How To Use Your Self-Directed IRA For Real Estate Investing

Amanda: Denver, Dallas. We just got back from Dallas. 

Toby: Yes. There’s Anchorage, Des Moines, Iowa. There’s nothing halfway about the Iowa way to treat you if we treat you, which we may not do at all. There’s Kapolei. That’s Music Man, by the way, just in case you like show tunes. San Antonio. There’s Arlington where we just were and it was very hot. Jersey Shore, DC, Florida, Lakewood, Minnesota, you’ve got everybody from everywhere. Where do you hail from? 

Amanda: Las Vegas. 

Toby: Originally? 

Amanda: No, I’m from California. One of the hundreds of thousands of Californians who moved to Vegas. Although we did it prior to the pandemic so we did it before it was cool.

Toby: You grew up in California? 

Amanda: Yeah, Southern California. 

Toby: Somebody’s in London. They’re probably about nine hours ahead of us. Nice. 

Amanda: South Pasadena in the house. 

Toby: All right, guys, we got to get started. This is Tax Tuesday where we like to deliver a little bit of tax knowledge to the masses, which means we like to answer a bunch of questions. I’m Toby Mathis and we have Amanda Wynalda. That is because Eliot broke a tooth. It hurt him. He’s suffering. 

Amanda: We made the mistake of letting him have lunch today. 

Toby: We feed him rocks apparently. Anyway, poor guy. Prayers are with Eliot while he recovers from whatever the heck he did to himself. But breaking teeth, it gives me the heebie-jeebies. Just thinking about it makes me get the heebie-jeebies. At least two people gave me an emoji. There are three. 

All right, enough of this nonsense. Let’s dive in. We have rules around here, Amanda, and we will adhere to them. We will not mention US soccer sucking. They don’t suck. They fought hard and lost.

Amanda: They didn’t do well. 

Toby: Amanda has to live with this because your husband is? 

Amanda: My husband is a soccer pundit.

Toby: One of the best US players to ever grace the uniform. 

Amanda: I am working from the office today for the exact reason. 

Toby: He’s probably 24/7 talking about Greg and their crew. Anyway, hearts go out to them, but I think tonight we have Columbia and Brazil, so that’s our consolation prize. All right, why not? I’m from here. All right. That was great. 

Amanda: Don’t rub it in. 

Toby: You guys battle. That’s all I got to say. That’s all I care about is everybody giving it a good shot. By the way, where did heebie-jeebies come from? I don’t know. I’ve been doing it since I was a kid. 

All right, let’s get into this. We have a bunch of questions to go through. Amanda’s going to answer them all. If you have questions, you can put them into the Q&A. Just ask whatever tax question you have, because we have a huge team. 

I’m looking at Carl, Jennifer, Arash, Dutch, Jared, Jeff, Jennifer, Rachel, Summer, Tanya, and Troy. They’re there to answer your questions, so please guys, ask them questions, otherwise they get antsy and God knows what they’ll do. We don’t want to leave them in the house by themselves because they’ll chew all the furniture. 

If you have questions in between your Tax Tuesdays, because we do these every other week, email at taxtuesday@andersonadvisors.com and your question could become one of the questions that we answer live here. We have a whole bunch.

As always, if you start asking us like hey, I’m doing this and on this line it’s this. Here’s my other expense and here’s my P&L. If you start asking questions like that, we’ll say just become a platinum client. It’s less than $100 a month. You can ask all the questions all day long, every day inside our knowledge room, where it’s absolutely free.

If you don’t know about our knowledge room, lawyers and accountants are available all day long. We do them at Zoom so we can answer general questions and they can take you into a private room. If you have questions that you don’t want anybody to hear all day long, nine to two Pacific Standard Time, you can go in there and ask all the questions you want. I don’t know anybody else that does anything like that. I think we’re sick in the head. 

Amanda: Yeah, we’re insane. 

Toby: Yes. This is supposed to be fast, fun, and educational. I don’t know about fast, but it’s fun for sure. Sometimes educational, depends on how much you pay attention. No, it’s always fun. We always have a good time. Let’s dive in.

Here are the questions. I’m going to read out the questions first and then we will answer them second. Let’s go through the questions. Eliot picked these, so we will see whether or not he’s setting us up. I already see breeding in that word and I’m wondering whether Eliot was having fun. 

Amanda: That is preceded by a dog, just for anyone wondering.

Toby: Dog breeding, whatever. “Anderson Advisors has done a great job of creating all the pieces of my estate, but I have no idea how to put it all together.” All right, that’s a great first one. “In particular, how do the holding LLCs flow into my personal tax return and how does the LLC taxed as a C-Corp get reported on my personal returns?” 

Good question and we want to make sure that We get out way ahead of that. We should have a tax diagram for you. I don’t want you just to do these happenstance. We want it to be very deliberate, so let’s make sure that whoever asks this, we find out who it is and get right on them, make sure that those questions get answered more appropriately, personally. 

“Can I expense my breeding stock as a dog breeder rather than due depreciation?” Sounds like a fun one. I haven’t had a dog breeding question ever. 

Amanda: Toby’s a cat person.

Toby: Cat breeding, I could get into, but I like dogs too. It’s just cats you could leave them. I’m going to leave for a couple of days and they’re like good riddance. You come back and…

Amanda: They still don’t like you so nothing changes. 

Toby: Just kidding. They’re wonderful. All right. “Can you please speak about QBI and how it is often missed by business owners?” Really? “W-2 employees are not allowed to use it. Who else? On the other hand, S-Corp can claim 20% right away. Is this true? Please shed some light here.” All right, so we’re talking about qualified business, what do they call it now?

Amanda: Income. 

Toby: Income, yeah. It’s the Tax Cut and Jobs Act, which has been around since 2017 and all the software catches it. It’s almost impossible to miss it, but we’ll show you how it’s calculated. 

“How do I use my self-directed IRA to invest in real estate?” We can do that. 

Amanda: A little broad.

Toby: “What is the tax impact of moving an appreciated property into an LLC?” Good question. We’ll answer that one too. 

“What are the differences between an HSA and an HRA?” Health.

Amanda: They are spelled differently, check. 

Toby: Health reimbursement. 

Amanda: Next question. 

Toby: We’ll get to that. You’re having too much fun. 

“I have been depreciating my rentals for tax purposes.” Good. “How can I benefit or switch to cost segregation?” Oh, good question. 

