‘Tis the season for Tax Tuesdays giving. How do donations to charities and nonprofits impact your taxes? Toby Mathis and Jeff Webb of Anderson Advisors provide answers to help you get through the holidays when helping others. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- I received a large sum of money via inheritance in 2019. How can this amount be protected and have the tax burden minimized? Inheritances are not taxable to the recipient
- Is keeping a log of miles always required? How should the car be purchased so all the miles are considered business? Keep track of all business miles via MileIQ; how car is purchased doesn’t matter as much as how the car is used
- If I make a large stock contribution to my 501(c)(3), are there any capital allocation or income sourcing requirements that would force my charity to sell it off? No capital allocations or income sourcing requirements, but you must fulfill the nonprofit’s purpose
- Is a quitclaim deed sufficient to transfer the title of a timeshare from personal name to revocable living trust in California? Technically, you can, but most use a warranty deed; determine if ownership is deeded interest or right-to-use contract
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Go to iTunes to leave a review of the Tax Tuesday podcast.
Resources:
2019 Year-End Tax Planning Special
Capital Gains Exclusion/Section 121
Real Estate Professional Requirements
Anderson Advisors Tax and Asset Protection Event
Transcript:
Welcome to the Anderson Business Advisors Podcast, the nationally recognized, preferred provider for asset protection and tax planning in the nation. This show is for investors and business owners looking to save on taxes and build long-term wealth with Toby Mathis, an attorney, author, business owner, and a featured instructor at Anderson’s Tax and Asset Protection Event held throughout the country. Enjoy the show.
Toby: Hey, guys. This is Toby Mathis and you are listening to Tax Tuesday. I will be joined momentarily by Jeff Webb as well. In the meantime, I’ll certainly just keep on jamming on. I’m going to move my question box a little bit to make it easier to read all the questions. You guys have a lot of questions already. That’s really cool. Thank you.
First off, it’s always bringing tax knowledge to the masses. I’m going to give you an idea where I am right now, that’s out of my window as I’m speaking. I closed the door so you don’t have to hear the wind. I’m in Maui teaching continuing education class to about 130 really cool realtors. They all come in from Anchorage every other year to do their continuing education, really neat group. Only group that I work with that at 8:00 AM, they actually have a full bar. That’s Alaska for you. Cool people.
Anyway, as always, you can get lots of free information on YouTube, and on Facebook. Feel free to join us at andersonadvisors.com. andersonsadvisors.com/youtube or andersonadvisors.com/facebook will get you there. You can always also do our podcast which is andersonadvisors.com/podcast. You can sign up both on iTunes and Google Play where you can actually go and listen to all the Tax Tuesdays as well.
Somebody says, “Do you provide legal sale lease?” Yeah, we do quite often. The way it works is that a lot of our classes are either pre approved or you just submit the information. You can actually do that.
A lot of questions are already coming in. There’s a few from… Hey, Mark. We’re over just sitting over here which is a really cool place. I’m sure you’re familiar, I’m sitting at the black rocks. They always do it at the Sheraton here.
Going back to the sale lease, you can always hit us up. We have folks that work on the continuing education site. A lot of our courses are continuing education for accountants, et cetera. I’m not sure exactly how it would work for continuing education on the Tax Tuesday. A lot of our courses obviously are already qualified but the Tax Tuesdays, I’m not sure how that would work. You can always check it up.
Somebody said, “I was told $500 was a limit for charitable donations of goods, not cash, for the year in total. Another said that it was just for charity. Can you clarify?” It’s not quite like that. What happens is whenever you’re doing cash, it’s never an issue about providing backup. Whenever you’re providing goods, then you got a question as, “Why do you have to provide an appraisal?” If you’re under $500, I think you can just do an estimate. I think if you go over that amount, you’re going to actually have to breakdown the items, and get their market values on each item. It’s not for charity. It’s for the taxpayer when you’re giving goods. I hope that helps.
Let’s jump into this. I have a lot of questions to go through.
There’s something else between the $500 and $1000 too, I believe. I have to look that up. Maybe you can do that.
If you want to send in questions to Tax Tuesday at Anderson Advisors, you can do that. We answer those questions. I think I hear somebody on the line. Is that Jeff?
Jeff: Yes, it is.
Toby: All right, so you’re back. You killed your computer. You can always pick up the phone and dial in too if you ever need to.
Jeff: The whole computer froze up.
Toby: That’s usually a minute right before we’re just chatting on. You just fell off. Probably, Microsoft.
If you need a detailed response, just send it in to Tax Tuesday. If you’re a Platinum or a tax client, we answer those. If you’re not, then, we tell you how to become one. If it’s just a general question, we take it out of that pool, we grab a bunch of questions. That’s what we’re going to go over.
“Where can I find out information on the CLE courses?” Somebody should reach out to you. Maybe Susan, you can do that. Grab Dmitry’s information. I think it’s Valerie that handles that in our offices. You can try to get continuing education.
Opening questions, I’ve got a ton of them. I’m going to have to minimize a lot of little things that are on my screen. I apologize if you hear little delays. I’m on one screen today.
“I received a large sum of money via inheritance in 2019. How can this amount be protected and have its tax burden minimized?” We’ll answer that.
“I am married and want to start my real estate business. My husband is not interested in any of these businesses. How should I proceed without interference from my husband for both tax purposes and legal protection?” That’s a can of worms right there.
“I live in Illinois and I’m planning on starting a real estate business. I heard LLCs in Nevada, Wyoming, and Delaware are good. I created an Illinois LLC. Should I also have any of the other three or should I just create a Wyoming LLC and not Illinois?” We’ll go through all the options on that one.
“How do you fill out the personal reimbursement for an LLC Form 1065 Partnership and transferred into a C-Corp Form 1120?” Interesting question. We’ll answer that.
“If cashing out for long-term stock market gains, how many days after cashing out can funds be redeployed in opportunity zones?” We’ll go over that.
“The current limit on home mortgage interest deductions is a max of $750,000 for loans after 2017. Does that mean that if you have a loan for $1,000,000, 75% of the interest is deductible? Or that none of it is deductible?” We’ll go over that.
“I have paid $50,000 in legal retainer in the litigation case in 2017. The fees were withdrawn throughout the year in 2018. There’s still credit in the account, not the entire $50,000 was used yet. How can I deduct the legal fees?” We’ll go through that.
“Is keeping a log of miles always required? How should the car be purchased so all the miles are considered business?” We’ll go over to some of your options there.
“I sold an investment property in 2018 that I have owned for more than 20 years. What is the tax liability on the sale of the investment property? What are the options for mitigating the tax liability?”
“I have an LLC taxed as a C-Corp that manages my rental properties. It will not pay any wages and will operate at a loss for the next several years. It will provide fringe benefits. Can these entities sponsor a self directed 401(k) plan to accept rollover contributions?” Great question. We’ll go over that.
“What is your opinion on cost segregation software which can allow CPAs to prepare cost segregation studies worth $400? Is there any disadvantage for this versus physically sending someone to the property to do the cost segregation?” I’d love to answer that one. Yes, that will be a great question.
“If I make a large stock contribution to my 501(c)(3), are there any capital allocations or income sourcing requirements that would force my charity to sell it off?”
