391: Could This New Legislation Mean the END of the Self-Directed IRA with John Hyre

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It is my pleasure to welcome John Heyer to the show. He is a tax attorney. He lives in Puerto Rico, so he's taken advantage of that awesome Puerto Rico tax break and he really knows his stuff when it comes to self directed IRAs and solo 401ks and so forth. And we're going to talk about that today as well as some other things and this new legislation that we should all be very concerned about. John, welcome. How are you?

Very good. Glad to be here. No matter what happens, the tax lawyers always win. So.

Well, all the lawyers always win no matter what happens, right? Not just the tax attorneys.

And it's a coincidence that we dominate the legislature. So it's a pure coincidence.

Just a total coincidence, I'm sure. So John, what's going on with this new legislation and why should we be so concerned about it?

It's basically the destruction of self directed IRAs. Now, they're not honest enough to say, oh, let's ban self directed IRAs frontally and openly. No, what they did was there's a story here. The IRS hates self directed IRAs partly because they don't do their job. Their job is really twofold. One, to make sure people pay the right amount of tax. The but they forget that oftentimes and they think, no, you're supposed to pay more tax. No, that's not their job. It's to make sure people pay the right amount of tax. Self directed IRAs are what they would call resource intensive. That's a bureaucratic euphemism for we don't want to do our job. So in 2009, the IRS put in writing, we would like to see self directed IRAs gone because it's too much work for us. Senator Wyden of Oregon and I'm not a real big fan. I mean, I don't like Wyden or his politics. He has a major issue with self directed IRAs. In fact, he's really been the guiding force behind the attack on them for years. He proposed Some legislation in 16 that was about as bad as this. And then Trump won. So obviously Wyden knew at that point he wasn't going to get it through. So it's kind of sent dormant like a half killed vampire. You know, you have to burn, pour holy water on it and everything else or it doesn't die properly. So it's come back. What happened was, is the IRS talks to Wyden's staff, Wyden's staff talks to the House staff, and they slip it like a dagger between the ribs in 800 pages of dense language, hoping nobody would catch it. Well, we caught it and we're fighting it vociferously. Like, we'll talk about how people can fight that here in a little bit. But they're looking to destroy.

If it passes, what would it do? What would happen to people?

All right, the three big parts, and there are a lot more moving parts because it's tax than there always are. But the three big things, One, they're limiting your aggregate retirement accounts, not including defined benefit plans. So they're going to add up your IRA, your 401k, your SEP, your simples, they're going to add them up. And if you go over 10 million total balance, with some adjustment for inflation, they force you to distribute half of the excess. What does that mean? That sounds like something a tax lawyer would say. Let's illustrate. You have 11 million. Okay? The excess is 1 million 11 minus 10. Half of that is 500,000. You have to distribute 500,000 or they put a penalty of 50%, which would be 250 grand, on what you didn't distribute. So what they're functionally doing is limiting the size of IRAs. Now, we may see that number move up a little bit. There's some pressure, but I do think that's going to pass. I don't think politically arguing that people should be allowed to have more than 10 million in their IRA is a popular approach. So I do think they're going to succeed. But it also solves 99.98% of the Peter Thiel problem. Right. Think about it, do the math. What happens when we compare 10 million to 5 billion? 10 million is 20% of a percentage of 5 billion. That's a 99.8% solution. So everything else they're suggesting is extraneous and about control. So I think that's going to pass. Here's where the two major issues are. First issue, which is half the destruction. If the promoter of an investment requires you to disclose income, assets, experience or licenses.

In other words, if you have to be an accredited investor for your IRA to invest in something, because the way it works is if an investment normally requires accredited investors and your IRA invests, you have to show that you're personally accredited or sophisticated or for some crowdfunding, that you make a certain amount of income, that's gone. And if your IRA does any of that, it dies. Everything gets distributed and taxed. You no longer have an ira. So it's a very harsh punishment.

That's weird, though. I mean, the securities laws are on one side naming some investors as accredited based on income and net worth because they can take more risk, right? So that's why that law is in place. But if. If you invest in something that requires you to be accredited, Is that what you're saying? Or if you disclose that you're accredited.

