In this episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., address several listener questions on a variety of tax topics. They cover the tax implications of selling stocks to purchase rental properties, explaining capital gains strategies and depreciation options. The duo discusses using LLCs and management corporations for rental properties, including how property management fees can generate tax-free income. They explore inheritance tax considerations for 401(k)s, the benefits of short-term rentals for generating tax losses, and the implications of moving back into a rental property. Other topics include setting reasonable salaries for S-Corporation owners, maximizing depreciation to offset W2 income, claiming natural disaster losses, depreciating remodel costs for rental properties, and properly implementing the 280A/Augusta Rule for tax-free home rentals.

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Highlights/Topics:

• “I would like to sell my stocks and use the money to help purchase a rental property. Is there a strategy to minimize or avoid paying taxes on capital gains or any other tax-saving advice?” – Loss harvesting and short-term rental tax benefits.
• “Would a rental property not in an LLC also be reported under the Management Corporation or a 1040?” – Report rental on 1040, management fee on 1120.
• “What would the tax implication be when a spouse passes and the surviving spouse inherits a 401k?” – Lump sum, continue distributions, or rollover options.
• “What would be the tax consequences concerning W2 income, depreciation, etc., of purchasing a rental property, using it as a short-term rental with material participation in the tax year that it was purchased, then selling it the following tax year?” – First-year losses, later depreciation recapture on sale.
• “What are the tax implications if I’ve moved back into my rental and use it as my primary residence? I’m not planning on selling anytime soon.” – Reduced Section 121 exclusion, depreciation recapture later.
• “What is a reasonable salary range we should set for ourselves to remain compliant but still maximize our S Corporation Tax savings?” – 30-60% of net business income typically.
• “If a person is a W2 wage earner and wants to start real estate as a side job, what needs to be true when picking real estate options to maximize asset depreciation to help offset my W2 taxes owed?” – Short-term rentals with material participation (100+ hours).
• “If I experienced a loss from a flood that was declared a natural disaster in 2024, how do I take that credit on my taxes?” – Personal: federal declaration required. Business: none needed.
• “How do you depreciate remodel costs for an income property? So, a rental property. You purchased the property, for example, 10 years ago for 100k, and began depreciating it. This year, you put 30K into a remodel that included floors, paint, kitchen cabinets, and appliances.” – Separate depreciation schedules for each improvement type.
• “I’m interested in using the 280A/Augusta rule rental of my home for an upcoming seminar that I’ll be attending online. Am I allowed to use this strategy since I’m the only one attending? Also, I reviewed the document that Anderson put together for the 280A. It mentions getting three quotes. If I call a hotel and ask for a conference room quote for one person, I imagine I won’t be taken seriously. Do you just request a small conference room for five people or less?” – One-person meetings allowed; request quotes for small groups.

Resources:

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Full Episode Transcript:

Amanda: All right. Welcome, everyone. This is Tax Tuesday on Tuesday, April 22nd, 2025. My name’s Amanda Wynalda. I’m a tax attorney at Anderson Business Advisors, and this is…

Eliot: Eliot Thomas, manager of tax advisors here.

Amanda: All right. What do we got for these guys today?

Eliot: Got a bunch of questions.

Amanda: We do have a bunch of questions. Let’s first go over the rules because when you’re talking about tax, it’s all about the rules. In this webinar, in this Tax Tuesday, you can use the live Q&A feature. Chat is if you are having any technical difficulties, you could chat with our team on the side. But if you have a tax question that you want to ask, it could be related to something we’re talking about, oftentimes it’s not, just come on in. Ask whatever you want. You’re going to use that live Q&A feature. We’ve got a whole team in the background who’s going to be answering things for you. Who do we got today?

Eliot: We got Arash, we got Dutch, George, Jared, Jeffrey, Marie, Rachel, Ross, and Troy.

Amanda: Troy’s going to be on. We’re live on YouTube, so he’s going to be answering questions via the YouTube channel as well.  All tax professionals, CPAs, attorneys, people who do taxes, people who talk about taxes, dream about taxes like us.

Eliot: All the good stuff, the fun people.

Amanda: Yeah. Don’t let them call you nerds, guys. Don’t let ’em do that to you. If we don’t hit a question or if you have a more complicated question, you want us to feature your question here on Tax Tuesday, email in to [email protected]. Eliot here reads every single one and he picks them out. If you don’t like the ones he’s chosen, you can also send that feedback.

Eliot: Yup. We get those too.

Amanda: Don’t bully Eliot. If you need a detailed response, if you want us to run some analysis for you, do a little tax planning, you can of course become an Anderson client or a platinum client. Platinum is a membership program that we have, where you have access to our tax and our attorney team for a low monthly fee rather than an hourly rate. How much did you, when private practice, what was the most you charged clients?

Eliot: That was a long time ago.

Amanda: Not baby face. Don’t let him lie to you. It wasn’t that long ago.

Eliot: It was probably about $400 or $500 an hour.

Amanda: Yeah, $450-$500. Yeah. We’re not going to do that to you. We’re democratizing tax and legal knowledge. Platinum member, unlimited access to our team. This whole thing’s supposed to be fast, fun, and educational. We want to educate you. We love working with educated people. It makes our job easier, that’s for sure.

Eliot: Absolutely. Where’s everyone joining us from? Go ahead and put that into the chat, unlike questions. Let’s use the chat, see where everyone’s joining us from. Palmer, Arkansas, Draper, Utah. We have an office out in Draper, Utah. Come visit us. Most of our attorney team are there. San Diego. I’m originally from California, just north of San Diego, so Riverside County. Chicago, O’Brien, Florida, Ohio. Vegas, baby. That’s Suzanne. We’re located in our Anderson Studios off of Rainbow Boulevard in Las Vegas.

Eliot: Famous suite number 210, is that right?

Amanda: Yeah, the famous, the infamous.

Eliot: More than just famous.

Amanda: Right. Denver, Chicago. Couple people from Chicago, Princeton, New Jersey. My father-in-law went to Princeton. Do you know anyone who’s been to Princeton? You would definitely know that they went to Princeton because they’ll tell you. Fargo, North Dakota, Irvine, familiar. All right, we’re going to get in. We’re going to review, just to let you know what the plan is. We’re going to go over the questions that we’re going to hit on today, and then we’ll actually answer them.

First up, “I would like to sell my stocks and use the money to help purchase a rental property. Is there a strategy to minimize or avoid paying taxes on capital gains, or any other tax saving advice?” Yes, there is. Stay tuned for more. Eliot, what do we have up after that?

Eliot: “Would a rental, not an LLC, also be reported under the management corporation or a 1040?”

Amanda: All right. That’s a little asset protection, a little tax. We do both here it is, so we’re going to be able to give you that.

“What would the tax implication be when a spouse passes and the surviving spouse inherits a 401(k)?” That was one of the more complicated ones when we were reviewing these.

Eliot: “What would be the tax consequences concerning W-2 income, depreciation, et cetera, of purchasing a rental property, using it as a short term rental with material participation in the tax year that it was purchased, and then selling it the following tax year?

Amanda: That sounds tiring. Buy something, sell it, turn around and sell it. It could work out for you if you’re willing to do the work. You can save a lot on taxes sometimes.

