Should you use your personal name as a beneficiary of a Lady Bird Deed or should you set up a new entity to receive ownership?
In the first Tax Tuesday episode of 2022, Toby Mathis and Jeff Webb of Anderson Advisors discuss how to set up a beneficiary deed and answer additional tax-related questions.
Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- Are the profits from my real estate syndication investment considered passive income? It’s highly likely that your syndication income is passive in nature for two reasons – you’re probably a limited partner and it’s real estate, which are both passive activities.
- Should I use my personal name as a beneficiary of a Lady Bird Deed or should I set up a new entity to receive ownership? Medicare can take a real estate asset to pay for care, but a Lady Bird Deed is an enhanced life estate allowed in five states for a beneficiary to protect their home as an inheritance.
- How does a C Corp pay me (the homeowner) for the use of part of my house as office space? Don’t report it on your 1040. It’s a tax-free reimbursement. However, if you rent your home to the corporation, then it is taxable income.
- Can we still rollover a regular IRA to Roth? For now, you can still do a Roth conversion.
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Resources:
Coronavirus Aid, Relief, and Economic Security (CARES) Act
Full Episode Transcript:
Toby: All right, guys. Let’s see if everybody should be coming into the room right now. This is the first Tax Tuesday of 2022. Going to take me a while to get used to that. First off, welcome to Tax Tuesday. My name’s Toby Mathis.
Jeff: And Jeff Webb. I know who I am.
Toby: We got Jeff Webb here. We missed you a couple of times last year. He’s out running around the globe. He’s on a floating petri dish doing his best to catch COVID, but you weren’t successful.
Jeff: No, missed many flights.
Toby: You got too lucky. Anyway, we have a lot to go over today. If you haven’t been to a Tax Tuesday before, it’s an open forum. We bring in questions that are asked during the week from all of our wonderful folks from all over the country. In fact, if you would be willing to put in the chat, not the question and answer, but put in the chat where you’re from.
We already see Woodinville, Clermont, Florida. We have some people from Delaware, Long Beach, Houston, LA. Now they’re coming in too fast. Spring, Texas, Huntington Beach, Denver, Colorado, Danville Folsom, SoCal, Oklahoma, Minnesota, Jacksonville, Florida, Cheyenne, Wyoming, Toledo, Ohio, Nevada. Wow, they’re going so fast. We must have a pretty good-sized group when they go like that. Laramie, Wyoming, Corpus Christi, Texas, New Jersey, Marietta. We have people from all over the country, I’m not going to try to keep up with them.
We always get a pretty good group on and we answer your questions. We always grab about 10 of them that came in from the last Tax Tuesday and we answer your questions regardless. If you answer generic tax questions, we always get back to you and answer them.
Was in Vegas for two weeks, Minnesota. You’re free of […], it was pretty darn cold. It’s freezing this morning, just kind of weird here. I guess we’re in a desert so it doesn’t make sense.
If you have questions during the event, by all means, ask your question in the question and answer, the Q&A feature, and we have a bunch of folks on. In fact, besides me and Jeff, you have Patty, you have Alexander, I want to say Mr. Kretz from the tax department. We have Christos, […]. We have Dana, Dutch Eliot, Ian. We even have Troy, the head of our bookkeeping department, and Matthew who’s handling all the text.
We have a variable team to help you guys out here. You can always go into the question and answer and ask your question, and they are going in there and they are nailing it. I guess we’re also live on YouTube. If you’re on YouTube, you can ask your question. Our guys will grab it and ferry it on through.
If you have some questions as we’re going along, by all means, ask them in the chat feature. If you have a question about something you want clarity on something that Jeff said or I said, just jump through and just put it on into the chat and you’ll see sometimes I start having a conversation with somebody in chat that’s asking for clarity and I’m asking them specifics, and Jeff does the same thing. The benefit is that I can see stuff and Jeff sees a little bit. He’s like, is that out there?
Jeff: Usually those questions are, what did Jeff say?
Toby: What did Jeff just do? He’s been a CPA for a really long time. He’s not making any sense. Anyway, you can go ahead and ask live in the Q&A feature, question and answer, you can see it. Email our taxtuesdays@andersonadvisors.com. if you have questions during the week. If you need a really detailed response that’s specific to you, then we may say, hey, you need to be a platinum client. Platinum is a whopping $35 a month and you can do all the Q&A that you want. You can have a big old cornucopia.
People always ask us why do we do it. Because for whatever reason, you reap what you sow in this world, and we like to answer questions. I don’t know about you, Jeff, but I remember when I started. I’m an attorney so I’m not a CPA, but when I started in my practice, I met with a CPA and he confused the crud out of me. Made me feel really, really dumb. I was afraid to ever ask him a question because it’s $300 an hour and that was 20-something years ago. I was like hey, I don’t want someone to feel that way. I don’t want someone to have that so we try to make it to where we’re making up for all that stuff.
All right, let’s jump in. Anything you want to jump in?
Jeff: Nope.
Toby: All right. So 2022 first Tax Tuesday, let’s make it a good one guys. Opening questions. We’re going to be answering these throughout the day. There are about 10 of them that we answer, then we’ll answer lots of questions that pop up. Otherwise, we still have some cities coming in, this is pretty fun.
“Are the profits from my real estate syndication investment considered passive income? Can I use passive activity losses from my rental houses to offset my syndication income?” Really good question and we will be answering that.
Jeff’s favorite of the day, “Should I use my personal name as a beneficiary of a Ladybird deed? Or should I set up a new entity to receive ownership? The property is a $3 million asset, a horse farm in Florida.” Great question. We’ll get into what all that stuff is.
“For the second ⅓ repayment to an IRA for penalty-free withdrawals taken under the CARES Act in 2020,” don’t worry, we’ll unpack this for you, “is the correct tax year to list for this second ⅓ payment tax year 2020 or 2021? Also, is the second ⅓ repayment due by December 31st, 2021 or does the second repayment need to be made prior to the date you file your tax return, so potentially April 15th of 2022?” We’ll get into all that fun stuff for you and it’s neither. We’ll go over it.
“If my business is held in Wyoming, and I have rental entities in Connecticut, do I pay Connecticut taxes for those entities? I also live in Connecticut, does this hurt me?” We’ll dive into that.
“How does a C Corp pay me, the homeowner, for the use of my house as office space? How is that calculated? Do I then just have to report that as miscellaneous income on my personal 1040 return?” We’ll dive into that we’ll break it down into what it means and the tax implications.
“I have a property under my name and I transferred it to an LLC with five other members with equal ownership. I have not informed my lender about the change yet,” I always love these, “Is there going to be a problem if I do not?” Fun. We could be using ‘it depends’ a lot on today. Not the physical Depends, I mean the speculative depends. You maybe using the Depends on if you’re the one asking that question.
“I am thinking of setting up a business for mining crypto. My understanding is that I can depreciate the mining machines similar to real estate but that this business would not be considered passive and therefore would be taxed at an ordinary rate. Would I be able to offset my W-2 income if my depreciation results in a loss? Or will the loss be carried forward until I have income from this business venture? Will it still make sense to set up an LLC taxed as an S Corp if I’m already maxed out on FICA limits?” There’s so much in that. There’s so much goodness in there. That’s like biting into a Snickers, so we’ll get into that.
