Tax Tuesdays – March 19, 2019 EP 87

Tax Tuesdays – March 19, 2019 EP 87


(upbeat music) – [Toby] Hi guys, this
is another Tax Tuesday, this is Toby Mathis and– – [Jeff] Jeff Webb. – [Toby] Alright, so just let me know that
you can hear first of, We always love to make sure that you guys can actually
hear what we’re saying, looks like everything’s good. Fantastic. And we are just going to dive right in, we have a lot to go through, there always seems to be more than we can actually seem to hit in one show, so that’s a good problem to have I guess, because it means there’s lots
of people asking questions. So let’s just dive right on in, first off the ground rules, you can ask live and we will answer before the end of the webinar, I do go over most, but anything I can get
unless you write me a book I’m going to try to
knock out your question. If you do write me a book
we’re going to say email it in, and if you are platinum we’ll answer it, if you’re not platinum, then we’ll have somebody contact you to see what it would take to become, so we can give you a very
detailed fact specific responses. This is supposed to be fun, you’re supposed to be looking at taxes as something that’s enjoyable, because it’s a very rewarding subject. If you learn how to handle your taxes you can put a lot of money in your pocket, and folks that really understand tax, including whether you like
them or not are present, and happen to be very
good at understanding tax, and has used the tax laws to his advantage probably to the point where he doesn’t want you to see his tax return. Because most people would say
how the heck did you do that, that’s not fair. But anyway we won’t get
into all that fun stuff, it is what it is, the tax laws are written, I take no stance on them other than we’re going to
take advantage of the ones that we can and use them to
the best advantage that we can. So it should be kind of fun, it’s kind of like a Rubik’s Cube, unless you hate Rubik’s Cubes. Alright new stuff, and then I’ll quit doing this eventually. But new things is hey you guys can come in and listen to the recordings, anybody registers you
can have the recording, I also put them into our podcast, I break them into pieces so you can get doses if you like watching the Tax Tuesdays you can hop into our, somebody just said they’re looking, I can’t hear anything. If you’re having trouble
hearing everybody else can hear, chances are you need to put it through your computer speakers, or you can dial in, either one will work. Somebody saying hey I’m having issues. Maybe Patricia, hey Patty, if you’re listening maybe you
can reach out to that person. So archived recordings, you can go in there and pop them in, we also make them into podcasts here, I’m going to show you
some of the podcasts. Here’s one from iTunes,
you can go on there, we do a lot more than
just the Tax Tuesdays, but if for whatever reason
you have to leave early, and there’s topics that you
saw that you wanted to hear, or you had a question and you said, geez what did he say about that, you can go back and do
it on a podcast too, you can always watch the screen, but sometimes it’s better
to just listen to the audio. Google Play has us, Anderson Advisers by the way is what you write in either one of those, so it’s Anderson Advisers Podcast, Anderson Business Advisers
Podcast on Google Play, so either one you will be
able to get in their free, so you can come back in and listen. Opening questions, we have
a whole bunch to go through, so property aggregation, what is it and why would I want to do it? Next question is what happens if I forget to file a form 8606, which has to do with a
non-deductible contribution to our retirement plan, a.k.a. a Roth, is there any other one
that you would be doing? – [Jeff] No you can make
non-deductible for traditional. – [Toby] Yeah, yeah, yeah that’s right, you can do non-deductible. Is acting as a partnership representative a prohibited transaction with
some of the new tax laws? What principle address should I use for my LLC if I work from home? Can paying my minor kids for their work in my business offset taxes? Do I have to file returns in each state where I
own a rental property? That’s always interesting. And then of course you guys
can ask questions live, but let’s dive into these ones first. Property aggregation, what
is it and why would I do it? Do you want to knock this one out? – [Jeff] Property aggregation, this has to do with the
participation rules, material participation
and active participation. Same basically that you have enough hours. The material participation rule says the primary one says you have to have 750 hours of an activity. – [Toby] Material participation or the real estate professional. Material I think is
500, not to mince words. – [Jeff] No that’s fine. – [Toby] So you always have two things. You have hey I’m a real
estate professional and you actually have to meet both the material participation and real estate professional 750 hour with it being more than 50% of
the use of your working time. You have to meet all of those, and its per property unless you make an aggregation election. – [Jeff] Or as I say per activity. – [Toby] Per activity,
that’s a good way to put it. So if you’re going to be
real estate professionals, since we deal with a lot
of real estate investors, you have to make the property
aggregation election, otherwise you literally, there is actually a court case on this where you would have to qualify and spend the time on each property. Now the court case screwed it up, because they did 750
hours on one property, and I think it’s actually 500. But neither way what you look at is you have to meet the time tests, and if you don’t want
to do it per property you make an election to treat
them all as one activity. – [Jeff] And the whole idea
behind this is to convert from passive income to non-passive income. The one problem you may run into is if you have a bunch
of past losses built up, and then you aggregate the property. Normally when you sell property you release all the
losses from the property, once you aggregate all your properties you can’t release any of those losses until you sell everything,
all the properties. – [Toby] Right, it’s all one activity, so it’s one property as far
as the IRS is concerned. Alright, so why is it and
why would I want to do it? If you’re a real estate
professional you could write off the passive losses
against your active income, because it’s no longer passive, it’s deemed passive unless
you meet the exception which is real estate professional status. So when does somebody use it? You use it when you are a
real estate professional, that’s really what it boils down to. – [Jeff] And it can have a
substantial effect on income. – [Toby] Yep. What happens if you
forget to file form 8606. The IRS beats you with a stick. Actually there is no penalty, they let you go back whenever, in fact you don’t even
have to file a tax return, we were looking at this about an hour ago digging into it going, Jeff and I were kind of like, maybe we have to file a return. No you don’t have to file a return, you don’t have to do anything, as long as you’re letting them know, and all we’re doing is saying hey, I made a non-deductible contribution. The idea is your letting
them know there’s something in there that you put in that you are not taking
a tax deduction for. – [Jeff] Right, the one other
time you’d use this form is if you change a
traditional IRA to a Roth IRA, that also runs through this 8606. – [Toby] So when you took a traditional– – [Jeff] Because you have
to recognize the income. When you convert it. – [Toby] But they are letting you go back, so again, there was this what happens if you don’t, they are glad you’re filing
it and you can lump them up. I’ll tell you what, this
is one of those plugs of why you use a tax professional, because the software
will trigger this thing and create it for you, most people have no idea
that this form even exists, in fact there’s a bunch of folks
asking what the heck is it. If you make a contribution to a Roth you’re letting them know by the way I put money into this thing. And now they know, and that way when you
take that money back out, it offsets that amount. They know that you can
always take that money out any time you want,
there’s no five year test, there’s no waiting till
you’re 70 and a half, you can just take the money back out. So I hope that makes sense. – [Jeff] Yeah, and this form is important, if you have done a back door IRA, a back door Roth IRA where
you’re making too much money to make the Roth contribution, you’ve got to file this form to get that base in that Roth IRA. – [Toby] Yeah, so the back door IRA, I’ve always thought of
it as something else, so you’re talking about hey, I am phased about of being
able to do a Roth IRA. – [Jeff] So do a
traditional contribution– – [Toby] And then convert it. – [Jeff] And then convert it. – [Toby] And there is no limitation on what you can convert, so you do that, but again that’s
interesting, there you go. I always look at it as when you’re dumping money into
the solo and using that, but it sounds so sordid,
we did the back door IRA. There is just something wrong about that. Is acting as a partnership representative a prohibited transaction? Do you want to knock that? – [Jeff] No, that’s all you. – [Toby] This is not push back, I’m going to throw this to Jeff. So a partnership representative, there’s new rules on what used
to be a tax matters partner, which meant someone who
was responsible to deal with the IRS in the event they
were auditing a partnership. Because for those of you who pay great attention
to partnership taxation, partnerships don’t pay tax, they pass the tax down to the owners. So if you have a partnership which is two or more
individuals or entities acting in concert for business purposes, if you meet that test you have to file a 1065 every year, which is an information return, and what this says is hey, we now have one party and we are going to assess the
tax at the partnership level, so this is kind of weird. Now, certain people can opt out, but I can just tell you
none of our clients can, because you are entities. You would have to be individually owned and quite often you look at that and it has to be less than 100 people, and they could say we are
going to opt out of this and still use a tax matters partner. All this is a fancy way of
saying who the IRS deals with, who’s the party that they deal with. Not this is why it’s important, when I see prohibited transaction I’m now thinking you’re
dealing with somebody who is investing through their IRA or 401(k) in a partnership. So let’s say that you have
two IRAs investing together in a transaction, or better yet actually
the IRS uses an example of you have company one and company two, and company two as an exempt organization, it’s an IRA or an LLC owned
by an IRA, or a 401(k), you can fill in the blank. That party doesn’t pay tax
