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Tax Tuesdays w Toby Mathis – Oct 1, 2019 EP 101


(dramatic music) – [Toby] Hi, guys, this is Toby Mathis from Anderson Business Advisors, and you’re listening to Tax Tuesday. I’m joined today by Jeff Webb. Hey, Jeff.
– Hey, how’s it going, Toby? – It’s going fantastic, and
you’re in the right spot if you wanna hear some stuff about taxes. Let’s just jump right on in. I know that we have a tendency to go over. We try to do these in an hour,
but we’ve never actually, I think, managed to get
it underneath the hour. Maybe once. Let me see, make sure I can get it. If you guys have questions, by the way, just make sure that you’re
asking in the question pane. I already see a whole bunch. Wow, these guys are active today, Jeff. – [Jeff] Yeah, I know. – [Toby] Holy moly,
what’s up with you guys? Did somebody teach everybody how to type? Anyway, we’re gonna go through some of our little background rules. First off, if you want to, if you can join us on social media, we do disseminate a lot
of information that way. You can go to YouTube
and listen to our videos. If you click on that, it
looks like a little key or bell or something,
it’s a notification icon, what will happen is you’ll be notified when new videos come up,
only when you sign in. So, you don’t have to worry about getting hit up constantly with
emails or things like that. That’s not how it works. You just go on in there,
and if we do have notices, we tend to do them in webinars. We tend to do them in video. Just for example, in the
Tax Cuts and Jobs Act, people are just figuring
out some of the things now. If you had been on our YouTube channel, you would have actually
had videos in January, the month after it
passed, January of 2018. You would have known about these things a long time ahead of time. The reason being this is important is because a lot of folks only realize that they’ve lost something
when they actually have to pay the extra tax,
so we try to avoid that. Tax Tuesday rules. You could ask live, and we’ll answer before the end of the webinar. We try to do this. If you ask some goofy long questions, like, don’t write me a book. It needs to be a pretty
succinct little question. But, if it is a short question, and sometimes I ask you
questions too, you’ll see that. That, when Jeff and I
are going through these, sometimes we’re asking
clarifying questions. I’m trying to drag this thing over here. Because we want to make sure that we’re getting you the
best detailed response. But, if you write us too long, we’re not gonna be able to answer it. If you write it short and
sweet, we will get to it. Here’s an interesting one, so I’m gonna give you guys
an example right out the gate because somebody wrote a
pretty interesting question. So, before I get there, if
you have long questions, send them to
[email protected] If you need a very
specific, detailed response, you’re gonna need to
become a platinum client or a tax client of ours. It’s actually really cheap. Being a platinum client
is 35 bucks a month. Being a tax client is,
I think it’s, $29.95, and it’s basically, essentially, retainer. But, you get a lot of bells and whistles, including access to our tax classes and a very comprehensive tax
consultation, things like that. The whole idea of this Tax Tuesday is it’s fun, fast, and educational. And, we wanna give back and help educate. All right, now, let’s go to this question. How to take full advantage
of excess depreciation on passive real estate investments. This is interesting. So, somebody says they
have one million dollars in passive multi-family equity
shares and partnerships, so they have a bunch of
equity in a partnership. Let’s see, regular bonus plus cost, and you’re hitting it right on the head. You have a million dollars
in passive multi-family. If you cost seg it, and what that means is you’re breaking out the components and you’re writing it off
quicker than the 27 1/2 year. So, if it’s multi-family,
it’s residential property. And, if it’s 27 1/2 years,
which is what’s called a Modified Accelerated
Cost Recovery Systems, you could accelerate a
bunch of those into five and seven and 15 year property
and write them all off in year one under those scenarios under the new bonus depreciation
under the Tax Cuts and Jobs Act. The problem is, and
they said this, is that, if you’re not a real estate professional, you cannot offset your W2 employer income. So, the real estate professional
needs to be one spouse. And so, if you’re married,
you would have to make sure somebody is the real estate professional. And, the test that you’re using. So, this is actually a guy named Walt. The test that you’re using,
there’s two pieces to it. Piece number one is 750
hours plus more than 50%. One spouse needs to qualify for that. If you’re a W2 employee, and you’re working 2000 hours
a year, you are not going to qualify as a real
estate professional, you. Unless you’re in a real
estate trader business. And, that means, you know, basically. You mentioned a few, but I don’t even think a
mortgage broker’s gonna work. You need to be a real estate agent. You need to be in the process or broker, a construction person, an asset, you know, a real estate manager. Those types of things will qualify. And then, piece number two is
that you maturely participate on your real estate, and
what we do here is we make an election to aggregate all
your real estate activities. – Right.
– This is the one. Jeff, how often do you
see people miss this? – [Jeff] Quite a bit, especially in cases where it’s obvious they’re
taking large losses, and they’re not able to drop them. And, they have a spouse
who is not working. – [Toby] Yeah. – [Jeff] Actually, it’s the
perfect opportunity for this. – [Toby] Yes, and so when you
hit it, well, you’re right on. I’m just gonna tell you that first off. You’re right on, great job. You get to write off that passive income, and it’s no longer passive
under 460, what is it? 460?
– 469. – [Toby] Yeah, (c)(7). It’s an exception, and what
it becomes is non-passive, i.e. offsetting your active income. So, it’ll offset your W2. So, the best example I can
give you is an actual client, a lawyer friend of mine
down in Savannah, Georgia who makes millions of
dollars a year settling big traumatic head injury cases, and his wife is a real
estate professional. And, they buy lots and
lots of real estate, and he takes the depreciation against his active ordinary income. And, many years, he pays zero in tax. Now, that sounds great, but, if you’re trying to get a
loan, it’s a little tough. So, if you’re trying to buy a house and you have zero income,
it’s a little frustrating. But, yes, you’d be able to do it. Somebody else says, “What if the partner
has a retirement plan?” The retirement plan is not going to be a material participant. In fact, it can’t be. “Does it have to file a 990-T?” What is he looking at? Not the 5500, but it’s a retirement plan. An IRA is never gonna file that. He’s looking at the UBIT. If it’s debt related income, then, technically, you could have UBIT on it. So, if you are, this is what’s weird. So, you have an IRA. Would it invest in a syndication? – [Jeff] Mm-hmm. – [Toby] And, that syndication
leverages the asset. So, let’s say you put $2,000,000 in, and they use debt of five million to buy a piece of property. Then, you start getting the income in. Well, you actually have a majority of it being UBIT, technically.
– Right. – [Toby] How many people
actually file the UBIT on that do you think?
– Very few, because I know, a few years back, we were
seeing a lot of people were putting oil and gas
partnerships into their… – [Toby] That’s active. – [Jeff] And, that’s active income, and so that’s right on
the k1’s that they receive that it’s UBIT and they won’t report. Fortunately, those entities
are usually taking losses on the k1, so. – [Toby] Mhmm. – [Jeff] No harm, no foul. – [Toby] You’re supposed to pay the UBIT, but most people don’t. The IRS really doesn’t
sit there and check into all these things. Another one somebody asked is, “I have an LLC for my rental properties, “I take distributions out when I need it.” That’s fine. “I was painting one of those
houses and broke my heel, “can the LLC pay for
things such as co-payment “for therapy, etc.” That’s interesting, I’ve
never really thought about if you injure yourself, I
would actually be looking at your insurance, if
you have no insurance you can’t really sue yourself. – [Jeff] No, I don’t even
think your own insurance is gonna cover this. A workman’s comp policy
would, but most people don’t do workman’s comp for themselves. – [Toby] No usually they’re exempt, yeah. So the answer to your question
is, if you broke your heel you’re still able to take those expenses, and you can get reimbursement
from a C-Corp employer or an employer that has a
cafeteria plan, if it’s not you. If it is you, you just gotta
make sure you got a C-Corp and it can reimburse 100% of the cost. The way that you’d get the
money out of the C-Corp is you’d make sure it’s managing the LLC that has the rental property, or the property in which you got hurt. That’s way number one, way
number two is you exceed the 10% of your adjusted
gross income this year, unless it was last year,
in which case it’s 7.5%. But this year it would
be a Schedule A expense on your schedule, or on your 1040. So those are the two ways. The other thing you could
do, I guess you could do a, what is it, not a health reimburse, what is the health plan? The supplemental health plan. HSA? HSA. – [Jeff] You could do an HSA, yeah. – [Toby] Yeah, you do the
HSA and pay for the expenses out of that, and I think you, would you have to have
the HSA ahead of time? – [Jeff] You’re gonna
have to have the HSA, and you’re gonna have to
have that high deductible health plan too.
