Toby Mathis and Ian Hanuscin of Anderson Advisors talk about how to deduct taxes when purchasing a home and answer other tax questions. Submit your tax question to taxtuesday@andersonadvisors.
- How can I eliminate paying capital gains? I recently sold my rental property because I needed the cash to pay off a divorce settlement. What are my options? Since you already sold the rental property, doing a 1031 exchange is no longer an option, but a qualified opportunity zone is an option to defer the tax
- Which is better? A 1031 exchange with limited time and capital availability or paying capital gains with unlimited time available and no restrictions on capital? Depends on your income bracket, so before doing a 1031, talk to your tax person
- After receiving a sizable amount of money, how soon after do taxes need to be paid? Usually, it’s 90% of the current year’s income or either 100 or 110% of last year’s income for tax liability
- If I register a vehicle under my company name, is this tax deductible? If it’s 100% business use, yes; if not, determine the percentage of use and deduct that amount
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Real Estate Professional Requirements
Full Episode Transcript:
Toby: All right, everybody. Welcome to Tax Tuesday. We’ll give you a second to come on in. If you’re looking for Tax Tuesday, you’re in the right place. We were going to do it Tax Monday, but then we said no. We’re going to just do them on Tuesdays.... Read Full Transcript
All right. If you’re looking for Tax Tuesday, you’re in the right spot. Let me know where you’re from right now. I’ll introduce who we are and all that good stuff. I want to figure out where everybody is in the country. I can’t see anything else. There’s Mobile, Alabama. My dad is from Mobile. We actually went to Auburn, so it’s where […].
Tampa, Florida, San Diego, […]. There’s somebody from Canada, Maryland, Seattle, Phoenix, Detroit, Salem, Delaware, San Diego. We got a lot of folks on. Don’t get nervous. Tacoma, Washington, oh my gosh, we have an office up there on Broadway. David in North Carolina, Las Vegas. That’s where we’re sitting today. Maine, et cetera. My name is Toby Mathis and I’m joined by…
Ian: Ian Hanson.
Toby: Ian is filling in for Jeff. Somebody says Jeff looks great today. You grew your hair back, Jeff.
Ian: I’m starting to lose some now.
Toby: Jeff got married and he’s out on a cruise ship somewhere. He’s having some fun. You look good. Come on. You look good. Jeff, we miss him. There we go. We got some Hawaii in the house, some San Antonio. We got a lot of people thinking that you look good. Ian’s one of our CPAs. What’s your exact title?
Ian: Tax manager or something like that. I don’t know.
Toby: All right. Ian is the tax manager here at our Las Vegas office. He absolutely does a great job. We have callers on, that’s pretty good. All right, Tax Tuesday rules, ask live Q&A. You can go right into the chat and make a comment, or you can ask a question under the question and answer. We have a whole bunch of folks here to help you. We have Dana, we have Eliot. How many people were on? We had Troy. We had Christos, or did we have Christos?
Ian: I think he was. Dutch was on there, Piao was on there.
Toby: There’s Dutch. They’re waiting for you to crash and burn. So they’re all watching Ian to see whether he goofs up on something so that they make fun of him. Trisha, there’s Patty, we got Matthew. My God, I’ve never seen this many. We have a team on to help you. If you have a question today, this is a good day to ask because apparently, a big chunk of the tax department has come on to watch Ian.
If you have questions throughout the week, by all means, ask them by emailing us at email@example.com. If you need a very detailed response to your specific issue, sometimes we ask that you please become a client first. Otherwise, we just answer general questions, no problem. We don’t play around here with that. We just give free.
We dispense free tax information so that we can help people. We always say we’re fast, fun, and educational. We want to give back and help educate because we know how knowing taxes can be. Questions today, we’ll just read through them what we’re going to be answering.
“How can I eliminate paying capital gains? I recently sold my rental property because I needed the cash to pay off a divorce settlement. What are my options?”
“What is the best way to ensure I receive the necessary tax deductions, mortgage interest, property taxes, 121 exclusions, et cetera if I purchase a house as an owner occupant with direct financing from the seller? Should I use a third-party company that prepares my monthly bill statements?”
“Which is better, 1031 exchange with limited time and capital availability, or paying capital gains with unlimited time available and no restrictions on capital?” Good one.
“After receiving a sizable amount of money, how soon after do taxes need to be paid?” That’s actually a really good question we never get to see.
“If I register my vehicle under my company name, is this tax deductible?”
“If my spouse qualifies as real estate professional, can we activate passive losses generated from our investments in a real estate syndicator,” probably mean syndication, “multifamily apartments to offset tax liability on other sources of active income?”
“Is there a specific write-off for evicted tenants? I own several rental properties and between four evicted tenants. I have about $20,000 in collections with a collection company that is unable to collect anything from them. After a certain amount of time, is this debt no longer recoverable?”
“Can you explain the tax benefit of selling a stock for a loss and then re-buying the stock at a lower price?”
“If you put money in a pre-IPO, how is it taxed? Is it true that it may not be taxed at all depending on the amount of time it’s in there?” Interesting.
