Tax Cut Jobs Act 2017
Read the full text of the Tax Cut and Jobs Act of 2017.
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The Biggest Tax Changes in 40 Years with Steve Thebodo
The Biggest Tax Changes in 40 Years with Steve Thebodo
Steve Thebodo – Steve
Rich Merlino – Rich
Steve: Well, thank you for having me. Several faces in the room are familiar. I recognize them from last year, so thanks for coming back. Apparently, it wasn’t that bad.
This year, I’m going to expand on the Trump Tax Reform, which was the request of Rich and Doug. It’s been a little over a year since Trump Tax Reform came about. Last time I was here, it was about 3 weeks old or so, so it was very new and there’s been a lot more detail that come out and I’m going to go into some of those finer details where last year, we went more of the overall picture of taxation and different types of entities.
A few of the things that we’re going to go through is standard deduction versus itemized deductions, the changes there, how is that going to affect you; SALT, charitable and miscellaneous deductions. Those are the items that are going to affect you whether they’re going to be itemized or not, and I will explain what SALT means.
Tax rate changes. My firm we have a lot of high net worth individuals for clients and we do a lot of projections. I can probably count on one hand the number of my clients that are going to pay more in taxes next year out of all the projections I’ve done, so it should be very good for all of you when April 15th comes around.
Retirement deductions, changes in that. College savings. There has been changes to that under Trump Tax Reform and 1031 Like Kind Exchanges as well.
Then probably the biggest one that everyone here is interested in is this qualified business income deduction. I would assume that pretty much everyone in here would qualify for this because you’re here tonight and that’s a good indicator anyway. If we fly through all these things, I have last year’s presentation. We can touch up on some of those things if you have any other questions.
Under the Trump Tax Reform, there is no longer something called exemptions, so if you had two children and you’re married filing in joint, you would have four exemptions last year under 2017. That would be the equivalent of an extra $20,000 deduction, give or take a little bit, so that goes away.
It used to be a $1,000 credit per child, so what they did was they just jacked up the standard deduction to $24,000 and they adjusted the gross income level to $400,000 so that more people would qualify for the child tax credit and they increased that to $2,000.
Those two things offset. That $2,000 is up from $1,000, but you lose $1,000 by not having that exemption for the child, so these two things essentially offset each other and then they change the standard deduction, so if you add just two standard exceptions to that, it’s right in the same ballpark. It’s minimal increase over what the exception plus standard deduction used to be.
How does that affect you? Well, under the old rules, you could deduct on your individual return. Now this is your personal residence, not your rental. You could deduct all your real estate taxes, all your income taxes, your personal auto excise tax. We have clients that pay hundreds of thousands of dollars just in income tax. Well, now under the 2018 rules, you’re limited to $10,000 no matter how much you pay. That’s a big change.
Those people that used to claim $200,000 in estate income tax, now they’re limited to $10,000. That brings your itemized deduction way down, and most likely, that’s one of your highest deductions.
After this happened, a lot of people got the impression that charitable donations are no longer tax deductible. SALT stands for state and local taxes, so that’s your real estate tax, as well as your auto excise and income tax. Once you don’t have this deduction anymore and if your mortgage is paid down considerably, you may not be able to deduct those charitable contributions anymore because you’re not going to exceed that $24,000 as a married couple.
A lot of people give because they love the charity; they just don’t do it for the tax deduction, so a lot of people still make that donation, but I just want to mention that those donations are tax deductible. It’s just a matter of whether you’re going to be able to utilize them to minimize your tax exposure.
Miscellaneous deductions, so these are more or less for people that are employees of other companies, so myself, I get a W-2. If I had things like a high amount of personal expenses. A lot of times this is the outside salesman who may buy their clients gifts, have high mileage that they don’t get reimbursed for. You used to be able to deduct 2 percent; anything over your 2 percent adjusted gross income, you could deduct against your Schedule A, which is your itemized deductions. Those are gone, so there is no longer any 2 percent itemized deductions for business expenses out of pocket.
