How to Avoid Costly Capital Gains Taxes When Selling a Rental Property

Speaker A: 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. Hey.

Speaker B: Ah, welcome back everyone. Do Tax Tuesdays every other week answering your tax questions right here live on YouTube from our Anderson Advisor studios here in beautiful Las Vegas, Nevada.

Speaker A: Fabulous Las Vegas.

Speaker B: Fabulous Las Vegas. That's right. Welcome back everyone. My name is Barley Bowler. I'm one of the CPAs and tax advisors here at Anderson. Very happy to have you guys back again every other week. Going over your questions, Mr. Elliot Thomas.

Speaker A: Yes, Elliot Thomas, manager of the tax Advisors. Pleased to be here again.

Speaker B: Hm. So for any of you here for your first time, big welcome to you again, answering your questions live. To all of you joining us again, welcome back. Please give us a shout out in the chat if you're having any issues. Post any questions in the Q and A. Let us know in the chat. Where you tuning in from, where you listening in from. We'd love to have you guys join us every other Tuesday here in Tax Tuesdays is bringing tax knowledge to the masses. Tax Tuesday again, Q and A feature in Zoom. Post any questions you have. We're going to be going over a, uh, kind of a variety of topics here. Usually focusing on real estate, small business, stock trading, things of that nature. No exception today. A lot of, lot of great questions from you guys. So thank you so much for posting those questions. First of all. And here's the email address. Email Tax tuesdayndersonadvisors. Uh, dot com. Elliot reads all your questions, guys. We really do. It's not a chatbot. At least not yet. We haven't been replaced by a chatbot yet.

Speaker A: Not yet.

Speaker B: They can't tell jokes like that. The AI jokes are actually are pretty

Speaker A: decent but they can't tell bad ones like us.

Speaker B: Uh, that's right. That's right. We have a niche market on the bad tax jokes. If you need a detailed response. Right. This isn't a replacement for tax planning. This is meant to get you further down the road. You can certainly set up a tax call with us. Become a tax client. We have information on that as well. Can set up a tax consult. We got information on that in a moment. Fast, fun and educational. Want to give back. Help, help educate. So did that say fun? Fun and taxes. Can we put those two things in the same?

Speaker A: We can, we can. We're allowed to do that.

Speaker B: That's right. Fast, fun and educational. This has been a mission of the partners. Kind of from the beginning. Right. Deliver as much to you guys as we can to just get you started. I mean there's plenty of work to do. There's plenty of weeds to get out the weed whacker for. But just getting the base knowledge, that's always a good bit of work. Right. Learning kind of legal terminology, tax terminology all at once. So certainly commend you guys. Welcome back. And a uh, big welcome to anyone joining us for the first time.

Speaker A: Yeah, we got, we got Chandler, we got Atlanta, Richmond, Cincinnati, Wisconsin, whole bunch coming in. I saw Todd, I saw you in there. Great to see you.

Speaker B: Welcome back. Welcome back. Yep. Great to see you guys from all over the road, whether you're at your home office or on the road or your, your, your second office.

Speaker A: Heard from a lot of clients that they're listening to us. Yeah. On the road.

Speaker B: Right.

Speaker A: You know, may not be the live. But we're here.

Speaker B: Sure. That's right.

Speaker A: To listen to.

Speaker B: Yeah. No, that's a, that's a good. I remember when I used to have a commute, it was all about how much can I get done in my, my one hour of commute. Right. Or whatever it was back in the day. Glad I don't have that anymore. But we're going to read through your questions guys and then we're going to hop right in. So yeah, question number one here. Any announcements? My rushing too fast here? No, I think we're right smack dab in the middle of the year. We got a live event coming up we're going to tell you about but we'll just. Let's hop right in. I've lived in California for decades but now moving to Tennessee among a couple of other people.

Speaker A: Maybe one or two.

Speaker B: Maybe one or two. Once in Tennessee I'm going to sell some precious metals to go towards buying a personal residence in Tennessee. We're assuming there will California try to claw back taxes on the precious metal gain since I purchased it while living in California? I tell you one thing, they sure would want to. They've certainly probably tried. How long do I have to be a resident of Tennessee before I'm under Tennessee taxation rules for selling the precious metals? Great question.

Speaker A: There a lot of detail in there. As an equity options trader, not eligible for trader tax status. Uh, what is a good entity structure for tax advantages when the partner has an a single member LLC for business? Okay, a lot of detail there too. So these particular questions all have a theme. They have a lot of hidden details and nuggets of information in them that's Why I picked them for this week.

Speaker B: Right. M. And that's where we get the fun part, right?

Speaker A: Exactly. That's the fun.

Speaker B: That's the fun. Guys, I have a trading structure. A lot of you guys have heard of this. This is, you know, like I said, we focus on real estate, small business, stock trading. I have a trade structure. Please explain the tax treatment guidelines. When we sell some securities. Right? When we sell some securities, we get realized gains. What happens when. When is a K1 triggered? A partnership's going to generate a K1. When is K1 triggered, et cetera. We got more to talk about there.

Speaker A: I'm wondering if I can purchase a vehicle and lease it to my business year by year. Is that a possible tax advantage for a private investigation business?

Speaker B: Cool business either way, but.

Speaker A: Right. Exactly.

Speaker B: Uh, I live in Washington state. If I buy a rental in Oregon, do I have to file Oregon tax? Pay Oregon tax on the property located there?

Speaker A: I run three Airbnb properties and I have an LLC taxed as an S corp that I have as a management company where all the revenue expenses flow into it does not take depreciation. Since that llc, the S corp, doesn't own the property as we have the deeds in our personal name, how can I take advantage of loss and depreciation to offset our W2 in this case?

Speaker B: Right. Uh, we've got that question before. How can I avoid or minimize capital gain taxes if I sell a rental property, had it for seven years.

Speaker A: Can a long term capital loss from the sale of a business be used to offset long term capital gain from the Selma personal residence? A lot of capital gain going on.

Speaker B: Uh, we might have to draw some pictures and talk about accounting buckets and get into a little theory there, guys. Oh, we didn't scare anybody off? No, not at all. Right. Our non dividend distributions considered return of capital and therefore non tax. A good kind of a technical question there. Great.

Speaker A: I think that's it. Yep.

Speaker B: Guys, make sure you turn tune into the YouTube channel again. The kind of the. One of the original, the kind of principles of the. Of the. The partners here was just to post a bunch of content to help people get started. And then obviously part of the business model, we want you to, you know, come to us for advice if you have real estate, small business needs. This is our wheelhouse, this is what we focus on. But there is so much great content for free, obviously on the YouTube channel here. What do we have? A thousand videos between the two of them or Toby hit 1000 recently. Thousand and a lot of Content. Make sure you subscribe. Great interviews on there. Just real practical. A lot of fun, too. A lot of fun knowledge on there as well.

Speaker A: You could watch one every day for the next couple of years.

Speaker B: Just talk about fun.

Speaker A: Right.

Speaker B: Got a live event coming up in Dallas. Oh, right in the middle of 99. Right.

Speaker A: $99.

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Speaker A: Yeah.

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Speaker A: Tell them Barley and Elliot sent you.

Speaker B: That's right. They might even accept you. All right. All right, let's hop right in. Any questions we got to want to get to first? Any comments or anything? No, I think all good there. Excellent.

Speaker A: This big dog here.

Speaker B: All right. I've lived in California for decades, the land of milk and honey there. But I'm now moving to Tennessee. Once in Tennessee, you sell some of my precious metals to go towards buying a personal residence. Will California try to claw back taxes on the precious metal gains since I purchased it while living in California? How long do I have to be a resident of Tennessee before I am under Tennessee taxation rules for selling precious metals? Right, Chris? So we have a kind of a timing test. This is. Where is our tax home. Right. In our residency.

Speaker A: We certainly have that. We're going to get into that. But before we get there, I want to go into the clawback issue. And what exactly is a clawback? Yeah, clawback is a principle that only a few states use. It's going to be Oregon, California, Montana, Massachusetts primarily. And it's not for those states overall. And it can be at the federal level too, in certain federal issues, but we really only see it with these states. And the idea is it's on, um, just a specific transaction now where Barley and I run into it all the time is with a, ah, 1031 exchange. That's with real estate. You have a property. It's provision. The code says you, you sell your rental property, you're in California. Let's just draw it out here. We're in California, we got a rental and then we sold it. And let's say for. In the exchange you pick up a new property and it's somewhere elsewhere. It doesn't really matter where it is. Uh, we'll call this Wyoming. And you have a new rental, but you're still living in California. In fact, the fact that you live in California or don't is irrelevant. But you had a rental at one time in California. You sold it under 1031, which means you can defer all the gain if everything works out. The numbers work out.

Speaker B: That's how they get their clause in there.

Speaker A: Right. Well then we get this new property and that's fine. Everything's good. You don't have to pay any tax to the state or federal level under this.

Speaker B: We'll turn it upside down next time.

Speaker A: Oh, heavens. Didn't see that. Is that better?

Speaker B: Yeah, we'll do it on the next one. Yeah, people like, we'll get the point.

Speaker A: Well, anywho.

Speaker B: All right, so I hope you're looking in a mirror.

Speaker A: Yeah, right. Wow. Okay. So anyway, when we have that going on, the replacement property in Wyoming here, then later on, let's say we sell that in a certain special event. At that point, California says, well, look, you got, we gave you the, we gave you the uh, the ex. The time, the deferral on that property when we bought the Wyoming. That's fine. But the minute you sold that one,

Speaker B: come on and help us. Jacob Jacobs giving it. We don't do this by ourselves, guys.

Speaker A: There we go.

Speaker B: Don't think that we can figure out tech by ourselves.

Speaker A: No, I can't.

Speaker B: It's like mirror image for some reason.

Speaker A: Well, anywho.

Speaker B: Yeah, we can probably erase it and start over now that it's the right way. Uh, up. Let's try that. Hang tight, guys. Hang tight.

Speaker A: So anyway, we sell that Wyoming property that was the replacement property.

Speaker B: There we go.

Speaker A: Uh, here's our house. Thank you.

Speaker B: Thank you, sir.

Speaker A: There's Wyoming. We bought the new House in Wyoming, we got rid of that one, we picked up this new one, but now we want to sell that Wyoming. And what California says in these other states that have this say, well now you got to pay us our tax. We appreciate we gave you the 1031. Why you picked up that Wyoming of one step. We gave you the deferral. But the minute you got rid of that property, now you got to pay something called a clawback. But the clawback, back to our original question here isn't dealing with real estate. We're talking about something completely different. And the point there is that when we have clawbacks going on, it's only for specific types of transaction. It's not necessarily a whole state code here.

Speaker B: We're not your income.

Speaker A: Exactly right. We got a whole different type of transaction here. We got a precious metal and that's a whole different story. Now precious metals in their own have a unique story in the tax code. Typically if you're just talking about the physical. What do we call that?

Speaker B: Collectibles.

Speaker A: Collectible. Yeah, it's still capital gain, capital asset or loss, but it's a capital higher rate, but It's a flat 28% because of a collectible. So a little bit different when we're dealing with precious metals and physical metals like that. So in this instance and another part of precious metals, well, maybe you got into an ETF or something like that that simply invests in precious metal type businesses. Well there you're kind of, if you will, buying into stock of that etf. That's just stock. That's going to be a regular capital gain, not a collectible. So it really depends on really how these precious metals are. If they're physical, etc. We're going to go with the presumption that they're physical.

Speaker B: Yeah, bullion and whatnot.

Speaker A: You got it exactly called the collectibles that Barley was talking about. And that's our situation. Now you mentioned something. Well, what about timing? What do we got going on there?

Speaker B: Right. Well, I mean California looks at a kind of a facts and circumstances. Well, this is going to be true anytime we change residences. You know, how do we know what state we're a resident of? And if we look at that end of the year, by the end of the year, have we met this kind of checklist of options? You know, the franchise and tax board in California kind of has their own version of this. Tennessee is going to have its own version of this. But really the timing issue, when we sell the bullion, when the actual or Excuse me, the collectible, the gold and silver, when the transaction takes place, that's when we just have to make sure we're a Tennessee resident. At that time. We don't even want to be a part year resident ideally of California. So a couple issues there. You know, obviously we got the usual suspects, driver's license, primary residence, which kind of comes into play here as far as the timing goes. Plus we're going want to talk about where maybe you moved everything to Tennessee and you're all set. But when you sell the gold, it's still physically located in California. We want to make sure it's physically removed from California. So just, you know, it's almost like one of these point system.

Speaker A: It really is.

Speaker B: We're just going to circumstance as many things as we can and you know, if we hit, you know, enough points then we're considered a resident. So it's. We really want to make an effort there to understand what bull state options are.

Speaker A: I think you nailed it right there though. One of the big and maybe a, a trump card if you will, would be if that gold is still in California. Well, that's a California asset at that point. I think you would lose if you don't get that trucked over to Fort Knox.

Speaker B: That's right. That's funny.

Speaker A: So I would want to get it out of there. California is really aggressive on this. Okay. They're going to look at everything. Family moved. Are you done with your business ties there? Think of a continuum. You still have everything in California all the way to where you have absolutely no connection with California whatsoever. The closer we move back to, well, we got more activity still going on in California. The harder it's going to be for you to convince that you've severed ties there and are now Tennessee, if you will. Tennessee is a little bit more relaxed. Well, just get a driver's license right away, voter registration, get your insurance, show that you have a home and we're happy to have you in Tennessee. But is it possible to be a resident of both for tax purposes?

Speaker B: Probably. As far as the states are concerned.

Speaker A: Right. Uh, it really is.

Speaker B: I know as far as the Fed's concerned, you can only have one tax home. But the states a different view on this.

Speaker A: So is it possible that California says no, no, no, you're ours and Tennessee's no, no, no, no, you're ours. Yeah.

Speaker B: You end up paying tax in both states. Well, Tennessee, which brings up a whole

Speaker A: nother nugget here hidden within this question. A state like California, they have a provision that Says, all right, you know, we're going to tax you here. But if it turns out you had to pay some tax in Tennessee, well, we'll give you credit for that against the tax you're paying us. If you were in that situation where they're claiming everything there. The problem is, we went to Tennessee because they don't have income tax. And you know what else they don't tax? Capital gains. And what is it? We have a collectible, at worst, 28%. Or we have a stock in something where it's capital gains with its precious metal. Whatever it is, it's a capital asset. There's no tax in Tennessee. So what would California say? Well, you know, we're willing to give you the tax credit for whatever you paid in that other state. Oh, you didn't pay any. Well, then, no credit.

Speaker B: 100% of the tax. California.

Speaker A: Oh, California. So I really like Barley's idea there. Make sure you get that gold out of there to Tennessee. Brings up one last question, right?

Speaker B: We haven't really got into, um, the residents.

Speaker A: Right, because you're going to use the gold to pay for the residents, Right.

Speaker B: According to your question, sir, I'm going to sell some of my precious thread towards buying a personal rent. So that means you're potentially going to sell it before you move. Right? That's what we want to kind of avoid here. Why don't we have a worker?

Speaker A: I mean, do we go and get an apartment or something like that? Rent out a house or something in the city, establish our residency? That could be, but, you know, you're still going to have that. You kept the residents in California. That's going to be very difficult. They're going to use that against you. Really, the option here, I guess, probably easy one easy play would be sell your house, move to, uh, you know, and then. And then pick up the new house in Tennessee and then later on sell the precious metal once you're in Tennessee and pay off the debt when you purchase that, that. That house in Tennessee. That'd be one way. I think that would probably give you the least friction if you. But there's a lot here, you know, a lot of different factors that California and Tennessee are going to use to determine, well, where exactly do you live? Some. You know, this gets back into the old days when people were traveling along a lot. I m should say Covid days. You know, there isn't this idea that you don't have a home tax state of some sort. If you do fall into that, you're called itinerant. And that's even worse from a tax status with the irs. So pick one of these states and get there. Obviously, Tennessee is what we're looking for.

Speaker B: And go to that. The Franchise Tax Board FTB site in California. They actually have some pretty decent information there. I mean they're very aggressive, but. But they do provide information on what, what they kind of expect, what they're looking for. I was just looking at it yesterday, but I remember thinking there was some pretty decent information there. So check that out if this is your question or you know, for others of you that this might relate to. Kind of a common issue there. But great, great question. Yeah, a lot of issues right in one question.

Speaker A: Damn. That's just one.

Speaker B: Right? Just get started, guys. All right. As an equity options trader not eligible for TTS tax trader status, what is a good entity structure for tax advantages when partner, Nebula's partner, we're not sure who that is, has a SMLLC single member LLC for business. Again, a lot of kind of places we could start here. Where do you want to start out?

Speaker A: We'll start with the TTS Trader tax trader tax status. What that is is basically a situation where the IRS says, look, you're not just selling occasional stock here and there. You've really made it to your business and we kind of have to respect that. And so if you are consistently trading, trying to make a profit off daily market changes throughout the day, we call them day traders, things like that, and you're doing it every day that the market's open, it's your, your main source of livelihood and things of that nature. Clearly you're into it for a profit motive, trying to make a living off of it, then maybe they'll give you this status. Now the difference being that if you have it becomes active, an active business really, and it can allow you to take business deductions and that's really the key from a tax perspective, being able to have business deductions against your trading activity. And so this is kind of where we start with that. You deduct your expenses on Schedule C and then you still have your gains on schedule Ds and dog. Now as far as structures and things like that, typically, what do we recommend?

Speaker B: I like that. That's a good point there. There's no real structure that that requires put your gains on Schedule D, your losses on Schedule C. For some of you that listen to us for a while, are you just going to report losses ongoing on Schedule C? Yeah, red flag audit risk. So you got to really have tight Records. You got to really have this kind of, you know, know what you're doing there. But yeah, but then other than that, we do have advantageous structural stuff that we can set up as well. All you guys have heard this term, we call it just a trade structure. Essentially just you as an individual. You're going to form a partnership. Put the brokerage account in a partnership. Who are the partners? You as individual. You as an individual or uh, partner one, partner two is a C corporation that you own and control 100%. So those are the two partners in the partnership, you and your corporation. Yes, we recommend a corporation, typically a C over an S corporation, Uh, a lot of tax advantages. It uh, illegally isolates that funds off of your 1040. We're just skimming off the top of your own profits. Charging yourself not a management fee, but charging yourself to oversee your investments. Right. Pulling those profits off your tax return, tax savings. Right over to a corporation. Um, changing gears a little bit where then we can use for tax free reimbursements or an accountable plan. A lot of you guys have heard about this. Home Office 280A, medical reimbursements. How does that all happen when we have a corporation? So what we're talking about is a trade structure with a corporate trading partner again that we own and control 100%. And we just use it as a tax tool. Reduce our personal income, but then still be able to use those funds for tax free reimbursements.

Speaker A: So we start out first place. If we didn't have anything going on, we just have our trading account here. It's just owned by us, by the individual. You could put it in an llc, that's fine, but nothing particular, you know, fancy going on there. Or we can take that trading account and we put it into a partnership exactly like Barley's talking about. Maybe we have 10% over here, ownership 90% over here. We automatically have shifted 10% off of a return.

Speaker B: Uh, mm.

Speaker A: Uh, we're going to get a little bit more into the details on the next question of how that all works out.

Speaker B: Oh, that's right.

Speaker A: That's the concept here, is just having the trading account. Do you want it all coming onto your personal return or maybe put in this trading partnership? But we have another little aspect going on. Remember a lot of hidden things in these questions.

Speaker B: Right, Right. So what are we. So we're saying equity options trader not eligible for this trader tax status. But what is a good entity structure when a partner.

Speaker A: Well, and we just stop right there. Not eligible. That means it's not a business. That means they can't take any business deductions. But if we get into this, what Barley's talking about, this training structure over here, whoops, hit the wrong one. Now it does erase and stuff left and right. Oh my gosh. We took his head off. All right, so we got the C Corporation over here. Now over here we can deduct, treat it as a business and take deductions over there again. We're going to see that here in a little second. But we got that last part with this partner.

Speaker B: Right? What's going on here?

Speaker A: So when we hear single member llc, uh, that doesn't really tell us a lot. We usually say that's disregard. We hope it is, but it actually could still be an S corp or a C corp. Couldn't be a partnership because it only has one partner there. But we're going to go with that. It's probably disregard. So here's what's really going on. We have Barley and I want to get into some trading. Okay. He's already got a single member llc. Let's say it's another business that he has or something like that. And so in that case, Let's get Barley set up here. He's got his single member LLC and he's got some other business going on here. And then I'm over here and I want to, we want to trade, but we want to do some kind of partnership structure here. He contributes via his single member llc. I contribute personally or whatever it is. The issue that we have going on or a potential issue is we don't know what's going on in this single member LLC of Barley. Let's say he has this dog walking business. Now the minute Fido bites somebody under his control, he's going to get sued. And everything that he owns, including his, his options or his, his ownership in that partnership becomes exposed. So we don't want to be very careful with that. We probably wouldn't let another individual come in with their own business, active business, to get in this because it's uh, a, it's a liability issue. Not so much tax, but liability issue. Uh, what we would really recommend is not have this situation at all. And you know, you can copy and paste this kind of, this kind of setup. But we would probably say, well, business partner, go off and set up your own trading partnership with your own C Corp. And then our, our individual, um, asking the question would set up their own trading partnership as well. We wouldn't recommend, recommend. Getting into business together brings up a lot of potential people problems, especially when we don't know what's going on. That single member llc. So that would be a kind of a. More an asset protection issue to watch out for.

Speaker B: Yeah, no, and I like that. I don't like the idea of partnering. I, uh, have a MBA background. And that was one of the first things we learned at business school. Just there are so many better tax structures than a partnership. Because the second you get into disagreement, things can go south so fast. So why form a partnership? What we're proposing, you each set up your own trade structure. You guys can exchange information. You can kind of be in business together that way, so to speak. But you're not tangled at an entity level and at a tax level and at a liability level. So that's. That would be certainly recommended. Now, we're assuming this single member LLC that just might be another person holding their own brokerage account. Again, why would we partner those two things together? It's just kind of nothing but problems. You can get a lot of the synergy and advantages without having to actually, you know, marry. Literally marry yourself to another individual.

Speaker A: And we can tear that apart in the next question as well.

Speaker B: Right, Right. So continuing on that, uh, the trading structure, what we just talked about. Partnership holds. The brokerage individual is the partner. One C Corp is partner number two. I have a trading structure. Please explain what the. Please explain the tax treatment guidelines, when the investments are sold, when a K1 is triggered, etc. So we have this trade structure set up. We get a good chunk of realized gains. How is this structure beneficial? Yeah, what happens?

Speaker A: What are the details? Somewhat beneficial. Some of it may not be, but we'll see here when we get into it. Now we got a brokerage in our partnership. Well, first of all, somebody. Let's say this is Barley's. He put his original brokerage account into the partnership. And here's a C corp. And we're going to go with 10, 90% and 10% ownership.

Speaker B: Common structure. We use from 1 maybe up to 20%. You know, we're more than that. We kind of might be trapping some money, but.

Speaker A: Yeah, but it's all. That's. You sit down and you talk to a tax advisor and we look at. We will crunch those numbers out. But the key here is, let's say he already had. He bought Bitcoin at a dollar, and now it's worth $100. So he's got basically gain of, um, about 100 bucks. 99. And he puts that into the trading that brokerage account into the partnership. Now, what the rules say.

Speaker B: Sweet gains gone. Right?

Speaker A: Right. Exactly. Does that mean he get a. He gets a pull off 10% automatically to the C Corp?

Speaker B: No, not quite.

Speaker A: The rules say when he sells that. Let's say it goes up to $200 of value. It was at 1, but when he put it in, it was already at 100. So you have basically 100 gain after it was put in this part, after you put the brokerage account into the partnership. Well, then, yeah, 10% of the gain goes to the C Corp. And that'd be $10. And then $9 or 90. Excuse m. Me. $90 would go, um, to the individual Barley. But that original $100 of gain that he had while it was in his possession, we have to send that back to Barley. Okay, so that's one of the things you have to be aware of when you set this up. Now, not all tax preparers, frankly, know that sometimes that just automatically that hidden gain of $100, 10% does get shifted over into the C Population. It does, but it happens. But, uh, you know, but really what the code says is that 10% of it. Excuse me, the hundred, the $99 a gain, original gain, should go back to Barley. And then any gain after he put it into that trained partnership. Now that can be split and we get all those benefits, which. Exactly what are those benefits? So if we have $10 of income coming into our C Corporation, in this case, 10%. Now, we got to look at another issue here. Well, what kind of income is it? Because if you have.

Speaker B: Oh, uh, guys, we're going in the weeds. Hang on, hang on.

Speaker A: If we have, let's say, a large brokerage account, and at some point it just sits there in cash. M. You're probably getting interest payments on that. Let's say you have a million dollar trading account. 50,000 of it's in cash just sitting there because you haven't invested it yet. The other items are invested well. You're earning interest. And the code says there's certain types of income that a C Corp can earn that are poisonous. And interest income is one of those. Or dividends. Maybe you invested in dividend stocks and they're paying dividends. And if the C Corporation earns too much of that, well, we got a problem. We get what's called Ph.D. personal Holding Co. Tax on those gains. So we have to balance that out and have quote, unquote, healthy income. And we don't get a. We don't get to consider any capital gains in this equation. So what we have to look for is ordinary operating income. Which with a trading partnership, we can pay the C Corporation for basically managing the partnership. We can uh, we can.

Speaker B: Unique payment structure within a partnership. Guaranteed payment department. Think of it like a W2. You're paying to the partner for capital or services. This is a static payment. What's unique about this payment? Or ordinary or active or what? What kind of income?

Speaker A: It's healthy income. It's ordinary income. So that will take care of and avoid that tax I was talking about earlier. Now what are all the numbers? We're not going to get that far into the weeds, okay. That you just need to sit down and have tax advising to make sure we're good on all these type of things. But the guaranteed payment is what the critical item we want to get here. Because it's kind of like a management fee. But it is because it's a partnership, we call it a guaranteed payment. And let's say it's $10 that you're paying. That's also a deduction. Okay. So actually. And that's amongst partnership ownership percentages. What do I mean by that? Well, it's $10 a deduction. $9 or 9% of it would be a deduction on Barley's return. $1 or 10% would be a deduction on the C Corporation return. So these are the type of things that can help with this type of structure. But as the question was that we're looking for here, explain some of the guidelines. These are some of the guidelines. We want to be careful, make sure we have good income. Now a lot of our clients out there also use their C Corp maybe to manage rental properties or something like that. Well, that's healthy income if you will as well. But once we get all this income in there, what are we going to do with it at the C Corp level?

Speaker B: All that, the fun stuff.

Speaker A: Yeah, right.

Speaker B: Tax free reimbursements. Home Office 280. A, uh, medical that's unique and really only available through a C corporation. Medical reimbursement, a 105 medical plan. This is 100% reimbursement. Medical, vision and dental for you and your whole family. All of it a tax deduction. You can only do that through a C Corporation. That's one of the examples.

Speaker A: So what Barley's doing then is he's taking not only the $10 of cash from the capital gains and the $10 now would be $20 basically at the C Corp level. But he is removing it all through the 280Amed reimbursement go back to our

Speaker B: option one, we do nothing. We got 20 bucks of income in the C Corp. At the end of the year, we'll pay a flat rate, 21% on that tax. But before we file that tax return and before we pay the tax on it, we can pull as much of that cash out as possible. This is a unique tax return incorporated entity. The majority of our clients are family held corporations. Why? Because we get so many tax benefits, it really truly changes the landscape. Like we just talked about reimbursing medical. But two ADA meetings, you know, if you're watching along, call this A2ADA meeting, you can reimburse yourself 1500 bucks tax free to yourself and it's a tax deduction to the corporation. Right? So these are all ways we can pull cash out of their tax free.

Speaker A: And so then to the last part of the question about the K1, when's that triggered? Well, this partnership right here needs to file what's called a 1065 partnership return. Now it's just an informational return. Basically. The partnership's not going to pay any tax, but it had the earnings, we know that from all the trading activity, et cetera, the guaranteed payment paid to the C Corp. But each partner, C corp, whoops, C Corp and the individual barley are going to get a K1 for their respective shares. So he's going to get a K1. And when is that triggered? Well, when you do the return. So when we're asking here, guys, when is this K1 triggered? When the 1065 return is filled out by your tax Preparer, then the K1s will go to the respective partners and it goes on to their respective returns.

Speaker B: That's right, because partnerships and S Corps. Also remember, these are what we call pass through or flow through entities. They file a tax return, but they don't write a check to the treasury to pay taxes. So how do the taxes get handled? The tax burden passes through to you as the owner via, uh, this form K1 1 goes to each partner. When we do the tax software and you know, both the tax software to start the partnership tax return, it's going to ask me who are the partners in this business. I'm going to put, okay, here's the individual, here's the C corp, here's the information on those Percentage ownership. Yep, percentage ownership. Then we'd file that return. It's going to automatically generate those K1s. You're going to take that K1 and include it with your 1040 tax return. Similarly, the C corp is Going to do the exact same thing.

Speaker A: Excellent, Mark.

Speaker B: Oh, I, uh, just wanted to mention. Yeah. Almost all the 1099 composite statements I've seen do have interest income. I mean, this just is going to be on there. So we have to, we have to pay attention to this. It's not a big deal. Don't be scared of this. Just. But when we set up this trade structure to take the most benefit of it further, this goes back to one of our fund tax terms basis. Right. When you. If we have an appreciated security, any appreciated gain in your name is going to be taxable to you. If I transfer it to my brokerage partnership tomorrow, then the growth from that point on will be eligible for this tax treatment with a trade structure. The growth in my name. We're going to be looking at historical basis and transfer basis. That, that's what we were looking at earlier. So the, the advance. So what I want to say is if you had a stock and it's, you know, maybe you had one of these, what was it? Um, Nvidia. Maybe an Nvidia stock or something like that. Anyway, well, I'm going to move it into a trade structure so I can shift 10% that. You can't do that if the gain was in your name. But the moment you transfer it, any gain from that point will, Will be eligible. Just want to clarify that point. Kind of a common misconception there.

Speaker A: Yeah, but again, not all preparers know that and sometimes it gets missed on.

Speaker B: Right.

Speaker A: Uh, preparation. But again, tax planning. Make sure we get some guaranteed payment in there. Something that nature. There's a laundry list of things that can be this quote unquote poisonous type income. But typically that's where you're going to find it in your dividends and interest.

Speaker B: The term is Ph.D. personal Holding Company. Again, that's what, you know, kind of the, the guardrails we got to look out for there. If you guys want to look up that. Let us know if you have any questions. All right, moving on.

Speaker A: Yeah, this is a fun one.

Speaker B: You can tell we're having too much fun up here, guys. Wondering if I can purchase a vehicle and lease it to my business year by year. Is that possible for a tax advantage? Is that a possible tax advantage for a private investigation business? Hmm.

Speaker A: There's m. A whole lot.

Speaker B: Purchase a vehicle in my personal name and lease it to my business. You know, we actually get this question a lot.

Speaker A: Yes, we do. Yeah. Maybe not with a private investigation.

Speaker B: Right. No, that's new. That's a fun one for me. But yeah, equipment. We get that set, we get this question with rentals. Can I buy a rental and rent it to my corporation? Can I buy, you know, this equipment and rent it out or vehicle rent it out? It all kind of ironically creates the same kind of issue. Right? We got a, where do we report a rental property? On uh, schedule E. But when we're renting equipment, we call that personal property. In other words, anything that's not real estate is considered personal property that goes on schedule C. Why do we not like that? Audit risk subject to self employment tax. You know, a couple other reasons there, but that's, that's when I first look at that, I think, oh, you're going to have to report this on schedule C and pay self employment tax. And what, what issue jumps out at you first?

Speaker A: Well, I guess just firstly for the, to answer the question, can you do this? Yeah, you absolutely can, right?

Speaker B: That's a good point.

Speaker A: But you know, is there a real purpose to it? Are we just making our day a little bit more confusing? Because if you do this, as Barley points out, you now personally own the vehicle and you're leasing it to your private investigation business. Which brings up another issue. How is that taxed? Which we'll step into that later on. But that's a business transaction. So I have to recognize income for leasing it out to my business. And yeah, I can take some deductions against it. Perhaps it will depend on how much is personal use versus business use. You got to have over 50% business use. Typically if you want to have bonus depreciation. Vehicle brings into some certain problems, or I uh, should say problems, but check boxes that we have to look for.

Speaker B: Is it a car vehicle less than £6,000?

Speaker A: Yep. Then we got to watch out for things like we're going to be limited perhaps in how much deduction we can take immediately.

Speaker B: Uh, it's not 100% bonus.

Speaker A: Oh, it's not, yeah, exactly right. It's very limited. It's probably going to be in the 30, maybe 40,000 ballpark when it's all said and done, maybe a little bit less. Whereas if it's over £6,000, what do we got going on there? If it's an suv, that's right, you

Speaker B: go buy the Hummer or the G Wagon, you can deduct that. What are we just incentivizing 100% right away or something? But yes, those are eligible for 100%.

Speaker A: Exactly. So we have those kind of issues to think as well. But still getting back just the complexity, am I Making my day better if I lease it to the business. Because if the business doesn't use it as, you know, enough, it's not using business enough well that then all of a sudden you may not be able, you know, to take these heavy deduction amounts, depreciation amounts and bonus amounts can have depreciation recapture all kinds of drops

Speaker B: below 50 business use all kinds of

Speaker A: nastiness and well, you know, I know what I'll do, Elliot. I just won't, you know, I'll have a lease that's higher than what the. Or you know, I have an overall loss coming in. Well, it's got to be at fair market rates. It's got to be a arm's length transaction. I mean you got to see what the real value is here. You're going to be responsible for documenting that as well. So really the key here is we would go with what we typically recommend and that is that you keep a mileage log and typically you keep the, you purchase personally and then you can maybe get reimbursed depending on how your, your PI business is taxed. What are we looking at for reimbursements with a bit of what kind of taxation are we got?

Speaker B: Right, right. So like we were talking about just a moment ago with the trade structure a C corporation, similar kind of thing here. We'd like to see if you're making a certain amount of income. We'd like to see it likely structured as an S corporation. What's unique about that? You're by default considered an employee. You're the employer and employee. Right. No matter what, as an employee, you're now eligible to be reimbursed for mileage. Also health insurance, home office 288, all these other things. Right, but mainly what we're talking about here, obviously the vehicle so you can be reimbursed. It's uh, still 72 and a half cents a mile. Well the nice thing about that is you don't have to deal with any. There's no schedule C, there's no paperwork, there's no liability. Plus this is, correct me if I'm m wrong but this would be considered like a related party transaction kind of heavily screwed I'm sure would get scrutinized from the irs. I mean listed listed property vehicles are considered listed property. There's a lot of scrutiny there. We can avoid all that and just get take a tax free reimbursement 72 happens 72 and a half cents per mile, a deduction to the business if it's structured as An S Corporation. Get a good advantage there.

Speaker A: And just to. To. To dig a little bit deeper and put some more garnishment on that. What Barley's talking about is you can have an accountable plan. Count plans are only for employees. Which exactly why, as he pointed out, is what you are for your S Corporation, because you are an employee, you get the accountable plan. And underneath our accountable plan, that just means reimbursement. It means you can be reimbursed for that mileage every time you leave your home office. So now you want to get a home office area in your house.

Speaker B: Another reason to have this is an S Corp.

Speaker A: Absolutely. Yeah. So now we got our S Corporation, we have a back bedroom that we use as our office for our PI Business, where we keep all of our records. And I don't know what kind of photos, what kind of hard drives, whatever. Yeah, exactly. Uh, I don't know what's going on. Burn bags, right? Yeah, exactly. Whatever that kind of stuff is. Uh, but every time you leave now and you drive on a mission to go get pictures or whatever it is the reimbursable mileage now, ding, ding, ding.

Speaker B: Just leaving your house on a business trip. Yeah.

Speaker A: If you didn't have that office now, every time you drive, it's not a. It's not reimbursable. So that's one thing to take in consideration. Uh, and it'd be the same thing on a schedule. See, if you didn't have an S corporation. So things to watch out there as well. So a lot of, you know, advantages to maybe set. Make sure our PI business is a corporation. Probably an S Corp would be best. Why? Just because of savings on employment. M tax. C corp. If you had the medical. You mentioned medical. Maybe that's a more important issue with them. That would be a C corporation. We have medical reimbursement issues. Always talk with your tax advisor. Okay. Walk through these scenarios and the various fact patterns. You can see all these questions. This one's no exception. Very, very fact intensive. So we're making some assumptions here because we have to, but it just goes to the showing how. How it can twist and turn just on one fact pattern or one particular fact. So again, probably purchase in your own name, get reimbursed from your corporation for it. It's still yours. And the more you drive, the more reimbursement you get. And that's a deduction to your corporation, saving you taxes.

Speaker B: Yeah.

Speaker A: Money back in your tax free. Money in your pocket.

Speaker B: That's right. Schedule C. You can take it as a Deduction. If you're sole proprietor, even a partnership, perhaps you can take it as a ded, but you can't reimburse yourself the cash. Uh, we want to find that sweet spot where we get a deduction to our business that results in a tax free reimbursement. Our pocket. That's a great, great option.

Speaker A: Yeah.

Speaker B: All right, guys, shake it off. Uh, stretch about halfway there. How are we doing? Make sure you tune in YouTube channels. You know the drill. Toby's got so many great interviews on there. I mean, so, so does Clint. Focus more on the asset protection. Right. Or the. And then Toby, of course, is on the tax law side and together they are scan here. If you want to set up a call, we can get you in a strategy session right away with one of our CPAs, tax advisors. We've got a great team here. Plus, you know, uh, let us know whatever else you guys are working on. We got the nonprofit team, a bunch of, bunch of different options here. All right, hop back in.

Speaker A: Let's do it.

Speaker B: All right, guys, what do we got next?

Speaker A: We got what, the back four here?

Speaker B: That's right. I live in Washington state. If I buy a rental in Oregon, do I have to file organ tax and pay organ tax on the property located there? What say you, Mr. Tonks?

Speaker A: So this is kind of a softball one. If you have property, you know, any, any kind of source state is really what it comes down to. And definitely the source state here is Oregon. It's their land. So if you have rental in that state, you're going to have to pay Oregon state tax on that. No question about it. And so this is really kind of a, a softball one. Uh, threw it in there. Just kind of leading up to, as we get into more of the real estate stuff and a good point to

Speaker B: touch on here, I feel like from just going back to my tax prep days when we were talking about the partnership, right. How do we know who gets a K1 and all that? We enter this partnership information. It's a similar kind of process here. When you go to file your federal tax return, you're going to list out your different businesses and activities and assets that you own in other states and stuff like that. This is where you'll. You're going to say, I have, uh, an Oregon rental property. Here's how much it made. Then the state filing requirement can be may or may not be triggered at that time. I mean, for Oregon, you're going to, if you have income, you're going to, you're going to have to report. And that's going to be true in most cases. But, but that'll be handled when you, when you file your 1040, your federal tax return, you're going to report these different sources of income and that'll determine whether you need to file a, uh, state, uh, return and whether or not you. And how much tax you owe. There's.

Speaker A: And just being in Oregon, I know from some of our experience with tax prep on it, maybe we're in Portland and now Portland, if you're familiar with that area, you have county considerations, you have city considerations, you basically have some neighborhood considerations for tax purposes and all these different things going on there. So it can be. I haven't seen anything as complex as a Portland city.

Speaker B: That's right. I was just reading about that the other day. Multnomah county in Portland. Yeah, they have their own story set of things.

Speaker A: I hadn't seen anything that complex since maybe New York City, where you have the boroughs and all that. But you know, they really get into the nitty gritty in Oregon on, uh, some of these things. So you have a lot of considerations if you have a rental in, in the, you know, in that county that the area.

Speaker B: Yeah, uh, city limits there. Beautiful, beautiful area.

Speaker A: Oh heavens, yes. But it's, you know, the simple answer is, yeah, the property's located there. That the state's a sovereign. Okay. It owns its land and so it gets, it gets to, you know, certainly tax the income being produced there. Absolutely.

Speaker B: Mm. Mhm. Great question. All right, next, I run three Airbnb properties and I have an LLC taxed as an S corp that I have all the trans. Translations always write that as escort. That's funny that. I have a. And I have a management company where all revenue and expenses flow into. All right, we're going to address that. Uh, it does not take depreciation. We're talking about the S corp here. Since the LLC doesn't own the property. That's good. As we have our deeds in our personal name. We'll talk about that as well. How can I take advantage of the loss and depreciation to offset and meet our loss? Depreciation to offset, uh, our W2 in this case. Uh, another very common question. How do we get an active loss that will offset our W2 from real estate? Right, let's hop right in.

Speaker A: All right, so basically here we got

Speaker B: our S Corporation S corp manager. This is gonna be real typical, right, for you guys. We're gonna hold a property in an LLC or a partnership. It may even still Be in your personal name, like you have it. Um, before you get contractors in there swinging hammers and tenants breaking windows, you'll probably want to get an LLC or a land trust or something. Talk to one of the attorneys here. Right. A very typical structure. We're going to hold a rental property in an LLC instead of a corporation to manage our own properties. A lot of tax benefits there.

Speaker A: So if we didn't have that, if we had no S Corporation, well, then all this money would just go on to your 1040 and be taxed.

Speaker B: That's right. First option, always. Look, you know what if we do nothing, right? This just all one, uh, hundred percent of the revenue will flow into schedule E of your personal tax return. All, uh, all taxable to you.

Speaker A: But the minute that we bring in this management corp and this happens to be an S corporation, well, a portion of our rent, maybe 10% gross rents for each of these will go up to our S corporation and that's a deduction against the rental income from these.

Speaker B: Notice she said gross rents, dude. This isn't net profit. You can have a loss and still take a percentage of gross rents.

Speaker A: Absolutely. So if we had $100 of rent and now we just paid $10 off, well, now we have only net 90 and $10 of earned income in our S Corp. Which Barley pointed out earlier, when we have a corporation, we had a C corp in that question. But when a management corporation has that kind of income, he had all kinds of ways to get it out of there back tax free. 288 corporate meetings, medical. We don't have medical reimbursement in S Corp. But we still have the accountable plan. You're an employee there. So that administrative office, maybe if you have that administrative office, maybe you're driving again over to these properties in your little car. I'm not even going to try and draw a car. But you're doing that reimbursement for your reimbursement. Exactly right. So you got all these goodies under the S Corporation to help get that $10 or the 10%. Whatever amounts going in that S corporation, get it back to you tax free. And you already got the benefit of a tax deduction when you took it against your. Your rents.

Speaker B: That sounds kind of like the trade searcher. Yeah, it's kind of the same kind of concept. You're just skimming profits, uh, off the top of your own activity. You're charging yourself a management fee. It's reducing your income. But then once that. But you're like, well, I made that money, I still want to get it, take advantage of it. That's a good try, but I don't. I just have to do the sitting in the. You could put some blocks on it and some grass under there. But once the money's in the corporation, just like Ellie, uh, said, before we file the tax return, before we pay tax on that $10 of management fee or whatever in the corporation, we're going to pull it out tax free. And I know this is kind of a weird concept to wrap our head around, wrap our heads around, but we're looking for tax deductions to the business that result in a payment to us, uh, that we don't have to report. So it's kind of a sweet spot, kind of a, you know, a short list of things. Here again, 280. A home office. You pay health insurance premiums, reimbursed for a number of different things. There's the point being those are tax deductions to the business. But we don't even have to report that as income, let alone pay taxes on it. Once we get that money. And this is a direct transfer from the corporation to yourself. Do this every year. Wash, rinse, repeat. As long as you're in business, you're going to be taking this deduction tax free, cash back into your pocket. Great way to, great way to say it.

Speaker A: Now I want to jump back to some of the issues we spotted here. First, that first sentence, you caught some there, all the revenue expenses were flowing into the S. Corporation. Talk to us about that.

Speaker B: Yeah, so that's, that's actually not uncommon, you know, and some, I've heard some attorneys recommend that they like that better for asset protection purposes. That's fine. You can run the expenses through the corporation. But just remember, at the end of the day or end of the month or so, those expenses like you mentioned aren't going to be reported to the corporation. It doesn't report rental income or fence repairs or depreciation or property taxes. Those are all related to the rental. So yes, you can run those expenses through the property management Corporation. But then you're gonna have some bookkeeping to do. At the end of the month you gotta make a statement, send some cash or a statement down to the rental properties so that the rental property can report the rental income, the fence repairs, the depreciation, the property taxes, the corporations only going to report management fee income, all else being equal, if it's not doing any other business right at the end of the day, that's all you're going to have left in that corporation. It doesn't own anything. It doesn't report any expenses related to the rental. Well, I mean, likely all it can do. One thing it can do, if you just want to do bare minimum activity, it's going to collect rent and withhold a fee and send the balance down to the rentals. Done. You could just do it like that if you wanted. Now, whatever way you're doing, it's fine if you're running the core, uh, the expenses through the corporation. You just got to make some bookkeeping adjustments, make sure those rental related expenses aren't on. The corporation obviously are aware of that.

Speaker A: So.

Speaker B: Yeah.

Speaker A: So our, uh, rent check can go to the S Corp perfectly fine. It can pay out all the bills perfectly fine. But it only retains its management fee. That's the only income it has here. All those bills that paid that first initial rent check, that goes all in the bookkeeping of the red boxes. It has nothing to do with the S Corporation. So back to our question that first sensor, all the revenue expenses flow into it. Well, uh, that might be that it's receiving the check and paying all the bills and that's perfectly fine. Just remember, it's not its income, it's not its expenses. Those all belong to the red boxes. And then we get down here on the next section, or, uh, excuse me, the next sentence, it does not take depreciation since our LLC doesn't own the property exactly right. For the exact same reason that it's not going to record all the income or the expenses. Those all belong to the red boxes where they show up. Yeah. So now we get to the meat of it. How can we depreciate? You know, because usually depreciation is a huge deduction. It's going to create a loss often. How do we get it to offset our W2 income? We got Airbnb going on here is what we see.

Speaker B: All right. Thanks for the money. Yeah. Uh, short term rental versus long term rental. Of course, that's going to be one of the first distinguishments we look at why long term rental requires this rep status, real estate professional status. This is when we're spending more than half of our year on real estate activities. There's a list of 11 activity of broker, acquisition, financing, even like development, construction. If you're spending more than half your year on one of these real estate activities, you're likely qualified to be a real estate professional. Now, we still have to materially participate even if we have rep status. If I'm a real estate professional, driving around uh, working for myself, broker, dealer, selling stuff. Even if I have rental properties, I don't automatically just get to take the depreciation deduction. I still have to materially participate in the rental property. Long term rentals are per se default, passive activity. That's why we need rep status just to qualify to materially participate in the property. All right, let's go over to short term rental. By the way, this applies to all other businesses. How do we get the losses? Active? Make it make the short term rental active. We only need to materially participate because the short term rental technically not even really considered real estate anymore. For tax purposes, it's considered just like an active business. Just like a frozen yogurt shop or a chain of dry cleaners or whatever. You don't need rep status to make it active. You only need to materially participate. What's that mean? 500 hours or more. And you're a material participant. Likely you're going to see this 100 hours or more. As long as you have more hours than anyone else, you only need 100 hours to call it an active activity. Melanie said, you know, depreciation losses, these can be huge losses. That's if we do a cost segregation study and apply accelerated depreciation, we can, you know, oftentimes end up with these massive losses. Are they going to be active or passive? That's the very first fork in the road we come to. Why do we care? One's going to offset your W2 and one's not. Right. One's going to create a passive loss. One will offset capital gains, retirement conversions, W2, all other forms of income. It's that active status.

Speaker A: So going back here, call the question here. Well, first of all, I have three Airbnb properties, which makes us think that we have a short term rental. Average short term rental is if the average day is seven days or less, then we're in this call.

Speaker B: We should mention that too. Yeah, short term rental to the, to the IRS is kind of a specific thing. So average day, that means Average calendar year, January 1st to December 31st. In most cases. There's a quarter course exceptions to all this stuff. Average day, calendar year, less than seven days. That's what keeps us in this active business role. But if you have an Airbnb, you could be renting it out for a month at a time. Uh, just that Airbnb term doesn't necessarily mean short term rental.

Speaker A: Exactly right. But if it is a short term rental and the typical test, seven days average, say right there, you have a business. And so if we don't have any other evidence, it's a passive activity. And that means if you have losses, well, they're not going to offset that W2 that you were asking about. But it's a short term rental and if you materially participate over 100 hours more than anybody else, or 500 hours, there's actually seven different tests, but these are two most common, easy to grasp, well then all of a sudden it's not passive, it's now active or non passive. And if you take that heavy depreciation that we talked about, well then that is going to offset against your W2 that we're talking about in our question. If. Well, Airbnb, as Barley points out, actually the average date is like two weeks or something like that. More than likely you're going to fall into this category long term rental. You have to have rep status over 750 hours in the real estate trader business, more than 50% of your work week. And you have to materially participate in the management of your rental properties as well as. That's the same MP test that we have over here. They're identical.

Speaker B: Yep.

Speaker A: Uh, identical. Have you ever seen that? So that's what we have going on here. This is a much more difficult, challenging prospect. But if we're trying to offset, and here's a key word, our, that means to me spouses and they're both W2, that becomes exceedingly difficult to get this LTR, this, this long term rental rep status.

Speaker B: It's like you're doing a CPA exam test, right? So there's one little words can change the whole thing. Our as opposed to mine.

Speaker A: You're absolutely plain. Where's Waldo? You gotta find them everywhere in there.

Speaker B: Oh, that's true. If you're both W2, you know, sometimes the IRS, they're just gonna look at that right off the bat and be like, well, you're both W2. You can't be rep. Um, it's not going to be that simple. They're going to look at it more than that. But that's, that's going to be a tough one.

Speaker A: And we're referring to that part right there, over 50%. Because if you got even a part time job, you know, you work at the car wash 24 hours a week, well, you got to find 25 hours managing your rental properties and you, boy, skip it. You better have good records, okay? Good documentation, timely documentation to show that you put more time into that rental activity than you did the car wash. The IRS is going to come screaming now that they're using AI to audit. This is one of the higher areas of audit risk. Doesn't mean you did anything wrong wrong, but just count that you're going to be asked about and make sure you have documentation for it. That's all that's going on. But again, usually we think in our minds, if we have three Airbnb properties, usually we're looking at seven days or less. And then we again are under this far simpler, so to speak. Material participation test. Just one last thing. There is a test. Well, what if it's two weeks and we still call, you know, we, we still manage it, put a lot of time into it, a lot of effort. We provide significant services. Maybe you're cleaning it every day, you're providing food, maybe you get some kind of uber concierge type service. If it's near a sightseeing area or something like that, you provide uber access or something like that, you're providing all these extra services. Then maybe if it's in the eight days to 30 days range, you might be able to still get this material participation test. Again, you're really going down. I need a tax advising consult territory there. But back to our original question. We got three properties. We now know that the revenues and uh, maybe we're from a management standpoint, we take in that rent check, we pay all the bills, but that's not our S corporation's income or expenses. That's why it doesn't take the depreciation because all that goes on the red boxes with the where the houses are, the rentals, which not owned by the C Corp. How do we take advantage? We want to make sure that we have turned us from being passive into non passive and then we get the heavy depreciation deduction. And that's by short term rental, material participation, long term rental, real estate, professional

Speaker B: status then coupled with that 100 hour test. Yeah, you do have to keep track of it. If you have other cleaners or anyone there, you got to make sure you kind of track their hours and have more, more than them. And just to address this because, just because I know you guys have heard of this, this term they call the short term rental loophole. If you put a property in service, you know, now that we're coming up on July here, halfway through the year, if you put a property in service, you know, in the, the last quarter of the year, you only need to get 100 hours or less of uh, you know, you could even have substantially all of the hours or all of the hours. No one else was working on it. Just get it rented out a couple times and you're going to qualify for this big deduction. Now we need to keep it as a short term rental moving forward at least a year or two to prove our intent to the irs. This gets into kind of a gray area, guys, but just, I know you guys have heard about this a lot, so I just want to touch on this. But we can turn this over to a property manager in year two. You don't have to manage it forever. You got to manage a year one lock in your loss. This is where our documentation is so crucial, where the IRS wants to make sure we're not just doing this for the tax loss, that we actually have a real business. We plan on using this asset to generate income and this crucial for the documentation part. But what I'm saying is you don't have to be the active manager forever. You can turn that, turn that over to a property manager. Might cut into your profit margin a little bit. But then, hey, you don't have to change sheets and fix toilets anymore, right? You got to just sacrifice a couple of nights and weekends in the first year or even just the end of the quarter of the first year, get that active loss. And that's all. That's all. That's uh, all that really matters to a lot of us.

Speaker A: One of my favorite aspects of this, let's say we have a partnership. Barley and I decide, hey, let's get a short term rental. We'll put it, you know, this is Vegas. My gosh, we could make all kinds of money. It's not that simple, folks, but let's just say we did so. 50% barley. 50% Elliot. There's our short term rental. In it. Barley comes in at the end of the year. He says, hey, I know it's tax time. I put in 110 hours. Fantastic. You know, I materially participated. And I'm going to be sitting there and thinking, wow, that's great, Barley. I. I'm going to make an adjustment here. I put in 111 hours. Why? Because it has to be more 100 hours more than anybody else. So now all of a sudden I put 111 hours. I have more time than Barley. He doesn't get material participation tests because this is a partnership that owns it. I do so now know we're able to screw over barley.

Speaker B: Now, if you each had over 500, you could, there could be two material participants, right? If you have a dry cleaner, froyo shop again, same Thing applies. But the chances of a ah. Thousand hours on one short term rental. No you're not odds you need it.

Speaker A: Yeah.

Speaker B: You don't spend half a year, you know fix changing light bulbs. It's just not realistic. So very important that we track that. Track. Track our hours and others which comes

Speaker A: up a lot does. I've seen this happen actually in a partnership.

Speaker B: Right.

Speaker A: They were families, you know that were friends before and I'm not sure they're family or friends now but it's.

Speaker B: It's just a sad state of affairs that things can just go. You know those operating agreements on the partnerships can get so complex. But partnership's so simple. Shake hands, go start making money, file your tax return. I mean there's really nothing else to it. But when you're counting on those, the dissolution, the operating agreements and because the inevitable fights. Yeah of course you just. Yep. Get into the more you don't want to be. How are we doing a couple more here guys. Hanging in there, doing great.

Speaker A: Got like three left I think.

Speaker B: Oh, do we better keep it moving here. All right. How can I avoid or minimize capital gain taxes if I sell a rental property I've had for seven years Now I remember when we talked about this a moment. The very first thing I think of is I would look for what we call passive activity losses or pals or assuming a rental property. I'm just. We're going to assume it's long term rental for this case. Right. We're looking at a long term rental. Had it for seven years. I'm going to sell it and probably have some appreciation here. I bought it back. First of all let's start here. How do we determine gain? Ellie's going to go into the kind of various options here in a minute. But just real quick for you guys. Purchase price minus land is going to be our depreciable basis. Right. Depreciable basis minus depreciation is our uh, what we call adjusted basis. Why is that important? Sale price minus adjusted basis is your taxable gain. That's how we determine the gain. Now within there there's a couple more components. Might be some depreciation, recapture, that kind of thing. But generally speaking that's how we determine our gain. So if you held a held a property for seven years, it's likely gone up in value. What does that have for a tax purpose with basis? Not really anything. Where is it reflected in the sale price? Sale price is going to be a fair market value as long as it's a third party arm's length transaction, if you will, the fair market values the sale price less. Your adjusted basis is going to be our gain. So just to give you, you know, the background on that, that's our formula there. But what kind of options are we looking at here?

Speaker A: All right, so passive losses like Barley talked about, if you sell a property, all the passive losses it created or any other passive losses going on from other rentals will help be released to offset some of that gain. So that might be something 1245 cost seg. What's going on here? I just want to jump back to one fact here. It says we've had it for seven years. Maybe we did a cost segregation if we had our tax hats on when we first bought it. So we've split it into different kinds of property and what can happen, Part of that property is usually five year property, all right. But here we've waited seven years to sale, to sell it. So you can go through and do a second, what I'll call 1245 cost seg. And they go back and they look at the value. What's the fair market value of all the five year property? Because it's probably worth darn near zero, but it's not going to be zero. All right, so you can't necessarily completely write off all of it, but at least it's going to be greatly reduced. And our partners, who are vendors, I should say that help a lot of our clients. CSA authority cost. Yeah, they go through and do all these 1244, 1245 studies after the fact and they say, well, what is the real value of that five year property? Because if the five year property is very minimal and we've had it seven years, so it's basically we're saying theoretically has no value at all, then we can put more, write it off and that just means more they gain will be taxed other ways more favorably capital gain. Exactly. So that's what our second step, the first again being the passive losses. See if we could get those to help off some of our gain cost saving. 1245. Just talk to them, bring up CSA partners and say hey, I'd like to have a free estimate on a 1245 study. Think of selling. I've held it for seven years. If you add it, just something to consider. 10, um, 31 what we got going on there?

Speaker B: Well that's what we, that's the first thing we look at in real estate, right? Well, maybe not the first thing. The first option we, you know, do nothing or release pals. Those are easy. But 1031 exchange is always going to come up in real estate. This is one of our primary methods for deferring the tax. Remember, this is just kicking the can down the road. We're deferring the tax. Deferring the tax. But if we hold these properties for our, the rest of our lives and pass them on to our heirs, there's never any tax due. The tax eventually gets excluded, completely wiped out completely. But a 1031 exchange. So if we have a property that's gone up a lot in value, we know we're going to get hit with a big, uh, capital gain tax. It maybe want to reinvest into another piece of property that we found. As long as we trade up in value and up in debt so we pay more for the property, then we can defer all the gain, all the depreciation, recapture. That's, that's a excellent option to look at.

Speaker A: The lazy 1031 really is a close cousin, almost identical in theory to the pals.

Speaker B: Yeah.

Speaker A: Ah, we just, in the year you sell, go and pick up another rental property. This is if it's more usually in the passive realm. Again, it's not active or. Excuse me, you haven't had real estate professional status or anything like that, but you could get another property, do a cost segregation study. At, uh, most depreciation, you're creating a lot of passive losses that again will be released in the year that you sell, uh, that other property. So it's really a combination. It's a further step with number one, you're just buying a new property. You're not really doing an exchange. We call it a lazy 1031 because you're not going through any of the formalities or anything like that of a true 1031. But it helps wipe out a lot of the gain. So it's a very effective tool as well. Last capital gain harvest. If you have any other assets out there that have, you know, would create a capital loss, well, after you get through all this calculation, you have some element of capital gain left over, which is what we're talking about. How to minimize our capital gains. Just start selling other things at a capital loss if you know they're not going to do you any good later on, well, now's the time to use them and you'll set them up because that's going to offset those capital gains as well.

Speaker B: Yeah, great question there. Let's see. Anything else we want to touch there for 10 years? What do I want to meant cost?

Speaker A: Sorry.

Speaker B: No, no, no, no. That's It. I was just making sure we touched on everything. Yeah. Oh, I know what I was going to say. Back to the original question, which how can we offset our W2 with depreciation losses, right? Creating an active loss. Well, I just want to clarify. If you just have passive income, you don't need rep status. Just like we just went over. You can just be looking for rental properties, do a cost segregation study, take a large passive loss. If you just have a bunch of passive income in, that's a win. We don't even really have any steps after that. So just keeping that in mind, that can certainly be an option as well. Similarly, kind uh, of on the same line here. Can a long term capital loss from the sale of a business. We just talked about the sale of a rental. Can a long term capital loss from the sale of a business be used to offset long term capital gains from the sale of a personal residence? You guys can see a lot of these change terms are going to be interchangeable here. We had, you know, maybe we sold a rental or m, uh, and we had a loss or sold a business. We have a capital gain and a loss on a rental capital assets. Capital gains is what we're talking about here. Primary residence, ironically, even though it's not a business asset, it's considered a capitalized asset. It's matched to the. Match to the, the crime matches the punishment, if you will.

Speaker A: So what we're looking at here, just breaking down, we've talked about this on many shows. When you sell a business, you have two types of sales. It's either going to be a sell the assets or it's going to be a sell the stock, sell the assets. You get into a lot more complexity. But it can, you know, it's typically what you're going to see because it's more favorable to the buyer.

Speaker B: Oh yeah, thank you for touching on that. That's a first things we got to look at.

Speaker A: Of course when we do that, these assets are typically 1245 property, which doesn't mean a whole lot to us initially necessarily, but it does from a tax perspective when you sell something because it means that if you had, in this case, as they mentioned, it was an overall loss from the sale of the business. If it's a sale of assets through the complexity of the code, what really happens with most of those assets is you have what's called 1244, excuse me, 1231 ordinary loss through those assets. It's an ordinary loss. And that means, we talked about that uh, earlier. When you have an Ordinary loss that offsets any, any gains on your return. I don't care where the income came from. So that's something you want to keep in mind. And that's what they mentioned in the call. The question is that hey, this was a loss on the sale of the business.

Speaker B: Capital loss.

Speaker A: If it's a sell stock, it's simply just like you sold a stock of Boeing. Did you have gains or losses? What's capital activity?

Speaker B: So if there was your basis sales price line is basis. Yep.

Speaker A: And it's going to be a capital loss in this case. And yeah, that offset capital gains. But when we get down to the house, we got to first contend with something called 121. And actually before we do that, we have to contend with did I ever use it in a trader business? Maybe, maybe I'd rented this out before and then I moved into it, made it my home. Maybe I had an office that I use and I took depreciation on or something like that. So when you sell a house, let's say the gain was 700,000. Original basis was a hundred, but you'd taken 20k of capital of depreciation on that. So your, your, your, your first gain here of 600k, you're gonna have 20. The first 20, 000 is going to be depreciation recapture. If you did use it in a trader business, that leads us with a 580. And then we run into 121. What's going on there?

Speaker B: Uh, we love that one because it contains this magical tax word exclusion gone forever, not deferred, not kicking the can. Section121exclusion as it relates to your primary residence basically says if you pass what we call the ownership and use test, if you own the property, which you likely do, and you live there two out of the last five years. Again assuming it wasn't a rental before, because that would create a period of unqualified use that would eat away at our section 121exclusion. But if we pass the ownership and use test, two out of the last five years, we hold title, the property, all that stuff, then we can exclude $250,000, single, married, 500,000 exclude $500,000 from the gain, which don't have to pay tax on it. So that's certainly the thing with one thing we want to look at. This is another number that just hasn't gone up in a long. That was a big number when it first.

Speaker A: Right. It's not sold.

Speaker B: It's still kind of a decent number, but that probably should be about double what it is, but yeah.

Speaker A: Again, TL what's that? Week T. Yeah, right. Yeah. A lot weaker than it was, but, uh, we take that 500,000. Let's say we're married. Flying joint against our 580. Now we only have 80,000 again. And if we had 80,000 of capital and that's capital gain and we had sell stock, well then now we can marry that up, right?

Speaker B: Yep. Capital gains, you'd be pulled. Schedule D, for those of you following along in your tax returns there. Short term gains, net net, long term gains, net net, and then the net they net together. So our capital losses and capital gains all kind of get pulled into one eventually.

Speaker A: A lot of netting.

Speaker B: A lot of netting. What else on this one?

Speaker A: That's pretty much it. That's what I had. One more. Yeah, Personal reserve covered that again. Appreciation recapture we use in the business. I think we're good on that.

Speaker B: Excellent.

Speaker A: Last one.

Speaker B: All right, a little technical one. What's it? A non dividend. Our non dividend, by the way. Great, great work today, guys. Last question. We're going to do a little wrap up here in a moment, but just to make sure we don't leave you hanging here. Are non dividend distributions considered return of capital and therefore not taxed? What are we asking about here?

Speaker A: We got a lot going on. So what we're saying, and we're talking the corporate world here, when we talk about dividends and things of that nature. So if you have money that you're going to give out as a dividend to the shareholders, the first thing you look at is what is, what is the current year in accumulated earnings and profits and that's something that's tracked in your tax return. Okay? And so let's say we had 150 of that current and accumulated earnings and profits and we want to give out a dividend of let's say $500. Well, the first 150 is going to be a dividend and that typically means capital gain. Okay, so the first 150, that leaves us with 350, uh, left over at this point. And the rest is. The next part is a non dividend, which means it's a return of shareholder basis. So if you had a hundred dollars of shareholder basis, it's supposed to be a hundred.

Speaker B: So that basis term again.

Speaker A: Right. Keeps coming back up a lot. Oh boy, does it. And so our 350, the next 100, you wouldn't have any taxation. What? Because you're just getting your basis that you originally purchased that back in. So now your, your value of your shares is zero. If you ever sold those are going to be completely taxable. But this is a non dividend. That means you're getting your base shareholder basis back. That leaves us with 250. And the last that is going to be treated as if you sold property. Which just means capital gain. Yep, capital gain. You got it on the 250. So that's the ordering that the tax code makes us go through in order to get through all this. And that's where we get a non dividend distribution. That means return of shareholder basis.

Speaker B: Right, Part of it, return of the capital, the rest of its capital gain. Exactly.

Speaker A: Kind of fringe territory. A lot of these questions fail. We do a plane with the bread and butter rental. We even got that in there today.

Speaker B: But um, yeah, great work today guys. Kind of all over questions, Great questions as usual focusing on the real estate small business. Great questions today. Hope you guys got a lot of value out of that. Once again, sign up for the YouTube channels. You guys know the drill. Clint Coons, Toby Mathis live events coming up. Come down to Dallas, come see us in Dallas. Would love to see you there. Schedule a strategy session right now. You can scan that code and hop on and talk to one of our advisors. Get that ball rolling. But yeah, thanks again for. Go ahead sir.

Speaker A: A uh, real quick, thanks to Jennifer Dutch, got Harry, Jared, Jeffrey. Yeah thanks Tanya, Troy and we got Jacob in the back. Yeah, they are the ones doing all the heavy lifting.

Speaker B: We just gonna so appreciative and we

Speaker A: thank you and give them a hand if you would.

Speaker B: Yeah, yeah. I hope you guys got a lot of value out of this. Hope to see you back here in two weeks. Submit questions, participate. Right, let's, let's get, let's get down to it. Let's get in the weeds and get this figured out. Dirty, fast, fun, educational. We want to bring these concepts to you but you know, certainly this is, this is where we really want to start applying these strategies and start, start seeing these tax savings. Email your questions. Ah, we'll go through them. M here in another couple weeks. Go visit the website, let us know if you have any questions. Otherwise we'll see you back here in two weeks. All right, thanks guys. See you next time. Thank you for listening to today's podcast. Show notes for links to everything mentioned in this episode can be found on our website@andersonadvisors.com podcast. Be sure you subscribe to our podcast and if you are already a subscriber, please provide us a review of what you thought of this episode.