In this Tax Tuesday episode, Barley Bowler, CPA, and Eliot Thomas, Esq., tackle a diverse range of tax questions covering business structures, real estate investments, and tax optimization strategies. They demonstrate significant tax savings by comparing Schedule C sole proprietorship versus S Corporation structures, showing how proper business formation can save approximately $6,000 annually on just $50,000 of income. The hosts address healthcare deductions for S Corporation owners, explain the complexities of the self-employed limited partner exception, and dive deep into capital gains calculations and 1031 exchanges. They also cover tax lien investments, charitable boat donations, and probate avoidance strategies. With practical examples and real calculations, this episode provides actionable advice for entrepreneurs and real estate investors looking to minimize their tax burden while staying compliant with IRS regulations.
Submit your tax question to [email protected]
Highlights/Topics:
- “What is the best way to reduce my income and my self-employment taxes? I’m single, a handyman/contractor with no dependents. I work solo, no employees.” – Form S Corporation, pay reasonable wage, save on employment taxes.
- “I have an S-Corp LLC for my property management and business consulting activities. I’d like to provide my me and my spouse’s healthcare through the LLC. What’s the best way to go about this?” – S Corporation pays premiums, adds to W2, deducts on Schedule 1.
- “Self-employed limited partner exception. Please talk about this topic.” – Very risky strategy; IRS cracking down; use S-Corporation instead.
- “How can one start a business, LLC or C-corp, and an ideal state of incorporation and hold those shares in a Roth IRA?” – Cannot own an operating business in Roth IRA; consider ROBS instead.
- “What types of taxes and tax reporting will be involved if I begin investing in tax liens?” – Interest income or property ownership; depending on the redemption outcome.
- “What are the rules for capital gains taxes on the sale of a house when the profits are used to pay cash on the next property?” – Sales price minus adjusted basis equals gain; cash use is irrelevant.
- “I am taking my primary home and turning it into a rental for one to two years. How do taxes work if you wanted to 1031 a portion of the gains?” – Take Section 121 exclusion first, then 1031 the remaining gain.
- “Under a 1031, taxpayers must select three possible real estate properties within 45 days. Can these selected properties be changed before the 180-day deadline?” – No changes allowed after 45 days; very strict timeline rules.
- “I have a boat to donate to charity. Is it true that I can make a $5,000 donation without having a certified appraiser?” – Yes, under $5,000 needs written acknowledgment, not certified appraisal.
- “What are the ways we can avoid probate?” – Living trust, joint ownership, beneficiary designations, lifetime gifting strategies
Resources:
Schedule Your Free Consultation
Tax and Asset Protection Events
Full Episode Transcript:
Barley: Hey, everybody. Welcome back to Anderson Business Advisors. Welcome to Tax Tuesdays, bringing tax knowledge to the masses. I’m one of your hosts, Barley Bowler. I’m one of the CPAs and tax advisors here joined by Mr. Eliot Thomas.
Eliot: Hello, manager, tax advisors
Barley: Bringing tax knowledge to the masses. Tell them what we’re doing today, Eliot.
Eliot: We’re going to do a lot. We’re going to get through the questions. We’ll go through those in a second, but we’re just going to let people get in here. If you want to type into the chat, we got plenty of communication. If you’re having problems with visual or audio, please put your messages in there. But if you could tell us why we’re letting people kind of roll in here, just where you’re coming from. Also, if you have any questions, we have the q and a section. We got a whole host of people here in the background answering questions. I actually don’t have a list today of those people, but that will be a lot of our CPAs, tax attorneys, EAs, et cetera. We got some Florida going on there. And while they’re rolling in here, just want to say a big thank you to everybody who visited us this past weekend in Vegas, Thursday, Friday and Saturday. We had our big tap event.
Barley: Yeah.
Eliot: The wonderful New Durango Lodge, or, no, the bar. Durango Casino here was great to see you. And thank you so much for all the, all your thanks and your appreciation for the show. We really appreciate that. It’s great to talk to you all. We’re going to have another one coming up in September where we’ll have all of our tax advisors, our Vegas tax advisors, hopefully showing up there. We’ll have a little bit more expanded bandwidth. Got a little busier on some of the tax stuff. But thank you so much. And again, always thank you to our events team, the Kenny and Matthew handling all the electronics and all that stuff that we could never do anything.
Barley: And you guys got to see our main man, our fearless leader, Mr. Toby Mathis, is back at the live event. So great to see him, you know, back out interacting with us here in, at the live events. Welcome back to Mr. Mathis and welcome back to everyone here for, for anyone that’s here for their first, I’m assuming most of you guys have tuned in before, but for anyone here for their first time, again, post any feedback for us in the chat. If you can’t hear us, can’t see us, shout out where you’re tuning in from. All that good stuff. Post any questions to the q and a. This is Tax Tuesdays. We’re going over your questions. You submit these questions. Eliot reads every single one of them, I watch him, he really does. He reads through every single one. We pick out questions that’ll hopefully be the most beneficial to you.
Plus can, you know, try to cover a good bit of ground here. Provide the most value to you that we can here in this hour, hour and a half. We got events, big thank you for showing up to the live events, more live events coming up. Guys, for those of you that have attended, you know that it’s a lot of fun. It’s a lot of work, a lot of, you know, a lot of synergy. You can meet with your fellow entrepreneurs. Great time. Plus get to meet the partners, talk to your tax advisors there. Love getting to meet you guys one-on-one. So keeping out for the more, more live events coming up. Yeah, more coming up.
Eliot: September, Vegas, probably December Dallas. We’ll have the exact dates hopefully soon.
Barley: Yep. When we get into that Q4 tax planning, right, we’ll put the tax hats on, and come to the live events. We’d love to see you guys there. Now that said, we got a bunch of questions to go over, really covering the grant gamut today. We got structure stuff, plus we’re going to crunch some numbers. Really try to, try to keep you guys engaged here. I know we’re talking taxes here, but we want to go over the finer details. Make sure we’re getting every dollar deduction we can. With that said, we read through the questions here.
Eliot: Yeah. One thing that’s not on it, rep status.
Barley: Yeah, we left that part out. . Have you guys ever heard of that one? Right? Real estate professional status. Obviously most of the majority of our clients are real estate, small business stock traders, right? You guys know the deal. We obviously focus on that rep status. You’ll have material participation a lot. Today’s shifting gears a little bit, but still keeping it real estate, small business. Always sticking to the bread and butter here. We go over the rules here. Ask live q and a. Yep. Email your questions, right? You guys, mostly for anyone that does know the drill here, tax Tuesday at Anderson Advisors. Submit your questions we go through and read them all , we go through them live. This is purely for your benefit here, just offered as part of the service. We will push you to become a client if you need specific calculations or specific guidance for that matter, right? This is a general forum. We’re going to go over a lot of topics. One thing I like to suggest is when you hear us going through this stuff, if you’re like, Hey, that applies to me, right? Just kind of whatever the topic is. You can submit a platinum portal question for more detail. If you’re a platinum client. A lot of ways to get in touch with us for additional guidance, right? Fun, fast, and educational. Should we hop right in?
Eliot: Go through the questions first. Yeah,
Barley: Sounds good. Start us off.
Eliot: What is the best way to reduce my income and my self-employment taxes? I’m single, a handyman slash contractor with no dependents. I work solo, no employees.
Barley: That’s much of good info there. Question two, I have an S corp, LLC LLC, taxed as an S corp for my property management and business consulting activities. I’d like to provide me and my spouse’s healthcare through the LLC. What’s the best way to go about this? Great question. Common question.
Eliot: A self-employed limited partner exception. So that we talk about all the time, not . Please talk about this topic. We will do, just so it is a highly fact specific test, but if you qualify, it can result in significant tax savings.
Barley: Perhaps we’ll find out, how can one start a business LLC or C corp, or kind of any of the mixture of those, right? And the ideal state of incorporation and hold those shares in a Roth. IRA. Hmm, tricky.
Eliot: What types of taxes and tax reporting will be involved if I begin investing in tax liens?
Barley: Yep. Some of you guys are doing that, Tax liens. What are the rules for capital gains taxes on the sale of a house? Good question. When the profits are used to pay cash on the next property, okay, I bought the house for 130 K, put about six or 700 into it. Sold it for 1.1. We got some numbers here. How do I figure the capital gains definitely going to go over that.
Eliot: I am taking my primary home and turning it into a rental for one to two years. How do taxes work? If you wanted to? 10 31. A portion of the gains, the purchase price 10 years ago was 430,000. I actually changed that. They put in 400,000. We’ll see why. I lived in it for eight years and rented it for the last two years. Sales price was 1.4. I’m single. Taking the $250,000 exclusion and 1031, the remainder of the 750 into a new property. Can this be done? Are the annual depreciation calculation there? We’ll find out all that.
Barley: Combining a couple big code sections there related under a 1031 taxpayers must select three possible real estate properties and we’ll find out that’s not necessarily the case within 45 days of selling the original rental property, right? The relinquished property. Can these selected properties be changed before the 180 day deadline? We have these very strict timelines on the 1031, right? Due to some events that are perhaps out of our control, right? Finding a better property or maybe the property was delisted. Do we have any flexibility on that? We’ll find out.
Eliot: I have a boat to donate to charity. Is it true that I can make a $5,000 donation without having a certified appraiser and claim on my taxes as a direct write off?
Barley: Good question. Few moving pieces there. And finally, kind of a good, just catchall, right? How, what are the ways we can avoid probate? We talked about legacy planning, wealth building. A couple specific issues. We definitely want to stay focused on there. You guys know the drill Toby’s YouTube page. Well over a thousand videos. Now check that out. Of course tons of information on tax planning, interviews of captions of industry and just great industries. Yeah, just keep in touch I’d go over the different, different aspects of it. But I really like the interviews that he is been doing with kind of, I guess what we call blue collar type worker jobs. It’s just so much opportunity out there and I really like how Toby’s exposing that. Please subscribe, tons of good content. As you guys are aware, Clint focuses on the asset protection side. Bunch of good content there. Make sure you check that out. And got an event coming up here.
Eliot: We do a Saturday July 12th. That’s going to be our online virtual event as well as the 19th. Those two Saturday events. Again, I think the next tap event probably will be our Vegas one in September, right? And then fall by Dallas in December.
Barley: Nice.
Eliot:More details to come
Barley: Those. Yep. So these are virtual events, right? Live tune in. Let us know if you have any questions about that, you can register. Probably got registered links right in here in the chat if you need them.
Eliot: Great way to watch from the comfort of your own home,
Barley: Right. We can’t deduct the, you know, the flight and lodging. Alright guys, we’ll hop right in. Ready to get to some tax questions. Make sure everybody’s caffeinated here on a, what about a Tuesday afternoon here?
Eliot: I think it’s Tuesday.
Barley: What is the best way to reduce my income and self-employment taxes? Self-Employment taxes. That’s, that can be a big one. Big burden, huh? I’m single, a handyman. I’m a contractor with no dependents. I work solo with no employees. I love this. This is a good blank slate, right?
Eliot:It is.
Barley: We have a business and we got a whole bunch of options we can look at here. But where would you like to start sir?
Eliot: What we’re going to do here is start with structure that is formation. How are we going to, what kind of business are we doing this in? By that we mean the LLC. Many times we talk about this barley over and over with clients. What is special about the LLC?
Barley: It doesn’t by default have a tax designation.
Eliot:Exactly. What can it be?
Barley: It limits liability but it can be disregarded or a partnership or a C corp or an S corp.
Eliot: We’re going to use that kind of mess of different taxations to determine what’s the best in this situation. Now of course it always depends if you had too much money or not enough, how could you have too much money? But if you make a lot of money, some of our answers will change more
Barley: Money, more problems.
Eliot: Exactly. But there are some things that we can kind of put into a, maybe just the regular normal situation. In that case we’re going to look at what if we’re sole proprietorship, we call it Schedule C. And we’re going to see what happens if we’re an S corporation. We’re going to look at those two and maybe briefly touch on some of the others. I think now we’re going to use our pen.
Barley: Sure. And I just want to throw in there, remember guys, when we’re talking about, right off the bat, what’s the best way to reduce my income tax? I’m assuming right off the bat you’re potentially a sole proprietor reporting your business on Schedule C. What’s unique about that? A hundred percent of the net income is subject to your ordinary tax plus that additional 15.2 or three extra employment tax, right? That can be, we consider that an excessive tax, especially on a hundred percent of net income. So we’re going to run through an example here to crunch some numbers. Let’s show what we’re doing.
Eliot: We’re just going to go with what if we had 50,000 of income from this business and what if we were schedule C? If we do that, we take first of all the SE tax self-employment tax and that’s 15.3%. So if we took that 50 times 15.3, that’s going to equal 7,650.
Barley: Think you’re good with numbers.
Eliot: Right? Already a huge amount of tax right there. Then we’re going to have the taxable income, the taxable income on the whole 50 amount that comes out to be 11,000 even, I went with a 22% tax bracket just to put us somewhere in the middle.
Barley: So ti we got 11,
Eliot: 11,000, even
Barley: 11 even
Eliot: For a total of 18,650. And there’s not a whole lot, you know, we could do like maybe a home office and things like that, but we’re not going to do that on the other one. But we’re going to take advantage of things that it can on the S corporation that is, but the home office kind of just, we’re going to say it just washes out. I’m going to ignore that. Now we’re going to go with a C, or excuse me, an S corporation, which would probably what most people would want to go into here,
Barley: Right? Active business. That’ll be a good general recommendation.
Eliot: Yes sir. Same 50 of income. But now because it is an S corporation, we can do a little bit more. The one thing we can do that we wouldn’t do on the other is our two A DA meetings. Just the Augusta role. And I went with a $500 a meeting times 14. That gives us 7,000. We do 50 minus or seven. Now we’re at a net, 43,000 before we even start to tax we’re already way ahead of the Schedule C. Now something special about our S corporations. We have two forms of income. One the reasonable wage, we’ve got to pay a reasonable wage, W2. And then we got to pay tax on a distribution, reasonable wage subject to all the taxes that they could throw at us. Half of 43 we went just down the middle. If we do half of us of a wage, that’s $21,500 for our reasonable wage on their S corp.
Barley: Remember if this was the C corp, that whole 43, that’d be your net income subject to your ordinary tax and employment tax. Right? But over the S corp we can pay a chunk of that as a reasonable wage.
