Today, attorneys Toby Mathis, Esq., and Eliot Thomas, Esq., answer listener questions with a focus on optimizing tax outcomes for real estate investors and crypto enthusiasts. We explore strategies for handling income through complex entity structures, such as using an LLC and a C-corp to manage staking income and fund a 401(k). We also discuss the timing of LLC formation for crypto investments and how flipping houses can be structured within a C-corp or S-corp to minimize taxes. Listeners will learn about managing losses on short-term rental cabins, the implications of renting out a portion of your home, and the nuances of filing multiple LLC tax returns. Plus, we address how to handle passive losses if you’re a real estate professional.

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

• “As a tax strategy, let’s say let’s say I set up a trading LLC entity and a C-corp entity that owns 49% of the trading LLC. If the trading LLC makes around $10,000 in staking income, and the C-corp gets its $4900 as a partner in the trading LLC, then can the $4900 be used to fund a 401(k) owned by the C-corp? Is the income considered earned income or ordinary income? If it is ordinary income, can it be used to fund a 401(k)?” – By doing this, putting in the structures, we kept $4900 off the personal return. That’s a victory.
• “I currently invest in crypto. I anticipate selling some of it sometime in 2025 with gain over a hundred thousand dollars or perhaps far greater.” It’s crypto. You could quadruple in a day. “What would be the best move for me right now? If I were to create my LLC, would I be taxed when I moved my crypto to the wallet for the LLC, all crypto would’ve been bought more than a year prior to selling? Should I create an LLC this year or wait until next? – If this was just a disregarded LLC, meaning it doesn’t file its own tax return, it’s basically that taxpayer, either way, when we put the money in, it’s not taxable.
• “How do I save taxes on flipping houses? We have three houses we are flipping in the next few months.” “How can we reduce the taxable income on these properties?” – We often would put our flipping activity maybe in a C-corporation, possibly an S-corporation. Why? A lot of ways to mitigate taxes with reimbursements, corporate meetings, wages that you use to contribute to a retirement plan.
• “I bought a short-term rental cabin in May of 2022 using 1031 funds. Rentals are beyond disappointing at this point. If we sell for at least $200,000 loss more than the gain on the 1031 funds, how does this play out regarding taxes?” – we may not know exactly what our loss is. Let’s just assume we do have that loss. When we have losses, one thing we don’t have to worry about is depreciation recapture because we have no gains.
• “I have multiple LLCs. Do I have to file multiple tax returns?” – it depends on how the LLC is taxed. If it’s a disregarded entity, means it doesn’t file a return. If I have seven LLCs and you’re doing seven different tax returns, that doesn’t make a lot of sense when you could set up a single entity to own them all.
• “I’ve had my primary residence for the past 21 years. If I rent it for three years or more and sell it, would I be taxed on the depreciation I take over those 3 years, or would it be included in the 121 exclusion?” – If it was exactly three years, then they could take advantage of that 121 if they were to sell it and maybe even 1031.
• “If I have a two-level house and I live in the upper level but Airbnb on the lower level, can I deduct the depreciation repair management of the lower level? Does it need to be a legal unit and have its own address?” Same question, but what if it was a long-term rental? – Because you have rental income coming in, you will be able to take these expenses – the depreciation, repair, and management. It’s just a matter of how much.
• “If I am a real estate professional with over 750 hours actively acquiring properties, and I sell my other long-term rentals non-real estate investments, such as stocks, private equity, and venture capital investments, can the losses from my active or passive real estate investments offset gains on my other long term non-real estate investments?” – if you have passive income, it’s passive income. If you have losses, it’s passive losses. You can only use the passive losses to offset other passive income. So you may get losses trapped. We call it suspended passive activity loss rules.

Resources:

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Full Episode Transcript:

Toby:  All right. As you guys flow on in here, there’s a whole bunch of people coming in, it’s Tax Tuesday. I’m Toby Mathis.

Eliot: Eliot Thomas.

Toby: We’re going to be your hosts. They always make the ESQ on our names in all caps. Whoever’s doing that, stop it. ESQ, that’s really big. Plus, I can’t see anything today.

All right, flow on in and we’ll get started. If you have never been to a Tax Tuesday before, we’re going to go through a whole bunch of questions that Eliot here picked, that we’re going to go through because people email all along. We’ll give you that email, it’s where we can email in questions. How many emails are we getting?

Eliot: We go anywhere from a hundred to 300.

Toby: A hundred to 300 questions that get emailed in. Then you pick what, 10?

Eliot: Yeah, we got nine today.

Toby: Nine?

Eliot: Yup.

Toby: It’s going to be a short day.

Eliot: Yeah.

Toby: All right. Then we have a full team on that’s going to answer your questions here. I’ll just go over the rules. You can ask your questions. If you have a question about your taxes, a concept, or you’re like, hey, I’m selling a property, blah, blah, blah, and how does this 1031 exchange thing work, you can put it in the Q&A. There’s not a cost to it. Elliot might send you a bill later if he finds out who you are. We never send a bill. We just answer your questions.

We’ve got a whole bunch of folks. We’ve got Troy, Rachel. Hey, Rachel. Jeff, Dutch. Gosh, these guys are in the middle of tax season. Arash and Amanda, tax attorney. Patty and Matthew floating around out there. They’ll absolutely answer your questions.

My gosh, we got some horsepower on there. If you have tax questions, now’s the time to ask because there’s a whole bunch of accountants and tax attorneys there to answer it. You do that in the Q&A. The chat, that’s a little different. The chat, you could just put comments. Hi, Patty. There’s people that always do that.

You could also say, where you’re from. That would be cool. Put your city and state, and your state should not be drunkenness. It should be wherever you might be. Let’s see where everybody’s from. Put your city and state in there. Tacoma, Washington. Nice, Joe. I know that area. That’s where I went to school and we have an office there.

Salisbury, Houston, Odessa, Las Vegas. You’re in my backyard. Charlotte, Houston, Berkeley Heights, New Jersey, Crystal Bay, Nevada. Beverly Hills, California, San Rafael. My gosh, they’re going through so fast. We get hundreds of people on, sometimes thousands, usually hundreds though. Patty is incredibly popular. We’re getting that.

San Diego, bad taste is timeless. That’s just mean. Patty, what can we say? No, Patty is awesome. Anyway, we’re making fun of Patty. Baltimore, got a bunch of properties there. Some days, fortunately, other days, unfortunately. Miami, where I met my wife, wonderful. Douglas County, another Miami. Look at this.

Hi, Toby. Always enjoy joining you in LA. Thank you so much. We love having you guys, otherwise we would be sitting here in a room. I don’t know what we’d be doing. They let us out for an hour every two weeks. This is what we do. They put us back in our cages. All right, enough of that.

The idea here is to answer your questions and to have a little bit of fun while we’re doing it. I want you guys to learn. We want you guys to start embracing the idea that taxes is a game. There’s two paths, those who know and those who don’t. Once you start learning about this stuff, it really is addictive because you start realizing that nothing’s as straightforward as everybody likes to pretend. There’s always shades of gray. There’s always nuances. And if you get out ahead of it, you can make a huge difference.

