What’s up folks. Now this week, we’re gonna be talking to Clint Coons from Anderson advisors about legal and tax questions that a lot of you guys had submitted to me in the past. I know this stuff, but I’m always catching myself knowing that I’m not a CPA tax attorney. So we’re gonna hear it right from Clint.
A lot of your guys’ questions that you guys have given me in the past. I’m really excited. I’m gonna be seeing a lot of you guys this next week in Napa valley, as we do a little bit of a Huey mixer and then off to Huntsville, Alabama, to check out all our apartments out there. We try to do an apartment tour for you guys to come and check out the apartments that you guys own with us.
At least once a. This is about the time before Halloween and the holiday season. This is probably the last opportunity for the year, but if you guys want to interact with us, meet other investors again, that was a big turning point in my investment career was, really meeting other really passive investors and really understanding why I need to get out of rental properties because it’s a headache too much liability as we’re gonna be talking to Clint about that today.
And it’s just too much headache and really this whole brochure strategy. Buy rent, rehab, repair refinance. That’s a great strategy, but it’s just too much effort. And for a lot of our credit investors, most of the people who listen to this show and especially invest with us these days are credit investors and their time is more valuable than their money. And they certainly don’t wanna go to the risk of doing a remote BRRRR or a BRRRR even in their backyard.
So again, hopefully you guys can join us. January 13th, the 16th in Honolulu, Hawaii for our annual retreat. For more information about that, please join our club at simple passive cash flow.com/club. If you want to be considered to come to that you guys need to book those mandatory onboarding calls with me.
There, you’re gonna get a bunch of other content such as our free, even a banking eCourse, and a whole slew of other free resources. So again, join at simple passive cash flow.com/club and enjoy the show.
What’s up folks we have Clint Coons from Anderson advisors on the show. , we’re gonna be talking about tax and legal, a lot of the questions I’ve been hearing from a lot of you folks. What do we do by asking for protection? And I wanted Clint to answer some of the tax questions that I keep hearing from you guys. We will put this video up at simple passive cash flow.com/tax. And from there you guys can also sign up to have a pre-con with Clint’s folks. And all this other tax information we have on that page against passive cash flow.com/tax. Clint joined us again. It’s been like two or three years. I think it’s the beginning of the pandemic. I last saw you in person, I think in 2019 looking the same man looking good out there. Thank you, likewise.
So like the first thing, asset protection, why is it important? And maybe we start with some of the basics , it really comes down to ensuring that if anything were to go wrong with your investments or on your personal side, that the assets that you’re investing into are not gonna be put at risk.
Look, I’ve been investing now, like you have for 15 years, I’m older, so I’ve been going at it longer and I’ve, I built up a sizeable portfolio, over 300 properties and multiple different strategies, buy and hold, fix and flip self storage, apartment buildings.
And so through my investing. I’ve come across some issues before I’ve had two houses burned down in the last year. Luckily nobody was hurt. I’ve had a tree fall through a house and strike the master bedroom again, narrowly avoiding disaster. And through it all, if anything had gone wrong and somebody had actually died or been severely injured, that would’ve resulted in a lawsuit.
And I see people day after day not quite on that frequency, but I do see people every year that will send me a lawsuit, a letter from an attorney, explain to them how they’re being sued because of something that happened on their property. And, they live in Hawaii and the investments over in Florida and they have never even seen the investment, never physically been to the property.
And now they’re involved in a lawsuit. And so with asset protection I tell individuals time and time again. Hey, listen. The likelihood of being sued, it’s not huge, right? You’re probably pretty safe. But the thing is that if you do get sued. The first person you’re gonna call is Anderson or another attorney.
And you’re gonna say, what can you do to protect me? And unfortunately, there’s nothing I can do. I was just responding to an email before you and I got on here and this family’s going through a situation where the grandfather owned the property. He contaminated the property and now where four generations or four buyers down the line, and they’re asking me what they can do to protect themselves now because of that environmental contamination, cuz they know, they’re, they’ve already been threatened that they’re gonna be sued and they wanna start protecting their assets.
And the answer is nothing. I can’t help you now, you shouldn’t have told me that you were going to be sued and all the backstory, because it really ties my hand. So asset protection, you need to be proactive. You set it up just in case the worst harm occurs so that you’ve minimized your overall risk exposure very similarly.
I just just heard this story from one of my investors and they, it was a story of, they got inherited a property from their dad and their dad does everything old school just doesn’t do anything with lawyers. And I guess somebody, there was an elevator that broke and then, now they’re suing all the three siblings equally, so just can expand the scope of the lawsuit. So a windfall for the person suing to go after everybody. A lot of that stuff, like to your point, you can’t do it after the fact.
So maybe talk again where I’m always like why the heck would you wanna own any rental properties in the first place, our group, I know you work with a wide spectrum of investors, but to me, once you go over, million or $2 million net worth, that’s where the syndications as the LP position comes into play. But I guess, from When you’re in an infancy, under half a million dollars net worth, what do you think is more appropriate and maybe walk us through as people grow their net worth, what is more appropriate from an asset protection standpoint?
I get that question a lot. And what I tell people just think about its properties. How many people say, how many properties should I put in one limited liability company? And they’ll be shocked. I’ll tell ’em one property per LLC. I’m like come on. My property is only worth $60,000 or a hundred thousand dollars each in equity and say, yeah that’s fine.
But how much income do those properties generate for you? Because really for most of us we wanna protect the income stream. And if something goes wrong with one property, you have five properties in one LLC. And they make $5,000 each on an annual basis, you just lost $25,000 a year in income.
Wouldn’t you rather be in a situation where you lose $5,000 and you save $20,000. And so this notion that your net worth determines the type of planning that you should use for your structuring, I think is misplaced because the person that has $500,000, if they were to lose a hundred thousand dollars, that’s 20% of their net worth.
