I’m comparing on the defined benefit side, probably about two thirds are physicians. And of course, we get a lot of referrals from other physicians and other high end consultants or high income folks. But you’re right. It’s very tough, and it’s very unique for a lot of folks.

AdaPia d’Errico:

Yeah. And so, Paul, we’ll include the link, but again, what’s the name of your firm? I’m sure people are going to be looking it up?

Paul Sundin, CPA:

Correct. Yes, it’s Emparion E-M-P-A-R-I-O-N.com is our website. Certainly, you can Google my name, defined benefit plans. You’ll see a lot of articles. As AdaPia has said, I’ve written a lot about these plans for Kiplinger, Inc. Magazine, a variety of different types of things. And again, we’ve got clients that will put 200 grand into a plan and turn around and put it into a syndication deal, a debt deal. So, they’re great mechanisms for people who want both the large tax deductions and the ability to self direct their investments.

AdaPia d’Errico:

That’s really good to know. That’s really good to know. Actually, we were talking… You mentioned just to go back to the defined benefit plans is what types of investments can go into this? And just kind of a fun question, can you put crypto into these plans, and into the defined benefit? I know some SDIRAs maybe allow it. Just kind of a fun question for you there, and what else can you put in a defined benefit plan?

Paul Sundin, CPA:

Absolutely. You could do crypto. I’ve got a few people that do Bitcoin. I’ve actually had some people that have done a lot of day trading in their plans too, and I will tell you, even though it’s allowable, it’s a little bit more of a challenge. And the main reason is I think I mentioned early on that we’re trying to get a retirement benefit of a few million dollars at retirement. So to the extent you… I had a guy recently who had put some money in. I think he had $100,000 in Bitcoin and turned it into a million dollars pretty quickly. Well, I told him, “I’ve got good news, and I’ve got bad news. The good news is that’s all tax deferred. You don’t have to pay any gains on the 900,000. But the bad news is that your plan now is substantially over funded because we’re trying to get this amount at retirement,” which what that does is that significantly reduces future contributions.

Paul Sundin, CPA:

First and foremost, these plans are tax plays. People want the tax deduction, they’re craving the tax deduction. So while they’re very happy this thing went up 10 fold, they’re unhappy maybe that they can’t make those large contributions the next couple years. So, I always tell people, if you’re going to do anything with a very big return, or any sort of riskier investment, do that in an IRA, a 401(k), those types of vehicles. You typically want your defined benefit plans to be a little bit more conservative investments.

Paul Sundin, CPA:

They’re baked in usually a 5% assumed rate of return. So if you have a debt deal, and maybe it’s earning, oh, I don’t know, eight, 10%, whatever the numbers might be. Usually, that’s not going to throw the calculations crazy. But yes, if someone hits a home run in some deals, it makes it very difficult. But you can pretty much do anything in these plans like any qualified plans. You don’t want to do collectibles and certain things, but we’ve got people that do gold and land and hard money and all kinds of things.

AdaPia d’Errico:

So it sounds like it for those who have been able to put into their IRA, and they have a 401(k). This is another piece of the puzzle. And so, it’s you’ve said it multiple times, which of course, this is what you do. It all comes down to the planning and where do you want to put let’s call it like your crypto or your really volatile trading? And then what… I guess maybe the natural question is if there’s this 5% cap, it sounds like, what is a better option for the defined benefit plan versus let’s say like an SDIRA for alts and a 401(k? What should if we can use the word should, should people think about putting into a defined benefit plan?

Paul Sundin, CPA:

Yeah, it’s got an assumed rate of return, but that is an assumed rate of return to get you to a retirement benefit. So you don’t have to limit yourself. Some people think, “Well, I have to be very conservative, and I can only use around 3% of my investments.” Well, that’s not true. But because we’re looking for an overall rate of return. If you have up 30% one year, down 30% one year, that can really play games with your annual required contribution. So, to answer your question, if someone’s going to do Bitcoin, great, in a 401k, or in a self-directed IRA. Also, probably a good idea to do anything, pre-tax you got depreciation, if you’ve got money outside of plans, that’s great to do in an equity deal that we discussed.

Paul Sundin, CPA:

What I think is a great play in a defined benefit plans are debt deals, debt syndication deals, hard money, although it can be difficult if loans. It can be a little bit more difficult if people have loans that are going upside down because there’s some valuation issues. Things that earn a little bit more of a steady return, and of course, stocks, bonds, mutual funds. But we have seen like I said I got gay traders that put money into these plans, and there’s a lot of swings. And so, some people just have to take the good with the bad. But to the extent you’ve got a conservative part of your portfolio, which again, people are usually at their peak earnings in their 50s, late 40s, mid 50s. And so, if you’re getting a little bit more conservative as you’re getting older, the more conservative investments are typically what you want in these plans, keep the Bitcoin and some of the riskier stuff outside of it.

AdaPia d’Errico:

Yeah, it’s great advice. It’s kind of like some of those, the basics, you always come back to the basics around diversification and strategic planning around your age, which sometimes can be… We can forget that when we get excited about a deal or we get excited about returns. So, I really appreciate you bringing that up again because it’s really easy to forget because it’s easy to get carried away with stock market up 70% and Bitcoin, whatever, to the moon, whatever’s going on over there. So, it’s just really a great, great reminder for everybody.

Daniel Cocca:

Yeah. Do you mean to say I’m not going to 10X in three months? That’s not going to happen.