on receipt of the funds unless it’s something called UBIT, but we’re not going to worry about that. What they are saying is, let’s say their owner is in a building, the reason it comes up is because when the partnership is being audited, you could say you
shouldn’t hit us that hard because part of us is owned
by an exempt organization. Now the party that is a participant in that exempt organization, so now we have gone through
two different levels, we have the partnership, we have the owner of the partnership, and now we have the participant in the owner of the partnership when that participant
is an IRA or a 401(k). So we’ve broken it down into pieces, they are a prohibited
or disqualified person as far as self-dealing with entering into transactions with
that exempt organization, the IRA or 401(k) with
very few exceptions. Are they a prohibited person from being a partnership representative? The answer is no, not
as far as we can tell, there’s nothing out there, in fact if your IRA was audited you are allowed to defend it. If your IRA is ripped off you
can start a lawsuit against the party who ripped you
off and all of those things, you’re allowed to do
administrative activities on behalf of your IRA. – [Jeff] You did really good on that one. – [Toby] That was a break
down into little pieces. Lots of questions have been coming in. Is a partnership income
and an IRA required income tax to be paid on the income? I’m going to send you guys
all to English school, just like reading some of these questions, I’m just teasing on you guys, but some of these are really bad. Does the IRA, no, the income flows through to
the IRA keeps its character, if it’s unrelated business
income then you possibly could, so if the IRA is getting active income it’s an active partner, then you might have an issue, but if it just owns an
interest in a corporation, an interest in a passive activity then we don’t ever have
to worry about that. – [Jeff] Yeah, that IRA is going to get a K1 from the partnership, but you just file it, there’s
nothing else to do with it. – [Toby] You are exempt for the most part. And then somebody says
real estate professional, we have gone over real estate
professional in the past, but I’ll just tell you again. I think I already said it once before, but I’m just going to go
through it again very quickly. There are two pieces of real
estate professional status, you have to a, qualifying as a real estate professional, which requires that you spend 750 hours, and it is your number one
use of your work time. So whichever one is greater. So you have to spend at least 750 hours, and it has to be the greatest
use of your business time. So if you spent 751
hours being a therapist, boom, you lose, you’re not
a real estate professional. If you meet that test
then you also have to be a material participant in
your real estate activities, and that’s a much lower test, that could be just a few hours, but it’s automatic if
you spend over 500 hours and you have to aggregate
all your activities into one. So our first question was
about property aggregation. That’s about as much as I’m going to say, that converts a passive activity into where you can actually write it off against your ordinary income. Now here’s the big one, if you are filing a joint
return with a spouse only one spouse has to qualify, and all activity is treated as one. So basically you could be some executive somewhere
making a million bucks and your spouse makes or
spends enough of their time, his or her time on real estate and they meet the test,
and it offsets your income, because you have a bunch of losses. Material participation just means you are participating in any activity involving your property, it could be the managing, the manager, it could be looking
for property, whatever, there is like a list. There’s a bunch of videos
that I’ve done on those, you can look at some of the
past Tax Tuesdays as well. Now people are asking about opting out, if you don’t opt out from
the central audit regime then are you required to pay
tax at the partnership level? No, this is what it is, is they can assess the unpaid tax, they audit the partnership, and the partnership is going to say the partnership now owes the tax. In other words, normally
when they audit a partnership they would just go and
audit each of the partners, now they don’t have to do that anymore, they can just basically
audit the partnership. – [Jeff] These aren’t all that
different from the old rules, you’ve got companies
and all kinds of stuff, you’ve got over 100 partners, we’re just going to tax the partnerships so you don’t have to
reissue K1’s to everybody. – [Toby] Let’s see, if you
are a counselor consultant do you need the same 750 hours? No, you do not have to, this is only for real estate, and it’s because real
estate is deemed to be a passive activity unless
you’ve made this exception. Alright, we’ve got lots of
questions to hop through, and oops, I just missed one. What principle address should I use for my LLC if I work from home? It depends on where you set up your LLC. If you set up your LLC, generally speaking you need
to have a physical address. And I’m just going to say for our purposes when I worked with LLCs
I use a physical address as the principle address, and it should be something
different than your house. I don’t like people
showing up at folks homes, I don’t know how to put this. – [Jeff] Serving papers or? – [Toby] Well service of
process is always one, but what you don’t realize
is that once you register a principle address for a business, everybody pulls that information and starts sending you stuff. – [Jeff] Yes they do. – [Toby] So unless you love
piles of paper don’t do it, and unless you want somebody
showing up on your doorstep door to dooring you for
business services don’t do this. So what I would say, if you work from home use a
different principle address, use a different physical address, you can have more than one
address for a business, what you use with the state and for people that you don’t know, could be different than
the one that you use for your main office for example, you could have multiple offices, so you could have multiple
principal places of business. I hope that makes sense, and last but not least is the
good old-fashioned PO Box, most states are going to require that you have a physical address and then you can always
have a PO Box listed as well in different correspondences
so you don’t have people again showing up at your house. I would just never use a home address, and anything that would be a public record unless you really like people
showing up at your house Or just getting lots and lots of mail. Can paying my minor kids for their work in my
business offset taxes? Absolutely. They have to do something of value, but this is one of my favorite techniques, it’s called income shifting. And you’re shifting money that would have been in a higher bracket to somebody in a lower bracket, and if you know anything about me you know I love that stuff. Somebody just asked on that last thing, but what about the IRS business address? It’s whatever you use to file your SS4, and that one I don’t care
whether it’s your home really. – [Jeff] Yeah, they
don’t particularly care as long as they have a
place to contact you. – [Toby] Yep, but it’s not what you’re putting out in the public, and remember, as we have learned from our president your tax returns are not a public record, people cannot just take them and say give me your tax returns, they are private. You cannot go to the government and say, I want to see my neighbors tax returns, you don’t get to. So anyway, back to the kids. Speaking of governments
let’s talk about children because they act that way. How can we pay kids, is there a limit? You pay them either through your payroll, if you’re a sole proprietor you don’t have to run it through payroll, if you’re anything else you do. Partnership, you’d have to
run it through payroll too, but for the most part I
prefer to use corporations, you guys know me, I use accountable plans, there’s way too many tax
benefits not to do that. Including if I’m employing my kids, so yes, you employ your minor kids, there are cases on the books of companies paying nine-year-olds where the owner was the operator, and they paid young children, as long as the children
can actually do the work. So someone said can I pay
my parents for babysitting? – [Jeff] No, that’s a whole different– – [Toby] Yeah, you’re not
going to be writing that off, that’s not an expense. Yes you could pay your parents
but that’s not a benefit. Now, if you put your parents
on your board of directors and they did something and you paid them, that’s much better, because now you deducted,
they receive the income, and if they are in a lower
tax bracket than you, I.e., what if they are
below the threshold for tax, they have a standard
deduction, then it’s fantastic, they pay zero taxes, we like that. Do you like zero tax? – [Jeff] I love zero tax. – [Toby] I’m glad that I
have a CPA standing here saying he loves zero tax, because I get suspicious
about CPAs sometimes as to who they actually work for, but sometimes CPAs that I’ve met, it seems like they are
going out of their way to make sure that their clients pay the most amount of tax
that is humanly possible. Your like, what the heck are you doing. This is the way we have to do it. It’s like, no. Do you have to file a tax return in each state where I
own a rental property? – [Jeff] I mean my feelings on this is if you are making money in a state you have to report that income somewhere. California in particular, I’m going to point that one out, we try to set up LLCs and so forth that they are not actually
operating in California. – [Toby] Well let’s just talk
about state income taxes. – [Jeff] State income tax in general, say I have a rental back in
Kentucky and Ohio and Indiana, I’m going to have to pay
taxes on those rentals. I’m doing business in those states, I have property in those states, I’m going to have to
report something somewhere. – [Toby] You have to do a separate tax return in each state? – [Jeff] Yep, usually, if it’s a partnership. When we talk about the
pass through entities each state is different
whether you report or not. – [Toby] I could say I have real estate in 10 different states, I do not file a state
tax return in each state. I only file tax returns
in the states that require that I file tax returns based off of a franchise tax
or things like that, otherwise your going to pay tax
where you receive the income, as long as it’s passive. There’s always two things, this is fun to have an accountant, because lawyers always say
you have to file in this state and blah, blah, blah. I said there’s two rules, there’s the tax rule, which you don’t have to register there
to be subject to the tax, ask the My Pillow guy whether
he has a nexus to New York, because I know for a fact
somebody got paid a lot of money for turning him in
for not paying the sales tax. You can have a tax nexus with the state but not be doing business in that state for the purpose
