Joe Anderson
ABOUT Joseph

As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 15 out of 100 top ETF Power Users by RIA channel (2023), was [...]

Alan Clopine

Alan Clopine is the Executive Chairman of Pure Financial Advisors, LLC (Pure). He has been an executive leader of the Company for over a decade, including CFO, CEO, and Chairman. Alan joined the firm in 2008, about one year after it was established. In his tenure at Pure, the firm has grown from approximately $50 [...]


Andi Last brings over 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast, radio show, and TV show and manages the firm's YouTube channels. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with [...]

Published On
February 18, 2020

How do you run the numbers to find a good, profitable rental property? Should you pay off the mortgage, buy more real estate, or save for retirement? Should you buy a home with all cash? Can a property be considered a rental for tax purposes? Should you refinance your home to pay student loans? What can you do with unused education savings? And what do we have against 72(t) SEPP for early retirement withdrawals?

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Show Notes

  • (00:56) Should I Pay Off My Condo or Purchase More Real Estate?
  • (10:49) Should I Pay Off My Mortgage or Save for Retirement?
  • (18:42) Traditional or Roth 401(k)? Should We Do an All-Cash Home Purchase?
  • (26:37) Can My Real Estate Be Considered Rentals for Tax Purposes?
  • (30:32) Cash Gift Tax Liability
  • (33:04) Should I Refinance My Home to Pay Son’s Student Loans?
  • (35:04) Farm Crop to College Fund Strategy: Is It Legal?
  • (38:57) What to Do With Unused College Savings?
  • (42:18) Why Not Mention 72(t) SEPP When Discussing Early Retirement Withdrawals?

Resources mentioned in this episode:



10 Tips for Real Estate Investors


Listen to today’s podcast episode on YouTube:


Today on Your Money, Your Wealth® We’re talking cap rates, net operating income and cash-on-cash – it’s a nuts and bolts, bread and butter real estate investing discussion. How do you identify a profitable rental property?  Should you pay the mortgage, buy more real estate, or save for retirement? Can a property that isn’t actually a rental be considered one for tax purposes? Is it a good idea to buy a home with cash? Real estate dovetails into saving for college – should you refinance your home to pay off student loans? What can you do with unused college savings funds? Plus, find out what palm trees and ornamental corn have to do with education costs, why listener Earl wants to give Joe a big ol’ bundle of cash, and what the fellas have against 72(t) early retirement withdrawals. I’m producer Andi Last, and here to answer your questions are the hosts of Your Money, Your Wealth®, Joe Anderson CFP® and Big Al Clopine, CPA.

Should I Pay Off My Condo or Purchase More Real Estate?

Joe: We get a lot of questions on real estate.

Al: We do.

Joe: You’ve been invested for quite some time.

Al: Yeah. I like real estate. I always have.

Joe: Some of you are writing us like 14 pages of questions which is awesome. But if you’ve ever listened to the show I read the questions. And it’s sometimes very painful to listen to for me to read it. So you can just click on the button that says you can just talk. You can just ask your question.

Andi: It says ‘record a voice message.’

Al: I do agree. When you’ve got a long question that’s a much better way to do it.

Joe: Because then you can- then we know what you’re talking. Sometimes they write in- there’s their personality. And I screw that up. It would be nice to hear your-

Al: And your personality goes over theirs.

Andi: So it really gets in the way.

Joe: It totally gets in the way. So do that. That would be fun for us. I mean probably for all of our listeners. We got Brian. He writes in from San Diego. Now Brian “Want- I want-” See? I just told you. I just blow these things up. This is like just a couple sentences.

Al: We’re just getting started.

Joe: I know it. “I want to better understand my options for investing my money into real estate. I currently own two properties and rent one. I have $120,000 saved and want to put that money to work. I could pay off my condo or purchase another property.” What are your thoughts, Big Al?

Al: I love the question. That’s pretty open-ended too. So Brian in San Diego as Joe and I are also in San Diego. So here’s the thing about San Diego real estate is it tends to be pretty expensive relative to what you can rent it for. So it’s really tough to get a decent cash flow. In fact, it’s tough to get any cash flow. Usually, it’s a negative cash flow.

Joe: I like how you just put that. You’re like, “Joe and I live in San Diego. It is very expensive to live here.”

Al: Is that how I said it?

Joe: It sounded like that.

Al: It’s really exclusive. At any rate, let me give you a couple thoughts. Now you’ve got two properties already. You’re probably living in one and renting the other one I’m guessing and so good job. So when you’re renting a property it’s- of course, a couple of just quick things- one is it’s cash flow, cash flow, cash flow, cash flow. How does the cash flow look? And when you look at a potential property to purchase look at it from all different angles. Because you own a rental property you probably understand this but for those that don’t, it’s not just the rental income coming out and the mortgage. There are a lot more expenses. There’s vacancy. San Diego, for example, has on average about a 5% vacancy factor so make sure you throw that in. Now you may not have any vacancy for a year but you might have a month the following year.

