It’s never a good idea to gift things to somebody. Instead, make them work for it. Take care of yourself, your family, and your taxes. Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- How do I gift my son a fully depreciated rental property without causing a tax consequence? Typically, gifts do not cause tax consequences; however, it is not always wise to do so
- We are considering purchasing a vehicle, which will be used about probably 75% of the time for our real estate business. Should we purchase it in the LLC (an S Corp) or personally? What are the advantages and disadvantages of both? Consider liability, tax consequences, cost factor, and value of vehicle; unless it’s a maintenance or utility vehicle, put it in your personal name and get reimbursed for the mileage because commercial insurance is much more expensive
- Excluding the 1031 Exchange, is there any way to legally avoid paying depreciation recapture tax when you sell a rental property? Don’t have a gain on your sale
- I have several vendors refusing to give me their W-9, and I have to threaten to withhold payments. When should I collect and not collect W-9? Vendors need to complete the W-9, but you are not required to issue them 1099s—although you should anyway
- Can we sell our home on an installment sale to an Intentionally Defective Grantor Trust (IDGT) and then lease it back? And at the same time, have the depreciation and other costs flow to our return because of IDGT taxation rules? IDGT is an irrevocable trust that is not actually irrevocable because of adding ‘Grantor’ wording to make it intentionally defective for tax purposes
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Resources:
Real Estate Professional Requirements
Intentionally Defective Grantor Trust (IDGT)
Unrelated Business Income Tax (UBIT)
Solar Investment Tax Credit (ITC)
Taxpayer Certainty and Disaster Tax Relief Act of 2020
Rollovers as Business Start-Ups (ROBS)
Anderson Advisors Tax and Asset Protection Workshop
Anderson Advisors Tax-Wise Workshop
Anderson Advisors Infinity Investing
Full Episode Transcript:
Toby: All right, guys. Let’s see if everybody’s out there. This is Toby Mathis.
Jeff: And Jeff Webb.
Toby: You’re listening to Tax Tuesday. I’m messing around with my computer as I like to do. It’s actually my pastime—messing around with computers. How’s Jeff doing?
Jeff: Jeff’s doing okay.
Toby: Let’s make sure everybody can hear out there. If you can hear us, say, yay, I can hear you loud and clear. Somebody says, “Can you hear us?” Ms. Patty, let’s see. “Yes.” We have some people coming in.
Tell me where you’re from and where you’re sitting right now. I’ll rephrase that. Tell me where you’re sitting right now. Are you in an ice storm in the middle of Dallas or Houston? Somebody says, “Ice cold Kansas City.” Tell me where you’re at. Let’s see. Irvine, Fort Worth, Palm Springs, Cedar Rapids, Orange County, Atlanta, Big Island. Oh, they’re going fast now. Kapolei, Lynnwood, Washington, […], New Mexico, Maryland, sitting in my home office in Maui—everybody hates you now. Durango, Colorado, Boston. Nobody hates anybody for living in Hawaii.
Jeff: But the people in Texas may be jealous right now.
Toby: They might be. Minneapolis, Minnesota—with a negative windchill probably, Michigan, […], Phoenix, City of Angels, Georgia, Chicago, Illinois. Fantastic.
Jeff: My son said the wind chill in San Antonio was 7 degrees this morning.
Toby: Seven, New Haven, Connecticut. I hope everybody’s okay down there. I really worry about folks when they have to reluctantly go out. That’s no fun. Southeast Texas looking at the snow out the window. We had snow here in Vegas about two weeks ago.
Jeff: Yes, we did.
Toby: It’s like mother nature’s very fickle. New Jersey, Edison. We have people from all over the place. Let’s just dive right on in.
Taxes, taxes, taxes. If you’re in the United States, then this is relevant to you. If you have investments here in the United States, this is relevant to you.
Use the Q&A feature in Zoom. Don’t use the chat to ask questions. Ask questions in the question and answer. Comments—you can throw on the chat, but just know we have hundreds of people on, and they’ll oftentimes get buried.
Jeff: Yeah, they fly by pretty quick.
Toby: We want to be able to see what’s going on, so if you have a question, just pop it in there. We have folks on to answer. Who do we have on today, by the way? Hey Patty, unmute yourself and tell me who’s on because I can’t see everybody.
Patty: We have Piao, Eliot, Susan, Tabia, Christos.
Toby: Wow, you guys have a bunch of accountants on, bookkeepers. You guys have the power there so make sure that you ask your question. This is a good day to do it. This is one of the few times—I’m looking at the numbers—where we’re not blowing it off the rail. We’re in the hundreds, but it’s not the upper hundreds, if you know what I mean.
Let’s jump on in. If you do have questions that are longer questions, by all means, I’ll go back. Put it into the email to taxtuesday@andersonadvisors. We get hundreds of those a week, we go through them. You should be getting answers. If you don’t, just let me know. This is supposed to be fast, fun, and educational. We try to shoot for an hour. If Jeff would just stop talking, we’d actually get done in an hour. It’s like a Chatty Cathy. I’m trying to make him stop. I’m just kidding. We’ve never finished at an hour, did we?
Jeff: Yeah, but you weren’t here that day.
Toby: Yeah. It’s probably somebody else.
Somebody says, “I had a terrible time getting linked for the call.” I think Zoom’s doing evil things today, so it’s been a little wonky. Everybody’s online apparently. Somebody says, “Good one.” They’re rooting for you, man. Let’s go over the opening questions.
“How do you gift your son a fully depreciated rental property without causing a tax consequence?” I want a friend like that.
“I have a home and a second home in different states—neither are rentals. One of the largest unrealized gains is in a high tax state but isn’t my primary residence. How am I to exchange that for a new home in another state without having it as my primary residence for two of the last five years and avoid a big hit when selling it?”
Again, I take these almost verbatim right out. Every now and again, I’ll do an edit. When I read it, I’m like, oh, that’s an interesting question, let’s grab it.
“I have an LLC created in New York state in 2013 that I used to run my books business.” A bookie?
Jeff: That’s one of the things I thought about.
Toby: “However, I am now pivoting to a web design business. In order to keep my business straight, should I create a DBA specifically for the web design business or should I just open a new LLC?” We’re going to answer that too.
“We are considering purchasing a vehicle, which will be used probably 75% of the time for our real estate business, is it advisable to purchase in the LLC that’s taxed as an S-Corp or personally? Advantages or disadvantages of both?” It sounds like a Jeff special. We’ll go through that. Jeff just gives me the look.
“Excluding the 1031 exchange, is there any way to legally avoid paying depreciation recapture tax when you sell a property?” I love the fact that you said legally avoid it.
“My question is when to collect and when not to collect W-9? In particular, I have several vendors refusing to give me their W-9, and I have to threaten to withhold payments.” There was a follow-up on this one. They said they were corporations. I didn’t put that in because it’d just get long.
“Can we sell our home on an installment sale to an IDGT and then lease it back?” That stands for an intentionally defective grantor trust. “At the same time, have the depreciation and other cost flow to our return because of IDGT taxation rules?” That’s an interesting one. We’re going to play with that.
