Tax Tuesdays w Toby Mathis – July 9, 2019 EP 95

Tax Tuesdays w Toby Mathis – July 9, 2019 EP 95


(logo tones) – [Toby Mathis] Hey guys, this is Toby Mathis. – [Jeff] And Jeff Webb. – [Toby] And you’re
listening to Tax Tuesday where we bring lots of fun
tax knowledge to the masses. So first off, happy summer, I guess, we’re right in the thick
of it, about 100 degrees here in Vegas, hopefully
you’re getting some sunshine. Just to be completely annoying, Alexa play Tax Tuesday. Let’s see, I wonder how many of you guys actually have your stuff going. (Jeff chuckling)
I didn’t realize that you could control somebody’s Alexa from another machine. – [Jeff] Oh yeah. – [Toby] So, if you had that on speaker, you really hate me right now. Maybe it actually switched you off. All right, so let’s get jumping on in, it is just a little after three our time so we’re ready to get rolling. Already have some questions coming in, which we will get to, there’s
some really good ones already. Lot of good questions. And then of course you can ask questions via the chat feature. So, let’s get jumpin’ on in. First off, if you ask live we’ll answer toward the end of the webinar. We’re gonna jump onto these. What I try to do is when
somebody asks a question that’s relevant to some of
the questions that we go over, we try to answer it first
and then we go back, we grab all the ones
that were left behind. Send in your questions at Tax Tuesday, just that [email protected], you see the link there. And that’s where I grab
the questions we go over. Depending on how quickly
our staff gets through ’em, I usually grab a whole of ’em. If we have time today I’m gonna
dive into all those as well. If you need a detailed response, like if it’s very specific to you, you’re gonna need to become a client. And that comes in the form of two ways. You can either become a platinum
member, or a tax client. Both very easy to do,
you can always contact [email protected] and say, “Hey I need to get some of my
personal questions answered.” and they’ll get you where you need to go. This is fast, fun and educational, we wanna give back and help educate. As you guys know we don’t
get paid to do this. We have a lot of CPA’s
that jump onto these calls. I just like the idea that
business owners not over paying. For me, that just, for whatever reason, I get a little bit of joy out of that. Maybe I’m weird. Hey, if you like this sorta
stuff, go to our Facebook and YouTube channels,
you can always find it at Anderson Advisors
forward slash Facebook, forward slash YouTube,
all those fun things. I think you can even go
to forward slash podcast. All those will get you
to where you can actually keep feeding your mind. Here’s a whole bunch of fun stuff. More questions coming in
so I think we’re gonna have our hands full today. Speaking of which, let’s talk
about the questions we have. These are the questions
we’re gonna go over today. It’s should a California buyer
purchase investment rental property in Tennessee in
an LLC or hold individually with umbrella insurance? We’ll answer that. What is the best way to
transfer title in real estate without increasing the property taxes after a joint tenant dies? My S-corp will make only
around $20,000 this year. Do I still need to pay myself a salary? I’ll answer that one. When can I legally take money from a 403b, and transfer to a QRP and
how much or what percentage can I transfer if I’m still employed? I inserted the extra words there. But what percentage if I’m still employed? What is different about filing
taxes for option traders as opposed to stock traders? Can an individual place
Bitcoin in a Roth IRA account? More, I will be shutting down an LLC which has lots of expenses tied to it, can these be rolled over
to the C-corp or a new LLC? Can I pay my life insurance or family dental insurance from my LLC? Can the LLC fund my HSA? We’ll answer that as well,
HSA’s are interesting. I just learned a property
I bought and rehabbed is in an Opportunity Zone. Can I retroactively
qualify for tax advantages for the wonderful tax advantages
from an opportunity zone? Is there still a mileage deduction if I drive my personal
vehicle for my business or to get a job out of state? Next one, I have two sub S-Corps. I believe that you were
talking about Q subs here, that I’ve placed all my real estate under. Should I place the properties in LLC’s? Any tax concerns? Then how do we navigate
the standard deduction in the business sector? So let’s just jump on, right
on in and see what we can get. We’ll see what kind of
interesting questions we answer today and how
many additional questions come out of it. All right, should a California
buyer purchase investment rental property in Tennessee in an LLC or should they just hold it individually with umbrella insurance? – [Jeff] Yeah, I kinda got
mixed feelings on this. I gotta think that the LLC
is gonna be the cheaper liability protection for
your rental property. I would think for the ultimate protection you put it in LLC but you
still have an umbrella policy. – [Toby] Yeah, you always do both. So I’ll make it real easy. I’ve actually watched people
lose virtually everything they own, end up in bankruptcy
is what ends up happening, because they follow the
advice of doing the insurance. Now, how often does that happen? It’s a very very low percentage. – [Jeff] Right. – [Toby] The question is, why risk it? In other words you’re going into this, why would you put yourself in a scenario where you could lose everything? So if I’m in California especially, I wanna make sure that any
rental property that I hold does not get drawn back
into California if possible. ‘Cause California, well you have very plaintiff-friendly laws. I wanna keep it out of
the state of California and there are ways to do that. If I have property in
Tennessee I’m just gonna say that the rule of thumb is the
LLC holding the real estate and there’s inside and
outside liability real estate. In fact, I should just draw that out. Gimme just a second here. I’m gonna make myself a pen. So you can actually
see it, let’s see here. There it is. So let’s just say that we
have a piece of property. There’s inside liability, so pretend that’s a piece of real estate. There’s inside liability,
so if something bad happens on that real estate, you want
it to stay inside that box. But I’m standing out here
and that’s me, hi guys. And I do something, let’s
say I’m driving down the road in my sports car and I hit somebody. And so, (imitates crash)
they’re out, right? That person, let’s say I squished him, but let’s just say that I hit somebody and they sued me. They’re looking at outside liability, they’re gonna come after my LLC. And so for real estate,
we always wanna have the inside liability
trapped in a local LLC so that would be a Tennessee LLC, if that’s where the real estate is. Now there are some fancy ways
to get around this sometimes. I’m just gonna say that as a general rule, you’re gonna put it in there, unless there’s a reason not to. But, my outside liability,
I may stick another LLC and hold it in Wyoming that’s gonna own that piece of real estate,
so if anybody ever comes after me, they’re gonna be
stuck with the state of Wyoming. The reason we do that is ’cause you have charging order only protections. So, you get into this. Somebody says, in that
situation, living in California, property in another
state, how do you avoid getting double taxed? Well, because Tennessee taxes you, in this particular case we’d be looking at having you own it individually and then assigning your
interest over to the Wyoming because they have something
called a Family Owned Non-Corporate Entity exclusion
that does not tax you. The income will always
flow onto your personal return here and end up on your California tax return and personal. So what you’re always gonna end up doing, the taxes are gonna flow
down to you no matter what. So in this particular case
if we’re using Tennessee, we don’t wanna be subject
to Tennessee taxation, so we’re gonna make sure
that we qualify under FONCE, which is again, Family
Owned Non-Corporate Entity. And LLC qualifies if you own it. We’ll assign that to a Wyoming entity so that nobody can ever
take your stuff away, and what we’re gonna end up
getting to is a situation where you have lots of asset protection. The tax all flows down
onto your personal 1040 and we literally will
have zero tax returns if we don’t want to. Somebody says, “Can you
replace Wyoming with Texas?” Texas is good, but the
best is Nevada and Wyoming, those are the two best as
far as having very clearcut statutes that say the
sole and exclusive remedy, even in the case of single-owner
LLC’s is a charging order. So what you wanna make sure of is that you get away from paying,
I shouldn’t say paying, you wanna get away from that
court having any ability to get around the LLC. And you wanna stick it in a place that’s not in your back yard. So it tends to make state
judges go a little nutty when they don’t have
jurisdiction over an entity, end up having to go to
Wyoming in this case and assert your interest against there. And all they get is a lien. Lots of questions coming in on this. Do you still pay the LLC fee? It’s actually $800 a year, they said 700, it’s $800 a year, yeah
you’re still gonna pay the 800, but it’s typically
gonna be on what you own, so I would have it under that Wyoming. If you ask California, we just
had a Supreme Court decision that is horrendous for anybody who deals with California, and that
was the Hyatt v. Commissioner decision that our Supreme
Court just reconsidered for the third time where
they said that the California Franchise Tax Board was not liable for tortious conduct towards its citizens even if they go out of state. I’m not gonna get into all of it, but it was a pretty bad facts scenario where they followed somebody into Nevada, broke into their house,
dug through their garbage, and they just got found where
they’re not responsible. They can’t be held liable. So they’re gonna be very aggressive. So if you ask them,
they’re always gonna say, “Pay us the tax.” What I do is I say,
“Hey, I have one entity “that pays the tax.” And leave it at that. All right, so I’m not
gonna keep jumpin’ into. How does that flow on the tax return? So Larice, I think it is Larice, it flows onto your 1040 on schedule E, which is where your real estate holds. And the way it flows
through is this Tennessee entity is always gonna be
ignored for tax purposes. So I’m just gonna pretend
that it’s not even there. It’s not gonna file Tennessee taxes, you’re gonna file the taxes on this. Now you may still have to
file a Tennessee tax return for that rental income. Even, it would be no different than if it was just you owning it. And then that Wyoming