Joe: Hey why don’t you walk through the math because people might hear cash floor or cap rate. To examine- because if I buy a rental property how do I know that this is a good deal?

Al: Okay. Good. So let me just start with the rents. You know you subtract out, obviously the mortgage you add. But then like the vacancy, there are property taxes, there’s maintenance. There are homeowners fees if it’s a rental property. There might be pest control. There might be gardener, any number of things. So basically you start with your rent. You subtract out all your expenses and you come up to a bottom-line profit or loss. So let’s just say real simple example $100,000 property and you get $10,000 in rents and your expenses are $6000 let’s just say. So your bottom line profit is $4000. So now you look at that $4000 and you divide that into the property.

Joe: Did you divide that into net equity or market value?

Al: It’s both. Let me do both actually. Let me start with the property itself and that’s called cap rate. So it’s the bottom line profit without regard to the mortgage interest in principle. So without regard to your mortgage- in real estate investor term they call that net operating income. It’s the rental income minus all the expenses before the mortgage. You do have to add property taxes but it’s that net number. You divide that number into the total property value. That’s cap rate. And the higher the cap rate obviously the better, the better the cash flow. If you’ve got a property that has a 1% cap rate that’s really low. That’s a very poor cash flow.

Joe: So then you look at your opportunity cost. It’s like I’m getting 1% cash flow on this property. Where could I reinvest that into a CD and get 2.5%? without all the hassle.

Al: Yeah. Exactly right. Exactly right. Now, of course, the flip side to that is what if the property has high appreciation potential? So obviously that’s what you look at. And that’s what I was sort of getting to in San Diego. We tend to have not very good cash flow here but good appreciation potential. And that seems to be true on the West Coast and the East Coast. And there are many other places too. But then there’s a number of places in kind of Middle America where it’s the cash flow is better but appreciation doesn’t seem to be as much. It can work either way but so that’s the cap rate. The other one is cash-on-cash. And cash-on-cash is simply how much profit do you have from that property? Relative to how much your equity is in the property.

Joe: How much cash you have in it.

Al: So in my example, if you have $4,000 of profit after the mortgage and you had a $50,000 mortgage, $50,000 equity. So what’s that, $4,000 into $50,000? Now you go and challenge my math. But somewhere around 8%. 8% or 9%. That’s really good. That’s really good. In fact, in higher appreciating areas like San Diego and West Coast, East Coast, if you can get anything close to 4% that’s really good.

Joe: So even though the house might look like a dump. In a terrible neighborhood. But if I look at cash-on-cash or if I look at the cap rate it could be a pretty good investment.

Al: It could be and I have a couple more observations based upon what you just brought up and-

Joe: But on the flip side people might look at a really nice home. With all brand new furnishings. Beautiful backyard in a wonderful neighborhood. And the cap rate and cash-on-cash is terrible. Because you should be living in that versus renting that.

Al: Correct. That’s a good observation. In most cases, there are exceptions of course, but in most cases the places that have good cash flow that would make good rentals are not necessarily the place you’re going to live and raise your family. Not that they’re not-

Joe: Someone else will and pay you to do it.

Al: Someone else will yeah. If you’ve got the investable assets to invest in real estate, in general, you may want to a little bit better place than what I would call a bread and butter rental. Just kind of a starter family home in kind of a decent neighborhood, not a slum. So yes it’s probably, in general, the places that you rent will not necessarily where you want to live. But you also have to look at where you do buy a rental. It’s like those properties or that community, is it up and coming or is it declining? And you’re looking, you’re actually looking for a community that maybe has had some problems but now it’s kind of up and coming. Maybe it’s kind of a Center City community that’s now because there’s so much growth in the city that people are coming in. They’re improving their homes. The community is going in the right place. Maybe there’s a new employer or if you see a new Home Depot in an area. Sounds kind of funny but that’s actually a really good sign that this is probably an up and coming area even though it may not look that great at the time.

Joe: So hopefully that helps you out, Brian. Another thing I just thought of too, Alan, anytime you, I guess, debate about what investment that you should go into, there is a formula. Because there’s cash and then there’s growth. So you’ve got to look at the growth aspect of it plus the cash flow aspect of it plus the tax benefit that you would potentially receive from it, would equal your total return.

Al: Correct. And one quick thing about that Joe is if you put 100% down payment which usually you can’t do, it’s too expensive. But let’s just say you do. $100,000 property. You put $100,000 of your own cash in, if the property goes up 5% then you’ve made 5% on your money. But if you put a 10% down payment down and the property goes up 5%, you’ve made 50% on your money. In other words, the property doesn’t care whether there’s debt on it or not. If it’s $100,000, it’s worth $105,000 and you only put $10,000 down, now your equity is $15,000. You actually made 50% on your money. And of course, that’s way oversimplification because there would probably be negative cash flow in that case and a lot of other things. But that’s how people make money in real estate is by using leverage or other people’s money. It’s also how you lose a lot of money. Because if you put $10,000 down and it goes down, the property itself goes down 10%, you’ve lost 100% of your investment, because you have zero equity. So just remember it works both ways.