“Can we still roll over a regular IRA to Roth and what are the tax implications? If we have $250,000 in a regular IRA and do a cost segregation on a small apartment building, we’ll have $225,000 bonus depreciation. Will that cover the taxes due from the IRA conversion?” Really good question and we’ll go into what all that means. You guys are going to get a treat today because there are some advanced questions here.
“If I elect to pay the gift tax—the gift is greater than $15,000—instead of using my lifetime exclusion, is the gift tax a deduction on my personal income tax return?” Interesting. This is why I bring Jeff because he knows the answers to these when I just kind of look at you funny.
“I have an existing single-family home which I’m converting to an Airbnb,” just means short-term rental. “I will be personally managing this Airbnb starting December of this year.” These were probably sent in since the last Tax Tuesday. We had two in December, so obviously you’re getting some people that are doing the end-of-the-year stuff but are still very relevant. “My spouse and I both have W-2 income, no other active business. Can I use accelerated or bonus depreciation to offset my W-2 income?” You’ll see why this question is still there because it’s very germane. I’ll show you guys why.
All right, so really good questions today. We’re going to put our thinking caps on because there are some thinking questions in there. Speaking of thinking, we have two events coming up this weekend. These are absolutely free. If you want to share them with anybody, we don’t care. The more the merrier as far as we’re concerned.
The first one is a one-day event. That’s our Infinity Investing Workshop and I have Nicole DiBraccio and Pia Washington on. Nicole will be going over real estate investing. She’ll be up first and then I’ll have Pia on in the afternoon doing stock and stock investing. We’ll be talking about our infinity formula and how we calculate our infinity net worth, how we invest, and how our successful clients invest. Jeff, we do what? Upwards of 10,000 returns a year?
Jeff: Yup.
Toby: Do we like to look at who the successful people are?
Jeff: Oh, yeah.
Toby: We like to see what they do. Do they do kind of the same thing?
Jeff: You can tell the clients are successful and what they do with their stuff, and it’s a whole different mindset.
Toby: It is. We’re going to be teaching you that on Friday. It’s the first time we’ve done one on a Friday.
Jeff: I notice that.
Toby: It’s because we are just jamming. We are jamming, so we wanted to make sure that we didn’t have to push out another week. Then we had the Tax and Asset Protection Workshop, which is more on real estate investing, how to set up everything from land trusts, LLCs, corporations, how they’re taxed. That is on Saturday.
Again, both of these are free. They’re both 9:00 AM–4:00 PM Pacific Standard Time. That is Pacific time. If you’re on the East Coast, you can take a little jaunt in the morning. I love teaching these from the East Coast because I always go for a walk, work out, get breakfast. Then when it comes in on the West Coast, we’re diving right in. When you’re in Hawaii, it’s early. I think that’s the term.
Anyway, feel free to register for those. I think Patty will probably put those into the registration links there. Again, they’re absolutely free. Or you can go to andersonadvisors.com and you could sign it up. These are absolutely no cost. Feel free to join us and we love them. Are they on Zoom? Yes, they are. It’s always fun and don’t worry, during the breaks, we take lots of breaks, we put videos up, and then we always have an hour for lunch or half an hour if it’s Clint because he likes to talk so much. We have half an hour where we put videos up, so you’ll know when to come back. They’re really great.
All right, let’s jump into tax because taxes are so much fun. Jeff, “Are the profits from my real estate syndication investment considered passive income? Can I use passive activity losses from my rental houses to offset my syndication income?”
Jeff: It is highly likely that your syndication income is going to be passive in nature. For two reasons: (1) You’re probably a limited partner in that syndication, and (2) It’s probably real estate. Those are both passive activities.
Toby: They say a real estate syndication, and unless it’s development and flip, even if it’s development and flip, you’re still not going to be a material participant. It’s going to be passive.
Jeff: In this case, it’s a good thing because as you said, you have other rental properties with passive losses. If you generate income in the syndication, not only can you offset those losses, but if you got old suspended losses, you can use those also.
Toby: This is where a lot of people think of income and they think oh, there are two classes of income. You got active and passive. There’s actually a whole bunch. There’s active, there’s technically a portfolio which is where your capital gains live—dividend, income, interest, and royalties. They’re living on that portfolio income. Then you have your passive income. On the passive income side, you have rents—unless it’s an exception, which we dive into—and then you have businesses in which you do not materially participate.
Everybody always thinks passive and they immediately think of rental real estate, but it could also be that Jeff has a pizza shop and I’m a silent partner, I don’t do anything. I just provided some capital, I’m an owner, it’s kicking out income every year. Jeff’s a really great pizza maker, kicks me out of income, and now I’m trying to keep that income from being taxed. I might use my real estate and accelerate some of my depreciation on my real estate to offset that. Or, when could my real estate syndication be considered not passive? It depends on me. And what are the exceptions?
Jeff: Real estate professional.
Toby: Yup. Realistically, there’s the active participation in real estate, but that phase is out when you’re over $100,000. If you’re in syndication, you’re telling me that you’re making over $300,000 a year if you’re married, or over $200,000 if you’re single. That’s out the door, so it really is a real estate professional.
In real estate professional, 469(c)(7) and it’s just a little hoop you have to jump through. Hey, I work in this area as the primary source of my income. I’m a realtor, I’m a broker, I’m in construction. I’m doing development, I’m flipping houses. I don’t have to be doing it for myself. I could be doing this for other people. I could be doing construction for other people and still use that time, and then I’m materially participating in my real estate activities.
Jeff: I can be a real estate professional with one property if I can meet the time requirements. With a syndication, you’re probably not going to make those time requirements by itself. If you have other real estate properties like this question says and you group those together, you’re probably meeting that time requirement.
Toby: Yeah and what Jeff just said, that little grouping comment, if you missed it, it’s probably the biggest mistake we see on returns from people that don’t have accountants that understand real estate because you actually have to make an election to group all of your real estate activities as one activity and treat them as one activity. Therefore, your real estate with the syndication is no different than your single family residences over here. They’re all treated as one activity. If you have a little bit of loss over here, and you have income over here, they offset.
Jeff: Yup.
Toby: Yay, we like that. Or the time I’m using on this property over here, I can lump it up with this one over here, if that makes sense. The real estate guys are going yes. Everybody else is going, what the hell did he just say?
“Are there downsides to aggregating real estate?” Brandon actually asked a really good question. Yes, there are. If you group activities and you have carry forward losses from previous years, you’re suspending them until you get rid of the majority of your properties. Substantial all, right?
Jeff: Substantially all.
Toby: Yup, so what’d you do? Is there a trick? I should ask you because you’re the genius.
Jeff: Well there is a trick, like you talk about having a passive business that’s generating passive income. You could apply that against suspended losses, but otherwise, they’re trapped in there.
Jeff: Can you group different properties together with different activities? Do we have to group all of our real estates as one activity?
Toby: Once you make that election, that election groups all your real estate activities together. If I go out next year and purchase another property that automatically gets pulled into that aggregated group. One piece of advice we usually get is if you have a property that you’re considering selling in the near future, I would sell it first.
