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Highlights/Topics:
- How can I take full advantage of excess depreciation on passive real estate investments? Cost segregation, MACRS, and bonus depreciation through TCJA
- What is the best way to set up an Airbnb business that is a solely-owned, single-family house? If average guest’s stay is 7 days or less, pay self-employment tax and take depreciation
- If I sell my personal residence, what’s the best way to use the funds from the sale for a residential assisted living (RAL) startup? Create LLC, obtain inside/outside liability insurance, borrow money, and deduct costs
- I traveled via RV across and outside the country and needed WiFi to conduct business. Can any part of the travel expense be deducted? If travel is more than 50% for leisure, you can’t write off business expenses; otherwise, write off RV, WiFi, mileage, other costs
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Resources:
Pre-order Book Deal: Tax-Wise Business Ownership
Modified Accelerated Cost Recovery System (MACRS)
Real Estate Professional Requirements
Unrelated Business Income Tax (UBIT)
Capital Gains Exclusion/Section 121
Real Estate Investment Trust (REIT)
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Full Episode Transcript
Toby: Hi guys, this is Toby Mathis from Anderson Business Advisors and you’re listening to Tax Tuesday. I’m joined today by Jeff Webb. Hey Jeff.
Jeff: Hey, how’s it going Toby?
Toby: It’s going fantastic. You’re in the right spot if you want to hear some stuff about taxes. Let’s just jump right on in. I know that we have a tendency to go over. We try to do these in an hour, but we’ve never actually managed to get it underneath the hour. Maybe once. If you guys have questions by the way, just make sure that you’re asking in the question pane. I already see a whole bunch. These guys are active today, Jeff. What’s up with you guys. Somebody teach everybody how to type.
Anyway, we’re going to go through some of our little background rules. First off, if you can, join us on social media. We do disseminate a lot of information that way. You can go to YouTube and listen to our videos. If you click on that little or bell, it’s a notification icon. What will happen is you’ll be notified when new videos come up only when you sign in. You don’t have to worry about getting hit up constantly with emails or things like that, that’s not how it works.
You just go on in there and if we do have notices, we tend to do them in webinars, we tend to do them in videos. For example, in the Tax Cut and Jobs Act, people are just figuring out some of the things now. If you’d been on our YouTube channel you would have actually had videos in January, the month after past January 2018. You would have known about these things a long time ahead of time.
The reason being is, this is important because a lot of folks only realize that they’ve lost something when they actually have to pay the extra tax. We try to avoid that. Tax Tuesday rules, you could ask live and we’ll answer before the end of the webinar. We try to do this. If you ask some goofy, long questions, don’t write me a book. It needs to be a pretty succinct little question, but if it is a short question, sometimes I ask you questions, you’ll see that.
When Jeff and I are going through these, sometimes we’re asking clarifying questions because we want to make sure that we’re getting into the best detailed response. If you’re writing is too long, we’re not going to be able to answer it. If you write it short and sweet, we will get to it.
Here’s an interesting one. I’m going to give you guys an example right out the gate because there’s somebody who wrote a pretty interesting question. Before I get there, if you have a long questions, send them to taxtuesday@andersonadvisors.com. If you need a very specific, detailed response, you’re going to need to come out as a platinum client or tax client of ours. It’s actually really cheap. Being a platinum client is $35 a month. Being a tax client is $29.95. It’s essentially a retainer, but you get a lot of bells and whistles including access to our tax classes and a very comprehensive tax consultation and things like that. The whole idea of this Tax Tuesdays, it’s fun, fast, and educational. We want to get back and help educate.
Now let’s go to this question, “How to take full advantage of excess depreciation on passive real estate investments?” This is interesting. Somebody says they have $1 million in passive multifamily equity shares and partnerships. They have a bunch of equity in a partnership. You have $1 million in passive multifamily.
If you cost seg it, what that means is you’re breaking out the components and you’re writing off quicker than the 27½ year. So, if it’s multifamily, it’s residential property. If it’s 27½ years which is what’s called modified accelerated cost recovery systems. You can accelerate a bunch of those into 5, and 7, and 15 year property and write them all off in year one under those scenarios and then the new bonus depreciation under the Tax Cuts and Jobs Act.
The problem is, and they said this, it’s that if you’re not a real estate professional, you cannot offset your W-2 employer income. The real estate professional needs to be one spouse. If you’re married, you would have to make sure somebody is the real estate professional.
This is actually a guy named Walt. The test that you’re using, there’s two pieces to it. Piece number one is 750 hours plus more than 50%. One spouse needs to qualify for that. If you’re a W-2 employee and you’re working 2000 hours a year, you are not going to qualify as a real estate professional you, unless you’re in a real estate trader business. He mentioned a few. I don’t think a mortgage broker is going to work. You need to be a real estate agent. You need to be in the process or broker construction person asset, real estate manager, those types of things will qualify.
Piece number two is that you maturely participate on your real estate. What we do here is we make an election to aggregate all your real estate activities. Jeff, how often do you see people miss this?
Jeff: Quite a bit. Especially in cases where it’s obvious they’re taking large losses and they’re not able to drop them, and they have a spouse who is not working. This is a perfect opportunity for this.
Toby: You’re right on. I was just going to tell you that first off, you’re right on. Great job. You get to write off that passive income niche. No longer passive under 469 C7. It’s an exception and what it becomes is non-passive, i.e., offsetting your active income, so a loss at your W-2.
The best example I can give you is an actual client. A lawyer friend of mine down in Savannah, Georgia who makes millions of dollars a year, settling big dramatic head injury cases and his wife is a real estate professional. They buy lots of lots of real estate. He takes the depreciation against his active ordinary income. In many years, he pays zero in taxes. Now, that sounds great, but if you’re trying to get a loan, it’s a little tough. If you’re trying to buy a house and you have zero income, it’s a little frustrating. But yes, you’d be able to do it.
Somebody else says, “What if the partner has a retirement plan?” The retirement plan is not going to be a material participant, in fact, it can’t be.
“Does it have to file a 990T?” It’s a retirement plan, an IRA. He’s never going to file that. He’s looking at the UBIT. If it’s debt-related income, then technically you could have UBIT on it. This is what’s weird. You have an IRA and you invest this into syndication. That syndication leverages the asset. Let’s say you put $2 million in and they used a debt of $5 million to buy a piece of property, and then you start getting the income in. Well, you actually have a majority of it being UBIT, technically. How many people actually file the UBIT on that, do you think?
Jeff: Very few because I know a few years back, we’re seeing a lot of people would put in oil and gas partnerships into their…
Toby: That’s active.
Jeff: And that’s active income. They just write it on the K-1s that they receive that it’s UBIT […]. Fortunately those entities usually take the losses on the K-1s. No harm, no foul.
Toby: You’re supposed to pay the UBIT but most people don’t. The IRS really doesn’t sit there checking all these things.
Another one. Somebody asks, “I have an LLC for my rental properties, I take distributions out when I need it.” That’s fine. “I was painting one of those houses and broke my heel. Can the LLC pay for things such as copayment for therapy, et cetera?” That’s interesting, I’ve never really thought about if you injure yourself. I would actually be looking at your insurance. If you have no insurance, you can’t really sue yourself.
Jeff: No, I don’t even think insurance is going to cover this. A Workman’s Comp Policy would, but those people don’t do Workman’s Comp for themselves.
Toby: No, usually they’re exempted. Yeah. The answer to your question is if you broke your heel, you’re still able to take those expenses and you can get reimbursement from C Corp employer or an employer that has a cafeteria plan if it’s not you. If it is you, just got to make sure you have a C Corp and it can reimburse 100% of the cost. The way that you’d get the money of the C Corp is you make sure it’s managing the LLC that has the rental property or the property in which you got hurt. That’s way number one. Way number two is, you exceed the 10% of your adjusted gross income this year, unless it was last year, in which case, it’s 7.5%, but this year it will be a schedule A expense on your schedule or on your 1040. Those are the two ways. The other thing you could do, I guess you could do an HSA.
Jeff: You could do an HSA.
Toby: Yeah. You do an HSA and pay for the expenses out of that. Would you have to have the HSA ahead of time?
Jeff: You’re going to have to have the HSA and you’re going to have to have that high deductible health plan, too.
