Welcome to Tax Tuesday. Anderson Advisors attorneys Toby Mathis, Esq., and Eliot Thomas, Esq., tackle various tax-related questions. Topics include retroactively claiming real estate deductions and depreciation, handling health insurance premiums for an S-corp, understanding the rules around setting up a trading account under an S-corp, and how to qualify for Real Estate Professional (REP) status while working a W2 job. The attorneys also discuss deadlines for S-election, converting properties for tax purposes, alternative methods for substantiating business expenses, and more. Tune in for valuable insights on managing your tax strategies effectively.
Send your tax questions to taxtuesday@andersonadvisors.com.
Highlights/Topics:
- “I need to retroactively claim my real estate deduction or depreciation for my 2022 and 2023 taxes. I actively manage my own rental and have over 700-plus hours per year for real estate management. How do I claim accelerated depreciation for the past years?” – Yes, you can go back and retroactively capture previous depreciation, including accelerated depreciation or bonus depreciation, you do it n the current year. It’s a form called 3115.
- “I didn’t have my health premiums added to my payroll statements for 2024. I have an S-corp and pay myself and another employee but wanted to deduct health insurance payments. Is there anything I can do at this point? Regarding asset protection, we have a rental property. We’d like to move this to a trust and then to an S-corp. Would that work?” – If the S-Corp it paying the premiums, on our 1040, we can make an adjustment on Schedule 1 for the insurance premiums because we’re considered sole proprietor.
- “I have seen some of your videos and had a question about setting up a trading account under an S-corporation. Is this correct? Can I pay my wife $15,000 from it and then match that amount toward a 401(k)? “My wife is a homemaker with low income. If we file just married filing jointly, are there any implications with this move? We are not traders but more investors.”- Typically no, we would put it into an S-Corp.
- “My employer recently went through a restructuring. They offered me one year’s pay as severance. My last paycheck will be January, 2026. I feel confident that I’ll be able to fulfill the REP status requirement for time spent on material real estate management activities in 2025. I will not make more money from my real estate investments as compared to my severance pay. Can I still qualify for the REP status? I used my solo 401(k) to invest in a real estate deal as a passive investor. The bank recently foreclosed the deal. It was a total loss. Is there any deduction that I can take for the loss?” – It’s a common misconception that you can’t get REP status with a W2. It’s about time, not how much you make.
- “When is the deadline to make an S-election for 2025? Can you switch back to sole proprietorship after you elect S-corp in the same year or future years? Do you have to run payroll as an S-corp LLC? What are good indicators or reasons to switch to an S-corp for taxation?” – there’s something called late election, very common, we do it all the time. The IRS is very good about allowing it. To be safe it should be done by March 15th.
- “I’m converting a barn on my property to an auxiliary dwelling unit for realm purposes. I also have a separate building on the property that I use as a shop office for my construction business. How do I treat these properties for liability and tax purposes?” – the ADU, the Auxiliary Drilling and Dwelling Unit, that’s going to be either a long-term rental or a short-term. You could use the shop office as an admin office. I’d wrap it in an LLC and strip the equity out.
- “My business doesn’t have traditional receipts for its expenses. We primarily rely on bank statements to track our spending. What supporting documentation would I need to provide to the IRS or my tax preparer substantiate these expenses and ensure accurate tax deductions? Are there any alternative methods to proving these expenses without traditional receipts?” – A bank statement, credit card statements, can be used, proof of payments, cancelled checks, etc.
- “My business partner and I co-bought a condo in New York City by paying $900,000. He put in $700,000 and own 75%, and I put in $300,000 and own 25%. I’m deeding my ownership to him for $0. What would be his cost basis for future resale?” – Basically this is a gifting, it wasn’t, they didn’t sell it. So for any amount, so you just carry over the basis. File a 709.
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Full Episode Transcript:
Toby: All right, everybody. Hopefully you guys are finding your way into tax Tuesday. If that’s what you were looking for, you’re in the right place. Let the room fill up. My name is Toby Mathis. I’m joined by…
Eliot: Eliot Thomas.
Toby: We are going to be your host today for another Tax Tuesday. We do this every other Tuesday, where we try to bring some tax knowledge to the masses. What’s good today? First off, let’s go over the rules. How many of you guys, this is your first Tax Tuesday, and you’ve never been on Tax Tuesday before? Give me a thumbs up or some emoji so I know it’s your first time. There’s some more. Fantastic.
If it’s your first time, welcome. We try to keep these fast and loose. Eliot’s really goofy. Me, I’m straight. I just play it straight, everything. All right, let’s talk about the rules since you’re here for the first time. What you don’t realize and what you don’t see is that I have a whole crew answering questions while we’re up here pontificating.
We have Troy, Jeffrey, Patty, Kenny, Jared, Ross, Dutch, Tanya, Rachel, Arash, Amanda, all answering questions. We’re talking tax attorneys, CPAs, accountants, et cetera, all here to answer your questions. All you got to do is go into the chat to ask a question. If you have a comment, like Sherry just said, hi Patty, put it in the chat. I don’t think you can see each other’s chat just because there’s always somebody who’s a Nigerian prince asking for money or an insurance person who thinks that Infinite banking is brand new. We just try to keep them off of you guys.
You can go into the Q&A though and have a nice conversation with a tax professional the rest of the time. You can put comments like shut up Toby, that always works. All right. Ask questions and the rest of the time, and Eliot gets these. If you email to taxtuesday@andersonadvisors.com, then we get your questions. We answer them, but we also sometimes take them and make them into questions that we’re going to go over today.
If you need a detailed response to a question, like it’s very fact specific to you, requires tax work, or additional effort other than general questions, then we’ll ask you to become a client, which you can either do platinum or become a tax client. Either one will get you there. We will answer your question in great detail, spending as much time as needed. The whole idea is to make this fast, fun, and educational. The whole idea is that you should enjoy learning about this topic because it’s going to put a lot of money in your pocket if you do. There’s a lot of fear built around it, and we’re just trying to dispel that.
Sometimes we seem pretty chill on things, it’s because it is pretty chill. Taxes aren’t, ah, this is it. There are some black and white things that you follow, but there’s also just a whole world of gray, where you’re doing the best you can off the interpretation of the laws that are given by the judges and by the regulations that are put forth by the treasury and by the guidance that we’re given. We try to do the very best we can with that and give you guys things that are in your favour as opposed to interpreting in the favour of the treasury.
Again, it’s all about keeping money in your pocket that ultimately is better for the government. Believe it or not, they actually make more money if you keep more money, which begs the question, why do we still have taxes? That’s for a topic for another day. Maybe we won’t. Maybe we’ll go all to tariffs, which is a tax, or we’ll go all to inflation, which is a tax. We’ll just keep doing what we’re doing, which is a combination of income taxes, payroll taxes, tariffs, which is 1.8% of the budget was collected via tariffs, if nobody knew that. Now you have useless data that you can throw in your head.
