In this episode of Tax Tuesday, Anderson Advisors attorneys Eliot Thomas, Esq., and Toby Mathis, Esq., tackle a variety of listener questions. Topics include strategies for managing cryptocurrency gains, converting a primary home to a rental without losing the 121 exclusion, and navigating the primary residence exclusion when selling a home. They also discuss the benefits of forming an LLC for consulting income, handling rehab costs for a fix-and-flip property, and meeting the Real Estate Professional criteria for tax purposes. Toby and Eliot dive into depreciation recapture, 1031 exchanges, and how to structure property ownership to avoid taxable events. Tune in for expert insights on real estate and tax strategies for investors and homeowners alike.
Submit your tax question to taxtuesday@andersonadvisors.com

Highlights/Topics:

• By crypto, I bought $125,000, $24,000 invested $30,000 is now over $1 million, scared to sell because of the 35 % tax. Hold on until $125,000, $25,000 for 20%, but I’m scared the price is in my portfolio. How can I get around the 35 % legally? – If you will have other losses from other sales, you can use those to offset in the short-term…
• How do I convert my primary home into a rental without losing the 121 exclusion? – You can do this but you must meet the 5-year primary residence provision.
• My wife and I are selling our primary residence. We’ll be listing the house for sale before we have lived in it quite two years. But assuming that closing takes about 90 days, it’ll be over two years at the closing. Will this be acceptable for using the primary residence exclusion? – The clock starts when you have the title in possession, so the clock also STOPS when the new buyer takes possession of the title.
• I will be starting a consulting position in December. Is it better to create a LLC to receive wages or should I receive funds in my name? What are the benefits of creating the LLC? – If your employer agrees to pay you with 1099, you should have an S or C Corp LLC to protect your wages.
• We haven’t sold our fix-and-flip property After one year and are considering renting it instead How should we handle the rehab costs and office expenses and our tax return? The property is held in a disregarded LLC. – First we have to establish your “intent” – if you weren’t sure… you’re ok to leave it in that disregarded entity.
• I’ve never been able to claim real estate professional due to a full-time W2 job. As of December 31st, 2023, I took early retirement. However, I was paid a severance until December 2024. During 2024, I have been leasing, advertising, physically rehabbing new property, responding to maintenance, etc. I’m also a licensed real estate broker in Kentucky where my properties are. I materially participate in 100 % of the rental activities. Can I claim real estate professional for 2024, even though I was being paid severance but not working my previous corporate job? – Yes, you can, as long as you meet the REP criteria.
• When calculating capital gain from the sell of a rental property is the gain from the depreciated cost basis or cost basis after the depreciation recaptured. It’s the gain from the recapture cost basis or cost basis. For example, I bought at $100,000, sold at $200,000, that’s how you’re supposed to do it, had $50,000 in depreciation. Woo. Would it be $100,000 capital gains tax plus the tax on the $50,000 depreciation recovered or $150,000 capital gains? – The first 50,000 is what’s subject to depreciation recapture…the 100K is “straight capital gain”
• I know it’s a broad question, but would love for you guys to discuss depreciation recapture at sale after cost segregation has been formed on an investment property. If it helps, you could do, it could be a cost segregation on a pizza shop. – it depends on the different categories of whatever was in the building.
• Our rental LLC owned by a Wyoming holding LLC sold a Toronto property for a huge gain. We hear all these huge gains today. Like all you guys are making money, but we plan to 1031 rates. Our qualified intermediary informed us that the replacement party property should be under the name of the same LLC that sold the property. How can we move the ownership of the 1031 new property into a new LLC without triggering a legal and /or taxable event, how can we protect the assets of the new property if we can only be under the name of the old rental LLC? We want to dissolve the old rental LLC. – if you do this properly through a qualified intermediary, that’s a neutral third party that handles all the funds, you may be able to defer all the gain.
• We are a group of four investors and we have an apartment rental complex, 12 units, and a separate single-family rental. We would like to exchange both of those properties and invest into a motel. Can we exchange the residential rental properties for a business real estate property?  – Yes is the quick answer, must be “used in a trade or business”

Resources:

Schedule Your FREE Consultation
Tax and Asset Protection Events
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Toby Mathis YouTube
Toby Mathis TikTok
Clint Coons YouTube

Full Episode Transcript:

Toby:  All right, I’ll let you guys all come in here. If you’re looking for Tax Tuesday, you’re in the right place. We are not going to give you election results, but what we will do is answer a bunch of tax questions. Yes, Tax Tuesday! All right, you’re in the right place. Eliot, welcome. 

Eliot: Thank you. Good to be here.

Toby: What is it today?

Eliot: Tuesday. 

Toby: Election day?

Eliot: I suppose there are some stuff going on today. 

Toby: There might be some stuff. 

Eliot: Fed cut rates. We know that. 

Toby: Fed lower rate. First time, not in a recession. They’ve cut rates without a recession, but I think the numbers I saw were 95-ish. I can’t remember when they did the pivot, but they lowered interest rates, not in a recession, and it was a soft landing. Maybe we’re in for a soft landing, guys. 

Something tells me, though, that inflation’s going to go bonkers because both candidates aren’t shy about spending or running deficits, which means we’re going to be printing money. I think that’s how you make it rain. They’re going to be printing money. 

Let’s go. Tax Tuesday, let’s jump in. If this is your first time on a Tax Tuesday, give me a thumbs up. If you’ve never been on a Tax Tuesday before, give me a thumbs up. Let’s see if anybody. There are a few. Oh, there’s a bunch of you guys. Well first thing, welcome. That is a pleasant surprise to see so many thumbs up on the first Tax Tuesday.

The Tax Tuesdays are an open forum. We answer questions. I’m looking right now and I see Matthew, Patty, Amanda, Dutch, Jared, Jeffrey, Rachel, Troy, those are all a bunch of tax professionals. You have tax attorneys, CPAs, and accountants there to answer your questions and some folks just to answer your questions. 

Matthew and Patty are there to answer. General Amanda is a lawyer. We got CPAs and more accountants. It’s just a good group of people to answer your questions. Don’t worry, we’ll bill you later. Teasing, teasing. We’re not going to bill you. Just ask your questions. Go into Q&A to ask your questions.

Don’t put it in chat because chat goes by really fast. Just to prove that, maybe you could put in where you’re joining us from. What city and state? Maybe you could do that. That’d be fun. What city and state are you in? 

Oh my God, see now they’re flying through. Let’s see. We got New Jersey, we got some Elgin, Illinois, Edison, New Jersey, and Prescott, Arizona. There’s San Diego. There’s Claremont, Phoenix, Sun City, Houston, High Springs, Florida. There’s Vienna, Virginia, Montgomery, Alabama. 

That’s where my parents met. I went to Auburn. No, that’s outside of Montgomery. My dad grew up in Mobile. Parents met going to Auburn. […] Puyallup, Washington. I said that right, too. Puyallup. They have a big fair every year. Fort Myers, North Carolina, Charlotte, Basalt, Colorado, Reno, Bull Shoals. 