If you’re considering making an investment in real estate, I’ve crammed the podcast show notes at YourMoneyYourWealth.com with a ton of free resources. You’ll find Big Al’s video with 3 tips for beginner real estate investors, his blog on real estate investing 101, and a previous podcast episode on using rental real estate – specifically small apartment buildings – to build legacy wealth. I’ve also thrown in past episodes on other potential real estate investments like vacation rentals, mobile homes and raw land. Plus, exclusively in the show notes and especially for our San Diego-based aspiring real estate investors, you’ll find video of Joe and Big Al discussing cash flowing rental real estate here where we are, in the San Diego market. There’s also a free white paper with ten tips for real estate investors waiting for you too. Now while I was telling you about all those free resources, which you can get to by clicking the link in the description of today’s episode in your podcast app, Big Al left the studio. He joins us now via Skype…

Should I Pay Off My Mortgage or Save for Retirement?

Joe: Alan, how are you, sir?

Al: I couldn’t be better Joseph. And you know why? Because I’m 3000 miles away from you. In Hawaii.

Joe: Oh Boy. All right. Rub it in.

Al: So it’s a great day. In fact, just-

Joe: Any day a few thousand miles away from me it’s a great day.

Al: Yeah I could be in a prison and it would be an improvement. But actually I am sitting here looking from our living room. I’m looking at a really nice grass lawn, the ocean and I see the white water and some palm trees. So Yeah. This is better than a prison.

Joe: Got it. Well let’s start answering some questions.

Al: We still have a lot of questions don’t we?

Joe: We do. Since you’re in Hawaii we got Tom. He writes in from Oahu, Hawaii.

Al: We’re near brothers. I can wave to him almost.

Joe: You probably could.

Al: By the way, just for Tom’s benefit and our other listeners I’m on Kauai.  It’s not right around the corner from Oahu but it’s in the vicinity.

Joe: Well you could swim there.

Al: It would be a long swim but I could try. I might need to be rescued after about 20 minutes.

Joe: Maybe you should try, Al.

Al: I should?

Andi: Tom, be ready to rescue Al.

Al: Tom, could you have a boat set up for me? Because I’ll get probably, I don’t know, 300 feet? From Kauai-

Joe: Do it at night too. That’d be helpful.

Al: That’s when the sharks are active, probably.

Joe: So Tom writes “I have listened to your show for the last few weeks and especially the recent show that included Al’s description of veganism and discussion of Chinese restaurants.”

Al: Wow. I remember talking about veganism. I guess I don’t remember talking about Chinese restaurants. But maybe I did, because they have rice. Rice works just fine for me. Rice and noodles with some veggies I guess.

Joe: “We live in Hawaii and noticed that Al seems to know quite a bit about the Aloha State.”

Al: True. Very true.

Joe: “So if we ever come- So if he ever comes over to Oahu he’s welcome to stay at our waterfront home. We could grill and watch sunsets together while we pepper him with tax and retirement questions.” So.

Al: Wow. That’s next week’s show. I’m going to be at Tom’s house.

Joe: So here’s his question: “My wife, 41 and I, 45 are stingy professionals that love to travel, have no children, saved some money and have not invested or put anything into retirement. My wife is a university employee that offers 403(b), 457, neither is matched. We have a small LLC that I sometimes work through but it only has about $20,000. Her income is around $120,000. We are 8 years into a 30-year mortgage of $312,000. House is worth about $1,000,000. Also make about $40,000 in passive rental income. So we have about $70,000 in saving that just sits in bank accounts. Financially we are stable. But my wife may want to quit her job to travel more and concentrate on our LLC and make our income through a consultant rather than her job. We have been saving money in the bank in case one of us gets sick and we need an emergency nest egg to pay off the mortgage or medical payments. Is having this nest egg sitting in the bank a bad idea? If so what should we do with our future tax years? In what priority? So pay out the mortgage is question number one. Put money into the 457 plan? Or 403(b) plan? Or something else? Aloha Tom.”

Al: Aloha Tom.

Joe: So what do you think Al?

Al: Let’s summarize. So they’re 41 and 45; they love to travel; have no children. They’ve saved some money. They have 403(b), 457, neither is matched. They’ve got the mortgage at $312,000. They’re about $70,000 savings. They don’t really say how much is in the 403(b).

Joe: I don’t think they have anything in the 403(b). They offer it but they’re not taking advantage of it.

Al: They’re not taking advantage of it. So I guess maybe they’re relying on the university pension.

Joe: But she wants to stop working. She’s only 41.

Al: Yeah. That makes it tough.

Joe: So he’s got some passive income of $40,000 from some rentals. So that’s probably through the LLC. She makes $125,000. So what, to replace a $125,000 of income, you need a lot of assets to produce some passive income to create that type of income.

Al: They need about $1,200,000, give or take.

Joe: Oh more than that.

Al: Oh yeah. I’m in Hawaii. I’m not thinking properly. It’s double that. It’s close to $2,500,000.

Joe: Probably close to $3,000,000.  Depending on- at 41 and 45.

