The Best Entity for Real Estate Syndications and Maximum Tax Benefits

Tax season is in full swing, and in this Tax Tuesday episode, Anderson Advisors attorneys Amanda Wynalda, Esq., and Eliot Thomas, Esq., tackle numerous listener tax questions with practical advice. They discuss the Section 121 exclusion for primary residences, explaining how married couples filing separately can each qualify for the $250,000 capital gains exclusion. They outline strategies for converting personal residences to rental properties using S-corporations and installment sales to maximize tax benefits. Amanda and Eliot clarify 401(k) withdrawal rules, explaining when penalties apply and options like the Rule of 55 and hardship withdrawals. You’ll hear recommendations on optimal entity structures for real estate syndications, explanations of the short-term rental "loophole" for active income classification, and when to use trading partnerships versus simple LLCs for investment accounts. The episode concludes with a breakdown of key Tax Cuts and Jobs Act provisions set to expire in 2025, including individual tax brackets, standard deduction changes, child tax credits, and bonus depreciation, highlighting potential impacts for taxpayers.

 

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Highlights/Topics:

 

• "I understand that you can sell your primary residence and receive an exclusion from capital gains taxes on the first $250,000 if you're single and $500,000 if you're married filing jointly. However, I can't find any rules regarding if you're married filing separately. Could you please confirm if married filing separate also qualifies for the exclusion? Also, could you talk about how making improvements adds to the basis?" - Yes, both spouses filing separately can each get the $250,000 exclusion. Only one spouse needs to be on the title, but both must use it as a primary residence for 2 of the last 5 years. Improvements (new floors, additions, HVAC systems) add to your basis, which reduces taxable gain when you sell.
• "Can I use both cost segregation and bonus depreciation from an S-corp you sell your personal residence to for the Section 121 exemption? Also, what is the accounting treatment if you sold your personal residence to an S-corp using an installment sale?" - Yes to cost seg, no to bonus depreciation (not allowed for related-party transactions). For accounting, record the property as an asset on the S-corp with a liability for the note owed to you personally. You'll recognize all gain in year of sale (which is actually beneficial to utilize the Section 121 exclusion), and interest payments will be recorded as interest income.
• "Do I have to officially quit my job and be retired to take disbursements from my 401k? At what age can I take disbursements from my 401k? Are there any negative tax implications from taking early disbursements?" - You don't need to quit your job to take distributions if you're 59½ or older, though your specific plan may have different rules. Early withdrawals before 59½ incur a 10% penalty plus ordinary income tax, unless you qualify for exceptions like the Rule of 55 (if you leave your job at 55+) or hardship withdrawals for specific situations.
• "What is the best entity for tax purposes to invest in real estate syndications?" - A Wyoming LLC (disregarded) or partnership is typically best. This gives liability protection while letting income/losses flow directly to your personal return (important for using passive losses). Avoid S-Corps (reasonable wage requirements) and C-Corps (trap gains/losses on corporate return).
• "Regarding bonus depreciation and the short-term rental loophole, are either the 500 hours or 100 hours and, more than anyone else, material participation tests prorated for the year? For example, if a property is purchased and put into service in November, those hours would be difficult to achieve." - No, these hours are not prorated. You must meet the full hour requirements