Whereas somebody like yourself or myself, I could lose a hundred grand and it’s not gonna impact what I’m drinking. As you can see on my back shelf, they’re all empty by the way. It doesn’t impact me to the same degree because I have so many more properties and I make so much more income.
And so I think when you’re first starting out, you’re at more risk because you don’t know what you don’t know. And many times, and until you start having, you don’t even know what you need to know. And you get this backwards in your structures that you need more protection at the outset.
And then as you start to grow and you get to somewhere where I’m at, I don’t have 300 LLCs. There’s no way I would create that for myself. So what I’ll do is I’ll start grouping properties. I’ll put 10 properties in an LLC, and yeah, I could potentially lose an LLC if one of those houses that burned down was in an LLC.
If somebody was killed, I would’ve lost 10 properties. But the point is that I have 29 other LLCs or 290 other properties in that loss is not gonna change my lifestyle. Whereas the person that has $500,000 has one house. You get involved in a lawsuit because of that one property, or maybe you have two properties and you get involved in a lawsuit because of that, not only could you lose those two properties, but one impact is gonna have on your personal’s life as well.
If a judgment entered against you. And so I encourage people to always put plans together that is commensurate with the risk, but also ensures that if anything happens with the asset they’re protected, or if they’re involved in a lawsuit because they’ve entered into a bad lease or involved in a car accident, or a bank comes after ’em for a deficiency judgment that people can’t get after their assets, number one, their savings, their real estate, or what, a lot of times people don’t think about what you brought up syndications. If you’re investing in syndications, I think the biggest mistake people make time and time again is putting their own name down on the syndication. They should invest through an LLC so they can preserve that cash flow as it comes out. It wouldn’t be paid out to her creditor.
Maybe we can talk about that a little bit. There’s two types of liability. There’s the ones coming from so many chips and falls or the elevator breaks in your rental property, or I think what you’re referring to in that case is if the outside in. Liability. Is what your kind of primary concern is. Maybe expand on that.
And unlike, people that differentiate between the two, because I think that gets lost in the shuffle a lot of times. Yeah. So you, we have what are called dangerous assets that create liability for us real estate creates liability. Freedom. Just if you live in Hawaii and you have an investment property in Florida, if somebody injures themselves on that investment property, they’re gonna Sue the owner and you didn’t have to do anything wrong.
You had a property manager that was managing it, but it doesn’t matter. You’re still responsible cuz you own the property. And if you own it in your own name, they’re coming after you. But if you aren’t in an LLC, they’re going after the LLC. And hopefully that’s the only asset that’s available to them in that LLC.
So worst case scenario, what do you lose? You lose the equity in that property. Plus what I say is more important, the income, but you are preserved. I had a client. They’re a client and I met them a long time ago and they had this issue where they owned everything in their own name. And so now we’re gonna switch and talk about what happens with assets on our liability on the outside.
So they had multiple properties, 14 homes, and they sent their son off to college and he’s there less than a week. And he hits someone with a car and he makes this person a paraplegic. So the attorneys, of course. Sue the parents because they were paying for the kids’ education. They were still responsible for ’em and they found them liable for this person’s injuries and they bankrupt them.
And so here’s a couple, they had actually retired with living off the income from their assets. They’re in their early sixties. They BK themselves because of this lawsuit. And now they’re back at different jobs trying to rebuild. And the thing they said to me is they said, you know what? I wish we had this knowledge when we had the assets, we just didn’t appreciate the risk at that point in time.
And so this is what we refer to as outside liability, you’re gonna be sued personally. And then the question is, what can that creditor attach? What can they get from you? By using limited liability companies, certain types of trust, limited partnerships, what you’re able to do is limit a creditor’s recovery to what we call a charging order, which means that if it’s in an LLC, if you set it up the right way, we can’t take your LLC from you.
We can’t take the properties that are held inside of it. We can’t take your cash flow that is being generated from the properties or from a syndication that all stays protected inside of that box. You control it. I have a longtime client who lives in Oahu, and she was involved in a situation where.
She got into a deal with two Hawaii real estate developers. And she got the short end of that deal. And now she was going after ’em for $2 million and she got a judgment against them, a personal judgment against each of them for 2 million bucks. And she wrote me an email a couple years back, really frustrated.
She said, Clint, I’ve got this judgment and I’m not getting paid. They’re living in my own neighborhood and luxury condominiums, driving Teslas and Mercedes. And I know what they have. They have all these LLCs and there isn’t a single attorney that can get me paid. And she wanted me to look at it and see if I could offer any advice.
And unfortunately, my response was, there’s nothing we can do. She set ’em up. The developers set it up this way, so they’re protecting their income stream and their assets. And I knew every LLC that they had, and I knew how the money flowed through all the LLCs. And I explained to her, I said, I did the same thing for you.
And if the shoe was on the other foot, You wouldn’t have to pay out. And so I understand it’s frustrating, but that’s why people use entities. And that’s why I think people who have assets, people who are investing, they’re putting themselves out there need to take adequate steps to protect themselves.
So hypothetical question here, cuz it’s always hard for us to determine which one is the biggest liability outside in the inside out. If I had 10 rental properties, which I think are dirty assets, cuz things happen in them. And would you be more concerned for me personally, driving down to the grocery store, hitting grandma like that kind of outside in attack versus something happening with the 10 properties, I guess just that cuz you see these cases, you see the actual lawsuits and from the outside and inside all the time, which one?
Like which one would people do? People need to worry about more? It’s equal. People get sued for the most random things, cuz you can never predict when a lawsuit is gonna happen. You’re right. Driving down to the store two years ago, I was driving to a restaurant near Christmas time for dinner and it was raining.
