Wealth Formula Episode 267: URGENT: Tom Wheelwright Discusses New Tax Legislation!
Catch the full episode: https://www.wealthformula.com/podcast/267-urgent-tom-wheelwright-discusses-new-tax-legislation/
Buck: Welcome back to the show everyone. Hope you are having a good week here and we’re going to talk about something that hopefully makes your week better, but could make it worse. I’m just warning you. We’re going to talk taxes today. And when we talk taxes, we always talk taxes with, well I consider the Michael Jordan of taxes himself: Tom Wheelwright. Tom of course is the founder of WealthAbility. He is the author of Tax-Free Wealth. And there’s two editions to that by the way. So if you haven’t read the second edition, you may want to catch that. And he is Robert Kiyosaki’s Rich Dad Advisor on taxes so no better guy to get information on taxes. And it sounds like the timing on this was perfect. So Tom, welcome back to Wealth Formula Podcast.
Tom: Hey, always good to be here, Buck. I love your students and love what you’re doing.
Buck: Thank you. Well, listen. So we literally like you just said, they just came up with some new stuff here. And you said it just came out like an hour ago you were able to read up on it, what’d you find?
Tom: So we have what’s called the green book and we didn’t get this under the Trump administration. But the green book basically, so when there’s a proposal, when there’s a tax proposal, what the green book does is it explains the proposal and explains the cost or the benefit tax-wise of the proposal and even to the point of when they expect the effective date to be. And that actually was what was most interesting to me because we’ve heard about a lot of these proposals Buck, but we don’t know what the effective date is, is there any planning we can do. And actually, there’s some good news on effective dates or bad news on one effective date, but good news on the rest. So that’s we actually know. A lot more than we would normally know and we know a lot about when the administration wants it to happen, if it gets enacted. Remember, this is an administration proposal it is not a legislative proposal and congress has to get together to decide what they do on this.
Buck: So this was just released and this is basically what we’re talking about is the Biden plan and so why don’t we kind of start with some of the things in there that you think are most significant to investors like us?
Tom Well obviously there’s the 1031 exchanges, there’s carried interest which I know is very important in your group, and there’s capital gains. So you know those are I think the three big ones. They’re talking about raising the rates. There are some other actually very significant proposals in there and there are some very significant incentives
Buck: So awesome let’s talk about the stuff. Obviously, 1031 exchange is very useful stuff for real estate investors right I mean you know the Trumps and all his real estate families have relied on this for years and years and years.
Tom: Decades yep
Buck: Decades. So is it coming under attack again?
Tom: For sure. Under the Biden proposal, beginning next year 2022, 1031 exchanges would not be allowed. So you would no longer have a tax-free exchange of real estate. You wouldn’t have a tax-free exchange of business. You just don’t have a tax free exchange of real estate
Buck: Interesting. So that distinction is because the 1031 exchange is a kind of exchange so what they’re saying is okay fine you can do it with businesses but you can’t do it with real estate. That’s what you’re saying?
Tom: Right because 1031 applies to real estate and there’s a different code section 368 that applies to business. So business you can do it but you will not be able to do it with real estate.
Buck: Tom you’ve mentioned that over the years 1031 exchanges have sort of come under attack. This is not the first time.
Tom: No actually the last time they’re under attack was by the Trump administration. So Trump significantly reduced 1031 exchanges. He eliminated personal property. So the farmers and the ranchers really felt the effects of the Trump change which you could no longer for example exchange a cow for a cow or a horse for a horse under the Trump administration. They got rid of all of that and all you could exchange is real estate.
Buck: Well I wonder why. Yeah, interesting. So what is the likelihood in your mind of this because you’ve mentioned in the past there’s been you know some talk about elimination of 1031 exchanges? Never happened. What are the issues here that you think are going to come up that could you know make this not happen?
Tom: Well here’s the thing you know you keep hearing this you know Joe Biden keeps talking about how he’s pro small business which is basically anytime you hear a government official saying they’re pro something they’re really anti that. So this is an attack, one of the attacks on small businesses. Remember, the big guys don’t use 1031 exchanges. They don’t do it. They’ve got multiple investors. They’re never going to do a 1031 exchange. Who this hurts is the mom and pop pharmacy owner who owns the real estate right and they want to do a 1031 exchange into say a Walgreens for their retirement. It’s going to hurt that the person who owns duplexes and single-family homes and things like that can affect the syndicators. Syndicators never use a 1031 exchange so it really does hurt the little guy which is why it’s surprising to even be in there. It doesn’t raise a whole lot of revenue and I’m just not sure what the reason is except it’s all part of this capital gains idea that even unrealized capital gains should be taxed. And I think that’s what this 1031 is about is the capital gains issue
Buck: Okay so let’s talk about capital gains. What’s the legislation there?
