Open Forum | Main Street Business Podcast |

Foreign. Welcome, everyone, to the Main Street Business Podcast with Mark Kohler and Matt Sorenson. This is Open Forum week. This is the week where we take the questions that you want answered and we give it our best. You know, sometimes we answer them, sometimes we. Well, let me just say this. If you ask a question we don't like, we just don't bring it up. But.

Well, yeah, I don't know about your statement either. You implied these are the questions you want to hear us talk about. So what you're saying is all of our other podcasts are the questions we chose that you don't want to hear about.

So, yeah, maybe, yeah, we could have got lucky and you were interested, but for whatever reason, people actually listen to this episode more than any others, which, you know, you just get the people what they want, and that's. That's what we do here on the Open Forum show. That's our commitment to you. Okay.

There you go. I like it.

Have it your way. What is that? Is that Burger King? Have it your way.

I think. I think it's. Have it your way. Well, okay. I am really excited about a bunch of these questions. For those that are new to this show, Matt and I are both tax lawyers specializing in different areas of tax law. It's that wide of a swath of knowledge that is just so difficult to really be an expert in every area. But what we generally focus on is that of you, the small business owner, Main Street America, hence the name Main Street Business Podcast, and then also using your retirement account the way you want to. So if you caught the undertone there, we pretty much hate Wall street and everything about big corporations. We're all about you. Did I just alienate some of our client or listeners maybe? Or did I just.

No, they're not. Yeah, the Wall Street Business podcast listeners are on some other podcast. So we're good. Don't worry.

Okay. We just gave all of our listeners a big hug.

Yeah. So it's okay to have an enemy. You know, that's what brings people together, is having a common enemy.

That's true.

And, you know, you know, so in politics and business, you know, you gotta know your enemy. It's a great Rage against the Machine song as well. Know your enemy. I don't know if you're a fan of Rage against the Machine, but that was. That was a good one.

Know your enemy. I listened to today, Pumping some Iron, actually. That's.

Yeah. Great workout music.

It is great workout music. Now, last note. We try to keep this humorous and fun. I Apologize for some of you that are all business and just want straight, unadulterated content, which we understand, but it can be a little boring for the average person. We want to again reach out to so many of our listeners that are just right out of high school. I have some high school students that have said they've listened to our podcast and really liked it. I think they were just wanting free food at my house, but then all the way up to age 92, everywhere in between. So we're going to make some jokes here. Matt, I think validly scored a point for quoting a movie lyric that made sense in our dialogue. So I got to give you one for that. So we're quoting movies, we're quoting songs. We're just two good guys just screwing around here with you today. So let's hit it. Let's do it.

All right.

Okay.

Let's hit it. Okay, I'm going to go with Arlene. Can I have honors of going first?

Yes. Now, is it Addie or Arlene?

Well, the profile says Arlene, but it says Addie from Texas, which I got a daughter named Addie. So shout out to all the Addies out there. I set up an LLC for my rental property. But just recently, in the process of refinancing my rental, does that cancel out my llc? If so, how do I put it back into my llc? Okay, great question.

Great.

So this comes up quite a bit for clients. Let me kind of walk through the process. A lot of real estate investors, they're buying single family properties in particular, or buying them in their personal name, and then they close on it and they own it in their personal name, let's say in Addie's personal name. Then she's like, well, now I have an LLC I want for asset protection. This is a buy and hold property. I want to put it in an llc, so if something happens with the tenant, they slip and fall. I don't want them to sue Addie personally. I want them to sue the LLC and not be able to get my assets. So she puts it in an llc. Well, now rates are at record lows. Right now a lot of our clients are refinancing because rates are at record lows. So she's refinancing. But a lot of the banks say, hey, we don't want to refinance in the llc. We want to refinance it in your personal name. You're going to typically get a better rate. So what you can do, Addie, deed it out of the LLC to you personally. Refinance it, close, then deed it back into the LLC after that. And that's a common process for, for real estate investors, particularly on single family. You know, you're kind of your multifamily and stuff, you're going to get loans at the LLC level. But a lot of the single family, it's at the personal level. Even when you refinance, pop it back out into your personal name, get the refinance done, deed back to the llc.

Now, if I may add, Addie, Arlene, keeping the bank on a need to know basis is critical here. The more you go into the bank and are like, here's my plan and I'm going to deed it here, then deed it back and deed it here, it starts to freak them out. If I haven't already alienated the Wall street crowd, I will do so with the banker crowd right now. Bankers over complicate everything. Even bankers will admit that. I mean, they have got to get approval to go to the bathroom. So please just go in now. Oh, and a practical point, too. You asked, how do I do this? You could go to the county recorder and you could go to a local title company, you could call our law firm and a variety of people could do that deed transfer for you. We like the warranty deed. So you don't go to the bank and ask them or tell them what you're doing. Just freaking deed it to your name, Go refi, then deed it after. You don't have to say a word. Don't. Yeah, it'll just drive them crazy. Drives us crazy. Now, I'm sorry, some of you on the YouTube channel are seeing, this is our office or studio mascot. This is Winnie. They say, Matt, production in an Office increases by 20% when there's an office pet that people can pet when they're stressed out.

Oh, am I stressing you out on the podcast? Are these questions stressing out?

I'm really quite stressed. So I asked Winnie to join me.

Okay, all right.

So, but she's down here, like, leaning on my foot, like, can I please sit in your lap? So she's going to sit here for a minute, then she'll run and go find another employee to, like, get food from and then move on. Okay, now. All right, so Matt, since Matt chose a very short question because he wanted to, you know, just to come out

of warm up, you know, got to warm up. You know, we're kind of still, we're kind of doing layups before the game, you know, just getting loose. Getting loose.

Well, I might, you know, turn up the speed on the ball machine right here.

So okay, this is sports metaphors, but I'm with you.

