WCI #352: How to Reduce Capital Gains on Property Sales

This is the White Coat Investor Podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011.

White Coat Investor podcast number 352 at some point in our financial lives, it.

Will be time to buy a home.

A physician mortgage can be a good vehicle for a young doctor who's just out of training and has a more effective place to use their money than on a big down payment. These loans allow doctors to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you're further advanced in your.

Career or deeper into your journey to.

Financial freedom, buying a home with a conventional mortgage and then later on potentially refinancing that loan to a better rate with a shorter time frame could be a great move. Wherever you are in your financial journey, make sure you use the mortgage that will be most financially beneficial for you. Hop over to our recommended tab and learn more about all of your mortgage and refinancing options@whitecoatinvestor.com mortgage.

You can do this and the White.

Coat Investor can help welcome back to the podcast. It's February now. Shoot. We're on our way to wcicon. Super exciting. We're going to be down in Florida within the week. As you're listening to this, you can still come to that.

By the way, we'd love to have.

You if you want to come.

Probably virtually at this point. I suspect if you're still signing up at this point.

But if you can commit three days to improving your financial life and personal well being, here's what you can expect.

From the virtual version.

You get access to more than half of the sessions live streamed or on demand at any time, and the rest of the presentations will be available in the lifetime CME course that's included with your registration. So you get everything. You get most of it live as it's happening, but you'll get it all eventually. You'll get live Q and A with the conference speakers, you'll get breakout sessions. Connect with like minded White Coat investors and you can earn up to 16 CME or Dental Continuing CE credits. You can sign up for that. WCIEvents.com Cool stuff. Something else cool we're going to be doing this month. I guess I better tell you about it. It's only three weeks away by the.

Time you hear this.

I get invited to come out and.

Speak at medical schools and dental schools all the time.

I can't Go to all of them. It's just there's too many schools. I can't go to all of them.

Every year and give you all lecture.

I love coming and speaking to you.

But the truth is it's not a.

Very financially beneficial opportunity.

Most schools aren't willing to pay me.

To come and speak to you as students. And frankly, I can't get to all.

Of you at once anyway.

So we've done something different the last few years which has worked really well. We call it the Student webinar and you can sign up for that. Whitecoatinvestor.com studentwebinar it's called what Medical and Dental Students need to Know About Money. It's gonna run February 21st from 6 to 7:30pm Mountain Time. Okay, so that's 5 o' clock Pacific, that's 7 o' clock Central, that's 8 o' clock on the east Coast.

If you're in Alaska or Hawaii or in Europe, you're gonna have to adjust accordingly.

What Medical and Dental Students need to Know About Money. This is the lecture I would give you if I came out and spoke to you at your school. This is totally free. It can literally make a difference worth millions of dollars to you over the.

Course of your career.

You cannot afford to wait until the big paychecks start rolling in in five years or 10 years or whatever to learn about money. You're going to learn in this webinar why your patients need you to be financially literate. We're going to learn the secret to being a financially successful doctor. We're going to learn how to not worry about student loans.

And for those of you to whom.

This applies, how to invest during medical school. We'll also talk about how to save money during residency interviews and why buying a house during residency may not be.

Such a great idea.

All right, all of that you can sign up. Whitecoatinvestor.com studentwebinar I'd love to see a.

Whole bunch of you there.

All right. This podcast is driven by you. We love your questions.

We want to help as many of you as we can. If you want to leave a question.

For us, you can do that. Whitecoatinvestor.com speakpipe let's take our first question off the speak pipe. Here's Chris talking about selling a vacation home. Hi Jim.

Thanks for everything you do. I'm going to be selling a vacation home, not a rental, in early 2024 and we'll have a long term capital gain of about $150,000. I have about $20,000 of capital losses carried over from last year from tax loss harvesting. But I'll be in the 20% capital gains bracket, so I'll owe the IRS about $26,000 for the capital gain. I'm a W2 employee, so I've never paid quarterly taxes. Do I need to send the IRS a check for $26,000 for the first quarter of 2024 to avoid a penalty? Or can I wait until April 2025 to settle that up and write a check then? It's possible I could harvest more losses in 2024 from my taxable account if there's a market downTurn sometime in 2024. If I write the check and then harvest losses later, I assume I'll just get a refund in April 2025. Is there anything I'm missing here?

Thanks a lot.

All right, Chris, great question. First of all, yeah. If this is your primary residence, you could still owe capital gains taxes on that, right? Only the first $250,000 or the first.

$500,000 if you're married is exempt.

If it's your secondary home, I don't think any of that applies.

You would pay capital gains from the.

Very beginning on that same thing. If it's an investment property, not only do you have any depreciation you've taken recaptured at up to 25%, but anything above and beyond that is taxed at.

Long term capital gains rates, assuming you've owned it for at least a year.

One thing you can get around this with, especially if it's rental property, something.

You'Ve been renting out at least part.

Of the time, is you can exchange it. You can do a 1031 exchange. You have to identify the similar property. And the IRS is a pretty broad.

Definition of similar property.

You have to identify it within a couple of months. You have to close on it within six months. So that's one way you can defer and potentially eliminate the capital gains taxes completely. So consider that obviously if you have some losses saved up, this is a great place to use them.

You know, you can offset up to.

$3,000 a year in ordinary income using capital losses that you've harvested. But you can offset an unlimited number of capital gains using harvested tax losses.

So another great reason to harvest losses is if you'll ever sell your vacation property or your home or some rental properties or your business or your practice or whatever. Great reason to be carrying forward a bunch of tax losses to offset that.

But it sounds like you may just want to sell you don't want to exchange. You don't have enough losses yet at.

Least to offset those gains. And you may be paying some capital.

Gains taxes on this sale. So the question is, how do you do that? Well, you have to settle up with the IRS every April.

Okay?

So the bottom line is you'll pay for it in April if you haven't.

Paid for it before.

But the federal tax system is a pay as you go system, so you're supposed to pay as you go along. And what that means for employed income is your employer's withholding money from every paycheck, and they're required to withhold a certain amount.

They're given charts and computers and calculators to determine exactly how much they're supposed to be withholding from your paycheck, depending on what you put on your W4.

And then it's a little too much.

Or it's a little too little, and you settle up with the IRS come April.

And as long as you're close, there's no penalties. If you have a lot of income that nobody's withholding anything for you on, then you may have too much to settle up with the IRS in April.

They don't like that.

If you're outside of what they call the safe harbor, you may be penalized and actually pay some interest. They don't put you in jail or anything.

It's not the end of the world.

But basically they expect you to have paid as you went along and you didn't. And so you got to pay them for the fact that you used your money for the last six months or nine months or three months or whatever. And so there's some tax forms that.

Help figure out exactly how much that penalty is. I paid that before. It's not the end of the world. It's probably no worse than, you know, some of the other things we do in personal finance. Not a big deal. You know, it may be worse to.

Pay a bunch extra and get a huge tax refund.

Right?

Because the IRS doesn't pay you interest on what you overpaid.

So you're out of luck there.

So the goal is to hit it. Exactly. It's very hard to hit. Exactly. So you try to get in the safe harbor. Okay, so for high earners, the safe harbor is, number one, you can just pay everything you owe. If you've paid everything you owe as you went along, using quarterly payments and withholdings, you get within $1,000. Fine, no penalties. If you pay at least 110%, it's only 100% for low earners, but it's 110% for high earners of what you owed last year. Between quarterly estimated tax payments and other.

Payments and withholdings, then you're good to go.

You're in the safe harbor. If you did not pay that much.

Then you may not be in the safe harbor and you have to pay some penalties. It's not the end of the world.

If you have the money. If you don't have the money, then it becomes a big problem, right?

Because now you can't settle up with the IRS come April. And now you're definitely going to be paying some penalties and interest for as long as it takes you to pay.

That after April 15, even if you file an extension and don't do your tax return until October, you still have to pay your tax in April. So what can you do in your situation? It's not that big of a gain.

You're talking about, what, $20,000 in taxes or something.

You can just have a little extra withheld from your paychecks.

If you ask them to just withhold.

Another fifteen hundred dollars a paycheck, you're.

Good to go, Right? So they withhold $1,500 your employer does every month, then that'll get you into the safe harbor, Almost surely.

Now, the fun thing about withholding is withholding is all treated the same, whether it's withheld in February or whether it's withheld in December.

The IRS doesn't care.

They do care when you pay your quarterly estimated payments. If you made the money in the first quarter, you're supposed to pay it.

In the first quarter. But they don't care for withholding.

So you could just kind of cruise along where you're at this year. Hope you harvest some more capital losses if you don't. Come November, you could jack up your withholding from your main W2 gig quite.

A bit, have a bunch withheld from.

Your November and December paychecks, and be okay.

So there's lots of ways you can do this. But the bottom line is there's a.

Difference between how much is paid as.

You go and what you actually owe in tax. And that difference is sorted out come tax day.

All right, let's take another question. This one's also about real estate.

This one's from Dan.

Hi, Dr. Dali. I'm a third year internal medicine resident. I'm actually calling in just a few miles away from where you practice. I've been a big fan of yours for a number of years. In fact, whenever I teach the medical students or the residents. I make sure to include financial wisdom that I pick up from your book, blog and podcast. My question is about real estate. I know that you're very forthcoming about residents not buying homes. Confession. I purchased a small condo during residency that I'm going to rent out after I leave. It's in a great area where I I feel confident it will become a cash flow asset for me. I'm moving shortly to a new location for fellowship and I'm thinking about doing the same thing. I have enough for down payment thanks to my wife and we're wondering about buying something, renting it when we leave to have yet another asset. I know you routinely recommend that residents don't buy homes. Wondering if you have any advice on this. Thanks for all you do. It seriously means a lot.

All right, Dan, thanks for asking your question. Obviously, in the retrospectoscope it's easy to know when to buy a house and.

When not to, right?

2002 great time to buy a house. 2006 not so good. 2010 great time to buy a house, right? 2022, maybe not right. However, that's not how you buy houses.

You buy them in advance.

And if you want to make money on a house, you need to own it long enough that the appreciation for.

The most part now there's other factors in it, but for the most part.

You need the appreciation to be larger than the transaction costs. So the typical transaction costs on a Property are about 15% round trip, maybe 5% to get in, maybe 10% to get out.

Now, it's not just the Realtor's commission. That's all the expenses. So if it's a $500,000 house, you're.

Talking about $75,000 round trip. You need it to appreciate in the time you own it, from $500,000 to $575,000 in order to for that to.

Work out well for you. So if you're going to be in.

There three years, you need to appreciate about 5% a year.

If you're going to be in there.

For five years, you needed to appreciate about 3% a year.

If you're going to be in there.

For one year, you needed to appreciate 15% that year. And that doesn't happen very often. It does happen from time to time. I'm sure whatever you bought in 2020 and are selling now, you're probably doing just fine on. You probably made a killing on it. So congratulations to you on that. You gambled and won. But I would estimate that you only win about a third of the time.

When you're in there for three years.

And probably half the time when you're in there for five years. So in general, if you're not going to own it for five years, it's.

Probably not worth doing.

You know, people think renting is just terrible.

Renting is not terrible. I've rented houses. It's not that big a deal. You can rent a nice place, you.

Can rent a place with a backyard.

That your dog can run around in it. I mean, every now and then you go to some weird geographic area where you literally can't rent what you need. Fine, buy a house, right? It's going to might cost you something.

But you have to buy because there's nothing to rent. But for the most part, you can.

Rent what you need and that's okay, right?

Just recognize, like lots of people don't until they bought a house and sold.

A house once or twice or three times.

They don't realize there's a lot more to it than just comparing a mortgage payment to a rent payment, right?

And they're like, oh, well, the mortgage.

Payment is less than the rent payment. Of course it's a good idea to buy. No, no, there's a lot more that goes into it than just mortgage. Think about a real estate investor. What's his expenses?

Well, you got the mortgage payment, your.

Property taxes, you got insurance, you got repairs, you got management, you got vacancies, you got snow removal, you got all.

The crap you got to buy to do the lawn or whatever.

All those expenses go into it. So you have to look at everything.

And compare that to the rent, right? Including the time value of your money that you're using for any down payment.

