Toby Mathis and Jeff Webb of Anderson Advisors don’t get paid to answer your questions on Tax Tuesdays. They just want to give back by making sure you don’t overpay on your taxes. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- What’s the best way to transfer a title in real estate without increasing property taxes after a joint tenant dies? This shouldn’t trigger an increase in property values; publish certified death certificate to warranty deed it into your own name
- My S Corp will only make about $20,000 this year. Do I still have to pay myself a salary? It depends; you didn’t make a profit, but did you make any distributions
- Where do I put real estate professional on my return? Real estate professional is an election you make every year; it’s not a form, it’s a statement included with your 1040
- When can I legally take money from a 403(b) and transfer to a QRP? Most plans won’t let you withdraw/take money out, if you’re still employed, except in hardship cases; roll to QRP anytime plan documents allow it
- What is different about filing taxes for options traders as opposed to stock traders? Not much difference; short selling works differently for stocks and options
- Can a husband and wife filing jointly take two separate Roth IRAs and contribute to each IRA annually? You can’t share an IRA; you must have separate IRA accounts
- How does real estate profession benefit me? Real estate profession allows you to deduct all real estate losses against your personal taxes
- Can an individual place Bitcoin in a Roth IRA account? Yes, if plan documents allow it
- Can I pay my life insurance or family dental insurance from my LLC? Can LLC fund my HSA? LLC is not a tax treatment, so determine what it is and if it’s taxable to you
- I learned that a property I bought and rehabbed is in an opportunity zone. Can I retroactively qualify for tax advantages from an opportunity zone? No, the fund must be set up before the purchase
- Is there still a mileage deduction, if I drive my personal vehicle for my business? Yes, your personal vehicle for your business gets $0.58 a mile
- Is the mileage and unreimbursed employee expense no longer deductible? Correct, miscellaneous itemized deductions under the Tax Cut and Jobs Act were removed
- How do we navigate the standard deduction in the business sector? There’s no standard deduction on any business return
For all questions/answers discussed, sign up to be a Platinum member to view the replay!
Go to iTunes to leave a review of the Tax Tuesday podcast.
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.
- Claim your FREE Strategy Session
- Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
- Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates
- Anderson Advisors on Facebook
Full Episode Transcript
Toby: Hey, guys. This is Toby Mathis.... Read Full Transcript
Jeff: And Jeff Webb.
Toby: And you’re listening to Tax Tuesday where we bring lots of fun tax knowledge to the masses. First off, happy summer. I guess we’re in the thick of it, about 100 degrees here in Vegas. Hopefully, you’re getting some sunshine. Just to be completely annoying, “Alexa, play Tax Tuesday.” Let’s see. I didn’t realize that you can control somebody’s Alexa from another machine.
Jeff: Oh yeah.
Toby: If you have that on speaker, you really hate me right now. Maybe that actually switched you off. All right, let’s get jumping on in. It is just a little after 3:00 our time, so we’re ready to get rolling. I already have questions coming in which we will get to. There’s some really good ones already; a lot of questions. Of course, you can ask questions via the chat feature. Let’s get jumping on in.
First off, if you ask live, we’ll answer before the end of the webinar. We’re going to jump onto these. What I try to do is when somebody asks a question that’s relevant to one of the questions that we go over, we try to answer it first, and then we go back, we grab all the ones that were left behind.
Send in your questions at firstname.lastname@example.org—you see the link there—and that’s where I grab the questions we go over. Depending on how quickly our staff gets through them, I usually grab a whole bunch of them. If we have time today, I’m going to dive into all of those as well.
If you need a detailed response, if it’s very specific to you, you’re going to need to become a client. That comes in the form of two ways. You can either become a platinum member or a tax client. Both very easy to do. You can always contact email@example.com and say, “Hey, I need to get some of my personal questions answered,” and they’ll get you where you need to go.
This is fast, fun, and educational. We want to get back and help educate. As you guys know, we don’t get paid to do this. We have a lot of CPAs that jump onto these calls. I just like the idea that business owners not overpaying. For me, that just for whatever reason, I get a little bit of joy out of that. Maybe I’m weird.
If you like this sort of stuff, go to our Facebook and YouTube channels. You can always find them at andersonadvisors.com/facebook, /youtube, all those fun things. I think you can even go to /podcast. All those will get you to where you can actually keep feeding your mind. There’s a whole bunch of fun stuff. More questions coming in, so I think we’re going to have our hands full today.
Speaking of which, let’s talk about the questions we have. These are the questions we’re going to go over today. “Should a California buyer purchase investment rental property in Tennessee, in an LLC or hold it individually with an umbrella insurance?” We’ll answer that. “What is the best way to transfer a title in real estate without increasing the property taxes after joint tenant dies?” “My S corp will make only around $20,000 this year. Do I still have to pay myself a salary?” We’ll answer that one.
“When can I legally take money from a 403(b) and transfer to a QRP and how much or what percentage can I transfer if I’m still employed?” “What is different about filing taxes for option traders as opposed to stock traders?” “Can an individual place Bitcoin in a Roth IRA account?” “I will be shutting down an LLC which has lots of expenses tied to it. Can these be rolled over to the C corp or a new LLC?” “Can I pay my life insurance or a family dental insurance from my LLC?” “Can the LLC fund my HSA?” We’ll answer that as well; HSAs are interesting.
“I just learned a property I bought and rehabbed is in an opportunity zone. Can I retroactively qualify for tax advantages for the wonderful tax advantages from an opportunity zone?” “Is there still a mileage deduction if I drive my personal vehicle for my business or to get a job out of state?”
Next one, “I have two sub S corps.” I believe that you are talking about QSUBs here, “that I placed all my real estate under. Should I place the properties in LLCs? Any tax concerns?” And, “How do we navigate the standard deduction in the business sector?” Let’s just jump right on in and see what we can get. Let’s see what kind of interesting questions we answer today and how many additional questions come out it.
All right. Should a California buyer purchase investment rental property in Tennessee in an LLC or should they just hold it individually with umbrella insurance?
Jeff: I got mixed feelings on this. I got to think that the LLC is going to be the cheaper liability protection for your rental property. I think for the ultimate protection, you put it in an LLC but you still have an umbrella policy.
Toby: Yeah, you always do both. I’ll make it really easy. I’ve actually watched people lose virtually everything they own. End up in bankruptcy is what ends up happening because they followed the advice of doing the insurance. Now, how often does that happen? It’s a very, very low percentage. The question is, why risk? In other words, you’re going into this, why would you put yourself in a scenario where you can lose everything?
If I’m in California especially, I want to make sure that any rental property that I hold does not get drawn back into California, if possible, because California, you have very plaintiff-friendly laws. I want to keep it out of the State of California and there are ways to do that.
Let’s just say that we have a piece of property. There’s inside liability. If something bad happens on that real estate, you want it to stay inside that box. But I’m standing out here and I do something. Let’s say I’m driving down the road in my sports car and I hit somebody. That person sued me. They’re looking at outside liability. They’re going to come after my LLC.
For real estate, we always want to have the inside liability trapped in a local LLC. That would be a Tennessee LLC, if that’s where the real estate is. Now, there are some fancy ways to get around this sometimes. I’m just going to say that, as a general rule, you’re going to put it in there unless there’s a reason not to.
But my outside liability, I may stick another LLC and hold it in Wyoming that’s going to own that piece of real estate. So, if anybody other comes after me, they’re going to be stuck with the State of Wyoming. The reason we do that is because you have charging order only protections. So, you get into this.
Somebody says, “In that situation, living in California and property in another state, how do you avoid getting double taxed?” Because Tennessee taxes you, in this particular case, we’d be looking at having you own it individually and then assigning your interest over to Wyoming because they have something called a Family Owned Non-Corporate Entity Exclusion that does not tax you. The income will always flow onto your personal return here and end up on your California tax return personal.
The taxes are going to flow down to you no matter what. In this particular case if we’re using Tennessee, we don’t want to be subject to Tennessee taxation, so we’re going to make sure that we qualify under FONCE—Family Owned Non-Corporate Entity—an LLC qualifies if you own it, will assign that to a Wyoming entity so that nobody can ever take your stuff away, and what we’re going to end up getting to is a situation where you have lots of asset protection, the tax all flows down onto your personal 1040, and we literally will have zero tax returns if we don’t want to.
