In this episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle listener questions on tax strategies for real estate investors and traders. They explain the tax implications of house flipping, including when to report income and how installment sales affect taxation. Amanda and Eliot discuss transitioning from a disregarded LLC to an S Corporation for managing rentals and flipping properties, emphasizing the importance of avoiding dealer status. They dive deep into 1031 exchange requirements, including timing constraints, qualified intermediaries, and the rules for converting investment property to a primary residence. Other topics include home office deductions versus reimbursements, deducting mileage for consultants with administrative offices, optimal business structures for active stock trading, differences between S and C Corporations, and the tax consequences of using corporate equipment for personal use. Tune in for expert guidance on maximizing tax savings while maintaining compliance!

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

• [00:00] Intro
• [06:26] I purchased a home for $12,000 in 2025 for flipping. Do I show it on my taxes at all or only after I flip? How do I calculate the taxes from flipping? If I want to sell a flip on installments – how does that change the tax? Report only after sale; calculate as ordinary income plus self-employment tax.
• [10:02[ What do you recommend to transition from a disregarded LLC to S Corp for managing rentals and doing house flipping as well? Use separate S or C Corporation to avoid dealer status.
• [14:10] I’d like to do a 1031 Exchange and eventually move into the property as my primary residence. How quickly can I do that? Wait 24 months with proper rental use before converting to residence.
• [19:03] What are some of the pitfalls of a 1031 exchange to focus on? Timing deadlines, qualified intermediary requirement, and boot recognition are critical pitfalls.
• [29:28] Can my S Corporation pay rent to me for my home office? And if so, is this considered personal income? Use accountable plan reimbursements instead to avoid taxable rental income.
• [33:32] If I am a consultant and take a gig at a company 35 miles from my S-Corporation’s administrative office, can I write off the costs to get to the facility on the days I work there? Yes, with administrative office, mileage becomes deductible business travel expense.
• [36:41] What’s the best business structure setup for active stock trading? Limited partnership with C Corporation general partner provides optimal tax benefits.
• [42:19] What are the differences between an S Corporation and a C Corporation for an LLC? S Corporation flows through; C Corporation pays flat 21 percent rate.
• [47:25] If I move equipment into my C corporation, can I still use it for personal use? Personal use over 50 percent creates taxable fringe benefit complications.

Resources:

Tax and Asset Protection Events

Schedule Your FREE Consultation

Toby Mathis YouTube

Toby Mathis TikTok

Clint Coons YouTube

Full Episode Transcript:

[00:00:00] This is the Anderson Business Advisors podcast, the show for real estate investors, stock traders, and business owners. We help you keep more of what you earn and protect what you’ve built. Let’s get started

[00:00:11] Amanda: All right. Welcome into Tax Tuesday, everyone. My name is Amanda Winalda, and this is..

[00:00:18] Eliot: Eliot Thomas manager the tax advisors here at Anderson

[00:00:20] Amanda: Oh, we’re doing titles. My name is Amanda Winalda, executive attorney. It’s a lateral move. Alright, well, we are happy to see you. Why don’t you go ahead and throw into chat where you are joining us from? We are based out here in the lovely Las Vegas studio 210 Off a Rainbow Boulevard .

[00:00:45] Eliot: Yep

[00:00:47] Amanda: The classiest part of town guys. Where are you guys from San Jose, California?San Diego

[00:00:53] Eliot: We’re going to go buy LA City, Oklahoma.

[00:00:55] Amanda: Alabama Alexandria, Virginia, we just there back from DC. Yeah, the state of Michigan Pismo, California. Oh the people are coming in from way cool places.

[00:01:05] Eliot: Yes, Texas very nice

[00:01:09] Amanda: SF San Francisco, Sacramento, usually we get about one or two people from even overseas. What’s the furthest you’ve seen somebody join us from? I’ve seen someone from New Zealand.

[00:01:17] Eliot: Yes, I yeah, I’ve never seen one there in Philippines. I don’t remember too many in Europe. Maybe once in Spain, I think one of them Portugal,

[00:01:28] Amanda: Plano, Texas, Finley, Washington, Silverdale, Washington. there’s a Las Vegas, New Mexico?

[00:01:34] Eliot:  I did. I’ve been there, spent a long 20 minutes there. It’s very very cool town

[00:01:40] Amanda: All right. Well, just a reminder. These are our Tax Tuesday rules. This is a live Q&A. If you have questions based off what? Eliot and I are talking about or any tax question you’ve come to get answered. We’ve got a whole team in the background. Please use the Q&A for that. Who’s joining us? Who’s providing some support?

[00:02:00] Eliot: We got Patty. We got Dutch, James, Jared, Rachel and Troy.

[00:02:05] Amanda: Oh, yeah, a lot of our tax team are CPA. So put your questions into the Q&A. Stands for question and answer you put in a question. We’ll get you an answer. If you’re having any technical difficulties, please throw those comments up into chat. Otherwise, if you’ve got a question, please email to taxtuesday@andersonadvisors.com. Eliot goes through those every other week to pick the best 10 questions from the week.

[00:02:29] Which we will be tackling here today. And if you need a more detailed response, please consider becoming a platinum member. Platinum members here at Anderson get unlimited access to our attorney and our tax team. Any question? Let’s ask those questions before you make mistakes. That’s where we want to help you. Afterwards is sometimes difficult. This is going to be fast, fun, educational and let’s go over our questions.

[00:02:58] I purchased a home for $12,000 in 2025 for flipping. Do I show it on my taxes at all or only after the flip? How do I calculate the taxes from flipping if I want to sell a flip on installments? How does that change the tax? There’s a lot of different things to get in there. That’s going to be a fun one to start us off.

