The Titanium Vault hosted by RJ Bates III

Toby Mathis: Pay Less Taxes, Protect Your Assets & How to Maintain Cash Flow While Scaling

August 01, 2019 Episode 91
The Titanium Vault hosted by RJ Bates III
Toby Mathis: Pay Less Taxes, Protect Your Assets & How to Maintain Cash Flow While Scaling
Chapters
The Titanium Vault hosted by RJ Bates III
Toby Mathis: Pay Less Taxes, Protect Your Assets & How to Maintain Cash Flow While Scaling
Aug 01, 2019 Episode 91
Toby Mathis
Show Notes Transcript

Toby Mathis is an attorney and founding partner at Anderson Law Group. Toby is also a successful real estate investor who owns well over 100 units creating passive income for himself and his family. As an attorney, Toby focuses on asset protection and how to pay less taxes using the loopholes within our tax code. In this interview, Toby and RJ go into how the rich avoid paying their taxes, what are some common loopholes for smaller businesses and how can a growing business sustain the needed cash flow while utilizing these tax loopholes. To find out more about Toby Mathis visit http://www.andersonadvisors.com

To get more content from RJ Bates III and the entire team at Titanium Investments join our Facebook Group: https://www.facebook.com/groups/titaniumvault



Speaker 1:
0:01
Well, it's not real estate investors, entrepreneurs and agents doing long length place, unlocking the secrets to real estate investing and entrepreneurship. Welcome there. That titanium vault hosted by RJ Bates. But third, here's RJ.
Speaker 2:
0:26
Hey guys, welcome to the titanium vault. I'm your host RJ Bates. Today I'm sitting down with Toby Mathis. How you doing man? I'm doing awesome. Yeah. Well I'm excited to have you here. We're going to talk all things asset protection, tax advice. We've got a top notch attorney who has tens of thousands of clients from across the country. So why don't you take a quick second to kind of briefly introduce your company and how you got into being an attorney in the real estate investing industry.
Speaker 3:
0:53
Oh my goodness. All right. So yeah, yeah. As you said, I'm an attorney but I'm not that type of attorney. I'm the good guy. End of a journey. A lot of people want to kick their attorney, uh, got into becoming an attorney cause they didn't like attorneys. I worked for a, I had a mentor or just, I was very, very lucky and have a guy that, uh, he, his son was a very good friend of mine and he brought me up on, uh, on how to be an independent business owner. So we all, all of the son, the dad and I all went to law school at the same time. It was kinda funny. Dad got kicked out. He was a, he didn't know how to shut up. They don't like you there if you're challenging the professor all the time. Um, awesome guy. So he, and he also was a, introduced me to the first real estate investor I've ever met with a guy named weed Watkins out of a brewery in Washington who had hundreds of properties to his name.
Speaker 3:
1:42
This is back in the 80s, all in Seattle and Denver. And he just said, hey, if you ever get in a whatever you're doing by real estate, he goes, it'll treat you good and it'll feel pay you forever. So a, I follow that I have over a hundred properties myself with, with my partner Clinton. Uh, we work real hard to, to grow our firm. We have over 30,000 clients nationwide. We've taught, and we still do teach for the groups, like the rich dads to the world. And so, you know, groups that teach real estate investing, we come behind and teach you how not to lose it all to the tax man and how now to get it taken away from you by tenants that have, uh, you know, that drive down the freeway and see that, that, that advertisement for a lawyer and think that, uh, you're their lottery tickets.
Speaker 2:
2:26
So I, you know, we were briefly chatting before, you know, I went onto the vault, which is our Facebook group and, and I ask people like, Hey, there are some questions that you want answered in this. And one of your clients hopped on there and said, I absolutely adore Toby. He's a blessing to have on our team. Uh, but why do attorneys at this light and negative connotation? Like I can't stand attorneys, no offense, but I don't even really know why. I mean, what is that?
Speaker 3:
2:54
Well, okay, so you'll learn how to use a weapon. And the weapons are words. And so all it is is that if I walked and put a gun to your head and said, give me 20 bucks, I go to jail. If I had put a lawsuit to your head and say, give me $20,000 I get paid. And so it's, it's rewarding bad behavior. And before all the plaintiff lawyers out there start giving me all this crap about, hey, we do it because you know the unrepresented and you have these unequal, yes there's that case. But the vast majority of the time, what I see in business, a shakedown, I see legalized extortion. So, but a lot of people don't like it and lawyers tend to think very impersonal. In other words, you learn to think like a lawyer in law school, which means take the emotion out and take the, take the the equation out, take the people out.
Speaker 3:
3:39
You start thinking of people as plaintiffs and defendants and the whole world becomes one big old, here's a client and I can tell you go into court and I've clerked for three different judges that have been there, done that, have that tee shirt and I love them. But you never want to be in court. It's not a good place to be. It's just like if you can avoid it, avoid it and you want to force settlement and you want to pay your debts and I'm the first guy to tell you like if you owe somebody, hey, if they've done you wrong, then just try to resolve it outside of a courtroom. If you have to go to a courtroom, it's some, it's last resort from it is. A lot of lawyers think it's first resort. Like I guess the old adage is when you're a hammer, the whole world looks like a nail. A lot of these lawyers make their make, make their living driving nails and they're just trying to find nails out there and they're advertising for them. And there's looking and people are unwittingly becoming that nail.
Speaker 2:
4:31
Yeah. And I, you know, just from my personal experience, it's always kinda been like, I felt like anytime I needed an attorney for whatever reason, it felt like a very long gated process to where, you know, the hours were their way to make money and, and I'm kind of going, you know, you just spent six hours to essentially ask me what I want you to do. And then I told you and you wrapped it up in 20 minutes and then billed me for six hours and 20 minutes. And I'm like that, that was not a pleasant experience. So I know you have a ton of value to bring to today's episode. So I really want to dive into some of these topics. I just want to just jump into probably the one question that almost all real estate investors have, which is how did the rich avoid paying taxes? Right? I mean, as investors, we, we hate paying taxes, right? That's like the worst thing in the world for us. So, uh, what are some of those tips that you have for us?
Speaker 3:
5:25
Yeah. If you'd ever want to pay taxes, it just don't work right. They'll probably give you some money to sit on your buddy. No. The uh, how do the rich not pay taxes is they, they use the laws as they're written. So for example, we have a president right now that's taken some heat cause he doesn't want to release his tax returns. So that's because most people won't understand it. But like I know a few of the things that he does, he does use it as conservation easements for example. So he's always going down to the summer White House, right. Whatever they call it, the Mar-a-lago, he goes down and hangs out on his golf course. Um, regardless of whether like them or not, Trump uses the tax laws to his benefit. And one of the things he did down there was a Mar-a-lago, I think has six parcels and it's a big golf course.
Speaker 3:
6:08
So when he did is he gave the rights development rights, future development rights to somebody, to a conservation group. He says, we'll never develop this, will never make it into track homes will never do any of that stuff. In fact, we'll even give to a preservation, a foundation, all of the antiques and everything that are in the clubhouse, and we'll make sure that we never dispose of those. We'll always keep them there. And we'll have a gala every year and you can go, you guys can go look at the antiquities, you know, that sort of thing. He did that with three parcels and got about a $5 million deduction. It didn't come out of pocket. What he did is he restricted his right on that property and it devalued the property, the future value of the property. In other words, if you really wanted to make the most money on it, you would develop it and sell it to builders and they would build houses on it.
Speaker 3:
6:54
But he wants to keep it as a golf course. So that reduction in fair market value, he took as a charitable donation, he did it to the tune of about $90 million in New Jersey on his courses there. So, yeah, so he conjures up out of thin air. He goes, oh, I think I'll create a tax deduction over here. I think I'll take another one over here. And we all have that ability, especially in real estate. And that's because there's incentives in the tax code. To be an investor, you want to get beat on every dollar you make. Go work at McDonald's, they'll hit you with old age, death and survivors, Medicare, food of Suta and withholding and state. They'll hit you with every, like you look at your paycheck, you're getting it all. You own real estate, there's a good chance you'll never pay tax. And by the way, if you die, your [inaudible] your basis steps up and your kids won't pay tax.
Speaker 2:
7:42
So let me ask you this. I mean, you know, I, I highly respect our president. I think he's a brilliant man, but he's also a very busy man. Like he's not sitting there coming up with these decisions himself, right? I mean, who is it on his team that says, Hey, let's take these three parcels and this is the strategy to get this tax cut. Who's doing that?
Speaker 3:
8:05
It's a tax planner and there's a big difference between a preparer and a planner.
Speaker 2:
8:09
Hey, let me go ahead and not be prepared for this podcast and have my phone on a ring there. This is the 91st episode and that's the first time I've ever had my ring tone golf amid interview. That's awesome. Okay, so who on who on Donald Trump's team is, is coming up with this strategy for them?
