Articles, Blog

Tax Tuesday with Toby Mathis Ep. 109 – (From Business Funding to Foundations Get Tax Wise!)

February 13, 2020

(dramatic music) – [Toby] Welcome, this is Toby Mathis. – [Jeff] And Jeff Webb. – [Toby] You’re listening to Tax Tuesdays. We’re bringing tax
knowledge to the masses. So happy Tuesday. It’s another fantastic Tuesday. Hey, Lou says, sound is good. You’re right, because I
rewired wherever this thing is connected to. We were having some wiring difficulties. We’re already getting hit with
a whole bunch of questions, which is always fun, when we get right in and immediately get hit. I’ll get to those in a second. Let’s go over a little bit
of our rules, first off, which is Tax Tuesday Rules Ask Live and we’ll answer before
the end of the webinar. Send your questions to
[email protected] That’s Tax, you can see it right there, [email protected] and then that’s where
we answer the questions at these, during the Tax Tuesdays, we grab questions that we, gosh, there’s usually hundreds of them, so we grab ones that
are kind of duplicative and you say, “Hey,
here’s something that is “that kind of stumps us sometimes.” Sometimes it’s something that everybody needs to hear repetitively. So we’ll grab it and it’s
asked in a different way. But whatever the case, we grab those and then we answer them. If it’s just general
stuff, we just answer it. If you’re a Platinum client,
we’re gonna answer it. If you’re not a Platinum client, and you ask very specific things to you, then, you just need to
become a Platinum client. It’s actually really easy. It’s a whopping $35 a month. You can ask all the legal
and tax questions you want. This is fast, fun and educational. We wanna get back and help educate. We’ve been doing this, we’re well over 100 shows, I forget what exact number this is. But, we’re well over 100
shows that we’ve done and for those of you guys,
who’ve been on before, know we try to keep it around an hour. We’ve been saying that for years. (laughing)
And it usually ends up being a little bit over, like, sometimes two hours, sometimes an hour and a half. We’re gonna try to keep
closer to the hour mark, just because, some people don’t appreciate going long. We have a whole bunch of questions that have been asked already. But before we get to those, let’s go over the opening questions that we’re gonna answer tonight. “I may be inheriting a timeshare, “that I’m sure has fees associated with it “that I do no want. “If I end up getting this, “how do I figure out the details “to get out from underneath it?” So timeshares, just really comes down to inheriting a timeshare,
what if you don’t want? “How do I transfer ownership of a property “used as a rental in my
husband’s name, to an LLC, “under my real estate C-corp? “Is it possible to
refinance a rental property “and then transfer title?” We’ll get into that. “If I purchase a RAM Pickup
with rear passenger seating, “can I deduct the full amount on my taxes? “I have two Sub Chapter S corporations.” Also known as, S-corporations. You’ll usually see us
just call it an S-corp. “Is all of the funding for legal costs “to start the business, tax deductible? “Do we get our full amount we put into “starting this business,
refunded during tax time?” Interesting question. I’ll dive into that. – [Jeff] We’ll go over it. – [Toby] I know, Jeff’s already, Jeff just lost another piece of his hair. (laughing) Which is the best way, we’ll
go into what a deduction is and how it works. (laughs) Is, wait, someone says, “Jeff, are you the whistleblower?” No. That’s not even me, that’s somebody else. – [Jeff] I’m actually calling
from Washington tonight. – [Toby] You’re calling from (laughing)
Washington. But why does your caller ID say Shiff? (laughing)
“Which is the best way “to fund an Airbnb? “Cash or mortgage if money is no object?” Ah, I love that. Money is no object. “Which is the best way
to fund a new business “that’s mainly based on
one piece of equipment “and needs just one staff?” I wanna figure out what that equipment is. “Is there a rule of thumb to follow, “when deciding whether
to capitalize or expense “expenditures made to renovate a property? “For instance, would new
flooring, lighting, plumbing, “built in cabinets, et cetera, “be considered expenses or
capitalized expenditures?” Interesting question. “I am a resident of Oregon. “I’m carrying several notes on houses”, that just means loans, “that I have sold and
I’m carrying the paper.” So, owner finance. “I am considering changing my residency. “Would I have to continue to pay “Oregon state taxes on these notes?” Interesting question. “Where should property
management business be formed? “Wyoming or where I reside? “Corp? S-Corp? LLC? Disregarded?” That’s interesting. Somebody says, “Any tips
on getting audio to work?” (laughing) Viewing from a laptop. I would call in. So it’s always gonna be limited. So, this is not a question, by the way. This is a question from somebody saying, “How do I make the audio better?” When you’re listening online, it’s up to your connectivity,
or how big your pipeline is and if you’re watching
video and getting the audio at the same time, it may get a little bit garbled. So I would call in on the phone. Good questions thus far. “Can you have both a private foundation “and a public foundation? “The private foundation’s 5%
donation to go to the public?” “Do distributions from state specific “disregarded LLCs to a Wyoming holding LLC “cause a taxable event?” Good question. We’ll answer that one too. “Is it too late to rent
out your house for 14 days, “under the tax code?” We’ll answer that one too, we’ll get into what they’re
actually referring to. “Hi, I’ll be 70 in April of 2020. “Since the new tax law, or the new allows “us to take the first required
minimum distribution at 72, “then I don’t need to take RMD this year?” So, that RMD by the way, is
required minimum distribution, from a qualified account,
like an IRA or a 401K, or defined benefit, or
something, not a ROTH. “What is the requirement by the IRS “in order to qualify for
real estate professional?” We’ve gone over that a few times, but, it never gets old and it’s something we need to keep going over, ’cause people keep sending
me stuff that’s wrong. I love accountants, but
sometimes they’re wrong. – [Jeff] Made you a little crazy. – [Toby] And I like the IRS,
but sometimes they’re wrong. They actually have said, “Oops, we made a mistake on this one.” So they’ve done some
opinions and they’ve had some court cases where they
actually did it wrong and they’re pretty good about saying, “We got it wrong.” But there’s still bad stuff
floating around in there. We’ll go over that. “What is included in calculating “a gain/loss on sale of
a single family rental? “A single family home rental? “Broker commissions, seller-paid “closing costs, renovation…” So we’ll go over all that. Jeff loves that type of stuff. “Does all revenue in a partnership “have to be declared as
income by the partners, “even if some is left inside the company?” So you don’t distribute it. Yeah, we’ll go over all that. Before we get into this, we have at Anderson, basically there’s actually
five levels of classes, the last, the Level 5
is an executive retreat. But I just kind of wanna go
over these with you guys, because a lot of you folks, aren’t already Anderson clients, haven’t been to our workshops. So I wanna invite you to a bunch of stuff and I’m gonna give you free stuff, because that’s how we roll and then I’ll show you
some really cool stuff. So the first one is, “Tax &
Asset Protection Workshop.” Quite often, we run this one as a special, where we will give you an invitation, where you can come, it’s
a three day class on, tax and asset protection. We really focus in on real estate, because it’s a huge risk asset. But they’re all over the country. You can go to our website
at and look at it. You’ll see that there’s pricing on there. If you reach out to us, through the Tax Tuesday at
Anderson Advisors email, then you’re gonna, Susan
and Kendall will grab these and we’ll absolutely comp
you in, ’cause I said so. Level number one class also, is gonna be, “Investing Workshop.” My little favorite workshop,
that I love to teach, because I love teaching
it to younger people and it’s not sexy. It’s get rich and, it’s how to get rich slow. I know some of you are
saying, “Oh my gosh, “it’s easy, remember
things, very, very well.” Somebody’s point out. “Infinity Investing Workshop”,
we’re gonna be doing one on April 18th, I believe, that you will all be invited to for free, at my courtesy and it is a live stream. So it won’t be something
where you have to fly out. You’ll be able to stay home and listen to the recording as well. It’s a one day class. I would encourage you to
watch and also get your teenager, or young adult,
kids, or friends involved. The reason that I say that is, because, in 20 something
years of looking tax returns, I know who makes money and who doesn’t and I know what consistently, well you’ve been doing this
a lot longer than me, Jeff. – [Jeff] Right, well, close to 30 years. – [Toby] Close to 30 years
and are there things that people that make money all the time, pretty much do, that those that like to blow themselves up, do not? – [Jeff] Yeah, there’s different things and it’s anything from
really paying attention to where your money’s going. Setting up your structure properly. – [Toby] I’m gonna make
it real easy for you guys. We’re gonna learn what
an asset actually is and how to identify it and how to avoid buying liabilities,
with liabilities. You’re also gonna learn to actually use mathematical equations when (mumbles) and we’ll be able to cut our costs, just to give you an idea. If you have a stock account
with $100,000 in it. Chances are, you’re paying
about 4.8, or $4,800, in fees that you may not even be aware of and we’ll show you how to eliminate those. Yeah, it’s absolutely a hoot and it is again, we use stats. We use the information that’s available in the public record. You can go out there
and see who makes money, how they make it and how you can avoid being the gambler in the casino and you can learn how to be the casino. So “Infinity Investing Workshop”, absolutely fun and it goes hand in hand with everything else
you’re already learning. So we work with a lot
of awesome affiliates. A lot of great real estate companies. This will go hand in hand. It’ll just give you some
mathematical equations, on how to build passive income sources, to where the idea of infinity is, you never have to work a job again and how to figure out what that number is and how to back, you know, how to calculate it. So which of these are free? It’s the “Tax & Asset Protection Workshop” and the “Infinity Workshop”. “Structure and Limitation Workshop”, for those of you who actually
put a structure in place. If you’ve gone through one of our courses. If you have corporations, LLCs. We’ll teach you how to run them correctly, bookkeeping and all the
compliance that you need to do. I’ve been teaching this Level 3 workshop, this “Tax-Wise”, and I’m
gonna give you guys an offer. This next, actually,
two days, I think it is. On Thursday and Friday. It has been sold out for quite some time, but there’s still availability
on the live stream and I’ll show you how to get that. If you wanna watch it,
or watch the recording and then the “Non-profit Workshop”, I’ll be doing I think in
two weeks, three weeks. That is also sold out, but there’s also a live stream on that one. But if you like doing philanthropy, if you wanna learn how to run a 501c3, it’s a lot of fun. But I’m gonna focus on the “Tax-Wise”, because “Tax-Wise”, you’re
gonna learn basically 30 plus strategies on how you can save. I always tell people, walk
away with three of them and you’re gonna pay yourself several thousand dollars a year. It really does come down to about a $1,000 an hour of planning and we’re gonna give you the tools so you can do the planning, so you can save yourself a lot of money. It is obviously, the 6th
and 7th is sold out here. We’re completely at capacity. We have quite literally, about 600 people on the live stream and we have room for more,
because it’s a live stream. So what I’m gonna do is, just to kick off 2020, if you want to have
