Taxes can be fun. Just ask those who attended the recent Tax-Wise Workshop and Tax Tuesdays hosted by Toby Mathis and Jeff Webb of Anderson Advisors. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
- I have a corporation, but it does not earn income. Do I still need to file a return? Yes, you’re required to file a return every year of its existence
- If I am self-employed, or own a small business, are the health insurance premiums tax deductible? Yes, health insurance premiums, but you can’t write-off other costs
- What are the differences between a Solo 401(k), Qualified Retirement Plan (QRP), and Cash Balance Pension? Most 401(k)s and QRPs are defined contribution and/or profit sharing plans; Cash Balance Pension is a defined benefit plan
- How do I sell a husband-and-wife owned C Corp to reduce taxes? Whenever selling a business, try to sell the company’s shares for long-term capital gains
- Can I offset gains from rents with depreciation? Yes
- I have eight units in my own name. Will I save on taxes this year, if I transfer them under my LLC? No, it doesn’t make any difference; there’s no real benefit to doing it that way
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Toby: Welcome to Tax Tuesday. We’re doing a little bit of different format. We’ve been in a room with a lot of great people and a lot of folks that were streaming online, doing the Tax Wise Workshop for last two days. Hopefully, you guys are having some fun. Are you having some fun?
Toby: Yeah. So taxes don’t have to suck. We’re just doing the Tax Tuesday Live because it was scheduled at the same time. I didn’t want to kick it and I thought it would be fun to go through these. Plus because these guys have going through a two-day intensive workshop, I want to see how many questions they can answer. So, this is actually a quiz and if you lose, bad things happen.
All right. We’re just going to jump through. First off, freebies. If you want to continue to educate yourself, you can always do so for free on Facebook and on YouTube. Anderson likes to post lots of content. We just recently started Coffee with Carl, which Carl Zoellner, one of our attorneys, likes to put these little five-minute vignettes which are fantastic, very well-received, a bunch of you guys are nodding your heads. It’s been really awesome.
Now, normally when we’re doing the GoToMeeting or the GoToWebinar, I’m answering all the questions. I’m sitting there looking at this, asking you guys questions, and I can see the response. Today, I’m not going to be able to, so I have Eliott, one of our attorneys and soon-to-be-CPA, sitting and he’s going to ask you questions as you ask questions or as you type them in. In this room, you guys can feel free to ask questions, too.
The whole idea is that this is a sharing experience. I always call it giving drive-by wisdom to the masses, that’s an old radio show that I heard, but it’s drive-by tax wisdom to the masses. So, ask your questions live and we’ll answer before it’s over, to the very best of our ability. Sometimes we get slaughtered and if you have questions—this goes for everybody in the room, too—you can always ask a question and you send it to email@example.com.
It can be whatever tax question you want. If it’s too specific, we’re probably going to take it kick it over to an accountant who actually give you a specific answer, otherwise, I’m going to either make it a part of this are you’re just going to respond. When I say that we get hundreds of questions. Quite literally I could show you pages that are going into the 700–800 line items on questions that we get.
Eliot’s about to learn, are you on the GoToWebinar chat or are you on a regular chat?
Toby: Just the regular chat here?
Eliot: That Tax Tuesday.
Toby: It’s not the GoToWebinar, right?
Eliot: No, it’s not.
Toby: Yeah, because we will literally get on average about 200 questions.
Jeff: And he answers every one of them.
Toby: Not every one. I usually miss a couple. I try to answer but before four o’clock. So again, it’s fast, fun, educational, a lot of fun. Let’s go to opening questions. Hopefully, I can actually read these.
“If you have an S Corp, do you have to take an annual salary or can you put the profits back in the company?” Don’t you guys answer. We’re going to go through these because you guys already know this.
“I’m 75 years old with considerable medical expenses. I operate my businesses with an S Corp. What do I have to do to take advantage of the reimbursement tax treatment? We don’t own HUD Section 8 buildings, but we do rent to Section 8 tenants, apartments and single family homes. For example, in one of our four-unit apartments, three of the four units are Section 8. We listen to your HUD section and would like to know. Are there any tax benefits that we can take advantage of?” So, we’ll go over that as well.
“I have a corporation, but it does not earn income. Do I still need to file a tax return? If so, by what date?”
“I’m buying a commercial building via a limited partnership. The tenant is going to perform a large tenant improvement on the building once we sign the lease and close the deal. The tenant’s going to do that. If I do cost segregation on the building right before the tenant does the improvement, can I then do another cost segregation on their tenant improvement portion on the next year? This is a triple net lease and the tenant is a third party.” Interesting question. We’ll answer that one.
“I have a C Corp from purchase of a fix and flip. After renovation, I am unable to sell the property. If I refinance it and pay a business credit card off as part of the refinancing, can I transfer it to a holding LLC as a personal rental? What, if any, would be the tax liability and how do I make sure it’s done legally?”
“On a newly purchased rental property owned by an LLC, performing the cost segregation study will create a large depreciation for the first year. How is this loss recorded on the income taxes?” You guys have heard a lot of these, right? Yeah. I’m going to ask you guys.
“If I am self-employed and own a small business, are the health insurance premiums tax-deductible?”
“What is the difference between a solo 401(k), QRP, and cash balance pensions? Also, if my portfolio’s just passive income, I only take cash distributions. Is there a workaround it to establish a 401(k)?”
“How do I sell a husband and wife C Corp to reduce taxes?”
“How was a series LLC and operating LLC reported on personal tax returns?
“How do you determine the comparable square footage used for the meeting room when soliciting rental cost for the 280A 14-day rule?”
“I expect to receive $35,000–$45,000 capital gains from real estate soon. If I want to keep my AGI down, I’m thinking about investing in an opportunity zone deal that has a minimum investment of $50,000. I will need to sell some stock to have the gain that will make up the difference. Can I mix the two types of gain for a single investment? What documents will I need to make sure I properly document the transaction for current and future tax returns?” Good question, by the way.
“I own an online business and I’m out of the country most of the year. Can I qualify for the foreign earned income exclusion? Is there a strategy where I can still contribute to my IRA or 401(k)?” Interesting. Hope you know the answer to that one.
Toby: Yeah. “I have three kids. Can I pay them a modeling fee for multiple companies that I own for modeling? For example. If I have five companies, can all three kids be paid modeling fees from all five companies if they were truly models for that company and if it was customary in the business?”
“If I have multiple companies and would like to have board meetings or meetings for the companies for 14 days, can I rent out a room and then pay each company in the market equivalent of 14 days rental income for the exact 14 days?” Not sure I follow that one, but we’ll go over that.
“If I want to reimburse myself on a per diem basis for corporate travel rather than using expense reimbursement, how do I go about it? I can figure out the per diem amount for each trip on the IRS website, but there is no form. What documentation is required for per diem reimbursement?”
“I have eight units in my own name. Will I save on taxes this year if I transfer them under my LLC?”
“I recently retired from my job and had a direct rollover into a traditional IRA to a self-directed account in buying real estate properties.” Must be they’re buying it in that new self-directed. “Is it better to convert the account now to a Roth IRA for tax purposes since I’m anticipating expanding my real estate venture in the future? Which will benefit me more in terms of taxes when I sell the properties?” Interesting.
Then the last question we’re going to have is, “I have my personal home and rural land in my personal name. I want to be able to isolate it from future ventures as well as be able to pass it over to my sons when the time comes. I live in Colorado and have an LLC that was established a year ago without any holdings. It is registered here in Colorado. Do I use this existing LLC on the ranch or go with a trust and use the LLC for future real estate move?”
So those are the questions. Is that a few questions? Yeah. It’s called biting off a big chunk. All right, so here is the question. If you have an S Corp, do you have to take an annual salary or can you put all the profits back in the company? Does anybody know the answer in this room?
Toby: So what’s the answer?
Woman: Only if you take a distribution.
Man: Yes, […] salary.
Toby: Do you have to take a reasonable salary?
