Table Of Contents
In this episode, Brandon and Thomas discuss some of the tax proposals that came out last month and what they might mean for real estate investors.
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.
Thomas Castelli 0:00
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Brandon Hall 0:06
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Thomas Castelli 0:30
Hey, everyone, thanks so much for tuning into this episode of The Real Estate CPA Podcast. Today we're gonna discuss some of the tax proposals that came out via the Ways and Means Committee last month and what that might mean for real estate investors.
Brandon Hall 0:42
Yeah, and I think it's important to note that we're still in proposal mode, we don't have any clarity any in a finality to this yet, the new expectation is that we'll have a clarity, potentially even a vote by the end of October, October 31. And the reason for that is a lot of infrastructure programs are expiring. And the infrastructure bill is going to extend some of those programs. But that expiration is on October 31. So if the infrastructure bill doesn't pass by October 31, a lot of infrastructure programs that all of a sudden don't have budget don't have any money to continue. Now that that October 31 day is important, because like I just said, the infrastructure bill has to be passed by then. But that also means that the budget reconciliation bill has to be passed by then. And the reason for that is the Democrats are suffering infighting. So there are some Democrats that will only vote for the infrastructure bill, if the budget reconciliation bill passes, there are other Democrats that will only vote for the budget reconciliation bill, if the infrastructure bill passes. So that means that you have to pass both bills on the same day, or at the same time, which is going to be challenging. And that October 31 date is the new day. And the reason that this is such a big deal. And the reason that we're not talking about Republicans is because Democrats have a majority in both the House and the Senate and the Senate, they're split evenly. But the vice president gets to cast that tie breaking vote. So they have a majority in the Senate as well. And they have to use the budget reconciliation process in the Senate. Because you you can pass bills with just a simple majority, with the budget reconciliation process, which is why they're doing this and which is why we're referring to it as a budget reconciliation bill. But the interesting thing about this slim majority that the Democrats hold in both the House and the Senate, is that literally every single Democrat has veto power. If one Democrat decides I don't like this, then they can blow the entire thing up. Even though the rest of the party wants it. If one says no, they blow the entire thing up. That's why this has been such an interesting thing I should say to watch over the past few weeks. And it's gonna be really interesting as we get to October 31, and we flesh out the holdout Democrats what they want, and we're gonna see what changes in these proposals as a result. So everything that we're gonna talk about in this podcast is a proposal, it's not actual law, and there's a good chance that it's going to change. So don't get all wigged out. If you hear something that's going to negatively impact, you just know that you need to pay attention to it, especially around that October 31. Date. And you know, if you're a client of ours, or if you're a tech, smart investors.com subscriber, we're gonna run a Biden tax plan webinar for you, before we do any sort of like any sort of big webinar for the masses, and we're gonna, it's gonna be like kind of a VIP webinar where you'll get an invite to it. But we want to get closer to the bill actually passing before we run that webinars, we were actually originally trying to get that done October 6, but But the bill, you know, it stalled out. And now the house is off, I think, last week, and the Senate's off next week. So it's gonna be a race to the finish line here in the next couple of weeks to get all that done by October 31. But if you're a client at the real estate CPA, or if you are a subscriber to tax smart investors, calm, you'll be getting a special invitation. So just be on the lookout for that, it'll come through your email. And if you want to get that special invitation, it's not hard, just go to tax smart investors.com Sign up for the plus or the Pro Plan. And the basic plan, the plus of the Pro Plan, gotta get in that insiders group, and you'll get an invitation as well. Alright, so let's start off by talking about what is not in this proposal in this budget reconciliation bill. So why don't we start there?
Thomas Castelli 4:33
Absolutely. Absolutely. So prior proposals of these tax changes included a provision that will limit the ability to use a 1031 exchange. Basically, what the proposal said is that you would be limited to $500,000 of gain that could be deferred in any given year or million dollars if you are married. And as you know, there's when 1031 exchange transactions in many cases, there can be substantial gains that could be higher than those thresholds and that was a major concern for real estate investors. And the good news is that that is nowhere to be found in the latest version of these proposals. So, real estate investors out there with highly appreciated assets or plan to acquire real estate and have them appreciate over time, which is one of the goals of investing in real estate can breathe a sigh of relief at 1030 in exchange is not going anywhere, at least for now.
