Knowledge is power when talking about taxes. The more you know, the more tools you have to be successful. While Toby Mathis is taking some much needed rest and relaxation after Tax Day on July 15, Michael Bowman and Jeff Webb of Anderson Advisors answer your tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- Does it make sense to use an LLC as the property manager for self-managed rentals? Separate and isolate rentals to protect assets; consider Inc. instead of LLC
- If I put my property in a land trust, will it be difficult to sell? Land trust is basically a revocable trust with a grantor; land trust should sell the property but not via turn of title
- What is the best entity to do wholesaling? Disregarded LLC down to a corporation
- Property Aggregation: What is it and what are the reasons to do it or not? Primarily used with real estate professionals for material participation to combine multiple properties
- What’s the difference between a tax deduction and a tax credit? Tax deduction reduces your taxable income; tax credit reduces your actual tax
For all questions/answers discussed, sign up to be a Platinum member to view the replay!
Go to iTunes to leave a review of the Tax Tuesday podcast.
Resources:
Anderson Advisors Tax and Asset Protection 1-day Event
Healthcare Reform (Affordable Care Act)
Individual Retirement Arrangements (IRAs)
Capital Gains Exclusion/Section 121
Internal Revenue Service (IRS)
Real Estate Professional Requirements
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript:
Michael: Welcome everybody. My name is Michael Bowman, I’m one of the partners here in Anderson Business Advisors and I’m filling in for Toby Mathis. He is taking some much needed R&R. I’m here with Jeff Webb, the director of our tax department. Hey Jeff.
Jeff: Hey. As you can see we are not Toby.
Michael: No, so my take might be a little different from what you guys are used to. I’d love to get into some of the structure implementation side questions and get into the tax code. I’m one of those guys that love the tax code.
I don’t look at it as restrictions; I look at it as a playbook. These are all gifts that were given to us, so I like learning about it. I think that knowledge is power when we’re talking about taxes. I think the more you know, the more that you’re able to go ahead and make sure that you know the two-schools of logic. The more you know, the more tools you’re going to have to be successful
I think there are two tax codes, one for the informed, one for the uninformed. You guys joining this, you got a part of the informed crowd, so you guys are able to take advantage of the tax code, as opposed to being taken advantage of by the tax code.
If you guys want, you can go ahead and follow us on social media. We love interacting with you guys on social media. Here are all of the different social media sites and how to get a hold of us. The one thing that I really encourage you guys all to do is to go ahead and watch our YouTube videos. We spent a lot of time going through and creating content.
We’re different from most law firms, most law firms want to keep their knowledge to themselves. Here at Anderson, it’s been something that from the incorporation of Anderson, a theory of ours, if we have educated clients, that means that we’re able to synergize better with our clients. I don’t know about you Jeff, but I love getting on the phone with a client who understands these concepts, who’s been to our events, and we synergize. We come up with different strategies, and they’re saying, hey, what about this? Then, we take a look at that strategy and say, yeah, you can do this, but why don’t we tailor this way, and this way. What’s your opinion on that, Jeff?
Jeff: I agree with that, Michael, that a smart client, an informed client is a lot easier to work with. It’s just so much easier to work with. We also learned (occasionally) something new from our clients, especially when they’re doing extensive research on something that we rarely run across but that’s good for everybody, so we’re more than happy to help educate our clients, and we always get something back from that.
Michael: Don’t you think sometimes, we act like janitors, too? We have to clean up a lot of the online information and incorrect information that’s given by the professionals.
Jeff:: Yeah, we do. As a matter of fact, we’re doing some research yesterday, and if you just Google it, you could find a couple of different answers that didn’t agree with each other, so there are some bad information out there, and another part of the problem is there are some old information out there. Things have changed recently. While that information might have an accurate in 2017 or 2010, it’s not accurate anymore.
Michael: Yeah, the tax code changes, and it seems like it’s involving fairly quickly. Especially nowadays, with all the new acts being passed and changes to the code. One of the things that we, for the longest time, was a medical deduction, 7.5% of the AGI, then went to 10% of the AGI, then it’s back. You really have to stay abreast, or at least know someone who’s keeping up their knowledge.
I just got a hello from a longtime client. Sherry, great to see you on this. I think I’ve known Sherry for probably 15 years now, it’s been crazy. It’s so good to see long-term clients on this podcast.
We got the social media, let’s look at some of the rules. Ask live and we’ll try to get to the questions, or at least one of the advisors that are on the chats can actually answer that question for you. Tax questions are interesting. It may seem easy with first blush, but then you start looking at the actual tax question, it’s the ‘if-then, then this and that.’ So sometimes, we need a little more information. Or it’s a question that pertains to you individually, we’ll filter those questions out.
For the most part—I think Jeff can agree with this—we really want to get you guys information. If it’s a detailed response and analysis, we do have a section of Anderson that’s in our Platinum portal, and it’s our Platinum membership. It’s great because when we developed Platinum, one of the reasons for us to develop Platinum is we realize our clients and our past lives as litigation attorneys, clients really didn’t want to pay the $750 an hour to get a question.
What they would do is they’d phone a friend, they would research on the internet like Jeff and I were just talking about, get wrong answers, go down the path, and then sometimes lock themselves into something that was inaccurate, file something that we’d have to undo, or we have to clean up the path. Or even worse, we’d look at what they did and they paid too much in taxes from a saleable property, an asset, or what have you. Or filed an incorrect tax return. At times, we can go ahead and file an amendment, but the big thing on that is it’s just unnecessary expenditures.
What we did was we saw it as a barrier to our clients, the billable hour. We looked at our clientele, and decided that if we do a membership where everyone joins together, pitches in, brings out $35 a month, we can get you guys the answers and help you guys out. If it is a detailed response, become a member of Platinum, and we’ll get you squared away there.
Another thing, this is going to be fast, fun and educational. Again, presenting in a limited amount of time (I always hate), we are generally presenting for three days, one day, full day. In fact, coming up, we have a Tax and AP event. It’s a one-day event. We’re going to be rolling out some new strategies, but also some new programs. It’s this Saturday. I will give you guys a link. Everyone on this is going to be invited to it. I’ll give you guys a link and you can register. For taking your time out to be on Tax Tuesday, we’ll go ahead and comp your fee to get in, it’s going to be free to get in.
I highly recommend that, if you haven’t attended a Tax and AP event before, join us because there is a ton of information, a ton of strategies. One of the things I hate doing is seeing people overpaying taxes, and it happens way too often, so we’re going to be teaching you some tax strategies, asset protection strategies, and also business planning tailored into estate planning.
One of the things that’s important to me is the estate plan. I believe everyone should have a living trust. Don’t let anyone tell you that you don’t need a living trust, that you don’t have enough assets. That’s not accurate. The purpose of a living trust, in my opinion, is to keep family relationships intact and just make sure that whatever’s happening at that time when the stress with the family, that makes it as easy on your family as possible. It seems that we have a problem when someone passes. Grieving and greed go together, so we want to make sure that everything is outlined.
