We have now hit 237 episodes of Tax Tuesday! Today, Anderson Advisors attorneys Toby Mathis, Esq., and Eliot Thomas, Esq., discuss topics including depreciation strategies, with detailed explanations of how bonus depreciation differs from cost segregation analysis. The conversation also covers real estate professional status requirements, home office deductions, and the strategic use of management C-corporations to maximize tax benefits. Other key topics included the limitations of 1031 exchanges for partnership interests, tax strategies for international property purchases, meal expense deductions under current tax law, and the benefits of a stepped-up basis for inherited properties. You’ll hear practical strategies for leveraging existing properties rather than selling them and included insights on how to minimize tax exposure through various investment structures and borrowing strategies.

Send your tax questions to taxtuesday@andersonadvisors.com.

Highlights/Topics:

• In 2024, I spent most of my time managing rental properties under our LLC (not in a C or S management corp). I will claim real estate professional status for 2024 tax returns. What home office expenses can I deduct from rental income? Should we consider creating a management C corporation to maximize deductions? – You can deduct a portion of home expenses (mortgage interest, property taxes, utilities, etc.) based on either square footage or number of rooms method.
• Is 100% bonus depreciation available in 2025? Is this the same as cost seg? – Cost segregation breaks down property components into different depreciation schedules (5, 10, 15 years) while bonus depreciation allows immediate write-offs of qualifying components.
• If you meet 750 hours as a real estate investor and own both commercial/non-residential real estate property and residential rental property, could you use Schedule C or Schedule E on your tax return? – Generally, long-term rentals go on Schedule E regardless of real estate professional status. Schedule C might be used for short-term rentals (average stay less than 7 days) with significant personal services provided.
• Does selling a partnership interest in a hotel business qualify for a 1031 exchange? How can you save on taxes on capital gain when you sell your partnership interest? – A partnership interest generally doesn’t qualify for 1031 exchange (though the partnership itself could exchange the building).
• If I inherit a property and now use the property as Airbnb, do I need to depreciate the value of the property? – You should depreciate the property because the IRS will assume you took depreciation when you sell and tax you accordingly (recapture). You’ll get a stepped-up basis at inheritance value to depreciate from.
• Can you comment on food and meals? When can those be expensed and how much? –  Business meals are generally 50% deductible. Company-wide events like holiday parties or open houses with unrestricted attendance can be 100% deductible. Entertainment expenses are no longer deductible.
• I’m a full-time employee receiving W2 income and own two rental properties which I manage myself. Can I use the qualified business deduction (QBI)? – Yes, you can potentially qualify for the QBI deduction. The safe harbor rule requires 250 hours of rental services, but you may still qualify even without meeting this specific threshold if you can prove it’s a trade or business.
• How can I avoid capital gains if I sell my rental home in the U.S. to purchase a multi-family home in Costa Rica? – Options include: living in the property for 2 of the last 5 years to qualify for primary residence exclusion, leveraging the U.S. property instead of selling, harvesting capital losses to offset gains, or investing in tax-advantaged opportunities to create offsetting losses.
• I have two rental properties in SoCal owned since 2009 using straight-line depreciation. If I 1031 exchange these properties into replacement properties of slightly higher value, can I start depreciation over and do it correctly? If I 1031 these properties into replacement properties of slightly higher value, does that mean I can start depreciation all over and do it correctly? Getting more tax benefit. How does this affect my basis? What about any recapture when I then sell later? – In a 1031 exchange, you’ll have carryover basis from the relinquished property. The basis in the new property will be its purchase price minus deferred gain. Instead of selling, consider leveraging existing properties to buy additional real estate for more depreciation opportunities.
• What are the benefits of the step-up basis evaluation for a person’s residence and investment property? – When inherited, properties receive a stepped-up basis to fair market value at death, allowing heirs to depreciate from the higher amount and potentially eliminate capital gains tax on appreciation that occurred during the deceased’s lifetime.

Resources:

Schedule Your FREE Consultation
Tax and Asset Protection Events
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Toby Mathis YouTube
Toby Mathis TikTok
Clint Coons YouTube

Full Episode Transcript:

Toby: All right, welcome to Tax Tuesday, where we are bringing tax knowledge to the masses. We’ll let you guys filter on in, and then we will get started. I always wonder how long it takes everybody to get in because it just starts to…

Eliot: It’s jumping.

Toby: I see it jumping, but I always wonder, are they already all in?  We never know. Anyway, my name is Toby Mathis. We got…

Eliot: Eliot Thomas.

Toby: Eliot. Come on, keep it down. Keep it down for Eliot.

Eliot: Crickets.

Toby: Yeah, it’s going to go right to his head. First off, welcome to Tax Tuesday. If this is your first Tax Tuesday, give me any reaction, an emoji, a thumbs up.  It could be a heart. I got some crying. That’s appropriate for taxes as you’re saying goodbye or bon voyage to your money. They’re going to get rid of the income tax.

Eliot: There you go. No problem.

Toby: Problem solved.  I always love Milton Friedman. I always like pulling up old. All you got to do is look at the government spending. There’s all types of taxes, but as long as they keep spending, they can borrow and they can make money. I always like that. He’s really smart.

Eliot: He is.

Toby: Anyway, so it’s Tax Tuesday. We’re going to talk taxes here. Let’s go over some of the rules. Let’s see if I can make this thing advanced. All right. We have a bunch of accountants to answer your questions, believe it or not. I’m just going to start reading down the list. We got Matthew and Jen helping in the background. We got Tax Attorney Amanda Wynalda, Arash, Dutch, Jared, Marie, Rachel, Ross. Holy crap, we got more people, and Troy, Mr. Butler, all answering your questions.

If you have a question, put it in Q&A. If you have a question about something that’s keeping you up at night, can I write off my Coca-Cola, you’re just going to say Coke, but I don’t want you to get the wrong idea. 

Eliot: Team expenses.

Toby: Yeah, it’s no entertainment anymore. We used to be able to write off Coke. You can’t write off your Coke, Coca-Cola. You can run a 50% of it in certain circumstances. If you have a question that’s been bugging you, or you want to get clarification on a rule that pertains to you, put it in the Q&A. If you have a comment, by all means, put it in the chat.

Let’s test this. Somebody says Toby sounds hollow today. That’s not very nice. Why do we pay nearly double for the social security sole proprietorship? Because they hate you, Carlos.  No, because it’s not that you pay nearly double. It’s that you only pay social security. Is it really bad?

Eliot: It was cracking.

Toby: It’s cracking? Wow. They’re going to fix me. Do I sound less hollow? Can you slide your audio down a bit? No. Is this better? All right.

Eliot: Thank you.

Toby: I found the problem with Toby sounding hollow. It was on my side. I have no idea why I sound so hollow today. It’s because I’m so skinny. Mahalo that. Okay, no. I’m not skinny, but I identify as skinny some days. All right, back to your stuff.

Q&A, put it in your questions. If you have questions in between these events, send it at your questions into taxtuesday@andersonadvisors. We need these questions, guys because Eliot here picks them off and makes them into the questions that we’re going to be answering today. We need some choices because sometimes it gets a slim pick and everybody asks the same thing. What is the Tax Cutting Jobs Act? What’s going to happen if? No, stop it. We’ll make videos on YouTube for that.

Somebody said, now they’re struggling to hear. I’m just going to start using hand signals. No, I’m just kidding. We’ll figure it out. Somebody will help you with the tech. If you need a detailed response, and it’s something very specific about your tax return, then you just need to be a Platinum tax client.