entity is either gonna be a partnership which files a 1065, or it’s gonna be disregarded, meaning it doesn’t file anything. If it files a 1065, it flows onto page two of your schedule E. If it’s disregarded, it just goes to page one of your schedule E. And Jeff, have I said
anything that’s wacky? – [Jeff] No, I agree. And the nice thing about Tennessee is, like Nevada, Texas and
Wyoming, they don’t have an individual income tax. – [Toby] Right. – [Jeff] Unless you earn
interest in dividends, I believe they tax those. – [Toby] There’s some. – [Jeff] So again, you
may have to file a form with Tennessee but otherwise
it’s gonna look like, it’s not gonna matter whether it’s an LLC or not for tax purposes. – [Toby] Mm-hmm. Somebody said, “What about Oklahoma?” Yeah, you can do Oklahoma. So you could just change the name. I have property in Oklahoma
and this is exactly what I do, I have
Oklahoma City and several, few dozen properties there. And we do the exact same thing. We have an Oklahoma LLC
pointed to a holding company that falls under our return. And it files a partnership return. So it’s pretty standard,
this is what you do. Somebody said, “What about the anonymity? “Can’t they still see me?” In Tennessee if you wanna
get away from ownership being traceable back to
you, you use a land trust. And I don’t wanna get too far off track. You use a land trust to
hold the real estate. That way it’s not even in the LLC name, so they don’t see your name. So that’s how it gets kinda fun. Let’s see, somebody says,
“Use EAN from owner not, “disregarding even a L, is
there anything to be aware of “in completing this form?” No, yeah, the W-9, that’s federal tax. They’re just looking,
again they’re tying it in. So, the question was,
hey on a W-9 it’s asking for the owner’s social security number, because that’s where
it’s gonna be reported. – [Jeff] Right. – [Toby] Even if an LLC
has its own tax number, we’re telling the IRS to ignore it. Now if it’s a partnership,
different story. It’s filing its own return,
it’s giving you a K-1. – [Jeff] But real quick on that W-9, you’re gonna list on line
one, you’re required to list the ultimate owners name. In line two you would list the LLC’s name. – [Toby] Somebody always pops in. All right, so. Going back to Tennessee. Somebody says, “Hey, there’s
a excise tax in Tennessee.” Correct, that’s why we filed the FONCE, which is how we avoid it. It’s a foreign own, F, Family Owned Non-Corporate
Entity exclusion. Oops! Sorry, I’m hitting things all over. And so that’s why we’re filing the FONCE. And then the LLC’s always
gonna need a registered agent. If you live there, you’d act as your own. If you need one then it’s us. You’re always gonna do that,
and yes there’s a cost to it. It’s cheap insurance, trust me. And you always have to be careful when a lawyer says trust me,
but you always look at it and say it’s much better to have something and go meh 125 bucks
that I just threw away and never need it, than to lose everything saying, man I wish I’d paid that $125, that would have been way cheaper. And what we’re really
talking about is avoiding the law suit all together. We don’t want someone to
see everything you own. This is a tax webinar. So I’m just gonna say
from a tax standpoint, we set these things up to be ignored. From an asset protection standpoint, you set things up to
where people can’t see it. The whole idea is if they can’t see that you own stuff, the
likelihood of you being sued goes down considerably, in
fact, it’ll go down to zero. And so what we see with our clients, and we have tens of thousands of clients that own substantial assets. They just don’t get sued very often. It’s very very seldom. Now I can tell you when we see problems, it’s almost always somebody walking in who went off of just
insurance and the insurance gets declined, or they’re
dealing with insurance with a reservation of rights
and they’re freaking out, because somebody saw what they owned. And we had a father-son
team where we saw this thing play itself out and it was
a multimillion dollar claim, where they were looking
for a responsible party. The son got out for nothing, literally, because they couldn’t see what he owned. Dad had everything in his
name and they pegged him to the wall, they just
would not let go of him. And you have something called
joint in several liability in many cases where if you’re 1% at fault, you’re 100% liable, and
so they’re just looking for the party that they can
name, that has the money. And if you like having all
your stuff in your name, then you’ll get that joy
of getting those law suits. If you don’t have it in your
name and you have it in, you have it separated out
where they can’t trace it, then you don’t get it. Yeah somebody says, “What’s FONCE?” Family Owned Non-Corporate
Entity exception. It’s in Tennessee and it keeps you from playing the excise tax. Let’s see, somebody says,
“Platinum member, what is my cost “to be a registered agent in Texas?” I think it’s $125 a year. You said each rental
property gets its own LLC, does each land trust
only hold one property? And can I put all my
rentals in one land trust? You’d use separate land trusts. And Michelle, you may use one of more, you may put two or three
properties in an LLC. Best practice is to have one LLC, but we know there’s costs involved. And every state’s different. So if you’re in Ohio it’s really cheap. You’re in Texas, it’s more expensive. So, you’re always looking at it saying, hey what is it worth to separate it out and it really depends on
what type of property it is. Is it a million dollar property
with half a million dollars of equity or is it a
$50,000 house, you know? So you can go in and say,
“Hey, I really don’t want “to spend a ton of money “on my LLC’s ’cause
they’re really expensive, “maybe I’ll use land trust.” And that’s way better
than, I don’t wanna throw a bunch of money away. On like little houses, $25,000
houses if you’re in Tennessee for example, or in Kansas
City or some of these others. You may not want to
spend a thousand dollars setting up an entity. You may say, hey you know what? I’ll just go with the land
trust and I’ll put five or six properties, it’s whatever
you’re willing to lose. So again, I can tell ya, best practice is separate LLC’s but I
know that’s not always. When would you use a
land trust versus a DST, Delaware Statutory
Trust to own a property? So a land trust is a grantor trust ignored for tax purposes, so is a
Delaware Statutory Trust, but the Delaware Statutory Trust are used when you’re doing a 1031
exchange generally speaking. Otherwise your land trust
is gonna be sufficient depending on what state you’re in. In other words the land trust
should be a local entity. If you’re using a
Delaware Statutory Trust, more likely than not you’d
have to have a land trust pointing to it anyway. Let’s see, somebody said
something about Clint. Yeah, he’s my partner, he’s a good guy. My properties are managed
by property managers, when the property manager told
someone that I’m the owner, someone can still find out. It’s not about keeping, so Carolyn, let’s say that you’re my tenant and you find out that this Toby
Mathis guy owns your house. And then you say, hey, I’m
thinking about suing him, then they run Toby Mathis
and they go see what else does he own and they
can’t find anything else, that’s what you want. You don’t want it to where
hey, nobody could ever know that I own a piece of property. What you wanna make it is
that unless you tell them, or unless they really do some serious, like they must know
somebody and they really had to dig around for it,
they’re not gonna find it. I would say good luck. You know who I am, go
find everything I own. It would be really difficult. And all you’re trying
to do is put up hurdles so people don’t just tag you. I’ve had clients that have been sued simply because they
could see that they own a personal property in
California in Huntington Beach. And they say, “You must have money.” So there’s always gonna be a threshold where you say hey,
someone’s just bad taste. What you don’t wanna do
is tempt it by saying, “Hey, I found your
property, and by the way, “I can see you own 10 more in town.” That’s a much different law suit. Hey, I have something I can get and the local judge can order it. All right a bunch of
questions, that land trust, does it trigger the due on sale clause? Not necessarily so Fabiola, this is under the Garn-St Germain Act. So Garn-St Germain says
that if you have a piece of property that you put into trust and it’s your personal residence they cannot call the note due. But as a practical matter,
when you put things into trust, banks don’t call them due. We’ve done tens of thousands of these and never had one called due. You don’t get ’em called
due when you put them in an LLC either for the most part. The only time you see ’em called due is when you tell the bank, “Hey
I’m gonna put it in there.” As long as they’re getting paid, they generally don’t care. Let’s see, yeah, so somebody said, “Hey, I asked it because
I had probably in LLC, “but when I refinanced the
bank had me quick claim it “to my name.” Yep, ’cause that’s the only
way, whenever you refi, even in a trust they’re
gonna make you take it out of your name, I mean, take it back and put it in your name, if
it’s a conventional loan. – [Jeff] I’ve seen that quite a few times. – [Toby] Yep, and the
reason being is ’cause with a land trust or an LLC
I can change the ownership very quickly, so the
bank really doesn’t know. It kinda gets funny. – [Jeff] Yeah, the only time
I’ve ever seen a note called in those cases is where the bank felt that their investment was truly in danger. – [Toby] Yep, and if you
do a commercial loan, by the way, and you do an LLC,
they’re not gonna want you to close in your name,
they’re gonna wanna close in the name of the LLC
and they’re almost always, I can just tell ya ’cause
I’ve done a bunch of these, they’re almost always gonna want the loan to be with a special purpose entity, usually in Delaware and
the property to be owned by another LLC. In other words, they just
don’t want the headache of you or the properties
getting into the way of that loan. And then, which case,
they’re gonna do a loan directly to you and if
you ask for lenders, I can tell ya A10 is a good
one, CoreVest is good one, and there’s some really
good guys out there. They will not let you close in your name. That’s when you’re actually
buying in an entity. Let’s see, do we have
to list every property or a total amount on the 1040 Schedule E? So Larice if you have a
bunch of personal properties that are going on page
one, they would be listed. If you do this through a
partnership, hint, hint, then you do a total
and it goes on page two of your Schedule E. – [Jeff] But then we have
to list them separately on the partnership return. – [Toby] Yep. You’re still gonna list ’em.
