Welcome to another Tax Tuesday episode of the Anderson Business Advisors podcast. Today, attorneys Toby Mathis, Esq., and Eliot Thomas, Esq., delve into listener questions around how real estate investors can maximize their returns and navigate the often-overlooked tax benefits associated with oil and gas investments within retirement accounts. They also share valuable tactics for employing family members in a business to shift income and save on taxes. A significant portion of the discussion is dedicated to flipping properties, as they clarify the tax implications of this active income, debate the benefits of cost segregation studies for flips, and advise on the best entity structures to minimize tax burdens. Additionally, the episode covers charitable giving, exploring the differences between donor-advised funds and family foundations, and offering strategic insights for philanthropic tax deductions.
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “After seeing one of Toby’s videos on five overlooked deductions, my interest in oil and gas investments was piqued. I am wondering if you can use your 401 (k) or a Roth to participate in a partnership. If so, would you get the tax benefits on the front end in year one? If you can do this in a tax advantage account, how is the 15 % depletion credit treated? – Oil and Gas and a retirement account – depreciation wouldn’t really be a factor. Loan the money to yourself.
- “Are US notes bought at a discount in an aftermarket offering exempt from California income taxes?” – Yes they are
- What is the best way to pay your children for a small business owner?“- Pay them from a disregarded entity.
- What are the tax implications when flipping a property, is it? There’s three. Is it active income taxed at the ordinary income tax bracket? Another old company Took a while and is there? Stop it. And is there self-employment tax? Where is it? is it beneficial to do a cost segregation study for bonus depreciation for a flip? What is the best entity structure for flips? – Generally, flipping is active/non-passive income. It depends on your material participation.
- How can we offset a W-2 income and lower AGI through real estate investing in rental properties that are potentially fixer-uppers? Can we claim property repair expenses, investments, mortgage interest taxes, et cetera, against W-2 income to lower and offset taxable income?-
- I did a cost segregation study on a fixer property I purchased and rehabbed in 2023, but haven’t used it yet because I heard 100 % bonus depreciation might be reinstated. How long is the cost seg study good for since I had it completed in December of 2023? – The cost seg is based on 2023 never expires, you’d be eligible for at least 80%.
- Can I do cost segregation study on Airbnb in a foreign country? – Different countries have different tax rules, but for US tax purposes, it may not benefit you the way you think.
- I want to utilize rental property depreciation to the maximum. However, I held a property for five years and then did a 1031 exchange. I barely get any depreciation to use now. Please explain why what occurs to depreciation when I do a 1031 exchange. Will the original basis carry over to the replacement property? If so, is it accurate to say I get the most depreciation benefit when I buy straight up, not doing a 1031? – the original basis doesn’t carry, but the adjusted basis does.
- What’s the best way to transfer the ownership of my investment property to my son before my death? – You can gift it, but we don’t recommend it because they won’t get the stepped up basis to the fair market value. Put it in a living trust.
- How does a donor advice fund differ from a family foundation? – Both are great tools if used for the right purpose. You can invest up to 60% of your AGI in a DAF, or 30% AGI for a family foundation.
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Full Episode Transcript:
Toby: Welcome to Tax Tuesday. I’ll let everybody flow in here and hopefully you’re looking for Tax Tuesday. If you’re looking for, I don’t even know, something Wednesday or something Thursday—Thirsty Thursday—then you’re in the wrong place. If you’re looking for Tax Tuesday, you’re in the right place.
Let everybody pop in. If you are hearing my voice and you’re willing to put in the chat where you are sitting, what city and state, and we’ll see where everybody’s at today. There’s Tampa, Tokyo, Krum, Texas, Arizona, Orange County, Tampa, a couple of Tampas, and it’s Sherry. What’s up, Sherry? New Jersey, Austin, Maui, Boulder, Colorado. Now they’re going really, really fast.
Pinehurst. I caught Colorado, Maryland, Irvine, London, ah, as in some fish and chips. Let’s see. Malaysia, Pittsburgh, Jacksonville, Frisco, Texas, Barre, Vermont. We’ve got Powder Springs, Milwaukee, Anchorage. Gosh, we just got the whole… Saratoga Springs. Did we get Hawaii there yet? Where’s our Hawaii? We always got to have some aloha here. Oh, yeah, they’re saying yes. Oh, Maui, of course. Duh. Maui is Hawaii. Duh, I know. It just takes me a little while. Houston, Texas, Cincinnati, Lake Forest, Illinois. Welcome everybody.
If this is your first Tax Tuesday, give me a thumbs up. There’s a little reaction button somewhere. I know there’s a thing. I don’t know where it is, but maybe they can. Oh, you see it over? Look at that. There are some thumbs. Your first one. Welcome.
I’m going to go over some rules since we got some newbies. Just got off a plane from Dallas. Look at this logged in. LA, California. Thank you from California. We actually have a California question, I saw.
Eliot: Yes, we do.
Toby: You’re in for a treat. We’re going to talk about your state and how beautiful it is, but how […] your technology… no, I’m just kidding. This is actually… I’m Toby Mathis. This is…
Eliot: Eliot Thomas.
Toby: And we’re going to be your guide. I think we’re both tax attorneys. You’re an accountant too, right?
Eliot: Not a CPA, but yeah.
Toby: You’re about to be, aren’t you?
Eliot: I’m working on it. It’s…
Toby: You got two of the three done?
Eliot: Yeah, I got three of the four. Then I started to fall off on the fourth.
Toby: Eh, attorneys. Attorney is good. All right, let’s go over the rules. If I can make this thing move. There it goes. All right. We have a whole bunch of folks on to answer your questions. This is the secret. There are, let’s see, I’m going to go over here. I got one, two, three. I got attorneys. I got Arash. What’s Arash? Is he a…?
Eliot: He’s an EA.
Toby: EA. Dutch, CPA. Jared is CPA. Jeff.
Eliot: CPA.
Toby: Tricia, Troy. We got a whole bunch of tax professionals, and they’re hiding in the Q&A area. If you go to Q&A, not chat, Q&A, you can ask them questions. And guess what? They’re not going to bill you. They’re just going to treat you with love and respect, and be so excited that you’re asking them questions. Until 200 questions come in and then they’re going to be freaking out and they’re going to call all their friends and say, get on here.
No, they do this. They volunteer, they come in, and they just do a great job answering your questions. Please take advantage of that. If you have questions throughout the two weeks when we do this every other week, send it to taxtuesday@andersonadvisors.com. We answer all those, right?
Eliot: Yes.
Toby: There are 400 or 500 of them.
Eliot: Several hundred, yup.
Toby: It’s crazy. You guys can ask questions, share them with your friends. But if you require stuff that’s really specific to your situation where we start taking on liability, we’re not giving you general answers, we’re going to ask you to become a platinum client.