Somebody says, “Can you replace Wyoming with Texas?” Texas is good, but the best is Nevada and Wyoming. Those are the two best as far as having very clear-cut statutes that say the sole and exclusive remedy even in the case of single owner LLCs is a charging order. So, you want to make sure that you get away from that court having any ability to get around the LLC and you want to stick it in a place where it’s not in your backyard. It tends to make state judges go a little nutty when they don’t have jurisdiction over identity and end up having to go to Wyoming, in this case, and assert your interest against theirs and all they get is a lien.
There are a lot of questions coming on this. “Do you still pay the LLC fee?” It’s actually $800 a year. They said $700. It’s $800 a year. Yeah, you’re still going to pay the $800, but it’s typically going to be on what you own. I would have it under the Wyoming.
If you ask California, we just had a supreme court decision that is horrendous for anybody who deals with California and that was the commissionerization that our supreme court just reconsidered for the third time, where they said that the California Franchise Tax Board was not liable for tortious conduct towards its citizens, even if they go out of state.
I’m not going to get into all of it, but it was a pretty bad tax scenario where they followed somebody into Nevada, broke into their house, dug through their garbage, and they just got found where they’re not responsible. They can’t be held liable, so they’re going to be very aggressive. If you’re asking, they’re always going to say, “Pay us the tax.” What I do is I say, “Hey, I have one LLC that pays the tax, and leave it at that,” so I’m not going to keep jumping into.
“How does that flow onto the tax return?” Laurice, it flows onto your 1040 on your Schedule E, which is where your real estate holds, and the way it flows through is this Tennessee entity is always going to be ignored for tax purposes. I’m just going to pretend that it’s not even there. It’s not going to file Tennessee taxes. You’re going to file the taxes on this.
Now, you may still have to file a Tennessee tax return for that rental income. It would be no different than if it was just you owning it. That Wyoming entity is either going to be a partnership which files a 1065 or it’s going to be disregarded, meaning, it doesn’t file anything. If it files a 1065, it flows onto page two of you Schedule E. If it’s disregarded, it just goes to page one of your Schedule E. Jeff, if I said anything that’s wacky?
Jeff: No. I agree. And the nice thing about Tennessee is, like Nevada, Texas, and Wyoming, they don’t have an individual income tax, unless you earn an interest and dividends. I believe they tax those. So, again, you may have to file a form with Tennessee, but it’s not going to matter whether if it’s on LLC or not for tax purposes.
Toby: Now, here’s some […] Oklahoma. Yeah, you could do Oklahoma. You could just change the name. I have property in Oklahoma and this is exactly what I do. I have, in Oklahoma City, a few dozen properties there and we do the exact same thing. We have an Oklahoma LLC pointed to a holding company that falls under our return and it files a partnership return. So, it’s pretty standard is what you do.
Somebody said, “What about the anonymity? Can’t they still see me in Tennessee?” if you want to get away from ownership being traceable back to you, you use a land trust. I don’t want to get too far off-track. You use a land trust to hold the real estate. That way, it’s not even in the LLC name, so they don’t see your name. That’s how it gets kind of fun.
[…] somebody says, “Use an EIN from owner, not disregarding […] anything to be aware of in completing this form?” No, and W-9 that’s federal tax. Again, they’re tying it in. The question was, “Hey, I’m a W-9. It’s asking for the owner’s social security number because that’s where it’s going to be reported. Even if an LLC has its own tax number, we’re telling the IRS to ignore it. Now, if it’s a partnership, different story. It’s filing its own return. It’s giving you a K-1.
Jeff: But real quick on that W-9. You’re going to list on line one, you’re required to list the ultimate owner’s name. And line two, you will list the LLC’s name.
Toby: Somebody always pops in. Going back to Tennessee, somebody says, “Hey, there’s an excise tax in Tennessee.” Correct. That’s why we file the FONCE, which is how we avoid it. It’s a Family Owned Non-Corporate Entity Exclusion. That’s why we’re filing the FONCE. The LLC is always going to need a registered agent. If you live there, you act as your own. If you need one, then it’s us. You’re always going to do that and yes, there’s a cost to it.
It’s cheap insurance. Trust me. You always have to be careful when lawyers say, “Trust me,” but you want to look at it and say it’s much better to have something and go, “Man, it’s $125 that I just threw away and never need it,” than to lose everything saying, “Man, I wished I had paid that $125. That would have been way cheaper.”
What we’re really talking about is avoiding the lawsuit altogether. We don’t want someone to see everything you own. This is a tax webinar, so I’m just going to say from a tax standpoint, we set these things up to be ignored. From an asset protection standpoint, you set things up to where people can’t see it. The whole idea is if they can’t see that you own stuff, the likelihood of you being sued goes down considerably. In fact, it will go down to zero.
We have tens of thousands of clients that own substantial assets. They just don’t get sued very often. It’s very, very seldom. Now, I can tell you when we see problems, it’s almost always somebody walking in, who went off adjust insurance and the insurance gets declined or they’re dealing with insurance with the reservation rights and they’re freaking out because somebody saw what they owned.
We had a father-son team where we saw this thing play itself out. It was a multi-million dollar claim where they were looking for a responsible party. The son got out for nothing, literally because they couldn’t see what he owned. Dad had everything in his name and they pegged him to the wall. They would just not let go of him.
You have something called joint and several liability in many cases where if you’re 1% at fault, you’re 100% liable. They’re just looking for the party that they can name that has the money. You like having all your stuff in your name, then you’ll get that joy of getting those lawsuits. If you don’t have it in your name and you have it separated out where they can’t trace it, then you don’t get it.
Somebody says, “What’s FONCE?” Family Owned Non-Corporate Entity Exception. It’s in Tennessee and keeps you from paying the excise tax.
Somebody says, “Platinum member. What is my cost to be a registered agent in Texas?” I think it’s $125 a year. Michelle said, “Each rental property gets its own LLC. Does each land trust only hold one property and could I put all my rentals in one land trust?” You use separate land trusts and Michelle, you may put two or three properties in an LLC. Best practice is to have one LLC, but we know there’s cost involved and every state is different. So, if you’re in Ohio, it’s really cheap. If you’re in Texas, it’s more expensive. You’re always looking at it saying, “Hey, what is it worth to separate it out?” It really depends on what type of property it is. Is it a $1 million property with $500,000 of equity or is it a $50,000 house?
You can go in and say, “Hey, I really don’t want to spend a ton of money on my LLCs because they’re really expensive. Maybe I’ll use land trust,” and that’s way better than, “I don’t want to throw a bunch of money away.” Unlike little houses, $25,000 houses if you’re in Tennessee, for example or in Kansas City or some of these others, you may not want to spend $1000 setting up an entity. You may say, “Hey, you know what? I’ll just go with the land trust and I’ll put five or six properties.” It’s whatever you’re willing to lose. So, again, I can tell you best practice is separate LLCs, but I know that’s not always the case.
“When would you use a land trust versus a DST—Delaware Statutory Trust—to own a property?” A land trust is a grant or a trust ignored for tax purposes. So is a Delaware Statutory Trust, but the Delaware Statutory Trust are used when you’re doing a 1031 Exchange, generally speaking, otherwise your land trust is going to be sufficient depending on what state you’re in. In other words, the land trust should be a local entity. If you’re using a Delaware Statutory Trust, more likely than not you’ll have to have a land trust pointing to it anyway.
Lets see. “My properties are managed by property managers. When the property manager told someone that I’m the owner, someone can still find out.” Carolyn, let’s say that you’re my tenant and you find out that this Toby Mathis guy owns your house. Then you say, “Hey, I’m thinking about suing him.” Then they run Toby Mathis and they go see, “What else does he own?” They can’t find anything else. That’s what you want.
You don’t want it to where, “Hey, nobody could ever know that I own a piece of property.” What you want to make it is that unless you tell them or unless they must know somebody and they really had to dig around for it, they’re not going to find it. I would say, “Good luck. You know who I am. Go find everything I own.” It would be really difficult. All you’re trying to do is put up hurdles so people don’t just […].
I’ve had clients that have been sued simply because they could see that they own a personal property in California in Huntington Beach and they say, “You must have money.” There’s always going to be a threshold where you say, “Hey, someone’s just bad taste.” What you don’t want to do is tempt it by saying, “Hey I found your property and by the way, I could see you own 10 more in town.” That’s a much different lawsuit. “Hey, I have something I could get and the local judge can order it.”