Paul Sundin, CPA:

Well, I have some clients that don’t care. They’re going to do what they’re going to do. And as long as I point out to them. I mean, I kind of act a lot, like sort of what I try to bring to the table is sort of like a cafeteria plan. I’m going to point out… I’m going to give you a lot of options. I’m going to point out pros and cons. And I’m going to let you make a choice that fits what you’re looking to accomplish.

AdaPia d’Errico:

Yeah. Thanks, Paul. It’s really great. I just wanted to touch on one really quick thing before we wrap up the show we’re coming into this period of time right now, February 2021. It took me a second. We’ve had a lot of talk about the new administration, and people wondering if everything related to the real estate benefits is going to get stripped away. In your professional opinion, and what you’re seeing how should people be thinking about that right now? Should they be that worried about it or what are the more likely… Again, it’s an opinion right now because nobody really knows. But we’d love to hear your take on that because there’s so many rumors.

Paul Sundin, CPA:

Yeah, certainly. Biden, when he came into office, I mean, he ran on a platform of increasing taxes for certain folks. I think it was $400,000 and above, and there’s been a lot of talk about raising the top tax bracket from 37 to 39.6. You’ve got a lot of other states, Arizona, where I’m at increasing a few percent on the high end. So you’ve got half dozen states that have pushed through tax reform. So there’s no doubt that taxes are going higher, probably over time. I don’t know what the whole pandemic going on if this year is a great year for it because a lot of uncertainty out there. But I mean, I really don’t see a lot of changes on the real estate front.

Paul Sundin, CPA:

There was some talk about doing away with 1031 exchanges and a variety of other things. There could be some changes to depreciation, but I really don’t see it as being material or something that I would be that concerned about. One question I do get asked is long term capital gains. There has been some discussion about the long term capital gains rate, which is 15% or 20%, then there’s net investment tax and a variety of other things on top of it. So most people might pay 25% or so of that rate going to the top bracket of 39.6, but that might be for earners above a million dollars or maybe less or something like this.

Paul Sundin, CPA:

So you could see some cap. I wouldn’t be surprised if we saw the long term capital gains rates go up, which I think is a mix deferred plans, retirement structures, and things like that. But I really on the real estate front, I mean, I don’t see. The real estate lobbies are so strong in Washington. I really don’t see a lot of material changes that’s going to affect the real estate business from a tax standpoint. I just don’t, but I mean, time will tell.

AdaPia d’Errico:

Yeah, thank you for that. Yeah, it’s great to hear. Again, it’s really great to hear that that’s where you’re going with it and thinking about. So we always ask our guests. So this is the last question that we always ask all our guests, and that is what does wealth mean to you? How would you define wealth for yourself? What does wealth mean to you?

Paul Sundin, CPA:

Good question. I guess for me wealth would mean that you have control over your lifestyle. If you’ve got wealth, and we’ll say financial wealth, it gives you the ability to structure your business as you see fit. I do have a lot of self employed folks. Gives you the flexibility to invest in different asset classes that you want. So for me, it’s a little bit of freedom, and flexibility I think on the wealth side. I mean, because when it comes to wealth I know in talking to clients some people think they’re wealthy with a million dollars, some people it’s $10 million dollars, some people think they’re rich with 50 grand. So, it’s less, I guess, for me how much you have, but what you can do with it, and maybe the flexibility and the benefits to your lifestyle that will bring.

AdaPia d’Errico:

Yeah, thank you. Yeah, we always love to hear that from people. It’s a great way to put it. Thanks for sharing that. So, Paul, just a final thank you so much for taking some time. I know it’s tax season, and you’re in full swing. So we really appreciate you taking some time to talk to us today. And just giving us such an education on these defined benefit plans and going through the tax benefits and all the different things to think about when it comes to taxes. And probably the biggest takeaway for me is the planning that’s involved in making sure that working with your CPAs from a tax planning perspective because there’s just so many options out there. I guess also so many ways to get it wrong. I know I have in the past before I met you, and now I’ve got everything nice and straight. So, I just really appreciate you coming on and taking some time to talk to us today.

Paul Sundin, CPA:

Glad to do it. It’s always nice to help people at least understand the taxation, especially on the equity and debt deals because there’s a lot of misinformation and maybe CPAs in general sometimes they don’t understand it, or maybe they don’t do a good job communicating it. And then also, hopefully, a few people understand at least some of the advantage they’ve got on the defined benefit side. So again, if that’s something that they’re looking to do, hopefully it’s given them a little bit more insights.

AdaPia d’Errico:

Yeah, absolutely. Yeah, we’ll include the links in the show notes to where we can point people to speak to you about the defined benefit plans. And I’m sure you’re going to have quite a bit of outreach. I really hope you do. And so, thanks again. You and I will be talking soon, for sure. But thanks again, Paul.

Paul Sundin, CPA:

Thanks, guys.

AdaPia d’Errico:

All right.

Paul Sundin, CPA:

Thanks for having me on.

AdaPia d’Errico:

Thanks for tuning in to Real Wealth Real Health. We hope that you’ve enjoyed today’s episode and found it both informative and insightful. We welcome all your questions and your feedback about today’s episode, and especially, we welcome your questions about specific topics that you would like us to cover. So shoot us an email at [email protected] And if you have a moment, we really appreciate ratings and reviews as it helps us grow our online community and our interactions with you. And we’ll also be linking to a number of relevant articles on topics that we might have touched on during our conversations. Some of them are broad, some of them are technical, but we’re always aiming to provide information that helps you better understand the mechanics of building this healthy financial foundation, especially if you’re looking to do this with real estate.

Speaker 1:

This podcast is a part of the C-Suite Radio Network. For more top business podcasts, visit c-suiteradio.com.