In this episode, Anderson Advisors Barley Bowler, CPA, and Eliot Thomas, Esq., tackle listener questions on critical tax strategies. They cover the differences between Section 179 expense deductions and bonus depreciation, including how to combine them effectively and avoid creating excessive losses. Barley and Eliot discuss the timing of equipment purchases for tax planning purposes and explain the complexities of equipment leasing investments, emphasizing the importance of material participation tests. They address the mark-to-market election for active traders and explain why Anderson doesn’t recommend this strategy due to audit risks. The attorneys clarify that qualified charitable distributions can only be made from IRAs, not Solo 401(k)s, and explore strategies for using IRA withdrawals to purchase rental properties while offsetting taxes through cost segregation studies. They also explain excess business loss limitations, the interaction between cost segregation studies and qualified opportunity zone funds, and why 1031 exchanges cannot be used to avoid capital gains tax deferrals ending in December 2026. Tune in for expert guidance on these advanced tax topics!
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “How can I take advantage of tax code 179, Section 179?” – Section 179 allows immediate deduction of qualifying business equipment expenses.
- “If I have more business items to buy like a desk, should I buy them before the end of the year? Or maybe I wait to the new year? When do I buy these things?” – Purchase timing depends on which year needs the deduction more.
- “If one invest in an equipment leasing investment in 2025, and it’s active, and writes off 100% of the equipment cost in 2025, but then in 2026 no longer active, does the income revert to passive income or is it still active for 2026?” – Active losses remain locked in; only future income becomes passive.
- “Can I still take the IRS mark-to-market election for the tax year starting January 1st 2026?” – Election must be made on 2025 return by April 15th.
- “I have a Solo 401(k). First of all, how does this work? And can I make qualified charitable distributions from my Solo 401(k)? Plus do these tax-free distributions go on my 1040 as a deduction?” -QCDs only work from IRAs, not Solo 401(k) retirement plans.
- “Is there a cap on how much money I can withdraw per year from my traditional IRA to purchase an income-producing rental property? What are the things I need to consider before making this decision? I’m 55 years old and I am aware of the 10% penalty.” – No cap exists; expect regular income tax plus 10% penalty.
- “Is there an annual cap on bonus depreciation? Is there a limit on how much bonus depreciation we can take?” – Excess business loss limitation caps deductions at $313,000 single, $626,000 married.
- (44:44) Title question “Can I do a cost segregation study on a property that’s in a qualified opportunity zone fund? How does this impact the capital gains tax deferral that ends in December of 2026?” – Yes; cost seg helps operations but doesn’t offset deferred gains.
- “Can I do a 1031 exchange and avoid the tax due when the deferred tax comes due in 2026?” – No; cannot use 1031 to avoid QOZ deferred capital gains.
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Full Episode Transcript:
Barley: Hey, everybody. Welcome back to Tax Tuesdays, bringing tax knowledge to the masses. Just in case for anybody here for their first time, we do offer this free on YouTube. Every other week, submit your questions. We will answer them for free. Of course, we want you to become a tax client, learn about our services, all that stuff, but do this every two weeks. Submit your questions. We go over your questions, whether you’re a client or not, every two weeks.
Welcome to Tax Tuesdays. My name is Barley Bowler. I’m one of the CPAs and tax advisors here, joined by Mr. Eliot Thomas.
Eliot: Hello.
Barley: He’s a little shy right now, manager of our tax advising department. Very happy to have you guys here. And again, for anyone here for their first time, welcome. Very happy you’re here. We’re going to go over your questions. You submit your questions. We go over them live every two weeks.
We’ve got a chat feature here, got a Q&A feature here. Please post your questions. Shout us out in the chat where you’re from. And while everyone’s trickling in here, just want to tell you guys a quick little story. I just want to give you guys a little, quick minute on my background.
Toby used to do this every other week. We have Amanda Wynalda, the head of our land trust and deeds department doing this with us as well. Eliot, doing this as well. Just want to give you guys a quick bit of background on me. I’m originally from Montana. Missoula, Montana’s where I got my accounting degree originally, plus did my master’s degree there in business.
I had a small MBA program, tons of experience working with business owners. That’s what really turned me on to working with entrepreneurs, family-held/closely-held corporations. That small business success story is really what got me hooked on this whole tax planning, business planning, seeing your successes, avoiding overpaying taxes, avoiding audit.
I used to work in audit. I was that guy. I was this scary guy that showed up and everyone thought their birthday was getting taken away, when we dig into the records and tell people what they’re doing wrong. I really take a distinct pleasure in helping you guys avoid audits, avoid paying so much tax. That’s part of what I’m trying to bring here today as we go through the tax stuff.
Like I just mentioned, I worked in government audits. I audited a bank, audited a fleet of Ferraris in Beverly Hills. That was an interesting job, have some fun stories on that one. Let me know if you have any questions about it. So audit services. It is just very, very convoluted. It’s a look back process. You’re just looking back into the past.
Again, I was just way more interested in the business planning with entrepreneurs, looking forward, projecting financials, estimating financials, all that stuff. So very happy to be here at ABA. Well, that’s what I do here. When I replied for this job, I noticed the focus was on bookkeeping, tax planning, structural stuff. Having you run your business with our help, as opposed to just turning it over to somebody and not really knowing what’s going on.
So, just a little background on me, guys. I’m very happy to be here. Again, my name’s Barley. I’m a CPA here in the state of Nevada. Tax advisor here, background in business. I love working with you guys. A lot of you guys I’ve met.
Again, for anyone here for their first time, welcome. We do this every two weeks. Free tax knowledge to the masses. That said, we probably have a couple of announcements here or bullets we want to hit?
Eliot: We do. I’m pretty sure we—
Barley: I got them. Live Q&A feature. Guys, shout out your questions as we go. Plus the chat, shout us out. Let us know where you’re tuning in from, where you’re listening in from.
What else? If you need a detailed response, we’re going to give you a link to set up a tax consult. You can do that today. If you need a more detailed response—tax planning, crunching the numbers, et cetera—we encourage you to become a client. We’re going to give you a link for that in just a moment. Fast, fun, educational.
Again, this is a free service. We just put this out every two weeks to just plant these seeds, give you this information. A lot of this tax stuff is overwhelming, so we’re just going to chip away at it every two weeks, go over the basics.
