Ready to join Toby Mathis and Jeff Webb of Anderson Advisors for a fun Tax Tuesday in the middle of tax season? Do you have a tax question? Submit it to [email protected].
- Do I have to 1099 a hard money lender for interest payments? No, hard money is for a property mortgage, so use Form 1098
- How do I list a shareholder on my 1120, if I am a C Corp? Ignore the LLC and remove it; list yourself as a shareholder because you’re the owner
- If 501(c)(3) provides housing for veterans, can I hold homes in separate LLCs under the non-profit? Even if your 501(c)(3) provides housing, it doesn’t need to own the property; you could own houses in a for-profit LLC and rent or give them to the 501(c)(3)
- What is an RMD? Required minimum distribution for deferred retirement account; you put money in tax deferred and write it off against your taxes
- Are RMDs added to adjusted gross income? Yes, they are taxable as retirement income; give RMD directly to charity to not make your social security more taxable
- Who can open up an HSA account that allows us to invest proceeds into alternative investments in real estate notes? You can go to almost any bank, including Mellon
- What things can be listed as a liability for business? Any loans – anything you owe to a third party or shareholder
- How do I file my C Corp with 50/50 partnership? C Corp files Form 1120; if you haven’t made money yet, it’ll all be expenses – offset losses to not pay tax in the future
- With the new Schedule A rules, I’ve heard that since mortgage interest probably isn’t usable for most of us, is HELOC interest deductible elsewhere? Mortgage interest is still deductible up to $750,000, if used for acquisition indebtedness
- Any changes in how donations to charities are handled in 2019 compared to 2018? Same rules apply; 60% of adjusted gross income can be offset on Schedule A
- I don’t want to take profit from a house. Can I transfer the house to another LLC, and the other house can do the lending or funding? Yes, you can always borrow money on a piece of property without having to trigger a tax
- Where do I write fees for LLC state renewal and registration fees on my tax form? There’s a couple places; on the taxes and licenses line, or in other deductions
- Are there opportunity zone funds to invest in with similar tax deferral? Absolutely, that’s what big brokerage houses are doing; defer your money
- I hold a recreational property in LLC. Can I claim special assessments for the property as a loss against sources of income outside the LLC? It depends on how that LLC is taxed
- On Form 5500, do you not need to file it if it’s less than $250,000? If you have a retirement plan less than $250,000, married and filing jointly, don’t worry about it
- Formed an LLC in Wyoming, taxed as a partnership, I have no activities or expenses besides formation cost. Do I need to file the tax as a partnership? Yes, but you don’t have to file a partnership return, if there was no income or expenses to report
- If Airplane A leaves New York, heading west at 11 a.m. EST and Plane B leaves San Francisco at 6 a.m. PST, can I get an extension on filing for my corporation until Oct. 15? No, but if it’s an S Corp, you get until Sept. 15; if it’s a C Corp, it depends on its tax years
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Full Episode Transcript:
Toby: Alright guys, this is Toby Mathis and we’re in for Tax Tuesday joined by Jeff Webb.... Read Full Transcript
Jeff: Good to be here.
Toby: I want to make sure that everything sounds good. I already got a couple who’s saying it sounds better. I don’t know what’s going on. We had too many people on last week I think, so we got to tell people to quit showing up. I’m just teasing. We have a fun Tax Tuesday in the middle tax season. I’m going to give you a before and after of Jeff Webb. Last year before tax season here, I’m going to give you guys what he looked like. Then by the end of tax season, you saw what happened. I don’t know what that’s called, horrible. There you go, now he’s looking good. What do we got? We got Tax Tuesday rules, we got all sorts of fun stuff to do. I’m sorry can’t help it.
We’re going to ask questions live, we’re going to go through them, and we’re going to make sure that we’re jumping in to the questions. You guys also emailed. If you ask long questions, send in via [email protected] If you need a very detailed response, you need to become a platinum or tax client. This is fun, fast, and educational. We want to get back and help educate. These are questions for not just your benefit, but for everybody’s benefit. That’s what we’re looking at. In fact, we just got a long one in. Jeff loves reading unless they’re coming through. I can’t do two things at once.
Jeff: Who knows? I’m not talking right now.
Toby: That’s how it goes. The recording of this webinar, we made everybody archive recordings will be available in the platinum area. I’ll show you where that is towards the end. We make recordings in the podcast. Visit andersonadvisors.com/podcast or go to iTunes or Google Play. Review them while you’re there. For iTunes, just go into iTunes then type in Anderson Business Advisors. That’s what it’ll look like. You can see exactly what the page will look like. There’s the Google Play one. You’re going to see that we put all this stuff in there along with quite a bit of other content. If you like this sort of information, we’ll give you a steady dose. We’ll go through the whole bunch of questions.
Questions we’re going to go over today. I’m just going to start in on them because we got a lot to go through as always. First question, “About my home in 1994. I lived in it as a primary residence until 2012. It is now a second home. What are the rules for capital gains if I sell? Do I have to 1099 a hard money lender for interest payments? How do I list shareholders on my Form 1120 if I’m an LLC taxed as a C Corp?” I’ll explain, I’ll break that one down. “Then in a 501(c)(3),” that’s a nonprofit charity, “providing housing for veterans. Can I still hold homes in a separate LLC under the nonprofit?” It sounds like you have houses that you want to provide. We’ll go over that. “Are RMDs added to adjusted gross income? Will they increase as I get older?” We’re going to go through all of those plus a whole bunch that you got, that you’re asking, and we’ll get into all of these other ones. Let’s do the first one.
“I bought a home in 1994 and lived in it as a primary residence until 2012. It is now a second home.” It’s not your primary residence. “What are the rules for capital gains if I sell?” What do you think there, Jeff?
Jeff: Normally, we would want it to fall under the primary home exclusion, but that says you have to have lived in it for two out of the last five years. Having been your primary home to the last five years. It fails in that test. We really need to look at some other opportunities.
Toby: Yeah. If you would have sold it in 2015, you would have had a big old exclusion. You wouldn’t have paid tax on the capital gains, single $250,000, married filing jointly would have $500,000. You waited too long. It’s now just a regular old capital asset and it’s subject to long term capital gains if you sell it. That’s if you just sell it as it is. Long term capital gains will be either 0%, 15%, or 20%, depending on how much you make. It could go as high as 23.8% if you have the net investment income tax.
Toby: Whenever I see this, I always look and say, “How much can are we talking about?” If it’s $100,000, then you’re probably just going to sell it, you’re not going to whine and worry about it. But if it’s a lot, then you either make sure that you’re living in it for two out of the last five years, and then you sell it, or you convert it into an investment property. You put somebody in it, and then you sell it under 1031 exchange. You exchange it for more real estate. If it’s a second home and you’re like, “Hey, it’s gone up a lot. I like some rental properties. I want to buy an apartment building, some condos, or a mobile home, or whatever,” you could 1031 exchange that second home but you have to make it into an investment property. To make it into an investment property, how long do you have to rent it for? 14 days?
Jeff: Not very long. Really, determining if it’s an investment property or not is what you’re using it for. Using it as a second home may disqualify it. That may make it a personal.
Toby: Yeah. Well it’s definitely right now a second house. You have to convert it to an investment property. The question is, I may have to have to rent it to somebody, and then how long do I have to rent it for? Realistically, you could do that pretty quick. Technically, you don’t have to rent it, you just have to make it available for rental. I think you’d probably get scrutinized when it rents.
Jeff: You really need a personal use of that house.
Toby: I would make sure that I’m renting it probably for six months, and then I’d sell it under a 1031 exchange. What we look at is somebody says, “Is an intent the key?” Yes, you can prove the intent. In other words, if I list that thing to make it available as an investment property, I showed that I listed it for six months, I could not find a renter—the market was just crud or whatever—but I did a good faith effort, maybe I took some applications in, just nobody qualified, and then I sold it, you win. It’s an investment property, but you’re probably going to get scrutinized because you don’t have any income from it. You can still win. It’s just I try to avoid having any issues at all.
The other one you could do is you can sell it under installment sale to an S Corp. Increase its basis. It’s basically getting installment payments which means part of it, we return the capital, taxed at zero, part of it is going to be capital gains taxed at 0%, 15%, or 20%, depending on your income, and part of it will be interest. You spread that out. You can do that over 20 years, spread that puppy out, not get a big tax hit, and step up the basis. Before everybody says, “Oh my God, he’s selling real estate in an S Corp,” Yeah, I sure did. This is one of the few times that I would do it.
What we’re doing is we want a new basis so we can depreciate that thing. In the case of an S Corp like this, if you’re going to keep it and rent it, and you want to get some of the money out. Different strokes, different folks on this, but it really depends on how much there is. If it’s a small amount, I wouldn’t mess with any of it. If it’s $200,000-$300,000 then now I’m going to do something to try to avoid the tax.
Jeff: Yeah, small amount, you’re going to be subject to the long term capital gains. That’s probably not going to be that much tax.
Toby: Yeah and it depends on what your taxable income is. If you’re in the lower tax brackets, you don’t really care. Pay a little tax, c’est la vie. They always take a piece. Second question, “Do I have to 1099 a hard money lender for interest payments?”
