In case you missed it, Oct. 15 was another tax deadline. However, you still have some time to decide who you want to vote for in the upcoming presidential election: Donald Trump or Joe Biden? Toby Mathis of Anderson Advisors answers your tax questions about the impact of their proposed tax plans. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- What are the differences between Donald Trump’s and Joe Biden’s proposed tax plans?
- Individual Rates: Trump to lower middle rates; Biden to increase top-bracket rates
- Corporate Rates: Trump wants 21%; Biden wants 28%
- Dividends: Trump wants 0, 15, 23.8%; Biden wants 0, 15, 23.8, 43.4%
- Credits: Biden wants to increase child credits to give families more money
- Payroll Taxes: Trump to forgive OADSI; Biden to add OADSI
- Estate Taxes: Trump to keep TCJA; Biden to expire it with no step up
- Itemized Deductions: Trump to remove miscellaneous itemized deductions; Biden to reset deductions and add SALT
- What are actions that you may want to take in 2020/2021 considering Trump’s vs. Biden’s proposed tax plans?
- Gain Harvesting
- Roth Conversion
- 100% AGI
- Carryforward NOLs
- Wait on Harvesting Losses
- Gifting
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Resources:
Tax Toolbox (Only $595, Regularly $1,500)
Old Age and Disability Survivor’s Insurance (OADSI)
State and Local Tax (SALT) Limitation
Individual Retirement Arrangements (IRAs)
Real Estate Professional Requirements
Internal Revenue Service (IRS)
Unrelated Debt-Financed Income (UDFI)
3115 Change of Accounting Method
Healthcare Reform (Affordable Care Act)
Anderson Advisors Tax and Asset Protection Event
Full Episode Transcript:
Hey, guys. This is Toby Mathis. You can see my buddy Jeff there; he’s not doing so good. He’s up against the tax deadline, so I’m just trying to give you guys the visual depiction of what he looks like right now. Looks like not so good. Actually, this isn’t entirely accurate. I got to give him a little bit of drool. This is what happens to all the accountants around tax time.
Jeff is up against the deadline. Jeff’s doing great actually. I told him, I said, “Dude, I’ll take this. I love chatting with people.” Now since you guys can do it, well I have some fun with it. If your smile’s a smirk kind of, you guys are starting to figure me out here.
We have questions coming in already. Wow, you guys are already active. Tax Tuesday rules. Ask live and we will answer before the end of the webinar. We have a team on. We have Eliot Thomas, Patty Peery, Susan Nicholas, Tavia Harter, and moi. You could ask your questions and they’ll be jumping all over it. We’ll make sure that we can get you.
Real quick. Somebody’s asking, “Why won’t my accountant allow me to write-off all my 1231 losses this year?” Jim, that’s a capital loss, and capital losses can be used to offset capital income. You have to have long-term capital gains and short-term capital gains to use up that loss. Otherwise, you get to take $3000 against your other income sources and carry it forward. Doesn’t that stink?
You make a million one year, lose a million in the next. There’s a good chance you’ll be paying tax on the million dollars and not getting to write-off the million dollars the next year. It’s weird how it works, but that’s exactly how it does, so don’t lose money in the stock market, guys. It’s not a fair rule, it’s going to beat you up.
Tax Tuesday questions. You guys are going to see me drawing because it’s just me. Jeff can’t keep me away from the pen like he likes to. Feel free to send us questions. If you need a detailed response, you really do need to be a Platinum client. It’s not expensive; it’s $35 a month. There is a sign-up fee, but we have numerous programs to allow you to avoid that sign-up. Evade is a bad word in the tax world; avoid the sign-up fee. We could work to package it up with something else.
This is fast, fun, and educational. We want to give back and help educate. This is good stuff, guys. It’s always fun to talk about taxes. Feel free to banter with me if you feel like it on this. Anybody who knows what’s going on in the tax world knows that Biden has put some stuff out. He’s a little bit evasive and Trump hasn’t really put anything out. When we talk about Trump’s tax plan, we’re really talking about the continuation of the Tax Cuts and Jobs Act of 2017 which became active right at the end of that year.
A lot of the provisions sunset in 2025, but in 2022–2025 you have sunsets. Trump’s tax stuff is really a continuation and making permanent a lot of those provisions. In 2022, for example, your accelerated depreciation—which so many accountants love—drops down to 80% for a couple of years, then goes to 60%, then goes away. It starts to phase out, in other words. Let’s see if we can make that. We go over that as an opening question.
Since I’m doing this all by myself, I’m just grabbing a few that are really interesting to me. Somebody wrote, “Should I file bankruptcy on my business if I owe the IRS $1 million in back payroll taxes, or should I try an offer-and-compromise and continue operating the business to pay back what is agreed on?” We’ll answer that.
“If I own a commercial building in the name of my LLC and engage in a 1031 exchange, can my replacement property be purchased as a tenant in common arrangement?” We’ve done a bunch of those. I’ll go over what the rules are.
“Does placing real estate in solo 401(k) allow full use of the real estate tax benefits? We’ll answer that one. Great questions. I love those types of questions.
“In order to have losses from an active business be counted as active losses, do you have to work 500 hours in a year in the business? I just formed my active business in September so how would I hit that 500 hours?” We’ll answer that.
“Can you describe the best strategy for selling employee stock purchase plan shares obtained at a discounted rate? Do you always wait for it to be considered a qualifying disposition, or do that only when the stock has gone up in value during the purchasing term?” This is such a cool question. I’m going to give it a smiley face because I don’t get to answer those very often. It gets really complicated. It’ll give us a chance to go over and educate some people that may be in these arrangements and not even know what it is.
“I’ve made some good money trading cryptocurrency. This puts me in the highest tax bracket. Is there a way to reduce my tax liability?” You’ve come to the right place. We’ll go over that.
“I am a limited partner in a hedge fund through a Wyoming holding company, how can I deduct the management fees?” Great question. Some of you guys know that this is the Tax Cuts and Jobs Act that is causing this issue. “But wait, I thought that the taxes went down?” Individual taxes went up when you look at the numbers and how much was actually collected. Two reasons, which we’ll get into.
“My wife and I have W-2 jobs and are also renting out three rental properties. Those three properties are owned by our three LLCs, one property per LLC. What tax benefits are there if we form a C corp on top of those three LLCs to act as a property management company? What if my wife quits her W-2 job and becomes a real estate professional?”
I love questions like that. That’s a good question, it’s forward-thinking. Just as an aside on that type of question, by the way, if you understand how real estate professionals work—we’ll dive into this—we’ve actually had people reduce the hours that they work and net more money because the reduction in the hours that they were working allowed them to qualify for certain tax benefits. You guys will get that when we go through it. It’s a really weird thing to get your head around. “Wait a second. You mean I could work less and keep more?” Yes, the tax world incentivizes you to do smart things.
“Would the capital gains exclusion apply to a two-unit property where one unit is rented and the other unit we lived in?” You’re a house hacker, right? “For purposes of this question, say the property was purchased in 1999 for $500,000 and now it’s valued around $2.5 million. Can we sell the property without paying capital gains, and if so, how?” I like that question a lot. This deals with 121 and 1031 exchanges. This is so exciting. Jeff, you are missing out, brother, if you’re listening to this at all. We’ll get this.
Let’s talk about our presidential candidates, President Trump and former Vice-President Joe Biden, who’s running for Senate or President depending on the day. I couldn’t resist that. You guys have to admit that that’s pretty dang funny when he keeps saying. And there are some pretty big differences from a tax perspective.
Individual rates. This is what’s interesting, Trump did say he wanted to lower middle rates. He wants to lower middle rates, and then Biden wants to increase the top bracket to 39.6%. He hadn’t talked about the other brackets. He said to leave it all the same, which were those under the Tax Cuts and Jobs Act. Corporate rates. Trump is 21%, Biden wants to move that up to 28%. I’ll go over what the impact will be when we get into this.
Right now, qualified dividends are 0%, 15%, or 20%. If you understand net investment income tax, you could add 3.8% to this one, so technically, the top capital gains rate really is—when you look at it—23.8%. What happened here is, under Biden, you’d still have that 23.8% but it ends up being a 39.6% plus 3.8%. That’d be 43.4%. That’d be your highest bracket. It’s pretty heinous, and that’s if you’re over the million-dollar mark.
Biden also wants to increase the child credits. He’s talked about giving families some more money. Payroll taxes. There’s something called old-age, disability, and survivors insurance—the social security side. He wants to add that back in when you’re over $400,000—I’ll show you guys the chart—at 12.4%. He wants to have a phase-out, and the phase-out set $137,700 and then have it come back.
Trump wants to forgive OASDI for this year. He’d given his executive order. He wants to say basically, we were deferring and allowing you to pay your employment taxes in 2021 and 2022 that you incurred in 2020. We want to forgive those, is what he said. There is something there.
Estate taxes, he wants to keep and make permanent the Tax Cuts and Jobs Act which means $11 million-plus estate tax exclusion per person. Biden wants to allow it to expire, and go back down to around the $5 million mark, but he also wants to get rid of the step-up in basis. He wants tax on death of appreciated assets.
What does that mean? It means, let’s say that you had stocks. Ordinarily, when you die, your capital assets, the basis adjusts to the value on the date of passing. If Biden’s plan comes in place, he wants to eliminate that and make it taxable as though you sold it on the date that you passed. This whole idea was you’d end up with lots more taxes coming in when people passed away because they would have capital gains almost immediately on capital assets.
Itemized deductions. Some of you guys know that Trump got rid of them, so they’re gone. You have your standard deduction. Miscellaneous itemized deductions are gone, so I should say miscellaneous to be fair. The Pease limitation went away. Biden wants to bring a version of that back in, so I’d say Pease+, which just means that you’re going to have a 3% limitation over a certain dollar amount. I think they’re talking $400,000.
There’s also a phase-out of 199A. It’s gone. You would get that after $400,000. It already goes away for professionals, but for all businesses, it would go away.
Itemized deductions for Trump, you have SALT. That’s right. Biden would get rid of SALT, which is the state and local tax limitation. Right now, there’s a $10,000 limitation, so under Biden, that would go away. What Biden’s really doing is saying for anybody under $400,000, we’re going to let you have more deductions.
Somebody asked, “Why is $400,000 the magic number?” They just think that that means you’re rich if you’re making more than $400,000, so I think they just picked it out of the air saying that we can demonize those that are making more than $400,000. I shouldn’t say that that sounds political. They’re going to tax at a higher rate the people that are making more because they believe that they’re able to pay more.
This is the social security tax, this is the OASDI. This is 12.4%, and the employer pays half—50/50—unless you’re self-employed. It phases out right now, just that old-age, death, and survivors insurance. Medicare goes on forever. The 2.9% medicare does not have a phase-out. That’s just going on. But what happens is it used to go down to zero after you hit this phase-out number. All Biden’s plan is going to do is anything above $400,000 comes back.
When you’re looking at the tax bracket, let’s just be real and look at this. This is what would happen in 2021, assuming that Biden was able to change the laws, which he obviously can’t. I don’t really know. I guess he could try in an executive order, but it would be Congress who would have to obviously do that. He just wouldn’t veto or probably, he would welcome it.
What you really have is just the 35% and the 37% going bye-bye. Again, anything over $400,000, you start getting this pain. Another magic number is a million. You’re going to see where that comes in when we talk about capital gains. What does it really mean? Here’s the effective tax rate when talking about the income that flows through. You have 199A adjusting these numbers, you have social security or self-employment tax adjusting these numbers.
Since we’re talking about an S corp, we’re just going to be talking about social security. In the old days, you’re pretty much done if you got to the point where you are maxing out your bracket. You had a little bit of an extra but not much.
With Biden, you’re looking at about a 3.7% increase, and then where it really hurts is if you’re making in the $600,000 range, Over half a million, really. You are talking about an 11.6% increase in tax. Again, let’s just be real.
Capital gains and dividend rates. I kind of wish that they would just do this for us. Here’s how much it will go up. It would be up 2%. Most people probably wouldn’t care too much, but when you start seeing 10% increases in an already tough year, you’re like, hey thanks, maybe my business is just now reopening. I have deferred business and everybody helps me out. I have a great beginning of 2021 and I know I’m going to get slammed for it.
Here are the dividends. When you’re over that $1 million mark—this is where it gets crazy—you literally go from that 20% to that 39.6%. Why is this important? Because your dividend is what you get out of the corporation. What we wanted to be is more competitive worldwide. We wanted people to start doing business here. You see what transplanned is, hey, really you kind of capped it. He said if your company pays tax and you pay it out of the dividend, then you’re not getting murdered on it. Before it was 50%. That was too bad. Now we’re going to go 59%.
What do you think is going to happen? Remember, everybody who gets into this stuff, sometimes, we get people that get a little edgy. Corporations don’t really pay tax because if they didn’t pay it, they would pay out more. How do we know that? Because personal incomes have gone up steadily over the last few years and people are paying more in taxes than they were prior to the Tax Cuts and Jobs Act.
Anyway, I’m not going to argue with anybody. Trump tax versus Biden, what you may want to be looking at. Here are the things that I am looking at and I’m telling our clients. Some of you guys may be on a quarterly call coming up here in the next short period of time. It’s next week actually, but we may be looking at gain harvesting because remember, if you make a million-plus, you essentially could be paying 100% more in tax. You may be looking at the end of the year going, heck no, you’ll sell off everything that has lots of gain in it.
You may also want to do a Roth conversion. The rule there is if your tax bracket goes up from where you are right now, then a Roth is usually a good idea. If your tax bracket is going to stay the same, then there it’s equal. If your tax bracket is going to go down when you retire, then you’re better off doing a deferred plan like a regular 401(k), a defined benefit, or traditional IRA. You also have the ability to do 100% charitable deduction this year, in 2020. The reason I say that is because depending on what your income is, you may not get much of a benefit.
For example, let’s say you make a million dollars under the Biden plan in 2021. It would remove $400,000 from that—that’s their magic number—and you would have $600,000 times 3% which equals $18,000. You would take whatever your deductions are, minus $18,000, and that’s going to be what you’re left with.
If you wait, you may lose the benefit of the deduction, depending on what your income is. I know this is getting complicated. I just happened to look at the stuff, and I can play with the numbers, but to most people, it’s like writing Greek. Just know that these are the things that we would look at. Everybody’s situation’s a little bit different, but it’s worth taking a gander depending on what you think your income is doing.
Carryforward net operating losses. You have the chance—if you have a loss in 2018, 2019, or 2020—to either carry back for 5 years and then carry forward, or not and just carry forward. Why is that important? Because if I have a net operating loss in 2020, I may choose to carry it forward if I’m going to be in a really high tax bracket. It makes sense to me.
I might wait on harvesting losses. If I have positions that I’ve lost, I may want to wait a week. I could sell it in December. I may want to sell it if I’m going to be in that 39.6% capital gains bracket. I may just want to wait and sell my losses in 2021.
Then gifting. It’s the use-it-or-lose-it–type of thing. If the estate tax is going to go away, you’ll know that, probably in November and December, depending on who gets Congress and who has the Senate. We’ll have an idea of what they’re going to be able to push through. Again, I’m not being political. I’m just saying it’s the reality. If Biden gets in but he doesn’t have Congress, then he’s not going to be able to do much. If he does, then he’s going to be able to do a lot of things and you better be prepared. You may want to say, maybe we want to use up our gifting under the (I think) $11.8 million this year. If you’re at a higher state, you may want to look at that and say, maybe these are things we look at.
Speaking of things we look at, we did come out with the tax toolbox. This is only the time I’m going to bring it up today. It’s $595, it is in 20 different sections, and about a 300-page workbook. It’s pretty extensive. If you don’t want the physical, you could just do the E-version. It’s $495. If you’re interested in that, it’s aba.link/TaxToolbox. You just go to that link.
Why am I putting that up? Because nobody’s going to take better care of your tax situation than you. It’s good to have a guide that’s helping you and giving you ideas, but at the end of the day, for every hour you’re spending on tax planning, it should yield you about $1000 of benefit. That’s what I’ve seen over the years, so I get to say if you want to spend a few hours learning this stuff, you’ll probably put a lot of money in your pocket. That’s on an annual basis.
As a benefit, we’ll also give you the Tax-Wise Workshop coming up in December. I forgot the exact date. Patty may have it. Anyway, that’s going to be a fun workshop where we’ll go over tons and tons of stuff, but that’s also included. So, basically, you’re getting a bunch of materials to help you understand taxes.
Speaking of understanding taxes, let me just go and look at a couple that I wanted to hit here before we jump forward. I’m going to see if there’s anything. Somebody says, “Recent first-time homebuyer. How does this affect my taxes for 2020? Any insights?” Well, James, you’re going to get to write-off your mortgage interest and your real estate taxes that ordinarily we wouldn’t have been able to do. What you’re going to end up doing is looking to see whether that’s higher than the standard deduction.
The way it works is you have a standard deduction, and let’s say that you’re married filing jointly in 2020. I believe it’s $24,800. I’m not looking at the chart. It’s either that or $24,400. I always forget. Then, you’re going to add up all your Schedule A or your itemized deductions which is going to be your charity, your medical expenses that exceed a certain percentage. You’re going to get to write-off your mortgage interest, state taxes mortgage, your state and local taxes. You’re going to add all those up, and you’re going to take whichever one is bigger. About 80% of the people right now take the standard. It may impact you and may not impact you. Certainly, this is worth calculating.
We already answered about taxes. Question about Solo 401(k), “Can I roll a 2019 Solo 401(k) money contributed to 2020 if I can’t benefit from the contribution already in 2020?” I believe that if you made the contribution in 2019, then you’re stuck, but if you made the contribution since then before the end of the tax year, I believe that you could be categorizing it as a 2020. It all depends on when you actually did it.
Look at all these cool questions. The questions are getting answered pretty well by our group, so I’m going to jump into some of the fine ones that we have just because this is so much fun.
You got to put your bankruptcy hat on. This is going to be the ‘things are never as they seem.’ “Bankruptcy, IRS debt. Can you bankrupt away IRS debt? Yes or no?” The answer is yes, income taxes, but when you’re paying payroll taxes, they’re actually on behalf of somebody else. When they say payroll taxes, you are supposed to pay that. That was somebody else’s property that was supposed to go there, which means they call it theft when you don’t pay it, and theft cannot be discharged in bankruptcy.
It gets worse. Not only that not discharge in bankruptcy, but anybody who is a responsible party can be held responsible for the payroll taxes. Not only is it the company that’s on the hook, but anybody who is in charge of payroll is on the hook including any officer, director, or employee that was in charge of the payroll taxes. That could be really horrible. You never mess around with payroll taxes. Ever, ever, ever.
They even have cases where somebody popped out their AmEx and paid payroll taxes on the AmEx, and then tried to bankrupt away the American Express. The court said no because you used it to pay somebody else’s property, which means you robbed Peter to pay Paul, and we’re not going to let you walk away from the debt that you owed Peter. Isn’t that wild? There are a few of them.
Somebody says, “Does that apply to 1099 employees?” No, because a 1099 infers that they’re an independent contractor. A 1099 is equal to not an employee. This is only employment taxes. There we go. You learn something new every day.
“EDD unemployment?” Yes. Anything that was owed on behalf of somebody to another party, they can hold you responsible for it. All of the employment taxes, you would be held responsible for, even though you’re paying it on behalf of an employee. It sounds like it’s just a bill, but it’s not. They’re going to say that was supposed to be removed and remitted directly to us. You didn’t do it. Therefore, you robbed the employee. That’s just the take and it’s pretty unforgiving. I would say if I had to choose between paying payroll taxes and just about anything else, I’m paying payroll taxes.
Since we’re on this topic, whenever we’re talking about bankruptcy, that’s a clean slate. It’s not necessarily a bad thing. Some people are like, oh, bankruptcy. Disney went bankrupt and there are lots of successful people. Our President went bankrupt, God knows, probably more than once. It’s there to allow you to take risks and then not be destroyed for the rest of your life as opposed to that risk.
Even in our individual world, people don’t realize that there are certain things that you can’t bankrupt. You punch somebody in the head and you don’t want to pay their medical bills. You can’t bankrupt it, you did it on purpose. If you have student debt, you can’t bankrupt it. That’s a big thing. These people are getting into big debt. I could take a credit card, come to Vegas, make really bad choices all weekend and run that thing up, do a whole bunch of dumb stuff, and I could bankrupt that bill. Yet if I go get a degree at an institution, I follow all the rules, and I did everything great, because of just circumstances outside my control, I get COVID or a family member I’m taking care of and I can’t pay it. I can’t bankrupt it. It’s really weird.
Somebody says, “I have a property,” so you have a property, “titles held personally. Want to do a like-kind exchange, but prefer to acquire in an LLC. Should we transfer to an LLC before selling? Is there a seasoning period?” Roy, there really isn’t a seasoning period. What I would do is (say) if you already hold it personally, you got to go name the name. You could go LLC. You put the property in the LLC and then sell. But if you’re going to sell it soon, you may just want to sell it individually, and then buy individually, and then transfer it to the LLC.
I’ve never seen a problem when you buy first and then drop it. Where I see a problem is when there’s a change of ownership right before a sale, and then they start to question whether or not it was two sales, if you get it.
Somebody is asking another question. “If owning my interest in a company through an LLC and the company files bankruptcy, am I personally impacted?” Anne, It shouldn’t impact you at all unless you are a personal guarantor and they come after you personally. Otherwise, the company’s debts are not your debts.
We really saw that when the great recession hit. We had people that created separate credit profiles for their companies, where they had great credit. We had people that didn’t. What we saw is that when the person who didn’t get into trouble with their house, invariably, these banks would say skip a payment and then we’ll negotiate with you. We’ll do a loan modification.
They would immediately ding your business credit, pull it, and cancel your line of credit. We saw people with $3 million, $4 million lines of credit that got destroyed because of that. All of a sudden they can’t operate. It’s okay to have business credit, just make sure that it’s not tied to your personal, and that you’re not a guarantor on it.
“Are 401(k) and IRA accounts protected from bankruptcy?” There are certain amounts that are and some of it depends on state law. Generally speaking, you’re going to be okay. Somebody might not be able to force you into bankruptcy as well. They may not be able to attach it so they can go get their judgment. I’m thinking of O.J. Simpson on that one. He’s never going to bankrupt away everything, but they’re not going to be able to capture the asset anyway.
Here’s another one. This will be fun. “If I own a commercial building in the name of my LLC and engage in a 1031 exchange, can my replacement property be purchased in a tenant in common arrangement?” The answer is yes. You have to go LLC-to-LLC. In other words, the same owner and the TIC (tenant in common) arrangement cannot be a partnership.
We had a client that did this. They had really good counsel. They sold a strip mall and they basically wanted to park some money in some buildings. It was quite a bit of money. If you guys know how commercial real estate goes, it’s not like I can just clap my hands and magically sell. I know exactly what I’m going to do. It’s a little bit different than that. We have some timing issues and the 180 days may be a big issue. They park it in the TIC and they’re parking it with the idea that maybe at some point, they’re going to sell that TIC and acquire a final interest in something else, but they’re giving themselves a lot of time to be able to do it. You can 1031 exchange, and 1031 exchange, and 1031 exchange.
Somebody says, “I owe the IRS $100,000 and cannot pay it. I want to start an assisted living, but want to resolve this, somehow. Help. This is a personal, not corporate debt.” You can actually bankrupt that. There are requirements on making sure that you have filed your returns, and that you continue to file them, but you can actually bankrupt that away so that you could start something else. Again, the bankruptcy laws are there to give you a fresh slate, not to hammer you.
A lot of folks don’t realize that income taxes can be bankrupted away. I didn’t touch on this, and you guys may go back to my payroll tax; I’m just going to jump back into that. The one thing that I would say is you could go bankrupt on the main debt. I would do a Chapter 11 if it’s a business, individual possibly as well, or a 13 where I’m doing a payment plan. The only reason I’m doing this here is because I may not want to have to pay the penalties or interest.
Otherwise, I can’t get rid of the main debt. But if payroll taxes, the penalties can be pretty severe. If the penalties are so severe that they’re preventing me from being able to move forward, then I might look at going bankrupt just for that. I may not be able to get rid of that. I could basically make a payment plan.
Something he was talking about there was the offering compromise. Continue to run the business, engage with the IRS, start talking about getting rid of some of those honorous penalties, and keep them off you if possible.
“Does placing real estate in a Solo 401(k) allow full use of the real estate tax benefits?” The real estate tax benefits really come down to depreciation. And that depreciation’s the improvement on the property. Do you use depreciation in a Solo 401(k)? The answer is no. You’re not going to get that benefit and I believe you’re looking at a basis on a property of zero. Do you get any tax benefits? No. You got a deduction for placing it in there. Placing real estate, generally speaking, you’re probably putting in cash. Then the cash, you use the cash to buy the property. You get a deduction on that. You deducted it once already when you put the cash in. Now that you’re buying it, are you going to get a double benefit? The answer is no.
What I often get into arguments with some of the folks that do the IRAs is, I will say this. This is a Solo 401(k), so you don’t have something called unrelated debt-financed income. No, UDFI in a 401(k), but yes, UDFI in an IRA. The reason this is important is because you would use the depreciation to make sure that you’re not paying UDFI if you have debt in the 401(k).
If that just went over some of your guys’ just heads, I apologize. All I’m saying is that if you have debt, you’re buying real estate with debt, do it in a 401(k) because there are no hidden taxes. You do that in an IRA, you have hidden taxes. We would use the depreciation to make sure that we offset those taxes. But when you have to pay the money out, that’s the problem because it’s ordinary income.
At some point, I’m going to have to pay that real estate out and I could be paying myself partial interest. But it has a dollar value that I’m having to pay tax on. Sometimes what we say, it’s going to be better to convert your 401(k), depending on what you’re doing over your lifetime, maybe you do partial conversions to a Roth. Maybe we don’t want to be forced to take distributions. We may roll some of those monies into a Roth at some point, depending on what’s going on.
Somebody says, “When you have a self-directed IRA, can you explain how you operate tax-free and get funds in and out?” Okay, it’s an IRA. In order to put money in an IRA, you have to follow the rules, as far as how much you can put in and how much you can deduct. Putting money in means maybe I’m putting in $5000–$6000 a year. I could be doing a defined-benefit plan, dumping a whole bunch in, and rolling it into an IRA. I could be doing a 401(k) and dumping $37,000 or $57,000 a year into it.
If I take money out, it’s going to depend on whether it’s a traditional or a Roth. If it’s a traditional IRA, a traditional 401(k), or a defined-benefit plan, I’m going to have required minimum distributions, which is ordinary, and which means I’m going to pay tax as I take it out. You’re going to start that at age 72.
If you’re a Roth, you don’t have to take it out, but you never got a tax benefit for putting it in the first place. The way these things generally work is if they give you a tax benefit, it’s deferred. I could get a deduction by putting money into my IRA. I know I’m going to pay that at some point in the future. It may be that I’m waiting until I’m 72, maybe 73, 74. It comes down to about 4% a year that you’re taking out, that I’m having to pay tax on, but I get a deduction right now. I’m getting a nice benefit.
Realistically, I wouldn’t say do real estate in an IRA and self-directed IRAs. Again, they’re neat and all, but if you’re doing real estate, do it in a 401(k). Just because you’re in control, you don’t have to worry about a custodian and you don’t have to worry about UDFI. And if I make a mistake, it’s far less painful because in a 401(k), if you make a mistake, that portion becomes taxable. In an IRA, if you make a mistake, usually the whole thing is corrupted and they tax you on the whole IRA.
Somebody says, “Can we also live in a short-term rental home under an LLC? How does it work at tax time?” I’m not sure what that means. I’m just going to jump onto this. I may come back onto that one.
“In order to have losses from an active business be counted as active losses, do you have to work 500 hours in a year?” No. You have to materially participate. You, if you’re going to be taking that deduction on your return.
In other words, there are two types of businesses. If I am a business, I am either going to be active. What do you think the other side is? Or passive. Passive means no material participation. Active equals I’m materially participating. It’s not really 500 hours. It’s material participation that’s any one of (I think) nine different tests. It’s not something where you have to worry about that hourly.
The only time you’re worried about hourly, you really want to be keeping track of your hours. I’m talking about what you have to do when you’re dealing with a real estate professional. That’s because you have to keep contemporaneous logs and you have to do 750 hours. Plus it has to be more than 50% of your personal service time. So you have to hit that 750 hours. There’s no ifs, ands, or buts on that one. We want to make sure you’re documenting.
Somebody says, “How does the IRS like to see hours recorded? In a notebook or spreadsheet?” Roy, I would do it on your phone. What they care about is, is there a log? I would get into something where it’s really easy, like in your calendar, and also if you just email yourself at the end of the day. You could do something like that, or you can just put it on there.
Somebody asked, “Is it possible to open a 401(k) before the 1015 deadline?” The 401(k) wouldn’t help you. You’re not going to be able to put money in it. The only accounts where you could still put money in from last year would be a SEP IRA for a business. Or if you already had a 401k in place, you were contributing for last year, and you hadn’t filed your tax return on your business which, realistically, I don’t think that’s possible now. Maybe if it was a sole proprietorship that was sponsoring a 401(k), the business could still make a contribution, but you’re down to the nitty-gritty.
What you can do by the way, and this is before October 15th—if you are a real estate and you have real estate income—you can cost seg before. It’s called a 3115 change of accounting, and you would do a cost segregation. You could still do that for 2019 up until 10/15/2020. If you have a bunch of page two of your Schedule E, page one of your Schedule E, if you have a bunch of real estate income, you didn’t expect to have real estate income, then you may be wanting to look and say is it possible that I could still do a cost seg?
And even if you can’t get the cost seg done, you’d use a placeholder number. You’d file your return, and then you would amend it because what we care about is this being made. and we can always go back and amend; you want to do everything in good faith.
“Does a single-member LLC used for trading qualify for the 199A deduction?” David, generally speaking, you have to qualify as a trader. If you did, then there are arguments that you would be able to use the 199A. But to be a trader, I would say at least 700 trades per year, that’s the minimum. I’ve seen them deny people for even more trades. They’re always trying to find a way to knock you out.
So you got to be doing it day in and day out every day. If you’re doing that, then you could qualify as a trader. You’d make a (generally speaking) mark-to-market election and you would get your 199A. There are people that believe that. I don’t think I’ve seen any guidance on it because you’d be a trader business and you would fall under 199A.
A better option is I tend to avoid trader status. I don’t worry about the 199A so much on securities. What I do is I do a partnership. I’ll do an LLC taxed as a partnership, with the corporation backing as the manager and the partner that is getting a guaranteed payment. That would lower your taxable income, so it takes it off the top. That’s just me; I tend to do that.
“Can you describe what the best strategy is for selling employee stock purchase plan shares obtained at a discounted rate? Do you always wait for it to be considered a qualifying disposition or you do that only when the stock has gone up in value during the purchasing term?” Here we go. Let’s say we will call this date A. This is the date that they give you an option, basically, to start buying shares. On that day, the stock is $20. They say you can buy it at any time and you get a discount of 15%. You have to buy it during this term, and then this term is going to be all the way up until where you buy it.
Let’s say that on the date that you buy it, it’s now worth $25, but you can buy it at that discount, which means you’re buying it at $3 less, so $17. You’re buying it as $17 a share. You’re pretty good. Then you hold it up until C and C is going to be this determinative date. Let’s say it’s at $30 when you sell it on date C. Now we have to unpack this thing and figure it out. All right, what did I get? What’s my benefit? What will we know for sure is that your employer gave you 15%? So we know that 15% or $3 was what they gave you. We know for sure, you’re going to have to pay ordinary income tax when you sell on $3.
Now, the next question is, do I have long-term capital gains? That’s where you get into this qualifying disposition question. If this period between A and C is two years, and this from B to C is one year, plus I should say two years plus one year plus, then the entire amount of gain from that—what would end up being your basis—would be the $17 plus $3, or the $20. Your entire gain of $10 would be long-term capital gains. I hope that makes sense.
If it’s less, then bad things happen all over the place. If you don’t meet these tests and you sell it within that, you have your $3 that is taxable as ordinary. You also have the difference between the basis and the amount that you picked it up, this extra $5, would also be ordinary plus $5. You’d have $8 of ordinary at that point. Plus your difference, that extra $10, would also be ordinary. We’ll just lump that all together and you’re going to end up having ordinary tax treatment on $18 versus having $3 and then having $10 of long-term capital gains. Fun stuff.
I know that you guys are thinking that somebody just cancel this question. No, this is why you look at it. What ends up coming is, people will make this mistake. What they’ll do is they’ll get a share, they’ll get the opportunity to buy something, and they won’t realize that when they sell it—let’s say that you sold it the day after you exercise this ‘my rights underneath my employee stock option plan.’ I bought it for $17, it’s worth $25, and I sold it. I would have $8 of ordinary income.
Some of you guys, that half the money’s gone. The price is $25. They’re selling it at $25. It went up. If it went down, it’s not nearly as catastrophic because you’re going to have loss. You’re going to have some capital loss and you’re going to have some ordinary income. Could it be that the ordinary income, the discount, is not quite completely offset? Yeah, but for the most part, what we’re looking at is these things are going up.
I hope that makes sense to you guys. We see people do this all the time. They get it and they sell it. Then, it’s like, no. If this thing’s going to go up, just chill. You don’t have to cash it out. Wait for at least a year and you need to wait for two years from this date, and then you get much better tax treatment. This long-term capital gains, this $10, would either be at 0% or 15% on most people, as opposed to 27%. Some of you guys would be 30%-some. We end up saving, getting an extra 10%–15% of return just because we did that.
Somebody says, “We just did this, too. We had to. They also took FICA.” Yeah, it’s treated as ordinary income, so it’s wages. Kind of stink all of this, but sit on it. Sit on it if you can. Sally, I’m gonna say, I bet you that’s probably Johnson and Johnson. I don’t know why that’s popping in my head.