Somebody says, my name is Francis from Georgia. I love that. Are driveways and fence installation deductible on primary residence homes? First off, put that in the Q&A. Second off, no, it’s personal property. You got to make it into an investment property, Francis. But you could always add it to your basis, to the property so if you sell it, you don’t have to pay a bunch of taxes. That’s what we’re here for, to answer questions like that. We love it. I don’t mean to make fun of anybody other than myself, maybe Eliot, maybe Patty.

Taxes, the only dumb question is the one that you don’t ask. You want to make sure that you’re looking at all these things, and then you start learning some patterns. There’s definitely rules that incentivize investing, huge incentives if you know where to look, and it can make a huge difference.

All right, let’s go over the questions that we’re going to ask today. We’re going to go through each one of these. We’re going to answer them individually, but I’m going to go over them what they are ahead of time so you know if something’s pertinent to you that you perk up when it comes.

“As a tax strategy, let’s say let’s say I set up a trading LLC entity and a C-corp entity that owns 49% of the trading LLC. If the trading LLC makes around $10,000 in staking income, and the C-corp gets its $4900 as a partner in the trading LLC, then can the $4900 be used to fund a 401(k) owned by the C -orp? Is the income considered earned income or ordinary income? If it is ordinary income, can it be used to fund a 401(k)?” Good questions. That’s crypto if I’m not mistaken.

“I currently invest in crypto. I anticipate selling some of it sometime in 2025 with gain over a hundred thousand dollars or perhaps far greater.” It’s crypto. You could quadruple in a day. “What would be the best move for me right now? If I were to create my LLC, would I be taxed when I moved my crypto to the wallet for the LLC, all crypto would’ve been bought more than a year prior to selling? Should I create an LLC this year or wait until next? Great question. We’ll get into it.

“How do I save taxes on flipping houses? We have three houses we are flipping in the next few months.” You’re a brave soul. “How can we reduce the taxable income on these properties?” We’ll go over that.

“I bought a short term rental cabin in May of 2022 using 1031 funds. Rentals are beyond disappointing at this point. If we sell for at least $200,000 loss more than the gain on the 1031 funds, how does this play out regarding taxes?” We’ll go over that. I’m sorry you’re having tough time on those cabins.

“I have multiple LLCs. Do I have to file multiple tax returns?”  Wow, good questions. Eliot’s doing good.

“I’ve had my primary residence for the past 21 years. If I rent it for three years or more and sell it, would I be taxed on the depreciation I take over those 3 years, or would it be included in the 121 exclusion?”  Interesting question.  I like this. That’s a funky one.

“If I have a two-level house and I live in the upper level but Airbnb on the lower level, can I deduct the depreciation repair management of the lower level? Does it need to be a legal unit and have its own address?” Same question, but what if it was a long term rental? Really good questions today. I actually like it. A couple more.

“If I am a real estate professional over 750 hours actively acquiring properties, and I sell my other long term rentals non real estate investments, such as stocks, private equity, venture capital investments, can the losses from my active or passive real estate investments offset gains on my other long term non real estate investments?” Wow. It’s a capital gain question, and then there’s another one. I can see how your brain works.

Eliot: There’s a lot of pieces to it.

Toby: Yes. “How do you minimize capital gains when you sell a condo that you lived in for two years, that has never been rented and is not your primary residence?” It’s just a second residence, and we’ll go over all that. Great question,  Mr. Thomas. Eliot painstakingly goes through these and picks them.

Hey, if somebody gave you a heart, if you could, give Eliot a reaction, even if it’s a cry emoji, because you’re so like, oh, my God, Eliot. There’s some crying emojis. See, Eliot likes the weeping. He laughs when people cry. My God, what’s wrong with you? What’s wrong with you? The child is crying.

Eliot: Enough time in the show for that. What’s wrong with Eliot?

Toby: All right. That would be a good one. What’s wrong with Toby and Eliot? We should get some professional help here. All right. If you like this thing and you like learning about taxes, wealth planning, taxes, more wealth planning, asset protection, and more wealth planning, you can go to my website or go to the YouTube channel. I have a channel.

Also, Mr. Coons has a channel. Where’s Mr. Coons? He has the workshops here. I’m going to do this. Maybe Patty already did it. They’re way ahead of me. Yeah, go to Clint’s channel too. Don’t neglect Mr. Coons. He’s been my partner for a long time, since 1998 or 1999. His is more on the asset protection, but his is a great channel. If he ever does anything good, you could pretty much count on me just stealing it and doing it on my own. No, I’m just kidding. We tend to swim in different waters, but he has a great channel as well if you like this information.

Speaking of liking this type of information, if you want to learn more about how the entity structuring works and you want to learn how LLCs, corporations, land trusts, everything works for your real estate investing, join us at one of our free tax and asset protection events. We do the virtual events absolutely free. The live in person events, we have one coming up. It looks like in September in San Diego, and those are really fun. We get to get together.

If anybody has been to a live event, maybe give it a thumbs up. If you thought it was horrible, you can always give it a cry emoji. If you’ve been to the live event, there we go, a bunch of you guys, they’re fun. They’re a get together, and we are a big goofy family where we like to do things like investing together. We like talking about these things. We’re all sick in the head as far as we like to not overpay our taxes. We just have a lot of fun together.

If you like that thing, you can join our family. It is a big family when we get together because it’s hard to find a bunch of investors that think similarly and are trying to do things together. You could join some real estate groups and things in your local area. But when you’re really thinking about the United States, you want to be around people that are looking at the entire country as well. All right, let’s dive into the questions.

“As a tax strategy, let’s say I set up a trading LLC entity and a C-corp that owns 49% of the trading LLC.” Right off the gate, it’s an LLC taxed as a partnership, and the corporation is a 49% partner. “If the trading LLC makes around $10,000 in staking income,” If you don’t know what that is, it’s a crypto term. Basically, you’re getting paid ordinary income for a verifying transactions using your computer to verify. “And the C-corp gets its $4900 as a partner in the trading LLC, then can the $4900 be used to fund a 401(k) owned by the C-corp? We’ll go over that. “Is the income considered earned income or ordinary income? If it is ordinary income, can it be used to fund the 401(k)?” What say you?

Eliot: First of all, just going back at it, I can’t help but just say why would we do this partnership that Toby was talking about is because if we didn’t have this, and we had that $10,000 of income coming in from staking, it’s all going to be ordinary income to the individual subject not only to income tax, but also employment taxes. By doing this, putting in the structures the individual asking the question did, automatically, we kept $4900 off the personal return. That’s a victory right there, good tax plan.

Once it’s in the C-corporation, then they get the call to the question here. First of all, is it earned income or ordinary? We don’t really look at it that way because it’s in the C-corporation. What we do know is it’s going to be taxed at a flat 21% if we don’t do anything. We have a lot of things to help us out in the C-corporation, one of them, they could pay you a little bit of earned income as a W-2 wage out of that $4900, you as an officer. Then yes, you could contribute there from your wages into the 401(k). If you took half of that amount, maybe $2500 as a W-2 wage, you could contribute as the employee to your 401(k), and then the C-corp can contribute out of that $4900 as well into the 401(k).