“If I purchase a four-plex using an FHA loan and live in one of the units two of the five years, how are the capital gains taxes calculated when I sell the property? Is Section 121 exclusion valid for the entire $250,000?” We’ll get into that.
“If I invest my self-directed IRA, SDIRA funds in a private company that is structured as a C-Corp and they provide a Form 1099-Miscellaneous (not a 1099-INT or a 1099-DIV) for my earnings, will my SDIRA be subject to UBIT?” Which is an unrelated business income tax. We’ll answer that. I love all the little SDIRA, UBIT, IDGTs, CRATs, and GRATs.
“Can you explain the conservation easement and its benefits?” Absolutely. We’ll get to that.
“I have two entities traded with assets in each one on them.” I grab these and I don’t look at them again. “Do I need to file two separate taxes, or combine them into one filing?”
“Can we depreciate the solar system plus take the 26% tax credit?”
We have some good questions today. Are you ready?
Jeff: Yeah. I am ready.
Toby: Jeff is going to answer every question today. I’m going to sit duly by and just go like this a lot.
“How do you gift your son a fully depreciated rental property without causing a tax consequence?
Jeff: Gifts in themselves normally do not cause tax consequences. By gift, a fully depreciated building to you, Toby, it’s going to be at fair market value that will go against my lifetime estate credit, but it’s typically not going to cause any kind of tax.
On your son’s side, he’s going to take it in on your basis, which sounds like it’s going to be zero. He won’t be able to take any depreciation on the property that’s already been fully depreciated. Pretty simple.
Toby: Let’s think about this. I like to make things complicated.
Jeff: I know you do.
Toby: First off, Jeff’s absolutely 100% correct. The estate tax exclusion is sitting this year at $11.7 million. That’s the same for the gift tax exclusion. A lot of people think I can give $15,000 a year. You can give more than that, but then you have to file a gift tax return. What’s that return?
Jeff: The gift tax return is 709.
Toby: You have to let the IRS know, I’m using up some of my exclusion during my lifetime. I could give an $11.7 million property. If I’m married, I could give a $23.4 million property with no tax consequences to my kid for federal tax purposes. We still have to worry about the state. I don’t think there’s ever going to be a situation where there’s a state tax. Although you may cause a reassessment, especially now as of today in California, you’d cause a reassessment. And there are other places where it might.
Jeff: What about transfer tax in some of these states, is that going to be triggered?
Toby: We’re going to have to look at it. Washington state might be $2 million and some of these others. You have to be aware of it. I don’t think you’re going to get into it too much when you’re doing a gift. But again, every state is a little different so check with your local. Have us look at it.
You can definitely give it to your son, but the question is should you? Number one, if you have to use it, you’re going to have a little problem because your son could toss you. You got to make sure that it’s not a house that you need to stay in. I see that with parents. They’ll give it to kids. They won’t realize that the kid’s about to go through a nasty divorce, they’re being sued, or there’s something else that’s coming up.
Jeff: What I’d seen done sometimes with this with a rental property is we put it in an LLC and then give them—maybe over five years—a portion of that LLC until he eventually completely owns that LLC.
Toby: You could do it. I’ll give you guys a real-life example. I had some clients in Ohio. Their father had gifted interest of a building. I won’t get into all the specifics, but it was essentially the same situation. It was a commercial building, fully depreciated, very little basis. They were concerned that the estate tax exclusion was going to be reduced, so the accountant said, let’s give it to the kids. There were four or five kids and they spread it out. But the estate tax exclusion didn’t come back enforced—it was still a very large number.
All they did was manage to give an asset to the kids on their basis, and there was no step-up in basis when dad passed away. After the dad passes away, the kids go to sell it, and now they have a tax liability. If dad had done nothing, there wouldn’t have been an estate tax, there wouldn’t have been any sort of tax to the kids, they could’ve sold it, and its basis would have adjusted. It’s called a step-up in basis, and it is on the chopping block for the Biden administration.
They are talking about getting rid of it, but we never do anything until they actually do. This is a great example of why. The accountant was in fear, caused the client to spend some money to do a series of gifts that then caused these kids a better part of about 25% on all that gain from this property that’d been held for so long. It was a pretty nasty scenario. It’s like, ouch, oops.
It’s not can you without triggering a gift tax. To me, it’s, is it wise to do because what are you giving up when you do it? Well, you giving up control, giving up the step-up. What else are you giving up?
I’ve seen it enough where moms—it’s usually moms—and they’re giving it to their kids thinking that they want to transfer it before something happens. Mom ends up meeting assistants, kids don’t necessarily want to help. Now, all of a sudden, you have a house with somebody else on it.
Somebody says, “Oh, gosh. I’m not going to repeat that.” David, you’re being bad.
We have a follow-up. “What is their option?” Sandra, what I would do is I wouldn’t give it away. I would just hold onto it if ever I’m going to have a step-up in basis. The question is why were they giving the property away in the first place? It’s never really a good idea to gift things to somebody. If I wanted to give Jeff $15,000, I could do that. But it’s much better to have Jeff work for an organization and earn the $15,000 because at least I get a deduction for it.
“How do you give it to your son so they get the step-up?” You give it to them in a living trust so that the trust owns it. When the original grantor passes, the successor beneficiary might be the child, it can be descendants, or it can be any number. Whoever you’re leaving, you’d get an automatic step-up on that time, and then you’d avoid probate as well.
“I have a home and a second home—I have two homes. There’s one with the biggest unrealized gain. It’s in a high tax state, but it isn’t my primary residence.” They’re starting to sweat it. “How might I exchange that for a new home in another state without having it as my primary residence for two of the last five years to avoid the big tax hit when selling it?”
Jeff: There are several tests that the IRS looks at, and the biggie is where did you live the most? They’re going to count how many nights you spent in each home. There are secondary tests where they look at where your driver’s license is registered, where you’re registered to vote—those kinds of things—even what address you have on your tax returns.
It makes it very hard to just indiscriminately pick which house you want to be your primary residence. The best you could do is, I would say, live in them for another two years and live mostly at the more expensive house.
Toby: You could do that, and you could have more than one primary residence. In any particular year, you have to have one primary. And yeah, they’re looking at the factors.
What Jeff is saying is basically make sure that you meet that test. Then you would qualify under Section 121 to have the capital gains excluded up to $500,000 for a married couple, $250,000 for an individual.
However, if that is not something that is possible for you, then what I would do is I would make it into a rental property. I would rent it for at least six months, and then I would exchange it. I’d do a 1031 exchange into a new property that I would also rent for six months to a year to make sure that it qualifies as an investment property. Then I would take it out of service after that period of time, and I would use it however I feel like.
I’m going to have to give up about a year’s worth of use to save the taxes, or as Jeff says, you’re going to have to make it your primary residence. Something to think about. You can do this once every two years. What you may want to be doing is selling the first one, moving into the larger one, waiting two years after you moved into the larger one, buying another replacement from the first one, then two years later, do the same thing again. That would keep you from getting hit.