– Just like, you’re still gonna list ’em
but Schedule E, correct. – [Toby] Right, so here’s
why you use the partnership. ‘Cause if you go in for a loan
and you have 50 properties on your page one, good luck. If you go in for a loan and you have a K-1 that says here’s the total amount that you’re making, much easier. So I’m just gonna say, and if you are ever gonna sell commercial
property you wanna make sure that it’s in a partnership
because the buyer, if they’re financing it, for example if they’re buying an apartment complex, they’re gonna need that
separate tax return to qualify for the loan,
and it’s really gonna be frustrating when you tried, ya know, hey I saved a little bit of money, but now I can’t sell my building. We have a lender’s name here, for the ones that won’t close without an LLC. And we have the lenders
name here for the ones that won’t close, oh CoreVest and A10. There’s a whole bunch out there, but you look at CoreVest
is the one that I use. I’ve done both, I’m trying to think if I’ve done some others. I’ve done some others, bank in Hawaii, I’ve bought some properties there. Somebody just asked about
would you do the same thing in Indiana if you live
in Hawaii, absolutely. That’s exactly what you’d do. You’d own the property in an Indiana LLC or land trust pointed to an Indiana LLC and have that owned by a Wyoming LLC and then you would own it
and you’re living in Hawaii. Sounds complicated, but
once you get used to it there’s only one way to do it right. So it’s kinda like, hey, here it’s easy. Somebody says, “We are
building a new house, “it will be partially financed. “At what point do we deed
it into our living trust?” After you cash out that loan. So when you’re doing a building loan, usually they’re gonna cash
it out when you’re done. Let’s see, is he still on? Oh, somebody’s asking, yes
I’m still on the same screen. So I’m gonna move on, all right. (Jeff chuckling)
All right. You guys have to wake me up here. I’ll just keep answering
questions as they pop up. – Question two.
– All right, question number two, yeah,
this is why we never seem to be able to do this in an hour, usually it goes a little long. What is the best way to
transfer title in real estate without increasing property
taxes after a joint tenant dies? – [Jeff] I wouldn’t think
this would trigger an increase in property values. – [Toby] All right, I’ll tell you this. I have never seen it
triggered when you move it from this surviving joint
tenant to their individual name. Usually what they’re doing, and it depends on, it’s county by county, state by state, but if you are a joint tenant
and you’re the survivor, generally speaking you publish the certified death certificate. And in some cases you’re
doing an affidavit saying that you’re now the sole owner and you’re gonna warrantee
deed it into your own name. You don’t really have to do that though, because just by being a joint tenant with right of survivorship,
you are the own you pass. When the other joint tenant passes. So you’ll need it when you sell it, but a lot of people just let it sit there and just keep paying it even
though it’s in both names. You do not have to probate that asset just because it’s joint tenants
with right of survivorship. So what you do need is
the death certificate. So if somebody passes
and you’re a joint tenant with right of survivorship,
just make sure you get that. And in many cases you just
file that with your county and be done. If I put a property in a land trust with a title name change to,
since it’s public record, yes, it’ll be yourself as trustee, or a lot of times what
we do is an LLC that’s, we’re kinda evil, we don’t
like people being able to see what we own, so
we usually use an LLC as the trustee, it’s kinda fun. All right, let’s keep
going on to fun stuff. What is the best, so we
already answered that. My S-corporation will only
make around $20,000 this year. Do I still need to pay myself a salary? Hah hah hah, this is a tricky one. – [Jeff] You wanna give,
the multiple answer is– – [Toby] No, I like watching Jeff, ’cause I know what he wants to do. He wants to say, – It depends.
– Yeah, okay, there ya go. All right. I thought you were gonna say yes. – [Jeff] No no, I’m not gonna do that. So you did make a profit,
but then it comes down to, did you make any distributions? – [Toby] There ya go, that’s the big one. So the answer is, if you
made 20K and you left it in the company, no. If you made 20K and you took it out, the answer is yes, you have to pay yourself a reasonable salary. Isn’t that fun? – Yeah.
– All right, and then how much should you pay yourself as a salary? – [Jeff] I think this
question gets a little harder with the smaller profit,
because you have reasonable versus what you can adequately pay. – [Toby] See, that’s what’s fun. The test is generally speaking
is a reasonable salary, but the question is what’s
a reasonable salary? It’s facts and circumstances
and they give us no mathematical test. What we know is that there’s
cases and in every case it seems like they do about a third. – [Jeff] Yeah, they like
to tell us we’re wrong, but not necessarily why we’re wrong. – [Toby] Mm-hmm. Here’s the thing, you’re
not gonna go to court over taking a third. Have you ever seen an audit
actually go off the rails when they’re doing a third? – [Jeff] No, I haven’t
really seen that many go off the rails period, because
it’s a different audit. – [Toby] And they’re so excited
that you’re actually paying yourself a salary, ’cause
80% don’t. (laughs) This is funny. Let’s see, I switched
two rental properties under my name to LLC two months ago. I also got the local title
company to do a quick lien deed to get my ownership to LLC,
but I wonder why a city website in Philadelphia
I can still see the name as the owner of those properties. So, chances are it’s just
’cause it hasn’t updated. Sometimes it take ’em a while.
– Yeah. – [Toby] The thing about Philadelphia or Pennsylvania as a whole, is that’s the one state
where they’ll charge you for the transfer into anything. Even if you put it into
a, even into trust. It’s pretty annoying. And then somebody says,
“How would the $20,000 “flow to your tax return?” So Rory, that’s gonna go on a, so the S-corp files,
here I’ll write this up so you can follow it. The S-corp files a form 1120S and it issues a K-1 to the owner. That K-1 goes on the owner’s 1040 Schedule E, page two. You’re gonna see we like
page two of Schedule E. So, that’s how it flows. So that $20,000 is
gonna show up as income, just the profit. So if you took no salary, obviously it’s gonna just flow down. You’re gonna get what’s
called a 199A deduction which is gonna shave off
20% of that most likely, so if you had $20,000 you’re
gonna get a 20% haircut under the Tax Cut and Jobs Act. So you’re gonna only have
to show $16,000 of income. – [Jeff] I always wait
for you to do the math so I can check it.
– Yeah. So that’s assuming that you’re not above some income threshold. Somebody says, “Is it
possible to pay a salary “at the end of the year instead “of taking a salary every month?” So Louet, absolutely. In fact, there’s no federal law that says you have to pay people on a regular basis. There’s state laws that do, but you’re an exempt employee. – [Jeff] And we see that a lot
with closely held businesses. Single owners and such that
they’ll pay theirselves near the end of the tax year. – [Toby] Yep. Hey, this is an interesting one. Diana, this is going back
to our previous question, ’cause I just can’t let it go. All right what tax status should we elect, partnership or disregarded
for a Wyoming holding company that owns Wyoming Rental LLC’s
with California properties out in land trust? So I already like that
structure, I’m just. We actually won an audit on
that ’bout two years ago, maybe it’s three years ago now. Because technically what
you wanna make sure of is that holding company
is owned by a trust so you don’t wanna personally own it, you wanna own it through
your living trust, and we actually won that
audit, it was kinda fun. (Jeff coughing) And I think Jeff is dying over here. Quit dying, I’m not gonna
give you like mouth to mouth or any of that stuff. All right, so–
– I guess I can’t use the insurance if I die.
