We’ve reached quite a milestone – our 200th episode! For today’s Tax Tuesday, tax experts Toby Mathis, Esq., and returning guest Jeff Webb, Esq., CFO of Anderson Business Advisors share their expert advice on tax strategies and navigating economic uncertainties, with a focus on rental property and financial diversification. You’ll hear about the complexities of non-recourse loans and taxation, myths and strategies for day traders, taxes on land flips, the best time to do a cost seg, and more. Three lucky listeners will receive copies of our ebook in the episode. Submit your tax question to taxtuesday@andersonadvisors.
Highlights/Topics:
- Is there a minimum net income where it would be beneficial for a single-member LLC to file as an S corp rather than a disregarded entity? – It depends on individual circumstances, but if your income is quite low, you may be able to save a bit if you file as an S-corp.
- Can my rental income be directed into a self-directed IRA and what are the advantages to doing that? – Yes, rental income can be directed into a self-directed IRA which offers several tax advantages.
- I don’t understand the difference between owning rentals as a real estate professional (REP) or non-REP. And what, if any, disadvantages are there when buying a rental inside a Solo 401k using a non-recourse loan? – REP status offers tax benefits, while non-REPs face limitations. Buying a rental inside a Solo 401k with a non-recourse loan can limit potential deductions.
- How is the land flip taxed? Does land have to be held for a year like a house? – Land flips are taxed as ordinary income and there is no requirement to hold for a year.
- Is it acceptable for the IRS to trade futures from a 501c3 or a family foundation entity? Does the entity need to pay capital gains? –Yes, futures trading is allowed but can carry unrelated business income tax implications.
- If you form an LLC for rental property, is it best to report the activity on Schedule C or E? –Generally, it is better to report rental activity on Schedule E for tax purposes.
- When is the best time to do a cost segregation study? – The best time is usually after renovations are complete but it depends on individual circumstances, some you don’t have to wait on, like a pool.
- We fix and flip luxury homes and are thinking about keeping some to rent. We have held some in the past. We have an LLC but the accountant is saying to go to an S corp. – we disagree, investment property should not go into an S corp, it should go into a land trust/LLC.
- We are setting up a family trust in Florida and watch your video about trust Wyoming. The attorney says we don’t need Wyoming, is this true? – The WY trust is a revocable trust. If you’re working on a living/grantor trust, your attorney is correct. Transitioning to an S corp may provide tax benefits.
- What is the best way to pay my children who actively trade in our fix flips bookkeeping? – Consider establishing them as employees and paying them a reasonable wage for their work.
- I understand anyone can gift to anyone in a year an amount not to exceed $17,000 per person. Can I gift from a family limited partnership Units not exceeding that amount, giving them a percentage of the LP units each year? Does it avoid the generation-skipping tax? – Yes, but your gift from your interest in the LP…it can be a viable strategy for tax purposes.
- Send us your questions, and check out the event schedule listed in the resources section.
Resources:
Tax and Asset Protection Events
Full Episode Transcript:
Toby: Hey, guys. My name is Toby Mathis, and welcome to Tax Tuesday. I’m joined by none other than Jeff Webb.
Jeff: Howdy.
Toby: And we’re going to try to make this one fun. This is our 200th episode of Tax Tuesday. It’s been 200 episodes. I have sound effects today, so I have to test one out. It’s Jeff Webb. All right, that’s how fancy I can do.
Usually, you get confetti. You got some gifts. We hit 200, so we’re going to do some giveaways today. We’ll talk about that in a second. Let’s get into the Tax Tuesday rules. You could ask your questions in the Q&A. We have a bunch of accountants on today—Dana, Dutch, Eliot, Jared, Ross, Troy. Jen and Patty are obviously on, and Matthew. We even have Kenny in the house. We have a whole bunch of people there to answer your questions in the Q&A.
If you have comments—like Paul says, Jeff is older and wiser—you can put a comment in chat. Ask your questions in the Q&A. If you have long questions, or you have questions during the weeks when we’re not doing Tax Tuesday since we do this every other Tuesday, feel free to email them in at taxtuesday@andersonadvisorsc.om.
Here’s the thing, though. If you come in and you start asking us to do all sorts of craziness in reviewing returns and stuff, we’re going to say, great, you need to become a client. Sherry, we are having a party and you sound like you’re having a party. You got a hurricane coming down there. I hope you guys are all good in the hurricane path. Let’s pray for you guys.
Hurricane party. Hurricanes are always good at the party like the drink, not the storm. Watch my brother drink two hurricanes and then remove the hurricanes from himself. How do you say that? My brother can’t drink, so there we go. Somebody says, I’m now a tax nut. Play Tax Tuesday like Jeffrey. Kim, I love it. We have good questions for you today.
Before we do the good stuff of the questions, I want to say thank you guys for attending. As a big thank you, we’re going to give you guys a free e-version of the book, Infinity Investing. I got the physical version right here. I was even going to do a reading. Jeff loves it when I do readings, because nobody’s ever heard me read Infinity Investing.
Let me start right here. “Copyright 2021 by Toby Mathis, All Rights Reserved. No part of this book may be used.” That’s why nobody likes me to read books, guys. Anyway, everybody that’s on today, as a big thank you, you get a free version. Just go in. I think there’s a link that Patty just sent.
Here’s the other thing is we’re rolling out coaching on Infinity. It’s not a service right now that anybody can pay for, but we are going to let you guys do the coaching calls. I have four coaches that do a great job. They understand the Infinity system. We’re going to say, free coaching session. I want you guys to be the ones who get the freebie because you guys are the ones that show up and actually do the tax stuff.
Somebody says, I’m beyond help. Nobody’s beyond help. We’re going to do a free one hour coaching call. I just call it a coaching call. I don’t care if it’s 15 minutes, 30 minutes, or an hour-and-a-half. What we care about is that you get an idea, a plan.
What we’re really focusing on, just so you know, is we look at your net worth, your Infinity net worth, which if you don’t know what that is, that’s the number of days you’d survive without working. We blew through all your assets so we can get a number. If you’re not at Infinity, it means that you’re going to burn through your stuff at some point if you live long enough. We don’t like that. We want you to actually have enough income coming in from passive sources, where you don’t have to worry about that.
We’re going to look at your income spread. We’re going to talk about diversification. We use the 30/30/30/10 rule. We’re going to go through all that with you and give you some ideas to get you on a path going forward. It’s a lot of fun.
Somebody says, to follow the accounts online who’s working on my […]. Oh, Robert. Our poor accountants, this is their break. They’re like, I can go on to Tax Tuesday for a second and answer a question. No, we got a big old staff that’s just cranking through this stuff right now. But it is tax season. Give all the accountants some love.
Everybody, thank you for being on Tax Tuesday. I’m still surprised that we have so many people join us every other Tuesday live for these events. I’m still in shock. A lot of you guys hit it really hard on YouTube and watch the recording. I think it’s a kick that people are starting to get themselves educated because a dollar saved in taxes, the time value of that dollar is so important.
When we’re doing cost segregations or bonus depreciation, people never understand like, oh, yeah, I’m going to have to pay the tax anyway. I’m like, well, a dollar today is worth more than a dollar. A dollar today is worth way more than that dollar in five years. We want that dollar today, especially in this economy.