Speaker 3:
8:31
I forget the guy. I don't think,
Speaker 2:
8:33
but isn't, it isn't an attorney. I mean, is it someone in your role?
Speaker 3:
8:37
More than likely it's an executive who has experience in the area. So here's the, here's the, here's the hard truth. If you want to learn how to do tax planning, talk to somebody who's been an investor and who's done it and who learned from somebody who knew how to, how to get the past. So here's, here's the example. I'll give you RJ. So if I, if I flew into, um, oh I use this example, sometimes I, if you go into Orlando and you're going to go to Disney world and you follow all the signs, you will go and you'll hit every toll booth on the way to Disney world. But the very first exit when you leave that airport, you can go to sand lake road and you could avoid every toll all the way to Disney world. The only difference is that they used to be, you had to know somebody that was a local to say, hey, get off the toll way and drive down this road.
Speaker 3:
9:25
And now you have Google where you can say a boy totals. Well the tax code is no different. There's two tax codes. There's the tax code for the rich and the tax code for the poor. Or there's the tax code for the informed and the ill form. You don't know have to know the whole tax code. We don't have to know all the roads in Orlando either. We just have to know the role. That road that avoids the tall and maybe I have to stop at a couple of red lights along the way, whereas the toy would have gotten me there five minutes earlier. I get to make that decision if I want to avoid the tax, I can avoid the tax if I want to pay the tax because it's more efficient and maybe it's because it's less bother. I can do that too. And so I always say it's like tax appetite, how hungry are you? If you, if you, if you're getting killed in taxes, you're pretty hungry. If you're not, Max is anyway you don't really care. So
Speaker 2:
10:14
talk about some of these loopholes that you're talking about. What are some of the top ones
Speaker 3:
10:18
that
Speaker 2:
10:19
for someone that's breaking in? You know, I, I think some of our, the majority of our listener base is going to be somewhere in mid six figures to the, you know, maybe two to $3 million range. That's kind of where I learned the majority of our listeners are ranging. What are some
Speaker 3:
10:35
top loopholes that those types of businesses are missing right now? Well, the first thing I would do is say that as an individual, if you're making over half a million dollars, you're going to be in the top tax bracket. So every dollar that you make, depending on what state you're in, like if you're in California, you're paying 50% you got 13% plus 37% federal tax, you got 13% state, plus you have the a net investment income tax of 3.8 they have all these little taxes that they take on you as an individual. So the first thing I would say is you got to get really good at income shifting, which means creating other taxpayers. We're all used to doing it and we all know what it is, but we don't realize that we're doing it. So for example, going back to the president, Donald Trump, his dad figured out, hey, maybe if I pay my kids, that's going to be a lower tax bracket.
Speaker 3:
11:21
Fantastic. Maybe I'll have a corporation make some of the money. Fantastic. Maybe I'll fund an IRA. Great. About a 401k. Perfect. How about the tech, the, uh, the, the type of retirement account that nobody knows about, but that has more money in it than the 401ks all added up. That's a defined benefit plan. That's only for the rich. I'll tell you that. And uh, maybe we do that and maybe we're just starting to push the assets over here. So for example, let's say one of your listeners has kids and they're putting them through college, quit paying, you know, quit paying for your kid's tuition. Pay Your kids out of your business and let them pay their own tuition. It's gonna, it's gonna put it in a much lower tax bracket. In fact, they may be paying zero. My daughter graduated last year and her tax bracket was way better than mine. Something that I would've paid four or $5,000 on. For her, it was four or 500 bucks. And so we literally get to keep that money in our family. And you just got you. You just have to start thinking about that, right? You really just need a guide who says, Hey, here's your options. Here's why we should put it. Here's the good, the bad, and the ugly. If we do this, then here's what happens. If we do this, then here's what happens.
Speaker 2:
12:29
Was your daughter a member of the wolf pack? Hey, sorry, I was about to say, I mean you're wearing the Nevada shirt, so I had to ask. So it is Anderson law group. You're a company. Is that something that you guys specialize in and help investors do out of the 30,000 clients? Is that something, is this something that y'all help with?
Speaker 3:
12:49
Yeah, that's what that, that it really would of boils down to is when I look at somebody, I'm going to try to create a blueprint for them, say, here's what it would look like. And then on an annual basis, you're just tweaking around. You're seeing, let's, let's, let's see, let's try this and I'll give you a great example. Somebody comes in and they're, they're uh, they're going to buy real estate and they start buying some rental properties and that rental property is breaking even. We don't have a tax appetite on it yet, but let's say, I'll give you a prime example and this was from one of my classes about two months ago. Um, it was a doctor who was making about a million dollars. It was the wife that was making about a million bucks and the husband is doing real estate investing. And I explained to him, Hey, if that's all you're doing, you're going to be a real estate professional.
