Welcome back to another engaging session of Tax Tuesday from Anderson Business Advisors, where your pressing tax queries meet expert insights! In this episode, host Toby Mathis, Esq., welcomes regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors. This week, we explore the benefits of strategic corporate partnerships in investments, the allure of residential assisted living businesses, and the unique tax considerations for collectibles like wine. Submit your tax question to taxtuesday@andersonadvisors.
- If I purchase a vehicle in 2023, primarily for my business, is there a percentage I have to use for business versus per personal to deduct the amount I paid for I paid cash. and how will that affect other depreciation and such for my business? I guess I’m asking what is the best way to deduct this? -the better solution for our clients is often using just a standard mileage reimbursement and that or deduction in the case of a sole proprietorship.
- With bonus depreciation being reduced to 40% next year and 20% the year after that, then ending in 2027, what are the alternatives for investors who have been using bonus depreciation through real estate purchases to reduce taxable income? – the first step before you get there is you’re doing cost segregation.
- I have an LLC C Corp with an accountable plan including medical reimbursements good. I have a high deductible insurance plan and an HSA better. Would it make sense to use the medical reimbursement from the C Corp for uncovered medical expenses instead of paying With the HSA, letting the HSA continue to grow? – So the simple, direct answer is yes and yes, you can do that. You can have the medical reimbursement and an HSA.
- I have owned a residence for 10 years. I lived in it for the first year and then rented it out. We have recently moved back into it and want to live there for at least two years so as not to pay tax when we sell it. I will potentially profit about 350,000 and am married. Is this a wise action of 76 years old? I plan on moving into our other rental at that time and perhaps selling it after two years there. – Remember you did rent it out for nine years. You had depreciation and if you didn’t take depreciation you will be treated by the tax code as if you did.
- I am a real estate professional and bought many real estate homes the rental homes from 2018 to 2022. My account and encouraged me not to use my real estate professional status to depreciate faster. Now I regret it. Should I just do amended returns? I paid a lot of taxes that I could have avoided in those years. – There’s a form 3115 and that has to be done on a timely file original return. So we can’t amend and go back and do that. But what we can do is go back and look at the related cost segregations
- I have a partnership set up with my stock trading management company. Does it still make sense to distribute income to my trading management company, structured as a C-corp, for taxes if most of my trading gains this year will actually be long-term capital gains and therefore would actually be taxed at a lower rate than the corporate rate? – we don’t know specifically with your situation, but more than likely there’s still benefit to doing so.
- How do you determine the best structure for a residential assisted living business that will be located in Florida and Georgia, buying the home and running it to the business? –if we had the business and it owned the home, you always run the risk of having someone like me being in that business and I sue you and I take the whole thing. I take the house and the business. So we separate.
- What are the tax implications of investing in wine? This is for clint. Yeah, that’s going to say it doesn’t count if you drink at all. Right, all right. For example, like using a platform like vino vest, I made 20-something percent last year in my whiskey, yes, and I don’t even drink much. Is One able to write off losses from the sale of wine or offset these losses against taxes owed? Any sort of tax loss harvesting way interesting. – this is a 28% bracket and it’s called collectibles. This is gonna be your art, your fine alcohols and things like that, and so there actually is a unique category of capital gains for this…
- Is there a difference between filing taxes with an October deadline Versus an April deadline? If yes, what are the advantages or disadvantages of each? -we are always gonna recommend that you extend, and that would extend your April deadline out to October. Gives you more time to clearly see what’s going on and it gives you more time to get all things properly put into place.
Full Episode Transcript:
Toby: Hey, guys. Welcome to Tax Tuesday. My name is Toby Mathis.... Read Full Transcript
Eliot: Eliot Thomas.
Toby: We’re going to have fun today going over taxes. I know for a lot of you guys, you’ve been here before, and you know that we like to answer lots of questions during these. If you guys could give me a reaction, thumbs up, a heart, or something if this is your first time coming to a Tax Tuesday. Let’s just see. I don’t know if they can do reactions. Oh, there we go.
Eliot: There they are over here.
Toby: A few. Yeah, they’re down here. Our computer screens are all over the place. There we go. For you new guys, this will be for the benefit of you guys that are brand spanking new. First off, welcome to Tax Tuesday. It is all about bringing tax knowledge to the masses. All we’re going to do is answer a bunch of questions and answer your questions.
We bring a whole team. Let me just see. I got a bunch of folks. I got Dutch, Ross, Matthew, Patty, and a bunch more answering tax questions in the back. If you have a tax question, you could absolutely go and do it on your Q&A, that little feature in Zoom that’s marked with a Q and an A. What’s the little sign?
Eliot: I could say it before you ask me, ampersand.
Toby: Ampersand, right. It’s the Q-ampersand-A. You can absolutely pop in and ask a detailed question or ask a question that you need an answer to on tax. If you get in too detailed, we’re going to say, you got to be a client eventually. We’re not going to do your tax return, and we’re not going to give you tax opinions on these things. You’re going to have to actually engage for that. But if you just want answers to basic questions, we’ll absolutely do that.
You could always email in tax questions. Eliot grabs the questions. I might’ve missed, but he answered. He grabs all the questions, and we grab a few. When I say a few, probably 10–15 every session. We go over them, answer them, and I’ll show you how that works. It’s supposed to be fast, fun, and educational.
Guys, we’re just doing our best to answer your questions. We don’t charge for this, so please be nice. These guys are all volunteers that are coming in here answering your questions. A bunch of tax professionals, CPAs, EAs, attorneys, a couple of attorneys sitting here. We’re just doing the very best we can to give you a straight answer. Some people get a little snippety once in a while. It’s like, hey, chillax. We’re trying to get to you. We’re going to get to you. We’re going to do everything we can.
Speaking of everything we can, let’s go. First off, let’s do this. Where are you guys all from today? Let’s do that. I always like seeing where everybody’s at. What city and state?
I see New York. Welcome Timothy. I see Atlanta, Dallas, Claremont, Monument, Colorado, Wisconsin, Tacoma, Washington. Oh, my God, now they’re going too fast. Charlottesville, San Diego, San Francisco, Bend, Oregon, there we got that. Poconos, PA, I’m in PA myself, Honolulu. We’re stretching now.
We got Maryland, Arkansas, Florida, Clearwater, Florida, San Francisco, Seattle, Washington. I lived there for 25 years. Bothell, Washington. Not quite lived there, but just next door. University Place, Washington. I know that one, I went to school in Tacoma. We still have our office in downtown Tacoma, by the way. Orlando, Florida. We’ve got people from all over the place.
First off, welcome and thanks for joining us. Now we’re going to have fun. We’ve got a Stockton in the house, Wellington, Florida. We’ve got people from all over the place. You guys are awesome. First off, welcome and thanks for joining us. Now down to business. Let’s go over the questions we’re going to be answering today and a bunch, bunch more.
If you have comments, by the way, put them in chat. If you’re like, hey, Eliot, how did you get so good-looking? You just put that right in chat. Don’t put that in the Q&A, because he’s not going to see it, but we could see it. If you say, hey, what kind of knuckleheaded answer was that, here’s the real answer, go ahead and put that in chat, too. We’ve had it before. I forget how many. We’ve done 200-plus of these.
Eliot: There are 210, I think.
Toby: At this point, I think that we’ve seen it all. All right. “If I purchase a vehicle in 2023 primarily for my business, is there a percentage I have to use for business versus per personal to deduct the amount I paid for? I paid cash.” That’s my kind of person. Throw down the cheddar. “And how will that affect other depreciation and such for my business? I guess I’m asking, what is the best way to deduct this?” Great question. We will answer that.
“With bonus depreciation being reduced to 40% next year and 20% the year after that, then ending in 2027, what are the alternatives for investors who’ve been using bonus depreciation through real estate purchases to reduce taxable income?” Good question. It sounds a little sad, though, 20%, 40%, none. There are always some things that are floating around out there. That’s what you got us for.
All right. “I have an LLC, C-corp with an accountable plan including medical reimbursements. I have a high deductible insurance plan and an HSA. Would it make sense to use the medical reimbursement from the C-corp for uncovered medical expenses instead of paying with the HSA, letting the HSA continue to grow?” Really good question. I really liked that one. You did good. It’s a little complicated, but it’s a good one.
