Tax Tuesdays w Toby Mathis – June 11, 2019 EP 93


(dramatic music) – [Toby Mathis] Hey, guys, this is Toby Mathis. – [Jeff Webb] And Jeff Webb. – [Toby] You’re listening to Tax Tuesday. Welcome back to another Tax Tuesday. We’re just gonna get jumping straight on into this thing since, like always, we have way more questions. Wanna make sure we’re getting through as many as humanly possible in a reasonable period of time. We always say these are an hour, but I think we did an hour never. (Jeff laughs) We’ll just pretend, it’s a fictional hour. It’s usually about an hour 1/2. You don’t have to stay on for the whole thing, obviously. If you have to go do other stuff, just know that we record
’em and we put ’em in, A, if you’re a platinum member, you’ll have access to all of ’em in your little Platinum Portal. In fact, I’ll pull this up so you can actually see it. Kinda be helpful. But we also put ’em into podcasts and other things, so
if you wanna go listen to some of them. We’ll also be sending you out the link to the replay. You can absolutely listen to things if you get time crunched. Hey, Sherry. There’s a whole bunch
of people saying hello. Let’s go into this. Ask live and we will answer the question before the end of the webinar. Send in questions at
[email protected] It’s where we grab the questions that we answer every other week. We grab them, the ones that
are not books. (laughs) Some of you guys like to really write. But if it’s also not too personal, then what we’ll do is we’ll grab it and we make it one of the questions. If you need a detailed response, you’ll need to become a
platinum or tax client. In other words, if you’re asking lots and lots of specific things to you, as much as we love you, and we’d love to do it for free, we’re not a nonprofit. We still have to make
a little bit of dollars to keep the lights on. This is fast, fun and educational. We want you to come back and we wanna give back and help educate, so we always want you guys to share with each other. Bring it to your friends, as well. If you know anybody that maybe they’re just tired of
getting kicked around from the tax standpoint,
or they get runaround from their accountants or their attorneys or whoever they’re
getting tax advice from, maybe the guy down the street, maybe it’s a brother-in-law, whatever, bring ’em all on. It’s free and they can get answers and they can verify
some things to make sure that you’re getting good advice. All right, things that you can do. Here’s some freebie. You can always follow us on social media. Go onto YouTube, andersonadvisors.com/youtube. Sign up and become part
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posting up new content. It doesn’t text you or email you and stuff like that. It’s when you log on, it’ll say here’s the new ones. That way, you can keep up to date on all these wonderful tax law changes. Believe it or not, they’re still gonna keep making changes because that’s what Congress does is they
write laws, rewrite laws. I just wish they wouldn’t hire drunk elementary school children with their crayons to write the laws. It would be helpful if they actually– – [Jeff] It’s obvious that they’re not reading the laws that
they’re signing into law. I’m not sure who– – [Toby] Somebody’s doing it. It’s done in a back room. Again, I think that they have a, maybe. Somebody says they hire (mumbles). – [Jeff] You’re at the mercy of the cheapest intern they have. – [Toby] Oh, my goodness, yes. Somebody’s writing these things. They’re just not always checking to see what the ramifications of what they’re writing will be, whether it’s perhaps inconsistent with some (laughs) other provisions, or they’ll just get
rid of whole provisions and forget that there’s a bunch of laws that rely on ’em. It’s always fun, it’s kicks and giggles. Opening questions, what are the challenges of putting a California property into a Nevada trust? Will you be protected after two years? We’ll answer that. When is a cost segregation study beneficial to a real estate investor? We will definitely go over that. If I move to a different state, of consciousness, right? No, a different state.(
(Jeff laughs) That’s what I always
think when somebody says what state should I be in? Conscious. Does my LLC need to now be registered in my new home state? Does a home-based business help with lowering taxes, and does it have to be incorporated? Where is the best state to set up an LLC? If I start private lending
to individual investors, is it possible to take the 199A deduction? That’s the 20% deduction. We’ll go over that. What are the tax
ramifications or other issues with purchasing my personal property through my corporation? What is the best business
setup for a family building or purchasing a multifamily unit, LLC or C corp? We can certainly answer that. What’s the definition of dealer, and how can I avoid being
considered a dealer? What are the ramifications
of being a dealer? There’s the good, the bad and the ugly. We’ll go over that, too. Under our corporation, is it better to lease a vehicle or buy? Last but not least, a question we get quite often is can I deduct my real estate training costs? Frankly, can I just
deduct any training cost? We should just make that real simple because we will get through it. Questions. All right, somebody says
there’s some sound disturbance. We’ll see if that keeps going on. There’s only one person complaining, so it might be your line. Let’s just jump into these. This is always fun stuff. What are the challenges of putting a California property into a Nevada trust? Will you be protected after two years? Again, this is a tax course, I mean, this is a tax webinar that we’re going over, Tax Tuesday, but I don’t think that you’re asking just a tax question. You’re not talking
about avoiding tax here. You’re probably talking about a Nevada asset protection trust. The first thing to know, in any trust, ya have three parties, the grantor, trustee and a beneficiary. There’s two types of trusts: revocable and irrevocable. A revocable trust, the most common example is a living trust. An irrevocable trust,
the most common example is a irrevocable life insurance trust. But I think what they’re referring to is Nevada has a statute that’s called a spendthrift trust, where if you put an asset into it and you have an existing creditor, that after two years,
they cannot make claims against that trust anymore. Now there’s some conditions to be met. Ya have to be aware that California has its own interests to protect. Whenever you’re going across a state line and you’re grabbing an asset, California could say, eh, we have a fundamental interest to protect, so we’re not gonna follow Nevada law. We’re just going to ignore it because we have a fundamental state interest that we believe is really important, and we’re not gonna follow it. What are the challenges to putting California property into it is if you want it to be effective, you’re gonna have to make sure that you understand exactly what it is that you can protect and
what you cannot protect. The first thing is you wanna make sure that if you have a California piece of real estate, it might be wise to get that California real estate into a vehicle and convert it from just real estate into something that is
something different, like personal property. The way you do that is by using an entity. It may actually be a land trust. Then I would more than likely have that land trust have a beneficiary that is in a different state, like Nevada, Nevada or Wyoming. It really doesn’t matter as long as it’s not California. What we’ve done is we’ve converted that piece of property from
real estate in California to being broken into three pieces. Now you have a grantor,
you have the trustee who is on title, and the beneficial use and enjoyment of that piece of real estate is now transferred out of the state. I would then, this is gonna sound weird, but when you’re dealing with
asset protection trusts, you want them to actually be enforceable. Usually we would be stopping there and saying, hey, maybe we’ll have a holding company on top. But since you asked about the asset protection trust, we do many a year, and it’s usually for your higher end folks, and here’s why: It’s ’cause you actually have that LLC partially owned by the Nevada asset protection trust,
and partially owned by probably your living trust. We wouldn’t want you as an individual to own it just ’cause
California would say, great, doing business here for purposes of the franchise tax. They’d wanna hit you for that $800 a year. If it’s held by a trust,
we can get around that, and especially if it’s
a irrevocable trust, like a Nevada asset protection trust. People are saying,
yeah, it was my birthday last weekend, so yay. Got a little older, now I’m 30, again. – [Jeff] A little older, a little wiser. (Toby laughs) Ya have anniversaries
after a certain point. Anniversaries of your 30th birthday is what I like to have. Anyway, let’s go back to
the asset protection trust. They’re absolutely wonderful vehicles when used correctly. You just wanna make sure
that a California court can’t ignore it. Again, the way you do that is you gotta get that real estate in California from you being the true owner of it to something else being
the true owner of it. The only way you’re really
gonna accomplish that with a Nevada asset protection trust is to make sure that the
California real estate is owned in a trust, and that trust is owned by an LLC
that’s out of the state, and that that LLC is owned by the asset protection trust. It just sounds weird,
and I wish it was easier, but that’s really that way
that if you wanna use this. Now sometimes it’s like bringing a bazooka to a gunfight. The asset protection trust, it’s already been determined you
cannot break into those unless when you transferred it, you did something nasty, like you did a fraudulent conveyance or you were doing bankruptcy planning or you were making yourself insolvent, which is why, again, I said the LLC isn’t even owned 100% by the Nevada asset protection trust. We’ll have you own it and we’ll make sure that the asset protection trust owns it. The reason you do that is so there’s never a question as to whether
you were solvent or not. Then it gives us lots of tools if you’re ever being attacked. If something happens to
that California property, there’s not much you can do. They’re gonna be inside the land trust going after the beneficial interest, which is now inside of an LLC. It’s gonna be stuck inside that LLC. They’ll get that property. Where this is really potent is if somebody’s ever coming after you. Nevada is one of the only states, if not the only state, actually, it is the only state that alimony
is not an exception. If you have a ex-wife or ex-spouse, ex-husband, whatever, coming after you all the time, asset protection trusts are pretty strong. But just know that you need to make sure that the property’s not