If you're investing in something that requires. Requires an accredited investor or a sophisticated investor, or for crowdfunding a certain level of income, because crowdfunding amounts vary based on your income.

You'Re not allowed to invest in it with your ira. And if your IRA does invest in it, your IRA immediately dies.

There is no way they're going to get that passed. That would put out. That would put an entire crowdfunding industry, the whole startup business with all the PPMs, the private placement memorandums, and every syndicator out of business. Like, I can't imagine that they could go against that giant lobby. Or am I wrong?

Well, they tried for the quick strike and now they're bogged down fighting. The progressives and the moderates are not agreeing, and it gave us time. I put up a website, which is handsoffmyra.com I was the first one to sound the alarm hard. We got like 15,000 hits within two weeks on a website that was invented at that, just right away. Now, the good news, as you said, it took a while. You'd be shocked. I would call people saying, look, you raise money from IRAs, this is going to hurt you. And they're just like, no, now they're getting organized and more involved and given people who raise money from IRAs time to start objecting to this. So I think of all the provisions, this is the most likely to either die or at least be limited. Because get this, you have two years to exit existing investments.

And we talked about that before. And that would just create absolute chaos. I mean, that would just be a mess beyond comprehension.

It's extraordinarily punitive and nasty, frankly, because I get your contradiction point of. Wait a minute. Sophisticated investor status was to protect the little guy from strange, risky stuff. And now they're saying, but you make too much money on the strange, risky stuff. So we're going to ban little people from investing in it. And by the way, now we're going to ban you from investing in it because it's too good. So little people can't touch it because it's too risky. And your IRA can't touch it because it's too good. That's what they're saying. It's crazy. Here's the second pincer. So they're hitting you from both sides. The second pincer is your IRA may not own 10% or more of any organization. You can't have a checkbook llc. You cannot use a personal property trust. You cannot use a land trust. You and I cannot do a joint venture. I'll give you an example. If I say, jason, listen, I found a project, I'll be the sweat equity. Your IRA brings the money to the table. Let's virtually shake hands. That's a partnership under tax law, that's banned. Why? Because my IRA owns more than 10% of it. Furthermore, my personal ownership reduces the amount the IRA can own. If I own 6% in something, the IRA can only own 4%. So this is going to kill most private joint venture deals, all checkbook LLCs and trusts. And let's think this through. If my IRA has to own less than 10%, it's the kind of deal that we probably need to have a PPM and probably need to have an accredited investor status. There's going to be this tiny area in between. For example, you could still own a rental property in your IRA directly naked. You couldn't have an LLC for asset protection. You could still do hard money lending naked. No trusts or LLCs for anonymity, for example. So it's really going to limit to a very narrow corridor. They're hitting you from both sides. The little guys are not allowed to own 10% or more or invest in anything where they're effectively an officer or director, where they have power to do. Let's call it self direction.

Yeah.

And then from the other side, it's no accredited investors.

So look, you know, I've been saying for a long time there is going to be a significant movement to nationalize IRAs. And I think this is a precursor to it. You know, for years I've been speaking this stuff, and you probably are going to agree with it, John, is that a government that is broke becomes predatory on its citizens. Okay. Because that's the golden Goose. Right. And so the low hanging fruit for them in terms of getting money or nationalizing IRAs is all the traditional IRAs that aren't self directed, that are just in brokerage accounts, you know, they can just pass a law with a stroke of a pen and then all those brokerage accounts just become nationalized. Right. But a self directed IRA with a bunch of random fragmented investments is too difficult for them. You know, that's really complicated for them to figure out the value of it, to go and change the ownership of it and do all of these types of things. So I think what we're seeing is a step in this direction.

It's about control. Yeah, it's about control. They're trying to force you off of Main street into Wall Street. They want control. And this is consistent with decades of, you know, if you have a foreign bank account now, foreigners won't even do business with Americans because the IRS is trying to impose its law on foreigners, et cetera. They're absolutely corralling capital and limiting financial freedom and independence. We're building a Berlin Wall out of paper still backed by guns instead of concrete. They don't care if you leave. Your money needs to stay.

Yep. And that's what I said over 10 years ago about California, that they would build an economic Berlin Wall. And of course the US is doing that. And with Janet Yellen's big push to make a global minimum corporate tax rate of 15%, I mean, this is just. Folks, the control is just tightening and tightening and tightening. And if they get a digital currency, which they ultimately will, you know, that's gotta come. I mean, there is going to be a central bank, digital currency, or a digital dollar or whatever it's gonna be called, but it's gonna be checkmate. You know, it's gonna be checkmate over spending freedom, spending privacy, very disconcerting stuff coming our way.

There are two things we really want people to do. Tell them your story. Look, I invest personally. I bought rentals in the inner city. We did a great job as landlords. We rehab them. So you got to give the story of the social good. But the ones that are doing something that would be appealing to a moderate Democrat that they think is a good thing, because that's who we're targeting. Tell the story. Second, talk about how it's helped your retirement. You promised you would go after the billionaires, but you're forcing me to invest with them, the ones on Wall Street. The excuses get Peter Thiel. Instead, you're nailing me and forcing me into Wall Street. Write them, email them, send them the texts. I mean, overwhelm them so that they know why. Because the moderate Democrats, like most politicians, want to win. I would appeal to that. You got to tell your story.

Yeah. Okay, so what should we talk about? Should we talk about if it happens or what other strategies? Like if it happens, what should we do?

If you're looking to invest in something that may be banned, like a PPM or something, if you're using IRAs, use a traditional IRA. For the moment, they're not targeting 401ks with this. Now, there's other law I haven't discussed that does target 401ks having to do with Roth conversions, Mega roth, the backdoor IRAs, they're targeting all that as well. It's not a great issue, but it's not as harsh or as bad as this one. I've had a few people email saying, I use qualified retirement plans, I use solo ks. This doesn't bother me. I don't need to worry about it. Who do you think's next? Now, the interim measure. So I wouldn't get cocky for you 401k guys or you QRP guys who are like, this doesn't affect me, so I don't have to write any letters. This is just not a problem. I think that's next. But right now, what's one of the plans? If you invested with a traditional IRA, how do you get the IRA out of a prohibited investment? Roll it to a 401k, roll it to a SEP, roll it to a simple to whatever. So that's one very basic way to do it. Now, that's a problem with Roth IRAs, because with Roth IRAs, we can't roll those to 401ks. So with a Roth investment, you either have to sell at a fire sale price or you have to distribute. Assuming this thing survives, that would be a problem. This is an opportunity. By the way, here's a very. I'm shocked at how little this technique gets discussed. And it's super powerful from a tax standpoint. Estate planning uses discounting through entities. Let me explain that for everyone. Most people are familiar, but they don't know they're familiar with it. You and I each have a property worth 100 grand. We throw it into an LLC. So there are two properties worth 100 grand in the LLC, 200 grand in the LLC. We each own 50%. What's your 50% worth? Now, intuitively you would say 100 grand, right? Tax law, the answer is 50 to 90,000. Let's look at the typical PPM structure because this is where it really works. Well, in the typical PPM structure, you don't have liquidity and you don't have control. You're stuck in the investment.

And I would say that's the same as a real estate syndication, right?

Yeah. And I use the terms jointly. For me, a PPM is a generic catch all.

Most people think of the PM as going with a business like a startup.

Oh, got it.

Okay. Yeah. And any kind of fund you invest in is going to going to have this if it's not a publicly traded security.

So under tax law there is a big discount for owning something you don't control. And if you look most of these, again, I just use the term generically, the PMs or syndications, the manager is almost impossible to get rid of. They have to do something horrible on tape twice and be voted out by a super majority.

They're protected like crazy by the business judgment rule and all sorts of other things in the document.

