Episode 30 | Douglas Stein Part 2 – Changes In Tax Law in 2024

Episode Summary: 

Craig and Jack continue their conversation with Tax Attorney Douglas Stein of Stein Law. The conversation covers various changes and updates in tax laws and strategies for real estate investors. The topics include changes to bonus depreciation, the impact of cost segregation studies, modifications in captive insurance companies, changes in estate tax exemptions, transparency and disclosures for trusts, updates on qualified opportunity zones, and the workforce housing tax credit. The conversation explores various themes related to affordable housing and tax policies. It discusses the polarization and bipartisan support surrounding affordable housing initiatives. To learn more about Doug, visit his website at https://www.steinlawllc.com/

*The following transcript is auto-generated.

craig fuhr (00:07.669)
Hey, welcome back to Real Investor Radio. I’m Craig Fuhr with Jack BeVier. We are joined today by attorney Doug Stein, having a fascinating conversation on Episode 29. If you didn’t catch it, I would highly recommend going back and checking that one out, especially for real, honestly, for every real estate investor, Jack. That episode was timely in that laws have changed. And so you really should go back and check that.
Jack BeVier (00:27.027)
Everybody, yeah.
craig fuhr (00:36.481)
that episode out. Doug, welcome back to the show. Really appreciate your time. Can’t thank you enough for it. Jack, in this episode, we’re going to talk, I guess, about some of the changes that occur between 22 and 23 that folks should be thinking about now as they speak with their accountants and attorneys. As well, love to get into some of the changes in 24 that we could be planning for now as we prepare for next year’s filings. So, Doug, thank you so much for your time. Can’t thank you enough.
It’s been fascinating thus far. Welcome back to the show.
Douglas Stein (01:09.014)
Thank you for having me.
Jack BeVier (01:11.111)
So let’s jump in. Let’s talk about the changes to bonus depreciation. That’s one that we’ve been benefiting from for the past real estate investors who are adding rental properties, holding real estate for more than a year and taking depreciation have been benefiting from at least I hope you guys are for a while. Give us the quick background on that and how that’s changing right now.
Douglas Stein (01:32.302)
Sure. So when the rules first came out for bonus depreciation, it allowed real estate investors and others to bonus depreciate 100%. Those numbers last year for 2023 went down to 80%. And they’re currently scheduled to go down. I’m sorry.
Jack BeVier (01:47.415)
Yeah, yeah. And just a just a point of clarification. You’re able to 100% bonus depreciate the five and 15 year components of your real estate, there’s another component that’s 27 and a half year that was not eligible for the bonus depreciation. But it still became a pretty material chunk, right? You know, somewhere between 10 and 30% of your basis depreciable basis was eligible to be
taken as depreciation bonus depreciated in the first year. And Doug, sorry, go ahead and start to interrupt you there. And that’s phasing down.
Douglas Stein (02:23.591)
No, it was a big deal. It was a real improvement to cashflow, right? Because you’re paying less taxes and you’re taking these huge depreciation deductions upfront and people were looking hard for the right assets that they can do. And obviously if you’ve got residential, that’s one thing. If you’ve got commercial, it’s a different, every property is different. But I think 10 to 30% is probably right. We’ve seen higher for some clients. They’ve obviously pushed it as hard as they could and really got someone in there to look at it.
But it used to be 100%. In 2023, that depreciation deduction dropped to 80%. Still a good hit. People I know late last year were running around very hard looking at their properties, and they will be doing that at least in 2024 up until they file their returns. 2024, that calculus changes substantially. It’s now down to 60%. And it’s scheduled to go down by 20 percentage points each year until we get to zero. So basically another three years.
So properties that you acquire this year will be subject to the 60% max as opposed to 100%. That’s gonna change, I think, the arithmetic on some properties to the extent you’re buying them with the expectation for those depreciation deductions. It’ll be interesting to see if Congress changes it. There’s been some discussion of that. We’ll see what Congress does later this year.
Jack BeVier (03:39.175)
Yeah, that’s something I wanted to ask you about. Do you think that that’s going to be modified or they just going to let it phase out and then that was it? It’s gone, you know, so long. Where do you think it’ll be thrown back on the table in a new, in a new tax bill?
Douglas Stein (03:53.006)
I think once you know who’s running for president, who the actual parties are, and there’s two people or three people, depending on how we’re looking at this, we’ll have a much better sense. I miss the days when election season was short.
craig fuhr (04:04.321)
Don’t get us started, Doug. Don’t get us started.
Jack BeVier (04:11.333)
I’m sorry.
craig fuhr (04:12.472)
Jack BeVier (04:14.383)
Yeah. We’ve this is going to this phase out right now is a big change, particularly there were folks two or three years ago, even that a lot of syndications, you know, real estate syndications were even included in their advertising. One of the big selling points was, and you can, we’ve already done a cost segregation study. And here’s how much you’re allocated bonus depreciation is going to be because the tax benefit from making an LP investment and then getting a
Douglas Stein (04:15.266)
Yeah, that hasn’t been the case.
Jack BeVier (04:42.791)
call it 20% right off of that investment in the first year was a material part of the sales pitch, right to get LPs into these multifamily deals, particularly other real estate asset classes as well. But we saw it a lot in multifamily. And so
craig fuhr (04:58.041)
especially the deals that were particularly skinny, right?
Jack BeVier (05:00.879)
Yeah, absolutely. Right. Like if they were leading with that, you know, if you’re, if you’re leading with the tax benefits and not the cash flow and the quality of the asset, you know, maybe your eyebrow, hopefully your eyebrow gets raised a little bit, but, but it was a material impact. So, uh, you know, folks were, you know, folks were looking for that. And, um, so that’s going to be, uh, you know, kind of an arrow in the, um, an arrow in the quiver that, uh, general partners, syndicators don’t have as much on a going forward basis. So on a relative value point of view,
craig fuhr (05:07.821)
Jack BeVier (05:29.543)
The same cap rate is now on an after-tax basis, not as attractive as it was when that bonus was 100%. So yeah, and that’s just going to get worse as time goes on unless there’s a change.
Douglas Stein (05:44.918)
Yeah, I mean, the economics of those deals are going to change until Congress acts. I don’t think it’s going away forever. I think Congress will come back. I don’t think it’ll be a hundred percent. Um, I think it’s more likely they’ll come back at a 60, 75, 80% for an extended period of time, but it will not have, in my opinion, it won’t happen until the next administration, whoever that administration may be.
