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Anchor Funding CEO Kevin Lyons joins Steve to discuss the interest rate hikes and explore both investment and tax opportunities during this technical recession.
Episode Transcript
Intro:
Welcome to the Practical Tax podcast, with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz, LLP, a tax law firm.
Disclaimer:
The information contained in this podcast is based upon information available as of date of recording and will not be updated for changes in law regulation. Any information is not to be considered tax advice or legal advice and does not form an attorney/client relationship. Further, this podcast may be construed as attorney advertising. You should see professional consultation for your individual tax and legal situation.
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Chip Franklin:
Welcome to another edition of Practical Tax with tax attorney Steve Moskowitz. Steve, there’s been a lot in the news recently about interest rates and refis and how that’s affecting the country, the industry, and everything that goes along that. I remember in the past, people say, well, interest rates are high people tend to, instead of sell, they do repairs and additions and upkeep and stuff. But I don’t know where we are right now with that number. If it’s a number that we’re going to see smooth out soon, will Powell do that? Or will we continue down this road? Joining us right now is Kevin Lyons. Kevin is the CEO of Anchor Funding and old friend of mine. I’ve known Kevin for a long time, and he’s nice enough to join us here with Steve Moskowitz on Practical Tax. Kevin, hello.
Steve Moskowitz:
He doesn’t look very old, Chip.
Chip Franklin:
Your right.
Kevin Lyons:
Thanks Steve.
Chip Franklin:
Hi you Kevin. How are you?
Kevin Lyons:
Good guys. How are you?
Steve Moskowitz:
Great.
Chip Franklin:
Good. Let’s just jump right into this. We’ve known each other a long time and we’ve spoken over the last 15 years and we’ve seen interest rates go up and down. Let’s talk about where we are right now. And how do you feel people responding to the higher interest rates? Again, those of us who live in the ’70s like Steve and I, they don’t seem that high. But how are people responding to you right now when you’re talking about everything from new mortgages to refis?
Kevin Lyons:
Well, we’ve had a really good run the last few years. So everyone’s taken advantage of incredibly low interest rates. But if you look at interest rates over the course of time and you guys obviously remember, and so do I, and any viewers watching. Rates in the ’80s and ’90s and early 2000s were a lot higher. So when you go from rates in the-
Steve Moskowitz:
I remember in the 20% bracket.
Kevin Lyons:
Yeah, exactly. When you got 15% and 10%, that was a good rate. So the sticker shock that’s come into play is rates in the twos and threes suddenly becoming fives and almost as high as 6%. So anytime you get that, you’re going to get a change of scenery and the scenery’s changed. However, it looks pretty good for the long term.
Chip Franklin:
Yeah. We’re both all in California, all three of us. And here’s something that always occurred to me. So people might put off buying because the rate went up a little bit, but the housing market doesn’t seem to be slowing down at all and it’s continuing to move. Does it make sense to still buy at a little bit higher rate to offset the increase in the value in cost of homes as they go forward?
Kevin Lyons:
That’s a very interesting question, and we have that conversation pretty much daily. My personal opinion is yes. And the reason I say that is, and this is obviously my two cents, the Fed has done a really good job of raising rates really quickly, in fact, there’s a three quarter point high coming up shortly and another half a percent in November, they’ve taken such extreme measures in such a short period of time that ultimately they’re going to have to take the opposite path. When they take the opposite path and start dropping interest rates, home demand is high. I mean, there is still a huge amount of demand. COVID has changed the landscape. So people are working from home. So this idea of working in the same city is gone. You can work anywhere in the nation now. So home demand is shot up. So we’re seeing crazy high coming down to busy. And what we’re expecting in the next year or two is as soon as the Fed does decide to drop interest rate, these home prices are going to continue over the course of time to go up. Your home is your best investment. So you wait now, granted, you may get a lower interest rate in a year or two, but the chances of getting a better home value in my opinion are diminished.
Chip Franklin:
I bought a home in ’79 at a huge double digit rate, and we sold it 25 years later with a 300% increase in value. It was outside of DC, but nonetheless. I mean, it’s all relative to where you live and the money you earn and the taxes you pay, depending on what part of the country you’re in. To me, I was an intriguing question is what’s going up quicker, the interest rate which we know abates and drops eventually, but other than the bubble we had in ’08 which was really not about the housing market, as much as it was about just bad banks and bad practices. It seems to me that that’s a really good way to go.
But I mentioned this at the top, Kevin, but Steve, let me ask you this before that though. So if I took money out of my home for repairs, the equity that I have in my home, and I’ll ask the second part of this is how do you recognize equity, real equity, Kevin? But the first question is that interest that I borrow on that is that still tax deductible? Because I remember a point it was 100% deductible.
Steve Moskowitz:
So, that’s changed. It used to be 100% deductible no matter what you did with the money. Then they put a cap on it at a mill. Then the cap came down to three quarters of a mill. And what a lot of people don’t realize is if you refi, you only get to deduct the interest on the money that you used to repair the house or get a bigger house or an addition. And they even took away the extra 100 grand for a credit line. So the bottom line is, yeah, they take a look at it. So when people refi say, okay, it’s real important, again, keeping records because I was a CPA before I was an tax attorney. Because what happened is some people, most people don’t separate it, they just take it and the government says, well you paid off some credit cards and you made some improvements, government takes the position that since you can’t say which is which that used the money from the house for the credit cards no deduction for you.
So what you want to do is you say, okay, you’re very specifically put it in separate accounts and say, all right, this money that I took out the house I use it for improvements, that’s tax deductible. And there’s another trick too. It’s the Voss case. The IRS always said that the limit was per house. Mr. Voss bought a house with his girlfriend and Mr. Voss said, well, okay, I get a 750 and my girlfriend gets a 750 and the IRS said, oh no, no, Mr. Voss, it’s 750 a house. The tax court said, no, no, Mr. Voss is correct. It’s 750 per taxpayer. So one of the tricks here, suppose boyfriend and girlfriend buy a house [inaudible 00:06:54] common. If they got married, they could only deduct 750. If they live together without marriage, they could deduct a mill and a half.
So again, the minute you ask me something, having spent my life in this, it’s, oh, well wait a minute. The way to do that is this. It’s kind of like why the Fortune 500 doesn’t pay any taxes because they have an army of people like me saying, oh wait, wait, wait, wait, don’t do it that way, do it this way. And the last thing you want to hear from your lawyer is, oh, too bad, you did it that way [inaudible 00:07:26]-
Chip Franklin:
That’s tax attorney, Steve Moskowitz. Kevin Lyons is with us here. Kevin, how do you know what’s real equity and what is just a bit of a spike in the market?
Kevin Lyons:
I think equity’s equity. So when you get your house valued through an appraisal and that’s what an appraisal believes your house is worth and you look at what you owe versus what it’s worth. That’s your current equity position at the time. So in regards to a spike in the market, yeah, I mean we had borrowers coming to us over the last year who wanted to borrow up to 80%, in some instances 85% of their property values. They can go up to 90 with VA. And our advice to them has always been, just understand that once you take this cash out refi, you got to live with this mortgage. So if there’s ever a downtick in rates and you want to refi down the road, you may not have as much equity as you need.
So I think we always tend to heed to the side of conservatism. We like to see people getting up to 70% loan to value, maybe 75, always giving themself a 5% buffer in case of emergency or when they want to refi. So we definitely have a lot of equity right now. Are we going to see a big diminish in it? No. As I mentioned earlier, I don’t think property values are taking a dive. And you mentioned as well, there’s nothing to put them in that direction. There’s no bad mortgages out there that are pulling the market down. So real equity is, in my opinion, what your house appraises for and perceived equity is just be careful and don’t overdo it.
Steve Moskowitz:
Also, the thing I would throw in, it depends an awful lot on what do you plan to do with the money?
Kevin Lyons:
Correct.
Steve Moskowitz:
You say you’re going to take money out of the house and go on a wonderful vacation, maybe that’s not such a great idea. On the other hand, if you say, look, I have a really solid business idea but it needs some cash. In that case, you might want to say max out the equity every penny you can because you believe that for every dollar you take out of the house you’ll get multiple dollars back from your business investment. So when clients come to me and ask me that question, I say, what are you going to do with the money? And then you make a decision. I realize there’s risk in business, and what you talked about having the buffer, that’s really good. But again, business is about risk. How much risk tolerance do you have? Are you willing to take the risk to make the bigger money? And that that’s an individual decision. And with most business owners, they essentially do put their house into business because at some point they have to borrow money and they guarantee it with the house./p>
Chip Franklin:
After the ’08 great recession, Kevin, the government obviously put its foot down on banks for a long time and we seen a change, not subprime kind of changed, but with business loans and non QM loans, non-qualified mortgage, people that had their own business that wanted to get a loan. Is it easier now than it was like five or six years ago for a business, a small business to get a loan?
Kevin Lyons:
Resting on Steve’s point and he mentioned pulling equity out on your homework, on a cash out refi if you’ve got a business. And in that particular instance, yeah, we are seeing folks who self-employed pushing the equity in their homes as far as they can because it makes good business sense to pull money out of their homes-
Steve Moskowitz:
And if you use the money for a business, the interest adoption is virtually unlimited.
Kevin Lyons:
Yeah. So I totally agree with you on that respect. It makes perfect sense. Chip what we’re seeing right now as well is a lot of folks are coming to us to do what are call business bank statement loans, where they make great income but they take advantage of their write offs and their bottom line on their tax return. Like the painter, who’s making 2 million bucks a year who shows 100 grand on his tax returns because he can, and he’s taking advantage of all his write offs. But he’s got 160, $170,000 a month going into his business. So the industry’s cottaged into this full fledged play where we can take 50% of those deposits and we count them as income. So, all of a sudden someone who couldn’t qualify can because the bank’s going to turn him down and Fannie and Fred won’t qualify him, but his business deposits allow for it. We’re seeing that for business owners to put into their business. Funny enough, we’re also seeing people using it for ADUs, accessory dwelling units, when they just want to add value to their home. Yeah. Great angle.
Chip Franklin:
And your tax implications [inaudible 00:12:00]-
Steve Moskowitz:
Chip, another thing I would throw in there is exactly what we’re seeing here is that suppose that statement shows yeah, you have 100 grand in profit and you say, well, wait a minute, I have 2 million in depreciation. I didn’t write a check to depreciation. I have that money sitting in the bank or I have it in another investment. But in reality I made a cash profit of 2 million, 100. But through the use of depreciation, I don’t write a check to depreciation it’s just a paper entry that my tax return preparer has. My tax return legally shows 100 grand, but really I made 2,100,000 and we want to talk to him about what does it really mean.
Chip Franklin:
Pretty great stuff. Kevin, will you come back and talk to us again please?
Kevin Lyons:
Absolutely. I thoroughly enjoyed this. It’s right up my alley. I appreciate being a guest and thank you both.
Steve Moskowitz:
Thanks.
Chip Franklin:
Thank you again. Anchor Funding CEO Kevin Lyons. Thank you buddy. We’ll see you soon.
All right. So at time now for ask a tax attorney, this is a question I think that a lot of people struggle with and that is they get something in exchange for a service that’s not cash and they don’t put it on their taxes because it’s not babysitting. I know. I know. Let me ask the question.
Steve Moskowitz:
Naughty, naughty, naughty.
Chip Franklin:
The question is, for example I work on their homes, I’m a carpenter and I just do some work and they give me a gift certificate for like $150. I mean, that’s different than giving me a car or something like that. Where is the line and how does the IRS view this?
Steve Moskowitz:
So the bottom line is, and IRS looks for barter and there’s actually barter exchanges, if you go ahead and you exchange services or anything else, you report as income the fair market value of what you gained. So suppose for example, you come into somebody’s house and you’re a house painter and you paint the house and the house owner says, okay, in exchange, I’m going to give you a painting worth $10,000. You’re supposed to put $10,000 on your tax return. What happens is there’s a big difference between a gift and an exchange. In the house painter example, there was no gift here. Though, the homeowner said I want my house painted and the house painter said, well, okay, I have my eye on that, painting over your fireplace. And that’s worth about what the paint work is worth. And you say, okay, well that’s an exchange, that’s the same as if he wrote him a check.
Chip Franklin:
Right.
Steve Moskowitz:
What a gift is somebody says, it’s disinterested generosity, you’re not looking for anything back. So it’s happy birthday Chip and here’s some gift. That’s different. That’s different because you didn’t do anything for it.
Chip Franklin:
But how does the IRS even track that stuff and does it ever come up?
Steve Moskowitz:
It doesn’t matter. [inaudible 00:15:07] what the law is because basically the law says that’s what you’re supposed to do. How the IRS tracks it or finds it, doesn’t matter. As a tax attorney, my advice is always comply with the laws. The law says you’re supposed to do it, it doesn’t matter how they track it or not.
Chip Franklin:
I guess, the examples that we gave it’s when the exchange is, I mean obviously if it was 100 dollars, somebody gave me a gift card that’s different than-
Steve Moskowitz:
Well, Chip, no.
Chip Franklin:
No. Okay. All right.
Steve Moskowitz:
If there’s an exchange and the guy gives you $1, that’s income. An exchange is, you did something in exchange for something. Chip, I want you to do X for me and you say, okay, and you say, can I have that tie? If I run that errand for you can I have that tie? I say, okay, take the tie. I give it to you. The fair market value of the tie is income you put on your tax return. On the other hand, if I say to you Chip, happy birthday, I got you a new tie. That’s not income, it’s a gift because you still receive the tie, but you didn’t give it anything back for it. It was disinterested generosity. That’s the difference, the exchange is taxable, the disinterested generosity is a gift.
Chip Franklin:
This is kind of a tangent. But was the creation of the IRS in essence or taxes and what was it? The 16th amendment. I forget whatever amendment-
Steve Moskowitz:
So this was in 1913 and I was not in practice at the time. Just want to clear that up. The income tax came in as, quote, a tax on the wealthy. The top tax rate was 6%. And in order to be in the 6% bracket you had to be making, remember in 1913 dollars, over half a million dollars in 1913. Basically it’s like, okay, who in Congress was mad at that was wealthy? That is how our income tax law started. As you can see, it’s changed quite a bit.
The final bill increases that maximum standard amount next year to $12,000 for an individual, 24,000 for couples. Charities are already expressing worry that fewer people will itemize and without the tax break that that will reduce incentives for giving.
Chip Franklin:
As a double header for our ask a tax attorney with the tax attorney, Steve Moskowitz. I want to talk a bit about charity and how the IRS views that and how they have over the years and how states view it. My wife and I, every other Saturday it seems like we’re going to Goodwill and we take it down there and they write out of receipt. I never even put it on my taxes to be honest with you and I know I probably could. And you would admonish me too because it’s legitimate and honest and fair. But they value it crazy.
Steve Moskowitz:
So let’s start off with the receipt. The typical receipt that people get, if they get any at all is three bags of clothes, that receipt is not worth very much. What you need to do is have an itemized listing. So for example, one man’s suit, one woman’s dress, one TV set, one toaster oven. And then what you do is you put the original cost, its condition, the fair market value, and then you have the charity acknowledge that that is what they receive. That is much better. When you’re dealing with charities, there’s a lot of fancy things you can do.
For example, the stuff you’re talking about, giving some stuff to Goodwill, it’s a relatively small deduction. Although they add up because people clean out their closets and there’s a lot of people that buy expensive clothing, they don’t wear it very much or they change the size and they give it away. It can add up to a nice deduction, but we take a look at some really fancy deductions. Suppose we have this situation. Suppose we have husband and wife, don’t have any children. And they say, we love our house and we want to live in our house for the rest of our lives. But when the second of us passes, we want the house to go to the charity of our choice. That’s nice, but that’s no tax benefit. How do you get a tax benefit?
So you do a charitable remainder trust. And what happens is everything physically is the same. The husband and wife live in that house for the rest of their lives. If they live another 300 years, so be it. But the day you make that gift today, an actuary comes in and based on the husbands and wife’s ages makes an actual determination of what they kept, called the life estate, and what they gave away, called the remainder interest. So let’s make up a number. Let’s pretend that the equity in this house is a million dollars. And the actuary says what you kept is worth 300, what you gave away is worth 700. Chip, you have a $700,000 tax deduction and you say, well, wait a minute, physically everything’s the same. In both examples, husband and wife live in the house until the second one dies. The first way there’s no tax benefit. The second way, oh my God, you got a $700,000 tax deduction. It’s because she’s set up the CRT, charitable remainder trust.
See that’s what tax plannings all about. That’s why when somebody says here’s what I want to do, I want to give my house to charity, okay, but there’s a big tax incentive to do this. If you say, well, you know what? Steve, I don’t have $700,000 of income. I can’t use the deduction that big, carry it forward for five years. And the bottom line is, that’s why when I do tax planning, I say to people, what do you want to do? And they tell me, I say, well, you know what, doing it your way there’s no benefit, but doing it this way there’s a benefit.
One of the things that I bring up is that you can have a situation where you have twins that have identical income assets, but their planning is very different. Because somebody else says, well, I don’t want to do that. I want to do something else. And these are all things that you can do. Charity is very favored at tax law. There’s a lot you can do and everybody benefits here, the charity benefits because they get in the house eventually. You benefit because you get this giant tax deduction, you just pay less taxes.
Chip Franklin:
Well, what about this? If I want to get a tax deduction, do I have to donate to a registered charity?
Steve Moskowitz:
503(c)(1) organization. So yes. So it’s not like my neighbor is really needy-
Chip Franklin:
I can’t get money to a homeless guy on the street and ask for a receipt?
Steve Moskowitz:
No. You need a 501(c)(3) organization. Well what that is in English is, in the old days, when things were in papers used to be publication 78, there was this giant book that had all the charities listed in it. So basically yes, it has to be recognized charity. So if you just help out your neighbor or some guy on the street, that’s a nice thing to do, but no tax deduction for you.
Chip Franklin:
Second question. If I work for a charity and I get no remuneration, right? Can I deduct my transportation or clothing or something? It’s a job I’m going there, but I’m not getting paid, it’s charitable. Am I entitled to any deductions?
Steve Moskowitz:
Minor deductions like your transportation costs. Where a lot of people make a mistake, you’re not entitled to the fair market value of your services, but you are entitled to your transportation costs. If you have any out of pocket expenses. Suppose for example, you say, you know what? The people here in this neighborhood, they desperately need crayons for the kids for school, I’ll just buy some and give them to them. The cost of the crayons you can deduct.
Chip Franklin:
Or if we’re sweeping the streets like a broom, whatever, but not my actual labor is not part of that deduction. Interesting. I mean, I guess it’s interesting. I know that I remember the famous story, we might have talked about this in the past about Carnegie, who was not especially charitable person until after the Johnstown Flood. And it kind of changed his life because he actually owned the water that was above the town where the dam broke. It changed the way people kind of looked at charity in this country. And after the great depression, obviously I had a grandfather who lived in DC and was fortunate to have a job with the post office and people would knock on their door. I mean, I wasn’t alive obviously, but he would bring in people to eat at their table and give them what they had. It’s a big part of our country. And do you think the IRS does enough to recognize it and to reward it with [inaudible 00:24:02]-
Steve Moskowitz:
The IRS doesn’t recognize or reward anything. Congress makes the law. IRS is the cop. IRS enforces the law. They don’t make any laws.
Chip Franklin:
But do you think we do? I mean does giving money to a charity and that process, does that help the overall economy in ways? Obviously the charities are getting private money, they don’t need government money, right?
Steve Moskowitz:
Depends who you ask. If you ask a charity they’ll always tell you they never have enough funding.
Chip Franklin:
Right. Makes sense.
Steve Moskowitz:
Ask them if you need money, they never have enough. And then there’s all kinds of arguments about charity. For example, if you take care of somebody and feed them and maybe give them a trade or something, train him for a job. Now he becomes a productive citizen. As opposed to, he goes through life and he can’t support himself, needs some government agency to support him. There’s a lot of good things for charities. Other people say, people take advantage of him. Like everything else, depends who he ask.
Chip Franklin:
Yeah. Well that’s another addition of Practical Tax with tax attorney Steve Moskowitz. And you have a great weekend, my friend. And we’ll see you next time. Okay?
Steve Moskowitz:
Take care. Thanks so much.
Outro:
Thanks for joining us on the Practical Tax podcast with tax attorney Steve Moskowitz. To hear more and view more podcasts, go to moskowitzllp.com/practicaltax.