How was your 4th of July? Did you enjoy your time off and travel to visit family and friends? Now, back to reality and talk about taxes. Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions. Submit your tax question to taxtuesday@andersonadvisors.
- Business Vehicle: Buy or lease? What are the pros and cons of each? Do trucks and SUVs have an added deduction? Better to buy than lease larger vehicles, but it’s better to lease versus buy vehicles, such as sedans and coupes, under 6,000 lbs because depreciation is limited
- Can I pocket money when I file taxes when there is no profit with the business? Yes, if it’s your business; the only time you can’t take money is in excess of your business and you are not at risk for the business
- Are solo 401ks impacted by the new IRS rules for IRA accounts? Play by the rules and don’t begrudge those who win by playing the rules
- How many properties should one have before considering doing a cost segregation? One property is all you need to do a cost segregation
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Full Episode Transcript:
Toby: All right, guys. If you’re tuning in for Tax Tuesday, you’re in the right spot. First off, welcome to Tax Tuesday. We’ll just jump right on in. I’ll let some of you guys get into the platform. Jeff, I got to tell you, I have it easy where I’m at because I have multiple screens. I can actually look at the questions and I can actually see my mouse.... Read Full Transcript
Tell us where you’re from and where you’re sitting right now, that’s even better.
Jeff: I’m in Las Vegas.
Toby: Oh, Jeff. Let’s see. We got San Jose. Jeff has accountants. Orlando, Florida. “I am in Hollywood.” Florida, Santa Barbara, San Jose, Long Island, New York, Atlanta, Las Vegas, Delaware, Long Beach. Now, we’re starting to get him. Hi, Patty.
[…] Washington. I went to school there. Richmond, Arkansas, DC, New Jersey, San Jose, Austin, Roanoke, Roseville, Sarasota, Colorado cities, Lawrenceville, San Diego where Patty’s at, New York City, Dallas Fort Worth, Liberty Hill, San Antonio, Southern California, San Luis Obispo, Maui—there we go. We got them from everywhere. Playa del Rey, South San Francisco—we got people from everywhere—Illinois. That’s awesome.
First off, happy Tuesday. I guess it’s not the day after the Fourth of July, but two days after. Happy day after recovering from the Fourth of July. Let’s dive right in. How was your fourth Jeff?
Jeff: I didn’t lose any fingers, so it was a good day.
Toby: We had a guy back when we were in Seattle when we first opened who was missing his thumb because he was holding an M-80 and took it off. I just turned pink, guys. When I go out in the sun, I pretty much just turned pink. I’m down here visiting my wife’s old stomping grounds in Miami. We’re running around. It’s beautiful here.
Unfortunately, we are probably five minutes away from Surfside. If you guys know what happened there, it’s really sad, tragic what occurred for that family or with that building with all those families. Horrible, but the area’s pretty except it got a little bit of rain today because we’ve got the tropical storm headed to Tampa, I guess. God knows where it’s going.
Pretty sure it’s pretty much like a puppy. As you let them out and you just don’t know where they’re going to go. I think with hurricanes, it’s about the same. You could say, probably over there in that vicinity. God knows. No hurricane worries.
All right, let’s dive in. You can ask your questions on the chat. If you notice, we like to comment on anything that happens to go up in the chat. If you have questions pertaining to something that our folks can help you with, I’ll let you know that we had a whole bunch of folks. We got Christos, Dana Cummings, Eliot, Ian, Trisha, and Patty on. Who else do we have? Matthews is on and you, Jeff. Jeff Webb, CPA. I’m just a tax attorney. It doesn’t really count.
If you have questions during the two weeks in between our sessions, you can always send them in via firstname.lastname@example.org. We answer your questions, guys. If it gets too specific to your situation, then we will want you to become either a Platinum member or become a client so we can give you actual appropriate advice rather than just giving you a quickie answer. But you can absolutely shoot us the questions.
We go through those questions, Kendall O’Leary does. She grabs a bunch of the questions and says, here are the questions you can answer live, and that’s what we do. It’s a lot of fun.
Anyway, it’s supposed to be fast, fun, and educational. We try to get through your guys’ questions. We try to be as transparent as humanly possible. We answer a lot of things sometimes correctly, right, Jeff? Sometimes. We’re pretty good. We’ll give you exactly our opinion on things. We don’t play around with a bunch of hyperbole. We don’t couch everything like well, you know, I need to spend 10 hours investigating. No, we’ll give you an answer.
Here are some opening questions. “I own single family houses, rentals. Two in Utah, two in Tennessee, and three in Florida. What’s the best way to own them under a series LLC? When using a series LLC to own properties in several states, only one series owns them all, how does it work?” We’ll go over that.
“Business vehicle, should I buy or lease? What are the pros and cons of each? Do trucks and SUVs have an added deduction?” We’ll answer that.
These next couple are really long questions. Jeff said, “Toby, there’s a bunch of crazy questions today.” Yeah, they’re long.
“I’m in the process of selling my home and looking to use the capital gains to purchase an investment property in an OZ in Illinois. What things do I need to consider prior to closing? How should I apply those funds when I find a property, whether a rehab land, build, or operational property, do I need to use the funds within a specific period of time?” We’ll go over that.
“Hi, I’m a personal representative of my brother’s estate,” I’m so sorry to hear that if you’re a personal representative, it means your brother’s passed and I’m sorry to hear that. “I’m receiving the money from a Merrill Lynch retirement account to be deposited into the estate account. Is it better for the estate to pay the taxes on the money before distributing it to heirs? Or distributing the money and letting the heirs of the estate be responsible for remitting the taxes? Also, what is the effective tax rate under each scenario?” A really good question. We’ll give you some clarity on what to do here in just a second.