“I have owned a residence for 10 years. I have lived in it the first year and then rented it out. We have recently moved back into it, and I want to live there for at least two years so as not to pay tax when we sell it. I will potentially profit about $350,000 and I’m married. Is this a wise action? I’m 76 years old. I plan on moving into our other rental at that time and perhaps selling it after two years there.” Somebody’s being very thoughtful. We will answer, and we’ll give you your options.
“I am a real estate professional and bought many real estate rental homes from 2018 to 2022. My accountant encouraged me not to use my real estate professional status to depreciate faster. Now I regret it. Should I just do amended returns? I paid a lot of taxes that I could have avoided in those years.” Remember the old I could have had a V-8?
Toby: I could have had a V-8. How many of you guys remember that?
Eliot: Especially with low sodium.
Toby: I remember it was V-8. It was just drink this stuff and you felt immediately healthier.
Eliot: Drink your vegetables.
Toby: Now they have all this green stuff you drink and stuff.
Eliot: No, I don’t drink that.
Toby: My wife drinks that stuff. Oh, my gosh. She mixes it in with her protein drinks. It’s green. I just look at it and I’m like, it looks a little bit like mucus. No offense to you guys. It’s actually pretty good. But anyway, I could have had a V-8. Can I go back and fix it?
Eliot: We’ll find out.
Toby: Yeah. All right. “I have a partnership set up with my stock trading management company. Does it still make sense to distribute income to my trading management company structured as a C-corp for taxes if most of my trading gains this year will actually be long-term capital gains and therefore would actually be taxed at a lower rate than the corporate rate?” Good question. I got Inglorious Basterds stuck in my head.
All I could think of is ‘buongiorno’ or whatever the heck he said.
Toby: Arrivederci, yeah, shoot. Have you ever done that where you watch a clip of something?
Eliot: That was our prep for this.
Toby: Somehow we ended up watching Inglorious Basterds. He’s going, arrivederci. Again? Arrivederci with more flair, Arrivederci. Anyway, some of you guys will go look it up. Just look Italian scene in Inglorious Basterds.
Eliot: You’ll know what happens before we start.
Toby: Yeah, and then thank me for it. All right. “How do you determine the best structure for a residential assisted living business that will be located in Florida and Georgia, buying the home and running it to the business?” This is going to be good. We’ll go into that. You asked a very open-ended question, and you’ll get some options here.
“What are the tax implications of investing in wine?”
Eliot: This is for Clint.
Toby: Yeah. I was going to say, it doesn’t count if you drink at all. “For example, like Vinovest.” I made 20% something last year in my whiskey. Yes, and I don’t even drink much. “Is one able to write off losses from the sale of wine or offset these losses against taxes owed in a tax loss harvesting way?” Interesting. We’ll answer that. It’s actually an interesting answer.
Eliot: That was a little bit different of a question.
Toby: I never get to dive into this alcohol collectible, but we’ll get into all that fun stuff. You’ll get into that.
“Is there a difference between filing taxes with an October deadline versus an April deadline? If yes, what are the advantages or disadvantages of each?” Again, really good questions, and we’ll get that.
Somebody says, you can let me smell if it’s mine. Stop it, Betty. There’s jealousy in the ranks. All right. There’s Tyler Sasse learning to weld. I don’t know how that’s up there, but that’s awesome. I actually really enjoyed doing that interview. If you want to know about welding and how much you can make welding, that’s actually a fun interview. I just grabbed some of my favorite clients and I was like, dude, you got to talk to everybody. Not everybody should be going and spending $200,000 in college. These guys are making a hundred thousand doing welding.
Anyway, on my YouTube channel, there are all sorts of brain food. There’s how to write things off, there are different types of investment strategies too. Every lawyer should know how to weld. I agree, Thomas. I am with you. I sat there and said, I need to go learn to weld. It’s actually a really good skill.
If you want to, there are a little over 300,000 people subscribe to that channel. We don’t spam you or anything. You just get notified when it comes out, and you can absolutely do that. It’s aba.link/youtube.
Patty just shot out Clint’s channel. Thanks, Patty. I’m sure that she sent out a link for my channel too. Clint has a great channel as well on asset protection. Mine tends to be focused more on tax. We’ve been partners for 25 years, so I think that together, we’ll get you covered. There is a lot of information there.
Also, we do the tax and asset protection workshops. A lot of fun we’ve been doing. I have a client named Brent Nagy who’s been with us in some form or another, working together for 20 years. He was a ‘Rich Dad’ disciple and worked with Robert Kiyosaki. He’s a very successful real estate investor.
He comes on and teaches them quite often now because I like the idea of somebody who’s done it from the client side, teaching the clients what to expect. It’s not just some lawyer yakking at you, although I still join him. I like to do that too, but I just think that there’s a big difference.
How about this? We’ll do an informal poll. Do you like learning from people that do what you do, or do you like people that are a professional reading it out of a book and then regurgitating something that they read?
Would you rather have somebody who does it and did it from your standpoint just as a client and were successful at it teaching you? Give me a thumbs up, or give me a heart or something if that’s who you’d like to listen to. We won’t give another one. I see a ton of stuff. That’s my preference and somebody with direct experience. Yes, the person who does it.
Clint and I are real estate investors. We’re sick. We have hundreds of properties. We’re just absolutely twisted minds. For whatever reason, we like the idea of having lots and lots of properties. Everybody’s a little different.
Some people like syndications, some people like doing apartments. We do apartments, commercial. We have some commercial buildings. We have manufactured homes, mobile homes, a lot of single families—4-plexes, 5-plexes, 8-plexes, 16-plexes, probably some 24-plexes thrown in there.
We like to do what our clients do so that when we’re talking, we could say, well, this is what we do. It’s easier to relate that way. Anyway, come to those. It’s Clint, myself, Brent Nagy’s been teaching them. I’m probably going to get Amanda Wynalda to teach some more because she’s awesome, too. I’m just going to keep trying to do our best to bring you some different voices so you don’t always just hear me and Clint going yada-da-da-da. Not that there’s anything wrong with it, but a little variety sometimes is the spice of life.
All right. Let’s go to this, Eliot, we got to get to business. “If I purchased a vehicle in 2023 primarily for my business, is there a percentage I have to use for business versus personal to deduct the amount I paid for? I paid cash. How will that affect other depreciation and such for my business? I guess I’m asking what is the best way to deduct this?” What do you think?
Eliot: You’re looking towards a deduction here. Probably you’re thinking about the depreciation here because you throw it in the question. That would mean we’d probably need to purchase it in our business.
Again, it does depend on how that business is taxed. We’re talking about C-corp, S-corp, partnership, or disregarded. Assuming that it’s maybe a corporation, you’re going to need a title in the name of that. You can do the depreciation, but there are a lot of problems with that.
To your question on the percentage of ownership, you really have to use 50% or more for business to be able to do things like bonus depreciation or 179 deductions. That’s leading you into the beginning of your question there. Ultimately, the better solution for our clients is often using just a standard mileage reimbursement, or deduction in the case of a sole proprietorship.
Toby: Here’s what I see a lot of times. There are two kinds of categories. There’s the person that has one vehicle and they want to write it off as much as they can for business. They don’t know if they’re going to keep doing that business or using that vehicle in that business. What they’ll do is that first year, they go to the accountant, and the accountant says, buy something that’s 6000 pounds gross vehicle weight. We’re going to write the whole thing off, and you’re going to get this big benefit.
First off, not quite true. You get to write off the amount of business use. In order to use Section 179, which is this million dollar–plus deduction in year one, you can’t create losses. Or if you want to use 168(k), which is bonus depreciation, you have to exceed 50% business use. If during the life of that vehicle, you fall below 50%, you have recapture. I want you to walk through this.
Somebody talks you into, hey, let’s buy the Land Rover or the G Wagon at the end of the year. We’ll do 100%. They can do that, and you get this $200,000 deduction. Last year, you get 80% of that. In 2023, you’re going to get 80%, and then you’re going to depreciate the portion that you weren’t able to use the 20% you’re going to spread out over five years.
You’re going to get a pretty sizable deduction. The problem is if at any time in the next four or five years, you drop below 50%, that whole amount comes back and hits you as an ordinary tax. It hits people. They always say, nobody told me, my accountant just told me to write it off. If you’re buying a vehicle for the deduction, you’re missing the point.