It was dark. And some guys walking across the street in all black, in an unli street, I’m like you idiot. I almost clipped him. My wife freaked out. And because I couldn’t see very well cause it was pouring down rain and had I hit him that would’ve been a lawsuit and so things like that can occur.
But at the same time, I’ve got a whole bunch of emails and letters from clients that I use in my presentations, even where I show people, Hey, this person bought a piece of property and they’re being sued cuz this is what happened. And. It’s equal and that’s why you need to balance that out. And by putting together the structures, you’re protecting yourself from the asset. So if anything goes wrong there you’re protected. And you’re also protecting the asset from anything that you do. So you get two forms of protection by putting it into effect.
Yeah. I would also mention if you’re a doctor or high liability profession, even like a real estate broker, you’re gonna get sued all the time. That potential for that outside in attack is probably much larger than the average W2 employee out there. That’s what Clem’s saying. So if an investor is dumping all their rental properties, going into syndication deals as a passive investor, then they don’t have to worry too much about the liability from the investment, but they still have to worry about the outside.
They themselves are the worst enemy or the liability. At that point. Yeah. So actually a physician client one time called me up and this was classic. He’s a physician client. He wasn’t the time he wasn’t. And he said, Hey there’s a judgment against me. That’s coming down. And I’m about to have a liquidation event with this syndication that I’m invested into.
How can I word it to this deal sponsor, that’s running this syndication that I don’t wanna receive that money right now. And I want ’em to hold it until after this thing all plays out. And I said, really, you think they’re just going to make an exception for you and say, we’re gonna liquidate out our, every other investor in this deal.
But for you, we’re gonna hold on to your funds because you’re afraid that they’re gonna go to a creditor. I said, that’s not reality. And in fact, if you made that. What is it gonna show that you’re trying to influence or hide assets and you’re gonna put that person at risk. So they have no incentive to help you.
They, if I was their attorney, I tell ’em not to. So how do you protect against that? What you do is you take your syndication interest and you put ’em into a limited liability company. Typically we’re gonna set it up in Wyoming or Delaware, and you have it held by that LLC. So when the syndicators do pay out, it doesn’t go to you directly.
It goes to your LLC that you control. You’re the member of, and if you were staring down a lawsuit or a judgment, the creditors can’t step in front of you and swipe that distribution from you because the only time they’re gonna get paid, get this is if you decide to take money out of your limited liability company and pay it to.
And I haven’t met a person yet. That’s been in that situation where they say, yeah, I’ve got, 500,000 sit in this limited liability company. I’m just gonna start taking distributions to make sure my creditor gets paid more likely. They’re gonna say, I’m just gonna reinvest it, sit on this until that judgment expires.
And then I’ll start taking my money out. That’s how it works. But most time you’re never gonna get there. And the reason why is because attorneys understand how all this works and they’re gonna settle. One of my clients in Los Angeles $1.7 million judgment entered against him earlier this year.
And of course, he’s tripping all over himself, freaking out, he’s going into a debtor’s exam. He saying, what do I tell him? I said, you have to be completely honest. You disclose everything that they ask. And so he started going through and telling him how, set up LLCs. He was using myself as his attorney through Anderson and they pulled it up.
Our information on Anderson. And there was three attorneys that are grilling them and they started conversing amongst themselves. And then they turned the mic off, turned off the camera. They did a re they took a recess for, I don’t know, 15, 20 minutes. They came back and they said, listen, I understand you’re using this firm.
You’ve set up the structures. You’ve already disclosed. We don’t need to continue on if you’re willing to accept $400,000, we’ll settle today for 400 grand, 1.7 million to $400,000. Once they knew what they were up against calls me up, he goes, what do I do? I said what do you wanna do? He goes, I want to take it.
And I said, no, you don’t wanna take that. That’s just their opening offer. They’re gonna go lower. They just showed their hand because they knew they wouldn’t get paid otherwise. And so sure enough, we went lower or he did. And that’s the point why you have this stuff because it puts you in a stronger position.
And again, I think that’s where not a lot of people realize like this stuff it’s not black or white binary, it’s gonna protect you, not protect you in a way it’s like a magic card that yes, it shields you from a vast majority of the settlement. Everything’s pretty much settled. I don’t know what the stats are but like 90, 99% of things are settled.
Just goes to a math formula. If you have your LLC or some other legal entity set up that it’s basically like a shield. Correct. So what’s like the standard, like on the podcast form here, we can’t really go into too many details, but what’s some, like a typical like entity structure or maybe multiple structures, for the average, multimillionaire they’re just a passive investor. What kind of does that kind of look like for folks.
Typically, I tell people anonymity king, make sure they don’t know what you have, because if they can’t find it, they’re not gonna know they can go after and it’s not something they can recover against, make yourself appear as if you don’t own much of anything, because that increases the likelihood that a personal creditor will settle for policy limits and go away.
And that’s really what we’re driving towards. It’s those aggressive creditors where the attorney, is trying to make a buck more than the policy limits. That’s gonna push past that where you wanna make sure you have a firewall set up. And the best way to create a firewall is to use limited liability companies and LLC, that has what we refer to as charging order protections.
So I like to always set someone up with a Wyoming limited liability company, because it’s some of the best protection you can use to ensure that if you get sued personally, A creditor cannot break that LLC and get into whatever it holds. So we start with that as the base foundation, and then from there that LLC will own other limited liability companies because that’s the outside end shield.
So if somebody sues you that stops them from getting into your assets, your investments, you hit grandma going down the road, the outside in. Yeah, that’s right. Perfect example of that. So now your investments, your syndications your real estate that you own, your brokerage account equities, things like that.
You’re gonna set up separate not the syndications or the savings guy. You drop that right in your Wyoming, LLC. But if you own residential real estate, single families, maybe you have a duplex here, there you put those in separate LLCs. They all point to the Wyoming, LLC. So they’re all owned by that one, Wyoming, LLC.
So if you were involved in a lawsuit and somebody said to you, Hey how many LLCs do you own? I only own one. They need to ask the question. How many LLCs does the one LLC that you own? Oh, maybe it owns eight, but it’s your shield. So by setting this up in the manner which I described, if something were to happen with one of those other upper tier LLCs that happens to hold a duplex, then it’s gonna stay contained in that LLC.
And that’s going to absorb any losses associated with that, but your syndications protected your brokerage account. Your savings is gonna be exempt. You’re gonna be exempt from that lawsuit, your personal residence, not gonna be attached, it’s just gonna lock it down. And so for most people, that’s the type of structure we would recommend you set up now.
Where you’re investing is really important where you live is important as well, because there are nuances to the types of entities and strategies we use. It’s not a one size fits all people think I talk about LLC. So if they’re investing in Florida, we’re just gonna use a limited liability company. Or if you’re in California, it’s gonna be an LLC.
It’s really not. And so in different jurisdictions, we use different types of entities because you have to look at not just the asset protection you need to look at what are the tax implications. Do you wanna put together a structure that’s going to create a taxable event when you put the property into it?
Yeah. You get asset protection, but at what costs, it costs you $7,000 in transfer taxes or reassessment of the property. So you need to understand that other side of it as well, and look to different types of tools that will ultimately achieve the same desired result. But it’s not going to be with any type of negative consequences that can come from reassessments or transfer taxes.
And I think what Clint’s trying to say too, there is don’t go to legal zoom, cuz I think that’s where this stuff gets personal. And I think that’s why, let me tell you guys to, if you guys are new to our group book, a quick call with myself, we can dig into your guys.
Other, non-legal side that’s my area expertise, but it’s all personal finance and this is, it’s all legal structuring and it’s all personal to your situation where you live, how much money you make, what’s your values and what’s your legal liability is your profession, et cetera. But I guess Clint what’s what are some of these legal structures that you’re not a big fan of, or maybe don’t really apply to situations.
And I guess before you got you answer that I’m just gonna take a time to also say, tell everybody here, make sure you guys get your umbrella insurance, that’s essentially what is the giveaway for the lawyers when it comes settlement time? So get a umbrella insurance at least like a million bucks.
Most people on our family office group were getting that for three, 400 bucks a year. There’s nothing. Absolutely. What are some of the mistakes that people end up making. I see like these series LLCs, these land, there’s a bunch of like flat different options out there.
Maybe you can talk to why sometimes that doesn’t, those things don’t make sense, because where you’re using it, it has to be recognized or it has to provide. Some benefit. If you set up a series, LLC, for instance, and you create a bunch of cells associated with the series, LLC, and then you wanna own real estate in Hawaii through these independent cells of a Delaware series that ain’t happening.
You could do it, but at the end of the day, if you got sued, you’re not gonna have the protection that structure would provide you. If you’re making that same investment in Texas, that actually recognizes the series, LLC. So you see people try to use structures that aren’t appropriate for the state, where the assets located.
They think, oh, I’m gonna save a couple bucks by going with the series, LLC. Hate to tell you that it’s not gonna work there. Land trust, I use land trust for my investing, but I’m not one of those that I’m gonna tell you, you need to use a land trust in every situation because the problem you run into it complicates your life. So I like to keep things simple. I’ve seen multi-tiered structures before that the benefit doesn’t outweigh the cost. And when I say cost, I’m not talking about monetary costs. I’m talking about time, right? For you to have to get you wrap your mind around all this and operate it, that’s equally important, any type of structure you’re creating.
And then the other mistake that I see people make is not understanding the tax side. So there are things that we can do when the way we’re setting up our entities to ensure that we’re always going to look better to lenders so we can fund more deals or if we wanna sell the property. So I’ll give you two, two concrete examples here.
One individual comes to me, found me on the internet on YouTube, said, Hey, Clint I wanna book a strategy session with you. We get it all set up. His problem was he had a multi-family. Trying to sell it. Two buyers keep fell out of financing. He had it in a limited liability company set up by his CPA.
So the CPA got the structure, right? He just didn’t understand what tax election to make, which, he’s a CPA. You’d think he’d know this. He chose to treat that LLC as a disregarded entity. Now the benefit to the client is he didn’t have to file a tax return with the disregarded LLC, but the CP didn’t know the right questions to ask which would’ve been, Hey, what do you plan to do with this property?
Is this gonna be a rehab stabilization and sell? Because if that’s the case, this LLC needs to file a tax return and we’re gonna set it up as a partnership or maybe an escort that would kind of be my secondary option so that when we go to sell the property, the underwriters who are financing the deal for your buyers, they’re gonna get a tax return to verify the income and expenses and CapEx and all that with the property, cuz absent that.
It’s gonna be tough, cuz they’re always gonna ask for tax returns and he didn’t understand that. And so as a result, they kept falling out under financing. And so there wasn’t a clean cut solution for him. He had a third buyer and the same process, they kept asking for tax returns for the LLC. people say, just give him your 10 40.
It doesn’t work that way because underwriters, they got these little checkbox. They have to go through in order to underwrite a loan. Otherwise it isn’t gonna comport with the lenders requirements. And so they wanna make sure that they’re hitting all these boxes and the same thing with the private investor that owns multi or owns, residential real estate.
I’ll explain to them, Hey, you can set it up where you own it personally, or you own it through a disregarded LLC. So you don’t have to file a tax return federal return. But what is that doing to you rather than what is it doing for you? And if you don’t know what that is, then you’re missing out on a big part of real estate investing.
So what I’ll tell my clientele, what I like the way I like to structure it, that Wyoming holding LLC, all of it treated as a partnership for federal tax purposes. And the reason why I do that is because it hits your income will hit your 10 40 on a different line. Then if you own the real estate in your own name and so where it hits your 10 40 makes you actually look better to lender.
So you can get more deals done because your debt to income ratio, doesn’t go outta whack, cuz this is what can happen. If you own it in your own name, it screws up your debt to income ratio. Cuz they hold back income. You can make a hundred grand on your real estate and rental income. They’ll say, no, we’re only gonna give you credit for 70,000 of that.
You’re like, what the hell? There’s a hundred grand. You can see it. Yeah, but we’re forced to hold back. Whereas if you structured it slightly different, same income, same taxes to you, but where it hits your tax return, they give you a hundred percent of that. And then you take that and you look at the audit risk and now you just reduce your risk of audit as well.
So if you’re gonna engage in cost segregation to massively depreciate your property to throw off huge tax breaks to yourself, I prefer to do that through a partnership K one, then on a 10 40 schedule E page one, so that I’m taken out of the audit risk pool. And so there’s different layers. And I call that the business planning side of investing, where a lot of attorneys, if they’re not investors, then they’re not gonna see that, that side of it because they haven’t been down there and making the mistakes that, I made these mistakes.
And so it took me a few years to learn this stuff just from my own investing. And thankfully, because we work with so many clients all across the country, I would find myself talking to experienced investors like yourself and, You’re asking me for asset protection and I’m asking you questions yeah.
To help you plan, but also to figure it out, Hey, what is he doing? That’s helping him to achieve his goals so much faster than I am and started putting all this stuff together. And it’s really helped out our clients a lot in their investing.
And I think, like for our group, this is the simple passive of cash flow ways. When your network grows, you eventually get out of these little rental properties and not only for the legal headaches as we talked before, like why do even maybe I should take myself out because I still sign on the debt personally. But for most of our clients, why do you even need to show income to qualify for a loan?
Unless you’re gonna buy a primary residence, but then that’s another problem. I haven’t figured out personally, when you start to buy 2, 3, 4, $5 million properties, you can’t get a loan for bigger than a million dollars, but if you’re buying a regular house like for mostly you guys out there, you’re not gonna be doing deals, you’re not doing buying a duplex. TriFlex you’re just getting out of that world. And that’s where, you don’t really need to think about, these things as you start to gravitate more as a professional investor, as opposed to deal maker or, the bigger pockets world, group, B guy, those kinds of types of folks.
Let’s say that I’m in four year deals, that’s four K ones then that come down to my tax return. So if I held it through one entity treated as a partnership, not only have one K one that comes down to my tax return rather than four. So how does that benefit me? The benefit comes in the complexity of your return and that should you go to qualify for new personal residents and you want to use, qualified mortgages.
You’re not working in the non QM world. Then when they look at your 10 40, whoever you have to turn, your 10 40 over to less is gonna be better. The more you have, the more scrutiny it draws and you take yourself out of potential situations that you could have ordinarily qualified for. If you just didn’t have your tax return structured in a certain manner.
So when I look at planning, how your 10 40 looks is just important to me is how your asset protection side’s gonna play out. I think all you guys just should go work with Anderson and then go to the tax pitch, cuz I’ve just as the syndicate and sponsor, I’m just tired of working with some of your guys’ CPAs that ask, like they need to file this.
Or the mortgage brokers they ask for all these little K one S and it’s dude, it doesn’t even matter. It’s not like they. Debt recourse to this loan. They’re just a passive investor along with a hundred other investors. They give you guys, if the bureaucratic guy actually knew what a K one was part of a partnership, they wouldn’t be asked in these questions, but they’re just following a checklist.
And I don’t know, that’s my little rant against all these little doc or these requests that these mortgage brokers or underwriters ask for at the end of the day. Yeah. It’s frustrating because it just, can screw up your deal for sure. Oh, and it’s time consuming for you to have to deal with all those little request that come in.
Before we move off of the legal side and talk a little bit about some of these questions, these typical questions that I get on the K one and taxes side, you mentioned like the kid going out and getting drunk and you. Incurring liability for the family. We, this specific question has come up many times in our family office group.
The kids are becoming teenagers. Do you buy the car in their name? Do you put the, the loan in their name? What’s the best practice for that? Especially when, mom and dad worked for $5 million net worth and, mobile juniors out there doing OLS one.
That always comes down to what is the cost of insurance and how much you’re willing to pay? Ideally if a child, when you say child, what over 18 or under 18. So 16 year or even going up to the college, I guess I get, I don’t know if it matters, it really doesn’t matter so much.
If they’re going off to college, like the example I gave you, that vehicle is still in the parent’s name. So that brought the liability back home, but they can also say that you’re still supporting that child and therefore you’re responsible for them. They could try to rope you in that way because you have the deepest pockets.
So what I would recommend, if you have someone who’s over the 18 or over under 18, I don’t think you can get out of it, but over 18, make sure that the registered owner of the car okay. That legal owners aren’t necessarily liable. It is the registered owner. And you know this because when you finance a car, the legal owner is always the bank and you can’t Sue the bank because you go out and pull a DWE and you hit somebody else’s car and destroy it.
You Sue the driver and the registered owner. So that’s one way to, to minimize your risk exposure to the kids that are going off at college. Second thing is to show that they support themselves. Structure in such a way that maybe they’re earning income, where they have their own investment stream coming in.
So you bring them into one of your LLCs and you give them, five or 10% interest in that. And that gives them enough money to cover their expenses. And some people say heck if I give them a 10% interest and they’re making 80 grand a year, how do I know they’re not gonna blow it on, parties and girls and things like that?
Because if they are you’re in control, you just turn it off is what you would do. And so that’s what I tell people, you always wanna make sure you’re in control of of what you’re doing. Yeah. So have them put the loan in their name too or that doesn’t matter? The loan in their name, you could do that.
The benefit of doing the loan in their name is that now they’re gonna build business credit or not business credit. They’re gonna help build their credit. You may have to co-sign on the loan, but if they’re on the loan as well, now they’re starting to create that credit profile. So that’s advantageous for sure.
To do that. What about insurance policy does or does that does not matter, I guess it doesn’t matter so much, but what’s gonna happen, it’s gonna be more expensive for them than if they’re insured under your policy. I guess at what net worth would you say, would it make sense to bring it?
Irrevocable trust to take care some of these issues where they don’t, nobody owns the car. It doesn’t matter about the owner. It’s a registered owner that comes down to it. So you could have the legal owner is the trust, but the registered owner, what gonna be your child, or maybe you make the trust also the legal and the registered owner, but the child’s driving it.
Then the liability flows back to that trust. And whatever assets it would hold and the child gets sued. I could see you doing that. And that’s the only asset that holds is the car. The problem with that strategy is that someone’s gonna look at it and say, what is the purpose of the trust?
And you’re gonna say to hold a car and for asset protection, and then you could run into problems where they don’t respect the trust, because it was set up strictly for asset protection purposes. They might look through it. You could try it. I’m not opposed to doing it because I think more roadblocks you put in place the better off you are.
You could just tie an attorney up. Oh, that car out’s owned by an irrevocable trust. Oh, that’s owned by limited liability company over there. Oh, there’s a corporation over there and we don’t have the insurance that’s in the kid’s name and all of a sudden they’re just chasing down all these different paths.
To me that damn car is really the biggest point of contention. If you’re thinking about how to not lose your money, as far as here’s what you do, you give your kid a bicycle. Okay. And you solve the problem. Or number two, you make sure that all your assets are protected.
So even if they do Sue you, what are they gonna get? Or get an Uber one and give ’em a whole bunch of Uber credits and stuff like that. Yeah. So they never have to leave their house. Correct.
So let’s switch over to some tax stuff. And I had some questions here that I get asked a lot and I always feel bad. Taking your guys tax Tuesday videos and regurgitating it back to them. Appreciate Clint, answering these for me because they are the same old questions over and over again. The first one I normally get is this grouping election, right? Investor invests in syndication deal where they’re a passive investor and they get their gains and losses on this K one form.
And especially if there’s a cost segregation involved, there’s a huge amount of losses created often, like at least half of what they invest . And then, so the investor goes back to their CPA who looks up from their glasses and says you can’t use those losses to offset the gains on other rental properties or other syndication deals.
Maybe talk a little bit what’s the logical leap there. And. Should people handle that one. I’m not sure. As long as there’re passive losses and you have passive income, those net out. And so that’s the way that should be playing out. And there’s always gonna be nuances if people are going back to their CPA with passive losses, and they’re trying to take those passive losses against ordinary income or non passive income, then you’re gonna struggle unless you’re a real estate professional.
You’re not gonna be able to do that. So the losses that you pull out of a syndication, those can be grouped against similar types of income, but they can’t be used to set up unsimilar types of income, right? Similar types, meaning passive income gotta be passive. So from other rental properties or other syndicated deals, all passive that’s correct.
Let’s talk about then that kind of leads into the next question. You can’t use the passive losses to offset order income such as from your 10 99 to your day job. Unless maybe go into rep status, what that allows them to. Yeah. So unless you become a real estate professional, which means that, you’re spending 50% of your time, so you don’t hold a full time job in a non real estate related activity and you spend 750 hours on real estate related activities.
And so with reps to meet that test, it doesn’t have to be with your own rentals. You just have to be doing stuff in real estate. So you could be a broker, you could be a contractor, you could be someone that’s involved in that, an appraiser, and you’re gonna meet the first prong of the reps if that’s what you do for your living.
But then the second prong of that test. Is you have to materially participate in your rental real estate business activity. Or you folio there folio the properties you won’t correct. And so that’s either there’s seven tests, but the two that we look at the most is gonna be the 500 hour test. You spend 500 hours on your real estate.
Plus you met the seven 15 half of your time on other real estate activit. You’re good. Or you have to spend a hundred hours and that a hundred hours is more than anyone else that works on your properties. And so where I find that people struggle with the reps test is that they have out of state PMs. So they’re not involved with their own real estate.
And they try to use education looking at balance sheets and qualify. And there hasn’t been a case yet that I’m aware. That’s ever happened now that could probably qualify for that first 750 hours. That’s not involved in their portfolio. One might use that, cuz that seven, that 750 hours outside of their active portfolio is a little looser.
It’s gonna be tough because you got 50% of the time. So if you’re a physician, you ain’t making it. You’re already you miss out on that prong. So what I typically tell people is that if you wanna make sure you’re gonna qualify, self-manage your real estate. Now you don’t have to. Self-manage all of it just self-manage enough where you get the hours and you’re good to go.
Or if you’re not, if you don’t have the time and you can’t meet 750, 50% of your time, just do short term rentals for a bit, buy a property, turn it into a short term rental, spend a hundred hours on that property. You don’t have to worry about 750 hours, 50% of your time. You just do that.
And your average rental period is seven days or less costs like that thing, harvest a ton of tax deductions, turn it into a long term rental next year. And your goal, you can take that money now and you can offset those losses against all your income that are generated from that short term rental activity.
And so what I find is with many of our physician clients that are not yet just putting all they’re diversifying, they have their syndication interests, they have their equities, and they’re doing some single families on the side. We’re taking those. And we’re saying those need to be short term rentals for the first year.
Focus on that. So we can harvest the losses. We had one guy who sold a his interest in a clinic. He had a big windfall and. Poured all that investment into a property in Texas and turned that into a short term rental. His wife was the one that qualified. He still was busy wife qualified with the a hundred hours.
And it freed up for him must say he was $670,000 in deductions. So it can be huge. If you look at it from that perspective. So if they turn on the, short term rentals, they do that for the first year. What about the next year? Are they real professional next year?
When nothing goes to be a transition to a long term rental? No, you’re not because you couldn’t meet the test to begin with. Yeah. So only that it’s that, that one year. Everything comes here. You’re eating all the cookies the first year. There’s nothing left for the second year. So you don’t care in the second year you took it all now.
Yeah. So this is that strategy where you’re investing in a whole bunch of syndication deals. Maybe you invested half a million and you got 300,000 of pass the suspended, passive losses on your 80, was it 82, 85 form or something like that, but you have that ready to use. So you pulse it in next year.
You, you do a short term rental. Now it’s your game to use those passive losses as you wish. But after that, you lose that kind of that Starman ability that, that rep status for after that year. Or if you look, if you had excess passive losses, look for excess passive income opportunities you have where you have appreciated positions that are passive in nature, sell ’em harvest the law the gains this year to take your losses and offset it, or buy another short term rental next year, a couple years later, buy short term rental. Yeah. One of the things I, you and I were talking about, I had a client that approached me, said, I have this property, I’ve owned it since 2014. I told I couldn’t do a cost se on it. What should I do? And I, I don’t qualify as a real estate professional.
I need some tax deductions this year. I said, sell it. His complaint was well it’s tripled in value. If I sold it, then I have to fail this additional gain said sell it on a 10 31 exchange. Let’s exchange up into even a larger property with that. Now, since you bought the property between two, September of 2017 and the year 2022, it qualifies for 100% bonus depreciation.
So we exchange into a larger property for you. We then perform a cost segment on that larger property, generate a huge tax reduction this year that you can then use to offset that gain that you have. There’s ways to use the code to to fix your tax problems if you’re willing to do it. And in that case, he had to sell the property under a 10 31 exchange, find the replacement property, which he was willing to do because he wanted to get the tax losses harvest it.
And this is the best year to do it because a hundred percent goes away next year goes to 80%. Yeah. Still not as bad, the year after, I think 20, 24 be 60%, but , that’s another strategy that I’ve been personally thinking about is, buying a big house that I eventually like to live in, but to buy it and then cost it out stuff, those passive losses in my pocket, then maybe living it at some point.
That’s a strategy too. It’s exactly right. I’m running out of time in the year 2022 to do that. You are but the thing is, if you buy it this year, you don’t have to spend a second this year. To get a hundred percent bonus you could cost second, two years from now, as long as it was still an investment property.
And it relates back to the year of acquisition. So if you bought it in 2022 and you held onto it, put it in the service and then didn’t perform a cost second until 2024. Your bonus depreciation would be 100% because it relates back to the year of acquisition, not when you do the cost sec. So that’s why this year, as long as you buy something now, 4 20, 20 twos out a hundred percent.
Ah, that’s a good one. That’s a new one. I probably should know that. That’s why our other CPAs on our cost fixed indications. They say, yeah, you don’t need to do it just yet. But that’s a great point. And I really, I don’t know if people missed it, but Clint’s idea. I’m not a huge fan of the 10 31, but if you’re gonna do the 10 31 to get a larger property to, make the bigger bang for your buck on the cost, say before the end of the year or acquire it before the end of the year, then the 10 31 allows you to get something bigger, to get a larger cost say, and stick those losses in your pocket, or at least kick the can down the road. A little bit that way.
So the other questions that kind of come to mind as far as passive investor taxes like I, I think the big thing that, a lot of CPA firms are scrambling, or at least on our side, we’re seeing, K one S get taking so long and most times in private equity world, to have them get it completed in January, February is just ridiculous in the private equity world.
We tell ’em to do it in October when it’s normally due. But still, investors are their CPAs asking for these K one S and what, if a K one is missed, right? Can they just refile it next year? Or what’s the, they could amend the return, just make sure, approximately if there’s positive income there, what that’s gonna be and just report the income.
So you didn’t under-report your total income, but here’s the thing with, like you said, the CPAs, we have a large tax group inside of Anderson, and the problem you’re running into is industry. Why can’t you find enough people to work? And so it’s just really slowing down the process for everyone and getting their returns completed because there just aren’t enough preparers right now in the workforce.
That is willing to do the job. And so you see it across the board, doesn’t matter, you guys it’s taken them a long time to get their K one S out. Unfortunately it’s because they don’t have the manpower. And everyone we talk to cuz we are, we’ve been trying to grow and expand our tax department beyond the 140 people that we have to buy up other companies and thinking, all right, we’re gonna get more people, economies of scale and they’re behind, they’re struggling to get through their work because of that.
And here’s my personal tax question. So I get 80, a hundred K ones every year, then I make it into a little spreadsheet. So I can spot check you guys at the end to make sure approximately how much passive losses I should have.
Yeah. But like the K ones they’re never right. Like the names always felt wrong or the damn boxes on the bottom they’re checked, they’re all messed up anyway. Does the IRS even look at that stuff or does anybody even care that it’s not gonna get an issue audited?
They’re just looking to see if you’ve got the income reported on your return. They’re matching up, not with the name, but with the E that’s really what it’s pulling down to. So it matches back to the parent return. If they were to audit, they would partner, they would audit on the partnership level and just make sure all the numbers add up to what the partner divided up in the beginning.
And here’s why you’re not getting an audit. You have 80 K one S in your return. You’re an audit. You look at that, you’re like the hell , I’m going up for this 10 40 guy. That’s the biggest joke about it. That they keep talking about what they just passed. But with that inflation reduction act scam.
They say they’re hiring all these auditors. Who do you think they’re gonna target? They’re not going after the people that have the K one S and the more sophisticated returns they’re gonna target the middle income taxpayer that doesn’t have the investments that just files the 10 40.
because that’s the easiest person. Plus you don’t have the knowledge. We’ve got some X IRS attorneys that work for us that used to work in the audit department. And they said, it’s crazy. You gave me a room of a thousand auditors. There’s only 10 in that room that handle corporations and partnerships. And those types of returns, 10 forties that have K one S on ’em.
He said the rest of ’em can’t touch ’em. Yeah. So he said, that’s the best way to hold assets. So what should I tell a lot of our investors were new. They might have three or four K ones, and then they’re asking you, they’re saying, oh, we spelled their name wrong on this K one.
Or, this checkbox needs to be checked. It’s just not a big deal. I think you can send them a corrected K one, but as long as they’re gonna be reporting their income then it’s not in and of itself gonna trigger on and on. Yeah, I get it. People are always everyone’s concerned about being audited, but that’s not the thing that’s gonna co you know, trigger the audit.
What’s gonna trigger the audit is that you, the 10 65 reports that you earned $250,000, and you report that you only made $250. That could be a problem. If they catch it and you’re part of the 0.04% or whatever that number is that actually gets audited or point, 1%. But I think if I’ve followed your guys tax Tuesdays enough, your guys have a big strategy as you guys put as many things on as the schedule C right.
As opposed to what normally people will put things in a 10 40 or the schedule E and that’s a lot more audited. Schedule C is more audited. So you have page one of schedule E that gets audited. We prefer to put things on page two, which is gonna be via K one. So all those K ones that you get that have to do with real estate, those show up on page two of your schedule, E not on page one is reserved for real estate that you own in your own name or through a disregarded entity.
That’s the audit because again, 990 auditors handle those types of returns. When you put that income over on page two via the K one. Now you have 10. So another reason why not to own little rental properties. Got it. Yeah. That is the closest plan. I know you’re always looking at these inflation reduction acts and the B B.
Any, like looking into the crystal ball, anything coming up for investors to be on the lookout for for like new tax breaks, like maybe a new opportunity zone ish type of thing or something exciting you coming up or or should be really be worried about the 80,000 IRS agents who they’re teaching with the fake code.
I wouldn’t be worried about the 80,000 IRS agents because they’re not gonna find them. We can’t find tax preparers. What, who are they gonna find to do this? And you can’t find employees right now. They’re not gonna find employees. Just finding people that show basic level skills that they actually wanna work.
Good luck. But beyond that, I think that the biggest thing on my horizon for people who own entities is gonna be the corporate transparency act where they’re gonna issue the finals. Regs, and they’re gonna have the auditing procedure that’s going to be released in. They said December is when they have to release that.
And so I think that’s the one thing that I’m curious to find out what’s gonna be required and what the reporting requirements are for anybody who has a business that have set up a, Ivo business trust, or LLC, or corporation, how that information is gonna get disclosed to the federal government does that one have to do with I remember a couple years ago, I told everybody, that were, putting their syndications and LLCs.
They all got pissed off at me because I said we need your social security number, man. Like when they got all upset with me and I’m just like I’m just the messenger, I know. Is that what the corporate transparency act is that part of it or. Yeah, you’re gonna have to, you have to report on all the members of the limited liability companies, the managers, the officers, all that corporation, same thing that’s gonna have to get submitted to, to the federal government.
And I forget if on a syndication, if there’s a, if there’s a de minimis rule where you don’t have to provide that information, but it’s gonna be an annual reporting requirement. Government wants to know what you’re doing, because they think that you’re committing tax fraud or your money laundering is really what they’re concerned about.
Yeah. I know people don’t like to give that stuff up, especially when they’re purposely using entities to invest through like you mentioned earlier. But, from a standpoint of Iris doesn’t have enough agents and to collect revenue from people who are doing bad things like, on purpose, I think that night may be a good idea for them so they can go catch those guys because that’s what people were doing, right?
They were, creating all these LLCs and creating all these deductions or hiding all the gains. And it’s impossible to track unless you can tie it to one E or one social security number. And we’re not doing fraud here. They should go catch those guys. That’s not gonna change anything.
Tell me a law that stopped some type of crime from occurring, right? Yeah. It’s gonna happen. You wanna commit fraud? You’re gonna do it. so side note here years ago, this makes it harder for all of us. It does. The IRS came in to audit our company because they wanted transparency cuz we set up entities in Wyoming.
Or at that time we did a lot in Nevada and they said, we want a list of all your clients, which they can force you to provide. They do it all the time to companies. And we said why do you need this list? We said, we wanna know who’s behind all these companies. He said, you already know that.
He said, no, we don’t. We said, every time we set up a company, we obtain an EIN and we provide you the member, the owner of that company and their social security number. Who’s behind every single company that’s set up. That’s how we acquire the EIN. We don’t acquire ’em under our own names and this is what they told us.
You may do that, but we have no way in our system of matching that information up. I said, are you kidding me? That’s a basic computer system. You can’t run that. I said, now our system can’t handle that. And so that’s why we need to ask you for the information . So it just shows you how antiquated they are and the way they approach things.
And so even if they collect this information, it’s not gonna do ’em any good. It’s basically whether we didn’t keep our records straight or we didn’t, it’s too much money to revamp for a computer. Let’s just bother everybody again. That’s exactly right. Thanks for coming on Clint. Again, folks, we’ll put this in the tax section at the webpage at simplepassivecashflow.com/tax.
We’ve hit Clint on there and passed the webinar. So those are all up and there too. But remember, a lot of this stuff is personal. This is just a podcast made for entertainment, but hopefully we’ve created some questions in your guys head to ask more probing questions and again, join the investment club simplepassivecashflow.com/club. We’ll get on the phone there or get on a zoom call and we’ll see you guys next time. Thanks Lane.