In this comprehensive Tax Tuesday episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle complex tax strategies focusing heavily on 1031 exchanges and business deductions. They explain why fix-and-flip properties cannot use 1031 exchanges since they’re considered inventory rather than investments, and suggest using C-corps or S-corps for tax savings instead. The attorneys dive deep into 1031 exchange mechanics, covering depreciation carryover basis, cost segregation complications, and state clawback rules in California, Oregon, Montana, and Massachusetts. In other topics, they discuss the heavy SUV deduction for vehicles over 6,000 pounds, explaining how to maximize depreciation through Section 179, bonus depreciation, and MACRS while requiring material participation. Other tips include strategic use of management C-corps for rental property mileage deductions through accountable plans, qualifying for 0% capital gains rates, handling Ponzi scheme losses through IRS safe harbor provisions, tax implications of timeshare deed-in-lieu transactions, and expatriation exit taxes for high-net-worth individuals renouncing US citizenship.

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Highlights/Topics:

• “I own an LLC that I use to purchase a single-family house to fix and flip. Can I use a 1031 exchange to save on taxes while I look for my next property?” – No, fix-and-flip properties are inventory, not qualifying investments.
• “I have five years left of depreciation on rental property. I was looking into a 1031 exchange but didn’t realize that the depreciation schedule remains. Can I do a 1031 to defer some capital gains but no longer depreciate and/or buy another property and get new depreciation schedule for that one?” – You get carryover basis plus new excess basis depreciation.
• “What are some of the rules regarding a 1031 exchange when selling a rental home in one state, but purchasing the replacement property in another state?” – Allowed, but watch for clawback rules in four states.
• “If I buy a car with a weight more than 6,000 pounds for my newly incorporated business and have not earned any income in the first year of business, can I use it to reduce taxes against my spouse’s W2 income?” – Yes, through S-corp with material participation and 50% business use.
• “I own a rental house and a management corporation, which is a C corp. How do I deduct mileage for my rental activity?” – Use accountable plan reimbursements from C-corp for tax-free money.
• “How does one qualify for 0% capital gains?” – Single filers need taxable income of $48,350 or less.
• “I invested in an ATM syndication. It was a Ponzi scheme and all investment was lost. The K-1s I received for previous years were fraudulent. How do I file my taxes for those years that I received a fraudulent K-1?” – Use IRS safe harbor provision for 75-95% ordinary loss deduction.
• “What are the tax implications of doing a deed in lieu for a timeshare?” – Creates cancellation of debt income taxed at ordinary rates.
• “What happens to your real estate if when you move outside of the country, is it deemed disposition?” – Only if expatriating citizenship, then exit tax applies.

Resources:

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Full Episode Transcript:

Amanda: Hey, everyone. Welcome into Tax Tuesday. My name’s Amanda Wynalda. This is…

Eliot: Eliot Thomas.

Amanda: Eliot Thomas. We’re both attorneys, both tax attorneys, so get ready for a good time. We’re going to be talking about taxes today. We’re bringing tax knowledge to the masses.

Why don’t we giving everyone a chance to get onto this call. Throw up into chat where you’re from. We like to see where everyone’s coming from. Usually have several people from…

Eliot: All over. We got Colorado—used to live there. Maryland. Iowa, woo.

Amanda: Iowa boy right here.

Eliot: Las Vegas. We like that.

Amanda: We love Vegas. We’re based out of Vegas. Broadcasting live from Studio 210 in the Anderson Advisors building.

Eliot: Fabulous Las Vegas.

Amanda: Chicago, love it. San Jose. I was just out in San Jose. Did you know, it is the 20th year of Major League Soccer? Anyway, we were out in San Jose to celebrate that.

Eliot: Oh, congrats.

Amanda: Lawrence, Salt Lake. I was just out in Salt Lake for some kids’ soccer games.

Eliot: Do they have the World Cup? Is that starting?

Amanda: 2026?

Eliot: Oh, I still get a little bit, okay. Can I get tickets now?

Amanda: They’re kind of expensive. I don’t know. We’re going to have to get these people some tax savings so they can afford World Cup tickets.

Eliot: There it is. Oh, Hawkeye. Everybody’s a Hawkeye in Iowa.

Amanda: Is everyone?

Eliot: Just about.

Amanda: Logan, Utah.

Eliot: My friends went to Iowa State, though. But anyway.

Amanda: Friends.

Eliot: I have a couple.

Amanda: I have a couple. All right. Well, thank you from joining us from wherever you are in the United States or even in the world. These are the rules. Tax Tuesday comes with rules.

This is a live Q&A, so you can throw your questions into the Q&A. The chat is for if you’re having any technical difficulties. But if you want to have your tax questions answered, we’ve got a great group. Why don’t you tell us who’s here?

Eliot: We got, it says it starts with Amanda. We know that. We got Patty, we got Dutch. Harry, one of our tax advisors. We got Jared, Jeffrey, Marie, Rachel, Ross, and Troy. I think Troy is doing YouTube as I recall.

Amanda: Troy is going to be answering questions on YouTube as well if you’re joining us live there. So go ahead and throw your questions to the Q&A. We’ll get those answered for you. This runs about an hour, hour 15. We answer close to 100–200 questions, usually.

If you don’t want to put your question in a Q&A and you want to wait longer for an answer, you can email us at [email protected]. That is where we gather the questions that we’re going to be talking about today and at every Tax Tuesday. Eliot has the honor of going through all of those, so flood him. Flood them in. He puts together a curated list of tax questions.

Eliot: Made especially for you folks, our guests.

Amanda: Just for you. If you need a more detailed response than what we’re doing today live or in the Q&A, why don’t you consider becoming an Anderson client? As a platinum client, you have unlimited access to our tax and our attorney team.

This is designed to be fast, fun, educational. We love educating people. Educated clients make the best clients, don’t they?

Eliot: They really do, yes.

Amanda: They really do. We like it when you ask us the tough question. We’re going to go over the questions and then we’ll answer them.

I’ll start off. First one, “I own an LLC that I use to purchase a single family house to fix-and-flip. Can I use a 1031 exchange to save on taxes while I look for my next property? If not, could you suggest a few tax-saving strategies for managing income fluctuations?”

Eliot: Fantastic question. Next question. “I have five years left of depreciation on a rental property. I was looking into a 1031 exchange but didn’t realize that depreciation schedule remains.” We’ll cover what that means.

Amanda: It does.

Eliot: “I’m unclear what my tax plan strategy should be, as I was looking to buy another one anyway. Can I do a 1031 to defer some capital gains but no longer depreciate, and/or buy another property and get a new depreciation schedule for that one? Toby mentions, defer, defer, defer until you die, but most of us will live with investments for 27½ years. Please clarify.”

Amanda: So that’s number two in our 1031 exchange series. We’ve got one more 1031 exchange question. “What are some of the rules regarding a 1031 exchange when selling a rental home in one state but purchasing the replacement property in another state?” We’re going to do a deep dive with these three into 1031 exchanges today. What else we got, Eliot?

Eliot: We’re going to shift over two. “If I buy a car weighted more than 6000 pounds for my newly incorporated business and have not earned any income in the first year of business, can I use it to reduce taxes against my spouse’s W-2 income?

Amanda: I love it. “I own a rental house and a management corporation,” which is a C-Corp. “How do I deduct mileage for my rental activity?” There are actually two answers to this question, huh?

Eliot: Yes.

Amanda: “Let’s say that from my house to the rental’s, 100 miles round trip, and for 2025 taxes the mileage deduction is 70 cents a mile, am I due $70 for mileage or do I deduct the expense? How do I deduct the expense if I don’t receive any cash for the mileage?” In this type of structure, which we’ll go into, which entity actually takes the detection, we’re going to get all those questions answered for you.

Eliot: That was a great question. There are so many things and we maybe confused in a little bit there, so we’ll sort that all out for you.

Next one. “How does one qualify for 0% capital gains?” God love that. Paying no tax whatsoever.

Amanda: Zero percent’s my favorite percent.

Eliot: Can we do that? Yes, we can. Starting in 2025, single filers can qualify for 0% long-term capital gains rate with taxable income of $48,350 or less. Married couples filing joint or eligible with $96,700 or less. However, taxable income is significantly lower than your gross earnings. We’ll tear that apart.

Amanda: That’s true. That’s a couple of educated question askers there. The limits, the income thresholds, the reimbursement.

Eliot: Proud of our clients. Good job.

Amanda: “I invested in an ATM syndication. It was a Ponzi scheme, and all investment was lost. The K-1s I received for previous years were fraudulent. How do I file my taxes for those years that are receive a fraudulent K-1?” That’s no fun, but there is a little bit of a silver lining there. We’ll get into that.

Eliot: “What are the tax implications of doing a deed in lieu for a timeshare?”

Amanda: Short and sweet. I like it. “What happens to your real estate if when you move outside of the country? Is it deemed disposition?” We’re going to assume you mean the United States because that’s where we are.

Eliot: And that’s our questions.

Amanda: All right. You heard Toby mentioned in one of our previous questions. Here he is. The man, the myth, the legend, Toby Mathis. If you are joining us on YouTube, you’re on his channel. If you just came across us, go ahead and click that subscribe button. You’ll be able to get notifications. We do text Tuesday, every other Tuesday throughout the year.

We’ve also got Clint Coons, which is the other founding partner of Anderson Business Advisors. He focuses more on real estate and asset protection. Both of them YouTube influencers, get those YouTube awards lining their walls. Just have been doing this, putting out free education for over a decade.

Eliot: Two decades.

Amanda: Check it out.

Also, if you would like to join us live to hear all about Tax and Asset Protection, we hold a live workshop. You can use this QR code. Just pull up your camera right there, click on it, $99.

Eliot: Here in Vegas.

Amanda: Here in Vegas, June 26th through 28th.

Eliot: And there might be some deals. I heard they’re dropping the prices on the strip because—

Amanda: The live?

Eliot: Yeah.

Amanda: Oh, really? On the strip?

Eliot: Yeah, because of the summer travels down the road.

Amanda: Oh yeah. Some good summer travel deals if you want to come out.

Eliot: Come to Vegas.

Amanda: Then hang out with us. We give out some pretty good deals at our events, too. Pretty good deals.

Eliot: A lot of good tax information we give.

Amanda: We do.

Eliot: Can’t beat that.

Amanda: If you can’t commit to a whole weekend, join us on a Saturday for our Tax and Asset Protection events. One day webinar, typically from 9:00 AM Pacific to about 4:00–4:30 PM Pacific. Tax and Asset Protection in the morning, estate planning in the afternoon. It’s a good time.

The next ones are June 21st, then June 28th, and then our live one. Come out and see us either for three whole days, one whole day, whatever. However much you need, we’ve got something for you.

Eliot: Go to a mall.

Amanda: Yeah, go to a mall. You know? People actually come to our webinars 3–4 times.

Eliot: I believe it. You always got to check back in.

Amanda: It’s often drinking from a fire hose. Some of the times these events are, but if you keep coming back, keep coming back, you just get a little bit more each time.

Eliot: Turns into a garden hose. A little bit less.

Amanda: All right. “I own an LLC that I use to purchase a single family house to fix-and-flip. Can I use a 1031 exchange to save on taxes while I look for my next property? If not, could you suggest a few tax-saving strategies for managing income fluctuation?” I think we start off by what is a fix-and-flip?

Eliot: You tell us.

Amanda: We joking earlier that a fix-and-flip is when you fix your hair and then you flip it. But that’s not true. It’s real estate. Fix-and-flip is when you purchase a property with the intention to remodel it and add some value. Maybe you’re just updating the finishes. Maybe you’re completely adding on a new bedroom, adding some value.

Then you’re flipping it. You are turning around and selling it, either to a homeowner or to another investor who’s potentially turning it into a short-term rental, whatever. That is a fix-and-flip. Eliot, what is a 1031 exchange?

Eliot: 1031 exchange. The principle here is that you’ve had property that you use in a trade or business or as an investment, and now maybe we’re going to sell it. We’re thinking probably longer-term holding and use of it in that business.

A little bit different than the fix-and-flip that Amanda was talking about. But nonetheless, we’ve had this maybe as a rental property or something of that nature, and now we want to sell it. Well, if we sell it, it’s gone up in value. We’ve had some depreciation or adjusted basis has gone down. All that means probably we’re paying taxes if we sell.

A 1031 is a way that the government says, at least with real estate, if you go out and you buy a new property, we call it a replacement property within certain time constraints, et cetera, well then we’ll just go ahead and defer that tax. You don’t have to pay any tax on it.

It’s a really great incentive to defer. Again, we’re saying deferred. That doesn’t mean you get rid of the taxes. We’re just kicking them down the line, and that’s the idea. Here, we’re going to tear that apart and see when we can use this and when we can’t.

The fix-and-flip that Amanda was talking about, though, that’s an ordinary business operation. That ordinary type of income that’s inventory, we can’t use that on a 1031. We can’t use inventory. It’s got to be used as a trade or business, which means they’re going to rental property. Or maybe we just held it as an investment, but what we weren’t doing is flipping it up, fixing it up, and then flipping the property. We have a situation here where we can’t do a 1031 for a fix-and-flip. It’s ordinary income.

But how could we maybe have some tax strategies with that? Well, because it’s ordinary income, we’re going to suggest doing it in a corporation, maybe an S- or a C-Corporation that’s built for ordinary income. We now do our fix-and-flip in there. Let’s say we earned $100, we do it in an S-corp or a C-Corporation. They’re geared for that. Then we can do other things like reimbursements.

We can have accountable plan, maybe get reimbursed for our administrative office. We could do maybe the 280A corporate meetings, or possibly even a medical reimbursement with a C-Corporation.

If it’s an S-Corporation, we can also maybe save on employment tax, because with ordinary income on a fix-and-flip, it’s not only subject to 100% of all of it with ordinary income tax rates, but you’re going to get hit with employment taxes. So we have that to contend with as well.

A lot of reasons why we want to do the flip in a corporation, but we’re not going to be able to do a 1031. We can’t defer that tax, so we’re going to look for those other avenues to try and eat up that taxable income.

Amanda: You just flew right through that, didn’t you? So long story short, you cannot do a 1031 exchange with fix-and-flip. If you’re a flipper, the properties are not considered investments. They’re inventory. You can do a 1031 exchange for your investment real estate but not for your inventory.

Our solutions here are to use an entity. Entities are the bread and butter of how we are saving on taxes. We have two options, a C-Corp or an S-Corp. With the C-Corp, C-Corps have a flat 21% tax rate.

Right there, if your normal ordinary income tax rate is above 21% and you do the flip, you’re paying a lot more tax. If you do the flip within your C-Corp, you’ve automatically already saved some tax.

Then we’re able to pull money out of the corp tax-free. That’s what Eliot was talking about, terms of an accountable plan, which is basically a reimbursement plan. Your mileage, your administrative office, your phone, your internet, all of that stuff, the use of your home.

Then we have section 280A. This is often called the Augusta rule. It’s where you can rent your home to your corp, and then pay yourself a rental income, a day rate. You can do that up to 14 times a year, and that’s not taxable income to you, but these things are deductions to the corp. It’s taking what you would normally have paid at 21%, and we’re reducing that total income.

Then the last one in the C-Corp is 105(b) medical plan. That’s where you can essentially reimburse yourself, again tax-free, for qualified medical expenses.

These three things together can have quite an impact in terms of reducing the taxable income in the corp, which is already hopefully a lower tax rate than what you would hit normally on your personal tax return.

Now in the S-Corp, let’s say we’re looking at paying a salary versus getting a distribution. Because in an S-corp, if you sell a property, 100% of it’s subject to what?

Eliot: All of it’s subject to income tax. We’re not going to get around that one.

Amanda: Income tax. But we’re also worried about self-employment tax or payroll taxes. So the portion that you pay yourself as a reasonable salary, because S-Corp require a reasonable salary, is going to be subject to that 15.3 payroll tax. But the portion that you take as a distribution won’t be.

We’re already saving a lot of money here versus doing it in (let’s say) a disregarded LLC. Sell your property for $100,000, already you’re going to be paying $15,300 in just self-employment tax on top of your normal tax rate. Using entities and also the type of NC or the tax treatment of that entity is going to have a big impact.

Now, I had asked you this earlier when we were talking about this. Why can’t I do an installment sale, a seller financing. Why can’t I do that?

Eliot: And you can is the proper answer. You can do an installment sale, however, you got to pay all your tax in the year of sale. We can’t defer the tax, which is really why everybody does an installment sale to begin with. That’s why often I mistakenly say that you can’t do an installment. You can, but you have to pay all the tax up front.

Amanda: So I’m really not quite a benefit there if you’re doing any seller financing situation with it.

Eliot: But just as you laid it out here, just getting back, you’re not only going to be able to attack the self-employment tax for the S-Corporation because you’re only going to pay that on a reasonable wage.

But you got those same accountable plan, same 280A that we have from the C-Corp, but just depending on what we have going on, maybe we have some medical, well then we can use that C-Corp that Amanda put up here.

We got the accountable plan, 280A, and that medical reimbursement. All just great ways to sit there and mitigate that tax burden that we’re going to get from the flipping, because remember, it’s ordinary income. We can’t do our 1031 exchange.

But what if it wasn’t a flip and we had to 1031? We didn’t talk too much. We really talked about the flipping. But the 1031, again, as I quickly brushed through, it’s a way of if we sell a property that we use as a rental (let’s say), and we pick up a new one, maybe the IRS is going to less defer.

Now there are a lot of little rules to that. First of all, within 45 days of having sold, you have to list out which ones you’re going to pick up the replacement properties. Then you have to close on the whole deal within 180 total days. We have some rules like that.

And because we have a couple of questions coming up about the 1031, just lay a little more groundwork on it, some primary things to think about with the 1031. Number one again, for the deferral, the amount of income tax liability, when you sell the property, let’s say we sold it for $100, we had adjusted basis of $25, your gain’s going to be $75.

We want to know how to calculate our gain. It’s your sales price less your adjusted basis. That’s the gain. If we want to defer all that gain, we have to pick up a replacement property that’s equal or greater in the fair market value, and we have to equal or pick up more debt. Those are the two things. If we meet those criteria, we’re going to be able to defer 100% of that tax.

Number three, we always want to be aware. People asked this all the time. It’s a great question. When I get that new replacement property, what’s my basis? Well, the basis is going to be the purchase price of the new property.

That’s that deferred gain that we deferred from the sale of the other property. That becomes our new basis. There are little things that we want to keep in the back of our mind. It’s going to help us with these future questions here.

Amanda: It’s not just about saving on taxes, but what did you say? It’s not a if it’s not a surprise.

Eliot: I don’t remember. I remember, I had a great quote, though.

Amanda: You did.

Eliot: You can all laugh because it was great quote.

Amanda: Quote it, Eliot Thomas. It’s a little easier to write that check when you know ahead of time how much that check’s going to be.

Eliot: Oh yeah. It’s coming back to me.

Amanda: It’s coming back to you. All right. “I have five years left of depreciation on a rental. I was looking into 1031 exchange but didn’t realize that the depreciation schedule remains. I’m unclear in what my tax planning strategy should be as I was looking to buy another property anyway.

Can I do a 1031 to defer capital gains but no longer depreciate, and/or buy another property and get a new depreciation schedule for that one? Toby mentions, defer, defer, defer ’til you die or swap till you drop, but most of us will live with investments for 27½ years. Please clarify.” So depreciation, what is it? What is this 27½ years? Why do I care?

Eliot: When we deal with a rental property, which we are here in a 1031—again, we use it in a trade or business—we can depreciate. We want to be able to depreciate. We aren’t allowed just to deduct the cost of it right up front, so the IRS says, well, in the case of let’s say a single family rental, you can depreciate it over 27½ years, and that’s what we call straight line. Same amount every year for 27½ years. Or if it’s commercial it’s 39 years, but that’s the idea of what’s going on here.

What our questioner is asking here, it’s like, well if I fully depreciate or if I depreciate most of it, what really goes on with this whole depreciation thing and the 1031? Now, here they recognize that I didn’t realize at first that depreciation schedule remains. What’s going on there? That’s what we call carryover basis.

Again, we’re starting with a property. Amanda’s going to sell her rental. We call that the relinquished property. She still has an adjusted basis in our situation here. In other words, she bought for $100, maybe, and she’s depreciated most of it. I think that’s probably your red lines there.

Amanda: Yeah, this is depreciated portion. Then this portion that carries over is…

Eliot: The remaining adjusted basis.

Amanda: The carryover basis, right?

Eliot: Yup, and that was the part that she didn’t depreciate on the relinquished property she gave up. But then you have this other box up top, and that’s going to be the excess basis.

Well, what if you paid a lot more for this new property? It was a $1 million building. What you gave up was $250,000. That excess, it’s got to be depreciated somewhere, and we call it excess basis. They will portion it out amongst the asset to be depreciated.

Well, what happens? How do we depreciate it as far as number of years, et cetera? Well, the carryover portion, we just carry it on how we were doing it before.

Amanda: Five years left.

Eliot: Yup. You’re just doing the same thing. Five years just continues right there. But that excess, IRS says, well, you start all new.

Amanda: It’s brand new.

Eliot: Exactly. If it’s going to be 27½ years, or 39 if it’s commercial, I always take that. Again here we just have one asset. You could have multiple buildings, then you have to portion it out. A little more confusing there, but the code’s taken care of it.

We have pathways, but we have one fly in the ointment. What if on the property we sold, we’d done a cost segregation.

Amanda: Before we get there, I’m doing two lines of depreciation now—5 years and 27. Can I just slush them together? That’s a tax term, smush it together.

Eliot: Exactly. We do have a smush together provision in the code. The IRS says, well, we know that that could be confusing tracking both of those, so we’ll give you another option.

You can take that carryover basis and put it into the pile of the excess basis, and now you just do all of it at a new 27½ years, or 39 if it’s commercial. So you can do that. But what they won’t let us do is the opposite. Why? Because that would be speeding it up. They don’t let us do that.

Amanda: Okay. So now, it’s a cost seg. What is a cost segregation analysis? Why do people use it? What are the benefits?

Eliot: Again, we talk about this straight line, very limiting or very boring. The IRS says, well, you can have a specialist come in, look at your building, and break it up into other pieces of property.

The example was, we always talk about, well we have carpet. That’s actually five year property. Here in this building we have lots of carpet, some of it better than others depending where you walk around in the building. But nonetheless. it’s five year property. We have lights, things like that. That might be 7, 15, what have you.

Then there’s the foundation, which is, this is a commercial building, it’d be 39 years. The studyers come in. they do this cost segregation study, and say well let’s break it out into these pieces. Anything that’s 120 years or and under, is what we call 1245, it’s called personal tangible property (1245 property).

The rest is 1250 property. That’s what it was before you broke it. Whatever’s left as like, say the foundation, your 27½ or your 39 year, retains its 1250 carry. Those are code sections, 1250 and 1245. We’ve done this study and we broke it out.

Now if we’ve done that on Amanda’s property that she sold, the relinquished property, she’s broken it at 1250 and 1245 with a cost seg. well then the new property, we have to do a cost seg for. We got to have as much or more 1245 property. We got to have as much or more 1250 property. Otherwise, we’re going to have some depreciation recapture.

Amanda: Which is ordinary income rates.

Eliot: For the 1245, exactly right. No benefit there. What I’m telling you now is there’s a situation where not only may you not be able to defer, not only will it not get long-term capital gains treatment at maybe 15.0% we’re talking about or 20%, but now it’s going to be ordinary rates. No fun.

We want to be aware of that. If you had done a cost seg, you have to mirror or have more of those particular properties, the 1250 and the 1245 after a study.

Amanda: Yeah. So I have a rental property, I do a cost segregation analysis. I’m doing a 1031 exchange. I’m not going to go and do a cost seg on a property before I’ve actually bought it. I don’t know if the 1245 of the 1250 property are going to match up.

Eliot: It is. It’s a problem.

Amanda: What’s a way for me to shorthand it?

Eliot: Well, we were talking about this a little bit. Maybe if you go out, was it the mobile home parks? Mobile home parks, gas stations, the 7-11s are known for having a lot of 1245 property. That’s why they’re very popular.

In this situation, while you’re not required for the 1031 purposes to get a similar property, you may want to think about it. Because it has a lot of 1245 capability there, that might be the wise way. You’re going to be looking for that analysis.

Amanda: Like more similar property. If you’re going from a mobile home park to maybe a warehouse, that 1245/1250 property ratio is going to be off because they’re so different.

Now, you can do a 1031 from apartment complex to a warehouse to a mobile home park, but just be aware that there are some complicated tax issues on the back end there if you’ve done that cost seg.

Eliot: It always helps, talk to your people that know this stuff and make sure—

Amanda: Your tax peeps.

Eliot: Exactly.

Amanda: Last 1031 question. “What are some of the rules regarding a 1031 exchange when selling a rental home in one state but purchasing the replacement in another state?” You can do that.

Eliot: Absolutely, you can. There’s no prohibition to doing this. Most states are coupled or they follow what we call the federal rules on this. You don’t even need to worry about it. Nothing changes if you go from one state to another. However…

Amanda: But 50 states, they’re not all on the same page, are they?

Eliot: No, they never are. But there are four states that have what we call clawback. California, Oregon, Montana (MT), and then Massachusetts (MA).

Amanda: Don’t say MA like you weren’t confident that I knew that it was MA. I was just drawing slowly.

Eliot: Let’s see if you don’t have an MS or something like that. You go, no, that’s Mississippi.

Amanda: A claw back. That means they come after you.

Eliot: That’s exactly what it is. They come fiercely after you for their money. The example we always see, you always read this online and whatever and we use it, let’s say you had a property in California. You sold it and you picked up one in Texas. Many people to go there because there’s no state tax.

Now, at that point California doesn’t have a problem. But what if you later on sell that? Even at 1031, that Texas property in for a maybe a Louisiana property or something like that. Well now, they have a problem. They say, well you gave away that first deferment. Now, we want our tax back in California.

You have to pay the state tax that you were originally deferred. Why do we care? Remember, you’re probably not getting a whole lot of cash on these 1031s because anything that you do take for cash is boot, which means it’s taxable. So you have to be aware of that. California does have that clawback.

Now, if you just retain that Texas property and never did anything else, you don’t have to worry about it. Well how do they track it? Well, California and Oregon actually have annual reporting. They have specific state forms for this that you have to report.

If you’re from California, probably aware of this because we deal with it a lot. You have to every year send this form into, I can’t remember, I don’t want to say it’s like the 3348 or something like that, Franchise Tax Board form. You’re telling them, hey, I didn’t sell that property yet. If you failed to do that, then they’re going to make you pay the taxes even if you didn’t sell. So those two states in particular, California, Oregon, remember every year you got to file that form.

What about Montana, Massachusetts? Let’s be truthful about it. You don’t want to play games with these states on these things, but that’s what we have going on. That is one thing that we have to worry about when going from one state to another. Watch enough of the clawback. Again, the other multitude of states, you don’t have to worry about this.

Amanda: You get one degree of separation. You get to defer it for the one 1031 exchange. Then when you sell that replacement property, you at least have to pay the state tax even if you’re doing another 1031 exchange.

Eliot: Correct. That is our 1031 coverage.

Amanda: So patient of them. They’ll wait a little while but not forever for their tax.

Eliot: Oh yes.

Amanda: All right. “If I buy a car with a weight of more than 6000 pounds for my newly incorporated business and have not earned any income in the first year, can I use it to reduce against my spouse’s W-2 income?”

Let’s talk about this 6000 pounds requirement. This is typically the heavy SUV. We buy a car, it’s over 6,000 pounds. What are the requirements to fully deduct that from my income?

Eliot: It’s the heavy SUV rule here. We are talking about SUVs. We’re not just talking any car. It’s usually an SUV. There’s a specific category in the code for this. This is not what we’re going to go over today. It’s not applicable for maybe just a sedan or something like that.

This allows you basically for simplicity, the best way to get the most deduction for this vehicle. Now, yes, we have to use it at least 50% in our business. That’s a big key, okay? If we don’t—maybe we have it in a corporation or something like that—that other personal use becomes taxable income to us. So we’re going in the wrong direction. We’re not saving. It’s like wages, which means it could be subject to—

Amanda: Hostile payroll tax.

Eliot: Yeah, all that. So it’s certainly income tax. We got to watch out for that, at least 50% business use. Now, I’m going to get picky here when we talk about if we incorporate a business, that means to me C-Corp or S-Corporation.

Amanda: How are we deducting it?

Eliot: Well, if it’s on a C-Corp, I just want to point out that that is a separate taxpayer. Even if we could, if we had a $100,000 car and we deducted the whole thing, none of that. It’s not going to have $1 effect on your spouse’s W-2 because it’s a separate taxpayer.

Amanda: Not getting you where you want to be.

Eliot: No. If it’s an S-Corporation, it’s a flow-through entity. Well, yes, that could, provided we meet all the things that we’re going to go through, then we might be able to take a deduction. So I want to hit that first. C-Corp’s not going to help us.

What if it was a sole proprietorship? Well, we still have that rule to put up there, that 50% business use rule. It’s just there. You wouldn’t have taxable income for the personal use. You just wouldn’t have a deduction for that amount. Those are the first things, laying it out there. I’m going to go under the concept of maybe using an S-Corporation here.

One other thing with this business that often, I know I skip over all the time on this, I just assume, well, we’re looking for how much we can deduct against our spouse’s income. Here’s the calculation, et cetera. We’re going to go through that.

But we have to step back for a second. You have to be materially participating in that business. We talk about that all the time with the real estate. We’re going for REP status or short-term rental. Well, remember, those are a subset category of section 469, passive loss rules. Any business you got to materially participate in.

That’s the same rule here, same section 469. You have to materially participate. We’ve gone through those rules so many times, but basically you’re putting more time than anybody else in the business, over 100 hours more than anybody else, or at least 500 hours orders or some of the tests for material participation.

Now, we get all that preliminary work out of the way. We got an SUV, 6000 pounds. How can we use it? We haven’t earned any income. That’s an important factor here because we have three types of deduction here in the depreciation area.

First is 179—we’ll let Amanda get that on there—second is going to be your bonus depreciation, and the third is just going to be basically makers, we call it, or straight line, kind of, three forms.