Jeff: Well, we’re assuming hard money is for a property be considered a mortgage. In that case, the hard money lender should be 1098. Can you say 1098-ing?
Toby: Yeah, 1098-ing the person has a…
Jeff: The person is paying.
Toby: Yeah. Do you have to 1099 your hard money lender? No, you shouldn’t. Here’s another fun one, “How do I list shareholder on my 1120 if I am an LLC taxed as a C Corp?” I love this question for the fact that, it lets me get on my soapbox and again, gripe about the fact that people, especially professionals, don’t understand what an LLC is. LLC is ignored for tax purposes. It’s a creature of state law. You say, “Hey IRS, this is what I am,” and so what you’re really saying is, “How do I list a shareholder on my 1120 if I am a C Corp? You just ignore the LLC and just remove it and the answer is, you’re going to list yourself as a shareholder because you’re the owner. That’s it.
Jeff: That’s it.
Toby: That was too easy. Jeff, unless you want to make it more difficult.
Jeff: No, not today.
Toby: I don’t want to make it more difficult, I like easy. “In a 501(c)(3) providing housing for veterans,” first off thank you for doing that. Second off, 501(c)(3) are awesome, “can I still hold homes in separate LLCs under the nonprofit?” I know this doesn’t look like much of a tax question, but it’s really important. What it shows is actually it gives you the opportunity to add some color to this.
First off, providing housing for veterans does not mean you need to own the house. You could actually go out there and just facilitate other homes, go out there, rent other houses, and make them available to veterans at discounts, or working with third parties. Just because your 501(c)(3) is providing housing for veterans, does not mean it needs to own the property. You could actually own houses in a for-profit LLC and rent it to the 501(c)(3), or just give it to them if you really felt like it and say, “Hey, really what I’m doing is they were treated as being rented in contributions to the 501(c)(3) in the amount of the lease of the fair market lease,” so it’s like you’re not doing any favors by saying it’s zero. You would just say, “Hey, I’m going to charge you rent,” and you’re treating it like you’re giving it the rent. It pays you then you turn around and give it, which is perfectly fine. You can certainly do that.
You could actually just charge enough rent so that you’re offsetting the depreciation. If it’s below fair market value, then you’d have that same calculation where you’d say, “Hey,” it’s like the 501(c)(3) paid you, the difference between what you’re charging it and the fair market value, and you’re making a contribution to the 501(c)(3).” The last one is what’s really your question is about which is, “Hey, if my 501(c)(3) buys properties, or owns property, or I give it a bunch of properties, can that 501(c)(3) have LLCs underneath it?” and the answer is, yes.
If you remember, LLCs don’t exist to the IRS. We tell the IRS what it is. Under those LLCs, we would probably say ignore it, and treat it as though it’s in the 501(c)(3). That’s exactly what it would be treated as. It would just be carried as an asset on the 501(c)(3). The LLCs would be set up and disregarded, so there’s liability protection. Believe it or not, you still have to be aware that even if your nonprofit owns a property, it can get sued just as easy as if it was in a for-profit.
Jeff: You would actually recommend that they do this if they’re going to have multiple properties?
Toby: Yeah, you would absolutely. You’re going to have multiple properties in a 501(c)(3), isolate the property because you still have a liability. In fact, that’s one of the few ways to get that liability inside that into that 501(c)(3). Otherwise, 501(c)(3) are awesome, because they’re stuck up from you and nobody can take it away from you. They can fight with you about it, but that’s about it. You don’t own it. That’s why I love them, and you get a tax deduction for whatever money to put in.
This is one of the fun ones is when somebody is flipping houses and giving it away, or flipping houses and giving it to charity, or fixing it up for veterans or whatnot, I sometimes look and I say, “You know, you’re never really going to get that money, it might be added to basis.” Let’s say I bought a house for $50,000 and I put $50,000 into it. I can’t write off the $50,000 I put into it, nor can I write off the $50,000 that I purchased. Those are both added basis. I have $100,000 basis. I’m much better off giving my 501(c)(3) $100,000 and having it go out when I get a full write off. Let it go out and buy the property and fix it up. You could do that inside of an LLC. I think I just heard the Koosh of some brands hopping, but yes, that’s exactly what you can do. It’s kind of fun.
We got lots of questions. We’ll get to you guys here. “Are required minimum distributions added to adjusted gross income?” Jeff, I’m sorry. I’ve been bombarding you.
Jeff: That’s fine. RMDs are calculated based on your age or if you’re married and have a spousal beneficiary. Your age and your spouse’s age, there’s table set up for it. The way these tables work…
Toby: They’re expecting you to die. They’re saying, “Here’s how long you’re going to last.” It ends up being like, “Well at the beginning it’s 3% or 4% and then…”
Jeff: Yeah. Next thing you know, you’re at 8% or 10%, but the way these tables are set up is if the amount in your retirement doesn’t change and you’re only taking distributions, you’re going to get the same amount every year. However, if you’re taking a distribution and then the next year your account’s worth more, your RMD is going to be a little higher. Usually not substantially more, but…
Toby: Are they added to your adjusted gross income?
Jeff: Yes. They are taxable as retirement income.
Toby: This stinks right? Because then, isn’t that going to make you pay more in your social security?
Jeff: Yes, it will.
Toby: That sucks. You didn’t get a deduction for your social security and then you were smart enough to put money aside. Now you’re going to end up getting hit with more taxes.
Jeff: Yeah. I had to explain that to my mother.
Toby: Write your congressman. How was that explaining that to your mom?
Jeff: I threatened to fire her.
Toby: You can’t fire your mom. That’s just mean.
Jeff: I told her she might need to get another accountant. That does happen. If you have unexpected income whether that’s the RMDs. Typically, it’s not a lot. If it’s $100,000 account balance. You’re only going to see a distribution of $3000-$4000.
Toby: Here’s the thing, it’s required minimum distribution, something to understand about RMD is that, once you’re 70½, you can take the money out. If you need it, you can take more. Let’s say you had a year where you just had a cruddy year, a bunch of losses, or something. Now, it’s time to take your RMD. The only thing you do with RMDs or anything like an IRA or a 401K when you’re taking out those required minimum distributions, if you can contribute that to charity directly without having to recognize it was income first, it’s literally just washed. You don’t have to worry about the 60%.
Toby: You can just give your RMD directly to your charity and boom, now you’re not forcing your social security to be more taxable.
Toby: That one’s free folks. I’ll just give you that one.
Jeff: One of the thing about the RMDs is if you do take a larger distribution in a year, that does not reduce your RMDs in future years. We’ve run across that without people mistakenly thought that.
Toby: By the way, if you don’t take your RMD, they tax you 50% or whatever it would have been. Somebody asked on this precise issue “Is there a way to redefer RMDs or pass it to my spouse?”
Jeff: You can defer your RMD in the very first year you turn 70½. Then you end up having to take two RMDs in the following year.
Toby: Yeah, and then if you pass and it goes to your spouse, then they’re taking it out.
Jeff: They usually continue on whatever the RMD payout was.
Toby: What is an RMD? Somebody is asking what is an RMD. It’s a required minimum distribution for a deferred retirement account. If you have an IRA, or 401K, or a defined benefit plan, and you put money in tax deferred now, in other words, I’m putting money in and I’m writing it off against my taxes. Let’s just use a defined benefit plan. I’m deferring $200,000 this year I don’t have to pay tax on. I’m going to eventually have to recognize that $200,000, but I’m doing it over a long period of time. I have to start taking it when I hit 70½. That first year is going to be around 3% or 4%.
If I have put $200,000 in and it grows at a reasonable rate of interest or whatever, end up with $220,000 in there, I’m going to end up taking probably $8800. That’s how it works. We’ve got a lot of RMD stuff now all of a sudden. I tell you guys what it is and I get 50 questions. “Do you have to get RMD from an annuity?” No. You’re basically looking at the beginning of the year, you’re looking at the value of your account, your age, and you run that calculation. “Can you describe getting an RMD from an inherited IRA?”
Jeff: Those have completely different roles. If it’s a spousal IRA, you usually continue whatever the spouse was doing. They can inherit it.
Toby: In inherited, you’re going to fall into two categories, spousal IRA or another inherited. If it’s your spouse, it’s yours or the decedent’s life expectancy. I believe you can actually stretch it out over yours.
Jeff: I think so.
Toby: I’m going off of complete memory guys, so don’t shoot me on this. If I’m inheriting from somebody that wasn’t my spouse, then it’s going to be five years or the shorter of their life expectancy or my life expectancy if it’s me. If it’s a trust, then it’s the eldest beneficiary’s life expectancy that they use for their required minimum distributions. It gets a little complicated. Somebody says, “I thought you didn’t have to take an RMD from a Roth IRA?”
Jeff: Well, Roth IRA is not a deferred retirement plan.
Toby: We never got a deduction going in.
Jeff: That’s what deferred means, you’re deferring income, you’re not paying tax on it when you put the money in. That’s correct. The Roth IRA is not subject to RMDs.
Toby: Alright, see? We’re useful for something. We got a lot a questions. But before we get on those questions, let’s do a little bit of fun stuff. First off, if you like taxes and you want to learn more, come to TaxWise or for just $197—I’m just going to circle it because I have a pen that writes on my little thingy and I feel like using it—that gets you live stream to all of our events this year. There’s only two more that are going to be live, June and November, but you’ll also get January’s recording. The way you get that is right here or just email in anybody at Anderson and say, “Hey, I want to take advantage of that,” and that’s a two-day TaxWise. The next TaxWise is going to be in June. This can be lots of fun just because I get to teach.
Replay is in your Platinum portal. We’ll also sending out a link for anybody registered, you can redo this one on out. We’ll put these in into bite-sized pieces and put them on the podcasts. Somebody asked. “What is TaxWise?” TaxWise is a two-day tax course. We’ll go over 30 plus specific strategies on tax. If you like tax strategies and you want to learn a whole bunch, then you go to TaxWise. Ask anybody whether they liked it or not.
Jeff: All the clients I’ve talked to that have been to TaxWise have really enjoyed it.
Toby: It’s one of those weird areas, yeah I know you’re just bluffing me here.
Jeff: No. I’m not bluffing.
Toby: We’ve been doing this a long time for over 20 years. This is pretty cool. TaxWise is a culmination of a lot of time spent on that. Basically, what it comes down to is if you spend a little bit of time and we did it. I don’t know if it was with this group where we did the poll question, but people that spent more than about 10 hours, made more than $10,000 in tax. That’s how it works. If you spend a little bit of time on tax, you actually get a return. If you’re not, then don’t do it. You got to be making some money. If you’re making $30,000 a year, there’s not a lot I’m going to be able to show you from a tax standpoint. If you’re making $300,000 a year, maybe a little bit.
Platinum portal, you can ask any question to an attorney. You can ask questions to the accountants in writing. It’s $35 a month and you can ask all the questions you want. You can get on the phone with us and you’re going to get two free tickets to any one of our main four events. I would encourage everybody to go to Tax and Asset Protection. There’s a whole bunch of learning in there. For the questions here, I’m going to start going through all the ones you guys are asking. There’s a ton of them. I have a bunch of ones that you guys have emailed in. There’s a ton of those too. We’re going to get through them.
This is one of the first times in the last two or three months that I feel we’ll actually get through these in a reasonable period of time because usually, we’re just blown up. This one I think you guys are on vacation. You can ask your questions via [email protected] or visit us at Anderson Advisors. You can always go to our podcast. That is enough of that. Now it’s just questions, questions, questions.
I’m going to scroll down here and rather than go through the ones that we have that were emailed in, we’re going to do you guys live first. Somebody asked me to talk about opportunity zones. Yeah, so in a nutshell, all states designated something called a qualified opportunity zone. The treasury approve them. If you type in ‘qualified opportunities zone heat map,’ you’ll see them. They’re neighborhoods that are struggling. If you invest in those, you have to do so through a qualified opportunity zone fund or a qualified opportunity fund. That just is a fancy way of saying an LLC taxes a partnership, an LLC taxes a corporation, a partnership or a corporation. Any of those will work. You have to do a certification when you file a return for the qualified opportunity zone of course. We do set those up. We’re happy to do it.
When you set up an opportunity zone fund, it has to put 90% of its assets owned in qualified opportunity zones. That’s why you have to look and see where they are and what does that mean. It just means that you’re helping out distressed areas by investing. It could be a business, it could be real estate, et cetera. Now, here’s where it gets really interesting. You can take any capital gains and defer it into an opportunity zone. Whereas I usually sell a piece of property and I can 1031 exchange it, or I sell my Bitcoin and I’m going to get nailed with tax, or I sell my second house.
This is a good example because we had that gentleman. I sell my second house and normally I have to pay tax. If I put that into an opportunity zone, I’m deferring it for seven years at this point. I had to hold the opportunity zone property and I could defer that tax up to seven years. I’m only going to pay tax on 85% of it. Just the game. It kind of works like this, I sell a property. I have $1 million in capital gains. I put it on an opportunity zone, seven years later, I’m recognizing instead of the $1 million, I’m only recognizing $850,000 as long term capital gains, but you have to recognize.
Now, the opportunity zone investment, let’s say I’ll put all $1 million in the investment. If I hold that for 10 years, I will not have to pay tax on that. It will be excluded, all of the gain. Again, going back to this, I put $1 million in. Let’s say that I bought a $500,000 piece of property. I put $500,000 into it, so my basis is now $1 million. I have to recognize that $1 million investment by the way. I get to defer that for seven years. Then let’s say that property goes up to $5 million in 20 years and I sell it. I paid zero tax on that. That’s the benefit of the opportunity zone. I don’t want to get too far into that. They’re powerful, but I’d probably 1031 exchange if I’m doing real estate.
“My father was receiving payments from a trust before he passed. I am receiving those payments and I’m told that they will be dividing a distribution this month based on last year’s income. Will I report all the income and get all the current distribution or will this distribution get taxed to me anyway since I am his heir?”
Jeff: You will get a K1 from the trustee of the trust that will tell you what you have to report as tax. Probably not all that distribution is taxable. It’s a good idea to let the trustee tell you what is by giving you that K1.
Toby: Yeah and you’re not going to be liable for the tax on the moneys received by your dad. You file a tax return for the decedent and the final tax return. You’d include that portion of the trust income that was distributed to your father on his final return. You would only report the portion that’s to you. Fair?
Toby: “Who can only open up an HSA account that allows us to invest the proceeds into alternative investments in real estate notes?” Barry, I don’t know. I believe that you have to go to just about any bank.
Jeff: Yeah, I know Mellon does it and some of the other big banks do it.
Toby: It’s different than a self-directed IRA. You can just go to any bank. I don’t think they really care what you invest in, but I’m not the expert on those by any stretch. “Have you ever heard of a deferred sales trust?” Yes. “Is that any good?” It depends. Here’s how it works, this is kind of fun. Henry, that’s a really good question. I’ll give you in a nutshell the situation which these happen.
Mom and dad have a business that they’ve been running for 25 years and here comes along somebody says, “I want to buy it out.” The kids aren’t really in the business. The kids are all doing something else and they say, “You know what? I don’t want to pay tax on this business,” let’s say it’s $20 million, “I don’t want to pay tax on $20 million. I’ll get killed in it. How do I keep from having to pay tax on this. How do I liquidate it.”
You fill in the blank. This could be real estate. This could be anything. You just say, “Hey, I want to get out. I want to get the cash and I don’t want to pay tax.” What you do is you set up a trust with the beneficiary being your children and you sell. Actually, you drop the business into an LLC. This is really important actually because we’re going to have to step up the basis. You drop it into an LLC and you sell it to this trust. That’s what I call a deferred sales trust. The trust says, “I’m going to defer this payment for 5-6 years,” what the number is, “and I’m going to start paying you at which time I’m going to pay you back your basis, some capital gains, and some interest.” There’s going to be a calculation.
Depending on what your basis is in the company, that’s going to determine whether it’s all capital gains. This is where the secret is. Once I do that, I have just established a new value, the value of that company at the fair market value on that date I sell it to the trust. The trust elects to step-up the basis in that underlying company or asset and then sells it. When it sells it, you’ve now have a new basis. If you sell it for the amount close to what you already just sold it to your deferred sales trust, there’s no tax. The only tax is actually what you receive as you’re paying the installment note back to yourself.
Usually what you’re doing is, you sit with your accountant and say, “How much money do you need to have for the rest your life to make sure that you never run out?” Some people put a skin on this which is called a self-canceling installment note, but what you’re doing is, “Pay this out to me over the rest of my life, over a period of time, 20 years, 30 years,” something that you expect to live,4 by the way. If you’re 90 and you put a 30-year payout, they’re probably going to say no, but if you’re 70, then yes, whatever my life expectancy is. A reasonable period of time do I expect to get paid back, I’m just spreading it out. Now, I don’t get killed in taxes and I can sell it. Now there’s a bunch of money in a trust and guess what? I have just transferred out of my estate. Which is good for estate taxes. That’s when those are used. Do I add anything on that?
Jeff: No. I just know the first time I sold one of these documents for the sales prospect I thought, “What?”
Toby: Yeah. There is a firm in Kansas. This is really weird. I had a friend Theresa Fette, she owned Provident Trust and that’s what she did in her firm in Kansas City. It is what they specialized in. It was just funny. It’s like how you guys like, “Wow, hey.”
Jeff: They read really strange.
Toby: They do read strange because he had to jump through some hoops to make sure. Question one, “My residence state is California.” I’m very sorry to hear that. I’m just teasing. “I formed an LLC in Indiana in 2018 and hold an investment property. It has only expenses so far. Do I need to file an Indiana state tax return?”
Jeff: That depends on, not the LLC but to how the LLC is being taxed.
Toby: I assume it’s disregarded to call in.
Jeff: Assuming it’s disregarded to call in and you’re going to report it, I like following the state tax returns.
Toby: You’re going to get nailed in California.
Jeff: You’re going to get nailed in California but I like following those out of state tax returns so I can start capturing those losses for when I sell the property.
