How to Avoid Costly Capital Gains Taxes When Selling a Rental Property

In this episode, Anderson Advisors' Barley Bowler, CPA, and Eliot Thomas, Esq., tackle listener tax questions spanning real estate, trading, and business structures. They explain how California's clawback rules and residency tests apply to precious metals gains when relocating to Tennessee, and outline how a trade structure with a corporate partner can shift trading income while avoiding personal holding company tax. Barley and Eliot also cover entity options for leasing a personal vehicle to a business, the filing requirements for out-of-state rental income, and how a property management S-Corp can be used to offset W-2 income through short-term rental material participation. Other topics include strategies for minimizing capital gains on a long-term rental sale — including 1031 exchanges and cost segregation studies — offsetting capital gains from a personal residence sale with business losses, and how non-dividend distributions are taxed as a return of capital. Tune in for expert advice on these and more!

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Highlights/Topics:

00:00 Intro to Tax Tuesday with Eliot and Barley

08:06 — "I've lived in California for decades but am now moving to Tennessee. Once in Tennessee, I will sell some of my precious metals to go toward buying a personal residence. Will California try to claw back taxes on the precious metal gain since I purchased it while living in California? How long do I have to be a resident of Tennessee before I am under Tennessee taxation rules for selling precious metals?" — Clawbacks don't apply; timing and residency ties to California matter most.

18:24 — "As an equity options trader (not eligible for TTS status), what is a good entity structure for tax advantages when my partner has an SMLLC for business?" — A trade structure with a C-Corp partner shifts and protects gains.

26:05 — "I have a trading structure. Please explain the tax treatment guidelines when investments in securities are sold, when a K-1 is triggered, etc." — Gains split by ownership percentage; K-1s issue once the 1065 is filed.

36:05 — "I'm wondering if I can purchase a vehicle and lease it to my business year by year — is that a possible tax advantage for a private investigation business?" — Possible, but reimbursing mileage through an S-Corp is simpler and safer.

44:20 — "I live in Washington State. If I buy a rental in Oregon, do I have to file Oregon tax and pay Oregon tax on the property located there?" — Yes — the source state taxes rental income regardless of residency.

47:02 — "I run three Airbnb properties and have an LLC taxed as an S-Corp that I use as a management company, where all revenue and expenses flow into it. It does not take depreciation since the LLC doesn't own the property — we have the deeds in our personal name. How can I take advantage of the loss and depreciation to offset our W-2 in this case?" — Short-term rentals need material participation, not REP status, to offset W-2.

1:04:27 — "How can I avoid or minimize capital gain taxes if I sell a rental property I've had for seven years?" — Use passive losses, a cost-seg study, 1031 exchange, or capital loss harvesting.

1:10:32 — "Can a long-term capital loss (from the sale of a business) be used to offset a long-term capital gain from the sale of a personal residence?" — Yes, after applying Section 121's home-sale exclusion and depreciation recapture rules.

1:15:24 — "Are non-dividend distributions considered a return of capital and therefore not taxed?" — Only partly — earnings, then basis return, then capital gain, in order.

Resources:

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