Anderson Business Advisors Podcast Turning Your Home into a Rental: Keeping Your 121 Exclusion Intact
n this episode of Tax Tuesday, Anderson Advisors attorneys Eliot Thomas, Esq., and Toby Mathis, Esq., tackle a variety of listener questions. Topics include strategies for managing cryptocurrency gains, converting a primary home to a rental without losing the 121 exclusion, and navigating the primary residence exclusion when selling a home. They also discuss the benefits of forming an LLC for consulting income, handling rehab costs for a fix-and-flip property, and meeting the Real Estate Professional criteria for tax purposes. Toby and Eliot dive into depreciation recapture, 1031 exchanges, and how to structure property ownership to avoid taxable events. Tune in for expert insights on real estate and tax strategies for investors and homeowners alike.
Submit your tax question to taxtuesday@andersonadvisors.com
Highlights/Topics:
- By crypto, I bought $125,000, $24,000 invested $30,000 is now over $1 million, scared to sell because of the 35 % tax. Hold on until $125,000, $25,000 for 20%, but I'm scared the price is in my portfolio. How can I get around the 35 % legally? - If you will have other losses from other sales, you can use those to offset in the short-term…
- How do I convert my primary home into a rental without losing the 121 exclusion? - You can do this but you must meet the 5-year primary residence provision.
- My wife and I are selling our primary residence. We'll be listing the house for sale before we have lived in it quite two years. But assuming that closing takes about 90 days, it'll be over two years at the closing. Will this be acceptable for using the primary residence exclusion? - The clock starts when you have the title in possession, so the clock also STOPS when the new buyer takes possession of the title.
- I will be starting a consulting position in December. Is it better to create a LLC to receive wages or should I receive funds in my name? What are the benefits of creating the LLC? - If your employer agrees to pay you with 1099, you should have an S or C Corp LLC to protect your wages.
- We haven't sold our fix-and-flip property After one year and are considering renting it instead How should we handle the rehab costs and office expenses and our tax return? The property is held in a disregarded LLC. - First we have to establish your “intent” - if you weren’t sure… you’re ok to leave it in that disregarded entity.
- I've never been able to claim real estate professional due to a full-time W2 job. As of December 31st, 2023, I took early retirement. However, I was paid a severance until December 2024. During 2024, I have been leasing, advertising, physically rehabbing new property, responding to maintenance, etc. I'm also a licensed real estate broker in Kentucky where my properties are. I materially participate in 100 % of the rental activities. Can I claim real estate professional for 2024, even though I was being paid severance but not working my previous corporate job? - Yes, you can, as long as you meet the REP criteria.
- When calculating capital gain from the sell of a rental property is the gain from the depreciated cost basis or cost basis after the depreciation recaptured. It's the gain from the recapture cost basis or cost basis. For example, I bought at $100,000, sold at $200,000, that's how you're supposed to do it, had $50,000 in depreciation. Woo. Would it be $100,000 capital gains tax plus the tax on the $50,000 depreciation recovered or $150,000 capital gains? - The first 50,000 is what's subject to depreciation recapture…the 100K is “straight capital gain”
- I know it's a broad question, but would love for you guys to discuss depreciation recapture at sale after cost segregation has been formed on an investment property. If it helps, you could do, it could be a cost segregation on a pizza shop. - it depends on the different categories of whatever was in the building.
- Our rental LLC owned by a Wyoming holding LLC sold a Toronto property for a huge gain. We hear all these huge gains today. Like all you guys are making money, but we plan to 1031 rates. Our qualified intermediary informed us that the replacement party property should be under the name of the same LLC that sold the property. How can we move the ownership of the 1031 new property into a new LLC without triggering a legal and /or taxable event, how can we protect the assets of the new property if we can only be under the name of the old rental LLC? We want to dissolve the old rental LLC. - if you do this properly through a qualified intermediary, that's a neutral third party that handles all the funds, you may be able to defer all the gain.
- We are a group of four investors and we have an apartment rental complex, 12 units, and a separate single-family rental. We would like to exchange both of those properties and invest into a motel. Can we exchange the residential rental properties for a business real estate property? - Yes is the quick answer, must be “used in a trade or business”
Resources:
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