Al: It depends if the passive income is reliable. You wouldn’t need quite that much, but still. Here’s my first comment is when my wife retired to work on our rentals and LLCs, that didn’t last long. I gave it to Robbie. So just be aware that it may be a little different when she retires. That’s the first piece of advice I have.

Joe: So I don’t know. I think Tom needs to run some numbers a little bit. Because that income’s quite a bit- his income’s $40,000. They’ve got a mortgage of $312,000. They’ve got $70,000. Keep the money in cash. You need a cash reserve. So it’s not like taking the $70,000 from savings and start investing it. I would start by funding retirement accounts. I think that’s a good idea. If they want to retire earlier and live off of passive income, then you’ve got to pay off debt. You’ve got to reduce I think the monthly nut, so then the passive income doesn’t have to be as high. So this is a tough one.

Al: It’s a tough one. I think the way we sort of look at it is that if her income’s about $120,000 and we don’t know what their spending is but let’s just say that spending is $120,000. And so we would say Tom, you probably should have at least 6 months emergency fund. So that would be $60,000 at least right there. So that means the $70,000 in savings should just be in savings for the reason Tom, that you’ve identified which is in case something happens to either you, you need the emergency cash. So you can’t really invest that. And I do like the idea personally of adding to retirement savings before paying off the mortgage. I think the way I would think about it is once you have your emergency fund I would get to the point if you could, max out the retirement accounts. And then if there’s still extra then you want to pay a little bit more towards the mortgage, I’m okay with that. But I think I’d sort of go in that order.

Joe: The 457 I would start there. Because you have access to the 457 at any age, Tom. So if you do lose a job or quit work or do whatever you do have access to the 457 plan at any age. So your 403(b) would be subject to 59 and a half, just like an IRA.

Al: Hey Joe. Joe, question. What are the differences in investments between a 403(b) and a 457? Or are they pretty similar in general?

Joe: In general they’re pretty similar. The 457 is a non-qualified deferred comp plan in a sense. But it’s just usually run by the state and they have a certain provider that provides the 457. So it could be almost identical to the 403(b) or could be a little bit different. But in most cases I mean it’s 6 and half a dozen.

Traditional or Roth 401(k)? Should We Do an All-Cash Home Purchase?

Joe: All right let’s go to traditional or Roth. We got David. He’s writing in from El Paso, Texas. He goes “Hi Joe and Al. Great podcast. I can’t stop listening.”

Andi: Neither can I.

Joe: Oh God, David. I suppose in El Paso-

Al: And Andi, I’m thinking you have to listen.

Andi: Yeah. I don’t have any choice.

Joe: Anyway. “We don’t have a traditional home.” What the hell? What is a traditional home? “But for simplicity’s sake, we say El Paso, Texas.”

Andi: I betcha that they’re in a motorhome or something like that.

Joe: “I’m 50-” Oh, so they travel.

Andi: I bet that’s the deal.

Joe: That’s badass.

Al: Yeah yeah right. That’s what I want.

Joe: He’s all over the place. He’s just living the dream.

Andi: That’s my guess.

Joe: But he picks El Paso, Texas? Why wouldn’t you say-

Andi: He might have family or something like that and that’s home base but the rest of the time you’re you know in Hawaii.

Al: Well I know I know why he did Texas, because there’s no state tax.

Joe: Got it.

Al: I don’t know why he picked El Paso, but Texas is- that’s not a stretch.

Joe: So David he’s 50 his wife’s 53 and “I have a question about retirement. We both work for the same company.” Dipping in the company ink.

Al: Oh I wonder if they met there.

Joe: I’m sure they did.

Andi: You guys are such gossip mongers.

Joe: Guaranteed. I bet they were on the copy machine or something.

Al: Yeah. I was thinking coffee but you went to the copy machine. That’s even more interesting.

Joe: “Well so they both have the option of choosing either a traditional 401(k) or Roth 401(k). We have around $100,000 that we can invest each year.” Wow. “We would like to buy a house; $300,000 range in 5 to 7 years and pay cash. My plan was to max out our 401(k)s using the Roth option which would amount to roughly half of our available annual investment budget. And then take the remaining $50,000 and invest in a brokerage account to fund our future home purchase. We are able to contribute $2000 per week. After listening to one of your podcasts from last year though, you had mentioned that you love to see accounts in thirds which I understood as 1/3 traditional; 1/3 Roth; 1/3 brokerage, as it offers more tax flexibility. This made me wonder if it’s something we need to consider since we’re starting from zero. Should one of us max out the traditional and the Roth 401(k)? Should we both max out Roth 401(k)s and no traditional? Should we each max out Roth IRA and reduce the amount we put in the brokerage account? We started our annual or we started our retirement savings late in life but I think we put ourselves in a position to catch up at least a little. I just feel like we’ve got one shot to get this right and I’d like your opinion. Our accounts are at zero now as we spent the last year paying off our debt. Our plan is to invest $100,000 each year for the next 10 years and then will slow down a bit.” OK, so you want to hear the backstory Al?

Andi: It explains what they’re non-traditional living situation is.

Joe: “We both decided to quit our day jobs. Me, manager of a mid-sized manufacturer. Wife, supply chain manager for a tech company. Sell our home and just about anything that wasn’t sentimental, went to CDL school and became a professional driving team.” Wow. What the hell’s CDL school? Professional driving team-

Andi: Commercial Driver’s License. Wouldn’t that be what it is?

Joe: Oh so they’re like truckers.

Andi: I think so.

Joe: That’s even better.

Al: Yeah. That’s a great job.

Joe: “After spending the last year paying off a considerable debt we’re able to live on $20,000 a year and put about $100,000 towards retirement. Bonus. We love it.” I wonder what his call name is.

Andi: Smokey and the Bandit?

Joe: Right? Like Rubber Ducky or something. That’s awesome. So they could save $100,000 a year; 50, 53. He’s going ‘Roth, 401(k). What the hell do I do? I heard a third, a third, a third-‘ So he’s kind of getting information all over the place. From us. That is not consistent. Imagine that.

Al: Yeah, never happen with us, right?

Joe: So they want to buy a house in 5 to 7 years and pay cash, $300,000. If they can save $100,000 a year to do that. I don’t know Al. I’m thinking let’s start with a house. I think it might make sense for them to have a little bit of a mortgage but paid off in 5 to 7 years. You know what I mean? Interest rates are really low. Instead of putting $300,000 cash today get a mortgage for $200,000. Put $100,000 down and you pay a few thousand bucks or maybe $1000 a month on a small mortgage. But then you have the other $80,000 per year that is working for you. And then at some point, if you ever want to pay the mortgage off, you can accumulate enough liquid assets over the next 5 to 7 or 10 years where you would have that option.

Al: That’s not a bad idea Joe. Although it sounds like they’re on the road a lot. So maybe they don’t even need it. Maybe they can even rent it out for some extra income as well. So that could be a possibility. But I think interest rates are really low right now like you say, although real estate is high. So who knows what it’s going to do. It could flatten out, it can keep going, it could decline a bit. So if you’re of the opinion, and I don’t know that much about El Paso real estate, but if you’re of the opinion that it’s peaked and you think it may come down you might wait. But that’s timing and you know we’re not too interested in timing. It’s very hard to time markets, real estate included. So I think I would probably favor the home too. And with a mortgage, with a low mortgage, and then I would probably- let’s say they’re living on $20,000 and they get $100,000 that they can invest and their taxes are $20,000 maybe they make $140,000. They’re probably in the 24% tax bracket with no state tax. And I like the fact there are no state taxes so I probably would have at least some go into the Roth. I don’t know if it’s a third, a third, a third. What do you think, Joe?

Joe: No I think they’re in the 22% tax bracket at $140,000 even. So I would go 100% Roth, to be honest with you. I’m a big fan of that at 22% tax rates. Because the reason why we want to go a third, a third, a third, or break it up for tax diversification is because most people have 100% of their liquid assets in a tax-deferred account that’s going to be taxed at ordinary income. If you can forego a little bit of tax savings today which is not going to be huge at 22% and then accumulate all of that money into a tax-free environment. I like that the best.

10-4 Rubber Ducky! By the way, if, after listening to the YMYW podcast and perusing all the real estate investing resources in the show notes at YourMoneyYourWealth.com, if you still have questions about real estate investing – or any other money topic for that matter – you can always click the Ask Joe and Al On Air banner at the top of the show notes and send in your questions as a voice message or an email and I will get them straight onto our list of emails. How do you get to the show notes, you ask? If you’re hearing this right now in Apple Podcasts, Google Podcasts, Stitcher, iHeart, Pandora, Spotify, Castbox, Overcast or any of the other podcast apps, you’ll see a link at the very end of the description of today’s episode. Click that link and voila, you’re at the show notes. From that page you can send in your questions, read the transcript of the episode, sign up for the podcast newsletter, and access all those free resources. Then, the best way to say “thanks for the great show” is to share YMYW with other people who would enjoy it. You can do that right from the podcast show notes too.

Can My Real Estate Be Considered Rentals for Tax Purposes?

Joe: We got Matt from Minnesota again. Man, these guys take advantage of us, Al.

Al: They like to write over and over.

Andi: This is our dedicated loyal audience. We love them, Joe.

Joe: Yes. Odd question Matt’s got. “I have two properties besides my residence that I own free and clear but neither of them are technically rental properties. One is being used by a family that we know that has fallen on hard times. The other is being used by my son. In both cases, there is no rent being paid. Is there a way to structure this setup to save money on my taxes? Can I treat them as rentals that are losing money? Not sure what the best setup would be. Thanks.” All right Al. You’re the real estate guru.

Al: I will take that one. Matt, there’s very little you can do on that to create a tax deduction with one exception. And because they’re not rentals and I’ll get back to that in just a second. You can treat one of them as a second home and as a consequence, with a second home you could write off property taxes on your Schedule A., Of course, those are limited to $10,000 maybe there’s not that much benefit. You said the properties are free and clear so you don’t have mortgage interest but on a first property and second property you can write off mortgage interest and taxes. Now the fact that it’s basically being rented to family or maybe they’re being basically given to the family with no rent, it’s not a rental if there’s no rent or even if there’s below-market rent. In some cases maybe a family member will rent to another one and the fair market rent’s $1000  and they’re charging $500 so that’s a below-market rent situation. You can deduct rental expenses but only down to zero. You cannot create a loss when the rents are anything lower than fair market value which would be the case here. So, unfortunately, that’s not a great answer but that’s the rule.

Joe: How about this Al? So his son’s living in the house and maybe his son is married. So how about if the rent for the year is $30,000? The son’s not paying the $30,000. Matt is gifting the $30,000 to his son. Can that work? Because like you could do $15,000 per year per child. So let’s say Matt’s son’s married so he’s gonna give them $30,000 as a gift. Then Matt’s gonna give it back to him in form of rent.

Al: Rent payments. Yeah. So in that particular case, the whole $30,000 is income. And if that is considered fair market rent that could possibly work. Sometimes though what happens is people don’t give a lump sum they just say well let’s pretend it’s $1000 a month or $2000 a month and we’ll just do it on paper and that just kind of runs amok because it really does look like a gift related to the rental. So if you’re going to do a strategy like that you’d want to do like a one lump sum that wasn’t at all tied to the rental. In fact, you’d want the amount to go to the son. Not the sum of 12 months rental payments, some other sum. So it looks like it’s something completely different. So that could be a possibility. But remember when you have a rental in a lot of cases your rental income- your expenses- they may be a little bit lower than the rent or something. Certainly, in California, the expenses are pretty high and with depreciation, you can create a loss but that reduces your tax basis. And so when you sell the property you got a higher capital gain. So it may not benefit that much really.

Joe: Probably doesn’t at all.

Al: Because I think by the time you create a loss of a few thousand dollars you’ve reduced your basis by $10,000 I’m just guessing. And so you get a higher capital gain later which may not be worth it.

Cash Gift Tax Liability

Joe: All right on the same kind of thread here with taxes and gift tax. We got Earl. He writes in. “Big Al. Question has come up about tax liability on a cash gift exceeding yearly exemption of $15,000. Say I give Joe Anderson $25,000.” Wow.

Al: Do you know Earl?

Joe: No. I love Earl now. I like where his head’s at.

Al: It’s interesting.

Joe: “Is it the first $15,000 exempt? The overage is this example is then reported on IRS form 709 I believe? In the amount of $10,000? Then reduced from my lifetime estate and gift tax exemption which is $11,400,000? I keep being told by others that I’m wrong. The overages in this example is subject to tax this year. I think there is no tax. The amount over just reduces my lifetime limit. Not likely any tax ever with limits north of $11,000,000 will ever be due? Who’s got it right? I have listened to both of you for years. Fantastic service you provide. But it’s time to put together some new shows for Sunday morning.”

Al: I hear that.

Joe: “Maybe a piece on this often misunderstood tax. Thanks.” Earl, we are taping Season 5.

Andi: 6.

Joe/Al: 6.

Joe: It feels like season 60.

Al: Yes it does. We had a long hiatus but we’re back. We had to get a new studio which we now have almost ready. So I think our first show, the new show becoming out maybe in about 6 weeks or so. Give or take.

Joe: Couple weeks Earl.

Al: Just hang on. And so I guess if I’m going to answer the question Earl, I’d like you to give me the $25,000 gift instead of Joe. Let’s start with that. But I will tell you, Earl, you are correct. There is no current tax. You file a Form 709 which is a gift tax return. It does come off of your exemption. Of course, the IRS never makes things simple. It actually reduces your unified credit which is a different number. But for our purposes today it’s just like it comes off your exemption so you can think of it that way. So in other words, if you were to pass away then you don’t get the $11,400,000 exemption you get the $11,390,000. Right? Which is probably enough for most people.

Should I Refinance My Home to Pay Son’s Student Loans?

Joe: Mary Jo writes in from Carlsbad, California. “Would it be wise to refinance my home? I have equity. To pay off my son’s student loan of $40,000. He could pay me back and I would deposit it back into the principal each month. Thank you for your advice.” What do you think there would you rather hold the student loan? Or refi the house and have the kid pay you back?

Al: Well hopefully the kid can pay it back. I kind of hate to do that because you sort of hate to have family loans if you don’t have to. And in some cases, student loans have provisions where you can make lesser payments if you get into trouble financially. So which is not true of a home equity loan. So I don’t think I would probably recommend that. However it’s $40,000, it’s not necessarily-

Joe: It’s not $400,000. You know what I mean?

Al: It’s not the worst idea ever. It’s just- I probably with what little I know I probably wouldn’t necessarily recommend it, but if you want to do it, I’m not going to lose any sleep over it.

Joe: I agree with you 100% Al. Because there are certain things that you would definitely want to keep depending on what type of student loan it is versus rolling it in your house.

