Table Of Contents
In this episode, Brandon and Thomas talk about the latest on Biden's proposed tax changes.
This episode is sponsored by Landlord Studio and Tax Smart Investors.
Full Transcript:
This podcast has been transcribed using AI, please excuse spelling, grammatical, and other errors.
Thomas Castelli 0:00
You're now listening to the real estate CPA podcast. Your source for all things real estate, accounting
Brandon Hall 0:05
and tax. Here we reveal our secrets that can save you 1000s in taxes, streamline your accounting process and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors and current clients on what strategies they use to grow their business, and how they steer clear of Uncle Sam.
Thomas Castelli 0:30
everyone thanks for tuning in to this episode, the real estate CPA podcast Brandon Hall and Thomas Castelli here and today we're talking about the latest on Biden's proposed tax changes that have just been released.
Brandon Hall 0:41
Yeah, released. I guess this is coming out Tuesday. So released last Thursday, they've got a new framework 1.8 trillion, roughly $1.8 trillion or so of spending of social spending. Now, we're not gonna go into the actual like what's in the meat of the plan in terms of what they're going to spend the money on. But we want to talk about what tax changes are coming down the pipeline and what you should be doing as a real estate investor to prepare for these tax changes.
Thomas Castelli 1:06
While we all know minimizing taxes are important to grow your portfolio before we jump right in another important aspect of growing your portfolio is making sure you have the right accounting system in place. And while there are plenty of general business accounting software options out there, they're not designed for landlords managing rental properties and can feel clunky and overly complex. Landlord studio on the other hand, is designed specifically for Do It Yourself landlords, they offer a full suite of tools designed to help landlords save time with their income and expense tracking, as well as property management tasks like rent collection, rental listings, lease management and tenant screening. One thing I found particularly impressive was its ability to connect bank accounts to view and reconcile transactions from inside the software. And by using landlord studios mobile app, you can digitize your receipts and the software automatically lifts and imports the receipts details. Landlord studio is also a great way to stay tax compliant, particularly as they offer a number of different financial reports including Schedule II, where rental properties reported on your form 1040. You can learn more about landlord studio by heading to WW dot landlords to yo.com/cpa. Again, that's landlords to do.com/cpa. We'll drop that link in the show notes below. But for now, we'll jump right into today's episode. First thing I just want to point out what's not in the bill, that might be helpful for people to understand that there's no mentions at 1031 exchanges, right, which is good. They will not be having the billionaire tax in there. There's gonna be something a little a little variation of that which we'll talk well. Yeah, the
Brandon Hall 2:33
wealth tax that they removed. But they did add an income surtax is like an extra few percentage points if you earn a certain amount of money, but the wealth tax so you see, so all your billions are safe in battalions? Yeah. Oh, yeah.
Thomas Castelli 2:45
All my billions. Yeah, please, if I had billions, I don't know that. I'd be talking about taxes right now. But
Brandon Hall 2:51
what would you be talking about? Yeah, how nice the The wind feels in your hair on your yacht?
Thomas Castelli 2:56
Yeah, I probably that I'd be talking about all the real estate down a Keyblade. But either way, billions. If you're a billionaire, you're listening to this podcast, you're safe. There's billions in there. There's your billion
Brandon Hall 3:10
and you're listening to this podcast, shoot us a little note, we would, we'd love to hear from you. That'd be cool.
Thomas Castelli 3:15
Maybe we'll bring you on the show. Trying to think what some of the other things that people were concerned about that were going to be in the bill. Okay. So there's no basis except the basis is not in the bill, they're not changing that. So you could still you know, die and pass the assets onto your heirs
Brandon Hall 3:28
at fair market value, right. So when you pass away, you can give your heirs all of your assets, and they inherit them at stepped up basis, meaning at fair market value. So their basis is now equal to fair market value, meaning that they can sell them and not pay tax on them. And originally, Biden had campaigned on reducing that or eliminating that. But that's not in the bill either. So 1030 ones not in the bill, stepped up basis, not in the bill, billionaire wealth tax, not in the bill. What else is not in the bill.
Thomas Castelli 3:56
And another big one is the IRA for anybody out there who invest in syndicates and was concerned that you would not be able to invest in syndicates any longer if you need to be an accredited investor to to actually make that investment or that you'd have to remove assets that are already in your IRA, because of this rule that's gone. So that means you can still invest in syndications through your self directed IRA, and you do not have to remove the assets you currently have in there. So that's big news. That's a relief for a lot of people out there who were concerned about that provision impacting their their ability to continue to invest in real estate.