Let’s see. “Is an S corp the right entity for a syndicate brand capital raising?” No. I’ll make it simple for you. Roy, the reason that people don’t use S corps on those things is because when you’re raising money, you don’t know who’s going to be buying, and an S corp has to be a normal person. If it’s another S corp, or C corp, or partnership, or an LLC, you’re going to have an issue. It’s gonna kill it. It could be pretty brutal.
Somebody says “We took some and bought the rest of the share, it belongs to the companies.” You did that. Great, Saleh. But Roy, you’re probably going to be doing is an LLC taxed as a partnership, almost always, and you’ll have a management entity that’s, generally speaking, going to be a C corp or if you have partners it might be an S corp. Usually, it’s going to be a corporation of some deal.
“I made some good money trading cryptocurrency. Congratulations. This puts me in the highest tax bracket. Is there a way to reduce my tax liability?” So interesting that you say that. Crypto is taxed as capital. It’s a capital asset. When you sell it, it’s capital gains. Now, I know you say it puts you in the top tax bracket. That’s not necessarily bad because capital gains are taxed if it’s long-term. I’m making a big assumption here. Long-term is 20%. Short term, you’re looking at a high of 37%.
Is there a way to reduce my bracket? If it’s just you, then we’re going to be limited, and what we’re going to be limited to our itemized deductions, really. Itemized or retirement plans. You can’t get a refund for a retirement plan with capital gains. I’m just going to say, if I was lowering your income, I’d be looking at those areas.
What I’d be looking at are things that go to come off the top are charitable. I might do a conservation easement. Before you guys freak out, they’re not bad. There are bad actors in the easements, meaning that there are people that are going 15:1 stuff. The IRS doesn’t get mad as long as you’re 4:1 or so. If you put $1 in, you’re getting a $4 deduction, which is going to pencil out for you to save you some money, as opposed to just putting it all. That’s still available to you.
The other route is you are a spouse qualifying as a real estate professional that may work or net operating losses from another business. A real estate pro is a net operating loss if you know how that works, and so you may be wanting to look at some of these things. Now, if I had been able to get to you before, then what we do with crypto is I would normally place it into a vehicle like an LLC that is taxed as a partnership, and I would have a corporation acting as the manager.
The reason I do that is because I have a statute telling me I can pay that corporation. It would be a percentage of the partnership and I would pay it what’s called a guaranteed payment. Aside from the percentage that it’s going to get, I’m going to have that corporation get X number of dollars. That way I can move money into the corporation.
A corporation has a flat tax rate of 21%. It also has a ton of tax deductions that are available to me. At a minimum, it lets me start playing with some tax years. I’d want to make sure I document that, honor it, and actually do it when I’m acting as the manager. When I’m thinking about things to invest in, I’m going to be wearing my corporation hat. We want to be able to shave things off ahead of time. If we don’t have that, then yes, there are still things we could do.
This charitable giving is a huge area. That’s a conservation easement, but the charitable giving I can go up to 100% of my AGI. I can give and lower it to 30% if I give appreciated capital assets. If I give it cryptocurrency, I could actually shave off 30% of my income if I’m in the highest tax bracket. That means for every dollar of crypto, even if I haven’t sold the crypto, I just sit on it and I transfer it to my charity. I open up a Coinbase account in the charity and I transfer over a bunch of my crypto or a bunch of my coins. I would get whatever the value is, I would take a snapshot of what that value is on that day on a publicly-traded platform, and for every dollar, I’m getting 37¢ in my pocket of tax savings. I might do that and let the charity sell it.
Now, is it gone? Yeah, it’s not yours anymore. It’s the charities but at least I’m still in control of it. I can direct where it’s going. If I have a foundation, I have to spend 5% on giving it to other 501(c)(3)s, but most of my clients set up their own charities. They’re actually operating at something low-income housing, sports leagues, education, health, you name it, and all of those things are charitable activities if you want to put it in. Then we could really start saving off some taxes. We can give houses and other things, too, so it works really, really well.
Somebody says, “What method of accounting do you recommend to C corp?” Cash, unless you’re over $5 million and maybe then you go to accrual. Sometimes you’re required to.
Somebody asked a question about the manager. “Can I also be the manager of the LLC for trading or the C corp?” You’d want to be acting to a C corp. You do not qualify because you need to have a trade or business in this mix. If you’re doing stock trading, they don’t know when it’s trade or business. They call it trader status, but it’s all over the map.
I don’t want to mess with that. I know what a management company is because it’s managing other assets, and I don’t have to worry about being a trade or business. It’s so easy because there are lots of managers out there who have assets, it’s pretty easy. I just put my manager hat on, and I grow and run my businesses.
“Can I get a $500,000 capital gain exclusion on the sale of my residence if I am single when I occupied it, but I’m married when I sell it?” The answer is maybe. What matters is they’re going to assume that you’re both owners of it when you sell because you’re married, but the question is, did your spouse live in it two of the last five years as their primary residence? If they did, then yes, you could actually get both and so they always look at it and say, did you guys own it and did you occupy it as your personal residence two of the previous five years?
It gets fun. It’s even weirder when people divorce and figure out how the exclusion works because somebody’s not living there anymore, but you have a spouse that sells it. They look at it and say hey, wait a second. There were two of us as the owner and the IRS will treat it if it’s done correctly as though you guys both owned it when you sell. Then the only question is did they live in it two of the last five years so you can get the full exclusion, and you would each get the $250,000 I believe if you were divorced.
You get the $500,000 if you and your daughter live in it, and no, if you guys owned it together you would each get (I believe) $250,000. I haven’t looked at that but more than likely it sounds like you own it and your daughter lives with you, it would be a $250,000 exclusion. There are ways to avoid tax on the sale of a personal residence without using 121.
“I am a limited partner investor in a hedge fund through a Wyoming holding company. How can I deduct the management fees?” This is the Tax Cuts and Jobs Act, and they did away with miscellaneous itemized deductions. They’re gone. If I’m a limited partner investor in a hedge fund, then the only way you’re going to be able to deduct the management fees is if they paid general partner fees and that management entity covered all the management fees.
The way it works is this; I’ll show you guys the difference. No GP or with a GP, and this works when you’re an LLC with a manager. Since this is a limited partnership there’s just no manager. You just have a regular management company and you’re itemizing. If you make $100,000 and you have $10,000 of management fees, you cannot deduct the $10,000, so you pay tax on the full $100,000.
When you have a GP before it hits your K-1 you have $100,000, but you have $10,000 of management expense. Guaranteed payment to partner that’s going to that general partner, which means you have $90,000 flowing through on your K-1, so you only pay tax $90,000.
You see that little thing makes a pretty big difference on an annual basis. If it’s me and I have this happening—I have a limited partner, I have a holding company, and they’re not doing this—then I might be looking at whether there’s a workaround. The workaround might be, so I have a limited partnership. I hold mine through an LLC, and it has my interest, so the money’s flowing in there, and then it comes out to me. I might make sure that there’s a corporation up here acting as a manager of my LLC, and I might be shaving some of the money off here, so it doesn’t hit me all at one shot.