But there are other ways to write off a vehicle. Sometimes you’re not able to write off under 179 because it’s not equipment. It’s not over 6000 pounds gross vehicle weight. It’s an ordinary passenger car, in which case then you have limits. It’s like $20,000-something a year. With bonus depreciation, you can write off a passenger vehicle.
There are limits, but again, it’s your percentage of business use. I keep coming back to that because if you fall below that 50%, you have recapture of that ordinary income of that deduction that you took. If you’re pushing it to meet that 50% threshold, and you’re doing the hahaha, I’m going to write it off, and then the following year you use it for 10% business, you’re going to be in for a really nasty surprise.
Some of the accountants play fast and loose with it. They pretend or fake the numbers. It’s called tax evasion, and it’ll get you in deep hot water if they catch you. What you want to do is track your business miles.
When you put a vehicle into a business, you’re going to pay higher insurance because you’re covering any employee that could possibly be driving it, it’s commercial policy, and you’re subjecting yourself to the worry of having that recapture. If you keep it in your name, you’re going to pay a little bit less, but you can reimburse 100% of those miles.
Use an app like MileIQ, and it’ll track on GPS how many miles you’re driving. You could swipe left for business, right for personal, whatever it is. It might be backwards, but you’re swiping one direction for one and one direction for the other. It’s easy to track, and that counts as a mileage log. You have to keep a mileage log, period, if you’re trying to write things off with a vehicle for your business.
Even if you bought a vehicle and you said, hahaha, 100%, you better be prepared to show the IRS that you have a second vehicle that you use for your home. It doesn’t mean that you can’t do it, it just means that go in with your eyes open, guys.
Somebody says, “What about if you sold it from your business to yourself personally, then can that work?” Yeah, potentially. If the business sold it to you, the business is going to recognize that as a taxable income.
Eliot: It’s not depreciation recapture.
Toby: It can reimburse you for the business use. There are two methods you could do it, the actual expense methodology, or you’re doing the mileage reimbursement. I think the mileage right now is 67¢ a mile.
Let’s just say that you’re putting 20,000 miles a year, and you’re getting 67¢. Now we’re going to have to multiply that by two. That would be 13,400, so 13,400 comes to you. You don’t have to put it on your tax return. It’s a deduction to the company, and you never have to worry about recapture. The punchline is—I see this over and over again—they never tell you about recapture.
Hey, we’ll write this whole thing off. Okay, but when you sell it. Get the G Wagon, you sell it for $100,000 five years later, you have $100,000 of income. You wrote off $100,000. Let’s just say you’re putting 30,000 miles a year. That’s $20,000 a year.
Let’s just say it wrote off $20,000 a year. You have no recapture, and you could just keep writing it off, even if you kept that vehicle for 10–20 years. I don’t want surprises, and I want to write things off when they’re occurring, so I tend to be on the side of writing off. I tend to be on the side of doing the mileage reimbursement. Somebody says, so it’s depreciation or mileage. You can’t do both?
Eliot: The mileage has a depreciation component to it. Correct, you cannot do both. The more you drive, the better your value on that standard mileage rate, 67¢.
Toby: Somebody says, you don’t have to recapture the mileage when you sell. No, you do not. That’s why we tend to prefer. Everybody that I’ve ever read, when I read the journals and stuff like that, and they’re talking about cars and they’re doing this analysis, they’re always pretending that you’re buying another vehicle when you sell yours, and you’re getting another big deduction.
I have a vehicle. I sell it, I have recapture, but I buy another vehicle. It offsets that the recapture so I didn’t have to pay any gain. You’re literally forced into it. I’m like, hey, let’s just be real. My clients, on average, having looked at this, they’re probably 20% business use. They can’t use 179 and 168 for the most part. It’s really all about the mileage reimbursement. It’s easy.
Are you able to own the vehicle for one month as a business and still get the 60%? Yeah. Actually, if you own it the last month of the year, as long as you put it in service during that year, you could write that off, but then you have to exceed 50% every year for the life of that vehicle. It’s just one of those little things. They sucker punch you.
Here’s the other side that we never see if you are personally using that vehicle. Let’s say that the business is paying for that vehicle, and it gets to write off half. You have a taxable income component for the least value of the vehicle that you’re using.
You know how the company reimburses you 67¢ per mile, it’s essentially the equivalent. You have to pay for your personal miles as ordinary income for the personal use of that vehicle. You have a business vehicle.
It’s like this. If I gave Eliot and said, hey, here’s the keys to the G Wagon, the IRS has a chart. They say, the value of the vehicle, here’s its lease value. In that case, it’s probably about $48,000 a year. It was half used for business, so $24,000 would be taxable to this guy right here with withholding and everything else.
Eliot: As well as the insurance price that Toby talked about. It’s really not a good deal. It works if you are 100% using it for business, it’s all you use it, you got your own separate car for your personal, or if it’s a delivery truck and that is what the business is about, it’s a specified vehicle for that type of business, then it’s a little bit different.
Toby: If you’re a realtor, and you’re using one vehicle to take your clients around, and you have a personal car at home, you’re fine. Track the mileage on that business vehicle. That’s all I’m saying. Make sure you still got the MileIQ on there. If it’s 100%, you’ll be able to win that. You’ll say, this is the one I used to take my clients around, and here’s all the visits.
It’s actually pretty simple. You can actually set like, hey, if I’m driving between my brokerage and my home, and I have a home office, that can automatically. As soon as it sees that GPS and those coordinates, it says, ah, business. So you don’t have to mess around with it. You could track it out that way. You have your personal, and you’re not trying to write that one off, so you’re okay.
What usually trips people up is that they have one vehicle. If you’re in construction, it’s very common to have multiple vehicles. If you have multiple vehicles, sometimes you’re forced to go the actual expense method. If you have over five, I think, then it’s considered a fleet.
What’s the name of the app that tracks the mileage? It’s MileIQ. I have it on my phone. Patty, just put it up there. It’s easy. Just do that. It’s so good for you. Again, it knows your trip. If you have a common trip that you’re constantly doing between offices, like, hey, I have three offices that I zip around to, it’ll automatically track them as business. All right. Fun one.
“With bonus depreciation being reduced to 40% next year and 20% the year after that, then ending in 2027, what are the alternatives for investors who’ve been using bonus depreciation through real estate purchases to reduce taxable income?”
Eliot: That’s where we’re going to have to do some planning, assuming that it holds this course, which we don’t know, but historically it has not. We’ve always had bonus depreciation. If history means anything, we’ll probably get some form of bonus depreciation back. But if we don’t, we can look at maybe contributions to nonprofits or something like that. Look at other business expenses going along with your business.
It’s sad if we do lose this because it’s been such a great run. We can’t promise you that they’re going to come back with something, but like I said, historically, we’ve had at least 50% for some time.
Toby: Here’s the thing to remember. When you’re doing bonus depreciation, the first step before you get there is you’re doing a cost segregation. All that means is that, let’s say it’s a single family rental. If you just went to a regular accountant, they’re going to say, oh, that’s 27½-year property. That is true if you want it to be. The IRS will let you, that’s actually called an impermissible method. The IRS allows you to do it because you’re writing things off over their longest life of all the property in there.
If I actually get an engineering study, it’s going to say, hey, some of this property is 5-year, the appliances, furniture, and stuff like that, 7-year, land improvements are 15 years, carpet is 4-year, and the walls, the structure itself are 27½. You’re breaking it down. It’s usually about 60%–70% is the structure and 30%–40% is those other items. That’s what we’re talking about.
Those other items, we can write off over 5, 7, or 15 years, or we could choose to bonus them. The bonus is based on the year they were put in service. If I do this on a property that I bought in 2021, it’s 100%, even if I do it this year where bonus depreciation is at 60%.
I can still write off 100% bonus depreciation on a property that I’ve held. If I buy a property now, now I’m looking at it and going, okay, that five year property, I’m still writing it off over five years, but I could bonus 60% of it into year one. If I was going to write off $100,000 over 5 years, I would get a $60,000 deduction, 60% in year one, and then I’d have $40,000 that I’m spreading it out over five years. So it’s not like it just disappeared.
