Today on Tax Tuesday, Anderson Advisors Barley Bowler, CPA, and Eliot Thomas, Esq., focus on capital gains, cryptocurrency, stock trading structures, and real estate strategies. They explain how capital losses are deducted and the $3,000 annual limit that hasn’t been adjusted for inflation since the 1950s. You’ll hear about Bitcoin’s tax treatment as a personal asset with favorable capital gains rates but note the lack of wash sale rule protections. They demonstrate how a trading partnership with a C corporation can provide significant tax advantages through accountable plan reimbursements. The episode extensively covers real estate topics including the distinction between repairs and capital improvements, the inability to deduct lost rent from deadbeat tenants, and home office deductions for primary residences. They explain 1031 exchanges in detail and explore strategies for managing large capital gains from personal residence sales, including converting to rental properties and the Section 121 exclusion benefits.
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “I have a large capital loss. How are capital losses deducted? When should I consider taking a tax write-off by closing the position, unrealized versus realized gains?” – Capital losses offset gains first, then $3,000 annually against ordinary income.
- “My wife and I are considering investing in Bitcoin. What are the tax advantages or disadvantages of doing so, investing crypto for crypto for that type of investment?” – Bitcoin treated as capital asset with favorable rates, no wash sale rules.
- “I do a lot of stock buying and selling. Is it tax efficient to set up a business entity?” – Trading partnerships with C corporations provide excellent accountable plan reimbursement opportunities.
- “Can you explain what differentiates whether a real estate rental deduction would be categorized as a maintenance, repair deduction versus a capital expense deduction? And provide examples. Please explain how these are treated differently from a tax perspective as well.” – Repairs maintain property condition; capital improvements add value, extend life, or change use.
- “Can I deduct lost rent from a deadbeat tenant?” – No deduction available; you simply don’t report income you never received.
- “I’ve heard you talk about renovations major to rental property and tax advantages, but what about for my primary residence? I need to finish the basement. Upgrade the house. This is also the address of my C corp business is registered to, and I operate a home office out of it. When I complete taxes next year, is there anything specific that I can take advantage of due to this large expense?” – Primary residence improvements add to basis; home office allows business-related deductions.
- “Can I do a 1031 exchange on real property?” – Yes, but not on primary residences or inventory properties like flips.
- “I bought a rental property in California in 2019 for 700,000 as replacement property from a 1031 exchange. 400,000 was from the sale of rental property in Seattle, Washington. 300,000 from my savings. I took a loan, also 600,000 for expansion, uh, in repairs in January of 25. How much of the money I invested from my personal savings, the 300,000, can I get back without having to pay tax? I listed my rental property for 935,000.” – Any cash taken from 1031 exchange creates taxable boot; consider real estate professional strategies.
- “I’m selling my personal residence next year. We currently have an anticipated capital gain of a million. I’ll be paying taxes on 500,000 of the capital gain above the capital gain exclusion for married filing joint. What tax strategy would you suggest that I may plan to use in order to mitigate paying federal taxes against the 500K capital gains? Could I do a 1031 exchange or of a personal residence? Can we convert the personal residence to a rental and then sell it in one to two years?” – Use Section 121 exclusion first, consider converting to rental within five-year window for 1031.
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Full Episode Transcript:
Barley: Hey, everyone. Welcome back. Welcome back to Tax Tuesdays, every other week, bringing tax knowledge to the masses. You’re certainly in the right place if that’s what you’re looking for.
We’ll let everyone trickle in here for a moment. This is a live event, so we’ll give everyone a chance to come on in the room here. But again, you are in the right place. We are bringing tax knowledge to the masses.
Give us a shout out in the chat. Most of you are here. Again, if anyone here for their first time, shout us out in the chat where you’re from, what are you working on, what’s on your mind. We’re going over your questions today, as usual.
Eliot: As long as they’re tax-related.
Barley: As long as they’re tax related, of course. This is Tax Tuesday. You submit your questions. Eliot goes through every single one of them. He really does. He reads all the questions. We take your questions, format them together, compile them in a way that we hope brings the most value to you and here in this format. We do this every other week.
Welcome to Tax Tuesday, live, going over your tax questions. Shout us out in the chat. Let us know where you’re from. We got the Q&A section.
Eliot: The first timer from Tacoma.
Barley: Ooh, excellent.
Eliot: One of one of our offices.
Barley: Oh yeah, we got offices up there. You can go say hi to the crew, Clint, the Coons. Shout us out where you’re from. Have everyone go ahead and hop on in the room here. Definitely happy to have you guys.
We’re covering some super exciting topics today. We’re obviously going to hop into a bunch of the real estate stuff we always go into, but we’re going to talk about some fun tax rates, plus some more high dollar stuff.
Welcome back to Tax Tuesdays. My name is Barley Bowler. I’m one of the CPAs and tax advisors here, so very happy to have you guys back, joined by Mr. Eliot Thomas.
Eliot: Manager, tax advisors.
Barley: Yes, sir. We got an attorney and CPA in the house, guys, so we’ll try to keep the jokes not too dry, but do have a lot of fun material to go over today. Where do we got people joining us from?
Eliot: Oh, we got New York all over the place. A couple of Washington spots. A Puerto Rico there earlier.
Barley: Nice. PR.
Eliot: Miami.
Barley: Got Florida in the house as usual.
Eliot: New York, Texas, Tampa.
Barley: Excellent. You guys know the drill. We’re going over your questions. This is a live feature. You guys can submit your questions. Again, we read all the questions. You might recognize your question. We may format them a little bit, just make them more palatable for the general masses here, but certainly going to go over the questions.
Email your questions to the Tax Tuesday address here. This is a general format. We want to get as specific as we can, provide as much information to you as we can. That really is our goal here, as part of the whole educational aspect of this company. We want to give you as much as we can.
The only reason we’re not going to give you information is if it’s too detailed or specific. You need calculations. We don’t want to steer you in the wrong on track. That’s when we’d encourage you to become a tax client. Set up a tax call. We can do a one-on-one call. We have the platinum portal. You can submit written questions, too. Lots of ways to get your tax questions answered.
Eliot: We got one client driving a concrete mixer. Don’t worry. The humor won’t be that great. No danger of you falling on the road.
Barley: Keep your eyes on the taxes. Fast, fun, educational. We want to give back and help educate. That really is the point.
It seems there’s a disconnect. I have a background in business. I see the tax code is almost overly burdensome. We’re focused on main street businesses here. How do we build wealth, build success, build our knowledge? That’s just part of our mission here, bringing up that learning curve to help digest all this legal and accounting and tax stuff.
I went to school for this stuff for a long time. It’s still confusing to me a lot of these concepts. You just have to go over them, repetition. A lot of the new tax code came out, a lot of new tax laws, but…
Eliot: Or just keep showing up here.
Barley: Or just keep showing up here every other week and submit whatever your questions you have. And we do have the other services. We’re going to be going over those. Anything we want to get into before we hop into the questions?
Eliot: No, I think we’re good to go.