“When it comes to business expenses, do you have to provide the IRS receipts, or can you provide your business bank account statements? In regards to food expenses, does it need to be food purchased from restaurants or can it be food purchased at a grocery store? When it comes to these write-offs, does the IRS differentiate between the two?” We’ve got some good questions, really good questions.
All right, Ian. “How can I eliminate paying capital gains? I recently sold my rental property because I needed the cash to pay off a divorce settlement. What are my options?”
Ian: Well, if you had asked me before you sold it, I would have told you one option would be the 1031 exchange, however, that needs to be done before you sell the first property. So that’s off the table. Another one you go look at is doing a qualified opportunity zone that will defer the tax up to 10-ish years.
Toby: No. Actually, the qualified opportunity zone is recognized. It’s as though you sold the property on 12/31/2026, so you’d have to pay tax on it in 2027. The other one is the other 10 year is the increase in value on the actual opportunity zone fund. You wouldn’t have to pay tax, yeah, it’s a deferral.
This one, I always find interesting. When you see capital gains, you can offset your capital gains with capital losses. That’s number one. So you look around and see, do I have any capital loss carryforward? People have them on their returns. You don’t remember losing all the money.
Let’s say that you have a situation where in 1999 you just crashed and burned and you’re still carrying forward all those capital losses, look for those, please. They’re probably sitting in there. One of the other crashes. If you sold in 2008 when it was 38% down, you freaked out, you sold all your stock, and then you forgot that you couldn’t write it off, it might be out there.
The other thing is, I wish we could have talked to you before you sold because I would have said borrow against it. You don’t have to pay tax when you borrow, take a loan out on them, or something. But in this situation, I think you’re absolutely right. In order to avoid capital gains, there’s a way to defer it. You’re not going to eliminate it, but you can defer it. Otherwise, it’s going to involve other capital assets.
You’re going to have to harvest loss, or if you’re a real estate professional, you can accelerate some depreciation perhaps on another property, and offset it because it’s going to be ordinary loss. It sucks to use against capital gains so probably offset. When you offset your ordinary income first if I did that? I think I get to choose, right?
Ian: Yeah, the calculation is going to take the ordinary income first before it does the capital gain.
Toby: Basically, we could just look at your total tax bill and say, hey, capital gains aren’t bad. You might be getting taxed at 20%. Maybe if you’re 20%, you’re 23.8%, the net investment income tax. But maybe, we look and we say, how do we offset some of your taxes as opposed to the capital gains? How do I eliminate paying taxes on that gain? It might be a better way to put it and say, hey, maybe we look at other assets you have and accelerate the depreciation on it.
Ian: Right. You’re most likely going to be in the 15% bracket in this situation. I’m guessing you’ve had the rental for longer than a year. So it’s probably going to have you around the 24% bracket. If you do bump up to the 20% long-term, you’re probably going to be around the 35% bracket. So either way, you’d probably be looking more at getting your ordinary income down as opposed to your capital income.
Toby: Yeah. What Ian said in English is you get bigger deductions. I’m just teasing. Somebody says, “Hey, don’t you only have 180 days to get into a qualified opportunity zone?” You have 180 days from either the capital, the sale, or January 1st if it’s a 1231 property. If we have a sale of real estate, wouldn’t we be looking at potentially January 1st?
Ian: Yeah, and the reason they do that is most of the opportunity zones are going to be through partnerships. So you’re waiting on your K-1s because they’re looking to get people the most time possible and figure out what the gain is.
Toby: It is two parts. You have the qualified opportunity zone fund, which you have to put the money into. The fund has to invest that in qualified opportunity zone property. It’s a threshold. It’s like 90% within 180 days. So technically, in this scenario, we could probably be putting stuff into an opportunity zone more than a year after the transaction.
We set up the fund right away, get it before June so that you can defer it, and then we’d be looking at the investment making sure you’re in an opportunity zone investment. Are you high up on opportunity zones? Do you like them or do you think that’s more of a pain?
Ian: Not as much. 1031 would have been a better option.
Toby: Yeah. All right. “What is the best way to ensure I receive the necessary tax deductions, most likely the mortgage interest deduction in the property tax. If I purchase a house as an owner occupant?” Somebody’s doing owner financing to you. You’re buying it from an owner. “Should I use a third-party company that prepares my monthly bill statements?”
Ian: Generally, the person that is selling you the house should be issuing you a 1098 at the end of the year. It’s part for anyone that pays over $600 of interest. They should have some sort of amortization schedule that’ll break down the principal and interest for the payments each year so you know which portion is actually deductible.
The principal is not deductible. It’s the return of the liability. So only the interest is deductible. Then property taxes usually come through on the 1098 as well. I know California is a good state that doesn’t usually have those on there. So you’ll have to go check the county the property’s in to pull those.
Toby: What would you do if the person won’t give you a statement? They’re just being turds, they’re just not giving it to you?
Ian: You’re going to have the calculation yourself. So generally, you’re going to want the bank statements showing the amount that’s being paid out.
Toby: So it doesn’t kill you if they don’t give it? As long as you incurred it, you can put it. We don’t have to have the document. I actually did this once. I actually bought from a guy that had a—it was a 2% interest rate, and I bought a house when Vegas was just crashing and I couldn’t resist.
