If you are a real estate investor, Toby Mathis and Carl Zoellner of Anderson Advisors talk about how to fill out your tax returns. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- Can you speak about conservation easements as a way to decrease taxes in the correct and legal way? Conservation easement is donated property for a specific purpose
- Can an LLC buy back member units from individual members? Technically, your LLC as a whole could buy back member units, but usually when looking at member units in an LLC, ownership’s dictated as a percentage
- Is doing this when members are IRA accounts, a prohibited transaction? It depends
- What line numbers on tax returns are the most important when trying to qualify for funding as a self-employed sole member LLC as a real estate investor? Refer to schedules A, C, E, and K-1 on Form 1040
- If I want to establish an Airbnb from my timeshare, how do I structure my entities? What is the best way to operate that to save tax? Depends on timeshare rules and then refer to IRS’s Publication 925
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Resources:
Gene Guarino – Residential Assisted Living Academy
Full Episode Transcript:
Toby: All right, guys. Hopefully, you’re able to see us and everything’s good. My name’s Toby Mathis, and I’m joined by Carl Zoellner. What’s up, brother?
Carl: Hey. Thanks for having me. Yeah, a little fun, get to talk about a little tax today.
Toby: Everybody’s gonna ask where is brother Jeff, and I’ll just tell you Jeff doesn’t even know his own name anymore. He’s pretty much in the throes of tax ecstacy, so he’s unable to join us right now just because he’s got about 500 returns on his desk.
Welcome to Tax Tuesday. I only say that partially in jest. He’s not drooling, he still knows his name, but he is in the throes of the tax season. If you can, let us know where you’re from right now in the chat. Carl, you’ve done a Tax Tuesday before?
Carl: I have not. No, it’s my first Tax Tuesday.
Toby: Carl is one of our attorneys. We’re starting to see some names. Put in where you’re from, whatever city and state. San Jose, Bellevue, Chicago, Charlotte, Napa, Las Vegas, Miami, Florida, Dallas, Texas, Granite Bay. Now they’re going in too fast. Austin. Hey, you’re outside Austin, right? You’re in Georgetown?
Carl: Yeah, I grew up in Georgetown, so just north of Austin.
Toby: There we go. […], there’s Dallas where you just were, Los Gatos. We know where Los Gatos is. Union City, Baltimore, got a bunch of properties there. “Hate your city.” Not the city, but the people that work for your city are just not much fun.
A lot of California here. That’s because it’s tax season. You all have just got hammered with some tax bill. You’re limping through the end of the year. The year’s like, oh gosh there’s a PA. You’ve learned with SALT is. “Take a local tax deduction.” You learn that they cap it at $10,000 if you’re in California, PA, New York, Connecticut, or Maryland. You learn that you don’t get to write it all off. Let’s see. We’ve got a lot of folks. I’m waiting for a few more to drive in and then we will get diving on.
If you have questions, the chat feature is where you ask clarifying questions while we’re teaching. If you’re asking a question that’s specific to your situation, please ask it in the question-and-answer. There’s a Q&A on Zoom and we have a bunch of folks helping you out. Even though it’s tax season, there are a few hardy souls that said, hey I will help.
Specifically, I see Troy pop in. I see Jeff if still floating around out there. He’s probably just listening to see whether Carl screws up and he can make fun of him. Dana Cummings is on, tax professional Troy Butler is on. Jeff, I assume you’re probably just listening. I’m not going to make you answer questions. Eliot Thomas, one of our tax attorneys is also on. We also have Matthew and Ander and Patty on.
Somebody says, “I sent in a question earlier. Do I need to send it in here now?” I would send it in, Jim. What we do is we get about 500 questions a week that come in via email. We actually put that email up so you guys see how the rules work. We pick about 10–15 of them and throw them on. We just grab them at random, we’re not really going through them too carefully. I just look and say, hey, that’s a good question, that’s a good question, and we answer those.
We’re also responding to people’s questions. If they’re just generic; we just answer them. If it’s very specific to your situation, you’d have to become a tax client or a Platinum. Platinum is really simple. It’s $35 a month. If you’ve never heard of that service, by all means let us know if you want to hear more. You need to get on a little bit of access to our attorneys. You ask any tax question you want. There’s no billable time on it. It’s just a set amount per month and cancel any time.
We’re about as easy as it comes to work with when it comes to lawyers and accountants just because we’ve all been there. We don’t like it and are burned with those big bills, so we’re pretty mellow.
It’s supposed to be fast, fun, and educational. We like to teach, so whenever we get a question, you’ll see that we expand on it and then start giving variations on it, simply because we’re trying to illustrate certain points. You learn more and you continue to learn from each other in each other’s scenario. Then when something comes up that affects you, it will trigger your memory. We’ll get jumping in.
Carl, give a little two seconds on yourself, on who you are, what you are, what you do all day.
Carl: My name’s Carl Zoellner. For those of you who are familiar with Coffee with Carl, I am that Carl. Like Toby mentioned, I am one of the attorneys with Anderson Advisors. I sort of head up our attorney department, so if you’re working or if you’re a Platinum client already, chances are: (1) we’ve probably talked to each other, (2) if you talked to one of the attorneys through any of the many routes you now have to talk with us, yeah, I help maintain that system.
On a daily basis, I meet with a bunch of clients, we go through different levels of analysis depending on what you’re doing, and we try to give you the best picture we can on both the asset protection side and the tax side.
A couple of key pieces. Asset protection, you have to plan for it because you never know when it’s going to pop up. Tax, you have the ability to plan for it in advance because you know it’s going to pop up. From those two sides we get a pretty complete picture of what’s happening. It’s a pleasure to be here with everybody and I will chime in where I can.
Toby: All right. We’re going to give you a quick taste of how it works. I’m going to go through a whole bunch of questions that we’re going to answer today, but I’m just going to show you how spontaneous we can be.
Somebody asked, “Can you put an LLC into a trust to protect it from probate, or is there another way to protect it?” Actually, what you just hit on is putting into a living trust to avoid it from probate. That’s a perfect way. Yes, you can have an LLC being owned by (for example) yourself as trustee of your living trust. See? Easy one.
Somebody else asked, “If your Solo 401(k) owns 100% of the C-Corp, can you still be employed by the company? They’re hitting on the right topic. There’s something called a ROBS transaction where you could be an owner, shareholder along with your 401(k). It’s actually a set of laws and depending how you set it up, the answer is yes, you potentially could.
But like anything, you have to make sure your documents are very, very clear because you can’t be using your personal efforts to make the investments worth more, so it’s always kind of interesting. You have to be careful on that, so you’d want to be talking to a professional on that.
Speaking of professionals, let’s go over the questions that we’re going to be answering today. Carl, I know you haven’t seen these, but I go through them en masse and then we go through them one by one.
Here’s what we’re going to be answering today. “Can you speak about conservation easement as a way to decrease taxes in a correct and legal way?” Absolutely.
“If my spouse and I own an S-Corp and I’m not actively working for the company, do I have to take a salary from the S-Corp? Can all the distribution go to my spouse?” We’ll answer that one.
“I invested in a multifamily real estate syndication deal with my traditional Solo 401(k). Can I convert this from a traditional Solo 401(k) to a Roth 401(k)? If so, how do I determine the value of this conversion? Note: this is an 80% leverage deal and I know my percentage of ownership.” We’ll go through that. Good questions off the bat. See how fun it is, Carl. You’re probably going, man, this is too easy.