The majority of our clients have worked so hard sacrificing and building wealth that I really hate seeing it being squandered away to attorneys, court processes, and just destroying family relationships. Please, if you guys, this Saturday, sign up and join us for the one full day of Tax and Asset Protection with one of my senior associates, Carl Zoellner, and myself.
I do have to tell you guys that there is a small chance—we never know when babies are born—my wife and I are expecting a baby girl this week or the next, and the ETA has not been established. As most of you guys know, you can’t tell when they’re going to come. Most likely, I’m going to be there with Carl, if not, one of our other attorneys will join Carl and get that, but I highly recommend you guys signing up for the one day Tax and Asset Protection.
Looking into the questions, what I’m going to do is I’m going to read the questions that we’ll be covering and this will help you guys see what’s coming up. If you guys have questions pertaining to it, then we can go and expand a little bit more, take some of your questions, and really, really dive into these topics.
I chose a lot of these questions and more were chosen by other tax professionals in our firm. I chose them because, in my years of experience dealing with business owners in litigation, I felt like a lot of people have the same questions. I tried to choose as many questions that were relevant to help you guys succeed in investing in business altogether.
The first question, “Does it make sense to use an LLC as a property manager for self-managed rentals? What are the pros and cons?” This is going to be a fun one. What we want to do is (again) take you guys to the next level. When we look at a structure, we really need to attack it from a four-pronged approach. Number one, asset protection. We can save on taxes, but if we don’t have the assets we lost in a lawsuit, there’s not much to save there.
Number two, we do want tax minimization. If you guys heard me, I said minimization, not elimination. And then business planning. Business planning really needs to blend in with asset protection and tax. Far too often, I’ve seen people put together a great structure from an asset protection standpoint or a tax standpoint, then they’re not able to get funding and build their business.
We run into that quite a bit. The CPA is very excited that the clients are paying little or no taxes. All of a sudden, they go to try to get funding and the bank or the financial institution says, hey wait, you’re broke. You’re making no money, we’re going to lend to you. It really hampers the development of their enterprise. We wanted to develop them to make sure you guys can build your business also.
Unfortunately, we’re all going to pass, so the fourth prong that I always look to talk about is estate planning. How do we pass on to our heirs and really help them to build on what we’ve built? Again, keep family relationships from being destroyed.
The next one, “If I put my property to a land trust, will it be difficult to sell?” I love this question because it’s practical. Again, we got to have structures that allow us to build our business. If we put in a structure but can’t sell the property or make it more difficult to sell the property, we’re kind of taking two steps to go back to one. “What’s the best entity to do wholesaling?” What we want to do is to again, look at that from a business planning standpoint, but also in Tax and Asset Protection standpoint.
This is a great one, Jeff, you can give a two-second answer on this, but I love this because I think the answer’s going to be surprising to most people. It says, “If we just have one duplex investment property, would TurboTax be good enough, or is a CPA needed to get more tax benefits?” What do you think Jeff, real quickly?
Jeff: It depends.
Michael: I love that answer. It actually really does. We’ll go over the pros and cons. I think the answer’s going to surprise a lot of you, again in how we feel and what we think.
“How do we report the sale of the rental that is owned by our 401(k) and 70% by us?” Excellent question. I’m seeing a lot more of our clients team up with their 401(k), team up with other people’s our retirement accounts, so there are a couple of things that I know I want to go over, I’m sure Jeff has exponentially more logic and reason to go behind how do you want to set that up and how do you want to go and report that sale.
“What tax strategies should a startup real estate investor be aware of and plan ahead of time?” I love this question because again, sometimes we get it when it’s too late in the game, or we weren’t able to get it from the very beginning, and the horses left the barn in some cases. Those of you who are involved with Anderson, we really stress tax planning. That’s why we do the education, that’s why we have our Platinum membership and Titanium memberships. You guys come to us and we can do planning as opposed to doing planning I guess or dealing with taxes December 31st or April 14th, that’s what I’ve seen in the past.
“I have an S Corp. when I pay myself, am I responsible for payroll taxes?” We’ll dive into that. I love S Corporations and some business avenues. Definitely, we’ll get into how to do it, why to do it, how to maximize tax savings with an S Corporation, and self-employment tax.
“How do I set up a manager-managed LLC to protect the member-managed LLC I’ve had since 2013?” That’s going to be a good one because what we want to do is make sure that we gain privacy also. Sometimes that’s difficult to do if it’s already set up. We’ll show you how to do that.
“I sold my business and have $100,000 capital gains tax due.” I love that, congratulations on building a business and selling the business. “Can I invest in real estate and offset it with the depreciation credit?” Excellent question. We really have to match types of income, expenses, and deduction. We have to make sure that it’s all congruent.
“Can I use my 529 to pay for room and board if I own my house with a mortgage?” I love the way you guys are thinking outside the box.
“How can I benefit from some of these tax programs?” We’ll get into that.
“Is there a way to pre-plan and calculate the tax implications of the sale of a residential property? For example, depreciation recapture and how to go and get that.”
“I love self storage. I have a self storage business in Virginia, and I’m looking to expand and purchase another facility in Tennessee. What is the ideal structure I should use for this business and real estate investing?” We will get into that. I actually took a slide out of the presentation that we’re going to be going over on Saturday because it’s really congruent.
Not only do I want to show you the structure, but I also want to show you how it’s going to be relevant towards retirement, too. We’ll liken it onto how we can maybe capitalize on a business that we built and still sell it. It’s one of my favorite strategies for brick and mortar businesses, and also service businesses.
“When transferring my assets from my name to my LLC name, tax consequences?” We’re going to talk about that. It depends as Jeff says.
“What’s the difference between a tax deduction and a tax credit?” You guys maybe come up with that. I actually wanted to turn it back to basics and get you guys to understand the difference between a tax deduction and tax credit. It’s a foundation to really be in Tax-Wise. I understand the difference of what gives you more bang for the buck. I wanted to go over my favorite tax deductions, and then Jeff, his favorite tax deduction and tax credits. That’s what we’re going to be covering. What we all want you guys to do is put on your seatbelts and let’s get going.
I promised you guys the link for Saturday’s conference. Again, we’re going to be rolling out two new programs, a couple of new strategies, and also give you guys a great foundation going forward. I love this course. It’s my favorite course to teach because what we’re doing is we’re taking people who are investors and business owners, and we’re building them a foundation so that they understand it from a tax-wise standpoint, asset protection, business planning, and estate planning.
Carl Zoellner is a serial entrepreneur. He understands it. He’s also been in litigation himself with a business. He understands why you do things from a practical standpoint. He also is a top when you look at academia, too. It’s going to be fantastic. There it is. Go and sign up. Again, there are offers that we make during the Tax and Asset Protection events that aren’t available anywhere else. Again, we’re rolling out two new programs, so go to that. I’ll put this back up later on. I want to kind of give you guys a little heads up. Moving right along.