“What are the tax implications if I’ve moved back into my rental and use it as my primary residence? I’m not planning on selling anytime soon.” Which is a key fact that’s going to change some things around a little.

Eliot: What is a reasonable salary range we should set for ourselves to remain compliant but still maximize our S-corporation tax savings?

Amanda: Yup, that reasonable wage requirement.

“If a person is a W-2 wage earner and wants to start real estate as a side job, what needs to be true when picking real estate options to maximize asset depreciation to help offset my W-2 taxes owed?” A lot of these questions are going to be a little bit overlapping, a lot of things are applying to multiple answers here.

Eliot: “If I experienced a loss from a flood that was declared a natural disaster in 2024, how do I take that credit on my taxes?

Amanda: Which flood was that? I don’t know.

Eliot: Yeah. I knew of fires, but I didn’t know of flood myself.

Amanda: Yeah. The hurricanes. There’s a lot of natural disaster stuff going on, so this is a common question.

“How do you depreciate remodel costs for an income property, so a rental property? You purchased the property, for example, 10 years ago for a $100,000 and began depreciating it. This year you put $30,000 into a remodel that included floors, paint, kitchen cabinets, and appliances.” A couple of depreciation questions we’ve got going. This is our final one.

Eliot: This is a biggie.

Amanda: It’s a long one. You can do it, Eliot. You can do it.

Eliot: “I’m interested in using the 280A/Augusta rule rental of my home for an upcoming seminar that I’ll be attending online. Am I allowed to use this strategy since I’m the only one attending?” We get this question quite a bit. “Also, I reviewed the document that Anderson put together for the 280A. It mentions getting three quotes. If I call a hotel and ask for a conference room quote for one person, I imagine I won’t be taken seriously. Do you just request a small conference room for five people or less? Any advice on getting the quotes?”

Amanda: Yeah, we will be able to do that and cover that. If you’re here on YouTube, you’re on Toby Mathis’ channel. He is one of our founding fathers, founding partners. He’s a tax attorney. He’s @taxwisetoby on Instagram and TikTok. He’s on TikTok. Cooler than us, I guess.

Eliot: He’s way cool.

Amanda: He’s got some followers. We’ve also got Clint Coons, our other founding partner. Clint focuses more on asset protection, Toby focuses more on tax. Anderson is a unique place where we do both under one roof. If you’ve ever spoken to your attorney, then they send you over to your tax professional, and then your tax professionals are telling you, well, that’s a legal question, go ask your attorney, and you’re stuck in the middle going, well, I don’t speak attorney or CPA, how am I supposed to translate, around here you don’t have to because we speak both. Click, subscribe.

Eliot: Bilingual.

Amanda: Yeah, we are bilingual. I don’t speak any other languages, do you? No. We have people who speak a lot of languages. We had somebody who spoke seven languages.

Eliot: It wasn’t me.

Amanda: Yeah, it wasn’t me either.  Subscribe to those YouTube channels. You’ll get a notification anytime something new pops up. We also offer our tax and asset protection workshops. We’ve got two upcoming one-day seminars, Saturday, April 26th, and Saturday, May 3rd. Morning is asset protection, afternoon is tax. It’s a full day, so eat your protein bars and bring some snacks.

I cover tax on those frequently. I’m going to do the May 10th one, so not listed here. We also have our live event, so if you just want to come see us, you can come out to Las Vegas, June 26th through 28th. It’s three full days of everything you need to know in terms of protecting your wealth, launching your business to the next level, estate planning, tax planning. We’ve got everything. Plus it’s in Vegas, so why not take a tax deductible business trip out here?

Eliot: Sounds good to me.

Amanda: Here is the QR code if you want to join us live for that June live event. Only $99, wow. That’s inexpensive. All of that for free. Toby Mathis does say, we’re an education company first. We do a lot of free seminars. We do a lot of online training.

Eliot: That’s why we’re here today.

Amanda: Thank you, Eliot. That is why we’re here today. All right. “I would like to sell my stocks and use the money to help purchase a rental property. Is there a strategy to minimize or avoid paying taxes on capital gains, or any other tax saving advice?” First of all, when you do sell stocks, those are capital assets, you’ll pay capital gains, the rates are 0%, 15%, 20% based on your income. Most of the time if you’re going to liquidate enough stocks to buy a rental property, you’re probably looking at that 20% tax rate.

Eliot: Yeah, that’s often the case. Now, there is that unique situation. If you held the stock less than a year, that would be at ordinary rates, but we typically don’t see it. We’ll go with the more common, that’s going to be a long term, where you do get those more favorable rates that Amanda’s talking about.

Ways to knock that down, if we had any losses out there, let’s say stock A, you sold at a profit, now we got stock B over here that you’d listen to Eliot on that pick and it’s not doing so well, you may want to go ahead and sell that, create a loss, and it’s going to match with your capital gain there. That’s one, we call that loss harvesting.

Excellent way to knocking down those capital gains, we mentioned here though in the call, the question I think is something about rental property. There might be a couple of things we can do there. Any ideas?

Amanda: Yeah, that’s for sure. I do think some brokerage online situations, you can opt into loss harvesting. That will automatically do it in the background if you’ve got a big portfolio. It may not be feasible to individually look at everything, but who knows? Loss harvesting won. If we’re buying a rental property, what can we do with that rental property to generate some losses? I’m thinking, real estate professional status, short term rental loophole.

Eliot: Yes. The difference here, short term rental, again, that is the traditional Airbnb, something of that nature where your average stay is seven days or less. Puts in a different category for how we treat things. In order for it to be a non-passive activity, you just have to materially participate. Lots of different tests for that. The most common, you put on over a hundred hours more than anybody else or over 500 hours.

If we reach that status and then we do things like a bonus depreciation, cost segregation, couple those together, often you’re going to create a loss, and that loss will go against anything on your return, including those capital gains. Fortunately, it will actually hit your other income, your ordinary income first, which is always at a higher bracket. If you wipe through all that with the loss, then it’s going to start attacking those capital gains as well. That can be really effective. That’s the short term. If we had the long term rentals where I think we’re looking a more involved.

Amanda: Yeah, a little bit. For real estate professional status, and mind you, both of these real estate professional and short term rental loophole, but the short term rental strategy are designed to take what we normally think of as passive income losses, generating those. But you’re doing enough work, you’re putting enough sweat equity that the IRS says, you know what, we’re actually going to call that active. By generating those active losses, that reduces your taxable income overall. It’s not directly necessarily offsetting the capital gains from the stock, but it is reducing your total taxable income, which is going to typically result in a net positive for you.

Real estate professional status is when you have long-term rentals. Over a year, usually more than a year, or a year or more, typical what you think of a lease agreement. You have to meet certain parameters.

Now, if you’ve got a full-time W-2 job, you most likely will not be able to qualify as a real estate professional because the first test is that you have to spend 50% or more of your personal services in your real estate trade or business, so managing your rental properties. If you have a 40-hour a week job, you need to spend 41 hours a week managing your rentals, which is quite hard to do, or you’re just doing it really badly, or you have a very bad investment portfolio if it’s taking you that much time to manage just a normal long-term rental there.