By the way, Platinum at Anderson is unlimited tax and asset protection  Q&A. We have a knowledge room that’s open from 9:00-2:00 Pacific Standard Time every day. That’s manned with attorneys, CPAs, and EAs, where you can go in there and ask questions. If you say, well, I don’t want to ask a bunch of questions in front of a bunch of people, they’ll take you into a private Zoom room, where you can get that done. There’s no hourly fees, it’s just part of Platinum.

If you want to know how to become part of Platinum, just put I’d like to learn more about Platinum and our team will hook you up with somebody so that you can learn about becoming part of Platinum. It’s literally um less than $100 a month and it’s unlimited, so you could just ask questions day in and day out anytime you add something. Review contracts, all that good stuff, we take care of it, if you want to become a platinum, or you can always become a tax client too. That one’s a little different.

It’s supposed to be fast, fun, and educational. We’re trying to give you guys as much as we can back to you as far as straight answers that you can’t get other places, or that somebody’s going to charge you an hourly fee for, so it always sucks to call somebody up and then to have them send you a love letter that has a bunch of numbers on it that says pay me. It feels a little bit untoured. I like to have it to where we just say, hey, it’s free. Hey, come here, get educated, bring your friends. It doesn’t matter, it’s what we do. We’ve done this. I don’t even know how many event. I think we’re over 230.

Eliot: 237.

Toby: Two-hundred and thirty seven episodes. We’ve been doing this a long time. We’re going to keep doing this every other week. You can just bring somebody on. All right. Where’s everybody from? This is something that sometimes I ask. This is something you put in chat. Where are you guys all from? It’ll be fun since we have a lot of people on YouTube and a lot of people in our Zoom room.

We got Detroit, Claremont, Florida, San Antonio, Texas, Arkansas. There’s Maui. Yeah, they’re flying through here, Bay Area, California, Philly. Philly, that’s where I grew up. Fly Eagles fly. Portland, Oregon, Krum, Texas, Northern California, Tahoe, Castle Rock, Georgia, Texas, New York, New Jersey, Topanga Canyon, Dallas, Hollywood area in Los Angeles. I hope everything’s good down there. You guys got hammered. Prayers to your whole community.

Carmichael, Lakewood, Washington. I know that one well. Costa Rica this week, we all hate you. No, we love you. Oregon, Southern Oregon, the Kremlin. Yeah, right. Castine, Maine,  and all over the place. I always like to figure out, we got a big footprint, guys, so we have a really good group here.

What are we going to do today? For you guys who have never been on a Tax Tuesday, we’re going to go through a list of questions next, and there’s going to be about ten of them. There’s Poulsbo, Washington. Chuck, you’re right in our backyard. We got an office in Tacoma. My partner’s in Gig Harbor. I spent a lot of time in Poulsbo. You guys have a great little town there and a bunch of Vikings, I think. 

What was I talking about? We’re going to go over ten questions. I’m like a cat. I get distracted when there’s all these things popping up. I have the chat and the Q&A right in front of me, plus our questions. What we’ll do is we’ll go through the ten questions, we’re going to read them through them, and then we’re going to go through and answer them each one in kind. That’s what we’re going to do for the next hour or so, is go through that. It’s really going to be Eliot answering questions because I like to listen to Eliot.

Eliot: Toby correcting me.

Toby: No, I just like to listen to Eliot because Eliot’s smart. Eliot’s a tax attorney, I’m a tax attorney. Neither one of us are CPAs. You’re like two tests in.

Eliot: Yeah, I got three of them, but I missed the fourth.

Toby: No. Geez, Eliot.

Eliot: Try again.

Toby: Just became a lawyer.

Eliot: I just took the easy route.

Toby: You’re right, Toby. They do hate us. I’ll give you this, Carlos. There’s lots of different types of taxes. Again, one of my favorite people as far as the way he thought was Milton Friedman. He always talked about express taxes and then the hidden taxes. There’s an express tax. There’s two types of express tax that you’re hearing about right now, which is the income tax, which is everything from portfolio income, capital gains, dividends, ordinary tax, passive tax like rents and businesses that you don’t materially participate in. There’s those types of taxes, employment taxes, which is what you’re talking about with the sole proprietorship.

If you don’t know to become an S-corp, you just get hit with this thing and you end up paying an extra, usually about 10% of your gross income can come out in taxes. It should be 10% of your net income extra in tax. It sucks. You could avoid it and you get mad when you realize that you’ve been paying it for 10 years and nobody told you, and then there’s the hidden tax. There’s a hidden tax, which is inflation. That’s when the government borrows money and to cover its expenses or it prints new cash.

When you saw the M2 money supply, which is the total amount of currency, US dollars in the world and it spiked during Covid, that’s how we knew inflation was. It’s just going to hammer us. Guys like me were like, hey, this is what inflation is going to do. It’s going to be 15%-16% because you could see they were creating that much more currency.

There’s an express tax that you’re hearing about a lot lately, which is tariffs. When Trump says, let’s eliminate income taxes and do all tariffs, what he’s doing is forcing Congress to get off their ass and pass the Tax Cut and Jobs Act extensions, probably pass a couple of his wish list, which is no tax on tips, no tax on social security, no tax on overtime, which guys like me, we are just going to hammer away on.

How many hours a week do you work? Let’s do the calculus to figure out, like a lot of entrepreneurs work 60-70 hours a week. We’re going to be paying you a wage then over time, so you don’t have to pay tax on it. I’m just waiting for them to serve that up like a little softball so we can just crush it. There’s these different types of taxes.

Once you know that world and you’re like, okay, I see what Trump’s doing, then you can go back and say, what we’re going to really do is try to force down the express tax of income tax. We’re going to increase tariffs a little bit, but that’s going to mean that there’s the third kind, the indirect tax. That’s the one that scares the hell out of me because if we lower the other two and they don’t fix spending, inflation is going to go bonkers. Inflation is going to go absolutely nuts. That’s what I think.

I’ve been saying, oh, my gosh, they’re going to inflate away the $36 trillion deficit, those little knuckleheads. DOGE is the wild card if they can curb some of the spending. They think they can get rid of a trillion. If you knew last year, we were $1.8 trillion in the red. If they get rid of that, then we’re only going to be $800 billion dollars in the red. Hey, we’ll only be $37 trillion in debt. What’s a trillion dollars between friends?

Eliot: It’s like between a really bad Greek drama and a telenovela.

Toby: It’s not going to be this. It’s not going to be razzle dazzle. You’re going to take it right in the temple. The people that are investors like us, if you’re hanging out in real estate, you’re going to see rents go up at some point. It means there’s always wild cards. Nobody has a crystal ball, but it just seems pretty obvious that they have spending that they still have to do. It’s always about the spending.

Milton Friedman used to say, don’t pay attention to anything else, just watch the spending. The government always balance their budget at the end of the year by borrowing or printing cash. They can’t not have a balanced budget. The question is, is it going to come out of your paycheck, or is it going to come out of your pocket some other way by them devaluing your stuff? It’s going to happen. All we can do is minimize our tax burden, maximize our investment activity so that we can make the best of it.

You’re in the right place if that’s the type of stuff that interests you. If it doesn’t, well, there’s Teletubbies on another channel or something. I’d be watching Teletubbies. Let’s be real. I think it was always a trip. All right, opening questions. Let’s go through these questions.

All right. “In 2024, I spent most of my time managing rental properties under our LLC, not in a C or S management corp. I will claim real estate professional status for the 2024 tax returns. What home office expenses can I deduct from rental income? Should we consider creating a management C-corporation to maximize deductions?” Great question. We will absolutely answer that.

“Is 100% bonus depreciation available in 2025? Is this the same as cost seg?” Wow, you guys are getting the terms down. We’ll answer that.

