Taxes — What You Need to Know

Taxes are one of those topics where I want to be really straightforward about what I can and can't tell you. I'm not a CPA. I'm not a tax attorney. What I can do is explain how our products are structured from a tax reporting standpoint and give you the right questions to bring your own CPA. Because tax strategy is personal. It depends on your income, your other investments, your entity structure, and you need someone who knows your full picture. But the basics? Let me walk you through those so you understand them before you invest. Let's start with FreedomNotes and Masternotes. These are structured as private debt instruments, meaning you are a note holder, not an owner, and we pay you interest on your loan to us. When you earn interest on a debt investment, it's reported on a 1099-INT. That's a tax form you receive at the end of the year. The same type you'd get from a bank when you earn interest on a savings account. Simple, familiar, and straightforward. There's no complex schedule, no partnership income, no depreciation pass-through, just interest income on a 1099-INT. For a lot of investors, especially those who want simplicity in their tax filing, this is a meaningful advantage. The Liquidity Fund, our 3-month income fund, is structured differently. It's an LLC, which means investors participate as members of a partnership. Investors in the liquidity fund receive a K-1. That's the tax form that shows your share of a partnership's income losses and deductions for the year. Rather than a 1099-INT, the K-1 is more complex, and your CPA will want to know you're receiving one so they can account for it in your filing. It typically arrives slightly later in the tax season than a 1099, so plan accordingly. Now let me talk about the 1031 exchange question because I get this one regularly. A 1031 exchange is a tax strategy that allows you to defer, meaning postpone, capital gains taxes on the sale of a real estate asset by reinvesting the proceeds into another qualifying real estate investment within a specific time window. Interesting fact: it's named after the IRS tax code section that governs it. Here's the important thing to understand: FreedomNotes are a debt investment, meaning you're a note holder, not an equity investment where you own the real estate directly. Because of that distinction, FreedomNotes does not qualify as a 1031 exchange replacement property. Please talk to your CPA or a qualified intermediary about your options. We can also talk through whether a joint venture structure might make sense for your situation. Now let's discuss cost segregation. This comes up often with our equity investors, and I want to explain it because it comes up in conversations with note investors too. Cost segregation is an IRS-approved tax strategy that accelerates depreciation, meaning it lets you take larger tax deductions sooner on real property by reclassifying certain building components from longer depreciation schedules to shorter ones. The practical effect is a larger tax deduction in the early years of ownership, which can significantly reduce taxable income for equity investors. We've used cost segregation on our properties. At Serena Gordon, for example, one of our Ohio properties, cost segregation generated substantial depreciation benefits for our equity investors in that deal. As a FreedomNotes investor, you don't directly receive those depreciation benefits because you're a note holder. Not an owner. Note holders receive interest income reported on a 1099. However, for investors with larger capital who want access to depreciation benefits and who are accredited, there is a joint venture path worth a conversation. That's a different structure and it's not right for everyone. But if that's something on your mind, feel free to bring it up when we talk. And one more thing I wanna mention. If you're on the growth track where your interest compounds and reinvests rather than being paid out quarterly, you're still earning taxable interest income each year, even if you're not receiving that income as a cash distribution, meaning you owe taxes on earnings that stay in the account. Your CPA will want to know this, and it's something to factor into your cash flow planning if you choose the growth track. If you're holding FreedomNotes inside a self-directed IRA or 401, The tax picture changes significantly in your favor. That 1099 interest income, taxable in a regular account, grows tax-deferred inside a traditional IRA or completely tax-free inside a Roth. No annual tax hit on the earnings. FreedomNotes are actually a really ideal fit for these accounts. Simple reporting, no K-1, no complexity. So if you have a retirement fund, sitting in a low-yield account. Bring that up when we talk. The bottom line: simple tax reporting with a 1099 for notes investors, K-1 for liquidity fund investors, and real depreciation benefits available through equity structures for the right investor profiles. Your CPA is your partner on a specific strategy. We're your partner on the investment itself. In one of our next videos, we talk about inflation and market volatility and why real assets hold their value when paper assets don't. I hope this was helpful, and I hope we have the opportunity to work together. Head over to chatwithfreedom.com and let's talk.