sitting in your state that they’re trying to go after ’cause that court, whenever you’re in court, you’re kind of in that judge’s forum. They could choose to do
some pretty bizarre stuff. You wanna make sure that they don’t have the ability to undo what you put in place. – [Jeff] When we’re
talking about the trustee and the beneficiary,
the grantor is obviously the person turning over the property. Ideally, do you not have the trustee and the grantor being the same person? – [Toby] Ideally. I’ll tell ya what I like to do. Some of you guys might
not like this answer, but I don’t really care
what the statutes say. I’ll just stick an LLC in there. I don’t really want my name sitting on it, or I’ll borrow somebody. Have an attorney or somebody serving it just if I wanna make sure my name’s not floating around. Let’s use the example of I have a rabid ex-spouse that likes
to sue me all the time and try to get assets. I don’t want them to know what I own, where it is or anything like that, I don’t want my name on it. Well, the beneficial interest isn’t a public record, except in Arizona. If you’re anyplace else, then I’m just gonna put it in a land
trust, and I’ll probably use somebody else’s name, or I’ll use a Wyoming LLC to be the trustee. The way it works is this: The easiest way to think of a land trust, by the way, and this isn’t even getting into the asset protection
trust, just a land trust in itself is all we’re
doing is we’re making the legal owner different from the beneficial owner. The party that gets to occupy it is the beneficial owner. The party that gets to rent it is the beneficial owner. But the party on legal title is a trustee who has no liability for it and really nothing to do with it other than they’re holding title. This came outta Illinois, so that’s why they call it Illinois-style trust. There’s about 14 states with statutes, and the rest of it’s common law. But the Illinois was great. That’s how they bought the Sears Tower. If somebody had known that they were acquiring all these parcels and it was the same party, they would have jacked up the rates or somebody would have tried to block it. All they did is made sure that it was a bunch of blind trusts out there with different names on it. Nobody knew that they were acquiring all the properties. That was it. That’s how Disney did Disney World, too. That’s how they acquired
most of that land. All it is is a fancy way of saying, hey, I don’t want anybody
to know what I own. If you love people knowing what you own, go for it, put your name all over it. If you don’t think that
it’s anybody’s business, you don’t have to have
your name on things. Now there’s a ramification. If I’m running a business,
it might be tough if my name’s not on the business. Bankers don’t necessarily like it, so you gotta be a little careful of who you deal with, but for a lotta people, it’s worth the little complexity because if they can’t see it, they can’t take it. You’re asking for problems if everybody knows what ya own. That’s my opinion. That’s ’cause I’ve seen more lawsuits come out of the fact that somebody thinks there’s something to get than the reality of it. The reality of it. I just don’t wanna tempt that. Somebody says, “Can I use this setup?” Yeah, absolutely. There’s a few other questions. Let’s see if any of ’em have to do with what we were just talking about. I don’t see anything
that’s right on point, so we’re just gonna keep going. Guys, what I do is with all the live questions, we get a ton of ’em. Last time I think we
had over 400 questions. I’m looking for the ones that are relevant to what we’re hitting now. If we have time, we go back and grab everybody else’s. You’ll see that sometimes
I’m answering stuff as it pops in. I’m looking at this. California escrow loans,
Wisconsin LLC two, land trust with the Wisconsin as trustee three. I don’t know what that quite means. Home in a family trust
and in a land trust. Oh, that’s fine. Yeah, Ted, you can do that. All right, let’s keep going after it. In that two years, by the way, is what that statute says is if you transfer an asset that somebody would have been entitled to to an existing creditor. This is where it really gets interesting. You don’t have to wait two years. If they’re not an existing creditor, then unless it’s a fraudulent conveyance, they’re not going after anything anyway. You can set up an asset protection trust in Nevada and it’s effective right away. It’s just if you have
known creditors right now, then they only have two
years to make the claim, or six months from actual knowledge of the transfer, whichever is later. If I’m ever worried about it, I’m filing it with the county that I’m transferring an asset into the trust, that’s deemed notice. Then it’s just two years. But if they’re not a creditor of yours, ya got immediate protection. They’re pretty potent. Again, we use them with some of the higher end folks. It’s not that you shouldn’t use it. Hope that helps, makes sense. From a cost standpoint, by the way, let’s go back to that. From a tax standpoint,
these are grantor-addressed. There are no tax ramifications. Literally that structure I just gave you has zero tax returns. The land trust to the LLC to the asset protection trust, I make the asset protection trust, the way I like to do ’em is as a intentionally defective grantor trust, treat it as a grantor trust
for California purposes. There’s no franchise tax on it and there’s no federal tax return due. It just goes under your Schedule E. That whole structure
has zero tax (mumbles). Just to fill that in for ya. Fun question. We love cost segregation. Do you wanna jump on this? I don’t wanna Hobart this whole show. – [Jeff] Well, here’s my opinion for the cost segregation. These are almost always beneficial, except what I see in certain cases. If you’re gonna be selling
this property shortly, I see no reason to do a
cost segregation on it. You’re gonna get a deduction now that you’re gonna be paying
back in the next year. Also, if you are not a real estate professional and you’re already incurring losses on your rental properties, this may not be a terrific idea
because alls it’s gonna do is create passive losses
that get suspended while you hold the property. Now if you’re a real estate professional, cost segs are, I believe,
are even better ideas because being a real estate professional allows you to take losses that you might not be able to take as just a regular real estate investor. – [Toby] Yeah. – [Jeff] That’s kinda my two areas of staying away from
your rental properties that are suffering losses and if you’re planning on
turning the property over. – [Toby] Jeff, I feel like
geeking out right now. Let’s geek out. – [Jeff] Are you gonna be an accountant? – [Toby] Yes. When you buy real estate,
there’s really important thing. We have the value of the land or whatever you bought it for. We’ll call it, because Jeff’s gonna use the word basis and stuff. But let’s just say you bought it and it was 350,000. Your land value, let’s say it was 75,000, which means the improvement value is 275. I uses 275.
(Jeff laughs) – [Jeff] I know why you used 275. – [Toby] Because if it’s residential, the IRS has these things called the, what is it, modified accelerated
cost recovery system? – [Jeff] Exactly, MACRS. – [Toby] MACRS. That means that under the standard, you have 27 1/2 years to depreciate this, which means you take one 27.5. You just divide this by 27.5, which means you’re taking $10,000 of deduction every year. If your rents for the year are $10,000, you pay zero tax. That’s all. The IRS basically says, hey, you’re gonna have to replace that building every 27 1/2 years. If this was commercial, it’s 39 years. All a cost segregation is saying, study is saying, hey,
rather than take it all over 27.5, that’s
considered 1250 property. 1245 property is everything else, that’s personal property. See, we’re getting geeky now. You guys are gonna learn something. All right, so that personal property, this could be five-year property, seven-year property. What is the other one? – [Jeff] 15.
– 15. Anything below 20 and you could do something called bonus
depreciation this year, which means you can ignore all these and you can take ’em all in year one. What you’re doing is
you’re having somebody break the building down, that 275,000. They might say, hey, 200 of it is this 1250 property,
which gets this 27 1/2. The personal property would be 75,000, which means you can take that in year one. Ya take your 200 and
you divide it by 27.5, which is gonna equal X. You could actually do that. You’re also gonna get $75,000 in loss, as well. You’re gonna get something like, what would that be, about 7,000? – [Jeff] 7272. – [Toby] 7272. 7272, like that. You’re gonna get the sum of that as a deduction this year. That would be 82,000. Is that right? Yeah, whatever it is.
(Jeff laughs) 82. (laughs) No, I just butchered it, didn’t I? – [Jeff] No, that’s right. 82, 272. – [Toby] 272, all right. You’re gonna get an $82,272 deduction. Now that sounds neat and dandy, but you’re not allowed to take your passive losses and offset your active gain. There’s the passive activity loss rule. If you have $82,000 of loss, yay. I’m just carrying that forward. I’m getting really no benefit. There’s really not a big reason to do the cost segregation. But what if I have a
bunch of other properties that have positive rents? What if I have $30,000 a year coming in from other properties? Now that $82,000 is my best friend. It’s gonna wipe out $30,000 a year until we use it up. It just carries forward. Now the other thing is what if I am a real estate professional, which means that’s how I make my living? One of the spouses needs to spend at least 750 hours in
the field of real estate, the buying and selling of real estate, not just being a janitor in a real estate company or whatever. You actually have to be involved in it. Then you have to materially participate in your real estate. That’s the trip up, by the way. Over and over and over
again, we see people that forget that you have to also materially participate
with your properties. You have to an aggregation election, which you do by filing– – [Jeff] It’s just an election you file every year combining all
your properties into one. – [Toby] Is that a special form? – [Jeff] It’s an election. It’s a statement that
goes with the return. – [Toby] You just have
to remember to do it. – [Jeff] Right. – [Toby] If you don’t, you’d be sorry because that 82,000 could offset your W-2 wages. If you’re a real estate professional and you have one spouse
making 1/2 a million and the other spouse doing nothing, you just lowered your
tax bill substantially. You just got an $82,000 deduction. How do you calculate what the cost segregation will be? Do you need to hire a professional? – [Jeff] Yes.
