Flipping Real Estate With An LLC: Tax Pros and Cons

Welcome to another episode of the Tax Tuesday show. Host Eliot Thomas, Esq., Manager of Tax Advisors at Anderson Business Advisors, welcomes Kurt Bergfjord, CPA for Entrepreneurial Business Services at Mazars, to help answer your questions. We send a big thank you to all our people online answering your questions today including Dutch, Sergei, Jared, Kurt, and many others.

On today’s episode, experienced tax advisor Kurt Bergford and Eliot discuss the three capital gain tax brackets, tax tips for real estate investors, S-Corps and LLCs, and financial planning strategies for families.

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

Highlights/Topics:

• Is it true that you don't pay capital gains or dividend taxes if you make less than $40,000? If your total combined income is under 40K, there are no such taxes.
• I've been contributing to an HSA for several years. Can I withdraw funds from an HSA for prior medical expenses without a penalty? If so, how far can I go back? - as long as you have receipts, hold on to them and get the reimbursement in later years.
• Filing out state taxes. What are the pitfalls? Do we have to submit a whole state return if you have an investment in that state? - Your ‘resident state’ will tax your income from other states. You may have to file a non-resident income tax return in other states.
• Our LLCs, taxes of Partnership sold five long-term rental properties and it acquired one new rental property in a 1031, light, kind exchange. The original LLC still owns additional properties. How soon can we move the newly acquired property into a new LLC to be taxed as an S corporation? - Its not so much about the time frame but moving from one taxpayer to another ..it may disqualify your 1031
• We decided to be treated as an S corp. I've heard that we need to determine our W-2 salary based on our level of engagement each of the members have in the business. How can we determine our percentages? - To determine the percentage of ownership in an S Corporation, consider factors such as comparable technical knowledge, experience, and the average wage for the role.
• I'm thinking of transferring my primary residency into an LLC that I own and turning it into a rental. Can you explain how I should make the transfer so that I can get the 121 exclusion and have higher basis for the property in the LLC? - The 121 exclusion can be utilized by selling the primary residence to an LLC taxed as an S-corp, allowing for rental property depreciation.
• Can you speak about how options are taxed… would I pay capital gains on the spread or the total I received? Is it a capital loss? Is the cost basis lowered? Brokerage displays a lower cost-basis…This is difficult and complex…the credit spread occurs when you sell at one strike price, and buy another at different strike price…
• Do you recommend putting a flip into an LLC, If we buy and hold, later decide to sell, how does one change the LLCs, and how important to have the same address on the LLC… Living Trusts- should every property be included? Would you add homes if you’re only going to have them for 6 months. – Yes, if you’re flipping, don’t put it in your name. We want liability to stay in the LLC. You can use the same name but we don’t recommend it.
• Filing my 2022 as an S-Corp, my CPA recommended a profit-sharing plan, can I put it into a SEP-IRA, which do you recommend? - You need earned income from the business.
• I heard I can pay my kids without tax implications, what can I pay them? - Great strategy, put them to work, it's a tax deduction to your business. They need to do actual work. In 2023 it should be lower than their standard deduction of $13,800.
• Rapid-fire chat questions answered at the end of the show

Resources:

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