Understanding 1031 Exchanges for Real Estate Investment

Welcome to another Tax Tuesday episode of the Anderson Business Advisors podcast. Today on the show, attorney Toby Mathis, Esq., is joined by Scott Estill, Esq., a former senior trial attorney with the IRS. Scott and Toby dive into how to defer capital gains taxes on real estate with a 1031 exchange and discover the best way to leverage your LLC for tax savings. You’ll hear about maximizing contributions to solo 401ks, deducting startup costs, and the tax implications of fix-and-flipping properties.
Submit your tax question to taxtuesday@andersonadvisors.com

• 1031 exchange - What are the other options besides investing in one single property and how do I find them? - a 1031 is basically just a way to defer taxes and with proper planning. Up to 200% of the amount is what you can identify as other potential properties.
• As a 1099, what is the best way to leverage my LLC to save money on taxes. How can I save on self-employment taxes? - We need to know what type of LLC you have set up. If you set up an S-Corp, your salary can take out the employment taxes.
• I have a C-Corp that allows reimbursements for medical expenses. Is there a limit to the scope of the type of medical expenses eligible for reimbursement? I plan to reimburse for monthly premiums, plus out-of-pocket co-pays for annual procedures, checkup, etc – Your C-Corp is correct, and you’re limited to what the IRS Pub 502 lists out. (No weed, no cosmetic surgery!)
• I've just set up my entity with you guys, but I've already been doing business. Will I be able to write off startup costs that predate the actual formation of my entity? - You can write off $5K first year, and amortize the rest.
• How do I pay myself from my LLC if it is taxed as a partnership? In other words, what tax forms do I fill out to show the IRS that my LLC paid me for my work? - In a partnership you don’t issue a W2, but you get a “guaranteed payment” - You use a K-1, not a 1099.
• Can you use credit card statements as proof of expenditures? - Be prepared, the statement itself is not sufficient for the IRS, you need an itemized list. Write notes on all your business expenses so you have a record if audited.
• When calculating employer contribution to solo 401k, how does bonus depreciation affect the number? What if I do cost seg and wipe out most my income? Can I make an employer contribution? - Not sure how these elements are related, but the employer could contribute up to whatever you got as wages, period. But they can only deduct 25%.
• Would I be able to donate a property to a nonprofit organization and get the tax right off the sale year if the property was purchased in the same year? - So you have to look at any donation. the calculation here is fair market value on the date of the donation.
• What tax implications, inefficiencies do I need to keep in mind when doing a fix and flip?- There are some pretty serious tax implications if I don't structure the business properly. If you’re doing multiple, you’re a dealer, and you will have self employment tax.

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Scott Estill, Esq.

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