Revocable vs Irrevocable Trusts: Tax Differences Explained

[00:00:00]all right guys you are listening to tax tuesday where we bring tax knowledge to the masses my name is toby mathis and i'm jeff webb and uh we're gonna have fun today going over a bunch of questions i was just looking through them if you couldn't tell that you weren't on a title screen when you came in but i just like to do things like that all right so let's go over rules because we've got a lot of stuff to go over we have a state of the union tonight this is going to be really exciting um i just probably shouldn't bring up any politics at all because we'll have it the the chat will explode hey let me know where you're from right now as you come in here just tell me the city and state if you're willing to jeff and i like to see where everybody's coming from let me see if i can see how many people are on oh look at that so vegas vegas jeez you're in my backyard coeur d'alene uh anchorage austin minnesota california redwood they're just flying through oops chicago miami i love miami irving sandy utah san jose boise for real life military boise for a life grambling fantastic augusta home of the 280a deduction uh white plains new york pembroke pines pembroke pines florida oregon atlanta bordentown new jersey charles carson carson yeah carson california south lake tahoe um joan schomberg what up joan i haven't seen you forever that would be uh thug's wife oh okay and dougie doug who's been with us forever i know so we have about 400 people here 450 of us but uh doug's been with us since practically day one 1999 all right minneapolis minnesota the land of ten thousand swamps don't candy coat it greg tell us how you feel chico saratoga springs uh pete you've already got a bunch of these others so we got people from all over the country so toby looks like i will be in vegas in october you better be in town i'll be in town in october i'm sure we go to the last time sure you were here i think we went to batista's hole in the wall you ever been to batista's i have not been to batista it's a lot of pasta and a lot of wine all right oh is sherry nicer to you in person than sherry's always nice to me so she harasses the heck out of me on chat no they're good people i actually took uh we rented motorcycles once all over town went out to uh what was it we went out to valley of fire on the bikes red rock you know there we go um tried not to get hit by things vegas it's like you're taking your life in your own hands when you get on a motorcycle out here but anyway you they were much better than me i was driving uh what was it an oh wait uh street bug and they go cruising on the freeways and i feel like i feel like i'm going under every semi because i don't have a fairing or anything to block it's like they're just zipping through and i'm like i feel like i'm gonna end up being somebody's bumping their tread all right salt lake city we got a whole bunch of people from everywhere hey uh this could be fun today we're gonna go over a whole bunch of questions you can feel free to put stuff in chat but more importantly if you have questions that are on your specific situation i have dana troy elliott dutch ian pio i mean i can't believe we have this many people on around uh like we're two weeks away from a major deadline christos and patty like is that like 10 people we've got like 10 people on to answer questions not all of them were accounts we've got some tax attorneys got a bunch of accountants in there got the head of our bookkeeping department so if you have questions today is the day to ask them so if you have some stuff out there that's burning question get in there i see ian typing right now christos they're already bumping through questions so we're not going to send you an invoice everybody says why do you do this right because we're weird yes uh if you have other questions during the week uh whatever just send it in via tax tuesday to anderson advisors here's what we do if you ask a general question um we'll answer if you ask very specific questions then we'll just make sure you're a client first and it could just be as simple as being a platinum client 35 bucks a month and our guys will we'll get back to you to answer um yeah we are that free with our with stuff we figure it's hard enough a lot of people play hide the ball and that's frankly how accountants and attorneys have made their living over the years but we don't do that it's not as much fun all right so let me get started let's go over the questions maybe this will actually move let me see if there's no see this one doesn't even want to do it my little buttons don't want to work so here we go uh opening questions i bought a property in georgia in 2021 doing renovations and repairs planning to rent it out in march 2022.

[00:05:18]because i didn't collect rents in 2021 i can't claim this property on my 2021 tax return correct can i deduct the expenses i had for renovations in 2021 in my next year's tax return question mark 2022 so we'll answer that is youtube income considered passive or active question mark great question a lot of people are making money on youtube i'm gonna pimp my uh youtube channel i'm gonna give you a link at some point and say please subscribe because i'm behind clint and he's got way more than i do i manage properties for a relative as an employee of a c corp during a banking transaction i personally received the rents through zell in 2021 start of 2022. those rents were then redeposited into the property owner's personal bank account will i have a problem with my 2021 tax return do i need to issue a 1099 to the property owner for 2022.

[00:06:15]we'll go over that 1099s are always funky so did he say do i need i don't think he said he got a 10.99 so we'll go over that one here in a little bit i've been filing my taxes on schedule c and all my business income is loan interest from private lending schedule c sole proprietorship right my first year 2020 was a net loss this year 2021 and hopefully all future years i'll have a significant profit if i continue to report the interest income as gross receipts or other income on schedule c i'm assuming i have to pay sc taxes on the profit i'm thinking maybe i should report the interest on my schedule b and my expenses on schedule c what are your thoughts should i be paying sc tax on interest income can you elaborate on revocable versus irrevocable trust from a tax standpoint uh how can i actively participate in my short-term rental m while maintaining a w-2 job great questions great question so far all right if i use a property management company for short-term rentals short-term rentals is just airbnb guys uh somewhat practical due to distance from the property does this automatically exclude me from demonstrating material participation or are there other test activities that could demonstrate material participation beyond a property management company assisting question mark good question my husband receives guaranteed payment shown on a k1 as a limited domestic partner of an llc that's odd but we'll go over that he is taxed as a sole proprietor to lower taxes can he create an s corp for his guaranteed payments and still be a limited domestic partner of that llc again really good questions we've been seeing like we're getting hammered now with questions we're probably getting 500 a week but we're seeing like the types of questions you guys are asking is versus years ago when we started this few years five six seven whatever the years ago it was we started doing tax tuesdays it's pretty amazing we hear residential home exception is 250 for single if i buy three houses this year stay in the first house two years is two years stay in the second house two years and live in the third house two years on the fifth years after buying first house sell it and use the 250 exemption on the fifth year after buying second house sell second house and take 250 on fifth year after third house take 250 residential home exception assuming profit of 250 each house on sale would this work really good question we're going to map that one out right might have to write it out my my company is based in the us we have a customer from thailand my supplier are from honduras i have an american account i would like to know how to pay my supplier do i withhold taxes they are not residents or citizens of the usa really good question and not asked enough right so those of you guys are out there and then last question it sits on its own i am learning or i'm looking to learn about small landlord exemption which allows small landlords to deduct real estate losses from their w-2 income i'm trying to figure out if i qualify for that we will make sure that you understand the rules all right so we are going to get started before we do that by all means jump on and subscribe for the youtube if you like tax tuesdays if you like getting like i'm probably putting out two to three videos a week now on my youtube channel um a lot of it is like you could actually see some of the stuff here um it's depending on the topic obviously some people like it some people don't but there's a lot of them that like really easy questions that you can just go google in there and uh and find out uh whether we've asked it if somebody's asked it before and we answer it and then you can always put in things that you want us to do videos on so we love doing it i like doing it and i'm trying to build up the youtube thing i don't know why it's like we just clinton was way ahead of me on that one i used to have a channel it was another other company we merged it into to his and then he kind of was doing his own thing and i said you know we'll se make a second one not realizing how far ahead he was and then he likes to remind me he's like hey i have like twice as many people as you so i have a good sense of why you're producing more videos hey like it's we've been partners for a long time we're slightly competitive but he does a great job on youtube i said hey i'll come join you so you guys got to help me please help me all right i bought a property in georgia in 2021 doing renovations and repairs planning to rent it out in march 22. because i didn't collect rents in 2021 2021 i can't claim this property on my 2021 tax return correct can i deduct expenses i had for renovations in 2021 in my next year's tax return which would be the 2022.