Eliot: Yup. Send those questions in. I look over every question. Get as many as I can in for us to have during the show, but really enjoy it. I thank you all for sending those in. It’s a real pleasure to have the opportunity to read all your questions and some more than others.
Barley: We get some good ones. Some very challenging ones. Plus some basic ones, plus the one we’ve just flat out never even seen or heard before. Those are always fun. So, yeah, let’s hop right in. We’re going to run through the questions, guys. Then we’ll dive right in.
“How can I take advantage of tax code 179, Section 179?” Expense deduction. That’s a big one.
Eliot: Yes, it is. A lot going on there.
“If I have more business items to buy like a desk, should I buy them before the end of the year? Or maybe I wait to the new year? When do I buy these things?”
Barley: Fiscal tax planning. “If one invest in an equipment leasing investment in 2025,” so in the current year, “and it’s active, and writes off 100% of the equipment cost in 2025, but then in 2026 no longer active,” we’re talking about passive versus active, “does the income revert to passive income or is it still active for 2026?” Great question.
Eliot: “Can I still take the IRS mark-to-market election for the tax year starting January 1st 2026?”
Barley: Wow. I get nervous making that election, but we’re going to go over that for sure. “I have a Solo 401(k),” required minimum distributions coming up due here in 2025. “First of all, how does this work? And can I make qualified charitable distributions from my Solo 401(k)?” We’re going to iron out those details. “Plus do these tax-free distributions go on my 1040 as a deduction?” Not quite, but we’re going to cover that.
Eliot: “Is there a cap on how much money I can withdraw per year from my traditional IRA to purchase an income-producing rental property? What are the things I need to consider before making this decision? I’m 55 years old and I am aware of the 10% penalty.” Cover some of that in detail.
Barley: “Is there an annual cap on bonus depreciation,” related to the tax deduction, “Is there a limit on how much bonus depreciation we can take?” Kind of.
Eliot: “Can I do a cost segregation study on a property that’s in a qualified opportunity zone fund? How does this impact the capital gains tax deferral that ends in December of 2026?”
Barley: Some fun, fun timeline details we can get there. Qualified opportunity zone, qualified opportunity zone fund. Finally, “Can I do a 1031 exchange,” related here for a property in the qualified opportunity zone, the QOZ, “and avoid the tax due when the deferred tax comes due in 2026?” We’ll talk about those details as well.
Eliot: Who’s this guy?
Barley: In the meantime, go ahead and subscribe to these two characters’ pages. We got Clint covering, as you guys mostly know, asset protection. Clint and Toby, both tax attorneys. Clint obviously focuses more on the asset protection side, Toby more on the tax planning and mitigation side there. Subscribe. Tons of great content. As most of you are on YouTube, go click subscribe. Check out the most recent videos.
Toby is not on here, but just did another recap on the OBBBA, so check that out. Plus we got some events coming up.
Eliot: We do. We have a live one in Dallas, so if you’re in town only $49. Scan the box there and get some details.
Barley: Yeah, if you’re in Dallas, come see us. You’re going to be there, maybe?
Eliot: I was looking that way. Yeah, I think so.
Barley: Come and meet Eliot, talk tax. Corner him there, ask him your tax questions. And more live events, a couple of virtual. Obviously the one in the middle there, the Dallas event in December is a live event. But we also have these virtual events as well, tax and asset protection workshops. Got one of those coming up real soon.
Eliot: Yes, we do.
Barley: Another one in December.
Eliot: I think it is this weekend, I believe.
Barley: Yeah. If you need more information on those guys, shout us out in the Q&A. You want more information on the events. And as promised, scan this QR code. If you have tax questions and you’re ready to get the ball rolling, take a bite out of this and just really try to take on this tax planning effort, this is a great place to start. We offer the legal and tax planning service combined. Start here, scan the code, ask your initial questions, see if it’s right for you. We can take it from there.
Ready to wrap?
Eliot: I’m ready.
Barley: All right.
Eliot: Do it.
Barley: So first question, “How can I take advantage of tax code Section 179?” We’re talking about Section 179, expense deduction. Very popular, especially was as popular as bonus depreciation, phased out or phased down. Recall it was 100% bonus for a while, then it was going to 80%, 60%. I think this year we would’ve been 40%. But we’re back to 100%.
Section 179, not going to be as much of a play here, but we still want to be very aware of what this is and how it benefits us, right?
Eliot: Yeah. It’s been around forever. As Barley pointed out, we have these two different concepts. 179 just says that if you have business equipment, or at least it’s being used over 50% for business, then you can deduct whatever percentage of uses immediately that year.
Bonus depreciation does the same thing. Right now, it’s 100% bonus depreciation. For equipment, a lot of the equipment, you can (again) take immediately 100% bonus depreciation deduction.
Why is one better than the other? It’s really an overlap and that’s true to some degree. 179 does have some limitations, though. First of all, you cannot use it to create a loss. If you had $200,000 of equipment to deduct under 179, all of it qualifying equipment, but you only had $150,000 of income, you’re just going to level off there and wipe out the income with an extra $50,000. It doesn’t go away, just pick it up next year. That’s one big difference.
Whereas bonus depreciation can create a loss and many times does when you take enough of it. That’s the difference between the two. But how can you take advantage of 179? Well, you just need to have a profitable business and incur these expenses on qualified equipment, which is just about any business equipment.
There are a few exceptions, and especially in our area that we specialize in with real estate, yeah. We were talking about this earlier, and if you have a commercial rental building, well then you can use 179 quite freely, like for HVAC items, improvements, and things like that. However, if it’s just a rental building, well then maybe we can’t use 179 before (let’s say) an HVAC that’s coming.
Barley: Commercial versus residential. Single family residence. They just treat it differently. The HVACs are considered part of the structure. It’s not with the residential. It gets pretty hairy there. But with Section 179, the commercial building, a lot of use there.
Eliot: Exactly. Another popular one, that breakout, what we can’t use 179 for would be alarm equipment, fire and safety–type equipment. For some reason those are just not allowed. I couldn’t really tell you why. They’re just written out and they have been for some time under the 179. But nonetheless, a difference between the 179 and bonus depreciation we’ve seen so far.
