Opportunity Zones & Tax Deferred Investing With John Hyre
Episode 347: Opportunity Zones & Tax Deferred Investing With John Hyre
It’s always good to know what we are paying out in taxes, especially in retirement. In this episode, Mitch Stephen interviews John Hyre, a tax attorney, accountant, and investor who specializes in tax reduction and audit proofing. Today, John discusses tax-deferred investing and the importance of including real estate taxes in our retirement planning. He educates us about how we can legally avoid paying taxes, when we can use our 401(k), and the biggest mistakes that real estate investors make. Know more about the Opportunity Zone Fund, Defined Benefit Plan, and so much more from John’s diverse knowledge in this niche.
Watch the episode here:
I have John Hyre with me. This guy is a legend. He’s been around for a long time. He’s also brilliant. He’s figured out how to live some other place besides the United States to keep his business going and pay 6% total tax or I don’t know, something outrageous like that. I’ll be taking lessons from this guy soon because I’ve been looking at what I’m paying out in taxes and there’s got to be a better way. He might have it figured out. We’re going to talk to him about that in retirement. That leads into the retirement planning. If you don’t have a self-directed tax-free or tax deferred retirement plan with checkbook control, you’re missing out on life. You’re missing out on the biggest hammer you could possibly have in your toolbox that’s legal with the possible exception of buy a house and move every two years. With no further ado, how are you doing, John?
I’m doing well. I’m happy to be on here and happy to be doing it from Puerto Rico, where the 6% rate is real and the weather’s nice all year.
The beaches are pretty good too. I was in Puerto Rico for about a month in my previous life when I was wiring chain stores with the new IBM registers that were coming in to replace the NCR registers. My job was to run the cable from the cash registers back to the main office where the controller was, put connectors on them. I test the connectors and make sure it was wired right and go to the next store. I was in Puerto Rico for a month and I went all over the Mall of America’s. I went everywhere there. It was quite an experience and it was fun. I stayed on Tortuga Beach if I remember right. I had some very fun exploits there.
The tourists are here to have a little fun. It’s like Vegas, what happens here, stays here except for the herpes and the syphilis.
We didn’t have that much fun. We were swimming and we went to some places we weren’t supposed to go. We got flanked by people in the drug business and they told us that we needed to go home to wherever we came from and get off their Peninsula out there and I said, “That’s what we’ll do.” Luckily, they let us go there but the way the currents come into some of these Peninsulas that’s where they pick up their drugs. They let the current bring them in. We were in the wrong place, but Puerto Rico was fun. It was nice. How was it doing after the catastrophe?
The catastrophe here is more human than natural. The hurricane was an excuse to point it out and get the feds to pay for a bunch of it because they’re not federal income tax payers. They have their own system that they screwed up and the hurricane finished screwing up what they started. I love Puerto Rico with one exception, I detest their politics. The corruption and the socialism. They screwed it up before the hurricane. The place is workable but it’s Latin America. Things are done tomorrow maybe and slowly. The hurricane didn’t change any of that. When you’re not prepared for it because that’s your way of doing things, it makes it a lot harder. The states came in and fixed an awful lot here. Where I live is the first place fixed. I live in Old San Juan about two blocks from where the cruise ships dock. That’s a tourist moneymaker. They’re going to fix that. That’s why I live there.
Is it safe there at least? You would think that the tourist area is going to be the safest place. Do you feel safe there?
Old San Juan, yeah. I’ll walk here at night. I’ll let my wife walk here at night. That’s not a problem. Again, they don’t want issues. Anywhere else, you watch yourself at night everywhere. There are some places you just plain don’t go.
That’s the same in my town. That’s the same in New York City or San Francisco or any place else. Unless you’re looking for something elicit at 2:00 in the morning, you don’t go down there, you’re risking your life. I always hear these things about people getting killed in Mexico or wherever. When you delve into it a little deeper, they were to places they shouldn’t have been doing things they shouldn’t have been doing.
That’s usually the case. It’s similar here. You can’t pretend you’re living in a beautiful suburban Midwestern neighborhood. It’s not like that here. You got to be paying attention. Most of the crime is property crime. In terms of violent crime. I would agree with you. You are somewhere you shouldn’t have been and you weren’t paying attention what I call, some of the security guys, the cops, and I’ll call code white when you’re oblivious. No, you’ve got to be code yellow. You’ve got to pay attention to what’s going on around you.
Are you allowed to carry there?
Yes. They make it hard in the sense of the permits and all you’ve got to put about is $800 up, which for some people it’s not a problem. For your normal guy, that’s a real impediment.
Do you carry?
Yes.When you say retirement, most Americans don't think more than 20 minutes into the future. Click To Tweet
I would assume you would. This fits right in with the retirement conversation, I don’t feel we’re off-track at all. Where do you want to start? If a person either well on their way or if they’re starting out, what’s the first thing a person should think about when they’re trying to build a retirement or avoid paying taxes legally?
Avoid, not evade. You got it. Let’s reframe the topic a little of towards the second half of that. How to avoid paying taxes? When you say retirement, most Americans don’t think more than twenty minutes into the future. That’s a hard discussion to have. How about this? I talk to people and say, “Do you make more money than you need to live on?” If the answer is no, “I spend every penny to live.” For you putting money aside isn’t going to happen. There’s always the discussion of how much do you “need” versus how much you actually spend? Those are usually two very different numbers. If people are creating a surplus, they don’t need all of it. The next question is, “When you make this money on real estate, what are you going to do with it?”
