In this Tax Tuesday episode, Anderson attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle listener questions on choosing the right business structure and maximizing tax savings. They explore when to switch from sole proprietor to S-corporation status, explaining the sweet spot for making the transition and the significant tax benefits available through S-corps versus Schedule C filing. Amanda and Eliot dive deep into house flipping strategies using C-corporations to avoid dealer status and self-employment tax while maximizing deductions through accountable plans and bonus depreciation. They clarify the complexities of 1031 exchanges, especially when properties are held in partnerships, and introduce the “lazy 1031” strategy for offsetting capital gains using passive activity losses. The duo also addresses managing multiple LLCs without creating excessive tax filing burdens, deductions available for nonprofit volunteer work, and creative ways to fund retirement accounts through trading partnerships. Whether you’re a truck driver looking to reduce your tax burden or an investor navigating 1031 exchange rules, this episode delivers expert guidance on structuring your business for maximum tax efficiency!
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- “I have a trading partnership with 40% C-corporation and 60% myself for ownership. The partnership makes around $20,000 in ordinary staking income.” We’re going to be talking about Bitcoin. “Can the C-corp use its $8000 in income to fund a 401(k) owned by the corporation since this is ordinary income?” – Yes, use solo 401(k) or tax-free reimbursement strategies instead.
- “What kind of deductions can I use as a C-corporation to offset capital gains from a house flipping?” – House flipping creates ordinary income, not capital gains, offset accordingly.
- “If I have multiple LLCs, do I have to file multiple tax returns?” – It depends on entity type and how they’re connected.
- “I am a sole proprietor, independent truck driver, and I feel I’m paying very high taxes. What can I do?” – Consider switching to S-corp for self-employment tax savings at scale.
- “My tax preparer says, don’t switch to an S-corp. Make an S-election until your revenue hits a hundred thousand dollars. Why is that? And how will an S-corp help me?” – S-corps save self-employment tax but add compliance costs and complexity.
- “If a property purchased via 1031 exchange is held in an LLC partnership, can it be converted to personal use like a personal residence after two years? If so, what are the tax implications?” – Extremely complicated; partnership ownership creates significant tax issues and barriers.
- “How may I pay no capital gain without a 1031 exchange?” – Use the lazy 1031 strategy releasing suspended passive losses.
- “If I volunteer my work or my time at a nonprofit agency, are there any tax deductions that I can take?” – Personal time isn’t deductible, but mileage and expenses are.
Resources:
Schedule Your Free Consultation
Tax and Asset Protection Events
Full Episode Transcript:
Amanda:  All right, everyone. Welcome into Tax Tuesday, where we bring tax knowledge to the masses. We are the tax knowledge, you are the masses. All right, welcome in. My name’s Amanda Wynalda, and this is…
Eliot: Eliot Thomas.
Amanda: Eliot Thomas. We’re both with Anderson Advisors, which you probably know since you’re here. All right. Go ahead and throw up into the chat where you’re from. We always like to see where everyone’s joining us from, the furthest that you’ve been able that you’ve seen somebody come join us for Tax Tuesday.
Eliot: I think Singapore. We had a couple there. We got everybody. Santa Jose, Dallas, Dallas. Go, Cowboys.
Amanda: Best fingers out there. Reno.
Eliot: Seattle, Colorado.
Amanda: Colorado, that’s your old stomping ground.
Eliot: Yup.
Amanda: Castine, Maine.
Eliot: Nice. Been there too.
Amanda: Portland, Phoenix, San Bruno, California. That’s my hood. California, not San Bruno, from the IE. Most people are not admitting that. Pocatello, Idaho.
Eliot: In the house in Mobile.
Amanda: Yeah. What’s up Bob? Good to see you. White Plains, love it. Dallas, New York.
Eliot: Lot of Dallas.
Amanda: Yeah, which is great because we have some news for Dallas earlier.
Eliot: Yes, we do. Yeah.
Amanda: Welcome everyone. Welcome. We’ve also got a lot of our own people here.
Eliot: In flight.
Amanda: In flight? Oh, that’s the new furthest away because what is that? 30,000 feet. I guess that’s not as far as Singapore.
Eliot: It’s the highest though.
Amanda: Maybe if you were in the space shuttle, we could say so.
Eliot: Right.
Amanda: All right. This is how Tax Tuesday works. You’re going to use the Q&A for, you guessed it, questions. That is also where you’ll get answers. We have a private mode, so you can put as much information in. Nobody else in the Zoom is going to be able to see your answer. We’ve got a top crack team of advisors in the background answering. Who do we got with us today, Eliot?
Eliot: I don’t have that list, but I know they’re there. You know we got Patty. I can see her out there.
Amanda: Patty. I know Troy, if you’re watching us on YouTube, Troy Butler from our tax department will be answering questions on YouTube.
Eliot: I thought I heard Rachel in the background talking about her million steps.
Amanda: Yeah. We’ve got a step challenge going over on here at Anderson Advisors. Rachel walked over 500,000 steps last month.
Eliot: One million.
Amanda: One million steps. Stop it.
Eliot: Yeah.
Amanda: Oh, my God. She blew everyone away. We take things seriously around here, even how many steps we take.
Eliot: I was her coach. It was the training.
Amanda: Stop. That’s not true. That’s not true at all. Usually we got Dutch and who else?
Eliot: Yeah. I’m sorry, I don’t know who’s on the list.
Amanda: Jared. Stop making him names, Eliot.
Eliot: Yeah, Jared. Who else? Tanya’s in there a lot. Yeah, Jared, Dutch.
Amanda: Regardless, lots of CPAs, lots of tax attorneys in the background. If you do have a question, it doesn’t have to be related to anything that we are talking about. Go ahead and put that into the Q&A. If you’re having any technical difficulties, throw that out into the chat. Ms. Patty will also be making some announcements and giving you some links in the chat as well.
If you’d like to email your questions in, you can do so at at taxtuesday@andersonadvisors.com. We were a little light this month, so please send them in, because Eliot likes nothing more than to read tax questions and decide what we’re going to talk about. We don’t always like talking about the same thing.
Eliot: Yeah. I sit down, I read them all. I listen to the Bloomberg channel.
Amanda: What episode are we on?
Eliot: We’re at 256.
Amanda: Yeah, so come up with your wild and crazy tax questions. Send them on in to taxtuesday@andersonadvisors.com. If you need a more detailed response, which is often the case, we’re going to talk about general concepts, but taking these concepts and breaking them down and applying to your specific situation is going to get you a lot further along in your tax saving goals.
You can become a platinum or a tax client. We’ll give you a QR code and a link in the chat to do that. This forum is designed to be fast, fun, and educational, which are really the three words you think about when you hear Tax Tuesday and taxes. Let’s get into what our topics are.
All right. “I have a trading partnership with 40% C-corporation and 60% myself for ownership. The partnership makes around $20,000 in ordinary staking income.” We’re going to be talking about Bitcoin. “Can the C-corp use its $8000 in income to fund a 401(k) owned by the corporation since this is ordinary income?” A lot to unpack there. What else do we got, Eliot?
Eliot: “What kind of deductions can I use as a C-corporation to offset capital gains from a house flipping?”
Amanda: A lot of semantics, a lot of inaccurate words in that question, but we’re going to break that down for you. If I have multiple LLCs, do I have to file multiple tax returns? This is a great one because when we’re talking about putting together an asset protection structure, we don’t want to make our lives more complicated, do we?
Eliot: No, we don’t have to.
Amanda: Yeah.
Eliot: “I am a sole proprietor, independent truck driver, and I feel I’m paying very high taxes. What can I do?” We used to get this a lot on a lot of clients that were truck drivers.
