Imagine sitting on a beach, living the good life, and making $140,000 without paying a single dime in U.S. taxes. If this sounds appealing to you, check today’s episode and learn how you can get a bunch of tax free money! Find out how to save up to $10 million in assets in your name before you have to pay any estate taxes, how leveraging other people’s section 121 exclusion can be a source of tax free money, and why contributing to someone else’s retirement plan is a good investment.
What You Will Learn About 5 Sources of Tax Free Money:
- How you can get a bunch of tax free money
- Why a tax code is not a bad thing and how to enjoy its advantages
- How to save up to $10 million in assets in your name before you have to pay estate taxes
- How leveraging other people’s section 121 exclusion can yield tax free money
- Why contributing to someone else’s retirement plan is a good investment
- The benefits of being an ex-pat
- The pros of partnering with other people’s ROTH accounts
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Speaker 1: This is Theriault Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you can stop this madness? Isn’t it about time you play on a level playing field with the wealthiest 1%? Now you can. Tim Berry, attorney-at-law, shares here each and every week current tactics and strategies that anyone can implement to half the tax code, protect your assets, and keep what’s rightfully yours.
It’s time for Tax Hacker Tuesday.
Matt Theriault: Hello, and welcome to the Epic Real Estate Investing Show. It is Tax Hacker Tuesday with my attorney and friend Mr. Tim Berry. On Mondays here at Epic, we show you new and creative ways as well as time-honored ways of making money in real estate. On Tuesdays, we show you how to keep it, and just behalf of Tim and myself, want to thank you for sharing this show and sharing this specific episode each week with your friends and your family and your associates. It’s turned out to be one of the more popular days of the week if it’s not the most popular days of the week. That just wouldn’t be the case if it wasn’t for you. So thank you on behalf of Tim and myself.
If you have a question for Tim that you’d like him to answer here on the show, go to taxhacker.com/questions and you can post it there.
All righty, Tim. Good seeing you again.
Tim Berry: Good seeing you too, man.
Matt: Yeah. Lots of love being shared with the show. So you were the guy with all the answers. I got a bunch of questions, but, boy, you’re really knocking it out the park each and every week. So thank you for choosing to do this with me. I appreciate it.
Tim: Oh, thank you for the kind words.
Matt: Yeah, you bet. So today we’re talking about tax-free money, and you were running down a giant list of sources of how you can get a bunch of tax-free money. So I thought we’d just see how many we can come with.
Tim: Okay. Cool. That’s kind of the mind-blower of so many people look at the tax code as a bad thing, a detrimental thing, and I kind of like to flip that around a little bit and look at the tax code as, man, this is fantastic. It says guaranteed by law. I’m going to get this money totally free. So that’s what I love about the tax code, and that’s what I love about these various-I don’t even want to call them loopholes because they’re not loopholes. They’re just provisions of the tax code that by law we get to utilize.
Matt: Right. And that’s everybody. If you’re an American citizen and you abide by the tax, it doesn’t matter what background you come from, what your heritage is, what socioeconomic level you’re on and how much money you make, and doesn’t matter. It applies to everybody equally, yeah?
Tim: I don’t even care if you’re an American citizen, let’s bring them all over here and take advantage of their tax-free money too. Yeah. It applies to everybody.
Matt: All right. So good. I always hear about that gripe like the rich don’t pay their fair share or they get all the tax breaks and everything. All those tax breaks are, if you’re abiding by the code, it applies to everybody.
Tim: It really does.
Matt: Cool. All right. You just need somebody on your team such as yourself to show you how to take advantage of it. Thank goodness you’re here because Tim is going to show you how to do that today.
Tim: Okay. So which one did you want to start off first with, Matt? You said you had that list. What are they?
Matt: No. That’s a good one. No, no, no. That’s not what I said, Tim. No, no, no.
Tim: Well, let’s start off with one that we’ve already talked about before, but I just want to pound it in people’s brains about what’s out there. That is the complete step up on basis whenever you pass away. You’re allowed to have up to $10 million of assets in your name before you have to pay any estate taxes and so long as you have less than $10 million, there’s no taxes due on these assets in most cases, some states might hit you with some fees. But the cool thing is whenever you kick the bucket with those assets, they get to step up in basis. So translation …
Matt: Who’s they?
Tim: Oh, your beneficiaries, whoever receives those assets.
Matt: So you pass away, you leave $10 million to your beneficiary, then what happens? What’s this step up in basis mean?
