All Forum Posts by: Nicholas Aiola

Thanks, @Danilo A. !

Thanks @Petur Karlsson and @Michael Plaks !

@Thomas Jensen Capital gains = selling price — selling costs — adjusted cost basis.

Adjusted cost basis = purchase price + improvements — accumulated depreciation (if it was a rental).

The mortgage balance has nothing to do with the calculation of the gain.

@Peter Morgan There are absolutely tax benefits. The federal tax credit is 26% through 2022, reduces to 22% for 2023, and expires after that unless Congress extends the credit.

@Radhika Rao Entity structuring is an important consideration for investors, however, accurate advice would require an analysis of your specific tax situation. General rule of thumb - an S Corp is not a legal entity in and of itself; it is a tax election. In other words, you cannot form an S Corp; you must form either an LLC or C Corp and then elect to have that entity taxed as an S Corp. With this in mind, an LLC gives you the most flexibility. Should an S Corp be the most beneficial option for you, you can elect to have the LLC taxed as an S Corp.

The benefit of an S Corp is the mitigation of self-employment taxes.

If you have an S Corp, shareholders must be paid a reasonable wage (salary via payroll) and can receive profit distributions in addition. Partnerships cannot have their partners on payroll; you can just transfer the profits to your personal accounts in a partnership.

I would highly recommend consulting an attorney and CPA before forming anything, and especially before making any tax elections.

@Peter Morgan Both are acceptable. In order to change prior year depreciation figures, you can either amend the prior year tax returns or file Form 3115 with your current filing to change the depreciation method. 

@Jerry W. It's true that a shareholder of an S Corp must draw a reasonably salary, but it is not true that the salary must be equal to or greater than the profit distributions.

@Tristan Cai You cannot remove deductions alone. You would have to move the activity (including income) off your returns. What I was referencing was the possibility of introducing a C or S Corp into the mix to control the amount of income that ultimately is reported on your personal returns, but it may not be a viable strategy for you in particular. You'll need to consult with a CPA and attorney to ensure all bases are covered.

@Michael Plante It's certainly not a one-size fits all strategy/structure. The same could be accomplished with an S Corp, which would avoid double-taxation.

@Jerry W.Remember, the salary is not what is beneficial, since that is subject to employment taxes; the profit distributions over and above any shareholder salary are exempt from SE taxes. The sale of a rental in an S Corp would not be considered a service provided by you to the business. As a result, I would argue that you do not need to draw a salary at all, making the entire distribution to you exempt from SE tax.

I'm sure there are tax reduction strategies available to you, but to suggest a specific one is virtually impossible to do without reviewing tax returns, talking about your tax situation, and analyzing your specific details.

If your S Corp holds multiple rentals, you should still be reporting each property's rental activity separately on your books and on the tax returns. The S election does not exempt you from that.