We just tossed it into a land trust and I paid the mortgage statement. He was getting the 1098 from the mortgage company, and then I would just do the same thing, report it. We used a third party, they don’t do anything. All they do is collect the money, but they don’t give you any documents. That’s not going to fix it for you. So you’re just going to have to do it. Anything else you could say on that?
Ian: No. That’s about it.
Toby: Yeah, and then the 121 exclusion, you don’t need a document for that. That’s just, did you live in it as your primary residence for two out of the five years? Technically, if you were a tenant, if you bought this as an owner occupant and you did it on a lease option, you could actually use the time that you were in it to qualify as well. It’s kind of weird.
You have to own it when you sell, but you have to occupy it for two out of the five years as a primary residence. It’s kind of weird. Just goofy things. You don’t need anything from them for that. All right, this is very subjective, but I like subjective questions because I like hearing everybody’s opinion.
By the way, guys, if you want to play along at home, in chat, tell me what you guys think of this question, which one would you rather do? “Would you rather have a 1031 exchange with limited time and capital availability?” A 1031 exchange is when you swap real estate and you have 45 days to identify replacement properties, 180 days to close from your closing date. So you’re on the clock. You got six months to close. You have the 1031. So would you rather do that or would you rather just pay the capital gains and have an unlimited time? What do you think?
Ian: I think the first question you have to ask is what brackets are you in. Because if you have no income, you can have up to about $80,000 long-term capital gains. If you’re selling your rental and that’s the only thing you have, you get about $60,000 capital gains, you’re not paying tax. So at that point, you might as well just take the cash out. If you do, decide to go buy another property, then you can do that.
Toby: Yeah, we’re seeing some good ones. 1031 if there’s a property to exchange to pay the capital gains because you’re in a 10% tax bracket. So you got to look at it. It all depends. Somebody said, “I’d rather have Ian answer the question.” What did I do? David’s like, you’re harsh on me already. 1031 if the gain is enough.
Everybody’s now saying it depends. They become CPAs. You’ll learn the secret to making millions of dollars, you become a CPA and say it depends. Somebody says, “What do you think of deferred sales trust?” Okay, there we go. Now we’re starting to think.
All right. We have an exchange and I’m worried about like, I don’t want to be in a situation where I have to force myself to find a property, especially in this marketplace. But let’s just say that I want to recognize the income over a longer period of time. Maybe I don’t even need the money. I’m just saying, I just don’t want to get killed on the tax.
Maybe it is somebody that’s in a higher tax bracket and you’d have a few choices. I could do the deferred sales trust. Not a huge fan of trying to do the monetized sales trust. I’d rather just do a typical installment sale, recognize, and get the money over time then I can get that property back. But you could also do a qualified opportunity zone.
You could also look and see if you have other capital losses to offset. Maybe you’re a real estate professional and we have the ability to accelerate a bunch of depreciation that’s going to cause us to go even negative as far as income so that we could offset that way. It’s interesting also that on recapture, it’s not just capital gains.
The recapture is at your rate tube capped at 25%. So we have to look at all that, or, hey, I just want the cash. I just want the cash. I’m going to say what I said earlier, which is, if you just want the cash, you should consider borrowing against it at these really ridiculously low interest rates and keeping the property because the appreciation on real estate, it’s been like 20% on residential, and in a lot places it’s higher. That way, you don’t lose the appreciation and you’re paying pretty low.
Somebody says, “Between a 1031 and taking capital gains, I choose the latter because I always make sure my taxable income is below $80,000.” There you go. “What about if you use the capital gain to pay off debt?” If you have debt, obviously, you can always borrow cheap money. Let’s say I have real estate, you’ve been working with clients, what interest rate do they pay if they’re getting lines of credit against their properties?
Ian: I’m not sure about the lines of credit, but most people have been refinancing for 15 years beginning at about 2% and then 30 have been about 3%. I think pretty much every client I’ve seen that’s had multiple rentals has at least refinanced one property in 2020.
Toby: Let’s think about this. You pulled money out at 2%, pay off your debt that way, keep the property. […] you’re talking about using the capital gain. When I sell a property, here’s the deal. I’m losing about 8% of it because the closing costs and fees, typical. I know some of you guys are going to sell it yourself, but you don’t get that back.
That’s off of your principal and you’re paying the capital gains. When you add those two things up, it could be pretty sizable. It could be 30%. Now I’m living off of the 70%, that’s left. That’s what I’m going to have to grow. It takes really big growth to make up that 30% chunk that we lost.
Again, I like borrowing because the transaction cost might be 1%. I have a really low interest rate, that asset is continuing to appreciate, historically, greater than 4%. If we go back and look at real estate over time, it’s more than 4%. Recently it’s been double digits.
S&P, same thing. Historically, it’s like 11%. Since the 50s, it’s over 7%, and in the last 10 years it’s 13%. So you’re better off, in my mind, keeping the asset, borrowing against it, and avoiding the tax. If you have to sell it like, hey, I really want to sell it and go get something else and you have something else that you’re targeting, then I can see 1031.
But I’ve seen so many people kind of hosed on transactions because somebody drags them close to that deadline and then starts demanding terms because they know you have a taxable inclusion if you don’t get closed. It can be interesting. Somebody says, “Assuming capital gain is significant.” You have to look and do your calculations. So you get your little pencil up, talk to guys like Ian. You say, Ian, what’s it going to be?
Ian: One thing on the 1031s too, make sure you’re looking at the cash you’re going to get out and what you’re going to put back in, and then the same thing with the loans. How much are you going to pay off? How much are you going to acquire? Because that can be a part of your calculation. It’s going to determine if you get booed or not out of this.
Toby: Booed? If you pay off debt and you take the cash, that’s taxable too.
Ian: Yeah. Long story short, before you do a 1031, make sure you talk to your tax people.
Toby: Can you guys run scenarios?
Ian: Yes, we can.
Toby: So then, now, we’re not guessing. There’s no more it depends. You got to go and say, hmm, that one. All right. We like our accountants.
“After receiving a sizable amount of money, how soon after do taxes need to be paid?”
Ian: Okay. We were just actually talking about this before we came in. In terms of the safe harbor for your taxes that need to be paid in, usually, it’s 90% of the current year or either 100% of last year’s if you’re under $150,000 of income or 10% of last year’s if you’re over 150% of income. That’s not going to be your payment at the end of the year, that’s going to be your tax liability.
So it’ll be the line on the 1040 on page two, that says tax. So you’re going to look at that, then you’re going to multiply it by those numbers I just said, and that’s going to tell you how much you need to be paid before January 15.
Toby: The only one thing I would say is after receiving a sizable amount of money, I’d say what’s the source? What kind of money is it? It could be, I got a life insurance settlement, somebody passed. Okay, how soon do taxes need to be paid? They don’t because it’s not taxable. Hey, I got a sizable amount of money. I got a gift. Okay, what do I have to pay? Nothing. It’s a gift. So we have to look and see what kind of income it is. What if it’s capital gains?
Ian: Like we sold a GameStop stock?
Toby: No. Hey, stop that. You have some capital loss and now we got a bunch of money that came in, but what if you’re one of the people that had the big losses from 2008? We had quite a few clients that did that, buy high, sell low thing, and they would have these carryforwards. We’d inherit them from somebody else, you’d look, and you’d say, they would always say, oh, yeah, I lost money, but you’d never see the carry forward.
The accountant didn’t track it. Two or three years later, they lose it, and then you go back and you see, oh, wait a second, you had this carry forward $200,000–$300,000. We need to use that, right?
Ian: Yes. You want to look at all those, and then for the estimates, there are two ways you can do it. Either you split up between the four quarters, so it’s going to be due April, June, September, and January 15th, or your other option is you can annualize the income. A good instance of that would be, let’s say, you get a massive capital gain in the fourth quarter. Instead of paying, quarters one, two, and three, when you don’t have the cash to pay it, you can make an election on the tax form to spread that income to the fourth quarter and pay the estimates for January 15th as opposed to the other three.
Toby: What Ian is talking about is, when is the tax due? Technically, taxes are due when things are earned. If this was in the fourth quarter, like we’re in the fourth quarter, employment taxes quarters aren’t three-month, three-month, three-month, three-month. It’s like three-month, two-month, three-month, four-month. It’s goofy, but you’re supposed to be paying it whatever quarter you technically get it in, depending on what your taxes are.
It’s all income. It doesn’t matter if it could be dividends, capital gains, salaries, business. Anything that hits, technically, you have this tax liability right there. How soon after do taxes need to be paid? It depends on the type of income.
It depends on how much you’ve already paid. It depends on if you have losses. It depends on a lot of different factors, whether it qualifies to do a qualified opportunity zone, whether the source of the income is even taxable. All that stuff comes into play. I love these types of questions because it really does give us the ability to say like, it’s not an it depends, that’s a very open-ended question.
Speaking of open-ended questions, this one’s actually pretty straightforward. “If I register a vehicle under my company name, is this tax-deductible?” What do you think?
Ian: If it’s 100% business use, yes. If not, you got to figure out what percentage it is, and you would be able to take that amount.
Toby: Yeah. The fact, how important is a company name versus you own it?
Ian: Generally, you don’t want to put a vehicle in your company’s name if it’s not going to be solely used for business. If it’s going to be a personal vehicle you have, let’s say you do real estate on the side and you’re taking clients out to the houses, generally, you’re going to take a mileage log, and then you’ll either take the mileage expense, whichever the rate is for each year, it’s generally around 55 cents or so per mile, or you could take your total mileage for the year.
First, divide the business mileage by the total mileage, and then you can multiply it by your actual expenses and figure out which one is better.
Toby: Yeah. Let’s just say it’s Joe Schmo, ABC Company. They have a little S-corp, and they’re going to use it 50/50. Let’s say they’re a realtor, would you buy it in the company?
Ian: I would not. You’d have to worry about commercial insurance, getting the loan under the company’s name.
Toby: You just hit one of the big ones. It may be more expensive. Once you’ve tossed it in the company, it’s no longer a personal use vehicle. They expect you to be allowing employees and other things to use it. It’s like a rental car. They kind of know-how people are going to treat that car.
