Rules are Made for the Lowest Common Denominator (LA 792)
Rules are Made for the Lowest Common Denominator (LA 792)
Transcript:
Steven Butala: Steve and Jill here.
Jill DeWit: Hello.
Steven Butala: Welcome to The Land Academy Show, entertaining land investment talk. I’m Steven Jack Butala.
Jill DeWit: And I’m Jill DeWit. Broadcasting from sunny southern California.
Steven Butala: Today, Jill and I talk about how rules are made for the lowest common denominator, not the people who listen to this show, not the people who host this show, the lowest common denominator. I’ll explain.
Jill DeWit: I have something funny to say by the way. Remember I was thinking about … we always say we’re from southern California, now people can see us, right? But they’re like, “Yeah, right. We don’t see it. There’s a black studio. There’s nothing behind you that we see.”
Steven Butala: We’re in a closet.
Jill DeWit: “I don’t even believe that you’re really there.”
Steven Butala: We’re in Jill’s walk-in closet.
Jill DeWit: “Really? Are you really there?” And it’s funny because I thought, you remember a year and a half ago, I think it was a year and a half ago that we started to go out and do these on-location thinking that would be a good idea. Oh, that was such a pain-
Steven Butala: Very bad idea.
Jill DeWit: It was hard to do.
Steven Butala: Well, it wasn’t even … I would do it every day if that’s what people wanted, but nobody liked it.
Jill DeWit: I don’t remember.
Steven Butala: Nobody saw the value in it.
Jill DeWit: Oh.
Steven Butala: I got all kinds of stuff like, “Can you guys please go back to … because I listen to this in the car and I don’t care.”
Jill DeWit: I thought the quality-
Steven Butala: “I truly don’t care about your life.”
Jill DeWit: I thought the quality was not the best, so.
Steven Butala: The quality was great.
Jill DeWit: Maybe once in a while, but I mean there’s always background noise and there was people walking by, you know, that kind of thing. So you know what I’d like to do? Maybe we could do it once in a while on-location, though, because I would like to show everybody we really are here.
Steven Butala: In case you can’t tell, this is a novice hobby of mine.
Jill DeWit: Key word being novice.
Steven Butala: This audio video thing, like, watch me change the cameras. Here, I have to do it myself.
Jill DeWit: I know.
Steven Butala: Most people have people in a studio and they have more than one person doing everything.
Jill DeWit: Okay. Thank you.
Steven Butala: Jill’s right. Enjoy the inside of Jill’s closet.
Jill DeWit: Thanks.
Steven Butala: I’m just joking. Before we get into it, let’s take a question posted by one of our members on the LandInvestors.com online community, it’s free.
Jill DeWit: Maria asks, “Hi all you land flippers, I am new to the group, but excited to be here. I was talking to my accountant about setting up an LLC and he said something I hadn’t heard of before. Wondered if you all were familiar with it. He said the LLC has to be established in the state where you’ll be buying the land to protect you legally. He said taxes would be owed on profits in states where the property is located no matter where the LLC’s base. Is that consistent with your understanding and experience? Thank you.”
Steven Butala: Thank you, Maria, for your question. I’ve made a part-time career, since we started Land Academy, not answering this, and here’s why. Because I have an accounting background, not a tax background, but an accounting background, and there are a million ways to interpret this, but I’m going to give you a scenario just for fun. The technical answer here is I don’t know. It sounds to me like I’d get at least another second opinion, maybe a third opinion.
Jill DeWit: I was going to say that too.
Steven Butala: But I want you to follow me on this. Let’s say theoretically, you have an LLC that’s in Arizona and it’s all legit and you’ve got bank accounts in the name of the LLC, and you’re happily going along buying and selling property in Arizona, and you get a call from a guy who’s got a bunch of property in Arizona and he’s 95 years old, and he has property in 48 states. And he says, “You know what? I’m so old and I’m so done, I’m going to give you all this property for $10,000.” But because it’s actually a paperwork nightmare. They’re closing in all these 48 states, there’s lots of counties. By the way, when we’re all done, you will have property in 48 states for $10,000, and then you guys have to absorb all the deeds and the closing costs, which is a lot more complicated than it actually sounds. So do you think the following year that that person would file 48 state tax returns? Is that possible or plausible?
