2020-10-02_Friday_QA-Lifestyle_Biz_for_Efficient_Taxation_Sales_Jobs_Asset_Protection_Buying_a_More_Expensive_House

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00:00:26.400 | ♪ Gannon Zone, Auto Zone ♪

00:00:28.880 | - Restrictions apply.

00:00:30.600 | - Welcome to Radical Personal Finance,

00:00:31.680 | a show dedicated to providing you with the knowledge,

00:00:33.280 | skills, insight, and encouragement you need

00:00:35.280 | to live a rich and meaningful life now,

00:00:37.320 | while building a plan for financial freedom

00:00:38.720 | in 10 years or less.

00:00:39.840 | My name is Joshua.

00:00:40.680 | Today is Friday, and that means live Q&A.

00:00:43.040 | Works just like talk radio,

00:00:44.480 | where if you have a question, you wanna make a comment,

00:00:46.440 | you wanna discuss something with me,

00:00:47.640 | you are free to do that.

00:00:48.880 | And as you know from past shows,

00:00:50.680 | these topics tend to be very wide ranging.

00:00:52.560 | Everything from technical financial planning

00:00:54.720 | to broad-based philosophy, ideology.

00:00:57.320 | We talk about all kinds of things.

00:00:58.600 | No subject is barred from a Friday show.

00:01:01.080 | If you would like to join me for a Friday show,

00:01:02.600 | I would love to have you next week.

00:01:04.360 | You can do that by going to patreon.com/radicalpersonalfinance

00:01:06.920 | just search for Radical Personal Finance on Patreon,

00:01:08.920 | and sign up to support the show there,

00:01:10.200 | and you will gain access to the call-in information

00:01:12.400 | so that you can join me on a Friday Q&A show.

00:01:15.480 | With that, we begin with Jose in Colorado.

00:01:17.720 | Jose, welcome to the show.

00:01:18.560 | How can I serve you today, sir?

00:01:20.000 | - Good morning, or good afternoon over there, Joshua.

00:01:23.720 | I appreciate you taking my call.

00:01:27.280 | Just finished listening to your show

00:01:30.480 | on Donald Trump's taxes.

00:01:33.720 | And I never thought I would say this,

00:01:36.480 | but I think I'm actually inspired by Donald Trump.

00:01:39.120 | (Joshua laughs)

00:01:41.800 | But it's something that I've actually been thinking

00:01:46.120 | a lot about lately anyway,

00:01:47.400 | which is decreasing my taxable income.

00:01:50.840 | And so I've got a couple of questions

00:01:54.040 | that are tied with that.

00:01:57.200 | So first of all, this year we sold a property.

00:02:00.720 | I'm in the business of real estate investment.

00:02:03.760 | And I sold the property with the intent

00:02:06.000 | of doing a 1031 exchange.

00:02:07.840 | Some things happened at the last minute

00:02:11.760 | that made that not possible.

00:02:13.760 | And so we're gonna end up with about $200,000

00:02:18.760 | of capital gains, which I wasn't initially planning on.

00:02:26.240 | And so I'm trying to think about ways

00:02:28.240 | where I can decrease my taxable income for the year.

00:02:31.680 | And so that's part one.

00:02:36.240 | And then part two, which is kind of tied in with that,

00:02:39.440 | is my family and I, we really like to travel.

00:02:43.720 | I also do write sometimes.

00:02:46.880 | I blog.

00:02:48.200 | And listening to your episode the other day,

00:02:50.240 | it made me realize, well, maybe instead of,

00:02:53.320 | I've never tried to monetize my blogging,

00:02:56.280 | but maybe if I, is it something that I could do

00:02:59.600 | to actually run the blog as a business?

00:03:04.600 | And then maybe if I start another blog focusing on travel,

00:03:09.760 | actually run it as a business,

00:03:13.240 | with the intent of making money, of course,

00:03:15.440 | a travel blog, would I then be able to deduct

00:03:18.240 | some of my expenses, or most of my expenses

00:03:21.960 | involved with travel, such as maybe an RV, et cetera?

00:03:26.960 | - Good questions.

00:03:28.760 | All right, let's start with the real estate

00:03:31.720 | and the $200,000 of capital gains.

00:03:33.440 | When was the property sold?

00:03:34.880 | - This April.

00:03:37.440 | - This April.

00:03:38.640 | And at this point in time, with the timing

00:03:41.920 | and your property selection, there's no chance

00:03:43.880 | to still consummate a 1031 exchange, is that right?

00:03:47.840 | - Yeah, correct.

00:03:50.160 | - Okay.

00:03:51.120 | So you have a tough row to hoe,

00:03:54.600 | because anything, any expenses that you're going to use

00:03:58.360 | to offset that $200,000 of capital gains

00:04:01.540 | need to be incurred here during 2020.

00:04:04.640 | So across your real estate business,

00:04:07.440 | do you have any big expenses that are sitting there

00:04:09.880 | waiting for you that you need to pay for?

00:04:12.240 | - You know, I really don't.

00:04:18.920 | The biggest expenses are buying the properties

00:04:21.880 | and rehabbing the properties.

00:04:23.520 | And I don't, and those just kind of come along

00:04:26.840 | as they come along.

00:04:28.160 | I don't have any major tools that I need to buy.

00:04:31.760 | The one possibility, I thought, is maybe,

00:04:35.320 | and this also ties in with travel,

00:04:37.160 | especially where this year's travel is probably gonna be,

00:04:42.000 | we try to travel in the winter,

00:04:43.840 | and this year's travel will probably be based

00:04:46.840 | in the US and based out of some sort of camper or RV.

00:04:51.840 | So I did think, well, maybe we could buy a truck

00:04:54.360 | for the business, and maybe the business

00:04:57.080 | would be generous enough to let us use it

00:04:59.400 | this winter for traveling.

00:05:01.000 | That's my only thought with as far as big business expenses.

00:05:04.160 | - Right.

00:05:05.680 | Well, then you're gonna be limited,

00:05:07.560 | because at the end of the day, you have what you have.

00:05:12.480 | So what can you do?

00:05:14.360 | Well, first, have you done any cost segregation studies

00:05:17.480 | for the properties that you own

00:05:18.920 | to see if you can increase the depreciation rates

00:05:20.800 | based upon a cost segregation study?

00:05:22.600 | - You know, I haven't, and for the most part at this point,

00:05:28.680 | most of, I don't have a whole lot

00:05:31.160 | as far as long-term properties, buy and holds at this point.

00:05:34.000 | It's mostly just flipping.

00:05:35.520 | - Right, okay.

00:05:36.520 | So you know as well as I know

00:05:38.160 | that there's nothing magic about real estate.

00:05:40.720 | And I probably overstated a little bit,

00:05:45.320 | I hope I didn't overstate, but in terms of,

00:05:47.720 | when you read about President Trump's low tax return,

00:05:52.720 | the reality is that he has a low tax return

00:05:55.480 | because of losses.

00:05:57.080 | Now, what we can't know,

00:05:58.280 | what I tried to emphasize in the show,

00:05:59.760 | what we can't know is the degree to which those losses

00:06:03.120 | are paper losses that are simply reducing

00:06:06.680 | his taxable burden, but he's having

00:06:08.320 | additional gains elsewhere, or are those real losses,

00:06:12.040 | meaning he's actually getting poorer

00:06:14.240 | because his properties are consuming more money

00:06:16.840 | than what they create.

00:06:18.000 | We can't know that.

00:06:19.000 | Depreciation is not a magic pill.

00:06:23.600 | There's a depreciation schedule.

00:06:25.160 | And so if you're running a hotel,

00:06:27.760 | you have the ability to do a cost segregation study

00:06:30.760 | and potentially take higher rates of depreciation

00:06:33.480 | on your equipment, and a lot of those expenses

00:06:35.800 | will come in the front end.

00:06:37.180 | But at the end of the day, depreciation

00:06:38.520 | always runs out as well.

00:06:39.640 | And so you cannot escape taxes forever,

00:06:42.120 | and you cannot escape taxes on current income.

00:06:44.640 | The only way for you to offset your $200,000

00:06:47.560 | of capital gains is going to be to generate expenses.

00:06:50.960 | But it's one thing to generate expenses

00:06:52.760 | if you have an underlying profitability component

00:06:55.580 | where, hey, I'm generating expenses,

00:06:57.840 | but I'm still gonna be profitable overall

00:07:00.280 | when I look at the overall structure of my business.

00:07:03.280 | It's another thing to just simply spend money

00:07:04.700 | that you don't need to spend.

00:07:06.000 | And so I'm always nervous about people spending money

00:07:09.440 | just for a tax deduction.

00:07:11.520 | If you need something or if you have a business

00:07:14.680 | where you can profitably invest money,

00:07:16.880 | sure, take the tax deduction.

00:07:18.880 | Take the loss if you can do it in a way

00:07:21.080 | that genuinely leads to a profit

00:07:24.520 | and it helps your tax situation, do it.

00:07:26.880 | But I wouldn't even necessarily go out

00:07:28.480 | and buy a new truck just simply to offset the taxes.

00:07:33.380 | Now, if you need a new truck or if you want a new truck

00:07:36.600 | or if a new truck makes financial sense for you,

00:07:38.860 | then by all means, make this the year

00:07:40.680 | that you buy a new truck and think about

00:07:42.600 | what kind of truck that you need.

00:07:44.020 | But at the end of the day, there is no 100% tax rate.

00:07:46.940 | And so you don't wanna spend money just to reduce taxes.

00:07:50.780 | You want to invest money, and if you can see a way

00:07:53.580 | to profitably invest money so that it pays off

00:07:56.340 | in the long term, that's what you do.

00:07:58.420 | And I think that, as I thought more about it

00:08:01.620 | after I did that show, I think that if President Trump

00:08:05.900 | is doing something intelligent, right,

00:08:08.100 | if he's doing something intelligent,

00:08:10.880 | then it's probably due to the structure

00:08:13.980 | of the golf businesses where you have so much land

00:08:17.540 | that you're baking a long-term play

00:08:19.760 | for the appreciation and the value of the land,

00:08:21.420 | the appreciation and the value of the buildings, et cetera,

00:08:24.220 | that that's where your long-term profit play is.

00:08:26.400 | You're trying to capitalize by owning grade A real estate

00:08:29.620 | in highly desirable locations, and yet you have the benefit

00:08:32.940 | of the fact that that property is not currently taxed

00:08:35.700 | because it's just simply an increase in capital gains.

00:08:38.140 | So I don't see a solution for you other than

00:08:41.060 | is there a place that you can profitably invest money?

00:08:43.740 | If there is a place that you can profitably invest money,

00:08:46.080 | do it, if not, pay the tax.

00:08:48.420 | - Yeah, that makes sense, and I agree.

00:08:54.300 | I actually don't like the idea of buying things

00:08:56.720 | just to buy things.

00:08:58.560 | To save 30% or whatever.

00:09:01.920 | Yeah.

00:09:05.720 | - Now, if you expect there to be other income in the future

00:09:08.640 | that you need to shelter, for example,

00:09:10.640 | if you have two businesses, you have a real estate business

00:09:12.680 | that you're involved in full-time,

00:09:14.120 | but you also have another business

00:09:15.640 | that's a cash flow business,

00:09:17.200 | then think about your strategy of real estate

00:09:19.280 | and ask yourself, is there a type of real estate

00:09:21.600 | I can invest in that's gonna give me more depreciation,

00:09:24.040 | more current losses to offset this income?

00:09:26.200 | So, you know, a big multifamily apartment building

00:09:28.760 | might be a good fit.

00:09:30.400 | You can buy one that's gonna require significant capital

00:09:33.400 | up front to do repairs to the property, et cetera.

00:09:37.280 | Something like that is an ideal solution

00:09:39.840 | for your overall tax planning.

00:09:42.680 | But at the end of the day, I always come back to the fact

00:09:45.640 | that there's no 100% tax rate,

00:09:48.600 | and even as things stand currently,

00:09:51.000 | the capital gains tax rates,

00:09:52.440 | the long-term capital gains tax rates,

00:09:54.400 | are among the more fair of the US tax rates.

00:09:58.760 | I don't wanna call them fully fair,

00:10:00.960 | but they are more fair than our income tax rates, certainly.

00:10:05.700 | - Yeah. - All right.

00:10:08.400 | - Yep, that's my--

00:10:10.120 | - Let's talk about your second question.

00:10:11.320 | Can you start a travel business

00:10:14.520 | and use that travel business to fund your family travels

00:10:19.120 | in a way that is going to allow you

00:10:22.560 | to use your business expenses as part of that business?

00:10:27.560 | The answer is certainly yes, you can.

00:10:31.160 | But you will need to be very thoughtful

00:10:32.920 | about how you do this.

00:10:34.100 | So from the IRS perspective,

00:10:36.120 | there is nothing unique about a travel business

00:10:39.520 | versus any other kind of business.

00:10:41.240 | A travel business is a travel business.

00:10:43.520 | So imagine that you are a photographer

00:10:45.640 | and you get a job for National Geographic Magazine.

00:10:48.280 | I think they're still around.

00:10:50.000 | And so you're a photographer.

00:10:52.080 | And National Geographic calls you up.

00:10:53.800 | You live in Denver, Colorado.

00:10:57.200 | And National Geographic calls you up and they say,

00:10:59.280 | we're doing this special series

00:11:02.240 | on the waves off the coast of Portugal.

00:11:05.040 | And we want you to go and we want you to photograph

00:11:07.920 | the winter waves there that are 85 feet high

00:11:10.360 | off the coast of Portugal.

00:11:11.960 | So you say, fine, right?

00:11:13.840 | And so you take out

00:11:14.660 | your National Geographic business credit card.

00:11:16.740 | You're an employee of the company.

00:11:17.760 | You take out your National Geographic business credit card.

00:11:20.160 | You call up the airline.

00:11:21.060 | You buy an airplane ticket to Portugal.

00:11:23.000 | You reserve a hotel for yourself there in Portugal.

00:11:25.620 | You go to the beach with your camera.

00:11:27.200 | You take those pictures.

00:11:28.780 | Then you come back from that business trip.

00:11:31.400 | You're there for a couple of weeks

00:11:33.240 | to cover the surfing competition.

00:11:34.800 | And you gotta be there every day

00:11:36.000 | because the waves are,

00:11:38.040 | the waves are,

00:11:39.200 | you don't know when to expect them.

00:11:42.200 | And the surfing competition goes over the course

00:11:43.640 | of a couple of weeks.

00:11:44.720 | Then you come back to your home in Denver, Colorado.

00:11:47.960 | When you arrive back at your home in Denver, Colorado,

00:11:50.680 | you submit an expense report to your company

00:11:53.160 | telling them about all of the expenses that you've had.

00:11:56.900 | You tell them about the hotel cost, the plane cost.

00:12:00.940 | You tell them about the food that you ate on the trip.

00:12:03.040 | And all of that is deductible business expenses

00:12:05.920 | for the National Geographic Organization.

00:12:07.840 | It doesn't matter whether they paid you

00:12:08.800 | as an independent contractor

00:12:09.800 | or you submitted as an expense report.

00:12:11.800 | It doesn't matter whether you did it as an employee.

00:12:14.780 | All of those are deductible expenses.

00:12:18.000 | The IRS does not say that because National Geographic

00:12:21.280 | is a big business and a big known brand

00:12:24.280 | that they can deduct the travel expenses

00:12:25.960 | for their photographers.

00:12:27.300 | But you can't because you're not yet a big business

00:12:30.120 | or you're not yet a big brand.

00:12:32.440 | So let's say that you have an idea

00:12:34.040 | to start your own travel magazine.

00:12:36.000 | And you sit down and you figure out

00:12:37.880 | is this something that could be profitable?

00:12:39.440 | You write a business plan that shows,

00:12:41.040 | listen, if I start this offbeat travel magazine,

00:12:43.860 | I'll have the ability to create

00:12:46.720 | really just stunning photojournalism

00:12:48.640 | that everybody's gonna be really interested in.

00:12:50.760 | And you decide that you're gonna start a surfing magazine.

00:12:54.560 | Your first feature is going to be a feature

00:12:56.920 | on the Giant Wave Surf Competition in Portugal.

00:13:01.120 | So you do all exactly the same thing

00:13:02.880 | for your own business to start your own magazine.

00:13:05.640 | There's no difference from a tax perspective

00:13:08.500 | about your ability to do that starting your own magazine

00:13:12.200 | versus National Geographic.

00:13:13.760 | So that's the first thing is you gotta get very clear

00:13:15.800 | on what's allowed and what's not allowed.

00:13:18.000 | There's no, National Geographic and you

00:13:20.320 | have exactly the same tax code.

00:13:22.200 | And the tax code doesn't say,

00:13:24.160 | well, you have to, you're having fun on the job,

00:13:27.240 | so therefore you're not allowed to,

00:13:29.120 | you can't deduct it, right?

00:13:30.720 | 'Cause you can't deduct fun.

00:13:32.160 | The tax code doesn't say whether you can deduct your fun.

00:13:34.360 | The tax code says that you can deduct business expenses

00:13:37.340 | that are ordinary and necessary business expenses.

00:13:40.600 | Now, you can imagine that if you had a desire

00:13:44.660 | to start this travel magazine,

00:13:46.600 | this surfing travel magazine,

00:13:48.400 | and you spent nine months a year traveling

00:13:51.040 | to far-flung surf spots and putting yourself

00:13:54.200 | in a situation where you, each and every week,

00:13:59.200 | you're filming these things

00:14:01.400 | and those never make it public, right?

00:14:03.360 | Those never make it to a magazine,

00:14:05.860 | those never make it to the internet.

00:14:06.980 | You can imagine that in an audit,

00:14:08.940 | when you submit, I have $130,000 of travel expenses

00:14:12.140 | that I'm trying to deduct,

00:14:13.080 | you can imagine that being audited.

00:14:15.160 | But there's no rule that says that a paper magazine

00:14:18.820 | is more appropriate than an online magazine.

00:14:22.960 | There's no rule that says your magazine

00:14:24.440 | can't be a PDF magazine.