“The loss from one pass through rental LLC exceeds the gain from another, the LLCs are given space. Do I pay state income tax with the profitable LLC even though I have a federal loss?” We’ll go over that. That’s going to be great at that.
“If you buy a house as an investment property, hold it for five years, take depreciation for five years, sell it and do a 1031 Exchange, what happens? Do you have to pay the depreciation back when you do a 1031 Exchange?” That’s an interesting question. We’ll answer that.
“I’m initiating the sale of a California rental property that was held in my personal name. I will initiate a 1031 Exchange. I would like to put it in an LLC for asset protection and tie it to our management C-Corp today. Can I do this?” Yeah, we’ll go over that. That was a really good question by the way. This is a good grouping.
“Is a quitclaim deed sufficient to transfer the title of a timeshare from personal name to revocable living trust in California?” We’ll answer that.
“If you have a HELOC on your personal residence, which is in your personal name, and you use the HELOC—that’s a home equity line of credit by the way—to buy and renovate homes for your business, can you still deduct the HELOC interest of the business expense?”
“I am closing on a condo under my name but I’d like to have it under my LLC as I rent it out. The promised rates are a lot higher for the commercial loan to an LLC. I was thinking of getting a mortgage under my name and then transfer the title to the LLC after the closing. Is this a problem?” We’ll answer that.
“I have a holding LLC and a subsidiary LLC with rental property in it. I need to put some expenses on the company credit card. Can I use a credit card for the holding LLC and have the subsidiary LLC checking account pay the credit card bill or do I need a separate credit card for each LLC?” Fantastic. We have a lot of questions.
Jeff, who does that? Who picks all these questions?
Jeff: I don’t know but he must be one great guy.
Toby: We have a lot of questions but I’m just going to bust through some of these. Did you want to knock out this first one?
Jeff: Yeah. “I received a large sum of money via inheritance in 2019. How can this amount be protected and have the tax burden minimized?” This is a common misconception. Inheritances are not taxable to the recipient. They probably aren’t taxable to the grantor or the person who’s giving the money unless it’s a substantial amount that’s being inherited, like over $11 million.
Anytime you receive money or anything else in an inheritance, it is yours. If your grandparents bought a house for $50,000 30 years ago and it’s now worth $500,000, that house is worth $500,000 to you. The inheritance almost always works out in the recipient’s favor.
Toby: Another big one is when you inherit property, there’s a step up in basis when somebody passes. There’s actually no tax liability. Let’s just say that I own a dock. I inherited it from a parent. They bought it for $1000 and it’s now worth $100,000 when they passed. Your new basis is $100,000. That goes for real estate or anything that appreciates.
When you inherit these things, not only is there a huge exception. It’s over $11,000,000. $11,400,000 this year for spouse. Married couple, if you do that right, it’s going to be $22,800,000 but you will be taxed on that when it comes back.
Jeff: The stock is a good example. I could inherit it today, sell it tomorrow, and pay almost no tax on capital gains because my basis would be pretty close to matching what I’m selling it for.
Toby: Yeah. If you want to protect it, you protect it like you would anything else. You’d literally put it into an LLC. It’s probably going to be the best thing for you depending on what type of asset it is. If it’s just cash, you’re just going to want to make sure it’s separate. It’s not in your personal name.
The way that I would be doing that if I inherited a couple of million dollars in cash, $3,000,000, whatever it is, I’d more likely have that put into an LLC separate from me. There’s no way to minimize things that I do, or things that my kids do, or things that could cost me personal liability. Just in general we’re walking around, we’re always doing stuff or driving cars. I don’t want to make that cash subject to anything that comes up there. That’s the way to do it.
Let’s see. Lots of questions, lots of questions. Let’s just go to the next one. I know we have a ton to go over. Take a look at this one. This one is my favorite one. “I am married and want to start my real estate business. My husband is not interested in any of these businesses.” The question becomes, what kind of business is this? Are you going to do an investment? You’re going to be a real estate agent? You’re going to flip houses, wholesale, et cetera? “How should I proceed without interference from my husband for both tax purposes and asset protection?”
Here’s where it really boils down. It depends on your state as to whether your husband’s going to be stuck in thing involved at all. If I’m just a real estate agent then I set up a business, then the question is whether that business, even though it’s me individually, it’s still considered a community asset or whether it’s a separate asset, that really depends on the state. If you’re in a separate property state, then it’s you. It doesn’t mean that your husband is going to be completely off the hook and it doesn’t mean that he’s going to be nailed either if he’s not an owner on it. It’s just you. If any of the money coming out of that business is used for community purposes, then the community is on the hook. If it’s separate property and you keep it separate, yu really have to keep it separate. It’s possible in protecting as well. It gets kind of interesting.
What I would say, more importantly, is whatever you do, if you’re having an issue with the spouses, make sure that they sign off that they are not an owner. I would make sure that I’m doing that. That’s more of a structural. From a tax standpoint, if you’re filing a joint return, it’s going on your joint return. You’d have some innocent spouse relief if there was tax liabilities and for whatever reason you weren’t reporting it, you weren’t letting him know, and he had no way to get it, there might be some protection for him.
Otherwise, really what you need to be doing is saying, “Hey. I know you’re not interested in this. I’m going to run this separately but I still need you to be aware of what’s going on.” Just make your husband aware.
Jeff, do you have anything you want to add on to that one?
Jeff: No. If he truly wants to be completely uninvolved, he may want to file spouse protection for himself to avoid any liability that might pass through to him on a jointly filed return.
Toby: You’re basically just saying, “Hey. I’m not involved in this.”
Jeff: Correct.
Toby: This is another structured question. “I live in Illinois and I’m planning on starting a real estate business. I heard LLCs in Nevada, Wyoming, and Delaware are good.” I’m just going to say caveat. They’re good for certain things but if you have a business in New York state, for example, real estate business. If it’s rental properties, if it’s real estate agent, if it’s wholesaling, we’re doing business in that state. You’re going to have an entity in that state. “I created an Illinois LLC. Should I also have any of the other three LLCs or should I just create a Wyoming LLC and not in Illinois?”
The answer is almost always. You’re going to have an Illinois LLC. That’s great for inside liability. That means that if something happens in that business, it stays inside that box. Sometimes we do a visual where we take a cardboard box. We take glasses representing each piece of property in each business. We put all these glasses in the box and you close the box. There’s two things that you’re looking at. A, what if somebody wants to take the box from you? That’s outside liability. Somebody wants to take that box, they would get all those glasses. That’s where you use a Nevada or Wyoming. I’m not really going to use a Delaware just because you use it for other purposes.
If I want to make sure I have the best protection from outside liability, I’m going to be going to Wyoming first, then Nevada, second. Right now, it’s a little bit cheaper to do Wyoming, and have the same statute. Both protect and keep you anonymous. I’m going to go that route.
Your inside liability, which the inside liability talks about what happens inside. You’ve got all these glasses. The visual is we take that glass, then we shake it, and break all that glass inside it. That’s inside liability. If you put everything in one box then it’s all subject to inside that. It’s all subjected to anything that happens inside that box. You really want to have boxes holding each glass and you put those glasses inside a single box. The box that you’re holding those LLCs, each rental property, for example, in real estate may go into an LLC. They’re held by the Wyoming LLC. Those local LLCs would be in Illinois.