Now, the 179 here becomes critical with the question here. I didn’t earn any income. We can’t use 179 to create a loss. We do go in this order: 179, bonus, then makers. In this case here, we didn’t earn any income, so we can’t use 179, but we will go through an example where we did. But here, we’ll start off what we didn’t.

Let’s say we bought the car, $100,000, purchase price of a car. What we’ll be able to do without the 179, we can take bonus. Then in 2025, our bonus depreciation’s 40%. We can take that $100,000 times 40%, we get $40,000. That’s our immediate bonus deduction. That leaves us with $60,000, at which case it’s a five year property, so we can take 20% of that, which is another $12,000 we can subtract out. That gives us a total depreciation of the remaining $48,000, how you look at it. Then we would just divide the $48,000, at that case by five.

Amanda: Five year property.

Eliot: Yeah. I’m sorry. I guess I didn’t do that calculation. That amount is what we would take as makers…

Amanda: Then not equal something.

Eliot: It does. We’ll do that real quick here. A little bit under $10,000.

Amanda: The maker’s is what, percentage?

Eliot: It’s going to be 20% or five years.

Amanda: 20%.

Eliot: It looks $9600. All of that is going to be what we can deduct without the one, say if we didn’t have any gain. If we had no income, all that amount is going to be an automatic loss against the spouse’s W-2 income here.

That will work for us as long as we materially participated. It’s an S-Corporation. Assuming we have shareholder bases, that’s another little thing. But if you put the money in to buy the car, you got shareholder basis, so no problem. We’d have a loss of about $48,000 here and that would be all deductible.

Amanda: $48,000 plus the $96,000, right?

Eliot: Oh, I’m sorry. I’m sorry I messed up. The $12,000 is our makers. My apologies. Sorry. $48,000 is the proper deduction there. I guess I did […].

Now that was all, again, if we had no income. What if we did have enough income to maybe do the 179? 179 is a specific amount that the government has said that you could do. That’s on a chart.

Amanda: Let’s pause. $48,000 against your W-2 is big time.

Eliot: It is especially depending on your bracket. If you’re not, the bracket is 37%.

Amanda: It could pull you down to a lower tax bracket. Saving $48,000 just by purchasing a vehicle that you likely need in your business anyway is a huge tax deduction.

Eliot: And we’re going to see in one of our future questions coming up here, what if that costs below a certain amount and maybe we have some like capital gains? We might have a way to combine this for really great tax savings. We’ll loop back to this when we get there. It’s one of our future questions coming up here. But all kinds of good stuff.

Amanda: What if we are making some money in this company, then how does being able to take 179 change it?

Eliot: The government says in 2025 that you can take $31,300 179. In other words, we’re going to start with $100,000 again. Now you can take away, subtract out $31,300 for a heavy SUV in 2025. That comes out to $68,700. $68,700 we’re going to take now times our bonus, 40%. That is going to be $27,480.

Amanda: I’m just doing. I’m running out of room here. Minus 40 and then minus 12 again, right?

Eliot: Correct. When all that is said and done, your total depreciation with 179 is going to be $67,024 immediate deduction. That’s pretty steep.

Amanda: That’s huge. In order to use section 179 and get this $31,300 loss, how much money do I have to make in my company? I have to make at least $31,300?

Eliot: Correct. You have to have that after all other expenses and things like that. To this particular calculation, we’d have to have at least $31,300 in order to take the 179. Then we can hit our bonus and then we can do our makers.

Amanda: So good.

Eliot: Yes, big deduction. That’s how we get it. We got to materially participate. We always have to. It sounds so, people’s blown away. Don’t worry, I’m doing the business, I’m material participating, but you got to. You have to make sure you’re materially participating. Otherwise all this just goes out the window.

Amanda: You can’t just be the money partner as they say and get that new truck.

Eliot: Exactly. At least 50% of business, that’s a critical component that Amanda started out with up here.

Amanda: Or else it’s taxable income to you.

Eliot: Yup. there we go.

Amanda: This is on top of the mileage you get to take too.

Eliot: Yeah, we got mileage as well. Mileage takes depreciation into account too. In this particular situation, we wouldn’t have mileage on this one. But still, $67,000, I think you’re not hurting. That’s a good deduction.

Amanda: A great investment. All right. “I own a rental house and a management C-Corp. How do I deduct mileage for my rental activity?” Mileage? Let’s say that from my house to the rental unit is 100 miles round trip, and for 2025 it’s 70 cents per mile. Does this person get $70 for mileage? And then logistically, how do they deduct the expense if they don’t receive any cash?

Eliot: Lots going on here. Here, we’re going with our traditional structure. It looks like we have a rental LLC maybe and a management C-Corp.

Amanda: Usually, we’ll have a holding company, then a property LLC, then the C-Corp is a property management company. There is a property management agreement and a percentage of whatever rents are coming through here is then being paid over to the corp to manage the property.

Whether it’s doing regular property management, putting a tenant in, calling repair people, or it’s more of an asset manager managing the LLC itself, doing its bookkeeping, keeping everything straight, we’re looking usually 10%–12% going over here. That’s how we’re getting income into the corporation.

If I’m just at my house and driving over to my rental, can I deduct that mileage if I don’t have a structure, if I’m just a person with a rental property and I’m driving over there to collect a check? Can I deduct that?

Eliot: You’re being very accusatory.

Amanda: Can I?

Eliot: No. She’s right. You can’t. Even though some taxpayers may go ahead and put that mileage as a deduction—I don’t know who would do that, but still may—you’re not allowed to do that under the code because you don’t have an office.

That’s considered a commute by the IRS. Just like when I drive into Anderson, I can’t deduct that mileage. They look at the same way generally that if you’re just leaving your house, going to your rental, you can’t deduct that mileage of—

Amanda: Considered a commute.

Eliot: Although I’m sure a lot of taxpayers maybe probably do deduct that, but…

Amanda: Well, what if I do have a home office? If I carve out a little home office here? Now it’s not a commute.

Eliot: It’s exactly right. Then we do have this 100 mile trip times the 70 cents per mile, so we got $70 of deduction.

Amanda: And I’m just taking that against the rental income, Schedule E.

Eliot: Again, yeah. If we don’t have the C-Corporation, correct. If we’re just doing a rental, which we would call Schedule E. That’s exactly right.

Amanda: Why am I using this C-Corp if I could get this deduction anyway just by having a home office?

Eliot: If we use the C-Corporation, as you pointed out, we’re going to shift a little bit, let’s just say 10% to make it easy. Let’s say we had $1000 of rent and we move 10% over. That’s going to be $100 of income into our C-Corp.

That’s going to be a deduction against the rental income of $100. We have tax savings already. We already have a $100 deduction there for that management fee, so we saved tax. We just shifted the $100 over to our C-Corp.

But now, you can do what’s called the accountable plan. We referred to that a little bit earlier for reimbursements. I as the employee of the C-Corp, can turn in my reimbursement, my $70, my $100 of miles into my C-Corp so I get $70 paid back to me. The corporation cuts a check for $70 out of that $100, I get to pocket it tax-free.

Amanda: Tax-free, baby.

Eliot: We moved over that money off our personal return. We got tax savings there, and then you got the money back tax-free. Now, let us ask you. Do you want to just have your deduction against your rental income? That’s nice. Or would you like to have it shifted over where you get it the same deduction and you get money in your pocket tax-free? I’m going to take the cash in the deduction? If I listen to my tax advisor.

Amanda: Which you do.

Eliot: That’s what be one’s own counsel, I guess a little bit on some of this. But we have all kinds of things just like Amanda putting out the accountable plan, 280A, 105(b), to get that $100 out there, zero taxable income on the C-Corp. You just pocket now maybe $100, not just your mileage, but all this other stuff, too. In fact, you probably don’t have enough money and that’s okay. Then we just manage another property, get more money in there.

Amanda: Just get another property rent.

Eliot: Rinse and repeat, exactly right.

Amanda: Because you do actually have to pay yourself in order for the corporation to take the deduction for mileage, You have to actually, not cut yourself a check but do a transfer. You’ve got to document everything. We’re looking at a mileage log, an expense report, and you do have to transfer the cash over. If you don’t have money in your court, can’t take the deduction. How do we solve for that?

Eliot: I just want to stress what Amanda just said. That’s a really important point. We’ve got to have that cash, that payment. If we don’t have the cash, you can go ahead and put the money in. Put $100 into it. We call it loans from shareholder or something like that. Now your corp has the $100. It pays you the reimbursement, whatever it is. It’s a cash transaction. Now, we get the expense on the C-Corp. Again, you got the money right back in your pocket. No harm, no foul.

Amanda: And that net operating loss can carry forward.

Eliot: That’s correct. You have an NOL, perhaps, on your C-Corp. It carries forward. It’s just a snowballing of good events.

Amanda: If you are doing mileage, accountable plan, 280A, 105(b), and your company is just starting, it’s not making any money yet, you do have to invest, put some funds into the corp, actually take those reimbursements so that you can capture that operating loss. If you just are doing your expense reports, your 280A meetings, and you don’t actually pay yourself by the end of the year, those losses are gone. Can’t use them.

Eliot: If went into next week, you’ll be okay, but we just don’t want to have it out there as some loan on the books for a long time. We kind of get that expensed.

Amanda: All right, come see us. June 26th through 28 at our Tax and Asset Protection workshop. It’s three days of lots of information. Out here in Vegas. People tend to coming to Vegas. We live here so…

Do people call you when they’re coming to Vegas and go, hey, do you have any hookups in Vegas? No, I do not. I sleep in my own bed every night out here.

Eliot: Especially the first three years. I think most people when they move to Vegas, some people you haven’t talked to forever all of a sudden remember you. Everybody wants to come down.

Amanda: Hey, where should we go out on the strip? […] Just kidding, Vegas. Come to Vegas, spend lots of money here. That’s how we keep our state taxes at zero.

Eliot: Exactly.

Amanda: But come. Discover the hidden secrets of America’s most successful investors at our Tax and Asset Protection workshop. Three days here in Vegas. Grab that QR code. Tickets are only $99. Bring a friend.

If you can’t commit to three whole days, although we wish you would, come out to our one-day seminar from 9:00 AM to about 4:00–4:30 PM. Tax and Asset Protection. We hold these every Saturday. Sign up, come a couple of times. Come multiple times. With different speakers, different presenters.

You always get something a little bit new each time It works the same way as this Zoom call’s working now. You can come in, ask questions. We have attorneys and CPAs online to get you the answers that you need.

If you’re even ready beyond the information stage and you’re ready to actually start saving those taxes with us, schedule a free strategy session. There’s a link in the chat. You could also use this QR code. It’s 30–45 minutes with a strategist where we’ll talk about your goals, your investments, where you want to be, and how much tax you want to be saving.

All right, “How does one qualify for 0% capital gains in 2025 starting in 2020?” These people have done their research.

Eliot: They did.

Amanda: We’ve got the income thresholds, 0% long-term capital gains rate if your taxable income’s $48,350 or less if you’re single, and four married couples filing jointly, you get up to $96,700 or less.

Just fun statement here. How are taxable income is significantly lower than your gross earnings? Your taxable income is your gross earnings minus all your deductions. Maybe you’re itemizing your deductions on a schedule A. Maybe you’re taking the standard deduction. But yes, typically your taxable income is lower than your gross earnings. Sometimes significantly, sometimes just a little bit.

Eliot: That’s one of the things that, as we’re going to see, the capital gains brackets is one of the few things you look at that’s not based on AGI. So many tests that we look at are based on adjusted gross income.

This is well down the list, and I’ll go through actually where this comes on the return. But the last thing almost that you run into is taxable income with certain exceptions. That’s what our bracket for our capital gains is based on. That’s what our questionnaire here is putting in there for these tax rates for 0%.

To get to the overall point here, it is. If you had overall income of under $48,000 and you’re single, you’d have zero tax on your capital gains. But what we got to watch out for is how does the code, how does our tax return, how does it look at all the income we have coming up? The phrase I use, it stacks it.

Let’s say we have some W-2 income. We’ll put W-2 and other ordinary income. You could put another box if you want it, or you put it in that box, either way.

Amanda: We’ll do ordinary income here.

Eliot: And then we have our capital gains. We sold some stock or something like that, and it stacks on top of that, as Amanda’s pointing out here.

Now, if that total amount, that the very last dollar of our capital gains is less than what we have here in our question—$96,700 if you’re married filing joint or $48,350 if you’re single—if anything under that, then you’re paying zero on that capital gains in that box. Zero percent there. That’s how it works.

Now, what if we go $1 above? Well, that $1 above, everything’s still zero there in that first box. But that $1 above is going to be at 15%. That’s the next bracket. That’s a very large bracket. Goes all the way up to $533,000 for single and $600,000 married filing joint. Most people are falling in that 15% bracket.

Now with that in mind, once you understand this stacking and how it goes, I think it becomes much more easier to understand it. How are you going to do it? Well, you’re going to try and keep in those boxes down there, and that’s where you’re going to get your tax savings.

Now, the way it orders, just so you know, and I can even give you if you ever look at your 1040, line nine you’re going to have your total income. That’s, again, probably what they’re referring to as gross earnings here. Line 11 is going to be adjusted AGI which we use for so many other tests. AGI has always being thrown around in the code. But that’s line 11.

Line 12 is now going to be what Amanda talked about. If you itemize your Schedule A or your standard deduction, that’s going to be line 12. Then we get line 13, something that doesn’t hit all of us. It’s called QBI (qualified business income) deduction. That’s going to be if you have an S-Corporation, some flow-through entities where you have some income coming in, or maybe a sole proprietorship.

Lastly, all that cuts to line 15. That’s your taxable income. I go through that process to show you, this is exactly what we’re referring to. The difference between gross earnings and taxable income is that last line that we’re looking at to determine our bracket for our capital gains. There it is.

Amanda: So the value or the income or the gain you’ve made from selling that capital asset is included in that calculation.

Eliot: Exactly. Now, jumping all the way back, we talked about our vehicle. What if we had that business, we had spousal income on that one question, we get that vehicle, and all of a sudden it can drop us down here, and we had some other capital gains on our return as well? All of a sudden, that’s tax planning where we can drop into these lower brackets and take advantage.

Not only did we get a fantastic vehicle, we got a nice deduction for it, and maybe got to where we had zero capital gains. Or maybe we were in a higher 20% capital gains and it got us down to the 15% bracket. That’s tax planning. That’s the essence of what we do. This is a great example with all these questions you guys threw at us. We were able to walk through that and pull it all together really nicely here.

Amanda: All right. “I invested in an ATM syndication. It was a Ponzi scheme, and all investment was lost. The K-1s I received for previous years were fraudulent, of course. How do I file my taxes for those years that I received a fraudulent K-1?” So what’s a Ponzi scheme? How many of you out there remember Bernie Madoff? That’s the big one in my lifetime that I even I remember.

Eliot: When we talk about Ponzi scheme, there is the social definition out there, and then there’s what the IRS calls it. In many regards, this is a fortunate provision by the code, by the IRS. They wanted to make it easier. They know the hardship that this thing requires or brings upon an investor, so they wanted to make it easier. And they did. They came up with a revenue ruling back there based on Bernie’s activities, to try and make it easier and better for the taxpayer.

If you don’t meet the definition of a theft that’s going on, that’s a Ponzi scheme, you as an investor, you gave money to somebody. They took that money. Maybe they did it to pay for other investors and show them fake income or something like that.

So I pay $100 in. They give it to Amanda to show profit that she’s making, or maybe they take money from Troy or somebody, whoever it be, but really there’s no gain going on. It becomes a very tight web of lies and things of that and deceit. If we didn’t know how to do all that, this could be a capital loss, and you’re limited to $3000 every year, potentially.

The IRS said that hurts. So let’s come up with a formula that maybe allows people to avoid all that pain a little bit and get an ordinary loss, which will offset against any income on your return. They come up with this revenue ruling about the Ponzi scheme, and we have two different piles, if you will. We have what’s called the safe harbor, and then we have a non-safe harbor.

They do give you the option, that’s kind of go at your own understanding and your own choice, and make sure you understand the rules. You definitely want to talk to a tax professional on this,

The safe harbor approach. The idea was, well, we’ll go ahead and we’ll automatically assume it was a theft. As long as you gave money to somebody, it looks like they took it and used it to pay other investors, and took other investors money to pay you back, et cetera, there was really no investment strategy going on here, we’ll let you, under certain circumstances, go ahead and deduct 95% of that investment.

Say you put $100,000 in. You could deduct $95,000 immediately as an ordinary loss. No problem. Again, as long as you meet all the criteria. If you’re not going to sue another third party, they say you’re the direct investor and you’re not suing anybody else, then you get 95%.

Seventy-five percent can be deducted immediately as an ordinary loss if maybe you are going to go after another third party who got you into the investment. It’s not the original investment scheme, but it’s someone else. Well then they say you can deduct 75% if you have that third party.

Now, it has to be a qualified investor, which means, again, you’re a person who specifically put cash. It’s you directly. It’s not maybe your Schwab account or something like that that did a qualified loss.

That means there has to be charged with a crime or something like that, has to be deducted in the year of discovery. That would be the year that they did indict, or there was a complaint about that, and now you’re aware of it. That’s the year you have to take the deduction. This is critical for the safe harbor that you must do it that year. That ties into our question a little bit here. You got to do it that year.

For the amount of the deduction, the calculation, if you have, let’s say that you put money in year one, and the fraudulent conveyance comes back, they gave you a K-1 saying that you earned $10,000, you had to put that on your return that year. That you’ve got the K-1.

Now, you didn’t know any of this was going on, so you paid tax on that. Well, that’s not very fair. No, it’s not. But what the code says is that you can get this fictitious income. You go ahead and add that amount of your investment, call that investment basis.

Now we put $100,000 in, we paid taxes on $10,000 in a previous year on a K-1. So our loss becomes $110,000. We would take 95% of that immediately under the safe harbor. Those are all critical steps you want to be aware of, and that’s how we would handle it in this situation if we took the safe harbor.

Now, they mentioned here about filing taxes for all those years, or maybe they want to go back in a minute. Maybe they don’t want to take the safe harbor. Safe harbor allows you that option. And I’m just going to correct us, that safe harbor is 75%. We want to move over to the left side. That 75% is still safe harbor. It’s just that you’re going to sue a third-party potentially. We just want to get that over there. There you go.

Non-Safe Harbor says you can basically, if you can prove the theft, which is one thing. You’re going to have to have attorneys for this. Now, you get into the criminal code, and it may depend on the state you’re in, so it becomes much more intricate. That means lawyers. That means more expense. They really try and push you to the safe harbor, but they’re not going to handcuff you.

If you want to do the safe harbor, you take the gamble (if you will), that you’re going to be able to prove there was a theft, that you actually never received any income, actual investment income, that it was fictitious income, things like that. Then you can go ahead and then, what we call open tax years, you can go ahead back and amend, and you might be able to take the full $110,000 (in this case) as a deduction. This allows you a little bit more flexibility, but there’s a lot more.

While it’s easy to say you got to prove the crime, and easy to say that you have to prove that you actually had fictitious income, it is far more difficult to substantially prove that in a court of law. Whole lot of a different situation here.

So again, non-safe harbor is really not advised. We want to get into that safe harbor, but non-safe harbor does give you the flexibility that you’re not necessarily required to put it all in the year of discovery. You could go back to previous tax years, do some amending on open years, that is, which we usually say is three years.

There’s a little more complexity to it. We’re going to advise people to go safe harbor and in that case, this money you had on the previous K-1s, it would go into that pile of your investment, which we call fictitious income. That’s where you would take the deduction. You wouldn’t go back and change your previous return, you’re just going to recognize it as a loss in the year of discovery. That’s the difference we have going on there.

Amanda: What percentage do I get to deduct under the non-safe harbor?

Eliot: Non-safe, whatever you can prove, that’s all a loss.

Amanda: So the difference between the 95% and the 100% is substantial. Maybe you’re putting in the extra work to do the non-safe harbor.

Eliot: Yeah, but you definitely want to walk through this and make sure you have all your ducks in order in the line, because if something got messed up, if you’re past the open years, if you weren’t able to actually prove a crime, if you weren’t able to actually show that you didn’t receive any income, that if you can’t prove that it was fictitious income, that takes a lot.

If you ever worked on huge cases, I worked on a mammoth one, something like a hundred million documents that we had to go through. I’ll tell you, that takes years. It just becomes a big competition of lawyers. They’re going at it. You’re going to have a forensic accounting going on. It’s a lot to it.

Amanda: It gets expensive.

Eliot: But you’re right. If you want to do that, you’re absolutely right. It would be the way you’d want to go then, but it may not be worth it. There you have it.

So again, the previous years of fraudulent K-1s, that income, safe harbor, you would just add that onto the pile of your loss.

Amanda: So this question’s saying, how do I file my taxes for those years that I received a fraudulent K-1? To me, this makes me think that the person hasn’t filed their taxes for those years yet. Under the safe harbor, they would file their taxes as if that income was included, and then deduct it. Or would they just not include that fraudulent K-1 income at all if they haven’t filed yet?

Eliot: I think that would be the pathway. You’d go back and file the K-1s that you had knowing that there’s fictitious income. Then you would try and then in the year of discovery you’re filing, you’re going to combine all of that.

Now, we really get into the weeds here. The IRS could come back and argue, well those K-1s that you just filed, you now know that they are wrong. This is what I’m saying. You want to really work with somebody and sit down with them, to go through that, and make sure that you’re not giving up any rights by taking one path or the other.

If that were the case and the IRS might argue, look, that K-1 we know isn’t legit to begin with if you haven’t filed, well then maybe we have to go non-safe harbor. But you have other pitfalls potentially there as well. So you really have to sit down and talk with some people who do tax litigation and things like that.

Amanda: The timing of where you are in terms of the filing, and where they are in terms of, you may think, oh, this is a Ponzi scheme, but unless it’s been deemed an actual legal Ponzi scheme by the feds or by the IRS and the person’s being charged with a crime, then it’s going to be a lot harder to fall into that safe harbor.

Eliot: And great point. We had this question. I don’t know if it was a similar question, not this question, but about Ponzi. Usually, what I see from clients is there will be a letter from the FBI that they get, and this is how they find out about it. Or from the Treasury Department, what have you. Usually maybe even state government or something like that.

Often, you will have been contacted to have that kind of thing, and that puts you on discovery notice that, hey, that’s your discovery. We got to get moving on this. But there are pitfalls for both the safe harbor was just made to be hopefully a little bit easier and streamline people into a process so they could get that ordinary loss. Again, going back, if we didn’t get that theft, if for some reason we can’t call a theft, it becomes a capital loss most likely, we’re limited to that $3000.

Amanda: Which isn’t going to be significant enough.

Eliot: No.

Amanda: All right. “What are the tax implications of doing a deed in lieu for a timeshare?” A deed in lieu, also a deed in lieu of foreclosure, is basically the alternative to having your property foreclosed upon.

Formal foreclosure requires going through a court process. Instead of going through that rigamarole, you’re basically saying, hey, I owe you a debt. Here’s my property, in this case a timeshare, and you won’t come after me anymore for the difference. They now have your ownership in your property. The tax implications of that, what’s really happening here is the debt’s being forgiven, right?

Eliot: That’s exactly right. Of course, the IRS has a term for that—discounted debt. You get taxed on it. Whatever amount, if you get $50,000 forgiven, discharge of debt, cancellation of debt, it’s going to be an ordinary income. There’s our tax implication. I give over my deed, they take away the debt. I might have to pay ordinary tax rates on that.

There are a couple of situations where maybe you wouldn’t have to on that. That’s going to be a situation where if maybe before you did the exchange, you were insolvent. You had more total liabilities as an individual than you did assets, that possibly could get you out of that or at least a little bit less of the debt income. Or possibly if it had been discharged earlier in bankruptcy, if you’d gone for formal bankruptcy procedures, then that might as well. Those are things that you’d have to look at a little bit more in depth, but they are ways around it.

There’s another area where you have discharge on a qualified personal residence, but we don’t have that going on here. Timeshare is not your personal residence. I don’t think that’s an avenue there.

Amanda: And this COD cancellation of debt applies to any debt you have. If you take out a business loan and default on it, and then you negotiate to pay off 50 cents on the dollar for that loan, that other 50 cents that you owed, that’s ordinary income to you, so you’re paying taxes on it.

Obviously still better than paying the actual loan amount, but depending on your taxable income, is not quite the benefit that sometimes you think it is. It’s going to apply to business loans, credit card debt, student loan debt, really anything.

Eliot: But as you point out, it does get you, in lieu of foreclosure, around the formal proceedings. All the attorneys and all the people you have to pay in the court system, the time and anguish.

Amanda: Save attorney’s fees. We’re the only attorneys who try to help people save attorney’s fees.

Eliot: Save those fees for paying the tax on the cancellation.

Amanda: All right our final question. “What happens to your real estate if and when you move outside of the country? Is it deemed a disposition?” What’s it a disposition of what?

Eliot: First of all, normally when we think about real estate, that’s selling it. You sold it, you did a 1031 exchange or something like that, you gifted it away. But really what we’re looking at here, I think it’s something deeper. Amanda pointed this out when we were talking about before this show. Well, isn’t there something that happens if you just kind of, I’m leaving the US?

Amanda: If you’re just moving and relocating, becoming a digital nomad, nothing happens. If you’re a US citizen, you are taxed on your worldwide income regardless if your assets are in the US, in other countries, regardless if you are in the US or other countries.

You can get a foreign tax credit depending on the tax treaties in the particular country you’re in. What is it? Up to $90,000, close to $90,000 of income that you receive in a foreign country where you’re likely paying tax on that as income, but then you’re not doubly-taxed in the US. If you’re relocating, you’re most likely not getting doubly-taxed. Your assets are still your assets, but you are paying tax on your worldwide income.

Now, if you are expatriating, if you are renouncing your US citizenship, then that is when this idea of a disposition—it’s not technically a disposition—comes in. What happens on the day you expatriate your assets are treated as if you sold them all and you will pay tax based on that, with some exceptions.

You still own the assets, but for tax purposes, it’s not even going to be a final tax return unless you actually do sell the assets for, but for the benefit of not being a US citizen, you get a humongous tax bill. All of your assets are treated as if you sold them. What are the limitations there, Eliot?

Eliot: It’s often referred to as an exit tax. As Amanda points out, well I still have my assets. Well yes, but you’re treated as if you sold them. And they’re worldwide assets, not just your US assets. You get this exit tax.

How’s it all come about? Well, there are basically three criteria if we can get under it. But if you meet any of these, if you have over $2 million of net worth, basically, well, then you’re going to get hit with the exit tax.

If you had over $201,000 of taxable income the last five years, well you’re going to get hit with the exit tax. Or if you really weren’t up-to-date on your federal returns, you have some federal obligations out there, you didn’t maybe do all those tax returns, maybe got hit up with a Ponzi scheme and didn’t file returns or something like that, if you’re not in compliance, you could get hit with the exit tax. Any of these three criteria are going to get you into that unfortunate situation of the exit tax.

Amanda: The $201,000 taxable income, is that for the previous five years? Is that cumulative or each year?

Eliot: What I saw was that each year you’re over $201,000.

Amanda: So it’s possible if your net worth is less than $2 million, you made less than $200,000 in the last five years, and you don’t have any outstanding tax debt, you could expatriate and not have to pay the exit tax.

Eliot: Always want to check. Make sure nothing’s missing or whatever, whether your tax professional had already do this. But that’s the deal. But there is also an $890,000 exemption on that capital against. Again, you’re treated as if you sold everything that’s capital gains tax and you do have $890,000 of exemption for 2025.

Amanda: So the first $890,000 of that deemed distribution is not taxable.

Eliot: That’s correct.

Amanda: Most people aren’t thinking of renouncing their US citizenship. You can go to another country, you can live there, you can never come back to the US, you can often either have some visa or resident status there or have dual citizenship.

This is more to capture people who are very high net worth who are thinking, oh, I’m retired now. I’m just going to go off to the Cayman Islands, never be in the US again, and never have to pay taxes. That’s just simply not going to be the case, because if you still have US source income, guess what? You’re still paying income tax on that every year anyway. You’re just increasing your tax by trying to get out of here.

Eliot: They’ve thought of everything, haven’t they?

Amanda: Yeah. Oh darn. Those IRS people. Curses. Just go and relocate. Go visit. Don’t get hit with this exit tax. Continue to be an American.

Eliot: Things you don’t want to pay, probably.

Amanda: Well, we’re going to wrap it up. For those of you who are listening on YouTube or for those of you who are in our Zoom, head over to YouTube, smash that subscribe button, like our videos.

If you subscribe, you’ll get a notification each time Tax Tuesday comes out. It’s a live show. We’re here every other Tuesday throughout the whole year. Eliot’s here most of the time. I’m here once a month. We have a good time.

Eliot: But we have a whole team here, remember?

Amanda: We do have a whole team. Also subscribe to Clint Coons’ channel, Asset Protection. Clint and Toby are the two founding partners here at Anderson.

Finally, again, join us in Vegas for our Tax and Asset Protection workshop, June 26th and 28. Tickets are only $99. Bring a friend, make a friend when you get here.

Eliot: Yes.

Amanda: Not that kind of friend. Get your minds out of the gutters.

Also, join us Saturdays for our one-day webinar. If you want a little bit more of a bite-sized chunk, we have our Tax and Asset Protection plus Estate Planning workshops every Saturday.

If you’re ready to become a client, schedule your free strategy session. Sit down with a senior strategist. Talk to you about your goals, your assets, the things you want to be doing with your life, and how much tax you could be saving. There.

Finally, if you want to send in your questions, email them in to [email protected] or visit us at andersonadvisors.com.

With that, how many questions did the team answer?

Eliot: I lost that page, so I can’t bring it up. I’m not sure how many we got. But I can say, Patty, Dutch, Harry, Jared, Jeff Stalkin. Who else we got? Marie, Rachel, Ross, and Troy were out there just killing it. I’m sorry, I don’t know how many questions. Eighty-five.

Amanda: Yeah, 85 questions. Thank you guys so much for joining us. Thank you to the team in the background for answering all of those questions for us, and join us next time on Tax Tuesday. Take care everyone. Bye-Bye.