Well, did you say layups? I thought you said warming up. I was thinking hitting. You know, baseball's batting practice before, you

know, geez, I'm tennis when you hit the ball.

Winnie, don't feel stressed. Winnie, it's okay. He's just stressed today. Okay. This is Clay from Idaho. He says, I am a physician considering investing in a medical practice not my own. I'm considering it because this guy Mark Kohler said I should invest in what I know. And I'm fairly well versed in the local national healthcare industry trends. I would be a 1 to 5% equity partner, probably in an LLC. Expected returns would be mostly dividends and would never work there. Can I use my self directed ira, which I have not yet self directed, but some guy, Matt Swornson, keeps saying it's a good idea. So obviously he's listening to two really smart guys. I think.

Yeah, he's. Yeah, he's off to a good start.

Yeah. And he goes, I do have sufficient funds in an IRA that I could roll into a self directed format. Now he throws out a 1031 and that's where it goes to the X factor, Clay. We'll have to talk offline on that one. But I will say this, and Matt of course is the expert on the self directed IRA topic, but I want to just say love it. I love it in concept, Clay. Now that doesn't mean you're going to go do it, but I think you're headed in the right direction. And frankly just. Was it last week's that we did in, you know, due diligence and.

Oh yeah, yeah, last week.

Yep, it was last week. So the concept is there, but that doesn't mean you turn off your blinders from a due diligence standpoint. Not that you would anyway, Clay, but really you now need to drill down on the actual opportunity because here's the problem. When you're a 1 to 5% owner, you're. You're pretty much have zero say, period. So you've got to make sure that there's protection mechanisms built into the agreement right from the start because you're going to want regular reports, you're going to want to cap the salaries of certain key people because physicians are classic for wanting to get paid more when production increases. Well then you're like, well my dividends didn't increase at all or my profit. So you really want to drill down on the agreement and make sure you get some second or third opinions. But in concept, I love it. And absolutely your IRA could be a part of this. That's where I'd start out by saying, Matt, what would you say in addition to that?

Yeah, the one thing on the IRA is you may have UBIT tax, this unrelated business income tax. So just keep that in mind because that's this medical practice would be a operational business. Now. We've got more info on the directed IRA podcast, our sister podcast here. And I got a chapter in my book on UBIT free articles on my site. A lot of resources on what that is. You can use a blocker corporation as a strategy. Again, not enough to go over all that works, but just throwing out the ideas of what to think of. I like what mark that.

Can I ask you a question, Matt? This actually comes to mind for me. I know that sounds amazing. We literally in our attorney. I'm not. I know we joke around quite a bit, but I'm leader. I'm literally being completely transparent and honest here. We have a partner. We're shouldn't say a partner. We have a lawyer roundtable, for lack of a better word, for an hour every week where we all just share things. We're learning in our personal studies and on calls and for clients. And then we do it with the CPA team. And every time I learn something new, you may think, well, aren't you and Matt training everybody? No, we hire great people because we learn from them so much. And that that goes true with my amazing partner here on the podcast too. Okay, so Matt, let's say Clay invested in this partnership as an individual, but he wasn't going to participate as a physician. He just drove by and looked at it once in a while and went in and looked at the practice and said, yep, you guys are doing great. Because it's an. And it would be an LLC. You're not going to get dividends, Clay. LLCs don't pay dividends. So you would be getting what's called a K1 and it'd be pass through income. But since he's not materially participating, Matt. And that would not be subject to self employment income. But. But you're saying if my IRA invests in this practice, it's still tax. Yeah, UBIT tax is going to. We can't equate self employment income with UBIT income per se. There's ordinary income which you but applies to. And self employment income is a variation of ordinary income. Did I say that right?

Yeah, yeah, that makes sense to Me, I like how you described it there. Self employment income is ordinary income, but it's its own unique type which makes you pay into Medicare and Social Security basically. But I think ordinary income, like you said, you can have ordinary income without it being self employment like this where he's just a partner. But it's not generating rental income, capital gain income, it's not generating investment income. It's. It's probably a pass through. If it's an llc, taxes, partnership, you know, coming down to the ira, which would cause ubit, except if you did a blocker, corporate ira, LLC with a blocker on it.

Okay, now I want to get everybody excited for a minute. If some of you are like 10 minutes into this going, all right, I'm going to fall asleep, hang tight, I want to stand up, check this out. Now this is why what Clay's why? Clay's question is actually really, really cool. And this is where a boring CPA or tax attorney would just move on, but not us. Let me do a high five with everybody out there first. We have so many professionals out there that, see, like Clay said, they know their industry and they go, you know what? I've got a client, actually, I'm going to use an example that's a dentist, he's up in the Montana area and he has figured out how to make a dental practice rock. Now what he does is go out and invest in other dental practices and makes agreements with him that I'm going to come in and help you and I get a piece of the upside. If I help you improve, I get a piece of that and I want to be a part owner. But I'm going to prove that I can help you do better. And every time it's totally succeeded. They love him. It's a great relationship. So taking the IRA out of the mix, there's a lot of people out there that take their business and go, I'm good at running a restaurant, I good at doing online sales, I'm good at this. Partner with others that are failing but that may have a nice product and you can come in as an owner and do some just quarterly or monthly coaching for an ownership stake in their business and getting it legally drafted properly can make you a lot of money. Number two, we have clients that are like, you know what? I'm good with online marketing and click funnels and I can kill it. And we tell people all the time, you saw another opportunity, didn't you? That's why you're on the phone. Yes, I need to set up an entity. And we say, don't do the deal. And they're like, what? And we say, don't do it. Let your IRA or your 401k do it. And they're like, that's okay. Yes, your IRA or 401k can go and invest in your competing business. If you own a carpet installation or carpet factory store across town and your competitors across town doing the same thing, your IRA can invest in their business through a shell company where I hide your name so they don't even know it's you. But anyway, that would be an idea too.

Yeah. Now, and, and the one thing that's unique there too, it's a technical point, of course, is you're not working in that business. So that other carpet store you buy, that's. You have employees over there. You, you bought the competitor and same staff's working there. And so. And you may have your business where you're working personally day to day. That that's fine. And so when your IRA is investing, you just got to make sure. And Clay had that in his description. He's like, I'm not going to work there. I'm not. I'm. But he's like, but I'm going to invest. I want to invest in what I know, which is really what self directing is all about. So I do love that you're right, Mark. But the part two of Clay's question brings in a 1031 exchange. I'm just gonna say, without getting too far into it, it's probably a no, really, because you're not gonna have a large enough ownership stake to get the 504 loan if you're only at 1 to 5%. So I think you're gonna have to at least be a 20% or more owner. And I. So I doubt that would be an option.

But that's a little comment between. That's a little comment between Matt and Clay because Matt didn't even read the question. But Clay, I would say this too. Call and get a consult with Kevin Kennedy. He's in the Phoenix office under Matt's direction for these technical type things that you're talking about in part two. And Kevin can help point in the right direction. Okay, Matt, do you want to choose another question?

Oh, crap. I'm next. Huh? Okay, this is.

There's not a third guy here. Oh my gosh.

Let's see. Okay, let's go to Susanna. Okay, this is Suzanne. I like this. She says we, my husband and I have been landlords for the past 15 years. It is now time to sell our properties and retired. Congratulations, Savannah or Susanna. Love that. By the way, our account advises to sell only one property a year in order to keep our capital gains at a minimum. We would like to avoid any capital gains tax, knowing that we are not looking to invest through a 1031 exchange or anything that would keep us in our status as landlords. What are some options to best keep our money? Okay, so I get it, Susanna. You want your cake, but you and you want to eat it too, type thing, which I always thought that that analogy was terrible because I'm like, what else is cake good for? Yeah, you want your cake and you want to eat. That's the same. You want your water and you want to drink it, too.

Think of the wedding. You know, all the ladies want to save the wedding cake in the freezer to remember that special, very expensive moment. And then. But they want to eat it too. So I don't know. Okay, so this is a quandary. Okay, Go ahead, Matt. You give it your first shot. Then I will, too.

Well, I. Here's what I think. First thing, let's. Let's come to the tax question late, okay? I don't want to. I think sometimes people jump to the tax question here. Let's think about this from a big picture, okay? You've got. You have been landlords for 15 years. You probably paid down the mortgages on a lot of these properties, maybe paid up some of them off. You've got 15 years of appreciation, plenty of equity. I presume now you're going to be able to live off of these properties. Okay, let's look at the properties. And I want to first analyze those 15 properties in terms of which ones have. Do not have great cash flow but have equity. Because I want you to hold all the properties that have great cash flow, right? Where you're just cash flowing because you're living off of that. That's rental income. That's amazing. Why sell properties that have high cash flow? To just suck out equity, you know? So. So that's the one thing I'd look at. I don't know how many properties you have here, but consider that first. Okay, now let's say you've identified which ones to sell first. They have equity, but they don't cash flow as great as the others you hold. Okay, so let's get some of that equity out. Here's my first idea. Don't sell the properties. Strip out the equity. How do you not play debt? How can you get that equity but not pay Tax on it, get a loan, strip out the equity. I think that's, you know, when people were talking about Trump. If you remember back when Trump's tax returns came out and one of the big things that they harped on him was he had paid so little tax and he was leveraged to the hilt. Well, you know what he was doing, he was refinancing and stripping out equity, but not like a $500,000 rental, unlike a $500 million deal, you know, or 55 million, whatever. And so that's a great strategy of the rich, really is don't sell the asset, let it keep appreciating, keep getting cash flow on it, refinance and strip out the equity where you're not selling and paying capital gains tax.

Okay, I want to piggyback that and say, I. Actually, the only point I disagree with Matt on is there was some more friendly commentators talking about Trump's situation. Some like to characterize it as leverage to the hilt. There were others that said some of these properties that he does have mortgaged, they can't even calculate the value because they're so. There's no comps. They're so valuable. I would argue, Matt, in some of those senses, some of these properties had billion dollar value and they were like, and he's going to have to refinance in three years. So what?

So he's got tons of right now. Yeah, the cost of money is so low.

It was like he had done something wrong. And of course there were media outlets that wanted. That couldn't. I mean, he couldn't do anything right. And I, and I know he had his faults, absolutely. We all do. But maybe he had a few more than others. But the point is, on his real estate strategy, there was nothing wrong with that. And so I would, I don't think Matt's saying, Susanna, that you would get leveraged to the Hill either. I know that's not Matt, but what he's saying is, I'm just saying take

that concept of Trump where he had plenty of assets. Why would he sell them and pay tax? That was why his tax return was so low on income.

I had your back.

He was living off of the ass, the value of the asset, sucking it out of his debt.

I had your back, bud. I wasn't saying. I just wanted to talk about the leverage of the hilt thing. Is that because there are, in our, in our current day and age, we have this, this person over here on a pedestal named Dave Ramsey that's saying pay off everything. And so what we just said would fly in the face of Dave Ramsey. He would say, keep it paid off and live on the cash flow and don't live as extravagant. My concern, when you have properties, okay, so if you don't do strip equity, let's just move on quickly is if you do sell it, you've got this money just sitting there. That could be a target of a lawsuit. What are you going to do with it? You're not going to spend it all in one year. And so now what's day two? Are you going to put it in a ETF or a mutual fund because you still want to gain some sort of rate of return on it. Then on the. See, with the equity stripping, you can pull the money out as you need it. So your credit line will. The payments will only increase as you need it. And then also when you do pay off a property and just sit there collecting rent, you look at the real rate of return. It can be pathetic. So if you're saying I'm just going to leave it paid off versus stripping out equity or selling it, I'd at least say sell it. Because by the time you look at some of these properties that are worth 150 or 200 grand, you've paid off the mortgage and you're collecting say 12 grand in rent. Well, on a $200,000 property, that's a 6% rate of return. That's terrible. And you go, well, I'm getting appreciation. Really, right now we're at the top of the market in 12 years. And if anything, you're going to have a dip. So I think, Susanna, you've got a really. I like what Matt said. Before you even focus on taxes, let's look at what, what are you living on? What are your lifelong plans for the next 10 to 20 years? How much cash flow do you need? Let's look at this economically first.

