Ready for another fun-filled episode where Toby Mathis and Jeff Webb of Anderson Advisors talk about tax code rules to maximize your savings and keep more of what you earn. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- Can a married couple file a joint federal return, if we live in different states? Yes; federal government requires married couples to file jointly in some way
- We are paying our son’s rent while he’s in dental school. Is there a deduction we can take for that expense? No, it’s considered a gift
- Can an individual sole proprietor sponsor a 401(k) plan? Yes, but all their income is considered wages and other potentially negative factors need to be considered
- I am a realtor sales associate. My company requires me to place my broker as additional insured. Can I Roth the portion on my premiums? Yes, as an additional insured
- I purchased an investment property in another state and formed an LLC. Can the LLC reimburse me for flights, hotels, and meals incurred prior to formation? Costs incurred when establishing your business can be captured and amortized
- Can a previously established LLC be reconfigured to be taxed as an S Corp? Yes, just follow same rules as making an S election
- I have an Inc. How many LLCs can I have under it? There’s no limitation
- Do you give a 1099 to an individual who helped you find a deal for a referral fee? Give them a 1099, if it’s more than $600
- If you do a cost segregation, do you have to pay everything back, if you do a 1031 exchange in the future? No, you’re just rolling forward the basis on your property right
- I’m licensed with Primerica. Should I create an LLC for my business? It depends on how much you’re making because you’re personally responsible for any liabilities incurred
- Can I submit mileage driven from my main work location to a branch office to my employer for reimbursement? Submitting it doesn’t mean they’re going to pay it
- Can I form an LLC to purchase a vehicle, lease it to myself, and then use an accountable plan from my C Corp to reimburse lease payments? Don’t do that.
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Resources:
New Tax Laws That Give Real Estate Investors a Massive Deduction (free Webinar for Tax Tuesday listeners)
Franchise Tax Board of California v. Hyatt – SCOTUS
Real Estate Professional Requirements
Uniform Gifts to Minors Act (UGMA)
Who Pays if You’re in an Accident in a Company Car?
501(c)(3) Charities and Non-profit Organizations
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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Full Episode Transcript
Toby: Hey, guys. This is Tax Tuesdays with Toby Mathis, and…
Jeff: Jeff Webb.
Toby: Welcome back for another fun-filled day of playing with the tax code, trying to figure out what the heck all these rules are, and how to maximize your tax savings so you can actually keep more of what you earn. This will be an interesting day. Just as an aside, as we record right now, we still have that hurricane off the coast of Florida and just devastating Bahamas. Our prayers and thoughts go out to all the folks that are impacted by it. I’m sure that a lot of our clientele are impacted by this so hopefully, you get by with the least amount of damage possible. On the tax side, if they declared a federal disaster area, then you can at least get some tax relief.
Jeff: Yeah, we can get relief in forms of any losses you might have or also delays in filing tax returns if you’re affected.
Toby: Yeah, and this isn’t tongue-in-cheek either, you have to have federal designation. Otherwise, they don’t let you write those things off.
Jeff: It usually doesn’t happen my way, but once […] it almost always happens.
Toby: Yeah, but those poor folks in the Bahamas, ayayay. All right, let’s jump into Tax Tuesday, stuff, freebies, always remember to go and visit our YouTube channel, our Facebook channel if you like filling your brain with lots of asset protection tax and estate planning knowledge, anything that we can do to help you preserve, protect, and prosper, that’s what we try to do. We’re always coming up with new content, feel free to join us.
Obviously, you can always jump into the podcasts on this. We’re on Google Play and in iTunes. You can always come in and listen to our Tax Tuesdays after the fact. If you don’t want to look at our mugs, you could just look at the slides, I guess, but you’ll be able to do it just on the audio.
All right. Tax Tuesday rules. Ask live and we’ll answer before the end of the session. Let me just pull up the Q&A, I was not even thinking about doing that. Let’s see, we have a bunch of folks on already asking some questions, lots of questions. You guys can’t see them, but I look at them all the time. Jeff and I are routing these out. We try to answer them before we’re done, in that way we can be answering your questions. “Yes, you should sell Tax Tuesday mugs.” Maybe we will, we can make a dollar.
Anyway, you ask live, we’ll answer for the end of the webinar. Send your questions to taxtuesday@andersonadvisors.com. We get a lot of them, we go through them, and we pull out of those depending on when you send them. I try to get them a few days before we advertise the question. If you really want to see it get answered, make sure that you’re doing it a week ahead of time, but we’re still pulling them out as of yesterday afternoon.
If you need a detailed specific response that’s on your situation, you need to be a tax client or a platinum client so that we could answer that. We can’t just go through your personal stuff on air, it’s confidential, and I’m sure you wouldn’t want me to start getting into all that.
This is fast, fun, and educational, we want to give back and help educate. The whole idea is that you guys learn as much as possible and that we go through all this fun stuff so that you start picking up on it. I see people all the time at events that have been through the Tax Tuesdays and the constant refrain that I get is, “I’m starting to understand the questions before they’re even asked.” I already know what’s going to be asked. I already know a lot of responses and that’s exactly what’s perfect, that’s what we want. We love that.
Let’s jump on in opening questions. “Can a married couple file a joint federal return even though they live in different states?” “We are paying our son’s rent while he’s in dental school. Is there a deduction we could take for that expense?” We’ll answer those.
“I purchased an investment property in another state and formed an LLC. Can the LLC reimburse me for the flights, hotels, and meals incurred prior to formation?” We’ll go over that.
“I’m going to deed my rental property into a California LLC. How do I pay the mortgage if it’s still in my personal name?” “I am a new real estate investor,” welcome, “and in purchasing two properties with cash through my LLC, what kind of financial records should I keep?” We’ll go through that.
“I have co-wholesale properties 50/50 with another investor. The deals were made in my company’s name. Do I claim disclose the entire amount or only when I received his profit?” “Can I submit the mileage driven from my main work location to a branch office to my employer for reimbursement?” “What is the best entity for flipping raw land on an installment sale?” Interesting. “Can I form an LLC to purchase a vehicle then lease it to myself and then use an accountable plan from the C Corp to reimburse me for the lease payments?” That’s interesting. “How can I rent my home to a corporation which I’m a shareholder?” We’ll go through all those, so we’ll just jump right on in.
You guys know we’re always trying to be done in an hour, although I think in the last 90 plus sessions, we haven’t hit it, but we’re going to shoot for it today, Jeff.
Jeff: It’s a holiday weekend.
Toby: Maybe we’ll do an hour, maybe we won’t. We’ll see. Let’s see. There’s already a bunch of questions that have come in, so we’ll go through a bunch of those too.
“Can a married couple file a joint federal return even though we live in different states?” When this question came in, it was actually one spouse living in California. It was a really long question, so I took some editing to make it to where we could fit it on one screen. Where it really boils down to is they’re married filing jointly, federally, but one lives in California and the other one doesn’t. California has a very high state income tax and the question is can the other one avoid it on their income.
Jeff: Starting with the question, on your federal return, you have two choices: married filing joint or married filing separate. Married filing separate usually ends up much worse than married filing joint. The federal government demands that you file together in some fashion. Where the difference comes from is if you’re actually residents of two different states, you may file separately in each of those states as a resident of one California and wherever the other state was.
Actually, it was the opposite of this when the California had the registered domestic partners where we were having to file separate federal returns, but we were filing joint California returns. If one of the spouses are in Texas or Tennessee, they can claim to be non-residents of California.
Toby: You’re going to get audited on it by California.
Jeff: California is one of those states that they want you to be a resident forever.
Toby: The answer is yes, you can actually do this because there’s your tax home, there’s your physical home, but your tax home quite often is going to be your physical home and they’re going to try to prove that you really reside in the jurisdiction where they actually can hit you the hardest.
The big case that actually was just decided in the Supreme Court not that long ago was—you guys have probably heard me rail on this—[…] commissioner. It’s a case out of California that’s gone up to the US Supreme Court twice now and has been appealed on three different issues.
The Supreme Court ruled one way and then when it came up again and it ruled another. It’s like, “You’ve got to be kidding me,” where they actually dispatched Franchise Tax Board agents to his home in Nevada and the issue was a lot of tax on the sale of a business and they wanted to show that he was actually residing more in California than he was anywhere else and then they could assess their tax.