So there's a lot more that goes into it.

The New York Times has a nice rent versus buy calculator that can help inform this decision. But you'll generally see that what I'm telling you is the truth. Right? The truth. Most of the time, if you're renting for three years or less, or if you're going to be in it for three years or less, you shouldn't be buying it. Three to five years or more, it's usually a good idea to buy.

That's just the way it works out in general.

It's a rule of thumb. Anybody can find an exception to it, of course.

Now, does this change if you keep it longer as a rental? Well, yes. Well, now you got more years for it to appreciate and overcome those transaction costs, right?

Even if you live in it for.

Two years and you rent it out for eight more. Well, now you've owned it for 10 years, so you're spreading those transaction costs out over 10 years, and you're much.

More likely to come out ahead.

However, what happens is people don't buy the place they live in and rental properties the same way. You tend to look at rental properties.

In a very cold, calculated fashion, right?

What do the numbers show?

What can I rent it for? What's it going to cost me? What are my expenses going to be?

When we go buy a place we're.

Going to live in, we start imagining where our furniture is going to sit in it and where we're going to put our stuff and wrestling with our kids on the carpet in that room.

It becomes a much more emotional decision. And when you mix those two together, sometimes bad things happen, right? You end up buying a place that's perfect to raise your kids in, perfect to live in for residency, but really.

Doesn'T make sense as a rental property.

So if you can somehow divorce yourself.

From that mindset that you're trying to.

Get a place that's perfect to live in and buy it purely based on the numbers that this is a rental property you would buy whether you lived in it for a couple of years during fellowship first or not.

And I think this sort of approach.

Is okay, but I just find it.

Hard to believe that if you were.

Designing a real estate empire, a portfolio.

Of real estate properties, that you would.

Pick one condo in the place you.

Did med school and one condo in.

The place you did residency, and. And one condo in the place you did fellowship and have that be your portfolio.

That doesn't make any sense to me as an investment.

The only advantage there.

Well, there's a couple of advantages.

One is if you keep the thing.

Less than five years total and live in it for at least two of the last five years, right? Then you can exclude some of the capital gains. As a resident, you can do that once every couple of years.

So that's one advantage. And the other advantage is, well, you.

Don'T have to have that 5% transaction cost to buy it because you already own it. So when you convert a place you live in to a rental property, you get to skip those expenses. And a lot of times, people aren't exactly reporting to the lender that it's no longer an owner occupied place. And so they can often just keep the same mortgage they've been having. And that's usually at a better rate, especially these days, than they can get for A rental property mortgage. You may want to read your mortgage and see what the bank says about you doing that. But that's certainly a very common practice.

Those are the only advantages of taking.

The place you've been living in and turning it into a rental property. And they may or may not be enough to turn a bad deal into a good deal.

You got to look at the numbers. All right, so the rule of thumb is the same, Dan, as it was. I would have told you in 2020 that you're probably not going to come out ahead buying a property.

You're probably going to be better off.

Just renting during your residency, during your.

Fellowship, during your med school, whatever.

But you didn't listen to then. I'm pretty confident you're not going to listen now, especially once. Now that you've taken my advice and actually came out ahead by not taking my advice.

I'm sure you're going to do the same thing again. But those are the things to be thinking about. Try to think about it as an investment from the get go and buy it like an investment. And I think it's going to work out better for you than if you don't do that. All right.

Our quote of the day today comes from Thomas Edison, who said we should remember that good fortune often happens when.

Opportunity meets with preparation. Boy, isn't that the truth.

So lucky.

When WCI started making money and before, when we came into those attending level paychecks back in 2006 that it met prepared hands, we knew what to do with money by the time we started making it. And so it was pretty awesome what was able to happen in our personal finances by hitting the ground running when we started making money, not just coming out of residency, but also when WCI started making money. And it's made all the difference.

So make the preparation in your life.

So that when opportunity shows up, you're ready for it.

All right, let's talk about new cars.

This question's from Jacqueline on the speak bite.

Hey, Dr. Dali, this is Jacqueline from Georgia. I have a question about getting a new vehicle. 11 years ago I purchased my car. It was used and I bought it in cash. I have loved her really well, but she is getting on up there in age and maintenance costs. It's probably about time to think about retiring. I haven't been in the car market in a long time and I'm not sure how much it's changed during COVID or in the wake of COVID So I wanted to get your advice. How do you think about NAVIGATING getting a new vehicle. Any tips, tricks, best practices that you can pass along would be greatly appreciated. I also wanted to get your reaction to a piece of advice a couple people have given me, but I'm honestly having a little bit of a hard time squaring. I've heard from a couple people that it makes sense if you want a new vehicle to lease it. Otherwise you should buy a used vehicle. I'm not sure I totally can follow when, if ever, it would make sense to lease a vehicle. So generally, what's your thoughts about whether to lease or to buy? Does it make sense to lease a vehicle? Are you okay with buying new? Let me know what your thoughts are. Thanks for everything that you have done for me and for my family. We're incredibly grateful for you.

All right, Jacqueline, you have provided a great segue for me to tell everybody about my new truck. My new truck finally got here. I ordered it in December of 2021.

This is a super duty. It's an F250 with an off road package and all the bells and whistles. Platinum and it's got a huge sunroof and it's got everything automated and it's awesome.

It's a great truck.

I ordered it in 2021.

At the end of 2022, they told me, we're not going to get to your truck, but we'll give you a similar deal on a 2023.

And that was when I changed it from a mid level trim package to the platinum trim package because I no.

Longer needed all six seats since one.

Of my kids had moved out in the meantime. And they told me, well, we're not.

Going to start building those till summer. So the bottom line is it took me 21 months to get a new car.

Car I ordered was willing to pay essentially 4 price for I think actually I got a pretty good deal on it because I ordered it from a dealership in Iowa. I think I got it for 2% under invoice. And this was at a time when if dealerships could get one on the lot, they were just adding $10,000 to the sticker price, which is significantly more than invoice to start with.

So it ended up being a pretty good deal.

But I waited a long, long time for it. Very happy to have a new car though. Here's the deal with new cars versus used cars.

This is actually the first new car.

