Episode Transcript
[00:00:00] Speaker A: You're listening to the Preferred Way, a retirement podcast brought to you by Preferred Trust Company, the preferred custodian for all alternative investments.
[00:00:09] Speaker B: So thank you so much for joining us on the Preferred Way podcast. If you're interested in learning more about self directed IRAs, make sure you subscribe. We want to make sure that we are educating those out there that are interested in learning more. And today we have an outsider, a very special guest with us. Hi, Larry, how are you?
[00:00:31] Speaker A: Hey Carrie, how you doing?
[00:00:32] Speaker B: I'm doing great. You know, we have been searching for a CPA that really understands alternative investments. So you and I had some conversation a few weeks back and I discovered that you actually know what the heck you're talking about. So that's why you're joining us today. So why don't you give us a brief introduction. Who are you? Where are you from? Tell us a little bit about your company.
[00:00:57] Speaker A: Awesome. Appreciate it. So my name is Larry Pendleton, cpa. I'm based out of Norfolk, Virginia. So Southeast Virginia, Virginia beach, if anyone's familiar with their area.
My CPA firm is called PC Financial Services, where our mission is to help people achieve financial freedom by building passive income and saving on taxes. Calling ourselves tax and investment coaches or investment tax coaches, depending on which hat I want to wear and doing during the day, we merged those two worlds because like, I'm a CP by trade and my partner Terry on Connors is a class A contractor. So you don't really see that type of collaboration. So he's the one that got me into real estate investing myself with single family rentals, small multifamily rental, short term rentals, new construction, and then now we're starting to get into mortgage notes as well. So once he exposed me to that side investing, already knew the benefits of investing in real estate from a perspective, but then able to kind of show him that side, he showed me more of the investing side and we just keep building and serving people from there.
[00:02:17] Speaker B: That's wonderful. Well, good. We're glad that you're here.
I have got a lot of questions. You know, as a custodian, we cannot give tax advice. And you know, we're always looking for those that understand the concept of investing with an IRA and the potential tax benefits. And there could be some consequences associated as well. So if you're ready, I'd like to start firing off some questions to you. I don't know that we'll get to all of them, but I think you've, you've kind of answered a little bit of the first one of how you actually got involved with alternative investments as part of your process when you're working with clients as it pertains to tax related, I'll call it alternative advantages that they could be taking. So I'm going to, I'm going to switch just a little bit on that first question and say with your client base, how many of them are actually utilizing a self directed IRA to invest in alternatives?
[00:03:25] Speaker A: I would say roughly about 30, 35% that are actively using their self directing IRA.
[00:03:34] Speaker B: Okay, good. So a decent amount of base that is, that is utilizing it. What types of investments are they investing in from the alternative perspective? Is it primarily heavily real estate? That's what we see a lot of. Or are they dabbling in other alternative investments?
[00:03:53] Speaker A: Yeah, we, yeah, I, I, we have two clients that are investing in precious metals which is kind of a fascinating world when they try to explain it to me. It's all, all but you have roughly the 90, 99% of our clients who have, who are, who have self directed irascible are involved in real estate in one way or another, whether with the actual tangible assets or they're doing private lending out of it.
[00:04:21] Speaker B: Okay.
[00:04:22] Speaker A: And one that's doing one that's doing investing into oil and gas from, from, from, from that angle but really deep knowledge in that space.
[00:04:32] Speaker B: Okay. So from your experience like what is the most common tax saving strategies that investors can use inside of their IRA or maybe you would suggest them using inside of their ira? Is there one in particular or is real estate kind of the funnel that you're seeing most of the individuals going into as you just described?
[00:04:59] Speaker A: Yeah, some there's multiple strategies obviously from the outside of the IRA going in, you have the contribution of six, $7,000 get the exact, but you can get the contribution, get the tax deduction outside of the retirement account but it's also taking advantage of if you're going to invest within it. You have that tax free growth within and being mindful of if you, if you're investing the right way, make sure you're investing the right way. You can get that tax free growth within and then what we try to get people to look towards is the Roth conversion. Yes, if you're doing traditional involved there are tax implications but that's part of a bigger tax planning that's needed of okay, you may have a down year in income. All right, this may be a good time to convert some funds over so that you're already used to if you, especially if you have the capital in place to help Deal with that bit of taxification that way. So called chunking or laddering, there's different ways people call it, but it's just slowly moving those funds over and get into, to the Roth so that it's tax free on the, on the disbursement.
[00:06:20] Speaker B: Is there a certain age where you shouldn't be making those conversions to Roth accounts anymore? I get asked that question all the time. And you know, I've, I've kind of watched a financial planner move my parents in their late 70s over to a Roth and I'm like, oh my gosh, what is happening right now? Why, why are you paying taxes on this later in life? But what's, what's your opinion on that? Is, is it, is it ever too late or is there an opportune time to do that?