Barley: Yeah, so profitable in the business, you have net income there. Can’t create a loss. That’s pretty easy. There are no really additional limitations on top of that. It just can’t create a loss. But we’re going to go over this more in a moment. You can pair these two together. This is very important. I’m just going to leave it there. Bonus depreciations, Section 168(k), and expense deduction (Section 179) can be combined, and pretty much our software automatically does that.
Eliot: Oh yeah, it does. Well, it’s by judge. You do have to make an election to do it. We do it on our own as far as tax preparation. However, one thing that I would say from a strategy standpoint, maybe you don’t want to create a net operating loss. When we get into the bonus depreciation, you have to really do it all or nothing, at least within that class. If you have a five-year property and taken bonus appreciation, then you have to do it with all of it that you purchased that year.
179, you don’t. In fact, in one particular asset, whatever it be—maybe you got a new crane or something like that for your construction company—you can choose to only deduct so much of it. Let’s say it was $250,000. You may only want to deduct $200,000 and then you can hold off on the other $50,000 or just do straight line depreciation on that other $50,000. That is an advantage if there’s a case where you don’t want to create a loss. Whereas maybe bonus appreciation in your particular scenario will create too much of a loss.
Toby talks about that a lot, too much of a loss in a business or at least not showing enough profit, because that can affect a lot of lending and things like that, and other financial credibility issues. That would be one situation where maybe you’d want to do 179 as opposed to the bonus.
Barley: Great question. Let us know if you’ve got any follow up on that, guys. Tagging onto that, “If I have more business items to buy, like a desk” is the example given here, “should I buy them before the end of the year, or wait until the end of the year?”
I love this question because it really just gets to the root of this tax planning issue of timing. We’ve got cash flows and we’ve got timing. That’s going to be very important.
Obviously, if I buy it this year in 2025—I’m a cash basis taxpayer—I’m going to take the deduction in 2025. Maybe I didn’t have any income. Maybe I just got started. In 2026, I’m anticipating being very profitable. It might be better to take that deduction in 2026.
I really like this because this is where we get a little bit of opportunity, a little bit of freedom to have some control over how much tax we’re paying. We don’t have to purchase the asset now. We don’t have to purchase it next year. We have the choice. And anytime we have a choice, that’s usually a good thing, especially in taxes.
We can look at your cash flows, project your income, where you think you’re going to land at the end of the year, see which year it’s going to be more beneficial. Now, if you need a desk, buy a desk. But for tax planning purposes, that December 31st cut-off is going to be your main date there.
Eliot: It is and that’s the real issue. If you’ve done tax planning, you know how much income you have. Do you want to have an extra deduction before this year or next year? That’s really what it all comes down to. You’re still going to have the same deduction either year. It’s just a matter of if you think you have more income and you need a deduction this year versus the next year would be your choice. But whatever it is, we want to make sure that you have the transaction completed.
If you want to get in 2025, make sure you have the actual purchase in place in the service of that asset, and then you can get that deduction. Because if you don’t—maybe you’re following cash basis and then you’re trying to deduct it or buy it next year for this year—that’s not going to work. So just be aware of that. We run into that quite a bit.
Barley: That’s a really good point. Like you buy a pizza oven or something like that, you can’t just purchase it. You’re going to have to freight, installment, calibration. All these things are going to take time.
Eliot: Oh yeah. We’ve run into this a lot with some of our other reimbursements, especially on S- and C-corporations, such as our 280A. Our accountable plan reimbursements, administrative office being one of those, medical reimbursement.
How many times do we hear, well, I incurred these expenses and I even turned them into the C-Corp, but the C-Corp never cut me a check and paid me back. If it didn’t cut it back, well then there’s no deduction there for the C-Corporation. Ergo, the corporation’s not going to be able to take advantage of that till next year.
In the next year on your return, you’re going to have inflated numbers, really, because you probably incur some of those expenses again in the 2026 year. Not that it’ll be an audit risk, necessarily, but it’s something that is going to be offputting if you had income in 2025 that you want on your C-Corporation, you wanted to incur that deduction, but you didn’t reimburse yourself. That’s probably the most common thing we run into at this time of the year. I’d say make sure that you get that reimbursement in and you get that check cut.
Barley: Absolutely. Any questions we need to hit?
Eliot: No, I think that’s it.
Barley: All right, What’s this?
Eliot: The big one. “If one invests in an equipment leasing investment in 2025, and is active, and writes up 100% of the equipment costs in 2025, then in 2026 is no longer active, does the income revert to passive income or is it still considered to be active for 2026?”
A lot going on here. I think the bigger concepts here are really the passive versus active. And this goes for any business out there. I don’t care what the business is. The code has a special provision, 469, and it just says, if you’re running a regular business outside of long-term rentals, you need to materially participate. If you don’t, it’s passive.
Why do we care? If we have a passive activity, and maybe some of our passive activities create a loss for whatever reason—maybe we bought that desk in time, maybe we did bonus depreciation, create a lot of passive loss in our business—we can only take those passive losses and subtract them against other passive income.
It’s not going to offset our W-2 income or anything else that’s ordinary income. So that’s something we have to watch out for, and that’s the difference between that. Now if it’s active, if we materially participate, make it active, then it will allow us to deduct that cost against any income on our return.
Material participation test, we talk about all the time. It’s got seven different parts to it, some more relevant than others. The most common, basically if you put over 100 hours and more than anybody else in that particular business, or if you put over 500 hours. But to be sure there are other tests. Like if you were in the previous years, maybe it was active for you 5 of the last 10 years. We don’t talk about that one a lot. And there are other tests like that.
But getting straight to our question here, we have equipment leasing investment. Now this is something that’s out there. This is an investment I’ve heard about a couple of times recently. The concept is, Barley’s had a big successful year. He’s got a lot of extra cash. He wants to invest half a million maybe into something that’s going to give him a deduction.
He hears about this equipment leasing investment plan, puts the half a million dollars in there. Now he put $500,000 cash in, but they can extend him credit on that and allow him to buy equipment for his business, let’s say $2 million worth. Because of that, he owns that equipment worth $2 million. Now, he can take substantial deductions on his business, but he has to be actively materially participating in that business.
Well usually in some of these investments, really, Barley’s not doing a lot. He’s just maybe overseeing some stuff, but behind the scenes, these companies or these investment groups are really doing all the work for him. And now we get into a problem. If they’re doing all the real work, making sure he owns these equipment, things that are being leased out to the general public…
Barley: How are you going to pass that material participation test?
