Tom's Blog

Last week, I spoke twice for The Learning Annex in Southern California. In San Diego, 98 were registered for the seminar and 11 showed up. In Los Angeles, 198 were registered and 35 showed up. So only 46 out of almost 300 registered actually came to the seminar. Of those 46, 30% purchased our Financial Freedom Now! online course. So what does this say?

There could be many different reasons why so few of those registered showed up and purchased our course. But there is only one result that matters. And that's the number of people who are going to change their life financially. Congratulations to those who made the decision to take control of their financial future!!!

It's not easy to do this. Wealth does not come easy. It takes commitment, dedication and hard work. The good news is that there is no limit to the number of people who can become wealthy. There is no limit to the amount of wealth available in this world. Wealth is a commodity that can expand forever.

So why don't more people take advantage of the opportunity to learn how to become wealthy and then to apply this knowledge to actually do it? Is it a lack of optimism or a lack of willingness to work? I know that attending a 2-hour course on a weekday is something that is not easy to do after a long day at work. But WEALTH IS NOT EASY! It's possible for everyone, but it is not easy. So, for those who are looking for a fast buck, you can stop reading this blog right now. It's not going to happen! You have to study, you have to apply what you study and you have to stay with it.

But remember the good news! Financial freedom is available to all. And, as we say at ProVision, it's "closer than you think!" But you must take that first step. Spending a few hundred dollars to learn how to permanently lower your taxes or to learn how to create your own personal wealth strategy (http://www.ProVisionWealth.com/products) is just the first step. Then, you need to apply this knowledge and take control of your wealth.

To those who attended the seminars last week, welcome to ProVision! I promise you that if you will continue to learn and apply the strategies we talked about, you can have your financial freedom in a few short years. Please let me know how you are doing and how we can help.

Warmest regards,

Tom

We had a great call last night with everyone enrolled in the ProVision School of Tax Strategy. Welcome to all those who joined us from the Business Tax Strategies course. If you aren't yet a member, of the School of Tax Strategy, look for new opportunities to join us on our monthly coaching calls via our other tax strategy products at http://www.ProVisionWealth.com/products.

We had lots of good questions last night, when our topic was Getting the Most out of Your Real Estate Tax Benefits. One of the really good questions centered around mortgage debt relief and the recently enacted Mortgage Relief Act.

The question asked was what happens in the following situation under the Act:

You purchased a property for $200,000 at the beginning of 2007 with no money down. Now, you have negotiated a short sale with the bank and a buyer for $140,000. What is the tax effect?

The answer depends on whether this is your principal residence and whether the property is now worth only $140,000 or something else. The Mortgage Relief Act ONLY APPLIES TO YOUR PRIMARY RESIDENCE. So, if this is a rental property, the Act doesn't apply to you and you have to follow the normal rules. In addition, the Act only applies if you DO NOT sell the property. The intention of the Act is to allow you to keep your property, get a reduction from the bank in your loan principal so you can avoid a foreclosure, and not tax you on the debt relief. So, if you did not sell the property but just received a $60,000 reduction of your debt AND this is your primary residence, the debt relief will not be taxable to you.

However, if you sell the residence, then you effectively sold the house for $200,000. If the debt was nonrecourse, then you are treated as selling the house for the outstanding indebtedness on the property. Since you paid $200,000, there is no gain on the sale and you won't have to pay any tax. (Even if the debt were more, you might have the personal residence exclusion of up to $250,000/$500,000 available to you.)

If the debt were recourse and the value was $140,000, you would have debt relief of $60,000. If this is your primary residence, the income from discharge of indebtedness will be excluded from your income and not taxable. But, if this is a rental property, the Act DOES NOT apply to you. So, you would have debt relief of $60,000 (taxable to you) and a capital loss (or Section 1231 loss) of $60,000. This could be a DISATROUS RESULT for some people. See your tax advisor immediately if this is your situation!!!

Another question asked concerned the calculation of the home mortgage interest deduction for debt in excess of the limit. Specifically, if you have a home equity line of credit on your house that qualifies for the additional $100,000 debt/interest deduction and you pay down some of that line during the year and then raise it back up, and even exceed the $100,000 limit at times during the year, how do you calculate the interest deduction for the year?

The answer is simply to pro rate the interest deduction as it was incurred throughout the year. This is a computation that your tax preparer should be able to do for you fairly easily with the proper information.

Keep the questions coming! I'm happy to answer them here in my blog. For more on the Mortgage Relief Act and other tax issues, please go to our many articles on our website by logging onto Wealth Strategy U at http://www.ProVisionWealth.com/wealthstrategyu.

Warmest regards,

Tom

Edna from Texas asks the following question: I am a healthcare provider and if I work full time as a health care provider and work 15-20 hours a week on my real estate business would I be considered a real estate professional?

A: Perhaps. The rule is that you must spend more time on your real estate than you do in your other business/job. So, in your case, if you spend 20 hours per week in real estate, then you would have to spend less than 20 hours per week in your health care business. You should easily meet the 750 hour rule if you make the proper election to aggregate your properties (for more on this, go to http://www.ProVisionWealth.com/wealthstrategyu).

In addition, you have to make sure that at least some of your real estate activity pertains to operations (e.g., property management) and not just investing activities (e.g., bookkeeping).

Warmest regards,

Tom

The other day at church, one of my friends asked me how my business was doing in this down economy. She was a little shocked when I said it was doing great and, in fact, I was making tons of money in real estate right now.

The problem with the media is that when prices go down, they are all gloom and doom. Serious investors know that you make more money in a down market than in an up market. Two years ago, there were no good buys at all in Arizona. Now, there are hundreds of good buys. And, because people are not buying homes, they are renting and rents are going up.

The reason a lot of investors are in trouble is that they are not really investors - they are speculators. That is, they bet their entire farm on appreciation. Robert Kiyosaki, of Rich Dad fame, and I were talking about this yesterday. Good real estate investment requires 4 income streams: appreciation, cash flow, tax benefits and amortization of principal. Most of the "investors" who are in trouble did not follow this rule and relying solely on the appreciation. That is a very risky play and, quite frankly, they got what they deserved. (This is the reason I don't invest in raw land - all speculation - no other income.)

If you are not investing now, shame on you. This is the best time to invest in real estate since the early 1990's. Personally, I can't buy real estate fast enough right now.

Food for thought.

Warmest regards,

Tom

Earlier this week I met a delightful woman, Marci Shimoff. Marci was kind enough to send me her book entitled, "Happy for No Reason at All." I have been fortunate to be one of the lucky people who has been happy for no reason throughout my life. I was a happy child and have always found the good in life and in people. But I have never know why. Marci's book explains why and how everyone can develop this trait.

The great thing about being happy for no reason is that you don't have to depend on anyone else or anything else to be happy. Maybe this seems obvious, but I find a lot of people who believe that they will be happy when they have a better job, more money, better looks or better health. And, I have a wife and son who are bipolar. Happiness for them and for others who do not have a naturally high level of seratonin does not come easy like it does for some others (like me).

I believe Marci when she says that anyone can develop this trait. While I am naturally happy, I work at it as well. I exercise, eat right, and work on my positive attitude every day. My partner, Ann, is better than I am about letting things go. I remember when we had our little issue with one of our partners in another office how she was able to let it go immediately, while it took me several weeks to get over it. Getting over stumbles and things others do to us is not easy and we have to constantly work on this.

Being happy for no reason does not mean that we ignore all of our other goals in life. In fact, being happy for no reason allows us to focus more directly on accomplishing our goals because we are not so worried about what "might" happen to keep us from our goals. This is especially true when it comes to wealth goals. As we emphasize in our Financial Freedom Now! course (http://www.ProVisionWealth.com/products), focus is critical when it comes to achieving real wealth.

So, get happy and get wealthy! I highly recommend this book, "Happy for No Reason at All" by my new friend, Marci Shimoff. Being happy for no reason will accelerate your wealth and bring you much joy in your life.

Warmest regards,

Tom

I appreciate Caleb's recent comments about the opposition in his life and looking for a higher purpose for his training. I will get to his tax question in another blog. In this entry, I want to address the whole idea of opposition.

Opposition is necessary in order for us to grow. If we want to build muscles, we must provide opposition to muscle movements, i.e., weights. If we want to build our spirit, we must work to overcome the challenges that might cause us to shrink. Our mothers referred to this as building character. And if we want to build wealth, we must address the challenges that come our way and not run away from them.

It's only through serious effort that we build wealth. I do not believe that if we think happy thoughts, wealth will land in our lap. I agree with abundance theory in that there is an unlimited amount of wealth available. This is evident in the simple concept of money supply that we learn in Economics 101. (For more on this, get my special report at http://www.ProVisionWealth.com.) But I do not believe that we can just sit around and wait for money to come. We have to work for it. And it might be difficult. But, as we flex our wealth muscles, we will find our financial strength increasing as we increase our financial literacy.

I encourage everyone to go out and just do it. And, do it now. We are in the best real estate market for investing we have seen in 15 years. If not now, when? Work hard and succeed. There is not one person reading this blog who is not capable of becoming financially free. Let me know how I can help you.

Warmest regards,

Tom

Last week I was pleased to host a teleseminar about the new online world of blogs and social networks, otherwise known as “Web 2.0”. It was presented by my friends James Burgin and Jon Ward of Brandwithin. What struck me most about the presentation was the extraordinary marketing potential of these new online phenomena. Once you know some basics about the new Internet, you can quickly build brand recognition and drive tons of qualified traffic to your web site. I discovered how important it is just how you position yourself in the “worldwide conversation” and I also picked up some great technical hints on how to drive more traffic quickly. We recorded the presentation by James and Jon, so you can still hear it – and follow the accompanying notes – at the ProVision web site (http://www.provisionwealth.com/seminars/Details.asp?Seminar_ID=16). Be sure to listen soon, as the recording will only be available until February 22nd. If you have any product or service to market, you definitely will want to tune into this new information. It’s a real revelation.

Warmest regards,

Tom

I'm a little behind on answering questions for our School of Tax Strategy folks. Jeff in Boston asked the following:

When is it that we are required to issue a 1099MISC to service suppliers? When do we need to get them to fill out a W9? If the check always goes to a company name, (like ABC software or Software Technology Corp) does that by itself protect us from the need to produce a 1099 or do we need to require them to do a W-9 also? If it is to an individual and the amount is less that $600 should we send one anyway?

The rule is that 1099's have to be sent to any service provider who is not incorporated if the amount paid to that provider during the year was $600 or more. Jeff raises a dilemma that is encountered by most businesses, i.e., what if you don't know if they are incorporated? The safe answer is to issue a 1099 to all service providers you pay $600 or more during the year. Even if there is an "Inc." at the end of their name, this does not guarantee they are incorporated. I have seen this designation erroneously applied to LLC's and even to sole proprietorships. There is no reason you would need to issue a 1099 to suppliers you paid less than $600 during the year.

Warmest regards,

Tom

Corey asks the following question:

Q: Tom, I was wondering if there is a preference as far as tax strategy/legality with pulling the equity out of rental. The rental is currently a sole proprietorship and were are looking into transferring it to another entity(maybe LLC). Should you try to pull out the equity before the transfer or after?

A: As with most questions of this sort, the answer is "It Depends." In the case of a single family home rental, you probably want to pull the equity out prior to transfering it into an LLC or other entity. Banks typically do not like to lend to entities, but rather prefer to lend to individuals. So, you want the loans in place (including second mortgages) prior to contributing the property to your LLC. Be aware, though, that there are several details to attend to when transfering a property to an LLC to make sure that you keep in place the casualty insurance, the title insurance and to be sure you don't run afoul of the due on sale clause in the bank loan. Please contact your Tax Coach to go over all of these details as they apply to you. We also have this information in our ProVision educational course, "Getting the Most Tax Benefits From Real Estate," coming soon to http://www.ProVisionWealth.com/products.

Warmest regards,

Tom

Another question from Corey:

Q: My question involves type of entity concerns for a real estate business. We have a Vacation rental that we rent out weekly. Because of the duration(7 days or less average) and our participation(active) I believe it classifies us as a trade or business. We currently are operating at a loss (before depreciation) but we are incrementally increasing the rental charge and getting new customers ( this is the beginning of the 2nd season)Hopefully we will have a least minimal profit next year(before depreciation). The question is what is the best entity for this real estate scenario operating as a trade or business. We did a 1031 exchange last year (jan 22) and currently operate as a sole proprietor in joint tenancy with my wife. We Have earned income from my occupation of around 270,000. This rental is in Maine and we live in Pa. Would a dual entity structure with a Nevada holding company for liability be the best?

A: This is a fairly complex question and I would recommend you go through it thoroughly with your Tax Coach. Let me give you some of the fundamentals, though. First, typically the best structure for a primary operating business is an S corporation. To get the best tax benefits out of your S corporation structure, you should review the details of your situation with your Tax Coach or, at a minimum, review the ProVision educational course, Making the Most of Your S Corporation, that is part of our "Business Tax Strategies Your Accountant Will Never Tell You" course at http://www.ProVisionWealth.com/products.

But even though you may want your business owned in an S corporation, you may not want the real estate used in the business to be owned by an S corporation. The reason for this is that if you ever want to distribute the real estate out of the S corporation (to refinance, for example), then the IRS will treat the distribution as a sale of the property from your S corporation to you at the then current fair market value. This creates what we call "phantom gain" where you end up with a tax on a non-cash transaction. Separating the business from the real estate is a little tricky, so definitely go through this in detail with your Tax Coach prior to making any changes.

You have yet another question in the mix regarding where the entity(ies) should be formed. I would suggest you speak to your asset protection attorney about that. Your attorney can look at the effects of the different laws in Pennsylvania and Maine to help you out. Please feel free to contact our office if you would like a recommendation for an attorney.

Warmest regards,

Tom