– Yeah. – [Toby] So I just love giving
really weird answers so, Salvador, so the answer
to your question is you’re not going to be
able to write it out as a business expense, I don’t believe, off the top of my head
I just don’t think so. It’s gonna be a health expense
and even though you did it working on a piece of property, realistically you’re going
to have something else that has a health
reimbursement arrangement or a Health Savings Account, or you’re writing it off on
your Schedule A or your 1040. Or if you have another
employer and they have a health reimbursement
plan, then make sure that you’re making your claim there. “Can you discuss the
importance of resolutions “for an entity, say minutes?” Gary, we have ton of them on our website. If you become platinum we do it for you. Excuse me, maybe that’s not right, no if you have the opposite way we do it, if it’s platinum you have
access to all of them, and I think you do it. Most of our clients, we
do the minutes resolution so I would just reach out
and maybe Susan or Patty can give Gary the information, or grab his information so
somebody can talk to him. Let’s go through and let’s
retain some of these questions, ’cause we haven’t even
said what all the questions we’re gonna be going
over today, we got a ton. You guys are so active
today, jiminy Christmas. All right, so here’s the
questions we’re gonna go over. “I converted $250,000 of
my Traditional IRA to Roth “in early 2019, what options
do I have to mitigate “the tax consequences?” We’ll go over that one. “When a spouse dies and
the surviving spouse “has a step up in basis, is
the surviving spouse required “to sell the community
home within 12 months “of the spouse’s death in order to enjoy “the step up in basis? “Does the step up in basis
expire at some point?” “What is the best way to
set up an Airbnb business “that is a solely-owned,
single-family house?” We’ll answer that. “What is the process to turn a rental “into a personal residence? “Is it considered a sale when it becomes “a personal residence?” “How is the cost
determined when it becomes “a personal residence.” We’ll answer that. “How do I separate the
cost of a washer, dryer, “refrigerator, kitchen
cabinets, A/C system, “wooden floors, etc., from
a recently purchased condo? “Purchase contract
shows total price only.” And this is my favorite. “Parents own a home with two
extra rooms for their two kids. “If their kids share a room
and rent out the spare room, “what are the tax consequences?” Love that. “For an equity investor, what
is the best way to structure “ownership when concerning taxes? “LLC, personal? “Can the LLC be from the home state “of the investment property?” We’ll answer that too. “If I sell my personal residence, “what would be the best
strategy to use the funds “from the sale for my RAL startup? “I do have a QRP.” That’s a 401K for those of
you guys who don’t know. “So can I use those retirement funds “for the upgrades and repay
the loan from the proceeds?” We’ll answer that too. “Can I get reimbursed by my S-Corp “for the use of my personal pickup truck “for the last three-quarters of the year. “The truck is financed in my name, “and I was making the payments myself “but using the truck for business.” We’ll go over that one as well. See I told you we had a few. You can see Jeff literally
slumping down in his chair, he’s like going underneath the table, ’cause I kinda pick all the questions that we’re gonna answer, and
I forget to stop, all right. “I travel via RV cross country.” Sounds like fun. “Even out of the country.” So you must have gone out of the country. Canada or Mexico, right, unless
you can drive across water. “And needed wifi to conduct business. “Can any part of the travel
expense be deducted.” – [Jeff] That’s interesting. – [Toby] Yeah, we actually
had three RV questions, we narrowed it down to two, I don’t know what it is about RVs, it’s the end of the season,
but they’re different people. “Can I rent my RV to a
corporation for meetings? “How is it taxed?” Last one is, “I sold one of my rental homes this year. “If I have a gain of $200,000
and invest in a syndication “buying an apartment complex, “and if they use bonus depreciation, “will it offset any part of my gain?” So we’ll go over that. We got a lot of really good
questions, I love that. And by the way, you guys have not let up. It’s literally non-stop
questions from you guys today, what’s up! So this is like the kid
in the backseat going why, why, why, not that I did
that this weekend but, I did that this weekend. So anyway, so we got a whole
bunch of good questions. I will be getting into all your guys’, (laughs) can you change this slide? Nina, you’re not much fun. We will go through all of these and have lots of fun, all right. So here’s the first one, “I converted $250,000 of my
Traditional IRA to a Roth “in early 2019. “What options do I have to
mitigate the tax consequences?” What say you, Jeff? – [Jeff] Well I would
have had different advice a year ago, and even more
different advice five years ago. Five years ago you could
actually split the gain between a couple years.
– Yup. And pay taxes on it. Last year, you could actually
re-characterize this Roth conversion back to an IRA, and maybe get, I probably would have
suggested, if it’s an issue, then we only convert so
much going into the year. Unfortunately as of 2018,
there is no such thing as a re-characterization
from a Roth conversion. So as soon as you convert it
you have $250,000 of income. There’s no way to mitigate
that income in itself, so you have to kinda
look at what other things that you would normally
do to reduce income. – [Toby] When they converted it, it was a big taxable event,
it’s taxable in 2019. So what you have is, there’s
really only a few ways you’re gonna offset Traditional IRA income going into the Roth, and
that’s to come up with traditional expenses that’ll
actually offset your income. And we can count on pretty much one hand what you’re gonna get. You’re gonna look at your Schedule A, which means if you have a
lot of medical expenses, this is the year to pay them. You want to make sure that
you’re paying interest on your home, if you have it. You wanna make sure,
whatever your expenses are to your state for income
taxes or real estate taxes, you’re capturing those. And this is the year
where you may want to say, you know what, I’m gonna give
a whole bunch to charity, just because I want to
offset how much my income is. If you say Toby, you’re
nutty, you’re nutty buddy, I don’t want to give a whole
bunch of money to charity. Maybe you just look at see
whether you’re a tither. Give three or four,
five, six, seven years, whatever it is in
advance, give it to a DAF, or set up your own 501(c)(3). And the DAF is the Donor Advised Fund where you get the
deduction the year you make the contribution, but then you
dole it out over many years. This is a big one for me, so
the other one is you could do a conservation easement,
maybe where you do something along those lines. In a conservation easement,
the conservative ones are gonna give you four to
one to five to one return. In other words, if I give them a dollar I might get a $4 deduction. So if you have $250,000,
obviously to offset that entire amount you’d have to give
a sizeable amount of money, about $75,000, maybe closer
to 60, depending on the fund. But then you won’t pay the tax on it, and the tax, depending
on what state you’re in and what level, could be much higher. So you just have to kinda do that. The other one is real estate professional. If you are a real estate professional, and that could be either you
or your spouse, they qualify, then you could do something
called a cost segregation and bonus depreciation to
take most of the depreciation in the first year. And when I say most, it’s
really about 30% of it, so if you have a $300,000
improvement on a property, on a $400,000 property, you
have $300,000 improvement, you’re probably gonna get
about a $100,000 deduction. So, those are the things that you’d do. The last one is, you’re
already doing a Traditional IRA into a Roth, you may want to
look at your other options to do retirement plans
than to try to offset some of that conversion
by putting more money into a Traditional. – [Jeff] Yeah this is really a case, we can do nothing about
the $250,000 itself. But if we look at your entire, or you look at your entire tax plan, you can decrease the
amount of income you have. – [Toby] And that’s what
you’re trying to do, you’re just trying to see if there’s a way to mitigate it, so I
hope that makes sense. Some of you guys are bugging. (laughs) You guys are funny. There’s some funny, there’s
some good comments out there, I won’t get into them. I love our UC Berkley folks. Shout out. Let’s see, next one. “When a spouse dies and
the surviving spouse “has a step up in basis,
is the surviving spouse “required to sell the
community home within 12 months “of their spouse’s death in order to enjoy “the step up in basis? “Does the step up in basis
expire at some point?” – [Jeff] No and no. There is no expiration
on the step up in basis. You never have to sell that property if that’s what you want to do. – [Toby] Mmhmm. This gets so much fun, by the way. When you have a step up,
for those of you guys who don’t know what the step up is, let’s say I buy a house at $100,000, and 30 years later it’s
worth a million bucks. Before you think I’m crazy,
that happens all the time. In a community property
state, when one spouse passes, the tax basis of that property moves up to a million dollars. The value on the date of passing or, I believe you can do the date
of the estate tax return, so it would be within nine months. The hard part is figuring
out what that is. That’s the rough one,
is how do I value it? So the best thing to do is
go out and get an appraisal, and that locks in your time. And then that way you always know. If you’re in a separate property state, then one half of the basis
of the house steps up, so it even gets weirder. So you have a husband
and wife, let’s just say, one spouse passes, five years later the second spouse passes. So you have a step up from five years ago on one half of the property, and I don’t know why these
states do it that way, but it can get a little weird. So the rule of thumb is,
when somebody passes, I’d probably go out and get
an appraisal of the property so you can lock it in. – [Jeff] Absolutely. – [Toby] And it doesn’t
expire, and what this means is if you sell the house,
so let’s say a husband and wife, California,
community property state, one passes. The basis steps up to the fair
market value of the house, and if the surviving spouse sells it, you don’t have to sell within 12 months, there’s no rules there. And your basis is a step up, it’s forever. So that’s the date etched in stone, boom, now we have a step up. If you sell it pretty close
to the date of passing you’re not really gonna have
to worry about any gain. If it’s your home, you
have a huge exclusion so you may wanna sit on it for awhile. What I see as an attorney
that sits in the tax world, is I’ll see people gifting
things with really low basis, and you’re looking at
them going hey dude wait, all you gotta do is die and it steps up, you’re avoiding the tax benefit. Because they think they need
to get out of their estate. Somebody asked a really
good question by the way, “Can you do a cost seg on a
property that you already own “and maybe get an offset.” Absolutely John, but we’re
still going back into 2018. This sounds really twisted,
but if you have an extension, we can still make a change of accounting and do that.
(Jeff coughs) Do you need some water buddy? – [Jeff] Yeah I’m fine. – You sure?
