This episode of Tax Tuesday with Toby and Eliot is brimming with strategies to supercharge your financial savvy. From unlocking the mysteries of deductions and depreciation to turning real estate activities into a tax-saving powerhouse, we dissect the fine print of the tax code and transform it into actionable advice. The episode covers various topics including handling missed 1099 deadlines, gifting to clients and its tax implications, maximizing deductions, the benefits of cost segregation studies, combining short and long-term rentals for tax advantages, and the intricacies of aircraft depreciation for a flight instructing business. Remember, knowledge is power, especially when it comes to dealing with Uncle Sam. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- Do I have to get a 1099 to every sub who worked on a single family home we are rehabbing? Do I have to send a 1099 to them? And if we do have to get 1099s to parties, I’m assuming we have to get a W-9 from them first? – the duty to send a 1099 is when you pay $600 or more to a contractor.
- Hi, I am new to setting up a business for real estate investing. My taxes will be startup and training fees. At what percent can I expect there to be write-offs to the business? – If it’s a business expense, you’ll be able to deduct 100% of that expense.
- I hadn’t claimed depreciation in earlier years, thinking that I wouldn’t have to have my basis reduced in the future sale. Is there a way to claim those earlier years that it hadn’t been taken, or did my 27 years just begin when I started taking it? – form 3115 can catch all that depreciation back up.
- Is it too late to do a tax seg on a previously purchased rental property for tax year 2023? And what would be the advantages of doing it for 2023 versus 2024? – It can be done all the way up to the time your return is due the next year with extension.
- How can I use real estate profits to pay for kids’ college without paying taxes? – If it’s in an entity, an LLC, just pay them directly from that business.
- Are gifts to clients, vendors, employees, and members tax deductible,” “If yes, what is the threshold that we can spend on gifts? – it’s such a horrible rule. People really don’t believe me when I say it’s a $25 limit, and yet that’s what it is.
- My tax preparer died a few years ago.” “I have not been able to find someone to help me with my taxes. Can I file 2023 before I file 2021 and 2022? Or do I have to file their tax returns in order? – There’s no rule out there that you have to do this return or that return.
- Can you aggregate short-term rentals and long-term rentals together in your portfolio to meet material participation requirements for REPS? – as they are, no, they’re two different things. A short-term rental is a different type of business. It’s actually not a rental activity, it’s just a trade or business.
- Our LLC installed a $84,000 solar system on a rental property in 2023. Can we take the 30% energy tax credit and deduct the entire 59,976 basis? 84,000 minus 50% of the 30% in 2023 using bonus depreciation. – Quick answer, yes. I did check, $25,200 is correct at 30%
- Started a small flight instructing business in 2023 and purchased a plane in 1223 Finance. What depreciation options are there, and what would be the best approach if the income stream will not begin until 6/24? – It’d be a 2023 asset, and you can do the bonus depreciation we’ve talked about.
Resources:
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Full Episode Transcript:
Toby: Hey, guys. Welcome to Tax Tuesday. My name is Toby Mathis, and I’m joined by…
Eliot: Eliot Thomas, manager of Tax Advisors here at Anderson.
Toby: That’s a mouthful. If you’re looking for some tax questions and some tax answers, you’re in the right place. Let the room fill up, and we’ll see what has been created. I see closed captioning is being generated. That’s very exciting.
All right, I’m not going to be distracted. I got all these things everywhere. Just going to try to focus on the questions. If this is your first tax Tuesday, give me a reaction, give me a thumbs up.
Perfect. If this is your first Tax Tuesday, then this is fun. I get to tell you some of the instructions, which is you can ask any question you want on tax in the Q&A. Now, if it’s too deep and we’re starting to get into tax advising, where we’re like, hey, how do I fill this out on my return other than a generic question, then we’re going to ask you to become a client. Otherwise, you can just ask away.
We got a whole team. I see Amanda, attorney Dutch, one of the tax managers, Jared, CPA, all these people. I know Troy’s back there. Patty’s back there. Ross is back. Tanya’s back there. Oh, my God. We got a ton of people there to answer your questions. Go on into Q&A and ask away. This is the beautiful part.
Here’s the thing. How many of you guys know that tomorrow is a tax deadline? Give a thumbs up if you know that tomorrow is the tax deadline. We got three accountants on. They’re a bunch of scared faces. No, it’s not your individual taxes. It’s the deadline for 1099s. I think it’s the 1099-NEC.
Eliot: Yes.
Toby: See, that’s why we keep smart people hanging around. The 1099 Miscellaneous is due when?
Eliot: I didn’t catch that. Troy is actually helping us with that one.
Toby: Troy, are you out there? You can unmute yourself and answer that one.
Troy: Hello, it’s me, Troy. Yeah. We’d want to get them filed to the individuals that we need to send a 1099 too by the 31st. They are due to the IRS, however, I believe March 31st, I’m pretty sure.
Toby: That’s very exciting. If you’re panicked because you’re like, ah, crap, I blew the deadline, don’t worry. We’ve been doing this a long time, and it’s very seldom that you get penalties. They could be assessed, but don’t worry. Let’s have some fun ones. Let’s jump in.
All right. If you have questions during the weeks in between—we do these every other week—email us at taxtuesday@andersonadvisors.com. Not only will we answer your questions, because you get hundreds.
Eliot: We get a couple of hundred, yeah.
Toby: We look through those, and we grab questions that we answer. Each session, I think we grab 10. Eliot grabs them. I don’t know how he picks them.
Eliot: I try to hit a broad spectrum of if we get a lot of questions about depreciation of some nature, I try and put that question on there that covers as many as I can, or if there’s something that’s really unique. We’ll try and mix it up.
Toby: We’re going to pick a nice wide variety, and we’re going to answer your questions. If you are looking for someone to advise you, then the easiest service we have is Platinum. It’s a flat fee, it’s less than $100 a month. You could ask away all the questions you want to attorneys and accountants. We do both tax and legal on asset protection and business planning and tax.
If you want to become a Platinum client, just reach out to any of us and say, hey, how do I become a platinum client? Because you really can, just ask away. Every day between 9:00 AM and 2:00 PM, we have an open forum where you can pop in, and we teach all day long, but there are a bunch of attorneys and accountants in there.
If you have a question, they’re not going to answer stuff right in the general public unless it’s a general question. What they’re going to do is say, hey, come over here into my virtual office, and they’ll answer it. We try to make it as easy as possible to get answers.
Yes, you could call. Yes, you could email. Yes, you could jump in there and go into the Platinum room. If you’re not a client, you just send it into taxtuesday@andersonadvisors.com. As long as we’re not crossing the line over and to give you specific advisory services, we’re going to answer it. If it’s general stuff, we’ll absolutely help you.
People say, why do you do that? I don’t know. We’ve been doing over 211 episodes. We’ve been doing this for years. Frankly, it’s because it didn’t exist when I started. I would’ve loved to be able to ask questions of an accountant every other week. So we’ve said, hey, we’ll do it since nobody else is, so welcome. It should be fast, fun, and educational.
Somebody said, so you can pop in at any time? Yes. During the 9:00–2:00, we actually have an agenda every day of who’s coming in. Sometimes it’s the land trust attorneys coming in talking about deeds and land trust. It’s the accountants coming in talking about certain tax matters. Sometimes it’s attorneys talking about LLCs.
We have an agenda for the day, so if you want to learn, you could certainly come in there. If you want to just come in and ask a question, we have plenty of folks there to make sure that we get your questions answered. We just find it way easier to talk to clients if we break down all the barriers and make it easy. Are you guys ready to get started? Because we’ll go through all the questions. Are you ready?
Eliot: Yup. Good to go.
Toby: Yes. All right, let’s get going. Here are the questions we’re going to answer today, and then we’ll get back to these.
“Do I have to get a 1099 to every sub who worked on a single family home we are rehabbing? Do I have to send a 1099 to them? And if we do have to get 1099s to parties, I’m assuming we have to get a W-9 from them first?”
Eliot: It is timely, and that’s one of the reasons I picked it. A lot of questions about it and a lot of rules right here in this one question.
Toby: We’re not answering them yet.
Eliot: I’m sorry. My bad. Excuse me, sorry.
Toby: He’s new. No, I’m just kidding. We’ll go through these, then we’ll answer them.
All right. “Hi, I am new to setting up a business for real estate investing. My taxes will be startup and training fees. At what percent can I expect there to be write-offs to the business?” We just grab the questions, and sometimes the English is a little suspect. We’ll answer that one.
“I hadn’t claimed depreciation earlier years, thinking that I wouldn’t have to have my basis reduced in the future sale. Is there a way to claim those earlier years that it hadn’t been taken, or did my 27 years just begin when I started taking it?” Good question. We see this all the time. Scary answer, by the way. I’ll just give you a little hook there.
“Is it too late to do a tax seg on a previously purchased rental property for tax year 2023? And what would be the advantages of doing it for 2023 versus 2024?”
How can I use real estate profits to pay for kids’ college without paying taxes?” Good question. We’ll answer that one too.
“Are gifts to clients, vendors, employees, and members tax deductible,” especially if they’re given to Eliot? “If yes, what is the threshold that we can spend on gifts?” We have all these cool questions. We even have more.
“My tax preparer died a few years ago.” Sorry to hear that. “I have not been able to find someone to help me with my taxes. Can I file 2023 before I file 2021 and 2022? Or do I have to file their tax returns in order?” Good question. We’ll answer it.
“Can you aggregate short-term rentals and long-term rentals together in your portfolio to meet material participation requirements for REPS?” That stands for Real Estate Professional Status, and we’ll explain all that is. Wow. Good questions so far.
All right. “Our LLC installed a $84,000 solar system on a rental property in 2023. Can we take the 30% energy tax credit and deduct the entire 59,976 basis? 84,000 minus 50% of the 30% in 2023 using bonus depreciation.” I love that question. You’re talking my language, now we’re going to get the calculator out. Luckily, I think I have a phone somewhere. I have to make sure. Yes. We’ll have to get the calculator out and check your math.
All right. “Started a small flight instructing business in 2023 and purchased a plane in 1223 Finance. What depreciation options are there, and what would be the best approach if the income stream will not begin until 6/24?” Great questions so far. Love it. Let’s see. I think those are going to be the questions we’re going to answer today.
Before we jump in, also that’s free and available to you guys. By the way, we live stream this on YouTube, but you can also subscribe to both my channel and to Clint’s channel. Clint spends more time on LLCs, corps, and asset protection. I tend to spend my time more on tax and financial matters, making money. Those are free. You just go to YouTube, type in Toby Mathis, and you could check that.
Patty just threw up the link there. Patty, go ahead and give Clint’s channel too, and just subscribe guys. It doesn’t hit you up. It doesn’t solicit you. It just lets you know when new videos are up. I think we put up three or four a week, but there’s a lot of good stuff going up right now. I know that because it’s getting into the tax season, so you don’t want to pay attention.
We have legislation right now that has passed the house ways and means, and it is passed. I believe it’s the house that’s passed it. It’s in front of the Senate now, which would change bonus depreciation and the earned income tax credit, the Child Tax Credit. Is it EITC?
Eliot: Yes.
Toby: Earned Income Tax Credit? There’s legislation to increase the earned income tax credit as well as the bonus depreciation retroactive to 2023 being at 100%. You real estate investors, perk up your ears and watch this because we don’t know when it’s going to pass. But it looks like it could be as early as next week. We will see. That’s absolutely free.
Speaking of free, we do the Tax and Asset Protection Workshop. Myself, Mr. Clint Coons, and recently I’ve been grabbing Brent Nagy. He’s been a long time client of ours, a very successful real estate investor. I’ve been asking him to teach because he was a student and was a customer just like everybody else. It might’ve been 20 years ago, but he has gone through the process, and he speaks in plain English.
We’re sampling that out because it seems like people really like the plain language. We try to do our best as attorneys to speak in non-legal terms, but he does a really good job of explaining it. Every now and again, you see Mr. Nagy there, a great pilot, a great investor, and I think he’s bored in his retirement. He’s welcome to come and be bored with us.
We have the February 3rd coming up, we have Saturday the 10th coming up, and we have a live event scheduled now in Orlando. This is definitely going to happen this March 21st–24th. If you haven’t been to one of those, these are four-day events, 21st, 22nd, 23rd, 24th, four-day events where we do an Infinity day, three days of tax and AP.
If you haven’t been to it, you absolutely should come and hang out with us because it’s just fun to hang out. We get to see everybody’s faces. Hang out, talk about investing, and making the world a better place. It’s a lot of fun. You should come, and we’ll send you information on that. There’s a link. We don’t need that.
All right. Let’s have fun. Ready? You started to answer this one before, but I’ll read it again. “Do I have to get a 1099 to every subcontractor who worked on a single family home we are rehabbing?” You’re rehabbing a house. Do I have to 1099 everybody I paid? Do I have to send a 1099 to them? If we do, do I have to get a W-9 from them? Eliot.
Eliot: A lot of different rules packed in here with these different questions. First of all, the duty to send a 1099 is when you pay $600 or more to a contractor. That would be part of your factoring.
First, before anybody does any work for you, you should get them to fill out the W-9. The W-9 is a form that they fill out saying who they are, whether they’re representing themselves, they’re with an entity, or something like that, with the social security number or EIN number as applicable is, and you really need them to fill that out before you pay them or have them do any work. That’s your get-out-of-jail free card if the IRS asks about any 1099 business, because then you have their signed statement of how they’re taxed.
If you pay someone $600 or more, then yes, we need to send them a 1099, all the contractors, absolutely. If they’re a corporation, a C-corporation, you may not have to. Possibly, in S-corporation, you may not have to send them a 1099. Although sometimes, you may have to prove that they’re a corporation, but that is another aspect of the rules there. Yes, you do need to send 1099. As we talked about earlier, that’s really due tomorrow. Get it done. Usually, we don’t run into penalties. It’s rare that we run into them.