– The answer is yes. I could tell you a general rule of thumb is it’s gonna be somewhere in the 20 to 30% range, depending
on the type of property, but ya actually have to have somebody go out and do the study. The studies have gotten
significantly cheaper over the last few years. There is now software that’ll do it for single-family
residences that runs about $400 per study, but
you don’t have somebody going through the property. If you were contested, you may have a little bit of an issue. Is there a place to see an example of a real estate professional statement? When you’re a real estate professional, where are you putting that? – [Jeff] It goes in the return, usually after the return itself. – [Toby] All you’re doing is you’re making an affirmative statement
that’s part of the return. It’s not even a form. You’re just putting it as a statement? – [Jeff] Right, it’s a statement. It’s an election that basically says I am under this IRC code. I’m electing to aggregate all my rental, real estate activities. – [Toby] Hey, Joshua, if you email us at [email protected], we’ll kick you that. We’ll just give you what the language is, the magic language. But the language isn’t what’s important. What’s really important is that you actually document your hours. Your hours, it’s a two-part test. It’s 750 hours, plus you have
to materially participate with your real estate. The 750 hours has nothing
to do with your real estate. It has to do with you, one of the spouses being in the field of real estate, and it’s 750 hours plus it’s the number one use of that spouse’s time. – [Jeff] If you have four properties and you spend 200 hours on each of them, if you don’t aggregate those, then you fail the test
on all four properties. – [Toby] Actually, not necessarily. – [Jeff] Not necessarily. – [Toby] All right, so
let’s go through this. Number one, I have to spend 750 hours on real estate, period. It’s only one spouse has to do it. I don’t combine time between spouses. In your example, I had
four pieces of property, and I spent 200 hours each. I just hit the real estate professional, as long as that’s one spouse doing it, or if you’re single, you’re doing it. Now we say, all right, you have 800 hours. Is there any other use of
your time professionally that exceeded 800 hours? Let’s say you’re a full-time bookkeeper. – [Jeff] Ah, I see where
you’re going with this. – [Toby] You’re toast. You’re not gonna qualify ’cause you spent more than 800 hours. Let’s say that you’re not. Let’s just say you don’t do anything else as a profession except you goof off. Then you qualify under the 750 hours. Now we go to second test,
material participation. There’s literally three levels of testing. There’s 500 hours cumulative, or there’s 100 hours and you’re the number one provider of
time to those properties. Under the example Jeff gave, there was four pieces of property. It’s so much easier to say, hey, they’re all one enterprise. Because otherwise, you have to qualify for each property. But under the facts Jeff gave us, you would qualify for each property. You’re over a hundred hours. Unless there’s a property manager doing more than 200 hours,
which I couldn’t imagine, then you are materially participating. To answer your question, Michelle, what is materially participate mean, that’s what it means. Literally, they just say
you are doing some activity. You’re either managing the manager or you’re spending time
on those properties. Now the IRS says it’s per property unless you elect to treat them all as one property, so you’re making an aggregation election. Please treat all these properties as the exact same thing. It’s actually really
potent, but tough to hit. The most extreme example is actually a friend of mine who made about $3 million in his legal profession one year, and his wife qualified as
the real estate professional. He went and he bought so many properties. He had all of his doctor buddies and everything, they were just buying up all these commercial pieces of property. He was depreciating the heck out of ’em. His wife qualified as the
real estate professional, and he paid no tax. The IRS did not like that. They came in to audit him. He’s kind of sadistic, so he decided to represent himself ’cause he thought it’d be fun. He’s one of those people. He beat ’em. He’s actually pretty hilarious. You can actually– – [Jeff] Usually when I see pro se on a tax case, I know
it’s gonna end badly. – [Toby] Yeah, yeah. For yourself, pro se. All right, somebody’s asking, let’s see, in order to avoid
capital gains on property to posses it from probate. Oh, my goodness. Ashveni, I’m just gonna make your life (speaking in a foreign language) today. Here’s a question, this isn’t one of the questions that we have, but this is a question he just asked. The answer’s so potent I just want to. That was not Scott Estill, no. That was actually an
attorney buddy of mine by the name of Howard Spiva. He’ll tell ya the story himself, so I’m not breaching anything. He actually sued Savannah into bankruptcy a few years back. If you ever Google him, just kinda for kicks and giggles, you
can just go in there and Google Howard Spiva. He’s a very cool lawyer. He’s been our buddy for about 20 years. He actually represented a gal that had a tree fall on her in Savannah. Savannah said, “We’re not responsible.” He ended up winning, and
they didn’t have enough. Yeah, Scott is actually
smart enough to do it. All right, so here go through this thing. Somebody inherits property
through a probate. Then how do you avoid the capital gains? Well, here’s the beautiful part. When somebody passes, meaning they pass away or they die, all of their assets, their capital assets, step up in value to the fair market value on the date of passing. If Jeff owns a piece of property and he passes away and gives it to me, thanks, Jeff, I could sell it the next day and pay zero in capital gains because my basis stepped up. – [Jeff] Right. – [Toby] That goes for your stock. It’s okay to say die. Yes, ya die. Jeff dies. There.
– [Jeff] Thanks. – [Toby] That just sounds vicious. That’s pretty amazing. That’s pretty cool. – [Jeff] Pretty amazing that I died? – [Toby] That’s pretty amazing that you don’t have to pay tax on it. – [Jeff] Oh, okay. – [Toby] Here’s the kick. If you’re in a community property state and one spouse passes,
the entire basis steps up. If you’re ever gonna, hey, I really need to sell a property, I don’t wanna pay tax, all ya gotta do is go to the Grand Canyon with your spouse. (laughs). Give ’em a little nudge over the edge. But the basis stepped up. Thanks for taking one for the team. All right, so what are
the typical percentages of improvement value
for the cost segregation personal property for
five, seven and 15 years? Julie, it doesn’t matter whether it’s five, seven and 15, we just care that it’s less than 20 because the bonus depreciation rules
say, yay, we can do it. The typical percentage
is right around 20%, from what I see. But again, it’s gonna vary depending on your property and what ya have in it. Like if I have a lotta carpeting and I have lots of stuff on the walls and lots of fixtures, and I
spent a lotta money on my, like, hey, I put a bunch of countertops in and all this stuff, and
I spent a lotta money, that means that I’m
gonna have a whole bunch of value ’cause those items aren’t gonna make it 27 1/2 years. Or if it’s in a building,
a commercial building, they’re not gonna make it 39 years. – [Jeff] Now I will say that this, the bonus depreciation only applies to– – [Toby] Year–. – [Jeff] ’18 and ’19. You can do cost segs going backwards. – [Toby] Oh. – [Jeff] Do a change of accounting method. – [Toby] Yes. The bonus depreciation goes under the Tax Cut and Jobs Act. Before that, it was 50%. – [Jeff] It was 50% bonus. – [Toby] It’s gonna go back down again. Let’s see, if the person
sells an inherited piece of real estate for less than the appraised value, upon
death, can the person take a tax loss? – [Jeff] No.
– No. The basis resets. But I don’t think, would you get a loss on it? – [Jeff] No, you can’t take a loss on personal use property. Well, it depends. Okay, we’re gonna go back
to our standard, it depends. It depends on what you were
doing with the property. I guess it could be considered
an investment property. – [Toby] Yeah, if it’s
investment property, then the basis steps
us, so don’t you start your depreciation and
everything else again? – [Jeff] Well, I’m thinking about even property you’re just holding, that you inherit and you’re holding, waiting to sell it. I don’t know if there would be a period you would need to hold it to. – [Toby] It’s interesting. See, Bob, ya asked a very
interesting question. If it sells for less than the apprised, they’re gonna probably,
the IRS would argue that the appraised value,
we don’t really care about. The value is whatever you sold it for. – [Jeff] Right. – [Toby] But if ya held it for a year and this was in 2008, then, yeah, there’s a
chance you’d actually take a loss, depending
on the type of property. You don’t get losses
when you sell your house. – [Jeff] Right, you can’t take losses on any personal use– – [Toby] Right, so it’d have to be investment property, so
you’d wanna make sure that ya have a renter in there. Then I suppose you could. I’m not sure. I don’t recall any exceptions. Do you recall an exception?
– No. – [Toby] All right. Ya got us stumped on that one. We may look at that,
maybe email that one on in ’cause that would be a fun one to do. But I think that you’d
actually get the loss. Email it in, Bob, so we can dig into it ’cause that sounds like a fun one. Let’s see. On the cost segregation,
there’s another question. Do ya have to be an actual spouse, or can business partners still qualify? Spouses, it has to be one tax return. You can’t do it with
daughters and mothers. Oh, and by the way, that
material participation, that is cumulative hours between the spouses, by the way. – [Jeff] Right. – [Toby] One spouse has
to qualify under 750, but both spouses can be added up together to meet the material participation. All right, going back to our questions. – [Jeff] Oh, yeah. – [Toby] If I move to a different state, does my LLC need to now be registered in my new home state? The answer is,
(Jeff laughs) you know what it’s gonna be. It’s gonna be it depends, right? We already know. Here’s the deal. Your LLC is a separate person. If it has a different home than you, then it doesn’t register when you move. What that means is that
it has its own location. This is why when ya use Nevada or Wyoming, you actually have to have an office suite. If you live in a state. Let’s say that you have a Dairy Queen, and you have that Dairy Queen in an LLC. You move. The LLC doesn’t have to move with you. Now let’s say that you have an LLC and you’re selling essential
oils outta your house, and ya have an LLC that’s only address is your home, and you move. Will that need to be registered? More than likely, yes. Unless you have a place
for it to stay. (laughs) You’d have to have another home for it in your home state. – [Jeff] You’re gonna
lose liability protection, aren’t you, if you don’t move it to your new state? – [Toby] Yeah, you’d wanna
make sure that it’s there. – [Jeff] I’m assuming
you’re doing business outta your new home. – [Toby] Somebody says if I live in Ohio and business is in Ohio, but thinking of moving to Florida, where does it go? You leave it in Ohio. You could keep your LLC, it
doesn’t have to go with you. It’s separate, it’s an artificial person. You could always leave it in a state. Again, that’s why we use, you’re gonna see us use Nevada and Wyoming a lot. We’re not bringing it into your state ’cause we don’t want to. We don’t want your judges to have any. It’s kinda like this. If Jeff lived in California
and I lived in Nevada, and Jeff gets sued, I don’t want it to have anything to do with me. If I’m Jeff’s LLC, it doesn’t
have anything to do with. The judges in California
can’t do anything with me. But if my bank account is in California, now those judges could do something with it. I always wanna make sure that I keep my LLC that’s not in my
state separate from me and make sure it has its own address and its bank account’s not in my state and other things, and
no judges can touch it. Anonymity, we can make it to where they can’t see it, too. They don’t even know it’s there. The real secret sauce, in my experience in 20-something years of doing this, is people can’t take what they can’t find. They can’t see it if
it’s not in your name. There’s not a real place
that they can go to see it. Every year, we have
somebody saying something about tax returns. “I’ll just pull your tax returns.” I go, yeah, how’s that working for Congress right now? They’ve been chasing
after (laughs) Trumps. (Jeff laughs)
I’m sorry, but. They may be able to get it solely ’cause he’s the president,
but nobody else. I can’t go pull your tax returns for you, as much as we’d like to,
unless you give ’em to us. By the way, this is my cue. There’s no such thing as a phone call from the IRS to start an inquiry. It’s always a letter. They do not call you and threaten you. If anybody calls and threatens you, and this is actually a huge deal. It’s costing taxpayers
millions of dollars. Hang it up. Block it. Your phones now, especially
if it’s a cellphone, know enough to, they’ll tie it to any other numbers that
are used in that group so that you don’t get those phone calls. That’s not real. It’s not real. Hang up and block it, get rid of it. There’s no such thing as the IRS calling and harassing you. I get this because the clients call us up and say, “What did you do? “The IRS is calling me and telling me “I screwed everything up.” I’m like, it’s not the IRS. It’s (mumbles). – [Jeff] You can always call them. Their number’s 800-829-1040. Say, “This is me, did
you all send my anything? “I’m just verifying.” They’d be happy to deal with that. They’re having a lotta trouble with identity theft and fraud and stuff. – [Toby] It is bad. If somebody sends you something, don’t log in to it, either. They don’t email you, as well. – [Jeff] No. – [Toby] Let’s see. Regarding anonymity,
couldn’t a plaintiff’s lawyer use interrogatories to ask for all assets under your control? It depends, Dominic, on whether it has anything to do with your case. If I am being accused of speeding and running into somebody, what does my financial
situation have to do with whether I was negligent when I was driving? The answer is it has
nothing to do with it. I would contest that all day long. They’re not gonna get to
see my financial condition. Usually what you do is you hand ’em your insurance and say, “Please read it.” They can’t find anything else, they’re just gonna try
to get your insurance and they’re gonna leave it at that. – [Jeff] Deep pockets. – [Toby] We’ve seen this over and over and over and over. Ya always got some lawyer that says, “No, I’d get it.” Yeah, if ya have a rollover, a pushover, sure. But no, our clients,
and we’re talking about $30 million cases that they’ve gotten out of not because they’re
doing anything wrong, but it’s because they’re able to settle it without putting all themselves at risk. We got firsthand. Somebody just responded about that. We got firsthand experience with this during that downfall where ya had four and five partners in on properties. If the project failed, they would look for the guy with the money. Our clients were oftentimes the one with the money, and so we got to see how they were able to get outta these things, where there’s a $30 million liability that they didn’t cause. They just happened to be the only one that has anything left when
the whole thing blew up. I’ll tell ya what, we saw literally a son and his father go through the exact same suit. The son got released after two weeks. The dad had to fight it for two years. The only difference between ’em was the son’s assets
weren’t in the son’s name, and the dad was old
school and had everything in his name. Probably was some lawyer telling him, “You don’t need to do that.” Well, it cost him millions of dollars. We saw this over and over. Somebody just says, “Hey, I got four calls “from a computer place. “Probably a computer, this week, “saying that they were the IRS, “or risk going to jail.” That is absolutely a scam, guys. Please share that with all your mothers and brothers and sisters and fathers, anybody, especially old folks. My mom calls me up always freaked out because somebody’s calling her, usually with a really horrible accent, saying that she’s gonna be jailed for something she didn’t pay. It’s absolutely predatory. Predatory as all get out. Then report it. Who you calling old? (laughs) Hey, stop it. Let’s see what else we got. Somebody says, big question,
my son and his girlfriend and I plan on using our VA
loans to buy properties, one in North Carolina, one
in Florida, one in Ohio. Do we file a business name in each state? You file an LLC. Christie, you’re gonna have those in an LLC in each state. That’s what you’re gonna do. More than likely, your
ownership’s gonna be through a Wyoming holding company. I would actually talk to us or talk to one of our reps. (laughs) Kinda cute. Somebody says, “I keep telling Alan “not to make those calls.” Oh, my goodness. I know who (laughs) you’re talking about. All right. Next one, does a home-based business help with lowering taxes, and does it have to be incorporated? (mumbles) Going back, I’ll jump on that. Somebody says, “Does each LLC need “a checking account?” It does not. Under that circumstance, it does not, as long as you have a property manager collecting the money and it can forward it to the holding. It is a factor as to whether or not they’re gonna honor that LLC. In your case, you’re not
trying to dodge liability. The liability would stay inside that LLC. There’s an asset for them to get. If there was a death on a property or a fire or a horrible environmental
claim or something popped up that was wrong with the property. We keep seeing, if
you’re on the East Coast, lead still is an issue. I got to see that (laughs) firsthand. You just wanna have that
LLC wrapped around it so that they’re stuck in it. That’s not gonna hurt ya. You don’t have to go too crazy on it. You would just have one account where the money would go. All right. Does a home-based business help with lowering taxes, and does it have to be incorporated? Jeff, what do you say? – [Jeff] I’m gonna go with
the second question first, and say no, it does not
have to be incorporated. It can be a Schedule C,
preferably through an LLC. It can be an S corporation. It can be a corporation. – [Toby] But it doesn’t
have to be any of those. – [Jeff] It doesn’t have to be any of those in particular. You kinda want to have the entity that best fits whatever
your home-based business is. – [Toby] Yeah. – [Jeff] Now as far as does it help lower taxes, hopefully
your home-based business is generating tons of income and making you pay more taxes, but I understand what you’re saying. You’re gonna be able to
deduct the home office. There’s gonna be certain other expenses you’re gonna be able to deduct, your phone lines, your internet and certain other expenses. – [Toby] A portion of it.
– A portion of it. – [Toby] By having a home-based business, period, you’re gonna
get to write off things that you’re not getting to write off as an individual. For example, if I am in my house and I am using a room in my house, the IRS gives you a safe harbor of saying, hey, you can write off $5 per square foot per year for your home office, right? – [Jeff] Right. – [Toby] That’s what they’re giving you, and you’re done. It’s not so great. If you are a little more savvy, I would actually have something that is incorporated from a tax standpoint, so either an LLC taxed as an S corp, LLC taxed as a corp, or an S corp or a corp, and I would
have an accountable plan. I would just go around that rule and I would just have it reimburse you for your personal use, I mean for the business use of your personal property. Now you’re not reporting that anywhere, you’re just writing it off on the company. In any case, you’re getting to write something off that you wouldn’t have otherwise been able
to, so it’ll absolutely lower your taxes. – [Jeff] Yes. – [Toby] The big thing for us is, ’cause we look at asset protection and tax kind of on the same level, is if you don’t have a box around your business, there’s no
stopping the liability. That goes in and out. If something happens in your business, now they’ve taken your personal assets. If something happens
in your personal life, now they’re taking your business. We like to see a box
put around the business for that reason, so they
can’t take it away from you. At least you make it very, very difficult for them to take your business away. On the same token, you’re not responsible personally for anything that
happens in the business. Yeah, there’s a bunch of
tax reasons to do that. It’ll absolutely lower your taxes. Our average, and we’re trying to get the exact number, but it’s between 20 and $30,000 of extra
deductions per year. I think that’s what we’re looking at. I know we’re trying to grab a bunch of returns and give ya the actual calculation,
but just by incorporating, if you have that much revenue, then it’s a good chance
that that’ll go away. What’s that worth to you? It depends on what your tax bracket is. If that’s the only money
you have coming in, not that great. If it’s additional money on top of a high-paying job, then it’s fantastic. It always depends on your situation. – [Jeff] Here’s a difference between having an S corporation and a Schedule C is if you’re not profitable
in your Schedule C, then that home office
deduction is suspended until you’re profitable. If you’re reimbursing that expense through an S corporation– – [Toby] You’d actually create a loss. – [Jeff] It’s a deduction,
yeah, it creates a loss. – [Toby] Yeah, and a lotta people, like, again, accountable plans, that when the business is reimbursing the business use of personal assets. They only exist for you, the owner, in S corps and C corps. You can’t do that out
of a sole proprietorship or out of a partnership. That’s just life, unfortunately. The answer to your question is yes, a home-based business
absolutely will lower your taxes, and it does not
have to be incorporated, although we strongly suggest
that you look at that ’cause it’s better for tax and better for asset protection, and
just to throw it in there, for estate planning
’cause ya can’t give away something that’s you. If you pass and you’re a sole proprietor, so did your business. Whereas, if you have an LLC or something, then it’s separate from you and they can be perpetual. Can I change my LLC taxes
from one year to the next? Ya can, subject to certain limitations, but absolutely. Somebody else is asking, “Can I own “an Arizona property in a Florida LLC?” Ya can, but ya may be registering that Florida LLC in Arizona. Usually what we would do there is have a land trust, and
have the beneficial interest held by the out-of-state LLC. Let’s see, currently living and
having an LLC in California. I have a bank and credit
card attached to it. Can I run the C corp
and holding in Wyoming? Of course, absolutely, ya can. Just know that California likes to try to bring in anything. If ya ever ask ’em, “Hey, do I have to “pay taxes here, the franchise tax?” The answer is always yes. – [Jeff] Mm-hm. (Toby laughs) Yeah, (mumbles) go down. I have some bad examples. Their answer is yes, pay us money, every single time. That freaks people out. Can an LLC be re-categorized from a sole prop to a C or S corp in midyear? – [Jeff] Yeah. – [Toby] Yeah, absolutely.
– Yeah. We’ll just leave it with yes. – [Toby] Yes, you can, yeah, but you have to follow the rules. An S corp, if it’s an LLC that’s disregarded, wouldn’t you just file the 2553? Couldn’t you do it at the end of the year and just say this? – [Jeff] Yeah, if it’s an
LLC, you just file a 2553. You don’t have to do
the, check the box form. – [Toby] The other one,
you’re doing an 8832 as a C corp. You may be getting a different EIN, right? – [Jeff] Right. – [Toby] Somebody’s
having trouble seeing it, the same two weeks ago things. Louis, you’re probably having some issues with GoToMeeting, GoToWebinar. It’s probably the software
that’s giving ya fits. Something’s going funky. All right. Where is the best state to set up an LLC? – [Jeff] Does it depend? – [Toby] It’s gonna depend, absolutely. Hey, somebody’s in Bogota. Hey, yes, that’s so cool. Ted in Bogota, sweet. That’s where my wife’s from. Anytime I see Bogota, I think. I know, everything depends, yeah. (Jeff laughs) That’s what everybody says, right? Where is the best state to set up an LLC? If you are an active business, then you’re gonna have to be registered in your home state. – [Jeff] Yup. – [Toby] Then I look
at the inside liability and outside liability in that state, and I say, hey, could we be an LLC in that home state, and will that get us where we need to go? You could actually set up an LLC in your home state and have it owned by an out-of-state LLC. If we’re looking at
isolating the liability of the business in an LLC, it doesn’t really matter, we’ll
have it in our home state. If we’re trying to keep somebody from being able to take that LLC away from you, probably using Wyoming. Be straight with you. Nobody can take it away. (laughs) That’s the truth. You guys are being mean to me today. – [Jeff] Hey, he just had a birthday. Give the guy a break. – [Toby] I’m getting older. I’m getting a little cantankerous. I’m being like Jeff.
(Jeff laughs) These people are ganging up on us here. – [Jeff] Walter. (Toby laughs) – [Toby] Yeah. Here’s the other one is if you have a business that has other partners in it, then those partners, especially if ya have an angel investor, they’re gonna want you to be in Delaware because
they’re self-serving. They wanna be able to take
that business from ya. They also wanna use what’s called an objective standard of care. They want you to have to be
a reasonable business owner. Whereas, if you go to Wyoming or Nevada, it’s a
subjective standard of care, and I can pretty much do whatever I think, and I don’t have to worry about getting sued by these guys. You’ll see this, and if you’ve ever done a commercial loan, you will find yourself having to go to Delaware more than likely. What they’ll oftentimes
do is they’ll have, the reason I know this is ’cause I’ve done a bunch of these, is they’ll have a holding company that is gonna own the entity that’s getting the loan. That holding entity will be in Delaware. It’ll be the sole owner of the entity that’s actually gonna
hold the real estate. It’s a very interesting setup. What they’re doing is they’re making sure that they can pierce through
and take that company away from you in the event you don’t pay. That’s if you’re dealing
with commercial lenders, and that’s what you’re
probably gonna be doing. Then you would have the actual property held in an LLC in that state. If you do not need to do that, if you don’t have an angel investor or a hard money investor. Actually, hard money’s don’t really care. But if you’re not doing a commercial loan, so I’m not doing an asset-based lending, then more than likely, I’m gonna have your state LLC be wherever
the real estate is or wherever the active business is, but I’m probably gonna have it held in a Wyoming entity at some point. The reason being is that in Wyoming, the only thing that they’re allowed to get under law is a lien against your LLC. They can’t take it away from you. With the exception is
if you’re doing fraud or criminal activity, but if you’re doing your best and you’re
being an honest person, they can’t take it away. What it does is it
forces a early settlement because their win is a lien. It’s all they can get. They don’t get any money. You think about yourself. You’re gonna sue somebody. Your win is basically to
put a lien on their business that they still run. You’re not even in control. You have no say in it whatsoever. There’s some really good
questions people seem. What if you’re doing an
online business, like an app? Does the LLC need to
be in your home state? The answer is no. If you’re doing interstate commerce only, then you can have it be in Wyoming or Delaware or Nevada. Is equity stripping a necessity in real estate asset protection? Equity stripping. Jeff, that’s a great question. I think it’s one of the best things you can do is whenever. Let’s just go back to this idea of inside and outside liability. Pardon my drawing. Oops, this is not drawing. I have to actually get my pen. I’m just grabbing a
better ink color than red. Let’s say that I have
a piece of real estate. Here’s my real estate. Here’s my LLC. If I have a fire (imitates crackling) or something happens to this piece of real estate, I want
it to remain in there. What they can get is the equity in that real estate. If I own this piece of real estate and it’s $200,000 and I own it for cash, they’re gonna get my 200,000. Pretend that says 200,000. They would get whatever the equity is. Here’s another way. If I don’t wanna have equity in there, chances of them really pursuing it super aggressively are reduced. I may have an entity out here, my little lending entity, loan it money and take back and have a deed of trust or a lien against that property. That’s called equity stripping. You could use a bank, you could use your own entity, you could
use a buddy’s entity, you could use your buddy’s IRA and paying a little interest or whatever, but all you’re trying to do is say, hey, rather than have 200,000, maybe I take 160 on a loan, 160. Now my exposure is the $40,000 of equity. What that does is I happen to know that the average cost of a foreclosure’s right around 40 grand. It tells them that if they win, they’re gonna get nothing. The chances of them
pursuing you aggressively for $40,000 are greatly diminished. You’re probably settling
that thing for $10,000. It’s not trying to get out of things that you owe or escape liability. It’s forcing the frivolous
cases to go away. The legitimate cases, hopefully,
have decent insurance. If the insurance company is being goobers and they’re not paying for something, it doesn’t put you in the shooting, in the crosshairs. They’ll probably be kicking something out to make it go away, as well. But in any event, you’re limited on what your total loss could be. Now it went down from 200 to 40,000. Then somebody says, “If you already have “solid asset protection set up, “with regards to rentals, do you still “need landlord insurance?” Absolutely, positively. There’s a huge difference, Elijah, between a regular personal property and a D3 and some of these others. You want to make sure that you have landlord insurance, as well, and you wanna make sure that your tenants are carrying renters insurance and that they’re making
that their primary. Then this is, unfortunately, in this day and age, make sure ya have
umbrella insurance, as well. It’s really good lawsuit protection ’cause even if your landlord says, “Nope, we’re not gonna cover you,” well, the secondary insurance will come in and at least cover the lawyers so that you can negotiate this thing and get rid of it. What happens if there’s
a lien again your LLC in the example, and you’re
selling the property? You’d get a payoff. In my example, I’ll go back to it, let’s say there’s a deed
of trust for 160,000 and you go to sell it. When you sell it for 200, the deed of trust gets paid off, so you’d get the cash up here if it’s you. If it’s a bank, they get paid back, just like anything else. Let’s see. What is the beneficial to put your name on the title of other people’s property? If total is five property, do you use five LLC name or just one LLC? I’m not certain I understand the question, but I think you’re saying, hey, if you’re using a land trust, use an LLC. You could use one. Does the SBA put any special requirements on a (mumbles) setup? Of course they do. They want you to be a personal guarantor and they want there to be one entity holding the asset so that they know that they can get it and there’s not anybody else making a
claim against that asset ’cause that might be how they get paid. I’ve negotiated many an SBA loan. When the crisis hit here in Vegas, I got way too involved in a whole bunch of SBA loans on clients
where their businesses were failing or their bank pulled their lines of credit, and all
of the sudden you just had. I had one here, a huge restaurant, and it seems like everybody was doing their best job to put ’em out of business. It was like, are you kidding me? These banks were just being goobers. Ya had all this stuff going on. Yeah, the SBA was actually the easiest company to deal with, or the easiest organization to deal with. Nobody’s really in the business. They really don’t want the assets back. No bank is in the business
of running your business. They just wanna know that they’re secured. All right, going back
(laughs) to the same example. We’ll get back to this stuff, guys. We’ll go through all these questions. Somebody is asking, “Are you saying “the outside entity borrows 160,000?” No, this guy is loaning it. This guy up here, oops. Nuts. I have to make sure I got my pen back. Here’s my pen. There we go. This guy is loaning the money down here. This guy is loaning. The money is going this way to buy the property. That’s the lien, so that’s a deed against that guy. I meant if there is a
non-friendly judgment and they can’t take your LLC, what happens when you’re
selling the property held in the name of the LLC when it comes to the title search? Nothing. If you sell this property, hey, I sell this property inside the LLC, nothing. LLC owns it. Nobody can come outside and take it. If you’re out here, so
let’s say I’m out here. Here’s Toby, smiling. Who owns that property? The LLC does. This little LLC down here owns it. If they ever come after me, then they have to try to go get here, and there’s not much equity. Now I know what you’re saying. If somebody’s going after me and you sell the asset inside it, well, you’re still
getting 160,000 up here. The problem is if you own that one, too, you better hope that it’s in Wyoming because you don’t want
it to be able to take it. All right, so we have a whole bunch of more questions to go through. If I start private lending
to individual investors, is it possible to take the 199A deduction? Jeff, what do you say? – [Jeff] Well, the answer
is kinda sorta yes. – [Toby] Kinda sorta? – [Jeff] Maybe. We’re still not sure about this. We’re pretty sure that individual private lenders are not going to be able to take the 199A. They’re considering
whether, like, hedge funds or private equity funds may be able to take them because they’re usually considered trade or
businesses in themselves. But for an individual
doing private lending, you’re probably gonna be considered what’s called a specified– – [Toby] Specified service. – [Jeff] Specified service. – [Toby] Here’s where it gets fun. Clayton says, “What is a 199A deduction?” A 199A deduction is a fancy way of saying the 20% deduction on
qualified business income. I’m gonna unpack this for ya real quick. 199A equals 20% deduction versus QBI. There’s a few other tests,
and some of you guys that are savvy on this stuff knows that there’s some other
things ya have to meet. But it just means that if I make $10,000, I only have to pay tax on 8,000. Or if I make 100,000, I only
have to pay tax on 80,000. It’s a nice big deduction. It’s what they gave the
pass-through businesses when they gave the C corps that 21% flat tax rate. It’s pretty potent. Now here’s the thing, ya have to go to QBI and say what qualifies as
qualified business income? It’s trade or business income. Then ya have to look and say what is not considered trade or business income? Well, first off, wages are not considered trade or business income. Capital gains are not considered trade or business income. Interest is not considered trade or business income. Now I look at it and
say, hey, wait a second. I am doing private lending. Does that even fall underneath
the category of QBI? The answer is no, unless it’s your business, in which case now we’re gonna say do you meet the definition of a dealer? You’re buying it to sell it. If I’m buying notes and selling notes, then I might qualify, but if I’m just writing notes, probably not. Then we look at it and say, all right, maybe you’re rising to
the level of a trade or business where that’s
really what you do is you’re just doing a
whole bunch of lending. I don’t know the threshold,
guys, nobody does, but let’s just say that that’s what you’re doing in this business. Now you’re gonna fall into an exception of what they call the
specified service business, where it’s in finance or brokerage, if you’re brokering loans, especially, in which case you’re gonna phase out if you make over $157,000 as an individual, or $315,000 if you’re married, filing jointly. You’re gonna lose this deduction. To say the least, it’s complicated. To reiterate what Jeff said is really what he’s trying to do, he
doesn’t wanna say it depends just ’cause he doesn’t wanna have people make fun of him, but it depends. If you’re lending to individual investors, my position would be that
that’s interest income, and it’s passive if you’re
doing anything else. If you’re primarily a gap lender, would you be eligible? Probably not. If you are doing other activities, then the answer is a big fat maybe. What I would be doing is saying, hey, maybe I should just try to make sure I don’t have any of that income. Maybe I’m paying it up to a corporation, maybe I have an LLC
that’s doing the lending. Or better yet, you have the lending going to a corporation. That way, the corporation
has less exposure. It’s like it’s keeping
the exposure off of you, and you’re just getting interest income that’s not subject to
Social Security taxes. I would take that, too. All of that stuff. Let’s see if there’s somebody. Oh, they’re asking some other questions. Let’s see if anything’s relevant. No, all right. There’s another one. When I borrow money to an LLC from a private investor. I think I’m borrowing money from the LLC, and the LLC sends him a 1099 for the interest they made. If there any other paperwork I have to do for the IRS? I think wouldn’t that be a 1098? Or is that, or excuse me, a– – [Jeff] No, the 1099 would be fine. – [Toby] INT. Then you’d be good. What about lending through an IRA? Then you don’t have to worry about the 199A deduction ’cause it’s not a trade or business. Lending from an IRA is fantastic. – [Jeff] And you don’t have to do a 1099. – [Toby] Yeah, because it’s not taxable. Yay. All right, we like it. If you have an IRA, you should really consider lending to people that you know that aren’t related to you. That’s called a gift, it’s not a loan when it’s to family members. – [Jeff] You’re never
seeing that money again. (Toby laughs) – [Toby] All right, what
are the tax ramifications or other issues with purchasing my personal property
through my corporation? This is an interesting one. That’s ’cause it doesn’t make any sense if they’re buying personal property through a business, right?. You can hammer this one. – [Jeff] If we’re talking
personal property, meaning property that was personal to you, don’t do it through the
corporation, please. If you’re talking personal property (sighs) as in tangible personal property, like equipment, which is what I consider
personal property. – [Toby] Here’s the thing, they said my. Whenever you say my, that implies that you’re using it personally. When you say personal property, then I’m thinking that
you’re using it personal and you’re just buying it
through the corporation. What’s the tax ramification? You don’t have an exclusion for it. Like it’s not something that’s being used by the business and it’s just buying it, then that’s considered wages. – [Jeff] Yeah. If you’re buying your personal residence through your corporation, please don’t do that. – [Toby] If I buy you a car and I give you a car, that’s wages. If I buy a car in the
corp, even if it’s 50% used by the business
and I can write it off through the business, whatever portion that I’m using is still
taxable to me as wages. They use the least value. They put a new schedule out every year. Nobody does that. They roast people on it. You see 100% business usage
to buy the family car. – [Jeff] For example, we did have a doctor who bought cars for
everybody on his staff. – [Toby] That’s wages. – [Jeff] We had to compute every year what the personal use was so he could put it on their W-2s. – [Toby] Yep, yep, yep,
yep, yep, yep, yep. All right. Tax ramifications. Well, what if it’s a
computer or your phone or other things? Then the company can write it off and you don’t have to. – [Jeff] Yeah, I think if
the corporation’s buying you a cellphone because you’re required to have a cellphone
for your corporate job, I think that’s a legitimate expense. – [Toby] Absolutely. – [Jeff] It’s gonna have a business use. – [Toby] Absolutely. All right, sweet. What is the best business
setup for a family building or purchasing a multifamily unit, LLC or a C corp? I’ll be real easy on this. All right, if you are buying a property that you are going to sell immediately, then you are a dealer. Then you could go ahead and use a C corp or an S corp, probably an S corp. An LLC is not a tax designation. An LLC is only for state. It depends on how we would have it taxed. But if I was flipping a property, then I could have an LLC taxed as a C corp and an
LLC taxed as an S corp. LLC or C corp, it would not matter if I am a dealer. If I am buying a building or a multifamily and I plan on renting it
out and I’m keeping it, then I’m not doing a C corp ’cause there’s adverse tax consequences to having appreciating assets in a C corp. If I ever take it out, it’s
gonna nail me as wages, that whole appreciated
value of the business. That goes for an S or a C corp. If I am an LLC, I could be taxed as a disregarded or as a partnership. That’s fine for a family building. If I’m buying a building
that I’m gonna lease to my business or, hey, I want to have an apartment unit or an aplex, it’s gonna be an LLC taxed as either a disregarded entity, which means it goes right onto my Schedule
E, or as a partnership. In either case, it’s
gonna flow through to me. I’m not gonna have it being taxed as a corporation. – [Jeff] Gotta have that LLC, though. (Toby speaking in a foreign language) – [Toby] Let’s see, if I’m buying a duplex and living in 1/2. You’re house hacking. AJ, I know what you’re doing. 1/2 and renting 1/2, should I purchase or hold the home under an LLC, my current C corp, or
just under me personally? AJ, it’s kinda funky. If it’s me and I have
a tenant in that house, I’m isolating my liability, I’m putting it in an LLC, but I’m making it a disregarded LLC. The reason I do that is because 1/2 of that property is my personal home, my personal residence, and I qualify for something called a 121 exclusion. The 121 exclusion is
when I can sell a house and not pay capital gains if I lived in it as my primary residence for two of the last five years. If I’m single, it’s 250,000. If I’m married, it’s 500,000. I wanna make sure that I don’t ruin that. I’m not gonna use a C corp, but it’s gonna be an LLC. I wouldn’t do this just as me personally because there’s no stopping the liability. If somebody falls down the steps on their 1/2 of the building and sues me for something,
says I was negligent or whatever, there’s literally no cap on the amount of damages
I could get hit with. They could follow me
around the rest of my life. I don’t want that, so I
wanna be able to cut it. I guess I could go bankrupt at some point, but it depends on what you’re nailed for. Now you’re talking to
a guy that I actually, on behalf of a client, garnished a tenant in a piece of property for over 11 years at her job. You can, just ’cause somebody says, “Oh, I’d just go bankrupt.” Well, she tried to. There’s exceptions under
the bankruptcy code, too. There’s a good chance that you don’t even get to bankrupt away the liability. Anybody that says differently doesn’t know the exceptions. – [Jeff] Even though the duplex is one undividable property, you’re still putting that rental portion in that LLC? – [Toby] I’m putting the
whole thing in the LLC. – [Jeff] Oh, really? – [Toby] I won’t be able to stop them from getting my 1/2. I still have a homestead. In many states, I guess I should say. In some, you’d lose it. I think in Texas and
Florida where they have the unlimited homestead, it kinda stinks, but there’s nothing you can do about it. You have a home property that’s an undivisible piece of property that is both personal use and investment use. You ruined your homestead anyway. The way I look at it is I would just be putting that in an LLC. It’s more important to me that I don’t lose the rest of my assets that I have and I don’t subject myself
to adverse tax consequences. Those are the big things for me. Somebody says, “Any ways to minimize “the franchise fee for
multiple LLCs in California?” Yeah, you could have a local property management company. You have a single holding
entity out of the state. That holding entity really should be held by a trust so you’re not bringing it right back into California. Then you would make