Yeah, and let me say this too. On selling one a year, let's say you're like, guys, we don't want to be landlords anymore. I don't want to do this equity stripping thing. I'm going to sell some. Remember, long term capital gain rates for a married couple. Suzanne is married. Here is 0% up to 80 grand of annual income. So if you sold a property, let's say you had a $50,000 capital gain. You guys are. You're retired at this point. Maybe got some Social Security or something. You may have a 0% capital gains rate. If you can structure that and you only hit 15% up to about 500 grand. So now you're 15% up to a $500,000 of income for the year. The last rate is 20 once you're over 500 grand married. So there are some ways if you can be strategic. I don't know how much equity and gain you're going to have in these, but where you may be paying a 0% rate or again only the 15% rate, which I think is not that bad. And of course you're going to want to do all the other tax strategies, try and minimize your tax and keep your taxable income down to keep rates down. But it's not the end of the world. These are some of the best taxes to pay because they are some of the lowest rates.

Yeah.

If there is such a thing as a best tax to pay.

Yeah, yeah, that's a oxymoron there maybe. But I'm going to throw this out. One last idea, Susanna. And I've seen this a lot. In fact, my dad did this and my mom's still living on this income is he took several properties that were a pain in the butt. You don't want to be a landlord anymore. I like what Matt said there too. You're. This is not, this is an emotional decision as much as it may be economically. And oh, I like it. My producer saying your hair is jacked up. It's this long flowing hair that gets in the way sometimes and I've got to make sure I look attractive here. Thank you. One of the ladies, one of our lady listeners text you and say fix my hair. Thank you, Corey. But here's another idea and that is we have a lot of clients that do want to get out of the single family home rental business and say I'm going to 1031 into a commercial property now. I think there's going to be some commercial buys out there in a big way. Now you got to be careful because we went from a 3% work from home workforce in America a year ago to now over a 40% work from home workforce in America. There's going to be a lot of vacant commercial buildings I think turning the corner in the next couple of years. And because companies have figured out hell, my guys, my people can work from home. Oh my gosh, this isn't as bad as we thought it would be. So be careful. But. But it is true. If you can find a good quality long term commercial rental, you might take three or four single family homes, sell them 1031 into that and get a great cash flow with a triple net where you don't have the headaches. And that's an idea too. So. Okay, Matt. Oh, it's my turn now. Geez boy. You snooze, you lose. I was just trying to comment there. I'm just going to rank. Oh, should I randomly choose? Let's go to ertc.

Okay.

Okay. We. I wrote an article last week in Entrepreneur magazine and so we've got a number of questions on ertc. So I'm going to go with Brian here in Iowa. Thanks Brian. ERTC and PPP question for 2021. Okay, now let everybody so you don't fall asleep or careen off the side of the road in madness. Let me just say what the ROTC is. It's called the Employee Retention Tax Credit. Employee Retention Tax Credit. It came out the same time the PPP or payroll Protection Program came out last year. But last year where the COVID Cares act came out, they said you had to choose one or the other. 90% of business owners, if not more went with PPP. So there wasn't a lot of talk about ERTC. Well, under the new CARES act in the appropriation bill that's 5,500 pages long passed in the end of December just two short months ago, they said well you know what, we need to give a little bit more stimulus or juice to the economy. So we're going to allow anybody out there that had the PPP last year they could go back and double dip and get the ERTC if they qualify. And number two, they could get a PPP moving forward in 2021 and do the ERTC at the same time. And guess what everybody? No taxes on it. The expenses you use to pay those bills are a write off and the income is tax free. No one in their right mind in the accounting industry even a year ago or 20 years ago at ever thought the day would come that something would come on a silver platter like this. Seriously. Right? I mean this.

Yeah.

This is unprecedented. Yeah. Okay, so Brian in Iowa says my business likely qualifies for both the ERTC and PPP in 2021. Can I fully utilize ERTC for quarter one and two through June 30th and then use my PPP funds on payroll to starting quarter three. I will have to apply for my PPP 331 and we get funded likely in April. I was wondering if I could delay the usage of my PPP funds until after the ERTC is no longer available. I was thinking of just using PPP for rent and other non payroll until the ERTC ends on 630. Essentially, I want to maximize both of these this year and being able to take this approach would make a huge difference. Thanks so much. Love your podcast and listen to it religiously. Well, Brian, I anticipated this question and if. And I. If you haven't read the article, that's a monster. It was one of the longest articles I've ever written for Entrepreneur magazine. You can just Google Kohler ERTC or Entrepreneur ERTC, or go to the entrepreneur.com website and type ERTC. And the articles number one in the search. I was number one on the page, but not everybody's reading this one. But anyway, they're like, elon Musk is no longer the richest man in the world. Apparently entrepreneurs need to know that. But anyway, get to the article because any of you that are thinking about this. In the article, I talk about maximizing both the PPP and ERTC because it's a timing issue. See, it's easy for me to say, oh, you can do both, but you can't use the same payroll for both. So you've got to use your ERTC up and then, then use the rest for ppp. And if you do the math right, you can make it happen. So let me just say a couple. It was funny Matt, too. I was at Harbor Freight. I love Harbor Freight because I'm a weekend warrior in my garage. And any of you guys out there, maybe ladies that love to, you know, tweak things in the garage. Harbor Freight is the coolest store ever. Have you been in there, Matt? Have you ever been to a Harbor Freight?

I've never been. I probably never will.

No. That hurt. That cut me to the core. I can't believe you said no.

I mean, it's just, you know, different, different strokes for different folks. It's okay.

Okay. When you come up to Idaho, I'm going to take you to Harbor Freight and get you some tools because every manly man needs some tools. But anyway, I was in Harbor Freight and I bumped into an accountant.

You know, can I just give. Tell you a little funny. Speaking of, do you want to know what my. My toolkit that I. It's kind of like. It's like the, the lady toolkit they'll sell you, you know, it's like, here's

a little toolkit you get for the.

That's got a little smaller hammer and everything. It's like, it's like this big, you know, Anyways, teased me. He's like, he's like, I think this is like the lady tool kit that

you know, Anyways, well, we'll get you something manly at Harbor Freight. Anyway, I was in Harbor Freight, Brian from Iowa, and I bumped into an accountant and I accosted him and talked about this very issue until his wife drug him away from me and I was like, I'm sorry, I'm sorry. Okay, so in summary though, Brian, it's better than this. Okay everybody, listen, Brian, you say something that I disagree with. You say the ERT ends on 6:30. Remember the ERTC is up to, it's 70% up to 10,000 of payroll per quarter per employee. So if you have an employee that gets more payroll than 10 grand in first quarter, the remaining payroll could go towards PPP. So don't think of it as I only have to use my payroll for ERTC in the first two quarters. You're only going to use $10,000 of payroll per person per quarter during that period. So any excess could get PPP could be thrown at it. I think you know what I'm saying. The other thing that's interesting is you're right. Once you get paid PPP money, folks, you have 24 weeks, which is six months to spend it. There's no pressure, you can sit on it until you're ready to spend it. And so if you apply for payroll PPP by March 31, we got about five more weeks and then you get it, let's say the first or second week of April, you've got six months from then to spend it. And so Brian, you're right on. You want to use ERTC credit for the first quarter probably entirely. And then my article, I talk about kind of starting to bring PPP into the mix during second quarter. And then the last nerdy thing I'll say is remember that PPP only has to be used 60% for payroll. So I whatever you get in PPP, take 60% of that, carve it out, boom, right there, set it in an account and know you're going to use it for payroll. As soon as the ERTC credit runs out, even per quarter per employee, you can start throwing PPP at it. Keep a nice spreadsheet so if you ever get audited. And then I love what you said to use the remaining 40% of PPP for rent, fixed mortgage payments and utilities, you're going to rock it. So there is a lot of opportunity here for people and the threshold to qualify for that for this is actually quite easy. If any of you have been affected in your business by Covid, so read my article. I think you're going to love it. And the power of the two together is phenomenal. So thanks, Brian.

All right, I'm up next. Let's go to the 529 question. This was from Eric from Michigan, because I have $730,000 in a 529.

Holy crap.

Congratulations. Congratulations. Definitely funding the maximum amounts for a while that would have. There's the only way you get to that. Because the 529, remember, is different than a Coverdell, everyone. The 529 is an estate fund. And you know, you could be putting the gift exclusion max into it of 1515. And so I could see how you get there. But Eric says do not need for kids, grandkids, or relative education. Okay? Because that's the one thing when people get a large 529 is they start. They just keep passing it on. So your kids use it. Then it kind of goes from one kid to the next to the older to the younger, and you just keep draining it and draining it and draining it. Then you can go to like, even like cousins and grandkids and you just can keep passing this thing down. But if Eric's like, don't want it for that, he says, what happens if I die? Okay, Well, I don't know if you listen to our podcast. On the directed IRA podcast, we talked about what happens to your retirement accounts when you die and talk about inherited IRA. But a 529 is a little unique. He says, I assume it goes to beneficiary Wife Trust. Is this treated like a life insurance policy? Unfortunately, no. Only if taxes and 10% penalty come into play. What's going to happen is, see, in a 529, you have an account owner and you have beneficiaries. The beneficiaries, though, are. How do you say it? They're like beneficiaries for the account to use only for limited purposes for education. So when you die, let's go through a couple options here. If. Let's say you want to. If your spouse and who. Let's say you're married first. If you're not married, it's going to. It's just going to get distributed and you're going to pay this tax and a 10% penalty. But let's say you're married, your surviving spouse could say. Could say, I want to take a distribution of the whole thing. Let's just get this done. Let me get it out of here. Well, you're going to have a 10% penalty because it wasn't used for education. On the earnings part, and you're going to have to pay tax of ordinary income rates, your regular income rates on the earnings part. So let's say about $730,000. That. Let's say 500,000 of that is contributions. 230,000 of it is earnings. Okay, well, that 230,000 of earnings would be subject to this 10% penalty and would be subject to tax at ordinary rates. Now, a beneficiary, and I'm just confirming this here, you can list a spouse, a designated beneficiary that can retain control of the account and can list new beneficiaries possibly. So you could delay that essentially, but that money's still going to be locked up only to use for educational purposes of whatever education beneficiaries that let's say your surviving spouse decides to list. So you can have a sometimes called the successor account owner. They don't use the word beneficiary here because it's confusing. But you kind of have the successor account owner. So you could delay this, Eric. But here's the thing that's going to happen here, is this money's gonna have to get out and get taxed, okay? And if you're not gonna use it for educational expenses, frankly, I try to get it out sooner than later. Because here's what's happening. This money's growing. You're gonna pay tax on the gains of it coming out, plus the 10% penalty. So I don't think it's a great vehicle to keep letting sit if you're not gonna be using it for education. I know you're going to pay a tax bill to get it out, but this thing just keeps growing and growing and growing. You're just delaying the inevitable, and you're throwing a 10% penalty on top of a larger sum the further down the road you get.

Yeah. And I want to say a couple thoughts here to add to Matt's point. Let's take big picture. Okay? Everybody out there. And regrettably, this is, again, a Wall street crappy strategy is 529s, in my opinion, were created to help people put money under management again for some sort of fund that wants to manage it. The rates, returns are not phenomenal. And you're giving the use of that money to some broker dealer, in the end, that's making more money off of yours. That's the gist of it. And so hence the marketing of how cool the 529 has been overblown for years, in my opinion. I do not like the 529. Because you can't control the investment. The rate of return is not significant by any means. More Warren Buffett's doing better in basic ETFs and S&P 500 funds than you're ever going to get in a fricking 529. Now, I know some of you may take issue with that, but it's going to be the exception, not the rule, that you win that argument because the returns are terrible. So I prefer the Coverdell IRA that you can self direct. Now, I know what you're going to say. Well, you can't put as much money in a Coverdell. But you know what? I don't care. Because you're going to control the investment. And that's what really matters is the rate of return to me next. You've got so much money in this thing. This is not good, Eric. 530 grand. Do not put another dime. 730 grand. What did I say?

You said 530.

Oh yeah. 730. Do not put another dime in there, Eric. Remember this, any contributions that you've made come out penalty and tax free. So I would start taking those contributions out and redeploying them in Coverdales for your kids, your grandkids and or whatever, or just put the money in your own retirement account, but get rid of any of those contributions, get them out. Then whatever's in there growing, you're pretty much stuck with. And here's another thing that's cool is you can actually pay student loan debt off in the beneficiary's name. So if your kids, you give them, you make them a beneficiary, they tap it out as much as they can for college education. And then if there's any student loans, there's a lifetime limit of 10 grand that you can push towards student loan, which is another major crisis in America waiting to happen. So. But then you can say, oh, I can now move it to a niece, a nephew, a grandkid, yourself, your spouse. So change the beneficiary, let him pay off 10 grand of student debt, then change it to another beneficiary. Now, I know there's timing and there's some tricks and strategies to it, but the point is you want to start trying to spend that money down sooner than later and get the contributions out and get control of that money and invest it where you want. Made some enemies, that's my opinion.

In a priority, just so you know to Eric, is you get to take out your contributions first, which are not taxable. So the first sum of money you're pulling out of this 730, let's say again, it's 400,000 or 500, whatever it is, you get that out first. That your contributions. No tax, no 10% penalty. Once you hit that, though, the rest of the money in there is what you're going to get hit with. The ordinary income and 10% penalty. So you may want to start sucking out what you've put in. That's what I would do. Let the rest sit in there. Maybe you can use it later for kids or grandkids or deal with it when you pass on and it needs to come out. But I don't know. I think a 529 can be a good thing to do. I would do it after you put 2000 into a Coverdell. I think the 529 is kind of a secondary thing. I get it. It's funny, I was talking to some financial advisors and it's funny that they say we get more success when a new person working with a financial advisor to set up 529 college savings plans or Coverdells than we do setting up their own 401k or IRA. Because people are like in their 30s and 40s are so fixated on their kids going to college more than they are in their own retirement. So they rather save for that. And so they sell more 529 investments than they would even just someone's Roth IRA or a 401k or so.

That's.

Yep.

And you know what I hear to not hear? We have meetings with clients all the time that are in their 60s now and say, I need to start saving for retirement. Did everybody hear that? Let me just reiterate now. I know some of these questions are from people that I got 700 grand and 529. What do I do? And some of you are like, what did I do wrong? What planet are these people on? Please know the majority of our listeners do not have 729 grand sitting in a Coverdell. And I'm glad Eric's listening to us. And we don't want to lose him as a listener, too. We've got, again, a huge array of listeners out there in different economic circumstances. Don't beat yourself up if you don't have any retirement. Don't beat yourself up if you don't have your kids college savings account going. Let's just start with baby steps. And I love what Matt said again, start with the Coverdell couple grand per kid. Start investing it start putting away a little money. Start saving for yourself. Start with an Acorns Roth or a Backdoor Roth and then start rolling it up and getting into the point where you can self direct these little apps where you can start saving weekly with roundups and deposits. They're the gateway drug to getting addicted to savings. I do love Dave Ramsey. Getting our credit card debt and starting a savings plan and doing it as a family and making goals with your kids and your spouse saying, we're going to save as a family, we're going to get out of credit card debt. We have got to increase the financial literacy in our families. And having a little small business and a little rental property is that incubator that lets you do it together. And it's just so powerful. So it just. I don't know where I went with that. I just got off on.

Yeah, sorry. It was okay. It was, it was okay. It was fine.

I liked it.

I liked it.

Okay. My question, speaking of real estate, I'm going to jump over to Don in Missouri. He says, how does. Now this, this is not a D, a W N, which would be the female version. This is D o N. Okay. So I'm going out on it.

Thanks for clarifying.

Yeah, I'm going out on a stretch here. I think it's a male. Don from Missouri says, how does one go about investing in real estate personally and in self directed accounts? As someone who's investing in real estate, you need to advertise to find potential sellers. I'm concerned that those leads could be considered assets. So how does the real estate investor buy for both personal investments and for the 401k. Now I like Don's first question. I don't know where he goes. I don't know if I understand part two as much. Maybe Matt, you can read that for a second while I comment on part one. You see the question. I think his first question was maybe more parenthetical, but I'm going to answer it anyway. Okay. So Don says, how does one go about investing in real estate personally in self directed accounts? Now, it is true, Matt Sorenson and I are a huge advocate of buying real estate, but we certainly recognize there's risks. You've got to really educate yourself carefully. Take baby steps. Again, to use that word again or two words again. You don't go out and buy, you know, a $1.5 million Walmart building as your first investment. You might go out and buy single family home or a mobile home or a cute little meth lab or something. And rent it.

Did you say a $1.5 million Walmart building?

True. $20 million Walmart building. Yeah, sorry, $1.5 million dentist building with one dentist and two doors and one bathroom.

Yeah, maybe. Maybe a 1.5 Bitcoin

something.

Walmart building.

Anyway, yeah, okay, fair enough. Damn it.

Point here.

Jeez. Okay, but, but I'm saying just start small, start attending clubs, start getting some real estate education that's affordable and vetted and you've got, you know that you're with the right group. We speak at both at Renatus, an online real estate education that we think has a lot of integrity and not upsells up the wazoo out, you know, for months and months and months afterward. So we like Renatus for that. But get yourself educated. And, and how does one start investing in real estate? It's really running models start running just looking at real estate. Buying retail on the MLS for a rental property, you have to realize every real estate investor in the community has already passed it. So they passed over it and you're the one sucker that's going to pay retail. So you have to realize that in the real estate world of investing, you're going to have to start learning about the off market opportunities to buy real estate where there's a little sweat equity. As the infamous Matt Sorensen has said, when purchasing real estate, you make all your profit in the purchase. And if you're buying off mls, all the profit has already been hyped up and exploited by the seller and the real estate agent and rightly so. That's cool. But you're going to learn about strategies that are a little non traditional and that's okay. Get out there. We if you email me markjkohler.com My assistant will immediately send you a little two little spreadsheets to help you analyze real estate and some videos and articles by Matt and I to kind of get your feet wet. I recommend all the good real estate big top five real estate investment books out there that you can start learning about real estate. A new website that I really like lately, Matt, is roofstock.com roof r o o f as in Frank stock s t o c k dot com and what's fun about it is it if you don't buy real estate through that website, I don't even know who the owners are but they show you how to analyze rental property and you can click on any rental property in any state and I'll show you the roi, the cash flow, the equity and you're starting to go okay. Because last point, Matt, and I'll shut up, is you need to start looking at real estate as numbers. Not a cute little picket fence, white picket fence. As soon as you start going, oh, we need to put granite countertops in and we need a new sprinkler system. Okay, you're over rehabbing. This is not a house you're going to live in. You're looking for numbers. So you have to start putting in that mindset and education and the time, and then you'll be able to do fine. Anyway, Matt.

Yeah, that quote that you were saying, I stole that from someone else. But it's. It's basically like you don't. You make. You make money in real estate when you buy, you get it when you sell, you know, so you've got to like, get the good deal, of course, on the front end. But let me ask. Answer Don's question just in general, too. So when you're investing, a lot of our clients that are real estate investors are kind of like the question earlier of the doctor who's like, well, I'm a doctor and I do that as a day job, but I want to invest in other practices because that's what I know. Well, I'm a real estate guy or gal. I want to do. I'm doing real estate. My personal name, or that's. Maybe that's my profession, But I also want to invest in it with my retirement account. That's where I see deals. Why would I go buy a mutual fund when I'm finding deals that my IRA could invest in? And so you just want to keep those separate. So you have a separate entity that you're using for your personal real estate, and you're going to have a separate entity for your IRA real estate. Usually we use an IRA llc, and those are separate entities. Now, Don, when you're going out marketing and advertising for sellers, let's say you get a lead and you've already bought this lead in your personal business, but you're like, you know what? I really want to buy this property with my ira. I think if it's incidental and that happens and your IRA buys one property or you know, from doing that, or I don't think you're gonna ever have an issue with the irs. Frankly, I don't think they care or that they would know. So. But what I would avoid, of course, is running campaigns to get sellers. Mark, you might want to mute yourself running campaign.

I'm actually typing to Don here what you're saying. I'm saying Don Matt's answering this on the show, and so I'm almost done.

That microphone quality over there is pretty good. So what I don't want, though, Don, is let's say you're running campaigns or doing mailers or whatever it is, you're to getting potential sellers and you're doing that advertising, but you're paying for it personally because you want to expense it. And then your IRA is always buying or your IRA llc, that's not going to work. Like I said, if it's an incidental, I wouldn't worry about it. If it's like, no, I'm going to really go for it with the ira. We'll have the IRA LLC pay for that advertising then and let it take down those properties that's coming from that advertising. So you just got to be careful in keeping those things separate. Like I said, if there's incidental crossover of a deal, I don't think it matters. But if you're going full steam ahead one way or the other, just keep it isolated in its side. Whether it's personal side, let your personal LLC or S Corp, whatever you're using, pay for it. IRA side. Let your IRA or IRA LLC pay for it. Oh, all right.

I got another ERTC or question too.

Okay, let's maybe take one question each. What do you want to wrap up on? I've got. Oh, crap. I did have a question I wanted to hit. Oh, I want to hit Melvin's question.

Okay.

Okay. This is Melvin from California. He says after trying different real estate investments fix and flip single family rental notes, I now prefer to invest in value add multifamily apartments via real estate syndications. Most syndications sell after five years. So how do you make this tax efficient as owning real estate using after tax funds? Okay, we're not talking about an ira, just personal funds here. I've thought about staggering them up so that capital gain of older investments will be offset by the depreciation and passive losses of the newer ones. So in effect creating a pseudo 1031 exchange. Okay, so now what's going to happen in these multifamily investments is you're going to get a K1.

Okay?

This is what you get when you're a partner in an LLC or a limited partnership. And that's what these multifamily syndications or funds are. That's going to be your share of the profit or loss. Now, there's different boxes on a K1. There's going to be rental income or rental loss. There's also the I think it's 1231. Is that the capital gain was that box, the capital gain income, it's got its own box on the K1. And so you can, when you're going to your 1040, you're going to be netting this income and loss up. You might have a syndication that's got a K1 with positive rental income and a syndication with a K1 that's got negative rental income. And that may be both cash flowing, but one's got depreciation or doing cost. Sega, there is something to. To get a loss. Now if one sells and you get a capital gain. And this would be the question for Mark, our CPA here is. Let's say you've got, and we had a show, by the way, on how to take deduct losses. Let's say you had a capital gain in one property that sells, but you have rental losses on another property, another K1 flowing through the rental losses offset the capital gain.

In theory, yes. Many accountants out there will say, mark, be careful answering this because what you have, Melvin, is 1245 property, 1250 property. And some of you out there may think, well, all passive income and passive losses net, they don't. A better example is passive losses from rental real estate do not net against capital gains from sale of stock, where stock losses don't net against gains from real estate. Because it's apples and oranges. And even in the real estate realm, what you need, Melvin, to do is really sit down with your accountant, with your tax return in front of you with the K1s from some of these investments. Because Matt is absolutely right on this point. I've said that like three or four times today. Matt's right. Or I like what Matt said. I'm really just building.

I was kind of calling you in here to bail me out on this because I wasn't sure if like you get a K1 of net loss rental if it's going to help on the capital gain. When Melvin's talking about here one sells off.

Yeah, because when you make what's called the real estate bundling election for real estate professionals too, you have to sell everything before you can cash in on losses too. And I don't think you'd be doing that. But we don't know your whole story, Melvin. So I would sit down with your CPA and pull out the K1s for the last couple years from all these types of investments. And like I was just going to say, Matt's right. These boxes that one syndication may check or put dollars in Compared to a different syndication may not exactly match up in the way you hope. So the devil's in the details in your question. I will say this too though I was surprised you didn't Melvin allude to self directing in these syndications as well. It's very common for our clients in these multi unit syndications to use 401k or IRA or Roth money or coverdales. You could form an LLC with some coverdells and some Roth and an IRA and a 401k or SEP or a simple Grandmas and Moms and then go do a syndication because I know what happens here. These syndications want at least 100 grand to play in or more. And you're like, well I don't have 100 grand in an IRA. Well, you don't have to have 100 grand in that IRA. Form an LLC and pool your kids IRAs and your spouses and your mom's. Now you've got enough to get in the syndication. Now we're really making a tax efficient investment. So I put that on the table too and just meet with your accountant. I wish I could say more. Okay, I've got a question here and we're going to wrap up with another ERTC question. And some of you may think, ugh, this is totally not helpful, but Matt and I ourselves are looking at the ERTC because Scott from Tennessee asked a question that I think is really, really important. He says, hey Mark and Matt S Corp. With five employees. Now remember, you can't use the ERTC for yourself or your spouse or children. So if any of those are on payroll, you can use PPP money to those employees of family to calculate your PPP loan, but you cannot use it for the ERTC. So Scott in Tennessee says, Even though I got PPP1, I got PPP1 funded the second week of April. So back in 2020, so he was Johnny on the spot. Quarter two was my only quarter below 50% gross receipts. Can I use a portion of my Q2 wages as qualified wages for ERTC and the rest of Q2 wages and all of Q3 for PPP? In short, he says, can I use different amounts of PPP per pay period in quarter two versus three? Okay, yes, that's the easy answer. You can take your PPP money and use it for payroll in different quarters. That's fine. But here's the real issue, Scott. You're over complicating this. The 50% reduction in gross sales is only for one quarter compared to another quarter in 2019. Then you're in for the whole year. So it's not like, well, I only met the 50% test for quarter two of 2020 compared to quarter two of 2019. So I can only use the ERTC. No, once you meet that test in any quarter, it's an annual test for 2020 and next it's a two part test. And either test wins. Either you have to meet the 50% reduction in gross sales last year or you had to have your business partially or fully suspended, let me emphasize the word partially suspended. Under a state law, for any moment, even one day, you qualify for the ERTC for the whole year, period. So the test is so easy. So my clients that could have done the ERTC last year because their business was shut down for a week or a day or whatever, they can go back now and get the ERTC on wages in 2020 that were not paid for with PPP money at any point. So you're, you're just, you're, you're getting into the trees too much on which quarter and this and that. Scott, the ERTC is an annual. Look, I get some support from this, from one of the team members on our team or whatever. You're going to file the 940X or, I'm sorry, the 941X and do the amended payroll returns to go claim this credit. It's refundable. Scott, you're in the money. So if anything, I think I've got good news. The answer is yes, yes and yes. And you qualify more than you probably realize. So keep researching. I don't know your whole story. Maybe I'm wrong, but check it out. All right, Matt, today was a little more serious. Not as many jokes. I don't know.

Yeah, I mean, we felt, I mean, we just gave good advice and answered complicated tax and legal questions. No jokes. Terrible psych. This is. We're totally unsatisfied with the performance today. Well, I. At least you got some free advice, you know, and you get what you pay for. So the jokes are kind of a little bonus, you know, in addition to the free advice. So we appreciate though, for everybody submitting your questions. And by the way, if you want to submit questions, just go to mainstreetbusiness.com that's the podcast site. And there's a. Submit a question right there on the homepage. You can submit it, your other listeners can see the questions that are there and do it at any time. If you have a question that pops in your mind, like this would be great for the podcast. Just jump on there and submit it. And Mark and I scroll through them before each Main street business podcast that we try to do. Open forum every three weeks. And we do the song and dance we did today.

Yep. And I'm just here answering some of these via email or right here in the post. Some of you can look at that list of questions and we're going to answer some of them in writing rather than on the show. So I apologize for multitasking, but we just like to give, just like to answer because we go home and our family doesn't ask us questions. You know, the only question I get is, where's the remote? Or yeah, is there any more chips in the closet? Or when's dinner? Can I have $20? Those are the only questions I get at home. So, people, your questions are, you know, very fresh.

Yeah.

So, okay, don't forget we are doing the open forum on directed IRA podcast where it's exclusively IRA questions tomorrow. So go over to directed IRA backslash. Sorry. Directatirea.com podcast. Leave your questions there. Make sure you subscribe to that podcast as well if you're self directing. Thanks everybody and we'll see you next week.