A quick answer, yes, you can get it into the 401(k). We do have to have some earned income W-2 wage to you as an individual, as an employee, before the C-corp can start contributing to it. Really in this case, we would only look at it as earned income as you as an employee receiving the W-2, but it can be used to fund the 401(k).

Toby: Absolutely what Eliot said. Once the money’s in the C-corp, usually you’re getting it out tax free. You’re doing the administrative office for the home, you’re doing 280A, you’re doing ordinary necessary business expenses like your cell phone, your computer. That $4900 is just going to come out tax free. But if you wanted to get it into a 401(k), then you could contribute up to $23,000 into that 401(k) income that’s paid out to you. Plus if you’re over 50, I think that’s an extra $7500 or thereabouts.

The company could also make a match of 25% of the amount. If you took out a salary of $2000 and put it directly into the 401(k), you wouldn’t pay any tax on that. There’s some employment taxes that would be due, which is about 14%. Part of it is from the business, part of it is from taking out a year check. It’s not quite straight $2000, but then the company could put another $500 on your behalf into a 401(k).

At these dollar amounts, $4900, that’s an administrative office for the year. Usually, you’re going to get that out tax free. Like Eliot said, what’s the big difference? Whatever your tax bracket is, let’s say that you had $10,000 in staking income, that’s ordinary income, that $4900 bucks would have been taxed to you, and then you would have had to pay your expenses.

By doing this, you just eliminated $4900 of taxable income. What is that worth to you? It depends on what your tax rate is. If you’re in the top bracket, obviously it’s going to have a much bigger impact than if you were in the lowest tax bracket. It’s always a personal question, but regardless, you’ll be able to get that money out tax free.

Yay. We like tax free money. It’s called an accountable plan, and they’re available on S-corps, C-corps, 501(c)(3)s, LLCs taxed as S-corps and LLCs taxed as C-corps. They are not available on partnerships or sole proprietorships, generally. Okay, let’s go to the next one.

“I currently invest in crypto. I anticipate selling some of it sometime in 2025 with gains over a hundred thousand dollars or perhaps far greater. That’s awesome. What would be the best move for me right now? If I were to create my LLC, what I’d be taxed when I moved the crypto into the wallet for the LLC, all crypto would have been bought more than a year prior to selling? Should I create LLC this year or wait until next year?

Eliot: This is why I put these questions together because it is all in the crypto realm. Here, we have someone who’s thinking about the LLC, maybe the trading partnership. If this was just a disregarded LC, meaning it doesn’t file its own tax return, it’s basically that taxpayer, either way, when we put the money in, it’s not taxable. Something we got to hold on to is that we already have a gain. We have a hundred thousand plus of gain, perhaps more. When we put that in, if it’s a partnership, we actually are supposed to track that and make sure we understand where that gain came from, which partner, whoever put it in, so that that would still be attributed to them if it was later sold.

Any additional gain, if we’re at a hundred thousand, let’s say it went up to a million, another $900,000 of gain, then being in that partnership, just like Toby went over on the previous question, we’re going to do all those great things, all those reimbursements, corporate meetings, accountable plan, pay a little wage, put it into the retirement plan. All kinds of good stuff you can do there. That’s what’s going on. The fact that the crypto had already been held a year, as I recall, yeah, when it goes to the partnership, I don’t think it restarts.

Toby: No, it doesn’t change anything. It always depends on who the partners are. If I come to the table with a bunch of  crypto and somebody else comes in with a bunch of cash, we have some recognizable gain there, perhaps, because we have dissimilar assets being put in. Even though people think of crypto as cash, they’re different.

There’s a great case. It was old Boeing. I think it was the long acres racing park, where long acres contributed the real estate, Boeing put in a bunch of cash, and then they dissolved the partnership. One party took the cash and the other Boeing took the land. They built a bunch of offices on it, and they managed to avoid having a taxable event in Washington state. They changed the law after that, so now you can’t do that. There are some rules that we have to navigate.

I’ll just make it simple. If this is just you, you could set up an LLC to protect it. No problem. You could set up an LLC and a management corp if you want to do some tax mitigation. It’s still going to be long term capital gains. It does not reset your time, and it does not cause recognition of gain. Whatever you contributed at, it gets your basis. It doesn’t hurt you.

If you have that much gain in crypto, word to the wise is I’d probably take some of it off the table. Even though it might go up even more, you never know. But if you have some gain, I’m always a big fan of, hey, if it’s gone up a bunch, maybe take a little bit off to make sure that I don’t regret not having done so. More fun stuff.

“How do I save taxes on flipping houses? We have three houses we are flipping in the next few months. How can we reduce the taxable income on these properties?” What say you?

Eliot: The real common approach here at Anderson is we often would put our flipping activity maybe in a C-corporation, possibly an S-corporation. Why? Because again, we have a lot of ways to mitigate taxes on that with reimbursements, corporate meetings, et cetera, wages that you use to contribute into a retirement plan. Just from an asset protection standpoint, you certainly don’t want to do it in your name. Otherwise, you’re fully liable there. Certainly, that’s the way we’d want to go on saving the taxes there.

Toby: When you are flipping, this is no different than any other business. When you’re flipping houses, you’re treated like a car dealership. You buy the property and you hold it in inventory. If you put money into the house, it’s no different than if you add components to a car on a car lot. I put better tires on it. I painted it, and I do something. I don’t get a deduction for those. It’s added to the basis of the property that when you sell it, you have just regular ordinary income.

The problem with flipping is they considered it a trade or business. If you’re involved in it and you’re participating, then you have not only ordinary income tax treatment, but you also get old age, disability, and survivors in Medicare. You get employment taxes on top of it, FICA, social security, or whatever you want to call it. It’s that 15.3% employment tax. You get to deduct half of it, so it ends up being 14.1% of the first $170,000, and then it starts to phase out and go down a little bit.

Point is that you have this employment tax on it. If we don’t want those employment taxes, then you’ve got to use a corporation. We’re either going to use an S-corp. If you need all the money, pay yourself a small salary, use a 401(k), use a DB plan if you want to just pay no taxes.

If you don’t know what a defined benefit plan is, I did a video on it actually with Jeff Mason and Chris, his partner, about a week ago. Two weeks ago, I think it posted. It’s about a hundred thousand. I think it’s on my YouTube channel. Maybe Patty, you could find that link. I’m sorry to make you run around and chase things.

It’s something called a defined benefit, where you’re actually calculating based off of what you’re used to making and what you would need to have to continue to make that when you retire. In some cases, we get over a million dollars a year into these plans. I think they detailed one that was $1.2 million a year for somebody.

Let’s just say you’re flipping houses and you’re making $300,000 dollars a year. You’re like, this is great, I have other investments, but I’m getting killed in taxes. Could I mitigate that? You could actually set up a corporation, S-corp or C-corp. Yeah, you could probably mitigate the entire amount. It depends on how much. If you’re flipping three houses, typically you do about a house a quarter. Assuming if you’re doing three, you could be doing as many as 12 during the year. Be interested to find out how many you’re actually doing because that could be sizable income, in which case you’re saying, hey, I need to reinvest some of this, but I don’t want to get killed in tax.

That DB plan or the 401(k) could be an easy component. As Eliot said, you can either choose S status where it flows down to your return. You take a salary, maybe do a 401(k), again maybe do some tax mitigation. The rest of it flows down. You could spend it as you see fit. You avoid the employment taxes, or you do a C-corp and you’re keeping it off your return completely, unless you decide to take a salary. That’s usually when you are stockpiling it.

If I am in a situation where I want to keep flipping, I don’t need the money personally, I’m flipping, I’m trying to build that side of my portfolio up, I want to do more, and I’m just reinvesting that money, it may be better to have a tax to that 21% than having it hit you personally. A lot of this is easy to explain when you actually start looking at your numbers.

Eliot’s team, for example, did a projection. By the way, if you’re an Anderson client, you can absolutely do that as part of our tax advantage program. When you join our tax program, you could say, hey, I want to have monthly, quarterly, or twice a year meetings with the tax advisors. What they’re doing is they’re doing these projections. Which softwares do you use to do all your projections?

Eliot: We use 1 called Corvee  and we use a BNA, which is a Bloomberg tax product.

Toby: Somebody says, Patty, have you ever wondered how lost Toby would be without you? John, I’m lost with Patty. It would just be much, much worse. I’d be making noises like that all the time. See? Yeah. Wait, I think I still make those types of noises. That was our buddy, old Howard Dean. Just because I have to,  just remember when you’re flipping houses, it’s no different than flipping pizzas. Can’t let one go by.

All right. “I bought a short term rental cabin in May of 2022 using 1031 funds. Rentals are beyond disappointing.” That’s sad. “At this point, I will sell for at least a $200,000 loss more than the gain on the 1031 funds. How does this play out regarding taxes?”

Eliot: Yup, a lot going on here. First of all, just set back. What’s going on with the 1031? This individual had a property used in a trade or business. They sold it, we call that relinquished, and then they picked up this short term rental cabin as what we call replacement. That was done, we can pretty much assume from here, to defer the gains they would have had on that other piece of property, had they gone through with the sale without doing a 1031. It’s just a deferral of that gain.

Fast forward to what our question is here, maybe we’re getting rid of it. We realize the value is not there for what we originally purchased it at. We think right now, we’re probably thinking it’s a $200,000 loss from maybe where we bought it at. We have to remember, the 1031, what’s going on there?

One of the reasons we’re able to defer that gain is when we get rid of that property, it had an adjusted basis to us. Maybe it’d been a rental before we’d bought it at a hundred thousand. We depreciated it over time down to $40,000. That was the adjusted basis. That basis carries over to the new property. We may have bought this new replacement property a little bit higher, this short term rental cabin, but our basis is going to be that adjusted basis from the previous structure that we got rid of.

I want to just throw that out there to the person asking the question, we may not know exactly what our losses. Let’s just assume we do have that loss. When we have losses, one thing we don’t have to worry about is depreciation recapture because we have no gains. We’ll never have depreciation recapture if we don’t have capital gains.

If we have an overall loss, if it does equate out there, then we just wouldn’t have taxes. We would have a loss, probably capital, more than likely loss. In that case, you can take that against other capital gains you have or up to $3000 for a long period of time. That’s capital gains, capital loss.

Toby: Actually, if you sold it, it would be released and become ordinary loss no matter what. You’re going to get to offset your W-2. Again, the way to think of this, in my brain, I bought properties for a hundred thousand dollars, and I depreciated them $20,000. My basis is $80,000. I buy new properties for $400,000. I sold the old ones for $400,000 and bought new properties for $400,000. My basis was $80,000. The basis in the new properties is still $80,000.

If the $400,000 becomes $200,000 and I sell it, it’s going to be the difference between the $80,000 basis and the $200,000. I’m going to have gain of $120,000. I’ll have a little bit of recapture, the $20,000, plus I’ll have a hundred thousand dollars of long term gain, assuming that you didn’t depreciate the cabin at all. It won’t be quite that clean, but that’s how my little brain thinks of it.

Should you be 1031-ing into another property? That’d be the question. You might want to talk to a 1031 exchange facilitator to see if that makes sense if there’s a taxable event. Let’s change the scenario. Let’s say that you bought the first properties for $300,000, you sold them for $400,000, bought new properties at $400,000 that are now worth $200,000, you would have a loss.

Your basis would carry over. That $300,000 would come over. The depreciation would obviously lower that a little bit. Regardless, you’d end up with a loss. You wouldn’t have taxable income and you would have, if you sold them, some ordinary loss, believe it or not. It sounds weird, but you’d have potentially some ordinary loss or some capital loss. Yeah, it would release everything.

Eliot: Yeah, I was wrong about the capital. Sorry about that.

Toby: We always do our best. All right. “I have multiple LLCs. Do I have to file multiple tax returns?”

Eliot: We get asked this a lot. As we always say, it depends on how the LLC is taxed. If it’s a disregarded entity, which just again means it doesn’t file a return, it’s information, it’s income, and expenses go on the tax return of the person or entity that’s disregarded who owns it, in that case, the LLC doesn’t have to file a return, but that individual or entity does with that information on it. If it’s a disregard, no return for that specific LLC, at least at the federal level. If it’s taxed as a partnership, an S-corp or C-corp, then yeah, it’s going to have to file a return. You always want to look at your state because they’re all a little bit different. Most of them go with the federal rule that if they are that type of disregard, then they would not file a return, but it does depend on how that LLC is taxed.

Toby: An easy way to think of this is most people that are pretty good structures, if you have multiple LLCs, chances are you have a holding LLC holding them. If you have a bunch of properties, let’s say you have five or six properties and separate LLCs, 99.9% of the time, you’re going to see a holding LLC in one tax return, that partnership return for the holding LLC. You would not have individual tax returns for those individual LLCs, except possibly if it’s positive income for the state income tax. Whoever the owner is or that partnership might have a state income tax return, but you wouldn’t have a federal, so you wouldn’t have a whole bunch.

There’s still a few people that do this, but you’d find accountants that would set up multiple LLCs and tax each of them as a partnership so that they could do a partnership return. They always try to justify it in some way. Oh, we want to keep them separate. You want to just do a partnership return. Let’s be real. If I have seven LLCs and you’re doing seven different tax returns, that doesn’t make a lot of sense when you could set up a single entity to own them all, and then you could do one every year, it’s just going to cut down the number of returns you’re doing.

Sometimes accountants get their dander up a little bit when they’ve set somebody up that way. They’re like, how dare you? You’re like, well, just call it as I see it. I’m sorry, but it seems like you’re doing a lot of returns, probably charging a minimum per return. It might not be the best for the client. If they’re commercial properties, I get it. If you have separate apartment complexes and there’s underwriting when you sell it, I get it. There should be some factor like that, but you see individuals that just have a bunch of single family homes and they’re all partnership returns.

Eliot: We actually run into that same scenario for those clients. It’s not rental, it’s just really regular businesses. They may have 10 S-corporations. We might be able to do something there to consolidate on. We call it Q-subbing where you just have one return. You went from 10 down to one. You still have your asset protection amongst the little S-corporations.

Toby: Done that more than once, where the accountant gets really pissed. We did this with franchises, where they had all these different companies and it was like, why don’t we just do a Q-sub, have a parent? Even on the S corps, you could do this. If they own the qualified S-subsidiary, which is what the Q-sub stands for, it’s a disregarded entity into the parent. On QuickBooks, you just make it a class. You just make it a class underneath the one set of books.

It ends up saving you on bookkeeping, and it ends up saving you on having to do 10 different tax returns, now you have one. The accountant gets mad because their bill just went from $12,000 a year for doing those returns to $2000. They get mad a little bit to be expected. Sometimes they create complexity for their own benefit.

Eliot: They may be ignorant of it all.

Toby: They may be ignorant, but there’s a way. Usually, there’s a way to cut down on that. The question is always this because we get this with real estate all the time. If I have a cash buyer, I’m going to make disregarded entities, and I’ll probably have zero partnership returns for the real estate. If you’re a cash buyer, you’re not going to do financing, and you’re not doing commercial, you’re just doing single families, I may say, let’s just do it the cheapest way possible. Maximum benefit, you’re not losing anything.

You could still have a management entity in there or a family office that you could pay. You could do that with real estate. It doesn’t work with stocks, but you could do it in real estate. Just keep it really simple. Sometimes that’s better.

People hear something even at our events because Clint’s always talking about partnership, and it’s better for underwriting when you’re doing Freddie and Fannie, you can use a hundred percent of the income because it’s on page two of Schedule E instead of page one. Hey, if somebody’s trying to buy it, they need a tax return. I get all those things, but that’s not always present. Then you should be open to the idea. Hey, I don’t have a tax return on my real estate, it all just goes on page one of my Schedule E, and my life’s a lot simpler. Okay. I just don’t want you to hurt. We’re always going to say, here’s the good, the bad, and the ugly, so that if we could keep some dollars in your pocket, it’s better for us because we want you to be successful over the long term, for sure.

“I have had my primary residence for the past 21 years. If I rent it for three years or more and sell it, would I be taxed on the depreciation I take over, three years, or would it be included in the 121 exclusion?”

Eliot: There’s a lot going on in this question, actually. It was our primary residence. First of all, let me go back to what 121 is. That is the exclusion if you sell your primary residence. If you meet the conditions, which we’ll go over, then you can exclude up to a quarter million if you’re single, $500,000 married filing joint.

What this individual is trying to get at is they’ve had their primary residency for many years. They’ve owned it, used it as their primary residency for over two of the last five years. That’s the 121 rule, but then they rent it for three years. If it was exactly three years, then they could take advantage of that 121 if they were to sell it and maybe even the 1031 as Toby was alluding to there.

If they go over that three years of rental, then they lose. They go outside of that. You owned it two years within the last five years for the 121 exclusion, meaning they wouldn’t get any exclusion if they sold it. It’s right on the borderline that they picked that three years. However, the fact that they did rent it, let’s say they only rented it one year, but they’d had it the past 21, they could use that 121. They’ve owned it, use it two of the last five years, get the exclusion, and then because they put it in a trade or business, as Toby was going to, you could do the 1031, which we alluded to earlier, and maybe defer some of that gain. No depreciation recapture in that case. Otherwise, yeah, you’d have depreciation recapture.

Toby: Let’s play some scenarios here, and let’s talk about what you could do to avoid having a negative occurrence. What we have is the 121 exclusion, which is a capital gain exclusion. If you’re married, it’s $500,000. If you’re single, it’s $250, 000 of capital gain, not recapture, capital gain.

If you rent your primary residence, the rule is if you’ve lived in it two of the last five years and used it as your primary residence, when you sell it, you get that capital gain exclusion two of the last five years. That’s why if you lived in it and then you moved out, you actually have three years to take advantage of the 121 exclusion.

There’s one other caveat. You could not have taken a 121 exclusion for two years. You can’t do more than once every two years. If you moved out of your primary residence, rented it three years, but in two of those years, bought another primary residence, and then sold it in 121, you’d be ineligible to do it because you can only use it every two years.

Let’s just say that’s not the issue. You moved into another place, you’re going to keep this property, and you’re like, oh shoot, I’m going to lose this capital gain exclusion. Let’s use some facts. Let’s say that you bought this primary residence 21 years ago for $250,000. Let’s assume that it’s worth $750,000 now. We have $500,000 of gain. If we sold it right now, you would have zero tax. None, because you have a 121 exclusion for $500,000. It would all be gone.

Let’s say that you waited two years, and the property value goes up to $800,000. In that two years, you took depreciation. That saved you $15,000. You would lower your basis. $250,000 is what we bought it for, so we’d be down to $235,000. We’d have $500,000 of capital gain exclusion, so that would get us up to $735,000. Anything over that, let’s say we sold it for $800,000, we’d have some recapture on the $15,000, and then we’d have some long term capital gain.

If you want to avoid having to sell it, you just want to grab that $500,000 of exclusion, and you want more depreciation, let me give you the solution. You are going to sell your primary residence right now to an S-corp. You’re going to set up an S-corp and you’re going to buy it from the S-orp. Here’s why you’re doing that. When you do that, the S-corp is a separate taxpayer, according to the IRS, and this has already been vetted out, the S-corp could now buy it on an installment contract. We can’t treat it as an installment sale for tax purposes. It won’t matter here in a second, but that way you’re getting payment.

The rent’s basically coming out of the payment, and you’re going to see why it’s not going to matter because you’re using the capital gain exclusion to have zero taxable income, but now the basis of the property is that $750,000. Now, you could rent it out and depreciate it at $750,000. How much taxable income will you have from it? Zero. It’s going to offset that income. Somebody may be giving us another scenario. I’ll have to look at that. It’s something else. That’s not going to help me. I thought that might be this person.

All right. We get the capital gain exclusion, and now we could just hold onto it forever. If you ever wanted to sell it, you could 1031 exchange the difference now. You have a new basis of $750,000, and then you sell it in five years, six years. You want to buy other investment property and this thing’s now worth a million, you could sell it and pay no tax. Your basis is still that $750,000 minus the depreciation. It ends up avoiding the tax hit completely.

If you lose that capital gain exclusion, that is worth at a minimum to you, probably about 15%, probably closer to 20%. $500,000 is going to be at 20% if you have any other income. Let’s just say you’re going to lose about a hundred thousand dollars of tax benefit. We may want to take advantage of that. Step up your basis. You keep it.

I know people are freaking out going, you’re in an S-corp though. Yup, don’t take it out. Don’t refi it and take it out because that could be taxable, but you have a new basis set. It’s only on the value that it goes up. It doesn’t hurt us to have that S-corp.

The income made inside of an S-corp keeps its nature, so it’s still passive rental income. We get a higher amount for depreciation. It’s cash flowing out to me. I’m not having to pay tax on it. If there’s interest, I might have a tiny amount of interest that it has to pay me. But boy, what a much better scenario than losing that 121 exclusion. I’m sorry if I lost some of you guys, but this is the way that a tax planner thinks.

Eliot: Yup. This has so many options to it. A lot of good stuff that you can do here.

Toby: Yeah. The other route is you just sell it within three years. I live this. I had a primary residence that I moved out of about a year and a half ago, and I just made it into a rental. Furniture and everything, I just rented it as a corporate rental. I have three years from that date that I moved out to either do the S-corp and sell it to it or just to sell the property and use my 1 21 exclusion.

As of right now, I’m more than my 121 exclusion, but still, I could use the 121 exclusion and the 1031 exchange because now it’s an investment property. You use the 121 exclusion to offset the capital gain first. You use the 1031 to offset recapture in any other gain. You could do both, believe it or not. It’s crazy.

The IRS shows us how to do it. It actually spells it out, and it anticipates that so that you could do it. It works out great. You could actually buy a replacement property. Get this, rent it out for a little while and then move into it.  The 121 code actually anticipates that and says, hey, you can only do that every five years because it’s such a huge tax savings, especially for you guys in California and New York, where your properties have gone up $2 million or something.

The trick there is take your property that was your residence, turn it into an investment property, do the 121 and the 1031, acquire a new property as an investment property that you might move into in two or three years, and then move into it. It works like a charm, like crazy good. Anything I missed on that?

Eliot: No, I think we gave them enough.

Toby: All right. “I have a two level house, and I live on the upper level but Airbnb on the lower level. Can I deduct the depreciation, repair, management, et cetera, on the lower level? Does it need to be a legal unit, have its own address? Same question, but what if it was a long term rental? ”

Eliot: I’m going to start at the end here, just as far as the difference between short term and a long term rental. That really doesn’t matter in the sense that the treatment will be the same with one caveat that I’ll get to here in a second. However, you’re going to be able. Because you have rental income coming in assuming from renting this out, you will be able to take these expenses that you mentioned here, the depreciation, repair, and management. It’s just a matter of how much.

Because we are living in the same house, it very well might be that you might be limited to how much of that you can deduct, because you’ve rented out your personal residence. You may only be able to rent out up to the amount of income you have. However, you mentioned, does it need to have a separate legal unit, its own address? If it has its own ingress and egress way in, way out as its own kitchen, living room, stuff like that of its own separate facility, then you really have almost a sense of duplex here, two different units, and then you can run that completely separate.

We look at to, if it’s a short term rental, did you materially participate in the management of it, which we would assume you would, because it’s in the same building. You have to be the one running it, managing it. You don’t have to pay a third party to do so. If it’s a long term rental, you have to have that real estate professional status in order for this to be not a passive loss, but it has to be. We get an ordinary loss that are only an ordinary loss, then you’d be able to take more of those expenses you talked about, the depreciation, the repair, and management, to create that loss.

Toby: Yeah. Basically, you don’t lose the ability to do it. It’s a resident, so you’re not going to have the ability to take losses. That’s basically the takeaway here. It doesn’t have to have its own address. How would you structure it from an asset protection standpoint? I’d probably put it in an LLC and isolate it from its other activities. You cannot hide it from the rest of your property. Most states have a homestead exclusion on a portion that is a primary residence. I don’t think you destroy it by renting out some of it. But again, you want to do case by case.

What I would be doing, if it’s me and I’m renting out a lower unit, is I would have either a mortgage against it, whether it’s a friendly mortgage with something that’s loaning it to me, that’s mine. If I was going to buy it for cash, that’s what I would do. I would have my LLC loan me the money, put a deed of trust against that so it has very little equity. I put it in an LLC so that it cannot hurt me if the downstairs tenants do something crazy.

I’ve seen, just recently, more than a million dollars for somebody stepping on a nail. They were in a wheelchair and they stepped on a nail. I don’t know how you step on a nail from a wheelchair, but they managed to. The insurance company settled out, and then they left the landlord hanging out to drive for an additional amount. Yeah, it was crazy, and it was over a million bucks.

Eliot: That’s terrible.

Toby: Yeah, it bonkers some of these claims. You want to have some real fun, look at what they do with mold in California. It’s holy shmoly. I could have brain damage. Clearly, you have brain damage. You’re suing somebody for fake mold, but they get rewarded for it.

Anyway, what did Ed McMahon get, $7 million for his dog? That’s not a joke. Actually, you could go look it up. Look Ed McMahon lawsuit, mold. He got $7 million because his dog got sick and passed from alleged mold in a house. This is crazy.

You just never know what’s going to come your way, so you want to isolate that liability. Put it in LLC. I’ve had people win that lawsuit and still lose $250,000 for having to defend it because these people have no money. Patty just put the mold case. Is it 7 million? I want to click on it, but I’m afraid that’ll kill me. It’ll take me away. Patty, how much did Ed McMahon get, was it 7? 7.2 million, there we go. See, I’m not too crazy.

Eliot: A lot of cash. Even if you pay the lawyers a third.

Toby: Then he had to sell the house, and they were all like, but it has toxic molds.

Eliot: No one’s going to buy.

Toby: Yeah. Isn’t this the poisonous house?  Yeah, it’s the last thing you want as a landlord. Not only did I poison the tenant, according to the tenant. It’s stupid. These guys come in.

We had one where they flooded the downstairs of a house. Not kidding. The kid flooded the downstairs. It got the carpet wet, so they decided they had mold. They called in a university professor who is a specialist in mold who went in there.

They tore up the carpet, threw it away, didn’t tell the landlord, of course, and then sued him for millions of dollars saying, see, it was mold. You threw away the carpet, and we didn’t even see the mold. Oh, but it was there for sure, and they did it. Just silly, it’s crazy stuff. Some of the stuff that we saw.

Eliot: I had that in an apartment once, but I was not going to about to sue anybody over it.

Toby: I’m going to do a video on this. This is God’s honest truth. We have a news organization that’s our client, and they outed a pedophile who was trying to steal a child. They got the camera footage from the police, and they broadcast it. It got four million views on YouTube. They’re being sued by the lawyer for defamation.

There’s a lawyer that actually took that case. Of course, because I’m a nominee on it, they sue me too. They always like to do that. I’m always like, you can sue me all you want. I’m going to put you on my YouTube channel. As soon as my lawyers are like, go ahead, I’m going to put that out there like, it’s great, you’re a pedophile, and you’re going to sue the person that took the police’s camera.

This is how crazy our world is right now. You could pretty much sue anybody for anything at any time. It’s absolutely bonkers. These lawyers, I think some of them are starving because they just take absolutely crappy cases. All right. Do you want to learn how to defend against that and make sure this never hurts you?

Eliot: Talk to Clint.

Toby: Yeah, talk to Clint at the tax and asset protection workshop. Sometimes I’m on those too. Is it possible to sue Ed for the paper cut? I got opening the public thing. They’ve been absolutely torn apart, John. Publishers clearing house has been sued, it’s all over the place for false and deceptive stuff.

Some of the lawsuits we’ve seen with our clients are just really sad. We had one. I could just tell you guys stories all the time. There was a guy, and he was going to sell a house. Somebody set out. They wanted the house, so he was going through the background. In the meantime, somebody applied and they said the house is taken. That person that applied was a minority. The person that they were going to rent to didn’t pass the background check, so they put it back on the market.

They got sued for discrimination because they said, you did not rent to me because of my race. They didn’t even know the race. They just said, hey, the house is no longer available. They ended up getting nuked. It cost them all their properties. They got absolutely destroyed because the government got involved. At the end of the day, all it was, hey, we were going to rent it to these other guys. It doesn’t matter, they beat the heck out of you.

If you want to learn how to make sure that doesn’t happen to you, then come to the tax and asset protection event. Clint’s got really good stories too. We have tons of stories that we like to share. We’ve actually had siblings. One sibling got tased. They just went after him like a dog goes after a bone. Our client, they let out.

We just had this happen again. I’ll give you another one. They’re siblings. The rich sibling was our client, but they couldn’t see that he had anything. They thought he had nothing, so they let him out of the lawsuit, and they just attacked the other sibling. We’re like, that’s the difference.

One guy, you can’t see what he’s got. The other guy, they could see everything he had. Even though it was less, they still went after him. That’s actually how I learned about Nevada. I was up in Washington. There was a lawyer that settled with a guy, who ended up being an heir of a big family and having a ton of assets, but they couldn’t see what he had. They settled with him because they thought he didn’t have anything.

Eliot: That’s the way to do it.

Toby: Then they got really mad when they found out that he had millions of dollars. I had to look at it from a malpractice standpoint to see whether or not it fell below the standard of care. I was like, how the heck do you know? You can’t see what these guys are on. You should have gotten a declaration from them as to their financial statement, and they didn’t do that. At the end of the day, you don’t hold the lawyer responsible for it. You settled because you didn’t think you were going to get anything if you want it.

Eliot: That’s why we work with these guys.

Toby: There are some crazy cases. Another one in California, a girl got sued. This party, they were just suing everybody and their mother on a transaction. She was freaked out. I was like, don’t worry. I’m trying to say, chances are, you have insurance. They can’t see anything you have. It got better within six months.

This is California where they can sue a ham sandwich. They let her out because they couldn’t see anything. They said, oh, we only want deep pockets. She was kinda like, wait, are you saying that I’m poor? Shush, take that, walk away. All right, let’s go to it.

“I’m a real estate professional over 750 hours per year, actively acquiring properties, and I sell my other long term real estate investments such as stocks or private equity, private venture capital investments. Can the losses from my active or passive real estate investments offset gains on my other long term non real estate investments?”

Eliot: All right. Starting at the first definition of a real estate professional, you’re right, 750 hours. But before we try and get that status, we want to look at what happens when we have rental real estate. In the code, the normal status of that income you have coming in is what we call passive activity. If you have passive income, it’s passive income. If you have losses, it’s passive losses. You can only use the passive losses to offset other passive income, so you may get losses trapped. We call it suspended passive activity loss rules. That’s why this individual is going for the real estate professional because that wipes it all out.

If you have any income or losses coming from those properties that you are the real estate professional over, then that becomes a non passive, and you can use those losses against any other income on your return. Usually when one does this, we have a lot of clients have real estate professional says, normally you make an election that year to aggregate. You pull all of your real estate activity, maybe a short term rental, maybe some that you don’t even manage. But as long as you met the rep status requirement and you aggregate, it pulls it all in together.

Why does that matter? Because at the second to the last line here, you mentioned all the activity from my active or passive real estate, but we don’t have any more passive real estate activity. That doesn’t exist. It’s all active or non passive. If we have overall loss from that, yes, that’s going to wipe out any income on your return. I don’t care if it’s your W-2, I don’t care if it’s capital gains, I don’t care where it came from, what investment. It will wipe that out if you have enough loss for it.

Toby: Yeah. There’s two types of income and two types of losses here that we got to pay attention to, actually three if you want to get  technical. You have your ordinary income, wages, anything that you make that’s ordinary income. You have your capital gains and you have your passive income. Passive income gets offset with passive losses. Capital gains get offset with capital losses.

When you sell your stocks, private equity, venture capital, that’s going to be long term capital gain. Long term capital gain can be offset with capital losses. If it’s passive capital gain like from real estate, then you could actually use passive losses to offset it, or you can use ordinary loss. There are three types of losses that could potentially offset that capital gain.

The first thing I want to do is isolate that. Say you have capital gains. What kind of losses can offset it? Ordinary, capital, or if it’s passive capital loss and you have passive capital gains.

We can eliminate that third one already because this is stocks or private equity. These are going to be non passive, they’re just going to be capital gains. We need capital loss or ordinary loss. Now you have real estate professional status, where your long term real estate investments or creating passive losses that you want to have treated as ordinary. The exception to the rule, when you have passive losses like that, the exception that makes it ordinary is real estate professional.

Two steps to qualify as real estate professional. (1) 750 hours in a real estate trade or business that you materially participate in. If you have actively acquiring properties, I got to look at that and say, the only time they’re going to count towards that 750 hours is properties you actually acquire. If you are in a business where you’re just actively looking around for properties, they’re probably not going to count that. They’re only going to count the time that you spend acquiring properties, so I don’t know whether you’re going to meet the 750 hours.

Let’s just assume that you are and you meet the 750 hours, then there’s a second part, which is you materially participate on your real estate. That’s your long term real estate, your real estate, those particular investments that you want to be treated as ordinary.

There are two things you do here. You aggregate them and treat them as one activity, and then you have to meet one of the seven material participation tests. There are seven ways to qualify. (1) Either you do all of the management of those properties. You’re the only one who does anything on it, which is really tough. (2) You do more than 100 hours, and no other individual does more time than you and your spouse. You do over 100 hours. (3) You do 500 hours and we don’t care about anybody else. Those are the three that would really qualify for you.

There’s four others depending on what you’ve done in the past, but let’s just say this is the first year we’re looking at this. That’s the analysis that you do. Are you a real estate professional? Did you materially participate on your properties? If the answer is yes, then those losses are no longer passive. They’re ordinary loss.

Yes, you could use your ordinary loss against your capital gains. But the big question is, why would you? Because all of those non-real estate investments are long term, which means they’re going to be taxed at 0%, 15% or 20%. They’re not horrible. This isn’t 37% tax here, unless you’re in California, in which case you get 20%  plus it could be 13.6%, plus the net investment income tax. You could be up at 37% anyway.

Here’s the answer to this question. Get someone to calculate it for you, get with somebody like Eliot or one of our team, and have them actually run the numbers so you can see whether or not it’s something you want to do. If I have the choice to take long term assets, I may be at 0% and 15%. I may say, oh, not so bad, I thought I was going to be much, much higher. And I’m okay. Again, you just want to get the pencil out.

I used to joke and it’s not really a joke, but it sounds like one. What are the top three rules for tax planning? It’s calculate, calculate, calculate. You always just get a calculator out and you start figuring out what the tax is if I do it this way versus if I qualify over here. Is the juice worth the squeeze? Sometimes it is, sometimes it isn’t. You may not want to jump through that hoop, so I’m going to save you $5000. If it’s going to save you $50,000, you’re going to jump through the hoop. I hope that helps.

Eliot: Excellent.

Toby: All right. “How do you minimize capital gains when you sell your condo that you lived in for two years, that has never been rented and is not your primary residence?”

Eliot: The capital gain here, because we’ve lived in it for two years, but we never used it as our primary residence, this is going to call all the way back to what we were talking about, the 121 exclusion. Again, as Toby laid out there, you got to own it and you got to use it as your primary residence for two of the last five years, and you cannot have taken the 121 within the last two years.

We know that’s not going to be, we can’t use that. We got capital gains coming in. We never rented it. There, we had no depreciation recapture. That’s good, I guess. You’re just looking at capital gains coming in here. How are we going to minimize? You have to look for other things. If you’ve had an investment, you bought Bitcoin at the wrong time, you bought high, sold low. You have some losses there, other capital losses, as Toby just went off, that would offset your capital gains.

If you have anything hidden, bad investments like that, or you look for other things on your return. If you have other real estate investments that maybe you can do to sell it and create losses or something like that, but you’re really looking outside, this is where you’re going to really need tax planning to try and wipe that down so we can look at these other avenues. If you are into real estate, maybe you have a short term rental bonus depreciation, those old standbys or maybe set up a non profit, defer it by putting off into that. But other than that, you’re really going to have to look at it and get some planning.

Toby: Ordinary loss and capital loss could offset this type of income. This is a residence, so it’s not an investment property. You’re not going to have passive income, you’re going to have capital gain. You’re going to offset that with capital loss or ordinary loss. You’re looking around for those.

If I wanted to minimize the tax hit, I might reinvest that money in oil and gas because you could create a loss. I might give it to charity or donor advised fund to offset it by saying, hey, here, I can offset this gain. You would do the math. You wouldn’t have to do this big because you’d use the charitable donation against your ordinary income, which would be higher than your capital gains, always.

You don’t have to do dollar for dollar. You might be able to offset that tax with a much smaller gift. The same thing with the oil and gas, it creates an ordinary loss. You might harvest some tax loss. Like right now when the market pulls back.

Guys, here’s a secret. When they lower that federal interest rate, there’s about a hundred percent likelihood they’re going to do it in September, or it’s not a hundred, there’s always the chance they don’t, the market tends to crash afterwards. Just a word to the wise. Every time they do that, it seems to go down. It’s not a straight line. Sometimes it has big days, but some of the biggest trading days in our history are 2008 and 1929.

When the market’s taking a ride down, sometimes it blips up. You could harvest loss if that occurs and then buy back something else. There are ways to get around the wash sale loss rule. If you’ve watched some of my videos, you know that you could buy an option, buy back the stock, sell the option, the loss attaches to that. There’s lots of mechanisms that you could do to get around these, but you’re harvesting tax loss just for the purposes of using it against the capital gain that you have on the residence. That’s what I’d be looking at. I’d be looking at all those things.

Again, sometimes your brain breaks when you’re doing this. It’s a little game. Once you realize what the pieces are, you’re like, oh, that’s not so bad. It’s like trying to describe monopoly in words as opposed to showing you. We’re a little bit over.

All right. If you guys like this type of information, by the way, this should be fun. You guys should be looking at this. This is crazy, but use it as an opportunity to play it. Again, it’s like a game. What are the rules? What do I need to do to offset this? A lot of times we react. Oh gosh, I sold this. I’m going to have a capital, capital gain or capital loss. You don’t realize that there’s actually things you could do.

You know, we could do things for 2023. We could still do cost segs, DB plans, 401(k)s for last year with money from this year. Yes, there are things you can do to offset your tax and still do some tax planning. If it benefits you, you just look at it and say, what is the benefit? I always say, is the juice worth the squeeze? If I’m going to get a 5x, 7x, 10x return on a dollar. I’m probably going to do it. If I’m going to double it, probably not. It’s probably not worth it.

Go to the YouTube channels. Clint has a great channel. I like my channel. I’m biased. I think mine’s awesome because I create videos all the time. Go watch a few of them. They’re kicking the pants. There’s only 800. It’s 800 and something. How many do we have?

Eliot: 870?

Toby: There are  870 videos to play with. That’d be fun. I know it’s over 800, I just couldn’t remember the number.

Eliot: It’s huge. One century.

Toby: Yes, sorry.  Yeah, don’t watch them all at once, but look around. There’s all that stuff. Somebody was asking me for a flow chart on the house and things like that. Go in there. It says, if you’re selling your house, here’s how you avoid the tax on it. Go through it, break it down, and then you can watch it over and over again. You can share it with your accountant.

You can reach out and say, Toby, you’re a nut job. Where’s the backup to what you’re saying? Everything that I talk about, there’s going to be a backup on it and code. I could say, here it is.

Eliot: At Labor Day weekend, they can binge watch.

Toby: Is that coming up?

Eliot: Yeah, a couple of weeks.

Toby: Yay, binge watch. Always come to our tax and asset protection workshops. They’re free. You learn all these things. Clint, myself, Brent Nagy. Amanda’s on there sometimes. We all rotate around. I usually do taxes and legacy planning because I happen to think that it’s really important to create a legacy for your kids, leave your values behind. In the next two weeks, while you’re waiting for another Tax Tuesday to come around, ask Eliot questions at taxtuesday@andersonadvisors.com. You can always visit our website.

I got a call out Troy, Summer, Rachel, Jeff, Jared. Dutch, Arash, Amanda, Patty, and Matthew answering questions all day, over 150. There are still seven open questions. We’re going to say ado and stop our presentation, but those of you who are waiting for responses can go ahead and wait. They’ll answer your questions before they go off.

I’m just going to say, thank you so much for allowing us to entertain you. Hopefully you got some entertainment out of it for the last hour. They do some tax madness. Hopefully you’re not as nervous or scared about taxes, you realize that it should be fun, and really there’s tons of incentives. If you know where they find them, there’s ways to offset that gain.

As Justice Rehnquist once wrote, “There’s nothing illegal about a plan to avoid the payment of taxes. The internal revenue code does not prevent that tax avoidance. It is absolutely legal. Tax evasion gets you an orange jumpsuit or a striped jumpsuit, depending on where you’re at.” In either case, you don’t want them. There’s plenty of legal ways to offset your taxes that are legal, ethical. If you’re willing to jump through a couple of hoops, you get that big benefit. I’m going to say, thank you. Anything else?

Eliot: No, thank you so much.

Toby: All right. We’ll see you in two weeks, guys.