The thank you is a free book. You have a standing offer to have a free coaching call with our coaches who would love to chat with you, and put you on the straight and narrow.
In addition, we are going to draw three lucky winners who submitted questions for today’s episode. We know who you are. Jen and the whole team are going to figure it out. They’re going to draw it and make sure you’re on live.
If you’re on live, you’re going to get two signed copies, Tax Wise and Infinity Investing. Some nut job wrote these. This is actually the fourth version of Tax Wise. I’m going to sign them, and we’re going to send them your way. At the end, we’re going to pick three winners, and it’ll be a lot of fun.
If you’re a winner, that’s great. We love our winners. Winner winner chicken dinner is what we say here in Vegas. All right. Nobody ever admits that they lose. Everybody broke even in Vegas. The casinos built themselves on breaking even.
These are the questions that we’re going to go over today. What if you have both books already? Peter, it’s easy. Now you have gifts that you can give other people. You can be like, hey, I got these for you. I had an extra $60 burning in my pocket just for you. You can hand them. They don’t have to know that you want it.
All right, opening questions. Here we go. “Is there a minimum net income, where it would be beneficial for a single member LLC to file as an S-corp rather than a disregarded entity?” Good question. We’ll get into that.
“Can my rental income be directed into a self-directed IRA? What are the advantages to doing that?”
“I don’t understand the difference between owning rentals as a real estate professional, REP status or as non-REP. What, if any, disadvantages are there when buying a rental instead of Solo 401(k) using a non recourse loan? I guess there wouldn’t be any depreciation.” Good questions thus far. We will go over those.
“How is a land flip taxed? Does land have to be held for a year like a house?” What’s this year thing? He says a year? What is this year?
“Is it acceptable for the IRS to trade futures from a 501(c)(3) or a family foundation entity? Does the entity need to pay capital gains?” Good question. In other words, can you trade futures inside of a 501(c)(3)? We’ll get to that.
“If you form an LLC for rental property, is it best to report the activity on Schedule C or E?” Great question, and it’s going to surprise you. Some of you guys are like, no way you’re going to put it on a C.
“When is the best time to do a cost segregation study? Should I wait until after renovations or before I start fixing an investment home?” Very good question.
Two questions. Somebody’s doing a two-fer. They want to get two sets of books. “We fix and flip luxury homes and are thinking about keeping some to rent. We have held some in the past. We have an LLC, but the accountant is saying to go to an S-corp. We are setting up a family trust in Florida and watched your video about trust in Wyoming. The attorney says we don’t need Wyoming.” Interesting, we’ll get into those, probably.
“What is the best way to pay my children who actively trade in our fixed flips bookkeeping? Is there an age limit or other qualification? Must live at home? My daughter just turned 18 and is going to be attending college, but still will be helping on our properties. I have a C-corp. Do I need to somehow set the girls up as employees and set-up payroll?” Great questions. Very fair questions.
“I understand anyone can gift to anyone in a year an amount not to exceed $17,000 per person. Can I gift from a family limited partnership, units not exceeding that amount? Giving them a percentage of the LP units each year, does annual gifting under $17,000 avoid the generation skipping tax if gifted to grandchildren, nieces, nephews, et cetera?” Really good question. It gets a little complicated, but we’ll break it down and make it easy. Or I should say, Jeff will.
I just walked into this party, and it is a party. They gave me a toy to play with it. If you like this stuff, or if you want to go back and watch any of the videos, go to the YouTube channel. I have a YouTube channel. It’s right there. Patty, maybe you can share out a link to it. Actually, it’s right here. There you go. You can go to the ABA link on YouTube.
My partner Clint also has an equally awesome YouTube channel. His focus is more asset protection. If you love asset protection, you just want a whole bunch of asset protection, go to Clint. If you like tax and some other business planning, then stick with me. You could do both, they’re equally free.
All right, let’s dive into these. Jeff.
Jeff: Can I make a quick sales pitch on your books?
Toby: Yeah.
Jeff: You mentioned Infinity net worth. If your Infinity net worth is Thursday, you really need to get this book.
Toby: You’re like, if you lose your job and you’re immediately out of the street, then we need to talk.
Jeff: If you have an old version of Tax Wise, you really need to get the updated version. Things changed. When was the first edition?
Toby: 2001, I think.
Jeff: Things have changed dramatically since then.
Toby: We’ll keep up just a little bit, even now at the rewrite.
Jeff: You really want to get this and get an updated version.
Toby: Thank God, they didn’t repeal the Tax Cut and Jobs Act. It’s going to expire. I have an expiration day, where we’re going to have to rewrite it anyway. But we’d like to know what the Congress is going to do first.
How do we enter to win them? All you have to do is send in a question, and Jen is going to draw your name. If you’re live, if you’re on, you win. If you’re not, you don’t. I think we’re going to have three winners.
Everybody gets this one, Infinity Investing. Everybody gets an e-copy, I should say. You can get the PDF. We’re going to send it out, and it’s absolutely free. You’re going to see it on Amazon. It’s well-rated. It won a gold medal at a global book award. It’s not junk. This is one of those things, where I steal every idea from our clients that are successful.
I’m unabashed about it. I don’t have a good idea in my head, other than noticing what other people are doing that’s working and say, hey, here’s some stuff you can do, and here’s the stuff. We have about a thousand clients that year in and year out, just kill it. You just sit there and watch what they’re doing. How many streams of income are there? What investments are they doing? Boy, you know what? They’re all doing pretty much the same thing.
Let’s share it. Let’s teach it. Let’s make sure other people are doing it, because we’re tax guys. You got to be making some money for us to do anything for you.
Somebody says, how do I know I’m going to get deductions? Am I going to get to write some stuff off? You have to have income, otherwise it doesn’t matter. If you’re not making any money, you don’t need deductions. If you’re making some good money, then you need those deductions.
Anyway, all right, but if you’re on live, yeah, that’d be tough. I don’t know how you’d respond. We’ll still send it to you with flowers. You’ll be so shocked, you’ll be like, oh, my god, I won. We’ll still send you the books. There it is.
Somebody says, thanks for the PDF, but I prefer the hardcopy. It’s still for sale. You can still get a PDF. It’s not that expensive, it’s $29 or whatever. Okay, we’re going to give you the PDF.
Jeff: You need to work really hard at being a winner.
Toby: Yeah, be a winner. Yes. Jeff, you just hit it on the head. Stop losing. When I go around to the casinos, I follow people and I’m like, stop doing that. It doesn’t go over too well. I can’t gamble. I don’t know about you.
Jeff: My wife got a really nice oven mitt from the casino. I can’t tell you how many thousands of dollars it costs.
Toby: We had an employee win a car once. You actually know who it is, SW. I sat there and it’s like, that’s so great, she won a car. I was like, she must have been there over and over again to win a car.
I don’t think it was the first time she showed up, maybe. Then I started thinking about that going, oh, my God. What are you doing gambling? Stop it. You’re a numbers person. You’re guaranteed to lose all your money given a long enough time horizon. Come on. Stop that.
All right, “Is there a minimum net income, where it would be beneficial for a single member LLC to file as an S-corp rather than a disregarded entity?” What do you say?
Jeff: We typically, throughout the $50,000 number. The savings on self-employment taxes could be as low as $20,000. You’re going to have to set up the S-corporation that’s going to have upfront costs. All in all, you have to calculate the difference between preparing another return, the cost of that, and what you’re actually saving by not being a Schedule C, a sole proprietor.
Toby: Tax savings—all things being equal—is about $25,000 where you save about $1500 a year by being an S-corp. The cost is, hey, I’m doing that extra tax return. It’s actually the same information that would go on a Schedule C anyway. But since it’s an extra return, a lot of accountants are going to charge you for the extra return. So you got to factor that in. There are deductions under an accountable plan that you don’t get as a sole proprietor.
But here’s the thing. You can just change that single member LLC directly into an S-corp from a tax perspective by filing a single document called a 2553. It’s one doc, boom, you’re an S-corp. You just have to, if you’re taking distributions, make sure you’re taking a reasonable salary, so you’re going to have some payroll.
They’re the same. As long as I’m saving something, then it’s right around that $25,000 mark, unless you’re already making a whole bunch of money, in which case, that number starts to slide down. If I am somebody who’s making $50,000 a year, and I have a sole proprietorship, that’s a lot different than somebody who’s making $600,000 a year, and then you throw that money in where it might be taxed at 37%–50% depending on what state they’re in, then all of a sudden, the benefit starts to widen.
The easiest answer to give you guys is it depends on your situation. There is software that we use to run the calculation and say, this is what it’s going to save you on an annual basis. Now, here’s the question, if it saved you $1000 a year, would you do it? That’s the whole juice worth the squeeze.
The other thing that I look at, and I tend to be a numbers nut, I like to really stare at what happens if I do something, how the IRS treats me, the audit rate on an LLC taxed as a sole proprietorship versus an LLC taxed as an S-corp or a traditional S-corp, it’s hundreds of percent difference. When you get around the $100,000 mark, it’s quite literally 800% higher as a sole proprietor, so you get audited more.
What I like to look at is, hey, if I get audited and nothing happens, I don’t care. But if I get audited and lose, I care. You lose 94%–95% of the time statistically because realistically, it’s really tough to be in compliance as a sole proprietor if you’re not already operating like an S-corp. The formalities to the IRS, there’s no difference.
Accountants always say, oh, sole proprietors are so much easier, there’s less formality. It’s not necessarily true, guys. The tax requirements are identical and the tax returns, Schedule C versus the 1120-S are virtually the same. You need a balance sheet on either one. You need a P&L on either one. You need to be keeping good books and records, period. They don’t differentiate between those.
What happens is a lot of people going and thinking, oh, I don’t have to do all these things and separate out my accounts, then they get blindsided when they get audited, and they lose. Plus, there are a lot of deductions you don’t get.
I always use my cell phone. These cell phones aren’t cheap, the data on them. If I have my cell phone, and I’m spending $200 a month on my cell phone, and I’m a sole proprietor, I have to differentiate between the business use and the personal use.
If I am an employee of an S-corp because I set up as an S-corp, I can reimburse the whole amount. There’s an administrative office. They’re using something called 280A, the Augusta exception. What ends up happening is you end up being better off. Troy says, you’ve been listening to me. Anything else to add, Jeff?
Jeff: You were talking about somebody who’s making a lot of money, like $600,000–$700,000. Then the juice isn’t necessarily in the SE tax per se. You can pay yourself a large salary, which means you can pay or contribute greatly to a defined benefit plan. This opens things up more.
Toby: We just did this. I, quite literally two weeks ago, had a consult with a client that was very upset. They were looking at a tax bill of around $50,000. They had a sole proprietorship. What we were able to do is I was able to get them over to an actuary, who had time to do the assumptions, and we could do a DB plan. This is not a joke, eliminate more than half of the tax debt, and we probably could have gotten the whole thing.
You need to have that salary, though, to make it work. It was like we were doing some finesse in 2022. There’s still time to do some of these things, cost segs and 401(k)s, the employer contributions, DB plans, there’s still time. Boom, we were able to eliminate well over $25,000 in tax. Now they have a bunch of money in a tax deferred vehicle that in this particular case, it’s probably 25 years before they’ll need a nickel of it, so it’ll grow tax deferred.
Jeff: Think about what Toby just said. You’re lowering your tax by putting money basically in your own pocket.
Toby: Yeah, it’s in your realm of control. You know what? That doesn’t get enough air time. I always look at it. A lot of people know I use charities, I use retirement plans, and I’m using vehicles to try to get reimbursement. I pay kids. It’s all in your realm. That’s what I look at. As long as a dollar doesn’t leave your realm, I’m looking at that and when I add up everything that’s still in your realm of control.
It’s usually significant if we do a little bit of planning. That’s what matters to me. Some people are like, well, it’s not in my bank account, therefore, and I’m like, hold on, hold on, it’s still within your realm of control. You didn’t pass it off to a third party.
I’ve done this before. Somebody has a 401(k), and they have credit card debt. They have a high interest credit card, 11%–12%, whatever, anything higher. I’m like, borrow from your plan and pay that off. They’re like, I’m still paying interest. To yourself. It’s no longer there’s money going to a third party, it’s all staying within that realm of influence, which is you, and I like that.
Hey, we even have Kurt, I see Kurt on there. We got everybody coming in to help you guys. There are a lot of questions being asked. We like that. All right. Good answer, Jeff.
Jeff: Thank you.
Toby: We got another one. “Can my rental income be directed into a self-directed IRA? And what are the advantages of doing that?”
Jeff: I wasn’t sure exactly where they were going, so I’m going to answer both the possibilities I saw. If you’re trying to sign your rental income into your IRA, you can do that up to the contribution amount if you have other earned income to support that, but it’s still going to be rental income to you, and then you’re just going to contribute it to the IRA.
If you’re talking about having a property in the IRA and moving the income that way, that is frankly impossible. You can’t put any properties you already own into an IRA, self-directed or otherwise.
Toby: Yeah, prohibited transaction, You can’t do it. You got to get it in there. You have to get the money in there and then buy it in there. When you have a self-directed IRA, be aware of UDFI, which is unrelated debt financed income, because you do not get that with a 401(k). I always say that because so many people still go out and buy it in the IRA and get debt on it. Don’t do that. No debt in an IRA.
The hard part here is you can’t use your rental income to put it into the IRA, unless you convert it over into active ordinary income. The only way you’re going to do that is if you have another business. Sometimes you have a corporation managing the thing, but then you’re going to have to pay yourself a salary.
That might work. When you crunch the numbers, you might say, hey, that’s okay, or maybe doing a 401(k), in which case, hey, I’m getting $20,000–$25,000, whatever it is. I’m able to put it into that plan and avoid my income tax on it, then sometimes that pencils out pretty well. But if I just have rental income, I can’t contribute. You got to have that earned income.
All right. Good answer, Jeff. All right, “I don’t understand the difference between owning rentals as a REP or as a non-REP.” What they’re referring to is a real estate professional. 469(c)(7) is if you’re making the majority of your money, spending over 750 hours a year as a real estate professional, you can avoid the passive activity loss rules under 469. Let’s answer that. I don’t understand the difference between owning rentals as a REP or as a non-REP.
Jeff: The big difference if you’re a real estate professional, the income you get from your rentals, or more importantly, the losses you get from your rentals are not considered passive losses or considered non-passive. What does that mean? That means you can deduct them against other income. If you’re not a non-REP, and your properties lose $50,000, and let’s just say you’re making more than $150,000, sure.
Toby: There are four ways. I just did three, but there are four ways to avoid the passive activity loss rules. Dispose of the property, get rid of it. Active participation. You can write off up to $25,000, but it phases out between $100,000–$150,000 of adjusted gross income. There’s a real estate professional, which makes it all non passive. And then there’s real estate that qualifies as a short-term rental. It does not qualify as rental anymore. That’s an exception to the rule. Those are it.
When you’re talking about REP or non-REP, we’re just focusing on one of those exceptions. It doesn’t mean another one might apply. The big difference, like Jeff said, is as a REP, losses are non-passive. I can use it against my W-2 income. If I buy a property and I depreciate it, let’s say I do accelerated depreciation, I cost seg the property, and I get a paper loss. This is a non-cash loss. I didn’t have to spend money to deduct, I just get a non cash deduction.
If I get a paper loss, let’s say, of $20,000, I could go offset my W-2 income if I’m a rep. If I’m not, then that’s a passive loss. It can only be used against other passive income, but I don’t lose it. It flows forward, I carry it forward. If I am in a situation where I can’t use it this year, then I’ll offset passive income for next year.
Let’s go to the next one. “What, if any, disadvantages are there when buying a rental inside of a Solo 401(k) using a non recourse loan? I guess there wouldn’t be any depreciation.”
Jeff: In a Solo 401(k) or any retirement plan, you’re not really worried about your expenses, other than it’s coming out of your 401(k). Depreciation is not really concerned. What you’re really looking for is passive income going into your 401(k) and capital appreciation.
Toby: Sometimes I have money, and I want to buy real estate, and I can’t buy it because I don’t have any money. I went out and I saw a course where it says, buy with no money down, and you realize that it’s really tough to do. It does happen, but it’s tough. You’re sitting on $200,000 sitting in a retirement plan.
Sometimes it’s hard to resist the temptation of saying, hey, you know what? The stock market’s giving me whiplash, and it’s giving me nausea. I don’t like my account going down 20% in one year. I think I’d rather have some real estate, and you could buy it inside of a Solo 401(k). Yes.
But now you don’t worry about depreciation, it’s in there, and you’re going to be paying tax on it at some point. You’re going to have required minimum distributions coming out of that puppy. Even if it’s giving you a partial interest in the property each year, yet that has to come out.
Let’s say you sell the property. You don’t pay any tax on it, but it’s going to eventually be taxed to you as ordinary income when it comes out. But you’ll be retired, and you’ll probably be in a lower tax bracket. It may not be a big problem. But yes, you don’t have any depreciation. You don’t have a UDFI either, so you can have a non recourse loan. You can’t have recourse debt, but you can have non recourse debt.
You have a loan on a property instead of 401(k). It’s not bad. My personal preference is I like the depreciation on my personal side, but there’s probably a good, in some of the groups that I work in, 70%–80% of the properties that are purchased are through retirement plans, and they’re diversifying themselves out.
Again, Infinity Investing, one of the things we do is we do a 30/30/30/10 rule. Part of it is making sure that you’re diversified, and one of those areas of diversification is real estate. You’re not all sitting there with stocks and bonds, and at the mercy of what the markets are doing. You want to be a little more laid out. Certainly, a Solo 401(k) qualifies.
Somebody says, “If you’re a REP, does it increase the chances of an audit?” I haven’t seen any data to back that up.
Jeff: I haven’t either.
Toby: Frankly, if you are a REP, usually you’re doing a cost seg, bonus depreciation, and REP, that’s why people do it. You have an engineered study. I haven’t seen a single audit on those. I’ve been doing this for 27 years, you’ve been doing this probably 40 years?
Jeff: 33 years.
Toby: How many audits have you seen on real estate professionals?
Jeff: Almost none. If you do get audited for real estate professional, the only thing they’re going to be looking at is your hours, making sure that you qualify to be a real estate professional. They’re not going to be looking so much at your expenses and so forth, because at best, they’re going to move it from REP status to non-REP status.
Toby: Somebody says, recourse loans.
Jeff: You can’t guarantee a loan.
Toby: Yeah, you can’t use you personally to benefit a retirement plan. You cross over and it becomes a deal. Somebody says, option programs. Yeah, reach out to Patty. Offered passive management. Okay, somebody is talking about passive management of option trading, probably because we love to do that in Infinity.
I use Kevin Simpson over at DIVO. You can get an ETF DIVO, and they do it. There are other groups, obviously, that are money managers that are doing it. I don’t say either way. I tend to be really cheap, so I go to an ETF, it’s super cheap and I like Kevin, but it doesn’t mean we’re close to other folks. By all means, reach out, and we’ll take a look at it.
“How was land flip taxed? Does land have to be held for a year like a house?” What the heck are they talking about, Jeff?
Jeff: If you’re flipping land, and if you buy a big parcel and subdivide it, or even if you sell it as you originally bought it, if your intention was to flip that land, it’s going to be taxed at ordinary income rates.
Toby: They have one way. It’s less than five, subdivide it, less than five.
Jeff: Correct. If you don’t improve the land and you subdivide it, you can also use the installment method for that.
Toby: Yeah. What we’re talking about is, when you buy something with the intent to sell it, you’re a trade or business, you’re not an investor anymore. You lose the ability to do installment sales, you lose the ability to do 1031 exchange, the income is always ordinary, it’s not long-term, whether you held it for a year, 2 years, 10 years.
The seminal case some point, the guy held it for 10 years before he sold it, and they still classified him as a dealer and made it all ordinary income, no long-term capital gains. It has nothing to do with a year. I don’t know where this year comes from because accountants get lazy and say, if you hold it for a year, they’ll think it’s an investment. It’s not how it works. But if you buy land, there are some, hey, if you’re only subdividing it into three different lots, and you’re not doing a bunch of improvements, they won’t treat you as a developer. They’ll let you treat it as an investment.
Jeff: Outside of that exception, land is very hard not to be considered inventory.
Toby: Yeah. When you say inventory, just think of a mini mart. Somebody buys Cheerios and puts it on the shelf. It means you don’t get a deduction for it. You’re not depreciating land anyway, but it’s the cost of goods sold when you sell it, and then it’s ordinary income when you receive the difference between that money. That’s all it is, you’re just not going to get long-term capital gains treatment out of it.
You’re going to have an issue, because you can’t do installment sales on a trade or business. It has to be an investment property. You can’t do 1031 exchange and a trade or business on inventory. It has to be an investment real estate.
Just keep in mind that the land being held for a year isn’t the issue. I could buy a property. If somebody makes me an offer I can’t refuse, I could still sell it. It’s still short-term capital gain, but it could still 1031 exchange it. If I can show, this is only if you scrutinized, that when I bought it, my intent was to hold it long-term. That stuff happens all the time.
Somebody says, even if you bought it with the intent to build on it. If you bought with the intent to build on it, now you’re a developer, and then you have some issues. It always comes down to what was your long-term investment. Was it cash flow, or was it to improve and sell?
