Welcome to another episode of the Tax Tuesday show. Host Toby Mathis, Esq., joins our regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, to help answer your questions. We send a big thank you to all our people online answering your questions today – Patty, Dana, Dutch, Jared, Kurt, Ross, Tanya, and Troy.
On today’s episode, Eliot and Toby answer listener questions including inquiries about wash sales, what taxes apply to inherited stocks and real estate and the appreciation on inherited real estate, buying vehicles and how much is deductible and when, and setting up a brokerage account for a charity so it can receive donations of stock.
If you have a tax-related question for us, submit it to taxtuesday@andersonadvisors.
- If I have a company and want to loan money to another company using a promissory note, but I don’t want to charge them interest to do so, are there any tax impacts to my company? What is the recommended way to do this if so? – if it’s over $10,000 we got to charge interest to what it boils down to.
- Do you need to pay both capital gain tax and estate tax for inherited stocks? – Well, typically, if you inherit something, you’re not going to pay any tax because of the approximately $12 million lifetime exclusion. If the gift or inheritance was over $12 million, in this case, you’re going to receive stocks at stepped-up basis.
- Does real estate appreciation restart for 30 years after inheritance? Will real estate appreciation be re-depreciated? – I think what they’re trying to get to here is will you be able to depreciate again at 27 and a half years if it’s a long-term rental and yes, you will.
- I have an IRA owned single-member LLC that has invested in three syndications. Two of the three have losses over the last several years, which means it’s just kicking down passive losses, it doesn’t mean you lost money. One was sold last year and has profit, which is fairly common. Do you use a 990T to report both losses and profits? I don’t have to report profits or losses on my 1040, correct? – You don’t have to report it on your 1040 because it’s all in your retirement plan.
- Does the holding period for real estate start on the acquired date or the place in-service date? If bought in November 2020 and placed in service, placed in service March 2021, sold December 2021, is this long-term or short-term capital gains? – It’s going to be long-term. We’re going to go from the date where you closed, that’s where the holding period starts.
- When will we recoup the loss from a wash-sale if we’re no longer investing? – We wouldn’t run into a wash-sale in this instance because you sold the stock, you take your loss, it’s only if you buy back stock or a similar security that you would run in a foul of the wash rule within 30 days of it.
- When bonus depreciation goes away, what will be the process for cost segregation? How is it calculated and how much will be allowed to be deducted at what time or intervals? – we still can do cost segregation which is just an alternative, We’re still going to deduct it. It’s just how much is going to go into that 5-year property pile, the 7, the 10, 27.5.
- I have a 501(c)(3) that I started with Anderson—Kareem and his team are killing it by the way. It is ridiculous. The average wait time to get a nonprofit exemption certificate approved by the IRS is right around seven to nine months. We’ve been getting them, in some cases, in a matter of days. I was wondering if you were to donate appreciated stock to the charity, how to donate that to the charity properly and how do you record it as a personal donation, with appreciation? Does the charity need to start a brokerage account to receive this stock? – We certainly want to set up a brokerage account in the charity because when it receives that stock, they’ll have a place to put it.
- Should I set up a C-Corp LLC for land flipping business even if I just started, no deals yet? Should I start with the pass-through first then change to a C-Corp once I get more volume? – I would set that C-Corp so you can start building up losses and expenses in that C-Corp. When you flip it and you have that gain come in, you’re automatically offsetting against that gain.
- When you buy a bigger van for the business, do you depreciate it or show it as an expense on the year you buy? Where do I find a list of business expenses that are 100% deductible and other expenses are not? – Well first of all for the van itself, how you’re going to depreciate depends of course on the size if it’s over 6,000 pounds, etcetera. You probably got bonus depreciation a lot more of it. It may not be 100% anymore, but we probably solved the 80% going on.
- Is there a maximum number of LLCs that I can use for the IRC-280A deduction? I have two LLCs and I was wondering if I can take the deduction for both? Also, I have a nonprofit and was wondering if I could also have meetings for a nonprofit and the fee for using the space would be a donation from my LLC? – Well, 280A is a provision, it actually comes under a section that is dedicated to not letting you deduct personal expenses in your house particularly. – if you donate $10,000 to your nonprofit, is that the nonprofit can use it for nonprofit purposes.
- How do adjusted gross income AGI levels affect capital gains? Is it true that AGI below $76,000 will pay no capital gains? – Actually, AGI doesn’t have anything to do with this. It’s taxable income when we talk about the brackets for capital gains. The $76,000 is an old number. It’s approximately $83,000 I think this year.
- I’m opening a new IRA that will be managed by an IRA with custody TD Ameritrade, it will be funding a new IRA from existing IRAs, so it sounds like a rollover from the same custodian. I have a Wyoming LLC Anderson just set up. Should I open the new IRA in the name of the LLC and will it be a problem moving funds from a personal IRA that is titled with my name? – You can roll one over into the other, but what caught my attention was this Wyoming LLC- you can’t just have that connected to a retirement plan. Your IRA needs to set up its own LLC that it owns, and then it can transfer funds into that LLC and go do investing in real estate or what have you. But you do not want to take some other outside LLC that we set up for you and connect that with your IRA, we’re not allowed to do that.
- Rapid-fire chat questions answered at the end of the show
Full Episode Transcript:
This is the Anderson Business Advisors Podcast. The show for real estate investors, stock traders and business owners. We help you keep more of what you earn and protect what you’ve built. Let’s get started.... Read Full Transcript
Toby: Hey guys. Welcome to Tax Tuesday. My name is Toby Mathis.
Eliot: Hi. I’m Eliot Thomas
Toby: You’re watching Tax Tuesdays where we are bringing tax knowledge to the masses. Welcome. Let’s go over some of the house rules. For everybody who’s been to a Tax Tuesday before, welcome back. If this is your first time, then these are the rules that we operate under. Number one, you can ask your questions live via the Q&A feature. You can see some in Zoom. If you’re in Zoom that says Q&A, that’s where you ask your couple sentence questions. If you have a comment, put it in the chat. A comment might be, hey Sherry’s in Puerto Vallarta, where are you sitting right? What city and state, let us know and I’ll be able to see it in chat.
If you’re on YouTube, Eliot here has the YouTube livestream going. He can sit there, read your chats and make sure that they’re being answered. I have the Zoom over here on my left, if you see my eyes look over here, it’s because I’m reading a screen over here. We have Hackensack, Austin, Texas, Waterford, Wisconsin, Carmel, California, a lot of California, Ventura, Castaic, Houston. There we go from Baltimore, Maryland. I have a bunch of properties, Lee, in Baltimore. There’s Faith, hey Toby, how are you all? Make sure that somebody answers Faith’s question, looks like she had a comment there. More Baltimore, Carmel, eye of the storm in Boston, Washington, but just arrived in Texas.
We got people from all over the country. Anybody responding on YouTube?
Eliot: Not quite on YouTube right now.
Toby: All right. The other thing is, we will answer your questions while you’re on. We have right now, let’s see, Patty, Dana, Dutch, Jared, Kurt, Ross, Tanya and Troy answering questions in the background as well. We have a bunch of tax attorneys, accountants, and CPA’s that answer questions for you during these events. Does it cost you anything? No. If you have a question during the two weeks where we’re not broadcasting, since we do this every other week, by all means, email us at email@example.com and we will get you a response.
If it’s diving into your specific situation and it’s more just answering a general question, you’re going to need to become a client. It’s really easy. Platinum’s probably the easiest service where you can have unlimited discussions with our attorneys and you can write questions to our accountants. We say write because we want it in writing, because we’re going to respond in writing because we don’t want there to be any confusion. We cite things where necessary, because you’re going to ask the same thing three times over during the tax year otherwise. We make sure that we put it in writing.
