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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 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

ABOUT Andi

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

Published On
June 14, 2022

If you own houses in your self-employed, self-directed solo 401(k), is converting a house a year to Roth to avoid required minimum distributions (RMDs) a good strategy? What’s an individual coverage health reimbursement arrangement (ICHRA) and is it a good healthcare option for those with C-corporations? When putting away retirement savings, should you contribute to a Roth IRA, a brokerage account, a 401(k), or your employee stock purchase plan (ESPP)? When it comes to step-up in basis, how do you determine the past fair market value of a home? And finally, what happens if you retire before your construction loan becomes a permanent mortgage?

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Show Notes

  • (00:50) Can We Convert Houses in Our Solo 401(k) to Roth to Avoid RMDs? (Roberta – voice message)
  • (10:40) Is an ICHRA for Healthcare a Good Idea? (Roberta)
  • (14:31) Are Referral Credits Excess Roth IRA Contributions? (Jen, Utah)
  • (16:05) Roth Vs. Brokerage: Where To Invest Extra Cash for Retirement? (Allison, Northern Virginia)
  • (19:46) How Much to Contribute to 401(k) vs ESPP for Retirement? (Michael, VA)
  • (26:36) Step Up in Basis: How to Determine Past Fair Market Value of a Home? (Melissa, San Diego)
  • (30:40) What Happens If We Retire Before Our Construction Loan Becomes a Permanent Mortgage? (Edward, VA)

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Transcription

Today on Your Money, Your Wealth® podcast 382, if you own houses in your self employed solo 401(k), is converting a house a year to Roth to avoid required minimum distributions a good strategy? What’s an individual coverage health reimbursement arrangement or ICHRA, and is it a good healthcare option for those with C-corporations? When putting away retirement savings, should you contribute to a Roth IRA, a brokerage account, a 401(k), or your employee stock purchase plan, aka ESPP? When it comes to step up in basis, how do you determine the past fair market value of a home? And finally, what happens if you retire before your construction loan becomes a permanent mortgage? I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP® and Big Al Clopine, CPA.

Can We Convert Houses in Our Solo 401(k) to Roth to Avoid RMDs? (Roberta – voice message)

Joe: Go to YourMoneyYourWealth.com, click on Ask Joe and Al On The Air and we will answer your questions right here. You can leave a voicemail or you can leave an email, text message or something. What else can you do?

Andi: I’m not sure about text message. It might be possible, yeah. But you can definitely email us. Or you can send us a voice message like Roberta did.

Roberta: “Hey, Joe, Al and Andi. You guys are awesome. You’re full of good spitballing moments that make you go hmmm and plenty of laughs. So I have two questions from a self-employment retirement scenario. A little bit of background, I am continuing to work in our real estate investing business and we specialize in lease options, rent to owns. Funny story was we bought a portfolio of 7 homes and they were all rentals. Well, I didn’t even make it 45 days as a landlord, so we had always run our business model under the lease option, rent to own. Being a landlord was not for me. Anyway, husband is 66. I’m 59. I drive a Nissan 2017 Rogue. I listen to you guys in the YMCA while I’m on the treadmill, as well as while I’m driving to the office. And drink of choice is a hard lemonade. So the first question is about a solo 401(k). So we have 5 houses that we opened up the solo 401(k) and it was pre-tax. And the reason that we opened it was because we wanted to roll over the husband’s lump sum pension. So we did that and we put and bought 5 houses in there. We pay him a little bit of money to be on the board of directors of the company that sponsors the solo 401(k), which is what allowed us to do the rollover. And the spit balling is, should we or could we convert one house a year because there’s 5 houses in there, he’s 66, convert a house a year to a solo 401(k) Roth? And then- that would happen when either people cashed out the house because they executed their option to purchase or maybe we decided to sell it. Everything should be done before RMD time. So before RMD, we would roll it over to a regular Roth IRA. So that was a concept I was thinking and what I didn’t know, and the question is, is there really any cost to doing that? Is there a cost to roll it from the solo 401(k) Roth after converting from a solo 401(k) pre-tax, all into a Roth IRA before RMD time so that we can avoid those RMDs? Then the second question is because we own a C Corp and I have tried to poke holes in this one for a month, but we just set up an ICHRA. I couldn’t find anything wrong with it. It covers my premiums and medical expenses, dental, vision, covers husband’s Medicare plan D supplemental. In exchange for that, I did give up a $500 a month ACA on my marketplace insurance. I only had the ACA for two months this year because then I realized that your income is capped, and that just doesn’t work for me. So it seems like a no brainer. Go with the ICHRA if you have the C Corp and give up the ACA credit. But before I get deep into the weeds with using this ICHRA, am I missing something here? Thanks so much for your time and have a great day.”