[00:06:56] Speaker A: It's. I don't believe it's ever too late. It's, it just has to be part of the planning instead of just because I've seen people at various ages just move a whole over not knowing of the tax implications of okay, well that's a huge chunk of tax. And then it's too late to put the jar back on that. Yeah, cap on that jar again. So it's ever too late. It's just like what's the, what's the full strategy in place to help, to help get the funds over and to, and to start mitigate the taxification. Obviously you've got RMDs if you over, over that as well. So okay, are you, are you hitting people twice? But like you're trying to reduce how much, especially if they have intent, like have tangible assets like real estate in there and they may have to do some type of special, special sale or how to evaluate how much the R and D have to be out. So I don't think it's too late just, just properly planning for it.
[00:08:00] Speaker B: We've talked about how many investors are utilizing their IRAs to invest in real estate and the different types of real estate equity, real estate, REITs, they could be investing in a rental property.
What should they watch out for? Because so many of us think if we invest in an ira, we've got this tax sheltered opportunity to invest or maybe a tax free opportunity to invest. But what are some of the hidden gems that we should watch out for? Or maybe they're landmines. What should we be watching out for when it comes to investing in alternatives in your IRA that could have some potential tax consequences?
[00:08:41] Speaker A: So if you're investing in any type of.
I know we're kind of heavy on the real estate but someone you're investing into a fund or a syndication and they're acquiring the asset via debt. What they really have to be on the watch out for is unrelated debt finance income which is tied to the UBIT tax.
[00:09:04] Speaker B: Yeah.
[00:09:05] Speaker A: And basically what what that is is that like hey, like yes, you invested your funds out of your retirement account but it was bought with 70% leverage to them just throwing out a number.
[00:09:18] Speaker B: Yeah.
[00:09:19] Speaker A: All right. From the IRS perspective the any gains or any rental income you're receiving. Well only well 70 that was really due to but the problem with the damn the property is so you may have UBIT taxes if you have this unrelated if you're. If you're using this leveraged property leverage debt. So that has to be monitor and tracked along the way because those first few years it's probably going to be a net loss with the property if there's heavy renovations being done especially over these past since 2017 with the, with the tax changes and bones appreciation. So people really haven't seen that yet. But as you start to kind of vest rest out you have to kind of watch out. Okay, what is the. The the U UD UDFI portion of this and and be cautious that way also in the aspect of you can't be flipping properties out of your home retirement account. So then you're just going straight to UBIT which could be up to 37. Some 37% tax. At that point you can be a lender to someone's flipping business who's who is qualified to that you can, that you can lend to but you can't run any type of business any type of active business out of your retirement account. So those are kind of two things people need to be be wary of and using their self directed ira.
[00:10:48] Speaker B: I'm always fascinated with people like yourself that read all of this tax code that's out there because one of the things that I was reading not too long ago but had to do with rental properties and that whole fix and flip concept inside of a self directed IRA. And it was really interesting because the code made reference to I believe the word was a minimal amount right. Of that activity could occur before there was a tax consequence. What does minimal mean in the eyes of the irs? Is that one property a year? Is that two? Is it four? Is it six? Is it ten? Because minimal or whatever the exact word was it was similar to that was kind of ambiguous. It wasn't really.
It wasn't really specific. It didn't say no more than four in a 12 month period.
So how do you apply that when you're working with individuals when it pertains to having some, some fix and flips inside of their IRAs?
[00:11:57] Speaker A: We just steer people away from it fully. Primarily because it's subjective.
[00:12:05] Speaker B: Yeah.
[00:12:06] Speaker A: And, and I've talked to a lot of IRS agents throughout my two decades of doing this, and they're like, they're all great people. I had no issues with them. But they are different human beings and everyone interprets it differently. Yeah, just any, any, any law has, everyone has their own interpretation of it. So especially as they look at it to the individual, we're like, okay, if this is just this one time, and that's really kind of extreme, like this is the one time you did this, the funds were there and you decide to go, go for it. Okay, well we can, we can probably get away with that as minimal because there's no other activity and you showing no other history of doing it. But if it's, if it's a bit spotty, he was like, okay, like, like is the, is the risk overall worth the goal or there another way to accomplish what you're trying with what our clients trying to achieve, which is make some money to grow their retirement account? Yeah, that, that's that main thing that we know say, okay, well there's other ways we can do that. So I kind of steer away from the vagueness, especially as they're increasing their audit force and it's like, okay, let's go down this path here and just give you more options to accomplish the same goal and not just avoid growing your ira.
[00:13:31] Speaker B: Yeah, no, I appreciate that.
