Are you smarter than your accountant, especially when they tell you there’s nothing they can do? Toby Mathis and Toni Covey of Anderson Advisors answer your tax questions to provide clarity and understanding. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- I have an empty plot of land. If I sell it and have a loss, am I able to write-off the loss on my taxes? If treated as a capital loss because it’s a capital asset, the loss is deductible against any other capital gains or up to $3,000 of ordinary income
- Can you set up a hedge fund or other entity where you can trade your stocks, so you’re not taxed as long as the proceeds stay in the fund you created until they are reinvested? Hedge funds are usually operating in an LLC taxed to a partnership or limited partnership, which flows through owner’s tax return
- Are there any strategies to reduce paying taxes on benefit or pension income and Social Security benefits? Distributions from a retirement plan are taxable income most of the time; Social Security benefits may/may not be taxable, depending on other income
- What are the tax benefits of setting up a charity? Charity doesn’t pay any tax and you can give it assets
- Can I use my self-directed IRA as a hard money lender? Yes, but you’re personally responsible for excess liabilities with an IRA
- I was a passive real estate investor and I have passive activity losses (PALs). Now, I’m a real estate professional. Can I use those PALs against my ordinary income, if I’m a real estate professional? No, they’re suspended until you substantially dispose all the activity
- I’ve noticed that taxes on new construction properties are generally lower for a year or two before increasing. Why? Property taxes are based on assessed value of the home
- What are the limits for bonus depreciation? There are none; you can create $1 million worth of loss and not pay tax for a long time
- Does getting a disaster loan and PPP affect taxes? No
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Tax-Wise Business Ownership by Toby Mathis
Individual Retirement Arrangements (IRAs)
Economic Injury Disaster Loan (EIDL)
Paycheck Protection Program (PPP)
Paycheck Protection Program (PPP) Flexibility Act
Small Business Administration (SBA)
Real Estate Professional Requirements
Capital Gains Exclusion/Section 121
Internal Revenue Service (IRS)
Rollover as a Business Start-up (ROBS)
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript
Toby: Hey guys, this is Toby Mathis and I have…... Read Full Transcript
Toni: Toni Covey.
Toby: Toni Covey here sitting in for Jeff, and I should say that Jeff is sitting in for her in Anderson. People saying hi already, that’s good. We’re going to get rocking into this thing. I know this is the mid-summer doldrums where everybody’s like, ugh, taxes. Oh, I’m going to go sit by my pool, whatever. The smart people are in here getting their taxes on because now is the time.
All right, let’s get going. You’re listening to Tax Tuesday; we’re going to get a lot of questions. First off, let’s jump in and say if you want to continue the learning experience, obviously, social media is a good place to start. We are all over the place on social media. My personal favorite is jumping in and doing YouTube. […] some of you guys who are giving me a little hard time for that. That was years ago when I was much more of a smart arse.
Tax Tuesday rules. Ask live, we’ll answer the question. There’s a bunch of live questions already that have been asked, we will go ahead and jump onto that. Go ahead and send in longer questions to Tax Tuesday to Anderson Advisors. That’s where we pull the questions that are going to be our opening questions. There’s usually somewhere between 10 and 20 of those.
We say we’re going to take an hour, but I don’t remember the last time we actually took an hour. It’s usually an hour and one minute, give or take a half-hour or an hour. If you need a detailed response, you’ll need to become a tax client. Basically, if you start coming at us, you have a million questions, we’re probably going to say you got to retain us.
This is fast, fun, and educational, we want to give back and help you educate. We like doing this because I can’t even count how many folks come up to me when I’m teaching other events, just reach out, and they know so much more than even their accountants just because they have been listening to all the questions come at. They start learning the gist of it. Once you get it, you kind of never not get it, and you’re able to get it.
Opening questions. “I have an empty plot of land. If I sell it and have a loss, am I able to write-off the loss on my taxes?”
The second question, “Can one set up a hedge fund or other entity where you can trade your stocks so you’re not taxed as long as the proceeds stay in the fund you created until they are reinvested?” Is that mouthful?
“Are there any strategies to reduce paying taxes on benefit or pension income and Social Security benefits? If so, what are they?” We’ll go over all of those.
“Can I use my self directed IRA as a hard money lender?” Good question, we’ll answer that.
“I have noticed that taxes on new construction properties are generally lower for a year or two before increasing. Why?”
“How to avoid the transfer tax in Florida when buying residential loan rental property and transferring to LLC? Land trust costs?”
“Can I take a $100,000 distribution from my 457 plan and contribute it to my housing non-profit under the 2020 CARES 100% AGI charity contributor?” We’ll get into that.
“Does getting a disaster loan and PPP affect taxes?” And I love the fact they used affect? For whatever reason, the effect of the arrow is to affect the hard bark. That’s how I remember it if they used it right.
“If I have two rental properties, should I go for two LLCs or keep only one?”
“Can I use a self-directed IRA to fund the purchase of distressed mortgage notes using a C Corp?” “If you’re a full-time stock trader, do you qualify for unemployment if you just go bust?” I love that.
“I have several rental properties, but no legal entity and a reported loss in my 2019 taxes. Do I qualify to apply for the EIDL?” That’s an interesting one. Will answer that, too.
“How do 1031 Exchanges work if properties are held in an LLC?” Great question.
“If I do a 1031 from California property to Nevada property, what taxes do I pay?”
“Under CARES, I borrowed $100,000 from my 401(k). Does the remaining balance remain invested as before? And do the repayments I make?” That way you put money back in. Do they get to be invested? Really good questions this time. Love it.
Speaking of questions, you can get a lot of questions answered on real estate and real estate taxation at our free event on Saturday, on July 25th. You can join me and Aaron Adams, and we are going to dive into real estate, not just real estate but real estate taxation, all this fun stuff. It’s an online event. Aaron manages about 3000 properties and he’s a really great guy. We’re just going to be talking about real estate and then the tax and asset protection components of real estate.
For all of you guys that like to ask a million questions on real estate, this is a good event to come to because we’re going to dive into cost segregation, real estate professional, 469(c)(7). We’re going to go quite a bit into qualified improvement property and a bunch of other fun stuff. This is going to be a blast. Aaron is a kick in the pants. I promise you, this will be one of those ones where it’s not boring. It’s supposed to be all day. We’ll record it, so if you can only go half.
Somebody had said, “What are the hours?” 9:00-5:00, Pacific Standard Time. There will be a recording of it, too, so register, watch as much as you can, jump on, and we go over everything from energy credits, cost segregation, depreciation, expenses, and accountable plans. You can get your free pass, I’ll just have Patty, she’s really good about putting up links, but here’s the link if you want to try to spell it out, andersonadvisors.com/new-opportunities-real-estate-accounting. I’m not going to keep doing that. We’ll just make sure that we send you a link, how about that?
All right, question and answer. We have a bunch of questions already. This is going to be fun to answer. Here are the ones that are coming in live. We’re just going to knock a few of these out if that’s okay.
Number one, “What is the best entity for private lending other than an IRA or 401(k) for lawsuit protection and tax savings?” Jeff, whenever you’re doing private lending, I typically want an entity between me and the investor or the bettor. This is how it looks. I have my cash here in a box that’s usually an LLC. It loans the money to another box, either a corp or something out. This is going to be the lender. This is dealing with all those wonderful people who I like to call plaintiffs. Those are the people that could possibly come after you.
What happens is, there’s low cash in this entity and there’s lots of cash in this entity, and this is a loan. If any of these guys over here say, hey, Dodge Frank, I’m not going to pay you back. Whatever they claim against you. You cost me to take a predatory loan at 10%. They make silly allegations. You want to be able to not have your cash exposed. That’s how I would do that one.
Number two, “Is there any extension for corporate taxes that was due July 15th?” Originally due April 15th, yes. You can file an extension, but I think you had to have filed it last week. If you didn’t, the rule with corporations wouldn’t have been an S Corp because the S Corp would have been doing March. But if it’s a C Corp, then your only penalty is if it owes tax, but you missed the extension deadline.
“If you have time to answer the question, the taxpayer passed away in 2019. He had a loss in excess of the basis of an S Corp. His wife inherited his interest in the S Corp. Does she carry over his loss on the excess of the basis? Would it make a difference if he gave her his interest in the S Corp?” Robin, realistically, if it’s a husband and wife and they’re filing a joint return, it’s going to be on the return anyway, right?