Jack BeVier (06:04.287)
craig fuhr (06:05.121)
You mentioned five and 15 year components only. Is that clear of what those components are? Or is that also a murky waters that the average investor has to traverse?
Jack BeVier (06:18.591)
where you’re supposed to do a cost segregation study for every property. Whether that property is a $5 million office building or a $100,000 rental property, the safe harbor, Doug, please correct me if I’m wrong. But my understanding is that the safe harbor doesn’t exist unless there is a cost segregation study. And there are firm, large CPA firms that have in-house cost segregation departments. There are companies, KBKG is one that we’ve seen used a fair amount that
do this on a consulting basis as their core business. But those, and those cost segregation studies are not cheap though, right? You’re supposed to send a human into the property and have them literally fill out a 60 page report of all of the different things that are in the house. And the IRS regs will then tell you whether this is five year, 15 year, or 27 and a half year property.
And based off of that report, you hand that to your accountant, and then they calculate the percentages and fill out your tax return appropriately. Um, there are a bunch of hacks that have kind of become, you know, popular, uh, that are not covered under the safe Harbor, but are better than nothing, better than just coming, you know, putting your finger up in the air and coming up with an allocation out of the clear blue sky. Um, but the IRS regs are very clear.
like the field guidelines that are given to my understanding is the field guidelines that are given to IRS agents are very clear on what is correct and what is acceptable and what is not acceptable. And that band of acceptable is quite narrow. So in the context of an audit, it’s a point of exposure for everybody who doesn’t have a full cost seg. So that’s definitely in that spectrum of risk that I was mentioning in the previous episode that Doug is good about helping investors handicap.
craig fuhr (07:53.417)
Jack BeVier (08:09.447)
That’s something that we’ve had to make some judgment calls on, frankly.
craig fuhr (08:15.053)
Jack, as a lender to investors all across the country at every level, what’s the line of investor to where a cost segregation study really, as much as you’d love to take advantage of bonus depreciation, what’s that line where you’re like, it’s just too expensive, I can’t sink my teeth into that?
Jack BeVier (08:40.847)
I think that that’s a, so there’s two, there’s two different issues, right? There’s the business decision. There’s the risk decision that you’re comfortable with as the real estate investor. And then there’s also a risk decision that your CPA is comfortable with because they have to, if you’re using a third party to do your taxes, they have to sign the tax return. And so if you say, Hey, you know what? I’m going to be a little loosey goosey about it. And I’m just going to use one of these online cost seg calculators, which totally exists.
you can get comfortable with that as the investor yourself, but if your CPA is not on board, well, they ain’t signed in the tax return, right? And so it’s actually, it’s not a singular decision. It’s a conversation with whoever’s doing your taxes and then a business decision based off of that. So I guess I can’t give you a, I wouldn’t give you a full threshold on just like, Hey, at $300,000, it starts to make economic sense because
there’s a risk, there’s different risk tolerances amongst tax preparers, preparers as well. And you’ve got more business minded tax preparers, and you’ve got more folks who are just not interested in the hassle and just want to do the CYA decision. So sorry, sorry to give you the evasive answer, but it’s a little bit more complicated.
craig fuhr (09:55.381)
No, it makes sense. It absolutely makes sense.
Douglas Stein (09:56.694)
Well, let me add on to that. You know, the whole, one of the whole purposes by the cost side is it does buy you a sense of insurance in the event of audit, if you get audited, the service will ask you for it. I mean, with the, be no question. It’s one of the first questions they will ask for. And if you can’t produce one that is not going to help you. Oh, contra. It kind of opens the door and says, okay, here’s someone who didn’t really play by the rules, they acknowledge they didn’t play by the rules. What are the rules that they not play?
Jack BeVier (10:23.667)
Yeah, it’s kind of definitionally a bad act, right? You’re in the safe harbor or you’re not in the harbor. And once you’re outside of the harbor, you’re outside of the harbor, right? Like it’s…
Douglas Stein (10:30.03)
That’s right. It doesn’t mean you lose by the way. Being outside the harbor doesn’t mean you lose. It just means you’ve got a very significant uphill battle to wage.
craig fuhr (10:32.184)
Jack BeVier (10:42.911)
So what else is going on in terms of changes to things that we had gotten used to or that are coming up?
Douglas Stein (10:50.618)
We have got the captive insurance companies for those who have them outstanding. Those numbers have gone up significantly. In 2023, it was 2.65 million was the maximum premium that you could, uh, you could pay without the captive paying tax on the premium at least it’s now up to 2.8 million, which is a very big change. Uh, whether you have the risk or not, or whether you have enough insurable risk, obviously is a different question. It’s not a tax question. That’s a insurable risk question. Uh, but if it’s, if it’s available.
People will use that, no doubt. We do know that from the estate tax perspective, the maximum amount that you can pass free of estate taxes for your life has gone from about 12.9 to about 13.8. So that’s another big change, about 900,000.
Jack BeVier (11:38.279)
Let me let me back up real quick. So on the captive insurance side of things, what Doug’s referring to there is not like a captive insurance in the context of like workers comp or general liability where you’ll see some folks within the same industry pull their risk together because it makes more sense for them to self insure, you know, self insure amongst kind of a co-op versus going out and buying commercially available coverages. That’s not where we’re talking.
what he’s referring to there. What Doug’s referring to is the code section is 831B. And it allows for captive insurance companies as a risk management structure that they used to be much more popular in the context of pool. There was these pooled captive insurance structures. And there were a lot of organizers, sponsors that were basically these companies that were selling this as a tax strategy.
And that is like, you know, like that. And so it got on the IRS’s dirty dozen as, you know, as, as tax evasion, a huge red flag for tax evasion. Um, and there were a lot of those companies that were putting those structures, these pulled captive insurance structures together and charging big fees off of it. And there were, and it wasn’t really insurance. It wasn’t being used as insurance. There wasn’t, it wasn’t actuarially backed. Um,
were never any claims. They were just basically evading taxes using the structure to evade taxes. And as a result, they lost the IRS, the service one, a number of cases against these structures. And they have been that industry has been really whittled down over the course of the past five, six years. Particularly, it is still a legal structure when done correctly.