“I have an S-corp that needs an office space large enough to shoot video. Can I rent a privately owned house that I also live in and deduct a portion of the rent for office purposes? More specifically, is it legal for the homeowner to give my company the invoice for a portion of the rent?” We’ll answer that.
I like this one. “Can I pocket money when I file taxes when there is no profit in the business?” We’ll get into that.
“Are solo 401(k)s impacted by the new IRS rules for IRA accounts?” I think they’re talking about the SECURE Act there.
“How many properties should one have before considering cost segregation?” We’ll dive into that one.
“I’m buying a beach property in a month and planning on short-term running it for the summer via Airbnb. It has a separate garage with plumbing I could live in all year, but I would probably move back into the house. What are my best tax structure options?” Interesting question.
“If I decide not to buy a replacement property through a 1031 Exchange, I’ll end up paying capital gains. But will doing owner financing help to reduce the capital gains tax?” We’ll go over all these.
This is fun. I see a bunch of questions already going into the chat. If you can, use the question and answer. There’s a chat and question and answer. Try to use the question and answer for that because our guys will answer all your questions today. You guys got free services.
Somebody says, “Do you plan to do a video for new IRS rules for IRA accounts?” We’re going to be talking about it tonight. We’ll see where we end up under the SECURE Act. Jeff.
Jeff: Hey, Toby.
Toby: “I own single family homes, rentals. Two in Utah, two in Tennessee, and three in Florida. What is the best way to own them under a series LLC? When using series LLC to own property in several states, only one series owns them or how does it work?” The question is actually, how do I do it?
Jeff: My thought on this—my opinion—series LLCs doesn’t work that well for multiple states. You got two properties in Utah, two in Tennessee, and three in Florida. I would rather set them up separately in each of those states.
One of the important things I saw here is that two of them are in Tennessee. So we want to make sure those are owned—even if by an LLC—by an individual. The reason is in Tennessee, that franchise tax can get really expensive. Having them owned either directly or indirectly by individuals helps decrease that tax.
Toby: You have the FONCE. You have the Family-Owned Non-Corporate Entity Exemption to the franchise tax in Tennessee, I think.
Jeff: Yeah, but usually when you’re doing a series LLC, it’s in one state, correct?
Toby: Right. If I was pulling this apart, I would say first off, there are about 14 states that have this statute and it might even be less than that, that has some sort of series LLC statute. So they’re not recognized in all states. Even if you are in a state that does not recognize them, it doesn’t mean that you can’t use it. It means you have to use a different vehicle in that state.
A lot of folks will use a land trust, for example, to own a property. Assign its beneficial interest to the out-of-state series. But then your home state, what is it going to do with that? California says that any series that is owned by a California resident is considered a separate LLC for franchise tax purposes, and they’ll assess the $800 to prepare LLC.
The other consideration is there’s no uniform series LLC act, so we don’t really know what’s going to happen in each state yet. For example, California might say, hey, we’re just going to treat it as an LLC. Okay, good, then they’re going to recognize it. They’re going to apply the California laws to it.
If all you’re trying to do is separate it up, then, maybe you set up a Wyoming LLC and you use a land trust. Making sure that you’re using a trust as the owner of the actual LLC. Then, each of the series might be owned either by the parent or by another trust, for example, we probably use a Wyoming statutory trust. What you’re trying to do is make sure that you have arguments not to pay the franchise tax because it’s not actually there and you’re working around it.
In these other states, you’d be a little technical. I know that Utah and Tennessee do have statutes on series LLC, so you could use those. But for two, like you said, I’d probably just do two LLCs. I’d do two LLCs in Tennessee that are owned by the individual. I would assign that interest over to a holding entity. You need to make sure that it’s the individual that owns that LLC to avoid the franchise tax.
Then in Florida, technically I could use the series. I’ll probably use the series in Utah. You have to look at the statute and make sure that we’re not doing anything wrong, but you do have protections on land trust in Florida that perhaps we’ll use the Florida Land Trust for those three in Florida and assign the beneficial interest.
The other issue we encountered all the time was series, and I’m not saying don’t use a series. I’m saying go in with your eyes open. When you use a series LLC, the banks won’t bank the series because there’s nothing filed with the state. So you’re always going to run against that and you’re going to get freaked out because you’re going to have the parent—the main LLC—with all of its series. The series isn’t filed anywhere, and the banks won’t bank them. They want to see it filed with the Secretary of State. They want to see that it actually exists rather than just conjured out of paper.
Again, just being cognizant of these things. The most conservative route is to put each property in its own LLC in the state where that real estate is located and assign those LLCs to a holding LLC.
If there’s any sort of debt, especially in Florida, you’re going to be using a land trust. You could use land trusts at all these as well and get your name off of the public record if you want. With these many properties, I’d probably start considering that for sure. There’s a lot of protection in anonymity, just not letting people see all your properties. That’s our experience.
If you want to learn more, I’ll give you guys a link to come to our Tax & Asset Protection Class. We give about one a month, Clint and I do. There’s one coming up. I’ll make sure that we get that out. It’s absolutely free, so don’t worry. I’ll get you that link before we’re done today. Anything else you want to throw on that one, Jeff?
Jeff: No, it sounds good.
Toby: All right. “Business vehicles—buy or lease? What are the pros and cons? Do trucks and SUVs have an added deduction?” Jeff?
Jeff: I hear more often people suggest that you buy than lease. If you’re buying a truck or an SUV—I’m talking heavy, over 6000-pound truck or SUV—you probably want to buy it to get the deduction in the first year. If you lease it, you’re going to have to just deduct how much your lease payments are each year.
One thing I might suggest, if you’re talking about buying a sedan or coupe and it’s expensive, you may want to lease it instead of buying it. The reason for that is depreciation is limited to sedans, coupes, and vehicles in general under 6000 pounds. You’re limited to how much you’re going to be able to deduct each year. Whereas if you’re leasing it, you can usually deduct the entire lease payment.