Toby: Salvadora, the answer to your question is you’re not going to be able to write it out as a business expense. I don’t believe. Off the top of my head, I just don’t think so. It’s going to be a health expense and even though you did it working on a piece of property, realistically you’re going to have something else that has a health reimbursement arrangement, or a health savings account, or you’re writing it off on your Schedule A every 1040, or if you have another employer and they have a health reimbursement plan, then you make sure that you make a claim there.
“Can you discuss the importance of resolutions for an entity, say minutes?” Gary, we have a ton on our website. If you become platinum, we do it for you. Maybe that’s not right. That’s not via the office where we would do it. If it’s platinum, you have access to all of them and I think you do it. Most of our clients would do the minutes of resolution. I would just reach out and maybe Susan or Patty can give Gary the information or grab his information so somebody can talk to him.
Let’s retain some of these questions because we haven’t even said what all the questions we were going to be going over today, we got a ton. You guys are so active today. Here’s the questions we’re going to go over. “I converted $250,000 of my traditional IRA to a Roth in early 2019. What options do I have to mitigate the tax consequences?” We’ll go over that one.
“When a spouse dies and the surviving spouse has a step up in basis, is the surviving spouse required to sell the community home within 12 months of the spouse’s death in order to enjoy the step up in basis? Does the step up in basis expire at some point?” “What is the best way to set up an Airbnb business that is solely on single family house?” We’ll answer that.
“What is the process to turn a rental into a personal residence? Is it considered a sale when it becomes a personal residence? How is the cost determined when it becomes a personal residence?” We’ll answer that.
“How do I separate the cost of a washer, dryer, refrigerator, kitchen cabinets, AC system, wooden floors, et cetera, from a recently purchased condo? Purchase contract shows total price only.”
This is my favorite, “Parents own a home with two extra rooms for their two kids. If the kids share a room and rent out the spare room, what are the tax consequences?” I love that.
“For an equity investor, what is the best way to structure ownership when concerning taxes? LLC? Personal? Can the LLC be from the home state of the investment property?” We’ll answer that too.
“If I sell my personal residence, what would be the best strategy to use the funds from the sale for my RAL setup? I do have a QRP,” that’s 401(k) for those of you guys who don’t know, “so can I use those retirement funds for the upgrades and repay the loan from the proceeds?” We’ll answer that, too.
“Can I get reimbursed by my S Corp for the use my personal pickup truck for the last three quarters of the year? The truck is financed in my name and I was making the payments myself, but using the truck for business,” We’ll go over that one as well. I told you we had a few. You can see Jeff literally slumping down in his chair. He’s going underneath the table because I picked all the questions that we’re going to answer and I forgot to stop.
“I traveled via RV cross country,” that sounds like fun, “even out of the country,” So, he must have gone out of the country, Canada or Mexico? Unless you can drive across water, “and needed Wifi to conduct business. Can any part of the travel expenses be deducted?”
Jeff: It sounds interesting.
Toby: Yea. We actually had three RV questions, we narrowed it down to two. I don’t know what it is about RVs, I think it’s the end of the season, but they’re different people.
“Can I rent my RV to a corporation for meetings? How is it taxed?”
Last one is, “I sold one of my rental homes this year, if I have a gain of $200,000 and invest in a syndication buying an apartment complex, and if they use bonus depreciation, will it offset any part of my gain?” we’ll go over that. We got a lot of really good questions. I love that.
By the way you guys have not let up. It’s literally nonstop questions from you guys today. What’s up? This is like the kid in the backseat going, “Why? Why?” Not that I did that this weekend, but I did that this weekend. Anyway, we got a whole bunch of good questions. I will be getting on to all your guises. We will go through all of these.
Here’s the first one, “I converted $250,000 of my traditional IRA to a Roth in early 2019. What options do I have to mitigate the tax consequences?” What say you, Jeff?
Jeff: Well, I would have a different advice a year ago and even more different advice five years ago. Five years ago, you could actually split the gain between a couple years and pay the taxes on it. Last year, you could actually recharacterized this Roth conversion back to an IRA. I would probably suggest that if it’s an issue, then we only convert so much during the year.
Unfortunately as of 2018, there is no such thing as a great characterization from a Roth conversion. As soon as you cover it, you have $250,000 of income. There’s no way to mitigate that income in a sell. You have to look at what other things that you would normally do to reduce income.
Toby: When they converted it, it was a big taxable event. It’s taxed on 2019. What you have is there’s really only a few ways you’re going to offset traditional IRA income going into the Roth. That’s to come up with traditional expenses that actually offset your income and we can count on pretty much one hand what you’re going to get. You’re going to look at your scheduling, which means if you have a lot of medical expenses this is the year to pay them. You want to make sure that you’re paying interest on your home, if you have it.
You want to make sure that whatever your expenses are to your state for income taxes or real estate taxes, you’re capturing those. This is the year where you may want to say, “You know what, I’m going to give a whole bunch charity just because I want to offset my income.” If you say, “Toby, you’re nutty buddy. I don’t want to give a whole bunch of money to charity.” Maybe you just look and say what you’re […] there. Give three, four, five, six or seven years, whatever it is in advance, give it to a DAF or set up your 501(c)(3). A DAF is a donor advised fund where you get the deduction the year that you make the contribution, but then you dole it out over many years. This is a big one for me.
The other one is you could do conservation easement, everywhere you do something along those lines. In a conservation easement, the conservative ones are going to give you a 4:1 to 5:1 return. In other words, if I give them $1, I might get a $4 deduction. If you have to earn $250,000 you’re obviously going to offset that entire amount, you’d have to give a sizeable amount of money—about $75,000, maybe closer to $60,000, depending on the fund—then you won’t pay the tax depending on what state you’re in or what level. Could be much higher. You just have to do that.
The other one is real estate professional. If you are a real estate professional, that could be either you or your spouse that qualify, then you can do something called a cost segregation and bonus depreciation to take most of the depreciation in the first year. When I say most, it’s really about 30% of it. So, if you have a $300,000 improvement on a $400,000 property with $300,000 improvement, you probably can get about $100,000 deduction. Those are the things that you do.
The last one is you’re already doing a traditional IRA into a Roth. You may want to look at your other options to do retirement plans and to try to offset some of that conversion by putting more money into traditional.
Jeff: Yeah, this is really the case. We can do nothing about the $250,000 itself, but if you look at your entire tax plan, you can decrease the amount of income you have.
Toby: That’s what you’re trying to do. You’re just trying to see whether there’s a way to mitigate it, so I hope that makes sense.
Let’s see. Next one. “When a spouse dies and the surviving spouse has step up in basis, is the surviving spouse required to sell the community home within 12 months of their spouse’s death in order to enjoy the step-up in basis? Does the step-up in basis expire at some point?”
Jeff: No and no. There is no expiration on the step-up in basis. You never have to sell that property if that’s what you want to do.
Toby: This gets so much fun, by the way, when you have a step-up. For those of you guys who don’t know what a step-up is, let’s say I buy a house at $100,000 and 30 years later it’s worth $1 million. Before you think I’m crazy that happens all the time. In a community property state when one spouse passes, the tax basis of that property moves up to $1 million. The value on the date of passing or, I believe, you can do the date of the estate tax return, so it would be within nine months, the hard part is figuring out what that is.
That’s the rough one is, “How do I value it?” The best thing to do is go out and get an appraisal and that locks in your time. That way, you’ll always know. If you’re in a separate property state, then 1⁄2 of the basis of the house steps up. It even gets weirder. So you have a husband and wife, let’s just say. One spouse passes, five years later the second spouse passes. So you have a step-up from five years ago in 1⁄2 of the property. I don’t know why the states do it that way, but it can get a little weird. The rule of thumb is when somebody passes, I’d probably go out and get an appraisal of the property, so you can lock it in.
Jeff: Absolutely.
Toby: It doesn’t expire. What this means is that if you sell the house, let’s say, a husband and wife, California, community property state, one passes, the basis steps up to the fair market value of the house and if the surviving spouse sells it, you don’t have to sell within 12 months. There’s no rules there. Your basis is a step-up, its forever. That’s the date etched in stone.
Now, we have a step-up. If you sell it, pretty close to the date of passing, you’re not really going to have any gain. If it’s your home, you have a huge exclusion, so you may want to sit on it for awhile. What I see as an attorney that sits in the tax world, is I’ll see people gifting things with really low basis. You’re looking at them going, “Hey dude, wait. All you got to do is die and it steps up. You’re avoiding the tax benefit,” because they think they need to get out of their estate.
Somebody asked a really good question by the way. “Can you do a cost seg on a property that you already own and maybe get an offset?” Absolutely, John. In fact, we’re still going back into 2018. This sounds really twisted, but if you have an extension, we can still make a change of accounting and do that.
“Which one protects the properties better, to have the property in a trust or an LLC.” Noel, you kind of do both. You never just do a trust. Sometimes you do just an LLC, but you never just do a trust without an LLC.
Jeff: Are we talking personal residence or other property?
Toby: Which one protects the property? I’m talking about anything as an investment property. Usually, I don’t like to take houses and stick them in any LLC’s. You got homesteads and then you also have ways to draw the equity out and you can usually burn down your house before somebody takes it.
I’ve seen a house taken one time and that was a gal who was just egregiously given advice by the attorneys. She had a whole team and she had it within 15 properties. They took her house away and nobody really gave her the option of filing bankruptcy and stopping it or any number of things that could have happened. They didn’t use LLC. There’s a bunch of nonsense but the girl lost. It’s just bad.
It was not good, but usually the trust is just something we use for title. The classic example of a land trust is the Illinois style which came out of the Sears Tower in Chicago. They were acquiring the land in various trust names, so people didn’t know they were community land. All it is it’s an agreement to hold title with the beneficiary being separate from the legal owner. I could put anybody I want on the title, technically, I could be your trustee but the beneficial owner is somebody else, and it’s usually reassigned to an LLC, so you get the asset protection.
The trust itself doesn’t give you any asset protection, although there’s some practitioners that will pretend like it does. It doesn’t. If you get sick, they’re going after the beneficial ownership, so you want to make sure that’s taken away.
Let’s see, “We have a C Corp with health benefits for my wife as an employee. Can I have the C Corp reimburse my wife and include the expense paid for by the HSA?” You can’t double dip.
Jeff: Yeah, you can’t reimburse anything that’s already been paid by an HSA.
Toby: Let’s see. “When I become 65, can I use the HSA to pay premium for supplemental health insurance?” Yeah, can’t he? Can you the HSA to pay for other stuff?
Jeff: Yeah, but the HSA can’t pay for health insurance premium.
Toby: They just can’t pay the health insurance premium.
On to the question that’s actually sitting in front of us, “What is the best way to set up an Airbnb business that is solely owned single family house?” This is where it gets really interesting. When you have an Airbnb business and if the average day that a guest stays in your house is seven days or less, then it’s really a hotel. It becomes a different type of taxation. It’s subject to self-employment tax. When it’s over seven days on average, you just take the total number of days it was rented by the total number of guests and that’s going to get your number. Then it’s passive. Either way, you’re going to take your depreciation.
But if it’s solely on single family house and you don’t live there, then generally speaking, here’s what I’m going to do. If I know that I am going to average, let’s say, three days for rental, then I am going to set up an LLC for the real estate. That real estate is going to lease it under a monthly lease to my corporation or LLC taxed as a corporation. That corporation is going to be the host. It is going to lease that property and lease that property to the guest. That’s the general way of how you do the Airbnb business. You never want to have that one just sitting and hitting you on your personal return.
Alright, let’s keep going. “What is the process to turn a rental into a personal residence?” You just have to rent it less than, what is it, 14 days and 10% of the time, you have occupy it more than 10% of the time. If it’s your personal residence, then it automatically becomes personal residence.
“Is it considered a sale when it becomes personal residence?” No. “How is cost to determine when it becomes a personal residence?” The same as what you paid for it.
Hey Tim, we’ll get you with Eric real quick. He got blasted. I did a webinar and just smoked him. He’s getting to people. I’ll make sure if anybody out there is reaching out for Eric from that webinar we did, just let me know. Send it in and just say. “Hey, I’m waiting for Eric.” I think he had about 100 reports today, so we’ll make sure it gets done.
All right, “What is the process to turn a rental into a personal residence?” It’s easy. It’s what you use it for and it is not considered a sale. It is not considered a sale. You do not have step-up in basis.
Here’s what’s interesting, sometimes we do it the other way around, where you have a personal residence, we want to capture the of the capital gains exclusion. If you don’t know what that is that’s 26USC-121, so it’s called a 121 exclusion where any single person who’s lived in their home for two of the last five years or married couple two of the last five years. Single gets turned $250,000 of capital gains exclusion. Notice I said capital gains and not depreciation recaptures, it’s just capital gains and a married couple gets $500,000.
Often times, you’ll have personal residence and you’ll sell it to an S Corp to make it into a rental. That’s the only time you’re ever going to hear me say corporation and rental because we don’t do it otherwise, but when you go the other direction, the part you have to be aware of is that little 121 exclusion is now damaged. If you had a rental and you made it into a personal residence, that period of time before it became a personal residence is non-qualified use.
When you start capturing your two out of the last five years, you’re going to take it as a proportionate amount of how much capital gains you can exclude. So, things to just consider. Your basis doesn’t change.
Jeff is back. We’re talking about the one where they converted the rental into a personal residence, so I’m just saying is, the basis doesn’t change. You don’t have to do anything special. They just have to make it into a personal residence. If you had a period of time, let’s say, you did this in the middle of the year and half of it was personal residence and half of it was rental. You would write off depreciation for half of the year. You don’t have depreciation on your personal residence, so it’s proportionality.
You don’t have to worry about the cost because they’re using the same cost as whatever you bought it. It’s the basis and the improvement values do not change, until you have a sale or step-up in basis. Really exciting stuff.
“Does depreciation recapture completely negative for holding rentals or is there a positive to it other than the 1031 exchange?” Blankly, whenever you have depreciation recapture and it’s on straight line depreciation, it’s maxed out at your personal tax bracket with a cap of 25%.
This is where it gets kind of fun. If you have a year where you have some major low income and you have some losses you can take, you can actually keep your personal tax bracket low and you’re going to get taxed very low on depreciation recapture. If it’s more, if you’re in a really high tax bracket then it’s capped 25%. That’s a good thing. Just remember, it’s always going to be more than long-term capital gains and you can 1031 the whole thing. You can absolutely pencil the numbers to see whether a 1031 exchange makes sense to roll and avoid depreciation recapture.
There is one type of depreciation recapture that I want to cover with you guys and that’s when you do a cost seg. It’s either going to be ordinary income or nothing. It’s either going to be ordinary income or it’s going to be taxes long-term capital gains. That’s because when you depreciate a carpet, for example, a five year property as carpet, I write it all off, and I’ve owned it for more than five years, it has no value. I’m not going to recapture any of it. There’s no value to that carpet. I’m going to throw it away so it’s going to be capital gain. Anyway, that’s really exciting.
Somebody says, “On the Airbnb rent to my corp, can I do the monthly rent as a percentage of income?” We think so. It has to be a fixed amount for it to be considered and you’re in control of that, just remember. You’re in control over how much of the rent you actually pay. You could say, “I had a lot of trouble, landlord, getting this thing ready. I only want to pay half the rent. Okay.” You have to decide whether that’s reasonable for yourself.
“I’m selling my personal residence and move into my long-term rental that was originally a primary residence. How long do I need to live in it for the rental to be able to not have capital gains?” Jeff? It’s a duplex. That’s interesting. You’ve lived on both sides, then you’d need to live in it for two years. You’re going to have a portion of it depending on what the total amount of capital gains is it, a portion of it that you may not get to use the 121 exclusion on. That’s going to be considered non-qualified use.
“Does it make sense to do a cost segregation if you plan to turn it into a personal residence down the road?” Absolutely. That’s the best case. Take the deduction now and never recapture it. All you have to do is live in it—this is going to sound really crass—live in it until you die and then the base is […] up. Then, they can redepreciate it. Literally, that’s the case. You can ride off a house over and over again if you’re smart enough to never let it get sold.
All right. “How do I separate the cost of a washer, dryer, refrigerator, kitchen cabinet, AC system, wooden floors, et cetera from a recently purchased condo? The contract shows the total price only.” This is where you do cost segregation. This is where you have somebody come in. Otherwise, I think even the appliances, do they get lumped in to?
Jeff: If they can work five year property.
Toby: We got to break them out. Cost segregation has been around forever, guys. It’s just this year they did this bonus appreciation on used property. I shouldn’t say this year. It was anything after September 27, 2017, I think is what it was. Otherwise, it used to be you had to buy a brand new and put it into service and then that bonus appreciation just says, “Hey, rather than write it off in five years, why don’t you just write it off in one year if you want to meet the bonus of 100%.”
That washer, dryer, refrigerator, and the AC system for sure would be write off right away. The wooden floors would have a usable life, I want to say five year. The cabinets, I’m not sure whether they do cabinets at.
Jeff: Those are probably seven year property.
Toby: All of it. Anything less than 20 years you can write off.
Jeff: While you could go directly separate the cost yourself, under audit you’re going to have to be able to support how you provided those costs up. Whereas if you get a cost segregation, they’re going to do it for you. They do it very quickly and that is your support and you divide it and move out.
Toby: You’re going to win. If there’s ever an audit, you’re going to win it but they’re even going to audit it. They just don’t see it. If they do, they’re going to ask you whether you have a report. You send them the report and it’s done. We have a lawyer that has pretty bit of experience in those and he’s like, “Yeah. Hit the report and it’s over. Goodbye. Done.”
Somebody says, “I have a Schedule E rental income. I think I’ve issued myself a 1099 to fund a 401(k).” Yeah, you can’t do that. If you have a Schedule E rental income, you’re going to have to run it through a corporation or something. If you did, would it trigger medicare and social security tax if you pay yourself? A 1099 just means you’re sole proprietor own, if you can pay yourself as sole proprietor from your own property on a Schedule E. Can you do that?
Jeff: No, I don’t think you can.
Toby: I don’t think you can either.
Jeff: I’m not even sure why you would want to.
Toby: Here’s why you might. Let’s say you’re a high-income person and you have a bunch of rental properties. You set up a management corporation and it pays you and you defer it all into a 401(k). That’s where it might make sense and just say, “Hey, I’ll pay a little bit of employment tax but I don’t have to pay all of them big massive income taxes.” Here’s the trick. You run the numbers and you just determine.
“If I rent a home and do not take the depreciation and the tax return, by the time I sell will I have to recapture?” Maria, you’ll have to recapture. The rule with depreciation is you may take depreciation but you must recapture it. Whether you take it or not, you’re going to have to.
Jeff: Yeah, and it’s less about the recapture as depreciation lowers your cost spaces every year. Even if you’re not taken depreciation, your cost spaces is going down by however much depreciation you should have taken. If you bought a property for $200,000 and sell it down the road and maybe has $100,000 worth of depreciation on it or should have, your cost spaces is only going to be $100,000. Your gain is going to be a lot larger than what you would have expected it to be.
Toby: Okay, here’s another fun one. “Converted a personal residence into a long-term rental. I deeded the property into an LLC and have property insurance to the name of the LLC. Who owns that property?” The LLC owns. “However, I was told that an LLC is worthless in the event the claim against the property. A smart lawyer could just argue that the LLC doesn’t own the property since my personal name is on the loan. Is that true?”
No. Absolutely not. A smart lawyer could argue whatever they want. At the end of the day, you look at the title. Who owns it? You may have a loan. That’s certainly an indication that you owned the property and a mortgage company may object to you putting in the LLC and saying, “Hey, you have to pay me off yearly.” They never seen one. One time in 22 years, I’ve seen somebody object to that. That was a mortgage company. Usually, they don’t care. If you do, you just use a trust in between them.
What people always do is they throw these things out, “Smart lawyers are going to do.” The lawyers are going to throw all sorts of crud at the wall. It doesn’t mean anything because they’re going to say, “Who’s the land owner?” You deeded it into the LLC so the LLC is now the party if it’s being a property claim.
If you have insurance, the insurance is going to cover. They’re going to give you somebody to defend and that keeps you out of the firing line, even with a personal obligation. Then yes, you do an umbrella as well. Somebody say, “An umbrella versus an LLC?” You do both. What an umbrella policy is to make sure you don’t pay for the lawyers.
I don’t know if you’ve evered defended yourself in a lawsuit. I’ve defended myself in plenty because I have a lot of properties and I own a business. We have 250 employees. It’s just a cost of doing business and if anything, you’re going to find yourself where I’ve had tree falls on properties, people try to go after the mold nonsense and all that fun stuff.
At the end of the day, I just look at it as a transaction. The insurance is there to help you with the lawyers. At the end of the day, you’re just trying to get back to make sure it’s income-producing but don’t buy into that nonsense about mortgages or something being indicative of liability. It doesn’t. I can actually cosign on your property, it doesn’t make me liable for the actions that occur on that property. Legal ownership is legal ownership.
“Will the bonus for qualified improvement property come back?”
Jeff: There is a bonus for qualified improvement property now. What they get away with was the bonus for qualified lease home improvements and qualified restaurant improvements.
Toby: Right. That’s what I thought you were talking about, but they do the bonus appreciation.
Jeff: Yes.
Toby: But you don’t get it on a leasehold, do you?
Jeff: No. The new bonus has slimmed down quite a bit from what it used to be. It’s very particular. Off of the top of my head, I can’t remember all the constraints on it. There still is that qualified improvement.
Toby: Let’s see what else we have. “Such a good answer. Do you think it’s going to come back?” Maybe, probably after they get rid of the bonus appreciation.
“I have a single family residence and I’m under contract to sell. It’s been a full-time rental, not my permanent residence. Is it possible to 1031 into a REIT, or triple net lease, or something other than residential property?” Yes. Your property can go to any property. You can actually go into a TIC, too, a tenant in common. You can go into a deliverer statutory trust. You could go into a REIT. Some REITs qualify. Some do. It’s going to have to be a private REIT, right?
Jeff: Yeah, but they do define real estate for 1031 because it’s very wide. It’s a very wide definition.
Toby: Yeah. Again, I would have somebody on a 1031 exchange. I have a really good catalogue in Idaho. Really fair, really good price, so if you want to shoot me over, I’ll share it with you, her information.
“If I aggregate my rentals to take advantage of real estate professional, will suspended losses still be taken for passive income?” Great question.
Jeff: No. Unfortunately, when you become a real estate professional, and it’s actually a year by year election, only the current year income becomes non-passive. Any passive losses on a property remain passive until you have passive income to offset it.
Toby: It just sits there. Could you say, “Hey, no. I’m not going to be a real estate professional and take those losses and offset some gain in that particular year”? Could you do that particular type of planning?
Jeff: Yeah, I think you could. I think that would be a maximum idea but I’m not going to aggregate for this year. I’m not going to claim real estate professional this year because maybe I’m selling the property and I want to release some of those.
Toby: Yeah. All right, we’re going to get back to these questions. And Ric, the 1099 issue, you don’t pay a management fee to yourself. We’d have to set up a corporation to be the manager and then you can. You can get it.
I’ll go over a great example. You said, “Hey, I have a high tax burden.” This is where you set up a C corporation and let the corporation pay the tax on it. Get it out until you’re tax-free over a period of time but the corporation is taxed at 21%. It’s usually a lot better to just have it go in there or to just get it out there then get it back to yourself in a tax reduced manner like medical reimbursement plans, to a day-to-day renting, from reimbursing yourself for the use of your home, things like that that only come from an accountable plan. You can’t do those individually.
The corporation opens up a different world to us as far as being an employee. That’s a big one. Ric, if you want to talk about that, shoot something over to Patty and she’ll get you scheduled with somebody. They can run the numbers on you and see if it makes sense.
At the end of the day, our services, the way I always look at it is we should be a negative number. A sealed adage of value over price. You could pay somebody $500 to do some tax planning and pay your $10,000 tax or you could pay somebody $10,000 and state $50. End of the day, I’m going with the $10,000 to state $50 not the $500 to not state anything.
I’m not going to say that’s what our numbers are always going to be. Frankly, I always look at it and say, “Our average is probably about an extra $20,000 of deductions.” It’s going to be a pretty good value. Basically, what we want is we want to make sure that if you’re doing tax planning, it should put money in your pocket. It should not be costing you.