Platinum is really simple. You pay a fixed amount per month, and it’s less than $100. You can ask anybody here to explain platinum to you. You can ask questions and you don’t get a bill. It’s part of it, so lots of fun. We’re going to have a lot of fun today.
The idea is that it is something where we try to keep it loose because it’s taxes. We don’t want it to be ugh, taxes. We want it to be hey, taxes, which is different. It’s light. You have about a 1-in-500 chance of getting audited. It’s not something to be scared of. There are gold nuggets all over the tax code, but just educate yourself a little bit. It pays off.
We have a whole bunch of folks that have been watching these for a long time, and I get to meet them when we do the live events. A lot of folks come up and share their stories. It’s always cool when somebody comes up and says, you save me $5000. That little tidbit, I gave it to my account and he said, yes, we could do that, and it saved me money. I’m like, good. Like, hey, leisure activity. It’s like gold mining. You work a little bit and you got a nice nugget there. I’d take that every day.
All right. What we’re going to do is we’re going to go over the questions that we’re going to answer today. You can ask your questions in the Q&A, but in the meantime, Eliot and I are going to answer all these wonderful questions that have been emailed in. You grabbed how many?
Eliot: We got 10 today.
Toby: Ten questions today. I’m going to read them out and then we’re going to go through them.
This one has my name in it. “After seeing one of Toby’s videos on five tax overlooked deductions, my interest in oil and gas investments was piqued. I’m wondering if you can use your 401(k) or a Roth to participate in a partnership? If so, would you get the tax benefits on the front end in year one? If you can do this in a tax advantage account, how is the 15% depletion treated?”
Good question. We’ll get into that. If you don’t, if you’re not familiar with oil and gas, it’s one of those little weird little nuances in the tax code where they get some benefits for a specific type of investment.
“Are US notes bought at a discount in an aftermarket offering exempt from California income taxes?”
Eliot: Those are unique ones.
Toby: You like to pick some funky ones.
All right. “What is the best way to pay your children for a small business owner?” With candy. I’m just kidding. We’ll answer that one too. But I like the candy.
Eliot: Yes. That’s a good option.
Toby: Just give them. Say, I give you housing and clothes. Isn’t that enough? Why do you want more? No, no. We’re going to show you how to use them tax advantage–wise.
“What are the tax implications when flipping a property? Is it active income taxed at the ordinary income tax bracket? Is there self-employment tax? Is it beneficial to do a cost segregation study for bonus depreciation for a flip? What is the best entity structure for flips?”
“How can we offset a W-2 income and lower AGI through real estate investing and rental properties that are potentially fixer uppers? Can we claim property repair expenses, investments, mortgage interest, taxes, et cetera, against W-2 income to lower and offset taxable income?”
Really good question and we’ll dive into that, guys. That’s always the secret sauce is how do I take something that generates a loss and use it to offset my W-2 income. We’ll go over that.
“I did a cost segregation study on a fixer property I purchased and rehabbed in 2023, but haven’t used it yet because I heard 100% bonus depreciation might be reinstated. How long is the cost seg study good for since I had it completed in December of 2023?” That’s a good question. Really good one. Good job.
“I want to utilize rental property depreciation to the max. However, I held a property for 5 years and then did a 1031 exchange. I barely got any depreciation to use now. Please explain why what occurs to depreciation when I do a 1031? Will the original basis carry over to the replacement property? If so, is it accurate to say I get the most depreciation benefit when I buy straight up not doing a 1031?” Good questions and fair. We’ll get into it.
“What is the best way to transfer the ownership of my investment property to my son before my death?” That’s really straightforward. Kind of morbid.
Eliot: It was a good one.
Toby: You planning to die soon. I get it. Some folks want to make sure that the property stays in their family. I get it. We’ll go over that.
“Does a donor-advised fund differ from a family foundation?” Again, really interesting questions. These are niche questions, aren’t they?
Eliot: Yeah.
Toby: Hey guys, if you like these types of questions and also you just like to feed your mind, by all means go to my YouTube channel. You just google Toby Mathis and YouTube and you’ll find my channel or Patty will probably send you a link.
My partner, Clint, also has a channel. His is much more on asset protection. I spend to live most of my time over in the tax and investment world. I’m an avid real estate investor. Between Clint and I, we have over 300 properties. We’re sick. We can’t help it. We just keep buying property because that’s what we do. If you’re an investor, you know what I’m talking about. I’m talking to you guys. Once you start doing it, it’s hard to stop. It’s like scratching, itching. You just can’t.
And if you want to learn about land trusts, LLCs, corporations, how to structure things, just about every week we do a free workshop called the Tax and Asset Protection Workshop. We’re also doing one live. The next live one is a three-day event in Dallas, Texas. I think it’s the 27th, 28th, and 29th of June. You can absolutely come and join us there.
Just click on the buy tickets. You can see what those things are. They’re really inexpensive. It’s basically to cover the cost of the coffee, which is about $100 a gallon nowadays. It’s the best coffee in the world because it’s more expensive than gold, these hotels. But feel free to join us. We love to see you guys in person.
You can learn about all the structuring and how to set yourself up in a way where you can keep a lawyer, snoops, and Uncle Sam at bay. And if you do it right you get great results. So by all means, come on there.
“After seeing one of Toby’s videos on five tax overlooked deductions, my interest in oil and gas investments was piqued. I am wondering if you can use your 401(k) or a Roth to participate in a partnership. If so, would you get the tax benefits on the front end in year one? If you can do this in a tax advantage account, how is the 15% depletion credit treated?”
Eliot: Oil and gas, certainly a big investment tool out there. But we bring into this question the idea of using our retirement accounts, which is a little bit of a different aspect to it.
Remember, on our retirement accounts, we don’t take things like depletion or depreciation. They’re not really a factor. You just simply have investments that go up or they go down. Cash goes in, cash goes out. And then later at retirement, you can take it out. If it’s a Roth, of course it’s tax-free. If it was a traditional account, then you’d pay tax at that time.
Really, the depletion or depreciation in this case really wouldn’t be a factor as far as whether or not you can invest. You certainly can invest. As long as it’s in the provisions for your particular plan, which I would think it would be, then you can.
It may depend on what’s going on in that oil and gas. You could always run into UBIT if they have debt behind their investment and things like that, so you’d want to be careful of that as well. But I think the real crux of what the questioner is asking here is about the depletion. That really wouldn’t be a factor here in your traditional working interest for oil and gas.
Toby: Oil and gas, to me from a tax standpoint, I’ll just tell you that the working interest is where you go if you need a tax deduction, because It’s treated as ordinary. If you are investing in leases where you might have a mineral lease and you’re going to lease something and then sublet it someplace else, or you’re going to buy the land and lease it, and you’re not digging a hole, it’s already there, somebody else is paying you a royalty, you’re not going to get that deduction. Those ones are great candidates for your tax exempt accounts, so doing traditional IRAs and Roths.
