Tax Reduction Podcast

Episode 23. Sell Your Home to S-Corporation

• Boris Musheyev • Episode 23

Share episode

Interested in Tax Strategy for your Business? Send us a message with your email address and we’ll help you get started!

Looking to sell your home to your S-Corporation? Discover how this powerful tax strategy can help you maximize deductions, reduce capital gains, and unlock significant tax savings. We’ll dive into the benefits of depreciation and how to leverage write-offs to lower your taxable income. Learn the key steps to ensure a smooth transaction and minimize any potential tax liabilities. This podcast is a must-watch for business owners and real estate investors looking to optimize their tax planning and take advantage of the unique opportunities S-Corporations offer.

I've put together this FREE resource for you:

7 Write-Offs Every S-Corporation Business Owner MUST Know
🆓 Download FREE PDF here: https://7taxwriteoffs.com/

Ready to start saving money on your taxes?
☎️ Schedule your FREE Tax Advisory Session: https://taxplanningcall.com/

🤩 If you are looking for easy-to-use payroll software, I personally use and recommend to my clients Gusto Payroll Software - https://gusto.com/r/boris466

P.S. When you sign up for Gusto, you get a $100 Visa gift card

*Disclaimer This material & presentation content is for informational and educational purposes only. This material and presentation content is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Because each individual’s legal, tax, and financial situation is different, specific advice should be tailored to the particular circumstances. For this reason, ...

Speaker 1:

Hey, if you're looking to buy a new home and then rent your existing home where you live right now, you're going to end up paying a lot of capital gains taxes when, in the future, you end up selling your existing home. I will show you how to avoid those future capital gains taxes on the appreciation of your existing property by putting it into S-Corporation. It's a great tax strategy. It's a wow tax strategy. I will show you exactly how to get it done right. Ready, let's get going.

Speaker 2:

Welcome to the Tax Reduction Podcast for money-making entrepreneurs with Boris Mushaev. Boris has helped entrepreneurs across the United States collectively save millions of dollars in taxes with the power of tax planning and advisory. The only way you, the business owner, can save money on taxes is by using proactive tax strategies, and this podcast is all about saving you money on taxes. Boris will share with you in-depth and easy to understand tax reduction strategies that you can implement in your business within 30 days or less. Let's jump into today's episode.

Speaker 1:

Let's get started with this Now, the way we're going to break this down into three easy steps, right? First of all, we're going to try to understand why is it that you should sell your personal residence to an S corporation to rent it out? Again, I'm talking about the case where you want to move into a new home and you want to rent your personal residence, but what we want to do is put it into an S corporation and rent it out of there. So we're going to talk about why, we're going to talk about how it works and then, the most importantly, we're going to talk about a tax strategy and an example. Now I've actually put together a checklist for you to follow. Okay, checklist and the compliance, the free PDF, it. Take it to your accountant and do not attempt to implement this tax strategy by yourself. Now let's try to understand why. Am I sitting here and asking you, or really telling you, that if you want to buy a new home and rent your existing home is to actually sell it to an S corporation? Now we need to understand personal residence exclusion rules. So the IRS says if you lived in a house for two out of the last five years, that is your personal residence. Okay, and your house has appreciated in value and you made money on the sale of your house. So if you're a single filer, you don't pay any tax, any capital gains tax on that appreciation on what you made on that gain up to $250,000. Tax on that appreciation on what you made on that gain up to $250,000. If you're married, filing joint return, that's $500,000. Now imagine we have an example right. Imagine this scenario you purchased this house for $250,000. If you sell it to a stranger right now, it's your personal residence for $750,000, you're not going to pay tax, a capital gains tax on a $500,000, because you sold it to someone else and you're not renting it out. If you're going to now move into a new residence and rent your personal residence right away, well, guess what In the future, when you sell the house after renting it out, your basis what you bought it for is going to be $250,000. That means the tax you're going to pay is the sales price minus only $250,000. This $500,000 gain is also going to be taxable to you because why You've never exercised 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 the strategy of selling to your S-corporation works perfectly here. But again, we're talking about when you want to rent your existing home and you're moving to a new one, but you want to rent your existing. We want to rent it from an S-corporation, but we want to make that sale. By the way, like I said, I put together a checklist for you and a compliance checklist that you can just take it to your accountant or whoever you work with, whatever tax professional you work with. Okay, do not attempt to implement this tax strategy by yourself. Now let's talk about exactly how this tax strategy works.

Speaker 1:

Now. Let's say you want to start renting your home personal residence. Let's first form an S-corporation. Form an S-corporation, do it with your accountant, do it with a professional that knows how to do it. It basically takes forming the C-corporation and electing an S-corporation status. That's number one.

Speaker 1:

Number two start the process of selling your home to an S-corporation. Now, what you do not want to do is treat it excuse me, not treat it like a traditional sale. Definitely treat it as a traditional sale. Irs wants to see documentation and paperwork. So if you don't follow traditional sales rules, irs might say this is a sham. You just make things up over here. So what does it take to follow the rules? Number one get an appraisal report. If you were selling it to somebody else, right? That other person that buyer, right, would get an appraisal report and would say hey, or your bank would get an appraisal report, but there would be an appraisal report to determine the fair market value. Once you determine that fair market value and you've got that appraisal report, what you want to do now is that sell to your S corporation for that fair market value.