Jeff, did you have anything you wanted to add on that?
Jeff: Nope. I think you pretty well covered that.
Toby: Okay, cool.
“The current limit on home mortgage interest deductions is a max of $750,000 for loans after 2017. Does that mean that if you have a loan for $1,000,000, 75% of the interest is deductible? Or that none of it is deductible?” The answer is that the current limit on the home, you’ll get 75% of it. Also, even though you have the $750,000, it’s not after 2017. Technically, you’re grandfather did for loans prior to 2017, then all the way up through April 15 of 2018 if you have that loan in motion before. There are some little caveats there.
One thing that you can do if you want to do some year-end planning, we’ll come back to this. If you use that little link there, we did a year-end tax planning livestream. If you guys want to access through it, it’s available to the tax clients for free. We do this on a quarterly basis. But if you want to do the year-end tax planning, you can go to that little link, YETPS which is Year-end Tax Planning Seminar, I believe. You can go in there. What I did is I basically broke down year-end tax planning for everybody.
If you do something like that, I put a real simple guarantee, it’s $197. I’ll guarantee that you’ll save at least $2,000 or we’ll give your money back. That’s real simple. The reason that we do that is because if you do some tax planning, on average, it’s going to save you about $1,000 per hour from what we see. If you just spend a little bit of time on this thing, it’s usually going to reap you some huge rewards.
If you want to take advantage of that it’s aba.link. I’m sure Susan will provide a link for everybody to use. We’ll get to that.
All right. This is an interesting one. “I have paid $50,000 in legal retainer in the litigation case in 2017. The fees were withdrawn throughout the year in 2018. There’s still credit on the account as not the entire $50,000 was used yet.” This is a huge one, guys. The reason this is so important just because the law changed at the end of 2017. Prior to 2017 or in 2017, you could actually deduct as a miscellaneous itemized deduction your legal fees, your accounting fees, and things like that.
In 2018, after the Tax Cuts and Jobs Act, you could not write those off personally anymore. The reason this is important is because that legal retainer is either going to be a refundable legal retainer or a nonrefundable legal retainer. If it is a nonrefundable legal retainer, then the day they paid that $50,000 as a cash basis taxpayer, as an individual, you get that deduction in 2017. If it was a refundable retainer, then the fees are deductible when they are withdrawn which would be 2018, and you would not get to write any of them off. That’s if it’s personal.
If it is a business, then we have a little bit of different scenario. If it’s business, you can always write off business expenses. If it’s not business, then personal, you’re not going to get to write it off. It gets a little bit funky.
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All right, I’m going to keep jumping through these. “Is keeping a log of miles always required? How should the car be purchased so all the miles are considered business?” Here’s how this works. First off, you’re always required to keep track of whether something is personal, and business used. Unless it’s 100% business used in which case all the miles are business, you’re supposed to keep the log. The easiest way to do that is by using an app like MileIQ. If it’s business, yu may have the GPS already put into the vehicle. I know that most companies do that, most common carriers do that, and many are actually required to do that in many different types of industries.
The easy answer is yeah, keep tracking your miles. You can start at the beginning of the year. Write down what your odometer is and keep track which trips. If you’re using a MileIQ, it’s really easy because the GPS tracks all your trips. If they’re all business, then it’s really easy. But that car better be parked at that office. You’re keeping track of those miles if it is on the app, super, super, simple.
If it’s something between being used for business and perhaps being used for commuting car, and things like that, it’s not 100% business. I would say you really, really, want to use MileIQ or a similar app. Then, you can designate which trips are always business. If you’re constantly going between the home office and the business office, for example, you can set that and forget it. It always grabs those trips and make some business trips.
“How should the car be purchased so all the miles are considered business?” All the miles have to be used for business. If you own that car personally and you’re reimbursing the miles, then all the miles are considered business if they’re business miles and you’re tracking them as such.
Jeff: The one thing I thought about with this question was, “How should the car be purchased?” It doesn’t matter so much how the car’s purchased as it does how the car is used. If you want to depreciate it, it’s going to have to be purchased within the business entity although the mileage factor does have a deprecation part of that.
Toby: If you’re reimbursing miles, you’re not depreciating it. If you’re depreciating it, then you’re not reimbursing miles. The depreciation already built into the amount.
Jeff: Yup. We occasionally have clients who try to do both and we educate them.
Toby: No. They can’t do that. There’s basically a couple of different ways to write off vehicles right now. You have 179 Deduction and you have the bonus depreciation. They both have good and bad things along with them. For example, if you’re doing the 179, if you have an SUV that’s even over 6000 pounds, you have a $25,000 limitation. When you have a bonus depreciation, you’re over 6000 pounds, you can just write the whole thing off in year one.
Somebody has said, “What is the best option; to depreciate or mileage?” It depends, Marianna. Realistically, I tend to go where there’s no harm, no foul, which is miles.
Jeff: I agree.
Toby: It’s really easy. If I buy that vehicle and I don’t use it more than 50%, then I stand a chance of getting nailed with ordinary income for the value of the vehicle that I wrote off if I dropped below 50% during the five years following. There’s little traps that are out there. I tend to look at this and say, “What’s the easiest way to not just screw it up?” The easiest way to not to screw it up is to do the mileage reimbursement.
Jeff: You know, another thing I’ve seen, is the people who are trying to do actual miles. I see they tend to mess up a lot of their expenses and not keeping gas receipts or repair receipts. They would actually end up doing, often they do do better, with the mileage reimbursement.
Toby: Yeah. You don’t have to worry about how long you’ve had the vehicle or how valuable the vehicle is. I can have a truck that’s 20 years old. I can have another car that’s brand spanking new. They’re both 58 cents a mile. You’re reimbursing. If you’re doing 10,000 miles, that means you’re handing yourself a check for what it is, $5800, and you’re not reporting it anywhere, it just shows up as an expense on the company.
In order to do that, you would have to be a C-Corp, S-Corp, or a sole proprietorship. You can write off miles technically as a partnership. When you’re doing the reimbursement, you want to make sure it’s not reportable. You really need to be an S-Corp, C-Corp, or a qualified nonprofit.
Alright, let’s jump on. “I sold an investment property in 2018 that I have owned for more than 20 years. What is the tax liability on the sale of the investment property? What are the options for mitigating the tax liability?” What say you, Jeff?
Jeff: I see three different possibilities with this. One is you 1031 Exchange it which means you are selling your property and replacing it with another property.
Toby: They already sold it though. They sold it in 2018.
Jeff: They could still do the qualified opportunity zone that would accomplish more or less the same thing. There’s some other tax benefits that I know we talked about the opportunity zones. My third choice is if I got security for something with losses, I may just want to dump those stocks, and take the losses now to apply any gains that I have on my property.
Toby: I don’t think you can still do the opportunity zone. I think you’re toast just because they’re 2018. You would have had to have done that in the first half of 2019. Realistically, the tax liability they’ll be looking at is on the gain, they’re looking at long-term capital gains. That’s going to be 0%-20% depending on what your tax bracket is.