Carl: I’m having my flashbacks to the bar. I’m just picking out issues left and right.
Toby: Yeah, and somebody’s already asking where is Jeff. Jeff is in a tax coma right now. No, actually, he’s probably listening. He’s just […]. We’re three days before the tax deadline and our guys are going 24×7, working their katushes off trying to get as many returns out as humanly possible.
I said, Jeff, don’t worry, I’ll do this one. We asked Carl, do you want to step in? Carl said, yes, even though Michael had said yes before then disappeared; we don’t know where he went. So, Carl, you’re absolutely awesome.
All right. “I have a $750,000 IRA. I want to pay off my $300,000 mortgage. I’m 62½ years old and plan to work another 10 years. My annual salary will be at least $100,000. I want to be debt-free and start traveling. I know the capital gain will have a one-time impact on taxable income. I want to owe nothing and I can replenish the withdrawal if I wish.” There’s a lot in there. We will unpack that and we’ll go over the rules.
“Can an LLC buy back member units from an individual member? He’s doing this when members are IRA accounts or pivoted transactions.” Interesting question. We’ll go through that.
Next one. “In order to reduce self-employment tax, can I lower my salary as a W-2 from my company C-Corporation? What are the forms of payment other than dividends can I get from my company that would not require self-employment tax?” Good question. We’ll answer that one too.
“What is the capital gains rate for the year 2021 for the sale of stocks? Do the stocks tank?” This is the sad part. “I was forced to sell and take about $300,000 in long-term capital gains.” I’m forced to sell and make a lot of money. “Did President Biden propose a low capital gains rate […]?” I just love that. That is an interesting question. I don’t think Biden was proposing a lower capital gains rate. You learn that one the hard way. No, I’m just teasing.
“What line numbers on tax returns are the most important? I’m trying to qualify for funding as a self-employed, sole member LLC, as a real estate investor, and purchasing property for as little as $80,000–$500,000. I want to ensure my tax returns reflect as needed.” They probably need to get funding, funding, funding.
“Can you provide an example of how to utilize a charitable remainder trust to reduce or eliminate taxes from the sale of crypto stock or business?” Absolutely.
“Where do you place in your personal tax return and on a corporation’s return the initial investment as a board member at a nonprofit company? Can it be recuperated or does it become a tax deductible donation?” We will answer that.
The last question we’ll be answering today is, “If I want to establish an Airbnb from my timeshare, how do I structure my entities and what is the best way to operate that to save tax?” We got a lot. You ready, Carl?
Carl: I’m already.
Toby: All right, I hope you have until midnight to […]. I’m just kidding.
“Can you speak about conservation easements as a way to decrease taxes in the correct and legal way?” This something you want to jump on?
Carl: I guess I can give sort of a 10,000-foot view a little bit here. Usually, these types of things and especially conservation easements, you’re really talking about donating a property for a specific purpose. When I look at these things, especially when we’re talking to clients, the first thing I want to look at is what is the mechanism of where you get to see the tax benefit, and do you fit under that mechanism?
Now, from that perspective I’ll say, I don’t know all the rules to that mechanism, so I’ll turn it back over, Toby. You seem to be super well-versed on these.
Toby: Well, they’re on the dirty dozen list from the IRS because they’re so right for abuse. It doesn’t mean that they’re horrible. It just means that you have to make sure that the charitable component is real and it’s forever.
Let me just go over what a conservation easement is from a 10,000-foot view. Since we’re way up there, let’s look down on it. Conservation easement is really a simple way of saying, I’m going to give a charity like Ducks Unlimited a right to my property that does not extinguish. For example, I might give it mining rights, mineral rights. I might give it development rights and say, I want my land to remain as is.
For example, our past President Trump and Mar-a-Lago gave charitable conservation easements to nonprofit organizations, qualified nonprofit 501(c)(3) land conservation companies. He gave the development rights of those before (I think it) was 3 of the 6 parcels that make up Mar-a-Lago, and received a pretty massive tax deduction, over $5 million for taxes deduction.
You could do it individually or you could do it as a group, so that I could buy in. Carl and I could get together. Let’s say Carl had farm land in Texas and he loved it. He was a cattleman and he said, I love this. I’m having a little struggle. I don’t want to sell this land. I want to preserve it. He knows that the development rights, like somebody next door, sold their land and developed it. They know that the fair market value of that thing is X millions of dollars.
So Carl says, you know what? I don’t want to see this ever developed. I don’t want to sell it to a developer, even though I could get a big payday. I want to keep it the way it is. I’ll bring in an investor to get some liquidity, so Carl doesn’t have to worry about making a living anymore. He can give the development rights to a charity. In so doing, that land is preserved in the way it exists.
Now, as the investor, what you’ll get back is a charitable deduction based off of your interest. If bought in and you have your interest up to (I think it’s) 60% of your adjusted gross income per year for the year that you make the contribution, and then up to 5 years in addition, so 6 years of charitable donation that you could actually get based on the fair market value of that gift.
This is where it gets interesting because people give things to charity but they’ll have strings to get it back. They’ll say, but if you do this, or this, or the other then it reverts back. You didn’t actually get it. Or it will be for 30 years, or it’ll be some other number, or they’ll inflate the appraised value like they won’t actually have ever done a development. They’ll come in there and they’ll say, hey, we’ll say it’s worth $30 million to develop it, and for every dollar you put in you’re going to get a tax deduction of $14 or $15. Those are the ones getting torn apart right now because that’s not a charitable gift and because the appraised value is inflated. It’s not accurate. The IRS will look at those.
If you are a 250% increase of your donation, you’re in the safe zone. If you’re above that, then they may look at the organizer and make sure that it actually comports. If you work with any conservation easement company—there are a few that I like—make sure it’s a development company and that they’re actually doing this. This actually works great.
Somebody’s talking about the Ikea structure. Whenever we talk about nonprofits, Ikea’s my favorite nonprofit. “Ikea’s not a nonprofit.” Actually, the ownership is a big chunk of all its rights, including its franchise rights. Anyway, that’s conservation easements in a nutshell.
Why do people do conservation easements? Because: (a) they want to do good, and (b) they want to get a big charitable donation. If I put $100,000 in, I may get a $400,000 tax deduction. Then the question is, did I make more off that charitable donation that I would have paid in the tax? In other words, I gave up $100,000. How much is that deduction worth for me? If I’m at 37%, then I can do that math fairly easily and I can say, hey, it looks like probably worth about $150,000. I net a little bit of positive, but I’m doing something good too. If you’re going above that, you’re playing with fire, and that’s what the IRS keeps cracking on.
Fun one, Carl?
Carl: Yeah. I’m learning a little bit extra. Like I said, I sort of know enough to know I need to do the research or ask more questions.
Toby: Yeah. Well, that’s all it is, and that’s the thing. Whenever we teach this to folks, make sure that you are learning like when you’re looking at taxes, you start asking the question ‘how’ instead of a ‘can I.’ You say, how can I reduce my tax on this transaction and give a creative thinker something to work with. A lot of people just say, I’m paying too much in tax. Okay, let’s start breaking down things what you’re able to do.
Here’s the next one. “If my spouse and I own an S-Corp and I’m not actively working on the company, do I have to take a salary from the S-Corp? Can all the distributions go to my spouse? Carl, what do you think?