(Toby laughing) – [Toby] Don’t die on me. All right we got a
husband and wife that live in California and materially participate, so I like the material participation, but if you’re gonna be a
real estate professional, which is the bigger one,
you have to do the 750 hours and materially participate
and that’s called electing real estate professional status. You actually put it on
the notes of your return. You’d wanna aggregate all
of your activities too. And then you’d have an LLC
tax to C-Corp to manage it. So Diana, you’re doing exactly the way that I would structure it. You’d have your California entity there that’s already paying the 800 bucks. You’re not being a complete pig and then you’re making sure
that when you’re acting you’re acting on behalf,
you’re acting as a trust. So you’re gonna make sure
that your living trust, or if you don’t have a living trust, you use a personal property
trust on that Wyoming. Under your situation, if I’m
not looking at financing, I’m owning it as a disregarded, I’m gonna have that as
a disregarded entity. In fact, zero tax returns is always best. If you are ever going to have to, how would I say it? If you’re gonna do
financing or if you’re gonna have to go out and get a loan, then you’re gonna wanna make sure that you’re filing that
partnership return. But then you’re gonna have to file a California franchise tax
or the 800 bucks on that LLC. So it’s up to you. Where do you put real estate
professional on your return? – [Jeff] Real estate
professional is an election you make every year. It’s not really a form,
it’s just a statement that gets included with your 1040. – [Toby] Mm-hmm, so you
just track the 750 hours, and you’re just making a
certification that you did it. And technically it’s 750
hours and 50% or more of your personal services,
whichever’s greater. – [Jeff] And where this
calculation actually goes is on Schedule E page two,
at the bottom of the form. – [Toby] Yep. So means you’re gonna
see that keeps coming up. That page two is our magic number. Is it better for a holding company owned by a living trust or DST? I’m gonna say two different animals, but I’m gonna say a living trust is where you generally want
to have everything pointed. Somebody says, “Hey, if it’s
owned by my living trust “and I’m sued, wouldn’t
my LLC assets be subject “to charging order?” It doesn’t matter whether
you’re a living trust or just you, makes zero difference. So I hope that makes sense. Because living trust provides
zero asset protection. They’re just there for estate planning. All right, so when can
I legally take money from my 403b and transfer to QRP and how much or what percentage
if I’m still employed? You wanna hit this one? – [Jeff] Well the when you can
take money out of your 403b depends on whether you’re still employed. A lot of plans won’t
let you take money out. Most plans won’t let you withdraw money if you’re still employed
except in hardship cases. That includes 403b, 401k, 457 plan. So it’s gonna be determined
by the plan itself, the 403b and your employer. – [Toby] Yep, so what
it really comes down to is when can I legally
take money out of my 403b? Immediately, at any time you want. There’s nothing illegal about taking money out of a 403b. And a 403b is a fancy way
of saying a nonprofit’s retirement plan, so that’s
like a 401k for a nonprofit. So I have 403b or a 401k or a
457 or you name it, whatever. They’re all basically the same rule, they have plan docs. I could roll it to a QRP any
time those plan docs allow. – [Jeff] Right. – [Toby] And so for example
if you’ve ever set up a 401k through Anderson,
you know that our 401k’s profit sharing, Roth 401k’s they all allow in service distributions,
which means you can roll the money out any time you feel like. Some people’s plans don’t. So actually you have to look at the plan. But there’s no law that says you can’t. – [Jeff] One thing I would add to this, any time you’re gonna do this, transfer from a retirement
plan, to your own QRP, if you can do what’s
called a trustee to trustee direct transfer is always
the best route to go. Causes less issues with the IRS thinking that you took the money out and kept it. – [Toby] Mm-hmm. Anything else you wanna throw in that one? – [Jeff] Nope, keep going. – [Toby] We’re getting
hit with lots of questions and I’m just gonna say hey, Patty, you’re gonna have to grab
(speaking in foreign language), I think that’s (speaking
in foreign language), grab that, that’s very specific. That’s gonna need to
become a regular question. Let’s see, what is
different about filing taxes for option traders as
opposed to stock traders? Well, usually stock traders
have money on their return. (men laughing) Wait, hold on for a second, who said that? I’m just kidding. Come on you guys, lighten
up a little bit out there. – [Jeff] Yeah, there’s anymore there’s not a whole lot of difference. As recently as six or seven years ago, we used to get no reporting
from option traders. – [Toby] Now you get the
purchase, you get all this. – [Jeff] It’s so similar
to the stock trading. As far as the tax laws themselves, there’s absolutely no difference. – [Toby] Exactly. – [Jeff] Short selling
works a little differently both for stocks and for
options but otherwise, not much difference. – [Toby] See, nobody
laughed at that either. – [Jeff] It was funny. – [Toby] See? No, option traders, when the
IRS as you say somebody did, all right, see I need a little
feedback once in a while. See there’s somebody else right. So, if you are trading in the market, the question is when do
you become a business? And I never wanna make this a question that I’m trying to prove to the IRS, so I tend to avoid it by
using LLCs and corporations. If you are in the stock market and that’s what you’re doing, then what happens is the
losses become ordinary losses if you are a trader in securities. And securities includes both options and stocks–
– Right. – [Toby] And securities so, and
frankly it could be futures, it could be currencies, technically it could even be Bitcoin. ‘Cause Bitcoin is not a currency, it’s even a capital asset. So all of those things comes in and comes into play when you’re deciding how to be traded. There is no difference
between the tax filing for option traders and stock traders, it all goes on your Schedule D. So your 1040 Schedule D,
but if you are gonna file as a trader you better make
sure that you’re either buying stocks repeatedly
throughout the day, and I would say probably 700
trades a year round trips. Option traders have a much
easier time doing that since they tend to be in and
out on the option they swing. They’re so volatile. Somebody asked, “Can a husband
and wife filing jointly, “take two separate Roth
IRAs and contribute $7000 “to each IRA each year? “Does that make sense?” – [Jeff] Actually you have
to have separate IRAs. – [Toby] Yeah. – [Jeff] They’re individual
retirement accounts meaning truly individual. You can’t share an IRA. – [Toby] Yep. Somebody says, “How does real estate “professional benefit me?” I’m just gonna touch on this real quick. Real estate professional allows you to deduct all real estate losses against your personal taxes. It becomes ordinary. Here’s a fun one. Can an individual place
Bitcoin in a Roth IRA account? The answer is yes. It’s just whether the plan
documents will allow it. It gets back to this thing
where if you open up an account, let’s say at TD Ameritrade,
they might not let you buy real estate or do Bitcoin,
they’re all capital assets. – [Jeff] The biggest
issue here is custodians hate these kind of things. They hate real estate,
hard to value assets. – [Toby] Yep, so you’re
gonna have to go to a– – [Jeff] This is a perfect
time for a checkbook IRA. – [Toby] Either a checkbook
IRA or a self directed IRA, or avoid the IRA and just do a 401k and in any case what you wanna be away from is somebody whose plan documents are saying you can’t do it. So if you wanted to do a
good self directed IRA, they’ll probably let you
do whatever you want there. If you wanna avoid the custodian
you could just do a 401k. Somebody says Pensco
IRA Club there’s a bunch of good ones out there. With us, we do our own
401k and it lets you do whatever you want. Of course there are some
reasons to use a 401k. You can pool your account together if you’re husband and wife. And you can contribute a lot more. So each person could contribute,
it’s 19,500 this year, a max of 56,000, with
the catch-up provision of an extra six grand. If you’re over what is it? 59? – 59 and a half.
– 59 and a half, all right. Do you mean 401a? Sara you can do a, so our
401k includes the profit share component to it, so it’s
basically a solo 401k which includes the 401a provision and the Roth 401k. So yeah, you can buy again,
whatever you want inside those. – [Jeff] Oh there are
some exceptions though. You can’t put collectibles in ’em. – [Toby] Yeah, yeah, well
you’re talking about, all right. So there are certain things you can’t buy, collectibles would be one. – [Jeff] Insurance is
another that I’m aware of. – [Toby] 401k’s can
actually own insurance. – [Jeff] Okay. – [Toby] It depends on the type insurance, they generally can’t do term. And depends on the type
of gold or precious metal you’re buying, usually it’s– – [Jeff] Right, so can’t
put rare coins in an IRA, but you can put in modern gold coins. – [Toby] And somebody’s
pointing out that the catch-up is actually over 50. Yeah you’re right, it’s
gray hair, it’s 50. – [Jeff] Oh you, okay. – [Toby] Yeah your catch-up. How lucrative is buying
discounted promissory notes and/or trust deeds to,
oh somebody’s asking, that’s a pretty generic question. I thought you mean for like a, How lucrative is buying
discounted promissory notes and/or trust deeds to
generate passive income? If you’re asking that
inside of an IRA or 401k that’s one thing, if you’re
just asking in general, it can be very lucrative
depending on what you’re buying. Always come down to it. – [Jeff] Now one thing
I had thought about is, I approach that magic
age of 70 and a half, I am a little more wary of
putting hard to value assets in my IRAs or 401k’s. – [Toby] Because you’re
having to do the required minium distribution.
– Right. – [Toby] And then they’re gonna say hey. Yeah, oops, did I not answer this one? Oh here we go. We gotta get on task, my friend. – [Jeff] All right, I’ll stop talking. – [Toby] I’ll be shutting down an LLC which has lots of expenses tied to it. Can these be rolled over
to the C-corp or a new LLC? That’s an interesting way of saying it. If you shut down an LLC, let’s
go through this real quick. You’re never gonna get 1244
stock loss treatment on a LLC. So, if you have losses stuck in it, it’s gonna be a capital loss, which means it’s gonna
offset capital gains. So if you have other
capital gains, go for it. Otherwise you cannot roll
them into something else. You need to keep that entity alive and have it generate income at some point. – [Jeff] The only thing I
thought was that the LLC was actually disregarded
to a C-corporation. In that case I would think
those, any expenses of the LLC would stay with the C-corporation. – [Toby] Yeah, so if you have an LLC that is disregarded to a
C-corp, not really seeing that. But let’s just say that you did. Then it would be the C-corp. It goes to the owner. But if this is an LLC that’s
disregarded just in general, those losses you would
have taken personally on your Schedule C. If it’s partnership you’re
gonna have some of those losses. If it’s a C-corp you’re
not, you’re just gonna have capital losses. If it’s an S-corp can you
disregard to an S-corp? Yep, you can actually do that too then. Again it all comes down to a whole bunch of what-ifs on this. – [Jeff] Yeah, you’re
just not gonna be able to move those expenses to another entity. – [Toby] Nope, not
unless it’s owned by one. – Yep.
– But interesting question. So I guess what, the
answer’s really gonna be, and it depends, we’d have
to look and see ’cause, as you guys know, if you’ve
been on this call before, LLC’s, that is not a tax designation. So you never say to the IRS,
“Hey, I’m taxed as an LLC.” What you do is you take that LLC and you pick a tax treatment
of either ignore it, which is called disregarded,
treat it as a partnership, treat it as a corporation and
then if it’s a corporation treat it as an S or a C. You’re always picking one. And then if it’s ignored,
then whatever the owner is is where it’s gonna flow. So C-corp owns an LLC,
makes it disregarded, it’s flowing on to that C-corp return. – [Jeff] So somebody asks,
“Can you disregard an LLC “to an S-corporation?” The answer to that is yes, you can. – [Toby] Absolutely, absolutely. So, good questions. I always love these. So anyway, so if you ever
wanna just annoy somebody you just say an LLC as a tax designation, show me where it is on the SS4. All right, can I pay my life insurance or a family dental insurance from an LLC? Can the LLC fund my HSA? So we’re gonna go back to
this previous question. We’re gonna say, that’s why
we love these questions. The LLC is not a tax treatment. So we have to determine what it is. So let’s say that I have a C-corp, then could it pay for your life insurance? It could always pay for
your life insurance. The question is whether it’s
taxable to you if it does. So most people are aware
that there’s an exception for group life insurance
with a death benefit of under 50,000. Again there’s some restrictions
on if it’s top heavy. In a C-corp, maybe, in an S-corp, now way. That’s always gonna be taxable to you. Dental benefits, again if it’s a C-corp you can write them off. If it’s an S-corp it’s taxable to you. – [Jeff] Right. – [Toby] So and if it’s
an LLC that’s ignored then it’s gonna be taxable to you as well. Can the LLC fund my HSA? And again it depends. If it’s a C-corp the answers
really unless it’s providing an employee benefit
there’s no reason for it. Because you could write it off. So you don’t need to have a
deduction out of the C-corp. You wouldn’t have the
business paying for it. You would just pay for it. Because you can write it off. It’s a what, up to $7000
this year for a family, that you can put in an HSA. – [Jeff] Right and 3500 for an individual. – [Toby] That just stands
for Health Savings Account. Let’s see, somebody says, “Does
Anderson Business Advisors “have a retirement planning division? “I live in Seattle.” Yeah, we have an office in
downtown of Tacoma on Broadway. So you can absolutely
go and check those guys. What about medical insurance premiums? That’s a great one, mean it? So if it’s a C-corp it can
reimburse anything and everything that’s medically related. If it’s for the cure or
mitigation of disease you can write it off,
you don’t have to worry. The only issue is if I find an HSA and then I say, it’s a
Health Savings Account for those of you guys who are asking, there’s a number of you guys, what it is is it’s account
that I can write off, and it’s really the best of both worlds. I get to write it off as an individual, it’s kinda like an IRA, but
it’s a health savings account. As long as I use that
money for health expenses, I don’t have to pay tax on it. So I can write it off and I can
use it for medical expenses. Now if you have a C-corp already
floating around out there, there’s no reason to do an HSA. ‘Cause an HSA, when I put money into it, I’m gonna be doing mutual
funds or whatever they’re gonna allow me to do it. If I keep it in a C-corp
then the corporation can continue to grow that
money however it wants. And it can just reimburse me. So I tend do, it’s called
a health reimbursement, – Arrangement.
– Arrangement. HRA.
– HRA. So we’ve been loving those for years. In an S-corp, an S-corp if
you’re greater 2% shareholder it’s treated as taxable income to you. Somebody says, “I have health
insurance through my employer. “Can I write off those
expenses through my C-corp?” So Walter the answer is I can’t write off anything that I did not pay tax on. So I have to make sure
that I’m being reimbursed for something that came out of my pocket and not the employer’s pocket. If the employer pays it,
but you pay tax on it, you can reimburse it. If the employer pays it and
you do not pay tax on it, then you cannot. So lemme give you the real life situation. So, let’s say so I’m
married and in our company we cover the primary
employee for their health. If you wanna cover your
family you can cover it under our plan, but that comes out of your paycheck, the difference. So let’s say that it’s $500
to cover primary employee, but it’s $1300 to cover the family. Let’s do the math. The 500 was covered by
the employer of the 1300. So there’s $800 a month that
is coming out of my paycheck. Even though it says the
employer’s paying it, I’m reimbursing my employer. Now my C-corp could go and reimburse me for that, absolutely. That would be $9600 just on
the insurance premiums alone, not to mention it could also
reimburse me for my co-pays and deductibles and anything that’s not covered by insurance. Somebody says, hey, very nice
thank you, that’s awesome. What if the C-corp is not making money, can I write off my medical insurance? Yeah you can still write it off. It just carries forward. Am still W2 as a C-corp,
the standard deduction on my personal 1040 is
already around 22,000, it’s 24,400, so should I deduct
all medical off the C-corp? Yes, Sara, that’s the whole point is we don’t wanna use up
that standard deduction, it’s too tough. Plus you have to exceed, what is it, 7.5% of your adjusted gross
income before you can even start to take it. What if the $800 was pre-taxed? Then you would not reimburse yourself. So if it was pre-taxed, then
there’s nothing to reimburse since you didn’t pay for it,
somebody else paid for it. I hope that makes sense. So I’m always looking for stuff
that came out of my pocket. So if I, let’s say I had a
deductible, and the deductible was 5,000 bucks, yeah your C-corp can reimburse you for that. We have folks, what’s the biggest
one you’ve seen this year? In terms of reimbursement. – [Jeff] I’ve seen ’em
between 10 and $20,000. I haven’t seen huge ones yet this year. – [Toby] Yeah 10 and 20,000
just on the insurance, just on the reimbursement
alone, and that’s about– – [Jeff] Just the reimbursement, right. – [Toby] Yeah, that’s tax free money. Can I use the HSA to offset
long term healthcare premium? I’m not sure if the HSA can be, I don’t know the answer
sitting here on that one. HSA–
– Yeah, I’m not sure about, I wanna say yes, but I’m not sure. – [Toby] I think it’s just
for medical related expenses, but maybe, but John your C-corp again could reimburse you for
qualified long term care premiums for insurance so that’s, I thought healthcare premium
and long term premium were not taxable. Yes, they are actually. The IRS says you can deduct it, but then they give you
these ridiculous limitations on what you can actually write off. In fact it’s like 200
bucks or something a year. – [Jeff] Yeah, that’s age related and if you’re pretty
young you’re very limited. – [Toby] And you have
to exceed 7.5% of your– (Jeff’s voice muffled by Toby’s) Yeah. How long will deductions
carry over if C-corp is not making as much? I think it’s almost indefinite now. – Yeah it’s–
– Forever. And then Sara, what you
do is if you have a C-corp and you eventually just
say I’m done with it, I have all these losses,
that’s when you dissolve it and you take the losses personally. And that’s called a 1244 stock loss. – [Jeff] But you gotta have stock, it’s gotta be a corporation. – [Toby] It’s gotta be a corporation. This works for your
C-corp members too then? It depends on what you mean by members. So if it’s a C-corp and you
have employees then yeah. In fact, you can’t discriminate. So anyway, we gotta get
to another question. Bad Toby. All right, I just learned
a property I bought and rehabbed is in an Opportunity Zone. Opportunity Zone, lemme speak it clearly. Can I retroactively qualify
for the tax advantages? The answer is no. Like this is a straightforward, I wish I could say it depends. The only time actually I don’t think you can. – [Jeff] ‘Cause I was thinking the– – [Toby] The abandoned property– – [Jeff] The fund has to be
set up before the purchase. – [Toby] Yeah, so there’s
three levels of benefit for doing an Opportunity Zone. For those of you who don’t know
what an Opportunity Zone is, it’s an economically disadvantaged area where Congress is giving you
tax incentives to invest. The benefit is, you can
take any capital gain, enroll it into that Opportunity Zone through an Opportunity Zone fund. An Opportunity Zone fund is
an LLC taxed as a partnership or corporation or a
partnership or a corporation. So usually you set up an
LLC, tax it as a partnership and you file a piece of
paper with its first return saying it’s an Opportunity Zone fund. Now, first thing you get
is I roll the capital gains that I just, I had to have incurred in, I think it’s 180 days
and there’s some ways around that too depending
on whether you’ve had a, you know this was through
a private placement or something that you were
just a passive investor in or if it’s 1231 capital gains. Just think of this. There’s like 180 day test,
unless there’s an exception. – [Jeff] But the 180 days starts at the– – [Toby] Sale. – [Jeff] Nah, I was thinking it started as the last day of the year. – [Toby] It depends, if
it’s 1231 and it’s net loss or net gain, you’ll be
net gain in this case, it would be from January
first or you could choose to use the date of the sale. – [Jeff] Ah. – [Toby] It depends on
what suits your purpose. So there are exceptions. I’m just saying it’s 180 days
unless you got an exception. So if I just sell a piece of property and it’s in my name, then I’m
just gonna roll it in there if it’s investment property. So let’s say I put that in there. I’m deferring that, I’m gonna
defer that for seven years right now, you’re gonna
have to pay tax 2026. So, you’re gonna get a nice deferment, but you’re only gonna
pay, and I’m not gonna get into all the specifics,
but you’re gonna pay tax on 85% of the gain in seven years. And then you’ll never pay
tax on anything again, so long as you hold that
property for at least 10 years. Even if it makes $10
million you pay zero tax. That’s why people like
the Opportunity Zone. But you can’t retroactively get into it. You have to designate and create a fund and then that fund needs to
buy Opportunity Zone property. Then I’m not to get, my partner Clint did a fantastic webinar, I’m
sure it’s up on our site. He goes into this stuff,
there’s lots of nuances. Let’s see, if I understand
correctly I can have my C-corp reimburse me my life insurance premiums. Nada. Can I reimburse my wife, which is an officer and
two kids which is part of the board life insurance premium? So Robert it doesn’t quite work that way. In theory you can deduct up to, for a group life policy
that is up to $50,000 a death benefit which
is very minimal amount, and then if it’s top heavy,
meaning that it’s you and your family, then
it doesn’t work at all. So it’s not life insurance,
it’s health insurance. And yeah, then it could cover
all your health expenses. You can do long term care though. Uh lalalalalet’s see, says, I
have an LLC for buy and hold, some expenses I couldn’t
deduct ’cause it’s not a qualified expense. Can I include these
expenses with the C-corp? Potentially, it depends on what you mean by non-qualified expense. – Yeah.