On the depreciation you took, your recapture is going to be your ordinary rate capped at 25%. It’s not going to be a way to defer back in 2018. If you didn’t do anything, you’re done. If you were doing it this year, then I’m right with you, Jeff. If they hadn’t sold it yet then they could do a 1031 Exchange and roll the whole thing forward. They take their basis and roll it into the new property. They have no tax, they have no depreciation recapture, they have no long-term capital gains.
Jeff: The first thing I thought about with this question was, it’s a 2018 sale. It should already been reported unless it’s a fiscal year corporation.
Toby: Yeah. Again, if somebody did this, and they’re thinking maybe they haven’t reported it yet, or maybe they reported it, and they got hit with the tax liability. They don’t know what to do. The fact of the matter is we can just say, let’s pretend this is 2019. You’ve owned this for a long time. Then, you’ve already sold it. You’re really limited to a couple of things. Number one, you’re going to be recognizing that gain, that depreciation recapture. You can reinvest it in a qualified opportunity zone and defer it up to seven years if you did that during 2019.
The other thing you do is you look for your losers and offset your gains by selling properties that have loss. They offset each other. You can always try that route too. Other than that, I think you’re toast.
Jeff: You’re right about the opportunity zone. 1031 is not going to work because it’s already sold. The opportunity zone is not going to work because the time is already expired for 2018 sales.
Toby: Somebody asked, “What’s the name of the mileage app?” It’s MileIQ.
“Has the IRS stated the amount for 2020?” I think they came out with that.
Jeff: Mileage, I’m not sure if it’s come out or not.
Toby: They might have come out. They always adjust something. I know they just came out with something two weeks ago.
Somebody says, “I have a truck and a car. I never use the truck for personal. Must I track miles?” Do you always have to track the miles even if it’s 100% business use?
Jeff: I want to say you do because you need to be able to prove that it doesn’t have a personal factor to it.
Toby: My understanding is that you have to even if it’s all business. You’re still keeping a log. You have to show that the vehicle is being used for business. Otherwise, it’s presumed that it’s going to be not business.
Jeff: Right. The way the audit works is IRS gets to prove your income but you have to prove your deductions. To say that this is 100% business, they’re going to say prove it. The mileage rate for 2020 is 58 cents.
Toby: Is it 2019 that’s 54.5 cents? I just have that stuck in my head for some reason.
Jeff: I will say it was 2018.
Toby: Somebody says, “What is the largest amount of adjusted income you can have and get to 0% capital gains tax?” Married filing jointly, I think it’s $20,000 or $78,000 and some change. For a single person, I don’t know what it is. You may have the number sitting there. It used to be the lowest bracket, then they just made it a set taxable amount.
Jeff: Yeah. I do have it also at the top of my head what the brackets are.
Toby: Somebody else says, “For this gain, can you offset stock market losses against that real estate gain?”
Jeff: The capital gain potion you can but not any recapture.
Toby: If you have stock market losses, you can use the stock market losses to offset your gains on real estate?
Jeff: Yes. For a capital gain, it’s a capital gain. You can offset any capital gain within any capital loss.
Toby: Keep in mind that if you have long-term capital losses and you have short-term capital gains, that’s a great scenario because that long-term capital gain, that’s a lesser amount of tax against something that’s larger. So, it’s like 2019. Somebody else is putting this up as 58 cents. I’m thinking that 2018 was probably 54½ cents.
Let’s see what else we have. There’s a bunch of questions but none of that is really related to that, so let’s keep going on. I like that question, though. It’s sad because that’s the question you’re supposed to be asking before you sell the property.
“I have an LLC taxed as a C Corp that manages my rental properties. It will not pay any wages and will operate at a loss for the next several years.” What you’re allowed to do as a C Corp, by the way, Section 183 is the Hobby Loss rules. It’s only applicable to partnership, sole proprietors, and S Corps. It will provide fringe benefits. “Can these entities sponsor a self-directed 401(k) plan to accept rollover contributions?” The answer is yes it is. You don’t have to continue to contribute to a 401(k). If you have a bunch of IRAs or rollover for a past employer, you can roll them right into that 401(k). You never actually have to contribute to it. You just have control of it. It’s a great vehicle.
The big difference between an IRA and a 401(k), if you don’t know, is that IRAs you cannot borrow from. If you borrow money in an IRA, yu have something called unrelated debt financed income. If you do any real estate in your IRA, it’s a problem. That is not true of a 401(k). I can borrow money from my 401(k) up to $50,000 per participant, up to 50% of the plan assets, or if the assets’ my plan assets, my portion of it, and it is not subject to unrelated debt financed income.
Just to throw it in there, IRA is required custodians, 401(k)s do not. You could actually be your own trustee of a 401(k). You don’t even have anybody that you have to ask to sign on with it. Quite often we have real estate folks and they’re doing that self-directed IRA. You may want to consider a 401(k). It’s a lot easier to use and as this question illustrates, if you have an entity that’s floating around out there, you can hang a 401(k) off but you don’t have to contribute to it. Even if you have employees, you don’t have to contribute to it because you don’t have to worry about discrimination when you’re not actually putting more money into it.
Anything you might want to add on that one, Jeff?
Jeff: No. That’s exactly right. If you want to make contributions or have the employer make contributions later, you just need to run some salaries so you have something to base those contributions on.
Toby: Yup. Somebody just asked this, “I’m a licensed real estate agent. I have investments and drive for business. Do I have to track miles separately? Do you have to keep your business miles different from your investment miles?” I would say, yeah. You want to track them so that you’re one business is reimbursing you for certain miles and your investments are reimbursing you for others.
Jeff: Generally, you want to keep each activity separate from mileage.
Toby: Let’s look at the next one. “What is your opinion on cost segregation software which can allow CPAs to prepare cost segregation studies worth $400? Is there any disadvantage for this versus physically sending someone to the property to do the cost segregation?” I have very strong views on this, Jeff. Do you want to take a shot at it first before I dispute?
Jeff: I can only regurgitate what we talked about earlier. There are some disadvantages the CPA software doing the cost segregation. You’re probably not going to catch every dollar of savings that you could with having the engineers go out and take a look at things.
Toby: Yeah. The biggest issue is, there is no standard for who prepares the cost seg study. First off, there is no standard that the IRS has. There’s no standard that the congress has set forth. IRS is set in a chief office memorandum. They want a qualified person and the audit guy requires that as well. We look at what the IRS is going to say.
For those of you guys who are scratching their heads going, “What is a cost seg?” A cost segregation study is when you take a structure, and you break it down into components, the reason you do that is because a structure, let’s say a commercial structure, has a useful life of 39 years. You would take 1/39th of its value and deduct that every year. We’re talking just the structural value, not the land. If you want to speed that up, you find its components and then you have different useful lives.
For example, the carpeting, wallpaper, and things like that might be a five-year property. The sidewalk might be 15 property and the electric system might be a seven year property. You’re going through and you’re looking at all these different things. That allows you to rapidly depreciate them because the Tax Cuts and Jobs Act added this bonus depreciation that if you put something into service in 2018, 2019, 2020, 2021, or 2022, you’ll get a 100% bonus depreciation. Meaning, anything that’s less than 20 year property, you can write off in the first year. What it means is you get a huge, big, fat, writeoff on some of these things if you do the cost seg study.
Then it becomes, “Should I pay somebody a lot of money to do a cost seg study?” The cost seg studies have gone down, considering they used to be all $10,000-$15,000. Now, you’re getting down to $1500. That’s probably some of the most expensive ones. I’ve seen on multiple properties were in the $13,000-$14,000 range, but you’re generating a huge tax benefit which generates a huge cash benefit.
Here’s what they came up with. They have these companies out there that do these cost segs studies for $400 and they say, “Hey, CPA, you do the cost seg studies.” The problem is, when the IRS says, “What is the qualified individual?” It’s somebody who’s an expert at the components in breaking them down. I don’t know too many CPAs that can walk into a building and figure out the value of all the different pieces on that building. I know engineers that can do that. I’m just going to say, I’m going to side on the err of caution, and not do these in the software with a CPA. Chances are I do not have a qualified individual involved in that transaction, unless you’re a CPA, is an expert in real estate, and knows how to break down the components.
That’s not a slide on CPAs. It’s just my experience that most are not adept to the real estate that they’re going to be able to walk into the building and say, “By the way, the electric system is worth $43,615 because here’s all the components of it.” As a result, what a lot of these low cost cost seg studies do is they get very, very, conservative on what they allow you to deduct. They might be 20% of the structure as opposed to if you have an engineer coming in there. They might be 30% and what you just did is you went price over value. The value of having done an actual cost seg study is far greater when I use a qualified professional.
Keep in mind, I don’t do cost seg studies. We’ve done webinars with some great companies, Cost Seg Authority in […] all over; they’re great. We have some specials with those guys where they’ll do a free analysis for you. I think it’s andersonadvisors/csa. If you ever want to get a cost seg done and get a quote for free, fantastic groups. I don’t have a dog in the fight. I just look at it and say, “Hey. For my clients, I want to get the most out of it as humanly possible.”
Now, a bunch of you guys asks questions. You said, “Does it make sense to do a cost seg for a single family residence?” The answer Daniel is, it depends. It depends on how much the cost seg study cost and how much it’s going to put in my pocket. If it’s going to save me $15,000, it’s going to cost me $1500, I might do it. What I say is save me $15,000 as the tax savings. Usually, a cost seg study done by an engineer, you take whatever that structural value is, and it’s going to be somewhere between 25%, and 35%. Somewhere in that range. Low end, 20%. It’s going to be a pretty good size.
If I have a $200,000 structure on a $50,000 of land, I’m probably looking at a $40,000 deduction, which can save me a considerable amount of money depending on what tax bracket I’m in or what state I’m in and whether the state’s going to recognize that cost seg study. Those are all little pieces.
“I have a big fat cost seg write-off bigger than my income for the year. Should I take the whole thing in year one and carry forward a negative depreciation or space it out over five years?” Caroline, that’s up to you. You don’t have to take the huge cost seg. You can take it and carry forward the loss. Depending on whether you’re a real estate professional, it may offset your W2 as well.
“If you already own the property for years and been doing the depreciation for the whole building, can you do a cost seg, and depreciate the components starting this year?” Yes. We actually did that this year on the building that I acquired in 2003. We chose to do it because it was very profitable. We knocked off about $250,000 of income. That building kicked out, so we didn’t have to pay tax on it this year. “How often can you do a cost seg?” You do it once and it’s a change of accounting methodology.
“Can I unify as a benefit professional offsetting W-2 income?” Yes. If you are a real estate professional and you could actually take that loss that you have and offset your W-2 income. It really comes down to whether it’s worth it for you. Quite often, I always look at it, worst case scenario with the cost seg is you are getting an interest free loan on that money ahead of time. Yes, I would write it off over the next 39 years anyway so if I take a big cost seg benefit now, it means I’m not writing it off later, but I have that money in my pocket now, especially if I’m in a high tax bracket, then it’s a no brainer.
Somebody says, “What if I acquired the property in 2017?” Then it would be the Bonus Depreciation 2017. Jeff, correct me if I’m wrong, I think 2017 was 50%?
Jeff: Correct. We can always go back and we can go back at number years to do this change of counting method. If you do the cost segregation in the year you purchased a property, that’s not actually a change of accounting method. You’re actually establishing your accounting method when you follow your tax return.
Toby: Yup, and when you do that, let’s say you had 50% bonus, that doesn’t change. Everything that’s under 15 years, you could choose to take the bonus depreciation of 50% on the five year property, the 7 year property, the 15 year property, or all of them.
“Does the cost seg matter for a buy and hold or a flip?” It’s really the buy and hold. Somebody says, “What about the opportunity zone?” I’ll hit that, especially since I’m not sure, Steph, what you are talking about. I’ll go through and see if there’s an opportunity zone question coming up. We’ll knock these things out.
“If you refinance the property, does that not reset your basis?” No, it does not, or redepreciation. No, it doesn’t quite work that way. If you improve a property, let’s say you refinance it and you do an addition or something like that, then yeah you can.
“Does bonus depreciation affect depreciation of a state return?” Depends on the state. Like California doesn’t, other states do. “And specifically, starting a business in an opportunity zone?” Yeah, we could talk a little bit about that.
Here, let me keep going through our questions. I’ll try to hit that here in a second. “If I make a large stock contribution to my 501(c)(3), are there any capital allocation income source or requirements that would force my charity to sell it off?”
Jeff: And there isn’t anything I’m aware of as far as capital allocations or income sourcing requirements, but the one thing I did think about was you have to fulfill the non profit’s purpose and its purpose is not to hold stock, hold securities. You’re probably going to have to spend some of this. You probably have to cash in some of these stocks in order to fulfil that nonprofit’s purpose.
Toby: You might. I don’t think there’s any lot that requires that you dump it off. It depends whether the stock is producing dividends that you were using. At the end of the day, helping you fulfill your purpose and somebody giving your company or a company—it says my 501(c)(3) is not owned, they are only controlled—so if you control a 501(c)(3), and somebody transfers in a bunch of stock, as long as it’s helping it fulfill its purpose, we don’t really care and the IRS coming in there. I can see it if you own too much of a company that you are also a partner in that we may have some issues. I don’t know at the top of my head, the precise rules, but usually if you are a publicly traded company and you have too much of it.
Somebody just added, “This cost seg just won’t die. It’s always interesting.” You can do family’s, condos, any type of real estate. You can do a cost seg on. Number two, “Is there a difference between bonus depreciation and Section 179?” Yes. Bonus depreciation is Section 168 and it’s any property with a useful life of 20 years or less. You could choose to bonus that depreciation and take up to 100% in the year of acquisition. Right now it can be used on new property. Section 179 is for equipment and it allows you to write off up to $1 million in year one. The big difference is Section 179. If it drops below 50% business use, it’s all ordinary income and you have recognized it all back. It’s much safer to use bonus depreciation.
Let’s go onto the next one. Sorry, Jeff. I hope I hobarted that. I know you like going into some of that stuff too. The last from one pass through rental, “LLC exceeds the gain of another. The LLC are in different states, do I pay state income tax with the profit of LLC even though I had federal loses?”
Jeff: How state income tax works. If you are doing business in the state whether it’s a rental, assuming it’s not where you live, that state is only looking at the income earned in that state. On the other side means, you can apply losses from other states into that state. Now, your resident state, if it has an income tax, say California, Arizona, you are going to pay tax on all of your income regardless of what state you’re in.
How that actually works? You’re not getting double taxed, you are usually getting a credit in one state or the other to offset the duplicated tax between states.
Toby: Then the federal tax, they are right. They’re going to offset each other so you have rental right. It’s all passive activity. All your passive losses and all your passive gains are offsetting each other. The only issue you have is that you can’t take passive losses and offset active gains unless you fall under one of the exceptions. The exceptions, when you have a passive, is really only for real estate and that’s if you are an active participant in real estate or a real estate professional.
The active is a $25,000 loss and it paces out between a $150,000, so maybe it’s not the greatest thing. Then, real estate professional just goes for anything. That just changes your loss from passive into active.
Jeff: And something that often comes up is when you have loses in the state, people will sometimes say, “Well, if I have a loss, I don’t have any tax. Why do I need to follow state return there?” I personally like filing the state returns so I can build up my loses in that state. If I do turn around down the road and sell the property, I have a big loss that I may be applied agaisnt it any gain on the sale.
Toby: Can you touch on that? Because I bet a bunch of people don’t realize that passive losses get released when you dispose of an […].
Jeff: If I have two properties and one is just generating losses, and losses, and losses, I’m building up all of these what we call Passive Activity Losses. They are called suspended, I’m not using them, they are just sitting there, and they’re waiting for one or two things to happen. Either I’m getting passive income from another source. Maybe my second property is making a lot of money, and it’s passive also. Or when I sell that property, it releases all of those passive losses that has been suspended.
If I had a property and I sold it for a $100,000 gain, but I may have $50000 worth of passive losses on that property, so I’m going to actually end up paying tax on the difference between those two. On top of that, the gain of sale may be capital gain and the passive losses released are going to be ordinary loses. So there is a little bit bracket advantage there, too.
Toby: Yeah, and ordinary losses, just remember for folks out there, that means it offsets even your W-2 income. It’s any loss. It’s active loss at that point.
Jeff: Correct.
Toby: I just had this question come up from somebody who has been sitting on a loser property and they are losing money every year and they said, they had a $125,000 of passive loses that accumulated on this property, and I said, “Why aren’t you dumping that?” and they said, “Well because it’s negative and I’m not going to be able to use the negative.” I said, “What are you talking about? Well, it’s passive. How much are you going to lose on the property when you sell it?” They were like, “At $25000.” They had $125,000 of passive loses that were suspended. I was like, “You are going to get a pretty massive tax loss.” A $125,000 of suspended loss will be ordinary because you are just disposing of that asset plus the other $25000. I was looking at their tax return, it was about a $60,0000 savings to them by just getting rid of that property. They looked at it saying, “I’m losing $25000 and I don’t get to use any of it.” I’m looking at it and saying, “You are going to have a $150,000 tax deduction against your ordinary income. Why aren’t you selling this?”
Jeff: This is something you have to keep in mind when you are doing your tax planning. If I got a property that’s just killing me, but I got a big one fall bonus or whatever that I have a lot more income than normal, this is maybe the time to get rid of that loser property.
Toby: Yup, and if you are going to convert. Let’s say you are doing a conversion. You have your IRA, you just took control of a 401(k) from a past employer, and you’re thinking of convertign that to a Roth and you are hearing everybody talking about a Roth. You have a suspended loss, that’s the year to take it to make your income, get it almost to zero as humanly possible, so when you do that conversion, you are not paying much tax on the conversion. You are going to be at 0%, 10% , 12% or something like that. You are really going to be really low, then it might make sense to do that conversion. Otherwise, it almost never makes sense to do that conversion later in life, even that Roth. But if you are able to create a big tax loss, that’s when you start selling some things.
This is another one I mentioned guys, that you can do the year-end tax planning. One of the big parts of tax planning is that you look at it and say, “Wait a second, I could sell something at a gain that may have been at a 0% tax rate.” I’m looking at that married couple that were making $70,000 with their standard deduction, they were below 50 and they had gains in the stock market of about $15000 on stock and I say, “Sell the stock. Capture that gain. It’s at zero percent.” It was long-term capital gains, and I said, “Then buy it back immediately,” and they said, “You can’t do that. My accountant said there’s wash-sale rule,” and I said, “It’s the wash-loss.” You can wash gain, you can do that all day long.” It resets your basis when you buy it back and I said, “Now you have that $15000 you never paid tax on again.” You can do that stuff. You really get to stuff you need to be looking at.
Again, if you went on YouTube for that year-end finding tax livestream, the link is there. I can see Susan put it up. Those are the types of things you are looking at. You just want to go through a checklist and that’s exactly what we are doing, is learning how to check, check, check, that way, I can get a benefit out of this anyway.
“If you buy a house as an investment property, hold it for five years, take depreciation for five years, sell it doing a 1031 Exchange, what happens? Do you have to pay the depreciation back when you do a 1031 Exchange? How does it work?” Jeff, do you want to knock that one out?
Jeff: When you do a 1031 Exchange, everything is deferred. Not only the gain on sale, but the depreciation recapture also deferred. How that really works is if I have a property and I’m depreciating it for five years, when I get my replacement property, the best way to do this is you keep depreciating the old property but then you have a new asset for the difference in the two properties is how it works out. When you do that and sell the replacement property, again, you would recognize that depreciation recapture. But when you do this 1031 Exchanges, if you do them right, there’s no tax to pay at all. Not even the recapture.
Toby: This is fun. There’s a couple of really cool ones that people are asking some questions. “Passive losses and rentals can offset active income?” Yes, if you can meet one of the exceptions. If you are an active participant and you make less than a $150,000, basis’ out, actually, so $100,000 is the magic number where you get the full 25 or you’re real estate professional which is 469(c)(7), and all that means is it’s 750 hours of more than half of your personal services are in real estate and you materially participate. If one spouse has to meet the 750 hours, material participation is both.
Somebody said, “If you have passive losses, can one in a state haven’t been filing taxes, is there a way to still incorporate losses in that state?” Can you go back and track all your losses, Jeff?
Jeff: I’ve actually seen them done both ways. Sometimes when you file a state return, it picks up whatever federal losses are being released because technically, you are not even reporting the loss in that state. It’s suspended. Once the federal loss is released, it will usually pick up on the state return.
Toby: Right. Somebody said, “Number one, I buy a property. Number two, I cost seg and bonus depreciate. Number three, sell property and apply loses on active income. Number four, profit?” It doesn’t quite work that way. When you are taking bonus depreciation, that’s a deduction and you have to recapture your depreciation. Actually, when you are doing cost seg and bonus depreciation, it’s ordinary income based on the value, so if you sell the property right away, whether or not you have a loss isn’t necessarily applicable based on that bonus depreciation. It’s going to be what you paid for and your basis in the property. It doesn’t quite work that way, Craig. It would be really neat if you could.
Somebody says, “Can you explain more about the stock recapture? How do I know that one is a good idea? Is there a particular IRS form that needs to be filled to do this?” Stock recapture, I’m assuming that you are talking about the selling gain in offsetting loss. When is it a good idea? The best idea is when you have long-term capital losses that offset short-term capital gains because that short-term capital gains will be ordinary income so you have a loss that would be maxed at 20% offsetting short-term gains that could be as high as 37%. That’s a great situation.
The other one is, you are looking for anytime your long-term capital gain trade is in the 0% to 15% range and you want to reset. Like if you own stock for a long time and you want to reset it’s basis, then you sell it, you pay a little bit of tax, or in many cases it will be zero, and no you are not having where is it being reported? They’re sending you.
Somebody says, “What kind of structure for selling stocks?” That’s a big one. You want to make sure that you are on a partnership for the stock account or corporation and that partnership has a corporation as one of it’s partners if you are doing that. The reason being is because you want to have a guaranteed payment to partner to allow the expenses. You can add expense to most anything as an individual investor. You can even expense management fees.
Their itemized deductions and no itemized deductions are gone, so you don’t get to write that off. You don’t get to write off workshops, conventions, travel, meals, all that fun stuff. All that’s gone out the door if your investor. When you are doing stock, you almost want to have it and always want to have some sort of entity.
“Can you 1031 Exchange into a property you already owned from another?” No, you cannot. You can do brother-sister.
Somebody says, “S Corp, or C Corp, or LLC?” An LLC is not a tax type. It can be an S or a C, but either one will get you where you need to go. I would always defer to the C Corp whenever I’m doing something. The reasons because it’s not you. It’s even more separate from you.
Let’s go to the next one, “I’m initiating the sale of a California rental property that was held on my personal name. I will initiate a 1031 Exchange, but would like to put it in an LLC for asset protection and tie into our management C Corp to pay expenses.” I get what you are doing and the answer is whenever you do a 1031 Exchange, you have to sell in the same name that you buy in. That doesn’t mean that you are done. It means that you are going to buy, if you are going to sell in your personal name and then you are going to buy the replacement property or properties, yes you can buy multiple, so anything that is real estate qualifies.
I can sell one piece of real estate and buy 10 condos or I could sell 10 condos and buy one piece of real estate. […] replacement property. It exceeds greater than those values. Typically, you are selling a rental property, you might be buying two or three different pieces of real estate, especially if it’s California. Once you close in your name, you can put it in a LLC afterwards, but you have to close in your individual name and then you drop it into an LLC afterwards. That would be a spot that would work. What do you want to throw in that one, Jeff?
Jeff: What if they drop the property into an LLC before they sold it?
Toby: Then you would buy in the LLC. As long as they are going name to name, you could go either direction, it’s called a Starker Exchange when you do that to delay an exchange. I sell a property and then I buy one and close within a 180 days. I identify a property within 45 and I close. They’ve had it to where people bought it and then immediately drop in the LLC. It used to be practitioners said, “You got to wait for it a little while. You got to wait six months,” there’s nothing there. The IRS hasn’t barked at it. There’s actually cases to the contrary.
I would opt for the sale in the same name to make sure that you have that as an investment property that you don’t make it look like it was a flip by putting in a different name that sold immediately thereafter. Realistically, you want it to be in the name that it has been in the last year and then you want to sell it so it’s definitely investment property. You use your same name and then you drop it in the LLC. That’s got to be the safest. Hope that helps.
“If they quitclaim deeds sufficient to transfer the title of a timeshare from personal name to a revocable living trust in California?” They are assuming that the time share held is by title. Can you just toss it in there via quitclaim? Technically, you can. The reason that most people use warranty deeds is because if there’s title insurance of any kind, you could void it out by quitclaiming.
Jeff: And I thought the same thing that people need to look at their contracts and see how the ownership is because it could be a deed of interest, it could just be a right to use contract, and if it’s a right to use contract, I believe you can assign that interest to somebody else, is that correct?
Toby: Yeah, you can just literally assign it to your living trust. In fact, most of the time you do a revocable living trust, it’s going to say anything that is not titled, “I hereby assign into my trust to myself as trustee of a living trust,” is technically how you do it. What that does, for you guys who don’t know, especially in California (this is a big one), if you own something personally in California and you pass, you are required to go through probate, which is a court-appointed process to transfer that title to that asset.
The problem in California is it starts at 8% between the lawyer and the personal representative as statutory fees. Whatever the value of your estate is, it gets pretty expensive. It bases down as your stake gets bigger, but it’s still a really large amount of money. I think out of $1 million, it’s almost $30,000. It’s quite a bit that’s going to lawyers and personal representatives that you don’t need to. If you simply use a living trust, that entire thing is avoided, so it’s a really good idea because time shared aren’t cheap to transfer them into your trusts so you don’t die, will have to deal with the transfer afterwards.
Jeff: I think a quitclaim might be sufficient, but I would probably go ahead and do a warranty deed to transfer title.
Toby: Somebody says, “What about a timeshare in Florida?” It depends on whether it’s titled or not. Again, it’s right to use.
Here’s a good one about that 1031 Exchange. Somebody says, “If the property is at an S Corp, can we still do a 1031 Exchange?” Yes, “and then change to an LLC after the 1031 exchange? We don’t want to keep the property on the S Corp because there’s no step up and base when the owner passes away.” Dian, that’s not exactly true. If you pull it out of the S Corp, the appreciation is going to be treated as wages to you, so you don’t want to do that. But you do get a step up basis in the S Corp when somebody dies. So somebody who owns the S Corp passes, the basis steps up so you can deal with some things there.
Jeff: Right. If you do a 1031 in the S Corp and then pull it out, you are going to defeat the whole purpose of the 1031.
Toby: Yeah, so don’t do that. It will save you a lot of heartache.
“If you have a HELOC on your personal residence which is on your personal name and use the HELOC to buy and renovate the homes for your business, you can still deduct the HELOC interest as a business expense?” Jeff, I know this is right up your alley.
Jeff: I’m actually fine with this. We do the same thing when the owner of a company is using their credit cards for business expenses and IRS even said that as long as you are recognizing the expense in the proper place for who the expense was, it’s fine.
Toby: So this is the big one for you guys out there, you are not writing it off your Schedule A as a mortgage interest expense, you are writing it off as a business expense and the company is essentially just reimbursing you for the fact that you used your interest. You don’t make any money. You don’t get any personal tax benefit unless it’s an investment property and it’s on your Schedule E, but you are getting to write off that interest as a business expense. Did I say that right, Jeff?
Jeff: And we even see somebody who will use a HELOC on their personal residence to buy another property and that interest would rightly belong to purchase property, not the personal residence.
Toby: Somebody asked a couple of questions about the recording by the way. They said, “Hey, if you do my taxes, do I qualify?” Yes, you should have been doing the quarterly planning so you should get it. “If Anderson did write my returns, do I qualify for the recording?” Yes, you should actually reach out. We should have sent you a couple weeks ago so you should have had access to that in the recording. The year-end planning recording, if you are a tax client and you do the tax package, you get that. I want to make sure you actually participate, anybody who is a tax client.
Jeff, this relates particularly to your division because Jeff oversees the tax folks. Year-end tax planning is the quarterly meeting. It’s the year-end that we specialize in the year-end tax planning.
When I did my last TaxWise on November, I also did a section on year-end tax planning. I think if you did the TaxWise, you’re probably pretty good. It’s a lot of the same stuff. Again, it’s planning, planning, laying things out, it’s going through a checklist. I was probably a little more systematic on the Webinar, the live stream that I did than necessary on the TaxWise. We are going over a whole bunch of different strategies.
TaxWise are fun by the way. I think we had 33 strategies. The last one was a ton of fun. We are getting ready to get the schedule out for next year so make sure you do a TaxWise workshop if you haven’t done it.
“I’m closing a condo under my name, but I would like to have it under my LLC as I rent it out. The problem is that rates are a lot higher for a commercial loan to an LLC.” Yes, they are and they are a pain in the butt to get, “So I was thinking about getting a mortgage under my name and then transfer the title to LLC after the closing. Is this a problem?” No. It’s not a problem to transfer the condo into the LLC. The issue you are going to have is that if your mortgage company catches wind of it, they may say, “Hey, do on sale clause. We’re not going to agree to that.”
To work around generally is just use a land trust, the reason being is most mortgage companies think of trust as living trust, it is an irrevocable trust, and you give them a version with you as the beneficiary, they go, “Okay. We don’t really care,” and then you just assign the beneficiary interest to your LLC. It’s the same thing as transferring it to the LLC in the first place because if anything ever happens on that property, they want the beneficial use, the right to occupy, rent it out, sell it, all those things, and that goes with the beneficiary that they entrust.
Sometimes when you have a property that has a mortgage on it, the mortgage companies won’t let you move it over to an LLC, which most won’t. You end up using a land trust and gets you in the same place. Jeff, did you have anything you want to add on that or we’ll just keep busting through?
Jeff: Keep busting through.
Toby: I picked out a lot of questions, so I apologize guys. It’s a long run, but sometimes I do that just because I was sitting here in the sun and I must have had heat stroke when I said, “Let’s do these many questions,” but what the heck.
“I have a Holding LLC and Subsidiary LLC with rental property in it. I need to put some expenses on a company credit card. Can I use a credit card for the Holding LLC and have this Subsidiary LLC checking account pay the credit card bill? Or do I need separate credit cards for each LLC?” Technically, you don’t need a credit card in any of the LLCs. You can always reimburse if it uses yours. If you have a Holding LLC and you have a credit card, that’s going to be sufficient. The Subsiderial LLC I’m assuming are disregarded LLCs so for tax purposes, the IRS treats it all as one big enterprise. Anyway, since it’s a holding LLC, it’s going to be able to incur expenses.
If you are particularly worried and you’re like, “Oh my gosh. I want to make sure that I never have any co-mingling whatsoever. I want to make sure that I don’t have any expense somehow being attributed to that holding LLC.” Maybe you have a lot of assets that are really expensive then maybe you would set up one, but frankly, no. You don’t have to. It’s certainly not a requirement. Technically, it’s not a requirement to have separate checking accounts, it’s just a factor that the […] look at for separateness.
From a tax perspective, it makes zero difference but from an ease of use, technically you don’t have to have the holding LLC has its own credit card where in fact, you have a management corporation, LLC taxed as a corporation in the mix. Usually that’s where the credit card is. Is there anything on that one that you want to throw in on, Jeff?
Jeff: No, I agree with that. There’s no reason to have a credit card for each LLC and like you said, not necessarily having a bank account for each separate LLC. It does make things a little clearer for liability protection, but for tax it means absolutely nothing.
Toby: All right, you guys have done a great job today. Just remember to go to iTunes and I will come through and answer a few questions that are lagging behind there. iTunes, you can always listen to our Tax Tuesdays plus all of the other podcast that we put together. Everything on qualified opportunity zones, cost segregation, how to set rents, residential assisted living. I’m looking at just a few, they are all on there. You can do that either through iTunes or Google Play.
I believe this is the last Tax Tuesday of the year. We are going to take a break during the holiday week. This will be the last one for the year. You can always go in and watch more videos on our YouTube and Facebook. Have a lot of fun there and if you have questions, shoot them into taxtuesdays@andersonadvisers.com or visit andersonadvisers.com. There’s plenty of ways to contact us there.
“Did Jeff say you get a tax credit for paying taxes in a non resident state?”
Jeff: Yes, I did.
Toby: So the answer is yes.
Jeff: And that’s assuming that you are in a state with taxes. Living in the state with taxes.
Toby: Yup. “Can you pay directly the personal mortgage from an LLC or an LLC taxed as an S Corp?” Yes. You can absolutely do that. I’ve done that many many times and back in my more wiley days, I’ve actually bought houses with the mortgage without telling the lender because there’s a two percent loan on an expensive house. I just put in a land trust and took over the loan. You are not supposed to do that, but that’s always fun.
What else did we have? We have a whole bunch last session which I assumed were just not answered yet. Robert, we are going to have to pull in and you got to send that via Tax Tuesdays.
Here’s the deal guys and I see all the happy wishes and all that fun. I really appreciate you guys. I’m just going to say this. We get over 400 questions a session and I’m going through them. Sometimes, they are coming in so fast and I’m answering other questions that I just can’t keep up with it. If I did not get to your question, I know there’s probably a couple, send them in to taxtuesday@andersonadvisers.com we will make sure that we are getting you an answer. I just have to do that.
“Do you have a podcast on land trust?” Absolutely. In fact, here’s what you can do. If you are looking for specific answers on certain questions or you want to learn about a land trust, go on to our YouTube channel, there’s a ton on here. As we are going through some of our staff that are sitting there answering your questions off to the side, so you’ll see that there’s an answer to some of your questions.
Questions, “Is the land trust pretty simple? Or is it just as lengthy as living trust?” Very simple, Kevin. We keep it super simple and, “Do you provide auto protection services?” Yes. All the returns that we prepare, we provide auto protection services, too. And what is this, “I send it to Tax Tuesday before Thanksgiving.” So Robert, I’ll take a look at that. We will get it back. If you send it in, we should be answering it so I know that it’s going to be there. We will find it, Robert. We will make sure we’ll get you an answer. We appreciate you doing that.
To the doctors, “When are you having another seminar in Honolulu?” I’m over here in Mali right now and I’ve been here twice for the last month and a half. I know we are coming back over. We have Xavier, we have […] over there. We have a bunch of really cool groups. We need to go over Honolulu and do another one. Is that where you are at, Mark? I hope so. It’s beautiful over here so granted the time and distance, it’s weird. I was actually watching Football games at eight in the morning which is kind of a trip. You guys are used to it when you are over here.
That is it. I’m just going to say, thank you guys. This is the last one. Clients of both Paul and Lane, you are our rock stars. Both are really great guys and we want to come over there. We always come over and meet with Paul and whenever Lane invites us over. Absolutely, maybe a tax corps.
You know what? Joe, you are absolutely right. I think we had to do a TaxWise in Hawaii. It will be much more fun, except I don’t think anybody would stay in the class the whole day. Merry Christmas to everybody. Jeff, do you have anything else you want to throw in there?
Jeff: Nope. I just want to wish everybody a Merry Christmas and we will see you next year.
Toby: Absolutely. Thanks again, guys.
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