What do we do? We’re going to calculate both of them, right? We want the best deduction no matter what, so you’re still going to go through the process of whether you can itemize or not. There’s a lot of people that will not itemize because that increased by about $8,000 in the standard deduction.
I have a single taxpayer slide here and the next one is married filing joint, but one of the things that I really wanted to concentrate on here was under the old regulations, in this 25 percent tax bracket, when you jump to married filing joint, the bracket was much smaller, so if you were married, that’s where you might have heard something called the marriage penalty. That’s really where it kicked in, so the bracket gets smaller, the tax rates go up, so you pay a higher tax rate double that income.
Part of the Trump Tax Reform, what they did was all these brackets are double for married filing joint, so that marriage penalty is gone. Once again, it really helps the married couple filing joint, as well as you can see that the tax rates have come down considerably. Once again, that’s going to be a favor for all the taxpayers.
You can see here in the 25 percent on the single, it went up at $91,000, and so from $25,000 to the next, it went up to $91,000, so double that, it’s $182,000, so you can see that marriage penalty, you jump to the 28 percent bracket. Under the old rules, you would be at the 28 percent bracket quicker. Under the new rules, you’re still going to be in the 22 percent bracket. In that taxable income range, it’s good. It’s obviously a positive for you.
Rich asked me to talk briefly about the corporate tax rate. I assume everyone—there’s probably no C corporations in here, but that’s essentially what this talks about. The new C corp tax rate is 21 percent where last year it was 35 percent, so you can see that big reduction there, and the average of all nations is 24 percent.
Thank you. You can hear my raspy voice.
You can see that we’re slightly under the world average. Then the corporate AMT went away as well, so that’s going to keep this tax rate much lower. Essentially what AMT is they kind of just recalculate it. They throw out certain deductions and they recalculate your taxes under individual tax. All your taxes paid on your Schedule A, they get added back as well as a few other minor things.
Even if you’re taxable, your tax came out to $10,000 per year, AMT might say that you’re actually $12,000, that you would pay $2,000 in AMT tax. Under this new reform, because they limit the $10,000 for all your taxes that you can deduct on your Schedule A, very, very few people are going to be subject to that AMT level now. They increased the AMT income level, as well as taken away a lot of the add backs that exist, so a lot of people won’t be facing that AMT.
Then repatriation, essentially they brought the penalty for foreign corporations having assets overseas. To bring those corporations back over here to be Americanized again, that’s repatriation, so they reduced that tax to 15 percent from 34 percent plus a 10 percent penalty, so you can see that. They’re trying to get more business back in the States, and then we can tax that income going forward.
Brief changes. For those that are—again, I don’t say just— but as far as just into real estate, if you have a W-2 fulltime job, you can now contribute $19,000 to your 401k; that’s up $500 from the prior year. If you’re over 50, it’s still an extra $6,000, so now you can put away $25,000 into your retirement, increase your IRA contributions, went up to $6,000 from $5,500 and your catchup is $1,000 still.
To do any of these, you need earned income, so again, I don’t mean just, so please don’t get mad at me and give me a negative review on this nice little stickies that I say you’re just real estate investors. Real estate is passive activity. It does not qualify for these deductions, so that’s what I want to file.
Okay, so another change is the 529 Plans, so if you have grandkids, children, putting away money for their college education prior to this year, it’s unlimited how much you can put away. Up until through 2017, you could only use for secondary education, for college, trade school, that kind of thing.
Now you can use up to $10,000 per year for elementary through high school, and then once they go to college, you can use as much as you want to pay the entire tuition. Then if you have the Qualified Massachusetts 529 Plan, you can get $1,000 deduction, which really just translates to $51 per year, so if you have another 529 Plan that has better expense ratios, just do your research before you come into a Mass Plan because it’s a $51 savings per year.
