Main Street Business

#508 Accountant Q&A: Tax Advice The IRS Wants You Ignore

• Mark J Kohler and Mat Sorensen

Share episode

Join hosts Mark J. Kohler and Mat Sorensen on the Main Street Business Podcast as they delve into the topics that matter most to you. From strategies to minimize estate taxes to the complexities of cryptocurrency and S-Corp ownership, there’s no stone left unturned. Plus, get the inside scoop on the Main Street Tax Pro Certification and its many benefits. 

Here are some of the highlights:

  • Mark and Mat begin with an in-depth discussion on reducing tax on large inheritance from overseas investments.
  • Process of changing ownership of an S Corp and its tax implications.
  • Explanation of the backdoor Roth IRA process and common mistakes.
  • Importance of specifying access mechanisms for off-exchange crypto assets.
  • Mark and Mat unpack the various benefits of the Main Street Tax Pro Certification for strategic tax planning.
  • Impact of cost segregation studies on active income and real estate professional status.
  • Ways to reduce capital gains tax on the sale of a home.
Speaker 1:

I'm not upset, I'm not saying you did anything wrong, but I want to see what's going on.

Speaker 2:

This is what happens to my crypto when I pass.

Speaker 1:

Don't think you're ever going to get away from managing the prep. Please do not try to pull the trigger online and think it's the easy way to go. The IRS catches these all the time.

Speaker 2:

Stop the bleeding now and the pain now and doing it wrong now.

Speaker 1:

So many people think I can set up a charity, get a write-off and then still benefit from the charity.

Speaker 2:

Invest in real estate because you'll save taxes. That's not why you invest in real estate.

Speaker 1:

There's a lot you can do to reduce this tax. Holy crap, Throw down a dollar to save 10. It's okay. Welcome everybody to another episode of the Main Street Business Podcast with yours truly, Mark Kohler, and the amazing Matt Sorenson.

Speaker 2:

We're excited to be here with you today. This is our people show. This is the open forum. This is the people show, your questions, our answers. I think they're going to be pretty great today.

Speaker 1:

Yeah, we got a lot of good questions here. For those that haven't submitted a question before, you can go to MainStreetBusinessPodcastcom submit a question. We don't get to all of them. Podcastcom submit a question. We don't get to all of them and I'm sorry. We're not like some of the podcasters out there that do two or three hours a day, we do one hour a week and we're actually real business lawyers working and actually helping clients to run businesses.

Speaker 2:

But some of you I can say on these questions you need a consult, you know. But we want to get everyone down the right direction. I think this show is so popular because people like hearing other people's questions and it kind of sparks your mind about hmm, I didn't think about that. Maybe I should be asking that question. So a lot to learn in here. I always learn from Mark's answers in a lot of these, so let's just dive in. Yeah, you know life is short.

Speaker 1:

Yeah, there's so many here too, and I'm loving them, so we'll try to do rapid fire as much as possible. Do you have one? I know you're there. Yeah, okay, you go.

Speaker 2:

All right, this is from Search Dog. Search Dog asked a couple of questions and I'm going to throw one in about an inheritance. So I'll start one about property and LLC. It says, regarding inheritance, if someone is about to receive a large inheritance from an overseas investment, can the tax on the inheritance be reduced? If so, how? All investment? Can the tax on the inheritance be reduced? If so, how? All right, let's talk about this for the US. By the way, when you say overseas, I have no idea. There's hundreds of countries in the world and they all have different tax regimes and structures. So let me talk about what happens in the US search dog.

Speaker 2:

Generally, when you receive an inheritance of an asset, it's tax-free. Now, if someone the deceased person had an estate over 25 million-ish with a married couple, maybe 12, 13 million if they're single, if they're over that, they can have something called an estate tax, which, by the way, is about a 45% tax. But let's assume someone's under 10 million. They have less than 10 million of an estate and you inherit something from them. There's no inheritance tax on the federal level. There are some states that may be a little different here I'll throw a little caveat here in a moment, but there's no inheritance or estate tax on the federal level. One of the cool things, too, is if they're selling a property or an asset that you've inherited and now you've got to sell that stock or sell that real estate or sell that business.

Speaker 2:

The cool thing about inheriting an asset and then selling it is, even if there's a gain, you get what's called step up in basis If you're you know. Let's say, your mom passes away and she bought property for $100,000 an hour, worth a million. She passes away. You inherited a million bucks and you go sell it. There's no tax on it. You get to hurt the basis of fair market value when she passed away. So inheriting property is actually a great tax strategy. We don't get a lot of people that take it up because someone has to die in that equation, but in the natural course of things it can be a good thing. Now there are some States and this is the little caveat that do have an estate tax, some of them like Washington. A few other States that a million or 2 million of an estate and you're paying a state tax at the state level.

Speaker 1:

Yeah, I've got the list in our calendar. For those that haven't purchased one of our calendars, they're at markjkohlercom. And in the tax data sheet, which is just two or three pages in, we list those 10 or 11 states. Make sure you're aware of that because some people think, oh, the Fed doesn't have a death tax, which is sometimes the term, but a lot of states do, so know what the rules are in your state.

Speaker 1:

Okay, next question is from Jeffrey Toro and he says what is the process? This is S-corp ownership change. I love how you called it that and there's a lot more going on here that you've got to deal with it. My friend, he says what is the process to change the ownership of an S-corp? I'm like, hmm, why would I want to do that? Oh, I have an LLC taxed as an S-corp, but we'd be transferring ownership to someone different. That means you're selling it. Maybe you mean a kid or a family member. I'll just say when you transfer ownership, it's a sale, it's a deemed sale in the eyes of the IRS. You just can't transfer something. Or is it a gift?

Speaker 2:

Yeah, it's like a spouse or trust. That'd be the only thing that you own.

Speaker 1:

Yeah, and he says I don't want to close the existing EIN or business name, as all the business licenses and permits are under that name. We just like to change the ownership of it so that I can be disassociated from the business. I'm going to read into this that you're trying to give it to a family member. But here's the bigger point for everybody If you're changing the ownership of your company, that means you're transferring the stock or shares or the membership. If it's an LLC, it's either going to be a gift or a taxable transaction. You've got to get on a call with one of our tax lawyers for just an hour. Jeffrey, you don't even know some of the red flags and landmines you might step on here A lot of times.

Speaker 1:

Even if you're transferring to a family member, I want to do an asset transfer sale, not a stock or membership sale, because they can reset the depreciation. It's better tax-wise for them and can be for you as well. This is a taxable transaction. You just can't say I'm going to just transfer ownership. If you've already done it, please still get a consult because we might be able to unwind it, depending on what you've recorded somewhere or whatever. But please call the law firm and get an hour's conversation on this. So how do you change it? You do a membership transfer agreement, that's it. But it is going to have some reporting issues with the IRS. Oh boy. Now if you want to transfer the company so that they can keep all of that infrastructure in place, that's great. But there can be still latent liability up to the point of where the stock transferred, and so there's just a plethora of issues. I think you should talk with Mark Fetz. I'd probably say talk with Mark Fetz.

Speaker 2:

Yeah, but this isn't like a business. Really any of the lawyers could help on this, but Mark Fetz is definitely the lawyer that's helped clients that are buying businesses or selling a business. There's a lot going in there, like Mark says, from a tax strategy, legal protection. This looks like you're kind of just trying to transfer it to a family member. But yeah, there's some tax considerations obviously at play there. So now you might be like, well, it's worth nothing. Well then, why are you transferring it? Just have the family member start up their own new business on their own. Sometimes I get that it's like well, I want to transfer this LLC to my son. Okay, what does the LLC own? Nothing, but I set it up and I spent the money to set it up and I want them to use it. That's not really going to help them. The amount of work to move the ownership and just a little tax reporting on the sale of that I just don't know that it's worth it. So probably just better off them setting up a new entity. Yeah, all right, let me jump in.

Speaker 2:

I got a question here from Michael Edward about investing in a syndication. This is a good legal question here about your rights as an investor. He says the GP of my syndication mentioned that cash flow is going towards paying down a loan they extended to the deal. I asked where I could find this on the monthly report including balance sheet, and was told the personal loan wouldn't be found in the monthly financial reports. It does not affect the GP LP split of the investment and is common in the industry. In lieu of a capital call for investors in the deal, I was assuming to find the information tracked on the balance sheet to track the money flow. Thanks, mike, nice assumption. Yeah, yeah, yeah. So if you've invested in a fund where there's a general partner that's the GP or the manager of the fund and you're an investor in the fund, you are entitled to information regarding the financials of what's happening. Now this is happening quite a bit.

Speaker 2:

We're seeing more and more particularly real estate funds that have had interest rate shifts or they've had bridge financing having to do capital calls to go to their investors and say hey, by the way, we're not sending you checks. In fact, you need to send us checks because we need to raise capital, because costs have gone up. It's a little more competitive in the rental market. Rents aren't appreciating. We mispriced what we bought. There's a little bit of carnage out there happening right now in commercial real estate, and so you could be on the other end of that. We've seen that Now.

Speaker 2:

What sounds like the general partner saying here is hey, we lent the company money, the fund money, so we didn't have to come to you for a capital call.

Speaker 2:

But now we're back to cash flowing but we need to pay that loan back, and a lot of funds will allow that. For the general partner to say hey, we can go get debt or we can even inject in debt to cover expenses, rather than go make our investors do a capital call, and then we can pay it back. So typically in that mountain of documents that you sign that most of us don't read let's be honest there's probably a section in there that says general partner has the ability to go get a loan, and now they do have to be able to document that, so you do have rights to get that. Now, some general partners it's kind of a pain in the butt and so they don't want to produce it. So they try to give you a short answer like that kind of like don't worry, we're doing it right. And so your only recourse is to be a pain in the ass or to sue them.

Speaker 1:

Yeah, and it should be on the balance sheet and, depending on when the loan was entered into, this definitely should be in the financials that they release. I would give it one more shot with an email or formal letter I wouldn't say certified letter yet, because they are replying to you say I appreciate that, but no, I want to see the financial statement and these loans reflected there, and if I can't start getting a little more transparency, I will speak to my lawyer and it's going to cost you a lot more time and effort and money. I'm not upset I'm not saying you did anything wrong, but I want to see what's going on and so be respectful and don't give up on this. To just roll over is not the thing to do.

Speaker 2:

Yeah, and I think sometimes to that email with a phone call is most effective. I think, like a little personal touch on a personal conversation of like why am I trying to get this Like? I've invested money, I want to know what's happening. It's important to me. It's a fair question. You know, sometimes emails get a little off tone and also not as followed up to as quickly, so but my guess is they may have this question with other investors too, so they're going to have to sort this out.

Speaker 1:

Yeah, I went through it. Yeah, don't be a jerk. And I went throughout the words I'll see you in court. Yeah, you know that's not going to get any help yeah.

Speaker 2:

And having a lawyer, you know, put a nasty letter on letterhead.

Speaker 1:

You know, sometimes that can backfire against you. Well, next question we're going to be in general Q&A. Then we'll start moving through some other categories as you post questions. You'll see there's different options and areas.

Speaker 1:

This one is a little self-serving for me because I love our TaxPro network and certification we're doing right now, but it is such a common question and so many people frustrated out there in the industry. So TaxingCPA says and I'm going to truncate this quickly I have a background in accounting, hold a CPA license, but I found my passion lies more in strategic tax planning more than traditional tax prep. Yeah, join the club, we all feel that way. Okay, unfortunately, the CPA form I previously worked for didn't prioritize strategy, thinking outside the box, being innovative, and it led me to step away from preparation last year. Get it. That's why so many people are leaving the industry and so many business owners, followers and listeners on our show are starving for that good strategic advisor. Last paragraph, what I truly enjoyed about my role was engaging with clients strategically planning to minimize taxes. I'm curious if your system and he's talking about our Main Street Tax Pro certification accommodates individuals like myself who may not excel in tax prep or not want to do it at all but possess a strong aptitude for strategic planning. Additionally, I'm interested in learning if there's any options available to outsource tax prep aspect, allowing me to focus on strategic planning. So here's the answer. And for any of you that are in the tax, bookkeeping, legal or finance industry, this MainStreet Tax Pro certification is unbelievable. It's far more than I ever imagined it would become. The community, the tribe, the collaboration, the support for one another is unbelievable. I'm back in the studio next week in Idaho re-recording and improving on the 80 videos and strategies adding more to it.

Speaker 1:

We are focused on the strategy, but as a tax advisor, you do have to be multifaceted. You want to understand asset protection, finance, privacy, estate planning, business concepts and you're going to bring that all together in the strategic advice that you want to give here. I love your passion, but a client think of all these other people on our show listening they want a tax advisor that will quarterback the whole process Doesn't mean you have to do the tax prep. We were on main stage last week in Salt Lake. We had two different practitioners up there talking about how they're outsourcing, one offshore to India and another one doing it in-house, out of house, with people working from home. You can have people do the tax prep and feed it to you as the quarterback for your clients. So don't think you're ever going to get away from the prep at least managing the prep but you can definitely get out of the weeds doing it.

Speaker 1:

Bottom line everybody. If you're in the industry and you want to be strategic and you want to build a better practice with fewer clients and clients that are loving what you're doing and starving for you, please do a demo. Come check out the Main Street Tax Post, certification, taxing, cpa. You're on the right track. Come see us. All right, matt, your question.

Speaker 2:

Love it All right. Ks is from Brad7, in the asset protection category. He asks about are there special considerations involved in adding Bitcoin assets to a revocable trust? What are the advantages or the various means of custody when held under a trust arrangement? Okay, brad, great question. This is a big issue. This is a big deal.

Speaker 2:

The crypto industry has not been great about figuring out how to pass these assets on, because there's a couple of problems. The first is a lot of people like to hold their crypto off exchange. Well, this is almost like any piece of personal property you may have, then, like it could be like your record album collection. We even know and this is even categorized and even in your estate plan about who gets it. Forget about a trust or anything like that. Just like does your family even know what it is and that you have it and then it has value? I mean, that's a big issue in and of itself.

Speaker 2:

Now I will say if you're on exchange with your Gemini or Coinbase or any accounts there, you can list the beneficiary of your account upon your death. Let's say you have a crypto IRA with us at Directed and you have your exchange account at Gemini. Your beneficiary designation on your IRA says who gets your account and you could list your trust as the beneficiary. But let's say this is just a crypto you own personally. You need to think of two things. One you need to specify in your estate plan who gets it. The second thing you need to think of how's the mechanism that they're going to get it. If this is crypto off exchange let's say it's on a hardware device you've got to make sure they know how to get access to this, that it exists, that they have the keys or the password to get into this. They'll be able to move it and transfer it. It's not like you need to put it in the name of the trust or like you know there's no title to change. It's not like a deed or company ownership or something needs to get changed over on this stuff off exchange. But you do need some instruction to your family and a specification in your state plan to say this is what happens to my crypto when I pass. Now, if your state plan says, in general, my assets are going to go to all my kids you know one, I got three kids and they all goes to them one third each your crypto would fall into this and to not necessarily specify it exactly, but again, you need to give them information about how do they access your keys. Maybe it's in a safety deposit box at a bank, maybe it's in a safe at the house where they will know how to get access to at some point. But you've got to think through that.

Speaker 2:

For those of you that are off exchange, when you're on exchange it's a little easier, because for crypto and your personal name on exchange, there should be a beneficiary or payable on death, a form that you fill out, just like you do with the bank, just like you do with your life insurance policy that says who takes over your account upon your passing.

Speaker 2:

Now I have had this just recently. A couple of weeks ago, I had a client whose spouse passed away and they had an account at Coinbase, actually, and what they do is they didn't have any of these forms filled out. You know they were early adopters of crypto. If you're the surviving spouse or even family member, you can show up to the exchanges that have stuff on exchange with a death certificate and say you're next of kin and you can be. There's a process to get the account that way too. So the ones that are really I'm worried about, frankly, crypto being missing and not even inherited at all, because your family doesn't even know about it or they don't need to understand. The password or keys to get access to it is those of you that are off exchange, so make sure you got a plan and, by the way, it is estate planning special time at KQS Lawyers right now, so you can get your estate plan done including a plan for your crypto and what's going to happen to it.

Speaker 1:

Right now we have a discount. Get over to kikioslawyerscom. Question over here in small business. This is from Profitable Chameleon. I'm in the process of starting up a small service-based company with three partners Love it.

Speaker 1:

My question is in reference to one of my partners who has an established business in Canada. We would like to use this company as the parent company for the business name we will operate under here. Is this a strategic solution for us getting off the ground as a business with a reputable track? So what he's talking about, I think, is he likes that. The company name is well established in Canada. It's got a reputation, maybe online, and we want to use that name. So let's just use the Canadian company and put it. Plop it right here in the US. Love Canadians, love Canada.

Speaker 1:

But NAFTA and the treaty between the US and Canada on this point is not great. If you just plop that Canadian company here in the United States, it is not good for tax planning for the two US owners, probably not even for the Canadian owner. This is a very, very complicated idea and I, just on the face of it, cannot see it working. Number two. What you would probably want to do is take that name, register it in the US under a new company, probably an LLC, and then the two US partners are S-corporations and the Canadian partner probably would have a C-corp. The Canadian is going to be subject to double tax, likely subject to double tax, and it is not going to be very favorable for your Canadian partner. You do not want this parent company taxed as a C-corp. You and your US partner want S-corporations and an LLC. That's the creme de la creme.

Speaker 1:

You have really, really got to sit down with a tax lawyer that understands some of the Canadian nuances and give you some options. Even the tax lawyers at our office would give you some general parameters here and give you some guidance, and then you're going to need to really drill down on that Canadian issue big time. So you're going to spend a thousand or more just getting the advice of what to do before you even do it. And please do not try to pull the trigger online and think it's the easy way to go. This could be a ticking time bomb tax-wise for all the parties concerned. So be careful there. I'm glad you sent in this question and hopefully we kind of protect you there from a big mistake. What do you have, matt?

Speaker 2:

All right. Okay, I got a great question. I love this one. This one is from Goodboy and I read a great question. I love this one. This one is from Goodboy and I read through the question. I'm like Goodboy, you've been a bad boy and of course, it's about the backdoor Roth IRA. So you know I was going to answer this one, all right. It says hey, mark and Matt love the podcast. Consuming all the past YouTube as well Great content, love the camaraderie.

Speaker 2:

I left a job in 2016 and rolled $8,000 from my old employer 401k to a Schwab traditional IRA. He says I have a current employer 401k but I haven't moved the money. It's all there because I still work there. He says now, over the years, this traditional IRA that came from the old 401k has now grown to $36,000. Now this is where the question runs in, where he's made his mistake. This is where good boy became a bad boy. He says now I was naive at the time and I was not listening to you guys.

Speaker 2:

For the past six years, since 2018, I have done a backdoor Roth IRA, but I was not aware that I needed to move that traditional IRA to Roth or into a current employer 401k. I understand I've been doing the backdoor Roth IRA wrong for the last six years. I've also done it already for 2024. What are my options and how can I correct this? Can I just move the current rollover IRA to my Schwab 401k and keep quiet? Or can I still move the rollover to Roth and pay taxes due to moving it from before tax to after tax? Thanks, okay, great question.

Speaker 2:

I have a quick answer to this that I give to a lot of clients who have screwed up something up in the past and say how do I fix this? You get a DeLorean, you get some plutonium and you drive it you know 88 miles an hour and you get a flex capacitor and you go back in time and fix this. Okay, there's not necessarily a fix. You can go back and amend your returns, but how do I fit and basically undo the Roth conversion? And now you have non-deductible traditional dollars. Okay, that's probably what you should do. Now I've got a couple alternative things. You probably want to get a consult on this attorney, client privilege and all that.

Speaker 2:

But let me make sure everyone understands the problem here that good boy faced If you have a traditional IRA with deductible traditional dollars which he has and you want to do a backdoor Roth IRA, which he's been doing every year for six years. Every time you do a backdoor Roth IRA you have to look at your other traditional IRA deductible dollars. See, a backdoor Roth IRA is, I put in like for 2024, $7,000 of non-deductible traditional dollars and then I may convert that non-deductible traditional dollars to Roth. But the IRS says, when you convert non-deductible dollars, traditional dollars, to Roth, but the IRS says, when you convert non-deductible dollars, traditional dollars, to Roth, we have to look at your deductible traditional dollars and you have to convert that as well, or a portion of it, and there's something called the pro rata rule. This is where Goodboy screwed up.

Speaker 2:

So generally, what I would have said to Goodboy is it's a $36,000 traditional IRA. Just convert the whole damn thing. That's what I would have said. Just convert the whole damn thing. It's not a significant account. Yes, well, there'll be some tax on it, but if you're doing the backdoor Roth IRA for six years, good boy, you're probably making good money. You can pay the tax and get over it with the tax. It's not like this is a $300,000 account which we run into quite often and we're like, dang, that's going to hurt to convert. So what I would say now? Good boy, just get over it and convert it right now.

Speaker 1:

Convert it right now for 2024. And you cannot ignore this. Sometimes in a prohibited transaction situation, we'll tell you what you should do and you have a choice and you can just kind of hope it goes away. This is one that will not go away. The IRS catches these all the time because broker-dealers, as you move this account around in the future, are going to identify this and the pain is only going to get worse. This is deals with immediately and in fact I'm saying even before October 15th.

Speaker 2:

Oh yeah, because there's convert it now.

Speaker 1:

Yeah, if you've got repairs, that if you don't do it by October 15th it can even get worse. So the sooner the better, yeah.

Speaker 2:

Now I know the follow up question is like does this mean I'm okay for what I did in 23, 23 and 22 and 21? No, I can't fix that. You can go back and amend those returns and fix that. But what I would do is like stop the bleeding now and the pain now and doing it wrong now and let's get the statute of limitations to start running on this stuff. Just fix it now so you're doing it right, moving forward. Get rid of this $36,000 traditional IRA, get it over to Roth, pay the tax in the long haul. You'd be happy you did that anyways.

Speaker 2:

You're going in Roth every year on the back door Roth. Why would you not do?

Speaker 1:

that, yeah, and your required movie to watch is Alcatraz. Learn how to sew a rabbit.

Speaker 2:

Okay.

Speaker 1:

Now, okay. Now we've got another question here from D Alton. Is it possible to set up your own charitable organization and then donate your crypto to establish it? Yes, the way I'd say it is you can always set up a charity and you don't have to put something in to establish it. You can put all sorts of stuff in it later. Establishing it is step one. The donation itself doesn't establish it. Just to play on words I'm a word nut here. Will the IRS still recognize this as an acceptable donation? Damn straight, they'd love that. So you get a deduction based on the fair market value the day you give it to the charity. Think about establishing a scholarship fund. That's great.

Speaker 1:

Now, d Alton, let me just say everything you said did sound great, but this is the beginning of a phone call where I have to a lot of times tell clients a few things and give them a reality check. Where can my child sign up for your scholarship fund? You know this isn't going to work for your family or you. I just want to make sure that's clear. You want to set up a scholarship fund to help everybody else in the world except your family. Let's do it.

Speaker 1:

So don't think you're going to get around that you may have read something online or someone at a creative conference oh, set up a scholarship fund? No, they tell them to sign a dotted line that they'll back you up if you get audited and they're the ones in trouble, they'll change their strategy real quick. There's so many other things you could be doing if you want to continue to access this money for the rest of your life, and I'll just give you three letters C-R-U-T. Crut it's a charitable that's four letters. Did I say three letters? I thought I said four letters. You said three letters. You know what In my head I was thinking CRT, I know, and then you added a bonus letter, then I added the bonus letter, that's true, give me some grace here.

Speaker 1:

You bought a vowel, dude. I bought a vowel. I'm throwing down cashier like crazy, all right. So I meant my brain was thinking CRT Charitable Remainder Trust and then I thought, okay, the best trust we love is the CRUT, the Charitable Remainder Unitrust. Anyway, it is a type of charity and you do get a charitable donation, but it's reduced by the fact you're going to get cashflow for the rest of your life. You can continue to invest it. You pay no tax on the sale of that crypto Super cool. And I would recommend a consult with Max Merritt. He leads up our CRT Charitable Trust Department here at the law firm. And just do an hour with Max and say break down my options here and you could throw out your charitable organization ideas. So many people think I can set up a charity, get a write-off and then still benefit from the charity. This is no new idea. The IRS has been on onto this for about 50 years, so it's not easy to do. So check that out.

Speaker 2:

Meet with Max. You'd love it. All right, this is a cool question. This one came in from Kobe. I love this one. It says if I start a Roth IRA at 17 years old why are you saying that you're?

Speaker 1:

all on the retirement questions. I just want to help the people on the retirement questions. I just want to help the people on the retirement questions. I go to my strong suit.

Speaker 2:

And, by the way, this is a great question. This is in the retirement planning Roth IRA question. Let me start again. If I start a Roth IRA at 17 years old and end up making more money in the future than a Roth IRA allows you to be eligible to make contributions, do I have to close the Roth IRA?

Speaker 1:

I love this question. You are right, you had to take that one. You had to take it.

Speaker 2:

I presume Kobe's 17 years old right now, which I love that you're thinking about a Roth IRA. How many of the people listening to this show right now wish they were like Kobe, thinking about doing a Roth IRA at age 17? Now here's a nice thing, kobe you can keep doing the Roth IRA Once you make more money over the income limits which it sounds like you're going to probably do pretty quickly, kobe, because you're smart. You're doing a Roth IRA at 17. But once you get over the income limits, then you'd start doing the backdoor Roth IRA. This was the question we were just talking about with Goodboy here and you can start doing the backdoor Roth IRA. You can still get seven grand in a year. You just have to do the backdoor Roth IRA.

Speaker 2:

This is me, this is Mark. We're doing the backdoor Roth IRA every year because we're high income is what a lot of our higher income clients are doing, because they still want to get money in every year to do the Roth. So don't worry, you'll still be eligible. The Roth's not going anywhere. You can still get more money in. You're just gonna have to go through the backdoor. Now, remember, you just got to be careful about any traditional IRAs you might have, which was the problematic area for good boy. On that last, question.

Speaker 1:

Yeah, I just want to reiterate. It's so sad that he said I'd want to start my Roth now, but when I make more money I can't do it. Where is that misinformation? You know the backdoor Roth is alive and well. Multimillionaires are still contributing money to Roths every year. It is just such bad information out there. It's called the backdoor Roth, very well used and alive and well.

Speaker 1:

Okay, how do I reduce my capital gains on the sale of my home? Can I add to the base cost my home improvements, other ways of reducing it, like moving funds to an IRA, roth or LLC? Well, first of all, glicka4, how you reduce your capital gains on the sale of a home depends on what type of home and how long you've owned it. We got to talk about that. So if any of you are selling your primary residence, your personal home, and you've owned it two out of the last five years or held it at least two years, then you can sell it tax-free up to $250,000 of gain if you're single, $500,000 of gain if you're married. And then in two years you can do it again. So every two years you could sell your personal residence and not pay any tax or shelter any income, up to 250 if you're single or 500 if you're married. Now that's point number one. If it's a rental property, there's no exclusion like that. You're going to pay capital gain on the gain.

Speaker 1:

Now second part of the question was can I add to the base cost, which the term we use in accounting is basis? Can I add to the basis my cost of home improvement? Absolutely so. When you increase the value of the home, you put in a fence, a swimming pool, new anything into the house, you can add that to the basis of the home. It typically has to meet the category of attached. You can't add that to the basis of the home. It typically has to meet the category of attached. You can't add furniture to the basis of the home because it's not attached. But if you put in cabinets in the kitchen then those would go to the basis. So anyway, your accountant will walk you through that. So you want to look at how much I bought the home for, put into it all the improvements over the last one year, five years, 10 years that's your basis. And improvements over the last one year, five years, 10 years, that's your basis. And then you're going to subtract that from your sales price. And if it's more than 250 single, you'll pay some tax. More than 500 grand, you'll pay some tax. So start there.

Speaker 1:

Then the question was other ways of reducing the capital gains. Yes, there are all sorts of strategies. Please get over to Tax and Legal 360. We have another event coming up. We just did three days. We had whole sessions on ways to reduce or eliminate tax by using a deduction on the right side to offset a gain on the left side, if you will, and sometimes it works, sometimes it doesn't. Situations matter. But moving funds to an IRA, roth or LLC is not going to help in this situation. But there's other strategies. Let's think of creating a charitable deduction investing in oil or gas. Maybe you move some of the money into a short-term real estate investment and get pass-through losses. Buy some equipment with depreciation, da-da-da. So there's a lot of strategies, but nothing that falls into this. I'll just put money in an IRA, roth or LLC. So be careful there.

Speaker 2:

All right, Awesome. Got a great question here from Tex Kyle. This is in the tax strategies, Says howdy from Texas. I got a question about whether losses from my cost segregation study can offset my active income. I'm a real estate investor with a W-2 job. I purchased an RV park in 2023 under an LLC that I own. We had a cost seg study performed. Now it's tax season for 23. My W-2 income is substantially more than the RV park income and that will be true in 2024 as well. Can the losses from the cost seg offset my active income from last year and this year?

Speaker 2:

The RV park is extremely active business. I understand it's considered a hotel or hospitality, not passive investment. I log my time and spend about 1,200 hours a year on acquisition, maintenance, business management, operations of the park. It does have paid employees as well. If the cost seg does offset my active income in 23, does that mean I can essentially get a refund on taxes I paid for my W-2 job? Thanks for the great advice here on Directed IRA Podcast. That's where I heard you on your Main Street Business Show. Ooh, okay, this is one I think we got to be careful about. I want to debunk some things here on taking rental real estate losses, whether you did a cost segregation study or not, and then using them to offset your W-2 income. Now I believe Texas Kyle is. His W-2 job has nothing to do with real estate. He's hitting the I'm getting the hours in and it's an extremely active business.

Speaker 1:

Yeah, I love how you're putting all these great words.

Speaker 2:

He's stretching for it. Yeah, You're stretching. Tex Kyle, but you've got one problem, Tex Kyle, and that is it's not your primary occupation, it's not your primary line of work, and unless that W-2 job is a real estate qualifying profession which I'm assuming it's not you're not going to qualify for real estate professional status, which is what you're going to need to take these losses and offset your other income, your W-2.

Speaker 1:

Yeah, and an RV park could be an active trader business and not a rental real estate activity, depending on how it's structured. Are you renting pads? Are you talking about the RV park buildings where you're claiming ordinary income? Sometimes we have clients in an RV park that are an S corporation, because it's, but it depends on the type of income you're generating. In an RV park. You have a cost seg on what you can't cost seg land, so you have all these pads in an RV park. So that means you're cost segging the buildings where the laundry is, where you check people in, maybe some storage buildings. It depends on if those are claimed in an active trader business or if it's a rental business and how your CPA. But let me just say this you're not a real estate professional. It looks like you're already trying to shoehorn yourself into that situation. You've got to get a consult with another tax advisor with a second opinion here.

Speaker 2:

Let me say one other way to think about this, and this is something that I get a lot of questions about. I'm investing in real estate so I can save taxes on my W-2. And I hate to say it, it's a lot of doctors and dentists and just high-income people that they hear invest in real estate because you'll save taxes. That's not why you invest in real estate. Invest in real estate because it's going to get a good return, it's going to cash for the property is going to appreciate and it's tax deferred tax benefits over time, but it's not a direct cash flow of it might be tax.

Speaker 2:

I'm not paying tax like I can own a rental property, have cash flow going into my pocket from the rent. I'm bringing in more money than I'm spending out on expenses on the property. But because of depreciation I'm getting an actual expense on the rental property on my taxes. That I'm actually cash flowing. But taking more loss to offset your other income only works for real estate professional. Now a lot of people will see, like Grant Cardone or Pace Morby or some of these big influencers, and we love them and they can take these losses on their rental real estate and offset their other income because they're real estate professionals. But if you're the doctor or the person with the big W-2 that has nothing to do with real estate, it's not going to transition over to offset your W-2. Yeah, sadly.

Speaker 1:

Even if you get in the hours. And the sad part here is, I suspect maybe not. You may have just text. Kyle made this decision yourself, but if someone tried to sell you on a cost study analysis, I'd be calling them up a little pissed Going. You told me to do a cost seg why?

Speaker 2:

Were you there to Unless that RV income was really high. Yeah, but it doesn't sound like it because he's got a big loss. He's trying to use.

Speaker 1:

You may have chased the cost seg on your own and no one told you to do it, but you really need a second opinion. I would talk to any of the tax advisors in our tax advisor network. They're all certified. If they're not listed on the site at markshakeholdercom, go and look for an advisor that speaks to you, or schedule some time with one of our tax lawyers at KKOS and go. Here's what I'm facing your prior tax returns, how you're reporting the business, all are going to play into this. It's a complicated one, but like where you're at All. Right, well, I'll do one more question. Maybe you have one.

Speaker 1:

This is search dog. He says I, or she says I am planning to sell a rental property that's in an LLC. Great, my plans are to use the funds to buy a retirement home overseas and invest the funds overseas. Okay, so that is a little so. When you say retirement home, it sounds like your home that you want to retire in. But maybe you're buying a retirement home, you're going to rent I don't know and invest the funds overseas. So if you're investing, but it's your retirement home, are you doing two different things? I'm a little confused. But he says I believe my CPA said I will owe 30% on the sale of the property because you can't do a 1031 exchange into a foreign property.

Speaker 1:

Is there anything I can do to reduce this tax? If so, what? Oh well, search dog. Yeah, I've got like 10 things I could say here in about you know, 120 seconds. Of course there's things you can do. 10 things I could say here in about 120 seconds. Of course there's things you can do. And of course you need a second opinion and it's going to take an hour or maybe a little less, maybe a little more.

Speaker 1:

Search dog, I'm grateful that you threw this out on the show. There's a lot you can do to reduce this tax, holy crap. But again, it's going to depend on your income, your life, where you live, married or single, do you have a W-2? What's your other income? How do you specifically want to use this money? Yeah, you might use again oil and gas, solar, other small business, rental, real estate, cost, seg, charitable deductions, a charitable trust.

Speaker 1:

I mean there's like 20 things here and it sounds like your CPA didn't throw down a bunch of ideas for you. They just said you're going to owe 30%. So the problem here is you need that tax advisor. Please schedule some time with a real advisor that can give you some ideas. And even if you're like, well, that was worthless, they just rattle off a bunch of things that I already knew. Well then, good, now you know You've got a second opinion and sometimes the best answer is there is no other option. So now you can be rest assured. You've done your homework. You've turned over every rock and stone and just throwing this out on a podcast hoping for some free advice and Hail Mary, and you're going to pay tax of 30% on this Holy crap search dog. Throw down a dollar to save 10. It's okay, quit stepping over a nickel or stepping over a dollar to pick up a nickel. You've got to be super invested into getting a good second opinion and paying for it, and I think it'll help you out immensely.

Speaker 2:

Yeah, Love it, Okay. Last question I got here is from David. Of course it's in the tax category here, but it's got a little retirement twist to it. Can you answer this for me, and this is a common question that we get? This is david's. Questions are very common so I wanted to hit it. Can you answer this for me or please direct me information on how to answer this?

Speaker 2:

I periodically receive k1s for trades I've made inside an ira. I presume this means investments. This happens to be an inherited ira from which I'm taking annual required minimum distributions. Some resources on the web tell me to ignore them and others tell me they need to be paid. What's the real answer? All right, David, we're here at the podcast. We're going to give you the real answer. It depends, oh shoot. So, David, now this happens a lot.

Speaker 2:

If you have a self-directed IRA and you're investing it into, you're buying real estate or investing in a small business or a startup or a private fund, you might get K-1s or 1099 sales proceeds when you're selling an asset or property, and we want to make sure that that K-1 lists your self-directed IRA company's tax ID, not your social. So this is what I want to make sure you're doing right, David, is when you're setting those investments up. You're making those investments. You're doing a subscription agreement to invest. Don't put your social on there. Make sure you're putting your self-directed IRA company's tax reporting ID. So a directed IRA if you call up our team and we have it on some of our forms, we have a tax reporting EIN for our customer accounts and that's what you're going to use when you're making an investment and where you're going to get a K-1 or anything. And so now, if you have UBIT or UDFI, you go get your own EIN for your IRA.

Speaker 2:

I'm presuming you don't have that. If these are just and that's why you say trades, I'm a little confused. That almost sounds like you're at a broker dealer you shouldn't be getting a K-1 for trades. I don't know how that would be working. But in general, just make sure that the EIN for your IRA company is being used on those forms. If your social is getting used, the IRS is going to be expecting you to claim this on your return somewhere. So hopefully you haven't messed that up and put your social on these investments for the tax reporting.

Speaker 1:

Well, I'm just typing away here letting people know when we replied to their questions. I grateful both of us are so grateful for our many, many listeners and thank you for submitting these questions. We need a few more. Man, we knocked a bunch out, so we're about two and a half, three weeks. We'll do another open forum. Please throw in questions that might be setting you If you find yourself typing more than three paragraphs. It may be time to set up a consult for one hour and if it's an open-ended question like do you have any ideas on ways to save taxes?

Speaker 1:

That might be a good idea for a consult, because it's going to be yes we have some ideas and we have a whole podcast about it. We've written books about it and we have consults to help you in your individual fact pattern. So, but there's no question, this is a dumb question. Throw it out there, because if you have this question, we know there's hundreds, if not thousands, of other people that share that same interest. So thank you for being here, appreciate it, and what's your motto?

Speaker 2:

I mean, what is it?

Speaker 1:

Live it, live and let live. Oh, live and let live.

Speaker 2:

Isn't that like a do-it-your-daily Live and let die? That's what.

Speaker 1:

I was going for.

Speaker 2:

Is that ACDC or Live and let die Live and let die Come on you know that one.

Speaker 1:

Yeah, I do. I can't you got a better singing voice. All right, Thanks everybody. We'll see you next time.

People on this episode

Head Shot

Mark J. Kohler

Host