Welcome to another episode (#197) of the Anderson Advisors Tax Tuesday show. Host Toby Mathis, Esq., joins our regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, to help answer your questions.
On today’s episode, Eliot and Toby answer listener inquiries, including the requirements and tax implications for selling your home to a relative in installments, how to minimize taxes on profits from crypto-trading, and the pros and cons of investing in stocks within a Roth or Regular IRA/401K.
If you have a tax-related question for us, submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- “Is there a tax ramification of selling my personal home to my daughter via an installment sale? I have lived in the home for more than two years as a primary residence. Will I be able to still use their section 121 exclusion, even though I’m selling to a related party?” – You can sell to your daughter and still be eligible, provided we meet all the other boxes…You can sell to a related party, but you have to recognize all the gain up front.
- “I’m considering taking a small salary from my stock trading business. It’s a dual LLC Partnership, which means a C-corp and a partnership through Anderson later this year if the C-corp ends up with taxable income. What are the tradeoffs of deferring that into a 401(k), both positives and negatives like income, payroll taxes, and benefit of paying those for Social Security calculation, et cetera?” – As Toby always says, this is a calculate, calculate, calculate moment. If you take it out as salary, then one consideration—there are a lot of different variables here—is your personal tax rate below 21%?
- “For our C-corp, we’re aware that cleaning services of our personal residence can be deducted from our corporate taxes.” It can? Well get into that. “Would the total expense of cleaning be a write-off, or would only a portion of the total expense be a write-off since the entire house is not used for business? Would lawn services be treated the same way?” – if you are using part of it as a home office deduction or administrative office reimbursement deduction, either way, you can throw in an element for the cleaning…
- “When starting my Infinity Investing journey, should I start purchasing stocks inside of a type of retirement tax-deferred account of some sort, or should it be outside of that in order to use it for leverage or some real estate investing later?” – Here’s the easy rule. If you’re in a higher tax bracket than you will be when you retire, defer it. If you are in a lower tax bracket now than you will be when you retire, then put it in a Roth.
- “I have been learning and experimenting with earning dollars through crypto trading. Can you please tell me how to minimize taxes with profits earned through crypto platforms?” – we do the same trading partnership that we talked about earlier. Set up a partnership, put the account into that partnership.
- “My California CPA said that regardless of what type of entity I put my California rental property in, California will still want to get the $800 franchise tax board fee.” The Board of Equalization fee. That’s the minimum fee they charge. “Would that be true even with a Wyoming Statutory Trust?” – Chief Counsel’s Office has already said it’s treated as a business trust, and it’s not taxable. It’s not subject to the $800 a year, period, full stop.
- “Does a cash-out refi adjust my basis and multifamily apartments? If not, how can we step up in basis before I sell if I have a lot of equity and depreciation already taken?” – Generally speaking, a refi, all you’ve done is you’ve changed your equity in your house into cash. You’re just changing asset to asset. That doesn’t change your depreciable basis in that property.
- “How does the Corporate Transparency Act impact the timing of real estate investment decisions from a tax efficiency perspective?” – It doesn’t have any impact on your taxes whatsoever. This has nothing to do with taxes at all. I just wanted to get cleared out there for those who are listening.
- “In creating a living trust, is it necessary to pay capital gains tax on real estate assets as they are transferred into the trust?” – This is really simple too. There’s no taxable transaction moving assets into a living trust. It’s a revocable grantor trust. You haven’t done anything in the way of taxes.
- “I have carried a $600,000 loss since 2011. I am a real estate professional with an S-corp. Is there an alternate way to use that? I can’t live long enough at the $20,000–$25,000 max deduction.” – You need passive income. You need lots of passive income to wipe out that passive loss. You want to recognize that passive income. You probably don’t want to be a real estate professional.
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. Hey, Eliot.
Eliot: Hello. Good to be here again.
Toby: Eliot Thomas. He’s the head of our tax advisers. Also, oftentimes he’s teaching the Tax Tuesdays in my stead or Jeff’s. Welcome back, first off.
Eliot: Thank you. Good to be back.
Toby: I like your flowers. I don’t know if anybody can see them.
Eliot: Thank you. We got the Lego flowers here.
Toby: Is that Lego flowers? Plastic’s better than nothing. All right, we are bringing tax knowledge to the masses. Let’s just get into exactly what the rules are. If you’ve never been to a Tax Tuesday, you’re in for a treat. If you’ve been here before, you know the drill.
You can ask questions via the Q&A feature of Zoom. You can make comments via the chat. The distinction between those two is if you have a question that you want answered by a tax professional or one of our staff, put it in the Q&A.
If you’re making a general comment like, gee, Eliot, you look good today. You can put it in the chat. If you want to say, where are you from? By all means, put it in that chat and say, hey, what’s going on? Hey, I’m in Honolulu, Hawaii. I wish I was, but I’m not.
You can always put that in if that’s where you’re at. Just tell us where you’re rolling. I see Clermont, Florida. I see a lot of hello, hello. You are back there, Sherri. Somebody else says I’m in Hawaii. There we go, Brandon.
The whole idea here is to give you guys a bunch of content and answer your tax questions. We don’t charge, but we have a whole bunch of tax professionals, including Eliot here, but also Dana, Dutch, Jared, Kurt, Ross, Tanya, Troy, and even Patty. […] on. She’s not a tax professional, but she can answer questions. There are some folks that say, I’m from San Antonio, sunny Arizona. Only 103 degrees today, but it’s a dry heat. That’s what we all say in Vegas, but it’s dry just like fire.
Eliot: It’s even drier in Arizona, though.
Toby: If you have a tax question, in the meantime, if you have one during the two weeks between when we do the Tax Tuesdays, by all means, taxtuesday@andersonadvisors. Shoot it on, and we’ll get you to answer. There’s somebody from Seattle. We got Snellville, Georgia. We got people all over the place.
We already see questions coming in, so you could ask a question. If you ask somebody that’s too specific to your situation, like we’re not just giving general advice, but we’re actually advising you, we’re going to ask you to become a client. You could do that by becoming a platinum client. You can ask all the legal questions and tax questions you want to your heart’s content in the realm of business, asset protection, tax planning, even legacy planning.