the “Tax-Wise” courses, we do a beginning of the
year and end of the year. So we’re gonna do in 2020 is two. We’re gonna do a beginning of the year and an end of the year planning. Both of those, to have
both of the live streams and the recordings, is $247. You’re gonna go to this
little It’ll take you to a login page. It’s not in the portal. If a lot of you guys realize that you can, if you’re a Platinum, you
can go to the live streams for $197 each. So this is gonna be cheaper. It’s 247, it’s gonna take
you to a little page where, you just fill it out as basically, two for one, it’s 247. You’re gonna get the live
cast and the recordings, and you’re gonna get access to both the beginning of the year
and the end of the year. Guys, if you spend some time and I’m not gonna blow
smoke up your skirt, if you spend some time with us on taxes, you’ll absolutely put
money in your pocket, I guarantee it. If you don’t save, I would just say, at least 1,000 to 2,000 bucks, even a basic person, I’ll
give you your 247 back. How about that? You can just say, “Hey.” Got the facts matters, you
wouldn’t be making any money. I can show pretty much
anybody what the polls have to say and that’s just because, there are so many little
nuances that people don’t see, that we’re able to do. So absolutely join us, instead
of paying a lot of money, you’re gonna pay a little bit of money. (laughs) You’re gonna pay 247 bucks and you’re gonna have both recordings. Then we’re gonna get
(mumbles) right on over. All right, let’s jump into the questions. So, feel free to jump on that and that’s the last
you’re gonna hear of that. All right, “I may be
inheriting a timeshare, “that I’m sure has fees
associated with it, “that I do not want. “If I end up getting
this, how do I figure out “the details to get from underneath it?” So Jeff. – [Jeff] Many people have
run across these timeshares, that they’re cheap to get into, but expensive to keep and
they’re very hard to get out of. So I know one way of doing this, is to disclaim your
bequest, your inheritance. By doing so, you’re saying, “I don’t want this.” – [Toby] Yeah, it gets kind of fun. So whenever somebody passes, they have an estate. So unless you had
something in joint tenants, with rider survivorship,
or you had a paid on death, or you owned something with, well I guess it would
have to be joint tenants, I can’t think of another situation. It’s gonna be part of a separate estate. So if I’m joint tenants
with rider survivorship, we both own something together and if one of us has a liability, the other party is responsible
for it and vice versa. But if I pass, and let’s
say Jeff and I own something as joint tenants, then
Jeff owns it period. He’s on the hook. If I am a child of somebody and I don’t own that as joint tenants. Usually joint tenants
and rider survivorship, is something between the
parents, or husband and wife. Big issue is, don’t do
this with your kids, because your kids’ liability could come up and take something away
from you during your life. I see in certain cultures, mom will put their son
on their bank account and then son gets a divorce and the next thing you know, mom’s account’s getting hit, by ex-spouse, which is never good. Or a son does something funky. Ends up and we’ve actually
seen this a few times in bankruptcy, it’s an available asset of the bankruptcy estate. So they’ll grab it. So you don’t do that. But let’s just say that it’s a situation, where you don’t own a joint tenancy. It’s maybe a child. Then there’s actually the estate and before it’s transferred to you, you have the ability to disclaim it. And so, if you disclaim it, then you’re out from
under it, so to speak. But if you use it, you lose the right to disclaim
it in these situations, especially with the timeshare. – [Jeff] Yeah and the time to disclaim is actually fairly short, isn’t it? – [Toby] Depends, usually
you have nine months, – Okay.
– after somebody passes. To get everything done. If you probate it, then it’s an estate by estate, but it’s usually about 120 days, that they would have to make a claim. You’re just saying, “I don’t want it. – Right.
– “Because it’s too costly. “I don’t wanna get this
timeshare that’s just gonna “weigh me down.” Now if it’s an asset, like
you should have it valued. And let’s say that, you
don’t wanna pay those costs, but you could sell the timeshare, the estate should sell the timeshare. So now you’re under the clock. It’s usually you get about nine months. You might wanna list it for sale and see if somebody will take it. If they take it, then you’re off the hook again. You just sell it and then that asset would be part of the estate, gets distributed to the beneficiaries. If you’re one of the beneficiaries, then you would get the cash. But it’s kind of tough and then you have this weird forced heirship laws, that exist in like
Louisiana and Puerto Rico. This one may force you to take something and then you’re fighting off the liability and I actually saw this
once in Puerto Rico, where somebody was being force fed a house that was underwater with the mortgage. And they had to, it took
a little bit of paperwork, to get out from underneath it. So do not put your head in that sand and say, “I’m not gonna do anything.” You still wanna get rid of this. You still wanna get rid
of it and it usually is gonna require either a disclaimer, and let’s put it this way. If somebody leaves you as
the primary beneficiary and then it goes to another
sibling or an uncle, or some other relative, then it goes to them and
they have to disclaim it too. – [Jeff] Yep. – [Toby] So it all, it’s not easy peasy. I wish it was. All right. How do I transfer ownership of a property, used as a rental that
was in my husband’s name, to an LLC under my real estate C-Corp? Is it possible to refinance a property, then transfer title? What say you, Jeff? – [Jeff] Here’s how I would do it and you may have another idea, Toby, but, I would actually
transfer title to my spouse, or gift it to my spouse. It’s a tax free exchange and
then she can just dump it into that LLC, I mean she
can contribute it to the LLC under the corporation. – [Toby] If you are in a
community property state, then it may not matter, you don’t even – Right.
– have to do that. If you’re transferring it to an LLC, and this is where it
gets really important. So an LLC, is not a tax designation. There’s no such thing
as an LLC to the IRS. They want you to tell them, how it’s going to be taxed. So an LLC could be taxed as disregard it, ignore it and tax the owner. It could be taxed as a partnership. It could be taxed as an S-Corp. It could be taxed as a C-Corp. It could be taxed as a trust. It could be taxed as an individual. It could be taxed as an S, again, you’re just, you’re telling the IRS when you’re filing, it’s SS-4, how it’s gonna be taxed. So when you say, “I’m
taking a rental property. “I’m putting it into an LLC.” First question is, “How
is that LLC being taxed?” If it’s disregarded or a partnership, then we don’t really care. You’re not gonna pay
any tax on that transfer and yes, refinance the property
before you transfer title. 99% of the time, because
they will not finance it, in an LLC. They will not finance it in a trust, unless it’s a portfolio company. If it’s a traditional lender, they wanna finance it in your name and then you’re gonna put it in the LLC. If you’re worried about
a due on sale clause, or you’re concerned, I would use a land trust, maybe
as something to hold title and then make the LLC the beneficiary. When they say, under my C-Corp, hopefully that’s just
a management company, because I would never put
rental property, in a C-Corp. – [Jeff] I was gonna say
a couple things I saw was, apparently this rental
property’s not being protected by an LLC right now. So yeah, I think it needs
some kind of protection, but yeah, putting in a real state C-Corp, would not be my favorite place to put it, by any means. – [Toby] Yeah and somebody says, “Hey, what’s an SS-4?” So an SS-4, is a document that you file to get an employer identification number. So whenever you set up an entity, or if you wanna be a sole proprietor and you wanna operate in a different name, then you ask the IRS to give me an employer identification number, it’s like a social security number, but it’s for a company. So, you’re just going in and asking them, “Hey, you know, so it’s
an LLC for example. There is no such thing as an LLC. So you fill out the SS-4,
you might say partnership. Or if it’s gonna be disregarded, you’d actually click
other LLC, disregarded. You just write disregarded on it. Then you’d give the tax
identification number of whoever it’s gonna go, whoever’s return it’s gonna go under. So if it’s disregarded, for example, here. It’s the husband and wife filing jointly. You could give either person
social security number and the IRS now expected to see the profit and loss from that rental on that individual’s 1040, that’s what they’re gonna look for. – [Jeff] Right. – [Toby] If there’s a C-Corp there, again, I wouldn’t have the real property, on a C-Corp. There’s a number of reasons why, but C-Corps, you lose the
long term capital gains rate, as an individual. You lose the ability to
have flow through losses. You lose the ability to have real estate professional
status for that LLC, the real estate is
offsetting my other taxes, either as an active participant
or real estate professional. There’s so many things and then if you take it out of the C-Corp, it’s a taxable event. So we wanna make it really easy to, refi again, I wanna
pop it back in my name. It’s not taxable, if I have it in an LLC
taxed as a partnership, or as a disregarded entity. So to answer your question more clearly, assuming that LLC is really you and your you and your husband, or yeah, “in my husband’s name.” So it’s you and your husband. Then, I would more than likely, an LLC’s disregarded or
taxed as a partnership and then yes, you can
refinance to put it in there and transfer title. There’s no taxable event. You could take it out and if you’re in California, for example, there’s no prop 13. It doesn’t reassess the value, as long as you’re the owner. So we see that all the time and people that do real estate, they know that all the time. Let’s see, I have a bunch
of questions that popped in. Somebody’s mad at me. Let’s see. “Marketing too much, feels
like a waste of time.” (laughs) So somebody’s mad at me for talking about
– For giving away things.
– Classes, yeah. Like, “Hey, don’t knock a gift
horse in the mouth, right?” And then somebody says about books. They’re at the printer,
they’re gonna be done, but we will send you
the electronic version, in the meantime, and Susan
will take care of that. Or Susan will take care of that. And, duh, duh, duh, duh, duh. What if kids want the
timeshare, then they keep it and they have to pay all the bad stuff. That was on the previous question and then somebody asked,
duh, duh, duh, duh. No I will answer all these later. There’s nothing that’s, super. Somebody, this is doing ha, ha, ha. Then somebody’s asked, “What time is the webinar starting?” (laughs) It’s started. Anyway, I’m having fun now. (mumbling) All right. Let’s go to the next one. I love all these questions. “If I purchase a RAM Pickup
with rear passenger seating.” By the way, RAMs are awesome. Michael Bowman, my partner. You know Michael. This is up in Salt Lake City, where he lives now. And we’re driving around and
he just got himself a Rebel, a 1500, so those things are awesome. “Can I deduct the full amount on my taxes? “I have two Sub Chapter S.” You wanna whack this one? – [Jeff] Well, it’s funny
that you mention the RAM, because the 1500 starts
at just over 6,000 pounds. – [Toby] They work! I think there’s only the club. – [Jeff] And I bet there’s
something totally worthless, welded onto the bottom of that sucker, to get that over the 6,000 pound. – [Toby] Why is that
6,000 pounds so important? – [Jeff] So if it’s over
6,000 pounds, it’s considered a heavy truck, a heavy vehicle. At that point, it’s subject
to the Section 179 expense. It’s not limited in how much
you can depreciate each year. Even though Congress raised those, – In English.