Brandon Hall 5:24
Something else that is not in the budget reconciliation bill as at least as of today is the stepped up basis rules being pared back. So Biden, President Biden wanted the stepped up basis rules to be pared back, right, right. Now, if you were to die, and you own real estate, or really any asset, you get to pass that asset on to your heirs, and they get a stepped up basis in the asset. And what that means is if you bought the asset for $100,000, your basis is $100,000. And then if you depreciate that asset $30,000. Now your basis, your adjusted basis is $70,000. And let's say when you die, your value of that property is now worth $200,000. Well, if you had sold the property right before you died, you would have $200,000 of sale sales price current valuation minus the adjusted basis of $70,000. Because you take your original cost basis minus any depreciation that you've claimed to get your adjusted basis to $200,000 minus $70,000, that's $130,000 gain, some of that gain is long term capital gains gain from appreciation. And some of that gain is depreciation recapture gain from depreciation that you previously claimed, right. So I've got $30,000 of depreciation, recapture, and $100,000 of long term capital gain, that's if I sell the asset right before I die. Or if I just gift, a lot of people make the mistake of gifting real estate to their heirs, I know that it makes like it makes probate easier and everything, which is great. But from a tax perspective, if I were to gift this property to my son, before I die, then he he steps into my shoes, he inherits my basis. So he gets a $70,000 basis, and he turns around and sells that when I die. He's got $130,000 gain, so I can sell it before I die, or he can sell it before or after I die. And we all have to pay $130,000 gain. But if I hold on to the asset until I die, and then I pass the assets through death to my heir, then he gets a stepped up basis in the asset, he gets the value stepped up to the current market value. So we'll run an appraisal, we'll figure out that, hey, the property is worth $200,000. And now James, my son owns this property for $200,000. That's his basis. So the $70,000 basis gets stepped up to $200,000. Now what does that mean? Well, he could turn around and sell it immediately. Right? Right after he gets title, he can turn around and sell it for $200,000. He's gonna sell it for $200,000. But his basis is also $200,000. So his gain is $0,
Thomas Castelli 8:09
which makes this entire strategy of 1031 Exchange until you die. Still very viable for people out there. Because you could 1031 Exchange throughout your entire life. And just keep racking, you know, your basis is going to be low, by the time you get to the end. But guess what you get to pass it on to your heirs, they received at the fair market value of racing, all of the depreciation recapture. And basically, the the taxable appreciation, you would have recognized that you sold the property is eliminated through this process,
Brandon Hall 8:38
swap until you drop, baby. So we're talking about that stepped up basis rule, but it's freaking out because President Biden's his original proposals, tax proposals was to eliminate that. So So I die, I pass the real estate onto my heir James, in he has to pay tax on the $130,000 gain, I think and I think that the idea was that it was taxable upon transfer or something like that, like he would actually have to sell the asset, or he'd have to come out of pocket to pay the tax on $130,000 gain. And that's not in the proposal.
Thomas Castelli 9:09
Yeah, they wanted to make it, they wanted to make death that realization event. So basically, you would pay tax on the difference between the adjusted basis and the fair market value at the date of your death. And they're going to have some kind of special workaround. So allow people to pay it over pay that tax over a period of time. So they didn't necessarily have to sell that asset. But like Brennan said, That's nowhere to be found here, which is good news for a lot of people.