Fifty percent of your personal services, plus you need to materially participate. Again, Eliot said there are several material participation tests. In this case, we’re typically looking at the test that’s 500 hours per trade or business. You just have to hit a minimum of 500 hours. You don’t have to do more than anyone else. If you have a property manager, you can even elect to aggregate all of your properties together. Five hundred hours is a lot to meet for one property, but if you’ve got 10, or if you’re doing property management through your own company, you can aggregate all that activity and hit that 500 hours and then the 750 hour minimum for the year.

Complicated, but if you meet that, essentially you’re putting in enough work in your real estate trade or business that the IRS now says, okay, well that’s active income. Not necessarily what we want, but there are things we can do to supercharge our losses.

Eliot: Yes, one of them being the cost seg. We talked about that earlier. Cost seg all it does, it takes what would normally be deducted over straight line. Let’s say we have a short term rental that’s deducted. It’s a business asset. The building’s deducted straight line over 39 years, same amount each year. If the cost seg says, we’re going to break that building into different pieces, some of it will be 39, it’s probably going to be your foundation, your more sturdy parts of the house.

There will be other things like carpet, flooring, lights, wiring, et cetera, that are going to be 5, 10, 15-year property. We break those down, those are going to depreciate faster because it’s not over 39 years anymore. It’s now over five, 10, or what have you. Then we can add on what’s called bonus depreciation.

Anything placed in service that year, here in 2025, we’re looking at 40% bonus depreciation. We’d look at the total amount spent on that one asset, and we can add on another 40% deduction immediately. It speeds up a lot of deduction, typically causing a loss. If we’re materially participating, as Amanda talked about, that loss will now offset any income on your return. A bonus here, not just lowering your ordinary income, it could lower your ordinary income enough that you’re in a lower bracket, so now your capital gains no longer at 20%. It even goes down to maybe 15%. A lot of good can come out of this.

Amanda: The bonus depreciation goes down to 20% next year.

Eliot: That’s right.

Amanda: It was at a hundred percent.

Eliot: It was for a long time.

Amanda: For a while. There’s currently a bill in Congress. Hopefully we’re going to bring that back up to a hundred percent, in which case this strategy of accelerating depreciation is going to supercharge. We’re going to see a lot more people doing that.

All right. Would a rental property not in an LLC also be reported under the management corp? Let’s visually look at what we mean. If you work with us on the asset protection side, you may already understand what’s being asked here, but typically we’re going to have a rental property. Normally we’re putting that rental property into an LLC for asset protection purposes, but in this instance, it’s just owned by an individual. That doesn’t actually, whether or not it’s in an LLC, isn’t going to change the answer from a tax perspective.

We’re often recommending clients to do a property management C-corp. There’s a lot of tax advantages to that. What we’re going to need is a property management agreement, and then the corporation is going to provide property management services to this landlord, finding the tenant, collecting the rent, maybe paying for repairs, finding the plumber, oftentimes even paying the mortgage because again, it’s not a third party property manager. It’s you doing the same things you’ve always done just with your C-corporation hat on. You’re going to charge a normal rate, 10%, 12%, fee back to the corporation.

Eliot: Typically on gross rents.

Amanda: On gross rents, yeah. Whatever is standard for the area that you’re in. What is being reported on this guy’s 1040? This corp is going to have an 1120. What expenses are going where?

Eliot: Any of the operational expenses of that rental and of course all the gross income are going to report on the 1040. Let’s say the rent is a thousand dollars a month, 12 months, you’re going to have $12,000 of total gross income reporting on your return, and then all the various expenses from the operations, advertising, lawn care, mortgage interest, depreciation, property taxes, et cetera, all that will be deducted there. There will also be a management fee because we are paying our C-corporation. We’ll deduct that out as well. You get down to a net amount, and that’s what all goes on the 1040.

Easy to get this confused because if I’m the tenant, this is my landlord, and she’s working on her C-corporation, when I pay Amanda’s C-corporation, you see all the income go there. My whole rent check goes there and maybe it’s paying some bills. We got to remember, the C-corporation doesn’t own the building. It’s only providing a service for Amanda. We are not going to report the income there. The only income it has coming here is that management fee, that 10% to 12% Amanda was talking about. That’s where it’s going to have its income, and then we’re going to do all kinds of things to try and wipe that income out on the C-corporation return.

Amanda: Yeah. The tenants paying the C-corp, the rents, and then the property management companies deducting out the expenses it’s paid, and then paying over the net rent is going back over to the individual in this case. What stuff are we doing to get out of the C-corp? What deductions are we taking? It’s got the management fee as it’s income. What are its expenses?

Eliot: Certainly we have the accountable plan reimbursements. That could be if Amanda had an administrative office, we call it, there’s an amount she can be reimbursed from the corporation for that use. We’re going to talk a little bit later about 280A/Augusta rule. She can rent out her home for the corporate meetings in her house, get paid. You can do up to 14 times a year tax free to her. All these are deductions gets to C-corporation. Maybe she wants to use the medical reimbursement plan that we put in a C-corp. She could be reimbursed for all those. All those are going to subtract out from that management fee income that we had, and hopefully we just zero that out completely.

Amanda: Yeah, hopefully we zero it out.

Eliot: Yeah. Whatever that 10%, 12%, you just pocketed cash tax free.

Amanda: Completely tax free.

Eliot: And got a deduction at the same time.

Amanda: You can imagine a scenario where your portfolio grows. You have 10, 20, 30 properties collecting a 10% fee. If we don’t have enough deductions, we can even set up a solo 401(k) plan, pay yourself a salary, start deferring some tax on some retirement savings.

Eliot: If we had a lot of money, we could even do a defined benefit plan, which is just your 401(k) on steroids as just putting a ton of money into it right away. A lot of good options there, very flexible.

Amanda: For sure. What’s showing up on your 1040 is the rental income and the rental expenses for that property. What’s showing up on the corporate return is going to be the management fee minus whatever expenses that you have, some of which we listed here separately.

Eliot: Perfect.

Amanda: “What would the tax implication be when a spouse passes and the surviving spouse inherits a 401(k)?”

Eliot: This can get really into the weeds here, but just on the surface, first of all, a spouse inheriting the 401(k) can certainly just take what we call the lump sum. Drawbacks to that, it’s going to create a lot of income right away. Maybe we want to wedge it out over some time, but that certainly is one option though to take the lump sum.

Another is that you can basically start taking over the distributions just as the spouse was. If the spouse was already taking distributions, you can just step into their place. Keep those distributions coming out to you. In the case of a 401(k), it would be taxable income. Nonetheless, though, it’s extra income coming to you from the inheritance, or you can roll it over into your own plan. Maybe you have your own 401(k) and you can move over there, and then you wouldn’t maybe take any distributions until you’re 73 or depending on when you were born. Those rules change, 73 or 75. Those are some options that one could do, the lump sum, basically standing in the shoes of the decedent, or rolling over into your own plan of viable options that we could take advantage of.

Amanda: The rules are different if this is an IRA. It can get complicated. If you’re rolling it into your own and you’ve already started taking distributions or required minimum distributions from your own, you’re going to have to recalculate everything because it’s a larger amount. You’re going to have to take more distributions there.

Eliot: We had talked a little bit about the Roth component here. This wasn’t brought up here. Typically you’re going to get the Roth tax free as well because you inherited something that already had paid in tax. There are some special rules there. There’s a way here about the five year rule. You may have to wait five years from when the decedent started that Roth plan before you can take out with having some penalties. It really does get a little bit dicier, a little more complicated, so certainly talk to somebody. Just so you’re aware, there are those options as well for a Roth. Some things that we can do there.