Al: If it’s a loan that’s really high-interest rate and you can get a low-interest rate home equity loan and your son has good income and you trust them and there’s not this issue about needing to get lower payments. You know maybe it’s not a bad idea.

As this episode morphs from real estate and leveraging your primary residence to how to pay for college, I’ve added some resources on that topic to the podcast show notes too. Check out our webinar on How to Save for College, find out whether you should save for retirement or your kids’ education first, and watch How to Make College Affordable on YMYW TV. Visit the podcast section at YourMoneyYourWealth.com to view today’s show notes or click the link in the description of this episode in your podcast app.

Farm Crop to College Fund Strategy: Is It Legal?

Joe: We got Jared. He writes in from Greenville, South Carolina. “I’m considering planting a 7 to 10 year payoff crop.” What?

Andi: He’s a farmer.

Joe: Okay. “I’m considering planting a 7 to 10 year payoff crop as a hopeful source of college funding for my son. He will be 18 in 10 years and the crop I’m considering will be mature and ready to sell. I foresee that the profit from selling this then may-

Andi: -astronomically increase my income tax rate-”

Joe: Hold on. “I foresee that the profit from selling this then may astronomically increase my income tax rate then it’s lumped up with my day job earnings. I’m curious if what it is time to sell the crop-” God, he can’t write, it’s not my fault; I can’t- or is it me being-?

Andi: It’s you, Joe, it’s you.

Joe: No, it’s not! It is not me.

Andi/Joe: “I am curious-

Andi: – if when it is time to sell that crop-”

Joe: If when it is- and- well- and whatever. That’s what I’m reading.

Andi: That was not English.

Joe: I know. I can read English.

Andi: This is all you, Joe. This is all you.

Joe: It’s Jared’s accent is coming through his writing. “I’m curious if, when it is time to sell that crop, my son can report it as income for himself and pay taxes at a more reasonable rate that way? This needs to be done totally legally.

Andi/Joe: How can I navigate this?”

Joe: Relax over there.

Al: I’m thinking Joe, I think you’re over 40. You may need some reading glasses. I’m thinking that’s the thing.

Joe: It could be. It could be.

Andi: At least contacts, because I know you’re vain.

Joe: Yeah right. So Jared- I am very vain. Jared’s got a crop. He’s thinking about planting something and then this crop is going to mature in 10 years, right in time for his kid. Then he wants to sell the crop. He’s gonna have a massive astronomically profit to kill his tax rate. Can I just give it to his son and the son pays the tax? I think there’s a kiddie tax involved here.

Al: Well no, the answer to the question is no. However here’s a workaround is if your son is involved in the harvest of these, I’m assuming they’re trees because they take 7 to 10 years, I’m gonna assume South Carolina, maybe they’re palm trees. I’m gonna add some color to this email.

Joe: There’s palm trees in Greenville, South Carolina, huh?

Andi: As a crop, there might be.

Al: Maybe it’s pine trees. What do I know?

Andi: Maybe it’s Christmas trees.

Joe: I don’t know. I was thinking corn, but I think that’s probably a year.

Andi: I don’t think it takes 7 to 10 years to grow. This is why you are a financial planner and not a farmer.

Al: That would be pretty rotten corn. I don’t think it would be astronomical increases.

Joe: Maybe its some special corn.

Al: Here’s the workaround. Upon harvest, you get your son involved in the harvest and you pay him. And so that’s a deduction. It could be contract labor. It could be salary if you want to go the employee/employer route and that way you can transfer some of your profits to him. That’s completely legit. As long as he’s doing the work that you’re paying him for.

Joe: Very good Al.

Al: Like that?

Joe: I like it. I like it a lot.

Al: So you’re still thinking it’s corn.

Joe: No.

Al: Maybe it’s just the corn that you get Thanksgiving that’s all like petrified-

Joe: – yellow and orange. Yes.

Al: – petrified corn. Maybe it’s that.

Andi: Isn’t that stuff used only for like decoration?

Joe: Well maybe that’s what he’s doing.

Andi: Maybe.

Al: Probably takes 7 to 10 years.

Andi: There ya go.

Joe: Then he’s going to go to Wal-Mart.

Andi: Astronomical profits.

Al: And Wal-Mart’s going to say I’ll give you $.05 an ear.

What to Do With Unused College Savings?

Joe: We got one from Marion… oh, Marion writes in from Fresno, California. I don’t know why I thought- well, Marion could be a name.

Andi: Could be a name? It is a name, Joe.

Joe: I mean I don’t know why I said- what I meant to say was I don’t know why I thought Marion was a place of where she was- nevermind.

Al: Oh, where she was from?

Joe: Yes.

Al: She’s from the suburb-

Andi: From Marion Fresno.

Joe: So Marion writes in. “When my daughter joined the Marine Corps she signed up for the college savings plan during basic training. Later she decided to make the Marine Corps a career. My question is can she give away cash out of this savings plan? Anything besides try to use the money for education later in life?” So Marion has like a 529 plan. So she was thinking-

Andi: Is it specific for the military though?

Joe: Well no, actually, “When my daughter joined the Marine Corps she signed up for a college savings plan.”