And the idea is to write insurance for your operating companies for which there is not commercially available coverage. And so, you know, this is not for property and casualty. This is not for general liability. This is not for workers comp. This is for originally designed for farmers, frankly, in the Midwest to ensure against drought years. And so there’s a tax benefit to encourage farmers to save for drought years.
Jack BeVier (13:57.435)
So that they became more resilient businesses. Now they didn’t write it just for farmers though. All businesses can have a captive and a very large percentage of the Fortune 500 has captive insurance company, has captive insurance companies. So it can be used correctly, but it’s still a structure that invites bad actors. And what Doug was alluding to though, is that the amount of
deduction or amount of shelter, I guess that the captive insurance company can achieve continues to go up. So while the IRS continues to crack down, it continues the potential tax benefits continue to go up. So there’s a little bit of a back and forth there. Sorry, that was a big side.
ways but captive insurance company is I would say not commonly talked about not some not a structure that a lot of folks know about but maybe worth researching because there’s a lot of unique risks to real estate investing and real estate lending that can be mitigated if this structure is used appropriately you know as real insurance.
Douglas Stein (15:11.414)
Yeah, I’ll just quickly pipe in there. We like captive insurance companies, but we stopped doing a lot of them. We stopped not because we thought they didn’t work. It’s because we didn’t think the clients could comply. If you’ve got a client who, this is our firm position. We have a client that can comply. We know they’ll do the right thing. They’ll actually go and get the actual studies. They’ll follow the actual studies. They won’t make it up. They’ll actually have claims because.
Jack BeVier (15:22.983)
Douglas Stein (15:36.95)
You’d be amazed how many captives I’ve seen that’s been around for 10, 15 years and never had a single claim ever. And I’m thinking that’s the best insurance company I’ve ever seen. That’s impressive, right? Yeah, that’s right. That’s right. It’s kind of like State Farm. They’ve never paid out. So what’s the big deal? That’s a joke for State Farm.
Jack BeVier (15:47.631)
Or the stupidest business decision. Yeah. Buying insurance for me that never happened. Yeah.
craig fuhr (15:57.465)
There goes our State Farm sponsorship check. Damn it, I was working on that.
Jack BeVier (15:59.839)
Sponsorship. Yeah.
Douglas Stein (16:03.983)
I mean, they’re great structures, but they’ve got to be used right. And I grew Jack that marketplace used to be just saturated and now it’s really whittled down significantly. And my bet is a will down even more of the next couple of years, but they work. You just got to do them right.
Jack BeVier (16:20.115)
And then the other thing that you mentioned there was the death tax, right? That’s what’s commonly referred to as the death tax, the estate tax exemption, which went up significantly five, six years ago, um, and continues to climb frankly. Right. So now it’s, what did you say the new number is for 2024?
Douglas Stein (16:31.256)
Douglas Stein (16:37.39)
It’s about 13.8 million.
Jack BeVier (16:39.315)
So 13 point, 13 point, you can pass along $13.8 million of assets. The, the, the classic structure is to put those assets into a trust. Uh, that has your heirs is the classic structure as a beneficiary though. It need not be, but you know, the classic structure is, um, you know, with your heirs as a beneficiary and it’s $13.8 million per individual. So if you are married, that’s 27 six.
for you and your spouse to pass along death tax exemption free or sorry, death tax free. So if you can have a $27.6 million estate that you put into a trust for the benefit of your kids. And that’s based off of today’s valuation as well, right? Because it’s
Douglas Stein (17:16.354)
Jack BeVier (17:30.419)
typically as part of that maneuver, you get a valuation of the assets, a third party, but you must, it’s very smart to get a third party valuation of the assets that you’re going to put into this structure. And what was it, you know, 10, 15 years ago, this number was like a couple million, right. And now we’re talking, you know, mid 20s, mid 20s million, like it’s a humongous exemption. Do you think that that’s gonna stay in place? I was you know, that, that was that part of that was that big jump?
of the Trump tax code and it’s just no one’s talked about it or you know no one’s no one’s taken issue with it so it continues to climb how did it get to 27.6?
Douglas Stein (18:09.57)
So when I started practicing, it was a whopping $650,000. Just to age myself there about 25 years ago. Then it jumped to a million. And I remember the whole state tax bar was absolutely just giddy with themselves. I mean, we got a whole $350,000 extra. It’s more than 50%. That jumped to $1,005,000. And then somewhere along the lines, I believe it was 2010, maybe a little bit earlier. It was then.
It was then attached to inflation. So it went to 5 million and then it was inflation adjusted. And that number has just been climbing, climbing. 2026, it’s supposed to drop again. And it looks like it’ll probably be 5 million in 2026, depending on who you ask, what those numbers are. But it’s a lot of that.
Jack BeVier (18:58.619)
Yes, that’s
Jack BeVier (19:27.975)
down to five. And like if you’re gonna do it, do it now because we’ll, you know, we may never see this again, right? We may never have the, and it’s true, right? We may never have the political environment again to where this exemption is at those levels. So there’s a, that’s been a booming business for a state, state planning for the past, you know, whatever five, 10 years has been a booming business based off of this exemption as a, you know, product that those folks will help you put in place, a state planning product.
Douglas Stein (19:42.146)
That’s right.
Douglas Stein (19:56.386)
Well, I think that’s probably a good description all in. You know, my bet is it is going to go away. I mean, remember, the estate tax has historically been the political football for everybody. I mean, everyone’s kicking that thing. So depending on who’s in power and who’s got control, really define what that is. There’s been efforts to make it go away permanently. It’s never been passed. There’s been efforts to reduce it substantially. Some of that has actually happened in the past. I think whoever.
Whoever wins the next election will be the one to decide it because 2026 is your big day. The election’s right around the corner. They’ll have about one year to fix it. Whatever that fix may look like. From a budgetary perspective, people talk about the estate tax all the time. It’s like this massive thing. You read the Wall Street Journal. You know, it’s less than 1% of the revenue. I mean, in the grand scheme of things, it is a, if you got rid of it tomorrow, there’s almost no implication. The real hits would be…
Jack BeVier (20:51.123)
But from a political point of view, it’s like the football. Yeah.
craig fuhr (20:53.812)
Oh yeah.
Douglas Stein (20:53.942)
That’s right, because nobody likes wealthy people, whatever that term may mean.
craig fuhr (20:57.29)
It’s haves versus have nots for sure.
