hi Clint came here with Anderson
business advisors and in this segment
I'm going to discuss how to take your
personal residence and turn it into a
rental now you might be wondering why
would I ever do that well there are
people out there who are considering
turning their personal residence into a
rental property they don't want to sell
it it's in a location they think is
going to continue to appreciate it can
produce great rental income for them but
the question is how do you do it
do you just move out of your house and
then start renting it out well you could
do that but you're giving up a
tremendous tax benefit if instead you
chose to structure it in a slightly
different manner I want to show you is
how you can take your personal residence
turn it into a rental by selling it to
your own business and the tax benefits
that come from that so let's look at
this example right now let's say that I
bought my house 15 years ago for
$200,000 so this was my purchase price
now today my personal residence is worth
$500,000 okay so if I turn around I took
that personal residence and I turned it
into a rental property then I can start
depreciating my tax basis so my tax
basis on this property was $200,000 that
is what I paid for it so the
depreciation on this house that I have
right here would be based upon a
$200,000 a basis in that so that would
give me probably somewhere around eight
thousand dollars a year in depreciation
so if you want to increase the
depreciation because if you recall with
rental real estate if I'm writing this
out and I bring in twenty thousand
dollars a year in rental income I'm able
to write off my depreciation against
that and that leaves me with twelve
thousand dollars of positive cash or
positive income that I have to pay taxes
on well I don't like these numbers right
here I want to increase that eight
thousand dollars in fact I want to
double that number well there's a way to
double that number without really doing
anything different other than creating
the structure and selling the house to
an entity here's what we do we take your
property and we will create a F
corporation right here
great and escort your over here
and you have this house right here so we
will sell it to the corporation now of
course you're in this corporation that's
your business you're going to sell your
house to your corporation now you're
going to sell it on an installment sale
all right now if you're not familiar
with installment sales the way it works
is that when you sell something on an
installment sale you're going to bring
the money in over time so let's assume
we put this on a 20-year installment
sale so I'm not going to receive all the
funds upfront I'm going to receive them
over 20 years now we want this to
qualify for section 121 as well that is
you can sell your property and exclude
up to two hundred and fifty thousand
dollars or five hundred thousand dollars
in gain if you're a married couple so by
selling this personal residence to our
corporation we're going to lock in that
one twenty one gain on the sale of our
house because remember the corporation
is not you it's a separate taxpayer so
by selling to the Corp sell it to this
corporation I can still qualify for one
twenty one so I sell my house now to my
corporation now when I sell to the
corporation if the corporation is going
to buy it for me on an installment sale
for five hundred thousand dollars
then the corporation tax basis is what
it paid for the house it paid five
hundred thousand dollars for this house
so when the corporation takes the
property over here we're no longer at
this my tax basis that I had if I just
turned it into a rental my tax basis now
is five hundred thousand in the hands of
the corporation so here's what occurs
the corporation if it brings in twenty
thousand dollars in rent
it has about seventeen thousand dollars
in depreciation that leaves only three
thousand dollars in income versus in my
prior example if all we did was just
turn it into a rental we have
approximately twelve thousand dollars in
taxable income on annual basis so we
just cut your taxable income by
approximately nine thousand dollars and
all we did was sell the property to an S
corporation now that's great right there
but we did sell it so here's where it
gets even better so since you sold the
property to your corporation and we're
going to qualify it under section 121 so
we can exclude up the
$500,000 in gain and remember we have
$300,000 in gain here now when I sell it
I am going to in the year of the sale
opt out of installment sale treatment
that een I'm going to tell the IRS yes I
stole it on an installment sale but I
want to treat all that gain in the year
of sale so you're going to get taxed on
this $300,000 but since you can sell a
house and exclude up to $500,000
you have no tax liability personally so
as we progress forward and this
corporation starts making you payments
every year let's say it's paying you
each year under this installment sale
$15,000 a year that's non-taxable to you
because it's part of this sale so up to
$500,000 when we paid back to you out of
your corporation and you don't have to
pay tax on it because you qualified this
as a sale of a personal residence under
section 121 they're probably sitting
back on wow that seems kind of
complicated it's not it's actually
relatively simple so if you're
considering selling or turning your
personal residence into a rental think
about using a corporation call us at
Andersen business advisors and we can
help you out with this exact same
strategy or check out our millionaire
tax strategies workshop where we go into
strategies like this and 57 others on
showing you how to reduce your taxes if
you're a real estate investor or small
business owner my name is Clint Kunz
with Andersen business advisors