The IRS Loopholes That Could Save You Thousands This Year with Karlton Dennis

19:08I have obtained so much in loans, debt in order to acquire so much real estate in order to acquire so much depreciation just so I can offset my tax bill, right? Don't get me wrong. I love having real estate. I love having tenants paying for my properties, mortgages, but that's a lot of investment properties that I had to go get. And that's a lot of liquidity that I had to put out in order to build that investment portfolio. I'm building wealth with the tax code And a part of that requires me to spend money or part of that requires me to get illiquid at times. And for many taxpayers, they may not like it's uncomfortable.

19:44Carlton, interest rates have been super high. I don't know if I want to jump into real estate. Oil and gas have been super speculative. I don't know what's going on with the Hormuz Strait and all this other stuff going around the world. I don't know if I feel like investing in gas. Well, those are the things that the tax code wants you to do. Those are the legal incentives. Whether interest rates are high or not, the government needs affordable housing. They can't provide homes to everybody. So are you going to be a business partner with them and partner with them? We need energy right now. Orange County just had a blackout yesterday.

20:12What was that about? Interesting. We need energy. Are you going to invest in solar and oil and gas? So these are the things that the government can't do in abundance. So instead, they'll write it into the tax code and say, hey, I'll give you a 30 % tax credit if you go do this. I'll give you depreciation if you're willing to be a real estate investor instead of just a homeowner.

20:30Nicole Lapin:If you go out and do this is the key point, right? You have to go and spend money to pay less in taxes. A hundred percent. That is correct. And that's how most of the tax code is set up. There's only a few strategies where you don't spend money to get money back. I know. Only a few. So many people are like, but what about Elon and what about Trump? And like, they're not paying any taxes. How come I have to pay taxes? Elon and Trump don't make the same type of income that many taxpayers make. Many taxpayers make earned income. Elon and Trump don't make earned income. They make what's called portfolio income.

20:59They own corporations and they own investments. And when you own corporations and you own investments, you can take loans against your stock, which is non-taxable, borrowing against your own value of your company. You have liquidity to be able to go invest in assets that can hopefully give you an arbitrage on the debt of the interest rate that you took from your own corporation, your own stock.

21:16Nicole Lapin:And a lot of this, as you were saying, is done through real estate, which means you have to put out money to get money off your taxes. Can we break down the bonus depreciation when it comes to short-term rentals? Oh, yeah. When it comes to short-term rentals, what the IRS says is that if you are able to run a Airbnb or VRBO business and your tenants are staying in the property seven days or less, you have what's called an active real estate business, but you have to follow one other test, which is material participation. and material participation means that you're actively involved in the day-to-day operations of the property up to a certain amount of time.

21:52Many taxpayers realize that the IRS has a rule where it states that if you spend 100 hours materially participating, you have an active short-term rental or Airbnb business. Well, now how do we get the depreciation from short-term rentals to offset W-2 or 1099 income? When you buy an investment property, let's just say the investment properties,$500 ,000 and you put a 20 % down payment. So a hundred thousand dollars down, you bought a half a million dollar asset. And the IRS is going to let you write off the four half a million dollars on your tax returns, excluding land value. So that write off of half a million dollars is going to be divided over 27 and a half years, which is the depreciation amount that you receive every single year over 27 and a half years.

22:37Many taxpayers aren't going to wait 27 and a half years to receive all of that depreciation. So you can implement a strategy to accelerate depreciation. And that strategy is called the cost segregation study. The cost segregation study is very simple. You're just getting the cost of all the things inside of the property, cosmetically, and outside of the property, cosmetically, that you can write off in a quicker amount of time. Things that would never last 27 and a half years, such as appliances, flooring, windows, doors, nails, drywall, heating, air condition, HVAC. These items are never going to last 27 and a half years.

23:13And because with the one big, beautiful bill, we have bonus depreciation now at 100 percent. Any of these items that aren't going to last 27 and a half years, you can write them off in one year. That is beautiful. But the only way you're going to be able to do this, if someone did a study on your house, so you need two strategies here. You need the cost segregation study, which is done by an engineer and a CPA. The engineer comes to the house and takes an, takes an estimate of all of the materials that make up the property. And then a CPA will come back and calculate how much depreciation you get.

23:48So if you would love to receive a hundred and fifty thousand, $200 ,000 deduction on your tax returns by buying a 500 ,000 or$600 ,000 property, you can do so with a cost segregation study and bonus depreciation running a short-term rental.

24:04Nicole Lapin:How much does that cost? Cost segregation study is typically based off of square footage and can range anywhere from$1 ,000 to, I've seen some cost segs go as high as$25 ,000 on some larger scale commercial buildings. But they're always within reason relative to the tax savings that you're going to receive, right? If you're putting a$5 ,000 investment into a cost seg, you're getting a$200 ,000 deduction. That seems like a win to me at a at a 37 percent tax rate. So it's usually worth it. Yeah, it's it's always got to be worth it before you make the investment. And I see a ton of videos out there of people saying they have W-2 income, but they're paying zero dollars in income tax because of a short term rental and cost segregation studies.

24:45Nicole Lapin:But there are for sure limits on that. That's correct. Can you explain? Yeah, the IRS has what's called excess business loss limitation rules, and they update these excess business loss limitation rules every single year. So last year in 2025, I believe the excess business loss was$305 ,000 if you were single and about$610 ,000 if you're married filing joint. What that means is that if you buy a short-term rental and you do a cost segregation study, you accelerate the depreciation on your tax returns, you can only write off up to$305 ,000 of W-2 income as a single individual or up to that$610 ,000 if you're married filing joint going back to last year.

25:23And then in 2026, they did lower that a little bit further. But what this benefits you is, is that you get to claim those losses against W2. Anything that's excess losses will just roll over into the following year, ready to offset your new forms of income that you make in the following year. So we had a taxpayer last year that made about a half a million dollars W2 single. He used the full 305 ,000 excess business loss, had an extra$100 ,000 of losses that he gets to apply this year before the excess loss now, since the losses that you don't use get rolled over.

25:58Nicole Lapin:So overall, you like short-term rentals as a tax hack? I like short-term rentals as a tax hack, but taxpayers have to be willing to run legitimate short-term rental businesses, or else they'll invest the money just to get the tax savings, and then they have an asset that's not performing well. And then they get pretty upset if they have to cover their own mortgage payment in the following year because they ran it as a short-term rental just to get the tax benefits at the end of the year and the following year, no one's renting their property because they never knew how to run a real short term rental.

26:28They never really got great furniture for it. And the photos look like every other listing that you see on Airbnb.com.

26:35Nicole Lapin:Yeah. I worry about stuff like this because you actually have to then go deal with people. Like people want the short, quick fix, right? Get a big, juicy tax write off. Yes. But now you have a short term rental and now you have Bob in the rental and he's calling you and the toilet's broken, all this stuff. Like we have to fast forward what that actually looks like in your day-to-day life. And if that fits with your lifestyle, a hundred percent, you have to think with the end in mind. But one of the strategies that I like to give my clients, Nicole, is when they do a short-term rental in the last few months of the year, let's just say October, November, and December, they can get those 100 hours within a three month period.

27:11That's not too hard, but the IRS has no rule with you transitioning the property in the following year to a long-term rental. So if you ran the property as a short-term rental for the last three months out of the year, October, November, and December, you manage the property for a hundred hours. Your guests stayed in the property seven days on average or less. We have an active property. We can do a cost segregation study, get the losses against W2 income. And then right when January one hits, you can call up a property manager, transition it to a long-term rental. and now you have it ran as a property managed by a paid property manager.

27:45You can then go get your next short-term rental towards the end of the year, only really manage real estate for about 100 hours every single year in order to be able to capture these losses. So this is a strategy that some of our clients will play into is utilizing the short-term rental strategy, but only timing it right at the end of the year so they don't have to run a short-term rental for 12 months, only three months out of the year.

28:06Nicole Lapin:Oof, that's still a lot of work. Yes. Are you in this game? I used to be in the short-term rental game. I'm no longer in the short-term rental game, just in multifamily now. Why? Because it was a pain in the ass. Well, it was a breakthrough to get me and my wife to work together and for her to leave her W-2 job. And that was beautiful. And as our businesses started to grow and we started to become more and more profitable, buying short-term rentals for our tax strategy no longer made sense. Plus, I actually had other tax strategies that were giving me even bigger deductions than rental real estate at the time.

28:39So I started layering other strategies. I started moving into multifamily, which gives much better returns and actually has the ability to sell a lot better when you're looking to exit out of these properties in the future. And it's been able to serve my investment portfolio and definitely my lifestyle as well.

28:56Nicole Lapin:Another big popular real estate hack is the Augusta rule. Yeah. You talk about that a lot. The Augusta rule is a tax strategy that not too many tax professionals are familiar with. The Augusta rule was created out of necessity because in the state of Georgia, there's a golf tournament that goes on every single year. It's called the master's tournament. And unfortunately, back in the seventies, there weren't enough hotels and motels to house residents and tourists and travelers coming from out of town to be able to stay for the 14 days for that tournament. So you had homeowners that opened up their homes for seven days or for 14 days, the two weeks of the tournament to foreigners, and they were making a lot of money.

29:37The city of Augusta, Georgia allowed for those taxpayers to not report 14 days worth of rental income on their tax returns. The following year, it became a federal tax law code section 280A. And now business owners are utilizing that tax code between their house and their LLCs or their S corporations. What it means is if you have a business meeting or a fundraiser or a party that you like to throw for business purposes, you can go rent out a venue and go pay somebody else or you can choose to rent out your own house. You can create a contract between yourself since you live in your own house and your S corporation and rent your house to your S corporation for 14 days.

30:29Maybe you're charging$2 ,000 a day and it needs to be fair market value. Well, that's a$28 ,000 deduction. Right then and there, you've just paid yourself from your S Corp to yourself personally$28 ,000 and that income is non-taxable. That is one way a business owner can immediately save money on taxes without having to spend money.

30:51Nicole Lapin:So let me break down those elements. Do you have to own the house or can you be a renter? Does it have to be your primary house or could it be a short-term rental? And then on the entity side, does it have to be an S-corp or could it be an LLC or a C-corp? I'm glad you asked that. So those are three very important questions to ask. Number one, do you have to be a homeowner? The answer is yes. Number two, does it need to be your principal place of residence? Yes, it needs to be your primary residence. It cannot be a secondary home and it cannot be an investment property. It needs to be your primary residence.

31:22And the third one is, is can you do this in a single member LLC? The answer is no, because the single member LLC is considered a disregarded entity and is associated technically to your social security number. So if you're a sole proprietorship or a single member LLC, the answer is no. If you're an LLC taxed as an S corporation or you are an S corporation, the answer is yes. If you're a partnership and you're a 1065, can a partnership do this? Absolutely. You can. Can a C corporation rent out the place and be able to do it as well? Yes, you can do it through a C corporation as well.

31:51Nicole Lapin:Is this why you're obsessed with S corps? I am obsessed with S-Corps because so many taxpayers stay in LLCs far too long versus doing the math to determine did the benefits outweigh the cost of them switching over to an S-Corporation to avoid some of the self-employment tax that you pay as a taxpayer. Explain when you should switch over. Yes, it's different for everybody and it's based off of your situation. But by rule of thumb, if self-employment tax is 15.3%, you're paying that on all of your business's net profit. Over time, you can choose to take a salary from your business and only be subject to 15.3 % on the salary you're taking out of your business.

32:29So in order to do that, you kind of need to be making enough profit to draw that salary. The issue that most people are unaware of is when you transition from like a single member LLC to an S corporation, there's just more compliance involved. Now you're issuing yourself a W-2, you're filing a corporate tax return versus just a single member LLC tax return. So your administrative cost is probably going to jump from like maybe a thousand dollars a year when you're filing your single member LLC tax return to maybe closer to three to$5 ,000 a year. So if you're trying to save money on taxes, just by switching over to an S corp, you're probably going to want to know Carlton, if I have to pay three to$5 ,000 to just be an S corp, when did the benefits outweigh the cost to me switching.

33:10And it's right around 50 to$60 ,000 in net profit right around that amount. You can cut yourself a nice little salary of about 15 to 20 grand. You're only going to pay self-employment taxes on the amount that you gave yourself in that salary. And let's just say the other 40 ,000 of that 60 grand is, is, um, not subject to the 15.3 % self-employment tax. It's only going to be subject to federal taxes now and state taxes. So you might walk away saving about$5 ,000 to$7 ,000. That's around the time that somebody should be considering switching over to an S-Corp is when their profit is crossed 50 to 60 grand.

33:44Nicole Lapin:You call the S-Corp a wealth machine. Why? Because the S-Corporation can be pretty awesome to play some games in. You can play games with how much payroll you give yourself and maxing what's called this QBI deduction. Hang on with me here. QBI stands for Qualified Business Income Deduction. And guess what? It's 20%, but it's only if you're underneath a certain amount of business profit. If you cross, let's just say, for example, over$400 ,000 in net business profit, you may not even receive any of this 20 % QBI deduction. So I might strategically have you take payroll, 100 grand or 200 grand, reducing your business's net profit so you can qualify for that 20 % qualified business income deduction.

34:33Why is the S-Corp so powerful? Because I can also help you avoid some of those payroll taxes if I choose to lower your payroll. So there's just different things that you can do with the S-Corporation that the LLC owner cannot do when it comes to compensation and QBI.

34:51Nicole Lapin:What other considerations should people think about when they're opening or they're choosing their entity? Glad you asked this question. One of the biggest things that people should think about is what is going to be the name of my entity and what is going to be the state that I set up my entity in. If you're working in a 1099 capacity, you're self-employed, you're most likely going to have that entity set up in the state in which you operate in, and that's completely fine. I'd highly recommend that you don't associate that entity to your primary residence address. Many business owners go right online and they go to GoDaddy.com.

35:22They get their website set up. They set up their LLC on LegalZoom.com. They create the address associated to them and then they go pay for a registered agent. And then boom, your information is public information. The moment I become an upset client with you, whether you're a doctor, physician selling me t-shirts and the tie dye off of the t-shirt got on my beautiful skin, I can go online and find your LLC where it's associated to take your address, type it into Google. And now I can find information on who you are and where you live. But listen, one of the scariest things that my clients hate is when we see that their LLCs are associated to their home address, we immediately address it on the first call with them.

36:01We pull open Google Earth and we're zoomed in on their primary bed. We're zoomed in on their primary bedroom. And we're telling them, is this is this what you want us to see and what you want your clients to be able to see? Absolutely not. How can we protect you? Because business is a marathon. It's not a race. It's a marathon. And in order for us to stay protected, you have to be protected from the IRS. You have to be protected from creditors. Creditors are almost worse than the IRS. Sometimes lawsuits can almost punish you way more than the IRS can punish you. So can we structure you in a way to where your personal information is protected?

36:35So we end up amending their operating agreement, amending their articles, organization, getting them a virtual address. So that way their public information, their children's bedroom and the Google screenshots that were taken of their vehicle sitting inside their driveway is not information the world can now see. So where you associate that LLC is so, so important.

36:59Nicole Lapin:But what about people that want even more privacy and they set it up in Delaware or in Wyoming? Yeah, this is when we talk about entity layering. So one of the beautiful things about having an entity is you can have an entity that owns another entity. So if I'm operating my business here in California, well, California doesn't really have anonymity laws. So maybe I decide to set up an entity in California that's owned by a parent company in a state like Wyoming. You might ask, well, Carlton, why would you go to Wyoming? Well, Wyoming has different laws in California of such. One of the beautiful laws of Wyoming is Wyoming does not require managing members names to be at the public or county assessor's office.

37:36Meaning if someone looks up my entity in the state of Wyoming, they're just going to see the registered agent and the name of the entity, but you're not going to see the manager's names, the members names, or the fact that that entity owns a California entity. So for many taxpayers who use states like Wyoming, Delaware, Nevada, they might be able to fly underneath the radar because of those states discretionary position.

37:57Nicole Lapin:It's just for liability, just for liability. And you mentioned an alphabet soup. It reminded me of QSPS, which has also changed recently. So if you are an entrepreneur and you're starting to do really well and you're thinking about potentially exiting your business. Why should you think about QSBS and why should you think about it early? QSBS is pretty cool because if you retain your stock ownership over the course of five years and you're structured as a C corporation, you can avoid capital gains when you have an asset sell or sorry, a stock sell, and you're exiting out of your business up to 40 million.

38:30And for some taxpayers, they might even be able to get a multiple on that up to 75 million under certain circumstances. Why is that powerful? I mean, prior to the one big, beautiful bill, it was closer to about 20 million, 15 to 20 million. So for many business owners that were selling their businesses for, you know, a hundred million dollars, they're experiencing 80 million dollars, just hitting them all at once. I mean, that means the government's going to walk away right away with 30 million dollars. Well, this just helped out many taxpayers that just put an extra 20 to 25 million right back in their pocket.

39:00Right. So if you're somebody that's considering selling your business in the next five years, one of the things that you can look at doing is what does it look like for you to transition from an LLC or an S corporation over into a C corporation? What is it going to look like for you to start paying yourself dividends or giving yourself a salary out of a C corp versus taking distributions out of an S corp? Because when you do transition to a C corp, you will sacrifice some things. You will sacrifice the ease ability of just being able to transfer money from your checking account over to your personal checking account.

39:28You can't do that with a C corporation because every time you touch the money, it's a taxable event. But if the long-term vision is I'm going to sell this for a multiple. Well, maybe you make that sacrifice right now and you go to a C-corp right now, knowing that the QSBS is there to help you. This is just another incentive in the tax code that's written there to help you.

39:45Nicole Lapin:Yeah. We started the clock for QSBS, switched over to a C-corp. It definitely is an added layer of complexity. That's a nice way to think about it. But also, it is a big strategic move. And I think recently the big, beautiful bill also allowed you to amortize different years. So before, right, it used to be all or nothing. That's right. It used to be all or nothing. You can amortize different years. And one of the things that many taxpayers will also do, they might set up consulting S corporations to their C corporations. So maybe you have an operational entity that's the product and you're going to go take that product and launch it and you want to go IPO or whatever it is that you want to do.

40:22But maybe you have a separate S corporation that operates as a consulting entity. Why would that be beneficial? Well, you want to keep profit as high as possible inside of your C corp because you want to have a strong EBITDA when you get ready to exit. But you don't want the double taxation. So you might choose to, your corporation might choose to hire your consulting entity to do consulting work for your corporation. And that's a one way in which money can move over from a C corp to an LLC or S corporation where you're able to take distributions that are untaxed. This gives many taxpayers who are self-employed the ability to control money without it being taxed yet.

40:54Nicole Lapin:You're looking at me like, you know. I'm looking at you like, I feel like we're tax planning right now. I'm like, okay, she threw the QSBS at me for a reason. So I'm eager to hear offline some of the things that you're working on. That's exactly what we're doing. That's awesome. So let's talk about one of my new favorite tax moves. You too. I have a 15-month-old daughter. Children on payroll. Yeah. Children on payroll. I mean, children are so expensive. I think it's time they earn their keep. So I pay my daughter. Yes. Do you pay your daughter yet? I do pay my daughter now. Yes, I do. And what should people keep in mind when they're putting their kids on payroll?

41:32You have to keep in mind reasonable compensation. I know we all want to max out$16 ,100,$16 ,100. That's the new standard deduction. What that means is that you can pay children up to$16 ,100 without them needing to file a federal tax return. Depending on your state, you may still have to file a state tax return because states have different standard deductions. But let's just stick with federal for right now. The big thing is that when you're employing children, they have to be doing reasonable work and making reasonable compensation. A lot of taxpayers understand that they can make their children child models, but are they actually child models?

42:03Are you actually taking photos? Are you just keeping some photos inside of your iPhone? You need to be intentional about it. It needs to be on the calendar. You need to create a contract with them. You need to have a bona fide intent of what they're doing, and you need to transfer the money to them. The smart thing to do is also to take it a step further and to look at a Roth IRA. You can set up a custodial Roth IRA for your children, tuck away another$7 ,000 for them, and that money is growing tax-free in a tax-advantaged nature. and for many taxpayers who start this process very early, I believe at the age of five, you can put in 7 ,000 and by the time your child is 60 years old without making one additional contribution, there should be nearly about a million to a million one inside of that account.

42:42So that's a very powerful wealth building tool for an entrepreneur that wishes to get their children involved.

42:47Nicole Lapin:I think it's 7 ,500. Oh, 7 ,500, yes, for the Roth IRA, 7 ,500. And so is that what you did with your daughter? Yeah, so we're placing my daughter on payroll. We didn't give her the full 16 ,100. We gave her just enough to where we can make the full contribution into the Roth IRA. And that was intentional. One, I don't believe there are too many two-year-olds making 16 ,000 in the year. I can't spot too many of them online. But that being said, because of the amount of involvement that my daughter did have as a child model supporting us on social media, we decided to make that contribution to her Roth IRA after we made the payment to her.

43:23Nicole Lapin:And you alluded to how powerful the Roth can be. Because the tax treatment, when you take that money out, it comes out tax free. A lot of people don't realize that when they take their traditional IRA or their 401k out, you have to pay taxes. And the reason why I'm always going to advocate for the Roth, especially right now, is because one, we're in the lowest tax period that we've ever been in, at least in the last 50 years. This is the lowest tax rates that we've ever had. And two, when I ask people, do you think taxes are going to go up in the future? Most people will tell me yes. I mean, nine in 10 people tell me, you know, I feel like taxes are eventually going to go up.

43:57So if you think taxes only have one direction, which is up, does it make financial sense to just put everything into a traditional or a traditional 401k, knowing that you have no idea where those tax rates are going to be? When you can make the sacrifice right now, go Roth 401k or Roth IRA, pay the tax to know and have that peace of mind that when you draw it out later, it's 100 % tax free.

44:18Nicole Lapin:But the catch is that you can't make more than 153K as of 2026. But. You know, the tax code has its games. What you can do in two steps is legal that you can't do in one. It's called the backdoor Roth IRA and it's becoming increasingly popular. What you're doing is you're making a non-deductible traditional IRA contribution. You're putting in the 7500 knowing that you're not going to be able to deduct on your tax returns intentionally because what the IRS will allow you to do is flip it into a Roth IRA. That doesn't allow you to pay the tax on that 7 ,500 so you can get that money pushed into a Roth IRA account and then grow in a tax advantage nature.

44:59Nicole Lapin:And you can do a mega backdoor Roth as well. And what does that look like? With a mega backdoor, you're making a contribution by, well, there's two ways to actually do a mega backdoor. I'm gonna talk about the self-employed who's doing a mega backdoor. If you're doing a mega backdoor, you can give yourself a salary and set up a SEP IRA and contribute up to$69 ,000 to a SEP IRA and then convert the SEP IRA into a Roth IRA account, pushing more than$69 ,000 into a Roth account all at once. Do you advocate for self-directed Roths? You hear all these headlines about Peter Thiel growing billions of dollars within a Roth that you don't have to pay taxes on.

45:35Yes, so the self-directed Roth IRA is actually something that not too many taxpayers know about. But if you choose to, You can direct your investment funds to yourself, controlling what assets you wish to invest in. You can choose to invest in a business. You can choose to invest in real estate. There's taxpayers that we have that own Section 8 properties inside of the Roth IRA, just completely paid off, just cash flowing inside of there. You can invest in some types of private equity deals through your Roth IRA, some types of REITs through your Roth IRA, and everything is in a tax-advantaged nature.

46:08Everything is growing tax-free. One thing to keep in mind is that the money does return to the Roth IRA. Any deductions that you're receiving, such as rental real estate deductions, depreciation, the IRA receives those deductions.

46:20Nicole Lapin:And you can't have your own business. You can have your own business. Absolutely. You can. Yeah. If you have a self-directed 401k. I can invest in my own business. Sorry. Oh, no, no, no. You cannot invest in your own business through a Roth IRA. I thought you said, can I have a business and then set up a self-directed Roth IRA? No, but like the big thing that they were talking about with Peter Thiel is that he owned part of PayPal. And so putting something that you have shares in the Roth IRA was growing in a tax advantage nature. Yes. But your own business interests cannot be invested through the Roth IRA.

46:53You're correct on that.

46:54Nicole Lapin:What are some crazy tax hacks that people might not know about? Some crazy tax hacks that I really like now is leveraging film investments. This is probably the one that I've spent a lot of time on over the last year. IRC 181 allows taxpayers to deduct 100 % of production costs in the United States if the movie film is filmed in the United States and remains under$20 million. Now, I'm not a movie person that's going to go and create a movie, but I sure do like watching Netflix and Amazon Prime. And what movie producers will do is they'll sell or finance the production rights of the movie film to investors.

47:30As an investor, you're taking on recourse debt, plus you have your at-risk capital, the money that I'm putting at risk to invest in the movie film. You're taking on a loan to get the rest of the ownership of the movie film. And the loan is deductible, just like when you buy a vehicle. So we have taxpayers that put in, you know, a hundred thousand dollars into a Jackie Chan movie or Mark Wahlberg movie. And they're getting a leverage deduction of$400 ,000 write-off in year one with material participation. they have to spend a hundred hours watching other movie films and being involved in the direction of how they direct their dollars into that movie film.

48:09It's a pretty, pretty awesome tax strategy. And so with material participation, the at-risk capital, our clients like it because it gives them consistent cashflow. Movie films do provide a consistent cashflow. The cashflow does go back to pay the recourse debt, but at least they were able to get the sizable deduction in that first year that they made the investment. So it's a way in which they can be exposed to something that's a little bit uncorrelated to the public markets like real estate and being something that can also provide cash flow.

48:38Nicole Lapin:How do you find a deal like that? Movie production companies. Our advisory firm is actually pretty close with a lot of the production companies here in California. And when they get film projects that they are going to put 181 financing behind, we get contacted and we're able to offer these opportunities to our client. What's a tax scam that people should watch out for this year? Because it's just getting crazier and crazier. I would watch out for charitable LLCs right now. There's a lot of taxpayers that are looking into setting up these charitable LLC structures where the charity is, or where there's the ability to donate money that's going to acquire land through a charitable LLC structure that provides a 4X leverage deduction or a 5X leverage deduction.

49:27And a part of the charitable LLC structure allows for you to be able to have your own investment LLC where you might be able to take loans to it. I don't like that structure at all. I think that it can be abused. I think that it's structured in a way that doesn't protect taxpayers. A part of that is being pitched by attorneys that are stating that investors are able to pull their money together and do this as a group, almost like a fund to shield investment dollars. And the whole thing just seems like tax evasion to me, for lack of a better term. And if you're someone that's watching this podcast right now, there's so many other vehicles that you can set up where you can be philanthropic without having to go through a not very well-structured charitable LLC structure in order to just get a multiple on your investment dollars.

50:18And so what it's being pitched as is if you put in like$100 ,000 into this charitable LLC structure, you might be able to get a$500 ,000 charitable deduction on your tax returns, which is pretty awesome. That person that has those excess business loss limitations that we were talking about earlier doesn't have to worry about that because that has nothing to do with excess business losses. It's not a business loss. It's a charitable deduction, right? You can take as much charitable deductions as you want. So that is something that I would just be very cautious about.

50:45Nicole Lapin:You can't take as much charitable deductions as you want, can you? Well, up to 50 % of your adjusted gross income or 30 % with cash. Are there other AI-driven tax scams that you're worried about? Oh, that's really great. None that I have seen thus far, but we were having a conversation around AI and tax and the fact that many taxpayers are using AI right now as tax consultants and getting their tax information documented. But the one thing I would caution them of, which is fine that they want to use AI to help make things easier in the tax world, is just keep in mind that if you're using AI to validate what you're doing, AI does not represent you in the IRS courtroom.

51:27You will have a human being there, not AI, and you will have to represent yourself unless you have a CPA They are a tax professional. And if you did all your consulting with AI and then you go hire a CPA and tax professional, you have to go re-explain everything to him and almost guarantee it's not going to go the way you would want it to go. So I always caution people that are using AI for tax strategy advice, still keep your tax professional on your team because they're the one that's actually going to end up dealing with the audit and signing off on the tax return.

51:54Nicole Lapin:Makes total sense. And don't upload everything. Yeah. And don't share everything with AI, right? I mean, there's a lot of financial information that you can choose to provide AI in order to get data given back to you. But uploading your EIN reports and sharing social security numbers and data that is really meant to be personal can end up hurting you in the future. Well, there are so many tax hacks and it's so exciting to think about all of the options that you could do and all of the strategies that you could implement. Where do you think the balance is, right? Like, should you just live your life and do the best within these parameters?

52:31Nicole Lapin:Or should you really be gearing around these particular strategies so you can save the most possible? It's like the tax tail wagging the dog. Should you make decisions purely based on tax ramifications? Absolutely not. No, there becomes that divide where lifestyle and peace of mind matter far more than attempting to take actions that can take you away from moments and memories in your life. That being said, the cost of not knowing is very great. Those who choose to never approach the tax code don't realize what they're sacrificing. the tax code can give you the ability to invest instead of overpay the ability to be present with your family the ability to not spend three four or five months out of the year simply working for the irs so i absolutely believe it's a tool that can help you and open up more freedom in your life and at the end of the day i believe all of us want the same thing we just want more time to spend with our families and loved ones with the absence of fear of money and that's what the tax code is able to provide to you.

53:32Nicole Lapin:We end all of our episodes by asking our guests for a final investing tax money tip that they can take straight to the bank. We talked about so much already, but what else? One more. You mentioned family foundation. It was literally the last one I wanted to give. You know, people think philanthropy is just about giving money away. It's a wealth building tool at the exact same time. The wealthy have been using foundations in so many ways. And just let me just write a check. You can write a check, which is totally fine. But many people that have foundations are controlling wealth. There is no capital gains tax inside of private family foundations, which means you can own precious metals, real estate stocks.

54:05It could appreciate to whatever amount. There is no capital gains tax. You do not have to donate all the money that's inside of a foundation. Only 5 % of the assets inside of a foundation have to be donated every single year. You can contribute your own cash to a foundation outside of just stocks or highly appreciated assets and be able to take up to 30 % of your adjusted gross income as a year one tax deduction And the following year, if you don't want to make any more contributions, IRS says that's totally fine. Your foundation can be a non-performing foundation and you can just take a year off or two years off.

54:34As long as you stay within IRS compliance and you file your returns, reporting information, it's a hundred percent compliant vehicle. Many taxpayers also that are utilizing the private family foundation who wish to be philanthropic with family will hire their family members inside of the private family foundation, which then that becomes an income shifting strategy. They're shifting income to a private family foundation and then shifting income downward from the foundation to children or family members that might be in lower tax jurisdictions. So it's just a great wealth building tool when done correctly.