Carl: What you’re flagging on or I guess the question he is asking is within the S-Corp there is a reasonable salary requirement. When we look at that, we say with the activities you’re conducting, is there profit to pay a reasonable salary?
From my experience, when we start digging into folks not actively working in the S-Corp, sometimes they are actively working in the S-Corp so we need to look at the specific scenario. But if you’re literally not doing anything that would normally generate a salary, I would suspect that if it’s not something that would normally require a salary, it wouldn’t be there.
You also said, can all the distribution go to your spouse? If there’s enough money that would be there to pay that reasonable salary, it wouldn’t all be a distribution. Next logical question is always what is reasonable? I just say, great question. What is reasonable? Because the IRS doesn’t define it, either.
Toby: A couple of corps taking a knock at it usually do about a third. Here’s the interesting thing. When you’re saying ‘actively working’—we’re using the client—the material participant in a businesses is dictating of whether you’re doing any services. How much time you’re spending on that business is going to indicate whether you’re entitled to any salary or required.
The big thing that Carl’s hitting on is that if you are participating in that business and you’re taking distributions, then you have a requirement to take some sort of pay. It’s a set salary, but it could be a lower wage. If you are not participating in the business, then you don’t have a requirement to take a salary. It’s only if distributions are made does that salary requirement pop in.
There’s always this thing like, hey, I’m working for my S-Corp and now I have to pull a salary out. My account says that I have to pull a salary out. I always ask, are you taking the money out of the company? You’re not taking the money out of the company, there’s no salary requirement. If you’re taking distributions, then there is.
Now, rule number two is distributions have to be equal. They cannot be made disproportionately. In other words, I can’t have one person in an S-Corp taking out $50,000 and another person taking nothing. If it’s profit, it’s coming out to you, guys, and it has to be equal. If you’re husband and wife, and you’re saying, can I have 100% go into my spouse, you’d say no, 100% can’t go to my spouse. That’s going onto a joint return, anyway, so it doesn’t make any difference.
The bigger question is can I have distributions? I’m just a passive person. Do I have to take a salary? The answer is no. If you’re really not doing anything in it, as long as your spouse is taking a salary, then you’re fine. That’s called a passive interest and that’s very different from no self-employment tax, no salary. There’s a distinction. When you do not materially participate in a business, then you’re considered a passive business owner, and that distribution could be considered passive income, too.
You accountants out there know the difference. You’re looking at it going, hey wait a second. Yes, that’s very different than just not being subject to old age, disability, survivor’s insurance, and medicare. The answer to the question, you’re not actually working in the company, do you have to take a salary? No. Can the distribution go to my spouse? No, but it’s going on your return, anyway. You guys are joint owners. You would take it in proportion to your ownership.
All right. Let’s go to another cool one. Infinity, that’s a really cool question. Somebody was just asking. I’m just kidding. We’re teaching another Infinity Investing on Saturday. Infinity Investing is absolutely free. I bring on Pia Washington to talk about stocks, how to invest as a stock market landlord. I bring in Nicole DiBraccio to teach about real estate. Sometimes, Aaron Adams sticks his head in.
It’s a ton of fun, no cost, you get a free basic membership, we have three trading rooms a week that are absolutely free that you can pop into on the basic side, and you can learn how the wealthy keep their money over a long period of time.
Hint hint. It’s not watching cable news. Hint hint hint hint. It’s not doing what all these gurus say. It’s actually following tried and true things that work. The reason I know they work is because we do over 10,000 tax returns a year. We always look at returns at the end of the year and I start looking who’s making the money, what are they investing in, what are they doing, and lo and behold you figure out the people that are making the money year in year out.
And I mean care about what they show is the taxable income. I’m looking at what’s the cash flow popping in. If they have depreciation, don’t worry. We know how that game is played, too. I’m looking at the people making the bucks, and I like to share what they do.
That’s what Infinity Investing is all about. It’s free. It’s on Saturday. If you want to register, simple link. I think Patty shared it out. And don’t worry. We don’t even have a sales group with that, so it’s not like you get beat on if you come in here. We actually just try to get people to make money because hopefully, you’ll come over to Anderson and use us for your tax services when you start having that problem like some of these next folks have, like I had to make $300,000 in capital gain this year. I don’t want to pay the tax on it. There are some things you could still do.
All right, enough of that. “I have $750,000 in an IRA and I want to pay off my $300,000 mortgage. I’m 62½ years old and plan to work another 10 years. My annual salary will be at least $100,000. I want to be debt-free and start traveling.” I get it 100%. “I know the capital gain will have to have a one-time impact on taxable income. I want to owe nothing and can replenish the withdrawal if I wish.” I don’t know what that last sentence means, but Carl takes a whack at it.
Carl: One thing whenever it comes to retirement accounts, whether it’s IRAs, 401(k)s, annual salary around $100,000, first thing I want to look at is what is your effective tax rate and where do we want that money to go. With the IRA, you’re a little bit more limited on how you can take money out through (say) a 401(k); you can always do a loan. IRA technically you would just be taking advantage of a 60-day rollover, which I don’t think would get you where you want to go for your mortgage payments because you have to basically put it all back in pretty quick.
Age is definitely relevant here. I don’t remember the exact date off top of my head where you can start taking out distributions without the penalty, but you’re probably getting close there.
Toby: Year 59, I think.
Carl: 59½, is that it?
Toby: I can’t remember which one it was, but it’s in the 50s. Yeah, 59½ or something like that.
Carl: Maybe I’m missing it. I don’t see a direct correlation between the IRA money in paying off your mortgage.
Toby: It’s not in there. I always look at it and say, could you? Yes. Should you? Maybe. 59½, there we go. It’s always popping in. We got some accountants out there, Carl.
Carl: I know the person who did that. We were good friends on the platinum office hour.
Toby: Really?
Carl: Yeah.
Toby: You like it. You can say his name. You just don’t say his last name.
Carl: Michael. Yeah, it was Michael. We had a good old time. Interestingly enough, it’s funny because we used to compete or not compete. It was at the same time when Tax Tuesday would go over, so we did overflow after you all wrapped up.
Toby: Oh, I apologize for that. Tax Tuesday never goes over. We’re always… All right, so you’re 59½. You could start taking distributions out of your traditional IRA. This is just an IRA. I don’t make an assumption. If it was a Roth IRA, you just take the money out, pay off your mortgage, yay. If it’s a traditional IRA, then you’d pay income tax on it and it would add on to your existing.
They’re already trolling me, Carl.
Carl: Don’t be mean. Don’t be mean to Toby.
Toby: Yeah, Toby’s nice. We used to go way over, but now we’re just maybe going over. All right. The way I look at it is you have 10 years of making $100,000. We’re looking at your tax bracket. You’re right. What are you looking at? The 22 or something like that. It’s not massive and you have your standard deduction.
We’d be looking at any other things. Are you doing charitable donations? Should we do those straight out of the IRA instead of having those be taxed to you? Should we just make them directly out of the IRA and do that in case you’re tithing or something? If you’re making $100,000, you used to give $10,000 a year away, maybe we should do that.
Do we have any other accelerated depreciation that we can take advantage of? Real estate professional status, are you? Do you have any losses that are flowing forward? All those things go into kind of our little bowl of what we’re going to cook up here, and say, is there a reason to take the money out early?