Eliot: Right. At best, maybe you’re telling them what city to go to—maybe—and maybe you’re telling them whether or not to lease it that week or not. But someone else is doing most of the heavy decision-making. That becomes a potential problem. So just as you ask, how are you going to prove that?
Barley: Yeah. Well we started your conversation earlier. That was my question. How do you even show that you material… like if you have a syndication or something like that, or a bunch of owners, how do you even show that you’re participating in this?
Eliot: It’s tough. What’s he going to do? It’s a tough investment. I just say be careful out there and make sure you know what you’re getting into. You got to materially participate. How are we going to show that Barley’s materially participating in that?
Now if he actually took on the equipment and leased it out himself, that might be. But if he’s allowing someone else to do the investing for him, pushing it around the country, and determining where it goes and things like that, that’s not really all that active.
Barley: We could change the fact pattern just slightly, if one invests in an equipment leasing business, that would simplify it in our terms. But to directly answer your question, if we have active participation in year one, take some losses, get some income, it’s active income, active loss, and then you have somebody else manage it in year two, you’ll be considered a passive investor. Any losses incurred from that point would be considered passive.
But the active losses you already incurred in year one, they’re locked in, so to speak. You’ve already taken that deduction. They’re not going to take it away from you in year two just because you’re not managing the property anymore. It’ll just change the income and loss characteristics moving forward.
Eliot: That’s typically the case here where we had a really nice isolated situation where we had just two years, 2025–2026. Like I said earlier, if you have more activity going on—you’ve been in this business for a long time, and many, many, many years you’ve been active, and then all of a sudden you change to passive because you just didn’t do as much—it still might be a materially participation for you just because of some of those tests that say, (say) 5 out of the last 10 years or something like that, that you’ve been materially participating. So just be aware of that.
But in this isolated situation, only two years, exactly as Barley said, we were active one year, no problem, provided we materially participated, and then in 2026 you can go ahead and go passive, but it doesn’t have any impact on what happened in 2025. That’s only going to be what happened in 2026, as far as incomes and expenses, to determine the real impact of being passive.
Barley: We’re going to change gears a little bit here in just a sec, but I just want to note that a lot of you are like, well this reminds me of something we talk about a lot here at Anderson—buying a short-term rental. You actively manage it, materially participate in the short-term rental for the first year, do a cost segregation study. Those losses are active losses if you materially participate.
In year two, you turn that over to a property manager. Keep the same short-term rental status, turn it over to a property manager. Any incurred income or loss from that point will be passive. But these big deductions you took in year one will remain active. They’ve already been taken […]. I know a lot of you were out there thinking, I could do that with a short-term rental. You’re exactly right.
Eliot: But just remember, you got to do the work. Not other employees that are outside of your—
Barley: Material participation. It’s individual. You can’t have employees doing it. You and a spouse can share responsibilities there, but no other employees. Don’t want your kids doing it necessarily, either.
Eliot: Great question. A lot in here. A lot of depth here that doesn’t really hit us at the surface.
Barley: That’s why it’s deep, Eliot. It’s not on the surface. Great. Any questions before we change gears on this here?
Okay, great. IRS mark-to-market election. What the heck is this, Eliot?
Eliot: A lot going on here too.
Barley: Is this the same thing as active trader status?
Eliot: Well, mark-to-market’s coming now. We’re talking about trading stocks. Let’s just start there. You can have your regular account where you just don’t really do a whole lot. It’s just basic trading or something of that nature. Then you can be more active where it’s really your day-to-day job. Substantive, continuous trading and things of that nature. That could be trader status.
It’s a moving target. We don’t recommend it, but you can get there. One of the reasons people want to get to that status of being active trading is because they can make this election that we’re referring to, mark-to-market election.
What that means is that we go to the end of the year, let’s say December 31st, and we look at all that Barley’s been doing in his trading. If he had a lot of gains but he hasn’t sold them yet—this is the trick, he hasn’t sold them—or maybe he had a lot of losses, it really doesn’t matter, at the end of the year, you just look at what—
Barley: What is the […].
Eliot: Exactly. You add them up and act like he did sell that day at midnight, December 31st, and went ahead and recognized all those. Of course he didn’t, though. What happens is, if people have a lot of losses, they like to use this strategy.
Well, that begs why are you trading if you have a heavy amount of losses that you feel so encumbered that you must or can’t get by if you’re not trader status, because it’s an audit risk. I tell you that. But anyway, when you make the mark-to-market election and you have those losses, you could take them immediately against any other income on your return. And that’s nice. We understand that benefit.
However, what happens down the line, if you took a loss—maybe we want to draw this out, […] the basis works—let’s say again, we have $100 that Barley has as stock. He bought it for $100. That’s his basis right now. Now December 31st, let’s say the value is $80, so it’s gone down. He has a little bit of loss, but he hasn’t traded it yet. So normally he wouldn’t recognize that. It just wouldn’t show on his portfolio.
But if you do that mark-to-market, well now he can take $20. He has a $20 loss there, theoretically, and we act as if he sold it. So now he has a $20 loss on his return that he can take, and some people find benefit.
Now, that $20 then actually goes to reduce the basis of the $100. He recognizes the loss now. Then the $20 adds to basis. He’s going to have $120 later on. That way, he can’t duplicate a loss when he finally does sell in future years.
Opposite of that, let’s say it’s now at $120 at the end of the year, if you want to change that to $120.
Barley: Oh to a gain?
Eliot: Yup. The price is $120 at the end of the year. Then we have a $20 gain and he’d have to pay tax on that. It’s the same thing at 1231. He’s going to have to recognize that. Again, that would impact the basis so that he can’t duplicate or double dip on that. That would be handled in future years when he finally does sell the stock.
That’s what’s going on here. We want to recognize that gain if you’re taking this mark-to-market election. The problem is, to do that the IRS says, well, you have to do it on last year’s return.
Back to our question, can I take this on January 1st for 2026? Well, this particular taxpayer has to go back to their 2025 return, and make the election when they do their 2025 return. As long as they make that for the year 2026, as long as they make it before April 15th when their 2025 return is due, then they can.
That election is a statement that you have to put onto your return and send it in with your return saying, I’m trader status and I’m electing the mark-to-market election. As long as you have all that for the 2025 tax year, and we do it before we turn in our tax returns for 2025, which are going to be April 15th of 2026, then yes, we could do that.
We don’t recommend it, though, because when you get into this trader status, typically all the income and the deductions, it’s all going to show up usually on Schedule D for capital gains and losses.
Barley: Net income. It’s not the deductions.
Eliot: Correct, all the losses. But all the deductions from business-related expenses that maybe were incurred, those are going to go on Schedule C.
Barley: Ooh, auditor […].
Eliot: If we’ve ever heard anything from me, […]
Barley: Just go loss year after year after year.
Eliot: Year after year after year. Constant loss. And that loss is a heavy, heavy audit risk. So we really never recommend the trader status. We don’t do returns for it. We don’t recommend you do it. But that wasn’t the question. The question was on January 1st of 26th, going forward in 2026, can I be a trader and can I make an election for this mark-to-market election? Yes, you can for 2026, as long as you do it before you turn in your 2025 return without extension on April 15th.
Barley: So as if the election wasn’t complicated, the timeline for the election is complicating. But what’s easy to understand is that if you make this election, your unrealized gains become part of your taxable income or loss at the end of the year.
That makes me nervous. I love that if you had a big loss in stock this year, you get to take an active loss. But then what happens next year? What if you have a great year stock trading? You have a large gain that you didn’t sell. You’re going to owe tax on that gain at the end of the year, even if you didn’t sell it. It can be a nasty surprise.
Eliot: You’re only punishing yourself for doing well and trading stock by using this. Just as you pointed out, if you have a heavy gain, it made $1 million of that you haven’t sold yet, where are you going to pay the tax on it? We’re going to get the cash. You’re going to have to sell anyway. So why go through all this? Why go through the audit risk? We just don’t recommend it.
Barley: I think that should be reiterated again. We don’t prepare returns for people that make this election. Should tell you what we feel about it as a company. Toby knows this stuff pretty well. He knows the stuff inside and out. It’s not like we couldn’t do the returns. It causes us some trouble.
Eliot: We don’t need the headache.
Barley: That said, for those of you guys that are doing this and know what the heck you’re doing, you keep running with it. There are some people that this is their niche and they do this, but for our guidance here and now, that’s what we would recommend, just to be clear.
Eliot: Absolutely.
Barley: All right, moving on. Make sure you subscribe to YouTube channels. Again, just a great free source of information. You don’t have to be a client. Tons of great content on here. Captains of industry, industry leaders, CFOs, CEOs, bankers, all the above. Toby’s got a great network and shares that freely with all of us.
Same with Clint. Asset protection. So much good content on here. I think Toby’s winning the who got over 1100 videos. Cleared the thousand mark. Pretty easy there. Make sure you subscribe, though. Great content. And again, scan this QR code. You can talk to one of us, do tax consulting, tax advising, tax planning. Scan this code. You can just set that up right now.
Just to remind you, guys. We do focus on real estate, small business. We focus on stock trading as well, but we have a separate trade structure. We don’t recommend mark-to-market, but we’ve got a great way to reduce your capital gains on that. So that’s our area of focus. Real estate, small business, stocks, real estate being number one. Let us know, scan that code. We can talk.
And come to the event in Dallas. Another link here just to make sure you scan this QR code if you missed it the first time, at a live event coming up in Dallas, December 4th through the 6th. Love to see you guys there.
Eliot: $49.
Barley: That’s right.
Eliot: Best spent ever.
Barley: Scan the code and show up. Dallas is going to be beautiful in December. All that humidity should all die down. Look forward to seeing you guys there.
So, Solo 401(k). Talk about this a lot. We got a lot of closely-held/family-held corporations.
Eliot: Yeah, get a little bit of a retirement plan going on.
Barley: Solo 401(k) is a great way to do this. “I have a Solo 401(k),” excellent. Also have required minimum distributions (RMDs) coming due here in 2025. “Can I make a qualified charitable distribution from my Solo 401(k)?” Great question. “Do these tax-free distributions go on my 1040 as a deduction?” What do you think?
Eliot: I think first of all, we probably better say what a required minimum distribution—
Barley: Let’s define some terms. Good idea.
Eliot: RMD (required minimum distribution) just says at some point, you have to start taking money out of your retirement account. For a Solo, it’s typically 73 years old, then we start taking the RMDs. That’s going to be taxable income.
Qualified charitable distribution, however, is a concept where from a retirement plan, your RMD that was going to come out, go ahead and send it into a charity. I don’t want it, give it to a charity.
Barley: Never even comes to me.
Eliot: Exactly. Never even touch it, hands-off. When we do that, it never touches a 1040. If it never touches a 1040, it’s never income or a deduction. It just didn’t exist and you just didn’t get penalized by having that income come to your return. But you cannot receive it. It has to go from the plan operator sponsor over to the charitable entity.
However, we’re asking about Solo 401(k) here, and you can’t do this for a Solo 401(k). You can only do this for an IRA. So we have a little bit of confusion going on here. Only IRAs are eligible for these qualified charitable distributions.
Barley: So individual retirement account versus a company-sponsored plan.
Eliot: Exactly, so we’re not able to do it here with a Solo 401(k). But all the other pieces really are active here. If we had an IRA, had a required RMD coming our way, well then we could, up to approximately $108,000, I believe is what it is . For 2025, whoever’s handling your IRA would donate it to the qualified charity, and that way it never again hits your return. No income, no deduction. You don’t have the income showing up, no tax on it.
Barley: Wow, okay. So 401(k), a lot of you guys have these. Just FYI there. RMDs are required, but charitable contributions only from the IRA.
Eliot: Yup. You cannot touch the cash. That’s the important thing.
Barley: Or it’s taxable to you instantly. If you do the math on it, let’s say I take the required minimum distribution—it’s taxed to me—and then I donate it to a charity and take a deduction, you still end up with some taxable income. That’s the whole point of this. We have a good income stream. I don’t need the money. I just want to put this to my charity and avoid the tax headache. That’s a great option there.
All right. What do we got here? Oh, similar. Eliot does great with these, guys. He reads all these questions, guys, puts them in a good flow order, which is not easy when we’re talking about taxes. But on with the conversation here.
Eliot: “Is there a cap on how much money I can withdraw per year from my traditional IRA to purchase an income-producing rental property? What are the things I need to consider before making this decision? I’m 55 years old and I am aware of the 10% penalty.”
Again, a lot of little things going on here. We got another retirement plan. We’re trying to take money out. We’re recognizing here, though, if we take out a traditional, you have to pay tax. We’re taking that distribution. The tax cometh on this one, okay? We’re not trying to defer tax or anything like that. We’re going to pay tax.
Barley takes half a million out, it’s going to hit his return. He’s going to be taxed half a million from his IRA. Now, if you do it before you’re 59 years old, you’re going to get hit with a 10% penalty, and that’s what they’re referring to here at the end. So that’s one thing.
As long as we’re aware of those things that: (a) Barley’s going to pay tax on that income as a regular income tax, and (b) he’s going to pay a penalty of 10% on the amount taken out, well then he is fine to go forward. But you’d want to do that with open eyes, know what you’re getting into, okay?
But you’re going to go out and get a rental. Now all of a sudden we see opportunity. Because if he’s getting a rental that he’s going to hold out, he’ll have asset protection but it’s going to hit his personal return. We put in LLCs and things like that, but it’s still going to show up on his 1040. We got a lot of things we can do with a rental property. Maybe it’s for deduction.
Barley: Put on the tax hats, guys, because let’s pair this up. If I take cash out of my IRA, that’s a taxable event. But if I use those funds to purchase real estate and then get the resulting tax deductions, we can offset the tax.
Eliot: Exactly.
Barley: That sounds pretty good.
Eliot: And so we have a couple of methods to get that. When we’re in the real estate game, how are we going to make that? We talked a little bit earlier about passive/active. What’s going on there?
Barley: Cost segregation and depreciation’s going to be your main players there. But is it active or passive? We have to make sure it’s active because then active, as you guys know, is going to offset all other forms of income, including W-2, including taxable retirement distributions, including other income from your other investments.
Eliot: You go out and you get a short-term rental, what are you going to do?
Barley: Manage it yourself? Cost segregation study.
Eliot: Materially participate.
Barley: Materially participate, yeah.
Eliot: At that test, one of those seven branches of material participation that we were talking about earlier, the most common, over 100 hours more than anybody else. Or he puts in over 500 hours. And yes, his spouse’s time counts as well. That’s, if you will, an easy one short-term rental.
Now if you get a long-term rental, what do we got going on there?
Barley: Same exact concept, but we have a much larger additional test add, and that’s the real estate professional status test. But I think we’ve mentioned a couple of times on Tax Tuesday.
Eliot: Yup. At least twice.
Barley: REP status test, same exact concept there. Material participation, but we need the REP status as the prequel, if you will, to even be eligible to materially participate in a real estate activity. Because remember, real estate’s passive by default unless we actively materially participate.
Eliot: Very good.
Barley: Yeah, a lot on that one. But I think we covered that pretty good.
Eliot: As long as we get that income-producing property, if we make REP status (long-term rental), or we materially participate (short-term rental), well we can do a cost seg, say get a lot of tax deduction, and that’s going to go against that income that we just incurred when Barley took that half a million out. It’s not going to have any impact on the penalty, but it’ll make it less painful.
Barley: I want to mention this to you. You can’t take the money out 60 days to put it back. We just don’t really love that. I don’t like it because I get nervous. If you miss that by one day, all that’s taxable.
Eliot: I don’t know how we’re going to get it back in if we just got an income—
Barley: If you used it to purchase a property.
Eliot: Yeah, I don’t think we’re going to make that. That’s problematic I would think.
Barley: But just to be aware, you can take money out of your traditional, put it back in within 60 days. There are no tax repercussions there. I don’t like to mess with that one too much.
Eliot: Now if this was Solo, we saw in the earlier question that the confusion between Solo and IRA, about the qualified charitable distribution. What about this particular question with a rental? What if this was a Solo? Well, you might be able to take a loan. There are limits to it, but that might help at least give you enough of a loan for down payment on this property. But we’re not in that genre. We’re in IRA.
Barley: Yup. Can’t take a loan there. All right. Any questions we want to hit there?
Eliot: Speaking of questions, we got Patty, we got Amanda.
Barley: No wonder we don’t have any questions. We got Dutch, Jared.
Eliot: We have Dana.
Barley: Geez. We got all our tax superstars.
Eliot: Jared, Maria, Rachel.
Barley: You have a bunch of CPAs in the chat right now. Please hit them up with your questions. We like it if they’re related because we can then talk about them, but you got the tax team in the Q&A. Post your questions in the Q&A there.
Eliot: They’re wiping them out.
Barley: Good work. Thanks team.
Eliot: All right. “Is there an annual cap on bonus depreciation–related tax deduction?”
Big question here. There’s really no limit to how much bonus depreciation one can have. It’s going to be 100% bonus depreciation of anything. So that’s again, the big play. You have a property, it’s 27½ years. Do a cost segregation. That’s going to break it into pieces. Five year property, 15 year property, then you have the 27½ year property.
Anything under 20 that you’ve sped up through that cost segregation study is eligible for bonus depreciation. Once you’re there, there’s no limit to how much you can have and how much loss you can have on it as far as showing up. But what actually happens on your return, there is an overall loss limitation. We call it the excess business loss limitation.
While one can have considerably large amounts of deductions and things like that showing up from their activity, from things like bonus depreciation, when it actually hits your return, if you’re filing single, you can deduct up to $313,000. That’s the most that you can have as a loss. Double that for married filing joint, we’ve got $626,000.
But one thing that people forget about that excess business loss limitation is that you can pull in all your investment type of income. That would include, if you had an S-Corporation going on all your business income. If you had an S-Corporation, not the W-2 you got from it, but the K-1 you get, the distribution portion.
Let’s say again, Barley has a K-1 of a million dollars coming in, and maybe this property has a massive amount of bonus depreciation. How much can he do? $626,000? No. He can wipe out that million first and then an additional $626,000.
Barley: It’s the loss that’s limited.
Eliot: Exactly.
Barley: Excess business loss.
Eliot: Exactly right.
Barley: Or 65J or something like that if you want to look it up. That’s the limitation we have each year. Bonus, if you bought a commercial building or something and took bonus depreciate, that could be huge amounts of money. Active versus passive would be the first consideration we’d look at there. Obviously if it’s a passive loss, we don’t really have these excess business loss, net operating loss considerations. No limit on that.
I just want to touch on this quickly or we can go into this more detail if you guys have questions on it, but do we really want to get our taxable income down to zero or even negative? From a practical expense of those low bracket tax dollars are expensive to offset and they oftentimes don’t give us a lot of benefit.
It’d be nice if, boy, if I knew I was going to have $500,000 in income over the next three years, I’d really like to spread that deduction out over the next three years and eliminate those really expensive top tax bracket dollars. We want to eliminate those 37% tax dollars. Me, you, and Warren Buffett, we’re all paying the same on our first $12,000. Zero. We don’t need to eliminate that income.
Consider that if you’re looking at aggressive tax reduction strategies. Usually, the goal will just be to get you down into a reasonable tax bracket where you don’t feel like you’re overpaying.
Eliot: And that leads us back to where we started with that 179. I hear what Barley’s saying. It makes sense. I have this one large deduction happening or this amount of deduction happening. Is there some way I could stretch it over three years so that it hit all the 37% tax bracket savings?
Barley: We love wiping those ones out.
Eliot: Exactly. Even the 35%, that big break between 35% or 32% and the 24%, nice. If you get into that, you’ve done your job. Really, you have. Well, no, I want more. Well, okay. That’s fine. But with a little tax strategy, you can see how much more you could save if you just have a one time large event, and that would be a play where maybe you do do 179 over bonus perhaps, because you’re not trying to create an overall loss, perhaps, would be one thought. Again, this is how it all comes together. This is what we do for tax planning, help you walk through these mine fields to make a more informed decision.
Barley: Just one more piece on that. I know it’s getting in the weeds a little bit, guys, but I know this is what you guys are into, so this is relevant. Bonus depreciation. When we do a cost segregation study, we’re segregating out the various asset classes, is the language we use here. We got five year assets, seven year assets. Of course the property itself is a 27½- or 39-year asset. The four walls, roof, the foundation.
When we do a cost segregation study, we’re separating out these assets. We have some opportunity for tax planning there as well. We can deduct all the five-year assets this year, then all the seven-year assets next year, then all the 15-year assets in the following year, for example. So we can spread this out.
Again, just eliminating those higher tax bracket dollars, first and foremost, as long as we can. Getting down to zero, I’m sure there’s a strategy there, but 9 times out of 10, that’s probably not going to be your best play, especially if you’re looking for financing, lending, that kind of stuff.
Well, I think we got that one pretty good, huh?
Eliot: Yeah. I think we put them to sleep on that one.
Barley: But now we’re going to talk about cost segregation study in a qualified opportunity zone fund.
Eliot: So wake them up.
Barley: As if we didn’t go into weeds enough, let’s go a little bit deeper. Of course, we’re talking about more real estate stuff here. Go read the question for us.
Eliot: “Can I do a cost segregation study on a property in a qualified opportunity zone fund? How does this impact the capital gains tax deferral that ends in December 2026?”
Barley: Better define some terms, huh?
Eliot: Yup. Opportunity zone fund is simply a concept that the state government said, we got areas that we want to encourage investment into. So people who have capital gains can go ahead and take those capital gains, invest it (let’s say) in real estate in a qualified opportunity zone, usually more depressed areas or something like that, get that income flowing in that capital coming into that area. And we’re not going to make you pay tax on that capital gain.
This came into play around 2017–2018 with a new Tax Cuts and Jobs Act. It’s been extended. However, the Tax Cuts and Jobs Act said this plan that we’re doing right now for this bill, it’s going to end December 31st 2026. That’s what we’re asking about here. Well, okay, if I had capital gains and I put them in and bought a building and put it into this qualified opportunity zone fund, and I did a cost segregation study, which Barley just walked through, how’s that going to happen, impact those capital gains that I must pay at the end of 2026?
Barley: Can it offset those gains?
Eliot: Exactly. Well, what’s going to happen here is a couple of different things going on. At the end of December 2026, whatever your capital gains that were deferred, you will pay tax, and you will pay tax on them as the same class as what they were back in 2018–2019, whenever you put them in. So if they were short-term capital gains, well they’re still short-term capital gains, you’ll pay the rate. If it was long-term, well then you’ll pay long-term capital gains rates, whatever it be, but it’ll still be capital and it’ll still be short or long. But you will pay them. There’s no deferring that or pushing it off.
Barley: You’re already capped, maybe even for 10 years.
Eliot: Exactly. You’ve already gotten that benefit. Now if we do the cost segregation, this is more related to the ongoing operations at this moment. Well now we have a building and we have some income coming in because there are renters, and we have operational expenses. One of them for the building being depreciation. Well, we take the cost seg study, speed that up, and that will help offset against that rental activity of that particular building. But this has nothing to do with those capital gains that you use to put into the opportunity zone fund.
So go ahead and do your cost seg study. It will break the property into better pieces, if you will, so that you can get a better deduction now, and depending on whether or not active or passive, that could help against any income on your return. Some of which will be in December 2026, will be that capital gains that you had deferred from way back when you started. But they are different paths you’re going down.
Barley: Like an indirect offset.
Eliot: You got the investment with the cost segregation study, which you can do in a building like that, and then you’ll have the capital gains that you must pay. So that’s the idea there. So yes is the answer. You can. What’s the impact? None to the capital gains. You’re going to still pay tax. The more interesting thing is cost seg study, a lot of tax savings, potential depreciation recapture, if you ever sell that building later on.
Barley: Qualified opportunity zone, that’s the political boundary they draw around the area that defines the physical area. Then the qualified opportunity zone fund, that’s the entity you set up. Typically a partnership for real estate, maybe a C-Corp for business, but that’s the actual vehicle we use to reinvest the cash and get these good benefits. We’re going to talk about that more in just a minute.
There are still a lot of benefits here, especially, and I don’t think we’re going to go into this in a whole lot of detail right now, but the new bill expanded this to rural, added a bunch of other incentives there. So there’s still some play here.
Eliot: That’s a good point. The bill restarts it in a new phase, because in 2026 we’re done.
Barley: It’s the tax is due.
Eliot: Yeah. And I heard there’s a new one starting January 1st of 2027. Yeah, there is. Well, can I just move? No, you can’t do that. You got to pay your taxes. Well, can I…? No, pay your taxes. December 31st 2026, we pay taxes on those capital gains. Then we can start a new one. January 1st 2027, a whole new deal with any capital gains that we have for that.
Barley: All right. Little more detail on this one. Another great question here. “Can I do a cost segregation study,” we all know what that is, “on a property within a qualified opportunity zone in our qualified opportunities zone fund?” Now we’re actually a little something different here. 1031 exchange. This is where we run into the letter of the law, basically gives us our guidance on this.
Eliot: It gets a little hairy.
Barley: “So can I do a 1031 exchange for a property in a qualified opportunity zone fund,” the fund that you set up, the partnership or whatever, “to avoid the tax due when the deferral ends December 2026?”
We already answered that part. The tax is going to be due December 2026, no matter what. It’s going to retain the same character as when you originally incurred the tax, short-term, long-term capital gains. Whatever it was, you rolled into the fund. That’s what you’re going to owe tax on at the end of 2026, and that’s just the way it is.
Well, let’s address this 1031 exchange part. Is there a play here or not?
Eliot: No. 1031 exchange has to be for the exchange of property. If you invest in one of these funds, you typically are investing with multiple other investors. If Barley goes in there, invests in this fund, he can’t do a 1031 on that property because the whole fund owns it, not him.
We’ve seen this many times with any kind of partnership that a partner can’t just go off and do their own 1031 because the building, the real estate that you’re trying to doesn’t belong to them. You just own a part of the partnership. It’s the partnership that has the building.
The same thing happens, well, what if the fund itself? Well, you just said it could be a partnership. Yeah, but even then it’s an investment type that that fund can’t really 1031 into something else, either.
So the quick answer is no. It’s certainly not going to, as Barley pointed out, allow you to divert, defer, or void any tax on the deferrals that come from 2026. You will pay tax on that. There’s no question about that. The 1031 would only again defer on any new capital gains, anyway. If you’re doing a 1031, it wouldn’t be from past ones. That is a couple of reasons why it’s going to fail here for doing a 1031.
Barley: Now, potential problem. Number one there, that’s going to apply across the board. A lot of times these qualified opportunity zone funds, the actual entity doing the investing, you’re going to have fractional ownership. You and a thousand other investors are going to be in there. You can’t do a 1031 exchange in that, even if it wasn’t in a qualified opportunity zone fund. You can look at other options there. But even if it was maybe just you and a spouse in the partnership and you had a property, we’ve already used this tax deferral instrument, so that’s why they’re going to then limit that additional deferral mechanism.
Eliot: You can’t defer twice. You have the current deferral going on. A 1031 would be continuing to defer something that’s—
Barley: Deferral dipping?
Eliot: It would be double deferral dipping, exactly. Coined it here.
Barley: There we go. Double dip deferral not allowed.
Eliot: Not allowed. Good phrase, but we can’t use it.
Barley: But great question. And bottom line, the capital gain is due then in 2026. Again, if this is something you guys are already in, if this is you guys are already invested in these, you already know about this, look at the new rules. There’s a lot of incentive, and that’s the key buzzword here when we’re talking about tax law. Incentivization.
They’re going to say, hey, you get a 35% deduction if you do this. You get a massive tax break if you do this. We definitely want to take a look at those. They may not be up our alley or in our realm of expertise, but we certainly want to take a look at that. So qualified opportunity zone, go do a little easy research, ChatGPT-style research, get the generals on that. Then let us know if you have any specific questions. We can definitely go more in the weeds on that. Pretty specific treatment, but incentivized and very powerful potentially as well.
Eliot: Well, I think that’s it.
Barley: All right. We had our kick butt tax team answering all our questions.
Eliot: Exactly. Thanks to Amanda, Dana, Dutch.
Barley: Thanks for not leaving us any questions.
Eliot: Jared, Marie, Rachel.
Barley: Love working with such a great team. It makes me feel like I don’t have to do everything.
Eliot: We definitely don’t do everything.
Barley: We have a great team.
Eliot: We got the whole team back there.
Barley: It’s pretty amazing.
Eliot: So we’re very fortunate.
Barley: How dare you, Troy. We got Troy in the chat too, so great work. Thanks to our team for answering all the questions. We really do appreciate all your questions and hopefully you got your questions answered.
On that note, if you become a tax client, you can submit questions to the platinum portal, written questions, as many as you want. Our platinum knowledge room service comes five days a week. Talk to a CPA or an attorney. So we definitely encourage you. Do some tax planning, sign up, and become a client. Use that QR code. Scan, get more information. This is what we love to do, help you plan for financial success using real estate, small business, et cetera.
All right guys, we’re wrapping up. They must really want us to promote these YouTube pages. You guys better subscribe. Obviously, I want you to subscribe there. Make sure you scan the QR code. Just a last chance here. Please join us at the live event here. Got plenty of virtual events too if you can’t make the live one. If you don’t feel like flying down to Dallas. Scan that, join us live.
And again, scan this QR code right now. Talk to us. Let us know where you want to go from here. What’s your next business move? We have such a varied team of professionals here, mainly focused on real estate. Just within our team here, we’ve got such a varied amount of experience. So definitely look forward to talking with you guys and working with you.
All right, close this out here, Eliot.
Eliot: If you’ve got questions, please send them in. I’ll look them over. taxtuesday@andersonadvisors.com.
Barley: Well, we’re doing this again?
Eliot: Well I guess we go every two weeks.
Barley: Every two weeks.
Eliot: Do it again. Visit us at andersonadvisors.com. You see all kinds of stuff up there—events, information about the services that we provide, just about anything else you want to know about Anderson.
Barley: That’s right, so submit your questions. Again, even if you’re not a client, submit questions. We’ll answer them. We love to go over this stuff live. Try to provide whatever. Fast, fun, educational knowledge we can because we know this stuff can be overwhelming, confusing, but one step at a time. Chip away at it.
Take Toby’s sage-like advice. Pick one or two things, and focus on one or two tax topics that are relevant to you. Focus on those, get to know those well, apply them, save some money. Next year, pick two more and we’ll go from there.
Eliot: I think that’s it.
Barley: All right, guys. Well, another Tax Tuesday on the books. Thanks for submitting your questions. Please submit questions for our next Tax Tuesday in two weeks. We’ll see you back here then. Thanks again.