Toby: Yup. Tomorrow is the due date for the 1099-NEC, right?
Eliot: Yes.
Toby: The 1099 Miscellaneous is later. In order to provide somebody with the 1099, you’re going to need their EIN or their social security number. Anyway, you get that on that W-9, and you’re required to have that W-9. The reason I know this is because years ago, I think it’s probably 10–15 years ago, one of our companies was selected with 50,000 others for a random deep audit on W-2 and 1099. It was when the IRS was checking out and the treasury. It was checking out to make sure everybody was classifying people appropriately.
We had an agent come to our office for about a week. It was a lot of fun. He was like shaking a fish. He was wearing a white shirt. I kid you not, it looked like a character shirt from a movie. I started laughing when he came in.
Eliot: You knew which one was the IRS agent?
Toby: Yeah. Tell me you’re an IRS agent without telling me you’re an IRS agent. You wear black pants. It was either that or he was part of the LDS. He just came on a bicycle, if you guys get that one. He was a nice guy, white shirt, short sleeve, which in Vegas is pretty funny. Sat there and went through every W-2, every W-4, every W-9.
We’re talking about a company, our company. It’s quite literally close to a thousand documents, and there were two. We had a magician that we couldn’t find. He disappeared. It was a Christmas party, and we didn’t have his W-9. It was to a company. We said, well, it says Inc. They’re like, well, can you prove that it was a corporation? The magician made his phone disappear, so we couldn’t get ahold of him.
It was $700. We’re like, if we pay this, will it go away? Another one was a landscape company that we had used on one of our buildings. The same thing, they had disbanded, they had dissolved. They said, how can you prove that it was a corporation? We’re like, they’re dissolved, but it says Inc. It’s like, well, we think you should pay the withholding on that. If we do these two, then they’ll go away. It was $1000. I was like, here, go away.
You don’t give the IRS agent cash. Chances are, they’d take it and still audit the heck. It was just like one of those things where it’s like, all right, all right, all right. So get that W-9, get that W-4. You landscaped your building? Yes. In Vegas it’s fake, but it’s 60 palm trees. Ask me about palm trees someday. I actually had an expert in trees come out to make sure we didn’t kill them.
I’ll tell you lots of stories about some of the landscaping crap we pulled. Here’s a hint. In Vegas, don’t plant birds of paradise. It’s not because they die, it’s because your neighbors like them so much that they borrow all of them, right on camera. They don’t care. They have no shame, whatsoever. I got the camera, the guy’s looking straight at it as he’s digging up my bird of paradise.
Eliot: Smiling the whole time.
Toby: Yup. Landscaping is a 15-year property, so you can cost seg it. When it disappears, you can write it off. Anyway, you learn that fun stuff. Long story short, if you haven’t done your 1099, what’s the penalty if you haven’t done it in time?
Eliot: It is a time matter depending on how late we are. Anywhere from approximately $60 up to $630 or so.
Toby: If you intentionally disregard the rule.
Eliot: Yeah. We’re looking at the August standpoint. I think if you have up to August 1st, it’s $120 perhaps. First 30 days, $30. It starts to go up with time if they start to show intention.
Toby: $60 in the first 30 days. After that, it goes to $120, then it goes $350, and then it goes up to $600-something.
Eliot: Yeah, if you’re intentional.
Toby: Nasty, right? But we’ve been doing this a long time. I talked to Troy before this, and he says he’s seen twice where they’ve come in and penalized. I had a client that they penalized. It wasn’t us, but the accountant didn’t have social security numbers on people, and they filed the 1099. There was withholding due because they didn’t have the social security number, but we were still able to go get the W-9s and prove the social security on them, and then we were able to get that money back.
We actually had the client pay it. He’s freaking out because the IRS is all over them saying you owe this. But then we were able to get it back. Other than that, I’ve just never seen anybody really penalized on it. Please don’t rely on the good graces of the IRS on this because they could come back and penalize you.
What if a worker refused to provide a social security number? Linda, you have them do a W-9 before you pay them. You say, no social, no paycheck. If you want to get paid, fill this out before you do it. You should just do it as a matter of course.
In fact, a lot of payroll companies, not just payroll, but companies that do bookkeeping, if they see a new vendor, they’re like, W-9 before a check goes out. Because once you pay them, just like our friend, the magician, they disappear. Troy, you absolutely can jump in. Pop in, brother.
Troy: One other thing. If you’ve messed up, didn’t collect that W-9 ahead of time, and you still need to issue a 1099 at the end of the year, you can do that without the social security number without all the information. But what’s going to happen is you’re going to get a notice from the IRS saying any payments you make to this contractor going forward, you have to do backup withholding on them.
Toby: We had that precise situation, Troy, and it was one of our doctor clients. They assessed a withholding on all for three years. It was about a $100,000 issue. We were able to do it, but it freaked him out pretty good because his accountant wasn’t doing the W-9. Since they didn’t have the social, they were sending out 1099s with the amounts they paid all these folks thinking that was good enough. Of course it’s not. It triggers the withholding.
Troy: That backup withholding is 24% of the gross payments.
Toby: You’ll end up paying 24%. If something else, somebody probably reported and paid tax on, they’ll double dip on you guys. The IRS will absolutely double dip, because they’re the IRS and they can.
Eliot: Yup, so get it out there.
Toby: Tomorrow, jump in. If you need help. I’m sure that, Troy, if you’re rolling around, are you guys able to take on anymore? Are you guys just up to your eyeballs?
Troy: We’re closing our intake form at 5:00 today. It will reopen on February 1st.
Toby: February 1st. Suppose to everybody that’s on. You better put that form up there in case somebody’s panicking so that they can get them issued real quick. You guys have a little bit over an hour-and-a-half. Put that form, and send it out to everybody in case somebody needs to do it. How much is it? Is it $100 for 10 or something like that?
Troy: $100 for 10, correct. Yes, sir.
Toby: Look at that. So $10 a pop and we’ll get it done. There you go. That’s a W-9, Patty. Do we also have the 1099s?
Troy: Problem is the 1099 link Toby is individualized per client, so I don’t have one that I can just pop up.
Toby: All right. Just send an email where they can reach out to somebody.
Troy: Yes, I can do that.
Toby: We’ll make sure. If you’re panicked and you’re like, oh, my gosh, what is this, do not worry. (a) We could get it done. (b) If you don’t get it done, we don’t see people get penalized. It’s not like it’s automatic.
All right, let’s move on. “Hi, I am new to setting up a business for real estate investing. My taxes will be startup and training fees. At what percent can I expect there to be write-offs to the business?”