A bunch of questions to that land trust. “Does it trigger the due-on-sale clause?” Not necessarily. Faviola, this is under the Garn-St. Germain Act. Garn-St. Germain says that if you have a piece of property that you put into trust and it’s your personal residence, they cannot call the note due. But as a practical matter, when you put things into trust, banks don’t call them due.
We’ve done tens of thousands of these and never had one called due. You don’t get them called due when you put them in an LLC either for the most part. The only time you see them called due is when you tell the bank, “Hey, I’m going to put it in there.” As long as they’re getting paid, they generally don’t care.
Let’s see. Somebody said, “Hey, I asked it because I had property in an LLC, but whenever I refinance, the bank had me quit claiming it to my name.” Whenever you refi, even in a trust they’re going to make you take it out of your name, having take it back, and put it in you name if it’s a conventional loan.
Jeff: I’ve seen that quite a few times.
Toby: Yup, and the reason being it’s because with the land trust or an LLC, I can change the ownership very quickly, so the bank doesn’t know. It kind of gets funny.
Jeff: The only time I’ve ever seen a note called in those cases is where the bank felt that their investment was truly in danger.
Toby: Yup, and if you do a commercial loan, by the way, and you do an LLC, they’re not going to want you to close in your name. They’re going to want to close in the name of the LLC and they’re almost always. I’m just going to tell you because I’ve done a bunch of these. They’re almost always going to want to loan to be with this special-purpose entity, usually in Delaware, and the property to be owned by another LLC. In other words, they just don’t want the headache of you or the properties getting into the way of that loan, then in which case, they’re going to do a loan directly to you.
If you ask for lenders, I could tell you A10 is a good one, CoreVest is a good one, there’s some really good guys out there. They will not let you close in your name. That’s when you’re actually buying in an entity.
“Do we have to list every property or a total amount on the 1040 Schedule E?” Laurice, if you have a bunch of personal properties that are going one page one, they would be listed. If you do this through a partnership—hint, hint—then you do a total and it goes on page two of your Schedule E.
Jeff: But then we have to list them separately on the partnership return.
Toby: Yup. Here’s why you use the partnership. If you go in for a loan and you have 50 properties on your page 1, good luck. If you go in for a loan and you have a K-1 that says, “Here’s the total amount that you’re making,” much easier I’ll just going to say.
If you are ever going to sell commercial property, you want to make sure that it’s in a partnership because the buyer if they’re financing it, for example they’re buying an apartment complex, they’re going to need that separate tax return to qualify for the loan and it’s really going to be frustrating when you try to, “Hey, I saved a little bit of money, but now, I can’t sell my building.”
“We have a lender’s name here for the ones that won’t close without an LLC. Can we have the lender’s name here for the ones that won’t close?” Oh, CoreVest and A10. There’s a whole bunch out there, but you look at CoreVest is the one that I use. I’ve done both; trying to think if I’ve done some others. I’ve done some others. A bank in Hawaii, I’ve bought some properties there.
Somebody just asked, “Would you do the same thing in Indiana if you live in Hawaii?” Absolutely. That’s exactly what you do. You’d own the property via Indiana LLC or land trust pointed to an Indiana LLC, have that owned by a Wyoming LLC, and then you would own it, you’re living in Hawaii. Sounds complicated, but once you get used to it, there’s only one way to do it right. It’s kind of like, “Hey, here it’s easy.”
Somebody says, “We are building a new house. It will be partially financed. At what point do we did it into a living trust?” After you cash out that loan. When you’re doing a building loan usually they’re going to cash it out when you’re done.
Let’s see. “What is the best way to transfer title in real estate without increasing property taxes after a joint tenant dies?”
Jeff: I wouldn’t think this would trigger an increase in property values.
Toby: All right I’ll tell you this. I have never seen it trigger when you move it from the surviving joint tenant to their individual name. Usually, it’s county-by-county, state-by-state, but if you are a joint tenant and you’re the survivor, generally speaking, you publish the certified death certificate and in some cases, you’re doing an affidavit saying that you’re now the sole owner and you’re going to warranty deed it into your own name.
You don’t really have to do that, though, because just by being a joint tenant with right of survivorship, you are the owner when the other joint tenant passes. You’ll need it when you sell it, but a lot of people just let it sit there and just keep paying it, even though it’s in both names.
You do not have to probate that asset just because it’s joint tenant should right of survivorship. What you do need is the death certificate. If somebody passes and you’re a joint tenant with right of survivorship, just make sure you get that and in many cases, you just file that with your county and be done.
“If I put a property in a land trust, would the title name change too since it’s public record?” Yes. It will be yourself as trustee or a lot of times, what we do is an LLC. We’re kind of evil. We don’t like people being able to see what we own. So, we usually use an LLC as the trustee. It’s kind of fun.
Let’s keep going on to the fun stuff. “My S corporation only make around $20,000 this year. Do I still need to pay myself a salary?” This is a tricky one.
Jeff: Do you want to do the multiple answer?
Toby: No. I like to watch you, Jeff, because I know what he wants to do. He wants to say…
Jeff: “It depends.”
Toby: There you go. I thought you’re going to say, “Yes.”
Jeff: No, I’m not going to do that. Say, you didn’t make a profit, but then it comes down to, “Did you make any distributions?”
Toby: There you go. That’s the big one. The answer is, if you make $20,000 and you left it in the company, no. If you made $20,000 and you took it out, the answer is yes, you have to pay yourself a reasonable salary. Then, how much did you pay yourself as a salary?
Jeff: I think this question gets a little harder with the smaller profit because you have reasonable versus what you can adequately pay.
Toby: This one’s fun. The test is, generally speaking, a reasonable salary, but the question is, what’s a reasonable salary? It’s facts and circumstances and they give us no mathematical test. What we know is that there are cases and every case it seems like they do about a third.
Jeff: Yeah. They like to tell us we’re wrong, but not necessarily why we’re wrong.
Toby: Here’s the thing. You’re not going over to court over taking a third. Have you ever seen an audit actually go off the rails when they’re doing the third?
Jeff: No. I haven’t really seen that many go off the rails. It’s a different audit.
Toby: And they’re so excited that you’re actually paying yourself a salary because 80% don’t.
Let’s see. “I switched two rental properties under my name to two LLC two months ago. I also got the local title company to do quitclaim deed to get my ownership to LLC, but I wonder why a city website in Philadelphia, I can still see the name as the owner of those properties?” Chances are it’s because it hasn’t updated. Sometimes it takes a while. The thing about Philadelphia or Pennsylvania as a whole is that’s the one state where they’ll charge you for the transfer into anything, even if you put it into a trust. It’s pretty annoying.
Somebody says, “How would the $20,000 flow to your tax return?” Rory, the S corp files a Form 1120S and it issues a K-1 to the owner. That K-1 goes the owner’s 1040 Schedule E page two. You’re going to see we like page two Schedule E. That’s how it flows. That $20,000 is going to show up as income, just the profits. If you took no salary, obviously it just flow down. You’re going to get what’s called a 199A deduction, which you’re going to shave off 20% of that most likely. If you have $20,000, you’re going to get a 20% haircut under the Tax Cut and Jobs Act. You’re going to only have to show $16,000 of income.
Jeff: I always wait for you to do the math so I can check it.
Toby: Yeah. So, that’s assuming that you’re not way or above some income threshold.
Somebody says, “Is it possible to pay a salary at the end of the year instead of taking a salary every month?” Absolutely. In fact, there’s no federal law that says you have to pay people on a regular basis. There’s state laws that do, but you’re an exempt employee.
Jeff: And we see that a lot with closely-held businesses. Single owners and such that they’ll pay themselves near the end of the tax year.
Toby: Yup. Hey, this is an interesting one. This is going back to our previous question because I just can’t let it go. “What tax status should we elect? Partnership or disregarded for a Wyoming holding company that owns Wyoming rental LLCs with California properties out of my interest?” I already like that structure. We actually won an audit on that about two years ago. Maybe it’s three years ago now.
Technically, what you want to make sure is that the holding company is owned by a trust. You don’t want to personally own it. You want to own it through your living trust and we actually won that audit. It was kind of fun.