Toby: The reason being is that if you have losses that are being carried forward from that one piece of property. Let’s say I bought a property. It was pretty much breakeven and I took a bunch of depreciation and it’s accumulating. I have $50,000 of depreciation that’s carrying forward on that property. That $50,000 of loss releases when I sell that property if I do it before I aggregate it with all my other property.
Again, I don’t want to get too complicated. That’s why you sit down with an accountant and you say, should I do this? What are the upsides and downsides? I really appreciate you, Brandon actually asking that. It’s a really good question.
Somebody says, “Oh, investing in crypto.” I love crypto. I like crypto. Not everybody does. I used to not like crypto when it was like $3 and everybody was saying hey, you should be investing in crypto. I didn’t like crypto. I waited until I hit about $17,000 and I said ah this looks like a good idea. Toby’s a dumbass sometimes.
All right, let’s jump into the next one. “Should I use my personal name as a beneficiary of a Ladybird deed or should I set up a new entity to receive ownership? The property is a $3 million-plus asset horse farm in Florida.”
Jeff: Let’s talk about the Ladybird deed first. The Ladybird deed is a type of life estate. From what I know of it, its real purpose is to avoid some of the Medicare rules that allow them to come in and grab. If I just have a life estate, say for my primary residence and all, even after that five-year period, Medicare can come in and grab that asset to pay for my care. The Ladybird deed avoids that, but it’s only available I believe in five states, Florida being one of them.
Toby: Right, five states. What it is, just so you guys know, lawyers will look at this and if they’re not familiar with the term, I’ll just use the term you are familiar with. It’s an Enhanced Life Estate. I have a life estate, but it’s enhanced. Normally, if I have a life estate, I could sell Jeff a property subject to me residing in that property for the rest of my life. That’s called a life estate. We could actually use an IRS table to say what’s my life expectancy and do a percentage valuation of how much that thing’s worth. You could do things like that.
In this particular case, we also have the ability to say who gets the property when I die. I am getting the right to remain in that property, plus I still have control over who gets it when I’m dead. What Jeff is pointing out about Medicare is exactly 100% correct. The reason a lot of people do these is because in order to qualify for federal assistance and not have it deplete everything you own, you have to get rid of assets five years prior. I didn’t look it up on this one, but I believe that’s true on a Ladybird deed, too. You have to have gotten rid of this five years before you’re going to qualify for federal assistance.
Just think of it like this. Somebody has been living their life, they have this property that they’ve worked so hard to build up, and they know that their health is deteriorating. They don’t have any ways to maintain their existence other than their retirement account. They know that if they leave it, that the federal government before they allow Medicare to be used is going to sell that asset and require it be liquidated to continue to pay down until you have a small-enough base of income or assets so that then you qualify. You have to spend everything you got.
If you know that that’s your situation, let’s say Jeff was my kid, I might give Jeff a Ladybird deed where it says I’m going to reside in it until I pass away and then Jeff’s going to get it. But I’ve given away most of that value already and I’ve removed it as an asset that’s part of my estate because the right to reside in it wouldn’t be effective against the Medicare calculations. That’s what you do.
States that don’t have Ladybird deeds have Enhanced Life Estates still. You could still do Qualified Personal Residence Trust, the QPRT. You could do other types of things where I do Enhanced Life estate. I’m going to have to draft around it, but this is why you’re doing it.
Jeff: In Texas as Ladybird deeds, go figure.
Toby: The places that have the big homestead.
Jeff: I think it was Texas, Vermont, Florida, Michigan.
Toby: I think Michigan, Florida for sure.
Jeff: West Virginia, I don’t know why West Virginia.
Toby: That’s more than five so I know we’re wrong. Yeah, just go look him up. John’s asking is that like a Transfer on Death. Ladybird deed is two deeds, Life Estate plus Transfer on Death. That’s exactly what it is. If your state does not allow Transfers on Death, we’re going to have to draft around it. We’re going to use a trust.
Jeff: How do you feel about having the beneficiary of that deed be the owner of the property?
Toby: It depends on what they mean by the beneficiary. There are two types. There’s a remainder beneficiary, which would likely be an individual or your living trust. When you’ll be a living trust, it has to be something outside of your state’s. More likely an individual. Then there’s the lifetime beneficiary who gets to stay there.
Jeff: They ask about other choices. I don’t think that LLC does anything for them. I know another possibility is an irrevocable trust, which I’m not totally crazy about. QPRT.
Toby: And any other irrevocable trust, you draft around. If you sell it, you’re going to end up with all that cash. The Ladybird deed really is kind of your first level of saying, I don’t want to be moved. I want to live and I want to reside in my house until I pass. I don’t want to deplete the value of that asset. I want it to go to my kids or want it to stay in my family. This is the only way that you really do it. Ladybird deeds are currently only authorized for Florida, Michigan, Texas, Vermont, and West Virginia.
What would I do? Personal beneficiary is a lifetime beneficiary, I think you’d have to and then the other beneficiary would be whoever your heirs are. Realistically, I’d be using a QPRT or something else, if I wasn’t going to use a Ladybird deed in this particular case. The only thing that throws me off is the asset, which I believe you can always do in a personal residence. But if you have a horse farm that’s attached and they consider it separate, then I’m not 100% certain.
Regardless, we’d have to dig into this a little bit and make sure that we’re doing what’s right by it and frankly, I’d probably be pointing you to a local attorney on this one saying hey, deal with somebody who deals with something that’s specialized to that particular state. We could certainly assist and get you the information you need so you can decide whether it makes sense.
Somebody says, “What’s available in California since there’s no Ladybird deed?” Payable on death, Life Estate, that’s where you’re drafting around. Again, there are really two things. It’s an Enhanced Life Estate. If you were just walking in saying I’m just using real estate terms and I don’t want to say Ladybird, what I’m saying is it’s a Life Estate with the ability to pay on death.
All right, this is a good question, by the way. The CARES Act brought us the ability to take early distributions at our 401(k) and IRAs of up to $100,000 per participant. The rules when they came out with them under the CARES Act—I think it was section 2200—were really ambiguous and they said oh, you spread out the tax pro-rata over three years and blah-blah-blah. I don’t even think they said pro-rata, but they said something.
It’s been interpreted to mean you spread out the tax over three years and then you have until the end of the third year of the tax year to repay it. You take it in 2020, you’d have the end of the third tax year, which would be, 2022 would be this year, at the end of this year. You’d be spreading it out ⅓, ⅓, ⅓. The tax, you’d have to pay it back to avoid any tax by the end of the year. You can put it back in and it’s a glorified rollover.
Pretend you rolled out, you rolled over an IRA, and you have 60 days to put it back in. They’re just basically saying, you have three years to roll it back in but you have to recognize the tax ⅓, ⅓, ⅓ over those three years. The only reason I bring this up is because this gets confusing otherwise. Based on what I just said, Jeff, what do you think?
Jeff: Let’s forget about the whole tax part because that’s not really how it works. What the rules ended up saying was, I have to recognize a third of the distribution in year one, a third in year two, a third in year three. Just a little soapbox. I don’t know why they included 2020 as year one. The distribution year, you had to pay the tax on it. Anyway in 2022, let’s say you had a $90,000 distribution. You’ve already reported $30,000 in 2020.
