Transcription
In over 40 years as a CPA, I've seen and created thousands of tax strategies. Simple ones, complex ones, ones that work, ones that blow up. But there's one strategy, one specific structure that I've seen work better than anything else I've ever come across. And when I explain it to people, the first thing they always say is, "Why does nobody talk about this?"
I'm Tom Wright, CPA and bestselling author of Taxfree Wealth. And today, I'm going to show you the most advanced tax strategy that I've ever seen. And I've actually never heard anybody else talk about it besides myself. And I'm going to explain it so simply that you can walk out of this video and have a real conversation with your CPA about it today.
But before we get into it, what makes a tax strategy truly advanced? What separates what we're I'm about to share from just maxing out 401k or taking a depreciation deduction. What makes it advanced is that it's not a tactic. It is a strategy. So, a strategy is a plan of action to get to a specific result. It's a much deeper, broader plan than a tactic. A tactic is the Augusta rule. I'm going to rent out my house for 14 days and not pay tax on the income. That's a tactic. That's not a strategy. That is a tactic. Or I'm going to hire my kids. Not a strategy. That's a tactic. Okay? They're good tactics, don't get me wrong. and they can be part of a comprehensive strategy. But what makes a strategy great is when accomplishes multiple things and it does it elegantly. On top of that, I think that what makes a great tax strategy great is that it's permanent tax savings. It's not temporary. It's not deferring like a 401k.
So, here we go. Here's what it is. So, most people have heard about the bonus depreciation on real estate and they go, "That's great. The problem is I'm a passive investor, and as a passive investor, I can't use my passive losses." Okay, now I'm going to stop you right there because that statement by itself is false. And you may have heard it from your CPA or somebody online or they say, "Look, you can't use your passive losses unless you're a real estate professional." Well, I'm going to tell you if you're a real estate professional, your losses aren't passive. So, that's a dumb thing to say, too, as well. But let's say they they get it right. They say you can't use your losses from your rental real estate unless you're a real estate professional. I'm going to say that is a false statement. Now, let's make it true. If you are not a real estate professional and you have losses from rental real estate, those losses are passive and can only offset passive income until you sell the activity. That is a true statement. Okay?
So, I'm going to draw this. I'm going to show you what happens here. So, let's start over here. And we've got our real estate investing because we're going, "Hey, I really like the idea of investing in real estate. I'm going to form my LLC in real estate. It's going to be my holding company. This is my basic structure. If you're not using this, you should. This is my holding company. Here's the taxpayer. Now, I prefer this is also owned by the somebody else. We'll call it the spouse. Doesn't have to be your spouse if you're not married. It can be, frankly, it could be a corporation you own, okay? But I like it to be a partnership. And I've got a single family home here. And I've got a let's say a a a duplex here. And let's say I've got like a 16 unit apartment complex here and I've got bonus depreciation. So I've got losses. Let's say in any one year I have $500,000 of losses from depreciation. That's after my income. Okay.
Now, what is the challenge? The challenge is this is a passive loss. Now, some people say, well, we can make it not passive if you do short-term rentals. Not entirely true. Okay, so long-term rentals, in order for it not to be passive, you do have to be a real estate professional. short-term rentals, you still have to put in 500 hours a year. Still otherwise passive, okay? It's just instead of 750 hours a year, you have to work 500 hours a year. So, it's just a lower threshold. That's all it is. It's not a loophole, folks. By the way, if I hear one more time, oh, I want that shortterm rental or even worse, STR loophole. I'm literally going to come out of my shoes. I'm going to go after somebody because a it's not a loophole. It's a short-term rental. And by definition, it's not subject to the real estate professional rules. Okay? It's not considered rental. So, it's short-term. It's under seven days on average. It's still a business activity and still requires 500 hours for most people. Okay. All right. I've gotten that off my chest. All right.
Now, I've got this $500,000 loss. What else do I have? Now, I have over here a business. Now, my business, I have this formed as an S corporation. This is my holding company for my business. And I might have three businesses under here. Okay, business one, business two, business three. I have like 16. Okay, so you have all these businesses. And by the way, here's taxpayer. Same taxpayer. I'm going to tell you right now, I use this strategy myself. So let's say I have a million dollar of income for my businesses. I have a $500,000 loss. The business income is active. The loss is passive. Active income cannot be offset by passive losses. That's where people say, "Well, you can't offset your business income with passive losses." I'm telling you that's a false statement. What do I have to do? Passive loss can offset what kind of income? Passive income. So, I need to what I need to do is I need to convert my active income to passive. And I'm going to tell you there are two ways to do that and I've used both of them. The easy one, okay, frankly I think it's easy one is reduce your hours in the business. It takes some time to do that, right? It's five years. So, if you were active five out of the last 10 years, you're active in the business. So, you got five years that you need to wait. Okay? You don't want to wait five years. You're all excited about your real estate investing. I got $500,000 loss. What are we going to do? This is where number two comes in. I have a child over here and I can form a trust for that child. I can transfer stock to that trust. It's really a gift, right? I can gift it into that trust. Now, we got $15 million exemption, okay, for gift tax. So, I'm not going to be paying tax on it. Here, two things are going to happen here. One is this stock is now out of my estate and is not subject to estate tax just by making this gift into this trust. Second of all, my child does not work in my business. So, that means that this stock ownership is passive. So, let's say I give them 50%. Well, let's be realistic. I'm not going to give them 50%. I'm going to give them 40%. That means that they have passive income of $400,000. What if I also give them a holding company? Okay. Again, it's a gift, so there's nothing in exchange. Now, I I'm not getting all of it, but I might give them 80% of this of my holding company. Now, I want you to track these numbers. I now have $400,000 of passive income, which is 40% of my million. I have $400,000 of passive loss, which is 80% of my real estate. And now I have zero tax liability. Now, this income to me now, I only have 600,000 of income. Now, I've got $100,000 of loss being carried over. So, could I change these numbers? Absolutely. But I'm going tell you right now, I've just sheltered $400,000 of income and gotten both my real estate and my business out of my estate.
Now, I can do this in such a way that I have complete control. Do I still have control? Yeah, because this is non-voting stock. This is non voting shares. Do I still control it? Could I still get a salary? Absolutely. I could get a salary out of here. Okay. I get a salary here. I've got control, but this is money I was going to invest anyway. I want it to go to my kids. So, I will tell you right now, this is a pretty sophisticated strategy. Don't do this lightly. How come my CPA's never even talked to me about this? I'm not saying it's right for you. It may very well be wrong for you. But remember, it's not your fault that your CPA didn't bring it to you. It's not your job to bring it to your CPA. Most CPAs are trained in compliance, not strategy. And if you're realizing that that's the case, then the 30-day tax cut playbook is the starting point for you. It's free and the link is in the description.
So, why does this actually work this way? You know, let's pretend, okay, you're a smart business owner. Why have you never heard of this? Let me tell you a story. So, I'm walking into a course that I'm teaching at my office to a group of CPAs. And I'm walking in with an attorney. He's an estate planning attorney. So, he's the one who does all the leg work, all the details on setting something like this up. I said, "Do you think this would work?" And he looks at me, he goes, "Oh my heavens, that's the greatest thing I've ever heard." He says, "Of course it would work."
So, let's think about who does it actually work for. Well, remember this is not somebody who's making $100,000 a year and paying $1,000 in tax and, you know, piddles around in a little bit of real estate. Honestly, if you can be a real estate professional, it's an easier thing to do. If you or your spouse can be a real estate professional, that's easier. If you can reduce your hours to not be active in your business, it's an easier thing to do. This is a more complex strategy. I just want you to know what's possible because if you never know what's possible, you never have a choice. So, this is obviously you have to have a business because it won't work if you're an employee. Your real estate has to be significant. Okay? And you've got these passive losses. But you've never heard of this because first of all, most CPAs, and I I love my profession, are very linear in their thought process. I am a very nonlinear CPA and I get in trouble with it all the time. Okay? My business partner and my CPA firm will not let me do a tax return because I'm not good at the linear stuff. She goes, "You do all the strategy. You come up with all the ideas. You talk to the clients. You're good at all that. But don't you dare prepare a tax return. I can review one because I can see the big picture of it, but she don't want me in the numbers." I am not good at that. I know I'm not good at it. I've never been good at it. It's the one thing I had trouble with when I was at Ernston Young doing tax returns. But when it comes to looking at things from a holistic viewpoint, this is where strategy really makes sense.
Strategy is a holistic plan of action. Obviously, you've got to look at your estate planning here. You've got to look at your relationship of money with your children, with your spouse. What do you want to have happen to your money? There's all sorts of things that have to happen here. Okay? And I'm just sharing something, by the way, that I could have just kept secret. I'm telling you, most people won't do it. They will poo poo this. But I'm going to tell you also this is it's just too cool to keep secret and somebody's going to steal it. Say, "Hey, I invented this." I'm going whatever. But they don't understand it. They need to be able to explain it to you. If they can't explain it to you so that you understand it, and you may not be understanding me, and we may need to spend more time at it, okay? But here's the basics of it. Understand that all I'm doing is transferring the asset to somebody I want to have own the asset, the business that is not active in the business. I said a child in in a trust. It could have been a parent. Could have been a sibling. There's any number of person I people I could have done this with. Is this a sophisticated strategy? Yes. Should you ever do this on your own? No. You need professional help. Both a CPA and an attorney need to help you with this. But I will tell you, I've done it. I've done it with clients. And it's saved hundreds of thousands of dollars. Remember, $400,000 of income that's being taxed. Let's say it's 37%. Let's say we don't get the qualified business income deduction. Let's say this is professional income, 37%. So basically 40%. That's $160,000. Let's say you're investing every year. That's $500,000 loss every year and you're making a million dollar a year. That's $160,000 every single year. Is it worth doing the planning? Yes. This is why, you know, people who can afford to hire an Ernston Young where I used to work, they get this kind of planning. I I've never seen them do this that I'm doing, but that doesn't mean they haven't. Okay? Okay, they have really smart people. But how does an entrepreneur who doesn't have access to Ernston Young, how do they get this? Well, I'm going to tell you this. First of all, if you think you might qualify for something like this or you're going, "Hey, I'm just tired of these passive losses not getting any tax benefit." Then what is the first thing you ought to do tomorrow morning? Honestly, I'm going to tell you right now, you should call my franchise and CPA firms, TFWadvisors US. TFWadvisors us. That's what you should do.
Remember, the government literally pays you to invest in certain things as long as you know how to use the law the way they intended it. If you want to know what these things are that the government wants you to invest in, whether it's real estate or any of the other investing the government wants you to do, watch this video here. It's on the screen right.