00:14:26.060 | There's no rule that says the travel photographer

00:14:29.320 | who takes pictures for National Geographic

00:14:31.620 | is not equally, that somehow that's allowed,

00:14:35.700 | but the travel photographer who takes pictures

00:14:37.900 | for Instagram is not allowed.

00:14:39.940 | There's not a rule on that.

00:14:41.220 | So you can build a business like this

00:14:44.540 | that allows you to live a nice lifestyle

00:14:48.500 | and to put these kinds of expenses

00:14:50.300 | into a business expense deduction.

00:14:53.700 | Now, let's talk about your children and your wife,

00:14:55.980 | and we'll cover the RV, and then I'll tell you

00:14:57.380 | how to do this and how to do it properly

00:14:59.100 | so that you are steering clear of the edge.

00:15:02.060 | Because the biggest thing you wanna do

00:15:03.260 | is wanna know how to do it properly if you do it

00:15:05.460 | so that you don't have a problem.

00:15:07.180 | Now, if you're going to Portugal

00:15:10.020 | as a National Geographic photographer,

00:15:12.420 | and you ask them, "Listen, I've got a nine-year-old son

00:15:16.100 | "who I'd like to take with me,"

00:15:17.940 | and you ask them, "Do you mind?"

00:15:19.980 | They'll say, "Sure, you can take your nine-year-old son

00:15:21.740 | "with you after all, you're just gonna be standing

00:15:22.980 | "on the beach with a camera and a tripod taking pictures.

00:15:26.000 | "Your nine-year-old son can stand there next to you

00:15:27.580 | "and watch the surfing."

00:15:29.000 | But National Geographic would not pay

00:15:31.780 | for your nine-year-old son's travel expenses.

00:15:34.460 | You know, my dad did a lot of business travel

00:15:35.860 | over the years, and many times he would take my mom with him

00:15:38.260 | but he would always cover my mom's expenses.

00:15:40.300 | It was no big deal.

00:15:41.340 | She would hang out, and if they were in Stockholm, Sweden,

00:15:44.440 | then she would just spend the day

00:15:45.980 | cruising around Sweden by herself.

00:15:47.540 | She would spend time with my dad at night.

00:15:50.220 | But, and the company paid for my dad's hotel room,

00:15:53.660 | the company paid for my dad's food,

00:15:55.220 | the company paid for my dad's transportation,

00:15:58.100 | but my dad paid for my mom's plane ticket and for her food.

00:16:01.500 | So any additional costs, he covered personally.

00:16:04.260 | And that's the way the tax code works.

00:16:05.860 | So let's say that you wanna start

00:16:07.220 | your independent travel photography business,

00:16:09.460 | you're starting your own independent magazine,

00:16:11.740 | and you wanna take your nine-year-old son with you.

00:16:13.980 | Well, if your nine-year-old son

00:16:15.420 | is not an employee of the business,

00:16:17.220 | then you can't deduct your nine-year-old son's expenses.

00:16:20.360 | So you can't fly to Portugal and deduct two airplane tickets.

00:16:24.300 | You can deduct yours, but you'll pay for his

00:16:27.160 | out of your pocket if he's not an employee of the company.

00:16:30.140 | You can have a hotel room, and it's no big deal

00:16:32.240 | if your son uses the second hotel room.

00:16:35.260 | But what you wanna make sure of

00:16:36.460 | is that there's no additional cost for that second,

00:16:38.940 | for that two-bed hotel room versus the one-bed hotel room.

00:16:41.980 | And so a very scrupulous accountant

00:16:44.260 | who wants to be totally audit-proof

00:16:46.720 | would get a quote for a single occupancy room,

00:16:50.180 | and then they get a quote for a double occupancy room.

00:16:52.540 | And if there's an additional cost

00:16:54.700 | to the double occupancy room,

00:16:56.660 | then they would not deduct that additional cost.

00:16:59.500 | If the single occupancy room is $100 a night

00:17:01.380 | and the double occupancy room is $110 a night,

00:17:03.880 | you can deduct the $100 a night for you,

00:17:06.360 | but you can't deduct the marginal $10 a night for your son.

00:17:09.440 | If you're going out to dinner, you would get separate checks.

00:17:12.660 | You would pay for your son separately

00:17:14.580 | and not bill that to the business.

00:17:16.380 | You would pay for you as an individual.

00:17:18.540 | Now, it's rather obvious

00:17:19.960 | that there's some wiggle room in there.

00:17:21.680 | I would guess, although I don't know this,

00:17:23.440 | I would guess that when my dad did his expense reports,

00:17:25.840 | his bosses were fairly lenient with him.

00:17:28.420 | They probably didn't check to say,

00:17:30.620 | "Was your $40 that you bought,

00:17:33.260 | that you charged for this particular meal

00:17:35.420 | in Stockholm, Sweden,

00:17:36.780 | was that for an appetizer and a full entree

00:17:40.980 | that you ate yourself?

00:17:42.940 | And then did you separately bill

00:17:44.420 | an additional entree for your wife?

00:17:46.220 | Or was that an appetizer and an entree

00:17:48.520 | that you and your wife split?

00:17:49.640 | And because you don't eat very much, you're split."

00:17:51.780 | You get the point, that there's obviously

00:17:53.180 | some margin in all these things,

00:17:55.220 | where it's never that specific.

00:17:59.340 | The laws are clear, but there's a lot of,

00:18:01.580 | there's a good bit of wiggle room

00:18:02.780 | in some of this stuff for practicalities.

00:18:04.820 | So, you can travel with your children,

00:18:10.780 | you can travel with your wife,

00:18:12.100 | but you can't deduct their expenses

00:18:14.060 | unless they're part of the business.

00:18:15.740 | Now, let's take it to a different level.

00:18:17.500 | Let's say that your son

00:18:18.980 | has his own surf travel magazine,

00:18:24.100 | and he recognizes that there's an unfulfilled niche

00:18:27.500 | for an online magazine,

00:18:29.580 | specifically dealing with young surfers.

00:18:33.020 | And he wants to go and he wants to interview

00:18:35.820 | for his online magazine and for his YouTube channel,

00:18:38.340 | he wants to interview the young surfers

00:18:40.800 | that are in the surf competition.

00:18:42.020 | And so, you and he together

00:18:44.500 | are going to travel to all these places.

00:18:46.940 | And he's not just a bystander,

00:18:48.500 | he's actively running the camera.

00:18:50.140 | In fact, he's doing a lot of the interviews.

00:18:52.260 | So, he's very much part of the business.

00:18:55.300 | Well, in that situation now,

00:18:56.380 | he's clearly an employee of the business.

00:18:57.940 | He's not just a tag along,

00:18:59.180 | he's clearly an employee of the business.

00:19:01.020 | And so, his expenses are every bit as deductible

00:19:03.880 | as your expenses are.

00:19:05.060 | And so, you can imagine how you could expand this.

00:19:07.500 | If you have a business where the nine year old

00:19:10.480 | is very much a part of the business,

00:19:12.740 | then you can incorporate the whole family.

00:19:16.120 | Your wife can run a camera,

00:19:17.700 | you can run a camera,

00:19:19.040 | your daughter can run sound,

00:19:20.600 | your son can be the on-air talent,

00:19:23.000 | and then your other child is taking pictures,

00:19:25.880 | running the third camera and taking pictures

00:19:27.660 | and updating the social media

00:19:28.960 | while you guys are doing the interviews.

00:19:30.720 | Well, now you have a family business

00:19:32.400 | where it's genuinely part of the family

00:19:35.380 | where everyone is involved in it.

00:19:37.240 | And there is nothing in the tax code

00:19:39.200 | that says that you cannot hire your nine year old son

00:19:42.980 | to run a camera,

00:19:44.100 | assuming that your nine year old son

00:19:45.480 | is capable of running a camera.

00:19:47.120 | Now, you're not gonna win the argument

00:19:48.800 | that your one year old son is running a camera.

00:19:51.480 | But if your nine year old is running a camera

00:19:53.400 | or your nine year old is on-air talent,

00:19:55.480 | there's nothing that says it can't do it.

00:19:57.000 | And there's also nothing in the tax code

00:19:58.520 | that says that you can't shoot the entire thing

00:20:01.280 | with an iPhone, right?

00:20:03.040 | An iPhone today, a new modern iPhone

00:20:06.440 | has every bit as high of a recording quality

00:20:09.600 | as a professional TV camera did eight years ago.

00:20:12.360 | So, there's no reason why you can't do this

00:20:14.720 | with your iPhones.

00:20:16.000 | So, I hope you see what I'm saying

00:20:17.480 | is that the tax code is very, very clear,

00:20:19.720 | but it doesn't specify these details.

00:20:21.880 | So, if you design a business

00:20:24.320 | that incorporates your family,

00:20:25.920 | if you design a business that incorporates a lifestyle

00:20:28.580 | that you want to live,

00:20:29.880 | if you do that, you're not doing anything questionable.

00:20:34.880 | So, what do you have to do to prove that this works?

00:20:37.640 | Well, first of all, you need to be very careful

00:20:40.000 | that from the very beginning,

00:20:41.240 | this is a business and not a hobby.

00:20:43.960 | Because you cannot deduct hobby expenses,

00:20:47.600 | but you can deduct business expenses.

00:20:49.920 | That is your most important thing to be careful of.

00:20:52.960 | You cannot deduct hobby expenses,

00:20:55.140 | you can deduct business expenses.

00:20:57.380 | So, you wanna make sure that this is not a hobby.

00:21:00.680 | So, from the very beginning, you need to run a business.

00:21:04.480 | What does that mean?

00:21:05.300 | Well, you start with a business plan.

00:21:07.140 | One of the most valuable documents that you can create

00:21:09.720 | is a business plan.

00:21:11.880 | And so that if you're sitting with an auditor

00:21:14.000 | and the auditor says,

00:21:15.120 | "This Youth Surf Magazine thing that you guys do,

00:21:19.280 | this sounds a lot like a family hobby.

00:21:21.760 | I think you guys just like to travel

00:21:23.600 | and you're doing this for fun

00:21:25.240 | and there's not actually a business plan."

00:21:27.380 | But if you can pull out your business plan

00:21:29.100 | that was designed one year before you started the business

00:21:31.740 | or six months before it,

00:21:32.920 | and here's a 30-page business plan showing,

00:21:34.680 | "Look, here are three competitors who are doing this.

00:21:37.440 | Here's our plan to make money on ads, on YouTube revenue,

00:21:40.320 | on building a YouTube channel.

00:21:41.480 | Here's our brand sponsorship plan

00:21:44.400 | where we think that if we can grow our Instagram channel

00:21:47.020 | to 300,000 followers, we can monetize that

00:21:51.240 | for a promoted Instagram post

00:21:53.760 | for $5,000 per promoted Instagram post.

00:21:56.260 | And look, here's all the research that I've done

00:21:57.760 | on how I can do that."

00:21:58.920 | So, that's one of the most important things.

00:22:00.120 | You wanna have that business plan

00:22:01.660 | that clearly shows what's going to happen.

00:22:04.040 | You wanna, in that business plan,

00:22:05.240 | clearly show how this business can be profitable

00:22:08.340 | and outline what the business idea is

00:22:10.680 | and outline who's gonna be involved

00:22:12.720 | and how it's gonna work.

00:22:14.160 | There's no reason why you and your three children

00:22:16.200 | can't be all of the employees of the business,

00:22:18.280 | but you would wanna make sure that you understand

00:22:19.840 | why those three children are necessary

00:22:21.680 | and what they're actually doing in the business.

00:22:24.120 | The next thing is, if possible, you want to show a profit.

00:22:27.680 | Now, there are what are called

00:22:29.080 | the hobby loss rules of business losses.

00:22:33.000 | There is no requirement from the IRS perspective

00:22:37.340 | that you actually make a profit

00:22:39.320 | in order to prove that you have a business.

00:22:41.680 | One of the most common misconceptions that people have

00:22:44.160 | is they believe that I have to make a profit

00:22:47.120 | in order to prove that I have a business.

00:22:52.120 | That is not true.

00:22:54.800 | There are many businesses that lose money every single year

00:22:59.800 | for a very long period of time.

00:23:02.520 | And in that situation,

00:23:04.400 | they can still deduct those losses.

00:23:07.880 | Now, the deductibility of losses will be determined

00:23:10.680 | based upon the function of the business.

00:23:12.720 | If you're running this business as a sole proprietorship,

00:23:15.340 | losses from an active sole proprietorship business

00:23:18.440 | can be deducted against your other forms of earned income,

00:23:21.480 | which is very important for you to know.

00:23:23.380 | If the business does not have

00:23:25.560 | a significant liability exposure,

00:23:28.080 | and if you expect that in the future,

00:23:30.320 | this business will,

00:23:31.640 | if you expect it to create some losses for a while,

00:23:35.200 | you wanna think very, very seriously

00:23:36.940 | about running it as a sole proprietorship,

00:23:38.880 | because that's the most advantageous scenario.

00:23:41.440 | If your wife has $50,000 from her earned income,

00:23:44.560 | and your business produces a $20,000 loss,

00:23:47.600 | well, now that $20,000 business loss

00:23:49.880 | can be used to reduce her earned income

00:23:52.240 | from a taxable income of $50,000

00:23:54.280 | to a taxable income of $30,000.

00:23:56.120 | Thus, that's valuable.

00:23:57.380 | Now, the other forms of business ownership,

00:23:59.040 | be it an S corporation, C corporation, et cetera,

00:24:01.280 | have more limited deductibility of losses,

00:24:03.520 | but they do still exist.

00:24:06.760 | So back to the hobby loss rules.

00:24:08.660 | One of the things that is important

00:24:10.660 | is that you understand what the hobby loss rules are.

00:24:13.420 | What the hobby loss rules are is they are a safe harbor.

00:24:16.940 | And basically, the IRS says that if you can prove

00:24:20.620 | that your business is profitable, and you're making money,

00:24:24.020 | then we know that you're running a business,

00:24:25.420 | and you're not running a hobby.

00:24:26.900 | And so we understand that many businesses

00:24:29.140 | have some losses in the beginning,

00:24:32.340 | but at the end of the third year,

00:24:34.740 | if we sit down and we look and see that you're profitable,

00:24:37.080 | and then you have a safe harbor because you're making money.

00:24:40.200 | So the safest thing to do is to make sure

00:24:42.760 | that your business is making money.

00:24:44.780 | Now, we all know that some businesses

00:24:46.200 | make more money than others.

00:24:47.400 | We all know that you might have a business

00:24:49.040 | that you designed to make money,

00:24:50.440 | and you might run it to make money,

00:24:52.240 | but it may not work out.

00:24:54.120 | That's the case, that's true.

00:24:55.960 | But you still wanna make sure that you make money

00:24:58.120 | if you wanna be absolutely safe and have that safe harbor

00:25:01.520 | from the perspective of the hobby loss rules.

00:25:03.760 | So make sure that you make money.

00:25:05.460 | And along the way,

00:25:06.340 | if it looks like you're not making money,

00:25:08.300 | you wanna make sure that you're doing the things

00:25:10.760 | that a business would do to make sure

00:25:13.500 | that you're making money.

00:25:15.820 | So for example, if you started a magazine,

00:25:18.420 | a surf magazine for children,

00:25:20.460 | a digital surf magazine for children,

00:25:22.820 | and that digital surf magazine for children

00:25:25.060 | took you all around the world.

00:25:26.180 | In the first year, you lost $100,000.

00:25:28.980 | And then in the second year, you lost $100,000,

00:25:31.220 | and you still had a revenue of zero.

00:25:33.680 | You wouldn't keep traveling around the world

00:25:35.620 | spending $100,000 a year with a revenue of zero

00:25:37.820 | unless you thought that something

00:25:38.860 | would actually was gonna change.

00:25:40.460 | What would you do?

00:25:41.440 | Well, you would go to a conference

00:25:42.940 | on how to make money online,

00:25:44.500 | and how do people make a business as Instagram influencers

00:25:47.540 | and with digital magazines and with events, et cetera.

00:25:50.180 | You would hire a consultant to help you.

00:25:52.580 | You would focus on making money.

00:25:54.820 | That's the most important thing I can tell you

00:25:56.260 | is that any business that you run

00:25:58.300 | must be focused on making money.

00:26:00.320 | So if you can make money, then you get a safe harbor.

00:26:03.140 | And so if you can generate a profit

00:26:05.300 | in at least three of the last five years,

00:26:07.780 | now you have a much stronger position

00:26:10.580 | to not have these expenses disallowed,

00:26:12.740 | even if these expenses are not,

00:26:16.780 | even if they're significant.

00:26:18.420 | So with that in mind, what I would recommend that you do

00:26:23.060 | is you imagine the kind of business

00:26:26.320 | that is most likely to lead you to profit

00:26:29.880 | and to be the kind of business

00:26:31.140 | that your entire family can be involved in.

00:26:33.180 | And there are many of these kinds of businesses

00:26:35.060 | that you can do.

00:26:36.100 | Business does not have to be joyless.

00:26:38.100 | Businesses can be fun.

00:26:39.220 | Businesses can be interesting.

00:26:40.540 | And the expenses associated with them

00:26:42.580 | don't have to be without joy.

00:26:44.280 | The expenses do have to be ordinary and necessary expenses

00:26:48.620 | for the goal of making a profit.

00:26:50.020 | And within those guidelines,

00:26:51.820 | you can build the business that fits your dreams.

00:26:55.780 | And there are many things that you can do,

00:26:57.260 | including today with, like you said,

00:26:58.920 | with things like photography, et cetera.

00:27:00.380 | There are many people who make a living online

00:27:02.660 | simply taking photos and selling them as stock photography.

00:27:05.860 | And so I could do that.

00:27:08.220 | And if you have an eye and you have the equipment,

00:27:09.740 | you don't need fancy cameras,

00:27:11.660 | but if you have the eye for it and you recognize that,

00:27:14.140 | and you say, "My business is I'm gonna sell,

00:27:16.100 | "I'm gonna set up a stock photography business

00:27:17.900 | "where I take photos all around the world,

00:27:19.960 | "or I take little video snippets

00:27:21.340 | "and I sell these photos and license these photos

00:27:23.400 | "to the sites that sell them

00:27:25.300 | "and license this as B-roll video,"

00:27:27.460 | you can do that.

00:27:28.300 | And your expenses associated with that endeavor

00:27:30.180 | are every bit as legitimate as the expenses

00:27:33.540 | that National Geographic has with their stories.

00:27:36.820 | Your stories that you write for a travel blog

00:27:39.820 | are every bit as legitimate as National Geographic stories

00:27:42.940 | if you have a business plan

00:27:45.140 | that leads to profit with your business.

00:27:47.280 | Now, the last thing I would touch on is the RV.

00:27:49.980 | RVs are tricky because that's an area of significant abuse.

00:27:54.500 | And so what I would say is you can research that further,

00:27:57.260 | but in general, RV expenses are not deductible expenses

00:28:02.060 | because the IRS, even for those who say,

00:28:04.960 | "Well, I'm gonna use the RV to go and I make my living,"

00:28:08.620 | you know, there are people who make their living like this,

00:28:10.020 | "I make my living traveling around the country

00:28:12.080 | "and going to weekend expos

00:28:14.200 | "and putting my products out for sale

00:28:16.480 | "at these weekend expos."

00:28:17.940 | In general, the IRS will not allow you

00:28:20.140 | to deduct expenses associated with the RV.

00:28:22.580 | So what you wanna do is you wanna think about that

00:28:24.420 | and then figure out,

00:28:25.540 | "Is this a big deal for me

00:28:30.540 | "that I really need to do this differently or not?"

00:28:34.140 | Now, I have never been able to find any IRS cases,

00:28:37.780 | you know, private letter rulings or revenue rulings

00:28:40.540 | that have answered all the details.

00:28:42.480 | But what I would say is that there's probably some degree

00:28:44.940 | of variability here.

00:28:49.260 | So for example, let's say that I really wanted

00:28:51.860 | to be able to deduct an RV myself.

00:28:53.680 | What would I do?

00:28:54.860 | Well, I would make sure first of all,

00:28:56.480 | that the RV is the thing that is necessary.

00:28:59.860 | So maybe my business is, I hesitate to say horse racing,

00:29:03.500 | but it is a legitimate business.

00:29:05.260 | But maybe my business is horse racing.

00:29:06.940 | I'd rather use car racing,

00:29:08.220 | but horse racing gives me a set of facts

00:29:10.060 | that's a little bit clearer.

00:29:11.300 | So if my business is horse racing

00:29:13.260 | and I have these prized horses,

00:29:15.220 | maybe my business very well might be rodeo, right?

00:29:18.220 | Maybe your business is you're trying to do something

00:29:23.260 | related to the rodeo.

00:29:24.180 | You're an independent, you're a showgirl,

00:29:28.620 | you know, the girls that do the awesome tricks on horseback

00:29:31.020 | or you're a cowboy and you use the horse and whatnot.

00:29:34.720 | Well, that situation, you might buy yourself a nice RV,

00:29:39.400 | but it's one of the RVs that has quarters

00:29:41.480 | for your horse inside of it

00:29:42.720 | and also living quarters for you.

00:29:45.200 | And you need to be with your horse 24/7

00:29:48.160 | because your horse needs to be cared for,

00:29:50.200 | it needs to be fed, it needs to be exercised,

00:29:51.840 | watered, et cetera.

00:29:53.280 | Well, in that situation, I would feel very comfortable

00:29:56.400 | deducting my RV expenses as part of my business

00:30:00.200 | of being a rodeo cowboy or a rodeo cowgirl.

00:30:03.560 | That makes a lot of sense

00:30:04.740 | because the RV is a fundamental tool in that business.

00:30:07.480 | The RV is what allows me to travel all around the country,

00:30:10.260 | caring for this horse, and it's a horse trailer as well,

00:30:13.640 | which is clearly connected to the business.

00:30:15.780 | I think that those RV purchase expenses

00:30:17.640 | would clearly be business deductions.

00:30:19.840 | And also all of the expenses associated

00:30:22.600 | with driving from one place to another

00:30:26.180 | with my horse to compete in these rodeos,

00:30:28.680 | these are clearly business expenses.

00:30:30.460 | Those are clearly business miles.

00:30:32.620 | It's much less certain, however,

00:30:35.360 | if the facts start to be not so clear.

00:30:38.400 | It's much less certain if you say,

00:30:40.080 | I'm gonna buy this RV and you don't use it all the time.

00:30:45.080 | In fact, most of your travel in it is personal travel,

00:30:48.200 | but you take it out once or twice a weekend

00:30:50.480 | for your child's motocross race.

00:30:52.580 | Well, now you've got a big, big problem.

00:30:55.180 | The other thing you wanna look at

00:30:56.280 | is that you wanna be very careful about business use of it.

00:30:59.280 | So if you had an RV and you were trying to deduct it,

00:31:01.840 | then I would keep a logbook.

00:31:02.960 | You better have a logbook of how many nights

00:31:04.520 | is this thing used and the amount of time

00:31:06.040 | that's being used for business versus other things as well.

00:31:09.160 | So on the RV thing, what I would say

00:31:10.920 | is it's probably not deductible.

00:31:12.840 | And so I wouldn't push that one

00:31:17.120 | because there have been some guidance

00:31:19.560 | that's come down on RVs that basically RV expenses

00:31:22.160 | have generally been disallowed.

00:31:23.700 | But if your family business is something

00:31:25.920 | that could be created where the RV is clearly necessary,

00:31:29.640 | clearly important, maybe, maybe.

00:31:32.720 | That'll give you some thoughts to go on, Jose.

00:31:35.760 | - Yeah, that's great.

00:31:38.200 | I really appreciate this.

00:31:39.120 | I'm definitely gonna come back and re-listen to this.

00:31:41.760 | - Cool, my pleasure.

00:31:44.080 | Well, thank you for calling in

00:31:44.920 | and best of luck to you in your tax savings efforts.

00:31:47.800 | All right, I guess my answer

00:31:49.200 | was probably a little bit too long.

00:31:51.360 | I had four callers drop off,

00:31:52.560 | but I still got four more to go.

00:31:53.620 | So we go to California next.

00:31:54.600 | Welcome to the show.

00:31:55.440 | How can I serve you today?

00:31:56.480 | - Hi, Joshua, is this me up?

00:32:00.120 | - That's you up.

00:32:00.960 | - All right, thank you so much.

00:32:03.440 | So I'll try and be quick right now.

00:32:05.880 | Let me explain my situation.

00:32:07.880 | So I'm 25 years old.

00:32:09.480 | I currently hold three jobs.

00:32:13.760 | One is I'm an auditor for a public accounting firm.

00:32:17.520 | The other, I work as a dog hygienist on Saturdays

00:32:21.280 | and I work under a veterinarian.

00:32:22.640 | And then I also have a minor bookkeeping business.

00:32:25.300 | And so, and that's very, very minor.

00:32:29.040 | Basically what I'm trying to do is to end all three of these

00:32:32.080 | and I want to go into a sales career.

00:32:35.000 | I believe I have the personality to do it.

00:32:37.640 | I believe I have the determination, organization, et cetera.

00:32:43.160 | My goals are basically that I want to invest

00:32:45.400 | in real estate along the way, have passive income,

00:32:49.040 | be able to have other businesses to have passive income

00:32:52.160 | as well so I can live the life

00:32:53.480 | that I really do want to live.

00:32:54.960 | And I feel like accounting is great, but it's very static.

00:32:58.320 | It's good income, but that's going to increase slowly

00:33:00.680 | and steadily, not necessarily very quickly

00:33:03.560 | like how sales could be.

00:33:05.280 | So I just wanted to get your thoughts about that.

00:33:07.560 | - Do you currently have a CPA license?

00:33:10.060 | - No.

00:33:12.080 | - Do you have an ambition to get one?

00:33:15.560 | - No.

00:33:16.560 | - You don't have any ambition to get one,

00:33:17.760 | you're not interested enough to study and get it,

00:33:19.320 | you really want to make the career change faster.

00:33:22.440 | - Exactly.

00:33:23.280 | - Okay, totally fair.

00:33:24.440 | So what kind of sales have you thought about going into?

00:33:27.240 | - So I'm thinking about medical sales.

00:33:30.440 | I can, doing the hygienist as a dog,

00:33:33.840 | a cat and dog hygienist, I can leverage that

00:33:37.400 | to say that I had some sales experience in there

00:33:40.200 | when I'm recruiting for a medical sales job

00:33:42.920 | because I did talk to veterinarians

00:33:44.920 | and kind of sell the practice to other veterinarians.

00:33:48.220 | - Do you have a wife or children?

00:33:51.340 | - No sir, I'm single, or I have a girlfriend,

00:33:55.440 | but we're not married.

00:33:57.920 | I have about $20,000 saved up

00:34:01.040 | and we're looking to move to a lower cost area

00:34:03.840 | sometime next year.

00:34:04.880 | So this would all be like next year.

00:34:06.880 | - Yeah.

00:34:08.080 | Well, I love it.

00:34:08.920 | I think that sales is certainly

00:34:10.920 | one of the best money-making things

00:34:12.760 | that you can possibly be engaged in.

00:34:15.080 | Then sales skills, to acquire sales skills

00:34:18.480 | at an early age in your life,

00:34:20.240 | I think is an incredibly valuable proposition,

00:34:23.200 | whether you pursue it long-term or not.

00:34:26.560 | I started in insurance sales when I was 23 years old.

00:34:30.880 | And one of the reasons I did it

00:34:32.120 | was because I wanted to learn sales skills.

00:34:34.760 | And I figured even if I sell insurance for a couple of years

00:34:38.280 | and then quit, then I will still have gained a lot

00:34:42.080 | from that process and I can take that experience

00:34:46.160 | to many other things.

00:34:47.260 | And I'm glad I did.

00:34:48.560 | I did it for what, six years and then I quit

00:34:51.880 | to start Radical Personal Finance, something like that.

00:34:53.820 | And when I left, I left with

00:34:56.960 | a very strong sense of self-confidence

00:35:01.420 | in my ability to control the future.

00:35:04.040 | And being in sales taught me that if I wanted money,

00:35:07.700 | I picked up the phone and made phone calls.

00:35:10.040 | And that's a really valuable sense of confidence

00:35:12.440 | because you know, hey, if I want money in the future,

00:35:15.440 | I pick up the phone and make phone calls

00:35:17.260 | and the money starts to come in in the fullness of time.

00:35:20.480 | You start to understand how to deal with people better.

00:35:23.520 | There's a lot of skills that are associated with it.

00:35:25.360 | And I think that those skills,

00:35:26.560 | developing those skills at an early age

00:35:29.160 | are very, very valuable.

00:35:31.540 | So when you think about the different kinds of sales,

00:35:34.160 | what types of criteria will you use

00:35:37.340 | to decide what kind of sales job to go after?

00:35:39.880 | - That's a great question.

00:35:44.140 | I'm probably thinking more along the lines of

00:35:46.620 | like what do they expect of me?

00:35:49.100 | Are they expecting me to be there in the office

00:35:52.580 | or can I kind of run my own schedule?

00:35:54.540 | 'Cause I'm very determined by myself,

00:35:56.500 | but I don't, one of the things that isn't great

00:35:59.340 | about being an accountant is you're stuck to the job

00:36:01.620 | no matter if there's work or not.

00:36:03.060 | You gotta be there for the time.

00:36:05.040 | So that'd be one of my criteria.

00:36:07.520 | I had a buddy walk through the different pay scales

00:36:13.200 | for how they reward,

00:36:16.200 | what's it called?

00:36:19.240 | I'm blanking right now.

00:36:20.780 | - How they reward commissions.

00:36:23.440 | - Yeah, commissions.

00:36:24.280 | Yeah, he walked through the different commission scales

00:36:26.240 | and so I'd look for a company

00:36:27.800 | and ask them how that is determined.

00:36:30.840 | Basically just flexibility

00:36:32.940 | and their wide range of clients

00:36:37.740 | is the only criteria that I have right now.

00:36:40.740 | - So let me give you a few criteria to think about

00:36:43.020 | because what I want you to do

00:36:44.460 | is I want you to do a broad survey of the sales marketplace

00:36:47.740 | to try to start your sales career

00:36:49.700 | in the place where there's the most long-term potential.

00:36:52.740 | And let me begin with how would I do the survey.

00:36:55.340 | What I would start by doing

00:36:56.660 | is I would start by making a list

00:36:59.260 | of anybody that I know

00:37:01.600 | who is involved in sales in some degree or another.

00:37:05.320 | And then I would call them

00:37:07.000 | and I would take them out to lunch

00:37:08.560 | and I would get their input

00:37:09.780 | and I would ask them and say,

00:37:10.680 | I'm thinking about going into sales.

00:37:11.960 | Could you tell me a little bit about what you're involved in

00:37:14.080 | and most importantly, ask them

00:37:17.080 | what other areas have you heard of

00:37:19.680 | that you think are very lucrative

00:37:21.320 | or that you think I might like to be involved in?

00:37:23.760 | What other types of things should I consider?

00:37:27.080 | If you were gonna start in sales over again,

00:37:29.360 | what kinds of companies would you look at

00:37:31.400 | or what kinds of sales?

00:37:33.080 | Because the term sales is very broad

00:37:36.240 | and if you think about it,

00:37:37.780 | you can use it to create the kind of lifestyle

00:37:41.000 | that you would like in a number of different ways.

00:37:43.400 | So let me give you a few things to think about.

00:37:45.520 | The first thing to think about is

00:37:46.640 | what's the maximum amount of money

00:37:49.100 | that I can make in this sales job?

00:37:51.800 | You could go to your local cell phone store, right?

00:37:54.840 | You know, Verizon or T-Mobile

00:37:56.300 | or whatever your local cell phone stores are.

00:37:58.480 | You could go and you could get a sales job

00:38:00.340 | working as a clerk in that cell phone store

00:38:02.760 | and they will pay you a commission

00:38:04.640 | based upon the amount of new business that you generate.

00:38:07.700 | What's the problem?

00:38:08.540 | The problem is that to the extent that you are a sales,

00:38:13.440 | just a simple sales clerk,

00:38:15.120 | there's gonna be a cap on your income.

00:38:17.560 | I don't know this for certain,

00:38:19.160 | but I can't imagine how somebody in that situation

00:38:21.800 | could make $100,000 a year.

00:38:24.020 | They could probably make 50,

00:38:25.520 | which would be a great step up

00:38:27.360 | for somebody that goes from, you know,

00:38:29.640 | dipping, serving food at the food court,

00:38:33.680 | being paid $13 an hour

00:38:35.520 | to somebody who goes to selling cell phones,

00:38:37.980 | to go from $13 an hour to effectively $35 an hour

00:38:42.000 | with the ability to make commissions on your sales activity

00:38:45.080 | is a great step up.

00:38:46.600 | But you're gonna be capped in that kind of business.

00:38:48.640 | Why are you capped?

00:38:49.760 | Well, number one, you don't have recurring revenue.

00:38:52.180 | You just simply have transactions.

00:38:54.440 | I can't imagine how even the very best salesman,

00:38:58.480 | I can't imagine how that really good Verizon salesman

00:39:01.760 | can build a portfolio of clients

00:39:04.160 | who are gonna come back every year

00:39:05.680 | and upgrade their phone with him.

00:39:07.880 | Maybe he can get a few,

00:39:09.100 | but that's just not how that business works.

00:39:10.880 | And so you don't get a lot of recurring revenue.

00:39:13.280 | Everything is a new sale.

00:39:14.600 | It's just whoever walks in the doors.

00:39:16.160 | That's the second thing,

00:39:17.360 | is you're limited in your ability to sell

00:39:20.000 | based upon the foot traffic.

00:39:21.640 | And so you don't really get to control that.

00:39:24.440 | You can't, when coronavirus hits

00:39:26.240 | and all the malls are shut down,

00:39:27.880 | you can't really pick up the phone and make it rain

00:39:30.540 | because you're stuck due to the amount of foot traffic

00:39:33.080 | that's coming in.

00:39:34.620 | In addition, what else do you face?

00:39:36.680 | Well, your commission rate is just relatively low.

00:39:39.040 | I have no idea what it is,

00:39:40.880 | but you know that even if somebody's doing a big transaction

00:39:43.840 | they're buying a $600 phone or a $1,000 phone.

00:39:48.240 | And if somebody is signing up for $70 a month,

00:39:51.980 | maybe you can make $100.

00:39:54.220 | Maybe you can make a couple of hundred dollars

00:39:55.660 | and that kind of thing.

00:39:56.500 | I don't know what their commission rates are,

00:39:57.960 | but you're stuck, right?

00:39:59.260 | You've got a couple of hundred dollars

00:40:00.820 | of maximum commission.

00:40:02.440 | I can't imagine they could pay more than 150 or $200

00:40:06.340 | even on a big deal, right?

00:40:08.600 | When you sell a thousand dollar phone

00:40:10.160 | and $80 a month of service.

00:40:13.380 | So your commission rates are relatively low.

00:40:16.040 | Other things you would want to consider

00:40:17.300 | are things like scheduling.

00:40:19.220 | Downside of selling cell phones in a cell phone store

00:40:22.100 | is that you've got to be there to attend the store.

00:40:25.020 | And you have to be there to attend the store

00:40:27.120 | when it's busy and when it's not busy.

00:40:28.900 | And so you don't have any flexibility

00:40:30.620 | and control over your life.

00:40:32.820 | And in the end of the day also,

00:40:34.940 | there's not really any ownership.

00:40:36.460 | Like I talked about with recurring revenue.

00:40:38.760 | It's not like you get to a point where,

00:40:40.380 | okay, now I can just sit and I own this.

00:40:42.940 | I own my business.

00:40:44.320 | You don't.

00:40:45.160 | You're an hourly employee who gets sales commissions,

00:40:48.400 | but that's sales.

00:40:49.800 | Now let's compare that to something like insurance sales.

00:40:54.260 | Maybe you say, I'm good at money.