Now, I’m looking at us saying that we’re in an inflationary period where we’re above probably 5%, and the interest rates on mortgages are below that, about 3%, 2.99% last week. I don’t know what your mortgage interest is, but I’d be looking at that very closely to say whether you’re better off hanging on to that debt and letting that IRA cook a little while, because you have about 10 years before you have to take required minimum distributions, and you’re going to pay less tax on it if you wait that 10 years.
I’d probably want to play around with the numbers to see whether it’s better off. Something else that’s out there, this capital gain. You don’t have a flow through of the type of income out of an IRA. It’s just ordinary income to you, so we’re not going to be at capital gains rate. You’re going to be in your ordinary tax bracket.
Let’s say for example, I start taking out an additional $30,000 a year. That $30000 is going to be added to my already $100,000 salary, which might be going up, so you can be at $130,000. You’re going to be paying tax on that. You’re probably paying $6000 or $7000. Would you be better off leaving it in the IRA, letting it bake, continue to grow tax-free, and paying that lower interest rate on the mortgage? I’d be really really tempted to just keep that mortgage.
I know what you’re saying that you have the cash to pay it off and I’m a big believer in knocking out your debt. Not a big debt lover, but you already have the mortgage and you have the money in a tax-deferred vehicle. The benefit of a tax deferred vehicle is letting it cook as long as possible until you’re required to start taking it out, and then hopefully your income is even lower.
If you leave your job and you’re no longer $100,000 a year, what’s that, $750,000? What is it going to be worth in 10 years? It should be probably close to $1.5 million, if not $2 million. Then I start taking that out as required minimum distribution at a much lower tax rate because I’m no longer making that salary. I think I may be better off doing that.
That’s the fun part there. You’re doing the math on it and realistically, you should actually have somebody crunch the numbers for you and say, hey look. This is your long-term prospect. It might be a certified financial planner. It might be an accountant. It doesn’t necessarily have to be an accountant. It’s just somebody who’s going to say, hey wait. Here’s our growth rates, here’s what the S&P has been doing or you’re looking at what you’re investing in, looking at what your interest rate is. You are getting some deduction on that, assuming that you’re not doing the standard deduction, but it might be that you’re getting some benefit there. We have to take all that into consideration to make a smart decision.
Carl: What’s sort of wild there, too, is the amount of folks we run into that have those sort of—what I am term at least—large IRAs out there. For me, personally, I went to Infinity Investing; I like it. I traded my Roth, traded a personal account, and it’s been great for me. Like you say, I don’t know that I would mess too much with the mortgage, especially with the interest rates where they are, but certainly, you can put some of those retirement funds to work as well and grow it.
It’s not the same thing, but you’re still getting a net benefit out of the money (I think). The direct correlation was you want to pay off your mortgage with your retirement account. Sort of blow that, expanded that picture. In investing with that retirement account, you probably get a pretty similar bang for your buck at the very end of the day. If you can actually grow that account, take it out of a lower tax rate, and then just use it to your plan once you’ve got control of it instead of penalizing yourself.
Toby: We have two good comments here. “Question asked about capital gains out of an IRA, you can’t. It’s all ordinary income.” You’re actually right, Mike. Will, who’s a CFP says, “Great advice.” See? We like the CFPs out there because they’re fiduciaries. You don’t use a broker because they make you a broker. No offense if you’re a broker. Come on, send it to me. Use the CFP.
All right. “Can an LLC buy back member units from an individual member? Is doing this when members are IRA accounts a prohibited transaction?” What say you, Carl?
Carl: Technically, yeah. Your LLC as a whole could buy back member units. Usually, when you’re looking at the member units in an LLC, though, ownership’s dictated as a percentage. Depending how you’re doing it may not change a whole lot.
Is doing this when members are IRA accounts a prohibited transaction? Number of members could be relevant. Who those members are and the members that would be sort of funding the purchase return of those membership units, so yeah. The overarching point here is with IRA accounts or retirement accounts, we tend to lean a bit more conservative because those prohibited transaction rules can be a little sticky. That being said, we tend to lean more towards ‘let’s figure out how to do it’ than just tell, so I’d want to sort of dig into the details on this one.
Toby: So can an LLC buy back membership units? Yes, it’s called a redemption. There’s actually a pretty big difference between the sale of a membership unit and a redemption. If I’m not mistaken, if you fall under partnership law you’re going to have these things called hot assets which are things like your inventory, receivables, there’s one other that I’m missing; I can’t remember off the top of my head, but there are three main ones, that were to ordinary income.
You have recapture that you may have to be worried about if you’re selling out or doing a redemption. I think you avoid the recapture on a redemption and sticking it to the other partners. Let’s just say there are three partners and you have a bunch of recapture, $100,000 of recapture or something, and you redeem your interest instead. You could be leaving that $100,000 of recapture with your partners. They each get an extra $50,000 of recapture at some point. They maybe give me a little stink eye, like hey what are you doing?
You have to be aware of those things as opposed to buying out. There’s no prohibition on buying out in redeeming an IRA. I think your only issue is the arm’s length transaction and whether you’re a disqualified party. Honestly, I don’t know the answer sitting here. I think you’d have to look at it to see if it’s ever been done, to see if the IRS has had an issue with it.
I don’t think there’s an issue with it. I know legally you can do it. It’s just a question of whether you’re getting any inordinate benefit and whether the IRS you run an issue of having it reclassified as a sale as opposed to a redemption. And there are differences from a tax standpoint for that. It could be a considerable difference.
You can even do installment sales. And get this. If you do an installment sale on a redemption—I remember this—I can apply it all to my capital account first. I’m not even paying any taxes at first. Let’s say I do a 10-year installment sale. I might be paying no tax on the money I’m receiving from that LLC for 4–5 years, and then the tax comes in those last bunch of years. So instead of making it like an ordinary installment sale, you’d be putting your capital gains, your recapture, your interest, and return of your basis all being separate. You can apply them straight to basis right in the beginning and not have to pay tax. So it gets a little muddy.
Fun stuff, right Carl? See if I would be boring. You thought you’d come here and you’d be bored.
Carl: No. I was afraid I was just going to be the one asking all the questions, so this is turning out better than I thought.
Toby: There are a bunch of us. John says, “Withdraw from the IRA monthly to make the mortgage payment. Best of both worlds.” You’re right, John. If you’re not taking the standard deduction and you’re taking the mortgage interest, then you might just say, hey, I’ll take it out and it’s going to be awash. The mortgage interest is obviously going to offset the money you’re taking out of the IRA. That’s a point well taken.
One other thing I want you guys to just stop just because I have a bunch of you guys on the line. We have a friend of our firm—and Carl, you don’t even know this—Gene Guarino, who I’ve talked with on a number of occasions, super nice guy, Residential Assisted Living Academy. If you don’t know Gene and what’s been going on, I hate to be the bearer of bad news. I want to just take a second to pray for him because as we are speaking, it’s very likely that he’s being taken off of the ventilator and will not be making it. He’s continuing to decline.
He had this COVID that’s been going around. He ended up in the hospital and for two weeks he’s been on a ventilator, really suffering. To him and his family, Mona and Isabel, they’re just really great people. If you’re just willing and I know some of you guys are in prayer groups and things, Gene Guarino, just a really good, all-around person. His family run something called the Residential Assisted Living Academy, and has a national association.