Douglas Stein (20:58.978)
That’s right. That’s right.
Jack BeVier (21:00.559)
Just my mind can’t help myself, but I was thinking about the conversation we were having on the previous episode regarding the transparency and disclosures that are going to apply also to trusts. The combination of trusts being formed over the next two years and that information becoming at least in the government’s public domain.
man that could be weaponized right like that’s gonna get weaponized isn’t it like that’s that that’s a little that’s a little creepy and scary. That’s gonna happen. You know they won’t be able to help themselves. Anyway.
Douglas Stein (21:37.59)
I mean, it changes the state planning. Historically, you just transfer the NLLC interest or partnership interest and we’re done. Now it’s a transfer of partnership interest and a filing with the US government about who now owns it. You know, a lot of that’s gonna be kind of, it’s gonna be very different. It’ll be…
Jack BeVier (21:40.035)
Yeah, yeah.
Jack BeVier (21:56.007)
When you did this, when you do this filing this morning, you said you did it yourself. I’m, we’re circling back to the previous podcasts topic, but it’s, I guess it’s related. Did you have to disclose assets or income as part of that filing? Oh, interesting. Okay. Well, there’s that.
Douglas Stein (22:01.038)
Mm-hmm. Sure.
Douglas Stein (22:08.65)
No. No, no. I don’t know if that makes a difference. The government’s already announced, FinCEN’s already announced they’re gonna report it directly to the internal revenue. So, you know, it’s a matching program. Oh yeah, I mean, there’s a lot of things the government does poorly. Matching is not one of them. They’re really good at that.
Jack BeVier (22:19.167)
They’ll be able to match it up. Yeah, they should be able to match it up. Yeah.
craig fuhr (22:26.977)
This may be a horrible question, but I’ll go ahead and ask it anyway. So if I set up an estate in a trust, kids as beneficiaries, and I’m married, and my estate is, say, $20 million, and the law changes in 26, does that then become the…and let’s say it goes down to $5 million exemption.
Does that then become the exemption? I’m no longer, even though I set my estate up when it was a $27 million exemption, do I need to die today to get that $27 million? Or tell me, how’s that work?
Douglas Stein (23:06.214)
So the humorous part of me would say it depends who you’re asking. If they like you, it’s one answer. If they don’t, it’s another. But the real answer, the real answer is the government said that once you’ve made the gift, the gift is exempt. It’ll be exempt forever. So if it goes back down to five million, you basically have nothing left. You can’t give away any more. But whatever you gave away is given away. Now caveat then.
Jack BeVier (23:31.927)
You make a filing when you do the gift. Like it’s an overt filing. It’s a specific filing that you do with the IRS to say, Hey, today I gave away $5 million. And so then if the exemption goes up, well, you’ve got more room, right? To put more in as that exemption goes up. But if the, as Doug just said, if it goes down, well, you’re already above it. What’s done is was legal at the time. Fine. But gates closed.
craig fuhr (23:41.247)
I see.
craig fuhr (23:55.682)
Ah, interesting.
Douglas Stein (23:56.847)
That’s right. Yep. It gets more difficult at times, but that’s essentially right. The form is Form 709. It’s just how you report a gift. You have to report it, and you have to give all your evaluation to the government as well.
craig fuhr (24:11.274)
Jack BeVier (24:13.663)
Um, Doug, what else is a new changing on the horizon?
Douglas Stein (24:17.922)
We see big changes in qualified opportunity zones coming up. That’s in two years. Two years, you have to recognize all the gain. So those people who’ve made use of those, whether it’s for residential, at the renting, or commercial, or anything else, they need to keep in mind that in two years, they have enough cash to pay the tax. It will be interesting to see what the banks are doing at that point.
Jack BeVier (24:39.363)
That’s when the deferral expires. So if you did a qualified opportunity zone, you just, for those who are less familiar with it, you had a capital gain based off of the sale of some capital asset. And you rather than do a 1031, for example, rather than do a 1031 exchange, you could self report the gain and invest those dollars into a qualified opportunity fund, which owns owned owned.
either real estate or businesses that were qualified opportunity zone properties or businesses. And so by doing that, by investing that capital gain dollars, the money’s fungible, right? So you just said, Hey, yeah, I, you know, I sold some real estate and I had $300,000 again, and I invested that $300,000 into this new LLC that owns real estate in a census
qualify as an opportunity fund. And by doing by and so that you didn’t have to pay taxes on that capital gain. So the 20%, you know, $60,000 tax bill was deferred now until you’re saying until 2026. And so now taxes do. And question is, where’s the cash coming from? Is that you know, is that is there enough real estate? Is there refinance proceeds? Is there
Jack BeVier (26:06.614)
how are you gonna you know the bills the bills coming due.
craig fuhr (26:09.357)
Can I just, before you answer that, I know investors around the country who have taken advantage of Opportunity Zones. And it’s exactly the way Jack just said. They sold an asset, they had a gain, they put that into an Opportunity Zone fund. But these projects don’t always happen overnight. And I know guys that did, you know, that took advantage of that law.
Douglas Stein (26:09.654)
That’s correct.
craig fuhr (26:39.561)
a few years ago and they haven’t even broken ground yet. And so you’re saying that for, so there’s no cashflow. They’re just, they’re still waiting on permits and entitlements on the land and going vertical as they say. And so that tax bill is still coming due in 2026 on the gain that occurred as getting into the opportunity zone.
Douglas Stein (26:42.862)
Douglas Stein (27:04.451)
That’s right.
Jack BeVier (27:04.539)
Yeah, it’s and it’s due with the it’s due with the taxpayer level. So, you know, you might have to reach in your other pocket, right? The money doesn’t have to come from the, the QOF property, it doesn’t have to come from that fund necessarily. But yeah, the it’s but it’s a, it’s a taxable event that is coming back up. It was just a deferral. It was never a, you know, it was never an abatement.
Douglas Stein (27:28.43)
That’s correct. So the real question is if it’s going to come from the project, whether the project’s even financeable. And Craig, I got clients in exactly the same position. They bought properties. They were great properties. Permitting has slowed down for whatever the reason may be. Everything is taking longer than it should. You know, COVID came around, right? And whatever it may be. And I keep telling them, I mean you got two years and come October, 2027, that checks getting read whether you like it or not.
craig fuhr (27:55.085)
Yeah, start saving your money now.
Douglas Stein (27:57.586)
And we’ve had a couple of banks tell us that they’re only going to finance the best properties. Why should we be financing everything? We know it’s a unique opportunity. We know that we could squeeze the borrowers because they have real cash that’s due. At least to being honest about it, I found that actually quite refreshing.
Jack BeVier (28:15.783)
Hey, would you say, so do you think that given there’s only two more years for the deferral are qualified opportunity fund opportunities, uh, are they kind of not worth the squeeze at this point? Like, is that, is that over because you only getting, you’re only achieving a two year deferral and that, you know, and there may be just some like cost benefit that makes it not worth it anymore and we’re going to go, you know, and people should start looking back at 10 31s is the classic cap gains deferral mechanism.
Or is there still a place for QoZs for the next couple of years? And are they going to, are they phase out at 2026 too? Are they just done after that?
Douglas Stein (28:48.558)
So I like you.
Douglas Stein (28:53.098)
So interestingly, no, they don’t. I like QOZs for reasons other than deferral. I don’t get why I like the deferral and it was the early years, five, six years deferral in 15% basis or 10% basis. That made the math kind of interesting. But I don’t think it really changed the math because there was an underlying assumption that I believe just personally is false. I think Congress is gonna raise taxes in 2026. Like why not? If you look at our change in our deficits
over a relatively short period of time. You know, a two percentage hit to capital gains, if you raise the tax rate by two percentage points, that’s a lot of money coming in. And if you’re gonna do it, you do in 2026 and all this gains can be recognized anyway. I do like the 10 year play.
Jack BeVier (29:39.019)
We deferred ourselves into a less beneficial tax environment. Great.
Douglas Stein (29:46.014)
You know, so we actually ran those numbers for some clients early on, which was how much increase in taxes do we need in order to be even? Um, and no one liked the answer because it was only about two percentage points, which are break even point. Um, if it goes above that, then you’re actually negative. You’re in the hole. You should have paid the tax. Should have hit tax. I do like it for the 10 year hold. So if you’ve got a portfolio, you’re going to hold for 10 years.
Jack BeVier (29:52.831)
Jack BeVier (30:03.967)
should have paid the tax.
Douglas Stein (30:12.094)
I think that’s the real play for QOZs, which is after 10 years, if you hold it onto the property, you essentially get a full basis step up. So you could sell it in 10 years tax free. And that’s the real play I think for QOZs.
Jack BeVier (30:27.711)
And that continues to be the case. And that’s still eligible, right? It’s still a 10 year hold. The clock starts now, or the clock starts at the beginning of the project, but that’s still available for those 10 year hold deals that basis step up.
Douglas Stein (30:29.57)
That continues to be the case.
Douglas Stein (30:42.882)
That’s correct. So for those buying real estate, your analysis should be on a 10-year-old. Ignore the deferral. To me, the deferral for two years is negligible anyways. I mean, you can run the math. It’s tiny. True, this deferral over five years isn’t as much as people think it is anyway because you have an inflation hit and inflation has been higher than I think people anticipated. It’s only higher than most people budgeted.
Jack BeVier (31:08.795)
Hey, I’ve heard a bunch of stuff about like conservation easements never participated in one myself, but I know that you’ve got a fair amount of experience in that realm. You know what, can you explain that basic structure to folks, I just think they’ll find it interesting, but then and then also explain kind of the landscape of conservation easements as in the eyes of the IRS.
craig fuhr (31:28.641)
Maybe we can discuss exactly what they are first and then get into it.
Douglas Stein (31:32.334)
Yeah, so conservation easements came into the code, I think, about 1958. It’s been around a long, long time. And the original concept was that if you have property and you want to conserve it because it’s got value, it could be green space, it could be historically important, it could be anything that really made sense, you could conserve that by giving rights to charity, specifically, usually the land trusts that were gobbling up land or trying to preserve green space.
And you’d get a deduction roughly equal to the fair market value of the reduction value of your real estate. So imagine you’ve got 200 acres of land and or you’re in a city and you’ve got some extra lots and you want to give away those lots of this green space for everybody. Assuming a qualified, then you’d be able to you’d be able to take a charitable deduction for the fair market value of the easement itself.
Now the math is a bit more complicated. We can get to the details of the math if you want to, but simply speaking, it’s just the fair market value.
Jack BeVier (32:37.631)
And so the idea was that it was developable land before we’re going to put this easement in place and state that you can’t develop this land for 50 years, 99 years, whatever the forever, whatever the number is. And then that easement has then diminished the value of that land. And your deduction could be the difference between the developable value and the post easement conservation value.
Douglas Stein (33:03.858)
So that’s when things changed. Things changed about, let’s just call it 10 years ago, because it’s roughly about right. It was a little bit later than that. And what people started doing is they started getting this land that was otherwise crappy land. Like no one would build on this land. It was just bad land. It’s going up a mountain, going down a cliff, whatever it may be. And then they would try to get a multi-use or industrial, or my personal favorite was dense residential.
craig fuhr (33:34.038)
Douglas Stein (33:34.13)
on the property. Get it zoned. Yeah, and the cities look into this. Highest and best use, right? So if I can put up, if the rule is I need one property per acre and I can get it to one property per quarter acre, then I’ve basically got 400% more I could do. And therefore, in theory, the value of the property has gone up significantly, right? Some of these were done in a wink and a nod. Some of them were done, real simply done. So you get the highest and best use.
Jack BeVier (33:34.44)
Get it zoned that way?
craig fuhr (33:37.261)
Highest and best.
Douglas Stein (34:02.614)
So you may have some farmland that’s been used for God knows how long for chickens, cows, goats, whatever, whatever it was, you know, sorghum. Um, people would come in and they’d say, look, we don’t want your land. We just want to put an easement on it. You could still hunt on it. You could still plant some stuff on it, but we have to keep a green space. They then go, they literally rezone these properties to 10 story buildings, mixed use, whatever it.
And then they would go and they’d raise money into partnerships so that people could get a charitable deduction because after all, the highest and best use of my property is now this dense residential or mixed use property, even though I’ve got farms next door. And they would generate these very large charitable deductions, you know, four times, five times, I see them as high as eight times, even 10 times, whatever you put in.