“If you meet 750 hours as a real estate investor and own both commercial non residential real estate property and residential rental property, could you use a Schedule C or Schedule E on your tax return?” We’ll decipher what that means. These are good questions. Give Eliot some love. He needs some. Just even a smiley emoji would make him happy. Look at him. He’s over here. He’s giddy.

All right. “Does selling partnership interest in a hotel business qualify for a 1031 exchange? How can you save on taxes on capital gain when you sell your partnership interest?” Good questions. I’m sure some of you guys have thought about this in all the hotels that we own. I played Monopoly.

“If I inherit a property and now use the property as Airbnb, do I need to depreciate the value of the property?” So mean. I know.

Eliot: That actually just came up.

Toby: All right, that’s a good one. “Can you comment on food and meals? When can those be expensed and how much?” Comment on food and meals. What’s the difference? 

All right. “I am a full time employee and receive W-2 income and also own two rental properties which I manage myself. Can I use the qualified business deduction? I’ve read about the Safe Harbor rules, but I’m still confused if I qualify.” Really good questions again.

How can I avoid capital gains if I sell my rental home in the US to purchase a multi family home in Costa Rica? Apparently, 1031 exchanges are only good in the US.” We’ll talk about that. All right, good questions so far. 

“I have two rental properties in SoCal that I’ve owned since 2009. I’ve been using the straight 27½ years depreciation. I know better now with the growth and rental rates currently over $6500 a month between the two. The depreciation doesn’t really help much, so you’re getting beat up with some taxes. The properties are now worth considerably more. If I 1031 exchange these properties into replacement properties of slightly higher value, does that mean I can start depreciating all over and do it correctly, use a cost segregation, gaining more tax benefit. How does that affect my basis? What about any recapture when I sell later? What are the benefits of the step up basis evaluation for a person’s resident and investment property?” Those are good questions.

All right. If you guys like these types of questions and you want to do some deep dives, I’ve put together a YouTube channel. It has a few videos on it as in 982 videos. I just like the fact that we’re almost at a thousand videos.

Eliot: I’ve been waiting.

Toby: It’s an overnight success in 25 years. If you like this type of stuff, subscribe to my channel please. Subscribe to my partner, Clint’s channel. I’ve been partners with Clint for 28 years probably, a long time. Clint’s channel is great on asset protection. I tend to do more on finance and tax. I want people to make lots of money so that you have lots of screwed up tax problems, so you can come here and we can fix them. I really want you to make so much money that you’re getting sick of paying taxes. That’s my purpose in life, and then we can help you with the tax issues.

Of course, you can always come to our tax and asset protection workshop. They are free on Saturdays. Then we have a live workshop, where we do a three-day, plus there’s a fourth day if you’re a client, where we do networking. Go click on that on the March 27th to the 29th and learn more. It’s a lot of fun.

We’re going to be in Dallas this time. I think we’re going to do a couple in Vegas before the end of the year. It’s always fun to get to see everybody live and we get to hang out, get to meet you, get to shake hands, fist bump, whatever. You’re around a bunch of really cool people, so it’s a lot of fun. They’re very inexpensive, especially for clients as in very inexpensive. It costs us more to put them on. 

It’s just good to get everybody together. I don’t know about you guys, but we used to do 50 live events per year all the time. We’re bringing people out here, and then Covid hit. It changed everything. It’s just a lot, and it’s really great when we actually get together and get to see everybody in live. All right, let’s go through these questions. You guys ready? If you’re ready, strap it in.

All right. “In 2024, I spent most of my time managing rental properties under our LLC, not in a C or S management corp. I will claim real estate professional status for the 2024 tax return. What home office expense can I deduct from rental income? Should we consider creating a management C-corp to maximize deductions?” What do you say?

Eliot: A lot going on here as usual. Real estate professional status referring to the fact that they got rentals, long term rentals is what that means. For those who don’t know, usually if you have a long term rental, it’s going to be passive activity. It means if you have overall losses, you can only take those losses typically against other passive income. There’s a couple exceptions, but that’s the general rule.

What this individual’s done here is met a certain standard. They’ve put over 750 hours into real estate trade or businesses. They have put more time into those trade or businesses than any other business occupations that they have. If they had three jobs, other kinds of jobs in one real estate, they put more time into that real estate job than they do the other three combined, and they manage their own rental properties themselves, that gets us all this real estate professional status, which turns the whole activity from being passive into non passive, which means now if we have losses there, it’ll go against it. It’ll deduct against any type of income on your return, so it’s pretty powerful.

What they’re asking here is what if we have an office in our house, what we often call a home office, but I don’t have one of these management corps, which we talk about all the time, can I still take the deduction? Yes, you can. You’re still going to put it on Schedule E, where your rental activity, your long term rental activity goes. It’s just going to be a deduction down there. You pick, but it has to be based on a reasonable form of calculating that. That could be square footage of the room divided by square footage of the house, minus a couple things like restrooms and things like that that you can exclude, or number of rooms method, which is typically the better of them.

Maybe you have seven rooms in the house, couple bedrooms, living room, dining room, but you have one that you’re using as an office. You do one divided by seven, take that percentage times all of your mortgage interest, not the principal, but the interest, property taxes, utilities, water, gas, power, electric, all that, HOA, any of those type of expenses, I said property taxes. Take that times that percentage of office, and we’re going to take that as a deduction against the rental activity. Because they have real estate professional status, there might be a good chance that they’re already at a negative. They just increased that negative, and now that we know we’re real estate professional means that that loss is going to go against any other income on the return. It’s not limited by the passive activity loss rules. It would work really well.

The follow up on the C-corp, yeah, we typically manage the C-corp, but only if it’s going to make a tax benefit. If you have that C-corporation managing those rentals, we can shift some money off. It would be another deduction against the rental activity. Again, this is non passive, so it’s going to be a really good thing, anything you can deduct. Get in on the C-corp. We have things like this home office, one that’s called administrative office, where now you’ve taken that dollar amount, put it into your C-corp via the management fee, and now you can take it back as a reimbursement to you as an individual. Same tax deduction, but now you get cash tax free at your C-corporation, and you can add on there 280A meetings or medical. 

Toby: Yeah. The big thing that you lose when you do it on yourself, like, hey, I just have rental properties in an LLC that’s either disregarded or a partnership and it flows onto my tax return, is you have to report the home office deduction. I think you’re doing that on a separate tax form. It’s 8869 or something like that, where you’re saying home office, which we have found to be like putting a target on yourself. It just increases the audit risk statistically, from what we can tell, about 800%. That’s just based off of Publication 55 when they used to track that data.

They stopped doing it about five years ago, where we used to be able to peer right into it and see exactly what the numbers were, but it was always close to 1000%. In some cases, 1600% more likely to be audited when you did that. We prefer to have the corporation reimbursing you.

There are two reasons. (1) Here’s my cell phone. If I am managing my own rental properties and I want to write this thing off, I have to track my business use and my personal use. Nobody does. Everybody loses this in audit. All right, where’s your log? You’re like, what log? Log like Lincoln Log? No. They want to know where’s your log on all your activity, your computer, everything. They want to know what portion of it was used in business, because then you can reimburse that much versus if I have a C-corp or an S-corp, I could just reimburse the whole thing, and it’s not reported on my tax return. It’s a corporate expense. Everybody’s used to corporate expense.

Same thing with the home office is it’s trend. There’s no red flag saying, home office. It’s just a corporation and about 80% of them zero out. In your case, it’ll be very interesting to do the math to see if we paid the C-corp, let’s say you’re in the highest bracket, you’re at 37% in a state like California, where you have the 13% tax, so you’re at 50% tax.

If we jammed an extra $50,000 into that C-corp, and you paid $10,000 on that as opposed to $25,000 individually, that would be a good thing if you were a real estate professional, because that loss would flow through and save you a bunch of tax. You’d end up keeping about an extra $15,000 a year that we could do. We can’t do that when it’s just you. 

It gives us a chance to say, do we want to have a family office? If we do and we have these expenses that Eliot talked about, we can’t do 280A when there’s no corporation involved, we can’t do the medical reimbursement when there’s not a C-corporation involved, we can’t have a separate 21% tax break unless there’s a C-corp, all those things start to push you in saying, hey, we should have a family office, we should document it so that we can push money into it, actually start running your operations out of that, and actually have it stockpile some cash.

Sounds weird, but it’s going to save you a considerable amount in tax, and it’s going to make you flee to foot, so when you want to take advantage of new opportunities, those tax savings don’t just disappear. It’s sitting in a corp. I could borrow it, I could invest through there, I could use it for other activities, or I could pay salaries. I could have my siblings, my other people in my family sitting on the board, pay them, have them actually work for the company, actually create a home office, have them involved in your investing, and then you could pay them into a 401(k), or you could pay them and have them put it in an IRA, a Roth IRA, get your kids involved.

All those, that door opens once we go down the path of adding that one layer of complexity. Does it make sense for you? I don’t know. It’s always a numbers thing. If I say, hey, here’s how much energy it’s going to take and here’s the benefit, if it’s, hey, it’s going to cost you a thousand bucks and it’s going to get you $2000, you’d probably say, no, it’s not worth it, I don’t want to spend the time. If it’s going to cost me $2000, it’s going to save me $20,000, you might start perking up. It’s going to cost me $2000, it’s going to save me $30,000, you’re probably running saying, let me do that. It all depends on your scenario.

You hit the nail on the head on all the things whether or not you’re a real estate professional. We get this question all the time. What’s a real estate professional? Always try to make it into two pieces. Piece one is 750 hours in a real estate trade or business doesn’t have to be your properties and more than 50% of your time. That’s prong one. Prong two is, did you materially participate on your properties? There are seven tests that you can meet there.

We always look at those two and say, all right, let’s hear your story. Do you meet those? Great. That opens that door. If we don’t have that door open, then obviously we explore other things to see if we can’t give you some of the same relief through another format.

Eliot: Just remember that that savings Toby’s talking about, provided the numbers work out, it’s going to happen every year. It’s not just one year. You take this 10 times over 10 years. Now that savings, it just compounds.

Toby: Yeah, I’ll never forget. Do you remember Ben?

Eliot: Yeah.

Toby: We We had a local client here. He’s a high net worth guy, but he was a West Point grad and he flew jets. A serious guy. He was sitting there and I looked at his stuff. He was overpaying about $25,000 a year based on his structure. I just said, if you did this, you’d save about $25,000 a year. He couldn’t believe it. He was mad, so we called his accountant.

I won’t pretend to be Ben today. I just don’t want to do it, but his accountant name was Ben. We went through and I said, hey, Ben, why don’t we just do this? He goes, yeah, that would work. It would probably save him about $25,000 a year. And Mark just lost it. He was turning purple as I was twitching. He was really upset and goes, Ben, why didn’t you tell me? I just remember it like yesterday. Ben just said, you never asked.

A lot of times we have tax people in our lives that aren’t proactive. They’re not putting you going, hey, Eliot, this is great. Remember the first question. It’s like, why do you do the S-corp so we don’t pay the employment tax? That’s great, but if you just did this one piece of paper and you took out a salary once a year, you would save $25,000 a year.

The punchline is Mark had been doing that for 15-20 years. You do the math in your head and you start realizing that this guy cost me a half million. I didn’t want to be in the room with him anymore. I was like, see you, Mark. You’re going to stroke out right in front of me. No, he was a great guy and an excellent guy, just great guy in the local community, but I was just like, oh.

We see it all the time. It used to be worse. Now we have the internet and you have this thing called ChatGPT. You can start asking questions. It’s wrong a lot and it makes things up, but sometimes it’s right. You’re like, at least you get an idea.

Somebody says when he says reimburse, it means I submit an invoice. Yeah. I bought a computer and a telephone under a corporate credit card. You don’t have to submit for reimbursement there because the company paid for it. But if you paid for it individually, like again, I have this and some other stuff and I want the company to reimburse me, I just write it up as an invoice. Here’s what I paid, here’s my receipt.

What are your chances of actually getting scrutinized? It’s very, very low. The audit rates are ridiculously low right now, like way below a percent for most people. You got to really do something crazy. On corporations, for an S corp, it was an asterix last year. It’s a fraction of a percent, but it still happens. You want to make sure you’re backed up, but the chances of you having to prove all this stuff.

Somebody said, that sounds like my story. This is ongoing. You’re in the right place, Carlos, because you can talk to us. By the way, we have now Jen, Amanda, Arash, Dutch, Jared, Marie, Rachel, Ross, Tonya, and I know Troy is still floating around. All these tax professionals are in the Q&A area, guys. If you want to go ask them questions, ask them questions. Otherwise they get bored, and when they get bored, they eat their computers, so we don’t want them to eat their computers. No, they don’t eat their computers. I made that part up.

Eliot: We got 70 questions.

Toby: You know what, we have about 500 people on the Zoom and probably that same number thereabouts in YouTube. Matthew, how many people on YouTube right now? 

Matthew: Over a hundred.

Toby: That’s good. We got a bunch of people on Youtube. We got a bunch of people on Zoom. Go in there and ask questions. On YouTube, you’re going to have to ask. We have people answering questions there. On Zoom, go into the Q&A and we’ll answer it. If you’re on YouTube and you want to come onto the Zoom, just let us know. We’ll give you the link and you can pop in there too.

Anyway,  feel free to use these folks. If you have those questions, like, am I overpaying, that’s always a great question, I’m doing this, and we can say, well, we can help you so you don’t overpay. That’s part of it.

“Is 100% bonus depreciation available in 2025? Is this the same as cost seg?”

Eliot: All right. Is it available? It could be. It is in a sense. In 2025, bonus depreciation is dropped down to 40%. It was at a hundred, and then basically every year it dropped by 20%. But if you bought a property back between 2017 and 2022, I believe it is, there was 100% percent bonus depreciation. If you’ve been using it as a rental, during that time frame, yeah, you could jump back and still take 100% bonus depreciation on that. We want to break up before we get there into what cost segregation is.

You hit the two really important parts here, cost segregation, bonus depreciation. They are very different, but they do work together very well. Cost segregation, if you remember, when you have depreciation, the normal status for a long term residential rental would be you divide it over 27 ½ years to get your depreciation, straight line, 39 years commercial, same amount every year, all those years.

Cost segregation breaks it up. It says, as I always say, it’s like, Eliot, this building has carpet, it’s got lights, windows, it’s got electrical circuits, it’s got foundation. All of those independently have a different lifespan for depreciation. Carpet’s five years, if it’s tacked down I think it’s seven years. They’ve got a funky rule about that, but all these different things, and then the foundation. That is 27½ or 39 years, so it breaks into these pieces.

Cost seg, if you do that, if you can imagine all these pieces getting pushed into 5-year, 10-year, 15-year properties, that speeds it up. Instead of being deducted over 27 or 39 years, it’s now over five years, so you sped it up. We didn’t add, we just took it quicker.

Bonus depreciation, we couple that on to our cost seg. It says anything that’s under a 20-year lifespan, like the five-year property, if it was during those times of 100%, you could deduct 100% of it right away. That’s massive. Even this year where it’s 40%, that is if you bought it today, place it in service, in 2024, it’s going to be 40%. Still, if it was earlier, we’d go back to whatever year you put it in. Yeah, it very well might be available in 2025 depending on when you purchased and placed it into service. We’d take the cost seg first, and then we’d couple on the depreciation. 