Just know that you’re going to have to deal with that, which means go in with the understanding that you’re going to have to prove it, which means you’re going to want to show like how many hours you’re spending in that location, how many utilities you’re using. I’m not kidding, you’re going to have to show where your cars are actually registered, where your driver’s license is, all these things to show that one spouse is really residing in another state. Then the question is, is it worth it? You’re going to have to look at it and say, “Hey, basically, this is the amount.”
Jeff: California in particular really looks for what relationships do you still have. Do you have a property in the state? That driver’s license like you’ve mentioned? Unfortunately, the spouse living in California, especially if you were formerly a California resident, could be a dealbreaker. The FTB is going to go after, know you’re still technically a resident.
Toby: They like to audit it, but there have been people that have won. I remember looking at it once a couple of years ago. They tend to scrutinize them and there was a blog article so you could probably Google this stuff and maybe find it out there, said here’s the case. They tend to dispute them all, then here’s when you’re successful, here’s what they show. Then they give a little bit of a laundry list. Anyway, there’s that.
We got a lot of questions that have come in since the beginning though. I want to see if any of these are really relevant. “Can I do an installment sale on federal but a conventional sale in California?” That’s interesting. I believe California is going to have to follow. It sounds like he’s selling a property and would it be better just to recognize everything?
Jeff: I want to say that you might be able to do that, treat them differently.
Toby: You’re making an installment sale election on the federal for sure and the question is I think California follows the federal, but I’m sure you might be able to say, “Hey, but I don’t want to be treated that way for California purposes, although I’m not sure why you’d do that.” The whole idea is to spread it out over the receipts of it.
Jeff: The only thing I can think of is for example, California doesn’t recognize real estate professionals. You might have a gain on your federal side, but you could end up having a loss on the state transaction because you haven’t taken all those deductions but just running out there.
Toby: You can’t be a real estate professional in California?
Jeff: No, they do not recognize it.
Toby: So, you can’t take the deductions non-passive? That’s brutal on your state taxes. Federally, you can. That’s no fun, none of that’s fun.
Jeff: It’s California.
Toby: It’s California. Anyway, if you’re doing an installment sale, that’s when you escrow through me into the situation and explain it a little bit more so they said, “Hey, we want you to do a tax election on the federal side, but we want to treat it as a conventional sale,” because you have the election. You get to choose whether you want it to be an installment sale. Period.
Jeff: I don’t know why escrow would have him say that.
Toby: Yeah. I’m thinking that you’re getting some weird advice on that one and maybe push back on a little bit because buyer has to withhold payments. I’d have to see a little bit more, so if you can, maybe email it in so we could take a look at it and dig into it.
Jeff: Are you a non-resident of the state? Might be the reason they’re having to withhold tax.
Toby: How do you know if the state would be the issue? I guess maybe it would be the issue for California, but if it’s otherwise, withholding is only for non-US citizens.
Jeff: The state’s if he was a resident.
Toby: Right. The only one I know where you definitely have the withholding is on the federal side, on the state side, I imagine. A little more facts, California buyer has to withhold, escrow also had to withhold state tax, so it’s the state tax, but he lives in California.
Jeff: It’s weird.
Toby: Yeah. I don’t know about that. You may want to query, query and see what’s going on there, unless they’re being forced to withhold if they do it as an installment sale in California, I’ve not seen that.
There’s a whole bunch of questions but, “Does the calendar of days and the state affect the state residents decision?” It’s a factor that they use, but it’s not the deciding factor. If you live outside of another state and you spend a lot of days outside the state, what California cares about is how many days did you spend here versus those other places and then where’s your true tax home?
It says, “If you have a C Corp for various business activities and I want to do wholesaling, is it best to do it under a child LLC to separate the brands and liabilities? If so, how should the child LLC be taxed?” If you’re doing various business activities, you want to separate them out, what one’s talking about there is having a C Corp and having it own separate LLCs. They would be disregarded LLCs for tax purposes that flow up.
“Is there a sales tax on the sale of rental property in California in addition to K-1 flowing through?”
Jeff: I don’t know of any state that has sales tax on the sale of real estate.
Toby: Yeah. I don’t think you’re going to get hit. Let’s jump into the next one. We got a lot of questions but not necessarily related to that question. “We are paying our son’s rent while he’s in dental school.” It’s very nice of you. “Is there a deduction we can take for that expense?”
Jeff: No. I’m sorry that’s a gift. There’s no deduction at all for paying the rent of a relative.
Toby: But this is where we got to put on our thinking caps. We need to have a business first off. Here’s the big question. Is your tax bracket higher than your son’s? If the answer is yes, then you want to pay him out of a business and have him actively participate for that business, actually do something for that business. Then if it pays him, then he can receive that money at a much lower tax bracket, quite often zero, and he could pay for his own rent.
So, you’re just paying him, he is paying tax on that money at a lower bracket, and the rent is still being paid. You’re still coming out of pocket, but instead of you doing it personally, if you run it through a business, then he can work for the business. But he actually has to do something for the business, so you actually have to get him on your board to have him do things.
A lot of you guys know that I had a daughter go through college and I had her do social media and things like that, stuff that was pretty high value and there’s a wide swath of what you could pay for it. With sweeping floors, you’re going to have a tough time going above $25–$30 an hour, but when you’re doing technical stuff, really a reasonable amount can be a pretty high amount if they’re acting or doing Screen Actors Guild rates for photography and things like that when you’re using for modeling, that’s actually a tax court case.
In case some of you guys think I’m being garnished, there’s actually a case where it was a young individual, I think they’re 11. It was a pretty low age and they were given a reasonable amount was whatever the Screen Actors Guild. So, I just think that stuff’s a lot of times misunderstood. You got to actually do something and then you’re paying it.
As long as we’re talking about school, I just did a little section on this. A lot of people go to the 529 plans, which are great, you put money into them and you don’t pay tax on any of the growth so long as it’s used for education. It could be a private school for elementary school and high school and all these things now. It doesn’t just have to be higher education, but your returns really stinks. I get the calculator out because you have to stick it in mutual funds and they charge so many fees, you’re really not getting much. I tend to shy away from those.
Sometimes we get into Uniform Gifts to Minors Act in some of these accounts, but the problem there is when I see parents doing that is the money goes to that minor when they hit 18 and you have no choice if they’re going to use it for college or they’re going to spend it on a Lamborghini, you don’t get to choose on that.
The other one is using an index universal life or whole life policy where you put extra money into it when your kids are young and under 26 USC 7702, the cash value grows tax-free. When I say tax-free, I’m being deliberate with that word. I’m not talking it’s deferred. It’s literally tax-free as long as you borrow it from yourself if you’re going to use it for school. The good thing is you may not have to pay it back if you keep that policy inactive that when you die, the policy gets paid back. Say that your child has lots of scholarships and doesn’t need the money or just says, “Hey, I’m okay,” then you don’t have to spend it on education like a 529 plan. You could just keep the money in there. You can use it for your retirement.
Somebody says, “The dental student might also qualify for tuition credit to reduce his income tax.” Yeah, there is that and again, what I do with my daughter and I’ll tell anybody if they have kids and they’re underneath a certain threshold as far as income, let’s say, they’re making less than $40,000 a year—forget the actual amount; it’s over $100,000—you can do a Roth IRA and that’s a great savings plan.
People look at me and go, “You’re a goon, Toby. Why are you putting it into a Roth when there’s so many penalties to take it out?” I’m like, “No. There’s no penalty to take the amount that you put in, out. There’s only a penalty if you take the amount that it’s grown out.” So, if you put $5000 in it and it grows to $6000, you could take that $5000 back out anytime. If they never have to touch it and they get it there for 20, 30, 40 years, you just took care of their retirement.
“Can an individual’s sole proprietor sponsor 401(k) plan?” The answer is actually yes, you can although all of your income is considered wages. If you’re making over $30,000 ir $40,000, it could be a negative situation for you. It also depends on your 199A deduction, how much you’re making. “Yes, it can do it, if no, why not?” No, you can do it, but we just recommend that usually you’re going to use a corporation, an S, or an LLC taxed as an S and take a salary out and control how much you’re actually putting in there.
On the tax organizer page titled expenses, there’s a line called equipment rent. This includes a monthly cost for leased car used to drive to various education seminars for stock, just a crazy thought. Don’t do that, we’ll get to the car stuff here in a little bit. We always get a car question. I’m just always going to tell you guys, unless you have a really good reason to have a car in your company, you reimburse mileage instead. It’s 58 cents a mile right now, you just have to track your mileage.
