Epic Real Estate Investing - How Flipping and Employment Taxes are Skimming Your Profits | 423

Episode Date: July 10, 2018

If you're a prospective or current flipper, you're looking at thousands of extra dollars in taxes each year - unless you're taking Tim Berry's advice. On this week's Tax Hacker Tuesday, Matt Theriault and Tim Berry teach everything you need to know about flipping and employment taxes including how to utilize corporations to your advantage, when to start creating your entities, how to avoid huge pitfalls and crazy lawsuits, and much, much more! Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, Rockstars, welcome back. Glad you're here for another episode of Tax Hacker Tuesday. Tim put together something very special for the audience right here at Epic. And he put together his tax hacker blueprint. I mean, a blueprint, literally, a custom blueprint just for you, on how to hack the tax code in your favor, ethically, honestly, legally, and even with Uncle Sam's blessing. So it comes with five specific elements to create this blueprint,

and it's all custom just for you. He's going to give you a one-on-one consultation to establish where you are and where you want to go. He's going to give you a custom tax action plan organized into easy to follow steps so you can keep all of the money that's rightfully yours. He's going to give you an asset protection plan organized into easy to follow steps so you know how to protect everything that you want protected as he puts it so the bad guys don't come and get it. And then he's going to give you an accelerated retirement strategy so you can enjoy life while you're still young enough to do so. This working 40 to 50 years, it doesn't have to be that way. And he's going

to position your life and position your assets into a format. that really will accelerate your retirement strategy so you can go kind of against the norm, go against the grain and beat everybody there. And then he'll also give you quarterly check-ins to keep you on track towards your goals. So that's the tax hacker blueprint. It's normally $3,000 a year that he charges for this level of planning and consulting. The introductory offer is half off just for you here at Epic for $1,500. And if Tim and his team can't save you at least double that, then it's totally free.

You pay nothing. So go to taxhacker.com, grab Tim's free book on how to navigate the loopholes and Trump's new tax plan. And then after, you'll have an opportunity to schedule some time with Tim and his team and just let them know. You heard this on the epic real estate investing podcast. No questions will be asked. That introductory offer will be yours. And then tell him that you want your tax hacker blueprint. Go to taxhacker.com and everything you need, it's right there.

All righty. Now on with the show. This is Terio Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn't it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney at law, shares here each and every week current tactics and strategies

that anyone can implement to hack the tax code. Protect your assets and keep what's rightfully yours. It's time for Tax Hacker Tuesday. All righty, welcome to the Epic Real Estate Investing Show. It is Tax Hacker Tuesday with my attorney and friend Tim Berry. Hey, Tim. Hey, man. How are you doing?

Doing very well. Right here on Mondays here at Epic, we show you new and creative ways as well as time-honored ways of making money using real estate. And on Tuesdays, Tim, we'll show you how to keep it. I've got all the questions. He's got all the answers. And we try to make it the exciting subject of taxes as an enjoyable and is digestible. palatable as possible. What do you mean by that, Matt?

Isn't this always exciting? Isn't this always palatable? Isn't this always digestible? It wasn't until I met you. All righty. So today, we're going to talk about flipping and how that jives with employment taxes. This is something that you wanted to talk about,

so I don't really know what this is about as I never do at the beginning of the show. But I'm always so much smarter after we're done. So talk to me about flipping unemployment taxes. What do we need to know and what do we not need to know? Well, what we need to know is that there's a bunch of different taxes out there. Well, we already know that. There's way too many taxes out there.

There's income taxes. But then if you run a business and if you're running it inside of an LLC that's a partnership or a sole proprietorship, you have to pay employment taxes on your ordinary income that you create inside that business. And what a lot of people don't realize is those employment taxes are 15.3% on top of your regular income. And most people probably end up paying more unemployment taxes than they pay in regular income taxes. And it's pretty horrific if you take a step back. And here's the ironic part of the whole thing. These employment taxes go to fund your Social Security.

Some people know them as your Social Security taxes. And the challenge is, I don't know if you guys saw the report or not, they said, that Social Security isn't going to be just bankrupt. There's going to be absolutely no funds to pay anybody. I think it was 2035. So we're going to have the luxury, the benefit of paying the government 15.3% on the income we're making. And yet, nothing's going to be there. What a wonderful concept.

So that's what I kind of want to talk about was be aware of these additional taxes, these employment taxes, 15.3%. That means he make 100,000. That's another $15,000 on $100,000 of profit. It's just crazy, absolutely crazy. So that's when you are flipping just Joe Schmo is flipping in his name. If Joe Schmo is flipping in his name or Joe Schmo's flipping in the name of an LLC, they're going to have to pay that additional 15.3% on the profits from the flipping. And the challenge is Joe Schmo doesn't know that. Joe Schmo has. has no clue about that. He's just happy he made $100,000 this year. Yeah, they really are. They are. But he didn't make $100,000, did he? He made $85,000. And now he's got to pay taxes on that.

Yeah. And here's the crazy part, too, is I help people with whenever they run into tax problems, as well as helping try to fix it beforehand, inoculate them from the tax problems. And probably the number one reason why people run into tax problems is they're newly self-employed. They just left the W. job working for the man. They didn't know about employment taxes. Then they do their taxes and they say, oh my gosh, I've got a tax bill of XYZ thousands. I can't afford to pay that. They freeze. They don't pay. And now they just fall behind and behind and behind due to the employment tax situation. Got it. All right. So that's how not to do it. That's how not to do it. All right. So how do we do it correctly? Well, the best way to do it is utilize a corporation because now it's the corporation that gets hit with the tax liability, and corporations don't pay employment taxes. Now, if you utilize an

S corporation, you're going to have to pay yourself a reasonable salary. And that reasonable salary, you're going to have employment taxes on that reasonable salary, but anything over and above that isn't going to be subject to employment taxes. Same thing with the C corporation. You can pay yourself a salary, a reasonable salary. It's going to have employment taxes, but the dividends that come out of the C-Corp, not subject to the employment taxes. So that's the way to do it. Utilize a corporate structure on your flips. And big thing here, Matt, we talked to what, was it, two weeks ago about don't put real estate inside of a corporation, in particular an S corporation. Well, this is for flips. It's okay to do it if you're going to buy and sell in a rapid manner, but don't put long-term

buy-in holds inside of a corporation because that's just stupid. But for flipping, utilize a corporate structure, whether it's an S corporation or a C corporation, depends upon your situation to limit the amount you're going to pay on the employment taxes. Got it. All right. So rule of thumb is you're going to hold in like an LLC or a trust and you're going to flip in a corporation. Fantastic summary. Yes. Absolutely. So question we get is, and we've been getting this for the last 10 years, particularly from brand new investors that decide, hey, I'm going to go start a real estate investing business.

At what point should they start looking at creating their entities? You know, I would say if they're making 30,000 profit, start looking at setting up a corporation at that point in time if they're going to be doing the flipping. If it's buy and hold real estate, I'd say as soon as they have 30,000. thousand of equity, start setting up something that's going to protect that equity, because that would hurt to start losing 30,000 if you got hit with some lawsuit. Totally. So the 30K rule. Yeah, let's call it the 30K rule. Let's put it into place, Matt. Let's make it official. Yep. I'm going to put a little TM right after it, and we are good to go.

That stands for Tim. Pardon me? That stands for Tim. Yes, it's Tim and Matt. Oh, yeah. There you go. Oh, and I'm first. Thank you, Matt. Yeah, 50%. I'll take the front half of the back half. It's all the same to me. Okay. So 30,000 on the S corp, I've heard as to why, but why did you come up with that number on the flips or the profits? Once you start dealing with another entity, you're going to have to start dealing with paperwork. You're going to start dealing with payroll. You're going to start having a pain in the posterior to deal with. So why even put up with that whenever the dollar amounts are somewhat small? once you get to 30,000, that means if you've got the secret to get to 30, you've got the secret to get to 300.

You just replicate it more and more and more. So at that point, you're going to be a rocket ship. So let's start putting that stuff into planning. Got it. Okay. Sounds good to me. Anything else to add with that? You know what?

I'm going to be a little bit fragmented here. And I want to tell you about the one case that I just dealt with, we're not dealt with, but some clients I just had earlier, they just had a lawsuit, and it's the craziest lawsuit on the face of earth, but I just thought I'd share with people how crazy lawsuits can be. Is this a good time, man? Are you going to be upset if I do this? You're not going to be too mad? No, not as long as it's not my lawsuit.

Is that the truth? So I had these people, they had a property. They're renting it out, and their lease said black and white, no pets allowed. So guess what the tenant goes out and does? Got a tenant. I've got a pet. Yeah, they got a pet. It was a pet tenant. No, it was a pet. They get a pet. And we already know how this is going to end.

The pet ends up mauling another person. And now there's a lawsuit. And the poor landlords are dragged into this lawsuit. They're saying they shouldn't have allowed the tenant to get this pet. And in reality, this was the last week of the lease. Literally the last week this happened. and the landlords had no clue about this. They were absentee landowners over in a different state and everything.

So they had no clue about this. So they now go to court to get the case thrown out against them. And so they get the case thrown out against them. Now, this wouldn't be a story I'd be telling on the radio or a podcast if that stayed that way. Instead, what happened was the tenant, no, I'm sorry, the person who got mauled, they went and they appealed the judgment to have the case against the landlords thrown out. And so the appellate court says, you know what? You're right. The landlords should have to still be, they should still get sued. And not only that, they've got to pay all attorney's fees for the appellate court.

Is that insanity? Yes. When they even said, no pets allowed. They even said, their own rules said no pets allowed. And there was no wink, wink, nod, nod, where they said, oh, yeah, you can have one anyway. These people are hardcore, and they said, no, no pets, we don't want it. The tenant just, you know, snuck in the dog, the dog mauled someone. And not only are they subject to the lawsuit, but now they're subject to what is probably even more is the attorney's fees for the appellate decision to bring them back into the lawsuit. It's just absolute insanity. So now, if we were to rewind that, now that you just terrified everybody that was considering being a landlord.

Yeah. What could they do? What could that have landlord done differently to protect himself from that situation? Well, and this is going to sound like a setup, but it's not. They could have structured their financial affairs better so that if they did get involved in the lawsuit, they wouldn't care. So if there was a judgment against them, it just wouldn't matter. That one property might be up for grabs, but their other properties wouldn't be up for grabs. but quite honestly this is a case of they did everything right and they're still being penalized

it's just stupid stupid as could be there's a lot of things that happen in the in the legal system that are stupid as can be oh i totally agree with you there yeah i don't maybe you can confirm this that i don't know if it's an urban legend but the the burglar fell through the skylight of a house and as he fell down he cut himself with on the kitchen knife as he was falling through the ceiling And then he sued the owner for, I don't know, negligence of their kitchen utensils, and he won. Well, they shouldn't leave those things out there, should they? I know. You should have those hidden somewhere.

You never know when that burglars can be fallen to that roof and might be hurt by that stuff, huh? Yep. So have you heard that story? I've heard that story. I've heard variations of it. I don't know if that itself is the exact one or not, but there's all sorts of stupidity out there. I had one out in Washington where these people had road rage, and Dad and Jr. were in the front car,

and they were being chased by someone else. Dad and Jr. went over to their house, ran inside their house, road rager behind them, still kept on running, kicked down the door. Dad blasted the guy who kicked down the door. Dad got hit with a lawsuit. And there's all sorts of stupidity out there. It's just insanity. Hmm.

And it's makes you think. Yeah, that's an uplifting subject to end the presentation with, or the podcast. Let's talk about a happy story for a landlord. Yeah, they put it in a trust and the tenants paid and everybody

lived happily ever after. It's a wonderful thing. Most tenants do pay. Most tenants aren't pains in the butts and you get that cash flow and it's free money. That's the thing I love, by the the way about rental income. It's free money for the most part. Your depreciation and deduction is going to offset it so you don't have to pay taxes on it. It increases. It keeps up with inflation. So it's not like your stupid CD paying 0.001%. And the value of the property increases too.

I mean, it's a wonderful thing most of the time. Yeah. We only remember the bad ones. Yeah, unfortunately. Yeah. Yeah. It's no fun to talk about I received my check this month. And then stories over. Well, it is kind of fun, depending on which perspective you're on from. But totally. And then also the tenant is paying down the debt for you as well. So they're buying the house for you. You know, most people don't get that also.

They don't understand on the return on investment that the tenant is actually paying the principal payments. Yeah. That's just a wonderful thing as well. You're right. Amortization center. Yeah. Totally. All righty.

Well, this is a good one. If you'd like, you can go to taxhacker.com and download Tim's free book. just the five loopholes in Trump's new tax plan. That's the new name of the book. Otherwise, it is really long. But you can get that free book at Taxhacker.com, and after you've done that, you'll have the opportunity to schedule some time with Tim,

and either he or one of his professionals that work alongside him will get on the phone with you. For a short, five to ten minute call to assess your situation. If there's a good fit, they'll take the next step and schedule a tax action plan for you. And if there's not a good fit,

they'll go ahead and they'll share some alternative resources to where a better fit for you can be made. Either way, Tim and his team are committed that you are better off after the call than you were before. All right. Tim, any last bit of advice? Well, the last bit of advice, I'm going to ask you for the last bit of advice. Should you just change the title of the book to get your free money now? Get your free money now.

That's a much better title. Where were you in the design process? I don't know. Hiding out somewhere. All righty. So that's it for Tim and myself, and we'll see you next week for another episode of Tax Hacker Tuesday on the epic real estate. investing show. That's it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.

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