It’s not the big part. The big part is income taxes and payroll taxes, for sure, and then inflation, of course. The government either borrows money, bonds, or the print money, which is increasing the money supply. It gets us to the same place. Your US dollar becomes worth less, and that’s a tax. All right. Let’s go over the questions. Enough of that.
All right. “I need to retroactively claim my real estate deduction or depreciation for my 2022 and 2023 taxes. I actively manage my own rental and have over 700-plus hours per year for real estate management. How do I claim accelerated depreciation for the past years?” Interesting question. We’ll answer that.
“I didn’t have my health premiums added to my payroll statements for 2024. I have an S-corp and pay myself and another employee but wanted to deduct health insurance payments. Is there anything I can do at this point? Regarding asset protection, we have a rental property. We’d like to move this to a trust and then to an S-corp. Would that work?” Interesting questions we have. We’ll answer those, we’ll get to them.
“I have seen some of your videos and had a question about setting up a trading account under an S-corporation. Is this correct? Can I pay my wife $15,000 from it and then match that amount toward a 401(k)?” Match? Interesting.
“My wife is a homemaker with low income. If we file just married filing jointly, are there any implications with this move? We are not traders but more investors.” Interesting question. A bunch of issues in that one.
“My employer recently went through a restructuring. They offered me one year’s pay as severance. My last paycheck will be January, 2026. I feel confident that I’ll be able to fulfill the REP status requirement for time spent on material real estate management activities in 2025. I will not make more money from my real estate investments as compared to my severance pay. Can I still qualify for the REP status? I used my solo 401(k) to invest in a real estate deal as a passive investor. The bank recently foreclosed the deal. It was a total loss. Is there any deduction that I can take for the loss?” Again, interesting questions and we’ll go through them.
“When is the deadline to make an S-election for 2025? Can you switch back to sole proprietorship after you elect S-corp in the same year or future years? Do you have to run payroll as an S-corp LLC? What are good indicators or reasons to switch to an S-corp for taxation?” Great questions thus far, we’ll answer those.
“I’m converting a barn on my property to an auxiliary dwelling unit for realm purposes. I also have a separate building on the property that I use as a shop office for my construction business. How do I treat these properties for liability and tax purposes?” These are all good questions that we’ve gotten thus far. There’s a couple more.
“My business doesn’t have traditional receipts for its expenses. We primarily rely on bank statements to track our spending. What supporting documentation would I need to provide to the IRS or my tax preparer substantiate these expenses and ensure accurate tax deductions? Are there any alternative methods to proving these expenses without traditional receipts?” Eliot will probably go over that one.
“My business partner and I co-bought a condo in New York City by paying $900,000. He put in $700,000 and own 75%, and I put in $300,000 and own 25%. I’m deeding my ownership to him for $0. What would be his cost basis for future resale?” All right, great questions thus far. I can already see a bunch of people are in the question and answer, the Q&A.
Just as a reminder, you can ask questions in Q&A. We have a bunch of accountants and attorneys in there. Amanda, Arash, Rachel, Tanya, Ross, Dutch, Jared is in there. Let’s see. We got a bunch of others. Jeffrey, Troy, Kenny, I don’t think he’s going to answer your tax questions, and Patty are all there to help you in that Q&A section. You can absolutely go in there and ask questions. Just know that throughout this, you can do that. It doesn’t have to be about the topic that we’re hitting on. It can just be any question that you got and you’re like, oh, my gosh, I’ve always wanted to know, how do I accelerate my depreciation?
Also, you can always join my YouTube channel. My channel tends to be focused on tax and financial planning more than anything else. It does have a good dose of asset protection. It’s absolutely free. All you got to do is go to YouTube and type in my name. Also, Clint has a channel, and his is definitely more focused towards real estate investing and asset protection. Between the two of us, we should get you covered.
Of course, there are free events that we teach. It’s almost on a weekly basis. The only reason I say almost is because sometimes there are two. No, I’m just kidding. Sometimes we do the live ones, and it might be off by a week. Generally speaking, you could almost always get to a class on tax and asset protection where we’re teaching about land trust, LLCs, and corporations. Amanda teaches those. We have a whole a bunch of different folks.
Clint and I sometimes get on there and teach them, but Brent Nagy gets on there and Whitney Chafin gets on there. Just a really good group. Some of them are longtime clients that teach just because we actually like the idea that non attorneys are talking in straight language for other investors. Of course, you got a bunch of the tax people and the attorneys on there sometimes. Sometimes we have to be careful when you start using legalese, not always understandable.
Between us, we do a pretty good job of making sure you’re well versed on these topics, so you can take advantage of the rules that are out there so that you can minimize your tax, protect your assets, and create a legacy. That last one probably being the most important thing to me at this point. In my career, what I tend to work with clients on is really thinking out into the future, that 100-year plan, that 200-year plan of what your state looks like.
Before you say, but I’m not going to be around, you’re right. That’s why you need to document it to make sure that your state doesn’t get squandered, which it will statistically, pretty much inevitably within two generations if you don’t put a plan in place. We want to make sure that you don’t have what they call shirt sleeves to shirt sleeves in three generations. You don’t have your own version of that in your family. You create something that is lasting for many, many years.
How many of you guys want to create a legacy? Like, you want to create actual change in your family where you’re passing on your values and you’re passing on something that’s going to perpetuate itself over the years and actually have a major impact on your future generation? I see some hearts. Give me a thumbs up if that’s you, a heart, or a confetti. Not a cry emoji but anything else. There’s a bunch of you guys.
I agree, and I just think that a lot of times we have this weird mentality of die and distribute. Hey, I’m just going to leave it to my kids, and you’re not doing anybody any favors. Your kids might do okay with it. Statistically speaking, again, 50% of it gets burned away in the first few years just from frivolity or not understanding finances. We want to create something that keeps that from happening.
Somebody put in there the word legacy is lost meaning. I think of it as passing on your values, and I use an example during events. I’ll just use this as an opportunity to infect you guys with it.
I have clients that really believe in their heart of hearts that if you travel the world and you see other countries, it’s going to make you a better person. Their trust is all about making sure that their family members and their descendants can travel the world every year and go to a different country. That’s what their trust is all about. That’s what their legacy is. They fund it with life insurance and with their other assets.
Think about this. If you were their grandchild or great grandchild and you said, hey, there’s a trust and every year, two weeks, you can leave the United States and go visit another country, and the trust pays for this, here’s a little statement about why they think it’s important about going and seeing the world. That’s a pretty cool thing versus just, here’s $25,000. I’d rather have something that actually has an effect, and that is how you pass your values on as opposed to just giving somebody cash.
Cash. People can burn through that. They can make a mistake. They can get wrong spouse, broken picker. They keep picking the wrong spouse, go to Vegas, get into a car accident, make bad decisions, drugs and alcohol, whatever. You end up losing what you worked so hard to create. When we create a legacy, they can’t touch it. We’re putting it in an iron box that nobody can take. That’s going to be there for your legacy, whatever you decide it is. It’s actually pretty potent.