You’re going to go out and get hookers and drugs? Usually the answer is no. Sometimes you’d be surprised, but usually the answer is no. “What are you going to do with it? Buy more real estate. You’re going to reinvest it.” How about we run it through one of the many retirement plans you can set aside hundreds of thousands of dollars per year into a retirement plan, if you know what you’re doing. If you weren’t going to touch the money, if you were going to put it into more real estate, there’s no reason not to do that. That’s the way I like to frame it. They say, “I like my pay in taxes, but I don’t like not having access to the money.” You’ve got access, you can pull it out anytime you want.
You pay a price. “I’d like to be able to pull it out tax free and do whatever I want whenever I want. Since you’re putting strings on it, I’d rather pay the government full taxes knowing that I could take money I’m never going to take.” It’s crazy the mentality of some people, but I do get that people will say, “I’m not going to put money in an IRA or 401(k) even though I can buy real estate in it because I want to be able to touch the money with no penalty.” You pay the penalty but not having it in the account. I would say the other group of people that are crazy for not having one of these accounts is if you’re already 60 and I’m rounding up, the code says 59.5 but that’s a pain to say, I’ll just say 60. If you’re 60 or older, you can do an awful lot of real estate through one of these accounts. Take the money out the next day tax-free. Why would you not do that? I don’t understand when people don’t do that.
I thought you had to wait five years for it to mature if you were over 59.5.
You have to have a Roth for five years. Once you’ve had a Roth for five years, if it’s an IRA or in the case of a 401(k), you have to have the 401(k) for five years. That’s the basic rule. There’s always complexity, you know how taxes are. You can always come up with fifteen more paragraphs of amendments, but the basic rule is with an IRA, you have to have an IRA. Any of them has to be five years old and you can pull money out of any of them when you’re 60-year-old are tax free. With 401(k), which I like better by the way, a 401(k) is a much superior account to an IRA and you can have a 401(k). They’re not hard to get. You have to have the 401(k) for five years. I don’t know why you would do that? If you had three of them, each one would have to be five years old before you can pull the money out and you have to be 60. If you’re starting one up when you’re 60, you don’t get to touch until you’re 65.
If it’s a traditional from day one, it doesn’t matter.
Traditional, you pull the money out, but it’s taxable. I disliked traditional for most people, traditional is tax deferred. Roth is tax-free. Here’s the metric, if you look at this image in your head, would you rather pay tax on the acorn now or tax on the oak tree later? The answer depends on how big that oak tree is going to be. The way most independent real estate investors invest, they’re grown that oak tree awful damn fast.
It also depends on what the tax rate is going to be in the future. Do you think it’s going to be higher or lower? I’m going to guess higher. Some of the arguments about it is that some people were saying “It’s the lowest tax rate we’re going to see, let’s wash our money now.” That’s why I would do the Roth. Sometimes if you’re an entrepreneur, you’re younger and I didn’t learn this. I learn everything the hard way, John, or by doing it. I’m the guy that’s got to put his hand on the burner twice and get blisters on my fingers and go, “I got it. It’s hot.”
Only twice that’s pretty good.
Sometimes three times I’m telling you, this is how I learn. I’m very hardheaded. I learned by pain and I’m not proud of that, but that’s the fact. When I started making a lot of money because I always wondered, why in the hell would anybody invest in anything but an IRA? Especially if you know how to take a tiny amount of money and make it big really fast. Most people say, “I got $250 to open a Roth IRA with, how the hell am I going to grow that?” I say, “There are plenty of ways to turn that into $10,000, $20,000 in a very short period of time. We’ll talk about that maybe if you want to,” but I thought why would anyone do that instead of doing a traditional where you get a write off but you got to pay tax way down the line when you take it out? I figured out why, because when you make a lot of money and you have a traditional, you get a write-off, if you have a Solo 401(k) or whatever. My wife was putting in $26,000 or whatever and the company was matching her. I was putting in $26,000 so the company was matching me. I was getting $107,000 write off because I had a traditional vein going on.
You’ve got to do the math. I’m in the highest bracket or I was until I moved to Puerto Rico.
You’re making me jealous on that deal. I’m going to fly to Puerto Rico to talk to you.
I bet you times the dollars based on what we discussed about your business model. You could run your business from here.
I always put money into a Roth. When I was in the highest bracket in Columbus, Ohio, every nickel went into a Roth and it hurt to give up the deduction. If you do the math, the net present value of tax free later.
If you’re a businessman and you’re doing business especially if you’re a realtor and you’re turning deals, you can find write-offs all over the place. That one little write-off is well-worth passing to get the benefit down the line.
Here’s one that interest you, here’s one that’s traditional only it’s a retirement account a lot of people ignore and don’t pay attention to. If you set up a traditional pension plan, we call it Defined Benefit Plan. You can contribute up to about $300,000 a year depending on your age because it’s the reverse. In a defined contribution plan, like a 401(k) they say here’s how much you can put in what you grow it into, that’s your business. It’s the reverse. You say, “I want a plan that pays me $200,000 a year when I’m 62. How much do I have to put into it now?” Let me get the actuaries. The more you make and the older you are, the more you can put in because the older you are, you have less time to save. It makes sense.
You’ve got to jam a bunch in into a traditional because they don’t have Roth Defined Benefit Plans. They’re all traditional. That’s how you jam $200,000 to $300,000 a year into a retirement plan. You can self-direct it, which is a fairly new discovery for me because we’ve been looking forever for people who allow you to put real estate and self-direct. We’re finding them. They’re out there but they’re not real public. You could do that in addition to a 401(k) and in addition to an IRA. If you’ve got enough free cashflow that you want a $200,000 or $300,000 write-off a year and you’ve got the cashflow to do it that you don’t need that money, then you can create a very large pension plan and at some point you stop contributing to it.