– That doesn’t make a lot of sense if it’s,
it’s either something that you can write off or it’s not. If it’s business related or
related to your real estate. If it’s not deductible
but it’s added to basis, that’s a different animal. But if you have expenses
that maybe somebody’s saying, hey these don’t, I can’t write them off, for whatever reason, you
could pay the corporation a fee, write that off
individually and then it’s maybe the corporation can’t write it off. You just have to make
sure it’s not enuring to you personally to
make it taxable to you. So, yeah, I hope that
helps clarify that, right. Is there still a mileage
deduction if I drive my personal vehicle for my business. To answer that part, yes, first off. Your personal vehicle
for your business, yes. I think it’s 58 cents a mile right now. – [Jeff] Right. – [Toby] Or to get to a job out of state. No. If you’re doing the job out of state, unless they’re reimbursing you,
in which case that business is reimbursing you as its employee, and let’s just say they
didn’t reimburse you, then that’s commuting
and you would not get to write that off, or
it’s a personal expense. – [Jeff] And to go back to one thing, when we say if I drive my
personal vehicle for my business, that’s an assumption
that it is your business, not that you’re working for somebody else. – [Toby] If you’re
working for somebody else, or it’s your business, that
business can reimburse you 58 cents a mile, that is
not taxable income to you. – [Jeff] Right. – [Toby] Now you said
the mileage deduction. It could also just deduct
the actual expense. Somebody says, “Where can
I access recorded session?” So it’s either we’re
going to be sending it out to you, so if you registered for this, you’re gonna get a link
to the recorded session. Or, we make them into
podcasts so you can always go to Anderson Business
Advisors Podcast on iTunes or Google Play or go to Anderson Advisors forward slash podcast
and you can see it there. Or it’s gonna, we archive ’em. I think we’re getting
close to 100 of these that we’ve done that are
in the Platinum Portal. Let’s see, recorded session. Can RMD payments be sent to a C-corp? Required Minimum
Distributions out of an IRA. Answer’s no. You could put ’em in a C-corp, but it’s not gonna help ya at all. – [Jeff] Yeah it’s still your income. – [Toby] Yeah. All right–
– You can’t assign it. – [Toby] Bad Toby. And we had some questions
earlier on we gotta get to also. I have two sub S-corps. So when somebody says sub S-corps, maybe they just mean S-corps. – [Jeff] Yeah, I think they’re
saying sub chapter S-corps. – [Toby] All right, sub
S-corps that I’ve placed all my real estate under. Should I place properties in LLC’s? Any tax concerns? So the first thing is,
depending on how many pieces of real estate, I would
always separate them out into, oh by the way somebody says, “Is the mileage an
un-reimbursed employee expense “no longer deductible?” Correct, they did away
with miscellaneous itemized deductions under the Tax Cut and Jobs Act. You can no longer write
them off on your Schedule A. Un-reimbursed employee expenses
are no longer deductible. It sucks, but that’s just yeah. – [Jeff] And some people
had substantial expenses. – [Toby] Right. And that’s horrible.
– Yeah. – [Toby] Yeah, so you have to
write Congress and thank them. Though, you’d have to stand
in line behind all the guys with the SALT limitation. You have clients that are
losing out on 40 and $50,000 of deductions in New York
and California and Maryland and New Jersey and Connecticut,
they’re all ticked off. All right, so I have two
S-corps, and I have lots of real estate, so you should
separate the real estate. Remember what we said
about inside liability and outside liability, it
still applies even for S-corps. You wanna make sure that
you don’t have 10 pieces of property where there’s a fire on one and it costs you the other nine. Now, the reason you don’t
typically put real estate in an S-corp is because
if you take it out, it’s a taxable event and
it’s treated as wages. So if you ever distribute
that property to yourself you’re gonna have an
issue if it’s appreciated. If it hasn’t appreciated
then no harm, no foul. You could, I guess, potentially buy it out of it if you wanted to do that, but again, it’s better to
just use disregarded entities or partnerships and not get
yourself into that pickle. If you’re just gonna
hold ’em forever then, when you have a step up
in basis when you pass, then your estate can fix the problem. – [Jeff] And partnerships
don’t have that issue. – [Toby] Yeah, partnerships
never have that issue. Is there a limit for
depreciation deduction and cost segregation
on investment property? No. The depreciation, you’re writing it off, I’m just gonna say no,
somebody just asked a question. Somebody says, here’s one that’s relevant to this question, So what’s the difference between having a real estate investment
company as an S-corp and the company also owns the property which falls under the S-corp? Would the rules still apply
about not having property in an S-corp? I’m not sure I quite understand that, but lemme try to figure this one out. So a real estate investment company, if what you’re talking about
is something that’s flipping, we’re buying and selling
and we’re just keeping it off our personal return as a dealer. If we’re holding and
we’re buying these things to accumulate, then
that S-corp holding it, if I take the property
out and I distribute it to a shareholder that’s
treated as ordinary income. Whereas if the same scenario,
let’s say I had an LLC taxed as a partnership, I
could distribute the property out to that shareholder,
they could refi it, put it back in, no tax, no foul. I do that with an S-corp,
I have a taxable bit. There maybe a exception,
somebody mentioned an exception once, another attorney. I mean, I haven’t seen
it, I couldn’t find it, but they said, “Oh, if
you take it out to refi, “you could put it back in.” I’m not aware of that exception. It doesn’t mean it may be not out there, but I certainly couldn’t find it. – [Jeff] Sounds logical
so it’s probably not true. – [Toby] Yeah. Anyway it gets kinda clunky. Next one, how do we navigate
the standard deduction in the sector? Actually someone just said,
“So it’s essentially the owner “of the real estate,” here
I’m gonna go back to this one just ’cause I’m getting clarification. So essentially the owner
of a real estate business with real estate titled
under the S-corporation is costing themselves? Yes. Yeah, you don’t need to do
that, you shouldn’t do that. Doesn’t mean people won’t. Like I will sell my house
to capture a deduction to an S-corp if I’m gonna keep that house and I still want my half a
million dollar 121 exclusion. I might sell it to an S-corp. But I’m never selling it
and I’m probably never gonna refi, I’m just
gonna keep it in there and rent it forever. And then when I die I let
my family deal with it. They’ll get a step up in
basis they can distribute the money on, ’cause
now you have basis equal to the value of the
property, no taxable event. That’s always the issue. If you have appreciated
assets inside of an S-corp you need to distribute
’em, that appreciation. So I bought a house for
100,000, it’s worth 200, I distribute it to a
shareholder, my basis is 100, the value of the property
is 200, that means I have $100,000 of taxable income
just by transferring that. So I don’t have that in a partnership, I don’t have that in a disregarded entity. I only have that in an S-corp. So let’s go back to this question. How do we navigate the standard deduction in the business sector? You could answer this
one, you love this stuff. – [Jeff] I’m not sure what
they’re asking. (laughs) – [Toby] (laughs) I knew
that was gonna happen. ‘Cause I don’t really
understand what they’re– – [Jeff] There is no standard deduction on any business return. – [Toby] Yep, so if the question is this, actually I can see what it comes into. So you have your standard deduction and it’s really high, so let’s say, I’m just gonna use for an example, I have married, filing jointly, filing jointly. I have a $24,400, I think
that’s what it is, standard, is that it for 2019? – [Jeff] Yep. – [Toby] Standard deduction. So in that standard
deduction I have things like my mortgage interest. I have, oops, interest. I have charity, I have health, I have my state and local taxes. So I add all those things
up and they’re part of that $24,000. If you have a business and
you’re underneath that $24,400 then what you have to ask yourself is hey, maybe if I was to give money charitably, I wouldn’t get to write it
off because I’m underneath the 24,400, but if I
have a business out here, rather than give the money to charity, maybe I do an expense for advertising to the 501C3, so I might give it money in exchange for something. So I go to my church and instead
of just giving them money that I would never get to write off, I say, “Hey, I have a business. “How about you list my
business in your programs “and I give you 5,000 bucks?” You’d give ’em $5,000 anyway,
but now you’re doing it in exchange for something. Now it becomes a business expense, which I can write off 100%. And now I don’t have to worry
about my standard deduction. I get to take my full standard deduction and that $5,000 would
have done me zero good if I had done it as an individual. Now people are starting to see this. The charities last year, on
a inflation adjusted basis, charitable giving by individuals was down, I wanna say 3.6%. It was not a small amount of money. It was billions of
dollars that it was down, because they’re not getting
as many deductions for it. Now what’s interesting is
charitable giving as a whole was up because more and
more people are giving to their foundations which
are given the charitable deductions and businesses
were giving more. So it made up the gaps. I used to call it Tax-mageddon,
the unintended consequence of the Tax Cut and Jobs
Act was that charities were gonna lose out on
billions of dollars of giving ’cause nobody was gonna do it if they don’t get a tax benefit. And of course enough
people were seeing the ways around it, which we say
hey, do multiple years, use your own charity, use a
DAFy, a Donor Advised Fund, if you don’t know what that is. Do all these things where
we’re able to give more tax deducted in a particular year. – [Jeff] Right. – [Toby] And it seemed
to make up a lot more than what they anticipated. It was great though you guys. Americans give away lots of money. And if they have a tax benefit
they’ll even give away more. So, that’s how you use a business to navigate that standard deduction. Trying to think of any others. The other way, by the
way, is here’s another one just for funs, for giggles. So this little mortgage interest, if you have a home office, and I’m not talking about a Schedule C, I’m talking about an
administrative office in your home, so administrative office,
and your employer, which can be you, reimburses you, you can knock off a percentage
of even your mortgage interest and your property taxes. So I can hit these guys right
here through my business. My health, if you have a C-corp
we can reimburse that too. And what we’re allowing
ourselves to do is reimburse ourself expenses, write
them off through the company and then I can just take
my standard deduction. – [Jeff] And this is really a good tool when you’re being hit
by that SALT limitation, the limitation on state
and local income taxes. – [Toby] Absolutely. – [Jeff] You’re limited to
$10,000 of that deduction, but if you can put some
of it on a home office or other places, they’re
perfectly deductible there. – [Toby] Yep. Now, let’s talk how do you keep learning? I know that you guys are all on the call and I love that you guys
are all on the call. There’s only so much we’re
gonna be able to get to here. This little guy right here,
$197 is the Tax-Wise Workshop. I went over 31 tax
strategies over two days at the last workshop, which was awesome. If I may say so myself. It was just me, my sorry
butt, talking for two days and we packed it. Like we went through so much stuff. So we have that recording. We have the recording from January and you can live attend, to
be a live cast, I should say, at least a live stream,
meaning that you can, you can, how do I say it? You’re not physically at the location, but you’re watching it live
so I live cast sounds neat. Live stream.
– Live cast yeah. – [Toby] There we go live stream. You get all of that for one price of $197. You just go to Anderson
Advisors three for one, right down here and do that. Here’s the rub. You do that, the typical
savings are somewhere in the $10,000 mark from what
we’ve been able to gather from surveying our clients. And the best part is we’re
looking for three deductions. I’m saying that we’re gonna go over 31, pick three, implement ’em, you never know what you’re gonna say. Now somebody says, “So you’re
saying I need a separate “organization besides the C-corp
to get donation write off?” Nope, you could just use your C-corp. Your C-corp can actually use the 501C3 and advertise with it. That’s one of the best things
you can do, by the way, is have your business sponsoring charities that you care about. Now you can own the charity, you know. – [Jeff] Now I’m gonna say that a C-corp is probably the worst place in the world to make charitable donations. – [Toby] You don’t make it as a donation. You make sure that you’re
doing this little guy. – [Jeff] Yep. – [Toby] You’re doing advertising. So you need something in return. If they say just give me money, say no. That’s what you do as an individual. If I want to give money
with strings attached, like hey, I get to give
everybody a T-shirt, I’m gonna do advertising. You’re gonna, you just
put my name out there, you’re gonna give me
recommendations from the pulpit. Hey this Sara is awesome,
her company is awesome, they do this and you rock,
you know so it’s fun. Somebody says, “Hey, at
the next live stream, “could you hit more on
traders in the stock market?” Course! And Robert I also have
a very good live stream that I did that was
half a day that was only on traders in the stock market
that I can send you too. So shoot over a request at
[email protected], Patty or somebody can get you that. I did that a while ago. Not a while ago, but I did that last year, it hasn’t changed. It was after the Tax Cut
and Jobs Act came out and it was pretty hot
and heavy on this stuff because if you’re a stock
trader, you lost the ability to do Schedule A deductions. So anybody that does
that, you gotta be using an actual entity structure
to get your deduction. So won’t jump into too far, but Robert, I could absolutely help you with that. It’ll be my pleasure. Also, freebies, iTunes. Go to Anderson Business Advisor Podcast, and Robert you got the
right setup there brother. So that’s perfect. So you do iTunes or Google Play. In either case you go to
Anderson Advisors Podcast. Here we go and you got replays
in the Platinum Portal. You can go in there. I’m gonna answer a bunch
more questions guys, we had a bunch from the very beginning that I’m gonna get to. And you can always go
follow us on social media. Make sure that if you
like this sort of stuff, we do a ton on YouTube,
and click the little icon that says, I don’t know what it says. – [Jeff] Subscribe, I believe for YouTube. – [Toby] It’s not just subscribe,
but there’s a little icon that’ll notify you when
new videos come out. – [Jeff] Oh yes, yes. – [Toby] Only when you log
in, so it’s not like it hits you in your emails, but it’ll
let you know what’s new. ‘Cause we’re always putting stuff out. I know that I record constantly and I do a lot of podcasts with people, I just did one on buy/sell
agreements, keyman insurance. I did one earlier this
week, what was that on? Lemme think, the recesses of my brain. I dunno, I’ve done some pretty cool ones, Frank Otto was one of my favorites. I did one with the Camp YouCan and a gal that did a Ted Talk. All that stuff is really cool. You can always send in your questions and we’re gonna go over a
bunch of live questions now. You can always submit your
questions at Tax Tuesday. More complicated we’re
just gonna farm you out to one of the lawyers or
one of the accountants and make them answer it. And you can always visit
Anderson Advisors again. We love to give stuff away,
that’s just in our DNA. All right, so let’s go
back to some of this. This is what I love. What is the best way
to set up my accounting and tax business? So Rory, great question. And the best way I can
answer that is it depends. Depends on how much
revenue you’re gonna make. Most people, if they’re living off of it, it’s gonna be an escort. – [Jeff] Yeah I like the PLLC. If your state has that. And then filing as an S-corporation. – [Toby] Yep, you always
have to be careful. Somebody asked, and they’ve left, but hopefully they hear this. “When one of the members
of an LLC passes away, “what happens to his or
her share in the LLC?” So first off Jeff’s gonna make
fun of you for saying share. It’s a membership interest. LLC’s don’t have shares, right Jeff? – [Jeff] Doesn’t have shares. – [Toby] Yeah, all right. – [Jeff] Which is why you can’t take 1244, but we’re not gonna talk
about that right now. – [Toby] Right, geek, tax geek. All right, so when one of
the members of an LLC passes, it depends on your operating agreement. So if you have an operating agreement, so like in our case I know what ours say, which is the survivors, the heirs, become an assignee interest holder. They don’t get to become
members unless the other members choose to allow their
shares to have voting rights and have full membership. Otherwise they just sit out there and they have a profit interest. The reasons you do that
is ’cause maybe Jeff and I are partners, but maybe
I don’t wanna be partners with his wife or his kids
or whoever he leaves it to. – Oh no.
– Right. So if something happens
to Jeff, I wanna make sure that I have protection. I always say do this stuff
also in a buy/sell agreement. And also if you have partners
and they’re really important make sure that you have
keyman insurance on ’em. So that if they pass that your company has some money to hire a replacement, this is really important stuff sometimes. So there’s that. Anything you wanna jump on there? – [Jeff] No I was just
thinking if it’s a professional organization there may be regulations that determine what nonprofessionals, how many nonprofessionals can be involved. – [Toby] Yep. And I’ll say this, make sure you own it through a living trust. You don’t wanna have to get into a probate with these things. – [Jeff] No no. – [Toby] It gets ugly
and it gets expensive. All right, if a real estate property is gifted to a child, can the
child sell the gifted property at any time or are there
certain consequences if the child sells the problem? So if you’re the recipient of a gift, technically you’re getting the basis in the property, right? – [Jeff] You’re getting the donor’s basis. – [Toby] You’re getting the donor’s basis. So if they sell it right after, the tax consequences would
be as though you sold it. – [Jeff] Here’s my concern though. If you gift real estate to a minor, can that minor–
– I don’t even think that they can own it. – [Jeff] I don’t think they can own it ’cause they can’t sell it. – Right.