Amanda: Taxable income. “What would be the tax consequences concerning W-2 depreciation, et cetera, of purchasing a rental property and using it as a short term rental with material participation in the tax year that it was purchased and then selling it the following year?” We did talk about this earlier on in our first question, but STR with material participation, that’s going to be our short term rental loophole for short. That’s where your renting out, average length of stay is seven days or less, so a true short-term rental. Then the material participation, several tests.

The most frequent tests that we’re going to meet is 100 hours but more than anyone else. You’re going to need to put in at least a hundred hours, and you’re also going to need to do more work than anyone else. This gets a little tricky with the short-term rental if you don’t live close by, because you’re going to have to account for the cleaners there.

Eliot: Also, with that, we’ve had clients. Let’s say they live on the west coast, they have that short term rental on the east coast. Courts, the IRS, if they look at that, they’re going to be skeptical. How did you really manage it from afar like that? Along the same line. Absolutely, you got to track the hours of anybody who is down there. That can become a little bit difficult. We like to see that short term rental nearby, relatively speaking, in the same area.

Directly getting into, what happens in this situation where we get one in year one, uses a short term rental? We do that cost segregation with bonus depreciation, get that heavy loss deduction. We got the material participation, so that loss will offset any income on our return. Everything’s looking really good, but then what do we do in year two? We’re going to go ahead and sell it. Is there any tax consequence benefit?

What happens? When we do that short term rental, that cost segregation, again, it breaks it into different pieces of depreciable property. Some of it’s just the same old building. Again, the foundation’s typically the example. That’s still going to be 27½ or 39 years in the case of a short term rental. We have all that carpet, all those lights, electricity or electric circuits, what have you, and not the electricity itself, but we’ll have 5, 10, 15-year property, things like that. That’s what we call 1245 property, tangible, or personal real property versus the real estate, which is your 1250.

When we do that, we take the depreciation. We’re taking all this bonus depreciation in year one, and now we sell. We’re going to need maybe some example drawing here a little bit. This gets a little bit dicey. You got a house, and we’re going to break it into 1250 and 1245 property in year one. Now, the 1245 again is the shorter five-year, 10, 15, something like that. We’re going to speed that up a little bit here.

What do we want to say, maybe $50,000 on that? That’s the amount of depreciation we took the first year. What do we want to go, a hundred? Okay, a hundred there. We originally bought it $300,000. We’re going to not count land here. We’re going to exclude that from the equation here, just for simplicity.

Our basis when we buy it is $300,000. Amanda’s got this rental. She did a cost seg. She took $150,000. She’s going to subtract that from her basis, and that’s going to give her adjusted basis, which is another $150,000. Bad example there, I guess my fault. Adjusted basis of $150,000.

Let’s say that in year two she sells it. We can do this a couple of different ways. We could sell $400,000 on the first one. If she sells at $400,000 in year two, we’re going to subtract that adjusted basis that she has of $150,000, and that gives us a profit of $250,000. If we didn’t think anymore about it, we’d probably just call that the capital gains, $250,000.

Here’s the problem. We’ve already gotten a benefit by taking away eroding from our basis when we took that depreciation, and we can’t really double dip. The government says, we’re going to call some of that back in. We’re going to make you pay tax on that amount of depreciation you took. We call that depreciation recapture.

The rules start to split here when we’re talking about your 1250 or your 1245 property. When we do that depreciation recapture, it comes off the top of our capital gains. Again, our profit here is $250,000. The first $150,000 is what we’re going to have to recapture. $100,000 of it is 1250 property, the first $100,000. That is going to be taxed at a maximum 25% when we recapture, and the 1245 is going to be at whatever your ordinary tax bracket rate is.

In year one, if we’d had really high income, Amanda’s in the 37% tax bracket, she got a really great deal when she took that $150,000 of deduction from the cost seg and bonus depreciation. Very nice tax bracket break at 37%, the highest bracket out there. Now, year two, she’s selling it back.

Let’s just say she’s still in that high tax bracket. The most she has to pay on any of the 1250 is going to be capped at 25%. There’s a 12% gainer delta. She’s going to come out ahead by 12%. The 1245 is going to be at her ordinary rate, 37%, so no break there. She’s going to break even there, but she still comes out ahead in this overall aspect. Any of the other capital gains, the $250,000 minus the $150,000 that we took, so $100,000 left here, that’s all going to be at your 15% or 20% tax bracket capital gains rates. This could still work for us if we took that heavy depreciation this year, turned around and sold it the next year. Maybe a bit unconventional, but yes, in this case, Amanda would come out ahead.

Amanda: Yeah. It really depends what your other income is going to be in that second year. If you’re going to have high income, you’re in a high tax bracket. Worst case scenario, you’re paying 25% on a lot of it.

Eliot: Exactly right.

Amanda: You’re still going to be saving. But if you’re not doing anything, then save a lot.

Eliot: Yeah. Just a quick add on to that, what if the next year, you made all your money in that first year, that’s why you did the cost seg? That’s why she went out and got that short term rental and second year she took a break. It didn’t have a whole lot of income. Then her ordinary rates’ going to be very low on that 1245, so she’s going to come out pretty well there. Her profit can’t exceed 25%, so it’s definitely going to be below that. 37% our tax bracket in the first year, minus whatever our ordinary rates are in year two. That’s going to be the delta. That’s going to be your change. That’s going to be her savings on this whole deal.

Amanda: Is there any type of audit risk for doing this short-term rental loophole? We call it a strategy. In one year, having that property reported on as a short term rental, and then the next year having it be gone, does that raise a red flag for audit purposes?

Eliot: I think that’s the best question asked all day here. It could be, but I don’t think the IRS is particularly looking at that. You did properly report it. As long as it was being actually rented and used, they’d be hard pressed to say that wasn’t a business venture. You certainly had it rented. The government, the rules are very, very much supportive of one’s right to interact and contract on these type of things. While it might get their interest, I don’t think necessarily you’re looking at an audit risk.

Amanda: For sure. Yeah. The IRS can’t make you keep a property if you don’t want it anywhere.

Eliot: Right, exactly. Sell it.

Amanda: Plus that latest news, 22,000 IRS employees might be taking the buyout offered by the government. What do you think about that?

Eliot: Toby talked often about them trying to raise 80,000 jobs. They never met that standard, now they just lost 22,000.

Amanda: The audit rates are going down anyway.

Eliot: Yeah, there’s a consequence. Everything has a give and take, no free meal.

Amanda: That’s true. “What are the tax implications if I move back into my rental as my primary residence? I’m not planning on selling it anytime soon.” When your primary residence, you get some deductions from your taxes for that. You’re not going to be making any rental income, so no taxable income based off your rental. What are the things that we are still allowed to deduct?

Eliot: As a primary, you still typically going to deduct the property taxes if we’re itemizing on our Schedule A and your mortgage interest. Darn it, that’s where it ends because they really are not big on you deducting your personal expenses, but the mortgage interest on your primary is subject to a few limitations. If you have a loan over $750,000, you’re not deducting that interest. The property taxes, those type of things, if you’re itemizing against Schedule A, then you’d be able to deduct those as your primary residence.