Speaker 1:

Now a couple of things about the mortgage. If you have a mortgage on your personal residence, most likely your mortgage is going to have what's called due on sale clause, meaning say, hey, if you ever sell the property, you've got to pay us back the money. Okay, because we lent you that money, so you've got to pay it back. So to avoid the due on sale clause, definitely, first of all, speak to your attorney on this one. But when you're going to be putting together the purchase contract purchase agreement make it contract for deed or 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 binding contract, meaning to say shouldn't really use those terms. A binding contract, all this legal stuff, meaning to say there is no paperwork that needs to be filed with a mortgage company or anywhere else. But the beautiful thing is that for tax purposes this is considered a valid sale. So for tax purposes this qualifies 100% as a sale. So again, when you're putting together the contract between S-Corporation and yourself, speak to an attorney and tell them hey, I want to avoid the due on sale, let's make it a contract for deed or wraparound mortgage.

Speaker 1:

Now, also, if there is a mortgage, try to put 10% down. You might say well, boris, I've got an S-Corporation that you said I need to form, I follow the checklist, okay, but I don't have the money to put it down in the S-corporation. How do I fund the S-corporation? Very simple Write out a check to an S-corporation for whatever the down payment is okay, that will be owner contribution, and then the S-corporation will pay you back the 10% Done deal. Right, that will be the down payment.

Speaker 1:

Now, if you do need to take out cash, some people have a lot of home equity built in or they want to take out cash from the house, like a second mortgage. Make sure you do this before you transfer the property to an S corporation, because once it is in an S corporation, it is S corporation's property. It is not your property. Now, this is a related party transaction, so avoid installment sale rules. Again, word of caution do not implement this tax strategy by yourself, especially if you're that business owner that thinks you know everything and file your taxes on TurboTax. Please don't, okay. So what happens is that you're going to avoid the installment sale rules. You're going to elect out of it and it's going to be related to party transaction, which is okay. You just have to follow the rules. Download my free PDF. It's for you to take it to your accountant, okay, so follow these rules. Now let's actually go through an actual example what are the benefits of doing this and how this tax strategy works right after this break.

Speaker 2:

If you have a tax preparer and you do not have a tax advisor, the only way you can save money on taxes is by using proactive tax planning strategies that only a tax advisor can give you. Bora's put together a free PDF for you, the business owner Seven tax write-offs every S Corporation business owner must know. In this PDF you can find seven tax strategies that you can start using in your business to instantly start saving money on taxes. Click on the link in the description below for a free download.

Speaker 1:

Welcome back the moment. We've all been waiting for the tax strategy. So let's use the same example as before. You purchase the house for $250,000. You're filing a joint return. The fair market value of the house is $750,000. That means that if you sell this house right now to a stranger, you're not going to pay any tax on $500,000 because it's your personal residence and you live there with two out of five years. Good. But if you're going to end up renting this house, you're going to lose the $500,000 exclusion. So in this case, we want to follow these rules and sell it to an S corporation.

Speaker 1:

Now what are the benefits of this? There's two main benefits. Benefit number one is actually you will get an increased depreciation deduction. Remember, when you have a residential property or a commercial property, you can take a depreciation expense. The depreciation expense would be what the property costs you. So if you do not sell it to an S corporation, then depreciation will be counted on a $250,000. So it'll be $250,000 divided by 27 and a half years. But because you sold it to an S corporation, as a tax strategy, the depreciation will be taken on a fair market value of $750,000. So I have an example here year one, year two year three, what your depreciation will be on the $250,000 basis or on a $750,000 basis? The difference is more than $50,000 of depreciation deductions in the first three years. And I'm not even talking about doing a cost segregation study, okay, which will give you a higher depreciation. I have a video on that that should pop up somewhere now or in the description below. But the difference is more than $50,000 in depreciation.

Speaker 1:

So what happened? That's because you sold your property, your personal residence to an S corporation for $750,000 to rent it out. Now there is a basis of $750,000. The second benefit is step-up basis. So let's say, two years down the road you're going to sell the property for $1 million, right? I'm just going to.

Speaker 1:

If you haven't sold your personal residence to an S corporation, to your S corporation, then the tax you would pay would be a capital gains tax on $750,000. You take a million minus what you originally purchased for, which is $250,000. That's a huge tax. This is where you lost that net gain exclusion, right, where we talked about that. This is your personal residence, why? Because you haven't sold it to an S corporation, but because you will sell it to an S corporation, you'll take the same $1 million that you're going to make out of that sale, that you sell it to another stranger after a few years of renting.

Speaker 1:

Your basis right Assuming there was no repairs or anything of that sort would be that fair market value that, basically, you sold it to an S corporation for. 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 in value. Okay, so that's legit, that's good. What we did is that we preserved 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:

That's it for today's episode. Be sure to check out the description below for some free tax reduction resources that Boris put together for you. If you're ready to work with a tax advisor on your tax planning, be sure to schedule your call by heading over to wwwtaxplanningcallcom. That's wwwtaxplanningcallcom. And be sure to subscribe to our podcast to be notified when the next strategy is released.