I've driven in my life. Right. I'm 48 years old. By the time this thing came, I was 48. The whole rest of my life, I've been driving cars that were bought, used.

Now, Katie's had a new car since 2016, she's still driving.

And now it has 150,000 miles on it. Maybe it's not so new anymore, but that was also a new car, and.

That was the first new car she's.

Ever driven in her life.

So I think the first thing to think about is when you can afford.

To just kind of piss away some money.

Dave Ramsey uses a million dollars as the drawing line. He says nobody with less than $1.

Million in net worth should be buying a new car.

I think that's a pretty good place.

To draw the line.

Clearly, financially speaking, buying a new car is not smart.

Okay?

Now the markets fluctuate and there's been.

Some times, especially in the last few.

Years, where you just didn't get much.

Of a discount for buying a used car. And maybe there's some few oddball times when you can say, I'm not getting enough of a discount to buy used.

But most of the time it makes sense to let somebody else take that huge depreciation hit that occurs when you.

Drive a new car off the lot.

You might put 10,000 or 20,000 miles on the car that first year. So buying a year old car with.

20,000 miles on it, that could save you 10 or even 20% of the value of a car. It can be pretty substantial what you can save there, sometimes more, depending on the model.

So as a general rule, don't buy new cars until you're rich. Once you're rich, spend your money however.

You like, and if you want a new car, go get a new car. I certainly have done it.

You should not feel bad doing it.

You know, my definition of the good.

Life definitely includes a few luxuries along the way.

And a new car is one of those luxuries.

I love the fact that you can.

Order it exactly the way you want it, you know, I mean, you can go buy a new car right off the lot, whatever they have there. But I like the idea of being able to get it exactly the way I like it. You know, the colors, the features, the trim levels, you know, the add ons, whatever, all that stuff. I like that opportunity and I think that's cool.

And I have the money so I can afford it.

And so that's probably the way I'm.

Going to buy all my cars going forward. But there's a lot more savvy ways.

Financially to buy a car. And if you have a better use.

For your money and Especially if you're not rich yet.

I think you ought to take advantage of some of those things. For example, I have bought a car at auction. I've gone down to the auction, bought the car.

I paid $1,850 for it.

I drove it for four years.

This is as an attendee, a new physician. I bought this car in 2006, $1,850. I sold it four years later, having put one set of used tires on it, replaced the windshield wipers and swapped out the battery on the one day.

It didn't start at the hospital one.

Cold morning, swapped it, got a jump, and swapped out the battery on the way home. That's all the money I put into it for four years. And then I sold it for 1,500. I'm confident I could have sold it for $1,850, but my wife wouldn't let me because we sold it to one of her friends. I mean, that was an extremely economical.

Way to pay for four years of transportation.

And so there are deals out there.

Maybe you can't get a $2,000 car that's as reliable as that one was. Maybe you got to pay 5 or 6 or $7,000 for that sort of a car these days.

But my point remains.

You can get reliable transportation for less than $10,000.

And so in my view, it makes very little sense to take out a car loan, have more than $10,000 and.

Really probably more than $5,000.

That seems silly to borrow money to.

Get a depreciating asset. Now some people say, well, I can.

Get a car loan at 2% and my money market fund's paying 5%.

Okay, that's true.

You can do that with your microwave too.

I mean, you can do that with.

A stick of gum.

I mean, at what point are you.

Going to quit playing those games and.

Concentrate on the things that actually help you to really be financially successful, which.

Is boosting your income, carving out a huge percentage of it, and investing it in some reasonable way. These little games we play with credit cards and these little games we play.

With arbitrage and $10,000 car loans just.

Don'T really move the needle for most.

Of us in the long run.

Okay, so what do you look for? Where do you buy used cars?

Well, the safest place, but also the most expensive place is to go down to some sort of dealership or car lot where they provide some sort of warranty or guarantee, 37 point checklist and pre certify it.

It's a Certified, pre owned car, whatever.

That'S probably the safest place to do it because you know those folks are going to be down there and you can go back down and complain and whatever.

So that's one option. Another option is to just buy it from private party. I've done this lots of times as well.

Right.

You usually get a better price.

Now some might argue that better price.

Is because you know less about the car and it's going to be as.

Is and you can't go back and.

Complain about anything, it's not certified and.

That sort of stuff.

But the fact is it's cheaper.

So whether you are buying it off of Craigslist, you know, in our area.

In Salt Lake, it's ksl, you know.

They have classified ads, it's associated with one of the local, I guess it's an online newspaper really.

That's where most people list their cars around here.

And I bought cars off that, no problem. You call them up, you ask them.

A few questions about it, make sure it's actually something you'd want. You go over, you test drive it, you kick the tires, you walk around.

You can take your mechanic over. They might let you take it to your mechanic to look it over. You give them a wad of cash and they give you the title and it's your car and maybe you find.

Out something's wrong with it a few weeks later and you got to fix that.

But whatever, it's dramatically cheaper than buying a new car.

That process, however, is really intimidating for a lot of people and can be somewhat time consuming compared to just going.

Down to a dealership.

But I think it's probably overall you're going to get a better price buying.

Your cars in that manner. If that really bothers you, maybe you can buy it from a friend or a family member or somebody else that.

You trust a little bit more. They might give you a sweetheart deal on a car.

There's other places to buy a car, obviously, but you're almost always going to be coming out ahead driving used cars.

So do that until you get rich.

And then you know what one of.

The benefits of being rich is? You don't have to do that anymore.

And it's pretty fun. You can buy a brand new car and you don't even have to go.

To the dealership and fight with them.

You can send emails and just buy it basically online and they can even.

Deliver it to your house. You never even have to talk to the salesperson if you don't want to.

And eliminate that hassle from your life. If you'd like to do that.

Okay. But you also had another question about leasing a car. And just because somebody tells you that it's smart to lease doesn't mean it's smart to lease. It's not. Leasing is like renting a car for three years. We're not talking about a house here.

With huge transaction costs right where you want to make sure you're going to be in it for more than three.

To five years before you decide to buy it. That's not the case with a car.

Right. I mean, it doesn't take that long, owning a car before you're better off buying it and selling it.

Reminds me of these climbers I ran.