I mean there are venereal diseases that are easier to get rid of than some of those managers. You don't have control. And there's a discount under tax law for lack of control because it makes it harder to sell your interest. Your interest is worth less because someone's buying into a lack of control. Second, you have a lack of liquidity, especially if the agreement, let's say it's not publicly traded stuff. Maybe there are stipulations that somebody gets a right of first refusal. Maybe other members have to approve. It is by nature not a liquid investment. And you can put your thumb on that operating agreement and draft it to make it even less attractive. So we just did a deal, it's a small one with private friends. We bought discounted medical paper. We're factoring doctor's bills. And we set up an LLC with 20 people. One manager who had dictatorial control. Any one member could veto new members or sales of any stock. Everyone had a right of first refusal based on that draftsmanship. We took this to an appraiser and said if we invested, let's say 50 grand from our traditional IRA in there the day before we invest, what's it worth? 50 grand? It's cash. What's it worth a day after we invest? Appraiser came back with less than half, less than 12,500. When would you like to convert to Roth? How much would you. The day after when that value drops. The day you invest. And that's the lowest value because as the business matures and you get closer to liquidation. Hopefully things are going well. The value is going up. The day you invest is the lowest value date. Most of the time, that's the date you convert from traditional to Roth. That's a huge opportunity. I put 100 grand in my traditional account, I get a hundred grand deduction. I invest that hundred grand in a syndication. I get something that says it's worth 50 grand, I convert it 50 grand, I got to keep half the deduction. But all 100 grand once it comes out of the investment, or hopefully 150 or some larger number than what I invested. All of that's Roth.

Right. But the reality is a lot of those deals lose money. So you lose real money in the real world. Now, that's essentially. It sounds like what Peter Thiel did with his Facebook stock. Right. But different. That was out of the park, home run, which is unusual.

Well, there were some differences. So obviously you always want the. You don't want to let the tax tail wag the economic tail.

I agree. I don't let the tax tail wag the dog.

So we invest in a good deal. Was my unstated assumption.

Yeah, got it.

And if it's structured correctly, we get the cherry on top of this huge discount on converting. Big, big deal. And what Peter Thiel did was he grossly undervalued. First of all, only his IRA and the other IRAs had access to these shares. They grossly undervalued what they put them in at. And here's what my argument would have been to take him down without going down the total esoterics. You are not allowed to contribute property to an ira. If you do, you destroy the ira. You can only contribute cash. If you contribute property, the IRA dies. Now, there's never been any case law because no one's ever pushed it. Here's what I would have argued. Peter Thiel personally had the right to acquire those shares at that price. His IRA never had that right. He transferred that right to the IRA and used it to acquire the shares at an artificially low price. That contribution of Property to his IRA was prohibited under section 408 by IRA. IRS wasn't swift enough to do that.

You know, one of the things I think we should be talking about is the broader economic impact of this. You know, we tend to focus on, well, what if I have a self directed IRA or a solo K or something and it affects me? Right. Well, everybody's concerned about that. But think about the kind of dysfunctional business environment this would create where all of these Syndicators and startups who have collected monies now have all this massive pressure on them from their investors to say, hey, I need this money back in two years. You gotta unwind this thing. I mean, think of all the bad business decisions that would have to be made and how that would affect the economy.

Oh yeah, and it was already having an effect. It's already having an effect. Why? Because until we settle, is this going to pass or not? People with IRAs that they wanted to invest in these sorts of things, these syndications are, are sitting on the money and waiting and seeing because they don't want to be forced out in two years. So it's already drying up capital, which I think this is a great time to just dry up capital and just the fundamental unfairness of it. Self directed IRA and 401 rules are complex. I make a living off of that. But there's also a great big reward if you do it right. And they're changing, they're switching the ball. If you're old enough to remember Lucy and Charlie Brown, you're just yanking the ball again and again. That's not right. But the ability to raise money will be severely curtailed. I don't think the people who wrote this live in the real world or understand just how dependent a lot of businesses are on IRA money.

Oh yeah, businesses, end deals, syndications, all the apartment syndicators, the office building syndicators, the whatever syndicators, you know, self storage, investments, you name it. Right. That is, I mean this would be unbelievable. All of the crowdfunding industry that basically was created out of the jobs act, that just didn't even exist before. The startup culture, the angel investors. Wow. I mean this is just. The dominoes are staggering from this. I don't know how much money that is, but it's, it would have just huge effects that would just ripple throughout the economy.