Toby: You only have to take a reasonable salary if you take money out. If you don’t take money out and you’re just going to leave it in the S Corp, you do not have to take a salary.
Jeff: And you also don’t have to take a salary if you did not make a profit.
Toby: If you did not take a profit, yes. It looks like, “Hey, I just want to keep all the profits.” They said profits, so we’re just going to say maybe we’re reading too much into it, but you guys nail it, because you’re smart. Good job.
All right. “I’m 75 years old with considerable medical expenses. I operate my businesses as an S Corp. What do I have to do to take care of the reimbursement tax treatment?” What do you guys think in here?
Audience: C Corp.
Toby: Create a C Corp. Can I convert an S and change it to a C Corp?
Toby: All right. So, do you want to go over the rule?
Jeff: If you have an S corporation, you can revoke that S election and become a corporation. Anytime you revoke that S election, it doesn’t matter how you form. You’re going to be a corporation and IRS […]. The problem with that is you can only revoke that S election as of now. You can’t go backwards. You can say, “I want to go back to January first of this year and for all of 2019 I want to be a C corporation.” It doesn’t work like that.
Toby: So, to this guy out there, the deal is if you are reimbursing medical expenses out of your S Corp in you need to be able to write-off. You’re not able to write them off someplace else. Sometimes, you’re so far in excess of your adjusted gross income—this should be a question—what’s your adjusted gross income, because if the rule is I can write-off on my Schedule A more than 10%, then I need to know what that number is.
If you’re making $20,000 a year, you have considerable expenses, and it’s $2000 that would be the amount that I can’t write off, then I’m probably going to try to write it off individually. If I’m making money and I have a significant adjusted gross income, then I’m probably going to be converting this over to a C because that S Corp, if it reimburses a greater than 2% shareholder, that’s included in their income. If it’s a C Corp, it can enter into, do you guys know what the plan is? You guys remember? 105 plan? Any it can reimburse 100% of the medical expense. So, it gets fun. Do you guys see how this stuff works? It’s not rocket science. It’s just knowing.
“We don’t own HUD Section 8 buildings, but we do rent to Section 8 tenants.” That’s kind of weird. How do you know they’re Section 8 tenants? “Apartments and single family homes.” So, maybe you’re not qualified as a Section 8 homeowner. How many of you guys have Section 8 in here? A few of the guys. So, you actually have to go through the process. Maybe you’re renting those. I do not know how they’re renting to Section 8 tenants because they would be getting a voucher. Maybe they’re just saying generally they’re about the equivalent of a Section 8.
“For example, in one of our four-unit apartments, three of the four units are Section 8 tenants.” This is what’s weird. “We listened to your HUD section. We would like to know if there is any tax benefit that we can take advantage of?
Jeff: I think the first thing is when they say they’re not a Section 8 housing building. The property was not built and designated as Section 8, which will qualify them to get that low income housing credit.
Toby: Yeah, you’re probably right. So they’re probably going through and they’ve gone through the paperwork of qualifying it as a HUD.
Jeff: If you’re going to run out to Section 8, people who are qualified for Section 8, you have to be approved by HUD. There are some sleeping area where they’re going to be their share of it. There are no tax benefits other than that credit, if we just talk about briefly, for actually building low income housing.
Toby: I will say this, though. If you’re leasing the HUD, folks, then that actually qualifies it as a nonprofit activity. If you wanted to transfer the house, take the deduction now, get the fair market value deduction if you’ve owned it over a year or the basis if it’s less than a year, and you want to do that now, you could actually create a non profit and you literally have a nonprofit activity that you could run for infinity if you just kept those homes.
The good side of that is I’m not worried about the income and I get a huge tax deduction. The bad side is what if I get a bunch of money in that nonprofit? Remember that nonprofit can enter into an account of a plan with you, reimburse you, and you could be receiving your money back out tax-free, non-reported.
Jeff: The other upside to Section 8 housing or running to Section 8-eligible people is who’s paying the rent or at least a portion of it? The government is, so at least some part of your rent income is guaranteed.
Toby: I actually like Section 8 tenants. Some people had bad stories, but I have always liked them. Here in the valley, we have a couple of other places we have them. I like it because it forces you to have somebody go out and inspect your house every year. It’s not that I don’t trust property managers, but I don’t trust property managers. So I like the idea of somebody looking at it and going, “Hey, you need to fix this.” “Oh, okay. I’ll fix that.” “Hey, property manager. Why the hell didn’t you tell me to fix that?” Anyway, that’s why I like that, and I like buying them from other people. You have a question? Go ahead.
Eliot: We have a question. “Hello. I’m partnering on a house flip and I need to pay out 50% of our profits to my partner on this deal. What’s the best way to handle that prior to our or during our sales, so I do not have to pay tax?
Jeff: We just talked about that recently.
Toby: Yeah. Here’s what it is. Somebody’s flipping a house. Do they have a partner or is it they have a lender?
Eliot: It says they are partnering, so I’m assuming it’s partner.
Toby: Then if they flipped the house with a partnership, then the profits are going to be allocated via K-1 to each partner in proportion to their interest. They will not be paying tax on their partner’s income. If this was one of those funky doodle, JV weird things where it’s your property and they’re throwing in the money, and then it’s really a participating loan that they’re not actually an equity owner, then you pay them their 50% as interest and you would deduct it as interest.
Jeff: Have you seen anybody get in trouble with usury laws doing that?
Toby: Not on commercial. The only time you get into usury laws is when it’s a residential property that you’re lending on. This is what’s called a participation loan agreement. I actually prefer this for those you guys. Anybody here flip? Anybody? A few of you guys? Do you guys ever use money from somebody else to do the flip? Always? All right.
Some people will do a joint venture where you actually have a partner, where you owe them a fiduciary duty and they can sue you for sneezing wrong. “Hey, you passed up on this deal. Hey, you could have done this better,” whatever else. I prefer lenders and this just me personally. I would do a participating loan and I would say, “You can loan me money and I’ll pay you a guaranteed rate of 4%. Or 50% of the net profit, whichever is greater.”
That’s called a contingent interest agreement. I call them participating loans. They work out just great and that way when you close, they’re getting an interest rate and it lowers the profit by that amount, but you don’t own them a fiduciary responsibility. You can do what you deem is best and you already have an interest rate that you can pay them, so if all hell breaks loose and you need to wait two years to sell that thing, you know how much you’re paying them. Does that make sense?
Jeff: And here’s a problem I’m seeing with a lot of clients as they’re getting into these, or are getting hard money loans, or doing these JVs. They’re not documenting what they’re doing, they’re not documenting how the money is to be, what it is you’re actually receiving, and what you’re doing in return. Also, they’re not always documenting in a JV situation or even a tenant and common situation, who’s responsible for what?
Toby: We’ve seen a lot of really bad situations where you had folks doing a gap lenders. They had six or seven gap lenders, all on first position. They just never file anything. They never file anything on their properties. All they’re doing is just ripping people off, so you just got to be careful whenever you’re out there. I prefer to have a lender where they’re secured and I don’t necessarily want a partner. Partners, to me, that’s marriage and unless I’m going to keep complete control of that situation, I don’t want it. It’s easy to get into marriage and it’s really expensive to get out, so if you get into partnership with somebody that you just met or you don’t know really well, you got to make sure you have an exit before you walk in.
I would be like, “Hey, you’re in control. You’re the manager. You’re all sorts of fun stuff. You have control of this project even if you have somebody else that’s in there,” or if I’m the lender and I’m dealing with somebody they don’t know really well, I’m going to the opposite. I’m going to make sure that the lender has the control and that, that other party has to prove that they can get it done before they get paid. That way, you can boot them if they don’t come through.
Jeff: Yeah. If you’re that gap lender, you got to have that deed and trust or some type of security in that property. We see quite a few hard money lenders lose their money because they have no security in the property.
Toby: Yup. All right. “I have a corporation, but it does not earn income.” Sounds like Amazon. No, it has income. It just has losses. “Do you still need to file a return and if so, by what date?”