The service became very jaundice on this. In fact, started prosecuting some of the sponsors, we’ll call them sponsors, syndicators, sponsors, I guess it depends on your perspective. The big one being Ecovest, which is probably the first one the service went after. They went after them criminally and civilly. That recently resolved last year. The criminal charges went away. The agreement was that they would never engage in conservation easements anymore. They paid back, I don’t know, 10 or 15 million dollars.
But if you read through the numbers, the profits with these syndicators were in the hundreds of millions. They were huge.
craig fuhr (35:32.937)
I think Harry Reid has had a bunch of desert land. They did this in Nevada with didn’t he
Douglas Stein (35:37.438)
There’s a lot of people that do these things. Yeah, yeah. So the government came out with a safe harbor of essentially two and a half to one, which means you’re at par, right? There’s no benefit. You know, rinse wash, it’s equal. The service is still aggressively prosecuting these things. They’ve almost gone blind on everything. If they see the conservation easement, the underlying presumption is that there’s bad actors.
Jack BeVier (36:02.131)
Guilty until proven innocent.
Douglas Stein (36:04.422)
not yet guilty and tried as far as they’re concerned. That’s just a formality in their mind. And the service usually wins at the trial court on appraisals and other matters. They’ll often…
Jack BeVier (36:17.747)
challenging the appraisal saying it’s a juiced up appraisal.
Douglas Stein (36:21.942)
Yeah, you have actually several appraisers who’s been banned before practicing for the internal revenue because their appraisers were that bad. You have several people actually, attorneys included, if I recall correctly, that were banned from practicing for the internal revenue for their conduct in some of these actions. What we are seeing is on appeal, the service tends to lose the appraisal battle. But the cases aren’t going away. I got several friends of mine that actually are.
syndicators in these deals. And they’re not, they’re not really, a lot of these people are not pushing hard to settle the dispute because the theories, the longer it goes on, the more time there’s for political wind change, the more likely there’s gonna be a different result. Now we can argue whether that’s right or wrong, but then you’ve got other people on the other side, class action attorneys that have already been gathering up people to file class action lawsuits against the syndicators. These things are bad.
I tend to tell my clients, do they work? Absolutely. Like no question. How much money do you wanna spend for the opportunity of possibly winning a case that the service can’t settle? They’re just precluded from settling it. It’s a national office issue. And they’re toxic. At this point, they’re just toxic.
Jack BeVier (37:39.859)
Gotcha. Interesting. Thanks. I was curious about that.
Douglas Stein (37:44.01)
Yeah, stay away. At this point, I think the advice I’m giving my clients is stay away.
Jack BeVier (37:50.071)
I remember about a month ago, you sent me, switching gears here, the workforce housing tax credit. I’ve been hearing about this tax credit for, I don’t know, five, six years. It seems to be relatively bipartisan and yet it hasn’t been passed yet. There’s, you know, kind of a recognition that affordable housing is a need within the country and that the low income housing tax credit.
Douglas Stein (38:02.83)
Jack BeVier (38:19.079)
produces, you know, multifamily buildings that are full of low income housing, but that is not probably the optimal housing or social solution. And so there’s looking, looking for, I think, you know, the, the idea is that the sponsors of this bill are looking for another way to incentivize affordable housing. And this is what they’ve come up with. And it hasn’t been passed yet, but it keeps coming back. It also hasn’t died yet. It keeps coming back.
Talk to us a little bit about that and your thoughts on it.
Douglas Stein (38:49.742)
So there’s some things that the government has, that Congress and the government have done really well. One of them is low income tax housing credit. That worked for a very long time, but it also brought us things like very dense inner city, what are now almost slums are very dangerous places. Not always, but sometimes successful. We have something called new market tax credits that has done a great job for changing the economics. It’s almost always commercial, big projects, 100 million, $20 million projects.
Those are kind of two things that the government has done really well that have proven to actually make a difference and they reckon they were economically sound The why tech has fallen out of credit fallen out of favor Because there’s a social implication. It’s not very good or this is perceived the economics of
Jack BeVier (39:33.831)
your concept, which is you’re concentrating poverty. You’ve created a building, you’ve created affordable housing, but then you’ve put all of these folks who are low income in one place. And the, at least HUD believes that the, you know, the jury’s in on that, that concentrating poverty within a census tract does not lead to good social outcomes. Instead, we should be spreading it out, right? We should be dispersing low income folks into areas of opportunity, I think is the capital A, O, you know, capital O.
areas of opportunity, higher income census tracks, and that over the long term produces better social outcomes. It’s pretty overt social engineering that they’re undergoing here. But I think that the low income housing tax credit, the project-based voucher examples in over the past 30 years were the solution to projects, right? Like that was the answer to public housing. Let’s privatize it. But we’re still got the negative social implicate or social.
craig fuhr (40:25.593)
Exactly, exactly. Right.
Jack BeVier (40:32.451)
outcomes based off of the concentration of poverty, whether it’s publicly run or privately run, it’s still not optimal. And they’re looking for an answer to that, right?
Douglas Stein (40:41.59)
And those areas don’t gentrify. For the most part, they just don’t gentrify. So now you’ve got a city that’s got this huge area that is always gonna be low income. It’s built to be low income, caters to low income, but you can’t improve it. So this new work act, new workers act, workforce tax act will be interesting to see. I think it’s got legs. I think it’ll be the next administration. Congress is still highly polarized about everything. I mean, anything.
Apparently even pulling a fire alarm now is highly polarized. You know, everything is based upon something strange, whatever. But I think it’s going to have to, yeah, it’s, um, in light of what’s going on in the world, everything has become highly politicized and I think in the wrong ways and polarized and just very unhealthy ways. This one, I think has legs. It is bipartisan support. It’s expensive. That’s part of the problem is it’s not cheap. So the costs are going to be high.
craig fuhr (41:17.933)
very timely.