– They cannot go initiate a real estate contract. – [Toby] Right so generally
speaking if you’re doing it, it’s through something either an UGMA or, which is Uniform Gift to Minors Act trust. Or it’s something else where somebody else is acting on behalf of it. – [Jeff] Some kind of FBO. – [Toby] Yeah. Because the child doesn’t
have the capacity to sell. They cannot be a signatory on it. So it’s usually gonna be
somebody acting in their stead. Either a parent or, again, I
think that they automatically create an UGMA if it’s– – [Jeff] Yeah I think contract law’s gonna be the biggest blockade. – [Toby] Yeah, but then
the other issue you have is for the parent. If it’s kiddie tax,
which is passive income, then it’s added to the
parent’s tax return. So, the child doesn’t
have a lower tax bracket thus it’s active income. So, you can have a
little bit of a problem. And then it says same tax year, two years within the exchange. I’m not certain, it’s
ringing a bell as though, I’m trying to think of if
you sell a piece of property that’s been gifted to ya,
whether there’s something that’s lurking out there. Can’t remember–
– There is a passive, passive losses play into
that, that they stay with who sold or who donated the property, rather than who was receiving. – [Toby] Okay so I gotta, maybe we look at that one a little bit. But I don’t think there’s
certain consequences if you sell if there’s gain. – [Jeff] One thing I think you
could do in this case though is to gift them a very minor
portion of the property. Maybe every year, that
can probably get tedious, but then they have a minority interest, and I would think the
majority could still sign for any sales. – [Toby] Yeah, it’s possible. But again I think they’re
gonna be a passive holder which is gonna go right under the parents. – [Jeff] Yeah. – [Toby] So this is something
you better be holding it for a while. I probably wouldn’t give
it to ’em if they were just gonna sell it, it’s not
gonna really help ’em. Is there an easy answer to how
to set up a brokerage account and business entity for trading stocks? Not looking for trader tax status. But definitely above average trading. Been told an LLC is the way to go. So Brandon I would have it in an LLC. And here’s just word
to the wise right now. Brokerage houses, if you
open up an account in LLC, about 50% of ’em are gonna try to hit you with extra costs saying
you’re a professional trader. So what you do is, generally speaking, depending on where you’re setting it up. We would just do a personal property trust and then we’d assign the
beneficial interest to an LLC. And that LLC’s managed by a corporation. Sounds more complicated than it is. What ends up happening is
the LLC’s being essentially taxed to you. I would set it up as a partnership and the corporation would be
a general partner under it. And they would get guaranteed payments. And that allows me to
write off all my expenses. And so I would only pay tax
on the net taxable income after those expenses. The reason that we do that is
because Schedule A expenses are gone under the Tax Cut and Jobs Act. You never get to write ’em off. And I’m with you, don’t try to
qualify as trader tax status. Every time I see it it’s
a guaranteed audit almost. Like it’s a huge high percentage of people that get critique ’cause it
doesn’t exist in the tax code. It’s this weird thing that somebody does that says, hey we’re gonna
take our expenses on Schedule C with zero income and we’re
gonna report all the income on Schedule D. It’s just, it’s such a weird situation. It kicks it out and then you get audited. So why would you invite an audit? It’s just not worth it. Let’s see, also as I understand the child would receive tax basis of the donor. Yep, as well as the holding period. Also does the recipient
also receive that use of the property for
determining qualification for section 121? No, they wouldn’t. Ross, they actually have to live there. You can’t get somebody else. Let’s see, my husband has
an IRA pre-tax and a Roth. He’s 69 now and doesn’t
foresee needing the money from these accounts. How can we somehow
transfer these accounts now in the future to the
wife’s retirement account in a manner that best reduces taxes? So Kim, unfortunately there’s
not a way to transfer it to the wife’s account. They would just take the money. Even if they don’t need
it, they’re gonna have a little tax on it. What you may wanna do, if you
wanna make it pretty simple, it depends on the tax situation, you may wanna look at
converting it to a Roth and then as the money comes
out, you either take it or you don’t, I don’t
think that Roth is required to be distributed.
– No. – [Toby] And it just
keeps growing tax free. So you might wanna just say,
hey, I’ll take the tax hit now, I don’t need to take
distributions out of it, so I’ll convert it to a Roth and then when you inherit the Roth
there’s not a tax hit on it. So if the surviving spouse for example, they would get all that money tax free. How would you divide building and land depreciation for condos? Both residential condo
and foreign office condo. So that’s interesting. So for depreciation
it’s just the building. You’d never depreciate land. And then, if it’s an office condo– – [Jeff] Yeah, but what
we’ve seen is IRS wants some part of your cost to go to land. Even though technically you
don’t own any of the land. – [Toby] You can do an assessed value. The percentage off the assessed value. So you’d have to look at what
the assessed land value is. You’d use those percentages. – [Jeff] Yeah, typically for a
condo, whether it’s an office condo or a residential
condo, that land percentage is to be much lower than it would be for a single family home. Or even a multi-family home. – [Toby] And that would be good. – [Jeff] Right. – [Toby] All right. – [Jeff] Your depreciation
would be higher. – [Toby] Yep. So you can
use any reasonable method. I think most the time you’re gonna use whatever the tax assessment. – [Jeff] Yeah a lot of times
we use the tax assessment. If for nothing else, to get us a ratio. – [Toby] And I don’t
foresee you getting nailed on that no matter what. They’re not able to figure it out if you’re not able to figure it out. They’re just gonna say, is it reasonable? David, I have a vacation
rental LLC formed by Anderson. I follow form 1065, is it
better to take a section 179 deduction on my furniture
versus five year depreciate? Well you get immediate deduction. IRS says you cannot unless it’s used in your trader business. If renting the vacation
home is my business, can I take furniture and
computer used to rent properties as depreciation under
179 versus five years? Thank you. – [Jeff] So furniture and
equipment used in the rental is not eligible for 179. – [Toby] Yeah, so it would
just be bonus depreciation. – [Jeff] Bonus depreciation. – [Toby] Yeah, so you’re
not gonna have to 179 it, but you’re still gonna
get to write it off. And you’re not gonna have
to do it over five years. You can elect to treat it
as an immediate deduction. – [Jeff] So it might be five
year or seven year property, but you’re still gonna deduct
it all in the first year. – [Toby] Yep, so you
can write it off David. As a federal employee, can
I open a Roth IRA in my TSP? From what I understand I can
contribute 7,000 each year into the IRA over and above
the maximum contribution catch-up contribution, is that correct? – [Jeff] I did have a
TSP when I was with IRS. I don’t know if at that time
they had a Roth provision. I wanna say that’s probably
something you need to discuss with your TSP sponsor. – [Toby] I don’t think
there’s a special rule on it. So I think that what
you’re really getting into is you can either do a traditional IRA or you can do the Roth or
you can do the Roth inside the TSP depending if it’s
part of the plan document. In which case–
– Well the TSP is a Thrift Savings Plan,
which is a federal– – Right.
– Retirement. – [Toby] Right, but it would
have to be in the plan itself. – [Jeff] It would have
to be in the plan itself. – [Toby] And usually
you can go up to 19,600 or what is that now, 25,500? – With the catch-up yes. – [Toby] Yeah with a catch-up. So you could put a lot into a Roth. Actually I could show you ways– – [Jeff] I’m pretty sure the TSP has a Roth provision though. – [Toby] If it does then
again, you would wanna talk to them and yeah, it’s
more than 7,000 higher. You’re gonna be able to
put a bunch of money in. All right, we’re way beyond time. Somebody says, I’m gonna answer one more. “Please explain a
spendthrift trust advantages, “disadvantages, does it replace
irrevocable living trust?” So Philip, and spendthrift
trust is a special statute, depending on the state you look at. The number one state,
according to Forbes is Nevada. I happen to agree with
it, ’cause we have a, what’s called a credit shelter trust, which is the same thing. Somebody cannot force
distributions out of it to a beneficiary. If you have permissible beneficiaries and a crafty lawyer,
they know how to make it to where nobody can force money out of it. It doesn’t replace
irrevocable living trust, ’cause irrevocable living trust has a lot of other provisions in it. The medical power of
attorney, the living will, the end of life decisions,
your personal assets. In a spendthrift trust
it can never make you, what is it called? It can’t make you bankrupt. You can’t put more assets than
you have outside of it in it. Because it makes you insolvent. And you cannot, so you never do that. So you use ’em in conjunction,
but they’re a very effective tool, I know ’em very well. All right, so, one other thing,
if putting a multi member LLC, how do you still
show active and material participation to allow a 1031 exchange? You don’t. So here’s the beautiful part. You don’t have to show
material participation to a 1031 exchange. You just have to show an investment and you’re buying like kind property, which is real estate. With that, we are gonna bid you adieu. We’ve gone a little over, this time only half an hour over, Jeff. – [Jeff] Yeah it’s not bad. – [Toby] All right so,
until next time guys, thank you for joining us. I’m just gonna look at the very end to see if there’s anything else. Thank you there’s a few others. Questions, we will grab
it, so this gal says, the TSP has a Roth, so we know
that so that helps to have. De de de de de de, be investment sold to a related party. I’m just gonna see if
there’s anything else here that we need to hit. We will get the other questions if they’re still lingering out there. And we will make sure that
we get those answered. If nothing else, I will
see you guys in two weeks. On behalf of Jeff and I, I
wanna say thanks for joining us and of course you can always
listen to this as a podcast or just get the access to the recording and share it with your friends. Thanks guys. – [Jeff] We’ll see ya next time. (energetic music)

Leave a Reply

Your email address will not be published. Required fields are marked *