Barley: All right. We’ll just read through the questions real quick here. Give you guys an idea of what we’re working with.
“I have a large capital loss. How are capital losses deducted? When should I consider taking a tax write-off by closing the position, unrealized versus realized gains? When should I take a tax write-off by closing a position with a loss?”
Eliot: Good stuff there. These first couple are going to be capital gains-oriented.
“My wife and I are considering investing in Bitcoin. What are the tax advantages or disadvantages of doing so for that type of investment?”
Barley: “I do a lot of stock buying and selling. Is it tax-efficient to set up a business entity?” We’ll certainly talk about that. Like Eliot said, these are going to follow a theme here. Elliot really does put time into these to try and have some congruent flow, which is challenging when we’re talking about complex tax stuff.
Eliot: Then we get to the next three questions.
Barley: I’m supposed to get the last one.
Eliot: “Can you explain what differentiates whether a real estate rental deduction would be categorized as a maintenance repair deduction versus a capital expense deduction? And provide examples. Please explain how these are treated differently from a tax perspective as well.”
Barley: And they are treated differently. You’re absolutely right.
“Can I deduct lost rent from a deadbeat tenant?” A lot of you guys are landlords. We want to cover that.
Eliot: Get that one more often than one might think. It’s a good question.
“I’ve heard you talk about renovations made to rental property and tax advantages, but what about for my primary residence? I need to finish the basement, upgrade the house. This is also the address of my C-Corp business is registered to, and I operate a home office out of it. When I complete taxes next year, is there anything specific that I can take advantage of due to this large expense?”
Barley: I’m giving Eliot all the long ones here.
“Can I do a 1031 exchange on real property?” What’s real property? We’ll be covering that.
Eliot: “I bought a rental property in California in 2019 for $700,000 as replacement property from a 1031 exchange. $400,000 was from the sale of rental property in Seattle, Washington. $300,000 from my savings. We put some cash in there.
I took a loan also $600,000 for expansion and repairs in January of 2025. How much of the money I invested from my personal savings,” the $300,000, “can I get back without having to pay tax? I listed my rental property for $935,000.” A lot to tear apart there.
Barley: And that is going to combine a bunch of the pieces we talked about, just building up to that.
Finally here, “I’m selling my personal residence next year,” so not a business asset. “We currently have an anticipated capital gain of $1 million. I anticipated paying taxes on $500,000 above the capital gain exclusion,” for married filing joint. We’re talking about the section 121 exclusion there, obviously.
“What tax strategy would you suggest that I may plan to use in order to mitigate paying federal taxes against the $500,000 capital gains? Could I do a 1031 exchange of a personal residence?” That’s question one, can we do a 1031 exchange on a personal residence. “Can we convert the personal residence to a rental and then sell it in one to two years?” We can look at that as well.
“I’ve also heard Toby talking about ‘sell your residence to your S-Corp.’ This may be a strategy there, but I don’t have a business or an S-Corporation set up.” We’ll certainly be discussing that. “I currently have an LLC, managed, disregarded entity for asset protection. Please advise on how to avoid or mitigate paying a large tax bill on an anticipated $500,000 capital gain from the sale of a personal residence.” Great questions and all related. Put them all together so well.
As usual, guys, want to make sure we put you to the YouTube content. So much great content here. Toby obviously focused on a lot of the tax planning, Clint on the asset protection side. Of course, a lot of overlap. These interviews are great, guys.
What was a recent one? Another good one about storage units recently, investing in storage units. Great information in there. Plus a good two-hour section on the new tax bill.
Eliot: With Scott Estill.
Barley: Yup. I want to dive in there, so a lot of good information on Toby and Clint’s channels. Make sure you subscribe, as we are. Oh, didn’t subscribe to Clint’s page. Somebody’s in trouble for that.
It looks like we’ve got a live event coming up.
Eliot: We do.
Barley: Maybe one or two. Tell us about it.
Eliot: Where is that?
Barley: Looks like it’s in Las Vegas, September 11th to 13th. We might even be there.
Eliot: Yeah. It’s going to be at the Durango Casino, called the Durango Lodge, accidentally. Beautiful place. We had our last event there. It was a really nice event. Got a lot of great feedback for that location, so we’ll be there again. Only $99.
Barley: Come on down.
Eliot: September 11th through the 13th, coming up. Hit the little square there. Join us live.
Barley: Great time to be in Las Vegas, too. Boy, September weather. It can hit the pool parties. You guys know what to do when you get here after attending the Tax and Asset Protection Workshop, of course.
Eliot: You get the important stuff first.
Barley: This was Tax and Asset Protection live workshop. Here’s our available dates for the next. This one’s virtual though, right?
Eliot: That’s correct. Those are our Saturday ones.
Barley: Make sure I got these straight and should have done that first, but yeah, we got a couple of virtual of those events as well. Plenty more information on that, guys. Any questions about that or want more information on those events, shout us out in the chat. Let us know in the Q&A. We can certainly provide that.
Eliot: Very common for clients to go more than one, just trying to catch everything, make sure they’re up to date.
Barley: We talk about the structure implementation workshop. We recommend watching that. Maybe every year or two. Get another piece out of there. And you guys can scan this QR code right now. We’re going to be going through questions. You guys can submit questions here in the Q&A as we go.
Plus, of course, you can submit questions at the platinum portal, but you can also right now schedule a strategy session. If you want to just get the ball rolling, you want to start talking shop right away. Scan that QR code and we can get that started.
Should we hop right in?
Eliot: Let’s do it.
Barley: All right. “I have a large capital loss,” certain categorical loss there. “How are capital losses deducted? When should I consider taking a tax write-off by closing a position with a loss?” Like when selling a stock, when it’s in the red, so to speak. What’s a capital loss?
Eliot: Well, it’s going to sound comical, but it comes from the sale of a capital asset. That’s going to be typically your stock. It’s more that the code tells us what isn’t a capital asset, but if you’re thinking stocks, if you had investments, it could be property, could be a rental property, something like that.
Barley: Business assets.
Eliot: Business assets, any of those things. What it’s not, it’s not inventory. It’s certainly not any income or anything like that from services or things of that nature. Usually if you sell an asset that was used in a trade or business, that’s typically what we’re looking at for capital gains and losses.
Barley: Of course, we got the exception. The primary residence can also show up as a capital sale of a capital asset.
Eliot: Or if you had gains from selling your own assets, they very likely would be capital as well from your personal assets. It’s really just anything other than the actions that create ordinary income is probably the better example, but it’s stocks is the most common, things like that.
Barley: Of course.
Eliot: Now, how they’re deducted? We have a lot of special rules around how we deduct those capital losses. First of all, you can deduct them up to the amount of capital gains you have that year. We’re always netting. When we were getting ready for this, Barley pointed out a really good way of looking at it.
You have your long-term capital; that’s anything that you held over a year. You have your short-term capital gains and losses; anything we held less than a year. We net those two categories themselves—short-term capital gains, short-term capital losses—and then we do the same within the long-term. Net those and then we net the two piles together.
We come up with a certain number. We either had too much or we gained, or we had losses. If we had losses, we will have, at that point, wiped out all of our capital gains. Whatever losses we have left over, we can take up to $3000 against our ordinary income.
We see that a lot. If you have W-2 income or something like that, had some capital losses, you’ll be able to offset $3000 against that. All the rest, if we have continued capital losses, we’re going to carry that over to the next year.
We had a little example. If you had $100,000 of capital losses.
Barley: Probably draw this out even now.
Eliot: Yeah. That could be long-term or short-term; it really doesn’t matter. That’s our capital loss. Let’s say in the same year we had a gain of $40,000 capital gain. What we’ll do is we’ll net those two and we’ll come out with $60,000. This is all what would show up on your return until we get that special $3000.
Barley: That’s a loss.
Eliot: Yes, sir. Then we’ll take that $3000 against it. That $3000 special, it’s outside of our capital treatment. We can take that against any income on our return. But that’s the limit, $3000.
Barley: If it’s a capital, I’m calling it ordinary loss here because it offsets your ordinary. It’s a capital loss, but it offsets all other forms of ordinary income. I just put it as a capital ordinary loss.
Eliot: It’s like an ace in the hole. Now, these are the $57,000. If we didn’t have anything else going on in this example, that $60,000 cap loss, divide it by three, that’s going to be 20 years until you eat it all up.
This has not been adjusted for inflation anytime in recent memory. I think I did a calculation maybe seven years ago to get an idea of what it would’ve been today if they’d adjusted it for inflation. It’d be somewhere in the $20,000 range as I recall.
Barley: Weren’t you saying this is from the 50s?
Eliot: It’s a long time ago, yeah. Thereabout.
Barley: That’s when this limit was set.
Eliot: Yeah, that’s what I recall. All this came actually from an offshoot of World War II is what they did to get capital investments and things like that with these losses, so we’re looking a long time ago. Nonetheless, what we get to is that that will just carry forward.
Now, really what was asked here, the primary question was, am I forced to do that? Is there any way I could just hold back and not take that deduction and wait until a future year? Well, no. You have to follow those rules. We don’t have a choice. They’re not optional. It’s going to follow this pattern.
Just as Barley laid out here, we got to subtract out that cap gain. We get the $60,000. We got to take that $3000. That’s going to net us $57,000 that carries over to next year, and we will rinse and repeat. If we don’t have any other capital gains or no other capital activity, it’ll just be $57,000, subtract $3000.
Barley: Every year.
Eliot: Every year for a long time.
Barley: Or until you sell a rental or sell a pizza oven or something like that.
Eliot: Something that will create some capital […], and then we can net them just like we did to get that original $60,000. That’s how we handle the tax side of it.
Now, back to the question was when should I close out a position? If we had some stock and we know that that was maybe at a gain would be the time, if we knew we had $60,000 cap loss sitting in there, maybe we’d want to sell something or Bitcoin or something like that.
Two reasons to do that. First of all, you just want to unload that position and recognize the gain, take the cash, go home. Otherwise, you can maybe want to solidify the basis in that investment. In other words, you sell it, take the $60,000 cash. You’re going to have to write off the capital loss of $60,000, reinvest that cash back into that same stock, and now you’ll just get it at the current basis.
That way you’ve strengthened your position in that stock and been able to take advantage of the gains that were there. But didn’t have to pay much tax because you wrote off that gain against the $60,000, or the cap loss in this case.
Barley: For those of you that don’t do stock stuff that maybe didn’t make a…, what we’re talking about is just adjusting the basis to lower our taxable gain. There’s actually a little bit of tax planning we can do when we have these capital gains, capital losses. It does create a little bit of opportunity for some flexibility there.
Eliot: Absolutely.
Barley: Are we still on number one?
Eliot: Yeah.
Barley: Oh goodness.
Eliot: We’re ready for number two.
Barley: We haven’t even got that. I just wanted one other thing. When you say closing a position—obviously, most of you guys know this, but we’re talking about unrealized versus realized losses—if we have positions and stocks that go down in value, those won’t offset any capital gains until we actually climb.
I know you were aware of this, but just for anyone that’s unfamiliar with those terms—unrealized versus realized gains and losses—those are the ones that actually show up on our tax return, offset or increase our income.
Now, let’s skip over to crypto. “My wife and I are considering investing in Bitcoin,” also considered a capital asset in most cases, depends on how you treat it, “What are the tax advantages or disadvantages of this type of investment?”
Eliot: Bitcoin’s crypto. What do we got going on with crypto?
Barley: Well, we don’t know.
Eliot: The IRS came back and said, well, it’s a personal asset, which means…
Barley: That it’s not a security.
Eliot: Exactly. It means that when we sell or have gains or losses on the sell of it, it’s going to be a capital gain or capital loss.
It fits in with what we were just talking about. We’re going to have those same rules. We’re going to be limited on losses to offsetting whatever capital gains we have, plus that $3000 that goes against the ordinary, we’ll call it the ordinary loss as Barley pointed out. However, because it is a personal asset, it does have some different advantages and disadvantages. It doesn’t have the wash sale rule.
What’s that? The wash sale rule, getting back to stocks where we really run into this, says that if you sell a stock at a loss position—you go ahead and formally close out of that position—you can’t come back and buy that stock and recognize a gain, use those losses if you’re on either side of 30 days of when you sold the original position. We call it the wash rule.
You could sell something at a loss, go back and buy the same position, but they’re not going to allow you to use that loss offset that new position or any gain like that. You have to wait 30 days to repurchase that same or like security.
We don’t have any of that with Bitcoin, with crypto. We don’t run into the wash sale rules. That’s one advantage of it, certainly. Another advantage, we talked about the tax treatment as far as just the rates. By being in capital, what’s going on with our rates there in capital gains?
Barley: Capital gains rates, we consider those favorable tax rates. The highest tax rate federal is 37%-plus. Some knit, maybe close to 40%. When we’re talking capital gains tax rates, we’re talking 0%, 15%, or 20%. The vast majority of us will fall in that 15% range. I thought I should have looked up that limit again. It’s usually over 400 something, but I think that might have gone up even considerably more.
Eliot: The each year, those will go up a little bit, especially with the new bills.
Barley: But 15% compared to 37%–40%-ish. That’s a pretty massive difference, so we definitely consider that. That’s certainly one of the advantages to investing in cryptocurrency in general is treated as a capital gains tax rate.
Eliot: Absolutely. We have an advantage and a disadvantage when it comes to crypto in that also, there are people out there mining this stuff or staking. They have some Bitcoin and they’re basically using it to make more. When we have that stake and your mining, typically that’s going to be ordinary. That’s an activity. It’s treated as ordinary income on your return.
We’re no longer in the realm of capital gains that we have been. And often because it’s earned, we’re going to get hit with extra tax. Our self-employment taxes, another 15.3% can be added on to the ordinary rates. If we were at that 37% and we add another 15%, I don’t know, it’s a high number, 52%, but it’s pretty high. We’re looking at a lot in that case.