All right. We get a husband and wife who are living in California and materially participates. I like the material participation, but if your going to be a real estate professional, which is the bigger one, you have to so the seminar 50 hours and materially participate. That’s called electing real estate professional status. You actually put on the notes of your return. You’d want to aggregate all of your activities, too, and then you have an LLC taxed as a C corp to manage it.
So, Diana, you’re doing it exactly the way that I would structure. You have your California entity there that’s already paying the $800, you’re not being a complete pig, and then you’re making sure that when you’re acting, you’re acting as a trust. You’re going to make sure that you’re a living trust or if you don’t have a living trust, you can use a personal property trust owned at Wyoming. Under your situation, if I’m not looking at financing, I’m going to have that as a disregarded entity. In fact, zero tax returns is always best.
If you are going to do financing or you’re going to have to go out and get a loan, then you’re going to want to make sure that your filing that partnership return, but then you’re going to have to file a California Franchise Tax Board, the $800 on that LLC. It’s up to you.
“Where do you put ‘real estate professional’ on your return?”
Jeff: Real estate professional is an election you make every year. It’s not really a form. It’s a statement that gets included with your 1040.
Toby: So, you just track the 750 hours and you’re just making a certification that you did it. Technically, it’s 750 hours and 50% or more of your personal services, whichever is greater.
Jeff: And where does calculation actually goes is on Schedule E page two at the bottom of the form.
Toby: Yup. You’re going to see that. It keeps coming up. That page two is our magic number.
“Is it better if a holding company owned by a living trust or DST?” I’m going to say two different animals, but I’m going to say a living trust is where you generally want to have everything pointed.
Somebody says, “Hey, if I […] my living trust and I’m sued, will my LLC assets be subject to charging order?” It doesn’t matter whether you’re a living trust or you’re just you. It makes zero difference. I hope that makes sense because living trust provides zero asset protection. They’re just there for estate planning.
“When can I legally take money from my 403(b) and transfer to my QRP? And how much or what percentage if I’m still employed?” You want to hit this one?
Jeff: When you can take money out of your 403(b) depends on whether you’re still employed. A lot of plans won’t let you take money out. Most plans won’t let you withdraw money if you’re still employed, except in hardship cases. That includes 403(b), 401(k), 457 plan. It’s going to be determined by the plan itself, the 403(b), and your employer.
Toby: Yup. What it really comes down to is, “When can I legally take money out of my 403(b)?” Immediately at any time you want. There’s nothing illegal about taking money out of a 403(b). A 403(b) is a fancy way of saying a non-profit’s retirement plan. So, that’s like a 401(k) for a non-profit.
I have a 403(b) or a 401(k) or a 457 or you name it, whatever, they’re all basically the same rule. They have plan docs. I could roll it to a QRP anytime those plan docs allow. For example, if you’ve ever set up a 401(k) through Anderson, you know that our 401(k)’s profit-sharing, Roth 401(k), they all allow in-service distributions, which means you can roll the money out anytime you feel like. Some people’s plans don’t. So, actually you have to look at the plan, but there’s no law that says you can’t.
Jeff: One thing I would add to this, anytime you’re going to do this transfer from a retirement plan to your own QRP, if you can do a trustee-to-trustee direct transfer is always the best route to go. It causes less issues with the IRS thinking that you took the money […].
Toby: We’re getting hit with lots of questions. Let’s see. “What is different about filing taxes for options traders as opposed to stock traders?”
Jeff: There’s not a whole lot of difference. Recently, […] some years ago, we used to get no reporting for option traders.
Toby: Now, you get deferred to see, get all this.
Jeff: Yeah. It’s so similar to the stock trading. As far as the tax laws themselves, there’s absolutely no difference. Short selling works a little differently both for stocks and for options, but otherwise, not much difference.
Toby: If you are trading in the market, the question is when you become a business. I never want to make this a question that I’m trying to prove to the IRS, so I tend to avoid it by using LLCs and corporations. If you are in the stock market and that’s what you’re doing, then what happens is the losses become ordinary losses if you are a trader in securities.
Securities includes both options and stocks & securities. Frankly, it could be futures. It could be currencies. Technically, it could even be Bitcoin because Bitcoin is not a currency. It’s even a capital asset. All of those comes in and comes into play when you’re deciding how to treat it.
There is no difference between that tax filing for option traders and stock traders. It all goes on your 1040 Schedule D. But if you’re going to file as a trader, you better make sure that you’re either buying stocks repeatedly throughout the day and I would say probably 700 trades a year round trips. Option traders have a much easier time doing that since they tend to be in and out on the option they swing. They’re so volatile.
Somebody asked, “Can a husband and wife filing jointly take two separate Roth IRAs and contribute $7000 to each IRA each year? Does that make sense?”
Jeff: Actually, you have to have separate IRAs. They’re individual retirement accounts, meaning they should truly individual. You can’t share an IRA.
Toby: Yup. Somebody says, “How does real estate profession benefit me?” I’m just going to touch on this real quick. Real estate profession allows you to deduct all real estate losses against your personal taxes. It becomes ordinary.
Here’s a fun one. “Can an individual place Bitcoin in a Roth IRA account?” The answer is, yes. It’s just whether the plan documents will allow it. It gets back to this thing where if you open up an account, let’s say, TD Ameritrade, they might not let you buy real estate or do Bitcoin. They’re all capital assets.
Jeff: The biggest issue here is custodians hate these kind of things. They hate real estate hard-to-value assets. This is a perfect time for the checkbook IRA.
Toby: Either a checkbook IRA or a self-directed IRA or avoid the IRA and just do a 401(k). In any case, what you want to be away from is someone who’s plan documents were saying you can’t do it. If you wanted to do a good self-directed IRA, they’ll probably let you do it whatever you want there. If you want to avoid the custodian, you could just do a 401(k).
Somebody says PENSCO, IRA Club; there’s a bunch of good ones out there. With us, we do our own 401(k) and it lets you do whatever you want, of course. There are some reasons you use a 401(k). You can pool your account together if you’re husband and wife, and you can contribute a lot more. Each person could contribute $19,500 this year, max $56,000 with the catch-up provision is an extra $6000 if you’re over 59½.
“Do you mean 401(a)?” Our 401(k) includes the profit-share component to it. It’s basically a solo 401(k) which includes the 401(a) provision and the Roth 401(k). You can buy it, again, whatever you want beside those.
Jeff: There are some exceptions, though. You can’t put collectibles on them.
Toby: Yeah. I knew what you’re talking about. There are certain things you can’t buy. Collectibles would be one.
Jeff: Insurance is the other that I’m aware of.
Toby: 401(k)s can actually own insurance. It depends on the type of insurance. They generally can’t do term and it depends on the type of gold or precious metal you’re buying.
Jeff: Right. You can’t put rare coins in an IRA but you can put in modern gold coins.
Toby: And somebody’s pointing out that the catch-up is actually over 50. Yeah, you’re right because gray hair’s 50. So, may you catch-up.
“How lucrative is buying discounted promissory notes and/or trust deeds to generate passive income?” If you’re asking that inside of an IRA or 401(k), that’s one thing. If you’re just asking in general, it can be very lucrative, depending on what you’re buying. It always comes down to it.
Jeff: One thing I had thought about is I approach that magic age of 70½, I’m a little more wary of hard-to-value assets in my IRAs.
Toby: Because you’re having to do the required minimum distributions and then they’re going to say, “Hey…”
“I will be shutting down an LLC which has lots of expenses tied to it. Can these be rolled over to the C corp or a new LLC?” That’s an interesting way of saying it. If you shut down an LLC—let’s go through this real quick—you’ll never going to get 1244 stock loss treatment on an LLC. If you have losses stuck in it, it’s going to be a capital loss, which means it’s going to offset capital gains. If you have other capital gains, go for it. Otherwise, you cannot roll them into something else. You need to keep that entity alive and have it generate income at some point.
Jeff: The only thing I thought was that the LLC was actually disregarded to a C corporation. In that case, I would think that any expenses that the LLC will stay with the C corporation.
