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Video instructions and help with filling out and completing Can Form 4797 Guidelines

Instructions and Help about Can Form 4797 Guidelines

Hey guys Toby math is here with interesting business advisors a question I get quite often is what to do when I sell my house to make sure that I pay no tax and that one's pretty easy there's something called a 121 exclusion which most people know that you have to have lived in the house 24 of the previous 60 months prior to selling it and you have to pass the ownership test you have to own it when you sell it and so in English means that if I lived in the house it's my one of my primary residence or my personal residence and that and I had 24 months during that period of time and it qualifies that I could qualify for as a single person a $250,000 exclusion against the game the capital gains not depreciation recapture that's important against the game on the on the home or if I'm mailing or married filing jointly it's 500,000 so that's a big huge capital gains exclusion that you definitely want to capture now here's what sometimes happens somebody purchases a house the real estate market runs up over the years maybe they've been in it for 15 years 20 years and they want to sell it and go move someplace else and they say hey how do I avoid the game sometimes they'll have a twist they say what if I want to keep it and I want to make it into a rental then what do I then do I just put it into a rental and almost the time practitioners are gonna say yes and they just left a ton of money on the counter there and they passed up the chance to use their 121 exclusion here's why that 24 of 60 month rule apply is to before you sell it you have to be the owner and you had to have lived in it for 24 months at a 60 but if you were renting it too long you will lose that deduction entirely in other words you get past three years it's gone so if you're gonna keep it and you're gonna make it into a rental it does not make sense to not use the 121 exclusion and then you're gonna have to say you're gonna say oh you can't use it who do I sell it to I'm not gonna sell it to somebody else how do I get to make it a renter in a rental property and be selling it to somebody else I mean how do I could keep control of that Toby well you have to think outside the box you can sell it to another tax payer my business partner Clint Koons has done videos on this and has done a really good job of explaining how it works in the concept I'm just gonna put a little more meat on the bones here all we're doing is we're literally taking you so let's say that I have a client as a person you have a 1040 you're the one who gets the 121 exclusion and we're going to sell it to another taxable entity the most obvious entity that is going to be the best for the tax treatment on a rental property is actually going to be an S corp and so we will make this into an S corp and when I say S corp that means for federal tax purposes so it could be an LLC tax as an S corp or a traditional corporation that makes an S election and all we're doing is selling it at whatever the fair market value is it needs to be fair market value something reasonable and now you will capture the 121 exclusion more importantly so let's just use numbers let's just say that I bought my house let's just say it's a hundred thousand dollars I bought it for a hundred thousand dollars and now it's worth $600,000 I bought it let's say it's me and my wife and we bought it and we're looking at a potential gain of five hundred thousand dollars and you say hey I don't really want to sell it but I would like to not pay tax on that five hundred thousand dollars ever you do the sale at five hundred six hundred thousand dollars the escort agrees to pay you now all you guys are gonna say always say where's the escort gonna get the money you need to have about 10 to 20% of the of the cash to make it a bona fide sale to make sure it's reasonable so you're going to want to make sure that you fund the entity with something but the escort can pay you overtime under an installment sale in other words it doesn't have to come up with all the cash now maybe it comes up with $60,000 down what this will do is give you a new basis here of $600,000 if you know how to do depreciation then you're gonna take the land value and you're gonna subtract that from this six hundred thousand so six hundred thousand and you're gonna get X number of dollars to depreciate over twenty seven point five years so what's going to happen is you're going to get a large amount of depreciation as a result you're also going to have a new basis of six hundred thousand dollars which means if in ten years I decide to sell it and it's gone up to seven hundred thousand let's say they're my only gain is the hundred thousand I literally am going to get to keep the five hundred thousand dollars off the books as far as taxation no tax on that the five hundred thousand dollars again because I chose to do this if I rent it an ordinarily if it was just me and I turned this into a converted into a rental.

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