00:40:56.940 | I'm good at these numbers.

00:40:58.460 | What I'd like to do is I'd like to become

00:41:00.120 | an insurance salesman.

00:41:01.620 | And maybe you want to join and start a property

00:41:04.980 | and casualty insurance agency.

00:41:06.380 | So you call up State Farm and Allstate

00:41:08.340 | and you look at independence and you go around

00:41:10.220 | and you figure out what can I do here?

00:41:12.540 | Well, now you have a very different sales job.

00:41:16.600 | You have a very different structure

00:41:18.900 | to how your business is going to work.

00:41:21.820 | From the money perspective,

00:41:23.100 | your maximum upside is much, much bigger.

00:41:26.660 | If you can grow your book of business significantly,

00:41:29.020 | you might start off at a relatively low income, right?

00:41:31.480 | You might make 60 or $70,000 your first year,

00:41:34.240 | but you could put a plan in place in seven, eight, 10 years.

00:41:37.540 | You could very clearly be at half a million dollars a year.

00:41:40.260 | And if you can build the agency very, very large,

00:41:43.900 | you could certainly make a million

00:41:45.220 | or a couple million bucks a year

00:41:46.620 | doing that kind of business.

00:41:47.860 | I've worked with many property

00:41:49.300 | and casualty insurance agents

00:41:50.980 | who are making seven figures a year from their business.

00:41:54.500 | Seven figures is very different than 70,000, right?

00:41:57.660 | A million is very different than 70,000,

00:42:00.020 | but you still are going to be capped, right?

00:42:01.980 | You're not going to create a $100 million organization

00:42:04.980 | doing, you know, working as a State Farm agent

00:42:07.780 | or something like that.

00:42:08.620 | You're just not going to do it.

00:42:09.940 | But you have a much higher profitability

00:42:12.620 | than you do with the sales job.

00:42:17.060 | What are the other benefits?

00:42:17.900 | Well, one benefit you get

00:42:19.080 | with going with something like insurance sales

00:42:20.580 | is you get recurring revenue.

00:42:22.100 | So once you build the book of business,

00:42:24.400 | you're going to have some cancellations,

00:42:26.200 | but you're going to receive recurring revenue.

00:42:28.060 | And with a property and casualty agency,

00:42:30.620 | your ongoing commissions are substantial.

00:42:32.540 | There's not a big difference between your first year

00:42:34.540 | and your ongoing commissions.

00:42:35.680 | And so you can provide good service

00:42:37.900 | and you can build this company to be very large,

00:42:42.460 | and you can do very well,

00:42:43.700 | and you have ongoing recurring revenue.

00:42:45.600 | So if you had last year,

00:42:46.500 | you had the expected profit of $350,000,

00:42:50.180 | whether you work 60 hours a week or 20 hours of work a week,

00:42:53.620 | probably 300 of that is pretty well guaranteed.

00:42:57.460 | You also have the benefits of being able to build

00:42:59.780 | more of an actual business.

00:43:01.300 | So in something like a property and casualty business,

00:43:05.500 | you hire staff, the staff is servicing the client,

00:43:08.820 | they handle most of your customer service needs.

00:43:10.980 | And so once you've done the initial work

00:43:13.060 | to get the business going,

00:43:14.460 | your time requirements are far less.

00:43:16.600 | You'll work a lot in the beginning,

00:43:18.700 | but once you're 10 years in,

00:43:19.660 | your time requirements are much more modest.

00:43:22.100 | And so you have a lot more free time.

00:43:24.140 | You never get to the point of total free time,

00:43:26.540 | but you have a lot more free time

00:43:28.220 | because your staff and the agents that are under you

00:43:30.580 | can handle most of those things.

00:43:32.800 | That gives you a lot of benefits.

00:43:34.380 | 'Cause if you can say, I'm making $400,000 a year

00:43:36.780 | and I'm working 30 hours a week,

00:43:38.280 | that's a very different type of business proposition

00:43:42.220 | than if you are going into cell phone sales.

00:43:47.220 | Now, what are some downsides?

00:43:50.340 | Well, things you would wanna think about.

00:43:51.780 | If you built a property and casualty agency,

00:43:54.020 | something like that,

00:43:55.100 | you're not at all flexible in terms of your location.

00:43:58.940 | You're gonna be in the community.

00:44:00.700 | You need to be in the community.

00:44:01.940 | You need to become part of the community.

00:44:03.940 | And so if you say, well, I wanna move every two years,

00:44:06.340 | that's not gonna work

00:44:07.340 | because you've got to be part of that community.

00:44:09.420 | You've gotta build the relationships

00:44:11.300 | and establish the presence

00:44:12.900 | that's gonna see you as a long-term part of that community

00:44:15.380 | 'cause it just gets easier and easier and easier.

00:44:17.680 | So you're not gonna be traveling a lot.

00:44:20.080 | From the perspective, you can take personal trips,

00:44:22.020 | but you're not gonna be traveling all the time

00:44:23.540 | and moving every couple of years

00:44:25.080 | because you're tied to that place.

00:44:26.980 | In addition, you'll be tied to that place

00:44:29.060 | for the productivity of your overall business.

00:44:31.480 | So you're not gonna,

00:44:33.180 | you're gonna build one kind of business in a small town,

00:44:35.220 | you're gonna build another kind of business in a big city.

00:44:36.940 | And so you wanna think about that.

00:44:38.940 | Also, you're gonna have substantial responsibilities.

00:44:41.300 | You're gonna have an office,

00:44:42.300 | you're gonna have employees, and you need that.

00:44:44.620 | So that brings a significant amount

00:44:46.780 | of additional pressure on you

00:44:48.180 | when now you realize,

00:44:49.520 | not only is it my family that's eating from this business,

00:44:52.260 | but rather I'm supporting six other families.

00:44:54.860 | That's a big responsibility.

00:44:56.980 | It can be great.

00:44:57.900 | It can give you a tremendous feeling of pride.

00:45:00.260 | It can also be a downside where you're saying,

00:45:02.700 | I don't like this so much.

00:45:04.000 | Medical sales, right?

00:45:05.900 | You can do the same kind of rubric

00:45:07.420 | applied to medical sales.

00:45:08.860 | What's the benefit of medical sales?

00:45:10.220 | Well, the benefit of medical sales

00:45:11.260 | is you're gonna be given a route,

00:45:12.340 | you're gonna be given equipment.

00:45:13.500 | You don't have to deal with

00:45:15.820 | the difficulty of personal sales, right?

00:45:17.700 | Some people hate insurance sales

00:45:19.260 | because you know that whenever you meet someone,

00:45:21.740 | you're hoping that they'll place their insurance with you.

00:45:23.980 | You know, I used to sell life insurance,

00:45:25.540 | and there's always this thing in the back of your mind

00:45:27.220 | is I should probably sell this person

00:45:28.340 | a life insurance policy.

00:45:29.260 | And some people don't like that, right?

00:45:30.740 | Some people do not like doing business with their friends.

00:45:32.740 | They don't like working with it.

00:45:35.120 | So in a medical sales job,

00:45:37.860 | you don't have any of those constraints.

00:45:39.460 | You can have your personal life and your business life.

00:45:41.500 | And when you're doing sales,

00:45:42.820 | everyone knows what you're doing.

00:45:43.980 | You're just doing sales,

00:45:45.500 | but there's no crossover to your personal life.

00:45:50.080 | So medical sales can be a very high compensating business.

00:45:53.040 | You can do very well.

00:45:54.920 | I don't think you're gonna make as much as you could

00:45:56.940 | with something like a state farm office

00:45:59.780 | or running a big financial sales business,

00:46:03.100 | running a big investment company,

00:46:05.420 | but you could do very, very well in medical sales,

00:46:07.240 | certainly multiple six figures

00:46:08.980 | if you're with the right company and the right opportunity.

00:46:11.480 | But you are going to be,

00:46:13.140 | you're gonna lose freedom over your time, right?

00:46:16.460 | You've got a route, you've got to service these clients,

00:46:18.860 | you've got to see them a certain amount of time,

00:46:20.660 | and you've got to do it regularly.

00:46:24.380 | You can have some flexibility over your daily activities.

00:46:28.500 | You know, I've worked with medical sales people

00:46:30.540 | who had a significant degree of personal freedom.

00:46:33.500 | They had a lot of personal freedom.

00:46:35.260 | Many of them were doing real estate on the side,

00:46:36.920 | and they had plenty of freedom

00:46:37.940 | because they just have their route,

00:46:39.080 | and they're in their car.

00:46:40.080 | The company provides you with a car,

00:46:41.620 | and as long as your clients are happy, everyone's happy.

00:46:43.940 | But you don't have quite,

00:46:45.380 | you do still have a boss to report to.

00:46:47.020 | You do still have people that you're in charge of.

00:46:51.500 | Compare that to something like real estate sales, right?

00:46:53.360 | You could become a real estate agent.

00:46:54.620 | Now, if you're a real estate agent,

00:46:56.780 | that might put you closer at hand to your investment goals.

00:47:00.740 | Now, that might give you much more autonomy

00:47:03.780 | because as a real estate agent,

00:47:04.740 | you basically have total control over your time.

00:47:07.500 | And because you have total control over your time,

00:47:10.900 | you can choose when you work.

00:47:12.620 | But, you know, the downside of being a real estate agent

00:47:14.940 | is that much of that work,

00:47:16.300 | at least if you're on the buyer's side,

00:47:18.580 | not on the listing side,

00:47:20.020 | much of that work is in the evening.

00:47:21.540 | That's one of the biggest complaints

00:47:22.880 | for somebody who's a father with children,

00:47:25.220 | is I have to do this in the evening when I'm with my family

00:47:28.780 | 'cause that's when I show houses.

00:47:29.840 | But if you're single, it can be a great life.

00:47:31.880 | So I don't know which of these is right.

00:47:34.220 | But what I wanna point out is,

00:47:35.620 | if you'll survey the marketplace

00:47:38.380 | and get some ideas from people who know,

00:47:40.600 | get some ideas of what works in your area,

00:47:42.340 | of what works in your target area,

00:47:43.700 | what opportunities there are,

00:47:45.300 | then I think that'll help you

00:47:46.860 | to make a more informed decision.

00:47:49.460 | And as I look at it, if you're gonna go into sales,

00:47:51.480 | why go into sales where you're capped, right?

00:47:53.940 | Why go after the $70,000 a year cell phone job

00:47:58.500 | when you could go after the $700,000 selling 747s job?

00:48:03.340 | Why not?

00:48:04.180 | If you're gonna develop the sales skills,

00:48:05.920 | then why not target the job where those sales skills

00:48:08.260 | can actually pay off significantly profitably?

00:48:10.860 | And so I think that what I would recommend that you do

00:48:14.380 | is as you are talking to people,

00:48:18.540 | filter things based upon where the money is.

00:48:20.820 | And if you can find someone

00:48:22.740 | who's making half a million a year,

00:48:24.460 | then I would put that a lot higher on my list

00:48:26.540 | than somebody where, yeah, they're making 120.

00:48:28.940 | 120 is great, right?

00:48:29.940 | It's probably more than what you're doing right now,

00:48:31.180 | even with your three jobs.

00:48:32.540 | But don't put yourself in that,

00:48:34.540 | unless you're doing it as a training

00:48:35.780 | or it's what you can find,

00:48:37.180 | don't put yourself into one of those low-budget sales jobs.

00:48:40.180 | Target, you have the ability,

00:48:41.740 | target something where there's a big long-term potential.

00:48:44.500 | I think that makes a lot more sense.

00:48:46.300 | - Joshua, I appreciate your time.

00:48:51.380 | - My pleasure. - Very much.

00:48:52.420 | - Yeah, keep in touch and let me know how it goes.

00:48:55.020 | All right, we go to the great state of Montana.

00:48:56.460 | Welcome to the show.

00:48:57.300 | How can I serve you today?

00:48:58.300 | - Hi, this is Jeremiah.

00:49:00.740 | I was just calling to see if you could give me

00:49:03.100 | some thoughts on app protection, mainly at my primary home.

00:49:07.020 | So we live, again, we live in Montana.

00:49:11.420 | The homestead protection here in Montana is $250,000

00:49:15.540 | from my understanding.

00:49:17.340 | The value of our home is about 500,000.

00:49:20.460 | We both work in fields that have,

00:49:23.820 | we have liability protection for a handyman service

00:49:29.540 | and for the medical field.

00:49:31.300 | So we're a little bit worried about protecting our home,

00:49:34.260 | but we also like the idea of paying off our mortgage,

00:49:36.220 | having no mortgage.

00:49:37.700 | We have a rental and we thought about selling the rental

00:49:40.260 | to pay for the mortgage and we wouldn't have that cost.

00:49:44.620 | So I was just calling to see what your thoughts are on that.

00:49:48.380 | - Well, it's hard.

00:49:49.740 | There's certainly a balance there.

00:49:51.740 | So I've pulled up my little cheat chart here

00:49:55.340 | and let's just talk through what my chart tells me.

00:49:57.060 | First of all, Montana does not allow tenancy

00:49:59.100 | by the entirety.

00:50:00.420 | So that's a downside because tenancy by the entirety

00:50:02.780 | can be a useful way of protecting the house.

00:50:05.420 | Montana has a $250,000 homestead exemption.

00:50:08.380 | So they'll protect $250,000 worth of value.

00:50:11.620 | Evidently Montana will protect IRAs, but not Roth IRAs.

00:50:16.620 | Looks like Montana will only protect

00:50:18.660 | about $4,000 of life insurance cash values.

00:50:21.580 | My chart doesn't say annuities,

00:50:23.580 | it just gives me some code that I would look up

00:50:26.020 | and I would know if I were a Montana attorney.

00:50:31.020 | Life insurance proceeds protects beneficiaries'

00:50:33.700 | interest in proceeds and availability, 100% protected,

00:50:38.140 | and they'll protect $350 a month of annuity and cash values

00:50:41.300 | and they won't protect 529 plans.

00:50:43.140 | So what do you do?

00:50:45.180 | Well, the first thing that you wanna do

00:50:47.460 | is you wanna calculate your risk

00:50:49.020 | to the extent that you're able to.

00:50:50.900 | Because you can't, a lot of times with asset protection,

00:50:55.900 | you're trying to cover something

00:50:59.140 | that's just not really worth it.

00:51:00.940 | Many people have paid off houses

00:51:03.220 | and many people live in states

00:51:05.300 | where there's very modest homestead exemptions.

00:51:09.060 | And in that situation, they still are covered

00:51:14.100 | because they still, they don't have,

00:51:18.260 | getting tongue tied, they're fine because nothing happens.

00:51:21.740 | So if nothing happens, you're fine.

00:51:23.380 | You don't have to always have

00:51:25.140 | the world's greatest asset protection.

00:51:27.180 | Now, if you are in a higher profile scenario

00:51:30.180 | or you're potentially more exposed

00:51:35.180 | than a lot of other people, then yes, that's a big deal.

00:51:38.300 | And so you wanna make sure

00:51:39.580 | that you cover things a little bit better.

00:51:43.020 | So the first thing is the homestead exemption.

00:51:44.540 | That's always the first step.

00:51:45.360 | So you have $250,000 of protection.

00:51:47.340 | So I would make sure that I covered $250,000

00:51:50.900 | worth of exception.

00:51:52.180 | Now, beyond that, I wouldn't hurry to pay off the mortgage,

00:51:55.360 | especially if hurrying to pay off the mortgage

00:51:57.420 | is costing me something else.

00:51:59.100 | I don't know if you have a 401k,

00:52:00.380 | but a 401k would be an obvious place to put money.

00:52:02.740 | So if I had a $250,000 mortgage,

00:52:05.140 | I would first max out a 401k for me,

00:52:07.380 | max out a 401k for my wife if she has one,

00:52:09.700 | and get as much money in the 401k

00:52:11.420 | because the 401k is protected from creditors.

00:52:13.540 | And with a low cost of a mortgage, a personal mortgage,

00:52:16.500 | then that's your first step.

00:52:18.460 | So keep $250,000 worth of exemption,

00:52:21.820 | sorry, of equity in the property,

00:52:24.060 | but wait a moment before paying it off

00:52:25.620 | to see if there's anything else that's eligible for you.

00:52:29.140 | It looks like-

00:52:29.980 | - Can I have a follow-up question?

00:52:31.060 | - Go ahead, sure.

00:52:32.740 | - Yeah, so with that, in, let's say, five or 10 years,

00:52:36.140 | if you paid down some of the mortgage,

00:52:37.820 | would you look at refinancing at that point

00:52:40.540 | to keep that equity covered,

00:52:42.740 | the $250,000 worth of equity?

00:52:44.700 | - It depends on the value of the asset,

00:52:48.180 | where else you would put the money if you did,

00:52:51.100 | if you stripped it.

00:52:51.940 | That was gonna be my third thing,

00:52:52.760 | is strip the equity, right?

00:52:53.600 | That's the strategy.

00:52:54.720 | But it would depend on where else you could put the money,

00:52:56.900 | and then also how much your exposure is.

00:52:59.140 | So if you really are gonna benefit

00:53:01.980 | from having the paid-off house, it's gonna be wonderful.

00:53:04.900 | Well, if you have a $350,000 house,

00:53:07.820 | and you have it paid off,

00:53:10.060 | by the way, I blanked when you told me,

00:53:11.420 | how much is this house worth?

00:53:13.700 | - Maybe $500,000, we'll say.

00:53:15.300 | - So if you look at it and say,

00:53:16.900 | all right, if I've got $250,000 of equity exposed here,

00:53:20.100 | it's not that big of a deal.

00:53:21.300 | Now, 500 is significant, 'cause it's a lot.

00:53:23.620 | If it were a $300,000 house,

00:53:25.100 | I'd just say pay off the mortgage, because it's fine.

00:53:27.260 | It's 50 grand.

00:53:28.700 | In the grand scheme of things, you're gonna be okay.

00:53:30.900 | But if it's a million-dollar house,

00:53:32.500 | you can see how now it's a different scenario.

00:53:36.020 | So that's the Homestead exemption.

00:53:37.780 | Number two was tenancy by the entirety.

00:53:39.340 | You can't do it in Montana.

00:53:42.380 | So now we talk about equity stripping.

00:53:44.380 | And so equity stripping requires you

00:53:46.540 | to have a better place to do it.

00:53:48.300 | So if you have a good place to put the money

00:53:50.460 | that's gonna be more protected,

00:53:51.660 | or you have a good use for it,

00:53:53.180 | yes, I would definitely go ahead and strip the equity off.

00:53:57.260 | And so if I had a $750,000 house,

00:54:01.420 | and I had other places to put the money,

00:54:04.020 | and I felt like those places,

00:54:05.380 | and I was concerned about my exposure,

00:54:08.020 | then in that situation, I would definitely refinance.

00:54:12.620 | So if I get my mortgage balance below 500,

00:54:15.860 | and again, it's gonna be significant.

00:54:17.540 | It doesn't have to be every year,

00:54:18.380 | but if it gets down to 420, right,

00:54:19.860 | I'm gonna refinance if rates are low,

00:54:22.100 | and get it back up, and go ahead and bring it up

00:54:23.980 | to a $600,000 mortgage to protect that equity again.

00:54:27.020 | That's equity stripping.

00:54:27.900 | And you can do that so easily on a house

00:54:30.460 | that there's little reason not to do it.

00:54:32.780 | Okay, now the next thing you can look at

00:54:34.580 | is you would look into a domestic asset protection trust.

00:54:38.020 | Do you know if Montana has any legislation

00:54:40.020 | around a domestic asset protection trust?

00:54:42.060 | Okay, give me just a moment,

00:54:46.060 | and let's see if I can answer it

00:54:47.700 | with a one-minute solution here to see.

00:54:52.700 | Not coming up.

00:54:57.540 | Okay, so let me explain to you briefly

00:55:00.020 | what a domestic asset protection trust is.

00:55:02.380 | If your state allows it,

00:55:04.860 | and I'll try to get you an answer here,

00:55:05.980 | but you wanna research,

00:55:06.820 | can I do a domestic asset protection trust in Montana?

00:55:09.900 | This is a relatively new form of asset protection,

00:55:14.900 | but it is not as proven as some other things,

00:55:18.980 | but it is doable, and it works really well

00:55:20.920 | for an individual home.

00:55:23.380 | And many states are passing legislation on it,

00:55:27.460 | and let me see if Montana's on the list.

00:55:29.700 | Alaska, Delaware, Hawaii, Michigan, Mississippi,

00:55:32.060 | Missouri, Nevada, New Hampshire, Ohio,

00:55:33.620 | Oklahoma, Rhode Island, South Dakota,

00:55:35.180 | Tennessee, Utah, Virginia, West Virginia, and Wyoming.

00:55:37.540 | So we're out, evidently.

00:55:38.920 | So a domestic asset protection trust

00:55:41.260 | is probably off the list for you.

00:55:43.380 | But basically, it does work really well, probably.

00:55:48.060 | It's not perfectly proven,

00:55:49.220 | but it does work really well

00:55:50.760 | for protecting a personal residence.

00:55:52.260 | And so it's a self-settled trust

00:55:54.900 | that gives you a significant amount of asset protection.

00:55:59.700 | So I'm gonna skip it there, 'cause it doesn't apply to you.

00:56:02.020 | That was the next thing.

00:56:03.460 | Next thing is, how is the home titled?

00:56:05.460 | So do you and your wife have equal liability exposure

00:56:07.940 | in your assessment, or does one of you

00:56:09.260 | have lower liability exposure than the other?

00:56:11.520 | - I guess that's not something I've really

00:56:15.400 | been able to figure out.

00:56:16.820 | I'm a handyman.

00:56:18.220 | She works as a consultant in the medical field,

00:56:21.140 | but also as a W-2 employee.

00:56:22.740 | - Yeah, that's not-- - So mostly for her.

00:56:25.620 | - I'm sorry, I interrupted you,

00:56:26.580 | but that's not particularly clear.

00:56:27.860 | Like, both of you have some exposure.

00:56:31.260 | But if there's a spouse that has a low risk

00:56:34.260 | to liability exposure, then title the home

00:56:36.940 | into her name or into your name as appropriate.

00:56:40.660 | And then the final thing is just simply umbrella insurance.

00:56:43.140 | What you can do, no question, is you can put in place

00:56:46.040 | a nice umbrella insurance policy on the house.

00:56:49.620 | And so assuming that you want to keep homeowners insurance,

00:56:53.180 | which obviously in most situations is wise,

00:56:56.180 | but I say assuming because sometimes one of the goals

00:56:59.580 | of paying off a house is actually be able to drop insurance.

00:57:02.540 | You have to assess the value of it.

00:57:04.260 | But for example, when I was living in South Florida

00:57:06.820 | in hurricane country, the cost of,

00:57:09.220 | you could drop windstorm insurance,

00:57:10.680 | but the cost of maintaining the insurance

00:57:12.580 | was just crazy compared to the actual risk

00:57:15.300 | of the windstorm happening.

00:57:17.740 | And so one of the reasons why in Florida

00:57:20.060 | I would have paid off my house was so that I could have

00:57:21.940 | the ability to drop homeowners insurance on it.

00:57:24.780 | Or if I weren't gonna do that, just have a basic

00:57:27.860 | fire policy.

00:57:28.940 | And if you do that though, that runs into trouble

00:57:32.940 | with your umbrella insurance policy.

00:57:34.960 | But certainly umbrella insurance

00:57:38.100 | will probably protect you sufficiently.

00:57:40.540 | So I would guess that with that, you're probably okay.

00:57:44.220 | Both of you are probably okay.

00:57:45.720 | It's unknowable whether these strategies are valuable,

00:57:49.760 | but you're much more limited in your strategies

00:57:51.640 | than other people are.

00:57:52.740 | - Great.

00:57:54.500 | Well, that helps a lot.

00:57:55.320 | I wanted to make sure I wasn't missing something

00:57:56.740 | and thinking about it.

00:57:57.580 | And then umbrella policy, you said it on the house.

00:58:00.660 | Is that separate?

00:58:01.740 | 'Cause we have an umbrella policy for ourselves.

00:58:04.140 | Is there different umbrella policies

00:58:06.500 | for a home versus a business?

00:58:08.740 | I'm just a sole proprietor at this point.

00:58:11.220 | So I don't think I would have any on the business side,

00:58:13.540 | but if I was to advance and maybe become an S-corp

00:58:16.820 | at some point, would then you need an umbrella policy

00:58:19.700 | for the business separate from our personal

00:58:22.160 | to protect the home?

00:58:23.000 | It's just a sentimental thing.

00:58:24.320 | That's why we really wanna make sure

00:58:25.560 | that we're protecting this house.

00:58:26.840 | - Read the contract, right?

00:58:27.880 | Pull out your umbrella.

00:58:29.000 | If you have an umbrella policy

00:58:30.720 | with your homeowner's insurance company,

00:58:32.160 | pull it out and read the contract

00:58:33.320 | and see what it covers you from.

00:58:35.320 | And then protect it.

00:58:37.320 | And what I would say is that this is the problem

00:58:41.120 | with any kind of asset protection.

00:58:47.640 | You could get bulletproof asset protection, right?

00:58:52.240 | It's possible.

00:58:53.740 | You could establish an offshore trust

00:58:56.900 | and move all your money into the offshore trust.

00:58:59.020 | And your plan is that if something goes bad

00:59:02.060 | and anything emerges, I'm gonna leave.

00:59:04.060 | And if you're out of the country

00:59:05.060 | and your money's out of the country,

00:59:06.660 | it's pretty bulletproof,

00:59:07.660 | as long as you're willing to stay out of the country.

00:59:09.660 | That's always the weak point in offshore planning

00:59:11.660 | is that if you're there, the judge throws you in jail

00:59:13.460 | and says, "Get the money out of the trust

00:59:14.660 | "and pay your bills."

00:59:16.000 | But if you're gone, the judge can't touch you.

00:59:17.760 | And so you can do that.

00:59:19.640 | But that's probably not appropriate where you are

00:59:22.120 | in terms of your wealth, et cetera.

00:59:24.080 | So I would keep $250,000 of equity.

00:59:27.840 | I wouldn't hurry to pay off the mortgage beyond that.

00:59:31.280 | I wouldn't hurry to do it.

00:59:32.760 | I would put a good umbrella liability insurance policy.

00:59:35.120 | I would max out my 401ks

00:59:37.160 | and make sure that those are totally funded

00:59:39.400 | and IRAs, if eligible.

00:59:41.320 | And probably that's good enough in your situation.

00:59:44.960 | And then just control your liability with proper insurance.

00:59:48.380 | So with your rental properties,

00:59:49.400 | make sure that those are properly insured,

00:59:51.220 | that those are properly insulated with well-done LLCs.

00:59:56.220 | Make sure that your business is insured

00:59:59.420 | with your business liability policy.

01:00:01.540 | And that probably protects you well enough.

01:00:03.180 | You don't have to have a bulletproof plan.

01:00:05.280 | - Great, I like taking it to the extreme

01:00:07.980 | to think about it in that way.

01:00:09.940 | It helps settle it down a little bit.

01:00:13.100 | So thank you so much, Joshua.

01:00:13.940 | I appreciate it. - Yeah.

01:00:14.780 | My pleasure.

01:00:15.620 | The extreme is interesting to know,

01:00:17.160 | but a lot of times it's just simply unlivable.

01:00:19.500 | So you gotta just always be aware of that.

01:00:23.080 | All right, thank you for calling.

01:00:23.920 | We move on to, looks like the great state of Washington.

01:00:28.720 | Welcome to Radical Personal Finance.

01:00:29.680 | How can I serve you today?

01:00:30.980 | - Thanks for taking my call.

01:00:33.740 | Got a fairly rudimentary growing family housing scenario,

01:00:39.680 | but would appreciate your thoughts on it.

01:00:43.200 | My wife and I recently grown our family

01:00:46.780 | and we are in the Tacoma metro area,

01:00:50.620 | which is getting a lot of fallout from the growth

01:00:53.960 | in the Seattle metro area.

01:00:55.180 | So we looked and we're like, "Hey, great.

01:00:57.360 | "Our house has gone up tremendously in value,

01:00:59.120 | "but so has everything else as we are looking to move along."

01:01:03.500 | And so we're just trying to balance

01:01:07.020 | buying in an inflated market

01:01:11.320 | and the realities of what that means financially.

01:01:15.020 | We've been super conservative,

01:01:16.920 | bought an inexpensive house, got a starter home.

01:01:20.080 | But as we look on moving up,

01:01:21.520 | we've always been committed to doing a 15 year

01:01:24.640 | and not a 30 year mortgage

01:01:26.020 | and having it be a fairly small part of our lives.

01:01:28.520 | But the house no longer suits our lifestyle

01:01:32.960 | and we're trying to balance the market

01:01:36.320 | and where is appropriate and where is lifestyle creep.

01:01:40.120 | And it's all highly subjective,

01:01:42.600 | but just looking for some of your input there.

01:01:45.920 | - What's your household income?

01:01:47.480 | - Last year, right around 200.

01:01:51.720 | Down a little this year due to taking a bunch

01:01:54.120 | of voluntary time off to spend with our baby.

01:01:57.080 | But next year should be right back up around 200.

01:01:59.280 | - And how many children do you have?

01:02:01.080 | - Currently one.

01:02:04.040 | We'll have another, maybe another, maybe another.

01:02:06.680 | But probably two to four.

01:02:08.800 | - Okay.

01:02:10.120 | Do you have any ambition to move outside of the Tacoma area

01:02:15.120 | or do you feel pretty well planted there in that area?

01:02:18.920 | - We're pretty well planted in this area.

01:02:22.720 | We're probably not willing to relocate,

01:02:24.560 | which is part of the reality is we don't get a pass on now.

01:02:29.560 | We're just trying to not be unwise.

01:02:32.160 | - How much did you buy your current house for?

01:02:34.120 | What is it worth?

01:02:34.960 | And what is the mortgage balance currently?

01:02:38.560 | - We bought it 265, currently worth 380,

01:02:41.880 | balance is 200, and looking to purchase somewhere

01:02:46.120 | in the five to $700,000 range.

01:02:50.120 | - Okay.

01:02:50.960 | Well, let's talk about it,

01:02:54.240 | which obviously is why you're calling.

01:02:55.560 | So some big picture discussions.

01:02:57.300 | The first thing that's gonna make a big, big difference

01:02:59.320 | in the value of your house is simply where you are located.

01:03:02.860 | There's all the difference in the world

01:03:04.240 | of being located in Tacoma, Washington

01:03:06.120 | versus Columbus, Ohio.

01:03:07.960 | There's all the difference in the world

01:03:09.200 | of being located in Long Island, New York

01:03:12.680 | versus Shreveport, Louisiana.

01:03:14.720 | And so you've got to think about where you are

01:03:19.200 | with regard to what that gets you.

01:03:21.680 | And think about the lifestyle associated with that.

01:03:24.280 | Now, why do people live where they live?

01:03:26.240 | Usually it's due to that's where my family is,

01:03:30.640 | that's where I grew up,

01:03:31.960 | or it's due to this is where I have a job,

01:03:35.600 | or this is where I have a career, right?

01:03:37.580 | I'm in the tech space,

01:03:38.440 | and so I need to live in this place

01:03:39.760 | because it's in the tech space,

01:03:40.880 | or my family is here.

01:03:43.040 | And those things are very, very valuable.

01:03:46.400 | With children, having mom just down the road

01:03:49.600 | makes all the difference in the world

01:03:51.840 | for your ability, it's so valuable

01:03:54.040 | to have grandparents that you can trust,

01:03:55.520 | who can come and take care of your children.

01:03:57.320 | And those things are really valuable,

01:03:59.460 | but they often come with a cost.

01:04:00.840 | If you're in Tacoma, or you're in Southern California,

01:04:04.840 | or you're in South Florida,

01:04:06.760 | it just comes with a cost.

01:04:08.200 | And so you've gotta recognize what the cost is.

01:04:10.800 | Now, you're well-employed,

01:04:12.200 | and so if you really want to be able

01:04:16.320 | to make this move to a fancier house,

01:04:18.700 | and to do it comfortably,

01:04:19.820 | the answer is make more money.

01:04:22.080 | Because if you make more money,

01:04:23.600 | you can always accomplish both things.

01:04:25.680 | If you make more money,

01:04:26.920 | you have the ability to increase your lifestyle,

01:04:29.400 | move into a fancier house,

01:04:30.760 | and increase your savings.

01:04:32.240 | And so where your focus should be

01:04:34.200 | is not necessarily on finding the cheapest house

01:04:36.360 | that you can find,

01:04:37.840 | but figuring out how can I go

01:04:39.300 | from a $200,000 family income

01:04:41.440 | to a $350,000 family income,

01:04:43.880 | and enjoy a better work-life balance,

01:04:46.820 | and a better work lifestyle along the way.

01:04:49.000 | Is that that's usually the solution.

01:04:50.780 | When people are stressed about their housing decisions,

01:04:53.920 | it just usually means they're not making enough money.

01:04:56.160 | But if you're gonna live in a place

01:04:57.760 | where there's an expensive house market,

01:05:01.400 | it probably means there's plenty of money

01:05:02.780 | that could be made there.

01:05:04.240 | And so I would encourage you,

01:05:05.680 | spend time meditating on your career,

01:05:07.560 | and make a plan to go from $200,000 to $500,000

01:05:10.680 | over the next 10 years,

01:05:11.960 | and the housing problems become much simpler.

01:05:16.280 | More money solves the housing problem elegantly.

01:05:19.240 | Second thing I would talk about

01:05:20.720 | is that when you live in a place

01:05:23.240 | where there is an expensive market for housing,

01:05:25.860 | it's not necessarily a bad thing

01:05:28.320 | to buy a more expensive house.

01:05:30.600 | Because generally,

01:05:32.820 | if the trends that made that house go expensive continue,

01:05:37.820 | that real estate market

01:05:40.560 | is probably gonna continue fairly strong.

01:05:43.580 | So it stinks for you when you're buying the house,

01:05:47.020 | but probably it'll continue to be fairly strong.

01:05:49.460 | That's not always the case.

01:05:50.700 | And of course, here's where we're guessing,

01:05:53.140 | is California real estate gonna stay California real estate?

01:05:55.740 | Is New York real estate gonna stay New York real estate?

01:05:57.700 | We don't know.

01:05:58.780 | But generally, these areas

01:06:01.020 | have a pretty good insulation around them.

01:06:03.860 | People like to live there

01:06:05.020 | because of the lifestyle associated with it,

01:06:07.020 | and they're not anxious to move.

01:06:09.160 | And I think that's the case in many places.

01:06:11.420 | I think that if you went to the average New Yorker,

01:06:14.340 | and you said, "Would you like to move from New York City

01:06:17.940 | "to Biloxi, Mississippi?

01:06:20.980 | "And would you like to trade your postage stamp house

01:06:24.760 | "that costs you $900,000 for an enormous mansion,

01:06:29.960 | "an enormous mansion on the lake that costs you $450,000?"

01:06:33.420 | Most of them would probably say no,

01:06:35.380 | because they like the lifestyle associated

01:06:37.420 | with New York City more than they like the lifestyle

01:06:39.740 | in Biloxi, Mississippi.

01:06:41.300 | And I think the same thing applies across the country.

01:06:44.020 | Most people, they like where they live.

01:06:46.100 | If not, they would probably leave.

01:06:47.700 | And so if you like where you live,

01:06:49.180 | then you're gonna be stuck

01:06:50.640 | with whatever that market returns to you.

01:06:52.340 | But from a financial perspective,

01:06:54.060 | if you buy a house for $500,000 to $700,000,

01:06:57.500 | and the housing market stays strong,

01:06:59.700 | then it'll often increase even more.

01:07:02.200 | And I think that another thing I'd point out

01:07:03.920 | is that when you have a high housing market,

01:07:05.840 | it's probably because there's a lot of money.

01:07:07.680 | And when there's a lot of money,

01:07:08.680 | it means that when you're higher in the market,

01:07:10.440 | in some cases, I think you have more protection.

01:07:13.040 | Because when there's a recession,

01:07:14.800 | rich people don't generally,

01:07:16.200 | rich, high-income earning people don't generally suffer

01:07:19.280 | in a recession as much as poor people do.

01:07:21.440 | And so I wouldn't be scared to upgrade the house

01:07:24.360 | if it, just from a value perspective.

01:07:27.600 | I wouldn't be scared from,

01:07:28.760 | oh, am I making a bad decision

01:07:29.980 | to move from a $400,000 house to a $600,000 house,

01:07:34.140 | because probably the $600,000 house is doing fine.

01:07:37.540 | Now, what you wanna really home in on

01:07:39.300 | is your opportunity cost.

01:07:40.340 | What are you giving up?

01:07:41.660 | So the first thing that people usually will give up

01:07:44.060 | is they'll give up lifestyle.

01:07:45.660 | And so by lifestyle, I mean number of square feet.

01:07:48.380 | Let's say that you move to New York City,

01:07:49.860 | and you've got four children.

01:07:51.740 | You don't expect to move to New York City with four children

01:07:54.660 | and be able to afford a comfortable four-bedroom,

01:07:57.180 | three-bath house with a half acre of land.

01:07:59.600 | That's just not the New York lifestyle.

01:08:00.980 | You don't live that way.

01:08:02.520 | You're gonna get cramped into a little apartment,

01:08:04.360 | and you go to the park for your entertainment.

01:08:09.360 | You don't have the lifestyle.

01:08:11.840 | That same family with four children

01:08:13.360 | can move to the suburbs of Texas

01:08:15.560 | and have a really great lifestyle there,

01:08:17.560 | but they're not gonna expect that in New York.

01:08:21.000 | And so what people give up when prices go up

01:08:23.080 | is they give up lifestyle with regard to space.

01:08:26.320 | They give up lifestyle with regard to space.

01:08:30.640 | I don't have another answer to the space.

01:08:31.780 | You give up, you go to a smaller place,

01:08:33.500 | smaller yard, et cetera.

01:08:35.200 | And so ask yourself if you're willing to do that.

01:08:37.520 | If you're not, yeah, you might need to go to another place,

01:08:40.880 | but if you're not gonna go to another place,

01:08:42.300 | it is what it is.

01:08:43.140 | The market is the market.

01:08:44.740 | The other thing you wanna think about

01:08:45.660 | is what am I giving up in terms of lifestyle

01:08:48.300 | if I took this, sorry, what's the opportunity cost

01:08:51.700 | if I move up in-house?

01:08:53.140 | So if I move up to a $500,000 to $700,000 house,

01:08:56.220 | and my mortgage goes up commensurately,

01:08:59.620 | then am I not doing something else?

01:09:02.420 | Am I not buying a rental property?

01:09:03.980 | Am I not investing in something that I wanna invest in?

01:09:06.580 | Is there a cost associated for me there?

01:09:09.060 | If you're well-employed, you're happy with your job,

01:09:11.100 | and you say, "I just wanna go ahead and move up,"

01:09:12.840 | you can do that, but I wouldn't move up

01:09:14.620 | if it's costing you the ability to do something else

01:09:16.500 | that's important to you.

01:09:17.700 | I think the most obvious solution for you

01:09:19.620 | is to simply go from taking a 15-year mortgage

01:09:22.880 | to a 30-year mortgage.

01:09:24.340 | And if you don't wanna do that,

01:09:25.820 | then stay put in the smaller place.

01:09:28.460 | If you have one child who's less than one-year-old-ish,

01:09:32.260 | you don't need any space, right?

01:09:34.140 | Your child is not even walking yet.

01:09:35.940 | You don't really need any space,

01:09:37.220 | and you don't need any space right now.

01:09:39.820 | There's a change that happens, I would say,

01:09:41.600 | somewhere around maybe four, four to five years old,

01:09:45.220 | where your children, and there's a change that happens

01:09:48.260 | probably around three children,

01:09:49.820 | where now all of a sudden,

01:09:51.140 | more space becomes really valuable.

01:09:53.140 | Your two-year-old, you can have the biggest yard

01:09:55.380 | on the block, your two-year-old won't play in it, right?

01:09:57.260 | They wanna be right inside, right next to mommy.

01:09:58.960 | They wanna be inside, they wanna be with you.

01:10:00.940 | And so the yard doesn't matter.

01:10:02.220 | And if you're gonna go out and play with them in the yard,

01:10:04.100 | then you might as well just go to the local park

01:10:07.300 | and walk down the street 'cause you've gotta be there.

01:10:09.380 | That's very different if you have a five-year-old

01:10:11.300 | and a six-year-old, because now your five-year-old

01:10:14.020 | and a six-year-old can go play in the yard by themselves.

01:10:15.940 | And so the yard is more helpful at those points

01:10:18.360 | than it is necessarily right now.

01:10:20.580 | So if you wanna wait, I think you're fine with waiting

01:10:23.220 | and saving more money.

01:10:24.460 | I don't see any reason not to take out a 30-year mortgage.

01:10:27.360 | If you, and it gives you more safety

01:10:30.340 | and may allow you to provide,

01:10:31.820 | it may provide you with a better lifestyle.

01:10:33.500 | So if your family's upgrading in lifestyle

01:10:35.780 | and you are gonna really find this house to be valuable,

01:10:40.780 | the house is gonna be valuable

01:10:42.820 | when your children are from four to, I guess, 18, right?

01:10:46.900 | 17, 16, that's the point in the time

01:10:48.660 | where it's gonna be really valuable.

01:10:50.340 | So if you have a 15-year mortgage

01:10:52.180 | and you buy this bigger house,

01:10:53.740 | so from when your children are four to 17 or 18,

01:10:57.140 | what's the point of having it paid off

01:10:58.780 | when your children are 19 years old?

01:11:01.980 | At that point in time, your need for the house

01:11:03.860 | is probably gonna be less.

01:11:05.080 | And so go ahead and if you need to,

01:11:07.860 | use the 30-year mortgage to allow you

01:11:09.740 | to move into the bigger house comfortably,

01:11:11.500 | where it's not a strain,

01:11:12.900 | live in the house during that period of time,

01:11:14.940 | and then pay off the mortgage by selling the house

01:11:17.460 | when your children are out of the house

01:11:19.540 | and buying a smaller house again,

01:11:21.940 | now that it's just you and your wife.

01:11:23.420 | I don't see any downside to getting the 30-year mortgage

01:11:25.420 | instead of the 15-year mortgage.

01:11:26.660 | And in fact, I think the opposite.

01:11:27.900 | I think that the opportunity cost of the 15-year mortgage

01:11:31.300 | can sometimes be really expensive.

01:11:33.940 | In the United States,

01:11:34.780 | the whole real estate market runs on debt.

01:11:36.940 | And the debt is easy to get, it's low interest rate,

01:11:39.920 | it's safe debt, it's fixed,

01:11:41.740 | and so you're safer in almost every situation

01:11:44.260 | by getting the 30-year mortgage.

01:11:45.980 | And if you wanna pay it like a 15, pay it like a 15,

01:11:48.340 | but I'd rather you get the 30-year

01:11:49.900 | and then buy another rental property.

01:11:51.500 | Or get the 30-year, live in it for 15 years,

01:11:53.700 | and then sell it and then downgrade,

01:11:54.900 | or do something like that.

01:11:55.820 | I don't see the really strong arguments

01:11:59.420 | for the 15-year mortgage myself.

01:12:01.120 | Did that clear anything up or help at all?

01:12:05.480 | - It does, it does.

01:12:07.780 | We never intended to be moving this quickly.

01:12:11.340 | It's just been a lifestyle change this year.

01:12:14.380 | I mean, of course, the kid's not gonna benefit now.

01:12:16.780 | A lot of it comes from my wife has an immune condition,

01:12:20.780 | so she's basically been housebound

01:12:23.020 | and is now working from home,

01:12:24.700 | and we never intended to have a setup for that.

01:12:28.300 | - Could you put a shed in the backyard

01:12:33.740 | or fix the work problem in some other way?

01:12:36.060 | - No, no, that's the other big stressor has been,

01:12:42.500 | and this is completely our lifestyle decision,

01:12:46.380 | we've got two big dogs and have a tiny yard.

01:12:48.220 | We didn't intend to do that when we bought the house.

01:12:50.100 | So we've made some choices that have accelerated

01:12:53.620 | us growing out of this house.

01:12:56.180 | We're not completely there yet.

01:12:57.380 | We're looking kind of casually at this point

01:12:58.980 | and trying to be prudent and plan this out

01:13:01.940 | and consider the different angles.

01:13:04.700 | And I guess struggling with the reality of the market

01:13:09.700 | is just our big hiccup right now,

01:13:14.460 | 'cause we can make arguments.

01:13:16.140 | - Self waste.

01:13:17.580 | - And trying to come down to,

01:13:19.580 | are we being foolish to decide to do this lifestyle thing?

01:13:24.300 | The only reason we had been so hesitant

01:13:26.660 | to move forward on the mortgage,

01:13:31.180 | the financing changes,

01:13:35.860 | not because we'll be looking at it

01:13:37.620 | outside of financing at that point, right?

01:13:39.500 | It's to be able to have the security of the lower payment.

01:13:42.540 | And at this point we save 100% of my wife's income

01:13:46.140 | and I love being able to preserve the opportunity

01:13:49.060 | for her to choose if she's working or not.

01:13:51.460 | We don't wanna be in a position where that's not an option.

01:13:54.660 | As we have more children,

01:13:55.860 | I want her to be able to decide if she wants to work or not.

01:13:58.620 | The fact that we went through a pandemic,

01:14:00.820 | being able to say, yeah,

01:14:02.220 | if she chooses to quit her job

01:14:04.340 | because they're forcing her to come in in person,

01:14:06.500 | like, yeah, whatever, no big deal.

01:14:08.540 | She'll find a job later.

01:14:11.060 | That flexibility has been so worth it,

01:14:15.500 | this year especially.

01:14:18.060 | And so that financing change would be

01:14:23.020 | to keep that level of flexibility in our lives

01:14:26.180 | moving forward with increasing lifestyle.

01:14:28.780 | - Right.

01:14:29.620 | Are you working from the house too during the pandemic?

01:14:32.860 | - No, no, I'm not.

01:14:35.500 | - How close is your house to your work?

01:14:37.460 | - I travel for work.

01:14:40.780 | So I am all over the state of Washington,

01:14:43.980 | but always home at night.

01:14:45.820 | So I'm paid to commute.

01:14:47.580 | It's kind of an interesting situation.

01:14:49.780 | - Is your wife or your family

01:14:51.460 | very close to where you live right now?

01:14:53.460 | - Not at all.

01:14:55.580 | - Then what if you just went more east, right?

01:14:59.580 | What if you went inland a little bit?

01:15:01.060 | Because if she's working from home,

01:15:02.980 | and I expect that in most cases,

01:15:06.020 | that can continue to be negotiated in the future.

01:15:09.700 | But if she's working from home,

01:15:11.140 | what if you head east a little bit

01:15:12.340 | where prices are not so significant?

01:15:14.140 | - She won't be, she'll be back.

01:15:16.780 | She teaches public school, so she's online right now,

01:15:19.820 | but next year is anticipating being back with her team.

01:15:23.380 | - Yeah, I wouldn't give up.

01:15:24.500 | I mean, you know my opinions if you've listened to the show.

01:15:28.220 | I would not give up.

01:15:29.900 | First of all, if we're saving 100% of my wife's income,

01:15:32.420 | I would keep saving 100% of my wife's income.

01:15:34.700 | I would not dedicate her income to lifestyle costs.

01:15:39.240 | If we can do it from my income,

01:15:40.580 | if I can increase my income and do it from that, fine,

01:15:43.340 | but I wouldn't dedicate her income to that

01:15:45.140 | because that makes it so easy.

01:15:47.860 | If she decides that, hey, I do wanna be a full-time mom,

01:15:51.580 | that makes it so easy because you know,

01:15:53.900 | yeah, we don't need your income to pay our bills.

01:15:55.860 | We're gonna be totally fine.

01:15:57.460 | And with one new baby, with her working from home,

01:16:01.340 | she's experiencing one set of conditions.

01:16:05.120 | If you have two or three children,

01:16:06.820 | things change dramatically.

01:16:08.140 | One child, you can afford the daycare, right?

01:16:11.300 | You can afford those kinds of,

01:16:13.740 | the expenses associated with that with one child.

01:16:16.300 | If you move to three and if she's a public school teacher,

01:16:19.220 | the financial argument for her to work,

01:16:21.260 | if you have three children versus one,

01:16:23.260 | that financial argument totally falls apart.

01:16:25.540 | And you're far better off as a family

01:16:27.500 | from a lifestyle perspective

01:16:29.060 | with the ability for her to be a full-time mom

01:16:32.980 | than you are with her working and earning,

01:16:35.060 | you know, 40 to $60,000 as a school teacher.

01:16:37.820 | And then trying to figure out

01:16:39.380 | how to take care of the three children.

01:16:40.580 | And so with those details, I would encourage you to punt,

01:16:44.940 | figure out if there's a temporary solution, right?

01:16:47.900 | She's not gonna be working from home forever.

01:16:49.940 | You have one child who's less than one year old.

01:16:52.480 | Your child is not gonna use the yard.

01:16:54.260 | The dogs will and you're gonna be out there

01:16:55.840 | with your poop bags, you know, keeping the yard up.

01:16:58.100 | But whatever, maybe it gets you out walking at night.

01:17:00.980 | But so that's annoying, but you made that choice.

01:17:03.860 | I would punt and I would punt a couple of years

01:17:07.200 | with the idea being that once she learns

01:17:10.740 | what it's like to be a mom,

01:17:12.340 | and if you have another baby,

01:17:14.780 | if you travel for work, then it should be fair,

01:17:17.900 | and your mom is not five minutes away

01:17:19.820 | or her dad is not around the corner.

01:17:22.540 | We can just come over and take care of the baby anytime.

01:17:24.740 | Then I think that would be an obvious solution for you

01:17:28.100 | instead of trying to stay in the inflated area

01:17:30.100 | where people have to be in that area for work.

01:17:32.120 | The obvious solution would be move further out

01:17:35.940 | in the suburbs, go ahead and get a place that's large,

01:17:39.780 | and even if you go up a little bit in price, that's fine,

01:17:42.840 | but go ahead and move out to the suburbs

01:17:44.200 | where you can get a large place.

01:17:45.860 | Then you'll really have a lifestyle improvement

01:17:47.980 | because to go from a postage stamp yard

01:17:50.260 | to a slightly bigger than a postage stamp yard

01:17:52.180 | is not that big of a deal.

01:17:53.520 | But to go from a postage stamp yard to a couple of acres

01:17:56.420 | is a huge deal when you have a seven year old,

01:17:58.720 | a five year old, and a three year old.

01:18:00.180 | And then if she's a full time mom and you travel for work,

01:18:03.220 | then in that situation, there's no reason

01:18:05.640 | why you can't build a much better lifestyle

01:18:08.060 | being 45 minutes east, which would just change everything

01:18:12.180 | for you in terms of these costs

01:18:14.820 | versus trying to be 10 minutes outside of where you are now.

01:18:19.380 | So that's what I would do.

01:18:20.200 | I would punt and I would wait a little bit

01:18:21.700 | to let things develop.

01:18:22.980 | - Yeah, yeah, that's the direction,

01:18:27.380 | the type of house we're moving.

01:18:28.900 | I guess when I say a little towards the area

01:18:31.660 | where there's a couple rural pockets in the area.

01:18:35.580 | Still, and so a little further outside of the city,

01:18:38.660 | but not crazy far is the type of thing

01:18:41.100 | we're looking at now, 'cause that's where we are wanting

01:18:44.220 | to be in the future.

01:18:47.480 | So thanks for the input.

01:18:52.180 | Are there any indicator signs you can think of

01:18:56.020 | to pay attention to as far as the general market goes?

01:19:01.020 | I guess in the back of our minds is we have been

01:19:04.380 | on such a, I don't know, full market applies to housing too,

01:19:08.900 | but housing's just exploded here in the past couple years.

01:19:12.660 | And we do have the concern in the backs of our minds

01:19:15.700 | is there anything we can look towards

01:19:17.860 | for early warning signs, especially as we progress

01:19:21.200 | through a lot of these government mandated rental

01:19:25.620 | and eviction and foreclosure scenario

01:19:29.780 | that we're in right now.

01:19:31.260 | - I don't understand what's happening

01:19:33.260 | in the real estate market in the United States right now.

01:19:35.340 | I do not understand it.

01:19:36.620 | And I've followed it, but I get reports

01:19:40.820 | from people all across.

01:19:43.500 | For example, my understanding is that rural properties

01:19:46.580 | are selling like crazy.

01:19:48.620 | Even if you move to rural Washington or rural Oregon,

01:19:53.020 | rural properties are selling like crazy.

01:19:55.500 | I'm hearing that even vacation properties,

01:19:58.180 | lake properties are selling like crazy.

01:20:00.340 | I got a client of mine who's trying to buy a house

01:20:03.020 | on a lake in the central Michigan.

01:20:05.940 | And he can't get a house accepted.

01:20:08.860 | In many markets in South Florida, everything is nuts.

01:20:13.860 | There's no decrease in prices and houses are selling

01:20:17.540 | with full offers on exactly the same day.

01:20:19.940 | And I don't know where the demand is coming from.

01:20:21.980 | I'm totally confused right now by what's happening

01:20:24.820 | in the real estate market in the United States.

01:20:26.540 | And so what I would say is, my only advice is,

01:20:29.340 | don't try to worry about the whole country.

01:20:31.060 | Worry about your neighborhood, your town,

01:20:34.500 | and figure out what's happening in my town.

01:20:37.100 | If there's a big tech company

01:20:39.700 | that is your biggest employment option,

01:20:41.340 | that tech company is not losing right now.

01:20:44.060 | Whereas if you're competing with people

01:20:46.580 | who are blue collar workers whose businesses got shut down,

01:20:50.860 | then you can expect that things to pull through.

01:20:54.300 | But it feels to me like right now,

01:20:56.360 | the whole country is just kind of sitting

01:20:58.460 | and waiting to see what happens with the election.

01:21:01.060 | And I don't know what's gonna change

01:21:02.420 | with the election one way or the other,

01:21:03.540 | but I don't understand it, I guess is the best thing.

01:21:06.220 | You have to look at your local market.

01:21:07.660 | I don't understand what's happening

01:21:08.780 | across the whole country at the moment.

01:21:10.220 | Enough to speak on it.

01:21:11.320 | - Yeah, us either.

01:21:14.340 | It's a little odd and not what we're used

01:21:19.340 | to seeing historically.

01:21:21.220 | So it's got us a little uncomfortable too.

01:21:23.180 | - Yeah, cool.

01:21:24.420 | Well, I think that, like I said, in your situation,

01:21:27.040 | I think everybody, all the signs in my opinion are punt.

01:21:30.540 | And I think that with a new baby, just punt.

01:21:32.940 | Punt for a little while.

01:21:33.900 | Your wife is gonna learn a lot over the next couple of,

01:21:37.260 | over the months in the year.

01:21:38.780 | And one baby, two babies, three babies,

01:21:41.580 | those are big changes in her lifestyle

01:21:44.260 | and big changes with the employment situation.

01:21:46.420 | And so I would not commit myself to something

01:21:48.300 | that requires her income for us to flourish

01:21:51.820 | in that kind of situation.

01:21:53.820 | We move on to Andy in Indiana.

01:21:54.900 | Welcome, sir.

01:21:55.720 | What's the interview today?

01:21:57.260 | - Hey, Joshua.

01:21:58.100 | Thanks for taking my call.

01:21:59.260 | I actually didn't have a question in particular.

01:22:01.300 | I was just calling to make a comment about home mortgages.

01:22:05.860 | Your audience is pretty savvy,

01:22:09.060 | so probably everybody else is ahead of me on this,

01:22:11.660 | but I'm in the process of refinancing

01:22:13.660 | all of the real estate debt that I have

01:22:17.800 | and rates are, I think, crazy low.

01:22:19.940 | And I was able to just tell them

01:22:22.020 | that my house I bought a year ago has gone up 15%.

01:22:24.660 | And they said, "That sounds about right,"

01:22:26.780 | and gave me a, I'm blanking on the word,

01:22:31.660 | but a waiver where I don't have to get it appraised.

01:22:34.380 | - Great. - Appraisal waiver.

01:22:35.500 | And saved 500 bucks on closing costs that way.

01:22:39.000 | So it just seems like a really great time

01:22:40.460 | to be refinancing or at least considering that

01:22:42.580 | for any real estate debt.

01:22:45.340 | - That's a great tip.

01:22:46.420 | And definitely, I think that right now,

01:22:48.780 | the idea of refinancing is certainly worth doing.

01:22:53.180 | I don't predict any kind of exploding interest rates,

01:22:56.180 | but when you have the opportunity

01:22:57.700 | to borrow money at the current rates,

01:22:59.660 | if you can borrow money, and again, markets are high,

01:23:03.700 | if you can borrow that money on a home mortgage,

01:23:06.460 | even if you put the money in the bank

01:23:07.820 | and wait and see what happens,

01:23:09.560 | I think that's a very reasonable situation.

01:23:11.780 | If you've got a goal of paying off the house,

01:23:13.180 | obviously, follow your plan.

01:23:15.340 | But I have certainly encouraged a number of people,

01:23:18.480 | refinance the house, take the money,

01:23:20.140 | and just sit and wait,

01:23:20.980 | and wait for some investment opportunities to appear.

01:23:24.300 | Because the opportunity cost on doing that is so low.

01:23:27.460 | If you take the money out and you say,

01:23:28.940 | "I'm gonna buy a rental house,"

01:23:30.420 | or whatever you're doing with the money that's profitable,

01:23:33.060 | right, don't spend it necessarily.

01:23:34.620 | But if whatever you're doing,

01:23:35.460 | and you leave it in the bank for two years,

01:23:38.400 | you calculate the interest cost

01:23:39.760 | that you'll spend from doing that,

01:23:41.380 | and you say, "No deals emerged,

01:23:42.780 | "we'll just pay down the mortgage again."

01:23:44.060 | But the cost of doing that right now is very, very low.

01:23:47.500 | And I think it's well worth doing for the average person.

01:23:49.560 | - Thanks for the tip, Andy, appreciate it.

01:23:51.700 | - And the other comment I was gonna make,

01:23:53.420 | I don't know if you saw this,

01:23:54.860 | but I saw with the CARES Act,

01:23:57.660 | the first national moratorium on eviction for late rent

01:24:02.660 | was based on if that house had a federally subsidized,

01:24:09.780 | anything involved with it,

01:24:12.980 | which included a mortgage owned by Fannie Mae or Freddie Mac.

01:24:15.660 | So where I'm refinancing to,

01:24:17.860 | I'll be going from being owned by Freddie Mae, Freddie Mac,

01:24:21.440 | to a local bank owning and servicing those mortgages,

01:24:25.720 | which, not that I had a problem with that,

01:24:29.100 | but that kind of makes me happy to get that as well.

01:24:31.080 | I just noticed that as I've been reading

01:24:32.640 | about real estate lately,

01:24:33.520 | and didn't know if others had seen that.

01:24:35.900 | - So is what you're saying that you are potentially

01:24:39.880 | losing some of the protection

01:24:41.200 | that the CARES Act was providing,

01:24:42.760 | because you're going from a Fannie Mae, Freddie Mac loan

01:24:46.040 | to a private loan?

01:24:48.000 | - Sorry, so I, as a landlord, as I understand it,

01:24:51.720 | 'cause the houses were owned by,

01:24:54.700 | the mortgages on my rental houses

01:24:58.000 | were owned by Fannie Mae, Freddie Mac,

01:24:59.620 | the CARES Act prohibited me from evicting,

01:25:02.680 | which didn't matter to me, but it did.

01:25:05.240 | And then if this is owned by a private bank,

01:25:07.960 | that CARES Act, which has now,

01:25:09.540 | that provision has now expired.

01:25:10.880 | But if they did that again, I would be out from under it.

01:25:13.320 | - That is a great point.

01:25:14.560 | Now I understand it's for a rental,

01:25:15.820 | not for your personal residence.

01:25:17.160 | So now as a landlord, you have more protection,

01:25:19.920 | because now you're not dealing with the government

01:25:23.360 | as a lender, you're dealing with a private entity.

01:25:25.600 | And so unless your state passes

01:25:28.240 | some kind of broad-based moratorium

01:25:30.360 | that applies to private lenders,

01:25:31.720 | you're protected from the federal action.

01:25:33.080 | Great point, Andy, I love it.

01:25:34.040 | Good move.

01:25:34.880 | - Cool. - All right, well,

01:25:38.080 | that was all I had.

01:25:38.900 | Thank you. - Awesome.

01:25:39.740 | Appreciate the input.

01:25:40.580 | All right, final call of the day.

01:25:41.400 | We go to, it says Grand Prairie.

01:25:43.640 | I can't see where that is.

01:25:44.480 | Michigan, I can't remember.

01:25:45.320 | Is that Minnesota, Michigan?

01:25:46.960 | My screen is blank. - Texas.

01:25:48.520 | - Texas, oh, there we go.

01:25:49.360 | - It's actually Fort Worth, Texas.

01:25:52.320 | - Welcome, sir, how can I serve you today?

01:25:54.640 | - Hi, Josh.

01:25:55.680 | Your podcast on the New York Times article was fascinating,

01:25:59.200 | and the way you were able to provide clear insights

01:26:02.240 | into various tax features and practices,

01:26:05.520 | and just the mindset one should have towards tax planning.

01:26:08.860 | - Thank you. - But my question

01:26:11.600 | goes to some of the pieces I have trouble

01:26:15.000 | connecting the dots on is things like on whose tax return

01:26:20.000 | do things like business expenses, losses, depreciation,

01:26:25.080 | get reported beyond anything that's a sole proprietorship?

01:26:28.840 | And so we talked about, you talked about Trump's 500

01:26:31.800 | companies, and so I didn't quite understand

01:26:35.860 | how are Trump's losses in business entities,

01:26:39.400 | these losses that we talked a lot about,

01:26:41.640 | how are those making it onto his personal return,

01:26:45.080 | or reducing his personal income,

01:26:50.080 | and am I even getting that part of it wrong?

01:26:53.680 | - Yeah, so it's hard because we're dealing

01:26:58.560 | with a newspaper article, not the returns,

01:27:01.080 | would be my basic approach, and I don't know the answer.

01:27:05.660 | So let me just start with I don't know,

01:27:09.220 | because I'm not competent enough from the newspaper article

01:27:12.600 | to know all of those questions.

01:27:15.920 | When, for example, they say he has 500 companies,

01:27:18.400 | we don't know, I don't know whether those companies,

01:27:22.400 | what the structure is of those companies,

01:27:24.580 | and how each of them is being taxed.

01:27:27.840 | Obviously each of them can be a number of,

01:27:29.560 | can be different structures.

01:27:32.160 | So they could be pass-through entities,

01:27:35.000 | in which, and thus if they're pass-through entities,

01:27:38.980 | then the taxes roll up to the parent organization.

01:27:42.720 | So if you have your company A,

01:27:44.560 | and you have subsidiary B and subsidiary C,

01:27:49.560 | but if subsidiary B and subsidiary C

01:27:51.960 | are pass-through entities,

01:27:53.780 | then the losses of the profits roll up to company A.

01:27:57.080 | And so that makes sense, right?

01:27:58.920 | If Berkshire Hathaway has a loss on Furniture Mart,

01:28:02.680 | then Berkshire Hathaway is netting that loss

01:28:05.920 | against the other businesses.

01:28:07.820 | And I don't know the extent to which,

01:28:11.280 | I don't know the extent to which,

01:28:13.760 | how his actual companies are structured.

01:28:15.840 | I doubt the New York Times reporters

01:28:17.720 | fully understand it as well.

01:28:19.520 | I mean, it's obviously incredibly complex.

01:28:21.920 | I don't know, I don't know the answer to that fully.

01:28:26.320 | I think the important thing,

01:28:27.480 | that I feel like I glossed over it too much,

01:28:29.600 | the important thing is not to minimize,

01:28:32.280 | when you look at Trump's taxes,

01:28:34.440 | is that, is not to minimize how big of a deal

01:28:38.340 | his ability to take advantage of that 2009 tax credit was,

01:28:42.540 | that he had a huge amount of taxable income,

01:28:45.400 | but because that tax credit was passed,

01:28:47.940 | where instead of his losses being limited

01:28:50.020 | to being deducted over the last two years,

01:28:51.820 | but they could look back,

01:28:53.440 | then that allowed him to wipe out the big portion of taxes.

01:28:58.440 | With regard to his, you know, the last couple of years,

01:29:02.080 | what I would say is that probably,

01:29:04.420 | the Times article led me to believe

01:29:06.820 | that just simply his businesses are eating up cash,

01:29:09.820 | and he was getting cash by refinancing.

01:29:11.960 | And so that's the clear picture they made.

01:29:14.740 | And the point I tried to, that they painted,

01:29:16.740 | and the point I tried to make was,

01:29:18.580 | we don't know whether President Trump

01:29:21.020 | is actually a great businessman,

01:29:23.100 | and his businesses are just doing swimmingly,

01:29:26.020 | and these losses are merely paper losses

01:29:28.480 | that are offset by other gains in other places, right?

01:29:32.880 | We don't know if maybe he bought this awesome deal,

01:29:35.680 | he bought this golf course for $50 million,

01:29:38.480 | but in the last three years,

01:29:40.400 | although he's poured $30 million a year into it,

01:29:43.600 | and it's thus creating giant losses for him,

01:29:47.040 | it actually magically became worth $500 million

01:29:50.960 | over the last three years.

01:29:52.000 | We don't know if that's true,

01:29:53.620 | or if he's just simply a mediocre businessman,

01:29:56.520 | and these losses are real losses,

01:29:58.520 | and he is actually scrambling,

01:30:01.240 | like the Times article led us to believe,

01:30:03.540 | that he's scrambling and saying,

01:30:04.640 | "How can we cover the debt?"

01:30:05.720 | The data is unclear.

01:30:07.840 | And so what I would say is that

01:30:10.020 | while it's impressive planning

01:30:13.040 | that he has been able to reduce his taxable income so low,

01:30:18.040 | that's not to say that that's always the best move,

01:30:21.000 | because we don't know whether he's actually, again,

01:30:24.040 | a mediocre businessman,

01:30:25.440 | or whether these are just paper losses.

01:30:27.760 | So how it's structured, I don't know.

01:30:30.720 | What I would say is that

01:30:32.000 | because the vast majority of his empire is real estate,

01:30:35.520 | then there's a parent corporation

01:30:38.540 | or a parent holding company

01:30:40.400 | that is where the taxes are being paid at the entity level,

01:30:43.840 | and they're netting the losses against it.

01:30:45.400 | And also with him being very clearly

01:30:47.360 | a full-time real estate professional,

01:30:52.480 | he can deduct his losses against any other type of income.

01:30:57.480 | And that's something that is available to

01:31:00.840 | a full-time real estate professional.

01:31:02.880 | That if you are classified

01:31:04.320 | as a full-time real estate professional,

01:31:06.340 | then you can deduct 100% of your losses

01:31:08.860 | against your ordinary income.

01:31:10.440 | And so if he was earning ordinary income

01:31:12.820 | from his work with a show,

01:31:13.920 | if NBC was paying him ordinary income

01:31:16.520 | of whatever the price was,

01:31:19.200 | then, or if his entity,

01:31:21.280 | where he was doing the apprentice through,

01:31:22.680 | was paying him ordinary income,

01:31:24.880 | because he is a real estate professional,

01:31:27.480 | he can deduct his real estate losses

01:31:29.640 | against that ordinary income.

01:31:31.360 | Most people don't qualify as a real estate professional,

01:31:33.920 | but he clearly does.

01:31:34.880 | And so that would be the other kind of important part

01:31:37.960 | that would work in that situation.

01:31:41.200 | And so the way you can set that up--

01:31:42.360 | - So that look back,

01:31:44.360 | the look back then worked on real estate losses

01:31:47.560 | or those business losses?

01:31:49.020 | - I think so, I think so.

01:31:50.320 | - He's going against his personal income

01:31:53.360 | strictly because of that, he's in that industry.

01:31:56.400 | - I think so, yes.

01:31:57.500 | And again, I'm not the world's greatest tax expert.

01:32:00.720 | I do my very best,

01:32:02.040 | but I wanna always proceed with,

01:32:03.740 | there are people way smarter than me.

01:32:05.800 | I'm just probably one of the few people

01:32:07.560 | that publish it, that talks publicly about this stuff.

01:32:10.280 | But I try to understand it,

01:32:11.720 | and I try to share my understanding with you.

01:32:13.240 | But yes, it's because of his real estate professional status

01:32:16.120 | that he was able to expand,

01:32:18.840 | when they passed the 2008 expansion of losses,

01:32:23.840 | then that allowed him to wipe out the profit.

01:32:27.640 | Because basically, as a real estate professional,

01:32:30.080 | here's what I understood, kind of speaking big picture.

01:32:32.800 | President Trump doesn't generally make that much income.

01:32:36.480 | He doesn't usually do that,

01:32:37.740 | because he started with money,

01:32:40.480 | and then most of his income

01:32:42.960 | has come through developing projects and renting them out.

01:32:46.920 | But he's primarily trying to spend capital gains.

01:32:50.080 | And so he's done most of his investing with debt.

01:32:53.040 | That was what he clearly talked about

01:32:54.920 | in "The Art of the Deal," right?

01:32:55.800 | He was a billion dollars in debt,

01:32:56.920 | and he turned to whichever wife he was married to

01:32:59.820 | at the time, and he said,

01:33:01.360 | "That bum on the street over there

01:33:02.640 | "has a billion dollars more than I do."

01:33:04.680 | So that was his famous story.

01:33:06.440 | And so most of his income,

01:33:08.420 | sorry, most of his business activities

01:33:10.240 | are financed by debt.

01:33:11.160 | That's common in the real estate space.

01:33:13.360 | He inherited some money.

01:33:14.920 | He used that money for personal expenses,

01:33:17.240 | but then most of his work is with debt.

01:33:19.200 | And so if you imagine yourself

01:33:20.220 | that you're a real estate developer, what do you do?

01:33:22.480 | Well, you finance the project,

01:33:24.300 | you oversee the work,

01:33:25.640 | and then you refinance the project.

01:33:27.680 | And with the refinancing,

01:33:29.380 | you take your profits from the refinance,

01:33:31.420 | no taxable income,

01:33:32.500 | because you're taking a profit from a refinance,

01:33:34.560 | and you're hoping in time

01:33:36.160 | that the property will appreciate in value.

01:33:38.900 | And if you do this right,

01:33:40.840 | you have enough money from the refinance

01:33:43.220 | for you to live on,

01:33:44.600 | and thus you don't have taxable income

01:33:46.760 | 'cause you're taking out loans.

01:33:48.320 | But your business,

01:33:49.760 | the rents that you're receiving from your tenants

01:33:52.100 | are sufficient to cover the mortgages,

01:33:54.000 | to cover the notes,

01:33:55.120 | and you might get a little bit of profit on the top,

01:33:57.320 | but probably not a ton,

01:33:58.500 | especially by the time you bring in depreciation expenses.

01:34:01.180 | So you shelter most of your current profit,

01:34:03.720 | and then your big wins,

01:34:05.240 | if there are any big wins,

01:34:06.400 | will come from appreciation,

01:34:07.960 | which you'll realize when you sell the property.