All right, let’s look at this first one. “Does it make sense to use an LLC as the property manager for self-managed rentals? What are the pros and cons?” Let me look at it from an asset protection standpoint. I grabbed a slide and what we want to do is we’re going to look at it and then we can get into the tax savings and tax benefits from doing it.
When we’re looking at our rentals, we really want to separate and isolate. Many of you guys have attended our Tax and Asset Protection event, this is the exact stuff that we’re going to be recovering and maximizing tax savings by protecting the assets.
If you look at the structure that’s in front of you, the C Corporation will be our management company, so what we’re able to do is manage the active side of the business. I’m going to say not manage the rental property themselves but manage the LLCs. That’s where sometimes I read articles, I hear other professionals, I have to correct some of my staff, too. I don’t want you to say managing the actual properties. It’s managing the affairs of the LLCs.
Some of the duties that corporations are going to do for the LLC is it’s going to manage the day-to-day affairs, it’s going to collect rent, it’s going to do repairs or at least contract for a company to do the repairs, then also bookkeeping. It does all these services. I would also put in there going to do an analysis of the investment, making sure that it’s pulling the return on the investment property. You really have to broaden it out and manage it.
Jeff, in your experience in using a corporation to manage the LLCs that have rental properties in them, what are some of the things from a tax-wise standpoint?
Jeff: For me, it’s the only entity that really makes sense. It can be an LLC taxed as a C Corporation or I actually prefer a really Inc to be the corporation, primarily because you may build up losses in this from some of the other deductions you can run through this corporation, whether it be corporate meetings, mileage, any number of things.
But as you said, though, it’s important that you make sure it’s running the LLC, not the property. In fact, you may have a property manager who is maintaining the properties for you. The C Corporation would still be overlooking at the entire LLC for each property that you have.
Michael: Like a contractor with a bunch of subcontractors, right?
Jeff: Right. I do like having the Inc rather than the LLC, should you one day decide to dissolve it and have the corporation still owes you quite a bit of money. It’s a way to at least get some kind of deduction for it. I do really like that part.
Michael: This is something that gets our client’s friends in trouble. I hear the client comes to a Tax and AP, says they learn these strategies and they tell other real estate friends, other business friends, hey, you can put together a corporation. It can manage the LLCs. Each individual LLC is going to pay a fee to that corporation that you spend out on expenses.
The client’s friend hears this and probably what happens is they don’t put together an agreement. They don’t outline the duties. This is going out for normal businesses, too. You’re going to do this. You actually need an agreement in their Platinum portal. There’s the management agreement, the services agreement, but I want the actual written agreement out with the duties that the corporation is going to perform for the LLCs. I really do. Would you agree? From a substance standpoint. If you got scrutinized, that’s going to go a long way right?
Jeff: Yeah, that management agreement puts in writing why you’re collecting money from these LLCs, what this income is for in the C Corporation, and like you said, duties and responsibilities. Anytime we can have that, that’s a question that we’re not going to get back from the IRS. What this relationship really is.
A lot of times you’ll see that the longer I pay a management fee of 100% of the income and stuff like that, it needs to be a little bit more—for lack of a better word—better commitment into what you’re doing here. Unless you do other things like we said, taking the mileage expenses, taking medical expenses—
Michael: All the juicy deductions of the C Corporation allows you to have versus running everything out of your own name?
Jeff: Correct. Now, you asked about tax consequences. We’ve seen people set up property management companies as partnerships or as corporations, or even a Schedule C which is making even less sense. The problem with any of the past two entities is you’re just taking money out of one pocket, the rental properties, and just putting it in another pocket.
Michael: I’m so glad you said that. I have to clean this up all the time. Even for other accountants, clients sometimes are married to their accountants and have been their accountant for hundred years. They say we’ll put together an LLC to manage these.
Again, the default for an LLC will be disregarded, maybe a partnership, but then you’re really limited. You’re not going underneath the corporate tax code which you earn, you spend, and then you get tax on what’s leftover.
Jeff: Yes. Typically, the way these are set up is there are enough expenses in the C Corporation that is offsetting most of your income coming from management fees.
Michael: Jeff, have you ever heard my gatekeeping acronym for expenses?
Jeff: No, I have not.
Michael: CORN. I learned this from an old-time accountant, a really awesome guy. We’re going over expenses and we’re just talking how much fun they are and how powerful each of these expenses are because it’s decreasing the taxable revenue. He said it’s really easy. It has to be Customary, Ordinary, Reasonable, and Necessary.
I thought to myself that’s genius because Ordinary, Necessary, I’ve heard that before, but it really boils down to a task before you spend something underneath the business standpoint. Is it customary? In the line of business you’re in, is it ordinary, reasonable, and necessary? I think it keeps you out of pigs get fat, hogs get slaughtered, and a gatekeeping mechanism with expenses. I always like to say would the President of IBM do it? Don’t use Enron or what was the big toy chain where they had golden toilet seats and all that stuff? I’m going to call it […]. Was it Tyco?
Jeff: Probably. Another point with the C Corporations is when we talk about educational expenses. If you’ve been to some kind of seminar or you signed up with another entity. We have significant educational expenses, say $20,000, $30,000, $50,000. Those are the type of expenses we would run through the C Corporation because they are actually managing your real estate. That education actually belongs to the C Corporation and that’s in a place where we can actually deduct it without a lot of question marks from the IRS.
Michael: I’m an educational junkie. I love education. Again, I take it for being an attorney, but I also invest in real estate, the stock market, and business, and I think the more you know, the better off you’re going to be.
When I found out that education was a business expense, I was overjoyed because now you’re getting some financial benefit also. I was very dismayed that under Publication 550 and the code section that investment-related seminars generally are not tax-deductible to an individual, so we moved it over to the corporate realm and now we got the deduction.
Jeff: Correct.
Michael: “Pros and cons?” Jeff, I don’t really see many cons other than you might have another return, but you’re also getting benefit from that return. One of the questions I was scanning through the chat was, “How many properties before it make sense to go ahead and form that C Corporation?”
Before you answer, I’ll answer and I’m going to say it depends. Some of the factors I’m going to look at is are you going to invest in more rental properties? The bottom line is how much in expenses are you generating?
One of the things I don’t want you guys to do is go ahead and not create a C Corporation and then lose those expenses. The other thing is we can capture those expenses and rollovers. A Corporation is going to run on loss. That being said, what do you think?
Jeff: Like you said, if I have one property that I’m writing out, maybe I don’t do a management company for that, but then again, there’s no reason not to. It’s a cost-benefit calculation.
Like you said, there is going to be a certain cost with setting up a corporation, filing tax returns, especially if you’re in California, that’s another return that you’re going to have to pay fees on, but you’re going to have annual fees on top of that. You really have to look at what benefit you’re getting from the corporation. I don’t think it’s one size fits all. Do you, Michael?