Somebody says, doesn’t a cost seg cost $5000-plus? Thomas, no. They start right around $1500, and they go up depending on the type of property and who you’re using. We use Cost Seg Authority. They’ve just done a great job for us.
How many of you guys have used the Cost Seg Authority for doing your cost segs? We refer to them as a CPA firm, that all they do is R&D, credits, and cost seg. They do a great job. There are a few people. Give me a thumbs up our heart if you liked working with the Cost Seg Authority. I just want to see if there’s anybody out there that uses them. There are a few of you guys, there we go. It’s more than a handful, it’s actually quite a few.
As we’re going through, yes, they’ve taken away some of the serious sauce. It’s juice, but it’s not gone. You’re still writing things off much faster. Somebody says, I just had my first call with them yesterday and they were great. I’ve been working with Erik Oliver and those guys for years, and they just do a solid job. We just like working with them. I like working with experts, so this is what they do.
Eliot: Free estimate, too.
Toby: Free estimate. If you go through Anderson, that’s great. They’ll get to there fast. We’ll actually send you a link if you want us. That way, they know, so they’re not charging you for stuff. Patty, we’ll get it to you. I think it’s aba.link/csa for Cost Seg Authority.
One says, I’ve used Cost Seg Authority on three properties. Approximate costs, and how much did it save you? If you’re okay telling me one on a chat. In fact, I’m actually reading his chat. It’s fun. You never know. One says, we’ll see if the juice is worth the squeeze.
I use a rule. If I’m saving seven times what it costs, I’m doing it right. I want a dollar today, not a dollar in 5 years, or not a dollar in 25 years. I want that dollar today. It’s worth a lot more. A dollar today is worth a lot more than a dollar in 25 years, 27 years.
Anyway, he’s just laughing. I won’t press here. I won’t twist your arm. He said, it cost me $2500 and saved me over $22,000. There you go. That wasn’t the one, that was somebody else. That’s about right. That’s what you’re looking at. Okay, it costs me, it saves me more.
Here’s the thing. You just don’t pull the trigger. It’s not worth it. Juice has to be worth the squeeze. You’re able to go in there with your eyes open and say, here’s what it’s going to work out. You got to look and say, what are you going to do with that loss? If I’m able to create a nice, big, fat loss in that particular case, I’d guesstimate you’re probably getting $80,000 worth of depreciation.
If it’s just going to create a loss that I can’t use that I’m just carrying forward, it may not be worth it. If it’s going to offset a bunch of my other income, it’s absolutely worth it. That’s why they look at what is it actually saving me. Not what is it creating in terms of deduction, it’s what is it actually saving me. That’s a factor of what’s my tax bracket and how much of it can I use.
You’re right. You can use some other strategies. One of the things I do is I donate properties that have been depreciated. I’ve grabbed my houses. Patty has to deal with my shenanigans all the time. I think we’ve given away five or six houses where we buy them, depreciate them enough, they’re sitting around, and they’ve appreciated in value.
You buy a house at $50,000, it’s now worth $300,000. I might just give that to charity. You’re like, you going to give it to the American Red Cross? No, I’m going to give it to my charity where I’m actually running it, and it’s for a low- to moderate-income housing. I’m going to get a big tax deduction that’s actually worth more than the house. I’m writing it off twice.
I always look at it, but now it’s going to be charitable use for the rest of its existence, which I’m okay with that. I like stuff like that. There are other ways. We’ll get our little thinking caps on on your situation, and we’ll find ways to find you some other deductions. There are other ways to get there.
We didn’t always have bonus depreciation. We’re doing this for 25 years. There are always some strategies to find benefit plans, getting money into another entity, paying kids, paying other relatives, getting other people involved, creating other deductions as you’re starting up other types of businesses that can then offset the type of taxable income you have, making more charitable donations. All those fall in those categories, and we’re just looking at it to see whether or not it makes sense. Again, that’s all you’re doing.
You call it the three rules of tax plan. The three rules are really simple. This is another Inglorious Basterds reference. You got to watch it if you want to catch some of these. Three rules. (1) Calculate, (2) Calculate, (3) Calculate. We’re going to calculate and see whether it’s worth it. If it makes sense, then we’re going to do it.
Eliot: This is just around the corner.
Toby: All right. We have some fun. Anne, you’re back. All right. We love it when people stick around, come back, and do all that.
“I have an LLC, C-corp with an accountable plan including medical reimbursements. I have a high deductible insurance plan and an HSA. Would it make sense to use the medical reimbursement from the C-corp for uncovered medical expenses instead of paying with the HSA, letting the HSA continue to grow?”
Eliot: The simple direct answer is yes. Yes, you can do that. You can have the medical reimbursement and an HSA. The more complicated, strung out answer is that sometimes you have to have a special type of HSA. If you’re working with a group that sets those up, they’ll walk you through that. But usually, you can still do things like vision and dental. Do those, otherwise you might have to use your HSA first up to the deductible amount approximately, or the high deductible before you could use your medical reimbursement plan, but you can use them both.
Toby: I don’t know how they track this. I’ve never seen anybody go under audit on this. The IRS is saying, basically, we know that if you put money in the HSA and at the same time you’re wiping out all your expenses with the health reimbursement plan, you’re going to have a major amount of money in that HSA that you got a deduction for and you will never pay tax on. It’s a triple threat. Triple threat, meaning you get a tax deduction, tax regrowth, and never pay tax again. It’s like a Roth on steroids.
Could you imagine if you got a deduction for putting money in a Roth, then it grew, and you never had to pay tax on it? That is an HSA. You absolutely want an HSA. They don’t want you to sit there and jam a bunch of money in an HSA when you have your company reimbursing every nickel that you spend on health.
What they’re saying is, hey, HSA pays for the high deductible. That’s it. It’s not the premiums, it’s the deductible. Maybe it’s $1500, $2000, $2500, whatever it is. It might have to do that. But remember, you could put $7000 in these things a year, plus you have a makeup.
Eliot: Yeah, you’re still coming out ahead.
Toby: You are coming out ahead. It’s just making sure. I don’t know how they track that, guys. I have no idea how they track it. I don’t know what they would do if you screwed it up.
Eliot: It doesn’t mean we’re advocating, not tracking it.
Toby: I don’t know anybody that knows. We’re scouring, by the way. Is there anything out there on this that anybody that knowledgeable, that’s really written on it? They’re like, ah, no, you got three, this thing, that thing, and there’s this one over here. Maybe you’re supposed to do this, but we really don’t know. It’s always a percentage and it’s this, that, and the other. They just make it a little bit convoluted probably to scare people out.
John says, easy on the thinking, I got one brain cell left. That is questionable. Been in the pugilistic arts for a long time. I had a little bit of close head injury. As long as you’re functioning, John, yeah. Maybe self-directed HSAs. You can still do it, yeah. It’s still the rule, Hazen, that you could do a self-directed.
I have a self-directed HSA. At the end of the day when you’re doing these, there are different categories if you have that health reimbursement plan. Just be on a lookout. Questions, just reach out to us. It’s part of your platinum service. If you’re platinum, just say, here’s my scenario. We’ll research it for you, we’ll give you an answer, and you can rely on us.
The reason you do that is because you always have somebody else you can blame, and it gets you out of penalties. It might not escape interest if you ever got tagged and we did something wrong, but it keeps you out of the firing line for being the totally responsible party. That’s why you use a group like us.
We’re more than happy to look it up for you, find out what the answers are, talk to the people, make sure that we’re looking at it, crossing our Ts, dotting our Is, and making sure you’re getting the best benefit. Those HSAs are a potent vehicle, and they’re fantastic. You should have one. If you can have an HSA, open up an HSA.
Even if you’re like, hey, I could have one through my employer. No, try to get one on your own. Self-directed is the best. What happens when the HSA ends? You’re spending it on all medical. On average, people spend about $200,000 on medical during their retirement. You can convert a certain amount of it to a Roth. Otherwise, it’s going to be taxed. Is there a penalty on it? I always forget whether there’s just a penalty or whether there’s tax.
Eliot: I don’t think it’s a penalty after retirement.
Toby: After retirement, I think it’s just taxed, and then it’s just treated like an IRA. You’re not beaten up. You lose the big benefit if you’re not using it on medical, but we don’t have enough history on it to see whether somebody just gets millions of dollars in the HSA and then they don’t use it.
Eliot: The geek answer behind this is remember, you got that deduction 10–15 years ago. You use that hopefully for some benefit, and that will only continue to snowball.
Toby: You don’t have to disqualify the whole thing. You just take pieces out and you treat it like a 401(k) or an IRA.
All right. “I have owned a residence for 10 years. I have lived in it the first year and rented it out. We have recently moved back into it, and I want to live there for at least two years so as not to pay tax when we sell it. I will potentially profit about $350,000 and I’m married. Is this a wise action? I’m 76 years old. I plan on moving into our other rental at that time and perhaps selling it after two years as well.”
Eliot: I love this question because we’re trying to think down the line what we’re doing in our retirement years. What we got to do here is we got to look at the time that you lived in it, the one year. You got two more years, and our total time then would be 12 overall. But nine years it was rented out, so we take a fraction. We take the nine years that we were not using it as a personal residence, the years we were renting.
Toby: That’s called non qualified use.
Eliot: Exactly right. We divide that by the total number of years of ownership, the 12, we get 75%. We take that 75% times the amount of gain, the $350,000. We’re going to step back and look at that here in a second, but we would take that, times that, and that’s the amount of gain that you cannot exclude under 121, which is what we’re talking about here, Section 121, which is $250,000 single, $500,000 married filing joint.
Getting back to the $350,000 gain, remember you did rent it out for nine years. You had depreciation. If you didn’t take depreciation, you will be treated by the tax code as if you did. We’re going to have some of that depreciation recapture that we talked about all the way back in question one. Really, we have to deal with that first. We may not have $350,000 of capital gain here.
We may have a little bit less. But whatever that is, we take it times our 75%. That’s the amount of the capital gain that we cannot use under the 121. The rest we can. You could effectively just depending on what the number looks like here. While we don’t know the depreciation recapture, but 75% of $350,000, $200,000 or so, you’d be able to not use it in 121, the balance you would use against the one 121 exclusion. Yes, you can do this. It’s just going to be perhaps at a reduced amount.
Toby: Let me dive into a couple of things. The type of exclusion they’re talking about is the 121. It’s IRC 121 exclusion. It’s $250,000 for single, and it’s $500,000 for married filing jointly. You have to have lived in the house two of the last five years.
When we get into non qualified use, this confuses the heck out of people. If I lived in it for two years, and then I rented it for two years, the two years that I rented it before I sold it are excluded from this calculation, because they say any period of time prior to sell beyond the two years, ignore. I could live in it two years.
Let’s just say that we did two years personal, and then we did three years rental. They would not count that towards the non qualified use. They’d only count the non qualified use as being that time that occurred before the two years of personal use. When we add all this up, we have a total of 12 years. Three years is qualified use, nine years is non qualified. That looks like 25%.
Eliot: Correct, or 75%. Yup.
Toby: So 75% non qualified, 25% qualified. I’m just going to do the opposite, because it’s a little bit easier for me. We have $350,000. What we don’t know is depreciation recapture, because depreciation recapture is not offset by 121. 121 is capital gains only.
If there’s $350,000, and we look and we say, we’ve had this property, and we depreciated it for 9 years, the question is, how much of that $350,000 is recapture? Let’s say it’s $100,000. I’ll just say, all right, we have $100,000, then we’ll take $350,000 minus $100,000, which gets us to $250,000 times 0.25. That’s the amount of gain that I could potentially offset with my 121 exclusion. I don’t know what that adds up to.
Toby: Yeah, something like that. I think that’s right. That’s the amount. $62,500. It’s not $6200, but $62,500. That’s the amount we could offset with the capital gain exclusion.
When I see this type of scenario, and I see somebody who’s had it as an investment property, I’m really tempted to say, hey, you want to avoid all tax? You’re going to have to1031 exchange that. If you want to live in it for two years, go for it, then make it a rental, and then sell it. Make it a rental for a year or half a year.
Somebody says, or you can die. Then you step up and basis. Don’t kill yourself just for the step up. You’re not going to get a benefit out of it. All right, but you could do a 1031 exchange into another property. What they said is on the other property, they were talking about waiting two years and moving back into it. 121 allows you to do it. Every two years, you can use that 121 exclusion.
If we do this, we could actually do exactly your strategy. You’d offset and not pay capital gains on $62,500 out of that $350,000, which probably is not going to wow you. You’re probably going to be like, oh man, that sucks. All right, then 1031 it.
On the second property, if you’re going to live in that one, I’d probably just live in that one and sell the other one, 1031 it into another property that you might want to live in. You can do that. You can 1031 into a great property that you’re like, this is awesome, I would love to live in that property. You’re going to save a bunch of money.
You’re going to save I don’t know how many, how much tax that would be. Let’s just say it’s 20. You would be 23.8% plus ordinary income on a hundred. It’d be a good $30,000–$40,000 just on that, plus recapture, so probably $50,000 or $60,000 it would save you. Maybe you’re better off taking this property with all that gain.
Instead of moving into it, just selling it as a 1031 exchange and get something that you’re excited to go move into in a year. Because you didn’t use your 121 exclusion, sell the other property that you’ve been living in for the last I don’t know how many years. But the other rental, it looks like you’d have to live in it for two years. Live in that one for two years, and then sell that one. We’d have to run the same analysis on it.
Eliot: We had that video that we cut. If you wanted to do something different, you’re just trying to slowly get rid of your rentals. Toby did a video on his YouTube channel where we look at maybe putting that interest into an UPREIT (Umbrella Partnership Real Estate Investment Trust). You wouldn’t have to do rentals anymore if you didn’t want to do that, if you just wanted to have, but you’d still have your investment in there.
Depending on how the numbers calculate out, you could still defer that tax. It’s like a 1031, actually you do a 1031 still. There are other options out there. If you’re just trying to slowly get out of the real estate game, hands on, you can get into these other investments that still get the benefits of it, but you don’t have to do any of the work, so to speak.
Toby: Here’s the last fun one. If you keep it as investment properties, you can always buy other investment properties, accelerate depreciation, take some early write off, and use those passive losses against the gain that you have on the other property. There’s also probably some passive loss carried forward on this property for the nine years that may be released as well.
There are some other factors to look at to see, but it’s giving you scenarios. Remember the three rules, calculate, calculate, calculate. We’re just going to go through them, and we’re going to see, all right, at the end of the day, what looks best for you. Just keep working on it until we see whether there’s a solution that meets your needs. That’s what you need to work with a professional on.
All right, next one. “I am a real estate professional, and I bought many real estate homes from 2018 to 2022. All those years had 100% bonus depreciation. My accountant encouraged me not to use my real estate professional status to depreciate my rentals faster.” That’s just crazy. Probably they didn’t know. “Now I regret it. Should I just do amended returns?”
Eliot: It’s not going to help us, because when you take that form you have to file when you do this for the bonus depreciation, cost segregation, et cetera, there’s a form 3115, and that has to be done on a timely file original return. We can’t amend and go back and do that. But what we can do is go back and look at the related cost segregations that we might have on these properties and you could do effective today.
Because you bought them back in these earlier years and had them in service at that time, we actually get to go back to the 100% bonus depreciation time. Not all is lost here, potentially. It’s just going to depend on what we have going on in that house and what those costs segregation studies look like.
Toby: This is what happens a lot of times when somebody comes in and they’re like, oh man, I heard the bonus appreciation is 60%, I bought it three years ago, shoot, I just screwed up. We’re like, no, three years ago when you put it in service, it’s 100% bonus depreciation. Even if you make the election to do it this year, you get to write it off.
Somebody says, does ABA maintain a list of preferred tax preparers? We have a bunch here, but there are plenty of folks. If you have a good accountant that’s willing to learn, keep him.
All right. Get back to this. “I have a partnership set up with my stock trading management company. Does it still make sense to distribute income to my trading management company—structure is the C-corp—if most of my trading games this year will actually be long-term capital gains and therefore would actually be taxed at a rate lower than the corporate rate?” What do you say?
Eliot: This gets back to Toby’s mantra today. We got calculate, calculate, calculate, but remember capital gains are at 0%, 15%, or 20%. If you’re still in the 15% or 20%, it probably still is beneficial to have that C-corp. Remember, what we’re doing with that, you’re moving capital gains off of your personal return into a C-corp where you should have reimbursements, so you’re not paying any tax on that. That’s very tough to beat in your calculation. We don’t know specifically with your situation, but more than likely there’s still benefit to doing so.
Toby: That’s it. You just nailed it on the head. Here’s why we do what we do. In 2017, the Tax Cut and Jobs Act did away with something called miscellaneous itemized deductions. That’s when you could write off paying your financial advisor. Or if you had an entity that had a brokerage account, we would pay a corporation to be the management company. You could write off those expenses subject to the miscellaneous itemized deduction floor.
In 2017, they changed that. No more miscellaneous itemized deductions. The strategy morphed. We got to make the corporation a partner. The reason we do that is twofold. If that corporation owns a percentage, they automatically get paid. We usually start around 20%, depending on what type of tax appetite is in that corporation.
Maybe it has 280A, administrative office for the home, cell phone reimbursement, equipment reimbursement. Maybe it’s covering some expenses to go to some courses, maybe it’s traveling. Maybe it’s a traditional family office, and it’s also handling some of your real estate, so it’s covering those expenses too, of managing and overseeing your real estate. Maybe it’s doing your bookkeeping.
If that partnership makes $100,000, even if it’s all long-term capital gains, there’s a percentage of it that ends up in that corporation to pay all those expenses. We don’t have to worry about trader status. We don’t have to jump through all these hoops to try to claim those as deductions.
In addition, you can pay what’s called a guaranteed payment to partner. A guaranteed payment to partner is a payment to one of the general partners, if it’s a limited partnership or if it’s an LLC with the corporation as a manager, and it cannot be tied to the percentage of gain that you recognize. It can’t be tied to a percentage. It needs to be a dollar amount.
We would normally say, hey, there’s this much set expense. This is what we estimate to be that percentage. We really want to be in that range. We want to be able to knock those things out and write those off not as an individual, because we can’t, but through the corporation.
That corporation is designed to really get close to zeroing out. We shouldn’t have a ton of money at 21%. At the end of the day, the money that flows down to you is all long-term capital gains. It’s going to be at your 0%, 15%, or 20%, depending on what your taxes are. For most of you guys, it’s 15%, which is fine.
What we did is instead of having $100,000 hit us, we had $80,000 or $70,000 hit us. If you’re in a situation where you’re like, hey, you know what? I really like those long-term capital gains, maybe you reduce the amount of percentage that’s in that corporation and have it earn its money elsewhere. That’s by setting up a side gig, have it manage your real estate, have it manage another business, have it do the social media, bookkeeping, tax prep on other businesses. Otherwise, the revenue that it’s going to be fed with is from that training.
Again, it’s just looking at the numbers and saying what’s the best use of my money and how to best minimize the tax burden. You can run through a few scenarios. Eliot does these great. We have a thing where we’ll do one, two, three, four, five, six comparisons, and you could say that one. Three is best for me, it lowers my taxes, and then we shoot towards that.
During the year, you just want to make sure that you’re talking to somebody, usually, like a guy like Eliot meets on a quarterly basis with clients. I meet quarterly basis on with clients. I like to say, all right, let’s just make sure we’re following the track and nothing’s too far off. All we’re doing is saying, hey, you know what? If you have long-term capital gains, that’s what I want hitting my return. If I can avoid ordinary income from hitting my return, I’m going to do that to the best I can, especially if you have W-2 income from another job or something else like that. Hopefully, you guys get that.
Again, I don’t know another way to put this. You really want to have people that get this stuff so that they can run through scenarios, so that you can make decisions that are in your best interest. You don’t really want somebody telling you what to do.
Somebody said, and I’m just reading off the chat, sometimes you see these things come in, “I’d like to set up a self-employed trader status LLC to be able to have tax deductions. The Platinum Membership with Anderson helped me set this up. I live in Anchorage, Alaska.”
The question with trader status is you got to do about 750 trades a year, it’s got to be more than 70% of the trading days, and it has to be substantial. It’s where you make the most of your money. If you fall below those standards, we’re probably taking you into a structure like this one that we just described.
If you do qualify, then there’s something else that you could do, which is called a mark to market election, which could unlock your losses to become ordinary if you have losses. But it does allow you to take ordinary necessary deductions.
I tend to be one out of a hundred. People that think their traders actually qualify as a trader. When you look at the court cases, it’s nuts, so I try not to do that.
Question about depreciation. Next question. “This question is about depreciation recapture. When you sell a real estate property, is your depreciation recapture tax at the same rate as when you took the depreciation? Can the depreciation from other properties you own concurrently offset the depreciation recapture on the one you are selling?”
Eliot: Answer to the first question, the rate will depend on what your tax rate is that particular year that you sold it, or I guess the years that you were deducting it. In other words, you have a property, you’re depreciating it, you have it for five years. How much tax savings at rate is going to depend on whatever your tax bracket was for those individual five years? That could vary over time.
Come to the year of sale, it’s going to depend on what your tax bracket rate is for that year. That’s what we’re going to look at. They all have different rates. Theoretically, it could be the same, maybe different.
To the second question, you’re exactly right. If you have other passive losses, you’re going to be able to use those. If you had one property, and for whatever reason it didn’t track any passive losses, it didn’t have any, but you had other rentals that did, you’re allowed to use those passive losses to help you on that property you sold and then you sell it. So yes, it can help you.
Toby: Again, just to reiterate, your depreciation that you had, you didn’t even have to take. If you could have taken depreciation, you must recapture it. Even if you have properties that oh, I didn’t depreciate, so I shouldn’t have recapture, that’s not how it works. If you could have depreciated, you have to recapture.
The answer is depreciation that you’re entitled to would be at your ordinary rate unless it creates losses, in which case it carries forward and then is released when you sell. Then the question is, is there any gain? If it is released when you sell, is there any recapture? Because out of that game comes out recapture first, and then you have your long-term capital gain after that. It would actually be running a couple of scenarios based on your situation.
Eliot nailed it on the head. A lot of tax planning, we call it the lazy man’s 1031 Exchange, which means, oh, I have to gain and depreciation recapture on this property. I know that I’m going to have to pay tax on it. A lot of guys like us are like, buy another property, accelerate the depreciation. Write it off, we don’t pay tax on this one. Saves you $30,000.
It might be that you’re putting $50,000 down on a property to buy it and it’s paying for itself because you have good rents and you’re buying intelligently, but that little bit of money, you just got a huge saving. The IRS basically said, here, we’ll kick in. That’s the way to look at it. That’s fun.
Somebody says, God, taxes are complicated with this question and answer about recapture and tax after selling. Don’t worry. It’s a new language to you, but to us, it’s actually pretty old hat.
All we do is when we start looking at categorizing, and we say, it could be this, it could be that, it could be this, which way do you like it best, and we start leading you down the right path so that your eyes are open. They’re big and open, and that way you can make the best decision for you. That’s what really matters about, just being able to know what’s coming and being able to do things that you can. It works.
All right, back to work. There’s Clint. Mr. Coons. If you want to learn about land trusts, LLCs, corporations, if you want to learn about dealer status, accelerated depreciation, how to write things off, if you want to learn about basic estate planning and caddie create a dynasty, and by the way, how many of you guys would like to create a multi generational estate plan where you’re helping not just your kids, but your kids’ kids and your kids’ kids’ kids? How many of you guys would like to actually create generational wealth?
This is a great workshop to start. It’s not the only one that you probably want to go to, but it’s a great one to start with. We go over all those topics. Sometimes we do a condensed version that’s half day, where we’re getting into an asset protection. We’ll probably do some that are tax-specific too. We’re going to give you guys more choices coming in 2024. But the whole idea is to give you the option so you can make intelligent decisions to better your family.
I’m one of those guys that when I look at people, I’m like, what do you want your state to look like in 300 years? And they look at you like you’re from Mars. You’re like, what are you talking about? That’s only for the really wealthy. I’m always like, no, it’s actually for anybody if they know how to structure things right.
If you say, I don’t have any money, you have a body, you can insure it. That creates the money if something happens before you earn it. We’re all on a journey. When you start thinking in terms of 100 years, 200 years, 300 years, it’s amazing how the world gets very small, and your options get very specific, and you say, I can do this, this, and then boom.