of having to register. When you have real estate it’s real easy, your business is there,
your entity is there, but if it is a flow-through entity and its passive income it’s
usually heading out of state. You may have a certain
situation for example, again California, if you’re just there and you are registered there, or even if a Californian
resident individually owns something in another state, they consider that an LLC doing business there for tax purposes, not for filing with the Secretary of State but for paying taxes. It is weird, you have different things. So the answer would be it depends
unfortunately on this one. Do I have to file returns in each state where I
own a rental property? It depends, and I would
say as a general reason unless Jeff wants to argue with me, the answer is no on rental properties unless there is a law that requires that, but you are not paying
income taxes in that state. You’re going to pay income taxes
in the state where you reside. – [Jeff] I think I’d go the other way, if I have a rental property in Maryland, Maryland is going to want
their share of tax from that. – [Toby] They have a franchise tax, but you can even be, I know Maryland could have
a bunch of properties there, you can even be exempt from that. – [Jeff] Well then you have
the weird ones like Tennessee where your entity may have
to pay a franchise tax but you don’t personally. – [Toby] Right, so Tennessee
is a great example, they have something called FONEs, which is a family owned
non-corporate entity. Sometimes this stuff
gets stuck in your head and you are like get it out. But FONE just means if it’s you owning it, then you don’t have to pay tax there, because they actually have two taxes, they have an excise tax and an income tax. – [Jeff] Yes they do. – [Toby] And you don’t
have to pay the income tax but you have to pay the excise tax unless you meet the exception, so every state is a little bit weird. So someone is asking, I own property in Indiana
and live in California do I have to file a
state income tax return? In California you definitely do, I don’t believe you do in Indiana, but again, that’s why you have
real estate professionals, Jeff may want you to file income taxes, and again I can’t see how
you would on rental property. – [Jeff] Sometimes I like doing it just to capture the losses, so if you ever sell the property you have deductions against
any potential gains. – [Toby] Chances are if you have rental real estate you’re not having income tax, because you’re going to be offsetting it, and if you don’t then we need to check, because if you’re paying tax on it then you’re probably not taking all the deductions you are entitled to. Now everybody’s asking what about Colorado and all these others, I’ve got to say like a baseball player who is actively coming in
and actively making money, that’s different, they are
going to be filing tax returns in every state because it’s so much money that they’re making and they make them do that based off of how many games they play. But if you’re just doing
passive activities, it’s going to flow back to where
you live for the most part. You pay your income taxes in the state where you reside for the most part. And then there might be franchise taxes and things that you have
to worry about in a state, Colorado I’m not aware of, I don’t own any property in Colorado. – [Jeff] And you’ve got to remember, you’re never going to pay taxes in both your home state
and the rental state or wherever your generating
the other income. – [Toby] Unless it’s to franchise tax and you happen to be in California, in which case then all bets are off. – [Jeff] Yeah, but you usually get a credit in your home state. – [Toby] Do you get a credit in California because there are going
to say 800 bucks minimum. – [Jeff] Oh well that’s true. – [Toby] Yeah, they are evil. In case you were wondering. The franchise tax board
is a bunch of vampires who are just sucking
money out of everybody. – [Jeff] Not evil, they’re just broke. – [Toby] Well okay I
shouldn’t say the franchise, the board of equalization
in California is not evil, actually they are great people but they are very aggressive
in their collections. I’m trying to be nice about it. Tax Wise, hey if you guys
want to come and join I’ve been offering this
for the last two months, keep offering it all throughout the year, which is if you like tax strategies, some of you guys looks like
you could probably use some. Based off of the questions, I always get these, you should see the
questions we get by the way, we get a list, I’m looking at the list, and just where we’re at
right now is 456 this year of detailed questions, there is a lot of questions
that come flying in here. And some of them are like oh my god, I think that they went
to the anti-tax person, somebody who really thinks
that the country needs a lot of extra money, because they are like here
structure it this way, you could pay twice as much. Yeah, don’t do that. So the Tax Wise course,
June 13th and 14th, that is the next live one, you can live stream it, you can come and you get all the recordings for all
three that we did this year, we already did one of them, so you can get the recording of that one, then you live stream June and November and get those recordings, we make it real easy, it’s $197, all freight included for
live stream and replay access go to AndersonAdvisers.com, tax-wise-2019-3in1-offer, or 3in1-offer, whatever
it says on the screen. I don’t know who makes these things. – [Jeff] I was going to say I think they make these names specifically
to turn them off. – [Toby] It’s usually a tech
guy coming up with the name not realizing that somebody
actually has to type it in. – [Jeff] I’m surprised
there’s no symbols in there. – [Toby] It looks like my password. Somebody said be nice, I’m honorary today. Alright so $197, come and join us, I do about 30 different tax strategies, including da-da-da-da, real
estate professional status, plus using that in conjunction
with cost segregation, and let’s lump in some solar
credits while we’re at it and accelerated depreciation on the solar, yeah, we’re going to have some fun. If you bought the January 2019, Jim email us in because we
will get you a good deal. Alright replay it should
be in your platinum portal or we we’ll send out a link, if you want to be a Platinum
Member at Anderson Advisers, if you don’t know what platinum is it just means you can ask
questions of the attorneys, you get two free tickets to any one event, you get unlimited attorney
strategy sessions, and you can ask questions of the tax team, no cost except for your
$35 a month signup fee unless you did some sort
of structure with us, in which case we do all sorts of fun deals to make this thing almost free for you. But if you’re a Platinum Member the way I always look at
it, it’s 35 bucks a month, and we are at your beck and call, because you want to ask us questions before you do something so we can make sure you do the right thing. It’s hard to undo it. Alright, questions, questions, questions, you’re thinking oh shoot I
have tons of questions Toby. You can always send them in
[email protected] if you get that oh shoot I
forgot to ask, you can ask now, I’m going to go through a
whole bunch of questions. You can visit Anderson Advisers and just spend time with us on our site, if you know Clint, Michael and I, we love to record ourselves, we love to record lots and lots of stuff, and you can spend tons of
time watching videos for free. We have a very good YouTube channel, and it tons of fun, and then of course you
can go to the podcast. All of these things that
I just mentioned are free. Somebody says, what’s the fee, it’s free. Platinum, it’s going to
depend, 35 bucks a month. Now we have tons of questions, I’m going to answer a few that were shot out at the very beginning. Just because a couple of them I want to make sure
that I can see somebody going in the wrong direction here first. Can a self-directed 401(k) invest in an opportunity property? So first off, self-directed IRA, that just means you don’t
have to have a custodian, so whenever I see self-directed I want to say self-directed IRA because you have a custodian, but they allow you to
control the investments, you direct the investments. In a 401(k) you don’t
have to use a custodian, so I never call them self-directed 401(k), I just call them 401(k), because you can be your own administrator, trustee or whatever you want to call it. Can you invest in opportunity property? Yes, but opportunity property, I assume you’re going to be
talking about Opportunity Zones, and specifically an opportunity fund, because that’s how you
get the tax exemption, if you guys don’t know about this, the Opportunity Zones, every state put out a list of ZIP Codes that were approved by the Treasury. All of those ZIP Codes, you can go to Opportunity
Zone type in heat map, and you’ll be able to find
a map that you can click on, and you can invest in those areas and you can defer capital gains. Not just real estate
but any capital gains. I always use bitcoin as the example, I sell $1 million of bitcoin I could defer it for
seven years by investing it in an Opportunity
Zone fund that has 90% of its property in
those Opportunity Zones. Now the whole idea is to defer your tax, so why would I do that
in a 401(k) or an IRA? The answer is I wouldn’t, there is no reason to do it. – [Jeff] Yeah, you’re not
going to pay any tax on that capital gains that you’re putting in the Opportunity Zone. – [Toby] Now here’s the big
reason not to cut you off. – [Jeff] No, go ahead. – [Toby] You jump in, because
blah, blah, blah, blah, I’m just, but here’s the thing, in an Opportunity Zone if you hold that property for 10 years you have exclusion of capital
gains on any of that growth. If I buy a million dollars
of opportunity fund if I defer a million bucks, I will pay tax on that million dollars, I don’t pay tax by the
way on the full amount, I only pay tax as of right now you’d be paying tax on 85% of it. So I pay tax on 850,000 at whatever it would have been if it was long-term gains
it still long-term gains, but if that million dollars turns into 10 million in 20 years, you pay zero tax. If I put that same 10
million through my 401(k) I have to pay tax with the
required minimum distributions, and all of a sudden I took something which would not have been taxable, and I made it into something that is taxed at my ordinary bracket, and makes my social security taxable too, so I would say that’s a really bad move and I wouldn’t do it, sorry. – [Jeff] And I’ve seen
this happen in the past with people putting municipal
bonds and things like that in their 401(k)’s and IRAs and there is absolutely no reason, it’s a lower return, no tax benefit. – [Toby] You just put
it in an exempt entity, but what we know is that
the entity doesn’t pay tax, but you pay tax when you receive it, unless it’s a Roth or something, in which case again,
why would you do that? – [Jeff] The Roth again, there is no tax. – [Toby] There is no tax on it and you pay no tax coming out, why don’t I just own it, I’m not paying tax anyway, why do I complicate it
by sticking it in there, and then why do I take something that would have been taxable and convert it into something that is simply because somebody told me you should invest through a 401(k). That stuff, as soon as I see that I know somebody is out there pitching it and it bugs the crap out of me. I’m like you’re just taking something that would have been a
really good thing for you, and you’re making a mess of it. How do I know if I’m a Platinum Member, you just have to ask us, just email on in and we’ll tell you. You should know, because
you’d have a Platinum Portal and we’d invite you and we’d call you, and we’d bug you and all that fun stuff. More fun ones here. Let’s see, somebody else
asked a really good one. We have a management C Corp
manages real estate LLCs, can we set up a 401(k) in C Corp for one of the shareholders
that will no longer have a W-2 job without providing
ones for the other shareholders if the salary is about $20,000 can they contribute 100% to the plan, or only a small percentage? So Todd, that’s a great question. And here’s the deal, we have to look at how
many employees you have, you can do a solo if
it’s the shareholders, basically its partners, and a husband and wife and others, so I believe you can do a solo unless you know anything differently. Its shareholders, so they’re
actual owners in the company. – [Jeff] Well something
I was going to ask is just because you are a shareholder doesn’t make you an employee. – [Toby] Correct, you have to
be a full-time employee still in order to be required
to be a part of it. And let’s just use this example, they don’t have another job, $20,000, I could defer the
first 19,000 if I’m under 50, the first 24,000 if I am over 50 directly into the plan period, no percentages no nothing. In addition, the company can
contribute 25% of the amount. So let’s say it paid me your
salary was going to be 20,000, out of that amount I could
put 19,000 plus another five, so I could put 24,000, this
is going to sound weird, but I could put $24,000 into the plan even though I’d have to probably, well another company could match, so. – [Jeff] Yeah, oh yeah. – [Toby] So basically yeah, you can get the whole thing in there. – [Jeff] But this is where it’s important to determine who’s an
employee and who’s not. Because if you’re going to
make a company contribution you may find yourself subjected
to having to contribute to other employees. – [Toby] Alright, can you tell me what Platinum level means? It’s just a service. And we have two main
services here at Anderson that we use, funky names
for platinum and titanium, platinum is our $35 a month
you can ask any question, get on our calendars, and then you can ask tax
questions in writing. The reason we want tax
questions in writing is because we are going to
give you a written response, I don’t expect you to remember everything, I’m going to cite, and I’ll usually put in something, and the reason I do that
is because guess what? People ask the same question every year right at the end of the year. And this way I can just write it once, and say, look at what I said last year. I just signed up for platinum in a corp, what’s the difference in
PPT and private vault. Do you know what PPT is? – [Jeff] PPT? – [Toby] That’s PowerPoint to me. – [Jeff] That’s what I was going to say. – [Toby] I have no idea. Private vault is what we use
is indexed universal life or non-qualified retirement
plans our whole life, they are fantastic, it’s
using code 26 USC7702, and not paying tax on growth and you can borrow it
out the private pension is what they might be thinking of. – [Jeff] Personal property trust. – [Toby] I have no idea. Write in what that PPT means. How do you go about transferring a personal home that’s
been converted to a rental to an S Corp to increase spaces if the S Corp has no income? You’d have to give it money first off, and then you’d carry
it on installment note, and that’s the next question is, would you sell it on an installment note due when the property is sold, and would it be okay to get interest payment in the meantime? Yes. Why would an S Corp be better
than a single member LLC, because an S Corp is a single tax entity, it is allowed in under that transaction, a disregarded LLC is you, a single member LLC is
ignored for tax purposes so you can’t sell yourself a house, so you have to use a separate person. Is the California minimum franchise tax the same as the 1.5% for an S Corp, or 8.75 on profit C Corp? Yes, the minimum is 800, it’s the minimum, so the question is do I have to add 800 to whatever that tax is? No, the 800 is just a minimum, it’s going to be the higher of, so that’s why people
always get hit with 800, because they are like oh, I don’t have any taxable income, I don’t need to pay a franchise tax. No, that’s not how it works. I received a 1099C, and Jeff I am Hobarting
the heck out of this, – [Jeff] No, your good, your good. – [Toby] I’m just like
up against the screen, you guys can’t see this, this is a small little writing
here that I’m squinting at. Here, I’ll let you do this one. – [Jeff] I received a 1099C
from a credit card company. – [Toby] That’s a cancellation of debt. – [Jeff] Yeah, we protested the rate
that they were charging and they rebated the interest overcharge. – [Toby] Wow. – [Jeff] And sent a 1099C for the amount. So the 1099C, I’ll just stop right here is usually issued for the amount of debt that they write off, they may say you owe $10,000 and you pay 4000 to settle the debt, you’re going to get a 1099C for $6000. How do I deal with this
1099C without paying the income tax on this amount
that was not of benefit and not received or deducted? IRS is probably going to say for interest you are charged interest
for your credit card and that’s going to be part of
the debt that you did not repay. – [Toby] Hm-hm. They were
probably recognizing that income under the accrual basis, so they probably took income, and now they are taking
a deduction against it, so now they are going to give
that to you and say ha ha. How do you avoid it? You contest the 1099 and say hey, you didn’t actually give me anything, you just didn’t charge me something. – [Jeff] There is a possibility if you think that it’s a different amount you can contest that on your tax return, there is actually a form to fill out that says that you disagree
with an information form that you were given by somebody. – [Toby] Isn’t there a 1099A also, so you have a 1099C which is cancellation, and 1099A, it used to always be which
one triggered the tax. – [Jeff] Both of them can, the 1099A is usually for short sales and things of that nature. – [Toby] And that’s when it’s been sold? – [Jeff] Yes. – [Toby] What does the A stand for again? Um, A? – [Toby] No, there’s something. – [Jeff] I want to say acquisition but I’m not sure that’s correct. – [Toby] No, it’s when they actually– – [Jeff] Abandonment? – [Toby] Abandon, there we go, so now I remember, you abandon it they used
to give you a 1099A, and then the question
whether that was taxable, the IRS didn’t know the answer. And then C is when they cancel it. So somehow, someway, they are saying that they gave you money, and so you might be thinking its interest and they may be saying
its principal forgiveness, in which case now you still
owe them the interest, and they are writing
down the amount of debt, so you said they rebated interest, they may be treating it as though they extinguished some of the principal, then it would be taxable to you, so it sounds like you guys
are on different pages, so I would definitely
be looking at fighting that one depending on how much it is. Hello, we set up corporations
as managers of our rentals, to offset our management income we reimbursed our healthcare and home use, however we were unable to
reimburse our healthcare in 2090, are there other similar simple
expenses because the ACA, participating in ACA, I have no idea. Are there other similar expenses items that we could implement to offset income? There is a broad question, and
yes there are, there’s tons. We go over them all the time here, but what I would do is I
would point you to Tax Wise because we are going to go
over all of those there, and I would spend some time there. On the Tax Tuesdays you’re going to hear about a whole bunch of them, everything from cell phone,
to cars, to computers, obviously you’re using a
percentage of your home office, you also do too ATA
the corporate meetings. Maybe you’re not doing
the total Home Office which is a percentage. What documents need to be
filed for C Corp lawyer? It depends on whether you’re
filing it with the state, if you’re filing it with the state there is always three areas
that you need to be aware of. The state itself, third parties like banks and the federal government. So when you file a C Corp
you could file it with one, but then you need bylaws for the banks, you need resolutions for the banks, minutes for the banks, some sort of shareholder
agreement for the banks. You need to have documentation that gives your C corp a body, and then you also have to
file and SS4 with the state. – [Jeff] With the IRS. – [Toby] I mean with
the IRS, with the feds. And then you have to also, I’m thinking of states
because I’m thinking of the, you may have to register with your state from a taxing
authority standpoint. So all of those things. And then what do you
file on an annual basis? If it’s C corp you file
and 1120 with the federal, and then you file in whatever states you’re doing business in. Number one, here’s another question, how can I shield money in an
account from a future audit? How can I have an account
to shield from taxes? That’s interesting, you
want to knock that one? I love it when they say I want to put money aside from a future audit. – [Jeff] I don’t even
know what to do with the how can I have money in an
account to shield from taxes. – [Toby] Well here’s a hint, the feds are reaching all
over the world right now, they are reaching outside of
the United States to get money, and usually what they do is they squeeze the end country entity and beat up on them, so if you weren’t familiar
with what was going on with the Swiss accounts and all that, it’s really tough. – [Jeff] If it’s a US account
IRS already knows about it. I was registering something with IRS today and one of the questions was I had to give them one of my account numbers from a credit card, and they knew what it was. – [Toby] They know all
about you unfortunately. Or fortunately, they make sure that people pay their fair share, and it’s just a question of fair. Now for protecting yourself from audit, just make sure you’re doing
business with entities that are low audit risk and have lots and lots of
opportunities for deductions, because the chances are
that if you are audited, if you’re an individual
you lose 95% of the time, if you’re a business
you win 700 times more. So way better. – [Jeff] Let me ask one thing though. I know most times qualified
retirement plan accounts are shielded from creditors, correct? – [Toby] Quite often, it’s
a feature of state law, and then you also have
federal bankruptcy protection, and what a lot of you
guys don’t realize is that even your taxes you
can bankrupt away taxes. – [Jeff] But IRS, does IRS
have access to the QRP funds, the qualified retirement plan funds or? – [Toby] Yeah, IRS will grab
anything they feel like. The IRS, usually if you
have done something funky they will garnish anything that
they can get their hands on. I always say when it comes
to the feds all bets are off, they will go and grab everything, they’ll grab your parents stuff, I’ve seen them come through and if you haven’t been paying attention They will just go and nuke you. Sorry, but that’s just the reality of it. So the feds, you never want to sit there and hit them in the head with something, you want to do what by the rules, and they are very rule driven and they are easy to deal with so long as you follow the rules. You go sideways with those rules then don’t expect them
to treat you real nice. So you shouldn’t fear by the way the IRS or any organization like
that, you should respect them, and then you should do things legally. Do you have to have a real estate license to be considered a real
estate professional? The answer is no. If I am showing a loss on
my tax return for my C Corp, can I claim that loss on
my personal tax return? The answer is no, with the exception of if
you dissolve the C corp, and you made a 1244 stock election, we do that on all of our companies. So if you have a C corp
set up through Anderson, you can write off up to
$50,000 per shareholder depending on corporate losses. What is a good IRA platform to use? Lowest fees? We like IRA Club, Dennis, really nice guy out
of Chicago, IRA Club again. Is partnership income in an IRA
required to be income taxed? No, so if you have an
IRA owning a partnership then it would not pay tax on that income subject to there’s a few exceptions depending on whether it qualifies as UBIT or if there is debt, in which case if there
is debt on the asset then it’s called unrelated debt financing, income could be taxed on that, but as a general course, no. Somebody already asked that, somebody already asked this. What are the advantages of
self-employed trader status? Oh my God, I haven’t
heard that one in a while. So self-employed traders status is, there is no such thing as that, there’s traders status, and that is when you meet the test Which is not even a test in a statute, it’s a court test of being a trader, and it’s really real, you need to be doing hundreds of trades, I think the minimum amount
that I would even consider is about 700 trades a
year round trip trades, meaning it’s probably closer to 1400. – [Jeff] Unfortunately this is one of those subjective tests. – [Toby] It’s a court test, and I always tell people to
avoid it like the plague, trade through either a
corporation or partnership and have a corporation manage it, do not try to be a trader, unless you are really active,
like it’s what you do. If you have a job, don’t even pretend. What is material participation,
how would you document it, I already answered that. Do you lose the long-term capital gains, that must be the real estate professional. No, you still capital
gains or capital gains, you don’t lose that being
a real estate professional, it’s just that the losses
are not considered passive. Somebody already asked this, can the real estate, I
don’t know what that means. Let me grab this, we have a few more, we’ve got a lot of
questions just came through. I have an LLC that organizes
as a single member entity and treat it as a disregarded entity, if my wife and I obtain
a loan for real estate that is held in the LLC, is it still a disregarded entity, we live in a community property state? The answer is yes, the IRS defaults to your state, and if you are organized
as a single member and it’s both you and your spouse in a community property then
you are considered one person. Now this one says what about
properties in multiple states, they must be asking about
income taxes on the income, so if you are a lender
and you loan money out to a bunch of people in different states, what you have to file a
tax return in each state? I’d say again, its interest,
its interest income, and its going to depend– – [Jeff] Oh if you are loaned
out money definitely not. Because you’re actually performing your service in your home state. – [Toby] Yep, you are in your home state, they may be someplace else. Do the kids pay FICA taxes? Well yes and no, if it’s payroll then yes, They are paying old age and death and survivors and Medicare, so yes, they would have payroll taxes. – [Jeff] They are not going
to pay on employment taxes. – [Toby] The only way around
the FICA is if you are a sole proprietor and
you employ your kids, that’s the only exception, and I would just say
don’t be a sole proprietor because it’s so easy for them to say that wasn’t really a business activity. Look at this, do I have
to file state tax returns if you have rental lots
in New York or New Jersey? So you guys have done these. – [Jeff] Sometimes those
states hunt you down, they know you are there and
they want their tax returns. – [Toby] Yep, sometimes, if you have a loss then I doubt it, but they don’t have a minor. – [Jeff] Yeah, if you have a loss you are not required to file a tax return. – [Toby] And then we may do
it just as a matter of course, if we are doing your return, we may do it just because we want to let them know there is a loss, there is a carried forward loss. – [Jeff] Yeah, what most of the states say that if you have any
income as a non-resident in their state you are
required to file a return. But if you don’t have any income, you’ve got nothing but losses, there is no requirement
to file those returns. – [Toby] Yep, Jeff may still make you just because he wants to show the loss. – [Jeff] Just because I’m
an angry old accountant. – [Toby] Alright, so can you explain the recaptured depreciation
how it is determined. Yeah, it’s real easy Lee. When you buy a piece of property, and I’m just going to say this is probably going to be for real estate, but it works on any business property, if you end up converting business property to personal property
like a car or something, yeah you’re going to have to recapture that depreciation at an ordinary bracket, if it’s real estate, then when you sell you
recapture the depreciation, and its taxed at your ordinary
tax bracket capped at 25%. So if your ordinary tax
bracket is 15% or something, actually what are they now? It’s like 14, is it 15 still? – [Jeff] You got me, I
want to say it’s still 15. – [Toby] So then it would be 15, but if you are at 37% personal tax bracket it would be 25%. What is the website for
Opportunity Zone again, you just type in
Opportunity Zone heat map, and you’ll see a bunch. – [Jeff] Google search. I am interested in a tax
efficient 401(k) strategy, Clint Koons, want to double your real estate investment
return as easy as, Stacey I’m going to have to look that up, and see which, Clint’s my partner, great guy, very, very bright, what he may be doing is
borrowing from the 401(k), but I want to see which one that is, I don’t have time to watch it right now. Let’s see, question, this would
seem to be, alright so, see you still do these. We’re going to have to answer, there somebody who is referring
to a question earlier. What you do is if you
have a serious question about something that
specifically relates to you, email it in via
[email protected], I’m not going to be able
to answer it quickly here, just because we have people sending in three and four emails, because they have run out of room. I have a rental property that
I’ve owned for nine years, I lived there for the first
four years in one of the units, but the last five years
I didn’t live there, is there a way that I could avoid the exemption of 500,000? Avoid it? You can’t have it, so you
wouldn’t worry about that, you haven’t lived in there
it’s two out of the last– – [Jeff] Two out of the last five. – [Toby] Yeah, two out of the last five. – [Jeff] So yes he has
avoided the $500 exclusion. – [Toby] Yeah, I think
they wanted to find it, so maybe they meant how to get it. The answer is no, but you
can still 1031 exchange. That’s really important. Dovetail off the question
about 401(k) contributions. If the income the shareholders drive is from the rental property cash flow, can we contribute the
max to the solo 401(k) and not pay taxes? We get 1099s from our
property management team, so the answer is, they are getting 1099 and they want to be able to put money into a 401(k). So if you are the manager, then yes you could contribute
that to a solo 401(k). If you are not the manager, and what they are doing is
they are giving you the 1099 and saying here’s what we paid you, that’s not active income, that’s not the type of income that you can put into a 401(k). What you do is, you have that get paid to an LLC that is taxed as a partnership, and you have the corporation
act as the manager to that, and then whenever you’re doing
anything that is management you do it through your C corp, and your C corp charges for that activity with your property LLC and then yes you could pay yourself. It sounds weird, but you take money from an LLC usually by using a holding entity, so let’s say we have a
bunch of rental properties, end of the year we have
$50,000 of positive rents That’s not being offset with
depreciation or whatnot. I’m charging, let’s just
say I’m charging $2000 a month to manage the whole thing, so I have $24,000
deduction against the 50, and then that 24,000
I pay myself a salary, I could put directly into my solo 401(k) 19,000 profit plus make another contribution from the company, so that’s how you do it. Do you do estate plans? Yes, almost always a living trust, unless you beat us over the head just because there is no reason not to. Here’s somebody, I’m
wholesaling in Tampa Bay, what is the best structure for protection and Tax Wise for holding. I have a two member Florida LLC, I want to hold properties. Okay, that’s different, I’m wholesaling that’s an active activity, I would do that through a corporation, or an LLC taxed as a corporation. If you’re holding properties
for long-term appreciation and rental then you do that
through a separate LLC, depending on how many properties you have, our recommendation is to put each property in its own LLC. So if you have a liability occurrence on one they can’t take the other. – [Jeff] Yeah, I really
like to keep the wholesaling and dusting separate. So they don’t try to group them as the same kind of transaction. – [Toby] Lee asks can a shareholder of a holding company rent a property owned by the holding company? The answer is yes, unless it is an IRA or
401(k) that is the owner. If you are a shareholder of the company you can actually self deal as
long as it is arm’s-length, meaning that you charge a