As Amanda pointed out, you’re still having that rental income. You’re declaring that. You had a whole host of operational expenses, advertising, management fees, property taxes, again, interest depreciation, all those are gone, except for the mortgage interest and property taxes.

Amanda: Most likely though. At least this year and until the end of next year, you’re taking the standard deduction. It’s still quite high. The standard deduction, those tax cuts and jobs act, rules from 2018 are going to start phasing out. The standard deduction drops to half of what it is now. You may get a larger deduction by itemizing there, so it’s something to keep in mind.

What about repairs, maintenance, capital improvements? How does that change? Because if I’ve got a rental property and I make a repair, I get to deduct that, that repair is essentially tax free. That’s not the case with your primary residence, unfortunately.

Eliot: Yeah, it’s really not. If it rises to the case of maybe an improvement, we can add on to basis. Let’s say Amanda again buys, in this case, her rental first $300,000, and then she moves into it. Put some repairs in it. Eliot had been renting it out, it’s all a mess now. She puts 75,000 of improvements into it. It’s going to raise her basis. Maybe just your standard repair, you’re not going to get much of a deduction or even a basis raise if it’s your personal residence.

Amanda: Yeah. Just got to eat it.

Eliot:  There’s another aspect at the end here. I’m not planning on selling anytime soon. That leads me two ways. We’re talking about what we might sell at sometime, it’s just not right now. Both of those have some significance potentially. There it is, the 121. Amanda’s way ahead of it as always.

The 121, we got an interesting situation here. As you may remember, the 121 rule, the basics are two of the last five years. You have to own the property and you have to use it as your primary residence. What is the 121? If you meet those criteria of ownership, two of the last five, use of the primary residence two of the last five, and if you’re married filing joint, you can take a $500,000 exclusion against any gain on the sale, $250,000 if you’re single, except in the situation that we have here.

Amanda first had it as a rental for five years, and then she moved into it for five years as a primary. The code will say, well, you’ve held it for 10 years total, but you had five non-conforming years, five years as a rental where it wasn’t a primary residence. So 121 says that, that case, five divided by 10, that’s 50%. It says, whenever Amanda finally sells this property, whatever the gain is, let’s just say the gain is a million, 50% of that or $500,000 is not eligible for 121. In that case, she’d sell at $500,000, so I guess she’d be okay. Sorry, bad example.

You had $200,000 of gain, $100,000 would not be eligible for 121, but the other $100,000 would. We have another factor here that they throw in. She used it as a rental. They took depreciation as a rental over the years. Amanda’s seen this depreciation when she had her rental. That, we have to take into account as well. We have to take that depreciation recapture again first away from our gain, then we do the impact on the 121, that’s the 50%. We take all that away from the $500,000, then we’ll finally find out how much is eligible for the 121 exclusion.

Amanda: To summarize, for the years that you’ve been using it as a rental, you’re going to have to recapture depreciation, and this 121 exclusion is reduced.

Eliot: That’s correct.

Amanda: That is the impact of doing it. If you are previously in a primary residence, like they’re moving out of that primary into the rental, can we use 121 on that old house?

Eliot: Yeah, let’s look at that. Amanda is leaving in it. Her family’s in the house primary residence right now, and now they move out. Remember, we still have to make the two of the last five years. As long as she’s making that, she’s okay because they already qualified. They already had conforming years, two of the last five, they’re good to go. Unless she rents it out too long, we step outside of those conforming years, and now we don’t have two of the last five years, then we get pulled back into what we’re looking at here.

Amanda: How often can I do this 121, every five years, every two years?

Eliot: Every two years, typically. Unless you sell to a related party, then we may have to wait five years. There are some special rules, depending on who you sell to and things like that.

Amanda: There are always special rules around here, always special rules. Thank you, Eliot. That was quite clear. Thank you for handling that last question while I choked and Matthew had to bring me some water while I die next to you. He just keeps going. That’s how serious we are about making sure you get the answers to your questions of the tax savings that we’ll let our colleagues show a good guy.

Eliot: Yeah, we’ll just keep going. The show goes on. We’re warming down. Keep the show going.

Amanda: All right. “What is a reasonable salary range we should set for ourselves to remain compliant but still maximize S-corp tax savings?” The question asker knows that if you have an S-corporation that supplies to a true ink that’s made an election to be taxed as an S-corp or an LLC, which can also make an election to be taxed as an S-corp, there is a reasonable salary requirement. What is reasonable is essentially what we’re being asked here.

Eliot: That is a great question too.

Amanda: That is a great question. This is almost a term of art in the law. We use the reasonable man standard and a lot of things from personal injury to tax. What is reasonable to one person can be not reasonable to another. In this specific situation, can we pinpoint it down to just a number? Give me a number, Eliot. I just want a number.

Elio: No, we can’t because there’s not much art. There’s not a lot of coloring in the tax code. Amanda’s exactly right. This is the closest we’re going to get. It basically just says, what is the reasonable person make doing what you do in the area you’re doing it geographically and type of business, that’s what you go by. Suggestions out there, Google. Find out what the average person is making doing what you do in that area.

Amanda: The Department of Labor have some reports.

Eliot: They have a lot of data.

Amanda: Just go onto a job board and type in your job description. It’s a little hard to do it this way when you’re talking about your own corporation. If it’s a closely held family business or if you are the only person, you’re doing all of the jobs. I can’t add up the marketing job, the CEO job, the bookkeeping job, the service provider. I can’t add all those up. I’d be paid $1 million. How do we do it? Is there another method to figure out what a reasonable salary is?

Eliot: We use this rule of thumb. We like to look at the net income. First of all, just to set the standard here, you’re not required to do a reasonable wage if your business wasn’t profitable.

Amanda: That would be unreasonable, paying yourself money you don’t have.

Eliot: That would be the unreasonable person, which sometimes the government might be. Nonetheless, here, we don’t have to do a W-2 wage if we’re not profitable. That assumes that we are profitable. If we had $500,000 gross and we had $400,000 of operational expenses, that nets us at a hundred thousand.

A lot of practitioners out there will say, okay, well, we got $100,000. As a rule of thumb, anywhere from a third to maybe 60% might be what I’ll use as a reasonable wage, in this case about $30,000-$60,000 might be what I pay myself. That is not an IRS rule.

Amanda: What’d you say, 30-60?

Eliot: Thirty percent to 60% is typically. We have third to 60, somewhere in that range.

Amanda: I think you’ll get different percentages depending on who you talk to.

Eliot: That is very true. Yeah, 50% often thrown out there as well. Nonetheless, as you can imagine, the lower you are, 30%. Why are we doing this? Because we’re trying to save on unemployment taxes. The 30%, you’re going to have more to justify with the IRS if you ever got audited. Why was it 30 versus 60? Then you try and come out with all the studies that you found from the Department of Labor and whatever to try and defend at least.

Amanda: I’m only spending 10 hours a week on this business. Well, you don’t get $100,000 for spending 10 hours a week working, not in this economy.

Eliot: Right, exactly. With inflation, no way.

Amanda: Why do we want to make our salary lower is because that salary is going to be subject to payroll taxes, 15.3%, half paid by your company, half paid by you through withholding typically. This distribution, not subject to payroll taxes potentially coming through. Do you want to save 15.3% on all of it, on 70%, on 40%? We’re usually trying to weigh things towards this side.

Eliot: If we really want to get into it, it’s really beyond the scope of what we could do here, but we have other concepts here. If you have a wage going on of $50,000 you paid yourself, you might have something called a 199A deduction that’s dependent on that wage. You could be using things like the 280A corporate meetings or accountable plans. There are all these things that could impact. Factor how much wage you want to pay, how much is going to be distribution, what’s going to be left over after all these reimbursements, et cetera. There, you really do need the tax planning. It gets a little more complicated, but this certainly goes beyond just the surface level of understanding the wage.

Amanda: From a practical standpoint, how do I know what my net income is going to be till the end of the year? How do I pay myself throughout the year?

Eliot: Really, it’s just good planning. You try to forecast as best you can. Obviously, the closer you get to the end, you have a better idea, a better forecast. I highly recommend doing a little bit of this at the beginning of the year, and then we can see where we’re at. Maybe September, maybe August, something like that. Late July. Look how much has changed. What do you anticipate the end of the year?

Amanda: Yeah. It’s a reasonable salary, but there’s no requirement to pay yourself every two weeks. Most people want to get paid every two weeks or bimonthly, but if it’s just you running the show and you’re not quite sure, we have lots of clients who pay themselves quarterly, sometimes even wait till the end of the year to figure out this amount, cut themselves one check, and then defer most of it into maybe a retirement plan or a solo 401(k) plan. It’s not necessarily, you’re not having to set up payroll every two weeks. You can be paying yourself every quarter and adjusting that every quarter even.

Eliot: Absolutely. Another great point. Give yourself a happy thing, and then play some music over there or something.

Amanda: I do not like these. These are so goofy. I know Toby loves them, but they’re too silly for me. I’m serious.

Eliot: Yeah, hardly. Anyway, another great point though because that reasonable wage, you don’t have to do it all evenly throughout the year. That brings a lot of relief to a lot of clients. I was really stressing it. You don’t need to be doing that, but you do need to make sure you pay it, have some good tax plans, and see where we’re at on it.

Amanda: It’s really going to depend on whether you’ve got other income coming in and how frequently. All right. Shameless plug, come see us at our Tax and Asset Protection workshops, our one day webinars upcoming April 26th and May 3rd. They start at 9:00 AM Pacific and we go through till about 3:34. We tend to format very similar to this. You can come on, you can ask any questions that you want. We have typically a couple of attorneys and a CPA answering questions in the background.

The most I’ve seen answered in that one day is 1500 questions. We have excellent health insurance for all of the carpal tunnel that we get around here. We also have our three-day live tax and asset protection event. Here’s a QR code. You can snap that real quick with your phone at $99 bucks and you get three full days, and that’s going to be all day, 9:00 AM to usually 5:00 PM or 6:00 PM. We’ve got some great vendors that come out. People tend to have a good time when they come to Vegas.

Eliot: Absolutely, probably too good.

Amanda: The room’s sometimes more full on the first day than it is by the last day.

Eliot: Yeah. They lumber in a little later each morning.

Amanda: Tax deductible, business trip, so come on out and see us.

Eliot: I think it’s at the new Durango, it’s a relatively new casino here.

Amanda: Yeah, that. If you’re not a local to Vegas, maybe you don’t know all the new hotels that are coming out, but the Durango’s very nice. I’ve heard some good things about it. They’re not a sponsor.

If you do want to get involved with Anderson on the tax or the legal side, you could schedule a free strategy session. This is a 45-minute consult that is geared directly towards you. We got business advisors, senior strategists, who’s going to listen to your goals, know what your needs are, think about what assets you have, your concerns. We’re going to build a plan, a blueprint essentially for how to address those concerns and save you money moving forward. Free, not even $99.

“If a person is a W-2 wage earner and wants to start real estate as a side job, what needs to be true when picking real estate options to maximize asset depreciation to help offset my W-2 taxes owed?” We’re in the same wheelhouse that we’ve been most of today. Hi, W-2. How can real estate help me reduce my overall taxable income? A lot of the same things come to mind.

Eliot: It really is, but this allows us to pull it all together again. If you’re going to do that, we have an option as far as, are we going to go for long-term rentals or short-term rentals? We want to look at that first. It’s going to be a lot easier to do the short-term rental typically, because it’s a lot less time requirement. Over a hundred hours more than anybody else or 500 hours of material participation, that usually is going to get us in the ballpark for our short-term rental.

You brought up another great point earlier. You want to have that house somewhat nearby so that you’re managing. You don’t want it across the country. It’s a little more difficult, a little more challenging to prove that. It’s not that we don’t have clients that do do that, but you want to really document and make sure you’re showing any of this that you do, whether it’s short term or long term. Make sure we’re documented. Those are all thoughts I would have immediately.

Just remember that if you don’t meet the particular standard, material participation for short-term rental, a real estate professional for a long-term rental, if we don’t meet that requirement, it all becomes passive loss, which can only offset against other passive income. We want to keep that in the back of mind because we aren’t going to offset that W-2 unless we meet those standards.

That long-term rental, we haven’t hit that as much, but the real estate professional Amanda went through the test earlier, over 50% of your work week has to be in a real estate trade or business that you materially participate in. If we’re W-2 wage earner, it’s real difficult. Oddly enough, the one case that we often point back to is a guy who did just that. He was a pilot on a riverboat, used the same term pilot.

Amanda: You learn even non-tax things around here.

Eliot: Exactly. He had bunches of rentals, and he had just great records and support from his work staff on the boat of how much time this gentleman spent on his rentals when they weren’t on the river. He was able to document that. Even though he had maybe a 40-hour a week pilot job, he still was putting far more time into his rental real estate. We wouldn’t recommend that for everybody. It was a very difficult standard and he just lucked out and hard work.

Amanda: We see this. If you’ve got a normal nine to five, 40-hour a week job, it’s really hard to hit real estate professional. But if you are married and your spouse works inside the home and doesn’t get paid, the type of labor that the IRS doesn’t recognize but is often harder than other types, then your spouse can qualify as the real estate professional fairly easily. The 750 hours comes to just about 14½ a week in terms of material participation hours if you’re married.

I’ve seen firefighters, high W-2 sometimes, work those three to four shifts, so half the time they’re not on call. Teachers, if you’re not substituting or doing any tutoring over the summer, you’re working nine months outta the year instead of three over the summer, my first real estate partner was a professional soccer player, they don’t work very hard. Games are only 90 minutes, practices are a few hours. He had a lot of extra time. Instead of playing FIFA, he invested in real estate, so he met the standard.

Real estate professional status, not impossible, but it does have to fit your situation. Short term rental loophole, though, anyone can do that. You do need the desire because if you’ve got a full time job such that you’re earning a high W-2, assuming you’re working a lot of hours, doctors, lawyers, things like that, you do still have to put in the work. There’s no outside restrictions for short-term rental loophole. You just materially participate.

In terms of what are we looking to be true in picking real estate options, there isn’t any parameter in terms of single family home, multi-family home condo, the type of property, mobile, home, those types of things. Can you do short term rental loophole with a timeshare? I guess it would be hard. You usually don’t have a timeshare for the whole year.

Eliot: Yeah, I just stay away from the timeshare, so it’s bringing up a lot of other problems, namely if you ever want to get rid of it. There’s a lot of issues with their, and it actually depends on the title or your ownership is on that. I would stay away from that.