Toby: Well put. Yeah, what it really comes down to, just answering this thing straight up. Is 100% bonus depreciation available in 2025? Yes, for properties put into service in 2022, 2021, 2020, 2019, 2018, and 2017.

Eliot: Yeah, September, I think 17th or something like that.

Toby: Yeah. If you put in property into service and then you elect to cost seg it in 2025, you could actually get that deduction. We could actually elect to cost seg it in 2024, we have up until you file your tax return. You could make a pretty sizable tax deduction for last year going up until you file your tax return.

Cost seg and bonus depreciation are two very different things. Cost seg is writing things off over their useful life and breaking a property into its proper components, five-year property, the appliances, the electric system that connects that appliance, the foundation in which that appliance sits, if it has to have a special dishwasher place, refrigerator, or all those things. If it’s attached to that appliance, it gets its useful life, which is five years. Things like improvements, so your driveway, your walkway, the deck, the fence, the shrubs, the trees, all that stuff that you put in, removable flooring, removable windows, coverings. All that stuff is five-year property or 15-year property, which means it’s eligible for bonus depreciation.

If you put it into service in 2022, then you could write it all off even though it’s 2025. You can write it off in 2025. You can write it off in 2024. You still have time. If that went like this, that’s why you have to have somebody like Elliot talking to you.

By the way, guys, somebody was asking, do you guys do tax planning? Yes, that’s what Eliot does day in and day out, his whole team. There’s about 400 and some, almost 500 of us here at Anderson. We have a whole division that does tax planning, Eliot’s team, then we have tax prep, and we have bookkeeping. We call it accounting. If you have a need, you could say, hey, I’m interested and I’d like to talk to somebody, just put it into chat. Hey, I’m interested and I’d like to talk to somebody. We just tell you what the type of services we have. You could see whether it’s something that’s of interest to you.

I know that you guys come on here to get answers to questions. I want to honor that. But yes, if you did have that question, please just put it into the chat. Somebody will give you a link so you can have a consult with somebody and say, what are the options?

All right. Hopefully you guys are seeing these rules keep popping up in the same rules, so now you know that it’s real estate professional they’re talking about. “If you meet 750 hours as a real estate investor and own both commercial, nonresidential real property and residential rental property, would you use Schedule C or E on your tax return?”

Eliot: Actually, the fact that you might have a real estate professional really doesn’t matter as far as the placement too much here. If it’s a long term rental, typically it’s going to be on Schedule E. If it is disregarded to you, even if it’s in a partnership, it’s all going to come on Schedule E. The one exception might be if you have a short term rental, which is for simplicity, it’s typically if your average stay throughout the year is less than seven days. 

If you provide significant services personally, you’re doing really the hands on cleaning and things like that, that might shift us from Schedule E over to Schedule C. What’s the difference? Schedule C, it becomes more of an ordinary business, certainly, and the net profit could subject you to employment taxes. That’s why we like to stay on E if we could. 

Toby: Technically, you could have employment taxes on Schedule E, too. We’ve had this where people say, my accountant says it should be on E, my accountant says it should be on C. It doesn’t matter at all. It’s going to end up there, but it just depends on what you’re doing. At the end of the day, what the IRS cares about is, is it subject to two types of tax? Is it both ordinary and employment tax? If you meet certain tests, it could be.

In real estate, the ones that trip us are always dealer status, flipping houses, short term rentals, where you’re materially participating and providing extraordinary services. What is it, significant services or extraordinary? What’s the one that like a hotel?

Eliot: I think it’s significant.

Toby: Significant services like hotel type services, then all of a sudden we have this employment tax we have to be aware of. If we don’t, then we don’t. Again, it’s always saying, here’s what I’m doing. Here’s where the problems can lie, and then we can navigate you around those because there’s always a workaround. Even if you have a full-on, 100%, you’re doing all sorts of crazy stuff with your Airbnb, we could create it to where it’s still an investment to you into an entity. The active business, all the bad stuff gets trapped so that it doesn’t affect you. Yes, you can do that. It’s perfectly legal, and we’re very good at it. 

All right, next question. “Does selling a partnership interest in a hotel business qualify for a 1031 exchange?” How can you save on taxes on capital gain when you sell your partnership interest?”

Eliot: Your 1031 or like-kind exchange has to be real estate that’s using a trade or business. Right there, if we’re looking at the building of the hotel, that’s one aspect of the question. What about the actual business running a hotel? Two different things really going on there. The building itself typically could be exchanged in a 1031, but we’re talking about a partnership interest, and a partnership interest is not the same thing. When you have a partnership interest, you don’t own the building, you don’t even own the business. You just own the LLC that has all that and you receive a part of it.

There, you’re not going to be able to do a 1031 merely by just being a partner and something like that, unless it’s a tenants in common situation. That’s a little bit different type of property there where you could. The quick answer is no. You as an individual trying to exchange your partnership interest, it’s typically not worthy of a 1031 or allowed to take a 1031, but the partnership could 1031 the building itself.

Toby: It has to be the partnership that would do it. Here’s a weird thing. The Tax Cut and Jobs Act that was passed in 2017 did a way with the 1031 exchange for anything other than investment real estate. This is the big one. The only thing that you could 1031 exchange is investment real estate, period, full stop. There are ways, however, to write off a sale of an interest in a business, depending on how it’s structured. If it’s LLC taxed a C-corp or a C-corp, there’s something called a 1202 capital gain exclusion that starts at $10 million of capital gain exclusion.

Could we avoid tax on this? Possibly yes, depending on how it’s structured and how it’s taxed. You set a partnership interest. That’s going to say probably not the C-corp. You said an interest in a hotel that you’re probably not materially participating in. I’m assuming that if you’re a partner in this thing, you’re not there being the bellhop. You’re not running the thing, which means it’s a passive activity for you. If it’s passive, passive gain can be offset by passive loss. We call it a lazy man’s 1031 exchange.

We figure out when you sell, here’s capital gain that’s passive. We need that much loss from our other passive activities, which could be anything, real estate or a business that you don’t materially participate in, and we can offset that gain to get you to a zero tax or a low tax situation. It might be that you’re like, oh, crap, I sold this. I’m going to have to pay tax on it. But then you reinvest in another syndication that kicks down a loss, that offsets the game  from the one you just exited. That works, and we could actually run the numbers and tell you how to do it.

Somebody asked me, do you guys do LLCs, corporations too, and trusts? Yes. That’s what we’ve been doing for close to 30 years. If you want a consult, just reach out in the chat, and we will make sure that we get you set up with somebody. I would invite you though. I mentioned the tax and asset protection workshop. It’s absolutely free. We do them just about every Saturday. Make sure that you go to one of those.

You really do want to learn all the ins and outs of how land trust work, LLC works, how anonymity works, why we use Wyoming’s in certain times, why we use an S-corp versus a C-corp, versus an LLC taxed an S or a C, all those things. We do a really good job of spelling out on that tax and asset. I’ll show you the link before we’re out of here. I’ll make sure that you guys get a chance to sign up for free.

Why do we teach so much? Because it’s really complicated. Tax code’s 2000 pages at least and with about a million pages of interpretation between the regs and the court cases. No human being knows this stuff inside and out. Anybody who says they do is lying. It’s a practice. You just have to work at it and then you figure out what’s real and what’s not. You want someone who can identify with your situation quickly and figure out what’s relevant, so you’re not spending your time chasing your tail or talking to people that don’t know what the heck they’re talking about. You’ll be able to ferret that out really quick.

The second you say, bonus depreciation, cost segregation, real estate professional, short term rental, loophole, and all that stuff, if your accountant just looks at you and goes […], then time to move on. You want someone that knows this stuff.