You roll it over into a traditional 401(k). If you want to convert it to Roth or not later, that’s your business. It depends on the math. That’s $200,000 to $300,000 a year write-off for a plan that’s only traditional. They don’t do Roth. That’s the way you do it. You max out the 401(k) at Roth, you max out the IRA at Roth, and you get one of these plans and do traditional, what’s the catch? There’s always a catch. It’s the government. The employee has got to be included. However, if the employees are young or have been with you less than three years or don’t want to contribute or work only part time, there’s a bunch of exceptions that allow you to make it economically feasible. In other words, the amount you’re putting out that doesn’t go to you is small.
I went ahead and made my employee, which was my daughter, which is a special circumstance. I want made her 2% owner of my company and change that around. I don’t know if that really helps in this situation or not. I wanted to take care of them. There’s always a way. There’s usually a much bigger back discussion than what meets the eye. One of the reasons I made my daughter a 2% owner was because I couldn’t have with a Solo 401(k). I couldn’t have employees over 1,000 hours. I don’t have any employees except for her, but she was certainly over 1,000 hours. I thought, “I can’t do that.” Upon further discussion with someone who was much smarter on the subject than I was, he said, “Give her part of your company.” She’s not a paid employee, she’s a paid owner. I thought, “That’ll work.” Do you agree on that?
Yeah, that probably works subject-to details. I could see that working. What we normally do is tell people, “Set up instead of a Solo (k), set up a kissing cousin called a Safe Harbor Self-Directed 401(k).” What’s the difference between it and a solo plan? It’s a little more expensive. It’s $2,500 to set up, $2,500 a year. Where the solo plans are $300 or $400 to set up and $300 or $400 a year. I like the Safe Harbor plan, but the partnership route should work as well.
This is very typical. There’s more than one way to skin a cat and you need to figure out its personal. How do you feel about it or what resources do you have? Do I have a kissing cousin that I trust? The questions like that, how does it work? How long have you been in the middle of this and teaching this?
I’ve been practicing law for many years. I’ve been in the self-directed IRAs, but probably I only got big and tall the retirement accounts over the last several years by accident. A lot of things happen by accident if you’re ready for the accident. Somebody called me to help with a Roth IRA audit, self-directed IRA. I said, “There are probably people out there who know more than I do and rather you get someone who’s an expert. I’m not.” They said, “Nobody’s an expert. You’re going to become one and you’re honest enough to say you’re not an expert, which puts you ahead of most lawyers.” I took the audit on and we absolutely crushed it. I’ve had several since then and gone the tax court and I’ve never lost.
I’m going to guess it was quite a revelation to even you.
I told the guy flat out up front, “This is new. I’m a very good learner, but it’s not something I know.”
No, I’m talking about when you got into it and all the things you could do, was it a quiet revelation to even you?
It took me a while to convince me because I’m such a skeptic and a doubter that I had to run it 50 ways to Sunday until I figured this is legit.Auditing is a persuasion and negotiation game like any other. Click To Tweet
One of the things I wanted to talk to you about is opportunity zones in these accounts. Talk to us about that.
An Opportunity Zone Fund, let’s define this in human terms because people hear opportunities on fund and they hear fund and they think Wall Street and that’s doesn’t apply to me. All an opportunity zone fund is an LLC that you set up a certain way and you’ll follow certain rules. If you could run, for example, a self-directed IRA, you can run an opportunity zone fund 100% owned by you and your spouse. It doesn’t have to have a bunch of members, why would you do it? What’s the tax benefit? This is who it’s ideal for. If you’re going to buy, do extensive rehab and hold in these opportunities on, you’ve got a Google Opportunity Zones. They’re mostly down and out areas, but a lot of them are gentrifying and becoming very nice. You got to buy, do a lot of rehab and hold.
If you’re willing to do that in those areas here’s the tax break, it’s four tax breaks. A, you defer capital gains into it. Let’s say you sell something, a rental property maybe, you come up with capital gains, you could sell stock, and you could sell automobiles. We’ve got all people selling stuff. You roll the gain and only the gain. You sell a car. We had this, a client who had a car they bought for $100,000. It’s worth over a mil. The gain on it is about $900,000. They sold it. They’re going to roll the gain, the $900,000 on an opportunity zone fund. What’s the benefit? You don’t pay tax on the gain until December 31st, 2026 that’s when it hits your tax return.
How did you get the 26th? It happens this year. Is it a five? Is it a 7-year-plan or a 6-year-plan or how’d you get to 26?
Congress said so.
They picked a year and that’s when it is?
Yeah. It was politics in terms of sunset dates and how this law was passed. Get me to drink and then we’ll talk about how that happened. You get to defer the tax until 2026. If you hold the LLC, that is the fund for at least five years, they forgive 10% of the capital gains instead of deferring 10% goes away. If you hold for seven years, which to do that, you have to have this done by 2019. You have to have the fund formed and the money in it. You hold for seven years with 2026 being the end date, you get 15% forgiveness instead of 10% and those three things are nice, but they’re not the real benefit. The real benefits, what I call the J. Lo Benefit. It’s a great, big, beautiful backend.