Use MileIQ, it’s a simple app, I think it’s free, it’s really simple. You can make sure that you’re just tracking it. It literally GPSes. It just says it was that a business trip and it doesn’t matter what car you’re in, you just keep it and submit it. Fifty-eight cents a mile and it adds up. You don’t have to worry about 50% or more or bonus depreciation or anything like that. Do you have an opinion? You were sitting over there mute today.
Jeff: No, I was just listening. I don’t like the idea of putting these vehicles in the business especially if they’re not those 100% used vehicles which the majority of them are not. There’s going to be some personal…
Toby: That’s really important. There’s going to be a personal tax.
Jeff: There’s a personal issue with that.
Toby: People do not realize this.
Jeff: That personal usage is taxable to you.
Toby: There you go. Whenever I, as an employer, give a benefit to an employee, it’s considered taxable unless there’s a specific exclusion that says it’s not. For example, if I give you a Sodapop, it’s taxable unless there’s a de minimis fringe benefit rule that says it’s not. If I give you a car and it’s my company car, the company owns it—by the way, I’m going to scare the pants off of you here in a second because there’s actually a really good court case that I just read on a company car—that company car is a taxable benefit to you. You have to track your business miles and the personal mileage is considered personal.
Compensation is subject to old age, death, survivors, Medicare, Social Security taxes, and withholding. If I paid you with the Lamborghini, gave you a $200,000–$300,000 car, you have to pay tax on it. A lot of people don’t realize that, a lot of accountants don’t realize that. They’ll have this automobile and they’ll just write 100% business use. The IRS knows that’s not the case. You’re low lying fruit, they zap you, and they say, “All right, where’s your mileage log?” You say, “What are you talking about? Were you trying to concoct something?” they deny it and they say, “Great, the entire value of that vehicle based on its fair market value is the least value is going to be added to your wages every year.”
Then the other thing that really hurts is when you are zipping around in your company car and you get into a car accident or somebody does in your behalf, (a) it’s commercial insurance, it’s going to have to be the higher insurance, and (b) you just put the liability in the company. There was a case here that got a little bit of attention where it was a $100,000 personal liability and the individuals caused a traumatic head injury, they hit a bicyclist on the road, they just hit him on the side of the road; it was a truck.
They sued the business trying to get to the business’ million dollar policy. They dug their heels, fought it, and it being a $3.6 million verdict, there’s only a million and one of coverage for the business. What do you think the business is doing now? They’re yelling at the insurance. It ends up just being a nightmare situation for that business. The guy is saying, “I wasn’t on business,” but the lawyers on the other side, they’re going to sue anybody that they can get their hands on.
Jeff: The other side of that that I’ve seen is those people who decide that, “Commercial insurance is too expensive, so I’ll just use my personal insurance,” that driving on company business, get into an accident, now not only do they have the accident problem, their insurance company may say, “No, sorry.”
Toby: You got to make sure that you’re letting them know it’s commercial use. Two other questions that relate to that and how we got to these cars, Aloha Zach, and says, “Regarding company car, what if we already bought the car? How do we take advantage of the Tax Cuts and Jobs Act tax deduction?” What he’s referring to is depending on the vehicle, we used to do what’s called the Section 179 deduction and then depreciation. Section 179 is the first million dollars of equipment purchase you can write-off in a year, but there’s limitations depending on whether it’s a luxury automobile or whether it’s not considered equipment, just a passenger car. They usually limit it, I think it was $16,000 a year was the maximum amount.
Jeff: It’s actually $13,000 a couple of years ago.
Toby: What is it now? Is it still the same?
Jeff: Around $20,000.
Toby: Then you have bonus depreciation, which, under the Tax Cuts and Jobs Act says, “Hey, if something is written off over 5 years, 7 years, or 15 years, you just write it off in year one if you like. In that one, there’s still a limitation if it’s non equipment, so it depends on the type of car. If it’s over a 6000 pound vehicle weight, if it was an SUV or something, you probably were able to write it off.
Here’s the problem. Ready for the problem, Zach? I don’t want to freak you out. You got to make sure you’re using it 50% or more for your business. If you’re not, if you didn’t touch the 179 deduction, then it’s ordinary income you have to recapture. If it’s bonus depreciation, you just have to recognize the personal use of it. It’s not going to affect your bonus depreciation on recapture, is it?
Jeff: No, I think it is. I think it’s also going to affect any type of accelerated depreciation.
Toby: Yeah, you got to be careful. That’s right. It’s going to be ordinary income.
Jeff: If you’re just using straight line, you’re deducting a fifth of the value every year.
Toby: If you wrote it all off in year one.
Jeff: Yeah, you write it off. Speaking of luxury vehicles, I had a client who bought a Bentley within his company.
Toby: Wrote it all off?
Jeff: No, he never write any of it off or he had to explain to them the deduction was limited to $11,000 the first year and later on was $1775 dollars a month because they fell under the luxury vehicle rules.
Toby: Ouch. The answer to you, Zach, is to make sure that you’re using it 50% or more for business and again, just use MileIQ. Somebody said that you have to pay something for it, yeah, I think you have free for 40 or 50 trips, I think it’s a couple of bucks a month or something. Just get it, it’s cheap.
Jeff: But do you figure at 58 cents a mile, if you drive the standard 1000 miles a month, that’s paying $580.
Toby: Hey guys, look at this. “Hey guys, loved your advice last time about cost segregation. You just saved me a heap, $118,000 off my taxes. You may want to teach this again.” Carolyn, you’re reading my mind. I’m going to introduce you guys to that concept again and we’re going to keep going at it. Usually, you make big huge chunks of money.
Somebody says, “If I own six large vans for passengering school-age kids, would you recommend a separate corp for each of these vehicles then lease it back to myself to keep liability away?” Wow. I see, it’s daycare. What I’m going to say is it’s not the vehicle that causes the liability because cars don’t drive themselves, it’s the individuals in the daycare. What I would say is keep the daycare, don’t have a ton of assets in that daycare. Young drivers, make sure you have good insurance and then here’s the big one for you is to make sure you have an umbrella policy on yourself. I call that lawyers insurance and you can get a huge umbrella. They’re pretty cheap, but you can get $3 million and $4 million worth of coverage for $1000 a year or something like that or less.
Jeff: I like the idea of having the vehicles all in one place. There’s fleet discounts on the insurance. They’re treated differently for tax purposes.
Toby: There’s always the, “Where’s the liability come from?” The liability comes from the employees of that daycare. What I’m going to want to do is get the money out of the daycare, get the assets out of the daycare. The vehicles themselves, you’re going to write those off. I used to do liquidation, you buy vans for $500. They’re just not worth a lot when you liquidate them because when you auction them, realistically, nobody even gets to inspect it, they’re popping out there and they’re just bidding on, they have some pretty interesting rules on how to liquidate things out. They have wheels and can roll away and have somebody pull things out of them so that they don’t operate anymore.
Most people don’t go after you for your vans. What they’re going to go after you for is if they can get to you individually. So, make sure you have an entity for that day care. Lawyers go after to the low-lying fruit of the insurance policy unless you give them a really good reason to go outside of it so just make sure you have lots of insurance on it, make sure that business is separated and then make sure your other assets are not in your name. If you have rental properties, don’t have them in your name. You’re just asking for someone to come after you and try to break the veil of the business. That’s the easiest thing. What you’ll find is that things settle out or don’t get filed, they’re usually in an investigation phase and they say how much insurance you have, you tender it, and you’re good. When you have three rental properties and they can see them and they think you have something, then they just go right after you.
Jeff: I would say if you own the daycare property, I would probably separate them also.
Toby: Yeah, if it’s the real estate. The active business is usually going to be an S or C Corp and for those of you guys who have listened before, you can have an S or C Corp that is an LLC that is taxed as an S or C Corp. You would have your real estate in a separate LLC. Generally speaking, it’s going to be either a partnership or disregarded LLC that flows down on your return on your Schedule E and you’re going to lease it to the active business. We do this with residential assisted living, we do this with daycares, you do this with any business, you’re going to have real estate in an LLC, doctors, lawyers, exactly what I do in my business, our buildings are held in LLC is they lease back to the law firm.