If you’re going to keep the first property that has the lowest amount of unrealized gain, you just want to make sure that you’re moving into it like Jeff said, and spending the majority of the time in that state—making sure that it qualifies as your primary residence. Listen to Jeff.
Question and answer. These guys are knocking out all the questions. You guys can absolutely ask a bunch.
Here’s one. “If I transfer my rental property into a land trust which will be owned by a single-member LLC—also the single-member LLC is under another holding company—are we going to be able to continue to depreciate the rental property as we did previously?” The answer is yes, it’s not going to matter.
It depends on how it’s taxed. If it’s a single-member but then it’s going into another holding, then what matters is how that holding company is taxed. If it’s a partnership or it’s just regarded as so, then it’s not going to make any difference. If it’s taxed as an S-Corp, it’s going to make a little difference. If it’s taxed as a C-Corp, it’s going to make a difference.
For land, it’s not going to make a difference to you. I can almost guarantee you. It sounds like you have a holding LLC that’s there to hold your real estate LLCs, 99.9% of the time—those partnerships are disregarded. You’d never have one. I shouldn’t say never. I have seen one where the holding was owned by a corp because the person did not want any assets in their name. It was weird. That was even a C-Corp. It kind of tripped me out.
“Can you rent out your second home and collect rent as well as have the deductions and depreciation?” Yeah. That’s the point. There are some benefits to it.
Somebody says, “Jeff is looking good with that beard.” Yes, he is. I’m keeping my distance from him. He’s a handsome man.
“I have an LLC created in New York state in 2013 that I used to run my books business. However, I am not pivoting to web design. In order to keep my business straight, should I create a DBA specifically for the web design business or should I just open a new LLC?” What do you think, Jeff?
Jeff: This has nothing to do with tax, but for liability reasons only, I’d open up a new LLC. I keep those businesses separated. You don’t want the first business affecting the second business.
Toby: That is a good point. How about from a tax standpoint, what do you think?
Jeff: From a tax standpoint, they could actually be inside the same entity. You’d have this LLC and this LLC which are owned by another entity.
Toby: First thing is, anybody that’s been on this for a while knows that we like to say LLCs are not a tax treatment. It’s an LLC, we don’t know how it’s taxed. You could be a C-Corp, S-Corp partnership, it could be a sole proprietorship. That’s number one. How is the LLC treated from a tax standpoint?
From a legal standpoint, it’s different. So the liability of the books business is separate from that individual. If we bring somebody into that business—what they’re saying is a DBA which is a fancy way of saying doing business. Doing business is just saying, hey, I’m operating under a different name. I could have ABC LLC doing business as Jeff’s Beard Products.
Jeff could say, you know what I’m going to do? Jeff’s books. Underneath that same exact entity, they’re all treated as one from a legal standpoint. If Jeff sells some bad beard product, their beard falls out, and they sue him, they could go after his books business.
Jeff’s right, we want to keep those isolated. If it’s treated as a C-Corp maybe and the books business didn’t really do too much—somebody says, “Jeff’s Beard Products LLC.” I’m going to start it. Let’s say that was a corporation—a C-Corp—I might be tempted to operate them in the same entity if and only if I have losses sitting in that same business.
Jeff: That’s a good point.
Toby: I might be looking at it going, shall we bring in some additional revenue because I might lose those losses? Unless you made a 1244 election with an S-Corp—if I have a basis, then I could probably take it. I might look at that. I’m also going to look at where your business is located.
Somebody says, “Zoom is being bad today.” I can tell that. Our numbers are getting jacked around.
I’m trying to think if there’s anything else I could think of.
Jeff: We’re in the DBA, its primary purpose is to let you advertise as something other than your legal name. In some places, it does give you a little bit of anonymity. If you’re in California, it gives you zero anonymity because you can look up the DBAs and see who owns them. Please don’t use the DBA for that type of legal protection.
Toby: It doesn’t give you any. It’s just telling somebody you could do a different name.
This is the one thing. If you are really paranoid or if you have multiple businesses and you have different brands, I’m going to tell you probably to break the brands off into their own LLCs or if it’s an S-Corporation—something called a QSUB. But if it’s just something where you’re a startup and you don’t want to go through the expense, then you do DBAs and you spin it.
But DBAs generally don’t have a designator. It doesn’t say LLC or Inc. Most times, it’s just going to be the name, so it might be ABC Inc. doing business as Jeff’s Beard Products, doing business as Jeff’s Books. It’s all one organization, one set of books, one tax return, all that good stuff. It just depends on what you’re doing.
“We are considering purchasing a vehicle, which we use 75% of the time for our real estate business. Is it advisable to purchase it in an LLC, which is taxed as an S-Corp,” yes, “or personally? The advantages or disadvantages of both?”
Jeff: This is somebody who’s listened to Tax Tuesday before.
Toby: We do make fun of anybody who says, hey, how are you taxed? I’m an LLC. Deep down inside, we’re laughing.
Jeff: My opinion is if you’re purchasing a vehicle for your real estate business—unless it’s something like a maintenance vehicle or some type of utility vehicle—I would leave it in my personal name and just get reimbursed for the mileage that you put on the vehicle.
You’re going to have to keep a log regardless of how you’re doing. But as you’ve pointed out, the commercial insurance for having it inside the LLC is much higher.
Toby: There are several considerations. Liability—you’re bringing that liability into that business. If you’re using it 75% of the time, maybe that’s worth it.
Number two, the tax consequences. There’s no free lunch. If a business owns an asset and provides it to an employee, there’s a good chance that it’s going to be taxable to the employee. In this particular case, it’s not 100% of the usage is the business. There might be income inclusion for 25% of the use by you of that vehicle, which will be treated as W-2 wages to that individual.
Then the cost factor. Number three, which is insurance is going to be arguably more expensive. Almost always, it’s considerably more expensive when I do a commercial policy versus an individual.
There’s a fourth one which really depends on the value of the vehicle. If I’m buying a G Wagon and I’m taking accelerated depreciation or something, it’s a heavy vehicle, and it qualifies over the 6000-pound gross vehicle weight, I could write that thing off now. But I can only write it off once. That’s the problem. If I write off a vehicle, I am done. I don’t get to write it off over and over again. I’m done with that vehicle.
But if I am reimbursing Jeff for his vehicle, it doesn’t matter if he’s driving a 1989 Chevy dually—that’s what I had—it’s still 57¢ a mile. Whether the thing’s worth $500 or $50,000, I could now reimburse and be pushing money into Jeff’s realm tax-free and non-reported for the mileage.
I generally look at these things a little differently. I see a lot of accountants pushing people to have their vehicles inside their entity. I’ve had clients, one was in a bank line going to the ATM, but they were in the drive-thru. They rolled forward and tapped somebody in front of them. It was a business van. The person said it was just a tap. They’re like, oh, no damage, don’t worry about it.
Until about 18 months later, they got served for the soft tissue injuries of the children in the back seat and they went after the business. Because of the business, their perception is that they have more insurance.
If that vehicle had not been a business vehicle, you would have probably not had much of anything or you can just walk away from it. But in this particular case, there was no way to disguise it. They had it on the side. But still, when somebody discovers that it’s a business vehicle, all of a sudden, it’s a very different animal than an individual.