I just like that. If I was going to live somewhere, Brenda, I’d live in Bull Shoals. I just like to say that. Bull Shoals. Boynton Beach, Boynton. That’s cool. Sandy, Utah. We got them from all over the place. Thank you for joining us. What we’re going to do is we’re going to answer about 10 questions that Eliot spent some time thinking about what questions he would like to answer.

Eliot: I did. I put a lot of time into this. 

Toby: He grabbed a bunch and we’re going to be answering those today. If you have comments on those, put them in chat. If you have questions for yourself—and I already see it starting to fill up—go and put it into Q&A. If it’s like a whole bunch of stuff about your tax return or something, we’ll ask you to become a client.

Believe it or not, we have a service here called Platinum. Platinum lets you ask all the legal and tax questions you want to your heart’s content and it’s a fixed amount per month. It’s less than $100 a month and then you can go crazy. 

If you have a bunch of stuff that you want them to review, or contracts you want our lawyers to review, you want to talk to a lawyer about something, an accountant about something, we have an open room. We call it the knowledge room. It’s open from 9:00 AM to 2:00 PM every day Pacific Standard Time. You just pop in there. You could set up a time to talk to somebody. You could schedule a time. There’s a hotline that you can call into or however you do it.

We do this type of pricing because we want to answer your questions. We don’t want you walking around going to shoot, I don’t know anything, and that’s why we do this. We just try to educate everybody we can about taxes so that it’s not a scary thing for you and that you realize that it really is a game. 

We get about 10 audits a year out of 10,000 tax returns. Just to give you an idea. It’s a very low audit rate, the type of work we do because we structure people and we push them down into a very minimal risk. But it still happens that about one out of 1000 that we see get audited. 

We had one client who went through an audit and wrote a really nice email about how; it was actually fun. She ended up talking to the auditor and the auditor wanted to learn about multifamily investing. They’re human beings. 

Every now and again, you get a turd. You get one. It’s just like I stepped in it. I got the wrong guy. But most of the auditors are just normal people trying to do a job, checking, and verifying some stuff. Your return might get flagged if you have a lot of complexity or just random or you wrote off too many losses. Sometimes that’ll trigger stuff, but it’s few and far between and people are usually surprised. 

I don’t want you to fear using tax strategies. There’s nothing to fear. If you do it right, you’re going to get the benefit of the tax code. When I say you do it right, it just means keep your back up and know what the black letter is. There’s gray. We like to call it play in gray. You like to play in gray. Intelligent, make wise decisions, and mitigate your risk. and take advantage of the black letter law to the best of your ability.

That’s what we do here, so welcome to all you guys for all my people that are repeating or you’ve been here before. He says, do you still talk to clients? David, every day I talk to clients. I love to talk to clients. I love to work with clients. A lot of times I take on younger people now to sit and bend their brains a little bit, get them outside their comfort zone and think long-term. It changes their trajectory. It’s a lot of fun. 

Enough of that nonsense. Let’s actually get into our questions. “How do I convert my primary home into a rental without losing the 121 exclusion?” We will answer that. 

“Hello, I love tax Tuesdays.” Thank you. We love you back. “Always full of helpful insights and advice. My wife and I are selling our primary residence. We will be listing the house for sale. Before, we lived in it for two years. But assuming that closing takes about 90 days, it’ll be over 2 years at the closing. Will this be acceptable for using the primary residence exclusion?” Great question. I love facts like that.

I’m just reading that now and I’m like, I thought originally I glanced at it just before we came on and I thought it was less than two years. That’s over two years. So it’ll be fun. I’ll see what Elliot here says and then I’ll kneecap him. I’m just kidding. No, that would seem like it’s pretty direct.

“I will be starting a consulting position in December. Is it better to create an LLC to receive wages or should I receive funds in my name? What are the benefits of creating the LLC?” Good questions. We like these types of questions. They’re very open-ended. I need to give you something. Good job. The first three are good. 

Eliot: You haven’t heard my answers yet though. 

Toby: We got more to go through. We’ll go through each one of these in kind. “We haven’t sold our fix-and-flip property after one year and are considering renting it instead. How should we handle the rehab costs and office expenses in our tax return? The property is held in a disregarded LLC.” Great question. Lived that one. Always fun. 

“I’ve never been able to claim to be a real estate professional due to my full-time W-2 job. As of December 31st, 2023, I took early retirement,” Congratulations! “I’ve been goofing off all year. However, I was paid a severance until December 2024. During 2024, I have been leasing, advertising, physically rehabbing new property, responding to maintenance, et cetera. 

I’m also a licensed real estate broker in Kentucky where my properties are. I materially participate in 100% of the rental activities. Can I claim real estate professional for 2024 even though I was being paid severance but not working my previouS-Corporate job?” Really good question. That’s a good one. 

Eliot: Yeah, a little different fact. 

Toby: Somebody said, next thing you’ll be telling us, lawyers and CPAs are human. 

Eliot: I’ll never go that far. 

Toby: Yes, we are. Yes. Even this one is Howard Dean. By the way, we should do Howard Dean today just because it’s…

Eliot: The principle of it?

Toby: Yeah. Is he a lawyer? 

Eliot: Probably. He sounds like one.

Toby: I think I just have to hear Howard Dean. I think that costume, the primary right there, that little yell. All right, let’s jump in. 

“When calculating capital gain from the sale of a rental property, is the gain from the depreciated cost basis or cost basis after the depreciation recapture? It’s the gain from the recapture cost basis or cost basis. For example, I bought at $100,000, sold at $200,000.” That’s how you’re supposed to do it. “Had $50,000 in depreciation. Would it be $100,000 capital gains tax plus the tax on the $50,000 depreciation recovered or $150,000 capital gains?” There’s a lot there. Let’s break that one down. 

“I know it’s a broad question, but would love for you guys to discuss depreciation recapture at sale after cost segregation has been performed on an investment property. If it helps, it could be cost segregation in a pizza shop.”

If you don’t know, that’s our example that we’ve been using for God knows how long. But I always like to use pizza. Because if I had a new business, it would be a pizza business. I would just eat the pizza. I wouldn’t have to sell any of it. I’d be happy. I’d have a really good oven and a lot of pizza. 

All right. “Our rental LLC owned by a Wyoming holding LLC sold its rental property for a huge gain.” We hear all these huge gains today. All you guys are making money. “We plan to 1031 the proceeds.” Wait, they already sold it? 

Eliot: Yeah. 

Toby: “Our qualified intermediary informed us that the replacement property should be under the name of the same LLC that sold the property. How can we move the ownership of the 1031 new property into a new LLC without triggering a legal and/or taxable event? How can we protect the assets of the new property if we can only be under the name of the old rental property LLC. We want to dissolve the old rental LLC.” Good question. 

All right. “When you sell real estate using a 1031 exchange, does the cost basis get reset with the new purchase amount?” Interesting question. It would be great if it did. I won’t answer it now, but that would be pretty—

Eliot: Didn’t let it out there. 

Toby: Yeah. It’s just like you died at 10:30 now. 

“We are a group of four investors and we have an apartment rental complex, 12 units, and a separate single-family rental. We would like to exchange both of those properties and invest into a motel. Can we exchange the residential rental properties for a business real estate property?” Great question. 