The whole idea is you’re just keeping the activities separate. That’s really, really important is that if you have something go wrong on your property, on your real estate, in the case of a chick daycare, let’s say that somebody trips down the stairs, they’re going to sue the daycare, they’re going to go after that property no matter what. What you want to be able to do is isolate out the liability to the extent possible so that if they come after you as the landlord, there’s that liability. If the landlord gave it over to the daycare, now you’re trying to say, “It’s the daycare. I’ve created a line. When you’re walking up here, the daycare is responsible.” I have very little culpability if any and what you’re trying to do is keep that equity out of the firing line.
Let’s see, “I am a realtor sales associate. My company requires me to place my broker as additional insured. Can I Roth the portion on my premiums?” Absolutely, they’re just as an additional insured. You’re probably not paying too much, they’re just saying, “Hey, you want to cover?”
All right. “I purchased an investment property in another state and formed an LLC. Can the LLC reimburse me for flights, hotels, and meals incurred prior to formation?”
Jeff: We talk about startup costs a lot and corporations, but actually, any entity can have start-up costs including an LLC. These are costs that you incurred trying to establish your business and also this is something you would capture and amortise. That’s perfectly acceptable.
Toby: This gets fun. I think these things are fascinating. If you already have investment property that’s offered for rent, then it can ride off all these things as a start-up expense whenever you start bringing in the money. If you don’t, it’s going to be a start of expense and it’s going to have a little cap on it. It’s going to be limited to $5000. Anything above that, you’re going to amortize over 15 years, but you can only write-off the flights in hotels and meals where the property is purchased.
I remember this going back. There was a guy, he looked at three different states, and he was trying to look for properties. He went and he looked in New York, he went to DC, and I think he went to Georgia. He bought the property in DC and he wanted to write all the expenses off, but he couldn’t because it wasn’t in the geographical area that he did the investment property which is why we tend to use management companies where we just don’t care, We’re just, “Hey, if it has to do with you doing something on behalf of an LLC, we’re going to write it off.” It’s an active trader business which is something that we didn’t hit on here.
You can only write-off really the travel. You can’t write-off other expenses. I’m trying to think of a whole bunch off the top of my head, but there are expenses that you cannot write-off ordinarily necessary business expenses because it’s not an active trader business. These are investment expenses and they’re much more limited. There are things that here, I think with the hotels and flights and meals would be fine, but if you’ve had other expense interests, if you add ordinary office expenses and things like that, you wouldn’t be able to write it off. You’d actually have to have the rental property and activity and then even then, there are certain things you can’t write-off.
Jeff: Right. Some of those expenses you would probably have to end up capitalizing into the cost of the property.
Toby: There are some and then there are some expenses you just flat-out can’t write-off when you’re dealing with an investment property versus an active trader business. The biggest one is if you guys do seminars and things like that, you just can’t write them off as an investment, you can only write them off as an active trader business which means we use a corporation.
This is interesting. I don’t know who asked the question, but in this case, that’s on the screen, they would be able to reimburse themselves as soon as that investment property is available for rent. So, it has to be available. It’s not that I have it rented. Let’s just say I’m rehabbing it and I rent it and then they move in. Let’s say I have it rented on August 15th and they move in on September 1st and it’s available on September 1st, the date you can write-off those expenses and capture them is September 1st because that’s the date it was actually available for rent.
Same thing if I make it available for rent on September 1st, but I don’t get a tenant until October 1st, I still can start writing off as of September 1st because it was ready and available for rent. That’s always the big trick. It’s not when I acquired it, it’s when it’s available for the tenant even if they rent it ahead of time, it’s still not available to the tenant until it’s done. Did I misstate anything?
Jeff: No, the easiest proof or available for rent is an ad or something that says it was available for rent.
Toby: Two other questions. “I’m partnering in a flip with somebody 50/50.” Anytime I see these, I just go, “Hmm, two months long.” That’s what they all say. It’s going to be a two month flip and there’s going to be a two year flip. “What is the best form to create this partnership? Do I create LLC as individuals and both our companies, create a new company as a tax benefit?”
When you’re flipping, you’re going to want a corporation between you and the activity from a tax standpoint. When you’re working with somebody else, you’re going to do this in one of two ways. You’re either going to do a joint venture, where you both have control and you’re going to do a joint venture LLC between the two of you, or if for example, you are in control of this, I’m going to advocate for you to not have a partner in it. I’m going to say if they want to participate, they loan you the money and you do a contingent interest where you pay them 50% of the gain as interest and that way you write it off, you don’t have a fiduciary duty to them and it’s much, much, much cleaner.
Jeff: We actually have a question on this.
Toby: We do? Where?
Jeff: It’s coming up.
Toby: Oh, good. That’s what he has to hear. Another question, I don’t know if it’s the exact same one. They said, “Hey, what’s the difference between donating product to a 501(c)(3) non-profit or categorizing it as a market expense? This is a case of an S Corp. The important difference here when you have a corporation that’s giving something to a 501(c)(3) or a charity, is a C Corp can only write-off up to 10% of its net income. If it makes $100,000, it can donate and deduct $10,000. If it’s an individual, you can write-off up to 60% of your adjusted gross income. When you’re donating products, I think you have a little bit of a different issue and I’m thinking about donating products. If it’s foodstuffs, you can write-off the product and write-off the charitable gift. If I am donating a product, it gets whatever my basis is.
Jeff: It has to go towards this feeding of women and children.
Toby: That’s the food.
Jeff: Impoverished women and children for food products.
Toby: But if you’re donating product, in this particular case, let’s just say it’s inventory in a business, then you’re just going to not have it there when you do your inventory so it’s cost of goods sold.
Jeff: It won’t actually be a charitable deduction. It will be a write-off of inventory.
Toby: Right. In that way, you’re not actually even messing around with charitable. The other thing you do—I think I’ve talked about this before—is sponsorships out of a C Corp or an S Corp. You don’t have to worry about the charitable amounts.
For those of you guys who are taking the standard deduction, which is $24,400 this year for a married couple, for single, it’s $12,200, if you’re not necessarily going to exceed that and you’re like, “Oh, man, what’s another way I can get money to my church or to the organizations that I care about?” sponsor them through your corporation. It becomes a business expense to the company, you don’t have to worry about a charitable donation, it just comes off the top against the income.
Jeff: The other one I see occasionally is, “I donated my cabins to our church group that I usually ran out. What deduction can I get?” You treated it as that was your expense and that is your write-off.
Toby: Yeah. Somebody says, “With the 50% contingent interest on a flip, are we violating SEC laws?” No. It’s not the SEC laws. I’m not even certain what laws that would be. Can you elaborate? There’s usury laws, but that’s not for commercials. Whenever you’re commercial, I can do these contingent. I could say, “Hey, pay me 4% interest or 25% of net profit defined as following.” Usually what you do is you have your basic note and then you have a contingent interest agreement, it’s the second agreement that says, “Hey, if we make money on it, then here’s what I can do.”
We have a lot of questions coming in. “I had a New Jersey sales tax…” I have to look at the New Jersey sales tax. I don’t know what that is, Mr. Rahn.
Somebody asked, “Can an LLC previously established be reconfigured to be taxed as an S Corp?” Yes, you can. You just have to follow the same rules as making an S election on anything.
“Can you separate land and property under separate LLCs?” Land and property. Property is sitting on the same piece of land. I guess that’s what you’re saying. In other words, can you take the improvement and toss it in LLC and have the land on an LLC? I don’t see why you would. I imagine you could.
Jeff: I think it would be a burden. You’d have to talk to your county and they’ll let you do this.
Toby: It would be weird. I’m not certain the reason you would do it.
Jeff: For one thing you didn’t have having the parcel amount separately.
Toby: Yeah. Somebody says, “Do you just let the food deduction wash out the cost of goods?” No. Actually, Jonah, when you’re donating food, I think you actually get to write it off, too. I think you get to do both.
Jeff: If you deduct $1000 worth of food that you donate to a soup kitchen or something, you’re going to end up deducting $2000. It’s your cost of goods sold plus, again, whatever the cost of goods sold as a charitable deduction.
Toby: Yeah, and that’s why you want to go around, the food banks want to hit up all the bread companies and all these guys that have the day-old bread, and you say, “Give it to me.” You can write it off. You’re basically writing off the cost, not the retail cost, but whatever it cost you. You get to do that twice.