“If I inherit a property and now use the property as Airbnb, do I need to depreciate the value of the property?”

Eliot: I threw this one in here because of the word need. Do I need to? It’s an obligation. You want to because now we’ve taken this property, we’ve received it as an inheritance, we’re putting it into a trade or business. The IRS basically requires. They’re not going to put a gun to your head and say put the depreciation on your return. But if you don’t and you later sell it, they will act as if you did take the depreciation and you never got the benefit of it. Yeah, it’s not that you need to, you want to. It may even save you on taxes, depending on how the numbers work out, probably will.

What’s going to happen here? Because we inherited, we’re going to get what we call stepped up basis. Whoever left it to you, if it’d been their personal residence, or even if it’d been a rental, they had a certain adjusted basis. If it was a rental, they bought it for some price, they depreciated it over time, they add some improvements, that became their adjusted basis, now when they pass and it came to you, you receive what’s called stepped up basis. You get it at today’s fair market rate basically at the time of passing, and now you got a lot more you can depreciate. No, you don’t need to, you want to. Yes, you’re in a very good situation having inherited it, you’ll probably get that stepped up basis, and have a lot more to depreciate. 

Toby: I think you probably said this, but I was too busy goofing off with your people. The weird part about depreciation is you may take it, but you must recapture it. If you have some Tax Tuesday when you’re feeling bad, you’ll just magically start feeling better. It’s like chicken soup. You don’t have to depreciate it, but when you sell it, you’re going to get dinged. I hate it when I see that. Somebody says, I just didn’t really make any money on it.

Eliot: It happens all the time.

Toby: Yeah, but when you see it, you’re like, you got 20 years of recapture, you knucklehead.

Eliot: But we can capture it up.

Toby: If we get it before you sell it, you’re okay. But once you’re done, you’re done. I don’t think you go back and amend. You got to make sure that you get it. If you’re in doubt, you have a property, and you’re like, oh, I think I’ve rented it out, but I haven’t depreciated it, and I didn’t really recognize that income, hey, yo, let’s get that thing fixed. Do it right. What else do I have? Dude, there we go.

“Can you comment on food and meals? When can those be expensed and how much?” Eliot, can you comment on food and meals?

Eliot: I can comment a lot on food and meals.

Toby: I like my steak rare. I hate bad service. 

Eliot: I’ll take any service as long as I get the food. They’ve changed this a lot since, again, the Tax Cut and Jobs Act came in in 2017. There is a lot of confusion. They had some special rules during Covid to help out in this area. Now those are passed.

Now, where are we today? Basically, if you have a business meal, you go out with the intent to talk business. You’re talking to a potential client or about business. It’s a 50% deduction straight across. Most meals, anything related to food in that deduction is going to be 50%. Remember, entertainment does not count anymore, just the food.

Toby: Entertainment’s gone, guys. It’s not coming back either. That’s a permanent provision in the Tax Cut and Jobs Act. It does not come back next year.

Eliot: Yeah, so I think that’s it for that.

Toby: We need some entertainment. What’s up with Donald Trump and the whole getting rid of the entertainment stuff?

Eliot: Right. But we have a hundred percent for basically a certain type of meal. That is if you are having a picnic for your company. Most of the employees there are not what we call highly compensated or something like that, then you can deduct a hundred percent for that, the annual holiday party, things like that. If you are having an open house, where all types of people can come in, clients and non clients, it’s not really directed at any one type of person, you could deduct that as well, hundred percent. If you just specifically put out certain invitations just to your clients, well then, no, we’re back to not a hundred percent.

Toby: If you have an open forum and let’s say, what should we serve? We serve pizza. That’s what we need. We need to serve some pizza. You can write it off. We can write it off as long as we’re not just going to our clients. If we have a big party, what kind of party should we have? We’re going to have a pizza party. 

What about food in the break room? It’s 50%. Marty, you’re 50%. If I bring dinner to everybody, 50%. They figure you’re eating anyway. What was another good one?

Eliot: Back when I was in tax prep, this was a long time ago, Anderson is so good. I got to tell you, they would bring food to us for lunch and dinner during the deadlines. Do you remember that?

Toby: Yes, it’s because we didn’t want them to leave.

Eliot: It was fantastic.

Toby: We didn’t want them to even think about freedom for a second. It’s tax season.

Eliot: Different tax code too.

Toby: We glued them to the seat. They didn’t realize, we just put super glue. They’re like, I just don’t want to get out.

Eliot: We didn’t care, we were eating for free. It didn’t bother us.

Toby: Somebody was talking about an anonymity. It was in the chat, it disappeared here, now it got rolled through because too many people are asking questions. Do job interviews at Starbucks count for 100%? No, that would still be 50%. If I meet with Eliot and we’re having a business meal, we can do it no matter where we reside. But if I leave my area, like if I’m going out on a trip, if I go to another state, for example, for a meeting, then I can write off my meals, whether I’m just me or not. Is a luau 50% right off? It’s a meal. You don’t get to write it off as entertainment, the luau.

Eliot: The food portion, the IRS would make you break up the dancing from the food.

Toby: I would say you’re paying for the food, then you get the luau for free. It depends on how they write it. 

Eliot: You can always try.

Toby: You can try, these little turds. Is there any way to deduct professional sports tickets? Meals in a suite. Not unless you’re paying somebody with them. Yup, they’re made.  Somebody has to be separately. Troy, you’re too on it. Let’s see. I was going to give Troy something.

All right, tax and asset protection workshop. I’m not going to beat you guys up on that one. Please register. Come to the live one so we can meet you because. Otherwise, it’s lonely when we go to those and nobody shows up. There’s always 400 or 500 people, it’s always a blast.

All right. “I’m a full time employee and receive W-2 income, also own two rental properties, which I manage myself. Can I use the qualified business?” QBI, set to phase out at the end of the year. Come on, let’s get this done, Congress. “I have read about the safe harbor rules, but I’m confused if I qualify as is everybody who reads the safe harbor rules.”

Somebody said, hey, let’s have another hourly test. It’s not bad enough that we have 750 hours and we have seven tests for material participation. Let’s create another one for the QBI. They’re just like, hey, Congress, come here. Come here a little closer. You just slap them.

Eliot: What was so special about 250, really? Anyway, what’s going to happen here, first of all, a qualified business deduction, that’s what you often commonly heard as a 20% deduction right off your income. There’s a lot of rules to that. I’m not going to explain it all, but the simplicity of it is that it works for any business other than a C-corp. It was given to all those other businesses because C-corp’s got reduced to a flat 21. This was the level of playing field.

If they reach a level as a trade or business, which just means you are systematically doing the rental, overseeing of the rental on a continuous basis and things of that nature, you’re  running the show, so to speak, then you would be able to take qualified business income deduction. There’s lots of different tests here, not just a 20%. It could be a 2.5% of your unadjusted basis and things like that, but talk to your tax prep on that. Nonetheless, yes, you could. However, the safe harbor, remember, it’s just that. It’s a safe harbor. It just says the IRS is saying if you meet this standard, you’re okay. It doesn’t mean…

Toby: We can’t bug you. If you meet this, we’re done.

Eliot: It doesn’t mean you don’t have a good standing, perhaps, it’s been on your facts if you didn’t meet their standard. What it is is basically over 250 hours. First of all, you break your properties into commercial or non commercial. We call this RREEs, Rental Real Estate Enterprises. You break it in those two groups. If you have over 250 hours in one of those groups and you basically are running the show, the list that the IRS gives you, all the things called managing that you would think, you’re taking in the rents, you’re doing the advertising, things like that, then you’re going to qualify instant.

You don’t have to worry about it. They’re not going to bug you as Toby said, but it doesn’t mean you have to meet that standard necessarily that you don’t have a strong argument. Nonetheless, can you? Yes, you can qualify for qualified business deduction. Safe Harbor is a little bit nasty. You don’t have to reach that center, but if you can reach that center, then the IRS will leave you alone. 

Toby: I just got to call out Matthew, Jen, Amanda, Dutch, Jared, Marie, Rachel, Ross, Tanya, Troy, for absolutely killing it. We’re up around 200 questions answered. They are doing a great job today. Thank you guys, and there’s a ton of you guys on there. Thank you for coming in. I’d be remiss if I didn’t say there are guys and gals in there just answering questions away.

I’m looking at these questions because I can’t help but sit here and stare at them half the time. I’m always like, oh, that’s a good question. That’s a good one. They’re doing a great job, so thank you guys if we don’t say it enough, especially during tax time. It’s about to get real in the tax world.

Eliot: These people still show up.

Toby: Yup.They do it. They’re not told, they don’t have to. They do it because they’re bored. No, they do it because it’s fun. Yeah, thank you guys. They don’t get compensated for this, so it’s a big one that they do that. Thank you. All right. Do we need to go over that anymore? You think you hit it? 

Eliot: I think I hit it.

Toby: Did he hit it? You guys understand?

Eliot: I got one vote for it.

Toby: The safe harbor, 250 hours because it’s not enough to have 750 hours, 500 hours, 100 hours, or more than anybody else. We have to create another hourly rule to make you guys like you just want to slap them. You just got to like, come on, guys.

I have one thing to say to Congress. Nothing for you. Yeah, thank you. You guys are awesome. You can’t even pass your own audit. DOGE is going through there. We don’t want you to look at our stuff, but we can tear yours up.

Somebody was asking about anonymity with the Corporate Transparency Act. Understand that the Corporate Transparency Act is FinCEN, which is the Financial Crimes Department of the Treasury. It’s the same place your tax returns go. It’s not a public database. You still have privacy. There’s a lot of people screaming about it, and I’m like, they already know who you are if you’re a small business. If you’re a single owner or you’re married, they already know. 

They just don’t have you in an easy, searchable database to see if you’re doing crazy stuff overseas and stuff. What they’re trying to do is get these money launderers. They have the information. It’s just they don’t have it in a nice database, so they got Congress to pass the Corporate Transparency Act. For most people, I’m like, knock it off, come on.

I get it. There are some people that are really angry and they’re like, now the government has your information. The Bank Secrecy Act, know your client, they’re already turning it over.  Sorry. They already have your stuff, not to exacerbate it.

At the same token, it’s on hold right now because a court in Texas granted it. There were two courts, same district in the fifth district that granted stays of enforcement. One was a national injunction and then another one was a stay of enforcement for the BOI information. That’s the one that’s currently active because the Supreme Court vacated the national injunction. I think it was just yesterday that they had the oral arguments on both. Depending on how quickly justice works, in the middle of the next month or two, you might hear something. 

The Corporate Transparency Act I think is a red herring. I think that they’re not looking for us, they’re looking for people. They just wanted a tool to hit people in the head that were doing money laundering and using third party straw men to do their transactions, which is very common in the drug trade. They just wanted to be able to charge them with another crime in case they couldn’t prove the actual drug trade. They just have to show that they were doing something, didn’t disclose it now, and you have felonies all over the place. 

That said, I’d rather not have it or have exceptions for small family businesses. This is stupid to have you guys all having to report it. We’re having to report it too, so all of us having to report it, but now it’s on ice. We’ll see what happens.

“How do I avoid capital gains taxes? If I sell my rental home in the US to purchase a multifamily home in Costa Rica. Apparently, 1031 exchanges are only good in the US.”

Eliot: 1031 again, it’s real estate that’s used in a trade or business, investment property, things of that nature. Your multi family home, as far as a class qualifies, it’s in the US, it’s just under 1031. You can only exchange US. for US property. If you had international, you could exchange it for international. That gets a bit maybe confusing, but you just have to keep them separate. International being exchanged for other international is considered like-kind and US for US. We’re good there, but that’s not the situation we’re given here.

We have a US property sold, and our replacement property is international, so no. A 1031 would not work under that scenario. Really here, then you have capital gains. You’re looking for things that are outside on your return to try and reduce that. Toby talked a little bit about the lazy man’s 1031. Those could be other things. If you had other property, where you ratchet up the passive losses and get those released for something like this. I guess this one, it’s not a sell, so it wouldn’t release it.

Toby: I have capital gains if I sell a rental home in the US. (1) Did you live in that rental home at any point, two of the last five years? Would it be something, where you can move into it and live in it and make it into a qualified under 121? The answer is no. Then you go to step (2) and say, is it something where you would buy something in the United States? You’re selling it, then you’re buying a multifamily home.

One of the easiest ways to avoid capital gains is not to sell an asset but to lever it instead. If I have a rental home in the US, I want to purchase a multifamily home, and I don’t want to pay the tax, maybe I borrow against the rental home in the US, a DSCR loan or something, then use that money to buy the multifamily home in Costa Rica, and use the rents that come off of the rental home just to attack that debt, you could do that too.

(3) I have a rental home and I sell it in the United States, now I have capital gains. Capital gains are offset by capital losses. I look and I see, do I have any unrealized capital losses floating around anywhere in my real estate portfolio that I could trigger to use to offset? Or are there any opportunities that I have on any other properties to trigger anything like a loss so that I could offset some of my capital gains? 

Those are the world of your options. You start going through a checklist and then you say, shoot, I have none of those. Okay, do I have capital available that I could invest in an asset like maybe oil and gas where I can create a loss to offset? I already mentioned that maybe it was stock, but any other assets. Do I have Bitcoin that’s run down a little bit, where I can harvest some of that loss to offset the capital gains? All those things go into mental checklist, where you’re saying, boom, boom, boom, or any of these things that I could take advantage of.

By the way, there are funds that are specialized. I am in one in Raymond James, for example, that specializes in harvesting tax loss. Its sole purpose is to continue to grow while at the same time, taking advantage of short term market changes and avoiding the wash sale rule to create capital loss to use to offset the rest of your portfolio. There’s products out there that smart financial planners have access to to say, oh, okay, how big of a capital gain issue do you have? Could we even borrow from the Costa Rica home and use some of that money to put into a portfolio to create some capital loss, to offset the capital gains that you’re having from the sale of the rental home?

That’s what tax planners do. That’s what these guys do all day, where they’re saying, hey, here are your options. The question always becomes, is the juice worth the squeeze? If the juice is worth the squeeze, you do it. If it’s not, then you’re just going through your checklist going, okay, what else could I do? Maybe I need to do a short term rental, do a cost seg, bonus depreciation, and try to grab some loss to offset that. That sale. Maybe that’s what I’m doing. You have all these choices.

Just because it’s in Costa Rica, doesn’t mean you can’t cost a good bonus the Costa Rican property. Maybe that’s what you do because your capital gains are still considered passive. Then you get the new multi family home and you say, hey, you know what, this is what I want to do. I’m going to try to accelerate some of that depreciation to offset some of the capital gains that I have from the sale of it. You never just screwed. You’re always, okay, here’s some other doors we might be able to go down. 

Here’s a big one. This is a very long one that you did. “I have two rental properties in SoCal that I’ve owned since 2009. I’ve been using the straight 27½ year depreciation. I know better now.” For state tax purposes, I don’t think California even allows you to use bonus, but for fed, you can. “With the growth and rental rates currently over $6500 a month between the two, the depreciation doesn’t really help much. The properties are now worth considerably more.” I don’t know what they bought them for, but that’s great. “If I 1031 these properties into replacement property, which is a slightly higher value, does that mean I can start depreciation all over and do it correctly? Getting more tax benefit, how does this affect my basis? What about any recapture when I then sell later?”