Yeah, a bunch of you guys, so sad to hear. He’s just a great, great, just a really good dude. I have known him for a lot of years, so if you guys could do that. I know some of you guys. I believe in that sort of thing. Not everybody does, but if you’re willing to add him to your prayer group, because it’s probably going to be any day now if not already. I know his family. I talked to Mona this morning. Devastated. Great people.
Back to tax. I’m not going to say the pun. Something in taxes. It’s always because of both of those things. Right. “What lines on a tax return are the most important when trying to qualify for funding as a self-employed sole-member LLC, as a real estate investor? I’m purchasing property as little as $80,000–$500,000. I want to ensure my tax returns reflect as needed.” We jump into this realm much?
Carl: I wouldn’t know line number. I would just still be looking at it. Sole-member LLC, self-employed. If the […] of his taxes is sole proprietorship, it’s your individual return that’s going to make the difference there.
Toby: Yup. I’m going to see if I can find the line number. I don’t know what I did with it, and I’m not going to be able to. Sometimes, I have tax returns lying around. It’s going to go off of your Schedule 1. Anything that goes off of the Schedule C is going to go into when they call is a Schedule 1; I believe it is on the new 1040s. I want to say it’s like line six or seven down. You’ll see it. It’s before your total taxable income but before the adjustments. They’re always going to add all those things up.
Thank you guys for all the chats coming in for Gene right now. That’s really cool that there are a lot of people out there that know him.
Carl: I’m just going to say this one, too. I am a firm believer in paying somebody else to do your taxes and not sitting at home banging my head on my keyboard for TurboTax to accept some sort of formula I’m trying to type in. Whenever I go in for a loan, I usually just have a packet ready and do that. That would also speak to sort of Troy’s area in bookkeeping, and one of the things we put a huge value on, too.
Toby: Yeah, and talk to a mortgage broker. Especially if you’re a sole proprietor, just know that it’s really tough as a sole proprietor. Quite often, what they do—when I say they, the mortgage underwriters are the ones, and we also have guidelines for Freddie and Fannie—they’re going to use a formula for what percentage of your income they will allow. If you don’t have a W-2 income, it becomes a little tough. If you’re self-employed as a Schedule C, you do not have W-2 income from that business.
They’re going to look at it. Some will not even underwrite sole proprietors because you can make the numbers dance. They’re going to want to do a little digging. If it’s a partnership or an S-Corp, they’re going to use 100% of the amount. If it’s from just regular rental income going on page one of your Schedule E, they’re using 70%.
When we’re looking to do a mortgage, and depending on what type of holdings you have, so if you’re a real estate investor, for example, and you want to make sure you qualify, talk to the mortgage broker and make sure that your return reflects what they want to see. If you’re close, the difference between getting a good loan and getting something that’s more jacked up or I’m going to go hard money, may just be you and your spouse filing a partnership return on your real estate as opposed to leaving it on page one of Schedule E.
That’s because you’ll get 30% more credit of that income. That’s not something that the mortgage company gets to play around with. That’s the guidelines from the purchaser of that note. And since Freddie and Fannie are buying all these notes up, you kind of have to go with what they’re saying.
They also have a really wide range of $80,000–$500,000. It’s pretty wild. Right now, affordability of property is really high because interest rates are really low. I’d be looking to buy as much as you can now. I know that the market’s hot, but inventory’s not going away. It’s something that I look at.
Somebody says, “Twenty-five percent vacancy factor applied, so 75% of income used for page one Schedule E.” Okay, I’m not going to question it. So 75% on page one. In a sense, it sounds like you’re a mortgage broker. Somebody’s chatting right now.
“Are you still using 100% of page 2?” I go off of memory on this stuff, so sometimes I’m a little bit off. Yes, so perfect. That’s why we love our community. Sometimes, you guys teach us and then we get to share it with everybody, so that’s perfect. Am I giving good advice, by the way? They answered yes, so they’re saying talk to your broker. Get it down first and make sure it’s reflecting. Yeah, each one teach one. That’s perfect.
Since we have some folks out there that are in the mortgage industry, are you finding it more difficult to get the loans on the Schedule Cs or is it relaxing now? Because for a while there, it was pretty uncomfortable. Let’s see if anybody has anything.
“Would you even want to touch somebody who’s a Schedule C? Would you rather go ahead and incorporate, make their LLC taxable as an S-Corp or something like that?” See if we get a response. We’re not getting any yet, so we’ll keep going on.
Anything else, Carl, on that?
Carl: I guess recently, I went through and did a purchase, and I did the same thing. It’s sort of practice what we preach. I go in and said, what do you want to see? My wife and I have a corporation, some different things, and shifted around to what they want to see. The real golden rule: Those who have the gold get to make the rules, so the […] of the box. I said, let me squeeze myself in there and it went pretty smooth.
Toby: Yup. Somebody says, “Owning housing is 30% over inflation runs at 80%.” Michael, that’s a really good point. I’m here in Nevada, and there are areas that are 100% year-over-year increase. I think overall, we’re over 20% year-over-year. Nationwide, we’re about 20% year-over-year on the housing market.
The issue is in 2006, the pricing of homes, and what you do is you look at the rent equivalent for housing versus the housing prices. You divide them and you end up with the ratio. If the housing pricing is going up faster than the rent, you’ll end up with a bubble and it will burst. It’ll be like 2007. You could actually see that coming if you’re looking at that ratio of the housing prices versus rents.
Rents weren’t moving in 2005, and 2006 is highest in the house price. Right now, they’re both moving. You’re not seeing that weird inflation. It’s getting higher. I think that at its peak in 2006, we are about 1.7, 1.6-ish and we’re still in about the 1.3–1.4 range now, I believe is what the ratio is, which sounds close, but it’s not when you’re looking at it. You’re saying, oh we’re about in the year 2000 is the equivalent to what it was, going to 2006. We’re not out of the woods.
We can overbuild again and get out ahead of it, but we’re still seeing the national inventory rate is 5.9 months (I believe) with realtor association. I know that on Fred, the St. Louis Federal Reserve that holds the data, it was at 5.9 last week. That’s about average. It was down to 1.9 months of inventory of real estate. It was ridiculous not that long ago, just a few months ago.
So we’re seeing a cooling down, but the price is certainly aren’t out of whack. Anybody who thinks that the real estate market’s going to pop, I look at and say, well there’s one way to make it pop for the residential side, which is to make it less affordable by raising interest rates. Right now, they’re not doing that until probably early next year. And even if they do that, they’re going to have to go so slow. We still have historically low interest rates. It’s ridiculously low.
The affordability of housing is going up, you have more competition. The only way I know to combat that is to raise interest rates, but they’re afraid of destroying the economy since we’re just now coming back. It’s just a weird situation we’re in. Unprecedented.
Carl: I just read an article this morning that BlackRock is buying as much as they can get their hands on at this moment. Vacant land, anything. Just whenever they can have the funds for, they’re buying it.
Toby: What you’d look at is who owns all the different companies. There’s not that many companies that own all these, especially the media outlets. I think it’s three main funds: Vanguard, BlackRock, and one other. BlackRock is in our backyard. They came in here to Vegas and start buying everything up in 2010, 11, and 12, and we were flipping hundreds of houses. The next thing you know, we’re bidding on houses and they’re going 20% overvalued.
They’re doing it again. They’re buying at about a 4 cap on housing that should be a 7 cap, and we’re selling about 100 houses a month to them—Aaron and his group, part of the Infinity group—and they’re buying anything and everything at 4 cap with the belief that the real estate market in the next 3 years is going up 15%.