Somebody says, “Do I need to file a 1120 form even if I don’t have any taxable income?” Yes, you want to grab all your expenses for sure. Even if you didn’t have any, you would just say no activity, but you still have to file an expense.
Somebody says, “What about donating a service? Let’s say that you have a design expense of $10,000 and you give the design away, can you write-off the $10,000?” The answer is no because you never recognize the income. You treat it as though you sold it, had $10,000, and donated $10,000 which is going to be a wash. I have seen people give intellectual property to charities where you get an appraisal on the value of it. You could do that perhaps where you say, “Hey, we’re giving this and this is what it would be worth.” I just don’t know whether it’s going to be worth it for you to do that since the appraisal would be probably almost as much as the deduction.
Jeff: And you’re going to have to have a specialized appraiser to do that valuation.
Toby: Veronica is asking about wholesaling. I have a feeling that the question is going to come up. Let’s see, “Two member LLC husband and wife, they did not file a 1065 for 2017. Do they need to amend the 1040 return? The read all activity was reported on Schedule E.” Patricia, it depends on what state they’re in because in a community property state, they’re considered one person. They wouldn’t have to do it. Florida, separate property so technically they were supposed to file a partnership if they both own it. That’s interesting.
Here we go. “I’m going to deed my rental property into a California LLC. How do I pay the mortgage if it’s still in my personal name?” I guess mortgage companies will take a payment from anybody. We’ll make it really simple for you. I wish it’s a little more elaborate. I actually saw a thread on this question. All these people were throwing in their two cents. It was like, “Yeah, we’ve been doing this for 27 years, nobody really cares,” but you want to make sure that if you have other properties in that LLC, or if it’s related to other LLCs, or you’re trying to offset other income with it that it’s paying it otherwise, the mortgage company is going to be sending it to you. It’s going to end up on your Schedule E, no matter what.
This is the big thing, a lot of people when they’re doing a mortgage and they start freaking out over the Tax Cuts and Jobs Act and the limitations on the mortgage interest deduction on a personal property, that has no effect on your Schedule E. You can still write-off the mortgage interest against your rents.
But I wouldn’t try to move that mortgage into the name of an LLC. I’ll just caution you against it. Just go ahead and have that LLC pay the mortgage or the LLC can receive its rent, distribute it to you, and you could pay that mortgage if it makes you feel better. At the end of the day, it’ll have zero impact on your taxes and almost no impact with regards to asset protection. It’s highly unlikely that would ever be a factor because as long as the California LLC is someone who’s actually receiving the money and it’s receiving it either through a property manager or directly.
Let’s keep going. You guys are asking a lot of questions online today. I’ll get onto those here in a second, but I got to bust through some of these. “I am a new real estate investor and I’m purchasing two properties with cash through my LLC. What kind of financial records should I keep?” I’m going to hit on a couple of things. First off, Jeff, I’ve been […] this whole dang thing, haven’t I?
Jeff: You’re doing a great job. You keep everything that has anything to do with those properties. You spend a nickel on and keep that receipt. If you’re able to keep your own records and keep a spreadsheet or something.
Toby: Such a CPA. If it’s a nickel, you want me to keep a receipt on it.
Jeff: All right. We’ll make it a dime, but still you need that. Those dimes that up. Anything that has anything to do with a property, you want to keep receipts on. You want to keep your mileage for when you’re going to visit these properties and so forth. It’s usually not as much as it sounds like, but you got to be diligent.
Toby: Realistically, the IRS requires that you keep books and records on all financial activities. Books and records just means a record of your income, a record of your expenses, and a record of your assets. When it’s real estate, you’re allowed to take depreciation.
Here’s the thing. You’re not required to take it, but you are required to recapture it as though you took it. If you don’t take it, you’re nuts. You’re going to want to still keep track. What would I keep? Like Jeff said, I’d keep a spreadsheet of what comes in and out and then you could always work with an accountant at the end of the year to fix it. The more concerning thing is you’re buying two properties for cash and an LLC, which means something that happens on property one, they’re going to take property two and vice-versa.
Depending on how value those properties are, I would probably recommend that at a minimum, you use land trusts and hold them separately since buying them for cash it seems like maybe it isn’t something that’s 100% necessary. I’d probably just use two LLCs, but I don’t want to have an activity on one cost me property number two.
Some people would say, “What if they’re not very valuable? What if they’re $75,000 properties or $100,000 properties?” I don’t really care about that. I care about the rents that are going to come in forever off those properties. If it’s making $1500 a month and you end up costing yourself it because there’s a fire on a property or something happens on one property and they end up taking both, you’re going to be kicking yourself saying, “Shoot, I could have just tossed an LLC around it.” If you’re doing two properties, I’d caution you. I’d say, probably put them in a separate LLC if you can or use some financing so there’s not as much there.
Boy, we have a lot of questions that have come in, let’s see. “Please elaborate on the wholesaling, with a business partner. We have an LLC, we are not renovating and flipping the property, we are truly wholesaling. How can we share the tax burden?” That’s actually a question that’s coming up and I’ll show you how to do that. I won’t answer that just yet, I’ll answer it when it comes up.
“I have an Inc, but how many LLCs can I have under it?” As many as you want, there’s no limitation.
“I’d like to add a foundation along with my two houses and a publishing company and that’s four LLCs, is that okay?” Yes. you can always do that. Your personal property wouldn’t do it, but if you have other rentals, absolutely. It’s just management and I love to do that. I love to have a management entity that’s a family entity that we’re running all of our expenses. For our activities, it’s just a management company.
“With eight vacation rentals, two commercial renters, and a regular rental, do you recommend 11 LLCs?” Yeah. Actually, it probably depends on what they’re worth. There’s not a one-size-fits-all for anybody. You just have to know what the actual exposure is. Before you go, “Oh my God, 11 LLCs,” some states allow series LLCs and quite often, 11 LLCs they’re not nearly as expensive as what you’re thinking. In California, it’s ungodly expensive so I wouldn’t do that, but if you’re in Ohio, or Florida, or where it’s not really expensive, it’s just really cheap insurance. Oregon is not that expensive; $100 a year.
It can save you considerably if you ever found yourself on the wrong side of a lawsuit. You’ll realize that you’re thinking in terms of hundreds of thousands, not even tens of thousands anymore. It’s just really, really expensive to defend and you want to just be able to cut it off and say, “Here’s the total exposure I have.” Again, you make sure you have good insurance for each one and you make sure you have a good umbrella policy so they’re not interested in coming after your other properties. They just put the years back at the insurance and go, “We want some of that?”
Follow-up on the flip Q, “Can your deed go 50/50 in two separate LLCs owned by the individual partners to avoid partnering with someone at one LLC?” You can, it’s called tenants in common. Realistically, I wouldn’t do that. I would have an LLC that’s a joint venture LLC that’s owned by your two companies or again, try to keep them from being an owner.
Somebody says, “Yup, being sued to the walls right now.” Sorry. That just sucks. I hate being on the wrong side of lawsuits. Even on the right side of lawsuits, it still sucks. No offense to plaintiffs lawyers, but a lot of them are on contingency and their partners against you and they’re just using the client to see how much money they can claw into. If it’s me, I’m taking my heels and I’m fighting to the last breath if I can.
Jeff: You got to remember that a lawsuit can be expensive even if you win a lawsuit.
Toby: We had one of those very recently and it was $200,000 plus to go win the lawsuit, get a judgment against the tenant that they bankrupted. The worst part about a lawsuit, guys, isn’t the money is annoying—some of you guys are very well-off—it’s waking up at three o’clock in the middle of the night, not being able to go back to bed, and you’re just angry. I’ve been down that path with so many clients. I had a friend that had died of a heart attack at 52. Part of it is because he had a neighbor that was just suing him every time he’d turn around. I said, “Just move. Get out of there. You just want to be able to wash your hands off it.”
“I just sold a rental property last week, another resold this week. I think the basis on both may be incorrect. If I find basis on previous bookkeeping records that this is the case, is there a way to correct it? Would it trigger to change the depreciation? Is there a way to correct the change?”
Jeff: This you can change. You’ve heard us talk about changing accounting method because this is a change of estimate, not a change of accounting method. We just go in and change the numbers and depreciate the new number going forward. It’s pretty simple.
Toby: Yeah, what Jeff just said.
Jeff: Yeah, what I said.
Toby: You CPAs. No, Jeff’s actually, how many years, 27 years?
Jeff: A long time.
Toby: A long time he’s been a CPA and I’ve been a lawyer for not quite as long, a lot younger. Somebody says, “Would all the LLCs be Wyoming so they’re hidden?” Not necessarily. A lot of times what I do is I’ll have one LLC in Wyoming that owns the LLCs in the various states. A lot of you guys know me. We have over 150 rental properties ourselves and it’s like I always say, “Good luck finding them all.” It’s never what anybody thinks. All you’re trying to do is make sure that they’re not coming through the back door against you so they’re not trying to take your LLCs. In a lot of states, they’re like, “Oh, if I can’t get the liability and the property, I’ll go after the owner individually and see if I can’t take the LLC from them.” It’s just really frustrating.
But then can’t a lawyer find them easily? This is where it gets beautiful. If I use Wyoming where you’re not disclosed and set up a bunch of Oregon LLCs, they won’t be able to see your name. So, I can keep the Oregon LLCs from having your individual information on them anyway. But, again, what we’re really worried about is making sure that we don’t have them all simply sitting in one big LLC that is very easy to see and they can try to take it all. There’s always a way to do it.
We’re going to keep moving on and let’s see. This is what you were talking about earlier, a co-wholesale. This is wholesale, this isn’t flipping. There is a difference. “I have co-wholesale properties, 50/50 with another investor. The deals were made in my company’s name. Do I claim disclose the entire amount or only what I received as profit?” The question is what do you mean by claim and disclose?
Jeff: I think they’re saying if I wholesale these properties for a total of $1 million, whoever is named on the sales run is going to have to report that whole amount.
Toby: I’m reporting the million?
Jeff: Then you’re going to deduct from that million.
Toby: The amount that I give to my partner.
Jeff: Exactly. What you’re doing is you’re going to recognize 100% of it. Using Jeff’s example of $1 million, you’re going to give them $500,000, that’s going to be a 1099 MISC, just miscellaneous income to the other party which is going to kick you in the shins if you give it to them individually. You don’t want to make sure that they’re using a company to at least keep the self-employment tax off depending on how much it is, then you would just deduct it. All you’re showing is your profit. What’s the amount that you’re actually showing the IRS would be whatever amount you ended up keeping minus your other expenses, so you could […] expense.
Oh my gosh, here’s what I have to answer. “I did not claim depreciation on my rental property for the first 15 years. Started taking depreciation two years ago. Is there any way to claim 15 years of depreciation I did not take previously?”
Jeff: This goes back to what I was saying about that change of accounting method. What the changes that you’re saying, “Oh, I originally said I wasn’t going to take depreciation, now I’m changing my method to I’m going to take depreciation,” and they’re filling out that form 3115 for the change of accounting method.
Toby: Then you could take it all?
Jeff: We can go back and recruit all of those expenses in the current year.
Toby: Paul, the answer is you should email Tax Tuesday and say, “Send me to Jeff,” and let Jeff do take care of you on that. There’s a lot of folks that say no, that you can’t, that if you didn’t do it, that you go back two years and you can amend, but what Jeff is saying is arguably correct which is a chain of accounting method and to go back because you’re going to have to recapture it no matter what, which is silly. They make you pretend if you sold that property, you’d have to pay 25% on the amount that you should have depreciated even though you didn’t. It’s just crazy.
Somebody says, “Is there a difference between Nevada, Wyoming LLCs?” Yeah, Nevada is more expensive. That’s about it. Wyoming doesn’t disclose anything. Nevada will disclose officers, directors, or the manager of an LLC, but you can use a nominee.
Jeff: But the charging order protection is about the same, isn’t it?
Toby: They’re identical statutes so people can’t take them from you. Somebody says, “Hey, I have a whole bunch of LLCs in my home state and it shows my personal name as manager. Is there a way to do something?” Yeah, absolutely, Chris. We just […] nominee, I’ll just hop on and sign your doc and now you have a lawyer saying that says nominee, I don’t pretend like I’m actually the person, I would just put nominee next by name. If there’s ever an issue, they like to go after me and I just say, “Hey, I’m not going to tell you anything.” It works, 20-some years, never gotten through, so it works like a charm.
Somebody says, “Do you give a 1099 to an individual that helped you find a deal as a referral fee?” If you pay somebody, Regina, you’re going to want a 1099 if it’s more than $600. We got to keep going through this. Somehow we got over an hour. Dang it, Jeff.
Here’s what somebody was talking about the cost segregation, Susan, if you could send them the link, this is an invitation to join us next Tuesday at 4:00 PM, it’s free. I’m cheating on Jeff. I’m bringing in Erik Oliver. He’s an accountant, good guy, and his firm, all they do is cost segregation studies and I’m going to go over three deals.
We’re going to go for about an hour on this one. We’re going to go over three case studies. Here’s how it works, this is what we do. We’re going to go over the actual test on actual cases so you actually see how it works, not how it might work or anything else. Just so you know, Jeff and I, we do not do cost segregation studies. This is what you hire professional outside people to do, but we use them. Jeff files the 3115 on your return with that study because you have to have the study to take it.
You’re going to want to sign up for this one, Alyssa. You’re going to want to go to aba.link/CSW and just register for it because this is not Tax Tuesday. I don’t want to sign up people for something that they didn’t mean to, this is just for this one issue. We’re going to go over how a real estate investor that owned a property for over five years were able to harness the tax benefit even though the new law was passed in 2017. We’re going to show you how they were able to get about 30% of the value of the rental in one year as a deduction.
Before you go, “Wait a second, you can’t do that,” yeah, you can. The law allows you to do it and actually encourages you to do it, but if you’re going to take the full benefit of it, you better have some passive income or you better qualify as a real estate professional so you can write it off as an active expense. In other words, you don’t want to have a whole bunch of loss that you can’t do anything with except carry forward. Yes, it’ll be recorded, but you’re still going to want to register for it.
This was actually a really cool case study. They bought a duplex with tenants in it and then rehabbed it shortly thereafter. We were able to get a 50% deduction in the first year without even having to come out of pocket on the rehab. In other words, they financed it so it’s huge. I still don’t know what your question is. She keeps saying, “Are you going to answer this?” Oh, here we go, I see it. I’ll take a look at it and I’ll see if I can answer it real quick.
Another one we went over was a sale of a commercial building right before the sale sold. People say, “Hey, you’re never going to do this a cost segregation if you’re selling a property,” and that is not true. You got to understand how these things work and we’re going to go through that case study.
This is for you guys and the reason we’re doing this is because on Tax Tuesday last time and the one before, we had a lot of people asking about cost segregation, how it works, and you got to understand where it gets applicable. On the commercial building, it was a $2.2 million sale and it was $80,000 just because right before, they haven’t even done a cost segregation. It changes how the gain is allocated.
This is really, really important. I don’t care whether it’s $1 million, $1.5 million, or $500,000. These things pay for themselves and I always look for a 10X response. I want to see if I’m going to spend $1000, I better save about $10,000. Before you ever would even pull the trigger on something like this, you would know exactly what you’re going to get out of it. That’s what’s so cool.
Somebody says, “Is Tax Tuesday recorded? Where do you go to find the recording of this session?” We’ll send it out to you. It is recorded and you don’t have to do anything. It will be sent out to you. If you’re platinum, you see them all and if you go to our podcast, you’ll get recordings of the audio. This is so much fun. Anyway, we’ll get into more stuff.
Mr. Ron said, “I have a sales tax judgment, $11,000. I’m on Social Security. I have a traditional IRA with cash, wife is a realtor, made very little this year, under the $3000. What is prospected from collection? One day I would like to do an LLC.” This is the type of thing that I would prefer that you email in under taxtuesday@andersonadvisors.com because I don’t want to give you anything that would be perceived as legal advice in front of a whole bunch of people where we’re waving it.
Whenever you have tax judgments, depending on whether it’s personal or a business, they’re going to have to renew those every so often, but there are certain assets that are going to be exempt. On your particular case, it’s going to depend on your state and we’d be able to tell you. We’d also be able to tell you whether or not it’s something you could even bankrupt away if you think it’s an issue.
Somebody says, “Is it true that if you do a cost segregation, you have to pay everything back if you do a 1031 exchange in the future?” No, you’re just rolling forward the basis.