Joe: I’m so in the weeds right now. Wow.

Al: Well, there are a lot of weeds when it comes to an ICHRA.

Joe: ICHRA.

Al: ICHRA. By the way, that’s an Individual Coverage Health Retirement Arrangement. You want to do that first? Or do you want to do the house one?

Joe: I don’t know. There’s a lot to unpack here. Okay. So if I understand what Roberta is doing here, she set up a solo 401(k). She has a business that they’re doing, a lease to own real estate business. And so within that real estate business they set up a solo 401(k). And it’s her business. But they put the husband, her husband on the board of directors, paid him some cash, so that allowed him to be an employee of the firm. And because they’re married, he could also set up a solo 401(k) I’m guessing.

Al: Could be.

Joe: And that solo 401(k), hopefully is a self-directed solo 401(k).

Al: It would have to be.

Joe: And then from there, he had a pension plan or 401(k) plan from his employer. And because he set up the solo 401(k) through Roberta’s real estate business, that he rolled that money into the solo 401(k) that is self-directed, and we’ll explain what self-directed means in a second. So now he has a bunch of cash sitting in the solo 401(k). So then they purchased 5 homes within the solo 401(k), it sounds like.

Al: Correct.

Joe: So now they have 5 homes inside a qualified plan, and she wants to convert one of those homes per year. And she’s asking, is there any cost to that? Do I sum that up? I mean, does that seem like what the question was?

Al: I think you got it perfect.

Joe: Yeah. The cost is a lot of tax. I mean, how much is the home?

Al: Right. And what’s your other income? You said you’ve got your income is too high to qualify for the ACA credit. So I’m just going to guess that you’re probably in the 22% federal bracket at least. I mean, that’s a guess. I don’t know. And then whatever state tax, not sure what state you’re in, but you got that. So let’s just say your tax rate is 30% just to throw out a number. And we don’t know how much these homes cost. But what if the home costs $300,000? And so you convert it, 30% tax on $300,000 is $90,000. That’s what you have to pay to our government and your state. These are just make up numbers. But that gives you the idea. There’s not a cost to set up a Roth IRA to do this, but there certainly is a large tax cost. So then the question is, should you do it? And the answer is, it depends upon your tax bracket now and in retirement. And since we don’t know your assets, we can’t really answer that question. But that’s what you have to think about. What tax bracket am I in when I do this conversion versus what tax bracket am I in after, when RMDs start? And chances are you’re not necessarily going to want to convert everything, because if you convert everything, then you have no ordinary income in retirement. And it’s like you paid a higher tax to get it converted than you would have paid had you kept some of it in the retirement plan. So think about that, too.

Joe: Yeah. So it’s like, I want to convert a home a year over the next 5 years. That’s probably the wrong way to look at it. You want to look at how much money should I be converting to whatever bracket? It’s a dollar figure. It’s not an asset.
It’s not like I’m going to convert this mutual fund. It’s I’m going to convert a portion of this mutual fund to the Roth IRA.

Al: So what makes sense given your tax bracket?

Joe: Correct.

Al: Not that okay, we sold that home so I got to convert the proceeds this year.

Joe: Right. If you sell the home, you might want to convert $20,000 of the proceeds, not 100% of it.

Al: Or half of it or whatever, whatever makes sense for you and your tax brackets.

Joe: All right. And then the ICHRA.

Al: Well, before we do that, self-directed.

Joe: Self-directed. Okay. So if you want to buy a hard asset, you can’t buy that through a standard custodian. You have to set up a trust. And it’s a lot more complex than buying mutual funds, stocks, ETFs and the like.

Al: Yes, you can’t go to Schwab and say, okay, can I buy a house? I’ve rolled over my previous employer’s lump sum pension plan. So now I want to buy homes. Is that okay?

Joe: I want to buy a single family residence.

Al: And the answer Schwab says, no, that’s not an asset we will hold. So then you got to go to a whole separate company. You got to roll the plan. Maybe they did that initially, I don’t know. But it has to be a separate plan from what we’re all used to having that actually allows you to invest in real estate.

Joe: Yeah. It’s super complex, and sometimes it makes sense. And most of the time it doesn’t. Because you’re taking real estate, which is an asset- and no offense to Roberta, I’m not trying to rip on her strategy because that’s her business. That’s what she knows. That’s the asset class that you like. So it makes sense for them. But then we see people that, oh, I think I like real estate and I want to buy it inside my retirement account. If you have cash outside of the retirement account, it makes more sense to buy it outside. Because real estate is a fairly tax-favored investment. Because once you sell the property, you’re going to get capital gains rate. There’s depreciation that you have. You can hold debt on the property. You can’t hold debt inside- like a mortgage on your properties inside your retirement account.

Al: And you’re right. Any cash flow you get to net against your depreciation. So you’re not paying tax on the whole thing. And if you sell, you can sell on a 1031 exchange and not pay any tax. And you could hold it to end of life and then get a full step-up in basis for your spouse or your spouse gets it on you depending upon whether you’re in a community property state. That’s a whole other topic. But there’s a step-up in basis, and certainly the next generation gets a full step-up in basis.

Is an ICHRA for Healthcare a Good Idea? (Roberta)

Joe: This thing just came out right. This ICHRA? A couple years ago?

Al: Well, I’m not sure if that’s what they’ve always called it, but there always has been a reimbursement medical reimbursement plan for C Corporations.

Joe: So I think the concept- I’m not an expert on this at all- but is the concept, Al, where let’s say the employee just goes out and get their own insurance so they don’t go on a group plan, and then the employer then reimburses them for the plan, whatever they purchase that fits their needs?

Al: Within whatever limitation the employer sets up. So basically what happens is you pay your own medical, but you submit it to the company for reimbursement and the company reimbursement- reimburses you up to whatever the rules are in that plan. That’s only available in a C Corporation, first of all. And all employees need to be covered. Now because you have a solo 401(k), I’m assuming you have no employees, so that doesn’t really matter. So a C Corp could potentially be a good way to go because you get this medical reimbursement plan, which means your health expenses would be non-deductible. But there’s always issues with C Corp. So first of all is you got to pay yourself a salary. If you don’t pay yourself a salary, the profit is left in the company. If you want to get the profit out, you have to pay a dividend, which means you’re going to pay tax a second time. If you sell the company, most buyers want to buy assets of the company. The corporation will pay the tax on the gain and then you’ll get a dividend and pay the tax again. Most small businesses do not want to be a C Corporation. They usually elect S status or they become an LLC, that avoids that double taxation issue. But that is one benefit of a C Corp is these medical reimbursement plans.

Joe: Hopefully that helps. Thanks for the voicemail. We’ve been kind of in little hiatus mode the past couple of weeks.

Al: Yeah, we have.

Joe: What did we have, like the best, the worst of last week? What was that?

Andi: Yeah, we had the Best Of, it was Don’t Retire Until You Can Answer These 5 Retirement Questions.

Joe: What were the questions?

Andi: I pulled from the TV show actually, it was from season 4 of the TV show. And so I took the 5 questions that were in that and I stuck them in the podcast and found places where you guys had answered questions for people and put those all together so that people can figure out how to figure out on their own whether or not they are ready for retirement.

Al: So true story. I was on my-

Joe: I would like a true story versus a fake one.

Al: Okay, very good. I’ll give you the true one. It was either this morning or yesterday morning, I can’t remember. But I just popped into Facebook just for a second. I check it every 3 days or so, just for a minute or two.

Joe: How many hours are you on?

Al: Not very much, I can tell you truthfully. But I saw this ad. Five questions you gotto ask before retirement. And then I thought, God, I wonder who these people are. And I clicked on it and it was you and me. I thought, what do they know?

Joe: These idiots? That was a little catchy. Yeah, very good.

Al: Anyway, I just thought that was funny. I thought this would be good. It was you and me. Gave us the material we can use.

Joe: Yeah. Oh, boy.

Are Referral Credits Excess Roth IRA Contributions? (Jen, Utah)

Joe: Okay, we got Jen writes in from Utah. “Last year I maxed out my Roth IRA for the first time via the M-1 app.”

Al: Have you heard of that?

Joe: Yeah. M-1 Finance, I think?

Al: I had not heard of it. It’s described as the finance super app.

Joe: I think it’s probably like, what, kind of like Robin Hood, I would imagine. Maybe. I don’t know. “I then noticed I had two referrals that M-1 gave me a small credit into an individual IRA as well. Do I need to worry about over-contributing?” Well, I guess I don’t even know what this means. But she gave a referral and someone signed up for M-1 Finance and they gave her a couple of bucks as a referral credit?

Al: I guess so, maybe they put it right in the IRA.

Joe: And if it’s dollars in the IRA and you’ve already maxed it out, yes, that would be a-

Al: That’s a contribution. And by the way, that’s taxable income and you made a contribution. So, yeah, you got to factor that into your current year contribution, if that’s what this is.

Joe: Yeah, we have no clue. But yes, you can only put a certain dollar figure in. But I don’t know, can another organization put dollars in your IRA on your behalf?

Al: Well, I have put IRA money in my kids’ or whatever. Maybe- I’ve never seen it, but that doesn’t mean it’s impossible. Anyway-

Joe: We have no clue. Call M-1.

Al: Talk to the people that take retirement questions. I’m sure they know what they’re talking about.

Roth Vs. Brokerage: Where To Invest Extra Cash for Retirement? (Allison, Northern Virginia)

Joe: Let’s go to North Virginia. We got “Hi, Joe Al and Andi, this is Allison from North Virginia. I’m a 54 year old federal employee. I love the podcast and listen on my long commute in my 2015 Mazda 3.” (Joe coughs)

Al: That shook you up just to say it.

Joe: It was outrageous, got me all excited.

Al: Wonder what color it is.

Joe: It’s probably red. “My choice of beverage is usually a Diet Coke, but when I partake in adult beverage, it is usually a hard cider. No pets. A little background, I make about $130,000 a year. I will be eligible to retire in 6 years, but will likely stick around for two more years after that. Max out my TSP and the catch-up. My contributions are 50% Roth, 50% traditional. The overall mix in the account is 60% traditional, 40% Roth. I put another $2300 a year into my Roth IRA, have a small amount in a recent opened brokerage account with a balance of about $3000. I estimate that my current savings rate for retirement with no increase that I will have between $1,000,000 in my TSP and IRAs when I retire. My goal is to spend about $5000 to $6000 a month. My pension will be about $3000 a month, and Social Security is another $2500.” So she’s right there just with her fixed income.

Al: All good.

Joe: “The plan is to take Social Security at 67 or 70. So I will be spending a little bit more out of my TSP IRAs for the first few years of retirement. No children or spouse, but I have giving and family legacy planning goals if there are funds left over. So now for the question. I will pay off my home in the next year, freeing up about $800 a month. What do I do with this excess money? First thought was to max out my Roth and then the rest in the brokerage account.” Okay.

Al: Page 3.

Joe: “Or should I throw it all in the brokerage account to beef that up? Another thought is to switch my TSP contributions to all Roth to soak up some of the funds. I do believe taxes will be increasing even above the current expected levels. Currently in the 24% tax bracket and will likely be in the current 22% or low 24% in retirement, especially when RMDs hit. Any suggestions? My main goal is not to increase my lifestyle too much as I move closer to retirement. Thanks, Allison.” All right, what say you Big Al? I got my idea.

Al: Okay. Well, let’s see. First of all, the first question is, if you have a choice to go Roth versus non-qualified, go to Roth first because you can always pull it out.

Joe: Right, its FIFO tax treatment.

Al: Meaning you can always pull out the contribution. Now, if you have other Roths that you’ve had for more than 5 years and you’re over 59 and a half, you can actually also pull out earnings. If not, you got to wait 5 years from that first Roth that you set up, but you’re over 59 and a half. So I would always go Roth first and brokerage account second being that you can always pull it out. Should you switch your TSP to Roth? Probably. Because why not? I mean, you’re going to be in high brackets. The general rule of thumb is this. If you’re going to be in the same brackets or higher in retirement, you’d always go Roth and you’re going to be in the same brackets or close enough to it. And by the time the tax law changes in 2026, you’re actually going to be in a higher bracket.

Joe: Allison, change- well, this is not advice. This is talking. If I was Allison, I would change 100% of my contributions going to the Roth. If there’s something left over, I’d go Roth IRA. If something left over than that, I would put it in a brokerage account.

Al: Yeah, you bet. So great question. And congratulations on your pending retirement.

How Much to Contribute to 401(k) vs ESPP for Retirement? (Michael, VA)

Joe: “Hey, Joe and Al. Love the show. Keep up the great work. I have a question about 401(k) ESPP contributions and what percentage I should put towards each. My company offers a pre-tax 401(k), a Roth 401(k), an after-tax component, and an ESPP. The company offers a 15% discount. Right now I currently contribute to each of them at 5%, but looking for guidance on the best approach. I’m looking to contribute up to at least 25% of my paycheck. Any help would be greatly appreciated. Thanks so much.” Okay, we’re missing just a couple of things. Again. ‘I want to contribute 25% of my paycheck’. What the hell is your paycheck?

Al: How old are you? When are you going to retire? How much do you want to live off? What is your other fixed income? What are your assets?

Joe: So right now he’s saving 15%. He wants to up his game a little bit here.

Al: We’ll just give it a general answer, Michael, because we don’t really have all the facts.

Joe: What’s your tax bracket?

Al: Right. I always like the idea of saving more than saving less. So I support going to 25% savings versus 15%. We’ll start there.

Joe: Yes.

Al: So the second thing is we’ll start with, do you go pre-tax or Roth 401(k) after-tax? You pick either pre-tax or Roth 401(k) first. If you’re under 50, it’s what, $20,000, $20,500?

Joe: $20,500? Then it’s $27,000?

Al: Yeah, $20,500 and $27,000 if you’re over 50.

Joe: Correct.

Al: At any rate-

Joe: But then if you have after-tax, you can put up to $54,000, 55,000.

Al: Yeah, exactly. You can put more in. So the first question is, should you do regular 401(k) and- or Roth 401(k)? I’m going to give you the CPA answer. Joe is going to correct me with his answer. The CPA answer is look at your tax bracket today. If it’s higher than what it’s going to be in retirement, take advantage of the tax deduction. Take the tax deduction now because when you withdraw the money later, it’ll be taxed in a lower bracket.

Joe: I would say if you’re in the 24% tax bracket or lower, go Roth all day long.

Al: Yes. And why is that?

Joe: Because we’re seeing all time low tax rates in the history of the tax code. And if I could pay 24% tax now and get 100% tax-free growth forever, I’m going to do that all day.

Al: And as you’ve said before, you don’t miss the tax.

Joe: Exactly. It’s like, okay, well, I’m going to save a couple of bucks from the tax deduction. You’re not going to save it. You’re going to spend it. So at the end of the day, would you rather have a big pot of money that you’ll never have to pay tax on or would you rather have another pot of money that you’re going to have to pay 100% tax on? Another question I would ask is that would you rather have- Andi, I’m going to ask you a question. Would you rather have $800,000 in a Roth IRA or would you rather have $1,000,000 in a 401(k) pre-tax?

Andi: I’m going Roth all the way.

Joe: Even though it’s a lower dollar figure. What’s wrong with Andi? Because she never has to pay tax on those dollars. So it’s always looking at the after-tax dollar amount. And if we’re in all time low tax environment, I don’t know, maybe taxes go lower. Maybe it’s a flat tax. Maybe it’s- who cares? I don’t know. I’m just taking the uncertainty off the table and I’m not going to miss the money anyway.

Al: I think that’s a fine answer. And I think especially now, the markets dropped a little bit. And the best time to get money into the Roth is when the markets drop because your growth then grows tax-free. So should you save money into the after-tax? Yes. If you can. Because that, at least under current law, can be then converted directly to a Roth with no tax.

Joe: What about the ESPP? Would you put 100% into the 401(k) Roth, and then if there’s money left over, then go in the ESPP, or would you want to have a certain percentage of his 25% of his paycheck go in there?

Al: I would start with maxing out the $20,500 or $27,000 or 26,000, whatever the number is. But then after that, I would take a look at the company. The 15% discount, I like. But is this company going to go anywhere in the next 5 years? 10 years? 15 years? If you think so, then that’s a great deal. If you’re a little concerned, yeah, this company has been kind of flat for a while, and there’s some concern that we’re going to hang on. Don’t do it. It’s not a good investment, so I think you have to figure that. So you might split it. If you’re kind of bullish on the company, you might do some of both. There’s not really a right or wrong answer. I do like the 15% discount, but I want to make sure I’m very bullish on the company before I do that.

Joe: Yep, I agree. I mean, I like the ESPP, but-

Al: – it’s an investment. And if it does well, great. If it goes down 15%, well-

Joe: There’s usually limits on how much that you can save into those anyway.

Al: Sure. And then there’s limitations, you have to hold it a certain period of time. Otherwise it gains ordinary income. It’s a little complicated.

Joe: Sure. Answering your money questions. Go to YourMoneyYourWealth.com. We’re running a little low. What’s going on, Andi?

Andi: It’s that form. Sometimes it works, sometimes it doesn’t. So if worst comes to worst, email info@purefinancial.com, and that way we will be certain that we get it.

Al: Yeah. So if you have a question you’ve been waiting to ask, now’s the time.

Joe: Now’s the time. We cleaned out the mail bag.

Al: Yeah, we did.

Joe: Now we’re going to have to go back to ask Big Al, or the list.

Andi: Tax chat.

Al: Top 10 retirement places in the country.

Joe: A little tax chat, Big Al.

Al: It’s always like, I don’t know, Fargo, North Carolina-

Andi: Wyoming.

Al: Really? That’s the first choice. What about San Diego?

Joe: Yeah, we got a pretty bad review because of your show on the top 10 places.

Al: Oh, yeah. Someone took offense to that, didn’t they? Did you consider oh, yeah – the person said, all you do is get an article _____ and read it. And I’m thinking, they’re on to me.

Joe: That’s about right. When you guys don’t write in, Big Al just scopes the internet.

Al: 10 minutes before- here’s the best thing I found Joe. I’m reading it. And then we comment. Pretty poor comments, but we do our best.

Joe: Commentary is awful.

Nearly half of people have less than $100,000 saved for retirement, according to a 2020 Harris Poll. If you’ve been more focused on, say, buying a home or paying for your kids’ education, you may be short on retirement dollars, you may not even know it, and you might have no idea how to catch up. We’ve got 5 Tips to help you Fast Track Your Retirement, regardless of your current account balance. Click the link in the description of today’s episode in your podcast app to download the guide. Spread the knowledge: share the YMYW podcast and the free financial resources with your friends, family and colleagues. It makes them financially smarter, it helps us grow the show, and it proves to everybody that you rock.

Answering your money questions. Go to YourMoneyYourWealth.com. We’re running a little low. What’s going on, Andi?

Andi: It’s that form. Sometimes it works, sometimes it doesn’t. So if worst comes to worst, email info@purefinancial.com, and that way we will be certain that we get it.

Al: Yeah. So if you have a question you’ve been waiting to ask, now’s the time.

Joe: Now’s the time. We cleaned out the mail bag.

Al: Yeah, we did.

Joe: Now we’re going to have to go back to ask Big Al, or the list.

Andi: Tax chat.

Al: Top 10 retirement places in the country.

Joe: A little tax chat with Big Al.

Al: It’s always like, I don’t know, Fargo, North Carolina-

Andi: Wyoming.

Al: Really? That’s the first choice. What about San Diego?

Joe: Yeah, we got a pretty bad review because of your show on the top 10 places.

Al: Oh, yeah. Someone took offense to that, didn’t they? Did you consider oh, yeah – the person said, all you do is get an article from Forbes and read it. And I’m thinking, “they’re on to me.”

Joe: That’s about right. When you guys don’t write in, Big Al just scopes the internet.

Al: 10 minutes before- “here’s the best thing I found, Joe. I’m reading it.” And then we comment. Pretty poor comments, but we do our best.

Joe: Commentary is awful.

Step Up in Basis: How to Determine Past Fair Market Value of a Home? (Melissa, San Diego)

Joe: Melissa writes in, San Diego. She’s like, let’s see, “Your YouTube video was clear on step-up basis.”

Al: Good.

Joe: Thank you.

Al: Is that the first time someone told us we’ve been clear?

Andi: I’m not sure which video she’s talking about.

Joe: We just ramble and ramble –

Al: – talk in circles. It takes an hour to get a 1 minute answer.

Joe: Oh, boy. “However-“ there it is, the ‘but’- “-my mother-in-law is not selling her house- is now selling her house for $1,000,000 here in San Diego and moving out of state. Her husband died in 2018. How do you determine the fair market value of a home in the past, 2018, if the fair market of the home- fair market value was worth $715,000 in 2018, the appreciation would be $250,000. Would she be titled to the $500,000 exemption even though she has been a widow for more than two years? Their living trust lists them as joint tenancy, but they bought the house together and lived there since 1971, paid $20,000 for it. Wouldn’t that be considered community property? Thank you.”

Al: Great question. There’s actually a lot here to talk about.

Joe: What Melissa is asking is that mom wants to sell the house. So there’s a couple of different tax rules that go on and it depends on the titling of the property. So she was married and so we’re in a community property state. And so if husband dies or wife dies, do they get a full step-up or half step-up? And it’s going to be dependent on how it was titled-

Al: how it’s titled. So to make sure you get the full step-up, it should be titled as community property with the rights of survivorship. If you have a living trust, the living trust is set up in that manner. So it’s already done. If you don’t have a living trust, take it out of joint tenancy and do community property with rights of survivorship. Now, I will say a lot of people have their property in joint tenancy and so far people claim it’s a full step-up. I’ve actually never seen the IRS or Franchise Tax Board challenge that, but it doesn’t mean they couldn’t. So you’re better off having it as community property. But I will say what most people do, they treat it as community property. And there are a couple of court cases that seem to indicate you may be able to do that. It’s just not a sure thing. Right. So assuming that you want to do it, which you probably should do. Community property means that in 2018, whatever it’s worth at that point, is your new tax basis. So it’s not $20,000, it’s $750,000. So that’s your new basis. So it’s kind of like you bought a home for $750,000. That’s how the IRS looks at it.

Joe: Yeah. So Melissa’s mom, they bought the house for $20,000 in 1971. It’s worth $1,000,000 today. But dad died in two years ago. So it’s like- or 4 years ago- 2018. So 2018, when he passed, the fair market value was $750,000. That should be your new tax basis. And then whatever growth from $750,000 till when mom wants to sell the property is what’s going to be the capital gain.

Al: That’s right.

Joe: However, if she’s lived in the house two out of the last 5 years, she gets the 121 exemption, which is $250,000.

Al: She does not get the $500,000.

Joe: That is a married-

Al: That’s for married because her husband passed away- would have to be basically sold in the same year-

Joe: Correct. Yes.

Al: – as his date of death to get to get the $500,000. Sounds like you don’t need the $500,000. If these numbers are right that you gave us.

Joe: Right. If it’s worth $750,000, it’s $1,000,000, that’s $250,000. She sells the house. There’s zero tax.

Al: Also, one more thing, in 2018, if you did some improvements to the home since 2018, like $50,000 for a bathroom remodel or whatever, you can add that to the $750,000. Now it’s $800,000 is your tax basis. And you could sell it in this case $1,050,000 and still pay no tax because you get $250,000 exclusion.

Joe: So I think you’re in good shape.

Al: Yeah, probably so.

What Happens If We Retire Before Our Construction Loan Becomes a Permanent Mortgage? (Edward, VA)

Joe: “Hey, Joe Al, Andi, third question for me, but since it has absolutely nothing to do with Roth IRAs, I’m hoping you’ll answer it. I appreciate the answers in the past and love the show. I listen to you on my way to work. And also when I’m getting ready for work while taking care of my two year old son. Yep, I’m a 54 year old guy with a two year old son that’s looking forward to our 3 separate Social Security checks.” Perfect.

Al: That’s not all bad.

Joe: It’s not all bad. And the 54 is like new 24.

Al: It is, right? Yeah. What’s 65? It’s still 65.

Joe: “My son hears you talk on the speaker and just repeats the word ‘money’ over and over again. It might have been his third or fourth word he learned to say. Anyway, my question concerns get into construction loan to build a retirement home.” All right, so we got little Junior yelling money out there.

Al: Because of us, apparently.

Joe: Very cool. He’s going to learn ABCs and money is definitely part of that, I guess. “I know there’s a loan type that begins as a construction loan that converts to a regular mortgage when the home is finished. They called it a construction to permanent loan? And this loan or type of loan only requires you to close on the loan once at the beginning of the construction process. My question is this. If my wife and I are working our full-time jobs at the time of getting the construction loan, thus qualifying for the loan easily due to our incomes, what happens if we both retire prior to the home being finished and before the loan is converted to a regular permanent mortgage? Do we have to provide our new lower income at that point, which would be significantly lower? We plan on selling our current home prior to opening the construction loan and putting down about 1/3 of the total cost of the bill. Then we plan on retiring a few months before the construction is completed. Thanks, as always.” I don’t know. I’ve never done a construction loan. I’ve never talked to anyone that’s done a construction loan. But here’s 5 questions you need to know when you do a construction loan.

Al: Let’s prepare our next show.

Joe: Join us next week-

Andi: Major glick.

Joe: We do a little research and prep for the show-

Al: So I will put in my two cent and I will qualify this, I don’t really know either. First of all, the first comment, the construction to permanent loan, that’s true. If you’re building a property, personal or business, commercial, you can opt to get a construction loan that converts to a permanent loan. So that’s kind of cool. Whether it’s qualifying just once or whether they have to do it again, I’m going to guess. I’m going to guess that once you qualify off the bat, you’re okay. But that’s my guess.

Joe: I mean, I think you go through that process with your mortgage lender-

Al: – so they see that you would qualify.

Joe: Right. And say, this is my plan. Is this going to fly or not? I want to build a home. This is what we have. We’re going to put 1/3 down. Here’s our incomes, here’s our cash, here’s our assets, liabilities, all the other stuff. When they look at- their due diligence on your financial records and say, hey, I want to retire a couple of months prior to the completion of this thing, is that going to be an issue?

Al: Yeah. And so I would- can you imagine a company doing a construction to permanent loan? So they give you the construction loan because you qualify and then you get to the permanent loan? Nope, you don’t qualify.

Joe: Right, the house is built.

Al: You don’t qualify.

Joe: We’re gonna sell it.

Al: Please pay off your loan now. I don’t think that’s how it works, but that’s not our area of expertise.

Joe: Not even close. But yeah. Why don’t you ask a Roth question? We’ll probably kill that one.

Al: They don’t ask that because you say not to.

Joe: Well when you answer 17,000 of them a week- we like a little variety.

Al: Yes, sure.

Joe: All right. That’s it for us. Thanks a lot for joining us again, shows called Your Money, Your Wealth®. Wonderful to be back in the seat with you, Andi. I missed you.

Andi: Thank you. It’s wonderful to have you all- to have all 3 of us in the same place at the same time.

Al: It sure is.

Joe: Well, yes. You were in Hawaii. I went to Arkansas.

Al: Yes. Then I came back and got the Covid.

Joe: You guys got the Covid.

Al: And I’m okay, by the way.

Joe: Yeah. You look great.

Al: All good.

Joe: You look so good.

Al: Minor case.

Joe: All right. We’ll see you guys next week. The show is called Your Money, Your Wealth®.

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