The custodians, for obvious reasons, because it would put a lot of them out of business and I would say at a minimum, cut their revenue in half. At a minimum. The self directed custodians are in the fight. But what really is needed are the stories. That's what appeals to the sorts of people who are the decision makers right now. They need to understand both from what you just said, look, you don't understand the ripple effect on the economy. People raise a lot of money from this. But especially the sympathetic story of the individuals who are like, wait a minute, I played by the rules and, and I invest in things that are both profitable and I hate to Use the term. But one must play the game socially. Just.

Because you got to speak to that, you want something, you got to speak to those people in their language. It's a massive, massive impact. And again, they just slipped it in a few little paragraphs hidden in 800 pages. That's how they play the game.

You know what they say, John, we've got to pass the bill to read what's in it.

Yeah, that sounds familiar.

Hearkening back to Nancy Pelosi. Just unbelievable. Oh God. You just can't write fiction this good, can you? Let's switch gears as we wrap it up here and just, you know, share some of your great knowledge with us. Teach our investors something. You know, we've got lots of people listening who like to buy, you know, mostly single family homes directly, mostly not in any kind of fund or syndication or anything. What are just some tips that you want to share with our people?

Obviously, I like running things through self directed accounts. Some people say you should never run rentals through self directed account accounts because you're losing a tax benefit. It's inferior logic. Right. The account has a certain amount of money in it. Ultimately you're going to run out of depreciation and loan interest deductions and so on. So I think it's a silly argument, but that's one of my first. Of course you guys know about cost segregation studies if you're going to do a long term hold. I'm a big fan of cost seg. Good news is right now there's no proposal to eliminate 1031 and there's no proposal to eliminate stepped up basis. So the whole 1031 until you die concept still works. Here's one that a lot of people miss. You are able. There's an election you make to write off $2500 or lower invoices and a lot of accountants underutilize that on rentals. Now I've seen a few overdo it. Some of the accountants will only apply that to things you can normally write off as an expense. But the way I read the regulation is this applies against capital items. So if I'm doing a rehab, some portion of the rehab where the invoices are under 2,500, I think I can write off immediately using this rule. Now some people get stupid. They do a $40,000 rehab and say I need, what is it, 10 $2,500 invoices.

Okay, so let me just explain what I think you're saying to everybody instead of making it a cap X, which means you have to depreciate it over a longer schedule. You make it an expense. So it's deductible in the year paid, right? Yeah. Okay.

And there's greater ability to do that than people think. It's a subtlety. There's also a subtlety to how far do we push it. Right. Little pigs get fat, big hogs get slaughtered. Opportunity Zone funds are still a thing. They have not gone after them at all. The key is finding a deal in an Opportunity Zone where you're either going to do new build or you're going to rehab, such that the rehab cost equals the cost of the building. To give a simple example, $100,000 property, 20,000 land, 80,000 building. I got to either do a new build or I got to rehab 80,000 of the existing structure. We see this on self storage, mobile home, parks, residential, lots of it in Puerto Rico, hotels and so on. And what's the benefit of the Opportunity Zone fund? The little benefit is deferral of the capital gains till 2026. And if you look, the proposed increase in capital gains rates is fairly modest. It's not as big as we feared it would be. The net present value of deferring capital gains to 2026 is greater than a 5% increase in cap gains. So the deferral doesn't scare us. It's the small benefit, the big benefit. The big benefit is, I call it the JLO benefit, a great big beautiful back end.

Once the opportunity fund turns 10. Once it turns 10, its properties can be sold tax free, including no depreciation recapture. And you can set up your own fund. It's not hard to do. Or you can invest in one. People I think are under utilizing those now. It takes work. You got to be willing to rehab or bill.

We've done a lot of shows about opportunities and stuff, John, and you know, we, we have not, honestly not been too impressed by the Opportunity Zone discussion. But, you know, I get that people go after it and they like it. I think a lot of these funds will get caught in timing problems and.