Toby: Yes. If you have an LLC that is disregarded to a C corp, never really seen that. But let’s just say that you did, then it would be the C corp. It goes to the owner. But if this is an LLC that’s disregarded just in general, those losses you would have taken personally on your Schedule C. If it’s partnership, you’re going to have some of those losses. If it’s a C corp, you’re not. You’re just going to have capital losses. If it’s an S corp, can you disregard to an S corp? Yup, you can actually do that, too. Again, it all comes down to a whole bunch of ‘what ifs’ on this.
Jeff: Yeah. You’re just not going to be able to move those expenses to another entity.
Toby: Nope. Not unless if it’s owned by one. Interesting question. I guess the answer’s really going to be an ‘it depends.’ We got to look and see. As you guys know, if you’ve been on this call before, LLCs are not a tax designation. You never say to the IRS, “Hey I’m taxed as an LLC. What you do is you take that LLC and you pick a tax treatment of either ignore it, which is called disregarded, treat it as a partnership, treat it as a corporation, and if it is a corporation, treat it as an S or a C. You’re always picking one. If it’s ignored, then whatever the owner is, is whatever it’s going to flow. C corp owns an LLC, makes it disregarded. It’s flowing onto that C corp.
Jeff: Somebody asks, “Can you disregard an LLC to an S corporation?” The answer to that is yes, you can.
Toby: Absolutely. Good questions. I always love these. If you ever wanted to annoy somebody, you just say, “LLC is a tax designation.” Show me where it is on the SS-4.
“Can I pay my life insurance or a family dental insurance from an LLC? Can an LLC fund my HSA?” We’re going to go back to this previous question and we’re going to say—that’s why we love these questions—the LLC is not a tax treatment. We have to determine what it is. Let’s say that I have a C corp. Could it pay for your life insurance? It could always pay for your life insurance. The question is if it’s taxable to you, if it does.
Most people are aware that there is an exception for group life insurance with a death benefit of under $50,000. I tend to begin there’s so many restrictions on it if it’s top-heavy. In a C corp, maybe. In an S corp, no way. That’s always going to be taxable to you. Dental benefits? Again, if it’s a C corp, you can write them off. If it is an S corp, it’s taxable to you. And if it’s an LLC that’s ignored, then it’s going to taxable to you as well.
“Can the LLC fund my HSA?” Again, it depends. If it’s a C corp, the answer’s really, unless it’s providing an employee benefit, there’s no reason for it because you can write it off. You don’t need to have a deduction as a C corp. You wouldn’t have the business paying for it. You would just pay for it because you can write it off up to $7000 this year for a family.
Jeff: Right. $500 for an individual.
Toby: Let’s see. Somebody says, “Anderson Business Advisors have a retirement planning division other than Seattle?” Yeah. We have an office in Tacoma on Broadway. You can absolutely go and check those.
“What about medical insurance premiums?” That’s a great one, Mina. If it’s a C corp, it can reimburse anything and everything that’s medically related. If it’s for the cure or mitigation of disease, you can write it off. You don’t have to worry.
It’s a health savings account for those guys who are asking. What it is, is it’s an account that I can write off and it’s really the best of both worlds. I get to write it off as an individual. It’s like an IRA, but it’s a health savings account. As long as I use that money for health expenses, I don’t have to pay tax on it. I can write it off and I can use it for medical expenses.
Now, if you have a C corp already floating around out there, there’s no reason to do an HSA because when I put money into it, I’m going to be doing mutual funds or whatever they’re going to allow me to do it. If I keep it in a C corp, then the corporation can continue to grow that money however it wants and it can just reimburse me.
I tend to do what’s called a health reimbursement arrangement (HRA). We’ve been loving those for years. In an S corp, if you’re greater than 2% shareholder, it’s treated as taxable income to you.
Somebody says, “I have health insurance through my employer. Can I write off those expenses to my C corp?” Walter, the answer is I can’t write off anything that I did not pay tax on. I have to make sure that I’m being reimbursed for something that came out of my pocket and not the employer’s pocket. If the employer pays it but you pay tax on it, you can reimburse it. If the employer pays it and you do not pay taxes on it, then you cannot.
Let me give you the real-life situation. I’m married and in our company, we cover the primary employee for their health. If you want to cover your family, you can cover them under our plan, but that comes out of your paycheck, the difference. Let’s say that it’s $500 to cover primary employee, but it’s $1300 to cover the family.
Let’s do the math. The $500 was covered by the employer of the $1300. So, there’s $800 a month that is coming out of my paycheck. Even though it says the employer is paying it, I am reimbursing my employer. Now, my C corp could go and reimburse me for that. Absolutely. That will be $9600 just on the insurance premiums alone, not to mention it can also reimburse me for my copays, deductibles, and anything that’s not covered by insurance.
“What if the C corp is not making money? Can I write off medical insurance?” Yeah. You can still write it off. It just carries forward.
“I’m still a W-2 as a C corp the standard deduction on my personal 1040 I already around $24,400. Should I deduct all medical off the C corp?” Yes, Sarah. That’s the whole point. We don’t want to use up that standard deduction. It’s too tough plus you have to exceed 7.5% of your adjusted gross income before you can even start to take it.
“What if the $800 was pre-taxed?” Then you would not reimburse yourself. If it was pre-taxed, then there’s nothing to reimburse since you didn’t pay for it. Somebody else paid for it. I hope that makes sense.
I’m always looking for stuff that came out of my pocket. Let’s say I had a deductible. The deductible was $5000. Yeah, your C corp can reimburse you for that. What’s the biggest one you’ve seen this year in terms of reimbursement?
Jeff: I’ve seen them between $10,000 and $20,000. I haven’t seen huge ones yet this year.
Toby: Yeah. $10,000 and $20,000 just on the reimbursement alone and that’s about right.
Jeff: Just the reimbursement. Right.
Toby: Yeah. That’s tax-free money.
“Can I use the HSA to offset long-term health care premium?” I’m not sure if the HSA can be. I don’t know the answer sitting here on that one.
Jeff: I want to say yes, but I’m not sure.
Toby: I think it’s just for medical-related expenses, but maybe. John, your C corp again could reimburse you for qualified long-term care premiums for insurance.
“I thought health care premiums and long-term care premiums are not taxable?” Yes, they are, actually. The IRS says you can deduct them, but then they give you these ridiculous limitations of what you can actually write off.
Jeff: It’s age-related and if you’re pretty young, you’re very limited.
Toby: And you have to exceed 7.5% of your…
“How long will deductions carry over if a C corp is not making as much?” I think it’s almost indefinite now. Forever. Sarah, what you do is if you have a C corp and you eventually just say, “I’m done with it. I have all these losses,” that’s when you dissolve it and take the losses personally. That’s called a 1244 stock loss.
Jeff: But you got to have stock. It’s got to be a corporation.
Toby: It’s got to be a corporation. This works for your C corp members, too then. It depends on what you mean by members. If it’s a C corp and you have employees, then yeah. In fact, you can’t discriminate.
Anyway, we got to get to another question. “I just learned a property I bought and rehabbed is in an opportunity zone. Can I retroactively qualify for the tax advantages?” The answer is no. This is straightforward. I wish I could say it depends. I don’t think you can.
Jeff: I was thinking the fund has to be set up before the purchase.
Toby: Yes. There are three levels of benefit for doing an opportunity zone. For those of you who don’t know what an opportunity zone is, it’s an economically disadvantaged area where congress is giving you tax incentives to invest. The benefit is you can take any capital gain, enroll it into that opportunity zone through an opportunity zone fund.
An opportunity zone fund is an LLC taxed as a partnership or corporation or a partnership for a corporation. Usually, you set up an LLC, tax it as a partnership, and you file a piece of paper with its first return saying it’s an opportunity zone fund.
Now, the first thing you get is I roll the capital gains that I just happened to incurred in 180 days. There are some ways around that, too, depending on whether this was through a private placement or something that you were just a passive investor in or if it’s a 1231 capital gains. Think of this. There’s 180 day test unless there’s an exception.
Jeff: But the 180 days starts at the…
Jeff: No. I think it starts at the last day of the year.
Toby: It depends. If it’s 1231 and it’s a net loss or net gain—you’ll be a net gain in this case—it would be from January first or you could choose to use the date of the sale. It depends on what suits your purpose. There are exceptions. I’m just saying it’s 180 days, unless you got an exception.