If you’re platinum, it’s only $35 a month, really simple. If you become a tax client where we’re doing tax prep and bookkeeping for you, a little bit of a different answer there. You’d have to be engaged with our department, but our folks can absolutely walk you through that if you want to become a client. We do have a bit of a waiting list, especially during tax time. We’re not going to be able to help you this tax year, but by all means, you could put yourself on the list and see if we can help you out probably next year, I mean, earlier the next year, but for next year’s taxes, for 2023. It’s fast, fun, and educational.
We like to give back and we like to educate. I’m telling you, I’m already seeing out of the corner of my eye a lot of questions going into the Q&A. I have a whole bunch of people here answering questions. They’re doing the very best they can if you ask. We have 50 people piled up. It’s going to be a minute. We’ll still answer your question, we don’t leave here until we have your question answered. Do not worry. If for whatever reason, you asked a question and you’re saying it’s been 10 minutes. It’s because we’re getting through. It’s first come, first serve. We’re answering these questions as quickly as we can and making sure that we help you.
Eliot: Just want to give a shout out. We have Warren from Jamaica.
Toby: Warren from Jamaica?
Toby: Is he on YouTube?
Toby: Nice. Warren from Jamaica, welcome. My daughter’s down in Antigua right now, in the Caribbean. Here’s the questions that we have for today. Now, these are questions that somebody emailed in. Eliot here is grabbing all the questions right now and you grabbed these on Friday. We just answer them during the next hour. We’re going to go through them and we’re going to give detailed responses. In the meantime, you’re going to be asking questions and clarifications and all that fun stuff, we’ll make sure that we’re answering your other questions as well. But we usually have—do you know how many you grabbed this time?
Eliot: I went about 11 or 12.
Toby: Somewhere 10 to a dozen and we’ll get through them today. Let’s go over. Let’s see which screen I can actually read. If I have a company and want to loan money to another company using a promissory note, but I don’t want to charge them interest to do so, are there any tax impacts to my company? What is the recommended way to do this if so? Good question, you’re not going to be really happy with the answer but we’ll definitely go over it. The IRS is onto us. They’re looking at everything, how can they get money.
Do you need to pay both capital gain tax and estate tax for inherited stocks? Great question. Does real estate appreciation restart for 30 years after inheritance? We’ll clarify this but I’ll make sure I’m reading this right. Will real estate appreciation be re-depreciated? Basically, once you get an inheritance. We’ll go over that one too. Other question, I have an IRA owned single member LLC that has invested in three syndications. Two of the three have losses over the last several years, which means it’s just kicking down passive losses, it doesn’t mean you lost money.
One was sold last year and has profit, which is fairly common. Do you use a 990T to report both losses and profits? I don’t have to report profits or losses on my 1040, correct? Great question and we will break that down for you. Eliot probably more than me. I’m going to give you all the hard ones.
Does the holding period for real estate start on the acquired date or the place in service date? If bought in November 2020 and placed in service, and I’ll break this down for you guys, don’t worry, placed in service March 2021, sold December 2021, is this long term or short term capital gains? Great question and I’m sure other people have hit this as well. We’ll make sure of that.
When will we recoup the loss from a wash-sale if we’re no longer investing? Great questions thus far. Good job. We get like 500 and we just grab randomly, usually just 12, Patty says it’s 12, there we go. When bonus depreciation goes away, what will be the process for cost segregation? How is it calculating and how much will be allowed to be deducted at what time or intervals? Good question, we’ll break that down.
I have a 501(c)(3) that I started with Anderson—Kareem and his team are killing it by the way. It is ridiculous. The average wait time to get a nonprofit exemption certificate approved by the IRS is right around seven to nine months. We’ve been getting them, in some cases, in a matter of days. Kareem used to work for the IRS doing the approvals, so whatever he is doing, he’s getting it done so fast.
I was wondering if you were to donate appreciated stock to the charity, how to donate that to the charity properly and how do you record it as a personal donation, with appreciation? Does the charity need to start a brokerage account to receive this stock? All great questions as one big old question.
Should I set up a C-Corp LLC for land flipping business even if I just started, no deals yet? Should I start with the pass through first then change to a C-Corp once I get more volume? Good question, and for the flippers out there, this will be good for you. We’ll break down some concepts.
When you buy a bigger van for the business, do you depreciate it or show it as an expense on the year you buy? Where do I find a list of business expenses that are 100% deductible and other expenses are not? Is there a maximum number of LLCs that I can use for the IRC-288 deduction? I have two LLCs and I was wondering if I can take the deduction for both? Also, I have a nonprofit and was wondering if I could also have meetings for a nonprofit and the fee for using the space would be a donation from my LLC? Great questions and we’ll break all those down.
How do you like these ones today? You picked them.
Eliot: I like them.
Toby: These are good questions. These get our juices flowing. When there’s a lot of different variations, it’s a lot of fun. How do adjusted gross income AGI levels affect capital gains? Is it true that AGI below $76,000 will pay no capital gains? Great question.
I’m opening a new IRA that will be managed by an IRA with custody TD Ameritrade, it will be funding a new IRA from existing IRAs, so it sounds like a roll over from the same custodian. I have a Wyoming LLC Anderson just set up. Should I open the new IRA in the name of the LLC and will it be a problem moving funds from a personal IRA that is titled with my name? I definitely want to answer that one. Hopefully you’re on today. We’ll be able to thwart any issues here and keep you from making any mistakes.
If you guys like this type of information, if you like the Tax Tuesdays, you watch today and you say, I wasn’t aware that they have done this. What are we, 191 or something like that? We’re just under 200 episodes. We’ll be at 200 episodes here before the end of the year. How do I go and look at some of the older ones? They’re on my YouTube channel. It’s really easy, just go to YouTube. I post about three videos a week, if you like educational content about business, tax, and asset protection, I got you covered. Just go in there and subscribe. Click that little notification bell that says turn on notifications. What it will do and it will let you know when I post a new video. That’s it. It’s not going to spam you or not going to do anything crazy.
Just because it’s fun, here’s a slide that says the actual link, if you want to go there. But I think Patty put it into the chat. If you’re on YouTube, you’re already there. You don’t have to worry about it. Folks on YouTube are already probably sitting on over 500 videos, guys. Been doing this for years. Just started 25 years ago, overnight success in 25 years.
Eliot, let me ask you this question. I have a company and I want to loan money to another company using a promissory note, but I don’t want to charge them interest to do so, are there any tax impacts to my company? What is the recommended way to do this if so?
Eliot: Well, I think the first thing we want to analyze here is that we are dealing with a related party transaction here. One LLC owned by the client going to another business or a related party, an actual individual…
Toby: What if it is the client LLC to another client LLC?
Eliot: Related party. What that means to us and the quote says if it’s over $10,000 we got to charge interest to what it boils down to.
Toby: Yeah, and if it’s a third party, you’re going to have imputed interest. They call it imputed interest and what they do is they make you recognize the interest even if they don’t pay it, it kind of stinks, right?
Toby: If you have an LLC and I have an LLC, and I loan you money, no matter what it is, is there a $10,00 limit?
Eliot: No. I’m going to have to have an interest in that.
Toby: Where would I find the least amount of interest I could charge?
Eliot: It’s probably going to be the applicable federal rates, what we’ve just said as AFR for sure. That’s produced by the Treasury Department on the IRS website every month. We also tend to use the blended rate which is a rate for over a 12-month period which is just an average on them that comes out in July of every year. That would be another option to use that sometimes if forced. I used one or the other often in practice.
