August 15, 2025 • 33 mins
Why make someone else rich when you could be paying yourself? In this episode of the Main Street Business Podcast, Mark J. Kohler and Mat Sorensen reveal three powerful real estate strategies that allow business owners to become their own landlord, create cash flow, and protect family wealth. From renting your own building to your business, to buying your kid’s college home, to purchasing your parents’ house for asset protection and tax benefits, these proven methods could transform your financial future.
Discover how to structure these deals for maximum tax savings, including cost segregation, bonus depreciation, the Dash 4 election, and creative financing options. Learn the practical and emotional benefits of these moves — from building equity and cash flow to teaching your kids valuable real estate skills, and safeguarding your parents’ independence while protecting their biggest asset.
If you’re ready to stop paying rent to someone else and start building wealth for your own family, this is an episode you can’t afford to miss. Subscribe for more real-world strategies from Mark J. Kohler and Mat Sorensen, and take control of your financial destiny today!
You’ll learn:
- How renting your own commercial building to your business can build equity and slash taxes
- The steps to buy your child’s college home and turn rent into cash flow
- Ways to purchase your parents’ home for asset protection, Medicaid planning, and tax benefits
- How to use strategies like cost segregation, bonus depreciation, and the Dash 4 election to maximize deductions
- Creative financing options for owning commercial space, including commercial condo units
- How to leverage 1031 exchanges to defer taxes and reinvest in new properties
- The personal and educational benefits of involving your kids in real estate management
Get a comprehensive tax consultation with one of our Main Street tax lawyers that can build a tax strategy plan with an affordable consultation that will leave you speechless!!
Here’s the link - https://kkoslawyers.com/services/comprehensive-bus-tax-consult/?utm_source=buzzsprout&utm_medium=description&utm_campaign=SALT_Deduction
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Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
That entire time you were paying rent to someone else
, making them wealth.
You could have been paying itto yourself and paying off a
building.
It is so common for us to haveclients that have paid off their
own commercial space over timeand they are miles ahead of the
other business owner that paidrent to someone else.
Speaker 2 (00:18):
Even Mark and I one of our law firm's office
buildings our office in Utah webought.
We've been renting it fromourselves for years, and next
year the mortgage is paid off infull.
We not only have seen it forour clients, we've done this one
ourselves.
It's just such a powerfulstrategy.
(00:38):
Welcome everyone to the MainStreet Business Podcast.
This is Matt Sorensen, joinedby the dapper Mark J Kohler, and
we're here to talk about you,saving taxes and building wealth
.
We just want to help you.
Speaker 1 (00:50):
I mean, those are two very admirable goals, and when
we can bring those together, man, that's like two plus two
equals five.
It's awesome.
Saving taxes, building wealth.
Well, today we've got threestrategies that typically are on
the top of the mind ofinvestors, and we think these
are ones you should know about.
They can be extremelybeneficial and I love them.
(01:15):
I'll rattle off the first two,matt.
Number one just renting yourown building to your business.
Why am I paying rent to someoneelse, to a third party?
This could be a commercialbuilding space, it could be a
warehouse storage unit.
If you're paying rent toanybody, we want to talk about
it.
Number two is when your kids gooff to college or any family
(01:39):
member that is living in a newlocation for a short period of
time and paying rent to someoneelse, why aren't you the one
collecting that rent?
Because collecting rent fromsomeone you can guarantee you're
going to get paid from ispretty awesome, so pretty cool.
(01:59):
And then, matt, the thirdoption.
Speaker 2 (02:02):
Yeah, what about buying your parents' house and
leasing it back to them?
There could be some goodstrategies and reasons to do
that for their benefit, and youcan also be helping them, as
many of us do.
Our parents get older, helpingtake care of them and helping
plan for them and their future.
And maybe your inheritance too.
That can come around the corner.
So a couple of different anglesto look at there.
(02:23):
So we'll hit those threedifferent topics and each of
these do have a unique taxbenefit to them or a tax
strategy, I should say, aroundthem.
In addition to owning realestate and it's one of the tried
and true methods for ourclients Mark and I have done the
10,000 consults with clientsover our careers and I just
remember doing a lot of estateplans for clients and we do this
(02:46):
estate plan questionnaire and Ialways was curious on how
people made their money.
I'm just telling you, mainStreet Americans make their
money by having real estateownership.
Holding assets in real estateand business ownership those are
the two main categories where Iwas seeing wealth being built,
and so this topic today beingyour own landlord is a little
(03:06):
cheat code, I should say alittle way to get into some of
these real estate assets thatcan help you build wealth over
time, and why not get a cool taxstrategy along the way?
Speaker 1 (03:14):
Yeah, no, so good.
Great way of framing that, Matt.
So let's dive into number onebeing your own commercial
landlord.
Now the reason why I saycommercial is this is going to
be a strategy for those of youout there that already own a
business.
And number two are paying rentto someone else, again, a retail
shop, warehouse, storage unit,commercial building.
(03:37):
You could be a dentist, adoctor, a contractor, a
landscaper, a hair salon owner,whatever.
And what's so sad is people inthe rear view mirror and I've
got to tell you this right now,and some of you, it's going to
hurt 10 to 20 years later downthe road in their business they
(03:58):
realize all of a sudden you meanI could have been owning my own
hair salon and paying off thebuilding space, because if we do
it right, your mortgage paymentis going to be really quite
close to what you'd be paying inrent.
So now, that entire time youwere paying rent to someone else
, making them wealth, you couldhave been paying it to yourself
(04:20):
and paying off a building.
It is so common for us to haveclients that have paid off their
own commercial space over timeand they are just miles ahead of
the other business owner thatpaid rent to someone else, and
it's just such a powerfulstrategy.
Speaker 2 (04:40):
Yeah, and obviously it's just even Mark and I one of
our law firm's office buildingsour office in Utah.
We bought it's in a biggercommercial building but it's
condominiumized, so we own ourown suite.
We've been renting it fromourselves for years and next
year the mortgage is paid off infull.
We actually bought this fromsome other business that was an
engineering company and weassumed their mortgage and they
(05:03):
were maybe 10 years in on it.
So we got the back end of themortgage.
We just assumed it, took itover and we literally have one
year left on the mortgage.
It's crazy to think about that.
Time does fly for businessowners and we will own that
property free and clear, payingless rent and it's even going to
ourselves than we would havebeen thrown out the door to some
(05:23):
other tenant as well, excuse me, to some other landlord.
So we not only have seen it forour clients, we've done this
one ourselves more than once.
Speaker 1 (05:32):
Now let's tackle some of the myths and misconceptions
of the business owners outthere.
When they hear this Number one,they're going to say I cannot
afford a building or I can'tafford my own space.
You would be shocked is myfirst reaction.
Because there is what's calledcondominium commercial space.
(05:54):
So when you see a building, Iwould say at least half the time
that's not one building ownedby one person.
What they've done iscondominium, condominiumized it,
meaning they can sellparticular floors to different
businesses and you actually ownthat floor and you can build
equity and resell that floor orthat space.
(06:16):
And so and this is strip mallsstrip malls can be
condominiumized.
Each little unit in a stripmall can be owned separately
many times.
And I would challenge you onthis issue alone.
Call up a commercial realtor.
They will be so excited foryour phone call.
Call them up and go.
I own XYZ business, I own abike shop, I own a restaurant, I
(06:40):
own whatever and say I wouldlike to own my own space.
Can you tell me where I couldget a thousand square feet, 1500
square feet, 2000 square feet?
And they will go oh my gosh,come, get in my car, I'm going
to show you around town and youcan buy space where the mortgage
payment can be very similar towhat you're paying in rent.
I just and now I want to justthrow out the second myth and
(07:03):
Matt have you comment on this,and that is well.
I probably can't qualify forthe mortgage and I don't have
good credit.
You're missing an angle here,matt.
Tell them about the rent you'realready paying.
Speaker 2 (07:20):
Yeah, I mean, this is already an expense you're
paying for.
You're just giving it tosomeone else and their equity is
growing and they're makingmoney off of this instead of you
being on the beneficiary on theother end of this and you
getting equity in that realestate that you're in.
And so what I'll say on this isthere's SBA loans out there too
(07:41):
.
In terms of financing this andacquiring this, some 10% down
would be the more standard, some5%.
But they love doing SBA loansout there too.
In terms of financing this andacquiring this, some 10% down
would be the more standard, some5%.
But they love doing SBA loanson real estate.
Getting SBA loan to buy abusiness or something like that
where there's no real estate,involves a little more work, but
SBA loans to buy real estate,existing property, is a lot
easier to get.
(08:01):
There's a lot of little banks,community banks, credit unions
that play in that space.
I'd kind of chase those down.
So just know there's a lot offinancing opportunities out
there to buy these.
And I'll say right now, justfrom, if you know, kind of think
of the real estate investormarket out there right now.
This is probably where you getthe best deals right now,
commercial office has been at adiscount.
(08:25):
Residential homes and stufflike that have not been affected
, but in the real estate market,commercial offices is one where
there's definitely discountsand deals to be had.
So it might be a good time foryou to be considering this
strategy.
For any of you, existingbusiness owners, even you new
ones to be like, all right, thismight be a good time to pull
the trigger and see what's outthere at least.
Like Mark said, talk to thecommercial agent.
(08:45):
They can show you the optionsin your community or where your
business is at.
So we've got financing Think ofSBA.
We've got the wealth buildingconcept nailed in.
I get it.
I get the appreciation of value.
I'm paying down the mortgage.
(09:09):
I get all that equity.
Now it's an expense in mybusiness too, which is cool.
I'm writing off that rentanyways.
It's just going over to myother company.
That's paying down a mortgage,right, but there's more, right,
mark?
Speaker 1 (09:17):
Isn't that right?
Speaker 2 (09:18):
And this is where Mark's taught me so many tax
strategies over the years, ofcourse, but this was one I was
like hold on.
Speaker 1 (09:29):
That's pretty freaking awesome.
Well, this is a next level taxstrategy Totally.
And this is where the one bigbeautiful bill actually has some
direct impact to you on thispoint the bonus depreciation
when you go to buy this buildingthat you're going to rent back
to yourself, you can acceleratethe depreciation on the 5, 7,
and 15-year property of thatbuilding, which is called a cost
(09:51):
segregation analysis.
And you may say another myth ormisconception.
Well, I'm not a real estateprofessional.
I don't get to take thatdepreciation as a write-off
against my business.
Oh no, you're wrong is awrite-off against my business.
Oh no, you're wrong.
It's because of the dash fourelection which says, under the
(10:12):
IRS code, if I own the businessand own the building in the same
percentages, so if you have twoowners here and two owners here
, one owner here, one owner herein proportional ownership that
are near each other, I truly ambuying my own building.
I make a special election andnow I can treat all the losses
on that depreciation as anordinary loss.
I don't have to be a realestate professional, I don't
have to materially participate.
(10:34):
All of those other rules don'teven apply.
So, by setting up an LLC to ownthe building, which you would
do.
Do not put this in your currentoperational entity.
You open up a sister company inan LLC with the same ownership
percentages of the operationalbusiness, buy the building and
you just unlocked I'm notkidding thousands and thousands
(10:55):
of dollars of tax write-off thatyou can accelerate and maybe
even wipe out your entire taxbill this year or for the next
couple of years and use thoserefunds to invest back into your
business.
Use that money that you wouldhave paid to the IRS to expand.
See, think about this.
You're buying space that nowyou can expand into because
(11:16):
you're not going to have the taxbill.
You've been putting depositsaway for now.
This is insane.
Speaker 2 (11:23):
Yeah, I think this is like I don't want to say
dynamite or whatever.
I mean this is like it's verypowerful because so many
business owners right, you'rethe hair salon owner, the doctor
, the dentist, whatever theexamples we gave out there you
know, we hear about these losseson rental real estate and how
it's such a great thing.
And you hear about, you know,donald Trump's on his tax return
(11:44):
paid zero tax.
And how did he do that?
Well, he's a real estateprofessional.
He's got to take all his rentalreal estate losses and you're
like, well, I'm going to go buya bunch of rentals and do that
and that doesn.
But it does work for yourbuilding that your business owns
here in this self-rental rulewhere you can take that same
strategy.
So it's really powerful.
It helps you on your tax return.
It's a great wealth buildingstrategy.
(12:06):
It also gives you certainty inyour space.
That's another thing.
We've had clients over the yearsthat they've got a lease and
their lease terms running up andthey just think the landlord's
going to renew it and they jackup the rent, or they've got some
other plans in the building, orsomeone else owns the building
now and you're not happy withwhatever.
You got to renegotiate and so,um, there, you get a little more
control.
(12:26):
You can control your destiny alittle bit more when you um own
the space as well.
So, um, I love this one.
I think this is a kind of ano-brainer.
You've got to really considerthis.
If you're a business owner witha location, like really think
through, like why not?
I kind of want to.
You know, this is like onethat's like why are you not
doing this one?
And Mark and I have done thisin two different business
(12:47):
locations too.
So I'll just say, like we'vehit this strategy here of buying
our own office location wherewe're at.
Speaker 1 (12:54):
Yeah, no super powerful.
All right, now let's move tonumber two, and that is for any
of you out there.
Again, these strategies don'taffect every one of our
listeners, but if this is inyour, the stars align.
You're the avatar for this.
This would be any of you outthere that have a kid headed off
to college Now.
This could be.
(13:15):
Maybe you're looking out twoyears out from now, or maybe
they've already been at collegefor a couple of years, or they
could be looking at graduateschool.
So you want to be thinkingahead here as much as possible,
if possible, and say where isthis kid going to go to college?
Where are they going to collegenow?
How much are they paying inrent?
(13:35):
Where are their friends payingrent?
I'll give a classic example.
Had a client.
His daughter and son were goingoff to Salt Lake City to go to
University of Utah.
They lived in California, theydidn't own any property in Salt
Lake City, but they were likeour kids love that school,
(13:56):
they're going to go to the?
U, which I'm a fan of, and goUtes.
So they're going to go to SaltLake.
And this family?
They ended up buying a singlefamily home in the Sugar House
area which is right in bikingdistance of the campus and they
did room rental.
They were able to do four roomsand he put his daughter in the
(14:19):
home and she rented out threeother rooms to her friends.
Those three rentals roomrentals paid for 90% of the
mortgage and she didn't evenhave to pay rent anymore where
she was living and by addingthat into the mix, he was
actually cash flowing thisproperty.
So by going and buying thisproperty, they eliminated her
(14:44):
rent and actually started tocreate cashflow and the story
begins.
There are so many ancillarybenefits here, but that's the
example.
Before I steal any more thunderhere, this, this is again
incredibly powerful, matt.
What's your take on just thatthat equation right there?
Yeah, I mean, that's is againincredibly powerful, matt.
What's your take on just thatequation right there?
Speaker 2 (15:01):
Yeah, I mean, that's another again.
It's like you're going to havean outlay of money already.
Who gets to benefit from that?
Maybe I can be the beneficiaryon the other end by owning the
real estate here and againinstead of some other landlord.
And also, if you're willing totake that next step, like they
did here, of like getting theroommates as well, that that's
where this becomes a profitcenter, not just like saving,
(15:25):
you know, on the cost, but thisis now a profit center right,
cause there's other revenuecoming in.
And I think that trend thoughthat kind of roommate scenario,
is a huge trend right now.
We're seeing this withco-living concepts A lot of real
estate investors transitioningsingle-family rentals that are
even in their existing portfolio.
(15:46):
It might be a three-bedroom,two-bath.
They rent to one person or acouple or a family.
They're like we're renting itto three single people, we're
renting three rooms out here now, kind of a roommate scenario.
And this has been going on in,you know, expensive areas for
decades right, new York City,san Francisco, very expensive
(16:07):
places.
Everyone just has a roommateright In their 20s and 30s, like
you're, like I mean, for themost part, and so that's because
just the cost of housing is sohigh.
Well, now we're seeing that samething happen.
Cost of housing is so high andpeople are back to okay.
This roommate scenarioco-living, whatever you want to
call it is a good fit, but so Ithink it's a great strategy
where you can maximize rentalincome the college rental being
(16:31):
the one here where you mighthave one of your own adult
children being in, that you'reowning it and and getting the
benefit of owning the realestate and, um, that outlay of
money is coming back and helpingyou because you would have been
paying rent anyways to helpyour kid maybe go to college.
Speaker 1 (16:47):
Yeah, and let's talk about some other benefits before
we even get to the tax strategyhere too.
First, what it's been anincredible blessing for their
family and he's been teachingthe dad I've worked with the dad
for the most part and he's beenteaching his daughter how to be
a landlord, how to manage alease agreement, how to manage
her roommates.
(17:07):
This has been a huge eye-openerfor both of his kids on what
this experience has been allabout.
And to teach your kids aboutrental property.
And oh, you got to take care ofthe yard.
Oh, you need pest control, yougot to worry about this, you got
to worry about that.
And these kids have just beenoh my gosh, I'm learning
practical business skills whilegoing to college.
(17:28):
Unbelievable.
Number two, again, we'rebuilding equity.
So instead of paying rent tosomeone else, his daughter is
paying rent to their own LLCwith the property and three
other girls are paying down thatmortgage.
So he's building equity.
And now they have choices inthree years, two years, four
(17:49):
years, do we keep it as a rentaland rent it to a family?
Do we keep it to a rental andrent it to four more college
students?
Do we sell it and do a 1031exchange and trade it for a
property where his kids aregonna go to graduate school, do
we 1031 it back into thehometown and buy a commercial
property to rent back to yourbusiness?
So now you're not going to payany tax on sale and move that
(18:13):
investment to a new location.
That's the concept of the 1031exchange.
So we're building equity, we'resnowballing it, we're teaching
our kids strategies here andwe're building cashflow.
The list goes on and on.
Speaker 2 (18:27):
Yeah, Dang, I love that.
I didn't even think of nextsteps there, on what to do next
when they move on.
I mean, that's obviously thenext question that you should be
asking and thinking about.
It's like 1031 exchange.
I love it.
Repositioning they might moveto grad school.
Put it back into some othermarket you might feel good about
, Because a lot of times yourkids are going to college.
(18:48):
It might not be the best rentalmarket you would choose, but
you're choosing that locationfor those other reasons that we
talked about the kid's going tohelp, they're going to learn how
to manage it and you have thatoutlay of money.
You're going to be payinganyways if you're going to help
them rent a place and so, um,but that once they're gone, that
decision-making might shift of.
Well, I'm going to repositionthe equity here, um, into
(19:10):
something else that might be abetter cash flow opportunity.
So love that.
Speaker 1 (19:16):
Great, great, yeah.
And now for the tax benefit.
Speaker 2 (19:19):
Great solution.
I was going to say therebecause that was the next piece
I was thinking about.
Speaker 1 (19:29):
So and now for the tax benefit.
On a year-to-year basis we'vegot depreciation again.
So the first practical benefitis you won't be paying tax on
that cash flow, so anyadditional cash flow will be
offset by the depreciation again.
So the first practical benefitis you won't be paying tax on
that cash flow, so anyadditional cash flow will be
offset by the depreciation.
So there's no income tax thatyou're going to be affected by.
And if you do qualify as a realestate professional another
strategy for another day thisrental property is included in
(19:54):
your portfolio of real estate.
So now you could takedepreciation there if you
qualify for those pass-throughlosses as a real estate
professional.
You could even convert thisinto a short-term rental once
the kid's done with college.
There's a lot of families thatwant to rent a short-term rental
to go for graduation, to govisit their kids.
There's a lot of short want torent a short-term rental to go
for graduation, to go visittheir kids.
(20:14):
There's a lot of short-termrentals in and around colleges
and universities for thatpurpose of alumni parents that
are coming back to visit.
So that's another tax strategyin that if it could qualify as a
short-term rental property, wecould maybe unlock the
depreciation.
So meet with I'm going to saythis right now in the
description below we have a linkfor the depreciation.
So meet with I'm going to saythis right now in the
(20:34):
description below we have a linkfor the law firm.
Please get a tax consultation.
A comprehensive tax consult iswhat we call it practically on
our website, and one of our taxlawyers will meet with you and
go through some of these ideas,build a plan very affordable.
We want to make sure you wesave you in taxes.
Whatever you pay us for just agame plan.
(20:57):
You don't have to fire youraccountant, don't have to fire
your other lawyer, but this issomething we specialize in.
So get a console, get a planand look at some alternatives
here where your kids are goingto college.
Speaker 2 (21:09):
Yeah, and, of course, our law firm is KKOS Lawyers.
For any of you driving in thecar right now you're like, oh
well, we're going to Google thislater.
Kkos Lawyers, that's our lawfirm.
We've been helping clientsacross the country for 20 years
now.
We'd love to help you All right.
Last strategy here Buying yourparents' home.
Hmm, Should I buy my parents'home?
Should I wait for them to passaway and then inherit it?
(21:35):
I know that might be one of thequestions here, but we've had
some clients do this over theyears.
So why would Mark, why would Ibuy my parents home now, rather
than just inheriting it whenthey pass away?
Speaker 1 (21:44):
Well, there's several reasons and you have to make
sure it again aligns with yoursituation.
Yes, the first one and I don'tknow if there's any order of
priority here is that yourparents may be on a fixed income
.
They may be needing to go onsome sort of Medicaid assistance
(22:04):
in the future.
You're seeing this come downthe road to them the cost of the
home, property taxes.
Maybe they do have a mortgage.
Still, not all parents havepaid off their home.
Some of our older parents mayhave, but that home may be a
burden to them financially andthey may need to qualify for
(22:24):
Medicaid down the road.
When you buy the home from them,they get stepped up basis.
You get stepped up basis to thepurchase price.
They're not going to pay anytax, typically because of the
121 exemption up to 250,000 or500,000 of equity.
So they're not going to pay anytax.
You get stepped up basis.
(22:44):
You could assume the mortgagethey already have.
There may be no need to go outand get a new loan and any
equity that you're paying themfor will be in a note that, upon
their passing, would beforgiven.
You could structure this there'sno cash transpiring hands here,
no new mortgage transpiringhands, and so now you're the
(23:08):
owner of the property stepped upbasis, it becomes a rental
property for you and you controlthe equation.
So now your parents don't havean asset that's going to hold
them back from a Medicaidapplication and you're able to
gift them rent through us on thetax return.
So they're not going toactually pay you rent, you're
(23:29):
going to gift it to them,meaning, hey, mom and dad, go
ahead and pay me rent, I'll giveit back to you.
But you actually don't have togo through the process, but you
just put it on paper that I'mgifting you the rent, don't pay
me.
So your parents feel secure,they are able to apply for
better support from servicesthey might need without an asset
(23:52):
on their books, and you'regoing to inherit the property
anyway and you get it right nowat stepped up basis.
Now that may have sounded alittle complicated, but this is
a strategy we see over and overagain, where families work
together to better protect momand dad as they get older,
before they pass away.
Speaker 2 (24:09):
Yeah, let me just add into that just a couple of
thoughts.
As you're thinking through thatis sell a home exemption.
Okay, they sell their home aslong as they've owned it two
years out of the last five, andthese are typically the family
home they've been in for a longtime.
So we're assuming they've ownedit for at least a couple years.
And if they're still married,you know your parents are both
living there, or at least one ofyour parents, and they're
(24:30):
remarried, you know, if they'remarried, finally joined 250 K If
it's single, 500 K if they'remarried.
So that's how much gain they canreceive on this.
That goes into their pocket, notax, and that's just the gain.
Of course they could be gettingback what they paid in it too,
and and and stuff.
That's just the taxable gain.
So, um, and then the next stepis on that rent, that number of
(24:53):
gifting amount is $19,000 a year.
That's the annual amount youcan gift someone with no gift or
state tax consequence.
And if it's both your parents,that's what is that?
That's $38,000.
And if you got a spouse who'sgifting so now we got four
people in the mix you know, soto speak, we're up to what are
we at.
Speaker 1 (25:11):
We've got 6,000.
$76, so to speak.
We're up to what are we at?
We've got 6,000.
76,000.
1,500 per person per se, andwe've got four people involved.
So now we're going to be ableto cover rent, because it does
need to be fair market value,and that's where I'd like, where
Matt's going You're going withthis is rent needs to be fair
market value and the purchaseneeds to be fair market value.
Everything else in between canbe on paper.
Speaker 2 (25:34):
Yeah, cause let's say , the rent realistically for
that home would be $5,000.
Well, that's 60 K of rent.
So I'm going to need to belooking at that gifting amount
to make sure.
You know, maybe if my, if it'sjust your, your mom, let's say
it's that just lives in thathome and is renting Well, I got
19,000.
I can do If I'm married, myspouse can do 19,.
We're at 38.
(25:55):
You know, you guys, thedifference.
If you were 60,000, let's saywhat would need to be market
value for rent.
That would be and maybe yourmom has the income to pay that.
You know that discounted amount, that difference to make it up
to where you will have a realfair market value rent.
Speaker 1 (26:10):
And let's talk a couple other points that get to
play, that really play into thisasset protection.
If this home's paid for andyou've got grandpa driving
around in his car and I it could, it could be ugly and and I I
want to say this is a verysensitive topic and I get a
(26:30):
little emotional talking aboutit because I've had to take away
the car keys from my parents.
That's not fun because you knowit's dangerous for them being
on the road and they don't feelthat, they don't see that.
And they've got their home paidfor and grandpa's going down to
the grocery store every day andyou're scared to death.
(26:52):
He's going to kill someone orkill himself.
And so when you take the homeout of their balance sheet and
there is an accident, heavenforbid that home is not going to
get sacrificed in a lawsuit.
And so there is an importantasset protection factor here,
let alone Medicaid planning, andI think we forget that.
(27:15):
Our parents, we need to startto take over as the parent and
it's a very uncomfortable thingbut it's a very touching and
special thing because theparents all of a sudden realize
they do need you and there'sthat tipping point and the home
is typically their biggest assetand their biggest fear, because
(27:36):
parents I'll tell you this too,everybody, if you haven't been
at the table in this, and I'vebeen at the table so many times
their biggest fear is they can'ttake care of themselves.
They don't want to be a burden,and if you can create a
structure where they feel liketheir home is helping them feel
independent they, it's a hugewin.
Speaker 2 (27:57):
Yeah, and that by renting it back to them, they
get to stay there too, which istypically where they know people
is, where their family andtheir friends and all that stuff
resides, and there might be aplace where they transition out
and maybe they need to go to anassisted living or some other
place like that.
But this is a good step whereyou are, like you say, Mark,
(28:18):
coming in and helping them andwe do kind of got to take the
parental role at a certain point.
Really, I mean, wow, like spoton and practical.
Got a little emotional there,but I think you know these are
like dynamic situations whereI'll just say of like the why
(28:42):
behind you might do this andwe've kind of focused on all
right, think of the tax benefits, right, I like there's even
that asset protection angle toothat you dived into.
Maybe there's some Medicaidplanning issues.
There's a little bit of timingrules on that, how long you
might have to wait if they doneed to apply for Medicaid or
certain benefits, if they needthose for Medicaid or certain
benefits, if they need those.
(29:03):
But then the other thing is, ifyou think, well, what if I just
they still live in it or eventhey move out.
I want to just throw one otherlike alternative option you know
of.
We can obviously sell it andget the sell of home exemption
up to that 500 K.
But what if there's a milliondollars of equity in this, in
(29:25):
this home, and there's a lot ofour, our parents, you know, that
are lived in a place for 20, 30years?
I have a million plus in equityand that might be one where you
take a different angle Maybe.
Actually if, from a taxstandpoint, you might think of
maybe we do hold that longer intheir name.
Speaker 1 (29:47):
We've got to be careful and look at the possible
tax ramifications of themselling rather than getting a
stepped up basis at theirpassing, and if the home is
worth that much, they may wantto even start considering a
reverse mortgage in order to payfor their long-term care.
A reverse mortgage in order topay for their long-term care,
and now selling the home becomesa secondary or third option,
which is fine.
And so we need to look at avariety of factors here and
(30:11):
what's best for mom and dad.
How are they going to pay fortheir future?
Do they need Medicaid, do theynot?
Can they self-insure themselveswith the equity in the home
through a reverse mortgage,which can be very powerful?
And so get that consultationwith all the options on the
(30:31):
table.
Now I want to just say the lastpoint is that, for me, is the
tax strategy.
Where have we got to that?
Because what's amazing here?
Speaker 2 (30:39):
is the tax strategy on the front end.
Speaker 1 (30:41):
Yeah, when you're not going to visit mom and dad,
you're going to visit yourtenants.
So I'm writing off auto diningrepairs, maintenance
improvements and even if I'm nota real estate professional,
those are carry forward losses.
So after mom and dad are goneor maybe they go into hospice
and we sell the home I've gotcarry forward losses that I can
(31:03):
use against the sale.
I could do a 1031 exchangeagain.
I could put other tenants inthere.
I can do a rehab.
Once mom and dad move out,which is typical, we're going to
keep it in the same format.
Mom and dad still have carpetfrom 1984, whatever the case is.
So once mom and dad are out,we're gonna do a fix and flip in
rehab.
And I'll say this last dynamicthat's super important Siblings.
(31:27):
There's gonna be siblings atthe table that are not gonna
step up to the plate and helpmom and dad.
And if you're the one to stepup to the plate and help mom and
dad, you deserve the damn houseNow.
Keep it fair market value, buythe home.
Keep it fair.
Keep it fair market value, buythe home.
Keep it fair.
Keep it transparent.
But don't use this as anopportunity to screw over your
siblings.
Do it as an opportunity to stepup and be the sibling that
(31:50):
takes care of mom and dad.
But be careful Make sure you'recommunicating with your
siblings on the entire plan anddon't take advantage of the
situation.
Speaker 2 (31:58):
Yeah, I think that's such a great point.
Oh my gosh, how many times havewe seen this issue actually?
And the family home is probablythe one that sometimes, like
they've seen like some weirdscenarios, someone gets added to
the deed, the other kids didn'tknow, the will or the trust is
unclear on it, and oh my gosh,yeah, so definitely communicate
this and that should be part ofyour estate plan too, like this
(32:19):
should be, you know, veryclearly identified.
It's out of the estate already,or this is what we're planning
to do in the estate.
So there is some clear planningon this for the family that's
going to have to take over thisestate later on.
And I like the communication,but I actually like it in
writing too, you know.
Let's get it legally documentedas well.
Speaker 1 (32:40):
Good stuff.
I mean just hopefully we'veopened your eyes, folks, to
three potential strategies thatcould benefit you and your
family.
Grateful you're here with usand I can't encourage enough an
annual comprehensive taxstrategy planning meeting that
you can take out the door andimplement with us or with your
(33:01):
current professionals.
Get that second opinion.
There's always something outthere that we can learn from.
I learn something new everytime I'm on a podcast with Matt.
I just want all of you outthere to keep learning and keep
getting strategy sessions underyour belt.
I know it'll benefit you.
Speaker 2 (33:18):
Yes, Thank you for joining us everybody.
We'll see you next time on theMain Street Business Podcast.
Until then, please share thiswith your friends and family.
We'll see you next time.
That entire time you were paying rent to someone else
, making them wealth.
You could have been paying itto yourself and paying off a
building.
It is so common for us to haveclients that have paid off their
own commercial space over timeand they are miles ahead of the
other business owner that paidrent to someone else.
Speaker 2 (00:18):
Even Mark and I one of our law firm's office
buildings our office in Utah webought.
We've been renting it fromourselves for years, and next
year the mortgage is paid off infull.
We not only have seen it forour clients, we've done this one
ourselves.
It's just such a powerfulstrategy.
(00:38):
Welcome everyone to the MainStreet Business Podcast.
This is Matt Sorensen, joinedby the dapper Mark J Kohler, and
we're here to talk about you,saving taxes and building wealth
.
We just want to help you.
Speaker 1 (00:50):
I mean, those are two very admirable goals, and when
we can bring those together, man, that's like two plus two
equals five.
It's awesome.
Saving taxes, building wealth.
Well, today we've got threestrategies that typically are on
the top of the mind ofinvestors, and we think these
are ones you should know about.
They can be extremelybeneficial and I love them.
(01:15):
I'll rattle off the first two,matt.
Number one just renting yourown building to your business.
Why am I paying rent to someoneelse, to a third party?
This could be a commercialbuilding space, it could be a
warehouse storage unit.
If you're paying rent toanybody, we want to talk about
it.
Number two is when your kids gooff to college or any family
(01:39):
member that is living in a newlocation for a short period of
time and paying rent to someoneelse, why aren't you the one
collecting that rent?
Because collecting rent fromsomeone you can guarantee you're
going to get paid from ispretty awesome, so pretty cool.
(01:59):
And then, matt, the thirdoption.
Speaker 2 (02:02):
Yeah, what about buying your parents' house and
leasing it back to them?
There could be some goodstrategies and reasons to do
that for their benefit, and youcan also be helping them, as
many of us do.
Our parents get older, helpingtake care of them and helping
plan for them and their future.
And maybe your inheritance too.
That can come around the corner.
So a couple of different anglesto look at there.
(02:23):
So we'll hit those threedifferent topics and each of
these do have a unique taxbenefit to them or a tax
strategy, I should say, aroundthem.
In addition to owning realestate and it's one of the tried
and true methods for ourclients Mark and I have done the
10,000 consults with clientsover our careers and I just
remember doing a lot of estateplans for clients and we do this
(02:46):
estate plan questionnaire and Ialways was curious on how
people made their money.
I'm just telling you, mainStreet Americans make their
money by having real estateownership.
Holding assets in real estateand business ownership those are
the two main categories where Iwas seeing wealth being built,
and so this topic today beingyour own landlord is a little
(03:06):
cheat code, I should say alittle way to get into some of
these real estate assets thatcan help you build wealth over
time, and why not get a cool taxstrategy along the way?
Speaker 1 (03:14):
Yeah, no, so good.
Great way of framing that, Matt.
So let's dive into number onebeing your own commercial
landlord.
Now the reason why I saycommercial is this is going to
be a strategy for those of youout there that already own a
business.
And number two are paying rentto someone else, again, a retail
shop, warehouse, storage unit,commercial building.
(03:37):
You could be a dentist, adoctor, a contractor, a
landscaper, a hair salon owner,whatever.
And what's so sad is people inthe rear view mirror and I've
got to tell you this right now,and some of you, it's going to
hurt 10 to 20 years later downthe road in their business they
(03:58):
realize all of a sudden you meanI could have been owning my own
hair salon and paying off thebuilding space, because if we do
it right, your mortgage paymentis going to be really quite
close to what you'd be paying inrent.
So now, that entire time youwere paying rent to someone else
, making them wealth, you couldhave been paying it to yourself
(04:20):
and paying off a building.
It is so common for us to haveclients that have paid off their
own commercial space over timeand they are just miles ahead of
the other business owner thatpaid rent to someone else, and
it's just such a powerfulstrategy.
Speaker 2 (04:40):
Yeah, and obviously it's just even Mark and I one of
our law firm's office buildingsour office in Utah.
We bought it's in a biggercommercial building but it's
condominiumized, so we own ourown suite.
We've been renting it fromourselves for years and next
year the mortgage is paid off infull.
We actually bought this fromsome other business that was an
engineering company and weassumed their mortgage and they
(05:03):
were maybe 10 years in on it.
So we got the back end of themortgage.
We just assumed it, took itover and we literally have one
year left on the mortgage.
It's crazy to think about that.
Time does fly for businessowners and we will own that
property free and clear, payingless rent and it's even going to
ourselves than we would havebeen thrown out the door to some
(05:23):
other tenant as well, excuse me, to some other landlord.
So we not only have seen it forour clients, we've done this
one ourselves more than once.
Speaker 1 (05:32):
Now let's tackle some of the myths and misconceptions
of the business owners outthere.
When they hear this Number one,they're going to say I cannot
afford a building or I can'tafford my own space.
You would be shocked is myfirst reaction.
Because there is what's calledcondominium commercial space.
(05:54):
So when you see a building, Iwould say at least half the time
that's not one building ownedby one person.
What they've done iscondominium, condominiumized it,
meaning they can sellparticular floors to different
businesses and you actually ownthat floor and you can build
equity and resell that floor orthat space.
(06:16):
And so and this is strip mallsstrip malls can be
condominiumized.
Each little unit in a stripmall can be owned separately
many times.
And I would challenge you onthis issue alone.
Call up a commercial realtor.
They will be so excited foryour phone call.
Call them up and go.
I own XYZ business, I own abike shop, I own a restaurant, I
(06:40):
own whatever and say I wouldlike to own my own space.
Can you tell me where I couldget a thousand square feet, 1500
square feet, 2000 square feet?
And they will go oh my gosh,come, get in my car, I'm going
to show you around town and youcan buy space where the mortgage
payment can be very similar towhat you're paying in rent.
I just and now I want to justthrow out the second myth and
(07:03):
Matt have you comment on this,and that is well.
I probably can't qualify forthe mortgage and I don't have
good credit.
You're missing an angle here,matt.
Tell them about the rent you'realready paying.
Speaker 2 (07:20):
Yeah, I mean, this is already an expense you're
paying for.
You're just giving it tosomeone else and their equity is
growing and they're makingmoney off of this instead of you
being on the beneficiary on theother end of this and you
getting equity in that realestate that you're in.
And so what I'll say on this isthere's SBA loans out there too
(07:41):
.
In terms of financing this andacquiring this, some 10% down
would be the more standard, some5%.
But they love doing SBA loansout there too.
In terms of financing this andacquiring this, some 10% down
would be the more standard, some5%.
But they love doing SBA loanson real estate.
Getting SBA loan to buy abusiness or something like that
where there's no real estate,involves a little more work, but
SBA loans to buy real estate,existing property, is a lot
easier to get.
(08:01):
There's a lot of little banks,community banks, credit unions
that play in that space.
I'd kind of chase those down.
So just know there's a lot offinancing opportunities out
there to buy these.
And I'll say right now, justfrom, if you know, kind of think
of the real estate investormarket out there right now.
This is probably where you getthe best deals right now,
commercial office has been at adiscount.
(08:25):
Residential homes and stufflike that have not been affected
, but in the real estate market,commercial offices is one where
there's definitely discountsand deals to be had.
So it might be a good time foryou to be considering this
strategy.
For any of you, existingbusiness owners, even you new
ones to be like, all right, thismight be a good time to pull
the trigger and see what's outthere at least.
Like Mark said, talk to thecommercial agent.
(08:45):
They can show you the optionsin your community or where your
business is at.
So we've got financing Think ofSBA.
We've got the wealth buildingconcept nailed in.
I get it.
I get the appreciation of value.
I'm paying down the mortgage.
(09:09):
I get all that equity.
Now it's an expense in mybusiness too, which is cool.
I'm writing off that rentanyways.
It's just going over to myother company.
That's paying down a mortgage,right, but there's more, right,
mark?
Speaker 1 (09:17):
Isn't that right?
Speaker 2 (09:18):
And this is where Mark's taught me so many tax
strategies over the years, ofcourse, but this was one I was
like hold on.
Speaker 1 (09:29):
That's pretty freaking awesome.
Well, this is a next level taxstrategy Totally.
And this is where the one bigbeautiful bill actually has some
direct impact to you on thispoint the bonus depreciation
when you go to buy this buildingthat you're going to rent back
to yourself, you can acceleratethe depreciation on the 5, 7,
and 15-year property of thatbuilding, which is called a cost
(09:51):
segregation analysis.
And you may say another myth ormisconception.
Well, I'm not a real estateprofessional.
I don't get to take thatdepreciation as a write-off
against my business.
Oh no, you're wrong is awrite-off against my business.
Oh no, you're wrong.
It's because of the dash fourelection which says, under the
(10:12):
IRS code, if I own the businessand own the building in the same
percentages, so if you have twoowners here and two owners here
, one owner here, one owner herein proportional ownership that
are near each other, I truly ambuying my own building.
I make a special election andnow I can treat all the losses
on that depreciation as anordinary loss.
I don't have to be a realestate professional, I don't
have to materially participate.
(10:34):
All of those other rules don'teven apply.
So, by setting up an LLC to ownthe building, which you would
do.
Do not put this in your currentoperational entity.
You open up a sister company inan LLC with the same ownership
percentages of the operationalbusiness, buy the building and
you just unlocked I'm notkidding thousands and thousands
(10:55):
of dollars of tax write-off thatyou can accelerate and maybe
even wipe out your entire taxbill this year or for the next
couple of years and use thoserefunds to invest back into your
business.
Use that money that you wouldhave paid to the IRS to expand.
See, think about this.
You're buying space that nowyou can expand into because
(11:16):
you're not going to have the taxbill.
You've been putting depositsaway for now.
This is insane.
Speaker 2 (11:23):
Yeah, I think this is like I don't want to say
dynamite or whatever.
I mean this is like it's verypowerful because so many
business owners right, you'rethe hair salon owner, the doctor
, the dentist, whatever theexamples we gave out there you
know, we hear about these losseson rental real estate and how
it's such a great thing.
And you hear about, you know,donald Trump's on his tax return
(11:44):
paid zero tax.
And how did he do that?
Well, he's a real estateprofessional.
He's got to take all his rentalreal estate losses and you're
like, well, I'm going to go buya bunch of rentals and do that
and that doesn.
But it does work for yourbuilding that your business owns
here in this self-rental rulewhere you can take that same
strategy.
So it's really powerful.
It helps you on your tax return.
It's a great wealth buildingstrategy.
(12:06):
It also gives you certainty inyour space.
That's another thing.
We've had clients over the yearsthat they've got a lease and
their lease terms running up andthey just think the landlord's
going to renew it and they jackup the rent, or they've got some
other plans in the building, orsomeone else owns the building
now and you're not happy withwhatever.
You got to renegotiate and so,um, there, you get a little more
control.
(12:26):
You can control your destiny alittle bit more when you um own
the space as well.
So, um, I love this one.
I think this is a kind of ano-brainer.
You've got to really considerthis.
If you're a business owner witha location, like really think
through, like why not?
I kind of want to.
You know, this is like onethat's like why are you not
doing this one?
And Mark and I have done thisin two different business
(12:47):
locations too.
So I'll just say, like we'vehit this strategy here of buying
our own office location wherewe're at.
Speaker 1 (12:54):
Yeah, no super powerful.
All right, now let's move tonumber two, and that is for any
of you out there.
Again, these strategies don'taffect every one of our
listeners, but if this is inyour, the stars align.
You're the avatar for this.
This would be any of you outthere that have a kid headed off
to college Now.
This could be.
(13:15):
Maybe you're looking out twoyears out from now, or maybe
they've already been at collegefor a couple of years, or they
could be looking at graduateschool.
So you want to be thinkingahead here as much as possible,
if possible, and say where isthis kid going to go to college?
Where are they going to collegenow?
How much are they paying inrent?
(13:35):
Where are their friends payingrent?
I'll give a classic example.
Had a client.
His daughter and son were goingoff to Salt Lake City to go to
University of Utah.
They lived in California, theydidn't own any property in Salt
Lake City, but they were likeour kids love that school,
(13:56):
they're going to go to the?
U, which I'm a fan of, and goUtes.
So they're going to go to SaltLake.
And this family?
They ended up buying a singlefamily home in the Sugar House
area which is right in bikingdistance of the campus and they
did room rental.
They were able to do four roomsand he put his daughter in the
(14:19):
home and she rented out threeother rooms to her friends.
Those three rentals roomrentals paid for 90% of the
mortgage and she didn't evenhave to pay rent anymore where
she was living and by addingthat into the mix, he was
actually cash flowing thisproperty.
So by going and buying thisproperty, they eliminated her
(14:44):
rent and actually started tocreate cashflow and the story
begins.
There are so many ancillarybenefits here, but that's the
example.
Before I steal any more thunderhere, this, this is again
incredibly powerful, matt.
What's your take on just thatthat equation right there?
Yeah, I mean, that's is againincredibly powerful, matt.
What's your take on just thatequation right there?
Speaker 2 (15:01):
Yeah, I mean, that's another again.
It's like you're going to havean outlay of money already.
Who gets to benefit from that?
Maybe I can be the beneficiaryon the other end by owning the
real estate here and againinstead of some other landlord.
And also, if you're willing totake that next step, like they
did here, of like getting theroommates as well, that that's
where this becomes a profitcenter, not just like saving,
(15:25):
you know, on the cost, but thisis now a profit center right,
cause there's other revenuecoming in.
And I think that trend thoughthat kind of roommate scenario,
is a huge trend right now.
We're seeing this withco-living concepts A lot of real
estate investors transitioningsingle-family rentals that are
even in their existing portfolio.
(15:46):
It might be a three-bedroom,two-bath.
They rent to one person or acouple or a family.
They're like we're renting itto three single people, we're
renting three rooms out here now, kind of a roommate scenario.
And this has been going on in,you know, expensive areas for
decades right, new York City,san Francisco, very expensive
(16:07):
places.
Everyone just has a roommateright In their 20s and 30s, like
you're, like I mean, for themost part, and so that's because
just the cost of housing is sohigh.
Well, now we're seeing that samething happen.
Cost of housing is so high andpeople are back to okay.
This roommate scenarioco-living, whatever you want to
call it is a good fit, but so Ithink it's a great strategy
where you can maximize rentalincome the college rental being
(16:31):
the one here where you mighthave one of your own adult
children being in, that you'reowning it and and getting the
benefit of owning the realestate and, um, that outlay of
money is coming back and helpingyou because you would have been
paying rent anyways to helpyour kid maybe go to college.
Speaker 1 (16:47):
Yeah, and let's talk about some other benefits before
we even get to the tax strategyhere too.
First, what it's been anincredible blessing for their
family and he's been teachingthe dad I've worked with the dad
for the most part and he's beenteaching his daughter how to be
a landlord, how to manage alease agreement, how to manage
her roommates.
(17:07):
This has been a huge eye-openerfor both of his kids on what
this experience has been allabout.
And to teach your kids aboutrental property.
And oh, you got to take care ofthe yard.
Oh, you need pest control, yougot to worry about this, you got
to worry about that.
And these kids have just beenoh my gosh, I'm learning
practical business skills whilegoing to college.
(17:28):
Unbelievable.
Number two, again, we'rebuilding equity.
So instead of paying rent tosomeone else, his daughter is
paying rent to their own LLCwith the property and three
other girls are paying down thatmortgage.
So he's building equity.
And now they have choices inthree years, two years, four
(17:49):
years, do we keep it as a rentaland rent it to a family?
Do we keep it to a rental andrent it to four more college
students?
Do we sell it and do a 1031exchange and trade it for a
property where his kids aregonna go to graduate school, do
we 1031 it back into thehometown and buy a commercial
property to rent back to yourbusiness?
So now you're not going to payany tax on sale and move that
(18:13):
investment to a new location.
That's the concept of the 1031exchange.
So we're building equity, we'resnowballing it, we're teaching
our kids strategies here andwe're building cashflow.
The list goes on and on.
Speaker 2 (18:27):
Yeah, Dang, I love that.
I didn't even think of nextsteps there, on what to do next
when they move on.
I mean, that's obviously thenext question that you should be
asking and thinking about.
It's like 1031 exchange.
I love it.
Repositioning they might moveto grad school.
Put it back into some othermarket you might feel good about
, Because a lot of times yourkids are going to college.
(18:48):
It might not be the best rentalmarket you would choose, but
you're choosing that locationfor those other reasons that we
talked about the kid's going tohelp, they're going to learn how
to manage it and you have thatoutlay of money.
You're going to be payinganyways if you're going to help
them rent a place and so, um,but that once they're gone, that
decision-making might shift of.
Well, I'm going to repositionthe equity here, um, into
(19:10):
something else that might be abetter cash flow opportunity.
So love that.
Speaker 1 (19:16):
Great, great, yeah.
And now for the tax benefit.
Speaker 2 (19:19):
Great solution.
I was going to say therebecause that was the next piece
I was thinking about.
Speaker 1 (19:29):
So and now for the tax benefit.
On a year-to-year basis we'vegot depreciation again.
So the first practical benefitis you won't be paying tax on
that cash flow, so anyadditional cash flow will be
offset by the depreciation again.
So the first practical benefitis you won't be paying tax on
that cash flow, so anyadditional cash flow will be
offset by the depreciation.
So there's no income tax thatyou're going to be affected by.
And if you do qualify as a realestate professional another
strategy for another day thisrental property is included in
(19:54):
your portfolio of real estate.
So now you could takedepreciation there if you
qualify for those pass-throughlosses as a real estate
professional.
You could even convert thisinto a short-term rental once
the kid's done with college.
There's a lot of families thatwant to rent a short-term rental
to go for graduation, to govisit their kids.
There's a lot of short want torent a short-term rental to go
for graduation, to go visittheir kids.
(20:14):
There's a lot of short-termrentals in and around colleges
and universities for thatpurpose of alumni parents that
are coming back to visit.
So that's another tax strategyin that if it could qualify as a
short-term rental property, wecould maybe unlock the
depreciation.
So meet with I'm going to saythis right now in the
description below we have a linkfor the depreciation.
So meet with I'm going to saythis right now in the
(20:34):
description below we have a linkfor the law firm.
Please get a tax consultation.
A comprehensive tax consult iswhat we call it practically on
our website, and one of our taxlawyers will meet with you and
go through some of these ideas,build a plan very affordable.
We want to make sure you wesave you in taxes.
Whatever you pay us for just agame plan.
(20:57):
You don't have to fire youraccountant, don't have to fire
your other lawyer, but this issomething we specialize in.
So get a console, get a planand look at some alternatives
here where your kids are goingto college.
Speaker 2 (21:09):
Yeah, and, of course, our law firm is KKOS Lawyers.
For any of you driving in thecar right now you're like, oh
well, we're going to Google thislater.
Kkos Lawyers, that's our lawfirm.
We've been helping clientsacross the country for 20 years
now.
We'd love to help you All right.
Last strategy here Buying yourparents' home.
Hmm, Should I buy my parents'home?
Should I wait for them to passaway and then inherit it?
(21:35):
I know that might be one of thequestions here, but we've had
some clients do this over theyears.
So why would Mark, why would Ibuy my parents home now, rather
than just inheriting it whenthey pass away?
Speaker 1 (21:44):
Well, there's several reasons and you have to make
sure it again aligns with yoursituation.
Yes, the first one and I don'tknow if there's any order of
priority here is that yourparents may be on a fixed income
.
They may be needing to go onsome sort of Medicaid assistance
(22:04):
in the future.
You're seeing this come downthe road to them the cost of the
home, property taxes.
Maybe they do have a mortgage.
Still, not all parents havepaid off their home.
Some of our older parents mayhave, but that home may be a
burden to them financially andthey may need to qualify for
(22:24):
Medicaid down the road.
When you buy the home from them,they get stepped up basis.
You get stepped up basis to thepurchase price.
They're not going to pay anytax, typically because of the
121 exemption up to 250,000 or500,000 of equity.
So they're not going to pay anytax.
You get stepped up basis.
(22:44):
You could assume the mortgagethey already have.
There may be no need to go outand get a new loan and any
equity that you're paying themfor will be in a note that, upon
their passing, would beforgiven.
You could structure this there'sno cash transpiring hands here,
no new mortgage transpiringhands, and so now you're the
(23:08):
owner of the property stepped upbasis, it becomes a rental
property for you and you controlthe equation.
So now your parents don't havean asset that's going to hold
them back from a Medicaidapplication and you're able to
gift them rent through us on thetax return.
So they're not going toactually pay you rent, you're
(23:29):
going to gift it to them,meaning, hey, mom and dad, go
ahead and pay me rent, I'll giveit back to you.
But you actually don't have togo through the process, but you
just put it on paper that I'mgifting you the rent, don't pay
me.
So your parents feel secure,they are able to apply for
better support from servicesthey might need without an asset
(23:52):
on their books, and you'regoing to inherit the property
anyway and you get it right nowat stepped up basis.
Now that may have sounded alittle complicated, but this is
a strategy we see over and overagain, where families work
together to better protect momand dad as they get older,
before they pass away.
Speaker 2 (24:09):
Yeah, let me just add into that just a couple of
thoughts.
As you're thinking through thatis sell a home exemption.
Okay, they sell their home aslong as they've owned it two
years out of the last five, andthese are typically the family
home they've been in for a longtime.
So we're assuming they've ownedit for at least a couple years.
And if they're still married,you know your parents are both
living there, or at least one ofyour parents, and they're
(24:30):
remarried, you know, if they'remarried, finally joined 250 K If
it's single, 500 K if they'remarried.
So that's how much gain they canreceive on this.
That goes into their pocket, notax, and that's just the gain.
Of course they could be gettingback what they paid in it too,
and and and stuff.
That's just the taxable gain.
So, um, and then the next stepis on that rent, that number of
(24:53):
gifting amount is $19,000 a year.
That's the annual amount youcan gift someone with no gift or
state tax consequence.
And if it's both your parents,that's what is that?
That's $38,000.
And if you got a spouse who'sgifting so now we got four
people in the mix you know, soto speak, we're up to what are
we at.
Speaker 1 (25:11):
We've got 6,000.
$76, so to speak.
We're up to what are we at?
We've got 6,000.
76,000.
1,500 per person per se, andwe've got four people involved.
So now we're going to be ableto cover rent, because it does
need to be fair market value,and that's where I'd like, where
Matt's going You're going withthis is rent needs to be fair
market value and the purchaseneeds to be fair market value.
Everything else in between canbe on paper.
Speaker 2 (25:34):
Yeah, cause let's say , the rent realistically for
that home would be $5,000.
Well, that's 60 K of rent.
So I'm going to need to belooking at that gifting amount
to make sure.
You know, maybe if my, if it'sjust your, your mom, let's say
it's that just lives in thathome and is renting Well, I got
19,000.
I can do If I'm married, myspouse can do 19,.
We're at 38.
(25:55):
You know, you guys, thedifference.
If you were 60,000, let's saywhat would need to be market
value for rent.
That would be and maybe yourmom has the income to pay that.
You know that discounted amount, that difference to make it up
to where you will have a realfair market value rent.
Speaker 1 (26:10):
And let's talk a couple other points that get to
play, that really play into thisasset protection.
If this home's paid for andyou've got grandpa driving
around in his car and I it could, it could be ugly and and I I
want to say this is a verysensitive topic and I get a
(26:30):
little emotional talking aboutit because I've had to take away
the car keys from my parents.
That's not fun because you knowit's dangerous for them being
on the road and they don't feelthat, they don't see that.
And they've got their home paidfor and grandpa's going down to
the grocery store every day andyou're scared to death.
(26:52):
He's going to kill someone orkill himself.
And so when you take the homeout of their balance sheet and
there is an accident, heavenforbid that home is not going to
get sacrificed in a lawsuit.
And so there is an importantasset protection factor here,
let alone Medicaid planning, andI think we forget that.
(27:15):
Our parents, we need to startto take over as the parent and
it's a very uncomfortable thingbut it's a very touching and
special thing because theparents all of a sudden realize
they do need you and there'sthat tipping point and the home
is typically their biggest assetand their biggest fear, because
(27:36):
parents I'll tell you this too,everybody, if you haven't been
at the table in this, and I'vebeen at the table so many times
their biggest fear is they can'ttake care of themselves.
They don't want to be a burden,and if you can create a
structure where they feel liketheir home is helping them feel
independent they, it's a hugewin.
Speaker 2 (27:57):
Yeah, and that by renting it back to them, they
get to stay there too, which istypically where they know people
is, where their family andtheir friends and all that stuff
resides, and there might be aplace where they transition out
and maybe they need to go to anassisted living or some other
place like that.
But this is a good step whereyou are, like you say, Mark,
(28:18):
coming in and helping them andwe do kind of got to take the
parental role at a certain point.
Really, I mean, wow, like spoton and practical.
Got a little emotional there,but I think you know these are
like dynamic situations whereI'll just say of like the why
(28:42):
behind you might do this andwe've kind of focused on all
right, think of the tax benefits, right, I like there's even
that asset protection angle toothat you dived into.
Maybe there's some Medicaidplanning issues.
There's a little bit of timingrules on that, how long you
might have to wait if they doneed to apply for Medicaid or
certain benefits, if they needthose for Medicaid or certain
benefits, if they need those.
(29:03):
But then the other thing is, ifyou think, well, what if I just
they still live in it or eventhey move out.
I want to just throw one otherlike alternative option you know
of.
We can obviously sell it andget the sell of home exemption
up to that 500 K.
But what if there's a milliondollars of equity in this, in
(29:25):
this home, and there's a lot ofour, our parents, you know, that
are lived in a place for 20, 30years?
I have a million plus in equityand that might be one where you
take a different angle Maybe.
Actually if, from a taxstandpoint, you might think of
maybe we do hold that longer intheir name.
Speaker 1 (29:47):
We've got to be careful and look at the possible
tax ramifications of themselling rather than getting a
stepped up basis at theirpassing, and if the home is
worth that much, they may wantto even start considering a
reverse mortgage in order to payfor their long-term care.
A reverse mortgage in order topay for their long-term care,
and now selling the home becomesa secondary or third option,
which is fine.
And so we need to look at avariety of factors here and
(30:11):
what's best for mom and dad.
How are they going to pay fortheir future?
Do they need Medicaid, do theynot?
Can they self-insure themselveswith the equity in the home
through a reverse mortgage,which can be very powerful?
And so get that consultationwith all the options on the
(30:31):
table.
Now I want to just say the lastpoint is that, for me, is the
tax strategy.
Where have we got to that?
Because what's amazing here?
Speaker 2 (30:39):
is the tax strategy on the front end.
Speaker 1 (30:41):
Yeah, when you're not going to visit mom and dad,
you're going to visit yourtenants.
So I'm writing off auto diningrepairs, maintenance
improvements and even if I'm nota real estate professional,
those are carry forward losses.
So after mom and dad are goneor maybe they go into hospice
and we sell the home I've gotcarry forward losses that I can
(31:03):
use against the sale.
I could do a 1031 exchangeagain.
I could put other tenants inthere.
I can do a rehab.
Once mom and dad move out,which is typical, we're going to
keep it in the same format.
Mom and dad still have carpetfrom 1984, whatever the case is.
So once mom and dad are out,we're gonna do a fix and flip in
rehab.
And I'll say this last dynamicthat's super important Siblings.
(31:27):
There's gonna be siblings atthe table that are not gonna
step up to the plate and helpmom and dad.
And if you're the one to stepup to the plate and help mom and
dad, you deserve the damn houseNow.
Keep it fair market value, buythe home.
Keep it fair.
Keep it fair market value, buythe home.
Keep it fair.
Keep it transparent.
But don't use this as anopportunity to screw over your
siblings.
Do it as an opportunity to stepup and be the sibling that
(31:50):
takes care of mom and dad.
But be careful Make sure you'recommunicating with your
siblings on the entire plan anddon't take advantage of the
situation.
Speaker 2 (31:58):
Yeah, I think that's such a great point.
Oh my gosh, how many times havewe seen this issue actually?
And the family home is probablythe one that sometimes, like
they've seen like some weirdscenarios, someone gets added to
the deed, the other kids didn'tknow, the will or the trust is
unclear on it, and oh my gosh,yeah, so definitely communicate
this and that should be part ofyour estate plan too, like this
(32:19):
should be, you know, veryclearly identified.
It's out of the estate already,or this is what we're planning
to do in the estate.
So there is some clear planningon this for the family that's
going to have to take over thisestate later on.
And I like the communication,but I actually like it in
writing too, you know.
Let's get it legally documentedas well.
Speaker 1 (32:40):
Good stuff.
I mean just hopefully we'veopened your eyes, folks, to
three potential strategies thatcould benefit you and your
family.
Grateful you're here with usand I can't encourage enough an
annual comprehensive taxstrategy planning meeting that
you can take out the door andimplement with us or with your
(33:01):
current professionals.
Get that second opinion.
There's always something outthere that we can learn from.
I learn something new everytime I'm on a podcast with Matt.
I just want all of you outthere to keep learning and keep
getting strategy sessions underyour belt.
I know it'll benefit you.
Speaker 2 (33:18):
Yes, Thank you for joining us everybody.
We'll see you next time on theMain Street Business Podcast.
Until then, please share thiswith your friends and family.
We'll see you next time.
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