You bring that liability squarely into the business as opposed to keeping it personal. I would never want you guys to do that. Plus, if somebody’s driving the business vehicle and they cause a major accident or cause death, the business is defending that. The presumption is going to be the liabilities there. You’re going to have to show that they weren’t authorized, they weren’t doing business, or whatnot. It gets sticky.
I prefer me, myself. I think it’s so much cleaner just to do reimbursements at the mileage rate. Just think about it. If I’m doing 10,000 miles a year, that’s $5700 that I can give to myself that I don’t have to report as taxable income, and then I get to write off. I get to do that every year regardless of what that vehicle is worth.
Asset Protection Workshop coming up. It’s coming up on February 27th. If you like this type of information, you want to learn about LLCs, corporations, pension plans, Solo 401(k)s, UBIT, qualified or unrelated debt-financed income. You want to know about land trust, living trust, how all these things work together to minimize exposure from a liability standpoint, to minimize your tax, and to create legacies—come to the Tax and Asset Protection Workshop. It’s absolutely free.
Clint and I are teaching this one. If you’ve never seen Clint—Jeff is a handsome man, and Clint is right there with him, except he looks like a Ken doll. Is that fair?
Jeff: That’s fair.
Toby: We’re having fun today. Zoom is wonky, it’s making me wonky. By all means, come on in there and register. It’s free and we’ll send you out the recording too. It’s fun.
Jeff: Did you give them the link?
Toby: Yeah. It’s right there. Somebody sent it out too. You guys can see them. I’m looking around there. Eliot is rocking it. Piao is rocking it. Tabia is rocking it. Patty is even there, she’s rocking it Susan is rocking it. Matt’s rocking it. You guys are just rocking it, so there’s nothing for me to answer.
“Excluding the 1031 exchange, is there any way to legally avoid paying depreciation recapture tax when you sell a rental property?”
Jeff: I have one way. Going back to the 1031 exchange, you do not get out of the depreciation recapture because you’re 1031 exchanging it. You still have to recapture. There’s only one way I know to avoid depreciation recapture, and that’s don’t have it again on your sale. Your recapture’s going to be limited to whatever your gain is and will never be higher than your gain. It’s a little hard to get out of.
Toby: There’s that. There’s no getting out of it, but if you want to defer it, you could always do an installment sale or do a qualified opportunity zone. If you want to avoid it entirely, transfer it to a charity and then sell it.
Jeff: With the qualified opportunity zone because it’s still taxable in that initial year. Does it get included under the qualified opportunity zone?
Toby: My understanding is that it does. I remember Clint, we were having the same conversation about capital gain, depreciation recapture, and how they’re treated. They’re treated all as one is my understanding. You could always look into it, though. But that’s still only going to defer it for five, six years now. Six years—it’s treated as though it’s sold on December 31st of 2026. You still have to pay for it. If you want to avoid it entirely, put it into an exempt organization.
You say, when you sell the property, what if you never do and you just die with it? Then you don’t have to worry about the depreciation recapture. The step-up takes care of that so just die. Somebody says, “Never sell, wait for step-up.”
If you have a relative that’s talking about selling their rental and you’re the beneficiary, just take care of them. But I want the step-up. Your Honor, I did it for step-up.
Jeff: I’ve been telling my mother that and she’s not being a team player.
Toby: Look at this pillow, you’re getting […]. That’s horrible. Do not joke about things like that. That’s horrible, Jeff.
Other than the 1031 exchange, you have very few options. Again, spread it out over time by doing an installment sale. Maybe defer it to the qualified opportunity zone—subject to a second opinion. We have to take a look at that. Don’t sell it, just die and step-up.
“When I inherit it at fair market value is the depreciation recaptured on?” Yeah, it’s gone. When you inherit it at fair market value, the whole thing steps up. You re-depreciate that. You get to write it off even though somebody didn’t pay any taxes on it. The best thing in this world is to inherit something from somebody who passed away.
Jeff: That goes back to the question about gifting the house to the son.
Toby: You’ll lose that.
Jeff: Yeah. If the son inherits it instead, he gets to start depreciating it all over again.
Toby: That was that group. It was four or five kids. The accountant was still their accountant. I’m trying to be nice, and I’m like, well, actually, there’s no way to avoid it. Why did they do it? Their concern for the estate tax. The estate tax is $5 million. I know, but there was a worry that it was going to go down. What? I’m sitting there like, oh, God, they’re going to figure out that the accountant was the one who told him to do it. It’s not a small amount of money.
Here’s the question. “My question is when to collect and when not to collect W-9s? In particular, I have several vendors refusing to give me their W-9 and I have to threaten to withhold payments.” The part that I cut out was these vendors are all corporations saying that they don’t have to.
Jeff: They’re incorrect about that. They still have to complete the W-9, but you’re not required to issue them 1099s.
Toby: But you better do it anyway. Here’s the thing. We’ve got dinged by this. We were 1 of the 50,000 companies that they did this massive 1099, W-2 audit on. They picked randomly 50,000 companies, and they went through every single 1099 and W-2 that we had. We had binders of this for them. They came in and it was like, sit down and enjoy yourself.
There were two vendors. One became number two on America’s Got Talent. It was a magician that we hired for a holiday party. And the other was a landscaping company that had gone out of business that was a corporation. They said that unless we could prove that they were a corporation, we had to pay the tax on them. We’re like how do I prove? You have to get a statement from them. You can look at the database, it’s right here. You have to get a signature from the owner. It was three years ago and they’re out of business. How am I going to get it?
It ended up being like $500. So we said, hey forget it. Let’s just do it. But make sure that you get that W-9 because that would have solidified it for us. So even when they tell us that, well, give me proof that you’re a corporation, please.
Jeff: So the best practice is before you even contract with them, get that W-9. Don’t place an order and then ask for the W-9 because you’re going to run into this exact issue. The second way around this is to pay for everything with credit cards. You do not have to issue 1099 for anything you pay with credit cards.
Toby: Collect it. Somebody says, “Leverage.” Lever them. Use the credit card, get the points.
Jeff: That’s a little stronger if you say, I’ll buy something from you if you could fill out this piece of paper.
Toby: Yeah, just fill that out.
“If I had someone who passed away, I believe they have me as a beneficiary of a living trust with real estate. Will I be taxed for the properties if I have not acquired the business as of yet?” The property taxes go with the properties. It’s not an individual thing, it’s going with the properties. They’ll just lean the properties if you don’t pay them. You’ll still be on the hook for it.
If you sell it, you won’t have any capital gains or depreciation recapture if it’s the same value, if it’s close to one use when they passed. You’re not gonna have to worry about that, but you do have to worry about the real estate taxes. There’s no way to avoid that even if you inherited it.
Somebody says, “I have a rental property in Indianapolis through a self-directed IRA out of Chicago. My permanent residence is in Rhode Island. Am I protected?” It depends on Rhode Island’s treatment of IRAs. The general answer is the individual is responsible for the real property that’s held in the IRA. The individual in the IRA is personally liable for the activities of the real estate.
Can they take the IRA from the individual if with liability? The answer is yes. In most situations, they’re going to be able to take away an IRA, which is why a lot of times you’re going to do an ERISA plan like a 401(k), and you’re going to shut that down.
And/or if you’re going to own real estate inside of a plan, our recommendation is that you put it in an LLC that is owned by the plan. Don’t just set up an LLC willy-nilly. It’s got to have a specific language in it to make sure it’s not a prohibited transaction. You can’t be authorized to make money as its manager. You need to make sure you’re specifically putting in language to disclaim that to make sure that you don’t inadvertently step on a rule that blows up your strategy.
I like owning real estate inside of retirement plans under certain circumstances. I was talking to some people today—really high-income folks—and they’re always looking at depreciation and all this stuff. And I said, well, I’d rather have the tax deduction this year. If I have a choice, if I put a dollar in a retirement plan, it saves me 37¢. I’m way out ahead. I’m already ready 37% ahead.
Now if I buy real estate, I’m okay not getting that depreciation. I’m like, hey, you know what? It’s okay. I’m not going to pay tax on it either. If I never need it, that’s even better. If I start taking the money back as an RMD, Required Minimum Distribution, when I’m 72. That on average is taxed at about 10%. It’s actually a really low amount, even for high-income people. By the time they retire, they’re taking it.
Somebody says, “My mom passed away a couple of years ago and she had two properties in her trust. I am a trustee and beneficiary. Both properties are paid off. Can I take the depreciation again?” The rental properties? Yeah.
All right. Hey, follow us on social media. If you’re not, go to YouTube, that’s a great one. Check us out on Facebook. I know we’re pretty active out there. I don’t even know how to use Instagram, I’ll be honest. I’ve seen it. My wife’s really good at it. The daughter’s awesome in all these things, and I suck at them. But Anderson’s good at them. So you could go, I’m sure it’s fantastic.
This is where we get to talk about IDGTs. I’ve been waiting to talk about IDGTs for years. “Can we sell our home on an installment sale to an IDGT and then lease it back? At the same time have the depreciation and other costs flow to our return because of the IDGT taxation rules?”
Jeff: So, like you said, IDGT stands for Intentionally Defective Grantor Trust. It’s an irrevocable trust that ain’t really into a revocable trust because you’ve put wording into it to make it a grantor trust.
Toby: For tax purposes.
Jeff: For tax purposes. For legal purposes, it isn’t.
Toby: The question is, it’s intentionally defective for what?
Jeff: For tax purposes.
Toby: Yes. It’s a grantor trust intentionally Defective.
Jeff: Here’s the problem with that, you can’t sell your home to yourself, which is just basically what would happen here.
Toby: It’s the old, can I have my cake and eat it too? No, you’re not allowed to. If you wanted to have the depreciation cost, then you have to also recognize fair market rents, which is going to offset the depreciation and cost. If I rented my house to Jeff and I said, oh I want the depreciation. Well, it’s just a deduction based on the usable life of the property and the assets therein, I break it down. What’s my benefit? Nothing. You can’t offset each other.
Jeff: And he mentions the IDGTs tax rules. What the problem of the IDGT is it’s the tax rules for whatever the individual is.
Toby: I put something into an irrevocable trust. I have two choices, is the trust going to pay tax on it, or am I going to pay tax as a grantor? If it’s an incomplete gift, if it’s an incomplete bequeathment or transfer, then it’s defective. Or if I put in language that it’s incomplete, I continue to act as its trustee, and things like that, then it’s just going to be taxed as though it’s ignored. An IDGT is a fancy way of saying ignore it for tax purposes, it’s there for asset protection.
You use an IDGT when you are for an asset protection trust is a good example. If you set up a Nevada Asset Protection Trust—a NAPT, which is also a DAPT, which is also a hybrid trust. All those really neat words are a fancy way of saying, hey, it’s in a safe. I control the safe. If I open up the safe, the IRS says it’s yours. Whether I put money in my safe or take it out, put it in my pocket, it’s still my money for IRS purposes. IDGT it’s just that—it’s just a safe.
Jeff: What about instead of doing it through an IDGT? I sell my primary residence to—no, that’s not gonna work either. I can’t sell my primary residence to my S Corporation and then rent it back to myself.
Toby: You wouldn’t rent it back to yourself.
Jeff: I’d have to rent it out through another party.
Toby: You know when you might do that? Jeff’s talking about selling your primary residence to an S-Corp, and when would you ever do that? Why would you ever do that? If I want to increase its basis and I want to take advantage of my 121 exclusion.
Let’s say I have a house that I paid $250,000 for, it’s worth $600,000. So I can sell it to my S Corporation and I would do it on an installment sale so the S Corporation doesn’t have to come up with all the cash. I’m married, so I would exclude up to $500,000 of capital gain. Since it was my primary residence, I don’t have recapture. Let’s say $250,000 to $600,000. What is that $450,000 or $350,000—I would exclude from my capital gains. I wouldn’t have any capital gains.
I would then have the S-Corp opt-out of the installment tax or sale rule and treat it all as taxable in year one, and since there’s no tax, who cares? It would continue to pay me overtime. But now that S Corp could depreciate it at $600,000.
I just gave it an additional $350,000 of depreciation, which is not a small amount. You could do that. If you followed that you get a star or you’re an accountant.
Jeff: Have you shown them your coffee cup?
Toby: It’s a good coffee. You guys probably can’t see it. With my bull? Patty made me this, guys. It’s one of my art drawings from one of our deals.
Jeff: One of your seminars?
Toby: Yeah, one of our live streams, and I drew a bull. It was either a cow or bull. It’s either horns or ears, but whatever the case. She’s so impressed with my drawing, and she made it into a coffee cup. It’s a bull. All right. Yes. I have my bull.
Jeff: I like this next question because it confuses a lot of people.
Toby: Okay. I’m confused about it. “If I purchase a fourplex using an FHA loan and live in one of the units,” so they have four units. “I’m living in one of the two of five years, how are the capital gains calculated when I sell the property? Is the 121 exclusion valid for the entire $250,000?”
Jeff: So when you do this—you bought the fourplex, you’re using 25% of it—you actually have two separate properties in one building. You have your rental properties—the other three apartments, and you have yours. What it comes down to is when you turn around and sell the properties—say $200,000 is their profit. You apply $50,000 in that profit to your personal residence, and the other $150,000 goes to the other three apartments. So, unfortunately, that $250,000 Section 121 exclusion only applies to the portion of the sale that goes with your residence.
Toby: Must have been lived in two of the last five years as your personal residence. If you want to knock out two of the units, live in one of the units for two years. Move to the next one, live in it for two years. Sell it you’d get half. Isn’t that neat? I don’t want to move anybody. I don’t want to move.
Jeff: I’ve had clients do in this case they used the 121 exclusion against their gain on the personal property and 1031 the rest of it.
Toby: Yup, and you’re allowed to do that. You could 1031 the whole property if you want it to. You move out of the unit, make it into a rental, use up as much of the 121 exclusion as you can, 1031 exchange the rest.
