Land Trust Property Tips, How to setup Airbnb Business & More! Tax Tuesday Ep. 148
(bright music) - All right, welcome everybody to Tax Tuesday. My name's Toby Mathis. - And I'm Jeff Webb. - And you're listening to Tax Tuesday where we're bringing tax knowledge to the masses.
So, happy Tuesday. - Happy Tuesday. - You don't seem that enthused, Jeff. - (indistinct) started Tax Tuesday and so... - You're a little tired? - Oh, no. - Or is it you're so excited? - I'm so excited, one of being (mumbles).
- Jeff's exuberance is boiling over today. Hey, yeah, we got a lot of folks on today. I will kinda go through the rules and we'll jump right on in 'cause we gonna try to keep here for just an hour which is always a battle. But you'll ask questions live via the question answer feature and if you see the question and answer feature, that's where you ask questions that are very specific to you. If you're responding to something we're asking, use the chat.
'Cause then we can have a conversation. So I can already see people saying, "Hey." So why don't you, we'll practice? In chat, Let me know where you're at. What city, what state, what area? Whatever you want to use as a descriptor, so we can figure it out.
So Vancouver, San Jose. Oh my gosh they're going so fast. Kansas city, Boise, Jacksonville, San Diego. Oh my gosh, they're going too fast.
Boston, I see a Vegas. They're just going... Vancouver, Chicago, Queens, Iowa, Seattle, Jacksonville, DC, Palo Alto, Brooklyn baby. Craig from Las Vegas.
So we have people on, Anacortes. There's Don from that again, I always say this probably. I think you're always saying Anacortes, and I always say that's where my mom lives. Puyallup. Yes I can speak it correctly. Lancaster and not too far from where I grew up.
San Antonio, New Jersey, Dallas. We're obviously accustomed to you asking every time, I just like to know there's some Lake Kapsul. Yes. So got off the lake and said, "Hey, he's a little sunburn." And came in and he said, you know what I need? I need the, how do you say it, the salve? How do you say something that like cures your sunburn? - Oh, the salve.
- The salve of tax knowledge to cure your sunburn. We don't even charge for it. Jeff's a doctor kind of plays one on TV. All right, so we have Troy, Elliott, Christos, Payo, Ian, a bunch of tax professionals here to answer your question. So if you have questions, don't be shy.
Go up there and throw them in the question-answer and our guys will answer them for you. We will not be sending you a bill for this, we'll just do it, because everybody that's on here from the tax department said that they were tired of doing tax returns and they wanted to answer questions for an hour. Is that fair? I think it was something like that. No, no, it's just 'cause they're good people and they always come on and I'm always surprised at how many really great tax preparers we have on. We have tax attorneys, CPAs, even the head of bookkeeping.
Troy who rocks coming in and answering all your guys' questions. If you have a question that's not on today, just if something hits you during the middle of the week and you're like, "Well, that's a really good question." By all means, send it in via Tax Tuesday to Anderson Advisors.
We answer your questions. If you're getting into something that's very specific to you and needs engagement, then you either become a Tax Client or a Platinum Client. Right now I think your only option is to be a Platinum Client 'cause tax is absolutely getting hammered around taxes.
- No problem, that's well. - Yeah, so it would be the Platinum feature, 35 bucks a month. Talk to your rep if you wanna know how to become a Platinum member. This is fast, fun and educational I wanna give back and help educate.
We've been doing these for years now and they're fun. So let's just jump right on in. So you can have a good idea of what we're doing. "Are there any restrictions on being REP during retirement?" That stands for real estate professional. "My father is retired from the Postal Service "and spends more than enough time materially participating "in repair maintenance in general work in rentals." We will answer that.
"Do I have access to my Roth 401(k) contributions "in the way I do Roth IRA contributions "before age 59 and a half? "What if I separate from my employer "and roll the Roth 401(k) into a Roth IRA? "Do I have access to any of these funds "before age 59 and a half?" So we'll answer that, good question. This one's a long one. I picked this one for you just 'cause, it said RMD like 60 times and I said, Jeff loves our RMDs, right? "I'm 68 now and I have an inherited spousal IRA. "She was about five years younger than me. "I know that I need to start RMDs on my IRA when I hit 72. "When do I have to start taking RMDs" required minimum distributions by the way, that's what RMD stands for, "from the inherited spousal IRA? "When I hit 72? "Or when she would have turned 72, "which would be when I hit 77?" So we'll dive into all this when we're answering by the way.
"In settling her state, "I chose not to roll her IRA account into my IRA account "so that I could delay taking required minimum distributions "from the value in her accounts, as late as possible. "This meant that I could delay taking RMDs on her value "until she would have turned 70 and a half, "at which time I would have turned 50 or 75, almost 76." So we'll dive into that. That one has a lot of pieces picked it for that reason. Sometimes I grab really long ones because there's some little nuggets in there that we want to explore. "Why would someone invest in a Publicly Traded Partnership? "How are they taxed? "I don't hear you guys talking about them in any way, "either positive or negative.
"I wonder if a PTP, publicly traded partnership "is a good option to invest in for diversity?" We'll go into that. Yeah, absolutely. "I have converted my primary home "to a short-term rental," I think STR short-term rental this year means like Airbnb. "If I complete 100 plus hours of active participation "and more than anyone else, "can I deduct the losses from my W2 wages, "my active income?" Good question, we'll answer that. And then, was that you? Was that your stomach? (laughing) I was teasing.
"How should someone set up the business for Airbnb?" So that kind of goes hand in hand. It's just happened that they were one after the other, but it's good question, good question. "If you take regular depreciation, "then replace window roof and large items such as A/C "and want to take component depreciation for these items." Don't worry, we'll explain that. "Do you have to make any adjustment "to the regular scheduled depreciation amount?" We'll dive into all of this.
"Can I be a real estate professional "by running short-term rentals?" Great question, we'll get dive into that. "Why is it better for the Wholesale Trust/Land Trust "to be a C Corp instead of an S Corp? "If I'm buying land and subdividing on paper only, "but doing engineering studies am I looked at as a dealer? "Again, this is only land." Great questions. And I think one of those, like I remember in the last two months or so, but it's a good one. "I plan to donate my timeshare "and does that relieve me of my maintenance fee yearly? "Due to COVID I have not used my week "and I called the company and refused to give me credit "or they refuse to give me credit for time, "and I paid the yearly fee as well.