– I’ll live. – [Toby] I got wine, and liquor. I got some whiskey, you should
come take a shot of whiskey. There goes Patty, I can
hear Patty going up there. Hey guys, Patty could you take a look at Tim’s question too, we want to make sure he gets with Derek. Anyway, let me see,
here’s another good one. “Which one protects the property better, “to have the property
in a trust or an LLC?” Well, you kind of do both,
you never just do a trust. Sometimes you do just an LLC,
but you never just do a trust without an LLC. – [Jeff] Are we talking personal residence or other property? – [Toby] Which one protects the property, I’m talking anything that’s
an investment property. Usually I don’t like to take houses and stick them in LLC’s,
you got homesteads and then you also have ways
to draw the equity out, and you can usually burn down your house before somebody takes it. I’ve seen a house taken one
time, and that was a gal who was just egregiously given
advice by the attorney’s, she had a whole team and she
ended up losing 15 properties and they took her house away,
and nobody really gave her the option of filing a
bankruptcy and stopping it, or any number of things
that could have happened. They didn’t use LLC’s and
there’s like a bunch of nonsense, but the gal lost, it’s just bad. So it was not good, but usually the trust is just something we use for title. The classic example of a land
trust is the Illinois style, which came out of the
Sears Tower in Chicago. And they were acquiring the
land in various trust names so people didn’t know they
were accumulating the land. And all this is, it’s an
agreement to hold title with the beneficiary being
separate from the legal owner. I could put anybody I want on the title, technically I could be your trustee, but the beneficial owner is somebody else, and usually we assign it to an LLC so you get the asset protection. The trust itself doesn’t give
you any asset protection, although there’s some
practitioners that will pretend like it does, it doesn’t. If you get sued, they’re going after the
beneficial ownership, so you wanna make sure that’s taken away. Let’s see, “We have a C-Corp with health benefits “for my wife as an employee. “Can I have the C-Corp reimburse my wife “and include the expenses
paid for by the HSA?” Include the expenses paid
for, he can’t double dip. – [Jeff] Yeah you can’t reimburse anything that’s already been paid by an HSA. – [Toby] Mhmm, and Christina
I answer the questions that come in, so I apologize
for not moving the slide. I always get people
saying, “move this slide,” I’ll move this slide, all right. But I answer the questions
that come in online too, you guys can’t see those, I
don’t want you to see them all ’cause their names are next to them. “I have an issue getting in
today, which of the questions “from the email are we in”,
oh sorry Karen, “nevermind.” Oh, okay I won’t. Let’s see, “When I become
65 can I use the HSA “to pay premium for
supplemental health insurance.” Yeah, can’t he? Can you use the HSA to
pay for other stuff? – [Jeff] Yeah but the HSA can’t pay for health insurances premiums. – [Toby] It just can’t pay
the health insurance premiums. – [Jeff] It can only pay
out of pocket expenses. – [Toby] All right, so hope that helps. All right, on to the
question that’s actually sitting in front of us. “What is the best way to
set up an Airbnb business “that is solely-owned
single-family house.” That is a solely-owned
single family house. And so this is where it
gets really interesting. When you have an Airbnb business, and if the average day that
a guest stays in your house is less than seven days, or less, then it’s really a hotel,
and it becomes a different type of taxation, it’s subject
to self-employment tax. When it’s over seven days on average, and you just take the total
number of days it was rented by the total number of guests, and that’s gonna get you a
number, then it’s passive. And either way you’re gonna
take your depreciation. But if it’s a solely-owned
single-family house and you don’t live there,
then generally speaking here’s what I’m gonna do. If I know that I’m gonna average, let’s say three days for rental, then I am going to set up
an LLC for the real estate. That real estate is going to lease it under a monthly lease to my corporation or LLC taxed as a corporation. And that corporation
is going to be the host and is going to lease that property, and lease that property to the guest. (Jeff coughing)
I think Jeff is about to cough out his lungs, you okay? Go get some water. All right, they’re dropping like flies. (door closes)
All right, so it’s just me for now. Anyway, so that’s kind of the general way of how you do the Airbnb business. You never want to have
that one just sitting and hitting you on your personal return. So I assume you guys
are worried about Jeff, yeah he’s had a cold and he’s just, yeah poor Jeff, I see that. “Does he need..” you know
what, I was hinting to Patty to bring him some water, and then I tried to give him some whiskey and he can’t hold his
whiskey, I’m just teasing, I’m just teasing, she’s
coming in here to yell at me. All right, let’s keep going. Can’t say anything about Patty
without getting yelled at. Let’s see, all right. “What is the process to turn a rental into “a personal residence?” You just have to rent it
less than, what is it, 14 days and 10% of the time, and you have to occupy it
more than 10% of the time. If it’s your personal residence, then it automatically
becomes a personal residence. “Is it considered a sale “when it becomes a personal residence?” No. “And how is cost determined “when it becomes a personal residence?” It’s the same as what you paid for it. So whenever you look at real
estate, this is really fun, and hey Tim, we’ll get
you there really quick. He got blasted, I did a
webinar and just smoked him, so he’s getting to people,
I’ll make sure if anybody out there is reaching out for
Eric from that webinar we did just let me know. Just send it in and say
hey, I’m waiting for Eric, but I think he had
about 100 reports to do, so we’ll make sure that gets done. All right, “what is the
process to turn a rental “into a personal residence,” it’s easy. It’s what you use it for, and
it is not considered a sale. It is not considered a sale,
you do not have to step up in basis, here’s what’s interesting. Sometimes we do it the other way around where you have a personal
residence and we want to capture the capital gains exclusion,
if you don’t know what that is it’s 26 USC 121, so it’s
called a 121 exclusion, where a single person
who’s lived in their home two out of the last five years, or a married couple, two
out of the last five years, single gets $250,000 of
capital gains exclusion. Notice I said capital gains
and not depreciation recapture. It’s just capital gains, and a
married couple gets $500,000. So often times you’ll
have a personal residence and you’ll sell it to an S-Corp
to make it into a rental. That’s the only time you’re
ever gonna hear me say corporation and rental, ’cause
we don’t do it otherwise. But when you go the other direction, the part you have to be aware of is that little 121
exclusion is now damaged, because if you had a
rental and you made it into a personal residence,
that period of time before it became a personal residence
is non-qualified use, so when you start capturing
your two out of the last five years, you’re gonna take
it as a proportionate amount, how much capital gains you can exclude. So, things to just consider,
but your basis doesn’t change. So what I, Jeff is back, don’t die on me now. – [Jeff] Sorry. – [Toby] Woo, that was loud. All right, so we’re talking about, I’m actually using a slide for
the first time today I think. – [Jeff] Are we answering those? – [Toby] Yeah we’re answering those ones. So we’re talking about the
one where they converted the rental into a personal residence, and I’m just saying the
basis doesn’t change and they don’t have to
do anything special, they just have to make it
into a personal residence. And if you had a period of time, let’s say you did this
in the middle of the year and half of it was personal residence and half of it was rental, you
would write off depreciation for half of the year. You don’t have depreciation
on your personal residence. So it’s proportionality. And you don’t have to worry about the cost because they’re using
the same cost as whatever you bought it, the basis
and the improvement values do not change until you have
a sale or a step up in basis. – [Jeff] Right. – [Toby] So really exciting
stuff, so on the Airbnb, hold on for a second, what did you have? – [Jeff] I didn’t have anything, go ahead. – [Toby] All right, so, “are you guys okay,
don’t cough up a spleen.” “Poor Jeff.” All right, go ahead. “Is depreciation recapture
completely negative “for holding rentals or
is there a positive to it “other than a 1031 exchange.” So Blakely, whenever you
have depreciation recapture and it’s on straightline depreciation, it’s maxed out at your
personal tax bracket with a cap of 25%. So this is where it gets kind
of fun, if you have a year where you have like some major low income, and you have some losses you can take, you can actually keep your
personal tax bracket low and you’re gonna get taxed very low on depreciation recapture. If it’s more, like if you’re
in a really high tax bracket and it’s capped at 25%,
then that’s a good thing. Just remember it’s always
gonna be more than long-term capital gains, and you
can 1031 the whole thing, like so you can absolutely
pencil the numbers to see whether a 1031 exchange makes sense to roll and avoid depreciation recapture. Now there is one type of
depreciation recapture that I want to cover with you guys, and that is when you do a cost seg, it’s either gonna be
ordinary income or nothing. It’s either gonna be ordinary income or it’s gonna be taxed as
long-term capital gains. And that’s because when
you depreciate a carpet, for example, you have a
five year property carpet, and I write it all off
and I’ve owned it for more than five years, it has no value. I’m not gonna recapture any of it, there’s no value to that
carpet, I’m gonna throw it away. So it’s gonna be capital gain. Anyway that’s really exciting. Somebody says, “on the
Airbnb rent to my corp, “can I do the monthly rent
as a percentage of income?” Don’t think so, I think it
has to be a fixed amount for it to be considered, but
Tim you’re in control of that, just remember, and you’re
in control over how much of the rent you actually pay. So you could say hey, I had
a lot of trouble landlord, getting this thing ready, I
only want to pay half the rent. Okay, you’re gonna have
to decide whether that’s reusable for yourself. “I’m selling my personal
residence and moving to my “long-term rental that was
originally a primary residence. “How long do I need to
live in it for the rental “to be able to not have capital gains?” Uh Jeff, so it’s a duplex,
that’s interesting, and you gotta live in both sides, then you’re gonna need
to live in it two years. You’re gonna have a portion of it, I mean what the total
amount of capital gains is, there’s gonna be a portion
of it that you may not get to use the 121 exclusion
on, it’s gonna be considered non-qualified use. “Does it make sense to do a
cost segregation if you plan “to turn it into a personal
residence down the road?” Absolutely, that’s the best case. Take the deduction now
and never recapture it. All you have to do is live in it, and this is gonna sound really crass, live in it until you die
and then the basis steps up and then they can re-depreciate it. Literally, that’s the case. You can write off a house
over and over and over again if you’re smart enough to never
let it get sold, all right. That’s just me. – [Jeff] Well I had a
similar discussion come up with my mother, and she
wasn’t up for dying, so. – [Toby] (laughs) Don’t go help her, that’s why God’s punishing you right now, he’s making you cough out a lung. He’s like you even
thought about that Jeff. No taxes before mama, you
gotta take care of mom. All right, “how do I separate
the cost of a washer, “dryer, refrigerator,
kitchen cabinets, A/C system, “wooden floors, etc., from
a recently purchased condo? “The contract shows the total price only.” This is where you do cost segregation. And this is where you
have somebody come in, otherwise this is, even the appliances, do they get lumped in too? – [Jeff] Make it your five year property. – [Toby] Yeah, we gotta break them out, and so this is a great
example of, you know, cost segregation’s been
around forever guys, it’s just this year they
did this bonus depreciation on used property. And I shouldn’t say this
year, it was anything after September 27th, 2017
is what I think it was. Otherwise, it used to be
you had to buy it brand new and put it in service, and
then that bonus depreciation just says hey, rather than
write it off in five years, why don’t you just write it
off in one year if you want to, it’s bonus, 100%. So that washer, dryer, refrigerator, and the A/C system for sure would be a write off right away. The wooden floors would
have a usable life, I wanna say five year?