Where this really would come into play is if you were in a coastal city that had a huge appreciation. You bought a fourplex 20 years ago. Even living in one of the units, and you’ve been renting out the others. It’s gone up in value—$1,000,000. You know you’re going to get crushed in taxes because you’re going to recapture the depreciation, plus you have all that gain. This is where you could use the 121 exclusion to wipe out a bunch of this.
Let’s say it was $1 million of appreciation, 1/4 of that would be 250,000. So if you’re single, you don’t pay any tax on your gain and then you could 1031 exchange the other three units like Jeff said. And yes, you can and it works.
Jeff: What I like about when you have a really big gain on a property and you 1031 it, you can buy multiple less expensive properties that make it up. Then turn around and sell those off one by one just to start picking up the gain and bringing in the proceeds.
Toby: What Jeff is saying is, if I have one property that had $1 million and I rolled it into 10 properties, I can sell those onesie-twosies and recognize a little gain here, a little gain there. By the way, your capital gains are taxed as low as 0%.
People are always telling me, my capital gains are always 20%. No, it’s not. It’s 20% if you make a lot of money. If you’re over $500,000 or so. You’re married filing jointly, you’re at 20%. Otherwise, let’s keep it below that. You’re going to be taxed at 0%, 15%.
Again a strategy like that where you buy multiple properties and you’re going to take 1/10, I might not be paying much tax on that at all. I might be paying its effective tax rate of 7.5% or something, depending on what my taxes are. Which is why you hire good accountants, and you do the numbers before you sell it. After you sell it, it’s too late. We like to say, oh you could have done this. It’s our favorite thing in the world to do.
Jeff: It’s a really bad time to be asking questions afterward.
Toby: Could I have avoided the tax? Absolutely. But I didn’t, so what do I do now? You pay for it.
Jeff: You pay the tax.
Toby: But if I had a time machine we could go back. Somebody says, “Which would be better to safeguard cash assets, an IDGT or a Wyoming LLC?” They’re both really effective. An IDGT is a bazooka that’s never been fully tested. And because it’s a bazooka, nobody wants to get in the way of it.
There are very few cases on NAPTs, which I would end up using Nevada, or I would do a Wyoming statutory trust if it was me. I’m partial in Nevada because we can’t get through them. They’re immediate if you don’t have a creditor, it’s immediate. People say there’s a two-year seasoning period, that’s for known creditors or somebody that’s already a creditor to make a claim.
If you have something where you’re worried about liability right away, you do the LLC. But you can use them in combination. I can have an LLC and I could transfer it to an IDGT if I’m concerned. And then the other thing is Nevada is the only state where your NAPT or your IDGT, your Nevada Asset Protection Trust—we actually have a statute so it’s a credit shelter trust—is protected even in the case of alimony.
If you’re married and you’re worried, Nevada is your friend. If you’re in one of those relationships where you’re like, just know that you’d have to make sure everybody’s signing off on it. If it’s your separate property like if you have an inheritance and you’re concerned, then you could put it aside in a NAPT to make sure that there’s never a question that’s going to get drawn into a divorce. If there’s a big age difference between spouses, that might be appropriate. We have all those situations out here because we have all the casino executives doing knucklehead stuff.
Hey, make sure that you subscribe to Anderson on YouTube because we’re always putting out new information. We have Coffee With Carl and Tony Talks.
Jeff: I thought it should be Tea With Tony, but Tony Talks works too.
Toby: Tea With Tony, we’re not in the UK. We are in America where we drink coffee.
Jeff: She does talk American.
Toby: She does talk American. Tony’s awesome. She’s a rock star.
Jeff: Yeah, good information from both of them.
Toby: Carl’s awesome. Carl grew up in Georgetown, Texas. Probably his family is all huddled up together breathing on each other to stay warm. My heart goes out to those folks, that sucks. I grew up in Philadelphia then I moved out to an island in the middle of Puget Sound called Vashon. If the wind blew like 10 knots, your electricity went out. So we had to fire a stove like a wood-burning stove.
Whenever it would snow or it was really windy, you couldn’t take the ferry to the mainland. It sounds weird. We actually had a Thanksgiving once where we cooked the turkey on the woodstove. You would just cut wood. Some of these people are not in that situation. I bet you they’re wishing that they had some wood pellets and something to maybe they can cut their furniture. That sucks. All right. Let’s stop talking about that, it’s all me.
“If I invest my self-directed IRA funds in a private company that is structured as a C-Corp.” They invested money into a C-Corp, and the C-Corp provides a 1099-MISC, which is weird. “For my earnings, will my self-directed IRA be subject to UBIT?”
Jeff: I couldn’t get past the 1099-MISC.
Toby: It’s got to be a dividend. What are you getting paid for?
Jeff: There are times when you invest in certain LPs or something like that, that you might get a 1099-MISC income through your brokerage. But I’ve never seen it from a private company. Your self-directed IRA cannot do work for the corporation. It’s not possible.
Toby: That’s what I’m wondering. Whether you invested funds then you went to work with it, you just disqualified your IRA. I hate to say it, you probably want to talk to somebody quickly because you can’t use your labor to benefit the self-directed IRA.
Now there is a ROBS transaction where you can do that as long as it’s at the inception of the company. You could possibly do it then, but this is weird to get a 1099-MISC. What I would probably do is say that they misqualified it. It’s probably a 1099-DIV, and they’re trying to write it off because they don’t know what they’re doing.
Jeff: I actually saw this with my mother—I will bring her up again—who received 1099 for earnest money. It was just because of the way it was quoted in the bookkeeping software. It could be a mistake. I hate to diss somebody else’s tax work, but maybe they’re not sure of what they’re doing.
Toby: We should make fun of it. Yeah, it’s weird. 1099-MISC is for work that you did. In which case, if for whatever reason your problem isn’t unrelated to business income tax, it’s did you work for that company? What situation can you not use your own labor? You cannot use your own labor when it’s self-directed money or when it’s qualified money like 401(k) or an IRA exempt.
Jeff: What’s the term we use? You can’t pick up a hammer.
Toby: You cannot pick up a hammer. Jeff’s using a great example. Go over it.
Jeff: Let’s say you put in a piece of property and you’re self-directed IRA. You can’t do any work on that IRA primarily because that’s benefiting you personally. Yeah, it’s benefiting the IRA, but in turn, that’s benefiting you. You’re generating income by increasing the value of your property and so forth. I can pay Toby to come in and work on my property.
Toby: You can oversee but you can’t do the work. So I can hire Jeff to come in and clean my gutters, but I can’t go and clean my gutters if it’s my IRA or 401(k) that owns the property.
Here’s a good question. I’m going to go back to the questions. Somebody says, “I probably have 25+ years of past tax returns and if supporting documents including info on past and present properties. Can I actually toss these or do I have to keep them selectively?”
Jeff: Here’s what I would do, technically you don’t need to keep anything older than let’s say seven years. I would have them all scanned and then you have them forever. They’re not taking up room.
Toby: Put them on a cloud, a fluffy cloud. No, put them in the cloud, put them in a document box. Put them in Box, Dropbox, or one of those things just in case. Because someone’s going to want it for your depreciation schedules, if you’ve owned those properties for 25 years. Because I know that every time we have a client that’s had properties for over 25 years, and you say, hey, do you have the depreciation schedule? I wrote it all off. What’s the basis? What’s that? Didn’t I depreciate at all? You don’t depreciate by hand. You had other costs that were tied to the transaction. So let’s make sure we note our bases.
I just went past this question. “Can you explain the conservation easement and its benefits?”
Jeff: Conservation easement in general is a legal term. It is a promise not to change the nature of the property. It’s basically a conservation movement thing.
Toby: I put Jeff on the spot. He knows that I like conservation easement, so he’s probably thinking, he likes to answer this.
Jeff: I’ve actually seen these for millions and millions of dollars. I’ve seen it in raw land in Montana. I’ve seen it in golf courses in Georgia.
Toby: Our past president was a big user of conservation easements on his golf courses—including Mar-a-Lago where he now resides. A conservation easement is kind of as its name says, it conserves the land. It’s an easement that you give to an organization.
Generally speaking, it’s going to be like Ducks Unlimited or some sort of land conservation, 501(c)(3), or an organization where you’re giving it to them. Their mission is generally to keep properties in their natural state. I might give them an easement to the mineral rights. I might give them an easement towards the development rights, land usage, or the air. I might give them all these things so that nobody can develop my property in the future.
If they do, there are severe restrictions so it can only be used in particular ways. For example, Mar-A-Lago. The past President Trump went out there—I think it was six slots—and gave the development rights to two or three of them to a conservation company with the intent that they could never change the open-air nature of that land. So if you’re somebody who’s on that property, maybe you have—I don’t know if there’s housing in Mar-a-Lago or not. The property is always going to be open, and there’s a benefit to society by having open lands.
You get a deduction for that as a charitable donation—up to 50% of your adjusted gross income. It’s based on what it does to the fair market value of your property. If those lots were worth $1 million, you give away the development rights, and they become worth $500,000, you would get a charitable donation for the difference between those two figures.
In Trump’s situation, I believe it was a $5 million or $5.5 million deduction. And he’s done it to multiple properties including in New Jersey. I think he had over $90 million in charitable deductions because he was giving away the development rights of all those golf courses so that they would remain golf courses.
Jeff: And a little bit about that fair market value that you were talking about, that fair market value is based on best use is the term they use.
Toby: Best use, exactly.
Jeff: Which means when is it worth the most? For what kind of use is it working on?
Toby: You’re restricting the use of anybody whoever comes in and buys that property or inherits that property forever. That’s one of the big ones is making sure that it doesn’t go back, that it’s not something that reverts back because that would destroy the gift. But the best example is somebody who has lands that are for cattle or something where economically they’re struggling because they’re raising cattle on land that’s becoming more and more costly and the taxes are going up. They’re like, I’m going to have to sell this.
But if somebody comes in and says, hey, I’m going to push in money into an organization, we’re going to see what’s the best use of this property. Our intent is to see what the value is, to see whether it’s worth developing. If it’s worth developing, what its maximum amount is, maybe we give away the mineral rights and the development rights to a conservation company. That’s worth money to somebody who’s willing to go through the rigmarole to do that.
The cash may go to the rancher so that now they don’t have to worry about covering expenses, bills. The organization takes over the taxes. Anybody who put in money might be able to receive a larger donation because they just basically gave up all that upside in their investment by giving it away to a conservation company.
Somebody says, “How was it no self-dealing if Trump uses Mar-a-Lago as his home.” He probably has to pay for it, right?
Jeff: I don’t think he uses Mar-a-Lago for a home. I’m not going to go into that.
Toby: Where does he live?
Jeff: I’m thinking it’s not Mar-a-Lago. It’s his country club, but it’s not his residence.
Toby: He may have a different residence. You’re allowed to self-deal, by the way. I should say this, Mar-a-Lago is a for-profit organization in my understanding, and they give away development rights. You just have to pay fair market. Even if you have a charity, you could still self-deal with a non-foundation—if it’s not a private foundation, if it’s a public charity. As long as it’s arm’s length, you get a second opinion as to the validity. Everybody has to deal with it.
If you’re paying somebody money, you should probably have somebody make sure it’s a reasonable amount and you’re de facto. You’re good if you have a third party looking at it saying it’s reasonable.
Jeff: I think in his case, the conservation easements were not for the residential areas. It was for the undeveloped land or the golf courses.
Toby: Again, I remember some of it, I have to go back and refresh it. It was the country club where they maintained a bunch of antics. Then every year they have a gala and people can see them. Then they have a couple of lots that they gave the development rights, and that got him where he wanted to be.
There’s a lot of good conservation easements out there. When we were looking at last year, we had some clients invest with some veil. It was a developer who had done all the development in an area and said, hey, we’ll take one of them and give it away if you guys want to put money into it. They basically raised a set amount and said, hey, we already have the development done. It was where two rivers met, and they said if we want to keep this—because it benefits everybody—land the way it is and not develop it. But it was worth a heck of a lot under the development rights.
Usually, you’re going to get about a 4:1 benefit. If you donate $1, you might get a $4 deduction. If you’re in the 20% tax bracket, you went backward. If you’re in the 37% tax bracket or higher, you did all right. Still, you’re going to make a 20¢ on the dollar. But that’s the incentive. They want you to do good things.
Somebody says, “If my income is $100,000 and $50,000 of it is long-term capital gains, is all of the capital gains taxed at 15%, or would a portion be taxed at 0%?”
Jeff: I don’t have the brackets in my head. But I’m going to say it’s probably not going to be 15%.
Toby: If you’re at $100,000—it depends on whether you took your standard deduction or not and whether you’re married. Let’s assume that you’re married and you didn’t take your standard deduction. You’d take your $24,800—whatever it is—deduction. It will get you down to $70,000 some. And then you’d look and say if you’re married, you have up to $80,000 last year and it’ll still be in the 0% tax bracket. So you wouldn’t pay any tax on your long-term capital gains at all.
If this is after the standard deduction, then you’d have a good chunk of it that’s at 0 and a portion of it that’s at 15%. It’s not retroactive. You go bits and pieces. All right. “I have two entities created with assets in each one of them. Do I need to file two separate tax returns or combine them into one filing?” What say you, Jeff?
Jeff: That depends on a whole lot of missing information. We don’t know what type of entities these are. I actually asked Toby about this question beforehand.
Toby: He said, did you pick this just so you could be annoying? No. I said this is something we don’t get all the time.
Jeff: We don’t know what these entities are. Even if you told us they were LLCs, that still wouldn’t be helpful.
Toby: If they’re both disregarded LLCs, two entities. I set up two land trusts. I set up a land trust and an LLC. I set up a NAPT and a Wyoming statutory trust. I set up a land trust and a living trust. All of those are disregarded entities and you would never have to file any tax returns.