Rich: We had asked Steve to cover some retirement things and some college savings things because in addition to landlord stuff because landlords are also people, so as people, you might be interested in some of these other things. He’s covered a lot of details so far. I have a quick question. Because of the tax reduction for C corporations, and you’re right, there’s probably hardly anybody that has a C corp in this room, would there be any tax advantage to considering getting a C corp because of that?
Steve: Right, so a very common question. The good news is the tax rate is 21 percent; the bad news on a C corporation is all your income is paid inside the corporation, so everything. You paid 21 percent tax, your net income, it goes into your net assets. Now what happens on a C corporation when you take a distribution.
Rich: You get taxed again?
Steve: You get taxed again, so you pay 15 percent on those distributions, so while you may pay less tax at the corporate, you need to look at both the distribution and your tax rate to be able to get that money out. On top of it, to get money out of a corporation, usually you pay yourself W-2 wages and you’re going to pay regular tax rate on that as well. Between those, I actually run several projections on this and we really haven’t come across where it made sense to transition from an S corporation back to a C corporation.
Rich: Got you.
Steve: It’s very easy to go from a C to an S, and that’s what happened ever since the S corporation came around; the tax advantage is there. The double taxation doesn’t exist anymore on that level, and we don’t have a single client that’s transitioning back to a C corporation.
Rich: All right. Harry has a question.
Harry: Yes, thank you. This is regarding IRA. Is that rule still be in effect in for instance suppose that I need to put money in my IRA this year, but it’s for last year?
Steve: Yes, so you still have until April 15th to put money into your IRA.
Harry: Thank you.
Steve: Now, if you’re self-employed and you have a SEP-IRA, you have until April 15th unless you file an extension in that point. That allows you to put into your K1 and SEP-IRA whatever that maybe. You can actually extend your payment date into the retirement plan until October 15th.
Harry: Thank you.
Rich: Steve, what other things can we get away with until April 15th or October 15th?
Rich: Nothing else knows it?
Sandra: Can you go back for a second because I was told that charitable donations were disallowed into the new Trump tax plan? That’s question 1. Question 2, I know that a lot of us take care of our maintenance people by at the end of the year giving them a bonus or things of that nature because we appreciate the work they do for us. I’m assuming that is still tax deductible, yes?
Steve: Right. So, I’m not sure. Let’s just take the charitable deduction piece into different facets. If you do a charitable donation, say you have a single-member LLC, so you’re still going to file Schedule E within your individual tax return. That charitable donation is not deductible against your Schedule E, your rental property. It still goes to your Schedule A. That’s one small clarification. On the Schedule A, it is still tax deductible; however, if you don’t exceed—
So I always talk married filing joint, so single people in the room, your level is $12,000; married filing joint is $24,000. If you’re married and you do not exceed $24,000 amongst all your deductions, if you come up to $20,000, you’re still going to use that $24,000, so you’re not really getting a benefit from that donation. Does that make sense? Is there still a question on that?
Sandra: There’s [inaudible 0:17:53]
Rich: it sounds like if you give $20,000 to charity, you’re still better off with the $24,000 standard deduction?
Steve: Well, it’s not just $20,000 in donations. You get your $10,000 estate income tax, all your taxes are deductible, your mortgage interests. Let’s just do a quick example. Ten thousand dollars for taxes, $5,000 in mortgage interests, and you did $4,000 in charity. That’s $19,000. Those items don’t exceed $24,000; you’re still going to get $24,000 deduction on your individual tax return.
Change the scenario. You have $10,000, $5,000, and $15,000 to charity; now you’re at $30,000. Now you get to deduct $30,000. Now is every donation that you made technically deductible? No, because there is a gap where you get to the $24,000. Does that make sense?
Sandra: You have—
Steve: So, $10,000+$15,000 is the $15,000, so from $15,000 to $24,000, that first $9,000, you’re not really saving any taxes on that because you got to get to $24,000 before you get a dollar of additional deduction. Hopefully, I’m explaining it and it’s not just flying. Is that right?
