When you do things right, you don’t get sued, harassed, or audited. That’s why Toby Mathis and Jeff Webb of Anderson Advisors answer your tax questions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- I’m starting a real estate business. How should the LLC be taxed? LLCs choose how they are taxed
- Is there an annual amount you have to pay contractors that require 1099 and W-9 forms? Minimum is $600
- What is a quitclaim? Transfer of interest in county record of your interest
- What is the simplest software or way to log vehicle mileage? MileIQ
- What is a qualified business income (QBI) deduction? Deduct up to 20% QBI, 20% qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership (PTP) income
- Can you invest money earned through 501(c)(3) to invest in dividends and stocks? Yes
- Can you explain the 100% depreciation changes in the new tax code? Bonus depreciation allows 100% deduction as expense of asset
- Are you familiar with the Deferred Sales Trust concept? Yes, it works to sell a highly appreciated business under an installment note to spread out tax over a lifetime
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.
Full Episode Transcript
Toby: Hey, guys. This is Toby Mathis.... Read Full Transcript
Jeff: And Jeff Webb.
Toby: And this is Tax Tuesdays. We’re bringing tax knowledge to the masses and today, we got a really jammed one; just can’t help it. We got a lot to go over today. We got a ton.
Somebody just already asked, “I’ve been logging my real estate professional hours. How do I explain it to my CPA?” You shouldn’t have to. They should understand what tax professional is. If they don’t, you should actually switch CPAs. You don’t want some of the learning on your dime. That’s just the truth. You don’t want to teach somebody because there’s other things that they need to be able to do. You don’t want them learning and doing it wrong on yours then figuring it out.
There’s tons of vides both at YouTube and Facebook. You can come in. You can like us on Facebook. You get a ton of content. Then on our YouTube channel, it’s just jam packed. I take every Tax Tuesday. I think we’re into the 90s at this point.
Jeff: Yes, we are.
Toby: We break out the questions. We take bits and pieces of each one and make them into separate videos. You could just go in there and have a smorgasbord. There’s a good chance that we’ve answered the questions that you’re thinking of.
Here we go. Tax Tuesday rules. You could send your questions at any time. I do say this at any time. We compile them during the weeks between. We do this every other week of Tax Tuesdays. During that middle area, we compile the questions that we’re going to answer on the next one. That’s why they keep getting longer.
If you need a detailed response that’s very specific to you, like you want an actual advice, you’re going to need to be a tax client or a platinum. There’s ways to do either one of those. Platinums probably are number one service that we provide at Anderson. You joined platinum in $35 a month. You can ask any tax question, but you can also get on the phone with lawyers, advisors, to help answer your questions to noodle things out.
Tax Tuesday is fast, fun, and educational. We like to get as much information out there as possible. Some accountants jump on which is great. We do teach a lot of things that a lot of our classes already proved for continuing education.
If you’re an accountant, attorney, and you’re on the call, I don’t think these ones qualify, but there’s a number, one I could forward to you that do qualify for your hours and of course, become the Tax and Asset Protection class that we teach. It’s three days. In some cases, it’s 20 hours. It’s quite a bit. I have to ask Valerie depending on your state.
Most of them are approved. We have several of the courses that are approved. Both are continuing education for realtors, continuing education for accountants, continuing education for attorneys. If you’re a professional, you can get it up.
Lots of questions are already rolling in. Here’s an easy one. “Is the once a year rollover from an IRA to a Roth, 12 months doesn’t have to be exactly 365 days?” You’re actually mixing a couple of ideas there. You can do a rollover once every year, 365 days, which means, “I take money out of my IRA that would ordinarily be taxable, but I put it back in within 60 days.” There’s a lot of people that say, “Oh, you can take a 60-day long.” No, you can roll it over. As far as converting a traditional to a Roth, you can do that over and over again. At the end of the year, you’re just saying, “What did I take out and convert over to the Roth?” and pay tax.
Jeff: That 365-day rule or 12 month rule means that’s not trustee-to-trustee. That isn’t going from TD Ameritrade directly to Fidelity. They’re issuing a check to you and then you’re putting the money somewhere else. That, you can only do once a year. If you do one on April 1st, you can’t do another one for the April 1st in the following year. But the trustee-to-trustee, you can do those.
Toby: Yo can do that over and over again. At the end of the day, what really matters is if I take a traditional taxable IRA and convert it to a Roth, that just means I’m taking it for my traditional account, putting it in my Roth account. I’m just going to pay tax. What’s the one they give you?
Jeff: There’s a 5498.
Toby: Oh, yeah. 5498.
Jeff: It tells you what the contribution is.
Toby: Yup. That’s a form that says Pre-tax or Post-tax Contribution in your Roth.
Somebody says, “I’m trying to start a real estate business. But I don’t know how to have the LLC tax S Corp or something else.” That’s what we’re here for. I’m going to say this to Susan or to Patty, I would grab Brietta’s information and get it into an advisor because LLCs get to choose how they’re taxed.
It’s really comes down to your unique situation as to whether or not you want to be taxed as a disregarded entity, meaning the federal government ignores it and it’s taxed to the owner. If the owner is a C Corp, tax is flowing through under the C Corp return. If it’s an individual, then that would be under the Individual’s Tax Return. If it’s a partnership, then the partnership falls return gives K-1 to its owners. S Corp, the same thing. It passes the profits and losses down to its owners. You have choices. The LLC is a state entity and it’s a Swiss Army knife.
Let’s jump into the opening questions. Let’s see. “How do I handle my General Contractor’s W-9 at the end of the job so that I don’t create a problem for my accountant?” That’s so nice.
Jeff: We appreciate that.
Toby: “I jointly own a property (50%) with my cousin. Is it a taxable event then if he quitclaims the property to me?” I’ll answer that.
“What is the simplest way or software to maintain vehicle mileage logs?” I’ve got a great recommendation for you on that one.
“In general, when is it better to have your taxes flow through on your personal income versus using an LLC being taxed as an S or C Corp?” That’s a beautiful part, we’ll get into that. That’s a fun issue there.
“Is buying a property to use for Airbnb a profitable plan?”
“Can you invest the money earned through a 501(c)(3) to invest in dividends and stocks?”
“Can you explain the 100% depreciation changes in the new tax code and how they can best be used?”
“I started an LLC and have no employees or income coming in. I’m married and file jointly. Can I claim business expenses on my taxes?” We’ll answer that one too.
“We have several SFH,” I think it’s Single Family Home, “properties that need to be put in LLCs. Do they each get their own LLC?” We should […], by the way.
“If I move into one of my rentals for a year-and-a-half that’s in its own LLC, does the LLC still depreciate it and deduct repairs? Basically, if I move into my rental and I lived in it as a personal residence, do I depreciate it?”
“Which is the best entity to use to pay yourself from a house flipping business?”
“How do we structure our healthcare through our corporation to be able to write off things like gym memberships and doctor visits?” Interesting one.
“Can I deduct educational training costs, pertinent to the company mission, within an LLC framework if I file as a C Corp?”
“I am retired drawing social security and retirement. Do I need to pay myself a salary from my corporation and all of the associated withholding, federal, and state taxes or would I be able to simply pay myself a distribution of the profits (dividends, perhaps)?” We will answer those.
“What happens if a real estate property is gifted to an immediate family member and the recipient sells the gifted property within two years? Does the tax liability fall on the donors or does the recipient just file it on the recipient’s return?” Great question. We’re going to answer that.
“How do I start funding a Solo 401(k)?”
“Do Solo 401(k)s have to pay UBIT or UDFI if they finance real estate?” We’ll answer those as well and you’ll understand what UBIT and UDFI are by the time we’re done.
Let’s jump into the first one. This is you being very kind to your accountant. “How do I handle my General Contractor’s W-9 at the end of the job so that I don’t create a problem for my accountants?” Jeff, why don’t you explain what a W-9 is and give them the lay of the land.
Jeff: A W-9 is a form that you give to your vendors—every vendor you have—that you make payments to, that identifies who they are, who reports the income. The key with these W-9s is you want to have this W-9 before you pay them a single penny. The problem with a lot of vendors is you pay them and then you request the W-9, you’re not going to get it. They have no reason to give it to you.
Toby: I have that t-shirt years ago. One of our business was one of 50,000 sampling. It was a random audit for payroll. What they did is the IRS looked to see how big the problem of employees being classified as contractors. They go into businesses. I don’t know how they picked them, but they were all mid-sized businesses. They were all between a few million dollars and probably $50 million, somewhere in that range. They wanted to see some activity. It was about a week that they sat in our office. They went through each W-2 which means a W-4 when the employees were filling it out and all the W-9s.
At the end of the day, there were two contractors that we had paid over that period of time. I think it was a three-year audit that we did not have the W-9s on. One was a magician for a Christmas party. He was on America’s Got Talent. I won’t go over his name. I could not get him. He made his W-9 disappear and I could not get him.