Amanda: A lot of truck drivers out there. Hey, we need our stuff to move back and forth. There’s a lot of truck drivers in Vegas because we got a couple of big Amazon warehouses out here.
All right. “My tax preparer says, don’t switch to an S-corp. Make an S-election until your revenue hits a hundred thousand dollars. Why is that? And how will an S-corp help me?”
Eliot: “If a property purchased via 1031 exchange is held in an LLC partnership, can it be converted to personal use like a personal residence after two years? If so, what are the tax implications?”
Amanda: That’s always the question. What are the tax implications? Here’s the simple one. “How may I pay no capital gain without a 1031 exchange?” A couple 1031 exchange questions. We’ll go over what that is, what the rules are, and in these two instances, whether or not they make sense for you.
Eliot: Yeah, absolutely. Lastly, “If I volunteer my work or my time at a nonprofit agency, are there any tax deductions that I can take?” We get this quite a bit too.
Amanda: Yeah. Especially this time of year when we’re thinking about tax planning and going into the end of the year, charitable contributions are always a big topic of conversation.
Eliot: Speaking of which, Karim’s going to have the nonprofit show coming up here. I think it’s on the 11th and the 17th as I recall.
Amanda: I wrote it down.
Eliot: I wrote it down too.
Amanda: Nonprofit workshops. Our nonprofit attorney, Karim Hanafy, he likes to say, if you like a little Karim in your coffee, come to our nonprofit workshop. We’re going to host that November 14th through 17th. This guy worked at the IRS for over 25 years approving or disproving the applications for nonprofit or tax exempt status. For 25 years he did that, and now he works for us to help you guys, our clients, start your nonprofits. He has a 100%. Not a single application that he’s worked on for our clients’ nonprofits that we’ve set up for them has been rejected by the IRS.
Eliot: When the IRS is open.
Amanda: Yeah, that’s fair. That’s fair.
Eliot: That little asterisk on there.
Amanda: Government shutdowns, a lot of times you’re regular person so you don’t really see it happening. I worked at the IRS’ chief counsel’s office in law school, and government shutdown happens every four years. Usually it feels like I got to work, door was locked. It’s like, what’s going on? I called in. Hey, where is everyone? The door’s locked. How do I get in? They’re like, the government shut down, go home.
Eliot: Wow. I just can’t imagine. It’s got to be a shocker. Free day.
Amanda: Yup. I was still in law school, so…
Eliot: Yeah, got back to studying?
Amanda: Got back to studying, that’s for sure. All right. If you are here on Toby’s YouTube channel, why don’t you subscribe? Head on over to Clint Coons channel after Tax Tuesday, of course. Subscribe. Clint Coons is one of our founding partners. He hit a milestone recently, over 300,000 subscribers, close to 900 videos about asset protection. Lot of information. If you are want to go to YouTube University, this is a great channel to follow.
In addition to this channel led by our fearless leader, Toby Mathis, another founding partner here at Anderson Advisors, Toby and Clint are always in a little bit of a competition. Who has more videos? Who has more subscribers? Toby blows Clint out of the water though, over 500,000 subscribers and over 1100 videos. If you haven’t yet, like the kids say, smash that subscribe button. You’ll get a notification when we go live for Tax Tuesday and when another video is posted. Speaking of Dallas, if you’d like to join us live, we will be in Dallas, December 4th through 6th. I won’t be there. Are you going?
Eliot: I believe I am, but I’m not sure yet.
Amanda: Eliot’s going to be there, he’ll be there. Also Jeff Sulkin, who answers questions in our Q&A, he’ll actually be teaching our tax section at our live event. It’s three days, all tax and asset protection, really everything you need to know.
Eliot: Yeah.
Amanda: People come back over and over because it’s so much information coming. Just once isn’t enough. If you’d like to join us, tickets are only $49. Limited availability, of course. These events always sell out, so get your tickets early. If you can’t make it all the way to Dallas, can you make it to your couch?
Eliot: Yes.
Amanda: Most of us can. You can join us on one of our tax. Maybe you’re there right now. That’s true.
Eliot: We’ll move.
Amanda: Our tax and asset protection webinars. The next one’s coming up Saturday, November 8th, and then the following Saturday, November 15th. That’s my sister’s birthday.
Eliot: Hey.
Amanda: Yeah, hey Happy early birthday, Melissa. 9:00 AM to around 3:34-4:30 PM. Again, a lot of tax and asset protection. I teach those webinars every once in a while. They’re a lot of fun. Same type of forum, come in, ask questions, all of that good stuff. If you’re ready to schedule a strategy session, go ahead and click on this QR code. You will get a free, absolutely free 45 minute strategy session with a senior strategist, a business advisor, where they’re going to listen to what your goals are, what your assets are, what income you have coming in, and create asset protection and tax structure just for you. Personalized, that’s what we like to do.
Eliot: Yes.
Amanda: None of this cookie cutter stuff?
Eliot: No.
Amanda: Not for you guys. All right. “I have a trading partnership with 40% C-corporation ownership, and 60% the individual owns. The partnership makes around $20,000 in ordinary staking income. Can the C-corp offset its $8000 to fund a 401(k) owned by the C-corporation since its ordinary income?” Let’s start off with the staking income. What is that and why does that make a difference, or does it make a difference?
Eliot: It can, as always, it depends. The staking income is how we create a lot of the crypto. If you have bitcoin, they call it staking, where they use your bitcoin actually to help create the next in the blockchain and things like that. Once paid in that particular crypto, in a sense, you’re working. You’re actually or at least your product is working. It’s making earned income. Often it will not only be ordinarily taxed at your tax bracket, but also subject to employment tax as well. That’s why staking is always isolated and brought out for its tax aspects.
Amanda: Yeah. In a C-corporation, the fact that it’s staking income, does that matter?
Eliot: It doesn’t really. It’s a good question because in a C-corporation, it’s a separate taxpayer. It’s not a human, but it is a separate reporter or a separate payer. It doesn’t really get hit with employment tax. It would just get hit at its ordinary flat rate of 21%, which really brings us back. Why do a trading partnership to begin with?
Ordinarily if you had some income, let’s say we had a hundred dollars of the staking income come in, if we didn’t do anything, it’s all going to hit your 1040, your personal tax return. We subject the taxes at your ordinary rates, and again, very likely going to be hit with employment tax as well, which is 15.3%. It’s not a small amount. It’s part of your social security, your Medicare, and things like that.
Again, if we had a hundred dollars all hit your personal return, that’s what we got going on. As we had in this question, as Amanda just put up there, what if 40% was owned? We put that same hundred dollars into a trading partnership. Two partners. C-corporation, 40%. The individual is 60%. That a hundred dollars just got split. The individual there with 60% now only gets $60 in this case, $40 goes off to the C-corp. We automatically have tax savings on the 1040. We didn’t pay any tax on that $40, the 40%. Now that it’s going to get taxed 21%, but still it’s not at your ordinary rates. However, once in the C-corporation, we have a lot of goodies to get that out of their reimbursements and things like that.
Amanda: Why are we doing this structure though? Why do we want to trade this way instead of just opening a brokerage account in my personal name and trading that way?
Eliot: A couple of reasons. (1) If it’s in your personal name, we know you’re open for lawsuit then. If you run over my foot, she actually parks next to me and…
Amanda: I run over his feet every day.
Eliot: All the time. One of these times, I’m just going to have, that’s enough. I’m tired of it and I sue her. I’m going to take her hundred dollars, probably a lot more than that. That’s why we don’t want it in our personal name, so we certainly want the asset protection aspect of it. I wouldn’t say it’s the biggest reasons, but it’s certainly a central one, but again, the tax savings as well.