Andi: ‘-for the college savings plan.’ That sounds like a- is that a military thing?

Joe: No, no, no. A college savings, like 529 plan, could be a Coverdell IRA. So the question is can she get out of that thing without any penalties if she’s not going to use it for education? The answer is no. You’ve got to use it for education.

Al: But I will say I think a lot of people don’t realize- let’s say she put $10,000 in and it’s grown to $11,000. The $10,000 comes back no tax, no penalty. It’s only the $1000 in growth that you have to pay taxes and penalty on.

Joe: So it may be as bad as she might think.

Al: Yeah correct.

Joe: Or they could gift it. So let’s say the daughter has a child and they want to pay for the child’s education. It depends on what kind of savings plan it is. 529 you can kind of gift from different generations.  So we can answer that. And then Marion writes in again. She goes “After listening to podcast 255-” remember that one Al? That was a good podcast.

Al: Yeah I dream about that sometimes.

Andi: That would be the 5-year Roth clock.

Joe: Got it. “- about Roth IRA conversions a half a dozen times I realized I’m converting a tax-deferred 457 plan to Roth IRA to take advantage of current low tax rates. Anyway, hope I understand correctly. Attached is my understanding of the podcast. See attached.”

Al: Oh boy.

Joe: Ok, it’s hard to read this.

Andi: We went over that. So I will send Marion that information.

Joe: “And yes, the podcast is the best ever. I cannot remember how I found YMYW-

Andi: Your Magic Your Wealth-

Joe: Oh God- your magic- oh God. “But have recommended to my children and their friends. P.S. Marion is male. Marian is female until about 1950.” Oh boy. Here we go.

Al: We get the whole history. We’ve got John Wayne.

Joe: Yes. “Then it all went to hell. So Marion Mitchell Morrison, known professionally as John Wayne and nicknamed The Duke – again, named before 1950.” Thanks a lot, Marion, for the questions.

Why Not Mention 72(t) SEPP When Discussing Early Retirement Withdrawals?

Joe: Next in line. We got an early withdrawal question from Roger. No location given.

Al: Somewhere in the US maybe.

Joe: Roger. We gotta get tight on the rules here.

Andi: He’s on the podcast newsletter mailing list and he just replied to the newsletter and for episode 257 where somebody had written in and asked: “What are you supposed to do when you want to take money out before 59 and a half?” So Roger’s saying-

Joe: So he asks a question “Hi. Why didn’t you mention 72(t)/SEPP for the second question on IRA withdrawals before 59 and a half on podcast number 257? What do you have against these?” Well, Roger,, I got a lot of things against them. Because they suck. I hate 72(y). No. 72(t) is a code in the tax code, a section in the tax code. SEPP, Separate Equal Periodic Payments is what that stands for. So if you are under 59 and a half you can take money out of a retirement account, an IRA, without the 10% penalty as long as you take the same amount of money out of the account each year for 5 years or till you turn 59 and a half, whichever is longer. There are 3 methods that you would calculate to figure out how much money you can take from the overall account. I got into this business in 1998, I believe was the year. And you know what happened in 2000 right? Remember 1998, 1999, 2000, like was the dot com boom right?

Al: I sure do. You probably thought you were really smart during those years I’m guessing.

Joe: Oh my God. I thought I was a genius.

Al: This is easy, right?

Joe: Oh my God yeah.

Al: Every investment you picked went straight up.

Joe: Oh yeah. Putnam New Opportunities Fund is up like 48%. Then it was down 70%.

Al: When it went down.

Joe: Yes. So it was right before the dot com bust. And so there were a lot of younger executives that retired that have retirement accounts that were under 59 and a half that wanted to use a 72T tax election to get money out. But what- I don’t really care for it in a sense that you’re tied to a certain payment that is- it could be for a substantial period of time. If the market drops, you still have to take the money out of the account, it’s a separate equal periodic payment for 5 years or until you turn 59 and a half. It’s not like we’re not big fans or we have anything against them it’s just another tool that you could use. I don’t know why we didn’t even bring it up. Maybe we were just talking about-

Andi: That’s his question.

Joe: I have no idea. I forgot about it or something Roger, geez.

Al: We probably ran out of time. I think- I don’t favor it, necessarily, for the first reason that you said, which like let’s say you do it at age 40. You’ve got to do it till 59 and a half. Even if you have another job so that may not be something that works that well for you. And the second reason I’m not crazy about it is the amount of payment that you receive is usually pretty small. And so if you could do another method like retire at age 55 on a 401(k) and then you can pull money- then it’s kind of unlimited.

Joe: Without question because I think they think they could get a ton of money out of their overall accounts but it’s almost like the RMD, it’s a couple percent.

Al: You got a couple hundred thousand maybe you can pull out $4000, $200 a month. That doesn’t even pay the cable bill hardly. With all my two thousand channels that I never watch.

Joe: So Roger we got nothing against them I guess. Besides that, we probably would never recommend them.


We do have a couple of very quick Derails at the end of this episode so stick around if you like those.

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