Douglas Stein (41:37.794)
But I think it’s going to get enacted one way or the other. And it’s going to move poverty out from inner cities and kind of spread it into the suburbs. And you’re going to get into the NIMBY issue, right, not in my backyard. The cities will have to deal with that. Congress doesn’t care about that, as long as it’s not their backyard, right? It’s got to be someone else’s backyard. So they’ll kick that over to the states, and the cities, and the counties, and they’ll all solve that problem. But the goal here is to give people who are in need of opportunities that are low income.
the ability to live in socially better places, likely lower in crime because it tends to be with these light tech projects or they tend to turn into higher crime, not necessarily high crime, but higher crime. And there’s lots of reasons for it. I don’t feel the need to get into that because everyone’s got their own opinion. And I just, like, I don’t care. I just look at the numbers. I’m a simple numbers guy in those things. And if I’m wrong,
Great that I’m wrong. Wouldn’t be the first time. My wife tells me all the time I’m wrong. You know, the goal here is to really make those projects maybe not more affordable, because obviously high density, close quarters is cheaper to build, but help resolve the long term problems and helping giving these people a hand up or the ability to move up the social ladder and the economic ladder.
craig fuhr (42:56.673)
think you’re already seeing a model of that, certainly here in Baltimore, and other places around the country where I visited where it’s clear that there’s low income housing being built, but there has to be some percentage of that housing that’s going to also be not low income. And, you know, Columbia, Maryland would be a perfect example of that back in the early 70s where
a man had a vision to build, you know, basically work for it, how workforce housing amongst more affluent housing. But I think that what I’m seeing in terms of some of these projects are there has to be that percentage of in the building or in the development, subsidized housing versus non subsidized housing. And however that’s going to work out amongst the
remains to be seen, but that appears to be the push amongst the legislative class in DC right now. Not to have, you know, we’re going to make this cordoned off area, like we did in cities across the you know, industrial cities across the country. For, you know, section eight or low income subsidized housing that I think is a concept that has been tried and failed.
And I don’t see them going back to that based on what we know about demographics today and sort of what happens in areas that are just, you know, completely low income, right?
Jack BeVier (44:35.143)
Yeah, I think I think there definitely seems to be the political will for to approach this problem in a different way the way you guys are just talking about. And we’ve got the workforce housing tax credit which was been introduced I believe there’s also a workforce housing. I’m sorry, no, the neighborhood home investment act is another.
Jack BeVier (45:03.875)
and the ex president of director of NCST is now the director of the FHA, Julia Gordon. So they’re still pushing that really hard. It seems that over the next couple of years here we may actually see some version of this that is for scattered site affordable development, which we haven’t spent any time going into the specifics of these acts because frankly
They’re early into the machine, so who the hell knows what the sausage is going to look like on the way out, you know, on an actual passable bill. So it’s kind of not worth dwelling on the details at this point in the passage. But there’s a number of different, but they’re trying to solve the same kinds of problems. And it seems probable to me.
that the country’s scattered site residential investors are going to be the boots on the ground mechanism for this to happen, right? Like this isn’t gonna be some new public agency, the multifamily industry is not built for this kind of solution, but the small entrepreneurs who are buying houses and fixing them up all across the country in all kinds of neighborhoods.
craig fuhr (46:05.993)
Jack BeVier (46:22.891)
are already the boots on the ground, right? Like it feels like there’s going to be a much closer connection to a true, you know, to a truly private sector, so operational solution than even the light tech industry, which has become its own like thing, right? Like that’s not your you do lie tech. And that’s all you do. You don’t do anything other than lie tech, generally speaking, very few developers cross lie tech with other private sector development aims. So
It’s become like its own industry. And this may be something new that actually creates more opportunities for smaller investors to participate in helping to solve these problems.
Douglas Stein (47:04.142)
I think there’s a need for the change. I think Congress sees the need for the change. I do agree that these can’t be large projects. They just won’t work. What they’re trying to accomplish would fail if you put up a big apartment building. It’d probably work in a classic homeowners’ association or townhomes, you know, a couple houses here, a couple houses there will make a difference. The real issue to me in all of these things is how does it actually get implemented? I’m a man with a great deal of confidence that when you give politicians the chance to do something right, they’ll find a way to make it happen wrong.
Jack BeVier (47:33.371)
Where we’ve seen that get implemented poorly in Baltimore specifically, right? Big, big push for affordable housing in a city like Baltimore. Um, but where the public programs have really struggled is that they use the, they use the multifamily programs as a reference point, and then they try to adopt it for single family as opposed to creating its own thing. And like the, the real thorny devil in the details is site control.
Right? Like buying houses, if you want, if you want to buy a, if you, if you want to control, because, because they, they’re trying to look for some efficiencies in the application, right? Like they don’t want to review individual property applications. It’s a, it’s a bear administratively for them to do that. They’d really prefer to review a hundred units at a time. But the thing is, if you want to spread it out, if you want to spread out poverty, right? De, de concentrate poverty. Well, people don’t get site control over a hundred units on a
decentralized basis, right? On a scattered site basis. And so they write the application that you have to have site control at the time of application. And then we’re all like, that’s not a thing. Like I don’t buy, I don’t put a hundred houses under contract and then, you know, convert them, you know, make them eligible for a particular program, but I can go find a hundred houses this year, right? Like give me, give me guard rails. Our point is our point is that the right approach would be just
give me guardrails and then I’ll go find houses that fit this, the, you know, fit within the guardrails, but don’t tell me that I, but don’t require the addresses at the time of application for, you know, for the grant, for the subsidy, for the appraisal gap, um, you know, uh, trying to fill the appraisal gap, whatever, you know, whatever, the, the aim of that particular program is anyway, I digress, but I’ve, I’ve pounded my head against the wall for a better part of
craig fuhr (49:03.266)
Jack BeVier (49:20.635)
15 years trying to, you know, work more closely with the public sector and solving this issue. These issues and those are that’s just one of my personal frustrations pet peeves about where the rubber and hits the road and then nothing happens, right? Because the program was just poorly designed. You know, in with that with details like that being the thing that takes it down.
craig fuhr (49:42.925)
Jack, you and I have actually talked about that because the problem only gets bigger of affordable housing, especially with, as I can continue to say, 15 million of the world’s poorest and least educated people crossing our border. They all have to live somewhere. And so there’s a great opportunity there, but I think what Congress and even local municipalities are grappling with is, one, how do we make that work? And two, how do we dip our beak in?
right? And, you know, sorry to seem so mercenary, but let’s face it, that’s exactly what it is. And but I continue to believe that it creates one of the greatest opportunities over the next 15 to 20 years for a smart guy like you to figure out and certainly like Doug to figure out the legal aspects of it all.
Jack BeVier (50:34.771)
So Doug, what else? Is there anything else that we should cover today? What else have we missed? That’s changing.