Right now, if you had that hundred dollars again hitting your personal return, all will be taxed there. We just took $40 of it off your 1040, put in the C-corp. Got lots of tools to help get that out of there.
Amanda: Now, we’ve got that 40% of our income into the C-corp. How can we get it out? To the call of this question, can I then set up a solo 401(k) and shift the income over there? Sure. Why not?
Eliot: You can, but it’s not simply just that $40 that we had. The question was asking, can we take it’s ordinary income, we agree with that. Because it’s ordinary income, can we just put it into a retirement plan? It’s not so simple.
Amanda: Yeah. It’s not ordinary income to you as the individual yet. We’ve got to pay ourself. a W-2 salary.
Eliot: Exactly right. It’s the individual that’s going to have the plans sponsored by the C-corp, but it’s the individual’s plan. We have to pay that individually. Here, she has to have a W-2. In this case, we had $8000. Let’s just say we paid $4000 in W-2, now that’s going to hit her 1040. Here, she’s going to pay tax on that, and it’s going to be subject to employment tax.
They could defer it into the solo 401(k). We have about $23,500 for an individual as far as deferment. That would just mean they pay no tax at this point. It goes into your 401(k) and just grows tax free until you ever take it out later on in retirement. That would be one item. Yes, we have different categories now under the Big Beautiful Bill. I always want to call it the big bad bill but in a good sense.
Amanda: It’s beautiful. Bad isn’t good.
Eliot: Exactly, it is. As far as the categories going on, we can put a lot more especially 60-63. This is something new as of July 4th.
Amanda: Super catch-up contribution.
Eliot: Yes. For those lucky enough to be in that age group, 60-63, you can put over about $11,000 more into your retirement plan. If you’re below that, we have the regular catch-up of about $7000 approximately. It drops back down to that at 64. In this case, we have enough money that we could pay the whole W-2 and get it deferred, certainly. That’d be one way to do it.
That is earned income by the employee. The employee can put in there. Now, if it was only $4000, then the C-corporation as the employer could put in up to 25% of that earned amount in there as well. Twenty-five percent of $4000.
Amanda: Twenty-five percent match.
Eliot: Twenty-five percent of the $8000 earned income would be $2000, so we’d have another $2000 being put into there. It makes for a really nice contribution for both employer and employee. A lot you could do here.
Amanda: Yeah. As the income for this trading structure grows, you can even put away up to $70,000 doing the mega backdoor Roth strategy, $77,500 if you’re over 50. How that works is you are making your W-2 contributions, your employer. The C-corporation is doing the match, and then you’re allowed what’s called an after tax contribution.
This solo 401(k) basically has three buckets. You have a traditional, you have a Roth bucket, and then you have an after tax bucket. Meaning that you receive the salary, you pay tax on it, but then you can after the fact, contribute it into that after tax bucket up to a total maximum. Your contribution, your employer contribution, and your after tax contribution up to that max of $70,000. If you’re doing a Roth conversion as well, then those distributions, once you start taking them, are going to be completely tax free.
This can be a very powerful strategy. As Eliot said, sure, you are going to be paying some tax by the virtue of the fact that you’re receiving a W-2 salary. But if your goal is to save for retirement, that’s what tax planning is. Sometimes we’re paying a little tax over here because we’re getting a larger tax benefit in the long run over here. I have quite a few clients who are not doing staking necessarily. They’re doing options trading or other types of things, but they have this structure. It’s their only source of income, but because trading income is not earned income, so you can’t contribute to an IRA, or you can’t normally contribute that to a 401(k), the only way for them to save for retirement is by doing this strategy exactly this way. It works for them.
Eliot: It really does. I know it can get confusing. We throw a lot of terms out there. In this case, we did have staking. It is ordinary income, but what if we didn’t have the staking? What if it was just stock trading, capital gains, long term, short term? Same thing applies. You’re going to have that money coming into the C-corporation. Let’s say it’s $8000 of short-term capital gains. Same story, you could still pay a W-2 out of that. You receive that W-2. It’s a deduction to the corporation. That’s an employment check.
It is exactly the same thereafter. You pay a little bit of tax for the employment tax, make your contribution. If your employer or the C-corp, can make a contribution, so we get to the same spot. Just don’t want to get confused. The fact that we had staking, which is an ordinary income that’s unique, it’s special, that doesn’t change anything. As far as this trading partnership, we can do the same thing if we had capital gains.
Amanda: Yeah. In order to contribute to that retirement plan, it has to be earned income to you, not to the corp.
Eliot: Exactly. That’s the big ticket.
Amanda: Yup. All right. Could you do this? Let’s say you were just trading in your own LLC or just in your personal name. Is there a way to make this work for retirement? Saving for retirement as well?
Eliot: Not really. If we put in a safe assets, LLC, which we often talk about, Amanda was saying, why put it in an LLC because Eliot might sue her, we put it in a box. If Amanda doesn’t get paid a wage, and she hasn’t really done anything to earn anything out there, we probably wouldn’t have that going on in this situation. It would just be the capital gains hitting your return. Nothing wrong with that. It’s just we have this better option maybe if we can do the trading partnership, but we get a lot of clients that, well, I just sit back, I have ETFs, I’m just dividend income coming in, then maybe the trading situation isn’t quite for you.
We can always look at that. We’ve had situations where clients make a lot on the dividends on dividend trading, but we have techniques that we can do to enhance that to where they can get earned income as well and go through all the things we talked about.
Amanda: All right. Second question. “What kind of deductions can I use as a C-corp to offset capital gains from house flipping?” All right, Eliot, I got three questions that come off this. First of all, what is flipping? Let’s talk about that. Why would we do flipping in a C-corp? Why is flipping in a C-corp not capital gains?
Eliot: Right? Okay. What is flipping? Flipping is the concept that you find an undervalued home out there or some typically residential area of some nature, and you just rehab it. Bring it up to speed up to the current specs, if you will, or something like that. Sometimes you can find an undervalued house, you just buy it, and there’s nothing that needs to be done on it. You just have a better eye for that thing than the seller does. That’s fine too, but the whole concept here is you really have no intent to ever live in it or even to rent it out. It’s really inventory. That’s exactly what the IRS looks at it as. That’s what flipping is. It leads to probably, what was our next question there?
Amanda: Why are we doing this flipping in a C-corp? Flipping equals inventory.
Eliot: Yeah. Let’s draw off of that. The inventory. That means if you sell it, it’s ordinary income. Just like the previous question where we had that ordinary income from staking, this income’s going to be subject to the ordinary income tax rates plus employment tax. It could be a little bit fuzzy whether or not you’re going to have the employment tax. Some depends on who you ask and how you handle your income with the staking. There’s no misunderstanding here with flipping, you’re going to get hit with employment tax here.
It’s an extra 15.3% as I was pointing out earlier, 12% approximately going to social security, the rest to Medicare. It’s a lot. An extra 15.3% plus whatever your ordinary tax bracket is, it is not capital gains. That’s flipping. You can make a lot of money and you can pay a lot in tax as well.
Amanda: Yeah. That’s where the C-corp comes in.
Eliot: Yes.
Amanda: When we’re advising flippers, we’re typically having them flip in a C-corp. Now, if you’re doing multiple flips from an asset protection from a limited liability standpoint, then we want to be doing each flip in its own LLC rather than in the parent company C-corp. The C-corp can still pay all the expenses. All your trips to Home Depot can run through the C-corp credit card, but each property that you’re flipping, we want it in its own individual LLC because we want to be able to cut off that liability. You sell that property, what are we going to do with this LLC? We’re going to dissolve it. If something is wrong with the sale, or if the buyer comes back with some frivolous thing they want to complain about because they’re just trying to hustle you out of some money…
Eliot: You run over my foot in the driveway.