Here’s a fun one. “Parents own a home with two extra rooms for their two kids.” Mom and dad or dad and dad, I don’t know how to say it, parents and you have two kids. The kids get together and say, “Hey, why don’t we share a room and rent out the spare room?” Which is just weird. I’m trying to think of who they rent it to, the guy down the street. This is funny.
The idea is the kids don’t own the house, first off. Number two, the kids, if they’re under 23 and you’re providing them with assistance, that’s called kiddie tax. It’s going to be aggregated and put into the parents’ tax bracket anyway. Another weird one is if you’re renting out the room, what are you going to do? Depreciate the room? Like, “Hey, I have a three-room house. I want to take depreciation off a third to offset the income”? I suppose you could.
Jeff: Yeah. When it comes down to, the parents own home. They will be the ones renting out that spare room. Supposing it’s going to be rented out for more than 14 days, it’s all going to rental income.
Toby: If […], you did. Let’s just say you said to him, “I’m giving it to my kids for nothing and my kids are getting a profit on it.”
Jeff: Sandwich wise?
Toby: It’s still passive income that for kiddie tax purposes gets added back into parents’ income. There’s no way for the kids to get this, although I love this question. In fact, I’ll probably borrow this and see if anybody was paying attention tomorrow morning when I meet with all the attorneys and accountants. I like to throw weird questions at them. Let’s just say that your kids rented the house from you. Could you do that? Can you gift it to them? You gift them the use of the room then they rent it out.
Jeff: Could they make a real estate transaction, do a real estate lease?
Toby: No, because they’re under 18. They lack the capacity, but let’s say that you put it in their names. Then, the kiddie tax is bringing impact to the parent.
Jeff: Just the room?
Toby: Just the room. I’m just trying to figure out who they’re going to rent it to. I’m actually thinking of horrible examples, but I was thinking like Kramer from Seinfeld. I would rent it to Kramer just so I can be annoyed. Like what would he do? Hide in his room and then when you knock on the door he’s like, “Bah.” I wasn’t a great Seinfeld guy, but there were some good moments there.
“Does the kid’s income get taxed at the trust rates?” No, John. It goes to the parents. It actually gets added back into the parents, called the kiddie tax. Any time you have passive income going to the kids, it’s going to be added back into the parents’ bracket if they’re under 18 for sure and if the parents are supporting them and they’re under 23, I think it is.
“We have an LP for our stock investments. It is 1% owned by the C corp. With the new tax law, can we still deduct investing class and investing newsletter expenses within the LP?” The LP would pay the corporation, the corporation would receive that as a guaranteed payment to partner, and it would pay for those expenses, bring in your taxable income to nothing. That’s, actually, Tim, the way you’re structured, is the only way to do it now under the new tax laws and you’re doing it perfect.
Sometimes, what I do is I make the corporation a little bit more owner, maybe 10%–20% so I don’t have to pay it a guaranteed payment, just a percentage of the profit goes in there. The way you’re doing it is perfect. It’s a good way to start.
Somebody asked a pretty interesting question. Before we go into more, “Can an individual foreigner national take advantage of the 1031 exchange when he is selling the property which is in the LLC name and otherwise fully qualified for 1031 exchange?” Here’s the question, really. Can an LLC owned by a non-US citizen do a 1031 exchange? I know that 1031 exchange pushes […] US income. I don’t believe there’s a restriction on orders.
Jeff: I can’t make a restriction in that. That’s a fact.
Toby: I’m not 100% certain, do not quote me but I believe you’re going to be fine, at least on the US-sourced income. Just remember, you’re going to have to worry about the treaty in your country, too, if you are not a resident alien. If you are a resident alien, then I can say definitively, you can do it and your only tax is here.
The US is one of two countries that actually taxes worldwide. Revenue in most countries just say, “No.” Again, you want to look at your treaty depending on where you’re a citizen of that would control.
“I’m doing flips currently on an LLC. I was thinking of setting up a C Corp for flips and another LLC taxed as an S Corp for the management properties,” which is fine. That actually works. “I’m confused with the following. C Corp pays 21%, but if I want to take the profits, I’ll be taxed again.” Not necessarily. C corporation pays 21% on net profit but if you pay it out yourself as a salary or as a reimbursement, then it’s not taxed again. If it is taxed again, assuming that it’s US taxation and it’s a US company paying out a qualified dividend, then it’s taxed at your long-term capital gains rate which could be 0%, 15%, or 20%. It sounds like if you really want the money, you could get more money into the S Corp because then it just flows onto your tax return. I hope that makes sense.
Let’s go back to some of these questions. Great question on the parents, by the way. That’s the type of stuff that I really enjoy. Book did this last week because we have a 100th episode, so this is our 101th, but we’re going to do a pre-order on the Tax Wise book, assuming I get off by Duff and finish it up in the next couple of weeks, we’ll get this out. Hopefully, in October or early November and you’ll get your copy. It’s $10. You can pre-order if you like. It’s fourth edition. If you like this sort of stuff, it’s a good handbook to have.
Jumping back in, “For an equity investor, what is the best way to structure ownership when concerning taxes in LLC, personal LLC, be from the home state of the investment property?” Equity investor, what does that say to you, Jeff?
Jeff: I’m thinking that they’re just putting money in but not the actual owner of the property. I might be getting this totally wrong.
Toby: I just say when I see an equity investor, I’m thinking equities. The first time I read this, I was like, “Oh, it’s somebody doing stocks and equities.”
Jeff: But they do say at the end, “The home state of the investment property.”
Toby: Yeah, so maybe they’re an equity investor, meaning that they’re dumping money into a syndication. Here’s what I would say. If it’s an LLC that you’re investing in then we have two types of liability. We have inside liability that comes and gets you if you have a piece of property in your name and they sue you, […] sue the property. You don’t want it to come over to you personally.
Let’s say that I’m a doctor and I make $1 million a year and I’m a great surgeon. I buy a $50,000 house in Indianapolis and I say, “What’s the worst thing that could happen?” Somebody says, “If something bad happens on that property, they’re just going to take the property.” No they’re not. They’re going to garnish you forever because you make $1 million a year.
So you put a box around it that’s called an LLC. That way they can’t get out of the box. They’re stuck in the box. Then, there’s outside liabilities. Let’s say that same doctor has that property in an LLC. He commits egregious malpractice and gets sued for $30 million, then they take the LLC away. That’s outside liability, somebody taking the LLC away.
Another way to look at it is if you have a safe. There’s stuff inside the safe. Let’s say that you put something in there that’s explosive and it blows up inside the safe. It destroys everything inside the safe. That’s inside liability. Outside liability is if somebody takes your safe. That’s kind of fun.
Jeff: It is.
Toby: What were we talking about?
Jeff: Time to get a bigger safe.
Toby: Realistically, what I would say is if you have an LLC that you’re investing in, then you’re fine. If you’re worried, if you have personal liabilities, I’d probably put that in an LLC. I’d move that LLC out in the desert where nobody can find your safe. I would put it in Wyoming where nobody could get it or in Nevada where nobody can get it.
People always say, “Oh, it’s kind of sticky.” I’ve litigated some pretty major cases and I personally obtained judgements right down $100 million, so I know what I’m talking about guys. Lots of people give out advice that don’t actually do this stuff and usually it’s because they haven’t been up close and personal with it. I’m just going to basically leave it at that. You want to make sure that your stuff is not very easy to find and very difficult to take. Otherwise, someone’s just going to find it.
Somebody says, “Can a family living trust be made the managing member of an LLC? Is it legal and a recommended business practice? Is the structure provider useful nonetheless for protection?” Realistically, no. You wouldn’t make it a managing member. I use managing members seldom and it’s only when it’s an LLC or corporation owning another LLC or corporation.
Kevin, what I would do is if you would have to have somebody listed as a managing individual, you make this manager manage and make the LLC, the member be the living trust, and then make you be the manager or technically, I’d love to see managers be corporations. That’s just because I like to keep the inside liability away from you. In order to keep it away from you, I have to put it inside a box. The only types of boxes we have are corporations and LLCs, LPs. Trusts really aren’t asset protection tool. They’re good for keeping your name out of the record and also living trust is magic when it comes to estate planning because it doesn’t go through probate. It keeps you out of court.
Anyway, here’s another good one, Jeff, you’ll like this. “My brother owns a home. I rent a room in the home. I operate my small business from my room. Can I write off a percentage of the space as my home office?” That is wild. It has to be exclusive use.
Jeff: It has to be exclusive use.
Toby: Chris, what you do is you make an area that is your home office. You’re not really going to get questioned because if you do this right, use a corporation, it reimburses you. But yes, it can actually reimburse you.
Jeff: I just wanted to sum that everything but my bed was office use.
Toby: I actually had one—this isn’t me—it was from another accountant. They put files all over the bed and they took pictures of this and said, “We don’t use it as a bed, we use it as a file cabinet,” and I was like, “That’s a big file cabinet.”
Jeff: It is.
Toby: That is weird though but it works. IRS enforces the rule. “What’s best, S Corp or C Corp?” Ronnie, what kind of question is that? It depends on what we’re doing. How many hats do you run? It really depends. If you need the money, you use an S Corp. If you don’t need the money, you use a C Corp. If you have lots of medical expenses that you’re not getting any reimbursement for and you have no employees, you use a C Corp. Sometimes, you use them both. It’s like big old depends. My parents wanted me to be a lawyer so I can say that and get paid for it. They’re with the accountants, it depends.
Here, I’m going to go through this one. Somebody asked me a good question on this LLCs. “If I sell my personal residence,” so they sell their residence, they have $140,000 in equity, “what would be the best strategy to use the funds from the sale for my RAL set-up?” That’s a residential assisted living. That’s helping folks out that need activities of daily living assistance and that could be adults, autisitc, that could be elders, that could clean and sober living. There’s a whole bunch that fall underneath that. “I do have a QRP,” which is also known as 401(k), qualified retirement plan. “Can I use those retirement funds for the upgrades and repay the loan from the proceeds?”
I’m going to break this into two pieces. You have a personal residence. You have $140,000 in equity. That doesn’t tell me what the gain is. I need to know what you bought it for, what improvements you put in. Let’s just say that when they say equity, they actually mean appreciation and that’s third gain and they’ve never used it a rental. Assuming that you are married, you’d get all of it tax-free. Assuming that you are single, you would get a $125,000 of it tax-free which if you sold it, you’re going to have some deductions for all the expenses so it’s probably going to be around $125,000 anyway.
First off, you get that money and it’s tax-free. If it is not tax-free, then there are some other strategies we do to try to mitigate those taxes. You could do qualified opportunity zones. You could do giving money to charity. You could have other losses, whatever. Just try to offset it. You may sell some loser properties. Actually, would that offset the gain out of personal residence?
Jeff: Yeah, if it was taxable gain it would.
Toby: Basically, you’re going to get whatever that cash is when it’s all said and done, you’re going to have that tax-free. Now, could you use that in your startup? Heck, yeah and it’s not going to hurt you. Would it still be deductible by the startup? Of course. It’s just whether it’s going to be deductible in year one or whether it’s going to be amortized. It all comes down to whether it’s a current expense, whether it’s a startup expense.
“I do have a QRP, so I could use those retirement funds for the upgrades and repay the loan from the proceeds.” Yes, with a QRP, you can borrow up to $50,000. Excuse me, somebody said, “Isn’t $250,000 single?” Yes, you’re right, Michael. You should have slapped me, Jeff. I’m just babbling off nonsense. Yeah, the personal residence is $250,000–$500,000. Excuse me, I’m thinking $125,000. It is, it’s $250,000 so there’s not going to be a tax on the equity no matter what. Good catch, Mike. We’re just checking with you guys.
Jeff: I was thinking that they didn’t live there for two years so they […].
Toby: There might be a portion. They only got half. That’s horrible. “I do have a QRP.” Now, with a QRP, you can borrow up to half the funds and then you have to pay it back in five years. So, you can absolutely use your QRP. You can absolutely borrow those funds out of the QRP and then repay it. Then you pay it at Federal AFRH, which is right around 3%. Anything else you want to throw on that? There’s still a bunch out there.
Jeff: No.
Toby: I thought that was pretty good. All right. Somebody just asked a couple of questions. “In the case of Wyoming holding trust which holds multiple state LLCs, will living trust only Wyoming LLC or the hierarchy holding be different?” Sam, you’re absolutely right.
When you own something, when you own it personally, you can be looking at probate. If you own it through your living trust, then you don’t. If you have a Wyoming entity that owns a whole bunch of LLCs in different states that own real estate, which is a typical structure, we have inside liability and all the LLCs that own the real estate and then we have outside liability because we have the Wyoming holding trust. It’s perfect. Yes, you own that as a trustee of your living trust, you don’t have to worry about probating that thing.
“Is there a way to avoid a California franchise tax if you have a living trust which owns the Wyoming holding LLC?” Sam, the answer is yeah. We won that audit about towards five or six years ago where the individual wasn’t the owner. The trust was the owner. If you ask the franchise tax board, they’re always going to tell you you have to pay it. We’ve been checked on that one and the client prevailed. That said, if that holding entity files a 1065, they’re going to come after you for it. I would say just pay one. Don’t mess around with it. They’re always going to say, “Pay me more. Pay me more.” If they ever ask you that’s just because they need the money.
“If I conduct meetings with current and potential business partners in my office at home, can I get reimbursed by my C Corp from landscaping cost?” One, if you’re talking about business use of your home, you have a home office, and you meet people there, then yes. You can actually add the cost of landscaping into your reimbursement from your corporation to you for allowing them to use your home. If you’re doing a home office, I think you can write it off too. If you’re doing the standard 8869 onto a Schedule C at the form, then you can write it off, too.
If you’re meeting people there, it better be consistent. If it’s just a one-time deal, probably not. If you’re constantly meeting clients there and business partners, then yes. Fat hogs get slaughtered so don’t get too crazy.
“If you trade stocks or options, small account $30,000 in a C Corp, do you need an LLC managed by the C Corp?” Jane, no. I put that and tied to a corporation. Just know that all the profits are in the corp.
“I get reimbursed by my S Corp. Can I get reimbursed by my S Corp for the use of my personal pick-up truck for the last three quarters of the year? The truck is financed in my name.” You own it individually and you’re making the payments, but you’re using the truck for business. Jeff, what say you?
Jeff: Well, you can definitely reimburse for the business use of your truck. You’re going to have to track mileage on it regardless.
Toby: Use MileIQ. It’s a little app you get on your phone and MileIQ will track GPS. It’ll track your miles and then you swipe left for business, right for personal type. I think it’s a left or a right. I can’t remember which one. If the mileage was ugly, you swipe left. It’s pretty, that’s something else. Don’t start with me, Jeff.
All right. “So, I get reimbursed?” Yeah, you get reimbursed and it doesn’t matter. Just make sure you’re tracking your miles. Now, if the truck was financed in your name and you’re making the payments, then you may just have a standard personal policy. You better make sure that it covers you when you’re driving it around for business.
Somebody says, “Can you get reimbursed for gas?” No. You have to choose. You can only choose once. I tend to choose to do the mileage reimbursement. The other route is the actual cost method, where you write off the actual cost to the gas, to the repairs that are associated with the business. Usually, what you do is you say how many miles did you run for business, how many gallons of gas did you use? If you do an oil change, you figure out what percentage you use. See how this could be a big pain. If you have to get improvements or you get your truck fixed, thinking about your work done on it, it’s $1000, then you get to figure out what percentage was business. Say it’s 20% so I could reimburse myself $200 versus just doing $0.58 a mile. Those are your two choices. I’m always going to tell you 99% of the time is just do the mileage.
Jeff: Yeah, the mileage deduction actually includes all of those different types of actual expenses but if you’re making payments on a vehicle, you cannot be reimbursed for that. The interest portion, yes, the principal portion, no.
Toby: Somebody just asked, “If the truck is owned by the business, can you still do mileage or you have to do actual expenses?” You do the actual expenses and you’re allocated a portion of the least value of that to you personally for your personal use. You actually look at how much is the truck worth and then you allocate as though you got paid wages. Whatever percentage of that dollar amount could be a lot. If the car is worth $30,000 or $40,000, you’re probably going to be allocated $70,000 a year.
Jeff: It gets included on your W-2 and you pay your taxes on it.
Toby: And self-employment tax, am I right?
Jeff: I think it’s exempt from self-employment […] federal.
Toby: That’s good. Federal is good. You treat it like they paid you money. If I gave Jeff a Lamborghini tomorrow and said, “Great job, Jeff,” and I gave him a Lamborghini and he has to pay tax, I have to do withholdings on the value of the Lambo. I’m not going to give you a Lamborghini, though. I know. You’re too sick. You’d cough up a lung and crash. He’s a trooper.
Jeff: I can see it. […] said, “Oh my gosh. Jeff was in a wreck. I hope the Lamborghini was not too […].”
Toby: “The truck is used exclusively for business.” In which case, then you would just write off all the expenses currently.
Somebody just said, “Along the lines of the Wyoming LLC being held by the living trust, can a single member LLC but not a parent company be owned by the living trust?” Yes. Absolutely. That does make sense, Kevin. We try to keep you out of probate. People don’t understand how probate is. Here’s my little simple rule. We’re watching this stuff for years and I’ve had friends go through this. I’ve been through this for family members.
Bad things happen in probate. This is the way I put it. It’s more likely than not that bad stuff is going to happen if you have to go to court on probate. People are going to hate each other. They don’t like doing paperwork. They’re all ticked off. They’re digging through stuff. It’s not good. It’s more likely than not it’s going to be bad.
On the flip side, not going through probate and actually having some sort of estate plan done, it’s more likely than not that it’s going to turn out good. In fact, it’s going to be positive and they’re going to realize that somebody cared about them. There’s usually a trust and it usually has really cool things in it. If we’re drafting it, I like to put goofy stuff in there like, “Hey, if you’re going to be a beneficiary, you’re should have to travel outside the country. We’d love to sponsor you to go outside the country every year. Pick a different country every year.” Just something goofy like that.
People are like, “Woah, I have to leave the country every year.” Guess what. That’s good. That’s a good thing as opposed to, “I just get a bunch of money dumped on me and I have to go to court to fight it out with my siblings.” Anyway, I get crunchy on that.
“I travelled across the VRV cross-country, in and out of other countries.” Let’s say you went up to Banff, Canada. Driving around your RV and needed WiFi to conduct business. “Can any part of the travel expense be deducted?” Here’s the rule. If you are travelling for leisure and it’s more than 50% leisure, you’re not writing off any business expenses associated with that trip. If you are using that RV to do a business trip while on a personal trip, in other words, I’m driving around personally but I have to take a business trip from my personal location and I’m driving around, then I would reimburse myself mileage, pay for my WiFi, and other things that are actual expenses of business. In other words, just because you were on vacation does not negate your ability to take business expenses.
Jeff: But what you might be able to deduct is the cost of the WiFi.
Toby: You can write off the WiFi which would be good. Especially if you have to add it to your RV. Like, “Hey, I have to make sure that I can work while I’m travelling.” Then that’s a business expense.
Jeff: Absolutely.
Toby: The RV stuff, people sometimes try to write off the RV. Again, it qualifies as travel and it could get miles.
“Can I rent my RV to make corporation for meetings? How is it taxed?” This gets fun because the rule, there’s something called 280A G2, 26 USC if you like to have the full cite. What it says is the company can write off lease payments. You don’t have to recognize those lease payments as income if it’s 14 days or less.
It just has to be a dwelling and a dwelling, an RV qualifies as long as it has a sleeping quarter and a bathroom. If you could dwell in it, then your corporation can rent it. The corporation would literally write you whatever the fair market value of an RV is for a day so it could have a meeting and it’s not taxed. If it’s 14 days or less, it’s tax-free and the company writes it off.
Somebody says, “Please explain the 50% personal versus business requirements centered at trip expenses.” Let’s finish up. Do you have anything to add up on the RV?
Jeff: No. Go ahead.
Toby: The corporation pays you for the use of the RV. If it’s 14 days or less, you don’t have to recognize it as income. You don’t report it anywhere. The corporation writes it off as expenses.
Jeff: And the same applies for a boat, separate bathrooms and a bunk to sleep in.
Toby: Or any dwelling. It doesn’t have to be a personal residence. Most people use a personal residence but it could actually be your vacation rental, your timeshare, and all that stuff. All right, 50% personal versus business. Tim, when you travel outside of your home area and you’re going someplace, you’re going to spend the night. If it’s more than 50% business, you can write the whole travel expenses going there off. You can also deduct the cost of remaining alive while you’re on that trip.
The way it works is this. Let’s say I’m travelling somewhere and while I’m in that city, I’m going to go to a football game. Let’s say I go to Seattle and I go on a Friday. I know I’m going to do business and I have more business on Monday. I have to look and say, “All right, is it more than 50% business?” The way we count that is business days and a business is four hours and one minute plus the time to travel up there, plus weekends or holidays that occur between business days.
Let’s go over my example. I flew up on Friday to meet up on Friday. I stayed for a Sea Ox game on Sunday and I went to a meeting on Monday. I have Friday, assume that I did four hours and one minute, and Monday, four hours and one minute of business. If I did that scenario, I get the days before them to travel so I get Thursday, Friday, and I get Monday and Tuesday, travel day after, and I get the weekend days. Now I have a total of six business days.
That means that if I wanted to keep that trip being business and write off the entire cost of the airfare going up to Seattle, I have an extra five days I could stay up there. The hotels and things, I’d be able to write off Thursday, Friday, Saturday, Sunday, Monday, and Tuesday. If I stay another five days, that’s going to come out of me. That’s not going to be deductible unless I wrap into more.
Jeff: That’s just one of those weird rules that when you say 50% of your time, you’re counting by hours for each day so I do that. Four hours here, four hours here, four hours here. So I have 12½ business hours out of 6 days, I don’t qualify. Even though that’s not half the time that I’ve actually spent with travel.
Toby: You just have to say it’s a business day.
Jeff: It really works out to your advantage.
Toby: Absolutely. Gosh, we have a bunch of questions that just popped in. I’m going to go to the ones about the RVs. We have two about RVs. “Can we do the 280A deduction? Fourteen days throughout my home and my RV if the RV is on the same property as my home?” That’s pretty funny.
Blakely, here’s the deal. The statute doesn’t say that the taxpayer’s limited to 14, but it’s inferred and there’s a court case that says it’s 14 days for the taxpayer. I would say 14 days total, but you could get crazy because the statute doesn’t put that limitation. It just says that the taxpayer may rent his or her residence for less than 15 days a year and not include that in their taxable income as adjusted gross income. Right here at Section 61.
The answer to your question is, yeah, technically, you might be able to make that argument. I wouldn’t do it because I think you’ll lose it. Besided, pigs get fat and hogs get slaughtered. Then you say, “I actually do use both for office purposes and meetings.” I get it. You might be able to do the home office reimbursement. That’s separate than the 280A and that’s also tax-free. That assumes that you use it exclusively for business. So, you better have a section on your RV that’s only business.
Let’s see, “What can you do if a co-trustee did work on a trust property using her own company, build and trust over $3000 and I as co-trustee did not approve it?” Well, Robert, that sounds like you have an issue. I have to see the trust agreement. Trust agreements usually say both trustees have to unanimously agree on things or either one can act. You’d have to show that they violated their duty to the beneficiaries. It looks like a little self-dealing but that doesn’t necessarily mean they’re toast so I’d have a little chat with that.
Somebody says, “Do we have to actually make a payment record of this expense or just the paperwork?” Just document it. “If the corporation has a shareholder meeting outside the country, is that expense deductible?” Yes. It all depends on what the major reason of going outside the country for comes down to.
Let’s go back to this. We got a couple of more questions. “I sold one of my rental homes this year. If I have a gain of $200,000 and invest in a syndication buying an apartment complex and if they use bonus appreciation, will it offset any part of my gain?” Jeff, what say you?
Jeff: It will offset your gain but not directly. It’ll be just an expense that will be unreturned. I’m not sure I’m explaining this right.
Toby: Right. So you have a rental house. You made $200,000 and you have a syndication that loses $200,000 because you took bonus depreciation. You’re going to offset your gain. In other words, whatever the loss is of the syndication is you’re going to offset your gain on the sale.
Jeff: I think sometimes we get confusion that people are looking for things that actually offset a certain type of income. We’re offsetting total income not a particular type of income.
Toby: Well, this is capital gains on a rental house and assume that it’s gain plus depreciation recapture, right? Then they have a bunch of bonus appreciation. Will that offset it?
Jeff: Yes and in this case, you don’t want the bonus appreciation offsetting the capital gain, you just want to lower your income because your capital gain is going to be at a much lower tax rate.
Toby: Yes. It always comes down to is what are you offsetting? Maybe I don’t want to take it. Do you have to take it or can you roll for losses forward?
Jeff: Well, you can roll business losses forward but in this case, I’m assuming they’re going to have other income on top of things so it’s going to work out.
Toby: The answer is that it can offset it. “Is it a good idea to do cost segregation for a rental property that’s been rented for 20 years?” You’re not going to get much out of it. I showed an example during that webinar I did. If you need that link, we can send it out to you guys but I did, in a precise example kind of like this, where somebody did a cost seg right before they sold. It was only about $800,000 of a sale but I think it saved them about $70,000.
Again, it’s the idea that when you do a cost segregation and you break off pieces of your building into smaller chunks, you’re going to get capital gains as opposed to depreciation recapture in bigger portions of it. Again, the way that the world works, the way that the IRS works is your carpet has just as much value as the rest of that structure. After 20 years, there’s a bunch of stuff in that building that’s not worth anything, nobody’s going to pay for, but the way the IRS treats it is you have to recapture that at 25% or whatever your ordinary tax bracket is if it’s less.
I hope that helps. The answer to your question is always ask for a study. It doesn’t cost you anything, may as well. If it looks good, like I said this yesterday, somebody selling a house now like, “Ugh, they did a segregation study and it was going to double the money at the cost. It’s not a huge amount of money. I think it was going to save them $7,000, it was going to cost them $3,000.” Then, they were like, “Ugh, that’s not much.” I said, “Yeah, that’s not much but you double your money. It’s free money. It’s on the sale. It’s not like you have to recapture any portion of that. This is just raw money.”
If I got every dollar I gave somebody, they gave me two, I’d just keep giving them dollars. It’s one of those things. Usually, you want big chunks. Usually we’re trying to get big chunks but if you’re selling it, just check it out. If you’re not selling it then don’t.
Two for Tuesday. Let’s not forget what we’re doing here. Tax Wise workshop, I have one coming up. We keep forgetting what time of the year it is. We’re in October now, so you get access to all the recordings and we’re doing one more in November about the Tax Wise. That’s going to be the end of the year special so we’re just going to be really focusing on grabbing your 199A deductions, making sure it does apply to rental properties under certain circumstances, how to make sure that gets done.
We’re going to talk about setting up retirement plans for the end of the year. We’re going to talk about making sure things are in place that have to be put in before the end of the year and money transfers during the year. Then, we also have the Bulletproof Real Estate Investing: Make Your Investments Bulletproof.
We’re going to do these as a two-for. The Making Your Investments Bulletproof is you’re going to get tickets to a three-day class. It’s two tax and asset protection workshop tickets. That’s a three-day class guys. You come out to Vegas or wherever we hold them. We’re having them in Boston. We just had one in Chicago. We have them in California. We have them in Texas all the time, Florida. You come on out and three days with us. You won’t be sorry.
You’re going to get the tax and asset protection book that Clint wrote Tax and Asset Protection for Real Estate Investors. Then we’re going to give you a three-part video series from Clint, Michael, and myself, along with our Wealth Planning Blueprint. We’re going to give all that to you including the Tax Wise worksop, $497. If you want to take advantage of that, absolutely do. We’d love to have you. There’s got to be a link somewhere. I don’t see a link but just email us in at Tax Tuesday and request.
Here’s free stuff. I just did a podcast today with the cunning Dave Rufus who does service dogs for veterans that are suffering from post traumatic stress disorder. The guy’s pretty amazing. He ended up getting service dogs down to $25,000 for training with all the people that are working on it. He is pretty amazing and it really takes the suicide rate pretty close to zero for these veterans because now they have something to really live for.
It’s a huge issue, guys. I don’t talk about that stuff on the Tax Tuesdays because frankly, it’s a tax class but let’s be human beings for a second. We have a lot of folks that come back from overseas and they’re traumatized. It’s not just our veterans, it’s also the first responders. They see some pretty heinous stuff and it’s really tough to deal with. We can pretend like it’s not an issue but more people die over here by their own hands than die overseas at the hands of our enemies. It’s about time that we figured it out.
I did this pretty cool podcast with him and it’s on our podcast now. Go to iTunes, and it’s free, Anderson Business Advisors Podcast. We also have it on Google. It’s also free and it’s pretty darn amazing, guys. Again, I just cannot believe to do a service dog it’s like $50,000 and this guy and his group got it down to $25,000. It’s a big deal. If you want to sponsor, just go out and sponsor somebody. I always say it starts local. You don’t have to tell anybody if you want to keep it a secret. Just go sponsor somebody, go help somebody.
If you like working with the veterans, then that’s a guy I could tell you. He’s pretty down to earth. He was a former marine and seems like the salts of the earth have met him personally. Again, you see people and you see the way they interact with folks and this is a good dude.
If you like the sort of information pop-on, we’re education junkies around here. We like to teach. We like to share information. We try not to be pretentious about it as much as Jeff likes to make fun of me constantly. Gosh, Jeff, you can’t just leave me alone. I’m just kidding.
Jeff is awesome. Jeff’s a CPA, I’m an attorney. We’re just sitting around and we try to come up with things that help people. You can always send in questions, we don’t charge by the questions, to taxtuesdays@andersonadvisors.com. I know there’s about ten of them that I did not get to. We’re going to keep popping them off so you would go in order. If you sent in questions in the last week, chances are we didn’t get to it. You’ll still get an answer but I didn’t make it part of the show.
Somebody says, “I missed you in Chicago.” You got to deal with my brother, Michael Bowman. I’m sure he’s a fantastic speaker there in Chicago. I think Carl was up there. They’re both great guys. Anyway, so there’s your questions, Tax Tuesday Anderson Advisors.
The tax sessions are at the same time in the future, no specific date. Actually, the Tax Wise, if you hang on for a second I’ll tell you exactly when it is. I think it’s November something. We have one coming up November 11th. I think it’s sold out physically, but you can still get on the livestream. Looks like it is sold out because it’s in the red. Yes, sold out. You can get on the livestream. The live event is all sold out, it’s November 11–12. It’s always good to sell out at things with a month-and-a-half ahead of time. But they’re fun. They’re popular. The reason they’re popular is because people who save a lot have a few really cool testimonials. People that saved over $100,000 just sitting there.
It says if you can’t make November, what we do is we record them all. You’re going to get all three recordings anyway. Don’t feel like if you can’t make it personally, if you can’t make it through the livestream, by all means, go ahead and grab it. It is approved for continuing education if you are a professional.
I’ll go over last time. I’ll just tell you what I did. I went over 31 specific strategies for reducing tax. When we do a strategy, we’re just trying to do things that are going to put more money in your pocket. No offense to the treasury but I’d rather direct where my dollars go. I just wonder if you guys feel the same way. We’ll go from there.
I just want to say how much I appreciate you guys. We went a little bit over but not horribly. It’s only 4:27, Pacific Standard Time, so 7:27 East Coast and all that fun. But I really appreciate you guys getting on. You guys are an awesome community and we keep hearing really good stories coming out of you guys. It’s very exciting to see that people take this stuff seriously, you’re spending some time with this. Again, my personal thanks. Jeff, do you have anything else?
Jeff: No. I’ll try to be a little healthier next visit.
Toby: Yeah, Jeff gave up a lung for you guys. Jeff’s a trooper. He did really good. I could hear Patty cackling in the background. With that I’ll leave it. Thanks, guys.
Jeff: Thank you.
As always, take advantage of our free educational content and every other Tuesday we have Toby’s Tax Tuesday, a great educational series. Our Structure Implementation Series answers your questions about how to structure your business entities to protect you and your assets.
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