reasonable amount of rent, and all that fun stuff, there is actually lots of cases of that. People like to ask
really generic questions, what are the main tax
advantages of a C Corp. Has its own tax bracket, it’s a flat 21%, if it makes a million bucks its 21%, if it makes $10 million its 21%, if it makes $100 million its 21%, if it pays you that money as profit, just because you get a wild hair and you really want to
pay yourself some profit, you pay that at your
long-term capital gains rate, which can be as low as
zero and as high as 20. In addition C Corp’s can have
medical reimbursement plans where they reimburse 100%
of medical dental and vision and you don’t have to pay tax on it, you just have to be aware
of discrimination rules. Those are the big ones on C Corps. There are separate tax bracket and they have fringe benefits
that are not taxable to you that are not available through others. Not to S’s at least not to partnerships and definitely not to sole proprietors. Let’s see, what is 1099A dividends, there is no such thing as 1099A dividends, you have 199A dividends, what they are thinking of
is the qualified business income flowing through to
you and it’s a 20% deduction, so go ahead. – [Jeff] You say REET or RED? – [Toby] REET. – [Jeff] The re-dividends those
are also included as 199A. – [Toby] So it has to be
qualified business income, and you look underneath that definition its active certain
passive activities qualify like certain rental activities do, so for example commercial rentals that are not triple net leases, you spending time and your
agent spending 200 hours a year or more on residential property makes that residential
property automatically qualify or you actively being
involved in your real estate makes that activity qualify. It sounds weird, but we
have regs on this stuff, and that’s what they are giving us. If you were doing triple
net leases it wouldn’t, if you are doing a REET, the
qualified dividend do qualify if you’re doing other corporations
where there is dividends they do not qualify like
an ordinary dividend out of a C Corp, And then it has to be you
and it can’t be a C Corp, it has to be you. So C flowing through to you, usually you get to write off the 20%, usually there are some income thresholds, and then they have something
called a specified activity, doctoring, architecture, lawyering, medical, veterinarian,
engineer, performing arts, all these things are exceptions
where they faze you out, and then if you’re looking to much money then they look at your W-2
income from the company, not yours but the
companies W-2 total payout and they put a cap on that. So there’s all sorts of funky rules, I’ve done a ton of stuff on this, both online and then also there is a big section in Tax Wise. So if you really want
to know what I would do is I would get Tax Wise, I think I threw that up there earlier, I’ll do it again. Its $197, let me go back to this one, there it is. Do that and there is
a big section on 199A. – [Jeff] Just thinking the
REETS must have some really good lobbyists if they’ve
got that plugged in there. – [Toby] Oh REETs, Oh
those guys are killing it, and they have carried interest for long term capital gains. I have a home office in a basement, is that basement going to be deducted? Well here’s the thing, if you are a sole proprietor then you can do that home office, I would prefer you have
an accountable plan, and reimburse yourself. And then it’s going to
be the square footage based off of the total square footage or the room methodology or
any number of reasonable ways to determine how much of the
house you’re actually using, and if that’s the case, then yeah, you can reimburse yourself. Not just the actual space but your portion of
depreciation of the actual house the depreciation you get to take the percentage of maintenance, you get to take the
percentage of utilities, even if you have a house cleaner you get to take that percentage and reimburse yourself
that out of your company. It has to be an S or C Corp and
you would not be taxed on it and the company can deduct it. We talk a lot about
accountable plans here, here’s one speaking of it. I have an accountable plan, business ran out of cash and it’s been paying bills
personally without reimbursement. Does the amount due to me a, convert to shareholder loan at some point? – [Jeff] Yeah, if the
company owes you money it’s a shareholder loan, or if you are paying
bills for the company. – [Toby] It’s kind of like an IOU, because chances are your
company is a tax bases taxpayer, so you wanted to have the deduction, it needs to pay you back but it can’t. So you are literally loaning it, you’re really not paying
the bills on its behalf you are loaning the money to
it so it can pay the bills. And it can pay you that money back and you do not have to pay tax on it. I hope that makes sense. Lots and lots of questions, but we have a whole bunch
of others over here. So I’m going to switch off from
some of the live questions, holy crud you guys have been asking, you guys have been busy. And let’s go over to some of these Jeff. Where did my little
cursor go, there we go. Let’s see. I was told today that my C Corp can’t deduct a directors gym membership, but can deduct medical insurance. Even though the authorization
of this resolution is literally duplicates of each other. Correct, do you want to answer that? – [Jeff] The gym membership
is not a medical necessity, so it goes under what we
call the wellness plan, there’s this thing like your vitamins, your over-the-counter medications, the corporation can pay for this, can pay for your gym membership,
your yoga, your massage, they can pay for it they can
reimburse you for those items, but they can’t deduct those items. – [Toby] Wouldn’t you be taxed on it if it was like a C Corp that
paid for your gym membership? It sounds like a non-deductible. – [Jeff] No, under the wellness
program you can deduct, I’m sorry I did not say that, you can’t reimburse for
those kind of things. – [Toby] I’m going to replay
that over and over again. No, I’m just kidding. – [Jeff] You can
reimburse for those items, but the corporation can’t deduct them. – [Toby] Just keep in
mind that if it’s a C Corp its 21%, so it’s reimbursing you
it’s not taxable to you, the corporation can’t deduct it, it’s like the meals, you always want to say
meals and entertainment, entertainment is gone as of 2018, but meals you might only
get to write off 50%. So it’s kind of weird, you could have a company
that has zero money in it, and you still have a tax liability But it’s a much less tax
liability than your tax liability, so it always trips people up, because they are like,
well I spent all the money, yeah, but the IRS doesn’t
let you write it all off. I and my wife file on the same tax return. My wife doesn’t work she stays at home and I have some W-2
plus renter properties, can my wife sign up for a Roth IRA or IRA and get tax benefits, and if so how much? So she doesn’t make any earned
income, can she have an IRA? – [Jeff] Yep. – [Toby] How much can she contribute? – [Jeff] I can’t always
remember these numbers, but she can contribute to an IRA, and I believe a Roth IRA. As a stay-at-home spouse. – [Toby] That’s the exception to the rule, it normally has to be income, but if it’s a spouse
they can actually do it? – [Jeff] Yes, as long as the
other spouse has earned income. – [Toby] See, there you go. That’s why Jeff is worth
his weight in gold. – [Jeff] That’s a lot of gold. – [Toby] I always look at it like you have to have active income,
but I think you’re right, there is an exception. – [Jeff] There is an exception
for nonworking spouses. – [Toby] Second, is there a way to offset long-term
capital gains for stock, can I put it in a trust
and take it out slowly, will this work? The answer is pretty much yes you could, there’s a way to do it, it’s called a deferred sales trust, but unless this is millions of dollars I wouldn’t touch that, I would just take the
long-term capital gains and recognize it as I sell my stock. If you don’t want to pay tax on it, then the only option for you is to put it into a qualified opportunity zone fund, or if you’re looking at other
ways of getting tax relief. – [Jeff] Another way to offset
these long-term capital gains is sell some of your losers. – [Toby] Yep, lose money in stock. So if you have losses on other companies, sometimes you’re taking them. – [Jeff] If you got a bad deal go ahead and sell that puppy, and you offset it against
your long-term capital gains. – [Toby] And if you have loss carry forward take a look too, so you don’t lose them,
just carry them forward. This is a very long question,
I’m going to skip it. I have self storage business in Virginia and looking to expand and purchase another facility in Tennessee. What is the ideal structure I should use for this business in
real estate investing? That’s a very broad question, but the answer is for
most self storage units they are going to be an LLC in the state where they are located. Since you have two then what I look at is it might be time to separate
yourself from your businesses by having the businesses in LLCs and then put a holding company in another state that is not near you, so that in the event somebody ever attacked one of those businesses that they don’t get to come after you. Now Tennessee puts us in a little bit of an interesting position
since it has a franchise tax, so we want to avoid that. In that particular case for
what you’re doing right now, I’d probably just have two LLCs, one in Virginia and one in Tennessee, and I’d have you, if it’s just you, then you would be the owner. And I may look at adding a
holding company at some point. – [Jeff] But you would definitely split them between two LLCs? – [Toby] I would definitely, in fact if you have any debt they are not going to let
you put those two together. Banks believe it or not
do not like foreclosures. Let’s see, I’m going to take
this off the screen by the way. I’m going to put you back up
to where you can ask questions. I am presently funding gap funding through my S Corp corporation a
number of residential flips, all of which are expected
to resell later this year, assuming six months or
more holding periods, is my income on these deals taxed as long-term capital gains? It sounds like she is the gap funder. So if they are a gap
funder through an S Corp, then they are just going to
receive that as interest, that’s just going to be ordinary income, it would not be long-term capital gains. – [Jeff] And this is where I feel it’s important how
these agreements are written, to say what you are receiving in return. – [Toby] And this is
really big by the way. Whenever you are flipping, and it sounds like you
are just funding the flip, but if you’re the flipper it doesn’t matter how long you hold it. So we have a little bit of an issue there. Because if you are flipping then there is no such thing as
long-term capital gains, it’s all going to be ordinary income. We already answered that one. That one. That’s another one, here we go, does a new LLC who had to borrow funds have to file a promissory note in order for the note to be enforceable and legal? No, that’s real easy, it sounds like you borrowed the money and if I was the party
who gave you the money I’d want to make sure that’s documented. If they did give you the money
does it need to be in writing for them to be able to enforce it. No, it certainly helps, and they may have issues
collecting against you, but they could show that
you actually gave the money, then they are going to have
various opportunities to come back. Pay your debts. Background, I recently entered
the real estate business, five properties, 16 units and learning all
the real estate lingo. Should I purchase additional
insurance coverage or establish LLC for
each of my properties? The answer is yes to both of those. You want to make sure you
have your regular insurance, and you want to have an
umbrella insurance as well, I call lawsuit insurance. In case they exceed the primary, and yeah, you separate an LLC put each of the properties in its own LLC. Should I establish an S
Corp and have the S Corp own each of the LLCs? No, not unless you are flipping. The S Corp is used for active real estate, so real estate agent flipping, somebody who was wholesaling, and then what would be the best option, an LLC or an S Corp? An LLC can be an S Corp for tax purposes, it files with the state as an LLC, so realistically what
you’re really asking I think is do we want to have an
LLC taxed as a partnership or disregarded or an S Corp. Well if you’re holding these things, it looks like five properties 16 units you’re going to hold these for a while, you’re always going to be better off having it flow onto your personal
return on your schedule E. That’s going to be gone via
an LLC that’s disregarded or an LLC taxed as a partnership. Going to keep popping through this, that was really long one. When setting up your initial 501 C3, where should the start-up funds come from. Your personal account, or as a loan? Or is the start-up considered a donation? That one, there we go, so Jason the answer is
when you put money into and start up a 501 C3 it’s
considered a contribution, a donation. So could you loan it the money? Yeah, but man I guess somebody
possibly could do that, I wouldn’t, I would just
call it a contribution. And even if you loan the money by the way, I forgot about this, if you loan money to a nonprofit it’s considered a contribution, and then it’s income to
you when they pay you back. The IRS doesn’t play around, they said if you’re
loaning money to a 501 C3, that’s a contribution,
you just gave them money, if they pay you back
then it’s income to you. We own an S Corp LLC and a C Corp, we work out of our house, we do not deduct our
office space on our taxes, we are going to remove the septic system and hook it into a city sewer Which means there will be
several days where we have, I’ll just leave it at that. We would like to check into a hotel, can we deduct the hotel
expense as a business expense? The answer is no. – [Jeff] This is the cost
of giving up your home. – [Toby] What you would do is you want to have the office space, and then what would happen is the company could reimburse you for its percentage of the cost. So usually you get a business, you’re going to be somewhere
between 10% and 20% of a house, sometimes higher depending
on how big your house is, how many rooms it has, how big a spot your business is occupying. But what you would end up doing is reimbursing the percentage
of the septic system. The hotel expense, no. It would not be considered a home expense. I guess you could try to lump it in there and say that it’s– – [Jeff] It kind of goes along with the business continuity
insurance way of thinking. – [Toby] Here is what you would do, you would list it down as all
the expenses of the house, I would throw it in there, and if the IRS ever audited you you would have a novel argument, but I can see how you would work, you would say this was our
cost to run our household, and let’s say it was 15%
that the company occupied, they could reimburse you, it’s not a line item
anywhere it’s just for you, you just get the cash,
the company writes it off, and I’d be doing that
through your S or C Corp. I have an LLC taxed as a
partnership with the members 40% my wife, 40% me, 40%
corporation which manages the LLC, all profits gained by the LLC in trading are considered to be passed
immediately to the members. Yeah that works, so what happens is if you make $10,000 you and your wife would get 8000 of it, and 2000 would go to the corporation. Whether or not the money is distributed or not that’s how it would work. Now you could pay the corporation, this sounds like a partnership,
it’s a partnership, hopefully you have an agreement that says the corporation can
get paid to manage the thing because it’s going to have expenses too, for example, anything that you’re doing, like computers, cell phone,
home office, all those things, you’d want to make sure that it gets that money as
a guaranteed payment, and then that would lower your total, like you would take that off the top, so if it made 10,000 and
you have expenses of 3000, you’d end up dividing $7000, you take the 10,000 minus the 3000 and you divide that 40, 40,
20 between the partners. Anything you want to add on that Jeff? – [Jeff] No. – [Toby] Let’s see, formed
a single member LLC in 2018, what tax form to report? You don’t, it’s disregarded, it’s you. So you don’t have to worry about it, so hopefully if it’s a
disregarded single-member it depends on the activity,
it would go on your 1040. If it’s an active business then it would go on your schedule C, if it’s a passive business it goes on your schedule E. Right? – [Jeff] Right, the only
reason you would file it on 1120 is if you’ve actually
designated it with the IRS that this entity is
filing as a corporation. – [Toby] Here’s somebody else, I’m confused on using a Wyoming LLC and it being a disregarded entity. I purchased property using the LLC which I’m in the process of rehabbing, so first off, don’t do that. You are a dealer, you
are an active business and its going to flow
right onto your schedule C, not your E, your C. Where do I get to deduct the cost that I am incurring for the rehab? You don’t, when you flip it
gets added to your bases, period, there is no way
to do that to where that, actually I shouldn’t say there’s no way, there is one way, which is
to do it through a 501 C3, and let’s say that I was rehabbing houses for veterans or single moms or any number of old people, whatever, I shouldn’t say old people, the elderly. And I qualified my 501
C3 in that activity, then I could buy the house in there and I could give it cash to do the rehab and I’m deducting it as I go. Whatever I put in cash-wise into that thing I’m writing it off, and then it never pays tax again. Otherwise, if it’s in my personal realm you don’t get to do any of that, you are adding that to bases and then it’s basically
stocking your store, and then when you sell it
that’s cost of goods sold, so it’s the bases, so you only
pay tax on the difference, but it would be active ordinary income, so I’m just going to say don’t do that. Talk to us, we need to change
the tax of that entity, more than likely we are just going to make an S election on it, if that’s what it’s doing, and it’s at Wyoming LLC, unless you live in Wyoming chances are we are either setting up a
new LLC in your home state, or you’re registering that
Wyoming is doing business in the state where the
property is located. Here we go, I am getting $80,000 from a Roth IRA from my divorce, how is best to reinvest it in
my house flipping business? How is best to reinvest it in
my house flipping business? If it’s in a Roth IRA You’re going to want to leave it in there. Can you flip inside of an IRA? You can. You’d want to set up an
LLC owned by the Roth IRA, and then for all you guys who
are immediately going UBIT, there’s no cases on it, I would say if you’re going to do one or two you’re probably fine, if you’re doing six or seven
you’re probably going to run into a potential of having
unrelated business income tax, but even that’s taxed at 21% now UBIT? – [Jeff] Yeah, I believe so. – [Toby] So worst case scenario you’re going to pay corporate rate. But best case scenario
is you never pay tax ever again on any of those
gains, how about that? So look at this, I purchased a commercial office flex building in October 2018, I’m evaluating cost segregation, I would appreciate the following thoughts. As I understand it there are two gains, with cost segregation I get
the larger tax depreciation, in the early years compared to standard Property depreciation, this can reduce my taxable
income for the early years, if I sell the property in 10 years, this early deduction has increased value, this is the first gain, I
have no idea what that means. If I use cost segregation I will have larger capital gain when
I sell the property. No, you won’t. Let me just explain this. Cost segregation, all I’m doing
is rapidly depreciating it, that has nothing to do with capital gains, because we always take depreciation out of the capital gains equation. So if you’re cost segregating– – [Jeff] It’s going to decrease its bases by picking more depreciation. – [Toby] But he’s going
to have to recapture it. When you’re capturing– – [Jeff] That’s true. – [Toby] So what’s going to happen is, even though I’m getting
an earlier depreciation, my capital gains is going
to be my capital gains it’s going to be my bases, period, then I’m going to have
depreciation recapture, so I wrote it off earlier, so let’s say that I rapidly depreciate, something that would have been 39 years I get an extra half million dollars of deductions in the first 10 years, I’m excited, that saves
me a bunch of money. If I 1031 exchange that, first off we don’t worry about it at all it just rolls into the new property, if I don’t 1031, but I sell
this thing and I pay tax on it, the maximum amount I will pay on that accelerated depreciation, all that extra money is 25%. This is why it’s so powerful when you are a real estate professional, you can offset 37% tax in some cases depending on what state you’re in 51% tax and I can cap it at 25% federal and then whatever your state is. So it’s pretty powerful, but I’m not altering my
capital gains out of this, my capital gains is still
long-term capital gains, I would be paying it at my
long-term capital gains rate which is zero to 20%, if I’m making a lot of money then I have to add the
net investment income tax, so it’s zero to 23.9 plus your state, that’s why 1031’s are so powerful. Keep going down and then
I have a few questions. Somebody just said did I hear that right, if I’m flipping a property say in Illinois I purchased the property using
a Wyoming LLC that is bad? Yeah if you are flipping an estate, I don’t even know how
you took title in that, it’s possible you did it, but you don’t want to, you want to be an S Corp on that, or an LLC taxed as an S Corp, and frankly you’d want to register the Wyoming LLC in that state. You could probably get away with one without registering it there. Let’s see, somebody just asked a really interesting question, I formed a C Corp and then
I went on this bus tour, they have a lot of expenses, let’s just say that the
expenses were $75,000 After the C Corp was established and do I list these expenses
on a monthly expense report? Yeah absolutely, and if you paid the cash to it
it owes you that money back, so that’s generally speaking
your going to take the expense and you loaned it the money and your going to be able to
repay yourself that money. C Corp needs to make money. So if the C Corp only
collects $10,000 this year can I write the $10,000
as expense reimbursement? Well you have already paid the expense so you’re just going to pay off the loan of you giving the money to the company, is that a fair way to put it? – [Jeff] Yeah, you can always repay, what you repay has no tax consequences. – [Toby] Yeah, it’s going to be immaterial from a tax standpoint, but you could just say
you owe me this money, but it was paid, somehow
someway it was paid, so I like to think that you
probably paid that with cash or cheque or something or credit card, so it could just reimburse you, if it goes over a tax year, so it looks like this was last year and chances are it’s going
to be treated as a loan. We have set up our corporation
as a manager for our rentals to offset our management income, oh wow, are we already at 4:30? Bad Toby. – [Jeff] 4:30. – [Toby] We set up our
corporation as a manager for our rentals to offset
our management income we reimburse healthcare and home use, however we are unable, oh wait, I think we
already answered that one. – [Jeff] We answered this. – [Toby] Alright, we’re
going to scroll through this. Wow, I have holdings in my self-directed IRA real estate in Brazil. – [Jeff] Oh, that’s not good. – [Toby] No. Wow. Due to currency exchange we
lost more than two thirds, how do I adjust the value? You don’t, you don’t
have to do anything Tim, maybe if you’re taking
mandatory distributions your going to have to do that, for whatever reporting, so they have that form on an IRA where you have to report
the real estate holdings, I guess you’d have to do that. But that is horrible,
you turn it into US cash. – [Jeff] And I know QRPs
qualified retirement plans cannot hold foreign properties. I’m not sure if that holds true for IRAs. – [Toby] They must have
a self-directed IRA, they must have a custodian. It seems like it’s weird. But whatever the case, that’s really bad. But I don’t think you have to do anything. Alright, there’s a few others, what I’m probably going to do is there are so many questions here, so we’re going to get these knocked out. There’s a few questions that came in live that I’m going to answer, and then we’ll get rolling. Going back to long-term gains if we are flipping our property why would it be different as keeping it 12 months? So capital gains is
selling a capital asset, it’s not a capital asset
when you buy it to sell it, it is inventory. So it’s like this, let’s
say I’m a grocery store and I buy a whole load of Cheerios and put it on my shelf, and that Cheerios doesn’t sell for a year, have I owned it for a year? Yes. When I sell it do I get
long-term capital gains? No, because it’s inventory. When I am flipping a
house I am not an investor I am a dealer, it is inventory. So it doesn’t matter how long I held it, in fact there are cases where
people held it over 10 years and they are still treated
as an active business. So I may do this one, this is sad, my parents recently passed
and my siblings and I each inherited rental
property in California. Six siblings, six properties. Since we’ll each own one property would it make sense to form six LLCs and have a holding company
in Wyoming in one name? Yeah, so here’s what you can do, it makes sense to put rental properties in separate entities, I would say you don’t want to
have six LLCs in California, what I would more than likely do is I would have them at six LLCs but I would keep them out
of the state of California, I would hold them in trust in California Having the out-of-state
beneficiaries be the LLCs, and I would have you and your
siblings hold a single LLC in which you each own one sixth interest and it owns the respective LLCs. – [Jeff] So instead of each of
them owning their own house. – [Toby] Six houses in one LLC, and that way you guys can figure out, I’m sure they are not all of equal value, so rather than dealing with it, that would be my
recommendation off the cuff. So facts and circumstances
are already different, like your siblings, depending
on your relationship. And if you also some people
may want to sell something versus holding it. If you guys all want to hold it, and you’re saying we just want
to keep this thing together then I would probably set up an LLC where you guys all own a piece and you agree to a management mechanism. That’s easiest more than likely, you stepped up in bases by the way, so make sure that you know
that when your parents passed the bases in those properties stepped up to the fair market value
on the day they passed, which means that you get
to depreciate them again. That’s the silver lining is, whenever there is someone who passes, the asset steps up in bases and you get to depreciate it, even if they depreciated
it their whole life. So anyway, and then somebody just asked
what about asset protection? What I do is, a couple
of ways to look at this, when you have an LLC there’s more than one way to get a property in an LLC, I could put it directly in an LLC, or I could put it in a trust where the beneficiary is the LLC. So if I don’t like the state because they are charging me too much money, I’ll often times use a trust. So California, I don’t want
to have a bunch of LLCs because it’s 800 bucks a year for an LLC. And if you own the LLC individually that could be a problem
if it’s out of state, so I make sure that the LLC is owned, there is one LLC that’s potentially doing business in California and that’s the LLC that
all six siblings own, and even then I don’t know
where all the six siblings live, what I care about is that we keep it away, and if somebody says, no way, the franchise tax board they’re going to kill you on it, we want that audit, so I
already know what the answer is. They are going to tell
you you always own it, there are always going to say
pay us even if you don’t have to, so I just look at it and say, I know what the rules are, so I tend to be a little more, let’s just keep it away from them, there will be one entity that
we paid the 800 bucks on, and it will be the one that
is held by all six kids, assuming that there is children
that live in California. So sorry for your loss by the way, I know it’s always tough to lose a parent, but if there is anything that’s good, it usually gets the kids together and hopefully you treated as a legacy, and you say, hey, my parents
worked really hard for this. Let’s see, what’s the
best bookkeeping system for real estate investors
and financial services corps? QuickBooks? – [Jeff] We are always
going to say QuickBooks. – [Toby] QuickBooks, you
could try other stuff but that’s kind of like an also-ran, that’s like where do
you order stuff online? Amazon, and then there’s everything else. What is an ordinary income tax bracket for a real estate
professional filing together with high W-2 earners
making over a million bucks? 37% federal plus your state. Hey, I know there’s a
couple more questions, we’ll grab those and we’ll
throw those into the next, the next Tax Tuesday. Somebody asked about the IRAs and stuff, it’s like 5500, they raised it this year, it’s 5500 or 6000. – [Jeff] 6000. – [Toby] 600, and then you
get an extra thousand bucks if you are over 50. So you can put seven? – [Jeff] Yeah. – [Toby] Alright, so well we can always look at that, we have a tax cheat sheet
rolling around here somewhere. As always, a little bit of
tax knowledge goes a long way, so hopefully you picked up a
few tidbits here and there, I know there’s probably
some people sitting at home red-faced if they
were doing something funky, just know that the tax laws
are extremely forgiving, if you take action to fix it. And Cheri says thank you,
it was great seeing you too. Hi Cheri. A client I had lunch
with, that’s always fun. Hey, they are always cool
when they come into town sometimes people reach out
and say let’s go have lunch, and I’m like, sure, I’ll
meet anybody anywhere. – [Jeff] I’m always up for lunch. – [Toby] Yeah, it’s always good, right, it’s always fun to hang out with people, they are really cool. Cheri, we have gone motorcycle riding, if you guys like Harley’s
they are awesome, they are just a hoot, so
they are really good people. So I’ll say hi, hi Cheri. And Alison and all the cool
people I get to hang out with, that’s the benefit of
doing tax stuff guys, is we get to see people all
over the country all the time, and we’ve been doing this
so long that it’s cool, you guys don’t even realize, but just for this little webinar we had over 1000 people registered on it. So you are in good company. So keep learning, don’t get discouraged even if you have a bad tax mishap, I always look at it like
it’s touching a hot stove, just know don’t touch it again, and don’t put your hand on
it and say it’s not hot, it’s not hot when your hand is burning. Let’s just use some common sense and a little bit goes a long way, and in this wonderful world
if you are in the realm of entrepreneurship you should
benefit from your activities, the tax laws are written
to give you benefit, and the one word that I like to hear more out of clients mouths or anyone who is in business, is how to I write that
off as opposed to can I, the answer is too easy to a no, or it depends, it’s much
better when you say, how do I write it off, now we’re thinking. And we are going to find a way, and it may not be the way you think and it may not be the way we think, but it always pushes us. If you can’t tell we’ve
been doing this a long time, Jeff, how long have you been a CPA? – [Jeff] 27 years. – [Toby] Yeah, so I’ve been 20
something years plus myself, 22 years. Every day we learn something new, so what is that, 49 years and
then we have Gary downstairs who’s been doing it for
ever, all these guys. Doug downstairs has been doing
it thirty-something years, a lot of these guys you
always learn something new, so don’t be discouraged, if it was straightforward
everybody would do it, right. But a little bit of tax
knowledge goes a long ways, so we will see you next Tax
Tuesday, what, two weeks? – [Jeff] Two weeks. – [Toby] It will probably
be, well it’ll be April, so we’ll see you in April. Thanks guys. – [Jeff] Bye. (upbeat music)

2 thoughts on “Tax Tuesdays – March 19, 2019 EP 87

  1. Thanks for uploading

  2. 39:30 I would like to do this with my primary home.

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