Here’s How to Reduce Taxes When Investing

Welcome to another episode (#197!) of the Anderson Advisors Tax Tuesday show. Host Toby Mathis, Esq., joins our regular guest Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, to help answer your questions.

On today’s episode, Eliot and Toby answer listener inquiries including the requirements and tax implications for selling your home to a relative in installments, how to minimize taxes on profits from crypto-trading, and the pros and cons to investing in stocks within a Roth or Regular IRA/401K.

If you have a tax-related question for us, submit it to taxtuesday@andersonadvisors.

Highlights/Topics:

• "Is there a tax ramification of selling my personal home to my daughter via an installment sale? I have lived in the home for more than two years as a primary residence. Will I be able to still use their section 121 exclusion, even though I'm selling to a related party?" – You can sell to your daughter and still be eligible, provided we meet all the other boxes…You can sell to a related party, but you have to recognize all the gain up front.
• "I'm considering taking a small salary from my stock trading business. It's a dual LLC Partnership, which means a C-corp and a partnership through Anderson later this year if the C-corp ends up with taxable income. What are the tradeoffs of deferring that into a 401(k), both positives and negatives like income, payroll taxes, and benefit of paying those for Social Security calculation, et cetera?" - As Toby always says, this is a calculate, calculate, calculate moment. If you take it out as salary, then one consideration—there are a lot of different variables here—is your personal tax rate below 21%?
• "For our C-corp, we're aware that cleaning services of our personal residence can be deducted from our corporate taxes." It can? Well get into that. "Would the total expense of cleaning be a write-off or would only a portion of the total expense be a write-off since the entire house is not used for business? Would lawn services be treated the same way?" – if you are using part of it as a home office deduction or administrative office reimbursement deduction, either way, you can throw in an element for the cleaning…
• "When starting my Infinity Investing journey, should I start purchasing stocks inside of a type of retirement tax-deferred account of some sort, or should it be outside of that in order to use it for leverage or some real estate investing later?" - Here's the easy rule. If you're in a higher tax bracket than you will be when you retire, defer it. If you are in a lower tax bracket now than you will be when you retire, then put it in a Roth.
• "I have been learning and experimenting with earning dollars through crypto trading. Can you please tell me how to minimize taxes with profits earned through crypto platforms?" – we do the same trading partnership that we talked about earlier. Set up a partnership, put the account into that partnership.
• "My California CPA said that regardless of what type of entity I put my California rental property in, California will still want to get the $800 franchise tax board fee." The Board of Equalization fee. That's the minimum fee they charge. "Would that be true even with a Wyoming Statutory Trust?" - Chief Counsel's Office has already said it's treated as a business trust, and it's not taxable. It's not subject to the $800 a year, period, full stop.
• "Does a cash out refi adjust my basis and multifamily apartments? If not, how can we step up in basis before I sell if I have a lot of equity and depreciation already taken?" - Generally speaking, a refi, all you've done is you've changed your equity in your house into cash. You're just changing asset to asset. That doesn't change your depreciable basis in that property.
• "How does the Corporate Transparency Act impact the timing of real estate investment decisions from a tax efficiency perspective?" - It doesn't have any impact on your taxes whatsoever. This has nothing to do with taxes at all. I just wanted to get cleared out there for those who are listening.
• "In creating a living trust, is it necessary to pay capital gains tax on real estate assets as they are transferred into the trust?" - This is really simple too. There's no taxable transaction moving assets into a living trust. It's a revocable grantor trust. You haven't done anything in the way of taxes.
• "I have carried a $600,000 loss since 2011. I am a real estate professional with an S-corp. Is there an alternate way to use that? I can't live long enough at the $20,000–$25,000 max deduction." - You need passive income. You need lots of passive income to wipe out that passive loss. You want to recognize that passive income. You probably don't want to be a real estate professional.

Resources:

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