Tim: Well, let’s say you had a warehouse, a commercial warehouse if we’re going to go to the $10 million figure. It’s been depreciated down to zero. So if you personally sold it, you’d have to pay taxes on it.
Matt: It means they’ve owned it for 27 and a half years.
Tim: Probably a little bit more but yeah, let’s say that.
Tim: Now, they kick the bucket holding that warehouse, and inside their living trust, they give it to little Susie. Since they kicked the bucket holding that warehouse, and well, since they kicked the bucket holding the warehouse, the warehouse gets a step up in basis from zero to $10 million in this case. Now, little Susie inherits it. She can either (A) sell it the very next day, get $10 million, and she doesn’t have to pay a dime in taxes; or (B) she can start depreciating that thing all over again. So that’s probably one of the bigger tax savings ideas out there. If death is a little bit too harsh for your tax planning, well, talk to parents or grandparents or what have you. I have to sound a little bit tacky, but it’s a massive tax benefit they can be giving you.
Matt: Okay. So if that was just in probate, that would not be the case. What kind of structure has to be in a trust? I think you said that.
Tim: It’s best to have it inside a trust. I mean, even inside with a will, meh. So we got to pay a couple bucks for probate. Probates not going to be too much relatively speaking compared to capital gains taxes.
Matt: Well, I actually meant without a will in probate. Now you’d be really screwed, right?
Tim: Yeah. You would be. Probably.
Tim: That gets into all sorts of variables. But yeah. Just use a living trust. Just use a living trust.
Matt: Put it in a living trust and you get all these benefits. It’s automatic.
Matt: Okay. Cool. So there’s one. What’s number two?
Tim: Number two, another big one, and this is mind-blowing to me that more people don’t do this, is the section 121 exclusion. The section 121 exclusion, a lot of you real estate people know this, is as long as you live in a property two years out of the last five and use it as your primary residence, you get to exclude the first $500,000 of gain if you’re married. Now, you got to stop and think, how many people fully utilize that $500,000? Eh. Probably about 1%, if even that. Then how many people fully utilize that full $500,000 every two years? Once again, we’re probably looking at half a percentage point or so. So there’s a lot of money being left on the table.
There’s all sorts of way you can structure joint investments with people and have them go out and use that money to buy their primary residence. Now, as it increases, they sell it in two years. They get this tax free money, and then they have to give you some of that tax free money too. Give them a little bit of it, but then you get the lion share of it and that can be done in a tax-free manner. It’s a way how you can coat ride on people with their 121 exclusion.
Matt: Okay. So you’re essentially loaning them the money to buy their house.
Tim: They go out and buy a house, and, by the way, if you do things right, let’s say it’s Johnny and Susie. They’re just starting off in the world, and they can only afford a $100,000 house, a $200,000 house, whatever. Okay, cool. Chances are a $200,000 house isn’t going to appreciate $500,000 in the next few years.
Tim: So it might make sense for you to help Johnny and Susie move into a more expensive house, a $500,000, $600,000, $700,000 house that is projected to appreciate by $500,000 in the next two years. Now little Johnny, little Susie, they’re getting the benefit of a better school district for their kids, a better lifestyle, more safety, and all that other stuff. So maybe you really don’t have to give them much if anything whenever you sell the house, and you get the full benefit. So that’s another neat thing that’s just a lot of money sitting out there and no one fully utilizes.
Matt: Got it. Okay. So leveraging other people’s section 121 exclusion.
Tim: Yeah. Another one and this is more of a tax credit, and let’s go back to little Johnny and little Susie again. A little-known feature of the tax code is if you make contributions to your retirement plan and you earn below-I don’t even know what the cut off is-$50,000, $60,000 or so, the IRS will give you tax credits. They will actually give you money to make contributions to your retirement plan. So now if you can loan money to little Johnny, little Susie, so they can make the contribution to their retirement plan, the IRS is going to give them free money and you can structure the deal so you participate in that free money. This ones not nearly as big as the $500,000 or so. It’s going to be a few thousand dollars at a time, but if you’ve only got $10,000, $5,000, you want to make an investment and start getting money tax free, this could be a really simple one you can start off with.