Now that can be an advantage in that you have the opportunity to make your own Bitcoin, but you just get taxed heavier at it. But then the end product, you get paid in Bitcoin to mine it, you have the Bitcoin there, you paid tax on the earnings of it, but now it’s back to a capital asset should you sell it in the future. It’s a unique investment in that you can earn and then later sell at a capital rate.
That can be looked at as an advantage or disadvantage, depending on how you set it up, but that’s some of the tax attributes of it. The mining is something a lot of people don’t think about having that extra tax.
I remember probably about 10 years ago when we really started to hear about it a lot more. Everybody said it couldn’t be taxed. Right. Good one. We found no problem with the IRS finding a way to tax that. Like you pointed out, the lower tax rate at the capital side.
We’re not investment advisors, but really the Bitcoin’s not backed by anything. These cryptocurrencies are not like you have a share of Tesla, which whether it goes up or down, you have a lot of assets behind it. We’re not investment advisors, but I think that while not a tax attribute, certainly might be an investment consideration.
Barley: I know for you guys, you’re either all into this stuff and you know the terminology and all that probably better than we do. Or you’re like, I don’t even know what this is and I don’t care.
For those of you that are into it—this probably goes without saying—one of the disadvantages we talked about earlier is you got to use some software to track this basis in first and first out. How do you track these things? I don’t know. We have better guidance maybe, but still have limited guidance on how we track the basis of these investments. There still is some ambiguity there. It still seems like you got to use some good coin tracking software.
Eliot: We had more than one return come through Anderson, where we didn’t have good tracking of the trades. It’s really a disaster because the client has to go back and really reinvestigate purchase and sales prices.
A good software, go out there and do your due diligence. Search around. It’s imperative that you have really great software to track it. That’s something you want to throw in there because that’s going to be a cost. Maybe we could deduct it, maybe we can’t, but nonetheless we have to have it. That’s something to take into consideration as well.
Barley: Excellent. Any questions related to that, that we want to touch on?
Eliot: No, I think we’re good.
Barley: All good? All right, let’s keep it moving. Same theme here. “I do a lot of stock buying and selling. Is it tax efficient to set up a business entity?” We talk about this a lot, using a corporation for tax purposes. Any use for that here?
Eliot: You want to draw something out here maybe?
Barley: Yeah. Let’s get on the drawing board. What do we got?
Eliot: We got Barley investing here, okay?
Barley: Me as an individual.
Eliot: Yes. Let’s say he makes $100. Right now, this is a, again, a capital asset. He trade his share of IBM or whatever, has $100 or $100,000 I guess—that’s good too. Right now it all hits his personal return. It’s going to be tax either at short-term capital gain rates or long-term capital gain rates. The bigger story here is just 100% goes to this 1040 be taxed.
Now, if we take that same example, that same 100%, and we put it into what we call a trading partnership, it’s the partnership that has the account. But it is a partnership. That means it has what partners. And we’re going to have a C-Corporation that owns 10%. Then Barley will still own 90%. We have a 90/10 split. This is very common. But that same $100, just by simply putting it into the partnership, we took $10 off of his 1040. He only has 90% now. That $10 never suffered the taxation on his 1040.
Barley: We immediately reduce taxable income to the 1040.
Eliot: Absolutely.
Barley: But I still want that $10.
Eliot: But we come back and they’ll say, well hold on guys. I’m smart enough to know that the C-Corp’s at 21% flat tax, it’s going to have to pay tax on that. In this case, $2100 on that $10,000.
Barley: That’s higher than my capital gains.
Eliot: Exactly, so thank you for nothing.
Barley: What’s going on here?
Eliot: Well, but we have that treasure trove and our C-Corp of things that goodies to help them with that $10,000. You open up that big box of goodies. What are you going to find there?
Barley: What’s that thing called? The accountable plan for reimbursements, right?
Eliot: Very nice.
Barley: You heard that laundry list—cell phone, internet, home office, meals, miles, travel, 280A meetings, medical reimbursements. You can pull all that cash out of your corporation, no questions asked, as a reimbursement. Tax free to you and a deduction to the company.
Eliot: Exactly. He’s going to deduct that against that $10,000 and he’ll probably wipe it all out in this instance. Now, we have nothing taxable in the C-Corp. He’s got $10,000 of tax-free money in cash in his pocket, and he only had to pay tax on $90,000 on his 1040. It’s a win win win. It’s very hard to beat that arrangement.
And there are other things that we can do to add to that. We can have a guaranteed payment that gets a little bit more involved, but the C-Corp could be paid more, which creates a greater deduction on his 1040.
If we need more income for those, what I call again, the treasure chest of reimbursements of 280A, which isn’t really a reimbursement but it’s tax-free money, certainly, and get all those back. If we had a lot of money, we talked about some other things we could do. Maybe pay you a payroll. Why would we want to do that?
Barley: This is crucial. If any of you are transitioning out of a W-2 to managing your own investments, put on the tax hats right now because this is crucial. This corporation will take the place of your employer, in that you can put yourself on payroll, pay yourself W-2 wage.
Eliot: But why would you want to do that?
Barley: Set up a qualified retirement plan like a Solo 401(k). By the way, we get unheard of contribution limits. If you’re a closely family-held corporation like the majority of you are, we get 10x the individual rate. IRA (Individual Retirement Arrangement) $7000-ish contribution limit. Solo 401(k) $70,000, 10x that. This is a massive benefit. You have to be on W-2 payroll. It’ll put you on payroll, set up a qualified retirement plan, reimburse a bunch of your common expenses, including medical.
Eliot: And if we have heavy W-2, if Barley takes a really, really large salary a couple of years, if we have a lot going on here, even a defined benefit plan, which is pretty much the Cadillac (or Mercedes if you’re German) and that’s a heavy, heavy deduction. Lots more. You can put in $700,000 into those plans. A lot of good could come from this, all from the fact that he just moved his trading account from him personally into his partnership.
Now one caveat. Remember Barley talked about realized gain. If his stock had already gone up and he puts it into the partnership, he really has to have that gain come back to him on that sale, even though it’s in the partnership because you can’t put appreciated property into partnership, sell it, and avoid tax to the individual. But any new gain that happens after that will play out the way we just showed you here.
It’s just something to keep in back of your mind. But it can be really a great tax play. That was all a run-through of capital gains and investments, all those examples. They could be doing this type of thing, having that partnership. We culminate and curated it up to this point. Good word there, curate.
Barley: Yeah. All right, let’s move on from the cap gains.
Eliot: Follow that.
Barley: This can be a great opportunity to set up a corporation. We refer to that as the trade structure, guys. We got a great video from Toby on that. Plenty more guidance on that. Let us know if you have any questions.
Eliot: It’s always going to be in those Saturday events that we have. They talk about it a lot there too.
Barley: Oh, okay. We’re going into the real estate. As you guys know, this is one of our primary focuses, real estate, small business, stock trading. Let’s hop into the fun stuff. I know this applies to many of you, so looking forward to hop. You want to kick us off there, Eliot?