Jeff: Because he was a magician.
Toby: I could not get him for the life of me to actually sign that document there. IRS said, “You can’t prove that he was a corporation.” Technically, when you 1099 somebody, you don’t have to 1099 a corporation. It was so annoying.
Then, we had a landscaping business that has gone out of business. We couldn’t prove what they were because they were bankrupt. There wasn’t anybody to act on behalf of the company or sign anything. They made us pay the withholding on it 28%. The total amount that we ended up writing him the check was $750. Right around there, I said, “If I write the check, do you go away?”
So, I wrote him a check, but it was one of those things that if you don’t keep track of this, it could be a real bear for you because how do you 1099 them if you don’t have a W-9? You don’t know what their information is. If you ever get audited, that becomes your very best friend. If you’re paying somebody money, Jeff, you get that W-9 first.
Jeff: Get the W-9 first. I would even recommend, especially in the case of construction contractors that unless you’re sure they’re reputable, I would get it from them as soon as I have a contract with them.
Toby: Yup. You only need to get it once, that’s the thing. What I do is I say, “Hey, when they send the invoice over, just get in the habit before you write the check, saying, ‘Hey, will you sign this W-9?'” If you haven’t paid them yet, they’re pretty quick to sign it. All it is, it’s a one page form. Just google W-9 IRS.
Jeff: You list your name, EIN, or social security number, address.
Toby: It’s literally three or four lines. It takes two minutes to fill up. Then, you don’t have to worry about it. Now you’re reporting that income to them so you can take the deduction.
“Is there an amount annually that you have to pay contractors requiring W-9?” Tony, if you’re paying somebody anything more than $600, you need their W-9. I would say $600. Technically, it’s any dollar.
Jeff: Yeah. The problem comes if you pay them $500 this time and you have to call them back later in the year or something else. That’s another $500. Now, they are in the threshold for requiring a 1099. If they’re a corporation, they still have to fill one out. They just mark a box that says they’re a corporation which means you don’t have to file a 1099.
Toby: Yeah, which is great. Like Jeff is saying, if you’re a corporation, people don’t have to 1099 you and vice versa. If you’re paying a corporation, says Inc., and you’ve got a W-9, they say they’re a corporation, you don’t have to 1099 them. It makes life a lot easier unless you like sending lots and lots of 1099s out in January.
A 1099, by the way, you’re just saying, “Here’s what I paid you.” That way the IRS knows that the contractor got paid and they’re looking for that income on their return. You get to write it off. If you don’t then you have to prove that expense and show them the check. In which case they have two choices. They could say, “All right. You get the writeoff, but you should’ve done withholding and you didn’t, so we’re going to charge you that money. Or you get the W-9 and show that you were required to.” Then, you don’t have to worry about it. You always get that W-9. That’s your best friend. You get it before you pay them. Good luck getting it from them. People will drag their heels on that one, especially if they’re not reporting their income.
All right, “I jointly own a property (50%) with my cousin. Is it a taxable event if he quitclaims the property to me?” Jeff, what do you think?
Jeff: This is a gift. It is a taxable event, but it is a taxable event to your cousin. If it’s more than $15,000, he has to file a gift tax return.
Toby: Yeah. How big is our lifetime gift amount?
Toby: For $11 million that I could give to somebody. I could give Jeff $11 million next week. He doesn’t have to pay tax on it. I don’t have to pay tax on it. Depending on the property value and what your actual amount is, your cousin, if he gives you the property, you’re going to have to value that gift. If it’s pretty close to the purchase, I would probably just use that within a year. If you’ve owned it for a while, then, it’s more than $15,000. By all means, it’s a form 709. You finally get gift tax return and you say, “Here’s how much of my $11 million or whatever it is that I’m using up right now.” You’re allowed to make gifts.
What is a quitclaim? That is transfer of interest in a county record of whatever my interest is. Quitclaim is what you use when you don’t really care whether you have a bunch of liabilities. “I’m quitting my claims against these properties. I’m just giving you my right.” If you’re doing a transfer where you want there to be some representation on it, then you’re doing a warranty deed. We always recommend warranty deeds. Title insurance requires warranty deed. But if I just quit claim it over, joint tenants with Right of Survivorship, somebody quitclaims over and extinguishes their rights, then you shouldn’t have a problem.
If it’s tenants in common, where we each owned an undivided 50%, then, that quitclaims basically no warranties are made with that. They’re just saying, “Hey, whatever I have with this, I’m giving it to you. I’m not saying that I have perfect ownership. There might be something out there on that title.”
Jeff: However, a word of warning. A quitclaim does surrender your interest, but it does not relieve you of any debt on that property. If there is debt, you’re maybe on the hook for it.
Toby: Yes. You’re quitting your interest, that’s it. You’re not saying, “Hey, there’s no deeds or no liens against it. It’s kind of fun.
Dawns is asking, “Is there no limit per person per year on the gifting?” No. I have a lifetime gift that I can make. 2019, it’s $11,400,000. But if I don’t want to do a gift tax return, then my limit is $15,000 per person and that’s per spouse. If my cousin gifts me their interest in the property and the property’s worth $100,000. You have an $80,000 lien against it, then your cousin’s interest is worth 1/2 of that $20,000 or $10,000. If they gift that to you, you don’t have to do a gift tax return.
If there is no debt and they give you $50,000 of interest, so you have $100,000 property, and they give you 50% of it, then you would do a gift tax return for $50,000 which would mean that it’s not just cash. It’s anything of value of $15,000, by the way. But he gives you that interest in the property, then they would do a 709 and he would basically say, “Hey, I’m using $50,000 of my lifetime gift exclusion of $11,400,000.”
Jeff: That annual exclusion really confuses a lot of people. They think that’s the most that they can gift.
Toby: No, you can give a lot more. You just have to report it and say, “Hey, I just gave Jeff $100,000. I can give him $100,000. I just have to say ordinarily the IRS wants to tax transfers of wealth.” If I give Jeff a chunk of money, they want to know about it so they can calculate it.
For example, Bill Gates giving away billions of dollars to people, that now is not taxable. They would rather be part of his estate so that they can tax it when he dies. When I say “they,” it’s Congress that writes the laws, but it’s the treasury that gets it.
“What is the simplest way or software to maintain vehicle mileage logs with the least effort?” On this one, I have a very personal view on this. MileIQ is the app. We want to go back to the very beginning of what these rules are. Either the company owns the car and your taxed on the personal use. Or you own the car and you get reimbursed by the company for the company’s use.
There’s two ways to do that. It can either reimburse you the actual cost that you incur on that vehicle and that percentage. If I’m driving it 30% for business and my actual cost of owning that vehicle, at the end of the year, I calculate all the gas, the repair bills, everything else, is $3000. The company would give me $900, 30% of $3000.
If I do the mileage, then it’s a flat rate, $0.58 per mile and you reimburse the miles. In either case, I have to keep a mileage log. If I own the vehicle personally, I just have to keep a mileage log, and it’s a pain. It used to be that you have a physical little book that you write down, beginning odometer, ending odometer, on a business trip. Now, I used MileIQ. It’s really easy and it GPS’ you. You swipe left to right depending on whether it’s a business trip or a personal trip.
If you swipe business enough on a certain trip, it’s going to say, “Hey, do you want me to keep track of that one?” For example, my drive between offices or my home office to one of my offices here, it already knows that it’s a business trip. It doesn’t even ask me anymore. It just automatically tracks it. Then, I can use that.
Somebody asked a question on the last question we had. “Do you have to do a gift tax return if the gift is not cash regardless of the amount?” No. It’s only if the value exceeds $15,000. By the way, a husband and wife each get $15,000 per recipient. If you have two kids, you can get $30,000 a year to each one of them.
Jeff: Mom and Dad can contribute to son and wife, $15,000 to each following totaling a $60,000 gift that does not get reported?
“What’s the simplest way is MileIQ?” I’m just going to answer that one again. If you need that email to your something, I’m sure we can get it out to you.
Jeff: Yeah because it’s going to work the same way whether you own the car or the company owns the car. You need the same information.
Toby: Yeah. A lot of accountants, they do this weird thing where they buy their car in the company name which is no good in my world. Just because 9 times out of 10, the insurance alone makes it not worth it. Now, you have commercial insurance. It gets stinky so you don’t want to do that.
Personal is left, business is right, when you’re on the MileIQ. It’ll literally tell you how many miles you drove and how much that’s worth to you. I’m looking at one right now that was 7.8 miles. That’s $4.52, there we go. That’s a business. That’s a business. See, I just love doing business. I’m just looking at them all and it tracks them. You know you’re being tracked.
“What is the name of this app tracking mile, again?” MileIQ. Just go to the app store.
Jeff: That’s very popular. MileIQ is.