Toby: Hold on a second, you say in 2020 you took a $90,000?
Jeff: 2020 took a $90,000 distribution. I heard that.
Toby: Let’s apply that to these facts. They took $90,000 in the year 2020. How much did they have to report as taxable income on their 2020 taxes?
Jeff: They had to report $30,000 of income.
Toby: Did they have any penalty on that?
Jeff: No, if it was COVID-related.
Toby: Did they actually have to pay back the $30,000?
Jeff: They did not.
Toby: Do you have to pay anything back in the year 2021?
Jeff: No.
Toby: Do you have to pay anything back in 2022?
Jeff: No. It is an option, though.
Toby: Yes. If I do pay back the entire $90,000 by the end of 2022, then what do I do?
Jeff: Then you’re going to go back and amend your previously filed returns.
Toby: And you’re going to get back…
Jeff: The tax you paid on that $30,000 you reported each year.
Toby: This is where Jeff and I were griping like angry school kids because this is the dumbest thing ever. They’re going to make us recognize the tax over three years, but if we pay it back, then we’re going to have to amend. I said, why don’t you just give them an option to recognize it in any of those three years? That way, it’s no-harm-no-foul if you pay it back.
By the end of 2022, you just pay back the $90,000. There’s zero, then you don’t have to do any reporting. It’s easy. They made it hard. Now we’re going to have to amend two years of tax returns. The answer to this question is, for the second ⅓ repayment, there is no such thing. You only have a second ⅓ tax bill. That is due, regardless of whether you paid it back or not. You have to pay the thing back (the entirety) by December 31st of 2022, that’s it.
Jeff: If you choose.
Toby: If you choose. If you don’t, you’re going to have that last third taxable in 2022. You pay it in, you don’t have any penalties, you go about your merry way. You get it back into the retirement plan, which is actually a pretty good option, and you get to go back and write off. You’re going to take two amended returns, depending on what your tax brackets are, maybe great. You could go back and get the money on that.
For some of you guys, I was reading in the question & answer, somebody said that 50% tax bracket, somebody like that, $60,000 would be worth $30,000 of dollars in your pocket, I might be going and doing that.
Jeff: This year I’m going to file my 2021 return. I’m going to put in $30,000 for retirement income and that’s going to go into my tax calculation.
Toby: Yup, that’s assuming, again I’m going to write it down just so people don’t get confused. Here’s the tax, $90,000 was taken in 2020. Tax in these following years on that would be $30,000, $30,000, if you don’t pay anything back. Repayment is all the way up until the end of 12/31/22. There’s nothing that has to be repaid, just so you know. For this individual—again the reason I grabbed this particular question is I looked at it and I said it’s relevant to some of you guys, even though it’s after the year-end—you don’t have to repay.
Jeff: Let’s say I’ve taken $90,000 out. I’m in 2022, can I make a partial repayment?
Toby: Yes. I could partially repay and it’s just like a rollover. They call it a trustee-to-trustee rollover. If I did not roll it back into my retirement plan, then that would be treated as an early distribution. Under the CARES Act, you don’t have to worry about the 10%. So if it was part of that distribution, you don’t have to worry about it.
Jeff: Now the last question on here had to do with a tax payment. Technically, it’s due April 15th. Whatever your tax is, you may have estimated tax penalties if you didn’t pay along the way. I hate to say they’re not really substantial.
Toby: […] about the taxpayer. She’s just saying, they have to repay.
Jeff: Okay.
Toby: A lot of people are under the assumption that they have to pay this thing back over three years. No, you have three years to pay it back. Again, the same thing as the 60-day rollover. It’s just they made it a 1200-and-something–day rollover, 3 years. It was 3 times 365, some big number. It’s a lot of days that you have to treat it as rolled back over. They make you pay tax as you go along, which is in my opinion, kind of dumb, but I don’t write the laws.
Jeff: That’s a nice interest-free loan, but a lot of people don’t have the money to repay it.
Toby: Yeah. Nowadays, they’re giving everybody free cash. You get some cash, you get some cash. They’re going to print more cash this year. Everybody says the hedge against inflation is this crypto. That’s not why I like crypto. Crypto actually follows the growth stocks pretty closely. Go chart Bitcoin and look at the dates that they announce the interest rate or the inflation rates.
Every time they do the inflation rates, watch what happens to the crypto right after. Now you can thank me for trading crypto because that’s what you guys are all going to run into. You’re going to say, oh, my God, they’re tied. What do you mean they’re tied? They’re not supposed to hedge against inflation.
Jeff: But gold’s been going down and they can’t explain it.
Toby: They always say it’s a hedge against inflation. I’m like, yeah, it’s doing the opposite of what you’re saying.
Somebody is asking a question. “Can you take the interest-free loan in 2022?” No, you had to do it by, I think it was like January of 2020 or something. The boat has long since sailed, Richard.
All right, “If my business is held in Wyoming and I have rental entities in Connecticut, do I pay Connecticut taxes on those entities? I also live in Connecticut. Does that hurt me?”
Jeff: I’m assuming that this Wyoming entity is a pass-through entity.
Toby: It’s probably holding.
Jeff: Yes, if it’s a partnership, it’s going to follow Connecticut tax return. It’s got Connecticut property. It probably won’t pay taxes in Connecticut, however regardless, that income is going to get passed to you, especially since you live in Connecticut, and you’re going to report it on your tax return. So yes, you will pay Connecticut taxes.
Toby: Unless he is ready to look at it. Wherever you make the money, chances are, it’s going to be taxed then. If you live in California, they’re going to tax your entities as though they’re there too. Because the way they look at it, the Franchise Tax Board, it says if you’re an owner, your entity is there for their purposes, whether it’s constitutional or not. I think that they always have issues. They tend to lose those cases, but then they just change it slightly and go doing it.
I can say that because Eric used to work with their Board of Equalization and he said, that’s exactly where they take it. I could say from somebody who worked there as an attorney, that was kind of their ammo or something. We have to get the revenue. The state needs the money. In most cases, you’re just going to be paying taxes on the rental income. If it’s rental losses, do you pay any Connecticut taxes?
Jeff: No. Actually, it could reduce your income on your personal return.
Toby: It may actually help you. It doesn’t hurt you. Then some states have franchise fees. Some states have set costs. In Nevada, we have a business license. Yes, you’d have to pay those in Connecticut. You wouldn’t necessarily have to pay it on the Wyoming side. But in the entities that are doing business in that state, you would just pay them to Caesar. So you have to pay for it.
And somebody correctly pointed out, by the way. When we’re talking about taxes, especially the CARES Act, those are federal tax statutes and some states don’t follow them. I think Mark was pointing out that in Hawaii, if you took out the early distributions, you don’t have the federal penalty payment, but you might have a state tax. That’s probably 4% or something like that, 4% or 5% that you may have to look at. So, 100% Mark, you have a very good comment.
Think of it, when we’re talking about things that are federal, that you always have to also apply to your state. The CARES Act was very specific. It was a federal statute that gave a lot of benefits and there are all sorts of fun stuff, carrybacks, accelerated depreciation, increase. They gave us 100% Adjusted Gross Income deductions for charitable donations. That’s all for federal tax purposes. Whether a state follows it, is up to that state. They kind of do what they want. If you live in a state that’s kind of into you, chances are, they didn’t follow it. So California, Wyoming—
Jeff: California is notorious for not following.