Something interesting, and there’s a big misconception. You guys can play with the math if you want, but I’ve done it. I’ll probably do a video on it again because I like doing the math in real time so people can’t go to these calculators where they miscalculate it.
For whatever reason when you look at a Roth versus a traditional account, whether it be a 401(k) or an IRA, their math is all screwed up on the calculators. I go in and I go to Schwab and all these different places and bank rates and all this, and it always shows like, boy, this Roth is better. I’m like, no.
Let’s say that my tax rate is 20% going in and 20% coming out, and I do the math on an investment. It’s going to be identical, whether it’s a traditional or a Roth, if the tax rate does not change. I don’t care if it’s 40 years, 20 years, 30 years, 15 years. It does not matter. The math is identical. I’ll do it as a live video someday where I’m just walking through it because it is weird when you start doing it.
You’re like, how do they keep coming off and they’re always pushing people to the Roth, Roth, Roth Roth, convert, convert, convert? Math doesn’t work that way. They are literally identical if you pay the same interest rate. Where you’re better off doing that Roth is if you’re in a lower tax account now than you’re going to be when you retire.
For young people, do that Roth. Why? Because you’re probably in the lower tax bracket. When you get older, you’re more than likely going to be in a greater tax bracket. If you’re in a high tax bracket now, then that 401(k), and if you’re in a really high tax bracket, those DB plans become absolutely critical.
Oil and gas, though, unless I’m doing those leases, if I am digging the holes, if I’m investing in a syndication that’s going to go dig 15 wells, I get a huge tax deduction. It’s usually 70%–75% in the first year that I can use against my W-2 income. It’s called a working interest.
That’s why when I talk about overlooked tax deductions, that’s one of them. I use this personally. I can tell you I did investments last year, and the tax benefit is really the return. It’s going to take me a while to get my money back. It’s going to take me 5–7 years, typically on average to get every dollar I put in. Then probably 10–15 years of gravy.
At the end of the day, I probably made a 10% return, but in that first year I get a 37% return. I’m killing it because I didn’t have to pay tax. That’s what they’re talking about here. If that’s the case, I’m staying away from working interests inside of an exempt entity. It doesn’t make a lot of sense. Do those in your personal.
If I have a 401(k), here’s a little trick. Let’s say I have $100,000 in a 401(k), and I want to invest in oil and gas. Well loan it to yourself. You can loan up to half of it, so up to $50,000, and you pay it back over 5 years at federal AFR rates, which is right around 5% right now. You borrow it from yourself and put that in a working interest.
Let’s say I got a $40,000 deduction. Let’s say you’re in the 30%-ish because there’s no 30% tax bracket, but let’s say you’re 32% or something like that, 30% so I can do the math. It’s $12,000 savings. I save $12,000 in my pocket just by doing that thing, and it’s going to cost me 5% interest, so about $2500 for that year.
If I pay it all back, then fantastic. Otherwise, what I really just did is use that money to create a nice tax deduction. I keep the spread. I like it. I like that. But I’m not really interested. Would you concur?
Eliot: Yeah, always. It’s always safe to concur.
Toby: Eliot’s very verbose. I worry about him. I’m sorry about that. I just think that oil and gas is one of those areas. Now that said, I don’t have people I can point you to. There are a few that I’ve been watching over many years, like one ia a third generation family down in Tennessee that I really like, that I invest in, and then I would invest in another fund.
But there are a lot of folks out there. I’m just not going to sit here and say, here’s the guy. It’s really tough to vet them because they pay back over such a long period of time, like the payback’s over 10–15 years. If they’ve only been doing it five years, you’re like, you’ve never even given anybody back their money. How am I supposed to know whether you’re legit?
All right, let’s go to the next one. “Are US notes bought at a discount in an aftermarket offering exempt from California income taxes?”
Eliot: Yes, they are. Typically.
Toby: You’re going to have to explain this one.
Eliot: Typically, what we’re talking the tax here is going to be on the interest. These are US notes, so you receive interest payments. Really what they’re going after here (I think) is if you have a US note, normally a state cannot tax that note. It’s not allowed to.
However, here they bring in this little bit of a difference where they bought it on the aftermarket, and that doesn’t change anything. It’s still a US note, still creates interest that cannot be taxed by the states. So we’re still exempt here.
Toby: So bonds and stuff like that, your estate can’t tax them, but the feds do.
Eliot: Even California.
Toby: Yeah, California is in timeout. But if you are buying things at a discount, I believe it’s classified as interest.
Eliot: That’s my understanding is that it would go towards interest. You would still be in that same category of talking about interest income, US portfolio income not subject to state tax.
Toby: There are some notes that can be tax-exempt too. You’re looking at munis, right?
Eliot: Yeah.
Toby: If that’s the case, then nobody can tax it. But yeah, that’s just one of those weird things. Whenever you see a state, you could fill whatever state has a tax and you could say, do they charge? Do they charge? No, they can’t. The feds get to say we’re going to tax it. You don’t get to.
I’m not aware of exceptions. Accountants, are there any exceptions to that rule? Some of these guys might know. I think you have to do it. You just have to do a lot of returns and be running into that, but I know for sure that it’s exempt to California. Very exciting.
All right. “What is the best way to pay your children for a small business owner?”
Eliot: It’s going to depend on their age. If they’re under 18, what we like to look at is paying them through an entity that’s disregarded to the parents or a partnership. In that case, you get a special provision where you don’t have to pay the employment tax, so you get a little extra savings there.
Of course, that’s just on the employment tax. Then it is income to them, so subject to US federal income tax. However, you get the standard deduction, which is $14,600 this year. You can pay quite a bit and not pay any tax at all. Again, they have to be W-2 employees when you do that method. We’re paying them from a disregarded entity that’s an entity owned by mom or dad, just comes down to their 1040.
Toby: It could be a partnership—
Eliot: Or partnership owned by the parents, correct.
Toby: So if you have a real estate partnership and it employs your 17-year-old or younger. By the way, there are court cases where they’re employing a 9-year-old. As long as they’re doing something of value, then you don’t have the employment taxes, period. And withholding, you don’t have withholding if they didn’t have tax the previous year.
If you have young kids that don’t owe taxes, then you don’t have to do that. Somebody says you have to file the quarterly returns. There’s nothing. There’s no filing, really.
Eliot: Yeah, there’s no tax.
Toby: There’s literally zero. You’re just putting it in as an employment expense.
Eliot: This is just a good way to shift income, especially from rental properties or something like that. If one of the parents is maybe REP (real estate professional) status, you get that nice write-off against other ordinary income on the return, so that’s a positive there.
Toby: Even if they’re 18 and over, if you have parents or siblings that you’re going to put on your business, have them on your board. You’re going to pay them something, so you can maybe get them some tax-free fringe benefits. That’s fine too. You just have to run it through payroll. It’s not the end of the world. There’s just going to be some withholding, which you’re just putting them on payroll.
I would encourage you to do that. It’s actually very effective, especially if you’re caring for somebody and you’re going to be supporting them anyway. It’s just so much better for you to have them pay and earn their own money as opposed to you just giving them money.
There are gift tax returns and things like that. If you start just caring for them. If they’re dependent, then it’s not as big of a deal because you could pay for expenses under an accountable plan for them. If they’re your dependent, then you could definitely like for health and education expenses, things like that. Then dental, vision. Then if they’re dependent, then you can reimburse those expenses.
Eliot: Just to latch on something you said earlier, just take this back to our previous question where Toby was saying, if they’re younger, if they’re kids, have them put it into a Roth. This is earned income. Now they can sock that away in the Roth, and you didn’t pay any tax ever. When you’re retired, it’s tax-free.
Toby: Think about this. You have a 16-year-old and you’re going to teach them how to do real estate. Here’s what I would encourage you to have them do. Have them learn with your business, all your social media, high value, like if I went out and I hired somebody, I’m paying thousands of dollars for this.
You go in and you’re like, hey, let’s have you learn at very high dollar, high value to me service, and you’re doing it as a kid. They’re 16 years old and you pay them $10,000 a year. Let’s just say you pay them $800 a month or something like that. What is that? $9600 a year. You could take, what is it, $7000 this year or $6500?
Eliot: We’ll say it’s $6500. It might be $7000 now.
Toby: I think it was 2023. I think it’s $7000 now, but in 2024, whatever the max is that can go into that Roth, I think it’s $7000. Maybe one of the accountants can confirm. Throw it in the chat. Chat it to me, guys. What’s the max that you can put into an IRA? Or I could just google it, I suppose. But put that into a Roth, they will never pay tax ever.
Somebody says, “What’s the maximum amount we can pay a kid who is under 18?” It’s based off of what they’re actually providing, period. There’s a court case on a 9-year-old and they were providing modeling services for a business. The court was the union. There was screen actors guild rates at $7000 for under 50. Okay, good. I’m not completely losing my mind. So 2024, the amount that you can throw into a Roth IRA is $7000.
In this particular case, the child was being paid to be on the brochures, be on the website and all that jazz. I think it was hundreds of dollars per hour. If you can find a high value item that you’d be paying another party a large amount for, and your kids can get good in those areas, that’s what you do.
Research is very expensive. Anything technology is very expensive. Have them looking for properties, that can be very expensive if they find properties. Those of you who are wholesalers or have purchased from wholesalers know that that could be thousands of dollars. It’s very easy to move money over to those kids. And yeah, they don’t have to pay tax on it. You pay them $14,000, zero tax, none. Like zero.
If I got hit with that, if I had $14,000 that floated onto my tax return, I’m having to pay more than $5000. Some of you guys, it’s higher. It just depends. So it makes a big, big difference. It’s one of those things. If you went IRS, hiring family, you’ll see they actually have a whole page telling you exactly to do this. They’re not playing hide the ball, guys. It’s right there for you to take advantage of if you want to.
All right, here’s another fun one. “What are the tax implications when flipping a property? Is it active income taxed at the ordinary income tax bracket? And is there a self-employment tax on it? Is it beneficial to do a cost segregation study for bonus depreciation for a flip? What is the best entity structure for flips?” That’s four questions at one.
Eliot: We got 14 questions today. I really liked this because it throws a lot of misunderstanding, so we just wanted to straighten it out here. First of all, when you’re flipping, generally speaking, it’s going to be active or what we call non-passive income, most of the time subject to employment tax.
However before the show, Toby was pointing out, if you don’t materially participate in the flipping business, maybe Toby and I go into a flipping project, true to nature, Eliot doesn’t do anything, Toby does all the work, I’m just passive, in that case, for me it wouldn’t be subject to employment tax probably there because it is passive, but he’s active. It would be.
Toby: It depends on your material participation in that endeavor. If you’re not regularly working in that flipping, then you’re probably going to be passive. If you’re passive, it’s still ordinary income. You’re still at that federal 0%–37%, but you don’t have employment taxes on it, the FICA, the self-employment tax, the social security, the Medicare, which is 12.4% for old age, disability, and survivor’s insurance and 2.9% for the Medicare. It goes up, goes down, then it goes back up. There are all these little quirks with it. But you don’t have to worry about that if you’re passive.
If you’re active, here’s the deal. Flipping a property, does not matter how long you held it. There are cases where people held it 10 years and still were treated as though they were holding it as inventory. You are a car dealership, you just have houses on your lot. When you buy a property with the intent to sell it, it is flipping. Ordinary income subject to self-employment tax if you are doing everything.
The way you minimize that punch in the neck is you’re going to use an S-corp or a C-corp to make sure that there’s something there between you and that enterprise from a tax standpoint. We want to make sure that when that income comes in, let’s say it’s through an S-corp, at a minimum we’re minimizing the self-employment tax or the social security taxes. Technically it’s social security.
Let’s say I make $100,000 and I just earned it myself. Let’s say it’s Eliot’s the sole proprietor, and I’m the S-corp. Eliot makes $100,000. How much employment tax are you going to pay on that $100,000?
Eliot: Well, I’m only going to pay myself a reasonable wage. W-2.
Toby: You’re the sole proprietor.
Eliot: Oh, excuse me. I’m going to pay 100% of that. It’s going to be subject to an extra 15.3% that Toby was breaking down there. I’m going to pay tax on all of it. Extra tax. Not just income tax but full-blown employment tax.
Toby: But Toby, who’s an S-corp, I pay myself a small salary, usually about $30,000. I will pay employment taxes on that, which is about 15.3%. Half of it’s deductible, so the math is 14.1%. Let’s say about $4200. Eliot paid $14,000. I paid $4200.
Eliot: And all the reimbursements he can do in his S corporation there, there’s not even a consideration here. I lose out on every category plus the audit risk. This is a very common question. It’s understandable because we’re talking real estate, why we get asked. We often get asked on a flip, can we do a cost seg? Bonus depreciation, that thing? Those aren’t allowed on a flip because as Toby pointed out, it’s inventory. That’s one deduction while you’re looking for those deductions that we cannot take advantage of on a flip.
Toby: Things you cannot do if you buy property to sell it. You cannot 1253, which is installment sales. You cannot 1031 exchange, which is tax-free or like kind exchanges to avoid tax. You cannot depreciate, so you don’t get bonus depreciation. Cannot cost segregate because there’s nothing to depreciate. It’s all inventory.
It’s like having a mini mart. You have Cheerios on the shelf, that’s your property. They’re sitting there waiting to be sold and they’re the cost of goods sold. You really do get hammered as a dealer if you’re not expecting it. You got to talk to somebody.
Talk to us if you’re confused and you’re wondering what your situation’s going to be like so that we can map it out for you, so that your eyes are open. There’s nothing worse than somebody who thinks they’re an investor, and they find out two years later that they’re a dealer.
They’re just getting slaughtered all over the place. They’ve done a bunch of installment sales. They’re carrying notes. It’s taxable when you sell it even though you’re not getting paid yet. You could be underwater pretty quick. We’ve seen it happen with folks and it’s not pleasant. So just make sure that those eyes are wide open and you’re talking to somebody so you know what it looks like.
There are ways to defray that. If you’re an active business, there are DB plans, there are 401(k)s, there are tax-free fringe benefits, there are accountable plans, 280A, administrative office for your home, ways to reimburse mileage, hiring kids.
There are all those things in play that you can still get a lot of money out tax-free because it’s active and it’s quite different than if you’re just investing. Again, when you’re just investing, you have that depreciation, which really helps. You’re a flipper, you don’t. So we just want to make sure that your eyes are open.
Somebody says, “And the self-employment tax is on capital gain?” There’s no capital gain. It’s ordinary income because It’s not considered an asset. When you buy a house and you sell it, it’s inventory.
No different than if you were a grocery store selling milk. I bought the milk. I don’t depreciate the milk. It’s the cost of goods sold. When I sell it, it’s all ordinary active income. It’s not capital asset. I’m not buying it for the long-term appreciation and the cash flow. I’m buying it to sell it. And they just totally toss you.
We cannot deduct the renovation cost. There’s probably a question where they ask that. You add the renovation cost to the cost of goods sold. You deduct it when you sell it. It’s going to lower the amount of income.
If I buy a house for $50,000, I put $100,000 into it, and I sell it for $350,000. What did I say? I bought it for $100,000 and I put $50,000 in it. Now I’m at a $150,000 basis and I sell it for $300,000. Then I have $300,000 minus $150,000, so the $50,000 that I did to… I probably screwed up the numbers there, but you add the basis, and you add to your basis the renovation costs. That creates the basis so that when you sell, it’s just the difference. The cost of goods sold is increased. Fun stuff.
Eliot: Our next question falls into that a little bit.
Toby: Oh good. There were a lot of dealer questions, huh?
Eliot: Yeah. Tons of cost seg questions and things.
Toby: We’re seeing a lot of it guys. The fact of the matter is we’re underbuilt as a country and we’re seeing people do all sorts of things to creatively put properties, ADUs, and all sorts of stuff into service. You got to know these rules so you don’t get tripped.
It’s really easy to go around thinking, hey, I’m going to carry some notes back and I’m going to be taxed at 20%. Then you find out that no, it’s 37% and I owe the tax today even though I’m not going to get paid for five more years. It could be shocking if you don’t do it right.
“How can we offset a W-2 income and lower AGI through real estate investing and rental properties that are potential fixer uppers? Can we claim property repair expenses, investment, mortgage, interest, taxes against W-2 income to lower and offset taxable income?” This is real estate investing, right?
Eliot: Yeah, we’re talking real estate. The quick answer is it’s probably going to be rental, and where we are going to be real estate professional, typically, it just means that basically at least one of the spouses, all they do is rental real estate.
If you create enough losses from the things like just property repairs, the interest, the taxes, et cetera, all that goes against the cost of the rents, creates a loss. If you or your spouse meet the criteria being a real estate professional, then that will offset against your W-2.
There is a provision if your AGI is $100,000 or less, where you do get to take $25,000 of what we call passive loss, which would be the result if you’re not a real estate professional.
So you have two choices. Real estate professional or any losses are non-passive or what we call active losses. Or it could just be a passive loss, meaning that you’re not a REP status. Maybe both you and your spouse have regular jobs. One doesn’t just take over just the real estate. In that case, if you’re under $100,000, you can take $25,000 of passive loss against your W-2.
More than likely here we’re probably talking where we don’t meet REP status, and there you’d want to become a REP if you can, or have your spouse try and reach that status.
Toby: It’s called active participation if you’re an active participant in real estate. It starts to phase out at $100,000, $1 for every $2 above $100,000 AGI. You start off with this $25,000 max that you get without being a real estate professional, but when you hit $150,000, you phase out entirely.
If you hit $110,000, you still get a $20,000 maximum deduction. It always depends on your facts and circumstances. You may be looking at having a loss of $8000 and you’re making $120,000 a year. You’re probably going to get to write the whole thing off as an active participant. All that means is that you manage the manager.
Real estate professional, on the other hand, one spouse has to do at least 750 hours in a real estate trade or business, or real estate trade or business sets if they have multiple. It’s got to be more than 50% of their working time.
You also have to materially participate on your rental properties, on your investment real estate. There are little tricks we can use like aggregation and treating all your properties as one to beat that test.
Make sure you’re working with somebody if you’re going to be a real estate professional. Somebody, meaning an accountant who’s going to total up your time and make sure you’re tracking it right. Then yeah, you could use it to offset your W-2 income, and it works great.
Eliot: Another option is if it was a short-term rental. I guess we didn’t cover that. Short-term rental by definition, generally speaking, is that the average stay is less than seven days. You often hear about Airbnb and things like that.
If you meet that, then all you have to do is one of the spouses has to just materially participate where you have over 100 hours. That’s the most common test. There are seven different tests, but that’s the one we most often hear. Over 100 hours where you’re directly managing it, you do more than anybody else that would cause your loss. All these expenses that you mentioned, you take that as a deduction. If you had a loss that would go against your W-2 as well.
Toby: Yeah, and Mandy, it’s against your joint income. I’ll give you a real life example. Had a surgeon in, I won’t say the state, but it was a surgeon. Her husband was a real estate investor. Within 15 minutes of talking to him, he realized he qualified as a real estate professional. They weren’t doing it. They had substantial holdings with a cost seg and a bonus depreciation. We saved $183,000 in the first year. Boom. It offset that much income.
There are limits of how much active income you can offset. The net excess business loss rule. There is a limitation. I think it’s $600,000-some. When they look at all your businesses and say how much loss did you create through a business? It’s absolutely fantastic though.
If you’re a high income earner, then you really have three ways. Here are the three ways. The real estate professional, the active participant which is probably not going to be for you if you’re high income, or that short-term rental loophole. Those unlock some pretty massive amounts of deduction.
To get way out ahead of you, you could be a short-term, seven days or less for one year, and then go to be a long-term. Or if you’re smart, you buy them like in the third quarter or fourth quarter of the year.
Like hey, I’m going to buy this in November. Make it a short-term rental just for the end of the year and I’m going to manage it myself. Boom. All that loss, all that bonus depreciation, everything comes into this year, then next year I make it into a long-term rental.
I suffer for a month-and-a–half. Big whoop. But I get a huge deduction. We love stuff like that. you have a bunch of clients that do that, I know.
Eliot: Yeah. We got a lot of that going on.
Toby: How much has the good doctor saved this year?
Eliot: A lot. It was probably getting up to $200,000 in that ballpark, I would imagine.
Toby: We like to see tax savings there. You’re getting $150,000–$200,000 a year tax savings, not deduction. It’s actually the tax savings get that high. You have to ask yourself, are you willing to manage a property for a few months or a month, or sometimes it’s weeks to qualify for $200,000? Yeah, I think I’ll take that action.
All right. “I did a cost segregation study on a fixer property I purchased and rehabbed in 2023, but haven’t used it yet because I heard 100% bonus depreciation might be reinstated. How long is the cost seg study good for since I had it completed in December of 2023?” What do you say?
Eliot: The cost seg study itself doesn’t really go out of fashion, if you will. A lot of it, the report is based on prior cases, description of the property, things like that. Probably the bulk of the report is okay.
What might need to be adjusted are the numbers, the calculations they’re in. But you’ll be able to go back to 2023 if that’s when we purchased and put into service. You’d still be eligible for at least the 80%.
The 100% is something I wouldn’t rely on. If Congress does reinstate it, if they make it retro, it could go back and you might be able to get the 100%. But I don’t know that I’d wait around holding my breath on that.
Toby: They’ll automatically do it. They were talking this year because we thought they were bringing back the 100%. They had agreed that they would, the house passed it, and then we had political unrest in the Middle East. All of a sudden the Senate was distracted for several months.
Now, you have a president who’s getting up there saying, hey, I’m going to let the Tax Cut and Jobs Act provisions expire, but I’m not raising the tax and anybody under $400,000, which is a huge increase. But I’m not doing anything, so I’m not passing any laws. I’m just going to let them expire. That’s going to hit us. If they let those expire.
As a real estate investor, one of the best things that you had at your disposal was that 100% bonus depreciation at 60% this year. But Eliot is 100% correct in that it doesn’t matter what year you implement it. What matters is the year that you put the property into service, and that cost seg study that you did in December of 2023 never expires. Because those are the numbers.
Some of the tax numbers, like when you do a report, might change, but the percentage that is in 5-, 7-, 15-year property, and they’re dividing up your basis, that’s not going to change. Those ratios continue to be used. If you add more basis, if you fix some things up that you can’t deduct as an expense, that could adjust things. But those ratios are going to continue to hold true.
I could pull the trigger in 2026 for 2023, and I get the tax benefit in 2026. This is how tax planning works. I have it in my back pocket. I know exactly how much deduction. We’ve done this before with people. Don’t report it. Don’t do a change of accounting on that property this year. Let’s wait until there’s a year where we’re going to have some more income because it’s going to be worth more to us.
Especially with the Tax Cut and Jobs Act provisions expiring, taxes are going to go up in 2026. Now you have a big deduction that you could trigger then to take the bite out of that. You might want to look at that and say, maybe I wait, or if you want the money now, you do it now. It’s up to you. You actually have a lot of flexibility when using those reports, but I don’t think you need to get another one.
Fun stuff. We love having options like that. That’s where tax planning is fun. How much did you make this year? How much do you think you’re going to make next year? Oh, I’m exiting three deals next year. We’re waiting, and this, that, and the other. Oh, well we’re going to have a lot of income next year. Okay, let’s not pull the trigger. Then you find out, wait a second. Actually it’s going to be another year from now. I’d rather have the money now. Okay, we can take that 2023. We can still do it.
Eliot: It’s the flexibility. There’s a lot.
Toby: Yeah. We could do that before October if it’s an individual?
Eliot: Yup.
Toby: You did the report back in December, but you could still do it.
Eliot: You’re in a really good position on that one. I think a lot of people would be very happy to be in that position.
Toby: It’s weird. You don’t realize that I could be doing a cost seg study for 2023 even after I filed my taxes for 2023. I could still amend and implement a cost seg for 2023 all the way into October. We do it all the time.
But if you only have W-2 income and your husband is not a real estate professional, you can only deduct it from rental passive income. You use whatever you have as passive income. You have active participation, real estate, professional, or short-term rentals. Those are the three where you can use it against your W-2.
If you’re not any of those, then you don’t lose it. You just carry it forward and you use it to offset your rents or any other passive income you have. If you’re doing a pizza shop but you don’t participate, and it makes $30,000 a year because you’re a silent owner, you use the depreciation from your real estate investing to offset it. You won’t pay tax on it.
That’s why you always see wealthy real estate investors. They’re always trying to be a silent partner in a business. I always scratch my head on that. Why don’t they ever want to participate? Why don’t they want to run the thing? They’re like, no, no, no, no, no.
Eliot: I want nothing to do with it.
Toby: Because their accountant’s like, don’t you dare, but we want the income. We want that income. If you can be an owner and you can make some income, people say, well, why don’t you just loan it to them? Because interest would be taxable at the ordinary rate, whereas if I’m making passive income from it, I could not pay tax on that. It’s like getting a 30-some percent greater return. It’s that significant.
Eliot: And always be careful. When we talk about passive, we’re talking about the definition under the tax code. You go right now and you google, hey, I want to make some passive income. They may talk about interest income and things like that.
Toby: That’s portfolio.
Eliot: Yeah, that’s portfolio. They’re just talking passive as in you didn’t do anything. That’s different from a tax code passive.
Toby: Two types of passive income. That’s it. Real estate income that is from investments or businesses that you do not materially participate in.
“Can it offset capital gains from a private equity deal?” Mary, actually yes if it’s a passive activity. If it’s passive capital gains, then your passive loss from the other real estate—and your accountant’s going to have a meltdown. They’re going to be like, no, you can’t. Oh.
Yes, the nature of the income, when you sell it as an investment, it’s going to keep its nature. Even though it says capital gain, if it was from a passive activity, it’s passive income and you can use your other.
Now, I wouldn’t necessarily use my passive losses against passive capital gains because capital gains, if it’s long-term, is a maximum of 20%. I’d rather use it against something that’s a little higher. I want to get that 37%. Thank you, Mary. Good questions. It’s nice to have options and not just be told to write the check.
All right. “Can I do cost segregation study on Airbnb in a foreign country?”
Eliot: We don’t get this every day, but we do get it quite a bit. Different countries obviously have their own different tax rules. You can do cost segs over there. I don’t want to confuse that. As far as the US side of it, you certainly cannot do any bonus depreciation that we’ve talked about. As far as a cost seg study, I don’t believe you would. Even if you could, I don’t think it’s going to benefit you the way you would think.
I guess I think they can do a cost seg, but I don’t know that I would on a foreign property for US tax purposes. That country very much might have different types of rules that allow their own type of foreign cost seg study there.
Toby: Here’s the weird thing. US taxes worldwide income. We’re one of two countries that do this. We tax it no matter where you make it. If you have an Airbnb in London, let’s say that you have a flat there and you’re Airbnbing it, you’re going to have to pay UK taxes on that income and they’re going to calculate it, and you’re going to get a tax credit for that amount. Then you’re going to calculate it in the US and the US is going to make you use the alternative.
What is it? ADS system. It’s basically 30-year depreciation on that asset. You don’t get to accelerate, no bonus depreciation technically because bonus depreciation is only available when ADS isn’t mandated. If I do a cost seg, it’s not going to do me any good because I’m stuck with this either 30- or 40-year depreciation.
Eliot: Forty is a long-term for a foreign country.
Toby: Then you’re going to look at that and say, all right, how much tax did you pay to that foreign country? I get a tax credit if we have a treaty. I believe we have a treaty with the UK. Most of the time against most major countries, we have a treaty that says, hey, if you paid tax there, you get a tax credit. If that amount of tax is greater than your US tax, then you don’t owe anything. You could actually use some of it. But if it’s less, then you’re going to end up owing some US tax.
To go to the actual text of the question, though, “Can I do a cost segregation study on an Airbnb in a foreign country?” You can, but it’s not going to do you any good. That’s the easy answer. It’s probably not going to help you at all.
Hey, if you like learning about entities and you like this type of conversation, by all means come and join us at the Tax and Asset Protection Workshop, absolutely free. There’s one coming up on May 11th. There’s another one on May 18th. Join one of those if you want a virtual one, and it’s one day.
Then we have the in-person in Dallas. You can come meet us. I’ll be there speaking, probably part of the event. I know I do a tax section and some other fun stuff on June 27th, 28th and 29th. It’ll be fun to come hang out.
It’s really inexpensive. Basically, it’s not even the cost of the room. It’s really, really, really inexpensive. You guys can come there and be around a bunch of cool people who are investors. Sherry says, I just left Dallas. The good news, Sherry, is that they have cars and trains and airplanes.
Eliot: Got to get back there.
Toby: Yeah, and somebody says, what about Florida? We were just there. We were just in Orlando. We did the last live event in Orlando. All right, let’s jump back into this since talking too much.
“I want to utilize rental property depreciation to the max. However, I held a property for 5 years and then did a 1031 exchange. I barely get any depreciation to use, now. Please explain why, what occurs to depreciation when I do a 1031 exchange? Will the original basis carry over to the replacement property? If so, is it accurate to say I get the most depreciation benefit when I buy straight up not doing a 1031?”
Eliot: I picked this again because it brings up a lot of common questions that we get with 1031s. While it’s not that the original basis carries over, what does is the adjusted basis of what was left in that property. We’re doing a 1031. The idea is I have a property, I want to sell it. We call that the relinquished property. I get rid of it. I pick up a new property that’s my replacement property.
What I have to take is what was my adjusted basis. After I’ve done all my depreciation on the one I gave away, the relinquished property, whatever that amount becomes my depreciation basis in the new property, save for other things if I put improvements and stuff like that.
Our individual asking this question is right on track. It’s just not the original basis, it’s just the adjusted basis leftover. It goes over to the new replacement property. That’s why we’re not seeing a whole lot more depreciation, even though it looks like this building was worth a whole lot more with a fair market value, et cetera. So in a sense, it is accurate to say that you get your most appreciation maybe if you had bought brand new and didn’t do a 1031. But that is not at all to dissuade one from doing a 1031. Those are fantastic tools.
Toby: I think you nailed it. I don’t know what else to say other than it is accurate to say that it’s better from a depreciation standpoint to buy straight up, but you’re avoiding recapture in capital gains by 1031. You got to weigh them both.
By the way, our guys are answering questions coming out of their ears. Over 100. Amanda, Arash, Dutch, Jared, Jeff, Tanya’s there now, Troy, plus I think we have folks that are answering the YouTube as well. We stream live on YouTube, all those.
You guys are doing a great job. Thank you so much for answering all these questions. It’s really kind of you to do so. I know you guys aren’t on camera and all that fun stuff, so you’re not getting to wrap, but you’re definitely going in and answering a lot of them. I’m reading them as you guys are doing them. I always find them fascinating. There are so many cool questions. I just want to sit there and answer them all day long.
All right. “What’s the best way to transfer the ownership of my investment property to my son before my death?” Say you?
Eliot: You could just go ahead and you’re allowed to gift up to approximately $12 million. It’s probably getting closer to $13 or $14 million, but that’s just a gift. You can certainly do so, but we wouldn’t really recommend that generally from a tax perspective, because they won’t get what’s called stepped-up basis.
It’s best to put it into a living trust so that if you pass, then it will automatically go to your beneficiary, and now they will get stepped-up basis to the current fair market value. If we must move it beforehand, you might want to just gift it perhaps. Otherwise, we would really recommend just putting it into a living trust and letting them get the stepped up basis.
Toby: Don’t give your house to your son. The reason being is because you just did a gift. You’re going to have to report it. You have to file it on your tax returns if it’s greater than, what is it this year? $17,000? $18,000? There’s an annual minimum amount where you don’t have to report anything, but you’re going to be well above it if you’re giving your house.
They’re also liable for everything. They’re liable on the property and you’re liable for anything they do. All of a sudden, they go through a divorce, they get in a car accident, they could take that house. Especially if the son’s not living there as a primary residence. You’re living there. That would be rather shocking if all of a sudden the house disappears, or the son decides I’m going to sell my interest. Then all of a sudden you have a roommate and you’re not particularly happy about it.
What’s the best way to transfer ownership? Into a living trust. Then when you pass, you get a step up in basis. Your son will not have to pay tax on any of the gain. It works out really great. But during your lifetime you don’t have any worries.
The other issue we have is if you’re doing any Medicaid or anything like that, they have a lookback period—I think it’s five years—that could cause problems and penalties. If you inadvertently do this within that timeline, you’re like, oh, nuts. But I’ve just found it causes way more issues to do this than just having a living trust and not worrying about it until you pass.
You need to have control of that asset in case something comes up in your life and you need to. The last thing you want to do is be later in life have an issue, and have your son say no. You put me on the property. It’s mine too. I’m going to object. I don’t want to sell it. I’m going to fight you. We’ve seen it happen and you don’t want to bring that upon yourself. Put it in a living trust.
If it’s an investment property, put it in some sort of vehicle, either a land trust or an LLC. Make sure that it’s protected so you don’t have liability issues. But when you pass away, there’s a huge benefit that you’re still receiving under the tax code, which is that step up in basis, which means your son’s basis.
Let’s say that you bought a house for $100,000 and now it’s worth $500,000. If you put him on that property and you pass, his basis is $100,000. If he sells it after you pass, there’s $400,000 of gain. You’re going to end up paying tax pretty close to 23.8%. You’re going to be paying tax and close to $100,000.
If you did nothing but put it in a living trust and you passed, your son gets it at $500,000, could sell it, pays zero in tax. You just created a situation. By gifting, that’s going to cost you $100,000 from your family in the long run, which is a big chunk of that asset.
Before you say, well, that doesn’t really happen, yeah, I had a client where it happened to the tune of a building. There were four siblings and it was millions of dollars of tax that would’ve been avoided had they just not gifted. The accountant helped them gift it and it cost them millions of dollars in tax savings. They weren’t too pleased with the accountant afterward.
The accountant of course had plenty of excuses. Oh no, I talked about this, I talked about that. He knew. Da-da-da-da-da. No, he just told him, hey, we’re worried about the estate tax. Let’s give it. Dad passed away in a year when they didn’t even have the estate tax. All you did is cost the family, in their particular case, about $3 million. It was pretty nasty. The kids were not happy. Here’s the easy thing. Use a properly drafted living trust, put it in the living trust. Make it easy.
All right, Eliot, here’s a question for you. “How does a donor-advised fund differ from a family foundation?”
Eliot: In a couple of different ways. First of all, a donor-advised fund is typically where you’re going to (in a sense) donate money to maybe a financial advisor. They put it in a special box, if you will, and you treat it as if you donated it to a charity. You get a deduction on your return. They, being this financial institution, will handle it. Then you will tell them which nonprofit you want the funds to go to.
The big key is that you get your deduction up front. Now if it’s cash, you can typically put it up to 60% of your AGI. If it’s an appreciated property, I believe it’s 30% of AGI. Those are the limits that you might get on your tax deduction. When it gets to the family foundation, though, you can still put money in, but you’re going to be limited to 30% AGI for cash, 20% for property that’s gone up. That’s capped what we call appreciated property.
You might have a little bit more of a limit on what deduction you get on your return. Both are great tools using it for the right purpose. Usually, you don’t mention the family foundation from the get-go. We like to see a public charity. If a client’s going to set something up, you do the public charity first. A little bit better deductions early on for about five years and then maybe it flips into a family foundation, which is not a bad thing. You didn’t do anything wrong. But certainly both of these are good quality products used in their proper context.
Toby: It’s weird. Donor-Advised funds were set up so people could basically give bigger chunks that they know are going to go to charity without designating the charity. I could go to Schwab and I could open up a donor-advised fund, then do you make grants out of it? They have to approve it though.
We have a donor-advised fund here, too, for folks that set up charities with us so that you could put money in there and you could eventually give it to your charity. We like that actually. You put the money in the donor-advised fund. All it is is basically a stock investing account similar to an IRA. You get the tax deduction right now, the money grows tax-free and it’s going to go to a 501(c)(3) in the future. You get to designate it. It could go to yours.
A family foundation is an actual charity 501(c)(3), but it’s not doing anything. When you hear a family foundation, I immediately think they’re running a bunch of money and they have to give 5% away on an annual basis of their assets to keep their charitable designation or they face a penalty. You just have to give it to other 501(c)(3)s.
A family foundation’s really designed to fund other 501(c)(3)s. There’s a hybrid called a private operating foundation, like the Bill and Melinda Gates, where they don’t have to give money because they’re actually doing something as well. They’re not a public charity, but they’re not a private foundation.
Whenever I hear the term family foundation, I’m going to assume you’re talking about a private foundation. Or you could always set it up as a public charity. That donor-advised fund is just like a box that is designated for charities, but I’m putting it there now so I can get the tax deduction.
Some of you guys, I do this at the end of the year. I’m like, oh shoot, I need to make charitable donations, but I don’t know where I want it to go. I have a couple of charities, I have some charities I support, but I want the tax deduction. I’ll park the money in a donor-advised fund and there’s no timeline on it. It could sit in there for 10 years.
Right now there’s nothing that says when you have to distribute it. These donor advised funds get huge because people are pushing money into it. All it’s doing is you could have it invested as you see fit. You want to do covered calls? Do covered calls. You want to do options? Do options. You want to just buy ETFs on the market, SPY, or VOO? Do it. Then it just gets bigger and bigger and bigger and bigger, then you make grants to other 501(c)(3)s. That’s all you’re doing, so very different.
I can take a salary out of a family foundation. I cannot take a salary out of a donor-advised fund. Donor-advised fund is somebody else’s bucket that I’m putting money into that’s sponsoring it. My family foundation is mine. I can reimburse expenses, I can hire myself. If it’s a public charity, I can do all sorts of stuff with it. There are no prohibitions with it, disqualified parties. There’s a lot more flexibility if it’s a public charity. But I can do all those things. So lots of fun that you could do with these entities.
By the way, I’ve done a bunch of videos on charities. You can go to the YouTube channel and look it up. I think I had Kareem, the head of our philanthropic division who was a former IRS attorney for the exempt division, so exempting governmental entities. He knows his stuff.
There was a recent one we did, I think the top 10 types of charities. He does a really good job breaking that out. It’s on my YouTube channel. Go take a look at all the videos and I think it was probably about a month ago, so you could just take a look there if you want to learn these things. Otherwise just peruse the titles. There’s a ton there.
Of course, come and visit us at the Tax and Asset Protection Workshop. You learn quite a bit there. The beautiful part about those Tax and Asset Protection Workshops, even when they’re virtual is we have them staffed with attorneys and accountants answering questions.
Again, if you’ve probably figured this out, we’ll answer your questions live here, no cost. We answer your questions at the Tax and Asset Protection Workshop, live, no cost. We’re trying to educate people as best we can. Those are the best clients, the ones that know why they’re doing it, and have a really clear idea of, this is what I want to accomplish. We’ll help you do that.
We reward you by saying if you’re willing to spend some time with us and learn these things, we’ll answer the questions. We’re not going to sit there nickel and dime you and send you a bill. If you have questions, shoot them to taxtuesday@andersonadvisors.com. We’ll answer your question.
Eliot: Yeah. Great questions. Just keep them coming. We love it.
Toby: Visit our website. There are lots of other free resources there as well. Not bad, only seven minutes over, so that’s better. I used to have a problem, guys. I think we used to go—
Eliot: Almost went two hours, I think, one time.
Toby: More than one, but it was fun. I would answer all the questions and we would sit there. I see there are still a few open questions. I think we’re over 200-something episodes in, so I don’t even remember how many years ago it was. We would just keep doing them. It was fun. But people didn’t necessarily appreciate a two hour Tax Tuesday.
Eliot: They didn’t see the enjoyment that we do.
Toby: I enjoyed it. We had a good time. Guys, if you have questions, they’ll answer them. In the meantime, I’m going to say thank you for joining us at Tax Tuesday. We’ll see you in two weeks. If you have questions, taxtuesday@andersonadvisors.com or if you’re a client, thank you. Just reach out and we’ll take care of you. Thanks guys. Bye-bye.