Brandon Hall 4:31
Yeah, two other things that were notably not in this bill that were in the prior bill, the first bill that was released in like into September, the bank reporting requirements that caused a lot of uproar. That's no longer there. They do have a clearing house $600 transaction requirement, but it's not bank reporting. So a little bit less of a, I guess, a privacy issue there, depending on how you view that but but that was nice to see that the bank lobby won out on that and The other thing that was not in the bill that was kind of interesting was the conservation easement. limitations. And we're not recommending this strategy because it's being aggressively attacked right now in the tax court, I'm just gonna explain to you how it works. So an investor can buy a piece of land and then donate that piece of land to a land trust. And that donation, they basically place an easement on the land, that doesn't allow anybody to develop the land further. So you protect the land by placing the easement on it. When you make the donation of the land to the land trust, you get to deduct as a charitable contribution on Schedule A, as an itemized deduction, you get to deduct the value of the easement. So the easements value is calculated from the future development value minus the cost of the purchase price if I buy land for 100,000, and I get an appraisal that shows that if I develop the land out, it'll be worth 250,000. And then I go and donate that to a land trust, I get to deduct the spread of 150k as a charitable contribution. So I put it, I bought it for 100. But then I get 150k charitable contribution. Now there's syndications out there that you can invest in. And I don't know that you can invest in them anymore, because of how heavily the IRS has been attacking the conservation space. But there are there are conservation easement like syndications out there that you can invest in, the problem that the IRS is attacking is the the appraised value. So they think that these easements or these syndications are inflating the appraisals. So you put $100,000 in and then you receive like 250k of charitable contributions, which would yield, you know, like 120k of tax savings, so you put 100k and you get 120k of tax savings back immediately. Pretty sweet deal for the taxpayer. Right? Obviously, though, you know, potential for abuse and, and the IRS doesn't like it. So they they've been auditing, like every single easement since 2016. And what was in the bill, the bill that was released in September was a retroactive disallowance of anybody that's invested in conservation easements, where their benefit, where their charitable contribution was greater than 2.5 times their investment amount. So if I put 100k in, and I got a $270,000 charitable contribution, the entire amount will be disallowed. And that was going all the way back to investments that you'd made in 2016 1718, and 19, and 20. There's a big retroactive tax, and that was stripped out of this bill. So there's no retroactive tax on conservation easements, there's nothing in here about conservation easements, there is a lot of funding for conservation, but nothing related to the taxation of conservation easements. And regardless of where you stand on conservation easements itself, I'm glad that there's not a retroactive tax like that. And same thing with the IRAs as well, it's just, you write the code, people make decisions on the code at the time that it's available. And a retroactive tax like that would be that would have been really, really painful, it would have been painful to litigate, it probably would have gone through several rounds of constitutional challenges as well. So I'm glad they strip that out just to really honestly not waste taxpayer money trying to fight it all. But But again, don't go and invest in conservation easements, this is not an endorsement, you do not go and invest in conservation easements, you will get audited. Don't just don't do it. Just don't do it.
Thomas Castelli 8:25
For sure. Definitely don't want to do that.
Brandon Hall 8:27
So let's talk about what's in the bill. The first thing that's in the bill is the corporate alternative minimum tax to 15% minimum tax on corporations just trying to get them to pay their fair share, there's a lot of excise tax changes, there's a lot of international tax changes that we're not really going to go into the column outbound and inbound tax changes in the bill itself. But we're not going to really dive into that.
Thomas Castelli 8:51
Alright, so one of the things that is in the bill is the change to the wash sale rules. And we had discussed this, I think either on a Facebook Live, or in an article I wrote, I think for tax smart investors that the wash sale rules, basically applied to stocks and securities, what happens is when you sell a stock or security at a loss, and then later on, buy it back within 30 days, you're unable to take that loss, that loss is basically not available to you and because cryptocurrency is treated as property, those wash sale rules and not apply to cryptocurrency, but now they're modifying those rules to basically include cryptocurrency so for everybody out there who's trading crypto, if you're buying in and out of different crypto assets, you will be subject to the wash sale rules. So just something you want to keep in mind that some of these losses that you're accumulating if you're going ahead and buying back the asset within 30 days, you're not gonna be able to take those losses to offset some of the gains that you had from the cryptocurrency.