Eliot: A lot of big words here, Ken. “You explain what differentiates whether a real estate rental deduction would be categorized as maintenance repair deduction versus a capital expense deduction. And provide examples. Please explain how these are treated differently from a tax perspective as well.” A lot of information we got to throw out here.
The first, the repair deduction. Repairs are simply just amounts that you put out to keep the particular asset moving forward in its normal state of repair.
It’s going to be maybe a broken window or something like that, but it’s going to just keeping it in an ordinary efficient manner is the idea here. Does not materially add to the value by putting that in there, it does not substantially prolong the useful life, nor was it give a new purpose or a new ability to use that asset in a different manner. Those are the three characteristics really of a repair.
What about a capital expense?
Barley: I like the window example. We fix a broken window, that’s a repair. We replace all the windows in the house, that’s a capital improvement. Just like Eliot said. Fixing a broken window, we’re just bringing it back to its original purpose use.
Eliot: The capital, basically that’s more of a permanent improvement, a betterment to the property. We are increasing the value. We are substantially increasing the useful life of it. And we very well might be changing the adaptation or readapting how we use that asset.
What are examples? We go back to repair. We talk about patching the roof. That’s the example that we talk about all the time. Repainting, fixing leaks, things of that nature, repairing the broken window, those are all repairs.
Barley: Not capital expenses.
Eliot: Right. Now we get to the capital. You’re thinking more involved. Let’s say Barley had me repair his roof. That was one thing. I had a little patch up there. Now he calls me, had to come over to his rental, 40 pounds ago, I get up there, on top that I’m repairing that thing, and I fall through the roof.
Now we need a whole new roof. That’s going to be massive. That’s going to be an improvement. You’re going to capitalize that one, add it to basis, depreciate that, and get Eliot on a weight plan.
Barley: Because that’s going to improve the house. It’s going to raise the value of the house. It’s going to extend the life of the house. All of these categorical requirements that the IRS wants to see for a capitalized improvement.
Eliot: Exactly. Increase the life. Again, it could be if you change which machine to making muppets or something like that. You’ve taken an asset, change it to a whole different purpose. That’s going to be a capital expenditure.
Again, what’s the differentiation? It’s really about the long-term this, if you will. Now, there are a few exceptions to this. We talked about that de minimis rule.
Barley: You’re absolutely right. Why do we even bring this up? Because generally repairs can be deducted right now. If I fix the window and it costs $500, I can report that on the profit and loss statement this year and take it as a deduction.
If I replace all the windows for $20,000 or something like that, then I am required to capitalize the purchase. What does that mean? It’s required to be depreciated over time. I can’t deduct the $20,000 right now in this current period. I’m going to put it over five or seven years or whatever. The life of the asset is divided by seven. I take that much each year. It stretches that out.
We’d rather have the deduction upfront. We want to look at this, a little bit of an art and a science here. Obviously, we have to categorize it the way it has to be categorized, but we do have a little bit of flexibility if we make what would normally be considered a depreciable capital improvement.
If the per ticket item is less than $2500, we have a de minimis safe harbor rule. The reason I’m just bringing this up because for you guys doing real estate, this means if you buy something less than $2500—appliances, furniture, flooring, new windows—that are normally required to be capitalized, you can just write that off in the current period. You don’t even have to add it to the depreciation table. That’s a benefit.
Eliot: Absolutely. It is buy ticket, if you will. In other words, if you went out there one day and bought a dishwasher under $2500, you’re safe. Then go out and buy cabinets for under $2500, you’re safe. Those are considered independent, $2500 tickets, if you will.
But the IRS caught on and said, if this is a bigger theme of overall renovation of the whole house, you can’t just piecemeal all of it and expect to get it all as a current write-off. We’re not allowed to do that.
But there is another way that we can still hit that, get out of that capital expenditure realm into the current deduction of it, even though it would traditionally be a capital asset. That is the routine repair.
Whatever the lifespan is—Barley mentioned seven year, ten year, whatever it is for that particular asset, the depreciation life—if it’s reasonable to expect that you’re going to have to add some maintenance on that or recover repairs more than once within that useful life, then we can go ahead and expense as well.
Those are two unique cases where we are in the capital expenditure world, but we’re allowed to get over into the repair world where we get that immediate deduction at Barley was talking about as opposed to the longer term depreciation.
Barley: And as usual, guys, this can go away in the weeds. Lots more guidance there, if-then. The theme here is if this applies to you and you have a specific question, let us know. You can shout us out right now in the Q&A or submit a question to the platinum portal. Or if you need us to crunch some numbers, set up a call with a tax advisor.
Eliot: Get to Toby’s toolbox. All those videos. I know Scott and Toby go over this one for sure.
Barley: Absolutely. Certainly, let us know if you have questions on that. These rules get pretty hairy, but we can certainly provide a lot of guidance based on your particular situation there.
“How they’re treated differently from a tax perspective?” That’s pretty much it. Repair versus whether you need to capitalize the asset.
Eliot: We beat that one to death.
Barley: That’s good. Well this is a good one. “Can I deduct lost rent from a deadbeat tenant?”
Eliot: We get this surprisingly a lot. When you first start getting into taxes, you think, wow, they have something here. What’s going on there? Can I get a deduction for that?
Well, we got to go back to what the definition of a deduction is. A deduction is somewhere you’ve had this expenditure towards some services that were provided you, or maybe an asset that you purchased, but you had outgoing money, you had to pay something.
But income, your rent, that’s it. It’s incoming. It’s rent coming in. That’s a whole different concept than you passing money out to pay for something, that is no money came in. It’s a different category. That’s what’s actually going to determine your taxes.
There’s no deduction for missed rent. It’s just that you didn’t get taxed on that rent. In other words, I’m renting from Barley, no surprise, I don’t pay him. I don’t pay the rent for $1000. The fact that he didn’t get paid, he just didn’t have $1000 that he had to show up on his return as income.
Barley: I didn’t spend anything.
Eliot: Exactly. He had nothing to spend because he trusted Eliot. Never do that again. We get to that situation where we had no income. It’s certainly not a deduction.
However, if you really look at this, say it might be an opportunity, lost income, choices of what you could have done, he could have a different renter, or if he had had that $1000, it’s really opportunity loss, not a tax consideration. That’s more economics and things like that.
Not much we can do with the lost rent, other than we just don’t call it as income because we were never paid it. We have that grace that we didn’t have to pay tax on it, but that’s it. But it’s certainly not a deduction.
Barley: Just to get a slight tangent there, if they didn’t provide any income, you still going to have to pay the property taxes, mortgage interest, all that. If that creates a loss, that you may be able to take that loss.
That’s where we’ll talk about terms like real estate professional status, material participation, stuff like that. I don’t think that’s what you’re asking, but just to throw that out there. That could be a passive or active loss, depending on the situation.
Eliot: Excellent point.
Barley: All right. Any questions on that? I don’t want to skip over anybody? All good there? Okay, let’s dive in. This is a great one because we’re talking about primary residence. I like, this is a mix of it, like a little bit of everything that we’ve talked about so far.
“I’ve heard you talk about renovations made to a rental property and the tax advantages. But what about for my primary residence where the home I live in. I need to finish my basement and upgrade the house. This is also the address my C-Corp business is registered to, i.e., I operate a home office out of it. When I complete my taxes next year, are there any specific advantages I can take advantage of due to this large expense?”
Normally, if we’re talking about our primary residence, there’s not going to be a lot of tax. You can maybe deduct property taxes, mortgage interest on your personal deductions on Schedule A if you’re itemizing. But generally not a lot of deductions there. But we do have the home office. A couple of angles we could pick this apart from where do you want to start, Eliot?
Eliot: No. Barley’s exactly right. Primary residence, not a whole lot to work with there. Certainly it’s not a business asset. There’s no deduction except for property taxes perhaps and mortgage interest.
Your ordinary wear and tear items, you had to put a new window. What about those things we were talking about? You had to repair a patch on your roof or something like that where Eliot fell through. Those things are not deductions because it’s not a business. That’s where we get thrown off thinking—
Barley: Deducted against what income?
Eliot: Exactly. But what if you add on a new room or you do a whole new roof or something like that? Well those are those capital expenditures we were just talking about not too long ago. Those will be added to basis. What’s our basis? That’s what you originally paid for it. If you paid originally $200,000 for that house, Barley goes in there, puts a new roof, maybe an addition, another room. Adds another $50,000 of expenses. Well now his basis is $250,000. Why do we care?
Barley: Well, it depends. When we go to sell the assets, sales price minus our adjusted basis or our basis there, it will equal the taxable gain, the gain on the sale there. If we don’t add those capital improvements to the basis of the assets, we’re just going to pay tax that we don’t need to be.
This really does tie in we talked about before. If we fix a broken window, do I need to keep that receipt? No. If we make capital improvements—go back to that original definition—there’s no tax form. You just want to keep those invoices, keep those receipts for if and when you sell your primary residence. That will reduce the gain on the sale. It’s going to be a purchase price plus whatever you invested into it on top of that.
Eliot: It’s not really a deduction until that day we sell. But at that point, you’ll be glad that you kept those receipts and can show proof of what your new increased improvement basis was.
Barley: Offset that gain.
Eliot: But we got this other thing where we have the office going on.
Barley: Also happen to have a C-Corporation set up like many of you do. We’re also using the primary residence for administrative use of the home. We’re renting a home office to the C-Corporation, so we can perform our administrative duties for the C-Corporation, I guess, I saw you say that.
Eliot: Exactly.
Barley: So I operate my home office out of it, when I complete my taxes next year or anything specific. Now we’re talking about home office. We tell you guys all the time. Home office through a corporation. We get reimbursed through this good chunk of our living expenses based on the exclusive use portion of the home. Well that’s where we can potentially possibly include part of these improvements.
Eliot: We got the administrative use of home. That’s one of the reimbursements we can do under our accountable plan. Accountable plan, just a fancy IRS term for reimbursement. You’ve paid something out. You’ve paid for the expenses related to your house.
Those related to that office space, you can take as a reimbursement. Usually, we go by square footage. How much office space is being taken up out of the entirety of the house. Gives us a percentage, so we can look at certain expenses like those property taxes, the mortgage interest. Anything else like that.
Barley: HOA, utilities.
Eliot: Now again, I have to come over and tell Barley why I didn’t pay his rent. I come to his home. He’s got his little office there in his house. His brand new white carpet in there.
Being the good guy he is, he gives me that fruit punch drink to go up there and well, let’s talk about it in my office. I spill it all over his white carpet in his office. Now he has to change that out. That is a direct expense, directly related to his office. How much can we deduct there on that repair?
Barley: Direct expenses, we can deduct 100%. What Eliot’s distinguishing there is anything in the actual office space itself. Shelving and internet booster. Maybe put some carpet or flooring in. You can take those at 100% deduction because they’re directly related to the office space.
Whereas your gas and electric bill is related to the home office, so we can only deduct the business use portion. We determine that from the percentage use of the home.
Eliot: If we did a roof repair or something like that, we’re probably going to break that out. That’s indirect. Even if it was right above the office, we’re probably going to still call that indirect, even if Eliot fell through that too. So things to think about there.
Here, the renovations added our basis. And if it’s a direct expense, we can take that as a reimbursement through our office. We get asked a lot about depreciation for the office. It’s possible you might be able to take some depreciation on that office space.
Just a caveat: If you ever sold your house later on, it probably would subject to depreciation recapture. A little bit more pencil and paper we got to take to it to keep track of all that. But that would certainly be in the possible realm as well.
Barley: But for those of you with a corporation that this home office deduction, because you guys are entrepreneurs, it’s not like you’re not doing work at home. We know you are. So as long as you make it an exclusive use space.
Another thing about those accountable plan deductions: wash, rinse, repeat. These are the deductions we want to put on autopilot. Maximize the deduction and then just put it in place where we just put it on autopilot. We take it every year and we don’t have to think about it. That’s really the goal here. You’re going to be just taking us the same percentage of the same bills each year.
Eliot: And there we have it. And just jumping back to our earlier question where we talked about the trading partnership, we had that $10,000 go into your C-Corp. This is exactly the kind of reimbursement we’d be able to use against that.
Barley: Administrative use of home, plus everything else. Watch that accountable playing video from Toby.
Eliot: I think that’s it.
Barley: Cool. “Can I do a 1031 exchange on real prop?” Is this a trick question?
Eliot: It is. It’s tricky.
Barley: What’s the answer, mister? A 1031 exchange? Well obviously, we are talking about real property, real estate, so yes, a 1031 exchange is used on real property in most cases. There are certainly some exceptions. Surprise. What are some of our exceptions? Well we can’t 1031 our primary residence. That’s one exception. What else?
Eliot: We can’t do it on inventory.
Barley: Any of you guys that are doing flip houses, you can’t 1031 exchange a flip property, just because it’s considered inventory as opposed to real property.
Eliot: Just take a quick step back to what a 1031 is. For those of you who don’t know, it’s where we have a business asset, an asset using a trade or business or as an investment, usually (let’s say) a house. It has to be real property—house, land, something of that nature—that’s not getting flipped, as Barley pointed out.
If we want to sell it and we’re going to recognize the gain, maybe we don’t want to pay tax on it—there’s a novel idea, don’t pay tax—well, the rules say that if we go out and buy another like-type property—could be a commercial building, could be a, a single family rental, whatever it be—we can maybe defer that gain.
If we can defer that gain, we just don’t have to pay tax. We kick the can down the road. If it finally goes on to the time when we pass away and we leave it to our heirs, they’re going to get stepped up basis, no tax at all on that.
But getting back to the 1031, the idea of how do we know if we can fully defer that gain on that sale in a 1031? Well, there are just three things—basics—that we want to look at.
Number one, you have the sales price of it. You sold your house for $100,000. You subtract from that your adjusted basis, which we talked about earlier. That’s going to be the purchase price plus any of those capital improvements, less any depreciation. That’s your adjusted basis. Subtract that from the sales price of your house. We have what’s called the gain.
Once we have our gain and at 1031, you’re getting one property—that’s the relinquished—you’re picking up a new property—we call it the replacement. If we get the new property at or above the fair market value of what we gave up…
Barley: Trading up in value.
Eliot: Exactly, and if we picked up as much or more debt on that new property, we know we’re going to have full deferment, 100% deferment on that gain that we just learned how to calculate.
Lastly, something that people always ask about the 1031, we have that replacement property we just purchased. We subtract from that price the amount we just deferred of our gain. That’s going to give you the basis in the new house. It’s a real simple calculation there.
But all that, can we do a 1031 on real property? Absolutely. As long as it’s not inventory, it’s got to be used in a trade or business, so it’s not our personal residence, things of that nature.
Barley: And the next couple is that we’re going to be going into more of this gain, the next couple of questions are dealing with that as well.
Eliot: Kind of feeding off of it.
Barley: Yup, so let us know if you got any questions on that, guys. We’re going to hop into more detail on that right now.
“I bought a rental property in California in 2019 for $700,000 as a replacement property from an exchange. $400,000 was from the sale of the property in Washington and $300,000 I put in cash myself. I took a loan of $600,000 for expansion and repairs in Jan in 2025.
How much of the money I invested for my personal savings can I get back without having to pay tax?” And when are we talking about here? “I’ve listed my rental house for $935,000,” so we’re assuming here. “When I make this sale, how much of this cash can I get back and not have to pay tax?”
We can look at this for a couple of different examples, but essentially the main question here is are you going to do it now, the 1031 or not?
Eliot: Exactly. We’ve got two paths.
Barley: Can either report the capital gain or do the 1031 or not. Really, that’s the crux of the issue. The rest of this calculation is, I’m not going to say it’s irrelevant, but essentially are we going to do use the 1031 for deferring our capital gains, use that vehicle to defer our capital gains? Or are we going to take the capital gain. Right in the middle there, if we do a 1031 but pull cash, that definitely will be taxable as boot. Let’s break those three pieces apart there.
Eliot: We have the first path. We don’t do any 1031. We just simply sell.
Barley: Sale of a capital asset.
Eliot: We know we’re going to pay tax because again, we just talked about it. You’re going to have the sales price less your basis equals the gain that you’re going to pay tax. Whatever cash came in, you’re going to pay tax on it, and whether that’s going to pay off debt or if it’s going to pay you back for the $300,000 you put in, no matter what, tax will be paid. No question about it.
Barley: First. And that’s important, too. You have to pay the tax. Then you can redeploy the capital however you want—paying yourself back, reinvesting it, or whatever. The tax will be due first.
Eliot: Exactly.
Barley: You know how the IRS works.
Eliot: They’re going to take their chunk first. But if we do the 1031, which we defer, which is how we got into this situation to begin with, well that’s fine. As long as we (again) meet those criteria, that you picked up a property that’s more expensive over $935,000, what you sold it for—you picked up more debt, whatever the debt was, we had $600,000 on a loan, so we know it’s probably going to be at least that much—as long as you picked that up on a new property or replacement property, well you’re going to defer all the gain, so you aren’t going to pay anything.
However, there’s that middle road that Barley was talking about. What if you took some of the cash out of the 1031 exchange? That’s going to be boot. Anytime you take $1 of cash back in any of these situations, you’re going to pay tax. There isn’t any way to avoid that. If you’re going to take cash, you’re going to pay tax, period. There’s just no way around that. But we know we’re in the real estate genre here because they’re talking about they have a rental, they’re going to get a new rental.
Barley: They’ve done a 1031 before.
Eliot: Right, and if they get a new rental, it sounds like that there are some things outside of this transaction that we could do in the real estate gain. Maybe a short-term rental that we have going on there.
Barley: Like Eliot said, I like how you approached this. You’re already in rental properties, you’ve done a 1031, you obviously have some experience in the rental world. In other words, might not just suggest this strategy willy-nilly, but you could use a short-term rental with material participation. Just to throw some tax terms at you.
If we materially participate in a short-term rental, it’s considered an active business. Any losses can potentially offset our other active income—W-2, all of it. If we do a cost segregation study, take bonus depreciation, again as long as we materially participate in the activity—we’re the ones managing it at least for the first year or so—we can lock in those good losses. If you materially participate—got to stress that—then that will offset all other ordinary income, including capital gains.
Eliot: Absolutely. That’s a surefire way. If we still want to stay in the real estate gain, maybe add to it, we could offset whatever gain we have here.
The other, if it’s a long-term rental, a little more involved. We have to make that real estate professional status, over 750 hours in real estate trades or businesses, over 50% of our work week dedicated to those trades or businesses. That same test Barley just went over, we have to materially participate in the management of each rental property we have.
We meet those, those are two ways that we could stay in the real estate gain, get a write-off that will separate from what’s going on as 1031. It could offset cash if we didn’t our taxes, if we didn’t go into a 1031, or if we pulled some cash out. These are things to mitigate that tax.
Barley: You’ve heard Toby say this, and kind of in other words, If real estate is your primary business, you have a lot more control of when and how much taxes you’re paying. If you’re a real estate professional and you’re materially participating, maybe if you’ve aggregated your rentals together, it’s just interesting how you can build your real estate portfolio while still getting these big tax […]. This is why we do this.
Eliot: Especially with 100% bonus depreciation, it’s not all the realm to be able to offset an extensive amount of this gain, possibly all of it.
Barley: Absolutely. Bottom line there, you’re working with a qualified intermediary. If you have any cash out from a 1031 exchange, that’s considered boot and is taxable at ordinary income or 25%. That’s a given there. Of course, you could just sell, take the capital gains, and reinvest the capital, considering that capital gains rates are considered favorable rates. They’re not terrible.
Eliot: Certainly better than ordinary.
Barley: Definitely better than the ordinary rates. Excellent. Any questions on that one?
Eliot: No, that’s it.
Barley: Doing good? All right.
Eliot: One last question. A biggie.
Barley: Now we’re going to tie it all together even more. “I’m selling my personal residence next year. We currently have an anticipated capital gain of $1 million. I’ll be paying taxes on $500,000 capital gains above the $500,000 capital gain exclusion,” we’re talking about section 121 exclusion for married filing joint; we know we get the whole $500,000.
“What tax strategy would you suggest that I may plan to use in order to mitigate paying federal taxes against the $500,000 capital gains? Could I do a 1031 exchange of a personal residence?” Well, we already covered that. “Can I convert the personal residence to a rental and sell it in one to two years?” That sounds like an option.
“I’ve heard Toby talking about the ‘sell your residence to your S-Corp,’ but I don’t have an S-Corp.” Well that’s okay; we could set one up. “I currently do have an LLC just for managing,” just a disregarded LLC for asset protection. “Please advise on how to avoid or mitigate paying a large tax bill on an anticipated $500,000 capital gain from the sale of a primary personal residence.” Great.
Eliot: The first thing we want to tackle is the 121. We’re selling our primary residence, and all of a sudden the individual asking this question is saying I can chop $500,000 off. We call that the 121 exclusion. Two criteria…
Barley: Ownership and use.
Eliot: Exactly. Two of the last five years, you got to own it and you got to use it as your primary residency. As long as you do that within a two out of a five year period, then if you sell it, you can take off up to $500,000 against the capital gains if you’re married filing joint, $250,000 if you’re single. That’s what is being referenced here. We can cut that million-dollar capital gain in half immediately.
Barley: And exclude—not defer—gone forever, right?
Eliot: Yeah.
Barley: It’s gone forever.
Eliot: Much better than just deferring. However, they mentioned ‘can I do a 1031 out the gate?’ Well we talked about that. Can we do that with our primary residence?
Barley: Not initially. Not as a primary. Not as a personal residence.
Eliot: Correct. What do we have to do?
Barley: We may be able to convert that to a rental. We can convert the property to a rental asset. That’s certainly an option. We just don’t have the option of using your primary residence for a 1031 exchange. It’s not a business asset.
Eliot: But if we turn it into a rental, we’ve now used it in a trade or business, and if we go back to the earlier 1031 questions, that qualifies.
Now we have the best of both worlds. As long as we sell within that five-year window, because remember we still got to capture that 121, or two of the last five years. You have technically up to three years to run it as a rental. I wouldn’t get that close. Maybe only two years or one year or something like that.
Barley: You got to market it, put it on […].
Eliot: Exactly. Could take all kinds of things that can go wrong (and usually do), but you get that $500,000 write-off, and now you can 1031 into a new rental. Mind you, it’s not going to be a new primary residency for you. It’s going to be a new rental property. But you could do that as long as you meet those criteria.
You pick up a property that costs more basically than what you gave up, you pick up more debt, what you gave up, you fully defer that gain, and right there in that case you wouldn’t pay any tax, any of that. That’d be your huge mitigation.
But we talk about this S-Corporation. What we got going on there?
Barley: We want to convert it to a rental. Do I just wave a magic wand or something, then it’s a rental? Is that how that works?
Eliot: It could be. But if you want to sell it to an S-Corporation, you got to set up the S-Corporation. They mention that here. If they don’t have one, well then set one up.
You can sell your primary residency to your S-Corporation. When we do that, it’s going to be at the fair market rate. You’re going to get stepped up basis in your S-Corporation. Now we can run it as a rental through there. You’ve got far more in the way of your straight line depreciation.
But what about cost seg and bonus? We do, but we’re selling to a related party. We’re selling to our own S-Corporation. You can do a cost segregation because you’re using it in a trade or business, but we can’t do bonus depreciation because it’s a related party.
So you’re going to get some tax benefit, but it’s not going to be the 100% bonus depreciation that everybody’s craving about right now. But you’re still going to have some gain, probably. What about that gain in this situation where you sell to a related party?
Barley: I have my primary residence. I want to convert it to a rental. What we’re proposing, you could sell it to your own corporation that you own and control. You get a step up in basis if the house has gone up in value. Then we can depreciate the higher rate.
There are some downsides to that: (1) We’re typically going to do that on an installment sale. (2) It’s going to be a related party transaction. These are going to inherently create some restrictions like we can’t defer the gain.
Eliot: Got to pay it right away.
Barley: All the gains do upfront. We can do an installment sale, but have payments over time from our own S-corp. It’s just our own money, though, so we have to keep that in mind. But all the gain is due upfront. This is a little bit more of an advanced strategy, but you can’t get the step up basis, convert your property to a rental, and then have it be a cash-producing property.
A little bit of a seasoning period there, probably, but if you sell your S-Corp, that would probably instantly convert it to a business asset. If you took the S-Corp out of there, you want to have it be a rental for a year or two before you try a 1031 exchange just as a side note.
Eliot: But yeah, you’re going to have to pay that tax up front and that’s usually a killer because you’re not having an influx of cash coming in from the sale. It’s your own S-Corporation, so it’s not going to have that cash. That’s probably the nail in the coffin why people don’t do that. But if we were able to get into a 1031 exchange and we’d fully defer, well we don’t have to worry about any of the attacks. It’s all been deferred.
Barley: Absolutely. There’s a great Clint video on this, just FYI. If any of you are interested in that, shoot us a platinum portal question or shout us out in the Q&A here. I could certainly provide that, walks you through the steps of that, why you’d even do it and what the benefit is. A little more detail there. Avoid or mitigate on the $500,000. Essentially, you wouldn’t avoid the taxable gain there.
How do we avoid the taxable gain on that? Well, you don’t. You’re going to owe tax on that gain. You’d either defer it or you can offset that like we talked about earlier.
If you’re anticipating a large gain of any kind—selling a business, selling your primary residence, selling a business asset, selling some stocks, whatever the case is—that’s where we can kick into gear with these tax planning strategies.
Maybe we do a short-term rental or maybe we look at selling some stocks that have gone down in value to do a little extra tax planning there. But what else can we touch on in this one? I feel like there are so many pieces to this.
Eliot: Yeah, but keeping it in the real estate realm, that’s pretty much it we can do there.
Barley: All right. Any questions we want to touch on?
Eliot: I think that’s it, attacking all of them.
Barley: Geez. Good work guys. Let us know if you got any remaining questions. Looks like we got through all of our questions.
Eliot: A hundred and forty-four by our team. I’m sorry I don’t have everybody on there, but it looks like it’s we got Patty out there, Troy, Ross, Amanda, Marie, and George.
Barley: And of course our tech team keeping us in line. Thanks, Ion. Thanks, Matthew. Got a great team back there. Thanks so much for tuning into today guys.
We are going to be going over a lot more of this year—you’re in the right place—but please check out those videos from Toby on the tax bill. We did a video on that somewhat recently. We’ve been discussing that, so I know you guys have questions on that. Be sure to submit any questions on that as well.
Eliot: Did the quarterly tax planning.
Barley: That’s what we talked about.
Eliot: And we’re going to have some more coming up here with the next Tax Wise coming up around the corner.
Barley: Plenty more live events coming up. If you have any questions about upcoming events or any of that, let us know. We’ll provide you a calendar. Or just go to the website, a bunch of good information there as well. Of course, make sure you subscribe to the YouTube channels, guys. Tons of good information there. Come to the live events. You guys know the drill. Las Vegas in September’s pretty nice. We’ll be there answering tax questions.
Eliot: Scan the square, get in.
Barley: That’s right. Scan the square for a free strategy session. You can set this up right now if you want. How do we do this? Tax Tuesday. Every other Tuesday, guys. This is your question, so please submit your questions here. Come check out the website, and let us know if you have any questions. In the meantime…
Eliot: We read them all.
Barley: That’s right. We go over them all. Anything else from you, sir?
Eliot: No, just thank you.
Barley: Yeah, thanks guys. Tax knowledge of the masses. Well done. I definitely commend you guys for taking in all this tax knowledge all at once, and definitely look forward to seeing you guys again in a couple of weeks.