Tom: This is the interesting one because the idea is to cut tax capital gains at ordinary income rates to subject all capital gains to the net investment income tax. So now instead of capital gains being taxed at 20, let’s say you’re a real estate professional, you’re involved in your business. Right now your highest rate is 20 percent. Now your rate would be 43.4 would be your tax rate okay. So it’s more than doubling the tax on all capital gains including businesses including and interestingly enough even on gifts, there would even be a capital gain on a gift. So and this by the way, the capital gains proposal on selling a property or selling a stock is effective as of today. That’s the effective date is today. The date of the announcement.
Buck: So that’s for the stock is that also for the 1031s? No 1031’s next year. For capital gains
Tom: This year. But if you sold a property this year and you didn’t do a 1031, you’d be subject to that 43 percent tax.
Buck: So what we could see as a result of this if it were to happen is a lot of people selling property to try to get into issues.
Tom: It would accelerate the selling of property and everybody would do a 1031 exchange.
Buck: Yeah okay and then the last thing you mentioned on this end was the carried interest. So carried interest doesn’t apply to as many people. Does it apply to syndicators which is basically the waterfall, the capital gains and waterfalls. What’s the news there?
Tom: There’s an interesting, so again I read through this really quick Buck. There’s an interesting minor point in there that it might not apply to real estate, okay. You know it doesn’t right now that the three-year rule doesn’t apply to real estate right they specifically pulled it out. Now the interesting thing is in the proposal it says it applies to real estate but then there’s a little line in there that suggests that well maybe it won’t. So it’ll be interesting to see whether it applies to syndicators or not. I think we still have to wait for the legislation on that one whether it applies to syndicators it would definitely apply to all the hedge funds and all of those guys.
Buck: But the legislation relates to a three-year hold is that right?
Tom: No no that’s the old legislation, was a three-year hold. This would make it all ordinary income.
Buck: So basically you’re almost just eliminating long-term capital gains.
Tom: That’s the idea on all of this proposal is to eliminate long-term capital gains any kind of preferential treatment of capital gains which is really completely contrary to what all the businesses say that businesses would all in all the proponents of businesses chambers of commerce and everything would say your ideal capital gains rate at zero and this is just the opposite.
Buck: So before everybody panics, I want to remind and get your thoughts on this too Tom. We have a split congress right especially that guy from West Virginia what’s his name Manchin pretty much controls everything that happens.
Tom: You know what we’ve got a couple of good democrats Krysten Sinema in out of Arizona my state, Joe Manchin, there’s some of those like Central California where there are a lot of farms there are some definite democrats in kind of family farm family business type areas that are pushing back. So I don’t think for sure this happens. In fact, I think it’s really the worst policy move as much as I don’t like a lot of the policy going on right now it would be the worst tax policy move in a century in the United States.
Buck: Yeah basically taxing people’s investments and you know just the incredible burden that puts on people you know their savings and their investments.
Tom: Well let me give you an example. Let’s say that you were an employee and you funded your 401k religiously every year you maxed out and let’s say by the time you’re 65 you’ve got 2 million dollars in that 401k right. What you’re able to do is you’re able to take that out a little bit at a time and get that into a lower tax bracket. Let’s say to 300,000 a year at a time right. Now let’s say instead that all of your investments in your business because that’s how business owners are we put all of our money into our business and that’s our retirement. So the day we retire as a business owner, 100 percent of our savings are taxed because the way we retire is to sell our business. So a hundred percent of that is taxed and it’s not taxed over a period of time it’s taxed at the highest possible rate 43 percent. So it’d be very similar as if that 401k when you turn 65 is all taxed as a lump sum distribution on that date at the highest tax rate that’s what we’re talking about.
Buck: Again, the good news before everybody goes and jumps off a cliff is that this is legislation and in many ways, it’s a starting point right so they’re going to want to probably be a little bit more extreme in what they’re asking for in order to you know work somewhere. So hopefully this doesn’t happen. Okay so is that for the most part the major potential bad news or is there more bad news?
Tom: No, there’s actually more. Okay, so one is that is the elimination of the deductions for oil and gas drilling okay. So no more intangible drilling costs. No more depletion. None of the tax preferences for oil and gas. Now that’s been proposed that was proposed every year in Obama’s budget never went through. This year we’ll see.
Buck: When would that be effective Tom?
Tom: That is effective also next year so 2022.
Buck: So again lots of potential oil and gas this year.
Tom: Lots of potential investment in oil and gas this year and then next year it would just tank. I mean you’re basically now outsourcing all oil and gas development either to the big companies or to you know China, Africa and Russia.
Buck: How about depreciation issues? Bonus depreciation that kind of thing
Tom: You know what, not being touched. So two interesting points here Buck. One is bonus depreciation seems to be in violet I don’t know why. And second of all no discussion about the 20% qualified business income deduction going away. So both of those neither one of those is in this proposal.
Buck: Bonus expires next year anyway right?
Tom: No it starts phasing down next year. So it doesn’t expire. It actually starts going from a hundred percent to eighty percent and starts phasing down until it gets to fifty percent but it never really goes away. So it’s really not that it goes away it’s just going to start phasing down.
Buck: Okay well I guess that’s good news in some respects in that you know part of what I think a lot of people were worried about was that you know some legislation would come out and eliminate it and the next thing you know you know we wouldn’t be able to use it potentially on ongoing projects this year.
Tom: Can I give you one more surprise that I think people weren’t expecting. So again don’t jump off the cliff this isn’t like Buck says this it hasn’t passed. It’s proposed, and it’s not even proposed by the legislature, it’s proposed by the president, okay. And it’s social security taxes on pass-through businesses and the proposal is, is that above four hundred thousand dollars you’re going to get social security taxes on all income including net investment income tax you’re going to get social security taxes on all income from an S corporation from a partnership from anything that passes through that’s not a dividend interest or capital gain.
Buck: Lovely. Well luckily I’m in the first floor here
Tom: I’m glad to hear that Buck because let me tell you, I mean you read this stuff you go if this were for sure to happen people would go oh my heavens what am I going to do? But the good news is there are actually some amazing tax incentives okay.
Buck: All right well let’s move on to that because it seems to me that we need to at least see the bright side.
Tom: We need to lift the mood here a little bit but right so the first is the low-income housing credit is being expanded. Okay, so for real estate developers that’s really good news and there’s also a benefit there’s a tax credit for fixing up homes duplexes triplexes and fourplexes in rundown neighborhoods. It’ll be a little bit like an enterprise zone classification and you’ll get a credit for going in and doing the rehab in lower-income areas. So that’s kind of a cool idea. Frankly I kind of like that one. So the low-income housing is certainly a priority clearly of this administration. Another one is, of course, we’ve heard a lot about the energy credits. Basically the proposal, and again these are all effective 2022, the proposal is that charging stations would no longer have the thirty thousand dollar limit they’d have a two hundred thousand dollar limit and so that’s a huge increase.
Buck: Tell us a little bit about that. I don’t know anything about charging stations.
Tom: So you put in the charging station. There’s an investment tax credit for that it’s been limited to thirty thousand dollars per location and that limit at least in a quick review of it is going up to two hundred thousand dollars. So what that means is you own a service station okay you own a convenience store and you put in charging stations, you interrupt massive tax credits for putting in those charging stations okay and some of the states, by the way, are adding their own credits. Oklahoma I don’t know if it’s still there but they had a credit of 75 percent for putting in charging stations. So they’ve got a whole bunch of charging stations done in Oklahoma. So there are some very serious tax credits on the charging station. There’s tax credits on heavy vehicles. So like big trucks and semis. If it’s electric this is gonna make Elon Musk even richer. And then there’s the solar energy credit which has kind of been coming down and it’s at 26% this year. Next year we’d go back up to 30% and that’s it. That’s a huge credit and there’s a bunch of other credits interestingly enough. So this one might surprise you. There are actually tax credits in there for existing nuclear facilities. So I was wondering about this. I actually did a podcast yesterday on this. I was wondering, will they include nuclear fuel in clean energy and it looks like they are so that’s really interesting. There’s lots of opportunities but I mean the opportunity, you just have to shift your focus about where you’re going.
Buck: It’s an enormous seismic which makes it really hard where do you think that when you look at this you know many of your clients and WealthAbility clients there are people who are listening to this podcast and when you hear about the way things are going what kind of advice are you giving them I mean I’m even thinking about it right now. Like so many of these potential opportunities really seem like okay yeah that sounds interesting but boy I mean where do I even start with that I mean am I gonna go buy a service station and put on you know charging station I mean so where do you think the best potential opportunities for passive investors in all of this might be?
Tom: I actually think the idea of the service station is a big one. I think solar generally is a big one any kind of renewable energy is going to be a big one and really when you think about it, it’s a real estate deal right I mean that’s what it is fundamentally. I could see going in doing a service station putting charging stations and putting on solar panels on all the flat roofs that you’ve got there right because you’ve got this big solar tax benefits. I think that we’re going to see more lending on this because of this whole emphasis from the administration. So I think your loans your loan to value on these properties is going to go up which of course increases the tax benefit as well. So I do think that that’s kind of the direction that you got to be thinking. You’ve got to be thinking about clean energy and investing somehow in that clean energy movement or low-income housing. I think low-income housing of course it’s always been a good one and I think there’s obviously a push to make that low-income housing better. So I think that’s it. and the other thing to do is remember that except for the capital gains on actually selling things this year, except for that, all of these proposals are next year. That’s actually really good news Buck because it means that we have eight months to get our planning done.
Buck: Yeah and we got to do it.
Tom: Everybody’s got to do it. We’ve got to get your attorney, and remember the attorneys are slammed right now so you got to get in line yeah excuse god get in line same with valuation guys because everything’s going to require valuation. Actually I think the next big growth industry from my standpoint would be valuation.
Buck: Okay so explain that because you’re talking about how they’re trying to tax things that aren’t even sold.
Tom: Right so for example if you transferred let’s say next year you decide I’m going to transfer my business to my kids, that’s a taxable transaction under this proposal. So how do you figure out what the tax is? So you have to come up with a valuation.
Buck: But I guess one of the things I was worried when you said taxing things that aren’t sold is like in Israel I think. So one of my Israeli investors was saying that they actually they essentially look at the value of a house or whatever every year and they just tax you regardless of whether you sell or not. They’re just doing essentially a wealth tax.
Tom: They have not proposed that. I’ve not seen that. I’m not saying it’s not buried in there somewhere, but I did not see that they have proposed attacks on unrealized gains until you actually make some kind of a transfer.
Buck: The last thing I got to ask, and I don’t know if you saw anything in there, what about various types of changes to basis after death you know resetting a basis those types of things I know those were things that they were talking about.
Tom: That’s part of the capital gains proposal. Part of the capital gains proposal is that when you die all your property is valued and you pay capital gains tax over a million dollars you pay capital gains taxes if you’d sold it.
Buck: Yeah so there’s a lot of reason in this if you think about kind of the way things are headed, and obviously neither you nor me are attorneys, is that it starts to become more and more important for people who used to not necessarily think about you know estate tax issues and transferring their wealth out of their estates into a trust that becomes a lot more relevant now doesn’t it?
Tom: This year it does. But after this year, it would be taxable. So it really puts a lot of pressure on getting that planning done right now.
Buck: Right 100%. Okay well that’s a great way to start the day here Tom you know we set these things up in the morning and there you go.
Tom: Just trying to brighten your day you know all the listeners. But you’re right though that you know there is a lot of pressure against this and we hear more and more of it. Jamie Dimon came out has come out pretty strong against these tax increases you’re seeing more and more pushback on the tax increases and the reality is so let me give you a simple example Buck. If you follow these proposals and the way they’re set up right now let’s say that you had a founder share of a tech startup in California and let’s say it by the time you died you know 30 years later it’s worth 100 million dollars okay. Take a wild guess under these proposals how much your decedents your heirs would get to keep of that hundred million dollars.
Buck: Well how much did you put in to start?
Buck: Zero 100 million what would be half maybe now your heirs get to keep two million dollars. 98 million dollars goes to the federal government and the state government that would be the estate that’s 98 between the capital gains tax the estate tax and the California tax. 98 percent would go to the government you’d get to keep 2 million.
Buck: What was the estate tax limitation change was it not changed?
Tom: No so in other words you have a capital gains tax and an estate tax. So the capital gains tax appears to be on top of the estate tax which is why now you’ve got a 45 percent estate tax and a 45 capital gains tax. Actually there wasn’t a change in this proposal down to the three and a half million but that was the original proposal was down to three and a half and that 98 million that two million dollars is based on bringing it down three and a half. We haven’t seen that. So you would get to keep a little bit more than two million dollars if they leave it at the 23 million dollars 24 million range but remember under this proposal you’re paying both estate tax and capital gains tax not one or the other.
Buck: What I would just say this much is that I think you have to react as if some of this is going to happen based on you know the end of the year. I think planning for most people who are active investors accredited investors makes a lot of sense to start doing now. It may sound crazy. You’re 40 years old and you have little kids but start talking about ways to you know transfer wealth now because you don’t want to wait until you’re worth 40 million dollars and then start thinking about it. And then the one bright thing in all of this is the pendulum always kind of moves back and forth and presuming that there is some, in the future, there’s government that comes in that is not I mean gosh we thought this was going to be a moderate government. Doesn’t end up being a moderate government at all you know but there will be at some point some pendulum. So you know I guess those are lots of reasons to think about over time that you may not be as screwed as it sounds. But in the meantime, I think acting on some of these things that Tom is talking about now even with all of the bad news, a lot of it if you have somebody like Tom you can potentially still plan around it. I mean you can still you know mitigate how badly it hurts you. That example that Tom gave with regards to you know 100 million bucks and you get your kids get to keep two million well there’s some fairly straightforward planning things that you can do with you know people like Tom and estate and asset protection attorneys that can make that a completely different story for your heirs, right Tom?
Tom: If you act now yes you know like you say the good news is that with good planning there are always opportunities. I mean you know I’m not quaking in my boots here because I’m looking at okay so how do we shift, how do we shift? But remember I would caution: hope is not a strategy. So we can’t hope that in four years we have the republicans control everything right maybe but maybe they won’t. Snd so you know we do need to plan I think as if some of this at least is going to happen. I think there are some things that will likely happen. I think they’ll increase the corporate tax rate. They’ll probably not 28% I think they will increase the top marginal rate up to 39.6 percent. I think some of those things are just going to happen. Will 1031s go away? I certainly hope that cooler minds prevail on that. I think that would decimate the real estate market. Will capital gains be taxed at 44% plus another 13 in California so almost 60 percent? I hope not. I truly hope that cooler minds prevail on that. But at the same time, we do have an opportunity right now and if you don’t take that opportunity to plan right now then shame on you. You know you’re here listening to this podcast, which is great, thank you for doing this Buck, I’m getting this information out because we’ve got a window. Why would you not take advantage of that window? We’ve got an eight-month window to do something and guess what, you can’t start in December because it’s going to be too late.
Buck: 100 percent. Tom along that lines, for people who don’t have good professionals, remind us what WealthAbility is and you know how we can get in touch with WealthAbility.
Tom: So fundamentally WealthAbility is a system for reducing taxes and building wealth that’s what WealthAbility is. And it’s a very engaged system as you know Buck, you get very involved as the client in the whole process. It’s not turn it over to somebody. This is being involved in the process of making decisions. I’m getting guidance making those decisions. The good news is, we have 40 CPA firms in the US and Canada that I train on literally a weekly basis and we’re ready for this. So we’re all ready to handle this. We have the capacity to take it on. We have the people who are trained to take it on and I think this is a window of opportunity. Just go to WealthAbility.com and tell them that you came from Buck Joffrey in the Wealth Formula and we will take care of you.
Buck: And that’s really important too, folks. Just so you know, I’ve worked with Tom’s group a fair amount and you know we have a certain type of client and Tom knows well they tend to come in pretty well educated because of podcasts like these and ideas like these. So it’s good to let them know where you’re coming from so they can match you up with the appropriate personalities that’ll fit because that’s a really big part of it is you really have to be a good fit with your tax professional. Might I also suggest while you’re at it you know to contact guys like Doug Lodmell for asset protection and he’ll tell you who to go to for estate planning in your particular state because that’s all part of it and you know they all got to work together because if they don’t, then you’re going to have pieces everywhere and no one’s going to know what’s going on.
Tom: You don’t want the accountant blaming the attorney and the attorney blaming the accountant. They want to make sure that they’re talking together. We talk to Doug all the time. I’ve actually known Doug for close to 20 years and we’re very good friends and we do talk. In fact, I was just shooting him an email this morning. So we talk on a regular basis and we love Doug. He does a great job in the asset protection side and plus he by the way he has a network of attorneys and he will you know he’ll help us even find an estate planning attorney in your neck of the woods.
Buck: Yep absolutely. So again it is WealthAbility.com. And Tom I want to thank you again for joining us on Wealth Formula Podcast and hopefully, you know when we get some resolution in a couple of months or three or four months, hopefully, when we know which way this actually is going to go and which way it lands, we’d love to have you back again.
Tom: Happy to do it anytime Buck. Thank you.
Buck: We’ll be right back