Amanda: That has nothing to do with flipping. Why are you convincing all these people I’m a bad driver?
Eliot: You haven’t parked next to her.
Amanda: Stop. You dissolve the LLC because you can’t sue what doesn’t exist anymore. From that standpoint, we want to be doing our flipping in an entity, a C-corp specifically, because when you’re flipping, it’s now inventory. You don’t get the capital gains rate. The corporate tax rate is 21%. If your ordinary tax rate is 34%, 37%, hey, let’s shift all of that income to a different type of entity, or it’s paying less tax.
Eliot: We keep mentioning ordinary income, the rates, and things like that. It is 21% here, but the capital gains that it’s not, that’s typically going to be lower on one’s personal tax return. It could be 0%, it could be 15%, it could be 20% approximately, somewhere in those ranges. That leads to another reason why we want to do it in the C-corporation, because if you did a lot of flipping in your own name, let’s take the lawsuits aside, the tax is going to be at your ordinary rates, so it could be much higher in 21%.
All those factors outside of it, if you consistently are using it as inventory over and over, then let’s say all of a sudden you go out and you buy one long-term rental, you said, I like flipping, but I want to invest in this one property, it could be that you have something called dealer status. The IRS is so used to seeing you use houses as inventory, and then all of a sudden you find this one that you wanted to keep as a rental and quickly, maybe within three months you decide, nah, you know what, not so much. I don’t like all that. I really like doing the flipping, so you try and sell it. It could be that the IRS gives you this dealer status. It just says that they’re not going to give you capital gains on that because they’ve seen this repetitive activity.
Amanda: Yeah. You’re a flipper.
Eliot: Yes, exactly. You’ve been stamped with the flipper.
Amanda: Been slapped with the flipper.
Eliot: Exactly. Yeah. You’re going to get hit with that. By doing it through the C corporation, it can protect you. It’s the one, if there is a dealer status, we don’t really care. It goes to the C-corporation, still taxed at 21%. Now, you and your personal world can go out there and still get that long-term rental. Maybe you get some capital gains treatment.
Amanda: Yeah, I’m not blurring the line there. What about the self-employment tax?
Eliot: Right. Again, an extra 15.3%, approximately 7%. I had the numbers, 7.65% for the employee is going to be going to Social Security of the employer. In this case, if we’re not using the C-corp, if it’s Schedule C, all 15.3% is paid by the individual on top of the ordinary tax bracket rates. If the activity was done in the C-corporation, we’re going to talk today all through all the questions, all the things you can do in a C-corporation. But if you still wanted to pay yourself a wage, you’re still going to pay the 15.3%. It’s just going to be divided between employee and employer down the middle half and half. Still, C-corporation avoids a lot of this this inconvenience of lawsuits, dealer status, and it has some great deductions behind it as well.
Amanda: Yeah. Now we know what house flipping is, we know why capital gains isn’t quite the term that we’re using when we’re flipping in a C-corp, and why we’re flipping in a C-corp. Now we’ve got a ton of money in our corp for house flipping. How do we offset that income? How do we pay the least amount of tax while having the most in our pocket?
Eliot: Exactly. We have all kinds of tools. We can do an accountable plan, which is just a fancy term for reimbursement, IRS term phraseology for that. In that, you can get reimbursed for anything that you put out of pocket on behalf of the corporation for a reasonable business expense. It could be an administrative office. That’s the most common.
If you have that administrative office, now your mileage can be reimbursed, 70¢ a mile. That adds up really quick. You can do those corporate meetings under 280A we always talk about and the medical reimbursement plan. If you have any out-of-pocket medical expenses, you can get quite a bit reimbursement. We’ve seen clients take full advantage of that to the tune of over six digits. It can be very helpful.
Amanda: Yeah. Medical is the 105(b) plan. If you are doing flipping construction, what about buying a vehicle this year?
Eliot: You certainly could because we got the hundred percent bonus depreciation that came back in with the Big Beautiful Bill as of July 4th, a hundred percent bonus. We do have to be careful with the vehicle because it’s not every vehicle. You’re really looking at the heavy, the over 6000 pound SUV rule. That’s going to get you the hundred percent bonus.
What about that 179? Everyone wants to throw that out there. 179 really doesn’t come into the play. We’ve talked about that on other shows, but it’s really the hundred percent bonus depreciation that you can do on your vehicle. If you’re over 6000 pounds, have that heavy SUV, it’s what we used to call back in the 90s, it was called the Hummer rule because of the Hummers were coming out at that time. People were doing it.
Amanda: Arnold.
Eliot: Exactly, yeah. We were doing that tax play way back then. You got to deduct a significant amount of that because it was a heavy SUV. Same thing today. If you had that G-wagon over 6000 pounds, you could deduct a hundred percent of it. Within that C-corp, if you’re making all that money on doing that flipping, you’ve done all the reimbursements, you’ve done your solo 401(k), whatever you want to do, then go ahead and get a vehicle, but you have to use it for that C-corporation. No personal use or any personal use.
Amanda: We are. We’re flipping houses. We’re moving lumber, paint cans, and that things that flippers nail. You need a truck.
Eliot: Everyone uses their Mercedes for that. Yeah.
Amanda: The cool part about these strategies is that they’re tax free reimbursement. When you receive those funds, you as an individual aren’t paying tax on them. You’ve essentially bounced this money through the corporation and then back into your pocket completely tax free, which is the best kind of dollar to come out in your pocket, the tax free dollar.
Let’s go back a little bit in terms of getting money out of this corporation through these tax-free reimbursements. How does that relate to our last question here with this trading partnership? They only have $8000 in this C-corp. Yeah. If your goal is for retirement, then yes. Solo 401(k), great option. But if your goal is to just get the funds out of the C-corporation, those three strategies are great as well.
Eliot: Absolutely. We usually see about, on average coast to coast, a thousand dollars, maybe $1500 for the 280A. You go out and get quotes for a small conference room or something like that with media and things of that nature. You have these meetings in your home 14 times a year, so you could eat up that $8000.
What if with all those reimbursements, the 280A, the administrative office, the mileage, everything, and you don’t want to contribute to the 401(k)? You just want to take it out, but you have $10,000 of, as Toby always calls it appetite, we only have $8000 of income, it is a partnership. Partnerships are allowed to pay partners a little bit more for doing certain things called a guaranteed payment. Out of that 20,000 of the partnership at earn, we could pay our C-corporation a little bit more because it’s overseeing everything.
We won’t call it a management fee, but it’s pretty much the same thing. It’s because it’s a partnership. We use the term guaranteed payment, so we could actually get a little bit more reasonable amount in there, get maybe up to $10,000 if that was our appetite. Now we’ve zeroed out, got more money in there, shifted in there, more tax savings.
Amanda: This is a great example of where tax planning is so important because based on just these few sentences for the question, we can give you an answer. It’s really that conversation with a tax professional where they dig into, what is your goal? Hey, I’ve got $8000 in this corp, is my goal to get it out in the most tax effective way possible? Then yes, these are the strategies you can use. But if your goal is to actually save for retirement, I know that that might be your first idea, but if that’s not your goal, then let’s do something else. That’s where the rubber hits the road for tax planning versus tax prep. You coming up with an idea. Yeah, sure. That can work, but is that really going to get you where you ultimately want to go?
Eliot: There’s a lot of times in those sessions, we hear what they want, and we’re able to maybe sometimes shine a little light from a different angle. They’ll see things on the person that they hadn’t caught before.
Amanda: A lot of times you don’t know what you don’t know exactly, so you don’t know the right question to ask. It’s up to us to ask you the questions, and then you figure out the question in. You get the point.
All right. “If I have multiple LLCs, do I have to file multiple tax returns?” This is the hilarious inside attorney joke of it depends. It depends. Let’s first start off with an overview of the different types of entities and whether or not that type of entity files a separate tax return. Let’s start out with corps, Eliot.
Eliot: Yeah. C-corporation first, I guess, we’ll start there. Yes. It needs to file it’s own 1120 form, and that’s an election you make with the LLC. You send in a form, an 8032, and say, IRS, I want my LLC taxed as a C-corporation. And they will do so. It must be filed, by the way.
Amanda: Then an S files a…
Eliot: 1120S. We just add on the S. It’s still a corporation, so we’re still in the corporate world. For better or worse, sometimes if we don’t have that S. You have to file a 2553, make an S election. Again, another return. Both those returns, you want to file every year.
Amanda: Yeah. We say a C-corp, we say an S-corp, but the underlying entity can be either an LLC or an Inc. You can have an LLC taxed as a C-corp and LLC taxed an S-corp. You can also have a corporation taxed as a C-corp or a corporation taxed as an S-corp. It’s the legal structure. Corporations have shares, LLCs have members, different reasons for different ones. Outside the scope of this question, what other type of entities do we have? Partnerships.
Eliot: Yes. Partnership files its own 1065. It’s a pass-through entity and incidentally so is yes. Corporation mean? They both file returns, but all the income comes onto the returns of, in the case of an S-corporation, the shareholders. In the case of partnership, the partners of the members. We’ll hit their personal returns, so you generally don’t pay any tax on those two items, whereas again, the C-corporation does. It’s a separate tax payer, so it has nothing to do with your 1040.
Amanda: Those are the types of entities that are going to trigger an additional tax return filing requirement. An LLC that is disregarded for tax purposes, I like to call these the John Cena of entities because you can’t see me as John Cena says. They’re disregarded by the federal government at least, so they do not file their own federal tax return. How does this different at the state level, though?
Eliot: Some states, California, you may be required to say something or file something, maybe even pay a tax on it. It just depends on the state you’re in. Many states are coupled onto the federal rule, so you’re not going to have to file a return for it, but in some states you do.
Amanda: Yeah. Okay. Those are the different types of entities. This question doesn’t specify. Depending on the type of entity you have, you could file a tax return, but it also depends on how they’re connected to each other, right, Eliot?
Eliot: Most certainly. Yup.
Amanda: Let’s just start with a typical rental structure, where we’ve got our Wyoming holding, and then maybe we’ve got our properties. They’re typically going to be in a state specific LLC. These LLCs here that hold the homes are going to be disregarded for tax purposes, so no additional tax return for those. What about this Wyoming holding company Eliot, though? Do we have a tax return here?
Eliot: We may or may not. I’m not going to say it, but it does depend. It could be that it’s disregarded, the term Amanda was just walking through. It could be disregarded to one’s 1040, or it could be a partnership. We see that a lot with a spousal situation, where both spouses are the partners. In that case, they’d have to file a 1065.
Let’s throw a little bit more fire on the confusion. It could be that you live in a community property state, Nevada, California, Texas, et cetera. They could have it as disregarded, even though both spouses are really members of that. Maybe it doesn’t have to file a partnership return.
Amanda: You get to have an option. There are reasons why you may want to have a partnership tax return here. There are reasons why if you’re in a community property state and you have a spouse, you may want to elect for it to be disregarded. There are different reasons for that. If you are a single person though, you’re not going to have the option. It’s going to be a disregarded structure.
We have one here. Maybe, maybe not now. Often clients will suggest a separate property management company, typically going to be a C-corp. This is an income shifting strategy. It’s going to have a lease agreement with each of these properties, and then they’re going to pay a management fee over to the C-corp. We’re shifting income that’s normally hitting our 1040 down here. It’s shifting over to the C-corp where we have that flat 21% tax rate. We have all kinds of tax-free reimbursement scenarios. How many tax returns do we have now?
Eliot: Now we got our C-corporation. We’re still disregarded, I think, at our Wyoming. Was it a partnership?
Amanda: I think this was a maybe.
Eliot:
Amanda: Let’s just say it’s a partnership just to get crazy.
Eliot: Exactly. Nutty. We got that one partnership at the Wyoming. We got the C-corporation and then we have the 1040, so we’re going to have three returns.
Amanda: Our 1040, yeah. You know what, I should have called that the first one. One, two, we’ll put three here. What if we’re in a situation like our last two questions, where we’ve shifted so much funds into our C-corporation that we don’t have enough tax free reimbursements to get it down to zero? What do we want to do? The next step in the evolution is to start a retirement plan, a solo 401(k). Do I have another tax return now?
Eliot: You could. If you have a quarter million of assets, you’re going to have a 5500.
Amanda: Potentially. This is a passive rental structure. What if I have, we talked about this, a safe assets LLC?
Eliot: We’re typically going to keep that disregarded and no return there.
Amanda: What goes into safe assets LLC? It’s a Wyoming holding company, but four assets that aren’t going to incur any liability, a brokerage account, for example. No one’s tripping over a stock and suing you cash. Coin collection, Bitcoin, gold, syndication, limited partnership, interest, and syndication, all of those things you can put into a single safe assets LLC. If your Wyoming holding company is a partnership because you and your spouse both own it, then you and your spouse most likely also own this safe assets LLC. I would say if your holding company with your rentals has a tax return and you do a separate safe assets LLC, then you would have a tax return there as well in that situation, so we’ll just add one there now.
This is passive rental income. What if that’s just your investing? What if you have your own business like an S-corp. Maybe you’re a consulting, maybe you’re even a realtor. Maybe you have a dog grooming business. Maybe you have a donut truck. All kinds of different things that you can do in an S-corporation for your active business, do we have a tax return there?
Eliot: We do. It’s a separate reporter. It doesn’t pay any taxes, but it does file a return. It gives off a K-1 that comes all the way back to our 1040.
Amanda: Yeah. It depends. I have seen clients with a Wyoming holding company and 60 rental properties in individual LLCs. Because the entire structure is disregarded, they still only have one tax return. It really depends on what types of entities you have, how they’re taxed, and how many owners there are really.
Eliot: It’s easy to look at this and say, won’t they try and set this up so they have the maximum returns to do? That’s not the case. We’re not out there to create more tax returns. Believe me, we don’t need more to do. We got plenty of returns to do.
Amanda: Yeah, and that’s where you have a choice. For example, if you’re a married couple, community property state, you can eliminate two of these tax returns just by electing to hold your holding company and your safe assets LLC as the disregarded. You’ve eliminated two tax returns. There are reasons, maybe you want the partnership return. A lot of times you have lending or borrowing power by having that income hit a separate return. You’re reducing your audit risk on your personal 1040 by having that income and hit that partnership return. But if the cost of having another tax return isn’t worth the squeeze, then maybe you’re staying as disregarded in that sense.
Back to the original question. I have multiple LLCs, do I file multiple tax returns? It really does depend on the type of activity you’re doing and the ownership. Are you working with partners? Are you an individual person? Are you a married couple in a community property state? You do have some options there, fortunately.
Eliot: Absolutely.
Amanda: All right. “I’m a sole proprietor independent truck driver, and I feel I am paying very high taxes. What can I do?” Truck drivers are what I think of as the unsweet spot in terms of paying taxes. It’s those people who work a job, maybe they’re a sole proprietor, maybe they just earn a W-2 salary, but they earn between a hundred thousand and $400,000 annually. It’s the unsweet spot. You get hit with the highest rates. You have the least amount of deductions available to you, and on top of that, the highest audit risk on your 1040. How do we sweeten up that unsweet spot for this truck driver?
Eliot: Right. I’ve been asked a lot the about this question because we’ve had a lot of clients that are truck drivers, and we’re thankful for them going out there and doing all of that. It’s really building off everything we’ve just been talking about in the previous questions. As Amanda alluded to, if it’s just a sole proprietorship, it’s going to be Schedule C. One hundred percent of the net income from this individual right now, he or she’s paying a hundred percent of that net income at ordinary rates plus 15.3%. There is definitely nothing sweet about this tax situation, as Amanda pointed out.
What can they do? You just simply change this. She was shown on the last picture there. We’re just going to change the box that’s in. We’re going to put it into an LLC, and maybe we make that tax as an S-corporation, maybe a C-corp. We saw a lot of other boxes out there, Eliot, what about this disregard? We certainly want the disregarded for asset protection perhaps, but we want the election of corporate election S or C because we’re going to get better deductions and reimbursements that we’ve come been alluding to so far.
Again, let’s just even say that it was in an LLC. It’s a sole proprietorship, disregarded, and we had a hundred dollars of income. Again, all $100,000 is going to hit the personal return of net income subject to ordinary rates, subject to 15.3%. But if we put it in this S-corporation, S-corporation has two different streams of income. It has to pay you as a W-2, still subject to the employment tax, still subject to ordinary rates, but then there’s also the different stream of distribution where we aren’t subject to the employment tax. We only get hit at the ordinary rates.
All that can come out after you’ve done all the reimbursements that Amanda and I have been going over, the corporate meetings, the accountable plan. We wouldn’t have a medical reimbursement in an S-corporation, but we would in a C-corp if we wanted to do it over there. These are some of the benefits of what you can do to reduce this tax situation. Just under the S-corporation, again, simply by making that election 50%, you’ve saved 50% of your income from being hit with 15.3%.
Before you even got there, you had this account plan 280A, 105 medical reimbursement. Maybe you do set up a retirement plan. You got all kinds of options and far less chance of audit. It’s a sole proprietorship. You’re at the highest audit risk. You’re right in the sites. The S-corporation has definitely less, C-corp even typically lesser less than that. Either one of those options. Yeah, we set up that sole 401(k). We got a lot we can do here.
Amanda: Yeah. Would you even go a step further and maybe if this is an S-corp, we make an S-election here, would you separately set up a C-corp management company like we do with our rental properties? We’ll set up a management company to shift some income over here to the 21% tax rate. Would you do that in this situation with an active business? If not, why?
Eliot: You certainly could. It’s a great question. We do get asked it quite a bit. You certainly can. I think one of the drawbacks to it in this particular scenario we have here is, what is it that the C-corp’s going to do different that the S-corp’s not already doing? If it has officers, probably most of the jobs that a management corp would need to do already being handled at the S level. However, maybe there are some things it’s not doing. Maybe it’s not doing the bookkeeping. Okay. We can charge that out to the C-corporation, put some income there, and now we get the best of both worlds.
We’ve added two tax returns here, so there’s a cost benefit here, but the S-corporation can do the accountable plan. The corporate meetings are 280A. All the reimbursements there save on the employment taxes, even contribute to that solo 401(k). But if it shifts a little over to the S-corporation, it can contribute to the medical reimbursement plan so you could have a benefit there, that really flies better if you had more businesses. Maybe you had some rentals for that C-corporation to manage, maybe a couple of other S-corporations or something like that, and maybe all the employees were working under the one C-corporation.
We had a tax advisor for some time with us, Gary, some of you may remember him. He actually worked in the simulcast business and started to come up for the horse racing here in Las Vegas. He had businesses and companies around the world doing this, and he set up one central C-corporation and all the employees were underneath it. They would change, charge a management fee, get some earnings there, take their tax benefits, and then pay all the employees out of there. There are things that you can do. You don’t have to be on that scale. Certainly he was working on a large scale.
There are options, but I maybe wouldn’t want to do that if I wasn’t making a lot of money. Because that is an extra return, we have to really justify what that job is. I think just saying we’re going to do one thing, like solely the bookkeeping, it’s a little thin to argue the need of it, but it could be done.
Amanda: Yeah. Making that S selection, making sure you’re maximizing the potential deductions that you get because of that S election, and then perhaps setting up some retirement account to defer income, would be the top three options there. In a C-corp management, maybe you’re growing, maybe you are subcontracting out other truck drivers, and you become more of the boss. Your C-corp makes a lot more sense at that point because it’s doing all of the bookings, all of the bookkeeping, marketing, and things like that.
All right, another shameless plug. For this YouTube channel, if you’re watching live on YouTube, thank you, Troy, for answering those questions. Keep him busy, people. Toby’s got over 500,000 subscribers, over 1100 videos, so go ahead and subscribe. You will get an alert when we go live for Tax Tuesday and when Toby uploads another video, as well as our other fearless leader, Clint Coons. He’s up in our Tacoma, Washington office. He focuses a lot more on asset protection, but over 300,000 subscribers and almost 900 videos.
They’ve been doing this a long time, people. If you want to go to YouTube University and learn all there is to know about tax and asset protection, these two channels are where to do it. But if you’re ready for a free strategy session, hit this QR code, scan this QR code. It’s 45 minutes with a business advisor. You get to talk about your goals. What your assets are, what you plan to acquire over the next few years. We’re going to create a customized blueprint, all these boxes with the lines and the triangles, and the different S-corp, C-corp. We’re going to draw that out for you, hand that to you so you have a blueprint plan to follow moving forward.
If you are feeling feisty, you want to meet us in Dallas, Texas, come on out December 4th through 6th. Tickets are only $49. These events do sell out. I know that those of you here, you know. Hanging out with attorneys and tax professionals is fun. Secret’s out, and the rest of the country’s coming in too, so grab your tickets now. These events do sell out.
All right. “My tax preparer says, don’t switch to an S-corp until your revenues hit a hundred thousand dollars. Why and how will an S corp help me more?” This is very related to our last question. Let’s dig in a little deeper in terms of the difference between sole proprietor or a disregarded LLC versus an S-corp. A hundred thousand dollars in, what’s the difference here in terms of how much tax we’re paying?
Eliot: Again, we’ll go with that. It’s a hundred net after expenses. On the left, or at least my left here, under the LLC, sole prop, all 100 of that is going to get hit with ordinary rates and 15.3% self-employment tax. It’s going to be at least 15,300 extra times whatever the ordinary tax rate is for this taxpayer on their 1040. It’s a lot of tax, and there’s nothing you can do about it. It’s the most highly audited. If it’s not even in the LLC, we hope it is, you have no asset protection, you’re a hundred percent liable for anything that goes wrong, nothing good happens on this box.
Amanda: Nothing good.
Eliot: Why would someone say not to move over to the right? Let’s look what the right hand side does for us first.
Amanda: There, we get to split it up. We get to split that a hundred thousand right down the middle, usually, because S-corp have what’s called a reasonable salary requirement. Initially that sounds bad. I have to pay myself a salary? In this situation, it actually works out to your benefit, because let’s just say you paid yourself $50,000 in salary. That’s going to be subject to, it’s not self-employment tax now, it’s just regular payroll taxes, but only on half the amount in the previous situation. This other 50,000, it gets to pass through to us without that additional tax.
Right off the bat, this $15,300, we flash that in half by filing one form, the 2553. There’s the benefit there. You can toggle those numbers. It doesn’t have to be half of the net income goes to pay your salary. I like it to be between 30 and 50.
Eliot: Yeah, that’s common.
Amanda: Yeah, I like it to be there.
Eliot: That’d be 30 of 50 of the net income, which is a hundred thousand in this case. Just know the lower you go, you may have to justify more if you were to be audited. This is an area that the IRS said they were going to start looking at more to see if there was a reasonable wage. Really what they’re looking for is the people aren’t paying any reasonable wage. I think 50 would be more than abundant here.
Why don’t you pay less? Maybe you want to give to the retirement plan that we’re talking about. If that’s the case, then you might want to pay yourself a little bit more because it’s that earned income. That $50,000 that’s payroll, that’s going to be eligible to be put into a retirement plan.
Amanda: Yeah. There’s a significant difference in reimbursements too between an LLC, Schedule C, business, and an S-corporation. One of them is going to be that home office. These reimbursements or deductions, if you will, have limitations when you’re just doing it on your Schedule C that you just don’t see on an S-corporation.
Eliot: That’s correct. The home office, first of all, you can’t use it to create a loss. You are limited if you take the safe calculation they have, it’s $1500. Whereas on the right hand side, the administrative office could create a loss if it was big enough. It’s a reimbursement. You get cash back in your pocket and the tax savings. You can do the 280A. All kinds of things that we can do on the S-corp, all that’s being added on to the tax savings that Amanda pointed out at the beginning, that tax savings you got from the employment tax or the payroll tax.
Amanda: No 280A on an LLC. What about cell phone and internet?
Eliot: Big question there. The sole proprietorship, you can only deduct the percentage of business use. Remember back in the day when the cell phones first came out, you had minutes. You had to know how many minutes you were on the phone. If you had 200 minutes and you spent 50 of them for business, then only 25% of your bill could be deducted here in the case on the left. Whereas if it’s an S-corporation, you can reimburse a hundred percent. It doesn’t matter. You don’t have to worry about the minutes or anything. Same thing with the internet. A lot of advantages to being that S corporation.
Why the hundred thousand? You are adding a tax return. You’re setting up another entity. Hopefully you already have an LLC set up anyway. Otherwise, again, you have no business being in business if you’re not protected. Really the setup, the LLC is irrelevant. It’s whether or not you want to be an S-corporation and incur another tax return, certainly at a hundred thousand, I would say.
Amanda: I like it a little lower. I like that decision a little lower.
Eliot: Yeah, a lot lower myself. It’s one of those things you want to sit down and talk to somebody. As you can see, we’ve seen all the different things you can do here. That way we can just help put it and focus for you.
Amanda: Yeah. All right. “If a property purchased via 1031 Exchange is held in an LLC partnership, can it be converted to personal use after two years? If so, what are the tax implications?” First, let’s start off with what’s a 1031 exchange.
Eliot: 1031 exchange, first of all, we’re talking about real property. That was used in a trader business, so your single family rental, long-term rental, short-term rental office building, any kind of real estate basically is what we’re talking about. Had to be used in a trader business, not inventory.
Amanda: Yeah. You can’t flip, you can’t 10 31 your flips.
Eliot: Right, exactly. It just says that if I sold it right now, I’m going to incur some tax. I have gain. The IRS approach is if you exchange that building for another one of equal or more value, you pick up equal or more debt, then we’re going to allow you to defer the gain. You’re not going to pay any tax on it. That can be a real win for you in your column as far as getting wealth generation because you’re not paying tax on this, it’s getting deferred. In time, should you pass, it can be left to your heirs, your beneficiaries, and they receive stepped up basis, which means that they don’t pay any tax on it either. They can restart all of it, do depreciation over time, and it just repeats. That’s the 1031. It’s a way to not ignore tax, just defer it.
Amanda: Yeah. There are very specific strict timelines. When you’re doing a 1031 exchange, you have to identify a replacement property within 45 days, and you have to actually close on one of those properties within 180 days. When we say these are strict deadlines, you can be emailing your choices to your qualified intermediary at 11:59. If you don’t get it done in the next 30 seconds, you can blow the whole thing. When you’re doing one of these, you need to make sure you’re working with a qualified intermediary, a QI, before the fact.
I can’t tell you how many times I’ve talked to clients, where they’ve already sold their property and they come and say, how will a 1031 exchange help me? I’m like, it won’t, you got to do it ahead of time. Now, you do a 1031. It’s a tax strategy. This idea that you’re doing it in a partnership that changes things.
Eliot: It really does.
Amanda: Most of the time when you’re doing a 1031, you’ll hear, oh, you’ve got to close in the same name. If you’ve got an LLC that holds the property, you’ve got to use that same LLC to close on the replacement property. That’s not exactly true. If this LLC is disregarded for tax purposes, we got to think about what tax return did that rental property hit. The only requirement is that the replacement property hit that same tax return. In a disregarded structure where it ultimately hits your 1040, you can close in a completely different LLC as long as it still hits your 1040. Now with a partnership, what do we’ve got?
Eliot: The difference with the partnership is that it’s the partnership itself. It’s a special type of entity that it owns the building, not the members, not the partners. It’s very different. I thought you guys said earlier that it flows through, hits my 1040. That’s true, but you have a different reporter, a different owner that is the partnership itself, and it creates all kinds of havoc when it comes to 1031s.
Amanda: Hitting that separate tax return.
Eliot: It really is, yes. You have to be so very careful. In fact, let’s say in the top here, the individual had bought a property, did a 1031, and later now we’re in the bottom where they get married and they want to put their spouse on that same property, they can’t do it.
Amanda: I’ve seen that.
Eliot: It’s terrible.
Amanda: I had a client where husband owned a property, wife owned a property, they were both doing a 1031 exchange, and they wanted to go into a jointly owned structure. They couldn’t do it because now you’re looking at a partnership that would ultimately flow through. You can’t take a property that hit your 1040 and another property that hit your 1040, even if it’s the same 1040, because now the new property’s not going to hit the 1040 once it’s in the structure. It’s hitting that 1065. That complicates things.
Anytime you’re doing a 1031, talk to a professional. Get with a qualified intermediary. Anytime there’s a partnership involved, that’s even more of a reason to talk to a professional attorney or a tax planner. Converting to personal use. I’m going to assume they mean they want to then move into this property. Talk about making things even more complicated.
Eliot: Exactly. There is an ability out there if you have a replacement property that you could move into it and call it your personal residence. You got to show the IRS though that originally, the whole intent was to put it into business. It has to continue into a trade or business. There isn’t any timeline given out there, although the IRS has thrown out this safe harbor. It’s not in the code. It just says maybe 24 months, so two years. Run it as a rental for at least two years, and they say, we’re not going to look back if you move into it.
It is still a problem ’cause you’re in a partnership. It is a little bit different there. Probably if you moved into it, you’re going to have to pull it out because your personal residence shouldn’t be in a partnership. If you did, that has other tax consequences because you have a…
Amanda: Now you’re dealing with the other partner, with your basis, buying that partner out of the property, assuming it’s a third party, even if it’s your spouse though.
Eliot: Yeah. It’s a distribution. You haven’t destroyed the 1065, but probably you’re going to shut it down. There’s a difference also between a distribution, why the partnership lives on or when you’re just dissolving it. All things you have to look at, but at the very least, you have to use it for 24 months at least as a business. Even if you could get past the fact of trying to move it out of the partnership, should you ever want to move on and sell it later on? You have to held it for five years.
This is not the two year, five year, in this case it is for the 121, but you have to hold it for five years from the date of when you acquired the property in the 1031. What that will allow you to do is if you lived in this property for two of the last five years as your personal residence, do not confuse that two years with the previous 24 months we were talking about that it has to be used as a business. This is something else. You’re living in it as a personal residence for two of the last five years. Hold onto it for five years, and then you could tie in a 121 exclusion. That’s the exclusion that says if you sell your primary residency, you can exclude up to a quarter million, single, half a million, married filing jointly right off the top of your capital gains.
Amanda: Very complicated.
Eliot: It really is. It’s a tough one. I probably wouldn’t really recommend it once we’re in the partnership. I’d just stay away.
Amanda: Yeah. If you’re doing the 1031 and it’s hitting your 1040, after that 24 months, you want to turn it into your personal residence, I’m okay with that. If you’re in that partnership situation, find somewhere else to live.
Eliot: Yeah, really.
Amanda: Find somewhere else to live.
Eliot: Yeah. Get the house next door or something like that.
Amanda: Be neighbors with your tenants. Maybe not.
All right. “How may I pay no capital gain tax without a 1031?” I originally read this question way too fast in my own head and read it as with a 1031, and I was like, that’s the point of a 1031. No. How do I pay no capital gains tax without a 1031 exchange?
Eliot: There’s one primary strategy we talk about. It’s called the lazy 1031 or sometimes the poor man’s 1031, whatever terminology you want to throw onto it. It’s not actually a 1031. We just throw that in there. When you have a rental property and often its status is passive, and what that means is the rent income is passive income, the deductions, if there are any, they’re passive losses. Those passive losses can only be used against other passive income. It’s not uncommon to see these passive suspended losses on one’s return after they’ve had a rental property for a long time.
Amanda: PALs.
Eliot: PALs, exactly. Passive activity losses. If we have that situation going on and you finally do sell the building at a gain, or if you permanently get rid of your ownership of it, you hundred percent sell, you can release those passive losses.
Amanda: Release the PALs.
Eliot: Exactly. Release the PALs that it created over the years. Let’s say your capital gain was $50,000 and you had $15,000 of passive losses in the previous years, $50,000, you’re immediately going to wipe away $15,000 of it, so you have only $35,000 left of gain. You’re also allowed to pull passive losses from other rentals you have out there or any other business out there, 8582, it’s a form you have. It attracts all these passive losses that all your other rentals have incurred over time, and it has a very complicated ratio. It’s going to pull PALs from all those other properties along this ratio. Slowly, if you had enough passive losses out there, you could wipe out all the gain from the sale of the property, the original sale.
If you didn’t have enough PALs and let’s say we sold in March, March 1st, you sold, you incurred your capital gain, you got some PALs released, but you still have a good $35,000 of capital gains, you could go out and buy another property before the end of the year, have them do a cost segregation with bonus depreciation, which is more likely going to create some passive losses. As long as it’s all done before December, at least you purchase a property and it’s in place in service, then you will have those passive losses before December 31st. They will help offset the gains from that sell back in March. That’s got to be the same year.
Amanda: That’s just really where the lazy part comes in. With the 1031, you’re usually needing to pre-plan because you got to work with a qualified intermediary. You got to hustle to hit that 45-day and 180-day mark. If that falls apart with this strategy, with the lazy man’s, poor man’s, or women’s, it’s not available only to men, women can do it too, you have until the end of the year to place that additional property into service to accumulate some PALs. With the cost seg, you actually have until you file the next tax return to calculate those losses and release those PALs. Release the PALs.
Eliot: That’s really lazy.
Amanda: Yeah, it’s really lazy.
Eliot: Yeah.
Amanda: Or smart as I like to say. It’s one of those strategies, where not a lot of tax strategies can you do after the fact, let alone after the calendar year ends, but this is one of them. You could potentially pay no capital gains tax.
Eliot: Correct. That’s a way without doing the 1031. No capital gains.
Amanda: All right, final question. “If I volunteer work/time at a nonprofit agency, are there any tax deductions I can take?” Right off the bat, if you are using personal services for charitable endeavor, charitable cause, a 501(c)(3), typically a nonprofit or tax exempt organization, those hours, your time is not deductible. You can be a brain surgeon getting paid a gazillion dollars an hour for your skills and your time is not deductible, unfortunately, but not all is lost.
Eliot: There are some things that can be done.
Amanda: That’s why we have a tiny bone.
Eliot: Right. They do. You can learn more about that when you see Karim, November, was it 14th through the 17th?
Amanda: Yeah, November 14th through 17th.
Eliot: You can ask him personally about it.
Amanda: Our nonprofit workshop.
Eliot: Yes. Part of what he’s going to tell you probably is that you could get reimbursed for travel or something like that. You do have a mileage actually of 14¢ a mile. That’s not really the 70¢ a mile you get in the for-profit world, but it’s a nonprofit. Your mileage could be reimbursed, your actual cost. Somehow I wouldn’t recommend doing this, but if you had the full tank of gas that you drove on behalf of the nonprofit purpose, you could be reimbursed to that full amount as well.
Trips. As long as the trip’s not purely for, have an exorbitant amount of pleasure, or a personal time to it, you’re not going there simply to entice some big donor or something like that, you’re really going for the nonprofit purpose, the travel could be reimbursed as well. You want to be a little more careful on that one. It’s easy to get in trouble probably on that, and I’m sure Karim will have some ideas about that.
Amanda: Yeah. If you’re expending any money on behalf of the nonprofit, you are working at a gala, they ran out of tablecloth, and you run out and use your own money to buy a tablecloth, the nonprofit can reimburse you for that, but that’s not really a tax deduction. That’s just getting you back to where you were before you spent those funds.
Eliot: It is very limited.
Amanda: Very limited. Even this 14¢ a mile, the standard deduction for 2025 is over 50.
Eliot: For the non-prop?
Amanda: No, the standard deduction for an individual.
Eliot: $15,750.
Amanda: Yeah. If you’re going to take this mileage, you’ve got to do it on a Schedule A, and you have to itemize deductions. If all of your itemized deductions, including this measly 14¢ a mile, don’t exceed the standard deduction. It’s probably not even worth it to keep track of that.
Eliot: Yeah, it’s real thin, no doubt about it. That’s why you want to set up your own nonprofit and donate.
Amanda: You could donate up to 60% of your income in cash and up to 30% in appreciated property, which is a much bigger deduction for you there. All right, our final plug. Hit that subscribe button. Smash that subscribe button. We’re trying to get to 6000 or 7000 subscribers here for Toby. I think he’ll probably hit 1500 videos in the next couple of years. What do you think?
Eliot: I don’t doubt it.
Amanda: I don’t doubt it. He’s a machine. Subscribe to Toby’s channel if you’re on YouTube. You’re already there. Just move that little mouse over and hit that subscribe button. Go ahead and subscribe to Clint Coons’ channel as well. There’s a lot of back and forth over whose channel’s more popular, so I don’t know. If you love Toby, you love tax, subscribe there, but also subscribe to Clint. We like to keep them competitive with each other. It’s fun for us.
Eliot: They both know what they’re talking about either way.
Amanda: Yeah, very much so. Both bestselling authors. I’ve been in this industry for almost 30 years, so a lot of free info here on YouTube University. If you’d like to join us in Dallas, Texas, December 4th through 6th, please do. Only $49, three days chockful of tax and asset protection. There’s usually a dozen, sometimes half a dozen attorneys there, including Eliot and his tax team. Many of the tax pros who are answering your questions in the background live with the Q&A will be there to answer your questions live in person. That’s where all of our fans are. Eliot, you got to go.
Eliot: Yes.
Amanda: You see your fans there all the time.
Eliot: It’s a great time.
Amanda: Join us there. We would love to see you there live. If you’re ready for working one-on-one with us, go ahead and scan this QR code and you can get a free strategy a hundred percent free. When do you get to talk to somebody, a professional who has been in this business for decades? that’s going to create you a free action plan to protect your assets, give you peace of mind, all for nothing? Did I mention it’s free? It is free.
If you’d like to submit a question, please do so at taxtuesday@andersonadvisors.com. The more questions, the more fun it is for us. Even give us some wild things. We like to get crazy over here. Visit us at www.andersonadvisors.com. Thank you so much for joining us. We will see you back here in studio 210 in two weeks. Take care, everyone. Bye-bye.