Rich: I think we might be good on that. Any other quick questions before we move on because he has a lot of stuff to cover? Okay, cool.
Steve: Okay? Are you sure? Okay. Is there any question on the 529 Plans? For grandparents, we have a lot of grandparents that do this. They set them up. There’s other in your college planning purposes. It makes sense to put your 529 Plan into the grandparent’s name with the child beneficiary for tax, for college planning, for college tuition and scholarships and financial aid. If it’s not in the parent’s name or child’s name directly, it doesn’t go against your college tuition in your financial aid.
There’s financial planners out there. There’s college financial planners out there. I recommend talking to them if you think that you would be able to qualify for financial aid without the 529 Plan. The 529 Plan is taken into account if it’s in your name or the child’s name directly.
So 1031 Like Kind Exchanges, Art mentioned this early. He’s done a ton of them. The idea behind here, so let’s talk about the changes first. The changes, so under the initial House plan, 1031 Exchanges is going to be eliminated. The Senate came along and said, “No, no. We’re not doing that.” Then in the final plan, they went with the Senate, so we can still do 1031 Like Kind Exchange on real property.
Now it got eliminated on the personal property. Minor overall, so real property is your rental property. Personal property is say a refrigerator or just other tangible things that aren’t land or building. A very common one for our clients is vehicles.
I know Brian Luciere is here somewhere. I know he has a big business, and I’m sure he has several trucks and vehicles and cars. For example, if you got rid of a truck, most commonly, you will trade that truck in towards another vehicle. Under these new rules, if that truck has zero basis and they gave you $10,000 as a trade-in, that’s a $10,000 capital gain. It’s a 1245 transaction and it’s taxed under regular ordinary income.
That new vehicle, what you have paid for that new vehicle, say the sticker price was $50,000, they gave you $10,000, you net $40,000. Your new basis in that vehicle is $50,000. The nice thing is if you qualify for bonus depreciation, it’s still all deductible and your net tax is the same. The difference if you have a luxury auto, so some of these nice cars like Audis and BMWs and they’re sedans, and they don’t qualify. They’re not over $60,000, and they are limited to a lower depreciation level. You can’t write off 100 percent. In that case, you could have a taxable event and you’re going to pay more tax over the first couple of years. That’s the big change in the 1031 Like Kind Exchange area.
Now not everyone was here last year, so we’re going to 1031 Exchanges a little bit. 1031 Exchange essentially is you can take a property, the same type of property, sell it, buy the same as that property, and pay no capital gains on it. You have all your money. It goes reinvested into that new property and you’re still whole.
What’s the catch? Well, that money you put into that new property, say you have $100,000 gain off that property, you put it in new property, you paid $300,000, your new basis is only $200,000, so that basis that you’re going to depreciate over the next 27-1/2 years is now only $200,000 even though technically you paid $300,000 for it. Is there any questions on that? Okay.
Male Audience 1: [inaudible 0:23:40]
Steve: What’s that?
Male Audience 1: [inaudible 0:23:42]
Steve: Correct. There has been no changes on the front as far as real property goes, so your rental properties.
Male Audience 2: Is [unintelligible 0:23:55]?
Steve: Okay, so that’s okay. I was told not to address anyone that just yelled out. Right, Rich?
Rich: That’s right.
Steve: But you look like a nice guy, and I’m going to address that question. You need to identify the property prior to sale and then you have 180 days to close on the property. You could identify more than one property. You can identify as many properties as you want. Another catch to the 1031 is you need a third party to take hold of those funds, so you can never take possession of the sale.
Off the sale, you do go through the PNS; you never get the proceeds from the sale of our property. A third party like 99 percent of the time is a lawyer; the lawyer will hold it in escrow until you close on that new property; the money transfers directly to the new owner. You never touched it, and therefore, you qualify. Art will probably say I’m very much simplifying the whole process, but that kind of gives you the idea.
Male Audience 3: [inaudible 0:25:06] 45.
Steve: Yes, it’s 45. I’m sorry. Right, sorry.
Rich: We have a question back here.
Male Audience 4: Can you sell a commercial building and land and then 1031 into just raw land to develop later?
Steve: Yes, but in the end, it has to be a commercial property. It’s like kind. in the end, the final product that you end up has to be the same type of property that you sold.
Male Audience 4: It can’t be—
Rich: It can’t be like a grow house for—
Steve: Yes, so you can’t. I mean the simple example is you can’t take a six-family and go buy a commercial property. It won’t qualify. I mean there are some exchange lawyers out there that are very aggressive and make some stuff work even though it’s like quasi. You just got to have to find the right people, but I guarantee that one won’t work, the residential for commercial.
Male Audience 4: These are residential buildable lots that we were looking to develop at a future date, and we’re selling a commercial building, so we’re going to develop those lots later—
Steve: Into what?
Male Audience 4: The residential housing.
Steve: Yes, so you can’t do it. It has to be the same purpose.
Male Audience 4: Okay, thank you.
Rich: As I was walking around, I see some writing on feedback cads. Thank you very much for that. Do we have any questions before Steve moves on? Okay.
Steve: Okay. Is there anyone in here that does commercial, again not just residential? There’s a qualified opportunities zone that went into effect under the new Trump Tax Reform. I’m not going to go into it because there’s only two or three of you, but if you don’t know about it, look into it. It’s a huge potential to never pay any capital gains on a 10-year investment on new property. There are some specialists out there and the reason I mentioned it at this point is you can take a 1031 Like Kind Exchange.
You don’t have to use the intermediary, and you don’t have to use real property to do it. The example would be say you have $250,000 in Apple stock and you want to sell it. You can take that $250,000 gain, roll it into this opportunity zone property as long as you qualify. There are a quite a few steps to qualify. You never pay gain on that $250,000 as well as if you hold –well you pay gain on it after 7 years. But if defers your tax, so you have $250,000 in your pocket and over 10 years, that property increase in value if you sell it. Say there’s a $500,000 gain off that property; there’s no capital gain off the sale of that, but there’s a lot to it and again I very much simplified that.
Okay, I’m just going to take a quick drink. Sorry.
Rich: Brian is going to sing us a song while he’s doing that, right?
Steve: He’s got the shirt for it.
Brian: He’s done.
Rich: He’s done. All right.
Steve: Qualified business income deduction. Again, everyone being here today shows me that you’re involved in your rental property. This came out as part of the Trump Tax Return, but it was very broad. A lot of people didn’t know much about it. I talked about it a little bit last year, and at that time, it was felt that rental properties would qualify. Now it wasn’t specific in the standard back in August 2018 obviously.
The IRS and government went back and they brought out more information on the QBI deduction. Their determination is it must be derived, it must be earned from aa trade or business. Now I already said a little bit a while ago that rental is considered to be passive activity, so can that qualify as a trade or business?
Because this is so broad, the position that it’s taken is if you’re involved in that property, if you’re doing the books, you’re overseeing management, you’re doing the maintenance, you’re doing your leases, however, as long as you’re involved in it, you’re not just giving a third party a blind interest in a partnership that you have nothing to do with, most likely that one is not going to qualify, but if you manage your own rental property, the position is that you’ll qualify for this deduction. You will have the potential to deduct up to 20 percent of your net income off of your rental activities. It’s huge. Yes? All right.
Rich: Hold on. I’m coming. I’m coming.
Steve: I was told to ignore you, but I’m really bad at ignoring people.
Male Audience 5: Okay. Would being a qualified real estate professional, which is an official status, [crosstalk 0:00:00] qualify?
Steve: No doubt.
Male Audience 5: Because I have my doubts about this because this it uses the word, “earned income.” It always excludes real estate income.
Male Audience 5: Because for example—
Steve: It’s net income earned from trade or business, so it’s a slight differentiation. I mean I’ve reached out to lawyers that write for Forbes Magazine and they have reassured me that that’s the position that the IRS has taken on this. I mean you’re going to have to talk to your accountant and see how they feel about it, but all accounts I know and the people I’ve talked to on the professional level feel that the real estate will qualify.
Male Audience 5: Well, this is huge, but one potential workaround is you could potentially pay yourself a salary for your management tasks, which would be earned income, which would already take for example an IRA deduction.
Steve: Okay, so two things. I mean it’s a good point and yes you could pay yourself a wage. At that point, you’re paying yourself like Medicare and all that stuff, so those are additional taxes that you’re going to incur.
Male Audience 5: Right, right, right.
Steve: Yes, you could put into an IRA or SEP-IRA, so yes those are things you can do, and they make sense for certain people.
W-2 income does not qualify for this deduction. It’s only the net income from a partnership or an S corporation that passes through you or as single member LLC, or sole proprietorship, or a Schedule E rental property outside of an LLC. I mean when I say single member LLC, it’s universal whether it’s an LLC or you’re just doing it on your own.
Male Audience 6: I want to concentrate on the word net income.
Male Audience 6: So, if you have a loss after your income and deducted your expenses, that it doesn’t qualify for a loss. You can’t take it just on your income. Is that correct?
Steve: He asked is it on the gross income? Essentially he asked is it on the gross income or the net income? So, we’re going to get into that. The quick answer is if you have a loss, you’re not going to get an additional deduction beyond the loss, so it’s on the net income, okay?
Male Audience 6: Thank you.
Steve: Yes, you’re welcome.
Rich: Do you a question?
Male Audience 7: Yes, sir.
Rich: Wait. One more.
Male Audience 6: Sure. I don’t have to change it. If I wanted a deduction for last year, is it too late to create an LLC? I mean not going forward but for last year to get that?
Steve: You don’t need an LLC. That’s what I was trying to say.
Male Audience 6: Okay.
Steve: You can be sole proprietor, just doing business as yourself. You could own the rental property in your own name, which most people don’t recommend as I would say with the LLC to give you additional liability protection. You can be in a partnership. You can be an S corporation, however you earn your income as long as it’s not a C corporation, W-2 income, cap gains, dividend on interest, and gambling winnings. These things do not qualify.
What does qualify, the things that I already mentioned and one little interesting piece is that the earnings from a publicly traded partnership reap the dividends from that does qualify, so if you have publicly traded partnership interest and they’re in REITs, you can get a little extra additional deduction. I do have several clients that have that. Again, dividends and interest, it’s not earned income. It’s investment, right? You just pass them through, cap gains, W-2 income. This is really important.
This comes into play in tax planning when you’re figuring out you’re in bonus for a shareholder. Actually, I had this situation. I had a client call up and say, “Should I give myself a $40,000 bonus?” He had already paid himself, so S corporation, you have to pay yourself a reasonable wage. He had already done that. He can give himself a bonus under election.
Once it goes from S corp earnings, which qualifies for the deduction to W-2 income, which does not qualify for the deduction, he would have paid more in taxes, so our recommendation was to not pay yourself a bonus. Because he was a 90 percent owner of the business and given himself a $40,000 bonus in W-2 reduced his QBI to such a level that he would actually pay, I think it was an extra $4,000 in tax. Once it goes from S corp earnings, which qualifies for the deduction to W-2 income, which does not qualify for the deduction, he would have paid more in tax, so our recommendation was do not pay yourself a bonus.
Now under the old rules and since 2017, this gentleman is 90 percent owner. He does 90 percent of the work or more, and his brother happens to be 10 percent owner and he kind of helped out with the startup costs, investing in the business to try to get it off the ground, so the guy doesn’t do as much as the 90 percent owner. Last year, he said, “Yes, give yourself a $40,000 bonus. That’s all in your pocket, so you do the work. You deserve it.”
Now it is worth it to give yourself $40,000 in the net pay more in tax? It’s not really. I mean it’s his brother. It’s not like it’s in remote that he doesn’t care about, so the cash in your pocket is a little more, but you give him the IRS. He’d rather give his brother a little more in his earnings than pay it to the IRS, so keeping it to the family. Is there any questions on that? I know there’s not a lot of S corps in here, I’m sure.
Rich: We only have a couple of minutes left, so I can take questions or we can keep going.
Steve: Okay. There’s not a whole lot. Now I feel fresher. There is a phase out. You can’t make on living money and capture on this unless you qualify for certain things. If I was self-employed or I was an S corporation, my company happens to be a C corporation we never changed, I would be called specified professional service, and once my adjusted gross income, I’m married, so if my income went over $400,000, which it doesn’t, I would not be able to qualify for any of the deduction, so it phases out from $315,000 to $415,000 for married couple and half of that for single. It works pretty much exactly like that. It’s a phase out.
Once you’re over this limit for married, if you’re not a specified professional service, you phase into it, so you need other things to qualify, so those things are 50 percent. You can use 50 percent of W-2 changes or 25 percent of wages plus 2.5 percent of your qualified cost basis of property, plant, and equipment excluding land.
All right, so what does that mean? Yes, you have $300,000 in land; you have $1 million in the building. The $1 million, you can take 2.5 percent of that over the life of that land, that building. If you have a property that you’ve owned in the family for 30 years, you’re no longer going to qualify for that deduction, so you got to be careful about that. Assets, 10 years or less. Even if it’s a 5-year asset, you can use it for 10 years.
I don’t know if anyone is in here that makes all these limits, so I don’t want to beat a dead horse, but again for the phaseout, this is really big. Last seconds of the Trump Tax Reform, this piece, this last piece right here was not in the Senate bill. This was a big change and Trump actually was a big proponent of this, so why did he want this? Well, we all know Trump is a real estate mogul and this 2.5 percent deduction helps him and everyone like him who’s millionaires investing in properties.
Hey! That’s my firm. All right, so here I am. I have additional stuff, but I know I’ve run out of time, and we can open up to some more Q&A. Just yell it out and I’ll repeat it out.
Cindy: Cover Airbnb [inaudible 0:039:48] Schedule C?
Rich: We have an important public service announcement.
Public Service Announcement [0:39:53-0:40:40]
Rich: Thank you. Normally we end here, but can I assume that everybody is interested enough that we can spend another 5 or 10 minutes on this? Show of hands? That’s most of the hands. Okay, if you have to go, if you have to run, if your parole officer is expecting you somewhere, feel free to grab your coat and head out. We have a question right here in the front. Cindy?
Cindy: I already asked him about Airbnb and treatment of that.
Steve: Right, so Airbnb, I would say it depends. If you are a real estate professional or you’re already renting out your units on a regular basis, say it’s a three-family—
Cindy: One or two.
Steve: One or two. But I would say if it’s Airbnb and you’re doing it in one of your rental properties, it’s going to stay as an Schedule E. If you’re doing it just out of your house and you’re renting a room out of your house, I would say that’s mostly going to be Schedule C. I mean I haven’t got into the Airbnb. I don’t have any clients with it, so I don’t want to speak certainly on that, but that’s the way I would see it because if you already have a rental property and you’re already doing that activity, you are in the trade or business of renting that unit where if you have a house and you just rented a room in your house on and off, then most likely it’s going to be Schedule C.
Cindy: And the differences between a Schedule C and a Schedule E—
Steve: Schedule E is where—
Cindy: What’s deductible and what’s not deductible on the other?
Steve: What’s that?
Cindy: What’s deductible on one and not deductible on the other?
Steve: Essentially, they’re both. You can deduct. The expenses are very similar on both. You pay FICA and Medicare on a Schedule C, it’s self-employment. Whereas Schedule E is your rental property, so you don’t pay FICA or Medicare there, and that’s the biggest difference, but the expenses would be very similar.
Cindy: Another question was what retirement accounts are available for just landlords that have no earned income?
Steve: None. I mean Art could speak to. I mean last year at this presentation, I talked about IRA. You take your IRA money, invest it into accounts.
Cindy: Retirement accounts, maybe I should—
Steve: If you already have IRAs, an option for you is to utilize those money to buy properties. I mean it can be expensive, but from what I remember, there were several people here that actually did that with their retirement funds last year, but if you don’t have earned income, you can’t go into a retirement plan on an everyday basis.
Cindy: Okay. It used to be able to deduct $250,000 on a sale of a personal home.
Cindy: Is there any change between jumping between homes and reselling your homes?
Steve: I’m sorry. Could you use the last piece?
Cindy: Is there an aging? It used to be you have to wait 2 years before you could deduct it again?
Steve: Yes, so the number of our married filing joint is S500,000, singles is $250,000, you have to live in that home up to for the last 5 years in order for it to qualify as a personal residence and have no capital gain. But if you decide to rent the house out at any time, you will have recapture on the depreciation that you rented out over that time.
Cindy: My house [inaudible 0:43:52]
Steve: That’s fine as long as it’s up to our last 5 years. All right, there’s no time in between, but 13 or 14 years ago, they changed the law where you used that to reinvest that money into a new residence. You no longer have to do that, so if you sell your primary residence, you decide to just rent the rest of your life, give your kids all your money, there’s no capital gain if you don’t reinvest that money. You can put it in the stock market, do whatever you want with that. there’s no requirement to purchase a new personal residence. That changed.
Rich: That’s awesome! Could you back up a slide just so people could see your contact information in case they have to take off?
Rich: Because we want to get Steve get past that $415,000 income.
Steve: Yes I got a ways to go. I left some business cards out there; there’s also a small box out here if anyone wants to grab a card and reach out to me as well.
Rich: I don’t think—
Steve: We’re not done.
Rich: Yes, we’re not done.
Steve: Sorry. This gentleman right behind you, Brian, has a question.
Male Audience 7: Reverse mortgages.
Steve: I hate them.
Male Audience 7: HELOC, okay?
Male Audience 7: Are there any changes between 2018 and 2019 and can this be done? You said from January to April normally. Can everybody]—
Steve: That’s better.
Male Audience 7: You said normally you have like until April for any changes.
Male Audience 7: Would this be covered under that?
Steve: For the HELOC?
Male Audience 7: Yes, the HELOC.
Steve: So, the HELOC. there was a change in the Trump Tax Return on the HELOC. Under the old rules, you can take up to $100,000 of equity out of your house if you want to buy a new car, invest it, pay off credit cards. You can take that first or you could do $200,000, but if you didn’t reinvest it into your house, the first $100,000 would still be deductible against your taxes.
The changes now if you refinance your property, you need to put that money, capital investment back into your property in order to deduct it against your taxes.
Male Audience 7: Even though it’s reverse mortgage?
Steve: Well, the reverse mortgage, yes.
Male Audience 7: Yes, reverse mortgage, HELOC.
Steve: Yes, honestly I’m pretty sure that it’s not deductible anymore under the reverse mortgage where it used to be, but I would have to double check that to confirm.
Male Audience 7: Okay, but there are changes between?
Steve: There are. A 100 percent there’s changes.
Male Audience 7: What I’m saying is can that be backed up to 2018?
Steve: You’re grandfathered in, so if you had your prior to believe it was January 27, 2017, you’re grandfathered in under the old rules, but for your refinance that HELOC after the Trump reform went through, you would be subject to these new rules.
Male Audience 7: Okay.
Male Audience 7: Thank you.
Rich: Any further questions? Come on right on up and ask Steve one-on-one. We are—
Steve: Okay. That’s good because Art scares me.
Rich: [laughter] I know we’ve already clapped for him once, but let’s hear it again for Steve Thebodo.
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