If two entities—one’s an S-Corp, one’s a C-Corp—you’re going to have two tax returns. If I set up two entities and one’s an S-Corp and another one’s a QSub, you’re going to have one equity. The combinations are endless, and we’re just talking federal. Because I could have 50 tax returns in one entity if I get technical. Like baseball teams and stuff or hockey teams.
Jeff: You may only have your 1040 to file, you may have to file two business returns for these entities.
Toby: Why does Jeff pick these questions? Anyway. That just gets to the point that you get to choose. It’s check the box, you get to decide. If you have assets, I have two homes and I own them both, it’s disregarded. You have no tax returns. You file it on your personal tax return, that’s it.
“Can we depreciate the solar system plus take the 26% tax credit?”
Jeff: We can’t depreciate the solar system because that’s the planets and the sun. I know what you mean.
Toby: You guys thought I was bad.
Jeff: Assuming that this is an income-producing property or rental, you would take the 26% credit, and then you would depreciate the balance plus half of the credit you already took.
Toby: I like watching Jeff think.
Jeff: Watch me squirm?
Toby: There are two types of properties. If it’s you on your personal residence, there’s a provision that lets you have the tax credit.
Jeff: Correct.
Toby: And if it’s Jeff as a landlord, there’s a provision that gives you the tax credit plus it’s an income-producing asset, in which case you can depreciate it. But if you took a tax credit, they take half of that and subtract it off the basis.
I would say it’s 87% this year. I can depreciate 87% of it and I get a tax credit for 26% of it. If it’s a $10,000 solar system—I don’t know if such a thing exists but let’s just use round numbers—then I would get a $2600 tax credit, which is dollar for dollar against my taxes and I don’t lose it. I just carry it forward. If I don’t have taxes, I don’t know if it’s refundable or not anymore.
Jeff: It’s not refundable.
Toby: So I just carry it forward in the future years? It’s just like a credit. Hey, I got a credit for $2600 that I will use against taxes that I owe. Plus I’m going to depreciate the installation and the solar unit—whatever I put up there. So I would get an $8700 tax deduction. And then the question is, what income is it producing? What income do I have to offset? I think it would still be passive. If it’s attached to a rental property, you’d have your depreciation. It would still be subject to the passive activity loss rules.
But what a tasty treat. Me, personally, what I’m looking at, I’m looking at solar systems on rental properties now. As soon as this pandemic eases up and materials are more readily available, which is doing nuts right now because it’s real estate markets on fire. That’s going to be something. In the second half of the year, I think we’re going to be looking. And you could do it right up until year-end as long as 10%, which can just be the plans are in place. Before the end of the year, you could take credit. For the depreciation, I believe it would have to be put into service.
Jeff: Now, is this credit still scheduled to go up in 2022? I know it’s scheduled to go up in 2021 and it did not.
Toby: Scheduled to go away or to be reduced?
Jeff: I thought it was to be reduced.
Toby: It was going to go to 22% and then at the end of December, under the COVID Relief bill— the very last one, I always forget what’s called. Not CARES.
Jeff: The one in December.
Toby: It was right at like December 22nd or something, they extended it. They extended a whole bunch of stuff. The solar, what they did is they said, hey, go back to 2020 and we’re going to do that for a couple of more years, and then it starts to go down. I believe 2021, 2022, it’s at 26%. 2023, 22%, and then I think it’s gone 2025. But I hope that they jack it back up to 30%, frankly.
It’s all that nasty stuff that’s going on in Texas right now, in Houston specifically. There were people taking snapshots of their Tesla solar walls heating their houses and still operating. I think that there were some cases where the winter vines froze, but the solar is still operational. It’s one more thing to put in the back of your head if you get a big tax credit for it. It’s just like everything is on sale for 26%.
All right. Go listen to our past Tax Tuesdays if you want. This is what’s really bizarre. I’m so used to having so many questions and we’re always stressed for time. But with Piao and Elliot just knocking it down, with Tabia doing such a great job, Patty and Susan taking care of the clients, and Matthew making sure that things don’t glitch, it runs so smoothly. We’re getting through all the questions.
Look at that, Jill just helped me out. Taxpayer Certainty and Disaster Tax Relief Act. Who the hell came up with that? TCDTRA.
Jeff: Speaking of taxpayer’s disasters—IRS.
Toby: “Christos too.” Christos is on too. But Christos is kind of slow. No, I’m sorry. Christos does a great job too.
Jeff: If you’re having issues with the IRS, welcome to the club. The IRS is a train wreck right now. We have people getting notices for returns they filed months ago.
Toby: They’re still processing the mail from July. They sent out a press release. You actually grabbed the couple of them and I put it in a little video together. I’ll tell you what, they put out a press release that they’re still opening mail from July.
Jeff: And it’s in the millions of parcels that they have to open.
Toby: Yup. Remember, we were talking about the truckloads. I was getting a report that there were truckloads unopened and locked at the Fresno facility the accountants were talking about, which means these things have been sitting there for more than six months unopened. And they’re just now opening them. They’re processing stuff that’s coming in but they’re going through the backlog.
Somebody says, “Christos is awesome.” Yes, Christos is awesome. He’s right next to my office and I never hear. I’m convinced that he doesn’t speak there. I’m just like blah, blah, blah. Yes, he is awesome. People come to his defense.
Jeff: I forgot. He just looks like…
Toby: I want to see Christos get mad someday. He’s just like the nicest guy. All right, podcast going in, check them out. If you like tax stuff. Now they’re saying Elliot’s awesome. All right. Elliot is awesome. We have a really good crew here. You guys don’t realize that there are more than 300 of us, and we’re all a little nuts because we all live in Vegas—well, not all. There are some up in Tacoma, some in Wyoming, some in Salt Lake. Actually, we have people all over the place.
Somebody says, “Will you host a special on solar tax credit episodes? Number in the show notes for this one or follow up email.” Of course, that sounds like fun. We should do a solar tax and just dive into it. For you, we will do that. I’ll make sure that we get something. I feel strongly about these things because we’ve known that our grid. And shoot, if you live in Texas, California, or New York, you’ve had the joy of having brownouts and rolling. Yes, all sorts of fun stuff.
Jeff: When Colton makes your power station shut down, you may need to update your infrastructure.
Toby: Somebody says, “I sent in a question about R&D when I signed up today. Where do you send it Raul?” Just type it out or unless it went to Tax Tuesday if it’s long.
Patty is saying, “Register at the Tax Tuesday.” Most people know, we’re just about done. You can send in your questions on taxtuesday@andersonadvisors or go online, just visit us. Register for the upcoming February 27th Tax and Asset Protection Workshop. If you like this stuff. If you want to make your edge a little sharper, come on out. There’s stuff that’s always changing in the tax world and asset protection world, in the business world.
We love to keep people up to date, we love to get your feedback too. We learn a lot of things from folks that are out there doing it. There’s only one way to figure these things out, and that’s by constantly being interacting with people that are doing it because everything else is old information.
By all means, email us and thank you to everybody who came on today. We will see you in two weeks on another Tax Tuesday. Make sure you bring in all your questions and we’ll get rocking.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
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