In this episode, Anderson attorney Eliot Thomas, Esq., and CPA Barley Bowler tackle a wide-ranging set of listener questions on retirement accounts, real estate strategy, and business tax planning. They explain the key differences between non-recourse and DSCR loans inside a Solo 401(k), and why maintaining non-recourse status is critical to avoiding a devastating unrelated debt financing income hit. They walk through how to properly establish state residency when relocating and cashing out a 401(k), and clarify why donating fully depreciated work trucks to charity won’t produce a charitable deduction or avoid recapture. Eliot and Barley also lay out a detailed framework for strategically unwinding a rental portfolio — factoring in passive losses, real estate professional status, and sale timing. They break down the reverse mortgage interest deduction rules for a mixed-use property, explain how insurance proceeds and roof capitalization work after hail damage, and make a strong case for why real estate should always be transferred — never sold — into a disregarded LLC. The episode closes with a warning about Universal Business Organization Trusts, a rarely used entity type that typically surfaces in fraudulent tax schemes and won’t generate the refundable NOL investors hope for. Tune in for expert guidance on these and more!

Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

0:00 — Intro

8:37 — “I want to change from a Solo 401(k) non-recourse SFR loan to a Debt Service Coverage Ratio (DSCR) loan. Any tax implications or penalties to be aware of, particularly considering I’m 67 years old?” – No tax implications exist as long as both loans remain non-recourse.

14:35 — “I lived in Colorado January through March of 2025 and moved to Arizona in April. I had a small 401(k) that I cashed out in October 2025. Taxes were withheld. I understand I will be required to file two state returns. How will I reconcile the 401(k) for both states?” – Establish Arizona residency first; the 401(k) cash-out is taxed only there.

20:25 — “I have a fleet of work trucks that needs to be replaced. Can I donate the trucks to charity to avoid depreciation recapture? Can the charity then sell the trucks tax-free to fund their operations?” – Fully depreciated trucks yield no charitable deduction and no recapture to avoid.

25:08 — “From a tax perspective, what is the most strategic approach to unwind residential rental property?” – Track passive losses per property and time sales to offset income strategically.

32:33 — “I have a reverse mortgage on a 2-unit property where I rent one of the units. Will I be able to deduct the interest when I sell the property? What are the rules regarding reverse mortgages? Anything I should know after 10 years pass?” – Interest deductibility depends entirely on how the reverse mortgage proceeds were spent.

40:05 — “My rental property sustained hail damage that totaled the roof. I replaced it. Insurance paid for most of the work, but did not cover deductibles or roof depreciation. Can I recover those expenses using Federal and State tax codes? I live in California.” – Out-of-pocket roof costs are capitalized and depreciated over 27.5 years.

43:58 — “When setting up a corporate structure to hold real estate assets, is it more tax efficient to sell the property to the corporation or just transfer ownership and declare it as startup capital?” – Transfer as a capital contribution; never sell to your own entity.

50:25 — “Can I sell my failing business/LLC to a Universal Business Organization Trust at ‘cost basis’? Since the trust has no ‘money/income’ yet, I believe it will create a refundable NOL. Is that correct?” – No — the LLC’s losses already flow through to your personal return.

Resources:

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Full Episode Transcript:

[00:00.00] This is the Anderson business advisors podcast, the show for real estate investors, stock traders, and business owners. We help you keep more of what you earn and protect what you’ve built. Let’s get started.

[00:12;00] Eliot: Eliot Thomas, manager tax advisors, joined by my cohort here. 

[00:15.24] Barley: Yeah, I’m Barley Bowler, one of the CPAs here at Anderson, very happy to have you guys. Again, every other Tuesday. We might have mentioned this, Eliot reads all your guys’ questions, all the questions you submit, picks a handful to go over every other week here in Tax Tuesday. Welcome back everyone, very happy you’re here.

[00:31.60] What do we got going? Got some as usual, the zoom format, Q&A, the chat, post it in the chat. Where are you tuning in from? Give us a shout out what you’re up to. What you’re working on today for your tax projects? Of course a Q&A, post questions as we go. We got people answering questions in the background as usual. Welcome back everyone, live here to go over taxes. Fast, fun, and educational that mention that part bringing tax knowledge to the masses. This really is our goal. We don’t go too in-depth here. I can’t really do too many calculations. 

[01:03.44] Don’t mess up anything live on the spot here but just to get general information to you guys. If you want to become a tax line, we’d love to have you join the team here. Certainly more information we love to get in the weeds get out the weed whacker. Try to keep it again, fast, fun, and educational so everyone can hopefully get something out of this.

[01:20.60] We’re obviously all at different learning levels for there’s some of these very complex tax treatments for as far as real estate and small business goes. Please email your questions to taxtuesday@andersonadvisors.com. Again, go over them every two weeks, try to group them together, provide the most value to you and formatting them and want to just get back and help educate. I just kind of a lot of our job here is education. 

[01:44.32] Eliot: It really is and even in tax planning we’re still educating. If you have questions, put them into the Q&A section. We got Patty, Harry, Jeffrey, Marie, Rachel, and Tanya in the back answering questions taking care of things. We greatly appreciate their efforts. Yeah, and we got Kenny and Z in the back running the tech.

[02:05.08] Barley: Thanks team, keeping an eye out on us watching our backs back there in the studio where all the magic goes down. And of course, for most of you with access to the platinum service here you can submit questions to the platinum portal, written questions to the platinum portal there. I try to get back to you within a day or two or three there.

[02:22.04] Try to get as fast to turn around time on your written questions. You can also come into the platinum knowledge room, ongoing zoom meeting five days a week five hours a day staffed by CPAs and attorneys every day of the week. Right, so take advantage of that service. That’s a great service. Shoot us questions here in the chat as we go through these topics. Kind of some fun different topics to go through today. 

[02:42.00] Eliot Yeah, a little bit different than our usual.

[02:43.72] Barley: Eliot mixes it up. He’s like we’re not talking about 28A meetings today. Now just in case you don’t know that’s a great way to get cash out of your corporation tax-free in your pocket and a deduction of your business, but we’ll be going over those.

[02:56.62] Eliot: But tax wise, the way you track that is with good bookkeeping.

[03:00.48] Barley: We might have mentioned that. Last week we had a great tax wise session a lot of resources here at Anderson. This is just one of the ways we’re trying to get these concepts to you. A lot of this stuff can be very complicated, very technical, and overwhelming. Try expose you to these concepts, once you kind of grasp this knowledge, we can always tell when you start asking us questions. Well, how does this work? How does that work? Okay, you’re starting to get these very very powerful tax strategies.

[03:27.72] They can really significantly reduce your tax. But anyway, let’s hop right in. We’re going to scan through the questions here. I want to change from a solo 401k non recourse, SFR loan to a debt service coverage ratio DS CR loan. Wow, that’s a lot of tax terms there and acronyms, any tax implications or penalties to be aware of particularly considering I’m 67 years old?

[03:50.84] Eliot: I lived in Colorado January through March of 25, when I moved to Arizona in April. I had a small 401k and I cashed out in October of 2025. Taxes were withheld. I understand I will be required to file two state returns. How will I reconcile the 401k for both states?