You buy a piece of land, it takes you three years to build and sell, you’re a dealer. You buy land, your intent is to hold it as a long-term investment, you build on it, you depreciate that building, you hold it for years and years, and then you sell it, it’s an investment, so you’re good. Always the intent.
All right. “Is it acceptable for the IRS to trade futures from a 501(c)(3)?” The way we think that 501(c)(3), 401(k)s, and IRAs, is they’re exempt. Can you trade futures in an exempt entity? I think I just answered your question. “Or a Family Foundation. Does the entity need to pay capital gains?” What say you, Jeff?
Jeff: It’s not acceptable. We talked with our buddy, Karim, who runs a nonprofit department. He said the IRS can pursue you for basically being a bad fiduciary.
Toby: If you’re doing futures?
Jeff: If you’re doing futures, yes. Some things are going to be considered extra risky.
Toby: Well, it’s not a tax issue.
Jeff: It’s not a tax issue. It’s a compliance issue.
Toby: Karim is the head of our nonprofit department. He used to work for the IRS. We like him because he looks at things from the IRS eyes. What he’s saying is it’s not a reasonable investment, you’re not being a good fiduciary if you’re doing it. But if you’re trading your own account, you don’t care because you’re not going to sue yourself. Just doing futures, though, that’s not going to cause adverse tax consequences. It’s going to be futures.
Jeff: No.
Toby: I can do futures in a 401(k) if I wanted to. I can do futures in a 501(c)(3). I can do futures in an IRA. Somebody else could attack you saying that, if you have other board members, or I imagined that the attorney general could say that you were not operating in a fiduciary capacity if you’re doing futures, I guess the answer would be, be careful. If you’re trading futures inside of an exempt entity, where they could get you as on the… there we go.
To clarify, cannot invest in speculative investments. You must invest prudently. If you invest in futures, make sure it’s a very small percentage of your assets in case you lose it all. What would be the bad part? Since Karim’s out there, he’s on the Ethernet, and he’s chatting, is the IRS, would they do anything? Or are you talking about it from a state attorney general coming in and saying, hey, you were operating this thing, you ran out of money, and you blew through a bunch of donor money? We’ll see if he responds.
Jeff: Type faster, Karim.
Toby: I know. He uses two fingers both. Here’s the answer. Unless you’re a really good investor, and you’re really good with futures, and you have a track record, don’t do it. Karim, you were from the IRS. Sometimes, I know you heard a lot. If you invest in a small percentage, they won’t come after you. Spoken like a true IRS guy.
Jeff: He’s just trying to keep you safe.
Toby: You have the green lightsaber now, not the red one. Karim and I are going to head down to Bogota, Colombia to watch one of our clients rock it.
Jeff: Did you skip one, or was that my imagination?
Toby: Let’s see. That’s the futures.
Jeff: You’re good.
Toby: All right. “If you form an LLC for rental property, is it best to report the activity on a schedule C or E?”
Jeff: It’s not really a choice. If it’s a long-term rental, it’s going to go on Schedule E. If it’s a short-term rental, it’s going to depend not so much whether you’re materially participating, but what services you’re providing. In that case, it would go on Schedule C. It could be subject to self-employment tax, but hopefully you’re taking tax losses, not cash loss. If you’re not providing services and it’s being managed by—
Toby: Yeah, the rental property, it’s going on Schedule E.
Jeff: It’s going on Schedule. Even the short-term could end up on Schedule E.
Toby: Where you have that weird thing is when you have less than seven day property, and you’re actively participating in it, you’re materially participating in it, and you’re adding significant service. Now you have self-employment tax, and that’s going to go on C. Technically, it could go on E. We’d like to get into fights with accountants, because they’ll take a position that it’s one or the other, and you’re like, either one.
Jeff: Yeah, this was always an ‘ehh’ topic, and then Airbnb came along and blew it up.
Toby: Airbnb wants it on C, I think. It could be as long as you’re paying self-employment tax on it. If you are meeting those requirements, you’re providing services. Otherwise, you could actually have an Airbnb and it still be passive, and it’s still going on E.
“When is the best time to do a cost segregation study? Should I wait until after renovations or before I start fixing an investment home?”
Jeff: My answer is going to vary from what I originally thought, because I would originally have said, wait till you get the renovation stuff. However, there are certain renovations you don’t need to wait on.
I’ll go to my traditional one, I’m putting a pool in the backyard. You know it’s going to be a 15-year property, you don’t care about that for the cost segregation. You don’t need to break that out. So go ahead and do your cost segregation. But if you’re tearing out kitchens, bathrooms, and stuff like that, you’re probably going to include that in the cost segregation. That means accumulating your invoices and giving them to the cost seg people.
Toby: Yeah, not too difficult when you’re doing improvements to property to figure out. The cost seg helps because it can figure it out. Let’s say that I’m going to do a renovation, and I’m going to get rid of the roof, I’m going to change out the carpet, I’m going to do a bunch of that stuff. I get a cost set done beforehand, and now I know what the value of all those items are. When I get rid of them, I can take them out of service and write the rest off the portion that I haven’t depreciated, so I get a big fat depreciation there.
Now, also because when we’re doing a cost seg, we broken the property into 5, 7, 15 years, 27½, or 39 years. We know the structural property, and now we know what the personal property is too. When you’re doing the rehab, it’s really easy to figure out on a rehab, because you have invoices on what property goes where. It’s really, really easy.
I think a lot of folks would say, hey, do the cost seg ahead of time, because it’s going to help you when you get rid of property, because you can take the rest of that deduction right now. A lot of people don’t do that. If I replace my roof, and I’ve only depreciated it for 3 years, on a residential property, I have 24 years of depreciation on the roof that I get to take home right now. Even though I’m improving, I’m putting a new roof on there, but I got rid of the old one.
Somebody says, are there any cost seg companies that you can recommend in Florida? Yeah, we use one. It’s a CPA firm. Their headquarters is in Draper, Utah, which is near one of our offices, and they’ve been fantastic. Cost Segregation Authority, Erik Oliver. We can get you a very easy link so that they’ll do a free analysis, but they have engineers all over the country. They will send somebody. Wisconsin, too. They do them all over the country.
What really matters when you’re doing a cost seg is the engineer going in, or they do a walkthrough video. As long as they get an idea of what the property is, and chances are, they do thousands that they’ll know some of the areas. It really comes down to it.
Anyway, that’s it. Really, I like to see it going into service. We like to see it going into service. As you fix it, you might be able to write some of that off as opposed to adding it to the basis.
More free stuff. We do lots of virtual events virtually every week. It looks virtual. That’s very descriptive. We’re doing a live event, a four-day event here in Las Vegas on September 14th, 15th, 16th, and 17th. I’ll be speaking at that. Troy will be there. I know Erik Dodds will be there. Jake Lamour will be there. I think I even have Shane Sams.
Clint does a bunch of the heavy lifting. Amanda Wynalda will be there. We have a really good crew coming in to teach for four days. If you’re interested in that, you can absolutely take a look. They usually sell out. I don’t think this one’s sold out just yet. Last year, it sold out in December way early. This one, I think we still have room. But we want to get you registered so that we know how many people are coming and make sure that we have accommodations for everybody.
The one day virtual events, they’re free. For the four-day live event, any CPE? We didn’t go out and get pre certified, but you could take the agendas and get it certified after a bunch of our courses, because I do this. When I’m doing my CLEs, I submit the agendas and the slides. They always give us, when it’s a day, usually eight hours. You can always try that.
I can’t guarantee it, but most of our courses have qualified at some point. We’ve done a bunch. The one that’s the hardest is the realtors because sometimes they want a bunch of stuff and money ahead of time to get qualified. But sometimes, you can do it after.
Somebody says, we’re Platinum and Infinity members, do we get a discount? I would send you the link. I don’t know off the top of my head. They try. Patty will talk to you. Jen will talk to you. We’ll make sure that we’re getting fair.
I think we had a two-fer going on. Jen, maybe you could tell me, or Patty. What’s the cost of the event right now? These guys are signing up, because I don’t want to click on links, so I’ll somehow probably cancel this whole event if I touch anything. I’m one of those techno guys. I’ll touch it and it will go away. What is it, Patty?
Patty: Executive is $699, where you buy one get one free. Premier is buy one get one free for $599. A member is buy one get one free for $399. It’s all in the link and check it out.
Toby: What are members? What’s $399?
Patty: $399 is Anderson Titanium Platinum clients only.
Toby: Titanium Platinum, you get $399, four days, $100 today. It covers the cost of the room, maybe. That will cover the cost of a gallon of coffee in Vegas. That’s about what it gets. Yes, Patty rocks.
Brian says, I’m attending. I’ll see you there. The last time I was at a live event, my head almost exploded. John, that is good, I think. You don’t want your head to explode. But it’s a lot of fun. We get to goof off and hang out together. It’s different.
Since Covid, we don’t get to see people face-to-face so much. It’s always the virtual stuff, which I liked. It’s so much cheaper to work with people. It helps with the costs. What’s the max attendance? I think probably around 500 is always where we go. We’re usually right around that 400 mark. We don’t overbook them so that we never want you to feel like you’re crammed into a ballroom, so it’s plenty of space.
Frankly, we really like to be able to meet with everybody. We always keep it under queue, we’re not going to go crazy. It’s so much fun to get to hang out with people and get to meet them. If you’ve done this before, you know. If you’ve been to events with us, you know that we’re pretty easy.
I live in the same town as Clint, how can I buy him a beer? Oh, you’re up there in Gig Harbor. You just tell him that you’ll take him fishing. Live events felt so comfortable. I thought I should have taken photos. You should have, Greg.
No more Harley rides for us. We’ve done Harley rides. Sherry and Dana, we went right around here. We’ve done events, sometimes we hop on the bikes and being good since right in front of me, somebody laid one down while my wife was on the back. She’s like, stop the bike. That was the last time she was on a motorcycle. I was like, hey, they didn’t hurt the bike too bad. It doesn’t go over well.
All right, free giveaways. Is this where we’re giving it away, guys? Are we drawing it right now, or are we just telling them that there’s a giveaway? You guys get the free. Okay, at the end, we’ll give it away.
You do get the free Infinity Investing if you just came on. We’ve had about an extra 200 people pick up since we started. Anybody on, because this is our 200th episode, gets a free digital copy of Infinity Investing. As an added benefit, you can meet with one of our wealth coaches. What they’re going to do is they’re going to crunch your numbers.
I always say, if you went into a hospital, or if you went into a doctor’s office, they’re going to put you on the scale, and they’re going to take blood pressure readings. That’s what we’re doing. We’re going to look at your net worth, we’re going to look at your Infinity net worth, we’re going to look at your income spread, and we’re going to take a look at the diversification of your assets.
If you’re high net worth, we’re probably going to have you work with a financial planner who’s going to do those things and look at it. If you’re just getting started, you work with our regular coaches. If you’re mid level, you work with our regular coaches. They’re excellent. All we’re trying to do is say, hey, how can we make sure that nobody hits their head on a crossbeam on the investing site? We don’t need to learn that way. We can learn from everybody else.
The Infinity Investing book is absolutely free. If I’m a Platinum member, can I get the PDF without the sales funnel stuff I’m already doing? Yes, Bryce. Literally, you’re going to get the book. If you want to do wealth planning, they’re going to send you a calendar link if you want to, and that’s it. It’s an invitation. You don’t have to do a coaching session, although I like the coaching because I teach the coaches. That’s fun.
Somebody says, do we get a link for the Infinity copy? She just sent it, so take a look. Tax Tuesday 200, you’ll get it. Before the end, we are going to pick three winners that submitted questions. The three lucky winners will get copies of Tax Wise fourth edition and Infinity Investing. The hard bound books signed by me.
You should sign them, too, even though you didn’t write them. That’d be fun. Jeff and Toby, because then nobody has a Jeff signed book. That’d be very unusual. I think we’ll do that, because Jeff has to sit and deal with these shenanigans over the years. It’s a lot of fun.
All right, here we go. We got more. Two questions. “We fix and flip luxury homes and are thinking about keeping some to rent. We have held some in the past. We have an LLC, but the accountant is saying go to an S-corp.” Let’s answer that one first. What do you say there?
Jeff: I’m going to disagree with your accountant. I don’t like property in an S-corporation. I’m okay with it if I’m just flipping the property. But if it’s an investment property, I prefer not to put it in an S-corporation.
Toby: It’s here. It says we fix and flip. I’m thinking of keeping some to rent. The problem is if it goes into the S-corp, getting it out is a taxable event. Even if you take it out to refi, it’s a taxable event. Let me give you some advice that you’re not going to get from your account.
I would put it in a land trust. I would have an LLC that is either taxed as a partnership or is disregarded to you depending on your tax situation. If you have a holding entity, it makes it even easier, but I would have it to where it flows down to your return on your Schedule E. I would have a second entity, an LLC taxed as an S-corp for the flippers.
The reason I would do it this way is because we just basically have, at one point, usually 10 months after the end of the year, you’ll have to tell the IRS what your decision is and make a firm decision as to which entity it is.
Until that point, if I have it assigned to the wrong entity, I can fix that. Nobody’s the wiser. It’s not a public record. It just makes it so much more flexible for me in case I want to keep that property. If I start off flipping and I’m like, oh, shoot, I really want to keep this one, I don’t have to go through and reinvent the wheel. I can just go ahead and cancel that assignment from the land trust, the beneficial interest. I can assign that to the correct entity and make sure that it’s sitting in the correct entity when I file its taxes.
Jeff: Is it illegal or immoral or unethical to put it in the S-corporation? No, it’s just I don’t feel it’s wise.
Toby: If you’re flipping, I’d put it in the S-corp, because it’s dealer property. I want to make it easy for the IRS to distinguish. Here’s property that I bought to sell, here’s property that I bought to hold. If you’re vacillating between it, it’s when you file your tax return that you’re declaring your intent. We want to make sure that we do it and give ourselves the option.
Question number two is, “We’re setting up a family trust in Florida and watched your video about trust in Wyoming. The attorney says we don’t need Wyoming.”
Jeff: When I read this question, I felt like you were getting your trust mixed up, because typically a family trust is going to be an irrevocable trust. Whereas the trust we’re talking about, the Wyoming Statutory Trust, is a revocable trust, grantor trust, and so forth, that doesn’t have the same consequences as an irrevocable trust.
Toby: Florida didn’t recognize the irrevocable asset protection trust up until this last year. What I would say is this is a family trust. Jeff, you’re absolutely spot on. When I see family trust, I either think living trust, or is this something that’s an irrevocable trust that said upholding. If it’s a living trust, grantor trust, then your accountant is right. You don’t need Wyoming, there’s no reason.
Frankly, in Florida, you don’t really need the LLCs either, especially a debt on our property. The doc stamp fees apply to an LLC, but in a land trust, it does not. Land trusts have a statute in Florida that gives you protection just like an LLC. Florida is the home of the Olmstead case, where they pierced a single member LLC anyway.
We tend to be like, hey, you know what they didn’t pierce, the land trust, because it’s pretty clear that there’s no other remedy. We generally take that land trust beneficial interest and assign it out of state anyway. We want to get it away from Florida. There might be a happy medium here.
If you’re doing a family trust, I guess the question asked is, is it irrevocable? Is it something where you’re trying to avoid the estate tax so you need to have a third party trustee? Or you’re using it for some other purpose? There might be something we don’t know. I would be happy to help if you can get the answer to those questions, because we’ll make sure that we take a look at it.
We could certainly help you with that. You can reach into us. That’s one of the things that we would do in a primary review too. I don’t care if you’re a paid client. We can help you get some direction on that as a courtesy.
All right, let’s go. “What is the best way to pay children who actively help and are fixed flips bookkeeping. Is there an age limit or other qualifications, must they live at home? My daughter just turned 18 and is going to be attending college, but will still be helping on our properties. I have a C-corp. Do I need to somehow get the girls up as employees instead of payroll?” What say you?
Jeff: I actually prefer to pay out of a C-corp, because you’re supposed to be managing your properties. It really doesn’t matter for the 18-year-old. However, if you have younger children, and you want to avoid employment taxes, they need to be paid out as a sole proprietorship or a partnership if that’s the case.
Again, they’re living at home, the 18-year-old doesn’t matter. She’s just an employee. But anybody 17 and under, they need to be living at home, being supported by their parents, and so forth. You have that mix going on. If that’s the case, and they’re being paid out of a partnership or sole proprietor, you don’t pay any FICA, Medicare, and certain other taxes, unemployment.
Toby: The only reason I see here is that it’s a C-corp, probably because they’re doing flipping. It’s not investment, it’s trade or business. Daughter that’s 18 going to college, I think you’re going to have to put her through payroll. The beautiful part is she’s not going to pay tax on $13,850 at a minimum. That’s the standard deduction.
She’d have a little bit of employment tax, it’s not huge. What it all comes down to, it’s about 14%. But if you’re paying her more, you could actually jam a bunch. You can put $13,850 into a Roth 401(k), believe it or not, and pay zero tax. I’d be doing that. You do that for a few years, and the retirement is already done. When you do the math on it, it’s pretty crazy.
But if you want to put more in there, if you’re saying, hey, she’s making $30,000 a year, you could probably get a substantial chunk of that. I know that you could get at least $22,500 of it directly into a 401(k), write it off, and not pay tax on it. You’d have the employment tax only, which is going to be a peppercorn compared to the total amount.
The tax savings over the next 60–70 years, is that money grows, or is it just going to be mind boggling? You just let that money compound. Put it in ETFs, put it in dividend stock, let it just compound, give it time, and that cake is going to be so big and juicy when your daughter is getting older, and she’d be able to use some of those funds to buy a house and things like that. There are some ways to get money out without penalties. To the extent that you guys can do this, do it.
There’s another way. I did this with my daughter. When she was going to college, I set up a separate company. I was the manager of it, and she was the member. I use that whenever she does activities for different businesses. I always use it for social media. I didn’t control her schedule or anything like that. I said, here’s what you have to do, just like I would any other contractor, and then I paid for it. And it all flowed down to her return.
In her case, it was a Schedule C because she wasn’t really making any money. At the end of the day, she had zero tax on almost every year, because she’d make $10,000–$12,000 and free money. We put it right into our retirement plan. It works.
Jeff: Let’s say this young lady, she’s 18, and she’s starting college. She’s going to college full-time, and she’s working part-time for our parents. Do you change what she’s doing? Do you pay her more and then have her pay your own tuition?
Toby: It’s always the thing. When a parent is paying for their children’s expenses, and you’re paying it with your after-tax dollars, you’re paying a substantial amount of money. I use $10,000. If I’m paying $10,000, I probably have to make about $15,000. I paid state, federal, social security, Medicare. When you add it all up, it’s about, according to the Tax Foundation, right around 29%–30%. I had to pay $5,000 hit.
If I paid the child and let them pay the tuition directly, I would save $5000. But I have the mind like, hey, you know what, I’ll still go ahead and pay the tuition. I’ll take that little hit, and that $5000 is going to seem like a peppercorn if I can get money into a Roth and into a 401(k).
Let’s just say that it was $6000–$6500, he got into a Roth. The compounding on that over the next seven years is going to be ridiculous. If we could do that every year just for five or six years, I don’t have the numbers in front of me, but there’s a good chance you just made her a millionaire.
If you did covered calls, did sector rotation on your ETFs, just listen to Erik in the Infinity realm. You know who Erik is. He runs our advanced trading room. It’s really awesome. It’s three days a week. You can go there and say, hey, what should I do with this money? They’ll show you sector rotation on ETFs. They’ll show you, here’s an easy way to play the SPY to make a little bit of extra money.
If that’s all you did, just went in there once in a while, a bunch of people are already giving the thumbs up and the confetti for Erik because he does such a great job, it’s really straightforward. We don’t do crazy option trading. We want to be at the casino. We want to make sure that you protect your principal, but that you don’t just leave it there for free. We want to rent it in rental. The stock market is covered calls. We show you guys how to do that.
Somebody says, do we need to set up the girls as employees and as payroll? Here’s the other beautiful part. You get your daughter. Let’s say that Jeff’s daughter is working for his C-corp. Daughter needs this to work for the company. especially if you’re doing social media or bookkeeping in this case.
You said, hey, can you do the books remotely? I won’t control when you do it, because you’re at school, you can be doing it at night, you can be doing it early in the morning, whatever. You sit there, and now you can reimburse for the cell phone, for the computer, everything, and it’s tax-free. Now you’re starting to write stuff off that’s 100% tax-free because she’s an employee. That is another trade-off.
You start looking at those things. You say, what’s the best route to go? The answer is always going to be, it depends; I hate to say that. You’re going to say, all right, what are the expenses? Is she a new MacBook-every-year type person? What type of degree? Maybe it’s engineering, and you’re using far more robust computer equipment, things like that. Can it be used for the business? Because the business can write that off. And then you get it.
Somebody says, that’s a study out by Fidelity that shows exactly that day traders lose money, people who do their best, and the people who don’t touch their accounts. There are 79 different studies that were out of Schwab that did all these things. The big one was out of Taiwan, where 98% of the day traders over a 15-year period lost money, which is scary. That’s been our experience. We saw about 80% losing?
Jeff: Yes.
Toby: You say that to traders, and they’re always saying, it’s because you’re doing it wrong, or you’re not following the rules. I’m like, okay.
