Celebrate the 100th episode of Tax Tuesday, where Toby Mathis and Jeff Webb of Anderson Advisors bring tax knowledge to the masses. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- Is there a preferred tax structure for a foreign investor compared to a U.S. investor? United States taxes worldwide income, if you’re a U.S. resident and there’s a treaty between the United States and other country
- I’m an independent contractor through a company that sends me a 1099. Can I be self-employed through LLC I created, or do I need to be an employee and have taxes taken out? You’re an employee of your S Corp; you can’t get a 1099 as a contractor
- Do you have to file a tax return, if you have an LLC owned by a solo 401(k)? No, unless it’s a partnership with more than $250,000
- If I own a timeshare (not as an investment), and I go there one week a year, are there tax deductions I can take? Very few are deductible and difficult to get
- Do IRS Section 179 Depreciation Rules apply equally to C and S corps? Yes
- I am remodeling an apartment building. Is cost segregation an option? What are the reporting requirements? Report depreciation of cost segregation of recent remodel
- What are the advantages of qualifying as a real estate professional? Real estate losses are no longer passive, but active to offset your personal income
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Full Episode Transcript
Toby: Hey guys this is Toby Mathis and…... Read Full Transcript
Jeff: Jeff Webb.
Toby: Yeah. Hey, welcome to Tax Tuesdays and we’re already getting a bunch of questions in, which is always fun. Somebody says we sound like chipmunks. I think they’re listing the old music and I didn’t choose it. This is the 100th episode of Tax Tuesday. We’ve been doing this for awhile and I guess this is a celebration. Jeff is probably going to have non diet soda or something. That’s about as big as you celebrate?
Jeff: I mix some Mountain Dew with my Coke.
Toby: All right, so Jeff’s here and yes, I’m not a good drinker, either. I’ve just never been good at it so I just don’t do it.
Jeff: I don’t like going across; they fall down.
Toby: Typical CPA, you can’t hold your liquor. We got Tax Tuesday. We got a lot to go on. We have a lot of questions already coming through, which means we’re going to have our work cut out for us. I put a lot of questions in this time, which we’ll get to here in just a second. Before we do, just know that there’s lots of freebies out there. You can send your friends, watch it yourself but we have a ton of videos that we put up. We have a ton of content that we put up both on Facebook and YouTube. You can go to andersonadvisors.com/facebook or andersonadvisors.com/youtube, or both. You can certainly hit the little subscribe button on YouTube. What it does is, it doesn’t email you or anything. It’s just lets you know when there’s new videos. That is a good way to communicate big tax law changes and other fun stuff.
Tax Tuesday rules. You ask your questions live. We’ll do our very best to answer it before the end of the webinar. We try to hit them all, but sometimes they come in fast and furious. If you don’t get an answer, it’s okay to say, “Hey, did you get this?” We do try to answer them all. People ask all the time when I’m at an event, “Do you really answer the questions?” Yes. The only reason I don’t post them up there is because some people ask very personal stuff or they divulge things that I don’t want the whole group seeing, plus your name is right next to the questions. I don’t want people seeing what your questions are.
If you have specific questions regarding tax, send them to firstname.lastname@example.org. If you have something that’s really personal to you, it’s specific to your situation, where we’re going to have to spend more time, you need to be a platinum or a tax client, then we’ll engage and we want to make sure that we do the appropriate engagement. This is fast, fun, and educational. I want to give back and help educate.
The whole idea here is that it’s kind of brain food. The more you hear this stuff and I get this all over when I speak. I’m shocked at how many of you guys are out there. There’s thousands of people that listen to this podcast every other week. A lot of people have us on the podcast and we always have many hundreds live. It is so interesting at how many people are actually just kind of plugging in and then they’re answering the questions during the events. They’re like, “I know the answer to that.” It’s good, so it works. That’s the whole idea, share some knowledge.
Opening questions, we’ll be going over these and more of your live questions, too. “If you have an S-Corp and hire your own children for earned income, are all of the payroll taxes you pay to the government written off as a business expense? How often and where do you send the payroll taxes or where are they withheld?” We will answer that.
We’ll also be answering, “We currently hold single family residential properties,” that’s what SFR means if you’re not a realistic person, “under a pass-through entity,” meaning, it flows under the individual’s return, “with a separate LLC to manage the properties. How much and how often should the managing LLC be paid?” So, this is about the manager’s fee. “Is it a percentage of rent each month or can we do a lump sum at the end of the year? Does the managing LLC need to show a profit or can it pass on losses to our personal return?” We’ll answer that one.
Here’s a fun one. I always like it when we have our foreign friends, especially from Israel. “I wanted to know if there’s a preferred tax structure for a foreign investor compared to a US investor? I registered my LLC back in 2015 and it now owns seven rental properties in Upstate New York. I have a social security number and I pay my taxes in the US and in Israel where I reside.” We’ll get to that one.
A fun one here. “I have a question and I think I’m asking in the right place.” Of course. “I’m an independent contractor through a company who pays me to coach their clients. Last year, they gave me a 1099. Due to the volume of the income, I established an LLC S-Corp. That company now sends the money to the LLC, and the LLC pays me. Do I have the option to be self-employed as a contractor and get a 1099 from the LLC or must I be an employee and have taxes taken out?” We’ll go over that. That has a lot of interesting issues.
“Do you have to file a tax return if you have an LLC owned by a solo?” That solo means a solo 401(k). The LLC holds investment real estate.
“Can you please detail what the 20% rule is all about and how to use it?” I think I know what you’re asking, we’ll get that.
Here’s a fun one. “I paid for real estate classes in March of 2019. I’m studying to take my real estate license in October. As a realtor, can I consider what I paid for the classes tax deductible even if I become a real realtor after many months? Do I need to create an LLC to claim the classes as tax deductible?” We’ll answer that.
“If I own a timeshare, not as an investment, and I go there one week a year, are there tax deductions I can take?” “Do IRS section 179 depreciation rules apply equally to S- and C-Corps or C- and S-Corps?” “Can I deduct business expenses on my personal tax return if I only do business as an LLC?” We’ll answer that.
“I am remodeling an apartment building and believe cost segregation might be an option. What are the reporting requirements?” We’ll go over that one, too.
“What are the advantages of qualifying as a real estate professional? Does that trigger special documentation?” Great questions. I probably say this before, but you guys are asking really good questions lately. We get tons, but this week, I remember going through a lot of questions and they’re all pretty extensive. There wasn’t a lot of one liners in there. This is people being thoughtful and asking really good questions. I love that. It makes us raise our game.
Here’s our first question, “If you have an S-Corp and hire your own children for earned income, are the payroll taxes you paid to the government written off as a business expense? How often and where do you send the payroll taxes?” What say you, Jeff?
Jeff: If you’re hiring your own children, you treat them like any other employee. You do have to withhold certain taxes. The exception with your children is you probably won’t have to have worker’s compensation for them. You probably won’t have to have unemployment taxes for them. You do save a little bit there, but otherwise, the taxes you pay on their behalf such as the employer share of social security, that is a business deduction. Now, how often you deposit these funds like your federal taxes…
Toby: You’re paying half, right?
Jeff: You’re paying half, but you also have the employee share that you have to deposit with the government. There’s actually multiple deposit rules of when you have it. It could be monthly, it could be quarterly, it could be two days after the payroll, depending on how big your payroll taxes are.
Toby: So, there’s no federal requirement for how often you pay somebody? It’s usually state level?