[00:11:11]good question jeff what are you thinking so yeah you're correct that you cannot claim those deductions in 2021 do they do they just disappear no they don't disappear uh they actually what happens is the majority of those renovation and repair expenses are going to go into the basis of your property so you will get to depreciate them uh if you do a cost segregation i'm sure this will come up again that you'll you'll be able to possibly carve out some of these deductions and is that called placed in service is that what they refer to yes placed in service means it's available for rent so it would become placed in service in march of 2022 everything they've spent up to that point is just going to land on 2022 yeah there's a there's a possibility that there are some true repairs in there and you'll be able to write those off in 2022.

[00:12:09]how about 2021 2021 no what about property taxes um no you're not you're basically him right off anything it's just considered personal property uh i think they would get the taxes wouldn't they insurance things like that they could technically write off the taxes on their schedule a which is probably not going to do them anything okay so that's considered personal because it's not invested yet so this could be yeah so it's basically personal property otherwise you lump it all into 2022. yes uh and the whole thing is it's not considered rental property because it's not available to rent so if they had purchased it in 2021 this is a planning tip so 2021 and they had just rented it out a few times what if they just made it a short-term rental they could have done that um and we've had clients do that where they started off as a short-term rental and then converted to long-term they put it into service make sure it's an investment property then fix it up and put it back in a rental property can i depreciate all the way going back to day one uh you can put it as soon as it's available in short term yeah so it makes sense guys that when you're buying properties that you're going to do a rehab on you might want to buy properties that already rented that are getting close to the expiration of their lease or put it into a rental pool for a period of time to get it to make sure it's into in service even if it's just hey i'm just going to put it out there for a year and i know i'm not i'm going to have to fix it up because you get such a better deduction that's only if you have a tax appetite if you don't have any passive income at all and you're not a real estate professional you don't qualify as an active participant then it's a no harm no foul yeah so what do you think about and we we've had this come up that as we said we started out we were not short short-term rentals airbnb such i go ahead and deal with that cost of get segregation while it is a short-term rental so first off i love that so what jeff is saying is let's say you bought it in 2021 towards the end of the year you rented it for an average use of seven days or less that's considered ordinary loss if you were the one handling the rentals and i say rentals the airbnb the short-term uh rental and you're materially participating those losses actually become active uh or non-passive and offset all your other income so it can offset your w-2 because it's not rental uh just be clear seven days or less is not rental activity it's you're basically a hotel it's a business so you could do a cost sag which is breaking down that property it's a much smaller basis and then when you improve it the following year you can do the exact same thing with that because you're going to have the invoices it's really easy to say hey this this is all stuff that we added in you could tell which property is which yeah especially when you're considering something like a kitchen or bathroom tear out a lot of it you're going to be able to deduct this bonus depreciation and so you could get a nice big fat loss if you do that if you keep it as a long-term rental and again if you create a loss it may not be used by you you may have passive loss which cannot be used against anything other than passive income so unless i have a whole bunch of other rents i'm just going to have a loss that i'm carrying forward so it doesn't really do me any good or maybe i'm in a lower income and i don't really want the loss you know i'm like looking at it going i'm making 75 000 a year do i really wanna you know thirty thousand dollar loss no maybe not you know i'm in a low enough tax brackets where it's not hurt me and i plan on making more so i might save it but those are your choices that's the whole thing with tax planning as you're making the which way should i go but just going with your eyes open but the calling of this question is really hey can i even what can i do i don't get to claim the property technically you can claim some things on your personal return but probably the better route is just to add everything to basis and and do it on 2022. yeah wow this is the shortest question i think i've ever pulled out of there is youtube income considered passive or active it depends on whether you are passively or actively participating uh and what we're talking about is material participation um and i'll give you the easy test there's actually tests too with substantially all of the activity is performed by me so my youtube channel for example that's going to be active forever because i'm producing it all on videoing and blah blah we have a whole bunch of other people on there so it's not just me but i'm involved i'm materially participating now let's say it's somebody let's say that i wonder how i do it how could i not participate maybe if i'm a silent owner in a business and that income's coming in and flowing through to me so maybe you're in a partnership or an s corp and you're not materially participating you just were the money person and you have a youtube channel for your business and incomes flowing through that would be passive because you're not a material material participant and i guess you could be the pretty face when somebody else is actually doing all the research and the work for what and they're just handing you what to read on the screen yeah and i always look at this because kind of this is one of those weird areas where i tend to look at royalty income is is portfolio income and you're looking at it saying it's not it's never subject to self-employment text just the royalty unless i'm the creator i guess i sometimes i don't put that caveat on there unless i'm the one who's doing something so like if i write a book and i'm getting a royalty stream i'm that's going to be active income right right if i create some code or something and somebody uses it down the road and they have to pay me a royalty for it in that case it's probably passive right like it's like if somebody's using my my patents or something then i imagine i'm going to get something different or if i buy an asset that has royalties like i buy a music library wouldn't that be passive i would not pass it but portfolio yeah and one of the things you you need to consider this kind of goes back to the other question about uh do i want my income to be active or passive if i have rental properties or showing losses then i want some passive income yep so i may want but but this isn't passive his portfolio wouldn't be passive if it's i'm in a business that i'm not performing well yeah i'm referring back to youtube yeah yeah yeah but i mean even if it's if i buy a music catalog and it's producing portfolio income that's interest income that's not technically passive if i am an investor in a business with you as a partner but i don't do anything right and it's kicking me income or losses that would be passive it's kind of weird right yeah you guys seeing how it's get the the waters always get a little bit muddy that's why you want someone that's kind of navigating and sometimes it's the facts and circumstances you're just looking at what did you do what was your involvement in this thing and that is actually the last test on the material participation test backs and circumstances yeah jeff likes to be cpa and he likes it it is the it is the material participation is facts that's that's test number seven right so there's yeah we'll go with that yeah there's like seven different things i always i never get past the first three i'm always like and then there's a whole bunch of crazy ones but facts and circumstances is the last one for material participation the other thing you could do and you're going to see this pop up and a lot of things is it's not so much is it passive or active it's whether it's going to be uh subject to self-employment tax so you know active uh involvement material participation material participation is going to subject you to tax under old age disability and survivors of medicare which is going to hit you at about 15.3 percent it phases out at 147 000 ish i think it's 47 seven or something this year uh a portion of it is but you have you get hit with this extra tax which is not insubstantial it's a pretty big hit right the way to avoid it if you're doing youtube or anything where you have income that is borderline is it active is it just regular ordinary is put it through an s corp make sure that you have an llc taxed as an s corp or just an escort and then if you're making that money you can take a small salary for whatever it is you're doing because you might say hey i barely did anything i did a couple youtube videos it took me all of 10 minutes and i got this great response and i have this big following and i'm making good money monetizing it just letting youtube run ads on it why do i have to pay this extra tax and you know this is the easy way you say hey you worked three hours i'll pay you 200 bucks an hour so i'll pay you 600 bucks and the rest of it don't you know there's no self-employment tax no fica no social security whatever you want to call it um yeah we're seeing gamers making millions of dollars just sitting there playing their games but bringing money in from advertising from their followers yep and you don't want to pay any more tax on that than you have to we have some folks that uh three million a year plus uh doing marketing advertising doing clicks they create funnels and they really don't do anything it's not even their product it's just they're getting paid for having built the funnels and they're always like but i don't do anything i'm like i know you don't do anything except you're smart you've figured out how to build these funnels now you're sitting back letting the money come in um but that's another way you can turn that into uh into something that's not subject to self-employment tax usually in that case if you have if you have millions we're dealing with different types of vehicles you're going to be using a c corp a foundation more likely probably a defined benefit plan probably 401k you're using other tools that are in the toolbox maybe a conservation easement depending on what type of activity you're in you might even be doing a captive insurance you're gonna be doing some other things but uh it always comes back to ground like to this thing is like hey do i want to get hit over the head with an extra tax on that first chunk of money i'm making no let's see if we can avoid it it usually saves an s corp will usually save you somewhere in the ten thousand dollar a year range if you're making a hundred grand net so it's a pretty potent tool if you know how to use it right all right i manage properties for a relative as an employee of a c corp cool so you guys are doing it right during a banking transaction or transition i keep saying that wrong during a banking transition i personally received the rents through zell in 2021 started 2022. so you got paid somebody paid you instead of the c court those rents were then redeposited in the property owner's personal bank account well i have a problem with my 2021 tax return do i need to issue a 1099 to the property owner for 2022 jeff let me get on my account and soap box first off never accept payments in your personal name that belonged to somebody else never ever i completely trust that you did the right thing put it where they're supposed to be but it's it's the whole perception fight but they zeld you they threw it right in your account what are you supposed to do uh give them the correct information after the first time they do that yeah okay so they did it once no they did it for 21 and 22.

[00:23:55]uh i personally received the rents oh so maybe they did it more than once yeah i thought it was once okay anyway uh will this cause a problem on your tax returns and something you said when you were first reading the questions was did you receive a 10.99 for themselves that's what i was looking at gazelle's now reporting because all zell pay paypal and all the all the platforms are now doing it uh issuing 10.99 so you're not going to have a problem but if you did receive a 1099 for this money i would issue a 1099 to back to whoever the money was paid to yeah so two ways two ways to deal with it venmo yes somebody's asking about venmo zell venmo gofundme if you received money everybody thinks it's charitable yay it's like no it's not a charity gofundme is not a charity you still uh you're gonna get hit you're way over there i'm gonna move over next to you i keep seeing myself go off the edge all right i'm gonna be right here me and jeff right there all right so uh unwanted touchings right don't hey we're not going there all right so i have a problem um hr yes speed dial nowadays all right i have a problem with my 2021. so it depends on whether you got the 1099 if you did not get a 1099 no issue right you just say hey as long as every the employer or your c corp is collecting the information and saying i'm reporting it they are required to report it whether they get a 1099 or not if you did get a 1099 then you have two choices you call up uh the zell and say hey you need to switch the information on the 1099 and if they won't do it chances are you're doing a schedule c showing the income with the corresponding deduction for the exact same amount so you're zeroing out a c cor a schedule c and paying it over to the owner now a little note on these zell and uh paypals and venmo's and all these it's only supposed to be for business transactions and what they're primarily looking at is whether or not you have a business account if it's money you just transfer back and forth like i have doing transfers with my sister [Music] then they're not good it's 10.99 for that kind of thing i think yeah you're based on what type of account i have correct but but gosh you know i wouldn't be betting against him doing weird stuff right at the end of the day you have choices and how you want to deal with it uh but don't sweat it somebody says troy zell isn't doing the 1099 thing fyi since direct transfer from the bank venmo and paypal yes though uh oh so there's okay you guys are getting me so zell apparently is not subject i thought zell was i had heard that they were not going to do that which kind of surprises me yeah so maybe they do maybe they said it's direct transfer from a bank yeah i mean you're going to be the bank's run cell yeah but it's it's still me paying something to somebody well we'll see i have a feeling that they'll end up reporting someday maybe they won't but you still have to rep like hey no 10.99 easies get 1099 might have issue if you do get a 1099 ever mistakenly or you're supposed to get paid 10 000 and they put 100 000 on the 1099.

[00:27:35]do not just say they screwed this up i'm gonna report the ten thousand you call them up and you say you need to reissue the 1099. if they won't reissue the 1099 then what i would do is whatever you receive goes on your return if it's a hundred thousand you never received it you put a hundred thousand with a ninety thousand dollar deduction next to it with an explanation i never received a hundred thousand i actually received ten thousand this was to make the numbers right and that's a great point don't don't ignore those 1099s uh because you will get a notice oh it's the easiest thing right now they're just it's just going to pop it out hey i got a 1099 that jeff's has on his uh return that he never reported it's really easy for them to say oh this doesn't match you know hey they'll just add it onto your return and send you a bill they'll say hey they have the right to do your return for you oh you forgot this jeff here let me send you a bill with some interest in some penalties all right i've been filing my taxes on schedule c just means sole proprietor so on your 10 40. and all my business income is loan interest from private lending so they're a hard money lender my first which used to be like this crazy thing i always thought a hard money lenders were kind of like sitting in the back of a bar break your kneecap if you didn't pay it back but now it's more common right my first year 2020 was a net loss so they lost some money this year 2021 and hopefully all future years will have significant profit if i continue to report the interest income as gross receipts or other income on schedule c i'm assuming i have to pay se pre taxes on the profit i'm thinking maybe i should report the interest income on schedule b and then my expenses on schedule c what are your thoughts should i be paying se tax on interest income so you are you are reporting it correctly and you do not want to put well i'm assuming that all they are doing is money so they're holding this llc out to be a money lender you're a trader business at that point yeah you don't want to put it on schedule b because if you do that you can't put your expenses on schedule c it's now uh investment expenses and muslim won't be deductible uh the other problem with that is uh if i'm reporting that interest on schedule b i'm saying it's an investment and and if somebody burns me on a loan i have limitations i have limitations on how much i can deduct if you're a business you get a whole bunch of other deductions and so if all you're worried about is the sc tax there's the easy fix right s corp make it the escort pay yourself a small salary if you're going to pay yourself a small salary it's your business and this is your income put a 401 k on it defer a big chunk of it you can defer what is it 19 500 if you're under 50 if you're over if you're 50 is it 50 or over over 50.

[00:30:33]over somewhere in there i always forget i think it's when you're 50 or over then you could put another 6 500 so you could put 26 000 of your pay directly in there and then the business can also contribute an additional 25 up to i think it's 61 000 this year so you could put a lot of money aside if you want to in a retirement plan um but the point is is that that's the only money that you'd have to pay the self-employment tax on which would now be employment taxes because it's s corp and you're an employee as opposed to a schedule c where you're the you're the business there's no you're not an employee of your own uh partnership or your own um sole proprietorship so uh yeah s-corp was the first thing i thought of when i read this question yeah i kind of looked at it too and it you know so and here's the thing people get confused in this and accountants get confused on this you have portfolio income you have passive income and then you have active ordinary income you can turn any of those into active ordinary income if you make it into a trader business so real estate's the prime example everybody's like oh no it's capital gains or it's passive and it's like no if you're flipping a property everything that you do is active ordinary income oh it's rental it's airbnb now if you're doing airbnb in seven days or less it's not rental income it's active active ordinary if you're materially participating so there's all these things so you can make interest income royalty income capital gains you can make all that into ordinary income if you're not careful and other than stock trading that's the only one where they didn't really codify it you act as a trader that they don't for whatever reason if you qualify as a trader they don't make you pay self-employment tax on it but then again almost nobody qualifies as a trader it's fun to watch them try though and what's crazy about the trading is not doing it individually but if you're investing in like a private equity fund or something like that that does trading that's considered trader business income usually yep but when you do it for your own account when you're trying and you're making the marked market election you're doing all this craziness which we don't subscribe to here um then you put your expenses on schedule c with no income and your income on schedule d and you're like yes i just avoided the self-employment tax but what you just did is said to the irs please audit the crap out of me it's like you couldn't wave a bigger red flag and you always see those people just get torched and there are you know famous last words but i was a trader no irs always seems to find a way around it even when they make you a traitor then they find that you didn't do the mark to market so they're like yeah the thing i see with the trader status and market market is they find a number of different ways to attack you and then they just have to win on one they might have ten arrows they could shoot at you and you're like but i but i i managed to avoid nine of them you got a big arrow stuck in your head all right so well this is fun i have a bunch of red dots it looks like i have prepubescent uh slides here right learn the infinity investing steps to build a long-term wealth we have the infinity investing workshop coming up on saturday it is uh a lot of fun if you guys want to learn how to make money from basically we just sit here and we look over returns of individuals that make money we've been doing this for 20 some years you've been doing this for how long 30 something 30 something 40.

[00:34:09]no no killing smalls getting close the fact that you even use that that was like the 80s i guess you could uh but anyway come to the infinity investing workshop we work great real estate investors and by the way i never tell you guys who's going to be there but uh the speakers that i'm always there and then nicole de brasio she was season six of the apprentice she got to the final she got fired she was the last one fired by the donald on season six wonderful wonderful she and her husband are down in winston-salem right now working with us we have several hundred properties down there just doing a great job and she always comes in and goes over real estate and then uh p.o washington who's in our offices uh here she oversees our uh all of our i mean basically it's all of our investment folks but uh she's in charge of all the education that goes on uh on that side and does a great job of teaching the basics of the she calls it the bur method for trading i still use stock market landlord i like to make money uh in multiple ways on a portfolio and it's never been more important if you don't like to watch the 700 point declines or 800 or 600 depending on what the day is and then the market's going this way and that way if you want to quit thinking about it just rent it out and rent it once in a while and then kind of just forget about it i would say one of the best ways to make money in the market is to open up an account fill it with good companies that you really like like i'm drinking a starbucks i've been drinking this since 7 30.

[00:35:52]i'm getting closer i know it's kind of gross i just sip but good companies you fill it full of good companies and then you lose your password for about 10 to 20 years and then when you come back and you finally remember hey i opened up this account and i filled it with some really good companies you'll be surprised at how much it's grown that's what i say at least so just know it's saturday march 5th by all means come it's absolutely free we go nine to four and you're going to learn stock market landlord and the real estate side especially in real estate we're laser focused on mobile manufactured shared housing this year we're underbuilt by about three and a half million units for low to moderate income housing so if you're under seventy five thousand dollars you're being really hit hard by the increase in real estate expenses especially folks that are renting and so there's some there's some really unique approaches that is that is good for guys like us uh to implement people like us uh really hard to do for the big institutions because they always have to be so cognizant on getting that little bit of return out to their investors so there's so much stuff uh anyways so it's uh it i think it's gonna be pretty amazing what we're gonna see over the next two or three years everybody's saying hey when does the bubble burst i'm like i don't see it we're underbuilt we haven't been keeping up with the population growth we've been focusing really high on the higher end stuff you know uh we've seen just this radical growth in the cost of real estate inflation maybe if they raise interest rates but it's not gonna be anytime soon and they get it up there in that three percent range which i think would take three years their current pay is it's never going to happen i just don't see it i just don't see the like there's there's too low of inventory too much need and we just really have a serious issue for lack of housing for a lot of our population here so i just my personal view is is that you're going to see these areas continue to to be really really huge and i also think the shared housing i really think the shared housing is going to be something to watch especially in the denser areas but anyway we we love real estate i'm a real estate investor for years and years several hundred properties me and clint love to love to buy things we're not really good at selling them but we do like to accumulate and it's uh great to have that passive income because rental income long term rental income is passive all right can you elaborate on revocable versus irrevocable trust from a taxes standpoint yeah uh a revocable trust is something it's almost like a disregarded entity uh it's good for protecting assets your estate and so forth from probate but you can change it every day if you want it what's in what's out so uh the revocable trust is taxed as though it doesn't exist so if i set up a revocable trust say a living trust and put all my assets in there all the income that has been generated through there is still going to be tax to me personally yeah it's uh it's a grantor trust and they just ignore it so if if you're a living trust they always say what kind of return do i follow you don't as long as you're the great as long as the grantor's alive grantor passes away becomes an irrevocable trust and then technically you have a trust uh return requirement unless you distribute all the assets right uh even if i distribute all the assets i'm probably just showing a zero return at a 10 a 10 41 yes some cases you don't have to file one at all so when we talk about the irrevocable trust uh you have actually giving given your property away my mother had this with the farm and i had a hard time explaining to her that you don't own the farm anymore it's not your property anymore um it it belongs to the trust and after that the beneficiaries of that trust yep and just to make your head spin a little bit so an irrevocable trust generally has a tax return unless you make it defective for tax purposes so it's called an idiot if you ever hear in a if an accountant goes unnapped adapt an idiot they use something that just sounds kind of funky what they may be saying is i drafted it for other purposes than taxes and i made it ignored for tax purposes it's a grantor trust for tax purposes wyoming statutory trust nevada asset protection delaware asset protection trusts a lot of these are set up as digits where they're not for taxes if you're setting it up to get something out of your estate like you're doing an irrevocable life insurance trust you're doing a charitable remainder trust you're doing an asset protection trust that's a true spend spent thrift sell it's non-self-settled you have somebody else managing the asset it's no longer your you have no claim to those monies then it could be doing its own tax return um and at that point you kind of have two choices if you have capital gains you can apply it back to to principal quite often you don't have to pay tax on it it's actually quite kind of wild or i distribute it out to the beneficiaries in which case i get to deduct that so i may not have any taxes so you know but i don't want to get too deep into it because it'll make you guys head spin you all trust you got to look at the actual terms of that agreement and what it's set up to do like a land trust is just a grand tour trust that's set up to hold title to a piece of property it's all it is doesn't file a tax return nothing a living trust is just a grand tour trust set up to cover me while i'm alive and then spring into into becoming revocable when i die now i want to point out one important difference between revocable trust and irrevocable trust if i have a property that i paid a hundred thousand for it's now worth five hundred thousand dollars if i put it in the air and the irrevocable trust it is a gift to that trust and that trust takes it on at my basis which is a hundred thousand dollars if i put it in my revocable trust and then die i get a step up you get a step up to the 500 000 that's a big one so it's when it transfers in and from a tax standpoint when it transfers in so i could still do an irrevocable not to contradict you but it's just but we could goof around and we could make it irrevocable but we could still make it defective for tax purposes if we don't care but that's where attorneys get annoying because we can make these things like you hear these slats gratz uh dings which is you know there's there's domestic income non-grand tour trusts i mean these have group or irrevocable non-grand tour trust goofy stuff out there we always name them what is a 10 41 tax return it's a uh it's a uh return for a trust yes so it's a trust tax return so when you hear is that complex trust when it's doing its own taxes no uh simple trust is when it's required to distribute all the income to the beneficiaries complexes this means it's discretionary and it means that the trustee gets to decide whether you get anything so mostly when you're setting up a irrevocable trust that is not defective for tax purposes it's going to be a complex trust and that's what the people that are playing the tax evasion game sometimes set up and they go it's coma low trust you don't pay to x yeah you still do all right but they get to make that argument usually when they make that argument they're like this but it's not taxable all right we can't make fun of those folks here we had a one in vegas they just got everything they were paying everybody in gold coins because it was in currency it's like they they're creative i'll give them that all right how can i actively participate in my short-term rental while maintaining a w-2 job of that uh or an llc of that or llc of that llc i don't know what that last part was but i just grabbed their questions uh yeah this is actually pretty simple um it is a business so you don't have to worry about all the long-term rules um if you do at least 100 hours of activity in the rental and nobody is doing putting in more hours and you then you're materially participating it's actively participate here though uh and actively participating really doesn't have any meaning in this it's it's a long-term rental time well if the short-term rental is seven days or less then you have two choices you're material or you're not right right yeah that's probably what they meant but active actually has another meaning for rental and for rental it's one of the two exceptions to the passive activity loss rules uh but you can do both right what are you what are you so i interrupted you when you're going through the material participation what are the what are the big ones the big ones that you've used uh the big one is is it the 750 hours or is it the 500. no it's real estate professionals 500 hours for 500 hours 500 hours if you and your spouse together manage your properties if you're involved in the day-to-day operations then you can even add in your investment activities with those properties and with your grouping of all your properties like you have to make you go to a guy like jeff and say make sure i group all my properties together because that's another way that account and screw this up um but it's if i manage it myself even if i have a w-2 job yeah i am automatically a mature participant yeah you don't even have to meet the hundred hours if you're doing all the work yourself you're materially participating and if you're not doing all the work yourself you have to hit 100 hours as long as nobody else is hitting 100 hours and it's the individual not the organization so if you have a property manager you actually have to say to them can you guys track your time on my properties i need to know who's doing what and how much time and so they come up with you know maybe they have 20 hours here you know 20 hours there you hit 100 hours between you and your spouse you're materially participating so even if you have the property outside of your geographic area it is possible to be a material participant it's just you better make sure you have good records uh one of the tests this one's always made me a little crazy is i've materially participated in five of the last 10 years yes those are the ones that i try not to pay any attention to so i was a partner in a firm for for five years the last five years i retired and i'm still drawing money from them and i'm still actively participating even though i haven't shown up at that office you are a material participant you are a material participant so yeah so anyway so how can i actually participate in a short-term rental while maintaining yes you can do that you don't have to have an llc or anything it's just your activities and it's you and your spouse so and again this is not the same thing as real estate professional this is just am i a material participant on my short-term rentals and just know by the way i'm go back to that if you do this and you also have other properties that are long-term and you're trying to make real estate professional status you can't use the time that you're using on your short term with the long term the way that you could is if we did throw a corporation in the mix to do the short term rental and we rented the property to the corporation on an annual basis then we could but otherwise uh no and this is again not for shameless plugs but this is why you talk to an accountant like jeff or somebody on our staff to to to see what those rules are or if you have a good investor like there's really the only thing i say about accountants is make sure they're doing what you're doing so if you're going to work with people make sure it's a firm that does real estate investing don't be the one off or they'll make mistakes there's too many nuances here if i use a property management company for short-term rentals somewhat practical due to the distance from the property does this automatically exclude me from demonstrating material participation or are there other test activities that could demonstrate material participation beyond a property management company assistant yeah that's kind of what we were just talking about yeah if you're if you're a distance away from your rentals and you have a property manager i think it becomes harder and harder to meet those tests so you still have the same tests the three that we focus on you manage all your properties and nobody else does it does subs i think the term is substantial service so so here if you have another property manager you throw that one out i do a hundred hours and nobody does more time there's actually a court case where an individual and his spouse owned property in another state and they would drive to the short-term rentals and they would say they're working on or this or the other and the court did not believe the numbers they were throwing out there and they said there was no record-keeping by the manager of their time and therefore we don't believe you and we don't have any data from the property manager so voila you don't meet the material participation because we didn't find you credible because they were doing stupid stuff you could still do it but you have to ask your property manager to please track their time whoever's working on the property please track your time and if it ends up being five hours a month or whatnot as long as you hit 100 hours you're okay how do you hit 100 hours it has to be in the active management of those companies unless you're involved in the day-to-day operation of that thing which would you'd have to be working hand-in-hand with that property manager on those numbers otherwise it's only when you're actually actively managing really tough to do last way is the 500 hours in which case if you're doing 500 hours and you have other short-term rentals and you can and again your short-term rentals are not your other rentals short-term is just your hotel your hotel hours would have to equal 500 hours so you'd have to have a bunch of other properties that are short-term and you'd have to be treating them all a short-term you cannot do this and add that in with your other real estate if you don't think you're going to make it then what you do is you again you find a you set up a corp s corp c corp llc taxes an s corp or c corp and you rent the property to them and let them be the host that then employs the manager and now we've made it passive again and you could wrap it all up with your other properties to meet material participation and you're probably at that point going for real estate professional one of the spouses qualifies under the first prong of 469 c7 which is 750 hours more than 50 percent yeah and my personal feelings if i'm qualifying as a real estate professional for my long-term properties i'm not doing any short-term rental on my name [Music] i don't want to do short-term rental my name i've seen too many bad problems uh you've had deaths you've had people fall off of things you've had parties a lot of people here in vegas for example these houses were party houses i don't even know how many issues there were but there were shootings and all sorts of stuff in california you have all sorts of liabilities that come along with short-term rentals for the most part they're pretty benign you know you're up in the wine country you don't really care everybody's pretty mellow but every now and again you have somebody that does something dumb and you don't want to have that come into your personal realm and from a tax standpoint you just want to realize that there's a big difference between seven days or less and everything else 30 days or less if you're doing way more for those people you're still a you could be a average tenant like an average guest stays for three weeks and if you're driving them around and doing tours or anything else there's a good chance that's you're no longer a rental that's actually exactly what do they call that extraordinary services substantial services or no yeah you're right extraordinary is the over 30 hours oh okay and then the other one is oh gosh i forget the term so there's i might be substantial services i always forget so if you're running a drug rehab for celebrities drug rehab for celebrities is never going to be rental fat farms never going to be rentals uh you know all these uh where you go out in the wilderness and stuff and you're out on somebody's property and you're you're you're learning to overcome your fears no outward bound and stuff like that those are not going to be rentals that is just incidental to the other actually you get a you get your cabin because it's incident incidental to something else um all right let's keep going lots of ways to get more information on these and other topics go to our youtube channel again but we also put our podcasts we bring a lot of our stuff uh a lot of the content that anderson does put into a podcast format including tax tuesdays we break them into bite-sized pieces i think right now we're just doing two pieces we used to do these for an hour and a half and two hours every time and a lot of y'all said stop that you're killing us you're killing us but uh but you just go to the podcast and absolutely absolutely free and if you're a platinum member you can always go back and look at it all right my husband receives guaranteed payments shown as a k1 is a limited limited domestic partner of an llc is taxed as a sole proprietor to lower taxes can he create an escort for his guaranteed payments and still be a limited domestic partner uh a short answer is no he can't do that the guaranteed payment guaranteed payments of limited partners are usually paid when they're doing work and it's their share of revenue or something like that like i went out and sold something for my company so this is what's weird it says an llc and then it says he's a limited domestic partner and he's getting a guaranteed payment i would say first off that he's not a limited partner because he's materially participating he's getting guaranteed payments unless he's not doing anything for the guaranteed guaranteed payments in which case i would say they're misclassifying it it's actually a preferred return but let's assume that they're doing it right and they're paying him for stuff he's doing you could actually make that into an escort his interest and avoid the self-employment tax on it because a guaranteed payment is generally active ordinary income right they would have to contribute his entire interest in the llc to the us corporation correct and the llc would have to be okay with that yeah so it says can he create an escrow for his guaranteed payments and still be a limited domestic partner so the answer that jeff said is correct which is no but what you can do is put your entire interest into the s corp and the s corp's now just getting paid as a as a guaranteed payment two partner the s corp has to be a partner in this yes and they have to agree to it under almost all operating agreements you can't just willy-nilly transfer you'd go to them and say hey wait a second you're killing me with this guaranteed payment i'm getting hammered with uh self-employment tax can we put it and change our our our interests over to an s corp in the before you say oh my gosh but then i lose out on capital gains and all this other fun stuff s corp doesn't change any of the nature of the income it just says if i have active income and i take distributions i have to take a reasonable salary and only that little reasonable salary is subject to self-employment taxes so one of the things i thought about was if these guarantee payments are for services performed or uh sales commission whatever uh could he have the s corporation 10.99 for that and still keep still be a partner all right so if it's a guaranteed payment that's lowering the profitability i believe he would have to be uh it would happen he'd have to own it and that's what i'm saying that we're no longer calling a guarantee payment if it was something yeah if it was payment for services then i think he could yeah you could say hey pay whatever i'm acting like let's say that i was a plumber and i had my s corp and i came in and i said toby's plumbing they could pay me for my plumbing what they can't do is say guaranteed payment to partner and i'm going to pay it to your plumbing business when it's not a partner correct so 100 all right i know we're getting a little late we're getting close to that 4 o'clock time we hear residential home exemption is 250 for single if i buy three houses this year so boy this is going to be fun so i'm just going to map this out because i know it's going to get crazy so year one actually i'll do it this way let's say one and you buy three properties all right stay in the first house two years so i'll go one two three do it this way and this one is two years so we're now at year three right we've had it oh wait one two so this is two make sure i'm doing this right so we buy the beginning year one so we buy three houses at the beginning of year one we live in one two years and then we live in the third house for two years so now we're at four years and then we live in the third house for two years so then we have four and then we do two years down here so technically we'd be at year six yep okay on year five after buying the second house sell second house and take the exception where they get the first house on the fifth year after buying first house sell it okay so so we're here and we sell it on year five we sell house number two so sell house excuse me that's not two that's number one so we sell house number one in year five so let's just address that one first off you lived in it two of the last five years so two of the last five years you get a homestead exclusion of 250 000 so you would get that 250 000 deduction if you sold it by the end of that fifth year so here's my [Music] do question need to wait till that fifth year no you could sell it at any time but once i've done my two years i can sell that property right yep i'm making this a big mess i should do this differently so let's just do house one two years sold year five equals 250 k exemption all right second house uh let's see after buying on the fifth year fifth year on the fifth year after buying second house sell second house so this is house number two you lived in it in year three through four so you lived in it two years sold year five equals no why do i say no because you can only use your exemption every two years it doesn't matter about the properties it manages how often you can take it so if i had lived in property one for two years and sold it i could have had the 250 then i lived in property two for three year three and four and then i sold it i would get the 250 on both and then same thing with with the year with third property i lived in it just year five and sold equals no because i didn't meet the i didn't meet the two out of three years test and that's kind of what i was getting at is that don't wait to year five as soon as you're done living in it and you've been to two years sell it and then the clock starts running for the next house yep so the trick is live in a house two years sell it buy another you know or let's say that i bought three houses but i staggered them a year it's much easier that way then the first house i lived in two years i could sell it take my exception exemption or i could wait three years and take it whenever i sell it the second house let's say i bought it in year two and lived in it for years first years the question is what did i do with it did i just leave it as a secondary residence or did i rent it because if i rented it i'm gonna have a period of disqualified use on that growth which which gets confusing i don't want to warp your mind but let's just assume you bought it you just kept it as a second place you're fixing it up once it was all good and honky dory then i moved in and i lived in that for two years i could sell that within three years after that point and i would be entitled to the exclusion but i can only take the exclusion every two years so i'd have to look and say did i take the exclusion at any time prior to that period of time that would throw up throw off my two years if i did i wouldn't be entitled to it so i'd be like oh nuts so i would be better off selling that one right away and hanging on to to property uh moving back into property one or keeping property one or better yet just having sold property one after the second year and then third year we're really in a in a no-win situation under these circumstances there's just no way to make it work because it's every two years so i bought three properties the most i'd be able to do in a five year stretch is two of them every two years every two years otherwise if i bought property three let's say we bought property three in year two or three we could hold on to it potentially for five years and we could make it work if we sold property one after two years property two after two years then we could sell property three six years from the first date of property one but but it would be five years from the first date that we bought property three if you follow that you get a star so you'd have you'd have to sell a property after year two after year four and after year six to make this work yeah and then you have a period of time to do it i don't wanna like say hey you know don't consider this type of thing i just most of the time what you're really doing is you're saying oh shoot i'm gonna lose my 250 exemption and if you want to keep the house and still get your 250 exemption sell it to a closely held escort under an installment sale opt out of the installment sale take the full 250 exemption do it on an installment sale put it into a rental now you're not forced to sell it to any third parties you could just keep the property at that point um and then you 10 31 and if you're ever going to do that but and you brought up a really good point and one of the things i thought about is i buy three houses today what am i doing with the other two if i'm renting them out and i lived at them first no issue if i rent them out and then move into it issue because you have disqualified use so the irs has little little jabs for you so if you're like 10 30 wanting a property and you're 10 31 into a uh for a if you do the a combo i had a residential property that i lived in and i want to but it's had so much gain that i want to protect that gain and i'm going to reinvest it into another property and then i decide to move into that property the property i move into chances are there's going to be a period of disqualified use because of an investment property it doesn't mean you're toast it just means you're going to lose a portion of the 250 so let's say you there's one year of non-qualified use at a you know and and you had it for five years twenty percent is non-qualified which means you'd lose twenty percent of the exemption so it'd be a two hundred thousand dollar exemption in your case if the property made a hundred thousand you'd still avoid a hundred percent of the capital gains but it's limited to that portion yeah the other place we see being a problem is if you're depreciating that problem property uh when you recapture that depreciation upon sale that 250 doesn't offset that that's a really good point the exemption that jeff is talking about is capital gains it's not recapture so if you had a property that you're using that you rented for a period of time you just have to be careful because you're probably gonna like even if you have a huge exemption hey i only made a hundred thousand and i have a two hundred thousand dollar exemption in the case i was just giving you there's still recapture that would be zero to twenty five percent talk to an accountant see it gets complicated but it's not rocket science it's just mapping things out with a pencil um i used to have a joke that the only three things you have to know in accounting or calculate calculate calculate just get your pencil out all right my company is based in the u.s we have a customer from thailand my suppliers are from honduras i have an american account i would like to know how to pay my supplier do i withhold taxes these are not residents or citizens of the united states i am not an international expert but i'm pretty sure that for the sale of goods from a foreign country there is no withholding so you're absolutely 100 correct when u.s residents uh let's say that they're going to give money to a an individual or an organization because the way that the us works is an individual could be a corp from our partnership foreign partnership and they make money they want to make sure they get paid their tax and they do it on what is it fdap um oh yeah remember what all that is fixed or determinable fixed or determinable annual or periodical periodical yep so fdap it just means that if i am paying consistently to somebody who's out of the country i got to make sure i'm doing a withholding and depending on whether there's a treaty some treaties make it zero otherwise it's 30 you've had to deal with this if you've ever sold or bought a property from somebody who was formed if you remember when you went to your closing they had to sign something saying that they were either exempt or that you know or they would talk about having to do the withholding and then they would file their taxes and they would and they would either give it as a credit towards their taxes or they would get it back but if you're buying uh but it's services that are performed in the united states number one so it's always derived from the united states so in your case your supplier from honduras i don't think it would be considered derived from the united states because they're sending stuff in from honduras if you were paying them and they were doing something in the united states like you're you're paying the honduras company and they were doing work for you in the united states on your factory that would be different then it would be derived from the united states and you'd have the withholding but i think you're 100 correct yeah there's there's two terms you're going to know once the fdap and the other ones uh eci have effectively connected income which you were just talking about and effectively connected means you're going to also get a little bit lower rate right yes if i'm effectively connected that's that's like if you're doing real estate and you're a foreigner and you're doing real estate in the united states and you have a partnership or whatever and you're doing things consistent in the u.s you have effectively connected then i think you could avoid a huge withholding or at least it gets lowered i always forget that one we deal with it with rentals that are held by folks that are outside the united states all right uh i'm looking to learn about the small landlord exemption which allows small landlords to deduct real estate losses from their w-2 income i'm trying to figure out if i qualify for that i've heard people use this term before it's not an actual term uh it is called the active par active participation test yeah which means if you make less than 150 000 modified agi bleed then you may be able to take some part of your losses real estate losses the easiest way to think about this is if you have passive losses you can't use them against anything other than passive income so a passive loss is really easy to generate in real estate because you can depreciate the real estate so maybe i do a cost sag on a property and create the 200 000 loss it doesn't mean i lost 200 000 that means hey i got rents but i get to write off a big chunk of whatever i purchased and maybe i financed it and i can create this big loss ordinarily i can't use that let's say it's a 200 000 loss i can't use it against my other income only against passive but there's two exceptions and the two exceptions jeff just named one active and active participation is for folks that are making 100 000 or less it phases out between 100 and 150 000 and i think it's one dollar for every two dollars over so it's gone at 150 but it's 25 000 so let's say that i buy real estate and i have a loss of ten thousand dollars and i make a hundred thousand dollars i could use that ten thousand dollar loss against my hundred thousand dollars if i manage the manager that's all it is active participation in real estate just means hey you're ultimately the decision maker you don't have to spend hours or anything as long as i hired the manager and i get to control them that's it i'm an active participant but if i make over 150 000 of adjusted gross income it's gone yeah then i only have the other choice which is real estate professional so you'll see in our offices we're always talking about real estate professional because that's the big that's the big one you could be making a million bucks a year and i could offset 100 of it if i'm a real estate professional or somebody qualifies and i buy enough real estate so accountants that do real estate we always joke if you don't want to pay taxes buy more real estate right get more actively involved if you're paying taxes you don't want to buy more real estate get more involved we can eliminate it all that's how we're former president trump wrote off 90 million dollars right carried it back and he got beat up in the press for it and i'm like hey he didn't write the he didn't write the code that said you could carry it back why are you mad at him it's like all these guys you're always like you write those incentives and then you can't be mad at somebody who takes advantage of it it's there for a reason which is to grow our economy and continue to incentivize people to put their monies into these big projects so this is one of them for the little guys and that's how you qualify it's uh if if you need more clarity on that or you want to see whether it applies to your specific situation by all means shoot in an email and we'll make sure we get it um somebody says even if that 100 000 agi is partially from rmds there's no there's no exclusion no yeah it will offset ordinary income so what it does is it makes the loss non-passive and you can use it against any income all right hey if you have questions tax tuesday to anderson advisors visit us at andersonadvisors.com i gotta say that uh our team here so let's see i'm looking at 178 questions uh answered dana christos dutch ian pio i think they just don't want to work on tax returns they're tired like this is their break this is literally like they're probably eating cookies and saying this is so nice i get to answer questions instead of looking at bar grass bio ian dutch elliott dana christos troy was on earlier matthew ander and patty we're knocking it out of the park again these guys don't get uh nobody's billing you for this uh you know just make sure you're reaching out and say thanks if somebody's answering a bunch of questions they're the uh they work their katushas off and they're not required to do this they do they do it unless you force them to no yeah people just say hey you want to jump on and answer questions and these guys are awesome they do it's it's one of the ways that we we learn too is jeff and i we're always looking at these things trying to figure out the right answers and like oh my goodness and it's a good teaching experience for us too so it's great so i appreciate you guys coming on we will see you again in two weeks if you have questions by all means tax tuesday anderson advisors if nothing else we will see you i'll make the screen go away we will see you in two weeks