Toby: Yeah, they like to do things like that. Make you go, yay, I can do this and then they go […].
All right, “How does a C-corp pay me, the homeowner, for the use of part of my house’s office space? How is that calculated? Do I then just have to report that as miscellaneous income on my personal 1040?” What do you say?
Jeff: Let’s answer the last question first. No, you don’t report it on your 1040. It’s a reimbursement, tax free
Toby: What if you rent it to your corp? What if your corp says, hey, Jeff, I really like to rent your home office this little piece of space?
Jeff: That would be taxable income.
Toby: That’d be taxable.
Jeff: Don’t do that.
Toby: Yeah. We’re going to go under an accountable plan.
Jeff: Accountable plan, reimbursement for administrative office. This is actually really simple to calculate. You’re going to come up with all the deductible expenses, interest on the house, taxes on the house, HOA fees, utilities, repairs, general repairs to the house, all of those types of things, and you’re going to come up with a number. Let’s say your house has four rooms, and you’re using one room for your office, and it needs to be only for your administrative office.
Toby: It doesn’t have to be this crazy, exclusive. It has to be where you pay the bills and basically run your business.
Jeff: One of the four rooms, so 25% of the total of all your expenses you came up with, you could get reimbursed for. You can do it on a monthly basis and annual basis.
Toby: Jeff said I hope he just caught it. The amount that you could actually reimburse yourself and it is not included in income, it’s 26 CFR 1.62-2. It’s for accountable plans. You have to be an employee, which means it has to be an S-corp, C-corp, or an LLC taxed as an S-corp or C-corp, and it’s reimbursing you.
You don’t have to get a salary. You don’t have to have wages in addition. It can just reimburse you for this because the business is getting the use of your home. It does not get reported. It is not subject to tax, it is not subject to employment taxes. It’s not subject to being reported as income. Period. It’s just like if Jeff was on his way to work and I said, hey, Jeff, pick up a bunch of Krispy Kreme or you guys like Pinkbox?
Jeff: I like Krispy Kreme.
Toby: But what is your accounting office?
Jeff: I don’t know. They’re too fancy.
Toby: They are fancy. I’m an accountant, but I like the Krispy Kremes, the mushy hot. My dad loves those things. Jeff stops at Krispy Kreme. He comes in and gives me the receipt. See? Sherry’s even on board, Krispy Kremes are the best. I don’t know. It’s just like liquid crack. It’s just like nasty stuff. He brings a receipt, $30 and I give you $30. We’ve all done this. No tax, zero reporting. The business takes that receipt and writes it off. This is no different when I do that.
Let’s say that Jeff is working from home. He’s doing all of his admin stuff from home and he’s working for his own business. His business is a Wyoming business and he’s doing his work from home. It’s what a lot of Anderson clients are doing. It can literally just reimburse Jeff.
Jeff, you can add in things like cleaning, utilities. And this first question here, the homeowner, you don’t have to be the homeowner. The homeowner, you’re going to have more mortgage payment. But if you’re a renter, you get to reimburse on the rental payment, too. This is not the home office deduction that you do as a sole proprietor.
Jeff: It’s actually a bigger deduction for the renter than it is the homeowner.
Toby: It’s actually because quite often, the renters pay more.
Jeff: Yup.
Toby: 100%. When you look at this stuff, you get to add it all up. We use a form sheet. If you’ve ever seen the tax toolbox, it’s in there. If you’ve ever gotten through a Tax Wise Workshop, it’s in there. I go over it quite often at the Tax and Asset Protection events on Saturday—I’ll probably do it in the afternoon—I go over the sheet and I show you how we’ve actually calculated them.
I’ll use an example on somebody that was a $750 deduction as a sole proprietor under the home office deduction. It was just over $5100 as a deduction for the business. That’s what accountants never seem to calculate when they’re running a, should I be a corp because they’ll C-corp? Oh, double tax. Not if you don’t have any. Anyway, fun stuff.
All right, here’s another one. “I have a property under my name and I transferred it to an LLC with five other members with equal ownership.” Five others, so there are six people. “I have not informed my lender of the change yet. Is there going to be a problem if I do not?”
Jeff: You want to say it?
Toby: It depends. Here’s the deal. If they ever figured it out, they might call the note, too. In all reality, a lot of people do this exact thing and they just don’t tell anybody, but you’re on the hook for it. Chances are, if you’ve got the loan, and you bought a property in an LLC, and only your name is on it, because generally speaking, the people that are on the loan are greater than 20% interest holders, so there are six people.
You may be the only one that has greater than 20. They don’t care about the other members anyway. You’re probably on the hook and they have the property secured. They’re ahead of those other members anyway. They’re generally, no-harm-no-foul. You’re not supposed to do it. You’re supposed to let them know.
But I’d be lying if I said I haven’t done the same thing. I’ll go out and say, I’ll get the loan on this one with my partner-client and sometimes they’ll be like, hey, it’s just so much easier. The mortgage broker will even tell you, just put it in an entity, please just let me deal with one person because we’re going to have to do all this paperwork. We don’t want to do, too. If it’s greater than 20% ownership, they have to go and put you guys both through this nasty underwriting process. If you just say, hey, I’m just going to do this, and this is the LLC it’s going to go into. It’s in that LLC, and then you transfer in the other members. Chances are, they’re never going to care.
Jeff: They mainly care, is the loan being paid?
Toby: That’s what they care about.
Jeff: If you have not given them a reason to be concerned, they’re probably not going to be concerned.
Toby: They don’t care whose bonds are paid. That goes like my dad passed away years, and years, and years ago, and his stain is still on the mortgage. He paid it off, but doing it his stain was still on the mortgage for a lot of years. We just kept doing it.
All right, this is a good question. This is a longy. “I am thinking of setting up a business for mining crypto. My understanding is that I can depreciate the money machine similar to real estate, but that this business would not be considered passive, and therefore would be taxed at an ordinary rate. Would I be able to offset my W-2 income if my depreciation results in a loss or will the loss be carried forward until I have income from the business venture? Would it still make sense to set up an LLC taxed as an S-corp if I’m already maxed out on FICA limits?”
Jeff: I’m going to get my caveat first. If you’re talking about mining Bitcoin, in particular, Bitcoin is 90% mined. There are only about two million coins left.
Toby: It’s going to take till 2140 to mine them all.
Jeff: Really?
Toby: The difficulty equation. It doubles.
Jeff: Go ahead. I did see where Bitcoin was trading below 46 this morning.
Toby: Yeah. But what most miners do just because I play with the miners, we know this, like there’s somebody second to the crypto question. The crypto, generally, if you’re using safe hash or something, which is the hash rate, it’s determining which coin is the best for you, and then converting it over to Bitcoin. You might be mining Cardano, and going, and then exchanging it over for Bitcoin.