Douglas Stein (50:38.822)
I think those are the really big issues that we see coming around. I think there’s an expectation that there will be some significant tax act changes in two years after the election. And hopefully a lot of this has gone behind us. The government’s got to raise revenue. I see tax rates only going up. You’ve got two wars going on. I know the Ukraine war is extremely expensive as it goes. I think there’s a misunderstanding of what expensive means in this context.
It’s not like we are building new stuff. We’re giving them the old stuff and then we’re building our own stuff. But the stuff costs money and they’re looking for billions of dollars on this. And the only way to make that happen is taxes have to go up. So my bet is you’ll see a change, a significant change in a lot of that. I think the next tax act is probably 2006 is my bet. And I think it, yeah, it’s my bet.
Jack BeVier (51:28.776)
Douglas Stein (51:30.858)
I’m sorry, 2026, this is 2006, sorry, 2020. I’m off by 20 years. Yeah, thank you, thank you. 2026, I think it’s gonna be significant. I think it’s gonna be a real change in operations as tax acts go. That’s kind of my gut. If real estate continues to fall, which is if you believe the newspapers, that’s what’s happening. I’m not saying it’s true. So the newspapers are announcing, so therefore it’s gotta be true because the media has never gotten anything wrong ever.
craig fuhr (51:34.421)
We’re tracking.
Jack BeVier (51:45.086)
Douglas Stein (51:59.766)
that’s going to make everything even harder to deal with.
Jack BeVier (52:03.775)
Super interesting.
craig fuhr (52:05.021)
and 87,000 agents to collect it all.
Jack BeVier (52:08.511)
Oh yeah, yeah. Can you give us a, so where’s the IRS at? Right? Like I remember a couple of years ago, I got told that I should be scared because the IRS was just getting a billion dollars of funding and they were coming after everybody. What’s, what’s the reality?
Douglas Stein (52:18.478)
Mm-hmm. I’ve seen a reduction of audits, not an increase in audits. The audits that we have seen have been lower quality audits. They’re not asking the right questions. They don’t even understand. We literally had an audit last year where the agent was upset with us because our balance sheet balanced. The assets equal the liabilities. And that was a little 30-minute rant by an agent about why the two have to be false, because you can’t have a balance sheet where they match.
I wish I could make this stuff up. What we actually see in the real world is attrition is eating into the new hires for the service. So what you’re getting is you’re losing a lot of the more educated guys, the guys who’ve been around 20, 30 years. They’re retiring, new people coming in who have no experience. I’m not as concerned about audits anymore. When I get a good auditor, I’m actually really happy. We have an intelligent conversation about what things actually look like and how things actually work.
We have seen a change in the appeals process. Some of the agents on appeals appear to be, at least from what we’ve seen, much more interested in the process and not the outcome, which is not what appeals is supposed to be about. We actually had a case where we filed our appeals, we went through the whole process. No, this is between your audits. You got your assessment by the internal revenue. They say you owe us X.
Jack BeVier (53:38.563)
And you’re talking about you’re in tax court at this point.
Douglas Stein (53:46.862)
Instead of going to tax court, you can go to an appeals process, which is internal with the government. And then if you lose on appeals, you can then go to the tax court. And we actually had case law, like square up exactly on point. It was the exact same fact pattern. And instead of just conceding the case, they made a show up at the hearing, right, for an hour and a half hearing, go through the whole process, explain everything, only to then say, OK, we agree. We’ll just drop the case.
Jack BeVier (53:50.728)
Douglas Stein (54:17.289)
It is increasing costs. We do see that, but we don’t see better audits. We see worse audits, just higher.
Jack BeVier (54:25.755)
Is the number of agents down?
Douglas Stein (54:28.63)
Yes, from what we’ve seen, the number of agencies down.
craig fuhr (54:31.745)
because of attrition.
Jack BeVier (54:31.884)
quantity and quality are both down.
Douglas Stein (54:34.582)
Yeah, perfect combination for good administration. It is. The numbers were always a little bit exaggerated. The attrition rates, if you believed what the attrition was supposed to be, which I actually think are right because the government knows who’s going to go, we have good history on that. Even if they hired all the agents and you kept the regular washout from new agents, you were down. It was a net loss to people. And the worst type of loss, right? Lose the experienced guys and bring in
craig fuhr (54:38.041)
Great formula.
Douglas Stein (55:04.394)
and experienced guys. So we have not seen a change. I don’t think that’s gonna change either. Overfunding the IRS has always resulted from Congress’s perspective in abuse. And underfunding the IRS has always resulted in less income. So everyone’s always trying to find where’s that perfect spot and the answer is it doesn’t exist.
craig fuhr (55:24.917)
Well, it’s a good thing they’re giving them guns now.
Jack BeVier (55:25.087)
Super interesting.
Douglas Stein (55:27.666)
Oh, so yeah, that’s a whole nother issue. You know, they’re not the only ones. The USPS also buys a lot of ammo and guns. You know, it’s. I have a friend, well, I have a friend of mine who does IP law and one of his clients manufactures ammunition. He said the biggest buyers of his ammunition is all government agencies. He can’t even make it for anybody else because the government is just buying it all and.
craig fuhr (55:38.393)
I couldn’t resist, Jack.
Douglas Stein (55:56.086)
It’s astounding to me that that’s what we’re spending our
Jack BeVier (56:00.831)
Super interesting.
craig fuhr (56:02.753)
Yeah, we won’t go down that rabbit hole, but we certainly could for maybe another episode. Doug, it has been a real pleasure to have you. Can’t thank you enough for your time, Jack.
Douglas Stein (56:08.689)
couple days are worth.
Jack BeVier (56:15.495)
Yeah, thank you so much. Appreciate it. A interesting and stimulating conversation as always. And we look forward to like to love to grab you again at some point in the future as stuff starts to unravel and we see, start to see changes. So really appreciate your time today, sir.
Douglas Stein (56:30.862)
I appreciate your time. Thank you for having me.
craig fuhr (56:33.409)
Well, another stimulating conversation on Real Investor Radio. We’re thankful that you all have turned in. We’d love to wish everyone a happy new year, prosperous new year and a peaceful new year. And thanks for tuning in once again, Jack. Any last words?
Jack BeVier (56:48.603)
No, thank you guys. Have a great one.
craig fuhr (56:50.297)
All right, we’ll see you next time on Real Investor Radio. Take care.

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