Eliot: If it’s a business expense, you’ll be able to deduct 100% of that expense. The issue here is really, what type of expense it is, I would think. You mentioned training expenses, and that’s one that’s really key training, education, and you mentioned that it’s a new business. If that’s the case, it’s a new line of business, then we typically can’t deduct training expenses on a normal return. You need to put it on a C-corporation.
We do have methods to work with that, but it might be that we have to roll through a C-corporation to get those training or education expenses deducted. If it’s a business that you’ve already had and it’s already shown up on your return, maybe you had a sole proprietorship year one and year two, you ran into those costs, well then that’s just continuing education. Probably not a problem. Here, it sounds like we’re talking about a new line of business with training, so that’s telling me, C-corporation.
Toby: C-corporation, and possibly a startup expense depending on when you’re rolling and how you structure this thing. Don’t worry, you’ll be able to write it off.
What happens if you don’t is there’s a great case. I don’t remember the case name. Woody v. Commissioner. That was the guy who talked to us. We gave this exact same advice to him, and they went to his accountant and did something different.
Now he’s a wonderful tax court case where he was denied his deduction because his business didn’t exist. He was trying to do it in his individual name, and it’s like, no, no, no, no, no, no, no. Don’t try that. Don’t do it on the cheap. Do it the right way, and then you get the deduction. It costs the guy a $40,000 deduction.
Eliot: We run across a lot of these in our two-year tax reviews where a client will bring in their returns. We’re reviewing them. We see that they had a new business on a sole proprietorship. They tried to deduct education, and we tell them in there more than once, I’d probably say four or five times, I caught it, and told them.
You feel guilty because they get a letter within a couple of months. Remember, it’s been two years. We’re doing a two-year tax review looking back, and they get a letter. I know they’re thinking that we turned them into the IRS, but that’s not the case. The IRS is just late getting those letters out there.
Toby: The IRS knows. You see that and they just go […]. But I’m a sole proprietor, I get to write these things off.
Eliot: But we can work with it. We get that C-corp set up.
Toby: We’ll still get it. We’ll either get it as a startup expense, or we’ll get it as ordinary expense depending on when you do the education, when you do the training. What we love is if you set up the company and then do the training.
Hey, I’m doing the training. Great, fantastic. If you can get the entity set up before you actually do the training, then it’s on behalf of the company. That actually makes a difference.
You can write off 100% no matter what. The question is whether you have to use it as a startup expense and amortize it over 15 years, or whether you can write it all off in the first year. We want it now. The dollar today is worth more than a dollar in 15 years, so I want the dollar today.
All right. “I hadn’t claimed depreciation in earlier years, thinking that I wouldn’t have to have my basis reduced in the future at sale. Is there a way to claim those earlier years that it hadn’t been taken? Or did my 27 years just begin when I started taking it?”
Eliot: Another common problem, as you mentioned when we started. We run into this quite a bit. People think they’re saving themselves a little bit of paying by not taking a depreciation expense early on. Problem is, if you ever sell, you’re going to be treated as if you did take that depreciation, whether you did or not.
Question here is, what can we do about it? We have a form 3115, and that can catch all that depreciation back up. In other words, let’s say you’ve had it for 10 years, never took depreciation. This year you can do a 3115, it will pull it up, and you’ll take all that depreciation this year and catch it all up.
Toby: 481, right?
Eliot: Yup.
Toby: Eliot just explained the rule, but I’m going to dig a little deeper on it. The way the tax law is is that if you put an investment property, this isn’t for your home. This is for a property that qualifies as investment, which means I’m renting it to third parties at fair market rent. It could still be a residence and an investment property if I am occupying it more than 14 days or 10% of the days that it’s rented.
I can take depreciation, but I must recapture any depreciation that I could have taken. What trips people is they’ll have a second property that they’re renting out. There, boom. You may take depreciation and they say, ah, I don’t need to, I’m not too worried about it, blah-blah-blah. Then 10 years later, they go to sell it, and they’re forced to recapture the depreciation as though they had taken it, even though they chose not to.
What would’ve happened is let’s say it was breaking even without taking depreciation. That depreciation creates a loss. It’s a passive loss. It sits on your return as a carry forward. Every year you have this loss, and it gets bigger and bigger and bigger, and then it gets released when you sell. Either you use it against your other properties, or it’s released when you sell, and now you use it against the sale to offset the gain so you don’t pay tax. If there’s no gain, there’s no tax.
If you have a big enough loss, you’re like, oh, I got this loss. Boom, I get to knock it out. If you don’t do that, you don’t have that loss. You’re just going to have recapture, it’s all gain. So it’s going to be either recapture or long-term capital gain. That’s how that works.
Unfortunately, you see that, but Eliot also gave you the way to fix it, which is a catch up under 481(a), I think it is, but it’s a 3115. It’s the same thing we do when we do cost segregations. We just grab it all. Anything that I could have written off, I’m going to take it now, and maybe it’s going to create this big, fat passive loss on your return. Good, it gets released when you sell.
Somebody says, what’s the difference between depreciation versus cost seg?
Eliot: I heard your new video on that.
Toby: Did I do one?
Eliot: Yes, you did with Mr. Estill.
Toby: That’s in the tax toolbox.
Eliot: Yeah, it’s in that exact question right there.
Toby: Here’s the difference. All property has a useful life. It might be 5, 7, 15-year, 27½, 39-year. Personal property versus real property, structural property. A lot of us are used to just taking 27½ or 39 years on our real estate without realizing that there’s a whole bunch of categories that are actually personal property. In order to break them out, you have to do what’s called a cost seg.
A cost segregation study just goes through and says, anything that would be removable without damaging the structure is personal property, including any structural components that are for that specific purpose. The electricity and plumbing for that purpose becomes the same useful life as that item.
You put a dishwasher in, and you have plumbing that goes to the dishwasher. That dishwasher is a five-year property. The plumbing now is a five-year property. The electricity to it is five-year property. If you had to modify the foundation or anything for that dishwasher or put it in a structural component platform for it, that’s five-year property.
A cost seg allows me to write it off faster. Instead of 27½ or 39 years, now I’m writing it off in 5 years. Bonus depreciation says rather than 5 years, you could write off. This year, it’s 60% of that 5 years I could write off in the first year. Three years, I get to write off right now, and then I’m spreading out the rest, those last two years over five, whatever’s left.
That’s going to go to 100%, almost a certainty. That means that we can write off five years in fifth year. It’s dictated by the year that you put your property into service. If you have property that you put into service in 2019, 2020, 2021, I guess 2022 went to 80%, it’s 100% bonus depreciation, even if you make the election now. Remember we did the catch up on the depreciation. We can catch up on our bonus depreciation, too. That’s the difference. I hope that answers your question.
Eliot: I think, actually, 2022 was 100%. In 2023 that was 80%, and now is 60%.
Toby: Yeah, you’re right. 2022 is still !00%, 2023 is 80%, 2024 is 60%, and they’re all going to be 100%.
Eliot: Yeah. We’ll get back to the good old days if they do the right thing.
Toby: If the Congress gets back in session and passes it. All right, next question. “Is it too late to do a tax seg, probably cost seg on a previously purchased rental property for tax year 2023? And what would be the advantage of doing it in 2023 versus 2024??
Eliot: Looking at tax, I think we’re talking about cost segregation here. With tax segregation, I think we get the idea of what we’re trying to do here. It’s just what Toby was going over. Is it too late? Not at all. You get to do that cost seg, take the study. It can be done all the way up to the time your return is due the next year with extension. Maybe have return due April 15th. If you extended and it was going to hit your personal return, that’d go to October 15th.
We got a long time that you have to do that cost seg. We can certainly do one of those. Even if it was purchased earlier back in 2023, that’s not a problem. As Toby mentioned, we’ll go back to 2023 where it was purchased. In the land of 80% bonus depreciation, you even get the benefit of that. Now we’re in 2024, you don’t have to deal with 60% or soon it might be 100%. Maybe that’d be better yet.
Toby: When you’re looking at two years, you’re going to look at which one’s better for you. Usually, what you’re looking for is, should I do it for 2023? What is it going to save you? If we did a cost seg, and then you were looking at doing bonus and adding it up, what are the tax savings to you? What are the dollars in your pocket?
If you had an okay year in 2023 and in 2024, let’s say that we get to September, and you’re just knocking the cover off the ball and just killing it, we might say, don’t do 2023, do the cost seg in 2024, let’s offset more of this income because it’s in a higher tax level. The tax system we have is the more you make, the more they take. If you’re getting into the 30%-plus category, those dollars really make a big difference.
Sometimes it makes zero difference. If all it is going to be is a carry forward, you could do it for 2023, carry it forward into 2024, it’s offsetting some income, yay. It may not make much of a difference at all, but quite often it would.
Especially, let’s say that you had a great 2023, and you’re having an okay 2024, then it would be the opposite. You’d look at it and say, that cost seg is going to save you $20,000 if you do it for 2023, versus it’ll save you $15,000 if you do it in 2024, based on our projections. You’re better off doing it sooner than later. Let’s go ahead and do it for 2023, but you could make that call all the way up until your tax return’s due.
Eliot: It’s really (I think) one of the best parts of the code as far as flexibility. It gives you a long time to make your decision. You’re going to have a lot of data by that time, well into the next year. You can just, as Toby always says, calculate, calculate, calculate. See what is best for you. No pressure on you, really, at that point.
Toby: Somebody says, if you want to get a study done, it’s aba.link/csa. I know the link off the top of my head, because I’ve just been talking to a bunch of people about it. I’m sure Patty can put it up too, aba.link/csa. That’s the Cost Seg Authority. They do all of the analysis for free, guys. They’ll tell you what it’s going to save you so you don’t have to pay to have somebody do a bunch of analysis for you. They’ll be able to tell you by looking at the property. They do a great job.
If you want to have that done, I can’t recommend them high enough. We’ve done quite literally, probably close to a thousand studies with them. Here’s an interesting one.
They’ve done over 21,000 studies, and they’ve had a total of 20 audits. There’s a perception sometimes that when you do these advanced strategies that save you money, it causes you to put a red flag on. It’s the opposite guys. It’s almost always the opposite.
Usually, if you do these types of strategies and you use quality studies, you’re doing exactly what you should be doing, you never get harassed at all. The audit rate here is ridiculously low every year.
Eliot: We have the benefit of watching our tax preparation team when they put these returns together, and they get that study from the Cost Seg Authority. There’s a lot of paperwork that goes in there. There’s a lot of backup. No IRS agent wants to dispute all that backup data that goes in there. It’s a good deal.
Toby: We’ll set it up, andersonadvisors/csa or aba.link, either one. If you need the link, Patty’s sending it out. Did Congress vote to move cost segregation to 100%? That’s bonus depreciation. They have not yet, but the house weighs a means. I think it was 40–3 bipartisan support to actually get this thing through. I think it was the Senate passed it or the house passed it, but one body of Congress has passed it. It’s waiting on the next, so hopefully it’s coming soon.
Let’s keep going. “How could I use real estate profits to pay for kids’ college without paying taxes?”
Eliot: The easy call here is pay them out. If it’s in an entity, an LLC, just pay them directly from that business. If it happens to not have that asset protection, you could still just pay them from the business of that rental. Pay them as W-2. If they’re under 18, you won’t have any FICA taxes. That would be the best route.
Toby: Technically, you don’t have withholding if they didn’t have taxes the previous year.
Eliot: Yeah, none of the employment taxes. If you’re paying them less than $13,850 for 2023, the standard deduction for single, there’s not going to be federal income tax. That is a really great way if you’re going to pay the children to go to college. Do it out of a business that’s owned by you, or you and your spouse in a partnership arrangement, and then pay them as W-2. It’s important you pay them as W-2. No employment taxes. If they’re under the federal standard deduction for that year, no income tax.
Toby: For 2024, I think we’re at 14,001 or something.
Eliot: Yeah, it went up. I just don’t remember the total number.
Toby: The standard deduction of the child is under 18. If they’re over 18, then we have a different issue. By the way, I always get asked. What’s the youngest age? It depends on what they can do for your business. If you’re using them for marketing materials, using their image and things like that, you can pay them what you could pay a third party to be a model.
If they’re pushing a broom or doing activities like that, you could pay whatever it would cost you to pay somebody else to do it. We have cases with nine-year-olds, where they’re getting paid a reasonable wage. If you’re paying them through a partnership or a disregarded entity, you don’t have to worry about any of the withholdings or anything like that.
If you are paying them out of a corporation, you still run it through W-2. You could still say, hey, I don’t want to do a bunch of withholdings. As far as the federal, it’s up to how you fill out the W-9, but you have employment taxes, but you’re paying into social security towards their 40 quarters. You’re starting them on the path of qualifying for certain retirement benefits.
I know some of you guys are like, yeah, social security is not going to be there, or you’re going to have to be 80 to qualify by the time they’re done. Yes, I get it. But you would pay them, and you’re still getting a huge tax benefit by doing it. Otherwise, you’re paying tax on that income.
Let’s just say you’re in the highest tax bracket in a state that’s smashing. Let’s say you’re in California, you got 13% state, 37% federal, and you could pay your kid $10,000. You just saved $5000 in taxes. What do you have to pay for that child? You’re paying social security taxes of about 14.1% is what it comes down to. They’re going to get a benefit when they retire, so you just lowered your tax bill significantly on that $10,000. You’re going to save yourself about $3500, which is a nice vacation.
If somebody walked up and said, hey, you employ your kid and I’ll send you on a $3500 vacation, I’d take it. Here in Vegas, that’s like three buffets. God, the prices are going up on the strip. They just see us coming. All right, Super Bowl. It’s going nuts, $1300.
Eliot: Stay away from there.
Toby: Yeah. Stay away from the buffet. Actually, here’s the rule. Don’t walk behind anybody after they’ve left the buffet. Just trust me on that. All right. “Are gifts to clients, vendors, employees, and members tax deductible? If yes, what is the threshold that we can spend on gifts?”
Eliot: This is an exciting part of the tax code. You’re limited to $25 per individual or business.
Toby: It’s been $25.
Eliot: It’s $25, and it’s terrible. It’s not for each gift.
Toby: Is that per day? No, that’s per year if you want to write off a gift. Otherwise, you’re going to have to fit it in another category.
Eliot: You can’t give someone a $25 gift and then a month later give them another $25 gift, but you can give it to unlimited people or other businesses, $25. But it’s lame. It’s terrible, horrible.
Toby: You’d give them a crappy basket. What do you get for $25 nowadays? If you send your customers something worth $25 they’re like…
Eliot: Why’d you even waste the effort? That’s why I picked it, because it’s such a horrible rule. People really don’t believe me when I say it’s a $25 limit, and yet that’s what it is.
Toby: Yes, the wonderful world of the IRS. All right. “Hey, my tax preparer died a few years ago. I have not been able to find someone to help me with my taxes.” Why? What did you do to your preparer? Just kidding. I just wanted to do that. What did you do? Yeah, the part they’re neglecting.
I didn’t want to say it, but my tax bill was too high. That’s where my brain goes immediately. “Can I file 2023 before I file 2021 and 2022, or do I have to file tax returns in order?” Some of you guys are having the same thoughts. Sorry, your tax preparer passed. What’s the answer?
Eliot: The answer here is that there is no order by the IRS. There’s no rule out there that you have to do this return or that return. Often, people will want to do them in order, because there might be effects from those earlier returns by the time we get to the present. But there’s something to be said for if you just want to get that 2023 out there, so you have no more accumulation. You’ve stopped the bleeding on any late fees or penalties and then get back to the earliest as quickly as possible. That’s certainly doable.
Toby: In 2021 and 2022, what if there’s no taxable income? You may not have a requirement to file. You got to look and see what’s been reported. I will probably pull a transcript on you right away. You can go get that for free and see what’s been reported on your social security if you’re having any issues with your data.
As far as the preparer, I’m sorry the preparer passed. We’re losing people in the tax industry. I think we’ve lost 15% of the licensed CPAs in the last two years. It’s going to continue to go up. Hopefully AI helps. Hopefully we figure out immigration a little bit, but we need accounting help for sure, because it’s putting a lot of stress on the industry.
The complexity of the code is not helping. Congress changing things three times a year doesn’t help either. It’s becoming really, really muddy and murky. If you’re not aware, the Tax Cut and Jobs Act that was passed in 2017 expires next year, and then you’re going to have just a complete mess if they don’t extend this.
Eliot: I’m sure they’ll get along and get it all hammered out.
Toby: Sure, yes. What do you guys think the chances are? Give me a percentage chance that Congress is going to be able to figure that one out. I think it will. It’s an election year. Hopefully they’re going to do something positive for the American people.
Eliot: Here’s hoping for that.
Toby: We know that the spending is going crazy. They’re running at a huge deficit. Somebody says 3% chance, you’re being positive.
Eliot: Wow, that’s generous.
Toby: Yeah. I actually think they’re going to get something done. They’ll probably extend it, but man, they make it murky. They make it really tough for everybody, which again, it’s not fun being on the tax advisor side, but it depends. We don’t know, and then they yell at you. Why don’t you know? They don’t have a crystal ball.
Tax and asset protection workshop, I do have a crystal ball for this. We’re doing one on the 3rd, we’re doing one on February 10th, and then we’re doing the live workshop on March 21st–24th in Orlando, Florida. Get out of the cold, come on down, and hang out with us in Orlando. I know the lake next to the hotel where we do the events, there’s a gator out there. If you want to, you can see a gator. That’s actually the truth.
It’s a lot of fun when we get together. It’s just different just being able to see everybody. It’s fun to be able to shake hands and see people eyeball to eyeball. It’s a bunch of really cool people. We’ve been doing these in the last few years in these types of formats, where it’s usually hundreds of folks that are all investors, positive people, a lot of great folks that are just coming out and have been our clients forever.
It’s actually just a really positive experience, so I’d recommend that. If you get a chance, come to a live event. They’re pretty inexpensive, so it’s not about that. It’s about getting together, being around people that are like-minded, trying to make positive changes, and that are investors because it’s a different mindset. If you’re around people that aren’t investors, man, they could be negative.
Investors, they’re fun. They’re always looking for the bright side and the silver lining. Sometimes you don’t know. Then you’re around somebody who says, what about this and this? You’re like, oh my gosh, that would work in my neighborhood too. Hopefully you get some good stuff out of there.
All right, question. “Can you aggregate short-term rentals and long-term rentals together in your portfolio to meet material participation requirements for real estate professional status?”
Eliot: A lot of terms in there, do a little definition here. First of all, STR is short-term rentals. That just means basically, seven days or less on average. There are other categories, but that’s the most common. It’s treated a little bit differently or can be on your return. Then you have your long-term rentals, which is pretty much anything else.
In order for any losses to really hit your return in a favorable manner that they’re ordinary or what we call non-passive losses, in the case of the short-term rental, you need to materially participate in the management of that short-term rental. In the case of a long-term rental, you need to get what we have at the end here, the REP status, real estate professional status. There are some tests there.
Basically, you have to have over 750 hours in a real estate trade or business. You need to materially participate in the management of your rentals. We meet all those boxes, then that can be non-passive. If you’ve got these things that Toby’s been talking about—depreciation, deductions, cost segs, et cetera—that can have a really great positive effect on your return.
The question here being, can you combine them? By themselves as they are, no, they’re two different things. A short-term rental is a different type of business. It’s actually not a rental activity, it’s just a trade or business. We talked about the pizza shop, it’s the same thing as an ordinary business. Long-term rental is a separate part of the code.
What we can do with structuring, by that I mean setting up other entities, you could have a C-corporation. We often use a C-corp. It puts a rental agreement. It rents your short-term rental for a year-long lease. That makes it a long-term rental now, that short-term. The short-term rental activity is happening in your C-corporation.
Now that your short-term rental has effectively a year-long lease with your C-corp, it becomes a long-term rental. We can do something called aggregation, pull all your rental activity together into one big pile, and probably get where you’re looking for your REP status. I know that’s a lot. We need a drawing. There it is.
Toby: Yeah, I just drew it out because it would help. If you are trying to hit real estate professional status, and if you want to look it up, it’s 469(c)(7) of the internal revenue code. It spells out the rule, which is 750 hours, more than 50% of your personal service in real estate trades or businesses, that you materially participate in those trades or businesses, plus you and/or a spouse have to meet the material participation on your investment real estate, not short-term rental, because short-term rental is considered an active business.