Elio: All right. If we do 1031, basically we have what’s called carryover basis. You take the adjusted basis of the relinquished, the property is sold. It moves over into the new property that you just purchased. To determine what the total basis is in that new replacement property, just as a rule of thumb, we take the cost that you paid for it and subtract out the amount of deferred capital gains. That’s a rule of thumb. That will tell you what the adjusted basis is on the new purchased property. 

There, on that amount, then you could do some depreciation items with it, but it’s not going to be at that level that you paid for the new one. It’s going to be reduced by, again, the deferred capital gains. We don’t really know all those numbers, but take that into account. That will give you an idea of what it is. Basically, that’s how it will affect your basis.

There will be depreciation recapture. If you ever resell in the future, there’s always going to be a possibility of that being in California. Another thought to be aware of, if it was a California property and you replace it with something outside of California, you’re okay there. But if you ever sell that replacement property into maybe another 1031, California has a clawback. They’re going to get their portion back. Even though you continued on the federal route of deferring that tax, you will not continue on the California side. 

Toby: All right, here’s one thing. If you have highly appreciated assets and you have good cash flow, don’t screw it up. I would say, if you want more depreciation, then you’re going to have to buy more real estate. If you want to buy more real estate without paying tax, then you’re going to lever the real estate that you have. In other words, I’m not going to sell my SoCal properties, but what I am going to do is borrow against them because I have great cash flow. You’re going to do a DSCR loan that doesn’t report to your personal, so it doesn’t screw up your other mortgages. You’re going to take that and you’re going to invest in something.

I’d probably be investing in something, maybe manufactured housing, self-storage, something that’s going to give me huge depreciation so that I don’t have to pay tax. If it’s over $6500 a month, what does that end up being a year? About $75,000, whatever it is, so maybe there’s $70,000 we want to offset. It won’t take much, you’d be surprised. You could probably buy about $200,000 of property and get a pretty good sized kick, especially if the bonus depreciation goes back up to a hundred percent. I don’t want to count on that.

If you do things that are mostly land improvements like self-storage, RV parks, manufactured home or mobile home parks where it’s all the pads, those types of things you can write off really fast. They’re 15-year with a 40% bonus depreciation, and then you still get the 15 years. You’re writing off 27½ year, 15-year, and immediate underneath the same property. It ends up being a nice little chunk of money that then you use so you don’t have to pay tax. That might be what you’re doing.

Realistically, the old adage is if you’re paying tax on real estate because you don’t own enough, then you’re going to have to increase your real estate holdings. The punchline is when you die, everything steps up in value and nobody pays tax on it, so you borrow against it. You lever, lever, lever. It’s what the rich do. It’s buy, borrow, die.

I buy something, it appreciates. I borrow against it, I don’t have to pay tax on that. When I die, I don’t have to pay tax if I have to sell it to pay the loans, and I get to keep all the difference, or I just keep it and then I re-depreciate it. I don’t know if the kids re-depreciate it.

There’s always a way. That’s real estate investor Toby talking. Tax attorney Toby is like, well, here’s the rules. 1031 is not going to get you where you need to go unless you’re buying something of considerably more value. Recapture is still an issue if you sell. I’d probably say you’re in SoCal, it’s not cash flowing usually. But if you have high appreciation, use it as a lever, and lever that puppy to go buy cash flow properties, and then use those cash flow properties to pay that loan down. Thirty years from now, you’re going to be thanking me because you’re going to have an even more real estate. 

Eliot: We’ll know what to do with it all.

Toby: Yeah, that’s what happens. That’s why the Kiyosakis of the world are like, lever, lever, lever. The Cardones of the world, lever, lever, lever. I’m not quite like that. I tend to just do it. I’m going to pay that loan down, but I know why I’m doing it. I’m doing it so I don’t pay tax. I’m doing it so I can increase my holdings, and that’s what I’m doing. Fun stuff. All right, what else we got?

Eliot: We got one more.

Toby: “What are the benefits of the step up basis evaluations for a personal resident and investment property?”

Eliot: Here’s an easy one. What we’re referring to, again, basis, that’s just what you purchase the property typically at. Here, talking about step up basis, that pretty much happens only that I only took place I know of its inheritance. That is if someone has a rental property, they’ve depreciated it for some time. Again, that adjusted basis goes down. They leave it to their children or something like that. The children get a stepped up basis up to the fair market value of whatever it is. They can, as Toby just talked about, take a depreciation at that higher new basis, and they have a lot more utility for it. That’s what we’re talking about, the stepped up.

For personal’s residence, the same thing. If you leave your house to somebody and they inherit it, they get stepped up to the fair market base at that time, or investment property, same standard. A lot of times, we have people come to us. They wanted to help their kids get along in business, so they thought, well, we have a rental, we’ll give them 50% interest in that rental while we’re still alive, showing the ropes. The problem with that is when it’s a gift like that, then they only get your basis at what you originally purchased it at. They don’t get stepped up basis when it’s a gift during their life while they’re still alive. That’s why we say wait, wait, wait until you pass, and then they give the full stepped up basis.

Toby: 100%. You actually hit it. That’s actually really good. Eliot just nailed it. We don’t need to belabor that. I know we’re a little bit over. Somebody was talking about Puerto Rico and Costa Rica. Puerto Rico is considered a territory in the US. The US Virgin Islands, Puerto Rico, Guam, and all these, that’s US property for a 1031 exchange. It’s not foreign. Your Costa Rica is not going to work with Puerto Rico. Your Puerto Rico will work with the US just so you know.

That is it, guys. We just went a little bit over. Thanks for  sticking with us. A bunch of you guys did, over 500 of you. Thank you. Make sure that if you get a chance, register for the YouTube channel, and then you can always do this. We do a live stream on the YouTube if you don’t want to do the Zoom. That’s always fun. We have people answering questions over there too. Of course, Clint, who just called me, has a great channel on asset protection for real estate investors. It’s very, very focused. It’s great.

Join us for the tax and asset protection workshops. The free ones are on the top. They’re Saturday the 15th, Saturday the 22nd, and then we have a live event, three-day, five if you’re a client and you want to go to a networking day from March 27th to the 29th. The extra day is Sunday. If you wanted to go and spend four days with us, you can. I teach the fourth day. It’s just a lot of networking, and we’re doing some different ways to do problem solving, the 100 day goal setting, and all that fun stuff.

If you like events, where you’re around with cool people, and we’re not doing too much crazy stuff, you’re just getting really good content all day in and out. It’s all tax and asset protection and things for real estate investors. If you like that sort of thing, it’s a great event to go to. Talk to people that have been there. Our community’s pretty open. You can always chat and see whether it’s something that’s right for you. Check it out.

If you have questions, email them on in. Eliot will look and decide whether or not he wants to put it out there for us to answer. This is fun. There’s still a bunch of questions out there. There’s over 250 questions that they’ve answered that I could see that, but there’s 12 that are open. What I’m going to do is I’m going to say, adeus for Eliot and I. We’ll mute ourselves.

If you have a question that’s still pending in the Q&A, we will answer it before we end the event. For everybody else, if you don’t have a pending question, thank you for attending Tax Tuesday. We’ll see you in two weeks. If you want to come back, which is great, we love our community. For those of you who are waiting on the questions, just hang on and we will make sure somebody answers it for you.

Of course, you can always just email us in questions over the next two weeks. Whatever strikes your fancy, you can say, Eliot, who does your tailoring? We’ll answer it live. No, I’m just kidding. We answer your question no matter what and make sure that you’re getting a question without getting a bill. That’s really important to us. All right, guys, thanks again. We will see you next time.