Yeah, how much discussion is there of people doing their own little fund? I mean, we have people sending these funds up with 100 grand and doing it themselves. Usually it's people who are already good at rehabbing and building or delegating. The same thing.

Yeah, I mean, basically you have to be a developer. Okay. You know, that's, that's who it's for, I think.

Yeah, you need to be good at those things or find someone to delegate. I'm not really impressed with the funds that are out there for me to invest in now. There are a few small private ones I like, but I'm a big fan of my clients who are already doing this stuff. They're already into those areas. They're already into rehabbing. This is crazy. Stupid. Excellent. For them. C Corporations are becoming more of an arbitrage opportunity, especially for a rental management company, for people with high incomes. Why? Looks like they're going to reduce the rate to 18% if the C Corp makes 400 grand or less, keep it at 21% for C Corps that are making 5 mil or less. And foolishly, I think raise it to 26.5% for C Corps that make 5 million or more. So I think that makes us less competitive compared.

We'll incentivize all the companies to keep the money offshore instead of bringing it back.

Well, and that's why they're doing that tax compact. They're trying to take the incentive away by making sure all jurisdictions screw us equally.

Right? Yeah.

I don't know how many guys do Airbnbs. My favorite technique there, hold the Airbnb, assuming you're actually owning the property versus doing a master lease or a sublease. Hold the master property in an llc, sublease it to, typically an S corp, maybe a C Corp, depending on what's on your tax return. That way we preserve some rental because most Airbnb income is treated like normal income, as if you had a hotel subject to Social Security tax because they're.

Staying less than 28 days. I think it is. And that makes it a hotel, not a rental property. So that's not passive income, right?

That's roughly correct. The rules are a little more complex than that. I can go there if you want.

Yeah, they always are. I'd like to delve more into the C Corp discussion because you mentioned it on Airbnb and also on property management. So how does someone use a C Corp? You know, most people think about an S Corp or an LLC treated under subchapter S, and what that means is that all of the income passes through to your personal tax return. So it's only taxed one time. But with a C Corp, you have double dipping because the corporation is taxed at the corporate level, and then when distributions are taken, you're taxed at a personal level. You know, most mom and pop type operators, they're not looking at C Corporations. But you're saying it's back in vogue because there's some arbitrage opportunity. Explain that to us if you would. You said property management. So for example, you've got an investor listening to this now. Maybe they own 20 single family homes. Would they set up like their own property management company as a C Corp or something or what are you saying there?

Let's talk about this. So property management company A, do we do it for asset protection purposes? Rarely, if mom and pop are the sole managers. Because a corporation or an LLC will protect you from the actions of others, contractors, partners, employees. But they rarely protect you from your own actions. So if all the action is you, I think a separate management company for asset protection doesn't make a lot of sense. Now once you've got others involved, I think it makes an awful lot of sense to try and insulate things. So that's the asset protection angle. On the tax side, you're going to use an S Corp if you're low to mid bracket. The biggest advantage of a C Corp is the arbitrage. If I'm in a 39% bracket and the C corp is getting taxed at 18% and I can keep the money in the C corporation, that starts to make a lot of sense. Well, what does it take to be in the 39% bracket? Probably about 500 grand. Married, filing joint. So it's for higher income types that makes the most sense. Could it make sense at lower levels? Sometimes, usually. My rule of thumb, and it's just this, it's a rule of thumb. If you're showing from all sources on your 1040 taxable income of about 400 or greater a C corporation to play tax arbitrage may make sense for you. In other words, I'm only paying the 18 or 21% now. Eventually I have to take it out. The object is to delay that dark day, to play certain games, to take the money out tax free as much as possible and for example, to have the use of the money. I'll give you an example. Before I came to Puerto Rico and made this all irrelevant for me personally, I thought about having my tax practice in an S Corp and my information marketing in a C Corp. And the C Corp would accumulate at a different bracket. And also remember that once you hit certain levels on your return, especially if some of this legislation passes right around 400 grand on your return, bad things start to happen. In addition to higher brackets, a lot of limitations and such kick in. This keeps your 1040 low. It's kind of like a halfway IRA. You got to keep the money in the C Corp as long as possible to benefit there are ways to indirectly access the money. By far my favorite by far is a bona fide legitimate mortgage loan to acquire rental properties. My information practice accumulates a bunch of money in the C Corp and it's got excess funds, so it lends it to me. Because this isn't an ira, so I don't have prohibited transaction rules. It lends it to me on a 30 year note with maybe a 10 year balloon. So 30 year am 10 year balloon, regular monthly payments, commercial interest rate. I would probably photocopy a bank document and modify it. The more your loan looks like the the bank, the less likely the IRS is going to say this is a disguised dividend and we're going to tax you. That's what you don't want. You want them to look at it and say no, that's an honest to God real loan. So these kinds of games, but it's primarily the arbitrage for high income people.

Okay, so the C Corp thing, if someone's making over $500,000 a year, is that, that's married, right?

Yeah.

What about single? Is it a lower number?

Yeah, probably closer to 300, 350.

Okay, so you're not sure the number, but you assume it's lower. Right. Which is probably a fair assumption. Okay, so if they're making single person above 300, 350, married above 500, then setting up a C Corp to be kind of your own property management company for your portfolio could be a good idea. Right?

Could make a. Could make a lot of sense. And there are other so.

Well, just one second about that though. So the money comes into the C Corp. Do you leave all of that rental income in that C Corp? Right. So if you've got $20,000 a month in rental income, it goes into the bank account of that C Corp, that management company, and it just stays there.

Right, so this is a great point, really important that you treat your rental management company like a normal real one you pretend you're dealing with, not you.

Okay.

And that takes work.

So you just take a percentage of the rent then?

Of course, yeah, yeah. It has to be a reasonable fee based on market conditions. You're written, written contract. That's followed.

Okay, so so that, that company, that C Corp is only going to retain a percentage of the rent. Say, say you can, you know, get away with 10% plus nickel and diming for this, that and the other thing, just like property managers do in real life. Which is why I think people should be self managing more often so that money is insulated in the C Corp and it's paying the lower tax rate. But what do you do with it? You just keep it in there, you pay expenses out of it or just build wealth through that company alone.

It's usually build wealth through that company. Or once you have a critical mass enough to make a proper loan on a rental property, use it to finance one of the rental properties that surplus. That's how we usually do it with the property management companies. And just a hint for your people who are not just real estate investors, this is much more common. For example, let's say we have a dentist who has three offices and they've got really good income. We might put one of the offices, the practice, not the literal real estate, into a C corp to shelter that. And that's a much larger sum. But for real estate investors. You know, it's funny, I was doing research. There's an outfit that puts out really high quality continuing legal editing for people who deal with very wealthy clients. And what their favorite technique with very wealthy clients, we're talking people who own skyscrapers in la, is to have a C Corp that you can run defined benefit plans through, for example. So that's another opportunity. I mean if we can set up a defined benefit plan for a management company, if it generates enough income, that's going to be the key. We can contribute in some cases 300 grand a year tax deductible to the defined benefit plan. Now, size matters. Or all the landlords, is that going to be attractive? No. And that's where we get into the income thresholds. Like you're saying, how much money can we funnel? Maybe we started as an S Corp and do something more modest like fund 401ks and other benefits. No income tax bracket arbitrage, but allows us to do a few other things. And then once you're making enough, we start playing the arbitrage game.

Okay, so what were you going to say before that you were talking about the C Corp thing and I was.

Going to go on to. Oh, they have a provision that if you have S corporation that's old, roughly 1997 or older, you're allowed to convert it to an LLC tax free. That's a big deal. That's a very big deal. Because anytime you pull property out of an S corp, it's treated like a sale. For example, you have a rental property in an S Corp which is normally a huge mistake and not something you would normally do. Usually it's an involuntary rental. Someone meant to flip it, couldn't, so they rented It. And then they call me and say, john, I deeded the property into my own personal name for 20 minutes. The bank said I would get a better rate on the property if the property were in my name. So I deeded it to me for 20 minutes, and then I put it back in the S Corp. Oh, sorry. If the IRS audits, they treat that as a sale. So anytime you remove any property from an S Corp or a C corp for any reason, you change the name on the deed. The IRS gets to treat it under tax law as a taxable sale. Real tax, phantom income.