Toby: Otherwise, a bigger SUV that doesn’t have the forward seats or large enough bed—I think it’s six feet—if it’s not meeting some of the exceptions, what is it, $25,000? There’s a max that they get per year.
Jeff: Oh, yes. I think it’s less than that. I want to say $18,000.
Toby: I think it’s because you get the 179 plus you get the […] the five-year, so you’d be right around $25,000, I think. The point is if you have big equipment and you’re using it more than 50% in your business, then we have that conversation.
If you are using your vehicle sparingly, then I’m going to say it’s so much easier just to do the mileage reimbursement. I think we’re at 56¢ right now to do the mileage reimbursement and not worry about tracking actual expenses and trying to prove that you’re using it over 50%.
The problem is if you have a vehicle and you accelerate or if you take depreciation, like depreciate it even above the straight line—we use 179 and we try to take some of that—and then it falls below that 50% threshold is you could have a nasty tax hit of all that ordinary income coming back and being assessed to you because it’s no longer a business asset. They’re going to say, it doesn’t meet it for that five-year test, for example, on cars.
You could end up with an adverse tax consequence by accident, simply because it’s no longer business equipment and it’s personal property, which is non-depreciable. If you’re not using it more than 50%, if you’re using a sedan, then we’re going to have a little bit of a different bit of advice for you.
If you’re doing heavy equipment, heavy trucks, something that’s very specific to your company—construction company, for example—then there’s some big incentives to accelerate that depreciation. You could even do a bonus under this depending on the type of equipment, Jeff?
Toby: This is where I say talk to an advisor. What are the pros and cons? If you’re doing a lease, you get to write off the lease payment that’s attributed to the business. If you’re doing 60:40, personal versus business, you can write off 40% of the lease in any of the other actual expenses.
If you’re buying gas and things like that for the year, you could reimburse yourself 40% of all those costs. If you don’t want to deal with that nonsense, just do the mileage reimbursement. Personally, I think that the easiest way to go is to get MileIQ and do 56¢ a mile. Hopefully, we answered that one. Do you have anything else you want to throw out?
Jeff: No, I don’t have anything.
Toby: How often do you get asked to do that analysis and the vehicle is actually being used enough in the business to make it work?
Jeff: Unfortunately, we usually see it happen after they’ve already purchased the vehicle. So, we really don’t get the chance to do the analysis that often. Unfortunately, most of these vehicles we’re told are 100% business use. We don’t know the real breakdown of what the usage is.
Toby: Could the individual just sell it to the business under those circumstances?
Jeff: They could actually just contribute it to the business and make it an asset of the business. If they do that, they probably want to retitle a vehicle to the business.
Toby: The one side of this that I’ve never really liked is that once the property is in that business, anything that that vehicle does is going to be attributed to the business. If you have a business that has some cash or some assets in it, you’re bringing in some more liability there. Even if it’s for personal use, it doesn’t matter. They’re going to sue the business.
I’ve seen these on a few occasions where one of the family members was using them. It doesn’t matter, the business gets sued because it’s being attributed as a business vehicle being owned by the business.
The other side is the insurance tends to be more. Make sure that you’re actually asking your insurance whether or not you’re going to need a commercial policy if the vehicle is held in the name of the business. You might be surprised to find out that it’s a little bit of an increase that you weren’t expecting. In which case, it is sometimes easier just to keep it personal and reimburse the mileage.
Question and answer, let’s see. A lot of questions. They’re just busting through them because we have many folks on here.
Somebody says, “I’m currently holding property in Florida Land Trust and myself as a beneficiary. I want to change the beneficiary to Florida LLC with myself as a manager and an irrevocable grantor trust set up as a spendthrift trust with myself as trustee and my nine-year-old son as a beneficiary only receiving benefit when he turns 25.”
Okay, these are a lot of specific questions. “One LLC for property, do you see any pitfalls with the strategy for asset protection?” Let me unpack this just for a second. This is basically what’s going on. You got real estate and you’re concerned about somebody taking it or taking assets from you that you want to make sure it goes to your child. You want to get it out of your estate, I’m assuming. Usually, people that are over, let’s say $25 million, that are married, they’re looking at substantial estate taxes, so they start getting rid of stuff ahead of time.
If you’re giving an asset to a minor, you can do so in a uniform gift to minors account. You could do a custodial account on some occasions, but it’s going to be their asset when they hit 18.
If we want to protect them and not let them have access to it, you’re going to have to use the trust. The irrevocable trust is one route to go where you’re giving it to that individual. Then, you’re either filing your tax return for your gift or you’re going underneath the annual limitation, which I think is $15,000 this year for a spouse to give to a child?
Toby: So, you get into that. You just have to worry about the gifting. Gifting, we can give up at $11.8 million?
Jeff: Right. That’s each parent.
Toby: Yeah, each parent. You could gift it, get it out of your estate, and get it to your son as a beneficiary. You can still put a restriction. You could say, hey, you have access at 25 so long have you graduated from college, gainfully employed, and not on substances, or whatever it is. You can put some wiggle room in there to make sure that you don’t give somebody who might not be ready for it a whole bunch of cash. But you can absolutely do it.
Sorry, that was a long question in the chat. It wasn’t easy.
“I’m in the process of selling my home and looking to use the capital gains to purchase an investment property in an OZ—Opportunity Zone.” I’m assuming in Illinois, “What things do I need to consider prior to closing? How should I apply those funds when I find a property whether rehab, land, or an operational property? Do I need to use the funds within a specific period of time?” Jeff, what say you?
Jeff: I know he said he’s selling his home, I’m assuming that’s a primary residence. We got to make sure we’re considering the 121 Exclusion, which would allow him to exclude up to a $500,000 of gain.