Amanda: The type of property, not really relevant. If you are doing short-term rental, most people are thinking vacation location type of places, but plenty of people make pretty decent real estate portfolios with non vacation area, short-term rentals, things close to hospitals for people who have to come in and visit family. Personally, our family’s a soccer family, and we are in Airbnbs almost every weekend for soccer tournaments. I’m just looking at an area that can sustain that type of rental activity.

Eliot: Common problems that we have run into, just remember when you get that building, again the real estate, the land, not depreciable. You want to factor that in when you’re looking at the price of it. Some places, the value of the land is far more than the structure itself. Keep that in mind. Again, the distance is another factor. Even under the rep status, long-term rental, you also have to materially participate in the management of your properties, so that would almost necessitates having that property a little bit closer, at least one or two of them.

Amanda: Very true, very true. “If I experienced a loss from a flood that was declared a natural disaster in 2024, how do I take that credit on my taxes?” First, it’s not a credit, it’s a deduction.

Eliot: Right, yeah. We want to be careful because tax credits are a direct dollar for dollar reduction in your tax liability. It’s not a credit, it is an expense deduction though. Potentially, how do we do it?

Amanda: There’s a difference between personal and business. What do you want to do first?

Eliot: Yeah, let’s do personal.

Amanda: I got you. You can keep going.

Eliot: On our personal, number one, we have to have a federally declared disaster. That’s the number one aspect we’re going to run into. Now, lot of the rest becomes somewhat similar to the business, but let’s look at this. What you’re going to do, it’s going to be the lesser of. We have an equation we have to use here. We’re going to look at the adjusted basis. That’s what we originally purchased the building for. In this case, personal, so it wasn’t used for business.

Maybe we made some additions added to it, but we probably didn’t do anything to really subtract until the natural disaster happen. We’re going to take less of that versus the fair market value of the asset before the disaster hit minus the fair market value of the disaster after. We take the lesser of those two components, that is the adjusted basis or the differential change here. Because it’s personal, we have to subtract $500 from that.

Amanda: That’s rude.

Eliot: It is. The remainder then becomes our deduction. You do actually have to file a claim. That has been a problem. Sometimes people don’t file a claim, so they’re not allowed. Again, this is all in the personal aspect, personal asset.

Amanda: Okay, business.

Eliot: Business, very similar with a few twists to it. Probably the number one starting point, no natural disaster needs to be declared. Significant difference number one. Our overall calculation is pretty much going to be exactly what we just did above, again, the lesser of the adjusted basis or the fair market value before or after, whichever is less. We don’t have a $500 deduction here like the personal does. In that, we’ll get to our business, and we don’t have to file a claim either. We can just put this on the return for that particular business.

One little caveat. What if the asset is completely wiped out? Total loss on the business component here. We have just a slight different calculation. We’re going to take the adjusted basis minus any salvage value. What’s left? If there’s just a bunch of wood laying around, well, if we sell the wood, what’s that worth? Lessen the insurance proceeds.

Amanda: I’m running out of room.

Eliot: That’s going to be our deduction.

Amanda: Adjusted basis minus insurance, minus salvage.

Eliot: In the above too, if you have insurance, you would subtract that as well from overall loss with the $500. You always take it into account.

Amanda: Can’t get a windfall as they call. You can’t take the deduction and the insurance, so we’re going to lessen our deduction, because we obviously still want to take that insurance. Are we good?

Eliot: Yup, we’re good.

Amanda: All right, jump to the next one. All right. “How do you depreciate remodel costs for an income property, so a rental property?” In this example, purchased the property 10 years ago for $100,000 and then began depreciating it. This year, they put $30,000 into a remodel, floors, paint, kitchen cabinets, appliances. First of all, what happens to that $100,000 if we haven’t fully depreciated it? Do we still just keep depreciating at straight line?

Eliot: That’s exactly what we do. Let’s just take the standard run of the mill, 27½ long-term rental depreciation life. You take the $100,000, divide it by 27½. Just a little bit under maybe around 22,000 a year or something like that. They did it for 10 years. That’s slowly being depreciated against that $100,000 of purchase. Remember, land not being a factor here. All of a sudden, we went out and bought these other assets for $30,000.

We don’t just throw that on to everything else here, into the pile. We look at those as separate assets. Typically the floors, paint, kitchen, cabinets, appliances, they all have their own depreciation life. Floor is often five, kitchen cabinet is five or seven, typically, the paint usually is just an expense unless it’s part of an overall renovation, which it sounds like it might be here. We would probably would add that amongst these costs in order to be capitalized and depreciated.

The big point here is that we don’t just add $30,000 onto our $100,000. We’re going to track those separately on the return, our floor amount to be depreciated. The kitchen cabinets and the appliances, there, we might be able to get away. If they’re under $2500, we could probably get away with the de minimis election, which says if that appliance is under $2500, Amanda is renovating her rental, she gets a new washer and dryer set there, it’s under $2500, she can go ahead and immediately expense that, and then she also goes out and gets a refrigerator, separately it’s under $2500. Do the same thing unless it’s a really great fridge.

Amanda: I don’t want those. When the robots take over, we don’t want those expensive fridges in our house.

Eliot: I’ll use the fridge all day long.

Amanda: You get to deduct that immediately instead of depreciating, which is essentially taking the deduction over time. We’re going to have multiple depreciation schedules going on. Now in order to separate out the floors, the paint, the kitchen cabinets, the appliances into these 5, 7, 15-year property, can I just do that on my own, or do I need to do a cost segregation study?

Eliot: I would suggest a cost seg.

Amanda: Yeah. It gets complicated.

Eliot: Yeah. If the dollar amount gets up there, and it may be beneficial to have done it overall with the original $100,000, we just don’t know, but it’d be worth looking at and seeing it. A little a sidestep here. What if what’s going on here is we were just fixing the floors or just doing the cabinets? We could fall back in underneath that $2500 de minimis election. She can go ahead and expense that just by itself. The cabinets and that’s all she did, it was a $1200, she could go ahead and meet that standard there. Here, we have that sense of an overall renovation going on a little bit bigger plan scheme. The IRS is clear on that, no, we got to start depreciating that.

Amanda: Yeah. Could you spread each of these things out over the course of the whole year and call them separate?

Eliot: You could certainly make that argument. There, we’re arguing. You’re trying to build a case one way or another.

Amanda: If you want to argue with the IRS, then you go for it. I don’t want to.

Eliot: I won’t be.

Amanda: This is a long one. Okay. “I’m interested in using the 280A/Augusta rule rental of my home for an upcoming seminar I’ll be attending online.” Let’s stop there. What is 280A or the Augusta rule? It’s where you can rent out your home to actually any third party for up to 14 days. It’s actually in the code. It says less than 15 days, which to us lay people means 14 days. You receive that rental income completely tax free. I could rent my home to Eliot for 14 days. When he pays me that, I don’t have to report it on my taxes. There’s nowhere to even report it, so it’s tax free income.

What we have been advising clients to do is combine that with the need to have meetings in your company. A corporation needs to have a director or shareholder meeting at least once a year. An LLC doesn’t require a meeting, but we do recommend you guys to have meetings at least quarterly, at minimum at least once a year. Instead of renting out to a completely different third party, hey, let’s rent to our own business. That’s going to take income coming into our business. Pay it to us. We put it into our pocket completely tax free, and then it reduces the taxable income on our LLC. That’s essentially what we’re talking about in terms of why we’re doing 280A meetings online.

This question gets into the nitty gritty of how to establish that rental rate. “Am I allowed to use this strategy if I’m the only person attending? Can you have a one person meeting?”

Eliot: Quick answer, yes.

Amanda: All right, that is a quick answer. We have a 280A kit for our platinum clients. You can go into the platinum portal, you can download this 280A kit. It walks you through step by step how to do that. Number one thing you’re going to want to do is get quotes for similar space from hotels, work life spaces, things like that. You’re typically getting a quote for a conference room.

The submitter makes a good point. If you call a hotel and say, hey, can I get a quote for one person to be in a conference room, they likely would just laugh at you. Unfortunately, different hotels will have different types of rates. It may be per person, it may be a food and beverage minimum, F and B it’s called. It’s a little tricky to do that if it’s one person. I would take the smallest space that they have, the smallest quote.

There’s also a lot of online options, quote generators. You can Google conference room, quote generator, plug in your info. Just get that without having to individually call or email any hotels. What have you seen people do with less people?

Eliot: Again, the quick answer is yes. You certainly can have a meeting with one person. There’s no question about that. However, we do strongly recommend that you do have others, maybe if you’re watching this seminar online, have other people come over, they’re like-minded, there maybe investment, maybe you have family that’s working for some of your entities or something like that. Yes, you can have one person. We really recommend having someone else over.

A lot of these meetings too, you watch the online seminar, maybe it’s not all day long, have someone come over. You have a friend, a family member, a colleague who’s into marketing, have them come over and answer questions that you might have about marketing, bookkeeping, or what have you. Whatever it be, you have that attendance. When we go out and we get these quotes, you can feel free in saying, hey, I need something for about five to 10 people. That’s what I’m looking for, a small conference room.

Remember, you only have to do the quotes once a year. You get two or three for a year. You don’t know that every meeting’s going to have a single person attending. Feel free to go out and get a quote for five to 10 people because you very well might have that going on the rest of the year.

Amanda: Yeah, and it doesn’t need to be a company meeting. It can be a networking event, it can be a mixer, it can be anything. Different from maybe using your home for a home office, it doesn’t have to be a space dedicated to that meeting use for the whole year. A home administrative office that you’re deducting, that does need to be exclusively used for that space. You couldn’t use your dining room table or your kitchen counter as your home office and take a deduction throughout the year because you’re eating dinner there, you’re eating breakfast there.

For this 280A strategy, you can use your living room, your dining room, a whole different room that you use separately for something else throughout the year, because we are just physically renting it for that one day or 14 days, ideally, throughout the year.

Eliot: I completely agree with Amanda on the various uses of it. I would be a little cautious if we do too much of the entertaining because entertainment is not a deduction. The IRS does hit on that. I won’t go into detail on the case of that, but I had a boat where it completely got wiped out as a deduction after just one use of someone entertaining on that boat. We don’t maybe want to do too much on the entertainment, but that’s not really what she was saying. She was doing more of a marketing type thing. Just be careful on that, but absolutely there’s a lot of ways you can use that.

Amanda: Yup. I had a client come into our platinum knowledge room. He’s doing this 280A strategy. He’s like, if I take my whole list of clients and invite everyone, over 300 people, do I get a quote for 300 people?

Eliot: I would.

Amanda: It depends, right?

Eliot: If that’s going to be the food and beverage part of it, I would say so, yeah.

Amanda: Yeah, it depends. If you have 300 people that you could invite to a wedding and you’re not sure if they all come, you still need a space for 300 people. In this particular case, the client’s listserv of people were not all local. If we’re inviting 300 people that are actually in a different country, they’re probably not coming to your meeting. You still want to make it reasonable of who potentially could show up, not because they think your party’s going to be good or your meeting’s going to be good but are physically close enough that it would account for that.

In terms of a quote, let’s say I got a quote for 500 a day, we got a quote for a thousand a day, and we got a quote for a really nice place with gold plated furniture for $10,000 a day, which can we use? What is a reasonable quote?

Eliot: A couple different factors here. You could add them all up, divide by three, and get an average. You could look at it from the aspect of how profitable is the business, because if you only made $10,000 of profit, no company’s going to go out and pay $10,000 for a meeting room.

Amanda: That’s fair. This is a reasonable quote. You went out and you got it on the open market, so you could use $10,000.

Eliot: Again, you still have the argument. Here, we would start making arguments.

Amanda: Yeah. We don’t necessarily want to have $140,000 meeting expense on your business tax return when your business only made $152,000. That’s going to raise some red flags with the IRS, so we still want to make it reasonable.

Eliot: Absolutely.

Amanda: All right. I think that’s our last one, Eliot.

Eliot: It is?

Amanda: It is. If you have not subscribed to Toby’s YouTube channel, you’re on it if you’re on YouTube. We do Tax Tuesday every other Tuesday, live. You could get notified if you smash that subscribe button. Also, if you’re interested in the legal and the asset protection side, these two things are very closely connected, especially when we’re talking about real estate investing, stock trading, things like building wealth, you can subscribe to Clint Coon’s YouTube channel. Those are our two founding partners. They taught us everything we know.

Eliot: Absolutely.

Amanda: Yeah. We do a lot of reading too. We do a lot of our own research. Again, join us for a full day of tax and asset protection, Saturday, April 26th, starting at 9:00 AM Pacific, and then again on Saturday, May 3rd. We run those most Saturdays out of the year. If you can’t make those two, register now, we’ll send you some emails for the next one coming up.

We also have our three-day live event. These are actually super fun. I know your idea of Vegas when you were maybe in your twenties was not hanging out with a bunch of lawyers and CPAs in Vegas, but they’re actually really fun. It’s great to see clients who have been clients for years. They come in. It’s additionally a great networking opportunity. Got a lot of deals that get done in those back rooms.

If you’d like to become an Anderson client, click this QR code and schedule your free strategy session. It’s 45 minutes with a business advisor or a senior strategist. We’ll go over your assets, your concerns, your goals, and we’ll put together a customized structure for you. Here’s the QR code for our live event. Again, you can also find all this information on andersonadvisors.com.

Finally, if you have got any questions, we did a lot short term rental, we did a lot of real estate. We usually do a lot of real estate. If you didn’t get your question answered, you can hit us up at [email protected]. If you say something really nice about Eliot, he’s probably going to pick your question.

Eliot: That usually doesn’t happen.

Amanda: Come on, guys. Give him some love.

Eliot: Speaking of love, just a thanks out to our team. There’s 160 plus questions.

Amanda: Just in the Zoom, that’s not even counting what Troy’s doing on the YouTube channel.

Eliot: Yeah, we got Jennifer G out there, Arash, Dutch, George, Jared, Jeffrey, Marie, Rachel Ross, Tanya, Troy carrying the day. Thank you all. We got Kenny, we got Matthew.

Amanda: Kenny and Matt in our studio. Thank you, Matt, for saving my life here with this water.

Eliot: Because Eliot wasn’t moving.

Amanda: Because Eliot was going to leave me to die on the side of the road. That’s it for us. Join us next Tuesday. It was great to talk to you guys. Have a great week.