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Are there tax consequences with lending hard money? Should I flip or hold?
Carolina Capital is a hard money lender serving the needs of the “Real Estate Investor” and the “Small Builder” borrower who is striving to build wealth and generate income for themselves and their families. We offer “hard money rehab loans” and “Ground-up Construction Loans” for investors only in NC, SC, GA, VA, and TN (some areas of FL, as well).
As part of our business practices, we also serve as consultants for investors guiding them to network with other investors and educating them in locating and structuring transactions. Rarely, if ever, will you find a hard money lender willing to invest in your success like Carolina Capital Management.
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Bill Fairman (00:02):
Okay, welcome to the show. Now, should you flip or should you hold? We're going to give you your different options based on the different formulas and current market conditions right after this. Hi, everyone! Welcome to the Passive Income, Active Wealth show. I'm Bill Fairman and this is Jonathan Davis. Wendy will be joining us eventually, we're holding her spot. We are Carolina Capital Management. Our website is CarolinaHardMoney.com. If you're an investor looking for passive returns, click on the investor tab. If you're a borrower, because we do lend money. That's what we do. Click on the apply now tab, correct?
Jonathan Davis (01:01):
If you want to apply now.
Bill Fairman (01:03):
By the way, don't forget to subscribe, share, follow us like us. Click the little,
Jonathan Davis (01:13):
Subscribe again!
Bill Fairman (01:14):
Yes. And I think there's a little bell ring as well, right?
Jonathan Davis (01:18):
I think there is a bell, yeah. I'm not sure what that goes to but,
Bill Fairman (01:19):
So this is our Ask an Ugly Question segment but they don't always have to be ugly questions. If you have a question for us, you guys can participate as well. Sogo to the, and it depends on what platform you're on. There's a chat either to the right of your screen or under, underneath, and put in your question. We'll be happy to answer that. So the tease.
Jonathan Davis (01:51):
Everyone likes the tease.
Bill Fairman (01:52):
Should you flip or, you know, and I'm not getting into that. Hang on. We have to talk about what's going on in the kind of the current events thing. So Scott!
Jonathan Davis (02:01):
That's great.
Bill Fairman (02:22):
We are so professional and it's not current events, it's called breaking news!
Jonathan Davis (02:30):
Breaking news. Yeah.
Bill Fairman (02:30):
All right. So employment numbers came in this morning, they were higher than expected. The new people that are claiming new unemployment, it's like 8 million, 300,000, or maybe it was seven, I don't know, it's getting up there.
Jonathan Davis (02:50):
It has nothing to do with all the, you know, the self quarantine shutting down.
Bill Fairman (02:55):
We, yeah no. We have over million people still on some sort of federal unemployment assistance right now.
Jonathan Davis (03:06):
Wow.
Bill Fairman (03:07):
And I'm sorry, I don't mean to get on my high horse here. I'm just trying to figure out what the governor of California and the governor of New York and the governor of Pennsylvania are trying to accomplish. There is very little science involved in their decisions to shut this down and I don't want to seem like I'm trying to get into their heads and try and figure out why they're doing this. I mean, there's only three explanations. They have to look like they're doing something, they're power hungry and there's another option.
Jonathan Davis (03:43):
Could be.
Bill Fairman (03:45):
And maybe they're trying to get, you know, the federal government to bail them out and the best way to do that is to go broke right in front of everybody's eyes and then call it, you know, COVID issues and that's why they're going broke.
Jonathan Davis (03:58):
I hope they're not banking on re-elections.
Bill Fairman (03:59):
Yeah, I don't know. It's just beyond me why they're doing what they're doing. The main thing is, and I'll give you an example in New York city, for example. In March, when they shut everything down, the shutdown was to keep the hospitals from being overwhelmed. That's why they did it.
Jonathan Davis (04:26):
Well, that was the reason that was given.
Bill Fairman (04:27):
Right. And there were 12,000 people hospitalized with COVID when they did that. Right now, New York city has 2000 people hospitalized with COVID and they're shutting down.