Now, if it’s a second home or he’s got more than $500,000, he needs to set up the qualified opportunity fund within the next 180 days so he can invest in that fund. Now, I believe the property doesn’t have to be purchased until it’s another 180 days.
Toby: Yeah. It has to go into the opportunity zone fund within 180 days of the taxable event or January 1, if you’re not in control of the transaction.
I think he would have 180 days from the date of the sale if you own the capital gains, so you can defer it. You put it into the fund, then the fund has to spend a percentage—I think it’s 90% of its money—on opportunity zone property. Which usually, you’re setting up another entity that’s going to buy land that’s going to be developed. You’re going to have some of it in cash, some of it in land, and you’re going to use the cash set aside on that property.
What you’re doing is you’re deferring your tax for five years at this point. You’re going to get a five-year deferral on the gain. The only reason you would do this is because you think that the opportunity zone is going to get huge. Then after 10 years, you don’t have to worry about the gain until about 2045 where you make a complete step up.
I look at this and I read it the same way you did. I said, oh, you’re home? I’m thinking, first off, it’s real estate 1031 Exchange, 121 Exclusions are sitting here, why wouldn’t we just use that and exclude a bunch of gains? The only time you wouldn’t is if there’s non-qualified use of that property or you have depreciation on that property that you can’t get rid of under 121. In which case, I’m wondering whether they would not just convert it into an investment property, qualify under 1031, just 1031 it into more investment property, and never pay tax.
I’m with you. I’m thinking that they see the opportunity zone and they’re thinking, this is really good. I really want to get into this, without really thinking you’re going to pay tax on this in five years. You’re doing this because you’re not going to pay tax on something after 10 years if it grows in value, and you’re going to have about a 20-year window of gain that you’re not going to have to pay tax on when we get to 2045.
Again, I think you’d end up with about 25 years of growth. I’m kind of looking at it and going, what should I be considering? Whether you should be doing that at all because opportunity zones are a pain in the butt. There are a bunch of other rules. You have to use the money to improve the property. You’re going to have to increase whatever the improvement basis on that property is, you’re going to have to improve it by at least what it’s worth. It can be a little frustrating and you have to tax it.
You’re almost always better off doing the 121 Exclusion where you’ll never have to worry about it ever again, or 1031 Exchange where you could keep 1031 Exchanging and never pay tax on that revenue.
Jeff: One thing that’s always bothered me about the OZ is it requires you to put most of your capital gain into the OZ. However, there’s a tax coming down the road in a few years. You said it was five years and you have to pay 85% of the tax.
Toby: What if they increase the capital gains tax, right?
Jeff: Yeah, are you still going to have any cash left that you can invest in […] or are you going to have cash left to pay the tax on this property that you sold?
Toby: Very real issue. I don’t think about that much and I don’t think a lot of people think about the fact that they have to be ready to pay the tax. It’s not like you can just sit there and put the money aside. If you do, it’s not going to be qualified for the exclusion, you’re going to pay tax on it right away.
Again, I’m not a big fan of Opportunity Zones. Some people are, some people think that it’s the Second Coming, but I’ve not seen one really used effectively. It’s not getting us out of pain. I think a lot of people are going to be surprised when they have $1 million of capital gains, especially if all of a sudden capital gains are at the highest bracket. They’re not going to be too pleased.
Either way, I think that they’re usually not prepared for the fact that they do get that tax hit. They do get a step-up on the basis of 10%, so they’re only going to pay 90% of the gain. Again, you’re still paying tax on it.
All right. “Hi, I’m the personal representative of my brother’s estate and I’m receiving the money from a Merrill Lynch retirement account to be deposited into the estate account. Is it better for the estate to pay the tax on the money before distributing it to the heirs, or distributing the money and letting the heirs of the estate be responsible for remitting the taxes? Also, what is the effective tax rate under each scenario?” What do you think of this?
Jeff: Well, the first thing I noticed was they were receiving money from the Merrill Lynch retirement account. Those accounts usually have direct beneficiaries. That money should actually be distributed by Merrill Lynch to the beneficiaries unless they didn’t establish a beneficiary.
Toby: Yeah. Let’s assume that the brother left the contingent beneficiary as the living trust to go there. They didn’t leave it to anybody in particular because you’re right, if it’s a spouse, you would just roll it into an account—the spousal account, right?
Jeff: My beneficiaries are for my sons.
Toby: Your sons can’t stretch it anymore under the SECURE Act, right? Do your kids have to distribute that money within 10 years? The spouse can put it out over their lifetime?
Toby: This is the brother and I don’t know who the heirs are, but if there is a spouse and that is something we want to do a quick timeout and say, hey, is that the spouse there? If not, can we still roll it to the spouse? I believe you still can.
Even if the trust takes the funds, the rules are such that it’s the life expectancy of the eldest trust beneficiary that rules for the minimum distributions or 10 years, whichever is less. I would not be paying tax on this from the estate, I’d be rolling it to somebody else to put it into their account to pay tax. They could be looking at paying tax over the next 10 years, just take out distributions, and that’s going to be the cleanest. That’s the best way to do it. Or they could just wait until year 10, just pay up, and take a big hit.
Jeff: Let’s assume this is a Merrill Lynch brokerage account that has cash and alpha securities. They’re sending the cash to the estate. The estate would only pay taxes on income-producing property after your brother’s death. As far as who pays the taxes, beneficiaries or the estate, if there is no income-producing property, there is no tax unless your estate exceeds that $11.8 million. There’s not even a requirement to file that estate tax return.
Toby: Is this where we could do some income with respect to a decedent though? If in that year we wanted to take some of the distribution out, make it into cash, and give it to him, depending on what the decedent’s tax situation is looking like if they had maybe some unused losses?