"How can I illegally make them accountable for this?" So I assume you say when you're saying them, you're talking about the charity. So we'll get into that. "If previous a multifamily owner took appreciated," when I see MF, I'm assuming that they're meaning multifamily. "So if a previous multifamily owner "took appreciated depreciation on 15 year items, "how would I know and would that impact the purchase price?" So it will get jump into that. "How does the IRS track capital gains on sales "under two years from acquisition "if 5 million homes sell per year in America?" That's probably your favorite question.
- That's my favorite. - Why is that? Why is that your favorite Jeff? - I think it's because somebody saying, "How could I possibly track all this stuff? - I always say it goes up there with, they don't know whether I've sold my Bitcoin, (Jeff laughs) right? I'm like, oh my goodness. Yeah. Cash business, they're running a carwash. They don't know if I got paid anything, do they? Yeah, we'll explain this one.
And we'll explain what an orange jumpsuit is and how to keep fashion while incarcerated. Right. "Are there any restrictions "on being a REP during retirement? "My father is retired from the Postal Service," (laughing) I was gonna go farther with it, (mumbles). All right, "Postal Services and spends "more than enough time materially participating in repair, "maintenance, and general work in rentals."
What'd say you, Jeff? - I'm assuming the father owns property rental real estate. So this is actually the perfect way to do it. You're retired, you're working anywhere else, you have all the time in the world to spend on your rental properties, and you're the ideal real estate professional. If you are spending, in this case sounds like, you're spending a substantial amount of time on rentals. - When does it actually matter? - It matters for the two tests material participation tests. - Let's even step it back further.
So dad has rentals, dad has rentals that makes $20,000 a year on rental. Do we care whether he's a real estate professional? - No - Because we're not worried about that. Now dad has rentals, but dad has losses because of depreciation. And he's able to offset some of his pension, some of his social security or whatever else, right? So maybe he's got $20,000 of losses.
Now does it matter? - It does matter because you have passive losses versus non passive losses. And those passive losses are likely to get suspended. Maybe, maybe not but... - Yes, so the easiest way to think about this is passive loss is only offset passive income.
There are two times when this isn't the case. And number one is, when you are an active participant in real estate and you make less than a hundred thousand dollars a year, it's technically to less than 150, because it phases out between a hundred to 150 but if you want the full $25,000 deduction, you just need to be below a hundred thousand. So if dad's retired and he's making less than a hundred thousand, that he doesn't even need to qualify as a real estate professional, unless his losses are more than 25,000. If the losses are greater than 25,000, then he would need to qualify as a real estate professional.
And real estate professional, you just mentioned has two tests. - Right. - What are the tests? - One is the material participation tests, and I don't even know what to called the other test. - The other is, 469 is the code section C7, if you need a direct site.
And you have a 750 hour plus more than 50%. So it's basically, are you involved in real estate development, construction, sales, brokering? It doesn't matter whether it's yours or somebody else's. It's, am I in those industries? So you could be in construction, you could be a real estate agent. And if you're spending 750 hours and more than half your time, then you'd qualify. So dad here who's retired, he would need to make sure he's hitting the 750 hours to be real estate professional. Then, you hit the next one.
And it depends on whether he's married as to whether he has to hit this or a spouse or a combination of the two, and that is they have to materially participate on their real estate activities. Do they have to do it for each house? - No, they can actually aggravate the properties. It's almost impossible to meet that test if you don't aggravate and have multiple properties, you just can't do it. You will qualify one. - Yeah, and that's what the IRS will do is if you're using an account doesn't know what the aggregation election is, you're gonna end up having to qualify materially for each property. The 750 hours doesn't matter about properties the 750 hour and half, even though there's a court case where they screwed that up it's been overruled multiple times, not just in courts, but also with the IRS Chief Counsel.
It is 750 hour half year time test number one, any real estate. Then they look at your real estate and it's per property. Did you materially participate in there? There's seven tests, seven, seven tests (mumbles) an extra finger, seven. I'll go like that, seven, seven.
I'm trying to figure out what the right number is, seven. I always think of a Inglorious Bastards when the guy's like there was three or something like that, the German way and the British way. Anyway, so there's the, you meet one of the seven tests. The easiest is if you're managing them yourself, so if he's doing and working on his rentals, you don't have to worry about anything else. If it is somebody else's managing, then you're gonna have to do more than a hundred hours total between spouses, so this is a joint return.
Somebody says eight. Don't make fun of me. Like it's hard sometimes. 'Cause I can't see.
I'm just hoping that I'm holding up the right number of fingers. Excuse. All right, so dad is probably gonna be okay, so your dad is probably gonna be pretty good, he may not even have to worry about it, he may be able to go underneath the active participation test.
And you know what? Just throw the scenarios and just make sure he's tracking his time. That's the only thing I would say. Do I have access to my Roth 401(k) contributions in the way I do Roth IRA contributions before 59 and a half? What if I separate from my employer and roll the Roth 401(k) into a Roth IRA? Do I have access to any of those funds before 59 and a half? Jeff.
- The first prohibition that you might run into (clearing throat) with a Roth 401(k) is the employer not allowing in service distributions. So if they do though, you could take it out. You could roll it into the Roth IRA before you're 59 and a half. If you do take money out of that Roth IRA that you rolled, you can take out all your contributions tax-free. There's a couple of rules, there is a five-year rule, which only affects earnings. There's a 59 and a half year rule, which again only affects our needs.
But if you're pulling that money out, that you've just contributed, there's no penalty, there's no tax. - Yeah, your contribution you can always take out. So what Jeff's really putting well is whether it's a Roth IRA or 401(k), you can always take out what you put in it without any penalty at all. It's just, you have to put it back in within 60 days or your it's gone, it's in your pocket. It's not taxed, but you're gonna lose the ability to have tax-free growth on it. Then you look at the growth on your contributions that you can take out if you're 59 and a half, and it's been in there for five years without any penalty, anything whatsoever.
There's some ways to get money out earlier than that. For example, if you are buying your first house, you can get up to $10,000. If you need higher education expenses, or if you're ill, there's a few exceptions to the general rule. But just remember, you can only take out your contribution. So I tell young people especially, use it as a savings account. Put your money in there and hope you never need it, but if you did, you just take out the whatever you put in there.
The growth you might wanna let ride. And if you take it out early, what's the penalty? - 10%. - 10% plus it's taxable, right? - Right. - So if I put in $10,000 over a couple of years and it grows to 15, I can always take my 10,000 out without a penalty. The $5,000 of growth, I may have to pay a 10% penalty.
So, 500 bucks plus it's taxable. - So talking about that five-year rule, we'll use your example that I put, I have $13,000 in my Roth 401(k). Originally I've only contributed 10,000, but I've rolled that to my Roth IRA.
That five-year clock doesn't start ticking until it hits a Roth IRA. So if you don't have any other Roth IRAs, your clock hasn't started ticking just because you haven't before. - Yeah, any Roth it would be on that growth on that. Hey, real quick, Patty, I'll answer. I think I see a Catherine who had a question on the material participation, I'll get into that. And also somebody who's asking a question on this one, which is, can I borrow against my Roth? - No. - No.
That's only for traditional funds and you can never borrow against an IRA. It's only a 401(k) defined benefit plan, like a pension, it never an IRA. There were some rules under the Cares Act that allow you to take early contributions and pay them back over a three-year period. That's gone now.
But so like if you'd taken money out last year, there's a good chance that you have a period of time to A, recognize it and B pay it back and take the deduction. - Other thing I wanted to mention one with a five-year rule, another weird thing is, that clock starts from the first time you contribute to a Roth IRA or put money in a Roth IRA. So if you later opened other accounts and put more money in, that clock has already started ticking with your first Roth IRA. - So for the five-year? - Yeah, for the five-year rule. - What if you only put a thousand dollars in and then? - And then put? - Another five in, you're good? - You're good.
- Yap, so it's 59 and a half in five years. - Correctamundo? - Yap. - Yap. All right, so somebody asked a question. I think it's worthwhile answering. When we're talking about material participation on this one. So this is dad, let's say dad and mom both alive and married, filing jointly, they can add up their time for material participation.
So if somebody says, can you clarify 100 hours for married couple, if they are not managing their own properties? Material participation is a different test. It's once I aggregate all my activities together, it's whatever I'm using for material participation on that property. If I'm not managing my own properties, if I'm not managing them, I'm using another manager, I'm still gonna add my material participation.
And that's fairly common, especially if you have properties in another state, you'll have somebody doing your Airbnb, but you're going there and you're doing repairs, you're going there and fixing it up. You might be going there and working in other manners, doing the finances with on that particular property with the property manager, you may be just coming town, even looking and looking over your investment. The question is, can I do investor activities at the same time? And the only way you can add in your investor activities to material participation is if you're managing your properties is my understanding. So if you're doing just, if you're looking for new properties and things like that, as long as you're managing your own property, and you're doing those types of activities, it could potentially be material participation. But we don't really see it like, usually you're blowing material participation out of the water.
It's like two people think about it. You're spending a weekend going in and doing work. That's a lot of hours that you guys are getting, and usually you're doing it quarterly, or at least twice, three times a year, you're gonna get over that a hundred hour mark and it just has to be more than the property manager spent. - Right. - So, just make sure you're keeping records of it. All right, Toby is being, - I go unwanted. - I go unwanted.
No we did that one. - Did we do that one? - Yeah. - Okay. - I went backwards just because there was a question and I'm sucker for answering questions. - Okay. - All right. Asset Protection workshop, we have another one coming up on August 28th. There's Mr. Coons
talk about real estate Tax and Asset Protection Workshop. If you guys like this information and you wanna learn more free workshop, we do it all day on a Saturday. Usually, it says nine to five, but usually we're done at four. The reason being is 'cause we don't want to kill you. (laughing) So we're gonna do that. Here we go.
Register for Free Tax and Asset Protection Workshop, aba.link/AP, all right. "I am 68 now and having inherited spousal IRA. "She was five years younger than me." I'm so sorry you lost your spouse, number one. "I know that I need to start required minimum distributions "on my IRA when I hit 72."
That's the new rule under the Tax Act and Jobs Act, right? And Secure Act. "When do I have to start taking RMDs "from the inherited spousal IRA when I hit 72 "or when she would have turned 72, "which would be when I hit 77? "In settling our state, "I chose not to roll her IRA account into my IRA account "so that I could delay taking RMD distributions "from the value in her account as late as possible." It's called a stretch. "This meant that I could delay taking RMDs "on her value until she would have turned 70 and a half," which really 72 now, "at which time I would have turned 50 or 75?" It would really be close to 77.
What do you say to this individual? - I'll be honest, I have not worked with a stretch IRAs at all. - It's complicated, I'll just tell you that much. - Because the old rules were, if she had not started taking distributions of any kind, either what they call substantially equal payments or her own RMDs, then all the rules would apply only to you and not to your wife, your spouses, age, or anything. - Correct.
You would have stretched it out. So, and it doesn't change. They changed it for everybody else but you, so long as you don't roll it into your account.
If you roll it into your account, then it's your funds, it's applying to you. You don't have to worry about something in the Secure Act, which says that you have to take all the distributions out within 10 years. If it's non-spouse and you inherit an IRA from somebody else, you have 10 years to take all the money out. That is not the case on a spousal IRA.
So you really, you have a few different flavors and I'm just gonna hit two of them. You rolled into yours, now it's yours it's based off of your schedule, so it's when you hit 72. Or you leave it in her name as you as the beneficiary.
So it's still her IRA and it's for your benefit. And you would use her numbers. Since she is younger than you, you would use her numbers. And it sounds like that's what you did. And the way it's gonna work is, you would be required to take minimum distributions when she hit by, it would be April of the year following her hitting 72. And so if you're five years older, it would be the April following her hitting 72, which would be your 77, possibly 78, depending on when your birthday is.
So you're gonna get more time out of it. I don't wanna dive into any more of the complexity because it's so fact driven. But just know that when it's a spouse, it's different rules.
When it's non-spouse, then it's always like, hey, if it's a Roth, you can always just take the money out. If it's a traditional, you can take the money out, but it's taxable to you, you don't have the 10% penalty. If it's traditional and it's spouse, then I could just be a beneficiary of it and use their age, for the required minimum distributions assuming that they haven't already started and that there weren't equal distributions under 72 T being taken.
Or, I take it and I'm just the beneficiary. I already said that. Or I just roll it into my account and nix it, and then I don't have to worry about the 10 years I just take it over my lifetime. All right. - One thing about the RMDs to be aware of is you can aggregate RMDs if they're the same type of investment.
So, you could aggregate all your IRAs and do one RMD from one of your accounts. - All your accounts together. - All you accounts? - Yeah, even if you're a beneficiary (mumbles). - 401(k) or 403(b) I think are the same way. (clearing throat) 401(k) should you have to take an RMD from each account, that you have inherited IRAs, you can also aggregate if you have multiple inherited IRAs.
- And you can give them to charity if you want up to a hundred thousand dollars and just directly. It says, if my husband is older than me and starts taking distributions out of the IRA and I inherit, am I forced to take the distributions, even though I'm not 72? I believe so. - Yes. - Sorry. Or you just take it all. Again, if it's a Roth, you don't have anything to worry about.
If it's non Roth, the reason you want it in there is so it continues to grow tax deferred, you could always take the money out, don't just pay the tax, tear the bandaid off. But I like the tax benefits, so I don't understand why other people do too. What else does somebody have? No, I'm not gonna to do this. Somebody asks, is it worth converting an IRA to a Roth after 59 and a half? What I'm going to say, it depends on the year of the conversion. If I have a whole bunch of losses, then I'm probably gonna convert.
If I don't, then I'm probably not. If I'm in a high tax bracket, it makes no sense to convert 'cause it's I'm gonna be paying a pretty good chunk of change and I don't have enough time to make it up. So the rule of a Roth is, if your tax bracket is gonna be higher when you retire, do the Roth. If it's gonna be lower when you retire, do traditional. And that's just math, I would have to spell it out for you.
It takes about 30 years to break even on the conversion if your tax is going down. So, if you're in a really low tax bracket, you have some events that, hey, I'm able to take some losses. For example, if we have losses that would ordinarily be something that we'd have to carry forward, convert some money, make some tax. - And you don't have to convert at all, you can convert a little bit of time.
- Yeah. So, we look at this, like this year we can't carry back business losses, ordinary losses anymore. So, under the Cares Act, it gave us three years to carry back loss. So if you have a business and you lose money, this might be the year where, hey, I had a really crappy ear. COVID's beating me over the head.
I got a restaurant I'm getting kicked in the shin. This is the year to convert. 'Cause you're not gonna use up all that deduction 'cause you don't really wanna carry it forward. Just talk to us, we'll map it out for you. We'll make it clear for you guys.
We'll actually give you the numbers. So, I always tell people there's three rules of anything financial, calculate, calculate, calculate. Look, I hit three. Playing with my fingers again. Why would someone invest in a Publicly Traded Partnership? A bad taste is timeless. No I'm sorry, how are they taxed? I don't hear you guys talking about them in a way, either positive or negative? I wonder if a PTP is a good option to invest in for diversity.
Jeff. - I Think the reason we don't talk about it is we don't talk about investments in general, as far as whether this is a good investment or a bad investment. Where I'm often let's see publicly traded partnership shoes is in the energy sector, oil and gas. So how are they taxed? There's a carve out for publicly traded partnerships that say, "Yes, the loss is kind of passive, "but you can't take those losses "as long as you hold that entity."
As soon as you get rid of that partnership, that PTP, that's when you get to recognize your losses. They can be good cash flows. You just have to be careful what you're looking at. I've seen some hedge funds that are PTPs.
They can be complex. As far as taxation, there's really nothing particularly special about it, you have to look at it from an investment point of view, not the tax point of view. - Right, so a publicly traded partnership. The reason people do them is if it's gonna be holding passive assets that are gonna flow through or investment assets, portfolio, income, really like if I wanna get technical, chances are it's gonna be things that are kicking down dividends, things that are kicking down interest, capital gains, maybe rents in the reason that they're doing it is because there's only one level of taxation, and that is what the shareholder or the partner. The problem that you have is, you're gonna have a tax nightmare and your accountant's gonna hate you. Because you have inside basis outside basis.
Like Jeff said, there's special rules. You get a K-1 and you're gonna get the tax documents that are done on year end. So you're gonna be getting different documents throughout the year. And your accountant is gonna have to make light, figure out what the heck's going on.
Are they fun to prepare? - They're not bad, I don't mind them. But like you said, if I paid a hundred thousand dollars for my PTP entrust, hold it for five years, my cost is no longer a hundred thousand dollars because of those K-ones, I'm recognizing income or possibly losses. - And somebody says, and the tax documents don't arrive until June, each year. They're coming all throughout the year. It's a joy of having partners that you can't control. But what you just said is actually spot on again, the people that do them is because they wanna treat it kinda like a syndication, but it's publicly traded.
- The other downside of these things are, they're usually in lots of states that may wanna come after you for state filings, for very little money. - It makes money in a particular state, then either it's doing, what is it? A consolidated return? What's the term? What's the about for it when they're doing one tax and it pays the state taxes, compound return? No, it's not a compound either. Is it a consolidate? - No, it's not consolidated. It's not compound. - It begins with a C.
Anyway, maybe one of the accountants. And California charges $800 per year in fees, composite, there we go. - Composite, thank you. Things like that. - Sean, he gets a star.
So we've got some smart people out there. Thank you, Sean because... - We have brain (mumbles)? - Yeah. All right, so, but yeah, you add a layer of complexity. So if you're just doing it as a, "Hey, I just kinda wanna put a little bit of money in one," and then it's usually a pain in the couture.
If you're doing it, because it's actually a specific investment you want, then the complexity is probably worth it, if you're being pretty targeted. But I don't really have a positive or a negative opinion. They're just a little bit different. And what Jeff said by the way, we spot on about is, if you're taking distributions out of a partnership that lowers your basis so when you sell it, you have to recognize that as tax.
And everybody's like, "I bought it for a hundred and I sold it for 200." Your basis is getting adjusted as those distributions are coming up. - The last PTP I was at was before oil collapsed and I was getting really good dividends out of it, and really good capital gain out of it.
But like you said, it did adjusted. So they do have their place in the world. - Yeah, I wouldn't say, I'm not negative on them but they do. You wanna walk them with your eyes open.
Somebody asks, "Did Toby say that you can't carry "over losses anymore?" No, Toby did not say that. Toby said you can't carry them back. So it used to be like last year, if you had a hundred thousand dollars a losses, if it was for 2020, we could carry it back to 2015.
Get your taxes back that you paid in 2015, use it all up to carry it to 2016, use it up carry it to 2017 carry it, it was great. It was big into like, we're getting back some of the taxes that we paid, that was the Cares Act. Now it's gone again, and we just carry it forward. But you have an indefinite period of time that you can carry it forward. It used to be at, if you could carry it back, three years carry forward 20. - Yes.
- And now it is, you can just carry it forward, but you're limited to 80% of your business income in any particular year when you carry forward, clearly smart, right? - So we'll never completely wipe out your business (indistinct) anymore? - No, that's kind of stinky. I kinda I don't like that. Not so happy.
Question and answer. There's a few questions, I would just answering one. - (indistinct) do kind of a job. - Yeah, everybody is knocking. Like they've already answered 56 questions.
Somebody says, my question is if Anderson Advisors that made a video show in the process of selling your primary home to an S Corp, but still leasing it as a way you can use 121? Yeah, Clint actually did one, I've done one. I believe I'm teaching it actually, what's today? - Tuesday? - Tuesday. - On Thursday to a bunch of lawyers for continuing education on 121, it's all about that. But what it is is you can actually double up 121 in 1031. A lot of times we're talking about just houses that have runaway in value and you don't want to pay the tax on it. So like you're up a million bucks, you got to $250,000 exclusion or $500,000 exclusion, we can do a 1031.
But also if you have part of your house, that's been a home office where you are recapturing depreciation, or if you had a separate unit that was only for running an opposite office and you were doing it as a sole proprietor where that thing didn't do. So there's a way to double up on it. It's actually, oh, let me see if I can remember. I remember it was 2005-14 is the revenue procedure 2005-14 is the revenue procedure that says you can do that. So your accountant, when they tell you that you're full of do hickey, you can just point them straight to it.
Why that stuck in my head? Nobody knows. Some of those numbers just get wedged in there and then nothing else can get in. I can't remember composite, but I can remember is a silly rev product that I read 15 years ago. - How can get remember what there was by sending them Tax Tuesday? - I'm telling you. Short-term memory loss.
Jeff's. - All time (indistinct). - All right. (laughing) I've converted my primary home to a single or short-term rental this year. If I complete 100 hours plus of service of active participation is actually material participation and more than anyone else can I deduct the losses from my W2 wages active income? Jeff? - Yes, if you're materially participating in your short-term rental. And as we talked of it's a rental, but it's not, so if it's seven days or less, it's considered non-passive income. And because of that, if you are materially participating- - Oh, I love this one.
- You gonna contradict me. - I'm gonna make so much funny. - Okay. - I'm not gonna contradict you. I'm just gonna say that you're making so many assumptions that they said short-term rental. How many people have you met that said, "Hey, I have short-term rentals."
And then actually we're short term rentals? (mumbles) (laughing) I've been doing a short-term rental, I'm renting it out at a month at a time. You can hit me now. - No, just- - There's three levels. There's the seven days or less with services, there's 30 days or less with substantial services and 30 days or more with extraordinary services.
Those are what qualify you for that potential to make it non rental income. Then you go and you look at it and you say, "Oh shoot, am I materially participating?" So if it's not rental income and it's ordinary non passive income, or it's just ordinary income, am I materially participating? And the reason this is important is 'cause Jeff and I, like I always use the analogy that Jeff opens up the pizza shop and I'm a silent owner. I'm not materially participating, Jeff is.
if there's losses, it comes the losses that get handed down to me, I can't write off. Unless there's other passive income 'cause I did not materially participate. So my income from being a silent partner is different than his, which if he had the pizza shop and he's running it, he's a material participant. So when you look at your primary home the question is, is it rental income? And if not, did you actively immaterially participate? They actually, I'm using active now it's material participation. Did you materially participate? So under the facts that you've given, chances are, you could use those losses, including accelerated depreciation against your W2.
However, it's no longer rental income. So you cannot use those hours of material or participation towards any other real estate activities you have, only on that particular activity. It's not rental activity.
So that could cause you to lose real estate professional status, for example. So, if this is all you're doing and you took a house and you made it into a short term rental, and you're able to accelerate the, if I'm able to accelerate the depreciation and take a big one, big loss this year, it'd be great to offset my W2 wages. Now, caveat, if you don't have if we get you too low, you're not gonna qualify for loans. It's gonna be really difficult for you to acquire more real estate. You're going into lower tax brackets like, I'm fine with big deductions at 37%, I'm not so fine at 12%. Like, why are we wiping out 12% tax? Like I'd climb over glass for 12% tax, most investors would at some point.
So don't screw that up. I would just say, "Hey, you know what?" "I don't need to take it all in one year." "Maybe I'm spreading it out over a period of time "and maybe I don't want to use it at all "because I need my wages." - So this material participation test really as important here. If you meet that test, it's better than the rental deductions.
If you don't meet that test, it's actually worse than your rental losses. - So it could be. - Yeah. - Because- - Because you have the passive losses that you can called real estate. - Correct. And you lose your real estate professional status when you're grabbing them all together. And it can get, "yeah, absolutely."
So, somebody says examples of materially participating. So, again, there's two categories that we always look at. There's the real estate professional side where it says, "Am I involved in a real estate business "with more than 50% of my time?" And that is, "Am I involved in the development, "redevelopment, construction sale, "brokering of real estate?" And in order for those hours to qualify, I don't have to be working on my stuff. I just have to be more than a 5% owner of the business that's doing it. So I could be a real estate agent and knock that one out.
For the material participation, it's a combination of spouses. So if Jeff and I were married, it would be our time together, and there's seven different tests. And the easiest one is I self-managed, I don't even have to keep track of my hours.
Or if somebody else is managing your properties, meaning engaging in the activities with the tenants, screening, collecting rents, all that stuff, then I would have to do more than a hundred hours and more time than them. If I don't want to have to worry about more time than them then I need to hit 500 hours total and it's per property, unless I treat them all as one. I know that some of you guys are like, "Oh, Rudd, what did he just say? That's why you come to our classes and we'll teach you plus you just talk to our people, they're good at it.
All right, how should someone set up the business for Airbnb? So this is a great segue. These things are kissing cousin questions. - My favorite still is you have a property and go start us off by saying, this is not your principal residence, that you're Airbnb. But if you have a separate property, you rent that property to your corporation as a long-term rental, and then have that corporation do the Airbnb work. - So what Jeff is really well putting is for somebody who is aggregating their real estate activities with other rentals, and you're gonna qualify as a real estate professional, the appropriate structure would be to make sure that Airbnb is considered a rental for your purposes, by renting it to your corporation, having your corporation actors to host. So the coast would be paying on a monthly basis.
Everybody's paying the host on a short-term basis. So that's still rental income. If you only have an Airbnb or all you do is Airbnb and you have substantial income. So this is for example a medical professional, and they're bringing in $750,000 a year, and they own a duplex that they Airbnb, they should self manage that at least in the year that they do the accelerated depreciation, because they can unlock that as non rental income, ordinary income and converted into ordinary loss with that depreciation, which will offset their W2 income, their 1099 income or anything like that. That's how that works. But there's a flip side to it.
If you make money in you're materially participating, you're gonna have social security tax on that. So there's two sides that we look at. We're talking about the loss, but if you're making money at Airbnb, it might make sense to do the corporation as well, to avoid getting hit with self-employment tax and all the income, if you're making a bunch of money. We have clients that are clear in $300,000 a year, for example, I'd much rather that be rental income or a good chunk of it, mix it up and avoid some of the pain of the self-employment tax on it. Anyway. So now we're back into Q&A.
I'm just gonna, if somebody says, "Did you just say you and Jeff were married?" No, I was saying, hypothetically. Jeff and I are not married. - He's not my type. - He's hurtful, hurtful.
All right, if you take regular depreciation, then replace windows, roof, and other large items, such as A/C, and want to take component depreciation for those items, do you have to make any adjustment to the regular schedule depreciation amount? - Sounds like we're talking cost segregation here. Unfortunately, most of the items you named are not subject to the shorter life. They're all subject to 27 and a half year lives. If you're replacing windows, replacing the roof, not repairing the roof, replacing the roof, other large items such as the A/C, so you're putting a new A/C unit outside the house? - HVAC, I believe does it, does HVAC- - That's only for commercial. - Oh, commercial HVAC. So we're assuming this is a residential, but- - Yeah, commercial HVAC, I think has a 15 year life now, which 15 year life subject to bonus depreciation.
- Anything less than 20 years of depreciable life we can take in one year under 168(k) this year. When they say regular depreciation, they're talking about either 27 and a half or 39 years, depending on whether it's residential property or non-residential property. You don't have to keep that. You could elect out of that with the change of accounting election and get a cost segregation engineering study that says, "Here's all the pieces of the building." Some of it's gonna be five-year property. The best example I can give you is carpeting.
Somebody is gonna be like 15 year property, like sidewalks, fences, the shrubbery, all that. - Swimming pool. - Swimming pool. Jeff wants you to write off a swimming pool.
You would have a swimming pool in a rental? - Do you think are some liabilities there? - This is tiny little bit, unless you had a lot of insurance. Maybe if you're gonna get like a bunch of money for it. But all of those items could be accelerated and written off faster than the 27 and a half years or the 39 years.
So there's a tax reason to do it. Usually it's just playing with the numbers. - So yeah, to answer your question do I make adjustments? The pretty much adjust everything when you do these cost segregations and do this component depreciation where you're pulling items out, maybe your cabinets, all the items Toby just talked about. And they're gonna adjust those numbers and reclassify them.
Like we use cost segregation authority- - Cost SEG Authority. - They give us a report that says, what all the items are and how much depreciation they have, and how much past depreciation they should have. And all it gets reconciled when you do that, what's called a change of accounting methods Form 3115, to make that adjustment for this cost segregation. - And those are like, if you wanna learn more about that we do discuss it quite often during the Tax and Asset Protection Workshop in brief set, but we go into great detail on a couple of the webinars.
You can just look on our website. And if it's the one I taught with Erik Oliver from Cost SEG Authority, we go through the examples and we break down a bunch of actual Cost SEGs that we've done, and you could see them. I do a lot of examples even during the Tax Asset Protection Workshop, but it's always great to actually see the numbers and see, this is what they were gonna have, this is what they got afterwards, and this is the impact from a tax standpoint at their tax bracket. So when you see somebody who's putting an extra $40,000 in their pocket, in actual dollars and tax dollars, not deduction, but actual dollars than it usually is like, well, that's a, yeah, it's worth it for me. I'll spend 2,500 or whatever it is to do the study and get it done because I'm gonna have a whole bunch of cash in my pocket.
I can go out and buy more real estate. Can I be a real estate professional by running short-term rentals? Jeff. - No, you cannot. Because, well, this goes back to- - I love these questions that I grabbed these questions just to torment Jeff. - Okay, you remember all that stuff Toby said about the earlier short-term rental? These are true short term rentals where they're less than seven days or less than 30 days of substantial services, they're gonna be carved out of your rental activities. There're considered trades or businesses.
It says if you're running a hotel or a resonance in or something like that. So those are not rentals, they do not qualify you to be a real estate professional. - From a standpoint of the 750 hours, would that be true? - I would think it would count for the 750 hours you are managing property. - Yeah, I guess you would.
So for a real estate professional member that there's 750 hours plus 50% of your time. And there's also the material participation. - No, where I see us being a problem is, if I have true rentals and short-term rentals, this could hurt my real estate profession. - It's actually, there's a couple of cases where it did just that.
Somebody had six rentals, three of them were short-term, they aggregated all six together, and the court said short term rentals are not rental. It was seven days or less with services, they were cleaning in between and they were providing linens and they had some foods in there and coffee and all this stuff that you wouldn't normally give a tenant. So it was with services, it was no longer rental income, it was ordinary income. And so the court said, "Well, that activity is no longer rental income." "It's no longer part of 469." So then when you do the next task, which is all right, did you materially participate on, you'd have to do each property, remember, but I could aggregate all my rental activities together as one economic unit, now you have a problem.
'Cause you're gonna have, that you can't count those. And that's actually been, there's a couple cases where they lost because they were playing the, I'm gonna be the Airbnb king and screwed up the real estate professional status. The way around this, Jeff mentioned it earlier is you rent all, like let's say you had three Airbnbs and three long-term rentals, you want six long-term rentals. Yeah, I'm back to using my fingers again, you want six long-term rentals, six. So what you would do is lease long to your corporation and let it do the hosting. And so you'd have a month to month.
So now you'd have six properties that all are long-term rentals. When do you make that decision? It's usually a wise idea to talk to your accountant and make sure you have a plan of attack so that you don't screw something up that's gonna leave a mark. So also you may say, "Hey, you know what? "I don't want seven days with services. "How do I avoid it?" All right, let's make sure that you're always doing two weeks.
Then as long as it's not substantial services, you could do the cleaning, you could do potentially linens, but as long as you're not doing a concierge and feed them every day, you're gonna be fine. Hey, if you like this sort of stuff, follow us on social media. It's aba.link/, your favorite social media, Instagram, Twitter, LinkedIn, YouTube, Facebook, all of them. You could see we have a lot of content out there guys.
We are truly education-based. We wanna give you as much information as possible so you can make really good decisions. We love our clients to be prosperous because there's really, there's no tax problems that we can help solve if you're not making money. Somebody says, "Why is it better for the Wholesale Land/Trust, to be a C Corp instead of an S Corp? I am buying land and subdividing on paper only, but doing engineering studies, et cetera, am I looked at as a dealer, again, this is only land. - I don't have a good answer for this.
So I'm interested to see what you have to say. - Yeah, so if you are a dealer you're in the business of buying and selling real estate. So you buy real estate to sell it.
There's a section in the code and I wanna say 1236 or 1237, I forget. Where if you subdivide land without adding substantial value to it, and you've held that land for at least five years, and you're not a dealer, then that doesn't qualify towards your dealer activity. So if you're just buying land and holding it for a long period of time and subdividing it, it's gonna be treated as a capital asset until you cross over to six deals in a year. And then when you hit six deals, 5% of that becomes ordinary income. So this is like, it's just one of those things that I don't even care about the 5% 'cause honestly, the transaction costs, we'll use those expenses to offset the ordinary income first. So like, I really don't care.
But what I do care about is are you a dealer? 'Cause if you're a dealer, then there's no exceptions for you. So I see this all the time, people say I flipped land, but I'm in this exception. And I'm like, well, the exception has a bunch of rules.
You violated this one (laughs). Well, I didn't know there was rules. Yeah, and they're hard. So we put it in a corporation stead, so you do not become a dealer. And the reason we do that is 'cause it's active ordinary income. We don't want you to get hit with the self-employment tax, so we use the S Corp.
You take a small salary, you can defer it all into a 401(k), the rest of it comes out to you is not subject to self-employment tax, social security, old age, disability survivors, whatever you want to call it, FICA, it's all the same thing. It's that extra 15.3% tax. Why would you use the C Corp instead? You might. If I didn't want the income to flow onto me, if I didn't need the money and I was in a high enough tax bracket, I might say, "Hey, you know what? "Just leave it in the C Corp."
Let it pay tax at 21%. - Yeah, and that's what I wasn't sure about because, if the S Corp did have dealer status that does not flow through to the shareholders, correct? - If the- - If the S Corporation is considered a dealer that does not necessarily have to- - It wouldn't contaminate you as a dealer. - Right, correct. - Correct. But the income would still be ordinary income. - So the other question I had was the engineering studies, does that cause any issues here? - Subdividing without more is not, then they used a few examples. I believe you could even put in reds.
1237 is the section. Somebody was kind enough to pull it up. Thanks, Joseph. And it basically gives you some things that you could do. If I put it up here, I could look.
Let's see. Yeah, I'd have to go read it. But there's subdividing without more is not gonna get you, is not gonna rise to the level of substantial improvement. If you put in sewer and things like that, yeah, you're probably gonna be ordinary income, no matter what. But there's always a work around guys.
This is the thing. So even the flippers in the world, like a lot of times you'll see somebody doing a big development and they wanna lock in their gain, for capital gains before they do the development so maybe they held some property for quite a few years and they wanna do a big development on it. Sell it, lock in your capital gains, do an installment sale. Then do the improvement and lock it into a corporation.
If you do the corporation, you said like, "Hey, now I'm regretting that I did this, "I'd rather keep it long-term," you do the opposite. You develop it in the corporation and then sell it at fair market value over a long period of time to somebody else. Now, technically, you can't do an installment sale or you're gonna have to recognize all that income, but you're recognizing it through the corporation to be able to give us some options to shelter, some of that income from hitting you. So it's always gonna be a weighing test, whether it's going to be the S or the C Corp.
I think that for the most part, we're saying don't do any harm, so you use the S 'cause it's gonna flow down to you regardless, but sometimes I'm gonna use a C. It all depends on your scenario. There's no one size fits all in that one. So, it's a conversation that you have with the accountant saying, "Hey, you need the money? "If you don't need the money or you in a high tax bracket, "is that gonna stay or is that gonna go away?" And pay maybe we'll let it be an a C Corp, because we know we have a bunch of expenses. Maybe you're doing a reimbursement for medical, dental, vision, whatever. And you say, "Hey, we're gonna eat that away over the years."
"So we have a one-time kind of tax hit "at the corporate level, "but we know we're gonna offset that at some point." So, anyway. I know we're going a little, look at that is four o'clock. "I plan to donate my paid timeshare "and does that relieve me of my maintenance fee yearly? "Due to COVID I have not used my week "and I called the company and refused to give me," I'm going to show you a word. "And they refused to give me credit for the time, "and I paid the yearly fee as well. "How can I illegally make them accountable for this?" - Timeshares.
- Timeshare. Jeff loves timeshares. He's visualizing being on the beach or wherever it might be.
- There are two types of timeshares. There's the Right To Use timeshare, and there's the for deed timeshare. When you donate a for deed timeshare, meaning you actually have titled to that timeshare that has value possibly, you're actually contributing the title to your nonprofit.
Now, the problem with that is, yeah, you could have a charitable contribution. However, many of these timeshares are trying to be sold for like a buck and they still can't get rid of them. - It's 'cause they come with the liability.
- Exactly. Now, some of these, the Right To Use timeshare, in my opinion, you don't own anything. IRS kind of shares this opinion, which is why you can't deduct mortgage interest all the timeshare, you don't own the property. Some non-profits will take these, some will take the others. They're either gonna use some personally or use them within the entity, or they're gonna try to sell them off through a third party.
So, before you ever do the donation, and it sounds like you already have, you need to make sure you know, who is taking over who, now has responsibility for this. - There's charities that will take them guys. Whenever somebody gives an asset, what are the requirements? Let's just say that it's a timeshare that is worth $10,000, Jeff. What are the requirements to take that deduction? And are there any adjusted gross income limits that we have to be worried about? - The first test would be what is the fair market value? - You have to get an appraisal of the timeshare so they're gonna look at the value of it minus any liabilities that come along with it if there's debt, for example, or if there's a liability like these continued fees, it's gonna adjust the fair market value. - For me, the biggest value behind donating and timeshare is to get out of that maintenance fee liability. - It's gonna become the liability of the organization that takes it over.
- Yes. - Charities will take these. Charities will bid them out and use them. Like people will go to the silent auctions and get the one week and such and such, that's how they're gonna use them. They're gonna use them to generate income. And they're gonna hope that there's a big enough chunk of money that's coming in, 'cause like let's say Jeff goes in and there's a week in Barbados.
And Jeff goes nuts 'cause he wants to do good for all the little kids and the little league or whatever it is that's the charity. Maybe it's American Red Cross, maybe it's Haitian Relief, 'cause we had these horrible earthquakes, whatever the case. And Jeff says, "I'll pay $2,500 for that." That's actually a pretty good price, right? But let's say that the fair market value for that week is $2,000. Jeff isn't gonna get a deduction for 2,500.
He's gonna get a deduction for 25 minus the actual fair market value of what he received. He got something in return. If Jeff bid $5,000 and the value of that week was 2000, the charity would get $5,000, Jeff would get a 5,000 minus 2000 deduction against his adjusted gross income on a schedule A.
If I give the charity a timeshare, it's going to be the fair market value of that timeshare calculating in any of the liabilities that come along with it, hopefully it's a very good positive number, and then I'm gonna deduct that against my adjusted gross income, depending on how long I owned it, whether it went up and down in value is gonna dictate whether it's gonna be an appreciated asset and subject to the 30% rule or whether it's gonna be the 60% rule. - If you look into this and just do a Google search, there's lots of people scamming saying, they'll take your timeshare for donations. So you need to be really careful.
In this case it says, how can I legally make them accountable for this? Can you pull that donation back if they haven't taken over? - When you deed it over, they assume responsibility and most charities they're gonna do the paperwork. So you're gonna basically run it through almost basically an escrow. Or they're going to sign off and say, "It is now my property." Which means they assume the liabilities that go along with that property.
So you don't just deed it and say, "Here you go." You actually have them and work with their donation department saying, "Hey, we have to execute this as a transfer." You go to a title company and you make sure it's done the correct way.
If it's a non titled timeshare, I think you're gonna have a lot of trouble getting any value out of it, honestly. So, that may not even be worth dinking around with. But again, most major charities will accept these. The question is, will they accept yours based off of the facts? Like they may say, "There's no way in heck, "I'm ever gonna take this particular timeshare "because it's more trouble than it's worth, "and it's more expensive than," in which case they'll just tell you, "No, we don't want it." It's like going down to the I've done this, you go down to the local thrift store or whatnot, and you show them TVs, I didn't know they didn't want TVs. We had a whole bunch of TVs.
I go down with TVs, they're like, "We don't take TVs." And like, "They're really nice TVs." We're like, "You don't want a bunch of TVs?" "We don't take TVs." Like sometimes they do that and you're gonna be annoyed. So you just find, you go someplace where they do. YouTube.
Hey guys, you can always check out a whole bunch of good content on YouTube. My partner, Clint has a great real estate channel. We have a whole bunch of stuff on ours on ABA.LINK/YouTube. And if you liked this sort of thing, chances are, we did a video on it at some point.
This is so much fun. I'm watching some of the questions going back with Elliot. And I liked an, she's like asking some things. "I'm trying not to be a twos." I love that. That's one of my favorite words.
If previous multifamily owner took accelerated depreciation on 15 year items. So the owner of the property before you accelerated their depreciation, instead of waiting 39 years or 27 and a half years, I wrote it all off in one year. How would I know and would that impact purchase price? Jeff. - The only way I noticed that, this is you don't care.
- It's a good way. - What the previous owner did is doesn't impact you in any way shape or form. Once you purchase that property, everything starts over. - You're now looking at their balance sheet, 'cause if they own it, like they owned it for five years and they have a huge chunk of depreciation, so what happened here? Did you retire something? Did your roof go bad? Like what's going on here? Oh, we accelerated a bunch of that components. You don't care to, you don't care.
- If they did a cost segregation last year, the year before they sold it and wrote off a whole bunch of stuff, you could do the same thing in the year that you purchased it. - Yeah, it doesn't matter to you, i