[04:12.00] Barley: Good question. I have a fleet of work trucks that needs to be replaced. Can I donate the trucks to charity to avoid depreciation recapture? Can the charity then sell the trucks tax-free to fund their operations? Very common got a lot of you nonprofit people out there, too

[04:25.52] Eliot: From a tax perspective, what’s the most strategic approach to unwind residential rental property? A broad landscape, we talked about that in a little back/

[04:35.40] Barley: A lot of directions we go there. I have a reverse mortgage on a two-unit property where I rent one of the units like rent it out. Will I be able to deduct the interest when I sell the property? Kind of a unique instrument here, the reverse mortgage, fairly common now actually though. What are the rules regarding reverse mortgages? Anything I should know after 10 years pass?

[04:53.76] Eliot: My rental property sustained hail damage that totaled the roof. I replaced it, insurance paid for most of the work but I did have to come. I had to cover the deductibles and it did not cover roof depreciation. Can I recover those expenses using federal and state tax codes? I live in California.

[05:12.40] Barley: Good insurance question. When setting up a corporate structure to hold real estate assets, is it more tax-efficient to sell the property to the corporation or just transfer ownership and declare it as startup capital? Actually a number of ways we could look at that question as well. 

[05:27.56] Eliot: Can I sell my failing business/LLC to a universal business organizational trust? Maybe some of you out there didn’t know that existed. We sell it at cost basis since the trust has no money or income yet I believe I will create a refundable net operating loss. Is that correct?

[05:45.16] Barley: I’ll tell you that somebody that does know about their existence, the IRS. They’ve heard of that term that’s for sure. As usual guys, talk about fast, fun, and educational and free, right? Clint Coons, tons of great content on here. Clint focuses more on the asset protection side of things. Lots of great videos on here.

[06:04.00] Of course Toby focuses more on the tax planning tax, tax advising side. A lot of go hand-in-hand but so much good material on there tons of great interviews that all the tax changes tax law changes. Clint has been doing videos on those recent FinCEN changes right with the financial crimes enforcement network. Where if you have a private loan out of that, not really in our tax world, right?

[06:28.12] But that’s why we hit both of these things from both angles there. Clint from the asset protection side Toby from the tax side. This is for our scan to get a consult. No this for our event. Oh, yeah this weekend, come visit us in Las Vegas, March 19th through the 21st. That is this weekend. Yeah, that’s right. Boy, this first quarter went fast. Then scan the code, let us know if you want more information. I would love to see you there where it’s at the Sahara. Is that one of the newly renovated ones? There’s been so much work.

[06:58.84] Eliot: Kind of a different foot. It’s here. 

[07:07.24] Barley: Come visit guys. Love to see you there this weekend. Eliot and I’ll both be there talk and shop, talking tax as usual. 

[07:13.48] Eliot: And yes to see you all 

[07:14.24] Barley: Plus more live events, virtual events. How can we get on board with these?

[07:19.52] Eliot: Yeah, it’s Saturday. We’re also going to have a virtual and then the 28th coming up. All you have to do is register in, scan codes, go to our website, all over the place. We got an easy access to get into those. They’re fantastic, they’re a little bit more of a whirlwind tour compared to the three-day event. However, they cover a lot of material and get through it a lot of questions. A lot of people come in several times just to absorb more information from both. Again, as you pointed the asset protection, state planning, tax planning, things like that are very good events.

[07:50.16] Barley: Nothing wrong with going to more than one workshop guys if you knew how many times I had to hear this stuff before Im confident to convey the information to you guys. Any ball repetition, man. It’s a lot of concepts here. Here’s our QR code to schedule a free strategy session. Set up a consult right now, if you want to go dive into any of these tax topics, you know in more depth. Scan the code we can meet and set up a schedule a constant call with an advisor right now. Alrighty, Got any questions, chats, anything we want to tune into there. 

[08:10.13] Eliot: Nope.

[08:12.16] Barley: All right. Go. Let’s hop right in. Alright guys, we’re talking about financing rentals within your solo 401k. It’s a bunch of terms we could kind of start with here. We’re going to run into maybe unrelated debt, financing, these non recourse loan, what the heck is that and why does this even matter in a solo 401k in the first place? And then of course this DSCR loan we’re going to have to figure out what the heck that is. What do you want to start your sir? 

[08:46.12] Eliot: Well, I think that’s the key. What are the two types of loans going on? What is non recourse and all that means that, if you’re a lender, you’ve probably secured that loan with the rental unit. If something goes wrong, if there’s a default, the loans not getting paid back. Their sole recourse is to take back the building but they can’t go after the individual or any other assets. and that’s critical.

[09:08.88] Barley: Retirement plan .

[09:10.36] Eliot: Exactly. That’s critical when we’re in the retirement plan because the government doesn’t want a retirement plan, exposed to those kinds of loans that would allow it to get more of the assets. They say really in these solo 401ks and in many other retirement plans, you can only have a non-recourse loan. They started out with a non-recourse loan. It sounds like it’s just traditional on a single-family rental.

[09:32.96] But they want to change it into this other type of loan called the debt service coverage ratio. We’re going to call it just the other debt. Going forward, DSCR loan probably need to figure out what that is. And this is just a loan that’s based on the net operations of the rental property.

[09:54.40] Barley: right your rental income

[09:54.76] Eliot: Exactly. The rental building being that the subject rental be building will look at the net operations. How much rent minus expenses, where we landing out on that? Are we met profitable or a loss?  Typically for this kind of thing. They probably remove depreciation, but you’d have to talk to the lender about that. And then you divide it by the amount of the debt and that gets a ratio.

[10:17.40] If they find it to be a very good ratio and they have their own levels of that and in termination then typically you can get this kind of loan. Why would anybody want to do this because it’s a loan that they don’t have to look at your personal tax returns. It’s based strictly on this building and its operations doesn’t have anything to do with your 1040 or anything like that

[10:37.04] Barley: Or your credit or whatever. 

[10:38.15] Eliot: Yes, sir. Exactly. Right. A lot of benefit maybe to a lot of renters out there. Excuse me, real estate investors, to go ahead and try and get into these loans that they can now. The real trick is, is it also non recourse because remember we’re still in the sole 401k. We’re under that umbrella, one rule is any debt like that has to be non recourse. There are non recourse DSCR debts out there or loans out there, but you got a hunt for them a little bit harder to find than other types of loans, but they are out there.

[11:09.56] They’re specialists in this area, but you’d have to meet those criteria. So again, we’re talking about a sole 401k, has a rental property, has kind of just a regular non-recourse debt on it. They want to change over to this other type of debt based on the operations of the net income of the rental. Can we do that? Yes, you can, they both have to be non-recourse, the one you’re leaving the one you’re getting into.

[11:30.12] Any tax implications when you do that when you just go to one loan to another anything you can think of any tax?

[11:35.96] No, there’s no tax implications

[11:37.78] We don’t have to worry about that, no penalties to be aware of as long as we’re doing everything. 

[11:40.90] And they’ll walk you through that on the loan 

[11:44.90] Barley: Or your lender.