Jeff: Typically, you can only do that with income that was earned by the decedent before their death by paying after their death.
Toby: I’m just wondering, can you do that with any of the retirement accounts?
Toby: The other route is if it says retirement account but it’s not, let’s just assume that this is not an IRA, that it was just money put aside or a savings account. Like you said, normally, if it’s an IRA, 401(k), pension plan, 403(b), there’s a named beneficiary on it. It’s usually going to be a spouse and then kids, or spouse and then trust. Let’s assume that this is not actually a retirement account, there’s no named beneficiary. It’s in the trust or you’re handling it as an estate.
Then, there was a step up on the basis where you’re not going to have any tax. The only taxes that I’d be worried about in this scenario, depending on the amount, is there’s going to be a federal estate tax, which is going to kick in after $11.8 million. Depending on the state that they passed in, there could be estate taxes, and depending on who the beneficiary is, there are a handful of states where there’s an inheritance tax. It’s really facts specific to your situation.
That’s why you’re going to actually talk to a professional trustee, you could talk to an attorney, and you can talk to an accountant. Probably, the accountant and the professional trustee because you’re looking at saying, hey, I want to see what the issues are for me as to how I should distribute these funds and making sure that you’re taking the least bite out of it from tax time.
Somebody says, “This has happened to me. My spouse passed away and Edward Jones rolled it into a decedent IRA. I can withdraw the money because he was older than 59 ½. I have to pay income taxes on the money I withdraw.” Yeah, I’m sure you can stretch it. Thank you for sharing that. I’m sure you could stretch that out over your lifetime too.
The penalty because they’ve already hit it. They don’t hit you with the 10% penalty. You can take that withdrawal whenever you want, but you pay the tax on it when you withdraw.
I love these types of questions because they bring up a lot of issues. Everybody realizes, wait a second, you have some choices here. There’s a lot of little nuances. Just make sure that you’re talking to someone who understands the nuances.
Jeff: This is a really common misconception that I have $1 million in my bank, I die, and my kids inherit it. Are they going to have to pay taxes on it? The answer is usually no. Unless it’s a very high net worth estate that we’re talking about.
Toby: Unless you’re in Oregon. I think they have a million-dollar estate tax exclusion. Yeah, so there’s going to be that side to it. For the most part, there’s not a lot of states that have a low estate tax. I think Oregon’s the worst. Inheritance tax might kick in, but again, you just check with somebody in your state.
Is the step-up on basis limited to 10%? Step-up, as it sits right now, is 100%. You can get a step-up and basis and that’s for the tax hit. Let’s say I had a bunch of real estate. My basis was $1 million, it was worth $5 million, and I passed away. Depending on what state you live in, it could be 100% even if you have a surviving spouse.
Let’s say you’re in California with a surviving spouse, community property steps up to $5 million. The spouse could sell the property tomorrow and have no federal income taxes. That doesn’t mean that they don’t have an estate tax. I think California follows the Fed, there wouldn’t be any estate tax. For the most part, you’re going to get away really well if you’re in a community property state, even in a non-community property state. There are four states now that have these kinds of funky trusts that you could do, but you’re still going to get at least half a step up.
If parents pass away, leave assets to their kids. The basis of their capital assets will step up to its fair market value on the date of passing, which is extremely effective. But it is something that Biden’s mentioned is on the chopping block, though I can’t see it. Again, those are red herrings to get people to negotiate. I can’t see that.
It’s like you would run out of town pretty quick if you start messing with 1031 Exchange as a step-up in basis. There are just too many people that have their wealth tied up in real estate that would not stand for it. Well, anything else on that one, Jeff?
To whoever wrote this, by the way, feel free to reach out to us. I know this stuff is tough. When you lose somebody, especially a sibling, it is confusing and you’re going to get lots of weird advice. Some people have a dog in the fight. You can always reach out and just get some 10,000-foot view advice from folks that don’t have an interest in it.
All right, aba.link/tap17. If you would like to go to the Tax & Asset Protection event, it is on July 17th. It’s going to be from 9:00 AM to 5:00 PM Pacific Standard Time. Clint and I will be teaching, I believe, and it’s free. Feel free to come on out. Clint does a really good job of breaking down the anonymity side. It’s having protection by not letting people see your stuff.
When I say people can’t see your stuff, that doesn’t mean you’re hiding it from the IRS. It doesn’t mean you’re hiding it from banks. It means that from a public record standpoint, somebody can’t just go find all your properties and say, aha, this is what Jeff owns. He’s that guy that rear-ended me and it didn’t really bother me. But now, I think my back really hurts. I think he’s got something to lose. That’s what you don’t want.
Or you get into a car accident. You make that fatal mistake of admitting that you’re a doctor when you’re talking to them. Oh, I’m a doctor. Don’t ever say that. Just saying, we see it. That was actually the number one issue from an insurance gal that runs an insurance office. She goes, Just tell all your doctor clients, don’t try to be so helpful during car accidents, they get themselves in more trouble by saying that their doctors and then the lawyers are all over them.
“I have an S-corp and need an office space large enough to shoot video. How can I rent a privately owned house that I also live in and deduct a portion of the rent for office purposes? More specifically, is it legal for the homeowner to get my company and invoice for a portion of the rent?” What say you, Jeff?
Jeff: Well, the one thing you don’t want to do is invoice your S-corp for the rent. That’s going to generate income in your name. That’s not a good situation.
Toby: An exception to that.
Jeff: What I was going to say was instead of sending them an invoice for rent, I would have that S corporation reimburse me for the office space. You could do that all day long. It’s not income to you, but it is deductible to your S-corp.
Toby: Great point. There’s one other side to that, Section 280A. This is actually what the private letter ruling was specifically on when somebody rented their house to their S-corp for video. I believe it was a video. She was at our party, but you could absolutely do it. But 14 days or less, it’s Section 280A.