The whole idea is that it’s supposed to be fast, fun, and a little bit educational. We record these, and we put them on YouTube. I’ll share with you my YouTube channel here in a little bit where you can see the recordings. I think we’re over how many?
Eliot: We’re at 197, I believe.
Toby: We’re coming across 200. I was wondering whether we crossed 100, but I remember doing the centennial a few years ago. We’ve been doing these for a while. We’re planning to keep on doing it.
Let’s talk about the questions we’re going to be answering today. I’m going to read these out, and then we’re going to answer them in a little bit, but I’m just going to go over what the questions are so you have an idea what’s coming up today.
All right. “Is there a tax ramification of selling my personal home to my daughter via an installment sale? I have lived in the home for more than two years as a primary residence. Will I be able to still use their section 121 exclusion, even though I’m selling to a related party?” We’ll go over that.
“I’m considering taking a small salary from my stock trading business. It’s a dual LLC Partnership, which means a C-corp and a partnership through Anderson later this year if the C-corp ends up with taxable income. What are the tradeoffs of deferring that into a 401(k), both positives and negatives like income, payroll taxes, and benefit of paying those for Social Security calculation, et cetera?” We’ll answer that.
“For our C-corp, we’re aware that cleaning services of our personal residence can be deducted from our corporate taxes.” It can? Well get into that. “Would the total expense of cleaning be a write-off, or would only a portion of the total expense be a write-off since the entire house is not used for business? Would lawn services be treated the same way?” Great question, and we’ll get to that. There are actually answers that people might be surprised by.
“When starting my Infinity Investing journey, should I start purchasing stocks inside of a type of retirement tax-deferred account of some sort, or should it be outside of that in order to use it for leverage or some real estate investing later?” Great question. Tax-wise, what makes better sense? We’ll break that one down from the tax standpoint and another standpoint as well.
“I have been learning and experimenting with earning dollars through crypto trading. Can you please tell me how to minimize taxes with profits earned through crypto platforms?” Good question, and we’ll hit it.
“My California CPA said that regardless of what type of entity I put my California rental property in, California will still want to get the $800 franchise tax board fee.” The Board of Equalization fee. That’s the minimum fee they charge. “Would that be true even with a Wyoming Statutory Trust?” Great question, which we will answer.
“Does a cash-out refi adjust my basis and multifamily apartments? If not, how can we step up in basis before I sell if I have a lot of equity and depreciation already taken?”
“How does the Corporate Transparency Act impact the timing of real estate investment decisions from a tax efficiency perspective?” Odd question, and we’ll get to it.
“In creating a living trust, is it necessary to pay capital gains tax on real estate assets as they are transferred into the trust?” We’ll knock that one out, too.
“I have carried a $600,000 loss since 2011. I am a real estate professional with an S-corp. Is there an alternate way to use that? I can’t live long enough at the $20,000–$25,000 max deduction.” Interesting questions today, and we’re going to get through all of them.
Toby: If you guys want to see the videos of other Tax Tuesdays that have occurred, we put the topics in, and it will say Tax Tuesday on the thumbnail on my YouTube, which you can pop into. I would welcome you to subscribe and click that bell so that you get notified. I think I do about three videos a week on tax and asset protection topics, including Tax Tuesdays.
Tax Tuesdays or every other Tuesday, so every other Tuesday or every other week, you’re going to get the recording. If you’re not able to watch live or you’re not able to stay for the entire visit, you can certainly pop on here and get the replay. By all means, it’s free. There is a lot of information on there. Let me go back here just for a second. How many videos? Only 579,000 videos at this point, so we just started.
All right, “Is there a tax ramification of selling my personal home to my daughter via installment sale? I have lived in the home for more than two years as a primary residence. Will I be able to use the section 121 exclusion even though I’m selling to a related party?” What do you say?
Eliot: All right. The mere fact that we’re selling to a related party does not impact the 121 use.
Toby: What is the 121?
Eliot: Good point. What is 121? 121 is a code section number. It is what allows you to exclude some gain on the sale of your primary residence, provided you meet certain circumstances, which basically called the two-year use and knowing two-year use of your personal property within the last five years. You can exclude up to a quarter of a million if single or $500,000 married filing joint.
Toby: Let me make sure I stop you there. If I live in a home as my primary residence 24 of the last 60 months, then I can avoid capital gains tax of $250,000 of gain if I’m single, and if I married, up to $500,000.
Eliot: Exactly right.
Toby: What this individual is doing—just call them parent, and they’re selling to their daughter—they want the house that they’ve lived in as a primary residence, and they want to sell it to a relative and still get the capital gain exclusion. Number two, they want to do it on an installment sale. The number one question is, can they do that?
Eliot: They can. If you ever look into the code there, not that anybody would want to do this in their free time, but in the 121 section, there is a part where they do make reference to related parties. But that’s not what’s going on here. That’s a different issue going on that I won’t get into, but you can sell to a related party. You can sell to your daughter and still be eligible, provided we meet all the other boxes, two years of use as a primary residence and ownership for the last two years of five years, so you’re still eligible up to that point. We’re good there.
Toby: Now, they want to do an installment sale. Let’s just talk about what an installment sale is. I’m recognizing income in more than one tax year. I’m selling it, and I’m recognizing income. Let’s say they carry back a note, and they get paid over 10 years to their daughter. In theory, you’re recognizing that income over 10 years.
Your capital gains, you’re recognizing over 10 years, return a basis over 10 years. You have to charge interest, federal AFR rates at a minimum, which are right around 4% or 5%. You’re going to have interest income, capital gains, and return a basis, which is not taxable. Now, I’m still trying to say, hey, I want to exclude that gain from 121. Can you do that?
Eliot: It depends how you look at it. One is not allowed to defer gain on an installment sale when it’s to a related party, which we do have here. Now, also that related party becomes a potential issue. However, as we just talked about, if there’s some gain, maybe if you’re single, and you’re under a quarter of a million in gain, you can still—
Toby: Let’s discuss that for a quick second. 453, there’s a provision on related parties. If they sell it within two years, you have to recognize the gain, but I’m able to sell to a related party.
Eliot: You can sell to a related party, but you have to recognize all the gain up front, the capital gain. You’re not allowed to take a 10-year note when it’s to a related party and just recognize a little bit of gain over time.