Into in Yosemite once. The first time I went to Yosemite, we were camping and in camp for total dirtbag existence. I think we're either about to graduate from medical school or had just graduated.

And they were looking for a campsite to share. So they shared our campsite, and we were there the first night, and we'd.

Bought some rump steak or something, some cheap steak, and we're cooking it over the campfire there. And they were looking at it like it was the world's greatest meal, you know.

And so we shared that with them, heard their story. They'd just come from Australia.

They were a bunch of British climbers that just spent three or four months in Australia.

And when they got there, they felt like it didn't make sense to rent a car. So they bought a car, some cheap old beater in Australia. And then when it came time to leave, they were trying to sell the car. They're trying to sell it out in front of the airport before the flight left. And they couldn't do it. They couldn't find anybody to buy the car at any price out there before they left. And so they literally left the title.

And the keys and the car in front of the airport, got on the plane and left.

And they still probably came out ahead.

From renting the car for three or four months in Australia.

So leasing is essentially renting a car. That's what leasing is. Dave Ramsey likes to call it fleecing.

Because it's generally not a good financial deal. It doesn't change if your business pays for it.

If somebody else pays for it, sure.

Lease me a car, I don't care. But a lot of times, if somebody else is paying for the car, they're willing to make your car payments, just like they're willing to pay a lease. And you can actually own the car when you're done. So no, I'm not a fan of leasing. While I'm sure somebody can come up with some cockeyed scenario where you can actually come out ahead, leasing, as a general rule, it's something to avoid.

If you want a new car, buy it.

Okay, buy the car.

Even if you're swapping them out every three years, which is probably the most.

Expensive way to buy a car, you're.

Probably still coming out ahead of leasing.

A new car every three years. So I'd avoid the leases. You know, if this is still a.

Significant part of your financial life, buy something used.

If it's no longer a significant part of your financial life, go ahead and.

Buy new and enjoy it.

New cars are fun.

Okay, let's talk about something besides houses and cars. Let's talk about side gigs. Let's talk about S Corps.

This question's from Mike on the Speak pipe.

Hi Jim, this is Mike from Ohio Again. I have a side gig where I make about 250,000, currently set up as an LLC tax deduction as a sole proprietorship. I also have a W2 job where I make in the low 7 figure range. My accountant suggested that I switch my side gig over to be taxed as an S corp so I can take a portion of the income as distribution and avoid FICA taxes. I tried to research this a little myself and it seems like this might not be a good idea in my specific case because I've already maxed out both the employer and employee Social Security taxes at my W2 job. From my understanding, only the excess Social Security tax paid by the employee is refundable and the excess Social Security tax paid by the S Corp would not be refundable. Therefore, I would end up paying an extra 6.2% tax on my S Corp wages to save the 3.9% on my S Corp dividends. Am I understanding this correctly or am I better off switching to S Corp taxation? Also, is it possible to have a payroll company not withhold the Social Security taxes from both the employer and the employee with the understanding that I already paid this from my W2 position?

Okay, yeah, you understand it well, your accountant does not. What is it with accountants these days? Come on, accountants out there, get your act together. I had somebody trying to convince somebody else.

I got this email this week trying.

To convince a white coat investor that they had missed the deadline for a Roth conversion.

Right. They had to do it by the end of the year.

No, you can do a Roth conversion anytime. There's no deadline On Roth conversions, the only deadlines in the backdoor Roth IRA process are with the contributions. You have until tax day to make that contribution. Sure, everything's cleaner if you do it.

During the calendar year, but there's not.

Actually a deadline at the end of.

The calendar year for anything but avoiding the pro rata calculation on backdoor Roth IRA process.

At any rate, I think your accountant's giving you bad advice.

I wrote an article that ran in June of 2020 on the blog.

It's called why an S Corp Doesn't Mix well with the W2 job, and it's exactly what you've identified. If you form an S corp for your side gig, you're going to pay that employer half of payroll taxes twice, right? It's going to get paid at your W2 job and you're going to pay it again.

And you're going to pay the employee.

Half too, but at least you can get that back. And so that's going to. That's going to eat up any savings.

In Medicare tax that you have from forming an S corp.

So in your case with a W2, it doesn't make sense if your main gig had been a partnership.

You know, this is my situation, right? I'm paid on a K1 both at WCI and I'm paid on a K1 my position partnership. This is not an issue, right? I'm actually not. I'm paid on a K1 and a W2 at WCI. But the point is, you know, I'm not being paid as an employee in two places. When you get paid as an employee.

In two places, they withhold Social Security.

Taxes from both places and you can.

Get the employee portion back, but not.

The employer portion back.

So no, I think this is a.

Terrible idea for you to elect to have your LLC taxed as an S corp. I wouldn't do that. And I might question some of the other advice that your accountant's given you.

Quite honestly, it's really sad, Mike. You work your butt off.

I assume you're a doc, you got a couple of gigs here, you're working really hard. If you're making 250 at your side.

Gig and you rely on professionals to tell you what the right thing is to do with your money. And yet then you have to go and research what they tell you on.

A blog on the Internet and leave.

A speak pipe for a podcasting physician to tell you what's up. It's really frustrating to pay somebody thousands of dollars to give you advice and then get crummy advice. So, anyway, thanks for what you're doing out there, Mike. No thanks to those in the financial services industry who don't know what they're talking about. If you're going to be professionals, learn this stuff in and out. If you're going to market your stuff, your services to doctors, understand a doctor's financial life and the issues they face. Maybe you need to read my blog, too.

I don't know.

There's not that many of these things.

I feel like if you're an accountant.

That deals with docs, you ought to.

Know this stuff, but sometimes that doesn't happen.

All right, let's take Jacqueline's question.

Hopefully her accountant isn't as bad.

Hey, Dr. Dali, this is Jacqueline from Georgia, and I have a question about taxes. In my family, I am the designated tax preparer, but my husband and I are also newlyweds and this is only my second year of doing our taxes and I could use all the help I could get. Here's what I'm worried about. My husband and I are both W2 employees, but our incomes are a little variable month over month. My husband's is affected by his call schedule and my income is affected by an annual bonus. That's a little bit hard to predict. These are, of course, great problems to have, but I'm worrying that I might not be estimating what we're going to owe in taxes as well as I could. I'd really like to avoid underpayment and penalties. What I've been doing is every four months or so pulling our most recent pay stubs, sticking it into the IRS calculator, seeing what the IRS thinks we're going to need to pay, and adjusting our withholdings to meet that. Is that the best practice? Is there something better that I could do? I also am aware of, but not really familiar with quarterly estimated payments, and I'm not sure if that's where that comes into play. Thanks for all of your advice. Let me know what you think we could do to navigate the situation as well as we can.

Well, don't go get Mike's accountant. Maybe Mike should come hire you to do his taxes. You seem to have a little bit.

Better handle on it than his accountant does. Here's the deal.

If you're afraid that you're going to.

Under withhold, then withhold more.

Worst case scenario, you get a bigger tax refund.

It's not the end of the world. Basically, you lost the use of that money for 1 to 16 months. 4 to 16 months. Really? That's not the end of the world. So withhold a little more and quit worrying about it so you don't have to do this calculation every four months.

Another thing you could do, you could look at what percentage of your income.

You paid in taxes last year.

Because although the tax amount changes quite a bit year to year, what I've found is that the percentage doesn't change all that much. I calculate it out every year and I'm usually paying between 32 and 34%.

Of my income in taxes.

Between federal income taxes, payroll taxes and state income taxes. That's just what it's been for the.

Last few years for me.

And so I know if I set aside about that much money that that's what I'm going to pay in taxes when I pay it.

Not quite as important to me whether it's withheld, whether it's made as quarterly.

Estimated payments, whether I use it to.

Settle up with the IRS come, you know, next April, whether it's, you know, paid as these cool payments you can.

Pay from your business to your state income taxes. So you can still deduct your state income taxes. These are the ptet payments. For those of you businesses owners out.

There, you ought to know about this. If your state allows them, it doesn't really matter, right?

You just want to make sure you have the money because your big fear is that you're going to have under.

Withheld and the IRS is going to.

Go, you got to pay another $30,000 in taxes and you're going to be like, I don't have 30 grand. That's the big fear, right? The smaller fear is the IRS is.

Going to go, hey, you got to pay $30,000 and you got to pay $600 in interest. And you're like, no problem, I got the 30 grand. Here you go. Bummer that I have to pay $600 in interest. But that's not the end of the world. You know, when you are a high.

Income professional and you're paying lots and.

Lots and lots of money in tax.

Like most of us are, sometimes you're.

Going to guess wrong and you'll get a tax refund back and you let the IRS use your money for free or sometimes you really didn't get into the safe harbor and now you got to pay a little bit of interest, all right?

They don't put you in jail. This is not tax evasion.

You just missed your estimate. So don't sweat it too much. I mean, I have been on both sides of this. I have paid that Interest.

I have loaned the IRS way too much money before and had a huge tax refund. It's hard to estimate, so don't beat.

Yourself up about doing it.

In your situation where you're both W2s.

You can almost surely adjust with withholdings if you need to, right? By changing your W4 throughout the year. If you feel like an adjustment needs to be made, you almost surely don't have to do quarterly estimated tax payments.

For someone with a main W2 gig and a small side gig, you can.

Usually do that as well.

But if you're in the situation like.

Mike, and your side gig makes $250,000, right, you're not going to be able to account for those taxes by adjusting your withholdings. You're going to have to make quarterly estimated payments. And they're not that hard, right? You send them in. It's basically a little tiny tax form. It's like a third of a page with like eight questions on it.

You know, like your address, what's your name, what's your address, what's your Social.

Security number, what quarter is this for?

You know those sorts of questions.

And you mail that in. Or you can do it on electronically at EFTPs. And you send those in on April.

15Th and June 15th.

Notice that's only two months between April and June and then on September 15th. And then the quarter four one is due January 15th. So you get four months for the fourth quarter, two months for the second quarter. That's the most annoying cash flow issue I deal with each year. But that's the way the system works. So I don't think you have to do quarterly estimated payments yet though, unless you really have some other source of income other than those W2 jobs.

It does sound to me like you're.

Sweating this too much. If you're having to look at it multiple times a year and make adjustments, I think you're worrying about it a little too much. Just have a little extra withheld and sleep better at night.

All right, here's an email I got.

And I got some follow up emails on it as well. Basically, the white coat investor said this.

I'm seeking advice from my daughter. She started a macaroon selling business when she was 13. She's going to be 15 this year. My wife helps her a little. I want to create either an LLC or an S Corp for her business. Part of the reason is to help from a tax perspective.

That's interesting.

But most importantly is for her college applications. So question one. For tax purposes, do you recommend an LLC or an S Corp. My tax advisor said S Corp and a financial advisor I know said llc. So I was wondering if you have an opinion. LLC sounds simpler, but I read that marketing expenses are more available with an S Corp. Question two, do you happen to know if it would make any difference in terms of college applications? If it is an LLC or S Corp is one more impressive than the other. Also, should the business be in my daughter's name or my wife's name? My daughter is an employee.

Thanks for any input you can provide and thanks for all your advice and guidance over the years.

Okay, well, I had to dive into this more with some follow up emails. It turns out that this business makes.

About $1,000 a year gross.

Okay, so it's great his daughter started.

Business, but this is not like the.

Next Apple or something. All right, so forming an LLC or an S corp seems silly for a business with $1,000 in gross revenue. Okay, you know the fee each year in California for an LLC is like $800. That's going to be more than the profit for this business. Just paying the annual LLC fee in Utah, I think it's 15 bucks or 20 bucks.

So maybe it's not so bad if you're in a state with a low fee.

But give me a break, right? It's a thousand dollar kid business. You don't need an llc. You don't need an S corp. You just put it on a schedule C. It's a sole proprietorship. It goes on her taxes, Schedule C.

She's got to pay a little bit.

Of payroll tax in it. She won't even have to pay any income tax. So forming an LLC or an S corp to trying to save taxes on $1,000 that the kid isn't going to pay anyway. I mean, what are you going to do? Call half the distribution and try to save some Social Security tax and some Medicare tax? That's just silly. Okay? Way too much hassle for what's going on here. Just put it on Schedule C. 4. Yes.