Brandon Hall 9:31
Yeah, yep. And the reason that they had that stepped up basis going away is because they wanted to tax long term capital gains at the top tax rate. So they wanted to move the long term capital gain tax rate from 20% to 39.6%. And I believe that was on anybody earning over a million dollars or gains over a million dollars. The problem is, is that when you do that, when you drastically increase the long term capital gain rate, what are investors going to do? Well, they're not going to sell their property, right. So what how happened was they they did some studies and they realized that if all you do is increase the long term capital gain rate, tax revenue will actually decrease. Because people just won't sell their property, they'll just hold on to it. And so then there's no revenue to tax, right, there's no gain to tax. So tax revenue would actually decrease for the IRS. So what I came up with was, well, if people are just going to hold on to their assets until they die, then we're going to get rid of the 1031 exchange. And we're going to get rid of the stepped up basis, because that will encourage people to just make selling decisions, just you know, today, not in 30 years from now when they die. And so that was the idea. So you basically lock in that 39.6% long term capital gain rate, you remove the ability to defer or eliminate via removing the 1031. That's the deferral and removing the stepped up basis. That's the eliminate gains. And in none of that's in the proposal. I mean, the long term capital gain increases in the proposal, but it's not to 39.6%, which we'll talk about here in a second. Is there anything else that's not in the proposal that was that was previously talked about? Big ones,
Thomas Castelli 11:05
I'm pretty sure that those are the two major ones for real estate investors were the 1031 exchange and the step up and basis, which was one of the major factors people were concerned about. That's not still in this bill right now. Go. Alright, let's talk about what is in the bill. So I think we could first start with long term capital gains rate, right, just picking up where we left off there. So like Brandon said, originally, it was gonna go to 39 and a half percent if you're making over a million dollars, instead, what they're going to do is they're just going to increase it from 20%, that top rate from 20% to 25%. And that would be effective after September 30 2021, which makes it a little retroactive, assuming this gets passed. And that's presumably to prevent people from rushing sell their assets right now, before that comes out. But that was there simply just increasing it from 20 to 25%, rather than the 39 and a half percent. So that is a win for a lot of people, although I will say this, that on the 39% and a half rate had they kept that that was on for people earning an income over a million dollars. This is just moving up the current rate from 20 25%. So that's going to impact people with incomes below a million dollars too, which is interesting, but the good news overall, it's not going up that high.
Brandon Hall 12:18
Yeah, yeah. Retroactive, though to September 13. Man, I hate that. I hate retroactive taxes, man. I mean, I guess I guess in theory, it makes sense. You know, you know, when people rush into the door to liquidate, which I don't think that they would do or a 5% hike. I wouldn't personally I would just keep holding, maybe buying cash flow and assets, right. You don't have to sell. But man retroactive. That's just yeah, that that's where you kind of get into that fairness, conversation. Is that really fair?
Thomas Castelli 12:45
Yeah, we also got to worry about the publicly traded markets too. Unfortunately, everybody could just sell their assets at a click of a button, send. It's the you know, the stock market plummeting. And I'm sure that some people in Congress who are near retirement age may not have wanted to see that occur. But yes, that's just another factor to consider, for
Brandon Hall 13:05
me all that works. So some of the things that are in the bill, they're moving the top tax rate back to 39.6%. So the 2017 tax cuts and Jobs Act moved the top tax rate down from 39.6% to 37%. So gave gave top high income earners a 2.6% break, and now they are moving it, the proposal is to move it back to 39.6%. Now, there's also a 3%. surcharge tax, a new tax that's going to be assessed on taxpayers with modified AGI is in excess of $5 million or 2.5 million if you're married filing separately. So it's an additional 3% tax on your income. I believe that's all income, is that in excess of 5 million, or is that on the entire 5 million? Like if my income is $5,000,001? You know, if that's is that on on the entire $5,000,001 Just on the dollar,
Thomas Castelli 14:04
I believe it's saying that there's the tax be in excess of 5 million. So I think it's if you're making over $5 million that would be imposed there. Well, it's actually not. It's not clear. It's not 100% clear, but the way it's reading that's what it sounds like.