Toni: Right. The income loss from the S Corporation should flow through to the shareholder via K-1. That loss should already be on the 1040 and carrying forward there.
Toby: Yeah, and then she said, “Would it make a difference if he gave his interest?” That makes me think of somebody going back in time. Don’t worry about that. You’re still going to get it. The shares themselves the basis steps up on the date of passing. Unless they’re in a community property state, the whole thing steps up. Otherwise, his portion, assuming that they jointly own, unless he owns it 100%, gets a little more complicated if you’re in a separate property state, but the losses are going to stay on the return.
“Should I still apply for real estate professional status if you have an unrelated full-time W job but meet all the criteria?” In a full-time job, you’d have to do about 2001 hours of real estate. Maybe you do, in which case you don’t actually apply for it. You just say you are. Wow. How many hours in a year are there? If you’re doing 2000 hours.
Toni: Full-time work hours, 2080 something like that.
Toby: That’s if you’re working 40 hours a week. You’ve got to be doing 80 hours a week.
Toni: I’ve seen it. You keep those contemplating records in the log.
Toby: As long as you keep track of it, you’re good. But I’d still suggest taking off some time off relaxing and enjoying life alone.
Toni: Maybe sometimes.
Toby: If you’re one of those people. “If I have an empty plot of land, if I sell it and have a loss, am I able to write-off the loss on my taxes?” Toni, what do you think?
Toni: Yeah, but it’s going to be the type of loss we’re talking about. It’s going to be treated as a capital loss, it’s a capital asset. That loss will be deductible against any other capital gains or up to $3000 against your ordinary income is what they give you. At least on the 1040.
Toby: Isn’t that weird? When you have a land, you’re not depreciating it so you’re not creating a passive loss. This is a capital loss if you sell it, right?
Toby: Will your analysis change if that empty lot was a residential property that you bought next to your house and you’re intending to expand your house onto it?
Toni: No, but two things happen there. Now, if we have passive losses associated with that property that got suspended, you are going to be able to release those passive activity losses against that disposal in that asset as long as you hadn’t aggregated all of your multiple properties. I’m getting it to something else.
Toby: You just blew their heads off. I was just thinking if I bought it as a personal property. If I had my residence and I bought the land behind it, thinking that one day I was going to build a pool and then I said, eh, not going to build a pool. In this case, it’s going down in value. There’s like, oh I’m going to sell my house and I’m going to sell the lot. You wouldn’t get to take the loss if it was personal property.
Toni: Correct. That would be if it was business-used property as opposed if you separate it out that land behind your house and you tailed it out for rent, people can put signs on it or whatever, what have you. Now you changed it, now you do have a loss you can possibly take if your land decreased in value.
Toby: Yeah, except that if you changed it, it would be the value on the date of changing it.
Toni: Yeah, that’s true.
Toby: This is why accountants have so much fun because they get to say what about this? What about this? We have lots of Q&A. The answer is, you’re going to get to write it off, but it might not be as quickly as you would like. If you sell land, you’re going to have a capital loss. You can use up that capital loss $3000 per year against your active income. Unless you have capital gain, in which case you can use all that carry forward capital loss. Which is odd. We see that periodically.
I just had a gal I was talking to and she was trying to do either 1031 exchange or possibly give it to charity. She had a piece of property and she freaked out about $100,000 with the gain and it turned out we looked and she had a loss carryforward of about $122,000 in capital loss carry forward. I was like, What are you doing? You got this big old loss carry forward. I can use that? Yeah.
Toni: And now you’re the hero.
Toby: It means that they go someplace else usually. What that means is, oh, now I got the answer.
Toni: Yeah, she is.
Toby: “When transferring residential unit purchase under my personal name to LLC, what expenses are transferable to the LLC? […] reimbursed to me for my personal expenses like prepaid taxes, insurance, HOA, et cetera.” I don’t think you’re going to have to worry about reimbursing. If you paid them, you’re just going to take those as expenses on your personal return. Chances are if you had expenses and you’re transferring into a holding entity, it’s flowing back onto your return anyway. You’re going to end up taking that. The only time you get into the reimbursable expenses is when you are using a corporation.
“For PPP loan, period to consider should be salary expenses incurred for a day to be computed or period upon salary paid also? I had to pay more salaries in a particular period last year. Can I be covered by a seasonal employee?” That’s interesting.
To make that make sense, everybody who’s listening, when you get a Paycheck Protection Program loan, you have a period of forgiveness. It’s either 8 weeks or 24 weeks and you get to choose to use the actual period or when your payroll period starts. The first period after you get funded for payroll, it could start the eight weeks so that you’re not missing out or having to do a weird payroll.
The way that they calculate it is when you did your PPP loan, that’s how you’re going to have to calculate because that’s what they calculated the loan on. They calculated it on probably your 2019 taxes. If you had an average amount that was how they calculate it. It was 2½ times your average amount. That’s what you’re going to be using for determining your pay off if that makes sense. And then your pay off is based on either your average number of employees for the 12 month period, the 2019 period, and I think it may actually include January or something.
Toni: I think it does.
Toby: Or you use the average number of employees extrapolated from January to February 15th. There’s a weird thing. I may be butchering that a little bit. You have choices. I don’t know exactly.
Toni: Yeah, the loan was based on the 2019 payroll or January–February 2020 is what it was.
Toby: The full of January and February?
Toni: January–February 2020.
Toby: So, they use that to determine the loan amount, and then the forgiveness would be the number of employees, probably from that average number of periods.
Toni: There was a change in the number of employee pieces of it with the Paycheck Protection Program Flexibility Act.
Toby: Yeah. They definitely changed it as to who would qualify, but you still have the number. Let’s say I had 220 employees. They just calculated that if somebody was a full-time person, they wouldn’t come back and there was a reason for it, COVID reason. You count them as an employee even if you didn’t pay them.
Toni: Right, yes.
Toby: We won’t dive into that stuff. We’ll lose our minds. All right, “Can I set up a hedge fund?” This is Toni’s favorite question. She says, “Who’s asking about a hedge fund? Why’d you put that question?” I was like, “Because it said hedge fund. That was kind of cool.” “Can one set up a hedge fund or other entity where you can trade your stocks so you’re not taxed as long as the proceeds stay in the fund you created, until they are reinvested?”
Toni: Hedge funds, as I understand it, are usually operating in an LLC taxed to a partnership or a limited partnership, which is going to flow through to the owner’s tax return. You’re going to pay the tax on the gain of the trades made in that hedge fund as it flows through the entity. I don’t see where a reinvestment or are they asking to defer the gains until they reinvest it? I don’t see that you’d be able to do that.
Toby: When I look at this, when Timothy says hedge fund, I always think we’re just pulling words out of our memory.
Toni: Yeah, but then you make me look into it.
Toby: Yes. I like that. I immediately think, oh this is for you. This is your IRA or your 401(k). I just look at that and say you’re probably trading in an exempt account and your exempt accounts are your IRAs, 401(k)s, Roth IRA where you never have to pay tax ever again. You only have to pay it when you take it out. 401(k), Roth IRA, obviously, and your 457s, 403(b)s, even your 501(c)(3)s can fit that category as long as they’re being used for their charitable purpose. Somebody actually is doing this more. The question is how can you get in and out of your stocks without charging your taxes until a distribution is actually made?
For example, like in a traditional IRA, you can buy and sell stocks without worrying. So, is there an entity that you can trade stocks in? And how can you get in and out of stocks without triggering taxes until the distribution is made? There really isn’t one other than you IRAs, 401(k)s, and exempt entities.
Toni: Outside of what you’ve mentioned.
Toby: Yup. The idea is perhaps you should be looking at an exempt account if you’re trading a lot, making a lot of money, and don’t want to get killed on the taxes until you actually use it. Either make it for a charitable purpose or use a retirement account. Perhaps the best retirement account for you if you’re going to make a lot would be using a Roth style account, either Roth 401(k) if your income is too high or a Roth IRA if you’re able to invest in it. If you can’t, then you do a backdoor IRA to get money in there or there are some fancy ways to make after-tax contributions even to a 401(k) and roll it into a Roth 401(k). You can put about 57 I think it is. I can’t remember.
Toni: That actually comes up quite a bit in Platinum.
Toby: You toss it in there. What you’re doing basically saying we’re never going to pay tax on this ever again and then I don’t have to care. You can trade like crazy.
All right. Somebody says, “If one of them spent 750 hours a week on top of a full-time job, if not, what are other options?” If it’s a husband and wife, only one of them has to hit the 750 hours and it’s not a week, it’s a month. The rule is 469(c)(7) that says your passive losses from real estate become active losses, ordinary losses if you are a real estate professional. To reach real estate professional status, one spouse on a joint return or the taxpayer on a single return has to spend at least 750 hours in more than half of their personal service time on real estate or real estate activity. Construction, development, sales, whatever real estate-related. And you have to materially participate on your properties.
It’s not as onerous as you think. We have clients all the time where one spouse is a practicing physician or has a big job and high W-2 income and the other spouse qualifies as a real estate investor and they’re buying the real estate to offset the W-2 income.
Toni: I suppose you can add two that. Which doesn’t happen all the time that if you are a more than 5% owner of the business that you’re getting the W-2 income from, it’s related to real estate, and the services you’re performing for that job is related to real estate, that’s also includable.
Toby: Yeah. As long as you own 5%, then any business, even if you’re an employee of it, you can count that towards your time.
Toni: We run into that with our realtors.
Toby: Realtors are interesting because the code says brokers. Some people think that real estate agents don’t count, that’s not true. There’s actually a tax court case on it where they said brokers, this means helping people locate buyer, sell property. You get it.
Lots of questions that are coming in, but I’m going to skip you guys for a little bit. “Are there any strategies to reduce paying taxes on benefit or pension income and Social Security benefits? If so, what are they?” This is all you. I could see you’re excited about this. You like that one?
Toni: I was looking at that one, I thought we’re talking about a couple of different things there. We’re talking about distributions from a retirement plan, which will be taxable income most of the time unless we’re talking about a Roth. And then, on the other hand, we’re talking about Social Security benefits which may or may not be taxable depending on the other income that you have on your return. If you have any W-2 income, any other income. Basically, we’re looking at a calculation that’s 50% of your Social Security benefits plus any of the other income you have on your return.
Toby: When that pushes you up to where your Social Security benefits are taxable, right?
Toni: Yeah. Depending on how much that is, we can be 50% taxable or I believe 85% taxable.
Toby: Yup. If they go over certain thresholds, like $32,000 or something. Silly. They tax your Social Security benefit, that’s what’s crazy. But if you don’t want them to, we just talked about a whole bunch of ways to not come down. You guys won’t even realize it. Become a real estate professional. By real estate, it’ll offset your income and then all of a sudden your Social Security benefits and your pension income are going to be below the standard deduction.
The other thing you do is depending on what type of income you have if you have stock. A married couple under $80,000 a year, your long term capital gains tax bracket is $0. If you’re making $50,000 a year, you could sell a bunch of stuff and not have to pay tax on it and buy it right back. If you want your Amazon, like, oh my gosh, I just had a bunch of growth in Amazon, because you love that company, you love giving Bezos free money, let’s just say that’s your thing, you could sell it and buy it right back and there’s a wash sale rule for losses, but there is no wash sale rule for gain. You can make that non-taxable.
The other thing you could do is give money away. This year, you can give up to 100% of your adjusted gross income to charity. It can be your charity for all we care. As long as it’s a public charity, if it’s a private foundation, you have a limitation to 30%, but you could still give stuff away. Other things you could do, what else can we do to lower our taxes? Those are the big ones.
Toni: Thanks for taking all of those and then throwing it to me.
Toby: I’ll throw oil and gas. You can do oil and gas and take that loss too. You can open up a business and you can incur losses. Buying equipment and accelerating the depreciation, you’re not going to create a loss with that. But you can go to zero with that.
Toni: I also like the idea of splitting income if you’re running any kind of business activities such as rental real estate and things like that. You can split income off to maybe a C Corporation or even create a further loss on the rentals (to your point of the real estate professional in taking those losses). You can cost seg to create a further loss to reduce your income on the personal tax return and get that down. There are tons of things we can do.
Toby: These are softballs, guys. See, that’s the thing. A lot of people look at this, they’re so used to the accountant saying there’s not a lot you can do. You have a high W-2. There’s not a lot you can do. There’s always something you can do. Sometimes you have to create it.
Somebody just wrote, “What are the tax benefits of setting up a charity?” Charity doesn’t pay any tax and you can give it assets. I used the example of me, just because I like to use me as an example. At the end of the year, if I want to lower my tax bill, I stroke a check to my charity. I had two of them. And/or I give it property.
I’ve given it some stock that I had almost no basis in that became more the lot. I just transferred the stock to it and I got my write-off based on the fair market value of that. It was publicly-traded stock, I bought it when it was private, waited my period. It had gone way up and I gave it to charity. I was able to take the deduction based on the value of it and I didn’t have to recognize any capital gains.
I have also given houses to charity. And you’re allowed to deduct the fair market value as long as you count it over a year. There are a ton of tax benefits for having a charity. You can go out and get charitable donations too.
“Can you give to a charitable organization you personally own?” Nobody owns a charity, Joyce. As long as it’s a public charity and it’s doing something. This is what’s weird, we work with people all the time at real estate. Low- to moderate-income housing is a charitable activity. Residential assisted living is a charitable activity. Veteran housing is a charitable activity. Housing for autistic children or autistic adults is a charity. It’s absolutely.
“Can you set up a public charity where you’re the main contributor?” Yeah, for five years, Leo. After five years, you have a public test. They’re looking at how much income to bring in and how much you’re contributing and then there’s a 33% rule or a third. It has to come from the activities or from outside parties. But it’s not fatal. It just becomes a private foundation. Then, your charitable donations become less and your ability to interact with it becomes a little bit less.
Here’s a good one. “A foreign investor buys a property in December of 2019. Rents it in February of 2020. Does he have to pay taxes in 2021?”
Toni: We have a rental…
Toby: That doesn’t get put into service until after the tax year. Buys the property at the end of the year, doesn’t put it into the service until February of 2020.
Toni: Yes. If you have a rental that was placed in service February 2020, you had a tenant who was actually paying rent, then you are going to be paying taxes if we can’t get that rental income down for you.
Toby: But in December 2019, did they have to pay?
Toni: Yeah, there’s no tax in December of 2019.
Toby: Yeah, there’s no tax there. You’re good if they bought it at the end of the year, usually you’re not filing a return at the end of the year unless you have an entity where you have start-up expenses and things like that and we may capture them.
Toni: If you actually did place the property in service for example in 2019, then we would and we would want to go ahead and take advantage of the expenses that we paid associated with that property and be able to take those losses.
Toby: Otherwise, you didn’t have a property in service until 2020. And then, when did they have to pay taxes? You would pay taxes on any of that income in 2021 unless you have to do quarterlies, right?
Toby: That just depends on whether you anticipate making money. Another one that’s being asked, and I apologize, guys. I know some of you get mad that I answer a lot of live questions, but it’s very interesting for me because they’re related. Somebody’s asking about depreciation, they don’t understand depreciation. “If I purchase a property and over a span of three months improved the property, what is my depreciation? I understand 27½ years for single-family residence and mid-month conversion.”
This is really interesting. When you have single-family residence, the default is 27½ years. I know we have a question later in the Tax Tuesday that was asking about getting depreciation the first couple of years, you can choose to do what is called cost segregation and take your 27½ year property and divide into 5-, 7-, and 15-year property as well as the 27½.
What that’s going to do is it’s going to accelerate your depreciation into shorter periods of time. In order to do that, you’re going to look at the improvements you put in the property and determine whether they’re going to be added to the basis or whether they were repairs and they’re immediate deductions.
You also have qualified improvement property, that’s 15-year property, right?
Toby: All of those can be accelerated to year one if you want. There’s something called accelerated depreciation this year and next year, it goes away in 2022?
Toby: 2023 it starts to phase down?
Toni: I believe so.
Toby: When it does, it allows you to write it all off in year one if you want. If you want to create big fat losses, even if you can’t use them, you just carry them forward and you just don’t pay any tax on your real estate. It’s actually nice.
Anyway, “Can I use my self directed IRA as a hard money lender?” What say you, Toni?
Toby: Absolutely. Here’s the one thing. Remember the earlier question we had where I drew a little bit? This is the same thing. I have an IRA that’s been in a box. The problem is, I’m personally responsible for excess liabilities when I have an IRA. I don’t really want to give money to people I don’t know. Maybe they’re not disqualified people. They’re people that I feel comfortable with. Maybe it’s a brother or sister whether or not disqualified, but I still know who they are, or maybe it’s a friend.
If it’s not somebody you know, then you create an LLC inside of the IRA and you’re essentially the manager because the IRA holder can be the manager and then it loans out money. The reason you do that is that there is a liability when you’re dealing with lending to third parties. If you trip on a law or something, you could find yourself on the hook for everything that you took in and possibly damages. You want to make sure that you don’t step on that land mine. We’ll jump into that. Unless you want me to throw anything more on that.
Toni: Nope. It was straightforward yeah. You can do lending from a self-directed IRA. I just bring out that when we talk about disqualified persons, we’re talking about you, your spouse, your children, your parents. When you throw in your brother, your sister, a lot of people tend to think that those are also disqualified persons and they’re not.
Toby: Yeah. The disqualification goes up and down, so grandma, grandpa, kids, spouses, it does not go sideways to your brothers and sisters and their spouses and stuff. Somebody says, “You have to be careful. You’re not self-dealing.” Yup.
There’s a whole bunch of questions here. “Do I need to be in a certain income bracket to establish a charity?” No. In fact, one of my favorite charities was set up by a gal that had lost her job, she did a Ted Talk, but it’s Camp YouCan. My daughter went out and actually donated time. It’s a camp for epileptic kids.
This year is going to be a struggle for them, but Camp YouCan, if you want to look them up, it’s the Midwest You Can Association. She didn’t have a job and she ended up having a very successful run with the charity and I hope that it continues. This COVID certainly hurt them because they do big summer camps for kids every year. It’s obviously been a tough one. We’ve had some that do millions of dollars in donations a year. Probably the top one here is probably $6 million in contributions just in these little charities. They do a really great job.
Here we go. “Can prior year real estate PALs (Passive Activity Losses) be carried forward against current year income if this year is the first time I will qualify as a real estate professional?” Rory, fantastic question. “I was a passive real estate investor and I have PALs. Now, I’m a real estate professional. Can I use those PALs against my ordinary income if I’m a real estate professional?”
Toni: No, they’re suspended now until you actually dispose of substantially all of the activity.
Toby: Yeah. Rory, you should be very angry at Toni right now. She said no.
Toni: I didn’t say no.
Toby: No. Unfortunately, it’s when you create the loss as to whether it’s active or passive. Just because you become active, you, the loss doesn’t become active when you carry it forward.
Somebody said, “File a Schedule E loss.” Yes, PPP forgiveness. “I realized that I don’t have to pay it back if I use it for salary, but what forms do I have to fill out on my taxes about it?” Ryan, you don’t have to fill any forms. You’re fulfilling a form for the bank. What they’re going to do is get money from the Feds or SPA and they’re going to get that money back. You’re not going to have to recognize it so there’s no tax form on it. That’s the good news. You don’t have to do anything. It’s just free money.
Here’s the thing: I just get mad. Everybody’s making fun of the Lakers and all these people for taking the money. The whole idea of the PPP money was to give the businesses the money so these people wouldn’t be on employment. It doesn’t matter how big the company is or whether they have other money. That wasn’t the reason they did it. I just think it’s ridiculous. All these people that have been shamed, all these companies were shamed for taking the money. It didn’t overwhelm the unemployment.
What happened when everybody started getting bid on, unemployment’s been overwhelmed. In my state here in Nevada, there are people that still haven’t got unemployment. We’ve gone through two directors of DETR, the unemployment department here. They basically quit after just realizing that they’re swimming up upstream and its really strong currents. It’s stinky. It’s horrible.
Somebody says, “Can you please give us an update on your thoughts about the Fed giving any tax concessions for 2019? You advised us not to follow 2019 taxes until November because you thought there might be some changes.” Yup. Do I know anything? They’re probably going to do a payroll tax cut for 2020. For 2019, what this could create is potential losses that you’d be able to carry back.
That’s why I said until we know for certain, let’s see what comes out of Congress. I think things are going to get worse before they get better from the small employer standpoint. What do you think?
Toni: I would agree with that. Let’s just agree.
Toby: Yeah, it gets tough. We don’t know what Congress is going to do. What we know for certain is that none of us have a crystal ball. I say, give yourself time on your 2019 taxes because it would really stink if you file them and you were able to carry back a loss from 2020. My statement since day one is just to let businesses have back some of the money they already paid.
Somebody says, “We know what Congress will do. It’ll spend the money.” Yup, absolutely. What they really need to do is allow us to keep some of the money. The businesses need to keep the money. We don’t need to give it to Congress and then have them decide who gets it.
Frankly, I’ve been talking to a bunch of CPAs and planners on our forum. Well over $1.2 billion was given to people that weren’t entitled to the stimulus money. That’s just the ones we know of. Plus, a whole bunch of folks that don’t live here. It’s been ridiculous as to what they’ve done.
I just think it’s ridiculous that they created competitors for businesses. You pretty much can’t hire somebody under $15 an hour because the unemployment that they’ve been receiving from the Feds is higher than $15 an hour.
It really created a situation that’s negative, including for us. I can tell you from firsthand experience, we tried to hire people during this period of time. We’ve been just busier than get out because everybody was going after the PPP loans, the EIDL loans. We have bookkeeping craziness. Everybody needed their records for 2019 done in a two week period. We couldn’t hire people because they were saying they made more on unemployment. It’s crazy.
Somebody says, “Aren’t gifts nontaxable?” No. A certain dollar amount is nonreportable and nontaxable. Otherwise, you’re using a calculation and you’re taking it against your lifetime exclusion which you file a tax return for when you make the gift. The recipient doesn’t have to pay taxes. Sometimes the giftor has to pay tax.
Toni: And you might have a requirement to file a gift tax return, depending upon the amount of the gift that you gifted that year. Again, that return is informational tracking your lifetime. Get the exclusion.
Toby: Yeah. Let’s go on to more. I think we’ve answered three questions thus far. We’re probably a little behind.
“I have noticed that taxes on new construction properties are generally lower for a year or two before increasing. Why?” You can answer that one.
Toni: The property taxes are based on the assessed value of the home. I’m not really sure why it would be different for a new construction.
Toby: I wonder if they’re asking about property taxes or whether they’re just talking about taxes in general. If the property taxes are going to be in the assessment, sometimes, the assessor’s office is going to be a year or two behind you. And all of a sudden, it’s going to go up because they’re basing it off on the neighborhood that surrounds you, square footage, and they have to update the records.
Toni: They also like to tack all kinds of other things on there.
Toby: Yup. It’s going to take them a little bit. A lot of you guys are looking at it. Here’s the other thing. Taxes, in general, are lower when you do new construction because it’s really easy to segregate out what portions are 5-, 7-, and 15-year property, and then you can rapidly depreciate it.
What’s going to happen is when you do any new improvements or if you buy a property, have it in service, and then you decide to fix it all up, look at the cost seg, guys. The cost seg is a fancy way of saying an engineer’s going to come in and tell me how much my electric system is, how much my doorknobs are, how much the fixtures in the building are, how much the flooring is, how much the cabinets are, how much the sidewalk is, the shrubbery around the outside of my fence, and everything else.
They’re going to be able to tell you those items, everything I just mentioned, has a lower lifespan than the property as a whole. Every one of those will be depreciated much faster. Generally, twice as fast plus than if you just took normal depreciation. Most accountants only do normal depreciation.
I just love this. Somebody says, “Can you please call up Texas and tell them to drop their property taxes?” Andy, Andy, Andy. All the California folks are joining you in Texas on the property tax… I’m just teasing. We love our Californians. But yes, Texas is known for having some high property taxes. I still do own a bunch of rental properties there. I used to think I used to, but now we sold our Dallas stuff and we have a bunch in Houston.
“Major maintenance costing over $10,000 for countertops, flooring, paint, et cetera, I thought the limit for expensing was under $5000?” Mina’s talking about the de minimis but also, what was that called? The property regs?
You should explain de minimis. People love that.
Toni: Well, the de minimis safe harbor is actually $2500. There is a $5000 but that’s if you have (I believe) the audited financials. You get up to $5000. Typically, what you’ll have is the $2500 amount. If you have repairs or improvements that are invoiced for under $2500, you’re going to be able to deduct that in the current tax year, not required to capitalize that as an improvement.
Toby: Yeah. The other thing, Mina, is everything you just mentioned there would have a life expectancy of less than 20 years. There are two sides to this. Number one, if you retire an item like a roof and you’ve depreciated it for 10 years and you have to replace your roof, you take whatever portion of the 27½ that would’ve been allocated to it. You actually have to do a little bit of analysis and say how much was that roof worth when I bought the house? You get to write all that off the day that you put it out on service. You tear the old roof off.
If there’s an extra $5000 or $6000, boom. You nailed it. Then, when you put the new roof on, you’re writing it off again. All the items you just mentioned are all under 20 years. Yeah, you could bonus depreciate it when you’re figuring it out but you have to change your accounting method.
If you go with the default, just plain vanilla MACRS (Modified Accelerated Cost Recovery System), then you’re 27½ years for residential, 39 years for nonresidential. A lot of people call it commercial. On most ones, you can change your accounting method. It’s a Form 3115?
Toby: 3115. You have a cost segregation study done which if you just did the build-out, it was really easy. They’re going to look at your invoices. Did you say countertops? They already know what portion that is. Then, you could accelerate the depreciation. You could elect to depreciate, accelerate the depreciation on 5-year property, 7-year property, the 15-year property, or all of it. You could just say I’m going to accelerate the 15-year property. I’m going to let the five and seven be as they are.
Toni: Which I see people doing more after 2023 when we’re not getting 100% bonus depreciation.
Toby: Yeah. I could see them taking it. It’s going to go to 80%, then 60%. I hope Congress extends that.
“Is it cumulative repairs in a year?” No, […]. It’s actually per item and per area. If you’re going to replace your roof for $75,000, you’re not supposed to go get three separate invoices for $25,000.
Toni: Yeah. I don’t want to see it invoiced for every shingle, okay?
Toby: It’s de minimis, so it’s in a different area. You can sometimes get creative as to how you’re breaking that.
Somebody says, “When starting a […] for a major conversion, would everything in it be subject to cost seg and move all the losses up?” Yeah, David. That’s exactly why you do it. Not all of it. When you improve the house and there’s betterment, then maybe not. Most of the items that you’re putting in it, yes. Especially if you’re fixing it up. Some of you guys are getting it.
“What are the limits for bonus depreciation?” There are none. You can create $1 million worth of loss and not pay tax for a really long time. That’s why we always laugh in the accounting circles. They always say that if you’re paying taxes it’s because you don’t own enough real estate.
Toni: I actually just did an analysis for a guy and looked at the NOL carryback for the five year period, how much he has to buy in property.
Toby: This is huge. You’re going to have to explain it to these guys.
Toni: Right. He’d already been working with the real estate agent. We looked at how much he’s going to be spending on real estate and what the improvements would be associated with that. We looked at all of that. We did the average reclass of a cost segregation and came up with the amount he would have to spend in real estate. Basically, wiped out all of his taxes if we carried it back for the NOL five-year carryback period now without CARES.
It’s a really interesting calculation. He’s in California. We did have interesting calculations there when it came to California. Yeah, it can be a very powerful thing if you’re willing to go out there, do work, get the real estate, put the investment in there. Invest that money in real estate rather than leaving it with the Federal government in the form of taxes.
Toby: Yup. What Toni just said is that you can create a loss. If you qualify as a real estate professional, that’s an ordinary loss that can be carried back for five years. If you did it for 2019 or at least 2020, you could go back to 2014 or 2015. You can get back some of the taxes that you’ve already paid.
Some people are doing this. It’s not the first time we’ve seen people penciling it out saying, how much do I need to buy? That’s called having a tax appetite.
For those of you who raised money for your syndications, be thinking about this, too. They have to be in the general partnership, partner group, or need to be an LLC. Do they need to be careful about not becoming passive? Do they really need to be in a management group in order for them to continue to receive that ordinary loss? You can go out and take down an apartment complex by levering it up and rapidly depreciating it. All of a sudden, that’s worth an extra 30% because they’re going back in getting all their taxes back from the last five years. It’s actually really cool.
Toni: Yeah, it was really fun.
Toby: Next one. “How to avoid the transfer tax in Florida when buying residential loan rental property and transferring to an LLC, land trust costs?”
Toni: That’s going to depend on a couple of things. How is the LLC taxed? Some states or counties do have exemptions for LLCs that are single-member LLCs and grantor-type trust, also. I did look up Florida. Specifically, if for them, there was no consideration for the transfer, then they don’t assess a transfer tax.
Toby: Yup. There’s a statute that lists out all. I think it’s 12B-4.014 where you can look it up and list all the exceptions. If you have, you just transfer it to an LLC. The mortgages, the big ones, you always use a land trust to avoid the mortgage stamp tax. If you’re just transferring property and the owner is free and clear, then we don’t even have to worry about that. You can skip the land trust. Otherwise, use the land trust. Either way, you can get it.
Somebody says, “Is carryback for five years for losses, for real estate professionals due to COVID-19?” No. It was passed in the CARES Act. As of February 15th, they said you can carry back losses, but you can carry back losses for 2018 and 2019. You can go grab, elect to take back 2018 losses now to 2013. You can take 2019 losses and carry them back to 2014. You keep rolling them forward.
Toni: So on and so forth.
Toby: Yeah. It’s pretty potent. Yes, it’s new but it’s not COVID-related other than it’s a relief that they allow us to do that because of COVID.
Somebody says, “Hey, Toby. Do you have a post-educational site indicating acceptable deductions or expenses for a charitable organization?” Actually, just grab Tax-Wise. It’s all the same for a for-profit or not-for-profit. They’re all the same for the IRS. We don’t really care about deductions for charities because they don’t pay any tax. It literally doesn’t matter.
The one good thing is if you have a church or something, you get the allowance for the personage. What is that, 105? Where the minister can live in the house for free that’s owned by the charity?
Toni: Right, we do see that.
Toby: We do see that. We have some fun clients. They’re actually really cool.
All right. “Can I take a $100,000 distribution from my 457 Plan,” that’s a government plan, “and contribute it to my housing non-profit under the 2020 CARES, 100% AGI charity contributor?” Here’s the deal, if you take $100,000 out of your 457, you’re allowed to do that if you’ve been affected by COVID. Pretty much everybody gets this. If you have an IRA, 401(k), 403(b), 457, you should be able to get that $100,000. What the CARES Act did is made it so you can deduct 100% of your adjusted gross income by giving it to charity. With that, what do you say?
Toni: Yes. In order to be able to take the $100,000 distribution from the 457, you have to have been affected by COVID-19, but you don’t have to use the funds for COVID-19-related expenses. It’s good cash. You can go ahead and take advantage of the 100% AGI.
Toby: Now, you’re paying back the $100,000 distribution by the end of 2022. It’s for three years. Within three years. There are three tax years.
Toni: They did it really weird.
Toby: Yup and they tried to apply the old Katrina payback period. They’re telling you that if you take $100,000 out, you’re supposed to recognize $33,000 and some odd change a year for three years. The fourth-year when you pay it back, then you file amended returns. That sounds stupid. That sounds like a bureaucracy. That’s not what the rules say.
The rule says it’s ratably, they used, not pro-rata. They use ratably for three years. If you pay it back, it’s a trustee-to-trustee transfer. There was never a tax in the beginning. I would just say as long as you pay it back by the end of 2022, you don’t have to pay any interest or any penalties.
Toni: I was wondering if they might even walk that back because they’re applying rules from a smaller-scale event to such a larger scale event.
Toby: It’s a bureaucracy. Congress passes the law. I was doing the news […]. I was on with Johnny Tobacco today. It’s pretty funny, that’s his name. We talked about PPP loans. It’s really crazy that a law says you don’t have to recognize this as income. Then they say, but you can’t deduct what you spent it on. That’s not what the law says. The law says that you don’t have to recognize it as income. Then, it’s silent on anything else. You have to spend it on certain expenses. The PPP loan is for salaries, certain types of interest, rents, utilities, healthcare expenses, and the benefits as part of your salary. All of a sudden, you’re not supposed to write that off? The bureaucracy just does stupid things.
Toni: He gets worked up every time.
Toby: I get grapey. Let’s see. Transfer and recordation. “Can you answer that for DC2? How much do you need to charge to amend over returns?” I would just reach out, have one of our guys take a look. We do consults for free for people. We could always see whether we could do anything to help in all situations.
Part of our platinum program is we do a two-year tax review. Formal tax review where Toni actually oversees that. Think about that, having you sit next to me. Jeff manages the tax department and Toni here manages all the professionals that are the planners.
Toni’s team is a bunch of tax attorneys and CPAs.
Toni: A bunch of geeks. Myself included, probably.
Toby: Yes. Everybody needs a geek. Anyway, they’ll take a look. When you’re changing properties, usually the issue isn’t so much the most states don’t tax. The one state we have an issue in is Pennsylvania. They want to hit that transfer tax on everything. Everybody else we can get around. Sometimes, you have to use a trust to effectuate it, especially if you have a loan. We don’t want to tick off the lender either. It’s easier to use a trust than it is to go straight into an LLC when you have a traditional lender.
Somebody says, “May I still apply for backtrack unemployment if I’m a residential broker in New York?” I don’t believe there’s a restriction if you’re entitled to it. I think that you can go back.
Somebody says, “If you’re a sole member LLC,” the Federal, that’s a sole proprietorship. The Federal system that payroll pandemic on insurance, Pandemic Unemployment Assistance, that $600 a week is for you. They actually made it specifically to cover sole proprietors.
Somebody says, “I have $120,000 EIDL loans. I’m not sure if I need it.” Take it. You pay interest but it’s 3.75% and you have a payment deferral. Is the interest deferred for the first year?
Toni: I do not believe the interest is deferred.
Toby: I think you’re paying the interest but it’s 3.75% but you’re not making any payments for the first year. I would always say that’s pretty cheap money. If you don’t have a use for it, then don’t take it.
Toni: Or, you take it. You can always give it back.
Toby: Yeah. […] interest in it. “Does getting a disaster loan and PPP affect taxes?”
Toni: They’re loans, so not really.
Toby: What if the disaster loan, the EIDL loan, they give you an advance on it? Emergency advance, some free money, $10,000, do you have to pay tax on that?
Toni: I don’t believe you do.
Toby: Nope. It goes against your PPP. You can have an EIDL loan and a PPP. Now, let’s say that they give you a PPP, it’s $1 million, you meet all the tests, and you don’t have to pay it back. Do you have to pay any tax on that?
Toby: Yeah, you do not. It’s free money. The only thing is that then they’ll tell you you can’t write it off. I want to write it off. I think they’re wrong.
Toni: I agree with you.
Toby: […] agrees with us. I get annoyed by these bureaucrats. Again, Congress gives us something, then the bureaucrats try to work so hard to take it away. Come on, help these folks out. Forty percent of businesses are probably going to tank by the end of this thing.
Somebody says, “Can you use the PPP or EIDL to buy residential property?” No. You have to use it for specific purposes. In the case of PPP, it’s for payroll, for benefits, for utilities, things like that to make it forgivable. If you don’t use it for those things, it’s just a loan.
For the EIDL, you actually have to use it for the damage done to your business. What you take the money you get from PPP and the EIDLs and you put them on a separate account, you use it to pay all your regular expenses, then if you have any extra money in your account, that’s what you use to buy a residential property with.
If I have $2 and I can buy a residential property with $1, I just have to make sure I’m not buying that residential property with the $1 that came from the EIDL loan.
Somebody says, “What are the rules for the under $100,000 distribution? Do you have to show much of a loss to defer payment?” No. You don’t. It’s just automatic. You get to take the money out of the IRA, the 401(k), whatever it is, and you don’t have an early withdrawal penalty ever. The 10% is completely not going to be there. You don’t pay tax if you pay it back. It is treated as a trustee-to-trustee transfer.
If you read the CARES Act, it just says if you pay it back by the end of the third tax year, it’s treated as a trustee-to-trustee transfer. That’s specifically what they say, which means it’s not even rolled out to you. They treat it as though you transfer an IRA-to-IRA, 401(k)-to-IRA, or IRA-to-401(k). It’s treated as though it never hit you.
Somebody says, “It can be used to pay back business loans. How do I associate loss? What qualifies?” If you have loans and you’re paying interest, I believe that there’s a restriction that it has to be for equipment or whatnot.
Toni: What are we talking about?
Toby: This would be EIDL payback loans. They’re saying […] loan is a private loan.”
Toni: If we’re talking about a shareholder loan to a corporation to an EIDL, there’s a very narrow set of circumstances as to whether you can use the EIDL loan to repay that. Number one, you have to have to loan the money to the business to keep it afloat after the disaster. Number two, you have to be in a position where repayment of that loan or not repaying a loan to the shareholder would cost the shareholder undue hardship. If you’re meeting those two things, then you could use the EIDL to repay the shareholder loan. It’s circumstantial.
Toby: You nailed it. What if you don’t pay back your loan? The PPP?
Toni: What if you don’t pay back the PPP?
Toby: It becomes a 1% loan, pay back over five years with one-year deferral.
Toni: You mean what if it wasn’t forgiven?
Toby: Yeah. What if you weren’t forgiven? What if you spend it on […]?
Toni: You’re probably in trouble with the bank. Yup.
Toby: Somebody says, “The EIDL promissory note says that you can buy inventory for your business. If you flip houses, isn’t that buying house inventory?” Technically, yes. If you’re a flipper, you can do that. If you don’t pay back the EIDL loan, by the way, it doesn’t matter. It’s a 3.75%, 30-year, loan. They’re going to come after you. They do a UCC-1. They’re going to secure it with all your business assets.
Toni: Which does not include real estate.
Toby: Yeah. It doesn’t include real estate. Then he said, “No. If I don’t pay back the qualified distribution, then it becomes taxable.” It’s supposed to be taxable over three years. What happens if you don’t pay it back? You’d have additional tax in year one, two, and three. You’d have it for 2020, 2021, and 2022. You’d have equal amounts of tax.
Toni: If you’re under 59½, you still don’t get the 10% penalty.
Toby: Yeah. You never get that penalty.
Somebody says, “Can you use PPP or EIDL to pay New York state or IRS taxes?” I don’t think so.
Toni: IRS, you can.
Toby: You can?
Toni: Yes. At first, it said, you couldn’t use it to pay any Federal government debts. The IRS stepped in and said you’re out of your mind. Then, the IRS became an exception.
Toby: Apparently, you can do the IRS. They must’ve done that in guidance after.
Toni: Yup. It was not there before.
Toby: When I first read the statute, I was just like, oh. Trust me, there’s a lot of these questions out. If anybody says they know the answers, they don’t. Quite literally, there was a period of time where it was changing every single day. And is it the IRS, the PPP, or the EIDL? For the EIDL, for sure. For the PPP, I don’t think so.
Toni: […]. No.
Toby: The IRS payment is an EIDL loan.
Toni: Correct. Not for PPP. PPP is very rigid if you want forgiveness.
Toby: Yup. All right. “If you have two rental properties, should I go for two LLCs or keep only one?” I can answer this real quick. If you have two rental properties, the question is always going to be how much equity you have on those properties? There’s good, better, and best.
Good is put it in an LLC. Better is to put an LLC with insurance. The best is to put it in two LLCs and still have insurance. But you don’t want to subject one property to the other.
Somebody says, “I am single-member LLC. No salary but I have debt and materials to buy. Can I apply for a PPP loan?” Lily, yes. What they’re going to do is they’re going to base it off with your net income for 2019. If it’s a brand new business, then they’re going to look at January and February. And then for the EIDL, they’re going to look at what?
Toni: Just 2019.
Toby: Just 2019. You could apply for both if you want.
Toni: For our single-member LLCs and for solo, if we’re talking about sole proprietorship, they’re looking at the net income of the Schedule C. That’s going to be your “payroll.”
Toby: All right. “Can I use a self-directed IRA to fund the purchase of distressed mortgage notes using a C Corp?”
Toni: Yeah. You can hold mortgage notes in an IRA. I was not really sure about using a C Corp part.
Toby: The C Corp puts you in a category where you’re not going to do an IRA with the C Corp unless you’re doing a ROBS transaction. I’m just going to nix this one at the inception. Unless you’re really going to be buying a lot of notes, I wouldn’t even mess with it. It’s expensive to do a ROBS transaction. You could do that with an IRA or 401(k). You can partner with an IRA or 401(k).
Anybody tells you that you can’t, doesn’t know the rules. If you’re going to do it, there’s a specific way you have to do it. If you’re doing the mortgage notes in a C Corp, you’re going to be doing what’s called ROBS (Rollover as a Business Startup). You can look it up if you want.
What I would say is just put an LLC. It’s called a checkbook LLC, but they call it a checkbook IRA. It’s an IRA that owns the LLC, then you do your lending out of the LLC. You’re keeping it out of your IRA. I think I drew that one up earlier.
Toni: You did.
Toby: Yeah. Kind of funny how that happens.
Somebody says, “Which state is considered the home state? I want to know because one of the three states has no income tax.” Let me see. I don’t know what they’re asking. I guess it would matter where you have the property. Maybe you could elaborate a little bit, David. I’m not certain.
“Related to personal income W-2, which state do I pay taxes in if I lived in three states during the year?” Perfect. We answered this once in a previous Tax Tuesdays. You end up choosing the state based on the facts and circumstances, based on where you register your vehicles, where your driver’s license is, where you spend the most time. They can actually get down where they’re counting how much electricity you’re using in a particular state.
Like in California, once you’re there, if you’re possibly there, if the state doesn’t have income taxes, they may not care at all. If you own properties there, you’re just paying the property taxes. It is kind of weird.
Toni: It is very odd.
Toby: This is the weirdest one. We have this question. You can have a husband and wife live in different states and file a joint return. File in two different state income tax returns. It’s weird, the questions we get asked.
Toni: They can also end up in a situation where you’re just filing non-resident tax returns in certain other states when you have income sourced in that state. It just depends.
Toby: “How long does it take to get a payroll tax credit when you’re filing?” It’s 941. I think that’s for the payroll tax. There’s another form that you’re using for the payroll tax credit. My understanding is they’re having a tough time getting them out. Have you heard anybody getting payroll tax credit?
Toni: No. The way that they were doing it so that you saw an immediate benefit from it is you’re still filing your 941 but you’re not having to pay the deposit. If the tax credit you’re entitled to is in excess of that, that’s where you’re filing the advance form to get those funds back. No, I haven’t seen anybody actually get it.
Toby: Yup, it’s weird. You’re applying it so you’re not paying it. If there’s an excess, then you’re supposed to be getting it. The IRS had something like 10 semi-trucks full of mail outside their Fresno location or something. It was a large number that they hadn’t opened because they haven’t been there. There are loans in it. The paperwork is not being processed. I think that’s where you actually mail it in.
Somebody says, “My PPP loan was approved in May. I’ve used all the funds on the payroll. How and when can I apply for loan forgiveness?” It’s a form you could be doing right now. He or she says, “B of A is not helpful.” As usual. We have it. If you reach out, somebody will get you the form. It’s actually a standard form that all the banks use. Do you know the number of it?
Toni: No. There wasn’t a number associated. I know there’s an EZ form.
Toby: Yeah. There’s an EZ form. I forget the number.
Toni: Wait for them to change it again.
Toby: Yeah. “If you file as a sole proprietor and operate at a loss in 2019, do you still qualify for stimulus packages?” Yeah. You can still do an EIDL loan because it’s based on your operating expenses and all that. You’re still able to get people even if they have a little bit of a loss.
Toni: If they had a loss as a sole proprietor? No.
Toby: On EIDL?
Toni: Oh, on EIDL? I keep getting these things confused. For Schedule C, getting an EIDL, yeah. That’s going to be based on your gross income less COGS.
Toby: Yeah. It’s called gross profit. That just means your gross income minus your cost of goods sold. Then, you have your rental losses, too. Yes, you can still get it. Then, you still need to file for an advance, yes. They asked me if I wanted a refund on form 941. That’s weird. I think this might be a different issue. I would say that we want to take a look at it. There’s an actual form that they’re using for the credit that you’re getting back when you’re doing that. You’re looking for an Economic Injury Disaster Loan.
“If you are a full-time stock trader, do you qualify for unemployment if you go bust?” It depends. You want to answer that?
Toni: I’m not sure about that one.
Toby: If you’re an S Corp and you’re an employee, then you could get unemployment. If you are just a stock trader and you’re trying to be a trader in securities, the answer is there’s no way. You could try but you don’t qualify. That’s always the fun part.
My understanding is that when you’re a trader in securities, you’re taking your losses on Schedule C and your income on your Schedule D. That’s usually what gets you audited because it doesn’t make any sense. That’s just what they’ve been doing for all these years. Everybody gets audited and they find creative ways to tell you no.
A trader who’s really doing it full-time every day, hardcore, thousands of trade, don’t take breaks. Those guys will often prevail. What they’re trying to do is take their losses which should just tell you right there, don’t be a trader.
If the successful ones are the ones with the biggest losses, it’s like the guys say. If we lose on every which we sell, we’ll make it up in volume. More fun stuff.
Somebody asked, “Can I apply for unemployment, and also EIDL and PPP?” Yeah, actually, you can, but it’s going to be a little weird. You’re not going to be able to take unemployment and pay yourself a full-time wage, that’s for sure, but your business can still seek those benefits. It’s just that there are certain limitations on what you can use it for, so with the PPP, if you want it forgiven, you’re probably not going to be able to get unemployment because that’s what it’s really there for. Really what it was, they gave money to businesses saying keep paying your staff. We’ll forgive it rather than have them go out of unemployment.
Toni: I don’t know if it was in all states or some states that were allowing a partial unemployment payment to make up for your employer not being able to bring you back full-time. That kind of thing.
Toby: Here’s the same question. This is almost the same as somebody asked in the chat. Maybe the same person. “I have several rental properties but no legal entity and reported loss on my 2019 taxes.” Oh, it’s a different question. They’re talking about sole proprietors. This is a rental. “Do I qualify to apply for an EIDL?” Yes.
Here’s when you apply for an EIDL, by the way, you’re going to get a free $1000 ‘thanks for signing up,’ no matter what. Wait, do they still have the bonus?
Toby: They just ran out of that money, so until they put more money into it. You were going to get a free $1000. If you have employees, you get $1000 per employee.
Somebody says, “Can somebody go on unemployment after eight weeks?” Yes. “If you do the PPP, you get yourself paid back?” Absolutely.
“How do 1031 Exchanges work if properties are held in an LLC?” Here’s how it works. When you do a 1031 Exchange, for those of you who don’t know what a 1031 Exchange is, it’s swapping real estate for real estate. There’s no other type of 1031 Exchange anymore. You’re selling one set of real estate or one piece of real estate or an LLC holding real estate, a real estate in an LLC, and you’re buying more real estate. Either 1, 2, 10, 20, 50 pieces of property, it doesn’t matter. As long as the value is more or the same, then you’re rolling the basis you have in a first property or properties into that new property.
First off, you’re not paying tax. It’s a fancy way of saying if I pay $1000 for a house, it goes up to $1 million, and I sold it for $1 million, as long as I buy $1 million of property, then I don’t have to pay any tax even though I made $1 million. It just rolls it forward. The rules under a 1031 Exchange, you have to go name the names. Did you have anything you wanted to throw on that?
Toni: That was the only piece that I want to make sure of. We do have to have the same ownership. If we’re doing it in an LLC, we want to do the 1031 Exchange in that same LLC.
Toby: Yup. You’ve got to name the names. If you’re selling a property, you’re buying the property on the same LLC. If you say I want to buy out some of the partners, okay. You do what’s called a swap and drop. You enter into an agreement to buy out their interest. You sell the property, buy the new one, refi that property, buy them out of their interest. You don’t do it where you’re just giving them cash and you’re buying ⅓ of the property. You have to close the property that is equal or greater value.
Toni: If we have the property that we’re giving up in a single-member LLC and we want to put the acquired property in a new single-member LLC, we can do that.
Toby: You can drop and swap, in that case. You might drop the property out of the LLC, sell it, then set up a new LLC and transfer into it. Technically, there are people that still get the hibbie jibbies off of that one. I think that you’re okay. The timeframe we haven’t heard anything. You always use a good 1031 Exchange facilitator.
Toni: Qualified intermediary.
