In this episode, Toby Mathis, Esq., and Eliot Thomas, Esq., bring more of their tax knowledge to the masses, answering questions on HSA contributions, employing your children in your business, and keeping your assets in a self-directed IRA. Be sure to check out our FREE virtual events happening this month. Submit your tax question to taxtuesday@andersonadvisors.

Highlights/Topics:

• “For an LLC that opted to be taxed as an escort is it better to not just. the profits and let retained earnings grow on the balance sheet and invest retained earnings in stocks or other investments in the name of the LLC? – the profits are automatically going to come down to hit your return. You’re going to have to pay tax on those
• “I am considering signing up with Anderson and contemplating having you amend the last three years as I don’t think my CPAs or TurboTax gave me all the write-offs that I was eligible for as a real estate investor.I think I may qualify for a greater return, but also don’t want to automatically trigger an audit. – the “triggering an audit” that’s, I think, a really common scare tactic that’s out there…amending is not going to create an audit.
• “Can I continue funding an HSA account if I am no longer employed by the company that offered it but still have the account? Does it make sense to place it into a HSA investment account? – You certainly can continue with that HSA. Even if it’s an employer-sponsored HSA, it is the employee’s property, should they choose to leave.
• “I have a K1 that will be late from the sale of an apartment complex in Georgia. I am a married filing separately tax payer. I will do an extension but still have to pay tax in April How do I know how much to pay without the K1? I Went through a similar sale last tax season and had to pay a late fee due to the late K -1. I’d like to avoid that again.- There is a safe harbor. If you’ve paid in at least 90 % of what will be due during your time period before April 15th,
• “What are the benefits of having children as employees? Are there education expenses eligible for payment by the company? – if kids are paid underneath the standard deduction for that particular year, then there’s no federal income tax on it. There are many benefits to shifting income to your children.
• “If we live in our rental house for two of the prior five years to avoid full taxation on capital gain, take advantage of the $500,000 exemption for married joint-filing, can the remaining amount that we, remaining amount we will pay in taxes be offset? Can the remaining amount we will pay in taxes be offset by losses in our other rental properties? Capital if we qualify as real estate professionals during the year for filing. For example, if we purchase another property, cost seg it can those potential deductions be used to offset the taxes paid on the primary residence sale? – As long as they’re in there for two of the last five years, they are eligible for ownership and use.
• “How long do I need to have a property in service to rent to be able to deduct bonus depreciation from a cost segregation study? – you want to be reasonable, probably a reasonable amount of time, but if it was available for rent. That’s it!
• “My asset is in a self-directed IRA, so when you see SDR at IRA, that means self-directed. I am assuming if I sell it, the money is considered income and I’m taxed on it like any other income. Also, if I use the money from the sale of that property for the purchase of a different property, not kept in the self-directed IRA, can I avoid taxes? What is your suggestion in this type of situation? – there’s a whole lot of misconception going on in this question. So no, we are not taxed on it like any other income. It’s quite the opposite.
• “Just started an ink taxes as C Corp What is an accountable plan? Is it something I need to join before I can get the benefit of it? Can any reimbursement be an expense with my personal name and get reimbursement like health dental vision cell phone, etc Do I need to have my cell phone account in the business name? – an accountable plan just means reimbursement. It’s a fancy IRS term.
• “Does the assignment of beneficial interest in a land trust count as an installment sale for tax purposes? Who’s responsible for the property taxes in such a transaction? – another one with some misunderstanding here.

Resources:

Tax and Asset Protection Events

Anderson Advisors

Toby Mathis YouTube

Toby Mathis TikTok

Clint Coons YouTube

Full Episode Transcript:

Toby: Welcome to Tax Tuesday. We’re going to let everybody pile into the room because gosh knows there’s a line. There’s a virtual line. If you’re watching out there, first off, welcome. This is Tax Tuesday. If you can, just because it’s fun, there’s a way to make a reaction. You can do a thumbs up, a crying face, or all sorts of cool stuff.

React if this is your first Tax Tuesday. Let me know if it’s your first Tax Tuesday. There are a bunch of thumbs. There’s some confetti. It looks like an ice cream cone, and there’s a heart definitely for you. I see Sherry out there. Welcome again. Some of you guys, I know your names and know your faces many times. There are first timers. 

This is what Tax Tuesday is. We’re going to go through, we’re going to answer a bunch of questions, and we’re going to allow you to answer or ask questions. We have a huge staff on right now. Tricia, Jen, Jeff, Jared, Dutch, Amanda, Patty, Matthew, all waiting to answer your questions. You can ask in the Q&A. You can even chat in the chat, and I’ll give you a chance to use that in a second. What we’re going to do is go through about 10. How many questions we got?

Eliot: We got 10.

Toby: Ten questions that Eliot picked from our emails that we get in the two weeks in between these. We get hundreds. We try to answer them all, but then we pick ones that seem to be popping up commonly. We pick the ones with the worst grammar, apparently. Somebody says Q&A says turned off. That’s not very nice. Can somebody turn Q&A on? If not, we will make sure that we get you on chat.

Let’s go over what it is. We always say that we’re bringing tax knowledge to the masses. What we’re trying to do is just demystify this thing called the internal revenue code, which is very, very long and very complicated. You used to think of it like poetry. You had to drink a little bit, then maybe some of it makes sense because gosh knows, Congress wasn’t thinking when they wrote it. They definitely like their own words, and they like making things complicated. For example, they can’t say 14 days or less. What they can say is less than 15 days, which is not very nice. 

Have you guys fixed the Q&A? Try Q&A now. There we go. You can ask live questions in the Q and A. I see it as working, so you can ask away. If you get into things like, hey, can you do my tax return, we’re going to say, no, you need to become a client. But if you say things like, hey, I paid my kids some money last year, what are the rules for having kids as an employee of your organization or things like that, we will absolutely answer. 

You can also email in your questions to taxtuesday@andersonadvisors.com, and we will answer them. Why do we do it for free? I’ve been asking myself that for years.

Eliot: I do it because he does.

Toby: Blame it on Eliot. It’s Eliot’s fault. No, I believe in reaping and sowing. It’s one of our company values that we just believe that you teach and teach. If you guys want to become clients, you could absolutely reach out. And yes, Sherry, because we love you.

If you need to have a very detailed response, we do have a service called Platinum that allows you to talk to our attorneys and our accountants. We literally have a room like this open every day from 9:00 AM to 2:00 PM. But unlike this, we can take you into a private room and have a discussion with you where you’re not being overheard by everybody.

What we do here is we turn off the chat, and we turn off the ability for people to see other people’s chats. In case you say something that’s incriminating, we want to make sure that we get to you. Just kidding, but you don’t want everybody to know your business. 

In that particular setting in Platinum, less than $100 a month, you can talk to the attorneys, accountants, and get all the advice you want. You can go in there daily. If you felt like spending five hours, six hours a day, you could. We don’t restrict it. Five hours a day. We do themes and all stuff. 

The whole idea is that we want to have a little bit of fun, we want to take the fear out of this, and enable you to keep more of your money in your pocket because frankly, our position is it’s better with you better served.

You guys do better things with it. You guys help your families out. You help your communities out. Government’s pretty good at giving it away, but they’re not very efficient, so let’s keep it in your pocket so it’ll be fun.

All right, let’s get into the questions. We’re going to read the questions. If it’s your first time, we go through which questions we will be asked answering so you know, hey, this is really important to me, I want to stick for that. If you just look at it and you say like, oh, man, there are only three here that are relevant, you know which three are coming, in that way you can make sure you pay attention when those happen. 

Let’s get into it. Are you ready?

Eliot: Yup. Good to go.

Toby: All right. “For an LLC that opted to be taxed as an S-corp, is it better to not distribute the profits, let retained earnings grow on the balance sheet, and invest retained earnings in stocks or other investments in the name of the LLC?” I love the fact that they keep saying retained earnings. Somebody’s been watching YouTube. We’ll answer that one.

“I am considering signing up with Anderson and contemplating having you amend the last three years as I don’t think my CPAs or TurboTax gave me all the write-offs that I was eligible for TurboTax. I don’t think they gave me all the write-offs that I was eligible for as a real estate investor.” I’m pretty sure you’re right. “I think I may qualify for a greater return, but also don’t want to automatically trigger an audit.” Good question, and we’ll go through that. I’m assuming you had a really good reason for picking that question.

Eliot: Yup.

Toby: “Can I continue funding an HSA account if I am no longer employed by the company that offered it, but still have the account? Does it make sense to place it into an HSA investment account?” Good question and interesting answers on those ones. I know HSA’s a lot of confusion, so we’ll get into that.

“I have a K-1 that will be late from the sale of an apartment complex in Georgia. I am a married-filing-separately taxpayer. I will do an extension but still have to pay tax in April. How do I know how much to pay without the K-1? I went through a similar sale last tax season and had to pay a late fee due to the late K-1. I’d like to avoid that again.” Great question, and we’ll go through that.

“What are the benefits of having children as employees? Are there education expenses eligible for payment by the company?” Good question.

“If we live in our rental house for two of the prior five years to avoid full taxation on capital gain, take advantage of the $500,000 exemption for married joint filing, can the remaining amount we will pay in taxes be offset by losses in our other rental properties IF we qualify as real estate professionals during the year for filing?” Good question. I’m going to break this one into pieces, and I’m going to let you break it into pieces. 

“Example, if we purchase another property and cost seg it, can those potential deductions be used to offset the taxes paid on the primary residence sale?” Interesting. Somebody’s thinking. Good.

“How long do I need to have a property in service to rent to be able to deduct bonus depreciation from a cost segregation study?” Really good question. Surprising answer, by the way.

“My asset is in a self-directed IRA.” When you see SDR IRA, that means self-directed. “I am assuming if I sell it, the money is considered income, and I’m taxed on it like any other income. Also, if I use the money from the sale of that property for the purchase of a different property not kept in the self-directed IRA, can I avoid taxes? What is your suggestion in this type of situation?” Great questions. I’m liking these. They’re long but excellent.

All right, last couple. “I just started an Inc taxed as C-corp. What is an accountable plan? Is it something I need to join before I can get the benefit of it? Can any reimbursement be expensed with my personal name and get reimbursement like health, dental, vision, cell phone, et cetera? Do I need to have my cell phone account in the business name?” I actually think a lot of people have this question and just are afraid to ask. I think it’s a good one.

“Hi, Toby. Does the assignment of beneficial interest in a land trust count as an installment sale for tax purposes? Who’s responsible for the property taxes in such a transaction?” Really good question. You’ll like it.

Eliot: Some confusion out there, I think.

Toby: Just a tad, you got it. This is what we’re here for. This is where it’s fun. If everybody thinks they already know the answers, I don’t know. We got to dig into them, but I’m always surprised at how there are always nuances. Every time I think I know something that I’m realizing that I don’t, I bring Eliot along to make me look stupid once in a while. He’s good at that.

Eliot: It happened never.

Toby: Yeah, it does happen. Happens a lot. Look at some of these pictures to my face.

Eliot: Green loves those.

Toby: Yeah, there’s a reason we do it. Apparently, people click on it. If you like this type of thing and you want to see the replays especially, join our YouTube channels. There are two of them—myself and my partner, Clint. You’ll see the replays I believe if you are clicking on mine. 

I think we have over 793 videos. If you’re really bored, you can just start busting through them. It’s not as good as Game of Thrones, maybe. Actually, somebody gave me a thumbs up. See, if somebody has watched all 793 and they’re like, man, this is great. 

Also, we have two tax and asset protection events coming up on April 6th and April 13th. They’re coming up, get more. See, all I have to do is ask for it. This is awesome. But we’re doing the virtual events.

We just had a live event in Orlando. If you were in Orlando or with us in Orlando at the live event this weekend, give me a thumbs up. Let me know who those folks are out there. I told him that if they put Orlando, and they sent it to taxtuesdays@andersonadvisors.con, you would answer. We would pick them. We’re going to give you guys some special attention.

Look at that. There are a bunch of you guys. We had a little bit of fun. We had four days. Four days, four days. It got intense, but we had a lot of fun. I got to meet a lot of you all over and over again. It’s like, hey, I’ve been watching on YouTube. It’s like, great, this is awesome.

When’s the next one? We have one coming up in June in Texas. Don’t ask me why we’re doing it in June in Texas other than we want you to melt. We’re really worried about you guys not sweating enough so we said, let’s do it in June. I think we’re in Dallas or something like that. Maybe Patty knows, maybe somebody knows. I think it’s coming up.

Maybe I’m not supposed to announce that until we have it nailed. Dallas. We’re in Dallas at the end of June. We want to make sure it’s really hot. No, I’m just kidding. We’re inside. We have air conditioning there and flushing toilets.

Eliot: Unlike our office.

Toby: What?

Eliot: We had all the problems with our plumbing here at the rainbow office while these guys were down in Orlando.

Toby: Couldn’t flush the toilet?

Eliot: Yeah, you didn’t hear about any of that?

Toby: No, I did not. Sounds like a really crappy situation.

Eliot: Yeah, it was.

Toby: I don’t have the buttons anymore. My buttons are gone. Otherwise, I would press a button and it would go […]. All right. If you want to watch the replay, go on and click this link, aba.link/youtube. If you subscribe, you’ll get the replays. Somebody says, are we doing Orange County? We’re talking about it. Would love to. I was just there in Terranea with DLA Piper doing a tax event.

Yes, I like to go to tax events too. I was like, this would be really fun. It was really beautiful there. I’d love to do that with you all. Can you give me a thumbs up if you’d like us to do a live event and like Southern California? Right in their noses, yes.

Yes, San Diego. We used to do those. We used to do those. All right, let’s get into this fun stuff. There are a lot of thumbs. Somebody says Hawaii. We do Hawaii too. Somebody says, New York, New Jersey.

Eliot: Maybe California franchise.

Toby: Wait, I’m going to give you the look for New York right now, guys, like any business owner. Yeah, Los Angeles, please. Yes. Come to San Diego, I’ll pick you up from the airport. See, all right. Patty’s on it. She’s going to be like, sure, we have an event. Where’s your Airbnb?

All right. “For an LLC that opt to be taxed as an S-corp, is it better to not distribute the profits, let the retained earnings grow on the balance sheet, and invest retained earnings in stocks or other investments in the name of the LLC?”

Eliot: A little bit of a trick to this. As far as knowing your terms, the profits are automatically going to come down and hit your return. You’re going to have to pay tax on those because it’s a flow-through entity as an S-corporation. If we had $100 of profits, keeping cash in or not really doesn’t matter. They’re still going to pay taxes on it from that aspect.

You could. If you left the cash in though, and you had enough other cash somewhere to pay your taxes from that, you may not have to pay a reasonable wage on your S-corporation because that is determined by the cash that you take out, whether or not you have to pay a reasonable wage. There’d be one aspect there.

Further getting into the investments and things like that, we may want to consider, would you want to have those investments in an S-corp? Because maybe the nature of your S-corp is something you’re a doctor. High chance of litigation. You may not want to have investments in there. We’d like to keep investments outside of our S-corporation. 

It would be one of those that depends situation by situation, but more than likely, you’re probably not going to want to do your investments in that same S-corp. Again, the profits, at least from a tax perspective, will flow through anyway, so you may want to just take the cash out.

Toby: I think you just hit on some really important issues. First off, when you see LLC taxed as an S-corp, just know that an LLC doesn’t exist to the IRS. They don’t know what it is. You have to tell them, hey, it’s either a C-corp, S-corp, partnership, ignore it, called disregarded entity. An LLC is not a tax treatment, so it’s an S-corp as far as the IRS is concerned.

As Eliot just said, it doesn’t matter whether you distribute the money or not, it’s taxable to you. Retained earnings is something you hear about with C-corps where they pay tax at 21% flat. If it’s like the global intangible tax, it might be 13% depending on what you’re doing. But you’ll hear them say, hey, but the corporation’s holding it.

Amazon’s famous for doing this, Microsoft’s famous for doing this, Apple’s, they have billions of dollars that they retain, and they don’t pay out as dividends to their shareholders. That’s usually what you think of when you see retained earnings.

Here, profits are flowing down to the shareholder. The only issue about paying out that money that has an impact on taxes, because if we leave the money in or leave the money out, it doesn’t impact our taxes. It’s what Eliot just nailed, which was, you don’t have to take a reasonable salary out of an S-corp unless you’re distributing money.

This is misunderstood by a lot of accountants. They always say you have to take a reasonable salary out of an S-corp no matter what. It’s like, no, that’s not the rule. It’s only if you have distributions do you have to take a reasonable salary. If you’re in the beginning stages of your business, you make $100,000, and you’re like, oh, man, I had to take a salary, I had to go through that whole rigmarole and do withholding, no, actually you don’t if you’re going to keep the money in there to grow your business.

The flip side of that is now the money’s in the business. We had this happen about three months ago. A client was running a property management business, and they had seven figures of earnings that were still inside the entity when they got sued. It was somebody trying to take a piece out of them and trying to go after all of their other tenants, trying to organize a class action against it, and there was a pile of money sitting there.

If that happens to you, it’s too late. You move the money out, you’re subject to voidable transaction or fraudulent conveyance rules. If you’re in a high risk, like you mentioned, doctor, but really any business—it could be plumbing, it could be the pizza shop—if you have cash, get it out of that S-corp. Get used to getting it out of that S-corp, unless you really do need all of that money to continue to grow the business. Anything else on that one?

Eliot: No, I think that’s it.

Toby: We’re still getting suggestions on where to go. Somebody says Palm Springs, Palm Desert. Because you didn’t melt enough in Dallas, you’re like, let’s do Palm Springs. I used to have a place in Palm Springs. I love the area, Palm Desert.

Somebody said Mexico, they want to do Mexico. Playa del Carmen. I actually gave a talk on a beach in Playa del Carmen once. I kid you not, the transportation was we took a cruise out of Miami and went down to Playa del Carmen, and it was with an IRS attorney. We both gave a talk in a little beach house. You can actually ride off your transportation, you don’t have to get there in a plane. Anyway, that’s an aside, but that’s really funny. Anyway, it was not the best talk in the world because…

Eliot: Too much sun?

Toby: Sun, margaritas, and taxes. Who the heck goes to a beach to listen to guys talk about taxes? It wasn’t super well thought out, but it was great for me.

All right. “I’m considering signing up with Anderson and contemplating having you amend the last three years as I don’t think my CPA’s TurboTax gave me all the write-offs that I was eligible for as a real estate investor. I think I may qualify for a greater return, but I don’t want to automatically trigger an audit. What do you have there?”

Eliot: Getting right to the heart of the observation, it wasn’t really a question, but the trigger in an audit is I think a really common scare tactic that’s out there or just ignorance. Amending is not going to create an audit. It does give the IRS a chance to look at it again, but if there’s a legitimate deduction there, you have nothing to fear.

I wouldn’t worry about triggering an audit just because I want to amend. As far as the three years, it is the limit of how far you can go back with amending. You are getting to that time area where we might not be able to go much further. You won’t want to think it out because as time goes by, you’ll start to drop off in those three years and maybe not be able to amend any benefit.

As far as having Anderson, we’re happy. We want to help however we can. We don’t typically go back and do prior returns because it’s not to your benefit, usually. If you have a CPA that did some returns, maybe we can review your returns to show that, hey, maybe this was missed or that was missed, and then you can go back to that CPA and they can do it. They already have it in your system, it’s going to be perhaps cheaper for you. It does depend situation by situation.

We’ve had some that were so erroneous, that we took it under. We went back. It cost a little bit more, but we did the full return. Usually, you’re better off going back to your current CPA, then we get that all sorted out, and then often the client will come over to our tax prep. Just some things. But the big thing here is I wouldn’t worry about an audit.

Toby: I’ve never seen any data support amendments triggering audits. Really, there’s a point system that the IRS uses on a return when things are sometimes out of the ordinary. 

For example, if you have a home office, I’m pretty sure that that’s one of the higher point items because we see more people get audited as sole proprietors taking that home office deduction to just about anything else.

The earned income tax credit, I guess it’s 13 per thousand versus 2 per thousand of audits. You’re significantly 600% more likely to be audited if you take the earned income tax credit. We’ve never seen that type of data, nor have we experienced it in our practice for having amendments. I’ve never, ever, ever seen an increase in audit from amending somebody’s return to make it accurate.

I would not stop that. I would say, that should not be a consideration. Having a return done that’s in your favor that will save you money is what I’d be looking at. The only thing I’d be doing in the analysis I’d be doing is, is the juice worth the squeeze? How much can I save?

Let’s say you brought it here. A team looked at it and said, well, you missed this, this, and this, but we can do it this year and catch up. For example, under 4d(1), we can grab missed depreciation and make a cost seg election or something like that. We can grab all the stuff they missed. You may not need to amend. We could still get the benefit, but we’re just going to push it all into 2024 or into 2023.

If it saves you $5000 or $6000 and it’s a simple fix, like Eliot said, you go back to the original preparer. They should have a file in their computer, or if you use TurboTax, you should have something there, whatever your login was, and you can make that change. Voila, you end up getting that benefit.

Eliot: A good job on the statistics there on the audit risk. Nobody knows it better than this guy.

Toby: It’s publication. They publish the data every year.

Eliot: You remember it.

Toby: Yeah, I spent a lot of time looking at it. We also know that we do over 10,000 returns here a year with very, very few audits. We had a long stretch with none. It was weird in the early 2000s when everybody was screaming, audit, audit, audit. It’s like we didn’t see them, so we thought maybe they just screwed up our address or something. Maybe they forgot about us.

Eliot: But you got the audit.

Toby: We got a random on it. We got the employer random on it, and 50,000 of us got this random audit where they went through all of your W-2, W-9, W-4s, and your 1099s. They went through every single one for a few midsize employers. They thought that they were going to get some really good data, and we had two where we couldn’t prove the lack of a 1099 because of a corporation, because we can prove the corporations still existed, but it was $750 and $2000. We were like, fine.

Eliot: Here’s $800, go away.

Toby: Yeah. It wasn’t even that, that was the inclusion. It was $300, and it’s less than an hour. They spent a week in our office too. They just come in and…

Eliot: Joined the AC.

Toby: Yeah, that’s basically it. You shouldn’t fear the audits by the way. Most of them are correspondence, which means you’re just sending in information about 20% of the audits. Very few audits anyway are in person. If you have an accountant, you’re not showing up anyway, nor should you. Don’t give them a free interview.

All right, next one. “Can I continue funding an HSA if I am no longer employed by the company that offered it, but still have the account? Does it make sense to place it into an HSA investment account?” What do you say?

Eliot: You certainly can continue with that HSA. You may want to move it out of that particular one that was under the employee.

Toby: Whose account is it?

Eliot: Yeah, I was just talking with Toby before the show about this. Even if it’s an employee or sponsored HSA, it actually is the employees, should they choose to leave. It’s something, for a long time, I didn’t know. I relatively recently figured that out certainly before I got to this question though. 

Anyway, it’s yours. Feel free to keep it, but you might want to move it into another one of your HSAs. You can actually have unlimited HSAs, we just can’t put more in a year collectively than whatever the limits are for that particular year.

Toby: Just over $4000 for an individual, about $8000 in 2024. For last year, $7750 and around $3850 for an individual. You’re just trying to make sure that you are putting that money aside. You get a deduction for it. You don’t pay tax on the growth.

I have one in Fidelity. I’m not saying where you should do it, I just happened to do that. It was super easy to open and I just fund it every year. There’s no income limitation on it. It’s actually really simple.

This is the cool part, you don’t have to use it right now. You could have all sorts of reimbursements, but you just let it grow. You can go back. If it’s 10 years from now, you could go back and reimburse all those expenses that were medical, dental, vision, those types of expenses. I think it’s covered all, but health expenses for sure. You don’t pay tax to any of the growth. As long as you use it for qualified health, you don’t pay any tax on it. 

You’re getting a deduction and you never have to include the growth as taxable income or the money you take out as taxable income. If you hit 65, you can even convert it to a Roth. There, I think you pay 10%, but these things are a huge tax advantage.

If you have an employer and you have an HSA, it’s your HSA. You leave that, you could roll it into another HSA, or you could just keep the same one. I just wouldn’t let your employer dictate what investments are in it. A lot of times, they’re being very conservative. They’ll give you five flavors of mutual funds, and you’re just not going to see a lot of success doing that. If you want to manage it yourself, just open up a HSA at any major brokerage house, roll the funds in it, and do some ETFs, do some stock investing. Do some covered calls, you can go nuts in there.

If you don’t know who Peter Thiel is, he started PayPal with Elon. He has a Roth IRA with (I think) $4 billion in it from the PayPal stock. None of it was taxable, and he’ll never pay tax on any of that money. HSA’s a great place to invest and to get a nice tax deduction.

As long as you use it for health, even if it’s just reimbursing, again, if you’re not getting a benefit on your Schedule A for health expenses because you have the 10% adjusted gross income limit, is it 10% or 7.5% this year?

Eliot: 7.5%, I believe still.

Toby: 7.5%? Whatever it is. You have a limit on what I can write off. Maybe one of the other accountants can confirm whether it’s 7.5% or 10%. For some reason, I have 10% stuck in my head.

Eliot: It was 10% for the longest time during Covid, I think. I can’t remember if they did or not. I haven’t seen on the returns.

Toby: A lot of folks don’t spend enough on their medical that exceeds the AGI limit for them to actually use Schedule A as opposed to using their standard deduction. They take their standard deduction, and they’re not getting any benefit for those expenses. 

Here, if you put it in your HSA, you can use that immediately. You’ve written it off. There’s a deduction for putting it in the HSA, and then you’re using it to reimburse your medical expenses. It’s great, it works.

Eliot: Triple threat as you call it many times.

Toby: Yup, it is a triple threat. It’s like, boom.

All right. “I have a K-1 that will be late from the sale of an apartment complex in Georgia. I am a married-filing-separately taxpayer. I will do an extension, but still have to pay tax in April. How do I know how much to pay without the K-1? I went through a similar sale last tax season and had to pay a late fee due to the late K-1. I’d like to avoid that again.” All right. What do you do?

Eliot: A popular topic that we run into a lot this time of the year with deadlines and things like that. There is a safe harbor. If you’ve paid in at least 90% of what will be due during your time period before April 15th, if you’ve paid 100% of your prior tax liability, if you’re under AGI of $150,000, or if your AGI is over $150,000, you pay $110%, that’s going to help stop the bleeding as far as any taxes and things like that. That’s called the safe harbor.

Should this come up? It’s unfortunate with these K-1s, many times, this is why Toby’s always talking about doing extensions, we try and really broadcast that because these K-1s are always being corrected or not coming at all on time as you’ve witnessed here. 

Outside of that, if you can just get some extra estimate of what you think the gain might be, you might want to put a little bit more in, but at least make the safe harbor amounts. If you can get those in, that will help reduce any possible penalties and things like that.

We do have underpayment, failure to pay, failure to file, and there’s interest on all of those. There are a lot of different things that the government hits us with, but certainly at least trying to get that safe harbor would be a first step and then anything else extra you could get in there.

Toby: You have three ways that they’re going to get you. If I did this early in the year and I had a large taxable event, technically you owed the tax, the estimated payment in the first quarter, maybe the second quarter depending on when the sale took place, you have an underpayment penalty that could come there. What is that 8%?

Eliot: The interest is 8%.

Toby: Interest is 8%, so ouch. Then you have failure to pay which is, hey, I filed, but I didn’t pay my tax. You have the, I failed to file and I failed to pay, which is you could be penalized up to 25% of your tax liability. You have these things that are sticking out at you.

Here you are, you’re getting a K-1, chances are there’s no tax inclusion to you because chances are, again, you’re getting a K-1 every year. You’re not the one that sold the building, it’s the syndication. They’re going to give you this K-1 and you’re like, shoot, I have no idea how big it’s going to be, and I can’t read the tea leaves. So then the safe harbor that Eliot is talking about is probably your best bet, which is 110% if you’re over $150,000.

The easiest thing to do is look at what your tax liability was last year, 110% of that amount. You don’t have to worry about the underpayment charges. You still may have to potentially worry about if you knew this occurred early on in the year that there was an underpayment on a quarterly basis, but I doubt that in this scenario. I’ve never seen that. I’ve seen it when people actually sold their own property, but I don’t think you’re looking at that here. Do you ever see that?

Eliot: I haven’t one way or another on this, I just hear the stories from clients from previous years. Usually, we get them out there paying that safe harbor.

Toby: The quarterly payments, and then you pay your safe harbor. You do that, you’ll never have an issue. You don’t do that, then there are potential interest payments. Not huge penalties. Again, these aren’t huge. It was a great one.

Eliot: Except for the IRS charged interest at 8% because they do that off the ground base rate of interest and they add 3%, so it’s getting up there.

Toby: It used to be 6%, and then you were like, yeah, whatever, I’d rather keep the money. Now you’re like, 8%, ahh.

Eliot: We’re going to get a little more of a pinch to it.

Toby: At the end of the day, you want to see whether you can guesstimate the amount. But in the worst case scenario, you’re over $150,000 in adjusted gross income. Make sure that you are paying 110% of the previous year to avoid the underpayment penalties. Make sure you file an extension so you avoid the failure to file. penalties. You do that, you’ll be good, even if you don’t have the K-1. Not uncommon. It’s actually fairly common in real estate investing.

It’s tough to get these numbers out on time, especially if companies are making decisions about cost segregation, how to write things off, or have any issues with their books of trying to get a determinative position to take. Sometimes they’ll come back and amend anyway.

At least my suggestion to you for sure is file an extension, pay the amount of tax that you owe as best as you can determine, or make sure that you’re in that safe harbor to the extent humanly possible. That lets you have the summer for people to do whatever they have to do. It may be where you could actually exert influence. 

For example, this is an apartment that was put into service last year. It may be that you’re having a discussion with them, whether they do cost segregation. They can do that all the way up until they file their tax return plus extensions.

If you can, you may be able to get them to do that if it makes a big difference on your taxes. Chances are, those types of decisions will have an impact on a lot of the investors. 

Somebody says, what if you’ve not filed your previous year for safe harbor? Then you have a problem. It’s 90% of this year, that’s your other safe harbor. If you don’t have last year to go off of, is it 90% of the current year or is it 100%?

Eliot: Yeah, 90%.

Toby: 90% of the tax is actually owed.

Eliot: 100% of the previous, but which we don’t have here is 110% over $150,000 and 90% of the current.

Toby: There are two safe harbors, three technically, because you have one that scales up at the AGI, but you have the last year’s tax or this year’s tax, 90% of this year or 100% of last year. Unless you’re over $150,000 of adjusted gross income, in which case it’s 110%. 

All right. Enough of that, gets lots of joy. Figure out what they sold it for and do the best calculation you can. You’ll be able to see on your K-1 what percentage interest and say, hey, what does it look like profit wise? I get it, it’s tough.

“What are the benefits of having children as employees? Are there educational expenses eligible for payment by the company?”

Eliot: Some of the benefits is you have somebody to do something. That’s what my parents did to me. But they can pay me. If I’m paid underneath the standard deduction for that particular year, then there’s no federal income tax on it. We might run into employment taxes, but that can be worked around as well.

There are benefits as far as shifting income to begin with. That child can then take that money. We often talk about putting it into a Roth IRA, and then that can grow tax-free. They can use that for college down the line or something like that, whatever they want to.

As far as education expenses, if we’re paying the child to learn about the job they’re already doing, let’s say you have a C-corporation, child’s doing the bookkeeping or something like that, they go off to school, off to college to learn about accounting, you can take a deduction or reimbursement of those courses directly related to that employment that the child had. 

We can’t use it if they’re trying to learn something like marketing or something like that, unless they were already doing that. There are some education benefits there possibly once they start paying for those types of classes.

Toby: And the big one is the kids have a lower tax bracket. Whenever you see kids get hired by a company, it’s because they have their standard deduction. They get the first $14,000 they don’t pay tax on. If they’re under 18, you don’t have to do withholding and social security. Technically, if they’ve never paid tax before they’re exempt, they could file exempt on their W-4.

At the end of the day, there are no withholdings whatsoever. You’re literally paying the child $14,000 a year, and they’re paying zero tax. You say, I want to write off some of their expenses. It’s like having them pay for their expenses. You’ll be a signer on their account anyway if they’re under the age of majority, so you can certainly direct those. That’s usually what you’re seeing.

There are things like cell phones, computers. If you have a child, let’s say they’re good at marketing, then like Eliot said, have them take some marketing classes in college. Maybe it was part of their degree, still okay, you could reimburse that 100%.

But if they’re working on the computer, then reimburse the computer. If they’re driving around and working with your properties, reimburse the mileage. If they have a space dedicated in their apartment or in a house that they’re living in, then you have an administrative office for the home and things like that. You start reimbursing those things as well, that become deductible. There are big benefits. What if they’re adult children?

Eliot: You can still pay them. There’s nothing against that. They could still be in a lower tax bracket, so you might be getting that break. Maybe they’re an adult, but still in school of some sort, again, maybe they have no income. They’d be, again, under the center deduction. That’s not a problem at all, paying adult children. You just want to take it into consideration.

Toby: And parents and siblings.

Eliot: Absolutely, any family or friends for that matter.

Toby: The age limit for not having to do with the withholding is 18, I believe. Under 18, you do not have to worry about if it’s family, but it also can’t be a corporation. In a corporation, you have to do the withholding. You just run them through payroll, and they’re paying in towards social security.

In theory, they’ll get that money back at some point, unless social security goes the way of the dinosaurs. We’ll see. They’re trying to make social security benefits non-taxable. I think it’s called the you earned it or something like that.

Eliot: Unicorn is what we call it.

Toby: Unicorn? Yeah. It was re-upped in February. I think I did a video on it, where they’re talking about making the social security benefits non-taxable again. We’ll see if they get that, but they were going to pay for it by raising social security taxes, the old age, disability, and survivors insurance costs, the 12.4%. They were talking about raising that and making it hitting income above $250,000 with it. Right now, it phases out at $168,000 and they wanted to come back in on the rich folk, let’s get them. We’ll see if there’s a video.

If you want to watch about social security benefits, you can certainly do that. A lot of folks get mad because you’re not getting a deduction for it and then you have to pay tax on it. It seems like a double dip by the government, but it’s social security. Did I answer that one? Yeah.

All right, here’s an interesting one. “If we live in our rental house for two of the prior five years to avoid full taxation on taxable gain, take advantage of the $5000 exemption for married filing jointly or married joint filing, can the remaining amount we will pay in taxes be offset by losses in our other rental properties IF we qualify as real estate professionals during the year for filing? 

Example, if we purchase another property and cost seg it, can those potential deductions be used to offset the taxes paid on the primary residence sale?” What do you think?

Eliot: A lot packed in here. That’s why I picked it because there are a lot of things we could tear apart here. First of all, this two of five years, what we’re talking about is a section 121, the exclusion on the sale of your primary residence. 

They started out as a rental house. So how’s that work, Eliot, when we have a rental house and we have a primary residency? They’re going to move into their rental house. As long as they’re in there two of the last five years, they are eligible for ownership and use, then they’re eligible for at least some of that $500,000.

There are other complications to that as far as it was a rental first, and we call that non-qualified use. It wasn’t being used as your primary residence. We take a fraction of that to determine how much of the $500,000 can actually take.

Toby: Can I stop you right there?

Eliot: Absolutely.

Toby: If it’s a rental property and then you move into it as a residence, then you have a period of non-qualified use. But if it’s your primary residence, and it’s not just I lived in it, it was your primary residence for two of the last five years, but you rent it. I lived in it for two years, rented it for three, sold it, that’s okay. There’s no disqualified use.

It’s a weird rule. If it starts off as a rental and then you think, oh, I’ll go live in it for two years, it’s not how it works. If you had a rental property for 10 years and then you moved in it for two years, they’re going to use that fraction.

Eliot: 80% of your $500,000 wouldn’t be allowed on the capital.

Toby: Yeah, it’s a weird thing. What they do is they say the exemption, again, it’s funky, but you’re saying, here’s my period of disqualified use. You’re going to use a portion of the $500,000. It might wipe out the entire tax bill if it’s a small enough tax bill, but still it’s proportionate. It’s less than 20% under that circumstance. Maybe they have an $80,000 capital gain exclusion and you’d be like, yay. But there are some other ideas I got here. You finish up.

Eliot: We have that going on. Would it be enough that we’ll be able to offset the rest of our taxes if we qualify as a real estate professional status? That’s if you do enough of managing your own rentals and things like that during the year. It’s possible, because we go on here with an example that you got a new rental, you did a cost seg, maybe bonus depreciation, whatever’s left of it, 40% or 60%.

Toby: You’d never use it on primary sale. You’d use it to offset your highest taxes. When you’re a real estate professional, that means that you don’t have passive loss. You have ordinary loss, and it can offset whatever the highest bracket. If you’re in the 37% federal tax bracket, that’s what we use.

We wouldn’t use it against your house because first off, you might not have capital gains. You’re going to have recapture for sure because you use it as a rental house. Recapture cannot be offset with the 121 exclusion. Only capital gains can. But recapture is capped at 25%. I’m looking at a 37% tax rate, 25% tax rate. I’m going after the big one. That’s number one.

If you’re a real estate professional, all bets are off. But you don’t technically have to be a real estate professional to still get a deduction against your gain on the sale of this type of property.

Eliot: Right. If you purchased the other one, you’re going to have a type of capital loss.

Toby: You’d have passive capital. The nature of the activity flows through when you’re selling an activity. If you have capital gains and it’s passive, it’s considered passive capital gains. It’s weird. A lot of accountants are probably going, wait a second, go look it up. It’s passive capital gains.

If I have passive losses from other businesses in which I do not materially participate, rental activities, or syndication, which I’m a limited partner or an LLC member that’s not participating so it’s passive, those passive losses will offset your passive capital gains. They will absolutely offset. Not to mention if you have losses from that rental house that you weren’t able to use, those are released as well. What is that, 4797? Is that the right one?

Eliot: The release of Powell’s? We track on the 8582.

Toby: Okay, 8582. But you’re releasing it. I think there’s another. It becomes an ordinary loss as well against your gain. It gets used against the property, and then you can use it against other things.

Eliot: There are a lot of possibilities here to work with.

Toby: And I’m going to throw one more at you just to be annoying. You have a 1031 exchange staring you right in the face. If you keep that as a rental property, you don’t pay any tax so long as you buy more rental property. If you have a rental house and you’re like, hey, I’m thinking about moving into it, then it becomes a residence and not an investment property. I can’t 1031 it.

Let’s say I move into it, it’s not my primary residence, and I think that I’m going to get this 121 exclusion, you’re probably not. It has to be your primary residence, it can’t just be a residence. Let’s just say that you qualified as a primary residence. You’re going to have a period of disqualified use. I may not get that big of a benefit, but what I gave up by doing that was an 1031 exchange where I just go buy more property.

A lot of times, we’re going the opposite. We have somebody who’s been living in a house, and they have a huge amount of gain. They live in San Francisco, Orange County, someplace on the East coast, Savannah, whatever. They’ve had this property go up in value. They’re facing down $1.5–$2 million worth of gain. They’re like, man, this sucks, this 121 exclusion is only going to offset a part of it. Then we say, well, hold on, you have three years to sell it once you move out to still get that capital gain exclusion.

Turn it into a rental, then 1031 it. You get the 121 exclusion first, step up your basis, and then that rolls into the next property. It actually works out just great. Technically, you could 1031 it into a property that eventually you make into your residents. As long as it wasn’t your residence when you bought it, you rent it for six months to a year or something like that to make sure that it’s definitely an investment property, and then you could literally move into it.

The tax code contemplates that. You just have a five-year bar from using the 121 exclusion on that property, that’s it. There’s so much in this question. This is one of those questions that’s like an onion. The more you dig into it, it’s got a lot of different levels there.

Sometimes rather than tail wagging dog, dog should wag tail. Let’s have a discussion as to what you really want to accomplish so that we can give you the right path. If something makes a big difference, you could say, you know what, Eliot? I’m willing to do X or Y to save $100,000 of tax.

Eliot: It’s worth a consult, not just trying to sell our services.

Toby: You want to have somebody actually know what they’re doing. The problem is 90% of the accounts would get lost once you went right into the investment field. The real estate professional, they’d be like, what are you, an agent? Can’t some of these exclusions be allowed after the property is sold? Of course. It just depends on whether you meet the rule. You could sell a house and you’re like, I had no idea. Sometimes it’s how you classify it.

The other part is, let’s say that I sold something and it’s passive gain, and I’m like, shoot, what do I do? Sometimes it’s just buying another property. Or if you already have a property, this gets more fun. I’ve done this so I can tell you exactly what you do. You have some capital gain or some passive income. You’re like, shoot, you find out in June or July that you have a tax liability. We would do this all the time because Clint and I are knuckleheads.

Sometimes we don’t look at the P&L, and you don’t really know what it is. We’re like, okay, let’s run our numbers. We have an idea, but here’s an extra chunk of money. You’re like, shoot, that’s going to be taxed as ordinary income. What could I do? You could still do cost segregations for last year all the way up until you file your tax return. 

In October, it’s not uncommon for Eliot, myself, whomever to be looking at people going, here’s the few things we could still do to keep you from paying the tax for last year.

Eliot: Let’s call up Erik.

Toby: Yeah, we call up Erik Oliver over there and say, can you run me a cost seg analysis? We’ve done it on October 15th and you’re like, make the election.

Eliot: We’ve been in consults, and Toby reaches right out where the clients they’re talking to us. By the end of the consult, Erik’s already gotten back with numbers. I remember that.

Toby: They’ve done 26,000 cost seg reports in the last few years. They know their stuff. They’ll know by the region, the area. They’ll be able to use comps to be able to get a pretty good idea. They tend to estimate conservatively, but they get them back quickly. Just so you know, 26,000 reports, 20 audits is what we’re looking at at this point.

Eliot: That’s a good percentage.

Toby: Very good percentage. It’s not something that puts a radar on you. If you do it right, you tend to go underneath the radar. Nobody wants to mess with you if you’re doing things right. They want to mess with you if you’re just doing things loosey-goosey and you don’t have professionals.

Somebody says I missed the definition, passive gain. Capital gains from a passive activity. Residential rental property, for example. Commercial rental property. If I have rental property, and it meets the definition of passive because it’s longer than seven days or longer than 30 with substantial services, there’s a whole bunch of different tests. 

But just think. Most people just know rental properties. Okay, it’s passive. If you have capital gains from that activity, that’s passive capital gains, you could still offset passive capital gains with passive losses from your other activities, so you could cost seg a property.

Actually, it has a name. It’s called a lazy man’s 1031, where you sell a property, and then you were so lazy you didn’t 1031 it. What do you do? You cost seg a new property, or you buy another property that we accelerate the depreciation on so we can offset the gain from the property we just sold.

Who’s the guy that does all those cost segs again? It’s actually Cost Seg Authority. Patty has a link. I think it’s andersonadvisors.com/csa. I’m sure Patty will send you guys the link. Been working with them for years. They do free analysis if you go through that link. You don’t have to do anything with them. Literally, I use a seven to one. If I spend a dollar and it saves me $7, I’ll do it. It’s the juice worth the squeeze.

Make sure that your tax professionals are proficient with it, and they understand what they’re looking at. I’ve had so many times where people go to their tax professional, and then they don’t use the cost seg. Even in the first year, you don’t even have to make a tax election. You get to take it right away. I screw that up sometimes too, so I’m a knucklehead. 

All right, enough on that. We can spend all day on that. We could probably spend an hour on that one question. Can we use CSA for primary residence sale? No. It has to be an investment property for cost seg because it has to be depreciable, and you can only depreciate properties if they’re used for investment. 

This is the perfect question for that. “How long do I need to have a property in service to rent to be able to deduct bonus depreciation from a cost seg study?” What do you say?

Eliot: There isn’t any time. Theoretically, one minute would be enough. One day would be enough. Reality is that you want it to be probably a reasonable amount of time, but there isn’t any. It’s just that you had the intent to put it in service, it was available for rent, that’s it.

Toby: That’s it. By the way, it doesn’t have to be rented. It just has to be available. The day that I put the for rent sign, it’s available, and it could be rented that day, it’s in service if it’s December.

I’m going to give you guys a real life scenario. Somebody bought an Airbnb. They put it in service the last two weeks of December. They rented it three times, average use was four days. That’s not even a rental activity. That is a trade or business. 

They cost seg’d the property, and all of that bonus depreciation. They were in a year with 100% bonus depreciation. Right now, we’re looking at 60%. There is legislation that’s passed the house to bring it back to 100%. It’s sitting with the Senate right now, and those guys can’t get out of their own way. If they do anything, it’ll be right before the election.

They take that big loss, and it offsets all their other income because they materially participated in the Airbnb. Before you lose your mind and say, there’s no way, my accountant said this is not a thing, it’s absolutely a thing. It is because in the regs, if you rent a house for seven days or less—average use—it is not an investment activity. It is a trade or business.

The only question is, is it active? Are you participating in it and subject to material participation rules? Are you providing substantial services to make that trigger employment taxes like social security? That’s the only question. Is it passive? I’m just a passive business owner, in which case it’s passive, it’s a trade or business that’s creating passive losses. That’s all it is.

It’s in the regs, it’s in the tax code. There are tons of case law on it. This is not new, but if you put that puppy into service in that last month or two, all you doctors or all you high income people should really consider, hey, maybe I should buy an Airbnb the end of every year, self-manage it so you don’t have to worry about material participation, if you manage it yourself, you automatically qualify, and you could take those losses. You offset your W-2 income with it. We know who you’re talking about, the brain surgeon. How much was that house right before the end of the year?

Eliot: For some reason, I want to say $800,000.

Toby: It was right around $800,000, but the deduction was about $250,000.

Eliot: Yeah.

Toby: How much did he save tax wise?

Eliot: I think that was the one we called Erik up.

Toby: Yeah, I think it was. You could do it every year.

Eliot: Yeah, 37% on $200,000. That’s $74,000 plus half of that. You’re looking north of $100,000 right there in cash.

Toby: Yup, funny. Somebody says, how do I join a group for $100 a month? It’s not $100 a month, it’s less than that. We call it our platinum membership. I just say it’s less than $100 because I don’t want to say the numbers.

If you want to learn more about that or anything else, come to the Tax and Asset Protection Workshop. We’re going to go over land trusts, LLCs, corporations. Clint does a great job, or Brent Nagy. I’ve been grabbing a client of mine for the last 10 years or ours. The last 10 years, Brent worked with Rich Dad. He was handpicked by Robert Kiyosaki, a really great investor, and he’s a pilot.

If I could get him to commit to a day, he’ll come out and teach it too just cause he gets it from the client side. He was just a real estate investor. He had a band, that’s what he did. He learned to be a real estate investor, and he’s completely independent. Killing it in real estate, but he did everything we teach from the client side. When he talks, he’s like, I was right where you were at. It might’ve been 13–14 years ago, but I know exactly what you’re going through.

He comes in and teaches. Sometimes it’s Clint, sometimes it’s Brent, and it usually is my sorry mug teaching the tax. I’m trying to get Amanda to do it. I’m thinking like, it’s more fun. Let’s get everybody involved.

“My asset is in a self-directed IRA. I’m assuming if I sell it, the money is considered income, and I’m taxed on it like any other income.” Can we just stop right there? Let’s just kill that assumption.

Eliot: There’s a whole lot of misconception going on in this question. You have an asset in a self-directed IRA. Fine. If you sell it, is it taxable? No, you can sell anything you want within the IRA, and the money just goes back in there. There’s no tax event going on when you’re in a retirement plan such as that. 

So no, we are not taxed on it like any other income. It’s quite the opposite. You can do that. You just get more cash in there, then you go out and get your other investment within the IRA, and it will continue to grow tax free.

Toby: That’s it. It’s an exempt entity. As long as it’s in there, the only time you have to worry about tax in a self-directed IRA is if you have unrelated debt financed income, which in English means you have a loan on the property that’s the creating the income, in which case, then a portion of it may be subject to tax because you use leverage. That same rule does not apply to a solo 401(k) or a 401(k).

If you’re investing, it helps us to know if you’re talking to us, we’re like, hey, you know what? If you do it over here, there’s a small tax. You do it over here, there’s not. Do it over here. There’s no income. 

Now let’s answer the rest. “Also, if I use the money from the sale on that property for the purchase of a different property, not kept in the self-directed IRA, can I avoid taxes?” What is your suggestion in this situation?

Eliot: Now, what we’ve done is we sold that property there. We want to take the cash out. Now we have a taxable event. Can we do things out to offset outside? Yes, but know that that will be taxed, and we’re not going to be able to do anything on that particular transaction. Tax will be paid, unless we find other things such as you go out and you get maybe one of those short-term rentals we just spent…

Toby: Create loss to offset. You’re saying, hey, I want to distribute the money. You have the penalties, depending on what type of IRA. It doesn’t say Roth IRA, so I’m going to assume that this is a traditional 10% penalty plus your tax. If we can make it low enough, we’re good. Or if you convert it over to a Roth, that’s another way, but then you’re still in the plan.

I wouldn’t get it out of the plan, honestly. It’s good to have it in the plan. You’re going to end up paying tax on it, but it might be 20, 30 years from now. Let it grow. The answer is don’t take it out unless you want to incur a tax. But if you’re going to incur a tax, minimize it by using deductions from other activities to offset it.

We have this all the time, where somebody has money in a defined benefit plan, an IRA, a SEP IRA, a simple IRA, a 401(k), a 457, or whatever it is. They had a really bad year, or they had a Black Swan loss event. Maybe they qualified as a real estate professional, they accelerated a bunch of depreciation into one year, and they ended up with a $500,000 loss. 

They’re like, I could carry it forward or let’s create $500,000 of income by taking money out of an IRA or rolling it into a Roth, in which case, that’s a very wise decision to do that. I would probably say keep it in a plan, but make it a Roth rather than take it out and use it individually.

Somebody says, but don’t you need to pay for all the repairs with the money from the self-directed IRA, and all the rental income has to go back into the self-directed IRA? Yes. You cannot pick up a hammer and do work. That’s your personal services, making the asset more valuable. You can’t do it in an IRA or a 401(k). You’re a disqualified part, you can’t do that.

Patty, I’m going to give you a heads up. Do you think you could find the link to my YouTube page? It’s actually just my main page, but I’d like to make sure everybody understands that they can get a free estate planning starter kit to do the emergency binder. I’m throwing that at you. I think we have two or three more questions, so I just want to make sure you have that link, and I’ll go to it for the end. 

Hey, guys, because you’re sticking with us, I want to give you guys something. I will give you that when Patty gets us that link, but we have a few more questions to go through.

Eliot: They’ve already done 180 questions.

Toby: They’ve answered 177, plus there are 9 more. There are guys who are absolutely killing it. I got Arash, Amanda, Patty, Matthew, Jared, Jeff, Jen, Trish, probably more, Dutch, all answering questions, guys. These are tax attorneys, CPAs, and EAs. These guys are just killing it, and you’re not having to pay for it.

Somebody says, why do you do that? Because I had to save up my first and only paid consult with a CPA where it was demoralizing. It cost me $300 and it was in 1997. Still remember it. I had to save up to meet with the accountant who made me feel like an idiot. That’s why I said, I’m going to learn this stuff because I don’t want to feel like an idiot.

I did not appreciate that. I did not appreciate somebody taking the money that I saved up for. I didn’t have any money. I was not a wealthy person. They took that money and I was like, no, you shouldn’t have to do that. You should be able to get the answers. People shouldn’t hit you. They should answer your questions first, and then you can decide whether or not to engage them. I would never ever engage that guy the way he made me feel. It was horrible.

All right. “I just started an Inc taxed as a C-corp.” He just has a regular C-corp. “What is an accountable plan? Is it something I need to join before I can get a benefit of it? Can any reimbursement be expensed with my personal name and get reimbursement, for example like health, dental, vision, and cell phone. Do I need to have a cell phone account in the business name?”

Eliot: A very common question within this little one here, so I picked it. What is an accountable plan? It just means reimbursement. It’s a fancy IRS term that means reimbursement. You personally pay for something with your own money on behalf of the corporation.

Toby: Like this.

Eliot: Like that.

Toby: I have my cell phone, and I pay for it personally.

Eliot: You’re just simply getting reimbursed for that by the corporation because you used it for the corporation business as an accountable plan.

Toby: As long as they get a benefit. An accountable plan could be any written agreement, where the company agrees to reimburse you for expenses you incur on its behalf for its benefit.

Eliot: It doesn’t have to specifically say accountable plan above it, but you probably want to have a meeting and moralize it in some written doc.

Toby: We do it in all of our documents as a matter of course. If you’ve ever done an LLC taxed as an S- or a C-corp, it has to be a corporation, guys, taxed as a corp. It can’t be done through a partnership or a sole proprietorship. In order to be reimbursed, you need to be an employee of the organization.

Eliot: Exactly. Just saying that there is reimbursement, that’s sufficient right there. It doesn’t have to be all fancy, although nice documents are out there saying, hey, I got an accountable plan.

Toby: It’s who, what, where, when, why. The easiest one is, who was it that I paid? Why did I pay it? What was the purpose? When was it? How much was it? Any other facts and circumstances? Why was it beneficial to the employer?

These are easy. Hey, my employer says to me, you need to be available to do real estate deals and answer questions all the time. Somebody says, I need to trade my LLC for a corp. No. We can make a corporation tax election for your LLC. Your LLC doesn’t exist to the IRS. It’s like a vessel. You get to tell the IRS what it is. You can just say, hey, that’s a corp, hey, that’s an S-corp, hey, that’s a partnership. Ignore it, it’s invisible and tax the owner. There’s all that fun stuff.

Patty, I’ll give them that in just a second. I’ll give them the link. I’ll tell you when to give them the link. It’ll be fun. We’re going to keep you guys on a little bit, but we will give it up. She just did it anyway. I need my button. I need my button for Patty. No, I’m not going to boo you. You did a great job. Anyway, I’ll explain what that is. Patty’s already throwing it out there. She’s like, yeah, let’s give the candy out.

Eliot: As far as it being in the business name, no. The phone would be in your name because you’re the one paying for it personally, and then you turn it in for reimbursement. You typically wouldn’t. If you’re going to have it reimbursed, you wouldn’t have it in the business name.

Toby: Absolutely, it doesn’t have to be you. If you’re doing the health, dental, and vision reimbursement, that’s called a health reimbursement plan, it has to be a C-corp. It could be a non-profit, it could be an LLC taxed as a C-corp. It can’t be an S-corp. S-, when they pay for health insurance or health expenses, it’s treated as wages to the individual. We don’t want to be in that situation.

C-corps become your best friend when you have a lot of medical expenses, and that includes for dependents. If Eliot was my dependent, let’s say he was my parent, he was my sibling or something, but he qualifies as my dependent, I’m caring for him, and it’s $25,000–$30,000 a year—this is something we live with, we see these, it’s not uncommon for our clients—I can reimburse that entire amount out of a C-corp. It has to have income, but I get to write it off, so side gigs become very lucrative.

I have cancer and have crazy medical bills. Exactly. I’m sorry you’re going through that. Unless you go over 7.5% of your adjusted gross income, then you can write it off on your Schedule A and still most stuff isn’t covered, this just lets us do it 100%. The health reimbursement plan out of a C-corp becomes really good. We do have clients that are doing that, where it is $25,000, $30,000, or $40,000 a year. It works.

Last question. “Hi, Toby. Does the assignment of beneficial interest in a land trust count as an installment sale for tax purposes? Who’s responsible for property taxes in such a transaction?” What do you think?

Eliot: Just like our last question, a lot of misunderstanding here. When you take a property you put it into what we call a grantor trust, a land trust, it’s not a taxable event, at least federal income tax. There’s certainly not an installment sale. We have no sale going on at all here. There might be a transfer tax in some crazy states like Pennsylvania. Is that where we run into a lot of problems?

Toby: Yeah, we don’t like Pennsylvania. They hit you for a 3% transfer tax, but it’s not a sale. Here’s an easy one. Let’s say it’s down in Florida. If I put it into an LLC first off and I have a loan against it, I’m going to owe doc stamp fees. I’m going to get taxed. If I do a land trust, I do not. So we like the land trust.

If I sell the beneficial interest, so I own a property, let’s say it’s 123 Main Street. Toby Mathis, trustee, and I sell the beneficial interest to Eliot, I can do an installment sale. It’s under Section 453. I could choose to recognize that income over a long period of time.

Depreciation, I recapture in year one. Capital gains and return basis is spread out upon receipt in the year that it’s received. I could do that though by selling the beneficial interest. But just me, Toby, putting a property into a land trust does not create a sale.

I think Pennsylvania is the only one that I know of on the land trust where they are like, no, we want you to pay a transfer tax, but that’s something completely different. In Clark County where I’m sitting right now, where we’re sitting right now in Las Vegas, if I put property into an LLC, I don’t pay any tax. If I take it out, I do. If I put it into a land trust, I don’t pay any transfer tax. But if I take it out, I don’t pay any transfer tax either.

In this county, we always use land trust because we don’t want to trigger it. Florida is another one. Florida, you don’t want those doc stamps. If we’re in Tennessee, we want to make sure that we meet the FONCE (Family-Owned Non-Corporate Entity) exclusion, so that we don’t have any excise taxes. 

There are all these little nuances that are triggered when you’re doing these types of transfers, which is why you work with somebody who actually knows what they’re doing so they can check and say, hey, by the way, this is how you want to do it to avoid a nasty surprise.

We see the folks get the nasty surprises all the time. They come to us and go, what do we do? It’s like you fire the party that did the nasty surprise, and you don’t do it again. Here’s how you do it. It’s like one of those things. There’s a little time bomb set up here and there, and you just want to make sure you’re not stepping on them. That’s always fun when we get into those.

All right. This is where I was going to say, if you guys go to my YouTube, the very first video—I put it up there—there is an emergency binder. I’m just going to say two things on this because I’ve seen it come up repeatedly now. Everybody needs an emergency binder. It’s not what you think. This isn’t a will, this isn’t a living trust.

These are instructions should something happen to you, about how somebody can access everything from your social media, understand what your bills are, understand what your wishes are for your funeral burial. If you gave service to our country and the armed services, you have nuances on how to receive benefits. 

Also, you’re entitled to certain honors so that they want to make sure they get, plus civilians don’t always understand the nomenclature that you use and the verbiage that you use. You can actually help your loved ones by writing it out a little bit for them. That’s an emergency binder.

There are also things like who’s your doctor, who’s your dentist, who’s going to care for your pets? If you have minor children, who are their friends, what do they like to do? It seems so weird, but we’ve had it over the last three or four years over and over again. I’ve had two friends lose their lives unexpectedly in their thirties and these last two years, and successful people leaving behind a lot of uncertainty that’s easy to fix. 

I created an emergency binder. You can absolutely go there. It’s free. There’s not a secret, hey, it’s $10 or this, that. It’s absolutely free. Download about 82 pages. You’re going to say, what’s 82 pages? Go through it and you’ll see what I mean.

Don’t worry, you’re not going to write all your passwords in the binder. If somebody finds your binder, you print it out, and they’re going to have access to your entire life. You take that password sheet, you’ll see that it’s numerical and that there’s no way that they could figure it out without having both documents. You take that password sheet and you put it in a safe, you give it to your lawyer, you give it to a trusted advisor, or you hide it somewhere and let your family know where it is.

In an emergency, it seems so weird just being able to get into your Facebook and let people know what’s going on. It makes a world of difference. I’m thinking about Brent Moorhead that we just lost. His daughter, it was like about two weeks before she could get in, get access, and let the world know of what had happened. You’re just looking at it saying, hey, let’s make it easier on the people behind us.

Again, there’s no cost to it. Why do we do it at no cost? Because you should do it, and I don’t want there to be a barrier. It’s the right thing to do. Hopefully you do that. You still should have a will or a living trust. I’m going to say a living trust because I hate probate, and I hate seeing what it does to families, but let’s make this really simple.

Let’s just agree. Maybe this year we’re going to actually put some things in writing. Print it out and hand write it out, or you could fill in the forms online, whatever floats your boat. It’s not super difficult. If you just took it and just did a little piece, get a three-ring binder, put it in there, say, hey, in case of an emergency, look right here. 

Where can the binder be found, it’s a free link. Patty just shared it. It’s on my YouTube. It’s the first video that actually starts talking to you. I do that once in a while. I put a video. It says, estate planning starter kit. That’s it. Watch the video, fill it out. I have a video that actually walks you through how to complete it so you know what all the sections are. It’ll take you about an hour. Do it for your loved ones because man, I’ve just seen so much anxiety and stress caused by people not doing some basic things, even if they do their trust.

You don’t want people to be sitting there going, gosh, darn it, what did Eliot want? How can I honor him? Or things like shoot, who are Eliot’s friends? Who should I be calling? Who should I invite? You want to have that stuff, right? You guys have all had to go through it, I’m sure, with their parents, somebody, or a sibling. It’s absolutely free.

Speaking of free, also our tax and asset protection events are absolutely free. You can get to those on our website at any time. We do them just about every other week or every week so you can learn about the different types of entities and how they work. You can always ask us questions. Just go to Tax Tuesday or email taxtuesday@andersonadvisors.com. Eliot has to read all those.

Eliot: I don’t have to. I love it. It’s a lot of fun. Remember, put the Orlando mentioned that you were at.

Toby: If you were in Orlando, just put I was in Orlando, and you get to the top of the pile. Everybody else can answer, ask questions.

Eliot: Certainly get additional consideration.

Toby: Yeah, we’ll definitely be pulling those ones for the next few weeks and do it. taxtuesday@andersonadvisors.com. Go to our website at andersonadvisors.com. In the interim, you got two weeks off, so we will see you in two weeks.

As always, we appreciate you coming on. There are 13 open questions. There are over 235 questions that our folks have answered in writing. If you are waiting on an answer, just hang tight. What we will do is we will say adieu and bid you blessings for the next two weeks, and then we will stop broadcasting the video, but we will keep this open until your questions are answered.

If you’re waiting on an answer, do not worry. We’re not going to kick you out into the cold. Our folks will stay on and answer those questions. Big old thank you to Amanda, Arash, Dutch, Patty, Matthew, Isaiah I know is floating around out there, Jared, Jeff, Jennifer, Phipps, who have been with us forever, Tricia. Thank you guys for answering all those questions.

It’s easy to get to sit here, and I can have a conversation with Eliot. These guys are sitting there just nailing away and answering questions. I see the questions. These are not simple questions that people ask. I could never get an answer from my accountant. We’ll do our very best to give you a straight answer and give you some direction. You put that into the Q&A. Anything else?

Eliot: No. Thank you.

Toby: All right, guys, we will see you in two weeks. We’ll continue to answer your questions. Email us in. Give us some good questions. Use good grammar, though. Thanks for watching. Click the link so you can join us live and get your question answered by myself and my tax team.