Toby: Yeah. You’ll see it. You can also google MileIQ. There you go. That’s an easy one. It’s one of those weird things were accountants go in there and they’ll have you buy a car in your business because they can write it all off. They think, “Oh, I’m going to write off the whole car.” But you are taxed on your personal use. If it’s less than 50%, the whole thing is taxed. You don’t get to write it all off.
These accountants are nuts that do it unless you are using that car for business. More than half of the time, when you plan on doing that for at least five years because if you go below 50% during that depreciation period and you wrote it all off even in year one, it’s all recapturable as ordinary income. Plus, your personal use on that, there’s a schedule they release every year, the IRS releases it, that says, “That based on the value of your vehicle, here’s how much you have to include in your tax return depending on how much personal use you have.” There’s a tax hit, subject to withholding, and I just say it’s not worth it. I get it over and over again.
Brilliant accountants are going out there and trying to do 100% use. I’m telling you, that’s an audit trigger. You’re going to get wasted and it’s going to be painful for you. Most of my clients are investors. A lot of them are real estate folks, but they have personal use on that vehicle and they’re not recapturing it. They can’t say 100%. That’s just not real.
If you have a vehicle for your construction business that has your name on the side, you’re using it for business, and it stays at your location, you’re just using it for business only, you never drive it on a weekend, you’re not using it to go home, then that’s a different story. But that’s not it.
“If you’re using the $0.58 a mile method is there any tax implications using the vehicle 50% or more?” Nope. Rick, it doesn’t matter. I used it 100% for personal and I use it 100 miles for my business, I can still reimburse those miles. They’ll give me $58.
Somebody else says, “What about a lease?” That’s actually the valuation of the IRS releases every year. They say if your car is worth $50,000, for example, the lease value is $12,000. If you use it for half, you have to include $6000 in your taxable income. It’s like you’ve got paid wages. So, it stinks.
“Could we postpone requirement distribution to 72 years of age?” 70½.
“Can the company reimburse actual expenses for the auto business use?” Yeah, it can actually. Remember, it’s only the business portion. Let’s jump onto the next one.
“In general, when is it better to have your taxes flow through on your personal income versus using an LLC being taxed as an S or C Corp?” Jeff, what strikes you as odd on that question?
Jeff: When I read this, I wasn’t really sure what they were doing. If it’s an S Corporation, it is going to flow through to your personal income.
Toby: Exactly. Remember, you guys can be really snotty about this. There’s actually a law professor blog where all they do is make fun of judges who called Limited Liability Companies, Limited Liability Corporations. I’m not joking. They literally call them out on every single opinion and make fun of them. But an LLC is a state taxable entity. It is not a tax type. Your LLC is ignored to the IRS.
You can have an LLC. When you say S or C Corp, an S flows through, a C Corp does it. Now, when is it better to have the flow through? In my world, it’s when you can’t control the income. It’s when I’m going to have unfeathered income coming to me that I need to use to live off of. I’m probably going to go with an S Corp, but that does not mean that I just have to have an S Corp. I may have a management company like a C Corp and use both.
What I’m meant to say, “Hey, I’m going to do all my high end management.” For example, I may have a C Corp managing my LLC—being a manager of an LLC. I can have an LLC taxed as a C Corp managing an LLC taxed as an S Corp or taxed as a partnership, it doesn’t matter. When it’s better is usually when you’re living off the income. If I don’t need the money and I already have enough income coming through, I have a spouse that’s making W-2 income, that C Corp tax bracket is really attractive. It’s 21%.
Let’s say Jeff is making $700,000 a year, has a spouse who’s making another $700,000, and says, “Really, we don’t need the money from the second spouse. Let’s just keep it at a C Corp.” The C Corp does not have to pay you a salary. It just sits there and stockpile cash that has a use for it. In real estate, it always has a use for it. We can cut our tax bracket significantly just by doing that, especially if you’re in a state like California, New York, Connecticut, Maryland, all these state tax places. It’s so much better.
At the end of the day, there’s three rules to tax. I get a little cheeky with it, but I’ll say this, the rule is calculate, calculate, calculate. There’s three rules. They’re all the same. Just get your pencil on and have somebody run a quick task. Now, I will say this. Flow through entities right now have something called QBI which is a 20% deduction on the income that flows through under certain circumstances. That was under the Tax Cut and Jobs Act. We have to calculate that. When you look at these things, a lot of times, our knee jerk reaction is to do this simplest approach. What you really have to do is sit down with somebody for 30 minutes, be disciplined about it, and say, “This is what I expect.” Then, they could run different scenarios.
Somebody asks, “If you have a C Corp and an S Corp, you both need to pay a salary?” The answer is no. Realistically, neither one has to pay salary. There’s a misnomer about S Corps having to pay a salary. I just dealt with this with somebody yesterday. The rule is, the amount that you take as income, as wages, is only there depending on how much you actually take out of a corporation. It cannot exceed what you take out. Technically, it can, but from a forced taxation standpoint, it’s not going to exceed what you’ve taken out.
If I take out $1000 out of an S Corp, there’s a good chance that that’s all going to be wages. If I take out zero from an S Corp, I’m going to have zero wages. Even if the corporation made $100,000. This is going to make some of the accountants out there, it’s going to make their eyes twitch. But if you look at the rule, you’ll see both in the code and in the IRS, they put out a fact sheet, and they give guidance. They said, “In the case of an S Corp that distributes profit, there has to be a reasonable salary.” Now, let’s flip that around. “In the case of an S Corp that does not distribute profit, it does not have to.” That’s actually the rule. It’s cool.
Somebody says, “Does qualified business income applied to rental income from properties held personally?” The answer is yes if it’s on your Schedule E, it counts […] even if it’s not an entity. I hope that answers your questions. By the way, there’s a lot of confusion on this because the IRS first put in their written response that you could not take QBI against rental income.
Jeff: They originally said it wasn’t a trade or a business so it wasn’t qualified.
Toby: Then they got blown up.
Jeff: They came out with an additional ruling […] for this. For QBI only, it can be considered a trade or business.
Toby: Yes. You have two types of rental activity, by the way. You’ve got personal residential versus commercial. When you have commercial, if you have triple net on your leases, that’s not trader business income. It’s not for QBI. If you’re doing triple net leases on a commercial property, you’re not going to get the 20% deduction.
If you are renting single family residences to people, you’re going to get it. They gave us these weird 250 hours bizarre stuff, ignore all that. I think that if you are in the business of having rental properties, you’re going to be fine. The IRS is trying to scramble eggs on us sometimes. They don’t like it, but they get it anyway.
“When is it better to have your taxes flow through?” Let’s say I’m a contractor or I’m a dentist, lawyer, consultant, whatever, and I live off of my income, I’m probably going to be an S Corp. I may have a C Corp somewhere out there for further activities or for managing, but I’m probably going to have that via flow through. If I have a spouse who has a high W-2 income, I’m probably going to be a C Corp and I’m going to stockpile that money. I hope that answers your question.
“Is buying a property to use for Airbnb a profitable plan?” What do you think? You do returns all day long.
Jeff: It depends on so much that it doesn’t have anything to do with tax.
Toby: Somebody asked a few months ago, “What’s a good safe return that gives you 10%?” or something like that. I’m like, “If I knew that, I’d be retired right now.”
Jeff: I think this is more of a case where you really have to do your work on what you can actually collect in rents and how often are you going to rent it. If you got a place on the beach, you’re probably going to be able to collect a lot more. It’s going to be a more profitable […].
Toby: We have a client who’s getting almost $300,000 a year for the Airbnb on his property on a beach. It’s a fantastic property. Here’s the deal. The reason I threw this in here is because your calculation needs to be accurate. When you’re in Airbnb, that’s a hotel. If your average rental is seven days or less, you are not a rental anymore. You have become an active trader business. You are now a hotel. You lose the ability to depreciate. You lose installment sales. You lose 1031 Exchange. You lose a lot of stuff and all that income can’t depreciate against it. It’s all ordinary income subject to self-employment tax. You’re going to get a little extra tax on there.
There is a work around. We have done videos on this. I’ll give you the 30 second view and then I’ll say we did a whole series on this. If you want it, email in and I will send it to your for free because we love you.
If you have an Airbnb, that is an active business. If I still want my depreciation, here’s how you do it. You take your hosting and you move it into a corporation. The host is an entity and the court’s recognize it as another person. Basically, me and Jeff, Jeff is the host. Jeff is going to go out an Airbnb and he’s going to rent the property over and over again to lots of people.
Here’s how it works. Jeff is the corporation. Let’s say he’s a C Corp, for example. Jeff goes out to the world, and says, I’ve got this great property. Jeff doesn’t have access to the property so he rents it from me, and says, “Toby, I want to be able to rent that property from you.” What he does is he rents long on a monthly basis or an annual basis, he rents the property for me. I’m Toby LLC that owns a rental property. Now, I can depreciate. I can treat it as an investment property for the amount of rent that Jeff pays me.
Then, Jeff is only taxed in the amount of income that he makes that is the difference between the rent that he generates and the rent that he pays. I hope that makes sense. You’re going to get all of your depreciation.
Poor Patty, you’re just getting slaughtered right now. There are literally pages of emails coming in. I’m so bad.
“Why cannot the Airbnb hotel? Why can they not depreciate?” Because it’s an active trader business. An active trader business are not an investment. They cannot depreciate their stuff. That’s inventory. I cannot depreciate the inventory. If I have a minimart that I buy Cheerios, I do not get to depreciate the Cheerios, that’s my inventory. For car lot, I don’t get to write off the cars until I sell them. It’s cost of good sold. I don’t get to depreciate it.
Because we are pigs here, we want to get both. We want to get our depreciation and we want to get the benefits of being an active trader business. That active trader business now, by the way, it can do an accountable plan. It can reimburse me my administrative office in my home. It can give me a cellphone, it can give me health. It can reimburse 100% of my medical, dental, and vision. It can do all sorts of cool stuff that I wouldn’t be able to do.
Jeff: The other thing it does is it separates the real estate from the business. If your Airbnb does get sued, they can’t get to that property.
Toby: There are cases of Airbnb business is being sued for discrimination or for misrepresentations. There are all sorts of stuff. You’re keeping it separate from the property. Somebody falls down, they’re suing everybody. Falls down your stairs. I find this stuff fascinating. I hope you guys do too.
There is a way to do it that’s right where you get the best of both worlds. It just takes a little elbow grease. I’m telling you, 99% of the accountants just don’t get it.
There’s Carl Sauner, one of our attorneys. He says, “I’m planning to do a new Airbnb video on 8-15. There has been some updates.” Fantastic. We’ll make sure that anybody who’s listening to this, who sends this in, we’re going to grab you all. We are also going to have Carl give you that. We’ll make sure you get it. There’s lots of you guys out there asking for it. Great. We had a source spot there.
“Can you invest the money earned through a 501(c)(3) to invest in dividends and stocks?”
Jeff: You can. They commonly do their excess cash in different investments. The thing you have to remember, though, is the purpose of the 501(c)(3) and what ultimately you’re doing with the funds in the 501(c)(3). If you’re putting a lot of money in the 501(c)(3), you’re not actually accomplishing your mission because you’re investing it all in stocks, other funds, and other investments.
Toby: Like, the California […]?
Jeff: Yeah, you might have a little issue there.
Toby: Actually, you can do it. What it really comes down to is when you’re in a 501(c)(3), that’s a fancy way of saying a charity. That could be education, religion, health, amateur sports, there’s a bunch of stuff. There’s actually a ton of different ways to qualify. But you’re a tax-exempt entity. You always have to be worried in a tax exempt entity as to whether you cross over into something called unrelated business income tax.
If you’re an inactive trader business, let’s say that the 501(c)(3) runs a McDonalds, it’s taxable. It’s called unrelated business income tax. It’s going to be taxable to you at corporate rates. That’s call UBIT. You’re going to see that popped up in the questions later. I saw UBIT in there. There’s portfolio income, rents, royalties, interest, dividends, and capital gains. Rents is actually not portfolio. It’s rent portfolio.
Jeff: But it’s passive and we’ll talk about that later.
Toby: Passive, right. Royalties, interests, dividends, capital gains, which is you get from stocks. All of those are passive and they’re not UBIT. So, 501(c)(3) can earn it and not have to worry, as long as it’s using it towards charitable purposes.
Jeff: I would even argue that you have a fiduciary responsibility to the 501(c)(3) to invest that excess cash.
Toby: But we are in a building right here in Downtown Summerlin. We had to flee our rainbow location today because the AC went out. It’s 115 degrees or some ridiculous temperature. We’re here in the Howard Hughes Company’s Downtown Summerlin. Howard Hughes put all of his money in the 50s. He transferred his companies to a 501(c)(3) so the government could not take it […] control. It’s a horrible story. Then, he sat on it for five years, They said, “Hahaha, we got you. You took a huge deduction for transferring your company in there and it didn’t do anything. All it’s been doing is paying you back a bunch of money on some loans that you […] gave it.” The IRS lost. You know that case?
Toby: Five years they sat on it and did nothing.
Jeff: I’m not giving you another dollar.
Toby: It’s just great. I love those cases. It’s Howard Hughes. By the way, that is now the third largest charity on the planet. They do over $580 million a year of medical research, but he didn’t do it while he was alive. He had to die and get out of the way of it before they could make it the way that he wanted, but it was interesting.
When you have a 501(c)(3), you don’t pay tax at gross. You’re not paying tax in any of the dividends and stocks. The downside is if you need that money and it pays you a salary, it’s all active ordinary income. You’re not getting capital gains. You’re not getting the long term capital gains that you get off the dividends. The 501(c)(3) doesn’t pay you tax. It’s going in there for your charitable purpose, great thing. Bless you for doing it. It’s probably not going to give you any huge personal benefits.
Here’s a quick food for thought just because the Tax Cut and Jobs Act screwed up a lot of charitable giving. Charitable giving last year was down for individuals because of this. You have that standard deduction that you have to exceed before you get the benefit from your charitable giving. $24,000 for married filing jointly.
If you’re going to give money or if you’re going to give things to charity, what I would probably do is I’d be giving stocks. I’d be giving things that are highly appreciated. If I have stocks that I paid $10 for and now it’s worth $30, give them the stocks so you don’t have to pay tax on it. You don’t have to sell it and give them money. Give them the stocks. You get a $30 deduction. Let the charity sell that. It pays $0 tax.
There’s another one. “What is the tax on investment added to the college endowment funds in the last tax law?” Oh. There’s a tax that, I think, it hit six schools or something like that. If your endowment fund was greater than, I think, $180,000 per student—some dollar amount—then they charge a 1% tax because schools like Harvard, they’re exempt. They’re non-profits. They literally pay nothing in tax. Their endowments are growing faster than their costs are. They just keep getting bigger, and bigger, and bigger. I think they have a ridiculous amount per year per student that the endowment could pay for. Again, I think it’s $180,000 a year. They literally would have to work really hard to start screwing up their finances. They don’t need to charge people for school.
Let’s go on to the next one. I know what we’re going to do. This is a cool offer for you guys. It’s a Two for Tuesday offer. What it is, is you get the Tax Wise Workshop which is coming up, I think, in November. The live workshop which may be already sold out. You get the livestream plus recording for sure. I get the recordings of all three 2019 workshops. We did one in June. We did one earlier in the year. Both of them were pretty awesome.
You get that and we’re going to give you the Bulletproof Investors Series which is two tickets to Tax and Asset Protection Workshop. That’s a three day workshop where we go over all different entities, a bunch of tax strategies, and how to create a legacy. You’re going to get Clint’s book on real estate, Tax and Asset Protection for Real Estate Investors.
We’re going to give you a three part—it’s a three hour series; it’s probably closer to four hours because every one of them is a little over an hour—video series on tax and asset protection and estate planning. A strategy session with an advisor or an attorney to create a wealth planning blueprint for you. Both of those together. There’s one we would call Two for Tuesday, the $197.
Guys, you do a little tax planning and I mean this. It’s about the calculation we did internally. You get about $1000 per hour return on tax in spending time on this. You’d be shocked on how much we can lower it. The average amount that we were finding at extra deductions for folks and I kid you not, we ran 10 of them, 10 high net worth folks and it was over $100,000 a piece. Then, the average amongst the firm, I’m going to give you a larger gap, it’s between $20,000-$30,000. Is that a fair assessment, Jeff?
Jeff: It is.
Toby: You can go through. You’d be shocked at how much you will learn if you go through this. There’s a three-part video series. It’s the Tax Wise Workshop which is a two-day workshop where we go over 30 tax strategies. You get two tickets to Tax and Asset Protection. You get the book and you get the wealth planning blueprint. If you added those things up, just the Tax and Asset Protection workshop tickets, there’s companies that sell that at $5000. I say that with a little bit of a chuckle, but that was actually what we sold for many, many years. It’s absolutely worth it by itself. The book is worth $29, but Clint thinks it’s worth a million.
The three part video series is worth a ton and the strategy session. Then, there’s Tax Wise Workshop which one client last workshop came back and had a deduction of $170,000 after that. Just on one strategy. I tell you to take three away, but we had a cost segregation on a real estate professional for a doctor. They’ll be able to get $178,000 deduction that wasn’t there the year before.
That leads us into something else. “Can you explain the 100% depreciation changes in the new tax code and how they can best be used?” Jeff, you may want to jump in this one because this is right in your wheelhouse.
Jeff: This is talking about bonus depreciation, primarily. Bonus depreciation allows you to deduct as an expense 100% of the cost of an asset. If it is a 15 year asset or less, for example, computers are 5 years, furniture and fixtures are 7 years, and land improvements are 15 years. All of those, you can take 100% depreciation. Now in 2023, it starts dropping off. In 2023, it’s approximately 80%. Then, I believe by 2026 it drops down to 20%.
Toby: The easiest way to look at this is let’s say, you took a car. The IRS says your car is going to last five years. You’re going to divide it into five equal amounts. If you just want one under what they call modified accelerated cost recovery system or MACRS, if you just one-off of that, it’s a five year property.
What bonus depreciation says is, “Whatever amount you want to take up to 100%, you take immediately.” There are some rules on cars, probably shouldn’t use that as the greatest example, but if you have a luxury car or a passenger car, you’re going to have some other limits. But if you have a piece of equipment, like a truck, you can write off the whole thing in year one if you want to. Or you can write off half. You can pick whatever amount you want to take as bonus depreciation up to 100%.
Jeff: The Tesla should be very expensive and you can write that whole […] off.
Toby: The Tesla X, like Jeff said, is absolutely true because it’s heavy and it’s fast.
Jeff: […] it weighs a lot.
Toby: Yeah. You can write the whole thing off in year one. If it’s not 100% used for business, you’re going to get slapped with the pretty heavy tax hit. Vehicles may not be the best example. Let’s use a coffee machine or some equipment for your business. Maybe a bunch of tools. Or better yet, let’s use the example I was just giving the $178,000 deduction.
What you do is anything that’s less than 20 years, you can write off in one year. With real estate, a lot of folks don’t realize that when you go under MACRS which is 39 years for commercial, 27½ years for residential, if you do that, that’s treating it all like structure. But you can have an engineer go in there and say, “It’s not all structural. A lot of it is personal property.” 1245 property is what they call it, which means the carpet might be 7 years. The paint, the fixtures on the walls, those might be 5 year property. They break it all down into pieces so that at the end of the day—this is the average I’ve seen—is between 20% and 30% of the improvement value, ends up being personal property or you can take immediate.
Let’s say I buy the single family residence worth $1 million. Maybe it’s a duplex, quadplex, whatever or maybe it’s a single family residence in California. I actually just did one of these this morning. It was a $115,000 land, $750,000 on the improvement. That $750,000 is going to generate somewhere between $200,000 in immediate deduction because I did a cost segregation. You can bonus depreciation that big chunk of land. Guys, there’s a tremendous amount of money if you do the cost segregation.
The question is, “Can I use it?” I get a huge deduction, but can I actually use it all? It’s passive activity. Unless I’m a real estate professional, I’m going to be able to wipe out all of my other rents for a long time. But if I want to wipe out my other income, I have to be a real estate professional.
We’ve answered that question a million times here. It means that your 750 hours and the material purchase spent on your real estate activity. You do that, you can wipe out your spouse’s other income.
The example I gave, $178,000, that was their bonus depreciation in one property. If you own most of the properties you could just pick one a year, do a cost seg, and wipe it out. Then, you can really control your taxes. It really gets fun, guys.
For that one client, it was about a little over $80,000 a year that they get to keep in their pocket. The way I look at it, it’s just not me. By making them aware, they were able to buy an extra house a year. In my little world, that’s pretty huge for a family if they do that for 10 years. That’s pretty significant. I think it’s cool for something they paid $197,000, I think they […], but that’s a pretty good return for your investment.
“I missed the part about Airbnb in an S Corp. Can you then depreciate it?” You don’t depreciate it in an S Corp. The real estate tells the separate entity and you’re the host. You lease it to your S Corp. The S Corp is the host for seven days or less. Yes, you can depreciate it. You’re going to get the best of both worlds.
“I started an LLC and have no employees or income coming in. I’m married and file jointly. Can I claim business expenses on my taxes?” What say you, Jeff?
Jeff: I sometimes have a problem with this because I sometimes see expenses as being turned away and there’s nothing really an effort to be profitable. Yes, you can deduct the expenses, but the longer you do this without any earning income, the more risky it becomes because then you’re starting to look at the hobby loss rules.
Toby: hobby loss rules is Section 183 which is only subject to sole proprietors, partnerships, and S Corp. As an S Corp, you can lose money. I’m just going to answer this real straight, as a sole proprietor, partnership, or an S Corp, the business expenses are going to be offsetting. It’s going to be a business expense that’s going to offset your personal taxes. A C Corp, you carry forward. You have no employees and no income coming in, but you just have loss. Then, in a C Corp you just carry it forward. Everything else, if you’re an S Corp and you do not have basis which I don’t know how you incur a bunch of expenses without basis in a startup, you’re going to get direct […].
What Jeff is saying is don’t do it more than two years in a row. If you do it more than two years in a row, then they could say you’re not really a business. If you make money three out of five years, then the presumption is that you are a business. You just have to make a little money after that. If you’re going to lose money, you might want to be a C Corp because they don’t ever have to make money. Hence, we have Amazon.
Somebody asked about the depreciation. “Shouldn’t a CPA know what depreciation should be taken or at least make the recommendation?” The answer’s no, Frank. You actually have to have a third party going in there, look at the property, and tell them which part is 1245 property versus 1250. I could not do it sitting here. I could give you the average which is the average on residentials between 20% and 30%. On commercial it’s about 30% of the improvement values. What most engineers are coming back and saying, “That’s the portion that’s personal property.”
Again, Frank, unless you have somebody that’s in real estate, like I’m in real estate, I have more than 100 properties. I have commercial. I have buildings and warehouse. This is what we do. Unless you have people like that, it’s really tough because these are nuances. Jeff, you’ve been doing this for almost 30 years.
Jeff: There are some CPAs that may have that experience of being able to evaluate real estate, but it’s going to be very far and few in between.
Toby: And it’s not a knock on him, either. If they don’t do it personally, the way our memories work, I’ll just give you a test. If you start looking at it like a truck, let’s say you’re looking at a Raptor. Raptors are pretty cool. That’s a kickbutt Ford. They go really, really fast. If you start thinking of a Raptor and you start driving around, guess what you’re going to see everywhere, you’re going to see Raptors everywhere you turn. Or if you play slug bug, you start seeing them everywhere.
That’s the way our memory works as a human being. It’s only relevant. There’s actually a medical term for it. Somebody probably knows it. For most people, it’s not relevant. They don’t see it. They can actually read it and they won’t see it. It won’t sink it because it’s not relevant to them.
If I read an article about something in another place in the world that has nothing to do with me—politics or something weird—I’m probably not going to remember much of it because it’s not relevant to me. Whereas if I read something in my town about my neighbors, I’m probably going to remember it forever.
That’s why when you’re dealing with real estate, I’m not going to say don’t use your CPA, I’m never going to say that. If you have a good CPA, you give them hugs and kisses. If you have somebody that doesn’t see these, you probably want to either get them with us, have them take our course, or just get them on Tax Tuesdays asking questions, and get it done. Obviously, we have a whole bunch of those folks. The answer is yes, you can take it.
Somebody says, “What about the downside of depreciating personal property?” If you recapture, it’s not the 25% recapture, it’s ordinary income. However, keep in mind that personal property that gets depreciated, if it has no fair market value, it’s not included in your gain, which means everything becomes recapture or capital gains. You’re not going to recognize that as ordinary income.
If I have a commercial building with a bunch of carpet in it, we just had this. It’s $248,000 for the carpet. I retired that after five years.
Jeff: How much?
Jeff: Oh my gosh.
Toby: Yeah. I literally sat down when we had a scenario with it. The engineer didn’t do a change order. They had it in there. It’s like $40,000. I was like, “In your square footage? I don’t know how you got carpet that cheap.” They went in and there was a change order. It was an extra $271,000. The accountant caught it. Not me. It was $248,000.
Then they were going to go and sell the building. They were yelling at the accountants saying, “I’m going to have ordinary income.” He said, “No. That has no value. When you sell it, it’s zero value. You’re not going to have to recapture it.” Again, this is why you have accountants that know what they’re doing. They will save you. They are worth their weight in gold. A good CPA, a good EA, a good tax attorney, you just grab onto them, you hug them, send them chocolates, and stuff because they will save you so much money. I don’t just say that because I need chocolate and because I’m a tax attorney.
“Are you familiar with Deferred Sales Trust concept?” Yes, Rick. In fact, I know the firm in Kansas City that really was paramount in that topic. One of my friends was one of their lawyers who’s out here in Vegas now. I’m not going to bore everybody on it, but it’s a way of selling a highly appreciated business and spreading out the tax over a long term by selling it under an installment note. Often times, with the SCIN—Self-Cancelling Installment Note—stepping up the basis, and then selling it the following period of time—most people say six months later—and not paying tax on that.
You can have a $50 million sale that pays $0 tax on and then you spread it out over your lifetime. Yeah, Rick. They do work. There’s folks that specialized on that. I don’t do them personally, but I know the concept, I know the taxation of it. That’s one of those things where I’d be referring you to somebody else.
Jeff: It’s been to court and back. It all works.
Toby: Yup. But there’s a way to do it right.
Jeff: And there’s a way to do it wrong.
Toby: Yup, so you want to do it with somebody who’s done it before. You don’t want your person learning on it. I know enough that it can be very dangerous and know some folks that’ll do it. If you’re selling, it’s a cracker jack for someone who’s exiting a business. Cognitive bias is also seeing more of the car you own.
All right. “Structuring an LLC series for privacy. Wyoming holding LLC must be formed before all others?” Kind of. Wyoming doesn’t even report anything anymore. You can actually do the whole thing and be pretty safe.
Let’s go into this. “We have several Single family residential properties that need to be put in LLCs. Do they each get their own LLC?” I’m going to do good, better, or best. Good is making sure that your property is separated from you, at least having one LLC. A house burns down and people are hurt, they don’t garnish your wages until you’re dead. If you don’t think that could happen, rest assured, I garnished one gal.
It was in Washington State in 1997. She trashed a friend ‘s and mine’s house on her way out. The gal’s son was dealing drugs out of the property. She was very angry that this landlord said that her son was dealing drugs out of the property. She took a ball hammer and busted a bunch of holes throughout the deal. This guy was not super rich. He worked his whole life and he had rental properties as a retirement. He’s a friend of a friend, a lot of you guys know my story, but I took the case pro bono which means you don’t get paid. You can’t just go after these people.
It was intentional. He got bankrupted. We sued. I did a leasehold, troubled damages, claimed in Washington state. If you damage a leasehold, you can actually get trouble damages. The lawyer didn’t understand it. The judge did. The judge ordered. We made $50,000 verdict against this gal who immediately went into bankruptcy, thought she could defeat it. We pursued her in bankruptcy and avoided the bankruptcy. Then, we followed her around and garnished her. She works for Boeing for many, many years. It took us 11 years to collect that entire judgment. We collected every dollar plus 12% interest.
If you don’t want that happening to you, if you’re doing something bad, then we’re not going to help you. If you just have a property and somebody says, “Hey, I have a toxic mold,” and you get an evil lawyer who takes and tries to sue you for $1 million, that’s going to keep you up at night. The LLC will protect that.
Better is when you have your multiple LLCs where you have properties in various LLCs. You might take four or five and put them in an LLC depending on the value of the properties.
A lot of times that we talk about is how much equity is available on most properties and do I want to cut if off? Let’s say you’re a doctor, you’re making a lot of money. You go and buy a property in Indiana for $100,000. You say, “What’s the worst that can happen to me?” They could garnish your medical wages which took forever. So, you put an LLC around it.
What’s the worst that could happen? They’ll take that property away. What if I have 10 properties? Let’s say I put five in one LLC, five on another. Then, I have a fire in one of them, a huge liability where I get sued for more than one of them. Then, I’m going to lose five. But it’s really the equity in those five. If I have a loan against them all, I really don’t have to worry about it.
Best is one property in each LLC. Again, you have to do cost benefit. Let’s say it’s an apartment buildings, it’s a no brainer. One, LLC for apartment building. If it’s single family residences and they’re $25,000 each, it’s not much value in it. It’ll cost more to foreclose on it. It’ll probably put a few of those in an LLC.
If I have a bunch of decent properties and they’re going to keep appreciating, I’m just going to start right from this, get going. I’m just going to do LLCs. If I’m in a state like California where I have a franchise tax on each LLC at $800, I’m going to take that into consideration. I’m either going to move my other state and use trust or I’m going to use something to make sure that I’m protected.
Somebody said, “I saw Clint Coons on YouTube video about holding properties and living trust to avoid probate. Many other videos have always own income property on LLCs. Please help me understand. How do you own a property in LLC and hold it into a living trust?” KC, in LLC, is putting your shaving cream in a plastic bag and your living trust is your luggage.
Let’s say that I’m going to go on a trip somewhere. I’m going to bring my shaving cream, but I have a really nice suits. Maybe my wife has some really nice clothing. I just put my shaving cream just right into the suitcase and zipped it up. First off, the living trust is just a convenient holding vehicle for all my clothing. It’s great. If I pass away, I don’t have to distribute the clothing. Let’s say my trustee, I say, “Could you please keep my clothes in this suitcase? If my kids need it, take what they need out of it.”
That’s how a living trust works. That shaving cream could still explode and destroy all my clothes. The LLC concept is basically to put it in a ziplock. If that shaving cream blows up, it stays inside the ziplock bag. If I open up my suitcase, I see that my shaving cream has exploded, it’s going to be confined in that bag, and I throw that bag away. That’s your LLC. I may have a whole bunch of shaving creams. I just put them in the suitcase, it’s not a big deal. That’s what your LLCs are.
Somebody else says, “Would you recommend a series LLC for multiple rentals?” There’s 14 states that have a series LLCs statutes, I believe. If you’re in Texas or Wyoming or in some of these places where they have pretty decent statutes and I know that their judges are just going to ignore them, then I would do it.
“The liability for each LLC is only for the equity?” Yup. They get the good and the bad. If you have a piece of property that has a loan against it, toss it in an LLC. The most they could get is the difference between the fair market value and that loan. That’s how we force settlement. 99.9% of the time guys, we just don’t see our clients ever go to trial. In fact, I’ve seen $30+ million disputes. I’ve seen $100+ million disputes on two occasions involving our clients. None of them ever went to trial. They all get settled out because there’s a cap on what they’re able to get. You’re basically saying, “I’m going to spend it down.” That’s going to be a better way to force people to do it.
You had a second question. “Is there some tax and legal benefit to holding properties in LLCs versus living trusts?” No. We first do no harm with an LLC. We want to get all the benefits of holding real estate. The living trust is ignored, Casey. That living trust, again, it’s just your luggage, and your putting stuff in it. All your personal assets and your business assets are going in that luggage. It’s not there for anything other than to make sure it’s easy for your family to keep control of it or those you care about or organizations you care about, and it does not have to go through probate.
“Who can set up the living trust and actually understands this method? My state attorney and I feels […].” Yeah. Casey, call us up. We have folks. We can help you anywhere you are.
“Is it better to hold loans in the properties?” I’m a big believer that when you put property into an LLC, it’s great to have a loan against it. Even if it’s your own company, we call that a friendly lien. Loan yourself the money to buy it so you’re keeping your cash. I called it a virtual safe. I don’t want to get too long-winded on this because I’ve already gone over.
The way I explain it, is you’re walking down the street at night and you can see right in the people’s house—peeping Tom. You walk down and if they’re lit up, you can see right into their houses. Just imagine if their door was open and they had a pile of cash right there by the front door that you could see wherever you walk. You don’t want people to see your cash and leave the door open. They’re just going to go and help themselves. Not you, obviously, because you’re a good person. There’s people on this planet that without even a hesitation, walk in there and take it.
You can close the door and turn the lights up, but the cash is still sitting there. If somebody goes into your house, they still take your cash. You say, “I can put it into a safe.” We’re talking to a guy who actually have a safe stolen out of his house after having their windows replaced. About two weeks later, somebody came back in and got my safe. So, the safe can still be taken.
What do you do? You basically take it and you bury it into a desert where nobody can see it or find it. Now, nobody can take it. That’s a good place to put your cash. Except you don’t want to go out of the desert and bury it.
So you use Wyoming or Nevada where they can’t see that you own it. It’s basically a virtual safe. You’re putting your cash in there and then you loan it to yourself. You lien your properties. If anybody ever comes after you, guess who gets paid first? Your virtual safe. They can never take that from you.
In Nevada and Wyoming, they have charging owner statutes, which means nobody can take your asset. The most they can do is slap a lien on it and it’s worth nothing. In fact, you can actually scare them off because you say, “Hey, I’m going to hit you with tax bill.” There is one ruling on it that’s favorable to that. Most people don’t mess with it. It’s enough to make them scared.
“Who knows? You may dig up a body.” Stop that, Robert. We don’t put bodies in our safes, it’s just bad. But you put your cash in there.
“Could I do a friendly lien on a property held in a self-directed IRA?” Not from you or disregarded person. Yes, you could, but you run into UBIT issues. I wouldn’t use the self-directed IRA. This is actually getting way ahead of us because we have a question on this in the end. You can have debt in a 401(k). You cannot have debt in self-directed IRA without incurring debt finance income. Yes, you can, but I don’t want to work and get more information.
Hey Casey, if you like this stuff, do the Bulletproof Investor, the Two for Tuesday. Maybe Susan or Patty can send that link out. It’s really cool. They’ll send you a link. It’ll be a part of the followup email. They’ll send it while we’re talking. Maybe they already did. Let me look. Look at this, yeah there it is. It’s in there.
If you want to learn this stuff, it doesn’t take that long. It’s actually really cool and it works like a charm. I’ve been doing this for 20+ years. Jeff’s almost 30 years. I could tell you that when you do things right, you don’t get sued. You don’t get harrassed. You don’t get audited. We see almost no audits. We do 5000 returns a year. How many audits did you see last year?
Jeff: A one or two.
Toby: Of our clients, right?
Jeff: Of our clients.
Toby: We see lots from others.
“If I move into one of my rentals for a year-and-a-half, that’s in its own LLC, does the LLC still depreciate it and deduct repairs?”
Jeff: The answer is no simply because it’s not available to be rented. It’s also become your personal residence for the time being. I might argue that you could deduct any mortgage interest and taxes on your personal return, but the LLC, the rental properties, are not going to be able to deduct anything during that time.
Toby: The beautiful answer is no. You can’t depreciate it. When it’s personal property, you don’t depreciate personal property. If it’s a rental, let’s say it’s a duplex, then you’re going to write off half. If it’s a single family residence where you just move into it, then it’s personal property. But if you’re staying in it for six more months, you can actually get the 121 exclusion, which per individual’s $125,000 against capital gains or $250,000 single, $500,000, you don’t have to pay tax on capital gains. It’s huge.
Jeff: At this point, I’m returning this to a rental property after a year-and-a-half, I would probably capitalize those repairs and start depreciating after my […].
Toby: Yup, you’re going to go grab it.
Jeff: I’m going to grab those repairs and say they are improvements or whatever I need to do.
Toby: Somebody says, “If I’m a platinum member, do I get to get in for free in November?” I don’t know. I think you do. I think that if you ask that we’ll get you in for free on just the live. But if you want all the recordings, all the livestream, and all that other stuff, you had to do the […] offer. But yeah, we give you tickets all the time to come and spend time with us. The Statute of Limitation Workshop, Tax and Asset Protection, if you’re platinum, we’ll give you tickets.
“Can you use a Wyoming series LLC to own properties in other states?” Yes. What you do is you have a land trust in your local state, you take the beneficial interest, and you put it in each of the series. It’s a mean trick, but it actually works like a charm. There’s lots of ways to do it.
“Can I deduct educational training costs, pertinent to the company mission, within an LLC framework if I file as a C Corp?” This is my new favorite person.
Jeff: Your answer is?
Toby: Absolutely. That’s the beautiful part. If it’s going to benefit the employer, I can write it off. Anything that helps me in my job with the C Corp which is the LLC tax in the C Corp, if I work for the C Corp, I’m now an employee. If I’m doing things, I can reimburse me those costs or pay for them direct. Absolutely. Anything you wanted to add on that one?
Toby: “How do we structure our healthcare through our corporation to be able to write things off like gym memberships and doctor visits?” I can’t help but laugh a little bit.
Jeff: A little clarification on that. Doctor visits you can deduct, gym memberships are not deductible. They’re reimbursable, but they’re not deductible to the corporation. That goes also for any over-the-counter medications or supplements and certain other health benefits. This would actually be structured if you have a 105 Plan.
Toby: If you’re an S Corp, it’s taxable to you and you can write off the insurance premiums only. If you’re a C Corp, you write off the whole thing off. The gym membership, that’s really a tough one unless you have a doctor’s prescription.
Jeff: That usually comes under what they call wellness program.
Toby: You’ve got to get your doctor friend to say you need a gym membership. Jeff, I’m a doctor. I’m a JD.
Jeff: Junior Doctor?
Toby: I used to tell my daughter that. I think I’m licensed to do small procedures.
Jeff: Juris Doctor?
Toby: Yeah, Juris Doctor. Somebody says, “Is the cost $35 a month to become a platinum member?” That’s what it cost once you become a platinum member. There’s a small initiation fee. If you do an entity, chances are it’s not going to cost you anything. I would reach out to somebody here and see what is it.
“Exactly what am I doing with my Alaska cruise? Write off my C Corp for financial education?” Here’s the deal and this is for Sherry. When you go on a cruise, that’s travel. You can’t actually write off cruises. There’s a way to do it. It has to be a US registered vessel. There’s only two of them and I think they’re in Hawaii. But if it’s a visit to foreign port, you do not get to deduct that.
What you can do is write off cruise travel that’s going to a place. If you’re on a cruise, chances are you guys are getting off at another location and actually having a meeting. You can write off up to twice the maximum federal per diem rate, per day, that’s part of your cruise. […]. Yup, that’s how you do it. Probably the ex-IRS trial attorney, if I’m not mistaken, Mr. Scott, that’s probably teaching that. That would be Scott, yes. Scott’s a great guy. He knows what he’s doing. He’s telling those guys how to do it right.
If you like doing cruises, start using it as travel. It’s about $800-$900 a day depending on what the maximum federal amount is. Yeah, you can use it to get places. You don’t have to take a plane, you don’t have to take a boat, you don’t have to take a train. You can take a horse if you really want to, but any of those you get to write it off. The IRS doesn’t get to tell you how to get there. If you have a car, you can do whatever. If you want to take a luxury water travel, it’s the max.
Here’s a little trick. Make sure that if you are using cruise travel that the meals are included because then you don’t have to do the 50% meals. It’s included in the accommodations, then it’s all deductible.
“I am retired drawing social security and retirement, do I need to pay myself a salary from my corporation and all of the associated withholding and federal state taxes or would I be able to simply pay myself a distribution of the profits?” I understand what you’re doing with social security and retirement. You do not want to give yourself more income because it makes your social security taxable.
The answer is you don’t need to pay yourself a salary. But, if you do pay yourself money out of it, the distribution of dividends, or the distribution, then you probably are going to have to pay yourself salary. You’re going to want to see what’s the most efficient way to get the money out and whether it’s better to be an S Corp or a C Corp. In your situation, it’s probably going to be a C Corp. There’s so many ways to get the money out tax free. I’m going to say that’s going to be your better bet.
Jeff: If you take an early social security and you’re not in a full retirement age, I would strongly suggest that do not take payroll. Every dollar you earn in payroll reduces your social security benefits.
Toby: I don’t want payroll. Does the distribution have an S Corp?
Jeff: No, I don’t think it does. […] is not considered earned income.
Toby: Yes, passive income is not going to mess with your social security. Here’s the answer. It goes back to something I said earlier. Anything in tax has three rules. That’s calculate, calculate, calculate. You really want to sit down with the tax person and run the numbers.
Somebody says, “I should also mention that the family members are retired and collecting social security.” Then you want to make sure.
Somebody […]. “I have a C Corp which accumulated $100,000 loss. Close the corp and buy properties in LLC.” Oh, here’s the beautiful part. James just asked a question. Here’s what he says, “I have a C Corp with accumulated $100,000 loss.” If you’re married and filing jointly, you can take that loss personally if you dissolve the corporation. Assuming you made it 1244 stock collection which you do if it’s a small corporation, chances are you already did that.
Jeff: It’s an Inc,, not an LLC.
Toby: Yes. It has to be a corporation, a traditional C Corp. Then, you’d be able to write off the $100,000.
Somebody says, “Calculate, calculate, calculate, and depends. The options profit costs me social security income.” Johnny, you’re probably doing short-term. Did they make you a trader?
Jeff: What they probably did was because of his income and the options, it increases his medicare cost. The more you make, the more they charge you for medicare.
Toby: Yeah, but he said social security, “It cost me social security income.”
Jeff: The medicare is deducted from the social security.
Toby: Oh, right. That’s what they got him on that. We have a whole bunch of questions.
“What’s the best business credit card used as a startup for LLC?” I’ve used AmericanExpress because they don’t report your personal.
Somebody says, “What is the best way to pay a family member 10% of gross rents on a monthly basis for their compensation for loaning money?” That sounds like interest who has purchased home equity loan, repaid by the property rents, LLC taxes C Corp who manage the property. Family members retiring and collecting social security. Without any doubt, I’ll just tell you, the gross rent what I would do is I would make this a participating loan that says 10% interest capped at 10% of gross rents. You’re making contingent on the collection. All it’s going to do is it still interest and it won’t hurt your social security. Easy answer to that one.
Let’s keep going on. “What happens if a real estate property is gifted to an immediate family member and the recipient sells the gifted property within two years?” First off, that two-year period, I’m not aware of there anything with gifts. I am aware of a 1031 Exchange that you sell to a related party. They have to hold it for two years. The question is, “Does the tax liability falls on the donor or does the recipient just file it on the recipient’s return?” Are you aware of any two years?
Jeff: This might be a 121. If I gave you a property and then you lived in it for two years.
Toby: It could be. I’m trying to figure it out. Maybe it’s something that I’m not aware of. I have to look at this a little bit, but here’s the deal. Gifted property, you get their basis. I’m thinking, what if I’m in a really high tax bracket and I gift the property to one of my kids. Then, they sell it immediately. It is attributed back to the gift donor?
Jeff: No. Like you said, you get the basis of the gift donor and then you pay the tax on it.
Jeff: I don’t think I’ve seen anything […].
Toby: I’ve never seen anything about two years on gifted property. The only one I’m aware of is the 1031 Exchange; two year. We may have to look at that one and see if there’s anything. I don’t think there’s an issue and I’ll just say the recipient will file it on their return and they get the basis of the party that gifted it. Let’s say, Grandma bought this property, depreciated the heck out of it, and it has $10,000 basis, it’s worth $300,000, they gifted it to you, and then you sell it, your basis is Grandma’s basis of $10,000.
Jeff: One other thing that you need to be aware of when you’re gifted, perhaps, rental real estate, and there’s passive losses on it, you don’t get those passive losses. They stay with the gifter, the grantor. They don’t get to recognize these passive losses either until you sell that property. It’s kind of a catch if there’s loss, suspended losses on a rental property.
Toby: Somebody said, “Are there any unusual tax consequences or penalties?” I’m not aware of any. Somebody’s going to pay the tax. CPAs said the IRS might say there’s a transfer of income.
Jeff: That’s the only thing I could think of. If you immediately sell it, specifically, to somebody in a much lower tax bracket than you, like your kids.
Toby: I’m going to say let’s take a look at this. We’ll hold it over until the next time.
“Is the depreciation improvements […] before they gifted the donor?” No.
It’s James again. “I’m not married so is there a way to recoup the loss when a person returns?” James, you get a $50,000 as a single person with that much of a loss. I’m going to have to say that we’re going to postpone that one. We’ll look at it. I’m not aware of a two year and I think the tax liability is just going to be yours. Remember, the income goes to you. If you gift it back within two years, I bet you there’s a period where they say, “We’re going to undo the gift.”
If I transfer to my kids, my kids sells it, and pays less tax than gifts it back to me, and now I have an issue. They’re going to look through that transaction as a step transaction.
“How do I start funding a Solo 401(k)?” This is a great idea, by the way. A Solo 401(k) has three buckets, it has the employee deferral bucket which this year is I think $19,500 if you’re under 50. Let me look. You know what it is off the top of your head?
Jeff: I want to say $18,500, but I could be wrong.
Toby: 2019 it’s $19,000. There’s a catch-up of $6000 if you’re 50 or over by the end of the year.
Jeff: The catch-up never changes.
Toby: Catch-up never changes. You could put up to $25,000 deferred, which means the company pays you $25,000, but you don’t receive the $25,000. It goes right over your 401(k). That’s deferral. That’s bucket number one.
Bucket number two. Company can match 25% of whatever you receive and deduct it. If I pay you $50,000 of salary, I can put in there $12,500. Let’s just say I paid Jeff $50,000, he can defer $25,000 plus the company could put another $12,500 for a total of $37,500 on his salary of $50,000. That’s a pretty good way to get money in there.
Last bucket is the Roth 401(k) bucket which is that catch-up in the $19,000. If I don’t want to take a deduction for my deferral, I could just stick it right into my Roth 401(k). By the way, I could actually get up to my entire compensation in there if I stick a bunch of money into the 401(a) bucket which is the employer match part. I could roll that all during the year into a Roth IRA—this is really twisted. The whole amount can go into the Roth IRA. It is called an in service company distribution and I can get the whole amount into a Roth IRA.
We got one more question and we’re way over. “Do Solo 401(k)s have to pay UBIT or UDFI if they finance real estate?” Let’s go over what those concepts are. UBIT. Do you want to hit that or do you want me to knock that?
Jeff: Unrelated Business Income Tax. This is a tax that Solo 401(k)s, 501(c)(3)s, any exempt organizations or entities pay on a trader business income. The important thing is how trader business income is defined. Interest dividends, capital gains, that’s all portfolio income that is not trader business. Real estate rentals is not.
Toby: Right. It has to be an active trader business if I am doing business that was competitive to an active business. There are a few exceptions, by the way. If you have a thrift store as part of your church, they’re going to let you do it. But if I opened up a McDonalds owned by my church, that McDonalds is paying tax even if it’s owned by your church. It’s Unrelated Business Income Tax. It’s unrelated to the charitable of the exempt purpose. You pay UBIT on any exempt entity, period. There’s no way to get around UBIT. Just because I’m doing an active business in my exempt organization.
Now, UDFI is when you do Unrelated Debt Financing Income. If you’re doing real estate, that’s not UBIT. Real estate is passive. If you borrow money on real estate, a 401(k) is not subject to UDFI. An IRA is. The way you look at it is if I borrow $50,000 to buy a $100,000 piece of property—my IRA puts in $50,000 and I borrow $50,000—that property generates $10,000 during the year. $5000 of it or the half is Unrelated Debt-Financed Income. I have to pay tax on that $5000. I do not have to do that if it’s a Solo 401(k). That’s a huge difference.
For those of you who do syndications, Solo 401(k) is what you should be using to do a syndication. You should not use an IRA to do syndications because that IRA is subject to Unrelated Debt-Financed Income. If you do a syndication, chances are they’re using leverage.
For example, let’s just use a common situation, I raised $2 million and I get a $5 million loan on an apartment complex to fix it up and get it operating. I have so much Unrelated Debt-Financed Income now. You think, “Oh, this is great. I’ve got it on my IRA.” You’re supposed to pay tax on it. In fact, 5/7 of it is taxable. That’s a big chunk. More than half is going to be subject to that tax if it’s in an IRA. You make sure it’s going to a 401(k).
Somebody says, “I did not get the answer to the question about the $100,000 loss on the C Corp.” I answered it. I’ll just tell you that the $100,000 loss you can take personally if you close that corporation if you’re married, and file jointly. If you’re single, then it’s $50,000. Your accountant is probably saying, “Let’s kill the corporation, take that loss personally. Then, invest in real estate through a different entity,” and I agree with them, depending on what your income is. Let’s say you’re making $100,000 you’re going to wipe out your tax bill. You’re going to have zero tax this year.
Somebody says, “Can I set up a solo 401(k) if my income is 1099-INT and K-1 from real estate syndications?” The answer is yes, depending on what type of income you’re getting from the K-1. The 1099-INT, is that interest?
Jeff: That’s interest.
Toby: Then you can’t. It has to be active income that’s going into the 401(k). What you can do is you can have a C Corp managing an LLC holding those pieces of income and you pay the C Corp. The C Corp could fund your retirement fund. You can actually do that. You have to shift it a little bit. What did I say? The juice has to be worth the squeeze. It’s got to be worth it. You do your calculations. It’s got to be worth it.
All right guys. Last little piece here. I’m just going to give you guys a few little things. Don’t forget, Two for Tuesday. Take advantage of this if you want. Some of you guys have probably already done the Tax Wise Workshop and there’s already a couple questions.
Here’s the gift. If you did that Tax Wise Workshop—this is going to tick off my people—I’m would just include the Bulletproof. I still think it’s absolutely a fantastic value. I’m not going to punish you if you bought it early on the Tax Wise Workshop because we had it for $197. I would say you get both. We’re […] because again, we care about you. We want you to be successful. We want you to get all the assets that you can. We’re not one of those companies that sits there that worries about nickels and dimes when there’s dollars out there that you guys can be making.
Let’s see. “Are there times when an S Corporation be preferable to a C Corp, for instance in wholesaling?” Absolutely. It depends on whether you’re going to use that money or whether you’re just stockpiling and what your tax bracket is. Again, we have to calculate.
“How do we get the Bulletproof if we already have the 1097 Tax Wise Livestream?” Email us and we will annoy the heck out of Patty and Susan. That’s what our job is.
Jeff: I’m not going to talk to you for the rest of the week.
Toby: No. I know we talked about this, and I don’t remember what the answer is, so I’m just going to give it away.
Somebody says, “Can I pay my daughter out of the LLC as a contractor?” Yes, so she can cover expenses while she’s attending college. That’s what we teach, America. You’re actually perfect.
“I will have to fill out the W-9, can I deduct it as a business expense?” Yes. You’re nailing it. She’s getting it. You’re already all over it. It’s better to have it in her tax bracket.
The Google Play Podcast, they get it done for me, by the way. Google Play, that’s the same thing. You get the free podcast. If you need the replays of all these, we have tons and tons of them. I think we’re in the 90s now. You can go in in the Platinum Portal, you can get access to them.
Of course, make sure you’re going on to andersonadvisors.com/facebook and andersonadvisors.com/youtube if you want to keep learning this stuff. You could find a lot of answers to your questions by just going in there. Subscribing makes us happy. Questions, you could always send them in firstname.lastname@example.org or visit us at andersonadvisors.com.
If there’s nothing else, I’m going to say thank you, guys. There’s a lot of really good questions tonight. We always enjoy doing these. I can speak for myself, it’s a lot of fun, and you guys are a really great group to work with. It’s a lot of fun. You guys have a great night and we’ll see you again in about two weeks.
Jeff: Two weeks, we’ll see you.
Toby: Thank you, Jeff. By the way, you did a great job.
Jeff: Thank you.