Toby: Yup. You always use somebody who knows their stuff.
Somebody’s asking, “On the 199A deduction, is it available for income from rental real estate?” The answer is yes and it depends. If it is residential rental, yes. If it’s a triple net lease, that’s different. Commercial is a little bit different. You have to spend 250 hours. I think Piao Sam already got you on some of that.
This is one of my favorites. “If you do a 1031 Exchange from a California property to a Nevada property, what taxes do I pay?”
Toni: You pay taxes on any booth that you might have. A 1031 Exchange can be done from one state to another state, the geographic location of where that property you’re giving up, and your property you’ve acquired doesn’t really matter. Is there something else to that?
Toby: It’s fun. If you have a California property, I sell it and buy Nevada properties, then I don’t have to pay any tax. California isn’t going to let you go quietly. California wants that tax whenever you do sell that property. They’re going to make you fill out this beautiful form every year. You do a 1031 Exchange and you just have to let them know I haven’t sold the replacement property.
If you sell the replacement property, let’s say I bought a piece of residential real estate that I rented out in Palm Springs. I bought it for $100,000. It becomes worth $300,000. I sell it and I roll that $300,000 into two pieces of property in Nevada for $300,000. I would pay $0 tax. But California knows that I made a couple of $100,000 plus recapture. That is going to be owed to California if I ever sell those. I have to let them know.
Toni: They’re going to poke their nose in every year. Make sure you haven’t done anything.
Toby: Yup. Somebody says, “Can you sell a rental home and buy land as a 1031 Exchange?” Yes.
“Does a 1031 Exchange need to be residential-to-residential or could it be residential-to-commercial?” It could be any real estate to any real estate. Residential-to-commercial is absolutely fine. You could do a mobile home park and buy six single families. You could sell a warehouse and buy 20 condos. Basically, it’s any real estate.
“Foreign national living abroad owns an investment apartment in New York City. Can they 1031 Exchange?” I don’t think there’s a restriction on foreigners doing a 1031 Exchange.
Toni: Not that I have read.
Toby: Yup. I think you’re fine as long as it’s US property that they’re exchanging into. I believe that’s the answer.
“Is there a way to make an agreement purchase before you sell the 1031 Exchange property?” I’m not sure I quite understand that.
Toni: Are you talking about a reverse 1031 Exchange?
Toby: Maybe that’s it. They’re doing a reverse. The answer is yes. You’re probably talking about a reverse exchange. You can actually do construction where you buy land and build a house on it as long as you’re done within 180 days. There are a few different ways.
The starker exchange is when you sell and then buy within 180 days. You have to identify replacement property or properties within 45 days. A reverse exchange is when you buy the property you’re going to go into before you sell your relinquished property.
I’m going to sell a property, I know I’m going to get $500,000. It’s the same thing. I have a property in Palm Springs. It’s worth $300,000. I bought it for $100,000. I go to Nevada and I put two purchase agreements on properties. Here’s what you’d want to make sure. He just answered, “I just want to lock the property.” Make sure you’re using the facilitator or the qualified exchange intermediary to put the purchase agreements on those. You want to make sure that you are not touching those new properties. It’s the intermediary doing it for you. The answer is yes, you can. It’s just domestic.
Somebody says, “Is it international?” No, it’s the United States or the US Virgin Islands. I know you can do that, too.
“Under CARES, I borrow $100,000 from my 401(k). Does the remaining balance remain invested as before into the repayments I make?” What say you, Toni?
Toni: If I had $200,000 on my 401(k), I took out $100,000, the remaining $100,000 is still going to be invested as before. The repayments you make, it depends. You’re going to have to get back into some of the positions that you might have been holding before if that’s the case.
Toby: Correct. If you borrow money from your plan now, it’s a six-year pay back. It’s a year of deferral. The interest accrues but you don’t start making payments until you’re two and it’s over a five-year period, you pay it back, and you pay it on a quarterly basis. Whenever you make your payments back, you can invest that however you want. We encourage that.
All right, you guys made it through another. If you guys like listening to this type of information and we do because we’re nerdy, then listen to our podcast. We break this down and you can always listen to some of the replays.
There’s one more question that I’ve got to answer. “Can I transfer out of my 401(k) with my current job and put it into a 401(k) with my C Corp and then purchase a short-term rental property through the C Corp?” No. You wouldn’t buy the short-term rental through the C Corp. You buy it through the 401(k) and yes, you can. Anyway, these are a whole bunch of fun stuff. You guys are good. You guys always ask.
Somebody says, “I love listening to this. You’re awesome. The Saturday seminar was awesome, too.” Yeah, we did Infinity Investing. We’re going to do one this next coming month in August that is for our Generation Zs. Do you know who Generation Z is?
Toni: People who are younger than me.
Toby: Yeah, […]. We’re going to do one just for Generation Z. Anybody can come on but we’re going to make it special. I think that’s the 22nd or something like that. We’ll give you guys free access, obviously. We always do that for our Tax Tuesdays people.
Speaking of free access, you get free access to iTunes. You get free access to Google Play. We always do a little giveaway for you. That giveaway is, please come to our event on Saturday if you want to learn about real estate. Aaron Adams rocks it, we always have fun, and I’m going to teach you the Tax and Asset Protection basics for real estate. We have one day to do it. We will do this from 9:00 AM–5:00 PM, Pacific Standard Time.
Aaron is one of those guys who’s worth millions and millions of dollars. He managers over 3000 properties, has properties, in Indianapolis, Charlotte, North Carolina, Kansas City, Idaho, and Texas. He comes and he just brings a lot of fun stuff.
Somebody says, “What’s the link for the podcast again?” Here, andersonadvisors.com/podcast. There you go. You can get access to the previous sessions. I’m sure we can get you that access. I know it’s definitely for our platinum people. You’ll get it. We always do it.
“I employ my Gen Z,” yes, “[…] for my business.” Doing what and for how much? You can get them for anything at a fair market value. I think somebody just got it. Piao just got you. He just sent it while I’m speaking. He’s giving you the link.
By the way, the reason we created Infinity was because I look at your tax returns all the time. Toni looks at tax returns. We know who makes money. We know who doesn’t. A lot of the people like to say they made money but they’re really not making any money. I look at cash flow. Cash flow is king, guys. The people that make money and keep the money are the ones doing the boring stuff.
Notice who’s not day trading right now. Grandpa Buffett. He’s sitting on his cash and buying big huge utility companies and energy companies.
Toni: He’s top Buffet.
Toby: Yeah. He actually wrote this to a shareholder, so […]: “You too can own a share for $280,000” and he says, “Be greedy when others are fearful and fearful when others are greedy.” He does a really good job.
Anyway, here’s the link to the investment if you want to learn about real estate. By the way, this is going to be cash flow stuff. This isn’t going to be, you’re going to make million dollars flipping. We will show you how to do the flipping but you’re doing it with the idea that you’re going to buy and hold. Your holding period is forever.
I don’t believe in selling stuff. You buy it and you hold on to it. You think you’re really smart. I always forget what I paid for stuff then I just tell people that I bought it cheaper than I did. I’m like oh, I think I picked that up for $10,000. But it’s a building. Oh, maybe it’s a lot more.
All right, there’s our link to all our social media. By all means, please send us in questions. We get hundreds per week. We don’t charge for this, but we get a really good idea what you’re all looking for, and we’re able to answer effectively.
How did you like this Toni? I know you’ve been on this before. Did you have fun today?
Toni: Yeah. It’s great.
Toby: I just want to say, thank you, Toni, for stepping in. Jeff’s head exploded after the tax deadline. He’s on vacation. What you don’t realize is that Jeff is actually 23. His hair all fell out. We miss Jeff but he has a much-needed vacation. He’ll be back in a few weeks. Maybe. We’ll see.
Toni: Oh, look. That’s a vote for me. He says, “You have a wonderful team.”
Toby: See? I didn’t even tell you guys, we had Piao Sam on, […], Susan, and Patty who were answering all your questions. I didn’t even tell you that, that we have this whole team there trying to make sure that you guys are getting your questions answered. Where else can you get these sorts of things? I don’t know. I don’t think it exists. At least, not at the price of a whopping $0.
We just like doing it and it keeps us on our toes. We learn from you guys, too. You guys rock it. Until next time. This is Toby and Toni.
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.