Jeff: The basis on your property right.
Toby: Yeah. When you sell the idea in a cost segregation, people always say, “It’s ordinary income.” No, it’s based on the value of the asset as it is on the date of sale and it could actually be long-term capital gains or personal income depending on the value of it. Mr. Ron, I want you to email me at taxtuesday@andersonadvisors.com so we could have somebody help you with that because it’s very specific to your state.
Somebody says, “I’m a Platinum member, can I access the cost segregation webinar from the portal?” Yeah, you just register. You don’t have to go into the portal, I’m going to give it to you just because you guys are on here.
Somebody says, “I’m licensed with Primerica. Should I create an LLC for my business?” It depends on how much you’re making, but the answer is almost always going to be yes because otherwise, you’re personally responsible for any of the liabilities that are incurred so you never want to be doing stuff in your personal.
Here we go, we got to jump on. “Was the $80,000 saving on the sale of property because of reducing recapture?” Yes, John you’re hitting it. Without getting into too much detail, it’s the idea that if I depreciate my carpet and then sell the house, I shouldn’t be paying taxes on recapturing something that has no value. That carpet is worthless. It should be gained. If you don’t break that out, you’re going to be paying recapture on it and that seems silly. You end up paying a higher tax rate on it, so I hope that makes sense. It’s the fair market value of assets after you depreciated them if it’s personal property. John’s smart, he’s already got it.
“1031 exchange, I was not aware of the plan. Is it too late after 60 days?” Yeah, but what you can do is you can still do Qualified Opportunity Zones if you want to defer the gain. You can actually do Qualified Opportunity Zones on a recapture, too. That’s the proposed or the temporary regs address those.
“Can I submit mileage driven from my main work location to a branch office to my employer for reimbursement?” The answer is you can submit it, but it doesn’t mean they’re going to pay it.
Jeff: My answer exactly. Yes, you can do this if your employer is willing to reimburse you for that.
Toby: Now here’s the problem. If they don’t reimburse you, you used to be able to do this miscellaneous itemized deduction, they’re gone now. Tax Cuts and Jobs Act got rid of them, so you can’t write it off at all.
Jeff: Here’s the other issue. We don’t see this very often, but a lot of people don’t understand. We talked about the mileage reimbursement being 58 cents a mile. That’s the maximum allowable. That doesn’t mean an employer has to give you 58 cents a mile.
Toby: They can give you 10 cents a mile. We don’t want to yell at employers. They usually don’t give you anything; let’s just be real. If they do, you got to pull it out of them.
Jeff: But like Toby said, this would really be up to the employer’s policy.
Toby: Somebody else asked, “I bought a triplex. I live in one unit,” must be the residence, “and the other as a short-term rental and there’s a long-term rental. We we’re setting up an LLC, let the money roll through. What are the pros and cons?” DeShawn, that is an interesting question. I call it house hacking when you live in one unit and you have the others. That’s actually a term, by the way, it’s called house hacking. It’s when you live in one part of a place.
What I would end up doing is more likely to stick in the whole thing in an LLC and then you would depreciate two thirds, you cut your expenses, you’d be writing off some of them as personal expenses and part of them, two thirds or whatever the portion is. If you’re doing short-term rentals then the question is whether it’s seven days or less because then you’d be considered a hotel to be an active business versus passive.
Jeff: How does that affect the 121 exclusion for the sale of the principal residents?
Toby: There’s going to be a period of qualified or non-use. You’d be able to write-off a portion of it, but there’d be a big section of it that would be non-permissible use. Your 121 exclusion would be available to the gain that’s attributed to the portion that you used as your personal residence.
Jeff: Even though it’s still in an LLC?
Toby: Even though it’s still in an LLC, right. The 121 exclusion is not affected by the disregarded LLC, I guess, if you have a partner in it, then that would be another matter. I don’t know a way to break it out and nor would I want to have somebody who’s in a rental being able to follow me around the rest of my life garnishing me. I tend to always stick things right.
That’s what they never tell you. There was like, “Ah, you don’t need these LLCs.” I’ve had that discussion with somebody that had gray hair and was really ticked off, they will not stop garnishing you, they can renew that judgment about every 10 years in most jurisdictions and they can just keep garnishing you until you’re dead.
Somebody has a fund depreciation question, “I bought a $200 ladder, I prepare the hurricane shutters for my rental property. Does this need to be depreciated or just straight expense?” If it’s a ladder, you just write it off. You got owner’s appreciation, 100% this year so you don’t have to give it a useful life. Would it be equipment anyway, 179?
Jeff: Yeah, it’s under the $2500 limit.
Toby: Yes, you can write it off. Good luck in the hurricane. Anyway, the mileage reimbursement. Ask your employer and hope that they pay you back and if not, then just say, “Hey, I took it on the chin on that one, but I am going to find other ways to get money out tax-free on some other ways.”
“What is the best entity for flipping raw land on an installment sale?” What say you, Jeff?
Jeff: I’m still not sure that I have a real good answer for the entity type because if it comes under the rules that allows you to do installment sales for parceling land, I would think it would work on almost any entity.
Toby: Yeah. So, here’s the deal. When you have a raw land, you just got to be careful that you’re not preparing it and developing it because if you do, there’s no such thing as an installment sale. Now it’s dealer property. If you’re subdividing it at, I think, six or more, it’s dealer property. Even if you don’t actually develop it, there’s a great case where the individual had it for 11 years and he was doing the engineering […], but he never pulled the trigger to subdivide it. They said, “Your intent when you bought it was to develop it. It qualifies as a dealer activity.” It just ruins you because you have ordinary income and you get no installment sale.
When you say flipping, I’m doing it through a corporation. It means you bought it to sell it, it’s inventory in an installment sale you’re not actually supposed to have. I hate to say this, but the installment sale rules specifically exclude dealer activity and inventory. It gets stinky, you’re supposed to pay the tax […], but if I was doing that, I would probably be running this through a corporation, probably an S Corp unless I am just buying land as an investment.
Here’s another one. Someone says, “What are the best ways to save on a double closed or assignment one wholesale? Also, is the best tax efficient way in a trust? Because I’m closing on a deal but signed it under a land trust for anonymity and looking to double close.” Yeah, if you can avoid the double close, you just sell the beneficial interest in the land trust.
Let’s see, then he asked another one on personal residence, “What’s the best way to save on a double close?” To avoid the double close tax is to use a land trust and sell your beneficial interest. That’s all you’re doing is you’re literally assigning your beneficial interest to somebody else and they’re paying you money so you don’t actually have to close. That’s going to be your best deal because when you’re closing and you’re having to do two closings, there’s just going to be costs.
Next person says, “When I sell my personal residence for $800,000 for the cost basis of $200,000, profit of $600,000, how much do I have to reinvest via 1031 to delay payment of taxable gain?” You’re doing a 121 plus a 1031 exchange at the same time. The 121 is going to exclude the $500,000 which is going to move your basis and your property from $200,000 to $700,000. When you 1031 exchange, it has to be converted to investment property which means you have to make it into a rental and then you’re going to 1031 $800,000 property into at least $800,000 with the real estate. I’m not certain whether this is going to get you where you want.
Jeff: I don’t think the 121 reduces his commitment to…
Toby: It’s the investment property, the value of it, it’s not your gain. It’s not the basis. It has to do with the fair market value and then if you say you have to buy more. I don’t know if I would do it under those circumstances, you might be able to save yourself $10,000. Maybe if you did it cheap enough and you were going to buy real estate anyway, that would work. Otherwise, I would be looking at adjusting my basis and seeing how much of that $100,000 is actually taxable because you’re going to have all, anything that you put into that property, you may be able to make that gain disappear almost into nothing anyway.
Let’s see. “How could they sell them my interest? “You just sell them your interest, we do wholesale trusts all the time. Brandon, this is something you email in taxtuesday@andersonadvisors.com. We do these and we actually have a kit that we could sell you, I think it’s $200, and you could actually use it. You’d save 10–20 times that much if you did this thing, if you used it. We like saving big tranches of money. Everybody thinks this is free. This Tax Tuesday is actually a negative amount because you’re saving so much money. It’s not just free, it’s minus thousands of dollars.
“Can I form an LLC to purchase a vehicle, lease it to myself, and then use an accountable plan from my C Corp to reimburse me for the lease payments?” Don’t do that, stop that.