You’re not necessarily mining Bitcoin because it might take too long, and too much resource, and too much energy to do it. But mining is ordinary income, mining is active if you materially participate. They’re going to say you materially participate in that business. Pretty much. Period. The only way I could see you’re not materially participating is almost impossible. It’s like if you had a partner, and you just weren’t doing anything, and your partner was doing everything. But if it’s your business, chances are it’s going to be taxed. When you say ordinary rate, that does not mean anything for the self-employment tax. That just means your ordinary rate.
Rents are taxed at your ordinary rates, interest is taxed at your ordinary rates. royalties are taxed at your ordinary rates, short-term capital gains are taxed at your ordinary rates. What you’re saying is I have active ordinary income. Is it subject to self-employment? Yes, because it’s active because you are materially participating. If you have losses, and then let’s answer number two, can they write off the machines?
Jeff: Yes, all your equipment. When you buy—and you’re going to buy a substantial amount of computing hardware—that’s all going to get bonus depreciation. You’re going to write it off in the first year.
Toby: You’re going to do section 168(k) or 179, right?
Jeff: Yup.
Toby: All that means is make sure that you continue to use it as money, equipment, convert it into a personal gaming machine in year two. Under 168, we don’t care. Under 179, it could cause income inclusion, which we worry about probably next year and the year after.
Jeff: And the way this mining equipment works usually has to have a large bank of computing hardware. You have to have methods to cool it. It’s all five-year property, which means it’s subject to bonus depreciation.
Toby: And it’s not going to make it. Let’s be real. Mining machines, you’re talking about three years on those video cards. Most of them, the motherboard might last, but those video cards are a big deal.
Jeff: You also need to track your utilities, which may not be the easiest thing to do if you’re running them through your regular electric bill.
Toby: There’s somebody asking a really good question, by the way. “What if I’m doing colocation hosting?” You’re hosting a facility, we would want to look at what that facility is and take a look. John, I would invite you. Hey, Patty, if you can get John’s information because I’m digging into this as much as I can. I don’t know of an exception for the colocation, but we are looking at it because you’ve been on my YouTube channel, you saw that we’ve shown you a way to make crypto tax-free, and you never pay tax on your mined bitcoin. You’ll pay tax on the mining portion, but on any appreciation beyond that, we’ve gone in and we showed you a way to do that inside of a Roth and actually do it.
There’s a specific way to do it. You have to set up an LLC taxed as a C-corp that does the mining and then you pay it out as a dividend. It’s not taxable. It only pays tax at 21%. Then any growth from that point on, because you pay tax on the spot value of that coin when it’s mined or that portion of a coin.
We have some clients, one guy, a really great guy. He’s an airline pilot, made over $700,000 last year mining coins, mostly Cardano, and there are folks making good money out there. There’s always this talk about energy and you just have to make sure that it’s worthwhile. It depends on the value, the spot value of those coins just like mining gold whenever I see the gold rush. I’m always like, they’d be really happy if gold was $10,000 an ounce. They’re still working their butts off when it’s $2000 an ounce.
Jeff: I think the biggest surprise for some miners has been the utility bills that come along with it because they can run $25,000–$35,000 a year.
Toby: Yeah, and you have to do this a lot. They’re loud.
Jeff: Put them in your garage. You can park outside.
Toby: It depends on how many video cards you have, really. You can co-locate or you can do this. Somebody is sending us. I’ve seen if there’s anybody else giving me anything, ASICS. We’ll have to look at the ASICS. Joe is another one. If you get my email from Patty, I’m looking at it, everybody.
There’s actually a helium minor in our office. Just so you know, Barbara, one of our guys actually does helium. Some of the machines aren’t. There are a few that are just massive energy sucks and some that aren’t. It depends on how many video cards you have in most machines. If you get one video card, you’re not going to care. You’re not going to notice it. You have 10 video cards, it’s going to be loud and it’s going to be sucking some energy, but you’re still going to have a profit margin. It’s usually per video card. It’s about $20–$30 a day, which again, I’m not telling everybody to go mine, but there has been no guidance on anything other than the hard forks and the mining. We still don’t know about staking, although, I think I did it on the last show where I recorded…
Jeff: Yes. Staking is still being treated as ordinary income.
Toby: It’s still ordinary income. Your Association of Certified Public Accountants have asked the IRS to give us guidance and they have yet to do it. But they’ve said let’s treat it as ordinary and I believe that’s the same.
Jeff: They’re still behind a million returns to be reviewed.
Toby: There’s this 10 video card mining on one PC. No, they’re building the machines. The mining machines are quite often just a video motherboard and then they’re adding a bunch of video cards. I don’t build them, so neophyte here. I’m a lawyer just trying to learn as much as I can from my clients.
Jeff: Can you go back to the last question about…
Toby: The setting up the LLC?
Jeff: I kind of prefer going with an S Corporation even if he is maxing out the FICA because he’s still going to pay Medicare on it.
Toby: Yeah. FICA has two components, old age, death and survivor or disability and survivors insurance, and then hospital insurance. The old age, disability, and survivors is phasing out. This year, I believe it’s 147,000, but it’s 12.4% and you get a deduction on 6.2%. There’s an equation. At 2.4, you’re going to be paying no matter what and you’re going to get a surcharge of 0.9, depending if you make too much money. You’re looking at 3.8%.
Is it worth it to do the S? In our opinion, yeah. Plus, if you’re an S-corp, you are now an employee and then you can do all the reimbursements. You cannot do that if you are just doing a sole proprietorship LLC. You can’t do the Administrative Office.
I’ve yet to run across a situation where it was cheaper to be the sole proprietor, plus your audit rate is almost 600% higher and they lose those audits. Last year data was 94%–95% of those times, so you lose when you’re a sole proprietor because you tend to do bad, like you’re not treating it formally. Most people just kind of treat it as a side business and they’re mixing the accounts. The IRS eats you alive. You set up an S-corp, you’re setting up a business account, you tend to keep it separate.
All right. I love going into the crypto stuff because it’s an open frontier and because we’re printing out so much cash that you see more and more people talking about it, getting it. If you’ve been part of our Infinity, you know we have a crypto. Grant Luna, great guy there. I think it’s every week, and we have a whole bunch of people that are true believers. They’re always going after the clients. I only know what I know, I’m not an expert.
“Can we still roll over a regular IRA to Roth, and what are the tax implications? If we have $250,000 in a regular IRA and do a cost segregation on a small apartment building, we’ll have $225,000 of bonus depreciation. Will that cover the taxes due from the IRA conversion?”
Jeff: The first part of the question is yes, you can still do a Roth conversion. That’s one of the things that Congress has targeted or getting rid of. They don’t like the Roths. But for now, you can do the Roth…
Toby: It was part of the Build Back Better plan. They were trying to undo the super mega backdoor Roth, which is the way to put $58,000 a year into the Roth. They’ve yet to undo it. It’s not part of anything that’s out there right now. Build Back Better right now has a fork protruding from it, but we’ll see. It’s one person away from passing.
Jeff: The second part of the question talking about can I use it to offset or I’ll use my cost segregation to offset the income from the Roth conversion, that’s going to have a little asterisk by it that yes, if you are a real estate professional.
Toby: Let’s break this down. First off, can I still do a conversion from a traditional IRA to a Roth?
Jeff: Yes.
Toby: I can do that until when? April 15th?
Jeff: No. That had to be done by December 31st.