By the way, an ancillary side benefit for little Johnny, little Susie, as they make contributions to their retirement plan, they’re an employer is typically enforced to match their contributions. This is one of the things that always blows my mind. You work for a big corporation, they match your contributions, and yet you don’t contribute. You’re giving away free money. I don’t understand that. So now, for example, little Johnny, little Susie, structure investment, (A) you participate in the tax credits from the IRS and little Johnny, little Susie, they get their free money from the employer.
Matt: Mm-hmm (affirmative). Got it. Question on this one and number two, will this work if little Susie is your daughter?
Tim: Will this work if little Susie is a daughter? Absolutely.
Matt: Okay. So it’s not like the restricted retirement thing.
Tim: No, we don’t have the restrictions of retirements and all that stuff. Yeah, works fantastic if little Susie’s your daughter. Yeah. Better yet, works even better if little grand-Susie is your granddaughter and you want her in the Beverly Hills school district so she gets the best education.
Matt: There we go. All right.
Tim: Quick side note, Matt, for years doing state planning and everything, it’s just amazing talking to the grandparents. 90% of them say I don’t want my kids to get anything. I want my grandkids to get it all. So it’s just always fascinating if it’s for little Susie, who really cares about little Susie, but little grand-Susie, yeah. I’m there, dude. So just a quick side note.
Matt: Got it. Then could you do this say you had little Susie, little Mary, and I don’t know-little Tabatha? I just came up with some names. What if they were all three of your daughters, is there any limit to how many times you can do this?
Tim: You can make this a production line. You can set it up with 500 different people.
Matt: Got it. You can create a little family tax-free empire.
Tim: Yeah. Don’t think of just family. At first you’re going to think the only people I want to help out here are family, but whenever you start looking at the economics of the situation and where you can help someone live a better lifestyle and you get 80% of the appreciation of the property, then it’s who gives a damn about family. Let’s broaden it out and get some real money here.
Matt: Right. No, I definitely see that. Yeah. I agree. Cool. So we got three. Got another?
Tim: Yeah, let’s start another one. This one’s kind of near and dear to my future heart. My future heart is saying I’m hitting the highway out of the states, oh, in about a year, two years or so. I’m going to leave, be an, sit on a beach somewhere and enjoy the good life. The cool this is there’s provisions inside the tax code that says if you structure thing correctly, you can earn roughly about $140,000 a year and you don’t have to pay any U.S. taxes. So I can be sitting on the beach living the good life and make $140,000 and I don’t have to pay a single dime in U.S. taxes on that money. Then let’s say I want to be a real greedy pig, let’s say that I’m making more than $140,000 and for some strange reason I don’t want to pay taxes on it. Okay, cool. Maybe there’s some other people in the foreign country who aren’t making that sort of money, and they work for your company. They start getting this sort of money, and you might want to start doing some joint investing. So you might indirectly benefit from them getting tax free money. So there’s all sorts of ways you can structure things to be getting tax free money.
Matt: Okay. So let’s say you, while living here in the United States and over, I don’t know, decade, you’ve built quite the portfolio. Talking about income property, and it pays you $140,000 a year from that portfolio.
Tim: Mm-hmm (affirmative).
Matt: Can I move the beaches of Belize and all of a sudden my $140,000 of income is tax-free?
Tim: I’d have to stop and think about it, but in my mind all things are possible. So my knee-jerk reaction is yeah, we can probably make that happen.
Matt: Okay. $140,000 on the beaches of Belize goes pretty far.
Tim: Matt, you’re preaching to the choir, baby.
Matt: All right.
Tim: Preaching to the choir.
Matt: Yeah, I don’t know if you can hear it way over there in Arizona, but my wheels are turning. Super. Okay. So there’s number four, we got another?
Tim: That’s all I have right now. Those are the main ones I wanted to bring up.
Matt: If you had a fifth one, what would it be? Just going to make for a better title of the podcast.
Tim: Oh, the fifth one would be ROTH accounts. Do investments inside someone else’s ROTH account and they’ll boot up that account. Then whenever they kick the bucket, you inherit it. That would be the fifth one.
Matt: Oh, I see what you’re saying. Okay. So it’s a self-directed ROTH. You’re doing investments in there. If it was your ROTH and I wanted to do investments in there, I give you money in that ROTH for you to invest?
Tim: Well, let’s walk through a dynamic of it.
Tim: Let’s say that I had a friend who was getting up in years.
Matt: Mm-hmm (affirmative).
Tim: Let’s say I’m a younger guy than I am because I don’t really care. I’m close to 59 and a half, and I can take the money out tax-free. But let’s say I’m a young whippersnapper, 30-35 or so.