Jeff: Let’s just say I’m not a fan of lease at all.
Toby: Right. You don’t need to do the lease and you don’t have to do this crazy stuff. Just reimburse yourself. A C Corp reimburses you, it’s so much cheaper. I do this stuff day in and day out and these accountants are always trying to write-off stuff in big chunks. Unless it’s 50% or more for business, don’t even go down that path. If you do have a car and you have multiple cars, it’s so much easier just to do the reimbursement and then you don’t have to worry about the commercial insurance and all this other craziness. Plus with the lease, you have sales tax, so don’t do that.
Somebody says, “How about the best entity for buying and selling raw land by buying tax deeds?” Probably doing it an S Corp, again, unless you know you’re going to keep that property, but if your intent is to sell, you’re never going to do that through your individual.
“I have an LLC taxed as a C Corp located in California to manage a property in Florida.” Wow, I don’t think I would do that. I would not have a California manager. It’s going to bring that revenue into California. They’re going to tax it.
Let’s keep going on. They ask these questions sometimes, it makes my brain hurt. “How can I rent my home to a corporation in which I am a shareholder?”
Jeff: I feel like this question is similar to the last one unless we’re talking about that 14 days or less of rental, this is just for me a bad idea.
Toby: What Jeff is pointing out is that there’s a difference between me renting something to somebody to the corporation on a monthly basis. Now that corporation gets an expense, but I have an income.
Jeff: Let’s say I’m renting it out $1000 a month. The corporation gets to […] up $12,000, but I’m picking up another $12,000 of income.
Toby: But also now I have a house that’s put up as a residence that is also a rental. I have depreciation, I have depreciation recapture and all this other stuff. It’s much better if I just rent it to my corporation for the meetings that it has once a month. Now that is just tax-free income, it’s under 280A(g)(2) so it’s 26 USC 280A, subsection G, subsection 2. It says that anybody can rent their residence for less than 15 days, which means 14 days and they don’t have to report the income. You don’t have to put it on your tax return so it’s great. You don’t have to do depreciation, you don’t have to do any of that and the corporation just expenses it, probably they’re one of the best tax deductions out there.
“How can I rent my house?” You enter into an agreement. I would not do it under a long term, I would not do it on a month a month or a yearly lease, it just doesn’t make any sense. I would not rent your house to a corporation unless you’re doing it for a monthly meeting and then it has to be 14 days or less.
Jeff: Going back to what we talked about about the depreciation recapture on 121, if you have to start depreciating your home and you have a gain when you sell the house, that depreciation capture is not eligible for that $500,000 exclusion. You have to pay tax on it.
Toby: Because that 121 exclusion is only on capital gains. You still have the 25%. What is this section for that?
Jeff: 1250.
Toby: All right, too many numbers rolling through my head. All right, guys, a lot of really good questions. Feel free to ask more.
This is the 2-for-Tuesday, I have to throw this at you guys a few weeks. I’m just going to go over it real briefly. You can do all the Tax Wise Workshops this year. You get two tickets to a Tax & Asset Protection Workshop that we have here in Vegas and other parts of the country. You’re going to get two tickets to that. You’re going to get a Tax & Asset Protection book for real estate investors, a three-part video series, a strategy session, plus you’re going to get all the live stream recordings of all of our Tax Wise Workshops including the one coming up in November for $197. Feel free to just email and I think there might be a link to it somewhere. Just say, “Hey, I want the Tax Wise and Bulletproof, the 2-for-Tuesday offer.” There’s some link somewhere, we will shoot it out to you.
Podcast, feel free to jump on and it’s free to listen to the last Tax Tuesdays plus we put a lot of other stuff out. I do podcasts with people, I just did one really cool with a trader who does a lot of futures trading and I just love talking to these guys to see what makes them tick. I did one today.
I’ve got a couple of more questions coming in which we’ll answer here before we’re done. You can go to Google play, it’s free, and then the replays are in your Platinum portal. Of course, feel free to follow us on social media: andersonadvisors.com/facebook, andersonadvisors.com/youtube, you can jump on in there. Then if you ask your questions, just submit it. It’s taxtuesday@andersonadvisors.com.
All right, a couple of more questions, “What is the best way to reduce taxes on a large gain after a house flip?” Cassandra, if you did it in your name, all of that is ordinary income subject to your ordinary tax brackets plus Social Security, which is old age, death, and survivors from Medicare, that’s 15.3% plus your federal tax plus your state. Hopefully, you did this through a corporation of some sort so we can try to minimize your tax. If you did it through a corporation, then we’re going to try to expense the living daylights out of it.
Somebody says, “I listen to your podcast when I’m on the treadmill.” That’s what I like to think about, people out there listening to this stuff while they’re sweating. Jeff, they’re listening to you while they’re sweating.
Jeff: I’m not sweating, that’s for sure.
Toby: Sweating out beer, this is our Minnesota Chris, I just know it. I had a buddy come over. He met with a bunch of businesses and they sell marijuana here—it’s all legal—so, he’s in this room with these guys, he comes back and he goes over to his doctor buddy who yells at him and says, “You’re sweating out weed.” He goes, “I didn’t smoke any.” He’s like, “You’re around it.” I was just laughing at him. I go, “Sure, whatever.” […] never inhaled.
The best way to reduce tax after a house flip is to make sure it’s not you. There’s a lot of deductions 280A, accountable plan, equipment, all sorts of things, set up your family, medical reimbursement, there’s so many different ways to write things off that we all use on your house flip if we can just get it into an entity.
“Can I do a partial in-kind distribution from an IRA LLC?” Yes, you can. If you have an IRA LLC and that’s all it is, there’s no cash, you don’t have to do required minimum distributions or you’re just trying to use up some losses and then you’re going to take partial ownership. It’s not illegal to co-own property in an IRA, but you cannot contribute to it nor can you use your personal labor to increase the value of it. So, no working on that, but you would talk to your IRA custodian. They’ll make sure you don’t step on any land mines there, but yes, you can. Because sometimes you don’t have cash in it. That being said, we’re right at an hour and a half, exactly what we anticipated.
Jeff: Absolutely.
Toby: Right on schedule, sorry we always go a little over. We’re going to do an hour one of these days. Before I forget, I’m going to go back to that screen, let me see if I can actually do it. I want to go to the screen that had the webinar. There we go, aba.link/CSW. Next week, come on in.
“Do you need an LLC to close in a land trust?” You probably would, but you could use the Social Security number of the individual instead, Brandon.
“Can you please explain the pros and cons of New Mexico versus Wyoming entities?” Yeah, Wyoming’s pretty good. New Mexico is okay, but Wyoming is an absolute sole remedy state, much like Nevada where they cannot foreclose on your interest. New Mexico is not bad, it’s right up there, but Wyoming’s just a little bit better. In New Mexico I think you only have to pay once, so it’s cheaper. It’s always a weighing test. I tend to go to Wyoming just because it’s $50 a year.
Then somebody says, “What’s your email again?” taxtuesday@andersonadvisors.com and we’ll send you a follow-up email and sure, you can ask your questions. Go to the aba.link/CSW, register, and join us next week. We’ll record it. We’ll send it to you, but it should be lots and lots of fun. I love doing case studies and I love doing case studies with really smart people and accountants qualified, it’s really smart people. Even Jeff. Jeff, you’re wicked smart. This is fun going over this stuff where people are crunching numbers. I just love digging.
Jeff: If you’re interested with cost seg, you really need that to invest. I was really impressed with Erik.
Toby: Yeah, Erik’s coming and he trains our staff, too. He comes in and there’s nothing better than sitting in a room with 20 or 30 accountants and people livestreaming and asking you questions.
Jeff: Yeah, it’s a lively party.
Toby: Yeah, I didn’t hear anything. It’s like a pin would drop because there were numbers on the board so they were all entranced. Look at those numbers, those are really cool numbers.
Jeff: Oh, my gosh, you color-coded them.
Toby: All right, guys. Join us next week and if nothing else, I’ll see you in the next Tax Tuesday in two weeks. This special event’s next week and there will be a lot of fun. So, join us, support us, and let Erik know that you care. […] Let Erik know that you actually care about accountants and you love cost seg. Until next time, this is Toby, and…
Jeff: Jeff Webb and we’ll see you next time.
Toby: All right, guys. Thanks.
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