October 01, 2024

Can You Use a 1031 Exchange for Property Flips Under One Year?

50 minutes

In this episode of Tax Tuesday with Anderson Advisors attorneys Eliot Thomas, Esq., and Amanda Wynalda, Esq., we dive into essential real estate investment strategies and tax implications for property owners. Discover why selling a rental property to your LLC is considered a prohibited transaction and learn how to protect capital gains from your primary residence using the 121 exclusion. We discuss the limitations of 1031 exchanges for properties flipped within a year and outline how to determine a reasonable salary from your S-Corp while considering payroll taxes. Additionally, we clarify the requirements for maintaining real estate professional status, the treatment of capital gains within an S-Corp, and the nuances of deductions for short-term rentals. Tune in for valuable insights to optimize your investments!

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Highlights/Topics:

I just purchased a property through a self-directed IRA and LLC. I own a rental property. Will I be able to sell the rental property to my LLC? - No, you cannot personally benefit, this is a prohibited transaction.

How can I protect the capital gains from selling my primary residence after adjusting the cost basis? And after taking the 121 exclusion and utilizing that money for investment purposes. - If the home was used as a personal residence for two of the last five years, you might be able to take some money off - it's 250,000 if you're single, 500,000 married filing joint.

Can I use the 1031 exchange when flipping properties under one year of ownership? - The IRS looks at the property as “inventory.” So although it is being used in a ‘trade or business’ you can’t use the 1031.

How do you determine the right pay for yourself? Is it worth the taxes you pay into Medicare and Social Security? So far, we've paid $30,000 in payroll taxes. Will that go towards our tax bill at the end of the year? - You have a ‘reasonable salary requirement’ from an S-Corp. It ranges from 38% to 60%.

What minimum must you do to maintain your real estate professional status and not be considered a dealer if you intend to flip a house? - REP status is when you spend 50% of your personal services time and at least 750 hours in your real estate trade or business.

What happens with the capital gain from stocks or from the sale of a rental property when inside of an S-Corp? - It is not ‘ordinary income’- the building is under “separately stated”.

What is the list of deductions with a STR that's a short-term rental for those of you in the know in the REI, as passive income when material participation is not met compared to a list of deductions when material participation is met? - There is no difference between passive and non-passive deductions. Google IRS PDF Schedule E.

If I volunteer my work or time at a nonprofit, is this tax-deductible? - the short answer is no, but you can deduct things like mileage

I have a W-2 and 1099 income. Bought a house to flip. How can I best take advantage of this financially to save on tax? - you may be able to run certain deductions against your income.

How does rental property via an LLC affect personal taxes? - we get this question all the time recently. Set up in a disregarded LLC, no impact at all on your personal taxes.

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