sure that the California properties are held in
individual land trusts and either with LLCs out of the state or something along those lines. That’s how you’d do that, Daniel. Now if he asked the franchise tax board, they’re gonna say, “Great, pay us $800 “on every LLC you have
that’s not nailed down.” You wanna make sure that you don’t own it, that it’s in a trust that owns the LLC, and that LLC is the one
that owns the other LLC. You wanna try to keep
yourself twice removed. What we oftentimes do is
we put different trusts between each layer, so you may have a personal property
trust owning the interest in the various LLCs. Again, all we’re trying to do is get out ahead of this thing. We actually won that on an audit. We had two highway patrol people that won against the franchise tax board simply because they didn’t own it, it was their living
trust that owned the LLC. How often does that happen? Well, we don’t get audited. We try not to allow that to occur, but if it does, it’s nice
to have your argument. – [Jeff] Right. – [Toby] Oh, boy, dealer stuff. What’s the definition of a dealer and how can I avoid being
considered a dealer? What are the ramifications
of being a dealer? You wanna hit this one? – [Jeff] Well, a dealer
depends on what your intent was when you purchased the property. If you were intending
to sell this property when you purchased the property, you’re gonna be classified as the dealer. – [Toby] A dealer is buying
something to sell it. – [Jeff] Right. – [Toby] An investor buys it to hold it and make long-term appreciation and rents. – [Jeff] Now the consequences of this is the income is
considered ordinary income, not capital gain income,
when you’re a dealer. I think there’s some danger that if you have other sales of
property, they may consider all of them, other transactions. – [Toby] One of the Journal of Accountancy had a pretty nasty case where a gal developed some properties. When she was a developer, a dealer and a developer are
considered the same thing from a tax standpoint, they’re
taxed as ordinary income, and they reclassified everything she had, saying, oh, it’s all
part of one enterprise, which was really bad because you lose long-term capital gains. Everything is active ordinary income, meaning that self-employment tax. You lose the ability to
do installment sales. – [Jeff] Correct. – [Toby] You lose the ability to do– – [Jeff] Well, let’s go back. You can do an installment sale, but ya still have to
recognize all the income now, which makes it really bad. – [Toby] All right, I’ll rephrase that. You lose the benefits, the tax benefits, of an installment sale. You can’t 1031 exchange. – [Jeff] Right. – [Toby] Ya lose a lot of the benefits of a dealer, and you can’t depreciate. You lose your depreciation, you lose your 1031 exchange, you lose your long-term capital gains and you lose installment sale benefits. (Jeff laughs)
– [Jeff] Yes. – [Toby] What are the
ramifications of being a dealer? It’s pretty miserable if
ya get caught doing this. As for the timeframe,
anybody who tells you that, hey, dude, you
hold the property longer than a year, you’re not a dealer, hasn’t read their cases. There’s cases where people have held the same property for 10 years and are still considered a dealer. They look at your intent
when you bought it. If they can see your
intent when you bought it, that’s what you are. If you bought it to sell it, even if ya didn’t sell
it, but they could see that that’s what you’ve been trying to do the whole time, you’re just waiting for the opportunity to
get outta that thing, you’re a dealer. If you fix and flip,
you’re definitely a dealer. – [Jeff] If you look at previous cases to determine the holding period, what the president basically says is it’s gonna depend on that person sitting on that bench. – [Toby] Yeah. All right, somebody said, I think this is going back one. If ya have the property deed in an LLC for liability purposes while using it as a personal residence,
do you have to do that for the personal residence exception? No. What they do is they ignore that LLC. Usually when we’re doing the LLC, we’re filing it as disregarded, so you don’t have to worry. If you sell your home
and get more than owed on the mortgage, is
that capital gains tax? No. Capital gains is your basis minus what you sold it for. – [Jeff] Let’s give ya
a really ugly scenario. Your cost in a property is $100,000, but over the years, you’ve refinanced and the loan amounts have gone up. You now owe $400,000 on this house that you sell for 500,000. Under the loan scenario, you would think your gain was only $100,000, but when in fact, your gain is 400,000. – [Toby] Plus you have to recapture the depreciation you took. How many years did you hold it for? – [Jeff] Oh, let’s say 10 years. – [Toby] 10 years, oh, man. – [Jeff] Let’s make it nine years, so 1/3 of the value. – [Toby] 1/3 of the value. Well, whatever the improved value. – [Jeff] About 170,000. – [Toby] If it was a hundred grand and your land value is 30, then you’d have 70, and you’d take 1/3 of that is probably
what you wrote off. – [Jeff] We sometimes see this on sales of property, especially if it’s residences and all that people have borrowed
against their home. What they get out of the proceeds of a sale after paying off their debt is way less than the gain on sale. – [Toby] You’re like a lotta people. Ya think, oh, shoot, but I didn’t get any of the money. You gave it all to the
lender, doesn’t matter. You got that money at some point. You’d still want to 1031 exchange that and you don’t wanna get another loan. You kinda have to, right? You have to buy equal or greater value, regardless of the debt. All right, under our corporation, is it better to lease a vehicle or buy? We get this question quite often. The answer’s always gonna be depending on what you’re buying, like how much is gonna
be used by the business. I’m always gonna say you’re better off to not own it in the (laughs) corporation, nine times outta 10. There’s people that think you’re a goober for doing that, but the ramifications of doing this wrong are so draconian that I’d just rather do MileIQ and reimburse myself, and
not have to think about it. Pay less in insurance and it’s my car and I don’t have to worry about which car it is, if the vehicle. All my mileage logs, I just
have one app on my phone. But if I am a corporation,
which one’s better? You’re writing both off. It depends on whether you have a bunch of income. If you’re making a whole bunch of money, then I might buy a vehicle. If I’m not, then I’m probably leasing it. – [Jeff] Let me throw this in. Let’s say you’re buying an expensive car. Not an SUV or a van or a truck, but an expensive car. Say your company needs that Corvette. Your deprecation deduction’s
gonna be limited to, what is it this year? Around 20,000? That depreciation? – [Toby] It’s like 16. – [Jeff] 16. If you leased the
vehicle, you’re gonna get a much higher deduction over time. I don’t know if a lotta companies lease vehicles to small corporations. – [Toby] You’re gonna
be a personal guarantor on it, no matter what. They will. Somebody said, going back
to the previous question, “I was told by my accountant that in order “to claim a personal residence exception, “you must hold it in
your name, not an LLC.” That’s just an accountant not knowing the tax laws. But if you’re worried, you just put it in a land trust, and
that way they don’t even have to know that there’s an LLC involved. But the LLC is disregarded
for tax purposes, period. If you’re owning it and it’s you, not you and a spouse in a
separate property state, but it’s you or you and a spouse in a community property state, then there’s not even a tax form. Nobody even knows. Again, pretty sure that the code
has that specific provision. I know for the living trust it does. – [Jeff] I know it has
the for living trust. – [Toby] But I’m 99% certain. I know what the IRS says, too. It’s like, hey, it’s
disregarded for tax purposes. Therefore, you still get
your personal exemption, as long as your personal residence. All right, can I deduct my
real estate training costs? This is the last question we have today. Can I deduct my personal training costs? Yes. The question is can I
write them off right now? Do I have to spread ’em
out over a number of years? Can I write them off personally, or do I need to put them inside of a corporation? The answer, Jeff,
(Jeff laughs) you like doing this stuff, is it’s always gonna be fact-specific. – [Jeff] I know we’re
gonna say it depends, but it’s gonna depend on where you want to deduct these and how it relates to the business that you’re currently in. I’m gonna disregard
the real estate portion and just say training costs by itself because we do have this. We sometimes have the personal training and the mentorship and coaching. If this is an existing business that’s doing business. – [Toby] Easy. – [Jeff] It’s easy. We’re assuming the training relates to the business that you’re in. It’s a deduction. If it’s a Schedule C and it’s a new Schedule C business, no, you’re probably not gonna be able to deduct the real estate training. Say you’re flipping on a Schedule C, which we don’t really advise. If it’s a corporation and you’re flipping, we go back to that depends on when the actual training took place and when the corporation reimbursed you for those training costs. Any real estate training that took place before incorporating,
you’re probably gonna have to amortize those
costs over 15 years. Any of those trainings
that were reimbursed back to you after you incorporated, we’re assuming that you are in business and those are training
costs for your business. – [Toby] It gets complicated. – [Jeff] It gets complicated. – [Toby] If a already have
real estate, it’s easy. If you don’t have any real estate, then you’d better make
sure you’re incorporating. That’s what it really boils down to. Then when you actually go through the training or mentorships or other will dictate whether or not it’s something that’s a startup cost or whether it’s an ordinary necessary expense while your business is going on. You’re just reimbursing. If it’s before your business, doesn’t it count as a startup? The answer is yes, unless
you haven’t done it. I’ll give ya an example. Let’s say there’s this guy Jeff who goes through real estate
training and mentorship, and he hires a coach. He pays $20,000 for coaching. That’s really his real
estate training costs. His coaching, it’s gonna
be for the next six months, and he incorporates. That’s not a startup expense. His corporation is now in existence. He hasn’t done any of the coaching. The coaching all goes to the
benefit of the corporation. That’s an ordinary and necessary expense. Even though Jeff
individually had purchased it before he transferred it over to the corp, corp got the benefit, corp doesn’t have to worry about a startup expense. Now flip that around. Jeff does $20,000 of coaching, sets up his business, says, hey, I really like this. I’m gonna really make it work now. That’s a startup expense. That startup expense, still deductible, but you’re only able to write off $5,000 in the first year. You’re taking the remaining $15,000 and you’re spreading it out over 15 years, so you’re taking $1,000 a
year for the next 15 years. You don’t lose it, you’re
just spreading it out. It’s obviously better to, if ya can, to make sure
you’re in business. It’s a lot more fun. Here we go, we got a bunch of questions that came in. La-la-la-la-la-la. By the way, so I paid for a livestream and I’m a full-time real estate investor. What type of expense is that? I would put down there
as continuing education. Depending on your
licensing, you actually get credit for that. Is a disregarded LLC simply an LLC with one member? Not necessarily. The IRS looks at it and say, yeah, it’s one member, but it could be a husband and wife in a
community property state. They’re considered one member. It’s just disregarded, we just ignore it for tax purposes, so it flows right down to the owner. Somebody says, “I went on the phone.” Trisha, this is recorded
and we’ll make sure that you get a link to the recording so you can go to the
question that you need. If it’s before the
business, does that count as a startup? Again, it kind of depends. If I owned a nonprofit and put a property in the nonprofit. Can I put a property in the nonprofit, can it charge rent? Yes, of course. The nonprofit. Let’s say that I donate
a piece of property to my nonprofit. I get to write off the value
of that piece of property. – [Jeff] Yes. – [Toby] If I’ve owned it over a year, it’s the fair market value. If it’s less than a
year, then it’s my basis. In either case, I’m gonna be limited to 30% of my adjusted gross income for the deduction that I can carry forward the additional for five more years. But that nonprofit now can rent it, yeah, it generates income with it. Do you have to be taxed as a C corp to get the benefits of education costs? Not necessarily. An S corp could do it, too. A C corp locks it in stone. If you’re an S corp, then I guess there’s a little bit of a worry that it’s not in the business unless it actually owns
the real estate, too. It’s much cleaner if you do a C corp, but I don’t wanna say that it’s just for a C corp. Are ABA workshops considered
continuing education expenses? Yes, a lot of ’em are actually qualified for continuing real estate education, depending on your state. A lot of ’em get your
continuing legal education, and some of ’em even get
the continuing accounting, what do they call that? Continuing. – [Jeff] Continuing
professional education. – [Toby] You check with your state. Then we have a member of our staff that can help you with that, Valerie. That’s what she kinda works on. We’ve gotten some, the three days, I forget how many hours those things. It was like 20 hours or
some ridiculous amount. I know because we get
’em for teaching ’em. All right, let’s keep going through. The Tax-Wise Workshop. We’re getting pretty close to an hour 1/2, so I wanna start to wind this thing down. June 13th and 14th, so this week we have the next Tax-Wise Workshop. If you want to attend that livestream, we don’t have any more room in our office. It’s andersonadvisors.com/3for1. You can get the livestream for $197, plus you can get access to the recording from January, and you get
the livestream for November, and you’ll get recordings on all three. It’s just basically a, hey, you get all the Tax-Wise for the entire year. I go over about 30
different tax deductions. I change it up every event just to keep it interesting and because we’re focusing on different things. Beginning of the year versus end of the year planning
is a little different. You can do that. – [Jeff] We got a live workshop coming up on Thursday and Friday of this week. – [Toby] Yep, this June
13th, 14th, right there. You could do the livestream. There’s not gonna be ability to come live, but you can stream it, which means you can sit there and watch it, and you’ll get the recording. – [Jeff] Be that much
smarter than everybody else. – [Toby] Hey, it only takes one. See, I get the benefit, I
get the emails afterwards. What’s always fun is
you’ll have one strategy. I tell people to try to learn three every time they go through. Just find three that you’re gonna apply. You don’t need to know
’em all and do nothing. You need to know one and actually do it, and you’re much better off. You find three that pique your interest, and those are the three. You could have one. I had one couple that ended up with 170-some-odd
thousand dollar deduction that they wouldn’t have had otherwise, offsetting some pretty sizeable income. The benefit of the class, just one of ’em, they were kinda chuckling about it, it was about $80,000 in their pocket. That’s not completely uncommon. – [Jeff] Yeah, unfortunately, there’s not usually room for me to send my tax people, but I do have (mumbles). – [Toby] Yeah, it’s fun stuff. – [Jeff] It’s fun stuff, it’s stuff to sharpen your skills,
even for us tax people. – [Toby] If ya can’t tell,
there’s a lot that changes. It’s one of those things
where you get different, there’s constantly things being put out there in the tax world. They have regulations being entered, you have things being
phased out, phased in. Then, of course, Congress
likes to change the laws. Ya kinda just have to keep your finger on that pulse. Otherwise, you risk losing a ton. ‘Cause usually they will pull things to where you think that
you’ve got it under A, they’ll make it into B, and B has an adverse consequence to ya. Ya just wanna kinda just keep your nose to the tax grindstone a little bit. You don’t have to know it all, but you’re just listening for things that are relevant to ya. iTunes, you can go in and
listen to our podcast. You’re gonna see a whole
bunch of Tax Tuesdays. Jeff and I do these every other week, so you can always come in and check with the Tax Tuesday. But you can get the podcasts with iTunes. I do a bunch of other, myself and Clint and sometimes Michael
Bowman and other folks, do interviews with folks. For example, residential assisted living, everything from cost segregation, qualified opportunity zones, insurance. We grab people that we work with or that we know or that
are experts in the field, and have them enlighten
us on certain rules and how people use these things. You can do the same thing on Google Play. Just ’cause you guys have been so good, I’m gonna throw this one at ya. If you like really thought out, kind of basic how to compute and actually make money without getting reamed
and without spending obscene amounts of money to make mistakes, then do the Infinity Investing Workshop. You go there, it’s the
infinityinvestingworkshop.com. Just sign up there. That little code there gets
ya everything for free. There’s 11-part series
plus four-part bonus series on everything from financial stewardship to how to create an infinity
investing income stream. It’s kinda fun. You can use that little FREETAX. If you’re super, super
smart and you’re really good at making money and you already know how passive income works, then don’t do it for yourself, but if you know of anybody that’s kinda tired of, they seem like they’re running it so fast
and they can’t get ahead, they’re probably trying
to build the wrong type of income and they’re
being sold liabilities in the guise that it’s actually an asset, go through this, share this with them so that they don’t make those mistakes. You’ll see that it’s
pretty easy, pretty fun, and you’ll learn how to make some money on some things ya probably didn’t realize you could make money at. Replays of this Tax
Tuesday, you can always go to your Platinum Portal and you could see it in there. Of course, you’ll get a link to this one if you registered for the event. Feel free to share it to anybody. We don’t charge for these things. All it is is getting the
information out there. It helps everybody. Then please follow us
on YouTube and Facebook. If you’re willing to, please rate what ya see and hear. We’re big education
junkies, and we believe that you should teach the topics that you’re constantly working with. It keeps skills sharp, if ya can’t tell. Jeff and I sit here, and between us we have, quite literally,
many, many decades of experience, and we’re still having to think very hard. We don’t always know the answer, and there’s a lot of
it depends just because there’s facts and circumstance tests. If you wanna know more and save more. Like I’m looking at this one, how to legally write off your cellphone, that’s pretty, on an accountable plan, you don’t have to pay any tax on it. Literally reimburse the whole thing, but it has to be an S corp or a C corp from a tax standpoint. – [Jeff] I reimburse my phone. – [Toby] Yep, gotta do it. Go to andersonadvisors.com/facebook, andersonadvisors.com/youtube. Of course, if ya have any questions, email ’em in, guys. No cost to it. Email it on in. We’ll either have somebody answer it if it’s really long and drawn out, or we’ll get it back to ya. Again, or just visit Anderson Advisors. We probably have 200 videos on our site. If ya can’t find the answer
to your question there, by all means, become
platinum and just ask us, and we’ll get somebody right on it. Unlimited Q and A. It’s a whopping $35 a month. If you wanna find out more about that, just go to our website or email us in [email protected] You can talk to a lawyer, ask
any tax question you want. It doesn’t go up, it doesn’t go down. It’s been the same price
for more than a decade. We’re not planning on raising it any time. We have a really great group of folks, we have a great group of advisors. We got awesome clients
all over the country. We’re always thankful. That’s it, Jeff, unless you have anything. – [Jeff] No, I’m good to go. I’m glad you all could
stay with us for today. (Toby laughs) – [Toby] Plus the coupon code again here, I’ll just go back to that real quick. It’s FREETAX, but you can grab that. By all means, share that with kids before they go too crazy. Where am I located? We are in Las Vegas. We have offices, three offices here. We have offices in 45 states, as well as our main office
is up in Tacoma, Washington. I and Jeff are sitting
here in our rainbow office in the second floor. We have three floors here. There’s about 250 of us here. Don’t tell ’em about the
zoo animals, oh, my God. You guys are crazy. Love it, thanks guys. Until next time, this is Toby and. – [Jeff] Jeff. – [Toby] Thanks again for spending some time with us on Tax Tuesday. ‘Til next time. – [Jeff] Bye. (upbeat music)

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