[11:45.50] Eliot: Yep, exactly now. This is a couple of these questions. We talked about age, you know, if I’m 67, is this going to change anything? No, not necessarily. This is just still a rental in there. Something does happen when we get to 73, depending on what time you were when you were born that becomes a possibility for an (RMD) Required Minimum Distribution. If we have that coming on this is one thing that we age might play a factor here is, if this minimal amount that you have to distribute in retirement if it eats up all the cash in the account. 

[12:21.48] The last asset you have left is this house, you may have to sell the house in order to come up with the cash to continue the required minimum distributions.  That’s one thing I could think of that, if it was but if we sold it within the plan. There shouldn’t be any tax on that only when we pull out for that distribution. Again, any problems changing from one type of debt to the other as long as it’s not a recourse.

[12:44.40] As long as we’re not dealing with a third party out there related party, to what to impede on the related party transit from transactional laws. As long as we’re not offending any of those things probably no problem. But you would want to be aware that if you have a house and you’re running low on cash in the plan that maybe sometime you’re going to have to sell it anyway just to get your RMDs. An excellent question, something a little bit different.  We don’t talk a lot about this type of thing. And that one we have a lot of that today

[13:10.88] Barley: Yeah. We want the non-recourse loan so we don’t get hit with the unrelated debt financing income. That’s where we zoom up really fast of the highest tax brackets imaginable all of a sudden. This is another one of those things, I hate to say this, you guys know I hate to say this but it’s one of these things the IRS does for our own good.

[13:29.84] Eliot: It really does right.

[13:34.98] Barley: I’ve got my retirement account. I’m going to go get this really creative loan. It’s like no, don’t do that.  You can do that if you structure it very carefully, but you know that we’re playing with the retirement money here.  We need to treat that like it’s kind of a sacred thing if you will. They just don’t want you messing around with that cash. 

[13:51.12] Eliot: It’s going to hook off of your UBIT on unrelated debt financing. Typically, we don’t have to worry about UDFI when we’re in a plan like that’s a sole foreign case.  It’s usually not subject to it. But the UBIT could come into play because we’re just talking about here we call a single-family rental we know that. But what if it was a different type of house? Maybe we’re going to flip. 

[14:09.44] Now that becomes an active business. Now we have to worry about that UBIT that Barley was referring to. This wouldn’t be the case for all houses that maybe a plan was going to buy. We’d certainly want to exclude flipping things where that’s going to be inventory that’s a regular operating business. That’s a no-no within our retirement plan. We are strictly talking rentals here.

[14:28.48] Barley: Just one piece of real estate for a lot of different purposes. Great question. I’m good on that. Alright, I lived in Colorado January through March of 2025 and then moved to Arizona in April at a small 401k. I cashed out in October 2025 taxes were withheld. I understand I’ll be required to file two state returns, how will I reconcile the 401k for both states?  Great question, the short answer if you’ve established residency in Arizona.

[14:59.56] Whatever you have to do to establish that, then likely it’s just going to be taxed to Arizona.Whenever the plan pays out, where are you living at that time? So again, it would be important, you actually establish the residency. Would you agree with that so far? That’s where that would be taxed in that state where you’ve established your new residency there. You may have to file two tax returns.

[15:21.56] Kind of depends if you’re going to want to look at that 1099 when you get it. If it says all tax withhold was just to Arizona then you’re good to go. If part of the taxes withheld from Colorado, you might have to refund that and there would be a little bit of a process there, but ideally you’ll just get the 1099 with the Arizona state withheld. What else do we want to add to that?

[15:41.56] Eliot: When I’m looking at this question I get a little bit confused because I actually lived in both states, but I went the opposite direction. I’ll try not to mess up the two states, Colorado, Arizona. But yes as Barley’s pointing out, if we moved from Colorado to Arizona and we weren’t considered a full resident in Arizona at the time that the transaction took place that we cashed out our 401k? 

[16:08.36] Then yeah, we’re paying tax and both. Then you get into, how are you going to prorate it and all those kind of good questions? How are we going to do that? We’re going to talk to our tax preparer, but usually it’s going to be proration depend on the source of income and how many days you’re in one or the other things like that. Typically are questions that we start asking when we get into that situation, but that’s not the case necessarily here. 

[16:30.64] We were in Arizona for a good portion of time, about seven months. That in itself doesn’t mean anything. What you have to go down and look at is the Arizona requirements, hey, what does make residency in Arizona? I’ve had it twice and basically as long as you’re intense to be there. But one of the tests if you’re there seven months, and they think well okay that looks pretty good. That’s just another factor that they use towards it. in this case. We met that and I think that’s probably the stronger of all the factors if you look at them.

[16:57.80] But they all have different weights and things like that. Do you have your license there, certainly do you have your residence there? Have we moved everything? Do we cut off all connection to the previous state? Things like that, are we running a business there? So on so forth. But certainly seven months is something they look at 213 days, and that’s just another factor. That’s a big one and so more unlikely we’re going to be okay here that we established it. But you also want to make sure you did all those other things.

[17:23.96] You have your home there now, you got a driver’s license, you’re registered to vote, so on so forth. Maybe you’re working there or whatever it be things like that, but if that’s the case then you wouldn’t have any Colorado taxes for this particular transaction now you made for something else that happened in Colorado, but on this case it would just be Arizona. And that’s how we would handle the 401k.

[17:48.88] Barley: You would have a part year for Colorado you just wouldn’t report that income on the Colorado side

[17:53.48] Eliot: Correct. If you had any activity in Colorado, why you live there outside of this transaction 

[17:57.00] Barley: From January through March.

[17:58.84] Eliot: Maybe you had some kind of I don’t know maybe you won some gaming winnings. They’re at one of the casinos in Colorado or something like that. Whatever it be, you’d have to probably pay a tax file return for that but related strictly to the small 401k that we cashed out. More than likely you probably met the criteria that you’re an Arizona resident. Therefore that event happened while you were out there and while you were in Arizona, that’s when we cashed it out October 2025, so you’re probably okay.

[18:25.68] Barley: Correct me if I’m wrong here. But what it doesn’t have to do with is like when or where the money was earned that went into your [inaudible:00:18:34] they’re not going to trace back like maybe you’re in part of it, New York part of it in Florida or something like that I think that’s how that works. 

[18:38.30] Eliot: Yeah huge lawsuits over that thing all the time, right? Well, you earned it for 40 years here in California, and then you just skip town on us. Because you tax heavy, that’s the thing they will try and chase you down. That’s why you want to make sure you did everything you could to establish your residency and sometimes that’s not just a simple yes or no, you have to go down a lot of time.

[19:03.00] Barley: I just realized what kind of a relevant and kind of big deal question this is right now. You guys know what just happened in Washington state probably with that increased tax there. We’ve had a lot of exodus from California, New York. This is going to be really common. I don’t know, people might be moving to states like Nevada, Arizona, Florida for tax reasons. I mean they already are but yeah,

[19:23.26] Eliot: I’m going to see a lot of consults already on, that people are getting out of Washington coming to Arizona, Nevada all different states and been looking into.