We’re going to answer all those. By the way, if you like this type of information and/or you like to stream Tax Tuesday, we have a bunch of folks on YouTube right now. Amanda, are you answering all this stuff on YouTube? I don’t know if you hear me or if you’re able to do it. Somebody’s usually over there answering. She says yes.

All right. We’re always over there answering questions too. I thought we were going to have three people today. We’ve got many hundreds already and a growing crowd. This is interesting. We’re doing great. Thank you, Eliot. We should say thank you Elliot. It is always such a blessing. I’ll remember myself for that. 

Hey, if you guys want to learn more about these topics. We actually put recordings. You’ll be able to access recordings of Tax Tuesday. They send them out, but I record a ton of videos on these topics in the YouTube channel. If you could, subscribe. Click that little bell and I’ll let you know. About three times a week, I publish something. Hopefully, it’s worthwhile to you. We do a lot of finance and tax on my channel. 

Then there’s Clint who has a much better channel for real estate asset protection. He’s really, really good at zipping into real estate strategies. I’ve been partners with Clint since a long time ago, 27 years or something like that. Really knowledgeable lawyer on the topic of real estate. Grew up in real estate, so lives, eats, and breathes it. If you want good advice there and it’s all free, we like that. 

Let’s go on. Speaking of free, you can always join us. It looks like Saturday, November 9th, and Saturday, November 16th, we have free virtual events called the Tax and Asset Protection Workshop. Those are great. I just taught one this weekend on Saturday. But we go over what are LLCs, land trusts, statutory trusts, corporations, how the tax works, what a living trust is, how to create a legacy, a bunch of tax snippets. It’s a lot of fun.

If you’ve been to a Tax and Asset Protection Workshop and liked it, could you give a thumbs up, confetti, a heart or something, so people can see that it was worth going to? Clint does a great job. Brent Nagy comes in. He’s an investor that’s worked with us for probably 15 years. Great guy that comes in and talks about it. He’s not a lawyer, and doesn’t work for Anderson, but he likes to teach and loves to talk about it. 

Amanda’s on there all the time, teaching tax and living trust. Then Clint and I are doing it quite often as well. I hope that you’re able to join us for one of those live free events. 

Then a live in-person event is coming up in December of 5th, 6th, and 7th in Las Vegas. There’s actually a 4th day on the 8th of December. That’s a networking event, a client appreciation networking event that you should be on the lookout to. It is open for clients, though. But if you wanted to come out and join us, it’s a couple of $100, I think maybe even less, to do the Tax and Asset Protection Workshop in Vegas. 

We’re going to be at the Green Valley Ranch. Did I say that right, Patty? I have no idea what the cost is. I know it’s not much. It’s pretty inexpensive, but you come and hang out with us for three days, and it’s live so you’re going to meet a bunch of investors. Oh, it’s $99, somebody said. It’s cheap. It’s more expensive for the coffee. They charge us $100 a gallon here for coffee and water. Water, apparently, is the same as coffee. I don’t know. 

Eliot: There’s a cheaper coffee store just outside the Green Valley in that little mall the district’s in.

Toby: There’s an outdoor mall attached to the Green Valley Ranch. It’s a great place. There’s a Whole Foods right down there. There’s an REI right down there. See? Go there and you can go to REI. 

Eliot: The homeland of REI. 

Toby: Whatever. Toby look at Troy’s question. What did I do? Toby, you got a YouTube question. Who paid us $20 for me to answer? You guys, all right, we have to answer this one. Apparently, somebody paid us. I love that.

“My crypto I bought on $125.24, invested $30,000, is now over $1 million. Scared to sell because of the 35% tax. Hold on, $125 for 20%, but I’m scared of the prices in my portfolio. How can I get around the 35% legally?” Interesting question. What do you think? 

Eliot: Well at this point, since you already have the appreciated gain, we often talk about using trader partnerships. That’s not going to help in this situation because you’ve already appreciated it, but in your future appreciation, you might be able to work with the structure. 

If you have any losses in anything else, you might want to think of selling some of that, recognizing offsetting against those losses, tax harvesting, loss harvesting, we call it, that will allow you to get some of that gain out of there. 

We have other strategies, but here being the second week almost of November or thereabouts, we have more advanced strategies, but think of maybe long-term, set up a non-profit, that’s a fantastic way. Get some of that and put away some of that gain. 

Toby: The problem you have with the non-profits—you guys can’t see the question because it was submitted via YouTube—he has what looks like $970,000 of short-term gain right now. But if he waits about another 2–2½ months—it’s actually pretty long time—then it becomes long-term gains, and now he’s going to have a 20% top tax as opposed to 37%. You also have the net investment income tax of 3.8% so you’re looking at 23.8% tax. 

If I was attacking this and I was saying oh shoot, we have a bunch of capital gain, I’m going to look at anything that’s creating a capital loss. I’m looking at anything that has unrealized capital loss in my portfolio and I’m thinking about whether I want to sell it and use that loss to offset gain and start winding myself out of the position. If I can’t, I’m looking at hedging, which means buying anything that you can.

I’m not familiar enough with the ETFs that are out there on Bitcoin, but I might buy a put so I can at least lock in. It’s like buying insurance on your portfolio so that I could force someone to buy my Bitcoin if I’m forced to, but you’d be doing that via a different financial instrument. To the best of my knowledge, I don’t think you can actually sell options on actual crypto. I think it has to be through one of the ETFs. 

The other route you could go is if you did want to avoid the gain and you wanted to say, hey, I’m going to harvest some of this because I’m worried, then you do a side by side here I sell some. Here’s the tax hit that I know and I’m looking for. I don’t have capital loss and I don’t have anything else. 

By the way, there are actually financial strategies where you harvest losses. I actually use this tool that Raymond James has. It’s not going to be enough to really move the needle unless you are going to make a significant investment in it, but it might get you $50,000–$100,000 of capital loss in the next few months without losing the money. 

It’s a loss harvesting technique that they do just to offset other capital gains like this. You can always reach out to me. I’ll put you in touch with a financial advisor who does those. 

But let’s say that I donate my crypto. It’s short-term so it’s going to be my basis. I’m not going to get a huge deduction, but if I sell that crypto, I don’t pay any tax. Let’s say that I took $100,000 worth of your crypto and put it into a donor-advised fund, or I set up my own charity. 

I know some of you guys are like, okay, now you’re going to charity, Toby. You’re always talking about charity. In the tax world, that’s what plays. You have to find something that’s a passion project for you. There are a lot of things that you can do as a charity, including housing, including shared housing, veterans housing, transitional housing, amateur sports, sanctioning bodies. We have folks that run volleyball leagues, all this stuff. 

But the reason you’re doing it is because now I could sell it. I’m scared. I don’t want to lose all that money that I’ve made, but I put it in there and now I am not taxed on it. I don’t have access to them. It’s not mine, but it’s a charity, but I could always take it out as a salary in the future or use it to reimburse expenses as I continue to do something that I care about doing. We would have to have a chat to figure out whether that is something else. 

“Why are so many people on today?” somebody just said. I don’t know because they don’t want to watch the election. We’re more fun than there’s a politician out there. I’m trying to think of other ways of how I could convert that into something that’s tax-exempt. Can you think of anything else? Maybe like a general remainder trust? 

Eliot: Yeah. 

Toby: Actually a general remainder trust would actually work too. You’re spreading the tax hit over a period of time. You get a tax deduction based on the future value, but you then get the income and you don’t have to pay tax when you sell it. Then you would just pay yourself an income stream over time. 

Eliot: You can use parts of all those different suggestions. It doesn’t have to be an all-or-nothing for any one of them. That might help break up the problem, so to speak, of having that much wealth. Congratulations. 

Toby: I’m going to ask Troy, did you have an idea? Was there something that you were thinking, Troy? We have a bunch of other accountants on, so I’m just going to ask our guys. Can I see the question? Sorry, it’s not a question. I’ll put the question up. The question came in off of YouTube. That’s why I was reading it out. When somebody submits a YouTube question, sometimes they pay to submit a question and I’m going to answer it just because they did that. Fun stuff. 

Let me see if Troy answered. I can’t think of anything else. Loss harvesting is what I was thinking. That’s what Troy says. We’re going to be looking to see if there’s anything else. But if that’s your only investment, the worst case scenario is you try to hedge it. You buy some insurance in the form of using some of these financial products that are out there that are based on Bitcoin. 

If it drops, those will go up in value and cover your drop. Eventually you get to where you’re comfortable. The Bitcoin you’ve held over a year uncovered, you have to make sure that it’s uncovered, and then you’d be able to sell it and you’d have long-term capital gains.

This is what you could do is not sell it all at once because you said 20%, but we have graduated rates. If you’re married, the first $96,000 is 0% capital gains if it’s long-term. Then it goes to 15%, and then right around $500,000 or $600,000, it gets up to the 20%. 

You could do that over a period of over years and harvest that. With some hedging technique, you should be able to do it. Or start a process of hey, I’m going to start selling a piece of the Bitcoin maybe in tranches, but I’m going to use some loss mitigation strategies to minimize that. 

When I say loss mitigation strategies, again there are funds out there that are specifically designed to capture those losses. Avoid wash sale rules and generate paper loss while still growing in value. 

It sounds weird, but they exist for this type of situation. I’d like to put this individual in touch with Nick Bruno or Raymond James. He knows that stuff. I’ve used it. I’ve done some and it works. 

All right, first question. “How do I convert my primary home into a rental without losing the 121 exclusion?”

Eliot: Well, the 121 exclusion, we probably want to describe a little bit what’s going on there. That’s simply a provision for your personal residence. We’re not talking short-term rentals or long-term rentals.This is your personal residence that you live in. 

To get there, we have to own it and use it as our personal residence for two of the previous five years. It doesn’t have to be consecutive. You can have one year and then take off a couple of years and then come back a year and live there. If we meet the criteria, then if you’re single, you can exclude upon the sale, $250,000 of your capital gains. If you’re married, $500,000. A married filing joint, that is. That’s what we’re talking about with 121. 

What we’re asking here, is there a way that we can still retain that? It has some time with it as a rental and yes, there is, but we have to remember that total five year window so we can live in it for two years, meet the criteria of ownership and live in it as our personal residence for two years.

Then theoretically you could rent it for the next three years, but you’d have to sell right away so you’ll probably want to do it a little sooner within that total five year window in order to take advantage of our 121. This is often what clients will do when they want to then for that portion of time that it was a rental, maybe roll that part into a 1031. This does happen. We work with this quite a bit, but that’s the basics of it. 

Toby: I’ll give you the get out of jail free card too. As Elliot put, it’s basically 24 months out of 60. Before you sell, it has to be primary residence. It’s not even just a personal residence. It’s got to be your primary residence. 

If you lived in your primary home—it sounds like you met it—you lived there for (let’s say) five years, and you’re going to move out and you want to make it into a rental. That’s all you got to do is put it into service, and putting it into service means it’s available for rent. It doesn’t mean it’s rented. It means it’s available for rent. 

Move out, move someplace, fix it up, whatever it is, get ready for rent, and now you put it on the market. Boom, that date. You should have about three years where you could rent it to third parties and still be eligible for your 121 exclusion. It’s 24 of the last 60 months. Let’s say you sold it right on month 60. After three years, you still have your 121 exclusion. 

You could also exchange it. You could exchange the investment gain, that is above the 121 exclusion and the basis of the property. I hope I just broke some of your brains. 121 exclusion is only for capital gains. 1031 is depreciation and capital gains. But you get to take the 121 exclusion first. 

Real life. Somebody bought a house for $500,000. It’s now worth $2 million. They make it into a rental. For two years they rent it (let’s just say), and then they go and they want to sell it. Their basis was $500,000. They have a $500,000 exclusion. Let’s say they’re married so there is $2 million. There’s $1 million of gain plus some depreciation recapture for those 2 years. 

We could 1031 exchange that million dollar gain. Let’s say you could buy one or more properties. Let’s say they buy three properties worth $2 million. Their basis is now $1 million divided up amongst those three properties. That’s how it works.

I’m living this. I had a primary residence. I moved out of it. I started renting it. The value of it’s gone up a ton. I’m in Vegas. I’m using my 121 exclusion to make sure I don’t lose it since it’s been just over two years. I will sell it, but I will not sell it to a traditional third party. I’m going to sell it to my own S-Corp. 

People are going, why would you buy a property in an S-Corp? I’m not going to ever ReFi it. An S-Corp, the rental flows down to me just like any other. It’s passive income. What it allows me to do is step up my basis in the property to whatever the sale date is, and I can do an installment sale, but I can elect out of installment sale treatment for purposes of that sale and use my entire $500,000 exclusion.

Eliot: You get the $500,000, you get stepped up, you get it all. 

Toby: Yeah, you get it all and then your house, I’m never going to sell it. I mean, it’s still just going to be a rental. Every time I say I’m never going to sell it and then I’ll probably sell it now in a month. Somebody will come knocking on the door going, here’s a stupid amount, and I’ll be like, hmm, hmm, hmm.

But the idea is that you don’t lose that $500,000 exclusion. As far as converting it, there’s nothing magic, just make it available to third parties. You could even house hack the home, still live in one of the rooms, still put two-thirds of it, start renting rooms out in it, and you start treating two-thirds of the house as a rental, a third of it still your primary residence. It’s weird. These are a lot more fluid than you might realize. 

By the way, the IRS tells us to do this, so it’s not something that we’re just concocting out of thin air. If you look at the 121 exclusion, you could do it every two years unless you took the exchange property and made it into a primary residence, in which case it’s once every five years. 

It actually contemplates that sometimes you’re going to buy another property that you’ll end up living in eventually. Going back to my example of the $2 million house, you may buy another house for $3 million, roll the $2 million into it, throw some extra cash in there, get the dream home, and then move into it after a while. 

You have to make it a rental first, and then you move into it, let’s say a year later, and you can make that your primary residence. And we’ve avoided a lot of tax. We just avoided $2 million of tax. You can do that. 

See? Everything’s fun. We like that stuff. Let’s see, I was thinking of a good one. It’s cash. It’s a little bit of dollars in your pocket. 

“Could you sell it to a disregarded LLC?” Technically you could, but it wouldn’t be from your C-Corp, you’d do it. 

Okay. ” Hello. Love the Tax Tuesdays. Always full of helpful insights and advice.” Thank you. “My wife and I are selling our primary residence. We will be listing the house for sale before we’ve lived in it. Quite two years, but assuming the closing takes about 90 days, it’ll be over two years from our closing. Will this be acceptable for using the primary residence exclusion?”

It’s the same exclusion we just talked about, the 121 exclusion. 

Eliot: Yeah, it is. And this is just taking a little bit further on some of the fact patterns we run into with the 121. We talked about having to have it for two years as our ownership and our use as a primary residence and that’s what we’re trying to get at here.

When is that time? When do we start the watch clicking to determine the two years? And it’s really once the title is settled. Once you take possession in title and you have it in your name, that’s when we start the two year clock. In this example, as long as the title didn’t change over, didn’t get recorded in the new buyer’s name during that 90 days of closing, you should be okay because that should take you from what it sounds like in the question, past your two year requirements, not just when you put it on for on the market for sale.

It’s not until you actually have the closing, the titles on there, that’s typically when the rights, the burdens, they call it with real estate, when those finally transfer to the new buyer, that’s when the clock would stop. I think you’re probably going to be okay here in your 90-day window there. 

Toby: Yeah, you’ll be fine. But even if you weren’t, then there are unforeseen circumstances, health or moving, where you could get a portion of the deduction. It works like this. Let’s say you lived in it for one year and nine months. What would that be? That would be 21 out of 24 months. You’d take 21 divided by 24, I think is what you do, and you’d multiply that by the exclusion.

Let’s say it’s $500,000. Its’ 87% times $500,000, so you’d get a $437,500 exclusion. If you sold your house and you had a $200,000 exclusion, you don’t pay tax. You sell your house and you have a $500,000 exclusion, you’re going to pay tax on a very small portion. You’re going to take $500,000 minus $437,500. 

Now, that’s assuming that you fit into the unforeseen circumstances or health or there are all sorts of cases out there. Somebody got married, blended family. House wasn’t suitable. That’s unforeseen circumstances. You get moved, unforeseen circumstances. You get sick, unforeseen circumstances. You get to do this. The economy is shifting under you and you’re having financial hardship. Those are unforeseen circumstances. You get to use a partial exclusion.

I’m not worried about you guys at all. You’re going to be just fine. Fine as wine. Assuming that you’re closing takes place two years, literally 24 months so you hit the test. Now we don’t have to worry about unforeseen circumstances and all that stuff. 

Patty, there was a question. Somebody in the Q&A that seemed like they were looking for me. If you could put it into the chat, I’ll answer that. No problems with that. I know that there was something in there that I was just addressing. I’ll make sure that they get it. I didn’t see it, but I know that they were looking for it. So feel free. I’m an open book. 

Let’s go. Let’s see. This is number three. “I will be starting a consulting position in December. Is it better to create an LLC to receive wages, or should I receive the funds in my name? What are the benefits of creating the LLC?” 

Eliot: Before we get into the tax aspect, really this becomes an asset protection to me question. All the greatest tax plans in the world won’t matter if you get sued and don’t have that asset and you get it taken away from some evil person out there. 

In our question here, how do I want to receive those wages? I want to receive them in some LLC, C-Corporation, or S-Corporation, whatever it is, something that gives me asset protection. Otherwise, there’s just no point to it. 

Now, aside from the asset protection, now we get into the fun stuff, all the tax stuff, and there’s a truckload of things you can do, depending on how our LLC is taxed. It could be an LLC taxed as a disregard, which just means it comes onto your personal return. It could probably not be a partnership in this case, because we don’t have another partner. But then it could also be an S-Corporation or a C-Corporation, or you could just set up a regular S-Corporation or a C-Corporation. Either way, LLC taxed as S or C or a true C-Corp or S-Corp. 

Once we get those, and we have that money come in, as long as they will give that 1099, that income is allowed to be moved into your entity, then we have all kinds of things, such as you could pay yourself a wage and put into retirement plans. We talk about accountable plans for reimbursement for administrative office, and 280A corporate meetings. If it’s a C-Corporation, maybe medical reimbursement. 

There’s a whole host of good tax deductions that we can do once we’ve moved it into a corporate standing, S or C. You definitely want an LLC. If it’s over approximately $40,000 or $50,000, more likely you want an S-Corporation unless we have heavy medical, you can think of a C-Corp.

Toby: What if it is an employee? It’s all going to depend. It’s weighted on their degree of control over you. This is a battleground right now, is whether you’re an independent contractor, an employee, and you may not have a choice. If they’re hiring you, they want you to do consulting for the company, and they’re controlling your hours—here’s where you’re going to be sitting, here’s your computer—you may not have a choice. 

But if you’re consulting with the company and truly, you provide your own computer, you’re going to work from home or whatever else, then yeah, you probably could set up the LLC. Like Eliot said, it really depends on how much you’re making. 

If you’re going to net less than $30,000 a year, I might do a disregarded LLC. I might just be a sole proprietor because it’s cheaper. It’s a little bit easier. Your audit rates are higher, but you just make sure you keep good records. If you get over $30,000 then it makes financial sense to make it an S-Corp. It could be an LLC taxed as an escort, it could be an S-Corp proper. 

For you, if you’re making wages, then you’re only paying half the employment taxes. You have withholding, which sucks, but it’s one of those things. You don’t get to write off expenses. Hopefully, the employer is reimbursing you for your expenses. You may get access to an employer medical plans. There might be those types of tax-free benefits. That’s great it’s not coming out of your pocket. Maybe a 401(k) with a match that might be a benefit.

Then you’re weighing that against hey, if I have my own company, I can write off just about everything under the sun that’s associated with that company. I can do 280A. I could do an accountable plan. I can do so many other things, but you just want to make sure that it’s even a possibility, and then weigh those things. 

A guy like Elliot here would probably read the numbers for you and tell you whether one’s significantly better than the other. You’re making $100,000 a year. The difference between having an S-Corp versus getting wages is about $10,000 a year. 

Eliot: It adds up. 

Toby: It adds up. If you have medical expenses that are really high and they have a Cadillac plan that you don’t have to pay for and your insurance is costing you $1000 a month to cover you and your family, then you might say, but wait, here’s a benefit over here. Now you’re doing the weighing test. I don’t want to say which is one better than the other. 

I tend to like it when I’m in control and I get to write off whatever I feel like writing off. I get to write off my cell phone, my car, mileage, my tech, and my administrative office at home, 280A. There’s a lot more. 

Then if I want to do a DB plan and put $200,000 a year in a retirement plan, I can. If I want to do a 401(k) and put $50,000 a year in there, I can. It’s up to me. I don’t have an employer telling me what I’m allowed to do. I like that. 

Guys, give me just a second. There was a question. I don’t know if this is the one Patty, but I thought it was something where it had to do with the 121 exclusion. I might have been drinking too much. 

You guys won’t be able to see this. This is coming out of another format. “You did a video in using a management LLC taxed as a C-Corp to manage other LLCs as a partnership with the corp owning 10%–20% and 80%–90% being owned by the other LLC that flows to the individual. You presented this as a strategy for trading.” Yeah, it works. That’s actually the strategy for trading. 

“My question regarding this is can I put all my liquidity into this LLC, which would be earning a blend of short-term capital gains, including swing trades, AI bot doing well, trading forex, and producing short-term, bond ladder, providing short-term gains, private equity fund, producing short-term gains and so on. Then strategically move money from the LLC to the management corp. In other words, can this strategy be used in multiple types of liquidity?”

Yes, it can. That’s why we do it. You don’t need multiple entities. If you are doing risk-free trading, which means you’re not incurring a personal risk by the activity, so owning bonds or investments doesn’t subject you to personal risk of getting sued. You put them all in one big bucket and it works. 

“Could the management corp also manage another LLC where I’m doing transactional real estate, lending gap funding and hard money loans?” Yes, absolutely. You just hit the nail on the head. To whoever that was, Patty, if they want to have a strategy session or something and hook them up with someone to chat because that’s exactly what you do. You just nailed it. You could not have said it better. Yes, that’s exactly what you do. 

Let’s go to the next one. Good questions today. I know we’re probably going to go long. I don’t know. 

Eliot: Nothing else to do today. Nothing going on. 

Toby: I know. It’s a boring day in the news cycle. “We haven’t sold our fix-and-flip property after one year and are considering renting it instead. How should we handle the rehab costs and office expenses on our tax return? The property is held in a disregarded LLC.” 

Eliot: First of all, when you look at a property that you’re picking up, it’s the intent that you go into. Here we’re mentioning the intent was to go into fix-and-flip as opposed to having it as a rental, which we’re now wanting it. 

If we forgot that was our intent, you could just leave it in that disregarded LLC that disregards you, run it as a rental. All of those expenses that you put in that you mentioned for the rehab costs, that just gets added on to the basis to eventually be depreciated as a rental.

Office expenses, that could be a very broad term, but maybe a lot of that could also be associated with some of the related rehab and maybe put into basis as well. We don’t really do a true home office with a rental property, so that might be a little bit of a kink if there was some, if that’s what we’re talking about, office expenses. 

But here, in this case, if we just really weren’t sure what we were doing, maybe we thought about flipping but weren’t sure, and now we have it as a rental, you’re okay to leave it at disregard LLC. Disregard to your 1040 is what I’m assuming,and then just run it as a rental going forward, the rehab cost. Grab as much of the office expenses that might be warranted, put that to basis, and then you’ll be able to depreciate them as a rental. 

Toby: You could even do a cost seg on this, bonus depreciation, if you want to accelerate it. I’ve lived this, guys. I’m sure anybody here who’s done a significant amount of fix-and-flips. Technically, the IRS could reassess that if you sell it. Anytime they could say it was a fix-and-flip your dealer and they could disallow your long-term capital gain and treat it as ordinary income.

Generally speaking though, they don’t look at these types, especially if you haven’t had a tax year where you designated it as inventory. If you did, and you’ve gone through a tax year and you’ve already declared that it was inventory, which is what a dealer property is, then I would sell it to yourself. Or sell it to a third party and dump it just because you don’t want to have that problem following you around. 

For the most part, we figure out within a year before we’ve said hey we’ve etched in stone. If you have to, there are some remedial stuff we could do. Otherwise, when you bought it, what was your intent? And remove the fix-and-flip from one’s mouth. I bought that real estate to hold it. 

I bought a property here in Vegas and I think I ended up with three. We flipped so many. There were three duds. The roof caved in and now we’re never going to make money on it, so let’s hold it. They were great investments. They paid us, I think one of them was three times over. 

You buy them and you’re like, hey, I think I’m just going to quickly turn it, but you get it onto the right tax return. As long as it’s going on your tax return, we’re okay. If it goes on a corporate return as a fix-and-flip then we’re selling it to your personal return, but we’ll make sure. 

It sounds like it was on a disregarded LLC, and I’m assuming that disregarded LLC is to you. But I don’t want to make an assumption that’s incorrect. Maybe that’s going to a court. I know Clint teaches that. Once we know that, we can give you the right direction. 

If you want to discuss it with somebody, just reach out in the chat and just say, I’d like to have a consult. We have a ton of really great people that can point you in the right direction. Just take a look at it. We could do that for you guys. Fun stuff. Let’s see what they say.

“Just to confirm, I can pay my children up to $14,600 to work for me at any age, but not be subject.” No, it’s under 18 where they’re not subject to employment taxes. They’re always subject to withholding, but they’re exempt if they haven’t had taxable income above $1000 previously. Is that right?

Eliot: It’s $15,000 for 2025, the standard deduction. 

Toby: Standard deduction. Sorry. There are three screens in front of me, and I start reading questions from other places. Bad Toby. That’s what accountants are for. 

“I’ve never been able to claim real estate professional due to a full time W-2 job.” I get it. You can’t do more than 50% of your time. “As of December 31st 2023, I took early retirement.” Congratulations. “However, I was paid a severance until December 2024. I’ve been leasing, advertising, physically rehabbing new property, responding to maintenance, et cetera. 

I am also a licensed real estate broker in Kentucky where my properties are. I materially participate in 100% of the rental activities. Can I claim real estate professional for 2024, even though I was being paid severance but not working my previous corporate job?”

Eliot: As long as we meet all the criteria of real estate professional, which we’ll go over here real quick, then yes. Let’s go into the test because that’s going to give us our answer. You have to have over 750 hours and a real estate trade or business that you materially participate in. That can be just about anything there that you’re mentioning, real estate broker, as long as you own over 5% of your real estate brokerage and the rental overseeing, the maintenance, et cetera, over 750 hours there. Plus, it’s over 50% of your work week. Well, guess what? We didn’t work in 2024, so I think we probably check that box. 

Toby: You still have to beat 750 hours.

Eliot: So I get that. 

Toby: But we don’t care about money. We care about hours. 

Eliot: Yeah, it’s all about hours. The fact that you got paid money for 2024, but you didn’t have to work for it, that’s not going to be a problem because there were no hours put towards getting that 2024 payment. It was all part of your severance. The last part you have to get your rep status, and then you just want to materially participate in the management of each rental property or aggregate them together. Then you got what you want. 

You got your real estate professional. You’ll be able to do all the deductions, the cost segregations, that we talk about, bonus depreciation, so on and so forth and you’ll be able to do that. The fact that you got paid money from something else might raise an eyebrow on your return from the IRS, but you didn’t do anything wrong because you put no hours towards that. That’s what it’s about. It’s about hours spent and here you didn’t have any. It was just a severance pay, so you should be golden. 

Toby: Yes, you can claim it as long as you get that 750 hours. As far as any management activity, any rehabbing you’re doing, any development, you count and you can have multiple businesses. 

Let’s say that I have my brokerage. I rehabbed a property and I oversaw the leasing. As a management, I did managing activity. You add all of that. Each one was 300 hours. That’s fine. You hit 900 hours. As long as it’s more than 50% of your total hours that you worked, you’re fine. It looks like you’re going to qualify. 

That’s the holy grail guys. That means that your losses are non-passive. Just don’t forget to aggregate your properties altogether. That means that you take all of your properties in Kentucky and treat them as one activity. 

Eliot: You make that election on your first return with extension. 

Toby: First return? 

Eliot: Yeah, your first timely filed tax return, 1040. 

Toby: He’s probably already done it. The first time is when you do your real estate professional, elect to aggregate them. It’s not the first turn.

Eliot: No, right. I’m sorry, yes.

Toby: You’re going to make him poop his pants.

Eliot: You were answering his question. 

Toby: Oh, was I answering his question? I don’t think so. Robert had some other questions. I just got to say this to Robert because I get a sound effect. How many of you guys remember that commercial? Love that. That sounds scary. Patty, what’s up? 

All right. “When calculating capital gain from the sale of rental property, is the gain from the depreciated cost basis or cost basis after the depreciation recapture? For example, I bought at $100,000, sold at $200,000, had $50,000 of depreciation. Would $100,000 capital gains tax plus tax on the $50,000 depreciation recovered or $150,000 capital gains?”

Eliot: What we got going on here, a lot of numbers flying around, we purchased at $100,000 we’re selling at $200,000. Right there our capital gain is going to be $100,000, but we have to use the adjusted basis, which is $50,000 of depreciation. So $100,000 minus $50,000. We take that. Now it’s $50,000 against the $200,000 that we sold at, $150,000 of capital gain.

But the first 50,000 is what’s subject to depreciation recapture. You’re not wrong in saying it’s $150,000 capital gain but $50,000 is subject to depreciation recapture and $100,000 would be what I guess you’d call straight capital gain. 

Toby: That is right and your recapture is at your ordinary rate capped at 25%. Don’t let anybody say it’s 25% because it depends on your ordinary rate. If you can create a loss that year and get your ordinary rate down to zero, guess what your recapture is? 

Eliot: Nothing. 

Toby: Guess what your capital gains is? 

Eliot: Zero. 

Toby: You add it up as far as what capital gain bracket you’d be in. But if you’re getting married, filing jointly, it’s like $96,000 and below is zero. You can get into pretty low. If you can get some losses, you can find yourself escaping the tax hit. And if you have passive loss and you sell a property, you can use that passive loss against passive capital gains. If it’s still a passive activity, you could still use those. 

A lot of people don’t realize that that’s a thing and they miss it. And it’s sad when they miss it because that means that they’re paying taxes that they shouldn’t be and that makes us all unhappy. You should all have a quick moment of sadness about that. 

“I know it’s a broad question, but would love for you guys to discuss depreciation recapture at sale after cost segregation has been performed on an investment property. If it helps, it could be a cost segregation in a pizza shop.” 

Eliot: It’s hard to say no to the pizza shop.

Toby: All right.

Eliot: What we got going on here is the depreciation. This just is a carryover from where we talked about depreciation recapture. After cost segregation, really what’s going on and what’s creating some confusion here is that you’ve broken the building into pieces. What we had was originally what we call 1250 property. That’s just the normal status. But we have some other that might be 5-year property, 10-year, 15-year property, etc. 

Toby: Ten-year property? 

Eliot: Well, not much of that. It just depends on the different category of whatever was in the building. That’s 1245 property. Now, in a normal world, if we didn’t do anything…

Toby: Tangible property. 

Eliot: Tangible property, yes.

Toby: Personal property. Not structure. 

Eliot: No, not the foundation and things like that. That’s going to be your, in this case, 39-year property, your 1250 property, stuff like that. 

Toby: Someone just gave a shout-out to Amanda. We love your YouTube videos from Anderson Advisors and Tax Planning. Amanda, good job. 

Eliot: Got love it. Our colleague extraordinaire. 

Toby: Yeah, they’re giving her love while Elliot’s talking. 

Eliot: I don’t blame them. 

Toby: I’ll write you something nice. You’re banned. 

Eliot: We got the 1245 property, but if we sell this, typically what’s going to happen, you’re going to try and allocate as much of that sales price over to the 1250, the the foundation, the things like that, that you didn’t take the heavy cost seg against the immediate depreciation. 

The effect of that is that you’re not going to have that situation, 1250 property being subject to your tax bracket. It’s all going to be, as Toby pointed out, the 25% bracket limit at the most or anything under.

That’s what’s going to happen here is probably most of that’s going to get allocated to the 1250 property. That is the foundation and things like that. Really, you probably aren’t going to have a whole lot of issues with the 1245 on it. 

Toby: Well, we’ll use a pizza shop as an example. If you have to do this special electric and gas, maybe a platform for a big gas oven or something like that, that’s all going to be a five-year property. If it’s depreciated and bonused, then it has zero basis. When you sell it, it’s going to be taxed at your ordinary rate. The question is how much are you going to sell it for? 

When you sell most of these businesses, the vast majority of it gets allocated to The things that they’re definitely going to keep. They’re going to keep the walls. They’re going to keep it. Maybe they’re buying the pizza shop as a whole and they’re going to keep the oven. You’ve got to figure out what the value of it is.

Its book value is zero. Let’s just say you agree that it’s $30,000. Okay, there’s going to be $30,000 ordinary income. The rest of it is capital gains. So you might have written off $150,000, and you’re going to have to recapture $30,000. That’s it. 

When you deduct and depreciate the 39-year property, this is non-residential property, the pizza shop, you have to recapture everything that you deducted, period. Or that you could have deducted, because some people don’t do it, and then they’re like I didn’t write it off, so that’s not a big thing. Then it’s like you get to recapture it as though you did. I didn’t get a tax benefit. I know the IRS hates you sometimes, so they’re giving you a little bit of anger. 

It’s always a matter of what that purchase and sell looks like. I’ll use the example of a warehouse. It was about a $3 million warehouse. I think the gain in it was right around $800,000. Just looking at it, looking at the depreciation schedule and the recapture and everything else, it was like, shoot, they really should have done a cost seg because so much of that property that was being sold should have been capital gains instead of the recapture. 

It did the cost seg after the sale, and it lowered their tax bill from $278,000 to about $200,000. It was a nice scenario, and you can choose to do that. You don’t have to do it. They had already sold the property. All you have to do is still have access to it so they could do the engineering study, but that’s it. 

I’ve seen them come back and bite people seldomly because remember they got the deduction anyway. Even if you have to recognize it, it’s like okay, I did the benefit that I received. But most people aren’t just turning around and selling these things two years later. They’re holding onto them for some period of time, usually five years or more. 

In which case, then the five-year property is definitely zero. The 15-year property, worst case scenario, you have two-thirds of it, if it has value, that you’re paying tax on, but it’s never the 100%. You wrote off a whole bunch and you’re recapturing just a small portion. It usually seems like it’s a lot better. 

Let’s keep going. I’m going to skip through that and let’s get into, “Our rental LLC owned by a Wyoming holding. Sold its rental property for a huge gain. We plan to 1031 the proceeds.” Okay. I hope you have a QI before you sold. It sounds like they did.

When I saw that, I immediately thought you can’t 1031 after you’ve sold. You have to have the QI except the funds. “Our qualified intermediary informed us that the replacement property should be under the name of the same LLC,” they are correct. “That sold the property.” It has to go name to name. 

“How can we move the ownership of the 1031 new property to a new LLC without triggering a legal and or taxable event? How can we protect the assets of the new property, if we could only be under the name of the old rental LLC. We want to dissolve the old rental LLC.”

Eliot: The 1031 or just is where you’re selling one property that was used as a trade or business and you’re picking up new properties. We call them replacement properties that are to be used as a trade or business as well. The idea being that—

Toby: Investment.

Eliot: Exactly, and the idea is that there would be gain. Well, if you do this properly through a qualified intermediary, that’s a neutral third party that handles all the funds, just as Toby was pointing out, well then, if you’ve purchased enough replacement properties over basically the value of what you gave up, you may be able to defer all your gain. 

That’s what we’re talking about here. But they have one caveat the IRS throws out there, is you have to have the same taxpayer status. Sometimes it’s called same title, but it’s really same taxpayer. In this situation, I’m not aware of a situation where you could do this. You have to put it back in that same LLC. I don’t know if you can move it out. Do you? 

Toby: You could move it out later. You just want to let it season in the new property. Then generally speaking, what you do is you have the new LLC set up to own the old LLC. The ownership is the same. It still flows onto your return. Then you dissolve the old one, and transfer it into the new. 

It’s the same thing that you do when you do a starker exchange, name-to-name, and then put it in an LLC. There’s no difference. What they’re saying is, did the beneficial owner actually change? The answer’s no. The IRS hasn’t contested it in years and years and years. They tried contesting it, and that’s where the starker exchange came on, because Starker Exchange 1 said there was no change of beneficial interest when they put it in an LLC or took it out.

As long as it’s still you, you’re fine. Just follow your QI. QIs aren’t licensed or anything like that for the most part, but they tend to have to deal with these types of things. If they tell you to leave it in the old one for a year, leave it in the old one for a year. Then set up the new one, do the transfer. But it’s still you as the beneficiary. You should be fine. 

“When you sell real estate using a 1031 exchange, does the old tax basis get reset with the new purchase amount?” I want that! 

Eliot: Right? If only. Usually what we have is what’s called carryover basis. It just means whatever the remaining adjusted basis was of what you gave up, the relinquished property, is a starting point for the new property. 

Really, if you want to know what that amount is, it’s going to be your adjusted basis minus the purchase price for the new property that gives you your capital gain that was deferred. Often that’s going to be what your new adjusted basis is but it is a carry over from the previous.

Most of it’s the basis from the part property that you gave up. There are a lot of things that come in—the debt, et cetera mortgage that you gave up, mortgage you picked up—and can impact that. But that’s the basic amounts of carry over. Whatever it is, it’s not the new basis of what you just purchased. 

Toby: Yeah, I wish we could, but they don’t. They do this. Oh, you want to step up that basis? 

Eliot: Yeah, exactly. 

Toby: No, but you don’t have to pay tax on the old. Do you know how you step it up? You die. That’s it. Easy. You hold the 10, you hold it, you never sell it, you borrow against it, and then you die and the basis steps up magically.

Eliot: Our equipment will all meet someday.

Toby: Yeah and then your heirs can sell it and they have a high new amount, new basis, which is great. They’re just waiting with a pillow. Go ahead and take a nice nap. 

Eliot: Tripping over the cord that keeps the life support on. 

Toby: We’re going to step up that basis. We’re going to manually step up the basis. Oh, that’s bad. No, you should not be clapping at that. We don’t want to off ground they are.

Eliot: Oh boy. 

Toby: It’s all in the interest of a step up in basis. Take it for the family. 

“We are a group of four investors and we have an apartment rental complex, 12 units, and a separate single family rental. We would like to exchange both those properties and invest into a motel. Can we exchange the residential rental properties for a business real estate property?”

Eliot: Yes, is the quick answer. The only requirement is, again, that this property that you gave up was used in a trade or business as an investment, and the property that you pick up, the replacement property, is likewise used in a trade or business. That fits in this situation. 

The properties you’re giving up are used as a rental. That’s a trade or business or investment. Obviously, the apartment is a trade or business or a rental. You’re picking up a motel that’s used in business, so you should be good with that. 

Toby: Yeah, you can absolutely do it. You just have to make sure you’re using a qualified intermediary. You don’t touch the funds. The apartment rental might be a tough one. 

You know what you can do is what’s called a reverse exchange. I’ve had a few clients run into this scenario where they’re doing commercial, like 12 units can sometimes take a minute, but they’ll already have other properties they want to acquire. You can do that. You just have to come up with the money ahead of time, buy the replacement property, and then sell the exchange property. 

Single-family shouldn’t be too big of a deal. Twelve-plex might take a minute or you just wait until you’ve closed them and then go and invest. But if you know you want that motel, it might be wise to get the funding for that. Get it closed, then sell. You have 180 days to sell and close the rental complex and the single family rental. That’s good. That’s it. 

Eliot: That’s all. 

Toby: Is it? All right. If you guys want to, again, learn more about this type of content, you like digging around into taxes, by all means please join my YouTube channel.

It’s just like and subscribe, which is always good. Or better yet, just subscribe. I don’t even know about that liking stuff. Same thing with Clint’s, absolutely free. Join us at the next Tax and Asset Protection Workshop. Looks like November 9th and that’ll be fun. It’s always fun. 

If you have questions, here’s where you get to Eliot, and you can send them over to Eliot at taxtuesdays@andersonadvisors.com. You could ask all the questions of Eliot that you want. That’s exactly right. You could ask him whose shirts you wear and all sorts of stuff like that. 

But if you have a tax question in the next two weeks, just shoot it over to us.We answer them all. I shouldn’t say we. Somebody has to answer them all. It’s hundreds of questions. We don’t let them sleep. 

We’re like hey, forgot 10. Get to it. But that’s just one of those things that we do. If you know anybody would benefit from a little bit of tax knowledge and by getting this type of information in their head, that would be nice. Invite them over. It’s free. Matthew, how many of these have we done at this point? 

Eliot: 231. This is 231. 

Toby: We’ve done 231 episodes. We’re not new at this, but we’re just getting our stride. It’s a lot of fun to go over and I’ll make sure that we get you guys squared away.

Have a great rest of the evening. Let’s hope and pray for our country, whoever gets elected, that they have the wisdom and fortitude to lead. Whatever the case that we do great as a country, it’ll be interesting to see. 

Yes, we had another Fed rate cut and my guess is inflation’s on the way. You guys know what to do. If you’ve been hanging around us for the last few years, you know exactly what to do. Those investments are just begging for you to go out there and continue to invest. Watch out for those US dollars because purchasing power isn’t what it used to be. Anything but that, and I will see you guys next Tax Tuesday.