Speaker 3:
13:33
That means that your losses on real estate are actually can offset your wife's income and it can have a pretty dramatic impact. They were in a high tax state, so they were paying on every dollar about 50 cents. So if we can create losses, and he said, well, I don't, I can't create losses. I just, I'm breaking even on my real estate, my depreciation offsets, my incomes were at zero. I said, that's your thinking and you're limiting your belief to what you've been told, which is that when I depreciate real estate, I depreciate it over this long time horizon, like 27 and a half years. Or, you know, if it's, if it's residential at 39 years, a lot of people don't realize you can accelerate that. That's the starting point. I could take about 20 to 30% of that value of the business and depreciate it and take it this year. It's called a cost segregation. I can take it in, in their particular case, they did one property, it was $178,000 deduction. So what was it worth to them? Half of 178 whatever that number is,
Speaker 2:
14:35
it's massive. And to have someone on your team, I mean that, that is giving that sound advice over the course of, you know, three, four or five years, that's a drastic difference to where their business is going to be. One of the things that I've really been focusing on here over the past three or four months is really not, not hiding on a platform or hiding behind a microphone and, and talking about how everything's roses and rainbows and really kind of talking about, hey, you know, uh, their struggles and trying to scale your business and, and continuing to grow. And I want to share some of the struggles that we've been going through. And, and one of those things that I've been talking about recently is the nightmares of trying to scale your business and what that does to your cashflow. So let's talk about, if I'm sitting down with you, and it may be this is going to be difficult to give a quick precise answer.
Speaker 2:
15:33
So I apologize if that's the case, but if I'm sitting down and I'm saying, hey, we need to do something to, you know, relieve the tax burden that we're going to have. But in using your example of like, well, maybe we'll find a corporation here or an IRA or 401k when you're talking to someone like me that's got these massive goals and I want to continue to grow, it's, it's a fear. It's a fear of mine to say, I don't want to put a lot of cash in a 401k or an IRA where I may need that liquid cash in six months because of cashflow issues. If something comes up on a larger project or a portfolio doesn't start performing the way, or multifamily doesn't perform the way we thought. So what is your advice to someone in that position going from, you know, one or let's call it two to 5 million, trying to scale the 10 million because that was a really like almost every entrepreneur and I've talked to in that position says that's kind of one of the hardest times, right? Like to go from that level. So what's your advice there?
Speaker 3:
16:40
I love that question. I've never been asked that question on a podcast before this. You're, you're going right into my wheelhouse by the way. So the, the zero to 1 million is a different mindset than the 1 million to 10 million and the 10 million to a hundred million dollars, a complete other mindset. There's actually really good books on it. Or an Hanisch wrote one called scaling up the Rockefeller Habits. There's traction that follow the Rockefeller Habits. And what it really comes down to is, yeah, you get the more of yourself, you got to surround yourself with excellent people. So when you're scaling up Cassius King, I'll just be like real serious, right? And so you start looking at things that are gonna allow you to preserve your cash by minimizing your tax liability. In fact, let's see if we can defer it out. If you get over $5 million, you go to accrual based accounting and we could start a crewing liabilities, not paying tax on income until sometime into the future.
Speaker 3:
17:27
In real estate, we can depreciate the heck out of things in a traditional business. We can buy things even on credit that create massive tax deductions. Now. So for example, I'll give you one of our cases, we are sitting on about a $2 million profit one year and I looked at Clinton, I said, I don't want to pay tax on him. Do you want to pay tax on it? I don't want to pay tax on it. I said, well, we have three buildings in Vegas. I said, let's put a bunch of new copiers in them. Well, here's the, here's the funny part. A lot of people think you have to buy it. No, you can do a lease with a paid on termination of less than 10% is capitalized. In that year. It was a hundred percent bonus depreciation, which means I didn't come out of pocket anything that they gave me $37,000 it was 57 excuse me, to pay off my previous lease.
Speaker 3:
18:11
It's like, here's the money that you're going to owe on your past copiers. And then we bought $2 million with the copiers and guess what our tax liability was? Okay, zero. Wow. So, but here's the rub on that. I can get your liabilities to zero. We could buy other assets, we could buy commercial real estate, for example, and take a huge deduction in year one. Even if you're blind, I don't know on credit, but you show a zero on your tax return and you're trying to scale up. It's going to be really tough to get alone.
Speaker 2:
18:39
Yeah. And that, and that's the give and take as well. Right? So when we're trying to scale up in and you're talking about buying real estate, so then we could depreciate it to limit the tax liability, but then we're going to bank saying, hey, you know, here's my tax returns in there and it, I, I look at to say, what are you a tax cheat? And I kid you not man, I am. I, there's a local bank here in Fort Worth, I won't name them. Um, I've used them for probably three to four years to get small, like single family loans on rental properties. And every year he wants to have a meeting with just me. And I go in there and I give them the P and l, the personal financial statement. And every year he just looks at me and he goes, you just don't make any money. And I'm like, well, we can fix that. I'm like, yeah, maybe. But that part of that is a little bit strategic, but it's also because I don't have someone like you on my team that maybe is balancing that equation out. Right.
Speaker 3:
19:44
You know what you're running up against. And we see this all the time and I'll tell you what, your accountant's not gonna get it. Your attorney is not going to get it. You got to deal with people that actually do what you do. So I own a lot of properties, right? It's like, and I had zero tax returns where they're like, what the heck? What are you a tax cheat? And we're like, no, we, we get all these tax benefits. Yeah, that's great, right? You have somebody, you have to have a banker that understands it or you have to make yourself look the way the banker wants you to look. So the question I would go to your bank here is what do you, what do you need me to make? And then I would make sure your business is not a flow through business right here.
Speaker 3:
20:18
That while you're growing up and in and where you're drawing your salary from is an entity that does not flow onto your tax return, but as a separate taxable entity and it's paying you a w two wage and you're going to say, well, wait a second. I'm getting this w two wage, this is going to be horrible. Now I'm going to have to, I'm going to pay tax on all of it to get to be able to grow. That's a small price to pay, but it's not going to be $1 million that they're going to see. It's probably going to be like 150 or 200,000. Fantastic. Well, I can find a retirement plan. I can put almost in many cases, all of that money into a retirement plan. It still shows up as my taxable income. In other words, when I show them a w two it says one 50.
Speaker 3:
21:00
That's what they need when they start looking at your tax returns. If you're a real estate investor, watch their eyes roll back. They're not going to get it. They don't understand the scheduling as soon as like they don't know the difference between page one and page two, no paid the first page of that 10 40 in maybe they know a few of those lines and uh, you just get yourself in hot water. So you brought up on my previous question that once you started club seeing that $5 million mark, that's when you need to go to the cruel accounting system, right? Technically you're required to, so you start going over a certain dollar amount is you're going to be on an act on a traditional business. You're going to be looking at changing the type of tax payer. So let's say I have five entities and are each doing a million a piece?
Speaker 3:
21:47
Is that when we need to do it or is it an individual entity is going over the 5 million? It's an actual individual business that we're looking at. Technically you can do accrual based accounting under many circumstances, right? But I, you know what we're looking at on accrual based accounting as being able to accrue liabilities that haven't had otherwise, if you're a cash basis. Just just so just to make sure that it makes sense. If I'm a cash patient basis taxpayer, I recognize income when I receive it. I get to write things off where I pay it. If I'm accrual-based, then I recognize income even before I receive it. If I'm owed that money and if I owe money, I can take that deduction even before I pay it. And so you could have massive liabilities. So for example, if I'm getting paid $1,000, I know it's going to cost me 100 bucks to fulfill it.
Speaker 3:
22:36
I'm only going to be taxed on $200 in that year, even though I haven't paid the 800 bucks companies to be more accurate in their reporting. Uh, you know, when you're doing it cause otherwise cash basis, you know, we can make the numbers jump all over the place. So one of the questions that you know, I see in Facebook groups and we're in several masterminds, everybody's got questions about the new tax laws. What can you tell us about that? What do we need to know about the new tax laws? So for real estate investors specifically, I'll just, I'll just hit on as an individual, as a human being, they eliminated miscellaneous itemized deductions, which means if you are filing something on a schedule a, you're probably hosed. Uh, they raised the standard deduction. So now it's over 24,000 as a married couple of units, 24,000, 400 or 12,200 this year.