Jeff: If you have a corporation or an S Corporation, you are required to file a return every year you’re in existence. It doesn’t matter if you formed the corporation and never think about it again. You’re still obligated the file that tax return. Now the upside on a C corporation is, if you file 10 years later, finally, and there’s no income, you’re not going to have any penalties. You’re just going to have IRS nagging you.
If you have an S Corporation and you haven’t filed a return or you filed late, it gets very expensive.
Toby: Yes. It’s like $195 per…
Jeff: Per partner per month.
Toby: We had one of those. It wasn’t an S. It was a partnership. Were you here for that oil and gas guy?
Toby: Big oil and gas, about 450 partners, and they didn’t file their partnership return for two years. The penalty was $1.38 million.
Toby: Yeah, it’s ridiculous and they brought it over to us saying, “Hey, can you do anything?” So, we did this stupid thing of saying, “Sure. Let’s see what we can do.” We got a power of attorney, we wrote a letter explaining the situation. They wiped out, they said, “Oh, okay. $0,” and they reduced the liability down to $0. We didn’t expect that. We were like, “They’ll probably get it down to a couple of hundred thousand or something like that. So they waved it, but we never got a retainer. They never paid us. We literally wiped out almost a $1.4 million tax liability for nothing.
Woman: Did you sue them?
Toby: We could sue them, but you know what? Lawsuits suck. Have you ever sued anybody?How many people have sued somebody? Was it so much fun? You wake up every night at about 3:00 AM and you’re like Perry Mason and you’re going to do all sorts of horrible things. You start thinking about hiring a hitman and all this stuff. You’re going to show up at their house. You’re going to put poop underneath their door handle and all that fun stuff. Not that I’ve ever thought about that.
Eliot: My wife stays at home and we want her to become a real estate professional. What exactly does she need to do?
Toby: All right. Class can answer that. What do you guys think? 750 […]. One spouse has to hit 750 hours and there’s a little laundry list. It’s the development, redevelopment, construction, management. There’s all sorts of things in real estate, 750 hours, and it has to be more than 50% of her personal time. Then, the spouses together have to materially participate on their real estate and you should group all your real estate together.
A material participation is about nine different tests, but the big ones are: If you’re self-managing, you don’t have to worry about how many hours. If you have somebody else manage, you have to hit 100 hours and be more than any individual that manages your property. If you just don’t want to care about it, you have to do 500 hours on your project.
Was there another part of that?
Eliot: Yeah. “If we employ her 760 hours under management LLC,” I think they mean C Corp, “does that cover it?”
Toby: You don’t actually have to employ her. It just has to be 750 hours. It doesn’t have to be employment, so you don’t have to have the C Corp actually employ, she has to document the 750 hours. You guys already knew that, right?
Toby: You guys are getting it. Did you know that the tax court screwed that up? The first time the tax court did it, they did the 750 hours and they were applying it to each property. They didn’t understand that there were two tests and there were two distinct tests.
So, the 750 hours is one spouse, the material participation is a combination of the spouses. It’s kind of fun. Apparently, the court can’t read code, but there’s probably some lawyer that briefed it and it briefed it wrong and the court accepted the wrong briefing.
All right, you want to read this one?
Jeff: “I’m buying a commercial business via Limited Partnership. The tenant is going to perform a large tenant improvement on the building once we sign the lease and we close on the deal. If I do cost segregation on the building “as is” right before the tenant does the improvement, can I then do another cost segregation on their tenant improvement portion the next year? This is a triple net lease and the tenant is a third party.”
Here’s the problem with this, is that second sentence. The tenant is going to perform a large tenant improvement. Who owns that improvement? The tenant owns the improvement. The tenant can cost seg the heck out of it, take the deduction on their return, but until the tenant actually abandons it, you don’t own that improvement.
Toby: When you have a triple net lease, that usually means that you’re putting everything onto the tenant, so the tenant actually owns all the improvements and everything else that they’re doing. I’ve actually seen that in leases, where if they put improvements and it’s affixed to the interior, then it’s the landlord’s. That would be the case, but they have no cost basis in it. So, even if you could, you didn’t pay anything for it.
Here’s the example. If you said, “Hey, Toby. I want to lease a piece of this building,” and I said, “Great. I’m going to do a tenant improvement for you,” and I include the TIs, now I’m the one who paid for it. If I’m the landlord, then I’m probably going to probably go ahead and I could do the cost seg on it. That does not sound like it’s the case here. It’s the tenant who’s doing a large tenant improvement, but if the landlord is, for some reason, paying for it, then absolutely they could do it.
The problem with the cost seg is you’re going to do the cost segregation once, but then you’re going to add, when you’re actually do improvements, to the 5, 7, and 15 year property, depending on what the contractors did. The contractors should be breaking that down for you. It makes sense? You guys are getting this stuff. All right. Any questions from the world of the Internet?
Eliot: “Would a real estate marketing photography business count as real estate professional activity?”
Toby: My instinct say on the 750 it might work, on the material participation I do not think it would. Realistically, it’s in the buying and selling of real estate. My gut tells me no, but I’ll have to look it up.
Jeff: I don’t know. I think IRS would deem that is more in the photography, the arts business that it is in the real estate business.
Toby: Yeah, I think you’re not going to have success on that one, but we could take a look at it. I believe that there’s a court case on […]. I would have to see if there’s anything else, but there’s two sides to this. There’s any business that’s in the acquisition and sales, and then there’s what I do on my actual properties. Even if it’s a real estate company and you’re just doing the fly by, you will have to show that that’s somehow integral in the part of the purchase and sale of the properties and you’re not just doing photography and marketing. I think you’ll probably lose that.
Jeff: On a newly-purchased rental property owned by an LLC, performing the cost segregation study will create a large depreciation for the first year. How’s this lose reported on the income taxes?
Toby: I create a big fat loss on my real estate activity. What is the default rule?
Toby: What kind of loss is it? Is it active or passive?
Toby: It’s considered a passive loss. Can I write-off passive losses against active ordinary income?
Toby: No. That would be a […]. It could be a loss carry forward unless?
Man: Real estate professional.
Toby: Real estate professional. There you go. So, the cost segregation is awesome. You won’t lose it. It will carry forward and offset your passive gains. If I’m making $30,000 a year on my rentals, net, I buy a newly-purchased rental property, and I get $100,000 deduction on it, I will offset that $30,000 in year one, $30,000 in year two, $30,000 in year three, and another $10,000 in year four. So, I just carry it forward and you look at it. Otherwise, I’m going to need to be a real estate professional.
Jeff: So, they do say it’s owned by an LLC, but what they have to keep in mind is supposing that it’s owned by an LLC taxed as a partnership or taxed as an S Corporation. That income or that loss, in this case, comes through to the individual, exactly the same way it would if it was on your return to start with. You can’t change how that loss is treated just because it came from somewhere else.
Toby: Very cool. “I have a C Corporation and purchase a fix and flip. After renovation, I’m unable to sell the property.” Well, that sucks. “If I refinance it and pay a business credit card off as part of the refinancing, can I transfer it to my holding LLC as a personal rental? What, if any, would be the tax liability and how do I do it to make sure it is done legally?” You want a whack at this one or do you want me to take it and knock it out?
Jeff: Well, anytime you transfer a property out of a corporation, you have to recognize the difference between your cost and the fair market value.
Toby: In this case, they lost money.
Jeff: You sure about that?
Toby: Yeah. I’m unable to sell, or I guess that’s an assumption. “After renovation, I’m unable to sell the property,” so I’m assuming that they’re not able to sell the property because if they did, they would take a loss. Does that make sense? No, it’s not. All I would do is just keep lowering the price, otherwise. If it’s in a C Corp, there’s a couple of different things.
First off, it depends on whether you filed a tax return, you’ve actually captured it, as to whether you just want to stick it in the court. Sometimes, you look at it and you go, “Oh, man. This was really a holding?” and you just kind of do a change of mind and you transfer the expenses associated with it? I’m not perfectly comfortable with that.
I’d probably do an easier one, which is I would just sell it at my basis to my own LLC. I would just buy it out of there and that way I would put it in my holding company. It’s probably going to cost me a few hundred bucks to do the transfer of title, but now I actually have basis and I have my basis for my rental, which will allow me to do a couple different things.
First off, the corporations are going to be able to recoup all of its expenses, pay off any of its bills and everything else. It should have zero gain if it’s selling it for whatever—I’m assuming again—that they didn’t make a ton of money on it because they can’t sell it. And number two, that gives me a higher basis for my depreciation. I could sell it at a loss but it has to be at fair market value. So, I could sell it at a loss. The loss then sticks inside the C Corp, which isn’t necessarily a really bad thing.
Jeff: Now, I would consider running it within the C Corp but keeping it on the market to sell.
Toby: If that’s your intent, if you bought it to sell it, then the intent sticks with that thing from years. Even if it’s 10 years from now, it’s still a flip, it’s still inventory.
Toby: I don’t know if I get to depreciate it. Hmm?
Eliot: You can change it […] in the C Corp, though?
Toby: You can’t. I either bought it with the intent to sell it, which in this case it’s inventory. This is the same thing as buying Cheerios at a minimart, I put it on the shelf, and it sits there for 10 years. I don’t get to do anything with that inventory. I either get rid of it, dump it, have somebody liquidate it, dump it in a dumpster, whatever. I’m not going to do that with my real estate. My real estate, I want to make it to where I can depreciate it so I get some benefit out of it. In order to do that, I really need it to be in the hands of an investor.
So my flipping entity is not an investor. I would need to sell it to my LLC. It could be my LLC and I could even have it carry the note. I believe I can just sit there and do it that way. I don’t have taxable gain, so let the corporation carry the notes so then I just go about my merry way of renting it, depreciation, pay back the corporation over time.
Jeff: It actually works better if there is a note attached because then you’re pulling less out of that corporation.
Toby: Yeah, absolutely.
Toby: My problem with the C Corp is I can only deduct up to 10% of my net income, so it’s net taxable income out of the C Corp. I really wouldn’t get any benefit out of the C Corp. I really need to have it out of my name.
You have a question?
Man: Can you change intent from coming inventory to…
Toby: It’s a case-by-case fact-based scenario where they look at the intent at the time of purchase. The case that we always point to is a guy he bought a warehouse, intended to sell it, the economy start shifting, every year he would go through and look and see what the market look like, 10 years later he sold it. He treated it as long-term capital gains. The IRS said, “No. Your intent when you bought it was to sell it. It was inventory the whole time and it blew him up. It was 10 years, not a year, 10 years.
You’d actually see this exact example in a couple of the tax journals. They say if you’re flipping a property and you end up getting stuck with it, sell it to your own entity outside of that business. You can do it on an installment note. The corporation would treat that as a sale on day one, even though they’re getting the money over time. But remember, this is a situation where we will probably be really close to breaking even. There’s not going to be a taxable event to the corporation.
Now, I have a piece of property that I can depreciate. I came even do accelerated depreciation on it. Hopefully, I’m renting it out and I’m not going to be paying tax on it.
Man: […] third party entity didn’t have any money to pay […] you can do a demand note?
Toby: Right. If the third party entity did not have the money to pay the note, could you do a third party demand note? Technically, I think you could, but you’d want to make an installment election, so I think you’re going to make it an installment note. Well actually, it won’t even matter. Actually, you probably could do a demand note, huh?
Jeff: Yeah. You wouldn’t need to make this installment. It’s inventory anyway.
Toby: It’s inventory so I think you could do a demand note, actually. I think you’re right. I can try to think of a situation. Maybe if I sold it?
Jeff: I’m not completely comfortable with the demand note because IRS may deem it not a completed sale, that it never actually happened.
Toby: The way I’ve seen it is installment. Again, if it were you, would you sell it to a third party on a demand note? I’ll just let you know when you just need to pay me for it. I mean, I guess if I was really flush and the circumstances were such where I didn’t need the cash and I want a little bit of interest, maybe I would. But otherwise, I’m probably saying, “Hey, I made a mistake on this one. I just want to sell it and get my money back and I can’t sell to anybody else, so I’m going to sell it to myself.” That’s the only thing I could think of.
Or you said, “Hey, I have a change of heart. I really don’t want to flip this house. I want to keep it,” in which case, you got to make sure that you’re changing it to a different taxpayer. And you’re a different taxpayer in that C Corp. So if I sell it to an LLC that flows on to me, I am the taxpayer they’re looking at. That would probably be a better route.
Eliot: “The client has a disregarded LLC through a 1040. They want to write-off as many expenses as they can. They don’t expect to have income for 2–3 years in that LLC. They have a home office, car usage, cellphone, et cetera. They want to know what they can write off.
Toby: So, it’s a sole proprietorship? Right, and they’re going to lose money?
Eliot: 2–3 years.
Toby: What do you guys think we should do? If we’re going to lose money as a sole proprietor, what do we probably want to do?
Man: Create a C Corp.
Toby: Prolly create a C Corp. I’m probably going to say, “Hey, keep yourself out of the Section 183, keep yourself away from being declared a hobby. Depending on what your income is and how hard you’re working at the business, if you’re going to be a sole proprietor and you really want to make sure that you’re covering your basis, I cannot imagine a sole proprietorship that would be treated as running an op in a business-like manner. It’s almost impossible, so they’re going to have to set it up.
If it’s already an LLC disregarded, I would make sure that they have a business plan, a bookkeeper, and a good account if they’re going to try to keep it that way. The only way I would keep it that way is if you saw a light at the end of the tunnel and you were going to take those losses and was going to give you some serious benefit, like you have a high income, and then I would use those losses to offset the high income. Then it’s probably worth the risk. Otherwise, I’m just setting up the C Corp and I’m carrying forward those losses and offsetting the gains in the future. That way, I take the pressure off.
Eliot: How can it be beneficial from a tax standpoint when the repairs and rehab performed after purchasing the rental property?
Jeff: The repairs and maintenance—I was talking about this with some other clients—is that a lot of times, those rehabs are nothing more than repairs and maintenance. You bought this property, it’s a wreck, and you’re bringing the property back up the standard. You’re going to be able to deduct those against any incoming you’re earning on that property.
Toby: You can’t create a loss if it’s abandoned or it was not rented. I believe that’s right. If you have the repairs and maintenance and it creates a loss out of that property, You can’t take them. You’re carrying them forward until you actually have rents. If it’s already being rented, then you just go ahead and the repairs and maintenance you’re immediately deducting against it. It’s not a bad thing.
If you’re improving the property and you’re like, “Hey, I’m making big changes adding, That just adds to the basis. In that particular case, what might we do class? If we just did a big improvement on a property that we are renting and we are worried about taxes, we want to offset our tax, we’re going to do a cost segregation and we’re going to break that into 5, 7, 15 year property and decide which portion we may want to take. We don’t have to even take bonus depreciation. We could just do that.
Man: The property is not rented for a certain period of time. Do we […] mortgage interest as a deduction during that time?
Toby: All right, so if the property is not rented during a certain period of time, do we write it off personally? The mortgage interest, is that what you’re talking about? We can always take the mortgage interest as a deduction if it’s an investment property. The problem that we have is I don’t think that we can take the repairs and maintenance if we create a loss. Remember, it’s passive activity. You still have passive activity loss rules. Even if I create a loss, I’m not offsetting my personal income.
There is one other exception I didn’t go over, which is if you’re making $100,000 or less, you can take $25,000 of a deduction if you’re actively participating on that real estate. I didn’t give that a fair shake. Otherwise, your passive activity losses are always zero. Your capital losses are $3000. We sometimes confuse these two, but if you have a passive activity losses, then they just they just carry forward. If I have losses on a piece of property and my income is low enough, I can use up to $25,000 as an active participant. There’s a small exception. It phases out $1 for every $2 you go above $100,000. As soon as you hit $150,000 of income, now it’s phased out and your only game in town is real estate professional.