Toby: Could I reclassify an account? I think I still have the ability to reclassify a traditional IRA and make it into a Roth.
Jeff: No, that would be a conversion.
Toby: I think I have a reclassification done.
Jeff: They did away with that in 2018 that there’s no longer any.
Toby: I think you’re probably right. I know that you can’t roll, that you’d have to do that before year end. But I believe that there’s a small little window that somebody can do something before the…
Jeff: You can make contributions to an IRA up until April 15th.
Toby: Yeah, but I’m wondering whether you could still reclassify that.
Jeff: That one, I actually looked up just this week.
Toby: Okay, so as long as you did it. Everything has to be done by 12/31, but the apartment conversion, when Jeff said there was the real estate professional status is what makes that go from passive to an ordinary loss. If you have bonus depreciation and you qualify as a real estate professional, then you could use it. You can make that election all the way up until you file your tax return.
Let’s say that apartment building is in a partnership, technically, you can make that election all the way up until the partnership tax is due. You could do a 3115 or you can make an initial election.
Jeff: All for the cost segregation?
Toby: Yeah.
Jeff: Yes.
Toby: You could do the cost segregation through next year all the way up until September, assuming that the small apartment building is not in an IRA and it’s probably an LLC taxed as a partnership. Or if it’s an LLC that’s disregarded for tax purposes and it’s flowing on page one of your Schedule E, then you’d have until October 15th, assuming that you file an extension. You have some time on the cost segregation, but chances are you would still have to have rolled the IRA to a Roth.
“Can you do this in 2022?” Yeah, you could do it. In fact, you could just delay this whole transaction. Let’s say that this individual said, oh, I don’t know, I’m not going to do anything, so they sat on their hands. You could do it in 2022. You could still convert the traditional IRA into a Roth. You’d want to do that. If you did that now, you’re going to get the same economic benefit because the money is in the Roth. You would have the taxes due on that conversion next year and you can make the cost segregation, the change of accounting election, on your 2022. You are not stuck having to do it this year.
Hopefully you realize you have a little wiggle room. You don’t have to do things. If you did do the conversion last year, and you have the bonus depreciation, and you qualify for the real estate professional, then you’d be able to offset almost 100% of the conversion.
Jeff: I agree with you. I think if I’m doing this transaction, I want both things to happen in the same tax year.
Toby: Unless you’re not a real estate professional, in which case, I don’t really care whether you take it.
Jeff: Yeah, that’s true.
Toby: You’re going to make more this year than last year.
Jeff: If you’re not a real estate professional, then you’re not going to be able to recognize that $225,000 of loss.
Toby: Unless you’re selling it. Or you could always say, you know what? I want to convert. How about I convert half this year and half next year? Can you do that?
Jeff: True. I mean, that’s a point that I make to people. You want to do a Roth conversion? You don’t have to do it all this year, you can do it in bits and pieces.
Toby: Let’s go right up until like, let’s say, hey, you’re about to go into the 37% something tax bracket. Let’s keep you out of that. We’ll keep you in 24%. What’s the pain level you’re willing to suffer?
All right, “If I elect to pay the gift tax,” this is a situation where you’re going to have to lay out what gift taxes are, “instead of using my lifetime exclusions,” which is $11.8 million lifetime exclusion right now. That’s per spouse of married couples, close to 23–26, or something like that. It’s a huge amount, “is the gift tax a deduction on my personal income tax?”
Jeff’: When we’re talking about the gift tax, gift tax and the state tax, they are taxes paid on gifts to others including inheritances, once your state or gift gets above $11.8 million. Now there’s the annual exclusion for gifts of $50,000 per person to another individual.
Toby: But I could gift somebody. Let’s say I gave you a million dollars this year and I say, I’m not going to use my lifetime exclusion, then what would I pay?
Jeff: You would probably pay a substantial amount of tax on that gift. If you gave me a million dollars, you could pay $400,000 or $500,000 in gift tax.
Toby: Really, is that high?
Jeff: I might be stretching it there, but it’s not low.
Toby: Is it going to be the estate tax?
Jeff: It’s going to be the same as the estate tax.
Toby: Which is going to be a really big amount. Yeah, it’s gonna be a big amount. It still has a graduated rate, but it still gets up to 40% pretty quick.
Jeff: My personal opinion on this is, I’m going to use that lifetime exclusion for any gifts I give.
Toby: The question is, let’s say you did have a $400,000 tax bill. Is that deductible?
Jeff: No, it is not. It is not an income tax. It is not deductible.
Toby: You’re paying tax on the entire amount, you get no deduction, no benefit for the taxes paid. Now, what would you tell this person?
Jeff: I would tell them to file a gift tax return, use the lifetime exclusion, and be done with it.
Toby: Or systematically gift. Let’s say that you’re giving $15,000. This is more than $15,000, but let’s just say that it’s, again, a single person, $15,000 per recipient. Let’s say you have 5 kids, $15,000, $15,000, $15,000, $15,000. Just going down the border $15,000, 5 times. A spouse could do the exact same thing. It’s $30,000 a year. Do you have to report that to anyone?
Jeff: Nope.
Toby: I could be giving $30,000 a year, five kids. I’m giving $150,000 a year. Every year I do that, it’s indexed for inflation. It’s going to keep going up. Inflation is going crazy, so that will go up. But what you said is also, just look at doing the lifetime exclusion, and using it up, and then you file your tax form. It says how much you use, right?
Jeff: And once I’m dead, it’s not my problem. But yeah, then that’s a good example. My wife and I can contribute or gift to my son and his wife $60,000 without doing anything.
Toby: Because you can each give $15,000…
Jeff: To each of those.
Toby: So $30,000 and $30,000, $60,000 here, not each, just $30,000 each, right?
Jeff: Right.
Toby: There we go. All right, “I have an existing single family home which I’m converting to an Airbnb. I’ll be personally managing this Airbnb starting December.” This is last year. “My spouse and I both have W-2 income and no other active business. Can I use accelerated or bonus depreciation to offset my W-2 income? Jeff.
Jeff: Yes, you can cost segregate this property, your former home. It’s not subject to the real estate rental rules. It’s considered ordinary gain or loss, so you could do all these things. You mentioned a couple of things that you’re managing the property. The one thing you don’t want on these short-term rentals is to have somebody else managing your property. It’s okay that Airbnb is scheduling the appointment stuff like that as long as you’re still doing the work.
Toby: This is going to confuse the people that are here listening and going, hey, it’s passive income. Here’s the deal. Airbnb generally falls underneath the category of seven days or less average occupancy. Each individual tenant occupying it for seven days or less is exempted from rental real estate. It is no longer passive income, it is just regular business income.
Then the only question is, am I materially participating? Am I a material participant? If I hire a property manager, then I’m not more than likely, 99% of the time. But if I’m hiring a property manager, oh, crud, that business, I am not materially participating in, now that would still be like the pizza shop. I’m a passive participant. They can get a little wonky.
Airbnb, because of that, potentially, I could get the accelerated depreciation and use that against my W-2. Now here’s where it gets really weird. If I had an existing single family home, and I used it as a passive rental for part of the year and then an active rental part of the year, does that throw a wrench into the machinery?
Jeff: Yeah, I don’t like those.