Toby: You can do that and that you’re trying to offset any state taxes. It always depends on the state you’re in or what they have in tax. I don’t think you actually have to file a 1040 or anything like that in that state, unless Jeff makes you. Jeff would you make him?
Jeff: I would suggest it, yeah. It would really depend on what kind of expenses we’re talking about. If they’re substantial, I want to capture them.
Toby: Alright. “If I invested with online syndication platforms as a non managing member in an LLC, is that on fractional equity interest in properties?” Oh my goodness. What this person is doing is they are investing with others. It’s a syndication and they’re investing. These LLCs that they’re investing in, own properties in different states. Do you have to file state tax returns in those states? The answer is, no. You’re just getting a K1 from these bad boys. You should only have one relationship and that’s between you and the entity which is doing all the investing. Unless you think something else?
Toby: The answer is, no. you don’t have to worry about that. “California’s community property state, but I formed a husband and wife multi member LLC in Indiana, which is not a community property state. Which states rules do I follow?” Your state where you reside. You should not be following a partnership return.
Jeff: California’s rules are going to drop Indiana’s non-community property rules.
Toby: Yeah. “I understand that in the first year of forming a company, we can write off $5000 as a start-up costs. I have a husband wife multi member LLC that has 50/50 split. Can I only write up $2500 per member?” About full $5000?
Jeff: Yeah, the $5000 is per entity and it’s both for start-up costs and organization cost.
Toby: You can do both. It’s really important what Jeff just said. Start-up cost are going back in time and looking back. Organizational cost or the cost of setting up the LLC, paying an accountant, getting all the information, paying the lawyer, all that. You get both, so you actually have $10,000.
“My wife had a small business and her accountant didn’t list each of my trades individually on Schedule E, for the summary. She no longer has her business, so I will be doing my own tax. Do I have to list each trader or can I do a summary?”
Jeff: If all of your transactions are covered transactions, they’re being reported to you by the broker that they’re covered, and there’s no adjustments to be made like wash sales, you don’t have to report any of those individual transactions.
Toby: Steven, I hope that makes sense. You don’t have to do it. If the brokerage house is doing it, you don’t have to do it. If you have some funky stuff like wash sales, then you would.
“Last time I asked a question about what I need to do to get the 20% flow through LP as part of the new tax law.” Alright, 20% deduction is on qualified business income, it’s 199A of the new tax laws. It’s that the gift from Congress saying, “Hey, if you have certain types of income, then you get a 20% haircut.” It has to be business income. It’s not capital gains, interest, dividends, and things like that. Unless you actually get a dividend interest on REITs.
Jeff: On REITs because it’s considered ordinary income.
Toby: Yeah. I knew you got the 20% but that REIT, you might be getting a…
Jeff: No, it’s not capital gains.
Toby: It’s all ordinary income. You get a 20% haircut, so it’s going to get you to the same place anyway, depending on what your tax bracket is. Big changes that were recent which was some rigs on a safe harbor for a real estate. If you’re an investor in real estate, you still qualify for the 20%. You have the safe harbor where you have to group your residential property separate from your commercial. You have to spend 250 hours on real estate. If you can’t, your agent, your employees, your property manager, they have to. But they have to track their time to be on the safe harbor. It’s really tough. I hate safe harbors. I like them, but I hate them. I don’t like this one just because it’s creating so much administrative nightmare. You have to account for these things separately and then know where do I see that you can write off under the 20% triple net lease.
Toby: There’s a whole bunch out there on the 20% deduction I could go on for an hour just on that thing.
Jeff: I was thinking of that very thing.
Toby: I’d go on to the internet. Go into our YouTube channel, go to Anderson Advisors, go to a Platinum portal and we have a whole bunch of webinars on it, and recordings.
“Can I take 179 on home office renovation? If you know how many years you depreciated it. What about special depreciation?” This is for the home office. Do you want to do this?
Jeff: Well, it’s going to depend first on what you’re renovating. I’m assuming that’s specifically for your office. Whether it’s just pictures, I mean if you throw a desk in there and computers, and all that, that’s all going to be subject 179. Paint, I would just put that off to repairs.
Toby: Well, you don’t have to do it because you get a bonus depreciation nowadays. You can just write it all off.
Jeff: Tearing down walls and stuff like that.
Toby: Here’s always the rule, if it’s a direct expense, you write it off, and I would reimburse it. I’d actually have a business reimbursing you for just the home office. It’s going to be an administrative office in the home. I don’t want to have tax hitting my personal return. I would have the corporation reimburse you as an office expense and leave it at that. It makes it so much simpler. Let’s just say that 179 is equipment. If I have like Jeff said, furniture, and computer, light switches, fixtures, displays, stuff like that, then I’d 179 it. Anything below that, I’d probably be doing bonus depreciation. Carpet and paint would be bonus depreciation. You’re reimbursing yourself. I wouldn’t even play that ‘let’s write it off’ game.
Jeff: Yeah. Like Toby said, you don’t have to use 179 because bonus is going to accomplish the same thing. The special depreciation.
Toby: Yeah, but that’s going to go away in a couple of years, like in 2023.
“My 22-year-old daughter is a senior in college.” Congratulation. “She earned $3000 in 2018. She has no prior 401K or Roth. What is the max amount she can contribute to Roth for 2018?” I would say $3054. “If so, would starting a Roth in 2018 be a problem for 2019?” No, you can go do it right now. In fact, do it before you file your tax return.
Jeff: Yeah. It’s going to be made before April 15th.
Toby: Yes and please do that. In fact, I tell this for anybody with kids that have any active income. Get them in a Roth IRA. It’s going to sound weird coming from a guy who always tells you to do 401K. This is the exception. Use a Roth IRA, because worst case scenario, let’s say she puts $3054 in it and she needs $3054 in three years, she can pull that out with no penalty. You can always pull out what you put in. Now, if that $3054 grows to $4000, she shouldn’t touch the amount that grew, because there will be a tax implication on touching that. Makes sense?
Jeff: After you’re five, she can even touch that.
Toby: Yeah, after you’re five, she can take that and just pay the tax.
“What things can be listed as a liability for business?” Wow, it’s about a hundred items. Any loans, anything you owe to a third party, anything you owe to a shareholder. Usually, you’re looking at long term and short term debt, so your credit cards, all that fun stuff.
Jeff: Yeah, if you’re a cash basis, which most of our clients are, it’s going to be money that you owed to other people.
Toby: Alright, next one. “If an individual owns a condo in a separate four-unit building, where should the owner live for maximum tax benefits? In the separate condo unit or one unit in the four-building? The only income is from the rentals.” I don’t think it’s going to matter.
Jeff: No, I don’t either.
Toby: Are you renting the condo? That’s the big question. Because if they’re not going to rent the condo then live in that. If you are going to rent the condo, I actually run the numbers and say chances are you’re going to be writing off, let’s say you lived in a four-unit building, you’re writing off ¾ of that building.
Jeff: Yeah. We’re going to carve out that one apartment that you’re living in.
Toby: Yeah. It all depends on how much it’s worth. It depends, it’s not really going to matter.
“How do I file my C Corp with 50/50 partnership? Well, we didn’t make any money because we didn’t flip any houses yet.” All right, so you have a 50/50 partnership and yours is a C Corp. Well, the C Corp’s just going to file 1120 and probably just grab some expenses. If you didn’t make any money yet, it’s all going to be expenses. You just want to capture those. It’s not going to give you really any benefit, but you want to capture them. If you have start-up expenses or organizational expenses, we need to file that on the first return to grab those. That’s the big thing. When you make money, you’ll just have losses to offset it so you won’t pay tax out in the future.
“Is the corp as a holding corp only model still being used. I think I’m going to be using that strategy in the near future.” I’m not certain I understand.
Jeff: I mean we do use the corporation for other things and just a holding corp. Flippings is one of those items as a management company. Probably less often do we use it as a holding corp.
Toby: I’m not sure or certain that I understand the color of the question, that’s my problem.
“Will the recording of this webinar be available for us later?” Yes. “I can’t write fast enough.” That’s good, that’s why we make it into a podcast and you can watch the recording too, if you like looking at the screen. Why do people like the podcast, what they do is they put us on time-and-a-half and they said that you could still understand us. Sometimes I talk too fast, but Jeff’s is really good.
“I had a REIT investment when they filed Chapter 11 where my investment was $50,000. How much of a loss can I claim per year?”
Jeff: Well, in year one when you have the loss, you’re going to claim the whole $50,000. But the biggest loss you’ll be able to deduct per year is going to be $3000.
Toby: Against your active income. If you have other income, passive, it wouldn’t have to be REIT, it could be any passive income, right?
Jeff: Well in this case, he lost his investments. That’s going to be capital loss.
Toby: Capital loss, but if he has other investment gains, so if you sold a bunch of stock maybe?
Jeff: If he’s got $50,000 of capital gain from selling Boeing or something.
Toby: Here’s how it works, Mike. You got to have the same type of gain to get that $50,000 loss. Otherwise, that $50,000 loss is capital loss.
Jeff: Yeah, and it doesn’t matter if it’s short term or long term.
Toby: Right. It offsets your W2 income or your active income of $3000 a year and you carry it forward forever.