Jeff: And keep in mind there’s a difference between if the property is rented or if the property is available to rent.
Toby: If it’s available to rent…
Jeff: Then you can take all your deductions because you’re trying to rent it out, but if it’s not available to rent…
Toby: Yeah, that’s true.
Jeff: So it doesn’t matter if anybody buys in there. It matters more whether or not you’re actively trying to rent the property. If you’re tearing the kitchen out and stuff like that, it’s obviously not available to rent.
Toby: Very good. Other question?
Eliot: “What is the difference between startup costs an organizational cost? Could you provide an example of each?”
Jeff: Startup costs are those costs—
Toby: These guys all know that now.
Jeff: You want to ask them?
Toby: What’s a startup cost, guys?
Man: Up to $5000.
Toby: Up to $5000. Give me an example of a startup cost.
Toby: Education. Something I did. Anything that would’ve been deductible the company before investigation, anything there. What is it?
Toby: R&D (research and development) and then the organizational cost is what?
Man: Filing fees.
Toby: Filing fees.
Man: Accounting fee.
Toby: Accounting. The cost for the LLC. You guys are good. See? I just have you guys do Tax Tuesday from now on.
Jeff: When you all do your IPOs, that will be part of your new organizational expenses.
Toby: “If I am self-employed or own a small business, are the health insurance premiums tax-deductible?” Well, this is interesting. Read it carefully. All right, so here’s the deal. If I’m self-employed and if you’re a sole proprietor, then you can write-off yourself and I think you still can write-off if that’s on your on your 1040, you’re still writing off your insurance premiums.
This is the operative word right here. The premiums could still be deductible. We have things like copays and other things that we really care about. Could we write those off? Not if I am self-employed, as a sole proprietorship, or as an S Corp. But could I do it as a C Corp?
Toby: Yes, absolutely. So if I’m self-employed or own a small business, are the health insurance premiums tax-deductible? The answer is yes. If I want to write-off anything more than that, the answer is no, unless if I’m a C Corp.
Jeff: And something most people do not know, medicare premiums that you pay through social security, those are also deductible if you’re self-employed, just like your other insurance premiums are. You go through an S Corporation, the S Corporation has to reimburse you for this medicare premiums.
Toby: Medicare, cool. How about Medi-Cal?
Jeff: Medi-Cal, probably also. If Eliot here owns a business and both him and his wife are paying medicare because he’s really, really old, he can deduct the self-employed insurance for both him and his spouse.
Toby: That’s cool. C Corporate we just reimburse everything. We don’t have to care about any of that.
Man: How about Christian-based […]?
Toby: Christian-based, there’s actually Medi-Share and a few others. Those count and actually, some of those are really good. It’s cheaper. You just have to certify that you’re Christian, so some people get all weird about that.
Jeff: And most of the cost-sharing ones will provide you with some type of documentation.
Toby: But those are considered as a high-deductible plan or in that case, they’re going to have limitations, so you’re going to need a catastrophic illness plan. There will be a small maintenance a lot like the Medi-Share’s. It’s covering pretty much everything other than really, really bad stuff going on. So cancer and things like that are not going to be covered, but if you want to go to the doctor, it’s going to cover everything.
What a lot of folks will do is they’ll do the Medi-Share. It’s pretty cheap. It’s like $300 a month or something and then they’ll do a really high deductible medical plan knowing that the base stuff is all being covered under this plan. Then, by the time it kicks into the higher amounts, you already you’ve got your coverage.
Is anybody do that in here, by the way? A few of you guys. Is that an accurate assessment? They pay for everything? Even high, high stuff?
Jeff: There’s no maximum?
Man: No. […] if you have cancer or a serious illness.
Toby: Which company is it?
Man: Liberty HealthShare. You just have to be very honest when you fill out the form that you have no pre-existing conditions and they are amazing.
Toby: That’s a great testimonial. Everybody’s a little different. I know that some of these have caps. But you’re saying that Liberty?
Man: Liberty HealthShare.
Toby: Liberty HealthShare? I’ll take a look at Liberty HealthShare. There’s so many floating around out there, but again, I can go off my experience. That’s really great to hear because they’re constantly morphing.
Male They are very, very slow to pay, but they pay.
Toby: They do pay?
Man: And you can also go to any doctor that you want, which is amazing in this day and age. You don’t have to play the game of who’s on your plan or who’s not.
Toby: What you’re saying is Liberty HealthShare is slow to pay but they cover everything. You can even go to your own doctor. That’s for the people that are out there. That’s interesting. What was the price on a monthly basis?
Man: $499 a month for us and our two teenage…
Toby: So $499 a month for you and your teenagers. I’ve seen that. There’s a few faith-based plans that are out there. Some do, some don’t. There was about three or four that we’ve run across and here’s the thing. The organization itself, the exception outside of the Obamacare was that they were faith-based, and that they couldn’t impose that upon them because they were already outside of it.
Let’s keep jumping on. “What is the difference between a Solo 401(k), QRP, and cash balance pension? Also, if my portfolio is just passive income and I only take cash distributions, is there a workaround to establish a 401(k)? Do you want me to […] it?
Jeff: I’ll hit the first part. A QRP is qualified retirement plans. They’re typically what we call defined contribution plans which a 401(k) is. A lot of the profit-sharing plans are also QRPs. A cash balance pension plan is a defined benefit plan. Have you all talked about the differences in those?
Toby: We talked about defined benefit. Just for everybody that wasn’t in this room, is we’re reverse engineering it. We’re figuring out what your benefits are going to be. Usually, we take in three years, we take a look at your average income, and then we give that to an actuarian and say, “In order for me to get that benefit when I retire, how much do I have to have in my plan?” They do a calculation based on your age, the projected growth on the plan, inflation, and then they also cap the benefit at I think $220,000.
If you’re making $500,000 a year, you don’t get to say, “How do I make $500,000 a year out of the DB?” they’re going to say, “How do I make $220,000 or whatever that limit is,” and then your actuary does the calculation of what you can put into the plan.
Jeff: Yeah. The client asked if his portfolio is just passive income and they only take cash distributions, is there a workaround to establish the 401(k)? Unfortunately no. The 401(k), all of the defined contribution plans, the IRAs, Roth, and traditional require that you have earned income.
There’s one case, so if you have a portfolio that’s passive income and I’m assuming that it’s rental real estate or trading, then what you can do is you could have that be an an LLC with the corporation as a manager or a limited partnership with a general partner that is a corporation, with the idea that they were able to push that money into the corporation and the corporation can then turn around and find a 401(k).
The bad side to that is you just took passive income and made it active. The good side is we get some deferral if you need it. So it’s always about doing the math in seeing whether it’s worth it or not.
Man: […] question was considered active. Would that work or not?
Toby: A real estate professional is the exception to the passive activity loss rules. It’s still considered a passive activity. That’s why your rental income still goes on your Schedule E as passive, even though your depreciation is treated as an active loss. It’s the best of both worlds.
Jeff: Yeah. Active and earned are not the same thing. For example, if you are running a bakery through your S Corporation and you get a K-1 that says you have $100,000 ordinary income, that is active income but it’s not considered earned income.
Toby: It’s not. Set it yourself employment tax. All right. Keep going on.
“How do I sell a husband and wife-owned C Corp to reduce taxes?” There’s two things that you look at. Whenever you sell a business, your best bet is to sell the shares of the company and you’re going to be treated as long-term capital gains. Depending on when this business was set up, you may have a small business exception where you have zero tax on those capital gains. If it’s a husband and wife C Corp, they may qualify to not pay any tax, depending on how long they held it, but worst case scenario is if you sell it, you could be treated as a long-term capital gains if you sell the shares. Now, if I’m a buyer of a company, do I want to buy shares? Why not?
Besides the liability, I also can’t depreciated it. It’s like if I buy Microsoft shares, can I depreciate it? No, I’m buying the shares. When you have a C Corp and you want to reduce taxes, realistically I’m selling the shares or if I may have a larger company, let’s say we’re over 20 million, probably 20–30 million, then what I could do is take those shares, toss them into an LLC, and sell that to an irrevocable trust for the benefit of a third party like my kids or some other organization. It would step up my basis the day that I stuck that into that entity when it purchased it, so it could sell those shares and pay zero capital gains.
I have an installment sale where I’m recognizing that income over a long period of time and that way I am getting a long term capital gains spread out over, and sometimes it’s 20–30 years, so I get paid. There’s ways. It’s called a deferred sales trust. There’s always a way to do some things. If you’re ever in a situation where you’re going to sell a business, you should have somebody go through the scenarios. You’d be shocked.
I’ve walked in, at the last minute, on what was the funniest one, was about a $7 million and the party that was selling it had no idea that the other side was buying the assets and they had no idea that they were going to have ordinary income treatment in a long-term care treatment. I had another one that was, again, about a $7 million sale where they were buying the assets of the company, but they were buying the company itself. They thought that they were going to be able to depreciate it. The lawyers never looked at it and never explained to them that they couldn’t write it off.
So the guy literally freaked out the last second because the attorneys never addressed the tax. He said, “Hey, could take a look at?” the buddy of mine and I was like, “Yeah. That’s not very smart. You’re going to buy the shares? Then he was like, “Yeah. Why?” I said, “Because you can’t write it off.” He goes, “What?” I said, “Yeah, you got to buy the assets so you can depreciate it. Otherwise you’re coming out-of-pocket the whole dollars. You’re never going to get to try it. Again, it’s like buying $7 million in Microsoft shares. You get no tax benefit until you sell it.
There is a hybrid and that is if you are an S Corp and you’re buying and selling through an S Corp. Technically I guess you could sell through a C, but the party who is acquiring the shares treats it as an asset sale. Actually, both parties treat it as an asset sale and it depends on what assets you’re buying. You’re selling the shares so you’re getting rid of the liability, but you’re still treating it as an asset sale. I believe that’s a 338(h)(10) where you’re able to get the best of both worlds and that it depends on what the assets they’re buying. If they’re buying a lot of good will, you’re going to spread that income over a long period of time.
“How is a series LLC and operating LLC reported on a personal tax return?” A series LLC is just a fancy way of saying LLC after LLC after LLC under one filing with the state. Each series, we still have to designate how it’s going to be taxed with the federal government. Do the feds recognize LLCs?
Toby: Right, so we have to go through and we could treat each one of the series as a C Corp, in which case how was it reported on your personal tax return? It’s not. If each one of these is disregarded for tax purposes, then it’s no different than you owning it individually. By the way, you could have a series that’s taxed as a partnership. One is a disregarded entity, one as a C Corp, one as an S Corp, it’s literally whatever you feel like calling it. So again, when we’re just looking at an LLC, just remember the feds just ignore it.
“Can I offset gains from rents with appreciation?”
Toby: Yes, always. We can always write it off with appreciation. We can offset our gains unless we’re talking about what? Possibly if its capital gains from stock?
Toby: Then, you’re looking at depreciation, but if this is real estate, then the answer is yes.
“How can you determine the comparable square footage used for the meeting room when soliciting rental costs for the 280A 14-day rule?” Again, if you’re renting your house I would just look at your total area that you’re going to be using. This isn’t your administrative office. If I am renting my house to a corporation, I’m saying which portions of the house I am looking at and then you want comparable space, so I’ll be looking in similar accommodations. If I am renting my house and have a big house, beautiful house, I’m not going with a crappy little room in a comfort inn. I want to have something that’s comparable to it.
Jeff: And when you’re getting these comps for your meetings, you’re not going to be called on quality and then saying, “I want 150 square feet.” You’re going to tell them how many people are going to be there, what kind of accommodation do you want, and so forth.
Toby: And the real expenses, I need to have Internet, I need to have a TV, I need to have connectivity. And you’ll realize that that’s very expensive in a hotel. Again, that’s what you’re using as your comp. Yeah?
Man: Can you use your full house as […] for that?
Toby: If you’re going to use the full house for the meeting, it’s kind of weird to use your bedrooms. It depends on the meeting. “Honey, I think we did really well this quarter. Let’s have a party.” The treats are in the other room. No, don’t do that.
“I expect to receive $35,000–$45,000 capital gain from real estate soon. I want to keep my AGI down and I’m thinking about investing in an opportunity zone deal that has a minimum investment of $50,000.” We haven’t hit the opportunity zone. We’re going to do it after, to hear it for the group in here. An opportunity zone is just a fancy way of saying, “I can defer my capital gain and I can defer it for up to, right now, seven years. Next year, it will be six years, but it has to be capital gain in order to qualify.
“I will need to sell some stock that have gain to make up the difference. Can I mix the two types of gain—real estate and stock—for the single investment? What documents will I need to make sure…” You don’t have to get into that. Yes, you can. You can mix the two. It’s capital gains. Actually, are you doing it on the individual? You’re doing a qualified opportunity zone fund that’s going to file the form. You were going to file a form on your 1040 that says, “These were the funds that I invested in a qualified opportunity zone.”
Jeff: You’re just reporting capital gains as you normally would on your tax return. There is a code that you use. I think it’s Z for adjustment code. It basically says, “I’m putting all this into an opportunity zone.”
Toby: And it’s deferred. I’ll show you guys how it works. Actually, I’ll just go over it real quick. After five years, your basis steps up 10%. So, if I put $50,000 into a qualified qualified opportunity zone fund, then I will have to pay tax on that $50,000 in seven years, except I don’t have to pay tax on the full $50,000. 10% of its steps up in year five. Another 5% in year seven, which means I’m going to pay tax on 85% of that $50,000, which is some number. $42,500. I’ll be paying capital gains on that in seven years but only on 85% of it.
Then, if I leave that money in my opportunity zone fund, invested in opportunity zone property for 10 years, I pay zero tax on any of those gains. If I hold it for 20 years and that $50,000 becomes worth $150,000, what’s the total amount of income I pay tax on? I invested $50,000, it’s now worth $150,000, I paid tax on $42,500 of it on year 7 and that’s the only time I’ll pay tax. That’s why people do it.
“I own an online business and I’m out of the country most of the year. I can qualify for foreign earned income exclusion. Is there a strategy where I can still contribute to my IRA or 401(k)?”
Jeff: This goes back to what we were talking about earlier with the needing earned income to have a 401(k). What the foreign earned income exclusion does is it says, “Oh, this money was actually earned in another country that you spend the majority of your time and so forth,” but what that does is that lowers the amount of earned income you have. It’s not going to take it down to zero.
Let’s say you receive a W-2 from Conaco $400,000 a year for work in Angola. You may get an exclusion for $75,000–$85,000 of that. So, you’re only going to report $15,000 on W-2 wages on your tax return. You only have that much earned income to produce an IRA.
Toby: Yeah. The 401(k) is still going to need a business sponsor. I don’t think you do a 401(k) out of a foreign entity. It needs to be sponsored by a domestic entity, so what you have to do is more than likely have a US counterpart where you’re able to generate some income. Technically, you could do that through a sole proprietorship, although I wouldn’t advise it for all the reasons we’ve got over the last couple days.
Man: Aren’t they taxed a worldwide income?
Toby: Yeah, but foreign earned income exclusion, when you’re out of the country it’s usually about $180,000.
Jeff: There’s actually two benefits for that foreign earned income exclusion which excludes a certain amount and then any taxes you paid on that money, the remaining amount, you can use a credit. You don’t get double taxed on it for sure.
Toby: Yeah, but it sounds like he has a business, but again it’s very fact-specific.
“I have three kids. Can I pay them a modeling fee for multiple companies that I own for modeling?” So, it sounds like they have a whole bunch of different companies probably doing different types of modeling for different types of medium. For example, if I have five companies, can all three kids be paid modeling fees from all five companies if they were truly models for that company and what is customary in the business? What say you guys?
Toby: Yeah, the answer is yes. “As long as they’re actually doing something, can the company each pay them a salary?” Yes. If they’re paying them a salary, then it really depends on the type of business as to whether you still have to do payroll taxes and things like that. If these are all five companies, they’re all sole proprietors, it’s going to be kind of weird maybe they’re disregarded LLCs, then you wouldn’t have to worry about it. If it’s an S Corp or a C Corp, then need to have some payroll taxes. But yeah, you could pay the kids. By the way, if you’re going to pay the kids, guys, and they have active income, What should we be looking at setting up for these kids?
Audience: A Roth IRA.
Toby: A Roth IRA. Absolutely. It’s like a savings account. Yes, sir?
Man: Toby, could you please […] kiddie tax rules?
Toby: A kiddie tax rule is if a child is under 18, any passive income is added to the parents’ tax return. If they’re 18–24 and you’re providing more than 50% of their assistance when they’re going to college, then it’s also included. It can go up to 24. Is that 24 or 23?
Jeff: Twenty-four, I believe.
Toby: I think it’s 24, but if they’re active income, you don’t have to worry about it. The reason the kiddie rule is there so I don’t give them a piece of a limited partnership that holds an investment in an apartment complex and all that income gets allocated to the kid and the kids like, “Hahaha, I just got $50,000 at my tax bracket,” and they have a standard deduction of $12,000, so they’re not paying much in taxes. They’re just going to add that back into the parents, saying, “The child didn’t do anything.” But if they’re working for it, then they’re okay.
Woman: Can you pay the kids 1099 instead of salary?
Toby: Can you pay the kids 1099? Technically, you probably could, but then, they’re a sole proprietor. A little bit weird whether they could contract, so depending on how old the child is, I probably wouldn’t do that.
This is a funny one. “I have multiple companies and would like to have board meetings or meetings for the companies for 14 days. Can I rent out a room and then pay each company the market equivalent of 14 days of rental income for the exact 14 days?
Eliot: As per taxpayer.
Toby: Yes taxpayer. So what we really care about is the companies aren’t getting paid. The companies are paying you. You’re going the wrong direction. You want the company to pay you and no, you can’t. Fourteen days for the taxpayers. If it’s you, spouse, or just you, it’s 14 days if you’re the taxpayer. It’s 14 days.
Now, again, somebody points out that the code doesn’t say that it’s per taxpayer 14 days. It’s 14 days per dwelling unit, but the courts have already said 14 days or less. I’m not going to argue with the judge. I think you’ll lose. I think the congressional intent was 14 days.
Could I, by the way, rent three days to this company, three days this company, three days this other company? Yeah. Could my corporation do 14 days with my house and 14 days with my business partners house? Yeah. It just has to be reasonable and making sure that companies have board meetings all the time or have meetings all the time. It doesn’t even have to be a board meeting. It could be, “I just want to use your house.”
Man: […] two different houses?
Toby: What if you’re on two different houses? Two different houses, two different corporations? If you’re the taxpayer. it’s 14 days between the two, or three, or four, or five because you could have an RV, a boat, a vacation rental, and a personal residence, I’m doing them all. It’s still 14 days. That be an exit non-taxable. Now, I couldn’t rent all those things out go beyond 14 days, but then what happens? It’s taxable, too. Yes, so I may not want to do it.
“If I want to reimburse myself on a per diem basis for corporate travel rather than using expense reimbursement, how do I go about it? I can figure out the per diem amount for each trip on the IRS website, but there is no form. What document is required for per diem reimbursement?”
Jeff: It’s called an expense report.
Toby: Yeah. It’s an expense report, but even more importantly, if you are a greater than 10% shareholder in a company, you cannot use per diem.
Jeff: I’m generally not in favor of using per diem. I don’t find it to be advantageous.
Toby: It’s not advantageous necessarily for you. It really depends. If it’s really a low amount and you have employees that don’t own your company, yeah use a per diem. It’s a little bit easier. You’re not worried about them running up a big old Amex bill or something like that when they’re going out. They’re not going to, “Hey, let’s order a bunch of some really expensive wine. We had caviar, lobster, and some Dom Pérignon.” If I just do the per diem, I’m just like, “Here it is,” but you can’t do that for yourself and your own company.
Jeff: So when I was getting per diem for traveling to Los Angeles, I was eating at McDonald’s everyday and pocketing the rest.
Toby: You know we did that once. Our guys would just sit there and it was so hilarious. We went to the per diem route about 20 years ago and they’re all standing at Supereight. They were like you’re showing up at events lame, you look like someone ran over you and the bus. They were like, “But I saved some money…” I’m like, “Yeah. Thanks for doing that for us, guys.”
“I have eight units in my own name. Will I save on taxes if I transfer them under my LLC?” It sounds like real estate and the answer is? No. It doesn’t make any difference. It’s all going to flow down to you, anyway. See? You guys already know this stuff.
Man: Unless you put it in a C Corp.
Toby: You put it in a C Corp, it’s not going to save any taxes. If you transfer it to an LLC, that’s that’s not going to be a 501(c)(3) for sure because we’re going to use a corp. There’s no real benefit. It’s not going to make any difference. Usually, LLCs, especially in real estate, are tax-neutral. We’re not using them for taxes other than we can have a management company and that we have a statutory basis to put money into the management company. But we’re not using it for anything else other than really asset protection and from an estate planning standpoint. If you owned properties in your own name, you have to probate in every state that you own property, so if you pass away and you have property in eight states, guess what you’re doing. You’re dead. You’re laughing from a cloud or looking up laughing.
Jeff: Hot, hot, hot, hot.
Toby: Right. It’s hot out down here. My kids are having to probate everywhere. Under those circumstances just left a little bit of a mess behind for other people. I’ve been through that, like my grandma. We ended up not taking any of her properties because they’re small lots, really inexpensive lots in Alabama and Florida.
My dad, when she passed, was supposed to be the beneficiary, but we had to probate it and it was more expensive to pay the lawyers than the lots were worth. Literally, we just […] in Washington, we’re now have to go back down to Alabama and Florida several times and it’s like no. Give it back to the state. That’s why you use the LLCs. Get them out. Or you just use a living trust or a land trust. Any of those work. It gets it out of your name. You just don’t want it personally own it.
“I have recently retired from my job and had a direct rollover into a traditional IRA to self-direct the account into buying real estate properties. Is it better to convert the account now to a Roth IRA for tax purposes since I’m anticipating expanding my real estate venture in the future? Which will benefit me more in terms of taxes when I sell the properties?
Jeff: Now here’s the thing. The key sentence here is, “I anticipate expanding my real estate.” Knowing that you can do that within a retirement plan, you can’t throw more money into it. It’s by making a bundle on the property you’re already in. If that’s the case and he’s sure he’s going to make a lot of money in this IRA, I will consider converting it to a Roth IRA. Now the problem with that is you got to pay tax on what’s already in there.
Toby: Based off its value, too. So, we already know. We did the math. When with this possibly make sense to do a conversion? Any year where my taxes are higher? Any year where my taxes are low?
Man: The following year, right?
Toby: Right. So, this particular case he says, “I recently retired from my job.” So, I’ll probably be looking at the year following the rollover, saying, “Hey, how much are you going to make? How much is this worth? Maybe we rolled it over because you’re not going to pay much tax at all and then you’ll never pay tax again. Now, the one thing that I look at here is when you say expanding my real estate venture in the future. When you expand real estate, what does it require? Money. And if it’s a Roth IRA, are we’re going to be able to get a whole bunch of more money into that Roth IRA?
Toby: No. So, what are we going to need to use? We’re going to need debt and if we have debt, we’re probably going to need to stay in a 401(k). So, under this particular circumstance, if I saw a rollover, I’d be looking at setting up a 401(k) in a small company and rolling that money over into the 401(k), so I can use debt to grow it. I’m probably not going to convert it, but I could convert pieces of it over the year. I could take a piece that’s in my 401(k) and convert portions of it. I can roll it into an IRA just like one property.
Let’s say I had most pieces of property. I could roll one property and pay a small amount of tax on each one of those and convert that into a Roth IRA. And I could do that every year. I don’t have to do all of it. I can just say, “Hey, you know what? I’m just going to keep doing this,” and realistically you have to have to have a pretty low tax amount. If they’re retired, there’s no way that it’s going to pencil out. I can already tell you every time I look at this. When somebody’s retired, they have such a small horizon you just don’t want to take that tax exit.
You have a question?
Man: If you […] maybe S Corp and I have a company-sponsored 401(k), and rollover the IRA to a regular traditional 401(k), if there’s an active income generated somewhere in the S Corp and maybe make a negative, can you offset the income from the 401(k) by rolling over? So when you pay yourself employer contribution, is this a negative number?
Toby: So if you create a loss in an S Corp. You guys online probably can’t hear it. He says, “What if I create an S Corp that sponsored a 401(k), could I create a loss in the S Corp so that I was able to do the rollover without having a taxable event?” Yeah, you could do that. You can try to do that. You have to have basis in the S Corp. You actually have to have the money’s coming from somewhere. You got to have some money lying around to put into it, and then you’re creating it by paying […]
You’re buying $50,000? You could play that game. I have to play the numbers. I think it’s probably more hassle than it’s worth. The easier thing to do is just to say, ‘Hey, you know what? I’m going to be in a pretty low tax bracket here in a few years. If I […] what my retirement income is, maybe I’ll do some conversions, maybe I won’t. If I’m building a real estate and the operative word was I want to expand, then I’m probably not going to play too many games. I’m just going to try to grow my real estate and I’m going to need to use a 401(k) for that, so I can use that finance income. That’s just me. Otherwise you’re probably putting yourself behind the eight ball.
Woman: I have a 401(k) that purchased a condo and it’s on Airbnb. All of the income from Airbnb goes directly into the solo 401(k). But Airbnb issues you a 1099. What do we do with that 1099?
Jeff: The 1099 should be issued to the custodian, not you. It’s going to be the custodian’s EIN, not your social security number, not the IRAs EIN or social security number.
Toby: The only thing I don’t know is whether that’s going to be UBIT or not (Unrelated Business Income Taxes) an act of business.
Jeff: And that’s what I thought. The Airbnb is probably UBIT. They may have to pay tax.
Toby: Airbnb, anytime you have a less than seven days, on average, it’s 28 days average that you’re doing it? So, you’re doing big, long chunks? Then you’re fine. If it’s seven days or less, than its considered hotel, and it’s active.
Male: Solo 401(k) […] I heard does not have UBIT versus the […] IRAs that has UBIT.
Toby: No. You’re thinking of debt finance income. UBIT’s are always on any exempt organization. Even a 501(c)(3) an IRA, 401(k), defined benefit, cash balance, QRP is a 401(k) or 401(a), all those, you always have unrelated business income taxes. What they don’t want is an exempt organization competing with a traditional business.
We got to run through these. This is the last one, I think. “I have a personal home and rural land in my personal name. I want to be able to isolate it from future ventures as well as be able to pass it on to my sons when the time comes. I live in Colorado and have an LLC that was established a year go without any holdings. It is registered here in Colorado. Do I use this existing LLC on the ranch or I go with the trust and use the LLC for a future real estate move?”
So, they have a personal home and rural land in my personal name. “I want to be able to isolate it,” and there’s really two items there, so they must be saying it’s all one big thing. “Pass it on to my son when the time comes.” So, it’s weird. How would you answer?
Man: Use both.
Toby: Use both?
Man: Use the trust and LLC […].
Toby: You could do that, yes. Here’s the deal. If you have a single owner LLC in Colorado, is a separate property state, whatever we’re going to do, we want to make sure that if we set up an LLC, its disregard. Partnership will destroy what’s called a 121 exclusion. If we want it to go to your kids, we probably want to make sure that we’re protected from them.
Realistically, all you really need here is a living trust. If I’m concerned about the rural land, if it’s a separate parcel, I’m putting out an LLC. But the actual personal residence, what you could do is an advanced strategy is you use what’s called a qualified personal residence trust (QPRT) where you put it into trust. You have a right to remain in that property into your into you die. Then it goes to your your family. That way, nobody can ever take it away from you. If you are worried about having liabilities or whatnot, and a lot of us worry about medical bills and things like that, that would be one possibility. The other out is just put in a living trust.
Jeff: The other issue here is they do mention the term, “It’s a ranch,” and you see this also with farms and all. Working ranches, working farms, things of that nature that some of the property may be business-related, even though they live on that ranch. That’s where the residence is, so sometimes it has to be broken out separately.
Toby: All right. We’re going to knock out a couple of little things. Tax Wise, you guys are in the last one right now. So before the end of the year, you can still sign-up to have recordings of all three Tax Wise. They’re $197 and get two tickets to the Tax and Asset Protection Workshop, get Clint’s book, Asset Protection for Real Estate Investors. And it has a three-part video series online, Strategy Session with the Blueprint. You can do that. It’s $197. I’m not going to spend too much time on that because we’re getting towards the end of the year, but you do get recordings, even for this event, if somebody needs that.
iTunes, our podcast is free. On Google Play, we’re also free. Replays of all of our Tax Tuesdays are available in your platinum portal if your platinum. If you’re not platinum, then I believe that there’s usually three or four from hanging around out there at any given time that you go back and listen to. I like the podcast. From what I’m hearing from people is that they don’t necessarily watch them all, but they definitely like to go listen to them and they put us on 1.5 speed so they don’t have to go through the full thing.
Jeff: What’s funny?
Toby: I could not handle listening to myself on 1.5 speed. I think I talk fast enough as it is. All right, of course all social media. For everybody here and everybody out there in Internet land, firstname.lastname@example.org. Feel free to email in questions. That’s where I grab those questions from every time. I just go through and see what’s there that’s making sense. I shouldn’t say me. Kendle goes through them first and she takes the ones that, again, are very specific or very time-urgent, give them to somebody right away, and then the other ones we put in questions. I’ll actually show you the sheets so you guys can freak out a little bit how many question we actually get. It’s pretty funny.
As you guys are probably aware now, it’s just question after question after question. You guys are starting to see that sometimes the answer is we need more facts, we need to dig into a little bit, but there’s usually more than one of more than one option. Whereas I guarantee you that if you gave that to your local accountant, the answer is going to be, “No, no, I don’t know, no, no, no, no, no, no, no, it depends.”
Anyway, shoot in Tax Tuesday. It’s free. If you have people that you work with or that you like, that our investors have them, there’s no cost and a lot of folks, again, they stay stick with that same accountant or professional and we don’t want to break through, but sometimes they’re not getting an answer, if they can they can come on to Tax Tuesday, there’s never a cost to it. We give the answer. We can give them the code provision. You guys don’t see what goes on behind the scenes, but when we’re answering questions, sometimes it’s just saying here’s the rule. If their accountant pushes back, I just say. “Hey, just email me. Bring me into the conversation. I can give them the backup.
It was like Eric all over it yesterday when he said that the accountant was yelling at him, “You better not get me thrown in jail,” and he gives her the law, gives her everything said, and she goes, “Oh, wait. That’s really cool,” and does it herself. I wish I had a t-shirt or nickel or whatever it was for every one of those because it would be kind of cool. I’ve had that conversation so many times, where the accountant says, “Really? You can do that?” “Yes, here’s the code provision.” “That’s pretty cool.” “Yeah, you should pay me something at that point.”
All right, so that’s it for Tax Tuesday. For everybody that’s out there in Internet land, is there anything else Eliot?
Eliot: We have a lot of questions.
Toby: You’ve been answering them?
Toby: We’re also out of time. So you’re going to have to answer them. Eliot is going to keep working away answering them.
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