Jonathan Davis (04:40):
So what's the shutdown for?
Bill Fairman (04:42):
Again, that's it's beyond me.
Jonathan Davis (04:44):
Yeah, we just ask questions. I rarely know the answers.
Bill Fairman (04:49):
However, and I don't want to be a conspiracy conspiracy theorist, but your big high-tech firms that benefit from lockdowns, they're thriving right now. It's the small business person that may be competition for the tech firms and to have people show up. I don't, anyway, I don't want to put that out as I already did though. Hello. So Wendy is sneaking in.
Wendy Sweet (05:27):
Sorry, bigger name on the other line. Buy, buy! Sell, sell!
Bill Fairman (05:32):
Yeah. So we're going to run through this. As you guys know, we're shortening our shows to 30 minutes each now because you people have a very short attention span.
Wendy Sweet (05:43):
And we don't have that much to say.
Bill Fairman (05:46):
I'm sure it has nothing to do with our short attention spans either.
Wendy Sweet (05:54):
We just got a lot of other things that we're doing. I don't want people think we're leaving them. We are doing a lot more videos and information that we're trying to record and put up on our website so we need that time to be able to get our website up to really being able to put out as much information as possible on that site so that you can get to it anytime you want. That's really why we're doing that
Bill Fairman (06:19):
By the way, Don and Quintin say, Hey. Hey!
Wendy Sweet (06:23):
Hey!
Bill Fairman (06:23):
So back to the numbers. We had really good news in the housing market. They had 1,000,300 thousand housing starts from the month of November.
Jonathan Davis (06:36):
I'll believe it.
Bill Fairman (06:36):
Part of, you know, our biggest issue in why prices keep going up is that there's a lack of inventory so they're working hard to do that. Also, permits have gone up about the same for the month as well. So they are, or at least trying to address supply. Their biggest issue is going to be, can they build them in the affordable housing markets at enough of a margin to make a profit?
Wendy Sweet (07:12):
Well, that's what's so tough. Buying that land, finding the land at a worthy price is what's tough.
Bill Fairman (07:18):
Yeah. But the good news is rates are low and just after talking to you guys about the unemployment numbers, we're going to end up with a, and I hope it doesn't turn out this way but right now, we're going to have to be dealing with the haves and the have-nots because you have a large segment of the population, again, 20 million that are unemployed and they're not going to be able to participate in this really nice housing market unless they're sellers and they're going to be able to make a profit when they sell their house, but they still have to go someplace.
Jonathan Davis (07:52):
To live somewhere. Yeah.
Bill Fairman (07:53):
Right. That said, we talked about this in our CG mastermind, that one of the things that they haven't concentrated on on there in the rental market is the single family build to rent and the apartment buildings are really oversupplied. So you have people leaving them,
Wendy Sweet (08:18):
Certain classes are ever supplied.
Jonathan Davis (08:19):
Well, for A, it sure is.
Bill Fairman (08:20):
When you're building them right now, that seems to be that they're only building A class. That said, you have people fleeing apartments because you know, they're trying to social distance, or they want to have a yard for the kids to play in since nobody wants to put in a stool
Wendy Sweet (08:38):
They want an office door, can not want to listen to the kids. It's my excuse.
Bill Fairman (08:42):
Anyway, a lot of people are moving to single family and they're moving out of the major MSA so apartment rents are on the decline, single family rents are on the increase.
Jonathan Davis (08:54):
Yes, but it is very geographically specific. I mean, you have Northeast and West rents lowering on the apartment side. You actually have Southeast rents rising on the apartments side. So just want to be specific about that. It is the location.
Bill Fairman (09:14):
Well, part of that has to do with there's very little inventory in the single family. So they have to rent apartment.
Jonathan Davis (09:21):
They have to rest so they can find.
Bill Fairman (09:21):
Until they can find a place.
Jonathan Davis (09:23):
Exactly.
