Should you consider switching from a Limited Liability Company (LLC) to S corporation? Not if you and your business partner have an LLC for your real estate investments that is an LLC taxed as a partnership. There’s no reason to convert it to an S-Corp.

In this episode of Tax Tuesday, Toby Mathis and Jeff Webb of Anderson Advisors provide answers to your tax questions. Submit your tax question to taxtuesday@andersonadvisors.

Highlights/Topics:

If I buy an existing home inside an opportunity zone, will I be able to save tax on the capital gain if I keep the property for 10 years? Qualified opportunities had three benefits. The deferral, step-up, and payout. You still get the deferral. It's a shorter deferral now, but you still get it. The step-up in basis is now gone. You've got a 10% step-up in basis of your property that you put into the opportunity zone. The payout is if you hold the property you put in there for 10 years, that's tax free and still exists. The one thing that's missing is that 10% step up-in basis.

We sold a single family residence in December 2021 and in the process of a 1031 exchange. Can our expenses, such as repairs, painting interior, and replacing carpet, be deducted as expenses, or used to increase the cost basis of the property? Although the word, repairs, was used, carpet and paint is always deductible as a repair. You never capitalize that. Anything that's truly repairs, write it off as a rental expense. If it goes to basis, you're not getting any benefit out of it.

My business partner and I have an LLC for our real estate investments. Our LLC is taxed as a partnership. Would it be better to convert our LLC to a S corporation? If so, why? No, there’s no reason to convert it to an S-Corp.

I incorrectly allocated too much building versus land. I understand that my depreciation expense will decrease. How do I correct my tax returns for a basis error on my vacation rental property? This is a change in accounting estimate, which means if it's wrong on last year's return, you go in and correct the numbers on this year's return. If you mess up something on a return, but thought you were correct when you did it, you are not under any legal obligation to go back and restate it.

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Resources:

Opportunity Zones

https://www.irs.gov/credits-deductions/businesses/opportunity-zones 

1031 Exchange

https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

Form 3115

https://www.irs.gov/forms-pubs/about-form-3115

Section 121

https://www.irs.gov/pub/irs-drop/rr-14-02.pdf

Toby Mathis

https://andersonadvisors.com/tobymathis-2/

Anderson Advisors

https://andersonadvisors.com/

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