Taxes and Your Land Business (LA 1334)
Taxes and Your Land Business (LA 1334)
Transcript:
Jack Butala:
Steve and Jill here.
Jill DeWit:
Hi.
Jack Butala:
Welcome to the Land Academy show entertaining land investment talk. I’m Steven Jack Butala.
Jill DeWit:
And I’m Jill DeWitt broadcasting from sunny Southern California.
Jack Butala:
Today, jill and I talk about the fantastically interesting topic called taxes in your land business.
Jill DeWit:
I’m excited.
Jack Butala:
Me too. I can’t wait to talk about taxes. No, here-
Jill DeWit:
We talk about this often, all the time. Gosh, it’s a topic that warms my heart.
Jack Butala:
The truth of it is it’s pretty necessary because if you do everything right, this is maybe the second or third or fourth most expensive line item in your expenses for your company. And with ours, it’s probably number two or three.
Jill DeWit:
True or false. If you do everything right, you’re a little bit teary eyed when tax time comes/however, that means you did well.
Jack Butala:
That’s right.
Jill DeWit:
Okay.
Jack Butala:
It’s a bittersweet situation.
Jill DeWit:
Oh, okay.
Jack Butala:
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:
This is a long one, I will warn you. Chris asks, “I’m new to the land business and looking for others to join an accountability group. Whether you just joined land Academy as I did a few days ago, or are otherwise somewhat new to the business, it’s all good. I anticipate we’ll be running into a lot of the same questions and hurdles around the same time as we do our research, get out our first mailers. Mine will go out next week. Field our first phone calls, et cetera. More answers and knowledge than we could ever ask for are here in the forums, education/podcast/ [inaudible 00:01:50] calls, et cetera. So, we’re covered there, but what we can do is provide each other some accountability and encouragement as we rack up our first success stories, not to mention learning from whatever unique talents/experience we each bring to the table. And that landed us in this business.”
And in parentheses, Chris says he’s an experienced software developer and business owner himself.
Jack Butala:
Excellent.
Jill DeWit:
That’s great.
Jack Butala:
Excellent.
Jill DeWit:
“Perhaps a biweekly networking call over Zoom and a free Slack channel to stay in touch in the meantime. Anyone interested? Please reply to this thread or send me a PM. Private message. Thanks.”
Jack Butala:
And there were about 20 people in there that replied to this almost immediately.
Jill DeWit:
I bet. This is a hot topic.
Jack Butala:
Right. So what do you think?
Jill DeWit:
I think it’s great. I think it’s something we should do and I think it’s something we are doing.
Jack Butala:
Go ahead.
Jill DeWit:
We are going to put together something for you. So in the meantime, Chris, I’m so happy. And for those of you who have created your own groups, because you know that that’s the one thing that you uniquely need. Some people do, some people don’t. It doesn’t … Nobody’s right or wrong. It’s just some people need it, and those I’m so impressed and proud about everybody that have taken this on themselves and just said, “I know I need someone making me check in and keeping me on track.” And I think this is awesome.
Jack Butala:
So do I.
Jill DeWit:
And our group has grown to the level where you have enough people, obviously, that this has become more of a thing. And so, we’re going to take it. We’re going to provide tools and resources to help you.
Jack Butala:
This falls under the category for me of what could possibly be bad about this? What’s bad about exercising? Nothing. What’s bad about more education? Nothing. So this, I think, accountability is just one of the cornerstones of succeeding at anything. And so, since we started Land Academy, I’d love to know your opinion on this too, and we’ve been doing this for five or six years now. I’ve learned a lot of stuff. Jill and I are just natural born self-starters. She can go off and I won’t talk to her about a specific topic for three or four days and come back and say, “Okay, we’ve got six properties under contract. Here’s the numbers. I think we’re going to net this. I took the money out of this bank account. And do you have anything to say about it?”
Which I think the first time I had some stuff to say about it years ago. This is years and years ago. She’s just a soft starter, period. So am I. So, I incorrectly assume everybody else is. And I think that this would be great, and we’re working through how we’re going to do … We are going to do some version of this.
Jill DeWit:
Mm-hmm (affirmative).
Jack Butala:
A couple of weeks ago or a week ago, I guess, and we’ll talk more about it on the Thursday call if you remember, the Thursday webinar. We asked everybody to tell us what … The next level of Land Academy, what they’d like out of it, and this is what came up the most. Some type of accountability group. So, we are going to … This will develop itself or we will develop some version of this pretty soon, actually.