Toby: Yeah. If somebody loans you money, there’s a tax implication to it, if you’re not a related party. If you are a related party, then they say basically, anything under $10,000 is a no harm, no foul. But if it’s over $10,000, you have to impute interest on it, even if it’s a related party. If it’s to me, though, and I have one LLC loaning money to another LLC and both are disregarded to me, that I just loan money to myself and you don’t have to do any interest, although I would.
I’d probably document it as interest because all you’re going to have is an interest deduction and the tax is going to be neutral regardless, but you want to have the transaction sometime for asset protection purposes. But the answer to this question is if I have a company, I loaned to another and I don’t want to charge them interest, yes, there are tax implications. You might be looking at imputed interest if it’s a third party or if it’s relative or anybody else. You’re looking at an interest if it’s greater than $10,000.
Eliot: I’ll just point out for the other viewers out there, what I like about this question is the author of it recognized, we got to have a promissory note. That’s critical. You always want to have something documented like that in a note.
Toby: Yeah, the way I look at it is your company’s out here marching along doing its thing, but it only knows what you document. It only knows the story that you write for the company. We’ve seen this happen over the last few years especially with Covid, we lost a lot of people unfortunately. You would see the difference between people who documented and people who didn’t in the aftermath if something happened to that individual.
You want to be able to say how would anybody know what’s going on if I don’t document when I loan money between companies? Even if it’s my company, I should keep documentation. Some sort of record. A promissory note—if you’re doing loans to shareholders even, out of a company or shareholder loans to a company, you want to document those on at least an annual basis. Make sure that you’re keeping some sort of written record. Good one, so we’re one in.
We’ll break this one into two. Do you need to pay both capital gains and estate tax for inherited stocks?
Eliot: Well, typically, if you inherit something, you’re not going to pay any tax because of the approximately $12 million lifetime exclusion. If the gift or inheritance was over $12 million, in this case, you’re going to receive stocks at stepped up basis. If you sold them, probably not much tax, but it would be capital gains tax. It will not be estate tax, unless the estate didn’t have anywhere to disperse that stock and it got stuck with the bill so to speak, then it would be estate tax. But that’s very rare because usually you have a pour-over will or something that would get all the assets out of that estate to where the recipients will get stepped-up basis…
Toby: There are very few states that charge an inheritance tax, I think there’s four.
Eliot: Yeah. Most of them went away.
Toby: Most of them have gone away. There’s an estate tax so when I die, and I give assets away, my estate gets taxed if it exceeds a certain valuation. Right now, it’s close to $13 million for me, and the spouse you’re close to over $25 million. If your estate’s below $25 million, you’re going to go, I don’t have to worry about that, right? Some states have an estate tax that’s lower. I think in Oregon, it’s $1 million. Anything above, they will hit it. There is an estate tax on the estate. But what happens to Eliot, let’s say he’s the beneficiary, and he inherited a bunch of shares that I have. Those step up in value to the fair market value on the day that he gets it.
The question is, does he reside in a state that’s going to subject him to an inheritance tax on the receipt of that? Even if you don’t sell it. They’re just going to say, you inherited money, we want you to pay tax on it. You’ve got very few states that do that.
The capital gains though is nonexistent under that circumstance because it’s stepped up. Let’s say I had $1 million of stock that I paid $100,000 for, I have $900,000 of capital gain built into that stock and I die, I name Eliot my heir. That stock was revalued on the date of my passing at $1 million. Eliot gets it, it’s still worth $1 million and he sells it for $1 million, how much tax does he pay? A big whopping goose egg
Toby: He doesn’t pay any tax on it. That’s why it’s called a step up in basis. It works for any capital assets. It works for real estate and it works for stock. You would not have to pay the capital gains. You might be looking at an estate tax but it’s the estate that pays the estate tax. As an individual, if you inherit it, you’re only looking at inheritance tax and very limited circumstances. It’s highly unlikely that a fraction of a fraction of a percent that you’d get hit with anything.
Number two, does real estate appreciation restart for 30 years after inheritance?
Eliot: I think what they’re trying to get to here is will you be able to depreciate again at 27 and a half years if it’s a long term rental and yes, you will.
Toby: Yeah. Remember it’s a capital asset, so the basis just stepped up. Let’s say again, I’m going to make Eliot my heir, it’s my estate. I own a property that I paid $100,000 for and now it’s worth $500,000. I was depreciating the improvement value–not the land, we never depreciate land–but the improvement value during my lifetime. I pass away, Eliot gets that property, it’s worth $500,000. He starts to re-depreciate the structural value, the improvement value, again, he gets to re-depreciate it. That’s how messed up this is.
Eliot: Yeah, at that stepped up level of sorts, so it’s a win-win for everyone involved.
Toby: It gets better. Let’s say that during my lifetime, I bought a property at $100,000, it went up to $500,000 and I borrowed $200,000, I never paid tax on the $200,000 that I borrowed against that property. Then I die, Eliot still gets to re-depreciate it at the $500,000. I have no recognition of any tax gain on that money that I took. If somebody says is that because it was debt? Yes. That is because you don’t pay tax on loans, unless they’re forgiven. But we’re not forgiving anything, we’re just dying at some point.
That’s why whenever I see people gifting assets over to their heirs, gifting real estate to their kids, when they get older I’m like, time out, don’t do that, because you’re taking away their ability to have a step up in basis. Again, same scenario, I paid $100,000, it’s worth $500,000, I gift it to my kids, their basis when I gift is $100,000 and I depreciated it a bunch. They’re going to have that recapture if they sell. All you have to do if you have real estate and you’re holding it in your name, before you pass, borrow against it if you need money and then pass away. But don’t give it to your heirs.
I saw that with a multimillion dollar property and it was a shocker to four kids, dad had owned a building close to between 40 and 50 years, the basis is next to nothing, it’s worth millions of dollars and the accountant totally hosed down—they ended up having massive amounts of recognition of gain and recapture as a result and they were like, my god. He gifted it the year before he passed away.
Somebody says, does the step up and re-depreciation occur if the property is in an LLC? Yes. It’s a flow through entity, so it’s still going to step up. Works out great. I have an IRA owned single member LLC that is invested in three syndications. It’s called a checkbook IRA you’ll hear them called, that’s when an IRA is isolating it’s liability by using an LLC to invest in real estate. In a syndication to me, it’s a little bit of overkill, because the syndications are almost always an LLC as well, but no harm, no foul. It’s single-member which means it’s disregarded to the IRA.
The easiest way to think about this is eliminate the single member LLC and just imagine that the IRA owns those three syndications. Two of the three have had losses over the past several years, chances are it was apartment buildings or what not, some sort of syndicated business or whatever. They generated losses that passed through to the IRA. One was sold last year and has profit. They had capital gain, more than likely. Do you use a 990-T to report both losses and profits, and I don’t have to report profits or losses on my 1040, correct?
Eliot: Correct. You don’t have to report it on your 1040 because it’s all in your retirement plan. Generally speaking, a retirement plan doesn’t have any taxable profits or losses. It doesn’t recognize any losses. It’s just inflows and outflows of cash, unless we have UBIT–unrelated business income tax–would be one example of where we might have to do some reporting of taxes.
Eliot: UDFI, which is a subset of UBIT, but that would be if it’s…
Toby: They’re using loans.
Eliot: Yeah, exactly. You’re using debt to create that gain, you’re going to have a ratio of how much gain was sponsored if you will by the debt, so we would have to report that on the 990-T. but something Toby went over, I think it was the last time we did this. If we have some passive income, does that not help offset or something of that nature? I can’t remember.
Toby: Not necessarily in this situation. What you can do is depreciate. If you have UDFI, you can still take depreciation to offset any tax that would occur inside the IRA. Here’s what I’m talking about, by the way, I’m just going to say this, if you’re out there watching this and this is you, roll that IRA into a 401(k) and UDFI goes away.
401(k)s don’t have to worry about unrelated debt financed income. IRAs do. What are we talking about? A retirement plan gets a loan to buy a building and there’s money being made, that would be taxable because you used debt to generate the income. If you’re doing syndications, 99% of the time they’re using debt. If you did that in an IRA, you’re going to have the 990-T which is just excise tax that’s basically saying, I need to pay tax on this portion.
But in real estate, almost always, we can eliminate, because you have those losses. It’s flowing losses, those losses will offset any of the income, so you wouldn’t have any income. Maybe some of the gain might be attributed to the debt, in which case, you might have a small portion, but again, your losses get unlocked, you’d still use those losses against the gains. There’s a good chance you’re not going to have any tax on this regardless.
Just make sure that you know when you have debt, and you’re using it inside a retirement plan, you’ve got to be careful. If it’s an IRA, it’s going to cause a potentially taxable event. If it’s a 401(k), you do not have to worry. Somebody says, you can’t roll an IRA into a 401(k). Of course, you can. The only IRA that you can’t roll is a Roth IRA. You can roll a traditional IRA into a 401(k) all day long. They said how? You open up a 401(k) and you roll the money from the IRA into 401(k). You take the money out of the IRA. They’re going to issue a 1099-R and then you’re just going to deposit that money into your 401(k). Within 60 days, it’s a non-taxable transaction.
Somebody says, is there no UBTI tax in the 401(k) as well? There’s still UBIT but there’s no UDFI. Great question, by the way. Jacquelyn, I don’t mean to laugh, you absolutely can roll an IRA into a 401(k), we do it all day long, every day. People do them all the time. Here’s a good reason why you do it, if you’re using financing, if you’re using debt, also because let’s say Eliot and I each have an IRA. Let’s say if we’re a married couple and we each have an IRA, or I have two traditionals and he has an old 401(k) from a previous employer and another IRA, we could set up one 401(k) and roll all those into one account. Now, we have control of it. Instead of having four different IRAs, we could roll it all into one account and that’s how you do it. Fun stuff.
Does the holding period for real estate start on the acquired date or the placed in service date? If bought November 2020, placed in service in March 2021, sold in December 2021, is this a long term or short term capital gain? What say you?
Eliot: It’s going to be long term. We’re going to go from the date where you closed, that’s where the holding period starts—easily, you get confused because you hear us all the time talking about when we place into service and we start taking depreciation, that’s a different story. That would be your March date. That’s not what we’re asking here. We’re talking about when does the holding period start? That’s going to be when we purchased in November.
Toby: Yep. The holding period of any capital asset whether it’s personal property, an investment property, starts on the date you acquire it. You start to depreciate investment property when you place it into service, which is when it’s ready and listed to be rented. The best example that I can give you is I own a house, I live in it for a few years and then decide to make it into a rental property. I’m still long term capital gains no matter what and then I convert to a rental property, I can’t depreciate it when it’s my personal property. I get to start depreciating it once I put it into service, or make it available to be put into service.
By the way, you could do that to do a 1031 exchange, believe it or not, and your 121 exclusion, we see this on people that have had their houses run up in value. Let’s say you bought a house for $500,000, now it’s worth $1.5 million, you’re married, you sell it and you’re like, I’m going to have $1 million of capital gains and I only get to avoid half of it under section 121. I’d have $500,000 of capital gains, how do I avoid it? Turn it into an investment property before you sell it. You 1031 it into more investment property like you get to use your 121 exclusion.
What happens is your basis will be moved up to the $500,000 that you paid for, you get a $500,000 121 exclusion, you’d have $1 million dollars and the replacement property even though you got $1.5 million, it’s not taxable, that’s all you have to do. What you do is you move out of your house, make it into a rental. I suggest, keep it as a rental for six months, rent it to somebody you know, or rent it to somebody who’s going to be gentle with your house, then sell it. You can wait up to three years by the way. You don’t lose your 121 exclusion when you move out. You have to live in the house two of the last five years.
If you’ve been living in it for a while, at least two years, you have three years to sell it once you make it into a rental property. You could actually convert rental properties into your house too and use 121. It’s just if it’s part of a 1031 exchange like I just explained, the IRS says you have to wait five years. Don’t worry, this stuff gets a little bit into the weeds, but you just have to talk to somebody who knows what they’re doing. They’ll be able to give you your scenarios.
Somebody also asked, Tina, I’m going to answer your question that came in through chat, you guys can’t see these but I’m just looking at it. Can I withdraw a Roth IRA to buy a house? Since we’re talking about houses, we may as well talk about it. You can always take the money you put into a Roth IRA back out, because you paid tax on it already. If I’m putting in $6500 this year, I’m over $50, so $7500 because you get the makeup, you do that for a few years. You got a bunch of money that you put into your Roth. You’ve been funding it for 10 years and you need $50,000 down, you could take that out anytime you want.
But if you want to avoid paying tax on the growth in a Roth-IRA, then you’re supposed to wait five years unless you’re using it. I think it’s $10,000 to purchase a primary residence. You can take money out to buy a house and you can absolutely do that. I thought you had to take the money out of your Roth for a first home purchase? You might be right Daniel, we have to look and see, we would just make sure that we follow the rules. There might be a distinction. I know you can take it out for a home, maybe it’s your first home, but we’ll take a look.
When will we recoup the loss from a wash-sale if we’re no longer investing?
Eliot: We wouldn’t run into a wash-sale in this instance because you sold the stock, you take your loss, it’s only if you buy back stock or a similar security that you would run in a foul of the wash rule within 30 days of it. I thought it would be a good question to go through the whole wash sale, what exactly is it? Where is it applicable?
Toby: What is it?
Eliot: Wash sale just says if you sell a stock at a loss, or security at a loss, and then go back and buy back the similar or the same stock within 30 days, then you can’t recognize the loss. Now, what happens to that loss is it just gets the basis of the replacement stock that you bought. When you finally sell that stock, then you’ll get the effect of taking that deduction. But in this case, our questioner has it, they took a loss and they never reinvested again, so we don’t have a wash sale situation here, we just have recognized loss.
Toby: In English, let’s say I owned ABC Bank stock and then all hell broke loose in the banking industry, it dropped and it lost 40% of its value. Let’s say it was worth $100, now it’s worth $60, so I sell it. I’d have to see what I paid for. I bought it at the top of the market which would be my luck. I paid a sale into 100 shares, that’s $10,000 that I paid, and I sold it for $6000, I have a $4000 of loss. The clock starts ticking, I have 31 days from the date that I just sold it, basically 30 days, so the 31st day, where I cannot buy that same stock back or similar stock back and count the loss.
Let’s say that I sat there, waited, two weeks later, I’m like the banks aren’t all going to go out of business, and I buy it back at $60 a share, I spent $6000, I don’t get to take the $4000 loss. I own the stock, it’s called a wash sale, they wash the sale. It didn’t occur because you bought it back. In order to avoid the wash sale, I wait until I’m 31 days past the sale date, then I buy it back. Then I would get to keep my $4000 loss and I have the new stocks. You just need to be patient in that circumstance.
If you want to work around, I just said 100 shares, instead of buying the shares back at $6000, I’d buy an option, probably in the money, so probably to buy those shares at $30 or something along those lines. Maybe $40, maybe $50 or whatever the market was allowing me to do. I would buy an option, which means the $4000 would attach to that option. One option equals 100 shares and magically I just covered my position. Now I can go buy the $6000 with the shares back and I don’t have to worry. I’ve already covered my wash sale.
Now, that loss is now part of the option. Then I sell the option afterwards and I take the loss. You just added all that loss into that option. That’s all you do. There’s always a workaround on most things. Wash sale loss rule only applies if you buy it back. If you do buy it back, there’s a tricky way to attach it to the shares that you sold which is to do an option instead, and then buy back the shares. I know it gets complicated, some people say oops. But I’m just giving you verbally, that’s exactly how you do it.
The end deal is if you have losses on stock, and you’re thinking about buying back, run it by a tax person, that’s why platinum exists so you could ask a question, so we could tell you what the rules are, so you could determine whether or not it’s a good idea for you to buy the shares back. If you buy it back, you won’t lose anything. You’re not going to get the loss, but you own the shares again, it’s just like you never sold them. There are worse things that can happen.
Speaking of worse things that could happen, there’s always stuff going on in the world with asset protection, people trying to take people’s stuff. Every time I drive down the freeway here in Vegas, I see so many lawyer billboards. They’re always looking for people so that they can try to extract money out of folks. Make sure you don’t have a target on your back.
Clint Coons, my partner and I, teach the tax and asset protection workshop where we’re going over LLCs, corporations, land trusts, Wyoming statutory trust, personal residence trust. We go over the different tax, cost seg, how to accelerate depreciation, 168(k), 179, all these different provisions that can help you as a real estate investor. It’s absolutely free. Let’s look at the dates, we have April 8th and April 22nd coming up. We do have a four-day live event, the first day’s going to be Infinity Investing, which is going to be a lot of fun, on Thursday. Then Friday through Sunday is tax and asset protection.
We’re going to do a live event in Orlando, it’s going to be a hoot, we did one of those in December out here in Las Vegas. I think we had 400 or 500 people out here. We sold out at that event. I think we have close to the same capacity here, we’ll probably sell out of this event. Jump in there and make sure that you’re signing up if you want to come to a live event and immerse yourself in all things tax and asset protection and a little bit of investing. It’s always fun. You’re going to be around a bunch of cool investors. I always say that those types of events, the cool stuff occur in the evenings, and in the hallways, in the afternoons, and during the breaks where you get to meet people who are doing what you’re doing.
Sometimes it can be tough to find like-minded people in this world that are actually interested in growing their investment. Somebody says Vegas was fun and very informative. Thanks, Don. Did you have fun? That’s the bigger one. Did you enjoy it and did you get to meet a lot of cool people? Were you sitting near cool people? I’m waiting for Don to respond, see if I can get something in chat. To me, there are always instructors at the front, but sometimes the best instructors are the people that you’re sitting next to.
Eliot: I know that Kurt and I had a great time at the event. Got to meet a lot of clients, answer a lot of questions. Got a lot of questions we had to research, it helps us sharpen our tax information as well.
Toby: We’ve been doing this a long time, you still get questions that make you go huh.
Toby: We get them every time. I always get them, I’m always scratching my head. I’m like, darn it. Sometimes I realize I would look at it, it was 10 years ago.
Eliot: I tell tax advisors that it’s a humbling job. It will always tell you how much you don’t know about tax. You get that one question that hits you.
Toby: It’s 21,000 pages of code or whatever it is. There’s over a million pages of interpretations by the courts and they may decide something. There’s always some fun stuff that you’re always going to learn. There’s no way you’re going to stay on top of it. The best thing that can happen is when somebody asks a question, you go and refresh it again. Lots of fun. Come out to Orlando or at least visit us on one of the virtual events. They’re absolutely free. They’re 9:00 to 4:00 on Saturdays, Pacific Standard Time. If you’re willing to spend some time, we’ll make sure that it’s worth it for you.
When bonus depreciation goes away, what will be the process for cost segregation? How is it calculated? How much will be allowed to be deducted and what time or intervals?
Eliot: Let’s just say we don’t have bonus depreciation, that’s no problem, we still can do cost segregation which is just an alternative, and still we will point out the actual correct way to deduct depreciation for an asset. It will still be broken up into 5, 7, 10, 20, 2.5 year property, so we don’t have any problem there. We’re still going to deduct it. It’s just how much is going to go into that 5 year property pile, the 7, the 10, 27.5. Then you would just simply take that dollar amount divided by the five years again, if it’s a five year property. That’s what your deduction will be for that year.
The only difference is that with bonus depreciation, we were allowed to immediately expense up until March 2022. 100% of our bonus depreciation, a really nice tool to have during those time periods. But we are losing that. It’s starting to go away. The laws of depreciation is just going to slow down the amount that you can deduct, but it doesn’t change anything for the cost segregation depreciation that was already in play long before we had bonus depreciation.
Toby: Yeah. The easiest way to think about this, for me, is there’s the house, there’s the land, and then there’s things like carpeting and fences and driveways, shrubbery, trees, appliances, cabinets. All those have different useful lives. The land, we can never depreciate. Land improvements, we write off for over 15 years. Carpeting, we write off for over five years. Appliances, over five years. Cabinets might be five or seven.
You’re giving it a useful life. When you do cost segregation, that’s all you’re doing. You’re defining what that useful life is. Then there’s the section of the code called 168(k) called bonus depreciation. It says anything under 20 years, you can write it all off in one year, or this year, you can write off 80% of anything that has a useful life of less than 20 years in one year. You’re like, okay, let’s say that I have a 5 year property that’s worth $10,000, a 7 year property that’s worth $5000, a 15 year property that’s worth $10,000. It’s $25,000. I could write off immediately today, 80% of whatever that equals, $22,000.
I could write that off right away. I’d get that immediately. It doesn’t mean I can’t write off the rest of that money, the extra $5000. It’s just being written off at its useful life, at 5, 7, or 15 years. You didn’t lose it, you’re still going to write it off at an accelerated pace. It’s just that the bonus is so big, especially if you have a use for losses. Eliot and I can get together, we could buy a $1 million building, $100,000 of land, $900,000 of the building. We do a cost seg on it, and Eliot has no other passive income and he gets this big fat loss.
Let’s say he gets a $200,000 loss. I get a $200,000 loss, I’m a real estate professional and it wipes out my W2 income and I pay no tax. It doesn’t matter, it’s still a cost seg. It’s still taking bonus depreciation. The difference is, it was useless for him, it was very useful for me, that’s why you always calculate these things and see whether or not you have an appetite for them. Time interval doesn’t change. You’re just going to get 80%, next year it will be 60% unless the congress does something, can’t see this congress doing anything.
Eliot: No. Some worthless trivia on that, the company that went through the court systems and one against the IRS on cost segregation, my sister actually happens to work for him.
Toby: Which company?
Eliot: I also can’t remember it. It has initials, all I know is it’s a medical company. They bought a hospital and they broke it all out.
Toby: Here’s why I do that, because when you have a business and you’re self-renting, it’s no longer passive. If I have a medical practice and I buy my own building, that’s not passive loss. I could use the depreciation to offset my medical practice income. The same thing if it’s a dentist or a mini mart, it doesn’t matter. If you’re self-renting, you can group that activity. There’s no longer the passive loss limitation. I imagine that if it’s a hospital, they were looking at millions and millions of dollars of tax benefit, and they didn’t want to wait 39 years.
Eliot: They paid their Anderson attorneys to get in there and fight for them.
Toby: That’s it. I have a 501(c)(3), a nonprofit that I started with Anderson. I was wondering if you were to donate appreciated stock to the charity, how to donate that to the charity properly and how do you record it as a personal donation with the appreciation? Does the charity need to start a brokerage account to receive the stock? What do you say?
Eliot: We certainly want to set up a brokerage account in the charity because when it receives that stock, they’ll have a place to put it. That would be a good idea, certainly. You can donate it. It will be at the fair market value. You may have a limitation on the amount deduction of the current year, you’re limited to 30% of your adjusted gross income for appreciated property.
Toby: If it’s a public charity.
Eliot: Those are concerns that you can get into the details with your tax professional but certainly, you can just donate the stock over. I assume the actual steps you have to go through, imagine you would work with your brokerage account and say, hey, I’m just…
Toby: I’ve done this, so I could tell you exactly what I did. I had stock that I forgot that I had. It was a private company and it went public, and somebody smacked me on the side of the head and said, it had gone up a lot, and they were like, what are you going to do? Crap, I have to go find my certificates and get them placed with the broker, because it went from private to public, one of those dumb things. I was like, well, I didn’t really expect it, why don’t I just donate it? The value of those shares was let’s just say, $100,000, is a deduction.
Let’s say I was able to use that full deduction and I’m in the 37% tax bracket. It was worth $37,000 to me as tax savings. I don’t have to recognize income. I gave the shares away to the charity which meant I had to open up a brokerage account in the charity’s name and donate those shares. I had to get a letter from the charity that says, nothing was given of value, and thank you for your donation, and here’s the fair market value in the time. Ordinarily, I had to get an appraisal, but if it’s stock and it’s readily available, it’s the price on the day that you transfer, it’s opening price, so you get that nice deduction. Great.
If I had sold the stock, I would have had capital gains and I could have donated the cash, but I would have had capital gains. This way, I didn’t have any income recognition and I was able to get the tax donation. I’ve done that with real estate too. I’m one of those guys that likes to—I don’t like giving cash, I like giving appreciated assets because it gives me two bangs for the same buck. I want to be able to do something right, I want to give somebody a valuable asset, but I prefer not to pay tax on it first. I’d rather let the charity sell it if they want to and turn it into cash. They’re exempt, so they don’t have to pay any tax, so I like that.
The only other issue, just to get into the weeds, is if you haven’t held that stock for at least a year, then it doesn’t matter what its fair market value is, it’s going to be the basis that you paid. If it’s less than a year, it’s short term capital gains. If you have appreciated stock, you’ve held it for nine months, then you donate it, you’re not going to get the fair market value, you’re going to get the basis of what you paid for. If you paid $1,000 for shares that are now worth $5,000, and you donate them, you’re not going to get the $5,000, you’re going to get $1,000 if it’s short term capital gains. Just keep that in mind when you’re doing this.
Typically, I can’t think of a single circumstance where I’ve seen somebody donating an appreciated asset that they haven’t held on for quite some time. A lot of time, it’s fully depreciated real estate. They may have had the property for 30 years, and they’re like, Toby, I don’t want to sell it because I don’t want the gain. I don’t know what to do with the property. I kind of rather just dump it, but I don’t want to pay tax on it, the recapture, and the capital gains would be annoying. I’m like, great. Give it to charity.
You can give that to charity and then the charity can do what it will with it. Sometimes, they keep them as rentals, sometimes they say thank you very much, then sell it. Regardless, you would get an appraisal under that circumstance, and then we’d have to report the sale if it’s within two years I think it is, because they want to make sure you didn’t have an inflated appraisal. If you’re using an actual appraisal company, you’ll be fine. Don’t you guys love this stuff? I don’t know, I find it extremely interesting. I love stuff like that.
Eliot: A lot of different angles you can look at things from in a prism.
Toby: Yeah. Somebody says, you just got to repeat and repeat. Go back and watch some of these.
Should I set up a C-Corp LLC for land flipping business even if I have just started, no deals yet or should I start with a pass through first then change to a C-Corp once I get more volume?
Eliot: Grand question, but you want that C-Corporation from the get go. You want to do that immediately when you start thinking about the business idea. I would set that C-Corp so you can start building up losses and expenses in that C-Corp. When you flip it and you have that gain come in, you’re automatically offsetting against that gain. There’s a lot of things that you can do to get some of that cash from a C-Corporation, medical reimbursement, accountable plan, corporate meetings, just a whole lot of good that can happen by getting that C-Corporation setup right away.
Toby: Yeah. You want to do it before you buy. You want to make sure that your name is not in the title, I’ve seen lawsuits for folks that just owned and flipped. They think that there’s nothing to it, they were barely on it, and then they get dragged into a lawsuit 10 years later. They were on the title and then all they have to do is allege that you misrepresented or concealed a defect that you knew or should have known, and the next thing you know, you’re dealing with litigation for something. It’s much easier to use an entity, and then kill that entity periodically.
A lot of times, people that are in the business of flipping, they’ll set up an entity per flip, and then they’ll dissolve it once the flip is done, that way they can do this. I’m done with the liability, the entity is gone, that did it.
From a tax standpoint, whether you’re an S-Corp or a C-Corp, there’s so much flexibility here guys. I don’t want to misstate anything, but if I am a C-Corp, that’s how all corporations start, I can make an S selection, and I usually do so by the 15th day or the third month after I set up the entity.
Generally speaking, it’s within the first 75 days. If I screw that up and still treat it as an S-Corp, I can go back and get retroactive relief when I file that return. I look at this and say, it’s not a gun through your head, don’t feel like you have this pressure on you. The most important thing is to actually be successful at your business. If you’re doing the land flipping business, and you don’t have deals yet, make sure you have that entity setup. That should not be your main concern. Your main concern should be buying things that generate profit. If you focus on the right things, and if you use the right vehicle, it will protect you from an asset protection standpoint and give us a lot of flexibility from a tax standpoint. A lot of these, we can look at how you are at the end of the year, and make some decisions then too.
Toby: The bigger van. When you buy a bigger van, I want to know how big your first van was. I had a 15-footer, I wanted a 20-footer. When you buy a bigger van for your business, you depreciate it or show it as an expense in the year you buy, where do I find a list of business expenses that are 100% deductible and other expenses that are not.
Eliot: Well first of all for the van itself, how you’re going to depreciate depends of course on the size if it’s over 6,000 pounds, etcetera. You probably got bonus depreciation a lot more of it. It may not be 100% anymore, but we probably solved the 80% going on. If it’s a smaller vehicle, then you might be limited to how much you’re going to deduct each year. This is for the business.
Toby: Couldn’t we 179 it?
Eliot: We could. We got the new thing coming back in and it’s been around but we’ve been ignoring it, 179 that just says—it’s the same concept as long as you’re profitable in your business, you can take a deduction of up to $1 million or so in assets this year. That would be another option. But depreciate or show us an expense either way, it’s going to be in the year that you buy, no question about that.
Toby: Let’s assume it’s 100% business usage. If you buy a big van and you’re only using it 20% for business, that goes out the window. It’s got to be 50% or more. Somebody says, is there a 6,000 pound rule? Yeah. That’s what he’s talking about, the gross vehicle weight, it’s on the inside of the door. When you open it up and if it’s more than a 6,000 pound gross vehicle weight, then it’s equipment, it’s not a passenger vehicle anymore. This van would likely qualify and you could write it off 100% in the year that you acquire it. That’s why you always see people telling folks to buy stuff at the end of the year. Hey, go buy your Range Rover, or whatever it is.
They never mention the part where it’s like, hey, personal use is going to be taxable to you, and you better make sure that you don’t drop below 50% or whatever you wrote off is going to be taxable to you as well. It’s nasty. Just make sure that this is business equipment. Otherwise, don’t get too fancy. I just prefer people if they don’t know or they’re using partial use for business, just do the old reimburse for mileage. But in this case, it looks like I’m getting a bigger van, and I’m using it for business. Hopefully, it’s 100% for business, you get to write off 100%.
Where do you find that list? There really isn’t. Anything that’s ordinary and necessary for business is 100% deductible. It’s usually based off of the business usage of it. It depends on the type of business you have, because S-Corps and C-Corps are treated differently than sole proprietorships on some items. For example, a cell phone. I have an accountable plan. I have a cellphone. I can reimburse my cellphone 100%, even if I’m only using it 10% for business.
If I’m a sole proprietor, not the same rule. I only get to write off what my business usage is and I have to track it. Where do you learn that stuff? The tax toolbox, or come to the tax and asset protection event, or spend some time on my YouTube channel. Two of those are free. The one that’s not is the tax toolbox but it has—how many videos are in there.
Eliot: A bunch and we’re going to add more.
Toby: Yeah. We do something called Tax-Wise Workshop for our tax clients. How many different deductions are we going over now?
Eliot: Probably 40 I think strategies, 40+ or 50.
Toby: It’s 40+ and we’ve done this for years, where we break it down, here’s the rule, here’s the code provision, here’s how you use it. It is long. You guys are doing these. I did one that I thought was going to last a day, we went into the night. It’s about eight hours.
Eliot: Regarding the types of vehicles, there are lists out there that you can Google and they’ll show you all the vehicles that qualify over 6,000 pounds. But as far as Toby was saying, just regular business expenses, as long as it’s used 100% for business.
Toby: Yeah. Buy a cybertruck, you could buy a Tesla X, they qualify, they’re so heavy.
Somebody says, can I convert a personal vehicle to business? Yeah, of course you can. You can actually reimburse yourself too.
Is there a maximum number of LLCs that I can use for the IRC 280A deduction? I’m going to ask you this, but we’re going to have to explain what 280A is to the people first. I have two LLCs and I was wondering if I can take the deduction for both. Also, I have a nonprofit and I was wondering if I could also have meetings for a nonprofit and the fee for using the space could be a donation from my LLC?
Eliot: Right. Well, 280A is a provision, it actually comes under a section that is dedicated to not letting you deduct personal expenses in your house particularly. Yet, they come up with the 280A and say if you rent it out to anybody for any purpose less than 14 calendar days a year, we’ll go ahead and let you take that income tax free. You don’t have to pay any tax on it so it’s really nice. As you often hear the history of it, it came from Augusta, we call it the Augusta rule. It comes from the big golf tournament down there, your IBMs, your AT&Ts were coming down, flocking down there. They were stronger. I mean, the IRS and congress to let them be able to deduct that business expense…
Toby: The locals would rent them their house. They go down there for a week and they pay $30,000 a day in some cases, and they didn’t want that to stop. If you made that taxable to somebody, then I’d say forget it.
Eliot: Yeah. When congress comes around and says, 14 days or less, you don’t pay any tax on it.
Toby: Airbnb loves it too. Here’s the deal, 280A’s subsection G 2 is the actual provision and it says, a taxpayer may rent out their residence. It doesn’t say their primary residence, but a residence for less than 15 days a year, and not have to include it in their adjusted gross income. It does not say per lessee. It’s not per whoever I lease to. However many LLCs, it doesn’t matter. You can have 4, 5, 6, 7, you could have 14 different companies all go in and rent your house for one day, and as long as the aggregate is 14 days or less, you don’t have to recognize it as income. As long as it’s a residence. It could be a secondary residence. It’s just that you’re limited as the payer who’s receiving those funds to 14 days or less.
You go to 15 days, guess what? 100% of everything that you received is now taxable, the 14 days included. You stop at 14, and you can rent to your nonprofit, you could rent to your C-Corp, S-Corp, it should be a corporation, it should not be a partnership or a sole proprietorship because they would cancel each other out. It wouldn’t give you a benefit. It has to be a separate taxpayer.
Eliot: Yeah. The nonprofit certainly can. We are a little bit careful on the nonprofit. The whole idea, if you donate $10,000 to your nonprofit, is that the nonprofit can use it for nonprofit purposes. We wouldn’t want to have a $12,000 280A bill on that to take it all right back. I think that would probably grow a foul of how the IRS and Nick Crane would look at it.
Toby: What you could do is you could say, hey, I’m going to rent it, what you do is, I’m not going to pitch the tax toolbox, but it’s in there. There’s actually a bunch of documentation that we’ve been using for over 20 years. It has an easy list. You call three locations locally that are commensurate with your space. Okay, I’m going to call a hotel and say, hey, if I want a meeting room that has refreshments and access to a kitchen, that has internet, and I want to be able to have that meeting there, you’re allowed to pay yourself the same amount, because that’s a reasonable amount. You get three quotes, and you can do that with your nonprofit. It would pay you that money in theory.
Let’s say you did it for $700 for the day, and it gave you $700, you don’t have to report that. You could donate that $700 right back and you would get a $700 donation. That’s the methodology that you use to allow yourself to get a deduction. You can’t deduct something that you didn’t receive, you just have to make sure that you receive it. It’s nontaxable too. It’s the same thing as if like, let’s say you bought a bunch of pizzas for the charity and the charity said, hey Eliot, thanks for the pizzas, here’s $100 and you said, hey, no worries. I’m going to donate that $100. Get a receipt for the $100 donation and do it that way. I wouldn’t donate the pizzas. Fun stuff. We’ve been talking about 280A for decades.
How do adjusted gross income levels affect capital gains? Is it true that if AGI’s below $76,000 we pay no capital gains?
Eliot: Calmly a misunderstood question. Actually, AGI doesn’t have anything to do with this. It’s taxable income when we talk about the brackets for capital gains. The $76,000 is an old number. That’s from several years ago. It’s adjusted basically every year. It’s approximately $83,000 I think this year. If your total taxable income is under $80,000 something, you won’t pay any tax on that capital gain. That includes all your income. Your W2, interests you earned, whatever.
Toby: This is the fun stuff that we do. During the Tax and Asset Protection event, I breakdown the three different types of income categories because it’s active, passive, and portfolio income, and capital gains is portfolio income. It sits in this weird category that says, if it’s short-term, it’s an ordinary income tax bracket, if it’s long-term, then it’s taxed at 0.15% or 0.20% depending on your income. The type of income we’re talking about is long-term capital gains.
You hold it for at least a year if it’s a capital asset, or it’s a qualified dividend from a publicly traded company that’s paying you a dividend, or it’s a future’s contract where 60% is long-term capital gains and 40% is short-term. Long-term capital gains are taxed according to your taxable income. Like Eliot just said, I think this year for a married couple, I think it’s $89,000 below, you’re in the 0% category.
If your AGI is below $76,000, it tells me you have a tax appetite. If you have unrealized long-term capital gains in your account, I’m telling you that before the end of the year, sell it up to the $89,000 limit if you’re married and filing jointly, and then buy the shares right back because you just reset, you just stepped up your own basis for zero tax. It makes your income go up a little bit but it’s at zero. This is the best thing, and then if you sell it later, you have a higher basis, so you’re going to pay less tax on it.
I do that every year. We deal with that at the end of the year, I’m always screaming at people, hey, you have a tax appetite for long-term capital gains, your dividends, you should be investing in companies that are paying dividends, you should be selling your long-term stocks that have appreciated, and reset them, just sell them and buy them right back. There’s no such thing as a wash sale gain rule, it’s only for losses, so you do that, and it works out great.
With a long-term position of 1256 contracts, be not taxable if taxable income is low enough. The long-term capital gain portion would not be taxable. The short-term would be at your ordinary bracket, and it depends on what your other deductions are, because you get a standard deduction. If you’re below the standard deduction, you wipe that thing out, you would be at zero.
Faith here asked, do you have to file an individual return if you make less than $10,000? No, it’s below the standard deduction. Standard deduction for an individual is $13,000.
Eliot: $13,850 I believe it is.
Toby: Yeah, $13,850 this year so you wouldn’t have an obligation to file, unless you want a refund or something.
Eliot: When we run into that kind of situation, we have someone who sold their business, took a year off. If they have a lot of stock that’s appreciated and sell $80,000+, you don’t pay any tax on it.
Toby: We see the people that are real estate professionals and have a year where they’re like, I got down to zero. Don’t be at zero knuckles, come on. Let’s use some of that. You’re in the 10%-12% area, and zero for long-term capital gains, it’s okay to pay some tax. You’re not going to get another shot at that, you have these big losses, these guys get themselves down to zero and I’m like, you’re going to have trouble with loans. Why ignore the fact that you have a bunch of free money? Again, long-term capital gains, you’re not going to pay tax on. You could sell $80,000 worth zero.
I am opening a new IRA that will be managed by an IRA with Custody TD Ameritrade. I have no idea what that means.
Eliot: Custodian, it’s TD Ameritrade.
Toby: No, but a new IRA that will be managed by an IRA. One IRA is not managed by the other. What it is, is I have one IRA with Ameritrade and I’m opening up another account, which I don’t know why you would do a TD Ameritrade, they’re custody there which by the way in this banking crisis, I did a video with Stefan Whitwell and we talked about the difference between the insurance on bank accounts versus custodial accounts, you don’t have exposure on the custodial account, they usually are 99% use a third party custodian. The only guy that I’ve ever heard of that’s self-custodian was Bernie Madoff because you’re stealing everybody’s money.
If you’re using a custodian in a brokerage house, your money is sitting there for you, it’s not like in a bank where it becomes an asset on their balance sheet and they pile it all together and write loans at 90 times that amount. That’s why your money is so much safer at custodian accounts. You have two custodian accounts, I’m going to fund a new IRA from the existing IRA at the same custodian which I don’t know why you would do that. I’m sorry I’m just stepping all over you.
I have a Wyoming LLC Anderson setup. Should I open a new IRA in the name of the LLC and will this be a problem moving funds from a personal IRA that is tied up with my name?
Eliot: This caught my attention because we got some potential wrong acts going on here. Nonetheless, we do have the two IRAs. You can roll one over into the other. Either way, whichever it goes, I’m not worried about that, but what caught my attention was, hey, I have this Wyoming LLC I set up with Anderson, great. But you can’t just have that connected to a retirement plan. Your IRA needs to set up its own LLC that it owns, and then it can transfer funds into that LLC and go do investing in real estate or what have you. But you do not want to take some other outside LLC that we set up for you and connect that with your IRA, we’re not allowed to do that.
Toby: Yeah. I would say talk to us before you do anything else because you don’t need two IRA accounts with the same custodian unless you’re separating those funds in the event that you are engaged in anything that’s in a gray area and you don’t want to disqualify a certain portion of those funds which then I would encourage you to be doing a 401(k) so you don’t have to worry about that.
You can have a 401(k) that opens up at TD Ameritrade, soon to be Schwab because they got purchased and they’re making everything go to Schwab. Let’s just say that you did a 401(k) at Schwab, then it doesn’t matter. You can have all your accounts in that same Schwab account and if you ever had a disallowed transaction, it doesn’t disqualify the entire IRA account like what happened if it’s an IRA. If it’s a 401(k), it would only be those particular funds.
There’s lots of little reasons why one account might be better than another. But I would actually say talk to somebody so we know what you’re going to do with it, to make sure you do not step on a landmine. There’s no reason, we’re here to answer your questions, and we will make sure that you’re in the black and white. We don’t even want gray.
Speaking of black and white, go to the YouTube channel, check it out, and listen to the videos. I just talked to you about one that was with Stefan Whitwell. Patty, if you have that, maybe see if you can find that one from Stefan. If you guys are worried about the banks, I’m worried about the banks. I’m worried about losing money. FDIC insurance is neat and dandy but I don’t even know how much it’s going to cover.
Somebody says, I think that if Russia changes its rules, we’ll have a new dollar. There’s a lot of folks worried about the US dollar being the currency for oil which is a big one. I’m not so worried about that right now as much as I am worried about the fact that we’re sitting on banks that bought bonds that have no fair market value and they can’t do anything with it. Hopefully the federals will say, you can borrow up to 100% of the face of that bond. It’s looking a little bit ugly.
I have two 401(k)s, ex-employers, and two traditionals. What would be the best advice, to merge or not to merge? I would merge them. You could have one account for those.
Eliot: 401(k) I would put them in there and have a solo 401(k) better yet so you don’t have the UDFI that we’re talking about earlier if you’re going to go into that.
Toby: Yeah. Patty, could you find that video from Stefan because Stefan is great. He’s a money manager, he’s a CFP, he’s a fiduciary. I’ve known him for years. He was partners with David McShane who helped me conceptualize and put together Infinity Investing. David passed away during Covid unfortunately. Stefan, I still maintain a relationship. But he’s really wicked smart. Wharton School, a business guy, knows his stuff, and he came on and we did a 30-minute. He explains the different types of insurance on different accounts, and all that good stuff. By all means, give yourself a little break.
Once you realize that certain accounts you’re not at risk, you can go, yes, I’m not too worried about that. If all your money is in a regional bank, you can freak out, run around in circles and go, what the hell am I doing? We could make sure that we are keeping your exposure to a minimum. I just say that, I’m worried about banks. You know what I’m more worried about? Your taxes, and making sure you get to keep what you own.
You guys are better stewards of your money than any government. Anything we can do to help keep that money in your pocket, we will do legally. We don’t do the illegal stuff, but we do like to do the black letter and make sure that you guys are keeping it in your pocket. A lot of that is a lot of common sense and just making sure that you’re having somebody look at it that actually knows what they’re doing.
If you guys have any questions during the next two weeks, Tax Tuesday at Anderson Advisors, we don’t charge for this, it’s not a surprise bill, and you can always go to our website. There’s a host of information and I’d be remiss to say, we have my YouTube channel but also Clint, my partner does a really great job. He’s more focused on asset protection. I tend to be more focused on tax. But we are a team here.
Speaking of team, not only is Eliot awesome sitting in for Jeff who’s just been dealing with a host of personal stuff which hopefully we get him back, no offense.
Eliot: No, I’m looking forward to getting him back.
Toby: I love Jeff, but Eliot has been awesome. Give a round of applause for Eliot, but also you have Dana, Dutch, Jared, Kurt, Ross, Sergei, Tanya, and Troy answering questions both on YouTube and in Zoom. I’m telling you, it’s the middle of tax season and these guys are taking time out of their busy schedules to just go and answer you guy’s questions.
I hope you guys realize how unique and special that is. Those guys all get a big star for doing that because it’s selfless. I just want to say thanks guys. You probably don’t hear it enough. People are always angry at their accountants. There’s a bunch of thank you, so hopefully they’re seeing that. I appreciate the fact that it is March and you have tax people taking their time off to answer questions.
Eliot: Try that with your own CPA.
Toby: Yeah, if they’ll return your call. Maybe in May. Anyway, thanks for being here.
Eliot: Great to be here.
Toby: Thank you guys. I see that there were over 225 questions answered in writing. There’s still some open so what I’m going to do is Eliot and I will disappear and we’ll keep this open so that you guys can get the answers that you need, your questions answered. We will not stop until we’ve answered all the questions. But stop asking questions so that they can go home. That will be it. If there’s nothing else, then I want to say thanks for joining us for Tax Tuesday.
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