Really?

Yeah. Yep.

I mean, that wouldn't just be considered if it's a single member llc. That would be if it's taxed as.

An S or C, then it's considered a taxable sale. And why? Well, Congress said so.

So we've had that situation where people have done that. So first, what's the lesson? Think twice before you put any property. Even like if you have a dentist's office, for example, putting property into the S Corp, you might have a separate LLC that rents it to the S Corp. You really want to think about that?

Well, most people aren't using corporations, though. They're using LLCs.

Well, LLC is taxed as a corporation is the same thing, right? Right. So if you have an S Corp or an LLC taxed as an S Corp, it's the same thing. Now, to hold the rentals, most people know you're supposed to use LLCs, but we have seen a surprising number of people put rentals into S Corps, or more commonly, they intended to flip and they couldn't and ended up with a bunch of rentals and an S Corp, we've seen that a good bit. So what's the good news if you have an old S Corp? Because normally when you convert an S Corp to an llc, the IRS pretends you sold all the S corp's assets at fair market value even though you didn't, which is a huge disincentive to make that conversion. What they're saying is with old S corporations, there's a specific date. I think it's May 13, 1997. If you have an S Corp, you can convert that to a regular llc. So it's, again, it's a small category, but for those people to whom it matters, it matters a lot. For the ones that want out of the S Corp format, I mean, you've got your classics, you pay the kids, you structure vacations to be tax deductible. The Augusta Rule where you rent your house to the, to you, typically your S corp or your management company, those sorts of things.

That's the Augusta rule.

Yeah, the Augusta rule is you can rent your personal residence up to 14 days a year tax free. And they call it the Augusta Rule because on that golf course they get some stupid amount of money like, I don't know, 10 grand a day or something. And so they get to keep that tax free. So we just put a little tweak on it. We rent our personal residence to our business 14 days a year and so the business cuts a check for the rent and gets a deduction. But it's not taxable to me personally as long as I do it 14 days or less. And we can argue over how much the rent should be. I think the key is you actually have to do something. An annual meeting, in my case, client meetings where we happen to have a lot of bourbon and rye or sometimes we have rye and then bourbon. I mean I am like into diversity, so.

But you actually do something, you know, it's not just on paper, that's a very easy deduction to generate. So that's the Augusta Rule. Very, very popular. I mean it's not a secret, but it's one of my favorites because I'm shocked at how few people know about that one. And then last but not least, because you said just point out a few of my favorite rules and things to play with. You know, we're seeing in this market when people start running out of depreciation and interest deductions and that net rental income starts becoming taxable. So usually for later in life, we're just seeing people buy high end properties that break even on cash flow. But given the market inflation, economics, regulation, they continue to appreciate. And it throws off an awful lot of excess depreciation to shelter all those other properties that lost their depreciation or you paid off the debt. So we're seeing more of a move in that direction. And they're easier to manage too. I mean, I've managed low income. That's something else.

Yep. Yeah. Now we like the class A or B high quality rental properties. That's what our clients tend to do best with. So. I hear you. Good stuff. Well, John, give out your website and a fascinating discussion. You know, there's so much we could talk about. This is just like this never ending field. Right. As you well know. But give out your site so people can learn more about you.

Okay, so my personal website, if you go to tax reduction lawyer or taxreduction class.com and when's the practice and one's the info product tax reduction lawyer or tax reduction class.com and then, you know, even more important, frankly, handsomeyra.com please just take the time, take the template letter, write out your story, send it in and let us stay in touch. Because there'll be inflection points where it matters when they're getting ready to vote, when they're getting ready to do amendments, when it goes to the Senate, they're going to be inflection points where we ask you to do it again.

Well, John Heyer, thank you so much for joining us today and sharing some of your wisdom. We really appreciate it and let's keep our fingers crossed that this disastrous legislation does not unfold.

I appreciate you helping share it, the message. I really do.

Absolutely. Thanks again.

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