You’re not sitting here wondering, well, I could do this, this, or the other. You get very focused very quickly, because there are only a couple of ways to do it. It’s either trusts or foundations in our world. Anybody can do it. Anybody can do it. If anybody ever tells you that you can’t do it or you don’t have enough money, they’re absolutely full of it.
We’ve had people have a ton of success starting off very modest, getting things going on, and setting up that plan early on. We’ve had folks unfortunately passed at young ages. We just had a 34-year-old who passed away because of a drunk driver. Thank God, they already had their plan in place. That’s the thing, their legacy still going to live on. Still going to live on, not going to stop, and that’s because they were very deliberate about their planning. Come to the tax and asset protection workshop. It’ll be worth your time now.
Next question. You ready? “How do you determine the best structure for a residential assisted living business when we located in Florida and Georgia, buying the home and renting it to the business?”
Eliot: At first, it doesn’t look like it has a whole lot of tax application. We’re looking for a structure. Sometimes that’s part of what goes into the tax. They work together. They walk hand in hand. One thing here I liked about it is that the individual asking the question is talking about having the home and renting it to the business.
Right there, we’ve separated the two components. Why? Because if we put them together, if we had the business and it owned the home, you always run the risk of having someone like me being in that business, and I sue you, and I take the whole thing. I take the house and the business. So we separate. That’s our structure. The benefit of that is that’s going to help us tax-wise as well. That’s why we picked this question here.
Toby: Yeah. Realistically, whenever you’re getting into residential assisted living, which is usually we do a lot of recovery housing, we do a lot of elder housing here, and you’re looking at it into little silos. You have your investor, and you might be wearing all three hats. But you might have your investor who’s coming up with the money. You have your operating company, which are the guys that are actually running things. They’re actually providing services, and then you just have have the land lord.
You want to separate those three things out so that if something happens in the real estate, it stays in the real estate. If something happens in the Opco, it stays in the Opco. Nobody’s coming after the cash because it’s only loaning to these guys. Now it’s in first position.
If somebody comes after the Opco, who gets paid back first? The investor. If somebody comes after the real estate, who gets paid back first? The investor. We do this to isolate risk and also to give you some more tax benefits, because guess what? This Opco could be exempt. It could be a 501(c)(3), it could be a C-corp or an S-corp, it could be a traditional business. You could even have different divisions.
Let’s just say that I was running multiple facilities, and I was even renting them from somebody else. In this case, let’s say I’m renting them from myself, but I could be renting them from a third party as well. I could set up an Opco for each property, but have it taxed up to one single entity as the parent. I could avoid tax entirely if I want to run that as an exempt organization. You could actually do that. It actually qualifies, residential assisted living.
There are a lot of benefits to residential assisted living. It could be a nice cash flow machine, but you actually have choices in how you structure it. My personal preference is exactly as you see right here, because I can take the cash. Everything that I risk is right here, and nobody is dealing with that. No third parties.
I have employees here. They like to sue. I have the guests in residence. Grandma chokes on key lime pie, gets mad, or they say you’re negligent when she fell down or he fell down, something like that. That stuff happens all the time, or HIPAA violations. Hey, you told the residents about that grandma had to go get a medical surgery or something like that. You disclosed it, and they try to go after people. They’re just relentless right now in California, especially. But you would just do these in each and every state.
If you were in Florida and Georgia, you would have these businesses actually registered in Florida and in Georgia. I’d probably put the investment in Wyoming using a Wyoming LLC, and then I would document that loan, lien the building. I would file UCC-1s against the operating agreement, depending on what type of assets it has, and I would put myself in first position.
If somebody comes after us, you have insurance, you have an umbrella, and you say, even if you win, you don’t win. Even if you win, you lose. That’s what you want the narrative to be.
When somebody’s looking at it, they’re not just looking at you to shake you down. They’re looking at you saying, this is more complicated, I got some hurdles to cross, and it makes a huge difference. We’ve been working on this for years. I can tell you, this works like a charm. It works very, very well.
It keeps you out of trouble because we can do so much of this with anonymity. It can keep you from having to pay tax if you’re doing the Opco correct. That real estate can also kick down losses so we can keep our taxes really low. But at the end of the day, it’s just a really easy structure to operate, and it’s very, very effective.
Somebody says, oh, my God, this topic is right up my alley, sober living in all this. Glenn, that’s exactly what we teach. I work with Frank and Sherri Candelario all the time, I think twice a year, we do one on shared housing. That is recovery housing, the National Alliance of Recovery Residences, NARR certification homes, we work with veterans. We have some clients that are just really all in on this.
It’s amazing how well they do financially as well, but there’s nothing wrong with doing well while you’re doing good. I just never have a problem with that. Do you help clients set up that safety structure? Absolutely, all day long, day in and day out. We’ve been doing this for years. Thousands of those types of structures, we’ve worked with over the years.
A very good friend of mine, Gene Guarino, before he passed, that was his whole business was. They call it The Silver Tsunami, because so many people are getting older. They don’t want to go into a typical nursing home. A lot of times, they want to live in a really nice home. It’s the old adage that you don’t want to go to home that you want to drive by. You want to go to a home that you want to drive to, if you know what I mean.
You want to actually feel good, so a lot of these homes are in golf course communities. You have somebody there. It’s like Club Med. They’re fixing the meals, they’re taking care of things, they’re doing their laundry. It’s actually a really nice high-level service. It’s not memory care, it’s not nursing. There are those as well, but just typical residential assisted living. It can be very effective.
The average right now in the United States is about $4000 per room per month. You’d be surprised. People would climb over glass to get into a nice facility, where it’s like they’re living at home. We get this all the time that people don’t want to leave their home. But when they see a house that’s just like their home or nice like that, and they’re in a good community, and it feels like home, they’re much more receptive, and then they’re much more receptive to care. The people that do that, they get a star. They get to be a gold star. You could absolutely do that.
Eliot: $4000 a room, that’s something to calculate. It started on that.
Toby: The numbers don’t lie. Frank and Sherri, we do recovery housing. They have a contract with the state of Washington. I want to say it’s $1300 per bed, and there are two beds per room, five rooms per home. They’re making about $13,000 a month, whether the beds are full or not. It’s recovery housing.
It’s getting people out of jail because it’s so expensive to incarcerate, and they shouldn’t be there anyway. They’re sober now, they’re in clean and sober living. One parole officer can come over and check everybody, and it seems to be a much better fitting. They’re being treated like human beings, which is amazing.
When you treat people like human beings, they tend to respond like human beings. When you treat them like animals, it tends to be negative. This is a much better idea. It’s catching up.
From six, seven years ago when we were really pushing this, a lot of closed doors to the face. Push, push, push, push, push. Now they have a waiting list. Governor Inslee did some accolades, too. We’re seeing it more and more around the country. People are realizing that this is a model that actually works, and they want to adopt it.
All right. Next question. “What are the tax implications of investing in wine?” We just talked about recovery housing. “For example, using a platform like Vinovest.” I actually use Vinovest. I buy whiskey. “Is one able to write off losses from the sale of wine or offset these losses against taxes owed in a tax loss harvesting way?”
Eliot: I think when we talk about wine, what we want to get into is how is it taxed if we had gains, or what category has it fallen? It is actually a capital asset. It’s a lesser known category. We talked about 0%, 15%, and 20%, but this is a 28% bracket. It’s called collectibles. This is going to be your art, your fine alcohols, and things like that.
There actually is a unique category of capital gains for this 28%, but here we’re talking about losses. Because it’s a capital gain, it’s treated just the same way as if we have losses. Yes, you’re going to be able to use those losses to write off against other capital losses or the $3000 limit against ordinary income.
Toby: It is nailed, I don’t even know what to add. Here’s the thing. It’s considered a collectible. The only thing I would say is, it’s taxed at your ordinary bracket. If you’re at 12%, it’s 12%. If you’re at 22%, it’s at 22%. But if you’re 32%, it’s going to be capped at 28%. That’s what happens to collectibles.
There’s always the question. Booze are not, they’re ordinary. No, they’re actually, alcohol is specifically mentioned, so you can get it. Somebody says, can I get a video after? We post these, Glenn, on YouTube in little bite sized pieces. We’ll also give you guys the actual recording for the whole thing. Some people like that.
