In this episode of Tax Tuesday, Anderson advisors Eliot Thomas, Esq., and Barley Bowler, CPA, tackle a packed lineup of listener questions covering construction business accounting, rental property depreciation, and family tax planning. They explain the pros and cons of switching from accrual to cash accounting, and when a SEP or Solo 401(k) can help reduce a tax bill before an extension deadline. They walk through how to claim a college student as a dependent even if the student earns grant income, and how hiring your kids through a C corporation can shift income and fund a Roth IRA.

Eliot and Barley detail how the Ladybird enhanced life estate deed works in the five states that allow it, and how stepped-up basis applies at inheritance. They cover when a management corporation makes sense for short-term rental owners with W2 jobs, the real risk of children’s working hours undermining a spouse’s material participation, and how the aggregation election simplifies real estate professional status across multiple properties. Other topics include how to catch up missed depreciation using Form 3115, how to properly report an owner-financed note, and whether repairs and maintenance on a non-income-producing rental are deductible. Tune in for expert guidance on these topics and more!

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

00:00 Intro to Tax Tuesday with Eliot and Barley

7:09 We file accrual; however, if I switch to cash, the tax bill will be lower. Is this a good idea? Is there anything I can do to lower 2025 taxes before my extension is due in September, like a SEP or retirement plan? – Cash basis is simpler; a SEP or Solo 401(k) can still be established.

16:16 My son gets some grant money from the University for his peer mentor role and research he does. He is a Junior and is 20 years old. Can I still list him as before as a dependent on my tax return? – Yes, if you provide more than half of his total annual support.

21:28 What are the tax ramifications of my brother and I inheriting my mom’s home via a Ladybird (enhanced life estate) deed? – You receive stepped-up basis; rental or personal use rules then apply.

27:17 My husband and I both have W2 jobs. We have both long-term and short-term rentals. I manage the STRs. Does it make sense that I open an S Corporation as a management company? Is there an additional advantage to employing my teenage kids to help manage properties? – A C corporation management company maximizes tax-free reimbursement benefits for families.

39:00 We have a home management company (partnership). My spouse qualifies for REP status with no other job. Could he have both? Can you also elaborate on this: “Under §469, each rental property is treated as a separate activity. You must participate in each property. Not just your portfolio as a whole.” – An aggregation election bundles all rentals to simplify material participation requirements significantly.

49:05 I have a single-family home rental. Depreciation was not taken on previous tax returns. How do I go back and calculate depreciation? -File Form 3115 to catch up all missed depreciation in one year.

53:50 How do I report the mortgage payment paid to me from my owner finance note? – Report interest received on Form 1098 and installment gain on Form 6252.

57:38 Can you write off expenses and maintenance costs for rentals that are not producing any income due to disrepair? – Yes, if the property remains available for rent or is temporarily out of service.

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Full Episode Transcript:

[00:00.00] Intro

[00:12.00] Barley: All right. Hey everybody, we’re live. Welcome to Tax Tuesdays, bringing tax knowledge to the masses. That’s what we’re doing here today. My name is Barley Bowler. I’m one of the CPAs and tax advisors here at Anderson. Welcome back to tax Tuesday every other week. Tell them what we’re doing here Eliot. 

[00:26.18] Eliot: We are going through your questions. You submitted them, I went through them. We picked a few out. We’re going to try and answer them. We thank you for all the questions that you’re putting out there and just going to bring some knowledge to you.

[00:36.46] Barley: That’s right. And as the title slide said, that’s Eliot Thomas, manager of the tax department. My name is Barley Bowler, one of the tax advisors here. He really does go through every question every other week. Of course we talk about real estate small business a lot. But we’re also trying to just pick some kind of fun different topics to keep it interesting.

[00:54.26] Get in the weeds a little bit. As usual for anyone here for the first time, big welcome to you. One of many ways that you can kind of reach us, ask questions, kind of engage with us here at Anderson. Big welcome to anyone here for their first time, the rest of you guys, you know the drill. Please post any comments and chat any questions in the Q&A. Any questions you have hopefully, you know related to the topic.

[01:17.02] We can maybe go over them as a group but questions in the chat or excuse me questions in Q&A any comments in the chat. What else? Email your questions tax Tuesday at andersonadvisors.com,email your questions in. We go through them all and try to just bring as many of these kind of questions to you. Detailed responses, you’ll need to become a platinum client or set up a tax call.

[01:37.26] We’re going to have more information on that if you want to run calculations like that, right? We’ll have information on how to get that started as well. As we mentioned,  fast, fun, and educational. Got about an hour and a half here, going to go through your questions. Let’s hop right in, we’re going to read through the questions, give you a little bit of information. Then we’ll go right through them. Any announcements saying you want to make before we?

[01:58.00] Eliot:  I think tomorrow’s probably a pretty big day in our tax world. 

[02:03.06] Barley: You guys know the drill five. Make sure you file your extension if you’re an Anderson client here. You likely have a complex structure. Maybe some business activities, some rental activities, getting some k1s. You’re going to always want to extend. Make sure you get that extension filed. Let’s hop into some questions.

[02:22.38] We got a bunch of questions all over the board today. Starting off with some construction business a lot of you guys are doing construction development out there. The construction business made more money last year than expected. Awesome. Now we have a large tax bill, bad. We file a cruel. Interesting, if I switch to cash the tax bill will be lower. Is this a good idea? Is there anything I can do to lower 2025 taxes? We’re going to might get that question a little bit today. Before my extension due in September like a set or retirement plans. Great question

[02:54.26] Eliot: Next question. My son gets some grant money from the university for his peer mentor role and research, he does. He’s a junior, he’s 20 years old. Can I still list him as before as a dependent on my tax return? It’s popular question with those right youngsters in college. 

[03:11.26] Barley: What are the tax ramifications of my brother and I inheriting my mom’s home via a lady bird enhanced life estate deed. I know we are not taxed in this way. But what if we don’t sell it right away and decide to keep it and either use it for ourselves or rent it out? What are we going to do with the property and how long we’re going to hold it that might make a difference? How we tax if we choose to keep it in one or both of these ways.

[03:33.34] Eliot: My husband and I both have W-2 jobs. We have both long-term and short-term rentals, I manage the short-term rentals. Does it make sense that I open an S-corporation as a management corporate as a company? Is there any additional advantage to employing my teenage kids to help manage the properties?

[03:51.10] Barley: Put them to work. I like that. We have a home management company, part of partnership. The taxed as a partnership my spouse qualifies for rep status real estate professional status with no other job. Could he have both? I think you’re asking, can you have a W-2 job and qualify for rep real estate professional status?

[04:09.86] Can you elaborate on this under 469 code six code section 469 each rental property is treated as a separate activity. As Eliot always says you must participate in each individual rental activity not just your portfolio as a whole. Yes, just a great question so many areas we can touch on in real estate there including participation rep status definitely going to go into that. You guys never heard those terms, right? 

[04:35.26] Eliot: I have a single-family home rental, depreciation was not taken on previous tax returns. How do I go back and calculate the depreciation?

[04:43.82] Barley: Actually not too bad, not too hard. How do I report the mortgage payment paid to me from my owner finance note? Good question.

[04:51.82] Eliot: Can you write off expenses and maintenance costs for rentals that are not producing any income due to disrepair.

[04:59.50] Barley: Yep another classic real estate question. All right guys, that’s our lineup for the day. Make sure you subscribe to the YouTube channels here, Clint obviously focusing on the asset protection, Toby on the tax planning. Together they are why you throw Michael Bowman in there and they’re focusing on the small business startup. Running and starting a small business, great information on here as you guys know.

[05:19.02] Hey, look, there’s Amanda talking about land trusts and deeds, probably. Ton of good content on here. Make sure you guys subscribe. I love those debunking videos. He does go and TikTok and pick out videos and tell them why they’re wrong. Plus everyone check out that video that Toby did on the Roth IRAs that YouTube pulled.

[05:38.54] They pulled it because they thought the numbers were wrong. They’re like, there’s no way this could be true. Of course Toby did the calculations, they’re right. He goes back to youtube shows and the videos back up. What’s it called something like or I think he just retitled it as reposting the video or something, but really funny. We got an event coming up here? Is this virtual? Tax Tuesday register now. I think this is a live event guys scan the QR code and find out we’ve got a lot of live events going on lately. 

[06:06.90] Eliot: Yeah, this is our live tap event down in Phoenix, Arizona. Actually, I think it’s going to be in Scottsdale. That area, I’m on 28 to the 30th, $99 pretty good deal. I’ll get to meet a lot of clients, fellow clients, a lot of synergy, get a talk. Go through different experiences and things of that nature. So really great event

[06:25.58] Barley:  Fun town to run around and spend some money into Scottsdale. What else? Real estate asset protection works. Sorry. This is the tax one. This is more the asset protection coming up we got. Any questions on that, any questions about the live events or upcoming events? Let us know we can give you the information on there and if you want to schedule a free strategy session, kind of get the ball rolling, certainly can set that up right now.

[06:57.58] Ask any one of us, throw a question in the chat. We can get you started there. Should we hop right in? My construction business made more money last year than I expected and now we have a large tax bill. We file accrual, accrual method of accounting. We file accrual. 

[07:17.94] However, if I switch to cash basis accounting the tax bill will be lower. Is this a good idea?Is there anything I can do to lower 2025 taxes before my extension is due in September like a SEPP or retirement plan? Well, I guess we better start with accrual versus cash, huh? 

[07:32.62] Eliot: Yeah. Absolutely. These are just different forms of how we report income or when we report income for our tax purposes. Accrual simply means that we don’t report it until we’ve earned it. Okay, so you can go ahead and not be paid. But maybe you completed substantially all the job. Well, you’re going to get taxed on that.

[07:52.70] Even though you haven’t received the cash.  It’s one of those things that you really want to walk through, think through. What you’re doing on your arrangements of how fast you act before you receive cash because it’s no fun to do a lot of work and then not get paid for it. Now just for those who might be questioning that you can later on take a bad debt expense.

[08:09.42] But it’s not until after we’ve already declared its income to begin with but that’s your accrual. You recognize when the work’s done. Hopefully you’ve gotten the cash but that’s one way of handling. Then of course, we do have the cash method which is as it says you report the income when you receive the cash pretty straightforward. There could be better and typically does lower the bill as we’re talking about here.

[08:31.98] However, could be a situation maybe the last few days of maybe 2025 you received a bundle of cash. Well, you got to recognize it and maybe you haven’t incurred any expenses you incur all those the next year. So you have a mismatch of timing. That’s what accrual is meant to defeat. Well in cash system, you don’t have that necessarily. 

[08:51.50] But here we got accrual preparer who did recognize an awful lot of income here in 2025. They want to switch to cash. They’ve noticed that it will lower the bill. That’s fine. That’s a good thing, we don’t have a problem with that. Is it a good idea? It very well might be got to remember though.

[09:08.06] You can’t just go back and forth, you have to wait five years before you can go back to accrual. Either method, depending if you’re not watching, you know, what’s going on in your business could get you into jeopardy as far as when you have you match those income amounts of cash versus your outgoing expenditure. So you just want to be very careful.

[09:27.90] But no problem here, especially if it gives you the tax relief that you’re looking for and you hadn’t done this in the last five years. Well, that’s that’s okay to do. So no problem with that. Again here talking about the extensions due in September that tells us. It’s going to be one of two types of entities, probably a partnership or an S corporation.

[09:46.94] How do we know that? Because calendar you’re in S corps or partnerships with extension become due the next year? Pretty likely I feel pretty safe that that’s what we probably are dealing with here. Is there anything we can do to lower those taxes before that extension like a step or retirement plans of various natures? Any thoughts on that?

[10:07.34] Barley: Yeah, certainly SEPP, we really like the SEPP because it’s a simple simplified employee pension easy to set up.  Now I always get the confused with the dates of whether we can set up these plans. I think the SEPP you can actually set up after year end. Is that correct? Or a lot of these plans like the 401k, for example, I think needs to be established before the year end But yeah, give us some detail on that. I get confused on those right.

[10:28.86] Eliot: On the SEPP we certainly can go ahead and set it up now. Today, if we want for 2025 and if we got the extension as we do here with our question. Well, we’re okay. We don’t have to really be bothered with tomorrow’s April 15th and taxes are due or anything like that. We’re in good shape there. We can set up this plan.

[10:45.74] However, if it’s a partnership. We already know how much income is going to flow through to you. Absent this calculation for contributing to a plan and we know what’s going to be earned income. Because remember, if you’re going to have a retirement plan, it’s got to be based on earned income. That means it’s subject to employment tax. Partnership all that money comes forward to you, if it gets hit with employment tax, then you have earned income.

[11:10.22] And yes, you could go ahead and set up a SEPP, make a contribution from the partnership, get that deduction. That’s fine. But if it’s an S corporation, we have a different consideration. We got two streams of income coming from our corporation, our S corporation one is the W-2 wage. Which is that earned income, the other is a distribution. 

[11:29.34] Now what if we didn’t actually pay us off a W-2 if we don’t have that earned income. What about the distribution? Does that count? No, it’s not subject to employment tax. In the case of the S corporation, it’s going to depend on what we did December 31st or earlier of next year of how much earned income we have. Whether or not we can contribute to something of this nature.

[11:48.78] We have that factor. I’m sure, probably there was some W-2. That’s pretty standard in a S corporation. We’re probably okay, but that’s kind of the analysis we would look at. Yes, you could go ahead and set up that sept right away this year, but it’s not too late to do so.

[12:04.78] Barley: Now you touched on this earlier. I think that’s why I got kind of tripped up a little bit at first. There was a recent rule change that allows some of these to be set up after 1231. Is that something we want to introduce here? Is that relevant? 

[12:16.38] Eliot: Yeah, that’s referring to a solo 401k not a 401k, but a solo 401k. After the secure Act 2.0, we’re now allowed to go ahead and set up a solo 401k. Solo 401k is unique in that’s going to be where you can contribute as an individual employee as well as the employer can contribute.

[12:37.58] We wouldn’t be able to do that with a well, we’d be able to set up a plan if it was a partnership. But we just have one stream of income. Again a partnership is really like two separate sole proprietorships that got joined together. We don’t really have W-2 in a partnership, but we have all that earned income. That will allow us to go ahead and set this up.

[12:57.34] It’s a little bit different. The calculation, the amount that we can contribute is going to be based at 20% of that net profit coming through so it’s a little bit different for a partnership. But we could set it up, still today at this point of the year and take advantage of as long as we made that contribution before 9/15 our extension deadline in September. 

[13:19.50] If it’s an S corporation, we got to remember again,you have to have that earned income that had to have been paid at December 31st. There you have again two components, the employee puts it in and makes an employee contribution up to $24,500. Then there’s the profit sharing component of a solo 401k, which the business puts into.

[13:39.98] The employee will have had to have been paid a W2 wage again before December 31st and have contributed his or her amount, the employee amount before December 31st. We don’t get to wait till September for that. But we can have the business.The business side the profit sharing portion here can put in up to 25% of whatever the W2 was that was paid to the shareholder back under before December 31st.

[14:08.70] We could still set up a solo 401k even if it’s an s corporation as long as the reserved income the employee can’t put into it, but the business still can before September 15. Likewise if it’s a partnership then they can go ahead and contribute. 

[14:27.18] Barley: Yeah, great question a lot there. Just a couple comments on switching to cash very generally speaking. It is going to be an easier methodology for tracking expenses. The majority of our clients. I think probably 99% of them are cash. Just FYI, just kind of some additional information there. I think it’s generally a good idea unless you have a lot of employees or some other certain circumstances that would kind of dictate that sometimes accrual is required. It’s almost like we kind of want it. Do you think that’s easier for our business? Typically speak again, just kind of general guidance there.

[15:05.18] Eliot: It’s if you have gross receipts under 31 million anybody up there falls in that category. I know I certainly do, then you can still switch to cash. It’s a change of accounting method. You’d file a form 3115. You’re going to hear that form a few times today. We’re going to go over that one.

[15:19.50] But that’s the form that we would file. Certainly can do it. I’m all for it if it saves you tax money, I’m just saying beware that you follow you’re aware of what’s going to happen when you receive cash. You want to make sure you have expenditures to match up against it. You don’t get hit with a huge tax bill again in 2026 because we cannot make another change for another five years. We can’t go back to accrual. 

[15:42.22] Barley: Real common buffer that five year.  We’re going to give you five years to think about that one. Want to hit any questions? We’re doing okay there.

[15:50.00] Eliot: I think they got it. We got our crack team. We got Patty, Dutch, Harry, Jeff and Rachel out there. 

[15:56.62] Barley: Thanks guys. Plus our tech team in the back. I don’t know if we shouted them yet. Let’s keep it moving. What do you got next here?

[16:03.10] Eliot: My son gets grant money from the university for his peer mentor role and research that he does. He’s a junior and is 20 years old. Can I still list him as before as a dependent on my tax return?

[16:14.38] Barley: I love this question because it’s a real common point of misunderstanding. Because we have two different things here like a dependency test and then he may have a filing requirement. But those don’t mutually exclude each other. You can still claim somebody as a dependent that has a filing requirement. 

[16:31.02] Just because they need to turn a couple a couple times. Since he may need to file his own tax return. But yeah, if you’re paying more than half of his support generally is going to be considered a dependent. Now, if you’re over 18 or 19, then you go into this kind of separate [inaudible:00:16:48] you’re in school.

[16:48.14] You’re still considered a qualified child or qualified relative depending on the circumstances there. But yeah 20 years old in college you’re likely paying more than half of the support. That’s going to qualify him as a dependent for sure. Yes, more than half the support test is really, it’s not an income test there again. I’ve just confused myself. He may have a filing requirement right for a tax return. But that doesn’t mean you can’t claim it for a dependent.

[17:13.66] Eliot: Yeah,  for this qualifying relative. First of all, it just has to be a relationship. It needs to be one of your kids. We got that box checked. It actually could be broader than that. Could be for a brother or sister.

[17:26.02] Barley: It’s pretty broad too, isn’t it? It could even be someone not related to you. It could be if it’s a foster child or something of nature. As long as we meet that, that’s one of about five different things the age again. We talked about 18 is exactly as Barley pointed out, here we got a 20 year old. But if they’re spending over five months a year as a full-time student in college.

[17:47.66] Indeed if they’re living at home or away that time away. All that counts to basically you’re supporting their living exactly. We get that or excuse me, the residency test. Then the support is that you’re providing over one half of their basic needs for food, lodging, education things of that nature. All those things as long as you’re doing that. The fact that they’re earning income might be a consideration.

[18:12.80] But we just as long as you’re providing more than half the support as far as the dollar amount here. Then we’re good to go and that’s fine. It can still be a dependent. Even with that earned income, we talk about that all the time. That earned income could go to school. It could go to an HSA, it could go to a roth account or something of that nature. A lot of options when our children start having earned income that we could take advantage of.

[18:36.38] Barley: Right and depending on what he’s doing in school. Maybe put him on payroll in your company, he’s doing accounting or marketing or whatever the case may be there. 

[18:45.18] Eliot: Yeah. Well, let’s explore that. What’s that look like?

[18:47.98] Barley: If he’s in college and you hire him to do your bookkeeping you can basically get reimbursed in full for accounting classes or you know similar marketing finance. Whatever the case is has to be related to the business and related to his job function there. Especially if you have a C corporation, for example, education is real flexible there. We can even have potentially new lines of education. But what we’re focused on here is again most common is going to be social media marketing kind of advertising and marketing that category.

[19:19.26] If they’re taking marketing classes and doing marketing for you, you can deduct those classes. That’s a deduction to your business. That’s a great way to go and building off what we’re just talking about here. If you pay them out of your really high tax bracket down to their effectively zero tax bracket. And then have them pay for school out of those funds. That’s just some good tax planning there right would get a lot of bang for the buck especially with the cost of school and all that kind of stuff.

[19:45.74] Eliot: Exactly, right. That would be with a C corporation. We can’t necessarily do that with other types of business structures. But as Barley’s pointing out, if your child is already engaged in some type of activity with the business and continuing their education. Enhancing their skill set through their college courses. Well, then yeah, you can get reimbursed.

[20:04.94] The C corporation can reimburse and take that as a deduction, very powerful play there for our children. Who are going off to school and things like that. The one thing it doesn’t work for it can’t be for something that where they are required to have a degree. In other words, the child’s now going to law school and I hired him on as internal, as in-house counsel or something like that.

[20:26.70] Well, that doesn’t work because he’s practicing now without a license. If he hasn’t completed law school, so you’re not able to do those type of reimbursements for that type of education or medical or you could still do accounting because you don’t necessarily have to be a CPA or be a lighting thing. Just want to be careful in some of those other areas like that, right?

[20:49.74] Barley: Keep moving. What are the tax ramifications of my brother and I inheriting my mom’s home via, this is called a ladybird deed. What do you mention? There’s maybe five or six states with these not super common. But that’s another reason Eliot picks these it’s like well, we got to go over something a little different an enhanced life estate i.e. Ladybird deed. I know we’re not taxed in this way.

[21:10.86] It’s an inheritance, what we would expect not to be taxed there. But what if we don’t sell right away and decide to keep it and either use it for ourselves or rent it out? How are we taxed if we choose to keep it in one or both of those ways? That’s a great question. We’re going back to of course when we’re talking about an inheritance typically not taxed. Actually, let’s hop into the deed part. 