Speaker 3:
23:25
And it, unless you're exceeding those, you're not getting any benefit for your, uh, finance. You know, for the, uh, interest you're paying on your primary home loan, um, you're not getting your charitable deductions if you don't exceed that. And, uh, in medical, if you have to exceed 10%, you're not getting that. And then if you live in a, that has state taxes or you're paying real estate taxes, you're capped at 10,000. So if you're like in New York or California or Connecticut or Maryland where you're paying 40 or $50,000 a year, you're only going to get to write off 10,000. So like that, that really stinks. Uh, from a business standpoint, they gave us a lot of benefits. They, they kept c corpse at 21%. I mean, a flat tax. And, uh, if you know how this works, most accountants immediately regurgitate something they learned years ago, which is double tax.
Speaker 3:
24:17
And they, you know, double tax bad. It's almost like a caveman, but it's not. You have to out there to actually pencil it out. What it is is the corporation pays tax and if it pays it to its shareholders, they pay it at the longterm capital gains rate, which could be zero. You know, if you're less than 75 78 $79,000 in a married couple, you're paying zero on your capital gains. Like I don't really care about that. Worst case scenario, you're paying 20% so I kind of look at it and say, but why would I issue it? Like I could count on one hand how many times we've issued dividends. You're just going to sit on it and you're going to wait and it's being taxed at 21% whereas as an individual, I may have been hit at 37 to 50% depending on where I live, beeping a big chunk of that money and then say, well how do I get access to the money, loan it borrowing, have it be a partner in something, just another person. It just paid a lot less tax than you.
Speaker 2:
25:13
So when they say loan it, are you saying like that corporation is then going to loan it to another one of your companies maybe to purchase a property or something along those lines?
Speaker 3:
25:22
Exactly. Like there's no reason that like it's, it's truly an artificial person, so could I use it too? You have to pay an interest if it's over $10,000 right? You gotta pay it interest, fine, I'll pay some interest. It's 21% like I'm not worried about that and I'm going to offset it with other expenses. What I know is that I can actually partner up with it or I could borrow the money. Worst case scenario is I pay it out to myself. Like if I paid a, if I had money to go into a corporation and the account immediately goes out with tax double decks, that's only on the profits. If I pay myself a salary and fund a retirement plan, I may not pay any tax anyway and I just avoided all taxes.
Speaker 2:
26:01
When you say it has to pay interest, does it actually have to make monthly payments or could you have an agreement where it's accrued interest and it's paid off at the time of closing?
Speaker 3:
26:11
Right. What happens is the IRS is going to impute interest to it whether you pay it or not, and so it's usually gonna be about 3% 4% right in that range. I think it's right around 3% right now we use the federal rates, so let's say that you loaned you 100,000 you're going to have to recognize $3,000 of interest as though you paid it to the corporation. Regardless, you don't actually have to make the payment back. You're taking it action too. And the companies recognizing some income, I would just pay it. I'll make it real simple interest. It looks good. Do it once a year. It doesn't really matter.
Speaker 2:
26:41
Put a paper trail there so you know you're not getting in trouble. Yeah. What do, what is one piece of advice you would give to someone if they were just starting their business today?
Speaker 3:
26:52
Cassius cane don't run out of cash. Be careful about the debt. Uh, and I would say that there's, the only thing that really kills a business is when it's running out of capital. So I hold onto it. And so let me give you a really good example. Um, I had a guy from Microsoft, he was a Microsoft contract. He was making about $200,000 a year and he was feeling the squeeze because Microsoft would pay him as a contractor about every 30, 60 days. So he had to pay his, uh, contractors, people that worked under him, and he had to borrow money every month to do it. So he kept a balance on his credit cards, about $70,000. When we added it up, it was about $11,000 a year that he was paying an interest. Uh, so I looked at his business and I said, hey, if we just slightly structure it differently that he could still have access to all the money, we just made him an escort and it eliminated a big chunk of the self employment tax he was paying.
Speaker 3:
27:44
Plus, we added a little 401k onto that for a lot of people. They don't realize that with an IRA you can't borrow from a 401k. You can actually borrow from yourself up to $50,000. And so what we did is we rolled his existing IRAs, his wife had 130, he had 90 and we borrowed the money out of his own 401k and wiped out his credit card bills. We made him an escort, which saved them about, I think it was $9,000 a year. It saved him $11,000 a year in interest on the, uh, credit cards, cause he still pays himself interest, but it's to himself. Um, and what it ended up doing is giving him, literally, it was a 10% of his, of his income just boosted up through the use of two simple structures. But here's the rub him because he got rid of that $70,000 of credit.