I can just tell you, because we’re selling to them nonstop, that’s what they’re doing now. I don’t particularly care for that. I like areas where we’re not competing with people that get money at literally 25 basis points. We get our money at 3%. They get their money at a quarter of a percent. It’s not a level playing field. I don’t like that.
You know me, guys. If you’ve ever been to Infinity, you know that I say you buy and hold forever, you don’t sell. Every bad decision I’ve made involved selling something that I shouldn’t have. I wish I had every house back that I’ve ever purchased. I’d be so happy right now. So don’t sell things, especially to big funds, if you can help it.
Okay, here we go. Somebody says, “Can you provide an example of how to utilize a charitable remainder trust to reduce or eliminate taxes from the sale of crypto stock or a business?” You like them charitable remainder trust?
Carl: They’re not my favorite. I think they’re cool. There are some moving pieces that go into. Certainly one of the hints is in the name of them. You have to have a charity involved. Usually, you can pull some sort of income stream, but the ultimate disposition has to go to a charity. And Toby’s drawn up some buckets here.
Toby: I like to draw things out so I remember them. Whenever you see a trust, just always remember there are three parties: there’s the grantor, there’s the trustee, and there’s the beneficiary. Anytime you hear a trust, just know that that’s what we’re talking about. We’re talking about a trust, and the name of the trust usually gives away. When you hear a land trust, it’s a trust to hold land.
When I have a charitable remainder trust, then we know that the beneficiary, the remainder is equal to a 501(c)(3). That’s it. Now we have a grantor—you—and a trustee which is you. You’re sitting on both of these, and this is the secret. You could actually have your own 501(c)(3) act as a remainder beneficiary. It’s kind of wild, but what’s cool is because I’m giving this to a trustee for the benefit of somebody in the future and for me now, I get a tax deduction.
Let’s say that I have $1 million of crypto. I have really no basis. Let’s say that I bought it really cheap. This year, 2021 tax deduction for charitable giving is equal to about 30% of that. I’m going to say you always have to run the numbers. It’s about 30. I’m going to get a $300,000 deduction and it’s going to go into the trust. It’s going to be held by me for the benefit of myself during my lifetime, so I get lifetime money in a remainder interest. It depends on whether it’s going to be an annuity trust or whether it’s going to be a unitrust, whether I’m getting the income off of it that’s going to come out to me or whether I’m going to get a set amount.
Let’s say I set this up and I’m going to get (let’s say it’s) 6%–7% a year. I’m going to get income for my lifetime of let’s just say $60,000 a year. I’m just throwing out numbers. All this is always going to be subject to the actuaries putting it together or we’re using the IRS tables. This would be taxable to you, that $60,000 a year as ordinary income. You get a big fat tax deduction during the first year.
Here’s the reason people like charitable remainder trust is you don’t have any tax on the gain. The trust can go ahead and sell that crypto and invest it into something else, and you have no tax. You just conjured up a nice, big, fat deduction for yourself. If you wanted a bigger deduction, you just skip the trust and go straight to giving it to a charity that you set up.
If you guys ever listen to me for long enough, you know that I oftentimes say set up all the rich folks to the charities. Why did they do the charity? Because they work. Money usually goes straight into the charity, rarely does it come back out. Usually, they’re just letting it grow and grow and grow and grow.
There are tons and tons of examples of families that have done very, very well. Their kids could still work for the charity and pull out a salary, but you’re not giving your son or your daughter a bunch of money that they can’t handle. You’re giving them a purpose instead. You’re not giving a Lamborghini. You’re giving them an income source, probably a modest income source.
I know folks that work for their grandparents’ trust. When the grandparents passed, the parents went into a private foundation or a public charity. In this case, I’m thinking about specifically as a private foundation. They make $60,000 a year, brother and sister out of it. They don’t pull much out, it grows, and it’s going to go to their kids, are going to do the exact same thing and it’s going to just keep growing, growing, growing, so it ends up working really, really great.
That’s how it works. You could do that with any appreciating asset. The downside is I’m getting income, it could be a set number of years, it could be your life, it could be two lifetimes (I believe) we can extend it out over. I get a nice big tax deduction now, but I do have it in a trust. It is going to go to charity. When I die, it goes to charity.
If it’s an outside party charity, your kids may be giving you the stink eye. Hey, mom and dad just gave away a million dollars. That original million is going to go to charity when it’s all said and done, so they look at it, maybe like where did it go?
To some people that make their living selling CRTs (charitable remainder trusts), they usually sell insurance, too, and they’re saying, hey, take part of the $60,000 and invest it in insurance. Buy a policy on yourself that replaces the million dollars. That’s what they do.
They do well at it, too, because the numbers usually work out. I don’t want to bad talk them. It’s not something I do generally because I prefer to go straight to the charity. I’m not going to say that they’re bad.
If you like this sort of information, by all means go follow us on social media. My favorite, really, is YouTube. Clint does a great channel, Anderson as a channel. Carl, you’re going to have your own channel. It’s Coffee with Carl. Just don’t spill any on yourself. Then there’s Instagram; she’s putting up all the links.
If you can find me on TikTok, you’ll see that I get trolled relentlessly by all the stock traders or the option traders because I always tell them they’re going to lose money, and they fight back. It’s like touching a nerve; you watch them freak out. I’m always like, well statistically you only have about a 1% chance of making money. It’s like telling a gambler while they’re sitting at the table, you’re probably going to lose money. They just lose themselves and they start yelling like, but I’m up, but I’m up. Wait until 5:00 in the morning you won’t be anymore.
Here’s a good one, Carl. “Where do you place on your personal tax return and the corporate return the initial investment as a board member at a nonprofit company? Can it be recuperated or does it become a tax-deductible donation?”
Carl: I don’t know the answer to that one, off the top of my head. I guess my instinct is pointing towards […] yes, which one do you want? Do you want it to be some sort of reimbursement? Because usually you can have a reimbursement plan that applies to the board members. Or do you want to treat it as a charitable investment into the business?
Toby: And you have a charitable investment in a…
Carl: I guess it wouldn’t technically be an investment because you wouldn’t be getting a return.
Toby: So no private inurement. It’s not investment, it’s not a company that you’re investing in. What are you doing when you’re giving money to a charity?
Carl: Donate.
Toby: Yup, it becomes a donation. You’re not getting it back. Somebody says someone TikTok. Yeah, I have fun. They’re 60-second things and I poke at them, just the crazy investors out there, so you’ll see my smiling face. My daughter likes TikTok; I don’t think she follows me, though. I think I have three followers at this point.
Carl: Not after you told her she’s getting a job at your charity, not a lump sum.
Toby: Yeah, she might stick around a little bit more. America’s good kid. All right. It usually is treated as a tax deductible contribution. If you’re putting money in, like hey, I set up the company, if you put it in ahead of time, you could say, hey, I want to get paid back. I could see you doing that as long as it’s documented ahead of time. Otherwise, just treat it as a charitable donation, and don’t set up a charity unless you have a real charitable…
I would say that you’re going to be really unhappy if you set up a charity and you’re not charitable. There are lots of rules that make it really hard to get unfettered access to the cash that you put in there. You can take a salary out, we can do deferred compensation programs for you, it could cover business expenses, anything that’s at an arm’s length.
There are so many cool things. You can get some cool split dollar if you want. With insurance, you can get a corporate-owned life insurance—I love that one, too—and just have a bunch of money dump in there when you passed. If you just like having access to your cash and you want to take it out of your company whenever you feel like it, don’t do a charity. Not the appropriate vehicle; there are plenty of others for you.
All right. I know this is your daily wick here, Mr. Zoellner, because I’ve seen you do this before. “If I want to establish an Airbnb from my timeshare, how do I structure my entities and what is the best way to operate that to save tax?”
Carl: It’s a deceptively short question with some longer analysis here. Timeshare—just hit it as we read it—is going to depend on the rules of your timeshare. A lot of times, if we have a client come in talking about that one Airbnb their timeshare, first thing we need to look at are the rules.
A lot of times, they’re going to restrict the way you own that property, which can change the strategy. Sometimes, they allow for trust to own it, which makes it a little easier. Sometimes, you have these weird fractional interest in these condo associations where you start to unravel it and figure out you don’t really actually own much of anything at all. There are lots of different ways to do it.
I would say, if it’s pretty straightforward or pretty easy—which is rare when it comes timeshares—you could hold it by traditionally use a land trust or an LLC. But really, takes looking at the documents to see what’s happening. Also see the stuff in retirement communities—seen them a lot—where you actually own shares in the community, not actual physical land or have it like a deeded ownership of a property, so it gets a little bit weird. Structure, we start looking at (like you say) from the liability side. Usually some sort of land trust or potentially directly at an LLC; both are viable.
Best way to operate that to save tax, we dig into our friend—IRS Publication 925. There are actually a few different routes or a few different ways money can be earned in a short-term rental. There’s a normal rental property, you get passive income. Then there’s active income not subject to self-employment tax. Then you get a third flavor of active income that is subject to self-employment tax. You have to look at those, like those rules Toby was talking about earlier with the ‘to what level are you participating in the business?’
Rule of Tax Tuesday, I am told, is calculate calculate calculate. One of the things you look at, first step is, is it a short-term rental? To determine if it’s a short-term rental, you look at the average length of stay. To figure out average length of stay, you look at number of days booked divided by number of bookings, which will give you your average length of stay. If that average length of stay is less than seven days, then it’s considered a short-term rental.
Then you move on to that next level of analysis to, what is your participate—
Toby: Don’t leave that off. It’s seven days or less. I’m going to make them less than seven days.
Carl: Okay.
Toby: What type of income? Is that rental income anymore or is that ordinary income?
Carl: I believe it’s ordinary income.
Toby: Yup. It’s ordinary, so it’s non-rental. It’s no longer rental income; it’s just ordinary income. You’re going to have two choices. You’re either going to have active or passive. Passive is simple. It’s I don’t materially participate. If you participate, you’re definitely going to fall under that active category.
The one other thing that they mess around with is do you provide significant services with it? Then you’re definitely have the self-employment tax. It gets kind of funky. What is significant services? It’s something that a hotel would provide. Do you ever dive into that? I don’t want to steal your thunder.
Carl: I dug into it. It’s been long enough that I can’t remember the verbiage because when you especially look at the publication, it’s all about how did they stick the words together. It is there, something that backs on to interpret it.
Toby: Yes, so once you’re dealing in that, what ends up coming up if you’re providing significant services is something that is not ordinarily provided when you’re doing a longer-term rental. It’s did you become a hotel? The way I always think of Airbnb is, it more like a hotel or is it more like a rental for a year? If I did a year lease, what do I expect to receive from the landlord? Do I expect to receive a bed? Probably not, so check, it’s more like a hotel. If I do get a bed, do I expect them to put sheets on it for me? Probably not. Do I expect them to clean the sheets and do all the laundry during my stay? Absolutely not. How about after my stay? Probably not. I don’t think they’re going to give me sheets. Will they leave me a coffee maker and a bunch of coffee? No. That’s more like a hotel.
When you start going down your little list, you realize that when you’re doing seven days or less it’s a hotel, which means it’s going to be ordinary income. The only question is, is it active or passive, and where’s it going to land? If it’s active, it’s going on Schedule C. If it’s passive, that’s going on Schedule E. It could possibly go on Schedule E even if you’re providing significant services but you’re not materially participating.
Technically, you can actually have a passive sole-proprietorship if you’re not doing anything. It’s kind of weird. What was the IRS publication again? There are some folks asking.
Carl: 925.
Toby: 925, there you go. What’s the other categories?
Carl: Of the types of income?
Toby: Or let’s do 8–30.
Carl: Eight to 30 is just like a normal rental, so it would be passive.
Toby: Yup. This is, by default, going to be rental. It’s possible that it falls under the category of rental income if you’re providing substantial services. Where you get substantial services is think of something where they’re staying at the house is incidental to something else. Let’s say you’re at a recovery facility. I’m a recovering gambler. The actual stay is incidental to the recovery. It’s not of itself. It doesn’t have its own value. That would be non-rental.
But if you’re just getting a place and it’s 8–30 days, unless you’re providing cleaning service, unless you’re providing concierge service, unless you’re providing food and things like that, it’s going to be a regular rental. In that particular case, it’s going to be passive, unless you fall into a category of active participation or real estate professional. It gets funny and you go more than 30 days, so 31+.
You have to have extraordinary services for it not to be a rental. Extraordinary services are like you’re literally going on a tour. Let’s say you’re going to go out on a three-month tour or something, and they’re just basically coming up with housing for you. If you’re the landlord on those or if you’re receiving the money for that and you’re handling all that, then it’s all just regular income. Otherwise, this is also going to be rental. Then it’s the same rule as the 8830.
How would we make sure that with all these options, that we don’t screw it up? What’s a good structure to make it so we don’t have to care about this?
Carl: I would say a good structure to look at this is that ultimately, we want the asset held just like we would hold any rental property.
Toby: Which would be?
Carl: Usually, a local LLC holds title to the property, and if we’re looking for a little extra anonymity and asset protection, we can have a Wyoming LLC sitting behind it as the owner.
Toby: You’re going to have it owned by a holding LLC. I’m just going to say Wyoming holding. But this is the big one. Now, the property is sitting in here. If we want to avoid the issue where we have to worry about this 8–30 or any of these issues, the easiest thing you can do is rent it one year lease to whom? Who should we rent it to, Carl?
Carl: Corporation.
Toby: Yup.
Carl: Separate taxpayer.
Toby: We do a corporation, SRC or an LLC taxed as, and this is equal to the host. You just do it that way. I get into fights with Clint all the time on this because he likes the idea of doing the short-term rentals seven days or less, and materially participating. I’m like, how the hell are you going to materially participate? Most of our clients are buying Airbnbs in other states.
But point taken is that yes, you could have that be. If it’s active, it’s ordinary loss. I prefer to get this real estate pro on somebody and to do the structure. That’s why you talk to somebody and have them actually look at your scenario. But I think you’re 100% right on that structure. This would be dealing with the host, would be renting to the guest, and then this right here is definitely rental. This here is definitely ordinary. We don’t have to worry about it anymore. We don’t to think around.
Carl: I guess it’s better to mention, too, because given the amount of people that are on here, those that understand or have been influenced or use Airbnb arbitrage, this is that. It’s just the ability to do it within your own structure.
Toby: Yup. You just look at it, you get facts. They’re talking about kids island down here. That is awesome. You guys can’t see the chat all the time because we have people that’s […] each other on that the chat, but I do enjoy reading your chats. There are some pretty good ones that comment sometimes. Sometimes, some are a little bit profane. Usually, a guy named Jeff Webb.
Carl: He’s trapped under a pile of returns.
Toby: Yeah. He’s probably trying to get his mind. I see him popping in here once in a while. You just can’t get away. Every time he tries to crawl away from from Tax Tuesday, it is […].
Somebody says, “So if you are a realtor how is that different?” If you’re a realtor, then qualifying for a real estate professional is very simple for you, because you’re going to hit your ‘750 hours or 50% or more’ test.
It’s basically like this. If I have rental real estate, it’s considered passive. If I want the losses from that activity, if I’m able to accelerate my depreciation and get big losses, if I want them to offset my other types of income, including my W-2 income from a spouse, my W-2 income, et cetera, if I’m a real estate agent and I’m making $150,000 a year, I have real estate and I can have a loss of $50,000 because of depreciation, If I want that $50,000 to offset my $150,000, I need to be a real estate professional.
To qualify for a real estate professional, I need to meet 750 hours in the realm of brokering real estate, construction, development, reconstruction, doing it like anything in real estate. It doesn’t have to be for my properties. It just has to be me.
Then in addition, I need to be materially participating on my real estate. The test is one spouse on a joint return has to qualify or one person on a single return has to qualify for the 750. In more than 50% of your time test, and both spouses together need to qualify for the material participation.
Material participation is there are seven different tests. The top three that I look at is, are you doing all the work? That you don’t have to matter about how much time you’re spending. If other people are doing substantial services on those properties like I’m a property manager, am I doing more than 100 hours in more than them? Or am I doing this 500 hours? And most importantly, that is per property unless I should choose to treat all my properties as one activity.
It sounds really complicated, but it’s a check-check-check test. If you’re a realtor, we already have the first one knocked out. You’re absolutely going to be a real estate professional. The only question is are you meeting the material participation test on your rentals?
If I don’t want to have to worry about the seven day or less, like let’s say I have five properties. Two of them are Airbnbs, three of them are long-term rentals. My suggestion is if you can meet the real estate professional test, that you do the structure that we just mapped up here, because if I am not doing rental activity with an Airbnb, that time does not count towards material participation. I want to treat them all as one activity. I want to be able to treat it as passive real estate activity, as investment activity, so I’ll have all five properties now as rental properties because I’m leasing two of them to my host corporation.
If I have two properties here, and then if I have three other rentals out here that are doing long-term leases, I can treat all of these together and add up all my time spent on all five for material participation. If I made your head spin, I apologize. It is literally just kind of going through and saying check-check-check. How do we get from point A to point B.
Here’s a good resource. Go to our YouTube channel. I probably put a bunch of that up on the Internet, in our YouTube channel. Carl, you probably had it on Coffee will Carl, too.
Carl: I think everyone of us who had posted content on the Anderson channel has had real estate professional status. I think I even went through with the PDF and highlighted some portions, too.
Toby: Yup. I know it’s not easy, but it’s fun. Go to YouTube, check us out. We have playlists from each other’s channels, too. There’s no end of good information.
Speaking of good information, I mentioned it earlier but I’m going to mention it one last time. The Infinity Investing workshop is on Saturday. If you know somebody who’s struggling with debt, who is trying to figure out investments, is struggling with what should they be investing in, send them to us. We’ll get their heads straight. We’ll point them in the right direction. It’s absolutely free. The basic membership is absolutely free.
The only thing that we ever charge for is we have an advanced workshop where you buy properties, where we sell properties that are generally six and seven caps. We’re looking for cash flow real estate, we have funds, we bring in all sorts of fun opportunities. For example, we had SpaceX before. With our investment bankers, we had Spotify, we had Zipline, and we just recently had Kraken. We get into them early. If you’re a credit investor you get to do that. That’s part of our advance.
Otherwise, if you just want to get good and grounded in your investments, by all means come in, do the Infinity Investing workshop, and join our basic […]. You can spend three days with Pia and Jason every week learning to trade for nothing. Shout out to Jason Cooper and Erik Dodds. You guys are awesome. Why do we do it? Because we are barbers and we are teaching you to grow your hair, right? Somebody said yes, they are amazing.
All right. You can join us by going there. If you like this sort of information, if you like watching or listening to Tax Tuesday, like you can’t stand looking at us but you like to get the information—you want to turn it on 1½ times, you listen to us faster—go to the podcast. You can absolutely do that.
A couple of other things. I’m seeing if there’s anything else in chat. I know that they’re answering questions. Get this, Carl. You see that? 115 questions they’ve answered? There are 14 outstanding so they’ll knock those out, but a big shout out to Eliot, Dana, Jeff looks like he’s on there, and Troy, for during tax season taking the time off to answer free questions. Troy, Dana, Eliot, Jeff, we’ll even throw you in there, and then a huge shout out to Carl for filling in for Jeff. You got big shoes to fill, even though you’re a big guy. Jeff has clown feet. His shoes are so big. Like Ronald.
Carl: Yeah, awesome. That’s amazing, 117 questions. Big shout out to you, guys. Awesome job. And Jeff, I’m drowning in your shoes at the moment, but it was fun to get a chance to chat with everybody live.
Toby: You gave me somebody to chat with and to bounce ideas off. And you’re always welcome back. If you guys have questions in the next two weeks—since we do this every two weeks—send them in to taxtuesday@andersonadvisors.com. There’s literally no cost. We don’t play games here, We’ve been doing this for a long time.
If you want to ask a question, don’t be embarrassed. Even if you think it’s a stupid question. We’ll make fun of it. No, I’m just kidding. We won’t make fun of it. We’ll just answer it, make sure that we get you guys squared away straight up. If you need additional information, by all means visit our website as well, andersonadvisors.com. There’s a ton of content on there as well, but we like sharing information.
If you think anybody would benefit from this, we do live stream this on YouTube so you don’t have to register. If you have one of those folks that’s super private, you say, hey, if you want to get some good answers to questions and you don’t want to pay $300–$400 an hour, by all means come on in and join these guys. We’ll answer your questions the best we can. Got to figure out a way to get those questions from the YouTube side.
Patty, how do they do the YouTube? Is that where we’re broadcasting? I like to get it to where we’re just sending out the information to those who don’t like registering for things. Patty just said yes. I guess you just go to YouTube and go to Anderson Advisors. We have a channel. Oh, she’s answering it, too, so they’re getting it to you. Yup, you just go to the Anderson Advisors. Just type in Toby Mathis or Clint Coons. You’ll find our sites. Clint has one, but Anderson Advisors has one. We’ll make sure that we get everything answered for you.
You can always come in and pop in. Usually, about 10,000 people registered for these. Good little community. Not everybody comes up live, but a lot of them watch it later. If you don’t want to register, you just want to watch the live stream, you certainly can do that, too, or live cast, or whatever they call that on YouTube.
All right, guys. That is it for us. I will exit for Carl and I, but you can absolutely continue to ask questions and the guys will finish answering up questions because they’re awesome. So thank you Troy, Dana, Eliot, Jeff, Ander, Matthew, and Patty who are answering questions nonstop. She always has a really good job. It’s a lot of folks come on here and trying to help you guys out, so take advantage of it. Thanks again, Carl, and we will see you later.
Carl: Thanks for having me. Thanks, everybody.
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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