Report the income. Don't cheat the IRS.

Although, let's be honest, most kids doing this, you know, we got some kids.

In the neighborhood that make bread and sell bread. I don't think they're reporting it on their taxes. Now if you want to put the.

Money in a Roth ira, you better.

Report it on your taxes and pay some taxes on it.

But let's say she makes $1,000, right? Let's say 500 of it is profit.

And she's got to pay the payroll taxes on that. She's not going to owe any income tax on it.

What's the payroll taxes?

Well, it works out to be about what, 15%, right?

12% in Social Security, about 3% in Medicare tax.

So it's about 150%.

It's about $75. We're talking about $75 in taxes. And you want to form a corporation to try to save some of that $75. I don't think you have any idea what kind of hassle we're talking about.

When you form a corporation.

So this is just crazy to do.

Any of this, right?

And what the heck? What is going on with the accountants for white coat investors out there? Your tax advisor said form an S corp for this. Are they insane? That's stupid advice. Accountants. What are you doing out there? Quit giving this sort of advice to white coat investors. It's a thousand dollar business. An S corp. Really? Okay. And this thing about college, what the heck? I mean, it's great your kid formed a business, learned some entrepreneurship lessons. I'll bet if her majors, you know, business or something, this is going to impress somebody.

Heck, it might impress them.

Even if she just wants to go into humanities, it's great. She can talk about in her college applications what she learned from forming a business.

You know, that she learned about marketing and hard work and, you know, and maybe she had some challenges she can write about in her college essays. But nobody cares if that business has LLC or corp after its name. Give me a break.

I cannot imagine anybody on an admissions.

Committee is going to care about that.

Now should this business be in your daughter's name or your wife's name? You know, technically when you start a.

Business in a state, a lot of.

Times you're supposed to register it with the state.

You're supposed to get licenses.

In fact, if you're doing food preparation.

The regulations are actually pretty complex. I had a partner whose spouse was getting into this and they had to have like this fancy commercial kitchen installed in their house. I mean, there's like a six figure amount in order to comply with the regulations for food preparation.

So it is no small thing to.

Actually be compliant with this sort of a thing.

Now, is your city going to come.

After you because your kid made $500 making macaroons in your kitchen? Probably not. And that's probably why most people aren't reporting this sort of income anyway.

But it's interesting. I looked into this. Some states do allow miners to own businesses. Some states don't.

Some. But if you're putting it on the kids Schedule C, you know, which means it's a sole proprietorship. I don't think the state's going to come after you because you're probably not registering it with the state really.

But if you really want to register it with the state, you better find out if your state allows that.

You might have to put it in your name or your wife's name. That wouldn't necessarily mean your daughter would.

Have to be an employee, I don't think. But you could certainly have them be an employee. If they're an employee of a business that is entirely owned by their parents and it's not a corporation, they don't have to pay payroll taxes as long.

As they're under 18.

So that would save the payroll taxes.

If you put the business in your.

Name, made your daughter the employee, paid your daughter the entire profit as a salary. So now this business has no profit. So you owe no taxes on it and your daughter owes no income tax because she doesn't make a lot of. And nobody has to pay payroll taxes. So maybe that's the winning way to do it.

You know, put it in your name.

Put it on the schedule C, pay.

Your daughter as an employee of the business and it works out great for everybody. So maybe that's the best way to do it. Man, I can't believe some of the advice coming from accountants today. Very distressing.

One of the common things we get asked for is we need some help.

With accounting, we need help with accounting, but there just are not that many accountants out there and many of them.

Just don't understand a lot of things about personal finance. It's really surprising.

I think they need to revamp some of the curriculum in accounting school. I don't know.

Okay, let's do another question off the speak pipe.

This one's about partnerships.

Hi Dr. Dali, thank you for all that you do. I am a young vascular surgeon, nearing the end of my two year contract of my first job and will be considered for partnerships to soon. I am employed by a physician group and we are contracted out and work for a private hospital. When considering partnership, are there any specific questions that I should ask the physician group to determine whether it is a good choice financially and for a prolonged career? The buy in for my particular group is quite high at about $600,000 and there is a five year vesting period. It appears that the group has been quite profitable over the past few years. But I was unsure of how to best gauge this other than asking physicians who have Retired from the practice and asking the group how much the value of their share has gone up over the past several years. Thank you and happy holidays.

Okay, great questions. First of all, God bless you. Thank you for what you do. Vascular surgery, lots of training. When you got to operate, you got to operate now. And so there's lots of call.

And I think you work like on average more hours than just about any other physician specialty. So thanks for what you do out there. That's great.

The truth about partnership is the time to ask about partnership and kind of understand all these details is before you.

Start working for them in the first place. This is kind of weird that you work for them for two years and then you enter into some weird vesting period over five years. That's a little bit weird. Five years is also a pretty long time. Most of these kind of partnerships, particularly.

In my field, emergency medicine, most of.

Them are one to three years and.

Most of them are sweat equity. So you work for less for one to three years.

This is your pre partner years, then you make partner and you make the same as everybody else. That's the way most of these small democratic groups work, but they don't have.

A lot in assets.

The only thing I'm really buying into with that sweat equity is the ability to make a higher hourly rate, number one. And number two, my share of the accounts payable when I leave the partnership. In my case, that's probably a five figure amount. Might not even be a very high five figure amount the way we calculate it.

So the first question, especially if you got a pony up cash and it's real money for somebody early in their.

Career, $600,000 is not a small amount of money. That's a lot of cash. You're probably gonna have to borrow some of it. And I'm not necessarily against that. But the point is it's a lot of money.

So you need to ask, what am.

I getting for that? Right.

And is what I'm getting going to appreciate? What are the risks to this business? You need to understand the business you're buying into. Because you're buying a business. What are the risks to it? I mean, is it like our business where basically we have one customer, the hospital, we have one contract, our entire business, businesses, a physician group is dependent on one contract. We lose that contract, the business has no value whatsoever other than the accounts payable, which will be rapidly distributed. Are you getting part of an office building? Are you getting some equipment? What are you actually getting for your $600,000? So I think that's the first thing to understand. Second, understand how the system works.