Michael: No, not at all. Not to keep going back to that. These are all the questions that we’re going to be answering during the Tax and AP. Also, join Platinum. These are the questions we’ll go over with you when you’re in Platinum.
I had a question come up. “Can a C Corp manage a trading business?” That is great because a lot of times we actually do a C Corporation manager trading business. You got to set it up properly.
Jeff: Our preferred method for the trading companies is maybe a limited partnership or an LLC where the corporation is the general partner or the general manager of that LLC or partnership. They get a small percentage of profits and losses, but instead of a management fee, they get what is called a guaranteed payment because like you said, before the management fees or trading is no longer deductible personally.
Michael: Correct. That’s something that some of the trading accountants haven’t been keeping abreast with. I’m scared about their clients that they’re going to get audited and not be able to take what they will be able to take.
Let’s keep going with the questions. One did come up. “If a C Corporation for active services isn’t set up in Wyoming or Nevada, would the real estate properties be set up under separate LLCs in Wyoming or Nevada?”
I don’t have a lot of clarity here, but what we really want to do is make sure whatever state we’re doing business in, we’re at least having an operating business in that state. A lot of times, that question comes up. Do I use Wyoming or Nevada? It’s going to depend, but if you’re touching concerned citizens in a particular state, we need an entity that’s doing business there, whether it’s a land trust, a C Corporation, or the actual LLC itself.
Now, we’ll be able to get asset protection if we have those individuals in-state LLCs. I got a picture of this coming up of those individual in-state LLCs if they are all owned by a Nevada or a Wyoming LLC. Again, here it is. All those in-state LLCs flow down to Nevada, Wyoming so that we can go ahead and get the asset protection because Nevada, Wyoming are the strongest states in the nation when it comes to asset protection.
What they’ve done is they kept that charging order protection intact. For those of you who are new and haven’t been to our courses, how that comes about is that if it gets too personal and you have membership in an actual LLC, the judgment creditor can’t reach in and take those assets. What they can do is they get a charging order, basically a lien against the interest but they really can’t get the asset as long as it’s in a state that’s kept it intact.
Here’s a question on land trust. Land trusts are an awesome tool. It’s almost like having your cake and eat it too because you get the benefits. There’s really no downside to it. For those of you who are unfamiliar with land trust, again this is something that we’ll go over in Tax and AP on Saturday. The land trust is nothing more than a revocable trust. All 50 states allow for revocable trust, so with the trust, there’s a grantor. You own the property, you grant that asset into the land trust or the real estate to the land trust, you are the trustees. You’re in control and then also the way we set it up, we make the LLC the beneficiary. It’s called an assignment of beneficial interest.
You as the trustee being in control, you can go ahead and sell the property. It depends on the institution, but I prefer to go ahead and just have the land trust sell the property. I don’t see any negative aspects of it.
What we do not want to do when we sell property is have what we call turn of title. We don’t want a lot of people, individuals, or companies on the title because it can spook the buyer. But from a tax aspect, any problems or any benefits you see with a land trust, Jeff?
Jeff: No. It’s actually invisible to us. I will say one thing when you’re talking about turning of the title. I know that FHA avoids certain loans that they see were recently purchased and then sold again. They avoid it like the plague, so you might be hurting your own market by turning that tide.
Michael: Yeah. Again, please ask us these questions and let’s get into your specific circumstance before we go too far down. I am always sad when it comes down to a client at closing or about to close and they’ve done something. Now we have to figure out how to undo it and time is of the essence, Whether it’s a personal property they’re trying to sell, an investment property, a business, a quick turn or a flip, we really have to be careful with that.
“What is the best entity to do wholesaling?” I really like doing wholesaling out of an LLC that’s disregarded down to a corporation. We do have a wholesale trust that we can use. Every situation is a little bit different and it varies state by state, too, so we have to be aware of those states. We want to use a land trust or a wholesale trust as opposed to an LLC, but here’s the big one.
I’m going to tease you and I’ll have Jeff really go into detail. The reason I want at least the taxpaying entity being a corporation is to avoid what we call dealer status, where you’re going in and you’re actively dealing in real estate because of the negative aspects of that from losing the ability to 1031 exchanges, everything’s taxed as earned active income. There’s about five negative ramifications if you’re taxed as a dealer. Are you in alignment with that Jeff?
Jeff: Yeah, I am. I prefer, like you said, the corporation or the LLC disregarded to the corporation. How do you feel about having an LLC if you’re doing a wholesale for each wholesale? Is that overkill?
Michael: That’s awesome. I love that you said that. Here’s my problem. A lot of people say you’re just wholesaling paper. Wait until one of those deals go bad and you can’t get the end buyer, the person that you’re moving that paper or contract to. They’re not closing, you’ve got 4–5 wholesales inside of that LLC, and you’re liable because you’re breaking the contract. You can’t get specific performance, you don’t have the money. There are damages that the seller is going to come after you for and then you got three or four wholesale deals. It can just be a nightmare.
Again, we only need to take a look at it and make sure that we’re not setting ourselves up for failure. If we have to say something in the vacuum, I like the fact that we would go ahead and do each wholesale. We don’t know what the problem of the property is. I know you’re just turning a contract, but maybe we do a combination of a wholesale trust and an LLC. Again, the biggest thing I want to happen is it goes to the corporation.
The LLC is disregarded or will be owned by the corporation and that’s the ultimate tax-paying identity because I don’t want you guys to be taxed as dealers. The other thing we lose—I’m going to give you a couple—1031, earn active income. They are the things we lose, the benefits of an installment sale, where if you get taxed as a dealer, you flip a property and take a note back on it, you have to pay the total profit right away as opposed to as you earn it over time with an installment sale.
Jeff: If you wholesale a property and it turns into an EPA supersite, everybody is getting sued. Your dog is getting sued.
Michael: Oh, my gosh. That’s one of those things. black […] is the other one. If something comes up or that, if you have things on your name, you might as well go ahead and be like, all right, I’m losing everything. So separate it out. Absolutely those super fun sides with it. Any sort of black mold. Environmental contamination is just deadly for a […].
This is my favorite question that we’re going to get into because I think Jeff and I are very congruent in the way we think. This question, “If we just have one duplex investment property, would TurboTax be good enough, or is a CPA needed to get more benefits?” Jeff, you’re probably jaded with this question, but let’s hear your opinion on this. I’m going to love this.
Jeff: I’ll tell you upfront. TurboTax is definitely good enough to do that, do the taxes for this property. But the real question is, are you, the individual, good enough to use TurboTax properly to get all the benefits that you should be?
This really comes down to the same question we have even for bookkeeping clients, clients that want to do their own bookkeeping. That might not be the best bet for them, they’re not good at it, they’re not good at that side and it’s better for them to hire somebody to do it.
TurboTax is a good software. It’s probably the most self-prepared software in use. We use some higher-end software, of course, but if you’re going to be doing your own taxes, I’m going to tell you really need to keep up on tax laws at least for that specific area that your investment is in.