[19:31.40] Barley: I just had one too. Washington, considering Nevada or South Dakota. I was like, that’s a very big difference. One’s going to be 20 below one’s going to be 120. But great question, very relevant, a lot of people moving for tax reasons, especially if you get close to retirement too.  Great work, any question. I only skip over anybody here. 

[19:54.00] Eliot: No, we’re good to go. 

[19:55.08] Barley: I got a fleet of work trucks that needs to be replaced, okay. Can I donate the trusted charity to avoid depreciation recapture? We like that. We want to avoid that. Can the charity then sell the trucks tax free to fund their operations? Great question that doesn’t really come down to because we talked about it’s you can donate appreciated assets to charity. And that’s such a great deal, right? Typically, we’re talking about capital gain type assets, right as opposed to ordinary income producing assets. 

[20:22.56] Eliot: Well, we’re talking about appreciated assets. First of all in a truck that you’ve used forever and probably fully depreciate. It’s not appreciated, we probably don’t have an appreciated asset here. But yeah, we sure do, we talked a lot last week about that during our tax wise event. Donating appreciate assets, going through some calculations, showing the difference and things like that.

[20:42.72] Barley: Rental property, stocks, vehicles.

[20:44.72] Eliot: Absolutely, but in this case that’s not what we have going on. These are work trucks, we use them in the business and more than likely they’ve been depreciated for some time. They need to be replaced which tells me probably they’re fully depreciated. That’s a key part to the answer here is how much depreciation? Well, what’s the basis in the operating business? What’s their basis in these trucks? That’s one key component here. 

[21:10.00] The second, how is the nonprofit going to use that vehicle? Maybe they’re just going to receive it and sell it. I’ve donated vehicles and they took it and the charity sold it and they were able to keep the funds and things like that for their purposes. That could be one option probably not in this case. They’re actually going to probably use it in their operations is what the way it was explained.

[21:32.28] In that case, if they’re going to use it. We have a whole different thing, we have to look at the adjusted basis from the donor. Then we look at the cost when it gets over here.Whatever’s left, if there was any adjusted basis that’s going to be critical and we would take the adjusted basis and here they’re selling it. Well, I guess here they’re going to use it. We would just take that adjusted basis and that could be the donation that the donor gets. 

[22:00.00] In other words, if we want to draw this up or something like that, maybe it’d be easier to explain. Let’s say we got a $30,000 original cost. Over time we depreciate $21,000. This is over in the business side, okay. That means our adjusted basis is $9000. That’s on the books of this truck business that’s been using these trucks in its business. If we want to donate that the key is again how they use it. If they’re going to use it, well, they would just pick it up typically at the fair market value. 

[22:37.08] They’re adjusted basis and that’s typically what your deductions are going to be. If they still needed it here in the nonprofit your deductions are going to be the $9000, typically. What if they decide to sell it? Well, then it’s going to be the gross proceeds. Let’s say that the nonprofit sells it for $10,000, it’s going to be the lesser of $10,000 the gross proceeds or the adjusted basis for  $9000. What the IRS is not going to let us get away with is that this business had nine thousand left on its books. It’s not going to let us get a deduction higher than that.

[23:10.80] That’s the key thing here, but in our actual question. It sounds like, probably fully depreciated and that brings us into kind of an ouch moment. Because if we have zero if we could cross that just put a zero there instead of nine. Let’s just pretend that we’ve fully depreciated it, we don’t have any adjusted basis. Now all of our deductions are going to be based off of that of the value that we would get. With the nonprofit sells it, we’re not going to get any charitable deduction for that. 

[23:43.00] Likewise if they continue to use it it’s still going to be that lower up. The lower is, you can’t get lower than zero, right? We run into a situation where, wow, thank you for the truck. We appreciate it, but you’re not going to get a deduction. You’re going to feel good about yourself. Your bank will not right. 

[23:59.08] Barley: That’s about it. Will that avoid depreciation recapture? 

[24:02.20] Eliot: We only have depreciation recapture when we have gain. No gain, therefore no depreciation 

[24:08.20] Barley: Technically, yes. You might not want to go this route with the with the with the donation. Ye, it would. To answer your question directly. It would avoid recapture. Essentially differentiating between that capital gain property, right? Depreciating assets we can get a tax benefit for that sometime, donating those to charity. Depreciating or fully depreciated assets, no adjusted basis, no tax deduction.

[24:32.84] We went over this a lot last week, but these new charitable hurdle rules. There’s a bunch of that guys if you guys have any questions about that shoot us a platinum portal question or something.  I don’t if you want to go into any of that now. There’s kind of a whole new set of rules there.

[24:47.68] Eliot: Charitable deductions have a lot of different limitations and things of that nature. Maybe we’d save that for the next show or something. 

[24:54.64] Barley: Alright. Let’s get this off of here and back to the questions. 

[25:02.04] Yeah, great question. Appreciate that you’re thinking about it from that charitable perspective. From a tax perspective, what’s the most strategic approach to unwind real estate rental property? That sounds like a legal term. You know how we’re going to my tax world. 

[25:18.84] Eliot: How are we going to get out of this? I have a bunch of rental property. How do I get out of that business? There’s a lot to this. This is very broad and I picked it on purpose because it just allows us to throw out a lot of different ideas that everybody might be able to, maybe one will kind of make sense to you and perk your interest or something like that.  But I think the first thing..

[25:37.96] Barley: I can draw some out maybe 

[25:38.50] Eliot: Sure you can if you want. Absolutely, it never hurts to draw. One thing to think about is how were you using these rental properties that you had? I’m going to assume you had several and if you’re trying to get out of that business and unwind. We got to look at how did you use it all those years? Was it a passive or activity? Or did you have real estate professional status where it was non passive?

[26:03.00] If it was indeed you were real estate professional. Were there any passive losses that you would incurred prior to getting your real estate professional status? What we call trapped house passive losses. Those are things that we’d have to look at as far as inventory. That would be for flipping certainly. If we’re flipping that’d be something else you just sell it recognize the cash.

[26:29.24] Barley: I was saying different ways you could use this, how to report the same property.

[26:33.48] Eliot: But if it was passive, let’s say that you got your regular W-2 job, your spouse does as well or whatever it is. You’re not managing your own properties and you built up a lot of passive losses. Well, then you could certainly sell them all and release those passive losses right away or you could sell one release the passive losses associated with that and maybe pick up some others from the other units that are on the on your on your 1040.

[26:58.04] But you’d want to look at how much income you have coming in that year. Again, let’s say we have three properties and we have some rough idea. A good estimate of how much income we expect for year one, two, and three going forward. Well, maybe we can do some tax planning depending on which units we sell and maybe you can recognize a little bit of loss for those particular years. We can maybe hit a higher year of more income, maybe year two.

[27:23.56] We’d want to track our selling of these properties are unwinding of this business so that we’d have the most loss in year two. I’ll set that year. We’re in a higher bracket perhaps. That’s what Barley and I and the other tax advisors. Those are the things that we’re going to look at when this kind of a question comes around. Because we can play that game. We can see how many passive losses we have which would be more beneficial, sell this unit, units one, four, and seven. Hold on to the others or maybe it’s one, two, and three you sell. 