Exactly. What do you get if you leave in a year? What do you get if you leave in two years?

What do you get if you leave in five years? What do you get if you get fired?

What do you get if you quit? What do you get in 20 years? What if you cut back and work half time? Or what happens if you go on the parent track for two years? What happens in all those situations? I think understanding that's really important.

Other questions to ask the truth about a partnership is a partnership. The most important thing in a partnership.

Is the people in the partnership. And you got to ask, are these.

People I want to be professionally married to for the next 10 to 40 years?

Are they people you trust? Are they people that have integrity? Are they people that you think are.

Going to try to get theirs and leave you with whatever's left?

I think that's the most important thing. So the details and the money can usually be worked out if they're good people that you're working with. If they're not good people, no amount of due diligence, no amount of legalese in the contract is going to save you. So first determine, are they good folks?

I think it's also worth paying for.

Some professional help here.

You've only ever done this no times in your life.

You may only ever do it one time in your life. How can you be expected to be an expert in it?

So we have a resource for this. If you go to whitecoatinvestor.com recommended, you'll.

See all our recommended resources.

Or you can go to the website.

Go into the recommended tab, and you will see a line called Contract Review and Legal Services. And we have a number of firms there. Some have advertised recently on this podcast.

Resolve is a company.

If you go to whitecoatinvestor.com Resolve, they're a company that's advertised on the podcast recently. You can use the code Whitecoat10 to.

Get 10% off their services, but they'll review your contract.

They'll not only review employee contracts, but they will review partnership contracts.

So you can get a sense of.

Whether this is kind of what most of these look like, or whether yours.

Is really bizarre that it's five years long for vesting, for instance, and kind.

Of get a sense for whether you're being treated fairly. And I actually recommend you do that. I think it's worth a few hundred dollars.

I mean, you're going to spend $600,000 on this thing. Why not spend 4 or $500 figuring out if you're getting a good deal.

And almost surely you're going to learn something from working with these sorts of folks. You're going to learn something that helps you to get paid more, that helps you to be happier, that helps you to understand how this is going to break up better. I can't imagine this isn't going to be worth the money to get this contract reviewed, so I would recommend doing that.

But yeah, it sounds like a great opportunity.

I mean, most docs, the medically related businesses they own, turn out to be the best investments in their entire career.

Whether that's a surgeon buying a surgical.

Center or a gastroenterologist buying a building that they can do their own scopes in, or an emergency doc buying an urgent care or just buying into a.

Partnership and owning a practice, dialysis centers, labs, whatever.

Ownership. I'm a big fan of ownership, but you don't want to just own anything and you don't want to pay too high of a price for it.

And this is a good price.

You're buying something that's going to cost a lot. The value needs to be there. You need to do your due diligence and really understand what you're getting into. So I'd get that contract reviewed, I would learn everything you possibly can about the business, and I would really take some time to get to know the partners and decide if you want to be in business with them for the next several decades.

Okay. At some point in our financial lives, it's going to be time to buy a house for almost all of us. A physician mortgage can be a good vehicle for a young doc who's just out of school and has a better place to use their money than on a big down payment. Doctor Mortgages Physician mortgages allow docs to secure a mortgage with fewer restrictions and a lower down payment than a conventional mortgage. But if you're later in your career or deeper in your journey toward financial.

Freedom, you may want to use a.

Conventional mortgage or even refinance that as.

Rates go down, especially if you're shortening.

Up the time frame so you can be mortgage free. But wherever you are in your financial journey, think about the white coat investor because we can help connect you with mortgage professionals and the mortgage that will be most financially beneficial for you. Go to our recommended tab to learn more about all of your mortgage and.

Refinancing options@whitecoatinvestor.com Mortgage all right, don't forget.

You can still come to the conference. Probably Virtually at this point. You sign up wcievents.com you get access to more than half of the sessions live, streamed or on demand. Everything else will be available in the lifetime CME course that will be included with your registration. You get CME credits. You actually get two sets of cme.

You get CME for attending the conference.

And it's actually a separate set of CME that you get for the online course.

Pretty cool, right? But you can use your CMA dollars to buy that. You get live Q and A with.

The speakers, breakout sessions, all kinds of great stuff. Again, you can still register@wcievents.com Students don't come to WCICON.

All right? You can't afford it.

Even virtually, you can't afford it.

I mean, we'd love to have you, but let's be honest, this isn't for you. Most people come in, there are mid career, there's a few early career and certainly plenty late career. But the majority of people are mid career.

For you. I got something else and it's totally free. February 21, 6pm Mountain. Sign up@whitecoatinvestor.com studentwebinar I'll tell you what I would tell you if I could fly out and sit down with you and 10 of your classmates and talk.

About finances for an hour. Come to the student webinar. I'll make it worth your time, I promise.

Thanks for those of you who have told your friends about the podcast. Thanks for those of you who are leaving us. Five star reviews. A recent one came in From Estate Nickname 1233 said Excellent. Best personal finance podcast there is. Listening to this for six months is.

Probably going to be worth millions over the course of my career.

Thanks for making this outstanding podcast five stars. Thanks.

You know, it's true.

Becoming financially literate and financially disciplined is like a superpower. It's so rare in our society.

It's like a superpower.

And if you can get both of those at the beginning of a career as a high income professional, it is.

Going to be worth millions to you.

Instead of retiring with 2 million, maybe retire with 6 million. Learn this stuff. It's well worth it.

I promise it's worth it.

It's a little bit of work up front. It's a little bit of work as it goes along. Totally worth it.

All right.

Guys are the best. We appreciate what you do out there.

We appreciate if you had a bad.

Day today and I know some of you did.

I mean, 30,000 people are listening to this. Surely a whole bunch of you had a bad day.

I'm sorry you had a bad day.

It happens.

Go home, recharge, hit the ground running.

Again tomorrow and get back to what you've committed your life to. It's really a wonderful thing you've done. You should be proud of the decisions you've made and the hard work you've put in in the past.

Let's help you do well while doing good. Keep your head up and your shoulders back. You've got this. We'll see you next time on the.

White Coat Investor Podcast.

The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.