Michael: Yeah, TurboTax (I believe) has a time and a place, or at least a segment that is good. People with situations where W-2 and that’s all they have. They have nothing else going into it. There’s very little that a tax professional can do for a person who just has straight W-2 income.
That’s not our clientele. That’s not the people who have taken time out to be on this podcast or that want to improve. I would say that once you start getting into other investments, other ventures, you start outgrowing TurboTax.
Jeff: Yeah, and here’s a problem with TurboTax, even if you are keeping it up. TurboTax is really good about asking you the right questions but you still need to know how to answer the questions whether it’s your share, personal use, or depreciation […], things like that. It tries to help you out a lot but like they say, garbage in, garbage out.
Michael: Yeah, and it’s a computer program. Again, if you’re not sure of how you should answer it, yeah they’ve got a support line (I believe), but I get nervous. Again, if all you have is a W-2 income. The other problem is even with TurboTax, you want an accounting firm that’s actually going to do tax planning.
What happens right now, if you’ve got a W-2 job but you’re getting into a business, getting into real estate, getting into stock investing, what kind of things you need to do to make sure you have the proper foundation going forward? We get this question quite a bit and it ties to our previous question when you set up that corporation.
If you set up the corporation, you are able to go ahead and capture all the expenses that you’re spending on getting that business going. One thing I like about getting that corporation into effect as soon as possible is you’re not limited to the pre-incorporation organization expenses of $5000 and amortizing the rest over 15 years. Once you get that corporation, you’re logging those expenses in my opinion.
Jeff: TurboTax isn’t going to advise you on whether or not you should be a real estate professional or qualify for it, or cost segregation and things of that nature. That’s some of the reasons you want to have a CPA or any good accountant. I’m not going to just say the CPAs. There are plenty of good accountants out there.
Michael: Sure. One thing that you really want to find is a firm that’s doing what you’re doing. […] everything in life, I don’t want to be the test case or the learning example for a professional. I think business taxes should be done by a business accountant. They ran through it. They’ve got the experience. They know what to look for.
Speaking of which, another thing a lot of our clients are doing is investing in real estate. This one is, “How do we report a sale of a rental that is owned by our 401(k) and I imagine 30% by our 401(k) and 70% by us?”
Jeff: We’re seeing this with IRAs also and other types of qualified pension plans. This is a case that hopefully you’re reporting the rental income on losses through a partnership tax return. The 401(k) is getting a Schedule K-1 as you are. Now the 401(k) is going to get that Schedule K-1 and just put it in the file cabinet.
They don’t have to do anything further with that unless they have to file Form 5500. If you have a solo 401(k), you probably know what that Form 5500 is about.
Michael: That’s because obviously there’s no realization of profit and losses.
Jeff: Right, because that 401(k) is basically an exempt organization.
Michael: Correct. I just want to make sure that our listeners were aware of that. Maybe for our future Tax Tuesday, we can get into pros and cons of tax-deferred accounts, things like that. Even the 70% will just be […] to the individuals, right?
Jeff: Right. So when you sold those properties, you would do a sale just as if the 30% is owned by somebody else and report it that way.
Michael: And there are some things that we can do with the way that’s set up. Again, that’s one of the strategies that we cover throughout our educational side. If you’re not familiar with Anderson, our first entry is the Tax and Asset Protection. It’ll give you a great foundation. Then, we have what we call Structure Implementation Workshop that’s actually based on my book, How to Run your Business Effectively. Now that I got it, what do I do with it and how do I do corporate maintenance and things like that. Dummy that down where a lot of people think corporate maintenance is really tedious and it’s time-consuming but it’s not.
After that we want to get you into what we call Tax-Wise where Toby Mathis and a few of our accounting professionals teach tax strategies. We can’t do it this year, but we like to get you in what we call The Executive Retreat which is a fun time with higher-end investors. We all get together and synergize. Then there’s a nonprofit. There’s a great way to decrease your tax liability.
“What tax strategies should a startup real estate investor be aware of and plan ahead of time?” I feel like we’ve touched on this a little, Jeff, in effect that we got to go ahead and do bookkeeping. We got to make sure we’re getting every expense that we’ve spent money on getting this business going. We got to log it, right?
Jeff: Correct. You need to keep a log. You need to keep good books and records. I’ll tell you Michael, I find a lot of times I’m seeing clients that maybe have all their tax planning done, but they haven’t really done any planning for their actual purchase of real estate. They haven’t done their homework.
Some are making bad purchases. Some are not making any purchases. I think as part of the startup, part of your tax plan is going to be how you go about this, what funds you’re going to allocate to it, and just a whole projection of where you intend to wind up.
Michael: Yeah. I’ve seen so many individuals here that just need an LLC to invest in real estate. It’s a blanket statement and I think there’s a lot of research you can do on it that will tell you that, but the problem is depending on your situation, I can see you investing on real estate with a C Corporation and some instances and an S Corporation in some instances, Disregarded LLC in some instances.
Again, those are the types of questions that we go over the situations and the Tax and AP, but those are also the types of situations we like to go over with our clients and make sure that they are setting their foundations up right.
The people who are at this conference, you guys are learning what you can write off, what you can’t write off. There are just a […] of things when you get into real estate and business. Again, it’s a business tax code. You’re earning it. You’re spending it and you get taxed on what’s left over. You really need to be aware of what you can actually write off. It’s kind of a deduction.
Jeff: And there are different answers on your intent. Are you renting long-term? Are you Airbnb-ing? Are you flipping properties? Or maybe some combination of that. So, your answers really depend on what your plan is.
Michael: I love the slide that Clint Coons actually photoshopped my face in. The people who have already taken Tax and Asset Protection know it. It’s a bunch of men in swimsuits (and they’re not flattering swimsuits) and it says, “One size does not fit all.”
Everybody is different. One of the things that we do with our clients is we get them in with a senior strategist and we go through the specific situation and create a customized (what we call a) blueprint, and that’s going to be our guiding light. Again, it’s individual-based.
Jeff, I’m having fun. You are right to teach […].
Jeff: I try.
Michael: You know what? I might try to edge Toby out of this and take this over, I tell you. I might be able to get one here and there, but he loves taxes more than I do and probably double what you do. You and I talked about this earlier. “I have an S Corporation. When I pay myself, am I responsible for payroll taxes?”
Jeff: If you’re paying yourself, I’m assuming you’re talking about some kind of compensation, salary, or wages, and you’re actually an employee of the S Corporation. If you’re doing any kind of payroll, payroll is going to be withheld from you just like it would be from any other employee.
The S Corporation is going to pick up their share of FICO, […] taxes, medical taxes. They will also probably have to pay for unemployment. They might also pay some kind of worker compensation. The S Corporation will actually pick up those expenses.