Bill Fairman (09:23):
So, there's good news there on both fronts. But one of the markets that was neglected is the build to rent side of things
Wendy Sweet (09:34):
You know, they started doing that four or five years ago. It was kind of a big thing to start with the single family build to rent programs that kind of petered out a little bit. Now, it's back with a vengeance, right?
Bill Fairman (09:47):
Well, you had this specifically, the millennial group that saw their parents,
Wendy Sweet (09:55):
He says like ha has a distaste for them. "The Millennial Group"
Bill Fairman (09:57):
No, no, no. I'm saying the group, because there's a wide range of ages, the millennial group, I don't know what you call them but a lot of them grew up seeing their parents going into foreclosure and whatnot and they just didn't want to own, because they were afraid anyone to see that happen to them so they decided that they're just going to rent. So that's why you had the big push in the single family rentals. Now, you're going to have a big push in rentals because there's going to be a group of us that aren't going to be able to buy a home and participate in this boom. There's going to be a whole other group that can work from home and haven't been affected and they're taking advantage of it, they're moving to areas that are less costly and they have, they can get more, further, more bang for their bucks.
Jonathan Davis (10:51):
I mean, I'm working on a gosh, I don't know, four portfolio loans to close?
Wendy Sweet (10:57):
And a portfolio loan in is?
Jonathan Davis (11:00):
A portfolio, I mean, it has multiple properties in it. So, you know, the ones that I'm working on are between probably 15 and 50 and property,
Wendy Sweet (11:10):
Single family units.
Jonathan Davis (11:10):
Single family, or they could be townhomes. It's not condos, it'd be town homes, duplexes, quads, stuff like that. So, working on those and every single one of them, a hundred percent occupied, a hundred percent occupied. Yes.
Wendy Sweet (11:26):
You know, we, I have a house with my partner, Darren, that, were going to rent it out. We were trying to decide, should we sell it? Should we rent it? So we had a section eight person approach us, wanting to stay there. It's a two bedroom. She's moving out of a three bedroom apartment complex once to get into a house cause she's more comfortable in a house and she can deal with the two bedroom and the voucher, we were renting it for nine 75. Her, the city of Rock Hill just called me to tell me that her voucher was only going to be $821.
Jonathan Davis (12:07):
Bill, everyone can see you on your phone.
Bill Fairman (12:09):
I was making sure that I turned my volume down so we wouldn't get interrupted.
Wendy Sweet (12:12):
He's so interested in everything I have to say.
Jonathan Davis (12:12):
He's a kid phoning in to class, you know, down there.
Bill Fairman (12:16):
I've heard it all.
Wendy Sweet (12:19):
Anyway, I think we're going to see what she was saying. The woman from Rock Hill, that works for the city was saying that the vouchers for a section eight tenants have not caught up with the increase in rents and that there, she has a lot of people that are sitting in that situation where they just, they can't afford what's out there anymore. So that's going to be another blip that's going to occur.
Bill Fairman (12:47):
That's one of the curses of rising values and you know, sometimes it benefits the sellers, sometimes it benefits the buyers. It depends on which way the market's going and you know, there's not a lot you can do about it other than move a little further out. But with a lot of folks that do have section eight, vouchers, transportation becomes an issue.
Wendy Sweet (13:12):
Right. So there's only so far out you can go.
Wendy Sweet (13:14):
[Inaudible] your own call, yeah.
Bill Fairman (13:14):
alright, I hate to move this along, but we need to move this along. So let's get to, should I flip or should I hold? We keep forgetting that Scott has all these wonderful graphics that he throws in there.
Wendy Sweet (13:36):
Yeah. And I didn't get to sing.
Bill Fairman (13:37):
And we're just talking. So I'm going to give you the attorney answer, it depends.
Jonathan Davis (13:45):
Should you flip, should you hold? What is the market doing?
Wendy Sweet (13:53):
Big question.
Jonathan Davis (13:53):
And what are your needs? I mean, if a cash, if you need cash now, I mean, I would even say don't flip, wholesale! You know, that's a quicker way of getting cash.
Bill Fairman (14:08):
Or hotel.
Jonathan Davis (14:09):
Or hotel. Yeah.
Bill Fairman (14:10):
So for those of you that don't know what that means is that you're a wholesaler, but you're selling directly to the person that's going to end up occupying the property so they'll get in there and do some sweat equity and get it fixed up nice but you can get a higher price for that sale. Then you can selling it to somebody who's going to fix it and flip it or fix it and rent it.
Jonathan Davis (14:36):
And I'll be shooting myself in the foot cause you know, I'd love to get wholesale properties, but I mean, hotel right now is big. I mean, cause everyone's looking for property and people don't mind to do a little bit of work to get into a house that they own.
Bill Fairman (14:49):
But it's the same thing that you, when I was in the retail mortgage industry. When refinances start piling in, don't forget about your realtors. Yeah. So yes, you can get a pretty penny or more money for these, if you're selling them directly. But if you ignore your buyers list and then the markets change, you're gonna knock on the buyer's list.
Jonathan Davis (15:15):
Yeah. That's true.
Wendy Sweet (15:16):
You got to keep that relationship in a good spot. So really, for people that are trying to decide whether to fix and flip, it really depends on what's going on in your particular market, because it really is a market driven and the markets are different from wherever you're located. We got a guy on here from Nigeria. How cool is that? So you just gotta be really, really careful about what that is. I always tell people that when you're fixing and flipping, you go from hero to zero, when you walk out off that closing table, right? So you've got to continue to do the same thing over and over again, whereas buy and hold. It's more of a, well, I hate to use the word passive with buy and hold because that's kind of an oxymoron, but it's constant income.
Bill Fairman (16:01):
Not as active.
Wendy Sweet (16:04):
Yeah. You're not having to find the next deal constantly.
Jonathan Davis (16:11):
So what are your goals? Are you wanting to be a full-time real estate investor? If you are, I mean the time it takes to build up an entire portfolio of rentals could be too long and that's too much gap for you to create monthly income for yourself to live on. So you might have to throw some fix and flips in there to build that cash but yeah. I mean, if you don't need cash right now to live on, I mean I'm a big fan of buy and hold
Wendy Sweet (16:39):
Yeah. Oh, I tell people if you're a W2 person,
Jonathan Davis (16:42):
Yeah, buy and hold.
Wendy Sweet (16:42):
You need to buy and hold all you can right now, you know, make sure it's a deal when you're getting.
Jonathan Davis (16:47):
And right now, I mean, there's a lot of people, I mean, it's tempting. I mean, and again, you have to know your own situation. If I'm going to sell one of my rentals probably right now is the time.
Wendy Sweet (16:57):
Yeah. You'll get the most cashflow.
Jonathan Davis (16:57):
I'm going to do this. I'm going to get the most money for it right now. But then does that play into your long-term goal? You know, does that help you, you know, if your goal is to retire in 10 years and live off of the, you know, the income, well, you sell that house and you make a $50,000 profit, you know, where does that $50,000 profit go to taxes and then how fast does it disappear with life?
Wendy Sweet (17:20):
That's exactly right. That's a good point.
Bill Fairman (17:22):
Well, let's look at the numbers. You have to study days on market and the property that you're looking at, if your days on market are long in the tooth, it's probably not a great fix and flip market. Now, you can take a poor sales market and still make it a decent fixing flip. It all depends on how you buy it. So if you can get it well market and then add or force some additional appreciation on it, by fixing it up, maybe adding an extra bathroom or something like that, you could still make money and then on the, I tell you the whole part of these things. If you're in an area where you don't get a lot of appreciation over time, those typically turn out to be the great hold markets because the rental side of things is usually pretty strong
Jonathan Davis (18:22):
The guy you talked with, was it in Alabama? Or was it Arkansas,
Wendy Sweet (18:26):
Alabama. Yeah.
Bill Fairman (18:26):
Montgomery
Jonathan Davis (18:27):
Montgomery. Yeah. So same thing, that's a heavy rental market,
Bill Fairman (18:32):
Right. And there's pockets throughout the country that are strong blue collar workers. Always been good rental markets. The values of the properties don't go up and down. But as I'm constantly saying and I'm not taking credit for this, I got this from David Phillips. The house does not care how much it's worth.
Jonathan Davis (18:53):
Only if you want to refinance it all.
Bill Fairman (18:55):
It's all about the cash flow. And if you get to a point where it does appreciate quickly and or greatly, maybe it's time to sell and put some of that lazy equity to work,
Wendy Sweet (19:08):
Or refinance that.
Bill Fairman (19:08):
Maybe you go into another area, sell it or refinance it, take the money and then go buy a couple more properties with it.
Jonathan Davis (19:17):
Well, I will say, you know, the house, you know, it doesn't care what it's worth. And that, in my opinion, that only works. If you're paying cash for the house, that's the only situation. If you're taking debt to purchase that like an acquisition debt and you want to refi it or whatever the case may be, it doesn't matter what the house is worth.
Bill Fairman (19:36):
Again, you shouldn't be leveraging it to the point where if the value goes down a little bit, you're going to be in the water.
Jonathan Davis (19:44):
Yeah. You shouldn't be on 90% leverage or anything like that.
Bill Fairman (19:47):
75%, I think you're pretty safe in most areas. Now there are parts of the country where the values drop lower than that. But I can tell you on the value scale, if you're in affordable housing, those values dropped at a much lower percentage than the upper middle-class side of the equation and then you get to the luxury homes, those drop quite a bit. So again, it depends on the class of properties that you're in as well. So I hope we,
Wendy Sweet (20:21):
Beat it to death.
Bill Fairman (20:21):
Well, here's the thing, we didn't tell you whether you should or not.
Wendy Sweet (20:26):
Yeah, that's right.
Bill Fairman (20:26):
It all all depends.
Wendy Sweet (20:28):
On what works for you.
Bill Fairman (20:28):
Just like we talked about at the beginning, it depends and you just have to analyze it. See what's best for you and your circumstances. See what's best for the market. If you don't know, get with a mentor or somebody that's been doing this for a while and have that discussion. Talk to other real estate and get their opinions
Jonathan Davis (20:49):
And everything, like we said, it's very, you know, geographic. I mean, you, you have to look at your own location. I mean, right now, well, what's going on in the economy, it's really hard to locate properties to flip forward with profits. I'm not saying it's impossible. You can do it. It's more difficult now than it was four years ago, three years ago, even two years ago.
Bill Fairman (21:11):
So there's a lot of competition out. There was some serious marketing.
Wendy Sweet (21:14):
Yeah. Right, right. A lot of lazy money.
Bill Fairman (21:16):
Yep.
Jonathan Davis (21:17):
So that's what we're seeing. We're having a lot of people buy a whole portfolio of rentals. That's for you as far I'm seeing, I mean, I'm doing one where, you know, the guy bought it through seller financing and I mean, he's probably at well below 50% loan to value.
Wendy Sweet (21:32):
Don't run from those deals because they can really be some, some great deals. And you got some junkers in there,
Jonathan Davis (21:36):
And you don't have to take down every property. If you can take the whole portfolio and then sell portions of it to other investors, I mean, you can take what you want. And then so all the others,
Bill Fairman (21:47):
Just be careful, if you're doing that. The financing part comes into play there to being able to carve out pieces and how much you're going to have to pay back whoever the lender is.
Wendy Sweet (21:58):
Discuss what those values would be if you were to cut some out
Bill Fairman (22:00):
Out and cause, cause sometimes they'll put in the contract there, you have to pay,
Wendy Sweet (22:04):
120%.
Bill Fairman (22:04):
80% or even maybe more, 120%
Jonathan Davis (22:11):
Typically, a release schedule for property from that is usually between 115 and 125%. The strategy that I would employ would be, I would do it at closing. So I would have the other investors come in and you basically just bifurcate that contract and those properties out of that contract at closing, and you take, you know, you get your lender or your cash, whatever it is, you take the six that you want and the other six. You have these other lenders or these other borrowers come in and take those guys out.
Wendy Sweet (22:41):
And I love the way that Jonathan was able to slip in the bifurcate, his big word of the day. That's good. That's good. We saw, there's a message there from Don saying that there are no Wednesdays with Wendy open and I apologize for that. I will go in and open up some February and March dates. I wasn't sure what February was going to look like with our masterminds and we just got that in recently. So I'll open those back up. I apologize. That'll happen today.
Bill Fairman (23:13):
No, she's just so popular. She has nothing left.
Wendy Sweet (23:15):
Approve to myself.
Bill Fairman (23:17):
So let's get to our next question because. Really quick with the button that time. Okay. So are there tax consequences with lending hard money? Once again, it depends.
Jonathan Davis (23:41):
Consult your CPA and your attorney
Bill Fairman (23:44):
So typically when you're getting income, and we're talking about if you're a lending, the money, if you're lending money, you're getting ordinary income.
Jonathan Davis (23:56):
Interest is ordinary income.
Bill Fairman (23:57):
Just straight interest income. So yes, there are tax consequences involved in lending. You have to pay tax on the ordinary income.
Jonathan Davis (24:08):
Now, if you're doing it out of your IRA, is there?
Bill Fairman (24:10):
You know, that's what I was going to say. There are ways to minimize your tax liability is to lend out of your IRA and pay cash for properties because you have, if you buy real estate with your IRA, there are depreciation and other things that you can deduct from your returns, which you can't if you do it in your IRA. So, try to maximize that tax strategy. Now, there are even more issues or possible issues. Again, I'm not an accountant, not an attorney.
Wendy Sweet (24:48):
And he doesn't play one on TV.
Bill Fairman (24:49):
That's right. However, if you are lending out of your IRA and there is, and you're doing it in a fund, for example, and there is leverage in the fund, or if you're buying a home and there's leverage on the home. So let's say, for example, you bought a home you're in your IRA and you got a loan on that home to buy it. You're using your IRA for the down payment and the fees and whatnot.
Jonathan Davis (25:21):
And payments.
Bill Fairman (25:22):
And you're paying the payments with it but you get a standard commercial loan for the rest of it. Well, you've now leveraged that IRA and you're subject to, what's called a UBIT tax and that's 45% of your profit.
Wendy Sweet (25:42):
That's a lot of money.
Bill Fairman (25:42):
Now a lot of money sounds like a lot, but it really is
Wendy Sweet (25:46):
It's 45% of what the profit itself, not what your hold, not part of investment.
Bill Fairman (25:50):
Right. Remember when I said, you don't get to take advantage of the taxes that you can get in a home. Well, now you can use the depreciation and whatnot to offset your profit so it lowers that UBIT. And the profit is going to be minus all your expenses. So you're only paying it on the cashflow, a percentage of the cashflow and if you have depreciation that you can also lower that a book value of the cashflow, then that'll help off setting the loan
Wendy Sweet (26:28):
Does talking about taxes make your eye twitch? I said, he's got this little twitchy thing going on in his eye. It looked like inspector clues.
Bill Fairman (26:38):
No, being next to her makes my eyes twitch.
Wendy Sweet (26:38):
I can understand that.
Jonathan Davis (26:40):
And so then also like, you know, if you invest in an LLC in certain States, it opens you up to tax implications with your IRA too. Not just lending, but it's like, if you do like a JV with your IRA or, or whatever the case may be, if you invest into an LLC, what does that tell us about that?
Bill Fairman (26:59):
I don't like it. No, it's the state specific. I know in South Carolina, they don't recognize the tax exempt or tax deferred status of an IRA if you're using that to invest in a private placement. And so that would be any type of an LLC, any type of a company that you would invest in. Now, keep in mind, if you invest in a company, you can't have any managerial responsibility, you can't make any management decisions so you're just a passive investor in a business, for example, South Carolina doesn't recognize that tax exempt or tax deferment.
Wendy Sweet (27:40):
And there are others, but we all know who they are.
Jonathan Davis (27:41):
Consult your,
Bill Fairman (27:41):
Yeah. Well, consult your tax professional. Now, the question was hard money lending. Are there tax consequences? 99% of the case, yes. You have to pay taxes unless you're doing it out of your IRA. But to me, your downside is much more protected in lending than other investments. Now, you don't get the benefit of the upside because you're not getting equity that builds up over time. You're not getting to take advantage of appreciation, but again, if you're in a rental situation and you're taking depreciation, and then you sell the property for a profit, then you had to pay all that back too.
Wendy Sweet (28:31):
That's right, it's a wash.
Bill Fairman (28:34):
Yeah. I was going to say half a dozen, a one and what's the saying?
Wendy Sweet (28:40):
They know.
Bill Fairman (28:40):
Okay.
Jonathan Davis (28:41):
I'm a millennial. I don't know the saying.
Bill Fairman (28:41):
So I hope you're more confused than when we started.
Wendy Sweet (28:43):
I'm glad that we could help.
Bill Fairman (28:45):
So if you guys have any questions, we will still have folks that will be looking over here in the chat and we will add that to a new show. Thank you so much for watching this segment of,
Wendy Sweet (29:02):
Don't forget to,
Bill Fairman (29:02):
Passive Investment. What?
Wendy Sweet (29:04):
I said, don't forget to like, look.
Bill Fairman (29:06):
Yeah. We'll get there. Hang on. Active Income, Passive Wealth show. And by the way, don't forget! To like share, hit the bell, subscribe. I'm waiting for my fancy graphics for my hit subscribe.
Wendy Sweet (29:28):
I was, I wonder why,
Bill Fairman (29:28):
There we go! See? Isn't that cute.
Wendy Sweet (29:28):
Oh yeah, that's pretty cool.
Bill Fairman (29:30):
Anyway, make sure you guys subscribe to the channel. Tell your friends. Hey Mark!
Wendy Sweet (29:38):
There's Mark,
Bill Fairman (29:38):
Good talking to you yesterday, by the way
Wendy Sweet (29:39):
He has a good question. If you invest in a fund, for example, on let your investment compound, is that subject to ordinary income tax or are your shares just increasing the value? Great question, Mark.
Bill Fairman (29:52):
Well, your shares aren't increasing in value. Your shares are still the same value per share. You're paying tax on the money that you reinvest every quarter. So if, say, for example, at the end of the quarter, we sent you a check. There's a tax consequence to the check that you just got.
Wendy Sweet (30:15):
Cause that's profits.
Bill Fairman (30:15):
Cause that's income and it's profit. Yes. The only difference is instead of taking that money and using it to pay bills with, or whatever, you're adding it to the balance of your current investment.
Wendy Sweet (30:32):
So by new shares with it,
Bill Fairman (30:32):
It's the same, It's the same if you were taking it as income as your compounding.
Wendy Sweet (30:42):
So yeah, you're paying. It's a tax gig.
Bill Fairman (30:42):
Yeah. Yeah. Every year you're going to get a K one for how much money that your investment performed.
Wendy Sweet (30:46):
Good question.
Bill Fairman (30:51):
Even if you get it in an IRA, you're still gonna get a K one. The good news is the custodian is going to hold it in a file and ignore it. Right?
Wendy Sweet (31:05):
That's right, because it's a self-directed IRA.
Bill Fairman (31:08):
So again, thank you so much guys for,
Bill Fairman (31:10):
Good question.
Wendy Sweet (31:10):
And yeah, that was a great question. Thanks for tuning in again. We'll see you on the next show. Don't forget. Uh, our website is Carolina, hard money.com. If you're a passive investor looking to invest, I click on the investment tab. If you're a borrower, click on the apply. Now tab, you guys have a wonderful day. Talk to you soon.
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