Jill DeWit:
It’s like when you think about anything you think about … I was just thinking about education. If I was [inaudible 00:05:07] … There’s some people that you give them the semester’s work, right? So you’re in a college class. Some people, if they have the whole syllabus, it’s kind of like me, it’s kind of like I want to get through it and then goof off and read it. I kind of read ahead. I like to work ahead, have it done, so that means I can have more play time on the backside.
Jack Butala:
I’m the same way.
Jill DeWit:
That’s my motivation. That’s really the reason why.
Jack Butala:
Same personality.
Jill DeWit:
And then there’s people that they need week by week by week by week by week kind of thing. But either way, it’s good to have. I’m just thinking … So I was thinking about college courses and how people are different and it doesn’t mean you’re better or smarter or anything like that. It’s just how you roll, number one. And then some people I know personally that will fall if they don’t have these deadlines. What’s really interesting to me is that I think what you and I do, what’s different is you and I create self-imposed deadlines, and some people can’t do that.
Jack Butala:
Yeah.
Jill DeWit:
I really think that’s the difference. And if they do, they can’t stick to them. And that’s where this comes in too.
Jack Butala:
So, I was thinking about this because I’ve really spent a lot of time on this and it will come to reality.
Jill DeWit:
Mm-hmm (affirmative).
Jack Butala:
Nowhere in college is there a class called … In your senior year how to interview or how to find a job. Maybe there is now, but there certainly wasn’t when I had it. That would have been maybe the most useful class there ever was or a mandatory job fair on Tuesday.
Jill DeWit:
Why is that? We had a home ec … We talked about this today.
Jack Butala:
Yeah. Yeah.
Jill DeWit:
I had home ec where I learned how to make a dress, but no one taught me how to fill out a resume.
Jack Butala:
Yeah.
Jill DeWit:
Like, okay.
Jack Butala:
And especially at college, there should be some type of course. I think there are … I think community college is packed full of stuff like this, but I think the universities don’t do it or maybe they do now.
Jill DeWit:
I don’t know.
Jack Butala:
They should have a course like a personal financing. Personal finances.
Jill DeWit:
That would be great.
Jack Butala:
How to mortgage a house. How to get through your life. [crosstalk 00:07:12]. That’s the course. The course should be called how to get through your life.
Jill DeWit:
Why not take out a new credit card to pay off X? Don’t do that people.
Jack Butala:
All that.
Jill DeWit:
People … It’s a good one.
Jack Butala:
So that’s what this kind of is.
Jill DeWit:
Okay.
Jack Butala:
And it’s based obviously on the knowledge that we’ve developed on how to buy and sell land. It’s based on a massive amount of mistakes that Jill and I made collectively and individually to help you not make those mistakes.
Jill DeWit:
What was your latest mistake?
Jack Butala:
Oh jeez. Personally or socially?
Jill DeWit:
Oh, wait, wait, wait. I did the same. Business or social?
Jack Butala:
[crosstalk 00:07:45]. I’ll answer it.
Jill DeWit:
All right. Go ahead.
Jack Butala:
If you do too, though, after this.
Jill DeWit:
Okay.
Jack Butala:
Most recent business mistake that I made [crosstalk 00:07:54].
Jill DeWit:
[crosstalk 00:07:55] own business.
Jack Butala:
And it’s recent. No, it’s in the last few days. Is getting some extremely high level private equity people involved in this big picture mobile home thing that I’m working on to the point where they’re trying to take it over. And we’re still in the discussion stages and it’s pretty funny that … Here’s what I came out of that with. There’s an incredible amount of low level work and attention. That’s required to succeed at anything. Operation stuff and failing and succeeding and one deal at a time kind of thing. And then you get to 10 and then you get to 100.
Private equity groups in general will raise a fund, a five, two, three, four, $500 million fund and say, “Let’s go buy as many mobile home parks as we possibly can. We’re going to put the management company in place that’s very expensive, nationally recognized because that’s the easiest way to raise capital.” It’s all driven. And then let’s just kind of see what happens. And that’s just … Oh, and by the way, here’s a two inch contract that you need to sign, and if something goes wrong, we get to take your house and your kids and every other company that you own.
Jill DeWit:
Right. There’s no guarantee. No, thank you.
Jack Butala:
So, I didn’t actually get it … To answer your question directly, I didn’t let it get to the point where it could have been a mistake, but you get to a point in your life where it’s … Things are going great. And yeah. I mean, we get opportunities, Jill and I, to double our income and revenue and triple it sometimes for all kinds of stuff. Do we need to do that and complicate our lives?
Jill DeWit:
Right.
Jack Butala:
What’s the most recent business mistake you’ve made?
Jill DeWit:
You know, it’s funny. It’s a little bit of accountability. I didn’t … I have a project that I started a couple of years ago and I even paid five grand to hold myself accountable. I actually … I can’t believe I’m admitting this. It’s obviously not important to me. If things are important to you, you follow through. If they’re not important to you, they don’t follow through. But I started a project a while back and I let it … I keep pushing it down on the to do list and I need to bring it back on the to do list. So, it’s holding myself … For Land Academy, I have no trouble. I am here. I show up. I do everything. I’m here for our community.
Jack Butala:
Yeah.
Jill DeWit:
I’m here for the shows.
Jack Butala:
Me too.
Jill DeWit:
The calls. You name it. I’ll get pulled out of stuff. But my own little personal projects that I do, I push those down, and I don’t know why it sounded [inaudible 00:10:29].
Jack Butala:
That’s not good.
Jill DeWit:
I know. It’s okay. Because you know what? This other stuff brings me such joy that it …
Jack Butala:
I know. I’ll tell you. Ironically, this isn’t the topic we will get to topic here in a second.
Jill DeWit:
Yeah, exactly. Eventually.
Jack Butala:
Our last child is still in the house. He’s 17. And I incorrectly assumed that he was as much of a self starter as Jill and I are. And so, now we’re going to have to take a bunch of steps back and really … If you’re a parent, you know exactly what I’m talking about and kind of retrace our steps back and say, okay, all right. He’s not as much of a self starter as I thought. He’s kind of making some decisions that he shouldn’t be. Some of it’s COVID, some of it’s not. It doesn’t matter. It’s life. It’s lifestyle. It’s not just owning a business.
Jill DeWit:
Mm-hmm (affirmative). It’s true.
Jack Butala:
Today’s topic. Taxes and your land business. This is the meat of the show.
Jill DeWit:
Everybody’s like “Finally. Thanks.”
Jack Butala:
I know.
Jill DeWit:
Geez.
Jack Butala:
No, they just hit the fast forward button.
Jill DeWit:
Oh, that’s it.
Jack Butala:
Like when you’re watching a movie [crosstalk 00:00:11:33].
Jill DeWit:
Skim, skim, skim, skim, skim. Got it.
Jack Butala:
With an Apple product, you can plus 10 seconds on the TV, you just hit it until … Okay. Yeah. So this is the topic anyway.
Jill DeWit:
Does it sound like we’re avoiding talking about taxes? Because maybe we are.
Jack Butala:
Just like real life.
Jill DeWit:
Because nobody wants to talk about it.
Jack Butala:
I got several questions about 1031 exchanges recently. It’s kind of a topic actually also in land investors. So here’s the deal. 1031 exchange is a way to postpone paying capital gains taxes on real estate and some other types of assets. So, if I’m an accountant happily going along and Jill’s a lawyer happily going along and we buy a mobile home park and it gets improved and everything’s great and a couple years later, or a few years later, or whatever the numbers end up being, we do decide to sell it. We make a million bucks. We are very subject to capital gains. And so, we are pretty heavily taxed on that.
As an alternative, this is years … 1031 exchanges are ancient. They go way before me. They started … As an alternative, when we go to sell that and we made a million bucks on it, We can go buy a like kind of piece of property. In this case, in the simplest terms, buy another mobile home park, probably because we have so much capital now, put a little bit more money down, and then go do the same thing and on and on and on. It’s the government’s way, in a healthy way I think, to encourage us to continue to keep putting money back into real estate and money back into the market, so everybody kind of wins. That’s the theory, anyway.
The question becomes, okay, great. I just joined Land Academy. I don’t want to pay taxes … I’m buying these pieces of land anyway. I’m going to buy another one next month. And if everything goes great, I’m going to buy two the month after that. And so, I don’t want to pay taxes on it. I want a 10 … It’s called 1031ing your way up to exit is what I call it. If this is your business, and please, I need to disclaim this. Jill, you said this right before the show. We’re not accountants. I have an accounting background. Stuff changes all the time. You can’t take my word … Don’t run out there based on this information that you’re getting solely on this show and go do this stuff. Check with accountants. I hope this goes without saying. I hate when people disclaim stuff.
Jill DeWit:
But you need to.
Jack Butala:
We have to.
Jill DeWit:
Uh-huh (affirmative).
Jack Butala:
The way that Jill and I buy real estate and the way that most people who have been in this for a while buy real estate, it falls under ordinary income the same way it would if you own a convenience store. So, that’s the same type of taxation that you fall in. So, can you 1031 your way up to an exit strategy with land? Maybe if you’re a full time accountant and you’re doing this stuff on the side, but even then, I don’t think … I’m not sure. Check with your accountant. I don’t think you can. So what ends up happening … What’s the real deal with taxes in your land business?
You’re going to pay federal income tax. You are going to be taxed in an ordinary income fashion just like you own any type of company. I always use a convenience store. So, you have 50 convenience stores. They make a bunch of money. You’re going to file a tax return at the end. Just the way that you would any way out, but I’ll tell you, here’s a friendly tip. The feds love W-2 income withholding. It’s been that way since as long as I can remember. And they give you some pretty good tax advantages for it if you structured it in an LLC. So, talk to your accountant and make sure that you’re maximizing your tax benefit with W … Meaning you give yourself a paycheck when you can. All of this matters when you’re making money. None of this matters in the first probably two or three years of doing this.
Jill DeWit:
Part time or full … Part time. Until you’re full time.
Jack Butala:
Yeah. Until you’ve got an LLC, you quit your job and you’re rolling some money in and then you’ve got to really get serious about it.
Jill DeWit:
Right.
Jack Butala:
There’s several people that I’ve seen professionally throughout my career, not necessarily just with land, but in all types of businesses that let the tax tail wag the dog. They’re obsessed. I can’t pay any taxes. I’ve got to do this. I got to do this. I’m going to put my money into the stock market. There’s all endless tax advantages that you can reduce your taxation down to a minimal amount, within the limits of the law. It’s no funny business. All the rich people I know, and Jill and I know a bunch of rich people way more wealthy than us say some version of this. Pay your taxes.
Jill DeWit:
Yeah. I was going to say one thing too. I have learned … I personally experienced and then I’ve talked to people in our community that have experienced this too. Different accountants give you different feedback and it’s not necessarily state driven. I just think it’s how they interpret the rules. So, I just wanted to say, don’t go with that first accountant that you call and says this is the way it is. ABCD. I would interview a couple accountants kind of like interviewing brokers. It’s like if I want to get a broker’s opinion on a property, I’m going to call a couple of different brokers and I’m going to see two are on the same page, and then I’m going to mesh with one of them. I really want you to do that with an accountant too. I want you to interview like five accountants and there’s going to be two or three, they’re on the same page, that they are saying the same thing.
You’re like, “All right. I believe these guys to be knowledgeable.” These three are all in general consensus. This guy’s way over here and this guy’s way over here about what I should do. These three are in the general consensus of what’s the right way to run my business and file my taxes. And then I want you to pick the one that is responsive and you mesh with.
Jack Butala:
I mean, in layman terms, what she’s saying, and she’s absolutely right, is this: there are some accountants who are so incredibly conservative and they read the IRC, the Internal Revenue Code and they say, “All right. So for every state you buy a piece of property in this year, you have to file a state tax return. And just to be safe, because want to make sure we do it right, we’re going to file each state tax return on the federal level amount, because that’s how it works.” And you will tax yourself into …Out of business if you do that overnight.
Jill DeWit:
Right.
Jack Butala:
So there are some accountants that say, “You know what? Come on over here. Come over here.”
Jill DeWit:
Yeah.
Jack Butala:
You don’t have to pay any taxes. I’m going to show you how. So, you don’t want that. You don’t want either extreme of that in any way. Jill’s right.
Jill DeWit:
Thank you. Yeah. I’ve [inaudible 00:18:16] also too, I’ve talked to accountants. It’s like there’s a sweet spot. There’s a … I love … Usually like a pilot. I would like an older seasoned pilot who’s been through all kinds of stuff. An accountant, I kind of want an older seasoned accountant, but not one that’s so old that he doesn’t read all the new stuff. I don’t want … And I’ve had attorneys and accountants like this in the past that were like, “This is not going to work.” Because they’ve said, “Look, I’ve been doing it this way since 1962 and we’re not going to change it.” I’m like, “Well, you know what? Things have changed since you started this in 1962.”
Jack Butala:
Things changed last week with taxes.
Jill DeWit:
Exactly.
Jack Butala:
That’s one of these things you really need to be up on it.
Jill DeWit:
Yeah. Truth time. We are personally transitioning to a different accountant/financial planner. We’re interviewing right now and probably going to make a switch because we’ve kind of outgrown our guy. And it’s not that he’s not a … He’s a great guy. We love him and he was great. But we’re dancing in a different level of finances that are a little bit beyond his expertise.
Jack Butala:
We’ve really grown in the last couple of years, the last few years, and our tax … Just the raw tax dollars that we’re we’re spending now are massive. It’s in the seven digits. So it just needs to be looked at there’s. A lot of longterm planning. What’s missing from our tax situation is longterm planning. We take a look at everything in September, October, right about now, and make some adjustments to make sure that we hit our goals, both revenue and net income wise, by the December 31st, but there’s more to it than that now. There’s long term planning.
Jill DeWit:
Exactly. Woo. I know.
Jack Butala:
That was painful.
Jill DeWit:
That’s a tough topic, but I think it’s a good topic. I think everybody wants to know. I wish there was one … I wish there was a one size fits all, but there isn’t. I’m sure you tuned in hoping that we can say, “Do A, B, C, D, and E and you’re set.” Unfortunately, it’s not that easy.
Jack Butala:
And I’ll tell you one last thing about this topic. There’s something about this topic. There’s a few topics in the world like this in the planet. This topic, for some reason, if it ever reaches on any type of forum or it comes up once in a while on our Thursday call as a question, it just becomes this heated, massive debate about the right way to do it. And Jill nailed it. There’s no right way to do it. It’s what’s right for you. It’s just like how politics just enrage certain people. For some reason, this topic enrages certain people. And they just … We all know these people professionally and they’ll … If you go to dinner and start talking about taxes, you might as well excuse yourself.
Jill DeWit:
Or just bring up religion or bring up anything. Yeah.
Jack Butala:
It just sends some … I’ve never heard a woman getting raised over taxes, but it’s just-
Jill DeWit:
I will.
Jack Butala:
Older men for some reason. And I don’t mean mad about paying taxes. Yeah. We’re all … No one’s happy when they pay taxes I don’t think.
Jill DeWit:
Oh, dig their heels in about [crosstalk 00:21:25].
Jack Butala:
Just angry, just livid. Or, “No, you’ve got it wrong. This is how you do a 1031 exchange.” People listening to this right now are all … They’re probably throwing their stuff all around the room. Certain people. It just makes … And it’ll be on YouTube. Watch the comments on YouTube. These guys don’t know what they’re talking about. He’s got this that. It’s hilarious.
Jill DeWit:
Everybody has their own opinion.
Jack Butala:
Yeah.
Jill DeWit:
[inaudible 00:21:47].
Jack Butala:
I have been doing 1031 exchanges since 1959. I haven’t paid a dollar of taxes. First of all, if that’s true, why would you say it out loud? Because they’re going to come for you.
Jill DeWit:
Yeah. Yeah. Now they know where you live. Thank you.
Jack Butala:
I’m happy you could join us today.
Jill DeWit:
Five days a week you can find us here on the Land Academy Show.
Jack Butala:
Tomorrow, the episode on the Land Academy Show is called math on rental property versus in buying, reselling land. You are not alone in your real estate ambition. Now, that’s a fun topic.
Jill DeWit:
Are you going to have numbers for us, or is it big picture show?
Jack Butala:
Yeah. I can create numbers in my head very quickly.
Jill DeWit:
I’m just curious.
Jack Butala:
I mean, we’ve … Here’s a little prelude to it.
Jill DeWit:
Okay.
Jack Butala:
I mean, we’re going to look at spending $400,000 on a house, or 300,000. I think national average now is like 300 grand. If you’re going to spend $300,000, leveraged or not, what do you want to … How can you maximize that money in real estate? That’s what this is really about, because everybody who starts off in real estate, me included, probably Jill included, I don’t know, we’ll find out tomorrow, started with houses. It’s just what we know.
Jill DeWit:
Yeah.
Jack Butala:
We live in a house. Our parents bought and sold a house, some of us.
Jill DeWit:
We all watched it.
Jack Butala:
Yeah.
Jill DeWit:
Exactly. Thank you for tuning in. We hope you find our content valuable and we appreciate your support. If you haven’t already, please check out our YouTube channel, hit the subscribe button.
Jack Butala:
And your comments and suggestions help us to create the type of content that you’re here for. Hitting the like button helps to support our channel’s algorithm, engage your interest for future shows. We are Steve and Jill.
Jill DeWit:
We are Steve and Jill.
Jack Butala:
Information.
Jill DeWit:
And inspiration.
Jack Butala:
To buy undervalued property.
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