“How should I set up my stock investing to avoid huge tax penalties?” Penalties? Don’t worry about the penalties. It’s the tax liabilities making too much money. 

I just sat with one of my clients, true story, pretty funny, yesterday afternoon, and he was up almost $800,000 this year and he was up 80% and a rough life. He was doing synthetic-covered calls and he was an Infinity follower. 

I was like alright, what are you doing? Because we’re targeting 15%, you’re doing something wackadoodle. He was doing synthetic covered calls on Nvidia, I guess. I was like that’s not my favorite stock to be doing that on, but you killed it. But he’s like now what do I do? I’m like, thank God that you made $700,000. Now what about taxes? 

Amanda: That’s the downside of the champagne problems. 

Toby: We have some tricks up our sleeves.

Amanda: True. 

Toby: We always have. All right. “Do you have to be an LLC to get all the tax benefits from purchasing investment properties?” Good question. Now, I just find it funny that when people make a lot of money, they immediately start hitting on the taxes and it just sucks to pay the taxes, but you just made a lot of money. Let’s not lose sight of the fact how extraordinary you just had a great year. Then I talk them off the edge and say, let’s not be that aggressive. please. You just killed it. But let’s target reasonable returns. 

If you want to learn more, there are lots of videos. I think I have over 880 videos now up on YouTube. I’m having a lot of fun doing them recently. I’ve been doing a lot more of the wealth building, those things. They’re fun. Do a lot of the tax too. If you’d like to, just type in my name and you can go and subscribe to my YouTube channel. I’d really appreciate it. Then while you’re at it, do Mr. Coon’s as well, because he’s been very active. I think he’s doing like three videos a week now. Boom, boom, boom. 

Amanda: He’s a machine. 

Toby: He’s a machine. Speaking of machines, let’s see, we have some Tax and Asset Protection workshops coming up. We have July 13th where we are doing a virtual event. I think I’m doing that with Clint. You’ve been doing them. 

Amanda: Yeah, I’m doing July 16th. 

Toby: Oh, cool. All right, anytime you want to do mine, you just tell me. 

Amanda: I think that’s how I got into this.

Toby: Then we have, September 26th to the 28th, we have another live Tax and Asset Protection Workshop, TAP Live, and we’re doing that one in San Diego. This will be a lot of fun. 

Amanda: Everyone comes and complains about California. 

Toby: Yes. You can come and hit on the Californians just right there in their face and be like don’t come to my town. Actually, Californians are great. 

Amanda: People complaining about California are Californians. 

Toby: They’re like pulling up the ladder behind them. It’s like, yeah. “If you have a church, what is the best way to set it up for tax purposes?” Calvin, you don’t even have to. That’s the best part about being a church, but you want to be a 501(c)(3) and put that into the chat so somebody can give you an answer.

All right, that’s the link for YouTube. I’m sure somebody shared the link. Somebody says can the link to the events be put in chat? Yeah, absolutely. We’d love to. I’m sure that we will make it happen. Other than the live event, everything’s free. Even at the live event, it’s cheaper than the coffee. Because coffee is $100 a gallon, it must be the best coffee in the world. 

All right, let’s talk about this setting together the estate. “Anderson Advisors has done a great job of creating all the pieces of my estate, but I have no idea on how to put it all together. In particular, how do the holding LLCs flow into my personal return and how does the LLC taxed as a C-Corp get reported on my personal returns?” What say you?

Amanda: Without knowing exactly what the structure is, most of the time what we’re doing, our clients are real estate investors so we will have maybe a land trust and then a property-specific LLC owned by a holding company. They’re dual level structures. If you already own your rental properties, most likely your tax reporting, the actual reporting on your taxes won’t change at all because these entities are set up as what’s called disregarded for tax purposes.

That means they legally exist and you have that limited liability protection, but the IRS doesn’t see them so you’re not having to do a separate tax return. If your entire structure is disregarded and you’re reporting your rental properties on your Schedule E page one, you would continue to report that exact same thing on Schedule E page one.

In some cases, we have properties that are owned by a married couple. If you’re married filing jointly, you’re reporting those on Schedule E page one. But when you set up your structure, you may opt to have your holding company be taxed as a partnership, which then will slightly change the way you report taxes.

You’re still collecting all of the same information in terms of income and deductions, but then that’s going to go on a partnership tax return, which is the 1065. That 1065 will generate a K-1 for each partner, you and your spouse. Then you take that K-1 and you report it on your personal 1040 Schedule E page two.

Toby: The big benefit to doing that page two is for federally-backed loans, at least the underwriting. They use 100% of the income on page two. They only use 70% of page one, so you do that. 

If you’re doing commercial property, we’re always going to encourage you to do the partnership because when you sell it, underwriting is a bear if it’s a personal return. They don’t quite understand. They want the 1065 return. If you don’t have one, they’re not going to underwrite it, so the buyer isn’t going to be able to get financing. You just shrunk your market down a little bit. 

If you’re doing multifamily or commercial, make sure please, because you know there’s going to be financing. If it’s a little single family and everybody’s buying them cash, who cares? 

This thing says “I want to set up a holding company, but it’s a little too expensive how difficult it is for me to transfer LLCs to a holding company.” Oh, how? 

Amanda: If you set up the LLC separately. The actual transferring of the ownership is pretty simple. You hold a meeting. Everyone involved in that meeting, all of the members of that LLC, signed meeting minutes, resolution, and then you transfer, and you assign the interest in that entity to the holding company. 

The problem is that most people stumble and make a ton of mistakes in setting up that underlying LLC, especially if you’re looking for anonymity to shield the fact that you own those properties. It’s almost impossible to set up an LLC with complete anonymity if you’re doing it yourself.

Toby: I would say anonymity is probably the most important component of setting up a structure right now. In this day and age, the way litigation is going, like I drive here, I drive in Vegas. I’ll drive from the strip to my house and I literally counted 27 billboards of lawyers soliciting clients. 

Amanda: Right, and probably three car accidents.You can’t drive past the strip without seeing a car accident. 

Toby: I think a lot of it, there is a lot of fraud out there, people setting each other up, you see them. Anyway, just make sure your stuff isn’t like low lying fruit. 

Now there was another question in here about the LLC taxed as a C-Corp and that one just goes on to an 1120 return or 1120-S if it’s an S-Corp, but here the C-Corporation pays itself tax, right? 

Amanda: Yes. The only way any of that income would show up on your personal return is if you’re taking a dividend. If you’ve loaned money to the corporation, it’s paying you back in some interest. Most of the strategies involved with setting up a corporation and most of our clients are setting them up for property management or asset management. It’s an income shifting strategy. 

You’re shifting some of the income that would normally hit your Schedule E and you’re shifting it over to the corporation where you can then pull it out tax-free. In terms of tax reporting, that’s not going to show up on your personal return because you’re being reimbursed for those things tax-free. It’s not your income. Those are things like 280A meetings, 105b plan, medical expenses, and just general accounting plan things such as cell phone, miles, home office.

Toby: You want that accountable plan. 

Amanda: Yeah, those are tax-related deductions and reimbursements you’re taking, but those aren’t necessarily showing up on your personal tax return because those are not income to you. You don’t pay taxes on it.

Toby: Somebody says, how can you have complete anonymity with FinCEN nipping at your feet? Oh, well, FinCEN’s the treasury guys. That’s all it is. Nobody can see your tax returns. Nobody gets to see anything filed with FinCEN, so it doesn’t actually have any impact on your anonymity. They already have the information under the Bank Secrecy Act. They just said they don’t really have it organized and it’s tough for them so they passed this law, which is dumb. 

Amanda: So you guys do it. 

Toby: Yeah, like could you just make it easy for us? I know it’s inconvenient, but could you just tell me what we already know, but we don’t know how to actually set up a database to gather, like, look about that forehead. That’s FinCEN for you. That’s the Department of Treasury. But yeah, it’s not a public record so do not worry, Ms. Jones, you have complete anonymity from a public record standpoint, even with FinCEN, and that’s what we really care about.

I can just tell you from 27 years of dealing with this stuff and I’m in real estate. I’ve had three fires, a tree fell on a house, you name it. It’s probably happened to one of our properties as well as our clients. We just don’t see very many lawsuits as a result because people can’t see it. I had this kind of fun. 

One of our clients and you would actually know her, got named in a lawsuit in California. She didn’t do anything wrong. She was just one of the deep pockets they were looking for, but they came back saying she doesn’t have anything and they dismissed her from the lawsuit, almost like you have nothing. 

Amanda: You’re free to go, poor person. 

Toby: She’s like, but I have a lot. Luckily she didn’t, but she was like, do they really do that? I’m like, yes, they really do that. They didn’t want anything. They were just like we need somebody with assets. They couldn’t see any. They were shocked. It’s like, it’s okay. Bye. Take that win. Move on. People do that. 

That’s not what we’re talking about now. Let’s talk about breeding stock. “Can I expense my breeding stock,” funny way to say a dog, “as a dog breeder rather than due depreciation?” It’s a weird question. 

Amanda: Sort of. Depreciation is when you have business property. Property has a useful life, so it wears out. Because you’re using it for business purposes, the IRS allows you to take a deduction every year for the life of that property. For dogs, the magic number is seven years. 

Toby: They’re not listed anywhere so they’re going to go to that.

Amanda: Yes, they have a seven year useful life. Whatever amount you paid for your dog. 

Toby: I was going to say an if. If it’s not inventory. If it’s a breeder?

Amanda: The breeding dog. 

Toby: Then it’s just a computer. It’s weird, right? It’s like a computer. 

Amanda: Adorable computer. 

Toby: What happens if you neuter the dog or spay the dog. 

Amanda: After you’ve depreciated it? 

Toby: Yeah. 

Amanda: If you take the full depreciation the first year, so for example, I paid $2000 for my dog because we are allergic to dogs and we got a golden doodle and it was two weeks into the pandemic and we were all freaking out and we had to have a dog like everyone. We have our dogs, we paid $2000 for him. He’s not a breedable. It’s not like the level. He’s a second generation doodle. 

Toby: He’s not a breeder. 

Amanda: If he was and we depreciated that $2000 and we bred him for two years out of the seven, then we would have to recapture the five years’ worth of depreciation and claim that as income if you’re not using the property the whole time. 

Toby: I think we made a jump to 179. We have a dog that we’re breeding. It’s an asset and it’s a seven-year property. That’s first. We can accelerate that depreciation, which means deductions. When somebody says, can I expense my breeding rather than depreciation? Depreciation is expensive, but depreciation is usually over the useful life. Unless you’re taking under section 168, which right now would be 60% acceleration or 179. The problem with 179, which is a code section that allows you to take 100% depreciation up front.

In your case, you had a $2000 dog. Let’s say you’re going to breed it and you put it into service. Then you wrote it all off so you took a $2000 deduction and the following year you neutered the dog. It’s no longer breeding. Now it is no longer business and it’s been taken out during its useful life. You would have recapture your ordinary income tax bracket for the six years of depreciation that you took in the first year that you didn’t end up keeping. 

This works for cars too, guys. Everybody that goes out there and gets a 6000-pound car, like gross vehicle weight, and writes it all off. I’m like, are you going to use that 50% or more in business for the next five years? And they look at you like you’re from Mars. 

The accountant explained to you that if it falls below 50%, you have to recapture all that expense that you took. Blank look. It’s fun to get just murdered by that and you’re like what the heck happened? Yeah, that’s why you don’t listen to these knuckleheads out there. 

You buy a Range Rover at the end of the year and expense it. If you’re going to use it 50% or more for your business, okay. But you got to track it. If you fall below 50%, it’s 100% you’re recapturing that puppy. If you sell it, let’s say that you have the dog, you wrote it off for $2000, and then you sell it three years later. You sell it for $1000, that’s all income plus the amount that you took too much.

We’re going to have to do a calculation. You sell it after three years, you have four years of depreciation plus the gain. Ouch, it would adjust its basis. I guess you might not have the game. You just have to recapture, but you’re going to end up paying tax on at least $1000, which sucks. A lot of fun. 

Amanda; What if you don’t take the depreciation at all? 

Toby: You have to recapture it anyway, no matter what. You may take it, but you have to recapture it. 

Amanda: May depreciate, must recapture. Taxes are fun. 

Toby: But anyway, that’s the dog. You can absolutely expense the breeding dog. Otherwise it’s inventory. If you have dogs that are like hey, I breed my dogs and I make a bunch of puppies, you can’t expense those unless they’re going to be used to breed because that’s inventory, which is the cost of goods sold. When you sell them, you subtract out the cost of the animal. It sounds weird when we talk like that, but that’s how it works. If you’re a dog breeder, there are some pitfalls that you have to be aware of and make sure that you’re doing it right. 

All right. “Can you please speak about QBI and how it was often missed by business owners? W-2 employees are not allowed to use it. Who else? On the one hand, S-Corps can claim 20% right away. Is this true? Please shed some light here.” 

Amanda: Like you had said earlier, this is a change in the Tax Cuts and Jobs Act, which passed in 2017, and went into effect 2018, so not many people are missing it anymore. Maybe if you were handwriting your own tax returns five years ago, then you might have, but all tax software is going to at least prompt you to see what that is or automatically calculate it for you. You qualified business income deductions available if you’re a sole proprietor so that’s anything on your Schedule C, LLC disregarded, S-Corp, partnership, but C-Corps, no. If you’ve got a C-Corp, then no, that’s a separate tax-paying entity. It’s really geared towards the small business owner. 

Toby: You might remember the Tax Cut and Jobs Act and they call them the Trump tax cuts. He took corporate returns which would go as high as 39%. The highest bracket went back down to 35% so they always say 35% and lowered it to 21%. It’s a flat 21% and to make it more level for people that aren’t a C-Corp and are using S-Corp or partnership or sole proprietors, they gave them the QBI. 

There is a phase out depending on the type of business you are. You have an exclusion once you get over a certain dollar amount. They’re pretty high, so you don’t see too many people. Do you remember the numbers or what? 

Amanda: I wrote them down, I would not remember them. If you’re a single filler then it’s $191,950. Then if you’re filing jointly, it’s $383,900. They’re pretty high. 

Toby: If you’re a doctor, a lawyer, an accountant, a performer, even realtors and stuff, if it’s all your talent then and you make too much, you may lose that 20% deduction, but it’s almost always captured in the way we work it. Especially towards the end of the year and we have high-income folks, we use our software to say, what’s the right ratio? There is a way like S-Corps get it, but you have to take a reasonable salary and that wage is not entitled to the 20% and then the profit is.

Sometimes you’re playing a game of, all right, how much salary do I want to take so I can use my 20%? And I have to be cognizant of my total taxable income because the phase out could apply or another test could apply for my wages.

Amanda: Jump into a higher tax bracket. 

Toby: That and I could also lose 20%. You’re going to lose the 20% quite often as a sole proprietor if you’re really successful. Just by its nature, you’re going to lose it. But if you’re making like $30,000 and below, you might be better off letting it be disregarded as a sole proprietor. 

It’s going to sound like, for a lot of you guys, your heads exploded because you’re like Toby’s always telling you not to be a sole proprietor. But what I say is you follow the numbers. The numbers say that a low-income sole proprietor isn’t extraordinarily higher from an audit standpoint. 

But what we really care about is, is the juice worth the squeeze, and under $30,000 you’re probably going to be better off just being a sole proprietor than the escort. You get above that. It’s just, it’s not even close. 

Even right around that, depending on your situation and what your taxes are, the S-Corp could still be worth it because of the accountable plan. But when it comes to QBI, the sole proprietor definitely would give you a little edge if it’s a lower income one. 

Fun stuff QBI, I remember when it came out, I would do events on it and we’d talk about it, but it was just like a big nothing burger along with the qualified opportunity zones. They didn’t really benefit that many people. I just called it like a red herring. Everybody was talking about them, but in all practice, you’d see one person doing it right. A bunch of other people trying to put a round peg through a square hole. 

“How do I use my self-directed IRA to invest in real estate?” 

Amanda: Just do it. Self-directed IRA, you get to choose your investment. Normally if you just have an IRA that you don’t have control over, then you’re limited to what you can invest in. Typically stocks, ETFs, bonds, and things like that. But if you are self-directed, then you can invest in what’s considered non-traditional types of investments, so that includes real estate. How do you do it? Find a property and you buy it with your IRA. 

Toby: I would add one caveat is that liability-wise, if you buy something inside the IRA, it’s your liability. People think I’m buying it in an IRA and I won’t be liable if somebody slips and falls on the property. They can sue the heck out of you still. 

What you do is if you’re doing an IRA, you’re going to use what’s called a checkbook LLC. You still use an LLC to own the property, but you have the IRA on the LLC. You have to make sure when we draft them, you put in some special language and you make sure that the manager is entitled to compensation so you don’t have disqualified occurrences. 

It allows you to buy without having to sit there and get the custodian to sign things on. They’re not going to do it quickly, so if you’re trying to buy a property, especially at an auction or something, you’re not going to be able to do it directly with the IRA. You’re going to have to set up a checkbook LLC. 

Here’s the other thing. The IRA, you’re subject to something called UDFI. If you finance real estate, you could be taxed on the profit that’s associated with the debt. Sounds weird, but let’s say I buy a building and half of its debt, half the profit would be taxable to me, even though it’s in an IRA. 

The same is not true of a 401(k). If you’re going to have debt or you’re going to do syndications, then my recommendation to people would be to set up a solo 401(k) and a closely held business and to roll that IRA. Some of you guys are like what if I have employees in another business? Okay, you’re never going to contribute to it. You’re just going to roll your funds in and use it to avoid UDFI still using an LLC. 

If you’re doing a syndication, you’re buying an LLC anyway, you don’t need to use an LLC. You can buy it directly in the plant, but you want to make sure that literally side by side, if I had an IRA on it versus a 401(k), this guy could end up with taxes. Whereas this one’s not, I’m going with the 401(k). 

Amanda: There are a couple of other things to consider too, in terms of if you’re looking for a partner or the property that you are going to buy. We have some clients who say, how can I contribute or buy my own property I already own with my IRA. You’re not going to be able to do that. There are prohibited parties. 

A husband and a wife will have separate IRAs. You can combine one time to purchase a property, but you can’t make ongoing contributions from your IRAs to maintain that property. It’s even a little questionable whether you can then transfer it into an LLC and avoid this prohibited transaction status, which would essentially disqualify all the funds in your IRA. That’s another reason why the solo 401(k) makes more sense because if you are married, then you can jointly roll both of your IRAs into it and have that much more buying power. 

Toby: 100%. “What is the tax impact of moving an appreciated property into an LLC?” 

Amanda: A disregarded LLC? An LLC taxed as an S-Corp? 

Toby: That was what I thought too.

Amanda: An LLC tax is a C-Corp?

Toby: You’re 10 miles ahead of me on that one. LLCs do not exist for tax purposes. The IRS says what is it? You tell me. You have like four choices, disregarded, partnership, S-Corp, C-Corp, but there’s no such thing as LLC so we need to know a little more information. Let’s assume it’s a partnership or it’s disregarded. Then what would your answer be? 

Amanda: The tax impact isn’t going to be immediate. It’s just considered a contribution, just as if you were putting cash in so it’s going to show up on the balance sheet as an asset. Then when the property is sold or you’re earning income off that property, that’s when there’s going to be a tax effect. 

Toby: You can put money in, take money out. I always think of an LLC as a safe. Put it in your house and you’re like what’s the tax impact of putting money in my safe? There isn’t. What if I put a million dollars of gold in it? Yeah, nothing. What if I take a million dollars of Bitcoin out of it? Nothing. It’s a safe. Your LLC is a safe. You’re just putting money in and out of it. It doesn’t have a tax implication, whether you take it out to refi or not. 

The same is not true of S-Corps and C-Corps, which is why we don’t hold real estate for the most part. There are a few occasions where I’ll do it, but for the most part, you do not put real estate in an S-Corp because if you pull it out to refi, it’s taxable to you. It’s like kicking the shin. It sucks. Don’t do it. 

Use that LLC taxed as a partnership. Use that LLC disregarded. But use that LLC. Of course, if you’re hanging around Anderson people, we’re probably going to use a land trust because we want to keep your name completely off of it, and we want to make it very very difficult for anybody to figure out who actually owns this thing other than the trust. We don’t want them to know who the beneficiaries are. We don’t want them to have any free information, right? Less is better.

Amanda: That brings up a good tax point, too, because you’re just answering the question based on income tax. But if you’re moving a property, there could be transfer tax. There could be property tax reassessments. That’s when the land trust comes in really handy as well, because it’s going to avoid those things. 

Toby: 100%. Right here in Clark County, where we’re sitting, we’ve done that a number of times. You move a property into an LLC, it’s not taxable. You move it out here, it’s taxable. 

Amanda: Even if it goes back to the direct owner of the LLC. 

Toby: Yeah, but if you put it in a land trust, not taxable, we always use land trust here in this County. There are also reasons to use it in Florida. You guys have your reassessment. Florida is just being a pain in the you-know-what. We don’t like them. What are we doing? They’re not very nice. 

Property taxes are too high. It’s a beautiful state. We love it. Everybody moved there and then they started doing stupid stuff. 

Amanda: Sorry, Florida. 

Toby: They have insects. 

Amanda: We’re still going to go back every spring. We’re still there every spring. 

Toby: I met Sandra there, so I have to, it’s good. Brickel. Enough of this. I answered that one, so you’re going to handle the rest. I’m probably going to take off. Let’s see. I’m just teasing. 

“What are the differences between an HSA and HRA?” 

Amanda: Spelled differently. Okay. HSA is a health savings account and an HRA is a health reimbursement account. There are actually a number of differences. The HSA is owned by you as the individual. You make contributions to it as does your employer. Whereas an HRA is owned by the employer and only the employer makes contributions to it. It’s really what it stands for as a reimbursement account. If you have your own business or you’re familiar with reimbursing yourself for 105(b) medical expenses. It works a similar way. 

Toby: What if it’s in an S-Corp? 

Amanda: The HRA? 

Toby: That’s taxable to you, right? 

Amanda: Yeah. 

Toby: It’s the employer’s agreement and how they pay you. If it’s a C-Corp, then I can reimburse 100% and it’s non taxable to the recipient. If it’s an S-Corp, I think it’s income. The HSA is your plan. You have to have a high deductible plan that you’re covered by and then you can contribute and I think it’s what?

Amanda: I also wrote these down. In 2024, it’s $4150 and $8300 for a family.

Toby: I just did it for this year. 

Amanda: Do you do it all at once or do you do a little bit every month? 

Toby: I just pop it in there. I’m just like, boom, as soon as I can. Pop it in there. I forget sometimes I’m like, shoot, then I have to go back and do it, but you can do it all the way up until April 15th, but I like the appreciation.

Amanda: Yes. 

Toby: Then here’s the rub on an HSA. You get to deduct it. Let’s say you put $8300 in. 

Amanda: You get triple tax benefits.

Toby: You get it gross tax rate and you get to start reimbursing. But you don’t have to reimburse right away. We could wait 20 years and reimburse all your expenses. You could just keep track of all your medical expenses. It starts to get really big years and years and years and you have this account that at some point you just pay yourself for all those expenses. Reimburse yourself. You write yourself a big check someday. No tax. No tax. 

Amanda: You can also invest within your HSA. Use the investments. It’s really just almost like another IRA when you think about it. 

Toby: I don’t talk about my investing very often. 

Amanda: What are you talking about? You literally wrote a book about investing. 

Toby: No, but my investing. I don’t talk about my investing. I have a lot of real estate. 

Amanda: You just said earlier, I have a lot of real estate. 

Toby: But not in specific, right? 

Amanda: You said you didn’t like that one stock. 

Toby: I didn’t like it. I like income producing stocks, but I didn’t tell you what I invested. But that one, I blew it up. I was sitting there cracking up because I was like every now and again, I forget that I have accounts and I go back and I’m like, dad, it’s like Christmas. My HSA was sitting there and I was like what is in there is about this. You go in and you’re like whatever happened. 

Amanda: When they ask you, do you need a receipt for that? 

Toby: Yes. 

Amanda: At the chiropractor? 

Toby: Yes. You get a receipt and you mark it down and you keep it.

Amanda: Take a picture. 

Toby: Keep a little reimbursement fund, but that’s the HSA. The HRA, if you have a C-Corp, you just reimburse yourself, but there’s no benefit. Technically, there is a little bit of interplay. 

Amanda: There’s no limit either to how much you can put into the HRA. 

Toby: Correct. The reimbursement, whatever it’s giving you, you can go hog wild on. But the one thing is, I believe that you might have some interplay between the HSA and if you have a reimbursement plan. There’s something if you’re getting a bunch of reimbursements, you may have restrictions on how much you can put in. I don’t know the rule off the top of my head, but I would look at it. 

Somebody says, “Do you have classes on nonprofit organizations?” Yes, we just did one and we have them on YouTube as well. Karim Hanafy worked for the IRS in their exempt department. He is a really good guy to teach that.

“I have been depreciating my rentals for tax purposes.” Good. “How can I benefit or switch to cost segregation?”

Amanda: All right. We’ve talked about depreciating a little bit already. Also applies when you have rentals, they’re business property. Residential real estate is depreciated on a 27½-year useful life and commercial is 39 years. You can take the total amount that you paid for the property plus any improvements. You back out the cost of the land and then you divide that by 27½ and you take that smaller deduction every year if you’re doing straight line. That’s typically what people think of as the deduction for what would be the mortgage cost. 

Then what cost segregation does is you have somebody come out and do an analysis. It’s a specialized accounting firm. I think Clint told a story about how he did one over the phone. He just went to his property and he had called them and he did it via FaceTime. 

We work with a really great company, the Cost Segregation Authority. I just interviewed Erik Oliver at our Dallas event. That was fun because I am. 5’3″ and he is 6’8″. My arm got tired from holding the microphone up to him. But with cost seg, they break out every piece within the property into its useful life so 5, 7, 15, your property, curtains, plumbing, carpets. 

Toby: Anything attached to an item that’s a useful life of 5, 7, or 15, that’s essential to it. Its operations like the plumbing that goes to a dishwasher has its lower yearly depreciation schedule. That might be a five-year asset now, a bunch of plumbing. It’s usually about 30% of the building in 5, 7, and 15 years in our experience. 

It is much higher when you’re doing land improvements. If you have an RV park, if you’re doing storage, some of those are crazy. I’ve seen 90% value of land improvements, which means I can depreciate it much faster, which means it’s a little money because we’re just taking the deduction now and I’d rather take the deduction now. It’s worth money to me right now.

Somebody says, I love Erik Oliver. I worked with him a lot, saved one of my clients $1.4 million in taxes a couple of years ago. Julie, he’s done great for our clients. His group has done great. It’s Cost Segregation Authority. If you want a link to get a cost seg study, they do it free if it’s one of our clients. Maybe they’ll put the link up. I think it’s andersonadvisors.com/CSA. 

Amanda: The great part about them in terms of this question is how can I benefit or switch is that they’ll do the analysis and actually show you if it doesn’t result in a benefit for you, they won’t do it. In terms of timing though, when would be a good time if you’ve been depreciating your property for a while, the switch to cost seg, when does it become not worth it? 

Toby: The big thing is the amount of bonus depreciation, which means like hey, if I’m going to do this because I want a big deduction early on, it depends on the year that you put the property into service. 

If you put it in service in 2020, 2021, 2022, you get a 100% bonus depreciation. I’m looking at that going this might really be beneficial. If it’s later than that, then you could be at 80% and 60%, which could still be huge. 

Anything beyond there, your five and seven-year property would be automatic. It’d almost be like bonus depreciation. Anything that you haven’t taken on that property because now it’s five and seven and you put it into service more than five and seven years ago, you’re going to grab all that depreciation. 

The way you do it is a 3115 form, change of accounting, when you file your tax return plus extension. We could still do cost segregations for 2023. If you got dinged by a tax bill and you’re like a man, I got some passive income. I had some property. I’m horrible at this. 

Usually around August, we start paying attention to how much money we made on the real estate and sometimes you’re caught off guard like oh, I didn’t realize that we had that much profit in which case, then we take one of the properties and we cost seg it. We did an apartment complex. Last year, we did one of the office buildings a year before that. Sometimes you could sit there and do that pretty late in the game. 

Amanda: August is actually early because cost seg is one of those few strategies that when people come to us in December or even January of the following year and say, I have this huge tax bill, what do I do? You can actually still implement this strategy to save taxes from the previous year. 

Toby: It’s fun guys because there are a few strategies. You can still do DBs and 401(k) employer contributions and cost segs all the way up until the deadline plus extensions. There’s still time to go capture some 2023 stuff if you’re motivated and you have the right types of assets, but cost seg is pretty easy if you’ve been depreciating. 

I would probably say you’d want within the last five years, how can I benefit or switch to cost seg? It’s a change of accounting. What I would do is actually have them do a study. 

By the way, this is weird. I didn’t realize how powerful it could be to do a cost seg after you’ve sold a property. But I saw one of the studies and it saved him about $80,000. They did a cost seg after the property sold because the recapture is different on the 5-, 7-, and 15-year property because of what they were buying the property for. If it doesn’t have any useful life, you don’t have recapture and it’s classified as long term capital gains. I’ve seen that now more than once. 

If you sold a property and I would say probably one million and above, or if you had a lot of gain on it and you were caught off guard, again, that sounds dumb but it happens all the time. I was caught off guard by a million dollars. No, you know it was there. You didn’t do anything to try to offset. 

Amanda: Count the zeros so you saw them on paper.

Toby: Somebody says, Toby, is cost seg a free service? No. Cost seg itself you pay to the Cost Seg Authority. The analysis they’ll do for free to see whether it’s worth it. But if they actually have to do the report then they’ll charge you. 

It’s like this, I always say if it costs me $1500 or $2000, whatever it is to do a cost seg, but it’s going to put $20,000 in my pocket, I’ll probably do it. I like to see it 7 times, 10 times in return. If I’m going to spend $2000 and it’s going to save me $3000, I’m probably not going to do it even though I netted an extra thousand. It’s probably just the juice worth the squeeze. 

There’s Mr. Coons, speaking of juices and squeezes. Saturday, July, it’s Clint, come on. People say he looks like John Cena. 

Amanda: Clint does get some fans on our webinars.

Toby: John Cena’s grandfather is what they said. Let’s see, Saturday, July 13th. You guys could do Tax and Asset Protection. July 16th, you’re going to be doing that one. 

Amanda: That’s Tuesday. 

Toby: I’m going to be doing the 13th and then the live one, we just did a live one in Texas. I would strongly encourage you to come out and hang with us in San Diego. Get out ahead of it. I’m sure that there’s buy one get one or something like that. Find out and attend because we like hanging around investors. 

Amanda: It’s so much different too. I mean, you get the opportunity to network. A whole bunch of different speakers. You don’t have to just listen to me for two hours. We’ve got half a dozen other speakers. You hear from vendors. 

Eric spoke at our last one. We’ve got a few others that come out and talk about IRAs and IOLs and all kinds of property management software, but just seeing everyone, especially if you’re already a client, tons of clients like to come and actually see the people that they’re working with in person. We really liked that too. 

Toby: We had 20 years and they come out and they keep coming back. 

Amanda: One of our most internally famous clients came all the way from Thailand to see us in Dallas. 

Toby: Nice. That’s really cool. Infamous. 

Amanda: Everyone knows. 

Toby: No, they’re just great. I talked to people for three days straight and I came home and I was like wow, I was tired. But you just realize you’re catching up with people. I always say you’re going there and yes, you’re going to learn something, but it’s the people that are around you that are the real value. It’s that networking. It’s good to hang out with like-minded investors. 

Amanda: You leave energized. You leave a little bit tired, but you leave totally energized so just dig into your…

Toby: I’m still trying to recover. Anyway, come join us in San Diego. This is an invitation.

Let’s see. “How should I set up my stock investing to avoid huge tax penalties?” Penalties. I don’t know if you’re going to get a penalty for stock.

Amanda: Maybe they just mean bills, how to avoid huge tax bills. Make bad trades. 

Toby: A lot of people think that the tax on it is a penalty. You work, you work, you work, you do covered calls or something. You’re going to have some ordinary income. If you don’t trade a lot, and what I mean by a lot, like more than 750 trades a year every day, 70% of the trading days, more than $50,000, that’s how you support yourself, you’re probably not a trader, which means you don’t get to take tax deductions. 

There are a lot of people out there that are investors by classification, and they feel like they’re being penalized because they actually go backwards. In other words, they make enough that they’d be okay, but they get no deductions so they end up having no tax benefit. They end up eating all those expenses so that $20,000 and $25,000 goes away especially if they go to events and are traveling around. 

Amanda: That was also one of the big changes with the Tax Cuts and Jobs Act. 

Toby: What was that? 

Amanda: Not being able to deduct those investment expenses.

Toby: Oh, miscellaneous items went away. But trader status has been an issue since the 80s. They had a guy, the mayor, I think he made $15 million for the trades and they said, nah, you’re not a business. Let’s go back to the dog breeder. The dog breeder does three litters and they’re a business. You’re like come on, you’re just not being fair. 

Amanda: You actually just have to intend to be the business with the operation. It can be very bad. 

Toby: If they reclassify you as a hobby, then they’re just like you can’t take a loss. 

Amanda: How are we getting deductions as a trader then? We’re using that partnership structure. 

Toby: We’re using a partnership structure. You need to have a corporation and you need to have an LLC taxed as a partnership, and the corporation has to be a partner. That way the money flows into the corporation. 

You could have a management fee that you’re charging as long as it’s not contingent on the profit and write it off as a guaranteed payment to the partner, but you can’t do the whole 30% of the gains I’m going to pay to the corp. You can’t write that off. They won’t allow you.

If the corporation owns 30% of the partnership, fantastic. It never hits you so you’re not writing it off, right? It’s going to the corporation. The corporation can then expense and pay all of its expenses. It’s basically a family office. I’m encouraging people to think of it that way. 

The more I am around larger family offices, the more I realize that’s exactly how they operate. You have whatever it is your investments, but it’s managed by a family corp and they’re running it. They have their board meeting, have your kids on it, and get together and say, here’s our portfolio. Does everybody understand why we’re making the decisions we’re making? 

You can write that meeting off to 280A. You get some tax free money out of it, cater it for all they care, get some tax-free food out of it, and bring those kids into the fold. I know a lot of us don’t want to. We’re like no, I don’t want to tell my kids what I have because then they’re just going to try to kill me. The living will come back to haunt you. They’re like, can I put the pillow over your face? Yeah, you did the whole what they did in Dexter.

Amanda: You’re so morbid. 

Toby: I just think of that. You don’t want your kids like now? You want them to want you to live, right?

Amanda: We watch a lot of crime shows. 

Toby: Dexter, she had the key lime pie before. 

Amanda: That’s a crime show. 

Toby: I know it’s a crime show. Don’t watch Dexter. It’s very bad. You don’t want your kids sitting there like oh, this is a great boon when you’re gone. You want to have it all set up and be talking to them.

Amanda: They don’t know how to do anything if you don’t teach them while you’re around. 

Toby: Stats are freakish. I forget who it was. They were talking about billionaires all meeting and they went through the stats of how many billionaires make it to the second generation. It’s like 20%. 

Amanda: Sorry, Taylor and Travis.

Toby: There are people that just can’t handle money. Don’t give it to them. Don’t let him have it. Put it in trust. Let him get the benefit.

Amanda: Teach them how to manage it. 

Toby: Yeah, if you stink at making money here, or if you have a medical issue here, here’s education, but you can’t have the money and buy a Ferrari. I’m sorry, but you’re in timeout. You don’t get to just take it, buy a big house, and make bad decisions. 

I’m not saying that buying a big house is a bad decision. I’m just saying it comes with a large expense like you have property taxes and the insurance and all the utilities and all that. A lot of times they don’t consider that. Then 10 years later, they’re in financial disarray because they can’t support the house. Anyway, fun stuff. Enough of this, next. 

All right, “What is the difference between tax deductible items and tax credits?” 

Amanda: Big difference. A tax deduction is an expense that you get to then use to reduce your taxable income. If you made $100 and you spent $75 on something you needed to do that business, then your taxable income would be reduced by that $75. You’d have $25 you needed to pay on tax. A tax credit reduces your actual tax bill so it comes later in the step. 

If you look at your 1040, and I know these forms are very confusing, but it actually set up so that it makes sense. It shows all of the different ways that you make income and then it gives you your deductions from your Schedule A typically. Then once that total is there, then the credits come onto your return to reduce that tax bill. If you owe $10,000, a tax credit will reduce the actual amount that you have to pay the IRS dollar for dollar. 

Toby: You just nailed it. The big tax credits that you see are like solar, some for electric cars, and things like that. 

Amanda: Tax credit and higher education credits. 

Toby: The easiest way to think about it is it’s cash. 

Amanda: Solar panel. 