That’s not why you guys are here. You guys are here to talk about taxes for some reason. You guys are all sick in the head and you said, really what I’d like this afternoon is to talk about taxes, more taxes. Let’s get into this.
“I need to retroactively claim my real estate depreciation for my 2022 and 2023 taxes. I actively manage my own rental and have over 700-plus hours per year for real estate management. How do I claim accelerated depreciation for the past years?” Eliot.
Eliot: All right. First of all, this is something I would encourage everybody to look at their returns. Make sure they have been taking indeed depreciation for prior years. Sounds like we didn’t here, or at least we didn’t take enough. Yes, you can go back and retroactively capture previous depreciation, including accelerated depreciation or bonus depreciation, things of that nature.
Usually there’s a form though. You’re going to do it in the current year. It’s a form called 3115. There, we have an adjustment called 481A adjustment. We can capture previous bonus depreciation, things like that, or any missed depreciation and get that cut up in the current year. I’m not so sure if it would be all that effective to go back and amend. I’m not sure you could amend if we’re dealing with accelerated depreciation in prior years, but I certainly know you can do it in the current year, catch it back up with that 3115. Your tax preparer professional will know how to work that document and get it into your return.
I also picked this question here because we see here, Toby, they’re asking about managing their own rentals, have over 700 hours. It sounds like they’re getting into the world of real estate professional, maybe going on there. Just to lay it out there, why do we care one way or another? Normally rental activities, what we call passive, if we went out and got this depreciation, maybe it creates a loss, but if it’s in that normal realm of passive, it’s going to be a passive loss. You can’t use that passive loss against anything else but other passive income.
What one wants to do many times is they or their spouse will go for real estate professional status. That means you turn it in from passive to active or non passive. To get there, we have to have over 750 hours, not 700, at least 750. It has to be over 50% of your regular work week. That means if you have other jobs, you have to do more in real estate than the other jobs combined.
Lastly, you and your spouse can personally manage or materially participate in the management of your own personal rentals. That has different tests for it. Most common, over a hundred hours and more than anybody else. If we meet all that standard and we get the REP status, then yes, we can go back and claim these things and get these deductions.
You’re going to need to document those hours, keep a log. We have software out there, or not Anderson software, but there are providers out there with software that will help track those hours. All things that you’ll want to think about. The quick answer is yes, you can go back and capture that. Do need to do the form 3115? The impact of it will depend on whether or not we were real estate professional status.
Toby: Yeah. You just threw a ton at them, so I’m just going to pick little pieces. When you don’t claim depreciation, you should know this, I own a piece of property, and I don’t depreciate it, but it’s an investment property, I have to recapture the depreciation that I could have taken but didn’t when I sell. It’s a nasty surprise when somebody has that second house that they’re renting out, but they’re like, I’m not making any money. You may end up having to pay tax on that portion that you didn’t.
Yes, you can catch up any year. You can say, here’s the depreciation that I forgot to take, and I’m going to take it in this year. For our purposes, what would that be? 2024. We can take it, but now the question is, can I accelerate it? Can I change the way that I depreciate it from being 27½ years for residential or 39 years for non residential? Can I change that and write it off over 5, 7, 15, 27½, or 39 years?
The answer to that one is you can’t do that for 2022 or 2023 at all. You could do it for 2024, and you can make an election to do that at any time before you file your taxes plus extensions. October 15th, or if it’s in an entity like a partnership, then it would be September 15th. But you’re changing your accounting method. That’s the 3115 that you were talking about.
Now that we have depreciation, if it creates a loss, then we say, is that a passive loss or a non passive loss? If it’s from a real estate activity, the presumption is that it’s going to be passive. If it’s investment activity, long term rental, there are two exclusions. If you’re an active participant in real estate and you make less than $150,000 a year of adjusted gross income, then you could write off up to $25,000. It phases out between $100,000 and $150,000. $1 for every $2 above that amount. You get a $25,000 deduction. At $100,000 AGI, you get zero deduction if you go above $150,000. That’s exception one.
Exception two is what Eliot went over, which is the real estate professional status. Sometimes we say there’s a third one, which is it’s not actually investment activity. It’s short term rentals, in which case that’s treated as an ordinary business. Whatever the case you go through and you say depreciation first, am I going to accelerate that depreciation? You have to do what’s called a cost segregation study, I’ll say what percentage, and then you can see whether it makes sense.
Usually we do our business with cost seg authority. If you went to andersonadvisors.com/csa, maybe Patty has the link out there, they will do a free analysis to tell you whether it’s even worth it to consider. They look at your depreciation schedules in the property. They’ve done tens of thousands of studies, so they have a really good idea of what they’re doing. Then they say, here’s what the numbers would be, so you can see whether or not it makes sense.
For this particular individual, it would be paramount to figure out what amount of depreciation they can grab. How much would it be in this particular year, does it create a loss? If it doesn’t, then we don’t worry about real estate professional status. If it does create a loss, do we meet any of the exclusions? Is it actually in a passive real estate activity? That’s all we do. It sounds like a lot.
Eliot could do that in about two seconds. It’d be like, oh, this, that, that. You’re like, […]. That’s why you work with somebody who knows what they’re doing because they’re just going to say, here’s what’s relevant. Let’s not pay any attention to this yet. Let’s just look at A, B, C, in that order. A, what’s the depreciation? B, are we at a loss already? Should we accelerate the depreciation? Should we do a cost seg? Yes. C, does it create a loss? Do we want to use that loss against our other income? Okay, then here’s this. If A and B, we don’t even get past A, then we’re not worried about it, and then you don’t have to waste your energy. Really good question.
All right, “I didn’t have my health premiums added to my payroll statements for 2024. I have an S-corp and pay myself and another employee that wanted to deduct health insurance premiums. Is there anything I can do at this point?”
Eliot: All right. If the S-corporation pays for our health premiums, it needs to be part of our wages, our W-2 wages. We stack that on top of our regular payroll, which in an S-corp, we often have what’s called that reasonable wage, W-2 wage. We add that on top is normally what happens. That becomes a deduction to our S-corporation, salary paid to officers. It comes on to our personal 1040 as a W-2. We’re all used to our W-2s. Then on our 1040, we can make an adjustment on Schedule 1 for the insurance premiums because we’re considered sole proprietor in this situation.
That is something that we could do here if we forgot it, but the S-corp has been paying those premiums. In that case, if we’re in that scenario, then we can go back and we can amend the W-2s to a corrected W-2, then we would declare that on our 1040 again, and then we would take the adjustment for those health insurance premiums on our 1040. We should be good to go.
If the situation here is, well, no Eliot, it’s not that I forgot to put him on my W-2 as income, my S-corp just didn’t pay them, it never paid for my personal insurance premiums, then we got a problem because it never paid for them. We couldn’t do it that method of getting it. Maybe you have some other business perhaps on your return, maybe a Schedule C where you’re considered sole proprietorship, self-employed, and then you can do it that way if you personally paid for your premiums.
Toby: What if they just didn’t pay the premium?
Eliot: If you didn’t pay at all, then there’s no deduction for that.
Toby: You’re a cash basis taxpayer, you can’t write off what you didn’t.
Eliot: That’s correct, yeah.
Toby: If you did pay for it, you can’t deduct it on your W-2. It’s going to come through as an income item because you’re greater than a 2% shareholder. The employee would not have to pay tax on it, but you would, but then you get a deduction for the insurance premium that you paid on your 1040 as a self-employed individual. It might freak you out. You might be like, hey, I don’t get to write this off. You don’t get to write it off on the business, but you get to write it off on your individual.
Somebody says there’s a long queue for Q&A. Don’t worry. We’ll get through them. We got a whole team. We got Troy, Jeff, Patty, Kenny, Jared, Dutch, Tanya, Ross, Rachel, Arash, Amanda. We got a whole team. Josh, submit your question, please. We’ll make sure we get to it. You’ll actually get it answered 100%. These guys are beasts. They’re tearing through this.
Eliot: They’re almost up to a hundred. It’s 80 something right now.
Toby: Twenty is nothing. They’ll knock that out in a few minutes, so go ahead and post it, my friend. We’ll make sure we’ll get you. We always stay on until we answer all of our questions. That’s a secret. For people that stay to the end, some of you guys do, you know that we’ll sit there and we’re like, hey, we’ll keep it going. Even if I stop and Eliot and I disappear, we’ll say, don’t worry, we’re not going to stop until the last question’s answered.
This is for you guys. We really believe that. This is our giving back. We know it’s difficult out there to get a straight answer from anybody, let alone a tax professional. I sit next to this guy and I lose my mind. No, it’s great. These guys are pretty good. We just want to give you guys an outlet. I don’t know about you guys, but for me, I could never get an answer out of an account to save my life that I could actually use.
There was a great joke of a guy who was a balloon racer. He would get in those hot air balloons and race across the country. He got in a bunch of tornadoes hit and swung them all over the place. He didn’t know where the heck he was. He lowers down, there’s a field, and there’s a guy dressed in a blue blazer and a light blue shirt with a briefcase. He calls down to him and says, hey, down there, can you tell me where I’m at? The farm reaches up and says, you’re in a hot air balloon. The guy’s like, he must be an accountant. Accurate but useless.
Eliot: From Iowa.
Toby: Yeah. We love our accountants, all of our CAs. There’s a bunch of you guys out there. I know it. I’m no better.
All right. “Regarding asset protection, we have a rental property. We’d like to move this to a trust and then to an S-corp. Would this work?”
Eliot: This is an open-ended question, but when I see these, I see peril, I see danger coming, so I try and pick them. First of all, obviously we’re not here to talk so much about asset protection as much as we are a tax. If there’s one rule that we have in tax that doesn’t seem to change, it’s about the only thing in the code that doesn’t, you never put appreciable real estate into a corporation, S or C, LLC taxed as S or C. Any of the above, you don’t do that. That’s why I grabbed this.
Toby: Unless.
Eliot: Unless we’re flipping property, then all of a sudden, yeah, we absolutely move all those in there to flip. Why? Because we just have different treatment in the tax code between the two. A rental, you’re going to suffer far more tax consequences if you put a rental into a corporation, a long term hold like that. That’s why I picked it even though I was asked about asset protection because that is a very severe tax aspect to it.
Just know also, we hear a lot of people, you know, hey, I know I’m going to flip, so I’m going to put it in an S-corporation. I saw Toby’s video or what have you. Just remember when you do that though, you can’t do installments. That’s considered inventory, part of the big difference between why we do flips in an S-corp and why we don’t put long term holds in there. I just throw that out there as well because that always seems to be a second problem that we run into.
Toby: I would say there’s one other time that you have real estate in an S-corp. It doesn’t hurt you if you buy and sell in an S-corp. What hurts you is when you take it out to refinance it in an S-corp because it’s treated as wages. It’s literally like somebody just paid you in a house. You have the active tax on it. It’s horrible. It’s catastrophic, so you never want to do that.
If you own a house free and clear, and you’re never planning on re-filing it, we do this sometimes when somebody owns a home that they lived in it two of the last five years, they’re about to go past the three-year period, and they’re going to keep it as a rental. They want to take advantage of the 121 exclusion, the $500,000 capital gain exclusion, because it’s going to save them. I figure they’re in the top bracket, it’s going to save them 23.8% of $500,000, which would save a lot, whatever that amount is.
Eliot: Yeah, that’s over a hundred.
Toby: Yeah, a lot of money. It saves you a bunch. In that case, you’re like, okay. Just know that if you take it out, to refi it, you’re going to have a problem. We just keep it in the S-corp. You can depreciate the heck out of it again, because now it’s going to step up with the 121 exclusion. You do an installment sale, opt out of the installment sale method so that you can take all that $500,000 gain tax free. That’s the only other time we do it. S-corps are good for flips. S-corps are good when you need to rescue yourself and use your 121 exclusion. There’s a bunch of other questions, or do you type your questions in the Q&A?
If you’re moving that rental property, first off, they’re using a trust, I’m assuming it’s a land trust, and then you can point it to the appropriate entity. It may be just a regular old LLC, plain vanilla. It might be disregarded, but we’ll get you there.
“I have seen some of your videos and had a question about setting up a trading account on an S-corporation. Is this correct? Can I pay my wife $15,000 from it and then match that amount towards 401(k)? My wife is a homemaker with no income. If we file married filing jointly, are there any implications with this move? We are not traders, but more investors.” What do you think?
Eliot: I’m going to let Toby cover a lot of territory here, but I’m just going to give the brief outline here. Typically, no, we would not put our trading into an S-corporation. We put it into a trading partnership, a partnership where the brokerage account is owned by the partnership. You have a C-corporation in there owning a certain percentage, usually a smaller percentage, maybe 10%. It could be more.
You individually would own the other 90% or what have you. What that does is it starts to shift some income a little bit off your return. The corporation could be a member, a partner that’s doing some of the work overseeing, maybe managing the situation, so it can be paid an additional amount called a guaranteed payment. That adds a little more tax savings and puts a little more in the C-corp. Why do we like that? Because the C-corp has a lot of reimbursements and things that we can take advantage of to get that money back to you tax free.
Effectively, when it’s all said and done, we take a portion of that money that you made in your trades, maybe get it back in your pocket tax free when it’s all said and done. There’s a lot more to that. Again, I’ll let Toby handle that. If you get to the C-corp and you have a lot of money in there, now you could have your spouse paid as an employee, contribute to a solo 401(k). It certainly could set one of those up. We do it all the time, set a lot of solo 401(k)s up for these types of C-corporations, again, underneath that trading partnership. Yes, your spouse could do that. You could do that.