If you do that and you want to grab the time, then you do this structure right here. You put the short-term rental, the real estate into an LLC, and you lease it long. It’s a one-year lease to a corp that then becomes the host and rents it out short. If you do not care about REP status and you just want material participation, then you would just keep them separate. You’d still have an entity for the short-term rental. You’re always going to do that, but you would just have it on its own.
This is no different than, as Eliot said, the pizza shop. This is just a trade or business. This is no different than if you were a plumber or anything else. It’s just a short-term rental. Sounds weird, but it is. Seven days or less is an active trade or business. If you materially participate, then the losses can be ordinary.
You could be a doctor, accountant, engineer, teacher, you fill in the blank, any profession that you’re doing full time. If you want to lower your tax bill, and you want losses from your real estate to offset it, the short-term rental is where you go, because that’s ordinary loss as long as you materially participate on that property or properties if you want to combine them.
These two things, short-term rentals and long-term, are very different activities. The IRS is going to say, keep them separate. If you want to create that bridge, we have to intentionally do it by using the structure. That was exciting.
Eliot: Yeah, that’s good stuff, right?
Toby: All right. This is exciting. I’m actually excited. I might have Howard Dean this one. “Our LLC installed an $84,000 solar system on a rental property in 2023. Can we take the 30% energy tax credit and deduct the entire 59,976 basis, which is $84,000 costs minus 50% of the 30% in 2022 using bonus depreciation?” What say you?
Eliot: Quick answer, yes. I did check, $25,200 is correct at 30%.
Toby: What is it?
Eliot: $25,200, that is 30% of $84,000.
Toby: $25,200 is a tax credit. What’s a tax credit?
Eliot: That is a great question right there. We’ve been talking about deductions here all day long. Let’s go back to the tax deduction. That’s going to be a deduction against income, and that’s going to lower taxable income. It lowers your tax rate, but a tax credit is a direct dollar for dollar reduction in your tax liability. Given the choice between a $25,000 tax credit, in other words, $25,000 less than you have to pay versus just a $25,000 deduction, they’re both great, but you’re going to want to have that tax credit.
Toby: Yeah. Here’s the math. I think they just goofed up on their math a little bit, because not only do you get the tax credit. That’s cash. That’s money in your pocket. That $25,000, the IRS is literally dollar for dollar for your taxes owed. It’s like, oh, I get a tax credit for $25,000? Yup. But I financed the solar system. That’s okay. You still get $25,000.
I really didn’t spend that much money. Do I still get the tax credit? Yes, and you get to write it off. The write-off is we take 50% of the tax credit. We have $84,000 minus one-half of the tax credit, and that gives us $71,400 that we get to do depreciation on. Right now we’re at 60%, and assuming it’s going to go up to 100%, it’s going to be $42,840. What you would get in year one, you would get $42,840.
Eliot: Yeah. This was 2023, so they’d still be under 80% though.
Toby: This was 80% of that. All right, and then you still get to depreciate what’s left over five years. Let’s say $71,400 times 0.8. There’s our $57,000. We get a $57,120 deduction. We take $71,400 minus $57,120. That’s $14,000 divided by 5, for lack of a better word, plus another $2800. Right around another $3000. You’re going to be in that $60,000 range for a tax credit plus $60,000 deduction.
That’s why in real estate, some of the solar stuff, that’s a lot of bass. Somebody says, yes, I like my toys guys. I just like to scribble, get bored otherwise. Yeah, I used to try this on crayons and it ruined a lot of computers that way.
What a big benefit. Again, you could be out of pocket almost nothing. Some of these cases, basically you’re paying them out of the electric bill that would’ve been. Depending on the deal that you strike, you may find that you’re out of pocket maybe $5000, and here you get a tax credit of $25,000 plus $60,000. What’s a YouTube super question? Go ahead. Throw it up there.
Troy: Okay, here’s a question, Toby. “If I pay referral fees to other companies or individuals, let’s say over $600 a year, what type of expense would that be? And do I have to file a W-9 for them?”
Toby: I’m paying a third party over $600. You’d have to W-9 them. What type of expense would that be? If it’s a referral fee, it’s probably a marketing fee.
Eliot: Yeah, marketing or consulting, either way.
Toby: Consulting, yeah, one of those. You can either put it under a professional fee or you put it under a marketing expense, but you’re going to get a 100% deduction no matter what.
Troy: I think they’re asking, should they 1099 them? I think the answer to that is yes, and it should be a 1099 miscellaneous box three for other income. It would be my thought there.
Toby: I agree with you 100%. The only thing I would say is it depends on the party. If they’re a corporation, then you don’t have to 1099 them.
Troy: Good point. Always collect a W-9 before you pay anyone. If they are a corporation, you aren’t required to issue a 1099.
Toby: Yup. We like our super YouTubers. That’s awesome. Guys, we’re streaming this on the YouTube channel at the same time, so we don’t see those questions. I want to make sure that we get those folks, too. We have teams on both. By the way, our team kicks absolute tail. They’ve answered almost 200 questions, 182 as we sit right now.
Let me see if I could see all the different people, because we have a whole bunch of people. Arash, Dutch, Jared, Ross, Troy, Patty, and Matthew. We got a ton of people answering questions. I just think they’re rock stars for answering these things, because they’re going rapid fire. You know what most accountants like to do? It depends. And then they’ll never actually answer a dang thing. These guys are answering questions, so I really like that.
Eliot: They go all through the whole show. I’m telling you, they’re typing away. Been there, done that.
Toby: Give them a thumbs up, a heart, or something. We never do that for these guys. Give them something, because they’re just sitting there answering questions all day.
Eliot: They are rapid fire, like you said.
Toby: Yup. We force them to do it, and we don’t feed them. No, they do a great job, except for Matthew. He’s right out here. He could just cut our feet at any time.
All right, let’s go through the last question. “I started a small flight instructing business in 2023 and purchased a plane on 12/23, financed,” Great. That’s awesome. “What depreciation options are there, and what would be the best approach if the income stream will not begin until 6/24?”
Eliot: Just going strictly as this question is written, it sounds like we started the business in 2023. We bought the plane in 2023. Maybe we didn’t have a lot of income, but you did buy it. That’s pretty much considered placed in services for these types of things. It’d be a 2023 asset, and you can do the bonus depreciation we’ve talked about.
What you’d want to do is compare it to the straight line, which I think it’s probably a five or seven-year property, I guess I don’t know off the top of my head. But if you compare the two, you could see what you think your income stream is going to be in 2024 if you wanted to, and you could calculate it out. Another approach would be just take it as a massive loss in 2023, and that loss will carry forward and wipe out income in 2024, 2025, et cetera, depending on how the numbers work out.
Toby: I would say the big issue here is, when is it placed in service? If that plane was placed in service on a business that’s an operating business in 12 of 2023, then you could bonus that 80%, soon to be 100% that year. What is a plane, seven-year property?
Eliot: Yeah, five or seven, I would think. I don’t know for sure.
Toby: I think it’s seven. I wanted to say it’s seven.
Eliot: That sounds as good as any.
Toby: If it’s a bonus, it’s going to be 100%. You’re just going to write it off. I think we had a client that bought an $8 million plus and wrote it all. It’s great as long as you’re using it for business. You’d switch it over to personal and drop below 50% use for business, you have a problem. A lot of times, you’re engaging an aviation leasing company to make sure that it’s being used in business regardless of just your use so that you don’t fall into that trap, so you get that big deduction.
If your income stream is not until 2024 though, that’s the part that worries me. The loss isn’t a big issue. You can grab that loss. If you’re at risk on the financing, if you’re going to get to write that thing off against your active ordinary income, assuming that this is a business that you materially participated in. Otherwise, it would be a fixed asset that is put into service in 2024.
Let’s say you didn’t have the business running yet, it didn’t do anything, and you bought this puppy, it would just be a fixed asset on your book. No different than if you had a rental property, you put into service in 2024, you could write it off then. You’re not in any jeopardy of losing the deduction. The only question is, is it 2023 or 2024?
Eliot: Yup. Depending on the expense of this airplane, you may hit up against the business loss limitation rules.
Toby: Somebody says airplanes can bonus 100% as an exception. Even with the bonus depreciation, they kept the airplane at 100%? I haven’t run across it this year. Last year, we had an airplane bonus. The last time I saw that was this year, so it was for 2022. Really, that’s really cool.
There may be an exception where it’s 100%, then we don’t have to worry about what its useful life is. It’s going to be five or seven. It’s right now. One of those years, you’re probably going to get to write that whole thing off. Thank you, Robin, for clarifying that. We’ll have to take a look and see.
Somebody says, hello, I have missed the full answer for the solar tax credit. Is there a way to get the answer in writing? You’ll see the recording, and you can actually get the recording. There’s a transcript, so you can grab it and do that too. I think we explained that one pretty good if you saw my math. If you need more clarity, just reach out to us, we’ll do that.
I think that’s the last question we have. There are a few questions here. Let’s see. Regarding the short-term and long-term, I’m just going off of the chat, guys. That was on the previous question. If I want to bridge them for the real estate professional, I put the short-term rental on an LLC.
I also have a C-corp that rents short-term rental for a year. Yes, and it could be a C-corp or S-corp or an LLC taxed as either of those, as long as there’s a long lease between the LLC that you own and the business entity that’s operating and acting as the host.
You can lease it, and then you could aggregate it in with your other investments. We’ve been doing that for years. I’ll tell you, honestly, that’s where I was at 90%, probably 5 or 6 years ago when Airbnb started to really explode. From what I was seeing, it was more important to mix it in with all the other investment properties and not separate it out.
What we found over the last two or three years is that especially our high income earners, this is one of the few ways where they can take a property and suck out, just like this airplane is a deduction, like that, so is your real estate when it’s short-term rental. It’s a 39-year property for Airbnb. It’s considered a hotel.
If the average use is seven days or less, so you take how many days it’s rented divided by unique rentals, if I rented it for a hundred days total during the year and I had 30 people, then it’s 3.33 days, that’s less than seven. That’s a business. No different to a plumbing business, pizza business. No difference than if you’re doing consulting.
That is a business and that loss, even if it was only in service for a few weeks, two weeks, or a week. As long as it was placed in service, the property was actually put in service in the tax year, leased out, and you’re the one managing it, doing all the activities, you could actually take that loss against your other income. It’s pretty massive. Especially for high income earners, the tax benefits are pretty attractive.
They’ll do that oftentimes. Keep a property as a short-term rental for a year or two, and then convert it to a long-term rental after they’ve sucked a bunch of the depreciation out and offset other income. It’s really cool. That is fun.
Somebody says, Toby said we are live streaming now, so I wanted to go on there on YouTube. How do I do that? Go to YouTube, and you’ll see there’s always a little live stream. Patty could do it. Hey, there’s my YouTube. Hi, YouTube. If you scroll down, you can see live. It says home, videos, shorts, live. I’m sure you just click on that.
As you can see, there are 760 videos. I’ve been doing this for years, so there are a lot of videos. There’s a lot of content on there, and we’re constantly putting more out. If you’re ever sitting there going, boy, I’d really like to learn more about real estate professional status, or geez, I’d really like to learn more about cost segregation, chances are, there are probably three or four videos on there that do a deep dive into that. You could spend some time there.
Always, we do the Tax and AP events. Again, we have the 3rd, the 10th of February, and then March 21st through the 24th. We’re going to do a deep dive on that. This is the cool one. For the next live event, I’m going to have my buddy Scott Estill out there, former trial attorney with the IRS out of the Illinois office, somebody I’ve worked with extensively to do the tax toolbox. Eliot obviously helped, and our team here helped a lot on that too.
Scott will come out and speak. A really interesting lawyer, because he worked for the IRS, and then we’ve worked together for the last 15–20 years on a lot of different matters. Great person, great guy, a lot of inside knowledge on what actually goes on because his entire practice is being around the tax court and handling stuff. He’ll come out.
We actually did the tax toolbox updates for this year, which are about done and are going to be out. We’ve been doing the final edit. If you purchased a tax toolbox, you don’t have to pay for this, it’s going to be automatically put into your toolbox. It includes all updates. If you don’t know what a tax toolbox is, reach out to Anderson. We’ll show you.
Like a lot of our stuff, it just is a continuous process. You pay for it once, and then we just keep adding more and more to it. This is a complete revamp. Everybody, I don’t care if you bought it 10 years ago, you’re getting the new content just because it’s a lot of fun.
If you have questions between the next two weeks, by all means, reach out at taxtuesday@andersonadvisors.com. You too could be selected for when we do these, read your questions on the air, and answer them. Or visit us at our website, andersonadvisors.com. There’s a ton of content on there guys.
What we are is an educational company with the services to help you implement whatever strategy might benefit you, save you money, keep lawyer snoops and Uncle Sam out of your back pocket, and allow you to create a legacy. We’re not just talking about, hey, I just want to get it to my kids, but actually think beyond that. Think 200 years in the future what your state looks like, what you’re actually creating. If we do it deliberately, it’s not that hard and it’s not very expensive. In fact, it’s a lot cheaper than not doing anything or doing the wrong thing.
Once you realize that, then you’re like, oh, my gosh, why didn’t I do this 10 years ago? That’s a good question to be asking yourself when you’re diving into this, because that’s what it should be like. It’s like, gosh, this makes sense. I understand it, and I understand the value putting it in place. That makes you an awesome client for us because we’re speaking the same language, and we have the same values.
All right, that is it. I see there are still 12 open questions. What I’m going to do is say adieu. Eliot, thank you so much today.
Eliot: Thank you.
Toby: We’ll leave this open. We’ll just mute ourselves and stop the feed or stop the video, but we’ll continue to answer your questions. Guys, if you’re waiting for a question to be answered, don’t leave. Hang on, we will get to it. Otherwise, I will bid you guys farewell and we will see you in two weeks.