– Probably. The cabinets I’m not sure, what do they do cabinets at? – [Jeff] Those are probably
seven year property. – [Toby] Seven year?
– Mhmm. So all of it, anything less than 20 years you can write it off in year one. – [Jeff] And while you
could directly separate the cost yourself, under audit
you’re gonna have to be able to support how you divided those costs up. Whereas if you get a cost segregation, they’re gonna do it for you
and they do it fairly quickly, and that is your support
for dividing it up. – [Toby] Yeah, if there’s ever
an audit you’re gonna win it. But they’re not gonna audit
it, they just don’t see it. If they do, they’re gonna ask
you whether you have a report, you send in the report, it’s done. We have a lawyer that has
– Right. pretty bit of experience
in those and he’s like, “yeah, get the report and it’s over.” Goodbye, done. Let’s see, somebody says,
“I have a schedule E rental “income, I’m thinking
about issuing myself a 1099 “to fund a 401k.” Yeah you can’t do that. If you have a Schedule E rental income you’re gonna have to run
it through a corporation or something, and if you did
would it trigger Medicare and Social Security Tax? If you pay yourself, a 1099 just means you’re a sole proprietor, I don’t know if you can pay yourself as a sole proprietor
from your own property on a Schedule E, can you do that? – [Jeff] No, I don’t think you can. – [Toby] I don’t think you can either. – [Jeff] I’m not even
sure why you’d want to. – [Toby] Well, here’s why you might. Let’s say you’re a high-income person and you have a bunch of rental properties, you set up a managing
corporation and it pays you, and you defer it all into a 401k. That’s where it might make sense, and to say hey, I’ll pay a
little bit of employment taxes, but I don’t have to pay all
them big massive income taxes. So here’s the trick, you run the numbers and you just determine. “If I rent a home and do
not take the depreciation “on the tax return, by the time I sell “will I have to recapture?” Maria, you’ll have to recapture. The rule with depreciation
is, you may take depreciation but you must recapture it. So whether you take it or
not, you’re gonna have to. – [Jeff] Yeah and it’s less
about the recapture as, depreciation lowers your
costs basis every year, and even if you’re not
taking depreciation, your cost basis is going down by however much depreciation
you should have taken. – [Toby] Mmhmm. – [Jeff] So if you bought
a property for $200,000 and sell it down the road,
and it maybe has $100,000 worth of depreciation
on it, or should have, your cost basis is only gonna be $100,000. So your gain is gonna be a
lot larger than what you would have expected it to be. – [Toby] Okay, here’s another fun one. “Converted a personal residence
into a long-term rental, “I deeded the property into an LLC “and have property insurance
in the name of the LLC.” So who owns that property, the LLC owns. “However, I was told the LLC is worthless, “since in the event a claim
came against the property, “a smart lawyer could
just argue that the LLC “doesn’t own the property,
since my personal name “is on the loan. “Is that true?” No, absolutely not. A smart lawyer can argue
whatever they want, at the end of the day they look at title. Who owns it? You may have a loan, that’s
certainly an indication that you owned the property, and a mortgage property may object to you putting in the LLC, saying hey, you have to pay me off yearly. I’ve never seen one, one time in 22 years I’ve seen someone object to that, that was a mortgage company. Usually they don’t care. If they do, you just use
a trust in between them. So I just, what people always
do is they throw these things out there like oh, a smart
lawyer’s gonna do that. Yeah, a lawyer’s gonna throw
all sorts of crud at the wall, it doesn’t mean anything,
’cause they’re gonna say, “who’s the landowner?” and it’s gonna be, you deeded into the LLC so the LLC is now the party,
if it’s being a property claim. You have insurance, the
insurance is going to cover. They’re gonna give you somebody to defend, and that keeps you out of the firing line. Even with a personal obligation, and then yes, you do an umbrella as well. So somebody says, “an
umbrella versus an LLC?” You do both. What an umbrella policy
is, is to make sure you don’t pay for the lawyers. I don’t know if you’ve
ever defended yourself in a lawsuit, I’ve
defended myself in plenty because I have a lot of properties, and I owned a business,
we have 250 employees. It’s just a cost of doing
business in anything. You’re gonna find
yourself where, you know, I’ve had a tree fall on properties, I’ve had people try to go
after the mold nonsense and all that fun stuff. At the end of the day, I just
look at it as a transaction. The money, the insurance
is there to help you with the lawyers, at the end of the day you’re just trying to
get back to make sure it’s income producing. But don’t buy into that
nonsense about mortgages or something being indicative
of liability, it doesn’t. I could actually cosign on your property, it doesn’t make me liable
for the actions that occur on that property. Legal ownership is legal ownership. “Will the bonus for qualified improvement “property come back?” – [Jeff] There is a bonus
for qualified improvement property now, what they did away with was the bonus for qualified
lease hold improvements, and qualified restaurant improvements. – [Toby] That’s what I thought
you were talking about. But they do the bonus depreciation, so. – [Jeff] Yeah so there is that. – [Toby] But you don’t get
it on a lease hold do you? – [Jeff] No, so the new bonuses
slimmed down quite a bit from what it used to be,
it’s very particular. Off the top of my head I can’t remember all of the constraints on it. But there still is that
qualified improvement. – [Toby] Mmhmm. Let’s see what else we
have, that’s a good answer. Do you think it’s gonna come back, maybe, probably after they get rid
of the bonus depreciation. Somebody said hey, they would
like to hear back from Eric, and so I’m gonna say Patty and Susan, if you guys could see
these folks and make sure they’re taken care of. We just have a lot of
stuff coming through. Somebody else asked a question, Rebecca, could you make sure she’s
taken care of Patty? You guys hear me doing that,
just ’cause if I see somebody emailing me and they have
a question on something, I’m usually gonna have
Patty get somebody on it to make sure we’re taking
care of you, as a client. Not gonna do it in front
of what is oftentimes more than 4000 people. “I have a single-family
residence and I’m under contract “to sell, it has been a full-time rental, “not my primary residence. “Is it possible to 1031 into a REIT, “or triple that lease or something “other than residential property?” Yes, so your property
can go to any property. You can actually go into a
TIC too, a Tenant in Common. You can go into a
Delaware Statutory Trust, you could go into a REIT,
some REIT’s qualify? – [Jeff] Yup – [Toby] Yeah some do,
it’s gonna have to be a private REIT right? – [Jeff] Yeah, but they do
define real estate for 1031, so it’s very wide, it’s
a very wide definition. – [Toby] Oh yeah, so again
I would have somebody on a 1031 exchange. I have a really good gal out in Idaho. Really fair, really good price. So if you wanna shoot me over, I’ll share with you her information. “If I aggregate my
rentals to take advantage “of real estate professional, “will suspended losses still
be taken for passive income?” Great question. – [Jeff] No, unfortunately when you become a real estate professional,
and it’s actually a year by year election. – [Toby] Mmhmm. – [Jeff] Only the current year
income becomes non-passive. Any passive losses on a
property remain passive until you have passive
income to offset it. – [Toby] Mmhmm, so it just sits there. Could you say no, I am not going to be a real estate professional,
take those losses, and offset some gain in
that particular year, could you do that type of planning? – [Jeff] Yeah I think you could, I think that would be an excellent idea. I’m not gonna aggregate for this year, I’m not gonna claim real
estate professional this year. Because maybe I’m selling the
property and I want to relate some of those. – [Toby] Yeah, all right
we’re gonna get back to these questions. And Rick, on the 1099 issue? Yeah, you don’t pay
yourself a management fee from your own, to yourself, we’d have to set up a
corporation to be the manager, and then you can, so. You can get it, I’ll go
over a great example, say you have a high tax burden. This is where you set up a C-Corporation and let the corporation pay the tax on it, get it out to you tax-free
over a period of time. But the corporation is taxed at 21%, it’s usually a lot better
just to have it going there, or just to get it out there,
then get it back to yourself in a tax-reduced manner, like
a medical reimbursement plans, 280A renting, reimbursing
yourself for the use of your home, things like that that only
come from an accountable plan, you can’t do those individually. So the corporation opens
up a different world to us as far as being an employee,
so that’s a big one. So Rick, if you wanna talk about that, shoot something over to
Patty and she’ll get you set up with somebody. They can run the numbers
and see if it makes sense. End of the day, our services,
the way I always look at it is we should be a negative number, so it’s the old adage of value over price. So you could pay somebody 500
bucks to do some tax planning and pay your $10,000 tax bill, or you could pay somebody
$10,000 and save 50. End of the day I’m going
with the $10,000 to save 50, not the 500 to not save anything. So I’m not gonna say
that’s what our numbers are always gonna be, and frankly
I always kind of look at it and say our average is
probably about an extra $20,000 of deductions, so it’s
gonna be a pretty good value. Basically what we want
is, we want to make sure that if you’re doing tax planning, that you put money in your pocket. It should not be costing. All right, here’s a fun one. “Parents own a home with two extra rooms “for their two kids.” So, mom and dad, or dad and dad, I don’t know how to say it. Parents, and you have two kids. And the kids get together and say hey, why don’t we share a room
and rent out the spare room? Which is just kinda
weird, I’m trying to think of who they rent it to,
the guy down the street. – [Jeff] Some creepy guy. – [Toby] Yeah, so this is funny. So the idea is, the kids
don’t own the house first off, number two, the kids if they’re under 23 and you’re providing them with assistance, that’s called Kiddie Tax. It’s gonna be aggregated and
put on the parents tax bracket. Anyway, another way to run
it is if you’re renting out the room, what are you
gonna depreciate the room? Like, hey a three room house,
I’m gonna take depreciation on the third to offset the income. I suppose you could. – [Jeff] Yeah, I mean,
what it comes down to is that the parents own the home. They will be the ones
renting out that spare room, and supposing it’s gonna be rented out for more than 14 days, it’s
all gonna be rental income. – [Toby] If it’s rental
income and you did, let’s just say you said,
hey I’m giving it to my kids for nothing, and my kids
are making a profit on it. – [Jeff] Sandwich slice? – [Toby] Yeah, it’s still passive income that for Kiddie Tax purposes gets added back into the parents income. Like there’s no way for
this kids to get this. Although I love this question. In fact I’ll probably borrow
this and see if anybody was paying attention tomorrow morning when I meet with all the
attorneys and accountants. I like to throw weird questions at them. This is fun, because this literally is, let’s just say that your kids
rented the house from you. I don’t know, could you do that? And you gift it to them? You gift them the use of the room and then they rent it out. – [Jeff] Well, would the
kids even be entitled to… could they make a real estate transaction, do a real estate– – [Toby] No, if they’re
under 18 they couldn’t even, they lack the capacity.