[00:03:18] Eliot: Yes. What do you recommend to transition from a disregard LLC to an S corporation for managing rentals and doing house flipping as well?

[00:03:27] Amanda: A little complexity there as well. I’d like to do a 1031 exchange and eventually move into the property as my primary residence. If you’ve got some red flags going up there. There’s a good reason for that. We’ll talk about how quickly that this person can do that.

[00:03:45] Eliot: What are some of the pitfalls of a 1031 exchange to focus on? We got a bunch.

[00:03:50] Amanda: Yeah, we got a long list. Can my S corporation pay rent to me for my home office? And if so, is this considered personal income? We’re going to talk about whether you can and not only that, whether it’s a good idea.

[00:04:04] Eliot: If I’m a consultant and I take a gig at a company 35 miles away from my S corporation’s administrative office, can I write off the cost to get to the facility on the days I work there?

[00:04:16] Amanda: Hmm. This person is so happy in this slide. She’s thinking. Yeah, i’m saving so much money. What’s the best business structure set up for active stock trading? We’re going to dig into that. There’s definitely a difference.

[00:04:31] Eliot: Yes, what are the differences between, S corporation and a C corporation for an LLC?

[00:04:37] Amanda: Yes, and finally if I move equipment into my c corporation, can I still use it for personal use? These are the topics we’re going to be going through today. If you have a question completely unrelated. We won’t feel bad. We’ve got the team in the back answering those questions through q&a.  I’ve already got dozen in there in the meantime, please consider subscribing to our youtube channels. This is Clint Coons. He’s one of our founding partners.

[00:05:05] He is an foremost expert on asset protection. He actually has two best-selling books. He speaks around the country. Smash that subscribe button and then our fearless leader Toby Mathis. We have taken over his channel today tax wise Toby. Look at that. I’m on there again. That’s me. I love it. How many views do I have there?

[00:05:26] Eliot: 301,000.

[00:05:29] Amanda: Wow. Check me out. My husband does some youtube stuff and we kind of compete there. So it’s the battle. If you’d like to come see us in Vegas, we’re offering a three days for our tax and asset protection event this format Eliot’s there. I’m there, consider registering now through that qr code. If you can’t make it to see us for three days in march, then come to our one day tax and asset protection workshop. It’s saturday’s typically from 9 a.m to around 4 p.m pacific register here on our website.

[00:06:07] If you’re just like man, I cannot wait to work with these people. They know so much. Then consider signing up for a strategy session. It’s 45 minutes. You’ll be talking to an expert in tax, business, and legal who can structure your investments your new businesses for wealth planning and really changing the future for you and your family. That’s why we’re all here.

[00:06:29] Eliot: Exactly. All for the better.

[00:06:31] Amanda: Let’s get into it. Our first question, I purchased a home for $12,000 in 2025 for flipping. Do I show it all on my taxes at all or only after I flip? How do I calculate the taxes from flipping and if I want to sell a flip on installments? How does that change the tax so starting from the basics? Let’s talk about what flipping actually is.

[00:06:54] Eliot: Absolutely. So flipping is going to be or something like that, where we get a house but we’re not really going to. We have no intent to use it as a rental, short term, or long term. We’re really just going to fix it. Maybe we don’t even fix it. But we’re going to resell it right away, is the idea as quickly as possible. That’s basically our flipping as opposed to rental

[00:07:14] Amanda: Yeah. When we’re thinking about flipping we’re obviously running this as a business the intention is to make money. But it’s a little bit different than a normal business where you’re deducting costs as you go along, right. All of the expenses for that flip get captured in a bucket and it’s only offset once you sell that flip.

[00:07:36] Eliot: That is correct. Your purchase price here $12,000. Maybe we put another $3,000 in rehab expenses. Well, we don’t get to deduct that right away. Here we’re talking about a 2025 purchase and maybe we put $3,000  in there and so at the end of the year. We have a total of $15,000 invested in this property. But if we don’t sell it in 2025 we don’t get to take that deduction. It just sits there basically as inventory or cost of goods available for sale and then maybe we sell in 2026. That’s where we’re going to recognize that cost against that sales price to determine the total.

[00:08:13] Amanda: How do we actually calculate the taxes? What are we paying tax on? If we’ve put$15,000 into it and let’s just say we sold it for $40,000.

[00:08:23] Eliot: Correct. So then we would have 40 minus that 15 and that’s going to give us a taxable basis a tax amount of 25,000.

[00:08:33] Amanda: Then because this is a capital asset. I get to pay capital gains tax on this right Eliot?

[00:08:38] Eliot: Exactly not. This is going to be flipping. This is an active business. Now we got to pay ordinary rates and that’s not all the good news. You also get hit with self-employment tax.

[00:08:49] Amanda: Yes.

[00:08:51] Eliot: Yeah, so you get a winner to the tax lottery there.

[00:08:54] Amanda: Lose the tax lottery there. If you are doing flipping continuously, then you get tagged. It’s what’s called a dealer if you get tagged with dealer status, then you get to pay that extra 15.3% on top of your ordinary income tax rate. We’re going to talk about in our next question how to avoid that using an asset protection structure. Getting back into the tax stuff, can we sell a flip on installments?

[00:09:27] Eliot: It’s a charged question because yes, you can. However, you can’t defer the gain, you can receive installment payments over time, maybe five-10 years. But you have to recognize all the gain in the current year, why? Because it’s inventory and we can’t do installment deferral when it’s inventory.