You could rent to the company and as long as it’s 14 days or less total days rented. You do not have to report the income, recognize the income, or anything. If you’re above 14 days, in other words, you’re not going to be shooting every week, I’m with Jeff. What you’re going to do is you’re going to look at your net usable square feet. We’re not going to use just square footage, you’re going to use your net usable square footage.
You’re going to remove bathrooms, some of the hallways—depending on whether it’s non-usable space—measure it out, and we’re going to figure out what that ratio is. If that doesn’t work, then we’re going to look at the number of rooms in the property and we’re going to find out what that ratio is that you’re using. That will allow you to reimburse.
This is what’s cool. When you do what Jeff said, it has to be an S-corp, a C-corp, or an LLC taxed as an S-corp or C-corp. When you have an accountable plan, it’s literally free cash. The company is writing it off as an office expense. You don’t have to report it. It’s for the portion of depreciation of property taxes if you have a cleaner of the cleaner bill, any expenses—utilities.
If you’re paying electric, water, gas—all those things, you get to reimburse yourself whatever portion. There’s 20% that you’re using for the studio. That was 20% of all those expenses. It’s not a small amount. That’ll end up being on a typical house, probably $5,000–$6,000 a year. Am I overstating that, Jeff? Is that pretty good?
Jeff: No, I agree. Instead of saying give my company an invoice, I would give my company an expense reimbursement form.
Toby: Very good.
Jeff: […] what exactly you’re being reimbursed with.
Toby: Yeah, you’re doing an expense report. I’m not charging you, I’m asking you to reimburse me because I came out of pocket for that property. Yeah, It’s like Jeff. Look at Jeff, look at his Oval Office. If I needed to use that Oval Office and I said to Jeff, hey, I need to use that. That’s 1 of 20 rooms in his house and 1/20 of all the costs, I should have to reimburse him for.
Jeff, I wish you’re in the Oval Office.
Jeff: I don’t want that job.
Toby: You’d be a pretty good president. All right. “Can I pocket money when I file taxes when there is no profit in the business?”
Jeff: Most times the IRS is only going to refund you money. I’m guessing that’s what they’re talking about.
Toby: I think they’re talking about, “Can I take cash out of it even if there’s no money?” I’m going to say a big, resounding yeah. If it’s your business and you’re running a business, there’s no profit in the business, you can take the cash out.
Jeff: But they say, “when I file taxes when there is no profit with the business.”
Toby: I think what they’re saying is, “Hey, even if I don’t show a paper profit, can I take money out?” The only time you can’t is when you take money in excess of your basis and you’re not at risk for the business.
If you’re an investor and I invest in Jeff’s syndication, we do an apartment building. I’ve got my money back. Now, they start giving me more money because we borrowed against the apartment building and they said, oh, we just got a bunch of cash, we’re going to distribute it out. In that case, I’m going to pay long-term capital gains on whatever portion exceeds what I put into it.
But when I’m a business owner and I’m at risk—I’m on the loans, I’m on the hook—then I can take whatever money I ought to have.
Somebody says, “If I have profit for a business and decide to donate it to the church, do I need to pay taxes?” It depends on the type of business. If it’s in a C-corp, you can give away 25% of your net profit this year.
Jeff: Was it that high?
Toby: It was 25% last year, but that was under the CARES Act. I wonder if they extended it. Otherwise, it’s 10%. But as an individual, you can give away 100% of your adjusted gross income in cash. Give it to your church, and not pay any tax on that.
Hey, speaking of money, just to put this back out there—Infinity Investing. It was the number one bestseller. I don’t know what it is today. It goes on and off for different lists. It was the number one bestseller on three different occasions, on three different lists. It was a book we wrote, published in April, and got a little bit of traction on the third printing, which is pretty neat. Which means that people are good about it. You can see the ratings there—68 ratings. I think it’s more than that now, but we got a lot of five star reviews.
I like it because I wrote it and because it helps you guys be great clients, make you guys make more money, which gives you guys good tax issues. When you’re making lots of money, it’s when you usually get the tax issues. Few people said, “Read it, my son is reading it now. Great book.” Thank you.
Somebody says, “I submitted some questions.” Yeah. Go ahead, Brandon, send it to Patty. I have no idea. I don’t get the Kindle suggestions.
“Great book, Infinity Investing. I recommend it to everyone.” It was published through Forbes. If you see a typo, I’m going to blame them.
Anyway, it’s a good starting point. It’s non BS. It’s very straightforward. Here’s what you do, ABC. It’s because guys like Jeff and I see returns all day long of people that make money and people that lose money. I can predict whether you’re going to make money or lose money with deadly accuracy just by knowing what you’re investing in. What would you say? You bet 99% accuracy, Jeff, now when you see what people are doing or do you think you’re […] less?
Jeff: Well, yeah. Some of it is the effort put into the business. Some of it is what you are investing in, knowledge, and many things. Usually, when you get into things that you don’t know exactly what you’re doing, you’re going to lose money.
Toby: We see a lot of folks that get in. Somebody says, “What are your thoughts on […]? The president loves it. It keeps going up.” It’s not something that sits on our fundamentals. So, Joseph, it’s not something I would invest in individually, just because it’s not what I look for. I look for income-producing companies that have compounders. There are only about 60 companies that we really pay attention to because we’re looking at revenue that they generate, we’re not looking at their growth.
We buy things and hold on to them forever. What we care about is not buying it low, selling at high. We care about the income that it’s producing so you can retire and not worry about the thing going up and down. Anyway, feel free to go peruse.
There are a few folks that are the vine voice, which means that they’re top reviewers and they give us a pretty good straight-up review. I’m thickened skin. You can tell me that I’m ugly and that my book sucks. It doesn’t bother me at all. But if you say, hey, here’s something else I would like. I take that stuff to heart.
When we go and we look at it, we try to make sure that we’re addressing all the issues to make it easy for people to go out there and make some more money. Now, we don’t make anything of you making money. We make money when you have tax issues and asset protection issues. So we like to help you guys keep it and create a legacy […] your taxes.
The next one, “Our solo 401(k) is impacted by the new IRS rules for IRA accounts.”
Jeff: These are primarily two different tax codes—401(k)s versus IRAs are under 401(k). But what usually happens when they come out with new IRS rules, they’re not just for one or the other. There may be rules that impact both and then you just say what the impact is.
Now, I think what they’re talking about is the Securing a Strong Retirement Act, which I believe is still sitting in Congress.
Toby: Well, it passed two years ago.
Jeff: No, it died in the 116th Congress. This isn’t the SECURE Act. This is a new one. This is SECURE 2.0.
Toby: That one hasn’t passed. Yes, you’re right. I’m thinking of the SECURE Act. It was applicable to both—the 10-year rules.
Jeff: When you say the new rules for IRAs, it’s usually new rules for retirement accounts.
Toby: You’re talking about them getting rid of not rolling to Roth IRAs. They’re talking about, you can’t convert to Roth IRAs. Gosh, they have a plethora of things that they’re trying to do. They’re mad at the Roth. They’re dusting off stories from 10 years ago to get mad at people again. We had somebody make $5 billion in a Roth and escape taxation like they would have paid tax on it in the first place.
Guys, when people make billions of dollars in their portfolio, they don’t sell their shares to live. They borrow against their shares to live, wait to die, and basis steps up. They give away most of it during their life to charities, so that when they do occasionally sell off a chunk of stock, they don’t have to pay tax on it.
Again, it was the PayPal guy who made a whole bunch of money in a Roth and they’re still up in arms about it. The IRS went after him, they lost. They were all ticky-tacky. The fact that they bring these things up, I always say like, what would the win have looked like? The guy wouldn’t have sold it. If he did, it would be a minimal tax in the first place.
These folks. It’s not a coincidence that there’s information being linked right now on billionaires and that they’re bringing up these tax proposals at the same time.
Jeff: A lot of these rules are targeted against the exceptions, not to the general population. However, the rules are affecting the general population.
Toby: It’ll be interesting to see who’s willing to actually torch their career over tossing something like a Roth. I just can’t see it. Peter Thiel, original PayPal Mafia, invested in Facebook for 20,000 times return through his Roth IRA after the PayPal payoff.
They bring out those things and play a little bit of class warfare. Rules are the rules. Just play by the rules and don’t begrudge somebody because they had a windfall because they played by the rules. What are the chances of that happening again? Frankly, that money is still going to come out.
Somebody says, “Can you give up your AGI to your own nonprofit?” Yeah, Section 501(c)(3), not a private foundation operating charity.
“What if you already have a donor-advised fund? Can you transfer that to your nonprofit as well if they allow you to? We have a donor-advised fund at Anderson that we’re rolling out.” Yes, you will be able to do it. That’s the exact reason a lot of them will restrict and say, hey, it’s only certain charities, a lot of people use exceptions and things like that. They don’t like giving it to churches.
“How many properties should one have before considering cost segregation?”
Jeff: One property is enough for me.
Toby: It’s just a different way of treating your property.
Jeff: The other side of that is not how many properties you have, but are you able to take the deductions you would generate from the cost segregation?
Toby: Do you have passive income? If you have passive income, one property could save you from paying tax on that. Is it worth it? You just run the numbers, calculate, calculate, calculate.
Jeff: I agree.
Toby: All right. We have some more questions. Wow, Ian, Christos, Eliot, Dana—all these guys are hammering away. Even Patty, I see her name in there. They have answered 131 written questions. These guys are rambling through it. Wow, that is crazy. I’m not going to have to answer a bunch.
There’s somebody saying, “Roth conversion, taxable event reporting it on my 1040.” Here’s one thing, Richard, when you think about doing a Roth conversion, here’s the general rule, are you ready? If your taxes are high now compared to what it will be when you retire, in other words, if you think your taxes are going to go down when you retire, do not do a conversion.
If you think that your taxes are going to go up when you retire, do the conversion. I’ll just tell you that the average tax rate goes down when you retire. That’s it, just consider that.
If you’re in a really high tax bracket, don’t convert. If you’re in a lower tax bracket, convert. If you think you have the next greatest investment that’s maybe on an over-the-counter, maybe you’re taking a company public or something, you can do that. I’d have to think about that. If you think you got a great investment, then maybe. Otherwise, it almost never makes sense.
That’s why kids are so awesome to do a Roth because it’s almost always 0%, right? They pay very little in tax.
“I am buying a beach property in a month and planning on short-term renting it for the summer via Airbnb. It has a separate garage with plumbing, I could live in it all year, but would probably move back to the house.”
I think they’re talking about the apartment there or the garage. “What’s my best tax structure options?” What do you say?
Jeff: I say in a situation like this, the 14-day rule bites you in both directions. There are two 14-day rules. If you rent it out for more than 14 days, it becomes income. Fourteen days or less, that rent is not income to you. It’s a great rule that I love.
Toby: What if they’re doing short-term for the summer? It sounds like it’s multiple months. I don’t think we’re going to be Section 280A here.
Jeff: The other side of it, if you’re living in it for more than 14 days or 10% of the amount of time you rent it out, then your losses are limited to how much you make.
Toby: If you live in a portion of it and you lease out a portion of it, you’re going to get an aggregate portion of the depreciation for the whole amount. You’re going to have to figure out what portion of the house you’re using it for. You’re actually going to have three things going on.