Toby: Are you sure of that?
Eliot: Yeah.
Toby: All right.
Eliot: It’s from the publication.
Toby: Okay, maybe it’s in a publication. I know that that was the rule, but I thought they switched it up when they changed the 121 last time. If I go there, there’s actually a related party section if they sell it within two years.
Let’s assume that you’re correct. You probably want to opt out of the 453 (the installment sale) anyway. Let’s just think about this. If, ordinarily, I’m doing an installment sale, it’s to spread out the tax hit. If there is no tax hit because I have a capital gain exclusion, then why would I spread that out over a period of years? I would just say, this is what you do when you sell, for example, to an S-corp. If I was selling my house to an S-corp under installment methodology, I would opt out of the installment method, and I would recognize it on year one.
Eliot: Correct. We’re really doing the same thing. As long as our gain is underneath, whichever exclusion route—$250,000 or $500,000—really, it’s no harm to go ahead and recognize all that because you’ll offset it, and then the child can still pay you overtime. You’re allowed to receive the payments over time. It’s just that you have to recognize the gain.
Toby: Again, let’s say that I bought my house. If you’re out there, if you’re the individual that wrote this question, could you put it in chat that you’re out there because I would love to see the actual facts? Just go into chat and say, hey, this is me. What I would be asking is, what is my basis?
Let’s just say that you bought the house for $250,000, and it’s worth $500,000, and you’re selling it to your daughter over a 10–20 years stretch. You would just say, hey, it’s $250,000 of gain. I’m just going to recognize it. But I could still have the installment sale.
The only additional tax that you’re going to get hit with potentially is the interest because you’re going to still have interest income on an annual basis from your daughter. And that’s it. It’s not harder than that.
Eliot: No. There’s some real opportunity. You can still be able to do what you want to do here and accomplish it, but we might have to do it in a little bit different representation on your return.
Toby: All right. Let’s move to the next one. “I’m considering taking a small salary from my stock trading business.” They have a LLC that’s taxed as a partnership with a corporation that is a partner, one of the members of the LLC, and that LLC is taxed as a C-corp. There’s an LLC taxed as a partnership and an LLC taxed as a C-corp, and the C-corp LLC is a partner in that partnership LLC, as is the individual taxpayer, more than likely.
This would be like me owning a partnership, and Eliot is the corporation. He owns a piece of the partnership. Therefore, when we make money, a portion of it flows into Eliot. It flows into the C-corp. Usually, it’s around 20%. And the C Corp ends up with income.
Usually, it’s expensing it. It’s writing it off by doing reimbursements for certain expenses. It might be things like cell phones, technology, subscriptions, education, going to classes, going to events, and things like that. A lot of traders are part of an active community like the Infinity community, and they have expenses.
What happens if there’s extra money sitting in that C-corp? There are a couple of ways that could happen. Number one, the C-corp could have an interest in that partnership, and it makes its money that way, but it could also charge a guaranteed payment to the partner. In both those cases, I get a deduction from the partnership.
I personally don’t have to pay tax on it, but what ends up is the corporation, or in my example, Eliot ends up with a bunch of cash. Now this person is saying, should I take that out as a salary and put it into a 401(k)? What say you?
Eliot: It’s just going to depend. As Toby always says, this is a calculate, calculate, calculate moment. If you take it out as salary, then one consideration—there are a lot of different variables here—is your personal tax rate below 21%? Why do I say that? Because a C-corp is taxed at 21% flat tax, so you might have a tax saving had you just left the cash in there. But if you want to put it into the solo 401(k), like you said, you’re going to have to have earned income anyway.
It’s a balancing of, if you take a paycheck from the C-corp, how much of earned income, your W-2 wage, do you want to take to balance how much you’re going to put in as an individual into this plan versus what the corporation itself will put in, which is limited to 25% of that earned income or the W-2 that you take as an employee? We have a lot of different things we have to look at here. It’s really going to take just sitting down, penciling it out, and putting the numbers and calculations together.
I think that’s ultimately, for this individual, what they’re going to be looking at. If you took all the salary out as a C-corp, just directly W-2, and took it personally well, then again, if you’re taxed at a higher tax bracket, you’re paying a little bit there over the 21% flat tax.
You’re not putting anything into retirement, yet you have more flexibility, arguably, with your investments outside of a plan. Although, Solo 401(k) is the way we set them up. We set them up for probably the maximum that you can as far as investment strategies within that solo. You have tax considerations and you have investing considerations both going on here.
Toby: All right. Let’s just say that you had $10,000 of net income in that corporation that will be taxable if we don’t do anything with it. It’s sitting in the corporation. It’s going to be taxed. You’re going to pay $2100 in tax, and you retain $7900 in that corporation for the future. Instead, you said, hey, should I take that out as a salary?
Let’s say that you pull it out as a salary and you defer the entire amount into a 401(k). The numbers will look like this. You’re going to have old age, disability, and survivors benefits, individual and corporate. It is 12.4%. Each side pays 6½%.
You would have a portion of it that goes and gets paid into Social Security for your benefit. Corporation pays in a portion for your benefit, but it ends up being about 12.4%. There’s also Medicaid, 2.9%. Again, it’s half and half, and there’s a phase-out. Do you know what the phase-out is this year? $167,000 or something like that.
Eliot: Yeah, that ballpark.
Toby: If you make over $167,000, you don’t even have to worry about the Social Security component of it. We’ll just use that number. It’s 15.3%. Because there’s a partial deduction, it’s actually 14.1%. You have $10,000; $ 1400 is going to have to go to the government in some way.
You’re going to have withholding, potentially, too. But I’m going to be able to get, what is that add up to about $7600, pretty close to that that I’m going to be able to get into my 401(k), and I’m going to write it off. I’m not going to owe tax on it. I’m going to have to pay the payroll tax only.
In version number one, where we don’t do anything, you end up with $2100 of tax. In version number two, you end up with about $1400 of tax, but your tax-deferred growth on that remaining sum until you’re required to take it out until you hit 73. It depends on what you’re investing in.
You could go and open up a regular old Schwab account and trade, or you could do an Anderson 401(k) and use the money for a variety of investments, including real estate. The other side is if I put money in that 401(k), let’s just say again, I have the $10,000, the company can contribute $2500 on my behalf as well and write it off.
Eliot: That’s not subject to payroll taxes.
Toby: Right. I could get a total, just doing rough math, of over $10,000 into my retirement plan. It’s going to cost me around $12,500. Here’s the fun part. I could actually borrow from my 401(k) half of those proceeds up to $50,000.
If I say, hey, you know what? I have a project over here, real estate, or I have a high-interest credit card. I can actually borrow from my own 401(k) and wipe out some of that debt. All I did is I put that money into a tax-deferred vehicle that’s going to be taxable, in some cases, 30 years or 40 years from now. Those are the weighings.
Eliot: Exactly.
Toby: I tend to just write the heck off of everything that I can get my hands on, instead of a corporation and get the tax to zero. That’s my goal. I’m not going to sit there. Unless I’m in the highest tax bracket, I’m probably not going to want to have money sitting in that corporation because I have to pay 21%, and then eventually, how am I going to get it out?
I’m going to either expense it out, or I’m going to have to pay it out as a dividend, and I’m going to pay tax at my long-term capital gains rate on it. It’s not like there’s a free lunch.
If I can expense it out, it’s a free lunch. I have the money. It’s not in a tax-deferred zone, but I don’t have to pay any tax on it. I like that. I like zero taxes. I’m a big fan. Those are the positives and the drawbacks of it. Anything else?
Eliot: No, I think that was pretty much it. A lot to consider in there when these considerations come up. This is what we do a lot in tax planning. Throw the numbers out there.
Toby: What you might be realizing as you sit there because I know I do this is, yeah, it gets complicated. There are a lot of different options. That’s why it’s really important that you deal with people that actually know this stuff. It’s really easy for someone to say, oh, never do a C-corp. Oh, never take a salary. What you should actually do is have somebody that’s willing to sit down and say, here’s the good, the bad, and the ugly. We do it here, but you could do that with an individual, too.
By the way, since we started, I’ve had Troy, Tanya, Sergei, and Kurt join as well. We already had Jared, Ross, Dutch, Dana, Patty, and Eliot, but we have a ton of people answering questions.
If you go into Q&A, and you have something that’s burning at you, like, hey, I really wanted to get an answer to a question about tax, now’s the time to do it. You got a bunch of CPAs and attorneys that are willing to answer, and they’re not charging anything. I don’t know the last time you got something free from a professional, but I got a free bill once. They did charge me for the postage, too.
Eliot: It was built in, trust me.
Toby: All right. “For our C-corp, we are aware that cleaning services of our personal resident can be deducted from our corporate taxes.” Really? “With the total expense of cleaning, be it write-off, or would only a portion of the total expense be a write-off since the entire house is not used for business? Would lawn services be treated the same way?”
Eliot: That’s what I thought the first time I looked at this question. There isn’t necessarily the right to write-off your cleaning services of your personal home and your corporation. But if you are using part of it as a home office deduction or administrative office reimbursement deduction, either way, you can throw in an element for the cleaning.
As the questioner points out here, it would be based on the percentage use of the square footage of the office or however you get that percentage. It would not be 100% write-off, but it would just be the portion that’s used for the office.
Toby: When you have a business, and nowadays, especially, you have an area of your home that’s being dedicated to that business, in most cases, they’re taking a bedroom. Let’s say you have a three-bedroom home. Maybe you have a living room and a large kitchen area. You could actually call that five rooms. It’s three bedrooms and two roughly equivalent large rooms.
The IRS allows a business a different methodology than you do as a sole proprietor when you take a home office. If I’m a sole proprietor taking home office, I use gross square footage, or I’m using $5 per square foot. I have a 10×15 room, and I might be looking at $750 a year that I can write off. Whereas a business, a corporation with employees, which is why we always use S-corps and C-corps in our structures, can reimburse you for the value of what you’re giving up.
If I’m the homeowner, I just made you the business. Here’s an office. I’m not charging you rent, but you need to pay your proportionate expenses. It’s called indirect expense, including a portion of depreciation. This throws people off, but the IRS actually gives us the schedule. This is it.
If I’m ABC Corporation, and Eliot works for me and he says, hey, I’m working at home, I could say, all right, Eliot, I’m going to reimburse you whatever that portion is. Let’s go back to where you have a three-bedroom home with two roughly equivalent rooms, and Eliot is using one of those rooms as the home office. One-fifth, that’s what he’s going to write off of any and all expenses associated with that house.
Now we go through the house. We grab the utilities, we grab the mortgage expense, we grab the property taxes, we grab the cleaning expense. If there’s a cleaner that cleans that home and they clean that office as well, it’s 20% of that expense. The corporation can reimburse you tax-free. It writes it off, you don’t have to report it. It ends up being, in some cases, a fairly sizable amount.
Yes, for your cleaning service. The cleaning service in and of itself is an indirect expense associated with the use of an administrative office for the home. Pretty straight, pretty cut and dry. There are some practitioners out there, they’re stuck in the past. It was an old case about a doctor, and they said, you have to do all of your administrative services.
There was a bunch of nonsense, which they changed the law after that. There’s still a case out there that sometimes people jump up and say, what about this case? I’m like, well, we changed the law, it doesn’t matter anymore. You’re allowed to do this, and it spelled out.
You can use any reasonable method. You could do net square footage, you could do gross square footage, you could do room methodology. You can use any method that’s reasonable and the IRS accepts. Now I get to write that off. The last question you had was on lawn service. This one, there are cases on. Do you want to hit it?
Eliot: Yeah, this is a little bit different. If we have stuff going on outside of the house, really what the IRS is going to look at is, do you have clientele that visit on a regular basis? It’s just not one client coming in a week. It’s every day you’re a doctor, you’re meeting patients there or something like that, or whatever it be, and it’s on a regular continuous basis. Then you’re going to be able to reimburse and deduct these outside expenses as opposed to just the inside.
Toby: Yeah. If I’m reimbursing Eliot, for his use of his home, and he doesn’t see any clients, what do we care what the outside looks like? But if Eliot is a therapist, and he’s meeting patients each day, then they say, yeah, you can deduct the reasonable cost of that maintenance, that landscaping to make it look presentable. I would imagine that it’s going to be a proportion again. It’s going to be that portion that’s being used.
You just have to be reasonable about it, guys. It’s not like there’s going to be a haha. I have somebody visit me once a year, therefore I’m going to write off all my lawn service for the year. It doesn’t work that way. Pigs get fat, hogs get slaughtered. We want to be pig-ish, we don’t want to be hog-ish.
In this particular case, there are facts and circumstances again. If you have the tax toolbox, I actually have a form in there where you can fill out all the information. They’ll calculate it for you, all your utility bills, your internet, the water, the electricity. You can say what year you purchased it, what month you put it into service, and all that stuff. You can even calculate the depreciation, which you don’t have to recapture. It’s reimbursing you for the cost, but you don’t have to recapture it.
It’s an easy spreadsheet that will calculate the amount that you’re able to write yourself a check for, and you don’t have to recognize it. It’s nowhere on your W-2. There’s not a tax form for it. You don’t have to recognize it.
It’s literally like being reimbursed if you brought a pizza into the office. Your office calls you up and says, Eliot, on the way in, hit Pizza Hut, and I’ll reimburse you when you get here. You show up, you got $50 of Pizza Hut, I write you a check for $50. You don’t have to report it anywhere. The employer is just going to call it an expense, and that’s what this is. The employer is going to call it an expense.
For housing expenses, leasing, or office expenses, you’re going to report it nowhere. It’s not going to go on your 1040 at all. We like that.
Eliot: Absolutely. It’s the best of both worlds.
Toby: Best of both worlds, well put. All right. By the way, we have a brand called Infinity Investing, where we teach people how to build wealth the Infinity way, which is to create multiple income streams. We happen to believe that the way to wealth is to have multiple streams of income and let them build up over time in compounders. That’s a big one.
“When starting my Infinity Investing journey, should I start purchasing stocks,” that’s always our first step dividend-producing stocks, “inside of a type of retirement plan, a retirement tax-deferred account of some sort, or should I be outside of that in order to use it for leverage for some real estate investing later?” Tax-wise, what makes better sense? What do you think?
Eliot: This, again, you may want to do some calculations, I didn’t have a strong opinion one way or another, depending on what my goals were. I’m really going to turn this one over to the guy who is the Infinity expert.
Toby: Yes. Here’s the easy rule. If you’re in a higher tax bracket than you will be when you retire, defer it. If you are in a lower tax bracket now than you will be when you retire, then put it in a Roth. Pay the tax now and never pay tax again.
It works like this. If you are in your peak years and you’re in the top brackets, the last thing you want is more income. You want to defer that. You want to be able to put money into a retirement plan. If you are just starting out, and you don’t have a high income, you’re making $50,000 a year or less, I would tell you, put it in a Roth IRA or Roth 401(k). Get that money into something.
Pay tax now because they’ll be really low. You’ll be in the 10%–12%. It’s not a huge tax hit, and then you’ll never pay tax ever again on that money. Then you say, but what if I have a real estate deal? Okay, you could actually partner with your Roth. Or if you’d want to take the money that you contributed out, you can do it. You leave the growth in the plan, but it’s not taxable to take out my investment.
If I put $5000 a year for three years or four years in there, then I have a great real estate deal, and I’m like, crap, I need $15,000 to close, I can take out up to what I’ve contributed tax-free, and I leave the rest in there. I’d probably caution you against that because if you’re just getting started, I’d be like, hey, it’s better to walk away from deals and keep the seeds planted.
It’s no different than farming. Don’t go eat your seed. Don’t go dig up the plants when it’s just popping up and sprouting. Don’t harvest it yet. Let it grow. I’m going to be one of those guys that’ll be like, hey, this is sacred money over here in that Roth that’s growing. You got 40 years of growth, 50 years, or 60 years. Let it grow. You’re never going to pay tax ever on that money, just leave it there. Pass up some deals or good deals will find money.
The truth is that if you find good deals, there are people out there that will loan you the money or that you can bring in as partners. You can even borrow. I can say, hey, Eliot, will you loan me money out of your retirement plan? He might say, okay.
Eliot: Actually, I would do that.
Toby: You could do that. That’s the idea. If you are on the flip side, people always say, oh, I’m going to convert my Roth, and I see them in the 32% or whatever they’re in. They’re in the 35% tax bracket. I’m like, you’re going to pay 35%.
You convert $100,000, you’re going to have $65,000 leftover. They’re like, but I’m going to invest it myself. I go, stop it. It’s going to take you. You’re going to have a 50% return, not double. You’re going to have a 50% return to breakeven. Statistically, it takes 30 years to catch up, all things being equal, the same growth rates and all that stuff.
I’m always like, if you are in a high tax bracket, don’t convert. If you’re in a low tax bracket, convert, and that could be a year-by-year thing. If I’m a real estate investor, and I’m a real estate pro one year, and I buy a property, cost seg, accelerate depreciation, end up in the lowest tax bracket, convert your Roth. Convert your Roth 401(k), convert your Roth IRA, but that’s the year to do it at that 10%, 12%, 22% bracket. That’s okay.
But if you’re converting it 35%, 37%, I’m going to have to sit down and have a stern discussion about math. It takes a long time to make up for that tax hit. If I was going to give you any advice, when you’re starting out and if you have kids, get your kids, fund them, pay them through your business, please, and put it right into a Roth. Those kids will never pay tax ever again.
If they’re making good money, if they’re making $40,000, $50,000 a year, and you’re like, oh shoot, they have to pay tax on this, defer it then. Get it into an IRA, get it into a 401(k). But once you plant those seeds, and it’s growing tax-free, it’s going to grow so much faster. You want it to compound, and that takes time.
Enough of that, sir. “I have been learning and implementing ways of earning money through crypto trading.” That’s interesting. “Can you please tell me how to minimize taxes with profits earned through crypto platforms?”
Eliot: Lately, we haven’t been able to talk a lot about profits through crypto. I saw one up to maybe 1300 a day, so it’s great news.
Toby: It’s killing it.
Eliot: Yeah, doing fantastic.
Toby: As soon as I sold.
Eliot: Really, when you think of this, as you say, it’s crypto trading, so we do the same trading partnership that we talked about earlier. Set up a partnership, put the account into that partnership. A partnership has two partners, usually a C-corp with 10%, 20%. The other goes to the individual, the other 90% or 80%.
That allows us to do a lot of good things. It, first of all, pulls some of the taxable gain off of your return into the C-corporation, that 10% or 20%. Once it’s in there, we’re going to do some of the things that Toby was just talking about, the Administrative Office. That’s how you can be reimbursed for that.
We have corporate meetings. We haven’t touched on that today, but 280A, which is probably the longest we’ve ever gone without talking about 280A. Also, a medical reimbursement plan and C-corp is very popular as well. Or get enough in there, pay yourself a wage, maybe put into a retirement plan, and do all those things that we’ve been talking about already.
Toby: Here’s the big one with crypto. I get into arguments with people because the crypto folks are independent. Sometimes you’re saying, here’s what the rule is, it’s not what I heard.
Here’s the rule. This is what the IRS has said, This is how they’re treating it. When you’re mining, it’s income. When you’re mining crypto, it’s ordinary active income. If you have miners, the machines, and you’re mining every day, you create a bitcoin, you create Ethereum, or whatever it is that you’re mining, that’s taxable at the price, I believe, that it opened for that day.
You’re going to have a taxable event, and it’s going to be ordinary. What you want is to get that from there into a realm where it’s never going to be taxed again. Sometimes you contribute it to a Roth or something, and then it’s a capital asset, and it’s going to grow.
If I’m trading crypto, I’m not creating it, but I’m trading it. I buy Bitcoin, I sell it, I buy it, I sell it, that’s short-term capital gains. It’s treated just like any other capital asset that you sell, just like stock. We’re going to structure it just like Eliot just said.
When I’m creating it, though, I might have my miners in some business structure to enable me to offset and avoid some of that tax hit, maybe get it into a 401(k), maybe even put it into a Roth 401(k), where I can put over $60,000 a year into one of those, and I’m like, I’m willing to take the hit upfront because I know my stuff, and I’m having great success.
The people in crypto tend to either feast or famine. Maybe you’re feasting, and you’re like, hey, I’m going to make $200,000, $300,000. Great, do that in a Roth environment once you get rolling. You never have to pay tax on it, it’s great. Fun stuff, and maybe someday they’re going to give us really clear rules.
Eliot: About what bitcoin is, what crypto is?
Toby: The SEC is cracking, but nobody will give a definitive answer. Even the stuff that the IRS came out with the chief’s counsels leave some stuff to the imagination.
All right. “My California CPA said that regardless of what type of entity I put my California rental property in, California will want to get the $800 franchise tax board fee. Would that be true even with the Wyoming Statutory Trust?”
Eliot: Generally, we use the Wyoming statutory trust as basically a disregarded entity, which I would not see paying the $800. I don’t believe it’s subject to it.
Toby: Chief Counsel’s Office has already said it’s treated as a business trust, and it’s not taxable. It’s not subject to the $800 a year, period, full stop. They’ve already ruled on that one. But if you’re talking about a grantor trust, land trust, living trust, again, those are not taxable for the Franchise Tax Board. What’s taxable to the Franchise Tax Board, corporations, and LLCs?
Eliot: Even if we took the Wyoming Statutory Trust, maybe had it taxed as a corp, we probably still wouldn’t be hit because the trust itself is not subject.
Toby: No, it’s treated as a business trust when it’s the trust itself. If you tax it as something different, you might be looking at a potential tax hit. If a tax hit is a corporation in California, you’d say, oh, it’s a corporation for tax purposes, great. Yeah, we’re going to assess the Franchise Tax Board. It depends on the type of vehicle it is.
You can even have a limited partnership. They can go look this up. I could tell you something now that’s not going to make any sense. If you go look it up, you’ll see that what I’m telling you is 100% accurate. You could have a disregarded limited partnership in California, and it is not taxable under the Franchise Tax Board or the Board of Equalization Franchise Tax, period, full stop.
That trips people up because they’re like, no, all. They use that word at all. No, the statute specifies what types of entities are taxable and under what situations. The question is, is this in one of those situations? If you have a disregarded limited partnership, they specifically said not taxable.
If you have a business trust, they specifically said not taxable. It’s not a question of interpretation. The Franchise Tax Board, Board of Equalization, stated, this is how we are treating it. You can rely on that. It’s not that hard.
Your accountant is 100% wrong, but what they’re not wrong about is the Franchise Tax Board if you ask them, hey, I’m going to be taxed as a dog, yeah, $800. What if I’m taxed as a cat? Yeah, $800. What if I’m a dream, and it’s not even an entity? Yeah, $800. If you ask them, they’re just going to tell you that you got to pay whatever. That’s why you gotta have professionals to keep you out of trouble.
All right. Speaking of keeping you out of trouble, we are doing two more tax and asset protection workshops. We have one coming up on June 24th. It looks like this weekend, and I’ll be teaching that with Clint. And June 29th, I’ll also be teaching that one with Clint.
Clint does a great job breaking down land trust, Wyoming Statutory Trust, LLCs, corporations using Wyoming, how to use this with real estate. I do a decent job of going over the tax treatment. We’re going to go over cost segregation, accelerated depreciation, deductions for things like the Administrative Office and the home, 280A, as well as creating a legacy of how you can create something for your family that lasts generations, hundreds of years as opposed to die and distribute.
I’ll show you how to do all that fun stuff on the one-day virtual event, The Tax and Asset Protection Workshop. It will not be a bad use of your time. It’ll be an excellent use of your time to learn these things because at any cocktail party, you go to, somebody’s going to spout off, and you’re going to be able to say, that’s not actually the case.
All right. “Does a cash-out refi adjust my basis in multifamily apartments? If not, how can we get a step up and basis before I sell if I have a lot of equity and depreciation already taken?”
Eliot: All right. Generally speaking, a refi, all you’ve done is you’ve changed your equity in your house into cash. You’re just changing asset to asset. That doesn’t change your depreciable basis in that property.
What might be impacted is what we call outside basis if you’re in a partnership arrangement, and you take that cash out to do something with it. You can work with it, but it does lower your outside basis in the partnership itself but not the building.
Toby: You’re really talking about outside bases on Tax Tuesday? Poor people just went, what is it that you were talking about?
Eliot: Generally speaking, just the basis in the building itself for depreciation purposes. No, it has no impact whatsoever on that.
Toby: Yeah, borrowing money is not going to adjust your basis. You’re not going to get a step up and basis and your property unless you die. You’re going to have to do a 1031 exchange. You could do installment sales, but it’s not going to step up your basis.
The only other way that I know of stepping up a basis is if you’re in a qualified opportunity zone, which means that you deliberately went into a qualified opportunity zone fund, and you held it for 10 years and stepped up. Otherwise, it’s upon death, or you’re selling. There’s no other way to get a step up, not from borrowing, that’s for sure.
Eliot: Step up, no. Increase, maybe, if you put more improvements in, but I don’t know if that really gets you anywhere you want to be.
Toby: That’s not going to step up your basis.
Eliot: No, it won’t step up. It would just increase the basis.
Toby: I just see they use that step up. Okay, that’s a buzzword. It has a meaning, let’s talk about it. The other thing is if you take out too much money and you’re not at risk, you’re in a partnership. This is for those of you guys who do syndications, and they give you money in excess of what you contributed. It’s called return in excess of your basis, that’ll be treated as capital gains.
If you’re one of those people that invested in an apartment complex, and they do the big remodel, and then they borrow, and they distribute all the money, and you put in $100,000 and you get $120,000, there’s a good chance you have $20,000 of capital gains there. Your accountant will catch that. Let’s move on because we’re talking about an outside basis. Let’s jump right over to the Corporate Transparency Act.
All right. “How does the Corporate Transparency Act impact the timing of real estate investment decisions from a tax efficiency perspective?”
Eliot: Just a little background, I picked this question because we’ve seen it coming up. The last couple of weeks, people have been asking about this, the CTA. Clint has a video out there about it, but at least in tax-wise, we haven’t spoken a whole lot about it. It doesn’t have any impact on your taxes whatsoever. This has nothing to do with taxes at all. I just wanted to get cleared out there for those who are listening.
Toby: That’s an easy answer. How does the Corporate Transparency Act impact the time? It doesn’t.
Eliot: But just to give some education because we are here to educate. If this isn’t taxes, what is it then? We need to start worrying about January 1st of 2024. Before then, you don’t have to worry about it.
In fact, you can even submit the forms until January 1st of 2024, and that’s going to be for any entity formed prior to that. You have up until January 1st of 2025 to get those in there. It’s just simple things showing who owns it over 25%, or who exhibits substantial control? Usually, a manager.
Toby: They’re looking for tax cheats. What they’re looking for is people that are using others to control. It’s not a public database, it’s FinCEN. They just want to know that you’re not some oligarch from someplace, and that you’re using Eliot’s name on something so that you can control millions of dollars. They want to know who the end beneficiary is. That’s it. There’s nothing wrong with it, I actually like it.
The Bank Secrecy Act is essentially the same thing, but apparently, that’s not good enough. If they’ll ask you the exact same stuff, I’m like, we already have it, but let’s create another statute, ask for it again, and get it to FinCEN. Really all it is, is who’s in control?
It could be, hey, do you have signatory control? Are you directing other people? If so, then you have a duty to disclose. They’re using it probably to catch some people that aren’t being honest and are using others to move money around, maybe money laundering, or things like that, and it gives them another tool in their toolbox to bring those folks to bear. But for individuals like us, it’s not going to matter.
Eliot: Yeah. An act like this is all about who’s really got the control.
Toby: It’s not a public record.
Eliot: No.
Toby: It’s not going to compromise you, it’s FinCEN.
Eliot: We’ve had a lot of questions come up about it over the years, so I just wanted to go back and just reinforce that it doesn’t have anything to do with tax. Well, Eliot, what if I had a disregarded and I changed it into a corporation? They don’t care. It has nothing to do with tax.
Toby: Yeah. If it’s a filed entity, you’re going to be doing it. If you have 25% or greater ownership or you exert control, you’re going to be reporting yourself. We’re going to say like, hey, you, you, you, you, you, you, you. Just do it so you don’t ever have to worry about getting hit for not doing it.
To me, it’s not going to be material. They’ve been asking for this for quite some time. The banks have been dealing with it for the better part of 10 years, 15 years. I remember, it used to be, back in the day, when you could open up bank accounts really easily.
They put the stop to that after the financial debacle in 2008, the Great Recession. They really did put the screws down on disclosure and getting to know your client. Most folks do that anyway. Now they’re just saying, hey, reported directly to FinCEN, you don’t need a third party.
All right, thinking of third parties, somebody’s got a bimini there. It looks like a sailboat. I never really noticed the people, but that guy looks so excited that he’s on a sailboat. I’m on a boat. “In creating a living trust, is it necessary to pay capital gains tax on real estate assets as they are transferred into the trust?”
Eliot: Over time, we get this question a lot. This is really simple too. There’s no taxable transaction moving assets into a living trust. It’s a revocable grantor trust. You haven’t done anything in the way of taxes.
I don’t know, Toby, but the only thing I could possibly think of is where we might have tax considerations at the state level in a state like Pennsylvania, perhaps, but they probably have an exemption for that. I don’t know.
Toby: Pennsylvania depends on the living trust, they do have an exemption. There are some states that still have a transfer tax. I’m not aware of any recently that I’ve seen. We’ve worked around all of those issues.
A living trust is a grantor trust, so it’s my trust. It’s my property. A grantor trust is ignored, and they tax the grantor. From a tax standpoint, I’m transferring it from my right pocket to my left pocket. That’s it. It’s still me, it’s still on my return, nothing’s changed, and you do not have to pay any capital gains tax. There’s not a single state in the union, nor is there a federal rule that you have to pay the capital gains tax.
The only time is if that living trust is not a grantor trust and it’s not yours. An irrevocable trust of somebody else, then you might be looking at an issue depending on that type of transfer.
All right. “I have carried a $600,000 loss since 2011. I am a real estate professional with an S-corp. Is there an alternate way to use that? I can’t live long enough at the $20,000- $25,000 maximum deduction.”
Eliot: I’m making some assumptions here because we’re talking about the $20,000- $25,000 maximum deduction. I think we’re probably talking about the passive activity loss rules here.
Toby: But that’s on a year-by-year basis.
Eliot: No, it’s not. It very much is what’s going on in that year. In fact, rep status isn’t necessarily a year-by-year status on its own. You have to actually qualify each year.
Toby: That’s what I mean. It’s a year-by-year basis. What matters is what were you in the $600,000 loss year because you have a passive loss carry forward or a capital loss carry forward. I don’t know which one it is.
If it’s a passive loss carry forward, then you need passive income to offset it. Whatever I do now doesn’t change that $600,000. That was etched in stone the year that it was generated. I don’t know why they even mentioned the $25,000 deduction.
Eliot: I think maybe they’re just saying if they had $100,000 of AGI, they’d be able to take $25,000 of passive loss, but I don’t know.
Toby: Would that be the carry forward? I guess they’d be able to take that. Yeah, that’s right, because we’re not converting it into ordinary loss. It’s not a real estate professional. They’re real estate professionals, which won’t convert it. They’re using up to $25,000 a year of passive active loss under 469.
I’m just thinking about that. My brain sometimes malfunctions on that one because I look at it, and it’s a year-by-year deal whether you’re an active, whether you’re a real estate professional, or whether you’re just straight-up passive. If this is me, and I really want to take that loss, there are two choices.
Eliot: My first one is just to use a quote from our colleague in the tax advising department he really loves, Arash. He uses this a lot, but the pigs eat pals. You can have what’s called a passive income generator. That just means, as Toby said, make some passive income, you won’t pay tax on it.
Start eating it up by finding something that’s going to generate passive loss. Or you could sell a property, but how we got rep staff becomes important. Did we do it by aggregating our property? In which case, maybe it won’t help us unless we sell substantially all of our property. That’s the only way we’ll release those passive losses.
If we didn’t aggregate, you could sell the offending property that created this loss, and that will all be released? Release the pals, one of the best things you could ever see on your tax returns.
Toby: It gets really interesting. If I get rid of the items that created the passive loss, then it releases those losses, and they become ordinary losses. They wipe out the gain. If there’s excess, it’s an ordinary loss that will wipe out your other income.
Like what Eliot’s talking about in the aggregation, if to become a real estate professional, I elected to treat all of my rental activities as one activity, the problem is, in order to release that $600,000 loss, you have to get rid of substantially all of those assets. Not just the one anymore, now you’re going to have to get rid of a whole bunch. We’ve tainted the $600,000.
Eliot goes back to the pigs eat pals. You need passive income. You need lots of passive income to wipe out that passive loss. You want to recognize that passive income. You probably don’t want to be a real estate professional. You want to use up that $600,000 for the time being because it’s going to wipe out, and you’re going to use it up. I know you’re half a dozen, it’s the same thing.
Eliot: Sometimes it’s easier said than done. Okay, Eliot, can you show me how I can make $600,000 passive? No, I can’t.
Toby: I’m just thinking about this. Based on what they just wrote, they’re making $100,000 a year as a real estate professional, and they have $600,000 of loss carry forward. What I really want is lots of passive income.
Here’s one thing that might help that you may not even realize. A lot of the exits of syndications, if you’re passive, they’re passive, so you may end up with passive capital gains. Sometimes we break through it, we make ourselves a real estate professional, and this is one of those cases where you may not want to just let it be passive and then wipe it out with your $600,000 of loss. That may be a more appropriate route to go, but it really depends on your tax situations. Those losses are gone.
Eliot: Not necessarily.
Toby: They got time. They got time to make it, but they took it right in the kneecap in 2011. A lot of people did. A lot of people are still carrying that.
All right. If you like this type of information, please go to YouTube. There’s a bell. There’s got to be a thumb that says subscribe, that’s why it’s not on there. Then you click on that little bell, and it’ll tell you three times a week.
All right, if you want to come to The Tax and Asset Protection Workshop, it’s June 24th and June 29th. There are two of them. It’s not the same event. It’s a one-day event on two different days, so it’s not a continuation. I’ll just say that.
Again, Clint does a great job breaking down LLCs, series LLCs, limited partnerships, living trust, corporations, everything’s there. Somebody says, what happens three times a week? We get videos. You can’t see all the videos, but I put about three videos out a week, and then you can come and absolutely see.
There is lots of stuff that I’ve been doing on the difference between different types of retirement accounts, on real estate, on how they’re keeping us poor. That’s always one of my favorite things to go over. Lots of tax strategies. My channel tends to be filled a lot with how to make money and keep it. Yes, the events are live, and we have a full staff on.
Today, we answered 200 questions. We still have 17 that are open. You had Eliot, Dana, Dutch, Jared, Kurt, Ross, Sergei, Tanya, Troy, and even Patty. Almost every one of those is either a CPA or an attorney, and we’re here to answer your questions.
We don’t charge for The Tax and Asset Protection Workshop. What we do is we show you solutions. If they make sense, we ask that you join and give us a try. It’s the only thing we ask and see if it works to make sure that relationship works for all parties.
If you have questions in the meantime, I know that a lot of you guys are used to talking to your accountant, and they send you a bill and stuff. We don’t do that. If you send us a question in taxtuesday@andersonadvisors, we look for the questions that we use for this. We get hundreds, so there’s plenty of opportunity to be selected, but it’s not a guarantee. It’s not a slam dunk either, but we pick from that group.
We answer all the questions we can. If it is anything else, visit us at Anderson Advisors. Lots and lots of information on that website, and you could take it from there.
I just want to say, thank you for joining us. I don’t see any other questions that we have that are in front of us. I see lots of questions that are still open. Do not worry. If you have a question that’s pending, we stay on and answer your questions so you don’t have to worry. We’re not going to end the event.
What I’m going to do is mute myself and my friend Eliot here, and we’re going to bail out. If you have a pending question, stay on until your question is answered. For everybody, thank you for joining us. By all means, we look forward to seeing you back.
Leave us some comments if you go to YouTube. If you have any questions or any comments, you can always put them in the taxuesday@andersonadvisors.com. Until next time. Thanks, guys.