I'm risk adverse. So there's a couple people that you don't poke the tiger. And I think the IRS is one of those where, why do that if there's ways around that? And again, it could be inside or outside the ira. But you know, your job is to protect us and make sure that, you know, if we need to file taxes on something, we, we do and if we don't, advise us on that as well. So we talked about a little bit about the debt financing and I know a lot of, a lot of structures or debt. Structures of investing include debt. But what about when it comes to operational side of things? Let's say you wanted to invest in a restaurant inside of your ira. Does that also have tax consequences associated with that being an operating business? And what's your take on that?
[00:14:30] Speaker A: The primary aspect that, that your IRA is just a passive partner. Like, like you are not Running the business at all. So you can either do this as, as a debt, a debt partner and claim interest or you can, if you want your IRA to be a partner. Like it's a silent passive partner just receiving distributions from the profit of the restaurant or whatever business it is. So you have the options of doing that. It's just ensuring that obviously the IRA can't do anything. But you as an individual, the beneficiary of that IRA is not involved. I know some people try to like, well, what if I just work in there and don't get paid? It was like, once again, why are we poking this bear? Like in order to accomplish something that could be done a different way.
[00:15:29] Speaker B: Yeah.
[00:15:30] Speaker A: And still achieved.
[00:15:32] Speaker B: Exactly.
[00:15:33] Speaker A: Which is grow the retirement account. Supposed to be passive, let it be, go enjoy a meal and get out. That's it.
[00:15:41] Speaker B: Exactly, exactly. Visit your investment, you know, make sure everything's working as, as intended and then leave it alone. Ensure that it's passive. And that's the beauty of it. There's a lot of investments out there that are providing you that passive opportunity. So take advantage of them. And you're correct. I mean the IRA is just that, it is a passive vehicle for you to be the benefactor of. I say this a lot, but you know, one of the greatest gifts the government ever gave us is a Roth ira. So figure out how to use it because there's very few vehicles out there that are tax free. But let's talk about that for just a second. What other vehicles out there are tax free?
[00:16:24] Speaker A: Yeah. So you always have the opportunity to, to, to invest in something that's helps going to generate a loss for you. And typically you try and get your one loss. And that's why people flock to rental real estate. Great. Like I, I'm getting a return on this thing. I'm getting all these losses and I'm able to, to use those losses to offset the income that I'm, that I'm making. So it is perceived to be tax free within, within, within your IRA itself. So that's always going to be the, the big portion of it there. So. And then also the timing of it. Once again, if you have losses outside of your, your, your Roth, outside of your ira, so you do your conversions or you may have significant amount of losses that can help offset the conversion. Now we're setting up more of a tax free retirement from you as you're getting funds distributed out of your retirement retirement council. So we're just kind of aligning your whole picture of investments and which ones that can generate those losses. A lot of people are getting to oil and gas for the, for the working interest and being able to claim those losses without having to be actively involved with drilling for oil or in the gas industry. And so all the different types of tax credits, especially in this administration when it comes to green energy and stuff like that. I tell people like we can figure out what whoever president is then. All right, that's the investments to go for because they going to shift a lot of tax benefits incentives to that industry.
[00:18:14] Speaker B: Are we allowed to talk politics for a minute?
Just a little bit.
[00:18:19] Speaker A: Oh, here we go.
[00:18:20] Speaker B: Just a little bit.
What do you think? Whom would be better in office as it pertains to taxes?
[00:18:31] Speaker A: It's always going to be the sense of the Republicans are going to be better from a tax perspective than Democrats from an investor business owner perspective because Republicans have been more tending to providing more of those tax benefits to the business and investor world. Then now Democrats are starting to try to catch up a bit.
[00:19:01] Speaker B: Yeah.
[00:19:02] Speaker A: With certain groups and whatnot. But, but they also kind of mentioned stuff about attacking unrealized gains and 1031 exchanges. And it's like okay, that, that shuts a lot of investment investors down on us.
[00:19:20] Speaker B: Yeah.
[00:19:21] Speaker A: Because it doesn't make a lot of sense. So, so it's always going to be the. I won't say always. Which is at this time now how is, how is all kind of be built out? It's like hey, well the Republicans seem to be be the one that's, that's more of a tax friendly to the business investor world while as the Democrats are trying to find ways to incentivize business owners and investors to reinvest but without the additional tax benefits. And so they gotta work out those kinks because you can't have get out.
[00:19:57] Speaker B: Of it both ways. What do you want one or the other? Okay, I'll get off the political train there for just a second. But always curious to see. I mean you're in the industry so it's fun to hear everybody's perspective on that as to, you know, what will happen, what will the benefits be?
All right, let's go back for just a second. As it pertains to. Let's say you do have debt financing inside of your ira. Let's say you do have an operating entity inside of your ira. The client comes to you and says all right, I didn't realize this. Now I do. You know, the original syndication did give them the opportunity to leverage. Of course they told me when they sold it to me, they weren't going to. Now they have, you know, what, what do I need to do in that situation?
[00:20:49] Speaker A: Yeah. So now we're talking about having to file a 990T for, for the, for the IRA and then having the UBIT tax and any UDF, UDFI basically rolls into UBIT. So calculating that within that and determining what is, what is the tax hit that we're talking about.
But we're also just really turning over every stone at that point. Like what other investments? Like what are the other K ones? If this is, if we're, if we're halfway through the year or we're going in the fourth quarter or is there anything, is there any money in your retirement account that can be, that can be invested into something? And I, that's a tough situation because I don't want people to rush into bad deals.
It's like if you have someone trusted and you know you can get some type of loss from them, just kind of assume what we can and get everything in there to help to help mitigate that tax hit that's coming.
[00:21:58] Speaker B: Yeah. Inside the ira, if you have losses, can you report those on your taxes.
[00:22:06] Speaker A: Your personal tax return, Those flow are directly into your ira. So if you don't have any income to report, so there's no 990T that's required, you're just really storing those losses in purgatory until further notice. But unfortunately they cannot be rolled over, that you cannot benefit from a financial or from a tax saving standpoint with your, with your retirement account.
[00:22:39] Speaker B: Perfect. That leads me right into the next topic. Oil and gas. You brought it up. All the benefits that are available, tax benefits that are available in investing in the operation.
From an IRA's perspective, would you suggest that a client invests in oil and gas in their IRA from an operational standpoint? I think your answer is going to be no, but I could be wrong.
Leave that in the cash perspective and inside of the ira, if you have an opportunity to invest in oil and gas. But maybe it's in the land lease. Right. Maybe it's something where a blocker company has been put in place where the operational side is not something that's passed on to investors. Maybe it's more of an equity play. What are, what is your take on that?
[00:23:27] Speaker A: Yeah, the. Definitely avoiding anything from an operational standpoint. Like I said, it's just not worth it from there. Now there's ways you want to put a C Corp, block or corporation in place to help mitigate that so that you can still get that benefit. That is an option there. But the aspect of the operations of it, like I said, it really wouldn't be. Would be something that we'll recommend unless we're going to working with the right attorney to make sure we got the right structure in place with this blocker entity. I tell people that this, this whole thing is a team sport. Like you're not going to try to figure this out on your own or with one other person like you. You got a tax advisor, you got legal advice, you got financial advisor, and you got the operator as well, all kind of all talking to make sure everything is properly, properly set up.
[00:24:24] Speaker B: All right, well, let's go down the path of prohibited transactions. This is always a fun one. I can imagine you hear some stories and you want to do the speak. No hear, no see. No.
But the reality is, as clients come to you, I'm sure, I'm sure this happens and they're like, okay, well, I've got this rental property. Yeah, I purchased it. Yes. You know, I charged my 3% commission on it. And oh, by the way, you know, my husband's the plumber and did some work on the property.
What do you do with that information?
Sorry to put you on the spot, but I have to ask because I know what happens to you all the time.
[00:25:03] Speaker A: Yeah. So. So try to fire your husband.
[00:25:09] Speaker B: Yes, fire your husband.
[00:25:11] Speaker A: To a lot of wives, that's, that's a, that's a great feeling to have. So like, go ahead, let's fire your husband and find new plumber.
Or we get a lot of.
I got my mom living in there or my grandma living in there, and those are ones that are more difficult because you going to have to evict your mom.
[00:25:40] Speaker B: Yeah. You can't use it as a vacation home anymore. You can't. Running down the list of all the things they can't do.
[00:25:46] Speaker A: Right. So yeah. So it tells them we gotta try to revert all that stuff out at that point because the, the risk of the, the whole thing being, being your whole IRA being disqualified and everything in there being taxed. I think it's like 50 excess tax now.
[00:26:05] Speaker B: Yeah.
[00:26:06] Speaker A: Is, is not, is not going to be worth it in the long run. So it's like, like you have to either get that, get, get, get you get your parents out or, or you have to contribute the, the property back to yourself, which has his own tax implications to it. But it's not as bad as this particular, this particular dark cloud kind of hanging over the head with it there. So, so so, yeah, we try to try. Hey, let's get everything reverted out. Let's get out. Get all the. Get all them.
[00:26:40] Speaker B: The.
[00:26:41] Speaker A: The sons, daughters, Gr.
Brothers, sisters are fine. We can go. We can go horizontal.
[00:26:49] Speaker B: Yeah.
[00:26:50] Speaker A: But you especially. There's a spouse involved. Like, we can't. We can't go. We can't go up and down. Yeah. With this. So, so, so, yeah, it's. It's. Is you sometimes uncomfortable conversation, especially because there's. There's family.
[00:27:03] Speaker B: Yeah. You're throwing family out. You're throwing husbands out, you're throwing your rental property out, you're throwing all of this stuff. And, and we hear it all the time as well. And, you know, all we could do is advise, correct, you know, take the corrective actions that we can. You know, as a custodian, we have to disqualify the ira to your point, when they get to you, you know, you could really work with them to make those corrective steps, you know, to minimize that risk as much as. As much as you possibly can. Ultimately, though, if there is an audit that's done, what happens then? What happens? If that comes to the surface, is it immediate disqualification?
Is it. You know, thank you, Larry, for helping me fix this years ago. And we can prove to them that we made corrective actions, therefore, maybe there's some leniency. How does that work? Have you been through that audit process where you've stumbled across the disqualified events that have occurred?
[00:28:06] Speaker A: No, we haven't. Haven't gone across the audit yet.
What we have come across is that it was corrected before the custodian found out.
Because I tell people, like what you just said, like, as soon as the custodian finds out, like, they have to disqualify it, that's. That's risk for. For you and your company. Yeah. At that point. Whereas. Okay, if I just found out about it and no one else knows. Okay. Where we're hitting the ground running, getting everything in place to get this corrected.
No more family working on it. No more family living in the actual renters in there actually market rents and no longer the discounted rents from. From. From family members, so forth and so forth.
But yeah, so it's really going through that because I fortunately have not gone through that type of audit where it's like a young. Could they. Could that particular auditor show leniency? If they show there was an actual effort to get everything cleaned up and things were clean for extended period of time? Yes. They're like, they're. They're not robots, like, exactly. They do have some wiggle room, but if you were just egregious about it and made no effort, then you basically are. You're. You're basically forcing their hand at that point to have to dissolve the IRA and hit you with the excess tax.
[00:29:35] Speaker B: Yeah, not worth it. Definitely not worth it. That's why it's so important to find CPAs that understand the rules and regulations surrounding IRAs. You think that there's a lot out there that understand it, but I got to be honest with you, Larry. We searched for a little while to find somebody that could have this conversation with us because ironically, there's very few that really understand it. So we certainly appreciate, appreciate that. I'm going to get off the IRA thing for just a second, if you don't mind. I mean, it's our podcast, so we can decide to throw that out the window. Let's talk about tax planning for just a second, if you don't mind. Let's. Let's get rid of the ira. Right? I'm just, I'm walking into your office. I'm calling you, I'm, I'm emailing you, whatever the case may be.
You know, I'm. I'm going to use me as an example. I'll use me as an example.
I'll even disclose age and kind of tell me what your thoughts are. Okay, so 47 years old look pretty good, right? I'm just messing with you, Larry.
[00:30:43] Speaker A: We both marry. I ain't gonna start no trouble.
Okay.
[00:30:48] Speaker B: 47 years old and, you know, I'm a CEO of a few companies.
Where should I be focusing my attention from a tax planning perspective, knowing that I'm a higher income earner?
You know, where do you start with a client like, like me?
Yeah.
[00:31:11] Speaker A: So it's really getting.
Digging a deep. A bit deeper than that. Okay, well, 47 or like the CEO aspect of. Okay, how many companies talking about, what's the entity structure of these companies and where they're netting going forward and what is the activity of each of these entities? Because we're most likely going to split. If you have one, you receive one entity. Like for me, I have real estate business. I got my tax business. My real estate business is mostly rentals in there. So we got. So if you're CEO of a rental business. All right, we want that on one side because we got the. Got our passive activity.
[00:31:53] Speaker B: Yeah.
[00:31:54] Speaker A: Within there. And. Okay, the strategies with that is. Okay, are you requiring more assets to flow into there?
Have you done cost segregation studies on those properties so we can Take, take advantage of, accelerate depreciation and bonus depreciation within there so that we can offset that income from there. And then on the other side is more of your, of your active businesses, your IRA business, anything that you're making ordinary income from. All right, because now we have this aspect of this income instead of the self employment taxes.
[00:32:30] Speaker B: Yeah.
[00:32:30] Speaker A: Or your entity just a llc. Is it a single member llc? Is it a partnership? Or is it, or is it not? Then okay, if it's, if you're netting more than $50,000, if you're high netting. If you're, if you're, if you're a high, high earner, you're probably netting way more than that. Or that needs to be. That needs to be. We need to have a holding S Corp in place for all of your active businesses to flow under at that point. So because we have to mitigate that 15.3% FICA tax and then by making you an employee of your holding of your holding S Corp entity, and in very rare cases where we're going to use a C Corp, that means you're, that means no matter how many deductions we have, you're way above the 21% corporate tax rate as of October 16, 2024. We'll see what happens in November.