– That’s what I thought. But let’s say that you
put it in their names, then the Kiddie Tax is
bringing it back to the parent no matter what.
– Just the room? Just the room, I’m just thinking who they’re gonna rent it
to, I’m actually thinking of like, horrible examples
but I was thinking Kramer from Seinfeld? I would rent it to Kramer,
just so I could be annoyed. Like what would he do, hide in his room and then when you knocked on the door and like, bah! I wasn’t a great Seinfeld guy but, there’s some good moments there. Does the kids income get
taxed at the trust rates, no, John it goes to the parents. It actually gets added
back into the parents, it’s called the Kiddie Tax. Anytime you have passive
income going to the kids, it’s gonna be added back
in the parents bracket. If they’re under 18 for
sure and if the parents are supporting them and they’re
under 23, I think it is. “We have an LP for a stock investments. “It is 1% owned by the
C-Corp, with the new tax law “can we still deduct investing class “and investing newsletter
expenses within the LP?” No, the LP would pay the corporation, the corporation would
receive that as a guaranteed payment to partner, and it
would pay for those expenses, bringing your taxable income to nothing. That’s actually, Tim,
the way you’re structured is the only way to do it
now under the new tax laws, and you’re doing it perfect. You know, sometimes what I
do is I make the corporation a little bit more owner, maybe 10%, 20% so I don’t have to pay
it, a guaranteed payment, I did just the percentage
of the profit goes in there, but the way you’re doing it is perfect, so you get a star. Somebody asked a really
interesting question, before we go on to more, let’s see. “Can an individual, foreigner national, “take advantage of the 1031
exchange when he is selling “the property, which is in the LLC name, “and otherwise fully
qualified for 1031 exchange?” So here’s the question really, can an LLC owned by a non-US
citizen do a 1031 exchange? And I know that 1031
exchange pushes it out and it’s US income, I don’t believe there’s a
restriction on foreigners. – [Jeff] I can’t think of a
restriction in that aspect. – [Toby] Yeah I’m not 100%
certain, so don’t quote me, but I believe you’re gonna be fine, at least on the US sourced income. So just remember that you’re
gonna have to worry about the treaty in your country too. If you are not a resident alien, like if you were a resident alien, then I can say definitively it’s gonna be, you can do it and your only tax is here. The US is one of two
countries that actually taxes worldwide revenue, most
countries just say no. But again, you’re gonna
want to look at your treaty, depending on where you’re a citizen of. “I’m doing flips, currently on an LLC, “I was thinking to set
up a C-Corp for flips “and another LLC, taxes, “an S-Corp for the
management of properties.” Which is fine, that actually works. “I am confused with the
following C-Corp pays 21%, “but if I want to take the
profits out I’ll be taxed again.” Not necessarily, so C-Corporation
pays 21% on net profit, but if you pay it out
to yourself as a salary or as a reimbursement,
then it’s not taxed again. If it is taxed again, it’s taxed, assuming that it’s US
taxation and it’s a US company paying out of a qualified dividend, then it’s taxed at your
long-term capital gains rate, which could be zero, 15 or 20%. It sounds like if you
really want the money, you get more money into the S-Corp, because then it just flows
onto your tax return. So I hope that makes sense. Let’s go back to some of these questions. Great question on the parents by the way, that’s the type of stuff
that I really enjoy. Oh book, I did this, I think last week because we had our 100th
episode so this is our 101th. But we’re gonna do a pre-order
on the Tax-Wise book, assuming I get off my
duff and finish it up in the next couple weeks,
we’ll get this thing out in the next, hopefully in
October, early November, and you’ll get a copy, it’s 10 bucks. You can pre-order if you like. It’s a fourth edition, if
you like this sort of stuff, it’s a good handbook to have. Jumping back in, “for an equity investor, “what is the best way
to structure ownership “when concerning taxes? “An LLC, personal? “Can the LLC be from the home state “of the investment property?” All right, equity investor,
what does that say to you Jeff? – [Jeff] I’m thinking that
they’re just putting money in, they’re not the actual
owner of the property, I might be getting this totally wrong. – [Toby] Mmhmm, I just say
when I see an equity investor I’m thinking equities. – [Jeff] Ah! – [Toby] And so I’m always thinking like, so the first time I read
this and I was like oh, it’s somebody doing stocks and equities. – [Jeff] But they do
say from the home state of the investment property? – [Toby] Yeah so maybe
they’re an equity investor meaning that they’re dumping
money into a syndication. – [Jeff] Okay. – [Toby] And here’s what I would say. If it’s an LLC that you’re investing in, then we have two types of liability. We have inside liability
that comes and gets you if you have a piece of
property in your name and they sue you, or sue the property, you don’t want it to come
over to you personally. So let’s say that I’m a doctor
and I make $1,000,000 a year and I’m a great surgeon, and I buy a $50,000 house in Indianapolis. And I say what’s the worst
thing that could happen? Somebody says oh, if something
bad happens on that property they’re just gonna take the property. No they’re not, they’re
gonna garnish you forever ’cause you make a million bucks a year. So you put a box around it
and that’s called an LLC, and that way they can’t
get out of the box, they’re stuck in the box. And then there’s outside liability, so let’s say that same
doctor has that property in an LLC, and he commits
egregious malpractice and gets sued for $30,000,000, and then they take the LLC away. That’s outside liability,
somebody taking the LLC away. Another way to look at
it is if you had a safe, there’s stuff inside the safe. Now let’s say you put something
in there that’s explosive and it blows up inside the safe and destroys everything inside the safe, that’s inside liability. Outside liability is if
somebody takes your safe. So, isn’t that kind of fun? – [Jeff] It is. – [Toby] All right, so
what were we talking about. – [Jeff] Time to get a bigger safe. – [Toby] Yup, so
realistically what I would say is if you have an LLC that
you’re investing in you’re fine. If you’re worried, if you
have personal liabilities, I’d probably put that in an LLC, and I’d move that LLC out
in the desert where nobody can find your safe. So I’d put it in Wyoming
where nobody can get it, or in Nevada where nobody can get it. And the reason you do that, and people always say oh
that’s kind of sticky. I’ve litigated some pretty major cases, and personally obtained
judgments right at $100,000,000. So I know about what
I’m talking about guys, lots of people give out advice that don’t actually do this stuff, and usually it’s because
they haven’t been up close and personal with it, so you know, I’m just gonna basically leave it at that. You wanna make sure that your
stuff is not easy to find and very difficult to take, otherwise someone’s just gonna find it and take it, you know. Somebody says, “can a
family living trust be made “the managing member of an LLC? “Is it legal and a
recommended business practice, “does the structure
provide a reasonable level “of asset protection?” So realistically, no you wouldn’t
make it a managing member, I use managing members seldom, and it’s only when it’s
an LLC or corporation owning another LLC or corporation. So Kevin what I would do is, you know if you have
to have somebody listed as a managing individual, you’d made it a managing, manager managed, so make the LLC, the member be the living
trust and then make you be the manager, or
technically I love to see managers be corporations, and that’s just because I like to keep the inside liability away from you. And in order to keep it away from you I have to put it inside a box, and the only types of boxes we have are corporations and LLC, LP’s, you know trusts really aren’t
a asset protection tool, they’re good for keeping
your name out of the record, and also a living trust is magic when it comes to estate planning, because it doesn’t go through probate, keeps you out of court. So anyway, here’s another good
one, Jeff you’ll like this. “My brother owns a home,
I rent a room in the home. “I operate my small business from my room. “Can I write off a
percentage of this space “as my home office?” That is wild. Has to be exclusive use. – [Jeff] Has to be exclusive use. – [Toby] So Chris what
you do is you make an area that is your home office, and you make sure that
it looks like a home– you’re never gonna get questioned, because if you do this right, use a corporation that reimburses you, but yes it can actually reimburse you. – [Jeff] I’ve just run
into some that said, everything but my bed was in use. – [Toby] Yeah, I actually had one, this isn’t me, it was
from another accountant. And they put files all over the beds and they took pictures
of this and they said we don’t use it as a bed,
we use it as a file cabinet. I was like that’s a big filing cabinet. – [Jeff] It is. – [Toby] Mmhmm, that is weird though. But it works, the IRS
just enforces the rule. “What’s best, S-Corp or C-Corp?” Ronnie, what kind of question is that? Depends on what we’re doing,
I’m gonna hassle Ronnie. It really depends, if you need
the money you use an S-Corp, if you don’t need the
money you use a C-Corp. If you have lots of medical expenses that you’re not getting
any reimbursement for and you have no employees,
you use the C-Corp. And sometimes you use them both, it’s like a big old depends. Parents wanted me to be a lawyer so I could learn to say
that and get paid for it. Right there with the accountants. It depends. In case, here I’m gonna
go through this one and then somebody asked me a
good question on these LLC’s. “If I sell my personal residence”, so they sell their personal residence, they have $140,000 in equity, “what would be the best
strategy to use the funds “from the sale for my RAL set up?” That’s a residential assisted living, so that’s helping folks
out that need activities and daily living assistance, and that could be adult
autistic, that could be elders, that could be clean and sober living, there’s a whole bunch
that fall underneath that. “I do have a QRP”, which
is also known as a 401k, so a qualified retirement plan, “so can I use those retirement
funds for the upgrades “and repay the loan from the proceeds?” So I’m gonna break this into two pieces. The number one, you have
a personal residence. You have $140,000 in equity. That doesn’t tell me what the gain is, so I need to know what you bought it for, what improvements you put in, but let’s just say that
when they say equity they actually mean appreciation,
and that’s their gain, and they never used it for a rental. Then you would get, assuming
that you are married, you would get all of it tax free, and assuming that you are single, you would get $125,000 of it tax free. Which if you sold it you’re
gonna have some deductions for all of the expense,
so it’s probably gonna be right around 125 anyway. So first off, you get that
money and it’s tax free. If it is not tax free, then
there’s some other strategies we do to try to mitigate those taxes. You could do qualified opportunity zones, you could do giving money to charity, you could have other losses, whatever, to try to offset it, so you could sell some loser properties. Actually would that offset the
gain on a personal residence? – [Jeff] Yeah if there was
an actual gain it would. – [Toby] All right, so
basically you’re gonna get, whatever that cash is when
it’s all said and done, you’re gonna have that tax free. Now could you use that in your startup, heck yeah, and it’s not gonna hurt ya. And would it still be
deductible by the startup? Of course, it’s just whether
it’s gonna be a deductible in year one or whether
it’s gonna be amortized. It all comes down to whether
it’s a current expense or whether it’s a start up expense. “I do have a QRP, so I could
use those retirement funds “for the upgrades and repay
the loan from the proceeds.” Yes, with a QRP you can
borrow up to $50,000. Excuse me, somebody just
said isn’t 250 single? Yes you’re right Michael, you
should have slapped me Jeff, I’m just rattling off nonsense. Yeah the personal residence is 250,500, excuse me I’m thinking 125, 250. It is, it’s 250,000, so
there’s not gonna be any tax on the equity no matter what.
– Right. Good catch Mike, we’re just
checking with you guys. – [Jeff] See I was thinking
that they didn’t live there for two years, so they didn’t get– – [Toby] Yeah there might be a portion, yeah so they lived in one out of the– – [Jeff] For five years. – [Toby] Yeah they only got half. (laughs) That’s horrible,
no I was just, brain fart. All right, I do have a QRP. Now so with the QRP you
can borrow up to $50,000, up to half the funds, and then you have to pay
it back in five years. So you could absolutely use your QRP, you could absolutely borrow those funds out of the QRP and then repay it. And you pay it at federal AFR rates which is right around what, 3%? – [Jeff] Mmhmm. – [Toby] Anything else you
wanna throw on that one, I just threw a bunch out there. – [Jeff] Nope. – [Toby] I thought that was pretty good. All right somebody’s
asked a couple questions, so I’m gonna go back to
some of the questions that you guys can’t see yet. “In the case of Wyoming
holding, let’s see, “in the case of Wyoming holding trust “which holds multiple state
LLC’s, will living trust own “the Wyoming LLC or the hierarchy
of holding be different?” So Sam, you’re absolutely right. So when you own something,
and you own it personally, you could be looking at probate. If you own it through your
living trust then you don’t. So if you have a Wyoming entity that owns a whole bunch of
LLC’s in different states that own real estate,
which is typical structure. We have inside liability in all the LLC’s that own the real estate, and
then we have outside liability because we have the Wyoming
holding trust, it’s perfect. Yes, you own that as a
trustee of your living trust, you don’t have to worry
about probating that thing. “Is there a way to avoid
the California Franchise Tax “if you have a living trust “which owns the Wyoming Holding LLC?” And Sam the answer is
yeah, we won that audit, about was it, let’s say
five or six years ago, where the individual wasn’t the owner, the trust was the owner. If you ask the franchise tax board, they’re always gonna tell
you you have to pay it. But we’ve been checked on
that one and we prevailed, or I should say the client prevailed. That said, if that holding
entity files a 1065, they’re gonna come after you for it, so I would say just pay one
and don’t mess around with it, they’re always gonna say
pay me more, pay me more, if you ever ask them. That’s just because they need the money. “If I conduct meetings
with current and potential “business partners in my office at home, “can I get reimbursed by my
C-Corp for landscaping costs?” One, so if you’re talking
about business use of your home, and you have a home office and you meet people there, then yes, you can actually add
the cost of landscaping into your reimbursement
from your corporation to you for allowing them to use your home. If you’re doing a home office, I think you could write it off too. If you’re doing the standard 8869 on a Schedule C, is that the form, then you can write it off too, right? – [Jeff] Right. – [Toby] So yeah, so if
you’re meeting people there, it better be consistent. Like if it’s just one
time deal, probably not. If you’re constantly meeting clients there and business partners, then yes. Pigs get fat, hogs get slaughtered, so don’t get too crazy. “If you trade stocks for
options, small account, “$30,000 in a C-Corp do
you need an LLC managed “by the C-Corp?” Jane, no, I put that
inside the corporation, just know that all the
profits are in the corp. All right, so I answered that question. I get reimbursed by my S-Corp, so I’m going to the slide now. “Can I get reimbursed by
my S-Corp for the use of my “personal pickup truck for
the last three quarters “of the year? “The truck is financed in my name”, so you own it individually,
and you’re making the payments, but you’re using the truck for business, Jeff, what say you? – [Jeff] Well you can
definitely get reimbursed for the business use of your truck, I would strongly recommend tracking miles, you’re gonna have to
track mileage regardless. – [Toby] Use Mile IQ, it’s a little app you get on your phone, and
Mile IQ will track GPS, it’ll track your miles
and then you swipe left for business, right for
personal type thing, I think it’s left or right,
I can’t remember which one. If the mileage was ugly, you swipe left. If it was pretty, something else, don’t start with me Jeff, all right. So I get reimbursed,
yeah you get reimbursed and it doesn’t matter,
just make sure you’re tracking your miles. Now if the truck was financed in your name and you’re making the payments, then you may just have a
standard personal policy. You better make sure that it covers you when you’re driving it
around for business. And somebody says yeah, can
you get reimbursed for gas? No, so you have to choose,
you can only choose once. I tend to choose to do
the mileage reimbursement, the other route is the actual cost method where you write off the
actual cost of the gas or the repairs that are
associated with the business. And usually what you do is you say, all right how many miles
did you run for business, how many gallons of gas did you use, if you do an oil change you figure out what percentage was used, you can see how this can be big paying. If you have to get improvements, or you have to get your truck fixed, you get a bunch of work done
on it and it’s 1,000 bucks, then you get to figure out
what percentage was business, let’s say it was 20%, so
I can reimburse myself 200 bucks versus just
doing the what is it, 57, 58 cents a mile. – [Jeff] 58 cents a mile. – [Toby] Versus 58 cents a mile, those are your two choices. And I’m always gonna
tell you 99% of the time just do the mileage. – [Jeff] Yeah the mileage
deduction actually includes all those different
types of actual expenses, but like if you’re making
payments on the vehicle you cannot be reimbursed for that. The interest portion yes, it
depends on what portion though. – [Toby] All right, somebody
just asked if the truck is owned by the business,
can you still do mileage or do you have to do actual expenses? You do the actual expenses
and you’re allocated a portion of the leased value
of that to you personally, for your personal use. So you actually look at how
much is the truck worth, and the you allocate as
if you got paid wages, whatever percentage of that dollar amount, could be a lot, if the
car’s worth 30 or 40 grand, you’re probably gonna be
allocated $70,000 a year. – [Jeff] It gets included on your W2, you pay taxes on it. – [Toby] And self-employment
tax and everything, right? – [Jeff] I think it’s
exempt from self-employment, I think it’s only federal. – [Toby] All right so that’s
good, federal and state. So you treat it like they paid you money, so if I gave Jeff a Lamborghini tomorrow, I said great job Jeff, and
I gave him a Lamborghini, he has to pay tax, I
have to do withholdings on the value of the Lambo. I’m not gonna give you
a Lamborghini though. I know, you’re too sick. You’d cough up a lung
and crash, all right. I traveled via, he’s a
trooper, the truck is used to– – [Jeff] I can see it
too, because you’d say oh my gosh, Jeff was in a
wreck, I hope the Lamborghini’s not too–
(Toby laughs) – [Toby] “The truck is used
exclusively for business,” in which case then you
would just write off all the expenses Karin.