Brandon Hall 14:19
Okay, there's also a this is a this is a bad one for like, literally everybody 3.8% net investment income tax that's been around for a while, but they're expanding the definition of it to include all business income. So even though it says net investment income tax, now that 3.8% tax is going to also apply to your business income, any sort of pass through income from partnerships, S corporations, anything like that. You're now going to pay 3.8% net investment income tax on Now, previously, you just paid this 3.8% net investment income tax. I believe if you're earning over $250,000 The net
Thomas Castelli 14:57
investment income tax was if you're earning over two 100 If you're single and 250, if you're married now it looks like they want to make it on all all business income if you're earning over $400,000 If you're single and 500 if you're if you're married filing joint,
Brandon Hall 15:11
got it. So then the investment income tax that was for like, if you're if your modified adjusted gross income thing is modified through modified adjusted gross income was more than 250k. This 3.8% surtax would come into play on your interest, dividends, capital gain, rental income rental net income. So investment income, but now they're saying we're also going to include business income from pass through entities, when your taxable income taxable income is greater than 400,000 or $500,000. Maybe that 250 And the current and it was taxable income, not Maggi,
Thomas Castelli 15:47
I am actually pretty sure was Magi. But you know, what they're what they're trying to do here, you know, what, what Biden's promise was to America was that taxes would not be increased on people making $400,000 or less. So I think that's why this is all based on this $400,000 Number is, is that they're trying to retain that promise, which is kind of shifting around the way things are, are done currently.
Brandon Hall 16:12
True, true, true. So the bill also includes disallowing excess business losses in excess business loss is a loss. So a simple way to think about this is that if you have losses in excess of business income, net business income, then you have an excess loss. But that's really not the definition because you get a $500,000 allowance, and then over 500,000, that's the excess business loss. So if at the CPA firm, for example, if I net $300,000, and my rental losses are $350,000, and I materially participate in my rentals, then I've got a $50,000 loss, right, a loss that exceeds my business income 350 loss 300k net income, if I have $300,000, for my CPA, firm income, net income, and I have a $900,000 loss from my rental real estate, maybe I bought some large properties, and I did a cost egg and I materially participate. So I create a $900,000 tax loss. Well, $900,000 of loss minus my $300,000 of CPA firm business income is $600,000. In this case, because I'm married, I get a $500,000 allowance, okay, so I get to claim the first 300k Because that's $1 for dollar that matches up with my business income, right, so I get to offset my business income, then I get to claim an additional $500,000 Because that's the allowance that married filing joint folks get. So I get to claim an additional $500,000 loss. And that offsets all my other income that's out there w two income, interest income, dividend income, Ira, liquidation income, 401k, liquidation income, all that type of stuff. So I get an additional $500,000 allowance. But when you look at the $300,000 of loss, that offsets my business income, plus the $500,000 of allowance, I'm only $800,000 of loss, but I had a $900,000 loss. So the remaining 100k of losses, that's an excess business loss. And all they're doing is they're making it permanent in this bill, so a lot of people will kind of wigged out, they thought, oh, that's going away, I can't even claim the additional 500, that's not true, you'll be able to claim the additional 500k, that allowance is going to be there. They're just making the this provision, they're making a permanent. So you're not going to be able to generate a 900k loss on 300k business income and claim the the entire $900,000 You're only gonna be able to claim whatever your business income is plus 500k. If you're married filing joint, any additional loss is an excess business loss and will be suspended.
Thomas Castelli 18:50
Yeah, it's a bummer. It's a bummer. But if you've been around for last few years, you know that that's already kind of been in place. So there's there's making it permanent, there's nothing to be too concerned about. When we kind of move down, we move down a little bit, we get back into estate planning. While they did not remove the step of basis, like we discussed, they are removed, they are reducing the estate and gift tax exclusion back down to the $5 million mark per individual, which is substantial, a substantial decrease from I think it's, it's over $11 million per individual today. So now estate planning for a lot of people is gonna become a lot more prevalent over the last few years, it hasn't been that big of an issue for a lot of taxpayers because a lot of taxpayers simply don't have, you know, estates that are worth or net worth that are that are in excess of 11 point. I forgot what it is today. So 11.2 6 million, I believe. And it's double that if you're married, so
Brandon Hall 19:43
that just means that you can pass that much value to your heirs without having to face a tax in the state.
Thomas Castelli 19:48
Exactly. Exactly. Exactly. So yeah, now now it's coming back down a little bit lower. People are gonna have to look at their state plans a little bit more closely to see how they could mitigate their exposure to state taxes which, which can be quite hefty. So that's a little bit more interesting.
