If you’re a prospective or current flipper, you’re looking at thousands of extra dollars in taxes each year – unless you’re taking Tim Berry’s advice.
On this week’s Tax Hacker Tuesday, Matt Theriault and Tim Berry teach everything you need to know about flipping and employment taxes including how to utilize corporations to your advantage, when to start creating your entities, how to avoid huge pitfalls and crazy lawsuits, and much, much more!
What You Will Learn About How Flipping and Employment Taxes are Skimming Your Profits:
- Everything you need to know about flipping and employment taxes
- The huge tax pitfall most people experience after quitting their jobs to flip real estate
- How to correctly flip real estate without losing it all to taxes
- How to utilize corporations to alleviate your tax problems
- The horrifying truth about taxes that most people don’t realize
- How protecting yourself from taxes differs if you’re a wholesaler vs. a flipper
- Exactly when you should start creating your entities
- How to protect yourself from crazy lawsuits
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- Also, check these out:
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Matt Theriault: Hey, rock stars. Welcome back, glad you’re here for another episode of Tax Hacker Tuesday. Tim put together something very special for the audience right here at Epic, and he put together his Tax Hacker Blueprint. I mean a blueprint, a custom blueprint, just for you on how to hack the tax code in your favor ethically, honestly, legally, and even with Uncle Sam’s blessing.
So, it comes with five specific elements to create this blueprint, and it’s all custom just for you. He’s gonna give you a one-on-one consultation to establish where you are and where you wanna go. He’s gonna give you a custom tax action plan, organized into easy-to-follow steps so you can keep all of the money that’s rightfully yours. He’s gonna give you an asset protection plan organized into easy-to-follow steps so you know how to protect everything that you want protected, as he puts it, “So the bad guys don’t come and get it.” And then he’s gonna give you an accelerated retirement strategy so you can enjoy life while you’re still young enough to do so. This working 40 to 50 years, it doesn’t have to be that way, and he’s gonna position your life and position your assets into a format that really will accelerate your retirement strategy so you can go kind of against the norm, against the grain, and beat everybody there. And then he’ll also give you quarterly check-ins to keep you on track towards your goals.
So, that’s the Tax Hacker Blueprint. It’s normally $3,000 a year that he charges for this level of planning and consulting. The introductory offer is half off just for you here at Epic for $1,500, and if Tim and his team can’t save you at least double that, then it’s totally free. You pay nothing. So, go to taxhacker.com, grab Tim’s free book on how to navigate the loopholes and Trump’s new tax plan. And then after, you’ll have an opportunity to schedule some time with Tim and his team, and just let them know, you heard this on the Epic Real Estate Investing podcast, no questions will be asked, that introductory offer will be yours. And then tell him that you want your Tax Hacker Blueprint. Go to taxhacker.com, and everything you need is right there. Alrighty? Now, on with the show.
Speaker 1: This is Theriault Media. Did you know that up to 50 percent of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn’t it about time you play on a level playing field with the wealthiest one percent? Now you can! Tim Berry, Attorney at Law, shares here, each and every week, current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what’s rightfully yours. It’s time for Tax Hacker Tuesday.
Matt: Alrighty. Welcome to the Epic Real Estate Investing show. It is Tax Hacker Tuesday with my attorney and friend, Tim Berry. Hey, Tim.
Tim Berry: Hey, Matt. How are you doing?
Matt: Doing very well. Right here on Mondays here at Epic, we show you new and creative ways, as well as time-honored ways, of making money using real estate. And on Tuesdays, Tim will show you how to keep it. I’ve got all the questions, he’s got all the answers, and we try to make it, the exciting subject of taxes, as enjoyable and as digestible and palatable as possible.
Tim: Hold up, what do you mean by that, Matt? Isn’t this always exciting? Isn’t this always palatable? Isn’t this always digestible?