Here’s the J. Lo Benefit. Once the LLC turns ten, let’s say in 2029 it turns ten, any properties it owns that are opportunity zone properties, if you were to sell those properties would generate a capital gain. It’s a certain type of asset, rental property, but not flip property for example. Once the fund turns ten any property that’s an opportunity zone property and would sell for capital gains, you can sell it tax free. You don’t have to pay back depreciation. In that respect, that’s even better than a Roth. You get the tax free sale of a Roth, but you also got the take depreciation for that time and you don’t have to pay it back.
Here’s the additional nice little hook, you can keep doing that until 2047. Can I buy a property in an opportunity zone now? Wait until the zone turns ten in 2029, let’s say I sell the property in 2030 for no gain. I pay no tax. Can I go buy another property, sit on it for three or four years, rent it out and sell it tax free? Yeah. You keep doing that gain until 2047 and in 2047 what happens is, everything gets a step up in basis like you died except you didn’t. You get that step up in basis and then that’s it. The law is over. If you fit into that category, it’s the crazy tax break. What people don’t understand is little guys can do it.
I want to point this out, especially given the political environment and people saying the rich don’t pay taxes. These loopholes, they’re not loopholes. These laws are available to every single person out there. The difference between the rich guys that aren’t paying taxes and the poor people that are complaining about it is the rich guys got educated and figured out how to play the monopoly game. It’s a game. It has a set of rules. If you learn the rules, you can win. If you don’t learn the rules, you get your lunch eaten. It’s the same way with anything in life.
You don’t understand. I’m an oppressed victim. My ancestors back in the Roman Empire were probably mistreated, maybe even slaves. My mother fed me led paint when I was a kid. It’s not my fault. I deserve a check from somebody.
It’s available to everybody. These people pass these laws, but they’re not required to send out any memo to use specifically. They post them. They pass mountains of laws. If you took the paper that it takes to pass all these laws, it would fill up huge buildings every year. Somewhere in there, there’s a tax break because them and their companies need to do something, but they can’t stop you from doing it. You have to get in there and learn from people like John or whoever, where these laws are and how you set up that certain LLC that goes by certain rules for $2,500 or $500 or whatever it is. Start playing the frigging game. If you don’t want to play the game, I don’t know how you expect to win because you’re in the game whether you like it or not.
There’s always a catch. You’ve got to review all of them and you’ve got to decide can you live with the catch? For example, in this case, the general rule is it has to be a new building, abandoned for five years or you got to put as much rehab into it as you spend on the building. If you buy a property, one of these zones for let’s say $100,000, $30,000 is land, $70,000 is the building, you’ve got to put $70,000 on rehab or you’ve got to build on it. We’ve got a lot of people doing the building.
The tax benefit, the reason why they’re doing it is they have a blighted part of town and they’re trying to bring it up. They’re offering you an incentive if you can, they will. They will give you a tax break if you can meet these requirements.
It’s worth it. We’ve set up about 40 of these within the last six months.
Any chance you can do one before the end of the year?
You better get your stuff into me by the 28th and that’s rushing it. You’ve got to be nice to me in addition to getting me my normal fee and everything, there better be alcohols or cigars involved.
That’s the easy part. I hope you don’t mind, but this is too rich not to use. I’m going to ask your permission, but I’m probably going to do it anyways, the J. Lo benefit in my repertoire there.
It’s a big, beautiful backend.
I know we’re out here feeding you water from a fire hose. There’s no way to cover this topic in any of its entirety in this segment that’s going to make anybody completely satisfied. You have a streaming workshop. You stream a workshop from Puerto Rico?
Yeah. We did one in December. We got another one coming up in June. It’s a five-day workshop. We only do five hours a day. After lunch talking taxes, even with someone as entertaining as me is not optimal plus people on this island if the ones come live. We got people who show up and we got people who stream depending on their schedule, willingness to travel. We do it a week long and we even structure it to maximize the tax deduction because the workshop is Wednesday, Thursday, Friday, Monday and Tuesday. Why don’t we do anything on the weekend? One of the tax rules says if you’re somewhere on the weekend and it’s cheaper to stay, the flight home, those days or business days, even if you do no business and on business days you get to write stuff off hotels, meals, cars, whatever. We arranged it that you could have some business days where you do no business.
Wednesday, Thursday, Friday, we get Saturday, Sunday off and then you go Monday, Tuesday. Is that what you said?
That’s right. June 10th through June 16th or 17th is the next one. We did that because June is hot here. If you’ve been here in June, it gets warm. However, we got a lot of feedback that people said they want to bring their whole family because where I live, Old San Juan Condado and near it where we have the meeting is paradise for young adults in particular but also family. It’s beachfront everywhere. People want to bring the family and all. It’s an experiment. We’re going to do it in June even though it’s hot but people are going to want to bring their families that are coming live.
It’s hot everywhere in June. You want to be hot where you’re at or you want to be hot in paradise. It’s easy. People say that to me when I do the vacation with Metro Mexico trips, they go, “Why do you think is so hot?” I don’t know. It’s a time when everyone can make it and you can either be hot where you’re at or you can be hot over there with blue water and white sand.
I got in trouble with my wife for pointing out because she heard me whining and all and I said, “There is a benefit to being hot and humid here like Houston.” She said “What’s that?” I said, “All the women don’t wear much and what they do wear sticks.” She didn’t appreciate that.
You got one five-day workshop. The good news is if you can’t make it, wherever you just stream it. You do it from where you’re at. The main thing is you get the information. That’s where the value is. If you can afford to get the information and the tourism, go ahead.