Insurance companies probably have stats on everything, but it’s more expensive. If you do get into an accident, guess who gets sued? The company. There were huge cases where somebody was driving a company vehicle personally and the company still gets sued like it was somebody in the family driving down and harmed somebody significantly. The company gets wrapped in. It’s almost always better just to own that thing individually. If you own it and let’s say I’m the company, can I reimburse you for the depreciation and things like that on that property?
Ian: If you take the actual expenses, yeah.
Toby: If I do the actual expenses. Actual expenses, we have to calculate—oil changes, gas, maintenance.
Ian: Repairs, insurance, et cetera. The mileage expense that the IRS comes up with actually has a depreciation component in it. They look at the average cost of vehicles plus all that. So there is actually a portion that’s for depreciation in there.
Toby: Yeah. Somebody says lease it back to the company. Maria, not so much just because there are two sides. I don’t mean to just disagree with you, but if I lease it, now I have a taxable event coming to me, and then I’m playing, all right, the company provided me a leased vehicle, now I have lease inclusion in my income.
For example, if I lease a vehicle for $1000 a month as a company and then I give it to Ian to drive around personally, he now has income wages of $1000 a month subject to withholding, income tax, old age, disability, survivors, Medicare. We don’t like that. That’s the part that accountants sometimes screw up where they don’t realize that if I have a vehicle and it’s 75% personal, 25% business, the business is paying for everything, and it writes it off, I now get 75% of the leased value.
The IRS publishes a chart. It says here’s the lease value of your vehicle, and I’m going to have a taxable event. It’s like if I went to an employee and said, hey, you’re the greatest employee ever, here’s a new Corvette. That’s taxable to them. Let’s say it’s $100,000. That’s $100,000 of taxable income to that person. They may not even want a Corvette. Would you drive a Corvette?
Ian: For $30,000, probably yeah.
Toby: You’re such a […]. They’re like $100,000 now.
Ian: If you’re […] out my W-2 I’ll take it.
Toby: Yeah. But would you buy yourself?
Toby: How many guys out there that are liking the Corvette? A friend of mine bought a Corvette and I was like, you’re not 50 yet. That’s horrible with all these everywhere. I’ll take the Corvette. Some of these guys like the Corvettes. They look like spaceships. They’re pretty amazing. I just know I would last about two days before you’d find me in a ditch somewhere because they’re just like rocket ships.
Ian: I’d probably be arrested for reckless driving.
Toby: Yeah, you got to be careful with those. They are beautiful in somebody else’s garage. I go, that’s a really great car you got there. You want to drive it? No, the voice has one. Who’s the voice? Oh, no, Patty, I know who you’re talking about.
All right. “If my spouse qualifies as a real estate professional, can we activate passive losses generated from our investments in a real estate syndication multifamily, to offset tax liability, on other sources of active income?” What say you?
Ian: If you’re going to aggregate them in, then yes. You would be able to take those losses non-passive so you can take it this year. However, that wouldn’t actually activate anything that was a carryover from last year. So if you have any passive activity loss carryovers, you activating it this year […] activate those.
Toby: Yeah. A passive loss can only offset passive income. When you’re a real estate professional, it doesn’t change the nature of the income. It just says it’s an exception to the passive activity loss rules. Typically, rent is passive, unless you’re a real estate professional, in which case, then it’s just not passive. Then you have to still do one of the things, you have to materially participate.
Ian and I could go out and we can start up a pizza shop. I will use pizza shop. I like pizza. They’re still talking about Corvettes, by the way, on the chat. So we started a pizza shop and I say, Ian, you’re the better pizza maker, I’m much better at going on vacation. So I put money in, he puts money in, and the pizza shop makes $100,000. We’re 50:50 owners. We each get $50,000.
Ian’s is active. He has to pay self-employment tax. My portion, passive, just like rents. That’s what we’re looking at. We have these things called passive activity losses. Here you are a real estate professional, you have losses coming from the real estate syndication, and it matters whether it’s an LLC or limited partnership for this the second portion as to whether you materially participate.
Let’s say that you have a syndication and it kicks down $10,000 of loss. You’re a real estate professional. Everything else you have, you managed to have zero income, you’ve offset all your income. Do you get to take the $10,000 loss from that syndication?
Ian: I’ll give you an NOL.
Toby: But you would get the loss. He’s saying net operating loss, but yeah, absolutely. So being a real estate professional just means your real estate activities are no longer passive. They’re no longer subject to the passive activity loss rules as long as you have to do one other thing. We have to elect to aggregate all of our activities, group all of them. Is that what that’s called?
Toby: All right. Let’s go to the next one. “Is there a specific write-off for tenants? I own several rental properties between four evicted tenants. I have about $20,000 in collections with a collections company that is unable to collect anything from them. After a certain amount of time, is this debt no longer recoverable?”
Ian: Okay, from the tax standpoint, you’re most likely going to be on a cash basis. In terms of getting a deduction for what you didn’t collect, you’re not going to be able to receive that. The only way you would be able to is if you’re on an accrual basis, which essentially, you would be recognizing income as it should be earned, not as you receive it. So if that’s the case and they determine this as uncollectible, then you’d be able to write that off as a deduction.
Toby: Nobody knows what cash and accrual mean.
Ian: Cash accounting is I get cash, I pick it up as income. Accrual is I do the work, but I don’t get the cash, I’m going to pick it up as income anyway.
Toby: Yup. So if I do work for Ian and let’s say that I invoice him $2000, under cash, I haven’t received any income, there’s nothing. Under accrual, I have to pick up the $2000 because I invoiced him $2000. In rental, do you have anybody that does accrual in rental?
Ian: I don’t think so. If I do, I usually tell them to stop.
Toby: For this very reason because you’re owed $20,000, you never recognized it as income, therefore you get no deduction. It’s going to be a big zero. If you were accrual, you would have recognized $20,000. Now I can’t collect it, I get a $20,000 deduction, I’m at zero. If I loan money to Ian, I’m part of my business and I loan him $20,000, I didn’t get a deduction. I had to pay tax on the $20,000 when I made it. Now I invest it, he doesn’t pay me back, I have to show that I’ve exhausted my abilities to collect it.
So usually it means suing him, trying to go to court, trying to go to collections. That’s all you got to do. Then I would get to write it off, but I have to be in that business. So it gets a little tough. So the answer to this question, then you’d say, sorry, but you’re not going to get it.
Ian: Yeah. You won’t get anything for it, but also, you didn’t pick it up as an income, 99.99% of individuals are going to be on cash basis.
Toby: All right, I’m going to go back to this previous question. The reason being is because there’s actually somebody says, “In regards to the real estate syndication, I’m in a similar situation. My wife and I have a partnership. I am 90% passive, she is 10% active. This year, I lost $20,000 in a syndication in which I invested in my own name. Can we take the deduction?”
So the question, Amanda, would be, what type of syndication? Was it a real estate syndication? What type of activity are you and your wife doing? It sounds like it’s real estate. I guess it is real estate from the syndication. But if you’re a real estate professional, it doesn’t matter.
Ian: If one of you is an REP, real estate professional, then you both are. So you can combine them together.
Toby: Your real estate activities are no longer passive. As long as you meet the 750 hours, more than 50% of your personal time, just one spouse has to meet that prong. Prong one is 750 hours in any real estate business that you own a greater than 5% share of. I could be construction, I could be development, I could be a property management, it could be other properties.
Yes, real estate. She is a real estate professional, I’m not. That is fine. So what you’re saying is it came down to my name, so it doesn’t matter. You are automatically a real estate professional if you qualify. One spouse is a real estate professional. Together, both of you materially participate in your group real estate activities. You have to make an aggregation election. You have to treat all of your real estate activities—including that syndication—as one big real estate activity. Now you don’t have to worry about passive losses. See, now we have happy people. All right, we already talked about the tenants.
The one thing I’d say to the tenants by the way is if you are owed back rent, I don’t know if you can get it now. But when they’re in there, we were pretty successful at getting the government money for paying for back rents. The hardest thing was getting the tenants to sign things or come to the door half the time. Sometimes, they think you’re about to toss them out and you’re like, no, no, no, I want to help you get the funds. I want to help me help you.
I don’t want to throw you out. That’s a pain. I have to repaint, do the carpeting, and everything. It doesn’t do anybody any good. So we want to do that. Somebody says, “But wait, 90% of that income is exposed to FICA, correct?” No, this is just for the loss.
Real estate professional is just about losses. You don’t have to worry about FICA because it is still a non-passive real estate activity. It’s still not passive. It’s a non-passive real estate activity. It’s not subject to self-employment tax.
Ian: Right. To give you the technical thing, the self-employment tax is usually now in that box one, which is the ordinary income. So it’d still be listed as a real estate and box two on the K-1.
Toby: Yup. You are good. See? All right, good. “Can you explain the tax benefit of selling a stock for a loss and then rebuying the stock at a lower price?
Ian: This would be considered harvesting losses. Let’s say I’ve got about $25,000 of capital gains this year and I got a couple of stocks that are showing about $5000 loss right now as it stands, I could sell those now, take that $5000 loss. I’ll bring my bottom line down to $20,000 as a gain, and then after day 31, I can go back and buy that stock.
Toby: This is the wash-sale loss rule. This is where you hear the accountant say, wash sale, it’s a wash-sale loss. When you take a loss on any security, if you buy that security or substantially similar security, if you sell Exxon at a loss and you buy Chevron, you might be in trouble. You get to take that loss. Somebody says the voice. You guys are still having it.
We’re about three questions behind on the chat. Somebody else asked another question about the reimbursement. There was government money under the CARES Act that went into helping tenants who could not make payment. So what you do is you look at landlord assistance, tenants not paying, or something like that and you can get it.
Going back to this. We sell a stock for a loss, rebuy it later, we just have to wait for that 30-day window, or you could buy an index or something if you’re worried about the stock market like, hey, I don’t want to miss out. Here’s the interesting thing. Cryptos are not subject to the loss rule. You could sell your crypto, you get a capital loss, and offset capital gains and vice versa.
If you’ve made money in crypto, you may want to sell it and buy it right back because there’s no wash sale gain rule. If I have a stock, sell it at a loss, wait 30 Mondays, buy it back, I could actually use that loss against my other stock against sale of property, sale of crypto. Any capital asset I could use that.
Ian: Jennifer, it’s 30 calendar days.
Toby: All right. “Since crypto is considered like property, can crypto gains from staking offset passive losses from real estate losses? Assuming I’m not a real estate professional.” If you’re staking, you’re making an active income, I believe. When you’re staking, you’re actually using a computer and they’re paying you to do the staking to verify transactions. I’m assuming that’s what it is, Trent.
If you are mining, that is also active. Your gains in those would be ordinary income, and your capital losses would only offset up to $3000 a year. We just have to make sure that we’re looking at it. So I’m pretty sure staking is ordinary income.
Ian: I think so, it is. Yeah.
Toby: Yeah, staking and mining are ordinary income. It’s not capital. Once you get it, then any gains or losses from that point are capital. So there.
We get to go to another one. “If you put money in a pre-IPO, how is it taxed? Is it true that you may not be taxed at all depending on the amount of time that it’s in there?”
Ian: The money you put in should just be your basis in it. It might be referring to an 83(b) election, which essentially is you would treat the taxable event. Let me rephrase that. You get stock from your employer, you can make this 83(b) election, you could pay tax now, and make your basis to fair market value, essentially. Then whatever it grows to after the fact would not be taxable. I think that’s what they’re trying to get at.
Toby: You’re not going to have to pay tax when it vests. What you’re doing is you’re basically saying, hey, that’s an option. Let’s just say that you’re investing in an IPO, pre-IPO. I go Reg D, I put money into a company, is there any tax implication to doing that at all?
Ian: There shouldn’t be, I’m not too sure.
Toby: All right. It’s no different than buying Microsoft shares. I don’t get any deduction for the purchase. Now, I sit there and it grows to be worth $10 million or you’re Elon Musk, $20 billion, $30 billion. He’s worth $200 billion or some ridiculous amount now.
Let’s just say that it grows to be worth a substantial amount, $50 million. Let’s just say you put in half a million dollars. You can always take back out half a million dollars, no tax, that’s your basis. You could go above that, it’s long-term capital gains. So you’re going to have to pay tax on it at some point for some reason.
There are very few little exceptions. The exceptions could be, if you are in a qualified opportunity zone, you use deferred money, you hold it for longer than 10 years, more than 50% of the employees are in that opportunity zone, and it goes public, then technically, you could avoid tax on that up until year 2025. You could reset the basis 2045.
There’s one way to do it. If it’s in a retirement plan like a Roth, you would never pay tax on it. I’m trying to think of anything else that could possibly be there. There are some small business stocks, which wouldn’t work if you’re taking it as an IPO. So I don’t see another way to do it.
Are you sure about staking being active income? I am not using my computer for that. Unlike mining, it is staked, meaning deposited on a server in a website run by a third party. I’d have to look at that.
You know what, Trent, if you would be so kind to email in your question at firstname.lastname@example.org, Patty will get you that and I’ll dig into it a little bit. Because crypto has been kind of the wild wild west for taxes for a little bit. I’ll make sure that I can get your question answered.
All right. Anyway, we put money into a stock, anytime we buy a capital asset we’re not writing it off. We’re just buying it, unless there’s a depreciation schedule tied to it. What we’ll do is we’ll try to take that. I might use that as one of the questions at the next Tax Tuesday. The crypto stuff always gets some chattering.
All right, next one. “When it comes to business expenses, do you have to provide the IRS receipts, or can you provide your business bank account statements? In regards to food expenses, does it need to be food purchased from restaurants, or can it be food purchased at the grocery store? When it comes to these write-offs, does the IRS differentiate between the two?”
Ian: All right. First things first, you actually have to get examined before you need to provide it to them. So there’s that, but they’re going to want the receipts on the bank account because the bank account is not going to sell them what you actually spent at the vendor, which is going to show you the amount. So you need the receipt to show what you actually bought.
Toby: Okay. If it’s food, unless it’s under $75, you don’t need anything for $75. If it’s meals, number one, 100% deduction this year if you go to a restaurant. You’d need to show that it’s a restaurant. So you need the receipt for that.
If it’s other things and you’re buying food for the office, et cetera, it might be a 50% deduction. It’s like we buy stuff at Costco all the time. We get a 50% deduction, even if it’s for the convenience of the employees. So you’d want to be able to do that. But under no circumstances, when you do your taxes, do you need to give the receipt with your return? You’re holding these things and keeping them, when do you have to show the IRS a receipt?
Ian: When you get examined under audit, essentially.
Toby: How many people are getting audited right now?
Ian: Pretty much, none.
Toby: What did we have last year, less than 10?
Ian: Something like that, yeah. Just just be smart. That’s really the big thing.
Toby: Don’t freak out. I actually did this. When I first got into the business, that little paint company, I sent them all my receipts. I was paranoid. They’re going to come lock me up. My dad had me so freaked out about the IRS. I was like, waiting for him to show up in my bedroom like, son, you didn’t.
I sent them all my receipts because I was an idiot. I saw the Republicans get out of it. Only for starting up a charity. That stopped years ago. Lois Lerner, she’s not in there anymore, is she? How many are going to be audited? The IRS just dedicated 80 million to auditing. You know who gets audited? I can back this up with the IRS data book.
If you make less than $25,000, there’s a good chance you’re going to get audited. If you take the Earned Income Tax Credit, there’s a good chance you’re going to get audited. If you make over a million dollars, it’s very rare. If you’re making something in between, very rare. If you’re a sole proprietor, you’re about a 500% increase over your brethren actually getting audited.
It’s like we can see who gets audited, but we know who doesn’t, S-corp, partnerships, people making a lot of money, people with just normal returns. They’re in the toilet. It literally looks like this. When you look at the chart over the last 10 years, that’s because the IRS is losing employees. Do you know how many they’ve lost?
Ian: I don’t know the number, but I can tell it’s a lot based on the wait times to call in.
Toby: How long does it take, wait line? Professional hotline number?
Ian: I don’t even bother trying to call in during the day. I usually call after five when most people are going home.
Toby: But how long is it that you sometimes have to sit?
Ian: Fifteen to 30 minutes, at least usually.
Toby: We used to actually have somebody that would dial in during the day and they were a dedicated dialer, they would just sit there, sit on hold, and then you’d come in with your list of questions there. It was silly. No, I wouldn’t be worried. Initial jobless claims, the lowest point since 1969. Our unemployment rates were 4.1%.
It’s hard as heck to find people. Here in Vegas, they have their businesses that can’t even stay open up seven days a week. Restaurants, et cetera, they’re having to close because they don’t have enough employees. I don’t know where they’re going to find 80,000 people that are competent to do audits.
Ian: We’re having trouble finding accountants.
Toby: The salary rates and everything else are following inflation even more. Somebody says, “I’m available.” Reach out to us, please. We have 49 states now that we have people in. So if you’re a good accountant and you understand business tax, we will train the heck out of anybody.
If you have the aptitude if you have any friends, send them our way. Literally, we had to turn off accounting for about three, four months last year. Just nobody could come in. We weren’t taking any business. Then you say, well, why are you doing Tax Tuesday? It’s because we love helping people.
Look, hey guys, real quick. This is an obvious slide to go to YouTube and if you like this type of information, come in. I think we’re posting the videos of a lot of the previous Tax Tuesdays. We’ve cut them into pieces and put them out there on YouTube. But also, we have an event coming up. Patty, do we have the link to go to the event this weekend?
On Saturday, I’m teaching another Infinity Investing workshop. If you’ve never been to an Infinity Investing workshop, I wrote a book called Infinite Investing. It was a bestseller on Google, yay. But what it really is, is helping people generate income just because we look at our tax returns of all of our clients, and we’re always looking to see what people are doing that consistently make money.
What we found is that it’s kind of the boring stuff. It’s really putting your right hand under your right butt cheek, I’ll do my own. Picking your left hand, putting it on your left butt cheek, that’s what you’re doing in investing sometimes, and you sit on them. You just try not to do anything. While the rest of the world is going nuts, you just stay calm and have a long view—50 years, 100 years, 150 years out. You’ll be amazed at how successful you are just because you didn’t do anything.
There we go with the butt cheeks again. Don’t be a hater, Sherry. My hands, I keep them warm that way. Anyway, it’s a really good book, if I may say so myself because it took so long to write. I wrote it and published by Forbes. But what it really comes down to is it’s helping a lot of the younger people who have lost some hope in this world. You’re like, no, no, no, it is possible. The American dream is still alive and well, and getting out there.
Somebody says, “I called the IRS a few times about an inquiry. The IRS automated system simply suggested that they were not taking calls for the issues and hung up on me.”
Ian: It opens up at 7:00 AM your local time every morning from Monday through Friday and it closes at 7:00 PM. So try calling either earlier or try calling in later.
Toby: Somebody says, “They finally got you to smile.” All I got to say is butt cheeks. Who’s the guest? This is Ian, one of our tax managers and a really good guy. Thank you. There we go. You did a really great job today, sir.
Ian: Thank you.
Toby: All right. If you have any questions, send them in email@example.com. Visit us at andersonadvisors.com as well. Send in your questions. We get hundreds a week. We try to answer them all, and then they flag a bunch and we pick. I usually just go down the list and say, here’s 10, 15 questions.
I’ve been much better this year. We used to go two hours every one of these and they always say it’s an hour. We’re actually hitting it. We’re allowed to do about 10. After that, they literally cut them off because I’m not known for going short. They answered—get this, do you see that—140 questions.
There are still 20 questions open, which I am shocked at with the number of people we have. But they answered 140 questions and I get to say, where could you get accountants to help you without giving you that big old nasty bill other than right here at Tax Tuesday? So by all means, share this with your friends.
We love getting all the questions. It helps us to keep our blade sharp, lets us know what’s going on out there, and what’s really important to people, and we always learn something. I always learn something. Listen to Ian. Not from Jeff so much, but from Ian.
Ian: He’s not here and we finish before 4:00 PM. So I think it’s a sign.
Toby: He’s sometimes a Chatty Cathy. Don’t tell Jeff. He’s on his honeymoon. He’s busy. He’s busy right now. Maybe not right now. It’s getting old. Just kidding. All right guys, thanks again and we will see you in a couple of weeks.
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