Toby: That’s what she’s doing here. They’re a married couple and they said they have an existing single family home. It’s either their personal residence…
Jeff: Okay. Yeah, it would be a personal residence for (say) the first half and then we would treat it as a short-term rental for the second half.
Toby: And that little period of time, if I had bonus depreciation, it’s not allocated over the entire year. It’s just, I immediately get that bonus. That’s going to throw some of you accountants off out there, people that are familiar with modified accelerated cost recovery systems because this is a bonus depreciation. This is a business asset, taking anything that is less than 20 years and writing it off in one year as bonus depreciation.
Whether it was in service for one day, you could write off whatever the bonus depreciation, which is in this case, is 100% of the personal assets in that home. So carpeting, appliances, specialized electric, specialized plumbing, your sidewalks, your fences, any shrubs, all of that, 100% of it, boom, get to write it off this year. If it’s Airbnb, seven days or less, average occupancy, and I manage it, I get to take that entire deduction against my W-2 income. The reason I pulled this one is because they were talking about December.
Here they are in January going, oh, crap, it doesn’t matter. Baxter kind of like that in the tax rule. The election for bonus depreciation can be made up until you file the tax return. You have an active business income. I don’t know how this Airbnb is held, but let’s just assume it’s in your personal name right now. You could make that election up until October 15th.
You don’t have to accelerate. If you do accelerate, you don’t have to take 100%. You could do a cost segregation and take bonus just the five-year property, bonus just the seven-year property, bonus just the 15.
Somebody says, “Why do you have to manage it yourself?” Because you have to be a material participant for the loss to be non-passive. Material participation, there are seven tests. The most obvious one is if I self-manage, I don’t have to worry about time. If somebody else is providing services like a manager, then I have to do more than 100 hours and I have to do more than them. If somebody is doing more than 100 hours, the other party, property manager, construction, whatever, then my spouse and I would have to do 500 hours.
When I look at Airbnb, it’s specific to that particular property, unless I’m doing a whole bunch of them. But if it’s that particular property, if I self-manage, I don’t have to worry about how much time I spent on it because it’s going to be really tough, especially if we put it into service at the end of the year. We’re in December, the easiest way to qualify, the only way really, is to be the one that’s the only one who’s managing it. That’s why I did that.
“Is there guidance or resources for cost seg on STR or short-term rental?” Yeah. Richard, realistically, I’d go into my YouTube channel. I did a pretty extensive deep dive. Forget the name of the video, but I dove in because with material participation, there are seven days or less. Without material participation, there are 8–30 days. With substantial services and material participation, there are 8–30 days, so with or without. Then there’s 31 days or more with extraordinary services, with or without material participation. Then there’s anything over seven days, if you’re not providing any other services, it’s just going to be passive and then the question is whether you meet the real estate professional status.
Jeff: It’s really straightforward.
Toby: There are doors you can walk through. I’m just rattling that stuff off the top of my head. There are nuances in all of those.
Jeff: It’s kind of like the Winchester house. Look it up if you don’t know what I’m talking about.
Toby: There you go.
Jeff: It’s going nowhere.
Toby: Lots of doors that go north. Patty understands and she’s like, lots of doors.
All right. “If I’m a real estate pro and self-manage many properties—we have some which are managed at a state by property managers—can I aggregate all the properties and balance out the gains and depreciate losses across the whole portfolio?”
Jeff: That’s a good question.
Toby: That’s a great question.
Jeff: He’s on fire today. You aggregate all your long-term rentals, but you do not aggregate your short-term rentals.
Toby: Yup. Guess what we do when we’re in that scenario where we need those short-term rentals and we need their time, then we make them no longer short-term rentals for me? What we do is we rent them to the corporation long and have a corporation act as the host, so that for your portfolio, everything is long-term. You don’t have short-term. Then the corporation would pay you rent. The difference between what it’s able to get on the short-term rentals and that rent would be taxable income to the corporation.
Again, usually, you’re trying to pull the money back out through reimbursements or using it up in other ways so that you don’t have a big bunch of cash sitting there, and you can always pay yourself a salary if you want.
“My rental is a condo. Can I be considered self-managing, even though there is an HOA hired management company?” Yeah, of course. If you’re managing it and it’s the rental, then yes. What they do is they look at your time. Nobody else is managing your portfolio. Even though they have an HOA, they’re not doing anything for your guests. They’re not doing anything for you other than they maintain the property, like you have the structure, the outside, and the common areas. They get to mess with that and make sure you guys all paint your doors the right color.
Jeff: We’re having fun with our HOA right now.
Toby: HOAs are a blast. We love HOAs. HOAs are good for your property value and when they do their job. Surfside was the fault of an HOA not doing its job. If you know Surfside, the building collapsed because they couldn’t get their stuff together. They didn’t get what they needed to get done in a timely manner. The HOA sometimes looks like this big ogre that’s mean to you. In all reality, it’s protecting you in keeping your values up high as a group, but boy, they’re a pain in the butt to deal with. Here we get one.
Somebody says, “Thank you. I’m already a real estate professional and flipping. Do I have to manage it or hire a PM?” You can do both, Steve. What I would be doing again is if you’re a real estate professional, then we probably want everything to be just aggregated as long-term. I would do a rental to your corp and let your corp be the manager of those local properties, hire it out, do whatever else.
Jeff: It’s for the short-term properties.
Toby: For the short-term properties, right. Then all of your properties, individually—that go into the page two of your Schedule E if it’s a partnership, page one of your Schedule E if you don’t have a partnership—are going to be long-term real estate income and losses and you’re going to change it from being passive by electing to be a real estate professional. That’s all you have to do. It’s so much simpler that way.
You’re going to see people still, hey, I have my Airbnb, it’s over here and at least, this time does not get counted over here. It’s going to suck if the reason you don’t qualify as a real estate professional is because you were 20 hours shy that you did on an Airbnb because somebody decided to keep you separate as opposed to say, hey, let’s make that Airbnb, we’ll rent it long, so now it’s part of this whole big group of properties that’s renting on an annual lease to a corporation, which then turns around and divvy that up in small bite sized pieces to your guests.
All right. Guys, we’re a little bit over because Jeff talks a lot.
Jeff: Catching up.
Toby: All right, so we have YouTube. By all means, go in there, jump in, and subscribe, please? Do subscribe so we know. We like to see how many guys are subscribed and it makes us happy. Listen to our podcast if you feel like it. These Tax Tuesdays get broken down into two pieces and we publish them over the week, so you can go listen to old Tax Tuesdays.
Whether we were spot on a year ago, you can do that. If you want to see if we’re spot on three years ago, you can do that. I would say listen to the most recent ones, they’re more fun. Then if you are a platinum client, you can always get your replays of these Tax Tuesday’s in your portal. If you have questions, send them into taxtuesday@andersonadvisors.com. Of course, you can always visit our main page. Anything else from you, sir?
Jeff: No, I don’t believe so.
Toby: Happy 2022. Let’s make it a great year. Let’s have some fun. Hopefully, the Build Back Better doesn’t sneak up and bite us, do weird things and give us headaches. Hopefully, this year is a happy year for taxes and you guys are all very, very successful. This is cool. All right.
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