– Those amounts. – [Toby] English. – [Jeff] English? – [Toby] Means you can
write the whole thing off. – [Jeff] Correct. – See?
– Now one thing, you gotta–
– That’s why you bring along a CPA. You need an interpreter with a CPA. – [Jeff] All right, all right, yeah, but you gotta keep in mind that, if you’re gonna write the whole thing off. You gotta be using it 100% for business.
– For business. Otherwise, you’re gonna
pay tax on the personal use and the IRS gives you
a wonderful schedule, that says, “Based on the value.” And RAMs, like a cheap RAM right now. Like let’s say you bought
a new one, is 50 grand. – [Jeff] I was looking at
the prices of the trucks. Wow!
– And actually that’s the cheap one. That’s one that’s kind of pimped out. You could probably get one for 35,000, if you really wanted to. – [Jeff] Eh, okay. Go ahead. – [Toby] But if you had
personal use of that, they’re gonna say,
“What’s the lease value?” Let’s say you used it 50% for business, 50% personal. Then they may say the lease value of that, is $10,000 a year and since
you used it 50% for business, even though your business
wrote the whole thing off, you’re gonna have to pay tax
on 50% of the lease value, which is half of that 10,000. So you’re gonna pay tax
on payroll of $5,000. That’s how that works. But your company got a $35,000 deduction. So you have to balance those. Somebody says, “Depreciation on a RAM?” Yep! Makes it look a little more palatable. So yeah. It’s kind of fun. Two questions somebody asked, “Is this recorded with slides?” Yes it is. We always record these
and you can listen to it in our podcast too, if you like listening. “Can a single member LLC tax as a C-Corp “create a 401K for passive investing?” It can sponsor the 401K,
but you are the investor. So it’s still your account you got. So the business sponsors it
and you are the participant. So but yes, it can. Somebody asked an interesting question, that has nothing to do with the RAM. So don’t get mad at me. People always say, “Hey,
advance your slides.” But, “I’m looking to
start an IT staffing firm. “I want to leverage after
tax, ROTH retirement accounts, “like ROBS.” Well that’s not really an (mumbles). So you’re thinking about
doing a ROBS transaction with a ROTH or a 401K
to minimize tax burden. You’re gonna have to use a C-Corp. So he says, “I’m trying
to avoid double taxation “with the C-Corp. “What is the best strategy/step?” D.J., I might be looking
at an opportunity zone, first off, because you
may never have to pay tax, if you hold it for 10 years and you can defer tax
for a good six years now, on anything that was taxable. So for example, if I sold something, I had some capital gains. I could push that straight in, I wouldn’t have to pay
any taxes this year. I pay taxes in 2026. And, never pay tax again, as long as half my staff
is in an opportunity zone. Or, if you did a ROBS transaction, you have to be a C-Corp. And C-Corps aren’t so bad. C-Corps are actually really good, because you have a 21% tax bracket and if you take the money out, you pay tax at your long
term capital gains rate, which can be zero. So it always depends on
when you take it out. So, yeah. Long answer to a simple question, right. Yeah so you have a bunch of options. What I would say is, you need to talk to somebody. Just raise your hand to Susan and she’ll get you hooked up
with a professional advisor, who will give you your options. Someone says, “I have not had any sale.” Oh this here, we’ll go over this. “Sorry, I have to leave at 5:50. “Where do we get a copy to
finish watching, sent to email.” Claudette, we will
absolutely get you a copy and thank you for letting us know. All right, “Is all of the funding “for legal costs to start
a business, tax deductible? “Do we get our full amount we put into “starting this business,
refunded during tax time?” – [Jeff] Okay, for the
first part of the question, we talk a lot about start up costs. Actually, these legal costs
to start your business, are what we call organizational costs. So you have startup costs,
you have organizational costs and both of them allow you
to deduct up to $5,000, or extends up to $5,000 in the first year. – [Toby] In the first year. “If it’s over $5,000, do I lose it?” – [Jeff] No you don’t lose it on $5,000. You can still amortize the rest of it over the next 15 years,
but once you hit $50,000 on either of those categories, (mumbling)
you’re gonna lose that $5,000 and you’re
amortizing the whole amount. – [Toby] So if you spent
legal costs of $30,000, ugh, you would take five and then you’d take the
25 and divide it by 15 and you get to write that off. – [Jeff] Correct. – [Toby] If it’s 100. Then you would just take
that 100 and divide it by 15. – [Jeff] Now the second
part of this question, “Do we get our full amount to
put into starting the business “refunded during the tax time?” And I hear this fairly often. You have to understand, IRS is not refunding any money that you have not paid directly to them. – [Toby] Yep. – [Jeff] But I think
what we talk about is, you can reimburse money that you paid for starting up the corporation, to yourself. So the corporation’s reimbursing you. It’s not IRS or any other
government authority, that’s refunding you money
or reimbursing you money. You’re also, if you’re
using these expenses, so. If you generate income, it’s
gonna lower your tax liability. – [Toby] Yeah so, so here’s the big one. First off, can you get
the full amount refunded? What you can get it is, you can have it returned
as a reimbursement from the company. – Correct.
– So yes, let’s say that I spent $10,000. Your company, can give you $10,000. It’s gonna get a deduction of 5,000. Plus, the other 5,000’s
gonna be divided by 15, that sum, I have no
idea what the number is. And you’re gonna have 4,000 something. No, 400 and some dollars, of a year. So your first year, it’s gonna have a 5,400 and
some odd dollar, deduction. If you make 5,400
dollars, you pay zero tax. And you got the money back in your pocket. It’s not a refund, like a tax credit. Tax credits, dollar for dollar. So you could absolutely,
potentially do that too. I don’t know if there’s
another way to look at this. But, no, you’ll just get a deduction. So you’re gonna make it really easy. What Jeff said. (laughing) – [Jeff] What the accountant said. – [Toby] What the accountant said. Actually, you said it, you
don’t even need an interpreter on that one, you did a
really great job on that. All right. Let me make sure I didn’t just skip one. There we go. Oh and by the way, Jeff. You said their startup expenses too. You get 5,000 for startup, which is the investigation
into the business. – Correct.
– And 5,000 for organizational costs, or filing fees, lawyer, accountant costs, all that. Startup fees can be just
anything that you spent, checking out your business and
getting ready to go into it. – [Jeff] Correct. – [Toby] So you can have, you can have both. Which is the best way to fund an Airbnb? Cash or mortgage, if money is no object? So. – [Jeff] Here’s my way of
looking at this question. It’s, kind of can I
get a mortgage loan off that I can invest my cash elsewhere, to get a better return? I don’t see this so
much as a tax question. Now you do have to figure out, you’re gonna have some
interest on your mortgage that you’re gonna be able to deduct and that’s gonna go into the calculation. But I look at this more as a
return on capital question. – [Toby] Everybody kind of does that. You know, here’s the thing. If my return on my money, and it’s, it always reminds me of Buffet. He always said you know, “Bird in the hand “is worth two in the bush.” And he goes, “No that’s not right. “It’s a bird in the hand might
be worth two in the bush, “depending on the length of ownership (laughing)
“and the return.” Or something like that,
I just remember laughing. I think it was his last year conference. But it was, what is the best way, you know, to use your money? So if I am getting 10%
consistently on my money and I can get a mortgage for 3%, then I’m better off to borrow
somebody else’s money at less. The problem is, that’s pretty hard to do. Like you have to
– Right. – [Toby] Have some consistency. If you’re sitting on cash, chances are, I’m not gonna tell you to get a mortgage, if you can buy it for cash, do it. Now here’s the thing with Airbnb. Whenever we see Airbnb. It can either be a trader business, or it could be a rental. What dictates that, is
whether the average daily use, or not the average daily use, the average rental period per guest, – [Jeff] Correct. – [Toby] Is seven days or less. If it is, then it’s a business. You’re a hotel and it’s active, it’s by active income. Which means you’re gonna get
hit with self employment tax. And your ordinary tax rate. If it is not, if it’s over that seven
to eight days or more, then it’s gonna be passive. The reason this is important is, you should look and see
whether you borrowed money, whether that interest, is going to keep you from
having taxable income. If that interest is gonna
make you operate at a loss, then you don’t get to use it, because it’s passive, then
I probably wouldn’t do it. If it’s gonna create an
offset active income, then I might, because, every dollar that I’m saving, if I’m paying that, not only am I, is it the interest rate
that perhaps I’m able to make a spread on it, but
it’s lowering my tax bracket, as well and I might say,
“Hey, I’ll take that action “just for the tax savings.” So, it’s a little bit
of a calculation you do. I’m not gonna sit here and
play with the numbers live, it’s a facts and circumstances. What I’d be doing is looking
at your situation saying, “Hey, here’s your option. “Here’s the spread.” And if you can get cheap money, but that cheap money that
you pay to somebody else, is lowering, like for every
dollar that I’m paying them, I’m getting 50 cents of tax benefit, then all of a sudden, I
have to factor that in to how much I’m actually paying. – [Jeff] Correct. – [Toby] And if I have a
nice dividend stock portfolio that’s paying me 3%, maybe
I’m selling some options on it and I’m getting another two or 3%, so I’m making a very easy, no sweat, five or 6%, maybe I’m doing this. Maybe I’m doing this and
maybe it’s gonna make a much better situation, because all that money
that I’m talking about by the way, when I’m doing the dividend, that’s long term capital gains too. That’s tax. Like even if it was a push, I may still be coming out ahead, because I may be paying
three, but I make three. But my 3% that I’m paying, is offsetting active income and saving me 50 cents
on the dollar, or 50%. But the money that I’m paying in dividend, is being taxed at 20%. So I make a little 30% spread there. You actually have to do the numbers. – [Jeff] Yeah the one
thing I would say on this, if you are gonna do the mortgage, you need to make sure that
you’re putting enough down on the property where
you are not paying fees that you don’t need to be paying. – [Toby] See these guys are fun. There’s a whole bunch
of stuff going on here. All right, I’m gonna have
to get to these questions in a little bit. You guys asked a ton of them, but they’re not related to this. (laughing) It happens once in awhile. All right. “Which is the best way to
fund a new small business, “that’s mainly based on
one piece of equipment “and needs just one staff?” – [Jeff] I found this
question kind of interesting, because, first off, I was very curious as to what this one
piece of equipment was. Also, if the staff was
somebody that they were gonna have to hire to work the equipment. And what were they doing
with the equipment? Are they renting it out, or is it some time of manufacturing? So a lot of questions. – [Toby] Here’s the deal. Whenever I have a new business venture and if I’m gonna use equipment, I’m gonna be very, very tempted, depending on what my outlook on it, ’cause most people get
one piece of equipment, with the eye towards getting
two, three, four, five. You wanna establish business
credit in that business. So if I’m gonna fund a new business, and I need to establish business credit, I’ll tell you exactly how I’ve done it. I’ve given it money. I take that money and I buy, I put money into a CD, or
a very conservative account and I pledge that as
security on a line of credit. So that that business starts to build up its own credit profile. That line of credit, I would use to buy that
piece of equipment. If I do this right, I may either generate a active loss, which I can absolutely take, depending on that piece of business, or I may not have to worry
about paying any tax. So for example, if that piece of equipment is $100,000, I may start off at the gate, taking $100,000 loss and if it’s 179, I don’t believe I can take that as a loss, against my personal, I would carry it forward. But let’s say I made 100,000
off that piece of equipment I paid zero tax on. The staff member just tells me I have to be careful about, taking out, depending on how many
hours a week they work, I may have to worry about
discrimination rules. And so if I throw a 401K on this, or if I have a very aggressive
cafeteria plan, a 105 plan, health, dental, things like that, I may have to allow them to participate. So I’d wanna factor that in. But, I would actually
be looking at funding it with cash, with an outlook
towards using that cash as security to start the
credit profile on the company, so when it comes around
time to buy new equipment, I now have a credit profile. It’s gonna take a couple of years, I’m just gonna warn you. But I’ve literally done this
on two different businesses, and this is the way you do it. What you end up with is you
have a credit history then on that business, and eventually, they don’t require the security, the piece of equipment is the security. If you have really good credit and you have, depending
on the type of equipment, if this is heavy equipment, for example. Then you may be able to co-sign and allow the business to
start building up its profile, with it being the main lender, or how would you say it? The debtor and you as
a personal guarantor. – [Jeff] So one of the
things we’ve talked about is, separating the equipment
from the business. Let’s assume like you said, it’s a piece of heavy equipment, it might be a mobile crane,
or something of that nature. If we were to do that and
rented the equipment to back to the business. So we have a company that
only has equipment in it. Where would you put the staff? – [Toby] It depends, because the staff, there’s liability with having staff. So if you have a really
expensive piece of equipment, you probably don’t want the
staff with the equipment. I’d have them in the operating business and I’d have the rental income coming over from the equipment, usually
it’s gonna be an LLC, so let’s just call it Equipment LLC, leasing over to a management company and the staff would be employed
by the management company. You have discrimination rules regardless. The discrimination rules say, any companies that I own more than 50% of, it’s all gonna be treated as one anyway. For discrimination rules. – [Jeff] So for benefits,
it’s not gonna matter where you put them. – [Toby] Right, some people think, “Hey I’m gonna, I’ll have employees over “in company A and I’ll be the
sole employee in company B. “I’m gonna give myself a
whole bunch of reimbursements “and a bunch of benefits,
insurance, et cetera, “and I’m not gonna provide
it for the other company, “where all the employees are.” Doesn’t work that way. They call you a brother sister corp and they’re gonna throw you in together. Or, at any organization, it doesn’t just have to be corp. But, that’s what they determine a brother sister organization. – [Jeff] So when you were talking about to lease it and building
the credit and all, does separating the
equipment from the business, change how you would do that,
or would it work the same way? – [Toby] No. You would use that particular business and you’d have to show its income. So let’s just say that I, that this wasn’t the only business. That I actually had a main company. So for example, let’s
say I had a dental office and I was buying equipment over here. If I was going to create
a separate entity, with its own credit, I’d have
to show an income stream. So I would have to figure out
what the fair market value for that rental is. I would lease the equipment
to my main company and I would start documenting. In credit, you always say it’s cash, collateral, or credibility. The three Cs. I’ve been doing this for years, so that’s just what you call it. You either have to have a bunch of cash. So you put money into it. Put it in a CD. Use it as collateral. You have collateral, which is, there’s the piece of the equipment. Sometimes you’re using real estate. Sometimes you cross collateralize. And then there’s credibility. The credibility is you, until the company is old enough to stand on its own two feet. It’s like a teenager. You’ll have to co-sign
in the very beginning and some people get really mad, they say, “I set up a company. “It’s got an 80 Dunn & Bradstreet. “Why do I have to cosign?” Because there’s no history, that’s it. “I just got approved to borrow by having “the LLC pledge the asset property. “Should I have applied as the corp “that owns the LLC?” Not necessarily. But see, this is case and point. So this is somebody asking this online. You guys can’t see the question but, so he got approved to
borrow by having an LLC pledge the asset, the property. So it’s cash collateral, or credibility. Which area does that fall into? The collateral and so you’re
cross collateralizing. So the LLC may have got it and this is exactly what
we’re talking about. Or if I wanted another
company, to build its credit, because it’s the one that
I want to have access to funds or equipment, then I would build it in
that particular entity, in which case, then I
would just have to pledge the other asset. You just say, “Hey, I’m
gonna use this as security.” Again, it’s like being a cosigner. So you always have to be very direct about which company’s gonna
build the credit and why. So if I’m gonna have a leasing company, like I wanna have a
whole bunch of equipment and I don’t wanna worry
about my employees, filing a discrimination case, or a slip and fall happening, you know, I put a bunch
of water on the floor and somebody, let’s say
it’s the dental office. They trip and fall, or
there’s a malpractice claim. I don’t want my equipment to be in the target field. I don’t want it to be, there for someone to take. Then I’d separate it out. Good question though. Somebody just asked,
“Do discrimination laws “apply if you’re 100% owner
of a C-Corp management company “and get benefits and
you’re also 100% owner “of an S-Corp that manages
that may have employees?” Yes, it does. Again, they look at it
if you and anybody else own more than 50%, I think it’s 50%, then any of those entities
are considered brother sister. – [Jeff] Right and a really
good example of that is, I can’t set up a defined benefit
plan in that C-corporation where I only am. And exempt all my other
people who are over in my S-corporation. I’m gonna have to, whatever I contribute for myself, I’m gonna have to contribute for the S-corporation employees. – [Toby] Right, somebody just answered and says it really, I’m gonna have to, so it says, “Company A is
a doc and has employees. “Company B is owned by
spouse and Company A “is also employed by Company B. “Company B has a 401K, with
only the doc and spouse. “Best employees of Company A be covered.” I’m just gonna say real quick, husband and wife. – Yep, yeah.
– Yeah, they’re considered one person. So yes, you’re gonna have to cover it. That’s a great example. This is the prime example. So when you do that, as much as we would love
to be able to say no, you’re gonna have to say yes. But then there’s ways around it. You just have to be aware of it and you can put in there, besting requirements. You can put in there different
classes of employees. So sometimes, for example, you’d say, only certain level
of employees are covered and sometimes their safe
harbors for like 401Ks. What you could do is, you just have to make
it available to them. So you may have your own 401K and you may have to have a
401K for the other employees, and you just meet the safe harbor, which may be a 3% match
or something like that. You actually work with a 401K specialist and they put it together and make sure that you’re copasetic. You just don’t wanna
pretend like it’s not there, because you don’t wanna
lose your deduction. All right. Here’s a good one. I have certain questions
that I see come in and I actually get kind of excited for. (laughing)
So when I saw this one, I was like, “Hey, this is pretty cool.” “Is there a rule of thumb to follow “when deciding whether
to capitalize or expense “expenditures made to renovate a property? “For instance, would
new flooring, lighting, “plumbing, built in cabinets, et cetera, “be considered expenses or
capitalized expenditures?” So first off, Jeff,
could you please explain what they’re asking? – [Jeff] Okay, so we have
a rental property perhaps, and we’re renovating, maybe
tearing out the kitchen. This actually has several rule of thumbs. The first and easiest one is, if each item comes on an invoice
that is less than $2,500, you can expense that. – [Toby] So what’s the
difference between an expense and a capitalized expenditure? – [Jeff] So a capitalized
expenditure is going to typically be depreciated
over the life of that asset. It might be a five year asset, seven, 15. As long as 39 years, for
a commercial property. So it may take a long time to, oh we use to see typewriters for $35, get depreciated over a number of years. So the first way to expense that, is like I said, you get the invoice, and it’s kind of important
to work with your contractor, if that’s the case. That he’s billing that
countertop and sink, maybe separately, to keep it
under that $2,500 invoice. What you don’t want, is a bunch of $2,500 invoices that say, “Renovating kitchen.” Because the IRS is just
gonna accumulate those and disqualify it. – [Toby] Well, okay. So what Jeff is saying, (mumbling) – [Jeff] Go ahead – [Toby] Paraphrase. If it’s something that’s an expense, you get to write it off now. If it’s something that’s a
benefit over the useful life of whatever it is you’re attaching it to, then it’s called capitalized
and they spread it out over the useful life of that structure, if it’s a piece of real estate. So when you say renovate a property, I’m assuming its real estate, it’s not a bicycle, right? (laughing) It’s not personal property. So if it’s commercial, it’s 39 years. If it’s residential, it’s 27 and a half. So that sucks. – [Jeff] Right. – [Toby] So if I put in
flooring, lighting, plumbing, built in cabinets, et cetera. I’m spreading it out over that lifetime. Certain cabinets, by the way, are over a shorter period of time, like if it’s in a kitchen, but I think if it’s in a bathroom, then it’s over the, they have some funky rules. But the whole thing is, if it’s expensed and Patricia, by the way, you’re hitting it. There’s people that are
responding live to me and they’re saying, “What
about bonus depreciation?” We’re gonna hit that. You’re getting it right on and somebody says, “What about
the (mumbles) safe harbor?” Erin, you’re absolutely right. You guys are hitting this, before we’re even getting there. What you end up doing, the central air conditioning repair. You guys, are smart. You guys are already
hitting on this stuff. So if you don’t want to capitalize it, then it needs to be considered a repair. Or, you need to be in a safe harbor, where even if it would be possibly something that’s
benefiting the useful life, it’s in an area where
the IRS can’t contest it and so what Jeff said,
is absolutely right. If it’s less than $2,500. The IRS can’t contest it. You’re in a safe harbor. They agree not to audit you on it, because it’s less than 2,500 bucks and you get to expense it. So I get to write it off right now. Now what about the stuff that I don’t get to write off right now? It’s over a long period of time. Well that’s the default, that
39 and 27 and a half years. If you decide to break it down, somebody nailed this already. I think it was Patricia, you get a star. If it’s less than 20 year property, you can write it off all in year one. And 20 year property means like flooring, it might be seven years. Lighting might be five. Plumbing, depending on
the type of plumbing, could be 15, seven or five. Built in cabinets, I’ve seen those, again, if it’s a bathroom,
they’re probably gonna say it’s part of the building. If it’s anything else, it’s probably five or seven year property, I forget which one. – [Jeff] And one of the
big changes with HVAC, was made to be a shorter life. – [Toby] HVAC I believe
you can actually do on your 179. – [Jeff] Correct. – [Toby] So you could, so there’s an equipment amount
of one million dollars a year you can write off immediately. And HVAC, I think security systems, but these are on commercial properties. These aren’t for residential properties. – [Jeff] Right. – [Toby] So, but everything else, you don’t need that, because if it’s anything else, and it’s less than 20 year property, you can write it all off in year one. And so, you’re looking at this going, “Well how do I get there?” Well you have to actually
break down the pieces. It’s easy if you’re doing a renovation, because you have the contractors. So like Jeff said, is
absolutely 100% accurate. But you’re gonna do something
called a cost segregation and that’s a change of
accounting election, and it’s a form 3115 that you file. And it says, “By the way,
I don’t want the default. “I don’t wanna write this
off over 27 and a half years. “I wanna break the pieces down into “five, seven and 15 year property.” And if you’re wondering
what is an example, I grabbed a few examples. But these are things
that you would have as, that would increase the
value of the business, that these would be
broken down into pieces. So for example, when we look at there and you see additions. Bedroom, bathroom, obviously. Deck, garage, porch, patio. Those are all additions. Those would probably be 27 and a half, 39 year property, depending on
what type of property it is. The porch, patio, might be 15 year. The lawn and grounds, those are almost all 15 year properties. Miscellaneous. Those are probably gonna be closer to like the new roof. What are those? 15 year property now? – [Jeff] The roof also got an exemption, but I think again, that’s
for commercial properties. – [Toby] The roof is, yeah, but it also has a shortened life. – [Jeff] It does have a shortened life. – [Toby] It used to be the whole, but I think it’s gonna be
covered underneath your bonus, central vacuum is probably gonna be five. Wiring upgrades, what is
wiring usually gonna sit under? For you guys?
– It actually depends on what it’s for. – [Toby] Yeah, it depends on
whether it can be removed. I know that there’s some funkiness. It might be five, seven. Seven is probably gonna be than 15. But either way, you have the right to write the whole thing off. Satellite dish is probably five. Security system, probably five. All of this stuff, you’re gonna get to write off, in the year, if you break it out. So like you could, anything that’s less than 20 years. – [Jeff] Here’s one of
my favorite categories, is that lawn and grounds. Some of those items, the driveway, the swimming pool, the retaining wall, can be very expensive. And they’re all 15 year property, which means, – [Toby] You can write it off in year one.
– You can write it off in year one.
– If you change your accounting and you go to a cost seg. Which I promise you, the only people that know how to do that, are people that do real estate. You need to make sure that
you’re working with, guys. “Does bonus depreciation year one, “only apply after cost seg
study is done and forms filed?” You can go back to last year. Like we could actually continue, we could do a cost seg and make that election for 2019, all the way up until October 15th, of this year. So, you know, nine months in the future. Is that nine months? – [Jeff] Yeah and the whole
reason for doing the 3115, it’s called a “Change of
Accounting Method” is, I was previously
depreciating my whole house, using this method. But now I wanna do it this way. – [Toby] The way that
it was explained to me that made sense, is if I have
a rental house that I buy and it has carpeting. Brand new carpeting. I know full well that that carpeting’s not gonna last 27 and a half years. But if I go into the default rules, I’m writing that off
under 27 and a half years. And if I sell that house, that carpet is supposedly worth something. When we all know that if
somebody buys a rental property, the first thing they’re doing is tearing out the carpet and
painting all the walls, right? So, why do we buy into that? Why do we let the IRS treat us that way? We just go in and again, we have the option, we get to choose. And, whether or not you try
to write that stuff off, really has to do with whether
you have taxable income from the real estate. If you’re getting into depreciation and it’s offsetting all your income and you’re just creating a loss anyway, then who cares? But, and as long as you’re
not a real estate professional or an active participant. You’re not getting any
benefits, so like why care? But maybe, you have other income. Maybe you have other rental income and I say, “You know what,
this saves me a bunch of money “in taxes so I’m gonna do a cost seg study “and I’m gonna take this now.” We’ve done webinars on cost segging. You can go to our website. Done a bunch of them. And that’s a huge, this is
a great winner for people. Somebody says, “If you put in a driveway, “do you still need the
change of accounting, “or just write it off
as bonus in one year, “without the 3115?” You have to do the 3115. – [Jeff] Well actually you don’t. For the asset placed in the current year, you’re not changing that – Oh yeah,
– depreciation. – [Toby] I see what you’re saying. So, walk somebody through this. So, I buy a rental property and I put in a new driveway. You would just separate it out. – [Jeff] Correct. – [Toby] And that would
be 15 year property. – [Jeff] Right. – [Toby] So I’d put it, – [Jeff] But I would still need, I would still wanna do that cost seg. – [Toby] But is it required? – [Jeff] I think it’s an
authoritative way to do it. – [Toby] If I have owned rental property and I’ve already been
depreciating that property, do I not have to do a 3115? – [Jeff] Then you absolutely
have to do a 3115, – All right.
– to change how you’re depreciating that. – [Toby] All right, all right. So I have to do it. The existing property that
needs new driveway in year five. So it’s year five. So you’re gonna have to do a 3115 and yeah, you do a cost seg study. Eva, it’s not that bad. This is fun stuff. “If you cost seg property this year, “but it gets done before April, “supposed to happen this week
with Cost Seg Authority.” I know those guys. Eric Ollivers. Kick butt, he has a great place. “We plan on 1031 this summer, “we do a 30,000 rehab prior to sell, “can we do another cost seg
immediately prior to sale? “Should we?” No you’d only have to do one. And when you rehab, it’s really easy. You’ve already chosen, to change your, your accounting methodology. And you have all your property broken out. So when you do the rehab, you just wanna make sure that it’s easy to classify the property. Then, you’re in like
Flynn and you’re good. All right, let’s jump in. We’re dilly dallying. How did we get to four o’clock already? Wow, Jiminy Christmas. Sorry, guys. We get chatty Kathys. All right. “I’m a resident of Oregon. “I am carrying several notes on houses “that I’ve sold and
I’m carrying the paper. “I’m considering changing my residency. “Would I have to continue
to pay Oregon state taxes “on these notes?” So let’s just say, are all
these properties in Oregon. – Okay.
– So let’s just say that all the properties are in Oregon and you have notes no
all these properties, and you moved to Washington, where there’s no state income tax. – [Jeff] Now, it can work one of two ways. If you’re just writing the note for it and you’ve recognized all the gain when you sold the properties, then that’s just an interest and I think you can move to another
state and no longer pay taxes to Oregon. – [Toby] It’s wherever you’re, it’s wherever the, however that state treats
certain activities. If you had a rental property, it’d be taxable in Oregon. If you have a note, which is simply, it’s interstate commerce, once you move to a different state, then I wouldn’t be paying
Oregon state taxes. – [Jeff] Now if I sold my Oregon rental on the installment sale, Oregon’s still gonna want, Oregon, or however I’m pronouncing wrong. – [Toby] Oregon. – [Jeff] (laughs) Oregon, okay. They’re gonna continue to want their share of the capital gains from that property. – [Toby] Chances are, this individual sold that
out on an installment sale. Chances are, if you’re
carrying back a note, unless they decided to recognize it all, because they had a bunch of losses floating around out there. Chances are, this is somebody who’s doing an installment sale. What that means, folks. Is that instead of, let’s say I had a house that I bought at $10,000 and I sell it for 100. I have $90,000 of gain. So I sold it to Jeff and I
carry back a $100,000 note. That entire transaction, is taxable, right then, in that year, unless I elect an installment sale, in which case, if I
elect to have it treated as an installment sale, then let’s just go this 10%, $10,000 basis, we have some depreciation we’d have to add back, we’d
have long term capital gains. Let’s assume I owned it for over a year. So I had $90,000 of
long term capital gains and then I have interest. So I have some money coming, that I’m paying at, receiving at zero. Some money that I’m receiving at my as depreciation recapture, which is capped at 25%. Some of it would come back, at my long term capital gains rate, which would be zero, 15 or 20%. And some of it’s gonna be interest, which is gonna be ordinary bracket. So hopefully your brain
didn’t just explode. – [Jeff] So every time
I make you a payment. It’s gonna be divided out into different, – Yeah.
– buckets. – [Toby] Yep. Then yours is saying,
“Hey the interest portion “would probably be taxable in Oregon, “in the capital gains portion, “would probably be taxable in Oregon.” Would the dividend recapture, that would be, do the state tax that? – [Jeff] I don’t think that
would be subject to state tax. That would be wherever you’re at. – [Toby] Right. “Is the interest taxable to Oregon, “along with the capital gain
on the installment sale?” If it’s an installment
sale, I believe that you’re gonna–
– Yeah, I agree with that. I think they’re gonna say it’s directly attached to those long term capital gains. – [Toby] Hey I just got
a really interesting one and I’m so sorry, guys. I get sidetracked, when I
see really cool questions. “For California rentals, can
you use an irrevocable trust, “versus an LLC, to own the
property asset protection “then file form 1041 and do
K1s to do trust beneficiary?” So Maria, here’s the rule, just ’cause you perked my curiosity. What that means is that, if you are filing as an irrevocable trust, it depends on where the trustee is, as to whether the funds
that are paid are taxables. So if the trustee is out of state, like let’s say in Nevada or Delaware, then the income would not be taxable, but if you paid it out to the beneficiary, then it would be. – [Jeff] Yeah California even asks on their state trust return, “How many in-state beneficiaries, “how many out of state beneficiaries? “How many in state resident, – [Toby] There a really good case.
– Trustees. – [Toby] There’s actually
a really good case that this came out, I
was totally geeking out with a trust attorney. So there was a, it was somebody famous and it was their heir. They had about two million
dollars in a trust, that was making about $400,000 a year. But they weren’t distributing any to them and they had a California trustee and a Nevada trustee and so half of that $400,000 was taxable, because none of it was distributed to the beneficiary. But when it does get
distributed to the beneficiary, they’ll have to pay
taxes on the other half. If both trustees had lived out of state, let’s just say you didn’t
have a California trustee, then it would not have
been taxable at all. Isn’t that wild? – That’s crazy.
– And that’s why people do these nings and dings and there’s brand new entity
we’ll be talking about, called a statutory foundation in Wyoming, which I think is really, really cool. We’re doing all of our due diligence. I’m talking to the drafters of the statute and we’re making sure
it works for you folks in California, but
California doesn’t get to do the franchise tax on y’all, when you have a grantor trust. And an irrevocable trust, filing a 1041 is not what I
would call a grantor trust. If you do an irrevocable trust, but you make it a grantor trust, then you get the asset
protection with no tax, from the Franchise Tax Board, other than your individual tax, you still, whether you
distribute it or not, you’d pay our individual any income, whether it’s distributed or not. I’m not gonna geek out anymore. I love that stuff. Let’s go to the next one. Whenever I see Jeff’s
eyes start to gloss over, he’s like, “Toby, shush.” (laughing)
Then I move on. “So, where should property
management business be formed? “Wyoming where I reside? “A Corporation? “S-Corp, LLC, disregarded?” Yes. (laughing) You can have this one.
– Yeah. As far as a property manager, is only managing the property. They don’t own it. They don’t have any employees there. So you can form that just about anywhere and my preference is,
some place like Wyoming, they don’t have a corporate tax. They have good liability protection. And I would probably
for a property manager, I would probably prefer
it to be a corporation, because we can do a few more
things with a corporation. – [Toby] So, yes. And I’d be just, it’s
facts and circumstances, so I wish I could give you guys an answer. But if you have a management company, if you are a property manager, it’s gonna be wherever
the property’s located. We may set it up outside the state and register to do business there. Or, if I want anonymity, then I’ll probably set up a, let’s say a Wyoming entity and I’ll have it owned. An LLC in the state. If I don’t wanna have my
name on public records. I may have an LLC that’s member managed by that Wyoming LLC
that’s taxed as a corp. Sounds long winded, but, keeps me, let’s say, all
rentals are outside of Wyoming. Rentals in Phoenix or Washington? So Arizona or Washington? It depends. So, the management company. You have two and it really depends on where you’re collecting the funds, whether you have another property management company doing it. So you actually have some choices here. If I’m dealing with the tenants and the properties are owned separately by like the trust with an LLC, then I am probably wanting to keep my name off of that entity. I wanna just act like I am the landlord. Not the owner, but I’m
just the management company and then you can actually
talk smack about the owner. Nobody knows. It’s funny how tenants
will treat you differently, if they don’t think you own the property. Anyway. And the private managers
are collecting rent, I’m just the asset manager. Then you could be in Wyoming. You don’t actually have to be there and that’s probably what I would do. Have the money get paid to
the out of state entity. You’d still pay tax on the rental. The profit. So Jeff, like if I have a property manager and I’m getting it out
and sending it to my LLC. I’d still be paying a little bit of tax in Phoenix and Washington, depending on what’s obligated,
like in both those states, there’s some version of a tax. Washington has the B & O and Arizona has the state. So I’m paying a little bit of tax on it, but only on the net. So the management company
is gonna take its piece out of both of those. – [Jeff] In regards to
what type of entity, I really feel like the
corporation’s the only one that makes sense for tax purposes. Putting it in any kind of pass through, you’re just taking it out of one pocket and putting it in the other. – [Toby] Yep and so he’s asking, this is somebody who’s actually asking it, consistent, “Rent would go to the LLC, “or go to the asset management company?” I would probably have it go to
the asset management company. Take your management fee out of it and then send the rest, as though it was received by the LLC, just like a regular property. – [Jeff] Exactly. – [Toby] Yep. And that will not change the it from rent, it would still be rent, but it would only be the net rent, whatever you leave in it. And if you needed to
pay more up to the corp, you could actually turn
around and write it a check, but, that thing, somebody says, “What kind of entity is an eQRP? “Is it the same as a 401K?” Yes, somebody just put an E in front of it and marketed that way. There’s no such thing as an e401K. Isn’t that fun? – [Jeff] That’s not in the code? – [Toby] Nope. There’s no such thing
as an e lower case eQRP. But whoever branded that, I get that question like every time. They’re a marketing genius. So, I’m gonna make one called a tQRP, that’s Toby qualified retirement plan. All right, and somebody, by the way, somebody they said, we were asking the brother sister corporation question and they had, one of the businesses was a 501c3. And, the other one is a company that they have employees in and they are owners. Yes, the no brother sister there, because there’s no ownership in a 501c3. It’s not owned. So you can’t be discriminated. So it actually works really, really well. So yes, they’re absolutely correct. Somebody had said that. And, yeah, so when it’s a corporation, we’re assuming a for
profit, S-Corp, C-Corp, where you’re an owner. If you have a 501c3,
that’s one of the ways, a way from the discrimination rules, because you are not an owner. You are merely a director. You’re an employee. Boy, some people ask some good questions. They’re asking about Schedule A, I’m so tempted to read it, but let’s just keep going on. “Can you have both a private foundation “and a public foundation?” Well you don’t own either one, but yes, you can control both. “The private foundation’s 5% donation “to go to the public?” Yes. – [Jeff] Yeah and real briefly, talking about that 5% donation. The private foundation is required to contribute 5% of its funds to a charity. – [Toby] Yeah. – [Jeff] And I’m gonna
say a private foundation and a public charity. – Yeah, well.
– I guess, but I guess it would also work with an operating foundation, wouldn’t it? – [Toby] Yeah, you can, so you have these, really you have two groups. You have a pseudo group, which is a private operating foundation. But here’s the deal. The private foundation is the most public charities are the most common. Those are the ones that are
actually doing something. A private foundation
is not doing anything, except, supporting, – [Jeff] Right. – [Toby] Public charities and in order to get the tax benefit in
the charitable donation, which is restricted, it’s not as much as, I think it’s half of the public charity. So public charity you can
give up to 60% of your AGI. Private foundation, you’re gonna be restricted
down to what, about 30%? – [Jeff] 30%, yeah. – [Toby] Yeah, so in order to keep that, you have to give up 5% of its assets, to a qualified 501c3. So the question is, can
I give it to another to my public charity? Yes, if it qualifies as a 501c3. Yes, if you’re not doing
any conflict transactions, you’re not trying to
get shareholder benefit, or something like that. But if you’re running
these things properly, then yes, you could do it. So I just put the caveat,
so that you can’t just take the money and run with it. Somebody says nice things. So that’s always good. Let’s see. “eQRP by the way, is a proprietary QRP, “by a guy named Damion.” (laughs) Marketing genius, eh. It’s smart! Hey I never knock anybody that manages to coin a phrase, you know
and here’s the thing. In all seriousness, we need more people saving money in their own retirement plans and here’s the funny one. People are always asking me which is better a ROTH versus an IRA, or a ROTH 401K versus a 401K and the answer is, it’s a push, if your tax bracket isn’t changing. But if your tax bracket
is going to go down, when you retire, it’s better to take the tax deduction now, and do a traditional. If your tax bracket is going to go up, when you retire, it’s better to do a ROTH. But everybody knee jerk
reaction, says ROTH. When you actually run the numbers, if my tax bracket is 25% now, versus when I retire and
I have 30 years of growth, the same amount, it’s exactly the same. – [Jeff] And I don’t
think people realize that, just because they put into
a traditional this year, if mine don’t have any income next year, there’s nothing says, well, not enough to make the contribution, but, if I’m in a low tax bracket, there’s nothing saying I
can’t start a ROTH account, – [Toby] Yeah. – [Jeff] And go back and forth as needed. Or even putting both accounts as, if you wanna do it that
up to the $6,000 limit. – [Toby] Yeah. You know, that’s the thing is when, here’s the deal. When you are in a really low tax bracket. So for example. I have clients that will qualify as a real estate professional, will do something this year to take a, maybe will cost seg, maybe will take a bunch of
accelerated depreciation, if you guys know what all that stuff is. Maybe we’ll make them, get them down to the 0% tax bracket. Now I’m looking at them, going, “Hey, if we’re
at zero and you have, “let’s just say that you
even have a negative 100,000, “you can convert up to $178,000 tax free “from your traditional IRA into a ROTH.” Now the question is, do
you think you’re gonna pay more than 0% when you retire? If the answer is yes, do that transaction. (laughing) The answer’s yes, guys. (laughing) All right, so anyway. Math is fun. Somebody says, “A times
B equals B times A.” Yes! But try to convince somebody that’s been drinking the Kool-Aid
of the ROTH IRA and yeah. It’s like talking politics to somebody who’s a rabbit on either side. Good luck. – [Jeff] What do you mean by that? – [Toby] Eh, nothing, Jeff. We’re not talking politics. I don’t care how much you try. (laughing) I can hear Patty cackling. All right, “Is it too late
to rent out your house “for 14 days under the tax code?” No, you can always rent
out your house for 14 days (laughs) under the tax code. – [Jeff] Well yeah, and
I had to think about this for a long time. If you mean for 2019, yeah, it’s too late. The year’s over. – [Toby] No! All right, yes, if you
actually rented your house. If you actually used your house, you could you know, you’re
a cash basis tax payer. So unless you physically move
the money into your account, yeah, you’re not gonna
get to write it off. You could still do it this year. But that 14 days is a section called, it’s 26USC280A, big capital letter A. What it says is, you can rent your house, and for 14 days or less, it actually says less than 15 days. So it’s 14 days or less. And you don’t have to pay tax on it. – Right.
– That’s why Airbnb people love to rent out their houses and have people sleep in their beds. It’s weird. I always imagine that
it’s gonna be some guy who comes over and this
is gonna sound horrible, but I went to school in Europe. In the middle of summer,
sometimes it smelled. So I always think of the
most smelly friend that I had and he’s gonna come over
and sleep in your bed. So that’s what I always say. Think of the most stinky person, the guy that like never
bathed, or whatever, or whatever and they’re gonna come sleep and roll around in your bed and that’s what you’re inviting in if you’re doing the
Airbnb out of your house. Don’t do that. See I’m helping them. – [Jeff] Where I’ve
really seen this 14 day thing work is, I know there were people in Miami, who were renting out their houses, for small fortunes. That maybe they’re paying a
$1,000 a month in mortgage and they’re renting it
out for $7,000 or 8,000, or more for a week.
– Then I’m happy to have the stinky guy, but what I’m gonna do is, I’m gonna put plastic sheets on. – Oh absolutely.
– Over it, then I’m gonna throw, I’m gonna burn the sheets. – [Jeff] And the mattress and. – [Toby] Yeah, but anyway. Somebody says, “Wait,
we need to write a check “from the business to the homeowner.” Yeah, or, if the money was already there, then you just need to re-classify it. So let’s say I put a bunch
of money into the company and it was a shareholder contribution. Then I need to offset
some of that contribution, as a return to the shareholder. There’s a way to do it on paper. But you’re supposed to
be reimbursing yourself. – [Jeff] And you should
really be documenting what these meetings are about. Rather than just renting for 14 days. – [Toby] And somebody says, “Hey I wanna do this. “Pay myself a $5,000 dividend. “Can I re-classify it?” Yeah. Absolutely you can. But in fact we’d encourage it. You just have to make
sure you document it. “Do I need to 1099 myself?” No, because it’s non, like this is actually
a section of the code, where you don’t have to report it. So, isn’t that awesome? “Would that be the same
for meeting rents?” Yes, 14 days or less. So if you rent your, like this is what we usually see. You see people renting their
house to their corporation, or their corporate meetings, or I have a lot of clients that do MLMs, or their real estate. We have clients all over the place. We have several by the way, before you think crazy MLMs, I have many, many clients. I wanna say like more than a handful, making over a million dollars a year from super and some of the nicest people you’ll ever wanna meet. It’s because they’re
passionate about something and maybe their passionate
about their product, and you name it, if you’re
passionate about something, it tends to rub off. But yeah, you could
absolutely have your meetings in your house, rent your house out, it’s the fair market value and yeah, you don’t have to pay taxes on it. Seen it. Works great. And once a month. And, “Can I do three in one month?” Yeah, it’s 14 days or less. So it’s not a, it can be 14 consecutive
days, for all the court cares. All the IRS says is, “Hey
we have to follow the rules “and the rules say 14 days or less.” – [Jeff] Yeah you just don’t wanna hit that 15th day or it all becomes taxable. – [Toby] Oh yep, and that’s where, we actually did this
calculation with an Airbnb when people were doing this. When you hit about 15, 16 days, you go backwards and in order to make up, you have to hit 22 days. So in English, 14 days is tax free. 15 days, the entire amount becomes taxable and it’ll take you til
about your 22nd day, to make up all the tax you had to pay. So don’t do that. If you’re gonna do, is it free state tax as well. It’s non reported, it’s
an absolute deduction. So yes, it’s state tax and everything. And you guys can look it up. It’s 26USC280A, I’ve been writing about it for 20 something years and yeah, just go knock yourself out. We do a great, we have a really cool 280A kit and we’ve defended this one
a couple times under audit, just sometimes it pops up. It didn’t trigger anything, ’cause there’s no paper trail. But one was not even our client, we just inherited the kind of a CPA’s mess and we fixed it and that
was one of the areas where we were able to get some serious tax relief for the guy. $79,000 tax bill down to 2,000. And it took about two weeks. Just because, if you know
how to classify things appropriately, those laws
are there for your benefit. If you don’t, then they’re done. Well they’re still there,
you just don’t know how to take advantage of it. “Hi I will be 70 in April of 2020. “Since the new law”, And she’s talking about,
or he’s talking about, is it a she? Just I assumed it was
a she, which is weird. A weird assumption. It might be a he. “Since the new tax law allows to take the “required minimum distribution at 72, “then I don’t need to
take an RMD this year?” The answer is correct. You do not have to. That’s because the SECURE Act, which is, Saving Every
Community from Retirement, or something like that, it’s the weirdest acronym. You know what SECURE stands for? – [Jeff] I do not. – [Toby] Saving Every Community Under Retirement Enhancement Act, or something like that, it’s weird. But it was passed in
December 20th, or 21st. The President signed into law at the very end of last year. This is one of the things. It raised that required
minimum distribution, that’s required out of traditional IRAs, traditional 401Ks and
defined benefit plans. It raised the minimum age to 72. Now here’s the rub. You have to be 70 and a half in 2020. So, if you’ll be 70 in April, then you’ll be 70 and a
half in theory, in October. I think that’s right. Yeah, so you qualify. So you will not have to take a required minimum distribution until, 2022. – [Jeff] So translate it for the attorney. – Yeah.
– If you (laughs). – [Toby] If you translate
it, because I get confused. – [Jeff] Yeah, so if you
were already 70 and a half, at the end of 2019, then this does not apply to you. I tell you what. They count to the very day. – Yep so if you turn 70 and a half, in 2019, is that what you’re saying? – [Jeff] Correct. – [Toby] Yeah then, yeah you’re toast. – [Jeff] So, you don’t
have to take your first RMD until you’re 72. Now here’s the other side of that coin, that’s really weird is, they did away with, you
can’t contribute to an IRA, when you’re over 70 and a half. – [Toby] You can actually you can actually
contribute to IRAs forever. – [Jeff] So let’s assume, I’m assuming too and
y’all typing out there, you can just stop talking
about me being 72 (laughs). – [Toby] They didn’t say you were 72. – [Jeff] So let’s say I’m 72. I may have a required minimum distribution where I’m having to
distribute some of my IRA. – [Toby] They said 10 years ago you were probably 72.
(laughing) – [Jeff] So I may have
a required distribution, which is taxable to me, but I can also put money back into my IRA. – [Toby] Hey let’s be twisted. Let’s put money in our IRA and give the money that was
required minimum distribution, to a charity. – [Jeff] You can also, yep, you can still do that.
– Is that okay? – [Jeff] With an RMD. – [Toby] I would actually
end up with a tax deduction. – [Jeff] Right. – [Toby] (laughs) And
then, that’s so much fun. This is like tax crack. – [Jeff] But there were
a lot of new factors in the SECURE Act, one of them–
– One of the things is, you lost your stretch. Somebody asked this. “Are required minimum distributions “still required for inheritances?” Well, Ruth, that’s an inherited IRA and the rules are a little bit funky for a spouse, or somebody
who is actually older than the party they’re inheriting from. – [Jeff] I think that’s
less than 10 years, – Less than 10
– Younger. – [Toby] Years and also, if
it’s a special needs child, or somebody that
– Yes. – [Toby] or under 18. Otherwise, it’s 10 years. – [Jeff] Yeah, which is much better than the old five year rule. – [Toby] The five year rule, but this is, there’s no stretch anymore. – Correct.
– So it used to be I used to be able to
take it over my lifetime. – [Jeff] Right. – [Toby] No more. It’s 10 years. Unless you’re a spouse. – [Jeff] They also, there’s now, you’re allowed to take IRA distributions, to pay for birth and adoption expenses. Up to I think $5,000. It’s still gonna be taxable, but there’s not gonna be – And then they get (mumbles),
– Any penalties. – From that too.
– Yep. – [Toby] It’s like 14,000
for an adopted child. Like there’s some pretty
big incentives there. So somebody says, “So if I take a required
minimum distribution “can I turn around and
re-invest it into the IRA?” (laughing)
Well, technically that’s not active income. So you take the required
minimum distribution, but you’ve also made
a little bit of money, so you put some of the money you made, into the IRA, then yes. You actually can. – [Jeff] Yeah, so if
you’re over 70 and a half, you’re still gonna have to
have that earned income, either from W2 or self employment income, or something like (mumbles). – [Toby] “Whenever I hear
distribution being taxed, “I’m so thankful that I have “a very universal life insurance policy. “That will distribute to me tax free.” That’s fair, and absolutely! And hard working folks is a game changer. Yeah, we actually wrote a book on it. It’s called, “The Private Vault.” If you ever go to our website, you’ll see it in there. People sometimes look at us and go, “What are you guys talking about?” And I’m like, “It’s
protected, it’s tax free, “I have three policies.” I tell people all the time. I don’t use variable. I use index. Simply ’cause I got killed at variable when the stock market corrected. Index is a little more conservative, and ratchets up and you can’t lose money, no matter what the stock market does. I just happen to be a
huge believer in them. I have three, because I have one for a buy/sell with my partners, because my wife and
daughter aren’t lawyers. They can’t be in on our firm. It’s just legally the way it works, and I structure it as a business, even though we do a lot of
tax and everything else, it’s still professional
limited liability company that requires ownership to be a lawyer, so they can’t, so it cashes them out. I have a key man policy,
’cause I’m one of the partners here and to replace me, there’s money that dumps in
so they can hire somebody else and then I have a regular one and all of those, I can borrow against, if I need it. I can also use it if
I need long term care. And, it’s non-taxable, so if I want money, I go do it, I used it for my daughter’s education and for her car. As well as paying her out of
the, into her company, so. I always laugh, like, I didn’t hit any tax. In fact, it was kind of ridiculous. Some years I got refunds back, while my daughter was going to college. I said, “Whoops!” Let’s keep going. How many more do we have to go? – [Jeff] Three, I believe. – [Toby] All right. “What is the requirement by the IRS, “in order to qualify as a
real estate professional?” Now this is about a two hour response. So I’m just gonna give it
to you guys in two seconds. So, you’re under 26USC469C7. You can go read it if you want. 469C7 and all this is, is to qualify as a real
estate professional, make sure real estate losses change from passive, to active. In order to qualify, there’s a two part first test and there’s a second test. The two part, first test, has to be satisfied by one spouse. So if your joint return,
one spouse has to qualify. And I’ll hit this in a second here. The first thing they have to do is, they have to hit 750 hours. Second thing they have to hit is, it has to be more 50% of their service time.
– Service time, yep.
– Yep. So whatever you do, that’s professional services. If you spend 1,000 hours being a waiter, then you have to hit 1,001 hours, in real estate. It doesn’t have to be your real estate. It could be your realtor, broker. It could be your construction person, you’re involved in real estate. You’re a developer. Doesn’t matter. So that’s test number one. 750 and 50% or greater. Test number two is, I’m materially participate
with my real estate. It’s a nine factor test. If you hit any one of the
nine factors, you qualify. And when you’re doing this factor, the time requirements, it’s both spouses. So one spouse could qualify
as a real estate professional and the other spouse could qualify for the material participation and you qualify for your tax return. Now, the ones I’m gonna focus on, this is the absolute, drop dead, don’t have to worry about anything else, if you spend 500 hours, cumulatively, you and your spouse, on your real estate, your rentals, managing it,
handling your real estate, you qualify for material
participation, period. Somebody says, “What
if you’re not married?” Then you both have to qualify. Like, then, you would have to qualify. Each person would have to
qualify on their tax return. But if this is a married, filing jointly, then only, then you add both spouses. There are two other tests. I manage my properties. I’m the only one who
does it, then I qualify. If I manage my properties and
I spend more than 100 hours, cumulatively, so 50 hours for each spouse, and nobody spends more than
100 hours, than I qualify. And then you have a five out of seven year and a bunch of facts
and circumstance tests. There’s nine of them. I’m giving you the big ones. You hit 500 hours cumulatively, you don’t have to worry
about anything else. If you don’t hit 500 hours and you’re more than 100 hours and nobody else spends more
than 100, than you’re good. Then here’s the last one. This is a per rental property test. Unless you elect to
aggregate them together. If you elect to aggregate it, something you do on your tax return, guys like Jeff love to
make aggregation elections. It’s all of what. You check a box and, write a little note?
(laughing) And you treat all of
your activities together. And somebody says, “What documentation?” Any log will do. Which means you can do it on a phone. You could be keeping it in a ledger. Just don’t make it up at the end, where people get in trouble is when they, – [Jeff] They like to use
a contemporaneous word. – [Toby] They want it contemporaneous, but it’s not, “I have to do it right now.” They just want it to be, correct, the people that
get themselves in trouble, are the ones where the hours
physically don’t add up. Like they do 2,000 hours of
real estate professional, and they have a job where
they did 2,200 hours. – Right.
– And the IRS says, “There’s no physical way
you could’ve done that.” And the court throws you out
and said, “You’re an idiot.” Or you have you know, 300
hours documented for one month and nothing else on any others. They just look at you
like you’re an idiot. “I am retired, real estate is all I do. “Do I still need a log?” Yeah. Technically, if they audit
you, you need the log. To claim it. – [Jeff] You need to be
able to prove your time. – [Toby] You need to be
able to prove your time, so. Here’s what I do. I tell people, “Keep track in your phone. “Just keep a little Google Calendar. “And just pop in there. “What did I do this week?” Easy. “Can you take a course
on pass real estate exam “and then join as a real estate broker?” Yeah, but you still have to do the hours. Being a realtor doesn’t mean you’re a real estate professional. It means that, that might be what you do, and you have, really cool. “How about being a capital
raiser for real estate fund?” I don’t know if that would qualify? – [Jeff] Yeah, some of
those will qualify you for the–
– Real estate. – [Jeff] The second test. – Yep.
– But not for the first test. – [Toby] Yeah, so if it’s your fund, then, actually, capital
raising I don’t think is ever gonna be, unless you’re doing it for somebody else.
– I don’t think so either. – [Toby] Yeah, so there are certain things that don’t qualify at all, but shoot us an email, it’s a fun one. We may throw that in as a
question, for next time. We’re way over. – [Jeff] Okay. – [Toby] Were we shooting
for an hour, or two hours? – [Jeff] It’s now six p.m. Pacific time.
– All right. – [Jeff] So we’re good. – [Toby] All right. President’s gonna be talking tonight. “What is included in calculating gain/loss “on the sale of a single family rental? “Broker commissions, “seller paid closing costs, renovation…” – [Jeff] Yes. So basically, it’s what your costs, your basis is gonna be. What’d you pay for? Less any settlement fees, on both ends. Or let’s just say plus
any settlement fees/costs. Plus any renovations, anything
you put into that property that you did not deduct elsewhere. – Yep, so.
– And then whatever you sold it for. – [Toby] And this is where the rub is, is if it’s your house and you have a capital gains exclusion, then it just sucks,
because you didn’t get to write any of those off. – Yep.
– And you don’t have any capital gains. If you have capital gains, then it’s helpful, but it really isn’t that great, because you’re like, “It’s capital gains.” It’s probably the best tax
treatment you’re ever gonna get. – Right.
– So it’s offsetting some of that. Which is stinky. The deductions that are out there, just because some people will say like, “Hey, do I have to, is it
lowering the capital gain “or is it a deduction?” The deduction is, when you’re
doing a mortgage interest, that’s deductible. Real estate taxes that
you pay on your house, that’s deductible. That will offset your ordinary income at the highest bracket. – [Jeff] Right. – [Toby] So we like those. This other stuff, eh. Eh. Maybe not great. Now if you’re 1031 exchanging, then it’s literally just you’re just, you’re never
gonna get that benefit. Like if you own it til you die, you’re just, you’re not
gonna pay any tax anyway. You got zero benefit from it, but you still track it. “Can you be a real estate pro “on only one property?” Yes. You could absolutely do that. It takes two or three times to manage. Travel to your rental properties. I don’t think is gonna
be included in your, in your time. – [Jeff] No, I’m not sure about that one. – [Toby] “Can I claim myself
on 1040 occupation section “as a real estate professional?” No. You wouldn’t say that necessarily, I mean you could, but, realistically, that’s not
what we’re talking about here. We’re talking about making passive losses into active losses and
it’s a special section. Then somebody asked, I
forget what I was gonna say. There was a question
somebody had asked earlier and I just completely blanked on it. Oh I know what it was. Somebody was flipping and
they were wondering about the deductibility whether
something should be deducted as an expense. If you’re flipping, it
doesn’t really matter, because technically,
you’re probably flipping within a year. If you need a deduction, like if you have a flip
that was really good and you’re in the middle
of the second flip, you might want the, when we were talking about
capitalized expenses, versus ordinary, just
like immediate expenses, you may wanna take the
immediate expense now. “Will you respond to
questions that you do not get “during the webinar?” Yeah, send it in. We answer them all month long. Send it to
[email protected] We’ll still answer your question. That’s what we’re here for. “Does all revenue and partnership “have to be declared as
income by the partners, “even if some is left inside the company?” – [Jeff] So in a pass
through, like a partnership, all revenue, all income, gets passed to the partners, whether they take that money out or not. So the distribution really
doesn’t have anything to do with, how much income you’re
gonna have to report. – [Toby] Yep. What Jeff said, is absolutely right. These are safes, that have
money growing inside it. And you’re being taxed on
the growth inside the safe. Sometimes you don’t even
know what the growth is, because it’s somebody else is running it and you’re just a passive partner. In which case, probably in a couple months, you’re gonna get, you’re gonna get told
what you made last year. And that’s when you
better have a diaper on, in some cases, because some of these guys do really, really well,
but they didn’t distribute any of it.
– Right. – [Toby] And you’re like, “Well
how am I gonna pay the tax?” Well you better read
your operating agreement and hope that it says that, they have to distribute something, ’cause this is where it’s kind of fun, if you’ve ever had a creditor become an assignee interest
holder in an entity, you know how much fun it
is to give them tax bills with no money. That’s the lawyer side of
me just being annoying. – [Jeff] No, I’ve been there. – [Toby] I think it’s fun. All right. Free stuff. If you wanna listen to our Tax Tuesdays, plus our other podcasts, by all means, it’s free. Go onto and listen. You can also go to iTunes, it’s free. There it is, there it is. iTunes is free and Google Play is free. All of our stuff and here,
I’ll probably give you guys two seconds to see it. You can see there’s lots and
lots of different episodes. Those are from last year, when I took the snapshot, but it’s always, we
always have new content. If you come and go to our
YouTube page, for example, you have Coffee with Carl. You have Michael’s podcast and videos. Clint’s videos. My videos. Everybody’s videos. We’re always sticking stuff up there, ’cause we’re an education company. Everybody says, “You’re a lawyer.” I’m like, “No, I’m a teacher.” And yeah, I happen to love working with real estate investors and business owners and frankly, I just look at myself as an advocate. Jeff and I love to do Tax Tuesday. I think Jeff likes it. – [Jeff] Love it. – [Toby] And it’s so much fun to just answer questions
and it’s mind food. Then there’s always the accountants. You guys should see some
of the stuff we get. They’re like, “Why are you answering stuff “on a public forum? “You shouldn’t answer stuff.” (laughing)
You know what? You need to stop it. Go back to your practice and make everybody else miserable, right? I’m gonna charge you
for an answer, come on. Give some people some direction. We don’t have to be stuffy. I think that the legal and the tax and the business professions changed a lot in the last 20 years and
it’s so much more fun to put information out. We try to be as accurate
as humanly possible. I’m sure we make mistakes, periodically, but we’re trying to, doing the best we can with what we got. If you like, go to any of those Instagram, LinkedIn, Twitter. There’s our replays. It’s in your Platinum Portal. If you have any questions by the way, so if you’re a Platinum,
you can see all of them. We always keep a few up for anybody else. Here’s another one. [email protected]
or You can always visit us. Ask us questions. Yeah, you guys are right. Some people said, “Hey,
can I ask questions?” Absolutely. Shoot it on over. Then just know that, if you ask a really good question, I’ll probably take it and
stick it on one of these and we’ll answer it live. ‘Cause, other people benefit from it. “So can I be sent the info on
where to find those links?” Absolutely. Susan will get that to you, Ruth. But I’m gonna put it back
up there for you guys. It’s really easy. If you go to, /YouTube, /LinkedIn, /Instagram, /Twitter, or if you go to our regular website at aba, or excuse me, and
then just type in podcast or YouTube, like you’ll find it. We’re pretty much creatures of habit. Everything’s kind of the same. But and then any of the places you wanna get to it. You can see that we’re
easy to get a hold of. Maybe Patty, you can
grab Ruth’s information and shoot that stuff over to her. Just ’cause, we can make
sure that you got it, so. If there’s nothing else, I know there’s a few questions that I may have missed. Feel free to email them on in. We’re gonna answer your questions and I wanna just say
thank you for joining us. It was fun, as always. Yeah, somebody just sent a
bunch of links out there. I think Susan just sent
it out there to you guys. That would be so much fun, we get to see you guys in two weeks. Then we’ll do another one and maybe we’ll pick another topic. I think we did bookkeeping last week. – [Jeff] Right. – [Toby] Which Troy did a great job. You guys have no idea,
but Troy is a superstar and he hates talking in public, so he was like, – He did a really
– hyperventilating. – [Jeff] Good job. – [Toby] Oh he did a great job. I give him a hard time. The next “Tax-Wise”, is on Thursday and I think I shot out and I’m gonna put this up, just ’cause somebody asked. You can do the live cast on them all, for all of them this year. Here we go. There we go, right there. If you wanna join me
on Thursday and Friday, we’re doing over 30 tax
strategies, it’s 247. It gets you both workshops this year. And we’ll do all that fun stuff and then, “How about details “combining C-Corps and LLCs for business, “not for real estate?” So we can do all that fun stuff. We’ll get into a bunch of, we’ll probably do a
retirement planning one and then a traditional business one and a few others this year, just to keep it fresh. So we may hit you guys up for for some questions specific
to some of those things. I know you guys are
already sending them in, but we’ll do it. “When are you doing bookkeeping?” Bookkeeping we just did last week. Get that recording,
because it was really good and it had chickens and swords. – [Jeff] Chickens and swords, you did. – [Toby] Chickens and swords. You guys never thought you’d see it in a bookkeeping webinar, but you did. All right, guys. Thank you so much an enjoy
the rest of the week. Oh and Infinity, we’ll send all that out. Debbie, Infinity rocks. We’re doing one on April 18th and we will send that out. I’m gonna give everybody a freebie. You guys can all come to that one, on live stream, we’re not
gonna do it live live, but we’re gonna do that and we’ll absolutely give
it to everybody on this Tax Tuesdays, for free. So we’ll make sure that
we get you guys a link. I’ll probably shoot it out in two weeks, about just remember April 18th, I believe it’s a Saturday
and we’re gonna do that. Bring everybody you can to that. We’re really revamping it. We’re really gonna be
knocking it out of the park. Just ’cause for two years, we’ve been testing it to make sure everything’s working and we have just about 100% success rate, on people growing their
assets inside of that. So we’re gonna keep spreading that word. All right, guys. Have a great one. We’ll see you in two weeks. (uplifting music)

1 Comment

  • Reply Anderson Business Advisors February 13, 2020 at 4:08 pm

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