You have use of a portion of it, you have the rest of it, and you have the amount of time on each that you’re using it for personal use versus it’s being used for investment purposes. Just because we like to be complicated because you’re doing short-term rental, the question is whether it’s been seven days or less, it’s going on Schedule C. Now, we have a whole other bevy of issues.
The best tax structure under that circumstance would normally be to have the C-corp lease the property from an LLC, so you’d put your property in an LLC. Then, you would lease it to the corporation to do the short-term rentals. You would just determine how much of that house is being used as an investment property.
Jeff: With it only being rented in the summer and living in it the other nine months of the year?
Toby: You’re not going to get much now.
Jeff: No. If you lived in a separate garage, I’m assuming the apartment over the garage or something like that, you could probably write off the whole year-long worth of rent for the house since you’re not living in there.
Toby: What you have is the separate garage. That portion would be 100% personal use. The house would be 912. Assuming the summer’s three months, whatever it’s going to be, but let’s just say it’s three months. Then, 3/4 of the year would be for personal use.
Jeff: Well, I’m assuming here he’s also saying he could live in the garage all year long.
Toby: They would probably move back into the house. If you stayed out of the house, if you stayed out of the main house, just lived in the garage, and that house was made available for the full year, then you could take the depreciation for the full year, in which case what I probably do is lease it. I would lease it to the corporation and just have it on an annual lease. The corporation would turn around and lease it short, kind of like a Regus or WeWork.
What it basically gets to is doing some calculations again to determine whether it makes sense for you to stay out of that house because you’re going to lose a lot of your depreciation by moving out of the house. The question is, does it really matter?
Let’s see how much you make during the summer. Are there ways to get that money tax-free because we have the corporation in the mix? That may make it a moot point you don’t care about so much of the depreciation.
Jeff: It’s possible you could just run out for two weeks out of the year. Make some pretty good money for a summer beach house and not pay taxes on the money.
Toby: Just say, hey, maybe it’s not worth it. Let’s see, “If I decide not to buy a replacement property through a 1031 Exchange, that’ll end up paying capital gains. But will doing owner financing help to reduce capital gains tax?”
Jeff: I actually like this question because let’s say we have blown 1031, 1031 is not going to happen. If you’re financing a sale of your property, you basically have an installment sale. Since it was eligible for 1041, it should be eligible for installment sale treatment.
You’ll only recognize the income as it comes in, the capital gain that is. If there’s any depreciation recapture, that might have to be recognized in the initial year. Otherwise, that capital gain is going to be recognized.
Toby: The recapture, do you capture that over the same term of the installment sale, or do you have to recognize that early? Because you haven’t received it yet.
Jeff: Well, it’s true. It’s going to be limited to your capital gain anyway.
Toby: I thought it was spread out over time.
Jeff: It might be.
Toby: You have different things built into owner financing. You have return on your basis, which is zero tax. You have interest, which is going to be ordinary tax. You’re going to have capital gains, which depending on how long you held it is going to be long-term capital gains, more than likely. You’re going to have the recapture on the depreciation you took.
If you did a 1031 Exchange, you avoid any of that. If you spread it out over a period of years, then you’re recognizing it over many tax years, unless you opt-out. Some people choose to just, hey, I’ll pay the tax now and then I’ll just recognize all that revenue. With the exception of the interest, I think you have to pay tax on everything else. You wouldn’t have to worry about it. Kind of fun.
Every time we look at these, Jeff and I see the questions the day that we’re doing this and we’re looking at it, sometimes we’re like, oh my God. These are all like it’s not what it seems questions today. It just seems so interesting.
All right. If you have other questions, you can always jump on to the aba.link/youtube. There are lots of cool videos there. Lots of cool ones. You got Coffee with Carl, you got me, you got PA, and you got Clint on there from time to time. We got Michael, we got the whole clan constantly putting up content, if you like this type of mind food. If you don’t, then it definitely won’t be for you.
All right, we have a couple more questions and then we’ll be done for today. I’m not going to answer the other Q&A. I can see we are now up to 157 questions answered in writing, 12 that are others, and 9 that are still open.
Go to Anderson Advisors Podcast, you can see the replay. If it’s awesome, you can always go back. If you like tax stuff, you like the banter, this is fun, shoot on over to it. You can see there are other podcasts too. You can see lots of different ones that are there. You see Clint doing them, I do them. The Tax Tuesdays, we also put the Tax Tuesdays in your Platinum portal. I think that they’re always going to be sitting in there if you want to go get your fill.
Somebody says, “Can I use my LLC to get into a year lease for an apartment?” Absolutely, a lot of people do that. The question is whether they’re going to have you as a personal guarantor. It’s going to depend on the length of time that LLC has been alive.
Somebody else said, “Hey, did we already hit the questions on?” I think I still have the S-corp in the office space. Yes, we answered that. You’ll get the recording. I would go through it and fast forward, you’ll find it. We always display the question when we’re doing them.
If you have questions, by all means, shoot it to email@example.com. We’ll make sure that we’re getting them. For those of you who are waiting on some answers, I see a whole bunch of you guys that are still going back and forth with the accountants. I’m not going to end the session and kick you off. It will continue on so you’ll be able to get your answers even though the video and audio will go mute.
Thank you to Eliott, to Ian, to Dana. Gosh, we have such a cool crew that’s willing to do this. To Matthew, Jeff, always thank you, sir. Dragged you out of your tax den and out of the Oval Office. To Patty, Christos, Trisha. I wish I had a video where I could just look at Ian’s face as he reads questions because it’s always fun to see people’s reactions to questions, and Ian has some really good facial expressions.
All right, guys. Have a great one. We’ll see you in two weeks. Throw your questions at us in the meantime. Good luck and God bless. Go out there do some really great things in this country during the summer. We’re all free from the pandemic for the time being. Let’s go out there and kick some tooshies. All right, guys.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.