Matt: It wasn’t until I met you. Alright. So, today we’re gonna talk about flipping and how that jives with employment taxes. This is something that you wanted to talk about, so I don’t really know what this is about as I never do at the beginning of the show. But I’m always so much smarter after we’re done. So, talk to me about flipping and employment taxes. What do we need to know, and what do we not need to know?
Tim: What we need to know is that there’s a bunch of different taxes out there. We already know that there’s way too many taxes out there. There’s income taxes, but then, if you run a business and if you’re running it inside of an LLC that’s a partnership or a sole proprietorship, you have to pay employment taxes on your ordinary income that you create inside that business. And what a lot of people don’t realize is those employment taxes are 15.3 percent on top of your regular income, and most people probably end up paying more in employment taxes than they pay in regular income taxes. It’s pretty horrific if you take a step back.
And here’s the ironic part of the whole thing. These employment taxes go to fund your social security. Some people know them as your social security taxes. And the challenge is, I don’t know if you guys saw the report or not, they said that social security isn’t gonna be just bankrupt, there’s gonna be absolutely no funds to pay anybody in I think it was 2035. So, we’re gonna have the luxury, the benefit, of paying the government 15.3 percent on the income we’re making, and yet nothing’s gonna be there. What a wonderful concept.
So, that’s what I kind of wanted to talk about, was be aware of these additional taxes, these employment taxes. 15.3 percent, that means you make 100,000, that’s another $15,000 on $100,000 of profit. It’s just crazy, absolutely crazy.
Matt: So that’s when Joe Schmo is flipping in his name?
Tim: If Joe Schmo is flipping in his name, or Joe Schmo’s flipping in the name of an LLC, they’re gonna have to pay that additional 15.3 percent on the profits from the flipping. And the challenge is, Joe Schmo doesn’t know that. Joe Schmo has no clue about that.
Matt: He’s just happy he made $100,000 this year.
Tim: Yeah. They really are. They are.
Matt: But he didn’t make $100,000, did he? He made 85,000, and now he’s gotta pay taxes on that.
Tim: Yeah. And here’s the crazy part too. I help people whenever they run into tax problems as well as helping try to fix it beforehand, inoculate them from the tax problems. And probably the number one reason that people run into tax problems is they’re newly self-employed, they just left the W2 job working for the man, they didn’t know about employment taxes, then they do their taxes and they say, “Oh my gosh! I’ve got a tax bill of x, y, z thousands? I can’t afford to pay that!” They freeze, they don’t pay, and now they just fall behind and behind and behind and behind due to the employment tax situation.
Matt: Got it. Alright, so that’s how not to do it.
Tim: That’s how not to do it.
Matt: Alright, so how do we do it correctly?
Tim: Well, the best way to do it is to utilize a corporation. Because now it’s the corporation that gets hit with the tax liability, and corporations don’t pay employment taxes. Now, if you utilize an S corporation, you’re gonna have to pay yourself a reasonable salary. And that reasonable salary, you’re gonna have employment taxes on that reasonable salary, but anything over and above that isn’t gonna be subject to employment taxes. Same thing with a C corporation. You can pay yourself a salary, a reasonable salary, it’s gonna have employment taxes, but the dividends that come out of a C corp, not subject to the employment taxes. So, that’s the way to do it. Utilize a corporate structure on your flips.
The big thing here, Matt, we talked, what was it, two weeks ago, about don’t put real estate inside of a corporation, in particular, an S corporation. Well, this is for flips. It’s okay to do it if you’re gonna buy and sell in a rapid manner, but don’t put longterm buy and holds inside of a corporation, ’cause that’s just stupid. But for flipping, utilize a corporate structure, whether it’s an S corporation or C corporation, depends upon your situation, to limit the amount you’re gonna pay on the employment taxes.
Matt: Got it. Alright, so the rule of thumb is you’re gonna hold in an LLC or a trust, and you’re gonna flip in a corporation.
Tim: Fantastic summary, yes. Absolutely.
Matt: Okay. So, question we get is, and we’ve been getting this for the last 10 years, particularly from brand-new investors that decide, “Hey, I’m gonna go start a real estate investing business,” at what point should they start looking at creating their entities?
Tim: You know, I would say if they’re making 30,000 profit, start looking at settin’ up a corporation at that point in time if they’re gonna be doing the flipping. If it’s buy and hold real estate, I’d say as soon as they have 30,000 of equity, start setting up something that’s gonna protect that equity, ’cause that would hurt to start losing 30,000 if you got hit with some lawsuit.
Matt: Totally. So, the 30k rule.
Tim: Yeah, let’s call it the 30k rule.
Matt: Alright, I like that.
Tim: Let’s put it into place, Matt. Let’s make it official.
Matt: Yup. We’re gonna put a little TM right after it, and we are good to go.
Tim: That stands for ‘Tim’, right?
Matt: Pardon me?
Tim: That stands for ‘Tim’, right?
Matt: Yes, Tim. It’s Tim and Matt.
Tim: Oh, yeah! There you go. And I’m first. Thank you, Matt.
Matt: Yeah. 50 percent, I’ll take the front half or the back half. It’s all the same to me.
Matt: So, 30,000 on the S corp. I’ve heard as to why, but why did you come up with that number on the flips or the profits?
Tim: Once you start dealing with another entity, you’re gonna have to start dealing with paperwork. You’re gonna have to start dealing with payroll. You’re gonna start having a pain in the posterior to deal with. So, why even put up with that whenever the dollar amounts are somewhat small? Once you get to 30,000, that means if you’ve got the secret to get to 30, you’ve got the secret to get to 300. You just replicate it more and more and more. So, at that point, you’re gonna be a rocket ship, so let’s start putting that stuff into planning.
Matt: Got it. Okay. Sounds good to me. Anything else to add with that?
Tim: You know what? I’m gonna be a little bit fragmented here, and I wanna tell you about one case that I just dealt with. Not dealt with, but some clients that I just had earlier, they just had a lawsuit and it’s the craziest lawsuit on the face of the Earth, but I just thought I’d share with people how crazy lawsuits can be. Is this a good time, Matt? Are you gonna be upset if I do this? You’re not gonna be too mad?
Matt: No. As long as it’s not my lawsuit.
Tim: Isn’t that the truth. So, I had these people, they had a property, they’re renting it out. And their lease said, black and white, “No pets allowed.” So, guess what the tenant goes out and does?
Matt: Got a pet?
Tim: Yeah. They got a pet. It was a pet tenant. No, it was a pet. They get a pet, and we already know how this is gonna end. The pet ends up mauling another person, and now there’s a lawsuit and the poor landlords are dragged into this lawsuit. They’re saying they shouldn’t have allowed the tenant to get this pet and, in reality, this was the last week of the lease, literally the last week, this happened, and the landlords had no clue about this. They were absentee landowners, over in a different state and everything. So, they had no clue about this.
So, they now go to court to get the case thrown out against them. And so they get the case thrown out against them. Now, this wouldn’t be a story I’d be telling on the radio or a podcast if that stayed that way. Instead, what happened was the tenant, no I’m sorry, the person who got mauled, they went and they appealed the judgment to have the case against the landlords thrown out, and so the appellate court says, “You know what, you’re right. The landlords should still get sued. And not only that, they’ve gotta pay all attorney’s fees for the appellate court.” Is that insanity?
Matt: Yes. When they even said, “No pets allowed.”
Tim: They even said, their own rules said, “No pets allowed.” And there was no wink-wink, nod-nod where they said, “Oh yeah, you could have one anyway.” These people were hardcore and they said no. “No pets, we don’t want it.” The tenant just snuck in the dog. The dog mauled someone. And not only are they subject to the lawsuit, but now they’re subject to, what is probably even more, is the attorney’s fees for the appellate decision to bring them back into the lawsuit. It’s just absolute insanity.
Matt: So, now, if we were to rewind that, now that you just terrified everybody that was considering being a landlord …
Matt: What could that landlord have done differently to protect themselves from that situation?
Tim: Well, and this is gonna sound like a setup but it’s not, they could’ve structured their financial affairs better so if they did get involved in the lawsuit, they wouldn’t care. So, if there was a judgment against them, it just wouldn’t matter. That one property might be up for grabs, but their other properties wouldn’t be up for grabs. But quite honestly, this is a case of they did everything right and they’re still being penalized. It’s just stupid, stupid as could be.
Matt: There’s a lot of things that happen in the legal system that are stupid as can be.
Tim: Oh, I totally agree with you there.
Matt: Yeah. Maybe you can confirm this, and I don’t know if it’s an urban legend, but the burglar fell through the skylight of a house, and as he fell down, he cut himself on the kitchen knife as he was falling through the ceiling, and then he sued the owner for … I don’t know, negligence of their kitchen utensils, and he won.
Tim: Well, they shouldn’t leave those things out there, should they?
Matt: I know!
Tim: They should have those in somewhere! You never know when that burglar’s gonna be falling through that roof and might be hurt by that stuff.
Matt: Yeah. Have you heard that story?
Tim: I’ve heard that story, I’ve heard variations of it. I don’t know if that itself is the exact one or not, but there’s all sorts of stupidity out there. I had one out in Washington where these people had road rage, and dad and Junior were in the front car and they were being chased by someone else. Dad and Junior went over to their house, ran inside their house, road-rager behind them still kept on running, kicked down the door, dad blasted the guy who kicked down the door. Dad got hit with a lawsuit. There’s all sorts of stupidity out there. It’s just insanity.
Matt: It makes you think.
Tim: Yeah. That’s an uplifting subject to end the presentation with, huh? Or the podcast with.
Matt: Let’s talk about a happy story for a landlord. They put it in a trust, and the tenants paid, and everybody lived happily ever after.
Tim: It’s a wonderful thing. Most tenants do pay, most tenants aren’t pains in the butts, and you get that cash flow, and it’s free money. That’s the thing I love, by the way, about rental income. It’s free money, for the most part. Your depreciation, your deduction’s gonna offset it, so you don’t have to pay taxes on it. It increases, it keeps up with inflation, so it’s not like your stupid CD paying .0001 percent. And the value of the property increases, too. It’s a wonderful thing most of the time.
Matt: We only remember the bad ones.
Tim: Yeah, unfortunately. Yeah.
Matt: Yeah. It’s no fun to talk about, “I received my check this month.”
Matt: Story’s over. It is kind of fun, depending on which perspective you’re on from the [inaudible 00:14:55]. And then also, the tenant is paying down the debt for you as well, so they’re buying the house for you.
Tim: You know, most people don’t get that, also. They don’t understand the return on investment, the tenant is actually paying the principal payments. That’s just a wonderful thing as well, you’re right.
Matt: The amortization center.
Matt: Totally. Alrighty, well this was a good one. If you’d like, you can go to taxhacker.com and download Tim’s free book. Just ‘The Five Loopholes in Trump’s New Tax Plan’. That’s the new name of the book.
Matt: It is really long. But you can get that free book at taxhacker.com, and after you’ve done that, you’ll have the opportunity to schedule some time with Tim, and either he or one of his professionals that work alongside him will get on the phone with you for a short five to 10 minute call to assess your situation. If there’s a good fit, they’ll take the next step and schedule a tax action plan for you, and if there’s not a good fit, they’ll go ahead and they’ll share some alternative resources to where a better fit for you can be made. Either way, Tim and his team are committed that you are better off after the call than you were before.
Alrighty, Tim, any last bit of advice?
Tim: Well, last bit of advice? I’m gonna ask you for the last bit of advice. Do you actually just wanna change the title of the book to ‘Get Your Free Money Now’?
Matt: ‘Get Your Free Money Now’. That’s a much better title. Where were you in the design process?
Tim: I don’t know, hiding out somewhere.
Matt: Alrighty. So, that’s it for Tim and myself, and 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.