Toby: You could pay them once a year if you wanted to and do the withholding then. States are a little different, but if it’s your child, just make sure they’re doing something. You really have two options whenever you’re paying your kids. If you’re paying them through an S-Corp, you’re paying them a salary, but if one of the spouses can be a contractor for the S-Corp, you could pay that spouse and that spouse could pay the child out of their company. In other words, the child wouldn’t work for the S-Corp, they would work for the one-op business. As long as it had substance.
For example, if you had a real estate company and one of the spouses set up an advertising company that handled all of the advertising and they set it up separate as a sole proprietorship with the sole purpose of, “Hey, I want to get paid and I want to pay this child, too,” you could avoid the withholding if you did that. It seems like a lot of steps to go through for probably a little bit of benefits, so I don’t think I’d probably do that. Otherwise, you’re just running them through payroll and yeah, you got some withholding but they’re paying into social security. The company deducts their half, the other half is the employee. The employee gets a deduction for that, don’t they?
Toby: Kind of.
Jeff: Kind of. One thing I would not recommend is paying your kids as independent contractors, because as soon as they get paid more than $400, they’re going to be starting subject to self-employment tax.
Toby: Yeah, that little self-employment tax we keep talking about is old age, death, and survivors. Actually, as an individual, it’s not deductible, it’s just for the company to have. The reason we call the self-employment tax is because when you’re an independent contractor, as a sole proprietor, you’re paying both halves. You’re paying the business half and the employee half. You have to write-off half of it.
When you’re an employer like an S-Corp, then you’re paying half, and the employee, the child is paying half, but either case, the government’s going to get its due. They’re going to get their little piece, but you are paying into social security. You’re going to start earning your benefits. You’re getting your quarters up. As far as the how often, realistically, it really depends on the circumstances.
I wish there was an easy way to answer this other than to say, “Hey, if it’s a child and they’re actually working for your business, and they’re doing stuff as part of the business.” In other words, you’re bringing them along. I have a lot of clients that have their children involved in their businesses when they’re younger and as they grow, they continue. Then, the kids end up taking it over. The kids draw substantial salaries. They do benefits. They do all that stuff that you should be doing and it starts somewhere.
If we’re talking about a 12-year-old pushing a broom versus an 18-year-old doing extensive research, or social media, or marketing, or going out and selecting properties, or being involved in your business, those are all very different things. Absolutely, you can pay them and it’s up to you guys decide how often. I would use a payroll company.
Jeff: I was just going to say that. A lot of these issues go away if you use a payroll company as far as when you have to deposit, where does it have to go. A payroll company is taking care of all that.
Toby: Love it. Next question. Some of you guys are asking some pretty big questions online, too, so we’ll get into that. By the way, for those of you guys who were on the cost segregation webinar, unbelievable. The amount of money I’ve seen with some of these folks. We’ve had a few where it’s $300,000 and $400,000 deductions that they got. Nobody knew, so that was a pretty awesome webinar. We put it up on our YouTube channel. If you didn’t get to see it, you should, but we’ve had folks just knock it out of the park as far as getting massive deductions, that they didn’t realize that they could take. There was one guy, he paid about $3000 was the cost segregation study, the total in his pocket is about $70,000. It was several hundred thousand, so we like that.
“We currently hold several SFR properties,” single family resident is what that means, “under a pass-through entity with a separate LLC to manage the properties.” When they say pass-through, that just means that it’s flowing through to the owner. I’m going to assume that the owner is the individual. “How much and how often should the managing LLC be paid? Is it a percentage each month or can it be lump sum at the end of the year? Does the managing LLC need to show a profit or can it pass some losses to our personal return?” Jeff, do you want to take a whack at this one or do you want me to jump on it?
Jeff: Well, how much and how often, I think ideally, you actually run it like a property management company. The property management company, your LLC manager is actually collecting rent, paying expenses, and so forth. They’re keeping a percentage of that income, they’re not passing all the income back, and typically I see it at 10%. It can be higher, it can be a little lower. You don’t want to go crazy.
Toby: Here’s the big one. When you have a pass-through entity, if it’s a partnership, anything you pay that corporation is considered a guaranteed payment to partner and it reduces the amount of taxable income that comes through. This begs the question then on the other question about whether it needs to show a profit. Technically, it’s supposed to show profit. If it’s C-Corp, we don’t care. It’s an LLC taxed as a C-Corp. It’s not subject to the hobby loss rules. That’s Section 183 of the Internal Revenue Code and C-Corps are not included in that definition. If you read it, you’ll see it’s S-Corps and individuals.
That LLC, which doesn’t exist for tax purposes, we tell the IRS what it is for tax purposes, we’ll make that a corporation. You can create losses in that corporation if you want. If it creates a loss in the LLC, then the question is whether you’re eligible to take passive losses. If it’s a single family residence and it has net losses, then you can’t take them except in a couple circumstances. Number one, I’m a real estate professional. Number two, I’m an active participant in real estate and I make less than $100,000. It actually phases up between $100,000 and $150,000 in which case I can take up to $25,000 of deduction.
I know I just threw a lot at you guys. Just know that you can pay that management company. My personal belief is, you should make it a fixed amount each month. I don’t like having it related to too many percentages. I like to just say, “Hey, I’m going to pay my managing LLC and it’s going out.” It’s managing the managers, it’s managing the accountants, it’s managing the lawyers. All these things that it’s handling on behalf of the other LLCs. Usually, there’s a holding LLC in it and there’s a management company that manages it. Then, you are literally in the world of, “I am paying an executive to manage my entire portfolio. I’m not just a property manager, but I’m managing everything.”
Jeff: I’ve seen a couple lately where the management companies have been other pass-through entities which to me doesn’t make a whole lot of sense. It’s all putting the money back in the same pot at the end of the day.
Toby: Real quick. Somebody asked a question which is going to knock a couple of these out, we’re getting a lot of them. “I asked this question via email, maybe I can ask it personally. I’m a platinum member.” Thank you very much. “I have two rental properties in several LLCs and I deposit the rent into each one of their accounts.” That’s fine. “Am I able to use the money as I wish without a problem?” Karen, the answer is actually yeah, if those are just regarded to you, or if they’re flowing directly under your return 100%, then yeah, we don’t care. You can take the money out.
The profits flow down to you. It’s always separate than what your actual capital account is. Your account at the end of the year just basically takes it out of your capital account. It increased with all your revenue and we’re just withdrawing the money. We’re just taking our capital account out. Yes, it’s kind of like having a safe.
This is a question on the definition of specified service to business, the 20% QBI deduction. “I have an S-Corp. Some of my business activities do fit the definition of consulting. Some don’t fit under the definition.” So Kathy, I forget the percentage of activities. Is that 60% or more for QBI? The way of your specified service? There’s a threshold that you use and I think it’s 60% or more of the income. If you have a business that does both…
Jeff: Oh okay, I see what you’re saying.
Toby: Then do you know the threshold?
Jeff: I do not know the threshold, because I was thinking that she was asking that she has some businesses, they are separate businesses, some are consulting and some are not.
Toby: They aggregate them all together. It gets kind of crazy, but Kathy, there is a way to look at it and it’s up to you as to how you want to classify it. If it’s me, I put it in the light that’s best for me.
“I’m considering buying a condo in Orlando close to Disney. Some have HOA fees. Are HOA fees deductible?” Elijah, I love the question and the answer is, it depends on whether that’s an investment property or whether you’re using it as a vacation home.
If it’s just a second home, then chances are no. HOA fees are not deductible, it’s personal expense. But if you rent that out to other people and you are careful with the 10% rule, 14 days if you use it. If he uses it less than 10% of the rental days, then it’s not an investment. If it is an investment property, he doesn’t have to worry about aggregating.
There’s a couple of different levels here. I’m not going to dive too deep into them, but if you are renting it to third parties, then the question is, at what level are you using it compared to those third parties? They look at a ratio and if the ratio is too high where you’re using it for more than 14 days and more than 10%, then they make you take partial deductions on the HOA stuff.
Jeff: You can end up not getting any deductions beyond what income you are earning.
Toby: “At what level of investments does it pay to say family office?” A family office to me just means you have somebody who’s in charge of the assets of a family who’s managing them for that family. Is there a legal definition for a family office?
Jeff: No, because I’ve seen family offices used for businesses and stuff.
Toby: Yeah, some people say family office and it’s not really. They just happen to be the accountant for the family, they go, “My office.” Usually, you have somebody that’s full-time, working for, and handling the assets of a particular family or a trust with lots of beneficiaries.
“We reside in the US. I have a property in the UK. Can we do a 1031 exchange in the US real estate?” I don’t believe so. It has to be US real estate.
Jeff: You can go foreign-to-foreign but you cannot go foreign-to-domestic.
Toby: That’s wild. I know you can’t go domestic-to-foreign, either. You can do US-Virgin Islands, I think its territories by account, but that’s about it.
“Can I deduct any non-expenses to visit expos, seminars, and investigate different funds to deduct any and all expenses?” Well, that’s kind of funny. If you’re an active business, if you’re an investor—this is a term of art—then the answer is no. If you are an active business, then the answer’s yes. If you don’t know, then you call us.
Toby: “I want to hire a medical assistant to work with me in two different practices I own and the other owned by others, can we split the cost for salary and benefits as an employee or IC? Thanks.” That’s kind of a fun one. They have two different practices, one owned by them and the other by others, so there’s two ways to do it. You either put her or him on two different payrolls, or you have one company cover the payroll and the other company reimburse half of those payroll costs, et cetera.
Jeff: Yeah. It’s fine splitting the actual payroll, but the benefits, one company or the other has to actually be paying those benefits. Then, like you said, just split the cost between them.
Toby: Yup, then you got to be just a little careful that you’re not giving them benefits. If there are other employees there, that other company is getting better benefits, you may have some control group issues. It’s best to seek the advice of a professional, make sure what the ratios are. It sounds weird, but trust me.
“What are the tax implications when rolling a TSP account into a solo 401(k)?”
Jeff: It’s just like any other account. The one thing you can say about the TSP account is that it’s a pretty darn secure. They’re probably the safest real estate investment there is, as far as the company’s not going belly up or the plan itself is not going to go under. Otherwise, it’s pretty much just like rolling any other retirement plan into a 401(k).
Toby: I don’t think there’s an issue. There’s either direct rolls or you’re rolling it to an IRA and then into the 401(k).
Jeff: I like the idea of always trying to do a direct role. Don’t put the money in your hands.
Toby: Yeah and you can only do that indirect role once a year. I know people always do this to me, so I answer questions and they start saying, “Hey, I thought this was on foreign properties and stuff.” Did I skip the foreign properties? that’s bad. Let’s see. No, I didn’t. Look at that, I don’t know where it went.
“I wanted to know if there is a preferred tax structure for a foreign investor compared to a US investor. I registered my LLC back in 2015 and it now owns several rental properties in Upstate New York. I have a social security number and pay my taxes in the US and in Israel where I reside.” First off, it’s always a big question about when you have a non-US resident as to whether there’s a treaty between the countries, because the US taxes worldwide income if you reside here. It doesn’t matter where you’re a citizen of. If you start staying here in the US too much, they’re like, “Great. We need you to file taxes on all of your income worldwide.” If you have a green card here, you’re going to be paying that. What do you have?
Jeff: They have a social security number, so I’m assuming they have a green card.
Toby: Maybe, maybe not.
Jeff: They’re a US resident.
Toby: If they do or they have an ITIN or they’re just a resident here, you can get a social security card even if you’re on a visa, you can get a social security number, I believe.
Jeff: You have to be a US resident.
Toby: You have to be a resident when you get it, so they get it and then maybe they go back.
Jeff: Otherwise, it’s like you said, they get an ITIN if they have some other type of visa.
Toby: Big question, though, is whether or not there’s a treaty and how that treaty impacts your taxation. For example, Israel, I was just dealing with this the other day and they give you a credit for you US taxes paid. The bigger issue is when you’re doing the LLC, whether they’re going to do some required withholdings. You like using the LLC because it keeps you away from the other party becoming the withholding agent.
Jeff: Right. I kind of like keeping the LLC on the individual, disregard it to the individual rather than through another pass-through entity. If this is truly a foreign investor, then S-corporations don’t work. It would have to be a partnership because I don’t particularly like putting rental property into a C-Corporation.
Toby: You can’t have an S-Corp because he’s not a resident.
Jeff: He’s ineligible to be an S-Corp.
Toby: Right. It’s weird. In S-Corps, you can be a foreigner living in the US and still have an S-Corp, you cannot be a non-citizen and reside outside the United States. It’s kind of a weird one and it will actually cause you to lose your S status, even if you’re a shareholder in an S-Corp. One shareholder loses their status, the whole thing becomes a C-Corp.
I like the way he structured it personally, so I just look at seven rental properties. The only thing that I have, that I worry about is, if you have all seven properties in one LLC, you’re asking for a problem, if something happens on one of those properties. You have inside liability, one thing happens on one property in that LLC, they get to go after the other six. I would like to see them separated into separate LLCs if possible.
As far as the taxes you pay in the US, that’s probably at 1040NR, which means 1040 non-resident. Any taxes you pay in the US, I’m sure you’re claiming as a credit in Israel. If you are not, you make sure you do that and tell your accountant to go back and amend it. I don’t know what the amendment rules are in Israel, but you overpaid your taxes if you’re doing both.
“I heard you could be an illegal alien and still get social security. Just saying.” I don’t think you have to be a green card holder to use social security number, I’m not sure. I think you just have to be a resident.
“Why no rentals in a C-Corp?” Tess, it’s bad. Here’s why it’s bad. You have appreciated assets that technically you would never have to pay tax on if it’s in your individual name, that if you take it out of the corporation, it is going to be a deemed distribution. The profits get taxed at the corporate level and then they’ll be taxed to the recipients of that money, at best, as dividends, which if they’re ordinary dividends, it’s ordinary rate. If it’s qualified dividends, then it’s your long-term capital gains rates. That’s why people tend to freak out about it is that they’re worried and you may be required to take a salary. So, all of a sudden you’re taking stuff that would’ve been taxable and you’re taxing it. Nasty.
I have clients that do a lot of activity, the development activity, the flips, everything else in the C-Corp, no problem. But if you’re holding properties long and you’re trying to get the depreciation, your personal benefits, you’re going to find yourself in trouble because at some point, if you try to finance that thing, they’re going to make it take it out of the C-Corp to do it, and you just have deemed-distribution. Now, you’re paying a pretty ugly tax on that.
Jeff: There’s also the tax issue if your C-Corporation has nothing but rental properties in it. If you’re making pretty good money on these rentals, you’re going to be subject to that personal holding tax, which is an additional 20% tax.
Toby: Yeah, they still nail that even with the flat tax.
Toby: Yeah, so if it’s just rents, royalties, dividends and interest, if it’s more than…
Toby: Yeah. Then, they punish you. Don’t do it, Tess, unless you really have some good direction.
“I have a question. I think I’m asking it in the right place. I’m an independent contractor.” First off, an independent contractor just means the company is not hiring them as an employee, but they’re paying them as an outside party like a company. “Last year they gave me a 1099,” which is perfect. “Due to the volume of my income, I established an LLC taxed as an S-Corp.”
When they say LLC S-Corp, you guys that have been around for a long time know that LLCs don’t exist to the IRS. We just tell it how we want it to be taxed as an S-Corp. The reason that you do the S-Corp is because in an S-Corp, (a) you have an accountable plan, you get all sorts of tax benefits, (b) it can pay you a salary which means, (c) any of the profits coming to you are not subject to social security taxes. You avoid old age, death and survivors, and Medicare on a substantial portion of your income, which can save you about 14% on that income. For $100,000 it’s going to save you between $9000 and $10,000 a year.
Let’s finish the rest the question. “That company now sends the money to the LLC and the LLC pays me. Do I have the option to be self-employed as a contractor and get a 1099 from the LLC, or must I be an employee and have taxes taken out?” Jeff, do you want to knock that one out?
Jeff: First off, you can’t be a 1099 contractor, you’re, by role, an employee of the S-Corporation.
Toby: Because you’re an S-Corp.
Toby: You’re an employee of it.
Jeff: The only time you could get a 1099 is if you’re doing work outside of your normal duties.
Toby: You won’t even know it. Here’s an easy one, you would never do that.
Jeff: It actually destroys the whole purpose of what you set the S-Corporation up.
Toby: Yeah, because 1099, you’re making yourself subject to social security taxes and then with the S-Corp, all that money that would not have been subject to the social security, now you still have a salary requirement to take it where you’re going to have withholding. Otherwise, that money is subject to self-employment tax.
Somebody just said, “Hey, somebody’s correctly noting an issue. Notary publics you don’t pay social security taxes,” so it doesn’t really matter. If this is you as a notary public then you have a statutory exemption from having to pay the social security taxes. Everybody else this is what the rule is and frankly this is the rule. You’re never going to be in a situation for coaching what you’re doing, you’re never going to be in a situation where it’s bad for you to be taking a small salary out. In fact I would marry this thing with a 401(k) and really get some tax savings.
Jeff: The accountant gives the why you can’t and the lawyer gives the why you shouldn’t.
Toby: What you do mean? Oh, this is great. You actually have a great structure. Now, you just have to tweak it. You have a hot rod and you’re saying, “Should I put water in the tank or should I put some nitro?” Do the nitro.
“Do you have to file a tax return if you have an LLC owned by a solo?” It’s solo 401(k).
Jeff: If it’s owned solely by a solo 401(k), then the answer is no, but we run into cases where it may be in a joint venture or partnership with multiple exempt organizations, and in that case, you do have to file a return, even though those K1’s from that partnership go to never-never land, they don’t go anywhere.
Toby: Here’s the deal, if you have a solo 401(k), you don’t have to file a tax return for it, unless you have over $250,000. When you say solo, that means you and a spouse or you and a business partner, if it’s you and business partner, you’re filing a 5500. If it’s you and a spouse and you have over to our $250,000 in there, your filing a 5500, if it owns assets and that asset includes the LLC. If the LLC is disregarded due to the solo 401(k), it doesn’t have to file a tax return, disregarded this. We told the IRS, “Ignore that LLC, it’s really just a big 401(k).”
Remember, LLC’s don’t exist to the IRS. We tell it what it is. We tell the IRS, “Hey, ignore that and just treated as a 401(k). Now, if that LLC as a partnership, then we have to get K1’s to the partners, so then the LLC has to file a tax return and that partner could be solo 401(k) and somebody else. Technically, it could be you. It sounds weird.
Jeff: […] solo 401(k) and an IRA.
Toby: This is going to trip some you guys out there that are in the financial services industry because you’re always told you can’t partner with your own 401(k). Actually, you can. You can’t transact a bunch of business with that actively. Even then, you could do a rob transaction and get away with it if it’s a C-Corp. I don’t even want to go down the hole. It makes my head hurt right.
Keep going, we have a lot of questions. I’m going to go back to some of the questions and don’t yell at me because I’m not going to advance the slide. I got people mad that we weren’t advancing the slides earlier. “I have a rental property for 18 years and lease is coming up for renewal, should I sell the property to my LLC?” No. Well, I can’t imagine, when would you ever sell it? Well, unless that LLC is taxed as an S-Corp, maybe. No. I can’t think of a single situation why you would do that. You’re not going to get big benefit.
What you would do is if you’re going to sell it, you better have a really good reason to sell it. You could transfer it into an LLC, but that 18 years means you’ve substantially depreciated it. I just can’t see a reason why I would sell it.
“Is the 50% too high on a management fee? We’re talking about management fees earlier. Realistically, a set amount, then I don’t really care what percentage of it is. It just has to be reasonable.”
Jeff: There’s an issue with the 50%. Now you’re classifying what the income is.
Toby: Just pick out amount, $100,000 a year. Just as long as you could be paying somebody to run a company $100,000 a year. The IRS is going to beat up on you. I haven’t seen this come up in 22 years. Well, you’ve been doing this longer than me.
Jeff: No, I haven’t seen those.
Toby: I saw this issue, the case on this was a $15 million management fee where they didn’t let him take about $1 million of it. Everybody is like, “See, you have really document your management fees.” Yes, you document management fees, but the amount just has to be reasonable. God knows what’s reasonable.
“Can you go over the depreciation of rental properties? Say I buy rental for $500,000 and rented out pretty much break even. Explain how the depreciation help in this case.” How depreciation works is you get a deduction based on the improvement on that land. You don’t depreciate land you depreciate the improvement on it and you have a couple of different choices. If it’s like what you just said here, it’s a rental property, then the question is, is it residential or is it commercial? If it’s residential, then the default rule is you write-off 127.5 every year of whatever the improved value is and you would use that as a deduction.
Now, if you’re breaking even, I don’t know what that really means, that means the actual expenses on that property before you even take depreciation is breaking even, then we have a little bit of a problem because now you have a loss. Steve, that’s not going to necessarily benefit you right away. You’re going to carry for that loss every year until you have income to be offset with it, or you would need to be a real estate professional, in which case you can offset your other income. There is a there is another exception, which is if you make less than $150,000 a year—it’s really $100,000 to $150,000 it starts phase up—and you actively participate, you manage as the manager, then you can write-off up to $25,000 a year against your active income. I hope that helps.
“I have a dormant S-Corp in California. Can I use this to be my management company or should I created C-Corp?” It depends on your situation, you’d want to email us, but yeah, if you have an S-Corp just sitting around doing nothing, I’d look at the articles and I would look at its by-laws and make sure that it doesn’t have problems that are going to come back and haunt us, you could absolutely use it, if that’s where you reside, I should say.
Jeff: I wouldn’t do it if you don’t reside there.
Toby: Yeah, because California’s expensive. “Can you explain when depreciation recapture is bad when you sell a rental?” You can answer this, you’re the accountant here.
Jeff: Depreciation recapture is never going to exceed the gain on the sale of your property. Also, it’s a slightly higher rate of taxation, so if you’re in the 22% bracket, it’s going to tax you have 25%, basically on some the depreciation that you’ve previously taken. It’s just a slightly higher rate.
Toby: And it’s up to 25%. It’s your ordinary bracket up to 25%. If you’re in the 12% tax bracket, that’s what’s going to be the recapture.
Jeff: But if you’re in the 32% tax bracket…
Toby: Then it’s capped at 25%. It’s not so bad. The other side is that, if you’ve done a cost segregation, you broke out your five-year or seven-year property, owned it that long, you’re going to not pay a lot of recapturing. It wouldn’t be traditional recapture, it should be taxed as ordinary income, but it’s almost nonexistent. It keeps you moving things over to the capital gains.
Jeff: The big difference here is instead of paying a normal capital gains rate, you could be paying that higher 25% which is not as good as capital gains rates, but it could not be as bad as your ordinary rates.
Toby: Somebody says, “If I want to do only fix and flip, do I have to do it an LLC or can I do it via a C-Corp?” so this is fun. We can all make fun of him. Just teasing. LLC’s don’t exist to the IRS, so we tell it how we want to be taxed. I would tax it as an S or C-Corp. If you are an active business, don’t do that in your individual name.
“Can a home office deduction be applied to more than one entity if business is conducted for both?” It depends on the space if they’re both exclusive. Otherwise, you’re just doing one. If you have two rooms, one for each business then you do it. If you have one then make sure it’s for one. I don’t think you can sit there and divide it up.
Jeff: Well you could say one room for two businesses, you’re just going to split the expense in half.
Toby: I think it has to be exclusive. In the back recesses of my brain, I remember them saying, if you have more than one business, you fail the exclusivity test. Maybe it’s not something they pick on, because they don’t even see these the way we do them. You’d be doing a reimbursement, don’t do it as a home office, do it as a reimbursement from your business. There’s no paper trail there. You don’t have to worry about it.
The best way for foreign investors to invest in large-scale commercial US properties. Recommended organizational structure. We were talking about this one earlier. You want to have a US-based business so you don’t have withholding issues, because anybody paying you money becomes a withholding agent and it’s a 30% withholding. You want to avoid that if you can. The easiest way to do it is to have a US taxpayer that owns it and then you own that US taxpayer if that makes sense. I would have a US entity owning your interest.
Somebody says, “Dual residency US and Samoa.” Samoa is a territory, though, right?
Toby: You don’t have to worry, Jennifer. You’re good, because Samoa is still one US tax return. They don’t have a separate tax return. I’m going to keep going. “No, Western Samoa.” is Western Samoa non-territory?
Jeff: I don’t think that’s America’s Samoa. I think that’s separate.
Toby: All right. So Jennifer, it’s an independent nation. If that’s the case and you live in Hawaii then you’re worldwide US assets are taxable there and it’s up to whether they will give you a credit for the US taxes paid, but you would have to pay taxes on worldwide income. If you’re making money in Western Samoa then you would be reporting it on your US tax return, yes.
Jeff: This is where we get into some of the complications of where you are a tax resident. We see nations like […].
Toby: All right. Let’s see. This is something. “Can you please detail what the 20% rule is all about and how to use it?” Yeah, you’re supposed to give 20% of your money to me, you just write the check. No. That’s our government and actually it’s more like 30%. “Can you please detail the 20% rule?” Here’s what they do, if you have qualified business income, it’s active trader business income including rental, if it’s non-triple net lease including residential versus commercial. All these things qualify for this 20% deduction. It’s what the Tax Cuts and Jobs Act gave everybody other than the C-Corp. C-Corps, they cut their tax by almost 50%. For you and I they said, “Hey, we’re going to give you a little gift and what we’re going to let you do is deduct 20% of your income, your qualified business income, 20% of your income.”
Jeff is yanking my cord all over the place. We’re still old school here, we still use wires. I’ll put it in English. If I’m a sole proprietor, I make $100,000, and that’s all I make, even if I’m in a specified service business—there’s this thing called a specified service business if you’re in medical, dental, legal, accounting, consulting, performing arts, all these things where you are the business—then they call you a specified service, but if I’m at $100,000 I don’t need to worry about any phase out strains like that.
It gets kind of complicated. The more you make, it starts to phase out. But if my net is $100,000, I would get a 20% deduction off the top and I would only pay tax on $80,000. That’s the 20% and it’s on net income, Mina. Under that scenario you get you get a nice $20,000 deduction. Now here’s the problem. The more you make, it phases out. Let’s get the exact number now, it looks like $157,000-$270,000 to phase out. If you’re a married couple filing jointly, it’s around $320,000-$420,000 it phases out, and you start applying a different test. If you’re a specified service business you’re done. You don’t have to apply a test; it’s zero. If it’s anything else then you start doing a 50% at W-2 wages versus by 2.5% of the assets, plus 25% of W-2, and you compare all of this to 20% of your taxable income. Yeah, you’re doing this weird test and you actually have to run these numbers towards the end of the year to make sure you’re not stepping on something. What it really comes down to when we do the planning is we’re looking at everybody saying, “What if we do here, how is it going to affect it?” and you’re looking for the best ratio.
For example, again, same scenario with the sole proprietor making the $20,000 deduction. you’re looking at that then you’re comparing that to an S-Corp where maybe they take a $25,000 salary and they only have $75,000 that flows out that is subject to the 20%, so you’re looking at it going, “Oh man, I only got a $15,000 deduction.” However, you saved 15.3% on the old age, death, and survivors of Medicare.
When you start comparing the two, you start realizing, “Wait a second. My 20% may be less, but my overall tax savings may be higher.” Which is why if you haven’t heard us say this before, this is the rule of tax planning. It’s called calculate, calculate, calculate. You got to do your calculation. You always got to do your calculation. “What is a specified service?” Specified service just means, again, legal, architecture, engineer.
Jeff: Architecture, no. They’ve got an exception.
Toby: They got an exception to architecture?
Jeff: Yes, they do.
Toby: Strike that. Not architecture. The architects, really?
Toby: When did they do that? Anybody that’s in the field of medical, accounting, and legal for sure, they toast you, or performing arts.
Jeff: Or professional sports.
Toby: Performing arts.
Toby: I don’t know. Whatever it is. Engineering, yes, I believe that you’re a specified service. What they do is they say, “We don’t like that particular type of business. You don’t get this big deduction because you make so much money.” That’s kind of what they’re thinking. In which case then you look at it and say, “Maybe I should make it a C-Corp because they slashed the C-Corp taxes in half,” and we start running numbers to see which one is the best.
Jeff: I’m actually expecting to see a lot of Corp cases over the next year or two on this, what is a specified service.
Toby: Yes. Cruise our YouTube channel. I dove into detail and frankly it gets muddy. Unless you’re looking at the rules and you’re going to the current regs, because they screwed it up, too. The IRS publicized that real estate agents couldn’t use it and then the regs said, “Yeah, you could.” You have conflicting documents out there where if you follow the publications, you wouldn’t take it. If you follow the regs, you do. We know that the instructions are not law, but the regulations are, so the regs went out. Then somebody says, “Isn’t engineering under architecture?”
Jeff: I’m not sure if it is or not, but one of the issues I’ve seen with this is we go through all these crazy calculations and we come up with our deduction from the qualified business income as $20,000 like you said, but if you find out your taxable income on your 1040 is only $50,000.
Toby: Right, it’s because you get to take all your retirement plan deductions, your charitable deductions and everything, and it […] your taxable income down.
Jeff: What it ends up saying is, it’s the lower of the 20% of QBI or 20% of your taxable income. I’ve seen a lot of people expecting this $20,000 deduction but they’re only getting a $10,000 deduction.
Toby: Here’s the thing. Here’s all you have to do, is how do I take it and how do I get the most out of it. When we actually do year-end planning, you’re literally looking at it and saying, “Hey, I need to pay more salary out of my company so that I can get more of the deduction.” You literally are sitting there running the analysis saying, “Hey, what if I put too much into my retirement plan if I’m doing a defined benefit plan or if I’m giving a bunch of money away to charity,” and you’re like, “Oh, it’s phasing me out of my 20% deduction.” Well you should know that. You should actually take that into consideration. “Maybe I’ll wait a month to give a bunch of money away if I need to give the money away just because I lose some deductions by doing so,” maybe it’s something you should consider.
All right, something I was just throwing up there, the fourth edition of Tax-Wise is going to be coming out. I am in the final editing stage, so it’s probably a month or two months out so I’m not going to snow you guys. We wanted to do something special for the 100th episode, so what we’re doing, if you guys know how this stuff works, we’re going to do a $10 preorder. It’s a hard-bound book, it’s normally $29.95. We sell them at events at $20. We sell them online at $29.95. If you want to preorder, it’s $10. I would say just pop on there, it’s aba.link/preorder. Lets me know how hard I need to prioritize this.
If there’s a lot of preorders, I’m jumping all over it. It’s not that many, I’m sorry, I’m going to take my time. No, just kidding. We have it going through final edits right now. I like to play around with it, which by the way if you’ve never read, Tax-Wise is the fourth addition. It first came out in, I want to say, 2003, although I started writing it in 1999, because myself and an accountant much like Jeff, we had a cheat sheet and we would just keep this binder. We would write out everything we could find out on certain deductions and we just kept a book of it. Eventually, we were like, “Okay, I should just publish this thing.”
Chapter five is really just a whole bunch of deductions alphabetized with the rules to take it, examples, and the IRS law behind it. So, it’s kind of a workbook. I already have mine, see? You don’t have the fourth edition, you probably have the third edition, I’m just teasing. All right, I’ve […] it cost more than $10 to make these things.
All right, “I paid for real estate classes in March 2019. I’m studying to take my real estate license in October.” This is somebody who is not a realtor, taking their real estate classes. “As a realtor, can I consider what I paid for the classes taxed but tax deductible, even if I become a realtor after many months? Do I need to create an LLC claim the classes as tax deductible?” The first thing is if you’re creating a new profession, you can’t write it off. The first thing you do is you look at it and say, chances are no, but if you are already a real estate investor and you’re doing this to improve your existing business, then the answer would be switched to a yes.
Jeff: I agree.
Toby: Somebody says, “There’s no field for a zip code.” Don’t worry Susan, we’ll get it for you. I think we might be able to look at it. “Is there any other situation where you could think of this?”
Jeff: No, not really. Like you said, it would have to be an existing business for something like this, but since this sounds so specific that the education is for the real estate license. I’m assuming that they haven’t been in that field before now. It’s not going to be deductible. One of the exclusions for deductions is training to get you into a new career path.
Toby: You got to look at it and say, “Am I in the real estate business? Does this help my real estate business?” Now it has to be a real estate business. This becomes really, really important and people keep asking. I think we have an electronic copy of the book. Last time we did it on a Kindle. I think we can get that to you, too. We’re actually going to send you a physical book. We like the physical book. The second edition came out in 2007 and the third edition came out like three years ago.
Jeff: […] tax change since then.
Toby: Just a couple. This one was a pain. I’ve been working on this for a year and it’s like the never-ending project. Amanda, yes, we record all of our Tax Tuesdays. It’s on a podcast and also if you registered here, you’ll get the recording. These things are fun to listen to when you’re working out. It will make you work out that much harder, because you would be like, I need to get off this treadmill to stop listening to this tax stuff. You’ll run that much faster, but you’ll never outrun being tax-wise.
I just don’t see them being able to write it off unless they’re already in the field of real estate. The big one for real estate is if you already own property, then you are in the business of real estate. If you don’t own property, you’re not. If you do your real estate classes after you already own property and you’re doing it to better your property, to become more experienced and you’re not trying to become a realtor and make your living doing it, then you have a pretty good argument.
“Does the new one cover the Tax Cut and Jobs Act?” Yes, it does. That was a big reason why we had to redo it. “Any other 2018 rules that are included?” Yes.
Here’s a bunch of questions, just some cool ones. “My dad owned a business with his two brothers. He is being bought out by his nephews and signed a promissory note for the purchase of the land that the business is built on. He’s been receiving installment payments over five years and due to get a lump sum in March with the balance due which is approximately, won’t say it. Is there any way to protect him from getting a huge capital gains tax charge?” Gale, the answer is probably not, however, there is a way to offset that capital gains if you reinvest it in a qualified opportunity zone. You have to do it within 180 days from him getting paid off. It’s a 1231 tax whether its end of the year. Is it the 1231? Am I saying, that right? Capital gains.
Jeff: It might be.
Toby: What I would do is say, “Hey, make sure that you’re talking to an accountant or one of us while you’re doing it just to make sure, but I think it would be 180 days from getting that balloon payment.
Somebody says, “In the home office conversations you said reimbursement from your business has no paper trail. If you reimburse yourself, do you have to pay taxes on that personally?” No, Jennifer. That’s why we love accountable plans and that’s why you never have a home office that you write-off on your schedule C ever again.
Jeff: I wouldn’t say it doesn’t have a paper trail because it has to have some kind of paper trail to be an accountable plan. As you’re going to that point is you’re documenting why you’re paying that amount.
Toby: Somebody says, “Why does Toby never show a copy of his law degree?” Because you don’t have a law degree. You have a juris doctorate and then you get it if you pass the bar, so stop it. They needle me from afar, Jeff. They’re not very nice.
“Can I order two books?” Of course, you can order as many as you want. It’s a free country and we love you guys to share them.
Let’s see, what else we got. The electronic version, I’m sure we have electronic version. Some people said, “Everything looks good on the zip codes,” so that was me just blabbering around. “You need to just frame it. It depends and frame that.” You guys are really mean.
“Can I fund a solo 401(k) with 1099 income from my own sole proprietor?” Yes, Rick, you actually can. Here’s the deal. When you’re a sole proprietor, the reason that we tend to shy away from them, especially if it’s over $30,000 of net income, it’s because the audit rate is significantly higher and you pay more tax. You can’t do an accountable plan like the home office, where it doesn’t have the paper trail and you get a much larger amount. That’s kind of the issue. “You do not do a home office on a schedule C. Why? Sorry, I don’t understand why.” Deidre, when you are a schedule C, a sole proprietorship, you and the business are no different. You actually file a separate tax form. What is it?
Toby: 8829 for your home office. In other words, you’re waving at them saying, “Hey look at me. I’m a sole proprietor and I’m taking a home office.” When you reimburse yourself under an accountable plan, you just don’t have to report it. It’s not on your personal return. There’s no paper trail on your personal return.
I can’t stress how important that is. The corporation writes it off. It has to be a corporation. You can get so much more out of it when you do it that way because you have about nine different ways to determine what the amount is and it’s just absolutely night and day. I usually get that question periodically.
Jeff: They do have the simplified safe harbor, that they’ll let you use on the schedule C.
Toby: It stinks. It’s $5 a square foot.
Jeff: It maxes out of $1500.
Toby: It sucks. Don’t even do that. You’re going to be able to get so much more, even if you have a rental property, even if you’re a renter. You can do the home office deduction, that’s the thing. We beat that question.
“If I own a timeshare not as an investment and go there one week a year, are there tax deductions I can take?”
Jeff: Very few and I’ll run through them real quick. The most obvious is real estate tax which is deductible if it is billed separately or directly to you. It can’t be part of your maintenance. They have to actually separate it. Interest is probably not going to be deductible because the loan has to be secured by the property. You’re not going to be able to do that if you only have that property for one week out of a year. Your maintenance fees are not deductible. Any other kind of fees typically are not deductible. The deductions on a timeshare are very difficult to get. One way to do this is if you bought the timeshare by borrowing it against your personal residence or something like that, that would actually work where you could deduct the interest payments.
Toby: There’s another way that you could write it off. That’s when you do the timeshare and you go there, you’re not even going to rent it to the business, you’re not doing a typical renter, but you’re reimbursing it if you go in there and using it for business purposes.
If you have a timeshare and for example if you decide you’re going to go to a seminar or an investment, you’re going to go look at investments in the area and you meet the minimum thresholds to do that which is four hours and one minute a day, and it’s more than 50% of the time. As long as it is more than 50% of the time, I always tell you that. Let’s say you had this for two weeks and you used it 50% business. A little bit more 50.1% business, now you can write the whole thing off even if you spent another part of the week.
It’s just weird for timeshares. What you do is you’re not writing it off on your personal return. You’re just getting reimbursed for the expenses from the company. That’s how you do it. You always have to do a little bit of elbow grease to marry them together. Did you know I will say that?
Toby: Right. I was reading all these questions. Sometimes I get lost. “Do IRS section 179 depreciation rules apply equally to S- and C-Corps?”
Jeff: Yes, they do.
Toby: “Can I deduct business expenses on my personal return even if I only do business as an LLC?”
Jeff: The fact that you said personal, did that business expense on my personal tax return? I’m not sure where to go with that.
Toby: Well, it sounds like they’re doing a sole proprietorship. “Can I deduct business expenses on my personal return if I only do business as an LLC?” Remember, the LLC isn’t a tax designation, so we have to look at that. Based on what you’re saying, it sounds like that LLC is disregarded for tax purposes. You set it up just for asset protection in which case, yes, you can write your business expenses off on your personal return on your schedule C which is what it’s for, but we don’t recommend it. It’s almost never a good idea to be a sole proprietorship and the reason being is: (a) you have the worst possible tax treatment, (b) you’re in a much higher audit risk, and (c) when you do get audited, you lose 95% of the time because it’s really hard to distinguish between you as a person and you as a business when there’s no lines drawn around them.
It gets kind of crazy. I would just say, you tend to pay a little more tax as a sole proprietor. Usually, it’s worth it to look at it as being an S or a C and yes, somebody asked this question. “Can an S-Corp do an accountable plan?” Yes. “Where do I find a template for an accountable plan?” You got to be a platinum member and we will give you one. I do a live stream for my clients once every six months where we do office meetings and I give them a bunch of planned documents, too. Yes, you can get them. If you’re platinum, you just ask us and we’ll send them to you.
“Do my private lending activities within my Quest IRA account towards the time needed to qualify it for being a real estate professional?” Paul, the answer would be if it’s lending activity.
Jeff: Within the IRA?
Toby: Yes, so what he’s looking at is the 750 hours.
Jeff: I don’t think it would.
Toby: I don’t think it does either, because that’s transactional. You have to be actively involved. It would be hard to be a material participant. Paul, I’m going to say no, but I’m going to put a please email that question in so we could research it a little bit. I don’t see how it could because they’re looking for active businesses and by default, an IRA is not an active business.
Somebody is saying, “Under what category do you write-off your home deduction? How much do you deduct?” It’s Teeny, you’re asking a great question. I would go under our YouTube channel and check out a bunch of videos because we answered those questions. If I started diving into that, we’re going to be here until midnight and I’m already over.
“What is the website for the book purchase?” We’ll send it out again but perhaps Susan or Patty can respond to Shannon.
Let’s see. There’s a bunch of other cost segregation. “Will you please send that info?” Absolutely. We’ll send that.
Here’s one. “I am remodeling an apartment building and believe cost segregation might be an option. What are the reporting requirements?” Do you want this?
Jeff: Do you mean by reporting on your tax returns, if the cost segregation only deals with the current remodeling, you just report the depreciation as the cost segregation reports it. I’m not really explaining that real clear. The difference is if you’re going back in time with this cost segregation, maybe place the apartment building service a couple years ago, then that works a little differently. We have to do what we call the change of accounting method. If it’s a current year purchase, there’s nothing unusual to report.
Toby: When you do the cost seg, you don’t have to do a 3115 because it’s the first year?
Jeff: It’s the first year. You’re not changing anything.
Toby: When you’re doing this, the big thing to think about is you have 5, 7, and 15-year property along with your structural property, which in commercial is 39 years, in residential is 27.5, you’re choosing whether to take the default, which is the MACRS (Modified Accelerated Cost Recovery System) default, which, for residential is 27.5 or 39 years for commercial versus breaking it out and actually saying, “Here’s how much 5-year property, here’s how much 7-year property, here’s how much 15-year property there is.”
Then, you marry that with the fact that you could choose to take any one of those and write those off, that category of property right now, 100%. We have bonus depreciation, so it’s up to you. You could actually go back in time and do this. Again, we did a great webinar on it. I would recommend, that was probably the highest attendance we’ve ever had on a webinar and I’ve been doing this for 22 years. People are starting to figure this out, that if you’re not in real estate, you don’t understand what they gave us with the Tax Cuts and Jobs Act on this provision which is the bonus depreciation. What they did is they made stuff that used to have to be new, first use, put into service in that year. They said, “No, you can do used.”
Jeff: That was huge in itself.
Toby: It’s huge. For real estate investors it’s absolutely massive. We’ll send you out that link to that as well. It’s on our YouTube channel. Susan, you know where that is. I don’t know if she’s still out there or Patty. Somebody can send a link to that individual so you can do that and we’ll try to send it out to the group, but it was absolutely awesome.
Jeff: I would say that as long as you have this property, I would keep that cost segregation in your documents until you get rid of the property.
Toby: Yes, and your cost segregation helps you when you sell too. This is the misnomer. Everybody thinks, “Oh, it’s a front-end load. Worst case scenario I’m getting an interest-free loan.” No. She says, “I just spoke to my CPA about cost seg, he felt it’s only going to be used for higher tax brackets.” Okay, that’s great. I would calculate it and see how much it’s going to be worth to you.
For example, I have a friend who’s a property manager. He did a cost segregation. His cost to do two houses was about $3000 and it saved him $14,000. He is not in the highest tax bracket. He just knew if I do this now, I save money and that money right now to me means I can buy another property. That’s what he does. I would just say to your accountant, with all due respect, let’s just figure out what it’s worth.
Now here’s the other thing. Right now, we’re used to the idea that when I have a house, let’s just say it’s a rental property, and I sell that house, everything appreciated in it. When I’m doing my recovery of my depreciation, it’s assuming that everything in that building is still valuable just as it was on day one. I’m going to have to recapture my carpet. I’m having to recapture my fixtures. I’m having to recapture everything that’s in that house, the doors and everything, as opposed to just getting rid of them and then paying capital gains on it.
So, with all due respect, no. That used to be the stuff. Now, you actually go out and get it done and again, you can get an analysis done for free over at Cost Seg Authority. We have a link, there’s no cost to it. They’ll actually run your property. You give them the address, the date it was put in service, how much you paid for it. I think there’s one other piece and probably your name and they’ll tell you.
“Can you use cost seg on a residential system living on the real estate?” Yes. It’s a pretty big deal, guys. It’s not a small one.
“What are the advantages of qualifying as a real estate professional? Does that trigger special documentation?” Your real estate losses are no longer passive. They are active and they offset your personal income. “Does it trigger special documentation?” Not really. You have to check a box. I would aggregate and group my properties together. You do have two tests. Test number one as in both tests, you have to meet 750 hours at a minimum and more than 50% of your personal time being used for real estate activities. One spouse has to qualify for a joint return.
The second test is materially participating in your properties, which then you can grab the time from both spouses, 500 hours is the absolute best. You no longer have to worry about how active you were. You could actually have 10 hours if you’re the only manager on your properties. It runs through the whole gamut. There are actually nine different tests.
Somebody says, “Also, a real estate professional doesn’t have to pay the net investment income tax?” Carrie, absolutely, that’s right. When you’re messing around with properties and you sell a passive property, you still get hit with, was it the 3.8% or 3.9% net investment income tax?
Toby: Yeah, 3.8%. Let’s just say in the highest bracket, you have long-term capital gains. You’re paying 23.8% for the fed, plus your state.
Somebody reached out, “Can I use cost seg on residential assisted living?” Yes. For residential assisted living—going back to that real quick—it’s on the real estate only. The active business itself, you could still use bonus depreciation but you wouldn’t need the cost seg because it’s not a macro asset. “Does that trigger a special documentation?” You just have to make sure that you’re meeting the hourly requirements.
All right, 2-For-Tuesday. We always do this. This has kind of been our standard offer for the folks that are actually on the Tax Tuesdays and make it to the end. You guys rock. You get bulletproof investments which is real estate investing really. You get two tickets to our Tax Asset Protection Workshop which is for three days, and if you haven’t been, you should absolutely go. It will change the way you look at assets and liabilities, your business activities, and you can make sure that you are not subjecting yourself to massive risk. One of the things people always ask is, “What’s the worst that could happen if I get into real estate or what’s the worst that can happen if I open a business?” They could take everything you own, I’ll probably say, so you want to make sure it’s isolated so they can’t.
You get Clint Coons’ Tax Asset Protection for Real Estate Investors hard-bound book. You get an instant deliverable of a 3-part video series on real estate activities. Clint goes over lawsuit protection. I go over taxation, and Michael Bowman does a lot of legacy and retirement planning, and you also get a strategy session. You get a blueprint made.
If you haven’t gone through those, go through it, plus you get the live stream of the Tax Wise Workshop which we have one coming up in November, the last one of the year, and you get access to all the other recordings. It’s $197 flat.
Somebody says, “Are you coming to Chicago?” I was slated to, but unfortunately, I have two other speaking engagements over the weekend, but Michael Bowman is going to be there.
Someone says, “How does the 2-For worth for platinum?” That is the 2-For price if you remember. This is the best deal that’s out there. If you’re already a platinum, there’s nothing better than the 2-For deal. Free stuff, it doesn’t matter whether you’re a platinum or not. Join our podcast. You can listen to all of our podcasts. Both Michael Bowman and Clint do awesome job at interviews and we’re always trying to bring things out that’s important to real estate investors and small business owners. Me myself, I’ve been getting into the philanthropy side a lot more and really seeing how these guys tick. It was pretty awesome.
I did a recent podcast which I think is coming out in two weeks of a gentleman that trains service dogs for service members, for members of our armed services that come home. There is a bad problem that we have with self-inflicted death, suicide of our service members. Many more are passing away every year than are dying in the wars, but their dying is the effect and the service dogs in his experiences is at 0%. This is something that has made a major impact.
I love talking to these guys and seeing what makes them tick and where they’re getting success. I love supporting non-profits, too, that do those types of activities and it’s always interesting. The stories are so real. We do have a nonprofit workshop. I know it’s sold out so this might be a mean tease, coming up next week we have the nonprofit workshops to start, find, and grow. If you like nonprofit stuff, I love doing that.
Somebody says, “See you in Saturday in Berlin.” Yup, we […], absolutely, that’s where I’m going to be, Tom. Replays are always in your platinum portal. This one will be sent to you guys, so everybody will have a copy of this and I think we always keep a couple in the queue there for you guys to watch or listen to. Follow us on social media, Facebook or YouTube, always fun. Of course, you can send your questions to Tax Tuesday.
I’m going to answer a few questions before we get off, just a few more just because Jeff really wants to go do some tax returns and I’m going to keep him from doing it. You can always send in to taxtuesday@andersonadvisors, and you can visit us at Anderson Advisors and do all that fun stuff.
Here’s an interesting one. Whenever I see a nonprofit and she left. This is funny. I’m going to answer her question then she’ll realize I’m answering. It’s interesting. “I donated a property from a disregarded entity to my nonprofit.” What happened was an LLC bought the property and was disregarded for tax purposes, and they put it into the nonprofit. You get a deduction and what you want to do is get an appraisal done on that property as close as you can to when it’s actually transferred because that’s what your actual donation deduction is.
You get to write that off personally. A lot of folks don’t realize that when you donate appreciated real property, it’s the fair market value. If you filed it for over a year, it’s the fair market value. The only limitation you have is that it can only offset up to 30% of your income, so that’s the only restriction. Cash, you can write-off up to 60% of your income. If you’re donating real estate itself, then it is just 30%.
I love seeing that. Let’s see, I’m going to just pop through here. I’m going to see if there’s anything else. There’s nothing else that’s really flying out at me. Somebody says, “Can you cover all your properties for asset protection for property spread out in different states?” Yes. You put each property in its own LLC and have it with a holding company in a state like Wyoming and you’re pretty good.
Thank you guys for spending the 100th episode with us. Excited to do another 100 more or a thousand more. We have really great listenership.
Jeff: They keep us on our toes.
Toby: Yes. “Does donated real property has to be owned for over a year in order to write it off when donated to a nonprofit?” No. You can only write-off the fair market value if you held it over a year, otherwise, it’s just basis, so you would be writing it off as the basis. Yes, so if I bought a property for $50,000 and it’s worth $60,000 but I donated it within a year, I only get the $50,000 that I paid for it, my adjusted basis, so whatever I put into it. It’s no longer the fair market value.
Jeff: This is where I’ve seen sometimes people will be asking, “Can I buy a property?” and then immediately put it in the nonprofit where it might be better to put the money in and let the nonprofit…
Toby: …buy it. Yup, and especially if you’re flipping. All right you guys, thanks for joining us. I know a bunch of guys are already bowing out, so I’m just going to say thank you, good night, and I really appreciate you guys coming on. It’s always a fun community. You guys think it’s all fun and games, right? No, it is fun. You should enjoy this stuff and you should be looking at taxation the way it’s an incentive to do right. If you do it right, you get the incentive, and it’s just knowing.
We just try to spread that out and figure out how we can help you guys keep as much money in your pocket as humanly possible. It’s best for the government, it’s best for us. You end up actually paying more taxes in the long run if you’re keeping it in your pocket for as long as possible. It’s kind of weird the way that works, but it does work that way. All right guys, spread the word. See you guys later.