Married filing joint usually is the way you want to go if you’re married, so that’s not a problem. We run into that all the time, and it’s not an issue at all. As far as the traders and investors and all the other real details here, I’m going to let Toby handle it.
Toby: Yeah. Whenever we’re talking about trader status, I just want to be real clear with you guys about a couple of things. First off, trader status just means, at what point do you go from having 212, which is investing expenses, which are very limited? It’s just the interest on a margin account to section 162, ordinary necessary deductions, from a trade or business. They don’t define it anywhere or what it means to be a trader.
Since it’s not in the code and it’s not in the regs, then you have to go in front of judges. The courts have grabbed this and said, hey, here’s what you have to do. It’s frequent, regular, continuous. They interpret these things to be like 70% of the trading days, it needs to be your major source of income, and it’s pretty arduous. We try to avoid messing around with trader status by using the strategy that Eliot just put out, which is to use the partnership and a corp. You get around that because the corporation is just a management entity, which is forever.
You can always have a management entity, and it’s a trade or business by being a manager. The LLC or the LP taxes a partnership, either one works, is just a pass through entity. We’re not trying to make it a trader. The only expenses that are getting written off are through the corporation.
The question is, could you do your type of activity through the S-corp? I would say, it depends on whether you qualify as a trader. If you did, I’d say, let’s do it through an S-corp. But you don’t, so I won’t. I wouldn’t. I would not do that under your circumstances. I would do what Eliot laid out, and I would have it in a partnership with the corporation.
Once you get it there, and let’s say the corporation has 20% or 30% of whatever that is, and in your case let’s just say it makes $30,000, how do I get this into a solo? Can I do that? The answer is partially yes. Your wife actually has to do work for the business and document her time so that she qualifies for the compensation. You have to run it through payroll. If she’s taking $15,000, there are payroll taxes on it, old age, disability and survivors, and Medicare.
That would have to be paid, and then you defer it straight into a 401(k), so there’d be some tax. It’s going to be small. It’s going to be 7.65% for the business, 7.65% for the recipient. You’re losing about 15% of $15,000. That’s about $2000, and it goes in there.
Can the company contribute another $15,000 on her behalf? Technically, yes, but it could only deduct 25% of that amount. Twenty-five percent of $15,000 would be whatever that is, 3000, 3500, or whatever it is. I’ll get my calculator out. You could only deduct a portion of it, and the rest of it would be taxed at the corporate level, 21%. Now your wife has $30,000 sitting in an account, and you wrote off just under $20,000. That’s not too bad. Depending on what you guys do with it and what tax bracket you could be at, that would be a big win.
There’s no free lunch. You do have to do the payroll taxes. The employer does have to make the contribution up to the amount that she’s paid. Twenty-five percent of it would be deductible, and 75% would be taxable to her as wages. That’s it. You do that and you’re going to be doing all right.
Again, it’s just numbers. Is this worth it? Is it worth it to pay about $4000 of employment taxes and a little bit of about maybe $5000 in tax to get $30,000 into a retirement plan. Is it worth it? Yeah, probably. It’ll be just under $30,000 because of whatever your net is.
That’s how you look at it. I wish it wasn’t so flipping complicated. Until Congress writes a law on it, maybe they’ll do regs on it someday, otherwise, we have the courts as our guidance. It tends to be a battlefield, so we try to avoid the battlefield if we can. Anything I missed?
Eliot: No, I think we’re good.
Toby: All right. Let’s see. “My employer recently went through a restructuring. They offered me one year’s pay as severance. My last paycheck will be in January 2026. I feel confident that I’ll be able to fulfill the REP status requirements for time spent on material real estate management activities in 2025. I will not make more money from my real estate investments as compared to my severance pay. Can I still qualify for REP status? Eliot, what do you think?
Eliot: All right. Again, just a real quick go over REP status, real estate professional status, this is where we’re trying to turn our real estate activity from what is typically passive into non passive. We usually have a tax benefit behind all that. Three basic requirements, at least for REP status, there’s two. Over 750 hours in real estate trades or businesses that you materially participate in. Over 50% of your work week is in, again, real estate traders or businesses that you materially participate in that be opposed to other jobs. Here, if we’re not doing anything else, then we should be able to cover that.
You have to materially participate in the management of your rentals as well. Sounds like you think you’ll get that here, so we check that box. Good, we have it. Then we come down here and we say, well, we’re not making as much money from the real estate investment as how much we were getting paid in our severance, maybe what we’re going to call W-2 perhaps on our return in 2025. That doesn’t matter. It’s a very common thought that you have to make more money.
If you have any W-2 that you can’t get REP status, really what it comes down to is if you did anything, you’re going to track your hours, and you’re going to show that you did nothing to get that severance pay in 2025. It was all previous. That shouldn’t be too hard to document. It’s going to be meeting the other requirements of a real estate professional. How much you make is irrelevant. It’s all about time.
Toby: It is about time. I was sitting here looking at this going, okay, you’re getting a year severance, but you’re leaving now. My guess is that they’re not working. They spent time on our material real estate management activity. It sounds like the first step is, did you do 750 hours in that real estate management activity that you materially participated in? The next step will be, did you materially participate on your investment activities? If you did that, then you qualify for REP status, and you could use losses that you create.
That’s always the big factor. Can we create real estate losses? If we can’t, then don’t care. You don’t need to do REP status. If you can, then we want to see if we hit REP status. It looks like you probably would. My guess is that it sounds like it probably could, but is it worth it?
Eliot: If you do get that loss, yes, that will go against your severance pay that you’re claiming in 2025. It could work out really well.
Toby: Somebody asked a question in chat that I didn’t answer from before. There was the other one. There is the other exclusion exception to the passive activity loss rules, which is the active participation. If you have a husband and wife and they decide to file separately, it does lower the the phase out from $100,000 to $150,000. It cuts it in half, so it’ll be $60,000 to $75,000. That’s the only tip. Otherwise, for single versus married. No difference, weird if you did active participation.
In this particular case, if you created a loss and let’s say it’s $10,000, and you made $110,000, you don’t need to jump through the hoops on real estate professional. You would have $15,000 of loss. Basically you’d phase out $5000. I guess you’d have $20,000 that you could write off, $2 for every dollar over a hundred thousand dollars. If you were at $110,000, you’d phase out $5000 of the $25,000 of active loss. You’d be more than enough to write off that loss.
That’s why I would say, we go through steps to see whether or not it’s even worth jumping through those hoops, because you track your time all year and then you find out you don’t need it. You’re going to be a little ticked. You’re going to be like, I kept a log for what?
Eliot: I listened to Toby and Eliot about this for why?
Toby: Yup. That’s exactly right. We don’t want you to waste your time. Sometimes it’s as easy as saying, is it worth it? Are you ever going to be in the realm? If you’re in the realm, then maybe we track it.
All right, “I used my solo 401(k) to invest in a real estate deal as a passive investor. The bank recently foreclosed on the deal. It was a total loss. Is there any deduction that I can take for the loss?”
Eliot: Yeah, unfortunately, no. What’s going to happen? When we talk about a retirement plan and money goes out into an investment, that investment sold or pays some income or something, and it comes back into the plan. We have money going out, money coming in. If it goes out to an investment and it’s lost, that money doesn’t come back in. There’s nothing to write off. There’s no deduction in that nature. It’s not like in our personal world outside of a retirement plan. No, there’s no deduction. We simply have the drop in the value of our plan. Hopefully we’ll be able to get to see their investments.
Toby: I wonder because I don’t even think like if they stole it, I think you’re still toast because you took a deduction for it going in there in the first place. I think that’s where you’re at a problem. Even if it was like a Ponzi or something, that still has to be outside the plan. I think you’re toast. I hate to say that. On the good side, hopefully you have a whole bunch more that you’re making in there. Always sucks when real estate deals or whatever deals don’t go well. You have foreclosure. You were in the right entity if you had debt, which is you don’t want to be in IRA where you’re having a UBIT or UDFI because you had debt and then lose it that way too. It always sucks.
I mentioned this earlier, so I’m just going to mention it again. If you’d like to join us for any of our tax and asset protection events, we go over what are LLCs, how to use the anonymity shield, privacy trusts, land trusts, living trusts, tax planning, cost segregation, bonus depreciation. All those things we do in a one day setting. We also have our live three-day event coming up in March. It’s March 27th through the 29th. You see it down there in the lower corner, it says Tax and Asset Protection Workshop in Dallas, Texas. This is a live get together. These are actually really fun because we all get together and hang out for a few days.
It’s actually a total of four days. You could do three days for the tax and asset protection, and then we have a client appreciation event. If you’re a client of Anderson, you could join that, where we do a bunch of networking. That’s on Sunday. There’s actually up to four days. Reach out to us. We’ll tell you all about it if you want to learn more.
If you are brand spanking new, you’re not an Anderson client, and you want to come around the community, meet people, just see, like, is this person real, or is everybody real, what is the community like, it’s usually several hundred people and all investors. We all have a really good time. Texas is always a good time. Unless it’s 100 degrees and a hundred percent humidity, in which case then it can be miserable.
Eliot: Probably not in March, though.
Toby: Yeah, March is going to be good. I think we did it in June last year, and I think I walked outside the hotel. I may as well have taken a shower in the valet. I was like, holy crap, I walked like three blocks, and it looked like I just ran a marathon. That was nasty. I’m sure I smelled good, too.
Let’s see. On a retirement plan loss, is there a total loss if total that comes out of retirement plan is less than the amount put in? No. Robin, you got a deduction going in. If it was a Roth, you can always take out your contribution tax free. If this was a Roth, you put in $100,000, and now you’re only taking out $75,000, you wouldn’t have any tax. But if you put in a hundred, you got a deduction for $100,000, putting it into a traditional plan, and then you took anything out, it’s taxable. That’s why it sucks. But it’s less. Let’s say you lost. You put in $100,000 and you lost $25,000. $75,000 is all you’re paying tax on.
Eliot: That’s one way of looking at it.
Toby: Yeah, it still sucks. No getting around it. That would be a bitter pill to swallow. All right. “When is the deadline to make an S-election for 2025? Can you switch back to sole proprietorship after you elect S-corp in the same year and in future years? Do you have to run payroll as an S-corp LLC? What are good indicators or reasons to switch to an S-corp for taxation?”
Eliot: Clearly this is centered around the S-corporation. In order to make that election, we had to file a form 2553. It’s very common. The traditional rule, what it says in the paperwork there is that you have to have it filed by March 15th of the current tax year. If you open it up later on in the year, you have two months and 15 days, 15 days into the third month, which would be equivalent to March 15th if you start from the beginning of the year. That’s where typically the form is going to tell you.
However, there’s something called late election. Very common. We do it all the time. The IRS is very good about allowing it typically. You have to put additional language on and say, hey, I didn’t get it in by March 15th. I was a little bit late. Got it in and we have some reasons that we put on there.
You have to have special language in there, but usually the IRS is very open to accepting the late election. They don’t have to. You just have to be aware of that. The IRS could deny it. If we want to be safe, we want to do it by March 15th, or again, 15th day of the third month, if it’s another time during the year.
Once we do that, could you revoke? There’s a special procedure you have to go through to revoke. You have to have a letter sent to the IRS to a specific department, listing all these items that you are trying to revoke, et cetera. Could you do that in the same year? I’m not aware of anything that says you couldn’t.
Let’s just say we started out January 1st as an S-corp, made that election right away, and then at June 30th, we thought, hey, this isn’t for me and I want to revoke, I suppose you could. You would do a short return for that first six months on an S-corp return, which is an 1120-S. Then you would probably have a sole proprietorship for the end of the year. We don’t normally see that, and it sounds like a lot of work.
Toby: You have a five-year rule.
Eliot: Yeah. Once you revoke though, it’s going to be another five years. You have to wait until you elect the S-election again. It’s something that you don’t want to play around with. You don’t have to. You want to make your decision, stick with it. Do you have to run payroll? If you take a distribution, if you take money out of your S-corporation, then typically you will have a requirement to pay yourself what’s called a reasonable wage, i.e. payroll. Yes, we could. If we didn’t take the money out, then there is no requirement to pay that reasonable wage. That’s just something that’s more when we get into tax planning.
When do we decide to do an S Corporation? As Toby mentioned earlier, usually for a business, I’ll say this first, we have a rule of thumb. Maybe if you’re making $30,000 to $50,000 net, that might be a good time because we would start to save on employment tax, because that reasonable wage is going to be taxed with regular income tax and employment tax, but the rest of the money from your S-corporation, which we call distribution, it’s not subject to employment tax, so you might have a savings at $30,000 to $50,000 of net income if you do a little bit of reasonable wage and take the rest without being hit by that extra tax, 15.3 for the employee and the employer split between the two.
Toby mentioned another time where you might want an S-corporation. Maybe you’re selling your former residents that’s gone up in value to an S-corporation you’re going to turn it into a rental. That’s a little bit different. That would be a good reason, but unrelated to an operating business in the sense of what I’m talking about, where you normally have a trade or business outside of rental. Those are the ways we would look at this.
Toby: I guess what I would say to this person is if you’re on the line as to whether it be an S or a sole proprietorship is to wait, because you can easily make a late election before the end of the year, and then you can even make a late election after the end of the year if you needed to. There’s relief that gets granted. I can’t remember the last time it wasn’t granted.
Eliot: I tell clients this all the time. I’ve only seen it once that it didn’t get granted. I wouldn’t have granted it either. It was just a bad fact pattern. I won’t go into the details. They always have been very good at accepting it.
Toby: You’re going to get it. If this is, hey, I’m trying to figure out what I should do, just sit on your hands. Otherwise, it would be March 15th to make the election?
Eliot: Yes, correct.
Toby/: If you’re making over $30,000 a year, then I would say that there are two big reasons why you do the S-corp. (1) The profit that flows through doesn’t have the employment taxes. (2) Because you get an accountable plan. When you’re a sole proprietorship and you use one of these guys, these little phones, you can write off the business use, but you got to track the business use.
If you’re an S-corp, it can just reimburse me the entire amount, doesn’t have to worry about it, and that goes for computers and goes for having an administrative office in the home. I don’t have to use that silly home office form. I don’t have to do the form SE that you do as a sole proprietor. People don’t realize that you have these extra tax forms that you have to file, and that’s what causes you to get audited.
There are all these accountants are out there who are like, sole proprietorship doesn’t cause you to get audited more. I’ve never seen that. It’s not the sole proprietorship, guys. It’s the form SE, the 8879, and that you’re waving a flag saying, I’m pretending to be a business because I think I am. They take a look and they say, all right, let’s see what records you got. They win 95% of the time. They just nuke you.
Statistically speaking, if you’re making $100,000 a year, you’re going to get audited about 800% more often if you’re a sole proprietor. That’s just stats. It’s actually higher than that. It’s 800% to 1600% more. You’re going to lose those, be real with you guys, 94% of the time and 95% of the time, depending on whether it’s a correspondent or an in-person audit.
You get your butt handed to you. Why? Because you believe somehow, somebody told you that a sole proprietorship is just you. It’s not. You actually have to keep the same book and records as you would if you’re an S-corp. All that happens is that S-corp is giving you relief of about 15.3% on any amount that you’re receiving that’s in addition to a reasonable wage. That’s only if you take money out of it. If you leave all the money in the S-corp, you don’t even have to take a wage out.
If you’re just using it as, hey, I’m working my butt off, I’m doing a side gig, I’m saving my money, and I want to buy some equipment, I want to buy more inventory, or whatever, you don’t have to worry about taking payroll. You just don’t have to pay that 15.3%. What does that mean practically on $100,000? The actual math on it is about $14,100 per $100,000.
There’s a phase out. There’s all these nuances. Let’s just say you’re $100,000 and below, that’s an easy one. Let’s just say about 14% is what it’s going to save me. If you’re below $30,000, then I would say it’s a push because even though it might save you a little bit of money, it costs you money to do that extra return, which is really the same information that would be on your 1040 anyway.
We’re just putting it on 1120s, but all accountants charge extra for it. They’re never going to say, oh, this is your 1040. It’s not. It’s a separate return. They’re always going to charge you for that second return. There’s a little added cost, so you just want to make sure it balances out. It’s right around $25,000-$30,000, depends on your business. I hope that helps you.
There’s a question down in the chat on the 401(k) distributions as it relates to taxable events. This is for David and Dorothy. If you have a 401(k) and it owns a partnership interest in an LLC, it’s not a taxable event to you to have income in it unless it’s UBIT. If it’s investment, like you’re doing real estate or you’re passive, you’re fine. If you’re running a McDonald’s and it’s kicking you a K-1 with profit, then you could have what’s called unrelated business income tax.
Assuming that it’s just investments, you don’t have to worry. It’s when you take money out of the 401(k) that you have a taxable event. The way the IRS make sure that you do that is something called required minimum distributions when you hit age, what is it, 73, 74?
Eliot: 72?
Toby: Wait, what is it now? I’m going to ask my accountants. Hey, guys, what is the year that you have to take required minimum distributions out? Is it 72? I’m just sitting here. Somebody can look it up. Maybe they can let us know. We’ve got all these accountants out here. We’ve got a bunch of accountants that listen to you. Bail us out. 73. Seventy-three and going up to 75.
There’s some weird stuff going on. I need every little bit I can get, guys. I have cats. They don’t clap. You could be doing some great stuff, and all they do is just look at you and like, did you feed me? Thank you, Gabriel, Arash, Troy, Greg. Accountants to the rescue. We should come up with a good title. Undercover accountants. That just sounds dumb.
All right. “I’m converting a barn on my property into an auxiliary dwelling unit for rental purposes.” I just got to say right now, I’m jealous that you have a barn. I don’t know, it’s a guy thing. I don’t know. If you say you have a tractor, then I’m really pissed. “I also have a separate building on the property that I use as a shop office for my construction business.” Now I’m really jealous. I bet you have some heavy equipment. I’d like to go ride around. That just sounds wrong. “How do I treat these properties for liability and tax purposes?”
Eliot: All right. As far as the tax purposes, the ADU, the Auxiliary Dwelling Unit, that’s going to be either a long term rental or a short term. That just depends on the average number of days per stay. If it’s under seven or less, then it’s typically short term rental. If it’s over that, generally it’s long term rental. You would just report it on your return, depending on which it is. The depreciation on your short term rental is typically 39 years straight line. Your long terminal, 27 1⁄2, that’d be some of the tax aspect here, unless you do some of these cost segregations and things like that that we’ve talked about.
As far as the construction building, it would depend. If you have an S-corporation, which encapsulates the business itself, it does a business return at 1120-S, a C-corporation, or maybe you could be using that as the admin office or something like that, if it’s attached to your house or something, I guess it is a bonus or probably not. You could pay it rent or something like that. As far as the liability portion, we might try and put this into an LLC. Toby, you were talking about maybe if it has its own address or something like that, perhaps that could help.
Toby: Yeah. There’s a couple of things. You have separate units. You have detached units here, so you can actually treat them as separate properties for tax purposes. If you want to 1031 them, you can actually separate them from the home and you can still use your 121 exclusion, your capital gain exclusion on your house. I’m looking at this going, is there a house? I assume there was a house, but this might just be a property with a barn and a building that they use. I’d wrap it in an LLC. If there are separate parcels, then I put each one in a separate LLC so that they don’t infect each other, or you put them all in an LLC and then strip the equity out so that there’s nothing for anybody to take if anything bad happens.
How do you strip the equity out? You get a loan or you loan it money from yourself. From a liability standpoint, I would isolate them from you for sure. From a tax standpoint, I would just let them flow onto my Schedule E just like anything else. If you have a Wyoming holding company that’s taxed as a partnership, that’s great. You can run them in through there. It’s still going to end up on your Schedule E, page 2. If you don’t, you just want to not have a tax return, then it ends up on page 1 of your Schedule E. Either case, it’s flowing through.
I just got to mention, Ginger says, hey, not a guy thing, I love my tractor. This is for you, Ginger, because that’s cool. She’s like anybody that rides. Clint has a tractor now. He goes over to his kid’s house, drives around when his wife’s not watching. Wait a second for Toby. Kenny Chesney, she thinks my tractor’s sexy. I should be a country guy. I’m just jealous of everybody’s tractor.
Eliot: I grew up with a tractor actually.
Toby: I don’t have a tractor. I have two cats. It’s not a good combination. All right. Imagine that when I’m not home, they’re riding around on tractors. That’s what I like to think. No, they’re very cat-ish.
All right, moving on. “My business doesn’t have traditional receipts for many of its expenses.” Never tell that to the auditor. “We primarily rely on bank statements to track our spending. What supporting documentation would I need to provide to the IRS or my tax preparer to substantiate these expenses and ensure accurate tax deductions? Are there any alternative methods for proving these expenses without traditional receipts?”
Eliot: Yeah, this is a great question. Very popular question this time of the year. No doubt about it. There isn’t an actual requirement that you keep receipts per se, especially if they’re not traditional receipts. You can have other things. A bank statement could be part of verification, canceled checks, credit card statements, something to show what you bought, when you bought, and something of a description of how it was used in your business. That’s really what the IRS is looking for, just so happens receipts conveniently have a lot of that information put together, just the list of who you paid, the amount, proof of payment, which again would be the statements or something like that, a canceled check, the date, or a brief description.
Toby: Unless you’re traveling. If you’re traveling and it’s $75 or below, you don’t actually have to do them.
Eliot: Except for the lodging part, that we still have to keep documentation.
Toby: Is there lodging below $75?
Eliot: Not that I’m aware of.
Toby: If you’re traveling and you got $75, but the IRS, if they start thinking you’re making stuff up, then they’re really going to press you. If you show good books and records, if you just have your records and you have these basics, where was this, I met with my accountant at Echo and Rig, we talked about this, and here’s the credit card statement, they’re not going to freak out at you. You’ve gone through that a few times. That said, it’s probably a good idea to keep them anyway. I hate receipts.
Eliot: We did have one client that brought us a literal, it wasn’t a shoebox, it was a tackle box. About yay big, full of receipts. I had my buddy Eric Day handle that one.
Toby: Eric, Merry Christmas. Eric was like, never talk to him again.
Eliot: Nope.
Toby: He left.
Eliot: It was silent for a while.
Toby: He left right after that. He was like, Eliot, I’m not going to say anything. Sherry, goodbye. She’s taking off. We know our people out there. We know who you are. You guys are great folks for coming and joining and hanging out with us. We’re all big family here. We’ve done 200 and some of these? Matthew, how many is it up to? Or Kenny? Does anybody know how many?
Eliot: 236.
Toby: 236? How do you even know that? Is that written somewhere?
Eliot: Because I have to type it up every week.
Toby: There are 236 of these. It’s a lot of hours.
Eliot: It’s in the questions.
Toby: We used to do three hour sessions too. Sherry says, I am with you almost 15 years now. That’s fantastic. It’s always fun. Sherry and I went motorcycle riding the last time we were out here. It’s always fun. We go to Batista’s hole in the wall.
All right, my business partner and I co-bought a condo in New York City by paying $900,000. He put in $700,000 and own 75%, and I put in $300,000 and own 25%. I am deeding my ownership to him for $0. What would his cost basis for future resale be?”
Eliot: Basically this is a gifting. They didn’t sell it for any amount, so you just carry over the basis. That recipient of the gift would get it at $300,000, that would be the basis. You may want to file a form 709 showing that if it was a gift just to declare it so that there’s not any gift tax on it, it might be a consideration. I don’t know how there could have been another business arrangement here because that would seem to be a sale, so I can only think it’s a gift. You probably do want to have someone file that 709.
Toby: Yeah, if there’s nothing in exchange, there’s no anticipation that you’re going to get anything of value, then it would be a gift. Eliot just nailed it, it would be that your basis. Assuming your basis is still $300,000 that it didn’t get moved in the last few years, then his basis is your basis. If it’s not that and you’re actually getting something, then it gets a little more complicated.
If you’re doing something below market, then there could be a taxable event. If you sold the $300,000 for $100,000 or something, then you could have an issue. You might have a capital gain of $200,000 or whatever the difference is. Again, we’d have to look at the tax return. Chances are, this is a gift, you do a gift tax return, you track your basis, that’s his basis, and voila, you’re out of it. Your accountant just makes a note.
All right, I think we’re getting there to the end. Hey, guys, if you like this type of stuff, we have lots of replays. We also have lots of additional video. My YouTube channel is absolutely free. Let’s see how many subscribers, 460,000 subscribers. We’re almost up to a thousand videos. I think at a thousand, I explode. It’s common. You could absolutely pop on there.
You also see there’s a free emergency binder. I’d actually suggest that everybody that you know, take advantage of that. It’s where you track all your passwords and who to call if there’s an emergency, things like your doctors, your dentists, everything. It’s absolutely free. You can download it, share it with anybody and their mother because it’s really important, because we’ve seen what happens when somebody doesn’t have that basic information. You’ll be really upset.
Another one is Clint’s YouTube channel. It’s absolutely fantastic. He deals with more on the real estate side and asset protection. He’s a genius when it comes to the anonymity and how to set these LLCs up. He’s a wizard when it comes to doing the operating agreements and very adept in making things disappear from a liability standpoint so you can sleep at night. Of course, join us for any of our free workshops.
If you feel like it, come on out to our live workshop in Texas. Learn more. Just click there. It’s fun. You’re going to get to hang out with us, Eliot, and everybody else. Hopefully it won’t be too hot. I won’t melt.
The cool part there is you get to hang around other people that are doing what you’re doing. I don’t know about you guys, but when I started buying properties, I used to get a little bit of guff. Clint and I are over 300 properties now. I remember the first 10, and I remember people were like, well, are you going to be a real estate baron? No, I just want cash flow. Sorry, that’s one of those items that I buy for cash flow. The more you buy it, the more addicted it gets. You just like buying it.
Eliot: What are those guys saying now to you?
Toby: I don’t know, I don’t talk to them. That’s why you need elevate your circle. Come on out to the event, hang out with a bunch of real estate people. No, there are great people all over the place. Just some people didn’t get it. My dad actually never got it, and then he came to me one day. He had a bunch of guys at Boeing that had done a bunch of real estate deals. He goes, you’re doing that, right? I said, yeah, that’s what I’m doing. He goes, oh, they did really, really well. I’m like, I’ve been telling you that for 10 years, dad. But I’m the kid.
All right, questions. If you want to have your question featured, email it on in. Please, give us some twisters so that we have some cool stuff to talk about. You can always check us out at andersonadvisors.com. Thank you to Kenny, Jared, Dutch, Ross, Tanya, Amanda, Jeff, Dutch, Patty, Troy, Jared, all these guys answering questions. They have answered over 209 questions. There’s still 10 outstanding. We will answer those. Boom, boom, boom. They will get done probably within five minutes.
This is what I’ll say to you. Adieu. Thank you for joining us for Tax Tuesday. We’ll see you in two weeks. I’m going to mute myself and turn myself and Eliot off. Thanks for being with us, Eliot. We will see you in two weeks. If you have a question pending, just hang out. We’ll answer it.