We cover self-directed IRAs, entity structure and advanced tax planning ideas like opportunity zones, children’s trusts, monetized, installment sales, and all that kind of stuff. Let me point out two other things. One, if you are physically present, the networking is phenomenal. When you see the testimonials we put up. I’ve had people repeatedly say to meet the other class members, was worth the trip all by itself. That’s one thing. The other one is it’s 50% Q&A. January 1st, I’m $500 an hour. The ability to ask Q&A for half the class and have some interaction and brainstorming between the students. Can I talk the whole time? I’m sure you figured out by now. I can talk plenty. The 50% of the class is Q&A. For the streamers, we did two separate two-hour sessions just for the streamers to ask their own separate questions.
I do a Q&A every Tuesday night and the archives are invaluable. I love Q&As because people ask questions that the other people don’t even think to think of. I want everyone to go to 1000houses.com/hyre. I want you to go and see everything that John has to offer. If you’re intrigued by this guy, which I don’t know how you couldn’t be because making the money, the first step of the plan, the second step is you’ve got to learn how to keep it because it’ll go away very fast. You can make as much money. It’s in fact, the more money you make, the faster it will go away. Certainly through taxes, but also other things if you don’t have a plan. Making it and keeping it are two different topics. They’re usually two different rungs on the ladder. I’ve got to get educated. You’ve got to make the money and then you’ve got to get educated again so you can keep the money. Am I right there, John?
I’m not disagreeing with you.Be willing to do what it takes to learn things. Click To Tweet
What’s the number one tax mistake that a real estate investors make?
It’s horrible bookkeeping and records.
You’re talking right to me. Did you talk to my office?
They called ahead.
I’ve got to tell you I got off on the wrong foot and I hired a couple of wrong people. It’s taken me 3.5 years. It’s been a nightmare. It’s cost me a fortune. I couldn’t agree more.
Here’s the key. You’ve got to do two things. You’ve got to have a profit and loss statement balance sheet for every property. It’s not hard to do. It can be delegated. If you don’t want to do it, you should learn how to do it, do it a little bit so that when you delegate it, you know that the people are doing it right. Second, you got to keep all the receipts, not just the bank statements. You don’t pay with cash. You pay with debit card, credit card, check and you keep all the receipts, scan them. People whine about that. Most receipts nowadays are emailed. I go to a hotel. I go to Home Depot.
You got to keep the paper trail. There has to be a provable paper trail.
It doesn’t even have to be paper anymore. We can scan it all. They will take scanned copies as originals. Whatever you do, put it in an envelope, have someone scan it. When they save it, just save it by the date. You don’t even write what it was for. They saved my receipts by dates. If I had two receipts, the name on the PDF when I scan it would be 12 18 19 A, 12 18 19 B and I will never see those again unless I get audited and what happens? A VA gets paid $4 an hour to go through my emails and my archives and put all the receipts together and match it to QuickBooks only if I get audited. If I don’t get audited, we never see it again. You got that and you’ve got a good set of QuickBooks or the equivalent income statement and balance sheet for each property, you’re good to go in and audit. You’ve got to do it. If you don’t do it, you can’t back up what you spent.
A lot of times I’ve heard from some very successful business people that were very organized. They got an audit called so they’re going to have an audit. They were organized that the guy wasn’t there for three hours. When he saw how organized they were, that everything was the way it was supposed to be. A couple of files they said, “This guy has got his crap together. I’m not wasting time.”
My shortest audit, fifteen minutes. We had a guy like that. We had an engineer, those guys have good things and bad things. This guy was organized, with his spreadsheets, he had printed out all the receipts and he even highlighted which receipts he didn’t have. He had a 1.47% failure rate on producing receipts. I go into this IRS agent’s cubicle and the first thing you do is you pay attention to personalities because it’s a persuasion and negotiation game like any other. I go in this agent, first of all, she’s a cat lady. Tell right away her and the cats. She likes hockey but you could tell the hockey guys because there’d be pictures of her and the Columbus hugging the local hockey guy and he knew what she did for a living, you didn’t want to make her mad, but he wasn’t really happy at getting hugged.
Bottom line is lonely lady. What happens? I hand her this sheaf of documents that are beautifully organized. She goes through it like this, puts it on the table and she goes, “I’m sure this will all be fine.” We talked a few basic questions about the audit fifteen minutes. I was in the cube for two hours, one hour and 45 minutes flirting and talking to her, because she’s a lonely person. I gave her what she wanted. Not all of it. That’s not right, but we got what we wanted. I told the client I billed you for the two hours. I did my part and that was it. You’re so right about if you come in with your feces together, you’re a lot more likely to get a good fast result.
You’re full of good ones, John. I had some questions written down that might be out of order, but I want to ask this one. What’s the best entity for a real estate investor? This seems to be changing.
First of all, everything except LLCs are obsolete because an LLC can behave like a C corporation. It can behave like an S corp. It can behave like a partnership or it can be ignored by the IRS. It could do all those things. I don’t set up corporations when someone needs, for example, a C corporation, I set up an LLC that’s taxed as a C corp, why? LLC’s have better asset protection than corporations and they’re simpler to run. They’re harder to screw up, but they have the exact same tax benefits. Which LLC format do I select? Which box do I check? C corp, S corp, IRS ignores it or partnership. I’m going to give generalizations, if you act on these generalizations without getting actual legal advice, which this isn’t, you’re going to blow yourself up and you’re going to be an example of Darwin.
People doing dumb things and eliminating themselves from the gene pool and everyone else is happy about that. This is generic. Generically, we like to hold investment assets. That’s assets that we hold for appreciation or for income. We hold rental houses for rental income and appreciation. We hold notes for income. Capital assets tend to go on a regular LLC, single member or multi-member. That depends on your situation. Second, S corporations are good for one thing and one thing only avoiding self-employment tax. If you’ve got self-employment tax, also known as social security tax, they’re the same thing, you use an S corporation to reduce that.
That’s an issue for you guys who do a lot of wholesaling or a pretty large volume of flipping. You don’t longer pay capital gains. You’ve got social security issues. An S corp can take some of the bite out of that. C corporations, and this is very general because of all the entities, the ones that require me to know the most about you personally, your future plans, your prior tax returns, your books, your income, your expenses. C corporations are the ones that you should never set up generically. In other words, only after an analysis of your personal situation because both S and C corps it’s getting pregnant once you are, you are. None of the solutions to get out of it are good. If you’re in a high bracket, let’s say you’re in a 37% the maximum federal income tax bracket C corporation pays 21% that’s a lot better.
It’s sixteen points better about 42% better. What’s the catch? There’s always a catch. The money is inside the C corp. If you take it out, a lot of the tax benefit goes away. You’ve got to find ways to use the money that’s in the C corp without taking it out. I’ll give you a good example. There are details, but if it’s structured right, a C corp can lend money on properties you buy outside of the C corp. It can be the mortgage lender and that way you have use of the money, but you’re not taking it out as a dividend. You’ve got to be careful because when a lot of investors have done, they get cheap. What did the little birds say when it flew over the landlord’s house?
They do it themselves and they get in trouble. A lot of what the investors call the loan, the court would look at and say, “No, that’s at the sky’s dividend. It’s not a loan.” In order for it to be a loan, it’s got to be set up a certain way. A good example is a line of credit from the corporation to you that you take money, whatever you want and you pay it whenever you want. That’s a dividend. That’s not a loan. You’re calling it a loan. You’re putting lipstick on a pig but the IRS looks and says, “That’s still a damn pig. That’s bacon. That’s it.”
C corporations, if you’re on high bracket or you have high healthcare expenses because if you have high healthcare expenses, a C corporation is one way to set up a health reimbursement account, which is like a health savings account but different. They are two very different animals both lead to the same result, which is deducting healthcare expenses. We get people who come in that for whatever reason, they’re spending $20,000, $25,000, $30,000 a year on healthcare, including insurance and they’re not getting a good deduction. You set up a C corp with a health reimbursement account. That’s usually the way to fix that problem.
Again, all hinges around people’s personal situation and you’ve got to sit down and air it out. Depending on how organized you are, if you’re organized, if you’ve heeded the first rule, you’ve had a bookkeeper, you have profit, loss statements and financial statements, it would be a lot easier and a lot quicker. It’s going to be different for most people will be different from the other person. What about Nevada entities? You hear so much about all that. Do you use any of those?
No, let’s talk out of state generically. First of all, I hate Nevada and Utah. If somebody gives you asset protection advice or tax advice and they’re out of Nevada or Utah run, probably you’re paying way more than you need to. Probably you’re getting advice that isn’t as good as you think. They’re going to market heavy, they’re going to sell the fear. Once they get that big upfront payment, their service tends to decline very quickly. I tell you from experience, I’m the guy that’s constantly called upon to fix the mess. Once the Nevada, Utah guy got his money and disappears and you’ve got 50 entities and twenty C corporations and 34 land trusts, including one based on the moon and another one in Jupiter because the federal government doesn’t have jurisdiction in Jupiter and I’m only being slightly sarcastic.
You’re talking about Indian Reservations though and all that crap.
The Nevada, Utah, people who sell stuff, watch out for them. When do you need an out-of-state entity? First of all, if you’re going to use an out-of-state entity, I prefer Wyoming. If you’re going to use out-of-state, but when does out-of-state makes sense? Rarely if the entity owns personal property and you can argue is that the personal property somehow in Wyoming. Let me give you three examples. I own a rental property in Ohio. It has a Wyoming LLC that gives you exactly nothing except extra fees because you’re going to Ohio there is a trip and fall. Does Wyoming law apply? Yeah, “Your honor. I got a Wyoming LLC. Let’s use a Wyoming law.” What do you think an Ohio judge is going to say? “No.”
Next example, I buy stock and I put it in what’s called street name, meaning it’s titled to a broker. It’s mine. I’m the beneficial owner. It’s an informal trust. I put it in the name of a broker in Cheyenne, Wyoming. The property is for legal purposes located in Wyoming, even though I’m still the beneficial owner. Somebody gets a judgment against me, wants to come seize that stock. They got to go after the LLC. They like Ohio. I say, “No, screw you, go to Wyoming.” There’s an argument, why? The personal property is arguably in Wyoming and under Wyoming jurisdiction and even if I’m wrong, they still got to go to Wyoming and fight to prove that it’s not in Wyoming.
I’ve put a roadblock which leads to a better settlement and I’ve talked to the both the asset protection litigators, the actual litigators, not the people who write and the plaintiff’s lawyers. They agree that if you’ve got a good structure, it leads to a better settlement. Third example, and this is the one I’m usually most involved with, you own four LLCs in Ohio. Each one owns $250,000 worth of real estate free and clear because there’s got to be some equity. You can’t strip out all the equity. If you strip too much, it’s going to backfire. It’s a limited liability company, not a no liability company. If you try and make it into a no liability company, you’re going to piss off a judge and that’s going to blow up on you. You got to leave something on the table. You’ve got to leave some skin in the game. You can’t totally equity strip these things. I’ve got four Ohio LLCs and they’re owned by a Wyoming master LLC.
That simplifies my tax return filings, especially if it’s me and my wife that own the master LLC. Theoretically, it’s rare that you have to put it to the test but if somebody manages to get through in Ohio LLC now that he got to go to Wyoming to sue, why? An interest in an Ohio LLC is personal property and arguably by being owned by the Wyoming LLC, it’s located in Wyoming. They have at least have to go to the Ohio court and ask the Ohio court, “Can we sue this LLC here or not?” I’m going to move to have it moved to Wyoming. They’re obstacles. It’s not perfect. Can they get through it eventually? Probably. It’s like a bulletproof vest. Would you rather be in a gunfight with a cotton shirt or a bulletproof vest? I’ll take the vest, but then the losers always whined. “I could get shot in the head.” Don’t wear the vest. That’s genius. Go with the cotton. See how that goes.
That’s one of the reasons we use land trust and stuff down here is to make it not so easy. It’s something out of the normal. No one understands land trusts at all. They’re not that complicated. The problem is the attorney is going to have to charge your adversary money to go learn about a land trust. The adversaries hopefully running out of money faster than I am.
You’re putting an obstacle, you’re increasing the cost of a fight, which makes for a better settlement.If somebody doesn’t have a good credit history, a brand new note is worth a lot less than the face value. Click To Tweet
We’re running out of time here, I didn’t ask you this and I don’t see it in my paperwork here. Do you have something to give away to the audience or some report or anything you can give to them?
I’ll have your people talk to my people because I should never be trusted with technology. We did and charged for a two hour webinar on opportunities on funds. It was all content. The sales portion of the two hour webinar, it was about five minutes at the very end, if you want one of these things, we’re happy to help you set it up. It’s rich content. It gives you a strong sense of what those things can do. They’re coming up on an important deadline, 2019 is the last year you can contribute and get a 15% forgiveness of the cap gains. After that, the forgiveness drops at 10%.
It’s a hot, relevant topic. Again, what’s the priorities? You get this free webinar. It gives you a sense of what we do and if it’s a fit for you, if you’re interested in investing in those areas and either building or doing heavy rehab and then holding the tax breaks are unparalleled. That doesn’t apply to you. For example, I’m no good at rehab. I don’t like doing it. I stay away from it. I’m not going to do this. I make my money other ways. For me personally, it’s not a good fit, but I got to put it out there. For the people that it is a good fit, we saved them a whole bunch of money.
I want you guys to go to 1000houses.com my people are used to that, John. 1000houses.com/hyre and I want you to get over there. I want you to check out the two-hour webinar talking about how to benefit from opportunity zones and how to use your retirement plans for that. You’ll have contact information. If someone wants a consult with you, I’m going to have the contact information over there, John. How does that go? Are they charged for a consult or did you get an initial consult? What happens?
We almost always charge for the initial consult. The only real exception if it’s a very large client. If it’s somebody pretty large, I might give them an hour and a half of talking. The reason for that is as economics, I’m good at what I do. Then oftentimes in an hour I can cover everything. Plus we’ve learned with real estate investors, we learned over the years when we give away free consults.
You get eat up.
That doesn’t work. We’re easy to find. If you look at TaxReductionLawyer.com, make an appointment. It’s all virtual. “I work at a Puerto Rico. Can you come visit?” “Sure.” It’s a great reason to write-off a trip. In fact, we’ve got a client come in to do some serious heavy lifting and tax planning. I’m sure they’re going to enjoy the site and seen our weather here, but most of it’s virtual.
How much you an hour? I want to make this statement, the guy can change this price up or down or do what he wants to. As of this conversation, what are you an hour to talk to?
It’s $400 for another twelve days.
It goes to $500?
That sounds like a lot, but the amount of money that you can save, if you want to go a real expensive route, don’t get any education from a guy who charges $500 an hour. Go ahead and do it yourself and figure out how much.
I’ll pay the cheap guy. Have we all hired the lowest bidder for the contracting work?
I have and it’s not better.
We do a lot of stuff fixed price, a lot of the time by the hour we do the planning and then there’s implementation. For example, the opportunities zones, we always do it a fixed price. For example, opportunities zone, “Will I talk to you off the clock?” “Yeah, for about twenty minutes.” In twenty minutes, I can tell if this is a good fit for you or not. If you’re serious and if we’re a good fit. I’m sure people have gathered on the call, I’m not politically correct, I’m not sensitive and I don’t care about your feelings. If those are big priorities for you, you probably need to find an inferior accountant who will make you feel good but cost you more.
That bottom line has no emotion. Those taxes, they have no emotions. You got to be like that. John, I appreciate you taking the time. I’m sorry we didn’t get to more stuff. You can go there to 1000houses.com/hyre. You’ll get his websites. You’ll get everything over there, his contact information. If you want a console, call him, text him, email him, it’ll all be over there. Also, get your two hour webinar on Opportunity Zones. I appreciate you being on. Do you have a podcast yourself?
Not yet. I have to make time for it as we’re staffing up. I probably will do more. I do a monthly webinar and it’s not a free one. We charge, it’s on advanced topics. What happens is to monetize my research because I’m like a lot of tax people. I’m always researching. I’m always looking for more because in order to be as arrogant as I am, first you have to be really humble. You have to look in the mirror and go, “I don’t know everything, but I’m willing to do what it takes to learn it.” I pay for a lot of very high-quality education articles, subscriptions. I go to tax court, by which I mean I fly to Washington, DC. I go to the building that has tax court on it. It is the one place I can pull the entire case. What most people refer to as case law is the decision, 10, 30, 40 pages. I pull a shopping cart worth of stuff. I get the depositions
You want to know what made them make that decision.