Toby: The big question you might want to ask is, is it a refundable tax credit which means they’ll send you a check even if it covers all your tax liability and it’s still greater. If it’s non-refundable, then they won’t send you a check, but you can zero out. But they’re huge. 

Amanda: We want both. 

Toby: We like a little cashola, so if you can get a tax credit, they’re worth probably five times what the tax deduction is worth. Easiest way to think about it is that tax deduction might save me 30¢ on the dollar. Tax credit gives me a dollar on the whole dollar back. Big time. 

“Do you have to be an LLC to get all the tax benefits from purchasing investment properties?”

Amanda: No, not all of them. I guess if we’re talking about all the tax benefits, probably, but you don’t have to have an LLC to own rental property. You’re still going to get all of those basic tax deductions such as mortgage interest, HOA fees, utilities, cleaning, state and local taxes, property taxes, those things. You still get to deduct those, even if you don’t hold your property in an LLC. 

We do want you to hold your property in LLC for liability reasons and asset protection. With that you’ll get a couple of extra deductions. You’ll get to deduct the cost of maintaining that LLC, filing any additional tax returns you need for that LLC, although you most likely won’t need a tax return for that. But you do still get generally the same tax benefits. You can do a cost segregation analysis, whether you own it individually, whether you own it through an LLC, 1031 exchange, either way. 

Toby: If you want the benefit of an accountable plan where you’re getting those deductions—it could be like a health reimbursement plan for anything—then you use the management corporation in conjunction. You’re going to want to have that LLC because you want to have the manager documented and entitled to compensation. That’s one of the benefits of having those. 

By statute, it says you’re entitled to it so the IRS can’t come in there and say, you need to pay that. No, it’s like the state and I’m sorry, but this is what it says and this is the document. Here’s my operating agreement. You have every right to pay that. 

By the way, I’ve never lost an audit on anything like that. It’s not even a trigger, nor does it really ever come up because it’s all documented. That’s the beautiful part. When the IRS says, provide me your documentation, they usually go, okay, that’s the threshold. Most people lose their audits because when the IRS says, can you provide me your documentation? They can’t. Then they disallow stuff. Then people are shocked, wait, wait, I can’t write that off?

Amanda: You literally have to have the bare minimum. I’ve done tax court cases where people showed up with boxes of receipts and you go, we need a minute judge and you go off to the side and you organize them and you add them up right there. You need to have your documentation. 

Tiby: You dealt with the NFL’s conversion firm, was it?

Amanda: Yeah, we did some research on that, but ultimately they gave up their non profit status. It was weird. The historical reasons why the NFL was a nonprofit to begin with are super interesting. It’s like where sports and politics collide. 

Toby: Were you the chief counsel’s office? 

Amanda: Yeah. 

Toby: Amanda, she worked for the IRS. Yes, we love it. She did work with the IRS. We love the IRS. I have nothing. The only time I get mad at the IRS is when an agent says stupid things like, I don’t care what the statute says my job is to collect money for the federal government. You’re like that’s not a thing. It’s called you’re violating my rights, but go ahead and please put that in writing and then you smash them later. 

Those are frustrating when people have to deal with that nonsense. That just comes from not being very smart. Every now and again, you get one of those people. Ronnie just had one of those. I was like, please make him put it in writing and then share it with me. They were just making fun of the guy. The talent pools are not particularly deep out there right now. They are what? 87,000 agents that were trying to hire. It’s like, good luck. 

Amanda: It’s not a popular major anymore. 

Toby: I think they were able to hire over 12,000 or 13,000. It’s crazy. 

Amanda: That’s barely any.

Toby: It’s barely any. They’re not keeping up with the outflow of their personnel. All right. Fun stuff. YouTube, if you want to look at more videos, it’s not just my channel. I don’t know. It’s just me, but Clint has a great channel. Subscribe for both. 

Amanda: Carl was on today. He’s got a good chance. 

Toby: I see what Carl is. He’s picking back up. Look for Coffee with Carl. We’ve got a bunch of people that will put content out. It’s not easy. It takes effort and you have to think and people make fun of you. 

Amanda: You got to put your makeup on. 

Toby: You got to put your makeup on, but people make fun of you all the time, call you names and things like that. Real estate, I did one with Clint and they were like Clint’s smart, but the other guy’s a clown. Because I was saying real estate, there’s no way it was going to go down and everybody was like real estate’s going to crash. This was two years ago. I was like, no, it’ll probably go up 3% or 4%. You’re an idiot. They were just mean. My daughter has to read it.

Amanda: America’s in the comments.

Toby: She’s always like, dad, they’re getting mean. I’m like, don’t take them down. Little feisty. Truth will tell. It takes time. 

Amanda: Engagement. 

Toby: Yeah. Obviously, the Tax and Asset Protection workshops, the virtual ones, are always free. The live ones may as well be free. It costs very little. Get on in there and join us. The live ones are three days long. The virtual ones are just one day. You could watch either myself or Amanda. It’s lots of fun. We had a good time. Did you have a good time? 

Amanda: Yeah, they are fun. 

Tubidy: Yeah, they should be. We always try to have a good time. All right, if you have questions, send it in to taxtuesday@andersonadvisors. Give Amanda a standing ovation for coming in after Eliot. 

Amanda: For saving the day. 

Toby: After Eliot broken tooth like come on, man. 

Amanda: Likely sorry, Eliot, likely sorry. 

Toby: Yes. He was doing that. That was not even the Kaiser. But anyway, hopefully Eliot feels better. To everybody else, I’m looking at the number of questions that they’ve answered. They’re just churning. They still have 25 open questions. You guys are asking great questions. I’ve been reading them here as sometimes I shouldn’t be doing, but I do it anyway. I’m not supposed to call out all the questions anymore. I’m supposed to behave and answer what’s in front of me, but I can’t help it. 

But the guys are doing a great job. Dutch, Summer, Tanya, Rachel, Jen, Jeff, Dutch, Arash, Jen, Matt, all of you guys, thank you so much for answering questions. What we’ll do is we will terminate the Tax Tuesday feed, but we’ll leave it on so you guys can get your questions answered. 

If you have a question and it has not been answered, hang tight. We’re going to end our feed for the video and audio, but you can stay on and get your question answered. These are attorneys and accountants answering that stuff, by the way, these aren’t slouches. They’ll make sure they get you an answer as you came on with us and we’ll make sure that we honor your time. Until the next Tax Tuesdays. Thanks again.