[21:30.86] Eliot: What is the Ladybird deed? It is something kind of unique. There’s only five states that have it, Texas, West Virginia, Michigan, Vermont and I know I’m missing one here Florida. Those are the five that have it. Even within those five states, they don’t all treat it the same way. It’s unique. We typically hear it from our clients in Texas. 

[21:52.94] And so we do hear quite a bit about it only from Texas. I don’t hear from it a lot in these other states. But what it is, it’s think of a life estate and what a life estate is simply. You are able to use a certain property, this house, this mother in this case, gets to use a home. In case of a life estate, you’re not allowed to sell or take on debt or do anything to really harm the property without the consent of the future beneficiaries. 

[22:19.26] The mom can live in this house until the end of her life and then it goes immediately it passes on to the children. That’s what happens in a life estate. But you can’t do anything to that house without the consent of the beneficiaries. Which in this case would be the two siblings here who are going to inherit from their mom. But the Ladybird is as it points out here an enhanced 

life estate meaning we got something special about it. 

[22:42.30] What this allows us to do, it allows the mom, she could sell the house, she could encumber it with debt, take on a mortgage or something like that or do really whatever she wants. She’s allowed to do that. If she sells it does she owe anything to her children who are supposed to be beneficiaries? No, not at all. She’s allowed to do that.

[23:01.18] But presuming that the mother carries on through the rest of her life with this house and it does get left to the two siblings. As we’re mentioning here, just as you pointed out. It’s an inheritance. It’s not a gift. That’s an important distinction a lot of court cases back in the day when these first came out. To determine that and the fact that it’s an inheritance means it gets that thing. We always talk about stepped-up basis. 

[23:22.86] We get the fair market value the children receive at the fair market value at the time of death upon receiving it. As our questioner points out here. They could go ahead and sell right then and not recognize any tax because if the fair market value is $100. They just got stepped up basis to fair market value of a hundred dollars. Well, a hundred minus a hundred is zero.

[23:44.22] So no taxable gain. But what if they don’t decide to sell it right away and they want to go ahead and rent it out? We talk a lot about rents, you’re going to have to determine what the basis is, which is the fair market value at the time they inherit it.

[23:58.14] Barley: Easy to determine that.

[23:59.00]  Eliot: Exactly one of the easier calculations. We want to subtract up the land. We never depreciate land. Then you would just simply go ahead and rent it out. Take income in subtract your expenses from operations and depreciation. That’s how it’s going to report on their return in this case would probably be a partnership between the two siblings. When we get 50 percent the other half of this activity on their return.

[24:23.66] What if they decide to stay in it themselves? Same story, if they own 50% of it. They could use it as their personal residence if they both want to live in it, that’s fine. They could and they could qualify for later on if it’s a personal residence and they sell it for 121 treatment. That’s an exemption on the sale up to a quarter million single, 500,000 married filing joint on the sale of the property. So a lot of opportunities here. 

[24:47.26] However, if they do live in it. They stay there over the greater of 10 days or excuse me 14 days or 10% of fair market rental days. They live in it and they decide to rent as well. They are going to be limited just like the vacation home rental rules where they can only take deductions up to the amount of rental income they have so that would be one thing if they have it kind of or if they have it as a vacation home something like that. 

[25:10.94] But really all this effectively the fact that there’s a ladybird trust going on here. We can really just kind of throw that out, they basically have a house and they can use it as a rental. We just went through all those rules and they can use it as a personal residence or that could be a vacation home and how it gets treated. It’s just like any other property out there. There’s nothing special really because a ladybird trust is involved here or detrust is involved here. We just treat it like a run-of-the-mill property.

[25:38.38] Barley: Excellent. Yeah, what alternative valuation date be something we’d want to discuss here.

[25:44.30] Eliot: You can whenever you have inheritance you can typically pick a date. The date of death or six months down the road. Why would that matter? Well think of stocks, you know, it’s six months a lot can happen in the stock market. I know lots happen to mine. All taken a good old dive into the pool. Certainly that’s one aspect. You probably want to go ahead and take the fair market value at the time of death.

[26:07.90] You do have to make that election and as I recall it is across all the assets of the estate if you’re an inherent in. As I recall it, I could be wrong on that. But I think it’s all or nothing if you’re going to take the date of death or six months down the line. But if you knew that some stock was maybe going to take off that could be a play somehow. But here in the house probably not going to see a whole lot of you know movement in six months

[26:28.70] Barley: Yeah for you guys once you inherit it, do whatever you want with it. Yeah, yeah, basically personal business use whatever the case.

[26:35.26] Eliot: You got a lot of options here. You’re in very good shape as long as mom doesn’t want to sell it. Because she has that right because it is this ladybird trust which makes things a little bit different than your life estate.

[26:50.06] Barley: Keep it going. My husband and I both have W-2 jobs. We have both long-term and short-term rentals. I manage the short-term rentals. Does it make sense that I open an S corporation as a management company? Is there an additional advantage to employing my teenage kids to help manage properties? We just kind of started touching on that one

[27:07.10] They’re going to go more into that. Yeah, so we’re big fans of using a corporation for management purposes. The majority of our clients, of you guys are family held corporations. A huge amount of benefit here for just a number of different reasons. Does it make sense to open a corporation as a management company when we’re talking about rental properties? I look at this as a cash flow kind of decision. 

[27:30.46] When we have positive income, doesn’t have to be net income as long as the rental is up and running for producing gross revenue. We can move 10%, 15%, maybe of that over to a C corporation or S or C corporation to be used for tax-free reimbursements. Does it make sense that I open an S corporation? What do you like to see before? We make the commitment to actually incorporate another entity and incorporate another tax filing return. Is it a fine like a numbers decision for you more?

[27:59.18] Eliot: I think it’s always facts and certain circumstances. It’s always going to be that 90% of the time we’re going to have to look at the numbers. See what they have to tell us. I think that’s exactly right. I think in this situation we want to look at it because we do have long-term. We do have short-term. They both had jobs. We kind of want to address that, you know, well really what happens there? What is this long-term?

[28:17.34] Barley: Loaded fact battery. 

[28:19.58] Eliot: It is. Why do we care? Well long-term rental? It’s normally going to be passive in this circumstance. That’s kind of its natural state. If we were going to change it from passive and why do we care? Because if it has overall losses, we can only take those passive losses against other passive income, which if you have W-2, that’s not passive income.

[28:37.98] We get kind of stuck. However, if they go for real estate professional status. One of the over 750 hours. Maybe we want to write this one up because this is going to lead into our next question as well. If we have rep stats real estate professional status, we’re talking about long-term rentals. If one of the spouses has over 750 hours in real estate trades or businesses.

[29:01.50] It’s over 50 of their work week basically. And prong number three, first of all those two gets your rep status. But then also in prong number three if they materially participate in the management of their long-term rentals. Then that whole operation goes from passive into active and we’re going to see more here between this question and the next why we care about that. 

[29:25.58] But we got three things, 750 hours in real estate trader businesses. You’re spending over 50% of your work week in those trader businesses and you’re materially participating in each rental activity. Then we get rep status. Now it’s no longer passive, it’s active activity short-term rentals on the other hand.

[29:45.02] All you have to do is get material participation. It’s not rental activity. You don’t have to worry about this other garbage. All you have to do is, basically there’s seven different tests for material participation, the most common over 500 hours. More than anybody else in that short-term rental or excuse me over 500 hours or over 100 hours.

[30:03.74] And more than anybody else those are the two most common for material participation on your short-term rentals. Two different ways to go there with your short-term rental. Now with all that in mind if we step back here to the question, we now know what we have to do to turn this into active income.

[30:25.02] They are managing the short-term rentals. We state that here. Because you have the W-2 job, we probably won’t get that rep status. We were just talking about for the long term and the people submitting the question here probably understand that, that’s why they jump to. We manage our short-term rentals because it’s much easier to get that material participation under that in this scenario because they both do have W-2 jobs.

[30:49.34] They did the smart thing, went for the easy play or the easier play or where they can get that material participation and manage the short-term rentals. Now we go to, do I want to set up a management corporation? Well, maybe because, remember the reason they like the short-term rentals, because now it’s active if they’ve done something like Bonus depreciation creating lots of losses. Those losses will offset any income including their W-2 income on their return.

[31:15.66] But what if they set up a management corporation like Barley was talking about. They do all the management through that C corporation or S corporation. They’re going to have to pay a management fee. You mentioned 10% to 15% maybe, so if we already had a loss on our short-term rentals. Just imagine if we increase it by 10% to 15% as Barley’s proposing and you move that cash over into your S corporation.

[31:38.14] Now you just create more deduction on your 1040 i.e tax savings. You got that money in the corporation. A couple of shows we’ve talked about if you have money in an S corporation or C corporation. There’s ways you can get that out. I don’t know if anybody remembers or ever heard of them. 

[31:54.14] Barley: We talked about 280A here before this home office, any of that stuff?

[31:58.14] Eliot: All those good things that we talk about we can use to get that money out of that corporation, Augusta rule, Countable plan, all that good stuff. Does it make sense? I would argue that probably does even if it creates more of a loss because it’s just more tax savings that you get right back in your pocket. I think it’s a win-win. I think the other question we run into a lot. Well, you mentioned an S-corp.

[32:21.34] Barley and I are talking C corp a lot here. What’s the difference? I’m more partial to the c corporation? Why? Because it’s a completely separate taxpayer. It also offers one more of these benefits that we talk about besides the 280A and the accountable. What’s that third one? 

[32:38.98] Barley: Medical? Well, we talked about education already, but in addition medical a hundred percent of your medical vision and dental for you and your whole family.

[32:42.70] Eliot: Reimbursement for medical plants. Now if you had other employees and any other business that you had control over you’d have to extend it to them, too. So i’m assuming we probably don’t since we have W-2 jobs. But that is why I’d probably go with the C corporation over an S. 

[33:01.66] But an S would you know if you still move the money over and you get it back tax free? You’re going to come out ahead either way. Now what about paying the kids? Well now let’s say we have to pay, we have two kids. We pay them each, we can pay them up to $16100 in 2026. Two kids I’m just going to go with two here because it’s plural. That’s $32,200 that you could pay from the same short-term rental cranium an even bigger hole an even bigger loss.

[33:29.50] That’s going to save against your tax, your W-2 tax income, and you can pay them. I don’t care if you pay them from the LLC that holds it or the C corporation either way. But you’re going to get a tax benefit. One trick here though. We got to be careful. We can get too smart. Too crafty for our own good because if the children are working as employees on this short-term rental. That means they’re putting hours into it.

[33:55.10] Just remember when we started this discussion. We have to have material participation between the two spouses. We don’t get to use junior and juniorettes time towards our material participation if your kids almost become the enemy in this case. You have to work more than they do which was never a problem for my parents with me. They always work more than I did but. We still have to track their hours. Because if they work too much. More than the two spouses here then they have material participation not the spouses here. So something to be careful with. 

[34:28.78] Barley: The rep status one. This is an individual test only the taxpayer or spouse has to have the 750 plus hours. The material participation one here like I said those can be combined just spouse and spouse and taxpayer. Be careful with the kids. But just to let you know those those hours can be combined for the for material participation

[34:47.10] Eliot: Exactly, right. In the summation coming back to it. We both have jobs, both spouses have jobs. We’re probably not going to get that rep status for the long term. Sounds like they probably already know that. So they went to managing the short term rentals. Our questioner here says he or she manages it, the other spouse does not. But the hours could still count for the two of them towards that material participation.

[35:10.72] We like the idea of how the management corporation if there’s enough money. If it’s creating more of a loss so we get better tax deductions. Sure, because we know we’re going to get that money right back to us through the reimbursements and all those things, all those benefits we get as employees of our management corp. We probably recommend the C [inaudible:00:35:26].

[35:27.34] Okay, but either way you come out ahead more likely.  Is there any benefit to paying the kids? There is as long as they don’t work too much. Whenever you pay them make sure it’s reasonable you track their hours. But make sure you’re putting in more time than they are.

[35:41.90] Barley: Yeah, great benefits to employing the kids. We talked about a lot of them shifting income from your high tax bracket down to their low tax bracket. That’s certainly one of them. Then they have earned income,, contribute to a Roth IRA. Remember, if you just give them $16,000 that’s not earned income not eligible to go to a Roth IRA unless they have other forms of earned income. That’s important too, right?

[36:04.38] Then of course just the awareness the education right now that your teenage kid has a Roth IRA and they have this awareness of an investment account. They’re growing plus you’re putting them to work in your business operations and teaching them basic business literacy and stuff like that. That they just don’t seem to teach in public school anymore. Maybe I was just absent that day.

[36:24.38] I don’t know but great to teach our young people that right? I definitely don’t feel like I got a lot of that education as a kid. Although I had a great public school, great upbringing. Just like I remember we had home ec and balancing a checkbook. That was about it like how to be a good consumer was basically hard.

[36:39.82] Eliot: Yeah, I got sent out home ec one time for being too noisy. I was talking too much. But just to latch on to the previous question you noted this a little bit. We’re paying the kids and what if they are getting into that college age? If they’re doing the accounting now, if they’re doing the marketing right now for your corporation, for your business.  They go and they take those classes in college. Again, just pulling from what we’ve already learned earlier today. There’s a whole lot that we could take advantage of out of this fact pattern.

[37:09.42] Barley: Those are deductions to your company reimbursements. Tax free reimbursements to you, tax savings all over the place. That’s what we like. Guys just as a reminder, make sure you take advantage of the youtube stuff just. Kind of the idea with this company from the beginning was just give away as much of this stuff as it can on youtube obviously. We get into the weeds fast enough. We get into the calculations fast enough.

[37:32.30] We want to just build this broad education base. I feel like our partners do a great job of that. Take advantage of that a lot of good information on Toby and Clint’s page plus you can set up a strategy session too right now if you like.

[37:44.70] Eliot: Amanda’s videos.

[37:45.38] Barley: Yeah, just we got to get a channel for her, man. She’s got a bunch of content out as well. Set up a strategy session, you know a good time to do this after the deadline. That’s what this is for that six-month buffer. Go through your accounting, review your deductions, retirement plans, cost segregation studies. We have up to the extended filing deadline to file those for last year. Lots of benefits to extending, make sure you scan that code if you want to talk to any of our advisors.

[38:13.66] Eliot: We saw some of that in some of the other questions about the extension what the benefits of having done.

[38:18.62] Barley: Yeah got to do that. If you have a complex structure pretty much pretty much got to do that one. Alright, keeping it moving. What do we got next? 

[38:29.66] Eliot: This is really just growing off the previous question.We have a home management company this time. It’s a partnership, my spouse qualifies for rep status, what we talked about earlier. With no other job, could he have both? Could he actually get a job and still qualify for rep status? Look at that again a little bit deeper.

[38:46.62] Can you also elaborate on this? Under section 469, that’s the passive loss rules. Each rental property is treated as a separate activity. You must participate in the management of each separate rental property, not just your portfolio as a whole.

[39:04.70] Barley: Yeah, there’s always an exception right guys.

[39:08.70] Eliot: What we got going on here. First of all, we talked about the management corporation, the partnership. Well, that’s fun. You can use a partnership, but I’m going to really suggest you do the S or C corporation.What do you think? 

[39:23.18] Barley: Here’s how I phrase it, the guidance that we provide in order to get the benefits that we talk about here. You’re going to get through an S or C corporation, You may be able to technically do a 280A meeting in a partnership. You can’t pay yourself a wage. You’re not considered an employee. We’re big fans of using a corporation again a lot. Most of you guys are family held corporations. You can use a disregarded LLC or a partnership, but you just don’t get  half of the benefits, right?

[39:51.74] Eliot: You certainly won’t have a medical reimbursement plan if that comes into play. The C corporation it’s just a separate taxpayer meaning it doesn’t have anything to do with your 1040. That can be nice to have something out there that’s working for you that you don’t have to represent on your personal return or likewise your activity on your personal return.

[40:10.38] Doesn’t go on the C corporation. It’s really nice to have that break because you just never know where your investing is going to lead you. Often I think the C corporation is very very difficult to beat as a management company.

[40:23.70] Barley: As a tax planning tool. Like Eliot said, it’s legally a separate taxpayer. It’s a separate person. It’s not a human, but it’s a person. It has its own kind of rights and responsibilities and that’s how we get that benefit, legally isolate those funds and then we can use them for tax free reimbursements. Not saying you can’t do that with other entities. But you can really max out the benefits, all the benefits you hear about here through a C corporation.

[40:46.06] Eliot: This next part my spouse qualifies for real estate professional stats with no other job. But could he have both so we go back to our little checklist here, 750 hours over 50 of the work week. We don’t have that one on here but that’s the second part of rep status. This is what we’re getting at the heart of this question is, if the spouse gets a W-2 job, is he or she still putting over 50% towards the real estate as opposed to whatever this W-2 job is? It could be.

[41:19.66] And in fact, you’ve heard me say this many times, I tell the team this whole time. Ironically the one case that the IRS often uses to counter anybody’s claim when they do have a W-2 job and they’re trying to get rep status. They use a case of a gentleman who did just that. He was the pilot on a riverboat and he worked hard. He put his 40 hours within like three days of the week and then he took off and all he did was manage his rental properties.

[41:49.98] He had affidavits from all his employees and all the people, you know that living in his rentals backing up all his time that he put into it and he did indeed to the court’s satisfaction. Put more time into his rentals than he did on his regular W-2 job. We can’t tell you that it can’t be done. But we can tell you that the IRS is coming after you if you try. It’s very challenging. You have to have immaculate records and so most of the time it’s going to fail. But again, the court case that they always use is one where the guy actually won, right?

[42:21.10] Barley: We don’t want to have to go get affidavits from all our tenants. But it’s technically possible. The hard thing is this because it has to be more than 50% of your time in the year. If you’re working exactly half time at another job, I mean, you’re really right up against the line.

[42:38.54] You got to be really working every day putting hours into the real estate activity. I don’t like to see it because it’s a lot of work for you and if this gets jeopardized, I mean we’re talking hundreds of thousands of dollars of deductions potentially. We don’t want to mess with that, right? 

[42:54.22] Eliot: All the reason now they’re more excited to do it. Hundreds of thousands of dollars in deductions.

[42:59.98] Barley: Yeah, that’s the reason we’re talking about this and you know one one little mess up on that can potentially jeopardize the whole thing. That’s why we put up these just kind of guardrails of guidance. That sounds pretty cool. There’s other ways you can do this. But if we want to maximize the benefit and stay in the lands and sleep good at night. Follow it the way that our partners have been doing it and continue to do it.

[43:22.42] Eliot: Yeah, we’re going to strongly suggest that he doesn’t get that job. As we get back to the question here, so could he? He can but it’s questionable. Then the last part here under 469 each rental property is treated as a separate activity. You must materially participate in their management of each rental property is actually what it says. Not just the portfolio as a whole and we’re getting back here again.

[43:49.34] This is that third part, the material participation at the bottom where you have to actually do. The management yourself, you and your spouse, you can actually use your spouse’s hours for this.  And you have to materially participate over 500 hours or over 100 hours and more than anybody else in each rental property. That’s the critical jux of this what’s going on in this question. Now that might work just fine if we only have two or three properties. 

[44:17.58] Maybe put 300 hours and not maybe too strenuous to do, that kind of work with a long-term rental. But what if you have 20? And you’re going to put over 100 hours or more than anybody else in each of those. Now you’re at 2000 it gets really difficult, especially if you’re going to try and have another job, too.  Getting back to the beginning of this question or towards the beginning. 

[44:36.30] It becomes really impossible almost mathematically to make this happen. What the code does provide is, you can make what’s called an aggregation election. That pulls in all and we mean all of your rental activity into one big bundle. It glues it all together and as long as you make material participation, 10 hours on this property, 10 on another and you get over the hundred hours. Again, you’re still making 750 hours in any other real estate trader business.

[45:06.06] It’s over 50% of your work week. And then you make this aggregation to get the third prong. But you’re materially participating in each rental activity managing it. Then all of a sudden you just have to meet that status once under aggregation becomes much more easier to accomplish. Yes, you can get that rep status with all those different properties. That’s what that section is referring to, that quote in there.

[45:33.18] It’s saying that if you don’t aggregate because they’re not talking about aggregation in the actual part here. Just says each rental activity. You have to put 100 hours into all 20 properties. But if you do aggregate, close it all together. Just have to meet it once that material participation makes it a lot easier.

[45:51.66] Barley: I liken this to a franchise, we have a burger stand on the corner. Material participation or we have a franchise like Mcdonald’s right you have to a hundred stores. Whenever you work at one rental you’re working on all of them, that’s kind of how it’s one way to think about it. I put 10 hours into rental one, I put 10 hours towards material participation into my aggregated pool of rentals. 

[46:13.50] Obviously much easier to meet that test. We threw this term out even though you didn’t bring it up, aggregation there. There are some you got to make sure to check and make sure you don’t have a lot of passive losses that could get trapped potentially. Set up a session tack to your tax advisor about it. It can be a great election, just got to double check a couple things before you do that. Many of you with real estate professional status are just kind of going to automatically default to this status if you’ve got more than a certain number of properties. 

[46:22.26] Eliot: If we really want to shake it up and confuse them. We have something else besides aggregation we often get this well, what’s the difference between aggregation and grouping? Grouping is, it’s a close cousin. But we’re talking about things that are not real estate.  We’re talking about you have a laundromat and you have a bakery in Philly and then you have a laundromat and a bakery down in Baltimore.

[47:12.78] You could group the two bakeries together in one business for material participation purposes or the two. The only laundromats together or you could group by location the two in Philly, the two in Baltimore. Which is actually pretty much what the example is that the IRS gives on this topic. 

[47:30.86] That’s a similar concept, but we get asked a lot.  Grouping is not the same thing as aggregation aggregation is for your rentals when we’re trying to get rep status. We’re trying to bring them all in. Grouping is when we have other businesses that aren’t rental activity. Just to clear that up.

[47:47.14] Barley: Car washing, the gas station. You got a good example.

[47:51.26] Eliot: A little bit different rules. This aggregation by the way, you do have to make a formal statement on your return. There’s language that goes on there. You want to work with somebody who understands this on your return so you can make that election. But once you make it, you’re stuck with it. Okay, there’s no one doing it. Until you sell basically all your properties.

[48:13.42] Barley: That was a great one. We could have even gone and more on that. 

[48:17.34] Eliot: I got a feeling out there. They’re getting tired of hearing about that though.

[48:19.66] Barley: That’s enough. Thank you. Let’s see. What do we got next? I have a single family home rental depreciation was not taken on previous tax returns. How do I go back and calculate depreciation?  Ooh, nice little opportunity for the whiteboard. Not taking on previous tax returns. First of all, we can catch up depreciation. We talked about this earlier, Form 3115 change in accounting method. Why are we talking about cash to accrual? It’s very similar.

[48:44.38] All we’re doing is changing an accounting method. Ironically, we’re correcting the accounting method when we do a catch up, depreciation catch up. Where are we at? I think single family home rental depreciation was not taken on previous tax returns. 

[49:00.06] Eliot: I think the first question I really want to address here and get out this information, this education out. What if we didn’t take the depreciation? Why do we care? Well, obviously because we didn’t get the deduction. Some preparers out there and we have a lot of clients who come to us and say well, my preparer didn’t take depreciation because it didn’t seem like it was going to work tax-wise, I’d heard about depreciation recapture and so they thought they thought it would be better for me if I didn’t take the depreciation.

[49:27.18] The problem is, when you later sell that business and someday it’s going to get sold. The IRS will treat it as if you did take all that depreciation and yet you didn’t get the benefit of it. We want to capture that depreciation, make sure we’re taking it. Yes, we can go back and speed up and catch it all up to this year. We do have to do a form 3115. How are we going to calculate that amount? What we’re going to look at?

[49:53.66] Our original purchase price minus land, plus any improvements. That’s going to give us our adjusted basis and that’s what we depreciate from 27 and a half year or 39 depending on if it’s single family rental or if it’s commercial, commercial would be 39. That’s just the straight line depreciation we would just simply go back to when we originally put this into service.

[50:18.06] Maybe it was 10 years and maybe it’s a short term rental, 27 and a half and let’s just say the total if we added up for 10 years was, I don’t know, 27500 or something like that. You would take all that depreciation, capture it on that 3115 form, get it all caught up. Then going forward you would just start doing it regularly starting with year 11 like nothing had gone wrong. And you’ll be all caught up. Now you got all the depreciation caught up and you’re good to go. 

[50:47.50] Could you go back and do a cost segregation? What’s a cost segregation? Well, that’s where we go in and look at the building. We have a special study done. We see that that building has lots of different as five year, property 15 year property. Indeed some of it is 27 and a half of your walls, and your floors, and things like that, the roof or something of that nature.

[51:07.02] It just speeds up our depreciation for at least that five year and 15 year property because it’s getting deduct over five years or 15 instead of 27 and a half just happens faster.  Depending on when you purchase this building, put it into service. You may even get a latch on bonus depreciation, which potentially could give you a hundred percent of that five or 15 That’s still left immediate deduction. So this is really explosive stuff as far as good deductions, something worth looking into.

[51:34.94] Now getting back to just looking at the question here again single family rental. That’s why we know 27 and a half years depreciation not taken. We now know we can go back and get that. How do we go back and calculate? Exactly right here. This is the what we’ll go through to calculate it and then we’ll just talk into someone who understands this type of stuff. Your tax preparer tax advisor determine, if maybe some other place such as a cost segregation might be worthwhile. That’s how we would do it.

[52:06.46] Barley: Final step of the calculation here at the very bottom there. Purchase price minus land plus capital improvements is our depreciable basis, divided by the service life is our annual depreciation amount. Annual depreciation times number of years and services are accumulated depreciation.

[52:22.22] Adjusted basis then we take out our, subtract our accumulated depreciation out we have our basically our adjusted basis. Why is that important? Because that’s how much we’re going to subtract from the sales price to determine our gain. There’s going to be a portion of depreciation recapture there and some ordinary gain as well.

[52:37.18] But that’s why we care about going back to calculating depreciation, really not too hard of a formula. Then we just use the current 3115 form in the current year don’t have to go back and amend, that’s the key. We already mentioned that but that’s a nice part about it. One form and you’re all caught up. 

[52:57.18] Eliot: Just keeps building and building upon each other. 

[53:01.10] Barley: If you want to touch on there. How do I report the mortgage payment paid to me from my owner finance note?

[53:07.66] Eliot: We hear a lot about owner finance and all these different types of financing. What’s going on with owner finance? Well, it is as it says, it’s really that the seller is acting as the lender? Barley has a rental property I’m interested in purchasing it from him. I can’t get financed by a bank. They know me too. Well, so Barley says well, I’ll help you out. Eliot, just pay me.

[53:33.10] Basically he is the bank, he’s the owner, he’s selling it, and he’s financing it. I’m paying him. It’s really no different. He’s just the same as any mortgage company at this moment. Every check I give him has a component of three parts. It’s going to have interest, we got to have interest on it. He’s definitely going to want interest for me.

[53:53.18] It’s going to have to have a gain component, if he’s selling it at a gain and it’s going to have to have the principle itself which is just him getting back his basis, which was the equation we were just looking at on the previous question. How do we report all this payment coming in for Barley? Well again, he’s the one financing it each payment that he receives from it. We’re going to break it into those components.

[54:16.70] The interest you take the interest rate times the loan balance. That’s pretty simple. That’s how we get our interest amount and then as far as the reporting of that it’s going to get reported on 1098 to me, showing that he received interest from me. It’s going to get reported to the IRS, showing how much interest he received over the year 1098. And then as far as the actual sales itself, the gain, we’re going to have to go through a gross profit percentage.

[54:44.70] Let’s say that he sold for a hundred thousand dollars. His basis was $60,000. He had $40,000 of profit, 40 divided by a hundred that’s going to be a 40% profit margin. That means forty percent of the basis amount you take away the interest right every payment 40% of it’s going to be gained. He’s going to report that on his return on the form 6252. That’s an installment sell because he’s getting these over time and he’s going to show his gain there.

[55:13.98] And the rest is just return of his basis. No tax impact there. Again, it’s just like any other mortgage payment or when you buy any building from someone that someone’s collecting the interest. They’re getting a portion of capital gain and they’re getting a return on their basis.

[55:29.26] It’s just that barley’s doing it himself as the lender. He incorporates all this into that 10 98 for the mortgage interest amount to show that IRS. I received interest. Then he files a 6252 showing how much the gain calculation, how much is that capital gain. He doesn’t have to recognize it all at once. He just gets a little bit of gain for each paycheck makes it a lot easier.  That’s how you would go ahead and report this. 

[55:55.42] Barley: Just throwing out some additional information here guys if this is a related party transaction, that changes. You can still use an installment sale, still have this set up the same way. We just can’t get a tax benefit from it. We have to report the full taxable gain and pay tax on that in the year up front. 

[56:12.78] Remember a related party can be family member. It can also be like a business partner. The IRS, this is independence rules. We’re talking about here. Conflict and independence rules are at least similar. It’s kind of broad. You can have a business partner that can be related party as well. Just to let you know because that comes up a lot of selling to a friend or family or something.

[56:32.22] All that might be the financer. We got to be careful if that’s a related party transaction. We’re limited there. But very common especially as interest rates were going way up. We saw a lot of these installment sales. Why not make your own money, right? What do we got next here?

[56:48.14] Eliot: Can you write off expenses and maintenance costs for rentals that are not producing any income due to disrepair? It’s kind of an interesting

[56:55.54] Barley it kind of depends why right? 

[56:59.34] Eliot: But why is it in disrepair? How in disrepair and what is the actual activity? Those are all kind of things we’re going to look at. First of all, if it’s still available for rent. It’s my old place and nobody wants to get near it. There’s rats running around and the cockroaches not paying rent and things like that. Nobody wants to stay there, but I have it available for rent if anyone wants to you know.

[57:21.66] Well, then I can, yes, I can still deduct the cost. Maybe there never will be a renter. No one’s going to take it but I will be able to deduct my expenses and maintenance costs in that point. What if it’s temporarily I take it out of service figure? Well, you know what? Maybe there is a problem with it. I pull it out and I do some repairs. Things like that just temporarily and then I put it back out there in the market.

[57:46.94] Well, then during that interim period where I took it off the market just to make quick repairs. The IRS will go ahead and give us the benefit and say yeah, I can still deduct those costs that are incurring the regular expenses and maintenance and things like that. No problem there. But what if I say this thing is just not going anywhere?

[58:04.86] No one’s renting it. I take it off and I say now it’s available for sale. I’m going to sell it. Can we deduct anything there? Yes, we can as far as ordinary maintenance. But because it’s not in service, I can’t take any depreciation. We just talked about that, a couple questions. Wouldn’t be able to do that because I’m no longer using it really in a business. But the regular expenses to keep it running.

[58:26.78] Barley: Property taxes, interest. 

[58:28.78] Eliot: Yeah, we can go ahead and deduct that. If I’m not really renting because it’s not going to happen at all. It’s not available for sale or anything like that. It’s just kind of sitting there.  Then I can’t really deduct anything, other maybe property taxes because it’s still personal property tax to me at that moment if I’m itemizing on a schedule A something of that nature. But almost repairs and expenses, yes, can you write them off?

[58:50.94] You can take them but then we get into the difference between a repair and what’s a capital improvement? We talked about that. What are you looking at when you think of a difference between a repair deduction and a capital improvement?

[59:02.94] Barley: I like to use the kind of structural analysis. Like a roof, if you patch the roof, if you repair a portion of the roof.  That would be deductible in the immediate period, replace the whole roof. What you’re doing is improving the asset and extending the life of the asset. Those are the buzzwords the IRS has. If we put on a new roof, we’re making the house last longer.

[59:22.78] Whereas if we just patch a hole in the roof, maybe not necessarily. Same with windows, you fix a broken window, that’s a repair.  The house isn’t worth more because you fixed the window. If you replace all the windows now the asset is improved. You’re going to have longer life assets, you know assumedly. This is the language the IRS uses those would be capital improvements. Kind of on a case by case basis. A lot of capital improvements can still be written off completely in the current period using a de minimis safe harbor.  But that’s where we’d start that decision tree there.

[59:52.30] Eliot: Just call the question. Can you write off expenses and maintenance costs? Yeah pretty much even though it’s not making any income that just means it’s going to be a loss. That gets into a whole nother fiasco.

[60:03.66] Barley: We got our next conversation to go into which is essentially, the passive versus active. You buy a rental and I mean sometimes you got to put a lot of money into it fix it up that’s totally expected. What we’re really wondering is, can you write off the expenses? Of course if they’re related to your business. Yes, you can take those deductions. How are those losses going to be treated?

[60:23.26] Are those active losses or passive losses? Is really going to be one of the big questions there. But you know Eliot just right out the gate. That’s a really good point if it’s not producing any income and I don’t plan on putting this into service anymore. We got to think about it a different way. If I have a path to profitability, think I can get this back on the market.

[60:41.10] Just got to make some repairs to it. That’s very very common in our world, right? Just track your capital improvements, add them to the basis of the property. No big deal, you’re going to need to determine that whether you’re in service or not. That’s going to have some factor there. But no no issue there if you have expenses and related maintenance costs related to the rentals are certainly deductible.

[61:01.34] Yeah, that’s fine with me, passive or active, that you’d want to look at that before you  put a bunch of money into fixing it. Any losses would likely be considered passive. It’s if it’s a long-term rental and you don’t have real estate professional status just FYI there. I think that’s about it for that one. That’s it. Yeah, good work. Well guys, we came to the we got right at the hour mark here. Make sure you sign up for the Youtube pages. Any questions, or events, or any current things. We want to talk about there before we let everybody get back to their day.

[61:31.18] Eliot: Yeah, we just want to thank our team. Again, Patty, Dutch, Harry, Jeffrey, Rachel, Tanya all out there answering all your questions. We got our techies in the back always making it all happen. 

[61:42.70] Barley: Handling biz back there. Appreciate you guys. Thank you. 

[61:43.70] Eliot: This is Jacob’s first. 

[61:47.42] Barley: Yeah, right. Welcome to the team. We got a great team here. Structure business for state. Oh, yeah, this is Phoenix, coming up. This is going to be a good time to be in Phoenix. Don’t go in August but end of May might still be okay. 

[61:58.46] Eliot: Doubtful, it’s going to get hot. 

[62:00.46] Barley: A couple more resources there, schedule a free strategy session get the ball rolling there. Love to just kind of get you guys on board with any questions you have to get started. And of course, we would love to have you become a tax client specializing the legal services also. But Eliot and I are obviously on the tax side here.  We’re going to do this again. We are in two weeks.

[62:20.54] Amanda will be back here with Eliot. Please email your questions in taxtuesday@andersonadvisors love to hear from you all. Your different questions helps us. I love reading through your questions because it helps me just really keep an idea of what you guys are. What’s important to you, what you guys are thinking about?

[62:34.62] A lot of similar questions when they come in it’s kind of interesting. So email your questions in. Of course visit the website for more information. Let us know if you have any questions. We’ll see you next time. Thanks guys.

[62:45.42] Outro