“I currently own a home that I’ve been in for the past five years. I plan on buying another home in the next few months and consider just renting out my home to a family. I heard somewhere that it would be better to sell my home to an S Corp in establishing a new basis which protects my $500,000.” Yeah. That’s pretty smart.
Jeff: Here’s why you want to do this. If you start renting out your home and you rent it for more than five years, you’re going to lose your $500,000 exclusion.
Toby: You’re going to lose it in just over three years. You have to have lived in it as your primary residence two of the last five. I love being nitpicky with Jeff, because he’s an accountant and he loves it.
Jeff: By selling to your S Corporation…
Toby: Your two out of five years is met, you can offset or you can basically exclude that capital gain. If you’re married, it’s $500,000. That gets added into the basis of the property. Now you have a new basis and here’s why it’s cool. Sell it and you have a new basis. Let’s say you bought it for $250,000. You sell it for $750,000, you’re depreciating that $750,000 minus the land value. Whatever the land value, you take that out. You’re going to have a much bigger deduction. Now here’s the problem with an S Corp. If you take it out, you pull it out, and you put that property in your name, you’re going to have a huge tax hit at some point in the future.
You just got to be careful. You always want to talk to an accountant before you do anything with that property, but the benefit is so huge. Chances are, you’re not going to pay any tax on any of that. A, you’re going to get a $5000 tax exclusion. B, you’re probably not going to pay tax on any of those rents for a long time. That’s what I’d probably do. I’d go calculate the heck out of it and make sure that if you’re going to keep that thing, you may as well.
Now, my investment period is forever. I always tell people what’s your holding period? Forever and I don’t want my kids to sell it or anything else, so S Corp’s fine. If you’re going to sell it, you want to give it out yourself at some point, not fine. We want to make sure what you plan to do with it.
“With the new Schedule A rules, I’ve heard that since mortgage interest probably isn’t usable for most of us, that HELOC interest is deductible elsewhere.” Sheila, first off, mortgage interest is still deductible up to $750,000 of mortgage interest, so long as it’s used for acquisition indebtedness, which means buying a house or improving a house that you live in.
Jeff: Now, if you’ve got an existing loan from before 2018, it’s $1 million.
Toby: Yeah, so if it’s 2017, you had a loan, you’re grandfathered into $1 million. First off, there’s that. Yes, it’s under Schedule A so you have to exceed the standard deduction which for 2018 married filing jointly was $24,000. A lot of people are like, “I’m not going to hit it,” in fact, 10% of people are going to hit it. So yes.
Here’s where you get to write it off. If you take the HELOC out, for example, when you buy a house with it or an investment property, you’re going to write that off on Schedule E instead of on your Schedule A. Whereas it used to be, it didn’t really matter. Now we’re going to say, “Hey, this is an acquisition indebtedness, it’s investment indebtedness, we’re going to offset the rents and things like that with it.” Anything you want to add?
Jeff: Just because it’s secured by your primary residence, doesn’t mean that that can’t be used for another business purpose or investment purpose.
Toby: “When downsizing to another home and moving to your rental, how long can you remain in rental, move into a new home, and retain it as a rental?” Man, you guys like to write some crazy stuff. When downsizing to another home and move into your rental. It looks like, “Hey, I don’t want my house, so I want to move into a rental property. How long can you remain in rent, move into your new house, and retain it as a rental?”
Jeff: I think in this case he’s actually moving into his own rental property.
Jeff: You can stay there forever, but it’s no longer a rental while you live there.
Toby: It doesn’t trigger bad tax consequences. Bad tax consequences are usually lost or not so much that you move into it and triggers that. Is it a rental anymore? No, so you’re not going to get to take the depreciation. If you move into it, it’s going to depend on that year which one you use most. They’re probably going to just count days. How would they do that? If you spend more than 14 days as an investment property, chances are it’s going to be treated as an investment property. Would they split the year?
Jeff: We’d probably split the interest between the Schedule A mortgage and rental mortgage.
Toby: Yeah. It’s a little bit of a calculation, but I would be worrying.
“Any changes in how donations in charity are handled in 2019 compared to 2018?” No, not really. They’re the same rules that 60% of adjusted gross income can be offset still on your Schedule A. It still freaks me out. I think that a lot of charities can be hurting because there’s not a huge tax incentive to give to charity anymore because your Schedule A have such a high standard deduction, so why do it?
“Thank you for the webinar. I missed my last tax filing. I’ve been living outside the US. I have a property in the US. I need to refinance, look better, I need to qualify for the loan. Do I file two years to comply with the bank?” The answer is, yes. If you haven’t filed your taxes, yes.
“What is the tax law or LLC regarding RMD with 13 years difference?” That’s interesting, if you have somebody with a huge difference in RMD?
Jeff: RMD is probably going to be lower because you have a longer life expectancy. So they want to stretch out how long your money is going to last before you could cut.
Toby: Yes. It’s basically let’s say a wife and a husband is 13 years younger or vice versa. They’re asking about, is it going to be your RMD if you inherit it. Then it’s going to be your RMD.
Let’s see, “I don’t want to take the profit from a house. Can I transfer the house to another LLC and the other house can do the lending or the funding?” Yeah, of course. I can always borrow money on a piece of property without having to trigger a tax. Here’s somebody making fun of me for being old. I’m not old.
Jeff: You’re not old, I am.
Toby: “At the recommendation of our advisor, we’re opening an S Corp in California. We also have some other entities, a couple of similar LLCs. The question is, are there any high level directional suggestives for leveraging the scenario and how these entities may or may not be related to each other?” Yeah, absolutely. We have a C Corp and an Interstate S. Here’s the big thing is if I have an out of state C Corp, I know that I’m being taxed at 21%. Period. It’s a C Corp, that’s one of the beautiful benefits of the new tax laws. Versus anything that hits my return, I’m going to have to pay my personal tax bracket plus my state. Here in California, you’re probably going to get slaughtered in tax. You guys, it’s like a 13% state, plus the federal.
Yeah. I’m moving money into the C Corp for sure. The other thing is, I’m using an accountable plan. I don’t want to have to pay tax on anything that I don’t need to. I’m going to make sure that I’m not personally taking deductions. I’m going to make sure that my company is reimbursing me for just about everything and anything that I can get my hands on.
“Where do I write up fees for LLC state renewal and registration fees on my tax form?”
Jeff: There’s a couple of places that you can do it. You can do it on the taxes and licenses line, or you can do it in other deductions. Just say that it’s the Secretary of State fees or your registration fees. There shouldn’t be any issue.
Toby: Alright. “I bought a property with a loan in my name, I just transferred the deed to my LLC. Who should pay the mortgage? The LLC or me? If the LLC doesn’t have money, how should I handle it?” Well, you give the money to the LLC and let it pay, but it’s not catastrophic if you’re paying and the LLC doesn’t have money. If that is an LLC that flows to you. Remember, the IRS doesn’t care what it is. They ignore the LLC, you tell it how it’s being taxed. Unless it’s an S Corp or a C Corp, then I have no problem.
“The question page is on the screen. Should I be seeing notes?” No. I’m just answering tons questions with Jeff here. We’re having fun.
“Are there opportunity zone funds to invest in with similar tax deferral?” Absolutely Jean. That’s what all these big brokerage houses are doing. They’re rolling out the red carpet on these opportunity funds. Defer your money.
“My father immigrated here 35 years ago. He had a house back home where he used to live which he sold. It was an investment property. How do you treat the capital gain?” If it’s for your dad, he can just recognize it as long term capital gains. It doesn’t matter where it is.
Jeff: If he sold it in another country, there may be taxes on that property, and you want to make sure you pick up those taxes on the US return. You may get a credit for those.
Toby: Yeah. My AGI is over $150,000. I can’t write up my rental expenses. Do you have any suggestions on how to lower my AGI? Or AIG without quitting my day job.” Lawrence, you’re asking a great question. The reason that your rental expenses, you’re phased out over the active amounts, you’re still going to get the 20% more likely deduction after that from that income that it passes down. The way to write off your adjusted gross income, there’s a bunch of them, I just rattled off a few, if you’re not married, then you can ignore this one, but if you have a spouse, make sure that they get certified or qualified as a real estate professional so that you can write off your expenses against your active income.
The other thing is you can do things like conservation easements. You can do oil and gas. You can do other things that offset your income or you set up your own 501(c)(3), dump much money into that, or if you’re just a giving person, skip setting up yourself and just give it to a 501(c)(3) charity, or set up a DAF, a donor-advised fund and give lots of money periodically to it to lower your taxes and before somebody says, “You’re crazy, why would I do that?” you just say, “Hey, I’m running the numbers. I’m going to see whether or not I’m already going to be giving some people ties and they get zero benefit from it so I lump them into multiple years, and say give every three years instead of every year, but give three times the amount every third year whatever it is so I can actually write it off.” That’s how you do it.
“I hold a recreational property in LLC. Can I claim special assessments for the property as a loss against sources of income outside the LLC?” That depends on how that LLC is taxed. A lot of times we talk about the LLCs and I’m assuming that this is a pass-through.
Jeff: Some of these code sections are 70, 80, 90 pages long.
Toby: Yeah and here’s the thing. It depends on how it’s taxed. If it’s a C Corp, no. If it’s an S Corp, no. Unless you have basis and you have loss, if its special assessment is creating loss against your LLC, that really depends on your income. Whether you’re phased out, whether you’re half a participant real estate professional, one of those things. We have to kind of go through a checklist. The answer is yes, under certain circumstances. But rather than just say that I’m going to say, we have to know your circumstance.
“On the Form 5500, do you not need to file it if it is less than $250,000?” Kim, if you have a retirement plan less than $250,000, married and filing jointly, you do not have to worry about it.
“Where is the website for the $197?” There isn’t one. You have to just reach out to us. You can just literally just email in and say, “Hey, I want to do the $197 deal.” Now I’m on the trail, now I got to go find it. There’s the website.
“How do you fund a newly created LLC personal cash. Can you use a loan out of solo 401K?” Yes. You can do either one of those by the way.
“Formed an LLC in Wyoming, taxed as a partnership, I have no activities or expense besides formation cost. Do I need to file the tax as a partnership?” Yeah, you’re going to want that. It boils down to you guys.
Jeff: Right. The rule say you don’t have to file a partnership return if there was no income of expenses to report.
Toby: “I am a resident of California and have a property in Colorado under California LLC.” Don’t do that. “Do I have to prepare a tax return in Colorado and pay Colorado taxes for that?”
Jeff: Have a property in Colorado with a California LLC.
Toby: They have a California LLC that owns a Colorado rental real estate.
Jeff: Yeah you do.
Toby: Anywhere that you have a rental real estate.
Jeff: Yeah, you’ve brought that property into California.
Toby: “It is disregarded.” Somebody says that. I don’t know where that came from.
“Do I have to file a tax return for a partnership for the State of California?” Oh now she says disregard it. The answer is no. You don’t have to file it. Just disregard the LLC. It’s you.
Jeff: So you have to file a Colorado return?
Toby: Yeah. I was going down back to this one.
Jeff: Which one? Oh, there we go.
Toby: There’s a client that has an LLC that’s disregarded. She said partnership and then she says now it’s disregarded up here. I’m just matching them up. It’s […] LLC. It’s just like having a rental in whatever it’s called in Florida. We’ve got so many of these puppies. I thought we’re going to get through it. Now I’m realizing that we’re in deep water again. I wanted to go back and answer some of these questions that were emailed in. Then we’ll go back up and finish off with a bunch of questions.
Oh my goodness. This is a good one. “If an airplane A leaves New York, heading west at 11:00 AM eastern time and plane B leaves San Francisco at 6:00 AM PST, can I get an extension on filing for my corporation until October 15, like a personal return?” Tony, no. But if it’s an S Corp, you can get until September 15th, and if it’s a C Corp, it depends on what its tax years.
All right. We have a whole bunch of questions that were also emailed in. “Did the step-up basis survive?” Yes. “Also on the sale of private residence, the old rule was you have a $500,000 tax deduction.” No, you have a capital gain exclusion. It’s a couple of reasons. Either in a property two to five years that’s survived. I won’t get to the nitpickiness. Yes, if it survived.
“How can an LLC set aside some of their profits for future use? Can an LLC use their profits for business travel without claiming it as a business deduction?” The answer is an LLC does not exist for tax purposes, so it depends on how it’s ultimately taxed. Can it set aside its profits? The LLC does not have to distribute money unless if it’s required to do so by its operating agreement, usually really that’s up to the manager. “Can the LLC use the profits for business travel without claiming it as a business deduction?” Yeah, that’s called just spending your profit, which is a personal expense but I wouldn’t do that. It’s business travel I’d be writing it off and I would be writing it off more than likely through a corporation.
Sorry, I’m whole barting all the questions again. “Do I have to file taxes on my business if I’m just starting but have any IN number?” Jeff?
Jeff: If you are a corporation or an S Corporation, you have to file a return.
“I am responsible to file for 2018. My business started in September of 2018. I did not make any money and my tax year end is June 2019. I already know that C Corp or LLC taxes. C Corp because that’s on off year end and you would be paying taxes in July, August, September 15th?”
Toby: All right. You’re going to have your taxes due on September 15th and yes, you would file it because your tax year is not even done yet. You still got a little more time. You don’t have to file now, though, so you can breathe a big sigh of relief.
“Do you have any advice on how I can get as much money shifted over to my adult children, including health and education? They’ll be working for me part-time.” Yeah, make them full-time, give them benefits, and pay them the maximum amount on the reasonable scale. Have an accountant tell you what’s reasonable for what they’re doing and pay them a whole bunch of money. Pay on the high-end. Jeff?
Jeff: No. I’m good with that.
Toby: I like it when he gets into this look, like…
Jeff: No. I didn’t give him that look this time.
Toby: All right.
“I would like to know, is there a real-estate wholesale? What percentage of each check should I set aside for taxes? I’m in Tennessee. Samantha.” You have two things. First off, if you’re a wholesaler, there’s not really a percentage because your whole activity is going to be aggregated. I would usually do this through an S Corp, or in Tennessee you’ve got that bonds exclusion. As a real estate wholesaler, you’re basically getting paid active ordinary income. I wouldn’t put a percentage down. I’m going to try to get that to zero.
In Tennessee we have FONCE, which is a fancy way of saying if you have a Family Owned Non-Corporate Entity. This one we have a corporate entity. So you have to worry about paying the Tennessee corporate tax. We’re want to get this thing to zero. If you have zero income in net profit, you have zero Tennessee tax, you have zero federal tax.
Samantha, we’re going to work in getting you to zero. How much do you have to put aside? None. We’re going to make sure that we’re getting it down or we’re going to pay it out to you in the form of a salary or something and deferred into your 401K. You should really come to Tax and Asset Protection and spend some time with us because we’re going to change the way you think.
“I have money taken out of my account for my granddaughter’s college, invested in mutual funds.” Oh, stop doing that. “How can I change it and use it as a write-off for my tax return? I’m also paying for my other granddaughter’s college books and parking pass. What then I needed to do to write this off?” Oh, you’re hurting my heart.
ll right, son, here’s what you’re going to do. You need to make sure they are a part of your business. You need to make sure they’re doing something for your business. You’re going to create a little family business, you’re going to put them on the board, and you’re going to say, “Hey you guys. You guys have to participate,” even if they’re young.
There’s cases on the books that people nine years and younger getting paid, as long a they’re able to do something of value. But you don’t want them to be a part of your enterprise and you’re going to pay them. You either pay them as wages or you’re going to pay them as independent contractors. Jeff might have a take on that one. If you pay them money, then they can pay all their college books, they can put their own money aside.
For example, the for the granddaughter, putting it away in a mutual fund, that’s a complete scam. Mutual funds really do stink as far as things I would really invest in, it’s way down there on the list because there’s so many fees and just statistically, you’re going to make about 2% on those puppies.
What I would be doing is putting it on a Roth IRA but I would like your granddaughter do it. Granddaughter receives money, active income, puts it in her Roth IRA. Now when they go to college, they can take that money out if needed, tax-free for the amount that you’ve contributed, and if they take out the money that’s over that, that has grown, as long as it’s been in there for five years, how much tax, you don’t have any penalty. Just pay tax on it.
In a third tax rate, it’s going to be zero. I did this with my daughter. She pays zero. She’s always below the standard deduction. She is graduated.
Jeff: What do you think about the 529 Plans, though? I don’t think it works in this case because it sounds like she’s already in college, but young children do you do the 529?
Toby: I don’t do it. I hate the 529.
Jeff: You hate the 529?
Toby: Because every time I’ve done the numbers on this—this is just me, I’m just telling you—I had clients do this, they were literally thinking they’re making 7% and when they did the numbers, what they actually have to disclose to you as fees are not what the actual fees are.
Forbes did a great article on this. The average was between 4.8% and 5.8% as when mutual funds cost and they’re returning between 6%–7%. They always say, “Oh, they’re making so much money.” The mutual funds take, on average, somewhere in the 70% of the growth range, which means you’re getting less than ⅓ of the growth and if it is 6%, you’re getting less than 2% and that’s the number that I see over and over again when I do the numbers. You’re basically giving your money to somebody else and they’re making it. It’s not getting to where you need it.
If you go above that 7%, you have somebody taking 15%. Now they look like a rock star but they’re still taking most of your money and your 100% at risk.
Jeff: You’re saying somebody is living in the Hamptons on your contributions to your children or grandchildren’s funds.
Toby: Yes. There you go. Go to Infinity Investing. I have all the numbers broken down. I will give that to anybody who asks. If you want my courses, 11-part course, we break it down. I’m just telling you. It’s not that all mutual funds are bad. Just most of them. And if you’re a CFP or somebody else, you can convince me otherwise, hire someone to manage your ETF account. That’s much better.
Jeff: No, I do a couple of the ETF accounts for the mutual funds.
Toby: Let them manage that. It’s just way, way, way cheaper. But we’re talking taxes here.
All right. “Is it best to file married, joint to both spouses on business?”
Jeff: If you’re married?
Toby: Married, filing jointly. Is it better to file married separately under some business?