– Yup. Somebody says, “along the
lines of the Wyoming LLC “being held by the living trust, “can a single bearer LLC,
but not a parent company “be owned by the living trust?” Yes, absolutely, that
does make sense Kevin, and yeah we try to keep
you out of probate. People don’t understand how probate is, here’s my little simple rule. I’ve been watching this stuff for years and I’ve had friends go through this, I’ve been through this for family members, bad things happen in probate. And this is the way I put
it, it’s more likely than not that bad stuff is gonna happen if you have to go to court on probate. Like people are gonna hate each other, they don’t like doing paperwork, they’re all ticked off,
they’re digging through stuff, it’s not good. It’s more likely than
not, it’s gonna be bad. On the flip side, not
going through probate and actually having some
sort of estate plan done, it’s more likely than not
that it’s gonna turn out good. In fact it’s gonna be a positive, and they’re gonna realize that
somebody cared about them, there’s usually a trust and
it usually has really cool things in it, if we’re drafting
it I like to put goofy stuff in there, like hey, if
you’re gonna be a beneficiary you should have to travel
outside the country, we’d love to sponsor you
to go outside the country every year, pick a different
country every year. Just something goofy like that. And people are like whoa, I have to leave the country every year, guess what? That’s good, that’s a good thing, as opposed to I just got a
bunch of money dumped on me and I have to go to court to
fight it out with my siblings. Anyway, so I get crunchy on that. “I traveled via RV cross
country, even out of country.” so let’s say they went up
to Banff, Canada right? They’re driving around in
their RV and needed wifi to conduct business. “Can any part of the travel
expense be deducted?” So here’s the rule. If you are traveling for leisure, and it’s more than 50% leisure, you’re not writing off
any business expenses associated with that trip. If you are using that
RV to do a business trip while on a personal
trip, so in other words I’m driving around
personally but I have to take a business trip from my personal location, I’m driving around, then
I would reimburse myself mileage and pay for my
wifi, and other things that are actual expenses of the business. In other words, just
because you are on vacation does not negate your ability
to take business expenses. – [Jeff] But what you
might be able to deduct is the cost of the wifi. – [Toby] You could write off the wifi, which would be good. And especially if you
have to add it to your RV, like hey I have to make
sure that I can work while I’m traveling, then
that’s a business expense. – [Jeff] Absolutely. – [Toby] Yeah, so the RV
stuff, people sometimes try to write off the RV again, it qualifies as travel, and get miles. “Can I rent my RV to a
corporation for meetings, “how is it taxed?” Well this gets fun, ’cause the rule, there’s something called 280A, G2, 26 USC, if you like to have the full site, and what it says is you can write off, I shouldn’t say you can write off, the company can write off lease payments. You don’t have to recognize
those lease payments as income if it’s 14 days or less. And it just has to be a dwelling, and a dwelling, an RV
qualifies as long as it has a sleeping quarters and a bathroom. – [Jeff] Yes. – [Toby] So if you can dwell in it, then your corporation can rent it. And so the corporation
would literally write you whatever the fair market
value of an RV is for a day, so it can have a meeting. And it’s not taxed if
it’s 14 days or less, so it’s tax-free and the
company writes it off. Somebody says, “please
explain the 50% business, “personal versus business requirements “to deduct trip expenses.” All right. So let’s finish up that,
do you have anything you want to add on the RV? – [Jeff] No, go ahead. – [Toby] So the corporation
pays you for the use of the RV, if it’s 14 days or less you don’t have to recognize it as income, you don’t report anywhere, the corporation writes it off as expenses. – [Jeff] Well and the
same applies for a boat, if it has a bathroom
and a boat to sleep in. – [Toby] Or any dwelling,
it doesn’t have to be a personal residence, most
people use their personal residence, but it could actually be your, what is it, your vacation
rental, your timeshare and all that stuff, all right. 50% personal versus business, all right. So Tim, when you travel
outside of your home area and you’re going someplace
you’re gonna spend the night, if it’s more than 50% business, you can write the whole travel
expense going there off. And then you can also deduct
the cost of remaining alive while you’re on that trip. So the way it works is,
let’s say that I’m traveling somewhere, and while I’m in that city, I’m gonna go to a football game so let’s say I go to Seattle,
and I go on a Friday, and I know I’m gonna do business, and I have more business on Monday. Now I have to look and say all right, is it more than 50% business? So the way we count that is business days, and a business day is
four hours and one minute. – [Jeff] Right. – [Toby] Plus the time to travel up there, plus weekend or holidays that
occur between business days. So let’s go over my
example, I flew up on Friday to meet on Friday, I stayed
for a Seahawks game on Sunday, and I went to a meeting on Monday. So I have Friday, assume
that I did four hours and one minute, and Monday, four hours and one minute of business. If I do that scenario, I
get the days before them to travel, so I get Thursday, Friday, and I get Monday and
Tuesday, to travel day after, and I get the weekend days. So now I have a total of
what, six business days. That means that if I
wanted to keep that trip being business and write
off the entire cost of the airfare going up to Seattle, I have an extra five
days I can stay up there. Now the hotels and things,
I’d be able to write off Thursday, Friday, Saturday, Sunday, Monday and Tuesday, and if I
stay another five days, that’s gonna come out of me,
that’s not gonna be deductible, unless I wrap it into more business. – [Jeff] Yeah this is
one of those weird rules that if you say 50% of your time, you’re counting by hours per each day so, four hours here, four hours here, so I have 12 business hours,
actually 12.5 business hours out of six days, I’ve done qualified. Even though that’s not half the time that I’ve actually spend on the travel. – [Toby] You just have to
say it’s a business day. – [Jeff] It really works
out to your advantage. – [Toby] Absolutely, absolutely. Gosh we have a bunch of
questions that just popped in. I’m gonna go to the ones about the RV, so we have two about RV’s. “Can we do the 280A
deduction, 14 days for both “my home and my RV, if the
RV is on the same property “as my home?” That’s pretty funny, so
Blakely here’s the deal. The statute doesn’t say
that the taxpayer is limited to 14, but it’s inferred,
and there’s a court case that says it’s 14 days for the taxpayer. So I would say 14 days total. But you could get crazy,
because the statue doesn’t put that limitation,
it just says that a taxpayer may rent his or her residence
for less than 15 days a year and not include that
in their taxable income as adjusted gross income. I think it’s Section 61. So the answer to your questions is yeah, technically you might be able
to try to make that argument, I wouldn’t do it because
I think you’d lose it. And besides, pigs get fat
and hogs get slaughtered. And then you say, I actually do use both for office purposes
and meetings, I get it. You might be able to do that
home office reimbursement, that’s separate than the 280A, and that’s also tax-free,
and that assumes that you use it exclusively for business, that portion is used
exclusively for business. So you’d better have a section on your RV that’s only business. Let’s see, “what can you
do if a co-trustee did work “on a trust property
using her own company, “billed the trust owner $1,000, “and I, as co-trustee,
did not approve it?” Well Robert, that sounds
like you have an issue, I’d have to see the trust agreement. Trust agreements usually
say both trustees have to unanimously agree on things,
or either one can act, and then you’d have to
show that they violated their duty to the beneficiaries. It looks like a little self-dealing, but that doesn’t necessarily
mean that they’re toast. So I’d have a little chat with that. Somebody says, “do we have to
actually make a payment record “of this expense, or just paperwork?” Just document it, so. “If the corporation has a
shareholder meeting outside “the country, is that expense deductible?” Yes, it all depends on
what the major reasoning on going outside the
country for, comes down to. All right, let’s go back to this, we got a couple more questions. “I sold one of my rental homes this year. “If I have a gain of $200,000
and invest in a syndication “buying an apartment complex, “and if they use bonus depreciation, “will it offset any part of my gain?” Jeff, what say you? – [Jeff] Well, it will offset your gain, but not directly, it’ll be just, an expense that will be on return, I mean, I’m not sure I’m
explaining this right. – [Toby] Right, so you
have a rental house, you made $200,000. And you have a syndication
that loses $200,000 because you took bonus depreciation. You’re gonna offset your gain, in other words whatever the
loss is off the syndication, it’s gonna offset your gain on the sale of the rental house. [Jeff] Right, I think
sometimes we get confusion that people are looking for
things to actually offset a certain type of income, we’re offsetting total income, not a particular type of income. – [Toby] Well this is capital
gains on a rental house, and assume that it’s gain plus depreciation recapture, right? And then they have a bunch
of bonus deprecation, will it offset it? – [Jeff] Yes and in this
case, you don’t want the gain or the bonus depreciation