But, but yeah, so if you're way over the corporate tax rate and everything there's. Okay, we possibly can do a C Corp, but it's not really that likely at that point. All right, so now we have the S Corp in place. We're going to put a.
How many employees that you, if you have employees or not. If you don't, we're going to be looking into a solo 401k plan so you can pay yourself a reasonable salary. Get your, get your employee deduction out of that, and then have an employer matching of it on the, on the back end so you can max out that $66,000 deduction there if you, if you have employees. All right, that's going to be a bit more costly to have a 401k. So then we had to assess, all right, what's the company making? Can it actually afford? Because you. Yeah, 401k. The solo goes out the window.
I was like, hey, well, everyone has to be able to be offered this. Can the company support that?
[00:34:28] Speaker B: Yeah.
[00:34:29] Speaker A: Do you have kids? Like, are they, how old are the kids? Are they involved? Are they gonna be employees of your escort? No. Why is that? Because they gonna have to pay.
And if they're under the age of 17 and they working for mommy's business.
Then we're going to create a separate family management company where there'll be a single member LLC that you hold your escort pays your other entity for the use of your children.
[00:35:04] Speaker B: Yeah, I wish you had a whiteboard right now. I can see the boxes and some lines being drawn everywhere.
[00:35:11] Speaker A: My little board here.
[00:35:14] Speaker B: We're going to do that next time we get together. We're going to have you outline something like this. Maybe we take different types of scenarios, you know, from, from a carry scenario, a really complex scenario, to a, you know, maybe a midstream scenario to a very basic scenario of, you know, I'm 25 years old and I haven't started anything. I haven't started my retirement plan. Where do I start? What do I do?
You know, what should I pay attention to? How do, how do I end with a million dollars when I'm 60 years old?
You know, maybe run through some of those structures. If you're open to it, Larry. If you're not open to it, that's okay. But if you're open to something like that, I think that, that education and our listeners and our clients could get a lot of value out of that. Just, you know, financial literacy is so lacking, you know, in this country. Without having a Larry in your corner.
[00:36:12] Speaker A: No, I'm definitely down and grateful for the opportunity to do that because. Yeah, because everything like that I just kind of ran through is like, I tell people and I, I'm a very informal individual, but I try to be straightforward to people where I like that you're not going to do this with just your job. Like, you're gonna have to have some type of business that you're passionate about. And I make sure that's in place because, like, I don't want people just doing stuff for the sake of, of just trying to, like, find something that you're passionate about and see if you can make that into a business so that you can take advantage of what. Because the government really wants to do is stimulate the economy.
[00:36:51] Speaker B: Yeah.
[00:36:52] Speaker A: People call the tax, the tax code.
Basically. Basically a book of how to save on taxes. And that's one way to look at it. I see it as the government way of.
For lack of a better term, because I can't. The word I can think of right now is manipulate, but that's not where I want to use, but I'm gonna say manipulate the public to do things to stimulate the economy. Yeah, they, they, they, they want, they, they want people to have families and have kids. There's a child tax credit. Yeah. Hey, they, they want people to reinvest in, in rental properties and not just hold on to what they have because the fear of being taxed in the sale. So they offer 1031 exchanges, stuff like that. So like that's how I view the tax code. And then once I know the individual and what they have is okay, now I have to. How do I fit you carry into whatever strategy that makes sense for you.
[00:37:52] Speaker B: Yeah, yeah, absolutely.
[00:37:54] Speaker A: Short term rentals and loopholes, stuff like that. Okay. But if you're not willing to run a short term rental for 18 to 24 months, okay, I'll let you know about it. But I'm not going to harp on too much because I know that's not something that you're going to actually do. Track your hours and all of that stuff. So it has to be aligned to what the individual is willing to do.
[00:38:16] Speaker B: Absolutely. Document, document, document, document and then document some more. You know, make sure you've got, you've got all your T's crossed and your eyes dotted. So that way if, you know, if an audit occurs. I don't know that we have enough IRS agents for that, but if one does occur, you want to make sure that you've covered all of your bases. I'm sure, Larry, you help with clients every day making sure that they cover their bases. On that front, let me make sure I asked all the questions first. Is there any question, Larry? I didn't ask that I should have that. Clients will go, dang, I gotta call that Larry guy.
[00:38:59] Speaker A: We talked about prohibited individuals.
I mean, you did have one question about just the trends. And, and like I said. Yeah, I, I think just more and more people. IRAs are very powerful. I think, I think I'm seeing a shift from, let's go back to 20, 2017 when the tax changes started.
[00:39:32] Speaker B: Yeah.
[00:39:32] Speaker A: And then you start to get the little, you started to get the wave of real estate syndicators and syndications start to come in and people raising capital and promising equity and probably, hey, you're going to get all these losses to offset your taxes. And people not really understand what that meant. To your question earlier, can I use those lawsuits to offset my personal. If it's not. If you ira. No.
So, but, and that's really how I got involved to working more and more with, with IRA custodians because that, that, that, that wave just was like, it was just too much misinformation going on.
[00:40:08] Speaker B: Yeah.
[00:40:09] Speaker A: I was. People starting to get more into funds because the market is shifting. So people need good assets to help offset bad assets and now it's more so. Okay, well SEC is going to start cracking down. We're just going to work with private lenders at this point. So I think people going to see a lot more people just wanting to not really provide equity at any time count or just like just give us a, just give us a loan and we'll pay you back this interest and yeah help mitigate our SEC regulation there. So I'm starting, I'm starting to see that kind of be more of the wave and to be quite honest it's a lot simpler process.
Yeah for sure. Then going to equity route. So that's a trend that people start seeing, seeing more of from there.
We didn't really get into RMDs much but that aspect of hey, if you got this illiquid asset and you have to take a RMD and making sure you're planning enough time or you gotta get evaluation as of the prior December 31st to what to be paid out by this upcoming December 31st, do you sell part of that asset if it's, if it's illiquid and not generating much income or do you do the in kind distribution but you know you have that tax hit.
[00:41:46] Speaker B: Yeah.
[00:41:47] Speaker A: Personal end. But that tax hit is better than the alternative.
[00:41:54] Speaker B: Yeah.
[00:41:54] Speaker A: For the rmd.
And if you do it early enough you may have enough time to reinvest or turn that, turn that asset into a actual rental property for you and leverage certain losses to offset to help on that end there as well. So the RMD is definitely a unique scenario that people need to be aware of as they reach that requirement age and be able to offset that implication. But so yeah, cover that quickly.
[00:42:36] Speaker B: Yeah. The RDs are kind of tricky.
I see that. I say they're tricky because you know, as a custodian we're required to file, you know, our 5498 and you know, it discloses the value of the account and you know we're filing those in the end of May. Right. And so it gives clients an opportunity to get the fair market valuation of the assets in their account marketed to the right or accurate value. And so for those that are not doing that, I know some, some custodians say oh it's our responsibility to do the fair market valuation. I gotta be honest, I don't have piles of cash sitting on the sidelines to do a fair market valuation for you know, 16,000 different alternative assets. Right. Some, some are commodity driven. Right. So precious metals Digital currency, those are things that custodians should be doing on your behalf.
But when it comes to real property, you know, when it comes to the value of syndication, you know, without them filing the proper tax reporting to us, we do not know what the actual value is. And in some cases, clients do need to go out and do a fair market valuation and provide that information to us so that we can modify the value of that asset. So definitely something you want to make sure that you're thinking about as you're nearing the end of the year or the first quarter of the year.
It's kind of unfortunate too there, because there's a lot of companies that file their extensions and then we don't get the K1s until middle of October, right before the 15th, and they're sliding it in as quickly as they possibly can. And, you know, what do you do in those kinds of scenarios? Right. But when it comes to an rmd, you know, that's, that's not something that you get the option of. Well, or whether you do it or not. Right. You got it. You got to take the rmd. So, you know, one thing we say to clients is, you know, is this your only account? Because when we're reporting what that RMD distribution should be from, from the perspective of your account here, that doesn't mean that you couldn't take the RMD from another qualified account. So that's kind of a little bit of a myth. I don't know if you deal with that at all. I know we do where they're like, oh, well, it's my preferred trust account. I need to take it from my preferred trust account. Do you ever stumble across that when it comes to RMDs?
[00:45:08] Speaker A: No, I haven't stumbled across that yet. But I do want, I did want to ask, what are your thoughts on getting the valuation from a CMA report from a real estate agent or brokerage?
[00:45:24] Speaker B: Absolutely, we allow that. Yeah, we do allow that.
[00:45:27] Speaker A: A lot of people just save money from an appraisal because most times, like they are agents or they got close relationships and for an agent to run a report takes them like no time at all. And so. Okay, that, that may be an option for, for, for a lot of people.
[00:45:42] Speaker B: It absolutely is. Again, that's that ambiguous code that's out there. Right, right. That we can accept as a valuation. So we have a valuation form. And really it's just, it has to be related to a third party. Right. It just can't be you valuing it.
But the third party could be the county assessor's website. It could be Zillow. I mean it's a reliable source. It could be a broker price opinion, it could be an appraisal. You know, there's, there are, there are acceptable valuation methodologies out there. You know, if you, if you read a lot into the IRS code and you read a lot into some of their opinion letters, you're able to extrapolate that information and then apply it from a custodial standpoint as acceptable valuations. And that's what we have done. So those are all deemed to be valid evaluations. Crazy that. I never thought Zillow would be on our list. But, but they are as a reliable, as a reliable source. So you know, things along those lines are how we work with clients to help them value, value some of their assets. But some of them, like I said, it's difficult with companies and getting, you know, the tax reporting completed in a timely fashion for, for them to be able to know, you know, what they need to take as far as an RMD before the end of the year.
So yeah, it's, it's a bit of a struggle. But, and you're right, you know, when you're, when you're investing in alternatives, the liquidity becomes an issue. And you know, being able to liquidate, that does become an issue. And before you get into the investment, if you know that you're of age to take an rmd, either make sure that you have enough cash sitting in one of your qualified plans to take that if there's a probability that the investment will not pay back to you. Right. The unknowns, there's no guarantee the unknowns. Make sure that you have that available or make sure that the investment sponsor is willing to allow you to maybe allocate a portion of it to you individually, you know, versus your IRA so that you can take that in kind distribution. So I mean you just gotta be, you gotta know when you're going into it, what age are you at? What are you investing in? What's the time horizon associated with it? I'm sure you're talking to your clients about that as well.
I'm not giving them tax advice, but I'm certainly having those conversations with clients should they ask us those questions because they need to think about it.
And so we see that a lot with precious metals where they invest all of the clients retirement account in it. And you're like, whoa, whoa, whoa, whoa, whoa. What is going on here? First of all, elder abuse, that's the first thing I think. And the second thing I think is this poor person has no idea what's going to happen when they have to take their RMD and the fees associated and you know, the liquidation costs associated and the potential loss of their investment associated. That precious metal deal, long gone. Spent their money. Right? They made their money. They're out. They don't care. But those are all things that we have to, you know, we have to think about. That's why it's important to have, you know, a reliable CPA in your corner that can help you and guide you, you know, through that process. So I'm assuming, Larry, you're taking on clients. Am I wrong?
[00:49:06] Speaker A: Yeah, we're taking on qualified clients. So we always, always take that, take that first call, see if it's a good fit for both sides.
[00:49:13] Speaker B: Y. Absolutely. Absolutely.
Well, I know we have a lot of qualified clients, so, you know, hopefully they'll, they'll reach out to you and get some much needed tax advice that we can't give them as custodians. So we truly, truly appreciate you spending the time with us today. And hopefully we can do, you know, maybe some quarterly touches, maybe some topics. You and I will, you know, talk offline and see if there's some topics. Maybe our listeners have some topics that they're interested in. Leave a comment, subscribe, tell us about it. What do you want to hear about? Maybe they're scared to pick up the phone and call a cpa, but Larry, you don't seem very scary to me. But maybe they're scared to do that. You know, some people are, you know, in, in their own little shells. But if you find yourself needing a cpa, you know, reach out to Larry. He's obviously qualified to handle very complex situations and he understands self directed IRAs. So we really appreciate your time today, Larry. If you've got any final words for our listeners out there.
[00:50:23] Speaker A: The main thing, and we touched on it, of course, the very beginning, is that this, this, all of this is, is really a team sport. You want to make sure you have the right, the right players around you. So that's your custodian, that's your attorney, whether it's a bookkeeper, supervisor, cpa, enrolled agent, they all can kind of do similar things or separate things, but all those individuals separately are going to help support you. I know we're in this world of gabby, you do everything yourself, but you can miss a lot of different things by doing that. But just finding the competent people to work with is worth the cost. It saves you so much time. So you can actually enjoy and look forward to enjoying your retirement. Yeah. When you, when you start pulling the funds out and not have to stress about is everything going right on the front end. So be sure to just, just have those interviews. Take the time to meet to learn who, who's you plan on working with and who you plan on investing with as well.
[00:51:29] Speaker B: Yeah.
[00:51:30] Speaker A: And see if they're on the same page and, and willing to, and it seemed like they're going to do, do right value and your, and your money.
[00:51:38] Speaker B: Absolutely. Don't burn it on the sidewalk. You know, do your due diligence. Make sure it's the right investment for you. Right time horizon provides you what other whatever tax benefits that you're looking for. We're not looking for consequences. We're looking for benefits here, people.
So make sure you're doing that. Well, thank you so much, Larry. We appreciate your time today and we will call it a Done for the Preferred Way podcast today. Thank you so much for joining us. We'll talk to you soon.
[00:52:09] Speaker A: Thank you.
[00:52:09] Speaker B: All right. Bye bye.
[00:52:12] Speaker A: Thanks for joining us for another episode.
[00:52:14] Speaker B: Of PTC Point of View, where retirement.
[00:52:18] Speaker A: Savers meet alternative investments.
[00:52:20] Speaker B: Know someone who's struggling with a retirement strategy?
[00:52:23] Speaker A: Tell them about our show. Can't wait for the next episode. To learn more, visit visit our website@preferred Trust Company.com or give us a call at 888-9907.