One thing I want to bring up is since we’re talking about payroll and S Corporations, if you have a health insurance policy through your S Corporation, the S Corporation needs to be paying that, not you. By doing that, they’re also going to add that income to the W-2. This will result in a deduction for the health insurance on your 1040, but you got to make sure you’re doing it the right way. If you have a payroll service, please talk to them about that and they will walk you through that.
Michael: When you have an S Corporation, I go in to probably 45 minutes on the determination of it. Interestingly enough—correct me if I’m wrong—the IRS gives us enough guidance to hang ourselves with. They deem it as a reasonable salary, it must be a reasonable salary?
Jeff: Yeah. Toby usually says you have to be making a profit for their salary to be required and making distributions. Toby usually recommends 30% of total paid out be salary. At least 30%.
Michael: I’ve heard 40%–50% from the other tax professionals also. I almost think you searched on the internet, salary.com, or somewhere like that, and see what people in your same experience like the time, location, making, or maybe pay for your file that way.
Funny story. I know we were running out of time, but I was actually in Dallas, Texas. I was teaching in a two-day event. I was by myself. I was teaching business owners how to run their businesses more effectively. I was in a restaurant. All of a sudden, a bunch of people from the same organization came in—this was years ago—I found out that they were all from the IRS.
This is one of those questions that I asked the agents. I said how do you figure out what a reasonable salary is in an S Corp? I’ll be damned, Jeff. Three out of four people said I didn’t know what I was talking about.
The funny part is that—that’s shocking—I said if you don’t know the answer, how do you get the answer? What do you do? They said we just put the caller into the queue. This was one of the interesting things that the IRS doesn’t even have a real firm grasp on.
Jeff: Yeah. I assumed when I was at the IRS, you could ask three agents the same question and get four different answers. It’s true. The reasonable salary is so subjective. There’s no objective way to calculate it.
Michael: Yeah. I just like having my file paper. From a litigation standpoint, show how I came up with what I did and why I did it. I just didn’t quickly put something together. If any sort of scrutiny, I like to have that file papered. It shows exactly how I came up with it. I just didn’t pull it out of thin air or that I wasn’t trying to cheat the system.
I’m going to touch on this really quickly; we can move off of it. “How do I set up a manager-managed LLC to protect the member-managed LLC I’ve had since 2013?” This is an interesting one because this ties back into having a holding LLC which is one of the things we want you guys to do.
What we want to do is have the privacy aspects. Again, if this is your question, please attend a conference on Saturday. What we want to do is, we want to first, you already have the LLC set up. We want to disregard it and make the member a Nevada or Wyoming Holding LLC. That’s how we’re going to do it.
Sometimes we want to look a little bit deeper. There are ways we can get your name out of the public record. We can make it look like you weren’t tied into it at all. It takes a long time to go into details. Basically, what we want to do is just set it up as a disregarded entity down to a holding LLC.
All right. Congratulations to the individual who sold their business and made $100,000 profit on that. Now, Jeff, I like the way that the thought pattern for this question. This is Tax-Wise. You started looking at all the available tools. This individual says, “Can I invest in real estate and offset it with some of the juicy tax benefits of owning real estate?” I know you’re going to have to get into some technical stuff with this, but go ahead.
Jeff: The way your individual tax returns work is most income, whether it’s capital gains, passive losses, interest, dividends, […], wages, certain losses can offset other income. Can you invest in real estate and offset it with depreciation, you said credit. It’s actually a depreciation expense and we’ll talk later why that makes a difference.
A couple of issues with this is the best way to buy real estate is you do cost segregation and you’ll get a lot more depreciation in that first year, that initial year. It basically accelerates it all to the front-end.
Now, the only problem with that is the losses from real estate are limited. They’re normally limited to $25,000 unless your AGI goes over $100,000. Then, it phases out over the next $50,000. If you’re making $150,000, you’re not going to be able to take any real estate losses unless you become a real estate professional. There are certain tests that you need to meet.
If you and your spouse are working full-time jobs, it makes it very difficult to be a real estate professional. However, if one of you is not employed, it can be very easy to become that real estate professional, take that larger expenses, and help offset some of those capital gains.
Michael: You just got to keep a log to make sure your belt suspenders are […], right?
Jeff: Correct. Got to keep a log. It’s one of those several things that you got to keep logs of. The capital gains thing is how much of that capital gain is actually going to be taxed and in what rates. It could be with the additional […] tax. It could be 23.9%. It could be much lower, 10% or 0%. That’s a calculation we need to do before we start worrying about how we offset that.
Michael: It keeps bringing me back to, please contact us before you go and sell your business. Do you sell the assets? Do you sell the business? There’s a lot of ways from a Tax-Wise standpoint you can structure it to normalize that tax liability.
Jeff: And I meant to mention since you’re selling the business, it’s probably a long-term capital gain. It’s going to be in that lower tax rate rather than your ordinary income rates. That’s something we need to look at.
Just keep in mind, any real estate that you purchase and put into service needs to be done definitely before the year ends if you’re going to have cost segregation. If you don’t do the cost segregation, the closer you get to the year-end, the less depreciation you’re going to have to work with.
Michael: I love it. A lot of stuff goes into tax planning. Your department does an excellent job in tax planning.
Jeff: Yeah. TurboTax doesn’t tell you some of this stuff.
Michael: No but they’ll tell you that you owe $100,000 in […] where you might only owe $50,000. […]. I like that.
Here’s one. There are varying opinions on the efficacy of a 529 plan. However, I think it’s a great savings plan if you need a forced savings plan. You can set it up. Sometimes, with investments, you get better returns in other ways.
I’m setting up for my son. Toby doesn’t like them. I like them just because they’re forced. Just put it over there and I forget it’s there. Hopefully, my son and my soon-to-be-daughter will have their college paid for. I guess I just like paying for it over time.
The question, “Can I use my 529 to pay for room and board if I own my house with a mortgage?” I guess we need to assume, Jeff, that basically they want to pay themselves out of the 529 plan.
Jeff: Yeah, you can do that. I don’t know if it’s you going to school or maybe one of your children. I don’t think that really matters. You can pay room and board to yourself out of the 529 plan. However, it cannot exceed the amount of room and board that the person attending who’d have charge.
Michael: What? It takes all the fun out of it.
Jeff: The other thing is if your child is just starting school, maybe they end up wanting to go to graduate school or whatever, this is one of those expenses where I’m just paying myself back with my own money. I’m not sure that I wanted to necessarily do that unless I’m close to the end and I just needed to get the money out of the plan.
Michael: Yeah. All of these questions are lovely. These are all Tax-Wise questions. “How do we go ahead, use these, and benefit us?” I did the other question from Sherry. She said, soon-to-be daughter. Yeah, like I’ve mentioned before, my wife and I have decided that one wasn’t enough. Yup, they have a baby girl. Like I’ve said in the next week, I was thinking, maybe she would come during this conference but it looks like we’re going to be able to get through it, which I’m glad. I’m having a good time with you, Jeff. Who said accountants are boring?
Jeff: I’ve been with some really boring ones.
Michael: I bet they’re better than most attorneys out there.
Jeff: I said terrible things about attorneys, but the guys I worked with are all good guys.
Michael: That’s right. It’s funny, myself, Toby, and Clint. We always get honest looks when we say we hate attorneys, but we really do. Oh my goodness. There’s a few good ones out there.
“Is there a way to pre-plan and calculate the tax implications of the sale of residential rental property using depreciation recap?”
Jeff: Absolutely. It’s going to be based on a few factors. You already mentioned one, the depreciation previously taken. How much are we selling them for? What’s your basis in the property is to calculate that gain? Also, whether you know closing costs or can estimate those closing costs.
Then, we can get a very good idea of what the taxes are going to look like from that based on, say, how you did last year, what your income lined up for the last year so we can put you in the proper tax bracket for that sale.
Michael: Awesome. I love tax planning.
“I have a self storage business in Virginia. I am looking to expand and purchase another facility,” congratulations on being a successful business, by the way, “in Tennessee. What is the ideal structure I should use for this business and real estate investing?”
I’ve got somewhat of a picture here. We can use this for assisted living facilities, for veterinarian businesses, doctors, dentists. Why I like doing the active side of the business and the corporation is from the tax code. We get from a business standpoint, we get more deductions.
I also like having the actual locations owned in a separate LLC. What I basically outlined here is I want that corporation to lease the premise or have some sort of an arrangement. I want the actual physical locations owned by individual LLCs in the state where they’re at and also have them disregarded down to the Wyoming LLC for their charge and order protection. That’s the structure for self storage.
I like to look at it maybe even from a veterinarian or a dentist. A lot of my dentists, they buy their own building. Unfortunately, what they do is they go ahead and they put it in their own name. From a liability standpoint, someone slips, falls, trips, and gets hurt. Now, the entire practice is at risk.
Also, I like to be able to say why don’t you sell the practice—the active business—and retain the actual property? The locations? Because any new business owner, there’s going to be goodwill in those locations. You’re able to still lease it out and make money on that on your practice even though you sold the active side of the business. I just like it from a retirement standpoint. Any insight?
Jeff: Yeah. Tennessee has a quirk. They have the franchise and the excise tax. The franchise tax is 0.25% of the net worth of the company and the excise tax is 6.5% of the Tennessee taxable income. There is an exception to that, it’s called the FONCE (Family Owned Non-Corporate Entity) fee. It basically says that if the entity is at least owned 95% by family members, it will not be subject to the franchise and excise tax.
Again, this is one of those things that you can’t go about willy-nilly. You really need to plan on how you’re setting something like this up in order to save some money. I usually see people […] property in Tennessee that can’t be used for this exemption. They’re paying thousands of dollars a year to Tennessee.
Michael: Good catch on that, for sure. “Property aggregation. What is it and what are the reasons to do it or not to do it?”
Jeff: Property aggregation is primarily used with real estate professionals. Due to the rules for real estate professionals, you have to have so many hours of material participation in each property. It has to be more than half of all the other services you have.With that, you can only qualify one property as a real estate professional.
What property aggregation allows you to do is combine all of those properties so you don’t […] properties. You combine them into one activity. It’s still going to show up in your tax return as individual rentals, but they’re all treated for that material participation as a real estate professional as one activity. Actually, it’s an election you look at each and every year that you’re a real estate professional. It’s very important for that reason.
If you only have one property and you’re claiming a real estate professional—we have so many who have very expensive commercial property—they didn’t need to do the property aggregation. If you have multiple properties and want a real estate professional so you can deduct more on your personal return, then this aggregation is very important.
Michael: Absolutely. Especially (like you said) if they get that real estate professional and get those benefits from being a real estate professional. The difference between a tax deduction and a tax credit, everybody needs to understand this. A tax deduction, Jeff?
Jeff: A tax deduction reduces your taxable income. A tax credit reduces your actual tax. A quick example of that is the electric car. People are buying Teslas and they’ve got $7500 credit. That credit actually went against your tax. It was not a deduction from your income. It was a deduction from your tax.
Anything else like depreciation is an expense. It’s not a credit. There’s a number of credits. There’s the renewable energy credit, some different research. Research and development are kind of interesting because it can be either credit or an expense. It’s whatever you choose it to be.
Michael: Which do you like better?
Jeff: I like the credits.
Michael: Me too.
Jeff: About the only time I questioned it is when I ‘may not be able to use that credit in its entirely’ clause. You may have heard of non-refundable credits versus refundable credits. Non-refundable credit means if you don’t owe any tax, you don’t get that credit. It may be carried over, it may not. It depends on the specific credit. I do like credits and they usually work out fairly well.
Michael: I think the majority of the time, we have to be careful if we’re able to actually use it or not. Again, that’s tax planning.
I’ll go first but some of my favorite tax deductions as a business owner, as an investor, somebody who has a lifelong learning, I love the educational deductions. They’re through a corporation. I do like Section 105(b), medical care reimbursements. I get a lot of thank you notes when people, unfortunately, have medical expenses out of the blue. At least you could write it off as a corporate income.
The charitable deduction also. I think it should be stronger, but it is what it is. Number one, you’re doing charity. I like that the government partners with you on that. What are some of your favorite tax deductions?
Jeff: I do like the charitable deduction. Unfortunately, it’s not very effective on a corporation because the magic and deduct is so terribly low. But on an individual or on a pass-through, it’s more effective. I like the bonus depreciation that we’ve seen on the cost segregation. It gives us a lot more deductions. The reimbursement for expenses such as administrative office or from mileage, things of that nature that we’re not generating income from the individual. Also, for the corporate meetings in the home. I do like that one, too.
Michael: Yup. I love those ‘aha’ moments like in-person classes. You mentioned that you’re able to write-off your personal or your income from your corporations, if you write-off your personal residence for 14 days a year. People are saying that can’t be right. You don’t have to claim the income. What? You’re kidding me? I love that part of it. It’s one of my favorites too for sure, and not very well-known.
Jeff: No, not at all. There are certain expenses that just aren’t being handled right. The corporate office is a big one. People will rent out their home to their company and that’s such a bad idea when they could just reimburse it and have no tax consequences to them personally.
Michael: In the past, I believe you and Toby have gone over the whole office deduction, how to do it right, and how to get the most bang for the buck, right?
Jeff: Correct.
Michael: People should go ahead and review the past podcast. Or sign-up and attend your Tax & Asset Protection this Saturday. We’re going to be going over a majority, if not all of these, and more on the Tax & AP. Sign-up and attend it. We’re also rolling up to new products that we’re including into a package. It’s going to be pretty awesome.
Jeff, […] some of the questions you got in front of you. Any of these you want to cover really quickly?
Jeff: I don’t know, Michael. I’ve been concentrating so hard on what you’re talking about.
Michael: Let’s go a few. “What kind of documents do we need to do every year for LLCs?” I’ve adlib a little bit. Most states are going to require you to go ahead and file an annual report. Some states are perpetual, you don’t have to do it. You do have to pay a resident agent fee.
Why that is important is we want to go ahead and keep your address out of public record. Resident agents are there to accept service or process on behalf of the actual business itself. I see this all the time with other companies and other attorneys who set up businesses. They’ll go ahead and in order to save $150, they’ll list the individual’s address down there. Pay $150 a year. Amortize it over 12 months if it makes you feel better. Those are the types of fees, the annual report to the secretary of the state you’re in. Then, also go ahead and pay that resident agent fee so that you can keep your name out of public record.
Someone learned CORN from a past in-person event and they say, “Used it quite often.” I like that.
Jeff: Somebody asked, “Why do you like tax credits better than tax deductions?” A credit is worth the same amount to everybody. It doesn’t depend on what it’s worth. It doesn’t depend on your tax bracket or because it is a straight reduction of your taxes. That’s one reason I do like it better.
There’s one question. “Which states have a tax on LLCs somewhere in California?” California is—I’m going to use the word—most egregious and that they’re so expensive. There are other states. I know Kentucky has one that’s $175 and some of the states in the northeast have returns that have fees of $100–$200. New York has actually one of the cheaper ones. They’re like $25. The $800 is a lot of money, especially if you have multiple LLCs and you have to pay that every year.
Michael: I think it’s the cost of doing business. You’ll kick yourself if you don’t pay it and then get sued if you put all your eggs in one basket. No one likes paying insurance but it’s good to separate those out in a way. I’m what they call a frugal individual. There are some things we can do to manage that, some strategies that we can use to get around $800.
Here’s one. “Can the single-member LLC be re-characterized with the IRS as a partnership?” I thought this is a funny one, Jeff, because it does depend, right?
Jeff: The only way would be to re-characterized as a partnership is if it was no longer a single-member LLC.
Michael: You’ve got to have somebody else. Another entity or another individual joining in to be a partnership. Then, you do an 8832?
Jeff: It wouldn’t hurt to do that. I’m not sure that you’re required to do that because a partnership is more or less a default for an LLC with multiple members. Yeah, it’ll probably be a good idea to do that
Michael: Yeah, and just file a tax return as a partnership tax return.
Jeff: Somebody asked, “Can you roll an old 529 to an HSA or existing Roth?” No, because they’re actually different IRS codes. There are some exceptions in getting the 529 money out. One of the examples is the education was paid for by non-taxable scholarship. Then, you can pull the money out that wasn’t used. There are some other exceptions. It’s not penalized or taxed.
Michael: Got to make sure like-kind accounts, right?
Jeff: Correct.
Michael: You’ve got some kudos. Someone said, “I was there three years ago during TurboTax. Let me tell you, the answer is no.” We can say that until we’re blue in the face, but the big one is not learning from your own experience but learning from other people’s experience.
Jeff: Sure.
Michael: I was one of those kids. I didn’t want to burn my hand on the stove. If I saw my brother burn his hand, I don’t want to do that.
There’s a lot of great questions here.
Jeff: Yeah. These guys kill us every other Tuesday, Michael.
Michael: We’re going for an hour-and-a-half almost. This is going by super fast. It’s been a ton of fun.
“What’s the best approach to put my personal vehicle under my business? My wife is a realtor and has established an LLC as an S Corp. We have a C corporation established.” I’m going to say that when you do a cost-benefit analysis, do you drive it a lot or not? Do you own the vehicle? Do you just go and take a mileage reimbursement? These are all the questions that we really need to do to analyze going forward. No one size fits all.
Sometimes, it’s better just to take the mileage reimbursement. If you have a Tesla, you’re probably making money on a deal. Sometimes, it’s better to take the actual expense method. When we go over that again in the Tax & AP in depth.
Jeff: Here’s a question. “I have a rental property in a personal name. What kind of structure is needed? I have a mortgage with them.” The mortgage doesn’t matter so much anymore, correct, Michael? They pretty much told the banks that moving properties to an LLC is not going to affect the mortgage?
Michael: I’m finding more and more that the banks are adapting to it. Here’s my issue. Back in 2006, the banks were starting to be okay with it. Then, all of a sudden, they got skittish. Instead of moving a property directly from your name to the LLC. A lot of times we use the land trust. Just go ahead and put that in there just so as not to deal with it.
I’ve got two sets of clients. One set of clients, we look at what kind of transfer fees are going to be on the county level. Some of my clients say I’m going to take directly from my name. Deed it into the name of the LLC. Other clients say, because of the chance that the bank might give us a hassle, let’s go ahead and use that revocable land trust. In all 50 states, we can use them. Just a revocable trust. Sometimes we get in trouble because people don’t understand it, but if you just say it’s a revocable trust like your living trust, then they start to understand it a little bit better.
There’s a solution to this. Sometimes, it entails using a land trust. Sometimes, it entails just going and deeding the property into an LLC. The fact that we need to look at are transfer taxes, due on sale. We also want to look at the privacy issue. With the land trust, we’re able to go ahead and keep our name out of public record. Bring a recovering litigation attorney. Keeping your name out of the public record is pretty important.
Jeff: I agree with that, Michael. Having anything like a rental property in your personal name is fraught with danger. You have to get some kind of liability protection and insurance. Even an umbrella policy is not going to do it for you. You basically have this hostile property that’s subject to a lawsuit in bed with all your other assets.
Michael: I’ve just got another hello from Crystal. Hey, Crystal! She’s been a client for 15 years at least. Oh my gosh. So great to see everybody here. I love it. It’s like a family reunion for me here.
Guys, consider signing up for that Tax & AP. I encourage everybody to attend it. I created the presentation for it. I know it’s going to be in it, it’s going to be of value. Also, I know Carl is presenting. We synergize really well. The people who are attracted to Anderson are a different type of person and are a different type of business people. They want to advance their life. They want to sacrifice for a better future, so we give you the tools to do that.
Please attend it. I’m giving everyone a free entrance into this. We know you guys are the ones […] to save for an investment. You guys have sacrificed for a better future for you and your family. We really want to show you how to protect it, not only from lawsuits but also taxes, and be able to pass it down for the future generations or at least somewhere where you designate it, not the government.
It’s been my pleasure to join Jeff. Personally, I want to wish you guys the best of success in all you do. Please get a hold of us if there’s something we can do for you. We’re looking forward to seeing a lot of you guys on the Tax & AP event on Saturday. Jeff, any parting words?
Jeff: Nope. I’ll see everybody in two weeks.
Michael: What? Are you taking them all to Hawaii?
Jeff: By the way, I won the lottery. This is my last two weeks. Just kidding.
Michael: That’s fantastic.
Jeff: I couldn’t quit.
Michael: That’s right. Awesome, guys. Please join us on Saturday. If you have questions, in particular, if you need some planning, join our Platinum division and sign-up for a […] session.
Guys, great being with you tonight. Hopefully everyone has a great evening. Thanks, guys.
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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