Matt: Mm-hmm (affirmative).
Tim: I want to start building up tax-free income. What I could do is I could partner with somebody’s ROTH account, build up money inside that ROTH, and then we structure the deals so that the ROTH gets the bulk of the profits, and I get a reasonable rate of return. But the bulk of the profits go into the ROTH tax-free.
Matt: Mm-hmm (affirmative).
Tim: Now, my buddy who owned the ROTH dies, but they name me as the beneficiary of it.
Matt: Mm-hmm (affirmative).
Tim: I inherit all that money tax-free, and no matter what my age so long as that ROTH was open five years. I can start taking money out completely tax-free.
Matt: No regardless of your age.
Tim: Regardless of my age.
Matt: Sweet. So we got the step up in basis.
Matt: That’s actually huge, right? That’s actually really big.
Tim: That’s massive.
Matt: I can see why that was number one now. Section 121 exclusion, you can leverage other people’s exclusions. Number three, contribute to someone else’s tax plan to get the tax credits.
Tim: To their retirement plan. Help them make contributions to their retirement plans gives them tax credits and gets them the employer match.
Matt: Okay. Let’s do that one again. So myself, I want to make a contribution to your retirement plan.
Tim: I want to help you build up more money in your retirement plan. So I give you $5,000 for you to make a contribution to your retirement plan. Are you with me?
Tim: Now because you made that contribution to your retirement plan, IRS gives you $2500. That $2500 makes it’s way back to me plus I’m going to get that $5000 sometime in the future, and then plus you also get the matching of your employer. They’re probably going to do a 50% match and probably give you another $2500 also.
Matt: Got it. Got it. All right. So for me to give you that money and for those tax credits to come back to me, is that just they write me a check from that credit or can I actually be transferred so it’s applied to my tax returns?
Tim: Oh, it is applied to your tax returns. What’s going to happen is you’re going to fill out your tax return, and you say hey, IRS, I made a $5,000 contribution to my retirement plan under this section. I get $2500 back from you. Thank you very much.
Matt: Right. But how do you give that money, that $2500 tax credit, to the person that gave you the money to put in your tax plan?
Tim: We can make it a loan in which case some of it’s going to be taxable or we can make it a gift if it is little Johnny, little Susie, family members. They just gift it back to you.
Matt: Okay. All right. Then number four, I kind of like it’s one. The moving out of the country thing.
Tim: I love it.
Matt: Yeah, this $140,000 because there’s a lot of places where $140,000 goes a really, really long way. A lot of beautiful places in this world. Okay. Then five was the ROTH accounts.
Matt: Partnering with other people’s ROTH accounts.
Tim: Let’s go back to number four real fast.
Matt: Mm-hmm (affirmative).
Tim: That $140,000 is mostly unearned income. If you have portfolio income, we can probably make most of that tax-free, to begin with. But even if it’s all earned income, you’re making let’s say $400,000 a year, and you want to be receiving that tax-free, a lot of the people on those beaches are just living on social security. If you spread the wealth and then make it where they’re going to invest that later on with you later on down the road, indirectly you’re benefiting that money tax-free too.
Matt: Got it. So like social security income, that’s not earned income, is it?
Tim: No. But that’s tax-free to most of those people on the beach as well.
Matt: Got it. Okay. Yeah, that wouldn’t make any sense. The government gives you money and takes it back.
Matt: Sweet. So we got five sources of tax-free money. I think that’s a good title for the podcast. All righty, so whenever you’re ready to have Tim customize a Tax Hacker Blueprint just for you to see which one of these five sources of tax free money can apply and how you can actually pull them off, go to taxhacker.com, answer a few questions about your situation, tell Tim about what you’d like to have happened, and then his team will take it from there. He’ll give you a copy of his free book.
Matt: All righty, so, Tim, any last bit of advice?
Tim: Nothing other than taking advantage of the tax code. Use it for your benefit as opposed to your detriment.
Matt: Yep. Yep. Now you know, right? To know and not do is to not know, but now you know. So now you’re responsible for the taxes that you pay with regard to this. Responsibility. It’s a wonderful thing, isn’t it?
Tim: It is.
Matt: Very good. So that’s it for Tim and myself. I’ll see you next week for another episode, or we’ll see you next week for another episode of Tax Hacker Tuesday on the Epic Real Estate Investing Show.
Speaker 1: That’s it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday.