Brokering Notes and Tax Strategies

Okay, if you're watching this video, you're a specialist, you're in that niche, that unique area of selling notes. You might be investing in notes and collecting points and interest, then you might be brokering those notes and selling those notes off to others. Maybe they default and end up as a rental property. But wow, lots of strategies here, right? Well, I want to just share a few important tax strategies and five tips of when you know you may have a self employment tax problem. You got to hear this. Alright now first concept in general, holding a note is passive, right? You're going to get points and interest. You might hold the note in your revocable living trust. You might even have an LLC or holding company to hold those notes for the long haul. And a little asset protection type strategy. But from a tax point of view, it is passive. Also if you have to foreclose on that note and you take ownership of a property, which sometimes is a great thing, and then you can flip the property or keep it as a rental, that's going to be also a passive or long term strategy. You're going to collect rent, put that rental property in an LLC and if you turn around and sell it, you'll have a short term capital gain. But you're not in the business foreclosing on properties and reselling them, right? You're here for notes and maybe even brokering the notes. So that again is also going to be a passive scenario. Now before I get into the question of are you in the business of brokering notes? And that's really what this video is all about. One final point. As you're holding those notes and maybe foreclosing on property and maybe holding rental properties, there's so many asset protection issues I want you to be aware of. Please check out my other videos on my YouTube channel. Please subscribe. Hit the little bell and whenever I shoot a new video, go live, you're going to hear about it. But there's so much to this topic and I love helping real estate investors and small business owners. Note brokering is all about that. So hopefully there's going to be some extra videos that will help you out. Now let's get into these topics or this topic of the brokering of notes. And is it a business now? Is brokering notes a business? A lot of those that specialize in note brokering like to say no because they just want short term or long term capital gain every time they buy or sell a note. Well, you got to be careful. The IRS doesn't think that anybody that brokers notes is passive. Short term, long term capital gain. It may be a business and if it's a business, you owe self employment tax. So I want to share five criteria that are subjective. There's no bright line test that if you do this you're in the business of note brokering. We've got to go through five tests. Now if you are in the business of brokering notes, you're going to want to implement an S corporation. It's not the end of the world. It's going to save you a ton in taxes and it's okay. So don't think this sky is falling if you meet any of these five criteria and you're in the business of brokering notes. Okay, watch my videos on S corporations and get a consult with one of my tax lawyers and we can design a plan to give you the maximum asset and tax protection. Make sure your accountant you are on the same page. Make sure that you are realistic about what you're doing and honest about what you're doing. If you're in the business of no brokering then buck up, get an S corp going and get a consultation with a real tax lawyer. Don't go on LegalZoom and click a button and think you figured it out. So there's some duties to do there. You got to do payroll and some other things. But that S corp can open up a lot of doors for you. And here's the bonus. Here's the good news. At the end of this process, if you are in the business of note brokering, you just got the 199A pass through deduction, which means you get a deduction of 20% on the bottom line off any flow through income. Also, you could form a 401k and start brokering notes in your 401k. There's so many doors that open for you that this is not a bad news deal. I've got clients that want their note brokering to become a business so they can open up the door to the 199A and the Solo 401K put their kids on the payroll. Guys, if you're just brokering notes and not in the business of brokering notes, you don't have a business. I can't deduct your cell phone in your home office because you don't have a business. It's all schedule D. So keep in mind that this is not a bad thing. Number one. Is note brokering your primary source of income? If it is, that might mean that you're in the business of brokering notes. That's how you pay the bills, that's how you get money to buy groceries. And that would be one of these five tests that if the answer is yes, note brokering is your primary source of income, that might be your business. Number two, do you have a separate source of income like a W2 or, or a substantial other business kind of related to number one. But this is really different question. You may make a lot of money as your primary source of income being in note brokering, but you also have a day job. Oh, that's going to help the argument that you're really not in the business of note brokering because you've got a full time W2 somewhere else or a full time business that you've been engaged in for many years to come. So if that's the case that you have this other stuff, source of income or a day job, that's going to help the argument. Number three, how many notes do you broker now in the fix and flip or the land flipping trade? There's court cases that are very clear on this. If you do four or more, that's four or more land deals or fix and flips or rehabs in a year, the IRS more likely than not are going to categorize you as being in the business of rehabbing or land flipping, fixing and flipping real estate. The same would go with notes. Now there's no case on this. That's the bright line case for everybody out in America that I brokered five notes. So I guess that's my business. But you're in that genre and as an accountant, if I'm signing your tax return and you're doing 20 or 30 note brokering deals in a year and you already failed tests one and two, we're going to have a problem. Number four, what does your note brokering look like from year to year? Maybe you did 20 or 30 note deals this year, but is it an isolated year? What did you do last year? What do you expect to do next year? If it's more of the same and it's 20 deals or more or 10 deals or more, 5 deals or more every year and it shows a pattern that this is kind of a long term gig for you and you're in the business because it's, it's not an isolated year in your life, you're going to fail that test. And again, you might be in the business of note brokering. Number five, how long are you holding the notes? Now? I know a note brokering, you might hold them one day you might hold them one week, two months. Some people hold their notes at least a year and collect points in interest and see how the property turns out and then flip the note or sell the note. It depends. The longer you hold these notes, the less a business it is, right? It's kind of a passive investment like a rental property and you get around to selling that note a year or two from now. So those are going to be long term capital gain. And make the argument would allow you to make the argument that you're not in the business of note brokering because you're holding them so long. Here's the point. There's five tests there. A good accountant is going to go through those five issues with you. Now you might want to be aggressive and pop them all on your tax return on a Schedule d on your TurboTax program and say, hey you all. Long term capital gain. It's okay if the IRS comes after me. It's no big deal. If they determine that your note brokering is a business, you're going to owe self employment tax, which is FICA, Social Security and Medicare on 15 on up to 130,000 or more. It's adjusted for inflation each year at 15%. This could be a 15 to $20,000 bill that you have to pay if you're making more than 100 grand doing this. So you don't want to just roll the dice with this. You don't want to risk this that I'll just put my head in the sand and if I ignore this issue I won't get caught or it won't be a big deal with the irs. I'll talk my way out of it. Good luck. In summary, note brokering is awesome. I got so many clients that do it and love it. I think it's awesome. This was not a Debbie Downer video. This was a video to hopefully help you save more taxes and do it right and better live your American dream. Thanks so much for watching that video and I want to be your source for tax and legal strategies. It's hard enough to live the American dream without being out on the web, on Google, trying to find answers to complex questions and just clicking a mouse hoping you got it right. My team and I want to be a huge resource to you, the law firm, accounting firm, my education resources on my site. Please continue to follow these strategies. I know they'll save you thousands. Now click here if you want to be a part of my newsletter. It's awesome. 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