Jeff: Married, filing separately almost never works out. You know where it usually work out is in Ohio because of their credit. State credit sometimes work out better.
Toby: You’re so much smarter than me on that stuff because I don’t know. I think what you do is you run them both ways and say, “In fact, a good tax credit could run both ways,” literally they would run that return.
Jeff: Yeah, we actually get a report that says if one way is better than the other.
Toby: “I heard the standard depreciation period for real estate investment property is 27½ years.” Yes, that’s the 1250 standard straight line deduction. “Is it possible to accelerate this?” Yes. It’s called a cost segregation. “What if I want to depreciate my investment over 20 years, 15 years instead?” We can’t all want things, John. You don’t get to.
No, what you do is you break the building down in pieces. Ordinarily, they look at it and they say, “All right, this is for residential real estate.” By the way, is 27½. If it’s commercial, it’s 39 years. What you do is take the improvement in the default. Let’s say it’s a $300,000 building, $275,000 is the improved value. I know those numbers are crappy, but bear with me. That means $10,000 a year you’re writing off because you’re going to take the $275,000 divide it by 27½. You’re going to have $10,000 a year. That’s you’re depreciation.
If you want to accelerate that, then you can’t use just 1250 property. You have to break it down into its components. That’s called a cost segregation where you’re segregating the property into not just the 1250 property but also its pieces like the carpet, the paint, the fixtures and everything else. Now, you can write those off. Get this. If it’s less than 20 year property, in that year you get bonus depreciation.
What you see is really it’s about about 20% of that. Let’s just say you get about an extra $50,000 deduction in year one under my example, that $300,000 piece of property. That’s about what you’re going to get. In order to take advantage of that, John, you’re going to have to either have a lot of other rental income or either you or your spouse is going to have to be real estate professionals so you can offset it.
He’s asking. There’s more questions on that. “Would cost segregation be beneficial for a lease whole build out?” I don’t think it’s available for a lease build out. You could break certain parts down, like HVAC and carpet and stuff if it’s a building. Oh no, this is a bad question, this next one. Some of it you’ll be able to 179.
Somebody says, “I’m selling a house that was my personal home. I rented it for 1.5 years but I’ve never depreciated anything. What do I do?”
Jeff: We can fix that.
Toby: Yeah. Depreciation is a ‘may’ but you have to recognize the recapture, no matter what. If you sell this and you’ve in it two out of the last five years, then you have an exclusion on the capital gains, not on the depreciation. You always have to recognize the depreciation. That kind of stink hole this. You didn’t take it, but they force-feed you the recapture.
Jeff: So we can actually do a change in accounting method, even in the year of sale, which kind of surprises me.
Toby: What does that mean?
Jeff: What we do is we go back and say, “Oh, we should have depreciated this and…”
Toby: You grab it.
Jeff: “…and we grab all that old depreciation in the current year.”
Toby: And what that’s going to do is basically offset your recapture because you’re going to write it off and recapture it the same year. Recapture isn’t horrible. It’s capped to 25% but it’s whatever your tax bracket is or 25%, whatever is lower.
Here’s one, then we’re going to have to get finish up. You guys know me. I’ll say that for the next 15 minutes to half hour. “I was keeping specific mileage for rental property. Our accountant said that unless I document all personal miles as well, I cannot count these miles. How do I have to keep records for rental property mileage?”
Toby: Yeah. Use MileIQ. It’s just MileIQ. It’s an app and it tracks everything. What your accountant really should be saying is that you need to track your odometer reading at the beginning of the year, then your business miles, your odometer at the end of the year, and then you could subtract off and say, “This is my personal miles.” Your accountant is being very mean to you. Roseanne, I wouldn’t fire them but I would probably threaten to fire them.
Jeff: Yeah, you don’t have to say that you went to 7-11 on Saturday and…
Toby: Yeah. You don’t have to do all that. So, yeah. You just tracking.
“I have a Canadian investor, hold a mortgage on US property. What are the tax consequences?” You’re paying a Canadian investor interest. Assuming they’re in Canada and if they have a business here, I think you’re okay. If they don’t, then I think you have to withhold it, 28%?
Jeff: It might be 15% but don’t quote me about it. It might be 15% under the treaty.
Toby: Oh, yeah. I think it’s a smaller amount because it’s interest.
Jeff: Yes. I think if it ends up in interest, come under the 15% for Canadians.
Toby: But Tracy, the answer is yes, you’re going to have to withhold, unless they can show that they have a presence here. Wow, look at all these questions that came in. You guys are killing me. I’m going to just start busting through these quickly just because I love to try to answer all of them.
“I think I heard you recommend paying three years to charitable deductions every three years rather than one year’s worth annually. Following TaxWise’s recommendations last year, I paid 2018 and 2019 deductions in 2018. Do I need to donate every three years or just two year’s worth?” It’s up to you. What I care about is, let’s just say that I’m making $100,000 and I tied $10,000 of it. Let’s say I’m married, filing jointly. I have to exceed $24,000 of all my schedule A, so that means my mortgage interest, my real estate tax, if I have any medical expenses…
Jeff: If I live in a non-taxing state…
Toby: It’s going to be so tough. I have to exceed that before I get a dollar.
Jeff: Even with that $10,000 contribution, you’re not going to hit the $24,000.
Toby: What I look at is then there’s no tax incentive for me to give to charity. But let’s say I gave $30,000. Now I’m at least getting a $6000 deduction. All I did is pay the same amount but I just paid it in a different sense. Gene, I hope that helps. You’re probably fine. You just have to look at the numbers to know exactly we can come up with something.
Jeff: I like when you do that, that you’re letting the people you’re donating to, let them know that you’re doing that because it helps with their budgeting and such.
Toby: Here’s a good one. “If I am paying fees to a Canadian citizen that lives and works in Canada, do I need to withhold US tax on the payments?” That’s kind of weird. You must be paying them as a contractor, then you have withholding 28%, I believe, unless they have a business presence here.
Jeff: This may be a case where the withholding doesn’t apply if they are doing all of their work in Canada. They have no US presence. I know you don’t have the 1099 in that case. I want to say that you may not have to withhold on them, either.
Toby: John, email that in and let’s have somebody actually pull that one for you. If you’re not a Platinum, be a Platinum. If not, that one’s pretty quick. We have some Canadian counterparts that we could throw it at.
“Is there any possibility to talk about increase in the SALT limit of $10,000?” Yes, they keep talking about it. Will they do it? We’ll see.
“My spouse is getting a 1099 but I believe she’s an employee. Should I file separately?” If she’s getting a 1099 and she’s an independent contractor, at least TaxWise, that’s a problem if you believe that she’s an employee because they’re not paying half of it.
“Yearly depreciation is taking on 80% of the purchase price. If the property is a condo, can I use 100% of its price when I technically don’t own the land?”
Jeff: No. The courts have decided that you do technically own part of the land.
Toby: Nice thinking. You’re thinking TaxWise, Will.
Jeff: It’s not going to be 20%.
Toby: It’s not. It’s going to be a portion. It’s going to be a lot less than 20%. How do they do it? You use assessed land value?
Jeff: Yeah and divide it up between who owns what. It’s probably going to be a lot closer between 5% and 10%.
Toby: Yeah. You’re thinking right, though.
“Can you convert a 529 into another better plan like a self-directed IRA?” I don’t think you can convert a 529 plan. I don’t know the answer. Jeff, do you know?
Jeff: No. As far as I know, the only way to get money out of a 529 is either for education or it’s taxable deliverance distributed, too. At least the gains are taxable. Let me rephrase that.
Toby: Do you know which Forbes article? I can send it to you, Elaine, if you want to email me. So email and say, “I’m looking for the Forbes article that Toby was talking about.” I have it as a link somewhere. In fact, I actually stole that from a CFP and they had to document everything they say, that’s why I just stole it. I could find it for you pretty quick.
Jeff: Hey, one thing real quick on the 529 plan. Say your kid doesn’t want to go to school. You can always change the beneficiary.
“I want to set up a Roth for my retired brother. He only has social security income. Can I legitimately pay him an income so he can set-up a Roth?” Your business will have to pay him, Kevin. You want to make sure that you don’t cost him any of the social security. I think that they have a very small amount of money that they can make. You’ve got to be very careful and he actually has to provide services.
Jeff: Someone say that that number was $18,000 of earned income.
Toby: Yes. Somebody just asked me, “Can you do another one? I have almost $160,000 in my retirement fund. Can I use that money? How can I use that money? I’m already checking out $50,000 as a loan?” You can use that for any investment that’s allowed by the plan. If you have it in the solo 401K, you can invest in just about anything.
Jeff: And you’re talking about the plan actually doing the investing.
Toby: Yeah. It’s really up to the plan. You see a lot of people do is they set up an IRA at TD Ameritrade. Let’s say you’re at TD Ameritrade. They’re going to say, “You can only invest in our stuff in securities.” They’re not going to let you buy real estate in it. So you’ve got to do a self-directed IRA, or if it’s a 401K usually you’re on trustee on those.
“Can you avoid paying the social security tax on wages paid beyond kids and grandkids?”
Jeff: I don’t think so.
Toby: No. You’re still going to pay that. You’re absolutely going to pay that. But you keep in mind, it goes towards their quarterly total. In other words, they’re still going to get a piece of that. Even if you have social security, I always look at it like I hate social security on profits on our business, but I like social security as far as, “Hey if you’re paying, you’ll probably going to get it back, anyway.”
Jeff: There’s a couple of items you can avoid like unemployment, worker’s compensation, but social security, medicare, no.
Toby: Let’s see. “I paid for the TaxWise workshop or what’s the name I was watching and would like to take advantage of the […] offer. How do I get it?” Just email me. Here, let me see if I can actually get it. You can get into that little offer there but you want to stick and burn it.
Jeff: Oh okay.
Toby: She probably already did it. There you go. Get it emailed in. We’ll take care of you.
“I left and employer and rolled my pension over to a traditional IRA account and they sent me a disbursement form.” Doesn’t that make you just go freaky? “Is that double taxation?” No. It used to be 15A and 15B. It says, “Here’s how much you receive on that 1099-R,” and then you say how much of it is taxable, you put zero.
Still on the new tax form I’m sure they have something, so you’re not going to pay tax on that. Yes, they give it to you and they send you the distribution form. They’re just letting the IRS know that they rolled it to you and you’re going to say how much of that stayed with you versus it went to another qualified plan. You’re going to say, “Hey, there’s zero tax on it.” You’re not going to get taxed on it. You don’t have to worry.
“My apology […] in Wyoming, Texas. No partnership, no activities. Do I still need to file the LLC, no activities or expenses?” You have no activities or expenses on a partnership, I’d still file it because there’s penalties for not filing it. But you’re going to have zero activities. Put […] zero on there but I think it’s almost impossible to have zero expenses on formation.
Jeff: Once you start filing, you don’t want to skip yours, either.
“If we have the opportunity zone, what is the next step?” If you’re going to invest in the opportunity zone, then you set up a qualified opportunity fund and you buy that qualified opportunity property. The fund is really simple. It’s an LLC taxed as a partnership. 99% of the time we put a little bit of language in there and we file the opportunities on statement when we file the first tax returns and then just make sure you’re investing in it. You get to say how much your deferring.
“If I receive income from leasing my farm in Illinois from the farmer who pays me based on a formula, it’s a sharecropper. Can I take advantage of the new business income deduction, the 20% off?”
Jeff: Yeah. I believe the farm lease also qualifies for that.
Toby: Yes, I think you’re absolutely right. In fact, there was something else. There’s some coops stuff, too. There’s some other language that were even more beneficial. But yes, you should get that.
“My LLC owns a USPS mailbox. Can my other LLCs I made personally use it?” Well, you don’t own a USPC. You’re leasing it. So yes, you could have other people on it, too. But you probably have to let the US Postal Service know that you have other names on it.
“I’ve had a 501(c)(3) since 2002 as a ministry. I’ve worked in real estate doing flips but I’ve never used my non-profit to do real estate housing projects. I’m considering using my non-profit to do some housing profits. Can I fund my non-profit projects for my for-profit corp and get tax deductions in the process? Is there a conflict of interest?”
Juan, you want to keep it separate from your ministry and yes, you can fund non-profit projects and give it to it, depending on whether it comports with your ministry. That’s the biggest thing is we have to make sure that we within lines with what you set-up your ministry to do. If it furthers your purpose, it’s really difficult to say, “Flipping property furthers my purpose.” What you probably be doing is a for-profit flip, make money, donate it. It pays you out then you’re donating it. The only problem we have is you have a 60% adjust your gross income limitation to how much you can give.
Jeff: And he’s talking about doing it from the corporation, which has a 5% limit.
Toby: Is it 5% or 10% now?
Jeff: They reduced it from 10% to 5%.
Toby: Yes, so you never really want to give money to a charity unless if it’s an S Corp, in which case it’s close to you. But if it’s a for-profit S Corp, then it’s a personal tax deduction. I hope that helps, Juan. You wouldn’t do it inside the ministry but you could certainly do it outside and give the money away. That is not a conflict of interest.
“My wife and I are 60 years old, close to retirement, makes six-figure income, we’re a little late in the game but we need to invest in something that will offset $14,000 of federal tax that’s being withheld. We have a HELOC and a personal residence. What is the best strategy to use for resources?”
Kevin, you sound like a perfect candidate for Infinity Investing. We use the […] model for allocation, which is a 30/30/30/10 for what you have. It would be about $60,000 into income-producing stocks and learn to write options on it, $60,000 in real estate, and $60,000 in a managed fund. I would get into Infinity Investing and make sure you have a group that’s supporting you. It’s free. You can come on Infinity Investing and see everything I’ve just talked about. It’s free. It’s 11-part series.
Again, just ask for the links on it and I’ll be happy to give that to anybody. Just as a personal note, that’s one I just went to Hawaii and gave it at the Hawaii Convention Center do the day with a really great group there, about watching young people dive into this stuff. It’s amazing when they start off young. How easy they have it. You be mad in about 30 years when you’re looking at them. You’re way ahead where I was. No, you won’t be mad. You’ll be actually feeling pretty proud.
“I have personally loaned money to my C Corp that has not been paid back and the C corp goes out of business. Can I deduct the personal loan and offset the loss?” Here it goes. This is somebody who loan money to their C Corp, if it’s an individual and it’s $50,000 or less, you contributed to the C Corp in exchange for shares, dissolve the C Corp or C Corp goes out of business, yes you can write it off against your active income. If you’re married, you go up to $100,000.
Jeff: What more than that, you write the rest off as capital losses.
Toby: Yeah. You’re gonna get the loss. It’s where you get to the offset all of your personal income. Jeff’s actually right. If you go above that, you still get to write it off.
“The $250,000 do I have to file a form that was on a qualified retirement plan. Somebody’s saying that’s for a C Corp.” No. C Corp has to file, period. Whether you make a dollar or $10 million.
“Can I sell my SUV to my LLC and write it off? Thank you.” I wouldn’t because you would have income. You might want to contribute it, depending how heavy it is. Actually, I saw an article on this one. Lisa, email that in. I may have something that’s relevant on it. I was reading it was Bradford that did something goofy about selling something. He may have been contributing it.
Jeff: I’m not really crazy about selling it. I would rather contribute.
Toby: But it’s got to be more than 50% used for business. So just use it as a big thing.
Jeff: And if it’s not going to weigh at least 6000 pounds, it’s probably not worth it.
Toby: Yup. “Explain what TAPS is.” I don’t know what that is. “Do we have to participate on our own states to pay taxes if we have a C Corp?” I’m certain exactly. It must stand for something. I’m just blanking on it. Do you know what it is?
Jeff: I cannot honestly recall.
Toby: Or it’s somebody making fun of the fact that we’re going over again. Oh my gosh. Is it 4:30?
Jeff: It’s 4:30.
Toby: Bad, bad Toby. All right. We’re going to have to figure out what TAPS is. Email that in and we’ll figure it out. We’re going to figure it out what it is. Sometimes, we have all these acronyms floating around. It’s just not hitting me.
Better question. “What’s the best way to hold multiple assets home without creating a million LLCs. Should I consider setting up in a different state other than where I reside?” Tory, if you are in Texas, you have something that’s called a series LLCs. That’s where you invest and doing a whole ton of them, then that may be something we look at. They’re just not my favorite right now because we don’t have a ton of law on them, but in certain circumstances. I have one client that’s got 400 or some odd properties. I don’t want to really set one up for everyone. In that particular case, we might do some other things.
All right. Email in your questions, guys. We’re going to have to cut it off here. Actually, I have to go run off a plane. I’m being really late.
Jeff: I was about to tell you about…
Toby: Oh just let me keep going. Blah-blah-blah-blah-blah. All right. See you guys soon. Oh, I see what this one is. That TAPS is a charity. So, email that on in. That’s fantastic. Thank you for pointing that out and we’ll get into that. Tragedy Assistance Program for Survivors.
Jeff: What I thought.
Toby: Yeah but I don’t know how that would play out.
Jeff: I’m not sure.
Toby: Yes. I will have to look at that. It’s not triggering something in my head as far as tax benefit. So. Anyway. “In a 501(c)(3) same as a charitable trust?” No, but it’s a beneficiary of a charitable trust. Until next time. I had to throw one in there.
Jeff: It wasn’t there before.
Toby: All right. Thanks guys. We’ll see you in a couple of weeks.
Jeff: See you in two weeks.
Toby: You got it.
Toby Mathis, is a founding partner of Anderson Law Group and current manager of Anderson’s Las Vegas office. He has helped Anderson grow its practice from one of business and estate planning to a thriving tax practice and national registered agent service with more than 18,000 clients. In his work as an attorney, he has focused exclusively in areas of small business, taxation, and trusts. In addition, Toby was the past director and host of the longest-running local business radio program on KNUU in Las Vegas “The BOSS Business Brief”. He sits on the board of directors for several companies and was recently appointed to the local board of Entrepreneurs’ Organization, a worldwide association of owners of successful businesses. He has authored more than 100 articles on small business topics and has written several books on good business practices, including first and second editions of Tax-Wise Business Ownership and 12 Steps to Running a Successful Business.