Brandon Hall 9:47
Yep. Also in the bill is the expansion of the net investment income tax to now be tax on trade or business income of high income individuals. So the net investment income tax is a 3.8% surtax that applies to passive income interest. I think dividends maybe capital gains, stock sales, anything like that when you're, I believe when your modified adjusted gross income or your adjusted gross income is above $250,000. But now what they're doing is they're expanding the application of that 3.8% tax to also include income derived in the ordinary course of a trade or business when your taxable income is greater than 400k. If you're single, or when your taxable income is greater than 500k. If you're a joint filer. Now, what this is really doing is it's assessing like if you have a 500k W two job, and then you invest in like a syndication and they provide you with a $10,000 profit allocation. What's happening is this income is going to be subject to 3.8% surtax, even though it's rental income, which actually it would be anyway, what's another example, another example would be like if you, let's say that you run your own business, and you make 500k as a W two employee from your own business, but then you take like, you take an additional 200k of distributions from just profit allocations that you didn't pay out as part of your wage as well, historically, in for S corp owners to this is where it's going to come into effect. You know, historically, you would just pay the FICA tax, the Social Security tax and Medicare tax on the $500,000 of wages that you paid yourself, the remaining 200k of profits that you take out as distributions, you wouldn't have any FICA taxes associated. But the net investment income tax expansion, that's what they're doing. They're they're saying, well, the additional 200k That you didn't pay yourself as a W two wage, you're gonna owe a 3.8% surtax on that additional $200,000. So it's just basically just think of it as like every dollar over $500,000 is going to be subject to a 3.8% surtax one way or the other? Because it's either going to be subject to a 3.8 surtax through my w two income as it is because that's Medicare. Right. So if I have a million dollar w two, well, it's all subject to that 3.8% surtax anyway, just as part of my w two, but any additional income that I earn now is also going to be subject to that 3.8% surtax, that's the easy way to think about it to kind of disappointing, but it's there to close that 3.8% loophole avoidance, specifically with S corp owners. Another one that's interesting is the limitation on excess business losses. So section 461, l was implemented back in 2017, with the tax cuts and Jobs Act, but then the Cares Act and 2020, press pause on it and pushed it to actually be implemented in 2021. So if you're listening to this, right now, you're subject to this right now. But excess business losses, this bill, the Biden Bill made it permanent. Now, the way that they weren't at though is it says that they're gonna permanently disallow access business losses. So you have to go to the actual bill text to understand what that actually means. And all they're doing is they're just, they're changing up some definitions to say that, we're always going to have excess business loss is going forward, or it's never going to expire. This essentially what they're saying. They're not saying that you can't claim losses in excess of your business income, because they're not changing the definition of excess business losses in the definition of an excess business loss is all of your deductions to like all of your business losses, added into or netted out against all of your business income plus 500k, if you're married, or 250k, if you're single. So what does that mean? So if I have $100,000 of business income, and I'm married, I can claim $600,000 of business losses. If I have $601,000 of business losses in total, then the first 600k is not considered an excess business loss. The remaining $1,000 is an excess business loss. Does that make sense? Tom, I'm explaining that. Okay.
Thomas Castelli 13:59
I think you did, but just just kind of reiterate the point. So basically, it's limiting the amount of losses you can take from your business against your other non business income. Most notably, for those listeners out there, probably gonna be your W two income or your spouse's w two income. So if you have
Brandon Hall 14:16
to, um, stock sales, maybe like got a big equity position.
Thomas Castelli 14:19
Oh, yeah, for sure. No, that stuff is all included in that because it's non business income capital assets that are not from a trade or business. But basically, if you had like, just give another example, if you had a million dollars of losses, and the cap was $600,000, the $40,000 of losses that are in excess of the amount that's allowed, will be carried forward into the future years when you can use those losses. It just means that you can't completely offset your income if your losses are above the excess business loss.
Brandon Hall 14:46
Right. Right. Right. So so just any other that was like, oh, no, I can't take any losses anymore. Yeah, you can. They haven't touched the definition of an excess business loss. And again, that definition is business losses in excess of business income. But those losses are in excess of 500k. Your total losses in excess of your business income plus 500k. So if your total losses are more than your total business income plus 500k, that is an excess business loss.
Thomas Castelli 15:14
Exactly, exactly. That's, I hope that's clear for everybody out there because we deal with this all the time. But believe it or not, it's it's harder to explain sometimes, then, then it may seem but there you go. All right. All right. So then another change. So like we said, there's no wealth tax all the billionaires, again, take another deep sigh of relief, because that law is not included in this bill. But what is included is a surtax for certain high income individuals, estates and trusts, right? So if your modified adjusted gross income is going to be in excess of $10 million, then basically, there's going to be a 5% surtax on top of that. And then if your your modified adjusted gross income is in excess of 25 million, there's gonna be another 3% for total 8%. So if you're making that type of money, well, you're just gonna have another 5% to 8% tax on top of your ordinary income tax rates and everything you're already subject to, which is
Brandon Hall 16:10
expensive for you, Tom? Like 30 million a year or something like that, right? Yeah, no,
Thomas Castelli 16:15
I'm about to flee the country over you kidding me? I go to Puerto Rico. Alright. They have a Puerto Rico, you know, if you if you do things, right, in Puerto Rico, there's basically no tax on certain types of income.
Brandon Hall 16:26
They did have something in here about the extension of supplemental security income to Puerto Rico. I don't think that I didn't read much on it, though. But if you're thinking about fleeing to Puerto Rico, you should read that section first, just to make sure,
Thomas Castelli 16:39
yeah, and I'll say this, you know, I'm completely joking about Puerto Rico look, every
Unknown Speaker 16:44
every thought about the $30 million. So that,
Thomas Castelli 16:48
you know, you know, but No, in all seriousness, the Puerto Rico thing, you know, now that I mentioned not to close the loop on it, there's a lot of sometimes a lot of people come to come, at least in my experience, have came to me and said, Oh, you know, if I moved to Puerto Rico, what's the tax? What's the tax, I heard, I could pay no taxes. And the reality is, in order to actually execute that strategy, you need to actually move to Puerto Rico and like, move everything to Puerto Rico, and no one I know ever actually executed it. Once they hear that you have to basically be a full time resident of Puerto Rico, and that you actually have to move your entire life there. Essentially, people are like, I think I like the United States. I'll just pay my tax. But yeah, I mean, that's just a little tangent we went on today, but just for anybody out there who's wondering about that sexy Puerto Rico strategy, how viable is it? Not very?
Brandon Hall 17:35
Yeah, United States we haven't made we haven't made I don't know why people say they want to leave and stuff like that. I mean, it's bad best country in the world run businesses. So next next, addition. So that mean, that's pretty much it on the tax increase. We there's no real tax increases in here, guys. So So you know, our kind of cliffhanger at the beginning of this, whereas like, stay on, because we want to tell you what to do what you need to do to, you know, avoid the tax and decent tax planning. Well, guess what, if you're making 10 million bucks, you're you're pretty much solid. I mean, if you're, if you're running an S corporation, and you're making you know, you're netting, netting 567 100k, you probably want to talk to your advisor about that 3.8% surtax, but I don't know, man, other than that, it's pretty, pretty vanilla. Yeah.
Thomas Castelli 18:21
And, you know, this is the thing that always kills me about proposed tax bills, right, is that they have all this hullabaloo about these proposed taxes, there's multiple revisions. And then then the final bill almost never looks like what they proposed. I mean, it I think that was my experience in tax cuts and Jobs Act Two, if I recall, I think there was a bunch of stuff that was supposed to be in it, that didn't make it in or that was trimmed down or cut back. It just it's just very frustrating. Because they put all this information out there. People try to make plans of it. That's why I always tell my clients to you can't make plans of proposed tax changes, really, I guess you could maybe see, okay, well, that might be what's coming up the pike. But as you can see almost nothing. That was the original proposed bill actually made it into, you know, what's likely to come to fruition at this point. So it's, you know, just be wary proposed tax changes. So I'm trying to say,
Brandon Hall 19:14
Oh, dude, another one that we missed was the long term capital gain tax increase. That's no longer in the bill either. Because you talked about that reminded me of it. Like all we had all these people during the summer saying, I'm selling my properties to avoid this long term capital gain tax increase. Yikes.
Thomas Castelli 19:31
So that didn't make it in neither did the the increase in 37% to 39. Point Yes. Pose 39.6% of that the top rate of ordinary income that's, that's gone to and to me, that was even that, I mean, it's rough. But I mean, it was a minor thing that they just they just cut out completely. So
Brandon Hall 19:49
yeah, yeah. Yeah. I mean, you're totally right. You can't make tax moves based on proposals and to be totally fair to everybody out there listening This is still a proposal to, at least as of Friday when we recorded this episode on October 29 2021. So it's still a proposal it hasn't been voted on hasn't been enacted into law or anything like that. Apparently, there's still a little bit of discontent within the Democratic Party. So I don't know if it's gonna get passed. But we will be holding a webinar when it does get passed. And if you want to join that webinar, make sure that you go and join the Facebook group that we have facebook.com/groups/tax smart investors to go join that that group to make sure you don't miss out. But there's one more, one more big change that I wanted to bring up in this will impact everybody listening to this podcast, the IRS is getting a pretty significant amount of funding. And funding is primarily being allocated to enforcement, taxpayer enforcement. So the IRS is being allocated $44 billion of taxpayer money to go and enforce the tax laws. Now, what does that mean? That means that audits are going to ramp up that that's the expectation. So everybody listening to this podcast, you need to go and make sure that your prior three years tax returns, that they're all buttoned up, your tax positions look good. If you're claiming real estate professional status, if you got short term rentals, or if you're doing something else that requires substantial documentation, make sure that you get that documentation in order today, if this bill passes, I would expect that these enforcement efforts will ramp up probably mid 2022. And they can go back three years. So your prior your prior three tax returns filed. So just just be aware that they're being the pretty significant increase in funding for the IRS, and they're going to be hiring agents to come after you.
Thomas Castelli 21:54
And you know, something that's interesting, though, this has been pretty consistent throughout all the proposals. So this, this one is likely it probably come to fruition in the final bill. So it's something you will want to take seriously now, for all these CPAs listening out there. I know what you're thinking 44 billion, you know, maybe it's time to go work for the IRS, but that's not what you should do. Instead, you should come work for the real estate CPA, you want to know why because we were going to have a few new positions open coming up in the next few weeks. And if your CPA out there, you're listening to this podcast, you have a passion for real estate, you have real estate experience, you're gonna want to come and submit an application over to us if you're interested in coming aboard the team because we're gonna have a few openings. And we'd love to have you on board. That was smooth, bro. That was real smooth. I mean, that was that was that was my that slid right into that. I saw I saw the perfect opportunity as I saw that. I'm like, I gotta I gotta take take advantage of that. But no, seriously, we are we are hiring people in the senior tax position a few other roles. So if you're interested in potentially working with us, we'd love to hear from you.
Brandon Hall 23:01
Yeah, come work for the good guys. Not the bad guess, where we're growing our team by 40% You know that this tax year 2021. Really, the last year and a half had been the hardest that I've ever experienced as a business owner, like ever. COVID just wreaked havoc on capacity management and staffing. And we didn't realize until too late so, you know, we we struggled tax season did not live up to my expectations. So what we're doing is we're growing our team by 40%. We're making a massive investment into our workforce, to provide better client experience to get deliverables out timely and accurately. And take the edge off of tax season for our current staff give them the appropriate support that they need to do their jobs. Well set them up for success. And this is a big move for us, man. We haven't done some like that. I mean, we're talking about spinning What $700,000 On Newport, we're looking at about eight to 10 new employees that we're trying to hire so seriously, if you're, you're out there and you're even thinking yeah, you like you like Tom and Brandon, you like our voice our voices sound like butter because we use these super expensive mics. So if you're, you're out there thinking man, I really like Tom grant, I want to do work for those guys. Are we sound smart? We don't we just read whatever our team writes on these podcasts. Seriously, in all seriousness, in all seriousness, you can email us at contact at the real estate cpa.com Or if you know of any accountants that need to be rescued from large stuffy firms, have them email us at contact at the real estate CPA calm and we'll send you over to our job site, which you're trying to get integrated with our website. But program we use is a little finicky. But anyway, just email us and we'll, we'll slot you in for an interview. Be a man we were trying to kind of blow this thing up in a good way. You know, in a smart, smart people first way people focus way 100% And that's I think all she wrote for me so we'll stay on this. If there's any additional changes. We'll let everybody know obviously we'll do another podcast. And like I said, if you want the final version, you know, you want final confirmation of what's actually being enacted. Go join the our Facebook group facebook.com/groups/tech smart investors. We'll be running the webinar later on this year for members of that group.
Thomas Castelli 25:14
Alright, so that's all she wrote for today, folks. Thanks for listening. We'll catch you on the next episode next Tuesday and until then, happy investing.
Brandon Hall 25:23
Thanks for listening to today's show. If you enjoyed the show, please find us on iTunes and leave us a review. You can also email us at contact at the real estate CPA comm with any feedback or topic suggestions. We are always taking on new clients and with the new tax laws in play. You really don't want to navigate this alone. Let us help you save money on taxes with your accounting and CFO needs. To become a client. Navigate to our client page at the real estate CPA calm and fill out a webform with as much detail about your situation as possible. Thanks so much for listening. Have a great rest of your week.
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