Eliot: But here we only have to do the 21,500 times 15.3. That’s our employment tax on, it’s going to be 30,
Barley: What did I mess up? I got net 43 K
Eliot: And here’s going to be our SE tax.
Barley: SE
Eliot: 3,289 approximately.
Barley: Okay.
Eliot: And then our taxable income again on our paycheck, it’s going to be 43 or excuse me, 4,730 at 22%.
Barley: Okay.
Eliot: And this again is just that first branch reasonable wage. That’s our paycheck. Then we have the second branch distribution, but that doesn’t have that employment tax that Barley was talking about at the beginning. That’s what, as excess tax. Tax that we don’t need to pay. We’re only going to pay ordinary. The taxable income at 22% on that other half. That comes out to be 4,730 as well. Same 22,000 or excuse me, 21,000 times 22%. So we got another 4730 that we add on there. When we add that all up, the total tax for our S corporation is 12,700 and we’ll say $50. Our difference comes out between the two, about $5,900, approximately $6,000. That’s the difference merely by changing tax form going from the Schedule C, which by the way, I think the Iris likes to look at a little bit more.
Barley: Yeah. High audit risk. Absolutely. And similarly near zero audit risk at the corporate level. Minimal audit risk.
Eliot: And even if they do look at it, even when the, the statistics show that they usually don’t find a whole lot, you know, when they do go the US corporation for an audit. We look better for an audit percentage. We certainly have better deductions that we can take advantage of and certainly don’t have to pay all that employment tax. Again, that Barley was pointing out the very beginning and employment tax, something that we have a lot of control over to limit. So $6,000 approximately of difference. That’s what we’re going to suggest in this situation and this would probably go up to a much higher tax bracket. You’d probably have to make a lot of money before we talk about the other form, say a C corporation, of course we’re not going to have the partnership because we’re just a solo. We don’t have another partner, it just leaves us with an S corporation. Maybe if we wanted to have a medical reimbursement plan, that might be a thought. Just something to think about. But absent that, this is normally what we do. Take a Schedule C, get rid of that high audit risk. Put it into the S corporation and there you go.
Barley: And notice this is what, 50 K income, right? A hundred income, 150 k. These are, you know, the numbers. The more income to make, the more pronounced the savings will be. Switching to an S-corp for sure.
Eliot: And we’re going to see more about self-employment tax, our good friend and some of the future questions here coming up.
Barley: I hope everyone can read the handwriting there. But on a, just 50 K of income, not that that’s a small amount of money, but you know, considering our, what we’re bringing in is total earnings. That’s still 6,000 books just on 50 K income. That’s right around where we’re going to be looking to incorporate anyway. Once we make 30, 40, 50,000 net income on Schedule C, that’s when we’ll look to incorporate to an S corp.
Eliot: Exactly. Save 6,000 by just tuning in today.
Barley: All right. Let’s see if I can get this erase and we’ll go back to the basics here.
Eliot: I guess we got that one. I think handled
Barley: No employees. That’s important. Boy, we’re going to talk about this in a moment too, but no employees set up an S corp. You now qualify for solo 401k. Now that’s when we get into the big fund numbers. Alright, I have an S corp LLC from my property management and business consulting activities I’d like to provide my for me and my spouse’s healthcare through the LLC. What’s the best way to go about this? Great question. We get this a lot too.
Eliot: We do.
Barley: Because Healthcare can be confusing.
Eliot: Exactly. On the S corporation we have rules. If you’re an over 2% shareholder or owner, which we do have here, probably presumably this individual owns a hundred percent of the S corporation or their spouse does or even if it’s 50-50. Nonetheless, the way we would treat this, we would have the S corporation pay for the premiums. We can do that. Have it pay for the family premiums. Even if the other spouse isn’t an employee. You can handle your, the employee spouses health insurance premiums, those of the spouse and dependents. We can throw that all on there. The catches to it though, we got to call it ordinary income. They’re part of their wage. In other words, if they’re taking a paycheck and in this case it’s an S corporation. We just talked about having a W2 paycheck. The reasonable wage, here, let’s just say it was $10,000 for that, that medical premium for the family. We would add that on. But that portion, because it’s strictly for the health insurance, we don’t have to add on self-employment tax. We’re just increasing the taxable income to the wages.
Barley: It gets added to your W2 but not subject to that additional employment tax.
Eliot: Now when they get that W2, they get that W2 from their S corporation come tax time, where are they going to put it? They’re going to put on their 10 40. On line one, one A is where you’re going to see your box one W2 wages. You’ll have that with the additional 10,000 on it, not subject to employment tax again. And then on line 17 you’re going to have what we call adjustments to taxable income. There we get to take all that back, the 10,000 back. What we’ve done by having a deduction at the S corp level of approximately let’s say $10,000. Remember in our question we just went over, we were able to reduce our taxable income by that two 80 A we moved from 50 down to 43. Well now we, if we had 10,000 of insurance premium, we did the same thing.
Eliot: 50,000 down to 40. What are we doing? We’re lowering the amount that we have to pay as reasonable wage and we’re going to save on even more self-employment tax. And we haven’t even touched a 280 A yet. If we’d put that back on the previous question, we’re going to see all kinds of savings and a far larger distinction here. I just throw that out there that that’s how it happened. You put it into the wages and then we take it back out as adjustment on our schedule one Or is it schedule two? Schedule one and that’s how we’re going to handle it for our S corporation.
Barley: Yeah. On that schedule one I think it’s self-employed health insurance deduction. You’ll notice that schedule one should look pretty familiar. That’s where your HSA deduction show up your IRA deduction show up there. I think you got a couple other common ones in there.
Eliot: Speaking of healthcare S corporation, you just said it. HSA Oh yeah, we got some stuff we can do there too. We got all kinds of opportunities just kind of leading off the fact that we’re talking about healthcare there with the premiums. Remember we have an HSA you can put into that, get a deduction. We Barley and I put some numbers together here. The family plan for 2025 is 8,550. That’s how much you can put into it. you get a deduction, single 4,300.
Barley: No restrictions on that either, guys. You don’t have to have earned income, which is very common for these deductions. There’s no AGI upper or lower limit for this necessarily. There’s no upper limit really is the, is the main concern there. You get that HSA deduction every year as long as you have that high deductible plan.
Eliot: Exactly right. And that high deductible plan, speaking of which we did a little research there. It’s $3,300 for the family plan.
Barley: That’s the deductible limits on
Eliot: Yep. On the plan itself. And then 1650 for the individual. Just carrying off the idea of how to handle the insurance. Just remember in that business you could probably throw out some HSA contributions, get a deduction. As we’ve talked about many times, we won’t go too deep into it. Remember that just keeps growing. If you don’t use it, it keeps growing tax free.
Barley: It’s like an IRA. Right? The growth is tax free. That’s a big deal. Hold the plan until after retirement, no penalties on the withdrawal. All the growth is tax free. That can be pretty significant. You can turn it into a self-directed HSA, you can pass it on to your heirs. A lot of options there. It’s actually very flexible. Flexible kind of tool there, a lot of people really like that myself included.
Eliot: Two questions. We have lots of tax savings already. Right?
Barley: It’s a field of dollars flowing. Alright, what do we got next here?
Eliot: Self-Employed limited Partner exception. Please talk about this topic. It’s a highly fact specific test, but if you qualify you can result in significant tax savings.
Barley: We joke around because some of these get, these get a little obscure. But you know these are great questions. I just want to bring that up. We’re not trying to be flipping here. Some of these are just such, you know, some of the tax code stuff is so obscure and like Eliot’s going to go into this. I don’t have a lot of experience with, but we can talk about in the seventies this would, we could look at it one way and then today we look at it a different way.
Eliot: As Barley mentioned back in the seventies, what we remember, it was a different time. Most of us, maybe many of us weren’t here. But at that time it was a real goal, believe it or not, to pay self-employment tax, people wanted to pay it. Why would they want to do it? Because social security was considered such a great deal. Many people would have maybe a limited partner and they say, I’m a limited partner but you know, I did enough work because I handled the hiring and firing or I did the marketing so really I should probably pay self-employment tax on that. They want to be charged so it would go under their social security and they’d be able to take advantage of later on. Clearly if we’ve seen anything that is not the case today. Things have changed. But back then the IRS said, we don’t want people taking advantage of the code like that. We’re all the way on one end of this, this spectrum where you say, no, no, no, we’re not going to let you. The IRS is saying we’re not going to let you pay self-employment tax. Okay. Whoever thought that argument would come up. Now fast forward.
Barley: We’re not taking your money.
Eliot: Yeah. We refuse. We don’t want your money. Now we get to the modern day. What goes on here? Well all the time we’re fighting this. The idea is that I could be a limited partner and I apologize, we should already start what a limited partnership is. Limited partnership is simply a partnership where you have what’s called one general partner or more. They have a hundred percent unlimited liability. You usually make that a corporation and then it has all these other partners that are just limited. They’re limited in their liability just to what they put into the partnership. Now people come in as a limited partner, limited liability. But now today what people are wanting to do is have it in their active business, do some work, but not get charged with the self-employment tax, that extra 15.3%, 12.4%, which of which is self or excuse me, social security tax on approximately another 2.9 that is your Medicare tax. These are all amounts that they’re trying to avoid these days. The idea is how much activity can I do as a limited partner and not have to pay that self-employment tax? Well there’s a lot of tests, a lot of going back and forth. Lot of court cases have happened.
Barley: Filing a highly fact specific test they had.
Eliot: Then approximately around 2023 a case came in maybe early 24 that really set and won for the IRS how we’re going to look at this or everybody’s projecting. Because we don’t have the answers yet from the IRS how they’re going to interpret this. But it’s going to get real strict. The IRS is kind of probably taking hints from the courts that they’re allowing a lot of leeway to the IRS on this. We can expect that five 15.3% self-employment tax to really get hammered against a lot of limited partners who do any kind of activity. That could be, again, in the hiring and firing decision making, the you’re, you’re doing the daily work there. If you’re doing any kind management or things like that, marketing, what have you, these are areas, if you’re doing any real activity, you probably don’t want to go down this route.
There isn’t any bright line tests. But the more activity you do, you’re probably going to get hit. It used to be they would look to state law and they still do and they look at a list of maybe 30 different types of different activity. I fired somebody or I hired somebody. Was that enough? Maybe not. But after this last case, again that came out in 2324. It’s really predicted that the IRS is going to hammer down this. If you want to save on self-employment tax, jump back to the S corporation, which we started off on. That’s your best bet for saving on self-employment tax. You can roll the dice, you can go ahead and try to have a little bit of activity in there, but probably the IRS is going to tag you once they, because they’re feeling very bolded by some of these cases, we’d recommend the S corporation. But that’s the whole, you know, the whole to do about the limited partner exception.
Barley: We’ve got clear guidance on using S-corp, C corporation. You want significant tax savings, you know, an S or C corp with a qualified retirement plan and all the accountable reimbursements. That will produce significant tax savings. At least for kind of your active business.
Eliot: Great point. And as we pointed out all the way back when Barley was doing all the calculations, you got extra things like a 280A we could throw in there, administrative plan. We didn’t even bring that up, accountable plan. All kinds of things. What we got in the accountable plan, what we got going on there.
Barley: That’s a great question because when we look at this, what when do we get a benefit for being reimbursed from the business? And the example, the business needs 20 bucks worth of office supplies or something like that, you just buy it on the business credit card. Right? There’s no benefit to you paying 20 bucks getting reimbursed. On the other hand, things like cellphone and internet for example, that’s a great example. You’re paying that bill, you know you’re paying a hundred percent of that bill, you’re getting personal benefit out of it. You’re using your cell phone and internet at home. Your family and friends probably come over and use it as well. But because you’re required to have those tools to perform your job duties, you can be reimbursed for those at a hundred percent tax free cell phone, internet, home office, that’s like a percentage of your living expenses reimbursed tax free every year. Right? Wash, rinse, repeat this we have plenty of clear IRS guidance on.
Eliot: None that cloud.
Barley: No cloud right. We have an accountable plan for reimbursements. We sign that, add that to our documents and now we can start taking reimbursements and then again couple that with a qualified retirement plan like a solo 401k or something that’s kind of getting to be a pretty unbeatable structure as far as taxes are concerned. We just avoid partnerships for active business generally.
Eliot: There’s nothing wrong with doing them. We do it with active like real estate all the time. There’s a time and place for them. But don’t try and save on self-employment tax. I really don’t recommend it. And I think part of that is how much are you making? How much is the distribution to that limited partner. If it’s a hundred grand, you know, it starts getting into significant amounts. The IRS is going to move every rock and stone that they can to try and hit that. Tag it with that 15.3.
Barley: Alright. Any questions made related here?
Eliot: I think we’re good.
Barley: Alright. How can one start a business LLC or C corp and ideal state of incorporation and hold those shares in a Roth IRA, which is a great and kind of scary question. I get a little nervous when this comes up because can we do it? Yeah, we can do it. There’s ways of having, you know, have your using a, a rollover business startup. We’re going to talk about it. Having th retirement plan owned the shares only, but it makes me a little nervous. What do you think?
Eliot: Well, it should make us real nervous with the Roth IRA because we can’t do it there. The simple answer is no, we can’t. But as Barley pointed out, can we have, well first of all, why can’t we, we can’t have an operating business owned by basically the beneficiary of the retirement plan. We can’t have that mixture.In other words, what would happen here is you have your own S corporation or C corporation being held by your plan and then you’re working for that business. That’s not going to work. Especially that’d be a prohibitive transaction, we aren’t able to do that, especially in a Roth IRA. Now we do have something where we can introduce maybe under a solo 401k, the concept of Robs or rollover business startup. That’s a little bit more unique.
And we have seen this come and go in popularity. But what basically happens is, let’s say you have your old 401k from your previous job. You set up a brand new C corporation. Now that C corporation sponsors a new plan, solo 401K. We roll the funds from your other retirement plans other than our Roth IRA because they can’t roll over. But we move all the others into the SOLO 401k. We have all this cash now sitting in that new solo 401k again sponsored by our new C corporation. Our solo 401K goes and buys all the shares of that C corporation. It now owns it. And you can work for that C corporation. Now all of a sudden you do have a business startup business. It has to be an ordinary C corporation meaning shares, but it’s now owned by your plan.
Eliot: But yes, you can be an employee now can you take a wage? Could you do a 280A? Could you do the accountable plan that Barley was talking about? Not so fast. We have to make sure that that business is starting up and actually bringing in money and funds. Because the plan is now the owner, the plan we, we gotta be careful of having us personally benefit, you know, as opposed to our plan. In that case, once the plan, or excuse me, the business is up and off its feet and making money, well then it probably could pay reasonable wage and things like that. Do some of these other things. But you really gotta make sure that the business is doing very well to justify that. Otherwise the IRS can come in again and shut the whole thing down for, for being a prohibited transaction. But that’s the rob section. But we can’t do that with a Roth IRA a Roth IRA unfortunately cannot roll over into any other plan. It’s not allowed to roll its funds over into a solo 401k. Even if that solo 401k has another Roth component. It is so frustrating. In this case, no, we cannot start a business that we’re going to be in, you know, operating, et cetera, and have those shares held in the Roth Ira.
Barley: And just to quickly touch on this, generally the best state to incorporate your corporation will be where you live. If you plan on putting yourself on payroll, setting up a retirement plan, all that stuff. Those all generally be required. I think if you want to put yourself on payroll through your court, you have to set it in your state of residence. But generally speaking, that it will be your state of residence there. There could be other situations there if you’re using it. Kind of for offhand management.
Eliot: One more thing, just real quick on there, because when we say a question like this, again, we didn’t have any, you know, no mention of our Robs or anything like that. We kind of go with what we think people might be really, maybe they’ve heard something. Another thing I would add on here is the idea of having a C Corp shares. If it’s a newer business, having my retirement plan, when might I want to do that? Well, maybe if it’s a new startup or something like that. A C corporation, I might want to have my shares put into my plan so it would grow if I had the next Bitcoin or the next, is it meta? Is that what Google, Facebook, and all that long? Yeah. Any, those, those big high techs. If that’s the next thing, well, maybe I do want to have those kind of shares, start shares in my plan. So we just kind of, that’s why we got into the Robs and things like that. I point that out that that would be good. Just not a business that you’re operating.
Barley: And to build up what Eliot just said, we are not trying to throw things that are invaluable at you, but throwing a bunch of different stuff at you so that, again, hopefully if this applies to you specifically. Submit us a platinum portal question, ask for more detail. We can go into a lot more on the weeds on these topics, guys. But certainly, please identify this. If this is something that is unique to your situation, we can give you a lot more guidance. Alright.
Eliot: Yes.
Barley: What types of taxes and tax reporting will be involved if I begin investing in tax liens? Hmm. That’s when somebody says, I owe money and they put a lien on my property. Right? Right.
Eliot: Exactly.
Barley: Some of you guys are into this, so let’s break this down.
Eliot: The tax lien, it is just that most often we’re going to see this with property taxes. Some state and local government taxes. They put it, you owe the property taxes. Most often we’re going to see that coming. It’s not that the federal government couldn’t put a lien and they can with, especially if you owe on income tax and things like that. There’s any assortment of taxes that could be involved. But the premise here is the same. Again, usually dealing with the state and local taxes, county level, something like that. We have that tax, it didn’t get paid. The government, the local government wants its money. They can go out there where investors can go and pay off that amount of tax and basically take over the lien. They buy the lien perhaps for at a discount, perhaps for a little bit more.
But whatever it is that investor puts in themselves in the shoes of the government as being the one, the recipient of that tax lien. Now homeowner starts to pay the investor. Okay, if they want to start paying, it can be a lot of money. There’s a lot of interest. Some states have up into 20% on these type of things on this note, that’s a lot of interest income. It could be very profitable to get into this type of investment. However, as we know on homes and in any other asset, indeed you can have all kinds of liens against it. It could be a, what if you put a new addition onto that house as a homeowner and you had a mechanic’s lien, the carpenter came over and you know, didn’t get paid fully. They put a mechanics lien on it. There could be all kinds of liens on there, or even the IRS or something like that.
You want to be very careful investing in these to make sure you know what liens are there. So we don’t get hit with a bunch of other, other liens or maybe liens that are ahead of ours, we want to be careful and, and note nonetheless, if you have that, that tax lien, the payments are coming to you theoretically, and if it gets paid, there is a redemption period often on these things where the homeowner has so often maybe a year, maybe a two to finally get caught up, pay that that lien off, get themselves clean and then they would take back the house. But the idea is you’ve had two years of 20 plus interest on your investment, that it can be a very profitable investment. But what if they don’t pay? They don’t pay. Well then we can go into foreclosure as the investor you take over the house. We either have free flow of money coming in, ideally, or we have a new house. And that’s kind of the basics beyond the tax lien, again, what taxes involve, it’s going to be the property tax most often that we see. But there, there could be others. But, that’s usually the general play there.
Barley: And a lot of these regs will be county to county, state to state. Kind of guidance or regulations as well.
Eliot: We talked a little bit about like here in Clark County and Nevada, you have to go down to the courthouse. They have the auction where they auction these things off. There’s a lot of different ways of doing this and every county pretty much has its own rules. Even with the state of Nevada, the various counties have slightly different rules is my understanding. You just want to really make sure you understand the area you’re going into this, make sure that you got you, you’re clean on other liens or anything that might be on the home. But those are, that’s kind of the idea. Another question we get asked a lot when this does come up is, okay, Eliot, I take over the house. Right? I finally got it. They didn’t meet the redemption period. I’m now the new owner. I claim it. What, you know, I’m going to use it as a rental. What’s my basis? Well, your basis, let’s say the house is a $1.2 million fair market value house. That’s not your basis. Your basis is simply what you paid. That’s going to be the tax only amount you paid in maybe some ancillary expenses with that. That’s what we would use for our depreciation. Maybe not as beautiful situation there because we’ve got a very low basis. But, hey, you got a one point million, you know, something house could be worthwhile. Right?
Barley: What types of taxes and report? It kind of depends on the outcome you’ll probably just get some interest income. You may end up owning a house. Those, those pretty much, those are your two options and you’ll just, the tax reporting will just be treated accordingly. The interest income one, that’s pretty straightforward. You just got to make sure you have all the right paper and all that stuff to substantiate your transaction. Anything else on that one?
Eliot: No, I think we’re good.
Barley: Investing in tax liens. I know you guys, some of you guys do that. That we have people that invest in tax notes. We’ve got people that invest in all kinds of different real estate things. Alright guys, how we doing? Stretch. Take a breath. Going through taxes. Put on the tax hats. Drink your coffee,Tax protection workshop. Just to remind you guys, live events. Make sure you tell how we got a thumbs up. We’re still alive out there. Thanks team, tune into these live events, guys. Lot of fun. From the comfort of your own home. I know taxes, tax and asset protection. It is repetition. You know, I studied this stuff. I still learn something new every single day because You just have to hear this stuff over and over and over again. Big props to you guys, commend you for taking on the challenge.
Eliot: Here comes the love
Barley: We’re taking on the challenge of learning illegal and accounting all at once. But my wife’s an attorney and I’m a CPA. You can imagine our dinner table conversations , but I can’t imagine learning both all at once. I’m still waiting through the tax code. But this certainly helps guys. Clinton, Toby, you’re such great teachers, right? There’s just something when you’ve been doing this for 30 years, that the information kind of just starts to crystallize and you can convey it to people in a way that that just works. As you guys know, it’s nice to get that from our partners. Real experience out in the field. We can do this right now if you guys want, I think this QR code is active. I mean you can let us know in the group chat there, but we can set up if you need to set up a live QR code. Thank you Patty. You can set up a strategy session right now if you want to get the ball rolling, get this process started. We’re only halfway through the year.
Eliot: Don’t wait till December 31st.
Barley: Click on that link and we can start talking right away. Alright, keeping it going.
Eliot: What are the rules for capital gains taxes on the sale of a house when the profits are used to pay cash on the next property. I bought a house for 130,000, put about 600 to 7,000 into it. Sold it for 1.1 million. Pay off a mortgage of 500,000. How do I figure the capital gains? I think we need some capital. You off the white board here?
Barley: Yeah. Alright. What do we got?
Eliot: First of all, we have the original purchase price, 130,000
Barley: Purchase price. 130 K. Okay.
Eliot: We put that in those improvements. We always talk about 650K
Barley: Capex. So 650 K. We put a lot into it.
Eliot: Our basis at that point is 780.
Barley: Basis, right? Remember that’s just what we put into it, right guys? That top that term is real common with stock. What’s your basis in the stock? It’s what you paid for the stock. What’s your basis in the investment? It’s what you paid for it and a couple additional terms to that before adjustable basis, depreciable basis.
Eliot: Then we sold it for 1.1. Our sales price from which we’re going to subtract our basis or adjusted basis, which we just determined was 780. And that gives us a gain of 320
Barley: Taxable gain. 320K. Okay.
Eliot: First of all, that’s how you determine your capital gains on this.
Barley: Purchase price plus improvements equals depreciable basis.
Eliot: And if we had used it as a rental, which we saw earlier on, we’re going to have that depreciation. We would subtract that out. But we don’t have that going on here right now. At least not in the fax. And then we mentioned the mortgage 500,000, that’s a red herring if you will there. It doesn’t mean anything. You paid off the mortgage, that’s fine. It doesn’t have anything to do with the calculation of the tax. Simply purchase price less basis or adjustable basis if you’ve made improvements in depreciation gives us our gain.
Barley: You could owe a dollar or a million. It won’t affect the taxable gain. Determined by adjusted basis.
Eliot: Exactly. But if we had any depreciation, again, we would subtract that out. And if we did have this gain, let’s just say that we had rented it and we had for the last year and we had $20,000 of depreciation on it, or 320 gain, then that first 20 of our 320 gain would be subject to the depreciation recapture. If it was just an ordinary rental, we hadn’t done any cost savings or anything like that. It’d be limited to 25% tax. A little bit outside of what we’re asking. But that’s how you would figure out your capital gains. Again, in that sample we took away 20 for our depreciation, recapture the other 300, just your ordinary capital gains zero, 15 or 20% brackets.
Barley: This example, right, we’d have 300 subject to the capital gain, typically 15% for most of us. And then 20 K subject to that. We’ll higher tax rate of 25% for the depreciation recapture of 20 K here. Kind of ran outta room there, but you guys get the deal. So 25% here, typically 15%, maybe 20% on the 300.
Eliot: I guess to the real question, let’s answer that. What happens on the cash that they put towards the next property? Nothing. It doesn’t mean anything that’s just your down payment. But it doesn’t change anything to do with the original amount here. Where we sometimes roll into that is when we start getting into maybe a 1031 exchange. Which we’re going to see in the next couple questions to kind of roll over . But at this point we didn’t do any of that.
Barley: Good question here.
Eliot: Do you deduct sales expenses from the gain? Yes. It will be taken from the sales. Actually we don’t say from the gain. No, it’s actually going to come from the sales purchase price. It would be an expense thrown in there. Which then determines the gain.
Barley: Commission, selling expenses, all that stuff.
Eliot: Really what you’re getting at is do you get a deduct it? Yes you do
Barley:. Yes you do.
Barley: That’s right. Alright, well let’s see, did we cover that one? The profits you used to pay cash in the next price. Very common question guys. I sold the property, I got a hundred K income from that. If I go reinvest that, I don’t have to pay tax on it, right? Well no, we have to pay tax on the income then we can reinvest it. Unless we use that 1031 exchange. Obviously very common for real estate. That’s just a very common question, right? We have to pay tax on the income and then we can deploy that income wherever.
Eliot: On this one, now we’re going to actually skip this question. Go into the next one.
Barley: Under a 1031.
Eliot: Alright, because we just talked about 1031. Let’s really go into depth about what it is. But first the question under a 1031, taxpayers must select three possible real estate properties within 45 days of selling the original rental property. Can these selected properties be changed before the deadline of 180 days due to some events out of the taxpayers control, such as being elicit from the market or finding more attractive property? So 1031, what we’re really looking at is we sold a property, the idea is that we don’t want to pay tax on that. We want to try and defer. That’s all 1031 it’s a deferment tool, but you have to pick up other properties. Now it does have this thing that’s 45 days. What’s that all about? You have to pick up the replacement properties, list them out to the IRS give an idea of what it’s going to be within 45 days of having sold the original.
Barley: Pick as an identified.
Eliot: Exactly. And then we slowly, we eventually close hopefully on all those properties within the 180 days from sale. Not 180 days from the 45, but 180 days from the original selling. About 135 days after the 45 day mark where we had to designate all these different properties. Now real quick, we know we’re doing a 1031. We want to defer those gains like we had in the previous question, we had 300,000 plus of gains. Could we have not paid tax? Well, if it had been used in business, yes we could 1031. You have to exchange property for property or real estate for real estate either way. But it has to be used in the trader business. We can’t do our personal home. Well we didn’t know exactly what the home was on the previous, but if it had been used as a rental, then we could go ahead and do it, 10 31.
Now once we defer that, we’ll have more stringent rules on how to handle that money. And we’re going to see that kind of in the next question here. However, as far as the deadline, it isn’t that you must select three properties. It’s that you can select up to three properties with no limitations on their value. Okay. By the 45 days. And you have to have this click by 45 days. You cannot go one minute into day 46. It’s very strict, we must have those listed out or alternatively you can pick up unlimited properties, okay? But their value cannot be more than 200% or double the sales price of the relinquished property. The one you gave up we have, Barley has a rental, he sells it. That’s the relinquished property. Let’s say he sells it for a hundred thousand, that was a fair market value. He could bring 200,000 more into it, of the replacement properties or something like that.
Barley: I can have 10, $20,000 properties. Or that just trade up in value.
Eliot: Exactly. But the three, you can do up to three and have unlimited value or unlimited numbers properties. With a limit on the value. Is the way it goes but it’s not a must. But those are your two options. We got to 1031, are we allowed to change? No, it’s very strict, you got to have those. Once you pick the houses, you gotta stick with them or change it before the 45 days. But after that point, no matter what happens, you’re out of luck. But that’s why we do recommend at least getting those three or if you know, you want to limit the value of how much you purchased, you could have unlimited houses. If you take that route. We could really do either one.
Barley: Right? And so as you guys are looking at this, for those of you that have done it, 1031 exchange, you know this. But for anyone that hasn’t, the time to start looking for the properties is not after you sell. Start figuring this out before you go into the exchange. And so just to reword here, you must select three possible real estate properties. You don’t have to, but it’s likely a good idea because what if the one you selected and you’ve got your eye on, what if that falls through and then you have three days to find a replacement property. That’s a terrible situation to be in. Terrible security. Then you’re going to owe all that gain like that instantly. What? 1201 midnight on day 46. It’s encouraged to identify three properties simply because if one falls through you won’t have to jeopardize the whole exchange.
Eliot: On that point, as far as trying to find properties out there, maybe they drop off. We just found out that the Senate did pass that bill. It’ll go back to the house on the tax bill. You know, we still aren’t there yet. But if that should pass, it’s right now they’re forecasting bonus depreciation. Was it back to January 19th, 2025? If there’s a lot of investors out there holding a lot of cash, you may see some houses fly off the market. You’d want to make sure you have at least three if you’re doing 1031.
Barley: You didn’t just mention the tax bill, did you?
Eliot: Right.
Barley: Questions. Hold on, hold on. Well, a couple more days we’ll answer all your
Eliot: Questions. Right. It’s not, it’s not official yet. It just passed the Senate not, yeah, it’s got to get through the house. They got to look at the changes. It could get shot down, but we’ll see what happens. But if it does, I think there will be probably a lot of investment out there.
Barley: Because he’s right, the biggest thing of that is the retro, the retroactive statement of the law or however you say it’s going to go back to January, 2025. That is going to provide a lot of really big opportunities. Alright. Keeping it moving on. Any relevant questions we need hit here.
Eliot: Alright. We want to go back to the seven.
Barley: Oh that’s right. Thank you. There we go. Yeah, we can switch up the order a little bit. 1031 exchange. Now we can talk about.
Eliot: Yeah.
Barley: After I’m taking my primary home, turning it into a rental. Great. I’m taking my primary home, turning it into a rental for one to two years. How do taxes work? If you want to do a 1031? If you want a 1031, the gain, the purchase price was 10 years ago 430k. I lived in it for eight years, rented it for two years. This is an important fact pattern, right? Kind of the timing. When did the rental activity occur before or after we lived there? All is very important. Sales price, 1.4 million. I’m single, taking the 250 exclusion and one at 1031. The remainder of the gain into a new property. Can this be done? Great question. Yes, it absolutely can be done. The ordering of the operations here, if you had used it as a rental prior to having it as your primary residence, you could incur what we call a period of unqualified use that would reduce your section 121 exclusion. Looks like you’re in the clear though. You, you held it or you’ve used it as a primary residence and you’re planning on renting it out for a couple years. That’s great. You’re typically going to get that full section 121 exclusion plus since you turned it into a rental for two years, it’s now considered a business asset eligible for a 1031 exchange.
Eliot: Right on.
Barley: You want to go from there
Eliot: Some of the peculiars here, the particulars I should say we purchased for four, the original question had 400, but 400 doesn’t really work because we did use it as a rental. I went with 430 and if we did 430 or if we did four and it doesn’t matter, but the approximate depreciation for two years as being a rental would be about 29,000 I went with 30,000.
Barley: If that makes sense. You’re saying since it was rental for a while, we have to take out some of that depreciation that lowers that, that depreciable basis is what you’re saying.
Eliot: We go back to the adjusted basis, which was the original purchase price, 430. We’re renting it. Hopefully it’s a long term because I went with 27 and a half years, gives us about 15,000 approximately each year. Now one of the problems here is we mentioned we’re going to rent it for one or two years. We’re okay there but what if we rented out, wow, they, I got a great tenant. I love this deal, this arrangement, I’m going to push it out three or four years. The problem with the 121, you have the criteria of having to own it and use it as your primary residency for two of the last five years. If we rent too long, we’re going to push outside of our 121. Okay. Here we’re okay with the, with what our fact pattern here.
We have one to two years. We clearly had it for 10 years and we don’t have to worry about the fact that we rented it afterwards. That’s not going to impact our 121 as Barley was talking about. We have conforming use, but if we rented it too long, we would step outside of that and we’d have to move back in in order to get the conforming use. Now we’re at 430. I changed it to 430. Why? Because we have 30,000 of depreciation for those two years. And what that’s going to do, we may want to write this one down again. Get some numbers on this one. We have the original purchase price at 430 minus depreciation for two years of 30,000, which gives us that adjusted basis 400,000.
Barley: Okay.
Eliot: Perfect. Now we sold it for 1.4 million. But now we’ve fortunately worked out really nice. We sold for 1.4, we subtract out the adjusted basis of 400. That leaves us with an even million
Barley: Sale price minus adjusted basis, which is 400 K equals 1M gain.
Eliot: Perfect. Now we can, in ordering, we can take our 121 because again we’ve used it as a personal residence and owned it to the last five years. We can do our 121, I believe we said we were single in this one. That would be 250,000.
If you were married it’d be 500,000. And that’s how our questioner came up with the 750,000 gain. That’s how we get there. That’s the gain left. Now we finally get to really what we’re asking, well can I 1031 that? Yes you can. We did the 121, now we wanted 1031. A couple rules about that 1031. If we want to avoid, or all the gain or defer, I should say all the gain on that 750, then we have to number one, pick up that replacement property that we talked about in the previous question. It has to be equal to or greater than the price of the home we sold, which was 1.4. It has to, the new property, the replacement property or properties have to equal 1.4 million or greater. And if we had any debt that we gave up, we have to pick up more debt equal or more than that.
We didn’t have any mention of debt in here. We’ll just assume that that’s the next, that’s how we’re going to defer that full amount of the 750,000. Now if we didn’t, if we didn’t pick up as much debt up on the replacement properties, if we didn’t buy enough properties to equal 1.4 million, you’re going to have a little bit of taxable gain. And as we saw earlier, what happens there if we start to rot into our 750 here? Well we had depreciation, again, we had pre depreciation of $30,000. The first 30,000 of our gain would be subject to depreciation, recapture most likely what we call 1250. It’s going to be taxed at up to 25% is probably what we’d run into here. But if we did meet those two criteria, picked up equal or more expensive house picked up more or equal debt, then we are going to defer the full 750 and we’re good to go.
Barley: Right. We’d have, part of that would be the re 30 for re 30 for the depreciation recapture.
Eliot: Right. If we didn’t defer the whole amount. That’s correct. Right. And then the rest would be 720, either capital gains or whatever gets deferred. That’s correct.
Barley: Or deferred.
Eliot: Now often the question we get asked, well okay, I get this, these new properties coming in and these replacement properties, well what’s the basis on those? Because remember it has to have basis. We got to know that basis because we have to depreciate. Why do we have to depreciate? Because it has to be used in a trader business. The property we gave up, the properties we pick up have to be used in a trader business. In order to get that basis, we simply take the purchase price of the replacement, which is going to, we don’t know here what the, the, the purchase price of the new property would, but we know it’s going to be at least 1.4 million if we want to fully defer. And then we subtract out that deferred gain, which in our case if we fully deferred, would be 750. That will give you a depreciation basis on the new property.
Barley: About 700.
Eliot: And it’s a lot of people hear about the carryover basis. That’s true. We’re still carrying over the basis in the old house, but we paid more. When the equation works out, it’s just going to be simply put purchase price for the new, the new home less. The deferred game is going to give you the basis on the replacement property.
Barley: Great.
Eliot: Well that’s how we walk through that one.
Barley: Any questions on that one?
Eliot: No open questions. Got 87 so far. Great job guys.
Barley: 1.4 taking the exclusion. That definitely can work. And we see this a lot too guys. Just FYI And then just to reiterate this, that if you have it as a rental first, that may interfere with part of that exclusion. But if you’re living there now and want to convert it to a rental, just be careful that five year window, make sure that you don’t roll outta that five year window. Because that will reduce your exclusion as well. Good question. There is depreciation recapture added back to the gain?
Eliot: No, the recap, that’s a tax you have to pay.
Barley: It’s a separate tax. Essentially your amount of accumulated depreciation and generally speaking will just be taxed at a little bit higher rate than the capital gain part. Capital gain taxed at zero 15 or 20%. The depreciation recapture will be taxed at 25%. Alright and we did this one. Now we’re to the boat. Alright. I have a vote to donate to charity. Is it true that I can make a $5,000 donation without having a certified appraiser and claim on my taxes as a direct write off? Well we certainly can. We’re talking about donating non-cash for essentially assets to charity. Certainly can do that. We talk about, we actually talk about donating appreciated value assets to charity a lot. That can be very beneficial but in this case we got a boat
Eliot: Doubt it’s appreciated.
Barley: We’re assuming it’s less than $5,000 or less value. Is it true that I can make a $5,000 donation without having a certified appraiser? Yes, that’s generally true and claim taxes as a direct write off. Pretty much true. I mean maybe not a dollar for dollar, not a direct write off, but it is a charitable donation. Write off if you itemize your deductions that will reduce your AGI, couple things on this. There’s these limits, I think it was 250, isn’t that what you said earlier?
Eliot: What you will need to do is you, you need to have a written acknowledgement. From the charity that you donated it to. You know, if it’s over $250, which clearly this is likewise, if it’s over $500, you have to file an IRS form 82 83 to describe the asset. That’s not the same thing as having an appraisal. I assume if it was over 5,000, if it’s $5,001, well then yes you’d have the appraisal and I’m sure the appraisal, mention of that would probably go into that form 82, 83 . But you would have to have that. A couple little paperwork items there. But nothing, nothing crazy.
Barley: Alright. Right. Well wrapping up here.What are the key ways to, what, what are the ways to avoid probate? What’s probate?
Eliot: Probate is what happens to your estate. Should you pass with a will or maybe if you don’t have any will and test state courts take everything over. You look a lot to state law and 50 different states. As I tell people over and over 50 different states, 50 different rules. No one has any idea what’s going to happen in those various rules or those various states except somebody who’s from there. It costs a lot to go through probate. It’s going to eat away at your assets in the estate. It’s going to take away from a lot of what your beneficiaries would otherwise be entitled to. How do we avoid that? The most common, we say it over and over, we can’t stress enough. Have a living trust. Living trust. You just put it in there. It takes care of business for you should anything happen to you.
It tells your wishes where you want these various assets to go. It bypasses the court system in that regards that they don’t have to supervise it for the most part. You’re not running into those extra expenses. I can tell you this, anytime you die, there’s enough expenses they’re going to be there. But nothing like the expenses you’re going to run into in probate. I worked for law firms where they did a lot of probate. It’s very, very costly as compared to its alternatives. Living trust is our number one. We’re going to always recommend that, you know, we do a lot of living trusts here. We have a lot of free information online about and feel free to always come in, hit that scan code we talked about earlier, get an appointment with one of our advisors so we can set up and look at that type of thing. But there’s other items too we can use to avoid probate. Joint ownership with Right of survivorship is another, that’s where maybe a couple goes in, buys a house, they list it as being joint ownership with Right of survivorship. If one passes then it all goes to the other owner without probate. You don’t have to have all the lawyers involved, anything like that. It just slides in there.
Barley: That’s the goal. Right.
Eliot: Right. Exactly. Avoid the lawyers, Trust me. Okay.
Barley: I’m involved in the front
Eliot: Right, exactly. Use us for the good part to avoid all of them later on.. Beneficiary designations, transfer on death, payable on death. All these are kind of getting to the same idea. maybe you’ve seen in some of your accounts they say well if you should pass, maybe it’s a brokerage account if you should pass, do you want it to go to one of your beneficiaries? Because it’ll avoid probate. You have those kind of designations where maybe you don’t have a full living trust. I recommend the trust, that’d be better. But at least some of these other things you can express your wishes and it will avoid probate as well payable on debt. Real estate can be done that way as well. Labels, again, payable on debt or a transfer on debt. Either one and it will immediately bypass probate.
Don’t have all the expenses, gets to the other owners. And then gifting while you living. We talked about that one as well. I think we had what we decided it was 19,000 for 2025. You can give to one individual if you’re married, each spouse can give 19,000. We get 38,000 and we have the lifetime exclusion of 13000009.99. So 13,990,000. We will see what happens again with the the tax bill. See if we can retain that. But all these are ideas of ways that you can get gifts transferred out there without the probate use. If we can, the only thing about that lifetime gift, 13.9, we probably wouldn’t recommend that upfront if we had any appreciated real estate. We like to give those or I any appreciated asset for that matter because we like to have our heirs get that at death because they get that stepped up basis, very critical. We want to make sure we’re doing that. But that’s a way to avoid expensive probate.
Barley: Absolutely lose that living trust. You don’t want the court chopping up your assets and doing your, you know, exposing your, running your dirty laundry. Living trust on your passing will assume ownership of everything you have and you take it from there
Eliot: Because the government’s done so well or you know, running assets so efficient.
Barley: Don’t you want them to manage your money for you. Great work guys. Great work. Any questions about that, please let us know. Of course we’re big fans of Living Trust. You hear Toby talk about it a lot. Right. Very important.
Eliot: And there’s the man who have almost 500,000 subscribers. Get in there guys. We only have 2000 to go.
Barley: Yeah. Make sure you subscribe, get in and subscribe. And certainly guys, all of these topics we talked about, you know, most of them have great videos from Toby and from Clint on, on all these topics. So use that as well.
Eliot: We have the tax and asset coming up here in September, again all Vegas.
Barley: Yep. Just to remind you guys again.
Eliot: And maybe in Dallas in December, and again thank you all who visited us this past week, we really appreciate, thank you for all the kind words you said about our program. It was great. And you know, as always, thanks to our event team who goes all over traveling, setting these things up. They work so very hard and it was so great to see Toby, anybody got the chance to see him as just outstanding.
Barley: Eliot was beaming. He was like, I’ve got to talk to so many people, so many clients. He’s so great.
Eliot: And all that one guy, Toby. Yeah.
Barley: That one guy. That’s right. Alright guys, make sure you scan the QR code plus the links in the chat there. Set up possession right now let’s get the ball rolling, right. We’re only halfway through 2025. We’re going to get some big changes. Let’s try and lock some of this stuff in, you know, mentally and financially before, before , before it all goes wild.
Eliot: Here’s your chance to get Yeah. Back on that you get your living trust taken care of.
Barley: Yep. Yeah. Scan that code, get the, get the ball rolling. Email your questions.
Eliot: Yep. That’s where we’re going to pick them and go through every one of those questions and there are a lot of great questions. It’s not easy to pick. Right. But again, thank you so much and appreciate it.
Barley: Thanks again guys. Email your questions, keep them coming. We’ll see you in two weeks.