Jeff: I have a little bit of an issue with people who think that they’re smarter than the supercomputer who was going to calculate constantly.
Toby: They already know what you’re going to do before you do it. It’s going, I know you’re going to do that. They’re like, maybe I’ll do this. I know you’ll do that next. What about this? Goldman Sachs had a perfect trading year, where they didn’t lose money on any trading day. That’s all you need to know. That’s who you’re going up against.
I always say, hey, you learn to dribble. You get on the court in front of the NBA. You got King James there in front of you, Lebron James. He says, let’s do some one on one. You’re like, I learned how to play basketball. You dribble up there, and because you learned how to do a hook or something that somehow you’re going to be able to compete with him. He’s going to smash it. His whole goal is basketball, basketball, basketball. That’s what you’re going up against when you’re day trading. How did we get there?
Jeff: I have no idea. Somebody asked the question.
Toby: I know. Let’s get out of this one. There are more questions, but somebody is talking about it.
Jeff: If you’re wondering why we’re going long, it’s to make you wait to find out who the winners are.
Toby: Did we go long? Oh, shoot. All right, this is the last question. “I understand anyone can gift to anyone in any year an amount not to exceed $17,000 per person. Can I gift from a family limited partnership unit not exceeding that amount? Giving them a percentage of the LP units each year. Does annual gifting under the $17,000 limit avoid the generation skipping tax if gifted to grandchildren, nieces, nephews, et cetera?”
Jeff: This was a really good question. It’s $17,023. I don’t expect it to go up next year, because it’s taken a couple of jumps recently. I will correct one thing. You don’t gift from the family LP. You gift from your interest in the LP. I could give Toby a portion of $17,000 worth of my entity.
Toby: You could do it two ways. I could give money to somebody from the LP, and it would flow through onto my return, all the limited partners. That’s a problem. If the LP gives them something, it’s the same as the partners giving something in proportion. Or I could give Jeff $17,000 of LP units.
If it’s mom and dad, and they got a couple of hundred thousand dollars in an LP, they could give a portion that represents $17,000 to each of their kids. You’d go nuts. I’m going to gift $17,000 here, $17,000 there. If you want to give more, you can. It’s just now you have to file a gift tax return, and it goes against your lifetime exclusion amount, which this year is $12,950 or something like that. It’s $12,950,000. Almost $13 million, you’d give away tax-free per spouse.
Now, generation skipping tax is if it’s 37½ years. If somebody is 37½ years younger than you in your giving, then you’re going to use your lifetime exclusion against that. What they don’t want is you to give it to a grandchild and skip a generation.
The IRS wants to tax each generation. They want to hit you. They’re like haha. I’m going to use that against these people. It’s all it is. But if you’re just giving $17,000 a year, you don’t have to worry about any of that. None of it. You get a big win.
Jeff: I’m going to put one caveat on it. If your family LP has any hard-to-value assets in it, you’re going to have to get them valued every time you give a gift to see how much of that…
Toby: Unless you’re just doing it raw. If you have fair market value that you could ascertain, and you’re not taking discount valuations, we used to get nutty on discount valuations. When estate tax exclusion was $600,000 we would get nutty. Everybody’s fighting, because you’re just trying to get it. You’d get 48% discounts on assets trying to get them to somebody else so you didn’t get killed in taxes.
Jeff: Minority interest and so forth.
Toby: I gave away $13 million. Can we have to gift it under your name? Yeah, it’s going to be a hell of a conversation. I know this one. This is for that conversation.
Jeff: I was just glad I didn’t get any buzzer for wrong answers.
Toby: I could do that. I don’t know when it would be the wrong answer. All right. You should never have given me this. I’d start making my own sound effects here in a second.
All right. You could go to YouTube, and you could see recordings of this. What we really want to do is give away books. Speaking of giving away, we give away virtual events. We have live events here in Vegas that’s coming up in September. I think we just talked about that a minute ago, so I’m not going to labor it.
I didn’t even think about that. Rest in peace, Bob Barker, a World War II naval aviator and a lover of animals. For sure, I think that’s the one thing people never really understood. He was always talking about spay and neutering. You just hate to see animals suffer.
I was just on the big island of Hawaii where they have feral cat issues. They have a half a million cats, they don’t know what to do. It’s really sad. It’s like you need to spay and neuter, where they’re just going to take over. You can’t feed them anymore.
Clint, my partner, likes to feed the cats. He can’t do that anymore. Somebody says, so you can gift up to $12 million, but only $17,000 a year? Somebody’s going to answer that. You can do $17,000 a year per person per recipient. Husband and wife could do $17,000, you’d have to report it. You go above that, you’re using up your lifetime exclusion.
If you have questions, you can always send them in taxtuesday@andersonadvisors.com. We want to go over our giveaway winners in the meantime. You guys get free stuff. You get the free Infinity Investing ebook. There are three people, do you have the names? Perfect. Hardcover book winners.
Jeff: Can we get somebody in here younger to read this?
Toby: I don’t know if that would do it. All right, number one, David Hisel. Congratulations. You are a winner. Oh, drumroll. Alicia Thomas, number two. And Kevin Pope. We have Alicia Thomas, Kevin Pope, and David Hisel. I just want to say, congratulations. Thanks for being on.
We will sign up. We will sign some books and get those sent out. We will make sure that we get that out to you guys. Thanks again for joining us for our 200th episode of Tax Tuesday. I got to say a big thank you. I got to say thank you to Jeff. I got to say thank you to Ronnie Withaeger who did this. I want to say thank you to Kurt. I want to say thank you to Eliot.
I think even Mike Bowman has done these over the years with me. I remember doing one in Hawaii with Michael. He wanted the questions ahead of time. I was going to pick all the new questions.
I was just going to mess with him, but I didn’t because that would be very, very me, but I should have. I want to see him sweat. You guys know Michael. He would have been so mad, it would have been fun. But he was awesome.
I just want to say thanks again. Two hundred episodes isn’t something to shake a stick at. It takes a lot of years and a lot of dedication. Again, this is not a paid event. Everybody’s donating time. You had Jen, Matthew, Kenny, Dana, I’m going to see if I could go through a list of people that are on right now answering your questions. Dutch. Eliot, Jared was on, Ross, Sergey. Sergey is awesome. Troy. Who else did I miss?
I think that’s everybody that’s on right now, but there are folks that come on and answer your questions and that always rocks. When will this recording be available? Erica, we’re going to send that out usually within a week. But more importantly, we’ll probably send you guys out that link again to make sure that you guys are getting a free copy of your ebook, Infinity Investing.
If you’re wondering, hey, is it different from what is actually sold on Amazon for $29? It’s the exact same thing. We’re just giving it away, and the free coaching session. You can sit down with those folks with David, with Chris, with Rob and Tate. Those guys do a fantastic job.
We can make sure that, especially in this economy, you’re not doing anything crazy, and that you’re getting a good second opinion sometimes, or getting led down the right path, because there’s so much crap information out there. We’ve been through this. We’ve been through a number of recessions. And we’ve watched what works and what doesn’t.
Follow us. We’ll make sure that you stay out of harm’s way. There are going to be lots of opportunities. We just know it will come in the future. Anyway, thanks again. We will see you guys on the next Tax Tuesday in a couple of weeks. Good luck to you guys.