I want to know which lawyer wrote the decisions. Who were the briefs?
Where’s the nuance to that? Where was the catch? There’s always a catch.
I pulled the tax returns, I pulled a cross-examination, I pulled the IRS lawyers’ briefs because if they won the case, there’ll be one argument that won the case and there’ll be nineteen other arguments they made there in the brief that the judge never addressed in the case. I want to know what they’re thinking. I want to know what the other arguments are. I want to know what they’re going to come at me with. That’s the research I do. My monthly webinars, I pick a topic that I’m curious about. For example, one was on monetized installment sales, deferring taxes for 30 years, but getting the cash up front. I went and researched the hell out of that because I had enough people ask me about it that I started digging.
Are you talking about dealership status?
No, that’s a separate issue. A monetized installment sale is when I sell something on installment contract, which normally defers taxes, but it also defers the receipt of cash. What people started doing was saying, “I’m going to sell something on an installment sale and I’m going to go hypothesize the installment sale note.” This might sound a little familiar to you. The code says you’re not allowed to defer taxes when you do that, but they used one word that was very important. You’re not allowed to directly hypothecate. That’s an interesting word because a monetized installment sale is indirect hypothecation. They set up essentially an intermediary that’s a lot like a 1031 Intermediary.
You sell him the house. He goes and sells it for cash, gets the cash, and he uses the cash as collateral for a loan. He gives you 95% of the proceeds. Technically, you’re still on the hook for the loan, but it’s not recourse collateralized by something you don’t own. You get a 30-year tax deferral. It’s a fascinating technique and by the way, it is the perfect definition of people have asked me, “John, how aggressive are you?” The answer is, I’m pretty aggressive. I have two jobs is to keep you out of jail and me out of jail. I don’t want to meet no 700-pound dude at 2:00 in the morning when he’s all hot and bothered. That isn’t my stick.
You don’t need a bank mate?
No. My bank mates are all going to be voluntary. I’m aggressive though. My job is to also save you as much as I can, but keep you out of prison if you want the definition of how aggressive I’m willing to be but any more than that would be over the line and I wouldn’t touch it, monetized installment sale.
I get a lot of questions from people who read, a lot of CPAs want a lump sum of my students who are owner financing more than a few houses a year. The CPAs automatically want to lump them into dealership status. I know there are ways around it. I don’t like it.
There’s probably an issue with that. If you sell enough properties and it doesn’t matter, I did it through fifteen LLC’s and each LLC only at three sales and nobody’s a dealer, the IRS ignores that. They look right through that. If you sell enough deals on installment financing, it doesn’t matter if you sell for cash or on payments, that doesn’t matter at all. If you sell enough properties, you’re a dealer and their issues, you have their things steps you can take to mitigate it. If you do enough volume, you’re stuck with it.
The good thing is there steps you can go to mitigate it?
C corp, S corp, how you report the sale in terms of the note and what’s the fair market value of the note versus the face value? That’s a very important distinction. It’s very valuable for your people. IRS taxes you on face value of the note if you’re a dealer. The law says they’re only allowed the tax fair market value. A brand-new note that I formed, especially if somebody doesn’t have a real good credit history is worth of a lot less than the face value.
The way that it works around my house is I’m a note buyer. I teach a lot of people how to buy this house. I teach a lot of people how to borrow the money from me on how to do it. I teach a lot of people how to create a note. I end up with notes.
If you buy a note and sit on a note, that’s fine. If the note came from selling a house, that’s a dealer issue. If I go out and buy a discounted note from somebody and there are always details because they’re like, “My cousin sells the house and I buy the note from him. We do that every time.” No, that’s not going to work. The IRS will look through that. If you go out and buy a note from someone and sit on it and collect the interest, that’s an investment asset, not a dealer asset. On the other hand, if every time you buy a note, it was because you sold a house on that note, that’s a dealer issue.
Again, more topics than we ever cover. We could go on forever and we could get into the minutia that I would love to sometime, but I’ve got to wrap it up. Thank you very much, John Hyre, for taking the time to speak with us. Go to 1000houses.com/hyre and get your free two- hour webinar. Check out how to get a free consult with him. All his contact information, websites, all that stuff will be over there. We appreciate you readers out there. If you have a chance to give this podcast a five-star review on iTunes, Stitcher or wherever you’re finding it, please do me the favor and let the world know what you think. We are always looking for new readers. Please forward our links to people you think might be interested. It helps us the bigger the audience, the longer we’ll be around. Thank you very much for your help in sharing. Thank you very much. We’re out of here.
About John Hyre
My name is John Hyre, and I am an attorney, accountant & investor. For the first seven years of my career, I worked at two large accounting firms and as Tax Counsel for a Fortune 500 Company.
I get corporate-level taxes. For the last 17 years I have run both an accounting practice and tax law practice. I have worked extensively with small businesses, real estate investors of all sizes, note investors and self-directed retirement accounts. I’ve prepared thousands of tax returns, helped thousands of clients with tax planning & tax reduction, fought the IRS in audits and in court and assisted clients in fighting IRS collection of taxes owed.
I have also invested in mobile home parks, low-income rentals and a few flips. I’ve written three home study courses and numerous articles and am a frequent speaker on the taxation of real estate and IRA’s. I have successfully defended clients, including those with IRA issues, in audits and in Tax Court.