Episode Transcript
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Speaker 1 (00:00):
Hey, if you're
looking to buy a new home and
then rent your existing homewhere you live right now, you're
going to end up paying a lot ofcapital gains taxes when, in
the future, you end up sellingyour existing home.
I will show you how to avoidthose future capital gains taxes
on the appreciation of yourexisting property by putting it
(00:21):
into S-Corporation.
It's a great tax strategy.
It's a wow tax strategy.
I will show you exactly how toget it done right.
Ready, let's get going.
Speaker 2 (00:31):
Welcome to the Tax
Reduction Podcast for
money-making entrepreneurs withBoris Mushaev.
Boris has helped entrepreneursacross the United States
collectively save millions ofdollars in taxes with the power
of tax planning and advisory.
The only way you, the businessowner, can save money on taxes
is by using proactive taxstrategies, and this podcast is
(00:57):
all about saving you money ontaxes.
Boris will share with youin-depth and easy to understand
tax reduction strategies thatyou can implement in your
business within 30 days or less.
Let's jump into today's episode.
Speaker 1 (01:05):
Let's get started
with this Now, the way we're
going to break this down intothree easy steps, right?
First of all, we're going totry to understand why is it that
you should sell your personalresidence to an S corporation to
rent it out?
Again, I'm talking about thecase where you want to move into
a new home and you want to rentyour personal residence, but
what we want to do is put itinto an S corporation and rent
(01:26):
it out of there.
So we're going to talk aboutwhy, we're going to talk about
how it works and then, the mostimportantly, we're going to talk
about a tax strategy and anexample.
Now I've actually put togethera checklist for you to follow.
Okay, checklist and thecompliance, the free PDF, it.
Take it to your accountant anddo not attempt to implement this
tax strategy by yourself.
(01:48):
Now let's try to understand why.
Am I sitting here and askingyou, or really telling you, that
if you want to buy a new homeand rent your existing home is
to actually sell it to an Scorporation?
Now we need to understandpersonal residence exclusion
rules.
So the IRS says if you lived ina house for two out of the last
five years, that is yourpersonal residence.
(02:09):
Okay, and your house hasappreciated in value and you
made money on the sale of yourhouse.
So if you're a single filer,you don't pay any tax, any
capital gains tax on thatappreciation on what you made on
that gain up to $250,000.
Tax on that appreciation onwhat you made on that gain up to
$250,000.
If you're married, filing jointreturn, that's $500,000.
Now imagine we have an exampleright.
(02:30):
Imagine this scenario youpurchased this house for
$250,000.
If you sell it to a strangerright now, it's your personal
residence for $750,000, you'renot going to pay tax, a capital
gains tax on a $500,000, becauseyou sold it to someone else and
you're not renting it out.
If you're going to now moveinto a new residence and rent
(02:52):
your personal residence rightaway, well, guess what In the
future, when you sell the houseafter renting it out, your basis
what you bought it for is goingto be $250,000.
That means the tax you're goingto pay is the sales price minus
only $250,000.
This $500,000 gain is alsogoing to be taxable to you
(03:14):
because why You've neverexercised the personal residence
exclusion.
Now you might say right now,boris, how do I exercise the
personal residence exclusion?
Because I want to rent it.
That is exactly why thestrategy of selling to your
S-corporation works perfectlyhere.
But again, we're talking aboutwhen you want to rent your
existing home and you're movingto a new one, but you want to
(03:35):
rent your existing.
We want to rent it from anS-corporation, but we want to
make that sale.
By the way, like I said, I puttogether a checklist for you and
a compliance checklist that youcan just take it to your
accountant or whoever you workwith, whatever tax professional
you work with.
Okay, do not attempt toimplement this tax strategy by
yourself.
Now let's talk about exactlyhow this tax strategy works.
(03:56):
Now.
Let's say you want to startrenting your home personal
residence.
Let's first form anS-corporation.
Form an S-corporation, do itwith your accountant, do it with
a professional that knows howto do it.
It basically takes forming theC-corporation and electing an
S-corporation status.
That's number one.
Number two start the process ofselling your home to an
S-corporation.
Now, what you do not want to dois treat it excuse me, not
(04:24):
treat it like a traditional sale.
Definitely treat it as atraditional sale.
Irs wants to see documentationand paperwork.
So if you don't followtraditional sales rules, irs
might say this is a sham.
You just make things up overhere.
So what does it take to followthe rules?
Number one get an appraisalreport.
If you were selling it tosomebody else, right?
That other person that buyer,right, would get an appraisal
report and would say hey, oryour bank would get an appraisal
(04:46):
report, but there would be anappraisal report to determine
the fair market value.
Once you determine that fairmarket value and you've got that
appraisal report, what you wantto do now is that sell to your
S corporation for that fairmarket value.
Now a couple of things about themortgage.
If you have a mortgage on yourpersonal residence, most likely
(05:07):
your mortgage is going to havewhat's called due on sale clause
, meaning say, hey, if you eversell the property, you've got to
pay us back the money.
Okay, because we lent you thatmoney, so you've got to pay it
back.
So to avoid the due on saleclause, definitely, first of all
, speak to your attorney on thisone.
But when you're going to beputting together the purchase
contract purchase agreement makeit contract for deed or
(05:30):
wraparound mortgage.
Basically, in layman terms,this means that the mortgage
will still stay under you.
The deed is just temporarily,so to speak, passing to an S
corporation.
Now, this is not a bindingcontract, meaning to say
shouldn't really use those terms.
A binding contract, all thislegal stuff, meaning to say
there is no paperwork that needsto be filed with a mortgage
(05:52):
company or anywhere else.
But the beautiful thing is thatfor tax purposes this is
considered a valid sale.
So for tax purposes thisqualifies 100% as a sale.
So again, when you're puttingtogether the contract between
S-Corporation and yourself,speak to an attorney and tell
them hey, I want to avoid thedue on sale, let's make it a
(06:12):
contract for deed or wraparoundmortgage.
Now, also, if there is amortgage, try to put 10% down.
You might say well, boris, I'vegot an S-Corporation that you
said I need to form, I followthe checklist, okay, but I don't
have the money to put it downin the S-corporation.
How do I fund the S-corporation?
Very simple Write out a checkto an S-corporation for whatever
(06:35):
the down payment is okay, thatwill be owner contribution, and
then the S-corporation will payyou back the 10% Done deal.
Right, that will be the downpayment.
Now, if you do need to take outcash, some people have a lot of
home equity built in or theywant to take out cash from the
house, like a second mortgage.
Make sure you do this beforeyou transfer the property to an
S corporation, because once itis in an S corporation, it is S
(06:57):
corporation's property.
It is not your property.
Now, this is a related partytransaction, so avoid
installment sale rules.
Again, word of caution do notimplement this tax strategy by
yourself, especially if you'rethat business owner that thinks
you know everything and fileyour taxes on TurboTax.
Please don't, okay.
So what happens is that you'regoing to avoid the installment
(07:21):
sale rules.
You're going to elect out of itand it's going to be related to
party transaction, which isokay.
You just have to follow therules.
Download my free PDF.
It's for you to take it to youraccountant, okay, so follow
these rules.
Now let's actually go throughan actual example what are the
benefits of doing this and howthis tax strategy works right
(07:42):
after this break.
Speaker 2 (07:43):
If you have a tax
preparer and you do not have a
tax advisor, the only way youcan save money on taxes is by
using proactive tax planningstrategies that only a tax
advisor can give you.
Bora's put together a free PDFfor you, the business owner
Seven tax write-offs every SCorporation business owner must
know.
In this PDF you can find seventax strategies that you can
(08:07):
start using in your business toinstantly start saving money on
taxes.
Click on the link in thedescription below for a free
download.
Speaker 1 (08:14):
Welcome back the
moment.
We've all been waiting for thetax strategy.
So let's use the same exampleas before.
You purchase the house for$250,000.
You're filing a joint return.
The fair market value of thehouse is $750,000.
That means that if you sellthis house right now to a
stranger, you're not going topay any tax on $500,000 because
(08:37):
it's your personal residence andyou live there with two out of
five years.
Good.
But if you're going to end uprenting this house, you're going
to lose the $500,000 exclusion.
So in this case, we want tofollow these rules and sell it
to an S corporation.
Now what are the benefits ofthis?
There's two main benefits.
Benefit number one is actuallyyou will get an increased
(08:57):
depreciation deduction.
Remember, when you have aresidential property or a
commercial property, you cantake a depreciation expense.
The depreciation expense wouldbe what the property costs you.
So if you do not sell it to anS corporation, then depreciation
will be counted on a $250,000.
So it'll be $250,000 divided by27 and a half years.
(09:19):
But because you sold it to an Scorporation, as a tax strategy,
the depreciation will be takenon a fair market value of
$750,000.
So I have an example here yearone, year two year three, what
your depreciation will be on the$250,000 basis or on a $750,000
basis?
(09:39):
The difference is more than$50,000 of depreciation
deductions in the first threeyears.
And I'm not even talking aboutdoing a cost segregation study,
okay, which will give you ahigher depreciation.
I have a video on that thatshould pop up somewhere now or
in the description below.
But the difference is more than$50,000 in depreciation.
(10:00):
So what happened?
That's because you sold yourproperty, your personal
residence to an S corporationfor $750,000 to rent it out.
Now there is a basis of$750,000.
The second benefit is step-upbasis.
So let's say, two years downthe road you're going to sell
the property for $1 million,right?
(10:20):
I'm just going to.
If you haven't sold yourpersonal residence to an S
corporation, to your Scorporation, then the tax you
would pay would be a capitalgains tax on $750,000.
You take a million minus whatyou originally purchased for,
which is $250,000.
(10:41):
That's a huge tax.
This is where you lost that netgain exclusion, right, where we
talked about that.
This is your personal residence, why?
Because you haven't sold it toan S corporation, but because
you will sell it to an Scorporation, you'll take the
same $1 million that you'regoing to make out of that sale,
that you sell it to anotherstranger after a few years of
renting.
Your basis right Assuming therewas no repairs or anything of
(11:03):
that sort would be that fairmarket value that, basically,
you sold it to an S corporationfor.
So now you pay a tax on$250,000, which is what happened
is that you really made$250,000 from the time that you
rented, when it appreciated invalue.
Okay, so that's legit, that'sgood.
(11:24):
What we did is that wepreserved your $500,000 personal
residence exclusion.
Great tax strategy, awesome,and I hope this does make a lot
of sense.
Thank you so much.
Speaker 2 (11:35):
That's it for today's
episode.
Be sure to check out thedescription below for some free
tax reduction resources thatBoris put together for you.
If you're ready to work with atax advisor on your tax planning
, be sure to schedule your callby heading over to
wwwtaxplanningcallcom.
That's wwwtaxplanningcallcom.
And be sure to subscribe to ourpodcast to be notified when the
(11:57):
next strategy is released.