01:34:11.000 | So it's very easy for a real estate developer

01:34:13.400 | to live a very tax-efficient lifestyle

01:34:15.400 | because most of the time,

01:34:16.560 | the money that they're spending

01:34:17.760 | for their personal consumption is debt.

01:34:20.360 | And they're keeping their portfolio,

01:34:23.200 | and thus avoiding incurring capital gains taxes

01:34:25.640 | on the sale of the portfolio.

01:34:27.160 | Now, what business was that he was involved in changed that?

01:34:30.800 | Well, his success was The Apprentice, right?

01:34:32.880 | He had other endeavors.

01:34:34.280 | He had the stakes.

01:34:35.500 | He had the beauty pageant.

01:34:37.180 | But in my reading about those,

01:34:39.240 | most of those have either been relatively small fish

01:34:42.400 | or relatively unsuccessful, right?

01:34:44.840 | They just weren't,

01:34:45.680 | the beauty pageant was a token thing that he liked to do

01:34:48.920 | because it gave him a fun way to be this celebrity

01:34:51.680 | and to look at beautiful women.

01:34:54.180 | But it wasn't a big moneymaker.

01:34:56.080 | The moneymaker was The Apprentice.

01:34:57.920 | And so when The Apprentice came along,

01:34:59.640 | that created income that was just pure income

01:35:02.800 | from the profit.

01:35:03.620 | So that created a hundred,

01:35:05.000 | what was it, $400 million of profit

01:35:08.580 | over the course of the running of The Apprentice.

01:35:10.520 | And so that's what he wasn't able to shelter

01:35:12.880 | because it was actual profit.

01:35:14.760 | So when The Apprentice ended,

01:35:16.720 | that ended his cash generating businesses.

01:35:19.200 | And now he was back to real estate,

01:35:20.900 | which is very tax efficient.

01:35:22.480 | And then it was a stroke of luck for him

01:35:25.240 | that he had all these losses from real estate

01:35:27.640 | that hit that 2008 extension of the look back period.

01:35:32.260 | That was the stroke of luck for him

01:35:33.640 | for him to apply for that $70 million thing.

01:35:36.080 | And so you can't,

01:35:37.440 | I've never been able to figure out any way

01:35:39.280 | that an American can shelter $400 million of profit

01:35:43.760 | from a TV show.

01:35:45.800 | There's nothing available that's gonna shelter that.

01:35:48.920 | You can't also go and all of a sudden

01:35:52.000 | buy a bunch of real estate and have that work.

01:35:53.840 | But for him, he was a full-time real estate guy,

01:35:56.540 | very tax efficient business.

01:35:58.160 | And then he had this big hit

01:35:59.400 | and then he had a very fortuitous timing

01:36:01.280 | of that tax deduction.

01:36:02.200 | And that's the basic underpinnings of the story.

01:36:05.220 | - Okay, well, let me shift gears slightly

01:36:09.240 | and thinking about this in terms of,

01:36:11.600 | having our own business as you encourage us to do

01:36:17.320 | and thinking about starting a small business,

01:36:21.380 | at what point does one move

01:36:25.040 | from reporting business profit or loss

01:36:28.560 | through your personal tax return

01:36:31.160 | to the business entity filing a tax return?

01:36:36.160 | And then, well, yeah,

01:36:41.160 | I'm trying to resolve how losses credit to you personally

01:36:50.880 | in that case versus to the business entity

01:36:58.720 | as a separate entity and taxing tax return, I guess.

01:37:04.560 | - So let's begin with what's deductible for a business

01:37:07.140 | versus what's deductible for real estate

01:37:08.800 | because that's important.

01:37:10.140 | The reason why President Trump can deduct

01:37:13.400 | his losses of real estate against his personal income

01:37:15.880 | is because he is a real estate professional.

01:37:19.000 | There are three classifications

01:37:21.120 | that the IRS uses for real estate.

01:37:22.840 | One is a passive investor.

01:37:25.120 | And so if you're a passive investor,

01:37:26.600 | you go and you buy your neighbor's house when they sell it

01:37:29.200 | and you own one house, then in that situation,

01:37:33.200 | you are only, wait, would that be a passive investor

01:37:36.240 | or an active investor?

01:37:37.460 | I need to check the rules on that,

01:37:40.480 | but let's just punt that.

01:37:43.080 | So if you're a passive investor,

01:37:45.080 | okay, so I think that this would be where

01:37:47.000 | if you go and you join,

01:37:48.720 | so let's say you join a local real estate investing club

01:37:51.800 | and you are investing in real estate,

01:37:55.440 | but simply as a passive investor,

01:37:56.840 | you're not active in the business,

01:37:57.980 | you're investing with a group, a consortium of people,

01:38:00.600 | but then you're a passive investor.

01:38:02.240 | In that situation, you can only deduct your passive losses

01:38:06.180 | against your passive gains.

01:38:07.960 | So your pals and your pags,

01:38:09.680 | which is how we remember it in the CFP, right?

01:38:11.280 | Your pals and your pags get put together.

01:38:14.120 | So losses, passive losses,

01:38:16.360 | only are deducted against passive gains.

01:38:18.280 | And this was a big deal when the tax code changed,

01:38:20.680 | I guess it was about the '80s,

01:38:22.280 | because previously people would go

01:38:24.280 | and they would invest in all kinds of,

01:38:26.320 | you know, an oil well and all these real estate projects.

01:38:29.280 | And the reason they did it, they would buy these,

01:38:31.360 | they would invest into a consortium,

01:38:33.320 | a company would put together a big real estate project,

01:38:35.720 | and they would say, "Listen, if you buy this,

01:38:37.400 | "then we'll give you a tax shelter for it

01:38:39.220 | "because we're gonna lose money

01:38:40.360 | "by the time we bring in our depreciation expense

01:38:42.400 | "on our real estate or our depletion expense

01:38:44.400 | "on our oil wells,

01:38:45.960 | "and so we're gonna report to you a passive loss."

01:38:49.920 | And at that time, you could net your passive losses

01:38:52.240 | against your other sources of income.

01:38:54.480 | And so the IRS changed all those rules,

01:38:56.240 | and forgive me, I'm just off the top of my head here,

01:38:58.280 | I would have to check the dates,

01:38:59.540 | but I think it was the '80s,

01:39:00.840 | and they have moved all of that.

01:39:02.280 | And so now your passive losses

01:39:04.040 | have to get netted against your passive gains.

01:39:06.360 | And you can only deduct those passive losses

01:39:08.560 | to the extent that you have gains.

01:39:10.000 | So if you buy shares in an oil well,

01:39:12.800 | and your depletion expense exceeds your income,

01:39:16.440 | your depletion expense exceeds your profits,

01:39:20.600 | then you won't have any taxes due,

01:39:22.880 | but those passive losses have to sit there

01:39:25.640 | until that oil well or your other passive losses

01:39:29.420 | generate gains for you.

01:39:30.720 | So that's the first thing is a passive investor.

01:39:33.000 | Now, the second thing is an active investor.

01:39:35.840 | So here is where you buy your neighbor's house.

01:39:37.880 | And so as an active investor,

01:39:39.920 | you can deduct losses against ordinary income,

01:39:43.540 | but you can only deduct that up to a limit of $25,000.

01:39:47.720 | And that phases out at,

01:39:49.760 | it was like $150,000 of adjusted gross income

01:39:52.520 | for a married couple filing jointly,

01:39:54.920 | so $100,000 for an individual.

01:39:57.580 | So if you go and you become an active investor,

01:40:00.760 | you buy your neighbor's house.

01:40:02.280 | And if that neighbor's house generates a loss for you,

01:40:05.760 | where the costs of the property

01:40:08.920 | plus the depreciation expense exceed the profit,

01:40:11.940 | so you have a loss,

01:40:13.080 | you can net that up to $25,000 of losses

01:40:16.620 | against your ordinary income

01:40:18.560 | if your adjusted gross income is below $150,000

01:40:22.200 | for a married couple filing jointly

01:40:23.700 | or $100,000 for a single individual.

01:40:26.160 | So that's if you're an active investor.

01:40:28.940 | Now, the third classification

01:40:30.400 | is to become a real estate professional.

01:40:32.680 | So if you become a real estate professional,

01:40:35.160 | then you can deduct all of your real estate losses

01:40:38.100 | against your ordinary income.

01:40:40.120 | And so again, that's what Trump is doing.

01:40:41.680 | You can deduct all of your real estate losses

01:40:43.700 | against your ordinary income.

01:40:45.800 | And so what do you do in your household?

01:40:47.280 | Maybe you have an ordinary income of $500,000,

01:40:51.940 | but your wife is a full-time real estate professional.

01:40:54.720 | She qualifies as a full-time real estate professional.

01:40:56.680 | She spends the majority of her time

01:40:58.280 | in a real property business.

01:40:59.740 | She spends 750 hours or more per year in that business,

01:41:04.120 | and she materially participates in that business.

01:41:06.520 | So now, to the extent that your properties produce losses,

01:41:09.640 | you can net all of those losses against your earned income.

01:41:13.520 | So that's the real estate.

01:41:14.440 | Now let's pivot to business,

01:41:15.680 | and let's talk about business losses.

01:41:17.560 | So here, the type of ownership matters tremendously.

01:41:21.700 | At the simplest level,

01:41:22.920 | which I talked about earlier in the show,

01:41:24.560 | a sole proprietorship has the ability

01:41:29.560 | to deduct unlimited losses against ordinary income.

01:41:36.440 | And so you can deduct any loss in that

01:41:40.200 | against your ordinary income.

01:41:42.000 | An S corporation and a C corporation

01:41:44.000 | are limited to deducting their losses

01:41:46.120 | against the capital that's been contributed.

01:41:48.560 | So you can only deduct your,

01:41:53.480 | man, I wish I had a reference book in front of me.

01:41:56.120 | You can only deduct your losses

01:42:00.920 | against what's actually been contributed to the company,

01:42:04.440 | and against your actual adjusted basis.

01:42:08.000 | So you can't start an S corporation or a C corporation,

01:42:12.100 | lose a million dollars in those,

01:42:14.140 | and then use that to offset

01:42:15.600 | your other million dollars of earned income.

01:42:17.580 | You can only use that to reduce you

01:42:20.120 | up to your basis that you put into it.

01:42:22.320 | And I can't, since I don't work with it every day,

01:42:26.120 | I can't do any better than that right at the moment,

01:42:28.160 | just off the top of my head.

01:42:29.560 | I would just point out that

01:42:30.640 | you can't just magically start a company

01:42:32.880 | and then use that company

01:42:34.120 | to reduce all the rest of your losses everywhere.

01:42:37.480 | Now, what you can do is you can,

01:42:39.880 | if you're a passive investor,

01:42:41.120 | you can net passive losses against passive gains.

01:42:45.360 | And so if you had one company,

01:42:47.520 | it would be in theory possible to

01:42:51.520 | net a company,

01:42:52.640 | one company against another

01:42:55.040 | if they're related for the individual.

01:42:57.000 | But I'm a little lost now.

01:42:58.200 | So I'm gonna stop talking.

01:42:59.160 | And I would say is that

01:43:00.080 | for some of my expert accountants in the audience,

01:43:02.120 | send me an email.

01:43:03.200 | And if you can explain this better than I'm doing it,

01:43:05.540 | I'd love to profile this out in more detail

01:43:07.920 | for the audience.

01:43:08.920 | So send me an email, joshua@radicalpersonalfinance.com.

01:43:11.400 | But in summary, what I would say is that

01:43:13.000 | it's just not possible to do it

01:43:14.720 | unless you're really involved with real estate.

01:43:17.020 | - Yeah, well, you covered the basic point

01:43:20.400 | in that real estate's different,

01:43:22.960 | but these others,

01:43:24.480 | sole proprietorship works on your personal return,

01:43:28.560 | basically those losses.

01:43:30.320 | And then these other entities,

01:43:31.820 | I guess you put distinct capital into those,

01:43:37.460 | it becomes a separate entity from your personal

01:43:41.720 | income and tax return.

01:43:46.760 | And only if you get paid from those,

01:43:48.860 | is from those entities is how the two start to mix.

01:43:53.860 | - Right, right.

01:43:58.940 | So if you're gonna have related businesses,

01:44:00.780 | and your businesses,

01:44:02.460 | so let's use an example, okay,

01:44:04.440 | to try to clarify this.

01:44:06.120 | I'm not aware of any rule that would say

01:44:08.500 | that you can't have disparate businesses involved

01:44:13.220 | in your business and net them together

01:44:16.060 | if it's part of your activity.

01:44:17.180 | So let's use a company like General Electric, right?

01:44:20.660 | General Electric famously produces stuff,

01:44:23.380 | they make stuff,

01:44:24.260 | but they're also a massive financing company.

01:44:26.780 | And so if you have a company that has two divisions,

01:44:30.600 | one is a financing company,

01:44:32.460 | and the other makes stuff,

01:44:34.260 | well, you can use that as a way to net that income together

01:44:39.260 | in order to avoid taxes.

01:44:41.460 | So if you're, let's say that your manufacturing business

01:44:44.000 | loses money because you've got so much money

01:44:46.100 | on plant, capital, depreciation, et cetera,

01:44:49.100 | but your financing business has very low expenses

01:44:51.920 | and it makes money,

01:44:53.100 | you have the ability to net those two things

01:44:55.100 | against each other

01:44:56.300 | because in order to reduce your overall taxable income

01:45:00.220 | at the end of the year.

01:45:01.380 | Now, in that situation,

01:45:02.740 | you would clearly have a C corporation, right?

01:45:05.340 | So what happens tax-wise?

01:45:07.300 | The business nets all of the income,

01:45:10.420 | and then the business pays taxes on the profit that year

01:45:14.500 | under the corporate income tax rates.

01:45:17.020 | And then that same business issues a dividend

01:45:20.100 | to their shareholders.

01:45:21.620 | And then the shareholders, when they receive the dividend,

01:45:24.460 | they pay taxes on that dividend income.

01:45:27.900 | And so that's clearly the case with that kind of business.

01:45:32.400 | And so if you have a business yourself,

01:45:35.180 | where you think that there's something you would do

01:45:37.120 | that would not be profitable or less profitable

01:45:39.780 | and something that would be more profitable,

01:45:41.220 | you can certainly do that.

01:45:42.700 | You can have in your business multiple lines.

01:45:45.380 | And so you can structure that under your personal business.

01:45:48.260 | And so all of the same rules apply

01:45:51.060 | that I talked about earlier.

01:45:52.220 | If the business is involved in something

01:45:54.420 | and it's something that you would enjoy,

01:45:55.860 | you can structure that under your business.

01:45:57.700 | Now, if it's a C corporation,

01:45:58.900 | the business will net the income

01:46:01.260 | and the losses together underneath it.

01:46:03.140 | And then it'll declare a dividend to you, the owner,

01:46:06.700 | and then you'll pay taxes to the owner.

01:46:08.360 | You can do the same thing in an S corporation

01:46:10.220 | and the taxes will flow through to you.

01:46:12.220 | You could do the same thing in multiple sole proprietorships.

01:46:14.700 | It's just a matter of where does my income come from?

01:46:17.220 | If you have a job, then that was what I was saying earlier

01:46:20.620 | when I was talking about the advantage

01:46:21.460 | of a sole proprietorship.

01:46:22.700 | If you have a job where you're earning a salary

01:46:24.620 | in the family, then the sole proprietorship is useful,

01:46:27.140 | but there's a big danger there

01:46:28.300 | because you don't have any asset protection

01:46:30.180 | and it's more likely to be disqualified.

01:46:32.420 | If you have an S corporation

01:46:34.220 | and you net your activities together,

01:46:37.760 | you might have multiple forms of business

01:46:40.100 | that you're engaged in,

01:46:41.480 | but I'm not aware of any rule, could be there,

01:46:43.500 | but I'm not aware of any rule that says

01:46:44.940 | these businesses all have to be exactly the same thing.

01:46:47.820 | You just need to make sure

01:46:48.700 | that you report the profits from your business

01:46:51.100 | and you need to prove that these are genuine lines

01:46:54.100 | of business.

01:46:55.060 | So if I have a business that,

01:46:57.460 | earlier I gave the example

01:46:58.500 | of my starting a photography company.

01:47:00.500 | If I have a car dealership

01:47:09.300 | and I also start a photography company,

01:47:11.680 | I just need to make sure

01:47:12.880 | that the decisions that I'm making under this business

01:47:16.600 | qualify as being ordinary necessary business expenses.

01:47:20.960 | And so I always need to be able to prove to my auditor

01:47:23.980 | that I'm making wise business decisions.

01:47:26.080 | I'm not just throwing money down the drain,

01:47:28.480 | but if my expenses are ordinary and necessary

01:47:30.880 | with a clear profit motive,

01:47:32.480 | then I can net them together

01:47:33.920 | underneath whichever corporation

01:47:36.080 | I'm paying the taxes out of.

01:47:38.480 | Okay.

01:47:39.320 | All right, that helps some.

01:47:41.700 | - Yeah, may you have great wisdom

01:47:44.100 | as you figure out how to make things better from here.

01:47:49.100 | All right, I had one more question come in,

01:47:52.260 | but I'm gonna save it.

01:47:53.100 | It came in on the chat from a listener who had to go.

01:47:55.100 | So Ori, call in next week and we'll try it again,

01:47:57.980 | but I'm gonna save that question.

01:47:59.100 | I think an hour and 48 minutes is sufficient.

01:48:01.300 | Thank you all for listening to today's podcast.

01:48:03.740 | I would encourage you, take these ideas,

01:48:05.220 | apply them to your own personal life

01:48:06.700 | and take action.

01:48:07.540 | Thank you for listening.

01:48:08.380 | If you'd like to join me on next week's Q&A show,

01:48:09.780 | please go to Patreon and search for Radical Personal Finance,

01:48:12.380 | sign up for the show there on Patreon,

01:48:14.020 | and you'll be able to join me on next week.

01:48:15.540 | Be with you very soon.

2020-10-02_Friday_QA-Lifestyle_Biz_for_Efficient_Taxation_Sales_Jobs_Asset_Protection_Buying_a_More_Expensive_House_etc.