Brandon Hall 20:04
So in switching over to kind of like the corporate or business provisions, the corporate tax rate is going to decrease to 18%. On the first $400,000 of income. So again, what kind of what Tom mentioned, President Biden's promised, the American people was not going to increase your taxes, if you're making less than $400,000. Well, they actually threw the corporate world a bone and said, Hey, if you're on the first foreigner cave, and GM, you actually, let's pay 18%, it's going to be a 21%, tax up to 5 million in income, and then it's going to increase to 26.5%. On net income in excess of $5 million. So so the corporate tax rate is going up for corporations earning in excess of $5 million.
Thomas Castelli 20:47
Yet, sticking on the corporate side of things, you know, this rule, this rule actually might help some taxpayers who have S corporations for who have had S corporations for quite a while. So basically, whenever you want to, and we talk about this all the time that you don't want to put rental property into an S corp, because in order to remove it, from the S corp, for any number of reasons that you may want to remove it, you have to basically recognize a gain because you have to sell it. So if you have an appreciated piece of real estate, in the S corp, you want to remove it, it's sold the fair market value. And now just for simply removing the asset from the S corp, you have a capital gain. So what they're doing is, if you had an S corp, that was an S corp. On May 13 1996, I don't know why they choose these dates, sometimes I'm sure there's some rhyme or reason for it, but seems relatively arbitrary. You can convert or reorganize as a partnership on a tax free basis, which is I know something that a lot of people would love to do, to be able to get their real estate out of the S corp and into a partnership. And the partnership has a lot more flexibility in terms of being able to remove that asset from the partnership tax and penalty student penalty free like as an IRA, tax free. And that's, and that's something that's going to be helpful for a lot of people out there who've had these S corporations for a long time.
Brandon Hall 22:07
Alright, moving into retirement accounts, some some interesting things with retirement accounts. So the first one that I want to talk about is the backdoor Roth IRA strategy that is going to be eliminated. So they're basically going to enact a provision that says you can not roll over any after tax contributions into a Roth IRA. So the backdoor Roth IRA contribution strategy, the way that it works is, you make an after tax contribution to a traditional IRA. And then you roll that traditional IRA in, you make an after tax, right, not before tax. So a lot of people make before tax contributions to traditional IRAs, meaning that they get a tax break for making the contribution to the IRA, right, they get tax savings. But but but they don't pay tax on the $6,000 that they put into the traditional IRA. But other people who earn too much money to make that traditional IRA contribution. They like to stuff, Roth IRAs, because Roth money is good over a long period of time. So they'll make an after tax contribution to an IRA, meaning that they pay tax on the contributions, they pay tax on the 6000 bucks, then they contribute the 6000 bucks to a traditional IRA. And then they roll the traditional IRA over into a Roth IRA. That is called a backdoor Roth IRA contribution because you can't earn too much money, you can't directly contribute to a Roth IRA. But you can always roll money over into a Roth IRA. So that's the way that it works. This proposal is going to eliminate that by basically saying you're not allowed to roll after tax money over to a Roth IRAs pretty much wipes that that strategy, I also believe pretty much wipes out the mega backdoor Roth IRA strategy, which you know, I don't know much about but I know that there's a lot of people pushing it online. So just be careful there. And these are for contributions made after December 31 2021, regardless of your income level. So you still have some time based on this proposal. But be careful, don't go and make something here before this bill passes. Don't go do this before the bill passes, because they can always make it retroactive. So just Just be careful. Right now it's December 31 2021. Regardless of your income levels, you cannot do a backdoor Roth IRAs anymore.
Thomas Castelli 24:21
Yeah, so another thing they changed for the IRAs or they want to change for the IRAs is they want to prohibit basically an IRA from holding a security when the IRA owner has has to have a certain amount of minimal assets or income, or they have to complete a certain amount of education or have a specific license. So in other words, what they're trying to do is private investments in an IRA when you have to be an accredited investor. And I know that's going to impact a lot of people out there who invest in real estate syndicates and funds. That's something you're gonna have to keep. Keep in mind that these are going to be prohibited going forward and that's going to start on December 31 2021. Now it gets a little bit worse if you already have These types of assets within your IRA, because they're going to give you a two year window to remove these assets from your IRA. Otherwise, your IRA is going to lose its status. And presumably, everything that you have in your IRA will be distributed, and you'll be subject to income tax and penalties. If you're under the age of 59 and a half, you'll be subject to a 10% penalty if your IRA is distributed. So that's something you're on. Keep in mind, there are ways to get around that. And we did discuss that on the Facebook Live, if you want to go and check that out, and go to the tech smart investors on Facebook and find the Facebook Live. And we give you a handful of strategies to get around that. But something that you're going to want to be aware of, if you do invest in basically private investments through your IRA.
Brandon Hall 25:46
Yeah, that'd be a big one. And and you should for sure, be be tracking that. I mean, if that goes into into effect on October 31, assuming that they passed the budget reconciliation bill, I mean, you need to be having conversations with your CPA in November and December on how you get out of these syndication investments that you're investing in. Now, it's not going to impact like private partnerships, right? It's just securitized partnerships. So those that require you to be an accredited investor. So Tom could still go and set up a, you know, a small rental partnership. And he could have Ira investors invest in a small rental partnership, as long as they're like friends and family or people that he knows, well, he doesn't, he just needs to be sophisticated, he doesn't need to be accredited, you can still do that type of thing with your IRA. But now you can't have more than 10% ownership in the entity. That's another proposed change in this reconciliation bill. So the IRA is capped at 10%. Otherwise, it's self dealing, and the entire transaction is prohibited and blows up in your face. But what you can't do is you can't go and invest in syndications or real estate funds with your IRAs, nothing about 401 K's. So if you have a solo 401k, at least in the current proposal, you're still good. But even people with 401k is you should be following this very closely. Because what's stopping them from throwing the 401k piece in there as well? Yeah, for
Thomas Castelli 27:13
sure. This is certainly a blow to investors who use their retirement accounts to access private real estate offerings that require you to be accredited, but we'll see if it makes the final bill. Another thing in here kind of wanted to throw in, just not not really to retirement accounts. But I know a lot of our clients have been investing in cryptocurrencies recently, over the last few years has been very popular, actually wrote an article for tax smart investors on this not too long ago, where in the article it stated, there's a loophole that you could basically get around the wash sale rules with cryptocurrency for anybody, just a quick refresher, a wash sale rule basically says that if you sell security and recognize a capital loss, and then buy back that same security or an identical security or substantially identical security, that you can't take within 30 days that you can't take that capital loss anymore. And that was not defined to me that rule is not in place for cryptocurrency. So it was a loophole. And it looks like they want to close that loophole and include cryptocurrencies in there. Now, it's not saying whether or not that would be retroactive. But it's something you want to keep in mind. If you are investing cryptocurrencies? Yeah, absolutely.
Brandon Hall 28:21
So that's pretty much the main crux of it, there's a little bit more than I want to talk about. But that's the main crux of the tax changes that are going to impact real estate investors. So another big part of this bill is increasing revenue or funding, I guess, is a better word. Another part of this bill is how do you fund the Internal Revenue Service? And you do it in two ways. One, you give them more money, so you appropriate more money, via budget, or and in this case, and you improve taxpayer compliance, right? So you what does that mean? You get more people paying what they should be paying in tax. So they're going to do a couple things here. The first thing that they're going to do is they're going to fund the IRS with an additional $80 billion. Now, I don't know what that actually means in terms of the staff that they can hire and things like that. But I do know that if the Internal Revenue Service gets more money, what are they going to do, they're going to increase audits because they're trying to make sure that everybody is compliant. So just be aware of that audit rates might go up. Now, we've been in a, probably a decade, maybe a decade and a half, just kind of living in this world where taxpayers do not fear the IRS. And that has not always been the case. If you look back through history, there were many times where there are many, many, many years where taxpayers feared the IRS and the IRS was the big watchdog that would or the big Bulldog that would come in and make it make you do it right. But because of all the budget cuts they face, they've They've gone bare bones with their staff. They're answering like, what is it some crazy statistic like 1%, or something of all the phone calls that they get? Which is insane. Right? So their bare bones. Yeah. I mean are defeater, somebody that like that right? So that that's the world we've been living in.
Thomas Castelli 30:18
Yeah, I've been trying to get on the phone with the IRS over the last few months it's been, it's been very difficult. I mean, it's almost impossible to get them on the phone. And from what I've heard recently, through some continuing professional education courses I've been on that a lot of the IRS stuff are still working from home. So really, at this point, the IRS is all bark and no bite. And it looks like they're trying to turn that around.
Brandon Hall 30:40
Yeah. And if they get the additional funding, you just Just be prepared. So get your documents in order. Get ready for audits, because if they get additional funding, they're coming. The the additional big one that I want to talk about because we've seen this in the real estate space, people investing in land conservation easements, syndicated land conservation easements back in 2016, I think it's 2016, were considered a listed transaction. And then then they landed on like the, the IRS is dirty dozen tax scam lists, maybe in 2018, or 2019. And they've been there ever since. Along with, like, micro captive insurance companies and stuff like that. So the way that a syndicated land conservation easement works is you put $100,000 into this partnership, they go and buy with, with everybody's money, they go and buy a piece of land, and then they put an easement on it. And the easement says you're never allowed to develop the land. So they're preserving the land forever. And you get a charitable deduction, the partnership gets a charitable deduction for the value of the easement. So they have to have an appraiser come in and value the easement, which is relatively hard to do these things end up in tax court a lot because the valuation is again, relative, there's not a free market for these big easements. So the valuations can be inflated. So you put $100,000 in, and you might get passed back like a $300,000 charitable contribution, which you can then claim on Schedule A, and that $300,000 charitable contribution might save you 110 $120,000 in taxes. So people would put $100,000 into like conservation easement and they get 110 $120,000 in taxes back. Now, with the way that the laws written, at least today is that's fine, right? Like, technically, it's okay to do. Now, the IRS doesn't like the appraisals naturally, right? I mean, the IRS is not going to like an appraisal, if you can put $100,000 in and then immediately get 120k and tax back right tax refunds back. IRS is not going to like that. So they've been auditing these, and they've stepped up a lot of pressure. And they started that process back in is 2016 2017. I remember when when it became a list of transaction, but somewhere around there, started that process. Then you started seeing a lot more audits of the syndicated land conservation easements, you started seeing a lot more than good attacks core and now almost every single one is being audited and going to tax court. But the IRS is challenging the technical provisions within the deeds. They're not challenging the appraisals even though the appraisals are the main issue. They're challenging the technical provisions in the deeds because they know that they can win on the technical issues. And they know that it's going to be a hard fought battle on the valuation issues. So they're going to hit the technical piece first. And then they're going to sort out the appraisal piece, the valuation stuff once they once the technical piece runs its course. Now the syndicated conservation easement industry works together on this stuff, they all have similar deeds. So they're all losing right now. They're all losing because all the deeds have technical flaws. And Iris is winning on all those. But my understanding is that those technical flaws were changed in like 2015 or 2016. Now all the deeds don't have those technical flaws. So the IRS is going to have to start presenting novel arguments, new arguments in tax court, on the technical side to win right or they're gonna have to start challenging valuations for all of these syndicated conservation easements that were like 2016 and beyond, which means that it's gonna be costly, which means they're not going to have as great of a win rate, they're probably still gonna win a lot, but they might not be, you know, total disallowances of these investments. The problem now is that Congress decided to solve this for the IRS and the tax work. So the current proposal says if you invest a syndicated conservation easement in the charitable contribution exceeds two and a half times of your basis in the partnership, the entire deduction is disallowed. And you owe 40% penalty for material misstatement or gross valuation misstatement. So if I if I put $100,000 into a syndicated conservation easement, they get a $300,000 charitable contribution, the 300 ks x, so I don't get the contribution. And I owe 40% of the total tax, plus the tax. So my 120k of tax, I owe that plus another like 45 $1,000 or so and in penalties, and the The interesting thing about this is they're making this retroactive to December 31 2016. So if you invested in a land conservation easement, syndicated land conservation easement in 2017 1819 2021, you need to be watching this provision very closely. My guess is that there would be some compliance period where you can come back into compliance and avoid that 40% penalty, maybe even write off your $100,000 investment. So you get a load of a break. But you need to be watching this provision very closely. It is a big retroactive multiple years, because it's so retroactive. I don't know that it's gonna pass. There are Democratic senators that disagree with retroactive law changes. But the reality is, is right now it's in the proposal. So watch out.
Thomas Castelli 35:51
Yeah, just to confirm it. Yeah, there was, became a list of transactions 2017. But they they're taking it a little back to to the end of 16. So we'll see what happens.
Brandon Hall 36:01
Alright, so the last thing, the last big one is that there's a proposal in the bills, this one's getting a lot of attention online, there was a proposal in the bill that expands the definition of a reportable payment for banks and in payment institutions. And these payments are subject to withholding. And what what the what the rule says is that if you have any transaction in excess of $600, you have to report it to the IRS and potentially have to have taxes withheld from that payment, or there's withholding requirements. And I'm sure you'll be able to get around withholding requirements by filling out a W nine and doing all that stuff. But the whole point is to increase compliance. So the IRS wants to know basically about any transaction that is in excess of $600 on any payment platform. Now, here's where it gets weird. If you go on Facebook, and you sell your iPhone, your old iPhone for 650 bucks, that becomes a reportable payment to the IRS. And you will potentially owe taxes on that payment, depending on the circumstances of you selling your phone. That's where it gets a little weird. So I don't know if that one's gonna make it all the way through. There's been a lot of pushback on that online. But just be aware, any payment, any payment in excess of $600. That's the proposal, it's going to be a reportable transaction to the IRS.
Thomas Castelli 37:21
I mean, that would be rough for people just trying to do normal everyday business through platforms like Venmo, or like the Facebook marketplace, or really pay pal. And it that just because that seems very prohibitive, like hey, now you have to track the basis of your iPhone, or save the receipts of your iPhone, right? So make sure you're not reporting again on those but
Brandon Hall 37:39
wow, yeah, Wild Wild, it says it says third party network transactions where the aggregate payment during the calendar year is more than $600. It's actually I actually don't know if it's every payment is looked at and asked in the question is, is it more than $600? Or if it's just like, once you do $600 A payments through Venmo. Now, literally every other payment, even regardless of how small is reported? I actually I don't know, specifically how that works. And I think that we'll get more information on it. But regardless, it's like, I mean, look, there are certainly tax cheats out there. But I think that the vast majority of people are not tax cheats, at least the clients that we work with are not tax cheats, they want to do things by the book. I mean, they want to reduce taxes, but they want to do it legally, they want to do it by the book. So it kind of just feels like an invasion of privacy. But I guess that's not a tax talk.
Thomas Castelli 38:29
Yeah, I mean, I could see them putting it maybe a little higher than 600. Okay, just the way people use these types of platforms today. I mean, that's, that's shocking that they would that they would try to do something like that, but we'll see. Alright, so that's not an exhaustive list of all the proposed changes that came out through the Ways and Means Committee, but it is pretty much the major ones that real estate investors will want to keep an eye out on. Like Brandon said, we're going to go ahead and do a webinar for our tax smart investors as well as our clients, as soon as the new bill is finalized and actually comes out. So if you want to stay on top of that want to know when that's coming out, go ahead and join the tax smart investor community facebook.com/groups/tax smart investors, and you can join there, or you can go check out tech smart investors.com To become a subscriber today.
Brandon Hall 39:20
And to clarify, if you are a subscriber of the plus, or the Pro Plan on tax smart investors.com, you'll basically get premium VIP early access to the Biden webinar tax or the Biden tax plan webinar that we run. You'll be there with our clients at the firm. If you join the free Facebook group at tax smart, I think it's like facebook.com/groups/tax smart investors or you just look up tax smart real estate investors on Facebook, you'll find our free groups has about 3600 or so. Real estate investors in there as of today. We'll we'll do something for those guys too. It's just going to be a little bit later. We want to want to cater to our subscribers and our clients first So, if you wanna be part of that early group, go go subscribe at Tech smart investors.com.
Thomas Castelli 40:04
So we'll catch everybody over there and until next episode have Happy investing.
Brandon Hall 40:10
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