Let’s just talk about the money for a second. Not the money to file a tax return because that’s crazy. The money … your actual operating percentage, what would it be? It would be insane, insanely low. So I can get into this in a great … in a lot of detail. And I have a number two point. Have you ever had something done in your house and a contractor comes, and he says … and it gets done. Let’s say, I don’t know, you knock out a wall in the kitchen. And the contractor’s all done, and he says, “You know, I noticed while I was knocking this wall down that you’ve got aluminum wiring in this house and it’s supposed to be copper. I’m going to give you a great deal. I’m going to say I’ll change out all your copper wiring for X.” And he never leaves. He finds something else and he changes it out. Accountants are very driven, like any businessperson, to upsell. So-
Jill DeWit: I wasn’t going to say it that way.
Steven Butala: Am I right? Am I wrong? I don’t know. Is any accountant ever right or wrong? I don’t know, but you can drive yourself nuts with this LLC tax thing. Concentrate on making money.
Jill DeWit: Here’s my thoughts. I hate to say he’s wrong, but I question it. And you know why? Because there are so many different rules out there. Which one supersedes the other? Let me give you an example. We don’t ship things. I happen to know, being in a business, an online business where you do have customers all over the country and all over the world, where you provide a service, like a software service and things like that and you’re not physically shipping anything, you have a whole different set of rules.
Steven Butala: That’s for California, yeah.
Jill DeWit: So … but there’s other federal things that take over too.
Steven Butala: Absolutely, Jill.
Jill DeWit: So like I said, I don’t want to say he’s wrong, but I do want to say that … I don’t want to-
Steven Butala: We don’t know if he’s wrong, he might be totally right.
Jill DeWit: So I wouldn’t buy into that. I don’t believe this all to be true. And I hate to say it, but I do believe that … I don’t want to pick on professions, but there are certain professions out there that that’s how they make their money, this is true. By getting you do to all this extra work and keeping you on retainer for years, and years, and years because that’s how they make their business.
Steven Butala: Here’s a fun fact quickly. If you buy a property in Canada, you get charged all the tax during the transaction, right out of escrow. How cool is that? Then you’re just don’t with it.
Jill DeWit: I know so many people … I know so many other investors, let’s put it this way, in the general investor community, does every investor have an LLC in every single state that they buy property in? Think about that one for a second.
Steven Butala: If you have to file a state tax return, here’s my question for your accountant. Do you have to file … is there sales tax? Some people believe that there’s sales tax on real estate. I personally don’t believe that, but it could be construed like that. Do you have to have a business license in the state where you’re transacting business, then, if you’re going to file a state tax return?
Jill DeWit: Right.
Steven Butala: It goes on forever.
Jill DeWit: It really does.
Steven Butala: How about capital gains?
Jill DeWit: Well, here, let me give you an … I have another example.
Steven Butala: If you do one or two deals a year and you have a full-time job, it’s probably construed as capital gains, not ordinary income. Maybe you should file for capital gains at whatever it is, 28% too.
Jill DeWit: Right.
Steven Butala: In fact, you should file … This is what the show’s about. Rules are made for the lowest common denominator, so if you want to stick to the absolute book, the tax book, and just make sure that you pay everything-
Jill DeWit: Play it safe.
Steven Butala: You will be out of business, I guarantee it.
Jill DeWit: That’s true. If you want to play it safe, you should have a business license in every one of those states, you should file for taxes in every one of those states, you should have an LLC in every one of those states-
Steven Butala: Keep going.
Jill DeWit: You should probably have a state specific accountant in every one of those states.
Steven Butala: Keep going, Jill, you’re absolutely right.
Jill DeWit: Let’s see what else. You probably should have a driver’s … you probably should have a registered address in every one of those states. Do you want me to keep going? It may involve getting an apartment in every one of those states, you know? I mean, come on. Having an office and an address and everything in every one of those states, what else do you want me to do?
Steven Butala: Let’s say, for sake of argument, you throw it all to the wind, throw caution to the wind, you don’t pay attention to the rules at all. Again, this is kind of on topic for this … and somebody, for whatever reason, calls the IRS or calls the state government. By the way, with the exception of California, this is just my opinion. There are no … states don’t run around chasing money, they just don’t. The feds do. And believe me, you want to follow the rules of the feds.
So let’s just say you throw caution to the wind and you file a tax return, but you’re not real … you don’t keep real good records on the whole thing and it catches up with you five years later, and the IRS does an audit. And they say, “I’m sorry, Steve, but you owe $82,000.” Is that the end of the world? Or do you just say, “You know what? You’re right. I do owe $82,000. I probably should have kept better records. Thanks very much. How would you like me to pay? Oh, you’d like me to pay $10,000 a month? Okay.” Or $5,000 a month, whatever works out for you because you’re in business. Here’s the key. My whole point to this is that if you know how to buy and sell land because that’s why we’re here. We’re not here for the LLC point. If you know how to buy and sell land and generate pretty positive margins consistently, then just bring it. Just bring it. Go ahead. Yeah.
Jill DeWit: Here’s my thing. Can I end on this one? Because we’ve got to get to the topic.
Steven Butala: Yeah.
Jill DeWit: My last thing, Maria, is this is how we run our business. We don’t run around trying to be rule breakers. I really am trying to do the right thing.
Steven Butala: That’s right.
Jill DeWit: And my bottom line is I don’t trust everything that one person tells me, I do my own homework. And I hate to say it, I often find them wrong.
Steven Butala: Yeah.
Jill DeWit: For every one person that tells me wrong, I can say three people that will argue it, and then it’s up to me to say, “Okay, what do I think is really the right thing here?” And then I make the decision. And like Steven says, if anytime I was wrong, you know what? I took this person into consideration, and I took these three peoples’ stuff into consideration. I made the decision. So if you, whoever you are now, government entity telling me I’m wrong, I will do the right thing. I got it. I apologize. I wasn’t trying to be a rule breaker.
Steven Butala: That’s right.
Jill DeWit: And that, I think, is all you need to do and you’re just going to be fine. Please don’t trust just one person and run out and … only get … and move to another state because that’s where you think you need to be. I don’t want you to do that. Thank you.
Steven Butala: Today’s topic? Rules are made for the lowest common denominator. This is the meat of the show. What do I mean by that? Somebody, somewhere screwed something up real bad and somebody had to make a rule so the rest of the people didn’t mess it up. That’s why there’s speed limits, because it was getting abused. That’s why there’s … I mean, every rule out there.
Our industry specifically is loaded with anti-fraud rules from the ’50s and ’60s, because people went out in the middle of the desert when there were no rules at all and took up, bought 1,000 acres for twelve dollars, and cut it up into 1,000 acre properties, really with reckless disregard, and then proceeded to mail out … people back east were freezing. Sell property to them on terms and they would sell the same piece of property fifteen times banking on the fact that it wouldn’t get paid off. That’s fraudulent, you know. We don’t ever do stuff like that, and it’s given this industry quite a bad name. In fact, if you talk to somebody much older than us, they’ll tell you all kinds of stories about how they bought a swamp land in Florida and things like that. So now, because of that, it’s so heavily regulated that … it’s not that heavily regulated compared to most industries, but by and large, everybody’s doing it right and it’s fine, but you just need to be conscious when you’re in this business of the fact that these rules are made for people who just are, for lack of a better description, psychotic about how they run their businesses.
Jill DeWit: I think it’s interesting to point out that for every law that’s passed, they don’t take off or undo the old laws, so let me just bring this up because it partially ties to Maria’s thing. What is the CPA or whoever she’s talking to went to college and has done his … because this is out there, he’s been doing his same business the same way for 40 years. That’s all he knows, everything. But you know what? And in the last six months, there’s been eight new laws that were introduced to change the way things were being done because this is reality. But they don’t go back and take those old ones off-
Steven Butala: It’s case law.
Jill DeWit: They just trust that you know that this is the new and improved, this is now the way we do it. But he still says, “But this one’s still in the books.” Guess what? He’s right, it is still in the books, but so is this one in the books. So like you just said. I’m trying to think of a … I’m looking out the window at people in parking and speed and I’m trying to think of an example of that, but you know what? You can’t drive down the street and see signs that don’t contradict each other. I guess that’s where I’m going. And that’s where this is, you know? It’s like, “No parking here, but you can have fifteen minutes here.” Well wait a minute, which one is right? We both … it’s the same thing, you know? So all of these rules and things that they introduce, because it meant no parking except for the street sweeper, and now we add in an extra sign because you just said, like the lowest common denominator, they don’t get it, so we’ve got to add an extra sign, so now everybody’s confused, and we’re all correct.
Steven Butala: If you talk to a legislator or a politician, politicians are almost always lawyers, and if you talk to them philosophically about this topic, laws and rules, here’s what they’ll tell you. “Well yeah, that’s my job. My job is to make laws and rules because you can’t govern yourself. If we let everybody govern themselves and make their own decisions, then it would be just mayhem and anarchy, so I’m here to save you all.” Which cracks me up. Because no, they’re not. I’ve never met a lawyer, by the way, who can actually count money. They’re just … money and numbers and spreadsheets are not their thing, it confuses them. They want stories. Case law stories. And they truly have this altruistic thing like they’re going to save us all.
Jill DeWit: I think [crosstalk 00:14:45]
Steven Butala: Their job is to protect the lowest common denominator.
Jill DeWit: Right.
Steven Butala: The person who can’t protect themselves. So just bear that in mind when you start to open a book about how to subdivide real estate, or a great example with the question today, how and why to file taxes and the implications of what goes on.
Jill DeWit: Do you know what this topic means to me? It’s like if you spend your whole life and your whole career going overboard to be 100% by the book, it doesn’t make you a better person, by the way, everything’s just going to bog you down. I hate to say it. It’s like, you know what? It’s like saying … you did well on a test and you realize your professor accidentally read some things wrong, are you really going to raise your hand and go, “Excuse me? I really … I actually deserve a B.” You know what I mean?
Steven Butala: That’s a good example.
Jill DeWit: Can you imagine? “Actually, it’s a C. I kind of looked. My first ten, you must have been drinking when you were grading papers or something, but these first answers I realize are wrong because I looked at my friends.” Stuff like that happens. Do you run to them and say whatever? Speeding is a good example. Nobody would speed. Everybody speeds.
Steven Butala: Speeding is a great example.
Jill DeWit: Speeding is a perfect example. Do we all drive 35 in a 35? No, but we should. And if you’re the one that does, by the way, you’re in the way right now because nobody does. You’re actually the hazard.
Steven Butala: The more mail you send out, this will happen to you at some point. Lots of members contact me on this. It happens to us still all the time. You send out a bunch of offers, some of them get signed, and some of them don’t, you get a little bit of hate mail back, like, “Oh my gosh, add $100,000 and I’d be happy to sell it to you.” And once in a while, you get a call from the Attorney General because you get reported. This is the truth. Which I just laugh about because we’re not breaking any rules. In fact, I talked to somebody from the California Attorney General’s office about three years ago, and they said, “Yeah, somebody called in again on you, Steve, and we all had a chuckle about it.” And I said, “Look, I’m absolutely all for being in compliance.” And what he said was, “You’re never going to hear from me again, please just fill out this thing that I’m going to send you and let us know you’re not a criminal and that’s it.” So that, in and of itself, is enough to discourage some people from ever sending out letters again.
Jill DeWit: It’s true and that’s okay.
Steven Butala: So the rules aren’t made for you and they’re not made for us. They’re made for somebody who just doesn’t have the stomach for it, or the intelligence for it, or the endurance for it.
Jill DeWit: I think-
Steven Butala: I have 50 examples like that.
Jill DeWit: You can still be a good person, I don’t want anyone to think that we’re advocating, just do what you want, do your thing, keep it under the radar, but-
Steven Butala: Let me close on this final point, is, everything in this business and probably every business is complaint driven. Keep your customers happy, make sure you’re giving them a fair shake-
Jill DeWit: Do the right thing.
Steven Butala: Don’t mis-sell land. You never want to … give the impression that their land is something that it’s not, never, ever, ever. And you never want to charge them a lot, okay? That’s part of it. Part of this is that everybody’s getting such a good deal on this real estate-
Jill DeWit: Everybody wins.
Steven Butala: We’re passing through the savings, yeah.
Jill DeWit: Yeah. That makes it easy.
Steven Butala: Yeah. This is a … just do the right thing, but don’t hyper focus on LLC stuff. Well you’ve done it again. You’ve spent another fifteen minutes or so listening to The Land Academy Show. Join us next time where we talk about managing your work burnout-
Jill DeWit: And we answer your questions posted on our free online community found at LandInvestors.com.
Steven Butala: You are not alone in your real estate ambition.
Jill DeWit: You know what? These shows, I thought these were going to be fluffy shows and it turns out these are long shows, we have a lot to say.
Steven Butala: I know.
Jill DeWit: It’s like, let me go, I have so much to share. Share the fun by subscribing on iTunes or wherever you’re listening, or on YouTube if you’re watching, and please subscribe, and while you’re at it, rate us there.
Steve and Jill: We are Steve and Jill.
Steven Butala: Information.
Jill DeWit: And inspiration.
Steven Butala: To buy undervalued property.
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