offsetting the capital gain, you just want to lower your income. Because your capital gain is gonna be at a much lower tax rate. – [Toby] Yeah that always comes down to it is what are you offsetting? Maybe I don’t want to take it, do you have to take it or
can you roll losses forward? – [Jeff] Well you can roll
the business losses forward, but in this case I’m
assuming you’re gonna have other income on top of things
so, it’s gonna work out. – [Toby] The answer is it can offset it. “Is it a good idea to
do cost segregation for “a rental property that’s
been rented for 20 years?” You’re not gonna get much out of it, but I showed an example during
that webinar that I did, if you need that link we
could send it out to you guys, but I did a precise
example kind of like this where somebody did a cost
seg right before they sold, and it was only about $800,000 on the sale but I think it saved them about $70,000. And again, it’s the idea that
when you do a cost segregation and you break off the
pieces of your building into smaller chunks, you’re
gonna get capital gains as opposed to depreciation recapture on bigger portions of it. Because again, the way
that the world works, the way that the IRS works is your carpet has just as much value as
the rest of that structure. So after 20 years,
there’s a bunch of stuff in that building Jorge,
that’s not worth anything. Nobody’s gonna pay for it. But the way the IRS treats it is, you have to recapture that at 25%, or whatever your ordinary
tax bracket is, if it’s less. So I hope that helps, so the
answer to your questions is, always ask for a study, it
doesn’t cost you anything, may as well. And if it looks good, I
just said this yesterday, somebody was selling a
house and they were like, ugh, they did a segregation study and it was gonna double
the money that it cost, it was not a huge amount of money, I think it would save him seven and was gonna cost him three. And they were like oh that’s not much, I was like yeah it’s not much, but you double your
money, it’s free money, it’s on the sale, it’s not
like you have to recapture any portion of that,
this is just raw money. If I got, for every
dollar I gave somebody, they gave me two, I’d just
keep giving them dollars, so it’s one of those things. Usually you want big chunks,
usually we’re trying to get big chunks, but if you’re
selling it, just check it out. If you’re not selling it, then don’t. 2FER Tuesday, so I forget
what we’re doing here. Oh, here we go. Tax-Wise workshop, I have one coming up, keep forgetting what
time of the year it is, we’re in October now. So you get access to all the recordings, and we’re doing one more
I think in November, about the Tax-Wise, yeah. So that’s gonna be an end-of-year special, so we’re just gonna be
really focusing on grabbing your 199A deductions,
making sure it does apply to rental properties under
certain circumstances, how to make sure that gets done. We’re gonna talk about
setting up retirement plans before the end of the year,
we’re gonna talk about making sure things are in
place that have to be put in before the end of the
year, and money transfers during the year. And then we also have the
bulletproof real estate investing, Make Your Investments Bulletproof. We’re gonna do these as a 2FER, and the Make Your
Investments Bulletproof is a, you’re gonna get tickets
to a three-day class, it’s two tax and asset
protection workshop tickets, that’s a three-day class guys. You come out to Vegas,
or wherever we hold them, we’re having one in Boston,
we just had one in Chicago, we have them in California,
we have them in Texas all the time, Florida. You come on out, spend three days with us, you won’t be sorry. You’re gonna get the tax
and asset protection book that Clint wrote called
Tax and Asset Protection for Real Estate Investors. Then we’re gonna give you
a three-part video series from Clint, Michael, and myself, along with a wealth planning blueprint. We’re gonna give that all to you, including the Tax-Wise workshop, for $197. So, if you want to take advantage of that, absolutely do, we’d love to have you. There’s gotta be a link
somewhere, I don’t see a link, but just email us in at
Tax Tuesday, and request. Here’s free stuff, the podcast, which I just did a podcast today with a guy named Dave Rafus, hopefully, I said that wrong, Rafus, who does service dogs for
veterans that are suffering from post-traumatic stress disorder. Guy is pretty amazing, he ended up getting service dogs down to $2500 for training, with all the people
that are working on it. He is pretty amazing,
and it literally takes the suicide rate pretty darn down to zero, pretty close to zero for these veterans, because now they have
something to really live for and it’s a huge issue guys,
I don’t talk about that stuff on the Tax Tuesday’s, because
frankly it’s a tax class. But let’s just be human
beings for a second, we have a lot of folks that
come back from overseas and they’re traumatized, and
it’s not just our veterans, it’s also first-responders,
they see some pretty heinous stuff, and it’s
really tough to deal with. And we can pretend it’s not an issue, but more people die over
here by their own hands than die overseas at the
hands of our enemies, and it’s about time
that we figured it out. So I did this really
cool podcast with them, and it’s on our podcast now,
go to iTunes, it is free. There’s some business adviser podcasts, then we also have it on
Google, it’s also free, and it’s pretty darn amazing guys, again I just cannot
believe to do a service dog was like 50,000 bucks,
and this guy and his group got it down to 2500. It’s a big deal. If you wanna sponsor, just
go out and sponsor somebody, obviously it starts local,
you don’t have to tell anybody if you wanna keep it a secret,
just go sponsor somebody, go help somebody. If you like working with the veterans, then that’s a guy I can tell
you, he’s pretty down to earth, he was a former Marine, and he just seems like salt of the earth. I’ve met him personally, and again, you see people, you see the
way they interact with folks and this is a good dude. Replays are in your Platinum Portal, you can always go in there. I think we have a few
that you can always get, you can always get this replay for, it’ll just automatically
get blasted out to you. And then again, if you like
this sort of information pop on, we’re education junkies
around here, we like to teach, we like to share information. We try not to be pretentious about it, as much as Jeff likes to
make fun of me constantly, gosh Jeff, you gotta just leave me alone. I’m just kidding, Jeff is awesome, Jeff’s a CPA, I’m an attorney, we just sit here around and we try to come up with
things that help people. And then you can always send in questions, we don’t charge for the questions, at [email protected] I know there’s about 10 of
them that I did not get to, we’re gonna keep popping
them off, so we go in order, so if you sent in
questions in the last week, chances are we didn’t get to it. You’ll still get an answer, I just didn’t make it part of the show. Somebody says, “I missed you in Chicago.” You got to deal with my brother,
Michael Bowman, I’m sure, he’s a fantastic speaker there in Chicago. And I think Carl was up
there, both great guys. Anyway so there’s your questions, [email protected],
let’s see the tax sessions are anytime in the
future, no specific date. Actually, the Tax-Wise, if
you hang on for a second I’ll tell you exactly when it is, I think it’s November something, isn’t it good when somebody
says November something. Here I’m gonna actually look it up. – [Jeff] Between the first and the 30th. – [Toby] I’m gonna have to look
at our own little schedule. Let’s see, events coming
up, Tax Tuesday is, this is magic. – [Jeff] Tax-Wise. – [Toby] Oh Tax-Wise, it’s
a good thing you’re here, I wouldn’t know my own name. Let’s see, where is it,
Tax-Wise, there it is, and it is, da da da da, upcoming dates, scroll scroll, we have one coming up November 11th. So I think it’s sold out physically, but you can still get on the live stream. Looks like it is sold
out, ’cause it’s in red. Let me just see if I
can go buy this thing, yup sold out, all right so you
can get on the live stream, the live event is all sold out,
it’s November 11th and 12th. It’s always good to
sell out of things what, a month and a half ahead of time. But they’re fun, they’re popular. The reason they’re popular
is ’cause people save a lot, I have a few really cool
testimonials from people that saved over $100,000
just sitting there. And then it says if we
can’t make November, what we do is we record them all, so you’re gonna get all
three recordings anyway. So don’t feel like if you
can’t make it personally, if you can’t make it, do
the livestream by all means, go ahead and grab it. It is approved for continuing education if you are a professional. And it is, I go over this last time, I’ll just tell you what I
did, I went over 31 specific strategies for reducing tax. And we’re gonna do strategies,
we’re just trying to do things that are gonna put
more money in your pocket, no offense to the treasury, but I’d rather direct where my dollars go, I don’t know if you
guys feel the same way, and we’ll go from there. So I just wanted to say how
much I appreciate you guys, we went a little bit
over, but not horribly, it’s only 4:27 Pacific Standard Time, so 7:27 East coast, and all that fun. But I really appreciate
you guys getting on, you guys are an awesome community, and we keep hearing really good stories coming out of you guys,
so it’s very exciting to see that people take
this stuff seriously, you’re spending some time with us. So again, my personal thanks. Jeff, do you have anything else? – [Jeff] No, except
I’ll try to be a little healthier next visit. – [Toby] Yeah, Jeff gave
up a lung for you guys so, he’s a trooper, no I’m
just kidding, (laughs). I love it, see, feel better,
you got a little sympathy here. All right, well I’ll give
it to ya, Jeff’s a trooper, he did really good, I can hear Patty cackling in the background. So with that I’ll leave it, thanks guys. – [Jeff] Thank you. (upbeat music)

Stephen Childs

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