If I just sell a piece of property and it’s in my name, then I’m just going to roll it in there as investment property. Let’s say I put that in there. I’m deferring that. I’m going to defer that for seven years right now. You’re going to have to pay tax 2026. You’re going to get a nice deferment, but you’re only going to pay tax—I’m not going to get all specific—on 85% of the gain in 7 years. And then you’ll never pay tax on anything again so long as you hold that property for at least 10 years. Even if it makes $10 million, you pay zero tax.
That’s why people like the opportunity zone. But you can’t retroactively get into it. You have to designate and create a fund, and then that fund needs to buy opportunity zone property. My partner, Clint, did a fantastic webinar. I’m sure it’s up on our site. He goes into this stuff; there’s lots of nuances.
Let’s see. “If I understand correctly, I can have my C corp reimburse me my life insurance premiums.” Nada.
“Can I reimburse my wife which is an officer and two kids as part of the board life insurance premium?” Robert, it doesn’t quite work that way. In theory, you can deduct up to—for a group life policy—$50,000 of death benefit, which is very minimal amount. Then, if it’s top heavy, meaning that it’s you and your family, then it doesn’t work at all. It’s not life insurance. It’s health insurance. Any other, then it can cover all of your health expenses. You can do long-term care, though.
Let’s see. It says, “I have an LLC for buy-and-hold. Some expenses I couldn’t deduct because it’s not a qualified expense. Can I include these expenses with the C corp?” Potentially. It depends on what you mean by non-qualified expense. That doesn’t make a lot of sense. It’s either something you can write off or it’s not, if it’s business-related or related to your real estate.
If it’s not deductible but it’s added to basis, that’s a different animal. But if you have expenses that maybe somebody saying, “I can’t write them off,” for whatever reason, you could pay the corporation a fee, write it off individually. Maybe the corporation can’t write it off, you just have to make sure it’s not […] to you personally to make it taxable to you. I hope that clarifies that.
“Is there still mileage deduction if I drive my personal vehicle for my business?” I’m saying to that part, yes, first off. Your personal vehicle for your business. Yes. It’s 58 cents a mile right now. “Or to get to a job out of state?” No. If you’re doing the job out of state, unless they’re reimbursing you, in which case that business is reimbursing you as its employee. Let’s just say they didn’t reimburse you, then that’s commuting and you would not get to write that off or it’s a personal expense.
Jeff: And to go back to one thing. When we say, “If I drive my personal vehicle for my business,” that’s an assumption that it is your business, not that you’re working for somebody else.
Toby: If you’re working for somebody else or it’s your business, that business can reimburse you 58 cents a mile. That is not taxable income to you. Now, you said the mileage deduction, it could also just deduct the actual expense.
Somebody says, “Where can I access recorded sessions?” Either we’re going to be sending it out to you, so if you registered for this you’re going to get a link to the recorded session, or we make them into podcast so you can always go to Anderson Business Advisors podcast on iTunes or Google Play or go to andersonadvisors.com/podcast and you can see it there. We archive. I think we’re getting close to 100 of these that we’ve done that are in the platinum portal.
Let’s see. “Can RMD payments be sent to a C corp, required minimum distributions out of an IRA?” Answer is no. You could put them in a C corp, but it’s not going to help you at all.
Jeff: Yeah. It’s still your income. Can’t assign it.
Toby: We had some questions early on we got to get to also. “I have two sub S corps.” Somebody says sub S corps. Maybe they just mean S corps?
Jeff: I think they’re saying Subchapter S corps.
Toby: All right. “Sub S corps that I have placed all my real estate under. Should I place properties and LLCs? Any tax […]?” The first thing is, […] how many pieces of real estate.
By the way, somebody says, “Is the mileage and unreimbursed employee expense no longer deductible?” Correct. They did away with miscellaneous itemized deductions under the Tax Cut and Jobs Act. You can no longer write them off on your schedule A. Unreimbursed employee expenses are no longer deductible.
Jeff: And some people have substantial expenses.
Toby: Right and that’s horrible. You have to write congress and thank them. You have to stand in line behind all the guys with the SALT limitation. We have clients that are losing out on $40,000 and $50,000 in deductions in New York, in California, in Maryland, in New Jersey, and in Connecticut. They’re all ticked off.
“I have two S corps and I have lots of real estate.” You should separate the real estate. Remember what we said about inside liability and outside liability. It still applies even for S corps. You want to make sure that you don’t have 10 pieces of property where there’s a fire on 1 and it cost you the other 9.
Now, the reason you don’t typically put real estate in an S corp is because if you take it out, it’s a taxable event and it’s treated as wages. If you ever distribute that property to yourself, you’re going to have an issue if it’s appreciated. If it hasn’t appreciated, then no harm, no foul. You could potentially buy out of it if you want to do that. But again, it’s better to just use disregarded entities or partnerships and not get yourself into that pickle. If you’re just going to hold them forever, then when you have a step up in basis when you pass, then your state can fix the problem.
Jeff: Partnerships don’t have that issue.
Toby: Yeah. Partnerships never had that issue.
“Is there a limit for depreciation deduction and cost segregation on investment property?” No.
Here’s one that’s relevant to this question. “What’s the difference between having a real estate investment company as an S corp and the company also owns the property which falls under the S corp? Will the rules still apply about not having property in an S corp?” I’m not sure I quite understand that. Let me try to figure this one out.
If what you’re talking about is something that’s flipping—we’re buying and selling and we’re just keeping it off our personal return as a dealer—if we’re holding and we’re buying these things to accumulate, then that S corp holding it, if I take the property out and distribute it to a shareholder, that’s treated as ordinary income.
Whereas if that the same scenario, let’s say I have an LLC taxed as a partnership, I could distribute the property out to that shareholder. They could refi it, put it back in. No tax, no foul. I do that with an S corp. I have a tax […].
There may be an exception. Somebody mentioned an exception once, another attorney. I haven’t seen it, I couldn’t find it, but they said, “Oh, if you take it out to refi, you could put it back in.” I’m not aware of that exception. It doesn’t mean it may not out there, but I certainly couldn’t find it.
Jeff: Sounds illogical, so it’s probably not true.
Toby: Yeah. Anyway, it gets kind of clunky.
Next one. “How do we navigate the standard deduction in the business sector?” I’m going to go back to this one just because I’m getting clarification. So, essentially the owner of a real estate business with real estate titled under the S corporation is costing themselves. Yes, you don’t need to do that. You shouldn’t do that. It doesn’t mean people won’t.
Like I will sell my house to capture a deduction to an S corp. If I’m going to keep that house and I still want my $500,000 121 exclusion, I might sell it to an S corp, but I’m never selling it. I’m probably never going to refi. I’m just going to keep it in there and rent it forever. And then when I die, I’ll let my family deal with it. They’ll get a step up in basis and they can distribute the money now because now you have basis equal to the value of the property, no taxable then. That’s always the issue.
If you have appreciated assets inside of an S corp and you distribute them, that’s appreciation. I bought a house for $100,000. It’s worth $200,000. I distribute it to a shareholder. My basis is $100,000, the value of the property is $200,000, that means I have $100,000 taxable income just by transferring that. I don’t have that in a partnership, I don’t have that in a disregarded entity, I only have that in an S corp.
Let’s go back to this question. “How do we navigate the standard deduction in the business sector?” You can answer this one. You love this stuff.
Jeff: I’m not sure what they’re asking.
Toby: I knew that was going to happen because I don’t quite understand what the […].
Jeff: There is no standard deduction on any business return.
Toby: Yup. I could see what it comes into. You have your standard deduction and it’s really high. For example, I am married, filing jointly, I have $24,400 standard deduction. In that standard deduction, I have things like my mortgage, interest. I have charity, I have health, I have my state and local taxes. I add those things up and they’re part of that $24,000.
If you have a business and you’re underneath that $24,400, then you have to ask yourself, maybe if I was to give money charitably, I wouldn’t get to write it off because I’m underneath the $24,400. But I have a business out here, rather than give the money to charity, maybe I do an expense for advertising to the 501(c)(3). I might give it money in exchange for something.
So, I go to my church and instead of just giving them money that I would never get to write off, I say, “Hey, I have a business. How about you list my business in your programs and I give you $5000?” You give them $5000 anyway. But now, you’re doing it in exchange for something. Now, it becomes a business expense which I can write off 100%, and now I don’t have to worry about my standard deduction. I just take my post standard deduction and that $5000 would have done me zero good if I had done it as an individual.
Now, people are starting to see this. The charities last year, on an inflation-adjusted basis, charitable giving by individuals to as down as, I want to say 3.6%. It was not a small amount of money. It was billions of dollars that was down because they’re not getting as many deductions for it. What’s interesting is charitable giving as a whole was up because more and more people are giving to their foundations, which are giving to charitable deductions in businesses were giving more. So, it made up the gap.
I used to call it taxmageddon, the unintended consequence of the Tax Cut and Jobs Act was that charities were going to lose out on billions of dollars of giving because nobody was going to do it if they don’t get a tax benefit. Of course, enough people were seeing the ways around it, which we say, “Hey, do multiple years, use your own charity, use a DAF—donor advised fund if you don’t know what that is. Do all these things where we’re able to get more tax deducted in a particular year and it seemed to make up a lot more than what they anticipated.
It was great. Americans give away lots of money and if they have a tax benefit, they’ll even give away more. That’s how we use a business to navigate that standard deduction.
Here’s another one just for fun, for giggles. There’s a little mortgage interest. If you have a home office—I’m not talking about a Schedule C, I’m talking about an administrative office in your home—and your employer, which can be you, reimburses you, you can knock off a percentage of even your mortgage interest and your property taxes so I can hit these guys right here through my business.
My health, if you have a C corp, we can reimburse that, too. What we’re allowing ourselves to do is reimburse ourselves expenses, write them off through the company, and then I can just take my standard deduction.
Jeff: And this is really a good tool when you’re being hit by that SALT limitation, of limitation on state and local income taxes. You’re limited to $10,000 of that deduction, but if you can put some of it on a home office or other places, they’re perfectly deductible there.
Toby: Yup. Now, let’s talk about how do you keep learning? I know that you guys are on the call. I love it that you guys are on the call. There’s only so much we’re going to be able to get here. This little guy right here $197 is the Tax-Wise Workshop. I went over 31 tax strategies over 2 days at the last workshop, which was awesome if I may say so myself. It was just me, my sorry butt talking for two days and we went through so much stuff.
We have that recording from January and you can attend via live cast, it’s a live stream, meaning that you’re not physically at the location, but you’re watching it live. You get all of that for a one price of $197. You just go to andersonadvisors.com/3for1 right down here and do that.
Here’s the rub. You do that, the typical savings is somewhere in the $10,000 mark from what we’ve been able to gather from surveying our clients. The best part is, we’re looking for three deductions. I’m saying we’re going to go over 31, pick three, implement them, you never know what you’re going to say.
Somebody says, “So, you’re saying I need a separate organization besides the C corp to get donation write off?” No. You can just use your C corp and your C corp can actually use the 501(c)(3) and advertise with it. That’s one of the best things you can do, by the way, is to have your business sponsoring charities that you care about. You can own the charity.
Jeff: No. I’m going to say that the C corp is probably the worst place in the world to make charitable donations.
Toby: You don’t make it as a donation. You make sure that you’re doing this little guy. You’re doing advertising. So, you need something in return. If they say, “Just give me money,” say “No.” That’s what you do as an individual. If I want to give money with strings attached, like, “Hey, I get to give everybody a t-shirt, I’m going to do advertising. You’re going to put my name out there. You’re going to give me recommendations from the pulpit.” “Hey, this Sarah is awesome. Her company is awesome. They do this and you rock,” so, it’s fun.
Somebody says, “Hey, at the next live stream, could you hit more on traders in the stock market?” Of course. I also have a very good live stream that I did that was half a day, that was only on traders in the stock market that I can send you to, so shoot over a request to firstname.lastname@example.org. Patty or somebody can get you that. I did that last year. It hasn’t changed. It was after the Tax Cut and Jobs Act came out and it was pretty hot and heavy on the stuff because if you’re a stock trader, you lost the ability to do a Schedule 8 deduction. So, anybody that does that, you got to be using an actual […] structure to get your deduction. So, won’t trump in to too far, but Robert, I can absolutely help you with that. It will be my pleasure.
Also, freebies. iTunes go to andersonadvisors.com/podcast and Robbie, you got the right setup there, brother. That’s perfect. We do iTunes and/or Google Play. In either case, you go to andersonadvisors.com/podcast and you got replays and the platinum portal; you can go in there.
I’m going to answer a bunch of more questions, guys. We had a bunch from the very beginning that I’m going to get to and you can always go follow us on social media. Make sure that if you like this sort of stuff—we do a ton on YouTube—click the little icon that says…
Jeff: Subscribe, I believe.
Toby: It’s not just subscribe, but there’s a little icon there that will notify you when new videos come out. Only when you log in so that it’s not like it hits you in your emails, but it will let you know what’s new because we’re always putting stuff out. I know that I record constantly and I do a lot of podcasts with people. I just did one on by […] it’s keyman insurance. They were earlier this week. Frank Cottle was one of my favorites. I did one with the Camp YouCan and the gal that did a TED Talk. All that stuff is really cool.
You can always send in your questions and we’re going to go over a bunch of live questions now. You can always submit your questions to email@example.com. More complicated we’re just going to farm you out to one of the lawyers or one of the accountants to make them answer it. And you can always visit Anderson Advisors. Again, we love to give stuff away. That’s just in our DNA.
All right. Let’s go back to some of this. This is what I love. “What is the best way to setup my accounting and tax business?” Rory, great question. The best way I can answer that is it’s going to be ‘it depends,’ it depends on how much revenue you’re going to make. Most people, if they’re living off of it, it’s going to be an S corp.
Jeff: I like the PLLC if your state has that and then filing as an S corporation.
Toby: Yup, you always have to be careful.
Somebody asked and they’ve left, but hopefully they heard this. “When one of the members of the LLC passes away, what happens to his or her share in the LLC?” First off, […] going to make funny for saying share some membership interest. LLCs don’t have shares, right Jeff?
Jeff: It doesn’t have shares, which is why you can’t take 1244, but we’re not going to talk about that right now.
Toby: When one of the members of an LLC passes, it depends on your operating agreement. If you have an operating agreement like in our case, I know what ours say, which is the survivors, the heirs become an assignee interest holder. They don’t get to become members unless the other members choose to allow their shares to have voting rights and they have full membership. Otherwise, they just sit out there and they have a profit interest.
The reason you do that is because maybe Jeff and I are partners, but maybe I don’t want to be partners with his wife or his kids or whoever he leaves it to. If something happens to Jeff, I want to make sure I have protection. I always say do this stuff also in a buy and sell agreement, and also if you have partners and they’re really important, make sure you have keyman insurance on them so that if they pass, your company has some money to hire a replacement. This is really important stuff sometimes. There’s that. Anything you want to jump on?
Jeff: No. I was just saying that if it’s a professional organization, there may be regulations to determine how many non-professionals can be involved.
Toby: Yup and I’ll say this. Make sure you own it through a living trust. You don’t want to get into a probate with these things. It gets ugly and it gets expensive.
All right. “If a real estate property is gifted to a child, can the child sell the gifted property at anytime or are there certain consequences if the child sells the property?” If you’re the recipient of a gift, technically, you’re getting the basis and the property. Right?
Jeff: You’re getting the donor’s basis.
Toby: You’re getting the donor’s basis. So, if they sell it right after, the tax consequences will be as though you sold it.
Jeff: Here’s my concern, though. If you don’t gift real estate to a minor, can that minor…
Toby: I don’t think that they can own it.
Jeff: I don’t think they can own it because they can’t sell it. They cannot go to initiate a real estate contract.
Toby: Right. Generally speaking, if you’re doing it, it’s through something, either an UGMA, which is Uniform Gift to Minors Act, a trust, or it’s something else where somebody else is acting on behalf of it.
Jeff: Some kind of FBO.
Toby: Yeah because the child doesn’t have the capacity to sell. They cannot be a signatory on it. It’s usually somebody who’s acting in their stead, either a parent or, again I think they automatically create an UGMA if it’s…
Jeff: I think contract laws going to be the biggest […].
Toby: Yeah, and then the other issue you have is for the parent. If it’s kiddie tax, which is passive income, then it’s added to the parent’s tax return. The child doesn’t have a lower tax bracket that’s an active income. So, you can have a little bit of a problem in that it says same tax you’re two years within the exchange. I’m not certain. It’s ringing a bell as though. I’m trying to think of if you sell a piece of property that’s been gifted to you, whether there’s something that’s lurking out there, I can’t remember.
Jeff: There is a passive […] into that but they stay with who donated the property rather than who received it.
Toby: Okay, maybe we look at that one a little bit, but I don’t think there’s certain consequences if you sell if there’s gain.
Jeff: One thing I think you could do in this case, though, is to gift them a very minor portion of the property. Maybe every year, it could probably get tedious, but then they have a minority interest and I would think the majority could still sign for any sales.
Toby: It’s possible. Then again, I think there’s going to be a passive holder which can just go right in with the parents. You better be holding it for a while. I probably wouldn’t give it to a […] if they were just going to sell it. It’s not going to really help them.
“Is there an easy answer on how to set up a brokerage account and business entity for sharing stocks not looking for trader tax status?” Definitely, above-average trading, I’ve been told an LLC is the way to go. Brandon, I would have it in an LLC. Here’s just a word to the wise right now. Brokerage houses, if you open up an account and an LLC, about 50% of them are going to try to hit you with extra cost, saying you’re a professional trader. What you do is, generally speaking, depending on where you’re setting it up, we would just do a personal property trust and then we’d assign the beneficial interest to an LLC and that LLC is managed by a corporation. Sounds more complicated than it is.
What ends up happening is the LLC is essentially being taxed to you. I would set it up as a partnership and the corporation would be a general partner under it. They would get guaranteed payments and that allows me to write off all my expenses. I would only pay tax on the net taxable income after those expenses. The reason that we do that is because Schedule A expenses are gone under the Tax Cut and Jobs Act. You never get to write them off.
I’m with you. Don’t try to qualify as trader tax status. Every time I see it, it’s a guarantee to audit almost. It’s a huge high percentage of people that get critique. It doesn’t exist in the tax code. It’s this weird thing that somebody does that says, “Hey, we’re going to take our expenses on Schedule C with zero income and we’re going to report all the income on Schedule D. It’s such a weird situation, it kicks it out and you get audited. So, why would you invite an audit? It’s just not worth it.
Let’s see. “Also, as I understand the child will receive tax basis of the donor.” Yup. The […]. “Also, does the recipient also receive the use of the property to determine qualification for Section 121?” No, they wouldn’t, Ross. They have to actually live there. You can’t get somebody else.
“My husband has an IRA pre-taxed and a Roth. He’s 69 now and doesn’t foresee needing the money from these accounts. How can we somehow transfer these accounts now in the future to the wife’s retirement account in a manner that best reduces taxes?” Unfortunately, there’s not a way to transfer it to the wife’s account. They would just take the money, even if they don’t need it, they’re going to have a little tax on it.
What you may want to do, if you want to make it pretty simple, depends on the tax situation, you may want to look at converting it to a Roth and then as the money comes out, you either take it or you don’t. I don’t think that Roth is required to be distributed. And it just keeps growing tax-free. You might want to say, “Hey, I’ll take the tax hit now. I don’t need to take distributions out of it, so I’ll convert it to a Roth,” and then when you inherit the Roth, there’s not a tax hit on it. If there’s a surviving spouse, for example, they would get all that money tax-free.
“How would you divide building a land depreciation for condos, both residential condo and for an office condo?” That’s interesting. For depreciation, it’s just the building. You never depreciate land and then if it’s an office condo…
Jeff: But what we’ve seen is IRS wants some part of your cost to go to land, even though technically you don’t own any of the loan.
Toby: You do an assessed value, the percentage of the assessed value. You have to look at what the assessed land value if you use those percentages.
Jeff: Typically for the condo, whether it’s an office condo or a residential condo, that land percentage is going to be much lower than it would be for a single family home or even a multifamily home.
Toby: And that would be good.
Jeff: Right. Your depreciation would be higher.
Toby: Yup. So, you can use any reasonable method. I think most of the time, you’re going to use whatever the tax assessment.
Jeff: Yeah. A lot of times we use the tax assessment. If for nothing else, we get a sub ratio.
Toby: And I don’t foresee you getting nailed on that, no matter what. They’re not able to figure it out if you’re not able to figure it out. They’re just going to say it’s reasonable.
“I have a vacation rental LLC formed by Anderson. I filed a Form 1065. Is it better to take a Section 179 deduction on my furniture versus a five-year depreciate where you get immediate deduction? IRA says you cannot unless it’s used for your trade or business. If renting a vacation home is my business, can I take furniture and computer use to rent properties as depreciation under 179 versus five years? Thank you.”
Jeff: Furniture and equipment used in the rental is not eligible for 179.
Toby: Yes. It would just be owner’s depreciation. You’re not going to have to 179 it, but you’re still going to get to write it off and you’re not going to have to do it over five years. You’re going to let it treated as an immediate deduction.
Jeff: So, it might be a five-year or even a seven-year property, but you’re still going to deduct it all the first year.
Toby: Yup. You can write it off, David.
“As a federal employee, can I open a Roth IRA in my TSP? What I understand is I can contribute $7000 each year into the IRA over and above the maximum catch-up contribution. Is that correct?”
Jeff: I did have a TSP when I was with the IRS. I don’t know if at that time they had a Roth provision. I want to say that’s probably something you need to discuss with your TSP sponsor.
Toby: I don’t think there’s a special rule on it. I think that what you’re really getting into is you can either do a traditional IRA or you can do the Roth inside the TSP, depending if it’s part of the plan or document.
Jeff: Well, TSP is a thrift savings plan, which is a federal retirement.
Toby: Right, but it would have to be in the plan.
Jeff: It would have to be in the plan.
Toby: And usually, you can go up to $19,600 or what is that now? $25,500?
Jeff: With the catch-up, yes.
Toby: Yeah, with the catch-up. So, you can put a lot into a Roth. I actually could show you ways.
Jeff: I’m pretty sure TSP has a Roth provision, though.
Toby: If it does, then again, you would want to talk to them and yeah, it’s more than $7000 higher. You’re going to be able to put a bunch of money in.
All right. We’re way beyond time. I’m going to answer one more. “Please explain a spendthrift trust, advantages and disadvantages. Does it replace irrevocable living trust?” Philip, a spendthrift trust is a special statute, depending on the state you live in. The number one state according to Forbes is Nevada—I happen to agree with it—because we have what’s called a credit shelter trust, which is the same thing. Somebody cannot force distributions out of it to a beneficiary.
If you have […] beneficiaries and a crafty lawyer, they know how to make it so nobody can force money out of it. It doesn’t replace irrevocable living trust because irrevocable living trust has a lot of other provisions in it. The medical power of attorney, the living will, the end-of-life decisions, your personal assets. A spendthrift trust can never make you bankrupt. You can’t put more assets than you have outside of it in it because it makes you insolvent. You never do that. You use them in conjunction, but they’re very effective tool. I know them very well.
All right. One other thing. “If putting a multi member LLC, how do you still show active and material participation to allow 1031 Exchange?” You don’t. Here’s the beautiful part. You don’t have to show material participation to a 1031 Exchange. You just have to show an investment and you’re buying like-kind property, which is real estate.
With that, we are going to bid you adieu. We’ve gone a little over, this time only half an hour over.
Jeff: Yeah, it’s not bad.
Toby: All right. So, until next time, guys, thank you for joining us. I’m going to scan and look at the very end to see if there’s anything else. Thank you. There’s a few other questions. We will grab it. This guy says, “The TSP has a Roth.” We know that. It helps to have a reinvestment […]-related party. I’m just going to say if there’s anything else here that we need to hit. We will get the other questions if there’s some lingering out there and we will make sure that we get those answered. If nothing else, I will see you guys in two weeks.
On behalf of Jeff and I, I want to say thanks for joining us. Of course, you can always listen to this as a podcast or just get the access to the recording and share it with your friends. Thanks, guys.
Jeff: We’ll see you next time.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
- Claim your FREE Strategy Session, and learn how Anderson Advisors can protect your assets.
- Join our next Tax & Asset Protection event to learn more advanced tax minimization & entity structuring strategies
- For all things investing, check out the Infinity Investing YouTube channel
- Subscribe to our YouTube channel to make sure you never miss the latest strategies & updates