[00:09:46] Amanda: Yeah, you can do the installment or seller financing deal to benefit the buyer. Maybe they can’t go and get a normal loan with the bank. It’s sort of widening your opportunity for who you can sell to but from a tax perspective you are recognizing. Recognizing all of that in the first year.

[00:10:06] Eliot: Absolutely.

[00:10:07] Amanda: Question number two. What do you recommend to transition from a disregarded LLC to an S corp for managing rentals and doing house flipping as well. I actually asked you if this was the same person submitting this question, but it was totally different.

[00:10:22] Eliot: It was totally different. Yeah, but the kind of on the same lines. But a little bit more material here to work with again our additional material than the last question. First of all, just recognizing what’s going on here, as far as managing it is just a property manager, not what they’re being proposed but what’s being proposed here through the corporation and that’s fine. We use corporations all the time for property management.

[00:10:44] Again, that would be opposed as opposed to the flipping that we just talked about where we’re just selling it as inventory. You could do that in your corporation, S corporate. We often see C corporations by the way for that, but either way, C corp, S corp. That’s fine. As far as any recognition recommendations, we certainly would want to change from a disregarded because if we don’t you talked a little bit about dealer status earlier if we do it in a disregarded as far as the flipping of homes.

[00:11:12] That changes things and you’re going to get hit with the dealer status, which basically means again you’re going to hit with an extra 15.3%. Even if you sell a long-term rental and that’s what we want to watch out for and then we would recommend doing so in a corporation such as an S corporation or a C corporation. Again that can be an LLC tax as an S or C. That’s fine.

[00:11:33] Amanda: For asset protection purposes, we’re typically flipping in a C corporation. Number one to avoid that dealer status and then we are creating individual LLCs for each flip. This is more of an asset protection reason. Once you sell that flip then you dissolve that LLC, you cut off the liability there and that allows you to mitigate your risk. If there’s some issue with one flip that’s in its own separate LLC.

[00:12:03] It’s not that liability that potential judgment creditor isn’t going to bleed into your other projects. And it’s not going to cause your business to come to a standstill there. There’s a lot of benefits to the Corp as well, we’ve got a lot of deductions that we can do. We’ve got an accountable plan. We’ve got a medical reimbursement plan. We can do our 280A meetings which we can get into later today. Those are all the ways that we’re getting funds out of it

[00:12:31] And then the Corp is a flat 21% tax rate. If you do the same structure as an S Corp then all of that income is going to flow through pass through onto your personal tax return. With the C Corp you just have a little more flexibility to do some tax planning there. Especially if your personal income tax is already much higher than that 21%. But again a C or an S will avoid that dealer status.

[00:12:57] We definitely don’t want to flip in our disregarded LLC in terms of these reimbursements, the only one that you can’t do medical in an S Corp. So if you’ve got very high out-of-pocket medical costs. We’d want to shift you over to that C corporation. If you want to do it, property management in the same entity to have everything flow down to the separate tax return. You can do that as simple as set up a separate LLC right under for that property management. Do it separately. Maybe you have one S Corp, one a C Corp, to give you the maximum way to really balance out and get creative with that tax planning.

[00:13:34] Eliot: Just so we’re clear though because we might be managing some rental properties. We would never want to put those rental properties in our corporations. Those are not being owned by the corporation and may receive the rent check, but it doesn’t own them.] And so while Amanda has all these boxes, she’s referring to those LLCs, the flipping. Yeah, these are certainly not rentals. We just want to make sure everybody’s clear with that.

[00:13:57] Amanda: If you’re self managing your own rentals, you can still do a separate property management company and we encourage you to do it separately. But we want to hold your own rentals separate out from this active activity.

[00:14:09] Eliot: Exactly right.

[00:14:12] Amanda: I’d like to do a 1031 exchange and eventually move into the property as my primary residence. How quickly can I do that? Let’s just first talk about what is a 1031 exchange and what type of property is it meant for?

[00:14:26] Eliot: 1031 exchange is simply the ability, if we’re dealing with real real estate property, is going to be your single-family rentals, your barren land, could be a commercial building, or anything real estate. Okay, that’s using a trader business that’s not inventory. Okay, so we’re not talking about flipping or anything like that.

[00:14:48] But these would be rentals, a long-term hold for investment, something of that nature has to be used in that capacity. The idea here is maybe if you sell it and instead of recognizing all your gain at that moment. You can actually exchange your funds and get a new property and if you pick up a new property, which we call replacement property. That’s more expensive, equal or more expensive than what you gave up the relinquished property and you pick up more debt or equal to what you gave up.Then it’s going to be basically full tax deferment if there’s nothing else going on and that’s the idea. You don’t have to pay any tax yet. You get a bigger and better billing is the theory.

[00:15:30] Amanda: We push that out into the future and there’s many investors who swapped till they drop. Meaning that they’ll 1031 exchange into new and better properties year after year. Then when they kick the bucket your heirs, your beneficiaries, get to take title to that property with the step up in basis. They can turn around and sell it and you’ve managed to completely avoid capital gains all together.

[00:15:55] Now this trade or business requirement. So 1031s are typically held for properties, held for investment, like you said rentals whether it’s short-term, long-term, raw land, commercial, single-family home. Is there any scenario where I can take a property I’ve done a 1031 exchange on and then actually make it my primary residence. That’s not business use property anymore. There’s got to be rules.

[00:16:22] Eliot: Correct. It’s not at that point but yes, you can do that. Nowhere in the code or the or there are the regs does it say exactly. But the IRS has come up with what they call a safe harbor and that’s from a rev proc. We call it, revenue procedure.That was 2008 – 16 and what the IRS says well, if you hold it for at least 24 months and during each annual period that is both 12-month periods during that you rent it out at fair market rate for at least 14 days. You don’t use it for personal use the greater of 14 days or 10% of the fair market rental days.

[00:17:03] Then you can move after that 24 months into it and use it as your primary residence. That’s the safe harbor. What we mean by safe harbor is that if you do that the IRS is not going to look into what was your real intent, when you went into the 1031. Because the intent of the 1031 again is to relinquish or give up some business or trade or investment property with the intent to pick up new property that’s going to be using a trader business.

[00:17:29] If the IRS sees that you made the safe harbor that is over two years 24 months. According to these rules, then they’re not going to look into it. They’re not going to examine it but if we fail the safe harbor, we don’t meet those standards the IRS can come in and they now you have to be able to prove that you had the intent the whole time to use it in a trader business.

[00:17:48] Amanda: Yeah, and then simply asking this question is going to get you got there. If you’ve done the 1031, the short answer is 24 months leasing it out to a third party. Then you can move in that’s going to qualify under this safe harbor. In terms of the 14 personal days that you use it, maybe it’s a vacation home that you’re renting out on Airbnb.

[00:18:11] Make sure you’re doing it at least those 14 days. If you are mixing, use using it for personal use, you want to make sure it’s 14 days or less. But interestingly enough the days that you go there to actually work on the property. Don’t count against either of those limitations. If you’re hanging out there, I have a client who has a beach house they rent it out and then they go out to change the sheets and fix some light bulbs and obviously enjoying the property and the beach while they’re there those days actually don’t count against your personal use.

[00:18:46] Eliot: Yeah, and they typically look at it from the standpoint if you spent substantially most of the day working on that property. That’s not going to get counted against you.

[00:18:56] Amanda; Yeah, you want to screw that light bulb very slowly. What are some of the pitfalls of a 1031 exchange to focus on?

[00:19:07] Eliot: We got a bunch.

[00:19:09] Amanda: We’ve got a lot on this list. It’s quite a lot. Let’s just start off with timing. Everyone wants to get into a 1031 because it’s a tax deferral strategy. Hey, I’m going to get into a larger property. Maybe I’ve expended all the depreciation I can take for this property. Now it’s starting to show some taxable income at the end of the year. Let’s 1031 defer the tax there, but timing becomes a really big issue. We’ve got very strict timing constraints. Tell us about those, Eliot.

[00:19:40] Eliot: Yes, for the 1031 you have 45 days to list the properties that you’re going to go out and buy that’s called the replacement property. In theory that will start kicking off from the minute that you sold the relinquished property. You sell property, you have 45 days to list the ones that you’re going to pick up instead. You really want to have that all done beforehand, kind of have an idea which ones you want to get as replacements before you actually sell yours because that starts the clock 45 days now.

[00:20:10] Then you actually have to tie it all up, that is get the replacement properties signed for and everything of that nature and owned before 180 days is up. We got the 45 day to list and go to the IRS say, hey these are properties I’m going to get a total of 180 days to finish the whole deal.

[00:20:30] Amanda: Then within the properties that you are identifying there are even more rules.

[00:20:36] Eliot: There really are. First of all you can have up to three properties and have an unlimited air-market value for your replacement properties or alternatively you can have unlimited properties with a fair market value that’s only twice that that you gave up and they’re pretty strict on that. There is a slightly less well-known rule that says if you happen to expand beyond those categories and you pick a whole mass of replacement properties.

[00:21:05] The IRS will let you slide by but you have to close on all those properties with 180 days at least 95% of all the fair market value of all of them. That’s kind of a trickster one. We don’t hear about that very often.

[00:21:19] Amanda: What this really means in practice is that you have to really hone down on the properties that you’re going to formally list as potential replacement properties. You can’t just list 50 plus properties or else you’re going to be required to close on 95% of those in order to get the benefits of that 1031 exchange. It’s really good to start looking at scoping out the areas that you plan to invest in.

[00:21:47] Eliot: Just one last comment on that 95% rule again, 95% of the fair market value of all the listed replacement properties if you don’t meet that you lose the whole 1031. You want to be real careful on that one. It’s kind of taking a gamble.

[00:22:03] Amanda: Alright, and then what about formalities, let’s talk about how functionally the 1031 works. You can’t just do this on your own. This is not something you just get a realtor do a deal and then call it a 1031 after the fact.

[00:22:17] Eliot: Exactly, right because that’s another one of the no-nos you can’t touch the funds. You have to have a special. It’s called a qualified intermediary, we call it QI for short. That individual is basically unrelated meaning they haven’t had anything to do with you or represented you in the last two years such as an attorney or something like that. This individual is the one that receives the funds from the property you relinquished and likewise. They’re the ones who will send out the funds for anything that you purchase and once everything’s cleared up.

Then they’ll give the properties to you the replacement properties.

[00:22:49] Amanda: At no point. Do you receive constructively or actually any of the funds that are involved in this transaction if you do.

[00:22:59] Eliot: It’s going to be taxed.

[00:23:00] Amanda: It’s going to be tax.

[00:23:01] Eliot: No 1031, common mistake while I was doing a 1031 and I didn’t know anything about this QI.  I just went to my attorney and they do a step, wholly different type of law and didn’t know the 1031 rules either. That’s an agent of you that is an extension. That’s that  constructive receipt that Amanda was just referring to it would blow your 1031.

[00:23:20] Amanda: For the funds that you do receive we call that boot and you can get boot in cash or you can get boot through the mortgage.

[00:23:30] Eliot: Correct. Again two requirements for deferral of income. Number one again, pick up a property equal or more in the fair market value and you pick up equal or more in the way of debt on that property you’re receiving. As Amanda’s pointing out here, what if you had a hundred thousand dollars a debt on the property you got rid of and you only get a property that has $90,000 a debt. Well, that’s ten thousand dollars of boot and you’re going to pay tax on that $10,000.

[00:23:59] Amanda: If you’re looking to kind of shrink your debt ratio the amount of overall debt that you have then the 1031 is you’re not going to be able to do it through that type of transaction.

[00:24:10] Eliot: At least for full deferment.

[00:24:12] Amanda: Correct, now what about related parties do it closing in the same name. Let’s talk about closing. A lot of times people will say, oh I need to close in the same entity or in the same name that owned the property and that’s not strictly true. It’s more of which tax return it’s going to hit.

[00:24:33] Eliot: I mean, that’s a good kind of guide if you will rule of thumb that it has to be in the same name but really it really has to just go to the same taxpayer. That gives us a little more leeway as long as it’s hitting the same return but we get into a lot of confusion with say a partnership some of the graveyard have failed 1031 ones out there. A perfect example an individual has a rental property that they received in a 1031 or something of that nature and then they go and get married.

[00:24:59] The other spouse well wants to be put on that title. They go ahead and put them on. That’s different because that typically creates a partnership and you’re going to have a different taxpayer now so that’s going to be a problem. That’s a very common one that comes up.

[00:25:14] Amanda: Yeah, any time there’s just to know any time a partnership is either the original owner of the property or you want a 1031into a partnership. Just know that that’s going to be very tricky to do and might not be possible. Now in terms of what kind of property it needs to be, the term is like kind, and the definition of like-kind has changed over the years, hasn’t it?

[00:25:38] Eliot: It used to be far more lenient. We would have like-kind exchange with automobiles and things of that nature. Always under the concept that was used in a trade or business. People often I had clients early on doing tax prep when I was back when I was doing that they would have trucks or something like that and they 1031 into a new vehicle. It was a lot broader now.

[00:25:57] They’ve limited it just to real estate. It’s only going to be again barren property buildings, things of that nature and they all have to be in the US. We cannot 1031 a property. Let’s say in Illinois for one in Paris or something of that nature.

[00:26:16] Amanda: But it doesn’t have to be a one-to-one ratio. If you have a single-family home, You can 1031 into a commercial property or a multifamily. It’s not quite one-to-one.

[00:26:27] Eliot: As long as we’re in the real estate area if you will. It’s actually very flexible then as far as what type you mean. Exactly as you say, you can go from single-family to a very large commercial mall or shopping mall or something that nature and that’s fine. It’s just that it has to be property for property.

[00:26:44] Amanda: All right now in terms of documentation, if we want to really nerd out on the tax, how are we reporting the 1031 on our tax return? And what are some of the pitfalls that we could come across there?

[00:26:55] Eliot: It’s going to be on a form 8824 as we’re all the calculations if you will take place and you just need to make sure that’s really done. Well, there’s sometimes it’s not prepared accurately and any of that kind of something being done wrong on that is going to probably get the attention of the IRS.

[00:27:13] Amanda: Now, can I just sell to anyone we have the question previously was can I move into a property I have 1031 and use it as my personal residence? Yes after two years subject to some requirements. If I know somebody, if my brother-in-law has a property and I have one can we just swap up in 1031 them?

[00:27:34] Eliot: You can but both properties have to hold on for two years if one of them sells before that time period. It’s going to crash to 1031 as well. We’re going to have to pay some tax.

[00:27:45] Amanda: They’re kind of used that two year litmus test to make sure that you’re not just kind of trying to wiggle into a part of the tax code to get the benefit of it.When your real intention was to do something else. Make you stick with it. All right, you are watching Toby Mathis’s YouTube channel we’ve taken over as the kids say, please subscribe you will get a certification every time we go live and every time Toby uploads a new video. He was just in here recording earlier 14 new videos guys come in your way.

[00:28:18] Eliot: What’s he up to know?

[00:28:20] Amanda: He’s a madman and then Clint Coons our other founding partner. He deals a lot more with the asset protection and the real estate investing side. But the reason you’re here is because the tax and the legal go hand-in-hand. You can’t really separate them. You don’t want to only think about one side of the coin.

[00:28:37] We got to think about both sides so subscribe to Clint’s channel as well.

[00:28:41] And if you’re ready to move forward with a strategy session hit click this QR code. It’s 45 minutes free strategy session. That’s wild. I mean, that’s great. I used to charge 600 an hour when I was in private practice.

[00:28:56] Eliot: That’s a lot cheaper.

[00:28:59] Amanda: Free is cheaper. Yeah, that’s true but no less value you’ll be working with a seasoned professional who has been four years structuring families, individuals, for their businesses, for their real estate investments, for their trading investments, so we could get you started there. Alright, can my S corporation pay rent to me for my home office? And if so, is this considered personal income and this is a great example of a question.

[00:29:29] The answer is yes, but yeah, here’s the list of reasons why you might not want to do that. First of all, S corporations. Let’s just talk about, S corporations are passed through taxation. Meaning at the end of the year any income that you have You pay tax on it. The s corp files its own tax return. Yes, it reports the income that reports the expense.

[00:29:54] But then it’s going to issue you a k1 and that you report that on your personal 1040 if we want to get technical it is Schedule E page two but then you ultimately still pay tax on that. Keep that in mind when we’re thinking about renting out a home office now. What are the requirements for being able to rent the home office back to our business?

[00:30:20] Eliot: We always have to use that area exclusively and on a regular basis. It’s typically we were run into here for the home office. As far as how much we typically are going to use square footage. Is often what will happen square footage of the office area divided by total square footage of the house? We get a certain percentage and that might be one way to come up with a value.

[00:30:46] But here we’re paying rent if we had just a flat rent amount which we certainly could do. All that’s going to happen there is it’s going to come to you as income. It will be a deduction to the S corp. But it’s just more income that you have to report on your own return. You’re not really getting a benefit from it. Whereas because it is a S corporation, Amanda mentioned early on those corporations. In fact, this could work for a C corp, we have the accountable plan.

[00:31:13] Accountable plans just reimbursement is the idea there and you can be reimbursed for having this type of office. A reimbursement means that you get paid back money that you would have otherwise paid out in the way of expenses for your property. It’s tax-free to you and it’s a deduction to your corporation at the same time. That’s far superior than just simply receiving rent that you’re going to have to call income on your return anyway.

[00:31:37] And not really have any movement, but when we do a reimbursement in a corporation. Again, we can come up with that calculation of square footage percentage versus the whole use of the house and whatever that percentage let’s just say it’s 15%. Well, that means 15% of your property taxes, mortgage interest rent if you’re a renter, whites, electricity, what have you 15%of all that can be paid back to you. It’s a deduction to your corporation at the same time.

[00:32:06] Amanda: Think of it this way, if you’ve got maybe toll roads near where you are or taking the freeway versus side streets. Ultimately you get to the same place taking either direction, but let’s take the one that’s going to be faster. With the escort paying you rent, now you’ve shifted your you’re calculating the cost of that home office the same way either way.

[00:32:30] You’re calculating the percentage of the utilities, of the HOA, of the mortgage interest, and you’re taking that as offset that rental income. But if your S corp is paying you you’ve suddenly put every dollar of the income and expense associated with that office on your personal return. Which is 10,000 times more likely to get audited versus keeping all of that expense on your S corp return. Which is audited at a much less frequent rate because it is a business tax return.

[00:33:00] So not only are you creating more work for yourself. But you’re also kind of waving a red flag in the IRS’s face, mo money, mo problems as they say right Eliot

[00:33:10] Eliot: Exactly, right.

[00:33:11] Amanda: You can but you probably do not want to do it this way.  Please don’t all right. I’m a consultant and I take a gig at a company 35 miles away from my S corporations administrative office can I write off the cost to get to the facility on the days that I worked there. Generally commuting is not deductible. I don’t get to deduct driving into the studio to hang out with this guy every day. And neither do you Eliot?

[00:33:40] Eliot: That’s correct.

[00:33:41] Amanda: That’s correct. But what about this situation actually allows the person to do that?

[00:33:47] Eliot: It’s that administrative office that we were just talking about. Having that office changes everything in your corporation because now when you step out on business related travel if you will or moving or whatever you’re driving to its other facility in this case. That mileage is deductible reimbursable for the mileage and it’s deductible to the corporation as well.

[00:33:09] Amanda:Do you know the mileage right off the top of your head?

[00:34:11] Eliot: 74 cents, I think, approximately, actually, I don’t remember what it is that changes for 26 yet.

[00:34:17] Amanda: Just say index for inflation. It’s per mile. How is that different if I just work a 1099 job it applies even if I’m going to the same place every day.

[00:34:31] Eliot: If we don’t have this then we can’t take any kind of deduction. We don’t have 74 cents a mile but having this administrative office turns it into, where it’s not a commute and now it’s just if you will business travel. Although it’s just driving to the office, it’s something again that you can receive the money back from the corporation to reimburse you. In 76, 70, excuse me, 74 cents a mile or whatever it is for 26 is going to be is pretty generous. Compared to the price of gas and what you get per mile.

[00:35:03] Amanda: Yeah, and that includes wear and tear. It’s essentially saying I’m no longer leaving my home every day. I’m going from one office to another office and that’s what makes it deductible and for that administrative office. We need to have a separate place that is exclusively used as your administrative office. If you are currently sitting on your couch with your computer that’s not going to count. If you do your work from your dining table, even if you never use that dining table to eat off of, that’s not going to count.

[00:35:35] You really need a separate space that is solely and exclusively used for your office and it doesn’t have to be big. There’s no requirement that it be a complete room with four walls and a door. You can set up a corner even in a guest room or even in another part of your home and it can be as simple as four by four feet with just a desk and a chair and a computer as long as you’re not using that space for anything else.

[00:35:59] Eliot: Having some clients. They just set up those vanity screens and well just to separate the little office area off. That’s perfectly fine. The IRS clearly says in the code just as Amanda said It doesn’t have to have again, four walls on the door.

[00:36:14] Amanda: You don’t have to install one of those curtains from the hospital. You don’t have to do that. It just has to be separate space not regularly used for anything else. Okay, what’s the best business structure setup for active stock trading? When we’re talking about business setup, we’re looking at not only the benefits of the tax flow.

[00:36:36] But also, why do you want to do certain activity that we may not consider high liability, why do we want to do that in a business entity? When you’re trading stock, nobody’s tripping over a stock that you sold them and suing you, right? It’s not a high liability activity. But we do want to put that activity into a business entity to protect it from us. We’re out there, I don’t know how well you drive but car accidents are a big reason why people get sued and we don’t want you to have a fat juicy asset like a trading account in your personal name. We want to section that off into a business entity.

[00:37:16] Now this is specifically talking about active trading. But I think we should actually start with passive and what we do maybe passive trading. What do we do there Eliot?

[00:37:25] Eliot: We’re typically going to, we’re thinking of a brokerage account. Maybe we just have a bunch of ETFs. They do all the work for us. We’re not really trading actively at all. We’re going to put that in a safe assets, Wyoming LLC. Just plopping it in there.

[00:37:39] Amanda: We could do mutual funds here. You can have your cash savings.

These are the set it and forget it type of investments. You could put gold you can put Bitcoin, things that we’re not interacting with every day. We set it in there and then that protects it from us. If you have a judgment against you personally, your creditor can’t reach in and take those assets from you. Now with an active trading, what does it mean to be an active stock trader?

[00:38:09] Eliot: For the purposes of what the IRS says, if we’re not working with this business strategy, there is something called the trader status and that just says that you’ve done it. You do enough trading every day that maybe this is your real job. If you will, your nine to five job or something that nature it has to be substantial regular trading frequently and on a continuous basis with the idea of aiming for short swings in the market and it has to basically be your primary source of income.

[00:38:42] That’s not very exclusive as far as numbers or anything like that. It’s a very hard-moving target. You have to be able to convince an IRS auditor that you meet all those standards and they’re not always the same. You have different people having different ideas of what all those terms mean.

[00:39:00] Amanda: They’re very vague terms.

[00:39:03] Eliot:  It really is, it’s on purpose

[00:39:04] Amanda: If you’re just starting out you’re not going to meet this last requirement that you’re doing it for your primary source of income. Most of the time we’re starting off on the side as we learn or as we start building it up before we make that formal jump now with a trader. If you’re considered a trader you get all kinds of benefits of deductions. These are things that with the tax cuts and jobs act of 2018 they were eliminated as itemized miscellaneous, itemized adjustments, that you would have normally taken on your schedule A. Subject to a 2% floor. What are some of these expenses and that a trader would get?

[00:39:42] Eliot: Yeah, this is going to be maybe having a home office subscriptions, platform fees, brokerage fees, things of that nature, charts. Common fees that one runs into with the trading activity.

[00:39:55] Amanda: Yeah, anything that you need for that trading business if you’re a trader you get to deduct these.

[00:40:02] Eliot: That’s correct. You’re going to do it probably on a schedule C most often again now schedule C. That’s the real lightning rod for an audit and furthermore all you have here are expenses. Typically, there’s no income associated with us because your income often is going to go on a schedule D as in dog for capital activity. Maybe you’ll have something that will create some ordinary income that you could put on there. But the point is that, you’re bringing a lot of attention to yourself and the IRS really likes to go after these type of traders for audit reasons.

[00:40:33] Amanda: yeah, so how do we get the benefits of what traders get to deduct with without actually having to meet the requirements of being a trader and get the asset protection and we use our trading structure.

[00:40:47] Eliot: What we’ll want to do is keep it in that business realm that gives us our deductions and we set up a partnership. In this case, we have a limited partnership. That means partnership means two partners at least and we’ll have a general partner. That’s a corporation a C-corp and then we have the individuals and just as Amanda pointed out here often.

[00:41:05] We’ll have 10% being owned by the c-corp that are 90 by you personally right there without having done anything. We’ve shifted ten percent of our gains off into our c-corp. So you already have tax savings on your 1040. But that income in there in the C-corporation now is flat. It’s going to be hit at flat 21%. We do have the 280A, we have our accountable plan reimbursements, we have medical reimbursement, on the 105 plan to help get that money out of the corporation back to us tax-free and it’s a deduction at the same time to the corporation.

[00:41:42] Amanda: All these business expenses here we can take as deductions on the form without having to meet the strict standards of being a trader.

[00:41:49] Eliot: Exactly, right?

[00:41:51] Amanda: That is the best business structure right here, our limited partnership trading structure with a C-corp as a partner there. Alright, what are the differences between an S-corp and a C-corp for an LLC? Let’s first just talk about, on the tax side. What’s the difference between an S and a C?

[00:42:10] Eliot: An s-corporation it’s going to flow through to your personal return man. I mentioned that earlier, it’s going to hit your 1040. It does file its own tax return of form 1120 S however all that income comes to our personal 1040 in two streams. You have typically a W-2 wage just like from any other job getting paid a paycheck from your S corporation. The other portion is what we call, distribution and that flows through the difference between those two is your paycheck.

[00:42:40] Both are subject to employment. Excuse me in federal income tax, but only the W-2 gets hit with the employment tax. We have no employment tax on that distribution portion. That will be just tax at ordinary rates.

[00:42:53] Amanda: Then the c-corp or fine are 1120 and then the c-corp not only files its own tax return, but it pays its own tax at a flat 21% rate. Regardless of the type of income that’s coming in ordinary income capital gain, that’s all going to hit at that 21% rate, which if your personal rate is 34%, 37%. That Delta provides us a lot of opportunity for tax savings there.

[00:43:18] That’s the big difference now, this says an LLC tax as an S-corp or a C-corp. Obviously LLCs if there’s a single member can be disregarded for tax purposes if there’s more than one member. You can also elect to be taxed as a partnership, but you can have a true Inc a true corporation. Why would we maybe choose the true corporation over the LLC?

[00:43:44] Eliot: Probably the main distinction between the two again being an LLC tax is a C versus the “true C-corp” is that the true C corporation has shares and you can use the 1244 stock loss. And what that says is that at the end of the day should you decide to shut down? If you have an overall loss going on in your C corporation when you dissolve you can take up to 50,000 of that loss if you’re single as an ordinary deduction or a hundred thousand if you’re married and filing joints. As opposed to a capital loss that you would normally have with a stock loss.

[00:44:20] Amanda: This is something to really think about because we don’t always go into it. I mean most people aren’t going into a new business thinking about the worst-case scenario. If it fails, what can I do? But we actually had a client who had gotten into had spent around 40,000 to learn how to flip real estate. They had retired and they were just looking for something to do to generate income and we started them with a C corporation. Their CPA was actually upset by that.

[00:44:50] Why didn’t you start them with an S corp? If you had started them with an S corporation, they would have been able to take that 40,000 deduction in the first year. We said well, we didn’t lose the deduction for them, we’re just hedging our bets. Their income, even in retirement, was well into the 30s their taxable income rate. By putting it into the C corp we allowed them to have a lower tax rate.

[00:45:15] Then what actually happened with this couple is that he had gotten a call three years later to go back to work. At 68 he went back to work, he got a huge signing bonus because that’s the only way I’m going back to work at 68. They hadn’t made any money in their flip yet, but at that point then because we had set them up as a true C corporation. They didn’t lose that deduction.We did the 1244 stock loss and that initial $40,000 investment they took it against that $30,000 signing bonus. Free money that we like.

[00:45:50] Eliot: We talked loss loss loss here. But if we had that true C corp, let’s say it took off this business did very well. There’s certain types of businesses where we can use something else called 1202 qualified small business stock. That says that approximately 10 million dollars worth of gain hold on to it for five years and then you sell that stock you get bought out. You pay zero tax. Whether you lose or win either way you’re winning at attack at the tax games

[00:46:18] Amanda: A lot of times if you’re only working with the CPA, they’re going to say let’s set up an LLC because it seems simpler. You don’t actually have to have annual meetings for an LLC. With a corporation, you need to have one whole meeting. That’s not a huge difference in terms of compliance. But LLCs are just seen of as simpler to run and set up.

[00:46:39] But if we’re really thinking about our exit strategy or the possibility of what’s happening down the road. Then that’s where we would maybe want to consider a true corporation for that 1244 stock loss if things go downhill or for that 1201, the 1202 if things go even better than expected.  If I move my seat equipment into my C corporation, can I still use it for personal use? What do you think this equipment is first off?

[00:47:12] Eliot: Yeah, just depends, it could be machinery of some type, it could be a computer, could be a car, is probably the most common one. We run across a vehicle.

[00:47:21] Amanda: An x-ray machine if you’re a doctor.

[00:47:24] Eliot: it could be something real fun like that to use for personal use.

[00:47:27] Amanda: It could be a dump trailer.

[00:47:32] Eliot: But if you move it into the corporation, well, that’s fine. That’s move it in there certainly. But your personal use, that creates a problem. Most of our clients and in fact I think the key word here is my C corporation that tells me their shareholder and employee at the same time. That actually makes a difference in the code and if you start using it for personal use. You’re going to treat it as a taxable fringe benefit. It’s going to be taxed at your ordinary rates and it’s going to be subject to employment tax.

[00:47:59] Basically it’s like an expensive paycheck for your personal use. Furthermore a lot of times we have these assets we’ve heard a lot about bonus depreciation where you could take substantial amounts of deduction if you start using it too much for personal use. It’s going to deflate that and you’re not going to be able to take the bonus depreciation. In fact, it could actually null and void previous depreciation you took and you have some recapture.

[00:48:23] Amanda: What is too much personal use if I’m the owner if I’m the shareholder what’s too much personal use?

[00:48:28] Eliot: Let me get over that 50% use is typically what you’re looking at.

[00:48:32] Amanda: How do I know if I’ve done that.

[00:48:35] Eliot: If it’s a vehicle you’re probably looking at mileage. That’d probably be the easiest way if it’s some other kinds of assets. It might be by time used. It would kind of just depend on what the asset is. But they’ll have to be some reasonable method for determining where that break is.

[00:48:50] Amanda: So you are tracking that.

[00:48:52] Eliot: Yes. You better.

[00:48:54] Amanda: I know we can’t all afford to just have one business car and one personal car all the time. If it got me out of doing a mileage log, I’d consider it. How does that change for an employee? You mentioned that said my C corporation, is the personal use different if I’m merely an employee that’s provided a vehicle?

[00:49:13] Eliot:  It’s slightly, is it still going to be a fringe benefit. But typically you may not be hit with the employment tax. It’s probably be at ordinary rates. They may throw that on to the circumstances employment tax if you’re just a shareholder, it will typically be considered a dividend and tax step maybe 20% or something like that.

[00:49:33] Amanda: At the end of the day. Just mo tax.

[00:49:36] Eliot: Yeah, we’re paying tax, no matter what.

[00:49:39] Amanda: Alright again, please subscribe to Clint Coons YouTube channel. He’s got one pay your kids this way. Hey, send a question in that you guys that we haven’t talked about paying your kids in a while. I’ve got six, pay to get him out of the house? Is that what I said and then Toby Mathis we’ve taken over his channel today for our live Tax Tuesday. We will be back in two weeks with Eliot and host Barley.

[00:50:04] Subscribe there and then if you’d like to come see us next month. We are hosting our live tax and asset protection event. It is three days March 19 through 21. Register it through this QR code or on our website. And if you just like to get to it have a free one-on-one strategy session, you can click this QR code. It’s 45 minutes with a senior strategist where they take into account everything you have, everything you want, how to protect it, and how to save you on taxes.

[00:50:35] A lot of these strategies are just built into the structures that we create. Works are out really great. If you want to submit a question for a future episode, please send that to taxtuesday@andersonadvisors.com and then of course on our general website you can find out more about us and the services we offer. Thanks everyone for joining, any last words Eliot?

[00:50:57] Eliot: No, thank you again. Yeah. Thanks for coming. We’ll see in two weeks.

[00:50:59] Amanda: Last words sound like, I’m not going to do anything to him. Just last words for the show. All right, we will see you guys next time, take care.

[00:51:11] outro: