Demystifying Cost Segregation: How Landlords Can Maximize Tax Savings on Property Investments

In this episode of Tax Tuesday, Anderson Advisors attorneys Eliot Thomas, Esq., and Amanda Wynalda, Esq., dive into various tax strategies. You’ll hear about renting property to your business, self-rental rules, and IRS grouping options. Then, we address the sale of a California primary residence, including the $500,000 capital gains exclusion for married couples. We’ll explore cost segregation for landlords and the 1244 stock loss provision for individuals. We also have answers about tax implications for C Corps, including reimbursement rules for accountability plans and transitioning from LLCs. Lastly, we touch on Opportunity Zones, rental property sales strategies like 1031 exchanges, and the tax impact of converting a rental to a primary residence.

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Highlights/Topics:

 

• So can I rent real property to my business? - Check self-rental rules, and the ‘grouping’ option from the IRS
• Just sold our primary California residents in July for a million and ninety thousand dollars. We purchased it five years ago for six hundred and fifty thousand, with three hundred thousand down and a three hundred fifty-thousand-dollar mortgage. Any taxes due considering the 121 married filing joint exclusion of five hundred000 capital gains. - We're going to look at the sales price, less our ‘adjusted basis.’
• Could you give an example about cost segregation? Have you heard? I have heard you talk a lot about it and they're kind of confused. I'm thinking about becoming a landlord. How can I do a cost segregation on, for example, the appliances that come with a purchased property? - The building itself has straight-line depreciation over many years. Contents of the building are depreciated at different rates.
• Is the 1244 stock loss provision, a $50,000 tax credit, that is dollar for dollar, against your 2024 interest, social security and passive incomes on your 1040 for 2024. - 1244 is only applicable to individuals, as a deduction/loss. It reduces your taxable income.
• When using the accountability plan for a C Corp, do the charges have to be made from the employee's personal account to qualify, and what happens if those charges are made on the company credit card? - The individual needs to pay for them first personally of their own pocket for a reasonable business expense, then submit for reimbursement.
• We purchased our first commercial building this year. Even though I knew in the back of my mind the property was in an opportunity zone, it did not hit me until a couple days ago. Is there still an advantage for us to go into the opportunity zone route? I believe the only benefit at this point is a 10-year mark and step-up in basis. Is this correct? I believe there would be some elections we would have to make in a fund. Can you explain how it all gets set up and what we would need to do? - Once you obtain that property, a stopwatch starts, and you have 30 months to substantially improve it. You had to put the funds into the Opportunity Zone fund, which is the business entity, and then purchase the property there, not going to be able to back into it.
• We are changing our LLC from being disregarded to being a C corporation. Over the year we have moved substantial money from our LLC to our personal accounts as distributions. Do we need to relabel those as dividends and would we be able to transfer the funds back, or does the C Corp election only affect forms from the date of transition, meaning we'll file a split return 1040 for a disregarded entity, 1120 for the C Corp? Thank you for all the great media you guys put out. - Nothing happens with the previous activity, but going forward you can’t take money out in the same way.
• We have rental property bought originally in 1991 as our residence. The current tenants want to purchase the property. What is the best way to approach this? To lower capital gains, we are considering using the funds either to purchase another property or invest in tax liens and deeds. - You have a lot of options. Installment payments, interest from seller financing, or 1031 exchange
• What are the tax implications of moving into a house that has been held as a rental for 12 years? They've never lived in it themselves. - What is your value/investment in the house? That becomes your adjusted basis when you move in, for future tax purposes. Many items are no longer deductible if they become your personal residence.
  
  

 

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