What other types of items could you use for the tax loss? Anything that’s capital. Or if you have ordinary loss, it will offset capital gains. But capital losses offset capital gains, even if it’s on a collectible.
If you have other capital losses, hey, I bought a bunch of bitcoin, you can loss harvest on a bitcoin. There’s no wash sale loss rule on Bitcoin. If you buy bitcoin or any of the other coins, you sell when they dip, and you grab a little bit of a loss, you can offset your gain off of the Vinovest and make sure that you’re not having to pay tax on that.
Eliot: Obviously, this is different than your liquor store. That’s where they’re doing it as an inventory sale. That’s something completely different. Here, the individual asking that question nailed it by its investing. This is where you’re doing it more as an investment than really as sales.
Toby: As an investment, you’re doing Vinovest. I don’t think you’re taking possession of the wine. A lot of times, they’re storing it for you. If you take possession of and start drinking it, it’s personal, and it’s no longer a capital asset. It’s no longer an investment, which means you can’t write off the losses.
Eliot: Help you get over the losses, though.
Toby: Yeah, the empty bottle. Somebody drank my wine.
All right. Here’s the last one. “Is there a difference between filing business taxes with an October deadline versus an April deadline? If yes, what are the advantages, disadvantages of each?”
Eliot: All right. We talked a lot about this. If you want to try and get your return all done by April or even March 15th through your S-corporations and partnerships, that’s fine. You can rush to that. But a lot of our clients are going to have those syndication investments, things like that. They’re relying on other things like K-1s, Those are notoriously not only late, but inaccurate.
We are always going to recommend that you extend, and that would extend your April deadline out to October. It gives you more time to clearly see what’s going on. There could be other tax reductions we might be able to get to to look at, even though we’ve closed your end. They are limited. Not going to oversell that, but there are some things. But it gives you more time to get all things properly put into its place.
We talked earlier about bonus depreciation, cost segregation. You got to do that form 3115. Doing an extension allows you more time to get that study done. You can do that up till October if you didn’t get it done before the year and maybe never heard of cost seg before. So there are a lot of benefits to doing that extension.
Toby: For the business return itself, then there are things like SEP IRAs, there are things like 401(k)s, there are defined benefit plans, that allow you to contribute and deduct them for last year, so long as the employer makes that contribution before it files its taxes plus extensions.
I always used to use an example. I shouldn’t bash on the guy. Somebody was like, hey, I have an S-corp, I’ve never been late, I always file March 15th. I was like, great. I would recommend that we extend it out, even though you’re done. Let’s just see if anything happens over the summer.
Sometimes business goes up, sometimes business goes down, sometimes I’m sitting on some extra cash. If I can lower my taxes for last year because I have some cash available to put into an employee 401(k) or at a defined benefit plan, I might do that. By the way, we can add them even after the end of the year nowadays.
They said, no, I wanted to file on March 15th. Sure enough, the comment was right around September, which is when their tax return was due. They had extra cash and they were like, hey, I really liked to do this contribution, can I do this now, because it’s going to save me a bunch of money for last year? I’m looking and I’m like, yeah, if we could go back in the time machine and change that. We could absolutely do it, but you were insistent on filing. Now, do you understand why we don’t do that?
Lesson learned. It was like $7000 that it would have saved them. They were just like, shoot, that sucks. They could still make more contributions for the current year, but they can’t go back and fix last year. I always tell people, if it’s me, even if I had the return down, I’m probably sitting on it because I want to see what happens. Plus, if you’re using a brokerage house, if you have 1099s coming in or K-1 coming from investments, sometimes they’re restated.
In other words, you get something in April that was hurried because they’re trying to do the year end financials and get everything done. In June, they say, we were actually mistaken, here’s what the actual numbers are. If you’ve already filed your tax return, you’re going back and amending. I would just rather not do that. So give yourself as much time. It’s not like the teacher comes in and says Eliot, your homework is due on Friday. But if you really want to, you can wait a week and it’ll be next Friday.
Eliot: Let’s not do that. Go back to those days.
Toby: Yeah. Eliot’s like, I’ll do it on Thursday early. No. Sometimes it’s not in your best interest. Sometimes it’s better to say, hey, I wrote my paper. Maybe I’ll edit it, maybe I’ll make sure nothing’s changed, whatever. Give it another once over. Sometimes you’re just sitting on it, then you just do it. But you’re giving yourself the chance to see if things changed, and that makes a big difference.
Eliot: There’s nothing to say that you can’t go ahead and get everything turned in, and maybe they can do just a trial run. Just don’t file.
Toby: Yeah, they’re just waiting. Hey, we’ll file it. Let’s schedule it for a week before the deadline or something like that. We’ll just do it.
Hey, guys. This is more fun. If you like this type of stuff and you want the replays, go on over to the YouTube channel. Absolutely. Patty will share the link. There it is. And subscribe. I’d love it if you guys subscribe. It helps us, it gets more people out there.
We do live stream these on our YouTube channel. If somebody doesn’t ever want to be known to us, they can absolutely do that. I don’t think we see who they are. At the end of the day, we just like to share the information. If you think people might benefit from hearing this type of information, if you want your kids to start getting used to taxes, we try to make it not as boring as typical taxes. We try to make it a little bit of fun.
We try to bring just a little bit of levity to it because otherwise taxes could just be boring as sin. It can be really annoying. Then come to the tax and asset protection workshop. We’d love to have you come. It’s really boring when there’s nobody there. We haven’t had one where there’s nobody there. But it’s more fun when lots of people are there asking lots of questions.
We have our attorneys and our accountants answering questions the whole time. The last time, we did over 1200 questions. It was bonkers. It makes it more fun, makes the day go by much quicker. Your questions actually feed what type of things we’re teaching to make sure that we’re doing it.
If you have questions in between Tax Tuesdays, please email us and let us know your question. I live in sin city, I know about the city. All I know is that the people that do a lot of that sin, the walk of shame, lack of money, although they never say they lose money.
Eliot: I get what you’re talking about.
Toby: Rule in Vegas. You see a lady walking down the street on a weekend and she’s carrying her shoes, go home. It’s too late, you’re out too late. You should be back in your bed. As soon as you started seeing dressed nice carrying shoes, a little bit of a look on their face, it’s time to go home. You’re out too late. That’s our litmus test in Vegas. Unfortunately, it happens at about 8:00 PM. I’m just kidding, it’s a little later than that.
Email us at firstname.lastname@example.org, guys. Absolutely, we pick your questions and answer them here. A lot of you guys, they respond. They’re really nice people who oftentimes say that was my question, and then we can ask them a few extra questions and make sure that we’re getting them a really good answer. We’ve saved some people some big money on those questions.
It’s always fun when they come in, they start asking, and they’re like, oh, my God, you could do that? You’re like, yes, I can actually do that. They don’t have to come to us. They can go back to their accountant. This is no strings attached, we just try to share information.
We will see you again in two weeks. Thank you for joining us. I wanted to say thank you to Patty, Matthew, Ross, Dutch. I know there are others. Tanya, Jared, Alisa. Amanda’s even on, Troy’s even on. Oh, my god, we have the 18 rocking it in the back of the house. They’re answering questions. I don’t know how many questions they answered, but I could find out. They just do a really good job, 183 questions.
Toby: That’s 184. When do we have to submit? You can submit questions whenever you want, Mr. L. I don’t know what the first name is. You could absolutely submit those questions, and we don’t charge you for it. Sometimes you’re getting picked, and you’re going to see your question getting discussed in a little bit of a deep dive, and you can always add some more color. It’s lots of fun.
We will be back in two weeks. We really do enjoy sharing this information with you guys. If you think anybody could benefit, invite them to the next session. Hopefully, we will honor bringing them in by giving them some information that actually impacts them and helps them.
Why do we do it? Because your money is better off in your pocket doing things in your community than the government’s pocket doing things all over the world, which it’s questionable whether we are spending our money wisely. I think you’d be better off using it in your community.
I’m going to do everything I can to help you guys keep the money in your pocket for no other reason than I know my clients. I know the people that I run across, the people that actually spend their time doing this. They tend to be givers, they tend to take care of their communities, and hopefully you use the money for that same thing. At the end of the day, it’s money in your pocket. We’ll do everything we can to help you make that pocket full. And we will see you in two weeks.