Speaker 3:
28:32
Uh, his personal credit score went from six 80 to seven 70. Yup. So he was able to get a better interest rate on his house and we calculated the savings over the 30 years and it was over 200 grand and he was able to get credit cards in the company name that weren't reported to his personal credit and that was over a hundred thousand. Nope, no. Now he is not in a cash crunch. He's keeping more, he has access to all that money. He has $70,000 on his personal that he like we just paid back. But those, that credit is still there and he had another a hundred thousand dollars in his, in his, uh, business and over the life of that business, that's probably going to save them three or 400,000. Just an interesting
Speaker 2:
29:14
that if he's, you know, leverages that credit score correctly. I don't know if he's an ambassador or not, but you could go get travel credit cards but rehab on there and immediately pay it off and to get those travel points and before long you're traveling the world free, you know, I mean, I'll just off of one particular move that boosted that credit score. And again, this is as investors, so often we want to talk about the, these magnificent moves of, you know, leveraging and you know, like we've already, you've already given some amazing golden nuggets today about, you know, how you can even loan from, you know, one corporation to, you know, another entity or to yourself, but it's also about leveraging these other benefits that are out there to us, right? Leveraging your credit score and how that benefits your lifestyle in the long run.
Speaker 2:
30:02
So that's, that's amazing. Um, you know, we, we get these, uh, these sheets, they give me questions to, to Kinda ask you. And, uh, the last one on here says, what makes you different from the majority of other lawyers? I'm going to skip that one because you've already given us that answer. I mean you, you came in here and just crushed it with the gold nuggets. But we did have one of my, uh, favorite listers, Matt Smith. He did ask a question he wanted to know, do you need a different entity for active income compared to your passive income?
Speaker 3:
30:38
The answer is I would, I'd separate them out. And then the way I described this in events, I teach classes all the time is that well I went to Catholic school and so when you're goofing off I would say it's over here. I'm goofing off over here. The nuns would just wacky, you know, and like I had ones that would throw a racist. That's active income you're getting hit with, with self employment tax on it. You're getting hit with old age others fibers, medicare, Buddha, Suta, you name it, they're just nailing you. That's, that's like, ah. So, um, it is kind of funny that tax comes from the Latin Word Tech. Sorry, which means to censure or express severe disapproval. I was looking at like, if you're paying too much in taxes, you got to pay attention. That's somebody telling you something, then you get the, and then when you're being good and you're walking the old lady across the street and stuff, they're giving you nuggies and they're telling you what a great person you're going to go to heaven and stuff like that.
Speaker 3:
31:29
And your mom loves you. That's over here. That's passive income. I, I could literally make, like when I worked at McDonald's, when I was in high school, every dollar they nailed when I go over here and I have, uh, you know, we have north of 130, 30 single families. We have some other stuff too. But uh, I could trade those into more properties. I could sell them and let's just say there were 5 million and then I put it into 5 million, turns into 10 million. I sell those and put it into more properties. I paid zero attacks and then when I die, my daughter could literally sell it all and pay zero tax. Actually, my wife could, I'm in community property state. So if I died, she could sell my entire portfolio the day after I died and pay zero tax. So that's the difference between active and passive income.
Speaker 3:
32:14
Passive income is wrench, royalties, dividends, interest and capital gains. And you give it big kisses. You give it noogies that's over here. So you really do want to cut it and make it separate. In our real estate world, this is when you're flipping houses, you're going to get hit. You can't, we were talking earlier about installment sales for the show. You can't do an installment sale on a flip. I can do an installment sale on, on, on over here on investment properties. I need to make sure that the IRS knows those are separate. So I would actually use a separate entity for those different activities. I'd have a corporation, either an SRC or an LLC tax as an soc, a doing my flips and I would just have a holding pass through entity, either a partnership or disregarded, uh, for my, my rental properties. And I would make it really simple like, Hey IRS, you can see exactly what I am. You know exactly which two types of income these are. And the beautiful part, if I, if I do it right, I can change that active income into passive income if I really want to.
Speaker 2:
33:17
So I'm so glad you brought up you dying. Let's talk about that. Um, how should a business be passed down to your, your spouse or your kids? What's the appropriate way to do that?
Speaker 3:
33:28
All right, so the, the, the answer to that question is kind of twofold. First off, if you have partners, then the question is, does your partner want your wife or your kids as their partner? Right? And if the answer's no, then I would have a buy sell and I would find it with life insurance. So if I die, for example, if I die in my, my firm, I'm an attorney, so I can't give it to my wife or my daughter. They're not attorneys farther than that, right? No. Uh, what I do is I'm still Clinton, I and Michael, we have another third party, but a Clinton, I did this a long time ago. We started the firm as we said, look, if I die, let's make sure we have lots of insurance. The benefits of the proceeds of that insurance policy. Go to my wife. Same thing with, with his wife and me. And then we take over the firm. So we own it. The surviving partner keeps going on with the firm and we documented that ahead of time. You need to do that if you have partners because you don't want to,
Speaker 2:
34:22
oh, advise that the business has insurance on you as well. Because I mean you're, you're a key part of the business, right? The light realize a little bit of payment to either replace you or at least replace the kind of income that you're bringing to the company. Right?