I don’t believe that you’d be able to go back and reimburse yourself expenses. I don’t think so. I’m just thinking off the top of my head. I think that the ship has sailed. What some hedge funds are doing is they’re doing carried interest, which (in theory) is not a management fee and they’re just saying we’re going to do more carried interest and we’re going to pay all of our management fees out of the carried interest.
If you don’t know what carried interest is it’s like a success fee. They’re not really a fee. They get an interest and its long-term capital gains to them. That’s why they do it, so they’re not having to pay an ordinary income. I hope that helps. I know it’s a little bit deep.
“I want to trade through a Florida LLC as a single member. Should I have it taxed as a C corp?” Ron, if it’s an LLC, I would generally have the LLC in Florida, be a partnership with a corporation acting as one of the partners. Or I do it as an S corp, more than likely. If I don’t want any of the money and I just want to trade it and use it for expenses and I’m going to zero it out then a C corp would work. You actually have multiple choices. Don’t you love that? It depends–type of answer. I wish it was cleaner than that, but eventually, your facts and circumstances always change everything.
“If a homeowner living in her main residence also has another family member paying her rent, which she reports as rental income, can she take the $250,000 once selling the house?” Yes, and you can 1031 exchange the other half. I’ll show you how this works. Actually, one of our questions is almost that precise situation; I’ll get to it here in a second.
“My wife and I have W-2 jobs and are renting out three properties.” They have three rental properties. You have property one, two, three. We have three rental properties. “What if we form a C corp to manage these? Can I get a tax benefit?” It depends. The C corp more than likely is you get an accountable plan so you can do medical, dental, and vision. You can do all those reimbursements. You can do 280A, you can do an administrative office. You can do reimbursement of mileage if it’s not otherwise available to you if you’re managing those. There are some benefits there. The thing that really caught my eye is this W-2 job and becoming a real estate professional. It depends on how much tax losses we can generate.
Let’s just say that we’re zeroing these out, so our situation is we have zero income. When I say income, I mean net income. All we’re going to do is we’re going to create a little bit of a loss if we use the C corp. Depending on how much you make, it will dictate whether or not you can write-off all of that.
Let’s say that you make $100,000 a year between you and your spouse, and you end up with a $10,000 loss because we did the C corp. You can actually write that off. It’s called active participation. You can write-off up to $25,000. If you’re making over $150,000 that goes away, and then you’d have to do the real estate professional.
But again, it comes down to whether there’s net income and then what your income is because these guys could create losses. If you’re a real estate professional, then those losses can offset your W-2 income, so it gets funny. Administrative expenses, office supplies, and all of that come into it. It’s called an accountable plan and it just means I reimburse anything that’s out of pocket that employee spends for the benefit of the corporation.
If the employee drives, I reimburse your mileage. If the employee has to have a cell phone, then it reimburses you for the cell phone. If it’s using an office in your home, then I reimburse you for the office. It’s not a home office deduction. It’s called an administrative office in the house. I don’t have to report it and the company gets a deduction. It’s actually quite potent, and if you like that stuff, that’s where you go to the Tax Toolbox and look at all the cool stuff you can write-off. I know you guys all love deductions.
“New real estate professional. Can I deduct the cost of the training in my corp?” For the most part, if it’s real estate–related, yeah. That’s why we do it. We’re just going to keep jumping. Let me see, I want to make sure. The real estate professional, then the losses can offset W-2. This is what I love to see, and I’ll give you guys a scenario.
What I love to see is spouse one. Let’s just say $500,000 and above. We’ll use Biden’s number, so $400,000 above. They’re a rich person and spouse two, let’s just say that they’re making $200,000. Between the two of them were at $600,000, and then you have a bunch of real estate and they’ve been acquiring real estate. Let’s say they have $2 million in real estate. We don’t care how many properties it is, we’ll just say it’s $2 million, and it’s pretty much breaking even every year. This extra $200,000, they’re donating more than 30-some percent of that or $60,000 to $70,000 in taxes on that and it’s not so good.
At the end of the day, really what you’re getting back on this is you’re going to get let’s just say X dollars. I’m just going to say X dollars. I’m not going to try to add, but let’s just figure that. On this alone, I’m getting to keep maybe $130,000 of it when it’s all said and done.
What if spouse two cuts back their time and say I’m only going to work part-time, and I’m going to reduce my pay now to $100,000 a year. I’m working part-time. That’s still a pretty good part-time job, but you guys get the idea. Then, I qualify as a real estate professional, which is 750 hours in more than 50%. Let’s say that I’m spending 750 hours here, I would need to spend 751 hours on real estate. I have to beat that 750 hours. If I spend 1000 hours, I need to spend 1001 hours, but what it does is it unlocks this $2 million of depreciation and makes net operating losses.
Let’s just do some math here. Let’s say that $2 million, I’m able to generate a $300,000 first-year deduction, which is nothing. It’s actually going to be closer. Let’s just say it’s $300,000. What I’d be able to do is off that. In this particular case, I did $400,000 plus $100,000, which is $500,000 minus $300,000. I’m going to end up paying tax on $200,000 as opposed to ordinarily I was paying tax on $600,000. Does it make sense?
How much money did I actually get to keep? I kept my full $500,000. How much money would I get to keep if I made $600,000, I’d probably get to keep about $450,000 of it, so working less paid me more. Those are the fun examples. If you’re wondering whether that’s your situation, some of you guys may have lost a little bit, but that’s why we get in and we pencil these things out, but it’s fun.
“Will the capital gains exclusion,” I’m just going to write the code number, 26 USC 121, “apply to a two-unit property where one unit is rented and the other unit we lived in?” When you say we lived in, that’s telling me that it’s married filing jointly. “For purposes of this question, say the property was purchased for $500,000, and it’s now valued around $2.5 million. If we sell the property without paying capital gains and how?”
This gets interesting. They would get a $500,000 exclusion of capital gains for their portion of that property that they lived in as a primary residence. Let’s say that right now, their portion, let’s just call it 50/50, the way it would work is their basis, each half would be $250,000 because they would split the basis. Let’s say we sold it, they’d have $1.25 million. If they sold it for the $2.5 million, the way it would work is we take the one point their half, $1.25 million minus—we don’t have to worry about their basis—the $250,000, so we’re down to $1 million, and we would subtract off of that their $500,000 which would equal $500,000 of capital gains.
Depending on where they live, that could be a pretty hefty chunk, that’s going to be 20%, at least, probably a little more. That’s what we’re looking at on that half. On the other half—remember it’s $2.5 million—it’s $1.25 million minus $250,000, so they’re going to have a million dollars of gain. They’re going to have a total amount of gain of $1.5 million. There’s depreciation recapture if they rent out a portion as well, but I’m not going to dink around. That’s going to be 25% tops. It’s going to be an ordinary bracket. Chances are, it’s going to be 25%.
Let’s just look at that. We’re looking at $1.5 million, so that’s not a small amount. We’re looking at several hundreds of thousands of dollars of tax. Now I’ll show you how to avoid it. The easiest way is for you to move out. Remember that this is two of the last five. It’s not the last two. It’s two of the last five. All I have to do is if I move out, make sure that I sell it within five years and I can still use my exclusion. What I would do is I would move out and I would bring in another tenant for the half, and I might rent to them for six months.
Now, the entire thing could be 1031. The way it works is I could sell this for $2.5 million, and I could roll that into other real estate. Before you guys get all crazy on me and say, but I want a house to live in. I get it. You can do that. I roll this into an investment property, that just has to be more real estate. It could be one, it could be two, it could be three houses, it could be an apartment, it could be land, and it could be whatever. I can move into whatever I buy, I would rent it for about six months and then move into it. The code does contemplate it. It literally talks about 1031 exchanges in Section 121. You have to wait five years before you can sell again instead of two as ordinary. It contemplates this.
What would happen is I use up my 121 exclusion, and it gets added to the basis of the property. What ended up happening is, let’s say I sold it. I rent it. Remember, our basis was $500,000. We sell for $2.5 million. We have recapture that we have to worry about and gain. Those are two things that we’re worried about. What ends up happening is if I 121, then I have an exclusion of $500,000. My 121 is I lived in it two of the last five years. The first thing we do is go up to the basis, and we add $500,000 to it.
Now, what’s my basis? $1 million. I 1031 exchange the recapture and the other gain, which means I’m going to buy another property at $2.5 million. I’m going to buy other property or other properties and I will pay how much tax? Zero and my new basis will now be one million basis. Assuming that the law stays the way it is now, all you ever have to do is die. At some point, the basis will step up and nobody will ever pay tax on that transaction. Regardless, I managed to get double my basis, and if I buy another property, as long as I’m buying an investment property.
Let’s say that I buy the house of my dreams for $2.5 million, and I buy it and it’s $2.5 million. Rent it out. There’s not even a technical requirement that they occupy it. There are cases on this stuff. You have to show good faith estimate, but I would just have somebody living it that you know. Rent it to them for six months—that’s just a safe harbor—and then move into it.
The question is, is it worth $300,000, $400,000 whatever it ends up being, depending on your tax bracket, but a minimum of $1.5 million. A minimum of $300,000 would it be worth it doing this? Yeah, absolutely. What would I do? I’d probably rent an RV, go drive around the country, and […] safe $300,000. I deserved my vacation. I hope that makes sense for you guys.
If you guys like this stuff I do, then by all means jump on and listen to some of our other podcasts, andersonadvisors.com/podcast. They’re all free. I love giving this stuff. You can always go in and watch the replays in the portal but you’ll see that we have tons of stuff coming out. I just did a really cool podcast with Eric Dodds today. I’ve talked to so many cool people. I’m going to be doing a podcast here coming up with some pretty cool investment bankers that get into all the cool stocks before they ever go public. Things like that. There’s just cool stuff. I enjoy this stuff and hopefully, you do too.
Somebody says, “When creating the Wyoming LLC, is it manager-managed or member-managed?” I would make it manager-managed in the examples I was giving you, I want to have a manager be entitled to compensation and make that manager somebody other than myself. Have to be a corporation.
“Can you deduct holding expenses on two properties waiting to be renovated? They’re not rented against the profit made on the three-year-old flip on three sold flip properties?” Yeah, of course, you can. The holding expenses are a true expense, but if you’re improving the property then it’s added to its basis. What you’re really talking about is running a mini-mart where, instead of selling Cheerios, you’re selling houses. A better example is like a car lot. You have a bunch of cars on the lot and you sold three and you have some expenses. Can I use the profits from the three cars I sold to cover those expenses? Yes, you can.
“If I get a $1 million gain, it’s 50% of my company sale. $500,000 rolled over equity. The company buys PEP, takes debt to buy my company $1 million on term, even though they retained equity.” I’m not following what you’re talking about. I thought I’d be able to answer one last one.
Somebody says, “I made a charitable deduction by paying with the credit card associated with my single-member LLC. Am I able to declare this on my Schedule A without exposing myself to veil piercing?” Yeah, as long as you document it, you can absolutely do that. By the way, you could actually do it through the LLC, and since it’s disregarded, it just flows. It’s treated as your charitable donation, so you don’t even have to worry about it. It’s not going to pierce anything.
You must be a really good person, Rob, if you’re using credit to make the contributions to charity. I get why you’re doing it. You’re probably like I want the deduction now and then I’ll pay for it over time. Good person. Give until it hurts, and then use the points to make sure you’re getting […]. I shouldn’t say stuff like that.
All right. There’s podcasts here on iTunes and also on Google Play. You can go in there and see what we got. There’s always stuff and then, of course, you can always go onto social media and check us out.
Somebody says, “It’s for the points.” You are my guy, Rob.
All right. Facebook, YouTube, LinkedIn, Instagram, Twitter. We do the Tax Tuesday every two weeks. Tax deadline is in two days. That’s why Jeff didn’t join us. He didn’t really lose his mind. I just said Jeff, don’t even sweat it. I can talk to myself for several hours without even breaking a sweat, but I would be happy to do this.
If you have questions, email us. We’re getting a lot of them. I know our guys are pretty good about getting back. Some of them probably push on me to select and hopefully that we’re getting through a lot of those.
Somebody says, “How can you claim title in Pennsylvania because land trust does not cover it?” You would title it directly in the land trust. Otherwise, it’s treated as a taxable event. We used to do the living trust and then convert it to a land trust, so we drafted as the living trust.
Anyway, taxtuesday@andersonadvisors.com or visit us on andersonadvisors.com. I always love doing this, so shoot us a question, and we might grab it and put it up there. If for whatever reason, you’re not getting an answer to your questions, by all means, feel free to reach out and poke us in the forehead.
We have hundreds of questions that come in each week and, as you guys know, we’re not getting paid to do it. We’re just doing it because, frankly, there’s too much ‘hide the ball’ these days. We just try to get through as many as we can, and I think that we’re getting through them all. But just in case, if you ever feel like we’re not paying enough attention to you, by all means, reach out. We want to make sure that we’re getting you the information you can.
If it is really personal and you’re just trying to get free advice on a continuous basis, we’ll probably say you’ve got to become a client. Otherwise, we do this because we love working with the small business folks, we love working with the investors, and because it’s hard enough to do it out there without getting shellacked with the tax stick.
Tax Tuesdays are about helping to keep a little more in your realm of influence so you can choose what to do with it. If that means that you’re going to give it all away, give it to your kids, or give it to your dog, that’s your choice. What we’re going to do is make sure that you’re keeping as much of it as possible so you’re able to make that choice.
That is it. You guys, we’ll see you in two weeks for another Tax Tuesday.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, another great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets. One of my favorites as well is our Infinity Investing Workshop.
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