Welcome to another episode of Tax Tuesday. Today, attorneys Toby Mathis, Esq., and Eliot Thomas, Esq., delve into listener questions around various tax and business strategy questions. Topics include the active vs. passive income classification for S-corp distributions in a physical therapy home health business, the optimal timing for cost segregation and bonus depreciation in short-term rental activities, and the tax implications of transitioning from short to long-term rentals. Other discussions delved into Opportunity Zones, S-corp taxation for owner draws, classification of employees, IRA to foundation transfers, tax-saving strategies for property flips, overlooked investor deductions, 1031 exchanges for rental properties, and the feasibility of lease options in Roth IRAs.
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Highlights/Topics:

• “We are starting an S-corporation for physical therapy home health business. My wife and I will be the only shareholders. My wife will run the business and see patients. I only plan to invest into the business. We’ll be a limited partner. Will my distributions from the S-corp be considered as passive income since I am not materially participating in the business?” – No. It’s all going to be active income.
• “If you started short-term rental activity in November 2023 when the property was purchased, can you use cost segregation and bonus depreciation in 2023, or is it still better to wait until 2024?” – more than likely, you’re going to be better off in 2023.
• “If I buy a house in September, use it as a short-term rental for a month until October, and then do long-term rental starting in November for the STR, short-term rental, I or my spouse will actively manage the property, can I still take the bonus depreciation in first year and offset my W-2 income?” – It’s all going to look at how much time did you rent it and what was the average stay.
• “If I put money into an opportunity zone and then sell after 10 years, does it all come out tax-free or just any growth? – If you’ve had capital gains, you sold some stock, sold some property, you have true capital gains, you can invest them in what’s called an Opportunity zone fund.
• “If you are an S-corporation and pay yourself a regular salary, but also take money from what Intuit calls ‘owner draw’, how is that taxed?”
• “Do all employees have to be W-2 employees under an S-corp, or can they be contractors?” – the W -2, as we pointed out earlier, that’s going to be subject to employment tax. All of this income is subject to income tax, whatever your bracket’s at, both streams.
• “Can an IRA balance be transferred to a foundation tax-free and also allow the owner a tax deduction? Can I create the foundation and operate the foundation receiving the contribution?” – there’s two ways to do it. I receive the money, pay tax on it, then contribute to a charity and I would take a deduction. Or I could put up to $100,000 a year of my distributions directly into the charity and now I don’t pay tax on it,
• “We sold our first flip at the beginning of the year and would like to know if there is any way at this moment to save as much as possible from being taxed, i.e. invested in the next flip or something else to avoid the “loss”. Also, if we have a loss for our S-corp in 2023, could we see that capital gain to be offset in 2024?” -it’s easy to get these things kind of mixed up. Flips are ordinary income, not capital gains.
• “What are typical operating and general expenses you’ve seen overlooked when investors file deductions?” – The way you avoid missing deductions is you have good bookkeeping, okay?
• “Can I move into a rental house I have for 15 years? Does it still qualify for a 1031 at a later date? I assume you mean when you move into it, it says a primary residence. Does it qualify for a 121 exclusion after two years?” – if we’ve moved into it, I’m assuming we made it our primary residence, it’s no longer in a trader business, So you lose 1031 capability. 121 is for a personal residence.
• “Can you do a lease option assignment in a Roth IRA? Can you do a sandwich lease option in a Roth IRA?” – Yes and yes. if we have a true option, true sandwich leases option, my understanding is yes, you can do them.

Resources:

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Full Episode Transcript: 

Toby: All right. We’ll let you guys file into the room. If you are looking for Tax Tuesday, you’re in the right place. We may even have some betting advice for you. Apparently, we got a bunch of degenerate gamblers on. Just kidding. No, we’re done with soccer for a while.

Eliot: Yeah. It’ll be back though.

Toby: It’ll be back. My God, my wife’s Colombian, so of course we were rooting for Columbia on Sunday. They hadn’t lost in two years either. It’s 28 matches. All right, enough of this. You’re here for taxes, so let’s get jumping in. If you’re looking for Tax Tuesday, you’re in the right spot. Tax Wednesday is tomorrow. My name is Toby Mathis, and I have Eliot here with me.

Eliot: Yes, hello.

Toby: We’re here to answer your questions. Yay, Eliot. I think we’ll give you the applause that you deserve. Eliot suffered a serious injury last time two weeks ago. What happened?

Eliot: I had a healthy cracker crack my tooth.

Toby: Everybody out there who’s eating healthy crackers?

Eliot: Stop it.

Toby: Yes.

Eliot: Our buddy Troy said, Lay’s potato chip would never let you down like that, Eliot.

Toby: That’s true.  All right, let’s see. Let’s go over some rules because Patty’s already spelling it out. Welcome, Patty. We have a whole team, by the way. We got Matthew, Patty. Amanda is in the house and Arash, Dutch, Jared, Jeff, Rachel, and Tanya. All these accountants are floating in here.  They’re here.

Somebody says Weetabix. It won’t hurt you either.  It would hurt you. It’s going to hurt you inside. It’s Weetabix. I’m pretty sure you’re going to have some intestinal difficulties later. I don’t know. I always look at those things and I immediately think […].

Eliot: I regret that one.

Toby: Yeah. Maybe you want to skip it. All right. Let’s get into the rules though because Patty’s already spelling them out, which is to ask your questions. We have a bunch of accountants and tax people in the Q&A area, not on chat, in the Q&A area. Yeah, you could absolutely ask your questions there.

All right. Q&A, and then you can put your comments into chat like Eliot learned to chew or whatever. Patty says sourdough is yummy. All right, that’s what you use chat for. Q&A is for your questions.

Also, if you have questions because we do these tax Tuesdays every other week, you can email in your questions. Eliot likes to answer them and also pick them out randomly to make them questions that we are going to be answering. If you just need a general question answer, do it today. It doesn’t cost you a nickel.  If you need an extensive answer, if our guys are really having to dive into the tax code for you or answering specific things on your return, you’ve got to become a client.

It’s really, really inexpensive to become a client of Anderson. Our platinum program, I always say this, it’s less than $100 a month. You could ask all the questions every day in our knowledge room. We have accountants and attorneys there. You can ask away to your heart’s content. You’ll never get an hourly bill if that’s what you’re doing. If that’s you and you’re just like, hey, you know what, I need general guidance, I don’t think anybody has anything quite like that in the country or in the world, as far as I’m concerned.

Anderson Global is our parent company. We have businesses in the Caymans, Switzerland, Italy, Dubai, France, and Singapore. I can tell you, nobody really does it like we do here in the US. Go USA. All right, enough of that. It’s supposed to be fast, fun and educational, so let’s get into the education.

Here’s the questions for today. I’m just going to read these. If this is your first Tax Tuesday, actually, let me know. If this is your first Tax Tuesday, give me a thumbs up. There’s probably a reaction button somewhere on your little bar there. There they are down there.

First off, welcome. There are a lot of thumbs. If this is not your first one, give me a heart. I think that I’m doing this right now just like we’ve been before. You guys are old hats. You’ll have to show the newbies how it’s done. We don’t share the chat because there’s always a Nigerian prince asking for money or an insurance guy who’s got something that he’s going to sell you. We can’t do that in chat because there’s just so many people on these. Sometimes it’s over a thousand, sometimes it’s hundreds. They like to pitch each other, so we shut that down.

What this is all about is going through these questions. You could ask your questions in the Q&A. You could ask clarifying questions in chat of the topic that we’re talking about, but I’m going to go through these questions, and then Eliot and I, really, Eliot is going to answer them because he’s smart. You ready?

Eliot’s going to answer this. There we go. I can’t apparently touch a button anymore. Okay, there’s Howard Dean showing up. I know it’s primary season. He always shows up.

All right, here are the questions. “We are starting an S-corporation for physical therapy home health business. My wife and I will be the only shareholders. My wife will run the business and see patients. I only plan to invest into the business. We’ll be a limited partner. Will my distributions from the S-corp be considered as passive income since I am not materially participating in the business?” Great question, we will answer that.

“If you started short term rental activity in November 2023 when the property was purchased, can you use cost segregation and bonus depreciation in 2023, or is it still better to wait until 2024?” Good question.

“If I buy a house in September, use it as a short term rental for a month until October, and then do long term rental starting in November for the STR, short term rental, I or my spouse will actively manage the property, can I still take the bonus depreciation in first year and offset my W-2 income?” You got some short term rental folks asking questions this way.

“If I put money into an opportunity zone and then sell after 10 years, does it all come out tax free or just any growth? Good question.

“If you are an S-corporation and pay yourself a regular salary, but also take money from what Intuit calls owner draw, how is that taxed?” We’re following Intuit now. Whatever, I know what you’re saying. “Do all employees have to be W-2 employees under an S-corp, or can they be contractors?” That’s pretty funny. I’m going to play with you later.

“Can an IRA balance be transferred to a foundation tax free and also allow the owner a tax deduction? Can I create the foundation and operate the foundation receiving the contribution?” That’s a really good question. I like that one. I love it when we get charity stuff, so it makes me feel happy.

“We sold our first flip at the beginning of the year and would like to know if there is any way at this moment to save as much as possible from being taxed, i.e. invested in the next flip or something else to avoid the “loss”. Also, if we have a loss for our S-corp in 2023, could we see that capital gain to be offset in 2024?” You’re having fun with this one. You’ve picked this one for a reason.

Eliot: Yup.

Toby: All you accountants out there immediately losing your minds because of the terms being used, but we’ll get that. All right. “What are typical operating and general expenses you’ve seen overlooked when investors file deductions?” Pretty general question, and we’ll get to those.

A couple more. “Can I move into a rental house I have for 15 years? Does it still qualify for a 1031 at a later date? I assume you mean when you move into it, it says a primary residence.  Does it qualify for a 121 exclusion after two years?” Good questions, and I’ll break it down for you. That’s actually a really good open ended question because there are so many things we could do with that.

“Can you do a lease option assignment in a Roth IRA? Can you do a sandwich lease option in a Roth IRA?” Great questions today. Eliot, I’m just going to give you a little bit of applause because these are really good questions.

First off, we’re going to  go and answer each one of those. In the meantime, you should know that if you can’t get enough of Tax Tuesday, there are 855 videos up on YouTube right now. Clint has his own channel as well. They’ll probably send a link out. It’s free.

If you haven’t figured out that Anderson likes to educate for free, you haven’t hung around us long enough. We’ll teach you until the cows come home. Whether you’re a client or not, Tax Tuesdays are open to anybody. You can always invite folks in, especially those people that you know are doing some weird stuff and maybe need some better advice. We’ll put them on the straight and narrow pretty quick, and it won’t cost them a nickel. You can go to YouTube. Please subscribe, and please share videos that you think are important to those that you think could be important too.

We always teach. We’re doing tax and asset protection workshops. I think we’re teaching one. I think Clint’s on it right now. We’re like, he’s roadkill right now. We just took all of his people, just brought them right over here. Just teasing. Not really. I know that he’s finishing up the TAP for today, but we are teaching another one. It looks like the 27th of July, and then we have our live three day TAP event, tax and asset protection, three day that is going to be in San Diego. I would invite you to come to that.

Those are not free because we actually have a bunch of overhead to cover, but they’re very inexpensive. Look for BOGOs buy one, get ones. Look for deals if you’re platinum and titanium. It’s always fun to get together in live events. Every now and again, Eliot actually shows up at one.

Eliot: Yeah, they’re a good time.

Toby: Yeah. You know what’s cool? Hanging around investors.

Eliot: Yes, a lot to learn.

Toby: Yeah. You learn so much being around people that do it all day long and investing all day long. It’s always fun. Ignore that slide. Here we go. Let’s dive into the questions. All right.

“We are starting an S-corporation for physical therapy home health business. My wife and I will be the only shareholders. My wife will run the business and see patients. I only plan to invest into the business and be a limited partner, sit in a corner, and do nothing.” Go over there, that’s what you’re going to do. “Will my distributions from the S-corp be considered as passive income since I’m not materially participating in the business?” What say you, Eliot?

Eliot: I think it’s a fantastic idea. I like the thought process, but no. It’s all going to be active income. The reason why is those same rules that we talk about all the time for material participation for a short term rental or as a subset under our real estate professional status. It applies to any business, including the S-corporation for physical therapy.

In other words, if two spouses are members of it, by default, if one’s material participating, the other will. We can’t get any passive activity in there. As much as we like, I like your thinking, I really do, but it’s not going to work in that case. In fact, in looking a little bit more into this, they’ve even covered, what if your spouse owned 100% and you just did a little work on the side? They would still pull your hours in and make you active as well. Not that you’d be getting any distribution anyway, but your hours could be counted towards the other spouse becoming material participation.

Toby: You burst their bubble like that.

Eliot: I did, but I liked the way they were trying to think outside the box.

Toby: Hold on for a second. What is passive income and how is it taxed? Passive income out of an S-corp will be taxed as ordinary income anyway. Whether it’s active or passive, it does not matter if you’re receiving profits out of an S-corp.

As long as your wife is receiving a reasonable salary for what she’s doing for the business, it’s taxed as though it’s passive anyway. It’s not subject to old age, disability, and survivors insurance. It’s not taxed as Medicare. It is no employment taxes. The only tax is your federal income tax, and it’s going to come to you via a K-1 that you’re going to put on your 1040.

The truth is it doesn’t matter whether you’re passive or not, you’re not going to get hit with the employment tax. That’s all we care about, except passive losses can only be used against passive income with a few exceptions, active participation or real estate professionals. This is actually better for you that it’s not passive.

Again, depending on whether you guys make a whole bunch of money, I’ll make it real for you. Let’s say that you make $300,000, and your wife takes a salary of $50,000. You have $300,000 of profit above that. Do the math either way. After she takes a salary, there’s $300,000 or there’s $250,000, that $300,000 we make sure she takes as salary. Either way, that big chunk of money, either the $250,000 or the $300,000 depending on however you guys want to do the example, is not subject to social security taxes. It’s the same thing that you would get if it was a passive activity.

If I was pizza shop, where’s my pizza? Eliot and I, we do a pizza shop. If you haven’t been with us, you know that we’ve been playing with pizza for years. Eliot and I open up a pizza shop. We’re not married.  Eliot works, I don’t. Those profits come out, I’m passive. I’m a passive owner, so that’s passive income to me. It doesn’t really matter from a tax standpoint for our purpose if it’s income.

The only time passive actually matters is when you have passive losses, and then we’re looking around for passive income to offset. That’s why really rich people like to be passive owners and pass through businesses because they have all these passive losses from the real estate, which people love to buy real estate and then create big fat losses, as you’ll probably hear.

With all these short term rentals and stuff like that, looking around, and people talking about depreciation, I know we’re getting into some waters where there could be some serious tax relief. They’re looking at it going, man, I need to be passive in these things so that all my rental passive losses will offset it. If you’re making money, it doesn’t really matter as long as it’s not subject to employment taxes. That’s the big one. Anything to add to that?

Eliot: No, I think that’s pretty much it.

Toby: All right. “If you started short term rental activity in November 2023 when the property was purchased…” Let’s assume that you bought a house and you’re going to make it into a short term rental, which is seven days or less on average. “Can you use cost segregation and bonus depreciation in 2023, or is it better to wait until 2024?” Eliot.

Eliot: Ultimately, you’re going to want to calculate first, but more than likely, you’re going to be better off in 2023. Why? Because in 2023, we have that declining bonus depreciation right now. In 2023, it would have been 80%, in 2024 it’s 60%. It continues to go down.

All things being equal, conventional wisdom would say probably in 2023 is when you want to do it. Let’s say you didn’t have a whole lot to work with there as far as income hitting your return, and maybe you would be better served by having a heavier loss in 2024 despite the decline, it could be that you’d want to wait to 2024, but I’d say probably most people won’t.

Toby: Yeah, there are three rules that we always follow in tax, and they are as follows. They’re very simple, calculate, calculate, calculate. In this particular case, we have a short term rental activity, which means it’s an ordinary business. If you are materially participating, that means we could create loss in 2023 that we use to offset 2023 income, even your wages. If it’s short term rental, seven days or less, you’re materially participating, it is not a rental activity. It’s considered a business activity, and the loss can be treated as ordinary and offset your W-2 income.

You put a building into service right at the end of the year in a regular business. Let’s go back to pizza, pretend that we opened up a pizza shop, and we bought an oven. We said, let’s depreciate that oven. Let’s say it’s a $5000 oven. If we put it into service, before the end of the year, we can write that off. Your house is an oven.

When you’re doing short term rental activity, that means that if we can make a part of that house into personal property, which you accomplish by doing something called a cost segregation, you take the house, and you say, here’s the 39-year property since it’s short term rental, here’s the 15-year property, here’s the 7-year, here’s the 5-year, and these ones, the 15, 7, and 5 are considered personal property, and you can accelerate that depreciation, that’s that term bonus depreciation. It’s under 168(k) of the code.

You want to write that down, 168(k) in bonus depreciation. You can google it up and get a really good understanding. It just means something that has a 5-year lifespan, 7-year, or 15-year, you could take a percentage of it immediately. In 2023, you could write off 80% of whatever that total amount. Usually it’s about a third of the building. I could write that off and create a loss that I could use against my W-2 or other income.

You could wait until 2024, but 2024, we’re going to still have to qualify as a short term rental, which means the average stay per guest is seven days or less. You take the total number of days you rented the house out for the year, or you used Airbnb or Vrbo, and you divide it by the number of bookings. If you had 200 days and you had 70 bookings, then you’re going to be at somewhere around 2.8 or whatever it is. You’re clearly a trade or business.

Did I materially participate? If the answer is yes, then any loss that I create, by the way, previous question, one spouse could qualify for material participation for the entire return, so only one of you actually has to materially participate. It gets aggregated, or if you guys both do it, you can add up your time to qualify. There are seven tests, I won’t get into them, but  it’s pretty easy to qualify if you’re self-managing. That loss, you could use and wipe out a bunch of your W-2 income or a bunch of your other income. We get to choose which year we pull the trigger on that bonus.

We can choose all the way up until it’s going to be about September 15th this year, depending on how it’s held for 2023, which means we can go back in time to November of 2023 and say, I’d like to take that depreciation now. If you’re facing a big tax bill and you don’t want to pay it, maybe that’s what you do.

Flip side. Hey, I didn’t really make much money in 2023, I was in a really low tax bracket. In 2024, I’ve been killing it. Maybe we wait, and we make the election. We could even do the cost egg study now and apply it in 2024. As we sit right now, there’s legislation that might change this.

As we sit right now, bonus depreciation has been reduced to 60%. I believe the House has passed legislation to knock that back up to 100%, and we haven’t seen the Senate take action on it. We’ll see. Maybe, maybe not. It’ll be interesting to see what happens given the presidential election. Somebody may get off their duff and say, yay, here, real estate investors, here’s something for you. We’ll see. We’re just holding our breath for these politicians. That’s how it works.

Eliot: Exactly right.

Toby: Thank you, sir.

Eliot: These are all built. Like you said, the previous question and what we’re going to see here in the next one, it’s all building up your knowledge on it.

Toby: Yeah. Do you guys realize how powerful a short term rental can be? It could offset your income. Give me a big thumbs up because I like reactions. If this is something that you look at and go, man, I would like to offset my W-2 income, maybe you’re making $200,000-$300,000 a year, this would be something, a bunch of thumbs. Then short term rentals become your friend. Now you’re not stuck into keeping it as a short term rental.

In this case, I’m just going to add a fact. In 2023, we did it as a short term rental, and then we turned it into a long term rental in 2024. You could still choose to use the short term rental as ordinary loss in 2023. If you converted it in 2024, now we have the passive activity loss rules to deal with, so then we’re going to have to be an active participant or real estate professional. That’s why you hired guys like this. Not me, I don’t work anymore, pretty much do nothing, but Eliot here would love to tear apart your return and say, here’s a bunch of money that I could find you.

Eliot: There are about 10 other people on here today who would do the same.

Toby: Yup. We like digging into returns. I say that because these guys are really, really good at finding money. Here’s some free money. It’s like Christmas or whatever holiday you celebrate. You get free stuff, that’s what I look at. Who likes free stuff? Give me a heart because I’m doing that today if you like free stuff. Not the ooh face. I see a bunch of ooh faces. All right. There, we got a little bit. I’m pandering today for reactions. That’s just how I roll.

All right. “If I buy a house in September and use it as a short term rental for a month until October, then do long term rental starting November for the short term rental, I or my spouse will actively manage, can I still take bonus depreciation in first year and offset my W-2 income?” Holy crap, that’s a really interesting question. Go for it.

Eliot: It is, and Toby’s already answered this. You just have to be able to piece it all together. It’s all going to look at how much time did you rent it, and what was the average stay? That’s what’s going to determine the definition, short term rental versus long term rental. The most common metric we use for short term rental is going to be seven days or less. If the average day is seven days or less, it’s going to be short term rental.

While I respect what they’re asking here and trying to show we had some short term rental activity and we had some long term, that’s all, in a sense, immaterial. How many times did someone stay there? What was the average stay? You’re not going to break it up throughout the year. It’s either all going to be short term rental or it’s all going to be long term rental. We don’t get a pick and choose.

Toby: It’s per calendar year. You bought a house in September and you used it through October or until October, so that’s one month. Let’s say that you did 10 three-day rentals. You have 30 days, 10 rentals, and then you get one tenant for 90 days. You have 90 days, plus you rented it for 30 days.

We have 120 days. We had 10 rentals, short term, one rental long term. We add them up, that’s 11. You would take whatever that adds up to be, 120 divided by 11. Your average daily usage is almost 12. It’s a long term rental. It’s a rental activity, it’s not a trade or business.

Hopefully you’re going to see something here. It might make sense to not rent it out. Let’s say I did  10 three-day rentals in September, but it’s an expensive house. I make good money, but that house could yield me $150,000 of deduction. That $150,000 of deduction is worth 40% to me with my state and federal. Maybe I’m looking at it going, that’s $60,000. I think I’ll not rent it until December. I’ll sandbag it.

We had 30 days there, 30 days of September, add those up, and we’re at 60 days, divide it by 11, you’re at 5 point something days, it’s a short term rental. Are you following me? It might make sense. to sit back on it and go, whoa, whoa, whoa, whoa. I’m not going to rent it for a little bit and I’ll bypass receiving rents. Maybe I bypass $3000 or $4000, whatever it is, but I’m going to get an extra $60,000 in tax relief. Again, that’s what this guy does, not me.

Eliot: That’s what they do.

Toby: Have you ever seen that commercial? I’m not going to get it  given what happened this weekend. The hunter’s pointing at the deer, and the deer is going like this. I’m like this, but I know we probably shouldn’t talk about stuff like that.  Horrific events over the weekend, but I can’t help it.

What is that? What are those commercial? You know the little cartoons? I can see it in my head, but one of those things that always stuck.

Eliot: Chick-Fil-A point to the cows.

Toby: Yeah. Okay, we’ll do the Chick-Fil-A. We’re pointing at the cows, eat the cow. Here’s the cow right over here. Apparently, I’m the chicken. All right. That’s not good, we’re not going to do that. All right, Seinfeld.  All right, that’s enough of that. All right. So next one, let’s get past this. I think we’ve done two questions and it’s 5:00.

“If you put money in an opportunity zone and then sell after 10 years, does all of it come out tax free or just any growth?”

Eliot: First of all, I did change this question a little bit because they had asked for nine years. It is 10 years in the code. If you hold it for 10 years, first of all, back up. What does it mean going on in the opportunity zone? If you’ve had capital gains, you sold some stock, sold some property, you have true capital gains, you can invest them in what’s called an opportunity zone fund. Opportunity zone fund, then invest in an opportunity zone, a land, a building, what have you, maybe a business. It will defer your capital gains up to the end of 2026 approximately, so you won’t pay any tax on them.

At that point, you’re going to have to pay tax on that deferred capital gain. We can’t get around that. Toby invests in an opportunity zone. He pays his capital gains tax at the end of 2026, but he keeps the building. It increases in tremendous amounts of value over a decade to 10 years plus later. Now, when he sells that, it’s treated as if his basis goes all the way up, so he has no capital gains. If we have no capital gains taxed, we don’t have any depreciation recapture. That is huge.

I’m not saying go out there and invest in these because there’s a lot to them, and you want to be careful where you’re investing. These are not always the best areas, but there was a lot of carrot to that stick when they put it out there.

Toby: Yeah. I don’t know. I always looked at it as a red herring. It’s causing people to invest in places they wouldn’t otherwise invest. I say that’s not good. There are rules you have to follow, like improvement on the property. You can’t just go buy a property and sit on it for 10 years.

Whatever you spent on the property, you’re going to have to spend again on improving that property. There are some rules that you have to follow to make that qualify, but then your gain, you don’t have to pay. Steps up on that day is the term , but the easiest way to think about it is I don’t have to pay any tax on it. I just haven’t seen a lot that got me excited.

Eliot: I haven’t heard a lot of good either.

Toby: Yeah. When this came out, it was a big thing. You still have to pay tax. First off, you have to have qualified capital gains that you could roll into the opportunity zone. You got to put it in an opportunity zone fund and then invest in opportunity zone property. You have timelines to do all of this.

First off, if you put money in an opportunity zone, without qualified funds, it doesn’t matter. You’re paying tax. There’s no such thing as, hey, I invested in an opportunity zone, therefore I don’t have to pay tax. No, you have to use qualified capital gains that roll into the opportunity zone that then you have to recognize in 2026.

There was a step up seven years and five years out when this thing first passed, but now we’re so close. You’re just going to be recognizing the capital gain and recapture in 2026. You could wait 10 years so you don’t have to pay tax on any of that gain. I’m always one of those guys that I want the money now.

Eliot: It’s a long hold.

Toby: Yeah. Otherwise, do a 1031 exchange, or do a lazy man’s 1031 exchange by accelerating loss on other passive assets and offsetting your gain, because then you don’t ever have to worry about it. It’s just, hey, I don’t have to pay tax on it. It’s great. That’s me, though.

Eliot: You probably know your investment area better that way.

Toby: Yeah. Anyway, some of that seems like a red herring, getting people to do things they wouldn’t otherwise do for a tax reason.

Eliot: I’d be a little scared of it.

Toby: Yeah. All right. “If you are an S-corporation and pay yourself a regular salary but also take money from what Intuit calls owner to draw, how is it taxed? Do all employees have to be W-2 employees under an S-corp or can they be contractors?”

Eliot: We’re going to have some definition lessons. First of all, basically with an S-corporation, you do have two streams of income. You have the reasonable wage, the salary that they’re talking about here, and then you have what we call the distribution off and what Intuits are calling owners draw. How’s that taxed? The W-2 as Toby pointed out earlier, that’s going to subject to employment tax. All of this income is subject to income tax, whatever your brackets at, both streams, but the W-2 is subject to employment tax, so it’s a little higher.

Congress requires that. Why? Because they know that that income is what’s going to get a little bit put into retirement, et cetera, so on and so forth. They let you put that into retirement plans, so on and so forth. That other part, that distribution is not. That’s not subject to the employment tax, but it will get hit with income tax. Those are the two streams that we often see in an S-corporation.

For a little bit of the definitions here, if we have any employees, do they have to be W-2? By definition, if they’re an employee, they are W-2, first of all. That means you’re going to pay half the S-corporation. The business, the employer, it’s going to pay one half of those employment tax, whereas the employees will pay the other half on their paychecks.

Can they be contractors? It depends. It depends on what they’re doing. They certainly can be. In fact, you could be both. If you’re an employee and then you do some side projects unrelated to your normal job there, you could be both, theoretically. If you’re a contractor though, everything you pay for the employer standpoint, the S-corporation is just a deduction. When the contractor receives it, all 100% of that on their side is going to be subject to employment tax. Of course, they’ll pay income tax as well.

Toby: Yeah. Think about this for a second. Let’s just say that everything you said is absolutely correct. Let’s say we have an S-corp and you’re a shareholder. You want to pay yourself as a 1099. You just undid the benefit of the S-corp because if you just let the S-corp do what it does, those profits would have flowed onto your return without being subject to employment taxes.

By 1099-ing yourself, now a hundred percent of whatever your 1099 is subject to employment taxes. You just cost yourself 15.3% or after a small deduction for half of the employment tax, 14.1%. I can’t help, but I always go nuts when somebody says 15.3%. Technically, that’s not true. It’s about 14%. It costs you money. For every $10,000, it’s costing you $1400. It’s the easiest way to look at it.

If I’m paying Eliot and Elliot is not an employee, but he’s doing work for it and I pay him 1099, I just get to write the whole thing off. If Eliot comes to work for the company and I pay Eliot, I have to pay half the employment taxes. He pays half the employment taxes, so it costs me. As the employer, I have to do withholding, I have to run payroll. It might be better to contract with people, but there are strict rules on contractors versus employees. You’ve got to make sure that you’re not controlling that individual. You’re just paying them to do a job like, hey, paint this house.

I could pay somebody, I could contract with them. But if I say, hey, I want you to be on board, I’m going to tell you what to do every day, and I want you to paint this house, here’s the hours I want you to work, that’s an employee.

Can you be an employee and a contractor? I get this question all the time. The answer is yes with a huge caveat. If you’re an employee as a service provider, for those services, you have to pay withholding. You’re a W-2 employee, you’re going to be subject to employment taxes and withholding. Unless you’re a shareholder, in which case, then the distributions, the owner draw, whatever. The profits flow to you, and you’re not subject to employment taxes.

If you do something unrelated to your services as an employee, let’s go back to the pizza shop. Let’s say that Eliot and I own a pizza shop. Eliot works at the pizza shop, but then says, but I’ll also be your accountant. I have Eliot’s tax services, and he’s a sole proprietor or something. He could get his W-2 for being a pizza person from the S-corp, and I could still pay his company or him as his company, if he’s a sole proprietor, a 1099.

What I can’t do is say, hey, I’m going to give you some money, Eliot, and we’re going to 1099 it so we can avoid employment taxes. I’m pushing it all onto you. I can’t do that. He’s a W-2 employee for those services that he’s providing for the pizza company. For his pizza services, he’s an employee. You do something completely unrelated, yeah, I could 1099 people. This is routinely. Accountants will just say, no, you can’t. It’s not quite that easy.

The best example I had was somebody who had a catering business yet. They were a secretary at a company. The company wanted to pay them through their W-2 for their catering business. They were like, hey,  I have a separate business, it does this, and they want to hire my business. I don’t want them to pay me because it needs to go to my business. I have other partners and other things. I’m like, yeah.

They would pay your business, not you as an employee. You’re not doing that. We were able to get that squared away so the employer felt comfortable saying, aha, okay, because our accountant kept saying, we have to pay you through payroll. No, no, no, no, no, not quite that simple. There it goes. Talk all day.  You have open ended questions.

Eliot: Yeah, they’re great. They’re great, yeah.

Toby: If you guys like learning this stuff, we could dial it back and just do 10,000 foot view too. Give me a thumbs up. I need some reassurance. Give me a thumbs up if you liked it. There we go.  All right, three thumbs currently, four, maybe five. All right, now we’re seeing some more.

All right.  “Can an IRA balance be transferred to a foundation tax free and also allow the owner a tax deduction? Can I create a foundation and operate the foundation receiving the contribution?”

Eliot: Yeah, I like this one. First of all, you can. When you’re 70 and a half, you can start making what’s called qualified charitable contributions. Is that the term?

Toby: Is it QDC?

Eliot: Yes, QDC.

Toby: You can take money directly out of an IRA, and you’re typically required to take a minimum distribution after the age of 73. You can direct that into a charity. You can actually do it at 70 and a half. Some people are taking distributions because you can start at 55 or 59 and a half, 55, then you have to make them equal. At 59, I can start taking distributions out of my IRA.

Eliot: But it’s not a tax deduction.

Toby: Hold on. There are two ways to do it. I receive the money, pay tax on it, then contribute to a charity, and I would take a deduction. Or I can put up to $100,000 a year of my  distributions directly into the charity, and now I don’t pay tax on it, but I don’t get a deduction. It’s just, that amount is not taxable.

If you have required minimum distributions, for example, of $50,000 a year and you’re like, man, I just wish they would go straight to a charity, I don’t need them, I don’t like paying tax on it, it makes my social security taxable, it pisses me off, you could direct that into a qualified 501(c)(3), but you have to be 70 and a half or greater and it has to be a qualified 501(c)(3). Eliot, can you use a foundation to do this?

Eliot: Yes. Under 171A, I think it was. Code Section 171A, it has a laundry list. You’ll often hear when it comes to charitable donations and things like that, we talk about DAFs, donor-advised funds. It cannot do one of these, but your foundations can and certainly your public charities.

Toby: They’re being mean to you. I would say if you’re going to do this, you’re on a line when you’re dealing with a private foundation, which the easiest way to think about this is public charities do something. Private foundations support the charities that do something. They’re required unless they’re a private operating foundation. We go down rabbit holes here.

A typical private foundation has to give 5% of its assets to another 501(c)(3). My suggestion is if you’re going to do this is to set up a public charity, which you can automatically qualify for a five-year exemption. You get it automatically, but do something with your charity. It could be housing, it could be section 8, it could be transitional housing, it could be something in science, it could be an amateur sports league, it could be teaching. You could fill in the blank, feeding people, helping people, health. A lot of you doctors and dentists out there, you’re already doing a bunch of service.

You could literally set up your own charity that helps people in those routes. Instead of you taking the money from your IRA, you direct it. Can you do this with a 401(k)? No, but you can convert a 401(k) into an IRA and do it through that. It’s limited to $100,000 a year when you’re 70 and a half or older. There’s a niche.

Otherwise, you’re just looking for stuff to donate. You could set up your own charity and say, hey, I keep getting all this money out of my retirement plan and it’s ticking me off. How do I not pay tax on it? You can give assets to charities. You could give money to charities. There’s lots of ways to offset it. But if you want to avoid the tax hit from the distribution from an IRA, you do a qualified charitable distribution directly from the IRA into a qualified 501(c)(3), which could be a private foundation. It’s more than likely, I would say, you’re safe as a public charity. It can not be a donor advised fund.

Eliot: I think the secure act part two, bumped it up to 105.

Toby: You think it went up?

Eliot: It’s adjusted now.

Toby: It might be indexed, so you would look each year. You think it’s 105 now?

Eliot: Yup.

Toby: All right.

Eliot: A little bit of redemption there.

Toby: I want every dollar. You’d run it and say, hey, how much can I contribute? Maybe it started at a hundred, now it’s going up. It must’ve had 5% inflation.

All right. “We sold our first flip at the beginning of this year. I would like to know if there is any way at this moment to save as much as possible from being taxed, i. e. invested in the next flip or something else to avoid the loss. Also, we have a loss for our S-corp in 2023.  Could we see that capital gain to be offset in 2024?” I have no idea what that means.

Eliot: I think we got some terms confused here again. That’s why I picked this is because I can see that. It’s easy to get these things mixed up. First of all, that first line, we’re talking about a flip. We know we’re in an S-corporation. When we talk about flips, that is not going to be capital gains, that’s ordinary income, not just subject to income tax, but also subject to employment tax that we were talking about all the way back from question number one. I wanted to clear that out.

There is no capital gain to be had here. I’m assuming that they had a loss in 2023 in their operations. That loss was taken in 2023. It’s an S-corporation, it’s a flow through entity. We saw that on our return in 2023. There shouldn’t be any loss unless we had a net operating loss. We’re getting into some other rules, but yes, that would carry forward.

Toby: They’re thinking, I think, of 2023. They had a loss and they’re like, hey, can we use that in 2024? If you weren’t able to use it in 2023, it can go forward. Otherwise, you’d use it in the year that it was incurred.

Eliot: Back to the, really, I think the heart of it, what can we do now? It happened in the early part of 2024. Are there any deductions and things? Absolutely. In an S-corporation, you’ve got a whole lot of things you can start taking advantage of. Corporate meetings of your S-corporation in your home, that’s going to eat into that income. That’s 280A. We talk about that.

You can use your accountable plan. Adopt an accountable plan for reimbursements for mileage and for a home office, administrative office. All good things there. You’re going to have maybe some income to pay yourself a little bit of the wage. We talked about that. One of the earlier questions, if we have earned income subject to employment tax, then we can donate to maybe a 401(k) we could set up or something like that. There’s a lot that can be done here to help us eat into that income that you’ve now gotten from your hard earned flip, but just remember it’s not capital gains.

Toby: You know the defined benefit guys that we worked with?

Eliot: Yes.

Toby: I had a client, $1.2 million into a retirement plan, tax deductible. They’ll be paid tax when it comes out. It’s not uncommon to be able to put $200,000-$300,000 a year into what’s called a cash balance plan or a defined benefit plan. These things, you have to have an actuary, which we can send you to. That does the calculation, but it’s a huge amount of money.

When you see people making money in an S-corp and they say, man, is there any way I could offset this income, the answer is yes. We’re used to 401(k)s, IRAs, and HSAs. You’re used to writing everything off under the sun from 280A, which is the Augusta rule, which is what Eliot was talking about, administrative office in the home, writing off your mileage, automobile expense, and things like that.

Sometimes we miss that there’s big, huge tranches, even when we’re getting hit with the tax or that we have this income, that there are still some places we can go. Those places are, hey, it’s coming out as a salary, I could push it into a retirement plan. That’s a DB plan, where I could put in hundreds of thousands of dollars.

There’s actually something called captive insurance that you can create your own insurance company. You could put up to $1.4 million into that a year. Those are on the IRS dirty dozen list because some people abuse them, but if you do them right, they’re just fine.

There are things like contributing to charity. You set up your own charity, you could write off 60% of your adjusted gross income by writing a check at the end of the year. There are other things that you could do like, hey, let me do short term rentals and create loss. Let me start another business, create loss, accelerate depreciation to that year. Or, hey, I have rental properties, I aggregate them all together, make a real estate professional election, and take that loss. There’s lots of things that we could do, which not to belabor, it is why you talk to guys like this.

Eliot: Just one more thing. I want to know a common misconception. We asked here something about, could I put some of the money into the next flip? What’s going to happen there is that that isn’t going to be a deduction to you. If you started a new flip, what’s probably going to happen with the most common scenario there is you went out and bought a bunch of boards or whatever. It’s work in progress. You don’t get any deduction for that until you finally sell later on.

You’re not going to be able to defer taxes simply because you took some of your income and put it into a new project like another flip, that is. We run into that misunderstanding quite a bit. I guess we’ll nail that down.

Toby: Again, whenever you say flipping, wholesaling, construction, real estate agent, broker, all those things, what I always hear is pizza. It’s a business just like the pizza business. It’s not real estate, it’s an active trade or business. Short term rentals, pizza pizza. We are a dealer,  pizza pizza. Flipping properties, pizza pizza. Yup, it’s all a trade or business. It’s not like when you’re an investor.

That’s why it helps to have people that actually know what they’re doing in these areas so that you can get out ahead of it. Hey, I’m going to do this. All right, here’s how it’s going to be treated. Try this so we can get more benefit out of it. Usually, it’s big tranches of money.

I know when you guys are doing your, the tax saver program. They keep a running total of how much, and it looks like it’s around $20,000 or $20,000 a year probably on average. There are people that save a hundred grand a year for, there are people that save $6000 or $7000 a year for.

Somebody says, I like the list. Little Caesar. I remember when that came out, I don’t know. I guess they’re big again, but I remember they went through a lull. Speaking of a lull, here’s tax and asset protection workshop. You’re really bored. They’re fun to do.

July 27th is the next one, and then we have a live one coming up in September. We’ll do some more between July 27th and September. We try to do them at least every other week so that you can come in and learn about LLCs, corporations, land trusts. You can learn how to create a legacy. You can learn the tax implications of real estate. It’s usually myself, Amanda, Brent, or Clint coming out and teaching these.

We like to break it down so you get a good idea of what depreciation is, when you use 27 and a half years, when you use 39, when you use five, seven or 15, and then a bunch of other deductions that you may not realize you get, they’re free. It’s free to go to the workshop unless it’s the live one, in which case there’s a small cost, but it’s well worth it because it’s three days. This one’s going to be in San Diego.

Eliot: Not bad.

Toby: Yeah. If there are places to go, San Diego ain’t so bad.

Eliot: Not so hot like here.

Toby: It was only 120 degrees last week, but I always hear it’s a dry heat.

Eliot: Still a heat.

Toby: So is fire. It doesn’t mean I want it all over me. All right. “What are typical operating or general expenses you’ve seen overlooked when investors file deductions?”

Eliot: I want to start first of all more on the theoretical. The way you avoid missing deductions is you have a good bookkeeping. That is your foundation. We’ve said it in many many past shows. Your good bookkeeping is going to track all of the things that you spend on which are your expenses, and it’s very hard to lose or hide those expenses when it come tax time if they’ve all been put into your bookkeeping. That’s the first place I’m going to start because you’re not going to miss them then.

Have a good bookkeeping. It becomes much more difficult to miss deductions. What do we normally see? Definitely, I’ve seen depreciation missed on people who do a lot of real estate. Rental real estate, that’s a big one.

Toby: Can I put a time out on that?

Eliot: Yeah.

Toby: If you’re not taking depreciation and you’re renting a house, you got to understand this. You’re not doing yourself any favors. You’re not being benevolent. They’re going to make you recapture what you could have taken, but you didn’t. It’s like, hey, you could have this deduction. You’re like, yeah, but it just creates a loss and I don’t need the loss.

Eliot: Unless I calculate that.

Toby: Yeah. When you sell the house, they’re going to say, hey, what could you have written off? You’ll be like, your accountant will know. and they’ll say, oh, look, you get to recapture it and pay up to 25% on the amount that you never wrote off. You’ll be like, what? It happens all the time?

Eliot: It does. It is one that typically you’re going to find taken as a deduction, but it happens enough and it’s so big that it’s one that definitely warrants bringing up. A lot of mileage gets missed. All of the operational expenses typically are in there.

People are really good on that from what I’ve seen. They’ll get the operational expenses. It’s the other, the property taxes, things like that that slide by. They just don’t think. They’re so much focused on the operations that they miss these bigger expenses. That’s typically what we see.

Again, to my point, this is why I picked it. If you have good bookkeeping, your chances go way down that you’re going to miss anything. You want to have that bookkeeping because bookkeeping is your guiding point to know how well your business is operating. It’s not just about the tax return, it’s knowing whether or not this was a profitable venture or not. It’s so critical, that’s why I hit it to really hammer that point home.

Toby: I’m going to make it easy for you guys. First off, Anderson does tax prep and bookkeeping. We do the entities, and we’re a national registered agent. There are close to 500 of us here, and we can handle your business work if you want us to. If you love your accountant, don’t change, but you could still come here and do bookkeeping. Just reach out.

If you just say, hey, I want to talk to somebody, put it in chat and they’ll give you a link. It doesn’t cost you anything to find out what it would look like. What we like to do is we look at you. First off, we use a platform called QuickBooks Online. We’re going to say, hey, let’s build your books together, so you have an understanding of what expenses are treated, what way, which ones you’re missing. We’re always looking for money.

If you’re paying us something, my favorite thing to think about is if somebody pays me a dollar and I give them back three,  I’m a net benefit to them. If you’re paying somebody 50 cents because you think you’re saving it, but it costs you $3, it just cost you $3.50 versus if you go to somebody who knows what they’re doing. They should more than pay for themselves. That’s my experience with tax people.

Don’t skimp on taxes. They will pay for themselves and put more money in your pocket. You’ll be shocked at the big tranches of cash that come in when you do it right, and you can avoid a big tax hit. We have a toolkit of about 45 different deductions and strategies that we use. When they apply it, there might be one, two, three, four. Who knows?

When they hit, it’s usually like, oh, wow, it’s going to save me $10,000 a year for the next 20-25 years? If you do it right, you can reap benefits for a long period of time and then you really don’t care, but you’ve got to make sure you have people that know what they’re doing, that do what you do. That’s why I say always work with somebody who isn’t their side gig. It’s not the thing that they do. Hey, 99% of my clients are like this.

Work with people who work with investors and business owners, please. Don’t go to H&R block or any of these other  houses, where somebody does it part time during the year and the rest of the year, they’re doing roofs or something.

All  right. “Can I move into a rental house I have had for 15 years? Does it still qualify for a 1031 at a later date, or does it qualify for a 121 exclusion after two years?” I always like when they put question marks and they’re like, is it this or this? And both of them are wrong.

Eliot: Could we have a rental, move into it, and still qualify for 1031? Probably not because 1031 requires that it be an asset used currently in a trade or business. If we’ve moved into it, I’m assuming we made it our primary residence. It’s no longer in a trade or business. We will have lost our 1031 capability at that moment.

You could move back out, start to rent it again, put it as a trade or business again, and then do a 1031. That, we could do. But the minute you moved in there, you took it out of a trade or business zone, if you will, or application, so it’s not going to be available for 1031 at that point. The next part though, what about 121? Right. It was a rental.

Toby: What is 121?

Eliot: 121 is for our personal residences. If you’ve had lived in it and owned it for two of the last five years, you can exclude up to $500,000 married filing joint or $250,000 of capital gains a single for when you later on sell it. The rules are that again, two the last five years of ownership and use as a primary residence. In our instance here, you had a rental for 15 years, you move in it for two years as your primary residence. Now, we can use the 121 there. However, what’s going to happen more than likely is you’re going to have a prorating of the time that you used it as what we call non conforming use, the 15 years as a rental.

You’re going to use your total amount of time you own that house. How much time was it used as a rental? How much was it used as personal residence? That fraction is going to be used against that $500,000 or $250,000. You could, in this situation, if you qualify for the two years, now rent it out for a little bit after. We put it back in a trade or business, and you could do both, 1031 and 121.

Toby: Yeah. 121 is the capital gain exclusion. It’s not a depreciation recapture exclusion. It’s just capital gains, and it’s up to $500,000 married filing jointly, $250,000 for single capital gains when you sell a house that you’ve lived in as a primary residence for two of the last five years. You can get up to that and use it first.

1031 exchange is when you sell an investment property or properties and invest the same amount or greater into replacement property or properties in the United States. If you’re a US. citizen, you can even go into territories. It’s fun because you could just keep rolling it forward and never pay tax. Where we see this rear its head is folks in highly appreciated cities like Austin, San Francisco, Seattle, Miami, people who bought things 10 years ago that were half a million dollars and now they’re worth $3.5 million.

They’re going to sell it and they’re like, okay. They go to their account and their accountant says, well, you’ve owned it for these last 10 years, you lived in it, you get this $500,000 exclusion. You’re like, that’s great. My basis is half a million.  I use a half a million of capital gain exclusion, that’s a million dollars. Now I have 2.5 million  of gain at 20% plus 3.8 million for the net investment income tax, plus my state tax. I’m getting punched right in the neck, and you’re acting like you’re doing me a favor.

Here’s what you do.  Like Elliot says, you move out and you rent it even for six months. Make it a rental, now it qualifies for a 1031 exchange. When you sell that 3.5 million property, you still get your half a million dollars of exclusion. Your basis is now a million in it. The $2.5 million of extra, you’re rolling it into new property or properties. I just have to invest it in more real estate.

Here’s a question we get a lot. What if I want to move into the house that I bought? As long as it’s investment property to investment property for a reasonable period of time, usually six months to a year, you can go move into that replacement house after you’ve established it as a investment. In fact, the tax code anticipates this. It talks about you have restrictions on when you do a 1031 exchange and move into it. You can only do the 121 exclusion. I think it’s five years instead of two, but it contemplates that you do this.

How much will it save you on $2.5 million at close to 30%, in some cases higher? It’s going to save you $750,000 to a million bucks, I’m taking that action. I’m willing to say, hey, you know what, let’s go ahead and make it a rental. If you’re flush with cash, then it’s not going to be an issue.

Let’s say me personally, we have hundreds of properties. I’d probably take a loan out against some of my commercial properties and go buy a new house. I’d turn my house into a rental, sell it, and then invest in more rental properties, or use that money from the sale after I put it into the new rentals and pay off the loan from the first one. You could do that. Fun stuff.

Eliot: Yeah, it is.

Toby: Drink it out of a fire hose, right guys?

Eliot: That’s why we’re here.

Toby: The whole reason that we bring up these types of strategies is that most people are like, oh, I can’t do anything. No, you can go back and forth. I can go from a rental, I can make it into a primary residence. I can go from a primary residence, I can make it into a rental.

Let me give you another example. I’m living this with a client right now. She moved to Florida, had a house in Michigan. She doesn’t want to sell the house in Michigan, it has sentimental value. She keeps thinking like, what am I going to do? What am I going to do? I have this capital gain exclusion. She has a half a million dollars that’s sitting on the table. There’s about a half a million dollars of gain in that property right now.

She moved out a year ago. I said, don’t worry. You have two more years to satisfy that I lived in it as my primary residence two of the last five years. There’s nonconforming use issue when you move out of a primary residence and sell it within three years. You don’t have to worry about it.

What we could do is sell it to, at that point, we create an entity called an LLC taxed and S-corp to buy the property from her, step up her basis, allow her to use her capital gain exclusion on that property, lock it in so she never has to worry about paying tax on it ever again. It’s one of the few times you’ll ever hear me talk about having a property inside of an S-corp, and then we’re going to accelerate the depreciation on that property because it has a new basis. We’re going to elect out of an installment method.

We’re going to pay it over a long period of time, but we’re going to tax it in the first year because there’s no tax because it’s capital gain exclusion. What we do is we lock in half a million dollars of tax benefit of capital gain. Erasure is the best way to look at it. Now there’s $500,000 of new basis that I’ll never have to pay tax on, and we could still lock it in, or she could just sell the property, or she could make it into a rental even after that.

We want to grab that $500,000. She and her husband have it in their hand. They could lose it. They wait, but we have a safety net. There’s almost always a safety net, guys. If you know what you’re doing, there’s usually a way.

All right, last question. “Can you do a lease option assignment in a Roth IRA? Can you do a sandwich lease option in a Roth IRA?”

Eliot: Yes and yes.  I had to look this one up. This is not my area of specialty, I got to admit. The only thing I would say is I just want to make sure that it is an option. Meaning, sometimes people enter a written agreement that says option, but it’s in practice by the IRS. They don’t look at it as an option. That could be considered a sale whereas if we did this really quick, maybe we’re looking at some UBIT here or something like that. Aside from that, if we have a true sandwich leasing option, my understanding is yes, you can do them.

Toby: Yeah. If you flip houses in a Roth IRA, and flipping means I buy something to sell it, and if you’re doing lease options in such a manner to where it looks like you’re doing that, and you do more than five or six of them, you’re in a gray area. We’ve never seen an audit on this, by the way.

The reason it’s an issue is because in a Roth IRA, if you run a regular business, a trade or business out of it, it’s subject to something called unrelated business income tax or taxable income, depending on whatever you’re looking at. We call it UBIT. Everybody just uses that term, UBIT, unrelated business income tax, so that we know, oh, hey, there’s a tax inside the IRA.

The other thing that you can look at in an IRA is if you’re using debt. If you are borrowing money inside that IRA, expect something called unrelated debt finance income. It’s another type of tax. It does not exist inside of a 401k or a Roth 401(k), but there’s no way to roll a Roth IRA into a Roth 401(k). You can go the other direction, but you can’t go back.

If you have a Roth IRA, it’s always worth having a discussion with your accountant before you pull the trigger on stuff. You may say. hey, you know what, this is a strategy that I’ll do in my for profit world and not in the exempt entity world of a Roth where you’ll never pay tax. You don’t want to screw up the Roth. There are too many good benefits from it, so you just don’t want to get yourself into a situation where you’re like, nuts.

All right, guys, hopefully you had some fun. I know we’re five minutes over. We used to do these. We used to do them for two and a half hours. We used to never have a question. We would just let it be a free for all, and then a thousand people would get on and ask questions.

Eliot: Feverishly typing in the background during the after all.

Toby: Yeah. Somebody says, how can I learn more about TaxSaver Pro package? That’s interesting that you bring that up because I think I may have mentioned it. We do an analysis. Actually, Eliot and his team do the analysis. Here’s how it works, you could do TaxSaver Pro. It’s a set fee where they’ll look at your tax returns. How many different strategies do you run it through? Is it 1500?

Eliot: Yeah, the software is north of a thousand.

Toby: Yeah. They’re doing different scenarios. They run it. You meet with the tax advisor. They’re looking at your return. It’s $2000 flat, I’ll just say that. Patty probably has a link. It’s $2000, but we guarantee that we’ll find you at least $4000 of tax savings, or we’ll just give you your money back. If you run this through and it’s like, ah, crap, I’m not getting any serious benefit, you get $3000, yeah, great, we’re going to give you your money back.

The way I look at it is it’s there’s a way. Patty just gave you the free consult. They’ll talk to you about TaxSaver Pro so that you can see whether that’s something that’s appropriate for you, or whether you just want to talk to an accountant and see if they can save you money.

I always say this, there’s price and value. Price is what you pay, value is what you receive. I’m much more focused on the value side. The price doesn’t really matter. If it costs me $10,000, but I save a million bucks, it’s a good deal. If it costs me a thousand dollars, but it costs me ten thousand dollars because I screwed up, then it wasn’t a great deal. I’m always going to look at what’s the value of what I receive.

Most folks that are successful, that’s what they focus on. That’s what we try to incentivize when people work here. It’s like, hey, let’s be a value add. Let us save you and put money in your pocket so that you’re not sitting there going, dang it, I wish I hadn’t done that or, oh, I wish I had talked to a tax person 10 years ago.

I’ve had people in my office that they realize they’ve been overpaying. In one case, it was about $25,000 a year just because of the way the accountant structured the business. One piece of paper saved him close to $25,000 a year. I still remember it was the S-corp.

I literally got the accountant on the line and said, couldn’t we do this, it’s going to save about $25,000? The client wouldn’t believe me. The accountant was like, oh, yeah, you can do that? The client just lost it. He was turning purple. He was like, why didn’t you tell me? We’re talking about 20-25 years that they’d been working together. He goes, well, you never asked me to.

I’m a spectator at this point. I just watched there like, don’t stroke out here, buddy. It’s just money, but let’s fix it from this point going forward. Yeah, it sucks that you realize that you had an accountant and not a tax planner. You got to have a tax planner on your team, and they’re worth their weight in gold. Eliot’s actually very valuable.

Eliot: I got a lot of weight.

Toby: His whole team is very valuable. All right, guys, if you want free information, you like this type of information, come on in. I think we post the recordings. You guys will get access to the recordings of this. If you want to go back and look at anything, don’t forget to register for tax and asset protection. They’re free. They’re about every other week, and it’s lots and lots of fun.

If you have questions in the meantime, just send them to taxtuesday@andersonadvisors.com. Just know that Eliot is looking at those, he steals the questions, and sometimes we answer them live. We will not call you out and make fun of you. We might make fun of you, but we won’t call you out. Hopefully you guys had fun.

There’s a couple more questions. I want to thank Matthew, Arash, Jeff, Jared still on, Dutch, Amanda, Tanya, Douglas. My gosh, we’ve got a lot of folks there. They’re all kicking butts. We have tax attorneys, CPAs, EAs, and accountants answering those questions. They answered well over 150.  There’s still a few that are left open. What I’m going to do is mute myself, turn off the video for now. But if you have a question that’s not answered, hang tight, they will answer it before we are off. I will say, see you in two weeks.