Speaker 3:
34:36
Absolutely. And so the key man policies is for, usually it's going to be restricted to the top five and they have to be bringing something of significant value to the business and what is there. But there's a key man policy on me. There's a key man policy on Clint, for example, that puts money into the company. And by the way, insurance proceeds are never taxable. So the company is going to get a big infusion of cash when I kick it. So Clinton wants me to go mountain climbing. He wants me to go scoop diving, skydiving, and anything else. He's like told me I'll take up some more dangerous hobbies. Right? There's going to be a bunch of cash float in there when I kick it. Right? Oh I'm, so that's number one. But number two, if it's just you, I would, I'll almost always really it's under any circumstances I would just have a living trust and makes sure that I am noting to whoever that is going to manage that asset, whether I want to keep it or whether I want to sell it. And I'll tell you what, protect your kids from themselves. So in my estate plan, my like they're not getting anything. They're going to money if they need it. Health, education, maintenance and support. But I have very specifically like, hey, I built up a real estate portfolio that's providing income and kicking off passive income. I never want to sell it.
Speaker 3:
35:49
In fact, I would encourage anybody that's called infinity income, right? That will never stop a hundred years from now. That'll still be paying out. There's nothing else out there, quite like it. So I would just say, don't let your kids sell it to buy a Lamborghini or buy a bigger house.
Speaker 2:
36:06
Well, very rarely do I ever ask someone to do this, but man, you've blown me away with the just the golden nuggets that you've given us. So give us the, you know, 32nd, 45 second sales pitch for the Anderson law group. How can people reach out? What's the best way to do this? And, and all the different, um,
Speaker 3:
36:27
I'm not going to sell anything. So here, here's how it works. I need smart people. I need people, like in our firm, we want you to educate yourself. So we teach classes, we teach webinars, we teach podcasts, all that fun stuff. So just go to Anderson advisors.com that's with a no, or you can just type in and look for Toby Mathis and here's what I would encourage you to do. Every other Tuesday, I do it free, open to the world tax in it, yet Q and a session. Go to that tax Tuesday's what we call it. We answer about 200 questions. It's just nonstop rock and roll. And you can ask any tax question you want. What I want to do is invite you to get used to interacting with us and you'll realize that we're pretty darn transparent. Where we actually start getting paid is when we employ, know put a plan in place.
Speaker 3:
37:09
So you've got to get your education up there so you know what we're doing. You never want to put yourself at the mercy of a, of a professional. You want to be able to control them cause otherwise what you'll find is that you're working for them. And so, and we're no different. I say just make sure that you're really learning your stuff and some of you guys are sophisticated. Then let us do a plan for you. We'll be able to tell you what we can save. You will be at a tell right away and you'll be at it. You'll, you'll pass the sniff test. Most important thing is make sure that what you have is protected so you keep it and you're in control of it in that you control your taxation. Cause you could choose one to pay tax, especially in real estate. She was paying us a lot.
Speaker 2:
37:47
Well, I'm going to do a couple of house cleaning items, a, you think about your final thoughts before we wrap up here. Um, guys, please, uh, do me a favor. We're looking for five star reviews on iTunes. You're watching on a youtube. Give us a thumbs up. You really didn't like us and you want to give us a one star review or thumbs down. Just Dad just x out and forget about doing that. Okay. Only if you like us. Um, on that note, Toby, thank you so much for spending time with final thoughts.
Speaker 3:
38:16
Oh, I'd say that you're in the right spot and here's the thing. Birds of a feather flock together. You want to stick around people that actually do what you do and ignore everybody else.
Speaker 2:
38:26
There you go. All right, buddy. Thank you for taking the time today. All right guys, we'll see you all next week.
Speaker 3:
38:32
Thanks so much for listening to the titanium vault, your host, RJ Bates.
Speaker 1:
38:36
The third. For more info and to stay up to date, visit www.podcast.thetitaniumvault.comandonfacebook.com/ [inaudible] titanium vault. If you enjoyed the episode, please rate and review and we'll catch you next time on that titanium ball.
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