[27:53.16] Maybe it’s one, two, and three you hold on to and determining which years you want to sell because we’ll be able to track when we can lease those passive losses and they can help you out. Typically speaking if you had three properties and they had the passive losses. You sell one, you’ll be able to take the passive losses it created and offset its gain. You have less gain at least and you can pull the passive losses from the other properties you have as well. Up to the amount of gain.

[28:18.96] In other words you sell that property you pay no tax on it would be the idea. That’s how we’re going to track that out when we determine which house to sell, when and where by how many passive losses it have. What do you think you can sell it for? How much gain do you think you’d recognize and what would be your best play? Let’s flip the coin and we were real estate professional, that brings up a whole another set of potential analysis if you will.

[28:46.40] Because if you’re a real estate professional that means that’s been your real job or your spouse’s and it’s no longer a passive activity. It’s now an active business or a non-passive.

[28:54.88] Usually to get to that status, we have to do something called aggregation. We pull all those properties. Let’s say we have three instead of them being considered individuals. They’re all one unit, one big clump when we aggregate to get to real estate professional status. Prior to us reaching rep status. Maybe they had passive losses in previous years and if that’s the case those passive losses become very trapped. We can’t get rid of them until we sell substantially all of the current properties that we have and we said we have three.

[29:31.72] And last week Barley and I went over this issue, that phrase substantially all. You can really ditch the substantial part of it because most commentary author says you really need to sell them all. IRS doesn’t go out there and really tell us the definition of substantial. I know people right away are clicking and clacking and saying hey, what’s its IRS definition of substantial? You’re going to find hits that tell you but that’s for different things. It’s not having to do with real estate professional for this particular term. Substantial has never really been defined. 

[30:00.84] Barley: Substantial, reasonable, safe harbor. They just throw those turn they can be if they apply the different things. 

[30:10.04] Eliot: But none of them are being spoken by the IRS. No, really a lot of commentators think at this moment you have to sell them all. Back to our case, we had three rentals, we agree. We pulled them all together, we’re going to sell all of them before we could get those passive losses that we had before we became real estate professional. That’s the only way we’re going to be able to release the

m.

[30:29.76] Back to their original question, how should I unwind this business? Well, we’re going to look at things like that. What’s the best year to unwind all this so we release those passive losses? Maybe you sell a little bit here and there. You just have to calculate, calculate, calculate, determine what’s in your best in your best interest as far as when to sell in these.

[30:50.24] Barley: Even if the rep the real estate professional status with the aggregation election. Even if that wasn’t even involved you’d still want to look at the timing of it. For example, maybe you’re planning on converting a retirement plan next year or something like that. We’d want to definitely stagger one of those sales out to the next period. That’s just going to be good old-fashioned tax planning, looking ahead determining when we’re going to have more income.

[31:12.48] We want to offset those high tax bracket dollars like Eliot alluded to there. If we can stretch that out and get more benefit of it. That’s one of the things we’ll calculate just to determine what the best path forward is as far as the for the selling and unwinding.

[31:26.10] Eliot: Absolutely. Definitely a very broad question and very deep question, a lot going on here potentially. Just to throw a little perspective out there. These are the things that we would look at to help you determine what is the best course of action and how much things like that.

[31:41.44] Barley: Yeah, great question. Don’t know if we mentioned this guy, yet this guy here got a lot of videos, asset protection.That’s half the focus here, tax and asset protection, very very important so you can sleep good at night. Anonymity is one of those terms you throw in there but strong asset protection. That’s what we really want to lean on.

[32:01.20] Of course the tax planning part of that we layer in the tax efficiencies depending on

where we are, what we’re doing, and who we’re doing it with. That will depend on how we stay compliant, build out our legal structure. And then you’ll talk to tax people like us to determine, where can we apply some of these tax strategies? How can we realize some of these tax efficiencies? Make sure you turn in tons of great free content on there on the YouTube channels. And of course scan this right now if you want to set up a console. This is available whenever you want it.

[32:27.24] Part two, reverse mortgage. My mother-in-law has one of these right now and we’re going through this whole process, right? She’s living with us, she’s not in the house anymore, but she’s not officially moved out, but it’s under a reverse mortgage. We’ve kind of been dealing with this. I think this is actually going to be a lot more common just for that reason. But so what the heck’s a reverse mortgage? 

[32:51.12] Eliot: It’s a good question. First of all just kind of looking the term reverse it just kind of tells us we’re doing something maybe different going backwards opposite mortgage. And that’s really what it is. You’re looking at what is the equity in the house, your fair market value less the debt you have on it. That’s typically your equity there and they’re going to lend on that amount. 

[33:15.92] What’s going to happen is the lender is actually going to give you a chunk of money based on the equity or it’s going to make monthly payments to you. Could be a lump sum, could be monthly payments, whatever it be. The borrower doesn’t pay anything. They just keep receiving the money or if it’s a lump sum they’re done. But you’re not making any payments. There aren’t any payments typically until you pass away. You sell the house or if you move out of the house.

[33:42.04] Barley: Like to assisted living or something any of those.

[33:45.04] Eliot: Triggering events and then all of a sudden it comes due and you have to pay that note. Now, you haven’t been making payments. The balance has gone up in the case of monthly payments where you had a static balance to begin with it was a lump sum. But over the years certainly there’s been interest. But you didn’t pay it and we’re cash basis payers. We have no deduction at this moment because the interest just keeps piling on and we don’t have until we have a triggering event and we’re forced to pay.

[34:16.24] There’s no interest to be spoken of, it’s been accumulating, but we can’t pay exactly. That’s kind of what we’re looking at here. This is a unique situation, I really love this question because it really starts to make us kind of go in deep here about this particular property. Well, hey part of its personal residence part of it was a rental for business. That’s the key there, rental. Okay trader business going on with that other unit.

[34:40.96] That brings us to some really interesting questions. Well first, let’s look at the residential portion. We did this loan reverse mortgage. We’ve received the funds, we want to maybe unwind this situation. What happens with that personal residence? Can we deduct the interest that’s been accumulating? Well, it depends. Number one, we can’t until we’re done with that loan.

[35:03.96] That is that we sell or remove until that year and then maybe on our schedule A we could deduct the mortgage insurance interest perhaps. But then we have to step back when we receive the funds, maybe it was monthly payments. Maybe it was a lump sum. How did we spend that money? Yay vacation, bad for tax.

[35:23.96] The problem is that we didn’t use it to buy or substantially improve our personal residence. We didn’t use the fund for that. Now come time, we sell it. We can’t deduct that interest on our schedule a mortgage interest even though it’s been building up. Now we have to pay a whole lot of it because that loan just kept growing and growing and growing and the interest kept compounding and compounding and compounding or we’re not able to deduct that because we didn’t use the funds we did go on vacation.

[35:49.32] That was fun, but we didn’t use it to substantially improve our personal residence. Therefore, we can’t deduct it. That’s what happens on the personal residence site. Now if we did use it those funds to help purchase or substantially improve the property. Then yes, we would be able to take that more than likely on our schedule A as personal residents a mortgage interest at that time in the year. Yet you sold it. What about the other half? It’s rental.

[36:14.96] Barley: Sounds like a business expense to me.

[36:17.56] Eliot: It is.Just because it’s a version mortgage and we hear these other terms. Let’s go back to the core that’s going on here

[36:22.56] It’s still just a rental business. It’s schedule E. It’s a rental property. For that portion

[36:27.32] We have rental income coming in. We have all these various deductions now in the year that we sell

[36:32.44] You got to go back to tracing the funds. We call it

[36:35.70] How did we spend that money as we received it. again going all the way back when we got the lump sum or maybe monthly payments

[36:41.36] Payments did we spend any of it on this new rental portion that substantially improve over there to help pay for anything over there? Well, then maybe we could deduct the interest for that portion over there 10 years later or whatever time frame it be. But again, if we didn’t, if we went the Barley route took the vacation, which I’m all about. No, we didn’t use it over there. We didn’t use in the business. We can’t trace those funds over there. So we’re not allowed to deduct it again. No deduction at this time, we just have to pay back that bill, nothing to deduct .

[37:11.16] Barley: Kind of like when you guys take out a home equity loan. If you use it to improve the home, you can deduct that on schedule A you don’t have to use it for your home.

[37:18.00] Eliot: But as far as 10 years away. Ten years have gone by. What should I know about that? Well, you should know that the interest has been accruing over 10 years. It’s probably pretty high that there are these factors or whether or not you can even deduct that interest for the personal, for the rental side things. To think about but other than that I don’t know of any significance to 10 years. 

[37:40.04] Barley: They can’t kick you out. I mean if you’re alive and you’re there with the documentation.

[37:47.84] Eliot: You’re still legal, you’re still the title owner of that home certainly. Yes, and you’re responsible for the maintenance on that house. Keep the upkeep. You have a duty to keep it in good condition and things like that pay the property taxes. We don’t get a tax lien on the house. Got to keep it so that it could be clearly, cleanly transferred over to the other party if you are any party if you had to sell in order to pay back on this reverse. That’s kind of the work through again in reverse note.

[38:11.48] As it says we’re going in kind of an opposite direction. They give you a ton of money. That’s kind of normal with a note, but you’re not paying it back. You don’t pay anything back for a long time and the interest keeps accruing. It’s either lump sum or monthly payments, whatever the arrangements of that loan are.

[38:27.00] Barley:  And they get the house.

[38:28.40] Eliot: Exactly. Yeah, they could take the house or you sell whatever. 

[38:32.00] Barely: I mean once they pass away then they get to deal with the asset.

[38:35.92] Eliot: Those are kind of the keys to this particular situation. 

[38:41.28] Barley: Great question guys. This is another good one.Boy, did this become relevant Hawaii, last year, was that just last year? It seems like so much longer ago, California lives in California, the fires there, flooding North Carolina. This is going to be unfortunately very common when we get you know partial insurance to replace the income loss of a business asset. 

[39:04.00] My rental property sustained hail damage, totaled the roof. I replaced it, insurance paid for most of the work, but did not cover deductibles or roof depreciation. That’s interesting concept there. Can I recover those expenses using federal and state tax codes? I live in California

[39:21.32] Eliot: Let’s go back to the pictograph here. 

[39:23.22] Barley: Let’s draw some pictures.

[39:25.32] Eliot: Yeah, let’s get some nice, build a house and put a little roof on it. What happens, circle the roof if you would. That’s what we’re talking about here. That thing got blown off. It got blown up whatever it be in some nature of event, mother nature didn’t like that or if it’s gone. Before, and this was a rental. Before this happened, it had some value. Now more than likely when you go on to your tax return from that previous year. You’re not seeing anything dedicated to the price of that roof. 

[40:03.36] Barley: Let’s just put a new one on or something. 

[40:04.36] Eliot: That’s a very good point. But let’s just assume we had. It’s probably that would have come up in the fact pattern but it didn’t. You have a building we typically divide over 27 and a half years. That’s how we depreciate over time just the building parts. We have to have some estimate. If you have to bring a specialist in whatever it be to determine what was the value of the roof at the time right before the moment before it got struck or fire burned or whatever it be. 

[40:32.32] We want to know the value it had right before the disaster. Tribute that, so that way we know how much adjusted basis because we’ve been appreciating over time. If we know the value of that we’ll know how much depreciation we took over time. We’ll have an adjusted basis basically for just the roof. Kind of like I don’t want to, almost anyone to say it. Kind of like the concept though of a cost seg where you kind of break it into pieces sure. But that’s not what we’re doing here. 

[40:58.28]We are breaking into pieces, but we’re not getting different depreciation lives here. So this will be the same depreciation life as the rest of the home. But we get an adjusted basis that we figure out we calculate on that roof itself. And then we look at basically well, we can write that off. Okay, let’s say the roof we thought was 15,000 originally.  We do appreciate that portion over time by 5,000. We got 15,000 adjusted basis and then Mother Nature came in and just [inaudible:00:41:23] it. 

[41:25.10] We’ll just write that 15,000 off loss okay. Now step in the insurance they cut a check to us now. We had to pay a deductible, maybe we had to pay some other fringe expenses related to this. Those are all going to go to be capitalized, we’re just going to add it right back into the basis of this house and start depreciating over 27 and a half years again.

[41:46.92] But we take all the sums of all the payments that you get from the cost of putting this back together. Subtract out the insurance proceeds and what we have left over is the amount. That we have to capitalize back into the house on the roof payment itself. In other words all the expenses that we incurred to get this thing fixed again, less the insurance. Whatever that leftover is we put it back in and capitalize it over 27 and a half years. 

[42:18.20] Barley: That’s our new roof. 

[42:19.20] Eliot: That’s our new room. First again, we had to isolate the roof, find out what its value was. Take away the appreciation on that unit over the time we rented it. To get an adjusted basis, that amount we write off. Now we start fixing the roof and [inaudible:00:42:39] a lot of expenses, insurance paid us some, we net those two. Whatever is left over, we put into the basis of the house again to be capitalized.

[42:48.80] Just to add this on there. You brought this up, this may be relevant. Even if you don’t have an insurance claim, you’re maybe replacing the roof. You may be able to deduct a portion of that depending on how much the cost to strip off the old roof, right? Just for example that may be a portion you could expense out and then capitalize the rest of the roof.

[43:06.60] A lot of ways you can go there. We’re talking about getting creative with the depreciation. But the insurance proceeds typically are going to be coming out of pocket for that. That will just be an additional capital improvement you will add to the to the balance sheet there.

[43:18.36] Eliot: Yeah, but back to the core question asking about the roof depreciation. That’s how we handled the writing off of the roof. Didn’t have the deductible again. It will go into the

capitalization the fact that we’re in California. They typically in this area follow the federal rules. There shouldn’t be any difference in California. 

[43:35.76] Barley: Except they’re really strict and just make sure you cross the T’s and dot the I’s all that stuff. They will find some reason not to give you your money. Make sure you you know, keep good records there.

[43:47.12] Eliot: But the real key is I think it’s capitalization is the real key. That’s how we handle it from a tax perspective. 

[43:55.16] Barley: Good work when setting up a corporate structure to hold real estate assets. Is it more tax efficient to sell the property to the corporation? Which we usually don’t recommend or just transfer ownership and declared a startup capital? Another kind of pretty broad question, right?

[44:11.28] Eliot: It is. But I picked this one because I saw maybe some misunderstanding and what really is going on. The corporate structure first of all, we don’t ever work with corporations as far as putting appreciable real estate into it. Unless we’re flipping right? The whole concept for flipping for those you don’t know. It just means it’s inventory you bought a house, maybe you fixed it up. Maybe you didn’t and then you just sell it again out of profit, hopefully. That’s inventory.

[44:36.82] That’s very different. That’s ordinary any gains are ordinary taxable income. That’s treated one way, we would only do that in a corporation because that’s a traitor of business where it is inventory. We’d like a C-corp and S corporation for that type of thing. But if we’re talking about real estate rental type of things going on here, that’s different. We’re going to put those in maybe isolated disregarded entities, which we talked about before, disregarded entity just means that it comes through onto your personal 1040. 

[45:03.58] It may go through a Wyoming holding, maybe we set up a rental in Michigan. Okay, and Anderson’s going to attach that disregard it to a Wyoming holding which in turn comes on to your 1040. That’s what we’re going to do for asset protection but from a tax perspective. How are we going to set that up? It’s going to put it in that box up there in Michigan and it’s going to flow all the way down through Wyoming to your 1040. Wherever you be that’s a typical arrangement. 

[45:28.60] And when we do that we’re not going to sell it. Because this is all disregarded to your personal returns. It’s just like you’ve taken it from your right pocket. You already own the rental and you just move it to your left pocket. There’s no sell going on there. And what if there was what if you’d had this rental for a couple years and you’ve depreciated it. You can sell it for, you bought it your basis was maybe 110,000 and you’re just a basis right now.

[45:56.60] But you could fair market values 200,000. Well, you’re not going to sell that to your own entity. First of all your own entity would have to come up with 200,000 to pay for it. You’re going to have to recognize capital gains and that’s our sell between a related party. You don’t have to pay the tax right away that year. Very painful if you do something like that. We’re just going to contribute it, you just put it in there.

[46:18.52] And yes, you could call a capital contribution in the case of the rental and really nothing else to it. That’s just the amount you put into that unit, the disregarded, Michigan going through Wyoming coming through your personal residence. It’s just a capital contribution backing up for a second on the C corporation. There when you can, if you’re contributing a house to flip it, it’s going to be inventory. 

[46:43.00]Well, then maybe in that case we might call it a loan that you lent it or we could call it a capital contribution in exchange for stock either way. Just depends on the nature of what’s best at that time to set it up. Either way, it gets into there again. That’s when we’re flipping in the C corporation.But otherwise you just transfer over to this box, if it’s a rental long-term hold or even a short-term rental. 

[47:05.76] Barley: This would still be a disregarded LLC. Even if you’re a flippant within the C corp. We wouldn’t have the C corp own the property unless it was considered inventory, it’s a long-term rental. But this would be the same structure if this was a flip here, still hold it in an LLC for liability protection, disregarded to the C corporation.

[47:25.72] Eliot: It will still be considered that you attributed to the C corp because it’s under the C corp umbrella. We have to call it a loan or  an exchange for stock, 351. But that would be for flipping again. If it’s rental real estate really nothing you would never want to sell. I don’t know of any instance here where you’d want to sell at all because now you’re getting the tax consequences that you’re incurring within your own economy, your micro economy, with you and your entities.

 [47:58.16] All you’re doing is creating taxable liability there without having any outside

Income coming in. You’re actually draining your world of cash because you’re going to have to pay tax on that. That’s a very bad play there. That’s what I would do for that.

[48:06.56] Barley: Yep transfer the ownership, call it a capital contribution. That’s why we use disregarded an LLCs for partnership or excuse me for real estate. Typically no tax rate precautions going in or out. We have this basis inside-outside, basis calculation. That’s kind of part of the whole point of this for transferring real estate. Very easy to use a disregard LLC partnership, very difficult to get property in and out of a corporation appreciating property.

[48:32.40] Eliot: Yeah, but if it was just again that real estate structure that Barley had up there as far as disregarded to maybe our Wyoming holding come to our 1040. What if he does tell him, hey, Eliot, how should I do this? I don’t sell it to your entity, of course. He has to recognize that tax right away. He’s going to hate me. It’s going to be a real problem on his 1040 because no one ever paid him for it.

[48:54.96] Even if his entity came up with a financing paid him. It’s still going to be a tax liability in his world that he’s going to have to pay the real cash outfall here it’s going to be to the US government and he’s going to be terribly grumpy. 

[49:06.96] Barley: Not a good tax advice. 

[49:11.76] Eliot: I don’t see anywhere where we’re going to sell. We would just transfer typically.

[49:15.76] Barley: How would we use a corp? Why do we all have these corporations part of our blueprint because we can use those for management purposes, our active business. It’s still going to play a role even in our passive long-term buying whole structure. It’s not going to own anything but we can manage it get a lot of tax benefits. We still might have a corporation as part of that whole structure. It just wouldn’t own the assets.

[49:34.62] Eliot: What would we do that we swore we wouldn’t talk about today?

[49:39.48] Barley: A lot of ways you can get cash out of your corporation guys, you know it  280A, home office, accountable plan for reimbursements in case anybody hasn’t heard of that one.

[49:47.04] Eliot: We tried to go one show without bringing it up and we can’t know.

[49:50.76] Barley: How can we resist if you get cash back in your pocket and it’s a tax deduction. Do you love us? Barley, Eliot, they’re so great. They wrote these checks and saved all this money. If we didn’t mention 280A.

[50:02.12] Eliot: Yeah, so we’re mentioning it. Okay, we own it.

[50:05.06] Barley: Well, that and this is good. We love doing this because this got questions from across the board right all all over the place to touch on a bunch of different topics. That’s exactly why we do this. 

[50:18.36] Eliot: Maybe next time we’ll get through it. We’ll try.

[50:21.36] Barley: The universal business organization trust. What the heck is that? Can I sell my failing business LLC to a universal business organization trust at cost basis since the trust has no money or income yet? I believe we’ll create a refundable NOL. Is this correct? What are we talking about here?

[50:39.72] Eliot: Got a lot of unknowns here at things that need to be answered. I think yeah, we want to draw again.

[50:44.04] Barley: Going to be honest I don’t know if I’d heard of a universal business organization trust before absolutely at least not.

[50:48.64] Eliot: We run across it. I run into maybe once every couple years someone brings it up. It is something recognized as a business organization if you will. It doesn’t have all the properties. It usually comes up 99% of time with a fraudulent situation, people don’t use.

[51:12.24] Barley: It’s on that dirty doesn’t list or whatever. 

[51:13.64] Eliot: It’s probably got permanent standing there.It’s always used because no one would typically use it in proper business. They’re going to use an LLC. They’re going to use a corporation, things of that nature, partnership. This is a little bit different and it’s typically used to try and come up with some scheme maybe not even intentional to try to avoid tax now. That’s the first thing. What is it?

[51:35.44] It’s just a recognized form of business entity. That’s really it. It can operate, usually has a trustee. That’s must be an unrelated party that will kind of oversee everything but nobody really significantly uses these at all. Unless they’re trying to probably get themselves into trouble wittingly or unwittingly. When we set that up, then we also have the cost basis issue. The question was how do I sell?

[51:57.92] I have a business that is let’s say an LLC. It’s not doing well. I want to sell it to this business organizational trust and this is not to be confused with something like we set up like a Wyoming statutory trust night and day difference. But they have an operating LLC that’s not doing well, it’s failing. Why don’t we sell it to this business at cost which just means whatever your basis is? We’re not selling a fair market value so we can just kind of shift it over there.

[52:25.72] With the idea that that’s somehow because it doesn’t have any income in this business trust somehow. That’s going to create a loss that hits our personal return, a NOL and I’ll get a refund for it. What this brings up, this question is a lot of misunderstanding and what’s really happens. First of all the idea of selling you’re losing business at cost into a business that really even though you’re not running you have a trustee. You’re still a related party.

[52:54.56] Okay, because it’s really based on you that business organizational trust.That’s a related party transaction really there. You’re not doing it at fair market value. IRS’s their ears are going to look at. Because if we were doing a fair market value it might be that we would actually have a gain, because we’ve depreciate assets or something like that. We might be trying to actually avoid taxes and so that’s going to get their attention right there. You’re trying to shift something out without paying.

[53:20.62] With a kind of fraudulent transaction they’re moving it in there. That won’t create an operating loss again right there. We got the issue that just doesn’t look right. It’s not creating the loss even if you’re in that business and it starts to create a loss or something like that. It’s not going to be able to operate as you point out that it doesn’t have any money in it. If it can’t operate if it can’t incur expenses.

[53:44.86] Then it’s not going to have a loss either and it’s not that loss that we don’t have will never hit your 1040. In other words, you’re never going to have an NOL. You’re not going to have a net operating loss. This is not all going to hit your personal return at a loss. It’s not going to create a refundable NOL or any NOL at that point. You’ve just moved it over here to there even if you “sold” a loss you sold to a related party. There’s rules on that.

[54:08.32] You can’t even deduct those losses, typically we have limits on that type of thing as well. This really doesn’t work. But the reason that it caught my attention is because I hadn’t had this come up in a long time. People  haven’t asked about these type of entities. Most people don’t trust them for good reason. They’re usually just used to they’re up to no good.

[54:28.88] We don’t recommend it. It’s not going to get us what we want as far as creating a loss that we can take on our personal return. Indeed getting all the way back to the operating LLC where we started that is failing. If it’s had losses those losses should be hitting your return anyway. You’ve taken the losses over time, they’ve shown up on your return. If any way those were going to entitle you to a net operating loss.

[54:55.52] You would have already seen it over the years of the failed operations of that LLC. That’s why the loss is already incorporated on your return assuming this is a disregard or a partnership that comes or an S corp that hits your personal return. You’ve already seen the losses whether you knew it or not. That’s why this doesn’t work. But I don’t want people to get tied up in these, every now and then would be. 

[55:18.24] I don’t know how this came up if you got pulled into maybe some type of a I don’t want to say it’s a scam necessarily, but usually they are. We just want to protect our clients out there and our listeners and just be very careful. If it sounds too good to be true. It very well might be i

[55:32.20] Barley: It’s a thousand different kinds of trust. You can really kind of tweak it to use whatever way you want in a sense. Like Eliot said, we’ll use it for a land trust, maybe holding property, or a living trust for legacy planning other than that. No tricks here. We do it the old-fashioned way. I mean if you’re looking to create a loss we have ways to do that. 

[55:53.04] We don’t need to do some, you know, highly abused tax vehicle. We oftentimes that was a great point that I made. We oftentimes have an alternative path to the same goal.. We don’t need to use that we have other ways we can show losses and take losses using real estate, small business, etc.

[56:11.98] Eliot: But a critical all my own element here is that that LLC had been operating a loss. That means that that loss if that business hits your 1040, you’ve already witnessed that loss on your return. Even if we’re in a situation and we talked about this maybe, I think the last time you were on here. Even if you didn’t see the loss as far as deductible on your 1040, maybe there was a basis limitation.

[56:36.36] We talked about that a little bit a couple weeks ago. That loss is still on your return the ability to take it. But you just have to have more income come in and something like that I get more basis. Again, as I keep saying over and over that failing business. It’s already been reported as a loss on your return whether you knew it or not,

[56:53.28] Barley: Even if it’s a passive. 

[56:55.36] Eliot: Exactly, right. That’s the same thing. 

[56:58.17] Barley: Even if you didn’t materially participate. You’re still showing that loss on your return.

[56:59.96] Eliot: Absolutely.  I appreciate the question. Just want to keep you out of trouble. These type of things typically don’t go well. Great questions on this was a little bit different. This was our last one very different than our normal path of questions. Just wanted to shake it up here and give you something different.These were the questions you guys sent in we’re happy. We’ll answer everything we can.

[57:23.10] Barley: Hey, we love talking about those deductions because you can apply them today get cash back in your pocket.  We love talking about that kind of stuff because you know again, it’s actionable. You can go do it right now and have a realized effect of that. We want to cover all this stuff a lot. This is the tax world really. If you guys want to get into tax and finance. It’s really never a dull moment.

[57:43.40] Eliot: I mean we really these quite these eight questions really stretched kind of what we normally talk about. It’s not that we don’t know about a lot of this stuff, but I just wanted to be able to get it out to you guys.

[57:52.08] Barley: Yeah, huge breath within the finance and accounting field. Fun to talk about some of these kind of more obscure topics. As usual guys mention this a couple times make sure you’re already on YouTube. Go subscribe to the pages show these guys some love they you know, got a bunch of great content on there. I usually mentioned, I really like Toby’s interviews for various industry leaders.

[58:12.72] Just great common-sense information there. I had so many recent changes all these tax laws, the FINsense stuff all, FINRA these recent changes. These guys really stay on top of that. All the strategies that we apply to you guys. This is just what the partners, they walk the talk. We’re just going to tell you what works for them. Generally speaking. These guys are out there doing it. Just like you guys are and we’d love to see you this weekend.

[58:39.16] You haven’t made plans guys in on that. Yeah, get on a flight. That’s right. Come in early. There’s a Friday, Saturday, three days. Yeah, I’d love to see you there. Another option to schedule a strategy session if you want to get the ball rolling. Learn about our tax services or anything else just have questions and want to learn about our consultation services. let us know right there and come back in two weeks emails your questions here at a Tax Tuesday at Anderson advisors. 

[59:10.60] Like we said Eliot goes over all your questions. We love getting your questions. Definitely. I like it too because it gives us a sense of what you guys are thinking about. What we obviously stay on top of the tax law changes, but what’s important to you guys? What’s relevant? What are you guys concerned about? What are you worried about? What are you excited about email and let us know and we’re going to be right back here in two weeks to do it again. Anything else?

[59:32.76] Eliot: no, we’re good to go. 

[59:35.] Barley: Alight guys. Well, have a good rest of the week. We’ll see you back here in two weeks. Thanks again for joining us today. We’ll see you next time.

[59:40.02] Outro: